Earnings Call Transcript
ASML HOLDING NV (ASML)
Earnings Call Transcript - ASML Q1 2023
Operator, Operator
Good day, and thank you for standing by. Welcome to the ASML 2023 First Quarter Financial Results Conference Call on April 19, 2023. At this time, all participants are in a listen-only mode. After the speakers' introduction, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference call over to Mr. Skip Miller. Please go ahead.
Skip Miller, Vice President, Investor Relations
Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President, 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 2023 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, and welcome, everyone, and thank you for joining us for our first quarter 2023 results conference call. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the first quarter 2023, as well as provide our view of the coming quarters, and Roger will start with a review of our first quarter 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, if you want?
Roger Dassen, CFO
Thank you, Peter; and welcome, everyone. I will first review the first quarter financial accomplishments and then provide guidance on the second quarter of 2023. Let me start with our first quarter accomplishments. Net sales came in at €6.7 billion, which was above our guidance due to higher than expected EUV and Deep UV revenue from faster installation and earlier acceptance of systems in the quarter. We shipped 9 EUV systems and recognized €2.9 billion revenue from 17 systems this quarter. Net system sales were at €5.3 billion, which was again driven by logic at 70% with the remaining 30% coming from memory. Installed Base Management sales for the quarter came in at €1.4 billion, which was lower than guided due to less upgrade revenue. Gross margin for the quarter came in at 50.6%, which is above our guidance, primarily driven by additional EUV and Deep UV immersion revenue in the quarter, which more than outweighed the impact of lower-than-expected upgrade business. On operating expenses, R&D expenses came in at €948 million, which was below our guidance, primarily due to exchange rate effects and some one-offs. SG&A expenses were €260 million, also lower-than-guided, primarily due to lower IT spending and timing of headcount additions. Net income in Q1 was €2 billion, representing 29% of net sales and resulting in an EPS of €4.96. Turning to the balance sheet. We ended the first quarter with cash, cash equivalents and short-term investments at a level of €6.7 billion. Moving to the order book, Q1 net system bookings came in at €3.8 billion, which is made up of €1.6 billion for EUV bookings and €2.2 billion for non-EUV bookings. These values also include inflation corrections. Net system bookings in the quarter were driven by logic with 79% of the bookings, while memory accounted for the remaining 21%. Bookings are lower than in previous quarters, which is not unexpected given the current environment, particularly taking into account our backlog at the end of Q1 of around €39 billion, which is almost 2x this year's system sales. With that, I would like to turn to our expectations for the second quarter of 2023. We expect Q2 net sales to be between €6.5 billion and €7 billion. We expect our Q2 Installed Base Management sales to be around €1.3 billion. Gross margin for Q2 is expected to be between 50% and 51%. The expected R&D expenses for Q2 are around €990 million, and SG&A is expected to be around €275 million. The higher R&D guidance is primarily due to investments in support of our continuous innovation as we further extend our product roadmaps and improve our installed base performance. Higher SG&A is mainly due to additional headcount and associated infrastructure support. Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%. In Q1, ASML paid a quarterly interim dividend of €1.37 per ordinary share. Recognizing the three interim dividends of €1.37 per ordinary share each paid in 2022 and 2023, this leads to a final dividend proposal to the General Meeting of €1.69 per ordinary share. This will result in a total dividend for the year 2022 of €5.80 per ordinary share, which is a 5.5% increase compared to 2021. In Q1 2023, we purchased around 0.7 million shares for a total amount of around €400 million. In the current uncertain market environment, it is prudent that we continue to manage higher levels of cash as the entire value chain will likely create some pressure on our free cash flow. With that, I would like to turn the call back over to Peter.
Peter Wennink, CEO
Thank you, Roger. As Roger has highlighted, we had a good first quarter above our guidance in a very dynamic environment and there continues to be a lot of uncertainty in the market due to a number of global macro concerns around inflation, rising interest rates, recession and the geopolitical environment, including export controls. Customers continue to see demand weakness in consumer-driven end markets, causing the industry to actively reduce inventory and lower the utilization of their production base, while demand in other end markets, such as automotive and industrial, remains relatively strong. Specifically, memory customers are more aggressively lowering CapEx and are limiting wafer output to reduce inventory to more healthy levels. Logic customers are also moderating wafer output for some market segments, while demand continues to be strong in other markets, especially in markets requiring more mature nodes. Despite this, both logic and memory customers are still following their technology roadmaps and continue making strategic technology investments. As a result of this market dynamic, we do see customers making adjustments to demand timing relative to last quarter. However, we also see other customers more than willing to absorb this demand change, particularly in Deep UV. For example, domestic customers focusing on mid-critical and mature applications, which make up over 20% of our backlog at the end of Q1, are now expected to grow to a similar allocation of our system revenue this year. After taking these demand adjustments over the quarter into account, our system demand still exceeds our capacity for this year, albeit by a smaller margin than in the last quarter and as a reference, during 2022, the demand for Deep UV was 50% higher than our build capacity, while this gradually reduced from 30% at the end of Q4 2022 to 20% at the end of Q1 2023. As Roger mentioned, we saw orders moderate in Q1 after several quarters of very strong bookings. A moderation in the rate at which customers are adding orders is to be expected in the current environment, especially considering the long period in which our backlog can cover shipments, which extends well beyond our normal order lead times. With regard to our total system capacity, we are still planning to ship around 60 EUV systems and around 375 Deep UV systems in 2023, with around 25% of the Deep UV systems being immersion. We currently see no change in our full year outlook as provided last quarter. As a reminder, we expect EUV business growth to be around 40% over 2022 and non-EUV business growth of around 30%. For the Installed Base business, we still expect year-over-year revenue growth of around 5%. And, in summary, based on our view today, we continue to expect a year of strong growth with a net sales increase of over 25% and a slight improvement in gross margin. To summarize, our short to medium term business outlook is still very strong, supported by a backlog that represents almost two years of tool shipments continuously pushing our output capacity to the maximum and further underpinning our plan to expand our capacity. On the geopolitical front, as it relates to export controls, we're still waiting for the Dutch government to publish further details on the export control restrictions. These new export controls focus on advanced chip manufacturing technology. Due to these upcoming regulations, ASML will need to apply for export licenses for shipments of the most advanced immersion Deep UV systems. And, as we've said earlier, we interpret most advanced to pertain to TWINSCAN NXT controls to be translated into legislation and take effect. Based on the announcement last month, our expectation of the Dutch government's licensing policy, the current market developments and the way we model our longer-term scenarios, we do not expect a material effect on our 2023 financial outlook, or on our longer-term scenarios as announced during our Investor Day in November last year. And despite the clear shorter-term cyclical concerns, the longer-term global megatrends we talked about at the Investor Day are broadening the application space and fueling demand for advanced and mature nodes. Secular growth drivers in semiconductor end markets and increasing lithography intensity on the future technology nodes are driving demand for our products and services. In summary, while there is clear uncertainty in the current environment, our customers' demand for our products continues to exceed supply. We had a good start to the year and based on our view today, we continue to expect another year of strong growth. ASML and its supply chain partners continue to work on the capacity ramp in support of our customers' demand and we remain confident in our long-term growth opportunity. With that, we would be happy to take your questions.
Skip Miller, Vice President, Investor Relations
Thank you, Roger and Peter. The operator will instruct you momentarily on the protocol for the Q&A session. Now, operator, could we have your final instructions and then the first question, please.
Operator, Operator
Thank you. And your first question comes from the line of Krish Sankar from TD Cowen. Please go ahead. Your line is open.
Krish Sankar, Analyst
Yes. Hi. Thanks for taking my question. I have two of them. First one, Roger, I understand your backlog is still pretty healthy, but the order run rate is definitely slowing. So, kind of curious how to think about calendar 2024 relative to 2023? If the order run rate continues to decline, is there a risk that calendar 2024 could be flat to down year for you? And then I had a follow-up for Peter.
Peter Wennink, CEO
Let me address your question about 2024. As we've noted, our backlog is strong, thanks to a significant order intake over the past few quarters. Looking ahead to 2024, we see an increased demand for tool shipments and sales compared to 2023. A large portion of this demand is already booked, although some orders for the latter half of next year still need to be secured. I am confident that these will materialize within this year. While there are uncertainties like inflation, interest rates, and geopolitical issues, we do not anticipate a drastic recession. Our customers are managing the current conditions by carefully reducing inventory and adjusting their utilization rates while preparing for next year's demand, as they are investing in new fabs that require our tools. Though not all orders for 2024 are confirmed yet, our discussions indicate a clear rise in the number of tools needed, driven by technology transitions and our customers' commitment to managing their inventory in a stable macroeconomic environment. This gives us confidence that 2024 will see growth compared to 2023. While I can't specify an exact date for when these orders will come in, I firmly believe they will. This is how we view the outlook moving forward.
Krish Sankar, Analyst
Got it. Very helpful, Peter, and I definitely won't ask for the specific date. And then as a follow-up for either you or Roger, there has been – clearly, the cost of EUV is pretty high and there have been some concerns that EUV intensity could slow down as we go beyond 3 nanometer, already some customers are using a low-cost 3 nanometer version. So, I'm kind of curious, how to think about EUV intensity actually go from 3 to 2-nanometer and beyond? Do you feel comfortable EUV layers are going to increase or do you think it kind of stagnates or saturates? Thank you.
Peter Wennink, CEO
I’ll address that as well. In relation to your long-term roadmap questions, we tried to clarify this during our Capital Markets Day. It was evident there that litho intensity is on the rise, which is largely driven by EUV for two main reasons. First, we anticipate a significant increase in EUV productivity throughout the remainder of this decade. Second, the introduction of High-NA will contribute to this growth as well. We're observing more EUV layers in chip designs, not fewer, indicating an upward trend in EUV intensity. This insight is grounded in extensive discussions with our customers' R&D teams and serves as the foundation for our Capital Markets presentation from last year, which remains applicable today. What we communicated at that time is still relevant.
Krish Sankar, Analyst
Got it. Very clear, Peter. Thank you very much.
Operator, Operator
Thank you. We will now go to our next question. And your next question comes from the line of Francois Bouvignies from UBS. Please go ahead. Your line is open.
Francois-Xavier Bouvignies, Analyst
Hi. Thank you very much. I have two quick questions. The first one is about EUV demand specifically. Peter, you mentioned some delays, but you reaffirmed the full-year guidance. Clearly, your strong backlog is supporting your revenues for 2023, and you've indicated it's significantly more than one full year of revenue. However, as net orders are weakening, how should we interpret the trend in EUV demand for 2024 with the backlog normalizing? Do you still anticipate that EUV shipments will increase in 2024, especially considering your visibility for the next two years regarding EUV? I'm just trying to understand your comments about the delays in relation to EUV demand for 2024 given the long visibility.
Peter Wennink, CEO
Yes. When we discuss a demand pushout, it's important to note that we have previously mentioned that demand significantly exceeds our production capacity. Therefore, we can address demand pushouts without impacting our production capacity, since our capacity is below the demand level. Currently, some of the demand that was expected in 2023 has shifted to 2024. Looking ahead to 2024, we anticipate an increase in our shipments, which is applicable both to our company overall and specifically to EUV. I have already provided reasons for this in response to the first question. This is particularly true for Deep UV as well. We experienced significant over-demand in 2022, and while it has decreased slightly in 2023, the situation remains similar. Demand fluctuations do not necessarily lead to changes in output because our production capacity is considerably limited. This is something to keep in mind. We also consider customer demand based on their expansion plans and their projected production capacity for the following year, which is influenced by their assessment of the current downturn's duration. However, customers currently expect to manage their inventory levels diligently and have reduced utilization to balance supply and demand in the chip sector. This approach suggests a short-term scenario rather than a long-term one, which implies that they are maintaining their 2024 demand levels with us as initially planned. Some of it still needs to be booked, particularly for the latter half of next year. We do need to secure those orders, but I am confident that we will do so, and we are planning for higher unit numbers for both Deep UV and EUV.
Francois-Xavier Bouvignies, Analyst
Great. Thank you, Peter. My follow-up is about China. You mentioned that it constitutes 20% of your backlog, which suggests that 45% of the Deep UV backlog is from China, if my calculations are correct. This indicates a significant share from China in Deep UV. How should we consider the sustainability of this and the potential risks associated with geopolitical factors beyond 2023?
Peter Wennink, CEO
Yes, it's clear that the Chinese market is focused on mid-critical and mature semiconductors, particularly lithography systems. The demand for these semiconductors is substantial. In conversations I've had with a Chinese end customer in the product manufacturing sector, specifically in electric vehicles, it's evident that the production of electric vehicles will require multiple 28 and 45-nanometer fabs, which are currently not available. This need is crucial. Many people underestimate the significant demand in the mid-critical and mature semiconductor markets. This demand will continue to grow, whether in automotive, energy transition, or industrial applications, and will include the sensors needed for AI systems. The mid-critical and mature semiconductor sector plays a vital role here, especially given China's strength in this area. Consequently, it's likely that this could account for 40% to 50% of our Deep UV backlog.
Francois-Xavier Bouvignies, Analyst
Thank you very much, Peter. Yes.
Peter Wennink, CEO
Thanks.
Operator, Operator
Thank you. We will now go to our next question. And your next question comes from the line of Amit Harchandani from Citi. Please go ahead. Your line is open.
Amit Harchandani, Analyst
Thank you. Hello, everyone. This is Amit Harchandani from Citi. I have two questions, if I may. My first question concerns the logic end market. You've mentioned some moderation there, could you provide insights on any changes in discussions with customers? You mentioned they are sticking to their tech roadmaps, but is this consistent across all customers or are there variations? I'd like to understand if there have been any notable changes in the logic end market. My second question pertains to capital allocation. I noticed in the annual report that you indicated your CapEx for this year might be €2.4 billion, which suggests a level of capital intensity higher than in the past, particularly the highest in the last 10 to 15 years that I can recall. Could you clarify if this is due to one-off factors? How should we view capital intensity and broader capital allocation for this year and beyond? Thank you.
Peter Wennink, CEO
Roger will address the second question. Regarding the first question about changes in the logic end markets and their roadmaps, I would say the advanced roadmaps are largely stable. The three roadmaps for the three, two, and sub-2 nanometer technologies are clearly outlined. Only three players are actively pursuing this, and I don't expect those roadmaps to shift. The main feedback from our customers in that area is for us to maintain our commitment to delivering the next generation to align with their introduction schedules. I don't see significant changes there. However, I do notice shifts in the mid-critical and mature systems. In these areas, customers are transitioning from mature to mid-critical levels, and from low-mid-critical to high-mid-critical, indicating a noticeable acceleration in roadmaps. This trend is more apparent in the mature and mid-critical sectors than in the advanced sector. The transition to EUV technology necessitates a significant boost in 20, 28, and 45 nanometer capabilities, presenting substantial opportunities. Consequently, we see the most substantial changes occurring within the logic segment.
Roger Dassen, CFO
Amit, regarding your second question, the €2.4 billion figure you mentioned for the full year aligns well with the approximately €0.6 billion expected for this quarter. The main components of that figure include two key aspects: the preparations for High-NA and the ongoing efforts to increase our capacity to 90 and 600. For High-NA, part of this includes the prototypes we are developing, which will eventually be introduced to the market. As a result, there will be some reversal at a later stage, contributing to the relatively high figure we're seeing this year. Additionally, substantial construction work is happening worldwide to support the capacity expansion we've discussed. Looking at the longer term through 2025, it is reasonable to expect capital expenditures in the range of €1.5 billion to €2 billion, as these will be the years we continue building the capacity previously mentioned.
Amit Harchandani, Analyst
Thank you, gentlemen.
Operator, Operator
Thank you. We will now go to the next question. And the next question comes from the line of Aleksander Peterc from Societe Generale. Please go ahead. Your line is open.
Aleksander Peterc, Analyst
Good afternoon, and thank you for taking my question. My first question is about the systems mix in the second quarter compared to the first quarter. In the first quarter, there was a significant level of EUV recognition. Do you expect a similar mix in the second quarter, or should we anticipate a shift towards more Deep UV in the second half? I have a quick follow-up as well. Thank you.
Roger Dassen, CFO
I think, you're right. I think, EUV was slightly over-represented in the first quarter. So, we've always talked about around 60 shipments for the year, so 17 is relatively higher than what you expect. So, I think, it is realistic to assume that in the three quarters to come that number will be slightly lower than the 17 that we have in revenue for Q1.
Aleksander Peterc, Analyst
Thanks. And then the follow-up would be just on your higher gross cash requirements in the current environment or is that perhaps due to higher working capital requirements. Could you maybe quantify what is the level of gross cash you will be comfortable in in the current environment? For the time being that I assume is higher than the €2.5 billion you previously mentioned or, in other words, if you could put a number on the higher working capital is required given the optimization of cash flow across the chain? Thanks.
Roger Dassen, CFO
Yes. I mentioned two aspects. One aspect is that everyone in the entire value chain is managing their cash flow levels, which means that our free cash flow might be somewhat under pressure. That's one aspect. The second aspect is that we believe it is wise to maintain higher levels of cash in the current environment. Looking at the cash levels at the end of this quarter compared to the end of the previous quarter, I believe those levels are definitely sufficient to handle any uncertainties that may arise. I think those cash levels provide us with the flexibility we're seeking, more than sufficient.
Aleksander Peterc, Analyst
Thank you.
Operator, Operator
Thank you. We'll now go to the next question. And your next question comes from the line of Alexander Duval from Goldman Sachs. Please go ahead. Your line is open.
Alexander Duval, Analyst
Yes. Hi, everyone. Thanks very much for the questions. I think you talked about mid-single-digit growth in services revenue this year and that's obviously understandable given hard comps last year, but I wondered if you could give your thoughts on the extent to which there could be upside given low machine utilization that you referenced and that typically in the past from memory has led to higher upgrade activity? And, secondly, a question we've received from investors is just on average selling prices, you obviously talked about some weakening semi fundamentals, which you've characterized as being shorter term in nature, but just curious to what degree that could limit your ability to increase the ASPs and offset some of those cost pressures you've talked about in recent quarters? Many thanks.
Peter Wennink, CEO
Yes, the potential for service is an important point. Generally, during an upturn, we don't have enough time to take down the machine for upgrades. While software upgrades are easier, any extended downtime on a machine during a growth period is problematic for customers, and they want to avoid that. You're absolutely correct. In a downturn, however, we do see the opposite effect, as utilization decreases. At the start of such a downturn, customer budgets for upgrades will also decrease. This is why we anticipate an upside in the second half of the year; we believe it's a shorter-term downturn. Toward the year's end, we expect to see signs of recovery, and customers will begin to extend their plans. We will encourage them to proceed with upgrades, even if they aren't at 100% utilization yet, because it’s likely they will reach it in one or two quarters. This is when we will emphasize the necessity of upgrades, and that represents an opportunity for us. If our customers can manage through the current inventory issues and notice the upcoming upturn with rising utilization rates, that’s the moment they will seek upgrades, and we will be there to remind them. Lastly, there are limitations on the average selling prices due to costs.
Roger Dassen, CFO
And maybe I will take that. I think you referred to the inflation adjustment that we've been talking about on previous calls that we're talking to customers about and I think there it's fair to say that we have made really good progress. So, I think, for a number of large customers, we have reached agreement on, indeed, compensating us for inflation. Not with everyone yet. So, we're still in discussions with someone we hope to be able to conclude those discussions actually in this quarter. So, by the end of Q2, we should be in a position to give you what the overall picture is, but I'm very helpful that the larger customers that we have are willing to share in the burden of inflation, which I think from a fairness perspective is the right thing to do. And, again, we're making good progress there and will give you an update by the end of Q2.
Alexander Duval, Analyst
Very helpful. Thank you very much.
Operator, Operator
Thank you. We will now move on to the next question. The next question comes from C.J. Muse from Evercore. Please proceed, your line is open.
C.J. Muse, Analyst
Yes. Good afternoon, and good morning. Thanks for taking the question. I guess, first question, you talked about seeing customers pushing and others pulling in. Can you comment specifically on what you're seeing just for EUV? And as part of that, given some commentary around reuse, does that cause any worry that we might be putting on overcapacity on the EUV side of things at least over the near-term?
Peter Wennink, CEO
C.J., could you clarify what you mean by reuse, and could you elaborate a bit more on the second part of your question? I want to make sure I understand it correctly. Could you please repeat the second part?
C.J. Muse, Analyst
Yes, I think there has been some discussion about TSMC potentially reusing equipment from the 5 nanometer process for the 3 nanometer process, including some EUV tools. I'm interested in understanding, even though you cannot disclose information about specific customers, how you view the broader potential for reuse and the possible effects on EUV demand.
Peter Wennink, CEO
Yes, I believe that has always been the case. Customers will utilize the tools for the nodes where they need them, so it really depends on the size of the node. If the 3 nanometer or 5 nanometer node is either small or large, that will influence the demand for EUV tools. Customers, being business entities, will allocate their capital based on their assessments. The key factor is the size of those nodes. From our discussions with customers, it seems they perceive the 3 nanometer node as significant. Any shortfall in the 5 nanometer tools can be compensated by using the machines in the 3 nanometer node. Ultimately, the node size drives the need for EUV tools, and this aligns with the current customer demand we are observing. This also answers the questions I received earlier today. We still expect overall demand for EUV and Deep UV to rise next year, reflecting our customers' beliefs about their required capacity, which is determined by their expectations for node sizes and the end demand from their customers. Regarding your first question about pushing and pulling, that's particularly relevant for Deep UV, but not as much for EUV. In the Deep UV space, especially in memory, we've witnessed that while 3D NAND doesn’t utilize EUV, the market conditions are not optimal. Therefore, we are seeing some pushbacks, but these tools will still be accepted by IDMs and our customers in regions like China. So, the pushing and pulling dynamics are primarily a Deep UV concern.
C.J. Muse, Analyst
Very helpful. And just a quick follow-up question on domestic China. I think you said 20% of calendar 2023 revenues, can you confirm that? And if that's right, then roughly 50% of your non-EUV tool business will be domestic China in 2023 and so the question there is, how sustainable are the demand trends there beyond 2023?
Peter Wennink, CEO
I believe the calculations are accurate, and as one of our analysts noted, the range of 45% to 50% seems correct. I find this level of demand to be quite sustainable. During my recent trip to China, I engaged with numerous customers and end users who discussed their expansion plans. This is particularly relevant in areas like the EUV transition, the deployment of communication networks, and the energy transition, which are all in the mid-critical to mature stage. The volume of end products they intend to manufacture is substantial, but the semiconductor capacity needed to support this growth is still under construction. This supports my belief in its sustainability. I think we might be underestimating the demand for mature and mid-critical semiconductors. Their application is extensive, and while I may sound repetitive, my recent interactions with customers have reinforced my conviction that this demand is real. The expansion plans in key Chinese cities like Beijing, Shanghai, and Shenzhen indicate that the necessary manufacturing facilities will be established. The markets are ready, and there will be significant production aimed at serving the domestic Chinese market. So, in summary, I view this demand as sustainable, based on my recent observations.
C.J. Muse, Analyst
Thank you.
Operator, Operator
Thank you. We will now go to your next question. And your next question comes from the line of Mehdi Hosseini from SIG. Please go ahead. Your line is open.
Mehdi Hosseini, Analyst
Yes. Thanks for taking my question. The first one is for you Peter. How should I think about the EUV mix shift in 2023? And I'm more interested in the mix of 3800E versus 3600D?
Peter Wennink, CEO
You can expect the focus to be on the 3600, with only a few 3800 units coming in. The 3800 shipments are primarily toward the end of the year due to the new technology that aligns with High-NA. Both the 3800 and High-NA systems operate alongside each other, causing this delay. Additionally, some supply challenges we've encountered over the past quarters are specifically related to the 3800 and High-NA technology, which has also contributed to the push to later in the year. Therefore, in your projections, you should prioritize the 3600D.
Mehdi Hosseini, Analyst
Okay. The initial 3800E shipment start at 200 wafers per hour throughput?
Roger Dassen, CFO
- Yes. 195, Mehdi. Okay.
Mehdi Hosseini, Analyst
Thank you, Peter. And then my second question. Peter, you mentioned in your prepared remarks that with China, the risk is seeking license for NXT:2000, which I didn't think is available. In the current earning conference calls, you have talked about the 5% downside risk to backlog due to increased restrictions. So, how can I reconcile the 5% downside risk to NXT:2000 that I don't think is available yet?
Peter Wennink, CEO
Yes. I think that even though we no longer produce the NXT:2000, we now make the 2050 and 2100 models. Essentially, they represent the NXT:2XXX series. The 5% we mentioned in the previous call was related to the indirect impact of the October 7 rule, which allowed us to ship lithography tools to China. It's important to differentiate between the October 7 U.S. regulations and the new trilateral Dutch export control rules. We interpret advanced immersion technology, designated as NXT:2XXX, under the Dutch regulations, not the October 7 rules. We could ship all Deep UV immersion tools to China unless restrictions were applied to deposition and etch technologies, which could have indirectly impacted us, accounting for that 5%. Currently, most Chinese customers have adjusted their plans away from anything that falls under the October 7 U.S. regulations to avoid being impeded. They are reverting back to 20 nanometer processes and above, which is a very significant market. The demand for that product in the Chinese domestic market is substantial. As a result, they are not ordering the 2050s or 2100s but are going back to the 1980s. So, I think the 5% impact is not relevant anymore. The situation is now governed by the potential Dutch rules, which allows for the 1980 model to remain unaffected by export controls as we see them today. This means that the market is still open, and there's considerable demand for it.
Mehdi Hosseini, Analyst
Thanks for clarification and details.
Operator, Operator
Thank you. We will now go to our next question. And your next question comes from the line of Sara Russo from Bernstein. Please go ahead. Your line is open.
Sara Russo, Analyst
Hi. Thank you for taking my question. In your commentary and the video released this morning, as well as what you mentioned during Q4, you indicated that you are focusing on shipments rather than system starts based on customer requests. This approach is helping to drive strong system sales for this quarter. Could you elaborate on the operational dynamics of this decision and what the implications might be for next quarter and throughout 2023? I also have a quick follow-up.
Roger Dassen, CFO
Yes. The primary operational focus was ensuring that caverns were emptied and that systems awaiting final parts were completed and sent to customers in Q4. We wanted to prioritize shipments based on customer demand and clean inventory records. This decision has affected output and shipments in Q1, which is observable. Looking ahead, we expect outputs to increase in the coming quarters, aligning with our capacity growth. If there are no changes to revenue recognition for fast shipments, as discussed in prior calls, we anticipate that the €1.5 billion decrease in fast shipments moving from Q1 to Q2 compared to what we received from Q4 to Q1 will be addressed over the next three quarters. Consequently, we expect to generate more output related to that €1.5 billion, leading to a recovery back to €3 billion by the year's end.
Sara Russo, Analyst
Okay, great. And then
Roger Dassen, CFO
And as I also mentioned before, at the end of Q2, we will give you an update of where we stand in our discussions with customers, because as we mentioned on previous calls, there is an opportunity that if customers accept the shorter testing cycle that comes with the fast shipments, if customers are fully accepting that testing cycle upon shipment, then actually we could for those customers and for those tools, we could start recognizing upon shipment again and that would mean that the fast shipment saga at least for those customers will come to an end and that would mean that in fact we could start recognizing upon shipment again. If that's going to be the case, then the €3 billion would be lower by the end of the year, but it would also mean that in all likelihood revenue during this year will be up.
Sara Russo, Analyst
That makes sense. Yes. And, as a follow-up, does that have any impact on average lead time, or is there anything we should consider regarding potential changes to lead times as orders decrease and some of the orders are not normalized, while the backlog begins to normalize with those lead times?
Roger Dassen, CFO
No, I think the lead time is what it is. What you've observed is that with an order book that is double the system sales, the order time actually extends beyond the normal lead time. That's the situation you are seeing as a result. Peter mentioned the backlog and discussed the irregular order intake. Therefore, I wouldn't anticipate any significant changes in that regard.
Sara Russo, Analyst
Great. Thank you very much.
Operator, Operator
Thank you. We will now go to our next question. And your next question comes from the line of Sandeep Deshpande from JPMorgan. Please go ahead. Your line is open.
Sandeep Deshpande, Analyst
Yes. Thank you for having me. My question, Peter, is regarding the latter half of this year moving into 2024. If the current situation remains unchanged until the end of the year, how do you anticipate things developing?
Peter Wennink, CEO
Sorry. Sandeep?
Sandeep Deshpande, Analyst
Hello. Can you hear me?
Peter Wennink, CEO
Yes. I can hear you, but I hear some background noise. So, you might say, what if what we're seeing today goes into the second half and goes into 2024?
Sandeep Deshpande, Analyst
Into the second half, yes. Yes, that's correct. Yes.
Peter Wennink, CEO
Yes, I think the second half will be what it will be. We expect to remain in this phase for another one or two quarters. Ultimately, what influences demand is our customers' confidence in 2024 and 2025. They require that capacity. As I mentioned before, we're not anticipating a significant recession; instead, it's more of a typical downturn situation for the semiconductor industry, which we haven't seen in several years. Currently, supply exceeds demand, and we understand the factors influencing demand—high inflation rates, reduced consumer confidence, and geopolitical uncertainties. These are contributing to lower end demand than initially expected. We find ourselves in a classic semiconductor downcycle, with customers diligently managing their output to achieve a balance in supply and demand, which is when we can expect a turnaround. The main question is the pace and angle of that recovery. While I can't predict it, I can say that no one is predicting a severe recession. We also observe that decreasing inflation rates might boost consumer confidence, and growth rates in China seem to be better than anticipated. All these factors could positively influence demand in 2024. We need to navigate through a couple more quarters like we are today, possibly extending for another one or two quarters. However, looking at ASML, our backlog, and longer lead times, this is not a major concern for us. We expect to see growth next year, and nothing I observe today raises significant alarms about our trajectory. I am confident that we will experience growth.
Sandeep Deshpande, Analyst
I have a quick follow-up regarding EUV. Considering the long lead times for EUV, will you need to place orders for shipments scheduled for 2024 in the coming quarters? Otherwise, you may not be prepared for those shipments, even if you currently have a backlog.
Peter Wennink, CEO
Correct. Correct, Sandeep. I mean, like I said, on the back half of the second half, you could say Q4-ish of next year, we still need the order as well. We have to get those orders in for over the next one, two quarters, yes. And I think that is going to be indeed something that we're going to discuss with our customers and that's an expression of their confidence that they need those machines by the time. So, yes, in the next couple of quarters, we're going to see some of that and if it doesn't come, then probably those customers have different views in a couple of quarters from now than they have today. We just don't see at that point in time what it is, but at this moment in time that's not the case, yes. So, I'm pretty confident that we will book those orders, but yes, you are right, we don't have only orders yet for 2024 or 2025 for that matter.
Skip Miller, Vice President, Investor Relations
All right. 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, Operator
Thank you. We'll now take the last question for today. One moment please. And your last question comes from the line of Joe Quatrochi from Wells Fargo. Please go ahead. Your line is open.
Joe Quatrochi, Analyst
Yes. Thanks for taking the questions. I just wanted to go back to the comment that Peter made on China and talking about your Chinese customers moving back to older nodes in response to the export restrictions, is that to assume that then the Chinese memory customers have got to stop taking what part of your tools?
Peter Wennink, CEO
Yes. For 3D NANDs, advanced immersion is not necessary. There will be challenges since they can't access advanced Deep UV and DRAM, and they'll need to address that. They still want whatever tools they can access, so mid-critical immersion shouldn't pose a problem based on their current robotics. However, if they have future goals over the next three to four years, there will be challenges. It's important to note that Chinese memory customers, particularly in DRAM, are not at the same level of robotics execution as the leading manufacturers and are still lagging behind. What they can acquire under the export control rules will be beneficial for now, but they will need to find alternative solutions or remain at their current level.
Joe Quatrochi, Analyst
Got it. That makes sense. And then just a quick follow-up. How do you think about the OpEx trajectory for this year? You kind of referenced maybe a little bit more prudent capital spending management, but any change in the OpEx trajectory?
Roger Dassen, CFO
No, I don't think so. I believe the direction of travel for both R&D and SG&A is clear, and I think that around 19% of revenue would be a reasonable estimate for the full year. You can see what we have for Q1, and what we've guided for Q2 gives a good indication for modeling the second half of the year.
Joe Quatrochi, Analyst
Perfect. Thank you.
Skip Miller, Vice President, Investor Relations
All right. 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, Operator
Thank you. This concludes the ASML 2023 first quarter financial results conference call. Thank you for participating. You may now disconnect.