Earnings Call Transcript - ASML Q4 2021

Operator, Operator

Thank you for being with us. Welcome to the ASML Q4 and Full Year 2021 Financial Results. During the introduction, all participants will be in listen-only mode, and after ASML's introduction, there will be a chance to ask questions. I will now hand the conference call over to Mr. Skip Miller. Please proceed, 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 2021 fourth quarter and full year 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 just caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today’s press release and presentation found on our website at asml.com and in ASML’s annual report on Form 20-F and other documents as filed with the Securities and Exchange Commission. With that, I’d like to turn the call over to Peter Wennink for a brief introduction.

Peter Wennink, CEO

Thank you, Skip. Welcome, everyone, and thank you for joining us for our fourth quarter and full year 2021 results conference call. Of course, I hope all of you and your families are still healthy and safe. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the fourth quarter and the full year 2021, and as well as provide our view of the coming quarters. And Roger will start with a review of our fourth quarter and full year 2021 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. Over to you, Roger.

Roger Dassen, CFO

Thank you, Peter, and welcome, everyone. I will first review the fourth quarter and full year financial accomplishments, and then provide guidance on the first quarter of 2022. Net sales came in within guidance at €5 billion. The effects of the logistics center startup and supply chain issues communicated during our Q3 results is a bit longer than expected to resolve, affecting some deep UV shipments in Q4. In order to address our customers’ need for additional capacity we completed an increased number of productivity upgrades in Q4 as a way to provide them with incremental productivity enhancement. We shipped 12 EUV systems and recognized €1.6 billion of revenue from 11 EUV systems this quarter. Net system sales of €3.5 billion was again more weighted towards Logic at 73% with the remaining 27% from Memory. Installed Base Management sales for the quarter came in at €1.5 billion, significantly above guidance, primarily due to the software upgrade. As just mentioned, in the strong demand environment, customers continue to use productivity upgrades to increase output of their installed base. Gross margin for the quarter was 54.2% and was above guidance, primarily driven by higher software productivity upgrades. On operating expenses, R&D expenses came in at €681 million and SG&A expenses at €203 million, which was slightly above guidance. In Q4, we had other income of €214 million related to the sale of the non-semiconductor businesses of Berliner Glas. Net income in Q4 was €1.8 billion, representing 35.6% of net sales and resulting in an EPS of €4.39. Turning to the balance sheet, we ended the fourth quarter with cash, cash equivalents and short-term investments at a level of €7.6 billion. Moving to the order book, Q4 net system bookings came in at €7.1 billion, including €2.6 billion for 0.33 NA EUV systems and €1.55 NAV system and EXE:5000 systems. Order intake was strong from both deep UV and EUV, largely driven by Logic, with 77% of the bookings and Memory accounted for the remaining 23%. For the full year, net sales grew 33% to €18.6 billion. EUV system sales in 2021 was €6.3 billion, which is a 41% increase from last year. We achieved 50% EUV growth margin systems on the systems in 2021 and continue to improve EUV service margin. Non-EUV system sales in 2021 was €7.4 billion, which is a 26% increase from last year. On the market segments for 2021, Logic system revenue was €9.6 billion, which is a 30% increase from last year. Memory system revenue was €4.1 billion, which is a 39% increase from last year. Installed Base Management sales was €5 billion, which is a 35% increase compared to previous year. In 2021, we had total bookings of €26.2 billion, more than 2x increase year-on-year, reflecting customers’ strong demand for EUV and DUV technology. Our R&D spending increased to €2.5 billion in 2021, as we continue to invest in innovation across our product portfolio. Overall, R&D investments as a percentage of 2021 sales was about 14%. SG&A was about 4% of sales. Net income for the full year was €5.9 billion, 31.6% of net sales, resulting in an EPS of €14.36. Improvements in working capital contributed to a free cash flow generation of €9.9 billion for 2021, mainly driven by customer down payments following the very significant order intake this year. We continue to invest in support of our roadmap and planned capacity ramp. Excess cash will be returned as per our policy. With that, I would like to turn to our expectations for the first quarter of 2022. We expect Q1 total net sales to be between €3.3 billion and €3.5 billion. Lower guidance relative to Q4 is primarily due to a number of so-called fast shipments. These are shipments in the quarter for both EUV and deep UV that will not complete factory acceptance after. As we have discussed in prior quarters, fast shipments are in support of customers' desire to bring systems into production as quickly as possible. By skipping some of these tests in our factory, we can shorten the cycle time. Final testing and formal acceptance then takes place at the customer side, at which time we will recognize revenue. The value of the Q1 shipment is expected to be between €5.3 billion and €5.5 billion, which means approximately €3 billion of revenue is expected to be deferred to subsequent quarters. We expect our Q1 Installed Base Management sales to be around €1.2 billion. Gross margin for Q1 is expected to be around 49%. The lower gross margin quarter-on-quarter is primarily due to the fast shipment impact of delayed revenues and lower upgrade business compared to last quarter. The expected R&D expenses for Q1 are around €760 million and SG&A is expected to command at around €210 million. Our estimated 2022 annualized effective tax rate is expected to be between 15% and 16%. Regarding our capital return, ASML paid total dividends of €1.4 billion in 2021, made up of the 2020 final dividend and the 2021 interim dividend. ASML intends to declare a total dividend with respect to 2021 of €5.50 per ordinary share. Recognizing the interim dividend of €1.80 per ordinary share paid in November 2021, this leads to a final dividend proposal to the general meeting of €3.70 per ordinary share. Total 2021 dividend is a 100% increase compared to the 2020 dividend. The 2022 Annual General Meeting of Shareholders will take place on April 29, 2022. 2021 was a rather exceptional year in terms of share buyback. ASML acquired 14.4 million shares for a total amount of €8.6 billion as part of our current and previous program. With that, I would like to turn the call back over to Peter.

Peter Wennink, CEO

Thank you, Roger. As Roger has highlighted, we have another record year of both sales and profit. We are seeing unprecedented customer demand across all market segments from both advanced and mature nodes, driving demand across our entire product portfolio. Looking to 2022, as we note our lower Q1 revenue due to Q1 fast shipments, as highlighted by Roger, we expect a significant increase in revenue for the remaining quarters. For the full year, we expect a net sales increase of around 20% compared to 2021. And bear in mind that this 20% sales growth does not include revenue from six EUV fast shipments in Q4 2022 and if you would take the full shipment value of the six EUV fast shipments into account, the growth percentage would have been 25%. For our EUV business, we still expect to ship around 55 systems, of which we expect revenue from six systems to be deployed in 2023 due to fast shipments. This translates to an expected EUV system revenue of around €7.8 billion in 2022. In our deep UV and application business, we expect growth in both commercial and dry systems, as well as continued demand for petroleum and inspection systems. We are also planning fast shipments for some deep UV systems, but we do not expect this to impact our 2022 revenue due to inherently shorter installation times for deep UV. We expect revenue growth of over 20% to non-EUV system revenue. For Installed Base Management business, service revenue will continue to scale with the growing installed base systems and customers will continue to look at all methods to add wafer capacity, and although, we saw upgrades pulled into 2021 to improve wafer output capability at our customers, we expect those types of installed base options to also stay very much in demand this year. We currently expect 2022 installed base revenue to be up around 10% year-on-year. Looking at the market segments, given the very strong demand situation and our continued push to increase capacity, we see growth in both Logic and Memory in 2022. In Logic, we have talked for some time now about the digital transformation that is underway as we move to a more connected world. The growing application space and secular growth drivers translated to very strong demand for both advanced and mature nodes. With this continued strong demand, we expect Logic system revenue to be up more than 20% year-on-year. In Memory, we also expect to see continued growth of our business this year. With customer expectations of DRAM bit growth in the high-teens this year and the property tool utilization, bringing at very high levels, customers need to add capacity in addition to planned technology transitions to meet demand. As DRAM customers migrate to more advanced nodes, we also expect to see an interest in EUV demand for Memory. We expect the 2022 Memory system revenue to be up around 25% year-on-year. With this unprecedented demand exceeding our capacity, we are ramping our output capability to meet the strong demand. Of course, this comes with challenges and we are even more vulnerable than running at maximum capacity as there is little room for recovery when things don’t turn out as planned and COVID, unfortunately, is not behind us and it impacts everyone including the workforce in our industry and in the supply chain. We also have to work through supply chain challenges of material and component shortages and COVID-related supply chain disruptions in our workforce, so we have hired a significant number of people throughout last year, and although we are currently in our plant workforce FTE numbers, they still need to be trained and brought up to a learning curve. All of what I just mentioned needs maximum management retention and monitoring, creativity and flexibility from all our partners and stakeholders. We are working closely with our customers to address these challenges. We are doing fast shipments, skipping some of the testing and factory and completing the final acceptance testing at the customer side, which provides more capacity as quickly as possible. This reduces cycle time in the factory and frees up cabin space in our premium, so we can ramp up capacity more quickly. In addition, we continue to provide software upgrades, which will give our customers more capacity. As I said before, we are doing our utmost to respond as best as we can to external challenges by handling COVID-related absentees and material shortages in our supply chain. Also as we reported earlier in January, we had a fire just after the New Year inside a part of our factory in Berlin. The fire was extinguished during the night and fortunately, no persons were injured during this incident. But the fire occurred in part of one production building on the site in Berlin and smoke partly impacted an adjacent building. We have been able to resume production in parts of this building already and the other building on the site has not been affected and is fully operational. The manufacturing of deep UV components has been restarted. And although there was some disruption regarding components for deep UV, we expect to remediate this in such a way that it will not affect our output and revenue plan for deep UV. As for EUV, the fire affected part of the production area of the wafer plan, which is a module in our EUV systems. Based on our current insights, we believe we can manage the consequent certification without a significant impact on our EUV system output in 2022. Overall, while it’s also a very unfortunate event, we are optimistic about the current situation and are very grateful for the enormous efforts and creativity of our Berlin staff. On High-NA EUV, we are currently building the first High-NA system in our new clean room in Veldhoven. We received an order for an EXE:5000 in Q4, the fifth order in total for the EXE:5000 model, which provides order coverage for planned High-NA shipments in 2024. In addition, at the beginning of this year, we received the first order for the EXE:5200. EXE:5200 is ASML’s next model High-NA system, which we intend to launch in 2024 after the introduction of our first High-NA system. EXE:5200 will provide the next step for electrographic performance and productivity. Demand continues to be extremely strong. Even to the point where we believe we are also this year following significantly short of customer demand. Looking beyond 2022, global megatrends, we talked about at Investor Day, a broadening in the application space and fueling demand for advanced and mature nodes, growth in semiconductor end markets and increasingly higher lithography intensity, driving demand for our products and services. We, along with our supply chain partners, are actively adding and improving significant system build capacity to meet future customer demand. In short, we are more confident in our long-term growth opportunities. With that, we’d be happy to take your questions.

Skip Miller, Vice President of Investor Relations

Thank you, Roger and Peter. The Operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I 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. Operator, can we have your final instructions and then the first question, please.

Operator, Operator

Thank you. Our first question comes from Joe Quatrochi with Wells Fargo. Please go ahead.

Joe Quatrochi, Analyst

Thank you for taking the question. I am interested in the DUV side, as the demand you are forecasting for 2022 seems significantly stronger than we initially expected. How should we view the 20% growth in relation to the capacity that you and your supply chain are adding, considering that in the past, you mentioned the goal of building some buffer inventory this year?

Roger Dassen, CFO

It's a great question, Joe. Looking at the overall situation, especially what occurred in the last quarter is crucial. Previously, we anticipated around €8.2 billion for the full year of deep UV, but we ultimately fell short, finishing at €7.4 billion, resulting in an €800 million gap. We managed to recover this in Q4 through increased EUV sales and a higher number of installations. Currently, we’re working to integrate that €800 million into our plans for this year. We already have the necessary materials produced by the supply chain, so now it’s about executing this within our manufacturing setup in Veldhoven. When you do the math, last year we expected to remain flat year-on-year for deep UV based on the initial €8.2 billion estimate. This year, with the €8.2 billion plus the additional €800 million carried over, we estimate around €9 billion after factoring in 20% growth compared to last year. Thus, we're focused on incorporating the shortfall from Q4, with the supply chain ready, and now it's just about maximizing our manufacturing capabilities here in Veldhoven.

Joe Quatrochi, Analyst

Got it. That’s helpful color. And then just a quick follow-up, on your Memory revenue growth expectations, I think, the other expectations for just total Memory WFE is more flat. So can you help us maybe understand just how much of that is being driven by EUV adoption?

Roger Dassen, CFO

Yeah. I mean, well, at least what we can say on EUV adoption is that about 20%, a little north of that even of the EUV sales that we are going to see this year, system sales, will be manually. So if you take about €8 billion, a little under €8 billion, if you look at the revenue number for EUV, 20% of that is related to Memory. So that’s already a substantial part, I would say, at that number.

Joe Quatrochi, Analyst

Very helpful. Thank you.

Roger Dassen, CFO

You are welcome.

Operator, Operator

Our next question comes from Krish Sankar with Cowen and Company. Please go ahead.

Krish Sankar, Analyst

Yeah. Hi. Thanks for taking my question. I have two of them. First one, Roger, for FY 2022, I got the revenue guidance on the tax rate. Did you give a gross margin and OpEx guidance for the full year?

Roger Dassen, CFO

We didn't provide specific guidance, but I can share my outlook. I anticipate a gross margin for this year to exceed last year's, landing around 53%. Last year's gross margin was 52.7%, which benefited from significant revenue from software upgrade packages. If we account for this impact, we can adjust that down by about 0.7% to establish a normalized base of 52%. Factors contributing to the expected increase include MXZ pricing, which we only had this year compared to the previous year, adding approximately 1.5%. Additionally, the High-NA impact on gross margin is expected to be slightly higher this year, contributing around 0.5%. Altogether, these elements point towards a gross margin of 53%. Regarding OpEx, we have only provided guidance for Q1, but I believe our estimates of 4% for SG&A and 14% for R&D will hold for the entire year. This aligns with our €22.3 billion target, which indicates a 20% year-on-year growth in revenue.

Peter Wennink, CEO

We actually gave you complete P&L.

Krish Sankar, Analyst

Thank you, Roger, you already helped me on my model. And I just had a quick follow-up for Peter or Roger. The 20% growth in deep UV this year, can you give some color into how much of that you expect DUV Memory to grow and how much would DUV for foundry growth this year? I think Roger, you mentioned dry and emerging roughly split half at this year, is that correct?

Roger Dassen, CFO

That is correct. That is what I said. I expect both to go up about the same percentage, around 20%. We also provided you with the numbers for the increase in Memory and Logic, and I shared the EUV number for Memory. So, I believe that gives you all the building blocks needed to determine the right figure there.

Peter Wennink, CEO

Yeah. And just to remind you that Logic will be up more than 20% year-on-year and Memory up around 20% year-on-year, so and then with the EUV numbers, you can probably figure it out.

Krish Sankar, Analyst

Yeah. Very helpful. Thank you folks. Thank you very much.

Operator, Operator

Our next question comes from Aleksander Peterc with Societe Generale. Please go ahead.

Aleksander Peterc, Analyst

Yes. Hi. Hi. Good afternoon and thanks for taking my question. Just very briefly on fast shipments, do I understand it correctly that this will now become systematic for EUV going forward? And so this would then imply that you take the biggest hit from this kind of new practice in 2022 and from 2023 the impact should that be negligible as you have only a little more revenue deferred then what you recognized from the previous year, but it then cancels out, is that a correct way of looking at things? Thanks.

Roger Dassen, CFO

Yes, Aleksander, you are correct. It's not only related to energy but also applies to immersion. We are combining both aspects, and for this year, this will be our standard approach. This year, as we've mentioned, approximately €2 billion will be spread across the following quarters related to Q1. Our aim is to minimize installation time for both energy and immersion tools, which should significantly reduce the impact by year-end. We believe we can shorten the installation timeline by two to three weeks to enhance the delta between shipment and customer acceptance. Our expectation is that by the end of the year, the amount related to the six EUV tools will be around €1 billion. Our strategy aims to achieve an addition of roughly €1 billion in the subsequent quarters, resulting in a net loss of €1 billion into next year. Whether this practice continues in the future will depend on its success. If it works well for us and our customers, as it did last year without compromising quality, we are confident in our ability to maintain that standard.

Peter Wennink, CEO

Yes, I want to add that this will apply to systems where there is enough confidence that we won’t face acceptance issues in the field. For the first type of a new tool, we will likely conduct traditional factory acceptance tests for the first four or five systems in Veldhoven to ensure that if any issues arise, we have a robust R&D team available to resolve them rather than pushing those problems to the field. I completely agree with what Roger said, but I want to specify that for new product introductions, we will probably follow the traditional approach for the initial tools.

Aleksander Peterc, Analyst

Okay. Thank you, very much.

Operator, Operator

Our next question comes from C.J. Muse with Evercore. Please go ahead.

C.J. Muse, Analyst

Yeah. Good morning. Good afternoon. Thank you for taking the question. I guess first question on gross margins, if I take that 53% and what you guided Q1, it looks like you are going to exit the year at roughly 54%. Is that the right number to use? And as part of that, that is the low end of your 2025 target model? So, I guess, I’d love to hear your thoughts on what you are going to do here exiting calendar 2022 and the confidence that provides to you in terms of your future outlook?

Roger Dassen, CFO

Yeah. C.J., so somewhere in the year, indeed, if we want to get to 53% for the full year and we start with 49%, somewhere in the year will have higher percentages. And also, as I mentioned, somewhere in the year, we will gain on the revenue side, right, on the sales side, because we lose €2 billion in the first quarter, only €1 billion for the year. So we are somewhat going to gain the building. So, and of course, those two are related. Whether that is going to be in Q4, I cannot tell you. So somewhere in the course of this year, we are going to see an improvement of the gross margin beyond the 53%. Bear with me it’s a little bit too early to already start making predictions on the gross margin for 2023.

C.J. Muse, Analyst

That’s helpful. Thank you. I guess, maybe a bigger picture question for you, regarding visibility. I think this is the highest kind of backlog coverage you have ever had as a company, and I guess, obviously, part of that EUV related and obviously part of it’s the supply constraints out there. But just curious, how do you think about that and I guess how are you thinking about the capacity you need to add into, I think, you talked about a $1 trillion kind of semiconductor market and the confidence you have today on 2023 revenue growth?

Peter Wennink, CEO

I believe it's a strong number and a valuable question. While I can't provide the exact figure, I can say that we anticipate shipping more systems, including deep UV and EUV, in 2020 compared to 2021, and I expect the same trend to continue in 2023. In fact, I foresee our EUV shipments exceeding 60 systems in 2023. This expectation is partly due to the reduction in cycle times we've discussed, which could result from faster shipments and shortened installation periods. That will definitely occur. And also for deep UV, I think, we can still squeeze, start squeezing and reducing cycle time in the supply chain, so we can do potentially more systems next year than we do this year. Having said that, I think we are still in a situation where, and I said it on the video, but also on several occasions today, that the demands for all our technology also specifically deep UVs so significantly higher than what we can currently make. When we look at our maximum capacity today, I think, the demand, which is not orders, but the demand, which customers would like to give us an order, but they don’t, because we don’t have the capacity, to be around 40% higher than what we can currently make. Everything moves out and so what we cannot ship today, we will move to 2023. So now what we cannot ship in 2023, we will move to 2024. That actually means that we need to add capacity beyond what we are currently planning and that is exactly what we are doing today. I believe we have developed a capacity plan that extends beyond 2023, although we haven't fully implemented it with our critical suppliers yet, which we plan to do this quarter. Our goal is to ensure that starting in 2024, we can meet all customer demand. Currently, we are aware that for leading-edge immersion and EUV, customers understand their requirements, and we want to avoid pushing excess demand beyond our maximum capacity into future years. This is the approach we are taking. I mentioned earlier that our EUV for 2023 will exceed 60 due to the measures we've implemented. Additionally, we've decided that we need to expand our capacity beyond that. This will be a topic for discussion with all of you, hopefully, once we receive confirmation from our critical suppliers next quarter.

Amit Harchandani, Analyst

Thank you, Peter.

Operator, Operator

Our next question comes from Stephane Houri with ODDO BHF.

Stephane Houri, Analyst

Yes. Thank you very much. Thank you. Good afternoon, everyone. I just want you have more color maybe on your Chinese business, what’s the size of your Chinese business? What was the growth for the last quarter and what the outlook…

Peter Wennink, CEO

I mean, you are talking about the China business, I guess, in particularly China domestic business, I think, that’s what you are focus on it. And then if you look at the China domestic business, last year, 2021, it was about €1.8 billion and our expectation is that, this will grow at the same base as company growth. So it will grow about 20% for this year, which in the supply constraints environment is exactly what you would expect that China would grow exactly at the same pace as the other deep UV business would be growing and that’s okay. So €1.8 million last year, expected to grow to approximately €2.1 million this year.

Stephane Houri, Analyst

Thank you very much. I wanted to follow up on the service margin of deep UV, which you mentioned is improving. When do you anticipate it will reach the corporate level? Are we still looking at a three-year timeline?

Peter Wennink, CEO

Last year it was about 30%, and we expect it to reach around 40% this year. I believe it will take until 2025 to truly achieve corporate-level efficiency. We have made significant progress in becoming more efficient, and demand for machine hours is improving mainly due to the scale of EUV. That outlines the trajectory we are on. From this point forward, the challenges are much smaller. However, by 2025, we anticipate reaching approximately the corporate gross margin.

Stephane Houri, Analyst

Thank you very much.

Skip Miller, Vice President of 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 ASML Investor Relations Department with your question. Operator, may we have the last caller, please?

Operator, Operator

So for our last question, we have Jerome Ramel with BNP Paribas. Please go ahead.

Jerome Ramel, Analyst

Good afternoon. I have a final question for Roger regarding the free cash flow in Q4. The short-term liabilities increased by €3 billion, more than double compared to Q4 last year. Is this increase solely due to accounts payables, and can you provide a specific number for Q4 compared to last year? Thank you.

Roger Dassen, CFO

No, it's not the account payable. That would negatively impact our supply chain. What it actually is, is primarily down payments on new orders, including orders for 2021 and even further out. We expect an order intake this year of €26 billion. By the end of 2021, we anticipate €8.5 billion in down payments, with a significant portion of that coming in the fourth quarter.

Peter Wennink, CEO

For which we are going to spend that money on building the machines and investing in wafer this year.

Roger Dassen, CFO

Yeah.

Jerome Ramel, Analyst

Okay. And so would it be fair to assume that most of the down payment has been done and gradually as you say normalized in the course of 2022?

Roger Dassen, CFO

Yeah. Exactly. So that’s why I say this is a very special year, because we get all these down payments. Next year, you will still get down payments, but you would also do shipments where you only get a percentage, because you already received the down payments in the year and the year before. And that’s why I said that you will see cash conversion to 100%, frankly, below 100%, because of the fact that this is still a growing company. So that’s why I think in the longer term, you would see cash conversion drop below the 100% at that point.

Jerome Ramel, Analyst

Thank you very much.

Skip Miller, Vice President of 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 would appreciate it. Thank you.

Operator, Operator

This now concludes the ASML 2021 fourth quarter and full year financial results conference call. Thank you all for participating. You may now disconnect your lines.