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LETTER TO SHAREHOLDERS

2016 was a mixed year in terms of our company’s performance. Despite strong gains in the logic and foundry segment, weaker demand from memory customers led to a double digit drop in the single wafer ALD market. This caused our revenue to decrease by 11% in 2016. Against that backdrop we were able to keep gross margins stable. We announced another share buyback program next to a stabilization in the proposed dividend. During 2016 we also further expanded R&D engagements with key customers, which positions ASMI well for healthy growth in the coming years.

INCREASED REVENUE IN THE LOGIC/FOUNDRY SEGMENT

During the year we substantially increased our revenue in the logic/foundry segment as these customers started investments in the 10nm technology node. Single wafer ALD is an enabling technology for logic and foundry customers to make this transition. Next to our existing high-k metal gate applications, the precision and film conformality of ALD is required for several new critical process steps to build these advanced devices. In addition, ALD demand for multiple patterning – an area where we already built a position in the memory market – is also increasingly needed in logic/foundry at the 10nm node. Compared to the previous 14nm/16nm node the number of single wafer ALD layers has increased significantly.

In the memory market, the single wafer ALD market saw declines in both the DRAM and the NAND flash segment. In 2015, memory, and DRAM in particular, was still a very important driver for growth in the ALD market. In 2016, overall spending dropped substantially in the DRAM segment. In the course of the year it became clear that investments in new ALD tools for the transition to the 1x node had been pushed out, resulting in a weaker development of the single wafer ALD market than initially expected.
Our ALD equipment has already enabled the ramp of several generations of DRAM devices. We believe ASMI remains well positioned to support key customers in their transition to the next nodes.

As far as the NAND flash segment is concerned, 2016 was, as expected, a transition year for the ALD market. The mix of spending shifted almost completely from planar NAND to 3D NAND in the course of the year. In planar NAND we had a strong position with ALD for multiple patterning, which is, however, not an important requirement in 3D NAND. This meant that ALD demand for this application, which was still a healthy driver for our business in 2015, largely disappeared in 2016. At the same time, the need for new, non-patterning, single wafer ALD applications has so far been limited in this phase of the 3D NAND transition. As customers transition to more complex ‘higher stack’ devices we believe that single wafer ALD demand is increasing step by step. In the course of 2016 we booked our first orders for high volume manufacturing from a number of 3D NAND customers. As these customers ramp production we expect a growing contribution from 3D NAND, starting in 2017.

ALD MARKET BELIEVED TO RECOVER IN 2017

The weaker development of the ALD market in 2016 follows on three consecutive years in which we grew revenue by more than 20% annually, as ALD moved into the mainstream of leading-edge semiconductor manufacturing. We believe the structural prospects for the single wafer ALD market in the coming years remain solid and we believe growth to resume again in 2017.

The broader wafer fab equipment market had a solid year with an estimated 10% year-over-year increase. For the market as a whole increases in logic/foundry and particularly 3D NAND offset declines in DRAM and planar NAND. The difference with the weaker development in the ALD market is explained by 3D NAND spending, which strongly boosted wafer fab equipment spending but was not yet a strong driver for the single wafer ALD market.

Despite the weaker revenue development we strengthened our company’s positioning in a number of strategic areas in 2016.
We substantially expanded our presence in the foundry segment where we grew our revenue significantly from 2015 to 2016. In 3D NAND, we booked orders for high volume manufacturing for multiple new applications with a number of customers. We continue our strong focus to broaden our participation in the 3D NAND market. We expect these efforts to become more visible in our results in 2017.

Our other product lines, epitaxy, vertical furnace and PECVD, continued to have a decent contribution to the bottom line.
In the past year, we have increased our R&D efforts in selected parts of these activities, which we expect will create growth opportunities in the coming year.

CONTINUED INVESTMENT IN STRATEGIC FOCUS AREAS

As far as our operational performance is concerned, in 2016 we continued to invest in strategic focus areas which are contributing to the structural maturity of the company. In 2016 we executed well on key operational improvement projects, including the development and implementation of leading-edge enterprise systems to further support more effective and efficient product development and product delivery. Our overall progress in operational excellence is also recognized by our customers and positions us well to continue to compete effectively in the future.

One of the highlights during the year was Intel’s prestigious Preferred Quality Supplier (PQS) award which we were awarded, for the first time, in March of 2016. And in February 2017, we received as one of five equipment suppliers a Supplier Excellence award from TSMC for the innovation, performance and support of ASMI’s ALD equipment and technology during 2016.

FINANCIAL PERFORMANCE

The drop in the ALD market in 2016 caused our revenue to fall by 11%. We were able to keep gross margins stable at 44%, thanks to the measures taken in the last several years to increase the efficiency and flexibility of manufacturing and supply chain operations. The continued strong balance sheet and positive cash flow generation allowed our company to return again more cash to its shareholders. In October 2016, we announced a new share buyback program, the third consecutive program in the last three years. With the publication of our fourth quarter results we announced an increase in this program from €50 to €100 million. We will propose to the Annual General Meeting of Shareholders 2017 an ordinary dividend of €0.70 per share, which is stable compared to the dividend paid in 2016.

ARTHUR DEL PRADO

Sadly, 2016 was also the year that our company lost its founder and former CEO, Arthur del Prado, who passed away last September. I would like to thank our shareholders and other stakeholders for the many messages of support we received.
Arthur’s strategic vision and steadfast focus on the long-term laid the foundation not only for the growth of ASMI, but of the entire European semiconductor equipment manufacturing sector. The best way we can remember Arthur is to continue the great work that he started.

CORPORATE RESPONSIBILITY

This year marks the third year that we are releasing a Corporate responsibility (CR) report with this Annual report. Corporate responsibility continues to strengthen across ASMI and our value chain, and it’s recognized by our stakeholders. Our Transparency Benchmark Evaluation score (per the Dutch Ministry of Economic Affairs), which measures transparency in corporate social reporting, more than doubled from the previous year. With respect to water conservation we commenced with the construction of a water reuse plant at our Phoenix facility. This is a big step and will contribute to our sustainability. These are only a few examples of how we continue to strengthen and grow Corporate responsibility at ASMI.

ASMPT

In 2016, our 39% shareholding in ASMPT contributed solidly to our net earnings. Normalized result from investments, which includes the contribution from ASMPT, increased strongly by 52% to €68 million. ASMPT’s revenue rebounded by 10% in 2016. Apart from a recovery in the overall Back-end market, ASMPT’s growth was supported by strong developments in specific market segments such as equipment for CMOS image sensors and LED.

We believe the financial results reflect the success of a number of important strategic steps taken over the last few years. Importantly, the company entered new markets which enlarged its addressable market while offering potential for synergies with the existing activities. In Advanced Packaging ASMPT has built a solid and extensive product portfolio. In addition, profitability of both the semiconductor Back-end and SMT activities has markedly improved in the recent years.

OUTLOOK

Our industry has entered 2017 in good shape. Market watchers such as VLSI and Gartner expect again a mid-to-high single digit increase in Wafer Fab Equipment spending, while the increase in semiconductor end market is expected to accelerate from 2% growth in 2016 to 6% in 2017. Longer term, the outlook for our industry also looks favorable.

As our customers transition to the next technology nodes, the continuous improvements in speed, power efficiency and cost of semiconductor devices support massive increases in computing power, connectivity, data processing and storage capacity.
This, in turn, helps our customers’ customers to develop new and potentially disruptive applications such as in the Internet of Things and Artificial Intelligence that will impact our everyday lives and the society at large.

The transition to the next nodes – Moore’s Law – is increasingly enabled by the introduction of new materials and complex chip architectures such as advanced FinFET technology. This plays to the strengths of ALD as more highly precise and conformal film deposition is required to manufacture the leading-edge semiconductor devices. As ALD will be used more and more for the critical process steps in leading-edge semiconductor manufacturing we expect the single wafer ALD market to grow as a percentage of the total deposition market. As a leader in ALD, our company continues to be well positioned.

We believe the single wafer ALD market will show a clear recovery in 2017. In logic/foundry ALD demand is likely to be supported by continued spending on the 10nm node and some early investments in 7nm. In NAND, we foresee a more meaningful contribution as single wafer ALD is used for more layers. In the DRAM segment demand for new ALD tools is believed to improve in the course of 2017, although overall spending is likely to remain relatively moderate compared to the spending levels in 2014/2015.

We would like to thank our employees for their continued dedication and hard work, our customers for their trust, and our shareholders for their continued support. ASMI remains committed to executing on the strategic plans that we believe will further create sustainable value for all our stakeholders.

March 9, 2017

Charles D. (Chuck) del Prado
President and Chief Executive Officer