Management’s discussion and analysis of financial condition and results of operations
We are an equipment supplier mainly to the semiconductor manufacturing industry. We design, manufacture and sell equipment and services to our customers for the production of semiconductor devices, or integrated circuits. The semiconductor capital equipment market is composed of three major market segments: wafer processing equipment, assembly and packaging equipment, and test equipment. ASMI through its Front-end business is active in the wafer processing segment. In addition, we have a 39.75% investment in ASM Pacific Technology, which is a leading supplier of assembly and packaging equipment to the semiconductor, LED and electronics markets.
ASMI sells its products to the semiconductor manufacturing industry and, through its 40% stake in ASMPT, to the assembly industry, which is subject to sudden, extreme, cyclical variations in product supply and demand. We conduct our Front-end business through wholly-owned subsidiaries, the most significant being ASM Front-end Manufacturing Singapore Pte Ltd ('FEMS'), located in Singapore, ASM Europe BV ('ASM Europe'), located in the Netherlands, ASM America, Inc ('ASM America'), located in the United States, ASM Japan KK ('ASM Japan'), located in Japan, and ASM Genitech Korea Ltd ('ASM Genitech') located in South Korea. The location of our facilities allows us to interact closely with customers in the world’s major geographical market segments: Europe, North America, and Asia.
Our wafer processing business supplies equipment to the leading semiconductor manufacturers in the logic, foundry and memory markets, primarily for the deposition of thin films. The logic market is made up of manufacturers who create chips that are used to process data, the foundry market consists of businesses that operate semiconductor fabrication plants to manufacture the designs of other semiconductor companies, and the memory market covers manufacturers who make chips that store information either temporarily or permanently, such as Random Access Memory ('RAM'). We also supply equipment to leading manufacturers of analog semiconductor devices.
The principal markets that we address in wafer processing are selected segments of the deposition equipment market. The total deposition equipment market is estimated to be US$7.8 billion in 2014 (VLSI Research, January 2015). Within this market we focus on the following segments: vertical furnaces, epitaxy, PECVD and ALD. ALD is an advanced technology that deposits atomic layers one at a time on wafers. This process is used to create ultra-thin films of exceptional quality and flatness. Plasma is sometimes used to enhance the process further (plasma enhanced ALD, or PEALD) and may enable the deposition at reduced process temperature.
A key driver in the semiconductor industry is the continuous demand for smaller, faster and cheaper semiconductor components. Through technology advances in the manufacturing process, semiconductor manufacturers are continuously scaling chips to smaller dimensions. This enables more transistors to fit in the same physical space, thereby reducing the costs and increasing the speed and the performance of a device. Another trend is that towards vertical or 3D transistors. This trend also helps to keep the industry on track with Moore’s Law (processor speeds, or overall processing power for computers will double every two years).
The manufacture of ever smaller and more complex devices requires more advanced and precise deposit techniques. ALD and PEALD offer the precision needed to deposition ultra-thin and highly conformal films, even on challenging 3D surfaces. Our portfolio of atomic layer deposition ('ALD') products is an enabling technology for our customers, helping them to manufacture semiconductor devices at smaller line widths with new materials and 3D architectures. Our technologies support our customers in their roadmap towards chips with a higher performance and reduced energy consumption, which in turn enables the introduction of new and more advanced products ranging from high-end servers to smartphones, wearable devices and automotive electronics.
Our investment in ASM Pacific Technology represents the Back-end business. The Back-end operations are conducted through facilities in Hong Kong, the People's Republic of China, Singapore, Malaysia and Germany. On March 15, 2013 we reduced our shareholding in ASMPT from 52% to 40%. The sale of the 12% stake in ASMPT caused and required the deconsolidation of ASMPT. Since that date our share of the net result of ASMPT is reported on the line result from investments.
Our strategic objective is to realize profitable, sustainable growth by capitalizing on our innovative strength, operational excellence and our leadership in ALD and other business segments we are active in. The key elements of our strategy include:
ASM has always been recognized for its technology leadership. Today, we provide leading technologies that support our customers in staying on the curve of Moore’s Law. Our innovative strength is what differentiates us in the marketplace and continues to be the cornerstone of our strategy. Apart from our internal R&D efforts, we are continuously expanding and deepening our strategic cooperation with key customers, suppliers, chemicals manufacturers, and research institutes such as imec. We also expand our patent portfolio where it is necessary and beneficial.
Leadership in ALD
ALD and PEALD technologies have been established as mainstream technologies in high-volume manufacturing supporting virtually all of the leading customers in the semiconductor industry. As a leader in this space, ALD and PEALD have turned into a key growth driver for our business. We expect that the trends of continued scaling and evolution towards 3D device structures will further expand the number of applications for ALD. We aim to maintain our leading position in ALD, by leveraging on our strong expertise and established customer relationships, and by developing new applications to support our customers with increasingly complex device node transitions.
While technology leadership remains crucial, we continue to focus on further improving the effectiveness of our organization and the efficiency of processes. We aim to provide our customers with dependable leading-edge products and services at a consistent quality and the best cost of ownership. To this end, we continue to optimize our manufacturing and global sourcing processes, including the migration to common product platforms.
Following a drop in 2013, global spending on wafer fab equipment strongly rebounded in 2014. Gartner estimated that the semiconductor equipment market grew by 17% in 2014. While spending in the foundry and logic segments remained at healthy levels, the memory segment accounted for the largest part of the increase in the overall equipment market. Leading-edge equipment continued to represent the largest part of global equipment spending in 2014.
We increased our revenue by 21% to a record high level for our Front-end operations. After a strong out-performance in 2013 our revenue grew again faster than the broader equipment market in 2014. Growth in our sales in 2014 was mainly driven by increased tool volumes in our combined ALD and PEALD business.
ALD has become a mainstream technology for high-k metal gate applications. Some of our customers have already ramped as many as four technology generations using our ALD equipment. In the more recent years, we have successfully penetrated additional customers. Our PEALD business posted strong growth on the back of the increase in spending on leading-edge equipment. With this technology we have a strong position in spacer-defined double patterning, which is used extensively in the memory market. Importantly, we have successfully increased our penetration in the memory market in recent years. Some of these new customers started to deploy our PEALD technology for the first time in substantial volumes in 2014. We also benefited from new PEALD applications in the logic and foundry segments, which started to contribute to revenue in 2014. Following several years of steady growth in customer deployment and the development of new applications, ALD has turned into a key growth driver for our company. Our ALD and PEALD product lines accounted for more than half of total equipment revenue in 2014.
Building on the strong momentum in the second half of 2013, revenue increased to new record highs in the first half of 2014 for our Front-end business. While still higher year-over-year revenue in the second half decreased sequentially, as some of our customers were absorbing the investments that they had made in earlier quarters. Nevertheless, underlying demand remained healthy, particularly in the memory segment, as reflected by bookings that were even higher in the second half compared to the already strong levels achieved in the first half of the year. For the year in total our new bookings increased by 26% in 2014. We finished the year with an order backlog of €176 million, a 53% increase compared to the end of 2013.
Gross margin increased by 400 basis points in 2014. This follows on a strong increase of 500 basis points in 2013. The improvement in 2013 was driven by the increase in sales and continued high levels of utilization. Next to the solid development in revenue, the improvement in 2014 also reflected execution of our gross margin improvement measures. In 2013, we started a number of programs to further increase the efficiency and flexibility of our manufacturing operations and supply chain, from which we saw the benefits in 2014. Measures included new outsourcing initiatives, a stronger focus on the sourcing of complete sub-assemblies and the migration of a larger part of our supply base to Asia. On a quarterly basis, differences in gross margins were mainly impacted by changes in the sales mix.
Selling, general and administrative expenses as a percentage of sales dropped from15.3% in 2013 to 14.7% in 2014. Research and development expenses excluding impairment charges on capitalized development costs remained 11% of sales. Operating profit more than doubled from €44.9 million in 2013 to €93.4 million in 2014.
Results from investments contributed €38.6 million, primarily reflecting our 40% shareholding in ASMPT. Excluding a net book profit of €1 billion in 2013 on the sale of 12% of the ASMPT shares and the effects of purchase price allocation, results from investment increased from €23.7 million for the prior year to €61.2 million for 2014. ASMPT showed a strong recovery in results in 2014, with revenue increasing by 31%. Next to an overall recovery in market conditions, ASMPT benefited from new products addressing the advanced packaging segment, share gains in the SMT equipment market and the acquisition of DEK. On the back of the rise in revenue and improving margins, ASMPT increased net profits which includes a provision for a tax settlement of ASMPT in Hong Kong for the period 2001-2010 with an impact of €9 million almost threefold during the year.