ASML Holding N.V. (ASML) Earnings Call Transcript & Summary

Great. Well, hi, everyone. I'm Alex Duval, I head up the Europe Tech Hardware team based in London for Goldman. Thank you so much for joining. I'm delighted to be joined by Skip Miller, Head of Investor Relations for ASML. Before we kick off, I'd just like to state the conversation is not intended for the media and is off the record.

And with that said, perhaps you can kick off with a high level of you on the latest trends you're seeing across logic, memory, EUV, what growth do you expect for each of them this year, next year and then we can get into some more specifics.

All right. Thanks, Alex. For this year, first off, we didn't guide on the specific market segments, logic and memory because of currently being supply limit. So we really talk more about our businesses and what we can supply. I think clearly, a logic-dominated year. But when you look at the businesses and you first start with EUV, we talked about growth coming into the year. We said looking at this full year, we expected around 40%. We now expect that to be around 25% year-on-year growth. The change there is that we had some systems this year that we won't ship due to fab readiness as being the primary driver behind that. And so that lowered some of those that will ship obviously next year when the fabs become ready. So that was one. So that's the EUV. On deep UV, we actually adjusted our outlook there for the year of the growth, we talked in April about a growth of 30% year-on-year, and we're now talking about a growth of 50% year-on-year. There's really 2 drivers on that front. One, just more systems and a higher percentage of immersion. We're now seeing over 25% of those machines, over, I should say, over 375 units first off, but of that over 25% of those will be immersion. So that adds some of the revenue, but the other piece of it being around rev rec and what we have changed communicated in July is that we will now, for machines where we do fast shipment, and maybe we can talk about fast shipment later on, on one of the follow-on questions here. But we're on -- we're doing fast shipments for DUV and EUV machines. And on deep UV machines, we reached agreement with our customers that on the reduced set of tests that we actually run our factory that, that will be the new standard. So now we can revenue recognize shipment from our factory. And that basically meant we saw roughly another EUR 700 million of revenue this year that would not -- we originally were planning it to be delayed out of '23 into '24. That will now be revenue recognized in '23. So that was deep UV. So you had a combination of, again, the change in fast shipment revenue recognition, but also more systems. And then the last one was the installed base, which initially in the year, we thought we'd see some growth there around 5%. And this looking at now July, because of kind of the timing of the recovery, we look at it as maybe it will be similar to the revenue that we had last year. So we said flattish relative to 2022 on the installed base. And that's primarily has to do with the upgrade side of it, meaning customers will wait and do upgrades when they start seeing some recovery there. And so when you roll all that up, the higher, obviously, deep UV revenue net. We now say instead of growing 25% year-on-year for the total sales. We now see that moving towards 30%. So that's kind of the summary we are with respect to the different businesses and the outlook we have for this year.

Super helpful, Skip. I think if you look at the recent earnings season, definitely highlighted robust demand for leading-edge chips related to AI generated by AI specifically and NVIDIA talking about guidance that was ahead of expectations. And obviously, in recent days and weeks, other bullish statements from other companies as well. I wondered if you could share with us what you see for '23 and '24 as far as ASML is concerned related to AI. How are you seeing the picture?

Yes. So AI clearly gets a lot of buzz in the media, but also you hear from our customers and our customers' customers about the opportunity that's provided and what they're actually seeing in terms of increasing demand. I think from a respect of AI, clearly, long term, we've talked about that in our -- some of our key secular growth drivers, AI being one of them. It's been on our Investor Day material now for a number of years. And I think from a question you're specifically asking more near term, I think we're kind of in the early innings. So although the growth rates are quite high communicated by some of our customers, you're working still a lower number. So again, it won't become more material as you move further in time. So we see that as a great opportunity. And I think it's also maybe something we'll have to see how the adoption unfolds in terms of the -- not only just in the cloud, but also at the edge and eventually in the end devices.

Super helpful. And do you see it sort of boosting orders, for example, next year, number one? And then, I guess, number two, if you think about 2025, to what degree could that provide a bit of an upside boost there.

Yes. So there's clear opportunity there. But the question becomes when does it actually translate into a meaningful number that we see back in demand? Is it going to be near or longer term? I think we're quite comfortable in the long term, and we'll have to see being in the early stages, how significant it really means in the shorter term. But clearly, again, that's going to be, over time, a great opportunity for growth going forward with this -- just another leg, if you will, on the whole opportunity for growth here.

Makes total sense. Given you gave a sort of lower revenue target for this year on EUV, and I think you referenced that a new introduction, maybe could you update us on what customers are saying in terms of technology road maps and desire to have EUV tools for next year. Clearly, ASML talked about a pushout in demand timing for EUV. So is that a one-off push from '23 into '24? Or could there be some of the orders that actually see a push into 2025?

Yes. Yes. So there are multiple points there. I think, first off, in terms of technology demand, customers continue to push innovation and therefore, technology needs. And you see that even some questions around memory demand and memory orders, and I think you're still seeing the technology buys there. And that same is true in lodging. So that will continue. Innovation will continue and depend on where you are in the cycle. So that's one. . I think the second piece, which is around the more the demand capacity-driven type demand. When you look at that, it's really a combination of inventory levels and how that is going to come down in time. And today, with inventory being higher, looking at, you could say, upstream in the channel, they are moderating wafer output today and do that lower utilization. And so we see lower tool utilization levels. And in time, as that inventory comes down, utilization levels would start coming up and eventually trigger new demand. So that's the dynamic that we're looking at, inventory levels and utilization levels. The specific item for 2023 and a shift of units had to do more with the fab readiness, which I mentioned earlier. And hopefully, as our customers work through bringing the skills level up, it's in some of the trades in terms of how they build out these fabs that, that will in turn address itself or resolve itself over the course of 2024. So I think I covered most of the 3 you asked. I don't know if there's another item on there or not.

I guess you referenced sort of fast shipment recognition and we know that sort of DUV is getting recognized. But there's this EUR 2.3 billion of EUV revenue. So what's the latest there on whether that just goes into '24 and stay there or push on? How should we think about?

Yes. So maybe a backup, just a test for those that aren't fully familiar with this whole fast shipment revenue recognition dynamic. Basically, when we came into the year, we said, okay, we're going to still do fast shipments on some deep UV machines, think immersion machines and EUV machines. And the objective there is to reduce the cycle time so that they -- we can ship more machines out of our factory but also more employing with our customers, they get the machines quicker and they can qualify and get them ramped in production sooner. So that was the origin of fast ships. Now doing fast ships meant that because we reduced the number of tests that are run in the factory that we had to wait to complete the whole 100% of the tests at the customer site. So you had this delayed revenue of roughly a quarter or so. In July -- and so sorry, at the start of this year, we said that due too fast shipments, both deep UV and EUV that we expected to delay roughly EUR 3 billion out of '23 into 2024. And then in July, we said we were able to align with our customers such that they were willing to run the reduced set and sign off after that, which in turn meant that we could revenue recognize on shipment on a fast shipped machine deep UV machine, which has been around EUR 0.7 billion. So instead of EUR 3 billion going out of 2023 into 2024, that's now EUR 2.3 billion. So that was the dynamic that occurred in the first half of the year. So going forward, any deep UV machines, even if they're fast shipped, will be revenue recognized when they leave our factory. But EUV, if we do a fast shipment, we still have to wait until those machines are complete their full testing at the customer site, if you're going to do a fast shipment, which means today, we still expect EUR 2.3 billion revenue -- EUR 2.3 billion of revenue will be delayed out of '23 into 2024. Now next year, the question becomes what will fast shipments look like going forward. And I think there's 2 dynamics that you have to take into account. One is that when you move to a new model machine, in this case, we're going from a 3600D machine to a 3800E machine next year. When you go to that new machine, you end up wanting to run the full test. You don't want to reduce run, reduce test. We want to see the full sequence for those machines. So we'll likely see the 3800E machines that we ship next year will not receive fast shipment. So that's one thing to keep in mind. And then the second piece is we continue to ramp our capacity for EUV. This year, we are talking about capacity around 60 machines and by 2025, '26 time frame, we plan to be around 90 machines. So in that ramp profile, if we can get the capacity above the demand in such a way where you no longer -- there's not as much value in the fast shipment side. And our customers aren't as pulling as hard to get the machine on the fast shipment because we can ship what we need there, then I think you would argue that you wouldn't do fast shipments in those 2 scenarios. So that's -- if both of those were to come through, that would obviously reduce the number of fast shipments that we would do in 2024 and then in turn could adjust the number of delayed revenue out of '23 into '24. But that's -- or out of '24 into '25, that's the dynamic at play today. And so we'll have to see how between those 2. I think the ease as we ship more of those in 2024, you won't see fast shipments on that front. And then the next question just becomes a supply-demand where are we on that front and what makes sense to do fast shipments or not.

Understood. And I guess, Skip, if we stay on this topic about sort of EUV and the unit dynamics, I guess, you talked about how the shift from '23 to '24, specifically, you have some fab readiness issues, and that's the majority of it. There's probably a bit of macro in there as well perhaps a minority of that. How should we think about the sort of shift from '24 to '25? Could this theoretically boost '25? How should we be thinking about that?

Well, yes. So I think the way to think about the second half of 2024 in terms of demand, you have to keep in mind that, that machines that we're shipping in the second half, in particular EUV that takes some time before you install, qualify and have those machines producing wafers. So those machines in the second half of '24 are really about wafer demand in 2025. So I think that's a piece, just keep in mind. In terms of how the second half will shape up, 2024, orders will continue in this quarter and the next. And yes, we'll have to see how that, in turn, means the demand dynamics there. In terms of the -- of your question specific around the fab readiness piece, as I said, hopefully, we'll have that resolved over the course of 2024, so that doesn't play into this. And I think the rest we'll have to just see how the recovery in terms of the shape, the slope will occur in 2024 that depends on how many units are needed.

Makes total sense. And on '24, you sort of talked about a clear opportunity for growth. I think that was the phrase that was used. Obviously, that's against very tough comps also EUR 700 million is kind of being pulled in. So what would need to happen for that opportunity for growth to kind of materialize? Is this kind of the orders you're referencing and the fact customers need to get confidence on the macro picture for '25?

Yes. Yes. So I think what we said in July, again, I was trying to provide some balance between the fact that if you look at the current forecast and the demand discussions, and what we're talking about with our customers. And you take that in addition to the strong backlog we have of EUR 38 billion, that provides a clear opportunity for growth next year. Now having said that, we also try to balance somewhat, though you have to keep in mind that there are still a lot of uncertainty in the macro there. And if you look at that from a perspective of, yes, there's a recession that's continuing to loom out there that people are wondering when that could happen and what impact that could have on demand. You have the geopolitical dynamic that's out there. And so those 2 items, I think, are what's the major driver around this macro uncertainty that's creating some, you can say, caution with our customers in terms of how to see through the recovery in terms of timing and the slope and shape of that. I think our customers are still of the opinion that the recovery will happen in the second half of the year, but it's probably moving closer to 2024 as opposed to the middle of the year. And then the big debate is on the shape and the slope. So I think that's the piece that we have to see how that will unfold. So a balance. So there's a clear opportunity there with all of the forecasts and discussions we're having and the growth opportunities are out there. Against this uncertain piece in the macro, and we'll have to see how these next 2 quarters play out and how our customers see the inventory levels and in turn what this means for the utilization levels.

Makes total sense. And you're talking about this clear opportunity for growth next year, but then, of course, trying to sort of inject some balance into the conversation, which is totally understandable in the current environment. Then how should we think about '25? There's obviously structural drivers you laid out in a lot of detail at your CMD, how confident are you there? What are the kind of different moving parts to think about?

Yes. So I think -- so the 2025 scenarios that we provided last year during our Investor Day, it provided an opportunity between EUR 30 billion and EUR 40 billion in terms of revenue for 2025. And again, that depends on a high-low market. So our view today is we're still quite confident in our 2025 scenarios that we provided. I think if you look at the structural growth drivers that are out there, we talked a little bit about AI earlier, but you see all the others kicking in and we talked about electrification, you see what's going on in the EV space. That's clearly an opportunity there. Industrial, IoT continues to unfold. And I think a lot of the secular growth drivers that we talked about are very much materializing. And so 2025, again, we have no change to what we said in terms of our opportunity there. And even beyond that, looking at 2030 and I think the other piece is still unfolding as this whole tech sovereignty play. I think you're seeing that materializing as well, which we spoke about at our Investor Day as well. That's also a piece of it where you're seeing these customers now building fabs in the different areas in regions that are trying to reshore or onshore, some semiconductor manufacturing. So that's also at play in addition to the whole technology transitions and then some question marks on the capacity timing.

Makes sense. And I guess you talked about building capacity next year. That's to make tools. But in order for you to have demand for those tools and ship those, there need to be the orders. Could you give a bit of an update on what we should be thinking about in terms of orders in the coming quarters? How should we be thinking about that?

Yes. So we don't -- Alex, so we don't guide for orders. So it's more of how we see second half of 2024. And clearly, we expect there'll be -- orders will continue in the second half of this year that will be towards the 2024, second half 2024 machine demand shipments. And again, as a reminder, that machines in that second half of the year of 2024 are more about 2025 capacity. I think most view our 2025 wafer capacity. So I think most view, by 2025, there's clearly, we'll be back end or we need to have a lot of wafer output in that time frame. So I give some confidence in the second half of 2024, we'll need more machines as well, in which case, you should see orders in the coming quarters. But customers are tight on cash. So obviously, they're going to push us on orders a bit. But that's the dynamic at play that's right now.

Super helpful. I guess you touched on sort of trailing edge demand and sort of all these sort of mature applications. Maybe you can talk about that, maybe leave China DUV to one side because I'd love to ask you about that separately. But if we think about sort of trailing edge demand, it's obviously been strong in recent quarters. Maybe you could give us a sense of kind of what's driving that? How do you think about supply and demand and how sustainable that could be?

So yes. So I think if you look at the auto, industrial piece of it, that's -- you've seen that being quite strong and resilient through these past few years, trying to catch up on the supply-demand dynamic with respect to the end markets and we see that in terms of demand for our machines. Now the challenge we faced over the past couple of years is our ability to ship these machines. We -- just the supply/demand we had, at one point, I think our demand was somewhere 30% to 50% above what we could supply. So as we said, we're ramping our supply capability there, but that demand remained. And so I think we're -- what you see now is because some of the shift in the demand timing for our memory customers and some of the -- as well as some of the logic customers to the right in terms of demand timing, that's provided the opportunity for us to meet or ship more of these more mature technologies to customers that are both outside of China as well as inside of China that are supporting these auto industrial and more mature applications. And we see the -- if you look at all these things we've talked about in terms of secular growth drivers, around AI and electrification and all these applications or these secular growth drivers. There's clearly not only advanced demand -- advanced application demand but there's also mature. And so you need all the infrastructure around that. And so we see this sustainable going forward. That's part of the reason why we talked about a need to grow our deep UV capacity from around 375 units today to around 600 by the 2025, 2026 time frame, is that that's a significant growth. And we even quantified how many wafers a year that you need to add or we think we need to add, the industry needs to add and therefore, the units that we need to produce. So we see it's sustainable going forward. It's going to be a key part of it. We're able to meet more of the demand this year with some of the shift and demand timing of others, but still not fully meeting all the demand that's out there today for the more mature applications.

Got it. And I guess on the sort of China side of this, that's another part of the equation. You've clearly had a lot of benefit coming from China. I guess investors sort of typically have 2 questions. Firstly, how sustainable is in the sense that is this all sort of a pull forward that then it's going to end, number one? And then number two, could there be a further regulatory change that could impact this, particularly when you see news flow about a sort of major Chinese smartphone vendor being able to use technology on 7-nanometer. So obviously, a bit of a sort of moving situation, but curious on your latest views there?

Yes. So China, from a -- first off, from a business perspective, I think if we look at this year, we have a backlog that's somewhere 20% or more of our backlog is targeted for Chinese customers. And I think if you -- what we've said both in April and July is that our expectation is for this year is that we will end up with a revenue that is somewhere aligned to our backlog. So think of a revenue of around 20% or more. And that compares to around 15% that we've had in the past few years in terms of the system revenue going to the China region. The -- in terms of the driver, why it's higher this year, it primarily has to do what we call the fill rate or a lack of ability to fill all the demand in prior years. So in the past couple of years, we've been only able to fill less than 50% of the demand of what they really wanted. And as I mentioned earlier, with the shift to the right with some of the demand timing of some of the other customers, that's provided the opportunity for us to ship more. So that's the primary reason for a higher percentage of our revenue this year going to China. In terms of sustainability, our view is that China will continue to be sustainable as they work to build out the capability. They want to put the capability in place. Obviously, it will be a focus on mature technology, which is what they can, in fact, produce. And it really is in support of the different industrial activities going on in China, the growth there and some of the items that we pointed out, electrification being one of them, energy transition being another one. But I think we even talked about some of the real impact that the example like an EV production has in terms of the wafer demand there. Every EV vehicle needs 1/3 of a wafer and therefore, it drives a lot of fabs. In China, and they're working on building those fabs. So we see that piece of it being a sustainable story and not something just a onetime pull forward and it's over, and we'll continue to do that going forward. And again, I think the -- we can talk a bit more about the export controls, but it's going to be -- the focus in China is going to be on the more mature technology, the 28-nanometer and above.

Makes sense. And then obviously, in terms of the sort of regulation itself, maybe you could just give us a recap on sort of where we are at the moment. And then you had obviously questions about whether it could get more stringent. I think your CEO said actually, that wasn't his expectation. So what's the latest thinking?

Yes. So the export controls and the regulations, you'll say, the official regulations that were communicated by the Dutch government last month -- sorry, at the end of June were largely aligned to what we communicated in prior -- largely aligned to our expectations as communicated in some of the prior quarters. And that was -- that it would go into effect September 1, and it would be targeted for the most advanced immersion machines. So you require a license, so you've to apply for license for NXT:2000 and above going to China starting September 1. And we expect that we will again beyond 2024, those licenses, it will be more about shipping 1980s versus 2000s and that it will not have a real material impact on our 2023 financial outlook and our longer term, our 2025 and beyond scenarios. And again, keep in mind, our 2025 and beyond scenarios are end market-driven, not independent of where they're built regionally, they can build anywhere in the globe, but it's about end market demand there. So largely as expected, it will impact -- require export licenses going forward for NXT:2000s and above. And again, as a reminder, we're restricted already on shipping EUV machines today. In terms of speculation on what might happen going forward, I won't speculate. Yes, I think there's been different comments made on this front. But again, I think there's reason to believe that 1980s needed in support of 28-nanometer and above for global supply, but I won't get into speculations on future government decisions.

Totally understand. I think we've got about 5 minutes left. So we should have time for a couple of questions from the audience. I think we have someone walking around at the back with a microphone. So someone would like to put their hand up if they have a question.

On the topic of recent headlines around Chinese smartphone makers and some of the progression that they've made there. Just a question on whether that has maybe resulted in some question marks around road map progression without the use of EUV and instead DUV multi-patterning, if you could maybe provide a reminder on the comparison between DUV multi-patterning and EUV as it relates to cost, performance, et cetera, when we talk about some of the more advanced nodes like 7-nanometer and onwards.

So yes, so first off, the -- in terms of the production of you can say, more advanced nodes using multi-pattern. I think our customers in the past before EUV because of some of the delays in EUV had manufactured 7-nanometers and beyond using a multi-pattern technique. And so the challenge with multi-pattern and say, the value, therefore, with EUV is that multi-pattern increases the process complexity, meaning it takes multiple layers, multiple exposures to produce one layer as opposed to one exposure with EUV, so that's the value, obviously, going to EUV. Now producing it with a multi-pattern, is it possible? Yes, I think our customers have proven you can produce 7-nanometers, for example, using multi-pattern. But by doing and utilizing multi-pattern, the process complexity translates into cost, cycle time and yield and challenges, meaning more steps, obviously, higher cost. On the cycle time, you have more steps, obviously, more cycle time. And then by process complexity, by trying to align all these different pattern sequences to make the one layer, you end up with edge-to-edge issues and so on and so forth that creates some yield challenges. So I think those are the 3 big challenges. Is it possible? Yes, you can make it. Is it -- does it have challenges with respect to cycle time, yield and cost? Yes, that's also the case, which is why you see all of our customers move to EUV on future nodes for that exact reason.

Gentleman, a question at the front.

Just going to ask one on IBM. So I know you've clearly articulated why there was a revision in the expectations for this year. I think you guys are still guiding to some ramp through the back half of this year. Can you help us understand what are the signs that -- like what is it you look to see from customers for IBM to pick back up? What sort of early indicators have you seen just so we can contextualize that?

Yes. Yes. So just to clarify. So IBM is installed base management. So some people may want to talk about a specific customer. Installed base management. And the question is we said originally growing 5%. Now we're talking we're flat in terms of year-on-year growth looking last year compared to this year. And the main driver why we're now saying flattish versus growth, is really around the upgrade. And so the question was really more of when or what should we look for or expect to start seeing the upgrade business pick up.. And the -- if you go a year ago, we have said, well, the challenge with doing upgrades are that the utilization levels are high because customers are trying to produce all they can. So we need utilization levels to come down. Now utilization levels have come down, and we're saying, well, why can't you do upgrades now? And it's because of the uncertainty. So now the fab manager is okay with it, but maybe the CFO is not okay with it. And that's the dynamic that's at play with respect to this year. In terms of what to look for in terms of recovery. I think if you look at the utilization levels as they come down and then inflect and then start going back up, that somewhere in that point in time where you start seeing going back up, but not getting to the high levels again but in that recovery period when the slope is starting to move up, that gives confidence to CFO that, yes, I'm in a recovery. And yet the fab managers go, I'm still not at max utilization levels would be a logical area where customers would say, "I'm willing to start doing upgrades." And some of them are quite short in their lead times. Others could be a bit longer, but that's kind of why you see upgrades being a bit lumpy in terms of history and when they occur. It's going to be tied more to the recovery. And as I mentioned, for logic, we're starting to see some flattening if we start seeing that pick up, it could be an opportunity going forward. We still have to wait and see when that will occur on the memory side.

[Technical Difficulty].

Yes, you won't -- so we haven't seen enough of it yet to warrant a growth. But as that picks up in time, obviously, you'd expect the upgrades to track along with that.

Great. I think we're just out of time. Skip, thank you so much. Really appreciate the discussion. Thanks all for joining.

Thank you. Thank you all.