Thank you for standing by. Welcome to the ASML 2020 third quarter financial results conference call on October 14th, 2020. Throughout today's introduction, all participants will be in a listen-only mode. After ASML's introduction, there will be an opportunity to ask questions. I would now like to, hand the call over to Mr. Skip Miller. Please go ahead, sir.
Yes, thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call is ASML CEO, Peter Wennink, and our CFO, Roger Dassen. The subject of today's call is ASML's 2020 third quarter results. The length of this call will be 30 to 60 minutes. Questions will be taken in the order that they are received. This call is also being broadcast live over the internet at asml.com. The transcript of management opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties.
For a discussion of risk factors, I encourage you to review the safe harbor statement contained in today's press release and presentation found on our website at asml.com, and in ASML's annual report on Form 20-F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wennink for a brief introduction.
Thank you, Skip. Welcome everyone, and thank you for joining us for our Q3 2020 results conference call. I hope all of you and your families are healthy and safe. Before we begin the Q&A session, Roger and I would like to provide you with an overview and some commentary on the third quarter, as well as provide our view on the coming quarters. Roger will start with a review of our Q3 financial performance with comments on our short-term outlook. I will complete the introduction with some additional comments on the current business environment and our future business outlook. Roger.
Thank you, Peter. Welcome, everyone. I will first review the third quarter financial results and then provide guidance on the fourth quarter of 2020. Net sales came in above guidance at EUR 4 billion, primarily due to additional EUV system revenue. We shipped 10 EUV systems and recognized revenue from 14 systems this quarter. For the four systems that shipped in Q2 but did not receive Factory Acceptance Test before shipment, we were able to complete customer site acceptance tests and recognized revenue this quarter, bringing the total to 14 EUV revenue systems in Q3. EUV system revenue this quarter was 66% of total system revenue, which is the first time EUV was higher than DUV system revenue. This further confirms EUV has entered the realm of high volume manufacturing and is an integral part of our core operational activities.
Net system sales of EUR 3.1 billion was again more weighted towards logic at 79%, with the remaining 21% from memory. The strength in logic is driven by the high EUV revenue. Installed base management sales for the quarter came in at EUR 862 million, showing continued strength in our service and field option business from the beginning of the year. Gross margin for the quarter was 47.5%, coming in at the midpoint of our guidance, which is a good outcome considering the significant EUV revenue. On operating expenses, R&D expenses came in at EUR 534 million and SG&A expenses at EUR 132 million, which was slightly better than guided. Net income in Q3 was a EUR 1,061 million, representing 26.8% of net sales and resulting in an EPS of EUR 2.54. Turning to the balance sheet.
We end the third quarter with cash equivalents, and short-term investments at a level of EUR 4.4 billion, which is the same level as last quarter. Moving to the order book, Q3 system bookings came in at EUR 2.9 billion, including EUR 595 million for EUV systems. We saw some EUV demand reduction due to a delay in customers node timing, resulting in a net booking of four EUV systems.
Order intake was largely driven by logic, with 86% of bookings and memory the remaining 14%. With that, I would like to turn to our expectations for the fourth quarter of 2020. We expect Q4 total net sales of between EUR 3.6 billion and EUR 3.8 billion. We expect our Q4 installed base management sales to be around EUR 900 million, which is driven by strong demand for field upgrades and growing service revenue, with an increase in contribution from EUV service.
Gross margin for Q4 is expected to be around 50%, which is significantly higher than Q3, driven by higher immersion volume and improved DUV product mix. The expected R&D expenses for Q4 are EUR 550 million, and SG&A is expected to come in at EUR 140 million. Our estimated 2020 annualized effective tax rate is still expected to be around 14%. I would like to talk about capital allocation and working capital.
As mentioned last quarter, we are in a transition period with customer contracts as we work to move towards new contracts with improved payment terms. We do see some of these new contracts starting to materialize and expect to improve our free cash flow generation in the coming quarters. Interim dividend over 2020 will be EUR 1.20 per ordinary share. The ex-dividend date, as well as the fixing date for the euro-U.S. dollar conversion , will be November 2nd, 2020, and the record date will be November 3rd, 2020.
The dividend will be made payable on November 13th, 2020. Conditions in the COVID environment have improved around our ability to operate and our assessment of our supply chain. Taking this into account, along with our improving free cash flow generation, we will resume executing share buyback this week, in line with the plans that we have communicated earlier this year, for a total of EUR 6 billion over three years. With that, I'd like to turn the call back over to Peter.
Thank you, Roger. As Roger highlighted, we had a very strong quarter with EUR 4 billion in revenue and good profitability driven by strong growth in logic. We expect Q4 to be a solid finish to the year in both sales and profitability. In spite of added macro uncertainty in the first half of the year due to COVID-19, our view on growth this year is largely unchanged from what we believed at the start of the year. This is a clear reflection of our customers' drive to innovate and continue to invest in future technology nodes. In logic, customers continue to see strong demand for advanced nodes in support of the build-up of the digital infrastructure, which includes secular growth drivers such as 5G, AI, and high-performance compute.
As we're still in the early stages of this digital transformation, we expect logic demand to remain healthy and continue to drive demand for our products. In memory, customers are continuing to indicate that they're seeing healthy demand in data centers with improving demand for consumer electronics. With customers' expectations for higher bit growth next year, and taking into account the longer lead times and qualification schedules for advanced litho, we are starting to see a recovery in lithography demand for DRAM, with strong growth expected in Q4 this year. Based on the continuation of this improving end-market environment, we expect this memory recovery to continue into next year. Sales to China continue to grow and accounted for 21% of our systems revenue this quarter.
We expect sales to our domestic Chinese customers to grow to above EUR 1 billion this year, which includes sales to both logic and memory customers in China, with the mix skewed towards logic this year, but trending to higher memory sales next year. Regarding U.S. export rules to China, we are aware of the requirements set by the U.S. Commerce Department for specific companies in China. As such, according to the current regulation, ASML can continue to ship Deep UV without resistance from the Netherlands. ASML requires a U.S. export license for systems or parts that are shipped directly from the U.S. to the customers affected by the rules.
While it is not our policy to comment on individual customers, we aim to serve and support all of our customers around the world to the best of our abilities while being, of course, compliant with laws and regulations set by the jurisdictions where we operate. On our installed base business, we still expect significant growth this year. Through the first three quarters, we realized revenue of around EUR 2.6 billion, and as Roger mentioned, we expect another solid quarter in Q4. Service business will continue to scale as our installed base grows, with increasing contribution from EUV service revenue as these systems run more wafers in volume manufacturing. We expect significant demand for upgrades as customers utilize upgrades to increase capacity and improve imaging and overall performance required on future nodes.
On EUV, although our customers are still climbing the maturity curve, we continue to see increasing customer confidence in the technology, which is translating into expanding layer counts in logic, initial deployment of EUV in memory, and in increasing service revenue. With 10 shipments this quarter, we have shipped 23 EUV systems year to date. With completion of customer site acceptance tests and revenue recognition of the four systems shipped last quarter, we have achieved a remarkable EUR 2 billion of EUV system revenue from 14 systems in Q3. We are still planning to manufacture 35 systems this year, Due to the pace of customers' node ramps and their fab readiness, a few systems may end up being shipped early next year. Despite this potential shift of shipments to early next year, we are still targeting EUV revenue to approach EUR 4.5 billion this year.
We continue to drive profitability of our EUV systems and service business. We are on track to achieve at least 40% system gross margin, and we started to break even on service business this quarter. We will continue to drive margin improvement in both systems and service cost, via cost reductions and delivering more value. As we said before, we expect EUV to reach margins comparable to Deep UV margins over the next two to three years. We are on track with our EUV cycle time reduction plan to get to 20 weeks by the end of the year, enabling a capacity of 45 to 50 systems. With respect to demand for next year, we currently have an EUV systems backlog of 6.2 billion EUROs exiting Q3, with around 65% of this backlog planned for shipment next year.
While we expect more orders in Q4, we did see some EUV demand reduction for next year due to a delay in customer node timing, which resulted in net bookings of four systems in the quarter. Although there is clear uncertainty due to the current macro environment as well as exact timing, slope of ramp, and ultimate size of the customer nodes, we currently expect EUV systems revenue growth of around 20% next year. In our DUV business, we qualified the first NXT:2050i in Q3, which shipped early Q4. This immersion system is based on a new version of the NXT platform, where the reticle stage, the wafer stage, the projection lens, and the exposure laser all contain performance enhancements. With these innovations, the systems deliver increased customer value via improved performance in overlay and productivity, are therefore critical in support of their next node introductions.
To summarize 2020, in spite of macroeconomic uncertainty in the first half of the year, we see the year playing out quite similar to what we saw at the start of the year. We expect to end another strong year in logic, memory growth of over 30%, and significant growth of over 20% in our installed base business. With this, we expect double-digit growth in both sales and profitability, leading to estimated revenue of at least EUR 13.3 billion. As we look to 2021, it's too early to provide any detailed guidance, as we are working with customers to determine demand plans going forward. While there are still significant uncertainties, we expect another year of low double-digit growth, largely driven by our current view of expected EUV systems revenue growth of around 20%.
There are a number of elements that will determine the degree of growth and the uncertainty, of course. First is the macro environment, as nobody can predict the global economic impact of COVID and how this will impact the end markets that we serve. On top of this, there is also the geopolitical environment, predominantly the U.S.-China dynamics, that creates additional uncertainty. In memory, demand will depend on bit growth next year. Customers seem to broadly believe the inventory issues will have been normalized by the end of this year and expect stronger bit growth in 2021. We currently see stronger litho demand for memory next year, which is consistent with customers' comments. The degree of growth will of course depend on continued technology transitions and how much capacity will be added.
In DRAM specifically, we see support of this expectation through high utilization of our litho systems in the field at the moment. While we expect to see more EUV systems go to DRAM next year in support of 1-alpha node, memory is still a key drive for our DUV demand. In logic, we expect demand will remain healthy. However, final demand will depend on timing and the slope of node ramps given by the end demand curves. Customers are continuously recalibrating their roadmaps, leading to changes in their shipment requirements, which will likely have an impact on our demand next year. The other aspect of demand timing is around the slope of the node ramps, and this will be determined by how many wafers will move into each of the fab node and is, as I mentioned before, a function of the health of the end demand next year.
Lastly, on installed base business, we expect continued growth, but the degree of growth will be more dependent on upgrade businesses as service business is pretty predictable and grows with installed base. In summary, there are a lot of dynamics at play, both at the macro level, geopolitical level, as well as market-specific circumstances. However, the ongoing transformation of the digital infrastructure, along with its secular end market drivers such as 5G, AI, and high-performance compute, will continue to fuel demand for advanced process nodes, both in logic and memory, which drives the demand for our products. Therefore, although we are currently going through a period of near-term uncertainty, the long-term demand drivers only increase our confidence in our future growth outlook towards 2025. With that, we will be happy to take your questions. Thanks.
Thank you, Roger and Peter. The operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I would like to ask that you kindly limit yourself to one question with one short follow-up if necessary. This will allow us to get to as many callers as possible. Operator, could you have your final instructions and then the first question, please?
Thank you, sir. At this time, we will begin the question-and-answer session. Again, if you have a question, please press star one to register, and star two if you would like to withdraw your question. If you are using speaker equipment today, please lift the handset before making your selections. Just a moment please for the first question. Our first question is from Mr. Krish Sankar. Please state your
Yeah, hi.
name, followed by your question.
Hi, it's Krish from Cowen. Thanks for taking my question. I have two of them. First one, Peter. On the 20% EUV growth for next year in terms of revenue, what does it imply for units? Is it around 40? I'm just trying to figure out what the unit number would be for next year for EUV, and then I had a follow-up.
Yeah. Krish, you need to understand, I mean, we always get this question on the unit numbers, but at the same time, we always get the question on why is the ASP in that quarter higher or lower since last quarter was like EUR 145 million, which was last quarter the result of the specific configuration sets and the tech upgrades that were included in the shipments. This ASP, because what you're asking is the number of units times the ASP gives you the EUR sales number. This is why we just give you the EUR number. It depends on the configuration and the richness, you could say, of the configuration that actually determines ultimately how many of those units we will ship. We're not guiding any units.
We just give you a EUR number that we believe is going to be 20% up from this year, which is around EUR 4.5 billion this year. I think it's going to be at least at 30%, because I think we've looked at the demand picture. I think we de-risked it for some of the recalibrations of the nodes and the nodes timing, and we're coming up with that EUR number. I think going forward also, we will do that. Just like we do with DUV, and with the total company sales, we just don't tell you how many units we sell. We just tell you what we think how much EUR we will sell.
Right, Peter, that makes sense. Thanks for that. I wanted to follow up on the DRAM side. Clearly you're seeing continuing strength from DRAM for DUV. There are some concerns in the marketplace that the DRAM makers might scale back some of their near-term CapEx because of Huawei going away. Have you guys seen any of this nuance or just because of your long lead times, you're kind of agnostic to such noise?
Yeah, I think, we have this question on the impact of a potential drop of Huawei as a key customer for our customers. When Huawei doesn't sell those smartphones or the digital infrastructure, somebody else will. I think that in itself is not going to be a driver. It can only be a short-term disruption in timing. Demand might fall away and might move to somebody else, but that probably takes some time before it pops up. I don't think that's a structural issue. More, I think we just need to look at what the situation is. We get a push from our DRAM customers. We corroborate that push with what we see in the utilization of our tools, and the utilization of our tools is high. It's grown, I would say, relatively gradually to this level throughout the year.
I think that if you listen to our customers say, "Well, we think that the inventory situation will normalize towards the end of the year." With the utilization position that we're currently seeing, that is pretty close to what we think is kind of the maximum capacity, it's not strange to conclude that they need more capacity next year, especially if you look at the demand coming out of the server business. Also the uptake that we're seeing in consumer electronics. All in all, that makes us more optimistic together with our customers on the DRAM business going forward.
Thanks, Peter. That's very informative and helpful. Thank you.
Our next question is from Mr. Joe Quattrocchi. Please state your company name, followed by your question.
Yeah, thanks. It's Joe Quattrocchi from Wells Fargo. Just back on the 20% EUV growth for next year. Can you help us understand, is that assuming that a few tools slip from 2020 and are shipped actually in early 2021? Secondly on that, is there a scenario that as we get into January and you get better visibility, there's actually some upside drivers to that 20% growth, X the systems that could potentially fall from 2020 into 2021?
Yeah, that's a good question. As we said, 2020, we always said about EUR 4.5 billion, which we stick to that. The guidance of the 20% up from that EUR 4.5 billion, of course, includes all shipments that go from 2020 into 2021. You can draw the conclusion from that our forecasted ASP at the beginning of the year, i.e., the configuration richness, has been a bit better than we anticipated. We've seen that through upgrades. Yes, that moves into next year, and that's why units, I said as an answer to the question of Krish also. Units are not that important because it's really the ASP that can really vary because of the configuration. We guide you euros. Yes, it will move into 2021. Now, is there upside? That's your second question.
I think what we clearly said also in our prepared remarks, that we have adjusted our demand picture based on the recalibration that has happened within the customer base on the node timing and on the ramp of that node. It's also like you have to look at this almost in a way of communicating vessels. What goes down also goes up at the other side. In a communicating vessel, it all happens at the same time. With us, there's a bit of a time lag between when you adjust downwards and when you see that demand later in time coming back up. That is the upside. That is not what we put into our 20%.
You could actually say we've taken all the information of today, taken into account all the uncertainties that we see, taken into account the node calibrations, and this is what we actually tell you what we corroborated we see today. That there is upside is also clear because like I said, if it's a communicating vessel, what comes down comes up somewhere. There's going to be time difference. That's why we're preparing for a potential upside also in 2021. That's why we still talk about a build capacity that is higher, it's 40 to 45 systems. Let's say 45 to 50 systems even. That's what we're organizing for in the supply chain. Yes, there could be upside, for the reason that I just mentioned, and we'll prepare.
Perfect. That's helpful. Just a quick follow-up. On the lowest double-digit revenue growth for next year, how do we think about OpEx growth?
OpEx growth, on the SG&A side, I think it will continue to develop as we've seen in the past quarter, so no major uptick there. On the R&D side, we are pushing down the accelerator quite a bit in terms of the programs, both on High-NA, also on EUV. We're also obviously looking at and working on the successor of the D tool, which will have some demonstrable progress and value to our customers, which obviously requires quite some R&D work. Also on the DUV roadmap, there's still quite something to be done. There, we talked in the past about adjusting the number that you've seen for this year with the salary increases. In fact, if we look at the magnitude of the program, it's probably going to be a bit higher.
We're in the process of finalizing that right now, because we're right now in the finalization of the budget. More precise guidance we'll be able to provide you with in three months' time. I think it's fair to assume that the increase in the R&D budget will be a bit higher than just the salary uplift.
Thank you.
Our next question is from Mr. Sandeep Deshpande. Please give your company name followed by your question.
Yeah. Hi, thanks for letting me on. This is Arun from JP Morgan. My question is regarding a couple of things. Firstly, you've already indicated that you've seen some push-outs and you've reported a net EUV order intake in the recent quarter. There has been a push out from one of your customers, but then that same customer could place orders at another customer of yours. Have you seen any movement on that front, or do you expect to see movement on that front in the next few months? The question there which arises is that, can you satisfy short-term demand? Because you've talked about in the past that EUV tools are 12 months lead time. My quick follow-up to that question is on the gross margin.
You're indicating this 20% revenue growth number into next year for EUV, which is a good number, but clearly, it implies some amount of unit cuts because of this push out from one customer. Does this have an implication on gross margin for ASML next year on EUV from the 40% of its progress towards a much better EUV gross margin? Thanks.
Okay. You guys were all squeezing five questions into one, which we have been a little bit prepared for. Roger is going to answer that one. On your question of the push of the net forces, have you then seen other customers then stepping in? Well, it's a bit the story of the communicating vessels. This is what you're asking, in fact, yeah? By the way, this is not retail. When you cannot get it with retail shop A, you move to retail shop B. It's a bit more difficult. Not so much for us, because we could probably do that, but it's for the customers. If one customer adjusts their no timing, it takes time for others to see what that means and how that needs to be digested. This is why I said in an earlier answer, yes, I see upside.
Because there's a timing difference, if you think about a communicating vessel between things going down and the other part going up again. I definitely see that. This is why we're preparing also to be able to ship more. To your point, if you would really only follow the order intake and then have 12 months lead time, it's never going to work. You have to prepare for more, because you would expect that there is a decent chance that you see some upside next year, and you want to be ready. This is where the 12-month lead time is actually, the integral lead time is more than 12 months. It's more like 18 months. If you then prepare yourself, because you do expect this, then you could, of course, accept POs with a delivery time that's way within that 18 months.
Yes, we are preparing for more, and time will tell whether customers need it in the timeframe 2021. I think they could, but time will tell. There's a real opportunity there.
Sandeep, on the gross margin for EUV, maybe a little broader than that. On EUV, you're absolutely right. The NXE:3600D will see an increase in gross margin. I think we have said in previous calls that we hope with the NXE:3600D to approach the corporate gross margin. An improvement over the 40% that we targeted for this year. As we already said, we're probably going to even slightly exceed that target for this year. Yeah, from that vantage point, there will be an improvement in the gross margin for next year. The downside on EUV is that in the gross margin for next year, you will also see that we already have some operating expenses for High-NA.
That is a little bit accounting, and with the CEO and the CFO of this company both holding degrees in accounting, we say it with a bit of pride. The downside is that even though we're not selling High-NA next year, we already have some operating expenses in there, which find their way into the cost of sales and therefore in the gross margin. That we assume will be about a 1% reduction in comparison to the gross margin that we have this year, just to give you an order of magnitude. A clear plus from the increased gross margin on the D. Also an increase in the gross margin of EUV service margin that we talked about, and then a little bit of a negative there.
If you look at everything, also into the DUV business, for instance, that then becomes a little bit of the swing factor for next year. The mix in DUV for next year, and also the level of field upgrades. All in all, target that we had for Q4 and also the target that we have a little bit moving forward to 50%. With all the pluses and minuses, we're probably going to be somewhere in that range of the gross margin that we had for this year, for the full year, and then the 50% target that we're envisaging. That's where you're going to find yourself in that mix with all the pluses and minuses that I just discussed.
Thank you, Roger.
Our next question is from Mr. Andrew Gardiner. Please state your company name, followed by your question.
Good afternoon, gentlemen. Thanks for taking the question. It's Andrew Gardiner from Barclays. Just another one on EUV, please. Just in terms of some of the distinction over what you're seeing with customer plans for next year, I think we can all appreciate some of the, as you said, node sort of migration, recalibration. In terms of the commitment to the technology, particularly by those who are leading the way in deployment, where are we in terms of EUV layer count looking to the next node, N3 node, relative to earlier expectations? Peter, you made a comment that customers are more confident in the technology. Are you, even if ultimate capacity may be taking a little longer to ramp in terms of wafers, are you seeing the layer count continuing to creep higher?
Yeah.
As per that logic, but also, similarly in memory, with DRAM, press are reporting one of your major customers visited you this week talking about EUV and commitment there. Similarly around DRAM, where are we in terms of layer count expectations? Thank you.
I think, on the layer count, it's clearly evidence given to us that the customers have embraced the technology and that the technology gives a lot of advantages in simplification, in lower with low work in process, faster turnaround times in R&D. When you take it all together, I think on the N5 in Logic, we're over 10 layers, and in N3, we'll be over 20. We actually see that creeping up. That has just the fact that it gives so much more advantage to go to single patterning and take away these multi-patterning DUV strategies. Which also true for DRAM. Of course, DRAM is a bit behind in terms of HVM main introduction as compared to Logic, also there we see the same trend. It's the process simplification that's actually driving the additional layers.
In DRAM, although we start with one, clearly we can see strategies going forward, 1-alpha and beyond that will add up to five, six layers. That's what is really dependent also on how much productivity can we get out of the tools. You have to realize that customers are currently pushing us extremely hard to get more wafers out. We are introducing EUV tools with more productivity, with more wafers per hour. We have the C version introduced. We're now looking at the D version, and beyond the D version, there's going to be another version that increase productivity. Today, when we have our customers discussion, it's really a discussion about could you please speed up the maturity of the tool, get your EUV tools at the same level of productivity and of reliability and uptime as you have your DUV tools.
They know it is going to take time, because we need more EUV wafers. We need more. That is the consistent question that we are getting. I think it's driven by the fact that they see the big economic and technical benefits of using EUV. That will drive the layer count up, both in Logic and DRAM. Like I said, N3 are over 20 layers, and that's going to be creeping up.
Thank you, Peter. Just quickly, Roger, if I could just ask a follow-up to the prior question. When you talk about your gross margin, just want to make sure I was clear on what you were saying. You're saying gross margin for next year, somewhere between the 2020 level, which based on the guidance you've given us for 4Q, is going to be around 48%, and the 50% that you're aiming for in terms of fourth quarter. Is that right? Somewhere sort of in that range?
That's right. 48 is, if you do the math and you take the 50% guidance that we gave for Q4, then you would probably see this year, for the full year, you would see about 48%. What I'm saying is if you take all the pluses and minuses that we just talked about, you're going to be in that range for the anticipated gross margin for next year. Of course, more guidance on that where the year is firming up. More clarity on that in 3 months' time. Directionally, I think that's what you're looking at.
That's based on the, let's say, low double-digit growth as compared to this year.
Yeah.
Any upside on additional business, of course, will have an impact on the larger profile. As Roger said, we just have to take care of this accounting issue on High-NA, where we don't sell High-NA, but we simply cannot-
There's a term life for it in the cost price.
We cannot capitalize anything in inventory. We just have to write it off. This is what it is. Which by the way, will give us better High-NA margins once we start shipping High-NA.
Thank you guys.
Our next question is from Mr. David Mulholland. Please state your company name, followed by your question.
Hi, it's David Mulholland from UBS. I just want to follow up on the comments you made around China, Peter. For those that have been facing sanctions, from everything we've read, are you assuming any shipments into those customers for 2021? Whilst you may be able to ship yourself, you'll obviously face some indirect impact if they're unable to buy from some of the other semi-cap equipment space. I've got a follow-up afterwards.
Yeah, I think it's a good question, David. When we talk to our Chinese customers, and you have to understand that when they look at some of the other process tools, there are some alternatives here and there. There's alternatives in Japan, where you talk about ALD, or you talk about deposition tools. There's a European company, which is in Singapore, that can be an alternative. On metrology, there are alternatives, both in the Netherlands and outside the U.S., in Japan, and even increasingly in other parts of the world. If you're a Chinese company and there's one thing that the alternative is more difficult on, and that's on litho. You just want to make sure that you get your litho tools. Of course, companies that are on a list where, under the current agreements, we cannot ship to, we will not ship to.
It wasn't our agreement. We just have to look at those lists, and we follow those lists. Currently, the customer that we've been talking about, our logic customer, one of the major logic customers in China, actually allows, or the rules allow us to ship litho tools. It's, for those Chinese customers, very important to actually get their litho tools and then find a solution for the other process tools. Litho is critical. It's the most critical tool in your fab. That's why it's not strange that they still talk to us and say, "Hey, just make sure that you ship us the tools that we need." It all starts with, in terms of CapEx, it all starts with the most expensive tool in the fab, and that's litho.
That's great. Thanks, Peter. Just a quick follow-up. You've obviously said you're keeping the door open to more shipments potentially for next year if you do see upside elsewhere. How long and how much balance sheet are you willing to keep that door open for? Obviously, you've got the funding to do it, are you making customers commit by the end of this year? How long are you leaving that flexibility?
I think it's a good question. Of course, we try to push it, but on the other hand, and I know customers are listening into this call also, so I'm not doing myself a favor. Part of the difference between the bottom-up numbers that we currently see under these circumstances that are of any more risk and our build capacity, anywhere in between, we're going to make sure that we have some extra leeway, some extra room.
We're not going to go all out and trying to completely maximize our output. Between what we currently think in terms of units and that maximum number, somewhere in between, we're going to make sure that we will be able to react. Like I said, I'm not doing myself a favor because customers are listening in, so we'll probably take a bit of time before we get the PO. If they need it, they will come, and we will ship.
That's right. Thanks, Peter.
Our next question is from Mr. Amit Harchandani. Please state your company name, followed by your question.
Thank you. Good afternoon and good morning, everyone. I'm Amit Harchandani from Citi. Two questions, if I may. My first question relates to the ramp on the logic side for EUV. Could you give us a sense for where we are in terms of technological readiness, whether that is playing a part in terms of how customers are thinking about ramping to beyond the N5 towards the N3? I appreciate the demand dynamics is one factor. If you could help us give us a sense for the overall technological readiness of the ecosystem. Secondly, if I may, on a separate note, you have given us some perspective on contribution from China. Could you maybe quantify that and give us a sense for how de-risked that number is? What's the put/takes if there was a potential change in U.S. legislation? Thank you.
Yeah, on that last part, Amit, I'm not speculating on the behavior decisions of governments because that's basically what it is. You cannot de-risk. The only thing that you know, if you look at the current situation, you have to look at the specific situation that this company is in the geographical area that we operate in, which is Europe. The ability of us, within the rules and the regulation, to ship tools. That's what we're planning for. There are a lot of powers at work which are beyond ASML, and it's very difficult. I'm not going to speculate on what that is, what an upside is, what a downside is. I'm trying to just deal with the reality as we see it today. That's what we do. That's how we de-risk, or that's just how we look at the Chinese business.
There's several customers there. We have four or five major customers there. I'm not going to speculate there because I don't know what governments are going to do. On the EUV, the technical readiness of EUV. It's technical readiness. The ecosystem on N5 and N3 is there. It's going to do it. It has to do with how quickly can we bring, for instance, the EUV maturity up to the maturity of our DUV immersion tools, which some of our customers are reaching 98%-99% uptime. Well, we are not at 98%, 99% uptime, and it varies. We have tools that are over 90%. We have tools that are under 90%. It is the stability which has to do with the maturity of the tools.
This is why our customers in the discussions that we're having with them are really saying, okay, first thing, focus on the maturity of those tools, which we will do, which is normal. This is a new technology in high volume manufacturing, completely normal. We saw the same thing when we introduced dual stages. We saw the same thing when we introduced immersion. It's very logical. It will take some time before we get all the solutions on lifetime of parts all implemented in the field. That's not an issue, just customers want it faster. Why do they want it faster? Their customers are just pushing them on more EUV wafers. That's what we see today. The key discussion that we're having with our customers, give us more EUV wafers. Preferably by improving the maturity of the tools faster.
On top, at the end, our market turns out to be okay, give me more capacity. That's the order. This is how it actually works. I have no doubts about the technological readiness at all. This was a question that we could go into a lot of detail a couple of years ago, but not today.
If you look at typically the things that are being referred to in terms of readiness for the ecosystem, it's the typical lift, right? You're talking about mask and mask inspection. I think it's pretty clear that the technology is further developing there to cater to that. You're looking at pellicle, and actually there, I think you've also recently seen some good breakthroughs in transmission there, both for ourselves and also for some others. Photoresist, which we all know is always going to be there. It's just that the massive development there will happen at a point in time where the whole thing is going into HVM. That's what you see. On the typical element there, you see that good progress is being made. I think that's also echoed at the EUV conferences by our customers.
They showed these slides where they talk about the progress in the ecosystem. To Peter's point, if you look at that, where they had their assessment two years ago, there was actually quite some amber and red on the slides. If you look at the slides that they present today about the recognizing of the ecosystem, the red is gone, and it's all green.
You have to also, which is the advantage of being around for a little while. We've seen this also when we did dual stages, when we did immersion. When you have a wafer change, things are very different for our customers in their production process. That needs to mature also. It's not only our exposure tool, it's everything that goes with it. It's the pellicles, where we started with 82% transmission. Now we have qualified 88%. We have, like we said, there are in research institutes, the transmission that is far over 90%. The same is true for, like Roger said, for photoresist. This is very normal. The entire industry, the ecosystem is up, is basically climbing a maturity curve.
That's going to be there with us for the next one or two years before it really starts hitting home on maturity levels that we saw with DUVs. It's just going to take a bit of time.
Brilliant. Thank you for the confidence, gentlemen.
Our next question is from Mr. Alexander Duval. Please state your company name, followed by your question.
Yes. Hi, everyone. It's Alex from Goldman Sachs. Thanks for the question. You talked about the progression in terms of EUV models and how you continue to invest in that direction. I wondered if you could talk a bit about the average selling prices, effectively, where will they go up to on the D and E models. Is it fair to assume a 50% of the mix into the next year is going to be coming from the D model? When do we see the E model roughly enter numbers maintenance?
Alex, in terms of the ASP increase for the D, what we've indicated there is somewhere between 10% and 15% is a good estimate of the increase in ASP. In terms of productivity, you see a 19% increase in the productivity of that tool, and also an overlay, you see an improvement of 1.5 to 1.1. Some pretty good value that is being provided to the customer, which justifies the uptick in ASP that I just talked about. On the E, that's quite a while out, so we're not going to give any indications on the ASP development there. As I said, there are some pretty significant improvements and value enhancements that are being planned on that tool. More to talk about that when we're approaching the launch dates of that.
On the D model and the composition of next year in terms of units, as we've indicated, we plan on really introducing the D model for HVM at the midpoint of next year. That kind of gives you a bit of an indication of how the spread is going to be for next year.
That's right. Many thanks.
Our next question is from Mr. Mehdi Hosseini. Please state your company name, followed by your question.
Yes. Mehdi Hosseini, Susquehanna. I have two questions with a few follow-ups. It would be great if you could give us the mix of EUV upgrade that is embedded in the field option, and also if you could give us an update on the multi-beam e-beam. I believe the beta tool was shipped early this year. What's the update? How do you see acceptance into next year? Thank you.
Okay. I don't think we can give you an update. I don't have it, the mix between upgrades and the system prices. Is that what you're asking, Mehdi?
Yes.
Yeah. In other words, the total-
I just want to understand the.
of our EUV sales, how much is upgrade business and how much is system business. Is that what you want?
Yes. You have highlighted upgrade opportunities with the older models, and I wanted to see how much of that is driving, and what is in the field option?
Okay. You have these different types of upgrades. You have an upgrade, for instance, this is why ASP in Q3 was a bit higher. You have upgrades that are already included in the tool that we ship. That is one. You also have upgrades of tools that are in the field. That depends on what upgrade do you want. Do you want to upgrade from a B to a C? That is a different upgrade than when you have a NXE:3350B going into a NXE:3400C. That's almost like a complete refurb in the field. That's significantly more expensive, and customers are looking at all of them. There also you have the mix of what kind of upgrade do you want.
You have (NXE:3400B) upgrades, which actually are, from a productivity point of view, that are in the midpoint between the original B and the current C. This is also what you can choose. It's very difficult to give you as a forward-looking outlook on what that is, because it very much depends on the customer plans and on the capacity planning in terms of wafers per day. We just have to give you the total number, and when that happens. These things, these upgrade plans also change. I had a very recent discussion with a very large customer who really wants to look at a upgrade plan where there were different scenarios. Well, depending on how the scenario pans out, the upgrade is going to be different than another scenario.
I wouldn't even dare to give you any guidance there, because I would be wrong.
Sure.
The MBI, the multi-beam tool, we're going to ship another two beta tools this year. Like I said, it is really customers are going to use those tools. It's not just the tool, it's also how do you integrate a multi-beam wafer inspection tool into your entire yield management process. That will happen over the next half year to three-quarters of a year, and that will determine the uptake of that tool and the deals for that tool. What we are seeing is that, at least that's what we believe, and we are now in the first integration phase of the first tool that we shipped last quarter. We just have to see that what we believe the advantages of a tool that is six times faster, how much of that can translate into real yield value for the customer.
That's going to be a bit of a wait and see, but we have people there and we're optimistic, but ultimately that optimism needs to be confirmed by the customer that starts putting in the POs. You have to be a bit patient, Mehdi, on that news. It's going to be another one or two quarters before we get some clarity on this.
Got it. Thank you so much.
Our next question is from Mr. Aleksander Peterc. Please state your company name, followed by your question.
Yes. Good afternoon. Thanks for the question. This is Aleksander Peterc from Societe Generale. Just one on the balance sheet first. Could you now give us an idea where we will land in terms of net cash for the year, and what will happen with working capital in the fourth quarter, if you could quantify that for us? Just secondly, coming back to your comment, Peter, on these communicating vessels in EUV orders. Given the push-outs by one customer, is there a realistic scenario whereby we get a big jump then in orders as that progression starts to materialize, and we get then a very strong 2022? Is that a realistic scenario, or do you see things more smoothed out in the future? Thanks.
Alexander, on free cash flow, we're not guiding free cash flow. I can tell you that there will be a very significant free cash flow generation in Q4, for a couple of reasons. One reason is the free cash flow generation this quarter was rather low. As a matter of fact, it was slightly negative. One main reason there is that many tools shipped in the last month of the quarter, as a result of which the cash generation of that will fall into Q4. There will be significant free cash flow generation in Q4. That's also the reason why we communicated that we will resume the share buyback, why we announced the interim dividends. We're very confident on the free cash flow generation in Q4, but we're not guiding that.
Yeah. On your communicating vessels question, well, it actually was my introduction on the communicating vessel. The question is, could that then give a big jump in orders because there's a time difference? You basically asked the question, how big could the time difference be? I know, like I said, we're preparing for more output in 2021 because I think it could happen in 2021. You asked the question about, what about 2022? Well, you could say, well, we're in 2020, what do I know about 2022? In the compass of your question, I do believe that in any case, 2022, we will see the effects of that communicating vessel movement. I think there's also an opportunity that it can be pulled into 2021.
This is why we're preparing for more shipments, let's say, from a manufacturing and supply chain point of view. More important in 2021, I think we will see then the introduction of the next nodes in logic and in DRAM. I think 2021, in any case, will be, you could say, the recipient of the node transitions. Yeah? 2021 will be a year where you see another node transition happening, which as we talked about, N3 will have over 20 EUV layers. That would then be on top of what I would see as a normal progression of the EUV volumes.
Very clear. Thanks.
Okay. We have time for one last question. If you were unable to get through on this call and still have questions, please feel free to contact the ASML investor relations department with your question. Operator, may we have the last caller, please?
Yes, sir. The final question is from Mr. Adithya Metuku. Please state your company name, followed by your question.
Yeah. Good afternoon, guys. It's Bank of America. I have two questions. First question, just on the assumptions you have embedded into your low double-digit growth guidance for revenue in 2021. Can you talk about what you're assuming in terms of domestic Chinese demand? Secondly, also foundry plus logic demand and memory demand and services. Just to get a sense for what exactly you're embedding. Secondly, now there's been a lot of discussion in the market around how the number of customers at the leading edge could go down over the next few years. If you could give us some sense based on your discussions and any order trends, et cetera, that you might be seeing, how likely do you think that is? I think that would be much appreciated. Thank you.
Yeah. Your answer. What do you want to know exactly? The number of customers in the leading edge? You mean, are you asking a question on how that is trending?
No. If you look out two to three years out, do you think the number of customers producing leading-edge devices could go down?
Okay.
How do you think about that? How do you think about that when you do your planning, et cetera?
Yeah. I think,
On the first question.
I'll take the second one.
On the first question, Adi Metuku, I think we've given you the top-line figure both for the total business and for EUV. As Peter mentioned, of course, there are quite some uncertainties that have been factored into that number, and there are quite some swing factors going left and right. I think what we should do is in three months' time, when we have a discussion on the full year's results, we're also going to have our first real insight into next year. I think that's what I suggest is that at that point in time, we're going to talk about what are the main drivers.
At that stage, I think it would be good to say, just as we did at the beginning of this year, if we look at the different segments of the market, how do we look at those, and what growth drivers do we see there? I think that's the way I would suggest we do that and leave it at the top-line indications that we've given for now.
Yeah, I think I will answer your two questions on domestic China. I think it is almost not relevant. It sounds a bit arrogant, you have to realize that the Chinese customers in logic and in memory, they are in ramp. They have customers. All their wafers are sold. They go to their customers. They put them into devices. If for whatever reason that China business does not exist, those customers still need wafers. Yeah? Then they will buy those wafers somewhere else. Yeah? I think where we just said, in memory, for instance, in DRAM, we see very high utilization towards the max. Where will those wafers come from? They need to come from added capacity somewhere. Yeah? I think this is, again, is a question of this communicating vessel.
When one set of customers might not, for whatever reason, need those capacity tools, then another one needs it. I think with DUV, that time period is much shorter than with EUV. Yeah? I think it will resolve itself relatively quick. Now, on the number of customers in the leading edge. One thing is absolutely certain, things are not getting easier. The next nodes will see increased complexity. I think only the very large customers can deal with that. We've seen over the last 20 years a significant reduction in the number of leading-edge customers. I think it's going to continue with less than a handful. Yeah? Less than a handful. I'm not going to speculate who those are going to be because they're all dear to my heart. Yeah?
I think they have to figure it out, who has the best designs, the best production technology. We're the most efficient and the lowest cost. In the end, it doesn't matter, because in the end, what we always talk about is the number of wafers and device and chips that are needed in the digital transformation that need to be made somewhere on the planet. Yeah. That means that I do believe that our large customers are going to be larger. Yeah. They're going to be dominant in areas of chip production. They're only going to grow. That is why I said at the end of my prepared remark, our confidence in our 2025 outlook has only grown.
As all in all, you could argue also a bit as a result of what we've seen as part of the COVID crisis, how important this digital infrastructure is. In that sense, yes, I think it will be fewer and fewer customers, but it will be much bigger than we are today.
All right. Very good.
Before we sign off, I'd like to remind everyone that due to COVID-19, we have moved our Investor Day to June 23rd, 2021. The event will be held in London, and we hope by that time, we can have a face-to-face meeting. More details will follow in due time. We hope you'll be able to join us. On behalf of ASML, I'd like to thank you all for joining us today. Operator, if you could formally conclude the call, I'd appreciate it. Thank you.
Thank you, sir. This concludes the ASML 2020 third quarter financial results conference call. Thank you for your participation. You may now disconnect your line.