EUV Technology Leader ASML Etches Successful Earnings Pattern

Semiconductor industry revenues are expected to reach around $1 trillion by 2030 due to increased demand in 5G, IoT, cloud computing, high performance computing, automotive chips and other segments. DUV (deep ultraviolet) and EUV (extreme ultraviolet) lithography systems are widely used for patterning the silicon wafers as we scale down the technology node. ASML is a leader in advanced lithography systems and equipment. With significant investment in advanced EUV technology and a value-based service model, including productivity and performance upgrades, ASML is expected to surpass its long-term forecast.

Scaling becomes more affordable for chipmakers with the adoption of EUV technology as it enables them to keep up with Moore’s Law.

ASML registers record revenues, margins in 2021

ASML has reported robust 2021 numbers and is expected to continue to support a strong premium valuation due to its:

  • Monopoly in EUV technology.
  • Dominance across the entire product line for older lithography systems.

ASML’s outlook also looks impressive due to positive global trends:

  • Semiconductor sales at a record $550 billion in 2021.
  • Capex allocations above $100 billion by major foundries.
  • Litho growth expected to be faster than that for overall wafer fab equipment.
  • Demand is exceeding capacity.
  • Increase in wafer-processing steps to produce diverse and complex applications.
  • Deployment of High-NA EUV systems for sub-3nm process by 2025.

EUV system sales have increased significantly over the years, with their contribution to total system sales revenue just under half in 2021.

Counterpoint Research
ASML Annual Revenues Share by Lithography Segment

ASML EUV investments to overcome advanced node challenges  

ASML has significantly invested in the next major technology change on the EUV road map, High-NA systems. These systems, currently in R&D, allow the production of chips below 3nm. Close coordination between various photomask, equipment and photoresist vendors will enable fast delivery of these systems in 2023. Incorporation of these systems in production during the second half of the decade will further drive revenue growth.

However, there are near-term challenges in implementing EUV in DRAM scaling:

  • Defects in large Critical Dimensions for active area scaling.
  • Hole size sensitivity and narrow process windows.
  • Thin photoresist

ASML will be able to meet the growth forecast in the long term through a resolution of these near-term challenges.

Foundries’ continuous efforts to increase wafer output, reduce defects and improve yield in advanced technology nodes will help in the adoption of EUV technology at a faster rate.

Successful implementation of a fast-shipment strategy could overshoot ASML’s provisional budget allocation and might affect its gross margin and operating income in the near term. But ASML will be able to meet its guidance in the long term.

ASML key performance metrics for Q4 2021, 2021  

2021 company update: Revenues up 35% YoY with solid gross margins

  • Net sales up 35% at €18.6 billion.
  • Net income up 64% YoY to €5.9 billion.
  • Systems net booking order at €26.2 billion.
  • EPS up 69% YoY to €14.36.
  • Gross margin at record 52.7%.
  • Net system sales at €13.6 billion, compared to €10.3 billion in 2020.

Breakdown: Net system sales — Taiwan, Logic remain biggest market, segment respectively

  • Region-wise: Taiwan 44%, South Korea 35%, China 16%, USA 5%, Japan 1%
  • End use: Logic 70% and Memory 30%
  • Lithography units: EUV 42, DUV-ArFi 81, ArFdry 22, KrF 131, i-line 33

Segment-wise: Share of EUV equipment growing fast

Counterpoint Research ASML-Annual Lithography Sales-v2

  1. DUV
  • DUV system sales grew 25% to €6.9 billion as part of continued capacity ramp-up.
  • €4.6 billion of DUV orders.
  • DUV installed base/system base 25%:75% in 2021.
  • DUV installed base/system base 30%:70% by 2025.
  1. EUV
  • EUV system sales grew 41% to €6.3 billion to support high-volume manufacturing for both Logic and Memory
  • €2.6 billion in EUV orders.
  • EUV 0.33 NA extension and EUV 0.55 NA introduction are expected to extend EUV values to the next decade.
  • High-NA program in R&D and manufacturing progressing well, one EUV 0.55 NA (EXE:5000) order received to be delivered by Q3 2023.
  1. Installed base management (service and field option sales)
  • Installed base business grew around 35% to €5.0 billion to form about 27% of total sales.
  • Increased sales in installed base management during Q4 helped improve the 2021 gross margin.

Q4 2021 metrics: Highest ever gross margin of 54.2% 

  • Net sales of €5.0 billion, gross margin of 54.2%, net income of €1.8 billion
  • Net income as a percentage of net sales at 35.6%
  • Order intake in Q4 high at €7.1 billion
  • Net system sales at €3.5 billion

Breakdown: net system sales 

  • Region-wise: Taiwan 51%, South Korea 27%, China 22%
  • End use: Logic 73%, Memory 27%
  • Lithography units: EUV 11, DUV-ArFi 20, ArFdry 5, KrF 35, i-line 11

Q1 2022 outlook: 60 EUV systems to be delivered in 2022

  • Net sales between €3.3 billion and €3.5 billion, including installed base management sales of around €1.2 billion.
  • Lower net sales as revenue shift of approximately €2 billion to subsequent quarters due to fast shipments.
  • Gross margin 49%.
  • Delivery of 60 EUV systems in 2022.

Long-term outlook (2021 to 2030): High-NA EUV systems to drive revenue growth

  • Lithography intensity increasing over time. Litho growth faster than total WFE.
  • Orders for five High-NA systems.
  • First High-NA system expected to be installed by Q4 2023.
  • Annual revenue to be between €24 billion and €30 billion in 2025, with the gross margin between 54% and 56%.
  • Net sales to grow around 20% YoY during 2022-2025 due to strong demand.
  • Going forward, the guidance of 20% YoY growth will be met through High-NA EUV equipment sales.
  • Installed base management with a value-based service model, including productivity and performance upgrades, could provide an annual revenue growth rate of 11% for the period 2020-2030 to reach €6 to €7 billion by 2025.
  • High-NA systems to be used in mass production by chip manufacturers in DRAM by 2025.
  • DRAM is projected to drive >30% of overall EUV demand by 2025.

Earnings call discussion: ASML’s capabilities for fast shipments in focus

Addressing strong demand beyond 2022?

  • Focus on building capacity, both in the company and supply chain.
  • Significantly increase output for DUV, EUV, and metrology and measurement systems.

Expectations regarding EUV and DUV?

  • Expect to ship about 55 EUV systems, with about six systems soon. EUV revenue growth of about 25% expected.
  • EUV capacity growth, 2020-2025: Number of units > 1.5X; Wafer capacity >2X
  • 20% growth of DUV business in 2022. Order intake across all industries — Memory, Logic.
  • DUV capacity growth, 2020-2025: Number of units ~ 1.5X; Wafer capacity ~2X

How does this all translate into your different market segments for this year?

  • Driven by the underlying secular trend of increased demand for more mature products and advanced products, Logic will grow about 20%.
  • Memory growth to be about 25%.

Update on EUV High-NA

  • High-NA is the next big promise. Execution of first High-NA tools in factory under progress.
  • Received fifth EXE:5000 (High-NA) order for shipment up to 2024.
  • Received first order for EXE:5200, next-generation high-volume manufacturing tool for EUV to be launched in 2024.

Capital allocation for 2021

  • Use free cash flow to support the business by:
    • Investing significantly in own capacity and capacity in the supply chain.
    • Investing significantly in R&D, given the high growth profile.
    • Increasing dividend and share buyback.

Challenges going ahead

  • Demand significantly exceeds capacity due to:
    • Secular growth trend.
    • Drive for more semiconductors.
    • Shortages and demand-supply imbalances due to COVID-19.
  • Monitoring disturbances is challenging when operating at maximum capacity as there is no buffer left.
  • Workforce: People need to be trained and taken up the learning curve, which takes time.

Addressing these challenges

  • More wafer output through fast shipments.
  • Reducing the cycle by not doing acceptance tests for weeks.
  • Installed base improvements. Hardware and software options to get more wafers out.
  • Any disturbance to be recognized quickly and corrective measures taken.
  • Close collaboration between the supplier base and company.

Key takeaways:

  • ASML recorded all-time high revenues and gross margins, thanks to the record number of EUV system sales and growth in the installed base business.
  • ASML will ship 60 units in 2022. Focus on fast shipments will increase wafer output.
  • Taiwan remains the key market, considering TSMC’s pledge to spend $100 billion during 2021-2023.
  • Efforts to reduce defects, improve yield and deploy High-NA EUV systems in mass production will enable ASML to meet its long-term forecast.

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