ASML Blockbuster Earnings Call: Slow Recovery of Chip Industry Demand, Customers Are More Cautious (with full text)

ASML Holding NV's poor third-quarter earnings report was released early on Tuesday due to technical glitches, sending the company's shares and a number of chip stocks tumbling. ASML CEO Christophe Fouquet said on Wednesday's earnings call that the slow recovery in the chip market is expected to "continue throughout 2025" due to disappointing third-quarter results.

Summary of key points from ASML analyst call:

1. The CEO of ASML Holdings apologized for "technical failures that caused the third-quarter earnings report to be disclosed in the European stock market one day earlier", especially when the company wanted to convey "important key information" to the outside world.

2. Now, ASML intends to slow down short-term investment to adapt to the fact that the market has become weaker.

3. As customers remain cautious, the company expects (the chip market) to recover gradually.

4. ASML still believes that artificial intelligence (AI) is a key driver of the recovery of the (semiconductor) industry.

5. Market reaction: ASML Holdings' Netherlands Amsterdam share price fell about 5% to 634.90 euros in late trading, continuing the performance of closing down 15.64% to 668.10 euros on October 15.

ASML cut its outlook for 2025 on Tuesday, triggering a 16% plunge in Amsterdam on Tuesday, the biggest drop since June 12, 1998. On Wednesday, its shares fell another 5.8 percent, losing its place as Europe's most valuable technology company and replacing it with software company SAP SE. Since Tuesday's unexpectedly early earnings report, ASML has lost more than 60 billion euros ($65 billion) in market value. Since Fouquet took office in April, the company's market value has fallen by nearly a quarter.

ASML's performance has sparked concerns that the AI boom has failed to address sluggish demand for broader chips.

Mr Fouquet said the slow recovery in demand had led to "more cautious customers and some investment plans being delayed". Although he said the AI boom, energy transition and electrification still offer strong upside potential, the company lowered its earnings forecast. He said demand recovery in the automotive, mobile device and PC markets has been particularly slow, adding that ASML will slow down its short-term investment plans to adapt to market demand.

"While we continue to see AI as a key driver of the industry's recovery, with potential upside, we are seeing a slower than expected recovery in other areas."

"Without AI, the market would be very bleak today, and the recovery would not be as everyone hoped."

Postpone the order

ASML CFO Roger Dassen said on the conference call that some orders, originally scheduled for 2025, have now been postponed to 2026.

When asked by an analyst about the "two customers" postponing demand, Dassen responded that not just two customers, but many more were postponing orders.

However, Dassen said that the company's EUV demand for extreme ultraviolet lithography machines is not a big problem. He said EUV capacity is fully booked and the number of orders is high enough to reach the low end of the forecast, but it is expected that around $2 billion in orders is needed to reach the median of expected orders.

According to the analysis, ASML is under pressure from multiple directions. While demand for chips for AI data centers remains strong, key customers, including Intel and Samsung, are struggling.

Intel last month delayed plans to open new factories in Germany and Poland amid declining sales and rising losses. Samsung apologized to investors for delaying deliveries this month, causing competitors to preemptively dominate the market for high-bandwidth memory chips for AI.

In addition, ASML said that the recovery of the mobile and PC markets was weaker than expected, and the media speculated that this may be an estimate of the weak demand for Apple's new iPhone. Apple shares fell 1.5% on Wednesday. Analysts said preliminary data on pre-orders and delivery times for the iPhone 16 showed weak demand.

At the same time, companies that produce automotive and industrial chips, often using older machines from ASML, are also in a prolonged downturn because their customers have too much inventory.

Analysts are particularly uneasy about ASML's weak expectations for next year. They point out that bookings can be volatile – ASML's machines are worth hundreds of millions of dollars, so a delay of a few months is important for financial results – but they are concerned that next year's forecast could hint at weaker demand going forward. "We are puzzled by how weak the orders are," said Janardan Menon, an analyst at Jefferies.

At the same time, UBS remains optimistic about the industry as a whole. UBS said ASML's weak earnings report would not spoil AI's growth story.

以下是阿斯麦首席执行官Christophe Fouquet和首席财务官Roger Dassen在财报电话会议上的发言:

首席财务官Roger Dassen:

I will first review the financial achievements for the third quarter of 2024 and then provide guidance for the fourth quarter of 2024.

ASML's total net sales in the third quarter reached €7.5 billion, exceeding the high end of our guidance, driven by more sales of DUV systems and higher sales of installed base management. Net system sales amounted to EUR 5.9 billion, consisting of EUR 2.1 billion in EUV sales and EUR 3.8 billion in non-EUV sales. Logic chips accounted for 64% of net system sales, while the remaining 36% came from memory chips.

Installed infrastructure management sales were above guidance at 1.54 billion euros, mainly due to higher revenue from services and upgrades. Gross margin for the quarter was 50.8%, in line with guidance. In terms of operating expenses, R&D expenses were slightly below guidance at EUR 1.06 billion, while SG&A expenses were in line with guidance at EUR 297 million. Net profit in the third quarter was 2.1 billion euros, or 27.8 percent of total net sales, and earnings per share were 5.28 euros.

Balance sheet aspect. We ended the third quarter with cash, cash equivalents and short-term investments of €5.0 billion, similar to the previous quarter. Our free cash flow in the third quarter was a slight improvement of €534 million.

However, as mentioned in the previous quarter, free cash flow remains under pressure. This is mainly due to the relatively low volume of orders received, so there are fewer upfront payments and higher inventory levels. The increase in inventory levels was primarily attributed to EUV systems, including high and low NA systems, due to extended manufacturing cycles and inventory to support future expansion.

In terms of orders, net system orders in the third quarter amounted to EUR 2.6 billion, of which EUR 1.4 billion were EUV orders and EUR 1.2 billion were non-EUV orders. Net system orders in the third quarter accounted for 54% of memory chips and 46% of logic chips. The relatively low order intake reflects the slow recovery of traditional end markets and the cautious attitude of customers in the current environment. At the end of the third quarter of 2024, our backlog exceeded €36 billion.

For the fourth quarter of the year, we expect total net sales in the range of €8.8 billion to €9.2 billion for the fourth quarter. Installed foundation management sales are expected to be approximately €1.9 billion in the fourth quarter, with net sales including expected revenue recognition for two high numerical aperture systems, and an expected increase in installed foundation management revenue compared to the third quarter, primarily due to the achievement of certain EUV performance thresholds and certain EUV productivity upgrades.

Gross margin is expected to be in the range of 49% to 50% for the fourth quarter. While fourth-quarter revenue is higher than third-quarter, gross margin is expected to be slightly lower than in the third quarter, as the positive impact of product upgrade revenue is offset by a dilution of gross margin from revenue recognition for two high numerical aperture systems.

Based on our fourth-quarter guidance, we expect 2024 revenue of approximately €28 billion and gross margin of approximately 50.6%, slightly lower than in 2023 and in line with expectations. R&D expenses are expected to be around EUR 1.09 billion and SG&A expenses are expected to be around EUR 300 million in the fourth quarter. We expect the annual effective tax rate to be between 16% and 17% in 2024.

In the third quarter, ASML paid an interim dividend of €1.52 per ordinary share for the first quarter of 2024. The interim quarterly dividend for the second quarter of 2024 is also €1.52 per share, which will be paid on November 7, 2024. No shares were purchased in the third quarter.

首席执行官Christophe Fouquet:

It was a solid financial quarter, but there were some market developments during the quarter.

The first is our technology, where we continue to make good progress on our two new EUV products. On the low NAP technology side, we continued to advance production of the NXE:3800E system during the quarter, and customers are now rapidly switching to this new model due to its higher performance and more than 37% increase in throughput (the number of wafers a lithography machine can handle in an hour) compared to the NXE:3600D.

We have already demonstrated a throughput of 220 wafers per hour in the factory and set a new record for stacking accuracy. We will deliver a full-spec system with new system deliveries and upgrades early next year. As customers transition to the NXE:3800E, the majority of deliveries in the fourth quarter will be the NXE:3800E system.

With respect to the high numerical aperture, two systems that have already been delivered are wafer exposed at the customer's site, and we expect to recognize revenue for these systems by the end of the year. A third system is being shipped to another major customer. The momentum continues to grow, with approximately 10,000 wafers now being exposed in ASML-imec's high numerical aperture labs and field systems, covering multiple logic and memory chip customers.

At a recent industry conference, we released new high numerical aperture data showing significant performance gains in imaging, overlay, and contrast. These advantages show that logic and DRAM customers can significantly reduce costs.

All in all, we have maintained our continued momentum in EUV technology and are making good progress within the range of our customers' expectations.

Regarding market conditions, while we continue to see AI as a key driver of the sector's recovery, with potential upside, we are seeing a slower than expected recovery in other areas. This recovery will continue into 2025, causing clients to become more cautious in their investments and postponing some investments.

On the logic chip side, the slower recovery in end markets (e.g., mobile devices and PCs), combined with the dynamics of certain competitive foundries, has led to a slowdown in the rollout of new nodes for some customers, who have delayed the construction of some fabs and changed the timing of demand for their lithography equipment.

In terms of memory chips, the market recovery has also been slow, resulting in limited capacity expansions by customers, with a focus on technology transformation to support AI-related demand for high-bandwidth memory (HBM) and DDR5.

Overall, while the long-term trend remains very strong and positive, the dynamics of the past few months, as well as the customer-specific situation, have led us to expect a lower growth curve and a reduction in overall lithography demand in 2025.

Given these developments over the past quarter, we think it's worth making some comments on 2025 at this point in time, rather than waiting until next month's investor day.

首席财务官Roger Dassen:

Based on the latest market dynamics that Christophe has just described, we now expect revenues in 2025 to be at the low end of the range of €30 billion to €35 billion. In large part, this is due to a significant reduction in our expectations for low NA shipments in 2025, which is expected to be below 50 units.

With respect to gross margin, we had expected an increase in the number of low numerical aperture systems and the transition to the higher gross margin 3800E system as key drivers of gross margin improvement. While the gross margin improvement for the 3800E system has been realized, the significant reduction in the number of EUV systems required next year has had a significant dilution effect on the gross margin.

As a result, based on current lower revenues and a less-than-ideal product mix, we now expect gross margins to be in the range of 51% to 53% in 2025.

Gross margin in 2025 is expected to benefit from higher gross margins for the 3800E system, improved gross margin for high NA systems, and higher gross margin for EUV services compared to 2024, but will also be affected by the dilution of the recognition of more revenue from high NA tools.

With regard to operating expenses, in 2025 we expect total operating expenses to be in the high end of the range of €5.6 billion to €6.1 billion provided at investor day. We will continue to advance our R&D roadmap as planned and will be able to absorb the significant wage inflation impact since 2022 within this range.

首席执行官Christophe Fouquet:

Looking further ahead, as we have previously stated, the long-term growth drivers for the semiconductor end market remain very solid. Applications such as artificial intelligence, energy transition, electrification, etc., continue to provide a very strong and positive outlook for our industry and ASML's business.

The expansion of application fields and the increasing demand for lithography at future technology nodes are driving the demand for advanced and mainstream nodes. In line with most of our industry peers, we continue to see AI as a potential growth point and continue to keep a close eye on the potential for its impact on us in the short and long term.

While we've discussed some of the postponements, we're still preparing for a number of new factories under construction around the globe to meet the future needs of the industry. These factories are located all over the world and are critical to our customers and plan to take over our systems.

As a result, we will continue to expand our capacity to respond to the growth in demand we expect in the coming years.

The following is an excerpt from the Q&A session on ASML's earnings call:

Regarding the decision to cut EUV shipments next year, the number of low numerical aperture lithography systems may be reduced by 20 to 25 units. How many of them do you think will be delayed until 2026? Is the delay due to weak final demand, or is it because several customers are experiencing process difficulties that prevent them from attracting enough customers to justify the plant? Installed infrastructure management revenue grew significantly in Q4, will this become the new normal? Will it be able to compensate for the decline in EUV business?

ASML: I think it's a difficult question to answer, as you can imagine, because the feedback we've received from our customers over the last few months has been mostly about delayed orders. So mathematically, you can assume that these orders will be delayed until 2026. It's a simple view.

Of course, over time, we need to reconfirm the dynamics of the market in the second half of 2025 and 2026. So, mathematically, we mention postponement because we do see customers delaying their plant construction. But we don't see customers changing their intentions to build these plants. That's why we're talking about postponement, not cancellation. Of course, 2026 is an opportunity to see demand return. But as I said, there is still a long way to go until 2026, and we will continue to monitor the dynamics of the market.

On the second question, I think it's a combination of the two reasons that you mentioned, so it's a combination of factors. I think the first thing we mentioned was the slow recovery because it affected every customer. We remain optimistic about AI. I think today without AI, the market would be very pessimistic. If you asked me, I would say so.

But for other areas, I think customers are still confirming that the recovery hasn't met everyone's expectations, whether it's mobile phones, PCs, or even the automotive market. This affects most of our customers' various fields and applications. There's also the competitive dynamics in terms of logic chips, which I think has also been mentioned in the news over the last three months, which also has a certain impact on delayed orders. So, these two factors are the main reasons why customers have started to make decisions based on their expectations of the market over the past few months, both in terms of overall market weakness and in some cases competition for market share.

Regarding the last question, I wouldn't say it's the new normal. As we explained earlier today, there's one contributing factor that we're hitting certain performance targets. This is a one-time effect that we expected, especially in the fourth quarter. So I don't think that's the norm. However, we do think the installed base management business, both in terms of services and upgrades, will grow healthily, especially in 2025. So we do expect fairly healthy growth for the business, with double-digit growth in 2025 expected to be in the double digits, healthy double-digit growth.

Your key customers have previously mentioned an increase in interest in changing the reticle size. I'd like to understand how you see the impact of this change on high numerical aperture lithography systems, especially when it comes to expanding the reticle size. Does such a change cause some kind of delay? What are your current internal capacity targets? What about the manufacturing capacity?

ASML: yes, I think the interest that you mentioned is increasing, and I think what you saw at the conference was that the initial data that we shared with our customers got very positive feedback because it showed a significant performance improvement in imaging and very good support on the DRAM and logic chips. So, indeed, interest is high and growing. This can lead to significant productivity gains for high NA and lithography as a whole, but it's not something to worry about right now, so it won't affect our current discussions and business development.

We have a lot of focus today on 2025, and I think we're talking about next year, and the amount of products that we're going to deliver to our customers is much lower than we expected at 2022 Investor Day, and also less than we expected a few months ago.

Now, as I mentioned in my introduction, listening to our peers as we look at the long-term outlook, I think they're very optimistic about the long-term opportunities in this market. We agree with this, which means that at some point, the need for more capacity will appear. So what are we doing? We continue to carry out those long-term projects, such as manufacturing some equipment. But on the other hand, we are also slowing down the pace of short-term investment because the short-term market is a little weaker than we had previously anticipated.

So when it comes to people, materials, etc., we don't need to do it right away today. We'll do it when we see visibility into greater demand. But we still want to push the structure of our capabilities because I would say that when the recovery takes more time to happen, if you believe in the long-term trajectory of the market, there will come a time when you need to deliver more products, and we want to be ready for that.

The smartphone market and the PC market have indeed slowed down, but the growth in the number of EUV orders does not necessarily indicate a weak market, and it seems that two customers mentioned in media reports that they were experiencing some problems. Are there any indications that there is an upside risk to the order? Or is the forecast provided to you by the customer too optimistic?

ASML: There are two main drivers for the change in our expectations for next year. First of all, as you mentioned, the recovery of the mobile device and PC markets has been weaker than expected. This has an impact on capacity planning as well as on what to expect. We mentioned the word "cautious" a few times, and when you become cautious, I think it means that you are not only cautious in the short term, but also in the medium term. So, if you will, you can say it's a double whammy. That's the first point.

Second, we also mentioned some of the upside risks to AI, as we continue to believe that the overall demand for these applications is still there and increasing. If we look at server demand, we see a very good recovery, and a lot of it is related to AI applications. So we're talking about upside risks, which also means that the overall dynamics of the market are still playing out and we feel the need for an update for next year based on some of the developments we've seen. I think that if everyone still believes in the strong demand for AI in the coming years, then that need must be met. So I think we'll see developments in that area over the next few months.

Our customers have placed a number of orders for high NA lithography machines for R&D, and we are very pleased with the progress in this area, pleased with both the performance and the data, and will continue to work with our customers in the coming months to translate these initial positive results into actual manufacturing plans."

What order levels will need to be reached in the coming quarters to achieve the new median guidance?

ASML: In addition to the overall decline in orders, there are also some cases where orders are postponed to 2026. What we're seeing today is that when it comes to EUV, I think it's fair to say at this point that EUV capacity is fully booked to achieve the low end of the guidance range that we're providing. And to reach the midpoint of the guidance, I would say that we need to get another order book of about 2 billion euros to reach the midpoint of the guidance by the end of the year.

As a result, another 2 billion euros of orders will need to come in this quarter. As for flexibility, I think there is still some flexibility. If the orders come in in the first quarter of next year, I think we may still be able to meet those orders in 2025. I think we're well prepared to create flexibility.

Two large customers postponed orders during the quarter. In the 2025 data, with respect to these two large accounts, do you already include more expectations when estimating 2025 revenue, or do you just reflect the postponement that you've seen this quarter? So if they delay again in the next two quarters, are we likely to be further impacted?

ASML: Basically, we've adopted the latest ideas that we've discussed with these customers. You should understand that the needs of these customers will become clearer and clearer over time. Also, you mentioned two customers, I think it's not just two customers, but what we're reflecting now is the latest conversations with those customers. You'll also understand that the closer you get to the end of the year, the more certain the needs of these customers become. So, I think what we're seeing at the moment is a fairly timely and accurate base case scenario for these customer needs.

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