2023-07-19 14:47:40 ET
Summary
- ASML Holding N.V. raised its full-year revenue growth guidance from 25% to 30%.
- However, the increased guidance is largely due to changes in revenue recognition from fast shipment agreements.
- Hence, ASML's increased guidance does not signal an improvement in fundamentals.
ASML Holding ( ASML ) reported its Q2 earnings today (July 19, 2023). The company came in toward the high end of its previous guidance from Q1. Additionally, ASML raised its guidance for full-year revenue growth from 25% to 30%.
However, although the increased guidance may initially seem like a signal of material improvements in ASML's prospects, a closer examination reveals that not much has fundamentally changed. Much of the increase in guidance can be explained by changes in revenue recognition as ASML rolls out fast shipment for its DUV immersion products. Once these changes are accounted, investors should have a more muted response to ASML's latest update.
The Full-Year Guidance
In 2022 , ASML's revenues stood at €21.2 billion. In the earnings press release , ASML's CEO Peter Wennink stated:
Due to strong DUV revenue and despite the increased uncertainties, ASML expects strong growth for 2023 with a net sales increase towards 30% and a slight improvement in gross margin, relative to 2022.
ASML had previously guided full-year revenue growth of 25%, which would have amounted to 2023 full-year revenue of €26.50 billion. ASML's updated guidance of 30% would lead to full-year revenue of €27.56 billion. Hence, ASML's updated guidance signals a significant increase in revenue of about €1 billion - which, since it is going to happen mostly in the next two quarters, would amount to an annualized €2 billion in revenue. But this isn't the whole story.
The Guidance Increase May Be Less Than It Seems
Although it may initially seem that ASML increased its guidance by 5 percentage points from 25% to 30%, differences in wording suggest this is not quite right. The full-year guidance from Q1 guided "expected net sales growth of more than 25% " (emphasis added). Meanwhile, the full-year guidance from Q2 guides "expected net sales growth towards 30% " (emphasis added).
The difference in language seems deliberate and suggests that the exact guidance in Q1 was probably 26% or 27% and that the exact guidance in Q2 is 29% or 30%. The difference is then likely to be only around 3 percentage points. If so, ASML's revenue guidance for 2023 did not really increase by a little over €1 billion. It probably increased by about €600-700 million.
Fast Shipment Explains Most Of The Increase In Guidance
In the earnings Q&A , a discussion of fast shipment revealed the following information, per CEO Peter Wennick:
[Question] With regard to fast shipments, have you made any progress with your customers on revenue recognition when it comes to fast shipments?
[Answer] Yes we did. As a matter of fact, particularly on DUV immersion. We came to an agreement with customers, where we basically have a reduced test protocol. Which they now accept as good enough to basically recognize revenue when we ship the machine out of our factory in the Netherlands. Instead of taking revenue when we do the installation at the customer site.
Having said that, what does it mean? It means we're going to recognize more revenue in 2023. We expect that about €700 million worth of revenue now being booked in 2023 which we originally said was going to be pushed to 2024. So, our revenue that we now defer out of 2023 into 2024 is not the €3 billion that we said last quarter, but it's €3 billion less €700 million is €2.3 billion.
As readers can see, the €600-700 million increase in ASML's full-year revenue guidance can be completely explained by fast shipment agreements with customers. These agreements allow for quicker revenue recognition, but they do not change much fundamentally in terms of profitability (other than reducing working capital requirements). Revenue is just being pulled forward from 2024.
The increased guidance from ASML is therefore not very meaningful-it does not signal a fundamental change in profitability.
Takeaways
Although on paper it may appear that ASML Holding N.V. increased its full-year guidance by a good bit, this is not very meaningful. Little has changed fundamentally. The increase in guidance is mostly due to changes in revenue recognition from fast shipment agreements, not due to a fundamental improvement in the company's prospects. Investors should therefore be cautious in interpreting the increase in guidance as a sign of material improvement in ASML's prospects. ASML is a strong business, and the company remains on track for sustained growth over the long term, but investors should not misunderstand ASML's latest update more optimistically than is warranted.
This analysis of ASML's updated guidance may also explain why the market is not impressed with this quarter's results. Investors may have been expecting more meaningful real growth in ASML's revenues, especially given skyrocketing demand for AI chips. It seems that these investors will have to wait longer. Although skyrocketing demand for AI chips must eventually have an impact on ASML's topline, given the company's monopoly on EUV lithography machines, this impact will take time to materialize.
For further details see:
ASML Q2 Earnings: A Closer Look At The Full-Year Guidance