ASML Holding NV

AEX:ASML

Earnings Call Transcript 2023-Q1

[Unknown Analyst]

Mr. Dassen, can you give us a summary of the first quarter results 2023?

[R.J.M. Dassen, executive]

Sure. Net sales for the quarter came in at EUR 6.7 billion, higher than guided primarily as a result of higher EUV and deep UV revenue, both driven by faster insulation in the field of our systems and also driven by, in a number of cases, earlier acceptance of the tool by our customers. Included in the EUR 6.7 billion is EUR 1.4 billion of installed base revenue. That is lower than we guided and that is primarily as a result of lower upgrade demand from our customers.

Fast shipment, obviously, a topic that we have been talking about quite a bit in previous quarters. As you might recall, we had EUR 3 billion of delayed revenue from shipments coming out of Q4 into Q1. At the end of Q1, we have about EUR 1.5 billion of delayed revenue that is going to be recognized in subsequent quarters. Why lower? Why EUR 1.5 billion versus the EUR 3 billion? A couple of reasons. One reason is actually what I discussed earlier on, which is the earlier acceptance of the customer and the faster installation.

But also, as you might recall, we said that in Q4, we really prioritized shipment over system starts. And why was that? A, because customers were asking for it. They wanted to have the tools earlier. And secondly, also for operational efficiency reasons. Gross margin for the quarter of 50.6%, again higher as a result of the things I just mentioned. So higher because of higher EUV revenue and higher immersion revenue. A little bit compensated by the fact that we had lower upgrade business. So that gets you to the 50.6%.

Net income for the quarter, EUR 2 billion and the order intake for the quarter at EUR 3.8 billion. That is lower than what you would have seen in previous quarters. But quite frankly, that was expected, a, given the current business environment and also given the fact that we're still looking at an order book at the end of this quarter of EUR 39 billion which is give and take 2x the system sales that we expect for this year.

[Unknown Analyst]

What's your guidance for Q2?

[R.J.M. Dassen, executive]

The guidance for Q2 net sales, we expect to be between EUR 6.5 billion and EUR 7 billion. Installed base revenue as part of that, approximately EUR 1.3 billion and we expect the gross margin for the quarter between 50% and 51%.

[Unknown Analyst]

Have there been any changes in the business environment?

[R.J.M. Dassen, executive]

We continue to see the macro trends that we talked about last time. So higher interest rates, inflation, fear of recession in some parts of the world and the geopolitical attention. So they continue to be there. If you then translate that to the semiconductor space, we do see in certain segments and certain end market segments and we do see that the industry is trying to manage the inventory levels down.

So how does that translate into litho demand is then the question? Well, I think what we noticed is that some major customers are indeed delaying the timing of their demand for certain tools. So that happens whilst we see other customers actually picking up that shift. So in that sense, for us, we still end up in a situation that supply is still the main constraint that we have. So demand is still higher than supply, albeit at a slightly lower cushion level, if you like, than we had last quarter, but it's clearly still there. So the #1 objective for us is still to make sure that we optimize the supply and that indeed we can deliver and that we can live up to the expectations that are out there.

If you then look specifically at a different segment. For both memory and logic customers, we do see customers making the strategic investments for technology transition. So that is clearly happening. For memory customers, we do see them limiting their CapEx, lowering their wafer output, which clearly is driving towards lowering the inventory level in the entire system. We see some of that behavior also in certain segments of logic. But quite frankly, we're also in logic, see that in certain segments, demand remains very, very strong, particularly, I would say, in the space of mature nodes and then particularly where that requires deep UV.

Specifically as it relates to China, as you would have seen, China accounted for about 8% of system sales in Q1. We also told you last time that China accounts -- domestic China accounts for more than 20% in our backlog, and that continues to be the case at the end of the -- for the backlog at the end of Q1. So I think it's reasonable to assume that we will see a commensurate allocation to Chinese customers for the entire year. So that means that you will see a significant pickup of the sales into domestic China for the quarters to come this year.

[Unknown Analyst]

How do all these developments translate into your outlook?

[R.J.M. Dassen, executive]

I would say the outlook for 2023 essentially remains unchanged. So as we said before, we expect that we are going to ship around 60 EUV systems, around 375 deep UV systems, of which about 25% immersion. And that continues to be our expectation. And that translates into the growth numbers that we gave you last time, which is 40% growth in EUV, 30% growth in the non-EUV business and around a 5% increase in the installed base business. And that all translates into a growth expectation for the year in comparison to 2022 of more than 25%.

Underlying assumption there is that the fast shipment value that we received from 2022 and 2023 will be similar to what we see in getting out of the year -- out of '23 into '24, so about a EUR 3 billion number. That would be the underlying assumption for that expectation.

[Unknown Analyst]

With the recent communication from the Dutch government on export controls, can you provide an update on the expected impact to your deep UV business?

[R.J.M. Dassen, executive]

We're still waiting for the final detailed guidance from the Dutch authorities. But as we said before, this is really geared towards advanced semiconductor manufacturing. That's what it's looking at. What this does for us is that we expect that we will require export control licenses or export licenses for advanced immersion tools. And our interpretation of advanced immersion tools would be for the NXT 2000 and subsequent versions.

What do we expect this will do well. If you look at some of the circumstances, so if we look at what the Dutch government published so far, our interpretation of the export license rules. If you look at the current climate but also if you look at the way we model our expectations on a go-forward basis, right? And that is really based on worldwide demand for litho. It's not based on geographic distribution. Then based on that, we would say that we believe the impact on our guidance for 2023 or on the scenarios that we model both for '25 and 2030, we do not expect that impact to be material on those expectations.

[Unknown Analyst]

Let's have a look at gross margin. Are there any changes to your expectations for gross margin this year?

[R.J.M. Dassen, executive]

And that is what we said last quarter is the guidance that we would still provide, which is that we expect gross margin to end up slightly higher than what we had in 2022. Again, just as a reminder, the puts and takes to that. So on EUV, we expect a higher number of shipments. We mentioned the 60 -- about 60 shipments before. And we expect that to have a positive impact on gross margin.

On deep UV, same story there. We expect a higher number of deep UV revenue in this year, and that would be a positive. A slight negative would be the mix within deep UV. But nonetheless, for deep UV, we expect the gross margin on balance to be slightly up from last year.

Installed base business, there, we expect the gross margin to be going down a little bit, and that's because of, as we discussed earlier on that we expect the upgrade business to be a little less than last year.

We also talked quite a bit about inflation. We are getting from quite a few customers, we are getting inflation compensation. So that's a good thing, but inflation continues to be there. So I still expect a small drag, if you like, on the gross margin number as a result of inflation. And then very importantly, as you know, we continue to build towards increasing capacity. So we have the 90 EUV capacity looking for by the 2025 time frame and the 600 deep UV capacity that we're aiming for, so we continue to prepare for that.

We also, as you know, are preparing for the introduction of High-NA. And all the preparatory work that is going on there, that continues to be a drag on the gross margin. So if you take all of those elements together, that leads to our expectation of a slight improvement of the gross margin in comparison to last year. And once again, I think that positions us very nicely for expectations that we guided earlier on in terms of gross margin by 2025, between 54% and 56% and between 56% and 60% by 2030.

[Unknown Analyst]

Can you update us on your capital allocation plans?

[R.J.M. Dassen, executive]

I mean we continue to expect significant generation of cash in the years to come and the policy hasn't changed. And the policy, just as a reminder, whatever cash is being generated, first off, we will apply that to the business needs, so whatever CapEx or whatever we would need that will be funded from the free cash flow that is being generated by the business. Whatever remains will be available to the shareholders, and that will be available through a combination of growing dividends and then whatever is available, would be allocated to share buyback.

If you look at the current environment and the current environment in the semiconductor industry that we talked about earlier on, you do see that all the elements, all the players in the value chain, they're really managing their cash quite diligently. So I think it's fair to assume that, that will have some negative impact on our free cash flow generation in the year. And also, in the current environment, we believe it is prudent that we maintain a higher level of cash than you would typically see us do. So that's a combination, I think, that we're looking at.

As it relates to dividends, we paid an interim dividend in this -- in Q1 of EUR 1.37 per ordinary share. And that was -- as it relates to 2020 -- to the year 2022, that was the third interim dividend that we paid for the same amount, so 3x EUR 1.37. And that means that we're going to propose to the AGM to pay a final dividend of EUR 1.69 per ordinary share.

[Unknown Analyst]

What are your expectations on demand and your business beyond 2023?

[R.J.M. Dassen, executive]

At the Investor Day last year, we very much talked about the megatrends. So what are the megatrends that are going on. And I think the implications that we were derived from that were a broadening application space of semiconductors. And those secular trends that we discussed there, they continue to fuel the demand for our systems. They continue to fuel demand for service. So we think all of that is very clearly intact.

That also means that we continue to drive the capacity expansions that we've talked about before, 90 EUV, 600 deep UV systems. So we continue to be on that track working very, very closely with our supply chain to get that done. And we believe that with that capacity expansion and with the very strong secular growth drivers, that we will be able to capture the opportunities and the growth opportunities that the market and the macro environment is going to present this on a go-forward basis.