Welcome to the ASML 2022 Third Quarter Financial Results Conference Call on October 19, 2022. Throughout today’s introduction, all participants will be in listen-only mode. After ASML’s introduction, there will be an opportunity to ask questions. [Operator Instructions] I would now like to turn 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 2022 third quarter 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 the 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. Thank you for joining us for our third quarter 2022 results conference call. And before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the third quarter 2022 results and as well provide our view of the coming quarters.

Roger will start with a review of our third quarter 2022 financial performance, with some added comments on our short-term outlook and I will complete the introduction, some additional comments on the current business environment and our future business outlook.

Roger, if you would?.

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

Net sales came in at €5.8 billion above our guidance, due to faster completion of installations, triggering earlier revenue recognition, a release of deferred income on a factory option which has now been accepted at customer sites, as well as higher installed base business.

We shipped 13 EUV systems and recognized €2.2 billion revenue from 12 systems this quarter. Net system sales of €4.3 billion, which was again driven by Logic at 68% and the remaining 32% from Memory. Installed Base Management sales for the quarter came in at €1.5 billion above guidance, due to higher upgrade revenue.

Gross margin for the quarter came in at 51.8%, which is above our guidance, primarily due to the pull-in of revenue from both the release of deferred income on a factory option, as well as additional upgrade business. On operating expenses, R&D expenses came in at €819 million and SG&A expenses of €236 million as guided.

Net income in Q3 was €1.7 billion, representing 29.4% of net sales and resulting in an EPS of €4.29. Turning to the balance sheet. We ended the third quarter with cash, cash equivalents and short-term investments at a level of €3.4 billion. Moving to the order book.

Q3 net systems bookings came in at a record €8.9 billion, reflecting the continued strong customer demand for both advanced and mature nodes. Strong order intake of €3.8 billion for EUV systems, including NA, as well as €5.1 billion for non-EUV systems, which is DTV and metrology and inspection system.

Total net systems bookings was driven by Logic, with 77% of the bookings and memory accounting for the remaining 23%. With that, I would like to turn to our expectations for the fourth quarter of '22. We expect Q4 total net sales to be between €6.1 billion and €6.6 billion.

This excludes around €100 million of net delay revenue for Q4, as a result of more expected fast shipments at the end of Q4 and at the end of Q3. We expect our Q4 installed base management sales to be around €1.6 billion. Gross margin for Q4, is expected to be around 49%.

The improved margin effect of higher volume relative to Q3, is more than offset by negative margin effects primarily from DTV mix, pulling of revenue recognition on higher-margin factory options from Q4 into Q3, and inflation costs hitting us this quarter. This translates to an expected gross margin approaching 50% for the full year.

The expected R&D expenses for Q4, are around €880 million and SG&A is expected to be around €265 million. The higher R&D guidance is primarily due to additional headcount and labor cost increases. Higher SG&A is mainly due to additional headcount and IT spending. There are also some small negative foreign exchange effects on both R&D and SG&A.

Our estimated 2022 annualized effective tax rate, is expected to be around 15%. In Q3, ASML paid a quarterly interim dividend of €1.37 per ordinary share. The second quarterly interim dividend will be €1.37 per ordinary share and will be made payable on November 14, 2022.

In Q3, 2022 we repurchased around 2.1 million shares for a total amount of around €1 billion. We have now completed our 2021-2023 share buyback program. On November 11, 2022 we will hold our Investor Day where we will provide an update on our long-term business plan, including a new share buyback program.

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

Thank you, Roger. As Roger has highlighted, revenue and profitability for the quarter came in above guidance. We expect sales in the fourth quarter to be higher, as we continue to work through supply chain issues and reduce cycle times.

Relative to last quarter, we now expect stronger revenue growth for the year, with a full year 2022 sales of €21.1 billion that are using the midpoint of the Q4 guidance. This includes a higher EUV system revenue of around €6.8 billion as well as higher rates of base revenue.

And due to fast shipments, we also expect delayed revenue of around €2.2 billion into 2023. The total business volume for 2022, is basically unchanged from the start of the year.

Looking at the current market environment, there's clearly a lot of uncertainty due to a number of global macro concerns regarding inflation, consumer confidence and real chance of a recession.

As we have shown in the past, in such an environment, we need to maintain flexibility in our supply chain, in our workforce and in our manufacturing capability. You would also expect an impact on customer confidence around their CapEx spending.

And in fact, we do see some customers running at lower tool utilization levels and revising their CapEx plans for next year. Now while some customers are now adjusting, the desired timing of their demand, the vast majority of our customers is still requesting shipments of the litho systems as soon as possible.

This is clearly driven by the strategic nature, of these little investments in support of technology transitions, capacity additions, which require time for wafer output to materialize, as well as government's global investments in pursuit of technology sovereignty.

And as a matter of fact, our 2023 shipment demand is still significantly above our build and shipment capacity for next year. And this is supported by the record bookings this quarter, of €8.9 billion and our largest backlog ever of over €38 billion.

Almost 85% of this backlog is for EUV and immersion, which is used for advanced nodes and related wafer capacity expansions. With regard to our supply chain, we need to continue to manage risks. But over the past quarter, we see the predictability of the move rates in the supply chain improving.

As a result, we now foresee a further improvement in our output capability in Q4. Looking at the net sales in the quarter, plus deferred revenue from fast shipments, you see increase in shipment value over the year starting with €4.9 billion in Q1, to €5.7 billion in Q2 then €6 billion in Q3 and we expect around €6.4 billion in Q4.

So building on this progress, we feel we are well positioned to further increase our capacity next year. Now looking to next year and bearing in mind the current environment, it's too early to provide specific guidance.

With demand expected to remain significantly above supply, and based on discussions with our customers, we're planning to increase our system output next year.

So assuming we will have addressed the supply chain issues in the coming quarter, we're planning to ship over 60 EUV systems and over 375 DPV systems in 2023, with around 25% of the DPV systems being emerging. Regarding gross margin, as Roger mentioned, we expect to approach 50% this year.

And as discussed last quarter, we are in discussions with customers to share the extraordinary inflationary costs from freight, labor, as well as system components. These discussions are progressing. And in general, customers understand our request to share this extraordinary cost increase.

And as such, we expect to receive a reasonable level of inflation compensation over the course of next year. Assuming successful progress on this item based on current macroeconomic conditions and inflation levels and considering that next year we will likely have less gross margin impact from fast shipments than in 2022.

We expect gross margin to improve next year. We will continue to make the required investments as we need to ramp our capacity in anticipation of leading to long-term growth of our industry.

And clearly these investments might put some pressure on the gross margin next year, but are inevitable if we want to maintain the longer-term growth profile of the company. And that said, we do see a clear gradual progress from today towards our longer-term gross margin ambition of 54% to 56% by 2025.

As I said before, longer term, the expanding application space for semiconductor and secular trends are driving structural demand and this is why we're actively adding capacity and are planning to further increase our EUV and DPV shipments in future years to meet customer demand.

As announced earlier today, we have come over a way now to the Board of Management as our strategic sourcing and procurement officer underscores the significance of working with our supply chain to further drive future capacity growth.

And regarding our capacity for 2025 and beyond, we're actively working with our supply chain to achieve the earlier communicated targets of 90 units for 0.33 of low NA EUV and 600 units for DPV, along with a medium-term target of Brent units for 0.55 High-NA EUV.

Next month, at our Investor Day on November 11, we will provide updates on how we see the changes in the end market growth, driving increased demand for our litho systems with -- what this means for our capacity plans, as well as the impact on our longer-term financial scenarios for 2025 and 2030.

Finally, with regards to the announcement earlier this month from the US government around export control restrictions, we have performed our initial assessment and expect a direct impact on ASML's overall shipment plan for 2023 to be limited.

However, there could be an indirect impact due to the inability of other equipment suppliers to shift their systems. Our current expectation of such an indirect impact will be around 5% of our backlog.

This percentage is based on the share in our backlog of purchase orders from Chinese fabs that in our current assessment are seen as meeting the technology criteria as indicated in the updated US export control restrictions. We will continue to refine our assessments as the situation evolves.

While ASML is, of course, fully committed to comply with all applicable regulations, the new regulations do not directly change US export controls on the property equipment. As a European-based company with limited US technology in our systems, ASML can continue to ship all non-EUV lithography shipments to China out of the Netherlands.

Additionally, we can ship most US origin spare parts to most customers in China that are working on mature nodes without the US export license. The new export control rules are directed at advanced nodes, while our business in China is predominantly directed at mature nodes.

Lastly, if for export control related reasons we cannot ship to more advanced fabs in China, we have more than sufficient demand for these systems elsewhere globally, as demand continues to exceed supply.

In summary, while in the current environment there's a lot of uncertainty due to macro concerns, our customers' demand for our products continues to exceed supply.

We're working to increase our capacity next year, with a plan to further increase this by 2025, as communicated earlier this year, since we remain fully confident in the opportunity this provides for our future growth. We plan to update you all on this during our Investor Day on November 11 and we certainly hope to see you there.

And with that, we'll 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. Beforehand, I would like to ask that you kindly limit yourself to one question with one short follow-up, if necessary. This will allow us to get to as many callers as possible.

Now operator, we have -- can we have your final instructions and then the first question, please?.

[Operator Instructions] The first question comes from the line of FX Bouvignies of UBS. Please go ahead. Your line is open..

Hi, can you hear me?.

Yes, very well..

Okay. Great. Thank you very much for taking the question. I have one on 2023 outlook and especially for deep UV your 375 deep UV tools target for next year.

If we assume that more than 40% maybe 50% of deep UV revenues is from Memory, can you help us reconcile your guidance and what your customers are seeing for example with maybe the wafer fab equipment Memory CapEx down more than 40% into next year. Just trying to think about the litho intensity excluding EUV.

And I mean could it be driven by inventory build or anything more fundamental that would suggest deep UV especially with such weight on Memory being resilient, despite what your customers are saying? Just trying to reconcile that number would be helpful. .

Yes, Xavier thank you. When you look at the backlog of €38 billion I mean about 1/4 of this is Memory and about 75% is for our Logic customers.

That backlog is based on what our customers are currently thinking about what they need in terms of lithography investments for their 2023 capacity additions which you need to remember is not only -- mainstream capacity is also for advanced technology nodes.

Now having said that, some of our customers and that would not exclude Memory customers that indeed look at their CapEx guidance for next year and have taken it down. But those same customers and the same breadth tell us listen we need those machines and these are the machines that we need for 2023 because they are strategic the long-term nature.

And if you ship me in 2023 it will only be 2024 output has to do with a long lead time and character of our systems. So these are strategic tools and we've never -- and we've said it before I think I said it over the last more than 20 years, must have been over 100 times, we never look at WFE as an indicator because it is a lagging indicator.

Customers will do what they need to do. And what we really focus on is a discussion with our customers on their strategic roadmap and the strategic expansion of capacity. And that drives currently the order intake. So this is where we are.

I fully understand that that could mean that in a particular year because of these particular reasons we are in quite a particular environment that the litho intensity numbers might spike up like if we're coming out of a downturn that it will come down when we go into a upturn.

These things are just relative percentages that yes in any given year might be different. But we look at the long-term investment profile of our customers where we have very close contact. So, this is what they tell us. And when they come with an order we're in a business where we actually accept orders.

So I think it is -- it could be for 2023 a bit of an anomaly if you look at that life percentage. Indeed at the end of 2023 it turned out that WFE came down as much as you currently think. .

And FX maybe one comment. I think your function that more than 40% of deep UV comes from Memory I think that's not correct. If you look at our backlog it is more or less inline with the overall representation of the backlog. So the 1/4, 3/4 representation of the backlog also holds for deep UV. .

You mean on revenues or -- because I was talking revenues?.

That's right. .

Okay. And I do have a quick follow-up is on installed base management. I mean that has been a bit stronger. I mean this quarter you mentioned some upgrades.

Now if we look about a bit 2023 and imagine that the industry has lower utilization due to lower demand, should we then expect your installed base management to perform better in this environment as you have more downtime machines, and maybe run above your mid-term target of 11% in this environment?.

Yeah, that could be. But also again in the -- normally what you see in an upturn is that to your point there is no available time to do upgrades. And in the downturn there is available time.

But then the upgrades that have to do with productivity enhancements, of course, are not that needed, but others which basically have to do with the lithography requirements, the patterning requirements might be. So yes that could be, but I think it's too early to tell right now.

As you have probably seen over the last quarters and the last couple of years the in-store base management business is a relatively short-term business. So customers can take those decisions on relatively short-term and we can actually implement those subjects also relatively short-term. So we'll have to see.

There's always some opportunity in a downturn like situation but that's clear..

Thank you very much..

Thank you. Our next question comes from the line of Joe Quatrochi at Wells Fargo. Please go ahead. Your line is open..

Yeah. Thank you for taking the question. I wanted to follow-up on the question around 2023 outlook. I guess, I wanted to understand it sounds like obviously some of your customers are maybe changing some of their delivery schedules.

And just given that you guys have the longest lead time for tools even in the DUV space right now; do you worry about this maybe creating some kind of air pocket in demand when you look into 2024?.

No, that's a reasonable question. But the answer is we have no clue, because nobody knows 2024, I mean we're starting to understand 2023. And for us 2023, on the demand side we are more or less protected you could say because there's still such a big gap between the demand side and what we can make.

So there's still a significant gap between our demand profile for 2023, which as we said really has come down somewhat. But it's all minor as compared to the gap that still exists between the current demand and our outlook capability. So I don't know about the demand profile for 2024.

But what I do know is that we're under-shipping still 2023 and all that means what 2024, I have no clue..

I think, Joe, the way to also look at that and I fully agree with what Peter said. But also the way to look at that is we believe that the over 60 and the over 375 that we've indicated before would be a normal trajectory towards our objectives on 2025.

So I guess your question of an air pocket is only relevant to the extent that you're really trying to get a view on are we entering into a recession territory? And are we entering to a very long and very deep recession. I mean that's in essence what you're asking. And this might not be the right -- still have that question..

That was my point. My point is what do we know about 2024, I mean -- but longer term, I have to also realize that longer term when there is very little doubt I think we're fully confident in the growth of this industry. I think many of our customers with healthy balance sheets have the same confidence, which actually we are the largest customer.

We have those in-depth discussions. And some of them either went public with saying we don't spend a lot of CapEx because we need that capacity. There's not going to be capacity that needs to be HVM, high volume available by the end of 2023 going into 2024. It will be 2025, 2026. So it's longer term.

And this is why these investments are of a strategic nature and we get -- continuously get the confirmation from our customer base, which includes our largest customers that spent most of the CapEx money that they will continue..

Got it. That's all -- I can appreciate it. 2024 is quite a long way away. Just as a quick follow-up and clarification.

The comments that you made around customers looking to change delivery schedules and some declines and maybe tool utilization, is that strictly on the Memory side, or are you also seeing that on the Logic side?.

Yeah, I see -- we see -- if you look at the decrease of utilization, it is actually still at a level, which we would at the end of 2021 or throughout 2021 still call very healthy. So it comes off a peak that, we've never seen before. So it's not that, you see a steep decline. You see it leveling off.

And here and there, we're increasing it both in some Logic applications and it's in Memory applications. So it's not significant in that sense, but we do see it..

And in terms of the change in delivery schedule, of course, we're not going to be Joe we're not going to be customer-specific here. But I guess, if you read the newspapers about the sentiment that some of our customers are sharing that probably gives you a pretty good indication of where you might see a little bit more softness versus the others..

Yeah. Some of our Memory customers have actually been pretty vocal and pretty public about what they want to do with the CapEx. So, the usual suspects. I mean, I'm not going to mention names. I mean, you can discover from the media reports..

Perfect. Thank you..

Thank you. Our next question comes from the line of Amit Harchandani at Citi. Please go ahead. Your line is open..

Thank you. Hello, everyone. Amit Harchandani from Citi. As a first question, if I may go back to the topic of bookings.

On our calculations over the past four quarters, you've reported about €17 billion worth of DUV bookings – well the DUV metrology and inspection bookings, which even in the context of a run rate of 600 shipment per capacity – 600 capacity by 2025 seems quite extreme.

So could you help us understand, who is placing these orders? What are their considerations? Is this the case of demand being pulled forward? Trying to get some confidence in what seems to be a very healthy DUV ordering pattern even in the context of the capacity that you've talked about by 2025? And I have a quick follow-up..

Yeah. That's a good question. I think you may remember that in our 2016 Capital Markets Day, and even I think in 2018, we anticipated that our deep UV shipments will go down as a result of the cannibalization of EUV. Actually, the opposite happened. It didn't go down. It grew significantly across our entire customer base.

So it's a customer base that is focusing on consumer products, because you're looking at the €70 million that you just quoted is the historical order intake. Its consumer, it's industrial, it's automotive, it's energy transition just the sheer application space has grown so much.

And the problem that we have unless you have that discussion with our supervisory board yesterday that nobody connected all the dots. There is not one firm on the planet that actually has the full insight into where all these chips are going and where they are being designed into.

But what I do know is that, the number of mask sets that are being run in Logic from let's say 20-nanometer upward to 28, 45, 65, 90, 0.13 micron the number of mask sets over the last 12 years has been relatively stable running through our tools, except for the last two years.

We see a significant increase in the number of mask sets up to 30% to 40% being used in that technology category, which actually means that the number of applications that are using deep UV technology grow significantly double digit every year. And if you ask me Peter tell me exactly where it is, we don't know.

The CEO of one of our largest customers said when I asked the question because you have a very significant market share you should know. Yet, I have no clue. And this captures nobody connected to all the dots. When you look at the facts, the facts are that it is in the deep UV space and it's the application space.

And if you ask me exactly where it goes, I have to also say, I'm not – we don't have that full clarity. But what we do know is that, the number of designs in the deep UV space above 20-nanometer is significantly increasing. And that's where it goes. And this is why we do see the order intake across a broad spectrum.

Our customers that have not asked any significant CapEx for the last 10 years are in our order book now quite significantly as a group. And those are the ones that write me very mad letters that, they still don't have their tools all time, as of two weeks ago still get those letters.

So I think that this is where, blame on us, blame us the industry that we don't have that visibility but we don't. But what we do know, there is a shortage and a significant increase in the number of designs..

And to add a few numbers to it, Amit, in terms of trying to get an understanding where it is it go.

There is no real anomaly in the composition, right? So, the 25%, 75% in terms of Memory versus Logic that we just talked about for the full backlog, as I just mentioned that's also what you would see in the composition of the non-EUV part of the backlog. So, that's pretty consistent.

So, no huge inconsistency there, as it being skewed towards one or the other, it's just the typical 25%, 75%. And in terms of China, China -- and if you look at the last couple of years, China typically was around 16% to 18% of our system sales. And that's also about the percentage that you would see in the backlog.

So, there's no real anomaly in the backlog where we say how can that be. And I think that's to support the comment that Peter makes, this goes in many, many different directions. But there is no clear anomaly in the composition..

There’s no overwhelming direction in a very well a certain application..

That's very helpful, gentlemen. And secondly as a quick follow-up if I may, and it might be probably one for Roger. The net deferred revenue run rate in Q4 is down to just € 0.1 billion.

Wouldn't it be logical to assume that as we look towards 2023, there should be no reason why this steps up again, but above €0.1 billion? In other words, the €2.2 billion that's getting deferred into 2023, would it be fair to assume a significantly smaller portion might go out from 2023 and potentially, the 6.4% that you're doing in Q4, is a good basis for quarterly run rate as we look towards 2023?.

Yes. I think Amit clearly, the first quarter where the quarters were most of the fast shipment effect was there. That's clearly the case. And now indeed you see that it starts to normalize and you already saw it in Q3, now you see it in Q4. And our expectation for Q4, you see that the normalization effect of fast shipments starts to trend down.

And in essence, if you stabilize your output at a certain stage, you would expect that what you get into the quarter is also about what you see go out of the quarter. So that's the normalization at a certain point you will see. You know that we're having discussions on -- is there another way to recognize revenue here.

I mean we've been having those discussions. And we told you as soon as we have that and as soon as we see potential to start recognizing revenue again upon shipment, of course, we will let you know. So we're looking into that.

But assuming that nothing is going to change then in all likelihood 2023 should be more or less neutralized for the effect of a shipment. So what get into 2023 is sort of what you expect to also go out of 2023 in terms of fast shipments..

Thank you, Roger..

Thank you. And our next question is from the line of Alexander Duval at Goldman Sachs. Please go ahead. Your line is open..

Yes. Many thanks for question.

You talked about your aim to help counteract inflationary pressure through discussions with customers, given presumably the mechanism for doing that is to adjust pricing based on delivering greater value in the form of higher prices per chip, how confident are you in your ability to do that, given the potentially softer demand environment in 2023, and implicitly in some areas perhaps for less robust prices per device? And then, I've got a quick follow-up..

Yes. You're talking about the inflation correction.

Because you're a bit soft in -- but you're talking about the inflation correction towards customers, yes?.

Absolutely. .

Okay. Yes. I think the softer environment for 2022, I think we were clear the demand we currently have is significantly higher than our shipment capacity. The issue that we are, of course, having is that -- when you look at the backlog, the great thing about it is a great backlog is that it's a great backlog.

Well, the bad thing about the great backlog is that you have science yield and deliver purchase orders with prices in there.

So, that means that you have to go back to the customer and listen there are extraordinary circumstances with inflation percentages in some regions of the world that are significant over double-digit that that's such an extraordinary circumstance where you really need to sit together and say, hey, what's fair.

And yes value pricing that's a good point. But also where you see in certain areas of the semiconductor industry that wafer price is also going up because there's also value. So, it's just a matter of where can you -- how can you sit together look at the combined business and about the fact that we are mutually dependent and say what's fair.

And this is where we are. And I think we will come up with a reasonable solution next year. .

Many thanks. And just as a quick follow-up. You referenced again your supplier day and reiterated you aim to put in place the 90 EV systems and 600 DV systems capacity beyond 2025.

Can you just give a bit more color on how the discussions with customers are proceeding and your sort of confidence level that the supply chain will be able to proceed in order to deliver that kind of level of production?.

Yes, that's a good question.

We are seeing as a gradually a bit more stability and the number of supply issues that we have where we really need to put massive management attention on is actually shrinking in number of suppliers with significant management attention and action from ASML side at those suppliers we feel that we have a clear roadmap towards better performance in the year 2023.

I think it's our internal target to basically have by the end of Q1 of next year. We want to put all hires in the shadow of Carl ZEISS. ZEISS is our land supplier optic supplier which of our spices are knocked in the shadow of Carl Zeiss. And Carl Zeiss can deliver over 60 EUV systems and over 375 DPV systems.

So, this is basically the target that we have. And I think we're on our way. We have identified the key areas and with a lot of management attention in there and our confidence has gone up. .

Many thanks..

Thank you. Our next question comes from the line of Didier Scemama of Bank of America. Please go ahead, your line is open..

Yes, good afternoon gentlemen. Thank you. I just wanted to ask you if you could maybe help us understand your point on the fact that your tools have got low content from the US intellectual property standpoint there is a lot of questions from investors on that point. And I've got a follow-up. Thank you..

Yes, I think the export control rules because of the relatively low percentage of US content the rules actually are such that because of that percentage we can ship the lithography tools. So that's that is -- you could -- that's a predominantly European product.

However, those tools need to be maintained so that there are spare parts that are at our US. Origin parts and they fall under the export control rules. So for the spare parts you need to apply export control rules and that's what we do. And that also is true for the people.

So, the people US citizen working on technology that is mentioned in the export control rules that's not allowed. So, -- it's not so much the system shipments. It's the part chip what those parts need when those systems need service.

So, this is why with the US origin spare parts you are in the realm of the export control restrictions that are affecting the more advanced factories of our customers in China..

Understood. So, that's actually very interesting.

So, that will impact more your installed base management business than your resale tool shipments? Is that fair?.

No, yes. But indirectly as I said in my prepared remarks, we make an assessment of which fabs of customers in China are potentially affected. But that's under the assumption that our peer company colleagues come to the same conclusion.

If they come to the same conclusion we said that we see about 5% of our backlog being potentially impacted by this indirect effect because if you don't need -- you cannot get the other operation equipment why would you need a litho tool. So, it's -- that is what we mean with the indirect effect. And that of course has an effect.

But also if you cannot maintain the installed base that of course also has an effect. That's for the installed base management, business but that's relatively small. The biggest impact is on not we are shipping to our advanced customers in China, because they simply don't need the machines..

Understood. And then, maybe one clarification, so you mentioned very kindly the 5% of the backlog impacted by those restrictions, indirectly if the rules apply indirectly to you effectively.

Relative to the 15% to 16% of sales going into China, can you give us a sense of a, the weight of multinational so Hynix, Samsung, Intel or whatever left of Intel in China? And then b, what is mature notes or above 14-nanometer set? If you could just give us a split is it five and five again, or is it more skewed either way?.

Yeah. Listen, like I said, the 5% is based on our assessment that our peer colleagues, yeah, our deposition and etch and metrology qualities will come to the same conclusion, as we came. So that is the assumption. But they have to do their own assessment. So this is basically what we currently think.

And I think if you just go back to what we said earlier, I mean the -- our China sales is about between, 15% and 20% let's say average 17% 18% of our sales. That's the same in the backlog. Now, so -- and then if the 5% of the backlog may be impacted based on our assessment of the advanced fabs then, you can -- yeah, that's about the ratio.

So -- and that is of course DUV, because we cannot ship EUV and we will not ship EUV into China. So this is what you need to look at. So limited on installed base, it's the pie that effect to 17%, 18% that we mentioned earlier..

Okay. Thank you..

Thank you. And our next question comes from the line of Mehdi Hosseini of SIG. Please go ahead. Your line is open..

Yeah. So thank you. I actually have a 2022, question.

Can you help me understand the mix of backlog? How should I think about the mix by High-NA versus EUV and DUV?.

Well, hi Mehdi, it's a bit of -- but I think from a backlog point of view, over -- just over 50% is EUV related, yeah. And that is just under 50%-ish DUV, yeah. About 55-45 that's how you get to look at it..

Okay. So you booked a couple of more High-NA in Q3 and I'm just trying to understand, how should I think about the incremental increase driven by High-NA versus the other tools, that relatively have a shorter life to turn backlog into shipments..

Yeah. Mehdi, we typically do not disclose the High-NA numbers. And I think in the last call we also explained why, is because the number of customers taking High-NA tools is so small, within that ecosystem, if they very quickly understand who is ordering. And because that is competitively sensitive that's the reason why we're not disclosing it.

So, sorry I'm not going to answer that question. We're not giving you numbers or order value of the -- but it is a -- there is a healthy intake of Low-NA machines in the number there as well. That is something that I can assure you..

Sure..

So when I mentioned the EUV number, it's all EUV. It's Low-NA and High-NA together..

Sure. Sure. Okay. And then, in terms of the capacity increase that you're undertaking is there a CapEx that you can offer if you already have plans to increase capacity for DUV 375 and it can eventually go up to 600 CapEx you can offer.

So you can give at least modern in terms of the cash flows? And how it would impact your costs?.

Yeah. I think what you've seen Mehdi is that you have seen our typical CapEx numbers. And I think what we've told you is that for every year all the way through 2025, you might expect another €500 million for that specific capacity expansion. That's the way to look at it.

So, on top of your regular run rate in terms of CapEx at about, €500 million for the years between today and 2025..

Got it. Perfect..

Thank you. Our next question comes from the line of Sandeep Deshpande at JPMorgan. Please go ahead. Your line is open..

Hi. Thanks for letting me on. I have two questions. But firstly, actually this is a follow-up from Amit's question. You've got this €2.2 billion which is deferred into next year. For what I remember you having said before, that you will have capacity to do 60 EUV tools next year.

If you take that into consideration, you take that into consideration also that you will have a higher capacity of deep UV next year. I mean, the revenue that you can generate if all that is going to be recognized next year is quite much higher than where the consensus is looking for you for 2023.

So maybe you can help us understand the puts and takes.

Did you mean that the €2.2 billion that we enter 2023 will still be remaining in the so-called pre-shipments or that need is pushing again into 2024, or how should we be looking at 2023 in that sort of sense?.

Yes, Sandeep, it all very much depends on what's going to happen in terms of revenue recognition. But that's – if you operate on the assumption that nothing is going to change in revenue recognition, i.e. also for 2023, we will continue to recognize revenue upon installation first and foremost, particularly then for EUV.

The thing that's prudent to assume that the amount that you're going to get into 2023, you're also going to lose out of 2023 into 2024. It's only at the point in time where we're going to recognize revenue again upon shipments. That's the point in time we're going to realize this additional value.

So when we talk about the 60 – over 60 and the over 375, that's really related to the output capacity that we see for next year. So that should then in that circumstance be translated into revenue. And then you would get €2.2 billion in and you would get sort of a similar amount out.

If the revenue recognition is going to change in 2023 then you're going to get – during 2023 then you're going to get to €2.2 billion in addition to that. That's how the math would work. .

Understood. A follow-up also is on your capacity. When we look at your immersion part of your Deep UV shipments this year, I mean I'm just looking through 2018, 2022, 2022.

That doesn't – I mean despite these huge orders you've had from the beginning of the year, there doesn't seem to be any acceleration in the throughput that in terms of your shipments.

Is this because of your inability to get parts, which was clearly very evident in the first half of the year, or is this something else in terms of your capacity what your capacity for Deep UV is?.

No, no. I think it's – the ASML, the system integration capacity in the Netherlands is higher. But there's nothing to integrate if you don't get the parts. So it's to the point that you just mentioned, that we had a higher plan for 2022.

But we were just limited by the supply chain issues, which we extensively discussed in previous quarters, which by the way as I said earlier, we're kind of getting our hands around.

So with the intention by the end of Q1 of next year, we have every supplier again in the shadow of our OpEx supplier ZEISS, which ZEISS we can support you which are 60 and 375 number..

Okay. Thank you..

Thank you. Our next question comes from the line of Aleksander Peterc of Societe Generale. Please go ahead. Your line is open..

Yes, hi. I just have one question and one quick follow-up. Thanks for taking the question. So first on the outlook for growth for Memory and Logic, you previously communicated on how these two will contribute to systems growth in the year.

So has this changed meaningfully, given the recent changes in CapEx intentions by some of your customer groups? And how would you see this developing into 2023? And then the second is just a follow-up for me to understand correctly.

If all goes to plan with a better offset of the inflation pressures that you currently see on your gross margins but also in your OpEx.

So assuming everything goes to plan and your gross margins to improve next year along the trajectory of trade we should then reflect that through higher average selling prices across your systems? Is that how you should modulate it? Thank you..

I will take the latter. .

Yes. Roger is going to take the inflation pricing question. First of all, what has changed throughout the year in terms of the demand, I think we said it before there have been some announcements without being specific on customers. But in the Memory space clearly, we have seen some replanning of.

But like I said earlier, it's not significant, but we are seeing some readjustment of the shipment planning. And that has been gobbled up very quickly by other customers of which by the way those customers that are gobbling this up are in the Logic space, but also here and there we have many customers said fine. Thank you very much.

If I can get as a tool a bit earlier. Thank you. Thank you. Yeah, thank you very much. It's been a bit of both, but the trend is clearly what you also read in the paper that the Memory customers or the Memory shipments have given it a bit, it's not much, but a bit in favor of the Logic shipments -- for next year..

Particularly for next year. On the inflation side, so yeah, you're right. I mean, the way this would ultimately pan out discussions that we're having with customers are both on systems and on the OpEx side so the installed base revenue that we're obtaining.

But I think it's fair to assume that most of the compensation we're seeking through the price of the system. So the impact of that would be then indeed you would see the price of the system the ASP go up. That would be the way that we would find compensation for the inflation that we've been incurring this year next..

Thank you very much..

Thank you. And our next question comes from the line of Pierre Ferragu at New Street Research. Please go ahead. Your line is open..

Hi. Thanks a lot of taking my question. Peter, thanks a lot for saying I have no clue as a CEO on an earnings call, it's very refreshing. And I think it's good to remember that it's difficult to figure out what's going to happen next.

And with that in mind, I have two like very, very specific clarification questions on things we've discussed a lot on the call today.

The first one is in the way you've commented about 2023, where do you stand on Memory? Do you take into account the fact that your main clients on that front have announced like WACC spending or like CapEx reduced significantly? And so is that already part of your plan, or is that something that you still need to see coming through because it takes time for the whole supply chain to process? And then my second question is more on your sales impressive $38 billion of backlog.

Can you explain to us in a scenario in which things slow down fairly significantly, how do conversations about this backlog go? Can your clients like ask you to reschedule shipments, to cancel orders, what are they tied to, what's your common business factors to manage a situation where your clients are giving you a lot of orders.

And as you say if you take orders that's what we would expect you to do.

But then if the work changes a bit and slows down then things have to be revisited?.

Yeah, yeah, yeah. That a great question. First of all for 2023, if there has been a replanning of their CapEx spend, it's already in. But like I said, if you have a significant reduction in the demand from our customers, which by the way is not significant, but it is a reduction.

But that gap between the demand and the capacity to ship is still so big then the impact on our total shipments is basically zero. But what you do see is a shift there is a bit of a shift between Memory and Logic for 2023. So it's in there, but it doesn't change the absolute numbers, let's say the over 60 and over 375. It's just a different allocation.

And on the €38 billion, how to deal with that if we really get into a deep recession. What is -- what we've always seen in deep recession that I've seen in the last 25 years or downturn customers never cancel? They ask for a rescheduling of the shipment.

And that's basically depending on their CapEx plans and on the depth of the recession about their ability to finance it, depends whether it's a few months out or to a few quarters out. That's what normally happens.

So we just get at the time in which we now plan to shift the back up in a situation where you have a deep recession then the time to shift the backlog is just going to extend that's what's happening yes -- that goes away..

Makes sense. Thanks..

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

Now operator may we have the last caller please?.

Thank you. That comes from the line of Adithya Metuku at Credit Suisse. Please go ahead. Your line is open..

Yes. Good afternoon guys. Thank you for squeezing me in. Two questions please. So firstly, it sounds a bit like you've been able to put together these EUV machines quicker in the field and that's part of the reason for some of the pull-in of revenue this year.

If my understanding is correct, can you give us some color on how long installation cycle times were at customer sites previously maybe in the first and the second quarters? And what are they now? And if this cycle kind of come down, does this not give you more confidence in being able to push out less into 2024 than you're pushing out into 2023? And that's my first question and I've got a follow-up..

Yes. So, Adi good question. And indeed that's the case. So the installation time is going more and more rapid also in comparison to the beginning of the year. And to give you a bit of flavor for that.

I think at the beginning of the year we were somewhere around 14 to 15 weeks and I think we were able to shave off around 10 days to 14 days of that number. So that's the -- that's what we've been able to do. Of course, there are differences. Some customers it works more rapidly than at other there are quite some differences there.

But on average I think that's about what you're looking at. There's two things. One thing that it does this is an important element also in the discussion that we had earlier on.

This is an important element also in demonstrating that fast shipments are not more difficult to install than normal of the shipments, which is an important element in the revenue recognition exercise that we talked about.

So there's an important factor element in ultimately trying to get to a situation where we can once again recognize revenue upon shipment. That's one thing that it does so that's helpful. Secondly, you're right.

I mean this could lead to the situation where maybe what you push out of the year is less than what you get into the year that is in a stable situation. If you grow of course than under normal circumstances, you would push out more.

So when I said in an earlier response that, I would expect about the same to go out of the year as what would come into the year. Of course, that would also assume growth.

So that's the reason why I think net-net with a growth situation, but then the benefit of being more economical and efficient on the install that kind of gets you to an expectation of a stable situation. .

Understood. And my follow-up is on your China-based customers.

Can you talk a bit about your ability and the ability of your peers to track and control, which node a particular tool is used in? And is it relatively easy for you to be able to say, which -- what node a particular customer is using, the tools you've supplied in? The reason I ask is, they're tracking is not that easy, any sort of risk that you have to stop shipping to wider nodes than you may be thinking at the moment?.

Yes. I think, it's a very relevant question. I mean, when you talk about nodes, as wording of the technology node, which could be an 18-nanometer node or whatever node, take 18-nanometer as an example, and that is a half pitch node, which basically has many half pitches. So the definition of what is exactly meant, is extremely important.

And I think this is exactly why the industry and the industry equipment makers, are of course in contact with the US government interpretation of this. And -- because you are right. I mean the difference. You have the nomenclature, which is used for marketing and you have the nomenclature, that is used for the real physical size.

And then just to give you an indication, if you talk about the pitch, which is a line in a space and half pitch basically assumes that the width of the physical structure of the line is as big, as the space. Well, trust me, there are spaces that are smaller than the physical line.

And it actually means that then in marketing terms, they refer to the space and not to the physical structure. So is that all things need to be worked out. I need to be clarified with the US government, and with the agency that's actually doing this particular assessment. And it's going to take some time.

This is why we continuously refer to, our initial assessment and this need for the work and interpretation clarification. .

Got it.

And would you say, that 5% is conservative, or would you say that there could be upside or downside risk?.

Right. It's -- I wish I actually knew. So I mean, what we really need is actually a clarification. And whether it's upside or whether it's downside, I have no clue. If I would know that, I would have already more or less having a clear direction of where the interpretation of the US government is, which of course we need to figure out. Still to be seen. .

Thank you..

On behalf of ASML, I would like to thank you all for joining us today. We hope you'll be able to join us at our Investor Day on November 11 of this year, at Veldhoven. Operator, if you could formally conclude the call, I'd appreciate it. Thank you..

Thank you. This concludes the ASML 2022 Third Quarter Financial Results Conference Call. Thank you for participating. You may now disconnect..