ASML Holding NV

AEX:ASML

Earnings Call Transcript 2020-Q1

[Leo de Later]

Mr. Dassen, before we talk about the quarter, because it's on everyone's mind, how is ASML dealing with the COVID-19 pandemic?

[Roger J. M. Dassen]

Well, these are unprecedented times for sure. And in unprecedented times, you need to make your choices and need to set your priorities, and the priorities for ASML are pretty clear.First priority, obviously, is to keep our people and their families, to keep them safe. That is absolutely the overriding principle.And second, we want to make sure that we continue to serve our customers and being able to continue to really deliver on our road map. Those are the key priorities that we have set. Obviously, we take a number of measures to make sure that we can make up to those promises and those commitments.Safety measures. For instance, as it relates to our factory, to the clean rooms, we make sure that they are completely isolated from the rest of the campus. Also within the clean rooms, we have very stringent safety measures applied such that our people are very well protected. We also make sure that in between shifts that isolation takes place. So we have a bunch of measures around the factories.People outside of the factories, in essence, work from home. The vast majority of the people outside of operations work from home. Of course, we have very, very stringent travel restrictions. Of course, there are the formal travel restrictions, but we also have our own travel restrictions in addition to that. And we leverage many best practices with our peers, with the customers, with the suppliers, just to make sure that whatever best practices are out there to keep our people safe, and nonetheless, be able to deliver on the commitments that we have towards our customers that we leverage those best practices and that we continue to be best-in-class in that regard.

[Leo de Later]

What impact has COVID-19 on your manufacturing capability and on the supply chain?

[Roger J. M. Dassen]

So on the manufacturing capability, I would say the impact so far is limited because we have been able -- in all manufacturing locations that we have, we are able to continue to be fully operational. So that's good news. Of course, there are inefficiencies as a result of, for instance, the quarantine measures that have to be taken. That's for sure. If you just think about installations that you have to do at customer sites, so installations, field upgrades, et cetera. Obviously, all the travel restrictions and all the quarantine rules that are out there, of course, they do create significant hurdles there. But so far, we have been able to, nonetheless, be able to serve our customers. Thanks to, first off, the commitment of our engineers. They go above and beyond what can be expected from them in these circumstances. You have to recognize that, for instance, an engineer traveling to a certain location, upon arrival there has to go in quarantine for a certain period of time. And then sometimes, upon coming back has to go into quarantine as well. So there's a double whammy in terms of quarantine there. And in spite of that, people are just completely dedicated to go.We also use new technology in order to allow remote access to what's happening in factories. So we use virtual, augmented-reality type technologies to really support the teams that are out there locally in the field with the knowledge that we have more centrally.So those are the measures that we take on the operational front. So inconveniences, inefficiencies, but at the end of the day, we are still able to keep our operational capability fully intact.On the supply side, we did have a few suppliers that have been confronted with temporary closures. We have been working around those and I think, we can say that at this stage, all those instances where that has happened, we have been able to find a solution. Solution could obviously be that the closure has been lifted, but solution can also be that we have been looking at workarounds. And the workaround could be, for instance, to find an alternative supplier, workaround could be to find new solutions for ourselves. So through hard work and a lot of creativity from our engineers to find a solution to circumvent that issue.So at this stage, I think we can say that the issues that did pop around the closure have been resolved. But listen, we need to continue to monitor this, and we do monitor this very, very closely. And as soon as we get any indication that there might be an issue, we immediately start looking into different solutions, which could also include, looking at safety stock and making sure that for certain parts where there might be a heightened risk that we build a safety stock as much as we can.

[Leo de Later]

Have you seen impact on customer demand?

[Roger J. M. Dassen]

At this stage, the demand actually looks really good. If you look at our order intake for the quarter, it has been really good, EUR 3.1 billion, including 11 EUV PO. So from that angle, order intake has been very strong, and we have had no pushouts or cancellations in the year. So from that vantage point, if you just look factually what's going on, demand is still very, very strong. And there's a reason for that, obviously, because a lot of the investments that our customers are making through buying our equipment are, of course, strategic in nature, right? So these are strategic investments that they really also need for capacity building on a go-forward basis.Customers also realize that the lead time for our systems is longer than anything else that they have in the fab. So from that vantage point, it is smart that they -- the last thing they would ever cancel is our equipment. So that's pretty straightforward. And depending on how customers look at -- how they come out of the current situation and depending on what their perspective is on the recovery beyond this point, they might also look at a recovery that could be such that all of a sudden, there is a significant pent-up demand that they need to cater to. And for that, they obviously need the latest and greatest technology from our side. So those are fundamental reasons why customers might think twice before they really push out or cancel our equipment.I think the longer-term perspective, that obviously is the big issue. And there, I think there is a number of different driving forces that we need to look into. On the one hand, you could say, if the world ends up in a recession somehow, then it's fair to say that some of the end markets that, of course, we have to look into as well, think of smartphones, think of automotive, et cetera. Of course, some of those end markets are correlated to GDP, right? So to the extent that GDP would take a hit, it is fair to assume that also some of those end markets might take a hit.On the other hand, it's also clear that you might be looking at a number of applications that in today's environment are in higher demand than ever, right? So anything that is related to working at home, obviously, is in high demand. So anything related to notebooks, advanced communication systems, but also data warehouses, I mean, those products are in very, very high demand. So I think we will have to see and so do our customers with whom we are in very, very close contact at this stage and who tell us that at this stage, they're still looking at fab operations that they say are pretty novel. But of course, they are looking as well, what's happening and how will ultimately, this balance between the different factors that I just mentioned, how will that pan out. And I think that will ultimately drive the medium-term demand for -- in the end markets and then the medium-term demand for our products.

[Leo de Later]

What measures are you taking to manage cost and to preserve your cash?

[Roger J. M. Dassen]

Well, of course, critical for the CFO, right? So -- and I guess for good reasons. Given the uncertainty that we just talked about, uncertainty short term, medium term, I think, it is prudent to look at cash preservation.Our starting point is very healthy, right? So if you look at our starting point, if you look at the quality of our balance sheet, if you look at the cash that we have at hand, if you look at the flexibility within our business model, the flexibility of our cost structure, I think our starting point is really good. But the way we look at cash preservation is not just for ourselves. We also look at cash preservation in order to make sure that our entire ecosystem, including our supply base that we can support them in the current environment. So that's why cash preservation is very important to us.So in that regard, we took a number of measures, recently. In the press release that we issued a couple of weeks ago, we indicated that we paused the share buyback in Q1 after having done EUR 507 million of share buyback in Q1. And we also said that we wouldn't execute on share buybacks in the second quarter. So that is a first significant measure in terms of cash preservation.Secondly, we are looking at head count. We will still grow in head count also for the remainder of this year, but we will only grow in head count where it is related to what we call business critical, right? So only to the extent that it's really business critical. So related to our capability, related to the R&D that we think is essential, only then will we grow in head count.And thirdly, we are looking at OpEx and CapEx. And also there, we apply a pretty high hurdle in terms of business criticality. And only to the extent that we think it's business critical, then we will continue with certain OpEx and CapEx projects.Again, there, I think it's key for us that we continue to -- that we continue the development around future technology road maps. So anything related to that, including the High-NA program, the accelerator is pushed down and will continue to be pushed down because we think it is critical that also coming out of the current situation that we are able to provide our customers with the greatest technology and the latest and greatest tools that they will need, in order to then cater to the demand that in that recovery situation will come up.

[Leo de Later]

Let's have a look at the results then. Can you give us a summary of the first quarter results?

[Roger J. M. Dassen]

Sure. So revenue came in at EUR 2.44 billion. And you should compare that to the EUR 3.1 billion to EUR 3.3 billion that we originally guided. Two main deltas there, in that regard.The first delta, so the first gap to the original EUR 3.3 billion to -- EUR 3.1 billion to EUR 3.3 billion guidance that we gave is related to installed base revenue. Installed base revenue came in at EUR 857 million, which is about EUR 100 million shy of where we guided. So -- and the main reason for that is that we didn't get the machine time of customers that we needed to complete some field upgrades. And also, it took a little bit longer for some customers to have the final acceptance of some field upgrades done.So as a result of that, we have a little bit of revenue around this EUR 100 million revenue that will shift into the next quarter. So it's not gone for the year, but it's just shifted away from Q1 into the next quarters.The second delta is related to system sales. And there, we have about a EUR 700 million delta, about EUR 200 million in Deep UV, EUR 500 million in EUV. And again, there, this is not revenue that is lost for the year. We think this is revenue that will shift into Q2 and Q3, in particular.So let's look at those components. So on Deep UV, the EUR 200 million, there is primarily related to shipments that we have planned to Wuhan and also some other places where as a result of very stringent COVID-19 restrictions, we're looking at significant restrictions in getting equipment shipped or -- and/or installed. So that's the main reason, about EUR 200 million Deep UV revenue that we missed as a result of that at in Q1. And we're working very, very hard now with those customers to get that into the next quarter. So again, this is a mere delay from one quarter into the others.The EUR 500 million EUV is -- can be decomposed into 2 categories. One category is that we had less shipments in this quarter than we originally envisaged, and that's the result of 2 events. One, as I mentioned, we had a few issues where we had supplier closures, temporary closures. So that led to some supply chain issues around EUV. We also had some longer-than-planned cycle time on EUV and on the completion of EUV systems. I will address those a little bit later. But that combination led to this quarter only 4 systems being shipped, which was lower than we originally anticipated. So that's one angle. Again, we're on track to still get to the 35 EUV systems that we planned for the year. So we will make up for that in the remainder of the quarter -- of the year. But for the quarter, obviously, that means that we only had 4 systems shipped.In addition to that, of those 4 systems, we could only recognize revenue for 2. And the reason for that is that we had customers that, in light of the situation and in light of the travel restrictions, the transportation restrictions, logistics restrictions that they looked at, they said, "Give us the tool as soon as you can." And that meant in that instance that 2 customers said, "Give us those tools before they are really tested within your own factory." So just ship them to us even though the complete testing program has not yet been executed.And the result of that is that we can only recognize revenue on those 2 tools at the point in time where the tools are installed at the customer and then the acceptance of the customer happens at the time that the system is fully installed at the customer's fab. So 4 systems shipped, but only on 2 of those, revenue could be recognized. For the other 2, this shifts to the second or the third quarter at the point in time where the final acceptance at the customer site happens. So that's it on the revenue side.On the gross margin side, we had a gross margin of 45.1%, lower than what we guided, driven by 2 events that I already mentioned. First off, lower Deep UV sales that I mentioned before, which typically is high-margin business and also lower field upgrades that I mentioned. And that combination led to a deterioration of the gross margin percentage.Net income for the quarter, EUR 391 million. And as I already mentioned, the order intake for the quarter, EUR 3.1 billion, including 11 EUV systems.

[Leo de Later]

We just touched on EUV. Can you give us an update on where you are with EUV?

[Roger J. M. Dassen]

So if you look at the way EUV is developing also at the technological front, it's interesting to look at the February SPIE Conference that was out there. I recommend that to all the analysts to look at that. There is a good website with a lot of good material on there. And I think what that echoes is the confidence of the entire ecosystem in EUV. So it's very clear that not just ASML, but the entire ecosystem is completely ready and very, very active in the continued development of EUV. So really good progress on that front within the entire ecosystem.I mentioned the longer-than-planned cycle time. That is related to the modular vessel, and we talked about the modular vessel and in-line refill, in the past. Those are essential elements in increasing the serviceability and also the availability of the EUV tool, and that was introduced on the 3400C. And as we said, the 3400C that is shipped in this year, all those 3400Cs are in full configuration, including the modular vessel and the in-line refill.The increased cycle times that we had, so the longer-than-planned cycle times that we had were on that front. So it was, in particular, related to the in-line refill as part of the modular vessel. So that is now being addressed. So we're now addressing and you actually see that week by week, we get to improvements in the cycle time as far as that is concerned. And we are on track to actually get to the target that we've set for ourselves by the end of the year because as we also said last quarter, it is important for us to reduce that cycle time because that is necessary to get our total capability, our total capacity for EUV production by 2021 to the desired level, and that's a level between 45 and 50. So that is the capability and the capacity that we're driving towards to get there. And the improvement of cycle time is a critical element to get there. So nicely on track to get there. So week by week, you see an improvement on that front.As I mentioned, for the year, with all the caveats and the current uncertainties associated with that, we're still looking at 35 EUV shipments for this year, even though the quarter started mild with only 4 shipments, we're still on track to get there, again with all the caveats that I just mentioned.On the gross margin front, we're making good progress. And we believe that the -- at least 40% gross margin target that we set for EUV systems that we're able to get there this year. And also, as we've indicated, we want to be a breakeven on EUV gross margin in the course of -- on EUV service gross margin in the course of this year.And finally, High-NA. As I mentioned, we keep the accelerator pushed down on High-NA, making good progress there also with our partners in order for us to be able to get the first R&D tools for High-NA shipped to customers by the 2021, 2022 time frame.

[Leo de Later]

By the way, how are the EUV tools doing at your customers?

[Roger J. M. Dassen]

So customers are really taking EUV into high-volume manufacturing and are really stepping up significantly there. There was an interesting message recently from one of our Memory customers who indicated that they had a shipment of 1 million 10-nanometer class DRAM modules made on EUV. So that was a pretty good news and pretty interesting news. And they also indicated that on a go-forward basis, starting next year on the, what they call, the fourth generation of 10-nanometer class, EUV would be fully deployed for that generation, and then obviously, also for the generations to come.

[Leo de Later]

For so far, there is visibility, what's your outlook for the second quarter?

[Roger J. M. Dassen]

So as I mentioned, at this stage, revenue looks good, right? At this stage, as I mentioned, we have -- we had a solid order intake. We had no pushouts, no cancellations. So from that vantage point, it is looking good. And if you look at the shipment plans that we have for the quarter, based on the orders that we have and based on the requests that we have from customers at this stage, then Q2 can be a really good quarter. And 2Q, we should be looking at a 50% improvement of revenue over Q1. So 50% higher than Q1. And also at the gross margin level, we should be looking at a significant improvement of gross margin over the gross margin that we recognized in Q1.So -- but you have to look at that in the context of everything that's going on. And we cannot escape from the uncertainty that has been introduced as a result of the COVID-19 situation that we currently face. And we have said, in spite of the fact that we're looking at the good set of facts, we cannot ignore that environment and that uncertainty. And as a result of that, we have said -- we believe it is prudent to not give formal guidance for the second quarter. So that's why we have said we're not giving guidance for Q2.The same applies to the full year. So again, for the full year, if we look at the current demand and if we look at the current shipment plans that we have, that should really enable us to achieve the numbers that we've talked about before and also the numbers that we've -- and the goals that we've talked about in the previous quarter. But again, there, in light of all the uncertainties related to COVID-19, we believe, giving any guidance on -- also on the full year is not appropriate.

[Leo de Later]

So all in all, a very dynamic environment for ASML?

[Roger J. M. Dassen]

This is not a boring time, for sure. We're really focused on doing the right things, doing the right things from a safety perspective, taking the right risk mitigation efforts. And -- but keeping the accelerator down in terms of the continued development of our technology road map. So we will be frugal, absolutely. We will be financially very conservative, but we do keep the accelerator down in terms of the development of our longer-term road map. And we think that is critical because as soon as things start to normalize, you will definitely see that customers want to have the latest and greatest. They want to have the greatest technology and tools because they will then look at a new and high -- increased demand for highly advanced nodes, and we need to cater to that demand. So that's why we keep on pushing down the accelerator, including High-NA because from that vantage point, the longer term looks very, very bright. I mean there's no doubt in anyone's mind that semiconductor-based applications will continue to significantly grow in the next couple of years. And we have to provide the solutions to our customers in order to do that.So from a longer-term perspective, we definitely still like what we're doing. We definitely still like the long-term prospects. And let me just say on behalf of the leadership of ASML, how proud we are of our company and of the people that we have, the creativity, the resilience and the unbelievable commitment that our engineers out there in the field, that everyone in the company is really displaying in this moment in time is deeply impressive. And as far as that's concerned, I'm very, very proud to be with ASML.