ASM International NV (ASMIY) Q4 2022 Earnings Call Transcript

ASM International NV (OTCQX:ASMIY) Q4 2022 Earnings Conference Call March 1, 2023 9:00 AM ET

Company Participants

Victor Bareño - Investor Relations

Benjamin Loh - Chairman of the Management Board and President and Chief Executive Officer

Paul Verhagen - Member of the Management Board and Chief Financial Officer

Conference Call Participants

Didier Scemama - Bank of America

Adithya Metuku - Credit Suisse

Marc Hesselink - ING

Stéphane Houri - ABN Amro

Tammy Qiu - Berenberg Bank

Nigel Putten - Morgan Stanley

Amit Harchandani - Citi

Timm Melander - Redburn

Michael Roeg - Degroof Petercam

Operator

Good afternoon. This is the conference operator. Welcome and thank you for the joining the ASM International Q4 2022 Earnings Call. [Operator Instructions] At this time, I would now like to turn the conference over to Mr. Victor Bareño. Investor Relations. Please go ahead, sir.

Victor Bareño

Thank you, Judith. Welcome everyone. I'm joined here today by our President and CEO, Benjamin Loh; and our CFO, Paul Verhagen. ASM issued its fourth quarter 2022 results yesterday evening at 6 PM Central pean Time. For those of you who have not yet seen the press release it is available on our website asm.com together with our latest investor presentation.

AS always, we remind you that this conference call may contain information relating to ASM's future business and results in addition to historical information. For more information on risk factors related to such forward-looking statements, please refer to our company's press releases, reports, and financial reports, which are available on our website. And with that, I'll turn the call over to Benjamin Loh, CEO of ASM.

Benjamin Loh

Thank you, Victor. And thanks to everyone for attending our fourth quarter 2022 results conference call. I'll start with a few of the highlights. ASM delivered a strong performance in 2022. We increased our equipment revenue by 38% at constant currencies. Our sixth consecutive year and we continued to invest in our people and in the growth of our company. I want to thank all our ASM people as they ran again the extra mile to meet our customers' requirements and contributed to another successful year for our company. I also want to thank our investors and other stakeholders for their continued support.

The agenda for today's call is as usual, Paul will first review our financial results. I will then continue with a discussion of the market trends and the outlook followed by the Q&A.

With that handing over to you, Paul.

Paul Verhagen

Thank you, Benjamin. So Let me start with first with our acquisition of LPE and how this impacts our financial numbers. As you know, we closed this deal early October and with LPE we now have entered the fast growing silicon carbide market. As we will disclose in our annual report, the revenue contribution of LPE in 2022 with consolidation as of October 3 amounted to EUR 11 million. This was to some extent negatively impacted by supply issues. LPE experienced solid demand in the recent periods and ended ‘22 with a strong order backlog. We now expect revenue of more than EUR 130 million for LPE in 2023, up from an earlier target of more than EUR 100 million. As we mentioned previously, LPE nicely fits the profitability target model of ASM and that is excluding expense for integration and amortization of Purchase Price Allocation, PPA. In the initial period, the PPA expenses will be relatively high for the combination of Reno and LPE, we incurred PPA expenses of EUR 8 million in Q4 and in 2023 the PPA will have an estimated impact of EUR 46 million at the operating level.

In our press release and investor presentation, we have provided a detailed overview of PPA expenses and the impact by P&L line item for Q4 and estimates for the coming years. In the rest of my remarks I will focus on the normalized numbers so adjusted for PPA expense.

Now I'm going over to our fourth quarter results. Our revenue amounted to EUR 725 million in Q4, up 42% year-on-year at constant currencies. And on January the 17th we already announced that revenue would amount to approximately EUR 710 million, which was higher than earlier expected thanks to a further improvement in supply chain conditions in the fourth quarter. By customer segments, revenue was led by foundry which increased substantially both year-on-year and compared to Q3 to a new quarterly high. This was followed by logic, which increased compared to Q3, but decreased year-on-year. Memory was the third largest segment up year-on-year but down substantially compared to the record high in Q3.

In the fourth quarter, gross margin was 46.9%, about unchanged compared to 47.0% in Q4, ‘21 and down from 48.1% in the third quarter. As always, the quarterly variations in gross margin are largely explained by mix, which as a reminder was relatively strong in Q3 of 2022. Q4 operating margin amounted to 26.2% in Q4, about unchanged from Q3, and in line with the 26% level that we announced in our press release of January 17. Below the operating line results included a translation, the currency translation loss of EUR 36 million in Q4 compared to a gain of EUR 25 million in Q3, mainly due to the depreciation of the US. Dollar in the quarter.

The full year results include a EUR 25 million positive translation result. Income and associates, which largely reflects a 25% stake in ASMPT, dropped to EUR 8 million in Q4, down from EUR 20 million in Q3 and EUR 26 million in the year ago period. For the full year of ‘22, income and associates dropped from EUR 87 million to EUR 78 million , which is mainly explained by the slowdown of the back end equipment market in the second half. Last year, our repo net results in Q4 were positively impacted by a partial reversal of EUR 106 million of the impairments that we took in Q3 for our stake in ASMPT. This reversal was due to the increased market value of the ASMPT stake in Q4. Our new orders in the fourth quarter amounted to EUR 829 million up 26% year-on-year at constant Currencies and up from EUR 676 million in Q3.

By customer segment bookings were led by the combination of foundry and logic, which increased year-on-year but decreased compared to the third quarter. This was followed by our power/analog, which includes an exceptionally high order intake from LPE in Q4 as also announced earlier. Memory orders continue to be relatively weak in Q4. In Q4, we also rebooted part of the China fab orders that we earlier removed from the backlog in Q3. As a reminder, in Q3 we conservatively de-risked the backlog by taking all orders for China swaps that could be impacted by the export controls that were announced on October 7. For the first nine months of 2022, this impact would have been equivalent to 40% of our China sales. At the end of November, we reported our updated assessment that the impact would be more moderate, a negative impact of 15% to 25% instead of the 40% of our sales in China. In Q4, we rebooked the larger part of the tool orders that we still can ship according to our updated assessments and complying with all export regulations. Most of the shipments related to these bookings are scheduled for the first half of ‘23. Our equipment sales in China for the full year amounts to 16% of total ASM sales, similar to the first nine months.

Apart from the rebooked orders, we had a solid order intake in Q4 from Chinese customers, virtually all of it relates to mature notes, power/analog and wafer manufacturer segments. Let's now go to the full year results, at EUR 2.4 billion, our sales increased 33% at constant currencies. Equipmen0t sales grew 38% in constant currencies, and as such we clearly outperformed the WFE market that grew by a high single digit percentage in 2022. We recorded double digit growth in all our product lines. ALD grew strongly and continued to account for more than half of our equipment sales. We booked the strongest growth in Epi, our second largest product line. Spares and services increased by 11% at constant currencies, driven by solid growth in our outcome based services.

In terms of customer segments, revenue in the combined Logic Foundry segment grew strongly and again represented more than half of our sales. Sales in the memory segment showed a solid double digit increase and accounted for 19% of the total equipment sales in ‘22. Growth was especially strong in NAND. Also worth noting was again the very solid growth of the combined segments of analog/power and wafer manufacturers in 2022 which in the recent quarters have been approaching the size of our memory business. Gross margin for the year decreased from 47 9% to 47.5%, mainly reflecting mix. Cost inflation went up considerably in 2022, especially in the second half, but we were able to manage it well last year. For 2023, our focus remains on managing on margin as per our midterm guidance through cost reduction initiatives such as value reengineering and prior price increases to offset inflationary cost impact. SG&A expenses increased 45% in ‘22, mainly reflecting the increase in headcount and higher compensation, both fixed and variable.

And as discussed at previous occasions, we stepped up SG&A as we needed to strengthen the organization and in preparation of higher business levels. Those investments have now largely been completed. At 3% in Q4, the sequential increase in SG&A was already more moderate. In ’23, we expect a further increase in SG&A but at a significantly more moderate pace than in ‘22. Net R&D expense for the full year increased by 52%. This largely reflects the increased R&D staff numbers, which were up 49% in 2022, and more generally, a strong increase in R&D projects. In 2023, we project a further double digit increase in net R&D expenses, driven by a growing pipeline of new opportunities on technology road maps in the next years.

Operating profit for the year increased by 30% and the operating margin slightly decreasing from 28.4% to 26.6%. As we continue to increase our R&D investments this year, it is possible that the operating margin will temporarily be slightly below 26% in 2023. We remain committed to the structural targets of 26% to 31%, and we expect the operating margin to move back into this range beyond 2023, supported by continued solid revenue growth prospects.

Now turning to the balance sheet, we ended the fourth quarter with a cash position of EUR 419 million, down from EUR 670 million at the end of Q3. Decreasing cash position was fully explained by the EUR 276 in cash spent in Q4 on the acquisition of LPE. As a reminder, we aim to bring the net cash to a target level of EUR 600 million , as announced in our Investor Day 2021. Excluding the EUR 314 million in cash spent on the acquisition of Reno and LPE, free cash flow in 2022 increased by 43% to EUR 381 million supported by a solid increase in profitability and [inaudible] increase in working capital. Days of working capital were at 62 at the end of 2022, up from 58 at the end of 2021. To have more flexibility, we increased our buffer inventories of critical parts and materials. Supply chain constraints also resulted in increased WIP as some close could not be completed for delivery to customers due to missing parts.

CapEx increased to EUR 101 million in 2022. This was at the high end of the target range and in line with our earlier projections. Apart from some spending that was carried over from ‘21, we spent more on expansion and upgrading of lab facilities, as well as the completion of the second manufacturing floor in our Singapore facility. For 2023, so for this year, we decided to increase the CapEx to EUR 150 million to EUR 200 million , significantly above the annual target guidance level of EUR 60 million to EUR 100 million. We plan to expand our innovation and manufacturing infrastructure to enable continued growth that we expect beyond our 2025 targets, and we need to start preparing for it now.

In terms of shareholder remuneration, in 2022, we paid EUR 122 million in dividends, and for this year's AGM, we will propose a dividend of EUR 2.50 per share similar to last year. We did not yet start a EUR 100 million share buyback program for the period ‘22 - ‘23 due to the cash required for the acquisitions we did in 2022. But we still intend to execute this program in 2023. And finally, looking at our solid performance in 2022, we believe we are on track towards the midterm targets that we launched on our Investor Day in 2021, including the 2025 revenue target of EUR 2.8 billion to EUR 2.4 billion. And we are planning to have our next Investor Day in September of this year.

And with that, I hand the call back to Benjamin.

Benjamin Loh

Thank you, Paul. Let's now look in more detail at the trends in our markets. The slowdown in the semiconductor end markets that started in the Q2 of last year continued in the final part of the year. Consumer related parts such as PCs and smartphones were hardest hit, but also other segments were impacted by inventory correction. The semiconductor market ended the year with growth of just 5%. The WFE market grew by a high single digit percentage with equipment growth of 38%; we clearly outperformed the WFE market in 2022. The Logic Foundry segment continued to be the strongest driver for the WFE market and for ASM in 2022 and also in Q4, demand remained healthy. Key customers continue to invest in advanced note capacity to prepare for the new end market products that will be introduced in 2023 and beyond.

In the numerous Logic Foundry node, which some of our customers have been ramping into high volume manufacturing since the end of 2022, the number of ALD layers and applications has increased by a strong double digit percentage. We also continue to have strong traction with all the Leading Logic Foundry customers for the next node, which will be the transition to gate-all-around device architecture. We are confident that the transition to gate-all-around will expand our combined ALD and Epi markets in Leading Logic Foundry with US $1.2 billion as we detail in our Investor Day. In the past few quarters, we have secured several two wins both for development and HVM for critical gate-all-around related applications. ALD is an enabling technology for gate-all-around devices. And supported by our active customer engagements, we believe we are well positioned to maintain our leading position.

In addition, in Epi the benefits of our intrepid, such as film uniformity and cost of ownership also particularly relevant for gain on all of our applications, which we expect will further share gains for us towards our target of doubling our Epi market share from 15% to at least 30% by 2025. In Memory market conditions further weakened towards the end of the year and going into 2023, illustrated by rising inventories and price declines, a number of customers have announced substantial CapEx cuts for 2023 despite the sharp correction in memory WFE in the second half, we grew our memory sales by a solid double digit percentage in 2022. Demand continued to be solid for high-k metal gate, in which ASM has a leading share as customers adopt this key technology for growing part of DRAM devices.

We had especially strong growth in 3D NAND as we successfully gained a number of new positions for our advanced ALD gap fill solutions in 2022. We are working with customers in R&D on several new opportunities as we remain focused on further strengthening our position in the memory market in coming years. We also had strong growth in the mature node segments of power/analog and wafer manufacturers. We serve these markets primarily with our vertical furnaces and with part of our Epitaxy portfolio, Silicon API and now Wave LPE, also Silicon Carbide. Over the last few years we have strongly expanded our position in this segment for a large part driven by the success of some of our new products. A great example is our intrepid ESA tool that we introduced in 2021 for 300 millimeter applications in power and the wafer market and already contributed significant revenue in 2022.Another example is our new 300 millimeter vertical furnace platform.

Next to customers in the logic segment. We have booked multiple new wins in the power/analog market and expect a solid revenue contribution in 2023. Among the highlights in 2022 were also the two acquisitions we did last year. Reno earlier in 2022 was a small but important acquisition that will help to improve the performance of our plasma products in the coming years. We also continue to be very excited about the acquisition of LPE. In the fourth quarter, LPE booked exceptionally strong orders from a mix of customers located in Asia and the US. As Paul mentioned, we increased our expectation for LPE sales to more than EUR 130 million in 2023. The forecast of a 25% CAGR for the silicon carbide Epi market that we communicated last July now looks conservative following recent announcements about substantial manufacturing capacity expansion in this segment.

In addition, LPE has expanded the number of R&D engagements for its next generation 200 millimeter tools. We are in the process of integrating LPE, and we continue to see many opportunities for value creation by combining expertise in areas such as platform development and process control technologies, and leveraging our scale in supply chain and our global service network. A key challenge in 2022 was a tight supply chain situation, while at the same time our customers demand continued to increase significantly. Our team executed well in close collaboration with our suppliers and customers, and with the benefit of earlier action such as maintaining strategic inventories and qualification of additional suppliers, we were able to grow our shipments consistently quarter-to-quarter, reaching again record high sales in 2022. In the fourth quarter, we increased our sales more than expected as we benefited from further improvements in supply conditions in the course of the quarters. Although, we currently are still experiencing constraints in certain areas.

From an internal capacity point of view, we benefited in 2022 from our timely investment in our newly expanded facility in Singapore. At the same time last year, we also made the second manufacturing floor in this facility ready for production. Which we completed in January 2023, and this will provide us with flexibility to meet our midterm targets. As Paul already discussed, we have to start preparing for continued growth beyond the 2025 period. This will require further expansion of our innovation and manufacturing infrastructure. As a first step, we recently announced a US $100 million investment in our Korea activities to expand R&D and manufacturing in the coming years. This is not only intended to serve our leading Korea customers, but in Korea we also have one of our global innovation centers where we develop key ALD applications such as gap-fill. We are also exploring options to expand our operations in Phoenix, Arizona and in Europe.

Next, I would like to highlight our progress in ESG. After announcing our net zero by 2035 targets in 2021, we took an important step by submitting our net zero measurements and targets for Scope 1, 2 and 3 greenhouse gas emissions to the Science based Targets Initiative in December 2022. People is another key focus area for us in sustainability, and in 2022 we continue to further embed our core values. We care, we innovate, we deliver throughout the organization. I'm also pleased about the progress in our diversity and inclusion targets. In 2022, the female participation increased from 15% to 17% of the total workforce, and we continue to target a further improvement towards 20% by 2025. Our progress in sustainability is increasingly recognized in improved ESG ratings.

Moving on to the outlook, looking at 2023, the global semiconductor market is forecasted to contract by some 5%, with continual inventory corrections in the first half of the year. WFE spending is expected to decrease by a mid to high teens percentage this year, a level that we expect to outperform. The Logic Foundry part of the WFE market is expected to be more resilient, with a forecasted single digit percentage decrease in the trailing edge notes Logic Foundry is projected to be weaker, especially for consumer related products while spending on the most advanced notes is expected to remain healthy in 2023 as leading customers continue to execute their multiyear investments in technology roadmap. The reduction in memory is expected to continue, with spending in this segment down double digits in 2023. While this will also impact our memory sales in 2023, we believe that our recent application wins, such as ALD gap-fill and 3D NAND position us well once new node capacity investments in the memory segment recover again.

Equipment spending in the power/analog and wafer markets is expected to remain healthy in 2023, with robust automotive related demand partly offset by slower consumer related demand. In this segment, as mentioned earlier, we also expect to benefit from solid new product momentum. We ended the fourth quarter with a record high order backlog of EUR1.7 billion, which underpins our expectation for the first half. As announced in yesterday's press release, we expect revenue for the first quarter of EUR 660 million to EUR 700 million at constant currencies, with a slight increase in the second quarter revenue compared to this level. Based on the current visibility, we expect revenue in the second half of 2023 to remain at a healthy level, a bit somewhat lower than in the first half of 2023. Looking at the longer term, we believe the prospects for ASM continue to be bright. Despite the market slowdown in 2023, structural drivers for our industry are still very much intact. Third part research firms continue to expect the semiconductor market to grow to more than US $1 trillion by the early 2030s. Semiconductors have become essential in all aspects of life and helped to create new applications such as in cloud computing, artificial intelligence, and the electrification of cars. Our customers continue to invest in the development of faster and more power efficient next generation semiconductors, enabled by further scaling new, device architectures such as gate-all-around and the introduction of new materials, all of which drive further demand for our ALD and Epi technologies.

With that, we have finished our introduction. Let's now move on to the Q&A.

Victor Bareño

We'd like to ask you to please limit your questions to not more than two at a time so that everyone has the opportunity to ask a question. Okay, Judith. We are ready for. The first question please.

Question-and-Answer Session

Operator

[Operator Instructions]

The first question is from Didier Scemama with Bank of America.

Didier Scemama

Thank you very much. Good afternoon, everyone. Just had a few questions, if I may. So first of all, can you help us try to calibrate expectations for calendar year ‘23 on the revenue line? I think your comments are helpful, but it's still reasonably vague for us. So maybe can you just help us understand what healthy levels in the second half might mean? My first question and then secondly on the CapEx guidance, what does that tell us about your level of confidence in growth in ‘24 and ‘25? I mean should we expect a return to double digit on mid-teens revenue growth in the medium term because of that or is that not the way to think about it? And I'm going to follow up. Thank you.

Benjamin Loh

Didier, thank you very much. I'll take the first question and then I'll maybe let Paul answer you on the CapEx question. So if you look at what we have guided, I think first half, we are actually looking at trying to convert some of the huge backlog that we have accumulated until the end of the year. So first half, we think that conversion is going to help us secure revenue. We do expect that in the first half, especially in the leading edge, logic and foundry, that revenue is going to continue to be healthy. We also expect that the momentum that we have seen in the power/analog and wafer, especially those that are related to automotive and industrial, that's also going to be healthy. Memory, of course, is going to be weak and compared to, let's say the second half, which in our opinion is still a little bit too early to really make a judgment call, I think we have looked at the second half, as I would say, somewhat going to be lower than the first half. But it's going to be dependent on, I would say, a couple of factors. One, of course, is are we going to see the macroeconomic situation improve so much so that demand goes up? We also need to see, for example, recovery in, let's say, some of the segments that are currently impacted by inventory, corrections or just adjustments.

So I think it's a little bit early to go into a second half to really give a better picture. But what we can say is that first half, because we are also announcing this time very late, we have a good view towards Q1 and Q2.

Paul Verhagen

Yes, I'll take the second part. Didier. Thank you. On the CapEx, for this year, we increased the CapEx to EUR 150 million to EUR 200 million. This is more for beyond 2025. So we have communicated earlier that with the current completion of our second manufacturing floor in Singapore, we believe we have sufficient capacity in place, up to ‘25, to deliver on our midterm targets. So there we are confident that still is possible. So with the announced CapEx plans that you have heard today, you should think of beyond 2025. And we are planning in our Investor Day, which we hold in September of this year, to give more color on what this precisely means. But for now, we thought it's appropriate to at least give an indication that this year CapEx is higher, because we're starting with the next level of expansion.

Didier Scemama

Very well. Thank you. And maybe my follow up is on gross margin. So if you could explain the dynamics impacting the mix in Q4. Was it just a function of the Chinese orders or Chinese business removed from the P&L? In which case is that the new level for the business or are there any other factors that we should be thinking about for ‘23? Thank you.

Paul Verhagen

Thanks for the question. Gross margin indeed, as actually every quarter short term is mostly determined by mix. In Q4, actually, we returned to, let's say, what I would call an average mix. It also included some China sales partially related to deep bookings that were done in Q3. As I already mentioned earlier, the biggest chunk of that we expect to actually see back in revenue in Q1 and Q2 next year. But I know also in Q4 we had some of that, plus we had also China sales related to, let's say, the combined power wave analog market, which was continued to be healthy. So there's nothing really special in the Q4 margin other than sometimes it makes it slightly better and sometimes it's slightly that's a favorable. So I would say it's a very average, maybe slightly below average quarter. But nothing really to call out. So I wouldn't say that this is the beginning of a new trend. We've seen this level of margin as close to 47%, actually almost throughout the whole year. I think Q3 was a little bit higher. So nothing really special to call out here at Didier.

Operator

The next question is from Adithya Metuku with Credit Suisse.

Adithya Metuku

Yes. Good afternoon, gents. So firstly just maybe just focusing on the second half, you talked about logic foundry remaining strong in the first half, momentum in power/analog and wafer remaining healthy and memory will be weak. Now when I look out to the second half, I can't see why leading Edge Logic and Boundary guys, if they're taking your machines with three to six month lead times now, why they won't take them at least at a similar level in the second half. And the same for the power/analog and wafer guys, where the structural trends are very strong. And memory, if anything, it will improve. It's unlikely to get worse from the levels you're seeing in the first half. So I'm struggling to reconcile why you think second half revenues would be lower than the first half revenue. So any color you can give on that on a market by market basis would be really helpful to help us understand your thinking. And would it be fair to then say that if it is too early to comment, then you've taken a conservative approach to what you expect for the second half? Would that be a fair assumption? That's my first question, and I've got a follow up.

Benjamin Loh

Okay, sure. Adi, thanks. I think your question makes a lot of sense. I think as we shared earlier, we do expect that logic foundry, especially at the leading edge, that's going to continue to be strong and, in the power,/analog, wafer space or segment other than those that are consumer related, we also expect that that's going to be healthy. The thing that we have done so far in maybe guiding that the second half will be slightly lower than the first half is based on what we can see today, it is still quite volatile as far as the market is concerned. I mean those are our projections and we think that highly likely they will play out that way. To give you an example, whether memory will or will not recover, I think in the second half is still left to be seen. I think there are various, to give you an example, whether memory will or will not recover, I think in the second half is still left to be seen. I think there are various forecasts and we are also hearing various types of, I would say forecast from our customers. So I think that is a little bit more uncertain. Even though it's a smaller part of our business, it is not insignificant as we have shared this time. It is about 19% of our revenue and we do hope that it recovers because if it recovers, I think we are going to be in a good position to even have more, let's say, wins because we have been focusing very much on the technology. That is the reason why, you could maybe say that we are a little bit conservative.

Adithya Metuku

Understood. And then secondly, just on the CapEx budget, when you, previously when you've talked about raising capacity in Singapore, you well, especially predecessor gave some color on how much additional revenue it could enable. I just wondered if you might be able to say something similar on the capacity of deploying in Korea and if you're unable to comment specifically on how much additional revenue this facility will be able to enable, maybe you can talk a bit about the additional square footage allot to your manufacturing footprint. Thank you.

Paul Verhagen

Yes, that's a fair question. Thank you for that. Actually, the plan is because this is beyond the ‘25 and we want to come a bit more comprehensive update to actually do this in September. Adi, with the Investor Day. For now, we stick to our 2025 guidance and I don't want to start already guiding beyond that at this stage. So in September we will give a more comprehensive update on all these questions that you have on CapEx and additional capacity and revenue contribution related to that capacity. By the way, a big chunk of that is also R&D. Again, because we see a lot of opportunities in R&D. There's a lot going on. So also note that the material part will be for R&D this time as well.

Operator

The next question is from Marc Hesselink with ING.

Marc Hesselink

Yes, thank you. Actually, my question is on what you mentioned on gate-all-around reading their first applications. And could you say something about what you're seeing so far on the increase ALD intensity? You also said it's a meaningful increase. Is this clearly more meaningful, like, really a step change in the ALD intensity and maybe also the Epitaxy intensity? Thank you.

Benjamin Loh

Marc, Thanks. So we are actively engaged with all three customers in the development of the gate-all-around technology. What's really interesting is, I think when you look at the technology that is being developed, that will be what you call the first generation gate-all-around technology. And because of the push in terms of technology advancement, we see that customers are also starting to look at what is going to be the second generation. So what we can tell you in terms of ALD intensity, whether you call it a step change, of course, depends on what is the number that you attribute to, but we do see a very significant double digit percentage increase as far as ALD layers are concerned. And this will continue into the second generation again, all around. Epitaxy as well. We do see more usage of Epitaxy and I think we did give some guidance during our Investor Day in 2021 that at least for the first generation of gate-all-around, we see the serve available market expanding by or increasing by at least US $1.2 billion for us. So we are all very excited, working hard on trying to secure as many wins as possible.

Marc Hesselink

And then second question is actually on LTE, the increase in the revenue guidance there. So what's happening there? Is certainly the demand stronger than you initially expected? Are you quicker integrating the businesses so that you can generate the higher quality product like with the synergies on the product level or what kind of things are behind it?

Benjamin Loh

Sure, I think LPE has always been a company that had very good technology when it comes to a silicon-carbide epitaxy. And of course we are now the transaction closed October 3. We are now still in the midst of doing the integration and I think what we are seeing today is there is very significant, let's say demand coming in for investments into silicon carbide over the next couple of years actually much larger than what we had projected as a 25% CAGR. If you look at what some of the major players have announced it's probably going to be a higher number. So we have, I think as part of the integration brought some value to LPE in the following ways. I think one with platform and process technologies we have been able to help them improve to some extent the product. Secondly, LPE by themselves were a small family owned company but now they have a larger, let's say, company so we have better supply chain presence in that sense. And last but not least, and I think this is where customers are getting a lot of comfort is that they see now LPE as part of a larger company with a global footprint and this has enabled us to engage and be in discussions.

And in fact, in some development with, I would say, all the major players in silicon carbide worldwide. So we are actually very enthusiastic about the prospects, and based on what we see, it was necessary for us to increase the guidance because we felt that the guidance of EUR 100 million was a little bit on the low side. We wanted to take this opportunity to increase the guidance to EUR 130 million.

Operator

The next question is from Stéphane Houri with Oddo.

Stéphane Houri

Yes, good afternoon, everyone. My question is around LPE and silicon carbide, again. I just wanted to understand what kind of differentiating factor are you bringing to the table? Because when we listen to some of your competitors, like Extron, for instance, where they are talking about multiple wafer technologies and seems to gain a lot of market shares, it seems that you are also gaining market share. So are you addressing different markets or customers? If you can give some color on, that would be helpful. Thank you.

Benjamin Loh

Stephane, thanks a lot. So maybe just a quick explanation of what's a little bit of what is happening in the silicon carbide market today. The market is actually in high volume manufacturing for six inch, 115 millimeter products. But over the next two to three years, the market is going to transition to 200 millimeter or eight inch products. LPE's products are involved in both. So they already have a very good presence as far as being used for six inch manufacturing or high volume manufacturing. And what is really going to drive further growth is going to be the transition from six to eight inch.

I don't think we should go into comparisons with some of our peers, but what we do know is that a lot of the customers that we have talked to are very keen and very, let's say, attracted by the performance of the LPE tools and their reactors. And we are in a lot of engagements at this moment, a lot of discussions, and we are actually confident that we will get our fair share of the market going forward.

Stéphane Houri

All right, and back on the comments that you made on the second half, let's say slightly below or somewhere below level in H2 versus H1. It probably means that you see orders coming down in the first half. So can you help us understand at what level they would fall, according to you.

Benjamin Loh

Stephane, in terms of orders, actually, orders still pretty healthy. So we base our second half kind of guidance not because we see a dramatic drop in orders. No, it's just as I said, again, the second half has less, still has less visibility at this moment, our assumptions or our projections and also based on what we work with our customers is we do expect leading edge advanced logic foundry that will continue to be healthy. Power/analog and wafers except those that are impacted by consumer type of products that will continue to be healthy. In fact, the automotive and industrial sector or that part of the market will be very robust. Again, memory is a wild card. We cannot tell. And at this moment, it could go up, it could recover, it could not recover. I think it's a little bit too early. And probably we will have more visibility as we go on into another one or two quarters.

Operator

The next question is from Tammy Qiu with Berenberg Bank.

Tammy Qiu

Hi, thanks for taking my call. So my first question is recently one of the large US semi companies have released a new tool which is aiming to eliminate EUV's double patterning processes. On the back of the launch, do you see your ALD double patterning plan being impacted negatively over the next few years?

Benjamin Loh

Tammy, I would also like to know. I think the news just came out very recently so we will need some time to look into that. But I think by and large we are not so concerned and the reason for that is I think EUV patterning or double patterning will continue to be around for quite some time.

And if you really look at a potential kind of replacement or substitute or complementary this is probably still quite a number of years out.

Tammy Qiu

Okay. Thank you. So I just had one more follow up. And my question is in terms of next generation two nanometer and from your large customer perspective, when do you think the ordering of the tools will start to happen and do you have early visibility of your market share two nanometer versus three nanometer?

Benjamin Loh

Maybe I'll answer the second part of your question first. I think in terms of market share, we are actually confident that we will continue to maintain our leading share just based on the engagements that we have. Of course, some of the applications are still in the final stages, not really fully decided which ones goes into process tool of record, so there's still some question mark there. But I think just based on engagements, based on what we are hearing from customers, we are very confident about our ability to keep our market share. Timing there is a little bit of a difference, let's say between the three players, but you could see potentially what we call parallel line kind of investments, maybe end ‘23 early ‘24. And you will probably see high volume manufacturing type of investments happening sometime in the ’24, early ‘25 timeframe.

Operator

The next question is from Nigel Putten with Morgan Stanley.

Nigel Putten

Hi, good afternoon. My question is just a clarification on the backlog. I think in your prepared remarks you indicated that it gives you some more visibility into the first half. So my question would be how do you see the backlog evolving towards sort of the middle of the year? Do you see it normalizing or should we expect to sustain at these levels? That's my first question.

Benjamin Loh

Nigel, thanks a lot. I think in terms of the backlog, we ended the year with a significant backlog. I think by the end of, let's say the first half, the backlog will still be higher than what is normal for us because we are not able to convert as much as we like to. As I said, we still have some constraints in the supply chain. It's not like the supply chain has fully normalized compared to maybe 9 to 12 months ago. I would say it has improved a lot, but we are not out of the woods yet.

Nigel Putten

Got it. Let me just clarify then on that. So that seems that maybe order intake is at a lower level and you're reading some of the backlog into revenue and that will be less so the case in the second half as you see it today, is that correct?

Benjamin Loh

Yes. I think in terms of orders, we will continue to see relatively, I would say healthy or resilient orders. The issue here for us is the visibility into the second half. And that is why I think we are giving a more guidance that we think that second half might be slightly lower than the first half.

I think, again, as we go into another one or two more quarters, when we have more visibility, we would be able to share more as far as how we see the second half.

Nigel Putten

Got it. Then a question on OpEx. So if I annualize the fourth quarter SG&A, I'm up 9%, and that's 30% for R&D. Now, historically, that's been sort of a good way, roughly to model this. Maybe in this inflationary environment, it's actually a little bit too low. Would it make sense that the average of this year will not be lower than the fourth quarter of ‘22?

Paul Verhagen

Yes, maybe to give some guidance there. So let's first go to SG&A. So we mentioned last quarter that we don't expect SG&A to go up a low time marginal increase. Now, if you correct the Q4 SG&A for the LPE consolidation and for PPE expense or amortization, and it's actually slightly lower even than Q3, but based on what you're seeing, Q4, I think you could assume more or less, let's say continued run rate based at the Q4 level, with some ups and downs from quarter-to-quarter, depending on certain calls come in. It's never fully linear aligned, but more or less Q4 run rate I would say. Then for R&D, you saw a big step up, which we also announced from Q3 to Q4, if you pull the [inaudible] and adjust it for, again, LPE. Ad for the PPA expense, the normal regular R&D LPE expenses and the PPA expenses, then the increase quarter-on-quarter is around EUR 10 million. So it's a big step up. And for ‘23, I think, also there, I would expect, let's say similar to what I just said for SG&A, a kind of Q4 run rate with some ups and downs from quarter to quarter. That's the best guide guidance I have at this moment in time.

Operator

The next question is from Amit Harchandani with Citi.

Amit Harchandani

Thank you. Hello, everyone. Amit Harchandani from Citi. Two questions, if I may. My first question goes back to the topic of adoption of ALD and the competitive dynamics in that space. For example, for silicon carbide, you already talked about the CAGR looking conservative. Could you give us a sense for your conversations in ALD today? Is the level of adoption discussions your positioning, or even broader market pointing to a direction which is higher than you previously thought? Higher than you previously thought. I appreciate the CMD coming up, but if you could give us a sense for how the ALD adoption blends in your competitive positioning is trending along, please.

And secondly, if I may just clarification around orders, just so that I understood that correctly, have you seen any pushouts or delays in shipments? So in other, the orders have been placed, but the shipment is being delayed, which means that there's a bit of a normalization as we go through the year. Thank you.

Benjamin Loh

Amit. Thank you very much. On the first question, it's a very interesting one. So when you look at what we have guided during our 2021 Investor Day in September, of course, we had a certain projection and we were expecting what you call the adoption of ALD or ALD intensity to reach a certain level. I think we were looking at a growth of maybe 16% to 21% starting from 2022 to 2025. I think we are still in that space where we need to do further work just based on the get all aligned engagements that we have. And we also need to look at, for example, what kind of data third party research companies are going to publish in April. I think with that, we will be able to have a better view. Is the adoption or is the ALD intensity higher than what we had projected or is it lower? I think we need a little bit more time, and hopefully by the time we get to our Capital Markets Day, we have more visibility and we'll be able to share this in more detail with everybody, including what happens on the first generation, what happens on the second generation. I think we will have more details on that.

Orders push out. Absolutely. In this market, of course, we have had some orders that were pushed out. But I also want to maybe stress that when you look at the EUR 1.7 billion backlog that we have, basically what is counted inside there are all orders that have to be delivered over the next 12 months. So we have a very, I would say, solid backlog that we intend to execute as much as possible, as much as supply chain constraints permit, and that's where we are. But we do see some push outs and I would say primarily coming from the memory segment.

Operator

The next question is from Timm Schulze-Melander with Redburn.

Timm Melander

Yes. Hi everyone. Thank you for taking my questions. First question maybe for Benjamin. Could you just, I know you disclosed it in the annual report, which is coming out later, but could you talk a little bit about the eval tool activity in Q3, 4 for the year and just kind of how active that is coming into 2023 and then have a follow up. Thank you.

Benjamin Loh

Sure, Timm. Thanks a lot. I think when you look at eval tools, so we are actually in the process. First of all, we have a lot of eval tools that were out in the market when we had to do three nanometer kind of logic foundry. We also had quite some of it that was out with our customers when we did the current high volume manufacturing nodes for DRAM and for three 3D NAND. Some of these have turned and they become revenue and they get taken off from our balance sheet line item of eval tools assets. What we are doing now or what we are going through now is most of the eval tools that are out with our customers. This is for gate-all-around and for the next generation memory. And we do expect that as we go through the year 2023, this is going to probably increase because we may have to put eval tools for the second generation gate-all-around as well. So it's a consistent model that we have been working on. We work with the customers to develop the process that they need and when they qualify us, that's when we go into high volume manufacturing. It's just that the intensity now because of the technology being more difficult is actually increasing.

Timm Melander

Okay, that's super helpful. And then a follow up question for Paul, please. It's very helpful getting your steer on some of the OpEx lines and your comments around how you might dip out of the margin channel that you've set yourself temporarily. Can you just maybe talk a little bit about the outlook for your services activity, particularly with parts of the market softening and is that a contributing factor here or is that not really a material impact vis-a-vis the margin guidance that you've or the margin comments you've given?

Paul Verhagen

No, thanks for the question, Timm. Actually, our service business is doing well I would say. We saw a good growth over the year, but in particular also, which is very positive supported. But if you call outcome based services, which we started late, I think 2020 or so, we've seen an annual year-on-year continued growth there, very healthy growth, I would say, which is a win-win for our customers and ourselves because we lock in customers for multiple years. But on the other hand, it's also a benefit to our customers because they get a better value proposition. So good for them, good for us. Also for ‘23, we expect the services, what we see now still to be good and healthy. And in terms of margin, very much in line with the group margin. Again, small differences from quarter-to-quarter, obviously, but if you look over the whole year, very much in line with the group margin and we expect that to continue also in ‘23.

Operator

The next question is a follow up from Stéphane Houri with Oddo.

Stéphane Houri

Yes, hello, actually the photo was also an LPE, just to understand the strategy, which is for the moment primarily based on silicon carbide. But it was just to know if you also have a vision for GaN, which is also a fast growing market and could be maybe as big as the silicon carbide market at some point.

Benjamin Loh

Stephane, sure. At this moment we are not looking into GaN, because it requires a different type of equipment that is not in our product portfolio. It is, as you've correctly mentioned, a very interesting fast growing market. But at this moment we do not have any plans to go into the GaN, market.

Operator

The next question is from Michael Roeg with Degroof Petercam.

Michael Roeg

Yes. Good afternoon. I have a question on your CapEx guidance, including the investment in Korea. There's a lot of subsidies available in Korea and also in the United States. I was wondering if you are able to get any of them for your investment programs.

Benjamin Loh

Paul, should I take that?

Paul Verhagen

You can take yourself. Please go ahead. You were in Korea just very recent, so maybe you think it –

Benjamin Loh

Yes, so I think, of course, Michael, you are correct. I think almost every country is now throwing subsidies to try to get guys like us or chip manufacturers, our customers, to invest, I think, in Korea. And this is actually the reason why we decided to sign a memorandum of understanding with the Ministry of Trade and Industry. We are working on that. But our investment in Korea builds on what we already have there. So it’s not, we're going to Korea just because of incentives or subsidies. We already have a very sizable R&D presence and a small manufacturing presence already in Korea, and we want to build on that and expand on that.

Michael Roeg

Yes, I understand the rationale for expanding your existing site, but still, $100 million is a lot of money, and there should be something from them as well.

Paul Verhagen

May be to add, Michael, is that we already today we have credits, tax credits, which we are with the current presence and our current level of operating operations in Korea are not consuming. So the new site will help us to further consume what we already have, which is a positive. And to get something on top of that is difficult, to be honest, because it's not really an incentive for the government to do so. Obviously, we ask, we knock on the door, we do whatever we can. But the most important reason is what Benjamin just said is we have a presence there. We want to build on that presence for a number of good reasons, intrinsic reasons, which are the most important for investment decisions. Obviously, subsidies help, but should never be a reason to invest. And as I said, we already have tax credits in place that we can further utilize when we have new facilities ready.

Michael Roeg

Okay, that's quite clear. Thank you. And then a follow up on the CapEx. Will the 2023 level be a onetime boost for future growth? And will it then return in 2024 to say, $70 million - $80 million? Or will we get additional investments in ‘24 for the period beyond 2025?

Paul Verhagen

Yes, that's also a good question. I don't want to really comment on it because I think it's too early to comment on it. Also because there are a few things that we are still, let's say, on our design table and some decisions have not yet been taken. So as I said, we want to come with a more comprehensive update during Investor Day and also for ourselves more things are clear, but at least for this year, we expect it to be above our initial guidance of $60 million to $100 million and again, that's for capacity. And in particular also R&D this time because we're literally outgrowing all our R&D facilities where we are. So that's a big part of it. But it's also for capacity beyond ‘25. So please give us a few more months and we'll give you a comprehensive update on our plans.

Michael Roeg

Perfect. See you in September.

Paul Verhagen

Yes, absolutely.

Benjamin Loh

Thank you, Michael.

Victor Bareño

We still have a few follow up questions in the queue, but I'm afraid we are running out of time.

Judith, can we answer the last question, please?

Operator

The last question is from Didier Scemama with Bank of America.

Didier Scemama

Yes, sorry, obviously talking to myself, as always. No, thanks so much for squeezing me in, on question on LPE, maybe could you give us a sense on pro forma calendar ‘22 revenues of about $100 million, the split between wafer manufacturers and IDN and maybe a geographical split as well. If you could tell us what the US versus Europe versus APAC and China, helpful for us to understand the dynamic there.

Benjamin Loh

So I don't think we have that detailed kind of numbers. But what I can tell you is that when you look at the high volume manufacturing, that is at 150 millimeter, large part of that is, for example, with customers in China. But as we go out into 200 millimeter kind of investments over the next two or three years, you will see that a lot is the reverse. A lot of it is going to be outside of China, highly focused on a couple of countries in for example, Europe and also in the US. That's where I think a lot of the 200 millimeter kind of investment is happening and we are right in the thick of action at this moment.

Operator

Gentlemen, there are no more questions registered at this time. I turn the conference back to Mr. Loh for any closing remarks.

Benjamin Loh

Thank you, Judith. On behalf of Paul and Victor, I want to thank everybody for your attendance today. We look forward to seeing many of you in our upcoming Investor roadshows. And thank you again. Stay safe and good bye.

Operator

Ladies and gentlemen, thank you for joining. The conference is now over. And you may disconnect your telephones.