Good day, and thank you for standing by. Welcome to the ASML 2023 third quarter financial results conference call on October 18th, 2023. At this time, all participants are in a listen-only mode. After the speaker's introduction, there will be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to hand the conference call over to Mr. Skip Miller. Please go ahead.
Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call are ASML CEO, Peter Wennink, and our CFO, Roger Dassen. The subject of today's call is ASML's 2023 third quarter results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received. This call is also being broadcast live over the internet at asml.com. A transcript of management's opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties.
For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's press release and the presentation found on our website at ASML.com, and in ASML's annual report on Form 20-F and other documents, as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wennink for a brief introduction.
Thank you, Skip. Welcome to everyone. Thank you for joining us for our third quarter 2023 results conference call. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the third quarter 2023, as well as provide our view of the coming quarters. Roger will start with a review of our third quarter 2023 financial performance, with added comments on our short-term outlook, and I will complete the introduction with some additional comments on the current business environment and our future business outlook. Roger, if you will.
Thank you, Peter, and welcome everyone. I will first review the third quarter financial accomplishments and then provide guidance on the fourth quarter of 2023. Let me start with our third quarter accomplishments. Net sales came in at EUR 6.7 billion, which is around the midpoint of our guidance. We shipped 10 EUV systems and recognized EUR 1.9 billion revenue from 11 systems this quarter. Net system sales of EUR 5.3 billion, which was mainly driven by logic at 76%, with the remaining 24% coming from memory. Installed base management sales for the quarter came in at EUR 1.4 billion as guided. Gross margin for the quarter came in at 51.9%, which is above our guidance, primarily driven by DUV product mix, as well as some one-off cost effects.
On operating expenses, R&D expenses came in at EUR 992 million, and SG&A expenses came in at EUR 288 million, both basically as guided. Net income in Q3 was EUR 1.9 billion, representing 28.4% of net sales and resulting in an EPS of EUR 4.81. Turning to the balance sheet. We ended the third quarter with cash, cash equivalents, and short-term investments at a level of EUR 5 billion. Moving to the order book, Q3 net system bookings came in at EUR 2.6 billion, which is made up of EUR 0.5 billion for EUV bookings and EUR 2.1 billion for non-EUV bookings. These values also include inflation corrections.
Net system bookings in the quarter were driven by logic, with 80% of the bookings, while memory accounted for the remaining 20%. As expected, we did see some moderation in orders this quarter. As the industry is working through a cycle, customers remain cautious in the current environment, managing cash flows and delaying purchase orders. In addition, there were no high- NA orders this quarter. While our bookings were lower than in previous quarters, our backlog at the end of Q3 remained strong at over EUR 35 billion. With that, I would like to turn to our expectations for the fourth quarter of 2023. We expect Q4 net sales to be between EUR 6.7 billion and EUR 7.1 billion. We expect our Q4 installed base management sales to be around EUR 1.4 billion.
Gross margin for Q4 is expected to be between 50%-51%. The positive impact of higher sales volume is more than offset by the diluted impact from a change in DUV mix and one-off effects relative to last quarter. The expected R&D expenses for Q4 are around EUR 1.3 billion, and SG&A is expected to be around EUR 285 million. Our estimated 2023 annualized effective tax rate is expected to be between 15%-16%. An interim dividend of EUR 1.45 per ordinary share will be made payable on November 10, 2023. In Q3 2023, we purchased shares for a total amount of around EUR 100 million. As mentioned in previous quarters, in the current environment, we expect to see ongoing pressure on our free cash flow.
As a result, we will be prudent in managing our cash flows and maintain relatively high levels of cash. With that, I would like to turn the call over to Peter.
Thank you. Thank you, Roger. I have a bit of a cold, so apologies. As Roger has highlighted, another good quarter, especially considering the current market environment. Uncertainty remains in the market, driven by global macro concerns around inflation, rising interest rates, lower GDP growth in certain economies, and the geopolitical environment, including export controls. However, the industry seems to be passing through the cycle trough. There has been some improvement in end market inventory levels downstream. Sorry, I have to get a bit of water. Although inventory levels upstream remain elevated. As a result, our customers continue to moderate wafer output by running at lower utilization levels.
While lithography tool utilization are still running at levels lower than normal relative to last quarter, tool utilization and logic continues to show signs of improvement, while memory has yet to turn. We concur with our customers that still expect to see an inflection point indicating the start of a recovery by the end of the year, although the shape and slope of the recovery remains uncertain. Looking further ahead to 2025, we expect a significant growth year, since more than 50% of our EUV and DUV shipments will go to new fab projects. On top of this, we expect existing fabs will be adding capacity, driven by a continued recovery cycle. Turning to our business, we now expect DUV revenue to grow towards 55% year-over-year, an increase from around 50% communicated last quarter, primarily driven by an increase in immersion revenue.
China demand for DUV systems continues to be strong, a trend we talked about in previous quarters. For system shipments this year to Chinese customers, the majority of the orders were booked in 2022. The demand fill rate for our Chinese customers over the last two years was significantly less than 50%. So the Chinese customers were, in fact, receiving a much lower number of systems than they ordered. This was due to the fact that... Sorry, this was due to the fact that the demand for our systems worldwide significantly exceeded supply. With current shifts in demand timing from other customers, we now have the opportunity to fulfill these orders to our Chinese customers.
So supply is, in fact, catching up to demand, and we're shipping lithography systems for mature and mid-critical nodes to China, while of course, complying with export control regulations. If you combine this with the fact that other customers are delaying their demand, this means indeed a higher sales percentage from China that we- than we saw in previous years. In EUV for 2023, we continue to expect year-over-year revenue growth for EUV of around 25%, as communicated last quarter. For the installed base business in 2023, the current utilization rates, market uncertainty, particularly as it relates to the timing of the recovery, customers continue to wait to perform productivity and performance upgrades on the lithography systems. Therefore, we now expect our installed base business this year to be down around 5% from last year, versus the flat growth previously communicated.
In summary, based on our full year, with higher DUV revenue offset somewhat by lower expectations on our installed base business relative to last quarter, we still expect net sales for the year to grow towards 30%, with a slight improvement in gross margin compared to 2022. Overall, a very strong growth year, especially considering the industry being in a down cycle. On the geopolitical front, as it relates to export controls, the U.S. government yesterday published updated export control regulations. A part of the regulations is an update from last year's October communication, and part is the implementation of the U.S. regulation on the trilateral agreement between the Dutch, Japanese, and U.S. governments. Given the length of the document, we need to review the final regulation thoroughly and make a detailed analysis, which will take some time.
But based on our preliminary assessment, we do not expect these measures to have a material effect on our financial outlook for 2023. The export control measures could have an impact on the regional split of our shipments in the medium to long term, but we do not expect an impact on the global demand scenarios as communicated during our Investor Day in November last year, since the long-term growth perspectives for our industry remains clearly unchanged. Looking towards the next year, the semiconductor industry is currently working through the bottom of the cycle, and our customers expect the inflection to be visible by the end of this year, as I mentioned before.
Although there's an opportunity for some demand to be pulled back into the back half of 2024, we currently prefer to take a more conservative view for the full year 2024, especially considering the inherent nature of the macroeconomic uncertainties. Therefore, based on our current view, we expect the revenue next year to be similar to 2023. As such, we see 2024 as a transition year, but also as an important year to prepare for the significant growth that we expect in 2025. Now, based on discussions with our customers, we currently expect 2025 to be a strong year, driven by a number of factors.
First, the secular growth drivers in the semiconductor end markets, which we have previously discussed, such as energy transition, electrification, and AI. The expanding application space, along with increasing lithography on future technology nodes, drives demand for both advanced and mature nodes. Secondly, the industry expects to be in the middle of a cyclical upturn in 2025, starting in 2024. Lastly, as mentioned earlier, we need to prepare for the significant number of new fabs that are being built across the globe. These fabs are spread geographically, are strategic for our customers, and are scheduled to take our tools. It is essential that we keep our focus on the future and build capacity to be ready for this round. In summary, despite going through an industry down cycle, we still expect very strong growth in our business this year.
While there are still significant uncertainties, primarily driven by the macro environment, it appears that we're passing through the bottom of this specific cycle, and the shape of the recovery will ultimately determine the demand curve beyond 2023. In the near term, it's understandable that customers remain cautious as they moderate wafer output to help lower inventory levels in the supply chain and look to build confidence around the timing and slope of the recovery next year. In summary, we clearly view 2024 as a transition year, as we prepare for future growth and expect strong year in 2025 and beyond. We remain confident that we're well-positioned for further long-term growth, as we discussed in the market scenarios for 2025 and 2030, during our Investor Day in November 2022. With that, we will be happy to take your questions.
Thank you, Roger and Peter. The operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I'd like to ask you that you kindly limit yourself to one question with one short follow-up, if necessary. This will allow us to get to as many callers as possible. Now, operator, could we have your final instructions and then the first question, please?
Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will now go to the first question. Your first question comes from the line of Joe Quatrochi from Wells Fargo. Please go ahead.
Yeah, thanks for taking the questions. Curious, embedded in your expectation for, you know, a more muted kind of 2024, how do we think about the gross margin puts and takes, just given there are several moving parts in terms of, like, mix, and you guys are obviously increasing your manufacturing output for later years. And then, you know, I think there's some benefits from higher EUV ASP, but at the same time, you're also going to start shipping the initial, you know, high- NA tools as well.
Yeah, Joe, you're doing a very fine job in analyzing it all. Of course, you will appreciate that we're not gonna give guidance on the, you know, quantitative guidance on the gross margin for next year. But I can give you, you know, some of the drivers of the gross margin, and I think you mentioned a few of them, which are quite important. So I would say the 3800 ASP is clearly one, right? So, you know, 3800 is gonna be, you know, an important part of the mix in next year for EUV.
So obviously, as a higher ASP, we talked about more than EUR 200 million, less on the call last quarter. So that comes with a higher ASP, but also drives the gross margin. So that's an important driver. I think service on EUV is one where we say we continue to make progress on that one, so that's another positive. I would say on the challenge side, so on the headwind that we're gonna get in terms of gross margin for next year, it is, as you said, next year, we are preparing, obviously, for a big year in 2025, because that's the way we look at it.
As we also mentioned, as Peter mentioned, and as we also said in the video, it's gonna be a big year, and that means that we're gonna add, you know, quite some capacity to actually allow that to happen. So that's gonna have a headwind on the gross margins, because those people will have to be trained in 2024, whilst primarily being productive only in 2025. And also on high-NA. You know, the high-NA numbers next year obviously are very, very small in terms of revenue and also output. But we are obviously preparing our workforce, both in the factory but also in the field, to accommodate, you know, the 25 and beyond ramp of high-NA.
Obviously, that also same story, a lot of people that will be added there will be a drag on the gross margin for 2024. A question mark, obviously, is on the installed base business. You know, that can go positively, can go negatively on the gross margin, very much dependent on how the upgrade business will come back in 2024.
And then finally, you know, in light of, you know, all the puts and takes that you might think of in terms of revenue, also in light of what Peter just said, the China export controls, you could maybe see, you know, less immersion tools into China, also less on the high end. So that could also be a bit of a headwind on the gross margin. So that's it really, Joe. Those are all the puts and takes I would see today. And, you know, in the Q4 call, so in January of next year, I think we have a much better handle on how those all pan out.
Got it. Thanks for that. And then as a follow-up, just wanted to reconfirm. For fast shipments, you're expecting still to exit this year in terms of revenue not recognized in the EUR 2.3 billion range? And then does that get caught up next year as part of, you know, kind of a more muted growth, that you're able to catch up to that demand?
I think, Joe, part of it will, the way we look at it today, but again, we will confirm that, in more detail in January. But the way we look at it today, we expect less fast shipments, by the end of 2024 than we would have, by the end of 2023. So there would be a positive effect from fast shipments in the number for next year.
Got it. And that EUR 2.3 billion is still the right number, exiting this year?
The EUR 2.3 billion is what we're currently driving towards. Yeah. That's, that's what we expect at this stage to have shipments this year, not recognizing revenue this year. Correct.
Perfect. Thank you.
Thank you. We will now go to our next question. The next question comes from the line of Krish Sankar from TD Cowen. Please go ahead.
Yeah, hi, thanks for taking my question. I have two of them. When you look into calendar 2024, how to think of EUV from a unit standpoint, EUV and DUV, how do we look at units for EUV and DUV in 2024 relative to 2023? Would they be up, down, similar? Any color that would be helpful, and then I have a follow on.
Yeah, I think, you know, on the DUV, I think Roger said it in the answer to the previous call. In the DUV, of course, we've had a great year for China because we were basically delivering out of the backlog. You know, these guys ordered, and the orders were there, they were prepaid, and we had the opportunity to ship. I don't think that will repeat itself in that volume so much next year. And on top of that, of course, there is a new export control regulation that will put... Let's say, there's a handful of Chinese fabs under the export control rules, where we cannot ship, you know, immersion tools.
It's just a handful of, but it's still, you know, it is still, you know, sales that we had in 2023, that we'll not have in 2024. So I think DUV could see some reduction based on that now. If then sales stay the same or at the similar level, then EUV grows. But there, you know, what Roger also said as an answer to the previous question, we do expect that fast shipments going out of 2024 will be, you know, lower. So there's going to be, you could say, a, you know, accounting windfall on the top line. So I think all in all, this is a bit of the picture, so somewhat lower DUV units.
EUV units could be lower because of the fact that, you know, we actually have... Although we could see revenue increase as a, you know, result of the fast shipment move, could indeed be also somewhat lower, but with higher, you know, sales prices. So this is what the picture is for next year. Now, like Roger also said, probably January, after the fourth quarter results, is probably the better time to go into a bit more detail. But, you know, directionally, that's what you can expect.
Got it. Got it. That's very helpful, Peter. And then, on China, I understand it was like 46% or so in the last, last quarter. Probably averages around 30% for the full year. If you strip out the export control issues or the geopolitics, you know, a lot of these spending is on mature nodes. Kind of curious, how long do you think, this level of spending is sustainable, or do you think at some point there's going to be a natural consolidation or rationalization of the spending? Thank you.
Yeah, I think you have to understand where these tools are being used for. You know, the vast majority of our shipments to China is mid-critical to mature. That's really where our business is. Of course, like I said earlier, there's a handful of fabs, not customers, fabs, that have been identified as ready for advanced semiconductor manufacturing. So those are now excluded, but the vast majority is mid-critical to mature. Will that level off? I don't think so. And why don't I think so? Because you need to realize where those chips are being used for. I mean, China is by far over 50% of all worldwide investments in renewable energy is in China.
That's wind, that's solar, that's the build-out of the grid. The electrification, the build-up of the EV manufacturing capacity in China is significant. Industrial IoT is a significant driver. Next to that is also the you know, the continuous telecommunications infrastructure rollout. That's all mid-critical to mature stuff. And as it happens, you know, China invests a lot there. It's a big country of 1.4 billion people, so there is a lot of you know, semiconductor need. And this is exactly when we look at the expansion plans of our Chinese customers, this is exactly what they- where they are putting their capacity you know, at work in these areas.
If you look at the total consumption of semiconductors by the Chinese manufacturing industry, then, you know, China imports more semiconductors than they import oil. On top of that, you see the significant increase in these new transitions. That means that if China wants to come to a certain level of self-sufficiency, yeah, they have still a huge gap to cover to be completely self-sufficient. So it's also logical that they actually invest in this type of semiconductor technology, because it's for internal use. And I think so it's it—I don't think we will see a you know peak this year. And actually, but I think there will be, going forward, a significant demand coming out of China for mid-critical and mature technology, and for all the reasons that I just mentioned.
Got it. Thank you, Pieter. Thank you.
Thank you. We will now go to the next question. Your next question comes from the line of Alexander Peterc from Société Générale. Please go ahead.
Yes. Hi, good afternoon. Thank you for taking my question. Could you help us understand what is the percentage of shipments into China this year that would actually fall under the restrictions that will be in place for the 1st January next year? That will be my first question, and then the follow-up, just very briefly, could you tell us how far out you're currently booked in EUV into 2024 and also in DUV? Thank you.
Okay, I'm just writing down. So on, on the, you know, China question, what... The percentage shipment this year, that, is now excluded, it's anywhere between 10%-15%. So the vast majority is mature and mid-critical. And I think, like I said in, in the answer to the previous call, I think that is what will basically re- basically remain because of the build-out of that capacity is actually needed for all the, for all the transitions that I just mentioned. So it's 10%-15%.
Thank you.
On the EUV backlog, I mean, we're currently looking at a backlog of around EUR 19 billion for EUV. But of course, that is a combination of the shipments that we still have to go this year, and then for 2024 and 2025. And by the way, it also includes high-NA. So that, that's so, you know, there's a substantial part of the shipments that we envisage in 2024 are included, but not everything. But a substantial part is covered by the EUV backlog, as I just referenced it.
Okay, great. Thank you. It's just the 3800 will be... So next year is all 3800, right?
No, no. Next year will be a mix of 3600 and 3800.
Thank you.
You're welcome.
Thank you. We will now go to the next question. Your next question comes from the line of Sara Russo from Bernstein. Please go ahead.
Hello, thanks for taking my question. So in your results package, you had indicated that you're seeing memory utilization remaining on the low side, and but you're beginning to see some recovery in logic and sort of indicated a potential bottoming of the cycle later this year. Can you give us any more specifics on the utilization levels and trends across memory versus logic? Any different... Like, more specifics on the differences you're seeing across those end markets?
I'm not, I'm not going to give you precise utilization levels because they're all different for our customers, but, it is bottoming out on, logic. That's what we've seen. I think we've already indicated that, I think last quarter, that we saw this very early first indication. I think that has continued. Yeah, so, which is good. But also I think that you have need to look at that in the context of, what I said earlier, that, you know, inventory levels downstream are normalizing and upstream are still a bit elevated. So this is in that context that that makes all sense. I think on memory, we don't see that upturn, you know, yet.
So we just have to look at and just follow this closely when that will, you know, happen. But generally, when we see this upturn in logic, somewhere down the line, memory will follow. Yeah, it's, you know, logic working without memories is not, you know, does not make sense either. So it's probably a timing issue, but we'll follow it closely. And like I said, there are other indications. You know, also some articles that I just read last week from Korea, that for the first time in 12 months, you know, you see NAND shipments going up. You know, first indications of DRAM spot prices going up.
Now, so these are early indicators, so that's why our expectation is that, you know, what we've seen for logic now over the last three months will also follow in memory.
Great, thanks. And maybe just a follow-up on the backlog topic. So, in the past, you've given us a sense for what share of the backlog is China demand, and it's, it sort of, you know, a lot of 2022 orders led to the significant increase in China. Have you seen that shift at all? It was sort of sitting around 20%. Is that shifted down now that you're able to ship more to China and meet more of those orders? Has that come down, or does that continue to remain in that range?
No, I think it's the, I think it's the same. I think, we said, the China, part of our business this year could be over 20%.
Yeah.
I think it's about the same range for the backlog. Yeah. That has remained the same.
Great. Thank you very much.
Thank you. We will now go to the next question.... And your next question comes from the line of François Bouvignies from UBS. Please go ahead.
Thank you very much. So two quick ones for me. The first one is on, maybe 2025. So you gave your market low and market high scenario at your capital markets day. I'm now looking at the, you know, current macro environment, I guess, for many, you know, people, it's, actually, we are more in a low market scenario, at least today, in terms of macro. If we look at your guidance on 2025 and taking into account the geopolitical environment, should we lean towards the low end of your guidance in a way? I mean, it would still imply a significant recovery in 2025, but I just wanted to check if it's fair to assume, given the current, utilization rate in the industry and, you know, the push out that you, also see on your side-
Yeah.
If we should lean towards the low end of your guidance. I have a quick follow-up.
Well, I mean, let me explain the following. I think, you know, our industry is cyclical when we're in a downturn, and the deeper the downturn is, the higher the upturn. And that's simply because the underlying trend, the secular trend of the capacity that is needed to support all these transitions that we all talk about and we all believe in, if there's a downturn, for whatever reason, it could be macro, it could be, yeah, macroeconomic shocks. The deeper the downturn is, the higher the upturn. That has been. If you just look at the 30-year, you know, cyclical behavior of our industry, that's exactly what is always happening. And it makes sense because the underlying trend is there, yeah?
Now, having said that, in my introductory comments, I actually had three reasons for why we believe 2025 is going to be a very strong year. One is these secular trends. They are there, and also it actually will, it actually means that we need to build the capacity to support those trends. And if we don't, if you don't build the capacity in 2023, 2024, and for memory, it even started earlier, it started in mid 2022, then it will have to be there to support those secular trends, which we all believe in. So, and also going back to that, that's number one. Number two, in answer to the previous question, it feels like, and also our customers are keep telling us, that they feel there's a trough.
We're in this trough or we're very close, you know, and that means they will see growth in 2024. You could argue about the slope of the growth because of macroeconomic uncertainties, but they all tell us, "Please prepare for 2025." So they strongly believe that growing in 2024, and it will, and it will probably start, you know, slow, but will accelerate into 2025. So they tell us, "Be ready." That's number two. Number three, and when you look at the number of new fabs that are being opened geographically, yeah, fab extensions that will need machines in Europe, in the U.S., across Asia, yeah? Then, that is already when we look at the demand, already more than 50% of our 2025 forecasted demand is on new fabs for DUV and EUV.
So, if you put it all together, also realizing that we actually look at 2024 and 2025 together. Why is that? Because our lead times are more than 12 months. Yeah, they're for EUV a year and a half. So we need to have that very close connection with our customers, and we have these insights into these new fab expansions, not so much where they're going to add capacity for the existing fabs, because that's basically, you know, a question of where the cycle is. But if you take those three things together, and then we look at the demand that we're currently discussing with our customers, then 2025 is a very strong year. And a very strong year doesn't jive with your low end of the guidance.
So it's again the cyclical nature of this industry. You know, we are now. Let's take memory. If 2024 is not a full recovery year, then memory is in a downturn of 2.5 years. Now, just look at it historically. You know, always followed by a strong recovery. Same is true for Logic. And if you have to look at those building blocks of those three building blocks, that gives us the you know conviction at this moment in time that 2025 is going to be a very strong year. But then we need to prepare 2024.
We can simply not wait until, you know, first quarter 2025, and then we start accelerating because the supply chain won't be there. Our lead time is simply too long, so we have to prepare that also in the year 2024. That's why it's a you know, transition year. We look at 2024, 2025 together. Why? Because the lead times of our tools and discussions with our customers are actually supporting all of that. Sorry for the long answer.
No, no, no, that's very clear. Thank you. And maybe as a follow-up then, if we have long lead times and strong recovery in 2025, the orders, I mean, this quarter has been, let's say, quite low compared to many people expected. But if you expect a very strong year in 2025 and the lead times that you are describing-
Yeah.
Do we expect to see that in the order behavior in the first half of 2024? I mean, if we take into account lead times, or how should we think about that? Because we should-
Absolutely.
See evidence of that, right?
Yeah, no, I think that's absolutely true. You know, we're in Q3 of the 2023, and we have more than EUR 35 billion in the backlog. If you're a customer, you can actually wait, you know, because they also see 2024 as a recovery year. Is it going to be Q3, Q4, Q1? So what, so when is it? So they will just wait because they don't need to have it. They have the capacity. If they want the capacity, they can just call it off, yeah? So, but indeed, you are right. You know, if 2025 is the kind of strong year that we expect, then indeed, you know, we would have to see the order recovery in the first half of 2024. Absolutely, yeah.
Great. Thank you, Peter.
Thank you. We will now go to the next question. Your next question comes from the line of Rolf Bulk from New Street Research. Please go ahead.
Yes, thank you for taking my question. In your Western customers, their demand profile, could you give us a bit more detail on this? Are these pushouts primarily on the leading edge, or is it more trailing edge, and has this trend of pushouts increased in recent months?
Yeah, I think, when you, when you think about trailing edge, I mean, we did not see pushouts from many of our trailing edge customers because many of them are in China. But even the ones that are not in China, because they are supplying the mature market, which, for instance, supplies, the automotive industry and industrial IoT, they actually kept pretty, pretty, pretty strong. They, they were pretty healthy. So it is, it is more in, you could argue, the leading edge than it was in a mature area. And but don't forget, leading edge doesn't only need high-end DUV or needs high-end immersion, it only also needs, you know, mature. It needs KrF, it needs i-line. So, but if you want to split this, then the demand, shift was probably more in those areas where... Which is logical.
Look at the end markets, you know, you know, smartphone sales, yeah? PCs, you know, this is the end markets were-- and that is where the inventory was. So this is also the area where you see the demand shifts. But, you know, healthy, or let's say relatively healthy, was more in the mature space. And in, and of course, in all China, because we heavily undershipped these customers, which of course, with their orders in the order book and all, and, and most of them were, to a large extent, prepaid. Yeah, of course, we will, we will ship those tools to them if others don't want them, and that's all mature.
Thank you. It's very clear.
Thank you. We will now go to our next question. The next question comes from the line of Didier Scemama, Bank of America. Please go ahead.
Yeah, hi. Good afternoon. It's Didier Scemama from Bank of America. I have a couple of questions. First, I wanted to just probe you a little bit again on 2025 revenue guide. I think you answered pretty well, but I guess what I wanted to ask you is, if we don't see those bookings coming through in the first half of 2024, is that roughly in July 2024, where you would consider changing that guidance, or at least telling us that you would be towards the lower end of that range or even below that? And I've got a follow-up. Thank you.
Well, you by now know us, Didier, because we know each other for a long time. We just tell you how it is, how we see the world at the moment that we have this call. This is how we see the world. So if we see the world by Q1 of 2024 different, we will tell you. If we see it different by Q2 2024, we will tell you. So, yeah, this is what we currently see, what we currently believe. If the world turns out to be completely different, better or worse, by the middle of 2024, we will tell you. So I cannot say, I cannot answer that question other than we'll just tell you how it is.
No, it makes sense. Second part, on China restrictions, is there anything you can share with us with regards to the, you know, sort of tools that might not be allowed to be shipped to those fabs? I mean, should we consider the 1980 to be part of the banned tools for those particular fabs, but that you could ship it to other China customers? Or is it too early to say at this stage?
No, I think that's probably not too early. It is, as you indicate. So, the way we read the rules now, and of course, you can imagine that that part of the regulation we've read pretty carefully, that the principle is that in principle, also the 1980s would fall under the export control restrictions, but only when those immersion tools are used for advanced semiconductor manufacturing. And those advanced semiconductor manufacturing, we've been informed, only applies to a handful of fabs. Yeah? So that means that the 1980 for those handful of fabs is off limits, but not for the vast majority of our Chinese customers, for which we don't need an export control license either. We can just ship. Yeah?
Those are for the mature and lower mid-critical chips that are needed for all the transitions that I just mentioned. So yes,
Okay.
Yeah?
Right. So that means that the majority of your immersion revenues next year in China will be at least some of the 1980, but probably move to 1950, 1930 sort of things for those customers?
No, no, because the 1980 is a low-end immersion tool, so the only export controls will be on the 1980s that go to a handful of fabs. Yeah? So not-
So you ship the 1980. Yeah.
Yeah.
Okay.
And for all the other customers which are using those chips for non-advanced semiconductor manufacturing, that is actually used for mid-critical or mid-critical mature applications, where there are no security concerns, yeah, we can just ship those. And that's-
Brilliant. Thanks very much.
That's the vast majority of our business.
Perfect. Thank you, Peter.
Thanks. We will now go to our next question. The next question comes from the line of Mehdi Hosseini from Susquehanna. Please go ahead.
Thank you. A couple of questions. Peter, I'm a little bit confused. I'm just gonna focus on lithography. I'm not gonna ask you about WFE or where we are in the semiconductor cycle. When I look at the leading edge, we've had a couple of years of a slow start to 3 nm. As a matter of fact, the leading edge has been trending in half pitch, and I was hoping that by next year, there would be a bigger demand for a leading edge amongst Foundry and your larger customer. But what I get from you is probably EUV unit shipment is going to decline. What I want to ask you or get clarification is this a kind of a pause as we insert a gate-all-around?
Is this something that happened when we went from planar to FinFET, and we're gonna see the repeat of that next year, and then that would impact your EUV shipment? Any thought around gate-all-around would be appreciated, and I have a follow-up.
You know, I think, gate-all-around and the nodes associated with that are 2025, 2026 high volume ramps. Yeah. That will happen. So that, so the pause or a lower unit shipment of EUV next year is simply the cause of what we discussed earlier. I mean, we're in a cyclical downturn, and our end markets that don't need that full capacity. So this is the reason. The R&D roadmaps are very much intact. Yeah? And as a matter of fact, our leading customers keep telling us this, yeah? So, I would not expect...
I would even say, if you would see the HVM volume ramp, yeah, on the gate-all-around architecture, it's just the reason, one of the reasons why I think 2025, 2026 is going to be a good year. It's a very strong year. Yeah? But everything that we see today, it's got nothing to do with that. It's got nothing to do with the roadmap. It's just got to do with the fact that we are in a down cycle, and we're climbing out of the down cycle, whereby, you know, capacity utilization, also at the leading edge, is of course, not at 100%. No? You just have to grow into it. It's got to happen. It's just the cycle.
Now, one difference this time compared to when we migrated to FinFET, is DRAM, adoption of insertion of higher EUV layer counts for DRAM. If I were to go back to your 2022 and 2021 Analyst Day, you highlighted the fact that more than 30% of EUV demand by 2025 is going to be driven by DRAM. Is that still the case, and could that make the EUV recovery a much stronger, with or without the adverse impact of, transistor change?
Yeah, I think that's absolutely true. But I still believe that a percentage is still valid. But, you know, but 20... Like I said, it is not today, but it is because we are where we are in the economic cycle. Yeah? So I think nothing has changed in that sense. And you could even argue, because they have, quote-unquote, "under invested" in 2023 and 2024, you know, there will definitely be an additional driver on top of the roadmap insertion points that haven't changed. Yeah? So yes, I mean, I would expect that to be the case in 2025, yes.
We just have to wait for the first half of 2024 to see that in your bookings.
Yeah. Yeah, and that, you know, and that is basically also. I said it before, you know, it's why we are conservative on 2024, because there are macroeconomic uncertainties, yeah? Our customers are closely watching this also. They're watching these inflection point trends. I mean, this is what we will also follow with them. You know, they have a better view of inventories. We have a better view of utilization. We have a better view of all the things that happened in the fab. We need to look at those inflection points and saying, "Okay, that means the trough, but then what will be the slope of the recovery?" And that's basically your macro call.
Thank you.
Thank you. We will now go to the next question. Your next question comes from the line of Sandeep Deshpande from JP Morgan. Please go ahead.
Yeah, hi. Thanks for letting me on. Peter, I mean, with response to an earlier question, you talked about, you know, that you will start seeing this order recovery potentially in 2024, which will help your 2025. But given that, at this point, what you see into 2024, the demand is not as much as your capacity, particularly in EUV, would you pre-build? Because, I mean, your tools don't have any obsolescence risk. This is my first question, and I have one quick follow-up.
Yeah, I think you're absolutely right. I mean, we are very... Also, our customers keep telling us this, you know? This is not that we, in perfect isolation on the 20th floor in a town called Veldhoven, think about this. It's because our customers also show us what they need and why. So and this is the 2025 we think is very real, so that means we need to pre-build, yeah? So you will see that in our working capital and the working capital of our suppliers, you know, and if things change a bit faster, we'll actually need that in the back half of 2024. So we need to prepare ourselves. But you're absolutely right.
Yeah, because otherwise we won't be able to react, and then we're in a, and then we're in a super crisis in 2025, because we can't make the tools that our customers want. Yes.
Thanks, Peter. In terms of a follow-up for Roger, I mean, next year, if you're looking at a flattish year, I mean, you must have had a spending plan on your OpEx for next year, whether it's R&D or SG&A. Are you going to continue with that plan, given that, you know, the environment is different from when you built that plan? Or are you going to continue spending as you would normally have done, and thus there is an earnings impact next year in a flattish year because, you know, you've got an upward trajectory on your expenses?
Yes, Sandeep. So obviously, in the current environment, we are frugal, right? As you might expect us to do. So we're definitely controlling our SG&A expense there. On the R&D side, you know, that's long term, and I think we would be ill-advised to now go cut our R&D roadmap, and that's not what we're doing, right? So we are, you know, continuing to execute on the R&D roadmap. You might have seen that, you know, that on the hiring of people, we slowed down a little bit this year. So part of that is in response to what I just mentioned on SG&A.
It's also in response to the fact that in 2022, we hired 10,000 people, so on the 42,000 people that we have today, that's massive. So obviously, you want a certain level of absorption to happen there, and that's exactly what we're doing, right? Making sure that people are well absorbed, that the growth also on the R&D headcount is nicely absorbed. So that's why you see the slowing down a little bit on hiring people. But no, I mean, we continue to push down the accelerator on the R&D front, because, you know, the opportunity is significant. And in order for us to achieve the growth trajectory that we've talked about in 2025 and 2030, we simply need to do that.
So yes, we will be frugal. No, we're not gonna cut back on our R&D roadmap.
Thank you so much.
Thank you. We'll now go to the next question. Your next question comes from the line of Janardan Menon from Jefferies. Please go ahead.
Hi, good afternoon. Thanks for taking my question. I just wanted to go back to the question of the backlog. You do have a sizable backlog of over EUR 35 billion and over EUR 19 billion on the EUV side. So just referring to a previous question on push-outs, you know, do you see a risk? I mean, if you were to look out into 2024, especially on your EUV side, is your uncertainty more on, do you get any push-outs on the existing backlog? Or is it a question of how many orders you can take in Q4 for shipment into 2024?
My question is more, you've said that it's, you know, that you've suggested that there's some conservatism in that, and I'm just wondering where the risk or the upside could come from. Is it more that there could be a risk of pushouts, or is it just the amount of orders you could take in Q4? Thanks.
Yeah, I think it's a good question, Janardan. You know, the way that we look at this is we look. One, of course, we are in close contact with our customers, and we are discussing in depth with them what they really need. But what they really need is also a function of where they are and what they see that they need going forward.
Of course, where they are is they're in a clear... All nearly all of them are in a down cycle, where they feel it's about the trough, or we might be seeing the inflection points that will take us out of the trough. So if you then think about the psychology of the customer, and they look forward, and they see these inflection points towards the end of the year changing positively, that means they will grow in, you know, 2024. That means what we discuss with them now as the, you can say, the minimum scenario, if everything happens the way that we think in terms of the inflection point, they will see growth, then I think this will be it, you know?
But that, of course, is that is. In their current mind, they don't give us a lot of orders. So their current mind is, we have what we have. We look forward to what we need as a minimum in 2024. They better tell us, they tell us, "You better prepare us for 2025," but the minimum in 2024 is what we call the conservative view, because. You know, you could have a more positive view and say, well, it will turn in this, in the second half of 2024. We don't have any indication that it's going to be that soon. So this minimum position that they see is what they have discussed with us.
Seeing those inflection points, I think there is little risk to the downside, to answer your question. Now, could there be, could there be an opportunity to the upside that would effectively mean that what we see in 2025, for reasons of a faster recovery in the cycle, will be pulled in into the back half of 2024? That could be, that could be an upside. Yeah? But this is where we are, this is where our thinking is, it is where our thinking of our customers is, and this is how we reflect on our, you know, view of, you know, 2024.
Understood. And just a small follow-up on China. You know, as you referred to the official regulations coming out of the U.S. government yesterday, if you look at the chuck overlay numbers of 2.4 nm, it seems to capture the 1980 as well.
Correct.
And what you're saying is that, you know, because it's only the advanced manufacturing facilities will be covered by that, and that's a handful. But do you think that that could be a moving target through the course of the year? I mean, could new fabs continuously be added to that or, you know, taken away from that? So does that sort of cloud the overall visibility on where China could actually end up, just from a geopolitical standpoint over the next 12 months?
Well, I think that last, where the geopolitical confrontation would end up is a billion-dollar question, I suppose. But, no, I think basically two answers. One, how the regulations are currently structured is like the Japanese have also done, the same thing. They basically say, all immersion, but export controls will only apply to advanced manufacturing, which is only those five fabs. Now, could that grow? Yes. But that has always been there. You know, that particular risk in terms of export controls being enlarged to what it is today, that's a risk that we've always had. And so that is basically a function of what you ended your question with, is how the geopolitical escalation will happen going forward. We don't know, eh?
I mean, we just have to live with what the regulation is today. And you need to realize that this regulation, which is a amalgamation, a consolidation of the October 7th proposal of last year, with the trilateral agreement between the Dutch, the Japanese, and the Americans, has led to this situation of this handful of fabs. So this is also the result of, you could say, in-depth discussions, multilateral discussions between governments. Now, I don't say that they're never going to change, but that's what you need to consider also. So we are where we are. I don't have a crystal ball to predict where geopolitics will go and how it will escalate, but we need to work from where we are.
I can assure you that the results that are currently on the table in terms of regulation are the result of very deep discussions between governments that are not just on a lazy Sunday afternoon, you know, being prepared. This is, this is very deep. So yes, it can change, but then also, I think the geopolitical situation first needs to change. And then, you know, yeah, of course, you know, like I said, I don't have a crystal ball.
And Janardan, a final element in the conversation, building on what Peter was just saying, and he said it before. Obviously, you know, the regulation really aims at advanced semiconductor manufacturing.
Yes.
I think you simply have to recognize that most of the Chinese customers have gotten the message already last year, and as a result of that, have really shifted to what we call mid-critical and mature manufacturing. That's what you see them do. As a result of that, I would say the number of fabs that are still involved, number of our customers and fabs that are still involved in advanced manufacturing, have gone down dramatically. As a result of that, we can now talk about a handful of fabs that are associated with that. So-
Yeah.
If that's the objective, you know, that then that is completely
It achieved.
in line with what, yeah, exactly, with what now has been achieved.
You know, that's a good point, Roger. When we do the roadmap discussions with our Chinese customers, they all moved back, not forward. They all moved back. And they do that because what I... It was an answer to a previous question, because if you look at the demand for mid-critical, low mid-critical, and mature semiconductors, and you look at the significant transitions that also China's going through, and where in many areas they're leading, whether it's electric vehicles, or whether it's the energy transition. The square inches of silicon that is needed to support that are massive. So they actually need to build that capacity, which, by the way, they're not going to be self-sufficient because the demand, the local demand, is simply too high. I mean... But they will be more self-sufficient, but not fully. Yeah?
So, there's no downside for our Chinese customers to actually move their roadmap in that direction.
Understood. Thank you so much.
All right. Thank you all. We are now at the end of the hour, so if you were unable to get through on this call and still have questions, please feel free to contact ASML Investor Relations Department with your questions. Now, on behalf of ASML, I'd like to thank you all for joining us today. Operator, if you could formally conclude the call, I'd appreciate it. Thank you.
Thank you. This concludes the ASML 2023 third quarter financial results conference call. Thank you for participating. You may now disconnect.