Earnings Call Transcript
ASML HOLDING NV (ASML)
Earnings Call Transcript - ASML Q3 2023
Operator, Operator
Good day and thank you for standing by. Welcome to the ASML 2023 Third Quarter Financial Results Conference Call on October 18th, 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 hand the conference call over to Mr. Skip Miller. Please go ahead.
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 2023 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 the presentation found on our website at asml.com and in ASML's Annual Report on Form 20-F and other documents, as filed with the Securities and Exchange Commission. With that I'd like to turn the call over to Peter Wennink for a brief introduction.
Peter Wennink, CEO
Thank you, Skip. Welcome to everyone. Thank you for joining us for our third 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 third quarter 2023 as well as provide our view of the coming quarters. Roger will start with a review of our third quarter 2023 financial performance with 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 will.
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 2023. Let me start with our third quarter accomplishments. Net sales came in at EUR6.7 billion, which is around the midpoint of our guidance. We shipped 10 EUV systems and recognized EUR1.9 billion in revenue from 11 systems this quarter. Net system sales of EUR5.3 billion, which was mainly driven by Logic at 76% with the remaining 24% coming from Memory. Installed Base Management sales for the quarter came in at EUR1.4 billion, as guided. Gross margin for the quarter came in at 51.9%, which is above our guidance, primarily driven by DUV product mix as well as some one-off cost effects. On operating expenses, R&D expenses came in at EUR992 million and SG&A expenses came in at EUR288 million, both basically as guided. Net income in Q3 was EUR1.9 billion, representing 28.4% of net sales and resulting in an EPS of EUR4.81. Turning to the balance sheet, we ended the third quarter with cash, cash equivalents, and short-term investments at a level of EUR5 billion. Moving to the order book, Q3 net system bookings came in at EUR2.6 billion, which is made up of EUR0.5 billion for EUV bookings and EUR2.1 billion for non-EUV bookings. These values also include inflation corrections. Net system bookings in the quarter were driven by Logic with 80% of the bookings, while Memory accounted for the remaining 20%. As expected, we did see some moderation in orders this quarter. As the industry is working through a cycle, customers remain cautious in the current environment, managing cash flows and delaying purchase orders. In addition, there were no High-NA orders this quarter. While our bookings were lower than in previous quarters, our backlog at the end of Q3 remained strong at over EUR35 billion. With that, I would like to turn to our expectations for the fourth quarter of 2023. We expect Q4 net sales to be between EUR6.7 billion and EUR7.1 billion. We expect our Q4 Installed Base Management sales to be around EUR1.4 billion. Gross margin for Q4 is expected to be between 50% and 51%. The positive impact of higher sales volume is more than offset by the dilutive impact from a change in DUV mix and one-off effects relative to last quarter. The expected R&D expenses for Q4 are around EUR1.03 billion and SG&A is expected to be around EUR285 million. Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%. An interim dividend of EUR1.45 per ordinary share will be made payable on November 10th, 2023. In Q3 2023, we purchased shares for a total amount of around EUR100 million. As mentioned in previous quarters, in the current environment, we expect to see ongoing pressure on our free cash flow. As a result, we will be prudent in managing our cash flows and maintain relatively high levels of cash. With that I would like to turn the call over to Peter.
Peter Wennink, CEO
Thank you, Roger. And I have a bit of a cold, so apologies. As Roger has highlighted, another good quarter, especially considering the current market environment. Uncertainty remains in the market, driven by global macro concerns around inflation, rising interest rates, lower GDP growth in certain economies and the geopolitical environment, including export controls. However, the industry seems to be passing through the cycle trough. There has been some improvement in end market inventory levels downstream. Although inventory levels upstream remain elevated. As a result, our customers continue to moderate wafer output by running at lower utilization levels. While lithography tool utilization is still running at levels lower than normal relative to last quarter, tool utilization in Logic continues to show signs of improvement, while Memory has yet to turn. We concur with our customers that still expect to see an inflection point, indicating the start of a recovery by the end of the year, although the shape and slope of the recovery remains uncertain. Looking further ahead to 2025, we expect a significant growth year since more than 50% of our EUV and DUV shipments will go to new fab projects. On top of this, we expect existing fabs will be adding capacity, driven by continued recovery cycle. Turning to our business, we now expect DUV revenue to grow towards 55% year-over-year, an increase from around 50% communicated last quarter, primarily driven by an increase in immersion revenue. China demand for DUV systems continues to be strong, a trend we talked about in previous quarters. For system shipments this year to Chinese customers, the majority of the orders were booked in 2022. The demand fill rate for our Chinese customers over the last two years was significantly less than 50%. So the Chinese customers were in fact receiving a much lower number of systems than they ordered. This was due to the fact that demand for our systems worldwide significantly exceeded supply. With current shifts in demand timing from other customers, we now have the opportunity to fulfill these orders to our Chinese customers. So supply is in fact catching up to demand, and we're shipping lithography systems for mature and mid-critical nodes to China, while of course complying with export control regulations. If you combine this with the fact that other customers are delaying their demand, this means indeed a higher sales percentage from China than we saw in previous years. In EUV for 2023, we continue to expect year-over-year revenue growth for EUV of around 25%, as communicated last quarter. For the Installed Base business in 2023, the current utilization rates, market uncertainty, particularly as it relates to the timing of the recovery, has led customers to continue to wait to perform productivity and performance upgrades on the litho systems. Therefore, we now expect our Installed Base business this year to be down around 5% from last year versus the flat growth previously communicated. In summary, based on our full year with higher DUV revenue offset somewhat by lower expectations on our Installed Base business relative to last quarter, we still expect net sales for the year to grow towards 30% with a slight improvement in gross margin compared to 2022. Overall, a very strong growth year, especially considering the industry being in a down-cycle. On the geopolitical front, as it relates to export controls, the US government published updated export control regulations. Part of the regulations is an update from last year's October communication and part is the implementation of the US regulation on the trilateral agreement between the Dutch, Japanese, and US governments. Given the length of the document, we need to review the final regulation thoroughly and make a detailed analysis, which will take some time. But based on our preliminary assessment, we do not expect these measures to have a material effect on our financial outlook for 2023. The export control measures could have an impact on the regional split of our shipments in the medium to long term, but we do not expect an impact on the global demand scenarios, as communicated during our Investor Day in November last year, since the long-term growth perspectives for our industry remain clearly unchanged. Looking towards next year, the semiconductor industry is currently working through the bottom of the cycle and our customers expect the inflection to be visible by the end of this year, as I mentioned before. Although there is an opportunity for some demand to be pulled back into the back half of 2024, we currently prefer to take a more conservative view for the full-year 2024, especially considering the inherent nature of the macroeconomic uncertainties. Therefore, based on our current view, we expect the revenue next year to be similar to 2023. As such, we see 2024 as a transition year, but also as an important year to prepare for the significant growth that we expect in 2025. Now, based on discussions with our customers, we currently expect 2025 to be a strong year, driven by a number of factors. First, the secular growth drivers in the semiconductor end markets, which we have previously discussed, such as energy transition, electrification, and AI. The expanding application space, along with increasing lithography on future technology nodes drives demand for both advanced and mature nodes. Secondly, the industry expects to be in the middle of a cyclical upturn in 2025, starting in 2024. Lastly, as mentioned earlier, we need to prepare for the significant number of new fabs that are being built across the globe. These fabs are spread geographically, are strategic for our customers, and are scheduled to take our tools. It is essential that we keep our focus on the future and build capacity to be ready for this ramp. In summary, despite going through an industry downcycle, we still expect very strong growth in our business this year, and while there are still significant uncertainties primarily driven by the macro environment, it appears that we're passing through the bottom of this specific cycle, and the shape of the recovery will ultimately determine the demand curve beyond 2023. In the near term, it's understandable that customers remain cautious as they moderate wafer output to help lower inventory levels in the supply chain and look to build confidence around the timing and slope of the recovery next year. In summary, we clearly view 2024 as a transition year as we prepare for future growth and expect a strong year in 2025 and beyond. We remain confident that we are well positioned for further long-term growth, as we discussed in the market scenarios for 2025 and 2030 during our Investor Day in November 2022. 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'd like to ask you 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 go to the first question, and your first question comes from the line of Joe Quatrochi from Wells Fargo. Please go ahead.
Joe Quatrochi, Analyst
Yeah. Thanks for taking the questions. Curious, embedded in your expectation for a more muted kind of 2024. How do we think about the gross margin puts and takes just given there are several moving parts in terms of like mix and you guys are obviously increasing your manufacturing output for later years, and then I think there's some benefits from higher EUV ASPs. At the same time, you're also going to start shipping the initial High-NA tools as well.
Roger Dassen, CFO
Joe, you're doing an excellent job analyzing this. While we won't provide specific guidance on the gross margin for next year, I can share some of the key factors affecting it. The 3800’s average selling price is certainly significant, as it will play a crucial role in our EUV mix next year, especially with its higher ASP. We discussed generating more than EUR200 million last quarter from this, which will contribute positively to the gross margin. Additionally, we're making progress in EUV services, which is another positive factor. On the flip side, as you noted, we anticipate challenges for next year as we gear up for a substantial year in 2025. As Peter mentioned in our video, we're preparing to significantly expand our capacity, which will temporarily impact gross margin due to the necessary training for new hires in 2024; they will mainly be productive in 2025. Similarly, while the revenue and output from High-NA will be minimal next year, we are training our workforce to support the ramp-up in 2025 and beyond, which will also affect the gross margin negatively in 2024. There's also uncertainty surrounding our Installed Base business, which could positively or negatively influence the gross margin depending on the recovery of the upgrade business in 2024. Lastly, considering the various factors at play, including what Peter mentioned about China export controls, we might see a reduction in immersion tools sent to China, especially high-end models, which could also pose a challenge for gross margin. Overall, Joe, these are the factors I see today, and we should have clearer insights by our Q4 call in January next year.
Joe Quatrochi, Analyst
Got it. Thanks for that. And then as a follow-up, just wanted to reconfirm, for fast shipments, you're expecting still to exit this year in terms of revenue not recognized in the EUR2.3 billion range, and then does that get caught up next year as part of kind of a more muted growth that you're able to catch up to that demand?
Roger Dassen, CFO
I think Joe, part of it will. The way we look at it today, but again, we will confirm that in more detail in January, but the way we look at it today, we expect less fast shipments by the end of '24 than we would have by the end of '23. So there would be a positive effect from fast shipment in the number for next year.
Joe Quatrochi, Analyst
Got it. And that EUR2.3 billion is still the right number exiting this year?
Roger Dassen, CFO
The EUR2.3 billion is what we're currently driving towards. Yeah. That's what we expect at this stage to have shipments this year not recognized in revenue this year. Correct.
Joe Quatrochi, Analyst
Perfect. Thank you.
Operator, Operator
Thank you. We will now go to our next question. And the next question comes from the line of Krish Sankar from TD Cowen. Please go ahead.
Krish Sankar, Analyst
Yeah. Hi, thanks for taking my question. I have two of them. When you look into calendar '24, how to think of from a unit standpoint, EUV and DUV? How do we look at unit for EUV and DUV in 2024 relative to 2023? Would it be up, down, or similar? Any color there would be helpful, and then I had a follow-on.
Peter Wennink, CEO
I believe Roger addressed this in his response during the previous call. This year, we've had a strong performance in China for DUV because we were fulfilling existing orders. The orders were prepaid and we had the chance to deliver, but I don’t expect that level of volume to repeat next year. Additionally, new export control regulations will affect some Chinese fabs, restricting our ability to ship immersion tools. While this is only a small number of fabs, it will impact sales we experienced in 2023 that we won’t see in 2024. Therefore, we might see a decrease in DUV sales. If sales remain stable or similar while EUV grows, as Roger pointed out, we anticipate that rapid shipments in 2024 will be lower. This situation will likely create an accounting impact on our top line. Overall, we might see lower DUV unit sales, and while EUV units could also decline, we might still see revenue growth due to increased sales prices. This is the outlook for next year. As Roger mentioned, the January update after the fourth quarter results will provide more detailed information, but this is the general direction you can expect.
Krish Sankar, Analyst
Got it. Got it. That's very helpful, Peter. And then on China, I understand it was like 46% of sales last quarter. Probably average is around 30% for the full year. If you strip out the export control issues or the geopolitics, a lot of this spending is on mature nodes. Kind of curious how long do you think this level of spending is sustainable or do you think at some point there is going to be a natural consolidation or rationalization of this spending? Thank you.
Peter Wennink, CEO
I think it's important to recognize the purpose behind the tools being used. Most of our shipments to China are focused on mid-critical to mature applications, which is the core of our business. There are a few fabs that have been identified as prepared for advanced semiconductor manufacturing, but these are exceptions. Generally, I don't expect this segment to level off. The reason for my outlook is the substantial demand for chips driven by China's investments, which exceed 50% of global funding in renewable energy, including wind and solar, as well as grid electrification and electric vehicle manufacturing. Additionally, the industrial Internet of Things and the ongoing expansion of telecommunications infrastructure are also significant contributors. With a population of 1.4 billion, China's semiconductor requirements are considerable. When we analyze the expansion strategies of our Chinese clients, we observe that they are concentrating their resources on these areas. In fact, China's semiconductor consumption outpaces its oil imports. Considering the rapid advancements in technology, China still faces a considerable gap to achieve self-sufficiency. As a result, it's understandable that they are investing in semiconductor technology for domestic needs. I anticipate that there won't be a peak in demand this year or the next, and moving forward, there will likely be significant demand from China for mid-critical and mature technology for the reasons I've outlined.
Krish Sankar, Analyst
Got it. Thanks a lot, Peter. Thank you.
Operator, Operator
Thank you. We will now go to the next question and your next question comes from the line of Aleksander Peterc from Societe Generale. Please go ahead.
Aleksander Peterc, Analyst
Yes. Hi. Good afternoon and thank you for taking my question. Could you help us understand what is the percentage of shipments into China this year that would actually fall under the restrictions that will be in place for the 1st of January next year? That would be my first question. And then the follow-up, just very briefly, you could tell us how far out you're currently booked in EUV into 2024 or in DUV. Thank you.
Peter Wennink, CEO
I'm noting that for the growth in China, the percentage of shipments this year that are now excluded is between 10% and 15%. The majority of these shipments are mature and mid-critical. As I mentioned in response to a previous question, I believe this will largely remain because the capacity buildout is essential for all the transitions I previously discussed. So it's 10% to 15%.
Aleksander Peterc, Analyst
Thank you.
Roger Dassen, CFO
We currently have a backlog of about EUR19 billion for EUV. This includes shipments that we still need to complete this year as well as those planned for 2024 and 2025. Notably, this also encompasses High-NA. A significant portion of the shipments we anticipate in 2024 is accounted for in the EUV backlog, although it does not cover everything.
Aleksander Peterc, Analyst
Okay, great. Thank you. It’s just that 3800 will be so next year is all 3800, right?
Roger Dassen, CFO
No, no. Next year will be a mix of 3600 and 3800.
Aleksander Peterc, Analyst
Thank you.
Operator, Operator
Thank you. We will now go to the next question and your next question comes from the line of Sara Russo from Bernstein. Please go ahead.
Sara Russo, Analyst
Hello. Thanks for taking my question. In your results package, you mentioned that Memory utilization is still low, but you're starting to notice some recovery in Logic and suggested that a potential bottoming of the cycle might occur later this year. Can you provide any additional details on the utilization levels and trends for Memory compared to Logic? Are there any notable differences in those end markets?
Peter Wennink, CEO
No, I'm not going to provide exact utilization levels because they vary for our customers, but we are seeing a bottoming out in Logic. This trend has been consistent since we noticed early signs last quarter. It's positive, but it's important to consider that while inventory levels downstream are normalizing, they are still elevated upstream. Regarding Memory, we have not yet observed an upturn, so we need to monitor this closely to see when it will occur. Typically, an increase in Logic leads to a corresponding rise in Memory, as Logic without Memory doesn’t work effectively. This likely comes down to timing, and we’ll keep a close watch on it. Additionally, some recent articles from Korea indicated that NAND shipments have actually increased for the first time in a year, and we’re seeing initial signs of rising DRAM spot prices. These early indicators lead us to believe that the improvements we've observed in Logic over the past three months will also extend to Memory.
Sara Russo, Analyst
Great. Thanks. And maybe just a follow-up on the backlog topics. So I mean, in the past, you've given us a sense for what share of the backlog is China demand and it's sort of a lot of 2022 orders led to the significant increase in China. Have you seen that shift at all? It was sort of sitting around 20%. Is that shifted down now that you're able to ship more to China and meet more of those orders? Has that come down or does that continue to remain in that range?
Peter Wennink, CEO
No, I think it's the same. We mentioned that the China part of our business this year could be over 20%, and I believe it's about the same range for the backlog. So that has remained unchanged.
Sara Russo, Analyst
Great. Thank you very much.
Operator, Operator
Thank you. We will now go to the next question, and your next question comes from the line of Francois Bouvignies from UBS. Please go ahead.
Francois Bouvignies, Analyst
Thank you very much. So two quick ones from me. The first one is on maybe 2025. So you gave your market low and market high scenario at your Capital Markets Day. Now, looking at the current macroenvironment, I guess, for many people, it's actually we are more in the low market scenario at least today in terms of macro. If we look at your guidance on 2025 and taking into account the geopolitical environment, should we lean towards the low end of your guidance in a way? I mean, it would still imply a significant recovery in 2025, but I just wanted to check if it's fair to assume given the current utilization rate in the industry and the pushout that you are also seeing on your side, if we should lean towards the low end of your guidance. And I have a quick follow-up.
Peter Wennink, CEO
Let me explain. Our industry is cyclical, and during a downturn, the more significant the downturn, the more substantial the upturn tends to be. This is due to the underlying need for capacity to support the ongoing trends we all recognize. Various factors can contribute to these downturns, such as macroeconomic issues. The cyclical nature of our industry over the past 30 years supports this observation. In my earlier remarks, I outlined three reasons we believe 2025 will be a strong year. First, these underlying trends indicate that we will need to build capacity to support them. If we don’t invest in this capacity during 2023 and 2024, which in the case of Memory actually started in mid-2022, we won’t be prepared to meet the upcoming demand. Second, based on feedback from our customers, it seems we are either at the bottom of the cycle or very close to it, suggesting growth will start in 2024. While there may be debates about how quickly that growth will come due to macroeconomic uncertainties, customers are signaling to prepare for a growth trajectory into 2025. Third, when we consider the number of new factories being built or expanded globally, particularly in Europe, the US, and Asia, more than half of our expected demand for 2025 comes from these new fabs. Given our lead times—over 12 months for most tools, with EUV taking even longer—we need to maintain close communication with our customers and understand their expansion plans. With all these factors in mind, the discussions we have had with customers suggest that 2025 will be a robust year, which is inconsistent with the lower end of our guidance. For instance, if 2024 doesn’t fully recover, the Memory segment could be facing a downturn for an extended period, which historically has always been followed by significant recovery. The same applies to Logic. Considering these three critical points gives us confidence that 2025 will be strong. However, we must prepare during 2024, as we cannot wait until early 2025 to mobilize our resources due to long supply chain lead times. Thus, we need to view 2024 and 2025 together, as our discussions with customers indicate this is essential for our planning. Apologies for the lengthy response.
Francois Bouvignies, Analyst
No, no, no. That's very clear. Thank you. And maybe as a follow-up then, if we have long lead times and strong recovery in 2025, the orders, I mean, this quarter has been, let's say, quite low compared to many people expected, but if you expect a very strong year in 2025 and the lead times that you are describing.
Peter Wennink, CEO
Yeah, yeah.
Francois Bouvignies, Analyst
Do we expect that to see in the order behavior in the first half of 2024? I mean, if we take into account your lead times or how should we think about that because we should see the improvements of that, right?
Peter Wennink, CEO
Absolutely. I think that's completely true. We are currently in the third quarter of 2023, and we have over EUR35 billion in the backlog. Customers can afford to wait because they see 2024 as a year of recovery. It’s uncertain whether this will happen in Q3, Q4, or Q1. They can wait because they don't have an immediate need. If they want more capacity, they can easily request it. You're correct that if 2025 turns out to be as strong as we anticipate, we should expect to see an increase in orders during the first half of 2024.
Francois Bouvignies, Analyst
Great. Thank you, Peter.
Operator, Operator
Thank you. We will now go to the next question, and your next question comes from the line of Rolf Bulk from New Street Research. Please go ahead.
Rolf Bulk, Analyst
Yes. Thank you for taking my question. In your prepared remarks, you mentioned shifts in timing of say your western customers, their demand profile. Could you give us a bit more detail on this? Are these pushouts primarily on the leading edge or is it more trailing edge? And has this trend of pushouts increased in recent months?
Peter Wennink, CEO
I believe when considering the trailing edge, we didn’t observe significant pushouts from most of our trailing edge customers, particularly those in China. Even the customers outside of China remained stable as they cater to the mature market, which includes sectors like the automotive industry and industrial IoT. The demand was quite solid in these areas. The shift in demand seemed to occur more in leading-edge markets rather than in mature sectors. It's important to note that leading edge also requires mature technology, like KrF and i-line, in addition to advanced DUV and immersion. If we break this down, the demand shift was likely more prominent in markets such as smartphones and PCs, where we’ve seen inventory issues. Consequently, this is where demand fluctuations have occurred. However, the mature markets remained relatively healthy, particularly in China, where we had under-delivered to our customers. Since most of those orders were prepaid, we plan to deliver those tools to them if there is no demand from other sources, which all falls under the mature segment.
Rolf Bulk, Analyst
Thank you. It's very clear.
Operator, Operator
Thank you. We will now go to our next question, and the next question comes from the line of Didier Scemama, Bank of America. Please go ahead.
Didier Scemama, Analyst
Yeah. Good afternoon. It's Didier Scemama from Bank of America. I have a couple of questions. First, I wanted to just probe you a little bit again on 2025 revenue guide. I think you answered pretty well, but I guess what I wanted to ask you is, if we don't see those bookings coming through in the first half of '24, is that roughly in July '24 where you would consider changing that guidance or at least telling us that you would be towards the low end of that range or even below that? And I've got a follow-up. Thank you.
Peter Wennink, CEO
We have known each other for a long time, Didier, and we are straightforward about how we see the world during this call. This represents our current perspective. If our view changes by the first or second quarter of 2024, we will communicate that. We will inform you if circumstances shift significantly, whether for better or worse, by the middle of 2024. I can't provide a definitive answer to your question, but we will be clear about our position as it evolves.
Didier Scemama, Analyst
No, makes sense. Second part on China restrictions. Is there anything you can share with us with regards to the sort of tools that might not be allowed to be shipped to those fabs? I mean, should we consider the 1980 to be part of the banned tools for those particular fabs, but that you could ship it to other China customers? Or is it too early to say at this stage?
Peter Wennink, CEO
No, I think it's probably not too early. As you indicated, the way we understand the regulations now is that the principle is that tools from the 1980s are subject to export control restrictions, but only when they are used for advanced semiconductor manufacturing. This advanced semiconductor manufacturing is only applicable to a limited number of fabs. Therefore, the 1980 tools are restricted for those specific fabs, but not for the majority of our Chinese customers, for whom we do not require an export control license and can ship freely. These shipments are for mature and lower mid-critical chips necessary for the transitions I just mentioned.
Didier Scemama, Analyst
Okay. So that indicates that most of your immersion revenues in China next year will come from at least some of the 1980, but will likely shift to the 1950 or 1930 models for those customers.
Peter Wennink, CEO
No, no, because the 1980 is a low-end immersion tool. So the only export controls will be on the 1980s that go to a handful of fabs.
Didier Scemama, Analyst
So you'll ship the 1980? Yeah.
Peter Wennink, CEO
Yeah. And for all the other customers, which are using those chips for non-advanced semiconductor manufacturing that is actually used for mid-critical, lower mid-critical, mature applications where there are no security concerns. We can just ship those. And that's the vast majority of our business.
Didier Scemama, Analyst
Brilliant. Thanks very much.
Operator, Operator
Thank you. We will now go to the next question and your next question comes from the line of Mehdi Hosseini from Susquehanna. Please go ahead.
Mehdi Hosseini, Analyst
Thank you. A couple of questions. Peter, I am a little bit confused, and I'm just going to focus on lithography, not going to ask you about WFE or we are in the semiconductor cycle. When I look at the leading edge, we've had a couple of years of a slow start to three nanometer. As a matter of fact, the leading edge has been trending in a half pitch, and I was hoping that by next year, there will be a bigger demand for leading edge among Foundry and your Logic customer, but what I get from you is probably EUV unit shipment is going to decline. What I want to ask you or get a clarification is this a kind of a pause as we insert a gate-all-around? Is this something that happened when we went from planar to FinFET and we're going to see the repeat of that next year and then that would impact your EUV shipment? Any thought around gate-all-around would be appreciated.
Peter Wennink, CEO
I believe that the gate-all-around technology and the related nodes will see high-volume ramps in 2025 and 2026. That will certainly happen. The expected pause or reduced unit shipments of EUV next year is a consequence of the cyclical downturn we are experiencing, where certain end markets do not require full capacity. The R&D roadmaps remain solid, and our key customers continue to affirm this. Therefore, while we anticipate a high-volume manufacturing ramp for the gate-all-around architecture, it contributes to my optimism for 2025 and 2026 being successful years. What's happening currently is unrelated to our roadmaps; it purely reflects the current downcycle we're in, and as we progress out of it, capacity utilization at the leading edge is not at full capacity. It's a matter of growing into that capacity as part of this cycle.
Mehdi Hosseini, Analyst
No, one difference this time compared to when we migrated to FinFET is the adoption of a higher EUV layer count for DRAM. If I were to refer back to your 2022 and 2021 Analyst Day, you mentioned that more than 30% of EUV demand by 2025 would come from DRAM. Is that still accurate, and could that strengthen the EUV recovery regardless of the potential impact of a transistor change?
Peter Wennink, CEO
Yeah, I think that's absolutely true, but I still believe that percentage is still valid, but like I said, it is not today, but it is because we are where we are in the economic cycle. Yeah. So I think nothing has changed in that sense. And you could even argue because they have quote-unquote under-invested in '23, '24, there will definitely be an additional driver on top of the roadmap insertion points that haven't changed. Yeah. So, yes, I mean, I would expect that to be the case in 2025. Yes.
Mehdi Hosseini, Analyst
We just have to wait for the first half of '24 to see that in your bookings.
Peter Wennink, CEO
Yeah, yeah. And that is basically also, I said it before, you know. Why we are conservative on 2024? Because of the macroeconomic uncertainties, yeah, and our customers are closely watching this also. They are watching these inflection point trends. I mean, this is what we will also follow with them. They have a better view of inventories. We have a better view of utilization. We have a better view of a lot of things that happen in the fab. We need to look at those inflection points and saying, okay, that means the trough, but then what will be the slope of the recovery, and that's basically a macro call.
Mehdi Hosseini, Analyst
Thank you.
Operator, Operator
Thank you. We will now go to the next question, and your next question comes from the line of Sandeep Deshpande from JPMorgan. Please go ahead.
Sandeep Deshpande, Analyst
Yeah. Hi, thanks for letting me on. Peter, I mean, with response to an earlier question, you talked about that you will start seeing this order recovery potentially in 2024, which will help your 2025, but given that at this point what you see into 2024, the demand is not as much as your capacity, particularly in EUV, would you prebuild because, I mean, your tools don't have any obsolescence risk? This is my first question and then I have one quick follow-up.
Peter Wennink, CEO
I completely agree with you. Our customers consistently communicate their needs to us. We're not just making assumptions from our offices in Veldhoven; we listen to what our customers require and why. We believe that 2025 is a very tangible situation. This indicates that we need to start pre-building, and you'll notice this reflected in our working capital and that of our suppliers. If circumstances shift more rapidly, we may actually need those preparations in the latter half of 2024. We need to get ready, or else we risk being unable to respond effectively, which could put us in a significant crisis in 2025 if we can't produce the tools our customers want.
Sandeep Deshpande, Analyst
Thanks, Peter. Regarding a follow-up for Roger, if next year is expected to be relatively flat, you must have had an operational spending plan for R&D or SG&A. Will you proceed with that plan, considering the current environment is different from when you formulated it, or will you maintain your usual spending, which could impact earnings in a flat year, given the rising expenses?
Roger Dassen, CFO
Yeah. Sandeep, so obviously in the current environment, we are frugal, right, as you might expect us to do. So we're definitely controlling our SG&A expense there. On the R&D side, that's long-term, and I think we would be ill-advised to now go cut our R&D roadmap, and that's not what we're doing, right? So we are continuing to execute on the R&D roadmap. You might have seen that on the hiring of people, we slowed down a little bit this year. So part of that is in response to what I've just mentioned on SG&A. It's also in response to the fact that in 2022, we hired 10,000 people. So on the 42,000 people that we have today, that's massive. So obviously you want a certain level of absorption to happen there, and that's exactly what we're doing, making sure that people are well absorbed, that the growth also on the R&D headcount is nicely absorbed. So that's why you see this slowing down a little bit on hiring, hiring people, but no, I mean, we continue to push down the accelerator on the R&D front because the opportunity is significant. And in order for us to achieve the growth trajectory that we've talked about in '25 and 2030, we simply need to do that. So, yes, we will be frugal. No, we're not going to cut back on our R&D roadmap.
Sandeep Deshpande, Analyst
Thank you so much.
Operator, Operator
Thank you. We will now go to the next question and your next question comes from the line of Janardan Menon from Jefferies. Please go ahead.
Janardan Menon, Analyst
Hi, good afternoon. Thanks for taking my question. I wanted to revisit the topic of the backlog. You have a significant backlog of over $35 billion, including more than $19 billion on the EUV side. In light of a previous question about pushouts, do you perceive a risk when looking into 2024, particularly for your EUV segment? Is your uncertainty primarily regarding potential pushouts in the existing backlog, or is it more about the volume of orders you can secure in Q4 for shipment in 2024? I'm curious about your perspective on whether the risks lean more toward pushouts or the number of orders you can accept in Q4. Thank you.
Peter Wennink, CEO
That's a great question, Janardan. We stay closely connected with our customers and engage in detailed discussions about their needs. Their requirements depend on their current situation and their outlook for the future. Right now, all of our customers are experiencing a downturn and believe we may be nearing a low point, or possibly witnessing some positive changes that could lead us out of this phase. Considering the customers' mindset, if they anticipate these positive changes towards the end of the year, they are likely to expect growth in 2024. Therefore, what we currently discuss with them reflects a minimum scenario, assuming that everything unfolds as we foresee with regards to these positive changes, they will experience growth. However, at this moment, they are not placing many orders; they are currently focused on their existing supplies and the essentials they require for 2024. They have indicated that we should also prepare for 2025 but see their minimum needs for 2024 as a cautious estimate. While a more optimistic scenario could suggest a turnaround in the latter half of 2024, we don't see any signs indicating that this will occur so soon. The conservative outlook they have shared with us suggests there is minimal downside risk. As for potential upside, that would imply that improvements expected in 2025 could actually materialize in the second half of 2024. This is our current perspective, as well as our customers' views, as it relates to our expectations for 2024.
Janardan Menon, Analyst
Understood. I have a follow-up regarding China. As you mentioned, the recent regulations from the US government include the 2.4 nanometer technology, which seems to overlap with the 1980 standards. You're indicating that only a limited number of advanced manufacturing facilities will be affected by this. Do you think this situation could change throughout the year? Is it possible for new fabs to be continuously added or removed from this list? Does this uncertainty impact your overall perspective on China's situation from a geopolitical standpoint over the next year?
Peter Wennink, CEO
I think the question of where the geopolitical confrontation will ultimately lead is a challenging one. There are two main points to consider. First, the way regulations are currently structured is similar to what Japan has done; they apply export controls only to advanced manufacturing, which involves just a few facilities. This could potentially change, but that risk has always existed regarding the expansion of export controls. This brings us back to how future geopolitical escalations will unfold, which remains uncertain. We have to operate with the current regulations, which stem from the October 7 proposal last year and a trilateral agreement involving the Netherlands, Japan, and the U.S. This has produced the current scenario with a limited number of facilities involved. It's important to note that this situation results from extensive discussions among governments rather than arbitrary decisions. While changes are possible, they would require a shift in the geopolitical landscape. Ultimately, I don't have the ability to predict future developments in geopolitics.
Roger Dassen, CFO
Janardan, to wrap up this discussion and build on Peter's earlier point, it's clear that the regulation primarily targets advanced semiconductor manufacturing. Most Chinese customers understood this last year and have consequently shifted towards what we refer to as mid-critical and mature manufacturing. This shift is evident in their actions. As a result, the number of fabs engaged in advanced manufacturing has significantly decreased. Now, we can only identify a few fabs that remain involved in that sector.
Peter Wennink, CEO
Has been achieved.
Operator, Operator
Thank you. We will now conclude the conference call. Thank you for participating. You may now disconnect.