Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2018 fourth quarter and annual financial results conference call on January 23, 2019. Throughout today's call introduction, all participants will be in a listen-only mode. After ASML's introduction, there will be an opportunity to ask questions. I would now like to open the question and answer queue. 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 the conference call over to Skip Miller. Go ahead, sir.
Thank you, operator. Good afternoon, 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, Netherlands, is ASML's CEO, Peter Wennink, and our CFO, Roger Dassen. The subject of today's call is ASML's 2019 fourth quarter and annual results. The length of this call will be 60 minutes, and questions will be taken in the order they are received. This call is also being broadcast live on the internet at asml.com. A transcript of management opening remarks and the 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 Q4 and 2018 annual 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 fourth quarter and the full year 2018, as well as provide our view of the coming quarters. Roger will start with a review of our Q4 and full-year financial performance, with 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 full-year financial accomplishments, and then provide our guidance for the first quarter of 2019. Q4 net sales came in at EUR 3.14 billion, slightly higher than our guidance. Net system sales of EUR 2.42 billion was more weighted towards logic at 60%, with the remaining 40% from memory. We shipped six EUV systems and recognized EUV revenue of EUR 579 million from five shipments. One system was shipped to collaborative research center imec, was not recorded as revenue, which we mentioned last quarter. Installed base management sales for the quarter came in at EUR 719 million. Gross margin for the quarter was 44.3%, which was negatively impacted by the Nikon settlement. Without this charge, the gross margin was 48.5%.
We signed a memorandum of understanding with Nikon to settle our legal dispute over alleged patent infringement that was initiated by Nikon. Therefore, we recorded a provision in our 2018 accounts, which has a negative impact of EUR 131 million on gross margin in 2018. Overall, R&D and SG&A expenses came in a little higher than guided, with R&D expenses at EUR 442 million and SG&A expenses at EUR 135 million. Turning to the balance sheet, EUR 345 million worth of shares were repurchased in Q4. This leaves around EUR 1.35 billion of the 2018-2019 share buyback remaining. We ended last quarter with cash equivalents, and short-term investments at a level of EUR 4.03 billion, which was higher than expected due to early payments by multiple customers at the end of the year. Moving to the order book. Q4 system bookings came in at EUR 1.59 billion.
Logic order intake was 80% of total value, with the remaining 20% from memory. We took five new EUV orders in the quarter. For the full-year, our net sales grew 20% to a record of EUR 10.9 billion. Net installed base management sales was similar to last year at EUR 2.68 billion. We shipped 18 EUV systems, with a total EUV system sales of EUR 1.9 billion, representing a significant growth over 2017. Our gross margin for 2018 was 46%, which would have been 47.2% without the Nikon settlement charges. We made considerable improvements on our gross margin in 2018 and remain on track to achieving overall gross margins exceeding 50% in 2020, as confirmed during our Investor Day in November of last year. We continue to invest in the long-term future of ASML to increase R&D from EUR 1.26 billion in 2017 to EUR 1.58 billion in 2018.
The increase was primarily driven by the acceleration of our EUV roadmap. Overall R&D investments as a percentage of 2018 revenue was about 14%, and SG&A was about 4.5% of revenue, both similar to 2017 as a percentage of revenue. Net income for full-year grew 25% to a record of EUR 2.6 billion, resulting in 23.7% of net sales and an EPS of EUR 6.10. With that, I would like to turn to our expectations for the first quarter of 2019. We expect Q1 total net sales of about EUR 2.1 billion. The lower revenue guidance is due to a combination of revenue pull into Q4 in 2018, as well as a reduction in shipments due to a fire at one of our suppliers, Prodrive, and some system demand change.
As announced in a press release on December 3rd last year, there was a fire at one of our suppliers of electronic components and modules. This resulted in a loss of work in progress, as well as some inventory. Due to the integral cycle time of about one quarter for these modules, our first quarter sales will be negatively impacted by around EUR 300 million, which we expect to largely recover in Q2. We expect the remainder to be recovered in the second half. Our total net sales forecast for Q1 includes around EUR 300 million of EUV system revenue. We currently expect to ship three EUV systems in Q1. We expect our Q1 installed base management revenue to be around EUR 600 million, which is primarily due to lower field upgrades as a result of the Prodrive fire. Gross margin for Q1 is expected to be around 40%.
The lower gross margin is due to a combination of mix, lower field upgrades, factory loading, and EUV service burden. The mix relates to a reduction in higher margin immersion systems and field upgrades as a result of the Prodrive fire and some system demand change. With lower system sales, there is also a reduction in factory loading, which has a negative impact on gross margins. As our EUV install base continues to grow, we must expand our service infrastructure to support these systems in the field, which is a decreased burden on growth margins until we start collecting service revenue later this year. We see the impact from these items continuing into Q2 with an expected recovery in second half.
The positive margin recovery in the second half will be driven by higher revenue, thus improved factory loading, as well as increased field upgrades, and we will start shipping the higher margin NXE:3400C, in addition to realizing EUV service revenue. We expect to move towards our 2020 target of over 50% gross margin as we exit the year. The higher R&D expenses for Q1 of around EUR 480 million are due to an acceleration of the NXE:3400 roadmap and growing investment in the High-NA EUV program. SG&A is expected to come in at around EUR 130 million, which is similar to prior quarter. Although we are currently going through a period of uncertainty in the industry, we look forward to a growth opportunity in 2019.
As we remain confident in our long-term growth, we will propose a 50% increase in our dividends 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 880 million. With that, I'd like to turn the call back over to Peter.
Thank you, Roger. As Roger highlighted, we had another good quarter closing a great year for us. With record demand from our memory and logic customers combined, across our entire product portfolio. While the current geopolitical landscape and economic environment are creating volatility in the markets and uncertainty on the near term, as mentioned before, we still expect overall growth in 2019. At the very end of last year, we saw the continued slowdown of memory end market demand, as well as some demand reduction in the logic end markets, primarily driven by the mobile and the server markets. This translated into pushouts of our planned systems to both memory and logic customers from the first half of 2019 in their attempt to gain a balance of supply against demand.
The NAND market, as mentioned in prior quarters, remains in an oversupply situation and is going through a digestion phase after a period of significant 2D to 3D conversions, yield improvements, and wafer capacity additions. DRAM is experiencing softening of bit demand, largely driven by decreased demand in mobile market as well as some inventory reduction in the server market. All this has resulted in some pushouts of planned shipments by memory customers in the first half of 2019. Customers have indicated that they believe there will be a recovery in the second half of the year, as they expect that inventory levels will be managed down swiftly.
In logic, while we see some softening in DPU demand, which is primarily driven by the mobile market, we still expect strong demand in support of the ramp of 10 and seven nanometer nodes. We also expect to see strong growth in EUV demand supporting customers' ramp of seven and seven plus nanometer nodes, as well as a transition to the five nanometer node. Although future developments in the macroeconomic environment can impact our current view, we currently expect logic demand to increase around 50% year-over-year, and memory to be down around 30% year-over-year. We still expect single-digit percentage growth of installed base revenue. Certainly, 2019 will be a growth year, largely driven by logic. On the ASML product side, let me start with an update of our EUV business.
In EUV, we continue to make solid progress, as evident in the positive public comments from our logic and memory customers on the use of EUV in their most advanced nodes. Logic customers are installing systems in support of volume manufacturing for the seven and five nanometer nodes. Memory customers are also working on qualifying EUV for their future nodes. This year, we expect the first commercial EUV-enabled chip to reach the consumer market. In 2018, we demonstrated over 145 wafers per hour, and we are accelerating our EUV roadmap to deliver 170 wafers per hour on our NXE:3400C, with first shipments planned for the second half of 2019. NXE:3400C will also include a number of innovations that will further improve availability. As Roger mentioned, we shipped six systems in Q4, which translates to a total of 18 EUV shipments in 2018.
With the five orders booked this quarter, our shipment plan of 30 systems for 2019 is covered. In DUV, we shipped 189 systems in 2018, an increase of 17% over 2017, and we were able to further increase our output in support of the demand from both logic and memory customers. We continue ramping our latest immersion system, NXT2000, with a record time to achieve mature customer yields. Our application portfolio has continued to see strong adoption in all market segments. Our latest YieldStar system continues to gain adoption at memory customers, following the strong adoption we saw in logic. Integrated products using the combined technology of HMI and ASML are being evaluated at multiple customer sites to help improve customer yields and time to market.
To summarize 2018, our fourth quarter came in slightly above our guidance, and we nearly achieved EUR 11 billion sales for the year, which was a milestone originally set for 2020. Although 2018 was a very good year from a financial perspective, I think it was also a milestone year in terms of technology innovations across all our products. Turning to 2019. We currently see some uncertainty in the market, after a long period of strong capacity investments driven by healthy demand over the past years, it is normal to see a period of congestion, which we expect in the first half of 2019.
With regards to the markets we serve, our customers responded quite late in Q4 to slowing demand in their end markets by delaying deliveries of litho systems for the first half of 2019 to balance supply and demand. We now see our first half of 2019 lower than the second half of 2018, with the reduction being roughly in equal split between memory and logic. The fundamental drivers of high-performance compute and associated high-performance memory and data storage are still in place, and our customers clearly indicated the need for a strong shipment pattern in the second half of 2019 in support of their 2020 business potential. The demand in the second half of 2019 could therefore be 50% higher than the first half of the year.
For 2019, the logic segment is expected to be the growth driver, investing strongly in technology transitions as well as production capacity for their advanced nodes. As we have consistently done in prior slowdowns, we sustain or even accelerate our investments in R&D to deliver on the leading-edge technology when the market turns up, which has been and will be a key driver to secure our long-term growth. We expect to increase our investments in R&D to EUR 1.9 billion for that of 2019. We reiterate that we see market demand that supports yet another year of growth for ASML in 2019, with significantly stronger demand in the second half of the year. As Roger explained, we see similar developments in our profitability, with lower margins expected in the first half of 2019, improving towards our 2020 target of over 50% as we exit the year.
Despite some uncertainty in the current environment, we remain confident about our sales and profit targets for 2020 and beyond, as we communicated during our Investor Day in November last year. We are happy to underline this confidence with our proposal of a 50% increase in our dividend. With that, we'll be happy to take your questions.
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session. Again, if you have a question, please press star 1 to be placed in the queue for a question, and star 2 to withdraw your question from the queue. If you're using speaker equipment today, please leave the handset before making your selections. One moment please for the first question. The first question comes from Mr. Mitch Steves. Please state your company name, followed by your question.
Thanks. Mitch Steves from RBC. I just had to really focus on Q1 and kind of the quarterly numbers going forward. I understand the EUR 300 million hit from the fire, but how do I think about kind of June, and then going forward to September and September in the sequentials? Secondly, also for the gross margin line, I think it's pretty difficult to get from 40% to kind of 50% at the exit, so any help there would also be very useful.
Thank you. Let me start by talking about the gross margin and the gross margin drivers, if you like, in the first quarter, reconciling that to how we see the rest of the year. As I mentioned in my introduction, the main drivers of gross margin in the quarter, bringing back the gross margin from 48.5%, which is the gross margin that we had in Q4, if you adjust for Nikon, bringing it down to the 40% that we essentially guide for Q1. The main drivers there are the loading in the factory. As we said, that is the result of obviously lower sales level. That would account for about 1% in that bridge.
The second element is the mix of EUV, that is essentially as a result of some of the push outs from the first quarter into essentially the second half. That generates approximately 2.5% impact in that bridge of the growth margin. The biggest impact on growth margin actually is from what we call the field upgrades and service. That has two components to it, I mentioned both components in my introduction. One component is the lower field upgrades. The lower field upgrades that we expect to have in Q1 are to a very large extent related to the Prodrive situation, because it means that there is no availability for field upgrades for certain components. That's one element.
If we talk about the EUV service burden, which I mentioned in my introduction, again, just to recap what we mean by that, as you know, the install base in EUV is growing. A number of our customers are looking into high volume manufacturing for EUV not too long from now. That means that we definitely have to support them, obviously, in the field to get everything up and running. Whilst the revenue associated with the service from EUV will only kick in once wafers are being produced, which we expect to happen at the end of this year. That means that we have a significant cost burden right now, while the revenues only kick in at the end of the year.
If you take those two together, the lower field upgrades and the EUV service burden, that accounts for approximately 4% in that growth margin bridge that I give you. Then there's about 1% left, which is miscellaneous. That has a number of elements in there. That kind of gives you the bridge from the 48.5% to the 40% that we have in Q1. Now back to your question, how are we going to recover to the normal margin levels, if you like, in H2? As I mentioned, how are we going to get from this situation towards 50% growth margin that we expect as we exit 2019 into 2020? As it relates to the mix effect and also the loading effect as a result of the uptick of the business that we expect for the second half, that is what is the main driver behind that.
We also expect some of the field upgrades that we lost as a result of Prodrive in the first quarter, we expect some of that to be recouped in the second half of this year. Third important point in getting the margin up to that level is the shipments in the course of the second half of the 3400C model, which is a model that, as you know, has a significantly better margin profile. Then finally, again, related to what I just mentioned, at the end of this year, when high volume manufacturing starts to kick in on EUV, that's where we also expect service revenue to come up. That's essentially how we came from 48.5% to 40%, but also to give you the bridge, how we believe we're going to exit the year at the level of towards 50% growth margin.
Yeah, Mitch, let me answer, let's say the Q on Q sequence. Let me say half on half sequence. First of all, I'd like to reiterate what I said earlier, that for the year, we expect the logic sales to be 50% up from last year, the memory about 30% down, and a single-digit growth in install base management. You can add it all up, and if you then come to that number, that sales number will be divided half on half as such that we believe that the second half of 2019, as I said earlier, will be about 50% higher than the first. If you take those numbers, then you can calculate the Q on Q, I would say the half on half trend.
Okay. Thank you.
The next question comes from Mr. Krish Sankar. Please state your company name followed by your question.
Sankar from Cowen. Thanks for taking my question. I have two of them. First one, Peter. Given the DRAM outlook has incrementally worsened over the last couple of months, and now you view that these tools that are being pushed out from first half to the second half of the year, what kind of tangible data points did you or your customers have on a conviction in the second half shipment recovery? Is there a risk it can get pushed out further? I also had a follow-up.
Yeah, I think, Krish, that is a good question. I think what our customers are actually seeing is what their customers are telling them what they need. There's nobody there with a crystal ball that can tell us that the second half is going to be absolutely certain at a certain level. They're simply not there. Therefore, the economic uncertainties are simply there. They need to basically stabilize to give us a bit more confidence. However, having said that, the feedback we get, especially from our DRAM customers, is, from our largest customers, is that they said we should not underestimate their ability to react swiftly, and that's what they have done. To what we are looking, where we're looking now, that is a 20% bit growth or even a slightly less this year.
Looking what they have installed in terms of capacity and their ability to react swiftly, which they have already done, they believe that with that bit demand, they should be back into a more positive territory in the second half of this year. That's what they've told us. Again, if you're asking for absolute certainty, which somebody did during our press conference this morning, there is no absolute certainty. It also is very much related to the economic environment. Based on these data points, our customers believe that we need to be ready to start shipping again in H2.
Got it. Peter, that's very helpful. Just as a follow-up, when I look at your memory orders in Q4, it's down almost 80% from the peak, and it's also back to early 2016 levels. Should we expect memory bookings to rebound in calendar Q1 in the current quarter? Do you think it's going to take a quarter or two before you see that happening?
Well, it is what I said earlier. It is a swift reaction, it's a quite significant reduction. I think the low memory order rate is a reflection of what the customers decided they wanted to do in Q4 with respect to their 2019 shipments. If they're right on the second half of the year, we should see a rebound of those orders in the course of the year.
Thank you, Peter. Thank you very much.
The next question comes from Mr. David Mulholland. Please state your company name, followed by your question.
Hi, it's David Mulholland from UBS. Just one question, firstly, on the EUV roadmap. Obviously, you talked a lot about this at your Capital Markets Day, and at some point, this needing to move towards multi-patterning. I think some of the comments we've seen at some industry events are suggesting that might even be the case with kind of the 5-nanometer node or the industry 5-nanometer node. I wonder if you could maybe comment on how you see that progressing? Then I've got a follow-up.
Yeah. I think if you talk about the industry 5-nanometer node, which some of our customers then call the N3 node, there is some discussion on this. I don't think we can say with 100% certain that it's going to happen, it's definitely something that's being considered. That's correct.
Just in terms of the follow-up on the comment you made on China, I'm still seeing pitching quite strong even after what happened on one of the customers there being banned from buying from the U.S. Have you started seeing more confirmations on orders from the likes of YMTC or Innotron at this stage?
I think we have to make a split between the domestic and the non-domestic customers. I think some of the slowdowns that we have seen, they do relate to the non-domestic Chinese customers and affect some of the Chinese customers. The domestic demand is still as strong as it was one or two or three quarters ago. It's understandable. If you look at what they're doing, many of those plants are new. They are strategic investments. Some of the products have been qualified. That means that it's not ramping, which I think from a strategic point of view, is something that they will do anyhow, which is also, I think, a confirmation of the fact of what they say they're going to do. That's what we see today. Yeah, from a domestic point of view, still pretty strong.
Just one quick follow-up on the comment in your response to the multi-patterning question. What assumption had you made in the model that you presented for 2025 on the industry five-node? Were you assuming single patterning in that?
I don't think so. That was not there. I think it's still uncertain whether it will happen, we assume single patterning solutions.
That's fair. Thanks very much.
The next question comes from Mr. John Pitzer. Please state your company name, followed by your question.
Yes. Pitzer. Thank you for the last question. Peter, you did a really good job kind of helping us understand for the overall business how the half-on-half recovery will look like in 2019. I'm wondering if you could just do that the same thing for sort of the EUV expectations. Clearly, given the slow start to the year, it feels like the half-and-half growth in EUV needs to be even stronger than the 50% you referenced for the overall business. Actually, I'm curious, as you think about 30 tools for this year, how that breaks down logic versus memory?
Yeah. Well, to answer your last question, we of course have a customer that does both. If you could say, I would say 80%-90% is going to be logic. 10%-15% DRAM related, but we said 80%-90% logic. It's true, I think you will see the same pattern for EUV shipments in the second half of the year being significantly higher than the first half. That's the pattern that was actually planned also. I don't think it's got anything to do with pushback. It's more that just the logistic planning of our customers shaped this pattern. Yes, it's going to be more than 50%, but it's just a matter of the planning logistics, which we already had. Nothing changed there.
Helpful. As my follow-up for Roger, can you just talk a little bit about the R&D cost going forward? It was a little bit higher than we were modeling both in the December and the March quarters. How should we think about R&D here? You mentioned the cost you're incurring now for EUV service without service revenue. Is that now fully baked into the model so that it's now a leverageable event as EUV revenue ramps, or how do we think about that?
Yes. Let me start with answering that latter question. The answer is yes. That is included now in the model for sure. On the R&D side, the guidance we give for Q1, EUR 480 million. In essence, that's kind of the runway that we would expect for the quarters in this year. Our expectation for the full year would be about four times this number. This is the number that we expect for 2019 with the roadmap in there that you're very familiar with, specifically the High-NA, the pulling in of the 3400C multibeam, and a number of other things. Going into 2020, I think the guidance that we gave there at that stage of around 14% over revenue is probably where we see that for 2020.
Perhaps on the R&D number for 2019, I think when we took the decision to accelerate the introduction of the 3400C and High-NA as the logical next node in EUV, the multibeam development. We accelerated, in the second half of 2018, the hiring of the people to make sure that at the beginning of 2019, we had all the people on board. If you take our Q1 guidance, and you basically take that on an annual basis, you could argue that we actually created the R&D infrastructure to do this, and we wanted to finalize that by the end of 2018, and this is what we did. This is basically the full year effect that you're seeing now in 2019 of the decisions that we've taken in 2018.
That's helpful. Thanks, guys.
The next question comes from Pierre Ferragu. Please state your company name, followed by your question.
Hi, it's Pierre at New Street Research. Thanks for taking my question. I was wondering after the introduction of the 3400C later this year, how this is going to look like in terms of deliveries. Is there a point in time from which all or vast majority of your deliveries are going to be 3400C, or is it going to be more gradual with half your shipments in B and half your shipments in C? Do you have any update or more color on how the economics are going to work between the two tools or the difference in ASP? Last but not least, I was wondering if your B tools that you are shipping today are going to be upgradeable to C, and something what the economics would be there.
Okay. The 3400C will ship in the second half of the year. You could assume that any ship in Q4 will be Cs. Yeah? Some of it will be in Q3. The majority of the shipment this year will still be Bs. Everything that we're booking now are Cs. It is going to be a handover, you could say, from the B to the C starting in the end of Q3. Roger, you want to say anything else?
On the other two questions on the economics. As you know, in terms of the specs, the current machine that we ship has a stack of 125 wafers per hour. We've guided that for the 3400C, it's going to be over 170 wafers per hour, which means approximately a 35% increase in throughput. I think as we've guided in the past, you can typically assume that the ASP kind of correlates with that percentage. Currently the ASP for the machine that we ship today is about EUR 100 million. You can kind of calculate what the ASP expectation is that we have for this machine. In terms of upgrades, indeed we do have options to have a part of the performance uptick that the C has over the B to also make that available to the B machine in the form of an upgrade.
Not entirely, but the vast majority of the performance upgrade can be obtained through a few upgrades.
Yeah. Having said that, it's going to be a question of the economics of this, because it's a different lens. Basically, you need to be able to take the hit of quite an expensive upgrade, and that, of course, needs to be balanced with the real performance of the B, the real performance with of the C. We'll just have to see whether that's going to happen. When it happens, it's going to be an expensive upgrade, but having a new lens into that system is not trivial.
Okay. Thanks for that. Very useful.
The next question comes from Mr. Manny Ho. Please state your company name, followed by your question.
Yes, sir. Thank you for taking my question. Peter, just as a follow-up to the prior question, of the 30 EUV system in your backlog, how should we think about the mix of that 3400C?
Like I said, the fourth quarter shipments will probably be all 3400Cs. If you think about this, it's probably going to be around, we have 5 to 10, but the total is 13, and I'm going to confuse you, that some of the Cs will have the fully upgraded new vessel. Which is 5 to 10. It's going to be an in-between version of a 35C, which will have a older type, EUV source vessel. It's 13 in total, but really the ones with all the new vessels, it's going to be 5 to 10. We try to do 10. It could be five if the supply chain is a bit slower than we think. All in all, it's going to be 13.
That also means that from a price point of view, we will start off, of course, it will be higher with the 35% that Roger mentioned. That applies to the full-fledged 35C with the new modular vessel.
Got it. Okay. I have a follow-up regarding just the big picture and how do you see the overall demand environment. If I were to strip away the EUV revenue, it seems like the core business could have a couple of quarters of sequential decline, which is typical of a downturn. If I were to look at the late 2015, early 2016, you had three quarters of sequential decline in revenues, and prior downturns were also a multi-quarter revenue decline. In that context, how do you see the current downturn compared to prior cycles? What is different now, and what are the things that are similar to the prior downturns? Thank you.
Well, downturns are always similar in the sense that supply is higher than the demand. Now the question is how big is that difference? To be very frank, we can only repeat or tell you what we get from the discussions from our customers, because they have a better view of their market in the discussions with their customers. I can only repeat what I said earlier. They talk about a two-quarter correction in inventory. That is driven, I think, very much by the macroeconomic situation and that economic uncertainty. This is a big crystal ball that I don't have and nobody has, so we'll have to see. I'd like to really comment on what you started your question off with, and that's all. If you strip away EUV and look at the core business, may I remind you that EUV is our core business.
We can only ship those leading-edge DUV tools because there is an EUV solution for seven and five nanometers. Without EUV, there would not be a five and seven-nanometer transition. That means that everything that we are shipping that includes EUV, has to do with the technology transitions that our customers are planning to actually capture the value of everything that we still talk about, and that will happen, which has to do with cloud, big data. I can repeat the whole thing again. That is undoubted. That will happen. You cannot strip EUV out because it drives this technology transition. It's part of the core business.
Got it. Thank you.
The next question comes from Mr. C.J. Muse. Please state your company name, followed by your question.
Hi, Evercore ISI. Thank you for taking the question. I guess, Peter, another follow-up excluding EUV, which you may not like, but if you look at 2019 and if I pull out immersion, which is obviously being weighed down by pushouts on the memory side, and exclude EUV, what's interesting, it looks like ArF and ArF dry and i-line are actually growing year-over-year. Can you kind of walk through what you're seeing that's driving that, whether it's legacy 200 millimeter China advanced logic? Would love to hear what is driving that, including as well, whether there's a rising litho intensity that we should be thinking about.
I think, C.J., let's answer it as follows. You are right. If you run those numbers, there are two areas where we see from a product point of view an increase, which is EUV, which we talked about. Like I said earlier, you cannot strip this out because it's just part of the entire development in the industry. Indeed, we have KrF, we have dry DUV, is also higher currently than what we saw in 2018. That has to do with in new fabs, has to do with China. It's not that much higher, but indeed, it doesn't show a reduction in their system sales. This is also what Roger referred to, that this mix, this DUV mix, which is a mix of immersion and KrF, is, of course, in the first half, leading to this 2.5% reduction in the gross margin.
With the immersion system picking up in the second half, that will resolve itself. It is indeed the right conclusion that you drew on the KrF systems being higher than in previous quarters. Of course, EUV in the entirety of 2019.
Very helpful. As a follow-up, specific to EUV gross margins, it looks like you came in around 20% in Q4 of 2018, if I pro forma that one-time charge. You talked about exiting calendar 2019 at 30%. Can you walk through how we should think about the ramp there, and as well, can you talk about where you're seeing bottlenecks? Is it still primarily Carl Zeiss SMT? We're still at roughly 9 months cycle time. Can we get it down to 6? We'd love to hear the working parts of the gross margins and cycle times as we go through the year.
The main driver of that improvement is, as we already mentioned, the introduction of the NXE:3400C model. That is the main driver through its higher ASP. Of course, there is an element in there of further reducing cycle time as a result of that being more efficient in the manufacturing of the machines. The main driver in getting to this uptick of 10% in the gross margin on systems really is the higher ASP on the NXE:3400C model.
On your question on the 20%, I think you're about right when you say the blended EUV margin is about 20%. The system margin, by the way, is over 30. The issue is, and I said it earlier, that we decided in 2018 to at least make sure that we set up the infrastructure for EUV service. We are at that point, but we don't go to grow that any further in 2019, but we do get the full brunt in terms of cost starting January 1st, 2019, because that EUV infrastructure, given the ramp profile of our customers, needs to be ready, and the learning curve for our people in the field is more than a year.
That effectively brings the blended EUV gross margin down, and we said it earlier, we don't have yet coverage of the EUV service infrastructure. That will only start at the end of the year when we start seeing the first HVM, high-volume manufacturing wafer output, for which we will get paid. Of course, that will accelerate throughout 2020 and beyond. The service burden, and Roger talked about it, is I think the main reason why there is a gap between the 30% and the 30% that you calculate.
Very helpful. Thank you.
The next question comes from Mr. Amit Daryanani. Please state your company name, followed by your question.
Thank you. Good morning, and good afternoon all. Amit Daryanani from Citi. Just a quick question, if I may, to begin with on the install-based management side of things. Given your comments, you talked about a mid-single digit or a single-digit growth in install base over the course of 2019. Just wondering if you could elaborate on the put and take of that and what should lower or higher. The reason I ask this is because as I look at the numbers for 2019, and then I look at some of the scenarios you've laid out for 2020, I think the install base number was seen at about EUR 3.6 billion-EUR 3.7 billion in 2020.
Just wondering if you still think you could get to that number, what would drive that ramp, and again, what would be the implication for gross margin, as I do understand this is a relatively higher gross margin. Thank you.
Yeah. I think on the gross margins, you do understand it will have an impact, a positive impact on the gross margin. The single-digit number for this year is also driven by what Roger said earlier. We did have a supply chain issue because of the supplier of some of the electronics and the motion control program. That fire had an impact on the upgrades that we were planning to do in the first half of this year. Now, we're using those components to ship. That actually means that the upgrades are coming back in the second half of the year, but those are complex upgrades for which we simply don't have the service capacity to do all those upgrades to basically catch up a six months or let's say 12 months of business in six months' time.
For the year, you would see that actually gives you a lot. You just lose upgrade business, and that brings the growth percentage down to the single digit. Hopefully, I do assume we do not have a similar situation in 2020, and that issue would really correct itself. This single-digit growth number has to do with the fact that we cannot recuperate 12 months in six months. That's the main reason.
Okay. You still are quite confident in getting to that 3.6, 3.7 if this is temporary issue. Thank you.
We're on target.
Okay. Thank you. Thank you, Peter.
The next question comes from Mr. Stephane Houri. Please state your company name, followed by your question.
Hello. Good afternoon. This is Stephane Houri from ODDO BHF. I have a question about the second half outlook. Just to understand a little bit more what you are saying. Basically, are you banking on any recovery in the memory DRAM or NAND space to talk about this strong increase, or it is just based on the logic business? If ever it was happening, would you have enough capacity to meet the demand? Thank you.
To answer your last question, yes. We will have enough capacity. Like I said earlier, it is really driven by the logic strength in the second half. We do expect when we talk to our memory customers that they do expect some recovery in H2. When you look at H2, it will be a strong logic-driven half.
Okay. I have a short follow-up. You said during your remarks that the EUV deliveries, the 30 machines that you were talking about, were covered by your order book. How do you see 2020 for EUV shipments? Thank you.
2020 shipments, well, I can only refer to what we showed at the Capital Markets Day, where we showed you the moderate numbers. If you should take that number. Now it can change. As a very wise person told me lately, I'm an optimist that worries a lot. I am optimistic on 2020 because I'm optimistic on the performance of the 35C. That means that if we can prove, and I think we will, that by the end of this year you have an EUV tool that has an availability of over 90% with 170 wafers per hour, then the economics for EUV are so convincing that I believe that our customers are definitely going to re-look at their plans and see which layers in the logics, but particularly in DRAM, are now eligible for EUV introduction.
I would refer to right now, I would refer to the Capital Markets Day and the market scenario we put in there gives you the EUV number. I can also tell you that I think very much looking forward to the performance of the 35C, for which we have a lot of confidence. That might trigger additional demand in 2020.
Thank you. Many thanks.
The next question comes from Mr. Mitaya Metsu. Please state your company name, followed by your question.
Yeah. Good morning, guys. It's Bank of America. Two questions, if I could. Firstly, just looking through the ramp that you'll need to deliver on EUV and DUV, I just wanted to better understand what DUV tool capacity you will have in the second half of this year. My understanding was 30 per quarter in 2020. Any color there would be very helpful. Secondly, just trying to practically peek back why R&D would come down in 2020 versus 2019 levels. Practically, what exactly will drive this? If you could give some color around that'd be helpful. Thank you.
Yeah, I think the shipment capability, I think you're about right. The second half of the year, maybe Q4, we should have a 10 per quarter run rate. Actually means to one of the earlier questions that the cycle time is coming down, the factory cycle time. The integral cycle time of EUV, which includes also the supply chain, is still well over 12 months. Our integral cycle time in the factory should go down to anywhere between 15 and 18 weeks. That is what you asked for. That will actually mean that we will be able to do 10 shipments per quarter.
As it relates to R&D, an important portion of the acceleration of the R&D effort that we talked about is related to the introduction of the 30C model, which as we've already explained, is going to happen this year. With that essentially done, that means that there is some leeway there that we would be able to manage down the total R&D expenses because that research is done. We're very well able to do that because in addition to all the headcount that Peter already talked about, there is a lot of farm out that we have there. In that way, we think we can manage that down to the number that we've guided for 2020.
Okay, understood. Just clarification on Q2 gross margin. You clearly said gross margins will improve in the second half. Would it be reasonable to assume that Q2 gross margin will be similar to the Q1 gross margin? Would that be typical?
We'll get there in a couple of months. As we said, we think the conditions that exist for Q1 to a very large extent also exist for Q2, and the major recovery items that we discussed are going to kick in in the second half.
Understood. Thank you.
The next question comes from Andrew Gardiner. Please state your company name, followed by your question.
Good afternoon. It's Andrew from Barclays. Thanks for taking the question. I have another one on EUV. Sort of one follow-up and then another question. Peter, in response to an earlier question, you suggested that indeed there had not really been any change to delivery plans or shipment plans through the course of 2019. Clearly, you're still saying 50 units in total, but I just wanted to first of all make sure that indeed your customers hadn't really changed any plans on that front.
That's correct.
Okay.
We haven't seen any customer pushbacks on the EUV shipments.
Okay. In relation to that, there's some discussion in parts of the industry, in parts of the financial markets about perhaps not so much concerns on your customer side, the end-user side, but perhaps the customer-customer. Some of the fabless guys have a little bit of trepidation as to how the ramp of EUV is going to go and what that means for high-volume manufacturing and their ability to get the chips out the other side. Are you hearing those fears? Are you having those discussions with some of the fabless chip vendors? What are you doing to help sort of satisfy those concerns?
Well, the customers of our customers, they're a bit more distant, as you can imagine. We do have interactions with customers of customers, but largely on the roadmap and not so much on the operational situation at our customers. We don't discuss our customers' production capability or the capacity of our customers. We don't have that insight. Like I said, we do talk about the roadmap. I think in the discussions that we've had with customers or our customers, it is also in our minds, it is clear that they all understand that EUV is here and it actually works. Now, having said that, what is particularly important is not so much the lithographic performance. I think the lithographic performance of the machine itself is actually better. Every time, it's better than what was anticipated, and that's what actually drives us a lot of the design.
This is good. We are, of course, not yet at availability and at a, let's say, maturity level that we would like to see for high volume manufacturing. The 35C, with all the improvements that are in there's also a lot of availability improvements in there, and that is going to be the proof of the pudding. I think this is why I also said, in an answer to an earlier question, that the 35C performance is going to be a big driver also in 2020. We're confident that we're going to get there. I can imagine that customers of our customers that are even a little bit further away from us, that they want to see this first. Well, they will get an opportunity to see this in the second half of the year.
Ladies and gentlemen, 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 ASML Investor Relations Department with your questions. Operator, may we have the last caller, please?
Yes, sir. The last question will come from Shravan Ravishankar. Please state your company name, followed by your question. Sir, your line is open.
Hello. Hi. Shravan Ravishankar here at J.P. Morgan. My question is regarding, Peter, about you mentioned in one of your press releases that your DRAM vendors are looking at EUV at this point. My question is, with this throughput going to 170 wafers per hour, in 2019, you've got majority of your tools going to probably TSMC. Will the DRAM guys be able to contribute enough tools to do that 23-25 tools next year? Or do you think there are going to be other contributors beyond DRAM in terms of EUV tools in 2020?
I think DRAM is definitely an additional contributor. It will be small this year, as I said earlier. They're going to be more, if it is more than one DRAM, they potentially are going to ship EUV tools. It is very much a function of our ability to bring the 35C up to maturity levels that customers need for DRAM. I think we can do that. I think everything that we have in front of us, which is the availability improvements in EUV source, the high productivity of 170 wafers per hour. Those are all ingredients that make it attractive for DRAM customers to start using EUV in DRAM. I think there is little doubt there. It's up to us. It's up to us and to the customer to make sure that what is in the 35C can actually be used in high volume manufacturing.
That will drive 2020 demand also. It's really the success of the introduction that will drive this additional demand.
One quick follow-up on gross margin. Given the weaker first half gross margin, with your expectation that there will be a big snapback in the second half, do you still think that your gross margin on an overall basis will grow in 2019 versus 2018?
Well, you can do the math. If you have six months of pushback and a lower gross margin, you have to be pretty high to make it all up. What we actually said is, I think the recovery, driven by all the reasons that Roger Dassen talked about, I think we will see gross margin exiting the year in Q4 that are trending nicely towards 50% plus that we said we would see in 2020.
I understand. Thanks a lot.
Now, 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.
Yes, sir. Ladies and gentlemen, this concludes the ASML 2018 fourth quarter and annual financial results conference call. Thank you for participating. You may now disconnect your line.