The Chipmaker’s Equipment Manufacturer – ASML

(Michael Vi)
(Michael Vi)
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The semiconductor shortage has put a lot of attention on the chipmaking supply chain over the past 2 years. Today, we are taking a closer look at ASML – a company that manufactures chipmaking equipment. ASML reported its Q4 earnings yesterday.


Company Overview

  • ASML Holding NV (ASML) is a manufacturer of chipmaking equipment.
  • It is engaged in the development, production, marketing, selling, and servicing of semiconductor equipment systems, consisting of lithography systems.
  • ASML’s products include systems, and installed base products and services.
    • The company offers TWINSCAN systems, equipment with lithography systems with a mercury lamp as a light socure (i-line), Krypton Fluoride (KrF), and Argon Fluoride (ArF) light sources for 300 millimeter processing wafers.
    • These products are for manufacturing environments requiring small resolution.
    • TWINSCAN systems also include immersion lithography systems.
  • ASML’s critical positioning in chipmaking has propelled the Netherlands-based company to a top 30 worldwide market cap of over $280 billion.

Q4 Earnings Highlights + FY2021 Highlights

Key Investor Messages

  • Growth in semiconductor end markets and increasing lithography intensity are driving demand for ASML products and services
  • At ASML’s investor day on Sept 29, 2021, the company projects annual revenue reaching €24 billion to €30 billion with gross margins between 54% and 56%.
    • The company sees significant growth opportunities beyond 2025 as well.
  • ASML expects to return significant cash to shareholders through growing dividends and share buybacks.

Financials (FY2021)

  • Net sales | €18.6 billion, 33.1% growth YoY
    • Net system sales | €13.7 billion (73.4% of total)
      • EUV lithography sales | €6.3 billion, 41% growth (46% of system sales)
        • Offered customers upgrade capabilities to get more wafer capacity out of their installed base systems.
      • DUV lithography sales | €6.9 billion, 25% growth (50% of system sales)
      • Metrology & inspection sales | €0.5 billion, 47% growth
    • Net service and field option sales | €5.0 billion, 35% growth YoY
  • Gross profit | €9.8 billion (52.7% margin), 44.3% growth YoY
  • Income from operations | €6.8 billion, 66.6% growth YoY
    • Operating margin | 36.3%
    • R&D expenses | €2.5 billion, 13.7% of sales (versus 15.7% of sales in FY2020)
    • SG&A expenses | €0.7 billion, 3.9% of sales (versus 4.0% of sales in FY 2020)
  • Net income | €5.9 billion, 65.6% growth YoY
    • Diluted EPS | €14.36

Management Commentary

Peter Wennick, Chairman + CEO

  • On full year shipments and sales outlooks
    • “For the full year, we expect a net sales increase of around 20% compared to 2021. And bear in mind that this 20% sales growth does not include revenue from 6 EUV fast shipments in Q4 2022. And if you would take the full shipments value of the 6 EUV fast shipments into account, the growth percentage would have been 25%.”
    • “Looking at the market segments, given the very strong demand situation and our continued push to increase capacity, we see growth in both Logic and Memory in 2022.”
  • On supply chain and labor
    • “We also have to work through supply chain challenges of material and component shortages and COVID-related supply chain disruptions. In our workforce, we have hired a significant number of people throughout last year. And although we are currently at our planned workforce FTE numbers, they still need to be trained and brought up to the learning curve.”
  • On the January factory fire in Berlin
    • “as we reported earlier in January, we had a fire just after the New Year inside a part of our factory in Berlin. The fire was extinguished during the night and fortunately, no persons were injured during this incident. But the fire occurred in a part of one production building on the site in Berlin and the smoke partly impacted an adjacent building. We’ve been able to resume production in parts of this building already, and the other buildings on the site have not been affected and are fully operational.”

Roger Dassen, EVP + CFO

  • On supply chain issues
    • “The effects of the logistics center startup and supply chain issues communicated during our Q3 results is a bit longer than expected to resolve, affecting some deep UV shipments in Q4.”
    • “In order to address our customers’ need for additional capacity, we completed an increased number of productivity upgrades in Q4 as a way to provide them with incremental productivity enhancement.”
  • On the order book
    • “Q4 net system bookings came in at EUR 7.1 billion, including EUR 2.6 billion for 0.33 NA EUV systems and 1.55 NA EUV systems and EXE:5000 systems. Order intake was strong from both deep UV and EUV, largely driven by Logic with 77% of the bookings and Memory accounted for the remaining 23%.”
  • On Q1 guidance (outlook below)
    • “Lower guidance relative to Q4 is primarily due to a number of so-called fast shipments. These are shipments in the quarter for both EUV and deep UV, that will not complete factory acceptance testing. As we’ve discussed in prior quarters, fast shipments are in support of customers’ desire to bring systems into production as quickly as possible. By skipping some of these testing in our factory, we can shorten the cycle time.”

Outlook

  • Q1
    • Net sales | €3.3 billion – €3.5 billion
    • Gross margin | 49%
    • R&D costs | €760 million
    • SG&A costs | €210 million
  • FY2022
    • Strong demand driving net sales growth of 20%

Valuation + Analysis

  • After yesterday’s earnings report, ASML is trading at $698.82 per share on the Nasdaq.
  • The enterprise value of the firm is approximately $288 billion.
  • Prior to yesterday’s earnings report, analysts estimated 14% for net sales in 2022. ASML management expects growth to be around 20%.
  • If we split the difference and project 17% growth in 2022 with analyst estimated margins, ASML is trading at 29x 2022 adjusted EBITDA.

JO: The company is trading for about 35x EV/(EBITDA – Capex) and a 2-4% Free Cash Flow Yield. I’d say this is probably a reasonably priced way to gain exposure to the ASML/TSMC tag team of taking over the future of semiconductors. I kind of like it. The question is how to think about “tech” oriented stocks amidst the treacherous macro environment…

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