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

Good day, and thank you for standing by. Welcome to the ASML 2024 Third Quarter Financial Results Conference Call on October 16, 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 third quarter results. The length of this call will be 60 minutes, and the questions will be taken in the order that they are received. This call is also being broadcast live 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 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 Christophe Fouquet for a brief introduction.

Thank you, Skip. Welcome, everyone, and thank you for joining us for our third quarter 2024 results conference call. First, let me apologize for the confusion yesterday after the early publication of our press release due to a technical error. Particularly given the serious nature of the key messages we wanted to deliver and discuss with you, this was very unfortunate. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentaries on the third quarter 2024 as well as provide some additional comments on the current business environment and on our future business outlook. Roger?

Thank you, Christophe, and welcome, everyone. I will first review the third quarter 2024 financial accomplishments and then provide guidance on the fourth quarter of 2024. Let me start with our third quarter accomplishments. Total net sales came in at EUR 7.5 billion, which is above the high end of our guidance driven by more deep UV system sales as well as higher Installed Base Management sales. Net system sales came in at EUR 5.9 billion, which is made up of EUR 2.1 billion of EUV sales and EUR 3.8 billion of non-EUV sales. Net system sales was driven by Logic at 64% with the remaining 36% coming from Memory. Installed Base Management sales for the quarter came in above guidance at EUR 1.54 billion due to higher service and upgrade revenue. Gross margin for the quarter came in within guidance at 50.8%. On operating expenses, R&D expenses came in slightly below guidance at EUR 1.06 billion, while SG&A expenses came in as guided at EUR 297 million. Net income in Q3 was EUR 2.1 billion, representing 27.8% of total net sales and resulting in an EPS of EUR 5.28. Turning to the balance sheet. We ended the third quarter with cash, cash equivalents and short-term investments at a level of EUR 5.0 billion, similar to last quarter. We ended Q3 with a free cash flow of EUR 534 million, which is somewhat improved relative to the last quarter. However, as mentioned last quarter, there continued to be pressure on free cash flow. This is primarily due to a relatively low level of order intake, and therefore, less down payments as well as a higher inventory level. The higher inventory is primarily attributable to EUV, both High-NA and Low-NA, driven by longer lead times in the build cycle as well as inventory in support of future ramp. Moving to the order book. Q3 net system bookings came in at EUR 2.6 billion, which is made up of EUR 1.4 billion of EUV bookings and EUR 1.2 billion of non-EUV bookings. Net system bookings in the quarter was more or less balanced between Memory at 54% and Logic at 46% of bookings. The relatively low order intake is a reflection of the slow recovery in the traditional end markets as customers remained cautious in the current environment. At the end of Q3 2024, we finished with a backlog of over EUR 36 billion. With that, I would like to turn to our expectations for the fourth quarter of 2024. We expect Q4 total net sales to be between EUR 8.8 billion and EUR 9.2 billion. We expect our Q4 Installed Base Management sales to be around EUR 1.9 billion. Gross margin for Q4 is expected to be between 49% and 50%. And we'd like to make a few comments on the Q4 guidance. Net sales include the expected revenue recognition of 2 High-NA systems. Installed Base Management revenue is higher than Q3, primarily as a result of achieving specific EUV performance milestones and some EUV productivity upgrades. Although Q4 revenue is higher than Q3, gross margin is expected to be slightly lower than Q3 as the positive impact from the higher upgrade revenue is more than offset by the dilutive gross margin impact from the expected revenue recognition of the 2 High-NA systems. For the quarter, the dilutive effect thereof on the gross margin is approximately 3.5%. Based on the Q4 guidance, we expect 2024 revenue at around EUR 28 billion with a gross margin of around 50.6%, which is slightly lower than 2023, as expected. The expected R&D expenses for Q4 are around EUR 1.090 billion and SG&A is expected to be around EUR 300 million. Our estimated 2024 annualized effective tax rate is expected to be between 16% and 17%. In Q3, ASML paid the first quarterly interim dividend over 2024 of EUR 1.52 per ordinary share. The second quarterly interim dividend over 2024 will be EUR 1.52 per ordinary share and will be made payable on November 7, 2024. In Q3 2024, no shares were purchased. With that, I would like to turn the call back over to you, Christophe.

Thank you, Roger. As Roger highlighted, it was a solid financial quarter, but there were also a number of market dynamics in the quarter. Starting with our technology. We continue to make good progress on both our new EUV products. On our Low-NA technology, we continue to ramp the NXE:3800E system this quarter, with EUV customers now rapidly shifting to this new model due to its higher performance, including over 37% improvement in throughput compared to the NXE:3600D. We have now demonstrated the full 220 wafer per hour throughput at a new record overlay in our factory, and we are on track to deliver full specification system with new system shipments and upgrades from the beginning of next year. As customer transition to the NXE:3800E, the majority of shipments in Q4 are the NXE:3800E systems. Regarding High-NA, the 2 shipped system are now exposing wafers at our customer, and we expect to recognize the revenue from this system by the end of the year. The first system is in the process of being shipped to a second major customer. Momentum continues to grow with around 10,000 wafers now exposed for multiple Logic and Memory customers using the High-NA system in the joint ASML-imec High-NA lab and the systems in the field. At the recent lithography conference, we published new High-NA data showing major performance benefits in imaging, overlay and contrast. Those benefits also indicate a significant cost reduction opportunities for both Logic and DRAM customers. As a reminder of the value High-NA provides, we have demonstrated the system ability to print pictures at a resolution of 8-nanometer. Compared to a Low-NA system, this represents an improvement to nearly 3x in transistor density per exposure. So all in all, we have seen continued momentum on EUV technology, and we are progressing well relative to customer expectations. With regards to market conditions, while we continue to view AI as a key driver of the industry recovery with potential upside, we see other segments recovering more slowly than anticipated. The recovery will extend well into 2025, which is leading to customer cautiousness and some pushouts in their investments. In Logic, the slow recovery of end markets, such as mobile and PC, together with specific competitive foundry dynamics has resulted in a slower ramp of new nodes at certain customers who are, as a result, pushing out some of their fabs and changing their litho demand timing. In Memory, the slower market recovery is also resulting in limited capacity addition with the focus still on technology transition, supporting the high-bandwidth memory and DDR5 AI-related demand. And finally, we expect the China business to go back to a more normalized percentage of our business, in line with the percentage of China business in our backlog. In summary, while the long-term trends are still very strong and positive, the developments over the past few months, combined with customer-specific circumstances, has led to a reduced gross curve in 2025 and an overall reduction of our lithography demand. Due to these dynamics over the last quarter, we felt it would be appropriate to make some comments on 2025 at this time versus waiting until our Investor Day next month. With that, I will turn it back over to Roger.

Thanks, Christophe. And as we discussed in our Investor Day in 2022, we provided market scenarios for 2025 of between EUR 30 billion and EUR 40 billion, with a gross margin of between 54% and 56%. Based on the recent market dynamics that Christophe just described, we now see 2025 revenue moving through the lower half of the range, so between EUR 30 billion and EUR 35 billion. To a large extent, this is driven by a significant reduction in our expected Low-NA shipments for 2025 to fewer than 50. We also now expect our China sales to be around 20% of our total revenue next year, trending back towards our historical China percentage and in line with its share of the backlog. With regard to gross margin, one of the key drivers of the expected improvement was Low-NA, driven by both an increase in the number of systems as well as a move to the higher-margin 3800E system. While the improvement in gross margin for the 3800E has been achieved, the large reduction in EUV unit numbers for next year is significantly margin dilutive in comparison to earlier expectations. Also, the reduction of our China sales, which typically contain a high percentage of immersion sales, is dilutive to our gross margin. Therefore, based on the current outlook of lower revenue and the less favorable mix in comparison to the 2022 Investor Day, we now expect a gross margin of between 51% and 53% in 2025. In comparison to 2024, the 2025 gross margin is expected to benefit from the higher gross margin on the 3800E, gradual margin improvement on High-NA and the improvement in EUV service margin, but we'll also see a dilutive margin effect of recognizing more High-NA tools in revenue. On operational expenses for 2025, we expect total OpEx to be at the upper end of the bandwidth of EUR 5.6 billion to EUR 6.1 billion, provided during Investor Day in 2022. We will continue with our R&D road map as planned and have been able to absorb the significant wage inflation effect since 2022 within the bandwidth. With that, I once again hand it over to Christophe.

Thank you, Roger. As we look out longer term, consistent with what we have previously stated, the secular growth drivers in the semiconductor end markets are still very much intact. AI, energy transition, electrification, among other applications, continue to provide a very strong and very positive perspectives to our industry and ASML business. The expanding application space, along with increasing lithography needs on future technology nodes, drive demand for both advanced and mainstream nodes. In line with most of our industry peers, we continue to see AI as an upside and continue to watch carefully how this will affect us on the short and in the long term. Despite some of the pushouts we have discussed, we continue to prepare for a number of new fabs that are being built across the globe to address the future demand and needs of the industry. Those fabs are spread geographically, are strategic for our customers and are scheduled to take our system. We will therefore continue to build capacity in order to respond to the demand increase that we expect throughout the remainder of this decade. We will provide a more detailed assessment together with the scenarios of 2030 at our Investor Day on November 14, 2024. We look forward to seeing you there. 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 the line of Joe Quatrochi from Wells Fargo.

I wanted to kind of understand the change that you're talking about in terms of the China demand. What are you seeing there that's causing that normalization? And then if we were to try to think about what, in your 2025 guide, you're implying for non-China DUV revenue, it seems like you're embedding a pretty significant increase year-over-year. What's the underpinning driver of that?

Thanks, Joe. So when it comes to China, I think it's a combination of two things. As we've said before, in the past 2 years, we've been very much eating into our backlog for China, and that backlog has come to that level simply because in the years before that, we were -- we had a fairly low order fill rate for China. So as a result of that backlog built up in the past 2 years, because of the global market circumstances, we were able to deliver on that backlog. So that's why the China sales in 2023 and 2024 have been so high. So as a result of that, we also indicated before that we expect at a certain point in time for that to normalize and that is, I think, what you now see in the numbers. So that's one driver. Secondly, I think we all read newspapers, right? We all see that there is speculation around export controls. And also that is a driver for us to take a more cautious view on the China sales. So with that combined, we've indicated that we believe the China sales for next year are going to go to, let's say, 20% of our expected sales level for next year. When it comes to deep UV and the non-China part of the deep UV business, if you do the math a little bit, our expectation is that the deep UV business next year will be lower than it is this year. So we believe deep UV will go down a bit. But you're right. I mean with the China business going down, as we've indicated, that means that the non-China part of the deep UV business will go up. And the main reason is that if you look at the more advanced nodes and if you do the math on the growth that you might anticipate in the EUV business for next year, you will see that there is quite some growth there. In the combination of Low-NA and High-NA, you will see quite some growth there. And I think what you're going to see is that the non-China part of the deep UV business is sort of following that trend. So the attach rate, if you want to call it like that, of the deep UV business to the EUV business will be kind of similar. So the growth rate you will see on EUV, you will sort of see back also in the growth rate for the non-China part of the deep UV business.

Got it. That's helpful. And then as a follow-up, I wanted to try to understand a little bit better the 2025 gross margin guidance in the commentary. I can certainly appreciate the lower mix of Low-NA. But for total revenue to still be kind of within the low end of the target range, I think it would still imply that your immersion shipments maybe being down year-over-year, it sounds like still better than what you're thinking about from the target model, which I think would be a positive for -- in terms of offsetting just some of the mix. So maybe can you help us unpack that a little bit of just how do we think about like the immersion relative to what you were thinking about at the Analyst Day in 2022 and that mix effect?

Yes. So Joe, immersion in comparison to the Investor Day in 2022, I think there, you will see that immersion is not dramatically different from the expectations that we had in 2022. So I think the immersion expectation has gone up a bit. But with everything I just told you, including our view on China, I think immersion has come down a bit. And all in all, I think our immersion view is not dramatically different from what we held out at the Investor Day. So the line, if you simply contrast the gross margin that we have that we now articulate for 2025 and compare that to the gross margin that we articulated 3 years ago, it really is, to a very large extent, it is driven by EUV. And there are two elements in EUV that do this. One element is volume. So the volume that we have on EUV now in our model with below 50 is substantially below the numbers that you saw in the Investor Day of November '22. But there was also a mix effect in there, because in 2022, we were looking at the high end of the mix, i.e., 3800 was going to dominate, and in fact we were expecting a few 4000s in there. And as a result of the dynamics in the market, you will actually see quite a few 3600s in there in 2025 as well. The 3800 will dominate, but it will clearly be 3600s in there as well. So there is also an ASP and gross margin mix effect in there. It's that combination of particularly a significantly lower number of EUV units and also the mix effect in the EUV units that is primarily driving down the gross margin expectation in comparison to what we were looking at in November of '22. And the unit effect is, by far, the biggest effect in that explanation.

Your next question comes from the line of Didier Scemama from Bank of America.

Yes. Roger or Christophe, I don't know, when you look at the cuts you've made to EUV shipments for next year, call it, 20 to 25 Low-NA systems, how much of that do you think spills over to '26? And I've got a follow-up.

I think it's a difficult question, as you can imagine, because I think the feedback we have got from our customer in the last few months, was about pushing out those tools. So I think you could say, mathematically, this move into 2026, I think that's the simple way to look at that. I think that we have to, of course, over time, reconfirm the dynamic of the market, I will say, for the second half of '25 and '26. So if you think about mathematically, we have talked about pushout because we really see our customers delaying basically their fabs, we don't see customer basically changing their mind on those fabs. So that's why we refer to pushout. Of course, '26 is an opportunity to see those tools back. But like I say, there's still a long way until 2026, and we will continue to watch the market dynamic there.

Excellent. And a follow-up to that would be, how much of the pushout is a reflection of just the end demand being poor versus maybe several of your customers struggling with process technology and attracting effectively customers to justify the construction of those factories?

I think it's both. So it's a mix of that. I think that we mentioned the slower recovery first, because I think this affects every single customer. So we are still quite optimistic about AI. I think today without AI, the market will be very sad, if you ask me. But for the rest, I think our customer continues to confirm that when it comes to mobile, when it comes to PC, when it comes to automotive, the recovery is not what I think everyone had wished for. And that affect, I would say, a large part of our customer on all segments and application. I think we also indeed mentioned as well some competitive dynamic on Logic. I think that also has been expressed at length in the press in the last 3 months. I think that's not really new for you. And this also contributed to some of the pushout. So I think those two things are really the two dynamics that have come up in the last few months to a level where our customers basically started to really make, I would say, a decision that were in line with their expectations, both on the total market but also maybe, in some cases, on the share they may end up having in some of the Logic market.

Makes sense. And just a tiny follow-up to Roger, if I may. When you look at your IBM revenues in Q4, there is a big step-up. Can you give us a sense as to whether that's sort of a new normal? And especially, I'm thinking about '25 in your guidance and coming back to the point that was raised earlier on the DUV revenues, which are look optimistic. So is the Installed Base Management going to grow a lot in '25 and effectively picks up the bottom a little bit from DUV?

Yes, Didier, I wouldn't say that it's the new normal, as we also explained today in the -- earlier and also as we explained in the video, there is clearly also a one-off effect in there, meeting a certain performance target. So that was one reason that we expect that's a one-off effect, if you like, in the -- in what we see for Q4. That said, we do believe that the Installed Base business, both on the service side and also on the upgrade side is going to grow in a quite healthy way to -- in 2025. So yes, we do project that it will -- that there will be quite healthy growth in that. So there will be healthy double-digit growth as we currently see it in the Installed Base Management in '25 in comparison to '24.

Your next question comes the line of Mehdi Hosseini from Susquehanna.

Yes. First one for Christophe. I want to better understand the momentum with High-NA. I think at the SPIE conference a couple of weeks ago, there was increased interest by your key customers for changes to the reticle -- going to larger reticle size. And I want to better understand how you see that evolving or impacting booking for High-NA. Or would the reticle or changes to reticle would cause any pushout as you try to book 5200? And I have a follow-up.

Yes. So I think the interest, you said it is increasing. And I think what you have seen at the conference is that the initial data that have been shared on High-NA by ASML but also by some customers have been received very positively because it shows significant performance improvement when it comes to imaging and some good, very good cost opportunity on some of the layer for DRAM and Logic. So I think the interest is high indeed and increasing. The discussion on the 12-inch reticle is a bit a discussion about what else could we do in the future to further improve the productivity of High-NA first and potentially other tool. So the conference you referred to is a bit of a technical conference. So people like to discuss basically what could come next. It was a good engagement. This was a sign indeed also of the fact that more customers start to count really on High-NA into the future. And that time frame is not at all aligned with the 5000 or the 5200. So I think there's absolutely no connection between what we do with High-NA and what we may do in the future with the 12-inch etched reticle. To give you an idea, that discussion may become more concrete towards the end of the decade or the beginning of the next one. So it's really a long-term technical discussion we have engaged with our customer, and we are happy to have the discussion with them because this can provide a significant productivity improvement for High-NA but for lithography in general. But that's not for tomorrow, and therefore, this will in no way impact our current discussion and business on High-NA.

Okay. And then a quick follow-up for you and Roger. Where are we with internal capacity targets? And given the updated '25 target, how do you see the capacity targets that you put out in '22 evolving? So where are we today with DUV and EUV manufacturing capacity? And how are you managing the targets for additional capacity that you put out back in '22?

Yes. So if you realize today, we have a lot of focus, of course, on 2025. I think what we say is that for next year, with a slower recovery, the number of tools we will be -- [ had up shipping ] to our customer is mostly less than what we expected, both in Capital Market Day 2022 but also a few months ago. Now what I've also said in the introduction is when we look at the long term, when we listen to our peers, I think that the bullishness about the long-term opportunity of this market is strong. We share that, which means that at some point of time, the need for more capacity will be there. So what we do, we continue to execute on the long lead time items, things like building some equipment. On the other hand, because the short-term market is a bit, I would say, softer than what we expected previously, we are also slowing down basically any short-term investments. So when it comes to people, materials, et cetera, et cetera, we don't have to do that today. We will do that when we have, again, visibility for a larger demand. But the structure of our capability, we want to still drive because, I will say, when a recovery takes more time to happen, if you believe on the long-term trajectory of the market, there's always a point where you have to deliver more tools, and we want to be ready for that as well.

And your next question comes from the line of Chris Caso, Wolfe Research.

My first question, I'd like to dig into a little bit more of what more specifically may have changed over the last 90 days? Because some of the things you referred to in China, the Memory spending, some Logic spending, some of it, I think, was sort of known 90 days ago and some may be incremental. If I take each of those three and some of the fab pushouts that have come about that, how would you characterize the change in your calendar '25 guidance among those three areas? Basically, what was new to you as compared to when we had the last earnings call?

Well, I think if you take the different pieces, I think when it comes to China, we already started to indicate in the last call that, over time, we do see China trending towards a more normalized percentage. I think the intensity also of the discussions in the press, including discussions on more export restrictions, I think have driven us to more cautiousness when it comes to China. So that, I think, is really driven by developments in the past couple of months. I think when it comes to other customers, on previous calls, we've indicated that there was uncertainty. And I think what we see to a large extent is that part of that uncertainty has really materialized. So what became a -- what was a question mark maybe a number of quarters ago has now become quite clear that a certain level of demand from certain customers was -- is likely not going to happen. So that was the reason why we decided to -- that we could no longer hold a large window of EUR 30 billion to EUR 40 billion at the -- in the world. And that as a result of that, we needed to reduce that window to the lower half. I think that's, Chris, I think the background of it, and that's what really changed. So it's the materialization of certain risks and uncertainties that we talked about before that have driven us to this lower expectation.

Got it. That's helpful. And just as a follow-on with your comments on China. Of course, there haven't been new export restrictions announced. So is it correct to interpret your comments is that you're making some judgment on what you think some of those restrictions, how that may affect revenue in '25 prior to those being fully implemented? Is that correct interpretation?

Yes. Chris, as you, we read newspapers and we see continued speculation on things that might happen. And as a result of that, we've decided to take a more cautious view. And that indeed has resulted in -- is one of the drivers. I mentioned the other driver as well. But the combination of China being -- us eating less and less into the backlog of China and speculation around more export control restrictions, that has led us to the conclusion that it is prudent to go back to this 20% for China, 20% of our total business.

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

My first question is on the comment that you mentioned on the smartphone market and PCs and the market is a bit slower. Versus 3 months ago, the smartphone market and PC is indeed slower, but the magnitude of the revision of EUV of 15 to 20 is still quite big compared to the weakness of the market. So I was just coming back, and it seems to be really 2 customers that's been well in the press having some issues. So we would have thought that you would see some swap-out in the orders in terms of customers. Did you see any signs of like upside risk into some orders, at least a bit offsetting or interest related to these customer issues? Or is it is there a scenario that your customers gave you some too optimistic forecast in light of a big shortage of EUV you had in recent years, and therefore, the swap-out will -- the swap will take much longer than expected? I'm sorry for the long question as usual.

No, it's okay, Francois. Those are good questions. And I think you touched again on the two drivers that we have seen changing our, I would say, demand expectation for next year. So the combination of the two, again, is important. And on the first one, I think you see yourself, as you mentioned, the recovery on mobile, PC to be weaker than expected initially. This has an impact, I will say, on the capacity planning, but also maybe on the expectation of capacity planning. So I think we used the word cautiousness a few times in the call. When you become cautious, I think this means you are careful on the short term, but also a bit on the midterm. So you have a bit of a double hit, if you want, with cautiousness. So that's the first one. On the second one, I think we also mentioned some upside on AI, because we still believe that the overall demand for those application is there, continue to increase. So if we look at the server demand, we see there a very nice recovery. A lot of that has to do with AI application. So we talk about upside, which also means that the overall dynamic of the market is still playing. And we felt the need to provide an update for next year based on some of the development we have seen. I think in no way we are also saying that there is a complete understanding of how the entire market will continue to play out in the next few months. So I think on the second part of your question, I would say maybe this has not played out fully yet.

Okay. And you would expect to happen then, I guess, to -- at some point will happen?

Well, I think if everyone -- and I think a lot of us still believe in a strong AI demand in the coming years, I think that demand has to be fulfilled. Therefore, yes, I will say mostly, we will see some development also on that front in the coming months.

Okay. And maybe my follow-up would be on High-NA. I don't want you to spoil the Capital Markets Day, but could you maybe give us an update on the High-NA now in terms of years of adoption, maybe Logic, Memory? Anything happening here versus maybe 3 months ago, 6 months ago since you passed the wafers?