ASML Holding N.V. (NASDAQ:ASML) Q2 2024 Earnings Call Transcript

ASML Holding N.V. (NASDAQ:ASML) Q2 2024 Earnings Call Transcript January 24, 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 the ASML 2023 Fourth Quarter and Full Year Financial Results Conference Call on January 24, 2024. [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. 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 fourth quarter and full year 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 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 2023 results conference call. Before we begin the Q&A session, Roger and I would like to provide you an overview and some commentary on the fourth quarter and the full year 2023, as well as provide our view of the coming quarters. And Roger will start with a review of our fourth quarter and full year 2023 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?

Roger Dassen: Thank you, Peter and welcome, everyone. I will first review the fourth quarter and full year 2023 financial accomplishments and then provide guidance on the first quarter of 2024. Let me start with our fourth quarter accomplishments. Net sales came in at €7.2 billion which is just above our guidance, primarily due to more installed base business. We shipped 10 EUV systems and recognized €2.3 billion revenue from 13 systems this quarter. Net system sales of €5.7 billion which was mainly driven by Logic at 63% and with the remaining 37% coming from Memory. Installed Base Management sales for the quarter came in at €1.6 billion which was higher than guided due to additional service and upgrade sales. Gross margin for the quarter came in at 51.4% which is above our guidance, primarily driven by installed base business.

On operating expenses, R&D expenses came in at €1.041 billion and SG&A expenses given at €284 million, both basically as guided. Net income in Q4 was €2 billion, representing 28.3% of net sales and resulting in an EPS of €5.21. Turning to the balance sheet; we ended the fourth quarter with cash, cash equivalents and short-term investments at a level of €7 billion. Moving to the order book; Q4 net system bookings came in at €9.2 billion which is made up of €5.6 billion for EUV bookings and €3.6 billion for non-EUV bookings. These values also include inflation corrections. Net system bookings in the quarter are more balanced between Logic and Memory relative to past few quarters, with logic at 53% of the bookings, while memory accounted for the remaining 47%.

Looking at the full year, net sales grew 30% to €27.6 billion, with a gross margin of 51.3%. EUV system sales grew 30% to €9.1 billion, realized from 53 systems while a total, we shipped 42 EUV systems in 2023. DPV system sales grew 60% to €12.3 billion. Our metrology and inspection system sales decreased 19% to €536 million. Looking at the market segments for 2023; logic system revenue was €16 billion which is a 60% increase from last year. Memory system revenue was €6 billion which is a 9% increase from last year. Installed base management sales was €5.6 billion which is a 2% decrease compared to previous year. At the end of 2023, we finished with a backlog of €39 billion. Our R&D spending increased to €4 billion in 2023 as we continue to invest in innovation across our full product portfolio.

Overall, R&D investments as a percentage of 2023 sales were about 14%. SG&A increased to €1.1 billion in 2023 which was about 4% of sales. Net income for the full year was €7.8 billion, 28.4% of net sales, resulting in an EPS of €19.91. We finished 2023 with a free cash flow generation of €3.2 billion. We returned €3.3 billion to shareholders through a combination of dividends and share buybacks in 2023. With that, I would like to turn to our expectations for the first quarter of 2024. We expect Q1 net sales to be between €5 billion and €5.5 billion. We expect our Q1 installed base management sales to be around €1.3 billion. Gross margin for Q1 is expected to be between 48% and 49%. Lower revenue and margin relative to Q4 is primarily driven by lower emerging volume, along with an unfavorable change in product mix.

In addition, we also expect EUV volume and lower installed base business in Q1 relative to Q4. The relatively slow start to the year is a reflection of the current state of the industry coming out of a downturn. As it relates to gross margin, I would like to make a few more comments on the 2024 margin drivers as well as our longer-term ambitions of 54% to 56% by 2025. We finished 2023 with a full year gross margin of 51.3% and there are a number of developments that could impact the gross margin in 2024. For EUV, positive drivers include a higher ASP of the 3800E as well as improving EUV service margins. For DPV, we expect product mix to have a negative impact on margin in 2024. On our installed base business, we currently expect a similar gross margin as 2023 but the final impact will ultimately depend on the level of upgrades in 2024.

And finally, as we have said before, we expect significant costs in 2024 related to the introduction of High-NA and to the ramp of our capacity to 90 EUV, 600 DPV levels that we have talked about before which will create pressure on the gross margin. When we assess the combined effects of these different developments, we expect a slightly lower gross margin in 2024 compared to 2023. We are still targeting our earlier communicated gross margin ambition of 54% to 56% by 2025. This increase in gross margin will be driven by a number of items. First, higher sales volume, both in EUV and DPV which improved fixed cost coverage. Second, a move to a higher-margin EUV 0.33 NA system as the vast majority of systems in 2025 are planned to be 3,800 E-Systems.

Third, we expect reduced headwinds from capacity investments as we ramp volume, including high NA. Fourth, we will also be transitioning to a higher-margin EUV high NA system, the 5200 in 2025. Lastly, we expect our installed base business to have a positive impact on 2025 margins due to both improved EUV service margins as well as increased upgrade business volume. The expected R&D expenses for Q1 are around €1.07 billion and SG&A is expected to be around €300 million. Our estimated 2024 annualized effective tax rate is expected to be between 16% and 17%. In Q4, ASML paid the second quarterly interim dividend of €1.45 per ordinary share. ASML intends to declare a total dividend for the year 2023 of €6.10 per ordinary share. The third interim dividend of €1.45 per ordinary share will be made payable on February 14, 2024.

Recognizing this third interim dividend and the 2 interim dividends of €1.45 per ordinary share paid in 2023, this leads to a final dividend proposal to the general meeting of €1.75 per ordinary share. In Q4 2023, no shares were purchased. With that, I would like to turn the call back over to Peter.

Peter Wennink: Thank you, Roger. As Roger has highlighted, we had another year of very strong growth in a very challenging environment. And we finished the year with a solid backlog of €39 billion. The uncertainty remains in the market due to a number of global macro concerns, while the semiconductor industry is currently working through the bottom of the cycle. Our customers are still not certain on the shape or slope of the recovery this year but there are some positive signs in the indicators that we have been monitoring. Industry end market inventory levels continue to improve, moving towards more healthy levels. Lithography 2 utilization levels are still running lower than normal but are now improving in both logic and memory.

We expect utilization levels to continue to improve over the course of this year. And lastly, as mentioned by Roger, we saw very strong order intake in the fourth quarter in support of future demand. To be able to follow the curve of the industry recovery, we are looking at the combined demand for 2024 and 2025. As mentioned last quarter, we fueled 2024 as a transition year in preparation with the expected strong demand in 2025. We, therefore, continue to make investment this year, both in capacity ramp and in technology to be ready for the upturn in the cycle. While we see some positive signs of recovery, we feel it might be a bit too early to change our perhaps conservative view as communicated last quarter and therefore, still stay with our previously communicated expectation of 2024 revenue to be similar to 2023.

Looking at the market segments; customers are indicating they are seeing healthy growth this year, primarily driven by AI-related demand for both Logic and Memory but also expected from other end markets as inventory levels improve. And coming off a very strong year in 2023 with 60% growth in Logic revenue, we expect some pause in demand as customers digest the capacity additions and while utilization levels improve. Based on current demand, we see lower Logic revenue in 2024 versus 2023. For Memory, inventories are approaching normal levels and customers are expecting to see demand growth on a number of end markets this year. Litho demand is primarily driven by DRAM technology node transitions in support of advanced memories such as DDR5 and HBM in support of AI-related demand.

We currently see revenue growth in our 2024 memory business versus 2023. Turning to our businesses for EUV; we are expecting revenue growth in 2024 and we are planning to recognize revenue on a similar number of EUV low-NA systems as 2023 which includes the fast shipments for 2023. Although we planned a similar number of systems as 2023, we will have higher ASPs from the NXE:3800E systems, more weighted towards the second half of the year. In addition, we expect revenue from 1 or 2 high-NA sectors. Based on the aforementioned, we expect our non-EUV business to be down in 2024, primarily driven by lower immersion 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, plus the recovery becomes more clear this year.

Customers may likely look to upgrade their systems in preparation for 2025. And this could provide future business opportunity this year. As a reflection of the current state of the industry coming out of a downturn and an expected recovery over the course of 2024, we expect a stronger second half relative to the first half of this year. On the geopolitical front, as communicated earlier, we do not expect to get export licenses for our most advanced immersion systems, the NXE:2000 and up for China in 2024. We have been in contact with the U.S. government on their export control regulations announced in October last year and we can confirm the estimated financial impact as communicated in October. At that time, we stated the impact of the Dutch and the U.S. export control regulations combined is 10% to 15% of our 2023 China system revenue.

This impact is based on our presumption that as of 2024, we will not obtain export licenses for NXE:2000 and up immersion systems to Chinese customers. And in the case of only a handful of Chinese fabs, this also includes NXE:1970 and 1980 systems. While the export regulations had an impact on our business, we continue to see strong demand for mid-critical and mature nodes in China. Looking longer term, while there are still significant uncertainties, primarily driven by the macro environment, it appears we are passing through the bottom of this specific cycle and expect an industry recovery over the course of 2024. Based on discussions with our customers and supported by our strong backlog, 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 applications, along with increasing lithography on future technology nodes, drives demand for both advanced and mature 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 a significant number of new fabs that are being built across the globe in some instances clearly supported by several government incentive plans. These steps 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 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, although there are still near-term uncertainties with a positive outlook trend, we clearly remain confident in our long-term growth opportunity. And with that, we’d 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: [Operator Instructions] And the first question comes from the line of Mehdi Hosseini from Susquehanna.

Mehdi Hosseini: Two follow-ups. Peter, you’re talking about your view on ’24 is still cautious but you could always change as the year progresses. Can you share with us the puts and takes, what are the key areas that could actually give you confidence and help drive upside? And I have a follow-up.

Peter Wennink: Yes. Okay. Yes, I think in the prepared remarks, I already alluded to it, I think we will see — we are seeing the first signs, the positive signs of a recovery which is basically the data we get on inventory levels but also we see our utilization rates going up again. That — and also in the history, not only of the company but the industry means that we’re in a recovery cycle, you will see that continuing throughout the year which means that 2025 could be the first full year of the recovery. Now having said that, to assess the slope of the recovery, we take a bit of a conservative view that could, of course, change. So if the slope of the recovery is a bit faster than we think than some of that 2025 business which we’re preparing, by the way, to ship or at least to build in 2024 could actually be shipped in 2024.

Now I don’t think it’s going to be in the first half but some of that — if you talk about key areas of potentially improvement. That could be an area seeing some pull-in for system shipments into 2024, one. Two, I think when that happens, customers see it happening. But we also see that they might have some time to take advantage of the time before full utilization and do upgrades and actually installed base business which is generally high-margin business. I think those are, I think, the two main areas where we see upside — potential upside for 2024.

Mehdi Hosseini: Okay. So it’s not really driven by any particular end market or application. It could be just a broad-based recovery that could give confidence to our customer and there will be some pool-ins, right?

Peter Wennink: Yes. That’s always the case. I mean, you could argue, I mean, we have seen the focus on AI in the memory space. Now clearly, that could happen. But I think it’s generally the end markets that are reflective of where the recovery will take us in 2024. That will actually drive higher utilization of our tools and will mean pull in of those machines because customers don’t want to miss the market upturn. I think it’s all a bit of the same because the end markets ultimately will have to — will have to drive the recovery. And I think AI is now particularly something which could be on top of that because that’s clearly a technology transition. But we’ve already seen a very positive effect of that in our Q4 order intake.

Mehdi Hosseini: Okay. If I may ask my follow-up. In the last Capital Market Day, you highlighted how DRAM could account for 30% of your EUV shipment in ’25. How does that transition looks like? Maybe you can share with us the DRAM mix of EUV shipment in ’23? And how does the ’24 look like as we focus on a 30% target mix for ’25?

Peter Wennink: Well, in ’23, our memory shippers were lower than the 30% that you mentioned. But if you look at 25% and we also take into account what I just said about AI and the need for EUV in the DDR5 and in the HBM era, then the 30% is a very safe path and could be on the conservative side.

Operator: We will now go to the next question. And your next question comes from the line of Joe Quatrochi from Wells Fargo.

Joe Quatrochi: I know you reported the orders for both low NA and high NA this quarter. But can you help us just kind of quantify that mix in the orders this quarter? I imagine that the high enablers that you’re receiving now are for deliveries that are beyond 2025 at this point?

Roger Dassen: Yes, Joe, as you know, we never disclose high NA orders and we do it for a good reason. I’ve said it before. The world is very small and high NA orders are something that is competitively sensitive for our customers. So that’s why customers, they don’t want us to be specific on High-NA. I think it is fair to say that if you look at the €5.6 billion of order intake for EUV that we recorded in Q4, obviously, the lion’s share of that is none that should be very clear. In terms of overall orders that we have for High-NA, I think a couple of quarters ago, we said it’s now double digit. I think since then, we had a few quarters where we added a couple — so I think that’s what we’re looking at. But the lion’s share of the order intake in the quarter really was obviously for Low-NA.

Joe Quatrochi: Got it. That’s helpful. And then just as a follow-up, can you give us the puts and takes on free cash flow this quarter. I wonder, I guess, thought that it might have been a bit higher given the record level of EUV orders and the associated partial down payments that are related to that. So just any help you could give us on the free cash flow this quarter?

Roger Dassen: Yes, of course. Down payments were helpful, right? So as a result of that, I do — you did see that in the second quarter, in the last quarter Q4 free cash flow was quite positive at €2.6 billion just for the quarter, primarily driven, as you say, by down payments. But it’s also fair to see that we are in ramping mode. We are preparing for a ramp in 2025 and that means we’re taking in materials. We’re building inventory for High-NA, et cetera, et cetera. So I think on the inventory position, you would see that we’re adding quite a bit. So that is obviously a negative, if you like, to the free cash flow. But still, overall, I think the €2.6 billion that we recorded in the last quarter, I think, was a healthy — was a healthy cash generation.

Operator: And your next question comes from the line of Stephane Houri, ODDO BHF.

Stephane Houri: Yes. Actually, the question is about the 2025 acceleration. My feeling is that you sound a bit more comfortable on the fact that this strong acceleration is going to happen? And I remember you’re saying that you are targeting the middle of the range. But at the same time and I’m sure you didn’t miss this one, consensus has come down really to the lower end of the guidance for 2025. So can you maybe tell us if you are still targeting the middle of the range, at least? And what do you need to see in terms of Memory recovery, Logic orders coming through to 2024 to reassure that?

Peter Wennink: Yes. Yes, Stephane. Yes, yes, I mean we feel a bit more comfortable on 2025 after having received €9.2 billion of orders which, especially in the EUV domain, it’s focused on 2025. So I think you get the vote of confidence from our customers on what we thought was going to happen which is always good. When you talk about the middle of the range, I said — my comment was that I thought the low end of the range was too conservative. That’s what I said. I can make it in the middle of the range or the high end of the range. It’s your choice but I’m not going to comment on that because that would give me in January 2024 — the 24th of January, give you an outlook or if you give you guidance on 2025. I mean it might be a bit early.

So — but I do feel directionally, that’s what I said. I said the low end, I thought it was too conservative because we do believe that 2025 is going to be a very strong year. Well, the order intake actually gives us at least some level of confidence that, that statement at that time was actually quite good. So I feel more comfortable. Yes, that’s absolutely true. Now if the recovery in 2025 is indeed what we expect. Yes, we should see a further order flow in 2024. Our lead time, order lead time is 12 to 18 months. So yes and that’s what I also said last time, if we’re right on 2025, we need to see orders coming in, in the first half of 2024. Now we’ve seen a significant batch of those orders already coming in, in Q4 2023. So that just supports our assumptions.

So in that sense — now make a long story short, yes, I feel more comfortable, I think, with me our colleagues.

Stephane Houri: Okay. And regarding the memory market as a follow-up, is it really the start of the recovery of investment in memory? Or is this just all that is related to AI, DDR5, HPM? Or is it wider in your view?

Peter Wennink: Well, I think it’s — what we’re seeing is, of course, the information coming off our tools that we see the utilization rates going up. That’s one. Clearly, there’s also an element of technology transition. That’s also clear. I think there’s a bottleneck in the AI and making use of the full AI potential, DRAM is a bottleneck. The performance memory is a bottleneck. And there are solutions but they need a heck of a lot more HBM and that’s EUV; so it’s a bit of a mix. I mean, yes, you’ve gone through, I think, the bottom of this memory cycle with prices going up; utilizations increasing. And that combined with the technology transition driven by AI. That’s a bit what we see today. So it’s a combination of both and I think that will continue.

Operator: And your next question comes from the line of Sara Russo from Bernstein.

Sara Russo: So you’ve said you’re expecting strong demand from China to continue in 2024. Is that expected to be sort of at the same level we’ve seen for the last few quarters where it’s been exceptionally strong? Or is there some rebalancing you’re expecting across global demand expected for later in the year as we get towards that growth expectation for 2025?

Roger Dassen: Well, I mean, we’re not going to be specific at the beginning of the year exactly on China. But I think a few data points that we want to share with you. First off, as we also said in the video, we do see the demand from China being very robust. Second, there is an impact, obviously, coming out of the export controls. And Peter just gave you that impact, the 10% to 15%. So I think fundamentally, it’s pretty clear that the China demand remains very strong. As we said before, it’s primarily driven towards mature and met critical notes. I mean that’s what it’s all for. It’s a bit too early to speculate exactly how the China demand is going to pan out because that’s also dependent on how the demand for the rest of the world is going to pan out because as you know, from previous years, we have allocation questions, right?

So for a number of tools, we’re still supply constrained. So there you have to determine where is the tool going. And that will only be known once you have a complete picture of all the demand on a global basis. So that’s why it’s too early to make specific predictions is kind of going to be a bit up, is it going to be down. But one thing is for sure, China will remain very strong in our numbers also in 2024.

Sara Russo: Great. That’s really helpful. And maybe as a follow-up, I understand that because in 2024, you’re not expected to be capacity constrained, especially on the EUV side necessarily. Are you — if you’re going to be prebuilding, are you anticipating incurring additional costs around potentially holding those machines for any period of time? Or are you expecting those orders to materialize closer to when the machines will be ready? Or are there any other — is that sort of a drag on margins for 2024 that you’re factoring in?

Roger Dassen: No, I wouldn’t say that the prebuilding is going to be a drag on the gross margin because as a matter of fact, what you’re prebuilding this year, most of the material that you have for the prebuilding is already in, right? So I think from that vantage point, I think there is no big impact on either the cash flow or the gross margin. Of course, the question is you prebuild but then back to Peter’s point. And Peter said what the — in response to the question of the puts and takes from Medi on this year. Of course, we currently look at prebuild. It could be that some of those are pulled into 2024. So I would look at a prebuild more as an opportunity than as a threat to the gross margin.

Operator: And your next question comes from the line of Francois Bouvignies from UBS.

Francois-Xavier Bouvignies: So the first question I wanted to come back a bit to Stephen question on 2025. And you said, Peter, that you thought low end was conservative for 2025. It was 3 months ago when you had the €5 million EUV bookings. And as you know very well, analysts, we are very good like extrapolating trends. So we were very skeptical about these targets of the €500 million of EUV bookings. Now you come this quarter with indeed this huge booking number in terms of EUV which basically puts you in a much better position into 2025. And indeed, it’s clearly supporting your comments 3 months ago. But I would like to know this Q4 orders, we know that it’s very lumpy. It’s always moving from 1 quarter to another very significantly.

To what extent Q4 orders is a pull-in effect? In other words, do you see still a healthy EUV activities? I don’t expect the €5.6 billion every quarter. I’m not saying that. But should we — do you see already in Q1, the activity of EUV fairly healthy and in Q2? Or should we just expect Q4 as an exceptional and it will take a significant post? That’s my first question.

Peter Wennink: I think generally €9.2 billion is pretty exceptional because it was the highest order intake forever. So, that’s — you don’t — you’re right, we would not expect to top that every quarter. Now I think yes, the analysts are very good and extrapolating trends. But I have to warn you that trends in EUV order intake in our business with a few customers might be a very tricky thing to do to actually try to accept it which is actually proven by the order intake in Q3 and in Q4. It’s lumpy, as you said. And it has to do with a couple of things. I mean, in Q4, also clearly, the — as a part of the EV order intake had to do with the obvious technology transitions needed in the [indiscernible] space to support AI. That will continue.

But I think all in all, in 2025, when we look at a recovery of these — of the cycle and have a full year recovery. On top of that, the new fabs. Yes, we need to see a healthy order intake for EUV in the first half of this year of 2024. Just like I said earlier, we have 12 to 18 months or a lead time, so that needs to happen. And I think this is what we need to see. And then, I don’t think that Q4 — yes, it was exceptionally high. It was a very good order intake. But for the good reasons. It’s basically moving the EV orders now into the 2025 delivery time frame, orders that we’re now getting is not for 2024, it’s for 2025. So that will have to continue and in my mind, will continue in the first half of 2024. So yes, may not be €9.2 billion again in Q1 2024.

But yes, in the first half, we need to see healthy further order intake and to support our 2025 view. Absolutely.

Francois-Xavier Bouvignies: Great. And maybe a follow-up to the Memory migration. I mean, this quarter, what is really outstanding is the split of memory within EUV which is like 50%, I mean, roughly which is very high compared to history. So to support exactly the migration you are describing. Now we know that the memory market is — has low utilization rate right now is recovering but still fairly low. So I would assume — I mean, to what extent, given the loitization, they can migrate more, they have it’s many off-line tools so they can migrate, spend a lot of time on it. And to which extent agitation grows, they will put the brakes on the migration? Do you see what I mean? I mean — in other words, should we expect the memory as investing significantly right now but then will slow down as the industry comes back?

Or should we expect a fundamental line growing line because you have a lot of wafers to migrate anyway? And therefore, we won’t see so much lumpiness. Do you see what I mean?

Peter Wennink: Not entirely but I do believe that what is important to us as you look at these memory cycles as this game of chicken. So it’s — you build the capacity, there’s always big step-ups, the underlying growth pattern is also more regular. So you have these times where you have overcapacity. I think that’s just part of it today. We are going through this cycle. We just see the utilization rates of our memory tools going up. I think EUV is always in that sense, cash. You don’t buy loosely extra EUV systems in dynamic space. That’s always going to be the gating item. Now if you then come to the conclusion that you need more EUV because DDR5 and HBM is where the external demand is, then there’s not much to migrate. You just need more — so — and I think that’s on the back of a cyclical recovery because inventories are being consumed.

So that migration, having the space to do migration or the — that — I don’t see that. It might be available in the non-EUV space but in the EUV space, that is actually scarce tool which you don’t have available in abundance and that tool will be the first to be fully utilized. So I don’t know whether it’s answering your question but it’s just — but I’m just trying to think of what you meant or what the other question meant. But I think the recovery in memory is cyclical. And on top of that, I think we have the technology transition into DDR and into HVM. And that drives memory. And I don’t think it’s going to be something that is very short, i.e., one or two quarters. This will continue.

Operator: And the next question comes from the line of Tammy Qiu from Berenberg.

Tammy Qiu: First one is on High-NA. So there has been some concerns relating to High-NA EUV being too expensive to be used for things like 1.4 nanometer. So do you say if you have any feedback on customers’ current development process? I know we’re still at early stage that is in going to be the best option when you go to 1.4 nanometer?

Peter Wennink: Yes, I think it’s a good question because we always need to answer or ask that question to ourselves and to the customers, whether we feel that the next-generation lithography tool is economic for our customers as you know, more loss than a big economics. Now having said that, there is no doubt in my mind now that the high of all our customers that are using EUV is the right choice from an economic point of view. We kept that corroborated now very clearly through our customer contacts and that used to be a question some time ago. But I think everything that we’re currently seeing and also looking at alternative patterns of multi-patterning low-AUV, High-NA is very clearly in vertically the most cost-effective solution.

I think that is also driven by the asset that Roger gave that is as we’ve had — he said last year, we have double-digit orders in the order book and I said in every quarter, we comfortably add a couple of those. Those customers give us those orders because they do those calculations and they see this. So yes, I can understand the question. I think our confidence that it’s the most cost-effective solution, both in memory and Logic, Logic and Memory has only gone up.

Roger Dassen: I think the commitment of customers is not just visible in the orders but for instance, also, as you saw, 1 of our customers has entered into a joint research center which is really focused on this and on the utilization of High-NA. So I think that’s another very strong underpinning of the fact that customers do believe that this is an important way forward.

Peter Wennink: Absolutely. And I think the fact that our launching customer of High-NA was very happy that we were shipping on time and the pressure that they rightfully put on us was also felt throughout our entire reorganization. We have to be on time because this is the tool that they need.

Tammy Qiu: Amazing. And also another follow-up regarding memory adoption of High-NA. So my understanding is, so memory will be on Low-NA EUV for a few years. How would you view this High-NA adoption time line for memory versus 3D DRAM?

Peter Wennink: Versus 3D DRAM?

Tammy Qiu: 5 Yes, I mean which one — which will come first.

Peter Wennink: I don’t think that’s a question. I think high NA will be introduced way before 3D DRAM. So it will just be introduced and I think will be introduced in about the same time frame as logic. So it’s not a competing technology in that sense from a timing point of view.

Roger Dassen: And that’s also clear on the order intake. So in the order intake that we see for High-NA, we equally see memory orders for High-NA as we see logic orders. So I think that is — it is clear that customers are looking at the same time frame for the introduction of High-NA, both into Logic and into Memory.

Peter Wennink: And not considering any trade-off against the 3 DRAM introduction. That’s not — that’s not on the road map.

Operator: And your next question comes from the line of Didier Scemama from Bank of America.

Didier Scemama: It’s Didier from Bank of America. My first question, Peter, when we see this big wave of AI orders coming from the memory vendors and coming from foundries. I just wonder, related to your point earlier that HBM and DDR5 could drive an upside to that 30% contribution to volumes in 2025. Do you think there is upside to your potential demand capacity limit. You’ve got like 75, 80 units from HBM first or from others?

Peter Wennink: That’s a very good question. That’s something that we need to consider very carefully. We have said our capacity buildout will be 90 EUV low-NA systems, 20 High-NA whereby internally, we are looking at that number as a kind of a base number where we’re investigating whether that number should be higher. The question is where that 90 is going to be enough. Now we have to realize we are selling wafer capacity which is not only a function of the number of units but also a function of the productivity of those tools. Now we have a pretty aggressive road map for the productivity in terms of wafers per hour. So it’s a complex question that you’re asking. But actually, we need to look at this especially against the math that we’re seeing for little requirements in the area of AI, whether it’s HBM or whether it is logic, whether the number of units and the road map on productivity which gives wafers because the combination is wafer capacity, whether that is sufficient.

That is a constant thing we have to look at and that’s going to be something that I think is going to be very central when we do our Capital Markets Day by the end of the year. I think we’re going to give you — it also gives us a bit of time to actually engage with our customers to really understand those requirements and translate that into units and productivity. So good question, Didier. But I have to refer to the Capital Markets Day by the end of the year where we’re going to be a bit more detail but this is exactly what we are now looking at.

Roger Dassen: Because Didier, it’s also pretty clear that this is not a ’24, ’25 or ’26 question, right? This is longer term. And in that context, we — absolutely, to Peter’s point, we need to look about the ramifications of AIR but they really are long-term and therefore, will be addressed in our 2030 scenarios at the end.

Didier Scemama: Super. Maybe my follow-up is a follow-up to I’m going to be — so on the high NA system bookings that you had this quarter, can you say whether you had more than 1 customer placing orders or not?

Peter Wennink: We could just say that all our customers have placed the orders.

Roger Dassen: But not in the quarter to be…

Peter Wennink: That would be…

Didier Scemama: All of them have placed orders in the double digits is you talked about I just wonder whether — because you made the point, Peter, that now you know from your customers test that High-NA is more economical than Low-NA and there were some bloggers out there, people, who talk a lot who said that High-NA is not economical. And so I just wonder whether you could break that bear case once and for all.

Roger Dassen: Yes. Didier, I made it very clear earlier on the call why it is that we are not being very detailed on our comments on High-NA. And I think for that precise reason, we’re not going to give the color and context that you’re looking for.

Peter Wennink: It’s — Didier, it is only a few tools. And as a customer, you know whether you did place your order or you didn’t. So they actually make that very simple game and then we get all these questions — and our sales force is already under pressure and we don’t want to put more pressure on these guys than necessary.

Roger Dassen: But you’ve got an A for effort, Didier, for sure.

Didier Scemama: And Peter, I hope — do we hear you on the next earnings call? Or is that your last earnings call?

Peter Wennink: Well, no, I think I will definitely be there whether I will talk a lot. I don’t know but you will hear me.

Roger Dassen: I think he will, Didier.

Peter Wennink: Laughing at some answers but that’s no that’s now — it’s going to be for you. Yes. I just got to be something. Yes. No, I will definitely be there. Also — but I think Christophe and Roger and myself will definitely do that. But I’m pretty sure that you want to hear Christoph also giving his view on what lies ahead.

Operator: And the next question comes from the line of Andrew Gardner from Citi.

Andrew Gardiner: You’ve spoken a lot about the 2025 outlook around the state of the cycle and process node development. And we haven’t spoken as much today on the sort of all of the new fabs that are being built around the world. So an unprecedented level of activity. And there has been sort of various press at different points over the last how many quarters about sort of delays and pushouts and some challenges, be it in terms of labor force or Chips Act money, that kind of thing. I’m just wondering if you can give us an update in terms of your from your point of view in speaking with the customers. Have things been moving around at all in terms of the key customers and their plans for these new fabs and the tooling stores? Or is it pretty rock solid from your point of view and therefore and evident perhaps in that €9 billion number?

Peter Wennink: Yes. I think a good question, Andrew. I think the longer-term let’s say, positions that customers have taken a pretty rock solid. I think they will happen. Now the question is about timing and timing could be a function of the things that you just mentioned. I mean is there enough capable resources or are there capable resources, people. Will permits and/or all the things that are necessary like energy and water will all be available on time. Those are, you could say, tactical and operational considerations that are always there. Now we have examples where we have indeed delays because of the things that you just mentioned. We also have examples where things are spot on time. So it’s really very dependent on the specific situation of a specific fab.

I think the intentions are very clear. We don’t see any delay there. We could seek operational or delays that will push things back 6 months or 9 months that could happen. But generally, those fabs are there, those steps are there in the U.S. They’re in Japan. They’re in Taiwan, they’re in Korea, they’re in China, they’re in Europe. I mean, we don’t see any indication or any customer messaging to us that those things won’t happen. Yes, there could be some regional issues. But we also have some good examples that give you Japan, for instance. Things will happen on the dot. So that’s will probably also like to happen in Germany. So it’s — these are things that will happen. And in other areas, there might be more problems with, like you mentioned it, water, energy, people building restrictions and stuff like that.

But that’s normal. That’s our business.

Andrew Gardiner: Understood. And then just a quick mathematics clarification, if I could. Did you say €38 billion or €39 billion worth of ending backlog?

Peter Wennink: €39 billion.

Roger Dassen: €39 billion.

Andrew Gardiner: And so if we think of the guidance you guys have set for ’24, sort of the toll revenue within that, that implies that you’ve got about sort of mid-teens or so already booked for 2025. Is that a correct assumption?

Peter Wennink: I think we’re booking nicely into 2025. Now — which also means that we need to still book a lot for the remainder of the year but that’s why we’re still January of ’24 — till we have some time to go. But yes, we’re booking nicely into 2025, especially for EV.

Roger Dassen: But when you say mid-teens, you do make the adjustment, obviously, for the installed base business, right Andrew?

Andrew Gardiner: Yes.

Roger Dassen: Because that obviously needs to be at then I get a bit higher than mites; that’s okay.

Operator: And your next question comes from the line of [indiscernible] from Cantor Fitzgerald.

Unidentified Analyst: I guess first question on memory. So, a couple of parts here. Were you surprised that memory ended up 10% for you. And if you think about the magnitude of the record orders in the December quarter, can you kind of separate CXP and ashore domestic China versus kind of the technology buys that you’re seeing out of Korea and the U.S.

Peter Wennink: Yes. I think very easy answer that technology buys are dominant. Yes. So — and they’re also very much focused on the technology transition, so EUV. And were we surprised? I must be — I say yes, certainly we were surprised in the mites we’ve had with customers and especially the Memory because we’re leading-edge memory customers. We were surprised about the technology requirements of for litho, EUV specifically and how it impacts how important it is for the rollout and the ramp of the memory solutions for AI. This is why we received more EUV orders than we anticipated because it was obvious in the detailed discussions and the reviews with our customers, that EUV is critical in that sense. And that was a bit of a surprise, it’s a positive surprise. But that’s what we learned. So yes, a surprise, yes.

Unidentified Analyst: Sorry, was that a function of EUV layer count or perhaps where they’re repurposing equipment? And so now they’re realizing they need more footprint [ph].

Peter Wennink: No, it is lay account and imaging performance. And that’s what led to the surprise, the positive surprise which need led to more orders.

Unidentified Analyst: Perfect. And just a quick follow-up on High-NA. Can you kind of update us on your planned shipments and revenue for calendar ’25 and how you expect to kind of shrink that time frame between shipping and revenuing? And as part of that number, how should we think about the overlay of memory adoption into ’25, ’26, ’27?

Roger Dassen: Yes. So CJ, the revenue for 2025, as you know at the Capital Markets Day, we expect 5 systems in revenue and that’s still the way we look at it. There will be more shipments but it’s a bit too early to say how exactly is the revenue recognition going to work is, as you know, we just shipped only the first modules of the first tool. It’s a bit early. But the 5% in revenue, that’s still the way we look at it. In terms of the introduction of high NA into memory, I think that’s consistent with what we had at an earlier question. We do see the time frame of memory and logic adoption more or less in sync. So to us, that is more or less the same timeframe.

Skip Miller: Yes. So we have time for one last question. If you were unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations department with your question. Now operator, may we have the last caller, please?

Operator: And the question comes from the line of Sandeep Deshpande from JPMorgan.

Sandeep Deshpande: I have a question to follow up somewhat on Didier’s question. I mean there is this bear case on High-NA EUV. I mean when you look at your 2030 guidance you look at you’re guiding to about 20 High-NA EUV tools. But when you look that, if you remember, when you had guided the initial ramp of EUV, you had talked about 50-plus tools. So is it that your guidance on High-NA EUV on 20 tools is a function of the throughput of the tool? Or is it a function on the adoption of the High-NA EUV into lithography — into semiconductor production? Because there is this emerging case of that ASML itself is not so bullish on the adoption of High-NA EUV. And I have a quick follow-up.

Peter Wennink: Well, it is the latter. It has nothing to do with the productivity of the tool. Although we will work on the productivity of the tool which we’re always doing to help our customers upgrade cost. But it’s basically the adoption of High-NA litho because it’s needed. It is needed in — when you look at the customer road maps and the customer designs, that’s what they need from a cost point of view. So I don’t know where the notion comes from that we at ASML are less bullish about INA or the adoption of High-NA, that’s not the case. Okay. I mean I think on the contrary, we’ve seen in the interaction with our customers that all our customers now are convinced that High-NA is a more cost-effective solution as opposed to mobile patterning Low-NA. So yes, I don’t know how to answer it differently.

Sandeep Deshpande: I mean — and then another quick follow-up. I mean, in terms of your optimism, I mean, clearly, memory orders were much stronger than we expected in Q4 but there is all these new fabs which are going to be built over the next two to three years. I mean and your customers would have given you what you need to ship to those fabs, etcetera. But do you expect to sign up those logic related? I mean, clearly, memory is going to ramp. You’ve talked about it earlier. But on the Logic side, those orders will be signed up in the next few quarters for ’25 and ’26.

Peter Wennink: Yes. I think — certainly for ’25. I think when we look at our large logic customers, there are still some large customers that still need to order, yes. So for 2025, it still has to come, yes. Now of course, we’re in discussions, this is clear. But I mean, you could also say that some are not in the order book that definitely need to be there if they want to have tools in 2025. So yes, it’s something that you will see over the next couple of quarters.

Sandeep Deshpande: So just to clarify, Peter, what I’m trying to understand is you will get the orders in advance rather than turns business orders that you sometimes recognize orders in the quarter, you shipped, et cetera. But you are demanding on these customers signed orders as such really.

Peter Wennink: I mean, we will get those orders before we start shipping. I mean, that’s clear. In the past, what we used to do but now that’s true. Some time ago, that is the advantage of being in this industry very long, so you have a good memory. In the past, we used to do this because we knew the customers. We’re actually opened the fact the [indiscernible] were there and we’re still negotiating some terms and conditions. That was largely on deep UV which the tool price is, of course, lower. Now you won’t do that when your tools are the €200 million or even €350 million. I mean that’s where the financial risk on both sides is a bit higher. So you want to get a little bit more certainty. So that practice might still be true for some, let’s say, I wouldn’t even call it cheaper tools, they’re [indiscernible] on a $70 million or $80 million achieved tools is deal.

But I mean — but that’s what happened at that time but I don’t think it EUVs, that’s going to be the case.

Skip Miller: All right. Before we sign off, I’d like to remind you and mentioned a few times today and also in the video with Roger earlier, that we — our Investor Day is currently planned to be held in Veltoven on November 14 this year and we hope you’ll all be able to join us. Now on behalf of ASML, I’d like to thank you all for joining us today. Operator, if you could formally conclude the call, I’d appreciate it. Thank you.

Operator: Thank you. This concludes the ASML 2023 Fourth Quarter and Full Year Financial Results Conference Call. Thank you for participating. You may now disconnect.