Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2018 Third Quarter Financial Results Conference Call on October 17, 2018. Through today's introduction, all participants will be in a listen only mode. After the Exelon 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.
Skidmiller. Go ahead please, 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 Headquarters in Velto in the Netherlands is ASML's CEO, Peter Wenning and our CFO, Roger Dassen. The subject of today's call is ASML's 2018 Q3 results.
The length of
this call will be 60 minutes and questions will be taken in the order that they are received. This call is also being broadcast live over the Internet at asml.com. A transcript of management's opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I would 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 law. 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 on our website atasml.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 Wenig for a brief introduction.
Thank you, Skip. Good morning and good afternoon, ladies and gentlemen, and thank you for joining us for our Q3 2018 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 Q3, as well as provide our view of the coming quarters. Roger will start with a review of the Q3 financial performance and with some added comments on our short term outlook. I will complete the introduction with some additional comments on the current business environment and our future business outlook.
And Roger, if you will?
Thank you, Peter, and welcome, everyone. I will first highlight some of the 3rd quarter accomplishments and then provide our expectations for
the Q4 of
2018. Q3 net sales came in at €2,780,000,000 which was towards the higher end of our expectation.
At system sales of €2,080,000,000
was a bit more weighted towards Mallory at 58%, with the remaining 42% from Logic. EUV revenue of €513,000,000 was from 5 shipments. Installed base management sales for the quarter came in at €695,000,000 Gross margin for the quarter was 48.1 percent, just above our expectations, reflecting the strength of our DUV and Applications business as well as the progress in EUV profitability. Overall, R and D and SG and A expenses basically came in as expected with R and D expenses at €397,000,000 and SG and A expenses at €122,000,000 Turning to the balance sheet, euros362,000,000 worth of shares were repurchased in Q3. This leaves around €1,700,000,000 of the 20 eighteentwenty 19 share buyback program remaining.
We ended last quarter with cash, cash equivalents and short term investments at a level of 2.95 €1,000,000,000 Moving to the order book, Q3 system bookings came in at €2,200,000,000 Memory order intake continued to be strong, 64% of total value. Logic made up the remaining 36% of the bookings. We took 5 new EUV orders in the quarter, which contained a mix of both logic and memory. With that, like to turn to our expectations for the Q4 of 2018. We expect Q4 total net sales of about €3,000,000,000 leading us to expect another record year with close to €11,000,000,000 of revenue.
Our total net sales forecast for the quarter includes around €500,000,000 of EUV system revenue from 5 EUV systems. We currently expect to ship 6 systems in Q4, including one EUV system to a collaborative research center, IMAAC, which will not be recorded in revenue but will be used to settle R and D services from IMAAC. Q4 will be our highest EUV shipment quarter to date, bringing the total to 18 systems in 2018. Due to a combination of end of year production challenges and customer readiness, we now expect a couple of the originally planned 2018 systems to ship in early 2019.
We expect the EUV order flow to continue
next quarter such that we will basically have our 30 systems planned for 2019 covered by purchase orders by the end of this year. We expect our Q4 installed base management revenue to be similar to last quarter at around €700,000,000 Gross margin for Q4 is expected to be around 48%. Taking Q4 guidance into accounts, gross margin for the full year would be around 47%, which is a step up from last year's 45% gross margin. This reflects the strength of our DPUV and Applications business as well as continued progress in EUV profitability. The higher R and D expenses for Q4 of about €420,000,000 are due to an acceleration of the Annex C 3,400 roadmap and the high NA UV program.
SG and A is expected to come in at about €135,000,000 We remain excited about 2018 as the customer demand for our products continues to be strong. We look forward to delivering another record year with continued strong growth in both sales and profitability. With that, I'd like to turn the call back over to Peter.
Thank you, Roger. As Roger highlighted, we had another good quarter and we expect the 4th quarter to be even stronger. With the current guidance, we expect our sales for the year to be close to €11,000,000,000 and our profitability will improve over last year. We continue to see strong demand for our products in both logic and memory as witnessed by our strong order book. Budget customers continue to ramp the 10 nanometer node and are also starting to ramp 7 nanometer.
As customers prepare to ramp up 7 nanometer node, it not only drives the EUV demand, but also drives significant demand increase for EUV. In DRAM, customers are continuing with technology migrations as well as adding wafer capacity additions to meet bit demand growth, evidenced by our strong Q3 audio intake for memory. And we believe that the limited number of wafer capacity additions by a limited number of customers combined with a healthy demand for DRAM bits should not lead to a structural overcapacity in this industry segment. In NAND, significant 2 d to 3 d conversions have taken place next to investments in several greenfield fabs, which is likely creating a period of some digestion as we mentioned in prior quarters. With regards to China, we continue to see strong demand for a broad suite of our products.
The China region has delivered around 20% of our sales this year, is on track to set another record revenue number. This is driven by both multinational customers as well as domestic China customers. And all 5 domestic customers that we discussed in prior quarters have at least some pilot capacity in place now and are looking to begin ramping next year. We believe this region presents a significant growth opportunity under the assumption that these ramps of the domestic customers are successful and that the non domestic customers will follow through with their investment plans. On the ASML product side, let me start with an update on our EUV business.
In EUV, we continue to make good progress. We have multiple NAC throughput systems at customer sites that are running at 125 wafers per hour or higher and are ready for high volume manufacturing. Availability is progressing in support of customer volume ramp with a clear focus on machine consistency. The overall progress has led to the decision to accelerate our EUV roadmap and we are as a result of this now planning the introduction of our next generation 0.33 NA EUV system called the NXE-3400C in the second half of twenty nineteen. This system will deliver productivity of more for 155 waves per hour.
We will talk more about the performance specifications and the roadmap during our Investor Day next month. As Roger mentioned, we continue to increase our shipments per quarter and plan to ship 6 systems in Q4, bringing the total to 18 systems in 2018. As we mentioned in earlier calls, this year our production output is heavily backup loaded, which has led to some production output challenges combined with custom fab readiness logistics. We now plan to ship a couple of systems originally planned in 2018, now in early 2019. Our shipment plan for 2019 remains at 30 systems as we now have an increased mix of the LHC-thirty one C systems in the second half of twenty nineteen, which will enable a significantly higher wafer output capability than the earlier specified 125 waves per hour.
With this higher productivity, we expect to be able to meet our customers' current EUV capacity plans in 2019. And as Roger mentioned, we expect order flow to continue next quarter and expect that our 2019 month for EUV covered by orders by the end of the year. In deep UV, the introduction of the NXT 2000 system into the market is making significant progress and will be used in volume manufacturing for both memory and logic. We're also seeing significant demand for our dry products in support of a number of greenfield fab ramps in China and other regions. In our application business, we continue to see growth across our full portfolio of software and metrology products notably related to the adoption of our YieldStar 375 system expanding from logic and DRAM now also into 3 d NAND manufacturing.
To summarize 2018, we expect the growth to continue from Q3 to Q4, set us up for another record year in both sales and profitability. Now regarding 2019, it's a bit too early to provide detailed guidance, but I will provide some qualitative comments regarding our initial views. And we continue to see strong demand for our products in both memory and logic as supported by our bookings and DPV demand continues to be healthy in memory as discussed earlier and we expect DPV demand in logic to further strengthen in 2019 driven by the 10 nanometer and 7 nanometer ramp. Furthermore, we expect continued growth of our applications business expansion of both on metrology as well as software products. EUV demand continues to be driven by logic, but also with a clear opportunity in DRAM where we meet our availability and productivity targets.
EUV revenue growth is expected from both a significant increase in unit shipments as well as a higher ASP of the MXD-thirty five C, which shipments are planned starting, as we said earlier, in the second half of twenty nineteen. Our installed base will continue to grow driving increased service revenue. Furthermore, we expect customers to take advantage of system performance upgrades on an in store base to maximize capital efficiency. Our current view of the overall business next year remains positive. We expect the first half to be somewhat similar to the second half of this year with business strengthening in the second half of twenty nineteen.
Now putting this all together, we expect another year with good growth opportunity. I think we're well on track to achieve our 2020 targets with significant growth potential beyond 2020 and we plan to communicate size and the extent of this growth opportunity through 2025 at our Investor Day, which will hold on November 8 this year. And with that, we would
be happy to take your questions. Ladies and gentlemen, the operator will instruct you momentarily on the protocol for the Q and A session. Beforehand, I'd like to ask that you kindly limit your question yourself to one question with one short follow-up if necessary. This will allow us to get as many callers as possible. Operator, we have your final instructions and then the first question, please.
Of course, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. The first question comes from Mr. Chris Shanker. Please state your company name followed by your question.
Hello, can you hear me?
2 of them. First one, Peter, looks like your demand from your memory customers has been very strong so far and you're also both in terms of bookings and sales, and you're also guiding to a strength into 2019. Just want to help can you reconcile what's been going on in the memory industry with NAND pricing weakness and potential CapEx that's in NAND and DRAM? And how do you reconcile that with your numbers? And where do you see the strength in 2019?
Is it going to
be DRAM or NAND in the first half?
And then I had a follow-up.
Okay. Well, I think you're all throwing memory on the one big heap, which of course, you need to separate as you indicated between NAND and DRAM. So let me talk about those separately. On DRAM, we haven't seen CapEx cuts. We have seen in this year some push out, but also pull ins from different customers.
So it could argue it's customer specific, but we haven't really seen a change in the DRAM memory demand for our products this year. And we don't see it also in 2019. Now we don't seem to forget recent history. So let me talk about DRAM. You have to put it all into perspective.
Up to including 2016, there has been a significant conversion of DRAM into 3 d NAND, which resulted in reduced DRAM capacity, which actually also led to a reduced DRAM memory spend of about 30% in litho and also a 10% to 50% reduction in the wafer capacity at our customers. Now in 2017 'eighteen, customers have been working to recover this wafer capacity and to increase the bit supply. The bit demand also was higher than anticipated. So this required indeed a much higher little spend per unit bit growth That is due to a combination of increasing litho intensity at these new nodes due to say an increasing number of critical layers, which includes double patterning now and the slowing of the shrink roadmap, which actually means you don't get the bits, the same number of bids through shrink, you actually get less, both leading to higher wafer capacity additions to meet this 20% to 25% demand bid growth. So this is what we have seen.
So in that context, the high investments in DRAM from our customers is not a surprise. And it's also what we are seeing in 2019. Now on 3 d NAND, over the last couple of years, almost all the 2 d to 3 d conversions have taken place. They've actually happened and those were very significant. Now we have not participated in that as a litho supplier because we basically use the same litho.
And next to that, the work investment in greenfield fabs. And if you add those 2 together, it's the 3 d conversions and then the greenfield fabs. And that has indeed led to a level of capacity. And don't forget these are big fabs or step ups in capacity to a temporary weakness of the 3 d NAND pricing, which we've all witnessed. That is the digestion that we're going through as we speak.
That's logical, and especially if you look at the number of greenfield fabs that have been opened and the capacity, the wafer capacity that's been added to the industry is quite normal. Don't forget that the growth rates of 3 d NAND are particularly good at 40% plus. So I think this is how we look at the market and this is why I also think that it's not a big surprise that our customers are still significantly spending on increase in weighted capacity both for DRAM and to a lesser extent today three d NAND.
Got it, got it Peter, that's very helpful. And then just as a follow-up, if I look at your commentary on calendar first half 'nineteen similar to second half of this year and strengthening the second half of next year, the fact that DUV should be strong in memory and further in logic, is it fair to assume that DUV units next year should be higher than this year?
Well, I think the DUV units will be at least at the same level as this year, whereby I think the mix, which was this year, will be skewed towards memory. We'll probably skew a bit more towards logical, though it's too early to say which part of the industry segment is going to be the largest. But in DPV, I think we will see at least same number of DPV shipments and sales in 2019 as in 2018.
Thanks, Peter. Thank you very much.
The next question comes from Mr. David Mohan. Please state your company name followed by your question. Hi.
It's David from UBS. Just coming to the comments you made on EUV and good to see the progress on the 3400C. I just wanted to clarify a couple of things. Firstly, of the bookings that you've seen in the quarter for UV, are those still the 3400B or are you not booking the 3400C? And then as we look into 2020, I want a few comments just on what impact in the way that this is potentially slightly dampening the number of tools needed in H2 'nineteen, what that might mean on 2020?
Obviously, we've assumed some of that's made back on pricing, but where do you end up in kind of really new expectations for 2020 from EUV as you kind of net those 2 higher productive systems but potentially higher value?
Okay, good. Well, I think everything we're booking is different C. I mean, we're not taking any orders for Bs because the only thing we will sell as of the middle of next year is seas. And yes, there will be a higher potential productivity coming out of these systems, which of course will have an impact on the normal systems that customers potentially want if they look at their wafer capacity that they are planning for. Now having said that, there's also a flip side to higher productivity and higher uptime and which is cost.
Cost is actually going down. It is higher productivity tools, which actually means that it opens also a possibility to add 1, in logic more layers and 2, in memory DRAM, we start using EUV in DRAM. Generally, you could say, if you have more than 2,000 wafers per day productivity on a DRAM system, it becomes attractive to add to basically start using EUV for several layers in DRAM and that will drive the 2020 number. So I think what is important for us is that we execute, that's why we pulled the R and D in because we want the 35 C ASAP because it will, 1, as you indicated, provide us with a higher value. And 2, it will also provide a higher value, I.
E. Lower cost to our customers, which will drive the demand for EUV, which means that we still stick to our production capacity of 40 units in 2020. And I think the final 2020 number will be a function of our successful introduction of the productivity and the availability metrics that we have currently in our targets.
Maybe one just quick follow-up. You haven't commented us directly in numbers in terms of the progress on availability for EUV. Obviously, it seems like you're saying it's at the level you need for insertion with customers, but last quarter you were saying you had to get to over 90%. Can you quantify where you are and
where you're heading? Yes. I think we said we want to have a target of 88% availability by the end of the year. This is where we're heading to. I think with the 34 C, we will go over 90%.
I think we have a target of 92%. I think what I said earlier, we need that 90% threshold. That's what we said in earlier calls. As it's our opinion today that with the current availability targets, customers will use EUV in HVM. And it's very simple and logic is very simple because without EUV and I just referred to comments that was made by some of our customers, without EUV simply won't work.
And there is so much 7 nanometer demand or if you want or 7 plus or 5 nanometer demand that you can't escape using EUV. They will use EUV at 88%. We would love it to be higher, and it will be higher, but that is not a take or break number.
The next question comes from Mr. C. J. Muse.
I guess a question, if I could go back to your 2019 outlook for DUV, it sounds like you're now seeing kind of first half similar to second half and growth into the second half of twenty nineteen. I'm just curious, is that a change statement from your views 3, 6 months ago? And if so, what has changed, I guess, visavis DRAM contribution, advanced logic in China?
Well, I
think it has not changed. I think it's been 1, we haven't quantitatively guided any trends for 2019 until today. So I think this is the first time. But internally, of course, we have this outlook. I don't think it has changed that much, absolutely not.
And in China, nothing changed in the sense that what Chinese customers were planning, let's say, this time a year ago on 2019, they're actually executing on. So you could argue that their execution of their first lines and their pilot lines have actually gone well. So I think it's there's no change. I think it was significant change nor in memory, nor in logic.
Okay, very helpful. And I guess as my follow-up, can you talk to how you're expecting linearity of shipments for the 30 UV tools in 2019? And how we should think about the progression of gross margins in that same timeframe? Thank you.
Yes. The linearity is what you would expect with a ramp. I mean, this year, we have if you look at the quarter, we do 3, 4, 5, 6. And I think this is the kind of linearity that you would also expect next year whereby the difference C of course is the model that customers really like. So you would clearly see also the 2nd level of the year the demand for that product going up.
Now on Roger, on your Sure.
On gross margin, I think we've articulated a target of 40% there for 2020. And I think we're on track to get there. And I think as we've mentioned before, 4 levers to get there. The first lever obviously is ASP, higher ASP, which is to a very large extent, correlated with the productivity and the throughput of the machine. So that's a major driver of the gross margin.
2nd, volume. Fixed cost coverage obviously increases to the extended volume and further ramps. 3rd, learning curve, and we're already experiencing that and we continue to experience that into the next couple of years. And 4th, service revenue and service margin will go up as well. And the combination of those four levers, we believe, gets us to the 40% target that we've articulated before for 2020.
The next question comes from Mr. Mitch Stevens.
Rich Steeves from RBC. I just had
a quick question on EUV. So basically, because you guys are off by about 2 units here in 2020 sorry, 2018, you guys are still reguiding to 30. Is the 40 units still the right number for 2020? And then second, I guess, why doesn't the 'nineteen number go up by 2 units?
Thanks. Yes. To answer your last question, we are introducing by the middle of the year the 500 C, which has a productivity, which is over 155 wafers per hour, which is a significant improvement in terms of productivity, which means that customers are not planning systems, they're planning waivers. So when you get more wafers out of a machine, you might potentially use less machines. So that's why the 30 unit is still good.
When we and it's not more than that, you could argue that the 2 units are then cannibalized by the higher productivity of the 3rd 100 C. Okay. But that's good because the 3rd 100 C is also a higher value tool, we'll just price it higher. So from a sales point of view, I think it's a good it's a good progression. On the 40 units, I said it earlier in a previous answer, I think the 40 yard is the capacity that we have.
I think that is whether we will sell it all is really a function of the success with which we're going to introduce the 3400 C, and we're able to start running up the availability of the machine over the 90%. That will drive down cost for our customers significantly and cost is the main driver for our customers to buy tools. And I think the opportunity here is in the memory space, in the DRAM space and also somewhat in the logic space because then you can add a few more layers to EUV because the cost is just better. And in DRAM, like I said, if you have over 2,000 wafers per day, we come in the realm where customers are really seeing the economic benefits of EUV application in DRAM. So for this capacity, let's go after it by executing on our 3400C program.
The
next question comes from Mr. Andrew Gardiner.
It's Andrew from Barclays. Just a few more quick ones on the EUV program. Firstly, Peter, you just mentioned it briefly there again, the question of layer count within logic. If I go back to this time last year, we were talking about end layers at the 7 nanometer node. To your point, the improved productivity and specs on the 3400C suggests it's going to be higher than that.
Can you give us any initial indication from your customers as to how much higher the layer count may be relative to that initial number of 10?
Yes, I think it's really different numbers. But again, like I said earlier, I assume a successful execution of our 31C specification targets and you could look at anywhere between 12, perhaps 14.
Okay. And then just as quick follow ups on EV. Can you give us an idea of mix between logic and memory in the 32 shipments next year? Clearly, again, if I go back a couple of quarters, logic was going to dominate, but you're sounding a bit more optimistic about DRAM demand. Also perhaps one for Roger.
Is there going to be any EUV deferred revenue left to recognize in 2019? Or is the rev rec next year purely on the 32 shipments? Thank you.
I think the mix is predominantly logic. But like I said, there is an opportunity there. And of course, throughout 2019, when we see the first module results, the test results of the critical modules of the 3rd event C, we can probably engage with our And there is an opportunity, I would say, that is predominantly logic. In terms of revenue
recognition, as you know, at this stage, the systems revenue gets As you know, at this stage, the systems revenue gets recognized upon shipments and that will obviously continue for this model into 2019. The interaction of 3400C at this stage, again, we believe that we will recognize revenue at shipment at this stage.
The next question comes from Mr. Alex Duvall.
Alex Duval from Goldman Sachs. Just a quick one on logic spending in 2019. You obviously talked about most memory and logic spending remaining on high levels in 2019, but talked about DUV logic actually being up even though revenues are already on a high level. So I wondered if you could just talk about what the key swing factors are that are driving that. And as a brief follow-up, you talked about a 2H weighted year for your overall group revenues in 2019, you've just talked about a flattish half on half growth rate in the first half.
So how should we be thinking about the step up into the second half? What is the key reason for that step up? And are we talking low single digits growth half on half or something of greater magnitude? Many thanks.
Okay. The Logic spending in 2019 is up, but don't forget, I mean, the majority of the spend this year was in memory. And logic will be ramping 10 nanometer in microprocessors and 7 nanometer in the foundry space. And that's happening because when we listen to the customers, the tape outs are there, the customer orders are there. That will happen and that will increase.
Now like I said earlier, that's why I think that the DQV business for 2019 will be at least as good as in 2018 by a little bit more skewed towards logic. And it's driven by $7,000,000,000 $10,000,000 Now on the half on half, I said in the earlier answer that our view as to 2019 and the, let's say, the shipment levels, first half, second half haven't changed that much from where we were 2 quarters ago. But effectively means that our customer plans, which is a result also of when their fabs are ready, when can they take the tools, That hasn't changed that much. So I would say the half on half is more a function of when the customers need the tools. So when do they ramp what?
Then that's the main reason. So there's nothing magical behind it. There's no other reason why there would be this particular secretality, if you want to call it this way. But no, I think it's just the way our customers plan. This means that the first half of twenty nineteen will be somewhat the same as the second half of twenty eighteen, which was a pretty good half.
So and then the acceleration you will see in the second half. Also, the EUV numbers will go up, yes, the difference C will be there, and that's all second half skewed. So that's probably the only answer I can give.
The next question comes from Mr. Stephane Lohrhy.
Yes. This is Stephane Louis from ODDO BHS. Actually, I have a question about the OpEx lines because we saw really an increase in R and D and SG and A, as you said. It's to ramp your new EUV tool, but the pace is accelerating throughout the year. We are now up 26% year on year on R and D.
Where do we go and how do we model it for 2019? Thank you.
I think we've said before also on the Q2 call, I think we've mentioned that we believe in the short term, there will be an D and that uptick is to a very large extent or is uniquely related to 2 things. It's the acceleration of the 0.33 EUV roadmap, as we mentioned before, the 3400C and also the high NA program acceleration. So that's why we said midterm, we expect that so we said short term that will lead to an uptick of the numbers. We also said that medium term, we expect that to go back through the model that you've seen before and that we've given to you for 2020, which is 13% of sales. All
right. And the follow-up is about metrology and inspection. You had a very good quarter this quarter. Is it a trend that we should push forward? Or is there was there anything special this quarter?
No, I think it's just a trend that maturity and inspection will become more important. There's a couple of drivers there. I think the introduction of the YieldStar 375 is a metrology system that is now not only being used in logic and in DRAM, but now also is introduced into 3 d NAND with very clear advantages for our customers. On top of that, we see good growth, very clear growth in HMI in the e beam business. We're planning to ship the first 3 by 3 multi beam tool in 2019.
That will also help the top line. And there's a whole suite of software products that we're helping our customers to deal with the complexities and intricacies of 7 nanometer and the 5 nanometer development node. So there's a whole suite of products that are actually helping our customers to basically deal with the increased cost of the next nodes. And that's particularly helpful when you look at our metrology and inspection business. That's a trend.
Next question comes from Mr. Mehdi Hosseini.
Yes. Thanks for taking my question. Mehdi Hosseini from SIC. Peter, I just want to go back to your comment about 2019, first half of 'nineteen versus second half. And I appreciate the details is still same view as a couple of quarters ago.
I'm just wondering, does that reflect the finalized CapEx plans by your key customers? Or if there's a change to those CapEx plans later this year or early next year, that could either something that could have an impact on your view that has not yet materialized? You
know, Mehdi, what you're asking me is looking at crystal ball, what the customer CapEx plans are going to be going forward. I don't know. I mean, if they going to change, they're going to change, but there's nothing today that leads us to believe that they're going to do that. Yes, when you look at their plans, it's about technology transition in logic, trust me, it's going to happen, okay? If you then look at the DRAM expansion plans, we have limited number of customers, only 3 and 2 of them have some capacity expansion plans with fabs are being built and you're long enough into this industry to understand that once you have the dealer structure there, you know to fill it up because it's the only way to cover your fixed cost is to crank out as many different bids as you can in this new fab.
So these are all plans that are pretty cost in stone. Yes? And whether they are going to cut or to slow down that ramp, I don't know. But the current plans are what they are, which means that the shipment that we're seeing in H1 and H2 that's been planned for some time now, they're still valid. And what changes in the future, I don't know.
Sure.
Thanks for the sincerity. And the fact that your customer mix has increasingly consolidated does make it more challenging to forecast. Just moving on
It makes it easier.
Yes. Well, it's easier for you because your crystal ball is better than mine.
That's absolutely true. All right.
One thing with EUV, I'm just very intrigued. We started the year with the commentary that you could ship 22 BC and I down to 18. I appreciate the improved throughput with the 3400C coming out second half of next year. But on the flip side, your customer mix has also consolidated. 1 of the key foundries is no longer pursuing leading edge.
And the leading foundry is now the leading semiconductor manufacturer, and they're well ahead of others. And perhaps the DRAM industry is waiting for 3400C before they finalize their plans. And I'm just trying to better understand when we dial in a 30 unit system into our expectation and 40 into 2020, what are the key wafer capacity targets that you're looking at? In the past, you've talked about certain foundry capacity for leading edge. Is there any metric that you could provide us so that we could have a more realistic set of expectation?
And if there is a change, we know what are the key parameters that have changed? Okay.
Well, I think the more realistic expectation is the expectation that I gave you, because I think it is realistic. And it has to do with the fact that, yes, our customer base is consolidating, which in itself generally leads to a better capital efficiency in the industry, because every customer plans for winning business and if you have multiple customers who are planning for the same business that, yes, there might be a reason or that might be a very good reason why you ship a few more systems. In this particular case, it's not the case because like you said, there's one customer that stepped out of 7 nanometer flown foundries and that business now goes to Taiwan. But the real question is, if that's a 7 plus or a 5 nanometer type business, what is the size of that 7 plus and 5 nanometer business for that customer? And that is significant.
I can only repeat what the CEO of the company said a couple of times, 7 nanometer, 7 plus amp type is going to be big. And that's based on what their customers are telling them, what they need in terms of wafer capacity. Since they're the only one really in that space, I'm not going to tell you anything about the plant wafer capacity, you should ask them. That's not my role. But I can tell you that this is a big driver for the 2019 EUV shipments.
And as only for the foundry business, on top of that, you have the microprocessors and you have the 1st start of some pilot production on DRAM. If you add it all up, you see those plans and you see the roadmaps, then the 30 number we think is a realistic number. Now if there's a upside, hey, if the 3400 seat turns out to be is a very good tool and we will figure it out in the course of 2019 even on module testing level, can we be up with 1 or 2 or 3 more potentially, but then let the customers decide. And I would not think it's going to be in logic, that upside would probably be in memory and in DRAM. So that's the situation today.
And we're giving you clear guidance on the 30 units as really based on a realistic scenario as presented to us by our customers.
Got it. Thanks for detail. I look forward to seeing you in a few weeks.
Certainly. The next question comes from Mr. Sandeep Viswan. JP
Morgan, Morgan, thanks for letting me on. Peter, my question is, I mean, I'm trying to understand what you've been saying about 2019. Clearly, EV is up to 32,000,000 is what you're guiding. Your metrology business is growing into next year. Your installed base management business is growing into next year.
So I don't think there are questions about that. So the question is about the DUV business. I mean, from what I'm hearing, you're saying in response to earlier questions that you're looking for a flattish trend, and I mean that is dominated by the growth in logic and memory not that strong. But mean, you still have a flattish trend in DOE next year. I mean, I think everybody's estimates for your on revenue for ASML are wrong.
Well, it's not my responsibility to come up with that estimate. But what I said at least means I see a bottom for our DPV business to be at least the same. Now DPV business has a lead time that is a bit shorter. So there are changes from time to time. So customers could still change for the second half of twenty nineteen to go up.
And I just called a bottom, which actually means that there could be upside. And yes, and I would not be surprised if there would be. But how big that upside would be, I don't know. So that is a bit where I have to stay qualitative and cannot be quantitative.
Because I mean, I'm just looking at the consensus ahead of today, the market is looking at about 7% revenue growth for ASML. So are you suggesting because we know approximately from the other three line items where your growth would be for 2019, but if you have flat DUV, we are looking at well into double digit growth. So would you say that you should you could potentially grow well into the double digits into 2019?
I think you've done the math for us. Okay. Thank
you. The next question comes from Mr. John Pitzer. Please state your company name followed by your question.
Yes, it's Chris. Peter, good afternoon. Thanks for the question. Peter, you mentioned in your prepared comments that China is going to end up being about 20% of previous in calendar year 'eighteen. What's domestic China going to be this year?
And as you look out to your 'nineteen forecast, is China domestic a breakout year in 2019 or is it more in line with trend line growth?
Well, I think what I said in my prepared comments that 5 of those domestic customers are now planning to ramp in 2019, which actually means that we see our business in 2019 from China also growing. Now beyond that, I think everything and I said it also in the prepared comments, how big the growth will be also depends on how successful all those ramps are going to be, because the first pilot lines have been installed and they are actually executing on their 2019 ramp plans. But as we all know, as some of these companies are greenfield companies, are they all going to be as successful? We don't know. But if they would be and they're executing on their plans as we currently see it, then our business in China will be up next year.
And then, Peter, my second question is just managing through the transition on EUV as you bring out these higher ed able productive tools. You mentioned in earlier question that you thought about 2 tools next year that cannibalized on productivity. The 30 EUV tools you have, what's it potentially at risk for further cannibalization? Can customers future proof? Can you upgrade an EUV tool to a higher NA once you've installed it or is that not an option?
And to the extent that that 30 number does get cannibalized, should that just upside our 2020 number for you guys?
So I
think the you cannot upgrade to higher NA, the higher NA, the high NA EBITDA is completely different to different dimensions. It doesn't work. But you can upgrade from, let's say, 3,350 to a 3,400, if you would like to do that. That is a big open heart surgery in the field. We that could happen in 2020.
We see some of those rates. But I definitely would say that there's not much downside to further cannibalization than what we just said. I think there's a upside if the TUVRC turns out to be quicker, beating the performance targets, then we could have Lewin 1 or 2 or 3 more systems in 2019 going into 2020 as a start for higher adoption in the demand market. But it's too early to speculate any further beyond the 30 units. I would certainly not speculate down, I wouldn't speculate up yet.
But if there is a chance for a change, I would say, it depends on the performance of the sea that especially opens up the possibility in the DRS space.
The next question comes from Mr. Amit Arshundani. Please state your company name followed by your question.
Good morning and good afternoon all. Amit Harshindani from Citigroup. And thanks for taking my questions. I really want to just circle back on a broader topic, Peter, if I could. This whole talk about trade wars that's going on right now and potential implications for supply chain.
Could you maybe give us a sense of if you have any assessment whether you are likely to be impacted by the second tranche of tariffs? And if you see any need within your own supply chain to make any changes based on what's already been made public today?
Then I have a follow-up.
We can be pretty short on this. We don't see any significant impact, not for our business, not for our supply chain either.
Okay. And secondly, in terms of just without trying to belabor too much on the point for the 32s, so you said that the capacity would be 32s and then of course it depends on the output for the 3400C. So would it be fair to assume that in terms of the production output or the demand that your customers are seeing out there right now, it's as strong as it was 3 months ago. If anything, it hasn't gotten even stronger, which is why you're saying there's more likelihood of numbers being up than down. Would that
be a
fair assessment to make?
Yes. First, there's a little correction. I mean, Seth, the capacity is indeed around 30 systems. But if you add the 2, so you could do 32. But so that's what we're saying, we are shipping 30, which includes the 2 that they are shifting from 2018 because the wafer capacity that customers are needing that only because we have a higher productivity tool that has they need 30 units, 28 plus 2.
So it's driven by the higher wafer capacity output coming out of the 3400 C. Now that actually means that it could be from a manufacturing point of view, it's a few 1 or 2 or 3 upside, but that will only materialize if we get our customers convinced that productivity of our EUV-three thousand five hundred C number is good enough and is reliable enough put them into earlier production for memory for DRAM in this space. So I said it a couple of times, I hope it's clear now. But this is why I said, I don't think from a demand point of view, there is a big change. What we said before is that when we looked at the overall demand for EUV, we did include, for instance, customers like GlobalFoundries, which of course have fallen off.
That could have driven the demand over 30 units. Now they're not there anymore. That is consolidated into one other customer. So that's the only thing that probably changed. It's the consolidation in the industry.
That doesn't have an effect on our shipping plan.
And then just if I could very quickly ask, have you because you talked about the productivity of the 3400C, have you decided what level of markup in price would you price the 3400 C over the 3400 B or has is that still to be fixed?
Yes, that's still to be fixed. We are talking to a few customers on that final pricing.
So let's
not do the pricing. So let's not do the price negotiation over this conference call. We'll be back in the private rooms of the customers.
All right, Peter. Thank you.
The next question comes from Ms. Tammy
Tali Qiu from Berenberg. The first one is, Pete, you mentioned that next year, DP resending is mainly skewed towards the logicfoundry side. I'm just wondering because when logic foundry maker like TSMC moving to new generation, their reuses percentage can be as high as 95%. I'm just wondering to what extent you're actually reflecting high re usage in your estimation? And also at the same time, would you say in your backlog of EUV shipment, has anyone already got full allocation of tools for ramping up next generation 7 nanometer plus equivalent or they are still ordering for that generation?
I have a short follow-up.
I think for anything beyond N7, let's say 7 nanometer or N7, still orders to be taken. That's easy. Reuse, you have to define reuse, what customers are mentioning when they talk about reuse is that the existing installed base can be reused for the next node. The next node needs more capacity. And so what we're looking at for next year for neurologic is true capacity additions as extra wafers out.
And when I said 2019, I didn't say it was mainly skewed towards logic, as that logic is going to increase in terms of its share in the DPV shipment as compared to 2018. Memory is still going to be strong, but Roche is also going to be a higher component of the DPV shipments than it was in 2018.
Okay. And also, you mentioned last quarter that you are accelerating your R and D process for high NA. I'm just wondering, has your accelerated R and D been impacting the number of layers UV can be used by the time of high NA is available?
Sorry, could you repeat?
So basically, last quarter, you have been accelerating your R and D process for high NA ubitol, right? So I'm just wondering with your accelerated R and D process for high NA, how should makers be making decision about introducing EUV for more layers when high NA is available because
it's available for short? Yes.
I think what you will see going forward is that high NA will be introduced in high volume manufacturing because the middle of next decade. Then you will see a very clear mix of 0.33, you could say low NAA layers and the use of high NAA layers. They're going to be used next to each other. So high NA is not going to cannibalize that much of the low NA, but they're going to address the additional critical layers of the N3 and N2 nodes. So this is how it actually works.
So yes, on EUV, if you think about EUV in total, of course, there will be more layers allocated to EUV in a combination of low NA and INA.
The next question comes from Mr. Aditya Metuku. Please state your company name followed by your question.
It's Adi Matico from Bank of America. I have two questions. First, a clarification on the OpEx. So obviously, your OpEx is ramping up a lot into 4Q. And when we look at the run rate quarterly run rate for 2019, should we assume that the 4Q run rate would be a reasonable number?
Or do you think that will start to trickle down as we go through 2019? And secondly, just looking at 5 nanometer demand and how the ecosystem is developing. I wondered if, Peter, if you could comment a bit on how the ecosystem is progressing, especially from a pellet and inspection to viewpoint? Thank you.
Yes. I can take the last question and Roger can take your first question. On the 5 nanometer development, if anything, it's accelerating. And I think the issue with telecom is a function of defectivity. Yes, so the defectivity numbers and defectivity control is increasing significantly.
So we have made a lot of progress this year together with our customers on defectivity control. And I think on the 5 nanometer node, the current use or the use of the current telecos and the deep activity measures are sufficient to support 5 nanometer. That's what we believe. At 3 nanometer, which is a couple of years beyond that, we might want to look into whether we need additional inspection tools. That is really depending on how successful we are in defectivity control at the 7 plus or the 5 nanometer node, which looks to be very good.
So whether we need that inspection tool going forward is still a question that needs to be answered, then perhaps it's negative that we don't need it. It depends on the progress that we will make on the productivity with the current generations.
As regards to CapEx, it's in
essence the same
logic as we had for R and D, which is over time and particularly when you talk about acceleration, you can see a bit of an uptick and you won't be surprised that CapEx to a certain extent correlates with R and D. So with R and D going up, there is logic that certain CapEx goes up
as well. So that will go
in and goes up as well. So that will go in and out, and that's something that we see in the short term. Medium term, long term, you will once again see that it models back to what we presented to you in our 2020 model, which is 4% of CapEx. 4% of sales would be assumed in CapEx.
Sorry, Roger, apologies if I said CapEx, I meant OpEx. So when I look at 4Q 'eighteen OpEx as a proportion of revenues, obviously, when I take your guidance, it's you're seeing a pretty strong uptick and the OpEx run rate is significantly higher than what consensus modeling for 2019. So I just wondered, you made a comment earlier on OpEx taking up short term but coming down medium term. So as we go through 2019, should that when should we expect that uptick to come down? When should we expect that downtick?
You
can expect that downtick and that's going back to the model that we presented to you in the course of 2019, early in 2019. So there are reasons for SG and A in particular because I think we need to distinguish here between SG and A and R and D. I mentioned to you R and D as it relates to SG and A. You see a bit of an uptick in what we expect for Q4. You will see that come down to the 4% model that we guided for in the quarter 2019.
Amar, yes, I think
you already answered We are driving the I and A introduction and the 300 C, which will mean that we see an elevated level of R and D spending 2019, which actually we give a very clear indication in Q4 of what the levels could be, but medium term, that will come down again. Where will that be? I think somewhere in the 2020, 2021 time frame. You will see that because that's when the peak of the high NA program will have happened, yes? And because I we are going to we're planning to ship high in a starting 2022.
So end of 2021, beginning of 2022. So that peak will be for the next 3 years and then it will level off.
Understood. Very clear. Thank you.
All right. Thank you. Before we sign off,
we'd like to remind you that we'll be hosting our Investor Day here at our headquarters in Beethoven in the afternoon of November 8. As the event is currently fully booked, we ask those that have not already confirmed to please join us via webcast. We will provide the webcast details in advance of the event. You can contact Investor Relations with any questions. Now on behalf of the ASML Board of Management, I'd like to thank you all for joining us today.
Operator, if you could formally conclude the call, I would appreciate it. Thank you.
Of course, sir. Ladies and gentlemen, this concludes the ASML 2018 Q3 financial results conference call. Thank you for participating. You may now disconnect.