Review|ASML 26Q3: Upgrades Lift Gross Margin; Capacity Expansion Awaits Further Clarity

Summary

ASML’s Q3 gross margin and Q4 guidance both beat expectations. The company narrowed its 2026 revenue guidance to EUR 44–45b and raised its full-year gross margin guidance to around 56%, driven by continued strength in the upgrade business within Installed Base Management. The company stated that its plan to increase capacity by 30% in 2027, together with the further 30% increase in 2028 that had been under investigation, will still not fully meet customer demand, and it is now looking into expanding 2028 capacity beyond 30%. Customers have expressed interest in placing orders for 2029 and 2030, although ASML has not yet accepted those orders. We raise our 2026/27/28 EPS forecasts to EUR 42.5/61.4/76.9.

26Q3 Gross Margin Beat Driven by Upgrades

ASML’s Q3 revenue was EUR 11.66b, in line with market expectations, while gross margin and earnings significantly beat expectations; Q4 and full-year guidance were also above consensus. The company guided Q4 revenue at EUR 14.2–15.2b and narrowed its full-year 2026 revenue guidance from EUR 43–45b to EUR 44–45b, driven mainly by strong EUV demand and growth in the Installed Base Management business. Q3 net income also included an approximately EUR 0.5b valuation gain on ASML’s investment in Mistral AI, which should be distinguished from underlying operating performance.

ASML’s Q3 gross margin was 57.5%, above the market expectation of 55.7%. Q4 gross margin is guided at around 57%, slightly above the market expectation of 56.3%, and full-year gross margin guidance was raised from 54%–56% to around 56%. The gross margin beat was again driven by the Installed Base Management (IBM) business: benefiting from demand for EUV and DUV productivity upgrades, Q3 IBM revenue reached EUR 3.29b, around EUR 0.4b above company guidance. ASML expects IBM revenue to grow further to around EUR 3.7b in Q4, with full-year growth of around 50%, up from the more than 30% expected last quarter. Demand for upgrades that increase output within existing fabs remains strong, and ASML is actively developing new upgrade products to expand the addressable market within its installed base. In addition, ASML has completed value-based pricing negotiations with key customers; the price increases will be partially reflected in 2027 and fully reflected from 2028 onwards. Expansion costs could offset part of the gross margin benefit. Management will provide 2027 gross margin guidance at the January 2027 earnings call.

EUV: Strong Demand; Capacity Expansion Still Under Review