ASM International NV (ASM) Earnings Call Transcript

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the ASM Third Quarter 2026 Earnings Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Victor Bareño, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, everyone, and thank you for joining our Q3 2026 earnings call. With me today are our CEO, is Hichem M'Saad; and our CFO, Paul Verhagen, ASM released its third quarter 2026 results yesterday at 6:00 p.m. Central European Time. The press release is available on our website together with our latest investor presentation. . Before we begin, I would like to remind you that today's conference call may contain forward-looking statements in addition to historical information. For further details on the risk factors relating to these forward-looking statements. please refer to our press releases and financial reports, which are available on our website. Please also note that during today's call, we will refer to profitability metrics, primarily on an adjusted basis. Reconciliations to the reported numbers are included in the press release and the investor presentation. With that, let me hand over to our CEO Hichem M'Saad.

Thank you, Victor, and good afternoon, everyone. Thank you for joining our third quarter conference call. We will follow our usual agenda. Paul will start with a review of our third quarter financial results. I will then discuss the latest market developments and our outlook. After which, we will open the call for questions. Paul, over to you. .

Thank you, Hichem, and thanks, everyone, for joining our call today. So let me start with the financial performance. So revenue reached a new records of EUR 1.16 billion at the upper end of our guidance rate of a guided range at constant currencies. Compared to the same quarter last year, revenue increased by 44% at constant currencies, while sequentially, revenue was up 14%. The Equipment revenue increased by 48% year-on-year at constant currencies, led by strong ALD demand. Service products also delivered another strong quarter with revenue increasing by 31% year-on-year at constant currencies. This was supported by continued momentum in our outcome-based services together with strong spares demand as customer fab utilization remained at high levels. In terms of customer segments, revenues led by the Advanced Logic Foundry segment. Sales-related 2-nanometer remained strong, while 1.4 nanometer made its first solid contribution as customers started investing in pilot line activity. 1.4 nanometer already represented a significant double-digit percentage of our advanced logic finery sales in the quarter. We also saw another healthy contribution from the 3 to 5-nanometer nodes. Mature logic foundry sales remained robust, mainly driven by the Chinese market. Memory increased strongly, both year-on-year and compared with Q2. The largest part of memory sales was related to high-performance DRAM for HVM applications. We've also seen increased memory demand in China, albeit from a low base. Finally, power, analog and waste revenue remained stable at a relatively modest level. For the fourth quarter, we expect revenue in this segment to increase significantly. Gross margin came in at 52% in Q3, broadly stable compared with 51.9% in the previous quarter. The continued favorable customer and product mix, together with the gradual benefits from our cost efficiency managers supported the margin during the quarter. For the full year, we now project gross margin to be around 52%. The increase in SG&A expense versus the previous quarter was mainly explained by higher head count and higher variable expenses related to increased activity levels and company performance. As a percentage of revenue, SG&A improved further to 7.6% compared with 7.9% in Q2, reflecting continued operating leverage and ongoing efficiency initiatives. For the full year, we now expect SG&A to be around 8% of revenue. Total company head count increased by around 400 or approximately 8% compared to the end of the second quarter mainly to support the ramp-up in operations as well as continued expansion in R&D and our service organization. Gross R&D spending increased by 14% year-on-year to EUR 144 million. As we continue to invest in a technology road map and future growth. Net R&D expenses increased more strongly by 30%. The higher growth in net R&D compared with the growth spending was partly due to the lower capitalization of development expenses and also reflects a EUR 7 million impairment charge in the third quarter. Operating profit increased by 54% year-on-year at constant currencies with the operating margin improving further to 33.4% compared with 33.0% in Q2. If you look at the main movements below the operating line, financial results include the currency translation translation loss of EUR 22 million in Q3 '26 compared to a translation gain of EUR 22 million in the previous quarter. Mainly explained by the weaker quarter and U.S. dollar against the euro compared to the end Q2. Our share of income from investments, reflecting our stake of 24.6% in Asian PT amounted to EUR 15 million in the third quarter, up from EUR 9 million in the previous quarter. Let's now move to the balance sheet and cash flow. ASM's financial position remains on a strong footing, and we ended the quarter with a cash position of EUR 1.3 billion. Free cash flow remained strong at EUR 330 million -- EUR 313 million in Q3. This was below the record EUR 335 million in Q2, but significantly higher than the EUR 139 million generated in Q3 last year. CapEx increased to EUR 55 million in Q3. up from EUR 38 million in the same period last year. We continue to expect full year CapEx to exceed EUR 250 million with the largest part related to our new Scottsdale sites. Despite the strong sequential increase in revenue, working capital remains broadly stable due to improved days of working capital, which dropped from 50 days at the end of June to 43 days at the end of September. Looking into Q4, we expect working capital to increase due to revenue growth as well as higher dated inventory as we prepare for higher activity levels in 2027. During the quarter, we executed EUR 150 million share buyback program, which was completed on September 14. And as most of you have probably seen in yesterday's press release, we also announced a new share buyback program of up to EUR 300 million. This reflects a strong cash position and financial performance as well as our continued commitment to return excess cash to shareholders. In summary, Q3 was another strong quarter. We achieved record revenue and a very strong level of profitability while continuing to invest in innovation. And with that, let me hand it back to Hichem.

Thank you, Paul. Q3 was another strong quarter for ASM, as Paul just outlined. -- revenue reached a new record, increasing 45% year-on-year and coming in at the upper end of our guidance. This was achieved against a backdrop of increasing pressure across the supply chain and reflects the tremendous effort of our teams to ramp output in -- gross cooperation with our suppliers. Our investments in referent years have provided us with substantial manufacturing footprint to support further growth. In terms of manufacturing space, we have the capacity in place to support approximately 3x our current sales level. Our focus today is, therefore, first and foremost, on the broader supply chain. We are working closely with our suppliers to secure the capacity and critical components needed to meet rapidly growing customer demand in 2027 and beyond. We continue to see a very strong demand environment. the continued build-out of AI infrastructure drives significant demand for additional semiconductor capacity, particularly at the leading edge. Expanding semiconductor capacity requires significant time from SAP construction through equipment installation, qualification and production ramp up. in response to sustained demand growth, customers are planning further ahead and working with us earlier in the capacity planning process than in prior cycles. This provides us with a good level of visibility into their requirement through 2027 and in certain areas into 2028. We see this as a positive indicator that customers are planning for sustained capacity needs, supporting a more durable growth outlook for the industry. Turning to advanced logic foundry. Demand remains very strong. Investment in 2nm-related continue at a high level as customers expand capacity and more advanced AI related and other high-performance computing applications moved to this node. We are also seeing increased investment activity across the 3-nanometer took 5-nanometer nodes, supported by strong demand for products such as CPU for Gentech AI, and base by application for HPM tax. At the same time, momentum at the 1.4 nanometer note continues to build. Q3 was the first quarter in which 1.4 nanometer made a solid contribution to our revenue, primarily reflecting investments in customer pilot lines. We expect this contribution to increase further in the coming quarters and to become a significant driver for our sales in 2027 as customers start investing in high-volume manufacturing. There are several reasons why we are particularly excited about the opportunity at 1.4 nanometer. First, the opportunity for ASM expands substantially. Both in terms of served available market and market share. With the first generation of gate all around that 2-nanometer, the focus was primarily on successfully making the transition to a new transistor architecture. At 1.4-nanometer, customers are increasingly focused on extracting more performance from that architecture driving demand for additional materials and ALD process steps. This plays directly into ASM's core strengths in materials discovery. Epitaxy is another important growth driver. With the introduction of gate all around, Nanos channel Epi emerged as a significant new application, and we were very successful in capturing that opportunity. At 1.4 nanometer, we are building further from there, securing additional applications and increasing our share. Taken together, these developments are driving a significant increase in our served available market at 1.4-nanometer compared with 2-nanometer while also supporting further gains in ASM's market share. Second, the wafer capacity opportunity at 1.4 nanometer looks highly attractive. The substantial improvement in performance and power efficiency enabled by 1.4 nanometer will be particularly important for the next generation of AI logic devices. Customer interest is strong. with some already talking about 1.4 nanometer potentially becoming a larger mode than 2-nanometer. And importantly, we see multiple customers actively working on this note further expanding the scale of the 1.4 nanometer opportunity for ASM. Turning to memory. DRAM investment increased significantly in Q3. capacity remains tight, particularly in high-performance demand and higher customer spending supported strong memory sales during the quarter. Looking beyond the current capacity investment, we see a substantial multiyear opportunity for ASM. DRAM technology road map remains dynamic. While the industry transition to 4x square architecture may take longer than previously anticipated, development activity remains strong. What remains unchanged is the need to continue improving the speed and power efficiency of each new generation of high-performance DRAM. What we are seeing as a result is that some innovation previously expected to come with 4 F square are being pulled forward to 6 F square. FinFET is a good example. -- customers are now introducing FinFET in the CMOS peripheral circuitry at 6 F square to improve performance. This drives additional ALD layers in the high-K metal gate stack as well as creating opportunities in other applications. We are already engaged in a number of applications for FinFET and other new innovations that enable these performance gains. We are also seeing epitaxi becoming increasingly important in DRAM. New FDA applications are emerging as customers push device performance further and we have already qualified additional applications for upcoming nodes. So while the precise DRAM road map continues to evolve, the underlying direction is very clear. customers need more performance and achieving that requires more advanced materials, more ALD and more epitaxi. For ASM, this creates opportunity to expand our served available market and increase our market share. In 2026, our growth is still driven primarily by industry capacity additions. Beginning in 2027 our new innovations will start to have a greater impact in 2028 and beyond. Another area where we see attractive long-term growth opportunities in advanced packaging. As AI systems become more complex, advanced packaging is becoming increasingly important, creating new opportunities for our materials and deposition technologies across a number of applications. One particularly exciting area I would like to highlight this time is Photonics, which is growing very rapidly. -- as the performance and bandwidth requirements of AI systems increased photonics and co-packaged optics are becoming increasingly important. We have established a leading position in epitaxy for photodetectors, positioning us well to participate in this growth. Aside from Photonics, we are also developing a broader set of solutions across ALD, EFi, PECVD and preclean to capture the opportunities in advanced packaging. While we are starting from a relatively small base, we believe advanced packaging can become an important additional growth area over time. More broadly, we continue to look for opportunities to leverage our materials discovery and chemistry expertise to expand into new growth areas. Last month, we launched XP8 Virtus flood carbon. It's the industry's first PECVD flowable carbon process technology and has already been deployed in high-volume manufacturing, developed around a novel ASM design molecule, flowable carbon addresses increasingly complex patterning challenges associated with advanced 3D logic and memory devices. While conventional carbon films have delivered significant value to the semiconductor industry for more than 2 decades. They were not designed for today's increasingly challenging 3-dimensional structures. Flowable carbon enables carbon films to flow into higher spec ratio and reentered features while maintaining the load if activity critical to carbon patterning applications. In addition, thanks to its unique flowability, the field naturally creates a more -- less merited and uniform surface across different pattern density and across the wafer, reducing process complexity and the need for downstream CMP steps. Global Carbon is a great example of how we can leverage our core capabilities to successfully expand into new growth areas and broaden our served available market over time. Let me finish with our outlook. As communicated in our earnings press release for the fourth quarter at constant currencies, we expect revenue of EUR 1.23 billion plus or minus 5%. Supply chain conditions are increasingly tight, and we continue to work closely with our suppliers and customers to support the planned ramp in shipments. Based on our Q4 guidance, we expect full year revenue to grow by approximately 35% at constant currencies with equipment revenue growing even faster at more than 40%. Looking further ahead, the opportunities I discussed today give us a high level of confidence in continuous strong growth in 2027. Advanced logic foundry is expected to be the key growth driver. Within this segment, 1.4-nanometer is expected to become a very strong driver for our sales as customers start investing in high-volume manufacturing, while we also expect further growth in 2-nanometer. In memory, we expect strong growth, supported by higher customer investment and our expanding ALD and epitaxy positions. We also expect the recovery in power analog wafer to strengthen further. Against this backdrop, we project revenue to exceed EUR 5.7 billion in 2027 at constant currencies. This means we expect to achieve the revenue target SFP for 2030 at our 2025 Investor Day 3 years earlier.

Thank you, Hichem. Let's now move to the Q&A to accommodate as many colors as possible. Please limit your questions to no more than 2 at a time. Operator, can we have the first question, please?

[Operator Instructions] The first question is from Jakob Bluestone BNP Paribas.

Firstly, can you maybe just comment a little bit more on the degree of visibility you've got into '27. So -- for example, how well covered is it out of your order book? And then the second question is you've obviously hit your CMD revenue targets 3 years early. So -- just sort of interested in -- I appreciate there's obviously been a lot more capacity expansion than anticipated at the time. But how should we think around the uplift in SAM per 100,000 wafer starts for 1.4 and the sort of DRAM transition as well. Are those SAM uplifts in your view still valid? Or do you think those numbers have moved up?

Let me first -- this is Paul speaking. Let me first talk about the degree of visibility. Yes. What we see today is clearly a much better visibility than what we've seen at least in the prior years. That's also 1 of the reasons why we came out with an early guidance for next year. Based on discussions with customers, the level of detail of the plans they share with us timing of what they need by when, et cetera, it is clear that they are working very, very closely with us to master they get what they need. -- and which can give us, of course, the confidence that the demand is real. We know their fab. We know when they come on stream, et cetera, at least when they are planned to become a stream and we can use that information and towards our supply base. So as is clearly it doesn't mean that, that is all already covered into POs. Maybe it's maybe slightly better than other years, but still the level of disability based on backlog, based on POs is there not a hell of a little better, I would say. -- also because the specific configuration sometimes still continues the last minute. Also really good in our backlog at year-end. We have mentioned that that 1 year, we disclosed backlog. So early next year, when we come Q4 numbers, you see that affected in the backlog. And on the SAM, is already talked about it. We're very excited about 1.4. It becomes a very solid on the company has become very solid content to revenue. And yes, this goes significantly increased in 2027. It will be actually pretty big. We see growth in 2-nanometer in 2027 compared to 2026. But 1.4 will actually be the biggest contributor in that year. So already bigger than already a big number for 2 nanometer, which is good. And in addition, also 3 to 5, will have a healthy contribution but at a much lower level than 2-nanometer and 1.4. The SAM being communicated in the Investor Day is still fail, but we believe it's at the higher end of that range, what we see. So we guided for 450 million to 500 million boater starts. Based on overtime now today, we see today, we believe that's towards the higher end of that range. So all looking pretty good.

The next question is from Tammy Ku of Berenberg.

So the first 1 is your decision of guarding 2027 is quite early. Is that because of the customer commitment has improved significantly in the quarter to make you make that decision to give us a precise number at this point? .

Yes, I think that -- I'll take that question, yes, Tammy. We have a very good visibility, yes with customer for 2027. There was -- the visibility became better. the past quarter, you're absolutely right. And we feel that based on that visibility that we have in 2027 that we'll be able to provide with EUR 5.7 billion revenue in 2027.

And I just wondered, how conservative you are on that number? Because obviously, your lead time is about 6 months. So I guess a lot of moving parts potentially can happen in the second half '27 -- have you been based that 5.7% plus number on a very conservative estimation of maybe something will turn out to be not going on, et cetera, how conservative you are .

I think that if you look into how the industry is going to go in 2027. The growth is going to be over 30%. So if you look into the number of 5.7 compared to our revenue in 2026. That's about the same number, okay? So we -- from that point of view, we already have always mentioned that we're going to grow at least at the level of the market, if not higher. So the EUR 5.7 billion is actually a really mimics the wafer fab equipment increase in 2027. If you take further that our position in 1.4-nanometer is also very strong, both in ALT and epitaxy and the fact that the SAM has increased there. So we think that EUR 5.7 billion is a very good number to go at. .

The next question is from Francois Bouvignies, UBS.

My first question is on the -- is on this FinFET on the memory side versus planar move. I mean you mentioned in Centa maybe for Square could be later. My original idea was that FinFET for memory would be more '28-'29 time frame. So the fact that you have 4Square, may be pushing out or pushed out -- do you see like a pull forward of the [ 6 F square ] FinFET into '27 instead versus '28? And I thought that it would be in terms of ALD layers 2 or 3x higher than the planar structure. Is that the right ballpark?

Yes. Okay. Yes. Francois, thank you for your question. Yes, definitively, we see fintec being put in 2027. And we see that also the LD there in FinFET to be higher, 3x from that point of view. That really comes down to our confidence in the number that we project for our growth in 2027.

And maybe my follow-up would be on the shortages. I mean we hear more and more in the supply chain that some components are quite tight, and you seem to acknowledge that in the release. I mean, what area is particularly tight? I mean, because obviously, you have a big growth project. So I was wondering how much risky it is due to this components tightness? And what specifically is tight for you at this point?

I will take that question, Francois. Yes, the supply chain is for sure challenging, to say the least, and we're on top of it. So also going into next year, that's definitely a continuous point of attention. And there is certainly some risk. I would be lying if you would say there's no risk. We have people at that a few critical suppliers. We are qualifying new suppliers, and we were taking a number of actions to manage it as good as we can. So far, we've been able with pretty hard work to manage it properly. But it will be definitely at our radar as an increase risk going into but we have quite a few actions ongoing to hopefully manage that. We -- I can tell you the precise components, but we don't want to talk about that specifically for a number of freezers. So I'm not going to go into which component specifically, we see shortage. There's a few ones where we where we see a lot of stress and that we are on top of. But we prefer not to go into detail which ones those are.

Next question is from Stephane Houri, ODDO BHF.

Yes. Actually, my question is -- my first 1 is on 2028 because I know you made an effort to give us guidance for 2027. But given where the industry is and the plans with the new fabs in advanced logic, but also in memory, -- do you already have a first view or discussions with your clients because some of your peers, not really competitors, but like in the same environment, already talk about 2029 and 2030 also. So where does your visibility leads you at the moment?

Yes. Thank you very much for your question, Stephane. To answer your question is that we see good growth continuing beyond 2027 into 2028. With some of our leading customer -- leading edge customer, they shared with us their road map for 2029 and even 2030. And even on 1.0-nanometer note, we also have that kind of visibility right now. So I think this -- we think that 2028 will be also a growth here. As you know, that 1.4 nanometer HVM production will happen. . And that 2027 is only the pilot production from that point of view because the 1.4 nanometer as was mentioned by many of our customers, is going to be a bigger node than the 2-nanometer node. And because the 1 4 nanometer has more players than the 2-nanometer node, we expect continuous strong sales in 1.4 nanometer node in 2028 and beyond. Second, for us, the growth that we have experienced the past year and also in 2027 -- 2026 and 2025 in DRAM for high-performance DRAM has been based mainly on capacity addition. In 2020 -- by the end of 2027, and most importantly, in 2028, some of the DRAM layers would use more ALD and the application, which we have won this year. So we expect also to see further growth in our DRAM market in memory market in 2028 and beyond. The third factor is also in the area of advanced packaging. We are just starting there. We talked about photonics -- we are very excited about photonics. We're using the photo dector, using our epitaxi. -- we see new areas of growth in also a trans packaging in PECVD, -- but most importantly, we see that we have more and more application beyond our core Epi and LD technology. So overall, what we feel is that, okay, that we have new growth area. Our service available market is expanding. We're gaining share in DRAM. So pretty much what would happen from 1 to the other that even if there is some economic effect and so on and so forth. I think the projection for us would be resilient and positively.

Second question is around gross margin and you've reached -- well, you said 52% for the year, which is really clearly above the high end of the guidance that you've given all the things that you're saying and you're also saying, if I'm correct, that power, it's going to recover, mature nodes are going to be supportive again next year. So is there a reason why the gross margin would go down from the 52% level that you have now?

I mean, I will answer this question this way. We would like to be able to continue to comment a high profitability for the company. And we -- and as you know, that the gross margin also depends on product next year, but also depends also on customer next year from that point of view. We're actually also having a very strong program to continue improving our gross margin. And some of it right now, I mean, I can even mention that okay, we have, in some cases, increase our pricing for the value that we're providing. But -- so we feel that will be aggressive in maintaining the gross margin that we have from that point of view. On the other hand, I think the supply chain concerns, not concerned, but also the fact that the supply chain is also tight we see some also increase in some component pricing from that point of view. So the positive is pricing, more value you have better efficiency that would tend to improve your gross margin. But at the same time, component costs will go the other way around. But overall, we do believe that our -- the trajectory for our gross margin would be positive going forward.

The next question is from Didier Scemama of Bank of America.

I've got a couple of questions. Maybe first question for is on the PECVD to. I know you started to talk about that more prominently last quarter. Obviously, the CVD, which is bigger than PECVD I get it, the TAM is 3x the size of ALD. So I just wondered with that sort of differentiated PECVD system, what sort of market share do you think you could get and over what time frame? And I've got a follow-up. .

Didier, for a person who spent 15 years in PC tell you that for ASM, this is really a very small market share than the other big competitor. PCB is a huge business. We have been a small player in PCB for the last 20 years, mainly having some local films at a couple of customers, but that was it. So these -- so this PECVD firm that we have the flowable carbon is a decision that we have made that our expertise, our materials discovery expertise, we would like to expand it beyond and PECVD is 1 of those areas. And with that, we have developed a new molecule, designed a new molecule that will provide this PECVD cell, which we call global carbon that's enabling much better patterning for 3D structure. And with that, we see a significant customer active acceptance of this technology because it provides much better yield of the devices. So from that point of view, in this part of the market, this is a new market for us, a new area for us in and we feel very good about where we stand from this point of view. On PECVD 2, there are also applications in advanced packaging. And in that, we have some new products that we have developed in PECVD for advanced packaging, and we'll be able to share with you in the next few quarters some of the wins that we have in this area when they happen.

Congratulations and best of luck with PECVD -- my second question is for Paul on OpEx. I think we saw like a pretty big uptick in OpEx in the quarter. just perhaps understandable given your growth rates on the top line. So I'm just wondering, given the guidance you've given for '27 How should we think about OpEx growth next year? .

Thanks for the question, DJ. Indeed, you saw an uptake. But to re extend at least in SG&A that's variable. It's variable expense based on the company performance and the growth, but still it's an expense. In R&D, we had an impairment of EUR 7 million. So also that number is a little bit inflated. But adding it all up, you get the numbers that you saw. We added 400 across the board and not only in R&D and obviously, the biggest part was actually in operations and field service engineers -- we added 400 people in the quarter to support the growth that we see. So also there, we are expanding. We also had some additional one-off, I say that benefits for our employees because it's happening almost across the industry. And that's also important to properly compensate our people and to make sure that we remain competitive in this industry where there's a war for talent going on. So all these elements also play a role, then come to '27. We guided for 2030, you might recall R&D at low double digits. And SG&A based on EUR 5.7 billion revenue or more below 7%. That guidance is now also valid for 2027. So R&D, we still target -- if we can achieve it, I don't know because we cannot even keep up with the growth to be very honest in R&D. So we might lag a little bit there, but we targeted these to be low double digits. And SG&A should come below 7% next year. .

The next question is from Timm Schulze-Melander, Rothschild.

Great. The first 1 is just trying to reconcile 2 things. I think you talked about a very strong book of client interest demand supply chain tightness. But I think you also mentioned that it hasn't converted to purchase orders. And I think that's something that's been echoed by some of your peers. Could you maybe just provide some color there? Is it the deposit rates that are being demanded? Why is that not flowing through? And then I had a follow-up, please.

That's a good question. Tim, why is it not followed through. I mean I guess, it's habit. I don't know. We -- this is how we work with our customers. Typically, we see 3 to 6 months of backlog and sometimes depending on time of or it can be a little bit higher or a little bit lower, but that's basically the trend that we've seen. That's how customers work with us. That is still the case. So they are not converting what they need immediate into POs partially also because we have quite some configurations are typically decided later in this process. We know what kind of tool, we know what kind of platform that we don't know the final configuration always that early. But what we do know is what I said in the beginning of this call, -- we have so much more granularity from customers compared to what we have seen in prior years, plus a much more committed tone, let's say, like that from our customers. So based on that and also based on the fact that their time demand is still higher than what they can supply. -- that's where we base this visibility on. And of course, great visibility does not necessarily mean certainty. There's a difference between these 2. But yes, based on everything we know today, based on everything we see today, based on everything we hear from our customers, that has basically resulted in the disclosure for 2017.