Earnings Call Transcript - ASML Q1 2022

Operator, Operator

Thank you for joining us. Welcome to the ASML Q1 2022 Financial Results Call. During this introduction, all participants will be in listen-only mode. Following ASML’s introduction, there will be a chance for questions. I will now hand the call over to Mr. Skip Miller. Please proceed.

Skip Miller, Vice President of Investor Relations

All right. 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 first quarter results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received. This call is also being broadcast live over the internet at asml.com. A transcript of management’s opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I’d like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today’s press release and presentation found on our website at asml.com and in ASML’s Annual Report on Form 20-F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wennink for a brief introduction.

Peter Wennink, CEO

Thank you, Skip. Welcome, everyone, and thank you for joining us for our first quarter 2022 results conference call. I hope all of you and your family are still healthy and safe. And before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the first quarter 2022, as well as provide our view of the coming quarters. And Roger will start with a review of our first quarter 2022 financial performance, with some added comments on the 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, if you will?

Roger Dassen, CFO

Thank you, Peter. Welcome, everyone. I will first review the first quarter financial accomplishments and then provide guidance on the second quarter of 2022. Net sales came in at €3.5 billion, which is at the high end of guidance. We shipped 9 EUV systems and recognized €591 million revenue from three systems this quarter. Net system sales of €2.3 billion, which was nicely balanced between logic at 50% and 50% from memory. Installed Base Management sales for the quarter came in at €1.2 billion, as guided. Gross margin for the quarter came in at the guidance of 49.0%. On operating expenses, R&D expenses came in at €739 million, and SG&A expenses at €208 million. R&D was below guidance, as fund rates in the quarter were lower than planned and will move to Q2. We still expect to be around 14% of sales for the year. Net income in Q1 was €695 million, representing 19.7% of net sales and resulting in an EPS of €1.73. Turning to the balance sheet. We ended the first quarter with cash, cash equivalents, and short-term investments at a level of €4.7 billion. Moving to the order book, Q1 net system bookings came in at €7.0 billion, including €2.5 billion for 0.33 EUV NA systems and multiple EUV 0.55 NA system, EXE:5200. Another very strong DPV order intake of €4.5 billion this quarter, reflecting the continued strong demand for advanced and mature nodes. Total net system bookings were driven by logic with 66% of the bookings and memory accounting for the remaining 34%. With that, I would like to turn to our expectations for the second quarter of 2022. We expect Q2 total net sales to be between €5.1 billion and €5.3 billion. This excludes around €800 million of net delayed revenue for Q2 as a result of more fast shipments at the end of Q2 than at the end of Q1. We expect our Q2 installed base management sales to be around €1.2 billion. Gross margin for Q2 is expected to be between 49% and 50%. Relative to last quarter, we expect a positive margin impact from higher volume for both EUV and DPV, offset by lower EUV ASP, DPV mix, and continued cost pressure in the quarter. The expected R&D expenses for Q2 are around €790 million and SG&A is expected to come in at around €220 million. In the current environment, it is also appropriate to address how we may be impacted by rising costs this year. We're not immune to rising costs. There is pressure on labor costs as the global job market for engineers is tight, and there is competition for talent. Costs related to components in the supply chain are also increasing due to higher material costs, including additional fees to secure parts. Transportation costs have increased due to rising fuel costs and changing flight routes. Energy contracts and renewable energy help limit the increased energy cost impacts. We clearly see pressure on margins due to these cost increases, which we expect to translate roughly to a 1% impact on gross margin for the full year 2022. We expect the second half of the year to be strong with expected gross margins of around 54%, primarily driven by higher EUV and DPV volume as well as improved margin from the installed base business. In summary, we currently expect gross margin to be closer to 52% for the year. Our estimated 2022 annualized effective tax rate is expected to be between 15% and 16%. In Q1 2022, ASML acquired 3.6 million shares for a total amount of around €2.1 billion as part of our current program. With that, I would like to turn the call back over to Peter.

Peter Wennink, CEO

Thank you, Roger. As Roger has highlighted, revenue and profitability for the quarter came in as guided with system revenue balanced between logic and memory. We expect a step-up in sales in Q2 as revenue from fast shipments in Q1 will be recognized. While supply chain challenges are still present, we will continue to utilize fast shipments as a means to get systems to customers as soon as possible. Although the current macroeconomic environment creates uncertainty, we believe the fundamental growth drivers remain intact. We continue to see unprecedented customer demand across all market segments from both advanced and mature nodes, driving demand across our entire product portfolio. We are running at maximum capacity and expect demand to exceed supply well into next year. Our view of the full year revenue, therefore, remains unchanged with year-on-year growth of around 20% over 2021. As mentioned last quarter, this 20% sales growth does not include the full shipment value of systems out for this year due to a number of fast shipments, which will result in delayed revenue into 2023. For our EUV business, we still expect to ship around 55 systems this year. And as we plan to do fast shipments on a number of these systems, including systems in Q4, we expect some revenue to be deferred to 2023. This translates to an expected system revenue of around €7.8 billion this year. In our deep UV and applications business, we expect significant growth in both immersion and dry systems, as well as continued demand for metrology and inspection systems. In addition to advanced nodes, we see growing demand for deep UV systems supporting mature market segments, such as analog, power, and sensors. These market segments are part of the secular growth drivers in support of digital infrastructure, which includes automotive and green energy applications. We expect revenue growth of over 20% for non-EUV system revenue. For the Installed Base Management business, service revenue will continue to scale with the growing installed base of systems. Customers continue to look at all methods to add wafer capacity, including productivity upgrades. In these times of very high fab utilization, some of these upgrades are hardware-intensive and require systems to be taken offline for installation. Therefore, available system time will dictate their ability to install these types of upgrades. As we mentioned in previous quarters, the quickest way to add wafer capacity is to install software productivity packages. These upgrades require less system downtime and have now been installed in most of our customer fabs. We currently expect 2022 installed base revenue to be up around 10% year-on-year. Looking at the market segments in 2022, our view on growth is similar to last quarter. We still expect logic system revenue to be up more than 20% year-on-year, and memory system revenue to be up around 25% year-on-year. On High-NA EUV, we're making good progress. And we have currently started the integration of the first High-NA system in our new clean room in Veldhoven. We received multiple orders for our EXE:5200 system in Q1. We also received additional EXE:5200 orders this month, April. With these bookings, we now have High-NA orders with three Logic and two Memory customers. The EXE:5200 is ASML's next model High-NA system and will provide the next step for lithography performance and productivity. The global market trends that we talked about at our Investor Day last year are broadening the application space and providing secular growth drivers for future demand. The strong demand this year and beyond is reflected in the significant bookings over the past several quarters, resulting in a backlog of around €29 billion, which is an all-time high. We expect the strong order intake to continue as demand will continue to exceed supply also going well into next year. With multiple countries pursuing technological sovereignty, we are now seeing a number of announcements from customers for new fabs in the coming years in support of this global trend. These announced investments are expected to have a positive impact on medium-term demand. As this unprecedented demand is exceeding our capacity, ASML and its supply chain partners are planning to actively add capacity to meet future customer demand, as communicated during Investor Day last year. But at that time, we talked about the current capacity ramp is expected to deliver an output capability of over 70 EUV, 0.33 NA systems and around 375 deep UV systems by 2025. As mentioned last quarter, we see a need to further increase our output beyond this level in order to meet the stronger and longer market demand to support an industry that is expected to at least double by 2030. With the goal of adding more capacity, we're investigating the feasibility of increasing our annual capacity by 2025 to around 90 EUV 0.33 NA systems and 600 deep UV systems. For deep UV, we're planning to increase capacity for both immersion and dry, with a heavier weighting towards dry. We're also discussing with our supply chain partners to secure a capacity of around 20 EUV 0.55 High-NA systems in the medium term. Bear in mind that this translates to what we currently feel our maximum capacity goal should be and may therefore not be a final output plan. We discussed our goal recently with our supply chain partners and asked them to come back in the coming quarters, with confirmation on the feasibility of our request. Once we complete this analysis, we also expect to revisit our 2025 scenarios and growth opportunities beyond 2025. We plan to provide an update to the capital markets in the Q4 time frame. It is clearly a dynamic, challenging, but also exciting period in our industry, and it only increases our confidence in our long-term growth opportunity. And with that, we'd be happy to take your questions.

Skip Miller, Vice President of Investor Relations

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 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?

Operator, Operator

Thank you. We will now start the question-and-answer session. Robert Sanders from Deutsche Bank, you may go ahead. Your line is open.

Robert Sanders, Analyst

Hi, everyone. Thank you for taking my question. I wanted to ask about the backlog for DUV tools. Based on some simple calculations, it seems that your backlog for DUV is around 500 tools, while you’re shipping about 60 tools per quarter for DUV. Does this imply that the waiting period for DUV tools is currently over two years? Additionally, regarding your plans to increase DUV capacity, what would be your target for reducing that waiting time? Would you hope to get it back down to nine months in an ideal situation, or do you think we are facing a new reality where the backlog might remain for a considerable time?

Peter Wennink, CEO

Yes, two good questions, Rob. One, the DPV backlog is quite significant. You mentioned 500; it's actually a bit more. We're currently shipping around 60 units, but it's important to understand that we're increasing our shipping capability. Although we're not yet at the 600 units we mentioned, we expect to boost deep UV shipments this year and next year because we're making significant improvements in cycle time reduction and process efficiency. I believe that number will increase, so it won't remain stable. However, if you're looking to order a deep UV tool now, you'll be waiting until the second half of next year. This is due to the fact that the purchase order lead time is no longer relevant; it's about capacity lead time. We need to expand our capacity to fulfill more orders, and we anticipate that it will take at least two more years to increase our capacity by 20% to 25%. After that, we hope to return to a nine-month or shorter purchase order lead time. This is also why we currently see demand in deep UV, but we can only fulfill about 60% of that demand this year, constrained by our maximum capacity. Anything beyond that is truly a matter of capacity lead time, not just order time.

Robert Sanders, Analyst

Got it. Just a quick follow-up to that. I'm assuming suppliers will want prepayments guarantees in order to build more capacity for you guys. And they may look for higher pricing. But so should we think about pricing of individual tools going up on top of the inflation that we're seeing from the various different cost drivers just from the fact that suppliers will want some kind of guarantee from you guys that you'll take delivery?

Peter Wennink, CEO

Yes, it's always the case that when we need to add capacity in the supply chain, we have a strong argument for suppliers that this industry is set to grow. As I mentioned earlier, we believe there is a very good chance that our customers’ industry will more than double by the end of the decade, which means we will need additional capacity, a notion agreed upon by our suppliers. While we do want to support our suppliers, sometimes their financial limitations could arise, and we might step in to assist, as we've done in the past. This situation isn’t a major concern, but it’s about ensuring prompt execution. Generally, our suppliers are large enough to fund their own capital expenditures, so I don't foresee this being a significant problem. Regarding pricing, I believe the cost increases we've observed are primarily short-term. We follow a value pricing model rather than a cost-plus approach. However, the value of the wafers produced by our customers will also increase over time, which will be influenced by these cost increases. Consequently, going forward, our value pricing strategy will adjust the prices charged to our customers. This isn't just a short-term situation; it's intricately linked to the next 12 to 24 months, as we will see new volume purchase agreements reflecting these changes when the current ones expire.

Operator, Operator

Thank you. And apologies for the issue earlier. We are now able to go back to the line of Robert Sanders at Deutsche Bank. So, please go ahead. Your line is open.

Peter Wennink, CEO

Oh, no. Hi, Rob. Do you hear us Rob? Operator, we can’t hear him.

Robert Sanders, Analyst

Hello. Can you hear me?

Operator, Operator

Yes. We can hear you.

Skip Miller, Vice President of Investor Relations

Yes. We can, yes.

Peter Wennink, CEO

Yes. Finally.

Robert Sanders, Analyst

Hi, thanks for taking my question. I'm curious about the backlog for DUV tools. From what I can gather, it seems that your backlog for DUV is around 500 tools, while you are currently shipping about 60 tools each quarter. Does this mean that the wait time for a DUV tool is now over two years? Additionally, as you consider increasing DUV capacity, what would your ideal wait time be? Would you aim to reduce it back to nine months, or is there a new reality where the backlog will remain extended for a longer period?

Peter Wennink, CEO

Yes. You asked two good questions. The DPV backlog is quite significant, and while you mentioned it being around 500, it's actually a bit more. We are shipping about 60 units, but it's important to note that we are increasing our shipping capacity. Although we're not at the 600 units we previously mentioned, we expect to boost deep UV shipments this year and next due to our efforts in reducing cycle time and improving process efficiency. That number should increase, so it won't remain stable. However, if you're looking for a deep UV tool now, you'll likely need to wait until the second half of next year. This is because the lead-time for purchase orders is no longer relevant; what's crucial is the capacity lead-time. We need to build capacity to meet demand, which we estimate will require about two more years to achieve a capacity increase of 20% to 25%. After that, we hope to return to around nine months for purchase order lead-times. Currently, we can only fulfill about 60% of the deep UV demand due to our maximum capacity. Anything beyond that is related to capacity lead-time, not purchase order lead-time.

Robert Sanders, Analyst

Got it. Just a quick follow-up to that. I'm assuming suppliers will want prepayments guarantees in order to build more capacity for you guys. And they may look for higher pricing. But so should we think about pricing of individual tools going up on top of the inflation that we're seeing from the various different cost drivers just from the fact that suppliers will want some kind of guarantee from you guys that you'll take delivery?

Peter Wennink, CEO

Yes. It's always the case when you approach the supply base to increase capacity. We have a strong case to present to them about the growth potential in this industry. As mentioned earlier, we believe there's a significant chance that our customers' industry will more than double by the end of the decade, which means we will need additional capacity, something that all suppliers acknowledge. If we are to support suppliers, sometimes we may need to assist with financial constraints they face, similar to what we’ve done in the past. This is not a major concern, and while it does involve some risks, it is important for ensuring swift execution. Generally, our suppliers are sufficiently sized to manage their capital expenditures, so I don’t foresee this being a significant issue. Regarding pricing, the cost increases we are experiencing are largely temporary. We employ value-based pricing rather than a cost-plus model. Over time, the value of the wafers produced by our customers will increase, reflecting those cost increases. Consequently, this will affect our pricing for customers moving forward. While this is not an immediate concern, we expect that as the existing volume purchase agreements expire in the next 12 to 24 months, new agreements will incorporate these changes.

Operator, Operator

Thank you. And apologies for the issue earlier. We are now able to go back to the line of Robert Sanders at Deutsche Bank. So, please go ahead. Your line is open.

Peter Wennink, CEO

Oh, no. Hi, Rob. Do you hear us Rob? Operator, we can’t hear him.

Robert Sanders, Analyst

Hello. Can you hear me?

Operator, Operator

Yes. We can hear you.

Skip Miller, Vice President of Investor Relations

Yes. We can, yes.

Peter Wennink, CEO

Yes. Finally.

Robert Sanders, Analyst

Hi, everyone. Thanks for taking my question. I wanted to ask about the backlog for DUV tools. It seems like your backlog for DUV is around 500 tools, while you're shipping about 60 tools per quarter. Does that imply that the wait time for a DUV tool is currently over two years? Additionally, as you consider increasing your DUV capacity, what would you like the wait time to return to? Would you prefer it to go back to nine months in an ideal situation, or is the new normal likely to have a prolonged backlog?

Peter Wennink, CEO

Yes, two good questions, Rob. The DPV backlog is indeed significant. You mentioned 500; it's actually a bit more than that. We're currently shipping around 60 units, but it's important to note that we are enhancing our shipment capacity. While we haven't reached the 600 units we discussed, we will be able to increase deep UV shipments throughout this year and next year. This is due to our efforts in reducing cycle time and improving process efficiency. I expect that number to rise, so it won't remain stable. However, you are correct that if you were to request a deep UV tool now, you would be looking at the second half of next year. The key factor here is that the purchase order lead-time has become irrelevant; it's now about capacity lead-time. We need to build our capacity to fulfill more orders, which could take at least two years, with an expected increase of about 20%-25%. After that, we might return to a nine-month or less purchase order lead-time. This situation also explains why we currently see demand for deep UV while we can only ship about 60% of that demand this year. Our shipping capability is capped by maximum capacity, and anything beyond that is related to capacity lead-time.

Robert Sanders, Analyst

Got it. Just a quick follow-up to that. I'm assuming suppliers will want prepayments guarantees in order to build more capacity for you guys. And they may look for higher pricing. But so should we think about pricing of individual tools going up on top of the inflation that we're seeing from the various different cost drivers just from the fact that suppliers will want some kind of guarantee from you guys that you'll take delivery?

Peter Wennink, CEO

Yes, it's always been necessary to approach the supply base when we need to add capacity. We have a strong case to present to them about the expected growth in this industry. As mentioned in the prepared remarks, we believe there is a solid chance that our customers' industry will more than double by the end of the decade, which means we will need more capacity, something they all acknowledge. If we are going to assist suppliers, it may depend on their financial capabilities or any financial limitations they might encounter, and we might need to intervene as we've done previously, although this is not a significant concern. While it doesn't eliminate risk, it can help ensure quicker execution. Generally, our suppliers are large enough to manage their capital expenditures on their own, so I don’t anticipate this being a major issue. Regarding pricing, the cost increases we have observed are primarily short-term. We implement value pricing rather than simply adding costs to our services. Moreover, the value of the wafers produced by our customers will increase over time, making the cost rise part of that dynamic. This means that going forward, value pricing will result in different pricing structures for our customers. Everything is interconnected, not just in the short term, but certainly over the next 12 to 24 months as existing volume purchase agreements expire, and we will have new agreements in place that reflect these changes.

Operator, Operator

Thank you. And apologies for the issue earlier. We are now able to go back to the line of Robert Sanders at Deutsche Bank. So, please go ahead. Your line is open.

Peter Wennink, CEO

Oh, no. Hi, Rob. Do you hear us Rob? Operator, we can’t hear him.

Robert Sanders, Analyst

Hello. Can you hear me?

Operator, Operator

Yes. We can hear you.

Skip Miller, Vice President of Investor Relations

Yes. We can, yes.

Peter Wennink, CEO

Yes. Finally.

Robert Sanders, Analyst

Hello everyone, and thank you for taking my question. I'm inquiring about the backlog for DUV tools. From my calculations, it seems your backlog for DUV tools is approximately 500 units, while you're currently shipping about 60 units per quarter. Does this indicate that the waiting period for DUV tools exceeds two years? Additionally, as you consider expanding DUV capacity, what is your ideal target for reducing that waiting time? Would you aim to bring it back down to nine months in an ideal scenario, or do you think there’s a new normal where the backlog might remain extended for a significant time?

Peter Wennink, CEO

Yes, those are two important questions, Rob. The DPV backlog is significant. You mentioned 500; it's actually a bit more than that. We are currently shipping around 60 units, but it's important to understand that we are working to increase our shipping capacity. While we haven't reached the 600 units we previously discussed, we expect to increase deep UV shipments throughout this year and next year. This is primarily due to our efforts to reduce cycle times and improve process efficiency. I anticipate that our shipment numbers will rise, so they won't remain static. However, you're correct that if you want a deep UV tool right now, your wait will extend into the second half of next year. This is because the lead time for purchase orders is no longer relevant; it’s all about capacity lead-time. We need to build our capacity to fulfill more orders, and we estimate that it will take at least another two years to increase capacity by 20% to 25%. Once we achieve that, we expect to return to a lead-time of nine months or less for purchase orders. This situation also explains why, despite the current demand for deep UV tools, we can only fulfill about 60% of that demand this year due to our maximum capacity. Anything exceeding that is indeed a matter of capacity lead-time.

Robert Sanders, Analyst

Got it. Just a quick follow-up to that. I'm assuming suppliers will want prepayments guarantees in order to build more capacity for you guys. And they may look for higher pricing. But so should we think about pricing of individual tools going up on top of the inflation that we're seeing from the various different cost drivers just from the fact that suppliers will want some kind of guarantee from you guys that you'll take delivery?

Peter Wennink, CEO

Yes. It's always been the case that when we need to add capacity from our suppliers, there's a solid argument to make regarding industry growth. As I mentioned earlier, we believe there's a strong likelihood that our customers' industry will more than double by the end of the decade, which means we'll need more capacity, and our suppliers are in agreement. If we can assist suppliers, which is certainly a possibility, it might be due to their financial constraints, and we may need to step in as we've done previously. This isn’t a significant concern, though it does carry some risk, as it’s important to ensure timely execution. However, our suppliers are generally capable of covering their own capital expenditures, so I don't foresee this being a major issue. Regarding pricing, the cost increases we’re experiencing are primarily short-term. We implement value-based pricing rather than simply cost-plus pricing. Over time, the value of the wafers our customers produce will also increase, which will be tied to those cost increases. Hence, moving forward, value pricing will result in new pricing structures for our customers. This connection isn't just a short-term perspective; over the next 12 to 24 months, as the current volume purchase agreements expire, new agreements will reflect these changes.

Operator, Operator

Thank you. And apologies for the issue earlier. We are now able to go back to the line of Robert Sanders at Deutsche Bank. So, please go ahead. Your line is open.

Peter Wennink, CEO

Oh, no. Hi, Rob. Do you hear us Rob? Operator, we can’t hear him.

Robert Sanders, Analyst

Hello. Can you hear me?

Operator, Operator

Yes. We can hear you.

Skip Miller, Vice President of Investor Relations

Yes. We can, yes.

Peter Wennink, CEO

Yes. Finally.

Robert Sanders, Analyst

Hi, thanks for taking the question. I'm curious about the backlog for DUV tools. If I do some simple math, it appears that your backlog for DUV tools is around 500 units, while you're shipping about 60 units per quarter. Does this suggest that the wait time for a DUV tool is now more than two years? Additionally, as you consider increasing your DUV capacity, what would you like the wait time to return to? Would you aim for nine months in an ideal scenario, or do you think the backlog will remain extended for a significant period?

Peter Wennink, CEO

Yes. Those are two important questions, Rob. First, the DPV backlog is indeed substantial. You mentioned 500; it's actually a bit more than that. We are currently shipping around 60 units, but it's important to note that we are working to enhance our shipping capabilities. Although we haven’t reached the target of 600 units yet, we expect to increase deep UV shipments throughout this year and into next year. This is because we are making significant efforts to reduce cycle time and improve process efficiency. I believe that shipment numbers will rise, so stability is not expected. That said, you are correct. If you were to order a deep UV tool today, you would likely wait until the second half of next year. The lead time for purchase orders is no longer the primary concern; instead, it’s all about production capacity. We need to expand our capacity to fulfill more orders, which suggests it might take about two more years to increase our capacity by 20% to 25%. Once we achieve that, we expect to return to around nine months or less for purchase order lead times. Currently, we can only meet about 60% of the deep UV demand due to our maximum capacity constraints. Anything beyond that is indeed limited by capacity lead time, not the purchase order lead time.

Robert Sanders, Analyst

Got it. Just a quick follow-up to that. I'm assuming suppliers will want prepayments guarantees in order to build more capacity for you guys. And they may look for higher pricing. But so should we think about pricing of individual tools going up on top of the inflation that we're seeing from the various different cost drivers just from the fact that suppliers will want some kind of guarantee from you guys that you'll take delivery?

Peter Wennink, CEO

Yes, it's always essential to approach the supply base when we need to expand capacity. We believe we have a strong case to present to them that this industry is set for significant growth. As mentioned earlier, we anticipate that our customers' industry could more than double by the end of the decade. If that happens, we will require additional capacity, and the suppliers acknowledge this. While we aim to assist suppliers, some may encounter financial limitations or ceilings, which we can help address, as we've done before. This isn't a significant concern, but it does ensure faster execution. Generally, our suppliers are substantial enough to manage their capital expenditures, so I don't foresee this being a major issue. Regarding pricing, the cost increases we've experienced are primarily short-term. We utilize value pricing rather than a simple cost-plus approach. Over time, the value of the wafers produced by our customers will increase, which will correspond with the cost increases. Consequently, this means that our value pricing will influence the prices we charge our customers moving forward. This connection isn't limited to the short term; over the next 12 to 24 months, as existing volume purchase agreements expire, new agreements will reflect these changes.

Operator, Operator

Thank you. And apologies for the issue earlier. We are now able to go back to the line of Robert Sanders at Deutsche Bank. So, please go ahead. Your line is open.

Peter Wennink, CEO

Oh, no. Hi, Rob. Do you hear us Rob? Operator, we can’t hear him.

Robert Sanders, Analyst

Hello. Can you hear me?

Operator, Operator

Yes. We can hear you.

Skip Miller, Vice President of Investor Relations

Yes. We can, yes.

Peter Wennink, CEO

Yes. Finally.

Robert Sanders, Analyst

Hi, everyone. Thank you for taking my question. I want to ask about the backlog for DUV tools. From what I've calculated, it appears that the backlog for DUV tools is approximately 500 units, while you're currently shipping about 60 tools each quarter. Does this suggest that the waiting period for a DUV tool is now more than two years? Additionally, as you consider increasing your DUV capacity, what is your target for reducing that waiting time? Would you ideally like to see it return to nine months, or do you believe there’s a new norm where the backlog could remain extended for a considerable time?

Peter Wennink, CEO

Yes. Two good questions, Rob. One, the DPV backlog is quite significant. You mentioned 500; actually it’s a little bit more. We're shipping around 60 units, but you have to realize that we are increasing our shipment capability. Although we are not at the 600 units as we mentioned, we will be able to increase more deep UV shipments throughout this year and next year because we are focused on cycle time reduction and process efficiency. I think that number will go up, so it will not be stable. You are correct that if you wanted a deep UV tool now, you'd have to wait until the second half of next year. The reason for this is that the purchase order lead-time is irrelevant at this point; it’s about capacity lead-time. We need to build capacity to increase the output, which will take at least another two years to improve by 20% to 25%. After that, we can return to a lead-time of around nine months or less. This is also why the current demand we see in deep UV can only meet about 60% of what we can ship this year, as it is driven by our maximum capacity. Anything beyond that is indeed related to capacity lead-time, not just the order time.

Operator, Operator

Thank you. And apologies for the issue earlier. We are now able to go back to the line of Robert Sanders at Deutsche Bank. So, please go ahead. Your line is open.

Peter Wennink, CEO

Oh, no. Hi, Rob. Do you hear us Rob? Operator, we can’t hear him.

Robert Sanders, Analyst

Hello. Can you hear me?

Operator, Operator

Yes. We can hear you.

Skip Miller, Vice President of Investor Relations

Yes. We can, yes.

Peter Wennink, CEO

Yes. Finally.

Robert Sanders, Analyst

Hi, everyone. Thanks for taking my question. I wanted to ask about the backlog for DUV tools. From what I see, it seems that the backlog for DUV is around 500 tools, while you're shipping approximately 60 tools per quarter. Does this imply that the wait time for DUV tools is currently over two years? Additionally, as you consider increasing DUV capacity, what would your ideal wait time be? Would you aim to bring it back down to nine months, or do you think there will be a new normal with extended backlogs for some time?

Peter Wennink, CEO

Yes, there are two important points to address. First, the backlog for deep UV tools is indeed substantial, and it's actually a bit more than 500 units. Currently, we are shipping about 60 units, but it's important to note that we are working on enhancing our shipping capabilities. While we haven't reached the 600 units we previously mentioned, we are focused on increasing our deep UV shipments throughout this year and next. This effort is driven by our commitment to reducing cycle times and improving process efficiency, which should lead to an increase in our shipment numbers. Consequently, the situation will not remain static. However, if you want to acquire a deep UV tool now, you will likely have to wait until the second half of next year. This is because the lead-time for purchase orders is less relevant at this point; what matters is our capacity lead-time. To increase our supply, we need to build out more capacity, which we believe will take at least two more years, ultimately allowing us to return to a lead-time of nine months or less for purchase orders. Currently, we are only able to fulfill about 60% of the deep UV demand due to our maximum capacity, and any additional demand beyond that is contingent on our capacity lead-time.