ASML – Strong DUV Throwback While EUV Slows- Logic Dominates Memory

– ASML has good quarter driven by DUV & Logic (@72%)
– SMIC & other major customer slow EUV plans
– Logic (read that as TSMC) remains key demand led driver
– We are happy memory remains muted given cyclical potential

A very solid quarter with a continued road to growth
The quarter came in at Euro4,254B and net income of Euro1,351B on gross margin of 52%. The company reported year total sales of Euro14B and Euro3.6B in income. EUV fell from last quarters 66% of sales to 36% of sales. The company increased dividends by another 15% showing strong intention to return excess cash to shareholders.

Bookings were even more biased towards logic with 78% of bookings being logic driven. Six EUV systems were booked.

Outlook is for sales of Euro4B +- Euro100M which is somewhat flattish

EUV demand variations cause slowdown ripple through supply chain
Making EUV scanners is a very complex business requiring an impressive global supply chain of technologically complex parts.

ASML has done a very good job of helping out or acquiring and supporting key supply chain manufacturers, starting with Cymer a long time ago.

Even with all the effort put into the supply chain there is still a limit of how fast production of these key components can be ramped up or down given the complexity which means long lead times.

However, customer demand seems to vary a lot more than the flexibility of the supply chain such as we are now seeing. SMIC was an unpredictable issue. We would expect some natural digestion periods and annual cyclical behavior in order patterns as EUV continues its rollout.

We might compare this problem to the whiskey industry where the global demand may increase or decrease in the short term due to global economies or politics the long term supply of 15 year old single malt scotch really can’t be changed that quickly.

DUV was a very good fallback
Falling back on DUV tools wasn’t all that bad as evidenced in the 52% gross margins so its not like ASML is suffering due to the variability of EUV orders and shipments.

We think it also shows the huge strength in the overall semiconductor market not just at the bleeding edge.

There have been numerous recent articles about shortages of chips for the auto industry. We would point out that most cars that we know of don’t use a lot of 5NM or 7NM chips made with EUV tools but have hundreds or thousands of chips made on 200MM and 150MM relatively ancient fabs and toolsets.

DUV will be around for a very long especially given the memory market and trailing edge demand.

Execution remains solid
We think management has done a good job of managing the many issues and complexities especially in light of Covid. Shifting gears from EUV to DUV and dealing with customer demand changes have been handled relatively transparently to the overall sales and earnings impact.

This is not easy to say given the complex global nature of the tool supply chain and organization.

Financial execution remains slid and the company continues to transition to returning more and more cash to shareholders as it throws off more cash from operations.

The Stocks
We think we will see a somewhat muted response in the stock. While the results were good, the outlook is flat. Investors will likely be a bit less happy with the air pocket in EUV sales that may concern them more.

Logic at 72% is not a problem and likely more of a positive given the variability of memory which can be scary.

All in all a good quarter but some complications.

The impact on collateral stocks is also likely somewhat neutral to slightly negative as we didn’t have overly positive results nor definitive recovery coming from the memory area.

Given that logic is so strong we would expect to see better results from KLAC than LRCX as they report their quarters given their respective concentrations.

About Semiconductor Advisors LLC
Semiconductor Advisors is an RIA (a Registered Investment Advisor),
specializing in technology companies with particular emphasis on semiconductor and semiconductor equipment companies. We have been covering the space longer and been involved with more transactions than any other financial professional in the space. We provide research, consulting and advisory services on strategic and financial matters to both industry participants as well as investors. We offer expert, intelligent, balanced research and advice. Our opinions are very direct and honest and offer an unbiased view as compared to other sources.

Also Read:

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