ASML: Exploding orders, is the semiconductor industry on the rise?

ASML released its fourth-quarter earnings report for 2023 (ending in December 2023) before the US stock market opened on January 24, 2024. The key points are as follows:

1. Core data: Exceeded expectations. In the fourth quarter of 2023, ASML achieved a revenue of EUR 7.24 billion, slightly exceeding market expectations (EUR 6.92 billion). Despite the slowdown in shipments from Taiwanese customers this quarter, the growth in shipments from mainland China and South Korean customers offset the decline. The company's net profit in the fourth quarter of 2023 was EUR 2.05 billion, a year-on-year increase of 12.7%, surpassing market expectations (EUR 1.86 billion). The strong profit performance was due to better-than-expected revenue and gross margin.

2. Business performance: EUV and ArF are the main sources of revenue. System sales revenue remains the company's main source of income, accounting for nearly 80% of total revenue. The year-on-year growth in revenue of$ASML(ASML.US) this quarter was mainly driven by increased shipments of ArF to downstream customers.

3. Regional revenue performance: Mainland China remains the largest customer. Due to the impact of EUV control, mainland Chinese customers significantly increased their shipments of ArFi. In addition to mainland China, revenue in South Korea has returned to relatively normal levels. However, revenue in Taiwan showed a significant decline this quarter, mainly because the company's major customer, Taiwan Semiconductor.US, tightened its capital expenditure, directly affecting the shipment pace.

4. ASML's performance outlook: The expected revenue for the first quarter of 2024 is EUR 5-5.5 billion (market expectation: EUR 6.223 billion), with a gross margin of 48-49% (market expectation: 51%). The decline in revenue is affected by export restrictions. Starting from 2024, ASML will no longer obtain export licenses to ship NXT:2000i and above immersion lithography equipment to mainland China, directly impacting the company's revenue from immersion lithography systems and consequently affecting the company's gross margin.

Overall, ASML's revenue and profit both exceeded market expectations, thanks to continued shipments from customers in mainland China and South Korea in this quarter.

Looking at the performance guidance for the next quarter, the company expects revenue of 5-5.5 billion euros for the first quarter of 2024 (market expectation: 6.223 billion euros) and a gross margin of 48-49% (market expectation: 51%). Both figures show varying degrees of decline and fall short of market expectations, mainly due to the slowdown in shipments from TSMC and export restrictions. Starting from January 1, 2024, the company will no longer receive export licenses for shipping NXT:2000i and above immersion lithography equipment to mainland China, directly impacting the company's performance in the first quarter.

Although the company has provided a less-than-expected outlook, Dolphin Research believes that the decline in ASML's performance in the first quarter is short-term. Looking at the current order backlog, ASML's current order backlog is already 9.186 billion euros, a 253% increase compared to the previous quarter. The short-term impact of export restrictions to mainland China is offset by the company's leading technological capabilities, and the current order backlog has reached a historical high. After experiencing a decline in the first quarter, the order backlog will be converted into performance through shipments.

Considering TSMC's financial report, with the expansion of 3nm production, TSMC's revenue from advanced processes has reached nearly 70%. Dolphin Research believes that as TSMC continues to widen the gap with second and third-tier wafer manufacturers, export restrictions on immersion lithography systems such as ArFi are expected to weaken in the future, which may once again expand the company's shipments to mainland China.

Here is Dolphin Research's specific analysis of ASML:

I. Key Data: Exceeding Expectations

1.1 Revenue: ASML achieved revenue of 7.237 billion euros in the fourth quarter of 2023, slightly exceeding market expectations (6.92 billion euros), and quarterly revenue reached a new high. The revenue increased by 8.5% compared to the previous quarter, mainly due to shipments of EUV equipment to customers in South Korea.

1.2 Gross Profit and Gross Margin: ASML achieved a gross profit of 3.717 billion euros in the fourth quarter of 2023, a year-on-year increase of 12.3%. In terms of gross margin, the company's gross margin for this quarter was 51.4%, a slight decline compared to the previous quarter. The decrease in shipment volume and average selling price of products such as ArFi directly affected the company's gross margin.

1.3 Operating Expenses: ASML's operating expenses in Q4 2023 were 1.325 billion euros, a YoY increase of 11.8%.

Specifically:

1) Research and Development Expenses: R&D expenses in this quarter were 1.041 billion euros, a YoY increase of 14.9%. The R&D expense ratio remained at 14.4%, indicating the company's continued high investment in research and development.

2) Selling, General, and Administrative Expenses: SG&A expenses in this quarter were 284 million euros, a YoY increase of 1.5%. The SG&A expense ratio remained stable at 3.9%.

1.4 Net Profit: ASML's net profit in Q4 2023 was 2.048 billion euros, a YoY increase of 12.7%, exceeding market expectations (1.86 billion euros). The growth in performance this quarter was mainly driven by demand from Korean customers for inventory equipment.

II. Breakdown of Data: Mainland China Becomes the Largest Customer

ASML's business consists of system sales revenue and service revenue, with system sales revenue accounting for nearly 80% and being the company's core source of revenue.

2.1 Business Performance

1) System Sales Revenue

ASML's system sales revenue reached 5.68 billion euros in Q4 2023, a YoY increase of 19.7%. The YoY growth in system sales was mainly driven by a significant increase in ArFi, with a growth rate of 46.7%. With the increase in demand from mainland Chinese customers, the average selling price of ArFi has also increased to over 70 million euros. The QoQ growth was mainly due to increased EUV purchases from Korea.

2) Service Revenue

ASML's service revenue in Q4 2023 was 1.55 billion euros, a YoY decrease of 7.6%. ASML's service revenue mainly includes equipment maintenance and other projects, and the business revenue remained relatively stable.

2.2 Revenue Situation in Various Regions

The revenue from mainland China still accounts for about 40% of the company's total, making it the largest customer this quarter. This is mainly due to the increased demand for products such as ArFi from customers in mainland China who are expanding production.

Apart from mainland China, the revenue from the Korean region has rebounded to a relatively normal level. However, the revenue from the Taiwan region has shown a significant decline this quarter, mainly because the company's major customer, TSMC, tightened its capital expenditure for this quarter, directly affecting the pace of product delivery.

Dolphin Research on ASML and related studies

ASML

October 18, 2023, Earnings Report Review: "ASML: The Pearl on the Crown, but Difficult to Escape the Cycle Curse" (Link)

July 21, 2023, Earnings Report Review: "ASML: Outstanding Capabilities, but Also Subject to Cycle Variations" (Link)

September 21, 2023, In-depth Analysis: "ASML: The Lithography King with a Valuation of Less Than 30 Times, Is It Expensive?" (Link)

July 14, 2023, In-depth Analysis: "The Ultimate Belief - ASML" (Link)

Semiconductor Industry

March 7, 2023: "NVIDIA: After the Magical Performance, Will There Really Be a Great Turnaround?" (Link)

December 29, 2022: "Semiconductor Avalanche? True Resilience Only After the Most Brutal Decline" (Link)

June 24, 2022: "Order Cancellations, Is the Semiconductor Industry Really Going to 'Change Its Fate'?" (Link)

June 17, 2022: "Consumer Electronics Market Maturity: Apple Stands Strong, Xiaomi Struggles" (Link) Deep Dive into TSMC

April 8, 2022: "TSMC (Part 2): Price Discounts, Unwavering Faith"

March 16, 2022: "Revisiting TSMC, the Top-tier Foundry King, After the Market Crash"

Deep Dive into SMIC

July 16, 2021: "SMIC (Part 2): The Undervalued Chinese "Chip""

July 9, 2021: "SMIC (Part 1): The Strategy of the Leading "Chip" Player"

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