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ASML Holding NV / ASML-NASDAQ / $30.27Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 2Q07 Earnings Update Previous Edition: June 13, 2007
Note: One ADR equals one ordinary share
Recent Events
On July 18, 2007, ASML announced its 2Q07 financial results. Highlights of the results (as reported by the Company) are as follows:
· Total revenue was €935.0 million versus €960.0 million in 1Q07, down 2.6% q/q, and €942.0 million in 2Q07, down 0.7% y/y.
· EPS was €0.33, in-line with the 2Q06 EPS of €0.33.
Overview
Key investment considerations as identified by analysts are as follows:
Key Positive Arguments / Key Negative ArgumentsStable market position: Introduction of the XT1700i machine and a potential pickup in orders in coming quarters could enable ASML to maintain its market position.
Strength in order book: ASML continued to have strong orders from memory chip makers for a number of immersion tools.
Lower R&D expense: ASML’s decision to withdraw from the flat panel business reduces R&D expenses. This could enable the Company to achieve margin goals and improve cash flow.
Technology leader: ASML is a technology leader in lithography, and is likely to continue to gain market share, especially in Japan, according to analysts.
Cost cutting: ASML continues with cost-cutting measures. / Low order pickup: Order pickup is low and overcapacity could lead to several years of flat capital expenditure.
Competitive threats: Competitors, including Nikon and Canon, are larger companies with greater resources, and have the ability to compete effectively on price.
Dependence: Sales are traditionally heavily dependent on the purchasing power of DRAM (Dynamic Random Access Memory) companies.
Limited supplier of lenses: ASML gets its supply of lenses from Zeiss whereas peers mostly make their own lenses. The Company’s business would be adversely affected if Zeiss was unable to maintain production.
Long time in uptake: The uptake of the 300 mm lens might take longer than expected, which could slow growth.
Based in Veldhoven, Netherlands, ASML (ASML or the Company) is a provider of advanced technology systems for the semiconductor industry. The Company offers lithography systems mainly for manufacturing complex integrated circuits, and supplies systems to integrated circuit manufacturers throughout the United States, Asia, and Europe. It also provides customers with a range of support from advanced process and product applications knowledge to complete around-the-clock service support. ASML is a holding company that operates through subsidiaries. Its material subsidiaries, each of which is a direct wholly owned subsidiary, are ASML Netherlands, B.V., ASML Hong Kong Ltd, and ASML US, Inc. ASML has more than 50 revenue and service organizations in 16 countries. Manufacturing sites and research and development facilities are located in Connecticut, California, and the Netherlands. Technology development centers and training facilities are located in Japan, Korea, the Netherlands, Taiwan, and the United States. For more information on the Company, visit its website: www.asml.com.
Note: ASML’s fiscal year ends on December 31.
Revenue
Provided below is a summary of total revenue as compiled by Zacks Research Digest:
Revenue / 2Q06A / 1Q07A / 2Q07A / 3Q07E / 4Q07E / 2007E / 2008E / 2009EProduct/System Sales / € 840.8 / € 858.9 / € 830.9 / € 833.6 / € 696.9 / € 3,339.9 / € 3,536.4
Service Sales / € 88.2 / € 101.2 / € 104.2 / € 101.8 / € 100.7 / € 408.8 / € 404.0
Digest Average / € 916.1 / € 955.7 / € 932.1 / € 922.0↓ / € 933.5↓ / € 3,723.0 ↓ / € 3,963.0↓ / € 4,277.0↓
Digest High / € 961.6 / € 960.2 / € 935.2 / € 977.3 / € 1,141.9 / € 3,989.2 / € 4,553.1 / € 4,783.9
Digest Low / € 562.1 / € 928.7 / € 915.0 / € 839.4 / € 839.4 / € 3,503.2 / € 3,236.0 / € 3,885.0
Zacks Consensus / $1,322.0 / $1,409.0 / $5,137.0 / $5,703.0
Digest Y/Y growth / 51.8% / 1.7% / -1.5% / -11.7% / 2.4% / 6.4% / 7.9%
Digest Sequential growth / 45.6% / -9.6% / -2.5% / -1.1% / 1.3%
2Q07 revenue as per the Zacks Digest stood at €932.1 million, down 2.5% q/q, but up 1.7% on a y/y basis. According to one analyst (J.P. Morgan), the sequential decline in revenue was seen as the result of a lower number of units shipment partially offset by an improved product mix. ASML shipped 65 new and 4 refurbished for sales of €831.0 million, and generated revenue from service and field options of €104.2 million.
2Q07 average selling price (ASP) for a new system increased to €12.7 million from €12.5 million in 1Q07. The average selling price for all ASML systems sold in 2Q07 increased to €12.0 million from €11.2 million in 1Q07.
Bookings
Net bookings in 1Q07 were described as much weaker at €399 million with 30 systems, down from 62 systems in 1Q07. Of the total orders received, new systems accounted for 22 bookings. According to one analyst (ABN AMRO), this was the result of industry-wide overcapacity in DRAM and NAND flash memory.
Bookings for advanced ArF systems declined sharply, approximately by 61.0%, while KrF systems and i-line systems were down 83.0% q/q and 35.0% q/q respectively. However, bookings from Korea increased 26.0% q/q to €121.9 million; orders from Taiwan and Europe were down 59.0% q/q and 77.0% q/q to €144.3 million and €40.6 million, respectively.
Backlog
As a result of weakness in bookings, backlog declined to €1745.0 million from €2163.0 million in 1Q07. In terms of end customers, 50.0% of backlog was from memory, 37.0% from IDM and 13.0% from foundry. One analyst (ABN AMRO) believes bookings from the memory sector are likely to increase in 3Q07, led by positive trends in NAND flash ASPs and DRAM contract prices.
Outlook
ASML plans to ship 59 systems in 3Q07 with an average selling price of €14.7 million for new systems and average selling price of €13.8 million for all systems. The Company expects the bookings increase in the second half of 2007, primarily driven by robust demand for its immersion systems, particularly from memory manufacturers, and expects that 2007 will be a revenue growth year for the Company.
One analyst (ABN AMRO) expects the Company’s shipment to decline from 69 systems to 59 tools, including 55 new systems with an ASP of €14.7 million. The firm expects bookings to increase from 300 tools to 45 systems with a combined ASP of €11.9 million. However, the firm expects ASP of new tools to decrease slightly from €14.0 million to €13.6 million.
Another analyst (Lehman), however, remains concerned about the Company’s near term order trends because of declining trends in bookings and backlog. The firm does not expect rapid rebound in orders, but expects sequential decline in revenue for 3Q07 and 4Q07, resulting to just 2.4% revenue growth for FY07.
According to another analyst (Citigroup), market share is one of the key metrics to the Company’s continued success, and therefore, it expects ASML to gain further market share in the new facilities. The firm expects ASP trend to be upward in 2H07 and beyond, attributable to increase in immersion tool orders for 1900i.
For more details please see the Consensus tab of the ASML spreadsheet.
Margins
Provided below is a summary of margins as compiled by Zacks Research Digest:
Margins / 2Q06A / 1Q07A / 2Q07A / 3Q07E / 4Q07E / 2007E / 2008E / 2009EGross Margin / 41.5% / 40.8% / 41.2% / 41.2%↓ / 41.2%↓ / 41.1%↑ / 41.5%↑ / 41.2%↑
Operating Margin / 25.9% / 21.9% / 22.2% / 22.0%↓ / 22.1%↓ / 21.8%↓ / 22.7%↓ / 22.7%↓
Pre-Tax Margin / 25.6% / 22.7% / 23.1% / 22.8%↓ / 22.5%↓ / 22.5%↓ / 23.6%↓ / 23.3%↓
Net Margin / 18.2% / 17.2% / 17.2% / 16.5%↓ / 16.4%↓ / 16.5%↓ / 16.8%↓ / 17.0%↔
2Q07 gross margin improved from 40.8% in 1Q07 to 41.2%, and was higher than the Company guidance of 40.0-41.0%. According to analysts, this was mainly because of the decline in cost of goods sold. In addition, gross margin benefited from the shift in product mix towards advanced ArF systems, which partially offset the negative impact of lower shipments.
2Q07 R&D expenses were €121.million versus €118.8 million in 1Q07, up 1.8% q/q. SG&A expenses of €56.2 million were up 0.2% q/q and up 10.5% y/y, and represented 6.0% of total revenue.
2Q07 operating income came in at €207.1 million, down 0.9% q/q and 12.8% y/y. Net income of €160.1 million was down 2.6% q/q and 4.2% y/y. 2Q07 net margin was 17.2%, in line with 1Q07, but down from 2Q06 net margin of 18.2%.
Outlook
Gross margin is expected to range between 40.0%–41.0% in 3Q07. R&D expenses for 3Q07 are expected to €120 million, net of credit, in support of advanced immersion and extreme ultraviolet (EUV) systems developments. SG&A expenses for 3Q07 are expected to be €56.0 million. According to analysts, ASML’s outsourcing strategy will continue to allow it to adapt its cost structure up or down rapidly and efficiently throughout a cycle, while maintaining its technology leadership.
For more details please see the Consensus tab of the ASML spreadsheet.
Earnings per Share
Zacks Digest pro forma EPS in 2Q07 was €0.33 ($0.44), down 4.3% q/q, but up 0.3% y/y. The pro forma EPS was ahead of the consensus estimate of €0.30. According to one analyst (J.P. Morgan), this positive variance was the result of better gross margin.
Provided below is a summary of EPS as provided by Zacks Research Digest:
EPS / 2Q06A / 1Q07A / 2Q07A / 3Q07E / 4Q07E / 2007E / 2008E / 2009EDigest High / € 0.37 / € 0.40 / € 0.36 / € 0.50 / € 1.52 / € 1.52 / € 1.88 / € 1.97
Digest Low / € 0.30 / € 0.31 / € 0.31 / € 0.29 / € 0.25 / € 1.16 / € 0.92 / € 1.28
Digest Avg. / € 0.33 / € 0.34 / € 0.33 / € 0.33↓ / € 0.34↓ / € 1.31↓ / € 1.48↓ / € 1.64↓
Zacks Consensus / $0.47 / $0.46 / $1.82 / $2.24
Digest Y/Y growth / 113.7% / 0.3% / -5.8% / -19.4% / 4.2% / 12.8% / 10.7%
Digest Sequential growth / 104.1% / -17.8% / -4.3% / -0.5% / 3.0%
Highlights from the above chart include:
• 2007 forecasts (18 analysts) range from €1.16 (Dresdner) to €1.52 (J.P. Morgan); the average is €1.31.
• 2008 forecasts (18 analysts) range from €0.92 (Dresdner) to €1.88 (Citigroup); the average is €1.48.
• 2009 forecasts (7 analysts) range from €1.28 (Societe Generale) to €1.97 (Citigroup); the average is €1.64)
Zacks Digest projects EPS of €1.31 for 2007, €1.48 for 2008 and €1.64 for 2009, representing y/y growth of 4.2%, 12.8% and 10.7% in 2007, 2008 and 2009, respectively. Estimated 3-year compounded annual growth rate (CAGR) based on 2005 EPS is 32.9%.
Most analysts have increased their EPS estimate for FY07 and FY08, attributable to increase in unit shipment assumption, lower operating expenses and lower share count expectation. One analyst (J.P. Morgan) believes multi year margin expansion and share count reduction will drive secular EPS growth for the next several years.
For more details please see the EPS tab of the ASML spreadsheet.
Target Price/Valuation
Of the 19 analysts covering the stock, 10 analysts have given positive ratings, 7 analysts have given neutral ratings and 2 analysts have given negative ratings. The average price target quoted by analysts is $32.33 (↑ from the previous Digest report and 6.8% upside from the current price). The price target ranges from $22.05 (27.2% downside from the current price) (Dresdner) to $38.64 (27.7% upside from the current price) (ABN AMRO).
Provided below is a summary of valuation and ratings as compiled by Zacks Research Digest:
Rating DistributionPositive / 52.6%
Neutral / 36.8%
Negative / 10.5%
Avg. Target Price / $32.33↑
Max. Target Price / $38.64
Min Target Price / $22.05
Number of analysts with Target price/Total / 16/19
Risks, which may impede the target price and ratings, according to analysts, are disappointing demand for Microsoft’s Vista OS, reducing demand for DRAM chips, pricing pressure in the end markets, and general market and macroeconomics risks. The reliance on key customers, the rapidity of technological change, the Company's net debt position, financial strength of competitors and the lumpiness of equipment orders are also considered as risks to the target price.
Metrics detailing current management effectiveness are as follows:
Metric (TTM) / Company / Industry / S&P 500Return on Assets (ROA) / 15.64% / 11.67% / 8.36%
Return on Equity (ROE) / 34.70% / 15.45% / 20.84%
Return on Investment (ROI) / 23.58% / 14.19% / 12.36%
ROA, ROI, and ROE of the Company are above the overall market averages (as measured by S&P 500) of 8.36%, 12.36%, and 20.84%, respectively.
For more details please see the Valuation tab of the ASML spreadsheet.
Capital Structure/Solvency/Cash Flow/Governance/Other