ASML Holding N.V.

Welcome to the ASML 2022 fourth quarter and full year financial results conference call on January 25th, 2023. Throughout today's introduction, all participants will be in listen-only mode. After ASML's introduction, there will be an opportunity to ask questions. If you'd like to ask a question, please press 01 to register. And if you'd like to withdraw a question, please press 02 at any time during the call. If any participant has difficulty hearing the conference, please press star zero for operator assistance. I would now like to turn the call over to Mr. Skip Miller.

Please go ahead, sir. 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 Winnick and our CFO, Roger Dawson. The subject of today's call is ASML's 2022 fourth quarter and full year 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.

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For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's press release and presentation found on our website at asml.com and in ASML's annual report on Form 20F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Winnick for a brief introduction. Thank you, Skip.

Welcome, everyone, and thank you for joining us for our fourth quarter and full year 2022 results conference call. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the fourth quarter and full year 2022, as well as provide our view of the coming quarters. And Roger will start with a review of our fourth quarter and full year 2022 financial performance with some added comments on our short-term outlook. And I will complete the introduction with some additional comments on the current business and on our future business outlook. Roger, if you want.

Thank you, Peter, and welcome everyone. I will first review the fourth quarter and full year financial accomplishments and then provide guidance on the first quarter of 2023. Let me start with our fourth quarter accomplishments. Net sales came in at 6.4 billion euros around the midpoint of our guidance. We shipped 18 EUV systems and recognized 2.3 billion euros revenue from 13 systems this quarter. Net system sales of €4.7 billion, which was again driven by logic at 64%, with the remaining 36% coming from memory. Install-based management sales for the quarter came in at €1.7 billion, which was higher than guided due to additional upgrade revenue. Gross margin for the quarter came in at 51.5%, which is above our guidance, primarily due to the pull-in of additional upgrade business as well as an insurance settlement from ASML Berlin Fire, which occurred in early 2022. On operating expenses, R&D expenses came in at €906 million above our guidance due to higher depreciation. SG&A expenses were €280 million higher than guidance due to increased IT and recruiting spending as part of our headcount growth plan. Net income in Q4 was €1.8 billion, representing 28.2% of net sales and resulting in an EPS of €4.60. Turning to the balance sheet, we ended the fourth quarter with cash, cash equivalents and short-term investments at a level of €7.4 billion. Moving to the order book, Q4 net system bookings came in at €6.3 billion, which is made up of €3.4 billion for EUV bookings, and 2.9 billion euros for non-EUV bookings. These values also include inflation corrections. Non-EUV bookings are a combination of DPV and metrology and inspection. Net system bookings in the quarter were driven by logic, with 66% of the bookings, while memory accounted for the remaining 34%. Looking at the full year, net sales grew 14% to 21.2 billion euros. EUV system sales grew 12% to 7 billion euros realized from 40 systems, while in total we shipped 54 EUV systems in 2022. DPV system sales grew 13% to 7.7 billion euros. Our metrology and inspection system sales grew 28% to 660 million euros. Looking at the market segments for 2022, logic system revenue was 10 billion euros, which is a 4% increase from last year. Memory system revenue was 5.5 billion euros, which is a 34% increase from last year. Install base management sales was 5.7 billion euros, which is a 16% increase compared to previous year. At the end of 2022, we finished with a backlog of 40.4 billion euros, an increase of 67% compared to the end of 2021. Our R&D spending increased to 3.3 billion euros in 2022, as we continue to invest in innovation across our full product portfolio. Overall R&D investments as a percentage of 2022 sales were about 15%. SG&A increased to 946 million euros in 2022, which was about 4% of sales. Net income for the full year was 5.6 billion euros, 26.6% of NAP sales, resulting in an EPS of 14.14 euros. Improvements in working capital contributed to a free cash flow generation of 7.2 billion euros for 2022, mainly driven by customer down payments following the very significant order intake this year. We continue to invest in support of our roadmap and planned capacity ramp. Access cash will be returned to our shareholders through a combination of dividends and share buybacks. With that, I would like to turn to our expectations for the first quarter of 2023. We expect Q1 net sales to be between €6.1 billion and €6.5 billion. Per customer's request, we prioritize resources towards the acceleration of DPV shipments at the end of 2022. As a result, we expect lower revenue in Q1 and higher revenue in the following quarters. We expect our Q1 installed base management sales to be around 1.5 billion euros.

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Growth margin for Q1 is expected to be between 49% and 50%. The lower margin relative to last quarter is primarily due to lower upgrade revenue and DPV mix effect. The expected R&D expenses for Q1 are around €965 million and SG&A is expected to be around €285 million. The higher R&D guidance is primarily due to additional headcount and labour cost increases. These investments are in support of our continuous innovation as we further extend our DPV, EUV, and applications roadmap, and at the same time work to improve our install-based performance. Higher SG&A is mainly due to additional headcount and IT spending. Our estimated 2023 annualized effective tax rate is expected to be between 15% and 16%. In Q4, ASML paid a quarterly interim dividend of €1.37 per ordinary share. The third quarterly interim dividend will be €1.37 per ordinary share and will be made payable on February 15, 2023. Recognizing this interim dividend and the two interim dividends of €1.37 per ordinary share paid in 2022, this leads to a final dividend proposal to the General Meeting of €1.69 per ordinary share. In Q4 2022, we purchased around 0.6 million shares for a total amount of around 300 million euros. ASML announced a new share buyback program during our investor day on November 11th, 2022 to be executed by December 31st, 2025. We intend to purchase shares up to an amount of 12 billion euros. With that, I'd like to turn the call back over to you, Peter.

Thank you, Roger. And as Roger has highlighted, we had a year of record sales in a dynamic environment. Demand remains strong, and we finished the year with a record backlog. And looking to 2023, there continues to be a lot of uncertainty in the market due to a number of global macro concerns around inflation, rising interest rates, recession, and the geopolitical environment, including export controls. Customers are still seeing demand weakness in consumer-driven end markets, the most notable being PCs and smartphones, with some indication of softening or lower growth rates in data-centered demand, while the demand strength continues in other markets such as automotive and industrial. Customers are telling us they expect a rebalancing of semiconductor inventories over the first half of 2023, with business expected to rebound in the second half of the year. A potential driver of this recovery in the second half of the year could also be the post-COVID opening of China. This could have a positive effect on both supply and demand. To help rebalance inventory levels, customers are running their lithography systems at the lower utilization levels, and some have also lowered their capex plan for this year. Based on this, we concluded that most of our customers have made the assessment that the duration of a potential recession is significantly shorter than our average delivery lead time. On top of this, lithography investments are strategic in nature, which means that the demand for our systems remains strong. For instance, this year, demand still exceeds our capacity, and we enter the year with a backlog of 40.4 billion euros, so our focus will still be on maximizing system output. We've experienced several quarters of very strong bookings, which now provides backlog coverage significantly beyond 2023, which is almost twice the expected 2023 system sales. Based on discussions with our customers and continued improvements in the capability of our supply chain, we're planning to increase our output capability this year. We're planning to ship around 60 EUV systems and around 375 deep EUV systems in 2023, with around 25% of the deep EUV systems to be immersion. We still plan a significant number of fast shipments this year, which under the current way of working, will result in a similar amount of delayed revenue out of 2023 that came into 2023. Looking at the growth of the business for the full year 2023 compared to 2022, we expect EUV revenue growth of around 40% and non-EUV revenue growth of around 30%. And for the installed base management business, we expect year-over-year revenue growth of around 5%. And as we are coming off a strong growth year in 2022 and customers are adjusting their utilization levels, we currently expect to see a slightly lower demand in our upgrade business in 2023. In summary, for a full year 2023, based on how we see the world today, we expect another year of strong growth with a net sales increase of over 25% and a slight improvement in gross margin. On the geopolitical front, as it relates to export control, this continues to be a geopolitical discussion with different government entities, a process where ASML is obviously not in control although we continue the discussion with governments to make sure that consequences of proposals are well understood. As of today, export control policy related to lithography equipment has not changed. We are still not able to ship EUV systems to China, but are able to ship DPV as well as metrology and inspection systems to China.

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As our Prime Minister recently stated, this is a multinational discussion, not only with the U.S., but with several countries. He reiterated that multiple companies in the semiconductor industry, including their supply chains, are involved and that the matter is complex and sensitive. It needs careful handling with precision. And he reminded us that there's a lot of interest at stake and it's important to find the right balance. We will therefore not speculate about the possible outcome, but we'll have to wait for the outcome of ongoing government discussions. Looking longer term, we talked at our investor day last year about global megatrends, where the broadening application space is fueling demand for advanced and mature nodes. Secular growth drivers in semiconductor end markets and increasing lithography intensity on future technology nodes are driving the demand for our products and services. ASML and its supply chain partners are actively adding capacity to meet future customer demand as confirmed at Invest Today with our capacity plans of 600 deep UV, 90 EUV low NA systems by 2025-26 and 20 EUV high NA systems by 2027-28. Also presented during our Invest Today last November, we see an opportunity based on different market scenarios to reach an annual revenue in 2025 between 30 billion and 40 billion euros and in 2030 an annual revenue between 44 and 60 billion euros. As part of our long-term growth opportunity, we also remain committed to our ambitious ESG sustainability goals. On February 15, 2023, our 2022 annual report will be published. As part of this report, we plan to provide you with an update on how we collaborate with our stakeholders to deliver on the ambitions of our ESG sustainability strategy which we can summarize as follows. Our ambition is to achieve carbon neutrality with net zero emissions in our operations, scope one and two, by 2025. We aim to achieve net zero emissions in our supply chain, scope three, by 2030, and net zero emissions from the use of our products by our customers, scope three, by 2040. In addition, our goal is also to have zero waste from operations to landfill and incineration by 2030. From a social perspective, our mission is to ensure that responsible growth benefits everyone. To maintain our fast pace of innovation and ensure our long-term success as a company, we need to attract and retain the best talent and provide the best possible employee experience. We aim to be a valued and trusted partner, improving the quality of life for all people in our communities. In summary, while there's a lot of near-term uncertainty in the current environment, Our customers' demand for our products continues to exceed supply. We are working to increase our capacity to meet our customers' future demand and remain fully confident in the opportunity this provides for our future growth.

With that, we would 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 would like to ask 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, can we have your final instructions and then the first question, please?

Thank you. At this time, we'll begin the question and answer session. Again, please press 01 to register and 02 if you need to withdraw from the queue. If you're using speaker equipment today, please lift the handset before making your selections. One moment, please, for the first question. Our first question comes from the line of Joe Quattrochi at Wells Fargo. Please go ahead. Your line is open.

Yeah, thanks for taking the question. I was wondering in your 2023 outlook if you could kind of give us any color of how you're thinking about logic versus memory growth this year.

Yeah, I mean, we've not made that, Joe, thanks for the question. We've not been explicit on that. We think that in the current environment, you know, with all the, you know, all the dynamics and all the uncertainties that are out there, and also the fact that we still look at 2023 as a year where we are supply constrained. We don't think that that makes a lot of sense to guide it around that. So that's why we said we're going to guide on energy, so EUV versus EUV and non-EUV, But we think it is not very constructive and meaningful to provide guidance on memory versus logic. I mean, clearly, if you look at the recent order intake, you do see that memory is far from dead. As a matter of fact, you see memory actually picking up in the quarter and quite healthy in the year. And that tells you that the memory buyers are also making strategic investments because they recognize that if at a certain point in time the market is going to come back, they need capacity. So that's what you see in the order intake. But again, for the full year, given indication of the distribution over logic and memory, we thought it was a meaningless action in light of the dynamics that I just talked about.

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Yeah, Joe, as you know, we've been through this before. We're having good discussions with customers. As you know, legally, the way the backlog is construed, we've agreed on a price. So this is just a matter of discussions with customers about a fair distribution of the burden. We're fairly advanced in that discussion. A number of customers have already, you know, made commitments to us on how they're going to contribute, but most other customers were fairly advanced and, you know, we think that we're going to find a solution. It's only a minority of customers that, you know, that are not open to this conversation. So the lion's share is open to the conversation, but it really is in the spirit of finding a fair distribution of the inflation burden. So that has helped and we're only putting into the backlog those inflation adjustments that have been explicitly agreed with customers. So more of that is to come because, as I said, we're with a number of customers who are still in negotiations. So all of that is coming. I think the way it's going to pan out without really quantifying it, but just to give you an indication, as you know, last year, We said that we were having about 1.5% drag on the gross margin coming from inflation. I would say most of that we expect to recover during the year. So most of the inflation that we incurred over 2022, I think most of that we will recover. But of course, there will be inflation in 2023, and that will remain a drag on the gross margin. So the gross margin impact of inflation will be less so than it was last year. But, you know, in comparison to 2021, you will still see a bit of a drag on the gross margin coming from inflation.

Yeah, I think on your sales price you want to put into your models, I mean, we guided EUV sales up with 40%, non-EUV with 30%, and then diesel-based with 5%. I mean, that's in the end where you need to end up with if you're going to change your model. and you come to a different outcome than something went wrong in your calculation.

And for the people that weren't really carefully listening, what that really means in terms of ASP for EUV, we talked about it before. Originally, we were looking at 160. We've then been talking about 165 to recognize also increased functionality, I think, with the increases on ASB, on the inflation, I think it's good to go somewhere between 165 and 170. I think that's, on average, I think the right way to go.

Got it. That's super helpful. Thank you.

Thank you. Our next question comes from the line of CJ Muse at Evercore ISI. Please go ahead. Your line is open.

Yeah, good morning, good afternoon. I guess first question, Peter, I was hoping you could take a step back and maybe talk about your discussions with customers. You know, obviously reducing utilization to clear inventories, but at the same time, giving your lead times, you know, you're continuing to have great visibility, you know, well beyond 2023. So I guess, can you kind of speak to the moving parts there? And I'd love to hear kind of your thoughts on your visibility for all of 2024.

Yeah, good question, CJ. Yeah, I think in the discussion with customers, it's exactly what I said. It's very clearly we concluded from the discussions that customers believe. And I think it's also you can corroborate those statements with their public statements and basically saying some customers feel that they see a recovery towards the second half of this year. And that actually means that they tell us, listen, you know, we know you guys are short of the demand we put on you. So it means that we don't want to risk our strategic investments, which go beyond the first half of 2023, moving into 2024 and 2025. So this is what they're – we're really having this mid-term to long-term discussion with them of what's needed. And that's why they keep saying, no, we need those machines. Having said that, of course, last year we kept informing you that the demand on us significantly exceeded our build capacity, sometimes up to 40%, 50%. Now, that demand did come down. I mean, that's also clear, that some of that demand disappeared because of the market situation. But the end result is that the demand, the cumulative demand, is still higher than what we can make. So this is where we are, and I think that is driven by what I said, you know, that I think the average expectation of the duration of the downturn of, let's say, working through the inventory is significantly shorter than the average lead time of our tools. And that gives us a lot of visibility into 2024 also. Customers give us orders throughout the year, very significant levels of orders, which actually have over 40 billion in the backlog, which is almost twice the system sales that we expect to have in 2023. So yes, we have the visibility. it still means that the customer expansion plans on adding fat capacity in 2024 are still very real. Otherwise you wouldn't give us these orders with down payments. So this is the level of visibility that we have. Now all of course hinges on the macroeconomic situation and on finally, you could say the expectation that the duration of any recession, if it would come, would indeed be short. I mean, that's the big question mark that is out there for all of us. But this is where we are today, and we're just telling you what the discussions with our customers are currently at, and they are exactly what I just told you. So this is the level of visibility that we have, and all is just a matter of watching the macroeconomic situation.

Very helpful. As my follow-up, just two quick housekeeping questions. What percentage of EUV bookings in the quarter came from memory in December? And then secondly, how many e-tools do you plan to ship in 2023? Thanks so much.

So it's roughly 25%, 75%. So that's true for the entire bookings. It's also true for the EUV tools. So about 25% would go to memory. Around 75% comes from logic. And I didn't quite get your last question. I couldn't really understand that.

How many eTools should we plan to ship in 2023?

Okay, that's a very limited number, a very limited number of tools. Less than a handful, I would say, CJ. Okay, great. Thank you.

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Thank you. Our next question comes from the line of DDSK Mama of Bank of America. Please go ahead. Your line is open.

Yeah, many thanks. Good afternoon, gentlemen. Quick clarification, if I may. I think there seems to be quite a lot of confusion around fast shipments. So maybe, Peter or Roger, if you could set the record straight. Number one, is it fair to assume that your calendar year 23 guide does not include any fast shipments either on revenue or on gross margins? And then number two, if that's correct, when do you think you could get clarification from your accountants that that could become the norm? I mean, is that something tied to the sign up of the accounts for 2022? Or is that a completely unrelated decision? I've got a quick follow up. Thank you.

Thank you, DJ. And thanks for the question. I think this is helpful to indeed clarify that. um what you saw is that we're having that we had past shipments for amount of 3.1 billion at the end of 2022 so the uh so the revenue for that will be recorded in in 2023 however we also assume that a similar amount will go from 22 to 23 from 23 to 24 and and what that means dj is that the guidance or the more than 25% growth over 2022 that we've given you that, in fact, treats the fast shipment effect as neutral, right? So we assume that that will be neutral, i.e., the amount that comes into 23, the 3.1, we also expect that to leave the year into 24. So it's neutralized for the fast shipment. So that's the way to look at it. The question on can you change the revenue recognition, as we mentioned before, there are two key elements in here. One is an accounting element, so to what extent can you get this done? But pivotal for the accounting treatment of past shipments is that customers are actually, upon shipment, are going to accept the full risk on the tool. That's what is pivotal. So the conversation that we need to have with customers and need their final blessing on is that based on a far more limited testing protocol, because that's what fast shipment in essence is, it's a far more limited testing protocol where there's a couple of weeks of testing that we actually omit out of the sequence. that based on a far more limited testing sequence, they still assume the full risk of the tool upon shipment. So that's the conversation that we need to have, and you will appreciate that that's a conversation that, of course, customers need to really look into and become comfortable with. So that's not a five-minute conversation. We're now done with the accounting analysis, so the accounting analysis in and by itself is clear, but it all hinges on the premise of being able to get to an agreement with customers on what I just told you. So those conversations we're now starting. Cannot tell you when that is done. In all likelihood, you know, I would say by mid this year, we should have clarity on whether customers are willing to do that or not. Could also be that some customers are going to accept it, others could not. And then once we have that clarity, of course, we will share that with you and we'll also clarify to you what that means. To the extent that we would be able to recognize, you know, revenue again upon shipment for these shipments, Of course, that would be additional to the more than 25% revenue growth that we've mentioned.

Yeah, that's very clear, Roger. Thank you. And as a follow-up to that, so if fast shipments becomes the norm, is it reasonable to assume that your actual capacity for EUV actually is increased by five units because you shave off effectively a month of cycle time? So 60 divided by 12 is 65, oh, sorry, is five, plus five, so 65, plus whatever differed from 22 into 23 fast shipments becomes, is that the way to think about it?

I think that's directionally correct, DJ. And bear in mind, in the outputs that we had for this year, of course, we already started to have that benefit, right? So there's already that benefit. But then to the extent that we're really able to get all the supply chain issues sorted, get back to a normal cycle time, as you heard before, we're eyeing a regular cycle time of 17 weeks, if we're then able to shave off three, four weeks of testing. Yeah, that's the unit number that you could see an increase with. Correct.

Brilliant. Congratulations. Not too bad for a recession.

Thanks, Vijay. Thank you. Our next question comes from the line of Francois Xavier Bousinier at UBS. Please go ahead. Your line is open.

Hi. Thank you very much for taking my question. So the first one is on Peter, you mentioned in your remark that the demand is still above what you are able to do in terms of supply. So in a situation where, and it's quite often a market share shift within your customer base, in deep UV and EUV, how do you plan to treat that? You know, if you see push out, let's say by a couple of quarters, so it sleeps to 2024, do you keep the slot for those customers or are you going to reallocate directly to the one that can, you know, take it straight away? So just how do you deal with push out in this kind of allocation market if some customers have some delays? That would be interesting to have your point on that and have a quick follow-up.

Yeah. Yeah, I think it would be very clear. I mean, we are capacity constrained. So if a customer says, sorry, we want to reallocate, I want to push it back to 2024, then that slot will be taken by a customer that raises their hand and says, ship it to me. And that's what we will do. So that slot will be taken. And that means that the slot that the customer says, well, I have an order called, okay, please push it back. We just need to negotiate when that pushback is, because that pushback could fall into a period which is already fully booked. So this is then fine, you know, if you don't want the tool then. It actually means that it's a kind of a negotiation when it's the first open spot in 2024. That's how it works. So yes, we are just filling it up and that means that customers need to accept the fact that that tool will not stay here in our premises in inventory or in workday process until they can ship it. No, it will go.

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Okay, that's very clear. And my quick follow-up is on Memory China. Since we had the restriction on Memory China not impacting lithography patients, Based on your previous comments, I mean, do you see any pullback or spend, you know, pullback on the memory China or you still see strong demand on that front?

Yeah, I think, you know, I think it's not only applicable to China, what I'm going to say. I mean, it's applicable to all our Chinese customers and as a matter of fact, non-Chinese customers also. You need to realize that, you know, and you actually know that, François, I mean, planning and building and executing a new FAB is a matter of years. So that means that anything that we ship this year has been planned in 2021, 2020. So these plans are there and we just execute on those plans. Now, having said that, it's also clear that we have a demand, we have a capacity shortage. So we have an over demand that indeed, you know, when we reallocate, which is true for Chinese and non-Chinese customers, if we have a bit more space to reallocate, then we will reallocate because the demand has been higher than our capacity. So, yes, that's true for Chinese and non-Chinese customers. We treat all the customers the same in that way. So I think we haven't seen any acceleration with just the execution of the plans because those plans are plants for years. You can just think of it as semi-fat and it exists in six months' time. So this is why it's just plants, but yes, you will probably see open spots, if you could call it this way, or pushbacks of others. There are many customers that raise their hands. It's not only China, it's across the globe.

And Li Jie, the demand from China remains very strong, right? So we reported last time on this call that the The percentage of China in the backlog was around 18%, and that's remained throughout the quarter. As a matter of fact, it's even gone up a little bit. So the demand from China still remains quite strong.

Thank you. Thank you, gentlemen.

Thank you. Our next question comes from the line of Krish Sankar at Gallen Co. Please go ahead. Your line is open.

Yeah, hi. Thanks for taking my question. I have two of them. First one, Roger, you'll see the district clarification on your backlog. Can you give us some color, if you did not, if you did, I forgot, I missed it, between EUV and DPV memory and logic boundary?

Yeah, so in the backlog, it's around 25-75%. So if you look at the backlog for EUV, around 25% of that is for memory customers, around 75% of the EUV backlog is for logic.

And of the backlog, the total backlog EUV and DPV?

Of the total backlog, let me see, it's around 55% of that is EUV.

Got it. And then as a follow-up, I just wanted to touch base again on the fast shipment. I understand last year and into this year, you know, customers are scrambling to get little tools and therefore they're willing to take fast shipments. In an ideal world, you'd like fast shipments too. If things do slow down, do customers really want fast shipments? Wouldn't they rather have you test the tool in your factory before you ship it to them?

Well, you know, customers don't care whether it's a fast shipment or not a fast shipment. They want a tool at a certain moment in time. And whether it's fast shipped or a regular ship, they don't care. Now, we did the fast ship because we were late. And we were late and the demand was higher. than what we could make. And this actually is a driver for still the fast shipment this year, because our demand is higher than what we can make. That hasn't changed. So if the customer says you can ship the tool, as long as they know the date on which the tool will arrive, it can be installed and can be signed off, that's the date that they're actually interested in. And as we see it today, there's still you know, there is still a higher demand than what we can make. So it's the same situation.

Got it. Thank you, Peter. Thanks, Roger.

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Thank you. Our next question comes from the line of Alexander Duval at Goldman Sachs. Please go ahead. Your line is open.

Yes, thanks very much and congrats on the strong results. Firstly, I wondered if you could just update us on how much bigger demand is in supply. You're obviously still positive on the demand backdrop, even though you talked about utilization of machines having gone down. I think in the past, you talked about more than 30% excess demand versus supply. So is that still the case? And then secondly, housekeeping item, just on OPEX, you've guided for 1Q, which is perhaps a little bit higher than expected. Could you help us put in context what that means for full year OPEX and specifically a bit more color on what you're investing in and what that means for harvesting future opportunities and your margin potential? Many thanks.

Yeah, I'll do the first part of the question and Roger will take the second part. I think on the 30% excess demand over supply, I see it's more like 50%. So now that has come down, but it's still significantly double-digit. above our capacity. So, and like I said earlier, in an answer to an earlier question, yes, of course, we also see the reflection of the demand curve because of the weakness in, for instance, the consumer demand. Clearly. So some of that over-demand has gone away, but it's still there. And it was actually not 30%, it was more like 50%. And it's come down now to, and it's still significantly double-digit. Roger?

Yeah, Alexander, on the OPEX question, I think the numbers that we gave you are, I think, a pretty good proxy for the full year. I think if you take them together, it's close to 19% that I would model for OPEX, so for SG&A and R&D combined for the full year. Of course, we had significant hiring in the course of Q4. Those people are added to the year, if you like, in terms of headcounts. Of course we had increases in wages, and of course that kicks in from Q4 to Q1, but that's the rate I would assume for the full year. In terms of what do we get for that, very good question. So on the SG&A side, obviously this is in line with the growth of the company, so you continue to see us operate around 4% SG&A percentage of sales. As you also would have seen if you look at the 2025 and 2030 scenarios that we've talked about, you see it coming down a little bit, and that's clearly the intention to get some operational leverage there. But, you know, for the fast-growing company that we are, investments like these are necessary to make sure that the organization is run in a very professional way, that security is up to scratch, that the IT support for our professionals is up to scratch, et cetera, et cetera. So that's what we're doing on the SG&A side. On the R&D side, you know, this really is the very, very aggressive roadmap that we have on all cylinders. So this is DPV. And as Peter mentioned earlier on, this is not just DPV on the immersion side where we continue to drive immersion. But also, this is on the dry side, KRF. So for KRF, we continue to drive roadmaps for smaller customers on the XD platform, for larger customers operating large paths on an NXT platform. We're looking at I-line roadmaps. We have a very broad roadmap that we have on metrology and inspection, and obviously, we continue to drive both low NA and high NA. So it's a very extensive roadmap, more extensive than we've ever had before in the history of the company. And of course, all of this is conducive to the goals that we've been talking about and the scenarios that we've been talking about at the investor day for 2025 and 2030. So yeah, definitely significant investment, but definitely rewarding if you look at the potential that we see in the market for those products.

Yeah, I think it's what Roger said. I mean, our relentless focus on innovation and R&D has paid off handsomely in terms of value that we could create with our products, but also the extension of our market shares, the integration of our product offering into a kind of a holistic approach and value to our customers. That will only increase going forward. Things in semiconductor manufacturing will not get easier. They're getting more complex. It actually means that the entire product portfolio focused on patterning, patterning the 2 nanometer, the 1.5 to 1 nanometer and beyond, that is going to be significantly valuable to our customers. And that means we need to spend that R&D that Roger just talked about to make sure that all the ingredients for that value recipe are actually there. And that's what we need to do. And it has served us extremely well in the past. It will serve us extremely well going forward.

Very helpful. Thank you so much.

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Thank you. Our next question comes from the line of Mary Husani at SIG. Please go ahead. Your line is open.

Yes, sir. Thanks for taking my question. A couple of follow-ups. Peter, based on your conversation with customers over the past month or two, has anything changed with your assumptions since the analyst day? What I hear from you is pretty much the same as what we heard in November, which is also consistent with what you said in October. On the surface, it seems like there hasn't been any change to the customer zone or how they're planning despite the fact that in-market demand is weaker. And I'm just wondering if there's anything else you can share.

Yeah. Well, I think what we definitely see in the discussion with the customer, they are addressing the short-term challenges. That's clear. I mean, they basically say, you know, we need to, we see inventories rising, we need to rebalance the inventories. How do you do that? You just lower the utilization of the tools. That's short-term. They're very clear. They're also very clear about their confidence in the long-term growth trajectory of the industry and of the need for significantly more semiconductors in all kinds of applications. I think it's without any exception, customers are talking about the medium to long-term growth trajectory of the industry. This hasn't changed. And it's also why, of course there are short-term concerns, like always short-term concerns. They say, what am I going to do short-term that will not impact my long-term targets. That's basically the question, what they had. That's why, yes, some of them have adjusted their CapEx plans, but they say, what is absolutely essential to secure our long-term growth path, we will still do. Which of course, this is why Litho is a very strategic tool. This is why the Litho orders keep coming. So in that sense, Yes, things have changed short-term, and they are reacting. But longer-term, and in the CMD, the Capital Markets Day, we didn't talk about Q4 or Q1. We talked about 2025 and 2030. And that's exactly the discussion we're having with customers. I would even say that the longer-term roadmap discussion with our large customers has intensified to a level we have not seen before. So, like I said earlier, it's not getting easier, it's getting more complex. But it also means that the cooperation models that we have with our key customers are actually intensifying. And that just confirms not only the technology roadmap, but it also confirms the capacity plans that they have and the confidence we both have in the growth of this industry. So in that sense, Mehdi, nothing changed in two months' time.

Thanks for all the detail. And just quickly regarding your calendar of 23, If the non-EUV revenue is growing by 30%, how should I think about the mix of metrology and inspection?

Yeah, it is in there. Yeah, I think it's the 30%. I think it applies roughly to all of it. I mean, you have to remember that our metrology tools have a very strong attach rate to our So, yeah, they're in line, you know, so it's for both. Thank you.

Thank you. Our next question comes from the line of Amit Harchandani at Citi. Please go ahead. Your line is open.

Thank you. Good morning and good afternoon. I'm Amit Harchandani from Citi. Two questions if I may. My first question again goes back to the non-EUV business, the significant growth that you have guided for in 2023, which admittedly is aligned with some of the points you made at the Capital Markets Day, but clearly that's where I feel investors also need to see the greatest level of comfort. So could you give us a sense on the DUV driver's your level of confidence in the demand, the level of discussions you are having around lagging edge and simply reverse engineering your 30% guide does suggest that you'll get pretty close to the 375 capacity number that you've talked about. So any thoughts on DUV would be appreciated and then I have a second question.

Okay. Yeah, I think you have to realize and it goes back to what I said earlier that the biggest shortage in terms of demand or let's say a shortage in terms of capacity or shipment, was in deep UV. So there is a backlog of deep UV investments that were planned by customers that we're now able to fulfill, should not underestimate the size of the gap in deep UV, which is one element, and that's especially true for those geographic areas where we cannot ship EUV, but deep UV is, you could say, the workhorse for the mature and less critical semiconductors, i.e., China. So that stays. That stays strong. On top of that, if you have more EUV sales, well, you don't make a chip or a semiconductor device with only EUV. I mean, so if you grow the EUV base, we need a lot of deep EUV layers. While the layer growth, node-on-node is there. It's always been there. So there's also an extra driver. against the background of the fact that we can't ship enough. So this is what is happening. There are very few customers, which, by the way, when you look at the industrial domain, when you look at, for instance, some of the smaller, you know, IDMs, smaller, they don't need to, you know, it's important customers, but they just simply don't buy the same quantities as the three or four large customers. They're in the industrial domain. They still call me and tell me, where's my DPV tool? No, tools, multiple. That's also happening. So it's this shortage that's still there. And it's, of course, I fully understand from an investor point of view to say, yeah, but, you know, we also see the weakness in the consumer markets. We see inventories going up. But in a specific domain, anywhere between 45 and 20 nanometres, It's still short, and definitely in certain industrial domains like automotive and just industry in general. So this is still there. And this is why there are a couple of drivers, like I said, it's of course China, EUV will need deep UV, and it's the deep UV OEMs that are in the sweet spot of where the shortage is. And then these are the reasons.

understood very helpful peter and as a second question if i may go back to the topic of the gross margin evolution over the course of 2023

You've talked about a gradual improvement over 2022. At the same time, looking at your top line guidance, seems like your ASPs are going to rise over the course of 2023. You obviously have greater operating leverage. Is the mix effect so strong that's triggering this incremental step up in gross margin? I guess I'm just trying to get a sense of what that incremental step up is going to be in 2023 and what are the headwinds. which are offsetting some of the tailwinds you've highlighted earlier?

Let me take that one. So many moving parts to the gross margin. We already alluded to one, which is the inflation one. So on inflation, it's important to recognize, yes, on the one hand, we will get some compensation. Yes, that will lead to an increase in ASB. But, you know, we're also getting inflation on the cost side. both on parts and on labor. So that will still be an improvement over the 1.5% negative that we talked about last year, but it's still a drag on the gross margin in comparison to, for instance, what we had in 2021, but still an improvement over the year. So that's one element. The second element, of course, the fast shipment. Last year we had a drag of 1.5% on the fast shipment. Of course, that drag is gone because, as I mentioned, we expect the fast shipment amount coming into the year to also lose out of the year. So that 1.5% drag is gone. So that's also a positive in comparison to last year. Then, you know, volume goes up both on the EUV side and on the DPV side. So that gives you a bit of a positive. Mix effect in the DPV business is a slight negative because of the increase in the drive business that we also talked about. So that's a slight negative. And then there are two big ones to bear in mind. First off, as you would have seen, we're pretty cautious, if you want to call it that way, on the install-based business. And of course you can assume that the service business will continue to grow. So then if we only guide 5% increase on the total installed base business, that implies that the upgrade business that we have in there is actually contracting. So that's upper speculation because that's the one that's hardest to plan for reasons that we talked about before. But we assume that the upgrade business will be lower and that of course is a big drag on the gross margin. And then the last element in the gross margin And that's important to recognize, and we've been talking about this before, but I just want to emphasize it. We are incurring significant costs in our operations as it relates to preparing for both high NA and preparing for the big staff changes that we're making in our capacity. Do not underestimate that. That's a significant number. It's an even bigger number than it was last year. And of course, that continues until the point in time where the capacity is built and will be fully utilized and or high NA is going to be utilized. So that's a drag that we, you know, continue to have. It's bigger, as I mentioned, in 23 than it was in 22. So those are the moving parts. That's why we say if you add it all up, you know, we're talking about a slight improvement over last year. I think it's important to note, Amit, that if you look at all of that, a number of the negatives will be gone, let's say, in the 25 timeframe. And that's why Peter also reiterated, you know, in his video that we believe the 54 to 56 is still there because at that point in time, you know, the capacity is there and should also be utilized. And the same high in A at that point would be up and running. And also potentially the installed base business at that point would be normalized. So I think that's the way to look at it.

Appreciate the details. Thank you very much.

Thank you. And our next question comes from the line of , of JP Morgan. Please go ahead. Your line is open.

Yeah. Hi. This is here. I just want to touch base back again at the gross margin. I mean, you've talked about the 3.1 billion Euros of being recognized in 23. and then potentially as much going into the following year. I mean, does that have an impact on the gross margin or is it completely neutral to your gross margin? And secondly, in terms of the crossover on the gross margin, which was expected to happen in the second half of this year between EUV and DPUV, is that happening? And I have a quick follow-up.

Okay. So, you know, on the effect of the fast shipments, if indeed we're going to have the same number going into the year as we see leaving the year, then the impact is zero. Of course, the impact, as I mentioned before, Sandeep, if indeed we're going to see some change in our revenue recognition, of course, that would be a potential plus for the gross margin. But we're not planning on that in the numbers that we've now shared with you.

Do you have another question, Sandeep?

Yeah, no, sorry. My follow-up on that on the gross margin was the crossover.

Yeah, the crossover. So, you know, EUV system gross margin at this stage around 50%, so more or less the corporate gross margin. What we said is there will be a point in time where you will also see EUV system growth margin getting closer and closer to the immersion business. There I think the introduction of the 3800 is going to be a big one. So the introduction of the E model, the 3800E, by the end of this year, even though as we mentioned it's only less than a handful this year, so the impact on the year will be small. But once the 3800E is going to be the lion's share of the EUV tools, then you will really a good boost to the gross margin that we'll have on ETH.

And just one quick follow-up on China, Peter. I mean, I know you don't really want to talk about it given everything is still up in the air. But when we look at what your competitors have done in other markets, there could be a future impact to ASML from whatever is negotiated in China. How should we look at it into 2023 as such, really? clearly without quantifying it, will there be an impact or do you think that you have enough in your backlog that you could, you know, recognize through the year, which would mean that there should be no impact to ASML at all?

It's a good question, Sandeep, but, you know, it really depends on what the outcome of the export control negotiations are, you know, because we can speculate all kinds of scenarios what that would be and what the impact would be. The only thing is that we have a safe buffer, you could say, between the demand and our output capability. So it fully depends on what the outcome is. And it's not that I want to talk about that. I don't want to talk about China. I want to talk about China. It's no problem. What I cannot do is just tell you what the impact of the potential outcome is, because I don't know the outcome. That's the only thing. So I just don't want to speculate. That's the only thing. But I think I find comfort. in the significant buffer, you could say, between the demand curve and our output capability.

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Thank you. All right, we have time for one last question. If you were unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations Department with your question. Now, operator, may we have the last caller, please?

Thank you. That comes from the line of Alexandra Petrick at Societe Generale. Please go ahead. Your line is open.

Thanks, Ian. So just a final question would really be on your question indication on EUV ASPs in 2023. Now, you obviously highlighted it slightly down versus 22. Is that a conservative assessment? And if you could maybe single out the elements that pushed the EUV ASP to such high levels in 22, that those will not be achievable this year. I have a very quick follow-up with the e-system obviously. Should we also assume that if we look at the increased current for that machine that you will basically keep half of the increase for yourself and the other half will be given to your customers as per usual? Thank you.

Yeah, thanks, Alexander. So as I mentioned, you know, gradually over these calls, we've increased the ASP of the D model that we've given to you. So it started with 160, then we said use 165, and I just said, you know, use somewhere between 165 and 170. You're right that if you just calculate the ASP in the quarters in 2022, sometimes you've got to some higher numbers. But the reason that that was the case, as we've also explained on previous calls, those were one-off as a result of revenue deferrals that were in there. So sometimes that led to a remeasurement of those deferrals, and that then sometimes because we were also looking at distributing those adjustments over a very limited number of tools, that could actually have quite a significant impact. But we've always said, normalize that, don't take for granted that those numbers are the right numbers to use on a go-forward basis. So, you know, it's not that anything bad happened. As a matter of fact, something good happened because systemically I think the ASP on the D has gone up. As it relates to the pricing of the E, yeah, I mean, definitely we're still sharing value with the customers. I mean, that's a fundamental principle in the way we do business with our customers. We want to make sure that the incremental value that a tool provides over the predecessor tool is being fairly shared between the customer and the sales. So that promise has not changed. If you look at the way that pans out, because you need to recognize value is a whole bunch of things. Value is better imaging quality. Value is better overlay. Value is higher productivity. If you add it all up, then in the past you saw a pretty strong correlation between improvement in productivity and ASP increase, and that's historically on EUV there was sort of a near 100% correlation there. As you know, ultimately on the 3800E we'll see an improvement in productivity 160 wafers per hour to 220. That will be in stages, but ultimately the 220 is the stage that we'll get to. So that definitely means that we're going to have a pretty significant improvement of the ASP. And, you know, I think that's something that also should play out in your models.

In addition to that, it doesn't mean that this goes without any cost increase. I mean, it's not going straight down to the bottom line. Why? Because the 3800, as we mentioned in many occasions, actually sees the first introduction of technology that we are applying in the high NA tool. So there is also sort of new stages, so it's also a cost element there. So it's not a one-to-one increase in ASP going to the gross margin. But yes, you'll see a gross margin increase, but also a cost increase because we are using the latest and greatest technology out of high NA that ported into the 3800. So just to correct.

Thank you very much.

All right, so 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 2022 fourth quarter and full year financial results conference call. Thank you for participating. You may now disconnect.