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

Good day, and thank you for standing by. Welcome to the ASML 2024 Second Quarter Financial Results Conference Call on July 17, 2024. [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, Christophe Fouquet; and our CFO, Roger Dassen. The subject of today's call is ASML's 2024 second 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 will also be broadcast live on our -- over 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 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 Christophe Fouquet for a brief introduction.

Thank you, Skip. Welcome, everyone, and thank you for joining us for our second quarter 2024 results conference call. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the second quarter 2024 as well as provide our view of the coming quarter. Roger will start with a review of our second quarter 2024 financial performance with added comments on our short-term outlook. I will complete the introduction with some additional comments on the current business environment and on our [indiscernible] outlook. Roger?

Thank you, Christophe, and welcome, everyone. I will first review the second quarter 2024 financial accomplishments and then provide guidance on the third quarter of 2024. Let me start with our second quarter accomplishments. Total net sales came in at EUR 6.2 billion, which is just above guidance. Net system sales of EUR 4.8 billion, which is made up of EUR 1.5 billion of EUV sales and EUR 3.3 billion of non-EUV sales. Net system sales was driven by Logic at 54%, with the remaining 46% coming from Memory. Installed Base Management sales for the quarter came in at EUR 1.48 billion, slightly higher than guided. Gross margin for the quarter came in at 51.5%, which was above our guidance, primarily driven by more immersion systems than planned. On operating expenses, R&D expenses came in slightly above guidance at EUR 1.1 billion due to higher R&D expenses regarding metrology and inspection, while SG&A expenses came in slightly below our guidance at EUR 277 million as a result of lower IT spend. Net income in Q2 was EUR 1.6 billion, representing 25.3% of total net sales and resulting in an EPS of EUR 4.01. Turning to the balance sheet. We ended the second quarter with cash, cash equivalents and short-term investments at a level of EUR 5.0 billion. We ended Q2 with free cash flow of EUR 386 million, which is an improvement relative to last quarter. However, as mentioned last quarter, there continues to be pressure on free cash flow as we provide some support for our customers and operate at higher inventory levels, the latter being a result of the increased material intake, including High-NA, as part of our planned capacity ramp in preparation for strong demand next year. We expect a gradual return to normal cash conversion levels as the industry continues to recover. Moving to the order book. Q2 net system bookings came in at EUR 5.6 billion, which is made up of EUR 2.5 billion of EUV bookings and EUR 3.1 billion of non-EUV bookings. Net system bookings in the quarter were mainly driven by Logic at 73% and Memory, the remaining 27% of the bookings. At the end of Q2 2024, we finished with a backlog of around EUR 39 billion. With that, I would like to turn to our expectations for the third quarter of 2024. We expect Q3 total net sales to be between EUR 6.7 billion and EUR 7.3 billion. We expect our Q3 Installed Base Management sales to be around EUR 1.4 billion. Gross margin for Q3 is expected to be between 50% and 51%. We still expect a slightly lower gross margin for the full year 2024 compared to 2023. Although margins for the second half of the year are expected to be positively impacted by higher volume and more favorable EUV Low-NA mix, we expect this to be offset by increased High-NA costs relative to the first half of the year. The expected R&D expenses for Q3 are around EUR 1.1 billion, and SG&A is expected to be around EUR 295 million. Our estimated 2024 annualized effective tax rate is expected to be between 16% [ and ] 17%. In Q2, ASML paid a final dividend of EUR 1.75 per ordinary share. Together with the interim dividend paid in 2023 and 2024, this resulted in a total dividend for 2023 of EUR 6.10 per ordinary share. The first quarterly interim dividend over 2024 will be EUR 1.52 per ordinary share and will be made payable on August 7, 2024. In Q2 2024, we purchased 106,000 shares for a total amount of EUR 96 million. With that, I would like to turn the call back over to Christophe.

Thank you, Roger. As Roger highlighted, a good quarter with sales and profitability above guidance. Although macro uncertainty remains, overall semiconductor industry levels continue to improve, trending towards more healthy levels. We also see continued improvement in lithographic tools utilization level at both Logic and Memory customers, all in line with the industry's continued recovery from the downturn. Our outlook for the full year is unchanged with revenue expected to be similar to last year. We currently see strong developments in AI driving most of the industry recovery and growth, ahead of other end market segments. We still expect a stronger second half relative to the first half of the year. Logic customers continue to digest the significant capacity additions made over the past year. With this digestion, we see lower revenue from Logic this year relative to last year. In Memory, demand is primarily driven by DRAM technology node transitions in support of advanced memories such as DDR5 and HBM. In support of this transition, we expect growth in revenue from Memory this year relative to 2023. For our installed base business, we continue to expect a similar level of revenue compared to last year. As the recovery becomes more clear this year, customer may look to upgrade their system in preparation for 2025. Turning to our businesses. We expect EUV revenue growth in 2024. We plan to recognize revenue on a similar number of EUV system as 2023, with expected revenue from 1 to 2 High-NA system. On our Low-NA EUV system, additional NXE:3800E system this quarter as we continue to ramp production. As customer transition to advanced nodes in both Logic and Memory, we expect the majority of shipments in the second half of the year to be NXE:3800E system. Regarding High-NA, we shipped the second system this quarter, and it is currently under installation. The first system shipped to a customer is running qualification wafer. Overall, the interest is high with EUV customers now using our High-NA system in the joint ASML-Imec demo lab in Veldhoven for their initial development. We have already exposed wafer for multiple Logic and Memory customer and have now achieved the imaging resolution specification of 8-nanometer. High-NA will enable an almost 3x increase in transistor density relative to the Low-NA system. So all in all, good momentum on High-NA and progressing well against customer expectation. We expect our non-EUV business to be down in 2024, primarily driven by lower immersion system sales relative to 2023. As we have stated over the last few quarters, we view 2024 as a transition year and continue to make investments this year, both in capacity ramp and in technology to be ready for future demand. While the slope of the industry recovery is still uncertain, based on discussions with our customers and supported by our strong backlog, we expect 2025 to be a strong year, driven by a number of factors as mentioned last quarter. First, the secular growth driver in semiconductor end markets, which we have previously discussed such as energy transition, electrification and AI are still very much intact. The expanding application space, along with increasing lithography and future technology nodes, drives demand for both advanced and mature nodes. Second, the industry expects to be in a cyclical upturn in 2025. And last, as mentioned earlier, we need to prepare for a number of new fabs that are being built across the globe, in some instances, clearly supported by several government incentive plans. These fabs are spread geographically and are strategic for our customers. They are all scheduled to take our tools. It is essential that we keep our focus on the future and build capacity in preparation for future long-term growth, as we discussed in the market scenario for 2025 and 2030 during our Investor Day in November of 2022. We plan to update our view during our Investor Day this year on November 14, 2024. In summary, although there is near-term uncertainty, we remain confident in our long-term growth opportunity. With that, we will be happy to take your questions.

Thank you, Roger and Christophe. The operator will instruct you momentarily on the protocol for the Q&A session. [Operator Instructions] Now operator, could we have your final instructions and the first question, please?

[Operator Instructions] And your first question comes from the line of Krish Sankar from TD Cowen.

Christophe or Roger, the first question is on the bookings composition and the outlook. In the booking for EUV and the EUR 2.5 billion, whether any 2-nanometer orders from foundry customers that you said you should expect in Q2 or Q3? Any High-NA in the mix? And based on the bookings momentum and backlog, how do you think about calendar '25 revenues? Do you think it could be towards the upper end of the EUR 30 billion to EUR 40 billion range? And then I have a quick follow-up.

So on the bookings, as you would have seen in the bookings mix, 73% of the bookings was related to Logic. So I think that gives you a pretty strong indication who the buyers are and who is in the mix. So I think it is reasonable to assume that the foundry business at 2-nanometer is in the book. So that's one. High-NA is not in there. So no High-NA bookings in this quarter. So everything you see there on EUV is related to Low-NA. As it relates to 2025, Krish, very consistent, I think, in our messaging. And that's why we say we confirm what we said in November of 2022, which is we expect 2025 to be between EUR 30 billion and EUR 40 billion. We've also said it's not the low point of that guidance. Last quarter, we've given you a bit of an understanding of what it takes to be fully booked at the beginning of 2025 for the midpoint of the range. I think you can conclude with the bookings number that we've reported that we're nicely on track. But with that, we still confirm that our expectation is between EUR 30 billion and EUR 40 billion and are not going to be more specific than what we've been so far.

Got it. Roger, very helpful. A quick...

And I think it's also -- and Krish, one more thing, and Christophe was very clear on that in his comments. I think in the Capital Markets Day that we're going to have in November of 2024, that's going to be the point in time where we are going to be more specific. So that's where we will be more specific as to what we expect for 2025. That's when we're going to narrow the guidance, but we're not going to do that before that.

And then a quick follow-up for Christophe. Obviously, the article today about the U.S. administration looking to impose some severe trade restrictions using the Foreign Direct Product Rule on China shipments. I know, obviously, you folks are good citizens who follow the rules. Kind of curious, what do you think about the implication for ASML from here? How much more severe could it be, given the fact that you do have a pretty high exposure to China? If you can give some color or some bookings around it, that would be very helpful.

Well, I think first, we don't comment on the rumors, and there's a lot of rumors on that topic. So I think on that topic, we comment even less, I will say. So that's the first thing. I think we had a discussion on China in the past together. I think the point Roger and I have made in the last few quarters, which is still valid, is before you look at China, I think you have to look at the opportunity we see on the mature semiconductor market. That opportunity we have defined as being significant in our Capital Market Day in November 2022. We still believe it's significant. In 2023, 2024, China has been investing a large part of this market. And this is why I think our revenue on China has been high. Moving forward, we still believe that this market is needed. And therefore, that the capacity is coming out of somewhere. So that's a bit the position we take on that discussion. I think we always look at the end market, at what's the need of the end market. I think we are a bit less sensitive on where that capacity may be produced.

And the question comes from the line of Alexander Duval from Goldman Sachs.

You confirm today that it's fair to assume that a Logic customer ordered on 2-nanometer this quarter. But clearly, for such a large node, one would expect to see more order flow. So I wonder to what extent it's fair to assume one should expect more EUV orders from them in the coming quarters? And as a quick follow-up, you mentioned in your prepared remarks that AI is driving most of the industry's recovering growth. Are you able to decompose what specifically is driving this to ASML? To what extent you see litho needs being driven by high-bandwidth memory, data center processing or edge AI? Is there any area that's surprising to the upside?

So it's clear, I think, that if you look at the orders that came in, that there is a healthy start, I would say, for the N2 foundry business. I think it's a healthy start. It's also clear that obviously, not the full capacity that you would need for this node is in there, but that is pretty logical, right? I mean obviously, this customer is going to ramp. And there you will see gradual buildup, and that will -- you will also see -- at some stage, you will see additional orders coming in for that ramp. Exactly what that buildup will be, you might want to raise that question by tomorrow. And maybe the second part, I think, is for you, Christophe.

Yes. I think -- so I think I said it in my comments initially, I think we've been also consistent there. So I think AI is driving, I would say, right now, the biggest part of the recovery. This is true for Logic. This is true for Memory. Roger just commented on Logic. I think you know that for high-bandwidth memory, those products drive more demand, more of a wafer demand because we are looking basically at a higher density of DRAM on those products. And we look at something that, of course, will take course over several months. So we started to see the positive effect of that for 2025. We expect that to continue into 2026, both for Memory and for Logic. And at some point of time, I also mentioned that maybe the other segments are a bit behind in terms of recovery. So a lot of the capacity today, either Logic or DRAM capacity will be [indiscernible] those AI product. As the other segments recover, we also expect potentially some capacity to be needed there. And that's also why we believe overall that 2025 will be a strong year. And I think the -- whatever one is trying to understand, what you're trying to understand is exactly the pace of it. That, I think, we don't know exactly. But the fundamentals, I would say, on AI, and I think the recovery in general are strong from our point of view.

Your next question comes from the line of Tammy Qiu from Berenberg.

So first one, on the leading-edge 2-nanometer ramp-up pace, so you mentioned that they are starting to ramp up their leading-edge 2-nanometer capacity already or preparing for that. Do you notice anything in this quarter suggesting that they are fully in the ramp-up phase or everything is as planned? And the second question I have is regarding the DRAM adoption of more EUV layers as well as High-NA EUV, how do you see the layer count change over the next few generations? Are we going to see a similar level of growth of layers as we have seen over the past 2 years or it will gradually slow down? If there is a number you can share, it would be great.

I'll take the first part, Christophe, you can take the second. But as it comes to do you notice any pull in there? I think the foundry customer has indicated that they're looking at N2 in the second half of 2025. I think you're typically, for this customer, looking at a lead time of around a year. As we've said, I think, putting in orders at this stage, I think, is consistent with that. To the extent that there is a difference in timing or ramp, again, I think that's a question that you might want to raise on a conference call tomorrow. But I think what we see here is pretty consistent with what we've also heard publicly or stated publicly about starting this in the second half of 2025. Christophe on DRAM?

Yes. On DRAM, so I think there also, I think I'll be very consistent with the information we have shared with you previously. So we see on there an increase of EUV use on every node. I think this is a trend that continue at least in the foreseeable future. Of course, it's always more difficult to make forecast on nodes or technology that are still being defined by a customer. But that logic is still in place. I think you have seen also in DRAM that at this point of time, all customers are using EUV in production. I think the last customer was very public about that recently. So you see a gradual basically adoption with different speed maybe per customer. But I would say, very much in line with, I think, what we explained already now for a few years. On High-NA, we also see opportunity for DRAM, the horizon of '25, '26. As I mentioned in my commentaries, we see customers very eager to test the High-NA tool in our lab, exposing their own wafer to validate basically that High-NA can provide a nice opportunity both in performance but also in cost savings. So they also -- same as before, we believe that '25, '26 is about the time where we could see some insertion of High-NA for DRAM.

And your next question comes from the line of Francois Bouvignies from UBS.

My first question would be on China. I'm afraid, I mean -- and it's very simple. Could you make in the future deep UV tools without U.S. IP at all? And are all your deep UV tools using U.S. IP? That's my first question.

That's a very hypothetical question. At this stage, there is -- as you know, we have a lot of operations also in the United States. So there is a significant contingent of U.S. technology in those tools. So speculating about could we do it without U.S. technology, I think it's a speculation that we shouldn't and will not go into, I think, or the way we produce and the way we run our business should not be influenced by this kind of question.

I think maybe to add to that, I think we've been also very vocal to say that we believe that preserving the ecosystem as much as possible is a good thing for this industry. I think we still believe that. And therefore, I think that's still also the discussion we're trying to have with all the stakeholders.

Makes sense. And maybe the second question I had is a bit of a follow-up. So if we take like this EUV orders of EUR 2.5 billion and your EUR 39 billion of backlog and that you have, I come with like you still have 30 tools, EUV tools to book for next year to reach the midpoint of the guidance. So Roger, you said nicely that your order backlog is orders is going well on track above this EUR 4 billion, but it's mainly driven by deep UV. And on EUV, it seems that you still need 30 to book for the rest of the year, which would imply around EUR 7 billion of EUV orders coming in H2 versus EUR 3 billion in H1. Is my math correct in a way to think that you still have a significant part of your EUV to be booked in the second half of the year, assuming, of course, you have 1-year lead times?

There are still -- I think the math that we gave before, I think, still holds. So as I mentioned, I think we're well on track to achieve the objectives, the objective there. And we have given indications or we have given a bandwidth for 2025, Francois, for the full revenue. I think you're now jumping into one specific element of the revenue, but I think our math holds for the full revenue. And I think that holds. And I think going deeper into that and going there, I don't think adds anything to the overall message that I believe we're nicely on the way to achieve the objectives and the bandwidth that we've discussed before. So I wouldn't go -- I wouldn't want to go at this stage any more specific into any of the components. As I mentioned before, we have a Capital Markets Day coming up. There we will be a lot more specific on how we look at 2025. And until that point in time, I think we're just going to stick to our messaging that I've given before.

And your next question comes from the line of Stephane Houri from ODDO BHF.

In your prepared remarks this morning, you seem to talk pretty much about increasing capacity or at least preparing for the ramp. So does it mean that -- and at the same time, you're talking about very highly about the reception of EUV High-NA. So maybe if you could clarify what you mean by preparing the ramp and if it does mean that you want to increase your capacity, do more investments and maybe open a new plant?

So in general, when we talk about increasing capacity, we really talk about increasing capacity across the board. And this really relates to the capacity expansion that we've talked about in the past, which is that we're driving towards the capacity of 600 deep UV tools and 90 EUV tools. But then added to that, we are indeed also expanding our capacity when it comes to High-NA. And that's, I think, it's that combination. So when we talk about adding capacity and ramping capacity is really across the board, it's been 90, 600. And as we mentioned before, medium term working towards 20 High-NA tools.

Okay. And can you maybe clarify where we are standing in terms of ASP for High-NA tools?

On the High-NA tools, what we said before is that we're looking at an ASP north of EUR 350 million. That's the ASP that we have for the 5200 tool, which is the high-volume manufacturing tool that customers are ordering in this time frame.

Your next question comes from the line of Andrew Gardiner from Citi.

If you don't mind, I'll try another one on China. I'll try and be specific, and we'll see whether you can comment on it. The article this morning seems to be, again, quite focused on your service activity in China, in particular, your servicing of tools that you were able to ship last year, the high-end immersion tools, NXT:2000, 2050 models. But as of the start of this year, you're no longer able to ship. Can you tell us whether you're still indeed servicing those tools at some of those clients? Can you just clarify that?

Well, we are following all the applicable laws and regulations when it comes to export controls. And of course, that is a landscape with U.S. rules and with Dutch rules. So for some fabs, there are more limitations to others. But in general, it is still the case that we can operate in the fabs of our customers. So we still have, as we call it, we still have eyes on the tools. So we're still in the fabs of our customers. But there are limitations that for some fabs are more stringent, and this is then particularly related to parts, so to parts being sent either from the United States or from Europe or when it comes to the use of technology, so manuals, et cetera. So there are limitations that for some fabs are more stringent than for other fabs. But in general, we're still in a position that our people can continue to serve in the fabs of our customers [ in China ].

And I think and will be aware, we have been now in this position for quite a few months. So I think the landscape has been set. So I think Roger said it, we fully understand the new regulation. We, I would say, adjusted our service, our action according to that. But for us, this is not new news at this point of time. We have been doing that for many months already.

If I could have a quick follow-up. Christophe, you mentioned the new fabs that are going to be built, some of which supported by CHIPS Act money or equivalent funds in other jurisdictions. With all of those "scheduled to take tools," how much of an impact do you think is that in 2025? And how much is actually beyond that, given the lead time effects to build a lot of concrete and steel going in at the moment? But certainly, not many ready to take actual cleanroom equipment just yet. Can you help us with how you think that's going to the phase over '25 and then '26 and beyond?