Q2 2023 ASML Holding NV Earnings Call Q&A

Good day and thank you for standing by. Welcome to the ASML 2023 second quarter financial results conference call on July 19th, 2023. At this time, all participants are in the listen only mode.

After the speaker's introduction, there'll be a question and answer session. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 1 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 go ahead.

Thank you, operator. Welcome everyone. This is Skip Miller, Vice President of Investor Relations at ASML.

Joining me today on the call are ASML CEO Peter Winick and our CFO Roge Dawson.

The subject of today's call is ASML's 2023 second quarter results.

The length of this call will be 60 minutes, and questions will be taken in the order that they are received.

The call is also being broadcast live over the internet at ASML.com.

A transcript of management's opening remarks.

And a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include four looking statements within the meaning of the federal securities laws.

These forward-looking statements involve material risks and uncertainties.

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 asml.com and in ASML's annual report on Form 20-F and other documents as filed with the Securities and Exchange Commission.

With that, I would 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 second quarter 2023 results conference call.

Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the second quarter 2023, as well as provide our view on the coming quarters. Roger will start with a review of our second quarter 2023 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 on our future business outlook. Roger. Thank you Peter and welcome everyone. I will first review the second quarter financial accomplishments and then provide guidance on the third quarter of 2023.

Let me start with our second quarter accomplishments.

Net sales come in at 6.9 billion euros, which is at the high end of our guidance. We shipped 13 EUV systems and recognized 2 billion euros revenue from 12 systems this quarter.

NUT system sales of 5.6 billion euros, which was mainly driven by logic at 84%, with the remaining 16% coming from memory.

The net sales value of our fast shipments not yet recognized in revenue in the first half of 2023 amounts to 1.4 billion euros.

Install base management sales for the quarter came in at 1.3 billion euros as guidance.

Gross margin for the quarter came in at 51.3%, which is above our guidance, primarily driven by additional deep UV immersion revenue in the quarter, partly related to starting revenue recognition upon shipment for immersion systems that are fast shipped.

On operating expenses, R&D expenses came in at 1 billion euros and FG&A expenses came in at 281 million euros. Both basically as guided.

Net income in Q2 was 1.9 billion euros representing 28.1% of net sales and resulting in an EPS of 4.93 euros.

Turning to the balance sheet, we ended the second quarter with cash, cash equivalents and short term investments at a level of 6.3 billion euros.

Moving to the audiobook, Q2 net system bookings came in at 4.5 billion euros, which is made up of 1.6 billion euros for EUV bookings and 2.9 billion euros for non-EUV bookings. These values also include inflation corrections.

Net system bookings in the quarter were driven by logic with 69% of the bookings while memory accounted for the remaining 31%.

At the end of Q2 we have around 38 billion euros in our backlog.

With that, I would like to turn to our expectations for the third quarter of 2023. We expect Q3 net sales to be between 6.5 billion euros and 7 billion euros.

We expect our Q3 install base management sales to be around 1.4 billion euros. Course margin for Q3 is expected to be around 50%, a little below last quarter due to deep UV mix.

and SG&A is expected to be around 285 million euros. Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%.

An interim dividend of €1.45 per ordinary share will be made payable on August 10, 2023.

In Q2 2023 we purchased around 0.8 million shares for a total amount of around 500 million euros.

As mentioned last quarter, in the current environment we expect to see ongoing pressure on our free cash flow. As a result, we will be prudent in managing our cash flows and maintaining relatively higher levels of cash. With that, I would like to turn the call back over to Peter. Thank you Roger. As Roger has highlighted, another salt quarter in a dynamic environment.

very high inventory levels, leading customers to moderate waiver output as the supply chain works to reduce and rebalance inventory levels.

In order to limit wafer output, customers continue to run at lower lift-to-tool utilization levels.

Customers remain cautious due to the uncertainty around the timing, the shape and the slope of the recovery.

We had an increase in bookings this quarter, resulting in a backlog of around 38 billion euros exiting the second quarter.

In our EUV business we have seen some shifts in demand timing. The majority of the shifts are due to fat readiness with some elements of uncertainty around recovery.

In the deep UV business we have seen some shifts in demand timing. The majority of the shifts are due to fab readiness with some elements of uncertainty around recovery. UV demands still exceed supply.

Well, we have seen delays in DPV demands from some customers.

It has been compensated by strong demands for tools that mature and meet critical notes, particularly in China.

The demand fill rate for our Chinese customers over the last two years was significantly less than 50%, so they now take the opportunity to receive and install systems in their fabs.

as the supply of tools becomes available. Turning to our business, starting with DPV, we're now planning to ship more than 375 DPV systems with a mix of over 25% immersion.

For emergent systems using the fast shipping process

We have come to an agreement with customers on a reduced acceptance test procedure that allows revenue recognition on shipment.

As a result, we now expect additional revenue of around €700 million in 2023. This in turn reduces the amount of delayed revenue out of the year. We now expect around €2.3 billion of delayed revenue from 2023 into 2024.

versus around 3 billion euros of delayed revenue as previously communicated.

This incremental DPUR revenue increases the expected year-over-year growth of our non-EUV from around 30% as communicated last quarter to around 50%.

In EUV, due primarily to customer adjustments in timing

In the demand timing, related to delays in fab readiness as well as some remaining supply chain issues, we now expect to ship around 52 systems this year, translating to a year-over-year revenue growth for EUV of around 25% versus a previously communicated expectation of around 40%.

For the installed base business, with the current utilization rates, market uncertainty as well as timing of recovery, customers are delaying productivity and performance upgrades on their little systems. Therefore we now expect our installed base business this year to be similar to last year, versus a growth of around 5% as previously communicated.

In summary, based on our view today, with higher DPV revenue, offset somewhat by lower expectations on our EUV and install-based business relative to last quarter, we now expect net sales growth for the year to move towards 30% versus a previously articulated expectation of over 25%.

We still expect a slight improvement in gross margin compared to 2022.

No change relative to what we said last quarter, as the positive margin impact from increased DPV immersion revenue is expected to be offset by the diluted impact of lower upgrade revenue in 2023.

On the geopolitical front, as it relates to export control...

The final Dutch regulations that were published at the end of last month are basically aligned to our expectations communicated last quarter and published on our website.

Due to these export control regulations, HTML will need to apply.

for export license with the Dutch government for all shipments of its most advanced immersion deep UV lithography system which means the twin scan NXT 2000i and subsequent immersion systems. As a reminder, the

Sales of ASML's EUV tools have already been restricted and the business in China is predominantly focused on mature and mid-critical nodes.

The new Dutch export regulations will come into effect on September 1, 2023.

There were also some reports in the media recently about additional US export controls.

Of course we will and cannot respond to speculation. However, based on our current understanding we do not expect to change our previously communicated view.

Therefore, based on everything we have been made aware of as of today, we do not expect the Dutch and potential additional US measures to have a material impact on our financial outlook for 2023 nor on our longer-term scenarios as communicated during our investor day in November last year.

Looking towards next year.

Our customers across different market segments are currently more cautious due to the continued macroeconomic uncertainties.

Based on our view last quarter, customers were expecting a recovery in the second half of this year, but it now seems that this is moving more towards 2024.

Also, the shape and slope of the recovery remains unclear.

However, based on a combination of the current firm demand and a strong backlog of around 38 billion euros,

There are clearly still opportunities for growth in 2024.

But given the mentioned uncertainties, it is too early to be specific about the forecast for next year.

We will continue to follow the market developments and update you on our view of next year in the coming quarters.

continue to follow the market developments and update you on our view of next year in the coming quarters. Despite the near term uncertainty, we are

The longer term megatrends we talked about at our investor day are broadening the application space and fueling demands for advanced and mature nodes.

secular growth drivers in semiconductor end markets such as electrification and AI along with increasing lithography intensity on future technology nodes.

are driving demand for our products and services. In summary, while the current macro environment continues to create significant uncertainty, we are working through a strong backlog and expect growth this year towards 30%.

In the near to medium term, customers remain cautious as their moderate wafer output to help lower inventory levels in the supply chain and to look to build confidence around the timing and slope of the recovery.

ASML and its supply chain partners are still actively adding and improving capacity to meet future customer demand as we remain confident in our long-term growth opportunity.

And with that, we would be happy to take your questions. Thank you, Roget and Peter. The operator will instruct you momentarily on the protocol for the Q&A session.

Beforehand, I would like to ask that you kindly limit yourself to one question with one short follow up if necessary.

This will allow us to get it to as many colors as possible.

Now operator, could 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 1 and 1 on your telephone and wait for your name to be announced.

To withdraw your question, please press star 1 and 1 again. Please stand by while we compile the Q&A roster.

The first question comes from the line of Chris Sanker from TD Cowan, please go ahead.

Hi, thanks for taking my question. I had two of them. Peter, I understand you don't want to give an outlook for next year. And I'm not looking for a revenue guidance, but if I look at from a unit standpoint or system shipment standpoint, do you think deep UV and EUV units would grow in calendar 24 hours to calendar 23? I think you're right.

Well, if I would know this, then I would probably give you some outlook on 2024. But I just refer back to what we call the firm demand from our customers, which and the strong backlog. And of course, as you understand, our full 2024 year is not fully covered by PL. So still PLs need to come in. But we do have firm. Kim, I hope that is clear that we have a revenues traders here and

Now, that is a demand that for 2024 you cannot decouple from the AlphaCom 2025.

And 2025 clearly shows the opening and the first ramp of some significant advanced fabs in the logic space.

3nm for the bolt.

for all three leading customers.

That, of course, leads to the firm demand in what we currently see.

And that means we see significant opportunities also, like we said, certainly for growth in 2024. However, we also need to realize that the uncertainties as it relates to macroeconomic developments and particularly I think the slope of the recovery.

I think we will very likely, as many analysts believe, but also customers say, we will probably see the threat of this down cycle somewhere this year and then we see a recovery coming. It's all about the slope of the recovery and that's driven really by the macroeconomic uncertainty. So, the extent to which

they're going to add more capacity in 2024.

Due to the macroeconomic situation, that's the uncertainty. I think in 2024 there's higher level of certainty of those fabs that will take those machines because they need to ramp in 2025 the next nodes.

That's pretty certain. But it's that uncertainty on the macroeconomic demand that makes us a bit more uncomfortable to give you some specific guidance on next year. So, in summary,

The order book looks good, the firm demand looks good, but I'd love to see all that being translated into orders over the next couple of quarters.

So this is why we also said we were going to follow this very closely and we're going to Keep you abreast of what we're seeing and what our customers are telling us in the next one or two quarters to come Okay, and And I know I didn't give you a specific answer, but I hope it was specific enough No, it was, thanks Peter. I really appreciate the context and the input and then a quick follow-up for Rojai

Can you give us a composition of the backlog in terms of EUV, deep UV, memory, logic, China, and also what do you expect China as a percentage of sales to be for this year? Thank you.

Yeah, so the backlog in terms of composition, we have around 85% the backlog is for EUV and immersion combined, so that gives you I think a pretty good indication there. EUV in total is around 21 billion out of the

to see system sales develop in the next period. But I think that's the key composition of the backlog as we see it today.

Thanks, Roger. Thank you. Thank you. Thank you.

We will now go to your next question. And your next question comes from the line of Mizzi Husseini from SID. Please go ahead.

Thanks for taking my question. Peter, I understand you don't have a clear picture on 24 outlooks, but how are you adjusting your own capacity? Can you give us an update how we should think about DUV and EUV capacity into 24 and have a follow-up?

Yeah, that's a good question. I think this is also what we're of course internally discussing. But again, the capacity 2024 is really a function of what we need in 2025. And the good thing about 2025 is when we look at the number of fab openings in Defender the ramp profile of new fabs in 2025 across our customer base.

which also includes memory.

leads us to believe that we should be very careful.

in reducing our capacity in 2024. Because if you do that, you won't be able to ship in 2025, given the fact that our lead times in the supply chain are ranging from 12 to 15 to 18 months. So this means we will, at this moment in time, we don't see any reason to reduce any capacity.

plans for 2024. And that's basically driven by our views on the 2025 timeframe. So I don't expect any adjustments there and we're not planning for it.

But perhaps the question has to do with the slope of the capacity ramp, like on DUV going from 375 to 600. That requires significant ramp, and I'm just wondering if the ramp will look more like a step function in the latter part of 24 as you prepare for 25. Well, I mean, you talk the difference between the ramp and the slope of the capacity ramp.

systems and I also feel that when we look at the firm demand

of course for DPV we don't have all those orders but a firm demand, then we actually need more capacity next year.

So it's going to be, the capacity are step functions. It is not like a gradual function.

So it means if we want to have 600 units by 2025, 2026, then somewhere by the end of 2024, in 2025, we need to have that step capacity built in the supply chain. Whether we're going to put all the orders in, that's dependent on the demand. But I think what we're putting in for 2025, 2026 is there for the remainder of this decade.

So we need to do this anyway because we are strongly convinced, as I said in the prepared remarks, that the long-term view that we have of this market is still very much intact. So you have to distinguish between a ramp as a result, as you know, as a result of the market demand.

and the capacity ramp, because the capacity ramp is a step function and serves the purpose for the longer term. And my follow has to do with technology migration, especially on EUV, NxE3800E is supposed to be a platform upgrade which carries a higher ASP and it's my understanding that that platform.

could be used for both 3 and 2 nanometer. Where are we with working for those systems? And would that ASP uplift provide you something as a question against a challenging macro environment?

Yeah, in terms of bookings, of course the bookings for the 3800 are coming in because if you look at next year, next year is going to show you a good blend of 3600 and 3800 tools. So obviously quite some of the bookings for EUV, MEDI, that are currently coming in are also for the...

also help in terms of revenue. It will also help in terms of gross margin ultimately because even though it's a more expensive machine to make because bear in mind there are commonality, there is quite some commonality in parts between a high-end A2 and the 3800 tool. It's a more expensive tool to make but it's also a very healthy uptick in terms of ASB so it will help both on the revenue side and also on the gross margin side.

you know, starting in 24, but definitely in 25, when the lion's share of the tools there will be 3800. Thank you.

starting in 24, but definitely in 25 when the lion's share of the tools there will be 3800. Thank you. Thank you. Thank you. Thank you. Thank you. This is a test.

We will now go to your next question. And your next question comes from the line of Stéphane Oui from Odo BHF. Please go ahead. Yes, good afternoon. Thank you for taking the question. I would like to speak about the...

quite an improvement. What does it mean about the ramp of 2024 and can you maybe give us some colour on the increase in the gross margin until 2025?

I think you heard our enthusiasm to share numbers on 2024, or leg that off, so I'm not going to do that. The growth drivers for 2025 in terms of the growth margin, there's a number that I think are significant there. We talked about one important one, and that's the 3800. Of course, that's an important one.

driver of gross margin improvement, definitely also in 2025. So that's one. The second one that I think is important in comparison to today, as you know, we are preparing both for capacity expansion on DPZ and LoNA, but we're also preparing significantly and putting a lot of money into getting the growth rate to the point where we're not getting the growth rate.

capacity ran and for preparing for high NA everywhere in the entire organization, you know, go straight to the gross margin today. That effect should be gone by 2025 because at that point in time, you know, you would hope that you're actually going to be in a position to utilize at least a significant part of that increase.

improvement of the EUV service margin in particular, but also on DPV. And on both we are driving to get the service margin up, both as a result of what we're doing on the revenue side, but also in terms of trying to further control the cost. So those are the main drivers looking at 2025.

We believe the scenarios that we gave you there, the 54 to 56% is a tenable and reasonable aspiration for us to have.

out of the leading memory makers. They are just preparing for the next node transition, which is a technology transition, which needs of course the type of machines and the type of technology that Roger just talked about like the EUE systems, the 3800s.

So this is what it is. You shouldn't see this as an immediate addition to the memory output capacity. Perhaps except Chinese ones, but we all know that's mid-critical to mature stuff. That's not leading edge. Thank you very much.

Thank you. We'll now take your next question.

And your next question comes from the line of Sandeep Deshpande from JP Morgan. Please go ahead.

And your next question comes from the line of Sandeep Deshpande from JP Morgan. Please go ahead. Yeah, hi. Can you hear me?

Very good, thank you. Peter, one question for you. You talked about the challenging macro environment at the moment. How do you see, I mean you can see how utilization is doing at your customer base. On average, where do you see utilization is at the moment because that will be...

When we look at utilisation, when we hear the data points in the supply chain, at least in the logic companies in China, utilisation is as bad, if not worse than what we are hearing in other parts in the industry. So maybe try to understand how sustainable these orders from China are into next year given that the end markets even in China seem to be incredibly weak at this point.

Yeah, good. Basically the utilization question, a good question that you distinguish between memory and logic. I think in memory I don't think we see a lot of...

bottoming out there. Yeah, you could argue it's bottoming out but we don't see it, kind of an inflection point. In logic though it's very early but we could see some of an inflection point today but that's just over a last short period.

So see how sustainable that is, but I would think if you think about that, that's bottoming out and you could even say, you know, we've passed an infection point although it's still early.

Now on China, how sustainable is it? That's correct, I mean, you see the same utilization trends in China as we see in the rest of the world. But you have to realize that the demand in China has two elements. One of course, it needs to fulfill the current demand and that's what we just talked about, I mean the current demand is of course weak.

to answer the big mega.

around the globe where China is leading, as a matter of fact, when you think about electrification of mobility, think about the energy transition, the IoT in the industrial space.

the rollout of the telecommunication infrastructure, battery technology, that's the sweet spot of mid-critical and mature semiconductors. And that's where China, without any exception, is leading. Now, that means that the Chinese industry, the customers of the semiconductor industry, needs semiconductors of that kind.

And I can just tell you in the discussion that we've had, the concern of many of our Chinese customers is that given the increase of the geopolitical tensions, they do not want to rely on supply that comes out of China.

So it's very simple that they're going to build a significant amount of capacity in that space, in the mid-critical to mature semiconductors, to actually fuel those megatrends where China is actually leading.

So if you look at the big home market and that desire because of the fear that they have on the increase in geopolitical tensions, they're going to build all those fabs themselves.

And that's what's happening. Those fabs will be built. There are many new fabs and new companies that actually say we're going to provide those type of semiconductors to support these megatrends where China is indeed leading.

And that's what's happening today. So it's not so much the current macroeconomic or the market situation that drives the demand. It's the strategic investment that drives the demand because it's the dependence that part of the Chinese industry has on imports.

And that's and I think it's very sustainable this is very sustainable for the next couple of years

Thank you very much.

Thank you very much. Thank you.

We will now go to your next question. And your next question.

comes from the line of Sarah Russell from Bernstein, please go ahead.

Hi, can you hear me? Yep. Yep. Great. Hello. Thanks for taking my question. I was just wondering if you could give us an update on HiNA. So indications are that customers are not delaying the tech transition. So are you still on track for first shipments to customers in 2024? And have you seen any increase in orders as you get closer to those first shipments?

Yeah, I think we're still on track for the first shipment in 2024, yes. Actually this year we're starting to ship the first module, so that's on track and that also means for 2024.

Yeah, I don't think they're delaying the introduction at all. You're absolutely right. And yes, we are still seeing orders coming in. So, both are confirmative. With the point made that, and I think Rocher alluded to that, that if there's anything on high NA...

we need to make sure that the supply chain, which of course needs to supply us with critical new technology, will actually be on time. So our main focus is on the execution in the supply chain, not so much from the demand side. It's really about execution.

Great, thanks. And can we get, maybe could you give us a little bit of color on where you stand on high NA orders in the backlog? So assuming that you now are sort of seeing a good number come in, can you give us a sense of orders in the backlog and timing of those orders? Yeah, we said before that our customers, given there is only a very limited number of customers for high NA, our customers really do not want us to disclose their orders.

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

And your next question.

from the line of Francois Beaubigny from UBS please go ahead

Thank you very much. Can you hear me okay?

So the first question is obviously Peter you were clear on 2024 uncertainty at least in terms of units and you will come back later with a clear picture. Roger you started to talk about the ISP for the EUV next year with the e-mod...

to next year for EUV, so you touched upon, but also deep UV, you know, with all the moving parts, with China, with your new models as well of deep UV on the market, the 2100 with a 20% improvement in overlay, you have inflation on top. So just how should we think about the ISP specifically, you need to cite.

if you like about your business basically.

Yes, first of all I think I was quite clear on the ASP for the 3800, north of 200 million, so I think that was clear. When it comes to ASPs in the DPV landscape, of course, it's very widely distributed and there obviously the mix effect is quite significant and that is true.

then all the models so that is clearly the case but it is you know completely dependent on the mix within the dry business and the immersion business.

And also in the immersion business you have to also realize that what I said in the in the prepared Remarks that we cannot ship our most advanced immersion tools to China, but we can ship our mid-critical immersion tools to you know China and that of course gives even in the immersion

scope gives a quite a significant spread. So it's very difficult to give you one number for the DPUV numbers. It's basically too heterogeneous. Okay, thank you very much Peter for that. And maybe Roger. And the second question is on the installed base management.

If we look at the guidance of flat, again, I understand that the level of upgrade is not as you may be expecting the current environment. If we look at the guidance of flat, it would imply decline in age to year over year at least.

How should we think about the level of, Peter you mentioned, small sign of recovery. It's early days but it means small size and the fact that the install-based management I would imagine would be very close to the demand in terms of recovery or eutagen rate picking up.

just trying to reconcile that and how should we think about install base management into next year with your EUV as well going up and ISP per tool per year I mean business model.

Let me first take the question on 23 and then maybe Peter you want to expand it further. But as it comes to 23 I think the right frame of reference of course is not half year over half year, but it is the second half in comparison to the first half. In the first half we had 2.7 billion and flat would mean that we're going to have 3 billion in the second half. So that would point at a recovery.

given the guidance that we've given for Q3. Q3 we indicated 1.4, so it doesn't take a lot of compute power to calculate it. That would mean 1.6 for Q4. So that tells you that indeed we are looking at a recovery there, that would be commensurate with the perspective.

the recovery that Peter has been talking about. But that's what we're looking at for this year and the slope of recovery there. Yeah, and I think the slope of recovery is critical and very important because like I said, you know, although it's very early, but you could argue and you look at the utilization graphs, you could think that, you know, there's an inflection point for logic. We've had that and then, but no, it's still pretty early on.

But if that would continue, then it's really important to look at the slope. Because for upgrade business, you basically could argue you have a relatively short period of time before you hit again high utilization and then customers say, well, I don't have the time. I don't want to shut down the tool. So I think we will watch this very carefully together with our customers to say,

okay, looking at the slope of the slope accelerates, then we really need to start negotiating with the customer quickly to put in more upgrades. And that could be an upside when the recovery accelerates. That is a

slower degrees, slower they probably take a bit more time. But that's also where it's the same reasoning. We now have time to upgrade because we don't have a full utilization of the install base. So there is some upgrade there, but still customers are currently saying, you know, market is not good. It's still CapEx.

because there are high value upgrades, so they are a bit cautious now, but we have to start being very close to our customers the next couple of quarters to say, you know, if we see an opportunity, let's go. Because before you know it, they don't have time.

high value upgrades, so they are a bit cautious now, but we have to start being very close to our customers the next couple of quarters to say, you know, if we see an opportunity let's go. Because before you know it, they don't have time. Thank you very much.

Thank you.

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

And your next question comes from the line of Alexander Petarek from Société Générale. Please go ahead. Drake P Hyst name.

Yes, hi, I'm taking for taking my question. I just have two. First one would be, you know, we talk about the recovery being pushed up somewhat and you do give a cautious message on 2024. So my question is really, is there a possibility that the significant tab openings you talk about in 2025.

could be pushed out by six months or a year? Is that something that's possible? I mean, if the customers have either capacity for longer, won't they push out capacity additions as a result? Or are all of those strategic plant openings really strategic and will go ahead regardless of demand patterns? That's the first one I have a follow up. Thank you.

Yeah, yeah, I think you know on these on the leading edge logic facts they will happen. I mean they have is basically it's not And it's driven by the the roadmaps of the customers of our customers It's the it's the apples the core comes the Nvidia's of this world that actually have a very clear You know roadmap based on the 20 or the three nanometer designs And they want those new products to be introduced at that time, so that's going to happen

We have little doubt there. I think on the strategic facts in China, I made that very clear. I think it's just a strategic, very clear focus area that they have because they want to hedge against any negative geopolitical repercussions that could come. So that's also strategic.

I see a little downside in 2025. Excellent, thank you very much. And then just a kind of a technical follow-up on the 700 million cash out in deep UV that are moving out of fast shipment. Did all of that occur in the second quarter that you reported or is it between the reported and the current quarter?

and explain what proportions please and while we're talking of fast shipments, are discussions of a similar change still on the table for EUV? Or is that on the table now? Thank you.

So the 700 million is the expectation that we have for the end of the year, right? So of course there will be a little bit of flux during the year, but the 700 million is the expectation that we have for that in the year. Of course we have some of that also in this quarter, but the 700 million really is the expectation that we see for the full year.

As it comes to EUV, it's based on the conversations that we have with the customers. They're very happy to take the risk of the tool for the immersion tools upon shipment and based upon a shorter testing program. For EUV, we're not there yet. So the question will be also based on how next year is going to pan out. I think that we're going to get the...

dependent on what we're going to do in terms of regular versus fast shipment. There are two considerations there for next year. One consideration is that as a standard procedure when we introduce new technology we want to test them more. So the 3800 clearly is a significant development in our EUV in our EUV shop and that means that

at least for a number of tools, we want to do more testing and more elaborate testing and therefore, at least for a number of the initial tools, we wouldn't fast ship them. So we would do regular shipments and do the full testing program. And secondly, as I mentioned, it will be dependent on the utilization of our capacity, right, because fast shipment is a way to get the tool earlier to the customer, but it's also a way to optimize our capacity.

So it will be driven by those two considerations, what we're going to see there next year in terms of type of shipment, and that will tell you whether or not we're going to get any tailwind for EUV revenue as a result of that. Excellent. Thank you very much.

Thank you. We'll now go to our next question. And your next question comes from the line of Alexander Duval from Goldman Sachs. Please go ahead.

Hi, May, thanks for the question. You spoke about a push-out in demand timing for EUV. I wonder to what extent we should think about this as a one-off push-out from 23 to 24, given the customers presumably would still need these tools for their fabs that are still getting built, and their customers in turn have product aspirations for 25 that you've just mentioned. Or to what extent would you expect some 20-24 units to be subsequently pushed to the European market?

into 2025 and then I got a quick follow up. Good question. We need to realize you had to look at the reasons predominantly the push-ups have to do with fab readiness.

And that was basically driven by construction skills. And you think, well, how can that be? You know, you just hire a couple of construction workers and you just build a fab. Just building a $20 billion fab that's going to do a 5 or a 3 or a 2 nanometer product is a skill.

And people don't seem to realize that when we start building those fabs across the globe now and are everywhere That that skill has been refined over the last couple of decades in only a few places on the planet and predominantly in Taiwan and in Korea and a bit in China. Now having to do that now and accelerate this

will lead to all kinds of issues because we are still building those fabs in Korea and in Taiwan but also in other places on the planet, also in the US for instance. So getting access to the requisite skills and skilled workers to keep the construction plan.

on time is a challenge, as at least what customers tell us. And this is the main reason. So you can easily look at a delay of a couple of months or a quarter.

And of course, like I mentioned earlier, we need those 2nm fabs or 3nm fabs in 2025. But that also means we need to resolve, in let's say an 18 month period, some of those skills gaps. But I think it might easily be a problem.

timing changes or the demand timing changes. And of course, there's also been in this particular year.

where there's a few supply chain issues that address one or two systems, but it was predominantly it was just fat readiness and for the reasons that I just mentioned.

they could reskill quickly and that at the end of 2024 we don't have those issues. Thanks, and just a quick follow-up. We've seen some news flow on demand for leading-edge ships driven by AI applications. Can you just share your latest views on any growth opportunity from AI in 2024 given that obviously...

the 2023 shipment schedules are full. I think you alluded in your video prepared remarks to that potentially being an incrementally supportive driver of demand. So just curious for any thoughts there. Yeah, I think that's true. But I think we're at the beginning of this, you could say, aAP Group increasing on its owninar.

AI high-power compute wave. So yes, you'll probably see some of that in 2024, but you have to remember that we have some capacity there, which is called the current underutilization. So yes, we will see some of that, but that will be taken up, that particular demand.

by the install base now and that will further accelerate. I'm pretty sure, but that will definitely mean that that will be, you could say the shift to customer by 2025. So I don't see that or don't particularly expect that that will be a big driver.

for additional shipments in 2024 given the utilisation situation that we see today.

additional shipments in 2024 given the utilisation situation that we see today. Very clear, thank you. Thank you.

We'll now go to the next question. And your next question comes from the line of Joe Kachaki from Wells Fargo. Please go ahead. Yeah, thanks for taking the questions. One on domestic China demand, you talked about a fill rate that was less than 50%.

Do you expect to be caught up to that exiting this year or will you still be trying to kind of fulfill that demand looking into 2024?

Yeah, I think we're still, like we said also in the prepared remarks, that the demand is still more than we can ship. So that also means that we still have a fill rate that's not 100%.

It's still lower than of course it's significantly higher than and the significantly lower than 50% that we saw in 21 and 22 You know where we had you know screaming customers, so we simply couldn't ship enough, and you know China was was You know one of the one of one of the real victims now of course today with the fabs being ready there The pedestals being there

Anything that doesn't ship to any other country goes to China. But there's still some demand that will move into 2024. Because we don't have a 100% fill rate.

that doesn't ship to any other country goes to China. But there's still some demand that will move into 2024 because we don't have 100% fill rate today.

Thanks for that. And then this is a follow-up. In the recovery of the install-based management business that you talked about in 54423, is that predicated on just logic alone or is there also some expectation that you see some memory recovery embedded in that?

You know I think we don't, somewhere down the line there will be a recovery, because that's going to be probably when we go through these inflection points in the second half of this year. And then it's all about the slope of the recovery, and this is where we have some uncertainty.

reasonable to assume that logic would be ahead of the curve in terms of upgrades. Yeah also because like I said earlier you could argue when we look at the stats you could already see an inflection point but it's like I said it's very early on so we just have to see how that continues over the next couple of weeks and months.

Thanks for the call. Thank you. We'll now go to your next question.

And your next question comes from the line of CJ Muse from Evercore ISI. Please go ahead.

Thanks for taking the question. I guess first question for Roger, I think you're fairly clear on the call that no changes to kind of the capacity add. So curious how we should think about OpEx growth into 2024.

I think the optics that we're currently guiding for the year, I think that's a pretty good estimate for what we see for the rest of the year. I think in terms of next year, I think it will also be a little bit dependent on how we further see things develop.

to assume that on R&D you will see some increase, albeit at a slightly lower pace than the very sharp increases that you've seen in the past couple of years.

Very helpful. And then Peter, I guess as a follow up, you know, I know that you're actively working with the Dutch government, but curious, you know, as to your kind of thoughts around any potential timeline from hearing from maybe more restrictive kind of thoughts out of the US government. Thank you very much.

But the reason why we said based on what our understanding is and...

I jokingly said here, internally, it wasn't even jokingly, I actually meant it. You know, I've been in this business for quite a long time.

And my hunch about what the Dutch were finally going to say in the end was about right, so this is why we informed you in March. And I also have a kind of a hunch on what's going to happen for the rest of the year and with the new rules. And my gut feel is based on what we hear and our understanding is not going to have a material impact.

Having said that, we don't know exactly what the content of those new regulations is going to be. But we just have to wait. I think Japan came out, the Dutch came out, I think the US government will probably come out soon and I will know for sure whether my hunch or my gut feel was correct.

Thank you. All right, we have time for one last question. If you are unable to get through on this call and still have questions, please feel free to contact the ASL investor relations department with your question. Now operator, may we have the last caller, please.

Thank you. We will now take your last question for today. And the question comes from Tammy Q from Berenberg. Please go ahead. Hi, thank you for scooting me in. So firstly, Peter relating to your China exposure. Do you have any format of customer concentration?

Does one or few customer accounting for more than, let's say, 50% of the demand from China at all?

No, I think it's the number of customers in China is significantly higher than, and I just talked about the spread of the customers, significantly higher than anywhere on the world of the planet.

It all goes back to where Chinese industry, don't talk about the semiconductor industry, but industry in general is actually growing. It grows in those areas which are covered by the big mega trends and that means that specific requirements will be Hungry 5 What will be my gold color saturation? failing failing failing failing failing failing failing refusing failing

for semiconductors to support those trends actually ask for very significant and different applications that put the demand on this wide range of...

mid-critical to mature semiconductors and that's a lot. And that also means that you see customers, semiconductor customers now focusing on certain of those areas. That means you have many, many customers, yeah? And that's all, it's pretty widespread, whether it's memory, whether it's logic, foundry, it's almost everything, but many of them.

and very much focused on specific parts of the industry. So yeah, it's on the contrary. I mean, it's not specifically focused on one or two customers. It's a broad base. Okay, thank you. And also you mentioned that you can actually ship the mid-critical machines to China and still basically allow them to...

You have to realize that.

when you ship an immersion tool and just do the math which is you know the wavelength of the light over the numerical aperture of the lens

That's 193 over 1.33, times a K factor, which is the process factor, which has an absolute minimum of 0.26, because beyond that you don't have any contrast.

So, if you do the math, you do it on your calculator, you come to 38 nanometer. So whether it's 1970 or 1980, or 2000, or 2100, it's 38 nanometer.

if you do the math, you do it on your calculator, you come to 38 nanometer. So whether it's a 1970 or a 1980 or 2000 or 2100, it's 38 nanometer. So how do you get...

to do it on your calculator, you come to 38 nanometer. So whether it's a 1970 or a 1980, or a 2000, or 2100, it's 38 nanometer. So how do you get smaller?

you know sizes that is where you start using double patterning and that's basically determined by your capabilities of materials, which is deposition and edge. Yeah, so it's of course the most advanced have one determining factor in that you know It's the position with which the tool works and this is where if you if you look at the Dutch regulation It doesn't mention a type name. It just mentions a technical specification which focuses on

the position with which the tool works. That's where the cutoff point is. But in terms of...

Feature size is the same, but it's really the precision with which you can position the feature size on the wafer. That's where the cutoff point is, and that's determined in the regulation.

So it's all deposition and etch. Yep. Okay, 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 AFML 2023 second quarter financial results conference call. Thank you for participating. You may now disconnect.

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