Earnings Call Transcript - ASML Q2 2024

Operator, Operator

Good day and thank you for standing by. Welcome to the ASML 2024 Second Quarter Financial Results Conference Call on July 17, 2024. 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, Christophe Fouquet; and our CFO, Roger Dassen. The subject of today's call is ASML's 2024 second 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 will also be 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 filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Christophe Fouquet for a brief introduction.

Christophe Fouquet, CEO

Thank you, Skip. Welcome, everyone, and thank you for joining us for our second quarter 2024 results conference call. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the second quarter 2024, as well as provide our view of the coming quarters. Roger will start with a review of our second quarter 2024 financial performance with added comments on our short-term outlook. I will complete the introduction with some additional comments on the current business environment and our outlook. Roger?

Roger Dassen, CFO

Thank you, Christophe, and welcome, everyone. I will first review the second quarter 2024 financial accomplishments and then provide guidance on the third quarter of 2024. Let me start with our second quarter accomplishments. Total net sales came in at EUR6.2 billion, which is just above guidance. Net system sales of EUR4.8 billion, which is made up of EUR1.5 billion of EUV sales and EUR3.3 billion of non-EUV sales. Net system sales were driven by Logic at 54%, with the remaining 46% coming from Memory. Installed base management sales for the quarter came in at EUR1.48 billion, slightly higher than guided. Gross margin for the quarter came in at 51.5%, which was above our guidance, primarily driven by more immersion systems than planned. On operating expenses, R&D expenses came in slightly above guidance at EUR1.1 billion, due to higher R&D expenses regarding metrology and inspection, while SG&A expenses came in slightly below our guidance at EUR277 million as a result of lower IT spending. Net income in Q2 was EUR1.6 billion, representing 25.3% of total net sales, resulting in an EPS of EUR4.01. Turning to the balance sheet. We ended the second quarter with cash, cash equivalents, and short-term investments at a level of EUR5.0 billion. We ended Q2 with free cash flow of EUR386 million, which is an improvement relative to last quarter. However, as mentioned last quarter, there continues to be pressure on free cash flow as we provide some support for our customers and operate at higher inventory levels. The latter being a result of the increased material intake, including High NA as part of our planned capacity ramp in preparation for strong demand next year. We expect a gradual return to normal cash conversion levels as the industry continues to recover. Moving to the order book. Q2 net system bookings came in at EUR5.6 billion, made up of EUR2.5 billion of EUV bookings and EUR3.1 billion of non-EUV bookings. Net system bookings in the quarter were mainly driven by Logic at 73% and Memory the remaining 27% of the bookings. At the end of Q2 2024, we finished with a backlog of around EUR39 billion. With that, I would like to turn to our expectations for the third quarter of 2024. We expect Q3 total net sales to be between EUR6.7 billion and EUR7.3 billion. We expect our Q3 Installed Base management sales to be around EUR1.4 billion. Gross margin for Q3 is expected to be between 50% and 51%. We still expect a slightly lower gross margin for the full year 2024 compared to 2023. Although margins for the second half of the year are expected to be positively impacted by higher volume and a more favorable EUV Low NA mix. We expect this to be offset by increased High NA costs relative to the first half of the year. The expected R&D expenses for Q3 are around EUR1.1 billion and SG&A is expected to be around EUR295 million. Our estimated 2024 annualized effective tax rate is expected to be between 16% and 17%. In Q2, ASML paid a final dividend of EUR1.75 per ordinary share. Together with the interim dividends paid in 2023 and 2024, this resulted in a total dividend for 2023 of EUR6.10 per ordinary share. The first quarterly interim dividend over 2024 will be EUR1.52 per ordinary share and will be made payable on August 7, 2024. In Q2 2024, we purchased 106,000 shares for a total amount of EUR96 million. With that, I would like to turn the call back over to Christophe.

Christophe Fouquet, CEO

Thank you, Roger. As Roger highlighted, a good quarter with sales and profitability above guidance. Although macro uncertainty remains, overall semiconductor industry levels continue to improve, trending towards healthier levels. We also see continued improvement in lithography tool utilization levels at both Logic and Memory customers, all in line with the industry's continued recovery from the downturn. Our outlook for the full year is unchanged with revenue expected to be similar to last year. We currently see strong developments in AI driving most of the industry recovery and growth ahead of other end market segments. We still expect a stronger second half relative to the first half of the year. Logic customers continue to digest the significant capacity additions made over the past year. With this digestion, we see lower revenue from Logic this year relative to last year. In Memory, demand is primarily driven by DRAM technology node transitions in support of advanced memories such as DDR5 and HBM. In support of this transition, we expect growth in revenue from Memory this year relative to 2023. For our Installed Base business, we continue to expect a similar level of revenue compared to last year. As the recovery becomes clearer this year, customers may look to upgrade their system in preparation for 2025. Turning to our businesses. We expect EUV revenue growth in 2024. We plan to recognize revenue on a similar number of EUV systems as 2023 with expected revenue from one to two High NA systems. On our Low NA EUV system, we are deploying an additional NXE:3800E system this quarter as we continue to ramp production. As customers transition to advanced nodes in both Logic and Memory, we expect the majority of shipments in the second half of the year to be NXE:3800E system. Regarding High NA, we shipped the second system this quarter, and it is currently under installation. The first system shipped to a customer is running qualification wafers. Overall, the interest is high with EUV customers now using our High NA system in the joint ASML-imec demo lab in Veldhoven for their initial development. We have already exposed wafers for multiple Logic and Memory customers and have now achieved the imaging resolution specification of 8-nanometer. High NA will enable an almost three-time increase in transistor density relative to the Low NA system. So all-in-all, we see good momentum on High NA and are progressing well against customer expectations. We expect our non-EUV business to be down in 2024, primarily driven by lower emerging system sales relative to 2023. As we have stated over the last few quarters, we view 2024 as a transition year and continue to make investments this year, both in capacity ramp and in technology, to be ready for future demand. While the slope of the industry recovery is still uncertain, based on discussions with our customers and supported by our strong backlog, we expect 2025 to be a strong year, driven by a number of factors as mentioned last quarter. First, the secular growth driver in semiconductor end markets, which we have previously discussed, such as energy transition, electrification, and AI are still very much intact. The expanding application space, along with increasing lithography on future technology nodes, drives demand for both advanced and mature nodes. Second, the industry expects to be in a cyclical upturn in 2025. And last, as mentioned earlier, we need to prepare for a number of new fabs that are being built across the globe, many of which are supported by several government incentive plans. These fabs are spread geographically and are strategic for our customers. They are all scheduled to take our tools. It is essential that we keep our focus on the future and build capacity in preparation for future long-term growth, as we discussed in the market scenario for 2025 and 2030 during our Investor Day in November 2022. We plan to update our view during our Investor Day this year on November 14, 2024. In summary, although there is near-term uncertainty, we remain confident in our long-term growth opportunity. With that, we will be happy to take your questions.

Skip Miller, Vice President of Investor Relations

Thank you, Roger and Christophe. The operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I would like to ask you to 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 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 Krish Sankar from TD Cowen. Please go ahead.

Krish Sankar, Analyst

Yeah. Hi. Thanks for taking my question. Christophe or Roger, the first question is on the bookings composition and the outlook. In the booking for EUV, in the EUR2.5 billion, were there any 2-nanometer orders from foundry customers that you said you should expect in Q2 or Q3? Any High NA in the mix? And based on the bookings momentum and backlog, how do you think about calendar '25 revenues? Do you think it could be towards the upper end of the EUR30 billion to EUR40 billion range? Then I had a quick follow-up.

Roger Dassen, CFO

So on the bookings, as you would have seen in the bookings mix, 73% of the bookings were related to Logic. So I think that gives you a pretty strong indication of who the buyers are and who is in the mix. So I think it is reasonable to assume that the foundry business at 2-nanometer is in the book. So that's one. High NA is not in there. So no High NA bookings in this quarter. So everything you see there on EUV is related to Low NA. As it relates to 2025, Krish, we're very consistent in our messaging and that's what we say. We confirm what we said in November of 2022, which is we expect 2025 to be between EUR30 billion and EUR40 billion. We've also said it's not the low point of that guidance. Last quarter, we provided a bit of an understanding of what it takes to be fully booked at the beginning of 2025 for the midpoint of the range. I think you can conclude with the bookings number that we've reported that we're nicely on track. But with that, we still confirm that our expectation is between the EUR30 billion and EUR40 billion and are not going to be more specific than what we've been so far.

Krish Sankar, Analyst

Got it. Roger, that's very helpful. And then a quick note.

Roger Dassen, CFO

I think Christophe was very clear in his comments. During the Capital Markets Day in November 2024, we will provide more specific guidance for 2025. That's when we will narrow the guidance, but we won't do that before then.

Krish Sankar, Analyst

Thanks, Roger. Thanks a lot for that amazing color. And then a quick follow-up for Christophe. Obviously, the article today about the US administration looking to impose some severe trade restrictions using the foreign direct product rule on China shipments. I know, obviously, you folks are good citizens, follow the rules. Kind of curious what do you think about the potential implication for ASML from here? How much more severe could it be, given the fact that you do have a pretty high exposure to China? If you can give some color or some bookends around it, that'd be very helpful. Thank you.

Christophe Fouquet, CEO

Well, I think, first we don't comment on rumors, and there's a lot of rumors on that topic. So I think on that topic, we comment even less, I will say. So that's the first thing. I think we had discussions on China in the past together. I think the point Roger and I have made in the last few quarters, which is still valid, is before you look at China, I think you have to look at the opportunity we see on the mature semiconductor market. That opportunity was defined as being significant in our Capital Market Day in November 2022. We still believe it's significant. In 2023, 2024, China has been investing a large part of this market. And this is why I think our revenue on China has been high. Moving forward, we still believe that this market is needed and therefore that the capacity from China has to come from somewhere. So that's a bit the position we take on that discussion. I think we always look at the end market, at what's the need of the end market. I think we are a bit less sensitive on where that capacity may be produced.

Krish Sankar, Analyst

Thanks, Christophe. Thank you.

Operator, Operator

Thank you. We will now take the next question. And the question comes from the line of Alexander Duval from Goldman Sachs. Please go ahead.

Alexander Duval, Analyst

Yeah. Thanks for the question. You confirmed today that it's fair to assume that a Logic customer ordered on 2-nanometer this quarter. But clearly for such a large node, one would expect to see more order flow. So I wonder to what extent it's fair to assume one should expect more EUV orders from them in the coming quarters. And as a quick follow-up, you mentioned in your prepared remarks that AI is driving most of the industry's recovering growth. Are you able to decompose? What specifically is driving this for ASML? To what extent do you see litho needs being driven by high bandwidth memory, data center processing, or edge AI? Is there any area that's surprising to the upside? Many thanks.

Roger Dassen, CFO

It's evident that the orders we've received indicate a strong start for the N2 foundry business. While it’s a positive beginning, we don't yet have full capacity for this node. This is understandable since the customer will gradually ramp up, leading to an incremental increase in orders during that process. For further details on the specifics of this buildup, you might want to discuss that in tomorrow's call. Now, I’ll pass it over to you, Christophe.

Christophe Fouquet, CEO

I believe we've been consistent in our comments. AI is currently driving the largest part of the recovery. This applies to both Logic and Memory. As Roger mentioned regarding Logic, high bandwidth memory products increase wafer demand since they feature higher density DRAM. We expect to observe positive effects for 2025, which we anticipate will continue into 2026 for both Memory and Logic. However, it's worth noting that other segments may lag in recovery. A significant portion of our capacity for Logic and DRAM is being allocated to AI products. As the other segments recover, we expect some of that capacity will be needed there as well. Therefore, we believe 2025 will be a strong year. While the pace of recovery is uncertain, the fundamentals surrounding AI and the overall recovery appear strong from our perspective.

Alexander Duval, Analyst

Many thanks.

Operator, Operator

Thank you. Your next question comes from the line of Tammy Qiu from Berenberg. Please go ahead.

Tammy Qiu, Analyst

Hi. Thank you for taking my question. So, first one on the leading-edge 2-nanometer ramp-up phase. So you mentioned that they are starting to ramp-up their leading-edge 2-nanometer capacity already or preparing for that. Do you notice anything in this quarter suggesting that they are pulling in the ramp-up phase or everything is as planned? And the second question I have is regarding the DRAM adoption of more EUV layers as well as High NA EUV. How do you see the layer count change over the next few generations? Are we going to see similar levels of growth of layers as we have seen over the past two years, or will it gradually slow down? If there is a number you can share, it would be great. Thank you.

Roger Dassen, CFO

I'll take the first part, Christophe, and you can take the second. But as it comes to, do you notice any pull in there, I think the foundry customer has indicated that they're looking at N2 in the second half of 2025. I think you're typically for this customer looking at a lead time of around a year. As we've said before, I think, putting in orders at this stage is consistent with that to the extent that there is a difference in timing or ramp. Again, I think that's a question that you might want to raise on a conference call tomorrow. But I think what we see here is pretty consistent with what we've also heard from them publicly about starting this in the second half of 2025. Christophe, on DRAM?

Christophe Fouquet, CEO

Yeah. On DRAM, we see an increase in EUV use on every node. I think this trend will continue at least in the foreseeable future. Of course, it's always more difficult to make forecasts on nodes or technology that are still being defined by customers, but that logic is still in place. I think you have seen also in DRAM that at this point in time, all customers are using EUV in production. I think the last customer was very public about that recently. So you see a gradual basically adoption with different speeds, maybe per customer, but I would say very much in line with what we explained already for a few years. On High NA, we also see opportunity for DRAM at the horizon of '25, '26. As I mentioned in my commentaries, we see customers very eager to test the High NA tool in our lab, exposing their own wafers to validate that High NA can provide a nice opportunity both in performance and in cost savings. So they also, same as before, we believe that '25, '26 is about the time where we could see some insertion of High NA for DRAM.

Tammy Qiu, Analyst

Okay. Thank you.

Operator, Operator

Thank you. We will now take the next question. And the question comes from the line of Francois Bouvignies from UBS. Please go ahead.

Francois Bouvignies, Analyst

Thank you very much. My first question would be on China, I'm afraid, and it's very simple. Could you make in the future deep EUV tools without US IP at all? And are all your deep EUV tools using US IP? That's my first question.

Roger Dassen, CFO

That's a very hypothetical question. At this stage, we have many operations in the United States, so a significant portion of the technology in those tools originates from there. Speculating about whether we could operate without US technology isn't something we should pursue. The way we produce and manage our business shouldn't be affected by this kind of inquiry.

Francois Bouvignies, Analyst

Okay.

Christophe Fouquet, CEO

Yeah, I think, maybe to add to that, I think we've been also very vocal to say that we believe that preserving the ecosystem as much as possible is a good thing for this industry. I think we still believe that. And therefore I think that's still also the discussion we're trying to have with all the stakeholders.

Francois Bouvignies, Analyst

Thank you for your response. I have a follow-up question. If we consider the EUV orders of 2.5 billion alongside your 39 billion backlog, it seems you still need to book about 30 EUV tools next year to meet the midpoint of your guidance. Roger, you mentioned that your order backlog is progressing well beyond the 4 billion euros, primarily driven by deep EUV. However, it appears you still need to book 30 more EUV tools for the rest of the year, suggesting that you might require around 7 billion euros in EUV orders in the second half compared to 3 billion in the first half. Is this correct? It seems that a significant portion of your EUV orders still needs to be booked in the latter half of the year, assuming there are one-year lead times.

Roger Dassen, CFO

The math we provided earlier is still valid. As I mentioned, we are on track to meet our objectives. We’ve outlined a range for our full revenue in 2025, and while you’re focusing on a specific aspect of that revenue, our overall calculations for total revenue still stand. Going into further detail at this time won’t enhance the message, which is that we are making good progress toward achieving our goals and the range we’ve discussed. I prefer not to delve into the specifics of the components right now. As I mentioned before, we have a Capital Markets Day coming up, where we will provide more details on our outlook for 2025. Until then, we will continue to uphold the core message I’ve previously shared.

Francois Bouvignies, Analyst

Understood. I tried my chance. Thank you.

Roger Dassen, CFO

You did.

Operator, Operator

Thank you. We will now take the next question. And your next question comes from the line of Stephane Houri from ODDO BHF. Please go ahead.

Stephane Houri, Analyst

Hello, thank you for answering my question. In your prepared remarks this morning, you discussed increasing capacity or at least being ready for the ramp-up. Does this imply that you plan to increase capacity, invest more, and possibly open a new plant? Thank you.

Roger Dassen, CFO

In general, when we discuss increasing capacity, we mean expanding capacity across the board. This is related to our previous discussions about reaching 600 deep EUV tools and 90 EUV tools. Additionally, we are also enhancing our capacity for High NA. It’s about that combination. So, when we mention adding capacity and ramping it up, we are referring to the total of 9,600, and as we have indicated before, we are medium-term aiming for 20 High NA tools.

Stephane Houri, Analyst

Okay. And can you maybe clarify where we're standing in terms of ASP for High NA tools? Thank you.

Roger Dassen, CFO

On the High NA tools, what we said before is that we're looking at an ASP north of EUR350 million. That's the ASP that we have for the 5,200 tool, which is the high volume manufacturing tool that customers are ordering in this time frame.

Stephane Houri, Analyst

Okay. Thank you.

Roger Dassen, CFO

You're welcome.

Operator, Operator

Thank you. Your next question comes from the line of Andrew Gardiner from Citi. Please go ahead.

Andrew Gardiner, Analyst

Hi. Good afternoon, gentlemen. Thanks for taking the question. If you don't mind, I'll try another one on China. I'll try and be specific and we'll see whether you can comment on it. The article this morning seems to be, again, quite focused on your service activity in China and in particular, your servicing of tools that you were able to ship last year, high-end immersion tools, NXT:2050 models. But as of the start of this year, you're no longer able to ship. Can you tell us whether you're still indeed servicing those tools at some of those clients? Yeah. Can you just clarify that?

Roger Dassen, CFO

Well, we are following all the applicable laws and regulations when it comes to export controls. And of course, that is a landscape with US rules and with Dutch rules. So for some fabs, there are more limitations than others. But in general, it is still the case that we can operate in the fabs of our customers. So we still have, as we call it, we still have eyes on the tools, so we're still in the fabs of our customers. But there are limitations that for some fabs are more stringent, and this is then particularly related to parts being sent either from the United States or from Europe or when it comes to the use of technology. So manuals, et cetera. So there are limitations that for some fabs are more stringent than for other fabs. But in general, we're still in a position that our people can continue to serve in the fabs of our customers.

Christophe Fouquet, CEO

And I think we'll be aware we have been now in this position for quite a few months. So I think the landscape has been set. So I think Roger said it. We fully understand the new regulation. We have adjusted our service and our actions according to that. But for us, this is not new news at this point in time. We have been doing that for many months already.

Andrew Gardiner, Analyst

Thank you. Also, if I could have a quick follow-up. Christophe, you mentioned the new fabs that are going to be built, some of which supported by CHIPS Act money or equivalent funds in other jurisdictions. With all of those fabs scheduled to take tools, how much of an impact do you think is that in 2025 and how much is actually beyond that, given the lead time it takes to build a lot of concrete and steel going in at the moment, but there's certainly not many ready to take actual clean room equipment just yet? Can you help us with how you think that's going to phase over '25 and then '26 and beyond?

Christophe Fouquet, CEO

Yeah. So I think to make the answer simple, I think, most of it will come, in fact, after 2025. So I think the volume from those fabs is still limited next year. I think you're mostly aware of the big announcements either in the US, in Europe, in Japan. So I think this will come after '25, mostly starting in 2026. This was also with my comment about preparing also the capacity for that. So as Roger explained, when we prepare the capacity, taking into account the lead time we have for some of our factories, some of our suppliers, of course, the capacity is there to meet the market demand, in fact, beyond 2025. So this is what we wanted to prepare for. So this is also why we are still very comfortable with the long-term view of the market, because those things are going to come. And we could expect even more government funding moving forward, because as you also see it in the news, I think there is more and more wish from everyone to really invest in this business. So I think that's also something we don't expect to slow down over time. We expect that there will be more after the first wave of investment.

Roger Dassen, CFO

So Andrew, that's absolutely right. And to add to that, of course, there are many new fabs that are being built, and not all of them are necessarily associated with the CHIPS Act money. So that's why also in the past, we said that when it comes to 2025, more than half of the shipments will go to new fabs, including new fabs, for instance, that are being constructed in Taiwan. So more than 50% of our shipments for 2025, we expect to go to new fabs. But Christophe is absolutely right. I think the effect really of the CHIPS Act money, I think you should probably see beyond that year.

Andrew Gardiner, Analyst

Thank you very much.

Operator, Operator

Thank you. We will now take the next question. And the question comes from the line of Chris Caso from Wolfe Research. Please go ahead.

Chris Caso, Analyst

Yes, thank you. Good morning. The question is regarding revenue for the back half of the year. And based on where you're guiding for the third quarter and maintaining the view on the full year, that does anticipate some acceleration as you go into the fourth quarter. Could you give some color on what's going on there with regard to the timing of the orders? Is this just kind of typical timing differences between some of the shipments in the third quarter and fourth quarter? And what gives you the confidence in the fourth quarter, please?

Roger Dassen, CFO

We are indeed building up momentum, which aligns with our outlook for 2025 as a growth year. As we progress through 2024, it is evident that this momentum is increasing quarter by quarter. We have been enhancing our capacity to meet this demand, which is also rising as we approach growth in 2025. Additionally, we have some deferred revenue that we are accumulating, resulting from systems we have shipped but have not yet recognized revenue for. The impact in the second half of the year is expected to be around a billion, which is significant. This figure comes from the expedited shipments we have made, and as our intention is to cease these expedited shipments by the end of this year, it contributes positively. Furthermore, we are shipping 3,800 tools for which we will recognize revenue after site acceptance testing by the customer. We are also shipping High NA tools, with revenue recognition occurring only at the moment of site acceptance testing. These factors will enable us to recognize revenue for items that have already been shipped. Given this momentum and our expanding capacity and demand, we anticipate a substantial increase in revenue throughout the year, aiming for over EUR9 billion in Q4.

Chris Caso, Analyst

That's very helpful color. Thank you. As a follow-up, I just wanted to follow up on some of the comments you spoke about for High NA DRAM. And speaking of timing, you think '25, '26 insertion timeframe for that. Obviously, the lead time for those tools are very long. It sounds like the customers are in your labs right now. What's your anticipation regarding timing on development tools or production tools for that and some idea of perhaps magnitude of tools or layer count for that going forward?

Christophe Fouquet, CEO

I think I should start by mentioning that we have a solid backlog for High NA, meaning all our EUV customers have placed orders for those systems. We are beginning to deliver these tools, and this coincides well with the opportunity to insert. The addition of the lab is beneficial for our customers because it allows them to obtain initial data even before the tools arrive. As you know, the early data on High NA technology is crucial for understanding its value. Currently, the wafers being exposed are already offering valuable insights that our customers can use to refine their insertion scenarios and assess the potential benefits of High NA. We are quite excited about generating this data and so far, the information aligns well with our customers' expectations, which is very encouraging.

Chris Caso, Analyst

Thank you.

Operator, Operator

Thank you. Your next question comes from the line of C.J. Muse from Cantor Fitzgerald. Please go ahead.

C.J. Muse, Analyst

Yeah. Good morning. Good afternoon. Thank you for taking the question. I guess first question, I would love to hear your thoughts around any changes in customer conversations over the last three months, whether foundry logic, and particularly as it relates to your more robust immersion shipment outlook for the second half of this year.

Christophe Fouquet, CEO

Well, the short answer is, no. No big change. I think the discussion we have with our customers are very consistent. So a lot of ramp of AI, the ramp beyond that, we don't see any major change. In fact, I would say our view of the market this quarter is very much the same as the one we had last quarter. I think the big difference, as you have seen, is that we have made progress with bookings on some of the segments, answering maybe one of the big questions we got from all of you last quarter. But the view of the market for Roger and me is not changing. I think the discussions are very consistent.

Roger Dassen, CFO

When it comes to immersion, your other question, we continue immersion to continue to be strong, even though in the total mix, we do believe that the mix in the second half will be a lot more dry. So in the deep EUV mix, you will see the dry component becoming more significant than it was in the first half. But overall, we do believe that immersion will continue to be strong also in the second half of the year.

C.J. Muse, Analyst

Thank you. And as a quick follow-up, can you speak to the 3,800? You talked about the majority of shipments in the second half of this year. Think about the impact to gross margins and ASPs for the second half of '24, and then kind of the same question for all of 2025. Thank you.

Roger Dassen, CFO

As Christophe mentioned, we expect to have 3,800 EUV tools in the second half of the year. However, it's important to note that the initial shipments of the 3,800 tools will not be fully configured right away. We will gradually enhance the 3,800s to reach the full specification of 220 wafers per hour. This means that not all of the tools shipped in the second half will generate the higher average selling price, as some revenue will be deferred until the tools are upgraded. Therefore, we may not fully benefit from the strong pricing of the 3,800s in the second half, although it will certainly provide some assistance. The impact will be more pronounced in 2025, when the share of the 3,800s will increase and all tools will meet the final specifications. Additionally, we will recognize some deferred revenue in Q4 from tools shipped in 2024. When considering gross margins for the second half, this will be one factor, along with positive contributions from higher volumes in 2025 and the second half of 2024. There will be a slight negative impact from the DVP mix, as the dry component will become more significant. Furthermore, we expect to see the first revenue from High NA tools in the second half. While this is a positive sign that customers are approving the tools, the gross margin for these tools is not high. As a result, we anticipate a slight decrease in gross margin for the second half compared to the first half of the year.

C.J. Muse, Analyst

Very helpful. Thank you.

Roger Dassen, CFO

You're welcome.

Operator, Operator

Thank you. Your next question comes from the line of Didier Scemama from Bank of America. Please go ahead.

Didier Scemama, Analyst

Yes. Good afternoon. I have a couple of questions. First on High NA, maybe for Christophe. It's good news that you told us about transistor density and the quality of the imaging on High NA. How are your conversations going with one of your customers that historically was a bit reluctant with that technology? I understand they came to visit you in Veldhoven, which is reasonably unusual. Just tell us a little bit about the feedback you got from that visit, whether you think the bid-ask spread between what they want and what you can deliver, how is that progressing. And I've got a follow-up.

Christophe Fouquet, CEO

Yeah. So first, I'd like to say I think we never qualify any customer as being reluctant for High NA. I think this information came from somewhere else. I think the short answer is the data generation help. Again, we are exposing important wafers. We told you in the past, we are happy to get that amount of backlog on High NA because our customers were showing the trust in the technology without having any data at hand. So they were basically following our, I would say, analysis or our promise that this will help them moving forward. And they have been willing to invest in R&D quite heavily and, by the way, even down payment some of those systems. So this has a huge commitment from the industry. I think the data is helping tremendously because our customers can see data. I think that can be used also for potentially their customers to have a much better discussion around High NA. So I think the dynamic is good. And I would say the discussion is getting a lot more concrete. And I think we need to give a few more months to that discussion, so that everyone, based on data this time, has a bit of a better idea of what could be done moving forward with High NA and how quickly.

Didier Scemama, Analyst

Excellent. Thank you. My follow-up is a bit of just picking your brains, and I'm sure you've got like armies of PhDs learning simulations. But if we were to assume that there is some sort of AI, PC, and smartphone refresh cycle pushing volumes for those combined markets to maybe a high single-digit volume growth in calendar year '25 or calendar year '26, do you think that there is enough capacity in DRAM, maybe NAND, and maybe to a lesser degree in logic to deliver that potential uplift in volumes?

Christophe Fouquet, CEO

Well, I think everyone is maybe trying to answer that question. I think it's very difficult to answer the question. I think what we have seen with AI is a major investment from many companies in supercomputers in the ability basically to train models. What we still miss in AI, I think, is the emergence of end product. So I think today, there's not much revenue made on AI. There's just a lot of investment. What we see is that still that investment requires a lot of capacity. I think you have seen some of our customers announcing also more capacity to be built before 2028. And as I said before, if the rest of the application were to recover, what has been done so far, which is to reallocate some of the capacity to HBM, may become more difficult. So overall, I think we still expect, as the rest of the market recovers, to see a need for more capacity. And that's, I think, also true for DRAM. Now to tell you at what speed, I think, this is still a bit difficult. I think we said it a few times. I think the recovery is something we are looking at every day and there is also a lot of uncertainty. So this is why you still see us being, I would say, strong in our view of 2025, but also a bit cautious because there's still a lot of uncertainty around these opportunities.

Didier Scemama, Analyst

Brilliant. Thank you.

Operator, Operator

Thank you. We will now take the next question. And the question comes from the line of Mehdi Hosseini from Susquehanna. Please go ahead.

Mehdi Hosseini, Analyst

Yes. Thank you for letting me ask the question. Two follow-up. Christophe, is there anything you can share with me to give me confidence that 3,800 is going to finally be on track? If I go back to your '22 Analyst Day, the transition was supposed to happen in '23, got pushed back to early '24 and now it's a big hockey stick coming with the 3800E shipment. Is there anything you can share with us in terms of throughput or any other thing that would help us with incremental confidence? And I have a follow-up.

Christophe Fouquet, CEO

Yeah. So I think there's two parts of that. I think the technology part where we are busy here in ASML to demonstrate basically the performance of the tool. We have seen very big progress there. We have measured 195 wafers per hour on the tool. We expect to see the final specification being measured also in the coming weeks. We don't see any hard showstopper, so we just see some work to be done. With the customer, I think some of the delay was also a choice we made to support the demand in the previous year. So if you remember, 2022 was a year where we saw a very strong demand from all customers on EUV. And we thought this would be wise to slow down a bit the ramp to the next product to not disrupt that demand. At this point in time, the tool also is getting at the customer. We made a choice, as has been explained before, to ship it initially at lower throughput, so that the qualification could start earlier at our customer, so that they can be ready for high-volume manufacturing next year when I think this is the real expectation for this tool to run in manufacturing. So from my point of view, maybe we said that the biggest element to help you is that technology-wise, there is no concern at all. And when it comes to qualification with our customer, I think this is underway. And of course, we are going to use the next few months to mature the system. It always takes a few months to do that.

Mehdi Hosseini, Analyst

Thank you. And for Roger, I think if I'm not mistaken, in the last earnings conference call, you talked about EUR700 million of fast shipment. Did I hear you correctly that you said it's up to EUR1 billion now? Is that the right figure for fast shipment?

Roger Dassen, CFO

Yeah. I think there are different numbers, Mehdi, and that's why I just lumped it together. So as I mentioned, we have a fast shipment effect, and your memory serves you well. But in addition to that, we also have 3,800 that we shipped in H1 but will recognize revenue in H2. And also, we have High NA tools that, with the long lead times and given this is a very new technology, we're going to recognize revenue not upon shipment, but upon SAC. And that combination of things that we expect is around EUR1 billion to be added to the revenue in the second half. So that's the difference. It's not just a fast shipment, but also the other dynamics that I just talked about.

Mehdi Hosseini, Analyst

Got it. Thank you.

Roger Dassen, CFO

You're welcome.

Operator, Operator

Thank you. Your next question comes from the line of Sandeep Deshpande from JPMorgan. Please go ahead.

Sandeep Deshpande, Analyst

Yeah, hi. Thank you for letting me on. My first question, I mean, clearly there were earlier questions on this, but I'm trying to ask it another way, which is that you don't have a view on where you're going to land in 25 years. And one can understand that given deep EUV, et cetera, they have much shorter lead times. But on EUV itself, given where the lead times on EUV are, you probably have a view on how many tools you're going to build into EUV already. So, I mean, my question would be, what is the capacity you have for EUV next year? And I mean are you building fully to that capacity or are you going to be building less than that capacity at this point? And I have a quick follow-up.

Roger Dassen, CFO

An A for effort, Sandeep, for sure in asking the question. But we're going to stick to our guns here, also on EUV. Wait until the Capital Markets Day. There we will give you a lot more color and context. We have been building capacity for EUV. As you know, we are working towards a capacity level of 90 in the '25, '26 time frame. So we have been driving up capacity quite a bit. So there is quite some room that we have to accommodate demand on EUV. But we are not going to give any more color as to what our expectations for EUV sales are going to be. In November of 2025, we'll give you a more concrete picture. Just reiterating, between 30 billion and 40 billion, and it will not be the low point. I think that's the expectation that we've articulated before and that's where we still are.

Sandeep Deshpande, Analyst

Thank you. Maybe stepping back a little bit. I mean, there have been a lot of conversations in the industry about whether litho is going to continue the kind of scaling it has done over the last 20 years, given the challenges with shrinking here from the current level. So maybe in terms of the adoption of High NA and litho itself, Christophe, maybe you can make any comments on your interactions with the foundries and the memory companies have been in terms of using litho as a critical driver of the scaling in semiconductors over the next few years because there has been a lot more conversation in the industry about the limitations of litho.

Christophe Fouquet, CEO

Well, I think it's two things that are well known. So, first, I think you're hinting to it. I think if we look at the last few years, the scaling, the shrink is slowing down. I think this is not new. And for a long time, litho had an impact on that. I think at this point in time, it's more fundamentals, basically, and related to all the innovation you need to put in place in order to be able to scale the transistors. Now, this being said, scaling is slowing down, so that's the reality we have been facing. What is not slowing down is the need for transistor density. So that curve, which is more slow, practically, is not slowing down. So customers are asking for more density at the same speed they have done for many, many years. And as scaling slows down, I would say shrink becomes even more valuable because shrink is still today the best way to save costs on density. Everything else requires you to just build more transistors with more steps. So shrink today, and that's true today, is still the best way to reduce cost. And sometimes, we say the less you can shrink, the more the value of shrink is going to be. That's one thing. The other thing, of course, is if you shrink less, you need more volume. And more volume can be obtained by exposing more wafers or exposing more stack on the wafer. But in both cases, this drives also more lithography. So we never really feared the reduction of shrink because this drives demand. This is one of the reasons why we have been building capacity. And at the same time, we know that every step we will be able to make in lithography will have huge value for our customers. So this is something also we believe continues to be important. And of course, most probably over time and we'll also talk a bit about that in November, we will look at more ways to help our customers to drive this density up. I will say, no news there. Scaling is slowing down. It's not a difficult thing to say for a litho person, it's just reality. Density does not. Therefore need for more volume, more value for shrink. And I think we can expect to see some opportunities to look at other applications to help our customers to raise this density at cost. We'll talk a lot about that in November because I think it's one of the things we want to explain again.

Sandeep Deshpande, Analyst

Thank you, Christophe.

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 the ASML Investor Relations department with your question. Now, operator, may we have the last caller, please?

Operator, Operator

Thank you. The last question today comes from the line of Adithya Metuku from HSBC. Please go ahead.

Adithya Metuku, Analyst

Yeah. Good morning. Good afternoon, guys. Thank you for taking my questions. So, firstly, just a clarification on your backlog. I just wondered if you could give us a sense of how big domestic Chinese demand is as a part of your backlog today, just to get a sense for the level to which it may contribute to revenues next year. And secondly, just on China again, there's a lot of rumors flying around, and I suspect the rules that are in place today are the result of some give and take in different companies, different stakeholders pushing in different ways. But just to hear it from the horse's mouth, can you give us some idea of what the US government would ideally like you to ship to China regardless of the rules that are in place today? And how does that compare to what you're shipping to China today? Any color on that would be helpful. Thank you.

Roger Dassen, CFO

Adithya, regarding the backlog, we previously mentioned that it is slightly over 20%, and that remains unchanged. This pertains to the Chinese share within our backlog. On the topic of rumors about China, we won't contribute to the ongoing speculation. This situation involves negotiations between governments, and companies are not involved in those discussions. We operate within the regulations we are given and will refrain from speculating on the preferences of different governments regarding rules. I don't believe that will bring any clarity to the situation. It’s essential to understand, as Christophe pointed out at the start of the call, that we assess demand for our tools without focusing on any specific region, including China. Our sales modeling, both medium and long-term, is based on global wafer demand, regardless of whether they are produced in one country or another. This recognition is crucial for understanding our approach. Our models do not include a specific element for China; instead, they reflect the overall global demand for wafers.

Adithya Metuku, Analyst

Understood. Thank you, Roger.

Skip Miller, Vice President of Investor Relations

All right. Now, on behalf of ASML, I would like to thank you all for joining us today. Operator, if you could formally conclude the call, I'd appreciate it. Thank you.

Operator, Operator

Thank you. This concludes the ASML 2024 second quarter financial results conference call. Thank you for participating. You may now disconnect.