ASML Holding N.V. (NASDAQ:ASML) Q1 2023 Earnings Call Transcript

ASML Holding N.V. (NASDAQ:ASML) Q1 2023 Earnings Call Transcript April 19, 2023

Operator Good day, and thank you for standing by. Welcome to the ASML 2023 First Quarter Financial Results Conference Call on April 19, 2023. At this time, all participants are in a listen-only mode. After the speakers’ introduction, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded.I would now like to turn the conference call over to Mr. Skip Miller. Please go ahead.Skip Miller Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President, Investor Relations at ASML. Joining me today on the call are ASML’s CEO, Peter Wennink; and our CFO, Roger Dassen.The subject of today’s call is ASML’s 2023 first quarter results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received.

This call is also being broadcast live over the Internet at asml.com. A transcript of management’s opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call.Before we begin, I’d like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the Federal Securities Laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today’s press release and presentation found on our website at asml.com and in ASML’s Annual Report on Form 20-F and other documents as filed with the Securities and Exchange Commission.With that, I’d like to turn the call over to Peter Wennink for a brief introduction.Peter Wennink Thank you, Skip, and welcome, everyone, and thank you for joining us for our first quarter 2023 results conference call.Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the first quarter 2023, as well as provide our view of the coming quarters, and Roger will start with a review of our first quarter 2023 financial performance with some added comments on our short-term outlook, and I will complete the introduction with some additional comments on the current business environment and on our future business outlook.Roger, if you want?Roger Dassen Thank you, Peter; and welcome, everyone.I will first review the first quarter financial accomplishments and then provide guidance on the second quarter of 2023.

Let me start with our first quarter accomplishments. Net sales came in at €6.7 billion, which was above our guidance due to higher than expected EUV and Deep UV revenue from faster installation and earlier acceptance of systems in the quarter. We shipped 9 EUV systems and recognized €2.9 billion revenue from 17 systems this quarter.Net system sales were at €5.3 billion, which was again driven by logic at 70% with the remaining 30% coming from memory. Installed Base Management sales for the quarter came in at €1.4 billion, which was lower than guided due to less upgrade revenue.Gross margin for the quarter came in at 50.6%, which is above our guidance, primarily driven by additional EUV and Deep UV immersion revenue in the quarter, which more than outweighed the impact of lower-than-expected upgrade business.On operating expenses, R&D expenses came in at €948 million, which was below our guidance, primarily due to exchange rate effects and some one-offs.

SG&A expenses were €260 million, also lower-than-guided, primarily due to lower IT spending and timing of headcount additions. Net income in Q1 was €2 billion, representing 29% of net sales and resulting in an EPS of €4.96.Turning to the balance sheet. We ended the first quarter with cash, cash equivalents and short-term investments at a level of €6.7 billion. Moving to the order book, Q1 net system bookings came in at €3.8 billion, which is made up of €1.6 billion for EUV bookings and €2.2 billion for non-EUV bookings. These values also include inflation corrections.Net system bookings in the quarter were driven by logic with 79% of the bookings, while memory accounted for the remaining 21%. Bookings are lower than in previous quarters, which is not unexpected given the current environment, particularly taking into account our backlog at end of Q1 of around €39 billion, which is almost 2x this year’s system sales.With that, I would like to turn to our expectations for the second quarter of 2023.

We expect Q2 net sales to be between €6.5 billion and €7 billion. We expect our Q2 Installed Base Management sales to be around €1.3 billion. Gross margin for Q2 is expected to be between 50% and 51%. The expected R&D expenses for Q2 are around €990 million, and SG&A is expected to be around €275 million.The higher R&D guidance is primarily due to investments in support of our continuous innovation as we further extend our product roadmaps and improve our installed base performance. Higher SG&A is mainly due to additional headcount and associated infrastructure support. Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%.In Q1, ASML paid a quarterly interim dividend of €1.37 per ordinary share.

Recognizing the three interim dividends of €1.37 per ordinary share each paid in 2022 and 2023, this leads to a final dividend proposal to the General Meeting of €1.69 per ordinary share. This will result in a total dividend for the year 2022 of €5.80 per ordinary share, which is a 5.5% increase compared to 2021.In Q1 2023, we purchased around 0.7 million shares for a total amount of around €400 million. In the current uncertain market environment, it is prudent that we continue to manage higher levels of cash as the entire value chain will likely create some pressure on our free cash flow.With that, I would like to turn the call back over to Peter.Peter Wennink Thank you, Roger.As Roger has highlighted, we had a good first quarter above our guidance in a very dynamic environment and there continues to be a lot of uncertainty in the market due to a number of global macro concerns around inflation, rising interest rates, recession and the geopolitical environment, including export controls.Customers continue to see demand weakness in consumer-driven end markets, causing the industry to actively reduce inventory and lower the utilization of their production base, while demand in other end markets, such as automotive and industrial, remains relatively strong.Specifically, memory customers are more aggressively lowering CapEx and are limiting wafer output to reduce inventory to more healthy levels.

Logic customers are also moderating wafer output for some market segments, while demand continues to be strong in other markets, especially in markets requiring more mature nodes. Despite this, both logic and memory customers are still following their technology roadmaps and continue making strategic technology investments.As a result of this market dynamic, we do see customers making adjustments to demand timing relative to last quarter. However, we also see other customers more than willing to absorb this demand change, particularly in Deep UV. For example, Chinese domestic customers focusing on mid-critical and mature applications, which make up over 20% of our backlog at the end of Q1, are now expected to grow to a similar allocation of our system revenue this year.After taking these demand adjustments over the quarter into account, our system demand still exceeds our capacity for this year, albeit by a smaller margin than in the last quarter and as a reference, during 2022, the demand for Deep UV was 50% higher than our build capacity, while this gradually reduced from 30% at the end of Q4 2022 to 20% at the end of Q1 2023.As Roger mentioned, we saw orders moderate in Q1 after several quarters of very strong bookings.

A moderation in the rate at which customers are adding orders is to be expected in the current environment, especially considering the long period in which our backlog can cover shipments, which extends well beyond our normal order lead times.With regard to our total system capacity, we are still planning to ship around 60 EUV systems and around 375 Deep UV systems in 2023, with around 25% of the Deep UV systems being immersion. We currently see no change in our full year outlook as provided last quarter. As a reminder, we expect EUV business growth to be around 40% over 2022 and non-EUV business growth of around 30%. For the Installed Base business, we still expect year-over-year revenue growth of around 5%.And, in summary, based on our view today, we continue to expect a strong — a year of strong growth with a net sales increase of over 25% and a slight improvement in gross margin.

To summarize, our short to medium term business outlook is still very strong, supported by a backlog that represents almost two years of tool shipments continuously pushing our output capacity to the maximum and further underpinning our plan to expand our capacity.On the geopolitical front, as it relates to export controls, we’re still waiting for the Dutch government to publish further details on the export control restrictions. These new export controls focus on advanced chip manufacturing technology. Due to these upcoming regulations, ASML will need to apply for export licenses, for shipments of the most advanced immersion Deep UV systems. And, as we’ve said earlier, we interpret most advanced to pertain to TWINSCAN NXT [technical difficulty] controls to be translated into legislation and take effect.Based on the announcement last month, our expectation of the Dutch government’s licensing policy, the current market developments and the way we model our longer-term scenarios, we do not expect a material effect on our 2023 financial outlook, or on our longer-term scenarios as announced during our Investor Day in November last year.

And despite the clear shorter-term cyclical concerns, the longer-term global megatrends we talked about at the Investor Day, are broadening the application space and fueling demand for advanced and mature nodes. Secular growth drivers in semiconductor end markets and increasing lithography intensity on the future technology nodes are driving demand for our products and services.In summary, while there is clear uncertainty in the current environment, our customers’ demand for our products continues to exceed supply. We had a good start to the year and based on our view today, we continue to expect another year of strong growth. ASML and its supply chain partners continue to work on the capacity ramp in support of our customers’ demand and we remain confident in our long-term growth opportunity.With that, we would be happy to take your questions.Skip Miller Thank you, Roger and Peter.

The operator will instruct you momentarily on the protocol for the Q&A session. [Operator Instructions] Now, operator, could we have your final instructions and then the first question, please.

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Question-and-Answer Session Operator Thank you. [Operator Instructions]

And your first question comes from the line of Krish Sankar from TD Cowen. Please go ahead. Your line is open.Krish Sankar Yes. Hi. Thanks for taking my question. I have two of them. First one, Roger, I understand your backlog is still pretty healthy, but the order run rate is definitely slowing. So, kind of curious how to think about calendar 2024 relative to 2023? If the order run rate continues to decline, is there a risk that calendar 2024 could be flat to down year for you? And then I had a follow-up for Peter.Peter Wennink Well, let me reverse it.

I will answer that question. And perhaps, Roger, can answer the second one. Great. So, yes, I think you asked a question on 2024, I think, we already mentioned it, the backlog is particularly strong, which of course is the result of very strong order intake over the last couple of quarters now.And when we look at 2024 and we have our long-term discussion with our customers. The demand for 2024 clearly shows an increase in terms of tool shipments and therefore sales as compared to 2023. Now, a significant part of that is already booked. You could argue that the back half of the second half of next year still needs to be booked and I’m pretty confident that that will come in the course of this year.Now — and although there are many uncertainties that we’re currently seeing that the rate of inflation, interest rates, the geopolitical situation, we believe we are not looking at a massive recession.

While our customers, of course, are dealing with the current circumstances by very diligently reducing inventory, adjusting their utilization rates and still very much planning for the demand for next year, because they are building fabs and those fabs are real and have to take tools.Now, not everything is booked yet for 2024 demand, but in our discussions, as I said before, we very clearly see an increase of the number of tools that are needed, because of the technology transitions and I also believe the confidence that our customers have in them very diligently working off inventory against a macroeconomic situation that doesn’t look like a massive recession. That gives us the confidence with the fact that these new fabs are opening that, yes, 2024 will be an up year as compared to 2023 and, yes, we have not booked all those orders and, yes, I’m — I strongly believe that those orders will come in in the course of this year.

But if you ask me an exact date like June 12, 2023, I cannot give you this, but it will happen. So, this is the way we look at the world.Krish Sankar Got it. Very helpful, Peter, and I definitely won’t ask for the specific date. And then as a follow-up for either you or Roger, there has been – clearly, the cost of EUV is pretty high and there have been some concerns that EUV intensity could slow down as we go beyond 3 nanometer, already some customers are using a low-cost 3 nanometer version. So, I’m kind of curious, how to think about EUV intensity actually go from 3 to 2-nanometer and beyond? Do you feel comfortable EUV layers are going to increase or do you think it kind of stagnates or saturates? Thank you.Peter Wennink Okay. I’ll answer that also.

I think the — as also shown in our — I think, I can best refer to — because you’re talking about long-term roadmap questions, I think we tried to answer that during our Capital Markets Day. I think, it was very clear in our Capital Markets Day. We gave you an overview of the litho intensity going up. Yes, that is also driven by EUV. It is driven by EUV for two reasons.One, I think, we will see, throughout the rest of this decade, a significant increase in EUV productivity, but also in the shrink by the introduction of High-NA. So, it’s also to be a combination. And what we’re seeing today when we look at the chip designs, we see more EUV layers, not less.So that means that we see an EUV intensity going up and that’s just simply based on the very intense and deep discussions that we have with our customers’ R&D people and that’s also the basis for our Capital Markets presentation we gave you last year and that still stands.

What we said at that time is still relevant today.Krish Sankar Got it. Very clear, Peter. Thank you very much.Operator Thank you. We will now go to our next question. And your next question comes from the line of Francois Bouvignies from UBS. Please go ahead. Your line is open.Francois-Xavier Bouvignies Hi. Thank you very much. So, I have two quick ones. So, the first one is on EUV demand, specifically. Peter, I mean, you mentioned in the video, actually Roger, some push outs, but you reiterated the guidance for the full year, so, obviously, your strong backlog is supporting your 2023 revenues and you said it’s way more than one full year revenues, your backlog. But as net orders is — are weakening, I mean, how should we interpret the trend in EUV demand for 2024 as the backlog is normalizing?

I mean, do you still expect EUV shipments to be up in 2024, especially given the visibility of two years you have for EUV specifically? Just trying to reconcile your pushouts’ comments and EUV demand for 2024 given the long visibility?Peter Wennink Yes. When we talk about a demand pushout, you need to understand, and I think we said it before many times during our quarterly calls, that the demand was far bigger than our build capacity, so we can talk about a demand push out without affecting our build capacity, because the build capacity is lower than the demand.So, this is what is actually happening. And some of that demand that people wanted in 2023, they moved back to 2024. So, when we look at the year 2024 and we look at the demand picture, and I just refer to the answer I gave on the first question, the demand picture looks at an increase of our shipments next year, which is true for the company, it’s also true for EUV.

So — and I gave you the reasons in the answer to the first question. So, the — which is true for EUVs, even more true for Deep UV. Yes. We have a significant over-demand in 2022, but now also in 2023, which is to a lesser extent but that one has actually shrunk, but it’s the same situation. You can have demand changes, which do not lead to output changes, because the output capacity is so much lower.I think that is what you need to keep in your mind. And I can only refer back to what I said in the answer to the first question. We do pencil in the customer demand based on their expansion plans and based on what they believe their production capacity needs next year, which is a function of how they think about the duration of this current downturn.Now, of course, if our customers start thinking about it, a duration that is extending in years that will be completely different, but they don’t.

Now they all think about to basically work out diligently our inventory levels, we reduced the utilization to get a balancing supply and demand in the chip sector, that’s what they’re doing and that just points to a shorter-term situation than a longer-term situation, which means that they keep their 2024 demand on us as is.Now, part of it still needs to be booked, like I said, and is particularly what I would call the back half of the second half of next year. Yes. Those orders we need to book, but I’m pretty sure that we will book them and both on Deep UV and EUV we’re both planning higher unit numbers.Francois-Xavier Bouvignies Great. Thank you, Peter. And then my follow-up is on China. I mean, you mentioned it’s 20% of your backlog, so it would imply 45% of the Deep UV backlog is from China, if my math is correct, and which would imply a significant share of — from China in Deep UV, how should we think about the sustainability and particularly the risk of pulling due to the geopolitical dynamics if you see what I mean beyond 2023?Peter Wennink Yes.

I think, it’s no surprise, we’ve said it before that the Chinese market is a market to mid-critical and mature semiconductor, so mid-critical and mature lithography systems. That’s exactly what we’re talking about, say, who needs all those semiconductors, because there is a significant — and I think your math is about right and that means that for our mid-critical and mature semiconductors, which are outside the realm of the export controls, because that’s on advanced immersion, yes, the demand for those semiconductors are significant in the discussions that I’ve had with one of the Chinese end customers, which is not a semiconductor maker, it’s a product maker.So the fact – they make electrical vehicles. If you think about the increase of number of electric vehicles that will be produced in three to four years from now, you need multiple 28 and 45 nanometer fabs, multiple, and that’s more than a handful.