Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2018 4th 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 Angelo's introduction, there will be
an opportunity to ask questions.
I would now like to open the question and answer I would now like to turn
the conference call over to Mr. Skip Miller.
Go ahead. Thank you, sir.
All right. 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 Zeltove and Inova is ASML's CEO, Peter Wennick and our CFO, Roger Dassen. The subject of today's call is ASML's 2019 Q4 and annual results. The link to this call will be 60 minutes and questions will be taken in the order they are received. This call is also being broadcast live with the Internet at asml.com.
A transcript of management's opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward looking statements within the meaning of the federal securities laws. These forward looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today's press release and presentation found on our website atasml.com and in the ASML's Annual Report on Form 20 F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wenig for a brief introduction.
Thank you, Skip. Good morning, good afternoon, ladies and gentlemen, and thank you for joining us for our Q4 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 Q4 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.
Jair, if you will?
Thank you, Peter. Welcome, everyone. I will first highlight some of the 4th quarter and full year financial accomplishments and then provide our guidance for the Q1 of 2019. Core net sales came in at €3,140,000,000 slightly higher than our guidance. Net net sales of €2,420,000,000 was more weighted towards Logic at 60%, with remaining 40% from memory.
We shipped 6 EUV systems and recognized EUV revenue of €579,000,000 from 5 shipments. One system was shipped to Collaborative Research Center, IMAC, was not recorded as revenue, which we mentioned last quarter. In store case management sales for the quarter came in at €719,000,000 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 infringements that was initiated by NYCAN.
Therefore, we recorded a provision in our 2018 accounts, which has a negative impact of €131,000,000 on gross margin in 2018. Overall, R and D and SG and A expenses came in a little higher than Gaia with R and D expenses at €442,000,000 and SG and A expenses at €135,000,000 Turning to the balance sheet, €345,000,000 worth of shares were repurchased in Q4. This leaves around €1,350,000,000 of the 20 eighteen-twenty 19 share buyback remaining. We ended last quarter with cash, cash equivalents and short term investments at a level of €4,030,000,000 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 €1,590,000,000 Logic order intake was 80% of total value with the remaining 20% from memory. We took 5 new EUV orders in the quarter. For the full year, our net sales grew 20% to a record of €10,900,000,000 Net installed base management sales was similar to last year at €2,68,000,000 We shipped 18 EUV systems with a total EUV system sales of €1,900,000,000 representing a significant growth over 2017. Our gross margin for 2018 was 46%, which would have been 47.2% without the Nikone 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 last year.
We continue to invest in the long term future of ASML and increased R and D from €1,260,000,000 in 2017 to €1,580,000,000 in 20.18. The increase was primarily driven by the acceleration of our EUV roadmap. Overall R and D investments as a percentage of 2018 revenue was about 14% and SG and A was about 4.5 percent of revenue, both similar to 2017 as a percentage of revenue. Net income for the full year grew 25 percent to a record of €2,600,000,000 resulting in 3.7% of net sales and an EPS of €6.10 With that, I would like to turn to our expectations for the Q1 of 2019. We expect Q1 total net sales of about €2,100,000,000 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 1 of our suppliers, Prodrive, and some system demand change.
As announced in the press release on December 3 last year, there was a fire at 1 of our suppliers of electronics components and modules. This resulted in a loss of work in progress as well as on inventory. Due to the integral cycle time of about 1 quarter for these modules, while first quarter sales will be negatively affected by around €300,000,000 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 €300,000,000 of EUV system revenue.
We currently expect to ship 3 EUV systems in Q1. We expect our Q1 installed base management revenue to be around €600,000,000 which is primarily due to lower field upgrades as a result of the Prodrive hire. Gross margin for Q1 is expected to be around 40%. The lower gross margin is due to a combination of mix, lower fuel 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 installed base continues to grow, we must expand our service infrastructure to support these systems in the field, which has an increased burden on gross margins until we start collecting service revenue later this year. We see the impact from these items continuing in Q2 with an expected recovery in second half. 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 a 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 and D expenses for Q1 of around €480,000,000 are due to an acceleration of the Annexe 3,400 roadmap and growing investments in the high NA EUV program. SG and A is expected to come in at around €130,000,000 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 suppose a 50% increase in our dividends to €2.10 per share at our Annual Shareholder Meeting, which takes place on April 24 in Veltorin. The dividend payment is valued at around €880,000,000 With that, I'd like to turn the call back over to Dieter.
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 compliance across our entire product portfolio. While the current geopolitical landscape and economic environment are creating volatility in the markets and certainly in Indonesia, As mentioned before, we still expect overall growth in 2019. At the very end of last year, we saw the continued slowdown of running end market demand as well as some demand reduction in the logic end markets, primarily driven by the mobile and the server markets.
And this translated into push outs of our systems to both memory and logic customers from the first half of twenty nineteen in their attempt to retain balance of supply against demand. The net market, as mentioned in prior quarters, remains in an oversupply situation and is going through a digestion phase after period of significant 2 d to 3 d conversions, yield improvements and weight capacity additions. DRAM is experiencing softening of demand, largely driven by decreased demand in mobile market as well as some inventory correction in the server market. All of this has resulted in some push outs of trans shipments by many customers in the first half of twenty nineteen. Customers have indicated that they believe there will be a recovery in the second half of the year, but they expect that inventory levels will be managed down swiftly.
In Logic, while we see some softening in DTV demand, which is primarily driven by the mobile market, we still expect strong demand in support of the ramp of 10 and 7 nanometer nodes. We also expect to see strong growth in EUV demand, supporting customers ramp of 7 and 7 plus nanometer nodes as well as a transition to the 5 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 instant base revenue. In summary, 2019 will be a growth year largely driven by logic.
On the Asian oil product side, let me start with a update on 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. Logi customers are installing systems in support of volume manufacturing for the 7 5 nanometer nodes. Here customers are also working on qualifying EUV for their future nodes. And this year, we expect the 1st commercial EUV enabled chip to reach the consumer market. In 2018, we demonstrated over 145 revs per hour, and we are accelerating our EV roadmap to deliver 170 revs per hour on our Annex E300C, the first shipments planned in the second half of twenty nineteen.
Annexe Enterprise LLC will also include a number of innovations that will further improve availability. As Roger mentioned, we shipped 6 systems into a core, which translates to a total of 18 new reshipments in 2018. And with the 5 orders booked this quarter, our shipment plan of 3 systems for 2019 is covered. Individually, we shipped over 89 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 other customers.
And we continue ramping our latest emerging system, NXT 2000, with a record time to achieve mature customer units. Our application portfolio has continued to see strong adoption in all market segments. Our latest yield to our system continues to gain adoption at primary 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 plan to market. So to summarize 2018, our Q4 came in slightly above our guidance, and we nearly achieved 11,000,000,000 in sales for the year, which was a milestone originally set for 2020.
Although 2018 was a pretty good year from a financial perspective, I think it was also a milestone year in terms of technology innovations across all our products. This not only provides our customers with higher value solutions, but it also fuels our future growth. Turning to 2019. We currently see some uncertainty
in the market, that after
a long period of strong capacity investments driven by healthy demand over the past years, it is normal to see a pivotal congestion, which we expect the first half of twenty nineteen. With regards to the products we serve, our customers responded quite late in Q4 to slowing the amount in our end markets by delaying deliveries of different systems for the first half of twenty nineteen to better supply and demand. We now see our first half of twenty nineteen lower than the second half of twenty eighteen with the reduction being roughly an 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 twenty nineteen in support of their 2020 business potential. The demand in the second half of twenty nineteen, whichever will 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 in our advanced loans. As we have consistently done in prior slowdowns, we sustain or even accelerate our investments in R and D to deliver on the leading edge technology when the market turns up, This has been and will be a key driver to secure our long term growth. We expect to increase our investments in R and D to €1,900,000,000 for the 2019. We reiterate that we see market demand that supports yet another growth 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, lower margins expected in the first half of twenty nineteen, 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 proper 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. And 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 The first question comes from Mr. Mitch Please state your company name followed by your question.
Thanks. Mitch Steves from RBC. I just had to really focus on Q1 instead of the quarterly numbers going forward. So I understand $300,000,000 hit from the fire, but how do I think about kind of June and then going forward to September and September to
the sequential? And secondly, also
for the gross margin line,
I think it's pretty difficult to get from 40 to kind of 50 to 50
to 50. So any help there will also be very useful.
Okay. Thank you. So let me start by talking about the gross margin and the gross margin drivers, if you like, in the Q1. And then reconciling that to how we see the rest of the year. So as I mentioned in my introduction, the main drivers of gross margin in the quarter, so bringing back the gross margin from 48.5%, which is the gross margin that we had in Q4, if you adjust for Nikon and then 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 DUV, and that is essentially as a result of some of the push outs from the Q1 into essentially the second half. And that generates approximately 2.5 percent impact in that range of the gross margin.
The biggest impact on gross margin actually is from what we call the field upgrades and service, and that has 2 components to it. And I mentioned those components in my introduction. One is the lower field upgrades. The lower field upgrades that we have in Q1 to a very large extent related to the coal drive situation because it means that there is no availability for field upgrades for certain components. So that's one element.
And 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 installed 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 have to support them obviously in the field to get everything up and running. While 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.
So that means that we have a significant cost burden right now, while the revenues only kick in at the end of the year. So if you take those 2 together, so the lower field upgrades and the EUV service building, that accounts for approximately 4% in that gross margin bridge that I gave you. And then there's about 1% left, which is distillating. So that has a number of elements in there. That kind of gives you the bridge from the 48 point 5% to the 40% that we have in Q1.
To answer your question, how is all of that going to how we're going to recover to the normal margin levels, if you like, in H2. As I mentioned, we're going to get from this situation into the towards 50% gross margin that we expect as we exit 2019 into 2020. So 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 Q1. We expect some of that to be recouped in the second half of this year. 3rd important point in getting 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. And then finally, again related to what I just mentioned, at the end of this year, when high volume manufacturing starts to kick in on EV, that's where we also expect service revenue to come up. So that's essentially how we came back 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% gross margin.
Yes. And yes, let me answer the, let's say, the pure on pure 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, memory about 30% down and a single digit growth in Institutional Case Management. Now 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 twenty nineteen, as I said earlier, will be about 50% higher than the first. So if you take those numbers, then you can calculate the Q on Q, I would say, the half all and half trend.
The next question comes from Chris Sankar.
Samkar from Cowen. Thanks for taking my question. I have 2 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 process to the second half of the year, what kind of tangible data points that you or your customers have on a conviction in
the second half shipment recovery? And is that a risk that you can get pushed
out further? And I also had a follow-up.
Yes. I think, that is
a good question. I think what our customers are actually seeing is what their customers are telling them what they need. So 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. It's simply not there. I think therefore the economic uncertainties are certainly there.
They need to basically stabilize to give us a bit more confidence. However, having said that, the key that we get estimates 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. That's what they said. To what we are looking where we are looking now at is a 20% bit growth or even a slightly less this year. And then looking what the heck is still the top shelf capacity and their ability to react swiftly, which they have already done.
They believe that with that demand, they should be back into a more positive territory in the second half of this year. And that's what they've told us. But again, if you're asking for absolute certainty, which somebody did during our press conference this morning, there is no absolute certainty. But it also is very much related to economic environment. But based on these data points, our customers believe that the rate will start shipping again in H2.
Got it. Peter, that's very helpful. And then just as a follow-up, when I look at your memory orders in Q4, it's like down almost 80% from the peak and it's also back to like early 2016 levels. So should we expect memory bookings to rebound in calendar Q1 in the current quarter?
Or do you think it's going
to take a quarter or 2 before you see that happening?
Well, this is what I said earlier. It is a strict reaction. So it's a quite significant reduction. And I think that the low memory order intake is a reflection of what the customers decided they wanted to do in Q4 with respect to the 2019 shipments. Now 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.
The next question comes from Mr. David Mulholland.
Hi. It's David Mulholland from UBS. Just some questions, firstly, on the EUV roadmap. Obviously, you talked a lot about this at your Capital Markets Day and at some point, this meeting to move towards multi patterning. I think some of the comments that you're seeing in some industry events are suggesting that might even be the case with kind of the 5 nanometer node or the industry 5 nanometer node.
So I wondered if you could maybe comment on how you see that progressing? And I've got a follow-up.
Yes. 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, yes? Now I don't think we can say without a sense of what that is going to happen, but it's definitely something that's being considered. That's correct.
And then just in terms of the follow-up, on the comment you made on China, I'm still seeing looking quite strong even after what happened on one
of the customers there being
planned for buying from the U. S. Have you started seeing more confirmations on orders from the likes of YMTC or Efron at this stage?
I think the 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. But the domestic demand is still as strong as it was 1 or 2 or 3 quarters ago. I mean and it's understandable. If you look at what they're doing, I mean medical staff are new.
They are strategic investments. Some of the products have been qualified. And that means quickly start ramping, which I think from a strategic point of view is something that they will do anyhow, which is also a, I think, a confirmation of the fact that what they say they're going to do. I mean, that's what we see today. So yes, from a domestic point of view, still pretty strong.
Just one follow-up on the comment in your response to the multi patterning question. What assumption have you made in the model that you presented for 20 25 on the Industry 5 node? Were you assuming single turning in that?
I don't think so. That was not there. And I think it's still uncertain whether it will happen, but we assume single operating solutions.
The next question comes from Mr. John Pitzer. Please state your company name followed by your question.
Yes. Thanks for taking the question.
Pete, you did a really
good job kind of helping us understand for the overall business how the half on half we currently will look like in 2019. I'm wondering if you could just think about the same thing for sort of the EUV expectations. Clearly, given the slower start to the year, it feels like the half on half growth in EUV would be even stronger than the 50% you referenced to the overall business. And I'm curious as you think about party tools for this year, how that breaks down logic versus memory?
Yes. Well, to answer your last question, we of course have a customer that does both. So if you could say, I would say that 80% to 90% is going to be logic, and 10%, 15% year end related, but 80% to 90% logic. And 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 feedback. It's more than just the logistic planning of our customers shaped this pattern. So 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.
That's helpful. And then as my follow-up for Jose,
can you just talk a
little bit about the R and D cost going forward? It was a little bit higher than we were modeling both in December and the March orders. How should we think about R and D here? And you mentioned kind of 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. So let me start with answering that latter question. The answer is yes. That is included now in the model for sure. On the R and D side, the guidance we get for Q1, dollars 480,000,000 and in essence that's kind of the runway that we would expect for the quarters in this year.
So our expectation for the full year would be about 4x this summer. And so the number that we expect for 2019 with the robots in there that you're very familiar with, particularly the high NA, the pulling in of the 3400 feet, multi beam and a number of other things. Going into 2020, I think the guidance that we take there at that stage of around 14% over revenue that's probably where we see that for 2020.
And perhaps on the RNG number for 2019, I think when we said we took the decision to accelerate the introduction of the TRICARELLO C and high NA as the logical next node AGV, the multi beam development, we accelerated in the second half of twenty eighteen the hiring of the people to make sure that at the beginning of 2019, we had all the people or more. So if you take our Q1 guidance, this is a new and you basically take that on average sorry, on an annual basis. You could argue that we actually created the infrastructure R and D infrastructure to do this and we wanted to finalize that by the end of 2019. And this is what we did. So 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, New Street Research. Thanks for taking my question. I was wondering about
like the inclusion 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 coal or vast majority of your deliveries are basically 3400 fee? Or is it going to be more gradual with like half year shipments in B and half year shipment B and C? And then do you have any update or more like color on how the economics are going to work between the 2 tools or the difference in ASP? And then last but not least, I was wondering if your these tools that you are shipping today are going to be upgradable to see and something what the economics would be there?
Okay. The interferon C will ship in the second half of the year. You could assume that any shipment in Q4 will be ceased, yes? And some of it will be in Q3. The majority of the shipment this year will still be seats.
And everything that we're booking now are seats. So it's going to be a handover, you could say, from the G to the C starting in the end of Q3.
Roger, do you want to take any thoughts? On the other two questions on the economics. As you know, in terms of the specs, the current machine that we should have the stack of 125 wafers per hour. We've guided that for the 600 feet, 107 more over 170 wafers per hour, which means approximately 35% increase in throughput and nothing has we've guided in the past. You can separately assume that the ASP kind of correlates with that percentage.
So currently the ASP for the machine that we ship today is about 100,000,000 to 100,000,000. So 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 uptake that the C has over the B to also make that available to the beam machines in the BAM upgrade. Not entirely, but the vast majority of the performance upgrade can be paid through fuel upgrade.
Yes. And having said that, I mean, it's going to be a question of the economics of this because it's a different lens. So actually, so basically, you need to be able to take the hit of quite an extensive upgrade. And that, of course, needs to be balanced with the real performance of the deep real performance with the C. So we'll just have to see whether that's going to happen.
But when it happens, it's going to be an expensive upgrade, but having a new lens into that system is not trivial.
The next question comes from Mr. May
Thanks for taking my question. Just as a follow-up to the prior question, of the 30 system in your backlog, how should we
think about the mix of that 3400
C, I'm sorry. Yes. It's the like I said, the 4th quarter shipments will probably be ultimately driven in cities. So if you think about this, it's probably going to be around, yes, 5 to 10, but the total is 13 that I'm going to confuse you that some of the seas will have the fully operated new vessel, which is 5 to 10. So it's going to be an in between portion of the 2,000,000,000, which will set a older type E2B source vessel.
So it's budget in total, but really the ones with all the new vessels is going to be 5 to 10. We tried to do 10. Could be 5 if the supply chain is a bit slower than we think. But overall, it's going to be 13, yes? And that also means that from a price point of view, yes, we will start off, of course, significantly higher with the 35% that Roger mentioned.
That applies to the full fetched currency with the new module vessel. Got it.
Okay. And I have a follow-up regarding the just the big picture and how do you see the overall demand environment. If I were to strip away the EUG 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 2016, early 2016, you had 3 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?
Well, downturns are always similar in the sense that supply is higher than the demand. And now the question is how big is that difference. To be very frank, we can only repeat or tell you what we kept from the discussions from our customers, if they have a better view of their market in the discussions with their customers. So this is why I can only repeat what I said earlier. They talk about a 2 quarter correction in Italy.
That is driven, I think, very much by the macroeconomic situation and the economic uncertainty. So this is a big crystal ball that I don't have and nobody has. So we'll have to see. And I'd like to really comment on what you started your question up with. And so if you strip away EUV and look at the core business, may I remind you that EUV is our core business, yes, and that we can only ship those leading edge EUV tools because there is an EUV solution for 7 and 5 nanometer.
Without EUV, there would not be a 5 and 7 nanometer transition. So that means that everything that we are shipping is and 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 data, the whole thing again. That is understated. That will happen. And you cannot strip EUV out because it drives this technology transition.
It's part of the core business.
The next question comes from Mr. Please state your company name followed by your question.
Yes. 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 push outs on the memory side and exco to EUV, it's interesting, I guess, it looks like ARF and ARF dry and iLine are growing year on year.
So 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?
Yes. I think it's CJ, that's answered as well. You are right. If you run those numbers, I think there are 2 areas where we see from a product point of view an increase, which is eerie, which we talked about. And like I said earlier, we cannot strip this out because it's just part of a higher development in the industry.
And indeed, we have pure, we have dry DUV is also higher currently than what we think that we saw in 2018. That has to do with indeed, move fast, has to do with China. It is not that much higher, but indeed, it doesn't show a reduction in their system sales. And this is also what Roger referred to that this mix, this ETV 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. But with the Immersion system taken up in the sector, that will resolve itself.
But it is indeed the right correction, the right conclusion that you drew on the KRAS systems being higher than in previous quarters and of course EUV in the entirety of 2019.
Very helpful. And as a follow-up, I guess specific to EU gross margins, it looks like you came in around 20% in Q4, but you've seen a pro form a that one times charge. I think you've talked about exiting calendar 'nineteen 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? It's still at roughly 9 month cycle time, can we get it down to 6? We'd love to hear working parts of the gross margin and cycle times as we go through the year.
And the main driver of that improvement is, as we already mentioned, the introduction of the 3400 feet model. So that is the main driver through its higher ASP. Of course, there is an element in there of further reducing cost of time as a result of that being more efficient in the manufacturing of the machines. But the main driver in getting to this uptake is 10 percent in the gross margin systems really is the higher ASP on the 3,500 C model. And on the question of 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, yes? So that goes into the right direction. The issue is, and I said it earlier, we decided in 2018 to at least make sure that we set up the infrastructure for EUV service. That as we are at that
point, we're not going to
grow that any further in 2019. We do get the full brunt in terms of cost starting January 1, 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. So that effectively brings the blended EUV gross margin down, and we said it earlier. We don't have yet coverage on the EUV service infrastructure.
We only start by the end of the year when we start seeing the first HVM, high volume manufacturing wafer output for which we will get paid. And of course, that will accelerate throughout 2020 and beyond. So the service burden and Jose talked about it, I think the main reason why there is a gap between the 30% and the 70% as you calculate.
Very helpful. Thank you.
The next question comes from Mr. Amit Arshanbani. Please state your coffee name followed by your question.
Thank you. Good morning and good afternoon all. Amit Bha Chandani from Citi. Just a quick question, if I may, to begin with on the installed base management side of things. Given your comments, you talked about the mid single digit or single digit growth in installed base for the course of 2019.
Just wondering if you could elaborate on the cost and take of that and what should lower or higher? The reason I asked is because as I look at the numbers for 2019 and then I look at some of the scenarios we laid out for 20 20, I think the installed base number was seen at about €3,600,000,000 to €3,700,000,000 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? I want to
Yes. I think on the gross margin, you do understand it. So it will have an impact of positive impact on the gross margin. But the single digit number for this year is also driven by what Jose said earlier. I mean, we did have a supply chain issue because of the supplier of some of the electronics and the motion control pro drive.
That fire had an impact on the upgrades that we had we were planning to do for the half of this year. Now we're using those components to shipments. 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 6 months or let's say, 12 months of business in 6 months' time. So for the year, you would see that, that actually gives you a lot. You could lose upgrade business and that brings the growth percentage down to the single digit.
Now hopefully, I do assume we do not have a similar situation in 2020 and that it should really correct itself. So this is the single digit growth and it has to do with the fact that we cannot recuperate 12 months in 6 months. That's the main reason.
Okay. You still are quite confident in getting to that 3.6, 8.7, 60 bps per issue.
You're all target.
Okay. Thank you. Thank you, Peter.
The next question comes from Mr. Stephane
This is Stephane Nouri from ODDO. I have a question about the second half outlook. Just to understand the look a bit more what you're saying, JV, are you banking on any recovery
in the
memory DRAM or non space to talk about this strong increase? Or it is just based on the Logic business? And if, Heather, if it was happening, do you have enough would you have enough capacity to meet the demand? Thank you.
To answer your last question, yes. We will have enough capacity. And like I said earlier, it's really driven by the logic strength in the second half. We do expect when we talk to our battery customers that they do expect some recovery in H2. But when you look at H2, it will be a strong logic driven that we don't have.
Okay. Okay. And I have a short follow-up. You during your remarks that the UV deliveries, the 30 machines that you were talking about were covered by your order book. How do you see 2020 for EUV shipments?
2020 shipments, well, I had already referred to what we showed at the Capital Market Day where we showed you the moderate numbers. You should take that number. Now we can change. And as a very wise person told me lately, I'm an optimist, it worries a lot. So but I am optimistic on 2020 because I'm optimistic on the performance of the Filicaros Sea.
And 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. And the economics for EUV are so convincing that I believe that our customers are definitely going to real look at their plans and see which layers in neurologics, but particularly in DRAM, are now eligible for EUV introduction. So I would refer to right now, I would refer to the Capital Markets Day and the Model of Markets scenario we put in there, it gives you the EUV number. But I can also tell you that I think very much looking forward to the performance of the 3rd front sea for which we have a lot of confidence. And that will trigger additional demand in 2020.
The next question comes from Mr. Vitayo Metuku. Please state your company name followed by your question.
It's Frank from America. Two questions for me. Firstly, just looking through the ramp that you need to deliver on EUV and DUV. I just wanted to better understand what EUV capacity you will have in the second half of this year. My understanding was certainly 10 per quarter in 2020.
So any color there would be very helpful. And then secondly, just I'm just trying to your piece about why R and D would come down in 2020 versus 2019 levels? And practically, what exactly requires if you could give
I think the shipment capability, think you're not right. The second half of the year in Q4, we should have a 10 per quarter run rate, It actually means to one of the earlier questions that the cycle time is coming down, the factory cycle time. The tangible cycle time of EUV includes also the supply chain is still little over 12 months, yes? But our integral cycle time in the factory should go down to anywhere between 15 18 weeks. So that is a little bit fast forward.
And that will actually mean that we will be able to do 10 shipments per quarter.
As it relates to R and D, an important portion of the acceleration of the R and D effort that we talked about is related to the introduction of the 3400C model, which has we've already explained it's going to happen this year. So with that essentially done, that means that there is some leeway there that we would be able to manage down the total R and D expenses because that research is done. And we're very well able to do that because in addition to all headcounts that we already talked about, there is a lot of farm out that we have there. So in that way, we can manage that down to the number that we've guided for 2019.
Okay, understood. Just a quick
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
something?
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 exists 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 question and follow-up by your question.
Good afternoon. It's Andrew from Barclays. Thanks for taking the question. I have another one on EUV also one follow-up and then another question. Peter, in response to an earlier question, you suggested that indeed you had not really been any change to delivery plans or shipment plans through the quarters of 2019.
Clearly, we're still doing 50 units in total, but I just wanted to, first of all, make sure that indeed, customers hadn't really changed any plans on that front.
That's correct. I mean, we haven't seen any customer pushbacks on EUV shipments. Okay. And so in relation
to that, there's some discussion in parts of the industry and parts of the financial markets about perhaps not so much concerns on your customer side, but perhaps the customer customer and some of the top list guys, it's a little bit of trepidation as to how the ramp of EUV is going to go to what that means for high volume manufacturing and their ability to get the steps out in the other side. Are you having
are you hearing those fears?
Are you having those discussions with some of
the fabless strip centers?
What are you doing to help satisfy those concerns?
Well, the customers are our customers, they're a bit more distant as you can imagine. We do have interactions with customers on customers, but largely on the road map and not so much on the operational situation at our customers. I mean, we don't discuss our customers' production capability or the capacity of our customers. We don't have that insight. But like I said, we do talk about the roadmap.
And I think the discussions that we have with customers over our customers is also in our minds to be clear that they all understand that the EUV is here and it actually works. Now having said that, what is particularly important is not so much in 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.
So this is good. Now we are, of course, not yet at a availability and at a, let's say, maturity level that we would like to see for high volume manufacturing. The 3rd row we see with all the improvements that are in there, there's also a lot of availability improvements in there. And that is going to be the proof of the pudding. And I think this will which is why I also said in an answer to an earlier question that the performance is going to be a big driver also in 2020.
And we're confident that we're going to get there. And I can imagine that customers of our customers that are even a little bit further away from us that they won't 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 ASML Investor Relations department with your question. Operator, may we have the last caller, please? Yes, sir.
The last question will come from Mr. Vangun Ravshani. Please state your company name followed by your question.
Sir, your line is open.
Hello, yes. Hi. Samish Deshpande here at JPMorgan. My question is regarding Peter about the 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 150 wafers per hour, I mean in 2019, you've got majority of your tools going to probably TSMC.
Will the DRAM guys be able to complete enough tools in
that 23 to 35 tools next year? Or do you think there
are going to be other contributors beyond DRAM in terms of EU tools in 2020?
Well, I think DRAM is likely an additional culture. It will be small this year, as I said earlier. But it's going to be more it's just more than 1 DRAM which I'm going to ship the retool. So there is a very much a function of the our ability to bring the silicon to maturity levels that customers need for DRAM. I think we can do that.
I think the everything that is that we have in front of us, which is the availability improvements in the resource, the high availability of 170 wafers per hour, those are all ingredients that make it attractive for DRAM customers to start using EUV in DRAM. So I think there is little doubt there. So it's up to us. It's up to us and to the customer to make sure that what is in the business, you can actually be used in high volume manufacturing. And then that will drive 2020 demand also.
And it's really the success of the introduction that will drive this additional demand.
And then one quick follow-up on your gross margin. I mean given the weaker first half gross margin, with your expectation that there will be fixed impact in the second half, do you still think that the gross margin on an overall basis will grow in 2019 versus 2018?
You can do that math. I think you have 6 months of pushback and lower gross margin, that could be pretty high to make the roll up. But what we actually said is, I think the recovery driven by all the reasons that Roger talked about, I think we will see gross margin exiting the year in Q4 that are set up trending nicely towards 50% plus that we said we would see in 2020.
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. Ladies and gentlemen, this concludes the ASML 2018 4th quarter and annual financial results conference call. Thank you for participating. You may now disconnect your line.