ASML Q3 2024 Pre Recorded Earnings Call Transcript

Quartr
Provided by Quartr
October 14, 2024

Key Takeaways

  • Q3 net sales reached SEK 7.5 billion, above guidance thanks to stronger DPV sales and higher installed base management revenues (€1.54 billion), with a backlog still exceeding €36 billion.
  • For Q4 the company forecasts net sales of SEK 8.8–9.2 billion, installed base revenues of around SEK 1.9 billion, and a 49–50% gross margin, noting a ~3.5% margin dilution from recognizing two high-NA systems.
  • EUV technology progress remains strong as customers shift to the 3,800 low-NA tool (37% throughput improvement to 220 wafers/hour) with full-spec shipments early next year, while high-NA systems continue on track with ~8 nm resolution and over 10,000 wafers exposed.
  • Market dynamics show robust AI-driven demand but more gradual recovery in logic and memory segments, causing fab pushouts and limited capacity additions, while China orders normalize to about 20% of total revenue.
  • 2025 outlook is revised to €30–35 billion in net sales (down from €30–40 billion) and a gross margin of 51–53% (vs. targeted 54–56%), reflecting fewer low-NA tool orders and a reduced China business share.
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Earnings Conference Call
ASML Q3 2024 Pre Recorded
00:00 / 00:00

There are 1 speakers on the call.

Operator

Total net sales for the quarter came in at SEK 7,500,000,000 which is above guidance. A couple of reasons for that. First off, we had stronger DPV sales, but also the installed base management business was higher than expected at €1,540,000,000 Gross margin for the quarter came in at 50.8%, which is within guidance. Net income at €2,100,000,000 net bookings came in at €2,600,000,000 which I think is a reflection of some of the market dynamics that we're going to talk about later on. Part of the €2,600,000,000 was €1,400,000,000 for EUV Systems.

Operator

And I would remind everyone that we ended the quarter with a backlog of still over €36,000,000,000 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 SEK 8,800,000,000 SEK 9 point 2 billion. Part of that, big step up again in the installed base revenue. We expect that to arrive around SEK 1,900,000,000.

Operator

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 or 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% 50%.

Operator

So what are the moving parts in that gross margin? First off, 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%.

Operator

If you then take that guidance and you translate that into the full performance for 2024, we're looking at the midpoint at around €28,000,000,000 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 3,800, which is no surprise because as you know, the 3,800 shows a 37% improvement in terms of throughput over the 3,600D model. So we also expect for Q4 for the majority of the Lowne EUV tools to be 38,3800s.

Operator

We've demonstrated in the past quarter in our factory the full productivity for the 3,800E 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 3,800 at that full 2 20 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.

Operator

And that also leads to the revenue recognition that I talked about before. We're actually in the process of shipping a 3rd Hi and A 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 transits of density in comparison to a low NA system.

Operator

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 10000 wafers, multiple customers, logic customers and memory customers, both in our joint ASML, IMAK, high NA lab, but also in the field. And we've presented in September, we've presented at a lithography conference the latest data far as that is concerned. And I think those latest data really show that there are significant benefits in imaging and overlay and in contrast. And that really is a clear value proposition to drive down the cost of patterning for our customers.

Operator

So I would say all in all, if you look at the progress made on the 3,800 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 and the strong performance of AI clearly continues. And I think it continues to come with quite some upside. But we will also see that in other market segments, it takes longer to recover.

Operator

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.

Operator

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 DDR FI. 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 a 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.

Operator

We provided market scenarios for 2025 between €30,000,000,000 €40,000,000,000 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, our expectation now is that we're going to see net sales in 2025 between €30,000,000,000 35,000,000,000, 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.

Operator

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 the gross margin was on EUV low NA. Because remember, on the one hand, obviously, we are we're going to see 2025 be dominated when it comes to the low NA business by the 3,800 tool. And as we said before, and which is also actually happening, that 3,800 tool does come with a higher ASP and a good improvement in the gross margin. So that actually manifested itself.

Operator

But another element why we believe that 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.

Operator

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% 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.

Operator

I think on a positive note, obviously, there is the improvement of the gross margin for the 3,800. So per tool, obviously, a 3,800 has a better gross margin than the 3,600. 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.

Operator

We get better at producing the high NA tools. We get faster in installing them. And also in 2025, we're going to see the first high volume 5,200 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.

Operator

So OpEx in 2024, we expect to end around €5,400,000,000 So that's a combination of R and D and SG and 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 SEK6.1 billion. We are still very, very much driving a very comprehensive R and D roadmap. So we're progressing on that as planned.

Operator

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.

Operator

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. Flow. If the business comes back, then obviously those two 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 indeed the inventory that we now have is being shipped to customers.

Operator

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 a 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.

Operator

We continue to plan for growing dividends. And also in Q3, we're looking at an interim dividend of 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 we will use that in buying back shares. If you look at the long term outlook, I believe the growth drivers are still very much intact.

Operator

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 and 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, etcetera, those secular trends are very, very much intact. It expands the application space for both advanced and mature nodes.

Operator

That 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.

Operator

And I'm very happy to see many of you at our Investor Day on November 14, 2024. And this will be the main topic of conversation, how we see the market, how we look at 2,030 and the journey towards 2,030, how we look at the market, how we look at little intensity as a key driver on the roadmaps of our customers. So I really hope to see you all there and look forward to having a good and solid discussion there.

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