Lithography Giant ASML First Quarter Orders Below Market Expectations, What Information Is Worth Paying Attention To?

China's large purchase of semiconductor equipment, in addition to the demand from the market, there are also geopolitical considerations driving this development trend.  However, China's advantageous industries such as 5G, Internet of Things, automotive electronics, new energy, and new infrastructure are growing rapidly, and there is also a strong demand for mature chip processes.

Entering 2024, the semiconductor industry as a whole shows a recovery growth trend. However, even under the strong demand for data center and AI technology, the global lithography giant ASML still failed to perform as expected in the overall market in the first quarter of 2024.

On April 17, the Dutch lithography giant ASML disclosed a quarterly report in 2024, achieving net sales of 5.3 billion euros (about 40.8 billion yuan), down 21% year-on-year and down 27% quarter-on-quarter; 

Net income was €1.2bn, down 40 per cent year-on-year and down 40 per cent quarter-on-quarter. Gross profit margin was 51.0%, up 0.4 percentage points year-on-year and down 0.4 percentage points quarter-on-quarter.

In terms of new orders, ASML's new orders in the first quarter of this year amounted to 3.6 billion euros, of which 656 million euros were orders for EUV lithography machines (previous quarter: 5.6 billion euros). 

Compared with the record 9.19 billion euros of orders in the fourth quarter of 2023, its orders in the first quarter of this year fell by more than 60%, far below market expectations of 5.1 billion euros.

 However, ASML is bullish on the market for the second half of 2024

In addition, it is worth mentioning that the Chinese mainland accounted for 49% of ASML's revenue in the first quarter of 2024, and has been ASML's largest sales market for three consecutive quarters.

Global Semiconductor Market Conditions

This indicates that the uncertainty of global market demand has negatively impacted ASML's results.

According to the latest financial data, the main reason for the decline in ASML's revenue in the first quarter is the slowdown in the procurement pace of its important customers, such as TSMC and related companies in South Korea.

 In this context, ASML's net profit has also been significantly affected, with a net profit of 1.224 billion euros in the quarter, a sharp decline of 37.4% compared with the same period last year

At present, EUV and ArFi technology are still the two pillars of ASML's profitability, especially system sales revenue, accounting for more than 70% of the company's total revenue, but due to the slowdown in customer purchases of high-end products such as EUV, 

resulting in a year-on-year decline in the company's overall revenue. The main reason for this situation is that in 2023, TSMC and related companies in South Korea have purchased more equipment, which takes a certain amount of time to digest.

It is worth mentioning that despite the restriction of semiconductor equipment policy in the United States, the Chinese mainland market has become an important source of revenue for ASML. 

ASML's latest financial report shows that in the first quarter of 2024, ASML's revenue from the Chinese mainland accounted for 49%, while the company's previous largest markets, Taiwan and South Korea, accounted for a low proportion, only 6% and 19% respectively. 

 The US chip equipment giant Applied Materials reported that in the first fiscal quarter of 2024, the company's revenue from the Chinese mainland accounted for 45%, while Taiwan accounted for 8% and South Korea accounted for 18%.

 In the fourth quarter of last year, China accounted for 40 per cent of its revenue, compared with 19 per cent from South Korea and 13 per cent from Taiwan, according to Pan Lin, another US semiconductor equipment giant.

  However, China's advantageous industries such as 5G, Internet of Things, automotive electronics, new energy, and new infrastructure are growing rapidly, and there is also a strong demand for mature chip processes.

Despite the weaker than expected first quarter of 2024, ASML's market performance throughout the year was confident. The company expects net sales in 2024 to be essentially flat compared to 2023.

Peter Wennink, President and CEO of ASML, also said: "ASML expects net sales of €5.7 billion to €6.2 billion in the second quarter of 2024, with a gross margin of between 50% and 51%. 

Research and development costs are expected to be approximately 1.07 billion euros and selling and administrative expenses are expected to be approximately 295 million euros.

 As the semiconductor industry continues to recover from the downturn, our full-year outlook for 2024 remains unchanged and we expect a stronger second half than the first. 

"We view 2024 as a year of adjustment, continuing to invest in capacity improvements and technological advancements to prepare for the industry's cyclical turning point."

AI Technology Is Driving The Need For Advanced Packaging Rather Than Lithography Devices In The Short Term

The more "difficult" reality is that the current demand growth in the field of data centers and artificial intelligence has not yet produced a significant pull effect on the sales of lithography systems.

From the perspective of major segments, although the demand for terminal consumer goods such as mobile phones and PCS has rebounded, the overall growth rate is very small, and it is basically in a cyclical downturn.

 Benefiting from the strong demand in the field of data center and AI, NVIDIA, TSMC and other giants have achieved performance growth, but this demand growth has not yet formed a significant pulling effect on upstream industries such as lithography equipment.

On the contrary, the rapid development of artificial intelligence (AI) technology has driven the continued growth of cutting-edge advanced packaging technologies. This is because advanced packaging technologies can meet the computing power, 

latency and higher bandwidth requirements of high-performance computing chips, especially for accelerators training AI models in data centers. For example, Nvidia's H100 "Hopper" 

AI chip significantly improves computing power and efficiency by integrating six HBM chips with Gpus using TSMC's CoWoS advanced packaging technology.

According to Mordor Intelligence, the advanced packaging market size is expected to be $32.64 billion in 2024 and is expected to reach $45 billion by 2029, with a compound annual growth rate of 6.63% over the forecast period (2024-2029).

To meet the growing demand for AI system accelerators, TSMC has committed to double the packaging capacity of CoWoS chips by the end of 2024. In addition, TSMC also plans to build a seventh advanced packaging and testing plant to further expand CoWoS packaging capacity.

As a result, the current sales of ASML lithography systems have not been significantly affected by the growth in demand for data centers and AI, which will also lead to pressure on the stock price in the short term due to poor financial results. 

However, in the long term, as the data center and AI fields continue to develop, their demand for semiconductor capacity will gradually be transmitted to devices such as lithography systems. Asml, as the world's leading supplier of lithography equipment, is expected to benefit from this trend.