Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the ASML 20 18 Second Quarter Financial Results Call on July 18, 2018. Throughout today's introduction, all participants will be in a listen only mode. After ASML's introduction, there will be an opportunity to ask your questions.
I would now like to open the question and answer I would now like to turn the conference over to Mr. Stitt Miller. Please go ahead, sir.
Thank you, Patricia. 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 Wennink.
And we would like to welcome our new CFO, Roger Dassen. The subject of today's call is ASML's 2018 Q2 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 over the Internet atasml.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 the 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 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 Winnick for a brief introduction.
Thank you, Skip. Good morning and good afternoon, ladies and gentlemen, and thank you for joining us for our Q2 2018 results conference call. Before we begin the Q and A session, Roger and I would like to provide an overview and some commentary on the Q2 as well as provide our view of the coming quarters. Roger will start with a review of our Q2 financial performance with added comments on our short term outlook and I will complete the introduction with some additional comments on the current business environment and our future business outlook. Roger, if you want?
Thank you, Peter, and welcome, everyone. As Peter mentioned, I will first highlight some of the 2nd quarter accomplishments and then provide our guidance for the Q3 of 2018. Q2 net sales came in at €2,740,000,000 somewhat higher than we guided driven by strong demand across
our full product portfolio.
Net system sales of €2,090,000,000 was nicely balanced between memory at 54% and logic at 46%. EUV revenue of €667,000,000 was a combination of revenue from 4 shipments, one more than previously guided and deferred revenue from previous quarters. And as you know, we are now recognizing the majority of revenue for an EUV system at the time of shipment. Install base management sales for the quarter came in at €654,000,000 Overall, gross margin for the quarter came in at 43.3%, which was just above our guidance, reflecting the strength of our DUV and holistic lithography business as well as progress in EUV profitability. Overall OpEx came in slightly above guidance with R and D expenses at €380,000,000 and SG and A expenses at €117,000,000 Turning to the balance sheet.
After paying a total amount of 866 €1,000,000 on dividend and share buybacks, we ended last quarter with cash, cash equivalents and short term investments at a level of €2,980,000,000 Moving to the order book, Q2 system bookings came in at €1,950,000,000 45 percent of the order intake was from logic customers, memory made up the remaining 55 percent of order volume. The bookings are mainly driven by the strong EUV business. We took one new EUV order in this quarter. In
Q2, €269,000,000
worth of shares were repurchased. This leaves around €2,000,000,000 of the 20 eighteentwenty 19 share buyback remaining. Additionally, we paid a dividend of €1.40 per share valued at €597,000,000 With that, I would like to turn to our expectations and guidance for the Q3 of 2018. We expect Q3 total net sales to be similar to Q2 at between €2,700,000,000 €2,800,000,000 Our total net sales forecast includes around €500,000,000 of EUV system revenue from 5 EUV systems, which we target to ship in the quarter. Our EUV shipment plan is still 20 systems for 2018.
We expect EUV order flow to continue in the second half of the year in support of our 2019 shipment plan of at least 30 systems. We expect our Q3 installed base management revenue to step up a bit from previous quarters to around €700,000,000 The service portion of this business is pretty stable, whereas the upgrade revenue is more dependent on system utilization. In current business environment, when systems are running at high utilization, customers are less willing to take systems down for upgrades. Gross margin for Q3 is expected to be between 47% 48%, reflecting the growth and profitability across all products. Higher R and D expense for Q3 of about €395,000,000 are due to an acceleration of the NXV 3,400 roadmap and the high NA EUV program.
SG and A is expected to
come in at about €120,000,000 We remain excited about the balance of 2018. Customers' demand for our products continues to be strong. We look forward to a year of continued strong growth in both revenue and profitability. With that, Peter, over to you.
Thank you, Roger. As Roger has highlighted, we had a good first half of the year and our business continues to perform very well. The positive industry environment and increasing litho intensity continues to drive strong demand in both logic and memory markets as customers migrate to more advanced nodes, requiring our full suite of products. For the second half of the year, we see strength in DUV driven by memory and EUV driven biologic. After next in the first half, in 2018, we expect the second half to be stronger with improved sales and profitability and as well as continued growth from Q3 to Q4.
Logic demand continues to be solid as both existing and new market applications require more high performance compute power. Customers are preparing the ramp of the 7 nanometer node, which is driving a significant increase in EUV demand. Given the progress made in EUV execution, there's now increased customer confidence in the future logic roadmap. And furthermore, plans are being put in place to secure the next generation high NA EUV. Progress in high performance compute requires similar advances in the memory roadmap execution, both volatile and nonvolatile memory.
Memory strength in both DRAM and NAND is driven by increasing content per device as well as expanding end market applications. And in DRAM to meet the current bit growth demand expectations of between 20% to 25%, we see customers continuing with technology migrations and wafer capacity additions. As fewer bits are being supplied via technology node migrations, it drives an increased need for wafer capacity additions. In NAND, with planned 2 d to 3 d NAND conversions nearly finished, customers require new greenfield fab capacity. This along with vertical scaling via stacks of stacks drives additional lithography demand.
Significant investments in greenfield fabs although dampened by high NAND growth rates which are expected to stay in the 40% to 45% range may create some short term volatility. In memory overall, we don't see any structural supply imbalance concerns that would significantly change our positive view of this market segment. On the AS and L product side, let me start with an update on our EUV business. In EUV, continue to make good progress as this technology ramps in volume production. Priority continues to be on productivity or wafers per day, which is a combination of system throughput and availability.
On availability, we have made significant improvements that have enabled 4 week availability above 85% on a number of systems with the latest configuration our NSE 3,400. On throughput, we have customer systems running at 125 waves per hour and we have demonstrated performance beyond 140 waves per hour. Focused execution of our EUV program is enabling an acceleration of our roadmap in terms of throughput, availability and overlay, creating the opportunity for value creation for both our customers and ASML. With this in mind, we decided to accelerate some of the R and D spending to pull in these benefits and we are working to finalize the configuration and specifications on this accelerated road map and we'll provide an update later this year. And these improvements will provide an even stronger foundation for our EV business going forward.
In DUV, we're now shipping the NXT 2000 system, which delivers increased customer value via improved lithography performance. We're planning an aggressive ramp of these systems in the second half of the year, driven by strong customer demand in both memory and logic. In holistic lithography, we continue to see growth across our full portfolio of software and metrology products enabled by the continued integration of HMI's e beam technology and ASML's computational and control products. To summarize 2018, we expect continued solid growth in sales and profitability versus 2017. And after an excellent first half, we expect revenue in the second half to be stronger with an improved profitability.
We furthermore expect the growth to continue from Q3 to Q4 as mentioned earlier. Regarding 2019, it's a bit too early to provide quantitative guidance. I will provide some comments regarding our initial view on high level trends going into the start of next year. In Memory, we see strong DPV demand continuing with an initial EUV opportunity at more advanced nodes. In Logic, 7 nanometer node will continue to ramp, driving a further increase in EUV demand on top of a solid demand in DUV.
In our installed base management segment, we expect continued growth by our service revenue from a growing installed base as well as upgrade business opportunity, although the latter is somewhat dependent on the customers' willingness to sacrifice utilization in the periods during upgrade. In summary, at present we currently expect the strong growth that we experienced this year to continue into 2019. We're well on track to achieve our 2020 targets, with significant growth potential beyond 2020. We plan to communicate our growth opportunity through 2025 at our Investor Day on November 8 this year. With that, we'd 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 would like to ask that you kindly limit yourself to one question with one short follow-up if necessary. This will allow us to get as many callers in as possible. Now, operator, we have your final instructions and then the first question, please.
Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer session. First question is from Mr. Sandeep Deshpande. Please proceed with your line.
Thank you for letting me on. This is Sandeep Deshpande from JPMorgan. Peter, I have two quick questions. I mean, firstly, on your gross margin guidance for the Q3, I mean, you're clearly guiding to a much stronger gross margin than the market expected. Can you give us the dynamics?
I mean, is this EUV related that EUV gross margins are beginning to ramp up and which is why your gross margin is improving so quickly from the Q2 when you had a large number of EUV shipments? Or is there some other mechanism which is causing the gross margin to improve? And secondly, I mean, the market has been worried about issues in the memory supply CapEx environment. And you have said in your introductory remarks as well that you are not seeing any of this. Can you confirm at this point that you have not seen any DRAM related push outs or anything of that sort at this point and that your customers remain confident on their existing roadmaps in terms of capacity additions that you mentioned on the wafers as well into 2019?
Thank you.
Okay. Thank you. Sandeep, I will answer your the second question and Roger will go into the gross margin question on Q3. On the memory market, as you said, our customers, which is multiple, and we've always seen that in the road map execution, customers from time to time have some push outs and some pull ins. And that's what we're seeing.
We're seeing one customer pushing out a few tools and other customers pulling in. So as a memory segment and especially DRAM and you referred to DRAM, we haven't seen any change. So there were some push outs and pull ins, that's actually quite normal. Roger, you want to take the first one?
Sure. On gross margin, Sandeep, it's a combination actually of 3 things. So as you see, there is a 4 percentage point increase in gross margin, but half of that is a result of the mix within DUV. So the mix in DUV is such that we see a 10% a 2% uplift of gross margin as a result of that. The remaining 2% uplift is in EUV and that is a combination of 2 things.
So first off, as you've heard, we plan to recognize 5 system sales in Q3 rather than 7. So that is an uplift. And secondly, we also are looking at an improvement of the EUV margin overall. So mix in EUV, improvement of EUV margin and 2 less systems in EUV.
Thank you.
Following question is from Mr. C. J. Musa. Please state your company name and ask your question.
J.
Muse:] Hi, good morning, good afternoon. Thank you for taking my question. I guess first question, you talked about accelerating your EUV roadmap. And curious, I guess, short term, long term question as part of that. What impact is that having on your ability to close orders for EUV shipments into 2019?
And then we think, I guess, medium term looking to 2020, what does this higher throughput mean in terms of your thought process, in terms of what capacity and or growth in shipments in EUV you'll require? And then I got a quick follow-up.
Mohit, okay. Yes, I think the acceleration of the road map is clearly driven by the fact that we see an opportunity to improve the productivity. And as I said, that's a function of availability and the wafer per hour capability of the tool. And that is the result of the execution results that we've seen over the last 6 months. So having said that, we'd like to pull in that value which is a clear value for the customer because that basically means that customers are of course wanting that value sooner than later.
But this is an R and D program that we're just starting in Q3. So we'll make well, it takes time for that productivity increase to become available in 2019. Until that moment in time, customers have the availability for a machine which is the 1300B that does 125 wafers per hour and provides full value for the price that they're paying. So for the customers, there's a very good alternative to keep going on EUV because there's a very capable tool out there with the expectation and with the promise of an even more valuable tool in the course of 2019. So it is what it is.
The tools will be available when they are available. Our customers need to ramp their 7 nanometer logic and they will do so. But in answer to your second question, clearly, if we keep increasing the productivity of that tool, it means that cost per layer will be more and more in favor of EUV. You will see layer adoption going forward beyond 2019, of course, potentially being more in favor of EUV than it was before because higher productivity means a lower cost. Now from a capacity point of view, from our point of view, it means that with the improved performance of that machine, we can provide our customers with more wafers.
So we don't need to do that by actually selling more tools at 125 wafers per hour, but we can sell same number of tools that we're currently planning with a higher throughput. So that will help our customers. And we don't see at this moment yet a need for a very fast increase of our current capacity at ASML. I think what we will see first give our customers more wafers on EUV at a lower cost of a wafer. Small answer, but I hope it will help you, CJ.
Yes. No, very helpful. And then I guess as a quick follow-up, you talked about early indications pointing to another strong year in 2019. If I look at your DUV order book excluding EUV, it looks like that business accelerated 30% Q on Q. So I guess how far does your visibility extend and should order momentum within DUV continue into the coming few quarters?
Thank you.
Well, given our longer lead time as compared to some other players in the industry, I mean, the visibility that we're getting from our customers goes into 2019. It's generally 9 to 12 months. So we're going to be pretty detailed on what they need and what we can provide, because we have a supply chain also. So when we say we see this DQV strength both memory and logic moving into 2019 that is based on the interaction that we have with our customers on this 9 to 12 month horizon.
Very helpful. Thank you.
Our next question is from Mr. Krish Sankar. Please state your company name and ask your question.
Yes. Hi. Thank you for taking my question. It's from Cowen and Co. I have 2 questions on gross margin.
1 on the near term, you guys mentioned revenue should go from Q3 to Q4. How should we think about gross margin in Q4 relative to Q3? And then on the longer term, it looks like your EV gross margin is in the mid teens. What levels do you have besides volume to drive it to a 40% gross margin for EUV based on your 2020 model? Thank you.
Well, we gave you a gross margin guidance on the Q3. We gave you that clearly. That also we won't give it on Q4. But we gave you an overall comment in the prepared remarks that we believe both our sales and profitability will go up. So I'm not going to give you any details on the gross margin, but clearly we see an improvement on bolt count sales and profitability and the first evidence we actually gave you for the Q3 gross margin guidance.
On the gross margin on EUV of 2020, I think there are 4 ingredients, let's call it this way. How to get to the 40% gross margin that we've always said is that is the volume. Well, the volume we haven't changed really. I mean volume is we said 20% this year, 30% in 2019 growing to potentially 40 in 2020. You can look that up into our into the scenarios that we gave you.
That hasn't changed, but the volume is very important for gross margin increase because it gives us a better coverage of our fixed cost. The fixed cost for our total capacity to 40 to 45 is already there. So that will be a big help, 1. 2 is mix. Mix we said the gross margin we said before was based on our views that we would in 2020 ship a combination of 125 wafer per hour tool and a potentially higher wafer per hour tool.
Now we've pulled that in. So So if anything, the second pillar of the gross margin increase has now actually been pulled in and has positively changed in the sense that by 2020, we will have only the higher productivity tool instead of a mix of a lower end, a higher productivity tool. So that helps. Number 3 is cost reductions. The cost reductions is a targeted program, is a targeted plan and we're on track.
It means higher volume will drive the cost per module down and we will benefit. 4th is service. Now we've mentioned that before service currently we're still in a warranty period. So we cannot collect a real good sales income from a wafer sorry from a sales per wafer system that we're going to apply going forward. But tools that are out of warranty by 2020 will of course create a service income that we currently do not have and will give us coverage for our service cost infrastructure.
Now there is an upside there, might not be in 2020, might be a bit too early, but later on we are selling higher productivity tools. Higher productivity tools will give more wafers per hour, will give more wafers per day, will give us a potential upside of our service income beyond 2020. Now so if you look at it and you look at those 4 ingredients, then I think we have a good level of high level of confidence, I would say, to meet our 40% gross margin target by 2020.
Thanks Peter, very helpful. Thank you.
Following question is from Mr. Andrew Gardiner. Please state your company name and ask your question.
Good afternoon, gentlemen. It's Andrew Gardiner from Barclays. Peter, I was interested in some of the comments you were making in terms of EUV tool shipments or capacity. You guys have talked specifically about 2019 and the sort of the 30 unit level. In prior quarters, last couple of quarters, you talked about how that was a challenging target, in particular, sort of through the supply chain and the lead times you're dealing with in terms of different components, different modules.
So perhaps reading between the lines here, but you sounded a little more confident in some of your comments on that 30 tool unit or at least 30 tool unit for next year. Is that the case? And is it indeed a case that you're sort of working through some of those capacity constraints and so there could be more likely to be upside to the 30 unit mark for next year? Thank you.
Yes, I think currently we stick to the 30 unit mark. But yes, of course, we're up in a learning curve and that also is true for our supply chain. So I think from a supply point of view, we are more confident about the 30 units, but I think it's too early to promise anyone including our customers anything more than that. Now of course, we will try to get every 1 or 2 units extra out of it, but our plan currently stays at that 30 units. And that 30 units is going to be a mix between what we call our B system and our C system like I explained earlier, whereby the C system will be introduced in the course of 2019.
And then just a quick follow-up. In terms of the EUV revenue recognition this year, you previously said €2,100,000,000 Is that still the case? Or given you did a little better in the current Q2 and you're expecting a reasonable amount in the Q3, is it likely to be a bit higher than that now?
Andrew, I think we're still aiming for the 2.1% in this year.
Okay, great. Thank you very much.
Following question is from Mr. Edmund Mook. Please state your company name and ask your question. Hello, Mr. Wok, please unmute your line.
Hi, sorry about that. Thanks for taking my question. So my first question on your outlook for 2019. Just curious how much of that growth or the strength you expect on the industry comes from indigenous Chinese customer versus kind of more of the multinational in China?
Yes. I think what we're seeing in China, yes, you have to make a separation between, let's say, the local Chinese customers and the multinationals having their operations in China. There are some activities on the latter, so the multinationals into China. For instance, there is an investment ongoing in Wuxi, which is from a Korean memory maker. So that will happen next year.
There are some others from other multinational customers, especially in the memory space. There is something happening in the logic space. So that's still going pretty strong. But the local Chinese customers will use 2019 to further ramp their first lines. We see shipments through the first lines of local Chinese customers happening this year.
And depending on the success of their products and the qualification of their products for the use in the local Chinese customer market that will drive the level of tools that they need to further ramp their first and their second line. And that is really dependent on the success with which they can execute on the qualification of their products, be it memory or be it logic products for their local customers. And that's something that we have not full insight in, but that is a potential upside if they do this very well. But I believe the Chinese market will be strong for both local and for international customers.
Great. That's very helpful color. And just my quick follow-up, you remind us what's the timing of the high NA2 and maybe give some color
on that?
Yes. The first high NA to a scheduled late 2021 and we'll ship through 2022 into 2023 the first R and D systems that would be called the early volume systems. And that in total it's about 12 systems. So 2021, late 2021 starting to 2022, 2023 about 12 systems. And then 2024 onwards, you will see the high volume introduction.
Is that clear? Operator, next question?
Our following question is from Mr. David Mulholland.
Hi. Thanks very much. Just coming back on the it's David from UBS. Just coming back on the road map acceleration comments you made. I know you said you're still finalizing the specification, but if I recall from the road map you've presented before, you'd said the next stage was 155 wafers per hour.
Is that essentially what you're pulling in? Or do you think you can do a little bit better than that? And can you help us understand what this means for ASPs? I know you've said it will deliver value to yourself and customers, but can you help us quantify that?
Yes. I think we what we presented last week at Semicon West, we gave you a teaser in the sense that we said, well, there's a roadmap beyond 155 wafers per hour, but 155 is the first target. Now how much that will be in the details of it? I think we'll be very happy to go into detail with you and your colleagues on November 8. We'll do an extensive review of the roadmap and how we see that developing the couple of years, the next couple of years.
And yes, that will have an impact on the ASPs because we will provide higher throughput, which will drive, of course, the cost per wafer down, which will also lead to a review by our customers of the layers that they want to allocate to EUV versus DPV. And that will lead to higher ASPs. What we've normally done, we've always said to the customer, listen, we're going to share that upside value. And the trend that you've seen of increasing ASPs on deep UV where ASPs rose generally with the productivity that is also what you would see in EUV.
And then just a quick follow-up on the confidence you have on kind of DRAM adoption, obviously, probably the most sensitive to the productivity of the tool. So given the progress you've been making, can maybe just comment on your confidence on seeing DRAM adoption in the next year or 2 of EUV?
Well, I think clearly higher productivity, better availability leads to significant lower wafer costs, which is more sensitive in the memory space and in the logic space. So yes, I mean, it is our expectation that when we execute our road map that the advantages of applying that lower cost in labor to the DRAM market are also obvious. So one of our drives of course is to make sure that we can have the consistency of that productivity also extended into the market for DRAM. And it may not be a surprise that of course the key focus of our key DRAM customer is on the productivity and on this 3400C roadmap. So yes, that will have a positive effect.
That's great. Thank you.
Our next question is from Mr. Stefan Houri. Go ahead please. State your company name and ask your question.
Yes. Good afternoon. This is Stephane Roy from ODDO BHS. So I have a question about R and D. We see R and D budgets going up.
Do you have a view or could you help us understanding how this budget is going to evolve in the coming years? I understand this is to accelerate the EUV road map, but could you give us some clarity on the numbers? Thank you.
Yes. I think when you think about R and D and the R and D increase that we're currently seeing is two reasons, two key reasons. One is the pull in of the high NA EUV tool, which we explained also last quarter. And this quarter, we see the acceleration of the 0.33 NA roadmap. That of course is there to support the ramp up of the higher productivity tool.
That will of course tail off at a certain moment in time. I think it will still extend into 2019. Like I said in the as an answer to the previous question in our at our Capital Markets Day in November, we'll give you more details on the productivity roadmap. And I will not stop at the 155 wafers. So some of that R and D that is needed there will continue in 2019.
But going forward, I think the R and D in itself cannot be seen as a separate item. We also have to look at what we see as an upside opportunity in terms of sales with progress we've made with EUV, fact that EUV can be used on more layers. I think it is good to realize that our sales numbers beyond 2020 will also grow. And that means that to support that growth and we'll give you more details in the Q4, we'll also we'll adjust our R and D spend to it. Now clearly that is going to be well explained and in detail I explained.
So it's too early to give you a quantitative guidance on the R and D number going forward because it's very much tied to the upside opportunity and the sales opportunity that we are seeing, which we believe is beyond 2020 significant.
Okay. And I have a quick follow-up, if I may. Did you see in your recent discussions with your customer any distortion regarding the potential trade war between the U. S. And China?
Did it have any impact on your discussion? Thank you.
You can be short on that, no. I mean, we have not had any negative feedback or feedback that has an impact on our business from our customers due to this dispute. That's not the case.
Okay. Thank you very much. Very clear.
Our following question is from Mr. John Pitzer. Please go ahead. State your company name and ask your question.
Yes, it's Credit Suisse. Peter, thanks for letting me ask questions. Congratulations on the good results and outlook. Peter, I wonder if you could elaborate a little bit around your comments around the expected uptick in upgrade revenues in the calendar Q3 that you talked about in your opening commentary. As you pointed out, customers only really willing to do that when they're willing to take a utilization hit.
And it's a little bit surprising given that Q3 is supposed to be the seasonally strong period that customers would make so much upgrade in that quarter. Is that sort of specific to a device type, a certain customer? Or are you at all worried that utilizations for your customers are your customers willing to take utilizations hit in the calendar Q3?
Well, I think our total installed base management business for the second half. And I think year on year does see an effect of the fact that our customers don't want to put the tool down to do an upgrade. I think that makes sense if you look at the profitability of the customers and the price that they can get for their devices right now. So generally, I don't think there is any issue with the upgrades that are currently not happening will happen later. And it is really it is not even seasonal, whether it's Q3 or Q4 doesn't really matter.
And as long as the business and especially the memory business of our customers stays really strong, that means that the upgrades that they planned earlier, they are they in the end don't want to do because there is a revenue downside that they don't want to take. So this will just move on. It will just move to 2019. And as long as the memory business stays healthy and stays very strong, they will keep pushing back those upgrades to a point in time where they have to do it. So it is all, you could say, deferred revenue to a point where customers can allow it.
And there's nothing more to it. That if you then say, what does it mean to the installed base business? Well, the installed base business year on year is probably likely to be flatter than we anticipated at the beginning of the year and that simply is caused by what I just talked about.
That's helpful, Peter. And then as my follow-up, just as you make progress on improving EUV wafer throughput per hour, one of the trade offs we're hearing is just as you raise power on the tool, the offset is kind of increased consumable costs for the customers, especially with reticle life. Is that a meaningful consideration on the ROI for your customer and rate of adoption? And then is there anything that you can do at the tool level to help on the consumable cost side?
Yes. I think on the when you think about the pellet cost for instance and we are working constantly on lifetime of the consumables. And I think that is not a major hindrance for our customers to start introducing a higher productivity tool because the benefits of the higher productivity are so large that they can deal with the initial higher cost of the consumables. But we as an industry are all working on driving the cost of the consumables down. You have to realize that when you take for instance pelacos, it's only very recent that we started to have pelacos that can withstand 250 watt.
So it's just a matter of time and matter of learning curve. That's not going to be a major issue. And in the discussions that we had with our customers on the 3400C or the high productivity tool, there was no concern at all in this direction.
Perfect. Thanks.
Next question is from Mr. Mehdi Hosseini. Please give your company name and ask your question.
Yes. Thank you. Mehdi Hosseini, SIG. Peter, I have two follow ups. You talked about the internal capacity to be able to ship at a minimum of 30 BUV system in 2019.
Can you help us understand perhaps qualitatively about the breadth of customer or customer diversity? And should we expect any DRAM application to be included in these targets? And I have a follow-up.
Yes, I think the breadth of the customer diversity clearly, DPV, if you look at the order book, I mean, it's been driven by top three customers that we have in both in logic and in memory. And they will be the drivers also for our shipments in 2019. And we and our planning DRAM is going to be part of that. So it's the top three customers. But then again, as you all see in 2019 customers following both in memory and in the logic space starting to receive their first EUV production tools.
But again, the top three customers will drive the bulk of the business, including DRAM.
Sure. And the reason I asked the question is, it seems to me that there's a bifurcation among your logicfoundry customer where one particular customer is pulling away winning all the any potential downside risk if that particular customer continues to win OLED designs for 7 and a 5 nanometer?
Well, we look at this from an industry segment point of view. I mean, we wish all our customers the best and we hope that they compete fairly and one win and the other won't. But as an industry segment, we are not that concerned because we're concerned about the ultimate demand for the 7 nanometer devices and the 5 nanometer devices, which are driven by the value that is being created by those devices, which will be taken up by the customers of our customers. So the end markets will in the end determine what the demand will be for EUV wafers and where we're going to ship them, we'll just have to wait and see who wins the business. So what we ship is determined by the ad markets and the customers of our customers, not per se by our customers from a segment point of view, from industry segment point of view.
Just to be clear, your capacity to ship 30 plus that doesn't include any upgrades, correct?
That's correct, yes. Okay.
Thank you.
Okay.
Following question is from Mr. Amit Harshandani. Please state your company name and ask your question.
Good afternoon. Amit Achandani from Citigroup, and thanks for taking my question. My first question relates to maybe an update from your side with respect to the e beam business. If you could kindly share with us what is the progress in terms of the roadmap of the new product as well as potentially customer traction? And how should we think about that shaping up going towards your 2020 targets?
And I have an unrelated follow-up.
Yes. I think the EBIT business, we showed you last quarters some some pictures of a 3x3 multi beam prototype, which are basically we're building that today and we will ship that commercially to our customers in 2019. But that will not end. There will be a next version, which has more beams in 2020. So currently it's execution of the R and D program, making sure we can ship the first 3x3 E beam 2 in 2019 and more will follow in 2020.
Okay. And as an unrelated follow-up, when we think about your installed base management revenues and as you said EUV tools gradually move out of their warranty period. Could you maybe help us understand if there's a step up in the opportunity you get in the installed base management side with respect to EUV, would the associated services revenues be dramatically different or higher than what you're generating today for DUV? Thank you.
Yes, I think the service revenue per tool with DUV is significantly higher, but also the costs are significantly higher. You could argue that in EUV and the source we have some consumables, I would say wearables with the CEV collector over time and some other parts of that tool. So that needs to be replaced from time to time. And I think the service charge is now based on a charge per wafer. So yes, you will see a step up once you see a significant number of our EUV systems coming out of warranty.
And when they are more productive, they will produce more wafers, which gives us an upside in the service revenue, but also clearly when you have more wafers then you also have an impact of your cost of the wearables. So but all in all, the increase in EUV shipments coming out of warranty after 2020 will definitely give an impetus to our service top line whereby as we said on earlier calls €5,000,000 to €6,000,000 of service revenue per EUV system is currently what we are planning or what we have in our long term financial models. Now clearly when we have higher productivity and we can sustain that then there is some upside to that number. But this is what we are working with beyond 2020.
Thank you, Peter.
Next question is from Mr. Robert Sanders. Please state your company name and ask your question.
Yes. Hi, it's Deutsche Bank. First question would just be on the 3400C. It looks like you're making good progress there on availability, but that won't ship until the mid of next year. So how do you ensure customers don't defer taking delivery of the older Generation B tool in situations where they don't have to ramp before 2020?
And I have a follow-up. Thanks.
Yes. I think the customers ramp in our plants are based on a certain capacity that they need for EUV waivers. Now the 3400C in 2019 is not going to fulfill that capacity on its own. You need the 3400B, yes, because that is a fully equipped high volume productivity tool, which of course is a lower price. So you get fewer waivers, but you pay a lower price.
So it is in that sense relatively simple that the EUV waivers that are needed in 2019, they need to be made. They can only be made in a mixed combination of 3,500 Bs and 3,500 Cs. And that's pretty clear to our customers and pretty clear to us. And that's why we say the 30 units that we have in our capacity plan, that's very valid. But I cannot give you any detail yet on the mix or the combination of a B and a C.
Okay, great.
And just one point of clarification.
I just wanted to check that you said that both Q4 sales and Q4 profit would be higher than the Q3. I just wanted to check. When you just said you indicated a rough kind of direction.
Yes. Well, the rough direction is as follows. Q3 to Q4 sales will be up and H2 sales and profitability will be up as compared to H1.
That's perfect.
Thank you very much.
Thank you.
Next question is from Mr. Aditya Metuku. Please give your company a call and ask your question.
Yes. Good afternoon, guys. It's Bank of America. So just looking at the gross margins on your EUV revenues in the Q2 in your Q3 rather based on your guidance, it looks like you will be doing something like 38 percent gross margin on your EUV revenues in the Q3. And this uplift is not coming from any deferred revenue recognition.
So in light of this, can you provide some color on how much higher your EUV gross margins in 2020 can be, higher than the 40% you've guided for, especially given the ASP and productivity of new EUV tools would be higher than what you've been planning previously? Thank you.
Yes. I think what I would suggest that you do because the 38% gross margin is not something that I can easily relate to. So why don't you after this call get in touch with our IR folks and they will probably can help you understand where you that they can understand where you're coming from in your calculation of the 38%. But if it would be 38% in Q3, then 40% in 2020 would be really sandbagging. So that's probably not what you are suggesting.
So somewhere we probably need to help you understand this or we need to understand what your thinking is. I don't think this call is suitable for that. So I would ask you to call our guys.
Okay. And just as a quick follow-up then, where are your EUV gross margins in the 3rd quarter?
We don't guide specifically on EUV gross margins, but we can say we've given you some guidance in the past of the, I would say, gross margin improvement to the 40% being almost on a linear scale from where we were in 2017. I think that is year on year that is approximately correct and we are on that trajectory. So we're not guiding on the quarter, we're guiding year on year in a more general terms. And there's some upside there that I would agree to if people say fine, if you start selling higher productivity tools in 2020 with some higher productivity and some higher value that might be a support of your 40% margin target for 2020, which I explained in one of the first questions. So no quarterly guidance, there is a linear improvement from 20 70 to 2020.
That's what you have to deal with.
Okay. Thank you.
Our next question is from Ms. Tammy Qiu.
So I only have one question. So you talk about your accelerating your EUV R and D process. Does that actually change your estimation of the layer count we can see in the Logic and Foundry initial adoption because I remember you actually said 10 to 15 layers insertion in the first phase. Does that actually increase the potential layers UV can address because you are actually doing better than previously expected?
Well, I think, Tammy, initially not. I mean customers have done their designs, have done the qualification work. I mean that's what it is. But I think clearly 2020 beyond having a better cost per wafer to higher productivity clearly creates an opportunity for customers to start thinking of adding more layers. But initially, I would say they stick to where they are today because it was probably too much of a hassle to do that.
They're going to start 7 nanometer like I said 2019, they're going to use the 1300B for it. And over time, you'll see an increased productivity will likely have an impact on the number of EUV layers.
Okay. So Pete, you actually mean the adoption layer increase can actually accelerate based on your accelerated roadmap of EUV?
I think so, because it's a matter of cost, but now it's a matter of when. I don't think it happens in 2019. It happened probably 2020 beyond.
Okay. Thank you. Next question is from Mr. Douglas Smith. Please state your company name and followed by your question.
Hi. It's Doug Smith from Agency Partners. I have a longer term question about I and A. I think in the last call, you said that the R and D units that are going to be shipped were priced at around €270,000,000 I recall some time ago the R and D units for low NA EUV were about 60, and now we see it's obviously much higher than that. Is the expectation that high volume manufacturing high NA is going to be €350,000,000 per unit?
That's my first question. And second, the production capacity for high NA you're putting in at Zeiss and Eindhoven, is it targeting around the 20 unit level for mid-2020s?
Yes, I think on your last question where you gave a bit more detail on the supply you have to realize that when we started EUV, it was completely new technology. So the first EUV low NA R and D tool was really a research tool. While when we think about high NA EUV, it's the 2nd generation EUV whereby for instance we use the same source. We have a mature EUV source by that time which when we've had the €60,000,000 there was a very immature EUV source that was not able to produce many wafers. Now the high NA tool will actually benefit and that means that the R and D tool will be extremely close to the high volume configuration.
So it actually means that R and D is almost the same as the high NA tool sorry as the volume tool, which is the same as the current DPV tool. If we sell a NXT 2000, which will be used in R and D first, that tool will also have the same configuration and the same price as the tool that is used in high volume. That will be also the same for high NA. So the comparison that you have made between low NA and high NA is really a comparison between immaturity and maturity. And that's why it doesn't add up.
But I would say €270,000,000 for a high volume tool is still a pretty good price.
Sure. That's a very good price. And just a quick follow-up, I think it was mentioned also previously, the wafer throughput for high NA would be greater than current low NA. Do you think it might actually be able to exceed 200 wafers per hour eventually?
Well, I think this is something that we're very happy to answer at our Analyst Day because that's where we will go into those details. I mean, like I said earlier, we have a now a road map that we're working on for our low NA tool, which starts at the next start at 125, the next data point is at 55 and it goes beyond 155 and we'll tell you then how much. But it also will show the roadmap of high NA and whether that goes over 200 wafers per hour, we'd like to save that for that date. And otherwise, it doesn't make sense to have a Capital Markets Day because everything is known by that time.
Sure. Thanks. I'll wait for November then.
Ladies and gentlemen, we have time for one last question.
If you
are unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations department with your question. Operator, may we have the last caller please?
Yes, sir. The last question is from Mr. Mitch Stevens. Please state your company name and ask your question.
Hey, Seth Sees from RBC Capital Markets. Yes, I just had a quick one to follow-up on the EUV comments about pulling in kind of the spending there. So does that mean that you're going to essentially have a lower spending going forward? I just want to understand the implications from operating margin front assuming the gross margins are continuing to drive to plan?
Yes. I think the EUV spend in terms of the acceleration, the acceleration R and D programs that will bring the productivity of the tool to 155 wafers per hour to pull that in, but also to accelerate that productivity beyond 155 wafers. That R and D program will start around now. That will also be still a program running in 2019. That's what I said.
That ultimately when you get to the highest level of productivity on the 3,400, that's the 0.3 gs NA tool, that will reach a certain maximum then before that time the R and D will tail off for that particular part of the EUV program. At the other hand, we will then see that high NA comes up. Now what the impact will be on the total R and D has to be seen in the context of total sales of the company at that time. And I believe that the progress of EUV will provide us with ample opportunity to drive the top line because EUV will be more and more cost effective going forward. And that top line will enable us to spend R and D that we need and we will be more detailed like I said in November timeframe when we put this into the context of the total long term financial planning of the company.
Perfect. Thank you.
All right. Before we sign off, yesterday, you should have received an invitation to our Investor Day, which will be here at our headquarters in Beethoven on the afternoon of November 8. Please let Investor Relations know if you did not receive an invitation and we hope you'll be able to join us in November. 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 would appreciate it.
Thank you.
Ladies and gentlemen, this concludes the ASML 20 18 Second Quarter Financial Results Conference Call. Thank you for participating. You may now disconnect your line.