Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2017 4th Quarter and Annual Financial Results Conference Call on January 17, 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 questions. I would now like to open the question and answer I would now like to turn the conference call over to Mr.
Skip Miller. Go ahead 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 Veldhoven, Netherlands is ASML's CEO, Peter Winnick and CFO, Wolfgang Nickl.
The subject of today's call is ASML's 2017 Q4 and annual results. The link to 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 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'd like to caution listeners that comments made by management during this conference call will include forward looking statements within the meaning of the federal securities laws. These forward looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today's press release and presentation found on our website atasml.com and in ASML's Annual Report on Form 20F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wennick for a brief introduction.
Thank you, Skip. Good morning and good afternoon, ladies and gentlemen, and thank you for joining us for our Q4 2017 annual results conference call. Before we begin the question and answer session, Wolfgang and I would like to provide you with an overview and some commentary on the Q4 and the full year 2017 as well as provide our view of the coming quarters. Wolfgang will start with a review of our Q4 financial performance with some added comments on our short term outlook and I will complete the introduction with some additional comments on the current business environment and our future business outlook. Thank you, Will.
Thank you, Peter, and welcome, everyone. I will first highlight some of the Q4 and full year financial accomplishments and then provide our guidance for the Q1 of 2018. Q4 net sales came in at €2,560,000,000 exceeding our guidance by over €400,000,000 Due to demand strength, some customers requested earlier shipments of lithography systems, which we were able to accommodate late in the quarter. This accounted for almost half of the $400,000,000 and the other half came from earlier than expected acceptance of the performance of 2 previously shipped EUV systems by a customer, which led to recognition of deferred revenue in Q4. Net system sales of €1,950,000,000 was driven by memory, which contributed 53% of sales Foundry accounted for 29% and IDM was 18% of system sales.
Installed base management sales for the quarter came in at €606,000,000 which was in line with our guidance. Gross margin for the quarter came in at 45.2%, which was 120 basis points higher than our guidance. This was the result of much stronger than expected DUV sales, more than offsetting the dilutive effect from incremental EUV revenue that was recognized during the quarter. Overall, OpEx came in slightly above guidance with R and D expenses at €317,000,000 and SG and A expenses at €113,000,000 Turning to the balance sheet. Order over quarter cash, cash equivalents and short term investments came in at €3,290,000,000 During the quarter, we purchased approximately €331,000,000 worth of shares.
Since January 2016, we have purchased a total of approximately 8,200,000 shares with a value of €900,000,000 against our 20 16 'seventeen authorization of €1,500,000,000 Moving on to the order book. Q4 Systems bookings came in at a strong €2,930,000,000 This is almost an €800,000,000 increase compared to Q3 bookings. The order intake was driven by the memory sector, representing 55% of orders compared to 30% for foundry and 15% for IDM. We took 10 new orders for EUV systems, and our EUV backlog now reflects 28 systems valued at €3,100,000,000 Our overall system backlog now totals a record 6.6 €8,000,000,000 and is balanced nicely between memory, foundry and IDM. Our strong Q4 results marked the closure of an exceptional year for the industry and ASML.
For the full year, our net sales grew 33 percent to a record of €9,050,000,000 Net installed base management sales grew more than 25% to a record of €2,680,000,000 With total EUV sales almost at €1,200,000,000 2017 was the year when preparations for inserting EUV into high volume chip manufacturing shifted into a higher year. Of the 12 EUV shipments planned for 2017, we shipped 10 during the year. One shipment is in progress and one shipment is planned this month. This means that our 2018 shipment plan will increase by 2 to a total of 22 systems. We made considerable improvements on our EUV gross margin in 2017, achieving 0% in the 4th quarter.
Due to accelerated investments in EUV service infrastructure, we did not achieve 0% for the full year. Nevertheless, even with a more than 3x increase in EUV revenue from 2016 to 2017, we were able to improve our corporate gross margin to 45%. We are on track to achieving overall gross margins exceeding 50% in 2020. We continue to invest in the long term future of ASML and increased R and D from €1,100,000,000 in 2016 to €1,260,000,000 in 2017. This increase was driven by accounting for a full year of HMI, our contributions to Zaius SMT and our own investments in high NA.
Overall R and D investments as a percentage of revenue decreased from about 16% in 2016 to about 14% in 2017. SG and A as a percentage of revenue reduced by almost 1 percentage point to about 4.6% of revenue. Our net income for the full year grew 44 percent to a record of €2,120,000,000 resulting in a net margin of 23.4 percent and an EPS of €4.93 With that, I would like to turn to our expectations and guidance for the Q1 of 2018. We expect Q1 total net sales of around €2,200,000,000 As a reminder, we pulled approximately €400,000,000 from this quarter into Q4 2017. While we target to ship 4 EUV systems in the March quarter, we expect revenue recognition of about €150,000,000 for our EUV business.
Overall, we do expect quarter over quarter revenue growth throughout 2018. We expect our Q1 installed base management revenue to come in around €600,000,000 Gross margin for Q1 is expected to be between 47% and 48%. R and D expenses for Q1 will reflect continued accelerated investments in our portfolio and will come in around €350,000,000 SG and A is expected to come in at about €115,000,000 We are excited about 2018, which will be a year of continued strong growth in revenue and profitability. Today, we also announced a new share buyback program for 2018 2019 of up to €2,500,000,000 We intend to cancel these shares after repurchase with the exception of up to 2,400,000 shares, which will be used to cover employee share plans. Additionally, we also will propose a 17% increase in our dividend to €1.40 per share at our Annual Shareholder Meeting, which takes place on April 25 in Veldofen.
The dividend payment is valued at around €600,000,000 With that, I would like to turn the call back over to you, Peter.
Thank you, Ofer. As Wolfgang highlighted, we had another record year in 2017. The demand for our full product portfolio is very strong and our business continues to perform very well. The strong demand in both logic and memory set new revenue records across both sectors in 2017. Expanding end market applications, IC device content growth, increasing window intensity, all evidenced by our strong backlog, provide a good basis for this positive momentum continue in 2018.
Most others, but certainly due to high demand from the server market, DRAM system demand remains strong as our customers continue to migrate to sub-twenty nanometer nodes. Advanced nodes are more little intensive and thus drive increased little demand. In 3 d NAND, little demand is also strong as a number of customers continue to ramp new greenfield fabs and scale vertically with so called stack of stacks. Additional lithography is required to connect these stacks, which further drives our political intensity. When adding the net opportunity to the DRAM business outlook for next year, we see another strong memory year ahead.
Logic demand continues to be solid as customers ramp 10 nanometer and start to transition to the 7 nanometer node. Linter intensity continues to increase with migration to more advanced nodes further growth with the adoption of EUV at 7 nanometer. EUV production ramp will accelerate in 2018 as customers are eager to realize the benefits of process simplification, cycle time reduction, yield improvement and ultimately resulting in cost benefits. With regards to China, we set a new record for this region in 2017 with over €700,000,000 in revenue. In addition to strong demand from existing customers in the region, we're also planning to ship to 5 domestic Chinese customers in 2018 for both memory and logic applications.
With continued ramp of fabs in China, both from domestic and non domestic customers, we see a very clear growth opportunity in this region over the coming years. On the AS and L product side, let me start with an update on our EUV business. In EUV, we continue to make significant progress in 2017. We demonstrated all system specifications, 125 waves per hour, while continuing to improve availability. Customer demand is strong, evidenced by public statements of their plans to introduce this technology in volume production starting in 2018.
We booked 10 EUV orders in Q4, paying our backup to 28 systems, of which we plan to ship 22 in 2018. Shipment profile, however, will be back half loaded as our planned step up in move rates will effectively only have an impact in the second half of twenty eighteen. Our EUV shipment plant beyond 2018 is unchanged to 30 plus in 2019 and 40 plus in 2020. In DUV, we shipped a total of 161 new systems in 2017, which is a 21% increase from 2016. We were able to significantly boost output in support of our increased customer demand in both memory and logic.
We also provided customers with an early access version of the TwinScan NXT 2000, is our most advanced immersion lithography system, is used for process development of the next node devices. As a sign of the continuously increasing maturity the NXT platform, the NXT 2000 system already meets or exceeds all of its performance targets. With 3 d NAND customers, we expanded our options portfolio with less critical process challenges and delivery of improved performance. In all lithic lithography, we showed growth across the full portfolio of software and metrology products. We shipped our first jointly developed product less than 1 year after closing of the HMI acquisition.
This product, EPFM5, the patent fidelity metrology system that leverages HMI's high resolution EV metrology with ASML's computational lithography technology. This product's high resolution capability enables high capture rate of systematic patterning defects, so customers can accelerate their yield learning curves and drive higher production yields. On top of this, we shipped our 1st EUV EV mask inspection system. Looking to 2018, we expect continued solid growth in both sales and profitability. Our high level view of 2018 business is largely unchanged relative to comments we made last quarter.
While we're able to recognize an additional €400,000,000 of revenue in 2017, which could be seen as a pull in from 2018, it will not impact our view of 2018 as it will be wholly compensated by increased TPV demand. In summary, we had another record year in 2017 with 33% revenue growth and 44% net income growth over 2016. Strong demand in both logic and memory set new revenue records in 2017, and we expect both sectors to see continued growth in 2018 supported by increased EUV sales. Expanding end market applications, device IC content growth, increasing litter intensity as evidenced by our record backlog, provide a strong indication that this positive momentum will continue in 2018. With that, we will be happy to take your questions.
Thank you, Peter. 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 yourself to one question with one short follow-up if necessary. This will allow us to get as many callers as possible. Now, operator, do we have your final instructions and the first questions, please?
Thank you, sir.
Hi. This is Farhan Ahmad from Credit Suisse. Thanks for taking my question and congrats and great set up to those. My question is on EUV. You booked 10 system orders.
Can you talk about the mix of customers within that? Is it coming from memory or foundry and are there multiple customers within that?
Yes. There are multiple customers. It is dominated by the logic side of our business. And that is also when we look at next year, next year, we see sales increase in logic really driven by EUV and the memory sales increase is driven by DPUV.
Got it. And then in terms of the linearity for the year, is there much change between memory and logic mix in the year? Is first half more memory driven and second more foundry logic as some of the other companies have said?
Not on the deep UV side or non EUV side. And then on the EUV side, as mentioned in the prepared remarks, it will be more back end loaded.
The next question comes from Mr. C. J. Muse. Please state your company name followed by your question.
Yes. Good afternoon. C. J. Muse with Evercore ISI.
Thank you for taking my question. First question, I guess, I was hoping that you could discuss, Peter, what you're seeing in the supply chain on the EUV side. Would love to get an update in terms of optics and things like that and whether you're feeling better, same, worse in terms of hitting that 30 tool target into the 2019 timeframe?
Yes. I think with respect to my feeling, no changes. I think sort of it's the same as we said last quarter. It has to do with the fact that the step ups in capacity are really long lead time items. So this is not something that you can change 1 quarter to the other.
So the supply chain situation is what it is. And I think the 30 plus is limited, as we said before, by the supply chain and the 40 plus is really when the supply chain can kick into a next step. So, no real change.
Okay. And I guess as my follow-up, you guided gross margin higher year over year despite the nice tick higher in EUV shipments. So curious, if you think about non EUV and growth in inspection and an uptick on the DUV side, is it fair to say that overall that part of your business can do roughly 53%, 54% gross margin through the year?
I wouldn't like to nail it down to an exact percentage. But if you look at both other businesses, so the holistic lithography business and the deep UV business, you will see an increased mix towards the more powerful machines, and that has a positive effect on gross margins. Also, we're continuing to do a lot of very profitable upgrades. And then from a mix between DUV and holistic lithography, you will see also over the next 2 or 3 years a continued mix towards holistic lithography, which will have a slightly higher mix in our overall revenue. And since this is very software driven, it structurally also contributes to the non EUV business being up.
So both effects, both of these businesses go up based on the products that we offer, and then you also have a mixed base effect. And that, of course, comes together with us making significant progress on EUV. And that's why we feel confident that from the 45%, we can advance in 2018 and then get to our 50% plus in 2020.
Very helpful. Thank you.
C. J, if I just may add one general comment on this is going forward, I mean, we are guiding and as we did, we are guiding a corporate gross margin. And going forward, we will do that because if you look at what our customers really want from us is note to note transitions. And note to note transitions going forward are really a combination of the entire set of products and services that we are offering. So you will see agreements with our customers that involve EUV, deep UV, holistic and applications in one goal and we will make one VPA, which effectively gives us one gross margin.
So going forward, we will guide you more and more on the overall corporate gross margin because it doesn't make sense to give you and I don't want to do that either to give you any specific gross margin guidance for those products because we have BPH for the entire product portfolio of AS and L.
The next question comes from Mr. Sandeep Deshpande. Please state your company name and your question please.
Hi. Sandeep Deshpande, JPMorgan. My first question is on EUV. Could you possibly help us understand in terms of the recognition on EUV into 2018? Are you going to be recognizing then all the tools on shipments by the second half of this year as well as the past deferred revenue on EUV will be fully recognized in 2018?
And I have a quick follow-up on EUV as well.
Okay. Let me see whether I can structure this for you because there's a lot of moving parts here. The first comment is by the end of the year, we should be able to recognize the majority of the revenue of the system as we ship it. At the beginning of the year, we still have shipments, as you have heard from my prepared remarks. Q1, for instance, we're planning to ship 4 systems, recognizing only $150,000,000 There are still shipments that have of tools that have changes in them that require us to wait with revenue recognition for an acceptance of the tool at the customer side.
So, these Q1 shipments will, however, recognize in the second half of the year. On top of that, we are carrying a deferred revenue balance of around 500 $1,000,000 on our balance sheet from prior shipments. And they're both short term and long term, so some of them will come into the P and L in 2018 and some will even carry a little bit into 2019. If you put it all together, we expect the revenue for the UV business to be somewhere in the $2,300,000,000 range for the year. As a reminder, just for clarification, we said 2.5 in the last call, but of course, we achieved the acceptance of 2 tools already in 2017.
And of course, they moved into 2017 where we overachieved by $200,000,000 I hope that helps, Sandeep.
Thank you, Wolfgang. And then following up to your earlier response, Peter, regarding EUV for 2019, I mean, some of those very strong orders you took in the Q4 are clearly 2019 related. How do you see, I mean, the order build for 2019, do you expect that because of your lead time, you'll get almost all the 2019 related EUV orders in this year itself? Or this is going to continue right through next year in terms of getting orders? And will you also start seeing a 2020 level of indications from customers for EUV?
Thank you.
Yes. I think what we're working on, because there's also one customer request, is clearly a reduction of the cycle time of our EUV tools. I mean, it has to come down. And by 2020, we really like to be at the cycle time anywhere between 12 15 months. That means also customers will take account of that and that means that they will actually postpone issuing the orders to reflect that reduced cycle time.
Now the first cycle time reductions, we will probably see somewhere at the towards the end of 2018. But I would suspect that the majority, I think the significant majority of everything that we will in 2019 will be booked in 2018 because the cycle time reductions will really take effect later and that will then have an effect on the order lead time of our customers. So, vast majority should be in this year.
Thank you,
Ben. The next question comes from Mr. Amit Harshandani. Please state your company name followed by your question.
Good afternoon, everyone. Amit Agendarani from Citigroup, and thanks for taking my questions. My first question would be with regards to the current traction you're seeing on the high NA EUV side. If you could please update us on the same and I say so in the context of your 2020 ambition, color or trajectory in terms of how revenues are likely to shape up beyond 2020 and I and A is a critical ingredient of the same. So it would be great to know your thoughts on the same and then I have follow-up.
Yes. It's a good question. I think we have had extensive discussion with our customers on our high NA concept and I mean the how the machine looks like and the looks like and the performance specifications that we started that already way into 2017. I think we got confirmation from our major customers that high NA makes complete sense from a technical point of view, from an economical point of view. So they want us to execute on this.
Now currently, we are in discussion with our customers under what terms and conditions we should start shipping the first R and D tools and how quickly after the R and D tools we should start ramping up for volume. Now having said that, you need to realize that high net tool is really a new scanner. It's not so much a new EUV source. As you know, the EUV source being the main reason why there was an delay with EUV introduction. We were using the same source as for the current EUV generation.
So that means that we would be able to actually see high volume, high NA EUV tools shipping somewhere in the middle of the next decade, starting to be used in the high volume production and then ramping in the second half of the next decade. Now those will be tools that we're currently looking at pricing significantly over €200,000,000 And that means that if you then look beyond the 2020 target number in terms of sales then, you don't need a lot of imagination to foresee our top line growing significantly beyond 2020. And it will be driven by EUV and the next generation.
Thank you, Peter. And as an unrelated follow-up, if I could get some clarity around China, You've given us an idea of shipment to domestic customers in 2018. In the past, you've talked about a cumulative life opportunity, if I remember correctly, of around €3,000,000,000 Could you give us a sense on is your sentiment more positive, more negative? And how are you thinking about China over the next 2 to 3 years?
Yes. I think we actually mentioned that $3,000,000,000 mark. But that takes into account, I think, our view as to the speed, the realistic speed with which our domestic Chinese customers will be able to ramp their fabs and to get their products qualified. Now if they can do this faster, then you will probably see an uptick on that $3,000,000,000 And if they would do it, let's say, at a speed with which we would normally see in memory and in Logic, you could probably get to a number that's almost twice as high as the 3,000,000,000 dollars But that is given the fact that many of these are greenfield, only greenfield fabs, but also greenfield companies. That's why we take a more conservative view.
But I would say, let's stick to the $3,000,000,000 and let's work very closely together with those customers to see whether they can accelerate.
Thank you, Peter. The next question comes from Mr. Jagadish Iyer. Please state your company name followed by your question.
Yes, Samit Redstone. Thanks for taking my question. Two questions, Peter. If you look at the foundry logic if you look at calendar 'seventeen, there has not been a significant uptick in your revenue in foundrylogic segment, whereas if you compare it to the memory, there has been a significant uptick there. So how should we think about growth in memory revenues in calendar 'eighteen?
And is there a potential risk that if customers decide to scale back on capital spending if the pricing environment does not support such and such a situation? And I have a follow-up.
Yes. I think we both for memory and logic, we see similar patterns in 2018 with here and there some potential upside, which is customer driven. I think the second half of your question is probably more relevant one because it comes up time and time again. The way we look at this is, are we creating an overcapacity in terms of the bit supply into the memory market, both DRAM and NAND. Now if we look at what our customers are currently asking us and then the forecast that they give us or what they want in 2018, which of course is not fully yet in the backlog, if we take that and we take into account that the nodes that they want to use this on, the effect it will have on the bit density, Then we can calculate what the capacity addition will be in terms of bits.
And in DRAM, where will we probably be anywhere, let's say, mid-20s max, so anywhere between 20% to 25%. And in NAND, the capacity addition of what we can see it based on Littel will be around mid-40s. And these are the way currently our customers are talking about it and the analysts are talking about it, about the same as the demand bit growth looks like. So when we take those 2 together and we look at the capability of the lithography machines to add bids, it seems that it's pretty much imbalanced. Well, is there a risk?
There's always a risk because it's about the end markets, it's about the global economy. But from where we are today, we don't see that as a major issue.
Okay. Thanks for that.
And then I have a follow-up. So you talked about EUV and you talked about 125 wafers an hour. On a high level, can you kind of quantify in calendar 'seventeen in terms of your progress, in terms of productivity and availability? And what should be the milestone for calendar 'eighteen, not quarter to quarter variation, but just on an overall annual level milestones?
Yes. You have to realize that nobody has EUV in full production yet. I mean, it's all coming out of the development phase. So they're qualifying product, which actually means nobody runs 25 wafers per hour continuously. I mean, we're not there.
We'll actually start in the back half of twenty eighteen. But that capability is actually there and marathon tests that we done by customers and by us show us that capability. Now with respect to the availability, with the 3,400, we're over 80%. We're significantly over 80%. And I think the target by the end of this year will be that the availability numbers are such that customers feel comfortable to put tools into a production that will give them around 1500 maximum 2,000 wafers per day.
And that is then a result of 7 25 wafers per hour on average and availability and the, let's say, inactive hours that customers are planning for their own production. So that's 100,000 to 1500,000 wafers per day, that is what we are focusing on and that seems very feasible with everything we have on the table today, which I think is evidenced by the fact that customers are giving us orders. We got 10 orders in Q4. Thanks for that. Congrats.
The next question comes from Mr. David Mulholland. Please state your company name followed by your question.
Hi. Thanks very much. It's David Mulholland from UBS. Firstly, one of the strengths in the quarter was clearly the memory bookings. And I wonder if you could just help us understand how that breaks down in the quarter for as much visibility as you have between DRAM and NAND and how that's changed versus Q3?
And also how much of it's coming from China at this stage? And then I've got a follow-up.
Yes. To answer the last part, China, of course, we have greenfield pads there. They're not going to ramp, like I said, as an answer to an earlier question, are going to ramp up with the same speed as the mature memory companies. So they will take those tools and will use those tools to create a first line where they can qualify their product. So it will be it is in there in terms of the bookings.
Now split between DRAM and then is very difficult for the simple reason that customers are continuously assessing how to allocate their lithography capabilities and their capacity between DRAM and between NAND. And there are a lot of relocations going on between DRAM and NAND. That's why some time ago, we decided to just give you the memory segment as one segment and don't split the net because they are continuously changing because of those reallocations.
That's clear. And then just on the follow-up, one of the comments you made was, obviously, 2 tools being recognized earlier in Q4. I just wonder if you can give us some clarity on what drove that. Was it customer lowering the performance requirement that got you there earlier? Or was it better performance on your side in terms of getting to the targets quicker?
It was because the customer signed off on the specification that we agreed when we shipped the tool. So no better or worse specification, just we met the specification and they signed off.
That's right.
Thanks very much.
The next question comes from Mr. Jerome Ramell. Please state your company name followed by your question.
One quick question on UV. Can you update us on the masking picture and petticoat?
Okay. Mask inspection, well, we shipped the 1st EV mask inspection tool through our HMI subsidiary. Mask in itself, as we also showed in the presentation this morning, when you have access, at least we showed we make significant progress on the pellet pole development. So, let's say, pellet poles are now able to be used at the 2 50 watt power level. Lifetime of pellet holes is going up.
We're all moving very nicely into the volume production area. So masks and the mask infrastructure, we don't think is any issue that will prevent our customers to put EUV into volume production in the course of the year.
Okay. And another follow-up on high NA EUV. Some of your potential clients made a comment that they might need to build new fabs to cope with these new tools. Is that the vision you are sharing? The question is, can we eventually use high NA UV in existing fabs or do we have to redesign the fabs?
Thanks.
Well, I think it's similar to the current EUV tool. I mean, when we had 5 years ago, the current EUV tool did not fit into many of the fabs at that moment in time. I mean, it's a better fab height. It's the strength of the floor and It's these are bigger tools. But this is as long as and this is why we have such a coordinated and very detailed interaction with our customers on I and A is also make sure that they understand the full specification sets, not only from a lithography point of view, but also from a logistics and a facility management point of view.
That's been communicated and I hope customers will build new fabs and not only because I and A, because the market is growing and we need more of those devices. I think that was the main reason why we started building new fabs and then take into account that some of the tools are a bit bigger.
Okay. Thank you. The next question comes from Mr. Douglas Smith. Please state your company name followed by your question.
Great quarter, by the way. I noticed that the dry EUV moved up from 20 units to 25 units, Q3 to Q4, but the immersion went from 22 to 20. Is that evidence of the increasing importance of NAND in your portfolio?
No. I think to draw conclusions on the quarter to quarter comparison between Q3 and Q4 is I think you probably shouldn't do that because it could be all kinds of incidental factors, customer specific shipments. But generally, I would say the dry UV systems are going up in numbers going forward because, yes, you are absolutely correct, there is a higher need in the 3 d NAND space. Now it's not only because the 3 d NAND space grows, but it's for different reasons. Once we use stacks of stacks, like I said in my prepared comments, which actually means you need extra little steps to connect those stacks.
That is 1. But also there is there are specific requirements that we need to put to those dry tools because there are peculiarities, I could say, with 3 d NAND manufacturing, which have to do with warped wafers, which have to do with opaque layers, so that the alignment needs to be different. And all those specific visualities of 3 d NAND will be addressed by us by bringing out the tools and options on the tools that will enable our customers to increase their yields and to make sure that they can do effective 3 d NAND production.
Got it. On a kind
of related issue, I was wondering, are you seeing any evidence yet that with the traction of EUV, customers might be planning on ordering fewer Immersion systems, which I guess is kind of the whole point of introducing EUV in the longer term?
Yes. I think what I think is probably best is we look at our Analyst Day of 2016. We gave you a couple of scenarios where high EUV introduction, lower EUV introduction for several reasons. It could be EUV not as effective as we then at that moment in time planned or whether markets were different. And you can actually conclude from those scenarios that higher EUV will lead to somewhat lower immersion tools, but still significant.
And it's logical because it will cannibalize some of the multiple patterning layers. And on the other hand, also layers are growing. So it also there is a dilutive effect in that sense that you have more layers and some of those layers will be the UV layers, will be the immersion layers. And over how you look at it, the number of EUV of immersion systems will still remain significant also with high EUV introduction. So this is I'd like to refer back to that to those four scenarios that we showed in the end of 20 16.
And just to give you the numbers, I mean, these four scenarios, is that anything between 50 80 tools and that right in the middle of that range around 70 is what we're shipping right now. So it's not in no case it is going down significantly.
Right. So it's that you're saying it's too early really to judge the level of cannibalization of EUV to emerge in?
Yes. There will be probably some. I mean, if we now look at a quite a at a good EUV adoption, which is I think is a realistic assumption right now, then yes, there will be some effect on the Immersion tools, but it's not going to be significant.
Thank you very much.
I think, by the way, that if you look at over the lifetime, over a very long period, it's actually not cannibalizing Immersion at all because EUV at one point in without EUV at one point in time, there wouldn't be even new nodes. And if there's a new node, there will also always be layers for immersion. So if you don't get it at a very long period of time, it's actually not cannibalizing at all. It's actually keeping it alive.
Yes, that's a good point.
The next question comes from Mr. Mehdi Hosseini. Please state your company name followed by your question.
Yes, thanks for taking my questions. Mehdi Hosseini from Sasolani International. A couple of follow-up. Peter, how should I think about your DRAM customers that are planning for EUV? Would that take for you to hit that 2,000 wafer per day target before you see a step up in booking activity?
Or is there any other metric that I need to track? Any insight here will be great. And I have a couple of follow ups.
Yes. I think it's another surprise that DRAM devices are more cost sensitive than advanced logic. So it is true that 2,000 wafers per day is we have said it before is a realistic economic productivity target. I think if we meet that target, let's say, on a continuous basis, it's our assessment that that will be a very attractive economic entry point for DRAM. Now how realistic is 2,000 wafers per day?
With everything that we have on the roadmap today, I think it is realistic to be there by the end of the year. So now let's work very hard and execute on it and work very closely together with our customers to get to that point because then, of course, it will be only for a very few layers, but there is a lot of DRAM wafers. So that could give an extra impetus to our EUV story.
Sure. Now I want to reconcile this with light source capacity. How long would it take for ZEISS to add additional capacity? Do you have any flexibility to accelerate investment there or accelerate capacity manufacturing capacity so that your 30 plus target for 2019 could increase. And I'm asking you this because if you're able to increase confidence among your DRAM customers that you can actually do 2,000 wafer per day, wouldn't they need to place a PO before 'nineteen?
And wouldn't some of these EUV shipment would have to take place into DRAM customer by late 'nineteen. So doesn't that create a kind of a double edged sword? And I want to get your view on the kind of levers that you can pull to accommodate these DRAM customers?
Yes. It's you'll make a very elaborate question, and I'll give you a very simple answer. The way that we the lead time to increase capacity at Zeiss has lapsed. I mean, we are where we are today. The only way to get 30 plus and how much the plus is dependent on the cycle time reduction in the factory of ZEISS.
Faster they can do that and the better they can do that, the more liquids squeeze out. Because everything else are long lead on items in terms of capacities, buildings, machines, people, training, the whole thing. That will not happen until 2020, our output to 20 20, which is their output to 2019. So that means we have what we have. And that also means we are very transparent to our customers on
We're
We're very transparent to every customer, and it's up to them to decide whether they want to take up that capacity. And there is very little we can do other than just working very hard with our Zeiss colleagues to keep reducing the cyber tap to squeeze out a few extra. But that's what it is and it's up to the customers to react on the transparency that we will give them. And probably 2 clarifications
just in case I get your question wrong. First of all, you referred to the light source. Of course, the light source is not done that size. It's the optical system. And secondly, you seem to imply that DRAM EUV shipments would start late in 2019.
We are already shipping EUV systems now. So I mean, it will also be in DRAM in high volume manufacturing in 2019, just so that's clear.
Thanks for the correction. Does the elaborate question give me a quick follow-up?
Yes. Because I knew we'd know each other first for such a long time.
Okay. Great. Thank you. You made an interesting point about the EV mass inspection. You said that you have already shipped your first tool.
How should we think about a year or 2 from now? Should we assume that you actually can turn this into a volume production and actually help customers meet the inspection or mask inspection without relying on other vendors?
Well, yes, it's a fully equipped mask inspection tool. So it's an EVM tool that can be used for UV mask inspection. And the more UV is used in terms of layers, the more mask inspection tools are needed. So I think we just are going to deliver that ship in that market. And that, it's what it is.
And I think when we did the HMI acquisition last year, I think we also the year before in 2016, I think we did discuss the opportunity of EB Mask Inspection, it's a couple of €100,000,000 So yes, it is where it is. And I think the success of EUV will, of course, help us also penetrate that market.
Great. Thanks so much.
The next question comes from Ms. Tammy
Kiu from Berenberg. So the first question is on the cycle. I understand that based on your comment, 2018 is likely to be a nice year. I'm just wondering what's your view on 2019? And what kind of could be the end market driver there?
Well, I sold my crystal ball. So I really can't answer this. But it all depends on the end markets. I mean, but just a more high level answer is the proliferation and the penetration of IC devices into almost everything now. It actually makes it more volatile than I think macroeconomic swings.
So if you want to talk about cycles, I think it will be macroeconomic cycles. I said it in the press conference this morning also. But when that happens, I don't know. The only thing is when it happens, we will be able to react up or down and in your case, you seem to be indicating what's the possibility of a downward question. I don't know.
But when it happens, we have all the means and the flexibility to react.
Okay. And the second question is, you talked about the EUV weren't actually limited demand for deep UV. So in general, I would say does that mean equipment have to become more and more expensive for the chipmakers over time? So therefore, they will have to keep by the more expensive and more equipment for making a leading edge node. So I'm not sure how you view this point.
Do you as the equipment maker need to cut the price at certain points so that they don't have to pay crazy CapEx all the time? Or can they actually pass on the incremental CapEx to their customers?
Well, what you're basically asking is, is Moore's Law still viable? Because when I just before the press conference, I bumped into 1 of the really senior ASML employees and he said, this is great where the company is going. I still remember sending out the first invoice for $1,000,000 Now we're selling €120,000,000 tools. So to your point, yes, customers have started to pay a lot more for those tools. But the cost per transistor and the cost per function has continuously gone down on a logarithmic scale.
So, is more so viable? Yes, we believe it's still viable. And yes, our customers will pay higher prices for our machines whereby the cost per function will keep going down.
Okay. Thank you.
The next question will come from Mr. Andrew Gardiner. Please state your
It's Andrew Gardiner from Barclays. We spent quite a bit of time talking about memory this afternoon. I was just wondering if we could spend a minute or 2 on logic. Just in terms of the first on the near term, thinking through 2018 and the sort of shrink or sort of node migration plans in place there, How do you view your sort of visibility into that Logic business this year? I presume it's better or sort of firmer than we see in memory where you seem to be highlighting the potential risk in the back half or at least lack of visibility in the back half.
But how so where's your conviction level or where are customers sort of order rates in terms of the 10, 7 nanometer migrations?
Yes. I think what we have we haven't changed our view as compared to 1 or 2 quarters ago. I mean, the logic 10 nanometer ramp is still going. Actually, to the areas in China, we are shipping 1428. And more importantly, I think what we will see is by the back half of the year, we will start to see EUV going into 7 nanometer pilot production.
This ramp, I think, and also if you look at the comments made by our customers and their assessment of the size of the nodes, there is no reason whatsoever to believe that they that there's an indication that those nodes will actually dwindle in terms of number of wafers that they would need to build that capacity. And on the gold area, I think comments have been made by customers on this on the 7 and 10 nanometer node being very large nodes and seeing a lot of pay bounce. So there is no indication whatsoever to change our view. And like I said earlier, when we look at the memory and the logic business, we see 2018 developing at least at the same level as 2017 for both logic and memory with some upside here and there.
Okay. Thank you. If I just have a quick sort of accounting follow-up for Wolfgang, We're starting to see the sort of the ZEISS investment come through in terms of the equity income line. It was somewhat negative in the 4th quarter. Is there a rough rule of thumb we should be thinking of as we put that in our models for future periods?
Yes. First of all, for everybody, we had 2 agreements with SAES. 1 was a high NA investment agreement and one was an equity agreement. The high NA one obviously goes through our R and D line and also through our balance sheet as it relates to the CapEx. But as it relates to the equity investment, you will see that equity method investment on the balance sheet of about €1,000,000,000 for the 24.9% that we own.
And then you see 2 elements in our financial statements. First of all, you see in the P and L a profit that, that reputed to those 24 point 9%. And therefore, the Q1, you saw a negative $17,000,000 And the second thing that you see is in our cash flow from investing, you see the dividend that's attributed to that investment. And you see that we received a dividend also for a 3 month period of almost €20,000,000 So the dividend is basically since SMT basically distributes their earnings, a very good reflection of the profitability of that business. Now accounting makes this a little bit complicated because you need to do numerous things.
So you start from a very healthy profit and then you start off with number 1, the adjustment from IFRS to U. S. GAAP number 2, you adjust for differences in accounting policies between the companies. But then number 3 is where it really hits you.
Even though it's not an acquisition, you still need
to do purchase price accounting. That means, fair market value. You need to identify HMI, you need to consume that inventory and you need to amortize these intangibles. And that takes your profit all the way to $17,000,000 loss. Now as it relates to the future, this is something that will still be with us for a long time because these intangibles have a lifetime of 15 years plus.
But the inventory part, we will walk through within a year or so. So I think net net for 2018, this will still be a loss. And then in 2019, you will also see a profit on that line and then the depreciation. And the cash, of course, follows the true profit and cash flow of SMT. And from a cash flow perspective, you should see a much, much higher number every year.
Thank you. Wolfgang, wasn't such a quick follow-up, sorry.
Good one to end up. Ladies and gentlemen, we have time for one last question. If you are unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations department with your questions. Now, operator, may we have the last caller, please? The final question will come from Mr.
Robert Sanders.
It's Deutsche Bank. I just had a last question on the EUV backlog. Just in terms of how many of those 28 tools are with the planned 50 watt configuration as opposed to, I think it's 205 of the standard tool? And I have a follow-up. Thanks.
All of them. Yes, there will be even if it's we have the commitment to have all those 2 ultimately to be at 2 50 watt. But so in fact, they're all at the 2 50 watt configuration.
I got it. So all of them will have an extra amount of money to be billed to the customer once you get up to 250 watt because that's beyond the spec, right?
No, because the spec is we need the 250 watt to get 125 waivers. So, when we get over 250, what we get more waivers out there, we get extra money, but 125 waivers is what we sold in that.
Okay. And just last question for Wolfgang. Just on the gross margin in 2018, given what you said about being higher than, I think, 45%, is 45% to 46% a kind of good model number for our models for 2018? % a kind of good model number for our models for 2018? If you can just give a vague range, that would be great.
Thanks. I think we would have not set it up if it
it's only extremely marginal, but I don't want to tie it down to a specific number at this point either. So we'll go through the year. And the more important thing is it will be a good step forward towards the 50 plus in 2020, and that's really what we are hoping. Okay.
Got it. Thank you very much, guys.
You're welcome.
Thank you. Thank you, Rob.
Now on behalf of ASML Board of Management, I would like to thank you all for joining us today. Operator, if you could formally conclude the call, I'd appreciate it. Thank you.
Of course, sir. Ladies and gentlemen, this concludes the ASML 2017 4th quarter and annual financial results conference call. Thank you for participating. You may now disconnect.