Dutch semiconductor equipment supplier ASML Holding (NASDAQ:ASML) reported mixed third-quarter results on Wednesday morning. While revenue was up, driven by system sales to logic customers, a weak memory chip market continued to weigh on the company's results. Uncertainty still reigns supreme in the memory business, although ASML does expect to grow total revenue this year.

Higher system sales and persistent uncertainty

During the second quarter, ASML's system sales declined while its net service and field option sales rose. That was flipped on its head during Q3, driving overall revenue higher.

Metric

Q3 2019

Change (YOY)

Compared to Average Analyst Estimate 

Revenue

2.99 billion euros

7.6%

Missed by 20 million euros

Earnings per share

1.49 euros

(6.9%)

Beat by 0.04 euros

Data source: ASML. YOY = year over year.

System sales were up 11.8% year over year to 2.33 billion euros, compared to an 11.3% decline in the second quarter. Net service and field option sales came in at 660.9 million euros, down 5% from the year-ago period. In the second quarter, net service and field option sales soared 9.7% year over year.

ASML's business shifted toward logic in the third quarter, with 79% of system sales going to logic customers. That's up from 61% in the second quarter. System sales to memory customers accounted for the remaining 21%.

The memory chip industry is still plagued with uncertainty, and ASML is unable to predict the timing of a recovery. The company said that its memory customers are still digesting capacity additions in a weak demand environment, which is being partly driven by the current macroeconomic environment.

A silicon wafer.

A silicon wafer. Image source: ASML.

The logic business is another story, with logic customers accelerating their ramps of advanced nodes. Through the first nine months of 2019, ASML has already generated more sales from the logic business than in all of 2018.

ASML reported net bookings of 5.1 billion euros in the third quarter, nearly doubling its bookings in the second quarter. The split between logic and memory was similar to the sales split, with 73% of bookings going to logic customers and 27% going to memory customers.

A capital return update

Along with its third-quarter results, ASML announced a change in its dividend policy. The company will now pay dividends on a semiannual basis, instead of just once per year. An interim per-share dividend of 1.05 euros will be paid on Nov. 15 to shareholders of record on Nov. 5.

ASML continued repurchasing shares during the third quarter as part of its 2.5 billion euro program, but it now says that it doesn't expect to use the entire authorization before the end of 2019. Through the end of the third quarter, the company has spent 1.4 billion euros to buy back 8.2 million shares.

With ASML stock up substantially since the start of the year, a lofty valuation may be the reason the company is slowing down share repurchases.

2019 is still a growth year

"Our overall view for 2019 is essentially unchanged as we continue to see 2019 as a growth year," said CEO Peter Wennick in prepared remarks included in the earnings release. Despite the weakness in the memory business, strong logic sales are expected to drive total revenue higher this year.

For the fourth quarter, ASML expects to produce roughly 3.9 billion euros in sales, along with a gross margin between 48% and 49%. That's far higher than the 43.7% gross margin the company reported for the third quarter. If ASML hits its guidance, full-year sales will total nearly 11.7 billion euros, up from 10.9 billion euros in 2018.

The memory business could start to recover sometime next year, although that likely depends on global economic conditions not worsening. Expectations are high: Shares of ASML trade for nearly 40 times the average analyst estimate for 2019 earnings. This lofty valuation leaves little room for error.