Former manager at ASML Holding NV
- EUV (extreme ultraviolet) and DUV (deep ultraviolet) systems volume outlook and demand drivers for ASML (NASDAQ: ASML)
- High-NA (numerical aperture) to hyper-NA R&D trends
- ASP trends, gross margin drivers and COGS evolution
- Key supply chain bottlenecks and relationships with Trumpf and Zeiss
Something that everyone is currently thinking about when it comes to ASML are the comments by the company’s CTO, Martin van den Brink, that high-NA [numerical aperture] could be the last economically viable machine. Essentially, the costs of R&D and production will be so high that it won’t be commercially viable to sell as a product, making the transition to hyper-NA unlikely in the short term. What are your thoughts on these comments?
To what extent would ASML lose its moat if high-NA to hyper-NA isn’t pursued?
If ASML were to go in another direction to enable further shrink – you mentioned particle accelerators in fabs could be one way – would the company still have exclusivity with high-NA, in terms of a significant moat vs what other competitors could do?
Do you feel that lithography and EUV [extreme ultraviolet] are likely to still be the force behind Moore’s law progressing past high-NA?
How long can high-NA be used at the leading edge of semiconductor manufacturing before there would be a need to move to something else?
Are there any other technologies that could drive Moore’s law progression, besides EUV and particle acceleration? If so, what would happen to ASML, and who would be the winners and losers if EUV and ASML are no longer winning?
With the high-NA to hyper-NA transition, we were talking 10-15 years until the challenges begin to impact ASML. The company announced in October 2021 a revenue target of EUR 24bn-30bn for 2025, about EUR 10bn-15bn higher than previous forecasts, and a gross margin target of 54-56%. A lot has changed since it announced that target. Management speaks about supply chain issues increasing, and there’s also the recent ban the US put on exports to China for products that have got IP residing in the US. How might these factors impact ASML hitting its revenue target by 2025?
I assume the forecasts would have been made with the assumption that the supply chain issues would be resolved, probably at some point in 2022. To what extent do you feel the supply chain constraints can be resolved quickly enough for ASML to reach its revenue target, whether or not we’re talking about bottlenecks from suppliers such as Trumpf and Carl Zeiss, or the chips used in ASML’s machinery? The company spoke about the chip inventory recovering in Q2 2022.
What percentage of supply chain issues can ASML influence and control to improve, and what percentage can it do nothing about? The company has partnerships with players such as Trumpf and Zeiss, and I know there will be other supplies it can’t control.
If ASML could control 60% of the supply chain issues, as you said, how could the company try to make things better or speed things up in terms of getting the supply of lasers from Trumpf or optical solutions from Carl Zeiss, or chips? What methods can it employ to ease supply constraints more quickly?
ASML’s management recently described supply chain constraints as increasing, so when could we reach an inflection point where the issues start to improve for the company?
At the other end, ASML is doing fast shipments to clients to mitigate supply chain issues and maintain lead times as much as it can, but these fast shipments delay revenue recognition. Can we expect this to become the norm, at least until the supply chain issues are resolved? Even after they’ve been resolved and we’ve had 3-5 years of fast shipments, could it be a structural change in how these products are shipped?
How might ASML’s 2025 revenue target split between logic systems and memory systems? Would you expect it to be roughly a 60/40 logic to memory split, as we saw in Q2 2022 bookings?
Thinking about some of the broader market demand drivers and how they might impact ASML meeting its target, the economic downturn has led to a slowdown in chip demand for consumer end markets such as smartphone and PC. Do you feel that will be meaningfully mitigated by high-performance computing, data centre, 5G and automotive, and that the slowdown in consumer won’t have any impact on demand for the company systems?
Thinking about the forecasts, I guess the demand for lithography systems more broadly will remain unchanged, for the reasons you mentioned. Since ASML released the forecasts, there have been the US restrictions on exports to China. How will these additional export bans impact the semiconductor supply chain more broadly? How will it impact the company’s sales to China, which I presume make up some portion of its revenue and would therefore impact its 2025 forecast?
I understand China revenue contributes 16% to ASML. If a ban were to come into force, coupled with the supply chain issues, would this lead to the company missing its 2025 revenue target, meaning it would likely reach the lower end of the guidance, so closer to EUR 24bn? Would there be no chance of it making that target if there were a DUV [deep ultraviolet] ban?
Given DUV isn’t US IP, couldn’t ASML hit back at the US for wanting it to ban DUV sales to China?
I suppose inflation impacting gross margins is another challenge for ASML and its 2025 target of 54-56% gross margin. How could the company achieve this gross margin expansion? Will it come from a change of product mix? Could we see more servicing contracts, which contribute to higher margin? Can we expect tool ASP to increase by 2025? Could any significant COGS cuts – perhaps through OPEX reductions – be put in place by 2025 to achieve the increase? ASML’s gross margin was 49.1% in Q2 2022, so there’s still a bit of a way to go.
ASML’s management talks about inflation potentially having a 150bps impact on its gross margin. How much of that could be passed on to customers, if not all of it, as you said?
Some EUV tools are guided at around EUR 116m. How do you expect ASP for both EUV and DUV tools to evolve as we approach the 2025 target?
Is there a route to DUV and EUV margins having more parity?
How might margins develop for servicing contracts for EUV machines? I understand that field options and service revenue are quite big margin drivers, so could ASML look to improve its offering here to mitigate some losses from inflation?
How soon are we from service contracts and field options for EUV developing the same as we’ve seen with DUV?
ASML suggested it will have the capacity to manufacture 90 EUV systems, 600 DUV systems and 20 EUV .55 high-NA systems annually by 2025. Do you feel that demand will match this new capacity? The company talks about demand continually outstripping supply, especially on the DUV side, given our discussion on the slowness in memory and DUV’s exposure to memory.
A specialist in a previous Forum Interview [see ASML Holding – Lithography Trends & Customer Wallet Evolution – 21 June 2022] thought the demand for EUV could be about 100 systems by 2025. Does that sound reasonable to you? Do you have an estimate on the DUV side?
Do you expect a downward revision in ASML’s 2025 target given the supply chain constraints, a US ban, inflation and everything else that we’ve discussed? If so, what range might it be?
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