ASML Holding N.V. (NASDAQ:ASML) Q3 2023 Earnings Call Transcript

ASML Holding N.V. (NASDAQ:ASML) Q3 2023 Earnings Call Transcript October 18, 2023

Operator: Good day and thank you for standing by. Welcome to the ASML 2023 Third Quarter Financial Results Conference Call on October 18th, 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 hand the conference call over to Mr. Skip Miller. Please go ahead.

Skip Miller: Thank you, operator. Welcome everyone. This is Skip Miller, Vice President of 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 third 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 the 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. Welcome to everyone. Thank you for joining us for our third 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 third quarter 2023 as well as provide our view of the coming quarters. Roger will start with a review of our third quarter 2023 financial performance with 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 will.

Roger Dassen: Thank you, Peter, and welcome everyone. I will first review the third quarter financial accomplishments and then provide guidance on the fourth quarter of 2023. Let me start with our third quarter accomplishments. Net sales came in at EUR6.7 billion, which is around the midpoint of our guidance. We shipped 10 EUV systems and recognized EUR1.9 billion revenue from 11 systems this quarter. Net system sales of EUR5.3 billion, which was mainly driven by Logic at 76% with the remaining 24% coming from Memory. Installed Base Management sales for the quarter came in at EUR1.4 billion, as guided. Gross margin for the quarter came in at 51.9%, which is above our guidance, primarily driven by DUV product mix as well as some one-off cost effects.

On operating expenses, R&D expenses came in at EUR992 million and SG&A expenses came in at EUR288 million, both basically as guided. Net income in Q3 was EUR1.9 billion, representing 28.4% of net sales and resulting in an EPS of EUR4.81. Turning to the balance sheet, we ended the third quarter with cash, cash equivalents, and short-term investments at a level of EUR5 billion. Moving to the order book, Q3 net system bookings came in at EUR2.6 billion, which is made up of EUR0.5 billion for EUV bookings and EUR2.1 billion for non-EUV bookings. These values also include inflation corrections. Net system bookings in the quarter were driven by Logic with 80% of the bookings, while Memory accounted for the remaining 20%. As expected, we did see some moderation in orders this quarter.

As the industry is working through a cycle, customers remain cautious in the current environment, managing cash flows and delaying purchase orders. In addition, there were no High-NA orders this quarter. While our bookings were lower than in previous quarters, our backlog at the end of Q3 remained strong at over EUR35 billion. With that, I would like to turn to our expectations for the fourth quarter of 2023. We expect Q4 net sales to be between EUR6.7 billion and EUR7.1 billion. We expect our Q4 installed Base Management sales to be around EUR1.4 billion. Gross margin for Q4 is expected to be between 50% and 51%. The positive impact of higher sales volume is more than offset by the dilutive impact from a change in DUV mix and one-off effects relative to last quarter.

The expected R&D expenses for Q4 are around EUR1.03 billion and SG&A is expected to be around EUR285 million. Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%. An interim dividend of EUR1.45 per ordinary share will be made payable on November the 10th, 2023. In Q3 2023, we purchased shares for a total amount of around EUR100 million. As mentioned in previous quarters, in the current environment, we expect to see ongoing pressure on our free cash flow. As a result, we will be prudent in managing our cash flows and maintain relatively high levels of cash. With that I would like to turn the call over to Peter.

Peter Wennink: Thank you. Thank you, Roger. And I have a bit of a cold, so apologies. As Roger has highlighted, another good quarter, especially considering the current market environment. Uncertainty remains in the market, driven by global macro concerns around inflation, rising interest rates, lower GDP growth in certain economies and the geopolitical environment, including export controls. However, the industry seems to be passing through the cycle trough. There has been some improvement in end market inventory levels downstream, sorry, I have to get a bit of water, although inventory levels upstream remain elevated. As a result, our customers continue to moderate wafer output by running at lower utilization levels. While lithography tool utilization are still running at levels lower than normal relative to last quarter, tool utilization in Logic continues to show signs of improvement, while Memory has yet to turn.

We concur with our customers that still expect to see an inflection point, indicating the start of a recovery by the end of the year, although the shape and slope of the recovery remains uncertain. Looking further ahead to 2025, we expect a significant growth year since more than 50% of our EUV and DUV shipments will go to new fab projects. On top of this, we expect existing fabs will be adding capacity, driven by continued recovery cycle. Turning to our business, we now expect DUV revenue to grow towards 55% year-over-year, an increase from around 50% communicated last quarter, primarily driven by an increase in immersion revenue. China demand for DUV systems continues to be strong, a trend we talked about in previous quarters. For system shipments this year to Chinese customers, the majority of the orders were booked in 2022.

The demand fill rate for our Chinese customers over the last two years was significantly less than 50%. So the Chinese customers were in fact receiving a much lower number of systems than they ordered. This was due to the fact that timing from other customers that, sorry, this was due to the — to the fact that the demand for our systems worldwide significantly exceeded supply. With current shifts in demand timing from other customers, we now have the opportunity to fulfill these orders to our Chinese customers. So supply is in fact catching up to demand, and we’re shipping lithography systems for mature and mid-critical nodes to China, while of course complying with export control regulations. If you combine this with the fact that other customers are delaying their demand, this means indeed a higher sales percentage from China than we saw in previous years.

In EUV for 2023, we continue to expect year-over-year revenue growth for EUV of around 25%, as communicated last quarter. For the Installed Base business in 2023, the current utilization rates, market uncertainty, particularly as it relates to the timing of the recovery, customers continue to wait to perform productivity and performance upgrades on the litho systems. Therefore, we now expect our Installed Base business this year to be down around 5% from last year versus the flat growth previously communicated. In summary, based on our full year with higher DUV revenue offset somewhat by lower expectations on our Installed Base business relative to last quarter, we still expect net sales for the year to grow towards 30% with a slight improvement in gross margin compared to 2022.

Overall, a very strong growth year, especially considering the industry being in a down-cycle. On the geopolitical front, as it relates to export controls, the US government yesterday published updated export control regulations. Part of the regulations is an update from last year’s October communication and part is the implementation of the US regulation on the trilateral agreement between the Dutch, Japanese, and US governments. Given the length of the document, we need to review the final regulation thoroughly and make a detailed analysis, which will take some time. But based on our preliminary assessment, we do not expect these measures to have a material effect on our financial outlook for 2023. The export control measures could have an impact on the regional split of our shipments in the medium to long term, but we do not expect an impact on the global demand scenarios, as communicated during our Investor Day in November last year, since the long-term growth perspectives for our industry remains clearly unchanged.

Looking towards next year, the semiconductor industry is currently working through the bottom of the cycle and our customers expect the inflection to be visible by the end of this year, as I mentioned before. Although there is an opportunity for some demand to be pulled back into the back half of 2024, we currently prefer to take a more conservative view for the full-year 2024, especially considering the inherent nature of the macroeconomic uncertainties. Therefore, based on our current view, we expect the revenue next year to be similar to 2023. As such, we see 2024 as a transition year, but also as an important year to prepare for the significant growth that we expect in 2025. Now, based on discussions with our customers, we currently expect 2025 to be a strong year, driven by a number of factors.

First, the secular growth drivers in the semiconductor end markets, which we have previously discussed, such as energy transition, electrification and AI. The expanding application space, along with increasing lithography on future technology nodes drives demand for both advanced and mature nodes. Secondly, the industry expects to be in the middle of a cyclical upturn in 2025, starting in 2024. And lastly, as mentioned earlier, we need to prepare for the significant number of new fabs that are being built across the globe. These fabs are spread geographically, are strategic for our customers, and are scheduled to take our tools. It is essential that we keep our focus on the future and build capacity to be ready for this ramp. In summary, despite going through an industry downcycle, we still expect very strong growth in our business this year, and while there are still significant uncertainties primarily driven by the macro environment, it appears that we’re passing through the bottom of this specific cycle, and the shape of the recovery will ultimately determine the demand curve beyond 2023.

In the near term, it’s understandable that customers remain cautious as they moderate wafer output to help lower inventory levels in the supply chain and look to build confidence around the timing and slope of the recovery next year. In summary, we clearly view 2024 as a transition year as we prepare for future growth and expect strong year in 2025 and beyond. We remain confident that we are well positioned for further long-term growth, as we discussed in the market scenarios for 2025 and 2030 during our Investor Day in November 2022. With that, we will 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. Beforehand, I’d like to ask you that you kindly limit yourself to one question with one short follow-up, if necessary. This will allow us to get to as many callers as possible. Now, operator, could we have your final instructions and then the first question, please?

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Q&A Session

Operator: Thank you. [Operator Instructions] We will now go to the first question and your first question comes from the line of Joe Quatrochi from Wells Fargo. Please go ahead.

Joe Quatrochi: Yeah. Thanks for taking the questions. Curious, embedded in your expectation for more muted kind of 2024. How do we think about the gross margin puts and takes just given there’s several moving parts in terms of like mix and you guys are obviously increasing your manufacturing output for later years and then I think there’s some benefits from higher EUV ASPs. At the same time, you’re also going to start shipping the initial High-NA tools as well.

Roger Dassen: Yeah. Joe, you’re doing a very fine job in analyzing it all. Of course, you will appreciate that we’re not going to give guidance on you know quantitative guidance on the gross margin for next year, but I can give you some of the — some of the drivers of the gross margin. And I think you mentioned a few of them, which are quite important. So I would say the 3800s ASP is clearly one, right? So 3800 is going to be an important part of the mix in next — next year for EUV, so obviously, has a higher ASP. We talked about more than EUR200 million last — on the call last quarter. So that comes with a higher ASP, but also drives — drives the gross margin. So that’s an important driver. I think service on EUV is one where we say we continue to make progress on that one.

So that’s another — that’s another positive. I would say on the challenge side, so on the headwind that we’re going to get in terms of gross margin for next year, it is, as you said, next year we are preparing obviously for a big year in 2025 because that’s the way we look at it. As we also mentioned — as Peter mentioned and as we also said in the video, going to be a big year, and that means that we’re going to add quite some capacity to actually allow that to happen. So that’s going to have a headwind on the gross margin because those people will have to be trained in 2024 whilst primarily being productive only in 2025. And also on High-NA, you know, the High-NA numbers next year obviously are very, very small in terms of revenue and also output, but we are obviously preparing our workforce, both in the factory, but also in the field to accommodate the ’25 and beyond ramp of High-NA.

So obviously that also, same story, lot of people that will be added there, and will be a drag on the gross margin for 2024. Question mark obviously is on the Installed Base business. That can go positively, can go negatively on the gross margin, very much dependent on how the upgrade business will come back in 2024. And then finally, in light of all the puts and takes that you might think of in terms of revenue, also in light of what was — what Peter just said, the China export controls, you could maybe see less immersion tools into China, also less on the high end. So that could also be a bit of a headwind on gross margin. So that’s it really, Joe. Those are all the puts and takes I would see it today and in the Q1 — in the Q4 call, so in January of next year, I think we have a much better handle on how those — all of those pan out.

Joe Quatrochi: Got it. Thanks for that. And then as a follow-up, just wanted to reconfirm, for fast shipments, you’re expecting still to exit this year in terms of revenue not recognized in the EUR2.3 billion range, and then does that get caught up next year as part of kind of a more muted growth that you’re able to catch up to that demand?

Roger Dassen: I think Joe, part of it will. The way we look at it today, but again, we will confirm that in more detail in January, but the way we look at it today, we expect less fast shipments by the end of ’24 than we would have by the end of ’23. So there would be a positive effect from fast shipment in the number for next year.

Joe Quatrochi: Got it. And that EUR2.3 billion is still the right number exiting this year?

Roger Dassen: The EUR2.3 billion is what we’re currently driving towards. Yeah. That’s what we expect at this stage to have shipments this year not recognized in revenue this year. Correct.

Joe Quatrochi: Perfect. Thank you.

Operator: Thank you. We will now go to our next question. And the next question comes from the line of Krish Sankar from TD Cowen. Please go ahead.

Krish Sankar: Yeah. Hi, thanks for taking my question. I have two of them. When you look into calendar ’24, how to think of from a unit standpoint, EUV and DUV? How do we look at unit for EUV and DUV in 2024 relative to 2023? Would it be up, down, similar? Any color there would be helpful, and then I had a follow-on.

Peter Wennink: Yeah. I think on the DUV, I think Roger said it in the answer to the previous call. In the DUV, of course, we’ve had a great year for China because we were basically delivering out of the backlog. These guys ordered and the orders were there that were prepaid, and we had the opportunity to ship. I don’t think that will repeat itself in that volume so much next year. And on top of that, of course, there is a new export control regulation that will put, let’s say, as a handful of Chinese fabs under the export control rules where we cannot ship immersion tools. It’s just a handful of, but it’s — it is still — it is still sales that we had in 2023 that we’ll not have in 2024. So I think DUV could see some reduction, based on that now, if then sales stay the same or at the similar level then EUV grows, but there — what Roger also said as an answer to the previous question, we do expect that fast shipments going out of 2024 will be lower.

So there’s going to be, you could say, an accounting windfall on the top line. So I think all-in-all, this is a bit of the picture, so somewhat lower DUV units. EUV units could be lower because of the fact that we actually have — although we could see revenue increase as a result of the fast shipment move, could indeed be also somewhat lower, but with higher sales prices. So this is what the picture is for next year. Now, like Roger also said, for the January after the fourth quarter results is probably the better time to go into bit more detail, but directionally, that’s what you can expect.

Krish Sankar: Got it. Got it. That’s very helpful, Peter. And then on China, I understand it was like 46% of sales last quarter. Probably average is around 30% for the full year. If you strip out the export control issues or the geopolitics, a lot of these spending is on mature nodes. Kind of curious how long do you think this level of spending is sustainable or do you think at some point there is going to be a natural consolidation or rationalization of this spending? Thank you.