ASML's lithography equipment sales in China account for 49%! The US threatens long-arm jurisdiction and its stock price plummets 13%
On July 17, 2024, ASML, a major lithography machine manufacturer, officially released its second quarter financial report for 2024. Although the second quarter performance was better than market expectations and the new orders were also better than market expectations. However, its performance guidance for the third quarter was slightly lower than market expectations.
Combined with the impact of the news that the United States threatened to implement “long-arm jurisdiction” on major semiconductor equipment manufacturers in its allies, such as ASML and Tokyo Electron, to force them to comply with the United States' further restrictions on Chinese semiconductors, ASML's stock price plummeted 13% at one point and still fell 12.74% at the close, with its market value falling below US$400 billion to US$366.69 billion.
The so-called “long-arm jurisdiction” is the implementation of the “foreign direct product rule”. Even specific items produced outside the United States will be subject to U.S. export controls if their development or manufacturing directly utilizes even the smallest amount of specific U.S. controlled software or technology.
It is worth mentioning that in addition to ASML, the stock prices of two other major American semiconductor equipment manufacturers also plummeted due to the news, with Applied Materials' stock price plummeting 10.48% and Lam Research's stock price plummeting 10.07%. At the same time, it also brought down several American chip stocks, with AMD plummeting 10.21%, Qualcomm plummeting 8.61%, and Nvidia plummeting 6.62%.
Second quarter revenue fell 7.6% year-on-year and increased 18% quarter-on-quarter
ASML achieved net sales of 6.24 billion euros in the second quarter, down about 7.6% from 6.75 billion euros in the same period last year and up about 18% from 5.29 billion euros in the first quarter, higher than the median of the official guidance range of 5.7 billion to 6.2 billion euros; gross profit margin was 51.5%, higher than 50.6% in the same period last year; net profit was 1.58 billion euros, down about 19.4% from 1.96 billion euros in the same period last year and up 29.5% from 1.22 billion euros in the first quarter; basic earnings per share were 4.01 euros, compared with 3.11 euros in the same period last year.
“We achieved second quarter net sales of €6.2 billion, at the high end of our forecast range, and gross margin of 51.5%, above our guidance, both driven primarily by higher sales of immersion systems,” said ASML President and CEO Christophe Fouquet.
“As in previous quarters, the overall inventory level of the semiconductor industry continues to improve. At the same time, we also see that the utilization rate of lithography equipment is further improving, whether it is logic chip or memory chip customers. Although uncertainties mainly in the macro environment still exist, we expect the semiconductor industry to continue to recover in the second half of the year.”
In addition, Fu Keli also said: “ASML expects net sales of 6.7 billion to 7.3 billion euros in the third quarter of 2024, with a gross profit margin of 50% to 51%. R&D costs are expected to be approximately 1.1 billion euros and sales and administrative expenses are approximately 295 million euros. Our full-year outlook for 2024 remains unchanged. We view 2024 as an adjustment year and continue to invest in capacity expansion and technological development. Currently, we see that the strong development of artificial intelligence is becoming a powerful driving force for the recovery and growth of the semiconductor industry, ahead of other market segments.”
Net system sales from mainland China still account for 49%
Looking at the specific sources of product and service sales, of ASML's 6.24 billion euros in net sales in the second quarter, 1.48 billion euros came from installed base management business, and net system sales were 4.761 billion euros.
Among them, EUV systems accounted for 31%, down 15 percentage points from the first quarter. The sales volume of EUV systems was 8 units, 3 units less than the first quarter; however, the sales volume of ArFi systems increased by 12 units compared with the first quarter to 32 units, which also increased its share of net system sales from 39% in the first quarter to 50%; ArFdry sales were 11 units, accounting for 7% of sales; KrF sales were 33 units, accounting for 9% of sales; i-line system sales were 16 units, accounting for 2% of sales.
From the perspective of terminal applications, as the demand for the memory chip market recovers and the price of memory chips continues to rise, coupled with the growing demand for HBM chips from AI chips, memory fabs have begun to increase their spending on fab equipment, which has also driven demand for ASML equipment. It can be seen that in the second quarter, ASML's equipment sales from the storage market accounted for 46% of the total sales, up from 37% in the first quarter. In contrast, the sales of equipment from logic fabs fell to 54%.
From the perspective of regional sources of net system sales, mainland China is still ASML's largest sales market, with net system sales accounting for the same proportion as in the first quarter, still as high as 49%, or about 2.333 billion euros (about 18.519 billion yuan). Compared with the sales of about 1.943 billion euros (about 15.426 billion yuan) in the first quarter of this year, it has increased by about 20% month-on-month!
After-sales service to China has not been interrupted
Obviously, after the Dutch semiconductor equipment export restrictions came into effect and ASML's license expired at the end of 2023, ASML's revenue has been affected to a certain extent in the past two quarters.However, the demand for ASML equipment in the Chinese mainland market remains strong, and is currently mainly shifting to unrestricted DUV equipment.
Even so, the United States seems to be planning to further tighten restrictions, such as putting pressure on the Dutch government to demand that ASML further stop after-sales service and technical support for advanced lithography equipment in China, and threatening to exercise “long-arm jurisdiction” over it.
Given that the Chinese mainland market is still ASML's largest source of lithography system sales, this has triggered a sharp drop in ASML's stock price.
However, as of now, the Netherlands has not yet introduced relevant policies to restrict after-sales services, and ASML is still serving mainland customers normally.
An ASML insider told Core Intelligence: “After-sales service mainly involves the repair and replacement of parts. We have established a maintenance center in Beijing to provide localized after-sales service. Except for a few American parts that may be affected (many customers have some inventory in this area), we can control most non-American parts. At the same time, we have just established a technical procurement team to find non-American supply chain resources. So far, among all the ASML equipment in China, not a single customer has stopped because we could not provide parts.”
It is worth mentioning that regarding the rumor that the United States “threatens to exercise long-arm jurisdiction over major semiconductor equipment manufacturers in allied countries such as ASML and Tokyo Electron to force them to cooperate with the United States' further restrictions on Chinese semiconductors”, Foreign Ministry Spokesperson Lin Jian said at a regular press conference on July 17, “China has repeatedly expressed its solemn position on the United States' malicious blockade and suppression of China's semiconductor industry. The United States has politicized, pan-securityized, and instrumentalized economic, trade, and technological issues, continuously increased chip export controls on China, coerced other countries, suppressed China's semiconductor industry, seriously undermined international trade rules, and damaged the stability of the global production and supply chain, which is not beneficial to any party. China has always firmly opposed this. We hope that relevant countries can distinguish right from wrong, resolutely resist coercion, jointly maintain a fair and open international economic and trade order, and truly safeguard their own long-term interests.”
New orders in the second quarter amounted to 5.57 billion euros
In terms of new orders, the financial report shows that ASML's new orders in the second quarter of this year amounted to 5.57 billion euros, of which about 2.5 billion euros were EUV lithography machine orders. Compared with the new orders in the first quarter of this year, which amounted to 3.6 billion euros (of which 656 million euros were from EUV), it achieved a significant increase of about 54%. It is also better than the market expectation of 4.41 billion euros.
ASML also said that as of the end of the second quarter, ASML's backlog of orders was still as high as approximately 39 billion euros.
Third quarter performance guidance and full year outlook
ASML expects net sales in the third quarter of 2024 to be between 6.7 billion and 7.3 billion euros (1.4 billion euros are expected to come from the installation management business), and gross profit margin is expected to be between 50% and 51%. Slightly lower than the market's expected revenue of 7.46 billion euros and a gross profit margin of 51.1%.
ASML still maintains its previous view on the full-year outlook for 2024, and expects overall revenue to be roughly the same as in 2023. Among them, the performance in the second half of this year will be significantly stronger than in the first half, which is consistent with the trend of the semiconductor industry continuing to recover from the downward cycle.
ASML's expectations for the market segments are similar to those in previous quarters. Revenue from logic chips in 2024 is expected to be slightly lower than in 2023, as customers are still digesting the new capacity in 2023; in the memory chip field, revenue in 2024 is expected to be higher than last year, mainly driven by the shift in dynamic random access memory (DRAM) technology process nodes to support advanced storage technologies such as the fifth-generation double data rate synchronous dynamic random access memory (DDR5) and high-bandwidth memory (HBM). In addition, revenue from the installation management business in 2024 is also expected to be the same as in 2023.
“As previously stated, 2024 is an adjustment year and we are continuing to invest in capacity expansion and technology development to prepare for strong demand in 2025. Based on the different factors discussed over the past two quarters and the impact on profit margins, we still expect gross margins in 2024 to be slightly lower than in 2023,” said ASML President and CEO Fu Keli.
The second High NA EUV was shipped
In terms of 0.33 numerical aperture (NA) EUV lithography systems, ASML shipped a new batch of NXE:3800E systems to customers in the second quarter and is continuing to increase production capacity as planned. As customer demand shifts to NXE:3800E this year, we expect that most of the equipment shipped in the second half of the year will be NXE:3800E systems.
In terms of the 0.55 high numerical aperture (High NA) EUV lithography system, ASML shipped the second device to a customer in the second quarter. The first device is currently undergoing wafer qualification testing at Intel's fab. The second device is currently being assembled and progressing quite well. ASML said that overall, it has good momentum in High NA EUV, strong customer interest and good progress in meeting customer expectations.
Although ASML did not specify who the second High NA customer is, it is speculated that it may be Samsung or TSMC. However, some people believe it is Intel, because there were rumors that Intel has already contracted ASML's High NA EUV production capacity this year.
Revenue expected to reach 40 billion euros in 2025
When talking about market demand and ASML's outlook after 2024, ASML also maintained its previous view that the overall inventory level of the semiconductor industry will continue to improve. The utilization rate of lithography equipment of current logic chip and memory chip customers is also further improving. Although uncertainties mainly in the macro environment still exist, ASML expects the semiconductor industry to continue to recover in the second half of 2024.
Currently, the strong development of artificial intelligence is becoming a strong driving force for the recovery and growth of the semiconductor industry, ahead of other market segments. Based on discussions with customers and ASML's large backlog of orders, 2025 is expected to be a strong year.
The long-term demand for the semiconductor terminal market remains strong, and energy transformation, electrification, and artificial intelligence will continue to bring demand. ASML sees that the space for application areas is also expanding, and the demand for lithography at future technology process nodes is also increasing, which will drive the demand for both advanced and mature processes.
The semiconductor industry is expected to enter an upward cycle in 2025. As a result, many wafer fabs under construction around the world will be put into use. ASML said it needs to be prepared for this because many customers plan to purchase ASML's systems.
ASML President and CEO Fu Keli said: “We will continue to focus on the future and prepare our capacity for further growth in the long term. As stated at the Investor Day in November 2022, our net sales are expected to be 30 billion to 40 billion euros by 2025 and 44 billion to 60 billion euros by 2030. In summary, although the macro environment still brings uncertainty in the short term, we are confident in the long-term growth opportunities.”