MarketWatch  Jul 18  Comment 
Shares of semiconductor-equipment companies Lam Research Corp. , Applied Materials Inc. , and KLA-Tencor Corp. are up in premarket trading after ASML Holding NV reported better-than-expected results and said it expected a stronger second half....
Yahoo  Jun 13  Comment 
I’ve been keeping an eye on ASML Holding NV. (NASDAQ:ASML) because I’m attracted to its fundamentals. Looking at the company as a whole, as a potential stock investment, I believeRead More...


Based in the Veldhoven, Netherlands, ASML Holding N.V. (ASML) is the world's largest original equipment manufacturer (OEM) of advanced photolithography systems used within the semiconductor manufacturing industry to produce integrated circuits (ICs). Gartner Dataquest, an industry consultant, estimated that ASML had 51% share of the market in 2004. Photolithography systems are employed during the front-end process of semiconductor production.

The front-end process begins with device formation. This process begins with a wafer (usually made of silicon) having a layer of photoresist (a chemical that hardens when exposed to an ultraviolet light source) spin-coated onto the surface in liquid form to drive off the excess solvent, and then "soft-baked" or cured. A photomask is then loaded into the lithography system. Photomasks, also called masks or reticles (if the mask is "stepped" across the wafer), are high-purity quartz or glass plates containing precise microscopic images that are used by a photolithography tool, also known as a stepper. An excimer laser is then passed over the photomask and through a reduction lens system that exposes the desired areas of photoresist, which is then subsequently removed, permitting deposition to the surface of the wafer. A strip system is utilized to remove the photoresist or other chemical residues following diffusion processing or film deposition. Thin layers of dopants are then grown or deposited in a precise pattern within the wafer using various chemical, vapor or ion implant techniques. The deposition process alters the atomic structure of the material, and therefore necessarily the electronic properties of the material. Further into the wafer fabrication process, a series of metallization steps are executed, in which conducting materials, that interconnect the semiconductor devices, are deposited. Multiple layers of conducting, semiconducting and insulating materials are constructed on and within the wafer via successive steps of lithography, etching and deposition, utilizing unique masks for each layer. Depending on the geometry and the device, anywhere from 35 to 45 unique masks are used in the device formation process with 10 to 100 layers (or more for microprocessors) being constructed. Typically, the outcome is a wafer with multi-layered semiconducting devices, known as transistors. The transistors are interconnected with conducting materials, and insulating materials are used to electronically isolate the active components. The net result is a silicon wafer that contains multiple copies of integrated circuit devices.

The firm's equipment includes stepper and scanner systems that are utilized in the front-end integrated fabrication or device formation lithography process. The firm has been actively researching two new technologies, immersion lithography and maskless lithography. Immersion lithography permits the ion beam to be more precisely controlled during the formation process, resulting in smaller design geometries or line resolutions. This is accomplished by using water rather than "dry" air between the wafer and hyper-NA (numerical aperture) lenses, thus improving the depth of focus and the extension of wavelengths to lower nodes. Because of the lenses, the same light sources used in 193nm lithography systems can be used down to the 45nm node. Maskless lithography is an alternative to using costly masks that take time to design and manufacture. The company outsources the manufacture of component modules to third party contractors that make the complex systems. ASML then assembles and tests the full system in-house, prior to shipment. Competition comes from only two other OEMs Nikon and Canon both of Japan.

Formerly known as ASM Lithography Holding N.V., the company acts as the holding company for its various subsidiaries located in the Netherlands, the U.S., Hong Kong, Taiwan, Italy, France, Germany, and Korea. Its customers are located in the U.S., Asia and Western Europe. ASML also provides a full range of support services, including process and product application knowledge, to its customers. In the second half of 2005, sales by geographical location were as follows: Korea 40%, the U.S. 23%, Taiwan 19%, Singapore 8%, Europe 6%, Japan 3% and China 1%. Roughly 90% of the top 10 global IC manufacturers were customers of ASML. One customer accounted for 18% of 2004 revenue.

Below is a table that converts the yearly revenue and earnings per ADR (EPADR) figures into United States dollars (US$) at the weighted monthly exchange rate. Future periods use the current spot rate as a forward proxy. Note that there have not been any accounting adjustments made from the reported financial results and this presentation is for illustrative purposes only. ASML reports all financial results in Euros ( ) using U.S. GAAP accounting rules.

Converted** Fiscal Year Revenue and EPADR



(US$ billions)

Pro forma





Exchange Rate


1.761 A

-$0.24 A

-$0.36 A



3.076 A

$0.65 A

$0.57 A



0.904 A

$0.26 A

$0.26 A



0.960 A

$0.28 A

$0.28 A



0.643 A

$0.12 A

$0.12 A



0.676 A

$0.13 A

$0.13 E



3.183 A

$0.79 A

$0.79 A



4.680 A

$1.55 A

$1.55 A


    • Conversions at historical weighted monthly ending exchange rate with future periods using the current spot rate as a forward proxy

ASML is a technology leader and it is this advantage that has given it an edge over other players in the field. The company was the first to introduce an immersion lithography technology (TWINSCAN XT: 1250I) and has just shipped the first of the fourth generation tools the TWINSCAN XT: 1700I. Additionally, it was the first to manufacture a full-field 157nm tool (Micrascan VII) that is able to create working chips. The improved TWINSCAN XT Platform will offer more advantages than any other single chamber platform. The modularity of the entire system is a competitive advantage, as customers can upgrade portions of the system rather than having to purchase an entirely new system. The first immersion pre-production tool was shipped in the September 2004 quarter to a U.S. customer. Even though the wet capability hasn't been put into a production process, the tool is backward capable for dry processes. The company shipped eight XT1400s (third generation) during the first quarter for 64nm node production and 45nm pre-production processes. In the second quarter, four XT1700s were shipped, targeting 45nm production processes. TSMC, the largest semiconductor foundry in the world, has also ordered the immersion tool.

Ramping R&D

Management has announced its intention to bring R&D up to 120 million from approximately 93 million in the second quarter of 2006. ASML feels the industry will require different architectures for each sub technology. The company plans to make 20-30% of this spending flexible so during downturns it could scale back. The company has two EUV tools it plans to ship this quarter. This once again speaks to technology leadership.

ASML's 193nm introduction is unlikely to face competition, at least in the near-term. In addition, the used equipment market is also improving, with tier II customers increasing their capacity by adding 200mm tools. The 200mm tools have better gross margins than the 300mm products, since these products are newer. The increasing demand for Dynamic Random Access Memory (DRAM) chips is the driver behind the recent sales surge. These are commoditized memory products used in computers. DRAM strength is good for the firm, as memory manufacturers continue to add fabrication capacity. Demand for higher-ASP 300mm products remains strong. Gross margin for 300mm products is expected to increase 10% with better component pricing and redesigns. 300mm scanners comprise 70% of sales, while 200mm scanners generated 25%.

While most of the recent equipment orders have been technology driven buys, the company is prepared to quickly ramp production for capacity driven orders in 2007. There has definitely been a noticeable shift from 200mm KrF systems to 300mm ArF systems, as ArF systems represent 67% of the backlog. There has also been a shift in the composition of the customer base from foundry to memory customers. While foundry customers made up 49% of the revenue contribution in the second half of 2004, memory customers now account for 61% of sales. However, the current backlog indicates that the sales contribution from memory customers will decline in the near-term. The pricing pressure in both the DRAM and flash memory businesses has driven this shift. Memory manufacturers are quickly ramping up production of leading edge 300mm systems to lower the cost of production and stabilize memory product margins. Foundry utilization has risen over the past several quarters, but is not yet at the level that demands capacity expansion. Although, some wafer manufacturers have begun to raise prices, which suggests that forward production capacity is becoming tighter. IDM customer orders have been stable over the past four quarters. ASML had problems in the past penetrating the Japanese market, the home turf of its two major rivals. However, penetration has begun with the introduction of the immersion systems at companies such as Matsushita. A more favorable product mix, combined with management's restructuring and cost reduction initiatives, should improve profitability.

Set to Dominate in 2008

Several factors point to a very strong 2008. First management is confident that the industry going to get out of 2007 with a balanced capacity demand. ASML has been building a lot of capacity in the DRAM and flash businesses, which will take until the end of year 2007, to be fully in balanced with demand. So we expect ASML to get into 2008 with a, fully utilized, optimum capacity level.

Factor number two, several industry sources analysis' (Gartner, VLSI, Insight), all look for a semiconductor unit growth in 2008, which would be higher than the one of 2007. The latest number calls for above 10% unit semiconductor gross and this is the driver ASML's business. We expect it to be, therefore a good year for lithography.

The third point is one that concerned to ASML's technologies. The firm is ramping immersion very quickly. Immersion is getting into production for the flash nodes at the 5x level that is 50-nanometer and above. Management expects in 2008, that the flash customers are willing to ramp 4x nodes to another completely different node in high volume and also expect the DRAM customers to start to ramp for the first time, immersion into their business. This is key to ASML's growth because DRAM today is still a business which is approximately twice the size of flash. So if they do ramp immersion into this business there is tremendous upside.


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