ASML Holding N.V. (ASML) was the first of the capital equipment companies to report third quarter results. Judging from the 100.7% increase in revenue to €555.3 million, we feel more optimistic about Applied Materials (AMAT), KLA Tencor (KLAC), Lam Research (LRCX) and Tokyo Electron, the other big players in the space.

Although the year-over-year decline of 20.3% indicates that sales are still quite weak, performance is still significantly better than the 67.2% and 80.0% year-over-year declines in the preceding two quarters.

The strengthening markets are not so much a reflection of a recovery, according to management, as they are a result of new product introductions, leading to increased demand from memory and foundry customers in Asia. 

Revenue increase in the last quarter was driven by increases in both average selling price (ASP) and units. ASML Holding shipped 24 systems in the last quarter at an average selling price (ASP) of €19.1 million. While this is not such a significant number, it does indicate a slowdown in the rate of decline. What is particularly encouraging is the increase in units booked from 15 systems in the June quarter to 35 systems in the September quarter.

The ASP increased slightly by 4.4% sequentially, following the 98.9% increase in the June quarter. The ASP of systems in backlog is even higher. The gap between ASPs of systems sold and those in backlog has been widening since the third quarter of 2008, and are currently the highest they have been in seven quarters. We believe this is indicative of pricing power.

We can attribute the underlying strength in prices to a couple of reasons. The first is related to the ongoing capacity shrink, where most of the 200mm fabs have been shut down. The focus on 300mm to drive cost savings is beneficial for the company since these fabs are more capital intensive and require investment in leading edge technology.

The second reason is tied to production cycles and technology transitions. In the memory segment, DRAM/NAND manufacturers require more advanced systems to ramp production of DDR3 memory devices. In the foundry and logic segment, the transition to smaller chip geometries drive demand for advanced systems.

As a result of the increase in sales volumes, the gross margin increased 2,199 basis points. Operating expenses declined from around €159 million to around €153 million, with the operating margin coming in at 6.9%. This is a considerable improvement from the double-digit operating losses reported in the preceding three quarters. GAAP income per share was -€0.05 compared to loss of €0.24 in the June quarter and profit of €0.17 in the year-ago quarter.

Management expects sales of around €550 million in the fourth quarter — flat sequentially and up 11.4% compared to the fourth quarter of 2008. The GAAP gross margin is expected to be around 37%, driven mainly be a richer mix of products. However, both R&D and SG&A are expected to be flattish at around €115 million and €37 million, respectively.

Management currently expects fourth quarter orders to be flattish with the third quarter in terms of value. The tax rate for the year is expected to come in at less than 20%.

Over the next few quarters, management expects the cash balance to fall below the targeted €1 billion. This is mainly due to the fact that initial lead times on the new NXT platforms (that launched in the third quarter) and the EUV platforms (scheduled for launch in the second half of 2010) are much longer.
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