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

Good day, and thank you for standing by. Welcome to the ASML 2023 Third Quarter Financial Results Conference Call on October 18, 2023. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference call over to Mr. Skip Miller. Please go ahead.

Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call are ASML's CEO, Peter Wennink; and our CFO, Roger Dassen. The subject of today's call is ASML's 2023 3rd quarter results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received. This call is also being broadcast live on the Internet at asml.com. A transcript of management's opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's press release and the presentation found on our website at asml.com and in ASML's annual report on Form 20-F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wennink for a brief introduction.

Thanks, Skip. Welcome to everyone. Thank you for joining us for our third quarter 2023 results conference call. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the third quarter 2023 as well as provide our view of the coming quarters. Roger will start with a review of our third quarter 2023 financial performance with added comments on our short-term outlook. And I will complete the introduction with some additional comments on the current business environment and our future business outlook. Roger, if you will?

Thank you, Peter, and welcome, everyone. I will first review the third quarter financial accomplishments and then provide guidance in the fourth quarter of 2023. Let me start with our third quarter accomplishments. Net sales came in at EUR 6.7 billion, which is around the midpoint of our guidance. We shipped 10 EUV systems and recognized EUR 1.9 billion revenue from 11 systems this quarter. Net system sales of EUR 5.3 billion, which was mainly driven by Logic at 76%, with the remaining 24% coming from Memory. Installed Base Management sales for the quarter came in at EUR 1.4 billion as guided. Gross margin for the quarter came in at 51.9%, which is above our guidance, primarily driven by DPV product mix as well as some one-off cost effects. On operating expenses, R&D expenses came in at EUR 992 million, and SG&A expenses came in at EUR 288 million, both basically as guided. Net income in Q3 was EUR 1.9 billion, representing 28.4% of net sales and resulting in an EPS of EUR 4.81. Turning to the balance sheet. We ended the third quarter with cash, cash equivalents and short-term investments at a level of EUR 5 billion. Moving to the order book. Q3 net system bookings came in at EUR 2.6 billion, which is made up of EUR 0.5 billion for EUV bookings and EUR 2.1 billion for non-EUV bookings. These values also include inflation corrections. Net system bookings in the quarter were driven by Logic with 80% of the bookings while Memory accounted for the remaining 20%. As expected, we did see some moderation in orders this quarter. As the industry is working through a cycle, customers remain cautious in the current environment, managing cash flows and delaying purchase orders. In addition, there were no high-NA orders this quarter while our bookings were lower than in previous quarters, our backlog at the end of Q3 remained strong at over EUR 35 billion. With that, I would like to turn to our expectations for the fourth quarter of 2023. We expect Q4 net sales to be between EUR 6.7 billion and EUR 7.1 billion. We expect our Q4 installed base management sales to be around EUR 1.4 billion. Gross margin for Q4 is expected to be between 50% and 51%. The positive impact of higher sales volume is more than offset by the diluted impact from a change in DPV mix and one-off effects relative to last quarter. The expected R&D expenses for Q4 are around EUR 1.03 billion and SG&A is expected to be around EUR 285 million. Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%. An interim dividend of EUR 1.45 per ordinary share will be made payable on November 10, 2023. In Q3 2023, we purchased shares for a total amount of around EUR 100 million. As mentioned in previous quarters, in the current environment, we expect to see ongoing pressure on our free cash flow. As a result, we will be prudent in managing our cash flows and maintain relatively high levels of cash. With that, I would like to turn the call over to Peter.

Thank you, Roger, and I have a bit of a cold. So apologies. As Roger has highlighted, another good quarter, especially considering the current market environment. Uncertainty remains in the market, driven by global macro concerns around inflation, rising interest rates, lower GDP growth in certain economies and indeed geopolitical environment, including export controls. However, industry seems to be passing through the cycle trough. There has been some improvement in end market inventory levels downstream -- sorry I have to get a bit of water -- although inventory levels and upstream remain elevated. As a result, the customers continue to moderate wafer output by running at lower utilization levels. While lithography tool utilization are still running at levels lower than normal relative to last quarter, tool utilization in Logic and continues to show signs of improvement, while Memory has yet to turn. We concur with our customers but still expect to see an inflection point indicating the start of a recovery by the end of the year, although the shape and slope of the recovery remains uncertain. Looking further ahead to 2025, we expect a significant growth here since more than 50% of our EUV and DPV shipments will go to new fab projects. On top of this, we expect existing fabs will be adding capacity driven by a continued recovery cycle. Turning to our business. We now expect DPV revenue to grow towards 55% year-over-year, an increase from around 50% communicated last quarter, primarily driven by an increase in immersion revenue. China's demand for DPV systems continues to be strong and trends we talked about in previous quarters. For system shipment this year to Chinese customers, the majority of the orders were booked in 2022. The demand fill rate for our Chinese customers over the last 2 years was significantly less than 50%. So the Chinese customers, were in fact, receiving a much lower number of systems than they ordered. This was due to the fact that timing from other customers that -- sorry, this was due to the fact that the demand for our systems worldwide significantly exceeded supply. With current shifts in demand timing from other customers, we now have the opportunity to fulfill these orders to our Chinese customers. So the supply is, in fact, catching up to demand and we're shipping lithography systems for mature and mid-critical nodes to China, while, of course, complying with export control regulations. If you combine this with the fact that other customers are delaying their demand, this means indeed a higher sales percentage from China than we saw in previous years. In EUV for 2023, we continue to expect year-over-year revenue growth for EUV of around 25% as communicated last quarter. For the installed base business in 2023, the current utilization rates, market uncertainty, particularly as it relates to the timing of the recovery, customers continue to wait to perform productivity and performance upgrades on the litho systems. Therefore, we now expect our installed base business this year to be down around 5% from last year versus the flat growth previously communicated. In summary, based on our full year, with higher DPV revenue, offset somewhat by lower expectations on our installed base business relative to last quarter, we still expect net sales for the year to grow towards 30%, with a slight improvement in gross margin compared to 2022. Overall, a very strong growth year, especially considering the industry being in the down cycle. On the geopolitical front as it relates to export controls, the U.S. government yesterday published updated export control regulations. A part of the regulations is an update from last year's October communication and part is the implementation of the U.S. regulation on the trilateral agreement between the Dutch, Japanese and U.S. governments. Given the length of the document, we need to review the final regulation thoroughly and make a detailed analysis, which will take some time. But based on our preliminary assessment, we do not expect these measures to have a material effect on our financial outlook for 2023. The export control measures could have an impact on the regional split of our shipments in the medium to long term, but we do not expect an impact on the global demand scenarios as communicated during our Investor Day in November last year, since the long-term growth perspectives for our industry remains clearly unchanged. Looking towards the next year. The semiconductor industry is currently working through the bottom of the cycle and our customers expect the inflection to be visible by the end of this year, as I mentioned before. Although there's an opportunity for some demand to be pulled back into the back half of 2024, we currently prefer to take a more conservative view for the full year 2024, especially considering the inherent nature of the macroeconomic uncertainties. Therefore, based on our current view, we expect revenue next year to be similar to 2023. As such, we see 2024 as a transition year, but also as an important year to prepare for the significant growth that we expect in 2025. Now based on discussions with our customers, we currently expect 2025 to be a strong year, driven by a number of factors. First, the secular growth drivers in the semiconductor end markets, which we have previously discussed, such as energy transition, electrification and AI. The expanding application space, along with increasing lithography on future technology nodes drives demand for both advanced and mature nodes. Secondly, the industry expects to be in the middle of a cyclical upturn in 2025, starting in 2024. And lastly, as mentioned earlier, we need to prepare for the significant number of new fabs that are being built across the globe. These fabs are spread geographically, are strategic for our customers and are scheduled to take our tools. It is essential that we keep our focus on the future and build capacity to be ready for this ramp. In summary, despite going through an industry down cycle, we still expect very strong growth in our business this year. And while there are still significant uncertainties, primarily driven by the macro environment, it appears that we're passing through the bottom of this specific cycle, and the shape of the recovery will ultimately determine the demand curve beyond 2023. In the near term, it's understandable that customers remain cautious as they moderate wafer output to help lower inventory levels in the supply chain and look to build confidence around the timing and slope of the recovery next year. In summary, we clearly view 2024 as a transition year. As we prepare for future growth and expect strong year in 2025 and beyond. We remain confident that we are well positioned for further long term growth as we discussed in the market scenarios for 2025 and 2030 during our Investor Day in November 2022. With that, we will be happy to take your questions.

Thank you, Roger and Peter. The operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I'd like to ask you that you kindly limit yourself to 1 question with 1 short follow-up, if necessary. This will allow us to get to as many callers as possible. Now operator, could we have your final instructions and then the first question, please?

[Operator Instructions] We will now go to the first question. And your first question comes from the line of Joe Quatrochi from Wells Fargo.

Curious -- embedded in your expectation for more muted kind of 2024. How do we think about the gross margin puts and takes just given there's several moving terms of like mix and you guys are seeing increasing your manufacturing output for later years. And then I think there's some benefit from higher EUV ASPs. At the same time, you're also going to start shipping initial high-NA tools as well.

Yes, Joe, you're doing a very fine job in analyzing it all. Of course, we want to appreciate that we're not going to give guidance on -- quantitative guidance on the gross margin for next year. But I can give you some of the drivers of the gross margin. And I think you mentioned a few of them which are quite important. So I would say the 3800 ASP is clearly one, right? So 3800 is going to be an important part of the mix in next year for EUV. So obviously, as a higher ASP, we talked about more than EUR 200 million last -- on the call last quarter. So that comes with a higher ASP, but also drives the gross margin. So that's an important driver. I think service on EUV is one where we say we continue to make progress on that one. So that's another positive. I would say on the challenge side, so on the headwind that we're going to get in terms of gross margin for next year, it is, as you said, next year, we are preparing, obviously, for a big year in 2025 because that's the way we look at it, as we also mentioned -- as Peter mentioned and also said in the video it is going to be a big year and that means that we're going to add quite some capacity to actually allow that to happen. So that's going to going to have a headwind on the gross margins because those people will have to be trained in 2024, whilst primarily being productive only in 2025 and also on high-NA. The high-NA numbers next year, obviously, are very, very small in terms of revenue and also output, but we are obviously preparing our workforce, both in the factory but also in the field to accommodate the '25 and beyond ramp of high-NA. So obviously, that also same story. A lot of people that will be added there will be a drag on the gross margin for 2024. Question mark, obviously, is on the installed base business. We know that can go positively, again can go negatively on the gross margin, very much dependent on how the upgrade business will come back in 2024. And then finally, in light of all the puts and takes that you might think of in terms of revenue, also in light of what was -- what Peter just said, the China export controls, you could maybe see less immersion tools into China, also less on the high end. So that could also be a bit of a headwind on the gross margin. So that's it really, Joe. Those are all the puts and takes I would see today. And in the Q1 -- in the Q4 call in January of next year, I think, we will have a much better handle on how those -- all of those pan out.

Got it. And then as a follow-up, just wanted to reconfirm, for fast shipment, you're expecting still to exit this year in terms of revenue not recognized in the EUR 2.3 billion range. And then does that get caught up next year as part of kind of a more muted growth that you're able to catch up to that demand?

I think Joe, part of it will. The way we look at it today, but again, we will confirm that in more detail in January. But the way we look at it today, we expect less fast shipments by the end of '24 than we would have by the end of '23. So there would be a positive effect from fast shipment in the number for next year.

Got it. And that EUR 2.3 billion is still the right number, exiting this year?

The EUR 2.3 billion is what we're currently driving toward. That's what we expect at this stage to have shipments this year, not recognizing revenue this year, correct.

We will now go to our next question. And the next question comes from the line of Krish Sankar from TD Cowen.

I have 2 of them. When you look into calendar '24, how to think of you -- from a unit standpoint, EUV and DPUV, how do we look at unit for EUV and DPUV in 2024 relative to 2023? Would it be up, down, similar? Any color there would be helpful. And then I have a follow-up.

Yes. I think on the DPUV, I think Roger said it in the answer to the previous call. In the DPUV, of course, we've had a great year for China because we were basically delivering out of the backlog. These guys ordered and the orders were there, they were pre-paid and we had the opportunity to ship. I don't think that will repeat itself in that volume so much next year. And on top of that, of course, there is a new export control regulation that will put, let's say, as a handful of Chinese fabs under the export control rules where we cannot ship immersion tools, just a handful of, but it's still -- it is still sales that we had in 2023 that we'll not have in 2024. So I think DPUV could see some reduction. Based on that now, if the sales stay the same or at a similar level than EUV grows. But the -- what Roger also said, as an answer to the previous question, we do expect that fast shipments going out of 2024 will be lower. So there's going to be, you could say, an accounting windfall on the top line. So I think, all in all, this is a bit of the picture. So somewhat lower DPUV units -- EUV units could be lower because of the fact that we actually have -- although we could see revenue increase as a result of the fast shipment move could indeed be also somewhat lower, but with higher sales prices. So this is what the picture is for next year. Now like Roger also said, probably January after the fourth quarter results is probably the better time to go into a bit more detail. But directionally, that's what you can expect.

Got it. Got it. That's very helpful, Peter. And then on China, I understand it was like 46% of sales last quarter, probably averages around 30% for the full year. If you strip out the export control issues or the geopolitics, a lot of these spending is on mature nodes. Kind of curious how long do you think this level of spending is sustainable? Or do you think at some point, there's going to be a natural consolidation or rationalization of this spending.

Yes. I think you have to understand where these tools are being used for. The vast majority of our shipments to China is mid critical to mature. And that's really where our business is. Of course, like I said earlier, there's a handful of fabs -- not customers, fabs that have been identified as ready for advanced semiconductor manufacturing. So those will -- those are now excluded but the vast majority is mid-critical to mature. Will that level off? I don't think so. And why don't I think so? Because you need to realize where those chips are being used for. I mean China is, by far over 50% of all worldwide investments in renewable energy is in China. That's wind, that's solar, that's the buildup of the grid, the electrification, the buildup of the EV manufacturing capacity in China is significant. Industrial IoT is a significant driver. Next to that is also the continuous telecommunications infrastructure rollout. That's all mid-critical to mature stuff. And as it happens here, China invests a lot there. It's a big country of 1.4 billion people. So there is a lot of semiconductor need. And this is exactly when we look at the expansion plans of our Chinese customers, this is exactly what -- where they are putting their capacity at work in these areas. And if you look at the total consumption of semiconductors by the Chinese manufacturing industry, then China imports more semiconductors than they import oil. On top of that, you'll see the significant increase in these new transitions. That means that if China wants to come to a certain level of self-sufficiency, they have still a huge gap to cover to be completely self-sufficient. So it's also logical that they actually invest in this type of semiconductor technology because it's for internal use. And I think -- so it's -- I don't think we will see a peak this year. And actually, I think, there will be going forward the significant demand coming out of China for mid-critical and mature technology. And for all the reasons that I just mentioned.

We will now go to the next question. And your next question comes from the line of Aleksander Peterc from Societe Generale.

Could you help us understand what is the percentage of shipments into China this year that would actually fall under the restrictions that will be in place for the first of January next year. That will be my first question. And then the follow-up just very briefly, you could tell us how far out you currently booked in EUV into 2024 for -- in DPUV.

Okay. I'm just writing down. So on the -- on China question what -- the percentage shipment this year that is now excluded, it's anywhere between 10% and 15%. So the vast majority is mature and mid-critical and I think, like I said in answer to the previous call, I mean that is what will basically remain because of the build-out of that capacity is actually needed for all the transitions that I just mentioned. So it's 10% to 15%.

And on the EUV backlog, I mean we're currently looking at a backlog of around EUR 19 billion for EUV but of course, that is a combination of the shipments that we -- still have to go this year. And then for '24 and '25. And by the way, it also includes high-NA. So that's -- so there is a substantial part of the shipments that we envisage in '24 are included, but not everything, but a substantial part is covered by the EUV backlog as I just referenced it.

Okay. Great. It's just the 3800 will be -- so next year is 3800, right?

No, no. Next year will be a mix of 3600 and 3800.

We will now go to the next question. And your next question comes from the line of Sara Russo from Bernstein.

So in your results package, you had indicated that you're seeing Memory utilization remaining on the low side and -- but you're beginning to see some recovery in Logic and sort of indicated potential bottoming of the cycle later this year. Can you give us any more specifics on the utilization levels and trends across Memory versus Logic, any different. Like more specifics on the differences you're seeing across those end markets?

I'm not going to give you precise utilization levels because they're all different for our customers, but it is bottoming out on Logic. That's what we've seen. I think we've already indicated that I think last quarter that we saw this very early first indication. I think that has continued. So -- which is good. And also, I think that you need to look at that in the context of what I said earlier that inventory levels downstream are normalizing and upstream is still a bit elevated. So this is in that context that, that makes all sense. I think on Memory, we don't see that upturn yet. So we just have to look at and just follow this closely, when that will happen. But generally, when we see this upturn in Logic somewhere down the line, Memory will follow, yes. Logic working without Memory is not -- does not make sense either. So it's probably a timing issue but we'll follow it closely. And like I said, there are other indications. Also some articles that I just read last week from Korea that for the first time in 12 months you see NAND shipments going up. First the indications of DRAM spot prices going up. Now these are early indicators. So that's why our expectation is that what we have seen for Logic now over the last 3 months will also follow in Memory.

And maybe just a follow-up on the backlog topic. So in the past, you've given us a sense for what share of the backlog is China demand. And it's sort of -- lot of 2022 orders led to the significant increase in China. Have you seen that shift at all? It was sort of sitting around 20%? Is that shifted down now that you're able to ship more to China and meet more of those orders? Has that come down? Or does that continue to remain in that range?

No, I think it's the same. I think we said the China part of our business this year could be over 20%. And I think it's about the same range for the backlog. So that has remained the same.

We will now go to the next question. And your next question comes from the line of Francois Bouvignies from UBS.

Just 2 quick ones for me. The first one is on maybe 2025. So you gave your market -- low end market, high scenario at your Capital Markets Day. I'm now looking at the current macro environment, I guess, for many people, it's actually, we are more in a low market scenario, at least today in terms of macro. And if we look at your guidance on 2025 and taking into account the geopolitical environment, should we lean towards the low end of your guidance in a way? I mean it would still imply a significant recovery in 2025, but I just wanted to check if it's fair to assume, given the current [iteration] rate in the industry and the pushout that you are also seeing on your side, if you lean towards the low end of your guidance and I have a quick follow-up.

Well, I mean, let me explain the following. I think our industry is cyclical, when we're in a downturn, and the deeper the downturn is the higher the upturn. And that's simply because the underlying trend, there's a secular trend of the capacity that is needed to support all these transitions that we all talk about and we all believe in. It has a downturn for whatever reason, it could be macro. It could be macroeconomic shocks. The deeper the downturn is, the higher the upturn. That has been -- if you just look at the 30-year cyclical behavior of our industry, that's exactly what is always happening. And it makes sense because the underlying trend is there. Now having said that, in my introductory comments, there are actually 3 reasons for why we believe 2025 is going to be a very strong year. One is these secular trends. They are there. And also it actually will -- it actually means that we need to build the capacity to support those trends. And if you don't build the capacity in 2023, 2024, and for Memory, it's even started earlier, it started in mid-2022, then it will have to be there to support those secular trends, which we all believe in. So -- and also going back to that, that's number one. Number two, in answer to the previous question, it feels like and also our customers keep telling us that they feel there is a trough. We're in the trough or we're very close. And that means they will see growth in 2024. You could argue about the slope of the growth because of macroeconomic uncertainty. But they all tell us, please prepare for 2025. So they strongly believe that growing in 2024 will probably start slow, but will accelerate into 2025. So they tell us, be ready. That's number two. Number three, when you look at the number of new fabs that are being opened geographically, fab extension that will need machines in Europe, in the U.S., across Asia, yes? Then that is already when we look at the demand, already more than 50% of our 2025 forecasted demand is on new fabs for DPV and EUV. So if you put it all together, also realizing that we actually look at 2024 and '25 together. Why is that? Because our lead times are more than 12 months. For EUV they are 1.5 years. So we need to have that very close connection with our customers. And we have these insights into these new fab expansions, not so much where they're going to add capacity for the existing fabs because that's basically -- that is a question of where the cycle is. If you take those 3 things together, and then we look at the demand that we're currently discussing with our customers, then 2025 is a very strong year and a very strong year doesn't jibe with your low end of the guidance. So it's -- again, it's the cyclical nature of this industry. We are now -- let's take Memory. If 2024 is not a full recovery year, then Memory is in a downturn of 2.5 years. Just look at it historically, always followed by a strong recovery. Same is true for Logic. And if we look at those building blocks -- of those 3 building blocks, that gives us the conviction at this moment in time, that 2025 is going to be -- is a very strong year. But then we need to prepare 2024, we can simply not wait until first quarter 2025. And then we start accelerating because the supply chain won't be there. Our lead times are simply too long. So we have to prepare that also in the year 2024. That's why it's a transition year. We look at '24, 2025 together. Why? Because the lead times of our tools and discussions with customers are actually supporting all of that. Sorry for the long answer.

No, no, that's very clear. And maybe as a follow-up then. If we have long lead times and strong recovery in 2025, the orders, I mean, this quarter has been, let's say, quite low compared to many people expected. But if you expect a very strong year in 2025 and the lead times that you are describing, do we expect that to see in the order behavior in the first half of 2024? I mean if we take into account lead times? Or how should we think about that because we should see the evidence of that, right?

No, I think that's absolutely true. We're in Q3 of 2023. And we have more than EUR 35 billion in the backlog. If you're a customer, you can actually wait because they also see 2024 as a recovery year. It's going to be Q3, Q4, Q1 -- so we said, so they will just wait because they don't need, they have the capacity. If they want the capacity, they can just call it off. So -- but indeed, you are right. If 2025 is the kind of strong year that we expect then indeed, we would have to see the order recovery in the first half of 2024, absolutely.