Earnings Call Transcript
ASML HOLDING NV (ASML)
Earnings Call Transcript - ASML Q3 2022
Operator, Operator
Welcome to the ASML 2022 Third Quarter Financial Results Conference Call on October 19, 2022. During today’s introduction, all participants will be in listen-only mode. After ASML’s introduction, there will be an opportunity to ask questions. I would now like to turn the conference call over to Mr. Skip Miller. Please go ahead, sir.
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 third 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. Thank you for joining us for our third quarter 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 third quarter 2022 results and also provide our view of the coming quarters. Roger will start with a review of our third quarter 2022 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 our future business outlook. Roger, if you would?
Roger Dassen, CFO
Thank you, Peter, and welcome everyone. I will first review the third quarter financial accomplishments and then provide guidance on the fourth quarter of 2022. Net sales came in at €5.8 billion, above our guidance, due to faster completion of installations, triggering earlier revenue recognition, a release of deferred income on a factory option which has now been accepted at customer sites, as well as higher installed base business. We shipped 13 EUV systems and recognized €2.2 billion revenue from 12 systems this quarter. Net system sales were €4.3 billion, which was again driven by Logic at 68% and the remaining 32% from Memory. Installed Base Management sales for the quarter came in at €1.5 billion, above guidance, due to higher upgrade revenue. Gross margin for the quarter came in at 51.8%, which is above our guidance, primarily due to the pull-in of revenue from both the release of deferred income on a factory option as well as additional upgrade business. On operating expenses, R&D expenses came in at €819 million and SG&A expenses of €236 million as guided. Net income in Q3 was €1.7 billion, representing 29.4% of net sales and resulting in an EPS of €4.29. Turning to the balance sheet, we ended the third quarter with cash, cash equivalents, and short-term investments at a level of €3.4 billion. Moving to the order book, Q3 net systems bookings came in at a record €8.9 billion, reflecting the continued strong customer demand for both advanced and mature nodes. Strong order intake of €3.8 billion for EUV systems, including NA, as well as €5.1 billion for non-EUV systems, which include DTV and metrology and inspection systems. Total net systems bookings were driven by Logic, with 77% of bookings and Memory accounting for the remaining 23%. With that, I would like to turn to our expectations for the fourth quarter of '22. We expect Q4 total net sales to be between €6.1 billion and €6.6 billion. This excludes around €100 million of net delay revenue for Q4, as a result of more expected fast shipments at the end of Q4 and the end of Q3. We expect our Q4 installed base management sales to be around €1.6 billion. Gross margin for Q4 is expected to be around 49%. The improved margin effect of higher volume relative to Q3 is more than offset by negative margin effects primarily from DTV mix, pulling of revenue recognition on higher-margin factory options from Q4 into Q3, and inflation costs hitting us this quarter. This translates to an expected gross margin approaching 50% for the full year. The expected R&D expenses for Q4 are around €880 million and SG&A is expected to be around €265 million. The higher R&D guidance is primarily due to additional headcount and labor cost increases. Higher SG&A is mainly due to additional headcount and IT spending. There are also some small negative foreign exchange effects on both R&D and SG&A. Our estimated 2022 annualized effective tax rate is expected to be around 15%. In Q3, ASML paid a quarterly interim dividend of €1.37 per ordinary share. The second quarterly interim dividend will be €1.37 per ordinary share and will be payable on November 14, 2022. In Q3, 2022 we repurchased around 2.1 million shares for a total amount of around €1 billion. We have now completed our 2021-2023 share buyback program. On November 11, 2022, we will hold our Investor Day where we will provide an update on our long-term business plan, including a new share buyback program. With that, I'd like to turn the call back over to Peter.
Peter Wennink, CEO
Thank you, Roger. As Roger highlighted, revenue and profitability for the quarter came in above guidance. We expect sales in the fourth quarter to be higher, as we continue to work through supply chain issues and reduce cycle times. Relative to last quarter, we now expect stronger revenue growth for the year, with full year 2022 sales of €21.1 billion, using the midpoint of the Q4 guidance. This includes a higher EUV system revenue of around €6.8 billion, as well as higher rates of base revenue. Due to fast shipments, we also expect delayed revenue of around €2.2 billion into 2023. The total business volume for 2022 is basically unchanged from the start of the year. Looking at the current market environment, there's clearly a lot of uncertainty due to a number of global macro concerns regarding inflation, consumer confidence, and the real chance of a recession. As we have shown in the past, in such an environment, we need to maintain flexibility in our supply chain, our workforce, and our manufacturing capability. You would also expect an impact on customer confidence around their CapEx spending. In fact, we do see some customers running at lower tool utilization levels and revising their CapEx plans for next year. While some customers are adjusting the desired timing of their demand, the vast majority of our customers is still requesting shipments of the litho systems as soon as possible. This is clearly driven by the strategic nature of these investments in support of technology transitions and capacity additions, which require time for wafer output to materialize, as well as governments' global investments in pursuit of technology sovereignty. Our 2023 shipment demand is still significantly above our build and shipment capacity for next year, supported by the record bookings this quarter of €8.9 billion and our largest backlog ever of over €38 billion. Almost 85% of this backlog is for EUV and immersion, which is used for advanced nodes and related wafer capacity expansions. Regarding our supply chain, we need to continue managing risks, but over the past quarter, we have seen an improvement in the predictability of the move rates in the supply chain. As a result, we now foresee a further improvement in our output capability in Q4. Moving to net sales in the quarter and deferred revenue from fast shipments, you see an increase in shipment value over the year starting with €4.9 billion in Q1, €5.7 billion in Q2, then €6 billion in Q3, and we expect around €6.4 billion in Q4. Building on this progress, we feel we are well-positioned to further increase our capacity next year. Looking to next year and bearing in mind the current environment, it's too early to provide specific guidance. With demand expected to remain significantly above supply, and based on discussions with our customers, we're planning to increase our system output next year, assuming we address the supply chain issues in the coming quarter. We're planning to ship over 60 EUV systems and over 375 DPV systems in 2023, with around 25% of the DPV systems being emerging. Regarding gross margin, as Roger mentioned, we expect to approach 50% this year. As discussed last quarter, we are in discussions with customers to share the extraordinary inflationary costs from freight, labor, as well as system components. These discussions are progressing, and in general, customers understand our request to share this extraordinary cost increase. We expect to receive a reasonable level of inflation compensation over the course of next year. Assuming successful progress on this item, based on current macroeconomic conditions and inflation levels, and considering that next year, we will likely have less gross margin impact from fast shipments than in 2022, we expect gross margin to improve next year. We will continue to make the required investments as we need to ramp our capacity in anticipation of leading to long-term growth in our industry. These investments might put some pressure on our gross margin next year, but are essential if we want to maintain the longer-term growth profile of the company. That said, we see clear gradual progress from today towards our longer-term gross margin ambition of 54% to 56% by 2025. Longer term, the expanding application space for semiconductors and secular trends are driving structural demand, and this is why we're actively adding capacity and planning to further increase our EUV and DPV shipments in future years to meet customer demand. As announced earlier today, we welcome a new member to the Board of Management, our strategic sourcing and procurement officer, underscoring the significance of working with our supply chain to drive future capacity growth. Regarding our capacity for 2025 and beyond, we're actively working with our supply chain to achieve the earlier communicated targets of 90 units for 0.33 of low NA EUV and 600 units for DPV, along with a medium-term target of high NA EUV. Next month, at our Investor Day on November 11, we will provide updates on how we see changes in the end market growth driving increased demand for our litho systems, the implications for our capacity plans, and longer-term financial scenarios for 2025 and 2030. Finally, regarding the announcement from the US government around export control restrictions, we have performed our initial assessment and expect the direct impact on ASML's overall shipment plan for 2023 to be limited. However, there could be an indirect impact due to the inability of other equipment suppliers to shift their systems. Our current expectation of such an indirect impact will be around 5% of our backlog. This percentage is based on the share of our backlog of purchase orders from Chinese fabs that, in our current assessment, meet the technology criteria outlined in the updated US export control restrictions. We will continue to refine our assessments as the situation evolves. While ASML is fully committed to comply with all applicable regulations, the new regulations do not directly change US export controls on our equipment. As a European-based company with limited US technology in our systems, ASML can continue to ship all non-EUV lithography shipments to China from the Netherlands. Additionally, we can ship most US-origin spare parts to most customers in China working on mature nodes without needing a US export license. The new export control rules predominantly affect advanced nodes, and our business in China primarily targets mature nodes. Lastly, if for export control-related reasons we cannot ship to more advanced fabs in China, we have more than enough demand for these systems elsewhere globally, as demand continues to exceed supply. In summary, while the current environment presents a lot of uncertainty due to macro concerns, our customers' demand for our products continues to exceed supply. We are working to increase our capacity next year, planning to further boost this by 2025, as previously communicated, because we remain fully confident in the opportunities this provides for our future growth. We plan to provide updates during our Investor Day on November 11, and we certainly hope to see you there. With that, we will 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 would 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, may we have your final instructions and the first question, please?
Operator, Operator
The first question comes from the line of FX Bouvignies of UBS. Please go ahead. Your line is open.
FX Bouvignies, Analyst
Hi, can you hear me?
Peter Wennink, CEO
Yes, very well.
FX Bouvignies, Analyst
Okay. Great. Thank you very much for taking the question. I have one on the 2023 outlook and especially for deep UV, your 375 deep UV tools target for next year. If we assume that more than 40% maybe 50% of deep UV revenues is from Memory, can you help us reconcile your guidance and what your customers are seeing, for example, with maybe the wafer fab equipment Memory CapEx down more than 40% into next year? Just trying to think about the litho intensity excluding EUV. And I mean could it be driven by inventory build or anything more fundamental that would suggest deep UV, especially with such weight on Memory, being resilient despite what your customers are saying? Just trying to reconcile that number would be helpful.
Peter Wennink, CEO
Yes, Xavier, thank you. When you look at the backlog of €38 billion, about one-fourth of this is Memory and about 75% is for our Logic customers. That backlog is based on what our customers are currently thinking about their lithography investments for 2023 capacity additions, which you need to remember is not only for mainstream capacity but also for advanced technology nodes. Having said that, some of our customers, and that would not exclude Memory customers, have indeed looked at their CapEx guidance for next year and taken it down. But those same customers tell us they need those machines, and these are the machines that they need for 2023 because they are strategic and long-term in nature. If you ship in 2023, it will only be for 2024 output due to the long lead time and character of our systems. These are strategic tools, and we have stated that we never look at WFE as an indicator because it is a lagging indicator. Customers will do what they need to do. We really focus on discussions with our customers regarding their strategic roadmap and the expansion of capacity, and that drives our current order intake. I fully understand that it could mean that in a particular year, there might be anomalies in litho intensity numbers due to various reasons as we transition from downturns to upturns and vice versa. However, we prioritize the long-term investment profile of our customers and maintain close contact with them, indicating the validity of their orders even in a challenging environment.
Roger Dassen, CFO
And FX, maybe one comment. I think your assumption that more than 40% of deep UV comes from Memory is not correct. If you look at our backlog, it is more or less in line with the overall representation of the backlog. So the one-fourth, three-fourths representation also holds for deep UV.
FX Bouvignies, Analyst
You mean on revenues or because I was talking revenues?
Roger Dassen, CFO
That's right.
FX Bouvignies, Analyst
Okay. And I do have a quick follow-up on installed base management. I mean that has been a bit stronger. I mean this quarter you mentioned some upgrades. Now if we look about a bit 2023 and imagine that the industry has lower utilization due to lower demand, should we then expect your installed base management to perform better in this environment as you have more downtime machines and maybe run above your mid-term target of 11% in this environment?
Peter Wennink, CEO
Yeah, that could be. But also, normally what you see in an upturn is that, to your point, there is no available time to do upgrades. In the downturn, there is available time. But then the upgrades that enhance productivity are not as needed, while others related to lithography requirements may still be considered. Yes, that could be a potential outcome, but I think it's too early to tell right now. As you have probably seen over the last quarters and the last couple of years, the installed base management business is relatively short-term. Customers can take those decisions and we can implement those subjects relatively quickly. We'll have to see how it evolves. There are always opportunities in downturn situations, that is clear.
Francois Bouvignies, Analyst
Thank you very much.
Operator, Operator
Thank you. Our next question comes from the line of Joe Quatrochi at Wells Fargo. Please go ahead. Your line is open.
Joe Quatrochi, Analyst
Yeah. Thank you for taking the question. I wanted to follow up on the question around the 2023 outlook. I guess, I wanted to understand it sounds like obviously some of your customers are changing some of their delivery schedules. Just given that you guys have the longest lead time for tools even in the DUV space right now; do you worry about this maybe creating some kind of air pocket in demand when you look into 2024?
Peter Wennink, CEO
No, that's a reasonable question. But the answer is we have no clue because nobody knows 2024. I mean, we're starting to understand 2023. For us in 2023, on the demand side, we are more or less protected, you could say, because there's still such a big gap between the demand side and what we can make. There's still a significant gap between our demand profile for 2023, which has really come down somewhat, but it's all minor compared to the gap that still exists between the current demand and our output capability. So I don't know about the demand profile for 2024. All we know is that we're undershipping for 2023 and what that means for 2024, I have no clue.
Roger Dassen, CFO
I think, Joe, the way to also look at that, and I fully agree with what Peter said, is that we believe that the over 60 and the over 375 that we've indicated before would be a normal trajectory towards our objectives for 2025. So I guess your question about an air pocket is only relevant to the extent that you're really trying to get a view on whether we are entering a recession territory and if we are entering a very long and deep recession. I mean, that's essentially what you're asking.
Peter Wennink, CEO
That was my point. What do we know about 2024? I mean, longer term, I think we're fully confident in the growth of this industry, and many of our customers, with healthy balance sheets, share the same confidence. Our largest customers, who account for most of the CapEx spending, have confirmed that they will continue to invest because there will not be sufficient high-volume capacity available by the end of 2023 or even by 2024. It will be more like 2025 and 2026. This is why these investments are of a strategic nature, and we receive continual confirmation from our customer base that they will proceed.
Joe Quatrochi, Analyst
Got it. That's all I had. I appreciate it. 2024 is quite a long way away. Just a quick follow-up and clarification. The comments that you made around customers looking to change delivery schedules and some declines in maybe tool utilization, is that strictly on the Memory side, or are you also seeing that on the Logic side?
Peter Wennink, CEO
Yeah, we see a leveling off in utilization levels in both Logic and Memory applications. It is not a significant decline but rather a normalization after a peak, which we've never seen before. We're seeing lower tool utilization levels in both categories, but it's not dramatic.
Roger Dassen, CFO
And in terms of the change in delivery schedule, of course, we're not going to be customer-specific here. But if you read the sentiment from some of our customers in the news, it gives a good indication of where you might see more softness.
Peter Wennink, CEO
Yes, some of our Memory customers have been quite vocal and public about their CapEx plans. The usual suspects. I mean, I'm not going to name names; you can discover that from media reports.
Amit Harchandani, Analyst
Thank you. Hello, everyone. Amit Harchandani from Citi. As a first question, if I may go back to the topic of bookings. On our calculations over the past four quarters, you've reported about €17 billion worth of DUV bookings, which even in the context of a run rate of 600 shipments for capacity by 2025 seems quite extreme. Could you help us understand who is placing these orders? What are their considerations? Is this a case of demand being pulled forward? I'm trying to get some confidence in what seems to be a very healthy DUV ordering pattern even in the context of the capacity you’ve spoken about by 2025. And I have a quick follow-up.
Peter Wennink, CEO
Yeah. That's a good question. You may remember that in our 2016 Capital Markets Day and even in 2018, we anticipated that our deep UV shipments would decline due to the cannibalization of EUV. In reality, it grew significantly across our entire customer base. Our customer base focuses on consumer products, as evidenced by the €70 million you quoted in historical order intake. It includes consumer, industrial, automotive, and energy transition markets. The sheer application space has grown tremendously. The number of mask sets used in Logic from 20-nanometer upward to 28, 45, 65, and 90-nanometer has remained stable over the last 12 years, except for the past two years. Recently, there's been a significant increase in the number of mask sets, up to 30% to 40%, which indicates a growth in deep UV technology applications. However, we lack complete visibility into where all these chips are going and how they're being designed. But the facts show that there is growth in deep UV applications, which is why we see healthy order intake from customers who haven't requested significant CapEx for the last decade.
Roger Dassen, CFO
To add a few numbers, Amit, in terms of trying to understand where it is going, there is no real anomaly in the composition. The one-fourth, three-fourths split we discussed for the full backlog is also reflected in the non-EUV part of the backlog. There is consistency there, which supports Peter's comments regarding the broad demand.
Peter Wennink, CEO
There’s no overwhelming direction in any particular application.
Amit Harchandani, Analyst
That's very helpful, gentlemen. And secondly, as a quick follow-up, the net deferred revenue run rate in Q4 is down to just €0.1 billion. Wouldn't it be logical to assume that as we look towards 2023, there should be no reason why this steps up again, but above €0.1 billion? In other words, the €2.2 billion that's getting deferred into 2023, would it be fair to assume a significantly smaller portion might go out from 2023? Can we potentially use the €6.4 billion that you're doing in Q4 as a good basis for quarterly run rate as we look towards 2023?
Roger Dassen, CFO
Yes, I think Amit, clearly the first quarter where most of the fast shipment effects were realized. Now you see that it starts to normalize. You already saw it in Q3, and now you see it in Q4. As you stabilize output, you would expect the amount entering the quarter to match what goes out. So, that's the normalization effect we should see. We're having discussions on whether we can recognize revenue differently upon shipment. As soon as we see potential changes in that regard, we will let you know. However, under the assumption that nothing changes, 2023 should more or less neutralize for the effect of fast shipments.
Amit Harchandani, Analyst
Thank you, Roger.
Operator, Operator
Thank you. And our next question comes from the line of Alexander Duval at Goldman Sachs. Please go ahead. Your line is open.
Alexander Duval, Analyst
Yes. Many thanks for the question. You talked about your aim to help counteract inflationary pressure through discussions with customers. Given presumably the mechanism for doing that is to adjust pricing based on delivering greater value in the form of higher prices per chip, how confident are you in your ability to do that, given the potentially softer demand environment in 2023, and implicitly in some areas perhaps for less robust prices per device? And then, I've got a quick follow-up.
Peter Wennink, CEO
Yes, you're talking about the inflation correction. You're correct that the softer environment may impact our position. However, the demand we currently have is significantly higher than our shipment capacity. The great thing about a strong backlog is, well, it's a strong backlog. But the downside is that we have sales and yield prices tied to delivered purchase orders in our backlog, which means we need to discuss with customers about extraordinary inflation that some regions are facing. It’s all about fairness in sharing these costs and determining value pricing. While wafer prices are rising in some sectors, both parties need to come together and agree on what is fair.
Alexander Duval, Analyst
Many thanks. And just as a quick follow-up. You referenced again your supplier day and reiterated your aim to establish 90 EUV systems and 600 DPV systems capacity beyond 2025. Can you give a bit more color on how the discussions with customers are proceeding and your confidence level that the supply chain will be able to adhere to that level of production?
Peter Wennink, CEO
Yes, that's a good question. We are gradually seeing more stability, and the number of supply issues that require significant management attention has been decreasing. We foresee improvements in our output capability in 2023 and want to ensure our key suppliers, such as Carl Zeiss, are fully capable of delivering the 60 EUV systems and 375 DPV systems we need to meet our targets. We have identified key areas for improvement, and our confidence in achieving our targets is gradually increasing.
Operator, Operator
Thank you. Our next question comes from the line of Didier Scemama of Bank of America. Please go ahead. Your line is open.
Didier Scemama, Analyst
Yes, good afternoon gentlemen. Thank you. I just wanted to ask you if you could maybe help us understand your point regarding the relatively low content of US intellectual property in your tools. There are a lot of questions from investors on that point. And I've got a follow-up. Thank you.
Peter Wennink, CEO
Yes, I think the export control rules allow us to ship lithography tools due to the relatively low percentage of US content in our systems. So, this is predominantly a European product. However, those tools require maintenance, which means that there are spare parts involved that originate from the US, and these fall under export control rules. We comply with all applicable regulations, which affects maintenance on our tools in China.
Didier Scemama, Analyst
Understood. So that will impact more your installed base management business than your resale tool shipments? Is that fair?
Peter Wennink, CEO
Yes, indirectly, as I mentioned earlier, our assessment indicates that around 5% of our backlog may be impacted by these restrictions. The primary impact is on our advanced customers in China who may require specific system components. If we cannot ship to more advanced fabs in China, we have enough demand for those systems elsewhere globally.
Didier Scemama, Analyst
Understood. And then maybe one clarification. So you mentioned the 5% of the backlog impacted by those restrictions, indirectly. Relative to the 15% to 16% of sales going to China, can you give us a sense of the weight of multinationals like Hynix and Samsung in China? And what is the split for mature nodes or those above 14-nanometers? Can you provide a breakdown?
Peter Wennink, CEO
As I said, the 5% is based on our assessment of our peers and their evaluation, but they need to conduct their own assessments. Our China sales account for around 15% to 18% of our sales, which should be the same in our backlog. Of course, this is primarily DUV because we cannot ship EUV into China.
Mehdi Hosseini, Analyst
Yeah. So thank you. I actually have a 2022 question. Can you help me understand the mix of backlog? How should I think about the mix by High-NA versus EUV and DUV?
Peter Wennink, CEO
From a backlog point of view, over just over 50% is EUV-related, and that is just under 50% for DUV. About 55-45, that’s how you should look at it.
Mehdi Hosseini, Analyst
Okay. So you booked a couple more High-NA machines in Q3 and I'm just trying to understand how should I think about the incremental increase driven by High-NA versus the other tools, which have a relatively shorter life to turn backlog into shipments.
Roger Dassen, CFO
We typically do not disclose the High-NA numbers because the number of customers taking High-NA tools is very small within that ecosystem. We avoid sharing specific numbers or order values due to competitive sensitivity. However, there is healthy intake of Low-NA machines in the backlog.
Mehdi Hosseini, Analyst
Sure.
Peter Wennink, CEO
When I mentioned the EUV number, it includes both Low-NA and High-NA together.
Sandeep Deshpande, Analyst
Hi. Thanks for letting me on. I have two questions. Firstly, actually this is a follow-up from Amit's question. You've got this €2.2 billion that is deferred into next year. For what I remember you said that you will have the capacity to do 60 EUV tools next year. If you consider that along with a higher capacity of deep UV next year, the revenue you can generate if all that is recognized next year is quite much higher than where consensus is looking for you for 2023. So maybe you can help us understand the puts and takes. Do you mean that the €2.2 billion that we enter 2023 will still be remaining in the pre-shipments, or is there a risk of pushing again into 2024? Or how should we be looking at 2023 in that sense?
Roger Dassen, CFO
Yes, Sandeep, it very much depends on what's going to happen in terms of revenue recognition. If you assume that revenue recognition remains unchanged, particularly for EUV, then the prudent assumption is that the amount entering 2023 will also exit in 2023. If the revenue recognition changes during the year, you will realize additional value. Therefore, our expected output of over 60 and over 375 relates to the output capacity for next year, translating into revenue.
Sandeep Deshpande, Analyst
Understood. A follow-up on your immersion part of your Deep UV shipments this year. Looking from 2018 to 2022, despite these huge orders from the beginning of the year, there doesn't seem to be an acceleration in the throughput in terms of your shipments. Is this due to your inability to get parts, which was clear in the first half of the year, or is there another factor impacting your capacity for Deep UV?
Peter Wennink, CEO
No, the ASML system integration capacity in the Netherlands is higher. However, we were limited by supply chain issues, which we have extensively discussed in previous quarters. We're working on resolving those, and we expect by the end of Q1 next year to have our suppliers back in line to support the 60 and 375 number we're targeting.
Aleksander Peterc, Analyst
Yes, hi. I just have one question and one quick follow-up. Thanks for taking my question. On the growth outlook for Memory and Logic, you previously communicated how these two would contribute to systems growth in the year. Has this changed meaningfully, given the recent changes in CapEx intentions by some of your customer groups? And how do you see this developing into 2023?
Peter Wennink, CEO
First of all, we have seen some reductions in CapEx from memory customers, but it’s not significant enough to change our absolute numbers for 2023. We do see a bit of a shift in favor of Logic over Memory for next year, but the overall targets and expectations remain in line with what we've previously communicated.
Aleksander Peterc, Analyst
And the second is just a follow-up to understand correctly. Assuming everything goes to plan with a better offset of the inflation pressures you currently see on gross margins and OpEx, we should then reflect that through higher average selling prices across your systems, correct?
Roger Dassen, CFO
Yes, the assumption is correct. We expect the discussions we've had with customers to lead us to adjust system pricing in line with the increased costs we've incurred due to inflation.
Pierre Ferragu, Analyst
Hi. Thanks a lot for taking my question. Peter, thanks a lot for saying 'I have no clue' as a CEO on an earnings call; it’s very refreshing. I think it's good to remember that it's difficult to figure out what's going to happen next. With that in mind, I have two specific clarification questions on the things we've discussed a lot on the call today. The first one is regarding 2023, considering the Memory sector. Are you taking into account the fact that your main clients in that space have significantly reduced CapEx spending? Is that already accounted for in your plan or something you still need to gauge?
Peter Wennink, CEO
Yes, for 2023, if there has been any significant replanning of CapEx, it has been factored into our expectations, but it hasn’t meaningfully changed the absolute numbers due to the continued strength of demand in Logic.
Pierre Ferragu, Analyst
And my second question relates to your impressive €38 billion backlog. Can you explain how conversations about this backlog evolve in scenarios of slower growth? Can clients ask you to reschedule shipments or even cancel orders? What are the common business factors that influence such situations?
Peter Wennink, CEO
In deep recessions, customers tend to reschedule shipments rather than cancel. The time for shipment adjustments depends on their CapEx plans and financial capabilities, ranging from a few months to several quarters. Overall, while conversations will occur in the face of a slowdown, we do not expect widespread cancellations.
Skip Miller, Vice President of Investor Relations
All right. We have time for one last question. If you're 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. That comes from the line of Adithya Metuku at Credit Suisse. Please go ahead. Your line is open.
Adithya Metuku, Analyst
Yes. Good afternoon, guys. Thank you for squeezing me in. Two questions please. Firstly, it sounds a bit like you've been able to put together these EUV machines quicker in the field, which part of the reason for some of the pull-in of revenue this year. If my understanding is correct, can you give us some color on how long installation cycle times were at customer sites previously, perhaps in the first and second quarters? And what are they now? If this cycle has come down, does it not give you more confidence in pushing less into 2024 than you're pushing out into 2023?
Roger Dassen, CFO
Yes, Adi. Indeed that's the case. The installation time has been decreasing; at the beginning of the year, it was around 14 to 15 weeks. We've performed efficiencies, leading to reductions of about 10 to 14 days in that timeframe on average. Some customers experience faster installations than others, but overall, this improved performance is encouraging and could potentially lead to less being pushed into 2024 than initially anticipated.
Adithya Metuku, Analyst
Understood. And my follow-up is on your China-based customers. Can you talk about your ability and the ability of your peers to track and control which node a particular tool is used in? Is it relatively easy for you to know what node a particular customer is using the tools you've supplied? The reason I ask is the tracking is not that easy, which poses a risk that you may need to stop shipping to wider nodes than you may be thinking at the moment?
Peter Wennink, CEO
Yes, it is a relevant question. Tracking technology nodes such as the 18-nanometer node, which involves half pitch definitions, is complex. We are engaged with US government interpretations affecting those definitions. There may be discrepancies between marketing terminology and the real physical size. We are seeking clarifications to better understand and adapt to these implications.
Adithya Metuku, Analyst
Got it. Would you say that the 5% is a conservative estimate, or could there be upside or downside risk?
Peter Wennink, CEO
It's hard to say if 5% is conservative or not. We need further clarification and interpretation from the authorities to assess whether there could be more or less impact.
Skip Miller, Vice President of Investor Relations
On behalf of ASML, I would like to thank you all for joining us today. We hope you'll be able to join us at our Investor Day on November 11 of this year, in Veldhoven. Operator, if you could formally conclude the call, I'd appreciate it. Thank you.
Operator, Operator
Thank you. This concludes the ASML 2022 Third Quarter Financial Results Conference Call. Thank you for participating. You may now disconnect.