EUR 850.00 For Business Accounts Only

Morningstar | Feeble Near-Term Outlook for ASML Appears Transitory as EUV Set to Be Deployed

ASML reported fourth-quarter results that were slightly below our expectations, primarily due to lower demand from memory customers for lithography equipment. This issue is expected to persist through the first half of 2019, with management noting that sales during this period will be lower than the second half of 2018. Positively, ASML’s logic and foundry system sales should be up over 50% versus memory down 20% in 2019, which is consistent with our broader outlook for wafer fab equipment spending during the year. Despite a fire at one of ASML’s suppliers that will negatively affect first-quarter sales by EUR 300 million (to be mostly recovered in the second quarter), the firm is on track to ship 30 extreme ultraviolet lithography tools in 2019. We are maintaining our $160 fair value estimate and narrow moat rating, and view shares as fairly valued at current levels.

Fourth-quarter revenue was EUR 3.14 billion, up 23% year over year and 13% sequentially. Equipment revenue came in at EUR 2.42 billion, up 24% over the prior year, with EUV tools representing 24% of system sales. Memory revenue fell 20% sequentially, as customers swiftly react to weaker market conditions in both DRAM and NAND. Although this will negatively affect WFE firms in the short term, we believe this weakness is healthy for the overall space as it shows prudence in managing capacity additions. Gross margins for the quarter were 44.3%, down 380 basis points sequentially primarily due to legal settlement with Nikon over alleged patent infringements.

For 2018, ASML enjoyed top-line growth of 21%, with equipment sales up 30% and service revenue flat. Equipment revenue growth was led by memory customers. The firm shipped 18 EUV tools and recorded total EUV sales at nearly EUR 1.9 billion. Management expects first-quarter sales to be EUR 2.1 billion, with EUV revenue at EUR 300 million. This implies a 33% sequential decline, mostly due to the fire at a supplier and memory weakness. Gross margins for the first quarter will be 40%, negatively affected by lower volume, a less-favorable product mix (with more EUV tools), and service-related costs for EUV tools. ASML should begin recognizing EUV service revenue as 2019 progresses because of customers deploying EUV tools for production (likely TSMC and Samsung in the foundry setting). Ultimately, gross margins should be around 50% by the end of 2019, management said.