ASML: A Leading Nanotechnology Innovator

A dip in first-quarter earnings won't hold back the Dutch photolithography equipment maker, which will roll out new technology to produce even finer circuits

It may come as a surprise that a small Dutch company provides the lifeblood of computers, cell phones, DVD players, household appliances, and scores of other high-tech products. But Veldhoven-based ASML Holding (ASML) does exactly that. The leading producer of photolithography equipment for the semiconductor industry, ASML counts among its clients the biggest names in chipmaking, including Intel (INTC) and Samsung Electronics.

Last year, ASML's sales increased 5.9% over 2006, to more than €3.8 billion ($6 billion), and net income grew faster, up 10% to €688 million ($1 billion). But the economic slowdown in the U.S. and elsewhere is now forcing some customers to trim capital spending, says ASML's director of market intelligence, Antonio Mesquida Küsters. The first quarter of 2008 saw a 3% year-on-year decline in revenues, to €920 million ($1.43 billion), and a 5% fall in profits, to €145 million ($226 million). ASML's New York-traded shares are down 5.7% year to date, though at $29.61 on May 7, they've rebounded sharply from a low of $21.84 set on Mar. 17.

The tough times likely won't keep ASML from growing its 65% market share to 80% by 2010, predicts Didier Scemama, a London-based analyst at brokerage ABN Amro. Key to the company's success is its immersion lithography systems, which use water to sharpen the images imprinted onto silicon wafers—similarly to how liquid on the surface of the human eye helps project images onto the retina. The technique can produce chip circuits 40-nanometers thick, less than one-thousand the width of a human hair. This year, ASML expects to sell 60 such systems, which are essential to building next-generation microchips, at a cost of up to €34 million ($53 million) apiece.

Leading the "Arms Race"

Next up for this European pioneer in chipmaking equipment is the shift to so-called "extreme ultraviolet lithography," or EUV, which uses shorter wavelengths of light to produce even finer circuits. Employing mirrors instead of lenses—in effect, tracing circuit paths directly into the substrate instead of projecting an image of them onto the chip surface via lithography—EUV will allow chipmakers to produce features only 10 nanometers in size.

Two of the company's EUV prototypes are in use—one at IMEC, a nanotechnology research center in Leuven, Belgium, and another at Albany NanoTech at SUNY Albany. ASML's Küsters expects the machines to go into production in 2012. In the race to innovate ahead of its closest rivals, Nikon and Canon (CAJ), ASML is continuing to bet heavily on cutting-edge technology. "It's an arms race, and ASML is the weapons leader," says ABN analyst Scemama. And also a top European performer.

Before it's here, it's on the Bloomberg Terminal.