ASML Holding NV

AEX:ASML

Earnings Call Transcript 2023-Q2

[Unknown Analyst]

Mr. Wennink, can you give us a summary of the second quarter results, 2023?

[P. Wennink, executive]

Yes. The second quarter was a solid quarter. I mean sales came in at EUR 6.9 billion, which is at the high end of our guidance range. Installed base business, EUR 1.3 billion. We had a good gross margin, 51.3%. That is the result of the fact that we sold more immersion systems than we anticipated. And on top of that, we started to revenue recognize the immersion fast shipments in Q2, which actually gave us some extra sales, which have some extra margin. So that was the reason for a good gross margin number in Q2. Net income, EUR 1.9 billion, EUR 4.5 billion on order intake, solid quarter.

[Unknown Analyst]

What's your guidance for the third quarter?

[P. Wennink, executive]

Third quarter, we expect sales to come in anywhere between EUR 6.5 billion and EUR 7 billion, about EUR 1.4 billion of installed base business, 50% of gross margin. And actually, our guidance for Q3 is pretty similar as the guidance we gave 3 months ago for Q2.

[Unknown Analyst]

Let's have a look at the market. Have there been any recent changes in market dynamics?

[P. Wennink, executive]

Yes, I think you can say so. I think it's all driven by macroeconomics. -- macroeconomics, we still see relatively high inflation rates, high interest rates. So fear of recession in Europe and the U.S. geopolitical environment is also difficult from time to time. So yes, I think the macroeconomic situation has not improved. Now on the end markets, we see some first reports coming in that some end market seems to be bottoming out, which is good. But it means that our customers are still dealing with relatively high inventories, high levels. And how do you deal with that basically by reducing the wafer output. And wafer output means that, of course, the utilization of our tools is also less. What does that mean? I mean on our EUV business, we see some shift in demand timing. That is largely driven, I would say, predominantly driven by fab readiness.

The fabs are not ready. And why is that? There are skills issues. We've said it before, I mean whether it's in Taiwan or whether it's in the U.S., no skills issues, people who actually have the capability to build these very advanced fabs. There's a little -- there's also some element in thereof, of course, the macroeconomic situation where people have some concerns about the duration of this down cycle. I think that's what we're seeing for EUV. On deep UV, the demands are higher than what we can make. Now of course, deep UV also has been impacted by what I said on EUV because we've seen some pushbacks, some pushouts in terms of the demand across different segments in the industry. However, we also need to realize that our Chinese customers had over the last 2 years a so-called demand fill rate. So how much of your demand can we ship of [ signify ] less than 50%.

So our Chinese customers say, yes, we're happy to take the machines that others don't want because their fabs are ready, they can take the tools. So when they become available, they will take the tools. So all in all, our deep UV business still looks pretty strong. And that has to do with the fact that what I just said that there is a significant demand, which is still higher than what we can make.

[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?

[P. Wennink, executive]

Yes. It's specifically on deep UV. A few weeks ago, the Dutch government came out with the final ruling, which was more or less in line with what we communicated about a quarter ago. And I think that in itself was not a major surprise that will become effective for September 1, and it deals with our, what we call advanced deep UV immersion systems, which is our tool type NXT 2000 and subsequent numbers, so 2000, 2050, 2,100 and up. That's what it's all about. It's not about EUV. So -- but it's -- because EUV is already under export control. Now so we just have to wait to really get a final answer on your question. We also need to understand what the American government has done. The Japanese government has come out with their ruling end of May, the Dutch government a few weeks ago.

So we're waiting for the American rules to come out. There have been some media reports that the Americans are contemplating some additional measures. Now because that's speculative. We don't know what it is. But what we understand will not have a major impact on what we said before. So I think all in all, when you look at export control measures in total, we don't expect a significant impact on our 2023 year, but also not on the longer-term outlook that we gave during the Capital Markets Day last year.

[Unknown Analyst]

With regard to fast shipments, have you made any progress with your customers on revenue recognition when it comes to fast shipments?

[P. Wennink, executive]

Yes, we did. As a matter of fact, particularly on deep UV immersion. As you know, we do -- we fast ship deep UV immersion. and EUV. But on deep UV immersion we came to an agreement with customers where we basically have a reduced test protocol, which they now accept as good enough to basically recognize revenue when we ship the machine out of our factory in the Netherlands instead of taking revenue when we do the installation at the customer site. Now having said that, what does it mean? It means we're going to recognize more revenue in 2023. And we expect at about EUR 700 million worth of revenue now being booked in 2023, which we originally said was going to be pushed to 2024.

So our revenue that we now defer to -- out of 2023 into 2024 is not the EUR 3 billion that we said last quarter, but this EUR 3 billion, less EUR 700 million is EUR 2.3 billion. And that's only EUV. So it actually means that deferred revenue because of fast shipments not only applies to EUV. Of course, there, we will book revenue when we get the final sign-off at the customer side for EUV systems.

[Unknown Analyst]

What does all this mean for your business outlook for this year?

[P. Wennink, executive]

This year, business outlook, like we said earlier, there is an impact on the macroeconomic situation. But if you then break that down into deep UV, EUV and installed base, they all have a bit of a different character. On deep UV, we expect to ship a bit more systems than the 375 units that we mentioned before, which is good. But on top of that, we also have the -- actually revenue recognition at shipment instead of at installation at the customer side for deep UV immersion systems, which all in all, gives us a higher sales number for deep UV immersion this year, where we originally anticipated that deep UV will grow with 30%, but now it will grow at 50%. So the deep UV business looks a lot more healthier than we actually said before.

On EUV, we see some -- like we said before, some shifts in demand in terms of timing largely driven by fab readiness fabs are not ready yet, so we will ship the tools later. That means that the original quoted growth number of 40% for EUV revenue this year will go down to about 25%. And on installed base, there's a reflection of the macroeconomic situation and the cautiousness or the conservative way that customers look at doing upgrades. You don't need to do an upgrade when you're reducing the utilization of your installed base. So we now expect instead of a 5% growth in installed base that to stay flat for this year. But if you take it all together, higher deep UV or lower EUV, flat installed base then the total sales of the companies are now expected to grow towards 30% instead of the earlier 25% that we said last quarter.

[Unknown Analyst]

What does this all mean for your gross margin in 2023?

[P. Wennink, executive]

Well, if you take everything together, you take higher deep UV sales, lower EUV but installed base being flat. We have a positive impact on gross margin because of higher deep UV immersion sales but lower installed base sales with good margins. So it all in all washes out a bit, and that means that, as we said before, our gross margin this year will slightly increase.

[Unknown Analyst]

Let's have a look at the longer-term outlook. What are your expectations for 2024?

[P. Wennink, executive]

Well, if we look at 2024, it will be driven by the macroeconomic development. We said it before, macroeconomics show higher interest rates, the higher inflation numbers, some fear of recession here and there. And that actually means that what we all thought that we would see this year, it would be a recovery in the second half of 2023. I think that's going to be later. That's not a general view that that's going to be later. Now having said that, ASML has a very solid and strong and healthy backlog of about EUR 38 billion. On top of that, when we look at the firm demand that we -- that our customers put on us together with the good backlog for next year, I think we see a very clear opportunity for growth in 2024. However, given all the increased uncertainties, I think it's too early to give you a prediction of any forecast for 2024. It's quite normal when we are in these down cycles.

We have to take it quarter by quarter. We will look at it quarter-by-quarter, and we'll just keep our eyes out on the inflection points for recovery.

[Unknown Analyst]

And how about your outlook beyond 2024?

[P. Wennink, executive]

Well, beyond 2024, it's really the solid belief we have in the mega trends that are not going to go away. You could even argue that some of these mega trends when you think about AI or even more important than we thought, let's say, at the end of last year. But it's not only AI, it's also the energy transition, it's the electrification of mobility. It's -- it's industrial IoT. It's everything that's driven by sensors and an actuator.

So effectively, we see very strong growth across the entire semiconductor space, whether it's mature or whether it's advanced. And that because of these mega trends, we have still has a very strong confidence in what we said at the end of last year. But by 2025, depending on what market scenario you are choosing higher or lower, we will have between EUR 30 billion and EUR 40 billion of sales and gross margin by 2025 timeframe between 54% and 56%. And if you extend that then to 2030, we are still very confident that by that time, also dependent on a lower or higher market scenario. The sales will be anywhere between EUR 44 billion and EUR 60 billion with gross margin between 56% and 60%.

So we have short-term cycles. This is what the industry is all about -- but we have a very strong confidence, even more -- even strong confidence in what the longer-term future is going to bring for this company.