ASML Holding NV

AEX:ASML

Earnings Call Analysis

Strong sales growth expected despite mixed market conditions.

In the latest earnings report, the company reported net sales of EUR 7.5 billion, surpassing expectations, driven by robust DUV sales and a thriving Installed Base Management sector. Looking ahead, Q4 is forecasted to see sales between EUR 8.8 billion and EUR 9.2 billion, with gross margin estimates between 49% and 50%. For 2024, the revenue is projected at EUR 28 billion with a gross margin of about 50.6%. However, due to changing market dynamics, 2025 revenue expectations have been revised to EUR 30-35 billion, reflecting a decline in low-NA EUV tool demand.

Strong Financial Performance in Recent Quarter

The company reported total net sales of EUR 7.5 billion for the quarter, surpassing expectations mostly due to robust DUV sales and stronger performance in the Installed Base Management business, which generated EUR 1.54 billion. Gross margins held steady at 50.8%, with net income recorded at EUR 2.1 billion. Notably, net bookings amounted to EUR 2.6 billion, largely driven by significant EUV system orders, contributing to a backlog exceeding EUR 36 billion.

Optimistic Revenue Guidance for Q4

Looking ahead, the company anticipates a significant increase in sales for Q4, projecting net sales between EUR 8.8 billion and EUR 9.2 billion, buoyed by anticipated growth in Installed Base revenues expected to reach around EUR 1.9 billion. This increase is associated with meeting specific performance targets for EUV systems, along with several upcoming productivity upgrades.

2024 and Long-term Revenue Projections

For the full year of 2024, the company forecasts total revenue at around EUR 28 billion, with a gross margin target of approximately 50.6%. Fast forward to 2025, the projected revenue range has shifted lower, now expected between EUR 30 billion and EUR 35 billion, due to decreased demand for Low-NA EUV tools, which are now projected to be below 50 units. Despite this, there are optimistic signs as the company continues to enhance product offerings.

Improvements in Technology and Market Trends

The company sees significant progress in both Low-NA and High-NA systems. Shifts in customer preferences towards the improved 3800 tool, which boasts a 37% throughput enhancement over its predecessor, are notable. The company has committed to delivering these systems to customers early next year, demonstrating practical advancements in manufacturing productivity with throughput targets of 220 wafers per hour.

Challenges and Market Dynamics

Nevertheless, there exist some market challenges. A cautious customer base, particularly in the logic sector, has led to slower-than-expected ramps for new nodes, resulting in delays for fab activities. This cautiousness also impacts the memory business, where limited capacity additions are being observed, although strong demand continues for advanced technology transitions, particularly related to AI.

Focus on Cost Management and Shareholder Returns

With regards to costs, the company expects operational expenses to conclude at EUR 5.4 billion for 2024 and around EUR 6.1 billion for 2025, as they continue to drive a robust R&D roadmap. In maintaining a healthy capital allocation strategy, the company plans to sustain dividend growth, with interim dividends already projected at EUR 1.52, alongside share buybacks when cash flows are favorable.

Long-term Growth Drivers Remain Strong

Despite the current business dynamics, the long-term growth drivers appear solid, particularly in the AI and electrification sectors, which are expected to underpin demand. The company remains committed to capacity expansion to meet increasing global demand from new fab openings, maintaining optimism for future performance as the semiconductor market evolves.

Earnings Call Transcript 2024-Q3

[R.J.M. Dassen, executive]

Total net sales for the quarter came in at EUR 7.5 billion, which is above guidance. A couple of reasons for that. First off, we had stronger DPV (sic) [ DUV ] sales but also the Installed Base Management business was higher than expected at EUR 1.54 billion. Gross margin for the quarter came in at 50.8%, which is within guidance; net income at EUR 2.1 billion. Net bookings came in at EUR 2.6 billion, which I think is a reflection of some of the market dynamics that we're going to talk about later on. Part of the EUR 2.6 billion was EUR 1.4 billion for EUV systems. And I would remind everyone that we ended the quarter with a backlog of still over EUR 36 billion. All in all, I would say, it's been a solid quarter in terms of financials, but also a quarter where there have been quite some market dynamics.

For Q4, we expect a significant step-up in sales. We expect total net sales between EUR 8.8 billion and EUR 9.2 billion. Part of that big step-up again in the Installed Base revenue, we expect that to arrive around EUR 1.9 billion. Couple of reasons for that again. I think, first off, we expect to meet certain very specific performance targets for EUV, and that should translate into revenue directly related to that. And we also have a few EUV performance upgrades -- productivity upgrades that we expect to kick in Q4. So that's the reason why we're looking at an Installed Base revenue number that is quite a bit higher than what we've seen in the past couple of quarters.

Gross margin, we expect to land somewhere between 49% and 50%. So what are the moving parts in that gross margin? First off, we have the Installed Base business that we just alluded to, and obviously, that is going to drive up the gross margin. But then we're also looking at the dilutive impact of recognizing 2 High-NA systems because that is the expectation. We have 2 High-NA systems that we expect to recognize in revenue in Q4, and we expect a dilutive impact of that revenue recognition on the gross margin for the quarter of approximately 3.5%.

If you then take that guidance and you translate that into the full performance for 2024, we're looking at the midpoint at around EUR 28 billion in revenue and the gross margin for the full year at that midpoint landing at approximately 50.6%, which I think is in line with what we said at the beginning of the year when we said that the gross margin was going to be a little bit down from what we had in 2023.

I think on the technology side with EUV, we're making really good progress, both on Low-NA and on High-NA. If we start with Low-NA, 0.33, we see more and more customers shifting their demand towards the 3800, which is no surprise because, as you know, the 3800 shows a 37% improvement in terms of throughput over the 3600D model. So we also expect for Q4 for the majority of the Low-NA EUV tools to be 3800s. We've demonstrated in the past quarter, in our factory, the full productivity for the 3800E tool. So that gets you to 220 wafers per hour throughput. So that's been demonstrated, and we're on track to get the systems in that full specification to a customer starting early next year. So early next year, we will start shipping the 3800 at that full 220 wafers per hour specification.

When it comes to High-NA, as I just mentioned, we were close to having the site acceptance test concluded with the customer for the 2 systems that we've already shipped, and we expect that to conclude in this quarter. And that also leads to the revenue recognition that I talked about before. We're actually in the process of shipping a third High-NA tool to a second major customer. So I think that is very much on track.

The value proposition for High-NA, I think, is pretty clear. We've demonstrated a resolution of 8 nanometers, and that actually gives you approximately 3x increase in transistor density in comparison to a Low-NA system. Very importantly, we've told you that quite a few wafers are being exposed. And at this stage, I think we've exposed -- or customers have exposed around 10,000 wafers, multiple customers, logic customers and memory customers, both in our joint ASML-imec High-NA lab but also in the field.

And we've presented -- in September, we presented at a lithography conference the latest data, as far as that is concerned, and I think those latest data really show that there are significant benefits in imaging, in overlay and in contrast. And that really is a clear value proposition to drive down the cost of patterning for our customers. So I would say, all in all, if you look at the progress made on the 3800 tool and also the progress and the feedback that we're getting from customers on High-NA, very much on track and very much delivering the value to our customers that we anticipated.

There have been quite some market dynamics in the past couple of months. Very clearly, the strong performance of AI clearly continues, and I think it continues to come with quite some upside. We will also see that in other market segments, it takes longer to recover. The recovery is there, but it's more gradual than what we anticipated before. And it will continue in 2025. And that does lead to some customer cautiousness.

If you take that element, you translate that to the different market segments, then clearly, this more gradual recovery has an impact on logic. And if you combine that with very specific competitive issues in the foundry business, you do see that, for some customers, there is a slower ramp of new nodes, and that leads to some fab pushouts and obviously also leads to a change and a delay in litho demand timing.

If you look at the memory business, this customer cautiousness that I talked about leads to limited capacity additions, while at the same time, we do see a lot of focus and strong demand when it comes to technology transitions and particularly as it is related to high-bandwidth memory and to DDR5. So again there, anything related to AI is strong. But other than that, there are limited capacity additions.

Also important, the China business. And we do expect the China business and the percentage of the China business as part of our total business to show a more normalized percentage in our order book and also in our business.

In summary, longer-term trends are still very, very strong, very, very positive, showing good signs of upside. But the development in the past couple of months and the customer-specific circumstances that I mentioned have now led to a more gradual growth curve for our business.

So at our Investor Day in 2022, we looked at 2025. We provided market scenarios for 2025 between EUR 30 billion and EUR 40 billion. If you recognize the recent market dynamics that I just alluded to, we do see the 2025 revenue actually moving to the lower half of that range. So therefore, expectation now is that we're going to see net sales in 2025 between EUR 30 billion and EUR 35 billion, primarily driven by a significant reduction in Low-NA EUV tools. We expect that at the midpoint of our expectation. We expect that to be below 50 tools for 2025.

And also what I just mentioned in terms of China, we do see China trending towards more historically normal percentages in our business. So we expect China to come in at around 20% of our total revenue for next year, which would also be in line with its representation in our backlog.

So again, referring back to our Investor Day of 2022, there, we said we're targeting a gross margin between 54% and 56%. And a very important driver of that improvement of gross margin was on EUV Low-NA because, remember, on the one hand, obviously, we're going to see 2025 be dominated when it comes to the Low-NA business by the 3800 tool. And as we said before and which is also actually happening, that 3800 tool does come with a higher ASP and a good improvement in the gross margin. So that actually manifested itself.

But another element why we believe that the gross margin was going to be up was that we expected a significant increase in the number of EUV units for 2025. And I think as a result of what I just described in terms of the demand, that increase in numbers is actually not happening, right? As we said, we expect less than 50 Low-NA EUV tools at the midpoint of our guidance. So that has a significant impact on our gross margin expectation.

And we also talked about the China business. As you know, a lot of the China business actually is on immersion. Immersion, as you know, comes with a significantly higher gross margin than the corporate gross margin. So the fact that there is some pressure there also means that we're having some pressure on the gross margin. So it's those 2, combined, as a result of which we now look -- we're now looking at a gross margin expectation for 2025 of between 51% and 53%.

If we then compare the gross margin, that expectation of 51% to 53%, to where we are today, so the gross margin for 2024, I think on a positive note, obviously, there is the improvement of the gross margin for the 3800. So per tool, obviously, 3800 has a better gross margin than the 3600. So that is manifesting itself clearly. We see improvements in EUV service margin. So that helps. And also for High-NA, we see that the gross margin that we're going to recognize in 2025 will improve. We get better at producing the High-NA tools. We get faster in installing them. And also in '25, we're going to see the first high-volume 5200 tools being recognized in revenue. So all that helps. But the flip side, obviously, is that we're going to see more High-NA tools being recognized in revenue in 2025 in comparison to 2024, and that has a dilutive effect.

So OpEx in 2024, we expect to end around EUR 5.4 billion. So that's a combination of R&D and SG&A. If we look at 2025, I expect that we're going to end somewhere at the upper limit of the bandwidth that we gave at the Investor Day in 2022. So that would be approximately EUR 6.1 billion. We are still very, very much driving a very comprehensive R&D road map. So we're progressing on that, as planned. And that means that the wage inflation, obviously, that we incurred after 2021, we're able to absorb that wage inflation within the bandwidth of the guidance that we've given in 2022.

So if we look at the free cash flow in 2024, the things that drove down the free cash flow, first off, lower order intake because lower order intake obviously comes with less down payments. And secondly, as you know, we continue to prepare for an uptick in the business. So we've taken in quite a bit of inventory, particularly, I would say, on EUV. So this is inventory that relates to High-NA but also inventory that relates to Low-NA. So we're still preparing for that future ramp, and that means lower down payments, higher inventory, obviously creating pressure on the free cash flow.

If the business comes back, then obviously, those 2 dynamics should become a positive for us because that means that as soon as we really start orders coming back in, that will also lead to more significant down payments for us. And obviously, also, it would lead to a normalization of the inventory, to the extent that the inventory that we now have is being shipped to customers. So with the normalization of the business, we would also expect a normalization in our cash conversion.

In terms of the capital allocation policy, it really hasn't changed, right? So you will continue to see us invest in our road map. You will continue to see us invest in capacity because we firmly believe in the continued growth of the business. So you will see us do that. We continue to plan for growing dividends, and also in Q3, we're looking at an interim dividend of EUR 1.52 to be paid. Share buybacks. Share buybacks will happen with excess cash. So to the extent that excess cash manifests itself, we will use that and use that in buying back shares.

If you look at the long-term outlook, I believe the growth drivers are still very much intact. The secular growth drivers are clear, and they are strong. I think if you look at AI, very, very strong, very clear and undisputed, taking an increasing share in the business of our customers. So I think that is going very strongly.

And also, if you look at energy transition, electrification, et cetera, those secular trends are very, very much intact. It expands the application space for both advanced and mature nodes. It also means that we will continue to prepare for new fab openings that are planned by customers. And yes, there might be some delays here and there, but still, if you look at the planned fab openings in the next couple of years, it is pretty significant, and as you know, it really is across the globe. So as I mentioned before, we continue to build capacity to respond to that significant demand increase as we expected for the remainder of this decade.

And I'm very happy to see many of you at our Investor Day on November 14 in 2024. And this will be the main topic of conversation, how we see the market, how we look at 2030 and the journey towards 2030, how we look at the market, how we look at litho intensity as a key driver on the road maps of our customers. So I really hope to see you all there and look forward to having a good and solid discussion there.