Earnings Call Transcript - ASML Q4 2022

Operator, Operator

Welcome to the ASML 2022 Fourth Quarter and Full Year Financial Results Conference Call on January 25, 2023. I would now like to turn the call over to Mr. Skip Miller. Please proceed.

Skip Miller, Vice President of Investor Relations

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. The subject of today's call is ASML's 2022 fourth quarter and full year results. The length of this call will be 60 minutes, and questions will be taken in the order 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, CEO

Thank you, Skip. Welcome, everyone, and thank you for joining us for our fourth quarter and full year 2022 results conference call. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the fourth quarter and full year 2022, as well as provide our view of the coming quarters. Roger will start with a review of our fourth quarter and full year 2022 financial performance, with some added comments on our short-term outlook. I will complete the introduction with some additional comments on the current business environment and our future business outlook. Roger, if you would like to go ahead.

Roger Dassen, CFO

Thank you, Peter, and welcome, everyone. I will first review the fourth quarter and full year financial accomplishments and then provide guidance on the first quarter of 2023. Let me start with our fourth quarter accomplishments. Net sales came in at €6.4 billion, around the midpoint of our guidance. We shipped 18 EUV systems and recognized €2.3 billion in revenue from 13 systems this quarter. Net system sales of €4.7 billion, which was again driven by Logic at 64%, with the remaining 36% coming from Memory. Installed Base Management sales for the quarter came in at €1.7 billion, which was higher than guided due to additional upgrade revenue. Gross margin for the quarter came in at 51.5%, which is above our guidance, primarily due to the pull-in of additional upgrade business as well as an insurance settlement from the ASML Berlin fire, which occurred in early 2022. On operating expenses, R&D expenses came in at €906 million, above our guidance due to higher depreciation. SG&A expenses were €280 million, higher than guided due to increased IT and recruiting spending as part of our headcount growth plan. Net income in Q4 was €1.8 billion, representing 28.2% of net sales and resulting in an EPS of €4.60. Turning to the balance sheet, we ended the fourth quarter with cash, cash equivalents, and short-term investments at a level of €7.4 billion. Moving to the order book, Q4 net system bookings came in at €6.3 billion, which is made up of €3.4 billion for EUV bookings and €2.9 billion for non-EUV bookings. These values also include inflation corrections. Non-EUV bookings are a combination of deep UV and metrology and inspection. Net system bookings in the quarter were driven by Logic with 66% of the bookings, while Memory accounted for the remaining 34%. Looking at the full year, net sales grew 14% to €21.2 billion. EUV system sales grew 12% to €7 billion realized from 40 systems, while in total, we shipped 54 EUV systems in 2022. Deep UV system sales grew 13% to €7.7 billion. Our metrology and inspection system sales grew 28% to €660 million. Looking at the market segments for 2022, Logic system revenue was €10 billion, which is a 4% increase from last year. Memory system revenue was €5.5 billion, which is a 34% increase from last year. Installed Base Management sales were €5.7 billion, which is a 16% increase compared to the previous year. At the end of 2022, we finished with a backlog of €40.4 billion, an increase of 67% compared to the end of 2021. Our R&D spending increased to €3.3 billion in 2022, as we continue to invest in innovation across our full product portfolio. Overall, R&D investments as a percentage of 2022 sales were about 15%. SG&A increased to €946 million in 2022, which was about 4% of sales. Net income for the full year was €5.6 billion, 26.6% of net sales, resulting in an EPS of €14.14. Improvements in working capital contributed to a free cash flow generation of €7.2 billion for 2022, mainly driven by customer down payments following the very significant order intake this year. We continue to invest in support of our roadmap and planned capacity ramp. Excess cash will be returned to our shareholders through a combination of dividends and share buybacks. With that, I would like to turn to our expectations for the first quarter of 2023. We expect Q1 net sales to be between €6.1 billion and €6.5 billion. Per customer requests, we prioritized resources towards the acceleration of deep UV shipments at the end of 2022. As a result, we expect lower revenue in Q1 and higher revenue in the following quarters. We expect our Q1 Installed Base Management sales to be around €1.5 billion. Gross margin for Q1 is expected to be between 49% and 50%. The lower margin relative to last quarter is primarily due to lower upgrade revenue and deep UV mix effect. The expected R&D expenses for Q1 are around €965 million, and SG&A is expected to be around €285 million. The higher R&D guidance is primarily due to additional headcount and labor cost increases. These investments are in support of our continuous innovation as we further expand our deep UV, EUV, and applications roadmap and, at the same time, work to improve our installed base performance. Higher SG&A is mainly due to additional headcount and IT spending. Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%. In Q4, ASML paid a quarterly interim dividend of €1.37 per ordinary share. The third quarterly interim dividend will be €1.37 per ordinary share and will be made payable on February 15, 2023. Recognizing this interim dividend and the two interim dividends of €1.37 per ordinary share paid in 2022, this leads to a final dividend proposal to the general meeting of €1.69 per ordinary share. In Q4 2022, we purchased around 0.6 million shares for a total amount of around €300 million. ASML announced a new share buyback program during our Investor Day on November 11, 2022, to be executed by December 31, 2025. We intend to purchase shares up to an amount of €12 billion. With that, I would like to turn the call back over to you, Peter.

Peter Wennink, CEO

Thank you, Roger. As Roger has highlighted, we had a year of record sales in a dynamic environment. Demand remains strong, and we finished the year with a record backlog. Looking to 2023, there continues to be a lot of uncertainty in the market due to several global macro concerns around inflation, rising interest rates, recession, and the geopolitical environment, including export controls. Customers are still seeing demand weakness in consumer-driven end markets, most notably with PCs and smartphones, with some indication of softening or lower growth rates in data center demand. Meanwhile, the demand strength continues in other markets such as automotive and industrial. Customers are telling us they expect a rebalancing of semiconductor inventories over the first half of 2023, with business expected to rebound in the second half of the year. A potential driver of this recovery in the second half of the year could also be the post-COVID opening of China. This could have a positive effect on both supply and demand. To help rebalance inventory levels, customers are running their lithography systems at lower utilization levels, and some have lowered their CapEx plans for this year. Based on this, we concluded that most of our customers have made the assessment that the duration of a potential recession is significantly shorter than our average delivery lead time. Additionally, lithography investments are strategic in nature, which means that the demand for our systems remains strong. For instance, this year, demand still exceeds our capacity, and we enter the year with a backlog of €40.4 billion, so our focus will still be on maximizing system output. We've experienced several quarters of very strong bookings, which now provides backlog coverage significantly beyond 2023, which is almost twice the expected 2023 system sales. Based on discussions with our customers and continued improvements in the capability of our supply chain, we are planning to increase our output capability this year. We are planning to ship around 60 EUV systems and around 375 deep UV systems in 2023, with around 25% of the deep UV systems to be immersion. We still plan a significant number of fast shipments this year, which, under the current way of working, will result in a similar amount of delayed revenue out of 2023 that came into 2023. Looking at the growth of the business for the full year 2023 compared to 2022, we expect EUV revenue growth of around 40% and non-EUV revenue growth of around 30%. For the Installed Base Management business, we expect year-over-year revenue growth of around 5%. As we are coming off a strong growth year in 2022 and customers are adjusting their utilization levels, we currently expect to see a slightly lower demand in our upgrade business in 2023. In summary, for the full year 2023, based on how we see the world today, we expect another year of strong growth with a net sales increase of over 25% and a slight improvement in gross margin. On the geopolitical front, relating to export control, this continues to be a geopolitical discussion with different government entities, a process where ASML is not in control; however, we continue the discussion with governments to ensure that the consequences of proposals are well understood. As of today, export control policy related to lithography equipment has not changed. We are still not able to ship EUV systems to China but are able to ship deep UV, as well as metrology and inspection systems to China. As our Prime Minister recently stated, this is a multinational discussion, not only with the U.S. but with several countries. He reiterated that multiple companies in the semiconductor industry, including their supply chains, are involved, and that the matter is complex and sensitive. It needs careful handling with precision. He reminded us that there is a lot of interest at stake, and it's important to find the right balance. Therefore, we will not speculate about the possible outcome; we will have to wait for the outcome of ongoing government discussions. Looking longer term, we talked at our Investor Day last year about the global megatrends, where the broadening application space is fueling demand for advanced and mature nodes. Secular growth drivers in semiconductor end markets and increasing lithography intensity on future technology nodes are driving the demand for our products and services. ASML and its supply chain partners are actively adding capacity to meet future customer demand as confirmed at Investor Day, with our capacity plans of 600 deep UV, 90 EUV low-NA systems by 2025-'26 and 20 EUV high-NA systems by '27-'28. Also presented during our Investor Day last November, we see an opportunity based on different market scenarios to reach an annual revenue in 2025 between €30 billion and €40 billion and in 2030, an annual revenue between €44 billion and €60 billion. Part of our long-term growth opportunity, we also remain committed to our ambitious ESG sustainability goals. On February 15, 2023, our 2022 annual report will be published. As part of this report, we plan to provide you with an update on how we collaborate with our stakeholders to deliver on the ambitions of our ESG Sustainability strategy, which we can summarize as follows: Our ambition is to achieve carbon neutrality with net-zero emissions in our operations, Scope 1 and 2 by 2025; we aim to achieve net-zero emissions in our supply chain, Scope 3, by 2030; and net-zero emissions from the use of our products by our customers, Scope 3, by 2040. In addition, our goal is to have zero waste from operations to landfill and incineration by 2030. Socially, our ambition is to ensure that responsible growth benefits everyone. To maintain our fast pace of innovation and ensure our long-term success as a company, we need to attract and retain the best talent and provide the best possible employee experience. We aim to be a valued and trusted partner, improving the quality of life for all people in our communities. In summary, while there is a lot of near-term uncertainty in the current environment, our customers' demand for our products continues to exceed supply. We're working to increase our capacity to meet our customers' future demand, and we're fully confident in the opportunity this provides for our future growth. With that, we would be happy to take your questions.

Skip Miller, Vice President of Investor Relations

Thank you, Roger and Peter. The operator will brief you shortly on the Q&A session protocol. Operator, could you please provide your final instructions and then present the first question?

Operator, Operator

Our first question comes from Joe Quatrochi at Wells Fargo.

Joe Quatrochi, Analyst

I was wondering in your 2023 outlook if you could kind of give us any color on how you're thinking about Logic versus Memory growth this year.

Roger Dassen, CFO

Yes, we haven't provided explicit guidance on that. In the current environment, given the dynamics and uncertainty, we still see 2023 as a year where we are supply constrained. It doesn’t make much sense to provide guidance on Memory versus Logic. We indicated we'd guide on EUV and non-EUV, but guidance on Memory compared to Logic isn't very constructive or meaningful. Looking at recent order intake, Memory appears to be doing well, with an increase in the quarter and healthy performance for the year. This suggests that Memory buyers are making strategic investments in anticipation of a market recovery, which is reflected in the order intake. However, considering the dynamics I've mentioned, we felt it was not useful to provide guidance for the full year on this.

Joe Quatrochi, Analyst

Got it. That makes sense. And as a follow-up, you talked about the inflation-related adjustments in your bookings. Are you able to reprice kind of your entire backlog or portions of your backlog? And is there any sort of quantification that you can help us with on just the average increase of ASP that we should be thinking about in our models?

Roger Dassen, CFO

Yes, Joe. As you know, we've been through this before. We're having good discussions with customers. Legally, the way the backlog is construed, we've agreed on a price. So this is just a matter of discussions with customers about a fair distribution of the burden. We're fairly advanced in that discussion. A number of customers have already made commitments to us on how they're going to contribute, with most other customers who are fairly advanced and we think that we're going to find a solution. Only a minority of customers are not open to this conversation. The lion's share is open to the conversation. But it is really in the spirit of finding a fair distribution of the inflation burden. So that has helped. We're only putting into the backlog those inflation adjustments that have been explicitly agreed with customers. More of that is to come because, as I said, we have a number of customers who are still in negotiations. In terms of quantifying it, last year, we said we were having about a 1.5% drag on the gross margin coming from inflation. I would say most of that we expect to recover during the year. Thus, most of the inflation we incurred over 2022, we will recover. But of course, there will be inflation in 2023, which will remain a drag on the gross margin. So the gross margin impact of inflation will be less than it was last year, but in comparison to 2021, you will still see a bit of a drag on the gross margin.

Peter Wennink, CEO

Yes. On your sales price you want to include in your models, I mean we guided EUV sales up by 40%, non-EUV by 30%, and then installed base with 5%. That's where you need to adjust your model, and if you come to a different outcome, then something went wrong in your calculation.

Roger Dassen, CFO

For those who weren't carefully listening, what that really means in terms of ASP for EUV, we previously looked at €160 million. We've mentioned €165 million to recognize the increased functionality, and I think, with the increases due to inflation, it's good to go somewhere between €165 million and €170 million. On average, I believe that's the right way to go.

Operator, Operator

And our next question comes from the line of C.J. Muse at Evercore ISI.

C.J. Muse, Analyst

Peter, I was hoping you could take a step back and maybe talk about your discussions with customers. Obviously, reducing utilization to clear inventories. But at the same time, given your lead times, you're continuing to have great visibility well beyond 2023. So can you speak to the moving parts there? And I'd love to hear your thoughts on your visibility for 2024.

Peter Wennink, CEO

Good question, C.J. Yes, in the discussion with customers, we concluded that they believe they can see recovery toward the second half of this year. That means that they don't want to risk their strategic investments, which go beyond the first half of 2023, moving into '24 and '25. This is really about mid to long-term discussions. Last year, we kept informing you that the demand significantly exceeded our build capacity, and while that demand did come down, the cumulative demand is still higher than what we can produce. Average expectations on the duration of the inventory downturn are significantly shorter than our lead times. This gives us good visibility into 2024. We have over €40 billion in the backlog, which is almost double the system sales we expect to fulfill this year. Therefore, customer expansion plans on adding capacity by 2024 are still very real. However, this all hinges on the macroeconomic situation, and the question is whether any possible recession will last short. That's the uncertainty.

C.J. Muse, Analyst

As my follow-up, what percentage of EUV bookings in the quarter came from Memory in December? And secondly, how many e-tools do you plan to ship in 2023?

Roger Dassen, CFO

It's roughly 25%-75%. So that's true for both the entire bookings and the EUV tool. In terms of e-tools, that's a very limited number, less than a handful, I would say, C.J.

Operator, Operator

Our next question comes from the line of Didier Scemama of Bank of America.

Didier Scemama, Analyst

Quick clarification, if I may. There seems to be quite a lot of confusion around fast shipments, so maybe Peter or Roger, if you could set the record straight. Number one, is it fair to assume that your calendar year '23 guide does not include any fast shipments, either on revenue or on gross margins? And number two, if that's correct, when do you think you could get clarification from your accountants that this could become the norm? Is that tied to accounting sign-off for 2022 or is it a completely unrelated decision?

Roger Dassen, CFO

Thank you, Didier. Thanks for the question. So what you saw is that we had fast shipments for an amount of €3.1 billion at the end of 2022. The revenue for that will be recorded in 2023. However, we also assume a similar amount will move from '22 to '23 and from '23 to '24. The guidance of over 25% growth over 2022 treats the fast shipment effect as neutral. In terms of changing revenue recognition, pivotal to this is having customers assume the full risk of the tool upon shipment, based on a more limited testing protocol. Those conversations have now started. I can't tell you when that will be done – likely by mid this year. We should have clarity on whether customers are willing to proceed.

Didier Scemama, Analyst

If fast shipments become the norm, is it reasonable to assume that your actual capacity for EUV actually increases by 5 units because you shave off effectively a month of cycle time? So 60 divided by 12, plus whatever deferred from '22 into '23?

Roger Dassen, CFO

I think that's directionally correct. That benefit is reflected in our output for this year, and to the extent we can return to normal cycle time, we could see that increase. Correct.

Operator, Operator

Our next question comes from the line of Francois-Xavier Bouvignies at UBS.

Francois-Xavier Bouvignies, Analyst

Peter, you mentioned that demand is still above what you can produce. In a scenario where there’s a market share shift within your customer base, how do you handle that? If a customer pushes out their order by a couple of quarters, do you keep the slot for them? Or will you reallocate it to another customer who can take it right away?

Peter Wennink, CEO

Let me be very clear. We are capacity constrained. If a customer says, 'Sorry, I want to push it back to 2024,' that slot will be taken by a customer that raises their hand and says, 'Ship it to me.' Customers need to accept that if they push back their order, it will be filled by another customer.

Francois-Xavier Bouvignies, Analyst

That's very clear. My quick follow-up is regarding memory in China. Do you see any pullback in spending on memory there, or do you still see strong demand?

Peter Wennink, CEO

It's not just applicable to China but to all our customers. Planning and executing a new fab takes years. Anything we shipped this year was planned long ago. We have over-demand, and we track that for all customers, including Chinese ones. We haven't seen any acceleration in expenditures because those plans have been there for a long time, but there may be reallocation due to varying demand levels across regions.

Roger Dassen, CFO

Demand from China remains strong. The percentage of China in the backlog was around 18%, and that’s remained stable throughout the quarter.

Operator, Operator

Our next question comes from the line of Krish Sankar at Cowen and Co.

Krish Sankar, Analyst

First, could you give us some color on the breakdown of your backlog between EUV and deep UV, Memory and Logic?

Roger Dassen, CFO

In the backlog, around 25% of EUV is for Memory, around 75% for Logic. Overall, about 55% of the total backlog is EUV.

Krish Sankar, Analyst

And on the topic of fast shipments, do you think customers would still want them if demand slows, or would they prefer you test the tool fully before shipment?

Peter Wennink, CEO

Customers generally want a tool delivered on time rather than the specifics of how it's shipped. We introduced fast shipments due to high demand, and that still applies because our demand is strong. They need the tool at a certain date, and as long as that's met, they will take the tool regardless of the shipment type.

Operator, Operator

And our next question comes from the line of Alexander Duval at Goldman Sachs.

Alexander Duval, Analyst

I wondered if you could update us on how much greater demand is than supply. You previously noted a more than 30% excess demand. Is that still the case?

Peter Wennink, CEO

Currently, the excess demand rate is more like 50%. That number has decreased, but we are still in significantly double-digit territory above our production capacity. There has been a decline, but overall demand is still higher than our ability to fulfill it.

Alexander Duval, Analyst

Regarding OpEx, can you give context on the guidance you provided? What should we assume for full year OpEx, and what are you investing in?

Roger Dassen, CFO

The numbers we provided are a good proxy for the full year. For OpEx, you might model close to 19% for SG&A and R&D combined for the year. We've had significant hiring in Q4 that continues into Q1, and wage increases are kicking in as well. On SG&A, this aligns with company growth. Even as we look at scenarios for 2025 and 2030, we aim to slightly reduce the SG&A percentage of sales. On R&D, we're aggressively advancing on our roadmap, focusing on multiple technology platforms including deep UV and metrology. Our extensive R&D plans are key to our growth opportunities moving forward.

Peter Wennink, CEO

Our relentless focus on innovation and R&D has paid off, creating significant value through our products and expanding our market share. As technology becomes more complex, we will have to continue investing accordingly to meet the challenges of semiconductor manufacturing.

Operator, Operator

And our next question comes from the line of Mehdi Hosseini at SIG.

Mehdi Hosseini, Analyst

Based on your conversations with customers over the past couple of months, have any of your assumptions changed since the Analyst Day?

Peter Wennink, CEO

Customers are addressing short-term challenges and are clear they need to rebalance inventory without impacting their long-term growth trajectory. They are adjusting CapEx plans but still recognize the essential need for lithography systems for long-term growth. We see intensified discussions about the longer-term roadmap with our major customers and their confidence in the semiconductor industry's long-term growth.

Mehdi Hosseini, Analyst

Regarding your calendar year '23 outlook, if non-EUV revenue is growing by 30%, how should we view the mix of metrology and inspection?

Peter Wennink, CEO

That growth is inclusive of metrology and inspection. You should consider that while project growth for deep UV will be strong, the relationship with metrology tools is solid.

Amit Harchandani, Analyst

Could you discuss the DUV drivers, your confidence level regarding demand, and the level of discussions around lagging edge? Also, reverse engineering your 30% guide seems to suggest you'll get close to the 375 capacity number you mentioned.

Peter Wennink, CEO

The most significant shortage is in deep UV, and there is an ongoing backlog of planned investments from customers that we are now fulfilling. The gap in deep UV demand is substantial, especially in regions where we cannot supply EUV. The combination of EUV sales increasing and the need for deep UV layers for chip manufacturing supports continued strong demand in that area.

Amit Harchandani, Analyst

On the gross margin evolution, would the average ASP increase over 2023 be influenced by the factors discussed earlier?

Roger Dassen, CFO

The gross margin has many moving parts. Inflation will continue to impact both cost and recovery. While fast shipments will no longer drag on gross margin as they did last year, the mix from the deep UV business is slightly negative due to increased dry business. The installed base's growth is slower, particularly in the upgrade area. Additionally, we incur considerable costs in preparations for high-NA capacity. Thus, when putting it all together, we expect only a slight improvement in gross margin compared to last year.

Sandeep Deshpande, Analyst

Does the €3.1 billion of fast shipments impact gross margin, or is it neutral?

Roger Dassen, CFO

If we indeed see a similar number coming into the year and leaving the year, then the impact on gross margin will be neutral. Although, a change in revenue recognition could be a potential plus for gross margins, but we are not planning on that at this time.

Skip Miller, Vice President of Investor Relations

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, Operator

Thank you. This concludes the ASML 2022 Fourth Quarter and Full Year Financial Results Conference Call. Thank you for participating. You may now disconnect.