ASML Holding N.V. (NASDAQ:ASML) Q1 2024 Earnings Call Transcript

ASML Holding N.V. (NASDAQ:ASML) Q1 2024 Earnings Call Transcript April 17, 2024

ASML Holding N.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and thank you for standing by. Welcome to ASML 2024 First Quarter Financial Results Conference Call on April 17, 2024. 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 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; and our Chief Business Officer and Incoming CEO, Christophe Fouquet. The subject of today’s call is ASML’s 2024 first quarter results. The length of this call will be 60 minutes and questions will take 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. Welcome, everyone, and thank you for joining us for our first quarter 2024 results conference call. Before we begin the Q&A session, Roger, Christophe, and I would like to provide an overview and some commentary on the first quarter 2024, as well as provide our view of the coming quarters. Roger will start with a review of our first quarter 2024 financial performance with added comments on our short-term outlook and I will briefly reflect on the current market environment and then hand over to Christophe to complete the introduction with some additional comments on the future business outlook. Roger?

Roger Dassen: Thank you, Peter, and welcome everyone. I will first review the first quarter 2024 financial accomplishments and then provide guidance on the second quarter of 2024. Let me start with our first quarter accomplishments. Total net sales came in at EUR5.3 billion at the midpoint of guidance. We shipped 12 EUV systems and recognized EUR1.8 billion revenue from 11 systems this quarter. Net sales — net system sales of EUR4 billion, which was driven by logic at 63% with the remaining 37% coming from memory. Installed base management sales for the quarter came in at EUR1.3 billion as guided. Gross margin for the quarter came in at 51%, which is above our guidance, primarily driven by product mix or immersion in UV systems and someone else.

On operating expenses, R&D expenses came in at EUR1.32 billion and SG&A expenses came in at EUR273 million, both slightly lower than guided due to a shift in spend to later in the year. Net income in Q1 was EUR1.2 billion, representing 23.1% of total net sales and resulting in an EPS of EUR3.11. Turning to the balance sheet, we ended the first quarter with cash, cash equivalents and short-term investments at a level of EUR5.4 billion, which is lower than previous quarter. We ended Q1 with negative free cash flow, primarily driven by lower down payments and higher inventory relative to last quarter. In the current environment, as customers work to return to profitability and strengthen cash position, we continue to provide some support for our customers.

The higher inventory is a result of the increased material intake, including High NA as part of planned capacity ramp in preparation for stronger demand next year. Moving to the order book, Q1 net system bookings came in at EUR3.6 billion, which is made up of EUR656 million for EUV bookings and EUR2.9 billion for non-EUV bookings. Net system bookings in the quarter were driven by memory at 59% and logic for the remaining 41% of the bookings. There is quite a bit of speculation around order numbers, so I will make a few comments here. In the past six months, we’ve had orders of almost EUR13 billion, which is quite significant. As we said in the past, our order flow can be lumpy and may not be evenly distributed over the year. Although we don’t guide orders, an order rate, a bit over EUR4 billion per quarter for the final three quarters of the year, would provide full order coverage at the end of 2024 for a 2025 sales number that would be at the midpoint of our 2022 Investor Day scenarios.

At the end of Q1 2024, we finished with a backlog of around EUR38 billion. With that, I would like to turn to our expectations for the second quarter of 2024. We expect Q2 total net sales to be between EUR5.7 billion and EUR6.2 billion. We expect our Q2 Installed Base Management sales to be around EUR1.4 billion. The relatively low first-half of the year, compared to the expected strong second-half is in line with the expected industry recovery from the downturn. Gross margin for Q2 is expected to be between 50% and 51%. The expected R&D expenses for Q2 are around EUR1.70 billion and SG&A is expected to be around EUR295 million. Our estimated 2024 annualized effective tax rate is expected to be between 16% and 17%. In Q1 ASML paid a quarterly interim dividend of EUR1.45 per ordinary share.

Recognizing the three interim dividends of EUR1.45 per ordinary share paid in 2023 and 2024, this leads to a final dividend proposal to the annual general meeting of EUR1.75 per ordinary share, which will result in a total dividend for the year 2023 of EUR6.10 per ordinary share, which is a 5.2% increase, compared to 2022. In Q1 2024, we purchased around 0.5 million shares for a total amount of around EUR400 million. With that, I would like to turn the call back over to Peter.

Peter Wennink: Thank you, Roger. As Roger has highlighted a relatively slow Q1 as start to the year is consistent with our guidance and expectations coming out of the downturn. Overall semiconductor industry — sorry, overall semiconductor inventory levels continue to improve, trending towards more healthy levels. We also see continued improvements in lithography tool utilization at both logic and memory customers, all in line with the industry’s continued recovery from the downturn. Looking at the market segments, we see a similar environment as communicated last quarter with demand momentum from AI-related applications. Memory demand is primarily driven by DRAM technology node transitions in support of advanced memories such as DDR5 and HBM.

Logic customers continue to digest the significant capacity additions made over the last year — over the past year. As many of you know, next week, April 24, is the General Meeting of shareholders and my last effective working day at ASML. Although this is not a big surprise anymore, it’s still a big event for me, Martin, and our families and it has been an enormous privilege of being able to serve the company and its many stakeholders for so long. I have thoroughly enjoyed virtually every moment of it and the many interactions I’ve had with many of you, including these conference calls, believe it or not, and I hope I will see some of you someday, sometime and wish you all good health, a prosperous and happy life. And with that, I’d like to turn over to you, Christophe.

Christophe Fouquet: Thank you, Peter. And first of all, thank you for the last 10-years leading ASML and making it the great company we know today. I think some of our audience have been with you for the 40-plus quarters you led as CEO, but probably not many for the nearly 100 quarterly calls over your past 25-years in ASML. I am sure everyone on the call will miss you as much as we all will at ASML. I am myself very honored and privileged to succeed Peter and I am very much looking forward to working with all of you. As Peter mentioned, our view on the market segment for 2024 has not changed relative to what we stated last quarter. We expect memory revenue growth this year, primarily driven by technology transition in support of advanced memory technology.

We see lower logic revenue this year relative to last year as customers digest litho capacity installed over the past year. Turning to our businesses. For EUV, we continue to expect revenue growth in 2024. We plan to recognize revenue on a similar number of EUV 0.33 NA system as 2023. In addition, we expect revenue from one to two High NA systems. On our 0.33 NA system, we shipped the first NXE:3800E this quarter for qualification at the customer. The NXE:3800E has the capability to deliver a significant increase in performance with a productivity of 220 wafers per hour, which is a 37% increase over the NXE:3600D in its final configuration. The NXE:3800E also brings imaging and overlay improvements, which will make it the future tool of choice for memory and logic advanced nodes.

Those performance increases will deliver better value for our customers, including cost of ownership, and will translate into higher ASPs and improve margins for ASML. EUV customer plan to transition to the NXE:3800E this year. As a result, the majority of our low NA EUV shipments in the second-half of the year will be this system. Regarding high NA or 0.55 NA EUV, we shipped our first system to a customer and this system is currently under installation. We started to ship the second system this month and its installation is also about to start. During the SPIE Industry Conference in February, we announced first light on our high NA system located in our joint ASML-imec High NA in Veldhoven. We have since achieved first images with a new record resolution below 10 nanometer and expect to start exposing wafers in the coming weeks.

All High NA customers will use this system for early access to process development. The customer interest for our system lab is high as this system will help both our logic and memory customers prepare for High NA insertion into their roadmaps. Relative to 0.33 NA, the 0.55 NA system provide finer resolution enabling an almost 3 times increase in transistor density at a similar productivity in support of sub 2 nanometer logic and sub 10 nanometer DRAM nodes. We expect our non-EUV business to be down in 2024, primarily driven by lower emerging system sales relative to 2023. For our Installed Base business, based on our view today, we expect a similar level of revenue, compared to last year. As the recovery becomes more clear this year, customer may look to upgrade their system in preparation for 2025 and this could provide future business opportunity this year.

Our outlook for the full-year is unchanged with similar revenue, compared to 2023. In line with the industry continued recovery from the downturn, we expect a stronger second-half relative to the first-half of the year. We view 2024 as a transition year and continue to make investment this year both in capacity ramp and in technology, to be ready for the upturn in the cycle. Looking longer term, while there are still significant uncertainties, primarily driven by the macroenvironment, it appears we are passing through the bottom of this specific cycle and we expect an industry recovery over the course of 2024. Based on the discussion with our customers and supporting our strong backlog, we expect 2025 to be a strong year driven by a number of factors as mentioned last quarter.

First, the secular growth driver in 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, drive demand for both advanced and material nodes. Second, the industry expects to be in the middle of a cyclical upturn in 2025. And last, as mentioned earlier, we need to prepare for the significant number of new fabs that are being built across the globe, in some instances clearly supported by several government incentive plans. These fabs are spread geographically, are strategic for our customers and are scheduled to take our tool. It is essential that we keep our focus on the future and build capacity in preparation for further long-term growth as we discussed in the market scenarios for 2025 and 2030 during our Investor Day in November 2022.

We plan to update our view during our Investor Day this year on November 14, 2024. In summary, also there is near-term uncertainty. We remain confident in our long-term growth opportunity. With that, we will be happy to take your questions.

Skip Miller: Thank you, Roger, Peter and Christophe. The operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I would like to ask you if 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. Also, as the CEO transition is planned next week following the AGM on April 24, Roger and Christophe will take the majority of the questions as it pertains to the forward-looking comments. Now, operator, could we take your final instructions and then the first question please?

Operator: Thank you. [Operator Instructions] We will now go to your first question. And your first question comes from the line of Krish Sankar from TD Cowen. Please go ahead.

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Q&A Session

Krish Sankar: Hi, thanks for taking my question. And Peter and I guess also for Martin as well, thanks for everything over the years. You both will be missed for sure. And then I guess my first question is for Roger. I understand bookings can be lumpy, but the EUV orders were also down quite a lot in the March quarter. And you said that you need to hit over EUR4 billion run rate to hit the midpoint of calendar ‘25. But I’m just kind of curious, there’s an expectation that it should be better than the midpoint of next [Technical Difficulty] Do you really need [Technical Difficulty] in EUV orders to really meet those calendar ‘25 outlooks? And where do you think that’s going to come from mainly? Is it the foundry logic vertical? And also just along the same path, how much of your memory bookings was from China? And then I had a follow-up.

Roger Dassen: And a follow up. Many questions in one question, Krish. Very well done. I’ll try and answer them as best as I can. But yes, Krish, I think you’re absolutely right and our conclusion that indeed order intake is very lumpy and I think that’s what we’ve seen in the past and we have been saying that for many, many years. We said it last time when the orders came in very high. We say it today when from the vantage point of some, the orders come in pretty low. And therefore, if you look at the past six months combined, you’re looking at EUR13 billion, which is EUR6.5 billion per quarter, which we still continue. We still believe it’s pretty significant. When I talk about the EUR4 billion that we need in order to get to the midpoint of next year.

I’m indeed talking about everything. So, of course, that also includes EUV. And I think, as many of you have probably recognized, if you look at the intake in the past couple of quarters and also in the past quarter, it’s pretty clear that there’s a few usual suspects absent in the order intake. And I think that’s pretty clear, right? So if we look at the plans of some of our large customers and you talk about foundry, foundry indeed does come to mind in this discussion. If you look at the plans and the announced plans of some of our larger customers, it’s pretty clear that in the next couple of quarters, significant orders need to come in. So — and part of the EUR4 billion that you should see in order to get to this midpoint, indeed have to include the orders from those customers.

So again, the midpoint, does that mean that now all of a sudden, we’re guiding midpoint? No, we’re not. As Peter has very clearly said it on previous calls, if we look at 2025, we’re looking at a significant uptick. We’re not looking at the low-end of the scenarios that we provided back in 2022, but we’re not saying now you need to look at the midpoint of the guidance. We just give you the math that is required in order to get to the midpoint of the guidance with our expectation of a very strong recovery into 2025 has by no means changed. In terms of your questions on memory and particularly then on China, of course, as you know, we typically do not disclose the geographic distribution of our order intake. Of course, there is a, I would say, healthy part in the order intake that is related to China, but it’s not like — the order intake is distributed over the globe.

So the very high concentration that you saw in the sales for Q1, you don’t see that back in the order intake. So the order intake is more distributed geographically than what you would see in the sales for Q1.

Krish Sankar: Got it. Yes, thank you very much. And just a very, very quick follow-up and really appreciate it. Obviously, with all these like incremental news coming on U.S. and Dutch rules and regulation. Just curious, has that changed your view on what it means for your China sales? Three months ago, it said it’s a 10% to 15% impact. Just want to see if there’s any updated view on this. Thank you very much.

Roger Dassen: No, Krish, nothing has changed that. I mean, when we talked about the 10% to 15%, I think that’s even longer back when we made that comment. That was directly the consequence of the fact that we realized that we will probably not get licenses to ship the latest generation of immersions. That was what that 10% to 15% comment was related to. Our perspective has not changed. The rules haven’t changed. Of course, there is continued discussion on export controls. The rules haven’t changed. Our perspective on the year hasn’t changed. We’re still looking at a strong sales level for China for this year.

Krish Sankar: Thank you.

Operator: Thank you. We will now go to the next question. And your next question comes from the line of Tammy Qiu from Berenberg. Please go ahead.

Tammy Qiu: Hi, thank you for taking my question. So first one is on China, please. Can you talk about your China business trend over the recent quarter, please? Because China has been really strong and there has been always concern that China may actually go to capacity by just impurity in this year or later this year. Do you have any comment on China trend, please? Then I have a follow-up.

Roger Dassen: Yes, I mean, China, relatively speaking is high, but if you look at absolute numbers, you would recognize that China is actually lower in Q1 than it was in Q4 of last year, right. So — because if you do the math, then China was at EUR1.9 billion in this quarter. It was at EUR2.2 billion last quarter. So I think from that vantage point, it’s gone down a bit, but it’s still strong. And the reason that China is strong both in absolute terms and relative terms is also because the rest of the world, the demand is — or at least the sales and the shipments in Q1 were relatively low, which was no surprise. I think it’s very much in sync with our perspective on a market that is in recovery. And a market being in recovery means that customers are first driving up the utilization of their tools, which is exactly what they’re doing and we notice that.