Earnings season has started in earnest with a mix of headwinds and tailwinds. This could be an important quarter and Deshima’s catch-up is delving deeper in numbers and management comments. SAP and ASML remain confident but TSMC, the largest player in semiconductor manufacturing, is revising down its outlook as the inventory adjustment takes longer than previously expected. 

ASML: Strong topline growth topped with a slight margin improvement 

ASML based in the Netherlands is the largest global Semiconductor manufacturing company. It manufactures lithography equipment for chips. Sales are split between EUV which stands for Extra Ultraviolet and is used for advanced microprocessors. ASML is the only supplier of this technology. DUV stands for Deep Ultraviolet is being used for mature processors and memory and, in that segment, ASML competes with Canon and Nikon. EUV commands higher growth and margin. The revenue split between EUV and DUV is 40-60. 

Quarterly Net sales came in at €6.7 billion, which was above company guidance due to higher-than-expected EUV and DUV revenue from faster installation and earlier acceptance of systems in the quarter. ASML currently sees no change in their full year outlook as provided last quarter. As a reminder, they expect EUV business growth to be around 40% over 2022 and non-EUV business growth of around 30%. In summary, ASML continue to expect a year of strong growth with a net sales increase of over 25% and a slight improvement in gross margin. During the earnings call, Peter Wennink, ASML’s CEO, summarized the situation neatly: “Short to medium term business outlook is still very strong, supported by a backlog that represents almost two years of tool shipments continuously pushing our output capacity to the maximum and further underpinning our plan to expand our capacity.”

TSMC: Stronger than expected cyclical headwinds to weather in 2023 2nd half 

TSMC is the leading and largest global semiconductor manufacturer. Their inventory and order book is widely followed and often considered as a lead indicator for demand for technology hardware. CC Wei, TSMC’s CEO, is highly respected and so his opening comment at the company’s latest earnings call carries some weight:

“First, let me start with our near-term demand and inventory. 3 months ago, we said we expect fabless semiconductor inventory to start gradually reducing 4Q 2022 and we forecast a sharper reduction throughout the first half of 2023. However, due to weakening macroeconomic conditions and softening end market demand, fabless semiconductor inventory continued to increase in the fourth quarter and exited 2022 at a much higher level than we expected.” 

In addition, the recovery in end market demand from channels reopening is also lower than TSMC’s initial expectation. Therefore, the fabless semiconductor inventory adjustment in first half '23 is taking longer than expected and may extend into third quarter this year before rebalancing to a healthier level. For the full year of 2023, TSMC forecasts the semiconductor market, excluding memory, to decline mid-single-digit percent while foundry industry is forecast to decline high single-digit percent. 

CC Wei believes that “we are passing through the bottom of the cycle of TSMC’s business in the second quarter. While we forecast only a gradual recovery, for the semiconductor ex memory industry in second half 2023, TSMC's business in the second half of this year is expected to be stronger than the first half, supported by customers' new product launches”.

SAP: Strong Q1 2023 results

SAP is a European software company which develops business operations and customer relations software products. Under a new management team, the company has been migrating clients from a “licensing business model” to a “cloud business model». Last week’s results gave very probing results concerning this cloud migration: cloud revenues and backlog order book were both up 25% in Q1 2023 confirming that despite war in Ukraine there was no slowdown in IT spending for European companies.

Tesla: From margins to volume growth

Tesla is the leading global player in electrical vehicles. It also leads in emerging markets such as energy storage, autonomous driving, and smart robots. 

In Elon Musk’s words, Tesla has taken a view “that pushing for higher volumes and a larger fleet is the right choice here versus a lower volume and higher margin” and he expects that electrical car, over time, will be able to generate significant profit through autonomy and it is better to ship a large number of cars at a lower margin, and subsequently, harvest that margin in the future as Tesla perfects autonomy”. At the same time, cost discipline in manufacturing and logistics is paying off, with unit costs improving in both Berlin and Austin. Progress are being done on energy storage with expansion of their California Mega factory.