ASML: EUV shipments remain similar to last year (FY24Q2 conference call minutes)

ASML released its second-quarter financial report for 2024 on the afternoon of July 17, 2024, Eastern Time

Below is the summary of ASML's 2024 second-quarter financial report conference call. For a detailed interpretation of the financial report, please refer to " ASML ASML: Expecting high landing slow, chasing the market "AI dream" "

I. $ASML(ASML.US) Review of Key Financial Information:

II. Detailed Content of ASML's Financial Report Conference Call

2.1. Key Points from Management's Statements:

1) Business Highlights:

① Overall Performance:

a. Sales and profits in the second quarter exceeded expectations, with the overall level of the semiconductor industry continuing to improve. AI is driving most of the industry's recovery and growth, with stronger performance expected in the second half of the year.

b. Logic chip customers are digesting last year's capacity increase, with logic chip revenue expected to be lower than last year; Storage demand is mainly driven by the transition of DRAM technology nodes, with storage revenue expected to grow this year.

② EUV Business:

a. EUV revenue is expected to grow in 2024, with the number of EUV systems similar to 2023; revenue comes from 1 to 2 High-NA systems.

b. Low-NA systems: Continued production of NXE:3800E systems, with most shipments expected to be NXE:3800E systems in the second half of the year.

c. High-NA systems: The second High-NA system was delivered this quarter, currently being installed, and the first system is running wafer qualification. Achieving 8-nanometer imaging resolution, High-NA will achieve nearly 3 times the increase in transistor density.

③ Non-EUV Business:

a. Non-EUV business is expected to decline in 2024, mainly due to reduced immersion system sales. 2024 is considered a transitional year, with continued capacity expansion and technological investment to prepare for future demand.

2) Financial Highlights:

① Q2 Financial Performance:

a. Net sales of 6.2 billion euros, slightly higher than guidance; net system sales of 4.8 billion euros, with EUV sales of 1.5 billion euros and non-EUV sales of 3.3 billion euros, logic chips accounting for 54% and storage for 46%; installed base management sales of 1.38 billion euros, slightly higher than guidance.

b. Gross margin of 51.5%, higher than guidance

c. R&D expenses of 1.1 billion euros, slightly higher than the guidance; sales and administrative expenses: 277 million euros, slightly lower than the guidance

d. Net income of 1.6 billion euros, accounting for 25.3% of total net sales, earnings per share of 4.01 euros

e. Cash and short-term investments of 5 billion euros; free cash flow of 386 million euros, an improvement from the previous quarter

f. Net system order amount of 5.6 billion euros, with EUV orders of 2.5 billion euros and non-EUV orders of 3.1 billion euros; logic chips account for 73%, storage accounts for 27%

g. Backlog orders of 39 billion euros

② Q3 expectations

a. Net sales of 6.7 billion to 7.3 billion euros

b. Installed base management sales of approximately 1.4 billion euros

c. Gross margin of 50% to 51%

d. R&D expenses of approximately 1.1 billion euros

e. Sales and administrative expenses of approximately 295 million euros

f. Effective tax rate of approximately 16% to 17%

3) Long-term outlook

① Market driving factors: Energy transition, electrification, AI, and other long-term growth drivers remain solid. Increasing lithography and future technology nodes drive demand for advanced and mature nodes

② Strategic planning: It is expected that 2025 will be a period of cyclical growth, and the construction of new wafer fabs will support long-term growth; stay focused on the future and build capacity in preparation for long-term growth

2.2. Analyst Q&A

Q: Regarding the 2.5 billion euros in EUV orders, are there 2nm orders from foundry customers included in these orders, and are these orders expected in the second or third quarter? Does the booking include High-NA orders? Based on the momentum and backlog of orders, how do you view revenue in 2025, is it possible to approach the high end of 30 to 40 billion euros?

A: 73% of the orders are logic-related, so it is reasonable to assume that 2nm orders in the foundry business are already included in the bookings. However, there were no High-NA bookings this quarter, all EUV bookings were Low-NA. Regarding 2025, our information is very consistent, we expect revenue to be between 30 billion and 40 billion euros, and the lower end of this range is not a low point. Last quarter, we provided some information indicating the midpoint needed for full bookings in early 2025 and showed that we are progressing smoothly.

At the Capital Markets Day in November 2024, we will provide more specific details about our expectations for 2025 and narrow the guidance range. Until then, we will not provide more specific information.

Q: Obviously, there are reports mentioning that the U.S. government is considering strict trade restrictions on exports to China. Considering your significant exposure to China, how serious could this potentially impact ASML? Can you provide some relevant information?

A: First of all, we do not comment on rumors, there are many rumors about this topic, so we will not comment on this topic. We have previously discussed the Chinese market. We defined the opportunities in the mature semiconductor market at the Capital Markets Day in November 2022 and still consider it an important opportunityIn 2023 and 2024, China made significant investments in this market, so our revenue in China is very high. Looking ahead, we still believe that this market is needed, so these capacities will come from somewhere in the future. Our position is that we always focus on the demand of the end market, rather than the production location of the capacity.

Q: You confirmed today that Logic Customer has placed orders for 2 nanometers this quarter, but obviously, for such a large node, people would expect to see more orders coming in. Can it be reasonably assumed that there will be more EUV orders in the coming quarters?

A: If you look at the orders, we see that the foundry business has a healthy start. It's a healthy start. Obviously, this is not all the capacity you need for this node, but it's very reasonable. This customer will ramp up gradually, and you will see additional orders coming in gradually.

Q: You mentioned that AI is driving industry recovery growth. Can you break down specifically what is driving ASML's development? To what extent do you think lithography demand is being driven by high-bandwidth memory, data center processing, or edge AI? Are there any areas unexpectedly performing strongly?

A: We all agree that AI is currently driving the majority of the recovery. This is true for logic and memory. High-bandwidth memory is driving more wafer demand as these products see higher densities of DRAM. We expect this positive impact to continue into 2025 and 2026, for both logic and memory. Some other areas may be lagging in recovery, so much of today's capacity, logic or DRAM capacity, will be used for AI products. As other areas recover, we also expect some capacity may be needed. This is also one of the reasons why we believe 2025 will be a strong year. The fundamentals of AI and overall recovery are strong, but the exact pace is not entirely clear to us.

Q: Regarding the pace of advancement of leading 2-nanometer technology, are there any signs that customers have fully entered the upgrade phase, or is everything proceeding as planned?

A: Foundry customers have indicated that they will upgrade to 2-nanometer technology in the second half of 2025. The current progress is consistent with what we have publicly heard.

Q: Regarding the prospect of more EUV layers in DRAM and the outlook for High-NA EUV, how is the trend of layer changes in the next few generations? Will it continue to grow or gradually slow down?

A: In the DRAM field, the use of EUV at each node continues to increase, and this trend is expected to continue in the foreseeable future. While predicting nodes or technologies that are not yet defined is challenging, the overall logic remains valid. Currently, all DRAM customers have adopted EUV technology for production, with the most recent customer also publicly acknowledging this.

Regarding High-NA EUV, we expect more applications between 2025 and 2026. Customers are testing High-NA tools in our labs to validate their potential in performance and cost savings. Therefore, we believe that High-NA will be more applied to DRAM production in 2025 and 2026.Q: Regarding China, is it possible in the future to completely eliminate the use of American intellectual property to manufacture deep ultraviolet tools? Are all your current deep ultraviolet tools using American technology?

A: This is a very hypothetical question. Currently, we have a large amount of business in the United States, so we also use a lot of American technology. As for whether it is possible to produce without American technology, we believe that maintaining the integrity of the ecosystem as much as possible is beneficial to the industry, which is a topic we discuss with all stakeholders.

Q: Taking the €2.5 billion EUV order and the €39 billion backlog as an example, it seems that you still need to order 32 EUV tools to reach the midpoint of next year's guidance. Given your good order backlog, mainly driven by deep ultraviolet, does this mean that you need to order around €7 billion in EUV orders in the second half of this year, compared to only €3.3 billion in the first half? Is this calculation correct?

A: The calculations we provided earlier are still valid, and we are progressing smoothly towards achieving our goals, with revenue guidance given for 2025. What you are focusing on now is a specific element of revenue, but our overall revenue calculations remain valid, and delving into specific components will not add new content. I believe we are successfully achieving the goals and ranges discussed earlier. Therefore, we do not want to make more specific statements on any components at this time. We will provide more specific details on our outlook for 2025 at the upcoming Capital Markets Day.

Q: You mentioned increasing capacity or at least preparing for enhancements. Does this mean you plan to increase capacity, make more investments, possibly open new factories? Also, you are very positive about EUV High-NA, can you clarify what you mean by preparing for enhancements?

A: When we talk about increasing capacity, it refers to a comprehensive increase in capacity. This is related to our capacity expansion plans discussed in the past, namely striving to achieve a capacity of 600 DUV and 90 EUV tools. Additionally, we are also expanding the capacity of High-NA tools, with the goal of achieving a capacity of 20 High-NA tools in the medium term. Therefore, increasing capacity and enhancing capacity are comprehensive, including the aforementioned deep ultraviolet and EUV tools.

Q: Can you clarify the ASP situation of High-NA tools?

A: As mentioned before, the ASP of High-NA tools is above €350 million. This is the average selling price set for the High-NA EUV (EXE:5200) ordered by customers.

Q: Regarding service activities in China, an article mentioned that you were able to ship high-end immersion tools last year, such as the NXT:2000 and 2050 models, but you have not been able to ship them since the first half of this year. Are you still providing services for these tools? Can you clarify?

A: We comply with all applicable export control laws and regulations, including those of the United States and the Netherlands. For certain factories, restrictions are tighter, but overall we can still operate our tools in customers' factories. Therefore, we are still providing services in customers' factories. However, for certain factories, restrictions are stricter, especially regarding the sending of components or the use of technology, such as manualsDespite this, we are still able to continue serving our customers' factories. We have been operating in this situation for several months, fully understanding the new regulations and adjusting our services and operations accordingly.

Q: You mentioned that some of the new factories under construction have received support from funds or other jurisdictions. These factories are planned to receive tools in 2025 and beyond. Considering the time needed for construction, not many are currently ready to receive actual cleanroom equipment. How will the phased deployment take place in 2025, 2026, and beyond?

A: The majority of the impact will be seen after 2025. Therefore, the impact next year is limited. As you all know from the major announcements in the US, Europe, and Japan, these factories will start operating after 2026. This is also why we are preparing capacity for this. When preparing capacity, we will consider the delivery times of factories and suppliers to meet market demand after 2025. We are very confident in the long-term outlook of the market as these projects are coming. We expect more government funding after the first wave of investments, and more people are looking to truly invest in this business, so we anticipate this trend will not slow down.

Additionally, many new factories are under construction, and not all of them are related to the CHIPS Act funding. We expect that over half of the shipments in 2025 will be used for new factories, including those being built in Taiwan. The impact of the CHIPS Act should be reflected after that year.

Q: Regarding revenue in the second half of the year. Based on your guidance for the third quarter and full-year expectations, the fourth quarter is expected to see accelerated growth. Can you provide some details on the timing of orders? Is this simply due to the typical timing difference between the third and fourth quarters for shipments?

A: We are indeed building momentum, as expected, as we anticipate 2025 to be a growth year. Momentum has been building in each quarter of 2024. We have been increasing capacity to meet the growing demand. Additionally, we have accumulated some deferred revenue, expected to have an impact of around 1 billion euros in the second half of the year, mainly from systems that have been shipped but revenue not yet recognized. We no longer plan to rush shipments by the end of this year, which has brought some tailwind. Furthermore, there are some 3800 tools and High-NA tools in transit, which will generate revenue upon acceptance at customer sites. Therefore, with the accumulation of capacity and demand, we expect fourth-quarter revenue to exceed 9 billion euros.

Q: Regarding High-NA DRAM customers, you mentioned the insertion time frame for 2025 and 2026, indicating that the delivery time for these tools is long. It sounds like customers are now in your labs. What are the expectations for the development time of tools, the scale of future tools or layers?

A: We have a good backlog in High-NA, with all EUV customers ordering these systems and deliveries already underway. This aligns well with some timely insertion opportunities. The data in the labs is very helpful for customers, allowing them to obtain firsthand data before insertion. In terms of High-NA technology, initial data is crucial for understanding the value of the technology. The wafers exposed so far have provided customers with valuable information to optimize uncertain scenarios and understand the value of High-NAThe data we are currently seeing is in line with customer expectations, which is very exciting.

Q: How have customer conversations changed in the past three months? Especially in terms of foundry and logic, particularly your more optimistic shipment outlook for the second half of the year.

A: Overall, there hasn't been a significant change in customer conversations. Our discussions with customers are very consistent, mainly focusing on AI-related content. Overall, the market outlook is similar to the previous quarter. The biggest difference is the progress made in bookings in certain niche markets, which was a major issue we faced last quarter. However, overall, our market outlook remains unchanged, and discussions are very consistent.

Regarding immersion technology, we expect it to continue to be strong. Although in the overall mix, we expect a larger proportion of dry technology in the second half of the year, in deep ultraviolet, the contribution of dry technology will be more significant than in the first half of the year. However, overall, immersion technology will also remain strong in the second half of the year.

Q: Regarding the 3800 tools, you mentioned that most shipments in the second half of this year will be 3800. How will this impact gross margin and ASP for the second half of the year and full year 2025?

A: Most EUV tools in the second half of this year will be 3800. The initial 3800s have not reached full configuration, and we will gradually ramp them up to the full specification of 220 wafers per hour. This means that not all 3800 tools shipped in the second half of the year will benefit from higher ASP, as some revenue will be recognized only after the tools are upgraded to the higher specification. Therefore, we will not fully benefit from the strong pricing of 3800 in the second half of the year, but it will certainly help. The impact will be greater in 2025, as the proportion of 3800 will be higher by then, and almost all tools will have reached their final specifications. In addition, we will recognize deferred revenue on tools shipped in 2024.

Regarding gross margin in the second half of the year, there are several factors at play. A positive factor is the higher shipment volume we expect in the second half of 2024, which has a positive impact on gross margin. Slightly negative factors include a higher proportion of dry technology in DUV in the second half of the year, which will drag down the gross margin somewhat. We will also recognize revenue from High-NA tools for the first time in the second half of the year, which, although beneficial overall, will have a slightly negative impact on gross margin due to its lower margin. Therefore, we expect the gross margin in the second half of the year to be slightly lower than in the first half.

Q: Regarding High-NA, how have discussions progressed with a customer who historically had some hesitation about this technology? They recently visited your lab in Veldhoven, what was the feedback? How do you see the gap between their needs and what you offer?

A: We have never defined any customer as hesitant about High-NA. Data generation has been very helpful to customers as they can see the data and use it to discuss the value of High-NA with their customers. Customers are willing to invest heavily in R&D and even make prepayments to purchase these systems, demonstrating their trust in the technology. Discussions have become more specific, and it will take us a few months to better understand the future use of High-NA based on dataQ: If the update cycles of AI, PCs, and smartphones drive these markets to achieve high single-digit growth in 2025 or 2026, do you think there is enough capacity in DRAM, NAND, and logic to meet this potential sales growth?

A: This is a difficult question to answer. We have seen AI driving significant investments in supercomputers by many companies, but the presence of AI terminal products is still limited. Currently, AI revenue is not substantial, it is more of an investment that requires a large amount of capacity. Customers are also announcing more capacity expansions, expected to be completed by 2028. As other applications recover, reallocating capacity to high-bandwidth memory (HBM) may become more challenging. Overall, we expect more capacity demand as other markets recover, especially in DRAM. The specific pace still has a lot of uncertainty, so our view for 2025 remains firm but cautious.

Q: Can you provide a concept of the proportion of domestic Chinese demand in the backlog orders to understand its contribution to next year's revenue?

A: The share of China in our backlog orders is slightly above 20%, and this proportion is still valid at present.

Q: Can you inform us about the ideal scenario the US government would like you to ship to China, and how it differs from the current shipping situation?

A: We will not add to the existing rumors. This is a negotiation between governments, and the company is not at the negotiating table. We comply with the regulations in place and do not speculate on what each government may want to see in the rules. I do not think this would add any clarity. We focus on global demand for wafers, regardless of whether these wafers are produced in Country X or Country Y, which is not important to us. This is crucial when looking at the model. Our model does not have specific Chinese elements but is based on the growth in global demand for wafers.

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