艾司摩爾 (ASML) 2021 Q4 法說會逐字稿

Thank you for standing by. Welcome to the ASML Q4 and Full Year 2021 Financial Results. (Operator Instructions)

I would now like you to turn over to the conference call over to Mr. Skip Miller. Please go ahead, sir.

Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call are ASML's CEO, Peter Wennink; and our CFO, Roger Dassen.

The subject of today's call is ASML's 2021 fourth quarter and full year results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received. This call is also being broadcast live over the Internet at asml.com.

A transcript of management's opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call.

Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the federal securities laws.

These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's press release and presentation found on our website at asml.com and in ASML's annual report on Form 20-F and other documents as filed with the Securities and Exchange Commission.

With that, I'd like to turn the call over to Peter Wennink for a brief introduction.

Thank you, Skip. Welcome, everyone, and thank you for joining us for our fourth quarter and full year 2021 results conference call. Of course, I hope all of you and your families are still healthy and safe.

Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the fourth quarter and the full year 2021 and as well as provide our view of the coming quarters. And Roger will start with a review of our fourth quarter and full year 2021 financial performance with some added comments on our short-term outlook, and I will complete the introduction with some additional comments on the current business environment and on our future business outlook.

Roger, if you will?

Thank you, Peter, and welcome, everyone. I will first review the fourth quarter and full year financial accomplishments and then provide guidance on the first quarter of 2022.

Net sales came in within guidance at EUR 5 billion. The effects of the logistics center startup and supply chain issues communicated during our Q3 results is a bit longer than expected to resolve, affecting some deep UV shipments in Q4.

In order to address our customers' need for additional capacity, we completed an increased number of productivity upgrades in Q4 as a way to provide them with incremental productivity enhancement.

We shipped 12 EUV systems and recognized EUR 1.6 billion of revenue from 11 EUV systems this quarter. Net system sales of EUR 3.5 billion was again more weighted towards Logic at 73% with the remaining 27% from Memory.

Installed Base Management sales for the quarter came in at EUR 1.5 billion, significantly above guidance, primarily due to the software upgrades. As just mentioned, in this strong demand environment, customers continue to use productivity upgrades to increase output of their installed base.

Gross margin for the quarter was 54.2% and was above guidance, primarily driven by higher software productivity upgrades.

On operating expenses, R&D expenses came in at EUR 681 million and SG&A expenses at EUR 203 million, which was slightly above guidance. In Q4, we had other income of EUR 214 million related to the sale of the non-semiconductor businesses of Berliner Glas. Net income in Q4 was EUR 1.8 billion, representing 35.6% of net sales and resulting in an EPS of EUR 4.39.

Turning to the balance sheet. We ended the fourth quarter with cash, cash equivalents and short-term investments at a level of EUR 7.6 billion.

Moving to the order book. Q4 net system bookings came in at EUR 7.1 billion, including EUR 2.6 billion for 0.33 NA EUV systems and 1.55 NA EUV systems and EXE:5000 systems.

Order intake was strong from both deep UV and EUV, largely driven by Logic with 77% of the bookings and Memory accounted for the remaining 23%.

For the full year, net sales grew 33% to EUR 18.6 billion. EUV system sales in 2021 was EUR 6.3 billion, which is a 41% increase from last year. We achieved 50% EUV growth margin systems on the systems in 2021 and continued to improve EUV service margin. Non-EUV system sales in 2021 was EUR 7.4 billion, which is a 26% increase from last year.

On the market segments for 2021. Logic system revenue was EUR 9.6 billion, which is a 30% increase from last year. Memory system revenue was EUR 4.1 billion, which is a 39% increase from last year.

Installed Base Management sales was EUR 5 billion, which is a 35% increase compared to previous year. In 2021, we had total bookings of EUR 26.2 billion, more than 2x increase year-on-year, reflecting customers' strong demand for EUV and deep UV technology.

Our R&D spending increased to EUR 2.5 billion in 2021 as we continue to invest in innovation across our product portfolio. Overall, R&D investments as a percentage of 2021 sales was about 14%. SG&A was about 4% of sales. Net income for the full year was EUR 5.9 billion, 31.6% of net sales, resulting in an EPS of EUR 14.36.

Improvements in working capital contributed to a free cash flow generation of EUR 9.9 billion for 2021, mainly driven by customer down payments following the very significant order intake this year. We continue to invest in support of our road map and planned capacity ramp. Excess cash will be returned as per our policy.

With that, I would like to turn to our expectations for the first quarter of 2022. We expect Q1 total net sales to be between EUR 3.3 billion and EUR 3.5 billion. Lower guidance relative to Q4 is primarily due to a number of so-called fast shipments. These are shipments in the quarter for both EUV and deep UV, that will not complete factory acceptance testing. As we've discussed in prior quarters, fast shipments are in support of customers' desire to bring systems into production as quickly as possible. By skipping some of these testing in our factory, we can shorten the cycle time.

Final testing and formal acceptance then takes place at the customer site at which time we will recognize revenue. The value of the Q1 shipments is expected to be between EUR 5.3 billion and EUR 5.5 billion, which means approximately EUR 3 billion of revenue is expected to be deferred to subsequent quarters.

We expect our Q1 Installed Base Management sales to be around EUR 1.2 billion. Gross margin for Q1 is expected to be around 49%. The lower gross margin quarter-on-quarter is primarily due to the fast shipment impact of delayed revenues and lower upgrade business compared to last quarter. The expected R&D expenses for Q1 are around EUR 760 million, and SG&A is expected to come in at around EUR 210 million.

Our estimated 2022 annualized effective tax rate is expected to be between 15% and 16%. Regarding our capital return, ASML paid total dividends of EUR 1.4 billion in 2021, made up of the 2020 final dividend and the 2021 interim dividend.

ASML intends to declare a total dividend with respect to 2021 of EUR 5.50 per ordinary share. Recognizing the interim dividend of EUR 1.80 per ordinary share paid in November 2021. This leads to a final dividend proposal to the general meeting of EUR 3.70 per ordinary share. Total 2021 dividend is a 100% increase compared to the 2020 dividend. The 2022 Annual General Meeting of Shareholders will take place on April 29, 2022, in Veldhoven.

2021 was a rather exceptional year in terms of share buyback. ASML acquired 14.4 million shares for a total amount of EUR 8.6 billion as part of our current and previous program.

With that, I would like to turn the call back over to Peter.

Thank you, Roger. As Roger has highlighted, we had another record year of both sales and profit. We're seeing unprecedented customer demand across all market segments from both advanced and mature nodes, driving demand across our entire product portfolio.

Looking to 2022, after a lower Q1 revenue due to Q1 fast shipments, as highlighted by Roger, we expect a significant increase in revenue for the remaining quarters. For the full year, we expect a net sales increase of around 20% compared to 2021. And bear in mind that this 20% sales growth does not include revenue from 6 EUV fast shipments in Q4 2022. And if you would take the full shipments value of the 6 EUV fast shipments into account, the growth percentage would have been 25%.

For our EUV business, we still expect to ship around 55 systems of which we expect revenue from 6 systems to be deferred to 2023 due to fast shipments. This translates to an expected EUV system revenue of around EUR 7.8 billion in 2022.

In our deep UV and applications business, we expect growth in both immersion and dry systems, as well as continued demand for metrology and inspection systems. We're also planning fast shipments for some deep UV systems, but we do not expect this to impact our 2022 revenue due to inherently shorter installation times for deep UV. We expect revenue growth of over 20% to non-EUV system revenue.

For the Installed Base Management business, service revenue will continue to scale with the growing installed base of systems. And customers will continue to look at all methods to add wafer capacity. And although we saw upgrades pulled into 2021 to improve wafer output capability at our customers, we expect those type of installed base options to also stay very much in demand this year. We currently expect 2022 installed base revenue to be up around 10% year-on-year.

Looking at the market segments, given the very strong demand situation and our continued push to increase capacity, we see growth in both Logic and Memory in 2022.

In Logic, we've talked for some time now about the digital transformation that is underway as we move to a more connected world. The growing application space and secular growth drivers translated very strong demand for both advanced and mature nodes. With this continued strong demand, we expect Logic system revenue to be up more than 20% year-on-year.

In Memory, we also expect to see continued growth of our business this year. With customer expectations of DRAM bit growth in the high teens this year and lithography tool utilization running at very high levels, customers need to add capacity in addition to planned technology transitions to meet demand. As DRAM customers migrate to more advanced nodes, we also expect to see an interest in EUV demand for Memory. We expect the 2022 Memory system revenue to be up around 25% year-on-year.

With this unprecedented demand exceeding our capacity, we are ramping our output capability to meet the strong demand. Of course, this comes with challenges, and we're even more vulnerable when running at maximum capacity is there is little room for recovery when things don't turn out as planned. And COVID, unfortunately, is now behind us, and it impacts everyone, including the workforce in our industry and in the supply chain.

We also have to work through supply chain challenges of material and component shortages and COVID-related supply chain disruptions. In our workforce, we have hired a significant number of people throughout last year. And although we are currently at our planned workforce FTE numbers, they still need to be trained and brought up to the learning curve.

All of what I just mentioned needs maximum management retention and monitoring, creativity and flexibility of all our partners and stakeholders.

We are working closely with our customers to address these challenges. We're doing fast shipments, skipping some of the testing at factory and completing the final acceptance testing at the customer site, which provides more capacity as quickly as possible. This reduces cycle time in our factory and frees up cabin space in our cleanroom so we can ramp up capacity more quickly. In addition, we continue to provide software upgrades, which will give our customers more capacity.

As I said before, we're doing our utmost to respond as best as we can to external challenges during COVID-related absenteeism and material shortages in our supply chain.

Also, as we reported earlier in January, we had a fire just after the New Year inside a part of our factory in Berlin. The fire was extinguished during the night and fortunately, no persons were injured during this incident. But the fire occurred in a part of one production building on the site in Berlin and the smoke partly impacted an adjacent building. We've been able to resume production in parts of this building already, and the other buildings on the site have not been affected and are fully operational.

The manufacturing of deep UV components have been restarted. And although there was some disruption regarding components for deep UV, we expect to remediate this in such a way that it will not affect our output and revenue plan for deep UV.

And as to EUV, the fire affected part of the production area of the wafer clamp, which is a module in our EUV systems. Based on our current insights, we believe we can manage the consequences of this fire without significant impact on our EUV system output in 2022.

Overall, while it's also a very unfortunate event, we're optimistic about the current situation and are very grateful for the enormous efforts and creativity of our Berlin staff.

On High-NA EUV, we're currently building the first High-NA system in our new cleanroom in Veldhoven. We received an order for an EXE:5000 in Q4, the fifth order in total for the EXE:5000 model, which provides order coverage for planned High-NA shipments in 2024.

In addition, at the beginning of this year, we received the first order for the EXE:5200. EXE:5200 is ASML's next model High-NA system, which we intend to launch in 2024 after the introduction of our first High-NA system. The EXE:5200 will provide the next step for lithography performance and productivity. Demand continues to be extremely strong even to the point where we believe we are also this year falling significantly short of the customer demand.

Looking beyond 2022, global megatrends, we talked about at Investor Day, broadening in the application space and fueling demand for advanced and mature nodes. Growth in semiconductor end markets and increasingly higher lithography intensity, driving demand for our products and services. We, along with our supply chain partners are actively adding and improving significant system build capacity to meet future customer demand. In short, we are even more confident in our long-term growth opportunities.

With that, we'd be happy to take your questions.

Thank you, Roger and Peter. The operator will instruct you momentarily on the protocol for the Q&A session. (Operator Instructions) Operator, can we have your final instructions and then the first question, please.

(Operator Instructions) Our first question comes from Joe Quatrochi with Wells Fargo.

Curious on the DUV side, demand that you're forecasting for 2022 is maybe quite a bit stronger than we had initially anticipated. How do we think about the 20% growth in the context of the capacity that you and your supply chain are adding relative to, I think in the past, you were talking about hopefully trying to build some inventory -- buffer inventory as well this year.

Yes, Joe, it's a good question. And I think it's important to look at the full picture here, including what happened in the last quarter because you might recall that in the last quarter, we were expecting for the full year of deep UV or the non-EUV business, if you want to call it that way, approximately EUR 8.2 billion, that was the expectation we had going into the quarter. And of course, we landed substantially below that. We landed at EUR 7.4 billion. So there was about a EUR 800 million shortfall that we then made up in Q4 with higher EUV sales and higher installed base sales.

So what we're saying now is that, that EUR 800 million, we're now trying to get that into the plant for this year. And we can do that because, of course, that's the material for that production was, in fact, already produced by the supply chain. So we have the material, so now it's a matter for us within our manufacturing plant here in Veldhoven to get that done.

And if you then do the math, right? So we told you last year that we believe we were going to be kind of flat year-on-year for deep UV. That was under the expectation that last year was going to be EUR 8.2 billion. So it's EUR 8.2 billion this year plus the EUR 800 million that you kind of transitioned from last year, that gets you to about the EUR 9 billion that you get to when you add the 20% to last year.

So that's the math. So in fact, it's the transition from the shortfall of EUR 800 million that we had in Q4, we have the supply chain for that. And now it's a matter of us trying to squeeze that into the manufacturing capability here in Veldhoven.

Got it. That's helpful color. And then just as a quick follow-up. On your Memory revenue growth expectations, I think the other expectations for just total Memory WFE is more around flat. So can you help us maybe understand just how much of that is being driven by EUV adoption?

Yes. Well, at least, what we can say on EUV adoption is that about 20%, a little north of that even of the EUV sales that we're going to see this year, system sales will be in Memory. So if you take about EUR 8 billion, a little under EUR 8 billion, if you look at the revenue number for EUV, 20% of that is related to Memory. So that's already a substantial part, I would say, in that number.

Our next question comes from Krish Sankar with Cowen & Company.

I have 2 of them. First one, Roger, for FY '22, I got the revenue guidance on the tax rate. Did you give a gross margin and OpEx guidance for the full year?

We didn't, but I'm happy to talk about it and give you a little bit of flavor as to where we see this land. And frankly, I think we're going to see gross margins for this year a little over the gross margin that we had for the last year. So I would say it's around 53%. That would be my expectation for the year.

And I guess your next question -- your next implied question is going to be, so help me understand that. Of course, we start with a -- it's 52.7% for last year, which we have to recognize is already helped by the very significant software upgrade packages revenue that is in there. And that, as we've said before, is very helpful to the gross margin.

So if you neutralize the very high impact that, that had on the gross margin for last year, I would say for the year, you probably take out about 0.7%. So that gets you to a base -- a normalized base of 52%.

And then there's a few things. First off, the NXE pricing, which is primarily driven by the fact that we only have these in this year in comparison to the mix of last year. That would give you about 1.5%. And then we talked a little bit about the High-NA impact on the gross margin. That's a little bit higher this year than it was last year. I would expect about 0.5% there. So if you do -- if you add it all up, then you get a 53%. Then there's a little bit of a swing factor as to the composition of deep UV in terms of dry versus immersion. At this stage, we expect both of them to grow about 20%. So I would say it's about neutral for the gross margin. But that's the buildup to the 53%.

In terms of OpEx, we've only guided the numbers for Q1, as we typically do, only for the quarter. But I think it's safe to say that the 4% on SG&A and 14% on R&D, I think those assumptions are a safe assumptions for the full year. And then obviously, on the basis of the EUR 22.3 billion, that sort of implied in the 20% year-on-year growth for revenue.

We actually gave you complete P&L.

Roger, you already helped me with my model.

And I just had a quick follow-up for Peter or Roger. The 20% growth in deep UV this year, can you give some color into how much of that you expect DUV memory to grow? And how much your DUV for foundry growth this year? And I think, Roger, you mentioned dry and immersion is roughly split half-half this year. Is that correct?

That is correct. That is what I said. I expect both to go up about -- with the same percentage, about 20%.

And then we gave you the numbers for the increase in Memory and Logic, and I gave you the EUV number for Memory. So frankly, I think that's given you all the building blocks you need to come up with the right number there.

And just to remind you, the Logic will be up more than 20% year-on-year, and Memory up to around 20% year-on-year. So -- and then with the EUV numbers, you can probably figure it out.

Our next question comes from Aleksander Peterc with Societe Generale.

Just very briefly on fast shipments. Do I understand it correctly that this will now become systematic for EUV going forward. And so this would then imply that you take the biggest hit from this kind of new practice in '22? And from '23, the impact should then be negligible as you have only a little more revenue deferred then what you recognized from the previous year, but it then cancels out. Is that a correct way of looking at things?

Yes. Aleksander, I think you see it right. So -- and it's not just for NXE. So we also do this for immersion. So it's the combination of those 2. And at least for this year, this will be the standard practice.

And then if you look at this year, as we mentioned to you, there's about EUR 2 billion that falls into subsequent quarters as a result of this as it relates to Q1. What we're going to do is try and at least try and limit the installation time, both for NXEs and for immersion tools as a result of which the impact by the end of the year should be a lot lower because we try to make the delta between the shipment movement and the acceptance by the customer that made [that more]. And we think we can squeeze out 2 maybe even 3 weeks in the install time in order to get there. So that's what we're driving.

And as a result of that, it is our expectation that the amount at the end of this year, I mean, we referenced the 6 EUV tools, so that would be about EUR 1 billion. So that's what we're trying to work towards. That the spillover, if you like, from the last quarter into the next quarter is going to be only about EUR 1 billion.

That's what we're driving towards. So that means that during the year, we're going to gain, if you like, about EUR 1 billion in the subsequent quarters and are only going to lose for the full year EUR 1 billion into next year.

Whether this will be the standard practice for years to come? We'll just see how this works, if this works well as we anticipate for ourselves and also for the customers, if we can really prove as we've done in last year that we can do this without a quality impact, if you like, in the field, and we are pretty comfortable that we can do that, then I think this will be appreciated by the customer and also leads to efficiency on our end. So then indeed also for subsequent years, this will be the practice. And then indeed, you won't have any impact anymore in the years to come.

Yes. And one small addition to that, this will apply to systems that we have whether it's -- there is a significant enough level of confidence that we don't run into acceptance problems in the field. So let's say, the first type of a new tool probably the first 4 or 5 systems you will probably do the traditional factory acceptance test in Veldhoven just to make sure that if you run into any issue, that there is a big R&D group that can actually help you solve the problem instead of moving that problem to the field.

So I would have completely comply with what Roger said with the exception that on what we call new product introduction, in the first couple of tools, we'll probably do the traditional way, okay.

Our next question comes from C.J. Muse with Evercore.

I guess first question on gross margins. If I take that 53% and what you guided Q1, it looks like you're going to exit the year at roughly 54%. Is that the right number to use? .

And as part of that, that is the low end of your 2025 target model. So I guess, I'd love to hear your thoughts on, what you're going to do here exiting calendar '22 and the confidence that provides to you in terms of your future outlook?

Yes. C.J., so somewhere in the year, indeed, if we want to get to 53% for the full year, and we start with 49% somewhere in the year will have higher percentages. And also, as I mentioned, somewhere in the year, we will gain on the revenue side, right, on the sales side because we lose EUR 2 billion in the first quarter, only EUR 1 billion for the year. So we're somewhat going to gain the [EUR 1 billion]. So -- and of course, those 2 are related. Whether all of that is going to be in Q4? I cannot tell you.

So somewhere in the course of this year, we are going to see an improvement of the gross margin beyond the 53%. But bear with me, it's a little bit too early to already start making predictions on the gross margin for '23.

That's helpful. I guess maybe a bigger picture question for you, regarding visibility. I think this is the highest kind of backlog coverage you've ever had as a company. And I guess, obviously, part of that EUV related and obviously part of it is the supply constraints out there. But just curious, how do you think about that? And I guess, how are you thinking about the capacity you need to add into, I think, you talked about a $1 trillion kind of semiconductor market and the confidence you have today on 2023 revenue growth?

Yes, I think it's a very good number. It's a very good question. I can't give you the exact number. But one thing is for sure that we will ship more systems, deep UV and EUV in 2020 as compared to 2021. And it's my expectation the same thing will happen in 2023.

And as a matter of fact, I also expect that in 2023, our EUV shipments will go over 60 systems. And part of it has to do with the cycle time reduction we talked about, could be through fast shipments and through shortening the installation times. Yes, that will happen.

And also for deep UV, I think we can still squeeze, start squeezing and reducing cycle time in the supply chain, so we can do potentially more systems next year than we do this year.

Having said that, I think we're still in a situation where, and I said it on the video, but also on several occasions today, that the demands for all our technology also specifically deep UVs, so significantly higher than what we can currently make. When we look at our maximum capacity today, I think the demand, which is not, with all respect, the demand which customers would like to give us an order, but they don't because we don't have the capacity, to be around 40% higher than what we can make.

Everything moves out. So what we cannot ship today, we'll move to 2023. So now what we cannot ship in 2023, we'll move to 2024. And that actually means that we need to add capacity beyond what we're currently planning. And that is exactly what we're doing today. I think we had a capacity plan beyond 2023 that we are currently have decided on. But we haven't had this internally, but we haven't gone for that fully yet in the supply chain with our critical suppliers, which we will do this quarter.

So I think we want to be in a situation that, starting 2024, we will be able to meet whatever demand the customers have. I think we are in a situation where on leading-edge immersion and EUV, the customers have nowhere to go. And we don't want to keep pushing excess demand being described as the demand over our maximum capacity to move -- constantly move into the next year.

So this is what we are doing. I already gave you an indication on the EUV for 2023, that will be above 60 because of all the measures that we have taken. But I think we also -- we are -- we have taken internally the decision that we indeed need to increase our capacity beyond that. And that will be something which we will be discussing with you probably, hopefully, when we get early confirmation from our critical suppliers next quarter.

Our next question comes from Sandeep Deshpande with JPMorgan.

I mean my question is actually a sort of follow-up. But when I look at your 2025 guidance, Peter, you've guided to EUR 25 billion to EUR 30 billion in sales. But when you look at your sales over the last 4 -- sorry, your orders over the last 4 quarters and add to that your Installed Base Management, you're already running at a 4-quarter run rate of over EUR 31 billion et cetera. So is the -- well, does the 2025 guidance need to be updated, or do you think that this was a different sort of period we've been in? Or how should we looking at that 2025 guidance of ASML?

Yes. Well, let's do everything in the right order, yes. And that's first, look at the customer demand and the demand curves and have very in-depth discussion, as you know, with our customers on their CapEx plans and their CapEx plans are driven by what they currently see as being short in customer demand, not only for this year and for next year, but longer term.

And I can only remind you of the very, let's say, confident messages that our customers have given over the last few days on how they feel about the strength of the demand. And we can also go into the details why we think the longer-term demand will be higher.

And having said that, on top of that, there's going to be a push by the drive for technological sovereignty, there will be incentives around the globe to actually build that capacity. That comes on top, which I don't think will translate into significant fast capacity anywhere before 2024 and it will be 2024 at the earliest, probably more like 2025, 2026.

Having said that and going back to the previous question, I think this is why we are looking at our maximum capacity for us and in the supply chain. And I gave the answer. I think this is the work that we're doing today. And when we have that confirmed that we can actually do that, then that would be the time also to relook at the guidance and to see whether we should indeed adjust some of the numbers that we gave you a quarter ago.

But that -- in that order, we have to get ourselves comfortable with the demand situation vis-a-vis our customers. We are translating that into a capacity number, which we need to get confirmed with our key supplier scenario, the size and [terms and VDLs] of this world, that needs to be confirmed, and that will leads to construction activities, where you're likely need to read at square meters. And that means if you have that confirmation, we can say, okay, when we have that, looking at the demand situation, what should we do with the 2025 range that we gave you. And when we have concluded that, we will come back to you with that information.

Just one quick follow-up on. I mean, you've indicated in your recent release that you've got a new e-beam tool shipping. Is this e-beam business now going to become much more significant in the next few years as these new tools shipped? Because I mean, clearly, your lithography business has flourished massively, but your e-beam business has been slower to take off. So can you make any comments on that? .

Yes. I think the fact that I think the 5x5 beam the inspection tool the 1100, I mean, this is definitely a tool -- actually, I think it's been packed today. So that will ship. We have high expectations of it. It looks good as when we ship to our first customer. And yes, when we get the qualification of that tool, I believe that's going to be a driver for higher sales numbers for our e-beam business. Next to the fact that our single beam business will stay also strong.

Our next question comes from Francois Bouvignies with UBS.

Francois, if your phone is on mute, please unmute, so you may ask your question.

Can you hear me now?

Yes, I can hear you.

Yes. Yes. Sorry about that. So my question actually was on High-NA. And the release you did with Intel. And you disclosed 4 orders back in '18. Now you had an order last quarter, you were discussing another one with Intel today. .

And in addition, you changed your disclosure of the net bookings, including High-NA now. So my question is should -- what should we expect going forward in terms of High-NA in terms of activity? Should we see more and more High-NA going forward in the following quarters?

And coming back to your 2025 guidance, with 5 (inaudible) of High-NA, you have 65, if I count correctly in your backlog now, so how should we think about this moving part and your forecast out of 2025?

Yes. I think on the 2025 number, we also said in my introductory comments that the EXE:5000, which is the R&D tool, which is the development tool. So there's 5 of it that will be shipped starting in 2022 through 2024. So in 2025, it's the High-NA tool. It's the one that we that's a 5200, that's the one that we received the first order for this quarter, the first quarter of 2022.

I think yes, so you will expect or you may expect. But given the long lead times of these tools, there is going to be more order activity for the High-NA 5200 going forward. I would expect that. But that's driven by indeed the shipment plan 2025.

Now, I think it was Sandeep that asked the question on the 2025 model. I think that this is not a time to piecemeal and give you that 2025 model, but we'll come back to that. But I think High-NA is not so much connected in 2025 to, let's say, the size of the industry and the demand in the industry. It's really technology transition.

So the way it looks now, I think we're still pretty solid on the plan. I think we -- and I think we said it in the last quarter, with the big evolutionary step from Low-NA to High-NA was the optics. Basically, bigger optics, very significant challenges in measuring the mirrors, and we succeeded. It was a success. It is a success, so we can execute. And this is what we are doing now.

I mean if you go to the Veldhoven factory now, you would see this massive tool. I mean we showed during the press conference that kind of a picture of some of our engineers, the production engineers in front of to frame. Now you can just see the size of the thing we're executing.

And I think receiving the first order for 5200, which is going to have, let's say, new standards, setting new standards for lithographic performance in terms of imaging and overlay, it also sets a new standards for productivity. So like Roger said at the press conference, this is the tool that will go for a price very significantly over EUR 300 million.

First of all, one additional comment on the 5 as we also said at the Investor Day, the reason we have 5 there is not because of shipments because I expect more shipments in 2025 than 5. The reason we said in all scenario is 5 is because of revenue recognition because this is an entirely new product. And therefore, it's hard to predict at this point in time how the installation is going to happen. How the testing is going to pan out, et cetera, et cetera. So that's why we said very conservatively, just put 5 into any model. So it's not related to volume or shipments. It's just a pretty conservative estimate that might take a bit longer before these are actually recognized with reference. So that's why we put in 5.

That's very clear. And maybe just a quick follow-up on the supply constraint, which was a highlight last quarter, I believe, and you don't talk too much about supply concern anymore. So should we read that it's improving and you see the risk less important now? I mean how should we think about the supply constraints that you had last quarter? And how is it now?

Yes, I think it hasn't eased. The fact is, if life is tough, you just adjust to it. I mean, and that's what we're doing. So basically, it's a fact of life, and it's a daily battle of our sourcing people to make sure that we get guarantees on supply -- in the supply chain because we don't buy those components. Those components are being bought by our suppliers. But what we do, we actually consolidate the shortages, which is especially components, microchips from different layers in the supply chain. .

So we actually consolidated and we bring it into what we call a [scarcity] center. And then we classify those components by semiconductor manufacturer. And then we get on the phone with them and then say, "Can you help us, you really can help us by what's on stock giving it to us or helping us through -- manage that through the broker system or the distributor system or making sure that those particular chips get somewhere" and it's not many. I mean, it's a few hundred to a few thousand of a certain type because we don't make that many systems.

And that's how we manage this. And we're able to do this day by day by day. But I don't think the situation has gotten any better. It's just that we got better at managing it.

Our next question comes from Didier Scemama with Bank of America.

I just wanted to check or double check a couple of things on EUV for next year. So can you talk a little bit about what your capacity will be for Low-NA and High-NA? And then what do you think could be the shipment number for '23 versus the revenue, at least the unit? So because obviously you've got 6 units shifting from '22 to '23. So if you can help me understand that. And I've got a quick follow-up for Roger on the cash flow.

Didier, on the -- what we expect for 2023, as Peter pointed out, we are working on a capacity over 60 for next year. So that's on Low-NA. We would get the benefit of the 6 going from '22 into '23. Frankly, we would also, if we continue to do a fast ship have a few systems go from '23 into '24.

So if we're able to continue to drive down installation time, we might gain 1, maybe 2 systems. But net-net, I think for next year, you should expect output in revenue to more and more be at the same level. So I think the over 60 in terms of capacity that Peter referenced, I think, is probably the number to look at.

In terms of High-NA, it's going to be very, very small, right, into 2023 because we expect to have the first shipment of the key modules in -- at the end of 2023. But I wouldn't hold my breath whether that leads to revenue recognition in '23.

Understood, very clear, Roger. So on the cash flow, you had a sort of an exceptional working cap in Q4 and amazing free cash for the full year. I just wondered if you could help us understand effectively what's your free cash flow expectation for fiscal year '22 and when do you think the working cap normalizes in your cash flow statement roughly, is it first half, second half, Roger, that would be helpful.

Yes. So you're right. So I think last year was a pretty spectacular year from a cash flow perspective. We had net income of EUR 5.9 million and free cash flow of [EUR 9.9 million]. So that's a pretty good significant conversion rate. But that was exceptional. I think it was exceptional, primarily driven by the huge order intake that we had this year and the huge contingent of EUV, and that's a primary source of down payments in there. .

But I would expect for this year to more and more neutralize that. So we're never guiding free cash flow, but I would say, to have an expectation that in a steady state, we're going to look at somewhere around 100% or a little bit below that because we're still growing, I think it's probably a safe assumption for the free cash flow development in the years to come.

Yes, you mean 100% cash conversion rate?

Cash conversion rate, exactly. Yes.

Our next question comes from Amit Harchandani with Citi. .

Amit Harchandani from Citi. Two questions, if I may. My first question, Peter, goes back to the comments you have made about assessing your capacity and supply. As ASML continues to get bigger, obviously, there's this whole talk about geopolitics in the background. How are you strategically thinking about bringing this capacity online? Are you going to pursue the way you have? Are you looking at doing more vertical integration? Is it more regional diversification? Just trying to get a sense of how you're looking at it, in terms of strategically adding capacity as you look to build for the next 5 to 10 years. And I have a follow-up.

Yes, I think, if you have been at our supervisory board meeting. I mean, this is, of course, the question that we are addressing not only asking ourselves because we already did that, but we're addressing these questions.

I think vertical integration, to answer that question, I don't think that is something which we -- I would say, we try to avoid it. Sometimes we are forced to it. I mean, based on the Berliner Glas, vertical integration, we actually acquired a supplier. But that had some very clear reasons. I mean they had to do with succession planning at the supply, but also that the technology at that particular supply became more and more critical for the performance of the system. So it's not an active -- it is more, you could say that is more a reactive way of looking at growth.

Geographical, clearly, but it's -- but geographical and especially against the background of the geopolitical discussions that are ongoing, of course, is something which is highly sensitive. So -- but yes, we actually look at if we need to build capacity, what's the best place to go to test? What are the best conditions to add capacity, which is a number of issues that we will look at. It has to do with the availability of suppliers that can help us, workforce talent.

Are we going somewhere where we know we will be heavily competing for workforce talent with some other major players or you could say, giants, that would, of course, put you into more difficult situation. It is incentives that can be provided by governments. I mean -- and that includes the -- where we currently have our manufacturing locations, but also we are looking at areas where we might not have significant manufacturing, but we could.

So I think these are all things that we are looking at. It's too early to give you a finite answer. And I think when we come to the conclusion that we need to go public, we will go public. But these are all the things that we are discussing right now in the company, in the management board and with the supervisory board, because you are right, we need to add significant capacity. I mean, this is not 5% to 10% extra.

And as an unrelated follow-up, you've talked about demand being unprecedented and significantly higher than capacity. Of course, you put forth your simulation scenarios at the CMD last year. In terms of trying to manage against the risk of over-ordering, double ordering, what are you doing in terms of the check discussion with your customers? We know the secular trends are positive and the industry will remain cyclical. But what are you doing from your side to minimize, if I may call it, the potential risk of oversupply once this capacity all comes online?

Yes. One major thing is that our build capacity, I mean, still, when you look at our cost of sales, and Roger can comment on that. The vast majority of our cost of sales is what we buy. So I think for ASML to add -- build capacity is the minority of our cost of sales. Because we're basically outsourcing, which is one of the reasons why we are not actively pursuing vertical integration. We actually love the fact that we have suppliers that are better at what they do than what we do.

So having said that, we are not afraid of investing in capacity nor is our supply chain, which is most of our critical suppliers are either like size or exactly the same position as we have and some other supplies are more diversified. So they are able to grow.

But it's -- you are right. There is always this risk of looking at where we are today, listening to the CapEx expansion plans of our major customers in Asia and in the U.S., looking at the geopolitical situation and striving for more technological sovereignty, not complete, but more with incentive programs means that yes, we will add capacity.

Now we can have -- look at our simulation model and looking at industry analysts, we have been blatantly wrong. So we can do this again or we can say, now let's look forward. Let's have a longer-term view. I do believe, and I think we're not the only one also our customers that -- the compound annual growth numbers for the semiconductor industry will lead to $1 trillion business by the end of the decade. We're over $500 billion now, which means that $500 billion was created in 40 years' time. So we have less than 10 years to just double it again. So I think we will need that capacity, yes?

Now, your question is, will this create temporary overcapacity? And it could very well be. These fabs are big, they're humongous. It's all about scale. So yes, when everything is timed in the same couple of years, you probably see overcapacity. But structurally and longer term, we need that capacity. So I'm not that concerned, yes? We should do it.

And my last reason why I think we should do it is. On some of these technologies, we are unfortunately, for the industry, the sole source of supply. I don't want to be in a situation as I said it before, that we have to keep pushing the over demand from one year to the other. We have to create a situation where we pay responsibility together with our customers that we can supply what the market needs. And that could indeed mean that there is potential, a bit of overcapacity. Given the fact that we're very bad at predicting the growth rate of this industry, I'm okay with that. But that's perhaps as an answer of an old man.

Our next question comes from Stephane Houri with ODDO BHF.

Yes. I just want you have more color maybe on your Chinese (technical difficulty). What's the size of your China? What was the growth for the last quarter? And what (technical difficulty)

When you talk about the China business. I guess China domestic business, I think that's what you're focused on it. And then if you look at the China domestic business, last year, 2021, it was about EUR 1.8 billion. And our expectation is that this will grow at the same pace of company growth. So it will grow about 20% for this year, which in the supply constraint environment is exactly what you would expect in China would grow exactly at the same pace as the other deep UV business would be growing successfully. So EUR 1.8 billion last year, expected to grow to approximately EUR 2.1 billion this year.

And a follow-up, quickly about the service margin of EUV. I think you said that was improving. Where do you think it will get to corporate level? Are we still talking about 3 years?

Yes. So last year, it was about 30%. We expect it to get to about 40% this year. And then I think it will take until '25-ish time frame, I think, until you really get it to corporate level.

So I think we've made major steps in that becoming more efficient, obviously, we also demand to machine hour very much improving simply because of the sale of EUV. But ultimately, that's the trajectory that we're on.

So from this point onwards, the steps are going to be a lot smaller. But in 2025, I think we'll get it to approximately corporate [gross margin].

All right. We have time for one last question. If you were unable to get through on this call and still have questions, please feel free to contact ASML Investor Relations department with your question. Operator, may we have the last caller, please?

So for our last question, we have Jerome Ramel with BNP Paribas.

Maybe a last question for Roger to come back to the free cash flow in Q4. Just on the short-term liabilities, it increased by EUR 3 billion (inaudible) double over Q4 last year. Is it purely the account payables? And so can you give us a number of Q4 compared to Q4 last year?

No, no, it's not the account payable. That would be a bit rough to our supply chain, right? So that's not what it is. It is primarily -- it really is a down payment. So it's down payments on new orders, orders for '21 and even beyond that point. That's what it consists of.

Again, we were looking at an order intake this year of EUR 26 billion. And that's really what it is. I mean you're looking at the end of this year. At the end of '21, you're looking at EUR 8.5 billion of down payments and a significant part of that came in Q4.

For which we're going to spend that money on building the machines and investing within this year. I mean, we don't get that money from nothing. Yes.

Would it be fair to assume that most of the down payment has been done and that will gradually, as you say, normalize in the course of 2022?

Yes, exactly. So that's why I say this is a very special year, why because we get all these down payments. Next year, you will still get down payments, but you would also do shipments where you only get -- you only get a percentage because you already received the down payments in the year and the year before. And that's why I said that you will see cash conversion get to 100%, frankly, below 100% because of the -- because of the fact that this is still a growing company.

So that's why I think in the longer term, you would see cash conversion drop below the 100 percentage point.

All right. Now on behalf of ASML, I'd like to thank you all for joining us today. Operator, if you could formally conclude the call, I would appreciate it. Thank you.

This now concludes the ASML 2021 Fourth Quarter and Full Year Financial Results Conference Call. Thank you all for participating. You may now disconnect your lines.