ASML, a crucial player in the semiconductor industry, recently participated in the Goldman Sachs Communacopia + Technology Conference. Skip Miller, ASML's Vice President of Investor Relations, provided valuable insights into the company's current position, future outlook, and the broader semiconductor landscape. Let's dive into the key takeaways from this enlightening discussion.
Current Market Dynamics and Recovery Trends
The semiconductor industry has been navigating a complex landscape, with varying recovery rates across different segments. Miller offered a nuanced perspective on the current state of the market:
"The recovery so far this year and the growth this year has been primarily AI related. I think that's definitely the case, both the Logic and the Memory. Come back a bit on that more of the different market segments. But in terms of the other more traditional PC, smartphone, auto industrial, a bit slower to recover."
This observation highlights the uneven nature of the industry's recovery. While AI-related demand has been a strong driver, traditional segments like PCs, smartphones, and automotive are lagging. However, there are positive indicators:
"I think there's clear indicators with inventory levels coming down. Litho tool utilization going up to give you some confidence that you're seeing the recovery. It's just, I think, a discussion now on what's the slope, what's the slope of that recovery as we go through the second half of this year and into next."
The key question now seems to be not if a recovery is happening, but rather how quickly it will unfold across different segments.
Logic and Memory Market Outlook
ASML's perspective on the Logic and Memory markets provides crucial insights for understanding the industry's trajectory:
Logic Market
"Logic would be likely lower this year relative to 2023 as the industry digests a lot of the capacity that was put in place last year."
This suggests a temporary slowdown in Logic as the market absorbs the significant capacity additions from the previous year. However, the outlook remains positive, especially with the upcoming transition to more advanced nodes:
"I think if you look forward, obviously, there's opportunity there, both in the Logic and Memory space with the move to 2-nanometer as you look forward in terms of more advanced technology, again, for high-performance compute."
Memory Market
The Memory segment appears to be in a stronger position this year:
"Memory, we saw it being higher this year. That's primarily a technology-related -- we call it, technology node transitions. And what we mean by that is that we saw a lot more of the capacity shifting to the higher end, the more advanced nodes, and that was in support, primarily, of the HBM-related demand, high-bandwidth memory, in support of some of these AI advanced applications."
The shift towards advanced nodes, particularly driven by AI-related demand for high-bandwidth memory, is a significant trend to watch in the Memory market.
The AI Factor: Impact and Sustainability
Artificial Intelligence has emerged as a major driver in the semiconductor industry. Miller provided valuable context on ASML's perspective:
"AI, it's not like it's a new thing that popped up. I think we've had AI in our different, call it, long-term trends and secular trends we've been talking about for a number of years now. So it's not like AI is totally new. However, I would say that we're now seeing this year really AI starting to take off."
This suggests that while AI has been on ASML's radar for some time, its impact is now becoming more tangible. The potential reach of AI across various industries is particularly noteworthy:
"I think maybe a number of years ago, we thought it was just this thing that happened more in the server space or in the cloud, but now you see it moving actually to the different end devices, and that's creating a significant opportunity. I would say also that it's just starting, and you don't really -- there's -- likely you'll see AI touching across all industries, which will be quite significant demand and so great opportunity going forward."
This widespread adoption of AI across different sectors and devices could drive sustained demand for advanced semiconductor technologies.
China: Navigating Complexities
The discussion around China focused on several key areas, including regulatory changes, service revenue exposure, and overall market dynamics.
Regulatory Environment
Recent changes in Dutch regulations have raised questions about ASML's operations in China. Miller clarified:
"The comments made last week -- or the changes made last week, there was no fundamental change in the restrictions, meaning that we can still ship 1980s to our Chinese customers. It does require a license. The difference being a technical process change and that the approval comes to the Dutch government."
This suggests that while there are procedural changes, ASML's core ability to serve the Chinese market remains largely intact.
Service Revenue Exposure
Addressing concerns about ASML's exposure to China in terms of service revenue, Miller provided some context:
"I think if you look at domestic China, it's around 2% of our revenue last year, and that's for all of China."
This relatively low percentage indicates that while China is an important market, ASML's overall revenue is not overly dependent on Chinese service contracts.
Market Dynamics and Future Outlook
Miller offered insights into the broader dynamics of the Chinese semiconductor market:
"China is a big part of that. They're building a lot of new fabs in China that supports that, with their end goal, obviously, to be more self-sufficient as they build this technology, which is the bulk of what's being built in China today, which is the mainstream technology."
He also noted the varying levels of maturity among Chinese customers:
"There are, you could say, a handful or so that are more mature customer. And then you have a lot that are in the process of not only establishing themselves as a customer but establishing a technology and learning how to ramp these fabs."
This diversity in customer maturity suggests potential for continued growth as less mature customers develop their capabilities.
High-NA EUV: The Next Frontier
High-NA (High Numerical Aperture) EUV technology represents a significant advancement in semiconductor manufacturing. Miller addressed several key aspects of this technology:
Value Proposition
Despite concerns about the cost of High-NA systems, Miller emphasized their value:
"The value that High-NA provides is that instead of having to go to a multi-pattern or double-patterning technology where it takes 2 exposures to complete one layer, you can do it all in one. And that reduction in process complexity will improve things like yield, better chip, better die, a number of good chips on a wafer, will help with cycle time."
This improvement in efficiency and yield is crucial for justifying the investment in High-NA technology.
Timeline and Customer Adoption
Miller provided insights into the expected timeline for High-NA adoption:
"We're -- our first shipment, we started at the end of last year. And those systems will end up at customer sites, and they will be qualified that will allow customers to start learning. But in the meantime, we have a machine in Veldhoven. That is a Imec-ASML joint lab system that will allow customers to go and run wafers their own designs on the machine in Veldhoven so they can do some early learning as they wait to bring their systems into their fab."
This approach of providing early access and learning opportunities could help accelerate adoption among customers.
Economic Impact of Potential Delays
Addressing concerns about potential delays in High-NA adoption, Miller offered a reassuring perspective:
"So from a financial perspective, it's not a bad thing from our perspective. But we're always looking at what's the most cost-effective and what's the best way to drive cost per transistor down. And we think in the end, you'll find that the solution that offers the least complex process and the highest yield possible and the lowest cycle time possible, therefore, the lowest cost will be the winner in the end."
This suggests that even if there are short-term delays, the long-term value proposition of High-NA technology remains strong.
2025 Outlook and Beyond
ASML has previously provided a revenue forecast range of €30 billion to €40 billion for 2025. Miller offered insights into the factors that will influence where within this range ASML might land:
"The 2025 scenarios that Alex is referring to, we communicated in 2022 between EUR 30 billion and EUR 40 billion. Obviously, the end market being the big driver between how will the markets be in '25, whether you go to the higher or the low end. And what we've said is that we still see that's the range."
He highlighted three key factors that support this range:
- Secular growth drivers: "The secular growth drivers that we were talking about, AI, for example, we've been talking about for a number of years. Those are still very much intact."
- Cyclical recovery: "Where are you in the cycle? And I think our view coming into this year is that we would be clearly in the up -- going in the upward part of the cycle. But some question on what's the slope."
- Fab availability: "Will there be fabs available to take our systems? And I think that's very much on track, and still fabs are being built both with the -- globally with the support of government but also without across the globe in many different locations."
Looking beyond 2025, Miller cautiously suggested that these factors could support continued growth:
"I think if you look at what I just said, the 3 things, which are the secular drivers being very much intact, there's no reason to believe that would be a 1-year event. I think the cycle, if you look at our history, having a 1-year or less cycle would be very rare, meaning it's a multi-cycle event."
Key Takeaways and Implications
- AI-Driven Demand: The surge in AI-related applications is creating significant demand for advanced semiconductor technologies. This trend is likely to continue and expand across various industries, potentially driving sustained growth for companies like ASML.
- Uneven Recovery: While AI-related segments are showing strong growth, traditional markets like PCs and smartphones are recovering more slowly. This uneven recovery could create both challenges and opportunities for semiconductor companies and their suppliers.
- China Strategy: Despite regulatory complexities, China remains an important market for ASML, particularly in mainstream technologies. The company's ability to navigate these challenges while maintaining access to the Chinese market will be crucial.
- High-NA EUV Potential: High-NA technology represents a significant advancement in semiconductor manufacturing. Its successful adoption could drive the next wave of performance improvements and cost reductions in the industry.
- Long-Term Growth Outlook: ASML's confidence in its 2025 revenue target range, supported by secular trends, cyclical recovery, and fab expansions, suggests a positive long-term outlook for the company and potentially the broader semiconductor industry.
- Capacity Management: The industry's ability to balance capacity additions with demand fluctuations will be critical. ASML's insights into fab buildouts and customer plans provide valuable context for understanding potential supply-demand dynamics.
- Technology Transitions: The ongoing shift to more advanced nodes, both in Logic and Memory, is driving demand for ASML's most advanced tools. The success of these transitions, particularly in areas like gate-all-around technology, could have significant implications for future semiconductor performance and economics.
In conclusion, ASML's discussion at the Goldman Sachs conference provides a nuanced view of the semiconductor industry's current state and future prospects. While challenges remain, particularly in terms of recovery rates in traditional markets and navigating geopolitical complexities, the overall outlook appears positive. The combination of AI-driven demand, ongoing technology transitions, and the potential of High-NA EUV technology suggests that companies well-positioned in these areas could see significant opportunities in the coming years. As always, careful monitoring of market dynamics, technology adoption rates, and geopolitical factors will be crucial for anyone closely following the semiconductor industry.
