ASML Holding NV

AEX:ASML

Earnings Call Analysis

Stable Revenue with Anticipated Growth in 2025

The company reported Q3 revenue of EUR 6.7 billion, aligning with guidance and a robust order book of over EUR 35 billion despite lower order intake due to cautious client spending. China contributed significantly due to previous bookings. Gross margin exceeded expectations at 51.9% due to product mix and one-off cost benefits. Q4 is expected to generate between EUR 6.7 and 7.1 billion in revenue, with full-year growth nearing 30% compared to 2022. The semiconductor cycle is bottoming out, with anticipated inflection by year-end, leading to a pivotal 2024 with similar revenue as 2023, setting the stage for significant growth in 2025.

Solid Financial Performance Amidst Uncertainty

The company reported a stable financial performance with third-quarter revenue at EUR 6.7 billion, aligning with the given guidance. Their installed base contributed a substantial EUR 1.4 billion. Notably, a higher-than-expected gross margin of 51.9% was reported, attributed to a favorable product mix focused on the immersion side and several one-off cost benefits.

Moderated Growth and Future Expectations

Although order intake dipped to EUR 2.6 billion for the quarter, a reflection of cautious customer spending, the company projects fourth-quarter revenues to hover between EUR 6.7 billion and EUR 7.1 billion, with consistent installed base revenues. They anticipate closing the year with revenue growth approaching 30% year-over-year and maintaining a gross margin around 51%, a robust performance in a challenging market.

Strategic Positioning for 2024 and Beyond

Looking to 2024, the company exercises caution, anticipating similar revenue levels to 2023; however, they see it as a foundational year setting the stage for significant growth in 2025. In spite of macro pressures, the firm is preparing to capitalize on expanding market opportunities, predicated on industry expansions with several fabrication plants (fabs) slated to open in the subsequent years.

Concentration of Sales in China

Sales to China surged this quarter, primarily for mid-critical and mature nodes. This increase largely stems from fulfilling previous years' purchase orders (POs). The company has balanced global demand shifts, allowing for a higher order fulfillment rate in China, which is a departure from traditionally having below 50% rates in this market.

An Optimistic Outlook in a Tumultuous Market

Despite a backdrop of inflationary pressures, high-interest rates, and geopolitical challenges, the company has managed to achieve notable revenue growth. Inventory stabilization downstream signals a positive trend, although upstream corrections are still needed. With logic tool utilization on the rise and memory utilization yet to peak, customers are preparing for an upcoming inflection point expected at the year's end. This anticipatory stance could manifest in a significant ramp-up by 2024 as the industry anticipates opening new fabs, thus requiring more tools, and showing prospects of recovery and sustainable growth in the longer term.

Earnings Call Transcript 2023-Q3

[Unknown Attendee]

Mr. Dassen...

[Unknown Attendee]

...can you give us a summary of the third quarter results 2023?

[R.J.M. Dassen, executive]

Revenue came in at EUR 6.7 billion, which was around the midpoint of the guidance. Included in there, EUR 1.4 billion of installed base revenue. Gross margin came in at 51.9%. That was actually higher than we guided. Two reasons. One reason is the product mix, which was more on the immersion side. And then secondly, we had a number of one-off cost benefits in there.

Net income for the quarter, EUR 1.9 billion and then order intake, EUR 2.6 billion, lower than what we had in previous quarters. But quite frankly, that was as was expected. Because in the current environment, we do see customers being very cautious with cash, being very cautious with CapEx and as a result of that, they're also very cautious with putting in orders. No High-NA orders in our POs for this quarter. And we're still looking at an order book of over EUR 35 billion. So quite a few orders still in the books and that's also reason why customers can actually manage to have quite low POs for this quarter.

[Unknown Attendee]

Can you comment on your sales to China, which increased?

[R.J.M. Dassen, executive]

Yes, China percentage in our sales was quite high this quarter. Again, I think this is something that we communicated about before. I think a couple of things are important there. As we mentioned before, the shipments into China are really for mid-critical and mature nodes. I think it's also fair to recognize that most of the shipments that happened in this quarter are based on POs that we already had in '22 and even the year before. So it's really based on bookings that we had in '22 and before. And as we mentioned before, the order fill rate that we had for China in the past couple of years has been rather low. As a matter of fact, below 50%.

What's happening right now, we see a number of other customers, we see some shifts in the timing of demand and that really allows for a higher fill rate, order fill rate of our Chinese customers and that's exactly what's happening right now. And so higher volume in China, lower volume of other customers. So that's why you see quite a high percentage there. And of course, all the shipments that were there very much within the limits of export regulation.

[Unknown Attendee]

What's your guidance for the fourth quarter and the full year 2023?

[R.J.M. Dassen, executive]

Revenue for the fourth quarter, our expectation there is between EUR 6.7 billion and EUR 7.1 billion, included in there, EUR 1.4 billion of installed business, which would be similar to what we had in Q3 and our guidance for the gross margin between 50% and 51%. If you then look at the full year, then as to revenue, we're looking at growth towards 30% in comparison to 2022 and the gross margin would end up around 51%. So if you look at that, it's a pretty decent performance, I would say, in a year where the industry is going through difficult times, still growing towards the 30%, I think, is a pretty decent performance for the company.

[Unknown Attendee]

Can you give us an update regarding changes in the market dynamics since last quarter?

[R.J.M. Dassen, executive]

Yes. I mean there's quite a bit going on. First, if you look at the macro front, I think it's plain to see for everyone. It's a combination of a few things. There's still pockets of inflation. We still see interest rates at pretty elevated levels. We still see GDP growth in some economies that is not where people expected that to be. And then I think there are quite some geopolitical tensions. So all in all, on the macro front, it's quite dynamic and quite challenging. If you don't specifically look into the semiconductor -- in the semiconductor industry, I think it's plain to say that our customers are really going through the cycle trough.

And if you just look at the number of characteristics there, what are some of the things that we are really looking at, we're looking at inventory positions. And there, what you see is that downstream, so let's say, with the end customers, we do believe that the inventory situation is starting to become more normalized. So I think there, we actually see a positive development. I think upstream, I think the inventory situation still needs to further normalize. So it's a bit of a mixed bag on the inventory situation.

I think as far as utilization of our tools is concerned, I think the progress that we started to see also in the previous quarter on the utilization of logic, we do see that, that progress is there. So we do see that on logic utilization is starting to improve. I would say on memory, quite frankly, I think we still need to see our customers turn the corner on the utilization front. So what does it do with our customers? What does it do with their expectations? What do they express to us? I think they do expect an inflection point at the end of this year. That's with all the dynamics that is what they typically would be looking at. But then obviously, the question is, what's the shape, what's the slope of the recovery into 2024? And that's obviously a dynamic that they're watching and that we're watching as well.

What we do see them do though is really prepare for continued ramp. So we do see quite a few fabs that are in the progress of being built and we do expect quite some fab openings in the '24 and '25 time frame. And obviously, that will require quite some tools.

[Unknown Attendee]

With the recent communication from the U.S. government on export controls, can you comment on the expected impacts to your DUV business?

[R.J.M. Dassen, executive]

Yes. So it just came in. The new regulations, so obviously still in the process of digesting it and making a full analysis of what the impact is. So I can share with you our preliminary assessment and our preliminary assessment would be that as it pertains to our business, we think it affects a limited number of fabs in China. We don't think it has a material impact on 2023. And we also believe that if you look longer term, so for instance, if you look at '25 or 2030, the scenarios that we've given there, we believe it might have an impact on the regional split but we do not believe that it has an impact on, let's say, the overall revenue numbers that we would be looking at in those scenarios for ASML.

Main reason being, as you know, that we make those assessments not on the basis of the bottom-up demand in a country but really based on the worldwide demand for wafers. So that's the situation on that front. Obviously, we will fully comply with all the laws and regulations. So we'll diligently go through it but that is at least our preliminary assessment.

[Unknown Attendee]

What does all this mean for your outlook for 2024 and beyond?

[R.J.M. Dassen, executive]

We really think 2024 is going to be a transition year. And if you look at the 2 topics that we were just discussing, so we -- that we discussed, the macro environment, we talked about the situation within the industry. We talked about the industry and our customers navigating through the cycle trough on the one hand. On the other hand, the situation we just discussed on the export goals, our current view is that we're taking a more conservative approach.

And what does that mean more conservative approach is that we're really looking at 2024 in 2 regards. On the one hand, we think revenue-wise, it's going to be similar, we believe, to 2023. And on the other hand, we believe 2024 is going to be a pivotal year in preparing us for what we think will be very significant growth in 2025. And there are a few building blocks why we truly believe that 2025 is going to be a significant growth year. First up, obviously, the secular trends, right? Everyone talks about the impact of electrification, of the energy transition, AI, et cetera. So those drivers are clearly there. The secular trends are very, very strong.

Secondly, we do see our current perspective that 2025, we will find ourselves on the uptick, if you like, in the cycle. So that should be a positive. We're also looking at continued strong litho intensity in our business. And as I mentioned before, if we look at the fab openings that our customers have scheduled for '24 and '25, it's pretty significant and that should all come together and essentially make for a strong 2025.

So that's why, if you take it all together, all the dynamics that we just talked about, we remain very, very confident in our expectations for the growth trajectory for ASML. And as also clarified in the expectations that we articulated on 2025 and 2030 in the Capital Markets Day of November of last year.