What is behind ASML's order miss
Bargaining power of the No 1 customer has gone up
Beside the technical error, ASML’s guidance was a big disappointment.
Revenue guidance for 2025 is now EUR 30-35 billion as compared to 30-40 billion earlier
Low NA EUV shipment will now be <50 units in 2025 as compared to expectation of 65-70
Gross margin of 51-53% in 2025 as compared to 54-56% earlier
Net booking of only EUR 2.6 billion (EUV was EUR 1.4bn or 7 units) as compared to expectation of more than EUR 5 billion
A shipment reduction of more than 20 EUV units is shocking for an equipment with lead time of more than a year. In addition, memory customers are increasing their adoption of EUV layers.
It is not China
The sharp decline of China business was what first came to mind. ASML expected China to go back to a more normalised percentage of sales (20%) as it had been in the backlog. China had been more than 40% of sales in the last few quarters, so this implies a decline of 30% yoy in 2025.
China had been one of the key risks for semicap companies given the high contribution to many semicap companies in the downcycle. We can’t expect China to continuously expand capacities at all costs. There are signs that SMIC, Hua Hong and YMTC are no longer expanding capacities as aggressively as they were before. In addition, there had been quite a bit of demand pull-in for fear of further export restriction by the US government.
However, guidance on DUV was not affected much due to the sharp rise in DUV orders from non-China customers.
Samsung and Intel are the culprits
From the press release, it certainly seems that both Samsung and Intel are having much slower capacity ramp as a result of their inferior technology and hence lack of customer.
"While there continue to be strong developments and upside potential in AI, other market segments are taking longer to recover. It now appears the recovery is more gradual than previously expected. This is expected to continue in 2025, which is leading to customer cautiousness.
Regarding Logic, the competitive foundry dynamics have resulted in a slower ramp of new nodes at certain customers, leading to several fab push outs and resulting changes in litho demand timing, in particular EUV. In Memory, we see limited capacity additions, with the focus still on technology transitions supporting the HBM and DDR5 AI-related demand.
This is nothing too surprising for those who have followed the 2 IDMs. 2 months ago, Intel announced that they will reduce gross capex by more than 20% to $25-27 billion in 2024 and $20-23 billion in 2025. Intel had delayed the construction of 2 fabs in Ohio and 2 fabs in Germany by more than 2 years.
Samsung had delayed its Taylor fab from 2024 to 2026 due to poor yield. Samsung’s execution on advanced nodes has lagged even that of Intel. For Samsung’s Galaxy 25, Snapdragon 8 Gen 4 will be adopted instead of the internal Exynos chip. Snapdragon 8 Gen 4 is fabbed at TSMC N3 instead of Samsung. Without a significant internal or external customer, it is no surprise that Samsung has cut its foundry capex massively.
Didier Scemama Excellent. And a follow-up to that would be, how much of the pushout is a reflection of just the end demand being pulled versus maybe several of your customers struggling with process technology and attracting effectively customers to justify the construction of those factories?
Christophe Fouquet Chief Executive Officer I think it's both. So it's a mix of that. I think that we learned the slower recovery first, because I think this affects every single customer. So we are still quite optimistic about AI. I think today without AI, the market would be very sad, if you ask me. But for the rest, I think our customer continues to confirm, that when it comes to [indiscernible], when it comes to PC or when it comes to automotive, the recovery is not what I think anyone had wished for. And that affect, I would say, a large part of our customer on all segments and application.
I think we also indeed mentioned as well some competitive dynamic on logic. I think that also has been express advance in the press in the last 3 months. I think that's not really new for you. And this also contributed to some of the pushout. So I think those 2 things are really the 2 dynamics that have come up in the last few months to a level where our customers basically started to really make, I would say, a decision that were in line with their expectations, both on the total market, but also maybe, in some cases, on the share they may end up having in some of the Logic market.
Source: Q3 2024 Earnings Call
This is further confirmed during the earnings call when Didier Scemama from BofA asked if the pushout is due to demand or customers struggle with technology. ASML CEO said that customers are making decision in line with their expectation “on the share they may end up having in some of the Logic market.”
In its preliminary Q3 preview, Samsung attached an apology letter. We might be seeing Samsung finally comes to term with the horrible state of its foundry process. Samsung could also be cutting some of the EUV orders for DRAM as its 1b nm process is unable to deliver the requirement needed for HBM3e qualification by Nvidia.
TSMC is increasingly becoming a monopoly at the advanced node for Logic
Capex today is capacity and market share in the future. If TSMC does not spent on 2nm capex in 2023, there will not be any 2nm revenue in 2025.
As I have written earlier in an article on Morris Chang’s 3 KPIs, capex today represents maximum potential market share in the future. Even if Intel’s 18A came to fruition, it will have limited market share without the necessary capacity. Customers have to believe that foundry have sufficient capacity for them before they choose to tape-out with the foundry.
Not only is Samsung losing its internal Exynos customer, but it is also increasingly likely that there will be partial outsourcing of Panther Lake tiles to TSMC in 2026 beyond Arrow and Lunar Lake. Panther Lake was supposed to showcase the success of 18A, but capex cut has happened, and Intel has become more active in its engagement with TSMC of late.
This is not TSMC gaining market share in foundry, but foundry gaining shares from the IDM. And at the advanced node, it looks like there is only 1 credible company remaining to drive the roadmap. This is not healthy for the industry in the long-term, but it was always meant to be with the economics of Moore’s Law
What does it mean for ASML if TSMC is increasingly becoming a bigger part of its EUV revenue? We have seen TSMC putting pricing pressure on ASML in its negotiation as TSMC recognised its dominant position in the industry. Lead time at ASML is also no longer as high as it used to be after capacity expansion.
When it comes to flexibility, I think there is some flexibility to the extent that orders would come in, in Q1. I think we'd still probably be able to cater to those orders in 2025. I think we build in sufficient flexibility to create that.
Source: Q3 2024 Earnings Call
In the near term, ASML will still have SK Hynix and Micron as they are ramping up their 1b nm and 1-gamma respectively. However, memory is cyclical in nature, and we are definitely nearer to the end of the semiconductor upcycle than the start of it.
EUV intensity is set to reduce in the next few years
ASML enjoyed higher share of WFE as EUV penetration rose rapidly from N7 to N3. However, the number of EUV layers is set to plateau as architecture changes such as GAA and Backside Power Delivery took place. The additional process steps will benefit mostly deposition and etching companies, especially for ASM International with its ALD and Epitaxy tool. TSMC has eliminated a couple of EUV layers from N3B to N3E. Number of EUV layer will be relatively flat at low 20s for N2 and A16 as TSMC relied on GAA and Super Power Rail respectively.
Eventually, the industry will still have to adopt High NA EUV as it further shrinks the transistor. This will happen nearer to the end of the decade, which is when ASML will start to gain share of WFE again as it did from 2018.