ASML Holding NV

AEX:ASML

Earnings Call Analysis

ASML Records Strong Q4 and 2023 Performance

ASML's Q4 2023 revenue reached EUR 7.2 billion, surpassing expectations due to robust installed base business, leading to a 51.4% gross margin, which also exceeded guidance. Net income hit EUR 2 billion, and the record order intake was EUR 9.2 billion, indicating healthy demand. 2023 full-year revenue was EUR 27.6 billion with a similar gross margin of 51.3%, culminating in EUR 7.8 billion net income, and a formidable order book totaling EUR 39 billion. However, 2024 is projected to be a transition year with substantial investments in capacity and High NA capability, anticipating a slight dip in gross margin.

Strong End to 2023 with Record Order Intake and Increased Gross Margin

ASML concluded the fourth quarter of 2023 on a high note, with revenues reaching EUR 7.2 billion, surpassing expectations thanks to a stronger installed base business valued at EUR 1.6 billion. This segment enjoyed increased service revenue and higher upgrade revenues, contributing to an elevated gross margin of 51.4%. The quarter was marked by very solid order intake, a record EUR 9.2 billion, equally split between Memory and Logic, and around EUR 5.6 billion attributed to EV-related orders.

Annual Performance Highlighted by Robust Revenue and Order Book

Reviewing the annual figures, ASML posted revenues of EUR 27.6 billion and maintained its gross margin consistency at 51.3%. The impressive performance led to a net income of EUR 7.8 billion and concluded with a strong order book totaling EUR 39 billion, portraying a company in good financial health with significant future business lined up.

Revenue Recognition Changes and 2023 Shifts in Demand

ASML adjusted testing protocols for immersion tools on fast shipments, allowing revenue recognition upon shipment, enhancing financial reporting. However, the expectation for EUV fast shipments, initially forecast at EUR 2.3 billion, was adjusted down to EUR 700 million due to shipment delays into 2024 and shifts in customer demand. Despite this, revenue from these fast shipments, totaling EUR 700 million, and tools shifted from 2023 into 2024, are included in the 2024 revenue estimations, encapsulating a strategic response to demand and scheduling challenges.

2024 Forecast: Steady Revenue and Preparations for Future Growth

Looking ahead to 2024, ASML anticipates revenues to mirror those of 2023 while positioning the year as a crucial phase of transition. The company is gearing up for capacity expansion, preparing for an anticipated surge in demand in 2025. This forward-looking approach underlines the company's strategic investment in its future capabilities and infrastructure.

Sector-wise and Technological Outlook for 2024

Splitting the focus, ASML predicts a bigger Memory sector in 2024, buoyed by transitions like advanced DRAM (DDR5 and high-bandwidth memory), whereas a slight decline in Logic is expected following capacity digests from 2023. As for EUV, equal units of revenue are foreseen, yet higher average selling prices (ASPs) from models like the 3800 contribute to an anticipated increase. Conversely, immersion system sales may dip somewhat. The installed base business is projected to hold steady, reflecting a balanced service and upgrade market. The year is expected to pick up steam as it progresses, with the latter half slated to outperform the first in revenue generation.

Gross Margin Projections for 2024: A Slight Decline

Gross margin for 2023 ended at 51.3%, and ASML predicts a slight reduction for 2024. The introduction of the EUV 3800 model should positively impact gross margins, and service gross margins for EUV are also expected to improve. However, the reduction in immersion system sales and significant investments for capacity expansion, particularly in High NA technology, will exert downward pressure on margins. These investments are crucial for capitalizing on projected growth in 2025, indicating a short-term sacrifice for long-term gain.

Earnings Call Transcript 2023-Q4

[Unknown Attendee]

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

[R.J.M. Dassen, executive]

Revenue for the quarter came in at EUR 7.2 billion, which was higher than guided, primarily driven by the fact that the installed base business at EUR 1.6 billion was higher than we expected. And that was both as a result of higher service revenue and higher revenue from upgrades.

That fact, so the higher installed base business, also drove up the gross margin. So gross margin came in at 51.4%, also higher than the guidance as a result of, as I mentioned, the higher installed base business.

Net income for the quarter came in at EUR 2 billion. And after a few soft quarters, the order intake for the quarter was very, very strong. Actually, a record order intake at EUR 9.2 billion. If you look at the composition of that, it was about 50-50 for Memory versus Logic. And around EUR 5.6 billion out of the EUR 9.2 billion was related to EV, both Low-NA and High-NA.

[Unknown Attendee]

And what about ASML's results for the full year '23?

[R.J.M. Dassen, executive]

So for the full year, revenue came in at EUR 27.6 billion, with a gross margin of 51.3%. And we ended the year with a total net income of EUR 7.8 billion and also an order book -- a total order book of EUR 39 billion.

[Unknown Attendee]

Can you give us an update on the impact of fast shipments on 2023 and 2024?

[R.J.M. Dassen, executive]

My favorite topic. So it comes to fast shipments, as you know, in the course of 2023, we changed the testing protocol for immersion tools on fast shipment, and we agreed those with customers. And as a result of that, we could recognize revenue again upon shipment. So that's for immersion.

When it comes to EUV, earlier on, we said that we expected around EUR 2.3 billion of value of fast shipments at the end of this year for EUV shipped but not yet recognized in revenue. That turned out to be quite a bit lower, EUR 700 million, and there's a few reasons for that.

First off, we had a couple of tools that were originally scheduled for shipment in, let's say, the last couple of weeks of '23. That actually slipped into the first couple of weeks of '24. And then secondly, we had some shifts in demand from customers that also led to a few tools slipping into '24. So as a result of that, the value came in at EUR 700 million rather than at EUR 2.3 billion.

That said, for 2024, we expect, at the end of 2024, that we will not do fast shipments for EUV. Main reason being that we assume that we'll not capacity constraint for EUV in 2024 because of the additions of -- additional capacity that we've been talking about. And that means that in our guidance when we talk about our expectation, '24 revenue being similar to '23 revenue, the revenue from these fast shipments, so the EUR 700 million, but also these tools that slip from 2023 into 2024, that's included in that expectation.

[Unknown Attendee]

Further to 2024, can you provide an initial outlook for the full year?

[R.J.M. Dassen, executive]

So yes, I mean, as we said last quarter, clearly, there is still uncertainty. There are uncertainties at the macro front. And also, I think it's clear to see that our customers are navigating through the downside of the order cycle. So they're really making that move right now. And as a result of that, I think the question really remains, as it was -- as we expressed it last quarter as well, what's the shape of the recovery?

Yes, recovery is there, but what's the shape of the recovery? And how fast is that recovery going to be? And I think that's still unclear. That said, I do believe there are a few positive signs. And I think it is important to recognize those as well. So one positive sign is that we clearly see that the inventory levels in the end markets are getting to -- are improving and are definitely at a better level than we were a couple of quarters ago. So there is a clear improvement on the inventory situation in the end market. So that's one positive development.

Secondly, if we look at the utilization of our tools, we clearly see that they are improving. They're not yet at what I would call normal levels, but they're clearly improving. And all the indications that we're getting is that we believe that, that improvement will continue to occur in the course of this year. So good development there.

And thirdly, clearly, the EUR 9.2 billion order intake that we talked about earlier on, I think, is also a clear positive indication. So few good data points, a few positive data points. But still, we believe it's too early to revise our guidance. So we would keep our guidance as we articulated it last quarter, which is that we believe that 2024 will be similar in revenue as 2023.

That said, we also set 2024 very much a transition year and a year in which we're really building up capacity. We're making good investments into our capacity because we believe 2025 is going to be a year of strong growth, and that's what we're preparing for in this year as well.

If we look at different elements in the composition of our revenue, I would say if we look at the end markets, I would say that we believe, on the Memory side, we believe there will be -- that memory will be bigger than 2023, in 2024. And that's primarily because we see no transitions there. And these no-transitions primarily support the increased demand for advanced DRAM. And then you should think about DDR5, you should think about high bandwidth -- high-bandwidth memory.

On the logic side, I would argue that we're looking at a small decline in comparison to 2023, primarily because of all the capacity additions that we've seen in 2023. I think it's fair to assume our customers will digest those capacity additions. So as a result of that, we believe that there, the growth will be a little bit smaller.

If we then look at the different technologies. On EUV, we believe that we're looking at an increase. From a revenue unit number perspective, we believe will have approximately the same number of units of EUV in revenue, and that includes the things that we talked about earlier on, the fast shipment and units, et cetera, are included in that estimate. But we will benefit in EUV from higher ASP because we'll have a bunch of 3800s in our revenue with a higher ASP. And also we'll benefit from 1 or 2 EXEs or High NA tools that we'll have in revenue. So I think for EUV, we expect an increase.

As it comes to non-EUV system sales, as a result of the flat guidance, we believe that we'll see a small decrease there, and that will be primarily related to immersion. So we expect to have less immersion sales in 2024 in comparison to '23.

And as it comes to installed base business. On the installed base, we believe that will be flat in comparison to last year. And then finally, in terms of the composition over the quarters, we believe that the momentum will build during the year 2024. And as a result of that, we expect the sales level, the revenue level in the second half will be higher than in the first half of 2024.

[Unknown Attendee]

What are your expectations for gross margin this year?

[R.J.M. Dassen, executive]

Yes. So in 2023, we ended at 51.3% gross margin. We expect that this year, we'll be slightly below that number. A number of puts and takes there again. I think if you look at EUV, we talked about the introduction of the 3800. So that would have a positive impact on the gross margin. And also, we expect that the service gross margin for EUV will improve. So that's positive.

But as I also mentioned, we'll have less immersion, and that will have a negative impact on the gross margin. And also, as we also mentioned in previous quarters, this really is an investment year as well. We're investing for the capacity expansion that we'll take benefits from in 2025, so significant investments there. And also we're very much investing in our capability, both in the factory and in the field as it relates to High NA. So those are drags, if you like, on the gross margin. And if you add that all up, we think that the gross margin of '24 will be slightly below the gross margin for '23.

[Unknown Attendee]

And what about your gross margin for 2025?

[R.J.M. Dassen, executive]

As you know, for 2025, we gave an expectation at the Capital Markets Day of a gross margin range between 54% and 56%. And we still believe that, that is the right window to look at. I recognize that's a jump from the gross margin that I just -- expectation that I just gave for 2024. We have good reasons for that.

First off, of course, in 2025, if you look at the EUV mix, there will be substantially more high ASP tools in there than lower ASP tools in there. So I think that's an important element in there. Secondly, we'll have many more High NA tools in revenue in '25 than in '24, and they will be able to absorb the costs -- better absorb the total cost that we have for high NA. And even more importantly, as I mentioned, we are building capacity for '25. And of course, that should lead to, as we expect higher sales levels for '25.

So many more outputs for EUV and DPV. And that means that we should, in '25, will get the benefit of the investments that we make in '24. And if we combine all of those dynamics, then indeed, we believe that the 54% to 56% window for gross margin in '25 is the right number to look at.

[Unknown Attendee]

We just started the year. What's your guidance for the first quarter of 2024?

[R.J.M. Dassen, executive]

So for Q1, we expect EUR 5 billion to EUR 5.5 billion of sales in that quarter with a gross margin expected to be somewhere between 48% and 49%. We expect installed base revenue of approximately EUR 1.3 billion. That's a bit of a soft start for the year. But that, I think, is very much in sync with what I told you earlier on that we really believe that the momentum is building up throughout this year. And we expect that the second half of the year will be better than the first half.

[Unknown Attendee]

Sales to China were very strong in 2023. How do you see this developing in 2024? And can you give us an update on the most recent export control regulations and how it's impacting your business moving forward?

[R.J.M. Dassen, executive]

So you're fully right. The business in '23 with China was very, very strong. I should remind everyone that, that was also driven by the fact that we already had many orders for systems into China. And the majority of the sales that we have with China was actually executing on orders that were already there by the end of 2022.

I think we explained it last time, the order fill rate typically for China was fairly low in the past couple of years. It actually was below 50%. So with the shifts in demand that we had with other customers, that meant that we were able to execute on the demand that was clearly there in China, and that's why the China sales went up significantly in this year.

I should also say that those sales are really to mid critical and mature -- for mid-critical to mature manufacturing. I mean that's where the systems are going to. And that demand is very, very solid. It was solid last year. We expect it to be solid this year and also on a go-forward basis because of all the dynamics that are going on in China, we believe that, that will remain solid.

In terms of export controls, you're right. I mean, last year, we had Dutch rules kicking in and we had additional U.S. rules kicking in. We actually sought clarification with the authorities on the interpretation of those rules, and that really confirmed the expectation and the interpretation that we gave in our update on Q3.

In that sense, what it means that we should now expect that for 2024, we will not get export licenses for shipment into China for, let's say, advanced immersion, so 2000 and up tools. And we should also expect -- for a handful of fabs, we should expect not to get export licenses for China for 1970 and 1980 immersion tools. So that is the interpretation that we had in Q3, and we had that confirmed in follow-up conversations with the authorities.

In terms of what that does, as you recall, we said on -- in Q3, we said that we believe that between 10% to 15% of the China sales in 2023 would be affected by this rule. So if you look at the impact that these export regulations that were articulated in '23, the impact that, that will have on the '24 sales, we confirm that we believe that will be somewhere between 10% to 15% of the China system sales in 2023.

[Unknown Attendee]

Can you update us on your capital allocation plans?

[R.J.M. Dassen, executive]

Yes. So we had a few soft quarters, but this was a strong quarter in terms of cash generation. So I think that was clear. And that, to a large extent, I think that was also related to the fact that we had a significant order intake, and as a result of that, we had an uptick in down payments.

The strategy -- capital allocation strategy and policy, by itself, hasn't changed, right? So we still -- whatever cash we need in order to make the investments into the business for capacity, for technology, et cetera, et cetera, that's the first deployment of the cash.

Secondly, we have a policy of growing dividends. And as it comes -- and growing dividends, which are paid out on a quarterly basis, and as it comes to this year, we will pay an interim dividend in Q1 of EUR 1.45 per share. And we will recommend to the AGM to declare a final dividend of EUR 1.75 per share in the AGM. And that would bring the total dividend for 2023 up to a level of EUR 6.10 per share, which would be a 5.2% increase over last year's dividend. And then whatever is left will be paid back to shareholders by way of share buybacks.

[Unknown Attendee]

Regarding your longer-term outlook, what are your expectations on demand and your business beyond 2024?

[R.J.M. Dassen, executive]

So essentially unchanged, I would say, in comparison to what we said last quarter. So we -- if we start looking at 2025, as I mentioned before, we are looking at a year of significant growth. And that is for a couple of reasons. First off, we think the secular trends in our industry are still very much intact, right? If you look at the developments around AI, if you look at the developments around electrification, around energy transition, et cetera, they will need many, many semiconductors. So we believe the secular trends in the industry are still very, very strong.

Secondly, I think we clearly, by 2025, we should see our customers go through the up cycle, I mean the upward trend in the cycle. So that should be a positive. And thirdly, as we also mentioned last time, it's clear that many fab openings are scheduled that will require the intake of quite some tools in the 2025 time frame.

So we view 2025 as a strong year of growth. Now we are making the investments, as I also mentioned before, in 2024 in order to be able to create the capacity that will be needed in '25, but also will be needed to cater to the demand that we talked about in the Capital Markets Day earlier on in 2030. So we see strong growth, and we believe we need to prepare for that growth.

And talking about Capital Markets, you can put it into your calendar. We expect our next Capital Markets Day to be on November 14 of this year. I really look forward to seeing you there, and discussing with you the good growth opportunities that ASML has for the foreseeable future.