Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2019 first quarter financial results conference call on April 17th, 2019. Throughout today's introduction, 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 Q&A.
If you would like to ask a question, please press star one to register. If you would like to withdraw a question, please press star two at any time during the call. Your questions will be answered in the order that they are received. If any participant has difficulty hearing the conference, please press star zero for operator assistance. I would now like to turn this conference call over to Mr. Skip Miller. Please go ahead, sir.
Thank you, operator. Good afternoon and good morning, ladies and gentlemen. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today from ASML's headquarters in Veldhoven, the Netherlands, is ASML CEO Peter Wennink, and our CFO, Roger Dassen. Subject of today's call is ASML's 2019 first quarter results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received.
This call is also being broadcast 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 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. Good morning, good afternoon, ladies and gentlemen, thank you for joining us for our first quarter 2019 results conference call. Before we begin the question and answer session, Roger and I would like to provide an overview and some commentary on the first quarter as well as provide our view of the coming quarters. Roger will start with a review of our Q1 financial performance with some added comments on our short-term outlook, and I will complete the introduction with some additional comments on the current business environment and our future business outlook. Roger, if you will.
Thank you, Peter. Welcome, everyone. I will first highlight some of the first quarter accomplishments and then provide our guidance for the second quarter of 2019. Although this was a modest quarter in absolute numbers, we did report both sales and gross margin above our guidance. Q1 net sales came in at EUR 2.23 billion, slightly above guidance, driven by an additional EUV shipment in the quarter.
Net system sales of EUR 1.69 billion was more weighted towards logic at 60%, with the remaining 40% from memory, the same split as previous quarter. We reported EUV system revenue of EUR 371 million from four shipments. Installed base management sales for the quarter came in at EUR 540 million, which was slightly lower than guided due to lower upgrade business.
Gross margin for the quarter was 41.6%, which is slightly higher than the 40% guided due to a favorable DUV mix, more than compensating for the gross margin impact of one additional EUV system. Overall, R&D and SG&A expenses came in a little lower than guided, with R&D expenses EUR 473 million and SG&A expenses at EUR 121 million. Turning to the balance sheet, EUR 55 million worth of shares were repurchased in Q1.
We ended last quarter with cash equivalents, and short-term investments at a level of EUR 3.28 billion. Moving to the order book, Q1 system bookings came in at EUR 1.40 billion. Logic order intake was 75% of total value, with the remaining 25% from memory, again reflecting the strong logic demand expected this year. We took three new EUV orders in the quarter. Net income in Q1 was EUR 355 million, representing 15.9% of net sales and an EPS of EUR 0.84.
This was favorably impacted by a one-off tax benefit. With that, I would like to turn to our expectations for the second quarter of 2019. We expect Q2 total net sales between EUR 2.5 billion and EUR 2.6 billion. Our total net sales forecast for Q2 includes around EUR 600 million of EUV system revenue on six expected shipments in Q2. We expect our Q2 installed base management revenue to be around EUR 700 million. Gross margin for Q2 is expected to be between 41% and 42%.
The lower margin EUV revenue will be compensated by higher margin non-EUV business. We continue to expect further improvements in gross margin in the second half, driven by higher system sales, increased field upgrades, shipment of higher margin NXE:3400C systems, as well as contribution of EUV service revenue. This will provide a significant step towards our 2020 target of over 50%.
Expected R&D expenses for Q2 are around EUR 485 million, and SG&A is expected to come in at around EUR 125 million. Our estimated 2019 annualized effective tax rate is around 11% because of a one-off tax benefit in 2019. We still expect our long-term effective tax rate to be 14%. As we remain confident in our long-term growth, we will propose a 50% increase versus last year in our dividend to EUR 2.10 per share at our annual shareholder meeting, which takes place on April 24th in Belgium.
The dividend payment is valued at around EUR 0.9 billion. We still expect to execute the remaining EUR 1.3 billion of the 2018-2019 share buyback program this year with a weighting towards the back of the year. With that, I'd like to turn the call back over to Peter.
Thank you, Roger. As Roger highlighted, although it was a modest quarter, the results came in above our guidance, and we expect further strengthening in the coming quarters. There continues to be volatility in the market due to the macroeconomic environment, and some uncertainty remains in the semiconductor industry. Our memory customers are going through a period of rebalancing supply and demand with an expected improvement in their business conditions over the course of the year.
Our view of 2019 remains unchanged from last quarter. We continue to expect overall growth in 2019 with increasing demand for our products as we move through the year. The fundamental end market drivers clearly remain in place as expanding end market applications continue to fuel the demand for high-performance compute and high-performance memory.
In memory, the NAND market continues to digest the high level of capacity additions over the past few years, and this digestion started last year and will likely extend through most of this year. DRAM market is also seeing softening in the near-term demand as they work through an inventory correction. Based on our customers view, we continue to expect memory demand for our litho systems down around 20% relative to last year.
Bear in mind, there is a portion of this memory demand that supports new technology as well as new domestic Chinese customers. This demand is clearly more strategic and is very likely to happen independent of the near-term global bit demand. If you remove these two components from our estimated 2019 memory demand, you get a lithography spend for memory bit supply that is 30% lower than the comparable spend in 2018.
This reduction in spend is significant and will help in correcting the supply-demand balance. On top of this, we have seen a significant reduction in wafer output in the memory space. This quick reaction to the changes in the end market demand is clearly different from what we've seen in earlier cycles and will also help in correcting the inventory situation.
The logic segment is expected to be the growth driver in 2019, with the majority of the demand linked to technology transitions and production capacity for advanced nodes. We still expect this logic business to be up around 50% relative to last year, driven by DUV as well as significant EUV demand. Furthermore, we still expect single-digit percentage growth on install base revenue. On the ASML product side, let me start with an update of our EUV business.
The EUV customers are starting production of the most advanced logic processes on our NXE:3300B systems, with plans to transition to the higher productivity NXE:3300C systems in the second half of the year. First set of qualified NXE:3300C optics are in our factory. These higher transmission optics will enable the higher throughput of 170 wafers per hour. We expect these systems will deliver the next level of cost-effective shrink in both logic and memory.
We shipped four EUV systems in Q1 and are on track to ship the planned 30 systems in 2019. In DUV, we continue to innovate in support of future nodes and new applications. Driven by a continued high level of demand for dry products, we will bring the DUV dry products to the high performance NXT platform, starting with the NXT1470 planned for delivery mid-next year.
We also see increasing demand for 200-millimeter TWINSCAN systems across all dry wavelengths and industry segments. For instance, in thin-film head manufacturing, we recently received an order for a special version of the XT1470K, which is a dry ARF platform, which is expected to enable the shrink roadmap at a leading hard disk storage manufacturer. In our application business, our computational lithography deep learning technology has been adopted by several leading-edge customers.
We continue to make progress in e-beam technology and are on track to deliver a multi-beam system for this year for R&D, with plans for commercial product shipments in 2020. With the announcement of the acquisition of Mapper's IP assets in January, more than 100 former Mapper employees accepted jobs from ASML and are now working on the development roadmap of our e-beam and application products.
In summary, despite uncertainty in the current environment, we continue to see market demand that supports another growth year, with strengthening of both sales and profitability quarter-on-quarter this year. Logic will be the primary driver of growth this year, supported by technology transitions and production ramp of the most advanced nodes. As discussed, memory includes more uncertainty, on the one hand because of the uncertainty of global bit demand, but on the other hand, due to fast adjustment of production capacity, and therefore presents both a risk and an opportunity.
Overall, our view of the business is largely unchanged from last quarter. We are on track to achieve our 2020 targets with significant growth potential beyond 2020. With that, we would be happy to take your questions.
Ladies and gentlemen, the operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I'd 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?
Thank you, sir. Ladies and gentlemen, 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 to withdraw a question from the queue. If you are using speaker equipment today, please lift the handset before making your selections. One moment, please, for the first question. The first question is from Mr. C.J. Muse of Evercore ISI. Go ahead. Please, your line is open.
Great. Thanks. Good afternoon. Thank you for taking the question. I guess first question on your memory outlook, if we're to exclude expected EUV shipments, it looks like memory half-over-half for you guys is roughly up 30%, give or take, in the second half. Curious there, is that all largely shrinks or are you starting to see greenfield from the 3D NAND side? Would love to hear your thoughts and any color on that from you.
Well, thank you, C.J. No capacity additions on the 3D NAND side. That's not what we're seeing. It's really technology transitions other than EUV. It's largely in the DRAM space.
Okay. Helpful. I guess as my follow-up, as you think about DRAM and adoption of EUV, it sounds like perhaps layer count could increase from perhaps 2 to as many as 4 layers. Would love to hear how you're thinking about that, how you're thinking about that ramp, and, I guess, what contributions to EUV we could see into the 2020, 2021 timeframe.
Yeah, that's a very good question. I think, as you know, I think we discussed this on previous calls also. It's much more cost sensitive than the logic space. It actually means that the higher productivity EUV tool, the 300C is the tool of record for DRAM manufacturing. Now, clearly, we're in the process of maturing that 300C tool in terms of availability, in terms of the productivity.
Of course, we see to be proven in the customer fab. I would expect that by the end of this year, I would say somewhere in Q4, where we see the first results of those tools in the customer fabs. We would need the projected wafers per day productivity, which is a result of the raw throughput plus the availability. That will really drive the number of layers ultimately, in application of DRAM.
I would expect, though, that customers will first allocate a relatively small portion of their output to EUV because it's a new technology, it's a new process. When that is proven, that can accelerate. Could really say it's really up to us to make sure, and of course, together with our customers, because it's new technology, new process technology.
We need to prove that in the course of this year, really towards the end of the year, that the promised productivity and availability is there, that we beat the 2,000 wafer per day target that we've set ourselves, and even see whether we can get higher. Going, I would say, significantly above the 2,000 wafers per day, which ultimately should be possible, will drive the adoption of the number of DRAM layers. It's a bit early to give you a guidance on the 2020, 2021. It really depends on how we perform. Of course, it's in our best interest and that of our customers to do as good as possible.
Great. Thank you.
Our next question is from Mr. Krish Sankar. Please state your company name followed by your question.
Hi, it's Cowen and Company. Thanks for taking my question. I have two of them. Peter, you kind of reiterated your EUV outlook for this year with 30 units. Is it fair to assume that these units are pretty much locked and loaded, and your customers have gotten the green light from their customers to proceed with EUV for their end products for the second half?
Well, I think, Krish, I think that is a fair assumption because these are not cheap tools. To spend that kind of CapEx without having the business and without having some decent level of commitment from your end customer, now that's probably not very likely. Yes, I would say yes.
Got it. That's very helpful. A question on the memory side. Your memory orders have been down sharply for the last two quarters, and it looks like it's stabilizing at these EUR 300 million run rate levels. You also mentioned that memory business should improve through the course of the year. Given your long lead times, is there a way to figure out if DRAM or NAND is going to bottom out at some point for your customers? How many quarters before that when they come and place the orders for ASML tools?
Yeah. Like I said in my introductory comments, what we're seeing is a bit different from what we've seen in previous cycles, is the pretty rapid reaction of customers to actually reduce output. Basically, to lower the utilization. I think that is an attempt of customers to quickly adapt the imbalance in supply and demand. That would lead to a situation whereby in the course of the year, and many customers have actually said this, that they expect throughout this year, could be middle of the year or at the end of the year, but throughout this year, a better situation for them and a return to better business levels for them.
What that means is that we don't expect this year that there will be a big snapback in demand for those systems, because if you lower the utilization now, the first what you will do is use that utilization when you go up. That probably means that if we see a correction is going to be next year and not this year. Having said that, we are preparing the supply chain.
We always have in the supply chain a certain level of buffers, so we can have a rapid response shipment ready, which is true for the long lead time items at our optic supplier and some very long lead time electromechanical parts of our tool. The first snapback we probably can do within a relatively short period of time, and that gives us the time to also organize the supply chain if the ramp turns out to be more substantial and longer-term.
Thanks a lot, Peter. Very helpful.
Next question is from Mr. Sandeep Deshpande. Please state your company name, followed by your question.
Hi, JPMorgan. Thanks for letting me on, Peter. Just one first question for me on EUV. To an earlier question you responded regarding memory and memory adoption of EUV into 2020 depends on a NXE:3400C. How confident are you on EUV shipments into 2020 based on what guidance you've given in the past? What will drive those shipments into 2020 at this point based on, clearly, you've already probably getting indications from your customers on these trends?
Yes, we did. I think what we are planning, what we have given you as an indication in the past, I'd like to refer to the update that we gave at the Capital Markets Day last year, where we gave you kind of a mid-scenario. When we look at that number, then I think everything that we're currently seeing in terms of logic demand, the use of EUV at 7-plus, 6 and 5 nanometer, I think that confirms our thinking for that particular number that we gave you.
There is a level of memory shipments in there also, whereby we assume that at least in a moderate market scenario, we will ship some shipments to memory customers also. All in all, I think we have in our moderate market scenario 2020 about 33 EUV units, and that's what we're targeting at.
Is there some upside potential? I think if the NXE:3400C works indeed as smoothly as we're planning, that could be, that means that we should have, I would say, double digits above the 2,000 wafers per day level, this could spark some additional demand, customers should give us the problem to get more out than those NXE:3400C systems. This is what we're currently seeing as the most likely scenario. That's what we told you back in November last year.
Thanks, Peter. Just following up on a margin question associated with EUV. In the second half of this year, you're looking at shipping about 10 tools a quarter. Essentially you're at scale in terms of quarterly volume on EUV. Would you be expecting to be shipping scale margin as well? You've talked about in the past that EUV can do about 40% gross margin initially, but then by 2022 or so, going towards the DUV level of gross margin. Do you think that you will be at that scale margin?
That's roughly speaking, the trajectory that we're on. I think what is important to recognize, Sandeep, is that for the second half, it will still be a mix, right? It will be a mix of 3400 B machines and 3400 C machines. In the course of the second half, starting in Q3, we'll see the first C shipments with a considerably better gross margin profile associated with that. What you just mentioned, the 40% for 2020 and then that gradually growing towards the margin that we have on DUV, that's exactly what we confirmed at the Capital Markets Day.
Thank you.
Next question is from Mr. Weston Twigg. Please state your company name followed by your question.
Hi. Thank you. With KeyBanc Capital Markets. Just wondering if you could help us on the logic side, just like you did on the memory. If you stripped out the EUV ramp or the technology purchases, what do you think the core logic revenue growth would be this year?
It's very hard to strip the technology component out there because nearly everything that we have in logic is related to that. We would say about 85% of our shipments would be related to technology upgrades. That's the vast majority of what's in there.
Okay. Yeah, that makes sense. Maybe on E-beam then, just wondering if you have any expected changes in the growth rate related to the multi-beam launch in 2020. If you give us an idea for what that might mean for revenue or ASP opportunity next year.
Yeah, I think the most important part is here to make sure that our D system lands by the end of the year, that is what we're still planning. Because it's a new technology, to give you a detailed outlook on growth rates for 2020 for this technology is a bit too early, because it also very much depends on how the technology is being used and on the application space.
For us, the most important part of EUV is to get the multi-beam out. Yeah? Get the multi-beam out, and to have the first qualifications done with our customers. Based on that, we'll be, by the end of the year, early next year, in much better position to guide you on growth rates and market expectations.
Very helpful. Thank you.
Our next question is from Mr. Mehdi Hosseini. Please state your company name, followed by your question.
Yes. Thank you. It's Mehdi Hosseini from Susquehanna International. Peter, I want to go back to your comment from January early conference call. You said you expect up to 13 EUV system 3400C, you are still not really clear of those systems, how many would be an upgrade from B to C. Is there an update here? I have a follow-up.
Yeah. The full Cs are actually less. You have a kind of an intermediate version. The full C is probably around five. Yeah. The rest is an intermediate version that will be upgraded later on. That was a bit of a confusion. It has to do with the fact that not all modules are fully ready when we start shipping the first C with the improved lens.
There are other features to that C system that come later. That is the upgrade in the C version, which is relatively minor. The upgrade you're probably referring is from the B to the C, this is where we don't think there will be a lot of upgrades for the simple reason that the B is a lower productivity tool with a lower price.
If you want to go to the C version, you really need to have the new optical path there, which actually doesn't apply. It's possible, they have such a major upgrade in the field that it's questionable whether it's economical for customers to take the tool down for such a long time and then pay such a high price for the upgrade. I think the Bs will remain the Bs and the Cs, the real Cs, the final end Cs are probably a handful. Yeah. There is this version that is going to be shipped at least with the right lens and with some other modules, later on. Those are small upgrades, which are part of the purchase price.
Thanks for clarification. A rather quick follow-up. I estimate the install base of all EUV systems out there in the field to be around 60. Obviously, some of these systems are for R&D and some of them are older generations. Let's say 60% to 70% of the 60 units could potentially be upgraded. You just referenced the economic challenges for upgrading. Again, I can't ignore the fact that there is a large install base. In that context, how should I think about the tools that are already being paid for and some of them maybe halfway through depreciation versus benefit of purchasing an outright C version?
I think it's not 60, it's just below 50 that is in the field. You have to realize that a number of those tools are 3300s, 3350s. Most of those tools have been used in the qualification and the R&D space. You're right. Some of them actually are entering into their last term of depreciation. Some of those tools will be used also in the R&D space and will not be upgraded.
Other tools, like the 3300Bs, they are lower productivity tools, but also lower price tools, but are perfectly capable production tools. Those will stay in production. That's nothing different than what we did in the past when we had NXT versions, where basically you have a 1950 followed by 1960 and a 1970.
Some of them can be upgraded, as I said earlier, the upgrade ability of the 3300B is there, it's very expensive, and you could argue whether it's economical. I don't expect it there. On the 3300s, not the 34, the 3300s, I see limited upgrade possibility, but many of those tools will stay in an R&D space. Some of them, we can negotiate with the customers to take some of them back and refresh them here in the factory. Those are the kind of plans that we are developing with our customers today, just to make sure that they have efficient use of their assets.
Those are programs that we'll probably run over the next couple of years there to make sure that we can help our customers get the maximum out of their install base, which is by that time fully depreciated. It will be kind of a trade-in and upgrade program. Those details still need to be worked out.
Great. Very helpful. Thank you.
Our next question is from Mr. Mitch Steves. Go ahead. Please state your company name, followed by your question.
Hey. Thanks much. Steves from RBC. I really have two. The first one's kind of on the gross margin side. You guys saw a better shipment in EUV, and you guys are talking about better DUV profitability, but then you're kind of guiding to similar gross margins for next quarter. I'm trying to understand why you're not seeing any scale from the extra EUR 300 million sequentially.
The gross margin from Q1 into Q2 is a bit of a blend. As you rightfully said, we'll have more EUV shipments, and as you know, with the NXE:3400B, that means that the gross margin for that reason will go down.
It will be compensated by the DUV business, and will also be compensated by the fact that we do have better installed base revenue with some field upgrades in there in the second quarter. If you take the negative from more EUV shipments, that gets compensated by the other two developments, and that gets you, as we already said by the way on our call after Q4, that gets you to essentially the same growth module for Q2 as you have in Q1.
Got it. Secondly, you guys have a pretty large target in terms of 50% out there for gross margin. When do we see that step function in terms of the gross margin? Is that driven by the type of EUV shipments you're going to have, or is that driven by mix? Just how do we get to kind of a step function from 41 to, call it, high 40s going forward?
You're on a roll there. You absolutely mentioned two very important elements in there. Indeed, the introduction of the 3400 C model, which as we said, is going to start in Q3, and that will be a significant uptick in our growth margin. That's one big component. The second component indeed is mix, which is also envisaged for the second half, the mix in the DUV business, even more towards immersion.
A very significant part that we talked about quite extensively also on the call last time is installed base revenue, and then in particular, the EUV service cost and service revenue. Working very hard, as you know, at this stage to get our customers and help our customers go to high volume manufacturing.
There's a lot of cost that we incur as a result right now, whereas the revenue is very limited because as you probably know, most of the revenue and service is tied to wafer outputs, which of course at this stage is very low. There's a big mismatch at this stage between the cost and the revenue. That will obviously remedy itself in the second half and then significantly into 2020 and beyond. Those are the key drivers.
We have factory loading to the extent that the business goes up, and some other components in installed base revenue, including field upgrades. Those are the main levers that we're pulling in order to indeed get to the over 50% that we've guided for 2020. We believe we're on track. The step change, you will see significant elements of that step change in the course of the second half.
Perfect. Thank you.
Our next question is from Mr. Stephane Houri. Please state your company name, followed by your question.
Yes, hello. This is Stephane Houri from ODDO. I have a question again on the services, because you said that the services will jump in Q2 to EUR 700 million. Just to understand the dynamic, I thought that services recovery would have come with EUV services revenue in Q3 and Q4. What services are driving the growth in Q2? Basically, will you be significantly above the EUR 700 million euro level per quarter in Q3, Q4? Thank you.
The main driver of getting it from the Q1 number to the Q2 number is not related to EUV, that would include field upgrades. That's an important driver where we had a limited number of that in Q1, as we also indicated, which was also a function of the supplier situation that we talked about last time. Field upgrades is one important driver of the higher number in Q2.
In the second half, we expect installed base revenue to be higher than in the first half. As you said, we're still looking at single-digit growth for installed base revenue. If you then do the math of the first half and the second half, you would see that there is about a 20% to 25% increase that you would have to have over the first half into the second half to get to that number.
Okay. Maybe a quick follow-up on the price of EUV tools. There has been a significant fall, if I might be correct, in Q1 versus Q4. Is there any reason for that? Where do you see the EUV average price going given the introduction of the NXE:3300B-C? Thank you.
If you compare the I guess what you say is you compare Q4 2018 to the Q1-
Correct.
- Q1 2019 number, right? Then the average. Yeah, the average pricing of all of our machines, including the EUV machines, is obviously to a large extent contingent upon the configuration of the machine and also the mix. What customers will it go to? What's the size of the customer, et cetera?
There is a number of drivers there, sometimes that's a little higher than the average sales price of EUR 100 that you typically work with, sometimes it's a little bit lower. As it relates to the introduction of the 300 C, I think we've been very clear there. We're looking at a 35% increase in the throughput in terms of wafers per hour. That, we've always said, translates into an ASP increase from the B to the C model.
Okay. Thank you very much.
Our next question is from Amit Harchandani. Please state your company name, followed by your question.
Good afternoon and good morning, all. Amit Harchandani from Citi. Thanks for taking my question. I would like to maybe get your thoughts with respect to EUV orders and shipments going into 2020. As you alluded to earlier, for 2019, your shipment plan looked fairly secure in terms of customer commitments. But as we look towards 2020, and we look at some of the recent order flow around EUV, how are you thinking?
What's your confidence levels with respect to hitting the 33 to 35 that you have referenced earlier? Do you need to demonstrate more improvement to your customers? Do the customers have to come through? I guess I'm just trying to get comfort in terms of when do we start seeing the EUV orders per quarter tracking close to the shipment level that's expected for next year. Thank you.
Two things here. One is, these orders come in choppy. There's only a few customers there, so it means that it's not a whole bunch of customers that get once they come in these batches. That's what you have, one. It's about the same as we were last year. Last year, first quarter 2018, same thing. Where do the orders come from, for 2019 this year?
The 30 units. This was the same question, same situation, choppy. We said at that time, before the end of 2018, we have all the orders for 2019. I think it's the same situation now. When we look at 33 systems, we look at, I relate back to an earlier question, where does the demand come from? It comes from the logic transitions, the 7 plus, 6 nanometer, 5 nanometer for three customers.
The potential for DRAM that we talked about in a moderate market scenario. Those are the discussion that we're having with our customers and gives us the confidence that we're preparing for these 33 unit numbers. We will have those orders by the end of the year to fulfill 2020 like we did last year. On top of that, we are reducing our order lead time to our customers.
When we're in this phase where customers need to order two years in advance with a semiconductor industry that's quite choppy. They don't like two years. Because we actually agreed with them that we're going down to 18 months and 15 months, and ultimately we want to end at a 12-month lead time for EUV systems. That gives them some more flexibility to better plan. Well, part of that you're already seeing.
With that planned lead time reduction, customers will take that into account in placing the orders that are going to be choppy, and that will fill the order book to make sure that by the end of this year, we'll have the units there for 2020 shipments.
Thank you, Peter. As a follow-up, if I may, could you maybe give us a quick update on the business momentum out of indigenous Chinese customers across the different end markets? Have you seen any changes versus previous quarters? Any further updates from your side would be helpful. Thank you.
I think, as I shared in my introductory comments, especially in the memory space, these investments are of a strategic nature because they're greenfield companies, have greenfield fabs. The first qualification rounds of the devices that they're making, they are behind us. Actually, they're looking at ramping their first lines, and that's what they're doing this year.
That will happen. I think we don't see any change there. I think the same is true for some of our indigenous logic customers. They have technology transitions ongoing to either 28 or 14 nanometer, which is strategic, and that happens, albeit at a somewhat lower level. I think in China, we see memory quite significant volume and logic is more modest. All those plans stay on track.
Okay. Thank you, Peter.
Our next question is from Miss Tammy Qiu. Please state your company name followed by your question.
Hi. Thank you for taking my question. Firstly, I have noticed that R&D has been keep increasing since last year. I understand that last year you started to accelerate your R&D for the High NA generation tools. I'm just wondering that, is 2019 another up year for R&D, compared to 2018 and of course the year before?
Or are we actually seeing, sometime, H1 2019 will be the top of the R&D cycle? Secondly, after 2020, in theory, if you have done all the R&D and all the preparation for High NA launch, your free cash flow should increasing significantly. What's your view in terms of your future capital return program? Thank you.
Thank you. In terms of the R&D, we're looking at about EUR 1.9 billion R&D for the year. That's what we've communicated, and I think we're on track, and I think the number that you've seen for Q1 is very consistent with that number. Indeed, we've said that there is a number of reasons why we're doing that. One is, continued preparation for High NA, pulling in of the 3400 C development and also, for instance, around the development of multi-beam.
There are distinct programs that underpin that. We've also said that we believe that in the course of 2020, we will see that we're gradually navigating that back to the longer term of 14% number that we've indicated. You will still see a higher percentage for 2020, but in the course of 2020, you will see us navigating back to that 14% longer term number.
I don't want to spoil the party, we shouldn't expect that the R&D work on High-NA comes to a grinding halt by 2020. Obviously, that will continue to be there and a significant part of the R&D work in 2021 and beyond will still obviously be related to High-NA. You are right, there will be a significant generation of free cash flow.
I think we've been fairly clear on that during the Capital Markets Day, where we said, first off, we're going to make all those investments that we deem necessary for the continuation of the business as we run it today, which is primarily R&D, and that's the number we just talked about. We said on the M&A front, it is unlikely that there will be targets both available and attractive for us, such that there would be a significant expenditure on that front.
We will sustain our cash balances as we've indicated, anything that is available over and above that, we said we'll return to our shareholders, and we'll do that in a policy of increasing dividends. I think the dividend proposal that we've given for this year, I think is testimony to that. Anything else that we have available, we'll return by way of share buyback programs that, as you've seen, we execute on in quite a disciplined way.
Okay, cool. Thank you.
Our next question is from Mr. Pierre Ferragu. Please state your company name, followed by your question.
Hi. Thank you for taking my question. Peter, I was wondering if you have any perspective on how things are happening in terms of the clients, of your clients in logic, adopting the nodes in which EUV is run. There are some reports that the seven-plus node might be not as popular and successful as initially anticipated, and maybe the five-nanometer node will end up being the bigger one and the seven-plus a smaller one.
My first question is, do you have any visibility and perspective on that? My second question is, if that were the case, does that impact in any way the cadence at which you're going to deliver your tools? Would that be actually not impacting you? Thank you.
Yes. Thank you, Pierre. I think to answer your last question, I do not think it has an impact on the cadence. What you will see is there's going to be more nodes and half nodes and quarter nodes that people are using for different purposes, so different devices for different end markets and different applications. It was clear some of our largest customers in the logic space have indeed announced nodes that they call 7-plus, 6, 5, 3, for different types of customers.
More importantly, I think when you talk to our customers, they actually say, and especially in the foundry space, that the number of tape outs for those devices are very significant. I think you will see a more heterogeneous supply of those nodes for different applications and different customers.
When we add it all up, this is the most important, and we see what we think the EUV demand will be next year and years thereafter. There's no reason why we change our, let's say, our modeled market view for next year. It all fits. You will see a more heterogeneous and thereby perhaps for you guys, a less transparent node-to-node transition. It's getting a bit more complicated.
Thanks, Peter.
Our next question is from Mr. Andrew Gardiner. Please state your company name, followed by your question.
Barclays. Good afternoon, gentlemen. Just another one on the memory space, perhaps slightly more near term. With the fourth quarter results, and I suppose with third quarter results before it as well, you had talked about pushouts from certain customers. I'm just wondering, clearly, you're keeping the full year guidance the same in terms of the down 20% for memory overall and down 30% as you described for the underlying business.
Just within that, as the customers are trying to find the bottom in the cycle and return to supply-demand equilibrium, have you seen any further pushouts, at least from a perhaps quarter-to-quarter basis within the year? Or have things been fairly steady for the last couple of months? Thank you.
I would say they've been pretty steady, Andrew. Like I said also earlier in my earlier comments, there is always the fact that we're in this digestion or this supply-demand balancing phase. There's always a question of how long will it last, and it's going to be basically a function of the bit demand for the end markets, which for DRAM, I think our latest outside analysts, when we think of a Gartner or these guys, for DRAM hover around the 20% and for 3D NAND between 30% to 35%.
If you follow that, we just stick to what our customers say and say you could see a rebound in their business throughout this year. That's basically because the first thing they were going to do, like I said earlier, they've reduced their utilization, which is pretty unique for us. We haven't seen that in earlier cycles to this extent. They will first reuse that. They will see their business pick up, of course, earlier. There are no signs that at this moment, in any case, that they're going to have another round of reductions.
I think what they're doing is they're just trying to get the supply-demand balance in order as soon as possible by, through their own actions, is basically controlling the utilization. That's good. Maybe that's the reason why they feel, based on, for instance, on the 20% bit growth in DRAM and 30% to 35% in 3D NAND, that they believe that somewhere in the course of this year, they'll see a rebound in their business. It could very well be.
No further adjustments that we've seen. Of course, there's absolutely no security or certainty with these comments because nobody can really predict where the end markets are going. At this moment, no change.
Sounds good. Thanks, Peter.
Our next question is from Mr. Adithya Metuku. Please state your company name, followed by your question.
Yeah. Good afternoon, guys. All of my questions have been answered, but just a quick clarification from Roger maybe, just on the CapEx. I noticed Q1 was pretty high in terms of CapEx as a proportion of sales. How should we think about CapEx for the full year? Is it going to be in line with your 2020 targets, or should we expect something different this year? Thank you.
CapEx this year will be fairly high. It will be higher than the typical run rate that we see on a long-term basis, but that's the nature of CapEx, right? CapEx is not a smooth line. This year will be fairly high in CapEx because we have quite some development preparation that we're doing for High NA, for instance. That's why CapEx is fairly high this year. Longer term, the guidance that we've given for 2020, 2025, that percentage of 4% is still the right percentage to look at. It will vary over the years, up and under. This year it will go higher.
If I were to annualize the Q1 number, would that be a fair representation or-
Um-
Too excessive?
I think that would not be excessive. I think that is a reasonable number to go by.
Understood. Thank you.
Our next question is from Mr. David Mulholland. Please state your company name, followed by your question.
Hi, this is David from UBS. Just one quick question on the kind of pace of node introductions. I know you touched on it briefly, are we normally having this discussion in terms of whether the cadence might slow? Overnight, obviously, TSMC has been talking about introducing a six-nanometer node and seemingly moving to annual node introductions.
I just wonder if you could comment on what you think that might mean for your logic business going forward, whether it becomes a bit more stable and less lumpy or doesn't change it that much. Then just as a quick follow-up, we've commented on a little bit, given the messaging around the 3400 series, is it fair to assume the next kind of sway to the EUV bookings for 2020 is likely to be quite back-end loaded this year?
Okay. Yeah, that could very well be. I do expect that to be honest, also given the reduced lead time, that it's more back-end loaded. Yes. Your first question, yeah, the impact of this cadence change, like I said earlier, I think it's a bit more heterogeneous and it's less transparent what that means. I also think customers of customers are probably going to make more application-specific choices of what they want to use in a particular application because it's not a full node, this is half nodes, you could even say quarter nodes.
That makes it less transparent also for us. We do in the discussion with our customers, we do talk about those nodes that require EUV, because that's where the question is, how much EUV would they need? In that discussion, we have to look at this blend of EUV applications and the number of wafers that you would need per node.
We would need to get to some kind of equilibrium almost to assess how much EUV we would need. Everything we've heard until now with all those node changes, we do believe that what we have in our moderate market scenario for 2020 is the right number. Yeah, you are right. It's just starting, we don't have the full transparency on this. We'll have to figure this out as we go with our customers.
Sounds great. Thank you.
Our next question is from Mr. Robert Sanders. Please state your company name, followed by your question.
Yeah. Hi, good afternoon. It is Deutsche Bank. First question, just on your U.S. logic customer, I was just wondering if you were assuming that they will roll out 10 nanometer across their three major sites, or do you think they are actually sort of revisiting what they are doing there? Because I guess it is an important assumption given what you are seeing in their terms of DUV to spend in 2019. The second question was just one for Roger. Just on the buyback. I noticed it slowed down a lot, but they raised the dividend. Is that just a general philosophy now to prioritize dividends over buybacks? Thanks.
Okay. Well, Robert, as you know, we are on the U.S. logic side. There is not many choices, so we cannot be very specific on that customer. I think, let us answer that in the general sense. We haven't seen changes in that sense, if you look at it from a point of view of the node introductions, the planned node
introductions are actually happening, and the existing nodes are at high utilization because there is a particularly high demand for that current node, which is not a surprise either. Everything else is according to plan. We haven't seen that much change, to be honest. That is on that particular customer, but no names.
Robert, on the dividend versus share buyback, as we said, we are looking also on a go-forward basis. We are looking at growing dividends. I wouldn't want people to assume that it's going to be a 50% uptick every single time, but we are looking at a policy of growing dividends. That's, as I already answered to a previous question, given the free cash flow generation that we expect in the years to come, we believe there will be significant amounts available also for share buybacks.
Particularly on the share buyback program that we're looking at for this year and for the previous year. Indeed, the amount that we had this quarter was fairly limited, but we are expecting to complete that program by the end of this year in accordance with what we've indicated.
Okay, great. Thank you.
Ladies and gentlemen, 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. Now, operator, may we have the last caller, please?
Thank you, sir. Last question is from Mr. David O'Connor. Please state your company name, followed by your question.
Great. Thanks for taking my question. It's David here from Exane BNP. Maybe, Peter, one or two smaller follow-ons from previous questions. Firstly, the smaller node transitions and the cadence change that we're now seeing, what does that mean for the change in customer ordering patterns for ASML? Does that smooth the kind of ordering?
How should we model that from a litho intensity viewpoint? Maybe just one second question on the memory customers in this cycle reducing utilization versus the previous cycle. What do you think is really behind that? What's the real big change there, and can we expect that in future cycles going forward? Thanks.
Yeah, I don't know exactly what is behind it. You should ask our customers, it's just simply what we are seeing. I think there's a certain logic to it. You can keep your utilization as high as you can, just that basically means you're driving the cost per device down, so the cost per chip. You basically use the fixed cost better. That's one strategy.
The other strategy is to say, that could mean that the cycles last longer. You could also have a strategy, say, basically with shorter cycles, you go a little bit deeper, then the recovery is also faster. I think this is where, when you see this and quite a significant reduction in utilization in the memory space, that looks like that's the type of decision that they've taken.
On the small node transitions, change in order patterns, I don't think so. What I basically think is that it's more the end markets for our customers, where they have different nodes that they can offer to their customers and different nodes for different purposes, different customers. Whereby the positive here is that the tape outs that our customers are talking about, the number of tape outs are as high as ever.
That means that there's a lot of demand for different solutions. As long as they all use EUV, I don't see there's going to be any choppy pattern here or a smoothing of that pattern. I think it doesn't make a big difference in my opinion. It's just more diversity. No big change. I don't expect that.
Very helpful. Thank you.
On behalf of ASML's Board of Management, 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. Ladies and gentlemen, this concludes the ASML 2019 first quarter financial results conference call. Thank you for participating. You can now disconnect your line.