Q1 2023 ASML Holdings earnings results

Speaker 2: Good day and thank you for standing by. Welcome to the ASML 2023 First Quarter Financial Results Conference call on April 19, 2023. At this time all participants are in a listen only mode after the speakers introduction. There'll be a question and answer session.

Speaker 2: To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advised in your hand is raised. To restore your question, please press star one and one again. 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.

Speaker 3: is ASML's 2023 first quarter results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received.

Speaker 3: 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.

Speaker 3: 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.

Speaker 3: For 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 sml.com and in sml's annual report on form 20F and other documents as filed with the Securities and Exchange Commission.

Speaker 3: With that, I'd like to turn the call over to Peter Winick for a brief introduction. Thank you, Skip. Welcome everyone and thank you for joining us for our first quarter 2023 results conference call.

Speaker 4: Before we begin the Q&A session, Rache and I would like to provide an overview and some commentary on the first quarter of 2023.

Speaker 4: as well as provide our view of the coming quarters.

Speaker 4: And Roger will start with a review of our first quarter 2023 financial performance with some added comments on our short term outlook. And then we will complete the introduction with some additional comments on the current business environment.

Speaker 4: and on our future business outlook. Roger, if you want. Thank you, Peter, and welcome everyone. I will first review the first quarter financial accomplishments and then provide guidance on the second quarter of 2023. Let me start with our first quarter accomplishments.

Speaker 4: Net sales came in at 6.7 billion euros, which was above our guidance due to higher than expected EUV and DPV revenue from faster installation and earlier acceptance of systems in the quarter.

Speaker 4: We shipped nine EUV systems and recognized 2.9 billion euros revenue from 17 systems this quarter. Net system sales were at 5.3 billion euros, which was again driven by logic at 70%, with the remaining 30% coming from memory.

Speaker 4: Install base management sales for the quarter came in at 1.4 billion euros, which was lower than guided due to less upgrade revenue.

Speaker 4: Grossed logic for the quarter came in at 50.6%, which is above our guidance, primarily driven by additional EUV and DPV emerging revenue in the quarter, which more than outweigh the impact of lower than expected upgrade business.

Speaker 4: On operating expenses, R&D expenses came in at 948 million euros, which was below our guidance, primarily due to exchange rate effects and someone else.

Speaker 4: SG&A expenses were 260 million euros, also lowered and guided, primarily due to lower IT spending and timing of HAB count additions.

Speaker 4: Net income in Q1 was 2 billion euros representing 29% of net sales and resulting in an EPS of 4.96 euros.

Speaker 5: Go to the balance sheet.

Speaker 4: We end the first quarter with cash, cash equivalents and short-term investments at a level of 6.7 billion euros.

Speaker 4: Moving to the order book, Q1 net system bookings came in at 3.8 billion euros which is made up of 1.6 billion euros for EUV bookings and 2.2 billion euros for non-EUV bookings. These values also include insulation corrections.

Speaker 4: Net system bookings in the quarter were driven by logic with 79% of the bookings, while memory accounted for the remaining 21%.

Speaker 4: Bookings are lower than in previous quarters, which is not unexpected, given the current environment, particularly taking into account our backlog at end of Q1 of around 39 billion euros, which is almost two times this year's system sales. With that, I would like to turn to our expectations for the second quarter of 2023.

Speaker 4: We expect Q2 net sales to be between 6.5 billion euros and 7 billion euros.

Speaker 4: We expect our Q2 install base management sales to be around 1.3 billion euros.

Speaker 4: Gross margin for Q2 is expected to be between 50% and 51%.

Speaker 4: The expected R&D expenses for Q2 are around 990 million euros and SGNA is expected to be around 275 million euros.

Speaker 4: The higher R&D guidance is primarily due to investments in support of our continuous innovation as we further extend our product roadmaps and improve our install-based performance.

Speaker 4: Higher-Ives GNA is mainly due to additional headcount and associated infrastructure support.

Speaker 4: Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%.

Speaker 4: Thank you, Ron. As Malpade, a quarterly interim dividend of 1.37 euros for ordinary share.

Speaker 4: Recognizing the three interim dividends of 1.37 Euro-Go-Adener-Share, each paid in 2022 and 2023, there's leads to a final dividend proposal to the general meeting of 1.69 Euro-Go-Adener-Share. This will result in a total dividend 40-year 2022 of 5.80 Euro-Go-Adener-Share, which is a 5.5% increase.

Speaker 4: cash as the entire value chain would likely create some pressure on our free cash load. With that, I would like to turn the call back over to Peter.

Speaker 6: Thank you, Roger. As Roger has highlighted, we had a good first quarter above our guidance in a very dynamic environment. And there continues to be a lot of uncertainty in the market due to a number of global macro concerns around inflation, rising interest rates, recession, and the geopolitical environment, including export controls.

Speaker 6: Customers continue to see the mount weakness in consumer-driven net markets, causing the industry to actively reduce inventory and lower the utilization of their production base.

Speaker 6: while demand in all the markets such as automotive and industrial remains relatively strong.

Speaker 6: Specifically, memory customers are more aggressively lowering CAPEX and are limiting waiver output to reduce inventory to more healthy levels.

Speaker 6: Logic customers are also moderating, waver out boot for some market segments while the man continues to be strong in other markets, especially in markets requiring more mature

Speaker 6: Despite this, both logic and memory customers are still following that technology road maps and continue making strategic technology investments.

Speaker 6: As a result of this market dynamic, we do see customers making adjustments to demand timing relative to last quarter.

Speaker 6: However, we also see other customers more than willing to absorb this demand change, particularly in deep UV.

Speaker 6: For example, Chinese domestic customers focusing on mid-critical and mature applications

Speaker 6: which make up over 20% of our backlog at the end of Q1, are now expected to grow to a similar allocation of our system revenue this year.

Speaker 6: After taking these demand adjustments over the quarter into account, our systems demand still exceeds our capacity for this year, albeit by a smaller margin in the last quarter. As a reverence, during 2022 the demand for DPV was 50% higher than our build capacity, while this gradually reduced from 30% at the end of Q4 2022.

Speaker 6: to 20% at the end of Q1 2023.

Speaker 6: As we already mentioned, we saw orders moderate in Q1 after several quarters of very strong bookings. A moderation in the rate at which customers are adding orders is to be expected in the current environment, especially considering the long period in which our back lock and cover shipments, which extends well beyond our normal order lead times.

Speaker 6: With regard to our total system capacity, we are still planning to ship around 60 UV systems and around 375 DPP systems in 2023, but around 25% of the DPP systems being emerging.

Speaker 6: The curve is no change, our full year outlook has provided last quarter.

Speaker 6: As a reminder, we expect UV business growth to be around 40% over 2022 and normally UV business growth of around 30%.

Speaker 6: But in slow-based business, we still expect year-of-year revenue growth of around 5%.

Speaker 6: In summary, based on our view today, we continue to expect a year of strong growth with a net sales increase of over 25% and a slight improvement in gross margin.

Speaker 6: Our short to medium term business outlook is still very strong.

Speaker 6: Supported by a backlog that represents almost two years of tool statements, continuously pushing our output capacity to the maximum, and further underpinning our plan to expand our capacity.

Speaker 6: On the geopolitical front, as it relates to export controls, we are still waiting for the Dutch government to publish further details on the export control restrictions.

Speaker 6: These new export controls focus on advanced chip manufacturing technology. Due to these upcoming regulations, ASMR will need to apply for export licenses.

Speaker 6: for shipments of the most advanced immersion DPV systems.

Speaker 6: And as we said earlier, we interpret most advanced

Speaker 6: to pertain to twin scan NXT 2000i and subsequent immersion systems.

Speaker 6: and will take some time for these controls to be translated into legislation and take effect.

Speaker 6: Based on the announced last month, our expectation of the Dutch government's licensing policy, the current market developments and the way we model our longer-term scenarios, we do not expect the material effect on our 2023 financial outlook or on our longer-term scenarios as announced during our yesterday in November last year.

Speaker 6: And despite the clear short term cycle of concern, the longer-term global MACCAP trends we talked about at the investor day are broadening the application space and fueling the demand for advanced immature nodes. Secular growth drivers in semi-connect rent markets and increasing the recovery intensity on future technology nodes are driving the natural products and services. In summary, while we are clear and certainly in the good environment,

Speaker 6: Our customers' demand for our products continues to exceed supply.

Speaker 6: We had a good start to the year and based on our view today we continue to expect another year of strong growth.

Speaker 6: AISML and its supply chain partners continue to work on the capacity ramp in support of our customers demand and we remain confident in our long-term growth opportunity.

Speaker 6: But that will be happy to take your questions.

Speaker 3: Thank you, Roger and Peter. The operator will instruct you momentarily on the protocol for the Q&A session. Before hand, I'd like to ask that you kindly limit yourself to one question with one short follow-up if necessary.

Speaker 3: 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 that you kindly limit yourself to one question with one short follow-up if necessary. This will allow us to get to as many colors as possible.

Speaker 2: Now, operator, can we have your final instructions and then the first question, please? Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will now take your first question.

Speaker 7: One minute please.

Speaker 2: And your first question comes from the line of Chris Sankar from TD Cowan. Please go ahead, your line is open.

Speaker 6: Hi, thanks for taking my question. I told them, first one, Roger, you know, I understand your backlog is still pretty healthy, but the order run rate is definitely flowing. So kind of curious how to think about calendar 24 relative 23. Is the order run rate can be declined? Is there a risk that calendar 24 could be flat to down year for you? I'm going to follow up for Peter. Well, let me, you know, reverse it. I will answer that question. Perhaps Roger can answer the second one. One great.

Speaker 8: shows an increase in terms of tool shipments and therefore sales as compared to 2023.

Speaker 8: Now, a significant part of that is already booked.

Speaker 8: And you could argue that the back half of the second half of next year still needs to be booked. And I'm pretty confident that that will come in the course of this year. And although there are many uncertainties that we're currently seeing, that the rate down is pretty intense and we are pretty confident that our estimates need to be as strong when

Speaker 8: interest rates, the geopolitical situation, we believe we are not looking at a massive recession. While our customers, of course, are dealing with the current circumstances, by very diligently reducing inventory, adjusting their utilization rates, and still very much planning for the demand.

Speaker 8: for next year because they're building fabs. And those fabs are real and have to take tools.

Speaker 8: Now, not everything is booked yet for the 2024 demands.

Speaker 8: But in our discussions, as I said before, we very clearly see an increase of the number of tools that are needed because of the technology transitions and I also believe the confidence that our customers have in them very diligently working off inventory against a macroeconomic situation that doesn't look like a massive...

Speaker 8: in a recession. That gives us the confidence with the fact that these new facts are opening that yes 2024 will be an up year as compared to 2023 and yes we have not booked all those orders and yes I strongly believe that those orders will come in in the course of this year. But if you ask me an exact date like June 12, 2023

Speaker 6: but EUV intensity could slow down as you go beyond three nanometer, or already some customers are using a low cost, three nanometer version, some kind of curious, how to think about EUV intensity as you go from three to two nanometer and beyond. Do you feel comfortable EUV layers are going to increase or do you think it kind of stagnates or saturates? Thank you.

Speaker 8: Well, I can answer that also. I think it's also shown in our, I think I can best refer to because you're talking about long term roadmap questions. I think we tried to answer that during our Capital Markets Day. I think it was very clear in our Capital Markets Day we gave you

Speaker 8: an overview of the little intensity going up. And yes, that is also driven by EUV. It is driven by EUV for two reasons. One, I think we will see throughout the rest of this decade a significant increase in EUV productivity, but also in the shrink by the introduction of INA.

Speaker 8: So it's also to be a culmination and what we are seeing today when we look at the chip designs we see more EUV layers not less.

Speaker 8: So that means that we see a EV intensity going up and it's just simply based on on the very intense and deep discussions that we have with our customers R&D people.

Speaker 8: And that's also the basis for our capital markets presentation that we gave you last year. And that still stands what we set at that time is still relevant today.

Speaker 6: God, it's very good for you. Thank you very much.

Speaker 6: Got it. Very good, Peter. Thank you very much. Thank you.

Speaker 2: We will now go to our next question. And your next question comes from the line of funds. We're both in the UBS. Please go ahead. Your line is open.

Speaker 9: Hi, thank you very much. So I have two quick ones. So the first one is on EUV demand, specifically, Peter. I mean, you mentioned in the video actually, Roger, some push outs, but you reiterated the guidance for the full year. So obviously, your strong backlog is supporting your 2023 revenues and you said it's way.

Speaker 9: more than one full year revenues, your backlog. But as net orders are weakening, I mean, how should we interpret the trend in EUV demand for 2024 as the backlog is normalizing? I mean, do you still expect EUV shipments to be up in 2024, especially...

Speaker 8: But you need to understand, and I think we said it before many times during our quarterly calls, that the demand was far bigger than our build capacity.

Speaker 8: So we can talk about a demand pushout.

Speaker 8: without affecting our build capacity because the build capacity is lower than the demand. So this is what is actually happening and some of that demand that people wanted in 2023, they moved back to 2024.

Speaker 8: So when we look at the year 2024 and we look at the demand picture, and I just referred to the answer I gave on the first question, the demand picture looks at an increase of our shipments next year, which is true for the company, but also true for EUV.

Speaker 8: So, and I gave you the reasons in the answer to the first question. So which is true for EUVs, even more true for deep UV. We have a significant over demand in 2022, but also in 2023, which is to a lesser extent that breath has actually shrunk.

Speaker 8: we do pencil in the customer demand based on their expansion plans and based on what they believe their production capacity needs next year, which is a function of how they think about the duration of this current downturn.

Speaker 8: Now, of course, if our customers start thinking about the market, it will be completely different, but they don't.

Speaker 8: They all think about you basically work of our inventory levels. We reduce the utilization to get a balance in supply and demand in the chip sector. That's what they're doing. And that just points to a shorter term.

Speaker 8: situation, then a longer term situation, which means that they keep the 2024 demand on us as is. Now part of it still needs to be booked, like I said, and it's particularly what I would call the back half of the second half of next year. Yeah, that's what we need to book, but I'm pretty sure that we will book them and both on DPV and EUV, we're both planning higher unit numbers.

Speaker 9: Great, thank you Peter. My follow up is on China. You mentioned it's 20% of your backlog, so it would imply 45% of the deep UV backlog is from China, which would imply a significant increase in the amount of UV that's being

Speaker 9: share from China in deep UV. How should we think about the sustainability and particularly the risk of pooling due to the geopolitical dynamics if you see what I mean, beyond 2023?

Speaker 8: Yeah, I think it's more surprising we've stated before that the Chinese market is a market for mid-critical and mature cynic marketer, so mid-critical and mature lefogabies systems.

Speaker 8: That's exactly what we are talking about. They say, you know, who needs all those semiconductors? And I think your math is about right.

Speaker 8: And that means that for our mid-critical and mature semiconductors, which are outside the realm of the export controls, because that's on advanced immersion, the demands for those semiconductors are significant.

Speaker 8: You know in the discussions I've had with one of the Chinese end customers, which is not a semiconductor maker, it's a product maker, so that effect, you know, they make electrical vehicles. If you think about the increase of number of electric vehicles that will be produced in three to four years from, you know, now you need multiple 28 and 45 millimeter fabs. Multiple, and it's more than a handful.

Speaker 8: those steps are not there. They need to be built. So I think this is something people underestimate, how significant the demand in the mid-critical and the mature semiconductor space is. And it will just grow double-digit. whether it's automotive, whether it's energy transition.

Speaker 8: the entire industrial robotics area, where there are other sensors that we actually knew as an integral component of the AI systems. This is where the mid-critical and the material semiconductor space is very important and needs to grow. And this is where China is very strong.

Speaker 8: And this is why, yeah, there could be 40 to 50 percent of our DPP backlog. That's what it is.

Speaker 9: Thank you very much Peter.

Speaker 9: Thank you MS Peter. Thanks. Thanks, yeah. Thank you.

Speaker 7: We will now go to our next question.

Speaker 2: And your next question comes from the line of Amit Hashandani from Citi. Please go ahead. Your line is open. Well, hello everybody.

Speaker 10: Thank you. Hello everyone. I'm a person learning from city. Two questions if I may.

Speaker 10: My first question is with regards to the logic and market. We've talked about some moderation there. Could you give us a sense for if anything that has changed in terms of discussions with customers, you talk about them sticking to their tech road maps?

Speaker 10: But do you see that as being uniform across customers do you see any variations? It just a sense of if you've seen anything change with respect to the logic and market.

Speaker 10: And my second question is with regards to capital allocation. I believe in the annual report towards the end of the annual report you have talked about your capex for this year being potentially 2.4 billion which would imply a capital intensity or a level that's higher than in the past. Certainly.

Speaker 10: highest in the last 10-15 years that I can remember. Could you give us a sense for whether that's a one-off and how should we think about capital intensity and broader capital allocation out this year and beyond? Thank you. It's the time to make sure you´re here for all the work. Thank you. Thanks.

Speaker 8: Roger will take the second question. On the first question, what do we see in the logic endmarks, what do we see in terms of change in roadmaps? I would say the least change we see in the advanced roadmaps.

Speaker 8: It's very clear that whether it's the 3 or the 2 or the sub-2 nanometer roadmaps, those are very clearly defined with only very few players. There's only two or three players that are actually looking into this. I don't think those roadmaps are changing. I think they're pretty much the push that we get from...

Speaker 8: the customers in that space is to keep our promises in terms of the shipment of the next generation litho tool to meet their roadmap introduction requirements. I don't think that's a major change there. But I do see a change, and it refers back to the previous question, I do see a change in the roadmaps for the mid-critical and the mature systems.

Speaker 8: This is where I see customers that are in that space moving from mature to mid-critical, from low-mid-critical to high-mid-critical. There you clearly see an acceleration of roadmaps. So it's more in the mature space, the mature and the mid-critical space than it is in the advanced space.

Speaker 8: And that is also driven by the things I just said. The whole EV transition is going to require a significant step up in, let's say, 20, 28 and 45 nanometer capability. And that is where there's a big opportunity. So you also see roadmaps addressing that opportunity. And that's why we see in the logic spaces the biggest change.

Speaker 4: Amit, with regard to your second question, indeed the 2.4 billion number that you referred to for the full year, that's very much in line with about 0.6 that you would see for this quarter, so that's very much in line. What is in there? Well obviously what is in there first and foremost is two things. It's the preparation for high NA.

Speaker 4: and it's the ongoing activity to increase our capacity to the 90 and the 600. On high NA, part of what is in there is prototypes that we're building. So we're building prototypes for high NA. At a certain point in time, those prototypes will obviously also find their way, or positive prototypes will find their way into the market. So at a certain point in time, there will be a lot of problems.

Speaker 4: longer term. I think it is prudent to expect that for the years through 2025, I think it's prudent to expect something between, I would say, 1.5 to 2 billion in that neighborhood. I think it is prudent to assume that we're going to see these levels of capex because those will be the years.

Speaker 4: where we continue to build the capacity that we have talked about before. Thank you gentlemen. Thank you.

Speaker 4: the capability of the capacity that we have talked about before. Thank you gentlemen. Thank you. We will now go to our next question.

Speaker 2: And the next question comes from the line of Alexander Peter from Society General. Please go ahead, your line is open. Yes, good afternoon and thanks for taking my question. My first question will be more short term just on the systems mix.

Speaker 10: into the second quarter versus the first quarter. So you had quite a high level of EUV in the first quarter in terms of recognition, that is specifically. Do you expect a similar mix to prevail in the second quarter, and then maybe reverse to more deep UV in the second half? Or how should we think about having a good follow up as well? Thank you.

Speaker 4: I think you're right. I think EUV was slightly over-represented in the first quarter. We've always talked about around 60 shipments for the year, so 17 is relatively higher than what you expect.

Speaker 4: It is realistic to assume that in the three quarters to come that number will be slightly lower than the 17 that we have in revenue for P1.

Speaker 10: Thanks. And then the follow-up would be just on your higher gross cash requirements in the current environment or is that perhaps also higher working capital requirements. Could you maybe quantify what is the level of gross cash you will be comfortable in in the current environment.

Speaker 4: for the time being that I assume is higher than the 2.5 billion we previously mentioned. Or in other words, if you could put a number on the high working capital is required given the optimization of cash flow across the chain. Thanks. Yeah, I mentioned two dynamics. One dynamic I mentioned is that everyone...

Speaker 4: appropriate in the current environment to sustain or to maintain higher levels of cash.

Speaker 4: You know what what do I think is realistic? I think you know if you look at the cash level at the end of this quarter if you look at the cash level that we had at the end of the previous quarter you know I would say that those cash levels are definitely sufficient to you know to weather any any uncertainties that might be there.

Speaker 4: So I think those casual levels are more than sufficient to have the deflexability that we're looking for. More than sufficient.

Speaker 2: Thank you. Thank you.

Speaker 2: We will now go to the next question. And your next question comes from the line of Alexander Duval from Goldman Sachs. Please go ahead, your line is open.

Speaker 11: Yes, hi everyone. Thanks so much for the question. I think you talked about mid-single digit growth in services revenue this year, and that's obviously understandable given hard comps last year. But I wondered if you could give your thoughts on the extent to which there could be upside given a lower machine utilization that you referenced, and that typically in the past from memory has led to higher upgrade activity.

Speaker 11: And secondly, a question we received from investors is just on average selling prices. You obviously talked about some weakening semi-fundamentals, which you've characterized as being shorter term in nature, but just curious to what degree that could limit your ability to increase ASPs and offset some of those cost pressures you've talked about in recent quarters. Many thanks.

Speaker 8: Yes, the website on service.

Speaker 8: It's a good point. I mean what you generally see is...

Speaker 8: that while it does an upturn, of course we don't get the sufficient time to take down the machine and then do the upgrade, and the software upgrades are of course easier, but any prolonged down of a machine in an upturn is a disaster for the customers that don't want to do that.

So you're absolutely right that in a downturn we do have that because the utilization goes down. Well, in the beginning of such a downturn when the utilization goes down, budgets that customers are going to allocate to do the upgrades are also going to go down. So what you generally see, and this is why there is an upside in H2, they were all right and we are all looking at this as a downturn.

a shorter term downturn whereby towards the end of the year you will see the signs of recovery.

then customers will start stretching the head and we will push it and say listen you know you're still not at 100% utilization but you're probably going to get there in one or two quarters so you have to do this now because you can see the upturn coming. I mean this is the time when we actually push the upgrades.

And that's an upside. That is definitely an upside. So if our customers work through this inventory, what today, and they see this upturn coming, they see the utilization rates going up again, that's the time when they want those upgrades. So you can rest assured I will be there to actually remind them of this.

So yes, and then the ASP, the limitation because of cost. Maybe I'll take that. I think you referred to the inflation adjustment that we've been talking about on previous calls that we're talking to customers about and I think that it's fair to say that we have made really good progress. So I think for a number of large customers we have reached agreement on Indeed them.

customers that we have are willing to share in the burden of inflation which I think from a fairness perspective is the right thing to do and again we're making good progress there and give you an update by the end of Q2. Very helpful, thank you very much.

Thank you. We will now go to the next question.

And the next question, one moment please. And the next question comes from the line of CJ Muse from Evercore. Please go ahead, your line is open. Yeah, good afternoon, good morning. Thank you for taking the question. I guess first question, you talked about seeing customers pushing and others pulling in.

Can you comment specifically on what you're seeing just for and as part of that. Given some commentary around reuse, does that cause any worry that we might be putting on over capacity on the side of things, at least over the near term.

CJ, I will answer the question on the pushing and pulling. But what do you mean with the reuse? Could you specify a bit more the second question? I want to make sure I understand your question correctly. Could you repeat it again, the second part? Yeah, of course. I think that there is...

Commentary out there that is looking to reuse 5 manometer down to 3 manometer. And as part of that could reuse a portion of the tools used for 5. so just curious how you're thinking about and I know you don't want to talk about specific customers, but how you're thinking about broad more broadly speaking. Um, the potential for reuse and what impact that might have on a demand.

Yeah, I think that in general has always been the case. I mean customers will use the tools for the note where they need to use them. So it's always a matter of how big is the note.

You know, I think if the if the three nanometer node or the five nanometer node is small or is bigger that will drive the demand for You know the UV tools and customers are like like us business people They will allocate their capital that they have on the balance sheet wherever they see fit so that is more a question of

how big are those nodes? And we currently believe, when we listen to the customers, that they believe the three-node nodes are very big nodes. Well, what they don't sell on the five, they can match it on the three, then they will use those machines in the three-node, but then it's the node size that really drives the need for the UV tools. And this is what is reflected currently in the customer demand.

that we're currently seeing. And this actually is part of the answer to the questions I received from Question No. 1 and 2 this afternoon. So we still see the overall demand, EUV and DPV, to be up next year. And that is a reflection over our customers' belief their installed capacity needs to be.

and that's based on how big they think the node is going to be. And that's driven by what they see from their customers as the end amount. And when it comes back to your first question of pushing and pulling, that's particularly true for deep UV, not so much for EUV. I think we've seen in deep UV, we've seen especially in the memory space.

We have seen, you can imagine, you know, 3D NAND, they don't use EUV, but the market situation isn't optimal. So you see there pushbacks, but those tools are happily been taken up by the IDM's and by our customers in China for instance.

So it's particularly the pushing and putting is a DPV event. Very helpful. And just a quick follow-up question on domestic China. I think you said 20% of calendar 23 revenues. Can you confirm that in this?

If that's right, then roughly 50% of your 90-UV tool business will be domestic child in 2023. And so the question there is, how sustainable are the demand trends there beyond 2023? Well, I think the math is correct. And I think it was one of all analysts asked the same question.

Yes, I think the 45% is about light, 45% to 50% is about light. I think it's very sustainable.

In my latest trip to China, I spoke to many customers and also some end customers.

and the expansion plans, especially when it comes to issues like the EV transition, when it comes to the low-level of the communication networks, when you talk about the energy transition, that's all in that mid-critical to mature domain.

and the number of end products that they are planning to produce is significant.

And the semiconductor capacity base to support that is not there yet.

the semiconductor capacity base to support that is not there yet. It's being built.

for those things is so wide. And every time, you could say, well, I'm biased because I've been there now very recently, and I talk to those customers and those end customers, but I'm convinced that that is needed. And so I think it's very sustainable. Also, when I look at the expansion plans.

in the major centers in China, whether it's Beijing or Shanghai or Shenzhen. Those fats will be there, the end markets are there, and there's going to be a lot of China for China. So I think it's sustainable, but again it's my view based on my latest visit.

Thank you. Thank you. We'll now go to your next question.

And your next question comes from the line of Mehdi Hossaini from SIG. Please go ahead, your line is open.

Yes, thanks for taking my question. The first one for you Peter, how should I think about the EUV mix ship in 23 and I'm more interested in the mix of KDA800E versus 3600D?

towards the end of the year, partly because the 3800 has new technology that is similar to the technology used in HINA. So basically it's the system integrations HINA and 3800. They run side by side. So that's the system integrations HINA and 3800.

And that pushes it towards the end of the year. And when it comes to some of the supply issues that we've seen over the last quarters, also particularly pertain to this technology, to the 300 and the high-nate technology. So that pushed it all back towards the end of the year. So I would in your...

In your models I would focus on the 3600E. Okay. Does the initial 3800E shipment start at 200 with a per hour throughput? So is that 30? But does the initial 3800E come with 200 with a per hour throughput? 195, yeah, 195 90. Okay, thank you for that. And then my second question, I see that you mentioned you put a

Yeah, I think we don't make NXT 2000s anymore, we make 2050s and 2100s, but that's just a number. It's basically the NXT 2XX. I think the 5% that we set in previous school had to do with the indirect effect of... It had to do with the October 7 rule, where basically we were able to ship...

lithography tools to China. You have to distinguish between the October 7 US rules and these new trilateral rules which are the Dutch export control rules. The advanced immersion which we interpret as NXT 2xxx are the Dutch rules. Now the October 7 rules we could ship every immersion or DPV immersion tool to China only.

if there would have been a restriction on deposition and adjurrences, then we could be the indirect victim of this. And this was the 5%. Now, currently where we are today, I think

Almost all of the Chinese customers that I know have actually changed their roadmaps back from anything that potentially falls under this October 7 US rules because they don't want to be blocked. So they basically are reverting back to the...

20 nanometer and above, which I just mentioned is a very significant market. The Chinese domestic market for that product is huge. So they're just reverting back. That means that they don't order 2050s or 2100s, they will order 1980s. Yeah and that's what they're doing. So I think the 5%

It's not relevant anymore. It's basically governed by the potential Dutch rules.

It's 1980 and you know up which by the way is not under export control as we see it today and and That means that that market is still open and and that's significant demand Thanks for clarification in details

Thank you. We will now go to our next question. And your next question comes from the line of Sarah will sew some burn seams, please go ahead. Your line is open. Hi, thanks for taking my question.

In the commentary in the video that you released this morning and from what you had said during Q4, you mentioned that you're prioritizing over system starts based on customer asks. That's helping you to help drive the strong system sales for this quarter. Can you talk a little bit more about the operational dynamics of that and what are the follow-on effects for next quarter and throughout 2023? Then I have a quick follow-up. I have a quick follow-up.

Yeah, the operational consideration first and foremost was to make sure that cabins are empty, right? That you really can, that systems that were waiting for final parts were being completed and were being sent to customers in Q4. So that was it. We really wanted to make sure that both are based on customer demand.

and on getting cabins clean, getting all the inventory records clean. That was the reason why we did and why we really prioritized the shipment over thought. So LMD does have an impact then on the outputs and for the shipments in Q1. And that's what you see I think in all light.

that's an all likely what you're going to see in the quarters to come. So if nothing changes on the revenue recognition for fast shipment, we talked about that on fire calls, then an all likely what you're going to see is that the 1.5 billion that were now lower in terms of fast shipments are carrying from Q1 into Q2.

in comparison to the revenue that we recognize. So that again, by the end of the year, we would be back to the 3 billion. Okay, great. And as I also mentioned before, at the end of Q2, we will give you an update of where we stand in our discussions with customers. Because as we mentioned on previous calls,

There is an opportunity that if customers accept the shorter testing cycle that comes with the fast shipment, if customers are fully accepting that shorter testing cycle upon shipment, then actually we could for those customers and for those tools.

we could start recognizing upon shipment again. And that would mean that the fast shipment, Sega at least for those customers will come to an end and that would mean that in fact we could start recognizing upon shipment again. If that's going to be the case, you know, then the three billion would be lower by the end of the year, but it would also mean that an unlikely revenue during this year will be up.

Does that have any impact on average lead times or is there anything that we should consider as far as anticipating changes to lead times as the orders come down and some of the orders normalize and the backlog begins to normalize?

than your normal lead time. I mean, that's where you're gonna see, that's what you saw as a result. And Peter talked about the backlog and talked about lumpy order intake. So no, I wouldn't expect any big changes on that front. Great, thank you very much.

Thank you. We will now go to our next question. And the next question comes from the line of Sandeep Deshpande from JP Morgan. Please go ahead, your line is open. Yes, yeah, thanks a lot for letting me on. My question is more about the latter half of this...

some background noise. So, what we're seeing today goes into the second half and goes into 2024? Into the second half, yes, that's correct.

Yeah, I think if it's just the second half, it's going to be the second half. We just are in this period for one or two quarters more. Yeah. But that's it. Ultimately, what drives the demand is the ultimate belief that our customers have that for 2024 and 2025, they need that capacity.

Now, this is all driven, like I said earlier, we are not looking at a massive recessionary environment, we're looking at a downturn, or we could say it's a typical downturn situation in the semiconductor industry, which actually hasn't happened for Washington over the years.

you know, the supply just exceeds the demand. And we know the demand drivers, which are driven by, you know, the high inflation rates, the consumer confidence hit as a result of it, the geopolitical uncertainties, there's all kinds of reasons why the end demand is now lower than what people expect. It's a really classical semiconductor down cycle.

whereby customers are working this up quite diligently. I mean, they're all, you know, reducing the output, making sure that there is a supply-demand balance for semiconductors, and that will be the point where you will see that turning, and then it goes back up again. And now the big question is with what speed and what slope is this recovery? That's your question.

Well, I don't know, but what I do know is that nobody thinks about this massive recession. And we do see that elements like lower inflation rates will actually help to go through the confidence. We do see that growth rates in China are a bit better than we expected. So there are all kinds of potential positives that will drive the 2024 demand. That's ultimately what we are looking at together with our customers. We just have to work through these couple of quarters where we are today. That could last us another one or two quarters longer.

But that in given, well, when you look at ASML, look at our backlog, look at our, you know, our long-wear, you know, lead times, that's not a major issue to us, you know. It's just going to be growing next year, the way we look at it today. And I think nothing that I see today gives me high concerns that we will not grow. I have the confidence that we will grow.

I mean one quick follow up on that would be on EUV. I mean given the long lead times for EUV, would you not be soon having to get in the orders for EUV by the end that will ship in 24 by in the next couple of quarters? Because otherwise you know you will not be able to be ready for those shipments as such because you don't have all of that in your backlog today. Correct Sandeep. I mean like I said on the back half of the second half you could say Q4ish.

of next year, we still need the orders as well. We need to get those orders in for over the next one, two quarters. I think that is going to be a need, something that we're going to discuss with our customers. That's an expression of their confidence that they need those machines by that time. So yes, the next level of course is we're going to see some of that.

And if it doesn't come, then probably those customers have different views in a couple quarters from now than they have today. Well, just don't see at that moment in time what it is. But at this moment in time, that's not the case. So I'm pretty confident that we will book those orders.

Because yes, you are right, we know that early on, it's yet 4.24 or 4.30, 20.25 for that matter. Thank you Peter.

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 ASMO investor relations department with your question. Now operator, may we have the last caller please?

Thank you. We will now take the last question for today. One moment please. And your last question comes from the line of Joe Cattracci from Wells Fargo. Please go ahead, your line is open. Yeah, thanks for taking the questions.

I just wanted to go back to the comment that Peter made on China and talking about your Chinese customers moving back to older nodes in response to the export restrictions. Is that to assume that then that the Chinese memory customers are going to have to stop taking lithography tools? Sorry will that prompt us to answer your last question?

Be back, right?

That will be it. They'll just have to figure that out. I mean, they still want what they can get, so mid-critical immersion, which I don't think is going to present them a problem looking where their robot is today. It's not going to give them a problem today. But if you have a roadmap that you want to go further in three or four years from now, yes, you do have a problem.

You should not forget that the Chinese memory customers, especially DRAM, are absolutely not at the, let's say, robot execution phase as the leading DRAM makers. They are still behind. So what they can buy under the export control rules will help them today. But yeah, you know they have to find different solutions.

I'm not a semiconductor manufacturing or design expert, but they have to either find a solution or they have to stay where they are today. Got it. That makes sense. Then just a quick follow-up. How do you think about the OPEX trajectory for this year? Maybe a little bit more proven capital.

have on Q1, you see what we got for Q2, so that gives you a good indication, I think, for what the model for the second half of the year.

you see what we got for Q2, so that gives you a good indication, I think, for what to model for the second half of the year. Perfect. Thank you.

So that gives you a good indication, I think, for what to model for the second half of the year. Perfect. Thank you.

All right, now on behalf of ASML, I'd like to thank you all for joining us today. Operator, if you could formally conclude the call, I'd appreciate it. Thank you. Thank you. This concludes the ASML 2023 First Quarter Financial Resorts Conference call. Thank you for participating. You may now disconnect.