What is the impact of missing the 7NM node with EUV?

The guidance for Q4 was between Euro 1.7B and 1.8B with 47-48% gross margin. The company will ship 4 EUV systems for the year, rather than the 6 it had targeted, one unit slipped due to customer issues and one unit slipped due to ASML supplier issues.

Logic was an overwhelming 84% of business in the quarter but is expected to normalize to a better balance between memory and logic going forward.

A logic heavy quarter at 84% of business….
As we have mentioned in previous notes, we think part of the strength was due to both TSMC and Intel spending for 10NM. We had also mentioned our concern that there may have been a temporary hiccup in capex spending by Samsung due to near term cash issues related to the smartphone battery debacle. There is the possibility that some business may have shifted out of the quarter……

EUV remains slow-only 4 systems to ship rather than 6….
EUV continues to move slowly along without a significant change in the relatively slow pace. Concerns continue to be centered primarily on system uptime and availability. However there are still many ecosystems issues that have yet to be finalized as well including pellicles, resist, inspection, etc; etc;.

ASML continues to diligently plug away at the “moonshot” like project but customers are still not willing to bet their multi billion dollar production on a less than firm solution when they have a working , albeit more expensive, solution in multi patterning.

5NM seems to be the insertion point…
Given the ongoing EUV issues, it seems virtually everyone is pushing off the decision which means that 7NM will be multipatterning. The only exception may be Samsung which has made more noise about EUV but has slipped a bit in progress towards 10NM and 7NM (could the slippage be because they are trying to use EUV??).

Given where we stand right now it feels like 5NM is a better bet for EUV.

On the positive side, ASML has gone from 3 EUV customers to 6. Obviously the second tier chip makers are sensing that we are getting closer to EUV so they have to start getting ready as the learning takes several years to come up to speed.

One of the new customers is likely GloFo who is skipping 10NM to go straight to 7NM (which we think is a great decision). However, it seems as if GloFo is doing multipatterning for 7NM not EUV.

Is ASML missing 7NM with EUV a problem???
One of our growing concerns is that ASML EUV may miss a large node opportunity at 7NM. We have heard from many in the industry that there is a strong expectation that 7NM will be a very popular node much like 28NM, which is “the gift that keeps on giving” to the industry.

TSMC and others seem very focused on 7NM being a “big” node as compared to “Lite” nodes such as 22NM. GloFo seems to be betting the farm on it.

If 7NM goes as big as expected and it is only multipatterning then ASML will have missed a significant spending window as 5NM will likely be more of a “Lite” node.

7NM could be the last big node before the industry sees some titanic shift in the core process technology as we approach physical limits of Moore’s Law.

How does an 84% logic quarter impact other equipment makers?
If the rest of the industry follows the pattern of spending that ASML just saw (and it usually does)then we would expect other tool makers to see a similarly logic heavy quarter.

This is obviously a very strong benefit to KLAC which has lived through some lean years as memory ruled the roost. The fact that Gen 5 is now out when logic is ramping makes the possibility of strong potential upside performance. Yield management tools are in strong demand during the ramp period which we are in right now. TSMC needs to get its act together to have strong yields for next years Iphone and 10NM processor.

AMAT has historically had a very strong relationship with TSMC (TSMC is the house that AMAT built) and as such should benefit from increased logic spend we have been hearing about. AMAT has had a more equal mix of memory/logic business.

Lam has historically been much more memory centric and Samsung remains its biggest customer. Given that Samsung feels a bit weaker right now and Samsung logic has been slow , we would not be surprised to see near term weakness associated with this mix in logic heavy spending. Additionally , Lam has historically not had as much success at Intel as other competitors, so heavy spending in Q4 by Intel (up 40% Q/Q) will not benefit Lam as much as it does other players such as KLAC and AMAT.

The stock…
We think ASML remains fully valued in the near term and we have heard no breakthroughs in EUV that make us want to rush out and buy the share. The Hermes acquisition is on track and will obviously cause a bit of a dislocation as it is absorbed. We think ASML is overdone above $100 and would be more likely to look at the shares below $100.