ASML Holding N.V. (NASDAQ:ASML) Q4 2022 Earnings Call Transcript

ASML Holding N.V. (NASDAQ:ASML) Q4 2022 Earnings Call Transcript January 31, 2023

Operator: Welcome to the ASML 2022 Fourth Quarter and Full Year Financial Results Conference Call on January 25, 2023. . I would now like to turn the call over to Mr. Skip Miller. Please go ahead, sir.

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 2022 fourth quarter and full year 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, everyone, and thank you for joining us for our fourth quarter and full year 2022 results conference call. And before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the fourth quarter and full year 2022 as well as provide our view of the coming quarters. And Roger will start with a review of our fourth quarter and full year 2022 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 — like.

Roger Dassen: Thank you, Peter, and welcome, everyone. I will first review the fourth quarter and full year financial accomplishments and then provide guidance on the first quarter of 2023. Let me start with our fourth quarter accomplishments. Net sales came in at €6.4 billion, around the midpoint of our guidance. We shipped 18 EUV unit — EUV systems and recognized €2.3 billion revenue from 13 systems this quarter. Net system sales of €4.7 billion, which was again driven by Logic at 64% with the remaining 36% coming from Memory. Installed Base Management sales for the quarter came in at €1.7 billion, which was higher than guided due to additional upgrade revenue. Gross margin for the quarter came in at 51.5%, which is above our guidance, primarily due to the pull-in of additional upgrade business as well as an insurance settlement from ASML Berlin fire, which occurred in early 2022.

On operating expenses, R&D expenses came in at €906 million, above our guidance due to higher depreciation. SG&A expenses were €280 million, higher than guided due to increased IT and recruiting spending as part of our headcount growth plan. Net income in Q4 was €1.8 billion, representing 28.2% of net sales and resulting in an EPS of €4.60. Turning to the balance sheet. We ended the fourth quarter with cash, cash equivalents and short-term investments at a level of €7.4 billion. Moving to the order book. Q4 net system bookings came in at €6.3 billion, which is made up of €3.4 billion for EUV bookings and €2.9 billion for non-EUV bookings. These values also include inflation corrections. Non-EUV bookings are a combination of deep UV and metrology and inspection.

Net system bookings in the quarter were driven by Logic with 66% of the bookings, while Memory accounted for the remaining 34%. Looking at the full year, net sales grew 14% to €21.2 billion. EUV system sales grew 12% to €7 billion realized from 40 systems while in total, we shipped 54 EUV systems in 2022. Deep UV system sales grew 13% to €7.7 billion. Our metrology and inspection system sales grew 28% to €660 million. Looking at the market segments for 2022. Logic system revenue was €10 billion which is a 4% increase from last year. Memory system revenue was €5.5 billion, which is a 34% increase from last year. Installed Base Management sales was €5.7 billion, which is a 16% increase compared to previous year. At the end of 2022, we finished with a backlog of €40.4 billion, an increase of 67% compared to the end of 2021.

Our R&D spending increased to €3.3 billion in 2022, as we continue to invest in innovation across our full product portfolio. Overall, R&D investments as a percentage of 2022 sales were about 15%. SG&A increased to €946 million in 2022, which was about 4% of sales. Net income for the full year was €5.6 billion, 26.6% of net sales, resulting in an EPS of €14.14. Improvements in working capital contributed to a free cash flow generation of €7.2 billion for 2022, mainly driven by customer down payments following the very significant order intake this year. We continue to invest in support of our road map and planned capacity ramp. Excess cash will be returned to our shareholders through a combination of dividends and share buybacks. With that, I would like to turn to our expectations for the first quarter of 2023.

We expect Q1 net sales to be between €6.1 billion and €6.5 billion. Per customers’ requests, we prioritized resources towards the acceleration of deep UV shipments at the end of 2022. As a result, we expect lower revenue in Q1 and higher revenue in the following quarters. We expect our Q1 Installed Base Management sales to be around €1.5 billion. Gross margin for Q1 is expected to be between 49% and 50%. The lower margin relative to last quarter is primarily due to lower upgrade revenue and deep UV mix effect. The expected R&D expenses for Q1 are around €965 million, and SG&A is expected to be around €285 million. The higher R&D guidance is primarily due to additional headcount and labor cost increases. These investments are in support of our continuous innovation as we further expand our deep UV, EUV and applications road map and, at the same time, work to improve our installed base performance.

Higher SG&A is mainly due to additional headcount and IT spending. Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%. In Q4, ASML paid a quarterly interim dividend of €1.37 per ordinary share. The third quarterly interim dividend will be €1.37 per ordinary share and will be made payable on February 15, 2023. Recognizing this interim dividend and the 2 interim dividends of €1.37 per ordinary share paid in 2022, this leads to a final dividend proposal to the general meeting of €1.69 per ordinary share. In Q4 2022, we purchased around 0.6 million shares for a total amount of around €300 million. ASML announced a new share buyback program during our Investor Day on November 11, 2022, to be executed by December 31, 2025.

We intend to purchase shares up to an amount of €12 billion. With that, I’d like to turn the call back over to you, Peter.

Peter Wennink: Thank you, Roger. And as Roger has highlighted, we had a year of record sales in a dynamic environment. Demand remains strong and we finished the year with a record backlog. And looking to 2023, 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 are still seeing demand weakness in consumer-driven end markets, the most notable with PCs and smartphones, with some indication of softening or lower growth rates in data center demand, while the demand strength continues in other markets such as automotive and industrial. Customers are telling us they expect a rebalancing of semiconductor inventories over the first half of 2023, with business expected to rebound in the second half of the year.

A potential driver of this recovery in the second half of the year could also be the post-COVID opening of China. This could have a positive effect on both supply and demand. To help rebalance inventory levels, customers are running their lithography systems at lower utilization levels and some have also lowered their CapEx plan for this year. Based on this, we concluded that most of our customers have made the assessment that the duration of a potential recession is significantly shorter than our average delivery lead time. On top of this, lithography investments are strategic in nature, which means that the demand for our systems remain strong. For instance, this year, demand still exceeds our capacity, and we enter the year with a backlog of €40.4 billion, so our focus will still be on maximizing system output.

We’ve experienced several quarters of very strong bookings, which now provides backlog coverage significantly beyond 2023, which is almost twice the expected 2023 system sales. Based on discussions with our customers and continued improvements in the capability of our supply chain, we are planning to increase our output capability this year. We’re planning to ship around 60 EUV systems and around 375 deep UV systems in 2023, with around 25% of the deep UV systems to be immersion. We still plan a significant number of fast shipments this year, which under the current way of working will result in a similar amount of delayed revenue out of 2023 that came into 2023. Looking at the growth of the business for the full year 2023 compared to 2022.

We expect EUV revenue growth of around 40% and non-EUV revenue growth of around 30%. And for the Installed Base Management business, we expect year-over-year revenue growth of around 5%. And as we are coming off a strong growth year in 2022 and customers are adjusting their utilization levels, we currently expect to see a slightly lower demand in our upgrade business in 2023. In summary, for the full year 2023, based on how we see the world today, we expect another year of strong growth with a net sales increase of over 25% and a slight improvement in gross margin. On the geopolitical front, as it relates to export control, this continues to be a geopolitical discussion with different government entities, a process where ASML is obviously not in control although we continue the discussion with governments to make sure that consequences of proposals are well understood.

As of today, export control policy related to lithography equipment has not changed. We are still not able to ship EUV systems to China, but are able to ship deep UV as well as metrology and inspection systems to China. As our Prime Minister recently stated, this is a multinational discussion, not only with the U.S., but with several countries. He reiterated that multiple companies in the semiconductor industry, including their supply chains, are involved and that the matter is complex and sensitive. It needs careful handling with precision. And he reminded us there is a lot of interest at stake, and it’s important to find the right balance. We will therefore not speculate about the possible outcome but will have to wait for the outcome of ongoing government discussions.

Looking longer term, we talked at our Investor Day last year about the global megatrends, where the broadening application space is fueling demand for advanced and mature nodes. Secular growth drivers in semiconductor end markets and increasing lithography intensity on future technology nodes are driving the demand for our products and services. ASML and its supply chain partners are actively adding capacity to meet future customer demand as confirmed at Investor Day, with our capacity plans of 600 deep UV, 90 EUV low-NA systems by 2025-’26 and 20 EUV high-NA systems by ’27-’28. Also presented during our Investor Day last November, we see an opportunity based on different market scenarios to reach an annual revenue in 2025 between €30 billion and €40 billion and in 2030, an annual revenue between €44 billion and €60 billion.

Part of our long-term growth opportunity, we also remain committed to our ambitious ESG sustainability goals. On February 15, 2023, our 2022 annual report will be published. As part of this report, we plan to provide you with an update on how we collaborate with our stakeholders to deliver on the ambitions of our ESG Sustainability strategy, which we can summarize as follows: our ambition is to achieve carbon neutrality with net zero emissions in our operations, Scope 1 and 2 by 2025; we aim to achieve net zero emissions in our supply chain, Scope 3, by 2030; and net zero emissions from the use of our products by our customers, Scope 3, by 2040. In addition, our goal is also to have zero waste from operations to landfill and incineration by 2030.

From a social perspective, our ambition is to ensure that responsible growth benefits everyone. To maintain our fast pace of innovation and ensure our long-term success as a company, we need to attract and retain the best talent and provide the best possible employee experience. We aim to be a valued and trusted partner, improving the quality of life for all people in our communities. In summary, while there’s a lot of near-term uncertainty in the current environment, our customers’ demand for our products continues to exceed supply. We’re working to increase our capacity to meet our customers’ future demand, and we’re fully confident in the opportunity this provides for our future growth. 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. Now operator, could we have your final instructions and then the first question, please?

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Q&A Session

Operator: Our first question comes from the line of Joe Quatrochi at Wells Fargo.

Joe Quatrochi: I was wondering in your 2023 outlook if you could kind of give us any color on how you’re thinking about Logic versus Memory growth this year.

Roger Dassen: Yes. I mean we’ve not made that — Joe, thanks for the question. We’ve not been explicit on that. We think that in the current environment, with all the dynamics and all the uncertainty that are out there and also the fact that we still look at 2023 as a year where we are supply constrained. We don’t think that, that makes a lot of sense to guide around that. So that’s why we said we’re going to guide on so EUV versus — EUV and non-EUV, but we think it is not very constructive and meaningful to provide guidance on Memory versus Logic. I mean clearly, if you look at the recent order intake, you do see that Memory is far from that. As a matter of fact, you see Memory actually picking up in the quarter and quite healthy in the year.

And that tells you that the Memory buyers are also making strategic investments because they recognize that if at a certain point in time, the market is going to come back, they need capacity. So that’s what you see in the order intake. But again, for the full year, given an indication of the distribution over Logic and Memory, we thought it was a meaningless action in light of the dynamics that I just talked about.

Joe Quatrochi: Got it. That makes sense. And as a follow-up, you talked about the inflation-related adjustments in your bookings. Are you able to reprice kind of your entire backlog or portions of your backlog? And then is there any sort of quantification that you can help us with on just the average increase of ASP that we should be thinking about in our models?

Roger Dassen: Yes, Joe. As you know, we’ve been through this before. We’re having good discussions with customers. As you know, legally, the way the backlog is construed, we’ve agreed on a price. So this is just a matter of discussions with customers about a fair distribution of the burden. We’re fairly advanced in that discussion. A number of customers have already made commitments to us on how they’re going to contribute, with most other customers who are fairly advanced and are — we think that we’re going to find a solution. It’s only a minority of customers that are not open to this conversation. So the lion’s share is open to the conversation. But it really is in the spirit of finding a fair distribution of the inflation burden.

So that has helped. And we’re only putting into the backlog those inflation adjustments that have been explicitly agreed with customers. So more of that is to come because, as I said, we have a number of customers who are still in negotiations. So all of that is coming. I think the way it’s going to pan out without really quantifying it, but just to give you an indication, as you know, last year, we said that we were having about 1.5% drag on the gross margin coming from inflation. I would say most of that is — we expect to recover during the year. So most of the inflation that we incurred over 2022, I think most of that we will recover. But of course, there will be inflation in 2023, and that will remain a drag on the gross margin. So the gross margin impact of inflation will be less so than it was last year.

But in comparison to 2021, you will still see a bit of a drag on the gross margin coming from inflation.