ASML (Minutes): Even if tariffs are imposed, ASML should not be the primary bearer of the burden

ASML released its Q1 2025 financial report (ending March 2025) before the US stock market opened on April 16, 2025, Beijing time:

Below are the minutes from ASML's Q1 2025 earnings call. For financial interpretation, please refer to ASML: Orders Decline "Sounding the Alarm," Will Tariffs Strike Again? - LongPort .

1. $ASML(ASML.US) Core Financial Information Review

1. Q1 Performance

① Revenue: Total revenue for Q1 2025 was €7.7 billion, in line with the company's guidance. Revenue from lithography systems reached €5.7 billion, with EUV sales at €3.2 billion and non-EUV sales at €2.5 billion. The logic chip sector accounted for 58%, while the memory chip sector accounted for 42%. Revenue from equipment services was €2 billion.

② Profit: The gross margin for the quarter was 54%, exceeding guidance, benefiting from installed EUV systems achieving customer production efficiency targets, a favorable EUV product mix, and higher ASPs due to high configurations. R&D expenses were €1.161 billion, and selling, general, and administrative expenses were €281 million, both in line with guidance. Net profit was €2.4 billion, accounting for 30.4% of total revenue, with earnings per share of €6.

③ Cash Flow: Following strong free cash flow in Q4, free cash flow for Q1 was -€475 million, due to changes in customer payment and prepayment dynamics, as well as ongoing investments in fixed assets for future capacity. At the end of Q1, cash, cash equivalents, and short-term investments totaled €9.1 billion.

④ Shareholder Returns: In Q1 2025, the third interim dividend for 2024 was paid at €1.52 per share of common stock. The total dividend for common stock in 2024 was €6.40 per share. During this quarter, the company repurchased approximately €2.7 billion worth of shares.

2. Guidance

① Revenue Guidance: Expected 2025 revenue to be between €30 billion and €35 billion, with 2026 being a growth year.

② Q2 2025 Guidance: Total revenue is expected to be between €7.2 billion and €7.7 billion; revenue from installed equipment management is approximately €2 billion; gross margin is expected to be in the range of 50% - 53%, as the scope, scale, and value chain's ability to absorb tariffs remain unclear, making this range wider than usual; Research and development expenses are approximately €1.1 billion, and sales, general, and administrative expenses are approximately €300 million.**

③ Gross margin: The gross margin in the second half of the year is expected to be lower than in the first half, but the annual gross margin is still expected to remain at 51% - 53%, taking into full account the uncertainties brought by tariffs.

3. Market Situation

① The growth of artificial intelligence remains a key driving force for industry growth. If AI demand is strong and customers can increase production capacity to meet demand, it is expected to reach the upper limit of performance expectations; otherwise, it may fall to the lower limit.

② Compared to 2024, the logic chip business is expected to increase revenue due to advancements in process nodes; the revenue of the memory chip business is expected to remain strong; the revenue from installed equipment management is expected to grow due to an increase in the equipment base, improved service levels, increased contributions from EUV, and increased revenue from upgrade services.

II. Detailed Content of ASML's Earnings Call

2.1 Key Information from Executives

1. Technological Progress:

a. Low NA platform (taking NXE:3800E as an example): This quarter, upgrades to the existing systems for a final configuration of 220 wafers per hour were initiated, with continued promotion on installed equipment by the end of the year; all newly delivered systems meet full specifications, and their maturity is sufficient to support mass production. Many logic and memory customers are advancing process nodes through this, and the enhanced productivity helps collaborate with customers to reduce technical costs, creating more opportunities for EUV single exposure, especially benefiting DRAM.

b. High NA platform (taking EXE:5000 and EXE:5200 as examples): At the February SPIA meeting, customers showcased multiple achievements, highlighting key performance and maturity milestones. This technology has advantages in simplifying processes, reducing costs, and shortening cycles, promoting the industry's transition from low NA to high NA. Intel exposed over 30,000 wafers in a single quarter, significantly reducing process steps. In one of Samsung's experiments, cycle time improved by 60%. The last EXE:5000 was delivered in the first quarter of this year, with three customers already, and deliveries of subsequent models EXE:5200 will begin in the second quarter. Customers adopting high NA technology are in three phases: currently in the first phase, customers are introducing systems to R&D facilities to explore value capabilities with the company; the second phase is expected to enter between 2026 and 2027, with trial production preparations for one to two layers; the third phase involves adopting and mass-producing at the most advanced node's critical layers.

2. Market Dynamics: The semiconductor market has seen strong recent growth driven by artificial intelligence, and future AI demand is becoming more stable. However, global economic uncertainties have increased due to tariff discussions. Based on communications with customers, 2025 and 2026 are expected to be growth years, and end-market dynamics will lead to a product mix leaning towards advanced logic chips and DRAM.

3. Future Expectations: Revenue is expected to be between €44 billion and €60 billion by 2030, with a gross margin of 56% - 60%.

2.2 Q&A Q: Are you currently considering flexible pricing to encourage customers to adopt high NA technology more quickly?

A: Generally speaking, single exposure lithography is superior to multiple exposure for customers, as it simplifies processes and reduces costs. With the launch of new lithography systems, we all want to promote customer adoption as soon as possible to achieve single exposure. We are still advancing low NA technology, and the same goes for high NA technology.

The main reason customers do not quickly adopt the new system for single exposure is not the tool price, but rather its maturity. If the maturity is not in place, the technology cost cannot be optimized. High NA technology is far more mature at a similar stage compared to low NA, which is the direction we need to work towards, and it is also a key focus in the second phase. Currently, we are focusing on high NA technology with customers to quickly enhance its maturity. If the maturity is low and we lower the price, it will only complicate matters for customers, as the tools may not be reliable.

Q: You mentioned that low NA EUV single exposure is being adopted more than multiple exposure, especially in the DRAM field. Can you talk about the specific timing? Is it around two years, or will we see such application opportunities sooner?

A: Every time we bring a tool like the 3800E that can optimize technology costs to new customer nodes, it is a good opportunity for promotion. This is a long-term effort, and we have been working hard with customers for some time. Currently, the low NA EUV technology is mature, and production efficiency has improved; the 3800E is 30% faster than the 3600D.

Q: Regarding growth expectations for next year, what should the order booking rate be for this and next quarter? If we reach the expected upper limit in 2025, can we continue to grow in 2026?

A: We will not discuss the growth rate. Based on technology, customer communication, and market demand, despite macro factors affecting us, we still believe we can grow in 2026. It is difficult to specify the required order volume, but we can calculate the current backlog of orders, many of which are related to after 2025. The booking situation for next year looks good, but we still need new orders to ensure growth. The focus for the next quarter will be on this, and given the nature of the orders, we cannot accurately reflect business momentum, so we will not quantify it.

Q: Do you still expect the sales proportion in the Chinese market to be around 20%? Can you talk about the composition of the backlog orders?

A: This year, the proportion of the Chinese market will slightly exceed 25%. Last time we mentioned just over 20%, but now there have been changes in DUV demand. The proportion of the backlog orders from China is roughly still in the range of 20% - 25%.

Q: Regarding tariff issues, how have communications with customers been in the past few weeks? Are customers interested in changing delivery times? How do you consider delivery times in terms of avoiding tariffs through early shipments?

A: After the announcement of tariffs, our business communication with customers has not changed. On one hand, the uncertainties mentioned in the introduction still exist; in the short term, both customers and suppliers are confused, and everyone is exploring the impacts. However, the current communication has not fundamentally changed business planning. On the other hand, it is unrealistic for many customers to act according to suggestions; the key constraint is space, as there needs to be a wafer fab to place the equipment. It is not feasible to speculate on early introduction of system equipment.

Q: You mentioned that the low NA 3800 model has become the main product shipped. How much inventory of the previously manufactured 3600 model remains? How is the sales situation for these devices? Can they be upgraded to production capabilities close to the 3800 model before selling?

A: No need to worry.

Q: The average price of low numerical aperture EUV is about 230 million euros, with a gross margin of about 55%. Is this correct? Previously mentioned equipment upgrades, do they have any one-time or special impacts on average price, gross margin, or related to IBM (services for installed equipment)?

A: The calculation is correct, the average price is approximately 227 million euros. Given that the products include the 3800 model, 3600 model, and various configurations, this price is slightly high. However, looking ahead, the overall average price is expected to decline, and for low numerical aperture lithography machines, it is more appropriate to set the average price at around 220 million euros during modeling.

Regarding the gross margin, the company will not disclose it on a per-product basis. It was previously mentioned that the gross margin of low numerical aperture lithography machines is currently significantly higher than the company's overall gross margin, and this is indeed the case, but specific data will not be disclosed separately for now.

Q: Previously, it was expected that the group's revenue from the Chinese market would account for just over 20%, but now it has risen to slightly over 25%. What is the reason for this? Furthermore, due to the limitations on wafer fab maintenance services, can you provide a rough guide for the revenue related to IBM (services for installed equipment) in China? Please inform us of the plans for this in 2025.

A: Regarding this few percentage points change, it actually involves a change of hundreds of millions of euros, but this falls within the normal range of business dynamics and is not a huge fluctuation. It can be seen that the demand in the Chinese market remains strong, particularly in mainstream business demand. Currently, the demand for mainstream chips in China is robust, meeting domestic consumption needs while also supporting exports, making this demand very resilient, even more so than expectations three to six months ago.

Q: There were reports in mid-quarter that China is close to self-developing EUV lithography tool alternatives. Could you share your latest views on this, particularly regarding scalability and reliability?

A: As for the current situation, there are no substantial new breakthroughs. It is expected that there will still be related reports mentioning China's progress in this field, mainly due to the strong willingness of the Chinese side to showcase results. Essentially, even if some images are displayed, they mostly represent research progress rather than product results. Indeed, generating extreme ultraviolet light and preparing extreme ultraviolet mirrors are not unattainable, but this is far from indicating that mature products are imminent. Therefore, we still believe that China will need many years to successfully develop EUV lithography machines. Moreover, such reports are likely to continue to emerge, as showcasing phased results is common practice.

Q: The speech mentioned that AI demand is stabilizing, and NVIDIA's GTC event indicates that the increase in inference models drives more semiconductor demand. Will this have a positive impact on ASML's long-term market expectations?

A: From the logic chip and memory chip customers, it is understood that demand in this area remains strong. In the past few quarters, the industry has focused heavily on the AI training phase, and now, as development deepens, it is logical to shift more focus to the inference phase. In the long run, the proportion of inference in AI demand will inevitably expand, and the subsequent developments in this regard are worth continuous attention.

Q: Given the impact of tariffs, the gross margin range for the second quarter has been widened. What is the expectation for the entire year? How directly does the gross margin for the whole year get affected by tariffs? What factors were considered in making this annual expectation?

A: Tariff dynamics are variable, making it difficult to provide exact figures. On one hand, the final tariff situation between regions is unclear, especially in the semiconductor field, where the U.S. government is still reviewing, making the scale of tariffs hard to determine. Secondly, even if clarified, how the entire value chain absorbs these tariffs is also a question. We are working closely with all parties to minimize the impact of tariffs on the supply chain, and we believe that after minimizing, the main burden should not fall on ASML, but rather on the next link in the value chain. Currently, there are too many uncertainties, making it impossible to assess the overall impact for the year; the second quarter is short, and we can attempt to incorporate the impact to provide a broad range, but we really cannot provide a figure for the entire year.

Q: There is a viewpoint that diversifying the geographical locations of wafer fabs, such as increasing production in the U.S. and China, will ultimately benefit semiconductor equipment spending (WFE), and the current tariff situation seems to promote this. I would like to understand your latest views on this, including the impact of geographical diversification on business and communication with customers regarding this.

A: I think this viewpoint is partly correct. Globally dispersing wafer fabs will likely increase capacity to ensure wafer output, but there will be efficiency losses in the process, which is evident in semiconductor manufacturing, data center distribution, and other areas, with a clear trend towards ecosystem decentralization. In the long run, this will drive up demand for semiconductors and wafers, as producing wafers in multiple locations naturally increases demand, which is positive. The current uncertainties should not be underestimated, and a comprehensive consideration is necessary; in short, there are both pros and cons.

Q: From the R&D stage of EXE 5000 to the mass production of EXE 5200, what are the key milestones? Can you discuss the output or other related factors?

A: Generally, it is divided into three stages: the first stage, the customer receives the first piece of equipment or tests new technologies using our ASML laboratory equipment, as it is new and involves imaging and performance aspects, the customer needs to verify whether the design meets standards. This stage relies on the R&D equipment EXE:5000, most customers are currently in this stage, so we are pleased when they share results, indicating smooth progress; the second stage involves customers selecting a small number of layers and products to test with the more mature and productive EXE:5200 in early mass production, and we have already begun delivering this equipment; once this stage is completed, and customers confirm the equipment is usable and mature, it will be fully utilized for large-scale manufacturing at future nodes by 2027 or 2028. Although the process is long, it must be so across multiple nodes, and customer progress is currently as such.

Q: Given the key points you mentioned about the February SPIE conference (International Society for Optics and Photonics), it seems that the advanced logic field will be the first adopters of this high-NA technology. So, who will be the second adopters of this technology, the foundries or DRAM?

A: It's hard to say. To be honest, I have mentioned before that the timeline is very close. The customers previously mentioned who can use laboratory equipment include both logic and memory chip customers. Once the equipment matures and costs are controllable, they all have reasons to adopt high numerical aperture technology as soon as possible In the past, it was commonly believed that the logic chip sector would take the lead, but this time the two are hard to distinguish in terms of priority.

Q: I would like to understand the revenue share from China's four major chip manufacturers. Is it declining over time, or has it remained unchanged?

A: Over time, the revenue share from China's four major chip manufacturers has declined. The number of market participants in China has increased (the long-tail effect is more pronounced), but a large portion of the products shipped to China still flows to large enterprises. A significant portion of sales in China still comes from large enterprises.

Q: Currently, the best-performing lithography equipment you provide to China is the 1970i and 1980i models. If you are later restricted to the 1950i or lower, can China manufacture 28-nanometer process chips using multi-exposure technology based on NXE:1950i or NXE:1940i from a technical perspective?

A: Of course. This has already been achieved by other customers in the past. Looking back at history, when some non-Chinese customers were producing 28-nanometer process products, they were basically using the mentioned equipment. This is definitely feasible. Using this equipment can even achieve finer process technology.

Q: Regarding backlog orders, can you disclose the proportion of orders priced at factory price, as well as the proportion of orders for which ASML bears customs duties, shipping costs, etc., in the backlog?

A: Generally speaking, the situation varies by country. The key is to look at the contractual agreements with customers; customs costs may be passed on to them. As mentioned before, customs costs should not be borne solely by us but should be fairly distributed within the value chain.

Q: You just mentioned EXE:5200, which ASML has begun to deliver. I would like to ask if this equipment will go into production in 2025, or is it only the EXE:5000 that will be put into production this year with high NA technology?

A: We expect that the EXE:5200 will also go into mass production this year. We have indicated that we expect to have 5 units of equipment achieving acceptance revenue this year. Last year, we had 2 units achieving acceptance revenue. And as you know, we have delivered a total of 5 units to customers — 5 units of the 5000 series equipment. So this indicates that among the 5 units we expect to achieve acceptance revenue this year, the 5200 model is also included.

Q: Geopolitical uncertainty is high, but in the first quarter, NVIDIA will surpass Apple to become TSMC's number one customer, which is an important milestone for high-performance computing surpassing the mobile sector. In this context, I would like to understand your outlook for 2026 and 2027, as well as the current communication situation with customers.

A: The demand for artificial intelligence is strong, and this has been confirmed by many customers. In the coming years, large-scale investments will be needed in the AI field, and many companies are betting on entering the market; the threshold for changing this investment trend is quite high, and customers have provided similar feedback. Therefore, based on our discussions, the business growth momentum for 2025 and 2026 is strong, primarily due to AI and its development trends. 2027 is still far away, and predicting what AI will be like then is indeed very difficult. However, in the next two to three years, commitments to investment in AI and chip production are very firm.

Q: The key point of the capital market day is the single exposure EUV replacing dual patterning, which was considered somewhat difficult to achieve at the time. However, progress seems to be accelerating. When do you expect this to be realized? I remember you mentioned starting in the DRAM field, and I would like to hear about the developments in the next two years and the overall impact on lithography intensity. Thank you.

A: This change will gradually become apparent. Although the workload is large, every step that improves production efficiency, matures customer equipment, and enhances efficiency is reducing the cost of EUV technology. Single exposure is more customer-friendly in terms of complexity and cycle compared to multiple patterning, and once the costs are balanced, customers are likely to shift. Therefore, it will be gradually promoted. The capital market day has already demonstrated that it is expected that the number of EUV layers will increase at each node for DRAM and logic chips. There are already many multiple graphics in DRAM, so short-term changes are more noticeable, and this process will continue in the coming years.

Q: I would like to know if the uncertainty of tariffs in the first quarter has affected your company's orders?

A: There has been order fluctuation and uneven order acquisition for the past few years. Large orders from customers require multiple approval processes. After placing a large order this quarter, it is unlikely that they will place another or repeat orders next quarter. For example, there was a large influx of orders in the fourth quarter of last year, which affected the order situation in subsequent quarters. This kind of instability is common, so it cannot accurately reflect business momentum; do not judge customers' views on the impact of tariffs on business from the orders.

Q: Regarding the coverage of the midpoint of the target range for 2025, last quarter it was mentioned that EUV has reached the midpoint. What is the expected situation for the significantly increasing EUV (especially outside of China)?

A: In terms of the target midpoint, EUV has met the standard, and DUV is about 90% complete. Considering the order delivery cycle, the current situation is good.

Q: The U.S. encourages the semiconductor manufacturing industry to return, while imposing tariffs on the equipment needed for TSMC to build factories in the U.S., which seems contradictory. I would like to understand ASML's position in Washington and the stance of customers?

A: A few days ago, many products in this industry were exempt from tariffs. However, the U.S. government also stated that it is reviewing the entire ecosystem and studying countermeasures. This complexity has been recognized by all parties, including us, customers, and the U.S. government. That is why they said it would take more time to achieve localization of chip manufacturing while reconciling the contradictions with tariffs. This is the reason for the current delays and the need to review this ecosystem.

Q: To achieve the first phase, you have a considerable backlog of orders. Do you think that the backlog also includes orders for the second phase, and therefore, in reality, new orders will only be truly needed when the production capacity increases in the third phase in 2027 or 2028?

A: High numerical aperture equipment has already received double-digit orders, which is sufficient to cover the first and second phases. Orders for the third phase will only come when customers are confident that the equipment is used for mass production. Before that, we can probably see this a few months in advance.

Q: Do you expect to start receiving third-phase orders for these high NA devices by the end of this year or in the second half of this year?

A: Not too many, or possibly a small amount, but it is still early. Most of us are still in the first phase and are still installing some equipment, which will take more time

Risk Disclosure and Disclaimer for this Article: Dolphin Investment Research Disclaimer and General Disclosure