ASML Rides the Immersion Lithography Wave

| About: ASML Holding (ASML)
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Market research firm VLSI Research recently compiled its list of the top semiconductor equipment suppliers. Applied Materials (NASDAQ:AMAT) once again held the top spot. Maybe more interesting though was the leap ASML Holding N.V. (NASDAQ:ASML) had as it overtook Tokyo Electron (OTCPK:TOELF) for the second spot. The main reason was lithography.

Immersion lithography permits the ion beam to be more precisely controlled during the formation process, resulting in smaller design geometries or line resolutions. This is accomplished by using water rather than "dry" air between the wafer and hyper-NA (numerical aperture) lenses, thus improving the depth of focus and the extension of wavelengths to lower nodes. Because of the lenses, the same light sources used in 193nm lithography systems can be used down to the 45nm node.

Maskless lithography is an alternative to using costly masks that take time to design and manufacture. The company outsources the manufacture of component modules to third-party contractors that make the complex systems. ASML then assembles and tests the full system in-house, prior to shipment. Competition comes from only two other OEMs — Nikon and Canon (NYSE:CAJ) — both of Japan.

Several factors point to a very strong 2010. Management points to three key events: The DRAM ramp-up of 55 nanometer, healthy revenue growth at foundry customers (in particular on leading edge processes), and the transition to double patterning lithography by flash memory leaders. These factors will contribute to a positive development mid-term, although the firm stopped short of saying when they feel orders will return to normal.

The firm is ramping immersion very quickly. Immersion is getting into production for the flash nodes at the 5x level that is 50-nanometer and above. Management expects that the flash customers are willing to ramp 4x nodes to another completely different node in high volume and also expects the DRAM customers to start to ramp immersion into their business for the first time. This is key to ASML's growth because DRAM today is still a business that is approximately twice the size of flash. So if they do ramp immersion into this business, there is tremendous upside.

By Ken Nagy