Thank you for standing by. Welcome to the ASML 2019 4th Quarter and Full Year Financial Results Conference Call on January 22, 2020. Throughout today's introductions, all participants will be in listen only mode. After ASML's introduction, there will be an opportunity to ask questions. I would now like to open the question and answer I would now like to turn the conference call over to Skip Miller.
Please go ahead, sir.
Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today from ASML Headquarters in Velto in The Netherlands is our ASML's CEO, Peter Linnick and our CFO, Roger Dassen. The subject of today's call is ASML's 2019 Q4 and full year results.
The link to this call will be 60 minutes and questions will be taken in the order they are received. The call is also broadcast being live over the Internet at asml.com. A transcript of management's 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 atasml.com and in the 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 Linnick for a brief introduction. Thank you, Skip.
Welcome, everyone. Thank you for joining us for our Q4 and full year 2019 annual results conference call. Before we begin, we begin the Q and A session, Roger and I would like to provide an overview and some commentary on the Q4 and the full year 2019 as well as provide our view of the coming quarters. Roger will start with a review of our Q4 and full year 2019 financial performance with other comments on our short term outlook. And I will complete the introduction with some additional comments on the current business environment and on our future business outlook.
Thank you. Brigitte? Thank you, Peter, and welcome, everyone. I will first highlight some of the Q4 and full year financial accomplishments and then provide our guidance for the Q1 of 2020. Q4 results were basically in line with our guidance.
Net sales come in at €4,000,000,000 Net system sales
of €3,100,000,000
was heavily weighted towards Logic at 83%, with the remaining 17% from Memory, clearly showing the continued strength of Logic business as well as the ongoing digestion phase of the Memory business. We reported EUV system sales of €922,000,000 from 8 shipments. Installed base management sales for the quarter came in at €906,000,000 Gross margin for the quarter was 48.1%. Overall, operating expenses came in above our guidance with R and D expenses at €516,000,000 and SG and A expenses at €148,000,000 Island guided SG and A is due to additional employee benefit costs and costs related to our IT implementation. Turning to the balance sheet, €186,000,000 worth of shares were repurchased in Q4.
We ended last quarter with cash, cash equivalents and short term investments at a level of €4,700,000,000 This amount is significantly higher than anticipated with most of the cash coming in, in the December period. Moving to the order book. Q4 system bookings came in at €2,400,000,000 including €1,100,000,000 for 9 EUV systems. Logic order intake was 79% of the total value, with the remaining 21% from memory, again reflecting the continued strong logic demand for leading edge lithography. Net income in Q4 was €1,134,000,000 representing 28.1 percent of net sales and resulting in an EPS of €2,070,000 For the full year, net sales grew 8% to €11,800,000,000 The installed base management sales was €2,800,000,000 which was a small increase compared to previous year.
In 2019, we booked €6,200,000,000 of EUV orders, which is more than 50% of the total booking value for the year, reflecting customers' strong demand for EUV technology. We continue to invest in the future of ASML and increased R and D spend to €2,000,000,000 in 2019. The increase was primarily driven by the acceleration of our EUV roadmap, low and high NA program. Overall R and D investments as a percentage of 2019 sales was about 17%, SG and A was about 4% of sales. In addition, ASML invested €886,000,000 in CapEx, supporting our long term growth opportunities, primarily around high NA capacity and infrastructure.
Net income for the full year was €2,600,000,000 resulting in 21.9 percent of net sales and an EPS of €6.16 With that, I would like to turn to our expectations for the Q1 of 2020. We expect Q1 total net sales between €3,100,000,000 and €3,300,000,000 We expect our Q1 installed base management sales to be around €950,000,000 driven by strong demand for field upgrades, especially EUV. Gross margin for Q1 is expected gross margin for Q1 is expected to be between 46% 47%. The lower gross margin relative to the strong Q4 number is primarily due to deep UV mix effect, fewer immersion and more drive systems with some positive EUV mix effect. The expected R and D expenses for Q1 are around €550,000,000 and SG and A is expected to come in at around €140,000,000 Our estimated 2020 annualized effective tax rate is around 13%.
Regarding our capital return, ASML paid total dividends of €1,300,000,000 made up of the 2018 dividend and 2019 interim dividend and purchased €410,000,000 worth of shares in 2019. Through December 31, 2019, ASML acquired 9,000,000 shares on the 20 eighteentwenty 19 program for a total amount of 1.6 €1,000,000,000 Supported by our long term business plan, ASML will submit a proposal at the 2020 Annual General Meeting of Shareholders to declare a dividend for 2019 of €2.40 per ordinary share. Recognizing the interim dividend of €1.05 paid in November 2019, this leads to a final dividend of €1.35 to be paid in the 2nd quarter. This is a 14% increase compared to the 2018 dividend. The 2020 Annual General Meeting of Shareholders will take place 22 in Veldhoven.
ASML announces a 3 year share buyback program of up to €6,000,000,000 to be executed in 2020 through 2022. ASML intends to cancel these shares after repurchase with the exception of up to 0 point 4,000,000 shares, which will be used to cover employee share plans.
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 resulting in another solid year of growth driven by Logic and EUV. We were able to achieve an 8% top line growth despite an overall industry decline of around 10% due to a weak memory market. It's always a reflection of our logic customers' drive to continue to innovate and invest in technology for future nodes. For 2020, we currently expect a year of double digit growth in both sales and profitability, primarily driven by EUV and installed base business.
Major innovation drivers such as artificial intelligence, 5 gs, high performance compute, autonomous driving and big data are creating new end user applications. And these applications require more high performance logic, fueling increased demand for leading edge nodes. And this is evident in several customer announcements regarding ramp plans for their 7 5 nanometer nodes, which will drive another strong logic year and an increased demand for EUV. In the memory market, customers have indicated they're seeing signs of demand recovery in some market channels and improvements in memory chip pricing also support this view. As customers have lowered litho tool utilization to reduce wafer output throughout the weak memory demand period, they will first use this underutilization to return to normal supply levels, which will take some time.
Subsequently, this will also trigger equipment demand, albeit a bit later than the supply demand recovery for memory devices. But taking the slope of the recovery of our little equipment utilization as a proxy, it seems likely that we will see stronger little equipment demand from memory in the second half of the year. We expect significant growth in our installed base business. Service business will continue to scale as our installed base grows. And we'll also see EUV contribute to service revenue as these systems start running waivers in volume manufacturing now.
We expect significant demand for upgrades particularly in EUV as customers utilize upgrades as a quick way to increase capacity. In EUV, it was a breakthrough year with the technology now starting in high volume production and producing consumer products that are already available in the market. As we continue to execute on our accelerated EUV roadmap, we were able to ship our first NXE300C in 2019, which provides high productivity translating to increased customer value, delivering higher ASPs and improved gross margins. We shipped 6 3400 C systems in Q4 of the 8 EUV systems total we shipped in the quarter, bringing the total to 26 EUV systems and the full year sales of around €2,800,000,000 in 2019. The increase in customer confidence in EUV is translating into more layers in logic production as well as expanding to new markets with the adoption in memory.
For full year 2020, we plan for EUV sales of around €4,500,000,000 on 35 systems. We continue to see demand building for next year's shipments and expect a healthy order flow to continue. In order to fulfill the expected strong demand increase, we're working on a cycle time reduction to enable the capacity of 45 to 50 systems next year. 2021 is shaping up to be a very busy year. Regarding our current outlook for the year, we expect 2020 to be another growth year as mentioned before.
Although it's too early to provide qualitative expectations, let me make a few qualitative comments. Major innovation drives in applications that require high performance logic are driving increased demand at the advanced nodes. Logic demand is currently strong and we expect that this demand to remain healthy primarily driven by EUV. As previously communicated, we expect sales of €4,500,000,000 on 35 systems this year, which translates to EUV sales growth of approximately 60%. Memory is showing an early signs of recovery.
And although there's still uncertainty around exact timing of the recovery, it is likely we will see strong demand in the second half of the year. And taking this into account, we expect stronger second half with strengthening sales throughout the year. Certainly, 2019 was another great year with continued positive momentum in EUV as well as solid demand across our entire product portfolio. We expect another growth year supported by healthy logic demand and likely recovery of the memory market with increased sales from our installed base business as well as demand for EUV. The positive industry momentum around innovation and expanding new markets further strengthens our confidence in 2021 outlook and our 2025 growth scenarios.
With that, we'd be happy to take your questions.
Thank you, Peter and Roger. The operator will instruct you momentarily on the protocol for the Q and 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. Now, operator, could we have your final instructions and then the first question, please?
Yes. Thank you. The first question comes from Mehdi Hosseini. Please state your company name followed by your question.
Yes. Thanks for taking my question. My question has to do with your comment regarding EUV manufacturing capacity of system by 2021. Peter, do you think your backlog would reflect that capacity as we progress through the year? In other words, would you be able to have a full commitment from your customer for full capacity?
And my short follow-up has to do with your the multi beam EUV wafer inspection. Are we still on target for the 1st shipment in the first half? And how should we think about the time it would take for your customers to evaluate the tool? Okay, Mehdi. On the EUV capacity, yes, I think the backlog will reflect this.
I think the order intake on EUV is looking very healthy. So I have little doubt that we'll have the backlog filled this year to support the capacity that we have lined out now for 2021. I think the issue here is really we need to reduce the cycle time, which we have good plans for. I mean, we see first progress. I think the focus is on cycle time reduction in this case.
MB, multi beam, in fact yes, we'll ship in the first half. And I think the customers will probably take throughout this year to evaluate the tool so that we can start shipping next year in higher volume. Great.
Thank you.
The next question is from Mr. David Mulholland. Please state your company name followed by your question.
Hi. It's Dave Mulholland from UBS. Just to follow-up on some of the comments you made around memory. Obviously, there are some indicators, things are improving. I think some of the checks we've been doing through the supply chain are certainly pointing to improved capacity plans, particularly potentially from Q2.
When do you think you could start seeing that in orders? And I guess in some respects, why haven't we already seen some of it in Q4? And then I'll come back with
a follow-up.
Yes. Thanks, David. It's a good question. I wish I had a definite answer because that would be make things easier. So I'm basically saying we're when I said in my prepared remarks that we see the utilization of our tools going up and we just extrapolate the slope of the utilization increase.
And I think it would mean that in the first half of this year, we will see likely a return to normal supply demand balance for our customers. Now they see that also. And taking into account the order delivery times, the order lead times then I would expect orders that have to have to come in somewhere in Q2 in order for us to make sure that in the second half of the year we should we could see an increase of our memory business. Again, we're in this business for quite a long time. And in my experience, memory always comes back with a vengeance.
They when it comes, it always comes quick. So we'll just have to wait. So I think it makes a big difference whether orders come back in Q2 or they come back in Q1 or in early Q3. I mean it makes a big difference for the year. So
we'll have
to wait and see and I wish I had a final and definite answer.
Okay. And just one second follow-up on the installed base management business, obviously, very strong run rate in Q1 at €950,000,000 How do you think about this on a full year basis? In the past, you'd had a target, I think, of €3,700,000,000 but been slightly more conservative run rate through the last couple of years. What's driving the pickup in Q1? How should we think about that on a full year basis?
David, I think the if you look at Q1 and also if you look at Q4, you see that the momentum was already building up in Q4, where we were already slightly over 900, 950 for the quarter. We expect that we will not be able to sustain it at this level for the entire year. I think a good way to go would be to say that we're probably going to see a 20% increase over last year annualized. So that would get you to approximately €3,400,000,000 for the year. That's where we would see it for the full year.
That's great. Thanks very much.
The next question comes from Mr. C. Muse. Please state your company name followed by your question.
C. J. Muse with Evercore ISI. Thanks for taking the question. I guess first was hoping to hit on gross margins.
Can you walk through where we exited on EUV in the 4th quarter? And then how you are seeing the trajectory for overall gross margins through the year as you contemplate increased EUV shipments as well as likely higher immersion shipments in the back half for DRAM?
Yes. Thank you, C. J. So let me first talk about gross margin for EUV and then give you the wider picture on gross margin. So on EUV, what we said, as you know, last year on the systems side, systems gross margin for EUV, we're looking at about 30%.
This year, we're looking at about 40%, four-0. So that's what we had in the plan, and that's what we're executing for, and that's also in our models for this year. On the wider picture for gross margin, and I know that many of you are looking at the Capital Markets Day. At the Capital Markets Day, we mentioned 50 percent. So let me start there.
Let me start at the 50% and let's look at what the circumstances were at the time, what the circumstances are today. And then we will start talking about how we see this further unfold and what the potential is that we see for this year. So back in November at the Capital Markets Day in November 2018, I think there are 3 things that we should bear in mind. First off, at that stage, what we modeled at that stage for you and that had the 50% in there was what we called a mid market growth scenario. And the thing in all likelihood, if we look at the circumstances today, if we look at the circumstances of the memory market today, then I think it will be hard to say that for the full year, we're looking at a mid market scenario.
It's definitely not what we're looking at today. Depending on when it's going to come back and as Peter said, how it's going to come back, you could still, on average, see a mid market scenario. But at this stage, I think it's hard to say that we're looking at a mid market scenario for that. At this stage, the memory market in these months is fairly flat. So that's one important circumstance, I think, to recognize.
The second thing that I think changed from November 2018, and I think Peter already responded to that in the first question, is the multi beam. So the delay in the multi beam were I think we're going to see commercial application and commercial sales of multi beam only in 2021. We're at a Capital Markets Day, as you know and as we already told you also last year, we were still looking for 2020 as commercial application of multi beam. So that's, in essence, shifted with a little under 1 year. So that's the second circumstance to bear in mind.
The third thing that deviates a little bit from what we told you in the Capital Markets Day in November 2018 is a bit of accounting issue and that has to do with high NA. We are preparing for high NA, not just on the R and D side, but we're also preparing for high NA on the manufacturing side and on the supply chain side. And we are incurring costs there that we cannot capitalize and have to run through cost of sales, which is a bit weird because we're not selling high and a, but nonetheless, that's what the accounting rules dictate you to do. And that represents a little short of 1% alone in gross margin. So those are three things to bear in mind that might be different from the perspective and the model that existed in November 2018.
So now let's look at this year and let's look at the 46 percent to 47% that we have for Q1 and let's look at the potential for the rest of the year. And I think there's a number of drivers in there that I think could further drive the gross margin up. The first one, obviously, is related to the situation in the memory market, and that is pretty important, not just for the top line, but it's also very important for gross margin because if we see a solid recovery in the second half of the memory market, that will have a significant impact on the sale of Immersion tools, which as all of you know, comes with pretty high gross margin and also with a good recovery in our voltage contrast business, which is, as you know, is also very much tied to the memory business. And again, that is a very high margin product that we have. So, if we get the recovery in the memory market, that will also have a significant impact on the gross margin on those two elements alone.
The second element that will that is expected to further drive up the gross margin throughout the year is the EUV service. EUV service for the full year is still expected to be to have negative gross margin. But over the quarter over quarter, you will see a sustained improvement in the gross margin that we have on EUV service for two reasons. First off, because as you know, with a number of customers, we have the paper wafer model. And to the extent that EUV continues to go into high volume manufacturing, obviously, we get more revenue.
And secondly, the cost that we have per EUV machine goes down because we get more efficient in doing it and we also get scale effects as a result of that. So quarter over quarter, you will see that the EUV service margin will improve. For the full year, it's still negative. But at least in Q4, maybe even a little before that, we will see that it starts to become positive. A third improvement that we expect to occur in the course of this year will be the introduction of our new Immersion tool, the 2050, the NXT 2,050, which again comes with a good improvement of our gross margin.
So those are 3 significant drivers that we have that we believe give us a good shot at achieving a significant improvement of our gross margin, particularly in the second half and a good shot at the 50%. And then this 50%, we will be able to then sustain further into 2021, which as Peter already alluded to, we think is going to be a very busy year. And a very busy year at that stage would also come with a number of scale benefits in our gross margin, better fixed cost coverage. And also in 2021, we would see the introduction of a successor tool on EUV that would also again come with a gross margin improvement. So then we think the momentum that would be created in the second half around reaching the 50% would then be further sustained and elaborated on in the 2021 timeframe.
Very, very helpful. If I may follow-up, I think the buyback announcement as we are moving into high volume manufacturing EUV seems to be a bit of an inflection here for ASML moving into cash cow mode. So curious if there are metrics that we should be looking at, whether it's free cash flow margins or working on working capital or perhaps CapEx intensity coming down as you've invested in EUV capacity, high NA, multi beam. So curious if there's kind of metrics you should be looking at to gauge free cash flow in the coming years?
Yes. And so in the short term, you will see that with the increase in EUV and EUV becoming increasingly important for the company, given the cycle time of EUV is significantly longer than deep UV, In the short term, you may expect that inventory levels will continue to go up a little bit. That's a dynamic on the one hand. And also, in the short term, as you as I think we've said before, you might expect that the CapEx level that you've seen for 2019, that will be above the CapEx level that you might expect for this year and for next year. So around €900,000,000 to €1,000,000,000 is a CapEx number that we think is likely for this year and for next year.
So those are dynamics in, I would say, the short term. In the years thereafter, I expect CapEx level to level off and actually go down because then the significant preparation for our future, I think CapEx wise, I think will have been done and will be able to go down. Also, I would expect that in 1 to 2 year time frame, you might expect inventory levels to go down for a number of reasons. First off, at that stage, we talked about 2021. There is a significant buildup of our capacity for EUV.
But once you're there and once you are at those levels, then the further buildup of inventory will no longer have an impact on your inventory levels. And secondly, as we mentioned before, the way we believe we will be able to get an increase in our capacity from the 35 ish that we have for this year to the 45, 50 that we talked about for 2021 will primarily be the reduction of cycle time. And of course, the reduction of cycle time will then kick in and further reduce working capital requirements. So in the short term, I think the burden on working capital will still be there. In the longer run, so let's say, 1.5, 2 years, you will see that we will be able to get it under control better.
One final dynamic as far as that is concerned, we talked to you in previous calls on the introduction of down payments for EUV, which we're pushing and where we have the initial accomplishments on that in 2019 and we'll continue to drive that. And that will also be a mitigating factor, if you like, in our working capital burden. So long winding answer, just to tell you that in spite of all of that, in spite of this preparation for the growth, we're still looking at a pretty healthy free cash flow development, both this year and next year. And then the years thereafter, I think the free cash flow that we generate will further increase substantially. And all of that taken together gives us more than enough comfort to introduce this SEK 6,000,000,000 program for the next 3 years.
Okay. Next question, Krish Sankar. Please state your company name followed by your question.
Hi. It's Krish Sankar from Cowen. And Roger, thanks for the detailed comments on gross margin. I have two questions. First one on EUV.
So, Peter, it looks like your commentary on 2020 EUV of 35
systems at
€4,500,000,000 revenue and next year about 45 to 50 systems capacity is similar to about 3 months ago. I was on the impression that over the last 3 months at the margin, there was more incremental demand from DRAM for EUV. So I'm just wondering, is it an issue that you're still capacity constrained and that's why you cannot ship more? Or are you being conservative? And then my second question is, how to think about DUV units this year relative to 2019?
Will it be similar levels, lower, higher? Any color would be helpful. Yes.
On your first question, actually, I tried to answer that in an earlier question that the issue with 2021 is to make sure that we can reduce the cycle time so much that we can create a capacity between 4550 units, which is a capacity issue, not a demand issue. So yes, DRAM will be there. And we'll just have to make sure that we can squeeze as many EUV systems out of our available square meters so that we can fulfill the customer demand. It's not a demand issue. It's a capacity issue.
So in that sense, that's why the commentary is similar to what we did last quarter because the capacity lead time unfortunately is a lot longer than just the customer order lead time. Now on the TPV units, good question. Very much changes on, and Roger said it, on the recovery of the memory market, yes? So the memory is still very much driven by Immersion. Of course, we are seeing with the increased number of EUV systems in logic, some cannibalization because of multiple patterning schemes that will actually move on to single patterning EUV schemes.
Now so if we would not see a recovery of the memory business, which I do not expect because we do expect a recovery, clearly, the digital units would be down. But it's really the timing of the memory recovery that will determine how much of the deep UV units we're going to see this year. It's really hinging on the timing of the memory recovery.
Got it. Thank you very much, Peter.
The next question Alexander Duval. Please state your company name followed by your question.
Alex from Goldman Sachs. Just wanted to ask or clarify on the extra R and D and SG and A for the Q1 that you've guided to versus where the Street was. And just wondered if you could help decompose a bit the most important drivers and sort of what underpins them. For example, to what extent
is this more about investing in faster cycle times
for those 50 or 45 to 2021? To what extent is it about increasing functionality of future EV versions as we move beyond the 3400T? And to what extent does it hinge on any other key factors?
So on R and D, last quarter, we were at $516,000,000 This quarter, we're guiding $550,000,000 And I think the vast majority of that increase is labor cost increase. As we mentioned before, at this stage, we have about a capacity that we think we need in order to accomplish the R and D objective that we have, which are all of the things that you just mentioned, but primarily focused on the low NA, high NA road map, multi beam, but also a number of developments in DPV, obviously. So we think we have the capacity that we need in order to get that done. And that's why we said on previous calls, expect the going out rate for the Q4 to be the basis. And then, obviously, it needs to be what we call inflation adjusted, which is obviously linked to wage increases for that.
And that's what you see. So the 6% increase from $5.16 to $5.50 really is primarily the wage increase on the R and D department. In terms of SG and A, SG and A, I think, is modeled at $140,000,000 which is, I think, very much in line with what you saw in previous quarters. Q4 had a little bit of a spike. There were some accounting adjustments in there in Q4 That had a little impact.
And also, we're in the process of implementing a new IT system, which has some impact on the SG and A number. But those are small things. But the guidance of $140,000,000 I think is pretty much in line with what we were in previous quarters and obviously there too the wage impact.
Yes. I think on the wage impact, I don't think we give our people a 10% wage increase because they will probably raise a lot of questions and when people start listening to this call. But it's the combination of the normally inflationary wage increase and the fact that, of course, we added people in 2019. So you see the full year effect now of that growth in R and D in 2020, which actually happened throughout 2019, but now you see the full year wage effect.
Very clear. Many thanks.
Next question is from Joe Quattrocci. Please state your company name followed by your question.
Yes, thanks. It's Wells Fargo. I had a question on the memory side. I know that ASML has historically been more tied DRAM than NAND. So I was hoping you could kind of help us kind of parse out the comments that you've made in terms of the recovery and seeing potentially improved bookings kind of looking into 2Q.
Is that more of a NAND comment or should we think about that from a DRAM perspective?
Yes. I think if you split the DRAM and NAND, and the only like I said, the proxy that we have is basically looking at some utilization data. I think it is first noticeable in 3 d NAND. I also think the slope of the recovery is a bit more aggressive in NAND than in DRAM, but there are both there. Having said that, I also mentioned in my prepared remarks that customers were creating underutilization in order to make sure that they could rebalance the supply and the demand in the memory space sooner that underutilization correction was also deeper in 3 d NAND.
So it's also not a big surprise that, of course, the return slope back up is also a bit steeper. So but that's where we are. I think Katrina had started a bit earlier. It's a bit steeper slope, but both are trending in the upward direction.
Okay. That's helpful. And then just for the March quarter guide, I was wondering in the past you guys have given us kind of the EUV shipment and revenue expectation for the quarter. So I was curious if you could give us that for the March quarter, because I know that there's 4 shipments systems rather that are included from 2019. And then maybe just any thoughts on the cadence for 2020 just now given that the 3400 T is available for the full year?
Yes. I think we've indicated in the past that as soon as we really see that EUV is, in essence, going into high volume manufacturing and also at a point where we can take revenue upon shipment, that would be the time where we're no longer going to give separate guidance on EV shipments. So that's clearly the case by now. So that's the reason why starting this year, we no longer do that. What we do, however, is continue to indicate at least for 2020 for the full year, we give you an indication of the euro value and also the number of units for EUV for the full year.
And of course, we will report quarter by quarter. We will report to you what the euro number and the unit number of that will be. As it relates to your second question on how is it distributed over the year, it's not completely evenly distributed. It's a little bit tilted towards the second half, but only but modestly so. So it's not as exacerbated, if you like, as we had it in 2019.
There's a better balance, but it is still a little bit tilted towards the second half of twenty twenty.
Thank
you. Next question, Jean Arden, Menon. Please state your company name followed by your question.
Hi, good afternoon. It's Janardan Menon from Liberum. I just had two follow ups on the logic side, especially on the EUV front. So if I take your growth number for this year, just calculating EUV revenues alone, you're going from 2,800,000,000 to 4,500,000,000. I'm assuming that much of that is going to be logic shipments.
And so if I put that 1,700,000,000 of additional revenue, which on the Logic revenue of 6,600,000,000 last year, that's about 25% of additional growth in logic for this year. I'm just wondering, given that DUV shipments will probably come down during the year, What kind of a decline in DUV are we looking at? Is it 3 or 4 units, in which case you will still be growing your logic revenues at about 20% or higher or will the DUV drop you a bit more than that and you could be sort of in the 10% to 20% range of growth on your logic side? And a short follow-up is on the EUV capacity. Given that you're seeing so much of demand for EUV right now and you're saying that in 2020, it's more a capacity issue, otherwise you probably could ship 50 units.
What can you do to add capacity further into 2022 if this kind of strength and especially if the memory market, the DRAM market comes in more strongly for UV in 2022 and the logic strength continues. Is there scope to further reduce cycle time to take your unit shipments above 50? Or can you use some of the base in your high NA new facility for low NA systems if that were to be required? Is there a way that you can go above 50 units by 2022?
Let me take the first question and then Peter can go into the second question. If you piece together the data points that we gave you, I think you can find sort of an answer to your first question. So, as Peter said in the video, we're looking at a double digit growth. So if you do that math and you have a number that you arrive at, and then we gave you 2 other important components. On the one hand, indeed, as you mentioned, the €4,500,000,000 for EUV.
And also on this call, I'll give you the 20% increase over the installed base, which would get you to approximately €3,400,000,000 So then you can sort of calculate where DUV and apps combined, what they would land for the year. And I think that's what you're looking at. And of course, as Peter said, it will be dependent upon the timing and the extent of the recovery. But we believe that the number that you derive in that way is a safe number to go by with some potential, obviously, if the memory recovery is significant and timing. Yes.
Peter, the second question on Yes.
The second question on when you look at the EUV capacity that we currently have and like I said, it will be driven by cycle time reduction because the lead time reduction for capacity adds is longer. Yes, for 2020 beyond 2021, we are looking to bring the output capability above 50, now which is what we're doing today is really looking at how much should that be. If we have to go over 60, we probably need to extend square meters of production capacity at ASML and at suppliers, which could be like you said using production facilities that we're currently building for high NA, use that for temporary use in ALO NA. Although we'd like to prevent that because you're in here, Gennard, and I mean these bays are different. The high NA bays are different than the OMN base, so it would mean some extra cost.
But if push comes to shove, you could probably do that. But I think we can with our Sabaton product, we can go over 50. But I think it will be very difficult to go over 60. So if we have to go over 60, then we probably need to quickly add some manufacturing capacity at ASML and at the supply chain.
Understood. Thank you very much.
Next question is Amit Harshandani. Please state your company name followed by your question.
Amit Harshandani from Citi, and A couple, if I may.
The first
question goes back to the demand for EUV. You've talked about obviously the capacity for 2021. In terms of the drivers of demand from your customers, what really do you think is changing or accelerating from a customer standpoint? Is it the number of layers of adoption? Is it the pace of cadence down the nodes?
Is it their end customers push? Could you give us a sense for what really do you think is driving this optimism and acceleration towards the number that you've talked about for 2021 from a customer standpoint? And then I have a follow-up.
Yes. I mean the easy answer is all of the above. Yes, we are seeing increase of layer count. The fact that EAV Works also gives the customer the confidence on their road map. And when they get confidence on the road map, you see a cadence change.
There's a push basically a pull in, yes? But also I think the discussion that we're having with customers and customers having with us or without going to very specific customer details, we will never do that, it's very clear that the number of tape outs and the requests from their customers, our customers' customers on different types of end applications is going up. So it is basically the combination of those three things. I mean you've mentioned them all. And that's what it is.
And I think we are responding to what our customers are asking us based on those three drivers. And this is why we come to the problem of more the capacity issue in 2021 than a demand issue.
Thank you, Peter. And secondly, if I may, could you maybe give us your latest thoughts on how you're thinking about demand from indigenous customers in China? There's obviously news flow around the EUV tool and you've commented on that very clearly. But more broadly, as you think of your 2020 guidance and 2021, things have changed a bit since November 2018. Any clarity on demand from indigenous China, the various end markets and what are baked into your assumptions right now?
Yes. I think the long core changed. The market has changed since November 2018. But I would say on China, we're pretty much on target in terms of the strategic rollout, especially in the memory space. In logic and it's not so much in Lydia's logic, it's more the mature logic systems.
I think our current assessment of the market is a bit higher than it was at 2018. So if anything, at the leading edge, we're on plan. On the trailing edge in a more mature technology, I do see we see it with an upside, but no downside.
Okay. Thank you.
Next question, Achal Sultania. Please state your company name followed by your question.
Hi, good afternoon. It's Achal from Credit Suisse. Roger, maybe on EUV Services gross margins, just trying
to understand like how much a headwind it has been on at a group level in 2019. Obviously, you made a comment that it will get to it will still be loss making this year, but basically we have improvement through the year. So I'm just trying to understand how much of it has been already a headwind in 2019? And then how quickly can that business ramp up towards 40%, 45% services gross margins like you have most likely in DUV? Does it take 2 3 years?
Any color on that would be helpful. And then secondly, on the mix, when you talk about this 45 to 50 capacity for EUV in 2021, can you help us understand like obviously logic is foundry is a big part of that number, But what are you hearing from Logic and DRAM customers in terms of the unit breakdown of that 45 to 50 unit number? Thank you.
Thank you. So on the gross margin impact of EUV service, that was around 2% for 2019. So that's the gross margin impact of that in 2019. As I mentioned to you, we do see it coming to a positive number in the course of this year. I expect it to be at least Q4, maybe even before that, that it will turn positive.
Before we have EUV service gross margin and the corporate growth at the corporate gross margin level, I think we're probably 2, 3 years away from that. But the aspiration clearly is there to have it at that stage in that time frame.
And on the split, the 45 to 50 unit split, I cannot give you any details. But the majority and I mean the it's above the 50% is going to go to the logic space. So it's still dominated by logic, but clearly the 2021 numbers for DRAM will go up. It's logical. I mean, Brett, in the logic space, we have several customers in the DRAM space.
We still have 1. So that's also an issue. That will drive the division between logic and between DRM. But maybe it's going to be significantly above 50% is going to be logic.
Okay. Thank you, Peter and Roger.
Next question, Aditya Metuku. Please state your company name followed by your question.
Yes. Good afternoon, guys. It's Bank of America. I had two questions. Firstly, just thinking about the memory demand as we go through this year and into next year.
Obviously, when we look at the last 2 years going into 2018, we had a very strong increase. We had a doubling in 2017 and then another 50% increase in revenues from memory customers in 2018. Now when you look at the next 2 years, obviously, things may be a little different. And I know it's very difficult to give a pinpoint number, but I just wondered what do you have in your scenarios internally? Where do you see if memory was to come back in 1Q, where do you see memory revenues for this year?
And if it were to come back in 3Q, where do you see that coming? Any color that you can give us to help us get a rough sense of where we might end up would be very helpful. And then secondly, just a question for Roger, just on OpEx. I just wondered if you could confirm whether the OpEx annualizing 1Q number would be a good proxy for the full year or whether there is anything else we need to think about? Thank you.
Yes. Well, I think on the question on the memory demand, I did give you some indication. I can repeat myself. But when I look at the best proxy we have is to just look at how our machines are being used. That's why I said I do believe that in the first half and it's a bit difficult to understand the exact timing or to gauge the exact timing.
There will be in the first half. I think our customers will come back to this more healthy supply demand balance and they will see this coming so they will place orders. So for us it's going to be likely going to be a second half event. But having said that, I mean 2019 was of course a weak memory market for us. And also the first half of twenty twenty could be not very strong as Roger indicated.
And but when I come back, the second half will have an impact on our business also on our financial performance. But when the memory goes back then I think you really need to look into 2021. I think I said it earlier 2021, we do see strong EUV demand. I see no reason why the demand of our customers for leading edge products in the memory space 5 nanometer will kick in then will go down. But when the memory recovery starts in the second half of the year for us, this will extend into 2021.
So you would then have had effectively 1.5 years of a memory downturn, which I think historically is not long but not short either. So it just it all seems to fit. This is the kind of call that I can give you based on on top of what I already said.
And Adejian, your questions on OpEx, indeed, I can confirm that what we have, so the $550,000,000 for R and D and the $140,000,000 for SG and A, those are good run rates for the quarters in this year.
Okay. Thank you, guys.
Next question, Sandeep Deshpande. Please state your company name followed by your question.
Sandeep Deshpande at JPMorgan. Most of my questions have been answered, but just actually a clarification Peter. Firstly, on whenever this memory recovery occurs, I mean you can see how the customer utilization is doing. Your exposure to NAND is lower than your exposure in DRAM. But do you see that NAND utilization is rising faster than DRAM or vice versa at this point because that will determine the timing of when your orders come in?
And then secondly, regarding these the microbeam tools that you're working on, you think at this point is the view that these will begin shipping in 2021 and thus the that there could be even further accretion to the margin in 2021? Thank you.
I think I will do the memory recovery. Like I said earlier, the slope of the utilization recovery is a bit faster, a bit steeper for 3 d NAND, but it also comes from a deeper point. So in that sense and yes, we have, as you mentioned, less exposure to the 3 d net market, but the 3 d net market needs a lot of exposures. So I mean that's what we're counting and this is what we're seeing. So I think NAND probably rising a bit faster.
I think that could be the conclusion. And sorry, second part was?
The second part was on the gross margin and multibeam tools.
Multi beam tools. Okay. Yes.
And indeed multi beam, as I mentioned, multi beam is expected to be a high margin product. So to the extent that when it will go into commercial application and that is expected for 2021, we do believe that it will be accretive to our gross margin.
If you
look at the Novi, as you look at the medium tool, it's a machine that it's very much it is compute power. So there's a lot of software also. And that's why margins are generally higher in EBIM space than in the lithography space.
Understood. Thank you.
Next question, Alexander Peter. Please state your company name followed by your question.
Yes, good afternoon. Thank you for taking my questions. This is Alex from SocGen. I'd just like to understand, as you now contemplate 45 to 50 EUV units in 2021, does this in any meaningful way accelerate your path to higher gross margins more closer to EUV for your EUV business overall? Or does nothing changed in terms of your gross margins now for this business unit?
And then just briefly, your comment regarding the timing of free cash flow generation, it looks like over the next 3 years, you will have an acceleration in free cash flow generation.
Yes. So let's first talk about the gross margin for EUV. I do believe a further increase in numbers will improve our gross margin for three reasons. 1 is obvious, right, to the extent that given the capacity that we have, we have a higher output. Of course, your fixed cost coverage will improve.
And as we mentioned, the increase in capacity will be achieved by reducing cycle time and will not be achieved by further CapEx. So that's why more units will result in gross margin improvement. That's one element. The second element is to the extent that we have more of these tools in the field, that also means that our service margin will in all likelihood improve because the number of the more tools we have in one location, the more efficiency we have in having our service crews there. So then the efficiency per tool will further increase.
And thirdly, not necessarily related to the number of units, but since you talked specifically to 2021, as I mentioned, that we'll also see the introduction of the successor to the 3400C, which again, we are hopeful will bring such value to our customers that the gross margin will benefit from that. So yes, a number of reasons why I think why we believe gross margin for EUV will continue to further improve through 2021 and beyond. On the free cash flow question, I think that is right as well. So I mentioned to you that in the very short term, the working cycle time, it will mean that we have to take significantly more inventory on board to get it done. But then at a certain stage, you will see the off selling factor of the fact that cycle times get reduced.
So I think in this 1 year window, you will see a spike and then the leveling off as a result of the reduction of the cycle time. And as I also mentioned, we do want to get down payments more as the default in our commercial model. And that should also, at some stage, lead to an offset in the working capital burden.
We have time for one last question. If you are unable to get through on this call and still have questions, please feel free to contact the SML Investor Relations department. Now, operator, may we have the last caller, please?
Yes, sir. Mitch Steves. Please state your company name followed by your question.
Hey, thanks. RBC Capital Markets.
Most of my questions answered,
but I just want to clarify a couple of small points. So first of all, based on the tone of this call, it sounds like 2021 will probably be an accelerated growth year relative to 2020. I want to make sure that that's a reasonable assumption. And then secondly, I realize you guys can't time the exact recovery of memory. But from a historical perspective, when you look at when the memory market recovers, what type of sequential growth do you expect from the initial first batch of that recovery, if I look at your Q over Q number?
Well, I think the second question is almost impossible to answer. I mean, it is you could say the memory business is quite different than it was a couple of years ago. I mean 6 plays in 3 d NAND, 3 in DRAM. So those patents will also be a function of the composition of that market and the individual position of those companies in that market. So that's really difficult to use historical rates as a proxy for what's going to happen now.
I think yes, 2021 could be an accelerated growth year. However, Roger said it, I mean, even without the assumption on the recovery of the memory market and the growth of the memory market. We already see a double digit growth here this year based on logic and on the installed base management. On top of that, we could see a recovery of the memory market. So I think you could see an acceleration this year also.
Now that's not for the full year, right, granted because we do expect it in the second half. So but it will definitely continue. Like I said earlier, once this memory market recovers, it doesn't recover for 2 quarters. I mean it recovers for a longer period like it always does on top of the logic market. So yes, I think we're looking forward to some acceleration.
All right. Thanks.
Now on behalf of ASML, I'd like to thank you for joining us today. Operator, if you could formally conclude the call, I'd appreciate it. Thank you.
This concludes the ASML 2019 4th quarter and full year financial Results Conference Call. Thank you for participating. You may disconnect.