January 19, 2022
Sales in the fourth quarter of 2021 were €5.0B, within the guided range of €4.9B to €5.2B. Gross margin was well above guidance (51% to 52%) at 54.2%. Net income was €1.8B. ASML sold 72 new lithography systems in the quarter, the same number as last quarter. They sold 10 used systems, compared to 7 in Q3. Quarterly revenue was down 4.9% sequentially but services revenue, which made up 30% of revenue in the quarter rose by 35% from the previous quarter. Services are subscription-like revenue and are typically more profitable and stable than selling machines. EUV technology is still early enough in its lifecycle that services profitability isn’t mature. Average selling price per system (used and new together) was €60.8M in the quarter, up from €52M last quarter. This richer mix is much of the reason behind higher company gross margin this quarter. v. This includes the effects of the fire at their Berlin site, which they don’t believe will affect system output in 2022. The full year dividend will be €5.50 per share, 100% more than in 2020. Revenue in the second quarter will be between €3.3B and €3.5B, but this huge decrease is misleading. Approximately €2B of revenue in the current quarter will be recognized later because customers are electing to have machines delivered with less factory testing than is normal, to increase their wafer output sooner. But this pushes out revenue recognition. Adjusting for this, the midpoint of the guided range for Q1-22 is €5.4B, an 8.3% sequential rise. Finally, net bookings rose to €7.05B from €6.18B last quarter, showing the continued strength in demand for ASML’s products.
From the CEO, “"Our fourth-quarter net sales came in at €5.0 billion which is within our guidance. The gross margin of 54.2%, is higher than guided due to strong Installed Base revenue. Our fourth-quarter net bookings came in at €7.1 billion, including €2.6 billion from 0.33 NA and 0.55 NA EUV systems. The total net sales for the year was €18.6 billion, including €6.3 billion from 42 EUV systems. For ASML, 2021 was a strong growth year in a dynamic environment. We experience higher demand for our systems than our production capacity can accommodate. Very strong demand in end markets puts pressure on our customers for more wafer output. In order to support our customers, we are providing them with high-productivity upgrade solutions for their installed base, and we are reducing cycle time in our factory to ship more systems. One way to reduce cycle time is through a fast shipment process that skips some of the testing in our factory. Final testing and formal acceptance then takes place at the customer site. This leads to a deferral of revenue recognition for those shipments until formal customer acceptance, but does provide our customers with earlier access to wafer output capacity.”
Statement of Operations
Revenue of €4.99B for the quarter was in the lower end of the guided range, and down sequentially by 4.7%. Gross margin of 54.2% was well above the guided range (51% to 52%). Overhead, after two flat quarters, rose significantly – R&D was up to €681M from €609M and SG&A was €203M, compared to €183M last quarter. Net income was €1.77B and EPS was €4.39 on 405.0 diluted shares. I will focus on the full year results as they give a more complete picture of just how much ASML’s business has grown recently and how good it is. Sales for the year were €18.6B, an increase of 33% over 2020. The ratio of services to sales was 26-74, the same as in 2020. Gross margin rose 410 bps to 52.7%. This is the most remarkable number on the statement to me. 2021 was the year ASML broke out of the mid-40s gross margin range all the WFE companies (except KLA) are in. I had wondered why ASML, with no competition, had the same gross margins as Applied and Lam, who must compete fiercely with each other in most segments. I think ASML is using the conversion to EUV to make a one-time step up in their margins. As EUV becomes more of their sales I expect their gross margin to increase as well. Net income was up almost 70%, to €5.88B. Share count decreased 2% year-over-year, to 410.4M diluted shares. EPS was €14.34 compared to €8.48 in 2020.
Tool Sales and Bookings
The company sold 82 lithography tools in Q4 compared to 80 in Q4 of last year. The average price per system was €42M last quarter, up €3M from a year ago as EUV tools make up a larger percentage of the total. More impressive is the year-over-year comparison and what bookings say about the future. ASML sold 309 total tools in 2021, 51 more than in 2020. ASP per system rose €4M year-over-year, to €44M. Bookings are the most impressive figure in 2021 compared to 2020. Total number of booked systems was 656 at the end of 2021 vs. 303 a year ago. Total value of booked systems was €26.2B at the end of 2021, or 2x system revenue for the year. At the end of 2020 the company had 1.1x annual sales booked in new system orders. ASML has more than two years’ worth of production at their current rate in backlog. The company is growing capacity so it will take less than this time to clear those orders, but it is safe to say they have good visibility behind their forecasts for revenue in 2022 and beyond.
Statement of Cash Flow
To match the resolution given to changes in the balance sheet, this section will only review the cash flow statement for the year and compare it to the previous year. Net income was €5.88B. Cash flow from operations was €10.85B but almost half (€4.89B) was from changes in working capital. As I said in previous quarters, the high growth rate ASML is experiencing now, along with the ramp of EUV capacity, is making working capital lumpy. For that reason, I am backing “changes in assets and liabilities” out of my calculation of owner’s cash flow. I also take “share-based compensation expense” out, as always, because this is a real expense, even if most companies pretend that it isn’t. Granting stock to employees is dilutive to share count. For the full year, ASML invested almost 2x as much in PP&E (€901M) as they burned off in depreciation and amortization (€471M). This is to be expected as the company ramps up EUV capacity and grows manufacturing across all system types to service the increase in overall demand for semiconductors. Total investing cash flow almost summed to zero. The €901M in PP&E was mostly offset by letting more short-term investment mature than were purchased. The company also brought in €329M in cash from the sale of a subsidiary. I left the negative cash effect in up in the operating activities section, so I’ll leave it in here too. My owner’s cash flow for the year is €5.22B, or 2.0% against the closing market cap on Friday January 22nd of €255.1B. This measure makes ASML’s stock price a better value than three months ago when my owner’s cash flow yield was 1.5%, but still well below the previous normal range for WFE companies of between 3% and 4%. This is expected since semiconductor stocks are down recently, and ASML is a monopoly. Management returned well over the €5.2B in owner’s cash flow back to shareholders, almost twice as much. The company paid €1.37B in dividends and bought back €8.56B worth of stock. Management funded this extra cash return with the large change in working capital. Stock ` buybacks are flexible, so they may have seen this extra cash from changes in working capital (deposits on new tools, etc.) as a one-time inflow that was best returned to shareholders.
The Balance Sheet
The company’s balance of cash equivs and short-term investments grew by €300M, to about €7.6B. Receivables grew by €1.1B, more than 30%. Growth here is to be expected given how fast revenue and backlog are increasing, but I won’t pretend to understand specifics of what is happening under the covers here. I’m not concerned about it, but I don’t want to give the impression that I can explain the details. Inventories rose more than 10% to €5.2B. I do know this is because customers are electing to have machines delivered to their fabs with less factory testing, which pushes out revenue recognition and increases the balance of inventory. As we saw in cash flows, PP&E increased €500M. Goodwill declined slightly with the divestiture in the fourth quarter. I don’t know what transaction this was and will have to wait for the 10-K filing to find out. ASML took their debt balance down to €4B, a decrease of €600M from a year ago. Current liabilities almost doubled, to €12.3B. Much of this is the effect of ASML’s new ordering policy, which they put in place on EUV systems, which requires an up-front deposit from customers. ASML’s book value declined from last year by 26%, because of the €5.6B increase in current liabilities. Book value is now €10.1B, or $27.90 per share.
They reiterated their forecast of an “opportunity” for the company to reach annual revenue in 2025 of between €24B and €30B, with gross margin between 54% and 56%. They said again they expect their installed base management business to grow at an 11% CAGR between 2020 – 2030. EUV system sales increased 41% in 2021, to €6.3B. Both logic and memory customers took delivery of these systems for high volume manufacturing. They received an order this year for an EUV 0.55 NA (EXE:5000) system. ASML’s metrology and inspection systems business grew 47% to €514M during the year 2021. Memory was 27% of revenue in Q4, down from 39% in Q3. Unit sales breakdown in Q4 is: EUV = 11, ArFi = 20, ArFdry = 5, KrF = 35, I-Line = 11. This is a sequential increase in the least advanced systems (KrF and I-Line) from 30 to 35 and 7 to 11, respectively. Full year system breakdown is: EUV = 142, ArFi = 81, ArFdry = 22, KrF = 131, I-Line = 33. Year-over-year growth was in EVU (up 35%), ArFi (up 19%), and KrF (up 27%). For the year, end use was 70% logic and 30% memory. From the previous year, memory was only up 200 bps, so memory is not out-growing logic in the rate of capacity expansion. Shipments to China were 16% of total in 2021, compared to 18% in 2020. Note this is to all customer locations in China, not just indigenous companies. The growth in sales to logic customers has driven ASML’s performance over the last three years. In 2018, the year of peak spending in the last memory cycle, total system sales to memory customers were €4.545B and to logic customers the total was €3.714B. Memory was below €3B the next two years and reached €4B again (€4.064B) in 2021. In contrast to memory’s u-shaped spending curve, logic has been up every year going back to at least 2017. Sales to logic customers were €3.406B in 2017, then from 2018 to 2021 they were: €3.714B, €6.566B, €7.393B, and €9.589B. Compared to 2018, memory industry spending on lithography equipment is down more than 10% while spending by logic customers is up more than 150%. However, memory is set to close this gap. Total system value of new bookings by memory customers at the end of Q3-21 was €989M. Three months later at the end of Q4-21 this value was €1.62B. Logic has grown, just not as much, from €5.19B to €5.43B.
Outlook for Q1-22 is:
• Net sales between €3.3B and €3.5B, excluding €2.0B revenue shift to later quarters because of fast shipments
• Installed base management sales of around €1.2B
• Gross margin around 49%
• R&D costs around €760M
• SG&A costs around €210M
2022 net sales growth is forecasted to be around 20%. Effective tax rate in 2022 between 15% and 16%.
Investor Conference Call with CEO Peter Wennick and CFO Roger Dassen
Opening Statements from CFO and CEO
• Installed base revenue was above guidance, from higher-than-expected sales of productivity software. This was the reason for gross margin being above the guided range. Customers demand more wafer productivity as soon as possible.
• Tool sales to logic customers increased 31% year-over-year while memory sales increased 39%
• Cash flow from working capital was primarily the result of down payments from customers on new system bookings
• Forecast for Q1: Revenue of €3.3B to €3.5B revenue (with €2B of additional revenue shifted out to later quarters because of fast shipments), installed base management sales around €1.2B, gross margin around 49%, lower because of fast shipments and lower sales of productivity software upgrades. Expenditures for R&D of €760M and SG&A of €210M. Their tax rate in 2022 is still expected to be around 15% to 16%. ASML is expected to pay dividends totaling €5.50 per share in 2021, a 100% increase over 2020. In 2021, ASML repurchased 14.4M shares for a total cost of €8.6B. This is an average cost of $677 per share using today’s (January 21, 2021) €-to-$ exchange rate.
• Full year sales are expected to grow 20% in 2022 over 2021. This will be 25% if three EUV systems expected to “fast ship” at the end of 2022, so revenue for these machines won’t be recognized until 2023.
• Installed base revenue in 2022 is forecasted to rise 10% year-over-year
Question and Answer
• A bit more than 20% of the EUV system sales in 2022 will be to memory customers
• Full year 2022 gross margin is expected to be around 53%. It is a good assumption that SG&A will be 4% of revenue for the year and R&D will be 14% of revenue.
• Within the expected 20% growth in DUV in 2022, half will be dry and the other half will be immersion. Logic will be a higher percent of this and memory a lower percent.
• During 2022, they are targeting a 2–3-week reduction in how long it takes to install new tools in customer fabs, to offset the later revenue recognition partially or mostly from “fast shipments.” If the overall “fast shipment” program works well for customers then it may become standard practice in the future, but that is yet to be decided.
• EUV system shipments are expected to be over 60 systems in 2023. ASML expects to ship more machines in 2023 than they ship in 2022. Demand today for DUV and EUV is 40% higher than their current capacity, so they need to add capacity beyond what is currently planned.
• The large cash inflow from working capital in 2021 was from the exceptional number of orders received during the year
• Indigenous China customers are growing purchases at a similar rate to their overall business
• Asked again about the risk of oversupply, Wennink gave a long and colorful answer. The condensed version is, yes, we will see oversupply in the future, but we need to build enough capacity into the semiconductor ecosystem to meet the World’s demand. We are far short of this today. He stands by his forecast that semiconductor revenue will reach $1T by the end of 2030, and pointed out that if that happens, the same amount of annual revenue that it took 40 years to build will be added in less than 10 years.
CEO Summary Video with Peter Wennink
• DUV revenue was “a little light” because of supply chain and logistics issues they talked about in the Q3 call
• Services revenue was again driven by productivity software increases. This was behind the higher-than-expected gross margin in the quarter.
• They had €4.6B of DUV orders as of the end of Q4
• The lower revenue forecast for Q1 is because of a change to how they are shipping systems to customers now, to reduce cycle time. Instead of customers doing acceptance testing of new machines at the ASML factory and again when installed in their fab, they now skip the factory testing. This lets customer receive machines earlier, but it pushes out revenue recognition by ASML until after the acceptance testing is done in the customer fab. Shipments in Q1-22 are forecasted to be between €5.3B and €5.5B.
• The company expects revenue in 2022 to increase 20% over 2021. Correcting for the “fast shipments” described above, revenue would increase 25%.
• They expect to ship 55 EUV systems in 2022, which is revenue growth of 25% year-over-year. DUV growth is strong and coming from across all industries. They expect 20% growth in DUV in 2022 over 2021.
• DRAM utilization is “very high” right now, so they expect extra lithography tool shipments are needed to support the high-teens DRAM bit growth they forecast in 2022. Overall memory revenue growth for ASML will be 25%.
• ASML has never seen demand outstripping their capacity to supply by as much as they are seeing today. This gives them little margin for error in manufacturing and shipping tools because they have no buffer capacity.
• Wennink named three risks they are watching closely in 2022; COVID, supply chain, and being able to hire enough people
• The fire at their Berlin factory caused “significant damage.” This won’t impact DUV output in 2022 but EUV is more at risk. They believe they can creatively manage and keep this from affecting EUV shipments in 2022.
• €4.6B of the €9.0B total authorization in the share buyback program announced last year has been spent
• Wennink said again that he believes the semiconductor industry writ large has underestimated demand. Everyone is playing catch-up now to build capacity to meet this new reality.
For the full year 2021, revenue increased 50% and net income rose almost 70%, to €5.88B. Revenue is forecasted to rise another 20% in 2022 with 53% gross margin. Bookings doubled from a year ago. Total value of booked systems was €26.2B at the end of 2021, or 2x system revenue for the year. The CEO said on the call that their actual demand from customers is 40% higher than installed capacity. If one takes this numbers at face value, ASML will still not have enough capacity to meet true demand at the end of 2022, by more than 10%. At some point the cycle will turn but we seem to be a ways away from that today. The semiconductor manufacturing ecosystem has underinvested for several years and now is playing a massive game of catch-up. This year was unusual for ASML because of the surge in cash deposits from customers for new orders. The company greatly increased the required deposit from customers for EUV tools compared to previous equipment types. As EUV has become a larger percent of total sales, their cash balance from deposits on new orders has swollen. The company took this one-time step up in working capital and used a lot of it to buy back stock in 2021. I think this will prove a good move given the company’s bright future. It says that management believes new order deposits will continue to replace this cash in the future, but don’t expect another year with an extra €5B added to working capital.
I am particularly interest in memory for insight into when the cycle in that sector will turn. ASML’s forecast for memory growth in 2022 means photo tool sales to memory customers will be around €4.9B for the full year 2022, above the previous peak of €4.55B in 2018. This is a leading indicator that 2022 will be the peak year in memory. The counter to this is if capital intensity has increased enough in the last 3-4 years that the higher absolute spending doesn’t lead to enough bit growth in 2022 to surpass demand.
The most important takeaways for me from this report are the size and durability of demand growth for ASML’s products, the one-time inflow of cash for customer deposits being reused for share buy-backs, and their new “fast shipment” method of delivering tools and the push-out of revenue this causes. ASML’s stock is a bit less expensive than it was a quarter ago, though I think the days of it being valued similarly to the other WFE companies are gone for good.
-S. Hughes (no ASML position)