After a rough third fiscal quarter, ASML (ASML 3.60%), the world's largest supplier of photolithography systems for the semiconductor industry, posted record quarterly earnings and a strong 2013 fiscal year that was largely driven by increased demand for the latest smartphones and tablets. Even so, the real star of its quarterly and yearly results is a new promising outlook in an often delayed technology that can yield strong long-term results.

The results
For the fourth quarter ending Dec. 31, 2013, ASML reported EPS of $1.46, beating the forecast $1.26 by 15.87%. Net income rose by 62% year over year to a record $657 million, up from $406 million a year earlier. Revenue rose 81% to $2.53 billion, up from $1.39 billion. Gross margins were strong at 43.6%, well within line of the company's standard. 

For fiscal 2013, ASML reported a record-breaking $7.19 billion in revenue, up 11% year over year, but it saw a decrease of 13% in net income, with a reported $1.38 billion. Gross margin remained strong at 41.5%. 

Why you should pay attention
Outside of continued success with its current photolithography machines -- of which the company sold 157 last year -- ASML has been continuing its research in the often-delayed EUV technology, a key component in allowing chipmakers to produce smaller, faster, less power-hungry chips with greater yields per wafer. Intel (INTC 1.28%), Samsung (NASDAQOTH: SSNLF) and Taiwan Semiconductor Manufacturing (TSM 3.91%) have invested more than $6.42 billion in ASML in hopes of accelerating the company's research. 

With Intel desperately wanting a larger presence in the tablet and smartphone markets, the company has invested the most heavily out of the three, with a $4.1 billion investment in ASML. Intel's big break in the mobile market could possibly come in the mid-to-late part of 2015, when the company will be shipping its first 14nm processor chip, code-named Broxton. With Intel having the best FinFET processes, which routinely puts the company years ahead of the competition, the industry could be caught off-guard with no answer to Intel's product line come 2015.

Luckily, Intel's two investment partners, Samsung and TSMC, have recently signed a contract where TSMC will be building 60%-70% of Apple's 14nm A9 chipsets using a 16nm FinFET process, with the remaining 30-40% being handled by Samsung using a 14nm FinFET process. This will prove to be a challenge for both companies, seeing as TSMC has already struggled meeting Apple's demand and that only Intel currently has the capabilities of using the FinFET process in producing chips in commercial quantities. Apple's iPhone 7 is rumored to be released during the second half of 2015.

Where ASML fits in
While EUV isn't necessary in the production of 14nm transistors, it is becoming more costly for chipmakers to manufacture smaller chips. In order to shrink chips without the use of EUVs, chipmakers can use current lithography machines with stronger light sources and triple patterning, but this process will heavily cut into both margins and yields. As chipsets become smaller, using EUVs will inevitably become essential.

A highlight in ASML's fourth-quarter results is that after having sold its first EUV system in the previous quarter, the company has sold an additional three more. It also has an additional 14 in backlog, eight of which are expected to ship this year. While the semiconductor industry likes to closely guard its dealings, it's safe to assume that these shipments are arriving at the doorsteps of Intel, Samsung and TSMC.

While this is good news, customers that are currently ordering EUV machines are dealing with a lot of risks. They are expected to upgrade to models that offer more stability and higher productivity once they are released. According to a Bloomberg report, ASML isn't expected to reach the required stability levels in its EUV systems until the second half of 2016 or in 2017. Nonetheless, Chief Executive Officer Peter Wennink assures that "current EUV systems are at a level that is good enough for initial production for our customers".

The Foolish bottom line
ASML is projecting a strong 2014 first quarter, forecasting net sales at around €1.4 billion  -- $1.9 billion -- and a gross margin of around 42%. For the first half, the company is expecting revenue of €3 billion  -- around $4.1 billion -- excluding additional sales of EUV systems. With the semiconductor industry making significant investments in accelerating ASML research in EUV technology, and with the first four EUV machines having shipped and 14 more already in the backlog, ASML looks to remain strong through 2017.

While the company may be busy shrinking chips, you might want to consider growing your portfolio with ASML.