ASML FY24 result--Im keeping with the strongest on the AI road

 ASML FY24 -result

SUMMARY

I won't replicate my earlier note on ASML, the summary is that it is a monopoly provider in EUV lithography, a critical segment of the semi-manufacturing chain. ASML is one of the five large equipment providers in the chain and one of the three “Godfathers” of AI. The business is tied to the health of the semi-industry and FAB growth and maintenance.

Recently, ASML has overcome a few issues. Firstly, the newest technology is being accepted and optimised, and ASML is the lone provider. As the complexity of advanced nodes continues ASML becomes more important. Secondly, the China impact through clients' front running restrictions appears to be managed well, with the exposure normalising around a low 20% exposure. Thirdly, we appear to be back in a FAB growth era, driven by AI in which ASML will undoubtedly play a part. The gap in demand due to INTC and Samsung issues appears to have been taken up by others.  Fourthly, the services revenue, the recurring high-margin stuff, is now 23% of the total (2024) and will grow with the installed base, giving a more smoothed earnings and revenue profile which is good for the rating.

Interestingly, ASML will stop giving order book guidance every quarter and only give an annual number. The reasons are to stop extrapolation by analysts in what is inherently a lumpy number. Of course, this makes sense, however, that is precisely what has opened up opportunities in the stock, both up and down. ☹

Valuation

My base case is a 5y eps growth of 16% and an exit multiple of 27X. At $742 this gives a 9% cagr, not too bad. Of course, this rests on an AI-driven market for several years. Although I'm happy to accept that risk, it will see some volatility, I suspect, and secondly, portfolio weight is an issue with TSM being a top ten holding and also having holdings in the three hyperscalers. That would complete my exposure to the sector, all being leaders and exceptionally strong companies offsetting some of the risks.

 

SUMMARY OF CALL

Roger Dassen CFO

Strong Q4

In the fourth quarter of 2024, total net sales were €9.3 billion which is above the high end of our guidance primarily due to installed base revenue

Net system sales was driven by Logic at 61% with the remaining 39% coming from Memory.

Gross margin for the quarter was above guidance at 51.7% due to a combination of additional upgrade business and lower-than-planned costs associated with the new product introduction of High NA systems in the field.

Changing Reporting

As we have said in the past, our order flow on a quarterly basis can be lumpy and does not necessarily reflect our business momentum accurately. With this in mind, we will continue to report bookings on a quarterly basis through 2025 but will no longer report on bookings thereafter. As of 2026 we will report the total systems backlog on an annual basis.—ed. this lumpiness has offered investors an opportunity to take advantage of extrapolation of the lumpiness, maybe disappears.

Full Year fy24

net sales came in at €28.3 billion with a gross margin of 51.3%. EUV system sales realized from 44 systems including High NA were €8.3 billion, 9% lower compared to 2023. DUV system sales grew 4% to €12.8 billion. Metrology & Inspection systems sales increased 20% to €646 million.

Looking at the market segments for 2024, Logic system revenue was €13.2 billion, 17% lower than 2023. Memory system revenue was €8.6 billion, 44% higher than 2023 and Installed Base Management sales were €6.5 billion, 16% higher than 2023. We concluded 2024 with a net systems backlog of around €36 billion.

R&D spending to €4.3billion in 2024, or about 15% of sales. SG&A increased to €1.2 billion in 2024, which was about 4% of sales.

Net income for the full year was €7.6 billion, 26.8% of net sales. In 2024 we generated free cash flow of €9.1 billion.

Guidance Q1 25

We expect Q1 total net sales to be between €7.5 billion and €8 billion. We expect our Q1 installed base management sales to be around €2.1 billion.

Gross margin for Q1 is expected to be between 52% and 53%. This is primarily driven by a positive effect from no High NA revenue recognition in the quarter, partly offset by lower immersion volume.

Christophe Fouquet CEO

New Product Delivery 2024

On our Low NA EUV technology, the NXE:3800E, we demonstrated the full system specification in our factory with 220 wafers per hour throughput at a new record overlay. We are on track to deliver new systems at full specification and start upgrades for the systems already at our customers during the first half of 2025. We continue to work with our customers to drive the maturation of the system to support their ramp to high volume manufacturing.

On High NA EUV, we completed the installation and customer acceptance on two systems in Q4. Customers have now run over ten thousand wafers on High NA systems and their feedback has been very positive. They are seeing major performance benefits in imaging, overlay and contrast which also provide significant cost reduction opportunities for both Logic and DRAM processes. We continue to work with our customers to define the exact insertion point for High NA in their processes—ed work in process. We also shipped a third system in Q4 that is now undergoing install and qualification.

On DUV, we shipped the first NXT:870B, the latest generation KrF system capable of throughput of over 400 wafers per hour and the NXT:2150i, the latest generation immersion DUV system capable of achieving throughput over 310 wafers per hour and overlay performance of equal or less than 1 nanometer.

And finally, in Applications, after close collaboration with multiple customers we have successfully completed the evaluations and recognized first revenue from a number of eScan 1100 Multi-beam Inspection systems.

All-in-all, our product pipeline remains strong, supporting the roadmap requirements of our customers and driving our overall competitiveness. We will share more performance data at the SPIE Lithography conference in February.

FY25 Guidance and longer term drivers

Looking to 2025, we see full year revenue between €30 billion and €35 billion and gross margin between 51% and 53%. Consistent with our view from last quarter, artificial intelligence has become the key driver for growth in our industry at this moment. As we have witnessed in 2024, AI has created a shift in the market dynamics that is not benefiting all customers equally in the short term.

If AI demand continues to be strong and customers are successful in bringing on additional capacity online to support that demand, there is potential opportunity towards the upper end of our range. On the other hand, there are also risks related to customers and geopolitics that could drive results towards the lower end of the range.

Looking at market segments, we currently expect Logic to be up versus 2024 with the ramp of leading-edge nodes while we expect Memory to remain strong, similar to 2024. With respect to our Installed Base business, we expect revenue to grow versus 2024 driven by both service and upgrades as part of a growing install base, to which EUV's contribution is continuing to grow.

Our China business in 2023 and 2024 was relatively high because of our ability to execute on a backlog that was created after low order fill rates in previous years. For 2025 and beyond, we expect our China business to go back to a more normalized percentage of our sales.

Looking longer term, overall the semiconductor market remains strong with artificial intelligence creating growth but also a shift in market dynamics as I highlighted earlier. These dynamics will lead to a shift in the mix of end market products towards more HPC and HBM which requires more advanced Logic and DRAM.

For ASML, we anticipate that an increased number of critical lithography exposures for these advanced Logic and Memory processes will drive increasing demand for ASML products and services. As a result, we see a 2030 revenue opportunity between €44 billion and €60 billion with gross margins expected between 56% and 66%, as we presented in Investor Day 2024.

Question-and-Answer Session

In the second half we did say that we expect the gross margin to be a little bit lower because the revenue recognition on High NA is to be skewed towards the second half.

I think that there's a few conditions for customers to use a new tool like High NA. The first one is the performance has to be good. I think that's most probably one requirement we check at this point of time. The second one is going to be the maturity of the platform. And there we typically try to ship a few early tools. We are going to start shipping the 5200 which is a tool more fit to high volume manufacturing. And then we'll have to spend a bit of time to demonstrate that the maturity research is such that customers are comfortable to use it in production. So that process typically takes 12 months, 18 months.

That around this point in time where we have eaten significantly into the Chinese backlog, we say that backlog is being normalized. And that also means that we believe that the sales to China will be a more normalized percentage. And as we said, as we said we think that is a low 20% number that China will represent in 2025 in our total sales numbers. The order intake that we received from China in the fourth quarter I would call is healthy. I think that's what you will see in 2025, ie low 20% of total, and frankly, beyond.

If you look at the past quarters, you do see that, the market looks at these orders and sometimes the reactions, both in terms of positive and in terms of negative order intake, the reactions can be quite significant. And that has been the reason that we, that we say we have been telling the market that order intake is lumpy. We have been saying that it doesn't necessarily reflect the business momentum accurately, but we do see very significant market response to it. And as a result of that, we have reached a conclusion that maybe the market is better off with what I just gave you, including an annual update of the backlog.

Ramp up for N2 node, looks very positive, as strong demand for EUV Logic driven by AI. I think we shared in the past, the ramp is definitely starting in 2025, will extend into 2026, most probably into 2027, in fact, with potentially a mix of 2-nanometer and some node. The other thing we mentioned in our commentary is we see that maybe there is an opportunity to ramp a bit faster if the demand remains strong. So I think that's another discussion we're having with the advanced logic customer. But I think we don't see any kind of pattern that you described. Note TSM mentioned N2 ramp profile +.

(CEO) I think through our guidance this year, we see that this risk is a lot lower in terms of volume. We are looking at 2026 as a potential growth year for ASML. That's how we look at it. But it is exactly as you said. It's way too early to provide any direction or magnitude on that.

I think that mostly, we have derisked the large part of EUV, but the risk is just on some potential pushout. So we're just a bit cautious based again on some of the experience we all went through last year.

we're looking at opportunity to get more clean room space. I think that's what we mean by building up additional capacity. And if this is possible and if this happened, then we can most probably put some of our tools there.

the AI driven chips are more demanding when it comes to advanced process. those new products mostly calling for a bit of an acceleration of Moore's Law and therefore our customer being more aggressive when it comes to technology transition. And I think we also said in November that historically this has always driven more demand for advanced litho.

we should be seeing order intake in the first two quarters, particularly when it comes to EUV. But definitely, we should continue to see good order intake in the first two quarters. I think that's a fair assumption (for growth into FY26)

I (CFO) think a normal backlog is ultimately what we want to be able to offer to our customers. We want to be able to offer to our customers a normal backlog because that will also help them respond to their business. I mean that's ultimately what you want to get, that customers have a backlog and they order lead time that is manageable for them and that allows them to respond in a good and flexible way to their demand fluctuations. –puts order book in perspective