ASML Holding NV (NASDAQ:ASML) Citi 2022 Global Technology Conference September 8, 2022 9:00 AM ET
Company Participants
Skip Miller – VP, IR Worldwide
Conference Call Participants
Amit Harchandani – Citigroup Inc.
Amit Harchandani
I’m Amit Harchandani, Head of Citi’s European tech research team and your host for this fireside chat session on ASML. Thank you for joining us, and I do hope you and your loved ones are safe and healthy. Representing the company, it’s my privilege to introduce our main speaker, Skip Miller, Head of IR. Thank you, Skip, for joining us and supporting our conference.
Skip Miller
Hi. Thank you, Amit.
Amit Harchandani
So in terms of the plan for the session, we’ll start by talking about some of the near-term dynamics, then broaden the discussion towards touching upon some of the mid to longer-term themes and towards the end, round off with some questions around the financials.
Question-and-Answer Session
Q – Amit Harchandani
So let’s get the ball rolling then, Skip. To start off, give us a sense for where Q3 as a quarter is shaping up to be and more broadly, your thoughts on the state of the business today.
Skip Miller
Yes. So I think if you look at where we are today, I think the — our view is like we mentioned in July, where demand is unchanged in terms of where we set in July, and it’s really more focused around the supply side. So we mentioned a number of supply challenges that we faced and talked about in July. They’re kind of broad-based. We continue to manage through those. And that’s kind of what we’re — again, demand is still significantly above supply for this year. And we still have our — in terms of our guidance, we’re still expecting a growth of 10% this year revenue.
And as a reminder, we have €2.8 billion of delayed revenue that moved into next year due to fast shipments. So we’re using fast shipments even more extensively coming from April to July, which is why we increased the amount of delayed revenue from €1 billion to €2.8 billion. And I guess we can come back and talk about fast shipments on future questions here.
Amit Harchandani
Absolutely. Thank you for setting up the overview, and definitely, we’ll come back to fast shipments. But staying on the topic of supply that you touched upon before we move on to a big discussion around demand, help us understand what were the gating factors that held you back in July. Was it chips? Was it components? Was it talent? And then walk us through how you’re looking to resolve some of those issues. And where do you expect to be by the end of this year?
Skip Miller
Yes. So I think if you listen to what we said at the start of the year, it was — chips were part of that. We work with a lot of our customers, obviously, that could help in prioritization of those chips. So we went into the supply chain, made sure we had the proper escalation channels within the supply chain where there was a communication to ASML. So first, we could identify what were the chips that were needed and then work with our customers to get the proper priority.
I think today, chips, you could say we feel we’ve resolved that particular supply chain challenge. And it’s a bit more broad-based. And it’s not just a first tier, more second, third and fourth tier in the supply chain, meaning it’s the component level that we’re working through right now. So we’re being as proactive as we can to get into not only just visibility at the first tier but how second, third and fourth and how we can make sure that, that will not gate us along the way. So that’s early what’s driving the focus within ASML.
As Peter, I think, and Roger mentioned in the call, we had some increasing escalations going from April, July, and we’re starting to see, hopefully, that starting to come down the other way. And our expectation is that we can work through these in the second half of the year such that we to maximize output next year as we plan to further increase that capacity. But yes, it’s a number of challenges that we’ll have to work through, and team continues to do a good job on that front. But they’re still — we’re not completely clear skies.
Amit Harchandani
Okay. So you’re no longer ripping open washing machines to get the chips? That’s behind us now?
Skip Miller
Right. We’re leaving the washing machines alone. So you should be able to get your washing machine now on time.
Amit Harchandani
Absolutely. Would appreciate that. In terms of — moving on then, so we’ve touched upon supply. But on the talent side, is that a gating factor for you today or not really? Because in the past, that has also been mentioned.
Skip Miller
Yes. So one thing we had also mentioned that, that kind of amplifies the supply challenges are the fact that we are asking our supply chain to ramp. So we’re in the process of ramping and even pulling in, trying to pull to the original ramp that we talked just about a year ago. And as you know, we’re talking about further increasing that, and we’ll talk more about that November this year.
But we’re asking them to pull the capacity forward, which puts additional strain on the supply chain. And that includes talent, obviously, in people. So people are part of it, components are part of it. As they ramp the equipment in their factory, these are all pieces that we’ll have to work through.
I think in general, we are effectively working through it, but they’re still — they’re there, the challenges are there. We need to continue to acknowledge that and say that we’ll hopefully have those results as we get through the year. But I think there will continue to be a pressure on the talent piece of it as well or the people headcount piece of it as you go through the second half of this year as well.
Amit Harchandani
Got it. Let’s maybe switch from supply to demand. And since yesterday at the conference, every investor I’ve spoken to looks at semis is asking me about memory and the potential drop in demand on the memory side. You seem to be saying something which is slightly different to what we are hearing out there. Help us understand, what are you hearing from your memory customers who are publicly talking about cuts to CapEx? But it seems like you are not seeing that come through in your order book just yet.
Skip Miller
Yes. So we see the articles and we hear that what’s going on with respect to the consumer side of the business or the end markets there in terms of slowing demand, primarily PC, smartphones, and also heard comments from some of the memory customers that they’re looking at taking CapEx lower in 2023. So acknowledged all that. However, we haven’t seen a change in terms of our demand.
You say, “Okay, why could that be?” Well, I think first off, the timing is quite long on litho tools. So if you look at the lead times extending even beyond what we typically have for the longest lead time in the fab, that may, in fact, say, “Well, I don’t want to get out of line, knowing that it’s going to take over 18 months to get an EUV tool.” Maybe they’ll wait on that. Deep-UV lead times are also stretching. So they’re going to be hesitant to get back in line, if you will, if you say, “I’m going to push my machine out in time.” So I think that’s a big one.
The other is, keep in mind that we’re running in a situation where demand significantly exceeds supply. So even though the — when the — we took the orders for the machines, their requested amount — and this is a broad-based comment, the requested amount was higher than what we were able to commit in terms of the supply. And so you already had some restriction on that piece of the demand that was there. So that combination, I think, is, again, going to at least keep our customers, you could say slow to make adjustments on any demand. So I think from that perspective, we haven’t seen any changes on that front.
Could it come? I think it’s going to depend on your view on the recessionary impact that we’re going to see. Is it going to be something mild and moderate? I think Peter and Roger spoke to that, that if it’s mild and moderate by the time you get through this thing, they may not want to — they may want to have the capacity in place.
And again, the other piece is that I think you’re going to continue to see customers innovate through this, make the strategic investments on future technology. So you have to keep that piece of it in mind as opposed to just a capacity addition.
Amit Harchandani
Got it. Just as a reminder for the audience, could you tell us what the typical lead time is supposed to be for your machines and where it stands today, EUV and DUV?
Skip Miller
Well, EUV, we used to say something close to 18 months, again, stretching it beyond that now.
Amit Harchandani
That’s for DUV or…?
Skip Miller
EUV, E as in Edward. D, we used to see on merchant, we had talked six to nine months the drive being closer to six months. And again, those lead times have stretched significantly. As we sit here today, orders that we’re taking for EUV are out in ’24, DUVs already moving from ’23 into ’24. So that’s where we’re faced today. It’s just the reality of the fact that we have this still continued gap in 2023, where demand, we’ve talked about being in the order of 40% above the supply line, the biggest gap being in Deep-UV. And if you drill a bit deeper, the biggest gap within Deep-UV being dry.
Amit Harchandani
Noted. So let’s then — we talked a little bit about memory. Let’s go to the logic side of it. Again, logic demand is seen as being relatively resilient. Again, our checks suggest some divergence in commentary between the Tier 1s, the Tier 2s, the IDMs again. So help us understand your perspective on what you’re hearing from your logic customers today.
Skip Miller
Yes. The logic compared to what we just stated on the memory side coming from the consumer piece of it, this is the mixed message part that we talked about in July. And I think that’s still very relevant where you have areas, PCs and smartphones, that are seeing some weakness or slowing of demand. And then, on the other hand, you have areas like high-performance compute, automotive, industrial that still are very strong. I think that’s still the case today that we see very strong demand both on the advanced and the mature side as it relates to logic.
So what’s driving that? I think we’ve talked about this for quite some time. I think TSMC most recently talked about this digital transformation that’s underway. We’ve talked about that. We’ve talked about the different drivers. Under that, I mean the AI, the 5G, the HPC, the dot-dot-dot that keep fueling not only advanced but all the digital infrastructure around that, which means the sensors, the power management, which is a mature technology. It’s a combination is really fueling the logic side of that. And still, again, the strength versus the — some of the slowing demand piece we’re seeing in memory. So I think that’s the mixed message that we’re working through right now in terms of the end markets.
Amit Harchandani
So if I put this together, and I think potentially in terms of what it may mean for bookings because that’s one of the leading metrics that — leading indicators that investors could possibly look at, the June quarter was a strong quarter of bookings, March as well. Any thoughts on how we should think about bookings shaping up in Q3 and Q4?
Skip Miller
Yes. We — so just as a reminder, last quarter, ending Q2 and in our July results, we talked — we had a record quarter of around €8.5 billion. And that brings us to a backlog of a little over €33 billion which, again, is why we said we feel fairly well covered not only for this year but next year as well. And we said for the quarter that we’re — in right now that we’re seeing healthy order flow already. We typically don’t say a lot on the order side in terms of guiding, but we’re already starting to see strong orders in the quarter end.
So again, we’re expecting another healthy year — healthy quarter there, such that the setup is already on a — over €33 billion. If you put a healthy order a quarter on top of that, it’s going to give you pretty good coverage through next year, which is why we said it could be set up to cover — fairly well covered for next year in terms of the total revenue and what we’re planning next year in terms of capacity.
So capacity next year, we’re talking about EUV units over 60. This year, we’re targeting 55. Next year, Deep-UV units over 375. And so that’s our capacity plan next year. I think the bookings and backlog that we’re building in the course of this year is setting up to support that, assuming we don’t go into some deep, ugly recession, which, of course, then we wouldn’t be amended.
Amit Harchandani
Okay. So actually, since you’ve talked about next year, let’s start segueing away from the near term into some of the broader topics I was talking about earlier. So firstly, for this year, you said revenue up 10% and the €2.8 billion of revenue is being deferred. So actually, you’re doing volume growth, if I could use that term, of 25%. Your volumes are going to be up 25%. Your revenue is up 10% because of the deferral into next year. As we look into next year — again, you talked about the capacity for DUV, the step-up in EUV. Doing the math, it does suggest another year of double-digit volume growth plus the deferred revenue coming on top of that. Is that a fair way to think about 2023 today?
Skip Miller
Yes. Look, maybe a note on — I think, first off, that’s shipping to our capacity. So we have to have the supply chain issues resolved by the end of this year or early next to, let’s say, realize the opportunity to ship to our full capacity next year, which is a greater than — 60 or more EUV and 375 or more Deep-UV.
The comments you made about the deferred amount coming out of ’22 into 2023, yes, we started the year at €1 billion and we now are at €2.8 billion of delayed revenue into 2023. And maybe we should circle back, talk about what does fast shipment mean for those at all to understand that detail. We can care that in a future question. But that €2.8 billion of delayed revenue, you could sit on top of whatever we do in 2023, but what we also have to understand is what’s going to happen with respect to these fast shipments over the course of next year.
And if we’re still doing fast shipments the way we are today, meaning the revenue only gets recognized at the site acceptance test, at our customer acceptance, which is basically a quarter after shipment, then you may still have some revenue that is delayed out of ’23 into 2024. So you have to keep that in account in terms of just taking the 60 or more EUV and 375 more or Deep-UV and then adding €2.8 billion on top. There may be some delay.
Amit Harchandani
Let’s actually elaborate on the fast shipments since we are talking about it, if you could?
Skip Miller
Yes. A good time for that. So first off, what is a fast shipment? A fast shipment — the intention of a fast shipment is to reduce cycle time in our factory or said differently, to get to the machine into production at our customer site as quickly as possible. That’s why we have incorporated fast shipments.
Why do we start doing that? We started doing that because we were having some of these issues with the supply chain, some of the constraints. We were finding the supply chains were delaying the starts. And so try to get the machine still out of our factory this year, we started incorporating the fast shipment. And what a fast shipment does is that we still fully integrate the machine in our factory. So all the hardware is in place. But then you run a series of tests that we call factory acceptance test.
And in a normal standard flow, let’s say you run 100% of the test, call it, 100 of these tests, and then you ship the machine to the field, it gets installed at our customer site, and then you rerun those 100 tests at the site or site acceptance at our customers. And under a fast acceptance scenario, a fast — sorry, fast ship scenario, you complete fully integrating the machine. At the end of that process in our factory in Veldhoven, instead of running 100% of the test, we run a subset of those tests.
And so what that does is it basically saves somewhere in the order of three to four weeks of cycle time in our factory that we can then in turn ship to our customer. And once it gets to our customer, we then have the same period, let’s say, 12 to 14 weeks, of installation and qualification. And then we rerun the site acceptance test, all 100 this time, and then that triggers revenue recognition.
The cash flow in either one of those scenarios is the same, but the revenue trigger is later. So it’s just delay of this 12 to 14 weeks until we wait for site acceptance tests. Now if — so if you’re sitting here in 2023 and we’re still doing this process, then there are machines that we shipped in Q4 that will likely fall into 2024. However, we’re also working with our customers and with the accountants to say, “Okay, look, if we establish a pattern here where under a fast shipment scenario where we choose using SPC, what tests we really want to run that we’ll try to detect any problems that we could potentially avoid and export into the field, which we don’t want to do, if we can demonstrate that this fast shipment flow still delivers in the same timeframe from shipment of our factory to install and qualification at our customer, then you can go back and say, “Okay, well, the fast shipment is effectively doing what our standard flow used to do only we’re doing it faster.” So customers can sign off with just doing these subset of these tests.
That’s something we’re working on. We’re not there yet. We’re working to with our customers. And if we can demonstrate the data can show that we have a pattern there that minimizes that risk or avoids the fact that we’re — we don’t want to export problems into the field or risk the machine having to come back, then I think we can convince both our customers and the accountants. That’s the process that we’re working through. We’re not there. But say, if we get to that point in 2023, then that full €2.8 billion as well as our full shipment value in 2023 can be recognized.
Amit Harchandani
Thank you, Skip, for that comprehensive overview. At this stage, since we are slightly past the halfway mark, let me see if there are any particular questions from the audience here. If you could kindly pass the mic to the gentleman in the front row?
Unidentified Analyst
Skip, can you just talk about trailing-edge demand coming from China? And what impact, if any, do you think U.S. policy on semiconductors is having on your business as it relates to China?
Skip Miller
So maybe first on trailing. Yes, so trailing-edge, obviously, beyond is China, but there’s a big a portion of that is produced in China. And again, there’s a lot of older technology that you say uses a lot of the dry products. But then starting in the 28 nanometers also have emergent technology that is used for the 28-nanometer and beyond technology.
In terms of demand, I think if you look at the growth that we’re talking about in China, we’ve talked about this similar to what we expect our top line revenue growth to be. A bulk of that obviously is going to be in that older or more mature technology but also including 28-nanometer. In terms of what we can do in export control, today, we’re not able to ship EUV machines, but we can’t ship Deep-UV machines. That’s because it’s the bulk of what’s produced in China and what’s needed in a global stage are these 28-nanometer and larger devices.
Unidentified Analyst
I guess the question is how would you describe demand coming from the region, specifically for those technologies?
Skip Miller
Still strong. And I think there’s also a component that says that, that will continue, likely to be a strategic investment in China as they continue to push from capability in China. But again, that’s all in support of a lot of this foundry demand, a lot of this mature technology, a lot of this digital infrastructure I’m talking about. A lot of that’s being also built in China.
Unidentified Analyst
Just trying to reconcile that with — there’s multiple reports about the foundries in China seeing their utilization rates come down, pricing coming down, seeing the impact from a weaker economy there versus what we’re hearing from you and your peers as far as demand for trailing-edge equipment. How would you reconcile it?
Skip Miller
Well, I think the point is we’re going to continue to invest in this. I think different from the memory discussion we had earlier, this is the mixed message side where they’re seeing end markets still quite healthy in terms of the demand as it relates to these foundries both the mature — or the very older technology. But again, a lot of the stuff that we’re talking about has to do with sensors, has to do a lot with power management.
We’ve talked — Peter even referenced on the call, one, we talked about energy efficiency and — or energy conversion as we move to green. That’s also fueling demand in China but also other areas across the globe. So I think that — those end markets are not feeling the same strain that’s maybe some of the memory guys have talked to. So they have a bit broader application space they’re supporting with the nodes that they’re building in China.
Amit Harchandani
All right. That’s one of my questions out of the way. That’s good. So if — since we have already touched upon China, I just wanted to then take the discussion forward a little bit and talk about, I guess, the picture slightly beyond 2023 because as you said, you are not seeing a drop in demand. That’s fine. Let’s assume the CapEx is lower than there are other providers of WFE who see the shortfalls in 2023. But then is there a risk that you end up seeing a shortfall in because then the customers are spending on stuff other than lithography? So I guess, is there a possibility of an air pocket? Or do you see other potential tailwinds, I don’t know, like tech sovereignty, for example, that might come in to support the demand beyond 2023?
Skip Miller
Yes. I think if you talk to the — what are the longer terms and forget the moment that this cycle that’s being talked about now in terms of near to midterm. But longer term, I think — and again, we’ll talk to that we see in our Investor Day in November 11 in Veldhoven. But I think if you look at the drivers there, I think a few things that have made the end-market demand even stronger than let’s say it was just our view a little over a year ago is the fact that you now have a lot of these end markets that were growing at a rate much stronger than we originally expected.
So first off, I think you talk about high-performance compute, automotive, industrial. Clearly, we had a fairly healthy CAGR, but it looks like it’s even stronger than we originally planned. I think that’s one of the things that we’ll continue to fuel beyond 2023.
Another piece is if you look at a lot of these high-performance applications, they also need to be energy-efficient. So another area that’s driving, you say, additional wafer demand is the fact that you need to make this energy-efficient transition as you grow your transistors. And what you’re seeing is that’s increasing the die size. So the increase the die size is also driving further demand in terms of the wafer demand as it relates to like applications.
I think another area that we’ve talked about is the mature piece, which back to the China question earlier, I think that whole space has been underestimated in terms of the digital infrastructure required. China is a part of it, but there’s a lot of players across the globe that build these, call it, more mature technologies that historically may have used refurb tools or have used tools that are available in the market. That’s not there. They’re having to buy new tools to build these factories that support older technology. And so I think that’s another piece that’s also coming across in the mature side.
And then lastly, you call it maybe — call it tech sovereignty, but also you could call it foundry and competition. Those two pieces we talked about a year ago in terms of the potential for tech sovereignty because it’s already a discussion underway. But fast forward, I think you now see a number of fabs that have been announced that are tied to this whole government initiative. Again, they were probably — they need additional capacity anyway. I think the government initiative in this CHIPS Act, for example, the EU has another also back there.
And that piece, I think, basically drove additional — you can say, additional demand, additional spend in conjunction with this foundry — increase in competition in foundry. And so all those pieces, partially end market, partially tech sovereignty, are really fueling additional demand in the longer term. And I think that’s something that will drive why we’re pushing for our capacity to increase in 2025 and beyond.
Amit Harchandani
Thanks, Skip. Was there a question in the audience?
Unidentified Analyst
Hey, Skip. Sorry to go back on China. But I don’t think you guys break out what revenues you’d get from China for your DUV particularly, but it would be helpful if you could give some color. But my question was more, as you look at your backlog for DUV, is that back — is China a bigger portion of your backlog for DUV than what you’ve been shipping for the past, I guess, 12 months or so? I guess there are more orders that have to be fulfilled for China.
Skip Miller
Yes. No. So I think we’ve said, if you look at the number in terms of — we do provide the revenue by region. We don’t break it out Deep-UV versus others. But obviously, what we’re shipping to China is all Deep-UV. In terms of backlog, obviously, there are customers in the China region as well in the backlog. I don’t think that you should think of it as any skew one way or the other in that respect is the backlog.
Amit Harchandani
All right. So before we get to financials, one of the other topics that comes up is, of course, some of these technology transitions medium term. You talk about gate-all-around, for example. On the logic side, there’s the debate about the eventual move to 3D on the DRAM side. Help us understand how do you think your litho intensity is likely to shape up, particularly as gate-all-around starts becoming more of a meaningful presence in the top line for your customers?
Skip Miller
Yes. So gate-all-around, first off, gate-all-around is a device architecture change, for those that aren’t familiar with the term. We — if you go back in time, we started with the planar device. At the 14, 16-nanometer node, we moved to a FinFET device. And finally, we’re planning in different timeframes the different customers are looking at gate-all-around. So that’s being implemented, let’s say, the upcoming between now and 2025.
The objective of gate-all-around is to get more control the gate. So before, a planar was only on one dimension. With FinFET, you could get around 3 sides. And with gate, you can completely wrap around and control the gate. So it’s all in the ability to control a smaller and smaller feature. So gate-all-around, just like FinFET, is good for the industry. It’s good for ASML in the sense it allows us to continue to shrink and realize the continuation of Moore’s Law. So that’s the reason behind gate-all-around.
In terms of the — if you look at the litho intensity and the growth in terms of spend per node, you continue to see it growing in time on all these different nodes. We talked about something on the order flow over 30% growth node on node when we communicated at our Investor Day with respect to the logic spend. This is gate-all-around has to do with logic. And if you look at that, what we — what occurred at FinFET, we expect will likely be similar to what will occur at gate-all-around, and that is that at the transition to this new device architecture, customers will likely want to manage risk there. And so they may be less aggressive with the shrink at that transition node before they resume a more aggressive strength going forward. And so you kind of see that and what went through a FinFET, we expect the same thing will occur at gate-all-around.
On the other front, DRAM, I think what we’re seeing there is that — yes. First off, the 2-dimensional DRAM or continued shrink using DRAM has extended way beyond, I think, many had thought even five, 10 years ago. We’ve had customers saying that they’re going to push it down to 5 nanometers over the next 10 years. And so they’ll continue to use EUV to do that. So you’ll see more EUV adoption on these future nodes, which will grow the litho intensity, which we — I think for Memory, we talked about something on the order of 20% node-on-node growth.
And then on NAND, I think as you continue to add more stacks or some additional litho along the way. And so we expected node-on-node growth to be something closer to 15%. We provided that in our litho spend slide in Investor Day last year, and we will talk about it again this coming November, and we expect any changes on that front. But again, I think the trend will continue to be increasing with the litho spend going forward in all three of these different areas of technology.
Amit Harchandani
Got it. We have a question in the audience.
Unidentified Analyst
A few minutes back, you talked about increased die sizes. And last 2 minutes, you’ve been talking about Moore’s Law, continuing ongoing shrinks. On balance, do you really see that die sizes overall are going to increase going forward, which means to get the same number devices out, a lot more wafers are going to have to be processed? And is that something that’s going to be a very obvious driver for ASML’s revenues going forward is larger die sizes?
Skip Miller
Yes. Yes. So I think that will be a piece of that, for sure. I think the increased die size is the exact is holding our scaling is nothing new, meaning it’s been, well, maybe 15 years or so ago, around 2005 or so, the realization that for energy efficiency, we have to maybe start scaling the die size. I think what we’re seeing though is the number of applications that need this energy-efficient transistor growth — transistor density growth is maybe more meaningful. Therefore, what you’re seeing is that the more — as these die size increases occur, it’s driving more wafer demand. So I think we’ll talk again about one of these as the components of what could potentially be a carrier for why we’re seeing a stronger demand for some of these more advanced nodes compared to what we’ve seen in the past, and die side obviously growth would be one of those.
Amit Harchandani
Just moving on very quickly, realizing we are coming to the end of the session. In terms of the 2025 capacity planning, you’ve given certain targets to the market, right? And then you’re talking to your suppliers. Of course, we’ll hear more at the CMD. But could you give us a sense for where those conversations with your supply chain are today in terms of bringing on the additional capacity at the plant?
Skip Miller
Yes. Sure. So the additional capacity we’re talking about for Deep-UV is going up to 600. Again, we’re targeting to be around 375 next year or more. On EUV, again, we’re talking about over 60, next year going to 90. So that’s the numbers we put out there. We’ve also talked about High-NA going to 20 in the medium term. Those discussions, we first talked about earlier this year when we first had this discussion with our suppliers, and they’re actively working on that now. And so yes, I think they’re — we’re doing all we can, as I said earlier, to pull some of this stuff forward. But we need to come back now in November and say, hey, so after we put all this together, can we get to what’s the timing that we will be at these different capacity numbers and what is required in terms of the CapEx, what buildings are required, what does that mean in terms of the timing.
So we’re still working through that with our suppliers. But overall, I think they’re very engaged, on board and working to come back what that really going to mean, can we achieve this by the 2025 timeframe. But I think overall, a positive view, very much supportive of trying to get this capacity in place. But we need to work through what does it mean on the timing. Because a lot of this is going to include building buildings. It’s more than.
Amit Harchandani
Well, lastly, from my side, inflation. So you have been impacted this year. Your gross margins have trended lower because your costs have gone up. How do you anticipate that to be reversed? When do we start seeing your pricing power coming through and potentially you absorbing some of the increase in costs that you’re seeing this year?
Skip Miller
Yes. So just to remind everyone what we told, we settle inflation. What we’re talking about is we actually adjusted the — coming into this year, we were targeting a 53% gross margin. In April, we adjusted that down to 52% because inflationary effects. And then we took it down a bit further in July. But due to a combination — we took it from 52% down to 49% to 50% for the full year this year. But in there, we also had this €1.8 billion of delayed revenue, but not only delayed revenue but high-margin or higher-margin delayed revenue. So that was the bigger part of the change in gross margin in July, but there was still some inflationary effects in there as well.
And in that bucket, inflationary effects, we’re talking about freight, which has gone up 4x or 5x, both in terms of fuel but also routing. Second being labor. Everyone’s seeing the increase in the labor; and then lastly, systems. And so — and that meaning components. And that has to do more with machines that are being shipped, let’s say, later this year and into next year. But the freight and the labor impacted us nearer term. And so we’re in discussions with our customers to find a fair way to share in this and working through that. So we’re in the process of doing that right now such that we can see some sharing going forward and we can get back to our longer-term gross margins, which are 54% to 56% by 2025.
Amit Harchandani
All right. On that note, we are out of time. On behalf of Citi, thank you, Skip, for joining us today. And thank you to all the participants listening in on this session. This concludes the session on ASML. Thank you.
Skip Miller
Thanks, Amit. Thanks, everyone
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