ASML Overcomes Memory-Chip Weakness

With oversupply in the memory-chip market leading some producers to slash plans for capital spending, companies that manufacture the equipment needed to make memory chips are facing weak demand for their products. ASML Holding (ASML -1.41%), a Dutch supplier of photolithography systems, is feeling the squeeze. ASML's second-quarter report was better than expected, beating analyst estimates for earnings, but the company sees the memory business struggling for the rest of the year.

Memory weakness and logic strength

ASML managed to grow revenue in the second quarter compared to the first quarter, largely due to an increase in revenue from installed base management, which includes service and field option sales. Installed base management sales also increased on a year-over-year basis, but that wasn't enough to prevent a decline in overall revenue from the prior-year period:

YOY = year over year. Data source: ASML.

Net system sales tumbled 11.3% year over year to 1.85 billion euros, while net service and field option sales rose 9.7% to 717 million euros.

Sales of systems for memory-chip production accounted for 39% of total system sales during the second quarter. Through the first six months of 2019, ASML generated 1.41 billion euros of revenue from memory system sales, tracking well below the pace set in 2018. The company sold 4.55 billion worth of memory systems last year.

ASML sees two headwinds hurting the memory business. First, the current macroeconomic environment is creating end-market volatility and industry uncertainty. Second, memory customers are digesting capacity additions in a weak demand environment, which is leading to less demand for new equipment.

While the memory business is struggling, the logic business is picking up most of the slack. ASML is seeing its logic customers accelerate the ramp of leading-edge nodes, particularly the 7-nanometer node. Advanced Micro Devices recently launched the first PC CPUs (central processing units) and consumer GPUs (graphics processing units) built on a 7nm manufacturing process, courtesy of Taiwan Semiconductor Manufacturing.

Maintaining its guidance

"For the remainder of the year we see further weakness in Memory," said ASML CEO Peter Wennink in prepared remarks. However, the company expects increased demand in the logic segment to offset lower sales in the memory segment.

ASML expects to report third-quarter revenue of roughly 3.0 billion euros, compared to 2.78 billion euros in the third quarter of 2018. Despite the memory weakness, the company hasn't changed its full-year expectations. "Our 2019 total sales view remains unchanged and we continue to see 2019 as a growth year," said Wennink.

With growth expected to return in the second half of the year, driven by strong demand from logic customers, shares of ASML were closing in on their 52-week high Wednesday morning. A complicated macroeconomic environment could derail things later this year or in 2020, but for now the company is on track to grow revenue this year.