ASML Q3 2024 Earnings

Note : This is not a financial advice. Please do your own due diligence.

What is ASML?

ASML Holding N.V. is a leading company in the semiconductor industry, specializing in the development and production of advanced lithography equipment. The company plays a crucial role in the manufacturing of integrated circuits, providing essential technology to major chipmakers worldwide. Headquartered in Veldhoven, the Netherlands, ASML is recognized for its innovation and technological leadership.

Products and Services

• Extreme ultraviolet (EUV) lithography systems
• Deep ultraviolet (DUV) lithography solutions
• Metrology and inspection systems

Why is ASML important to the world?

The advanced chips, with size 7nm or less, are needed for latest smartphones, computers and running the workloads in cloud of hyper-scalers.

These advanced chips require EUV lithography machines and only ASML makes these lithography machines. There is no competition at all.

Each EUV machine cost ~ € 350M and is shipped in 2 jumbo jets.

So, if ASML sneezes, the rest of the semiconductor industry tend to get cold.

Headline Numbers

All Numbers in €

Quarter Summary: Financial Metrics

⬆️ Revenue ↑ 11.9% to 7467.3 M

⬆️ Gross Profit ↑ 9.59% to 3793.4 M

⏺️ Gross Margin ↓ -1.07 % to 50.8%

⬆️ Operating Income ↑ 11.86% to 2441.2 M

⏺️ Operating Margin ↓ -0.01 % to 32.69%

⬆️ Net Income ↑ 9.67% to 2076.5 M

⬇️ Operating Cash Flow ↓ -15.8% to 949.9 M

⬆️ EPS (Diluted) ↑ 9.77% to 5.28

The Q3 quarter revenue as well was EPS numbers weren't bad.

However, the same cannot be said for bookings. ASML reported booking of €2.6B, which is higher YoY, but far below street expectation of ~ €1 5.6B

Bookings provides window into future revenue and 50% lower bookings than street expectation was not good.

Capital Allocation

Dividend:

Paid an interim dividend of €1.52 per ordinary share.

Share repurchase

No shares were repurchased. Good !!

Guidance

Next Quarter (Q4)

• Total net sales between €8.8 billion and €9.2 billion, including Installed Base Management1 sales of around €1.9 billion

• Gross margin between 49% and 50%

• R&D costs of around €1,090 million

• SG&A costs of around €300 million

Full Year 2024

• Expected total net sales of around €28 billion with a gross margin of around 50.6%. This was same as provided earlier. Management maintained that the sales will be near to 2023 (€27.5B)

• Estimated annualized effective tax rate between 16% and 17%

Stock Reaction

- Stock was down 16% after earnings announcement

These factors contributed to drop in stock price

• Bookings number was very low (50%) as compared to street expectations

• 2025 revenue outlook provided by management was € 30-35 B which is lower than the range € 30-40B management hinted during investor day in Nov 2023

Three Year Trend

The YoY , 3 Yr CAGR trend looks healthy. No worries there.

So, what happened in Q3 ?

Reason for lower guidance:

• Customers had inventory, so did not order and hence bookings were low. >>Chinese customers had frontloaded orders in prior Qs. China was ~50% of its revenue in previous 2 Qs, as they wanted to get ahead of export restrictions. Now it may normalize to 20% in 2025
• Two foundry customers have pushed out their plans on fab and that impacted ASML. My guess is, one of them is Intel. The other could be Micron or Samsung.
• Recovery in non-AI segments (Mobile, PC, Auto) not as quick as was expected

Management is more conservative in guidance in two ways:

• Management has included the impact of enhanced export controls which are not yet in place
• If Chinese manufacturers can’t build chips, its share may be taken away by others who will need ASML machines. While the downside risk of lower revenue from Chinese customers has been accounted, the upside risk of increase in demand from other players due to shift in market share has not been accounted.

Should a shareholder be worried ?

The biggest question shareholders have in mind is how will it perform once the Generative AI tailwind is over.

So, I jumped in the time machine and got back to end of 2022. There I reviewed its business performance for past 1, 3, 5, 10 and 15 years.

Business Performance prior to Generative AI world

Average ROIC of ~20% over 15 years without Generative AI - I'll take that.

Intel, TSMC are building new fabs across the world to meet the ever increasing demand of advanced chips and ASML is the only company in the world that can supply EUV machines that are needed to produce those chips.

The journey may be choppy because of investment cycles, but I feel there is still a lot of gust left in the secular tailwind.