ASML Holding NV ADR (ASML.US) conference call for Q3: Expected growth in EUV business, maintaining financial targets for 2030.

Recently, ASML Holding NV ADR (ASML.US) held its 2025 fiscal third quarter earnings call. The company expects that the total net sales for 2026 will not be lower than in 2025. The EUV business is benefiting from demand for advanced DRAM and cutting-edge logic chips, and is expected to see growth. The DUV business, on the other hand, is expected to decline compared to 2025 due to dynamics with Chinese customers. ASML Holding NV ADR stated that positive momentum from AI is expanding to more logic and DRAM customers, with increasing adoption of EUV lithography layers. While the positive news in the AI infrastructure sector may not immediately orders, it cumulatively creates significant potential future opportunities for the company. Furthermore, the company sees opportunities in AI expanding to more logic and DRAM customers, which not only expands the customer base but also provides capacity assurance to meet future market demands, signaling a positive long-term outlook. In terms of capacity, ASML Holding NV ADR has been preparing for growth for several quarters and continues to monitor these dynamics. The company is now well prepared for potentially stronger EUV demand next year and is also planning for long-term capacity, carefully monitoring the market to ensure it can meet demand without any concerns at present. Regarding financial guidance, the company expects total net sales for the full year of 2025 to be around 32.5 billion euros, with a gross margin forecast of approximately 52%. The total net sales for 2026 are expected to be no less than in 2025. The company maintains its financial targets for 2030, with revenue expected to be between 44 and 60 billion euros. The gross margin target is projected to be between 56% and 60%. Q&A: Q: You mentioned that recent "positive news" has reduced uncertainties. Besides the 5 billion euros in orders this quarter, what specific information makes you more confident about demand in 2026? Have you obtained clearer commitments or data regarding customer capacity needs in 2026 (such as the need for lithography layers)? Or is it mainly based on publicly available industry positive news (such as AI demand)? What changed your outlook for the future? A: Firstly, the positive news in the AI infrastructure sector, while not immediately translating into orders, cumulatively creates significant potential future opportunities for us. Secondly, more importantly, we see the opportunities from AI expanding to more logic and DRAM customers, which not only expands our customer base but also provides capacity assurance to meet the massive future market demand. However, it is too early to conclude the specific impact of these factors on the next few years (especially 2026). Q: The Chinese market has been a key driver of growth, but you forecast a significant decline in 2026. Considering the 3-6 month delivery cycle for DUV equipment, it seems that your visibility currently extends only to the first quarter of 2026. Is the prediction of a "significant decline" based on the strong orders in the second half of 2024 and the weak first quarter of 2026, making a conservative forecast? Or do you already have a complete view of the Chinese market demand for the full year of 2026? A: Our visibility for 2026 is currently similar to the same period last year. Regarding the Chinese market, our perspective has always been clear: in the past 2 to 3 years, especially in the last two years, the Chinese market has been at an exceptionally high cycle, with business levels far exceeding normal levels. Based on our current expectations and visibility, we anticipate that the Chinese market will return to a more reasonable level of business in 2026. Q: How do you view the distribution trend for full-year orders or revenue in 2026? What kind of quarterly rhythm can we expect? What does this AI investment mean for 2027? Could you share some preliminary thoughts? A: We have already provided our outlook for 2026, but it is too early to discuss 2027. As for the order rhythm, you will see that orders have been strong in the past two quarters, but orders themselves come in "batches," not linearly distributed. Regarding the positive flow of information in recent months, it does indeed bode well for the mid-term outlook, but it is too early to convert this into specific expectations for 2027. Q: DRAM demand is currently strong. However, from a long-term perspective, there is a view in the market that transitioning from 6F to 4F DRAM architecture is actually unfavorable for EUV, as the number of EUV layers will decrease. Is this viewpoint accurate? A: No. Transitioning from 6F to 4F, we expect that the number of EUV layers will not decrease. In fact, as the 4F roadmap progresses, we expect the number of EUV layers to continue to increase this is a conclusion we have reached after multiple discussions with customers. Furthermore, the 4F structure is more complex and actually requires more lithography mask layers, including more advanced lithography masks, which also benefits advanced DUV. So, in any case, 4F is not bad news for ASML, and we look forward to it. Q: In the updated outlook for 2026, is the more positive outlook mainly due to improvement in the DRAM segment, or is it a balanced contribution from the DRAM and Logic chips side? When you mention "more customers benefiting from AI infrastructure construction," is this mainly referring to DRAM customers? Or does it also include Logic chip customers? A: In reality, this is related to both the DRAM and Logic market. Last quarter, we talked about uncertainties, and now there is a positive flow of information. One factor of uncertainty was the tariff issue, which now has more clarity. The previous ambiguity also prevented customers from knowing exactly what to do and whether to build capacity, and this situation has now decreased. This has led to our latest outlook for 2026. Overall, when we mention the positive news in the frontier areas and the expected growth in EUV next year, it involves both DRAM and advanced Logic aspects. Q: Could you provide more details on the drivers behind the gross margin guidance? I noticed that your gross margin guidance for the December quarter seems somewhat better than implied in the previous quarter. Is this due to tariff-related issues, changes in product mix, or other factors? A: Clearly, the high sales volume is a positive factor from Q3 to Q4. The product mix has multiple influencing factors: we expect 2 EXE systems (High-NA EUV) in Q4, which is a negative factor; but on the other hand, we will also have good Low NA shipments. The upgrade business has slightly improved, as you can see, this business has seen growth. Overall, the median has improved slightly compared to the previous quarter. In general, these are relatively minor changes, but combined they make the median gross margin slightly better than our previous expectations. Q: I would like to delve into the topic mentioned earlier. We have all seen press releases from SK Hynix and Samsung after a visit to Korea, mentioning their intention to produce a total of 900,000 wafers per month of HBM, which is more than double the current HBM capacity. My question is: based on my estimate, there are currently about 30 EUV devices in the DRAM field, although not all are used for HBM, most of them should be. If we believe these numbers (although many believe these numbers are too aggressive, but for the sake of discussion), then HBM alone would require about 65 EUV devices, not to mention the demand from Samsung Foundry, Intel Corporation, and Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR. Q: a) How do you view these numbers? b) By 2030, will your Low NA EUV capacity be sufficient to meet this potential demand? A: We don't want to delve into specific calculations, as we have mentioned it multiple times that we are cautious about how these major announcements will actual production capacity needs. But I want to emphasize once again: the expansion of the customer base is a very important message. Regardless, we agree that the market should not be limited by supply, and this has always been a risk in the logic and DRAM AI chip suppliers, which is driving the expansion of the customer base. As for capacity issues, we have been preparing for growth for several quarters and monitoring these dynamics. Currently, we are aware that there is likely to be stronger demand for EUV next year, and we are well prepared for it. We are also planning for long-term capacity. In short, we are closely monitoring the market to ensure we can meet demand without any concerns at present. Q: Assuming Q4 orders of around 5 billion euros, the backlog orders at the end of 2025 will reach around 30 billion euros. Even after deducting the 15-20 billion euros for High NA equipment, this amount seems much higher than the level of "moderate growth." Is a significant portion of the current backlog orders for delivery after 2026? Is this why you remain cautious about 2026 and do not definitively label it as a year of "strong growth," "high single-digit growth," or "double-digit growth"? A: There is indeed a significant portion of the backlog orders intended for delivery after 2026, so your calculation for 2026 is not entirely accurate. Additionally, orders can always have some forward or delayed situations, making it difficult to make specific predictions for 2026 at this stage. But you are correct that there is already a substantial portion of the backlog orders scheduled for delivery after 2026, with the High NA equipment accounting for a significant portion. Q: As a key supplier in this market, you may become a bottleneck in the industry. Although you do not wish for this and are preparing for growth, considering the significant announcements being made every week, do you feel that the industry chain (whether it's yours or the customers') has enough understanding and preparation? As a key supplier, how do you ensure that the entire market will not face supply restrictions by 2027-2028? A: Firstly, we hope that there is a formula that can precisely convert all these announcements into the impact on us in the coming years, but no one has such a formula. The lessons learned from 2022 were to be prepared and maintain flexibility, as the market can fluctuate. We have done a lot of work in recent years and are well prepared with long-cycle projects like factories. As for specific production equipment, they have shorter lead times, giving us more flexibility. While we cannot answer all questions immediately after announcements, structurally we have improved flexibility. Furthermore, ultimately it is the customers who tell us about their needs, and this is an ongoing dialogue we share with you every quarter. We have been preparing for growth, considering market activities. By January, we will have more information and continue to monitor the market. We are more prepared than a few years ago, especially in investments in long lead-time projects. However, for short lead-time projects, customers need to notify us promptly so we can start the supply chain, recruit staff, etc. We now have more flexibility, but we also need timely communication from customers too ensure that we can increase capacity and improve the supply chain under the existing long-term infrastructure. Q: Do you feel that customers are informing you in a timely manner? Is there enough awareness and communication in the industry chain? A: We are very satisfied with the transparency and honesty in the discussions because over time, it has been very helpful and has helped avoid major surprises. I think communication has indeed improved significantly over the past few years, which is beneficial for them, for us, and for their customers. Q: It has been over 2 quarters since there have been High NA orders. I understand that you are digesting the backlog orders. But does this mean that if orders only come in at the end of next year, there may be several quarters in 2027 or 2028 where High NA revenue is zero? In other words, does the revenue growth curve for High NA show significant fluctuations and instability? A: We are indeed using a substantial backlog of orders for High NA production. As mentioned earlier, these backlog orders cover customer R&D needs (most of which have already been shipped) as well as systems for verification and introduction. The next wave of orders is expected to arrive after verification data comes out and tool maturity is confirmed. In terms of performance, we have essentially achieved milestones. As discussed last quarter, we expect this to likely happen in the second half of next year and beyond. However, we are not just waiting for orders; we will continue to evaluate progress with customers over the next 18 months to assess the prospects of introduction. Just as we have been preparing for EUV growth in recent months, even without clear demand, we are able to prepare through discussions with customers. Q: Can you provide more details about the XT:260 mentioned in your presentation? This includes its specific functionality, machine price, target customer types, main competitors, and market outlook? A: We mentioned this product in the press release and earnings call not because of its high price or value, but because this is ASML's first product to support 3D integration, which is the important news it provides. As we know, in terms of Moore's Law, customers demand us to double transistor density every two years. However, the scaling process of lithography technology has slowed down, leading to the need for more stacking or packaging of transistors. Customers hope that we can provide assistance as they need speed and accuracy, which is exactly what we have developed in our lithography product portfolio. We also mentioned that more related products will be coming soon. What is interesting is the customer interest we are seeing in this product. Technically, it is based on an i-line scanner a technology ASML has been using for many years. However, this time, we have implemented a new optical design that achieves a 4x increase in productivity. The main competitors are other i-line scanner manufacturers, and you should be familiar with who they are. What's more interesting is that there are many customers eager to adopt this technology next year. Due to the excellent technology and significant improvements we have provided, the business returns for this product are much higher than our historical performance on i-line. Q: I know you haven't provided guidance yet and will do so in January. But considering the situations you described reduced business in China, more EUV, and more High NA EUV can we expect an increase in gross margin next year? A: We will provide clearer information in January. But as you correctly pointed out, the product mix is a key driver. Currently, we are shipping mainly immersion lithography machines to China, with very good gross margins. So the business reduction in China will have a dilutive impact in this regard. However, on the other hand, the gross margin for EUV is very strong, especially if we anticipate growth in Low NA EUV, which will be a positive factor. Then there is the issue of the number of High NA tool confirmations, which is still a dilutive factor for the company's overall gross margin, and this is important. Another factor is our expectations for the installation base business. You know that the upgrade business is quite crucial for the gross margin. So all these factorsproduct mix and expectations for the installation base business compositionwill ultimately determine our outlook. These are the primary driving factors. Q: Could you update us on your view for 2026? You mentioned earlier that after entering 2026, some income from upgrades needs to be deducted. What are your thoughts on the installation base business for next year? A: If you look at our guidance for the fourth quarter, you will see that the expectations for the installation base business for this year have actually increased. Initially, we thought the first half of the year would be much stronger than the second half, but now the second half is as strong as the first half. This is because the service business has developed quite well. While the first half may feature more upgrade business, the second half truly benefits from the service business. As you know, the service business is closely related to the development of EUV installation base. With the growth of EUV installation base, the service business continues to grow. This is an important factor, and you can roughly calculate the impact on next year. The next question is the sustainability of the upgrade business. Clearly, even though this means more upgrade business in the first half of this year, the second half did not experience a steep decline. We will update our expectations for 2026 in January. Q: To summarize your more optimistic comments on the development of lithography strength. Can you specify the timeline? To what extent is this a result of GAA transition progress and not other factors? A: There isn't much new compared to the past few quarters. In the logic chip aspect, we have repeatedly mentioned that the GAA transition does not increase EUV layers because customers often change transistors first before moving to more aggressive size reductions, which we expect to happen below the 2nm node. This is very consistent with our previous view. In the DRAM aspect, we have discussed 4F today. Since last year's Capital Markets Day, we have received a lot of confirmations DRAM is very positive about adopting EUV in 6F EFCO (Enhanced Field-Coupled Oxide) technology. So the trend towards more advanced lithography technology development in DRAM is very strong. Q: We have discussed the ambition of AI investments today. But we have also seen news reports about AI chip manufacturers taking a more aggressive approach to future chip targets, which seems different from what people previously believed they would target at relatively leading positions. Could you talk about how these more powerful AI chips at a faster pace will impact ASML over time? A: We also mentioned this point last November that more AI applications will drive more advanced logic and DRAM. This area is still mostly observable, as it has only been 12 months, which is a small part of the node timeline. However, these applications' value can prove the reasonableness of turning to newer nodes due to the speed requirements. But now we see the value of AI and how it is changing how people view the industry. When we look at the industry only driven by mobile devices, there were many doubts about whether the next advanced logic node was meaningful. I think many of these doubts have been dispelled. The scale and climbing speed of the logic chip 2nm node is the first proof. We expect this trend to continue. We have not seen a real acceleration yet, but, as mentioned earlier, the expanding customer base is a very interesting development for the entire market and of course for us. Q: We have seen AI-related headlines, and you have been emphasizing how AI is driving incremental investments. But my impression is that you are also constrained by the increased customer concentration, especially in the logic chip area one customer is making all the forefront investments. This itself brings even greater volatility to your orders, backlog orders, and even quarterly revenue. In other words, while AI is incremental, does it indeed limit your visibility? A: We discussed this issue. I don't think there are any concerns about visibility or sometimes pricing power this was a question we were often asked when there was only one customer. I think the real concern when there's only one customer is: Will we face supply restrictions? Will the market be limited by supply restrictions? Because if there's only one customer, the market size will depend on what the customer can deliver. So that's a bigger concern, and it might be