ASML: "Broken bone-level" embarrassment, becoming the number one killer of AI?

ASML accidentally released its 2024 third-quarter financial report (as of September 2024) ahead of schedule during the US stock market on the evening of October 15, 2024, Beijing time, with the following key points:

1. Core Data: Record-high performance, but a sharp decline in orders. In the third quarter of 2024, ASML achieved a revenue of 7.467 billion euros, exceeding market expectations (7.174 billion euros). Revenue continued to rise this quarter, mainly driven by the increase in DUV shipments. The company's net profit in the third quarter of 2024 was 2.077 billion euros, a year-on-year increase of 9.7%, exceeding market expectations (1.908 billion euros). Despite the good performance this quarter, the backlog of orders plummeted to 2.6 billion euros, significantly below market expectations (5.4 billion euros).

2. Business Performance: EUV and ArFi are the main sources of revenue. System sales revenue remains the company's main source of income, accounting for nearly 80% of the company's revenue. The growth this quarter was mainly driven by ArFi shipments. Specifically, 11 EUV shipments were flat year-on-year, while 38 ArFi shipments increased by 6 units. The average selling price of the company's lithography systems this quarter was 51 million euros.

3. Regional Revenue Performance: Mainland China accounts for half. Despite regulatory impacts, the revenue share of Mainland China still ranks first, mainly due to the impact of countercyclical expansion, with Mainland China increasing its demand for ArFi and ArF Dry. TSMC and the US region saw a rebound in demand, while the Korean region and storage customers showed weak demand.

4. ASML Performance Guidance: Expected revenue of 8.8-9.2 billion euros for the fourth quarter of 2024 (in line with market expectations of 8.95 billion euros) and a gross margin of 49-50% (below market expectations of 50.49%).

ASML was originally scheduled to release its financial report before the US stock market on Wednesday, but due to a "mistake," it was released early on Tuesday, directly causing an early flash crash in semiconductor stocks.

Overall: ASML's financial data is still good, but the backlog of orders is significantly below expectations.

Financial Data: The company's revenue and profit both showed significant increases this quarter, with quarterly profit returning to 2 billion euros. Although EUV demand remains weak, the company mainly benefited from the growth in demand for DUV products from Chinese customers. Looking at the guidance for the next quarter, it is also decent, with the company expecting revenue of 8.8-9.2 billion euros for the fourth quarter of 2024, continuing to grow, in line with market expectations (8.95 billion euros); gross margin of 49-50% for the fourth quarter, slightly below market expectations (50.5%)

Taking a closer look at the financial report, the most disappointing aspect is the company's backlog orders. In this quarter, ASML's backlog orders dropped significantly to 2.63 billion euros, far below market expectations (5.4 billion euros). The backlog order situation directly affects future performance. Against the backdrop of AI and storage upgrades, the company's backlog orders not only failed to increase but also halved abruptly, undoubtedly pouring cold water on the market. The "flash crash" in order data is mainly due to increased regulatory restrictions and some customers suddenly canceling orders. With 2.6 billion euros, the backlog orders have returned to the lowest point in nearly 3 years.

Combining industry conditions and company situations, Dolphin believes that the significant decline in ASML's backlog orders this quarter is mainly due to restrictions on exports, Intel, and the storage industry: **1) Intel previously revealed that the company will significantly reduce capital expenditures in the next two years, directly impacting the demand for lithography systems; 2) Although the storage industry had shown signs of recovery earlier, with recent product price declines, the demand in the storage industry has weakened again; 3) As for TSMC, although the company adjusted its capital expenditure plan for this year (increasing the range from 28-32 billion US dollars to 30-32 billion US dollars), it only raised the lower limit of the range; 4) In terms of risks in the Chinese region, the Dutch government plans to further expand export restrictions on 1970i and 1980i deep ultraviolet immersion lithography tools, aligning with the unilateral export restrictions implemented by the United States last year.

Overall, although AI can bring new increments to the industry chain, the current slowdown in technological iteration in the logic field directly affects the demand for EUV. As the most upstream of the semiconductor industry chain, ASML's downstream demand and core customers' capital expenditures will directly impact the company's performance. The significant decline in ASML's backlog orders this time will directly affect the market's confidence in the AI and semiconductor-related industry chain in the short term, and will also raise concerns about TSMC's capital expenditures in the upcoming financial report. (For more information on the company and management, please stay tuned for Dolphin's ASML communication summary)

Below is Dolphin's specific analysis of ASML:

I. Core Data: Performance at a New High, but Orders Plummet

1.1 Revenue: ASML achieved revenue of 7.47 billion euros in the third quarter of 2024, exceeding market expectations (7.17 billion euros), with quarterly revenue continuing to rise. Revenue for the quarter increased by 11.9% year-on-year, mainly driven by increased DUV shipments, with ArFi quarterly revenue reaching a new high.

1.2 Gross Profit and Gross Margin: ASML achieved a gross profit of 3.793 billion euros in the third quarter of 2024, a year-on-year increase of 9.6%. Specifically, the gross margin for this quarter was 50.8%, slightly lower but in line with market expectations (50.7%). The company expects the gross margin for 2025 to be in the range of 51%-53%, showing a slight recovery but still lower than the company's previous expectations. This is mainly due to the impact of delayed EUV demand.

1.3 Operating Expenses: In the third quarter of 2024, ASML's operating expenses were 1.352 billion euros, a year-on-year increase of 5.7%.

Specifically:

1) Research and Development Expenses: R&D expenses for this quarter were 1.055 billion euros, an increase of 6.4% year-on-year. The R&D expense ratio decreased to 18.1%, returning to a stable level near 18% due to the company's increased revenue.

2) Sales, Management, and Administrative Expenses: Sales and management expenses for this quarter were 297 million euros, an increase of 3.2% year-on-year; the sales management expense ratio was 4%, remaining relatively stable.

1.4 Net Profit: In the third quarter of 2024, ASML's net profit was 2.077 billion euros, a year-on-year increase of 9.7%, exceeding market expectations (1.908 billion euros). The company's quarterly profit returned to over 2 billion, mainly driven by DUV shipments.

Although the performance improved this quarter, the company's order backlog significantly decreased to 2.6 billion euros, far below market expectations (5.4 billion euros). This is mainly due to the slowdown in EUV demand, Intel's reduced capital expenditures, and weak storage demand.

2. Segment Data: Weak EUV Demand Continues

ASML's business consists of system sales revenue and service revenue, with system sales revenue accounting for nearly 80%, being the company's core source of revenue

2.1 Business Performance

1) System Sales Revenue

ASML's system sales revenue reached 5.926 billion euros in the third quarter of 2024, an increase of 11.6% year-on-year. The year-on-year growth in system sales was mainly driven by the increase in shipments of DUV lithography systems.

The company's system sales revenue mainly comes from two areas, EUV and ArFi, which together account for 83%. In terms of shipments: the company shipped 11 EUV systems this quarter, unchanged year-on-year; while the company shipped 38 ArFi systems this quarter, an increase of 6 units year-on-year, making it the main source of growth this quarter. Driven by the growth in ArFi and others, the average selling price of the company's lithography systems this quarter increased to around 51 million euros.

Although the company's revenue is still growing this quarter, there has been a significant decline in backlog orders, falling to 2.6 billion euros. While there is still incremental demand in the AI field, the recovery in other areas remains slow. The slowdown in technological iterations in the logic field has also affected EUV shipments, and the demand in the storage field is starting to weaken.

2) Service Revenue

ASML's service revenue reached 1.541 billion euros in the third quarter of 2024, an increase of 12.9% year-on-year. ASML's service revenue mainly includes projects such as equipment maintenance, with business revenue being relatively more stable compared to system sales.

2.2 Revenue by Region

Revenue from mainland China accounts for nearly 50% of the total, remaining the company's largest customer this quarter. This is mainly due to the increased demand from customers in mainland China for production expansion, leading to continuous orders for products such as ArFi and ArF Dry, resulting in ASML achieving a new high in ArFi revenue this quarter.

Although the company's revenue has rebounded this quarter, there are also significant structural characteristics. Both TSMC and the U.S. region have seen an increase in orders, while revenue from the Korean region has significantly declined this quarter. Overall, Dolphin believes that the performance of the U.S. region's revenue is mainly driven by Intel's orders for EUV (the value of a single High-NA EUV lithography machine is nearly 400 million euros). With the stagnation in storage price increases, the demand for lithography machines in the Korean region (Samsung, SK Hynix) has slowed to a certain extent.