Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2017 Third Quarter Financial Results Conference Call on October 18, 2017. Throughout today's introduction, all participants will be in a listen only mode. After Exelon'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.
Greg De Jong. Go ahead, please, sir.
Thank you, Peter. Good afternoon and good morning, ladies and gentlemen. This is Craig De Jong, Vice President of Investor Relations at ASML. Joining me today from ASML Headquarters in Veldhoven, The Netherlands is ASML's CEO, Peter Wenig and ASML's CFO, Wolfgang Nickkel. The subject of today's call is ASML's 2017 Q3 results.
The length of this call will be 60 minutes and questions will be taken in the order that they are received. This call is also being broadcast live over the Internet at asml.com, and 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 security 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 and in ASML's annual report on Form 20 up and other documents as filed with the Securities and Exchange Commission.
With that, I'd like to turn the call over to Peter Wenig for a brief introduction. Peter?
Thank you, Craig. Good morning, good afternoon, ladies and gentlemen, and thank you for joining us for our Q3 results conference call. Before we begin the Q and A session, Wolfgang and I would like to provide an overview and some commentary on the recent quarter as well as provide our view of the coming quarters. Wolfgang will start with a review of our Q3 financial performance with added comments on our short term outlook. Then I will complete the introduction with some additional comments on the current business environment and on our future business outlook.
Wolfgang, if you will?
Thank you, Peter, and welcome, everyone. I would like to first highlight some of the Q1 financial accomplishments and then provide our view for the coming quarter. Q3 net sales exceeded our guidance coming in at €2,450,000,000 partially due to the revenue and was more than €400,000,000 higher than in and was more than €400,000,000 higher than in Q2. Installed base management revenue for the quarter came in €628,000,000 slightly above our expectations. Our gross margin for the quarter came in at 42.9%.
Gross margin was diluted by the additional EUV revenue recognized, but compensated by higher than expected CUV and holistic lithography sales. Overall OpEx came in slightly below guidance with R and D expenses at €315,000,000 SG and A expenses at €103,000,000 Turning to the balance sheet. Quarter over quarter cash, cash equivalents and short term investments came in at €2,680,000,000 As highlighted during our July call, we resumed share buybacks in Q3. During the quarter, we purchased €169,000,000 worth of shares. Since January 2016, we have purchased total of approximately 6,000,000 shares with a value of €569,000,000 against our 2016 2017 authorization of €1,500,000,000 Moving to the order book.
The 3 system bookings came in at €2,150,000,000 The growth in the Immersion and KRF order intake is an indication of the strength of our EUV business. Last quarter strong bookings were driven by the memory sector which represented 77% of orders compared to 40% in Q2. Our EUV backlog now reflects 23 systems valued at €2,600,000,000 As for EUV orders, we are working closely with our customers to understand the EUV demand through 2020 and use this as the basis for our shipment planning. Actual order intake is always lumpy and we do expect to take additional orders in Q4. Our overall system backlog now totals a record €5,690,000,000 With that, I would like to turn to our expectations and guidance for the Q4 of 2017.
We expect continuing sales strength in Q4 with total net sales of around €2,100,000,000 While we target to ship 6 NXE 3400s in the December quarter, we expect revenue recognition of about €300,000,000 for our UV business. We expect our Q4 installed base management revenue to come in around €600,000,000 This revenue guidance for Q4 brings our total revenue expectation for 2017 to approximately €8,600,000,000 which reflects a greater than 25% year on year increase. Installed base revenue will account for almost €2,700,000,000 for the year, also reflecting a 25% increase. Total EUV revenue for 2017 will be around €1,000,000,000 which represents more than 2.5 times the 2016 level. Gross margin for Q4 is expected to be around 44%.
R and D expenses for Q4 will be about €315,000,000 and SG and A is expected to come in at about €110,000,000 With this guidance for Q4, our total operating income for the year is expected to exceed €2,250,000,000 reflecting a greater than 35% year on year increase. With that, I would like to turn the call back over to you, Peter. Thank you, Ofer.
As Wolfgang highlighted, our business continues to perform very well and demand for our products is very strong. Based on our guidance for the upcoming quarter, we expect to deliver another record year with net sales growth of at least 25% over 2016. Positive industry environment across multiple end market segments continues to fuel strong demand for our products as we move into 2018. While Wolfgang reviewed our current performance and outlook for the coming quarter, I would like to provide some commentary on the longer term outlook of our market drivers followed by an update on the progress and plans for our product groups. This year's memory strength will translate into a record memory revenue year for us.
This in combination with our strong memory backlog seems to serve as a solid foundation for further growth into 2018. As our customers further migrate next year to the sub-twenty nanometer DRAM nodes, we benefit from a significantly increasing we benefit from a significantly increasing little intensity for those nodes driving little intensity up over 30%. Additionally, we do not see significant near term completion of new DRAM fabs. This is amidst a healthy mid-20s DRAM bit demand growth scenario largely driven by demand for performance memory in the service space. All in all, a strong basis for our 2018 DRAM business.
In 3 d NAND, little demand is also strong with a number of greenfield fabs ramping. Current greenfield fabs take approximately 10% more litho spend than the previous 2 d NAND fabs. As this technology scales vertically, there are challenges in building these very tall stacks. In response, some NAND memory manufacturers are implementing so called stacks of stacks where every new stack needs additional little, driving little intensity up by another 20%. When adding the NAND opportunity the DRAM business outlook for next year, we can see another strong memory year ahead of us.
Logic demand remained solid, driven by the continued ramp of 10 nanometer as well as the start of the 7 nanometer node. Litho intensity continues to increase as we migrate to future nodes and further strengthens with the adoption of EUV at 7 nanometer. As expensive multiple patterning schemes keep driving up the cost of every new node, EUV provides process simplification, cycle time reductions and yield improvement ultimately resulting in customer cost benefits which clearly explains their stated desire to introduce EUV for their next nodes. With regards to China, we continue to see revenue increase throughout the year and are on pace to set a new record net revenue from this region in 2017. This trend of increasing sales to the Chinese region will continue in 2018 as we see strong demand from multiple customers building out fabs in China including additional system orders from new domestic Chinese customers.
We expect to see a number of new customers starting pilot ramps next year and are further expanding our customer support footprint in order to meet the future significant demand growth in this region. As we mentioned last quarter, we estimate the initial lithography opportunity on these new domestic Chinese customers to be around €3,000,000,000 over the next few years. On the ASML product side, let me start with an update of our EUV business. In EUV, availability continues to make progress in both average performance as well as reducing variation. In addition to delivering 0 defect pellicles, we also demonstrated the capability of these pellicles to withstand 2 50 watts of power in support of 125 wafers per hour and beyond targets.
We continue to work closely with our customers to align on their EUV demand plans and the required timing of tool shipments. Supporting our customers' delivery timing requirements depends predominantly on the ramp up speed of our supply chain, specifically optics. Warm lead time for EUV systems combined with the inherent fluctuations of our customers' ramp plans also significant planning challenges. To address these challenges, we continue to work intensely with our supply chain to bring the lead times for EUV down from 24 to 18 months. Taking all of the aforementioned into account, we currently have a production plan of 20 EUV systems next year, at least 30 in 2019 and 40 plus in 2020.
Also in support of EUV production implementation, we shipped the 1st e beam EUV reticle inspection tool, the EXPLORER 6,000, a logic foundry customer. This system enables improved defect detection as optical inspection has resolution challenges on EUV reticles. In DUV, we see continued revenue growth across the product lines driven by Immersion and KREF technology. We provided early access to our latest TwinScan NHT2000 Immersion System for initial development of the 5 nanometer node. This new system features several hardware innovations that deliver improved imaging and overlay performance in support of aggressive matched machine overlay to EUV which is required for future nodes.
The very high demand for our immersion systems equals the fastest ramp of our NSP platform industry as we shipped the 100 NSP-nineteen eighty system in Q3. Strong demand for our KRF products is across multiple market segments, but primarily driven by 3 d NAND. In holistic lithography, we shipped our 1st jointly developed product less than 1 year after closing of the HMI acquisition. This product, the EPRM5 is a patent fidelity metrology system that leverages HMI's high resolution e beam metrology with ASML's computational lithography technology. This product's high resolution capability enables a high capture rate of systematic patterning defects so customers can accelerate their yield learning curves and drive higher production yields.
This integrated system enables the 1st ever guided metrology delivering faster effective throughput in support of volume production. In summary, with demand growth continuing across our entire product portfolio and we expect another record year, at least 25% revenue growth largely driven by continued strength of memory demand alongside solid logic demand. Although it's too early to fully quantify 2018, our current view is that the positive business trends that we're seeing in 2017 will continue in 2018. With that, we'll be happy to take your questions.
Thanks, Peter. Ladies and gentlemen, the operator will instruct you momentarily on the protocol for the Q and A session. But 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 in as possible. Now Peter, could you have your final instructions and then the first question, please?
First question comes from Mr. Dave Mulholland.
Hi. Thanks for taking the question. Just firstly, I think one of the interesting comments you made on the 3 d NAND shifting to customer stacking. I wonder if you could just help us to understand how broadly you see that happening throughout the customer base in 3 d NAND? Is it selectively or all of your customers moving towards that trend?
And then secondly, on EUV, just one quick update as a follow-up, if you could. I think on the last call, you mentioned there was potentially going to be €500,000,000 of revenue to be called up or unrecognized at the end of this year. Is that still the case? And could you help us understand when we
should expect that to be recognized into 2018? Yes. I'll answer the first one. I'll give the second question to you, Walter. Yes.
The 3 d NAND, how broadly do we see that? We see that with a few customers, not with all of them. But what we understand is that customers have similar issues. Now you can always argue at what level of stacks do they encounter those issues and that might be different from customer to customer. But I think it's our belief based on the feedback that we get from customers that ultimately they will all have to get to some kind of a stack of stack approach.
But it has started. It has started not with all of them, but with a few customers.
Yes. And Dave, on the deferred revenue and EV, you're correct. Same thing what we said last quarter. We will carry a significant deferred revenue balance into next year, which means that our total revenue for next year will be higher than what the 20 shipments that we have planned. And of course, the 4 upgrades that we also still plan to do.
So the total revenue will include some of that deferred revenue and there will be a little bit of revenue deferred of the 20 systems, but the majority will be recognized. Therefore, we continue to say that for next year, she should use planning assumption of around $2,500,000,000 for total year over year revenue.
And if I may just quickly follow-up
on the
profitability of the Faroe, is that still quite dilutive on what you're recognizing for the 3 tools in Q4? And then is it very profitable next year? Or is there less difference in the
deferral this time around? It's very different by different line items, but for your planning purposes, just assume the same profitability.
That's great. Thanks very much.
The next question comes from Mr. Farhan Ahmad. Please state your company name followed by your question.
Farhan Ahmad from Credit Suisse. Thanks for taking my question. My question is on the memory. You're seeing very strong orders in Q3. And I just want to understand what's the sustainability in that business?
And is there any concern that there might be too much additions? And if you can give some color on how much of it is new capacity versus just conversions that will be helpful.
The answer on the new capacity is a difficult one, like I said. Let me first answer your first question on the sustainability. On DRAM, like I said in my prepared remarks, there are no significant new fab plants that will take tools in 2018, so next year. So in other words, in terms of new fab capacity, it will be pretty limited what you will see in terms of wafers out in 2018 which actually means that the bit demand which is currently around the mid-20s needs to come from shrink from innovation which actually happens. I mean there's a lot of innovation happening in DRAM.
So we go sub-twenty nanometer and that will provide those bits at least that is what the expectation is. And I would support that. I mean that the innovation drive should be sufficient to deal with the demand, but it would be no relief. On 3 d NAND, a lot of greenfield taps. And that means that there's a lot of shipments to those greenfield fabs.
Now when we look the forecasted bit growth in NAND, this is really where the big question is whether that bit growth is going to be able to absorb all that new capacity in 2018. We don't know yet. I mean we've currently we've been suppliers also this year about a bit stronger bid demand growth than we originally anticipated. That's where probably a bit of a question is, probably too early to answer. But all our memory customers they indicate that also on 3 d NAND they see significant bit growth next year from a demand side.
So if anything, if you would want to raise a question on sustainability, start asking our customers on what they believe, how much capacity is now added or will be added in 2018 and what they think about the demand situation. And the demand situation of course we are further away from that, so it's more difficult for us to give you an answer in that direction. Now what is new capacity? Well, I actually answered. I said new capacity is a lot of new capacity is being added in the 3 d NAND space, not a lot of new capacity in the DRAM space.
But all in all, if we look like I said in my prepared remarks, what the drivers are very much the end drivers as customers tell us are server markets are the markets for the take up of the new three d NAND products all looks very healthy and customers are very upbeat is also evidenced by the intake in our order book in Q3.
Thank you. And then a quick question on EUV. Can you just remind us what are the main bottlenecks that you have in terms of the supply chain which you are working on? Yes.
The main bottlenecks as I mentioned also in my prepared remarks are the lenses, the optics. And the optics are the gating item right and right now. So we're working very hard with Zeiss to make sure that we can get a bit more output. But as we currently see it, I mean we've mentioned in all the numbers, which are about 20 for next year at least 30 for 2019 and 40 plus for 2020. That is what our current planning is.
But we also have started to run programs with our supply chain to shorten the lead time and to shorten the cycle time in their factory. So the total lead time for EUV can come down from 24 to our target by 2019 of around 18 months. So we're working hard, but it's currently OpEx.
Thank you. That's all I have.
The next question comes from Mr. C. J. Mills. Please state your company name followed by your question.
Yes, good afternoon. CJ Muse with Evercore ISI. Thanks for taking my question. I guess first question on the EUV front and specifically to memory, can you provide an update on where we are in terms of DRAM adoption at 1Y? And as part of that, are you including meaningful number of tool shipments in your 30 shipment outlook for calendar 2019?
On memory specific?
Yes, just DRAM specific, yes. Yes, I think we don't single out the DRAM memory customer customers in 20 10, 19 would be that would be not wise to do that because it would pinpoint to specific customers and we will not do that. But for EUV memory DRAM the adoption is currently target the initial adoption is currently target the end of next year. So that means the drivers for that are of course the productivity of the tool, but those targets are in our roadmaps. So that would mean initial adoption for initial production at the end of 2018 going into 2019 in that timeframe.
Very helpful. And I guess
as my follow-up, Wolfgang, can you talk about gross margin trajectory for EUV as well as the entirety of the company? I think you talked about 20%, if my memory serves me right, for calendar 2018. I'm curious, does that include the benefit of deferred revenues in the mix? And then as a second part to that, when do you think at high volume, call it 6, 7, 8 EUV tools per quarter, can you get to kind of a 45 plus percent gross margin overall?
Okay. CJ, our plan stands as we have communicated it before. The target is to get to close to breakeven or breakeven this year. And that includes everything, all the numbers like if you include everything, includes service, it includes all the it includes the systems, it includes the deferred revenue rollover. And then for 2018, we're targeting 20%.
And our objective for 2020 is 40%. So we haven't quite spelled out 45% yet. We have also said that 40% is not the end of the road. If you look at our other businesses, they return more than 40% gross margin. But that would always include the deferred pieces as well.
So breakeven this year, 2018, 40 in 2020 2019, somewhere in between 2020.
Very helpful. Thank you. You're welcome.
The next question comes from Mr. Mehdi Hosseini. Please state your company name followed by your question.
Thanks for taking my question. The first one has to do with your EUV manufacturing. What would be your shipment forecast if your manufacturing cycle time is actually being reduced to 18 months? Specifically, where would the 3040 plus unit in '19 2020 would go to?
That's a good question. It's an interesting question. And I think what we can say is that the customer demand that we're seeing for 2019 is in excess of that 30. Now we can just add it all up and then think about 2 years ahead and what customers indicate to us. That is, I would say, decently above that 30% number and decently means that it's at least 30% from that number.
But how much it in fact would be in 2019 is a bit difficult because it is still 2 years out. So but what we're currently seeing is that would be about 30% higher than the number that we quoted you.
Got it. And then it's been a few quarters since you have broken out the metrology inspection. Maybe this is more for Wolfgang. Can you help us how should we think about revenue contribution in 2017? And where would it go into 2018?
Is there any parameters or any metrics that you can offer us so we could better model this?
Yes, I mean the one thing that we have been clear on is a good chunk of that is of course the newly acquired HMI business. And there we said that revenue this year will significantly increase almost double albeit from a relatively low level last year. So it will be somewhere in the 220, 230, somewhere in that range. And then that business will continue to strongly grow next year based also on the Explorer product and the EPSM5 product that Peter had in his introductory remarks. It's a little bit too early to put a number in, but it's a significant step up, all in support of a business that is going to be around $1,000,000,000 in 2020.
I think what I was trying to get at is, if there are 2 buckets EUV and DUV, which one of these 2 buckets or factors are going to be critical in sustaining the growth and hitting that €1,000,000,000 revenue target in 2020?
It's not that easily to tie it to one or the other. It has to do with the total production process and the total development process of our customers. So we don't look at it this way. We just look at it as a total infection and metrology business.
Got it. Thank you.
The next question comes from Mr. Jagadish Iyer. Please state your Iyer.
Samit, Redstone Partners. Two questions, Peter. First on the in terms of the patent fidelity metrology that you provided, how big can the market be? And can you clarify in terms of the adoption between foundry logic as well as memory customers? And then I have a brief follow-up.
Yes. On the last question, it's it is predominantly being used initially, I would say initially, biologic, yes, because that's where the biggest challenges are because of the more random patterns that you will see there. So that will be the first area where you would see the introduction. But as we've seen with all these solutions that ultimately provide customers with more certainty what happens on the wafer and gives them the ability to make changes so that they can really manage yield. That also crosses over to the memory products also.
We've seen the same with YieldStar that started in logic and it also moves now over into the memory space. And how big is that market? Well, it's a good question because we actually it's a product for which a market does not exist yet This is a product that actually or the patent fidelity metrology where you have where you use the predictive capability to actually manage yield through the scanner is a completely new area. So we have our ideas of what it can mean, But and we think it can create has a lot of
value if you will.
If you look at the first PFM, the patent fidelity tool, metrology tool that we're shipping this year, which we're shipping a few, but the first one we did in Q3, I mean that has a high level of interest with our logic customers. So how big is the market? Depends on the value that we're going to provide. We have high hopes and expectations, but that needs to be basically worked out together with the customer because that really you really show the value on the waiver. So that is that jury is still a bit out, but we have high hopes and because it provides a feedback and feed forward look that nobody else does.
Okay. Thanks for that. And just as a follow-up, you had
an e beam inspection product rollout for
this EUV mask. When do you see the insertion mask.
When do you
see the insertion point for
this product? What time frame?
And where do you see that ramping
through 2020 beyond? Thank you.
Well, I think it's
we see that ramping at the same time as we ramp EUV. I mean you need EUV masks, you need the inspection of EUV masks. So that's why we are shipping the first tools now. So those will not go into volume production because volume production really initially starts at the end of next year, of course of next year in going into 2019. So this is the time frame where you also need to see the ramp of this product.
Thank you.
Next question comes from Andrew Gardiner. Please state your company name followed by your question.
Good afternoon, gentlemen. It's Andrew Gardiner from Barclays. I just had a couple of modeling questions for you, Wolfgang. Just as we sit here towards the end of 2017, I was just wondering if you could start
to give us a bit more
of a steer on some of the OpEx items in 2018, particularly around R and D. You guys have been pretty consistent this year at about $315,000,000 a quarter. Just interested how to sort of how that might step up, particularly when we consider the contribution to ZEISS next year? And also likewise on capital spending, particularly as you're continuing to fit out for the EUV ramp? And then finally, just do you have any thoughts on tax?
I know some of the tax proposal by the coalition government in Holland not yet sort of finalized, but have you guys looked at how that might impact your ongoing tax rate? Thanks very much. Hello, Andrew. OpEx first, let's
start with SG and A. SG and A should grow only very modestly. I mean, we have very few variable pieces in there, but we invest bit in sales, we invest a bit in HR and a little bit in IT systems. But I think that will be growing at a much lower rate than the revenue and will stay around that 110 rate probably a little bit up. If you look and our objective there for 2020 is 4% of revenue.
For R and D,
we are going to
add up to 1.25% or 1.26% for this year, which is based on our revenue guidance now with the 4th quarter, somewhere just shy of 15%. And if you contrast that 2014, 2015, 2016, it was 2018, 2017, 2016, respectively. Now we're around 15%. We will spend more in absolute terms next year, exactly for the reasons that you mentioned. High NA both on our premises, but then also on Dice S&T's premises.
And then we do continue to invest strongly also in the holistic lithography field. We're actually accelerating investments there. A bit too early to give a number, it will be up, but I think it will be 14%. So it will be up in absolute terms. It will come down in relative terms towards our target of 13% in 2020.
CapEx, we are not that super CapEx intense ourselves. We spent around €200,000,000 for the 1st 9 months. We usually don't guide that, but assume that we're getting out somewhere between 270, percent, 280 percent. The last 3 years were somewhere between 310 percent and 370 percent. So this year will be around 3% only of revenue.
Our long term model is 4%, and there you should expect it to come up a little bit over the next 2 or 3 years, but not beyond the 4%, I think, that we have in the 2020 model. And that is indeed to prepare the site for high NA prototypes and high and A manufacturing later on. Tax rate model is 14%. The Innovation Box negotiations have been going very well. We're in the documentation phase.
So we have a principal agreement when the documentation phase that very well supports our 14% model. As it relates to the outcome of the coalition negotiations here in the Netherlands, there is no law yet, that's just a proposal. But if that comes through, the benefit of the innovation box will reduce slightly without going into the technical details, will reduce slightly, but it's accompanied with a reduction in the corporate tax rate. So, both are literally offsetting to each other. There may be a slight timing difference that the reduction of the benefit comes earlier than the reduction of the corporate tax rate.
But I think that will not be a significant impact on the 14% in Marland Group.
Rule. The next question comes from Mr. Francois Meunier. Please state your company name followed by your question.
Yes, thanks. Yes, my question is regarding the ecosystem of EUV. In your opening remarks, you talked about the Pelican withstanding 2 50 watts EUV beam, which is really good. Hopefully, it doesn't get too dark too quickly.
If you could give
us a bit of an update regarding the other elements of the ecosystem like the photoresist, the mask manufacturing, but also maybe more long term, the Actinic mask inspection tool that we've been waiting for a very long time now?
Yes. To start with your last comment, the Actinic inspection tool is not an issue where we are today. I don't think it's going to be an issue for the 7 nanometer ramp either. I mean, we're going to do patent inspection. So you basically print the photomask and you inspect the pattern on repeatable defects and then you can know where it is on the photo mask and you inspect the photo mask with e beam preferably and then you can do the correction.
So masks, I think we have all the solutions that we can think of for the 7 nanometer nanometer introduction. Photoresist actually makes a good progress and especially on the sensitivity side. I mean we're seeing continuous numbers coming back out of the industry and industry participants on sensitivity of the photoresist, which is good because the more sensitive the photoresist is, the faster you can move the wafer the higher the throughput. So, at the petals you just mentioned, petals being able to withstand 250 watt of EUV power is very good. So I think it all I think from an ecosystem point of view, all those elements are increasingly coming to a phase where you can call them mass production ready.
That's great. Thank you.
The next question comes from Mr. Sandeep Deshpande. Please state your company name followed by your question. Yes. Hi, JPMorgan.
My
question is regarding DRAM, Peter. I mean, DRAM is possibly likely to use EUV in 2019. But I mean there haven't been new DRAM fabs built in the last virtually, virtually in the last decade with DRAM capacity having been converted to NAND, etcetera. Do you see that to actually for the footprint of the EUV tool, etcetera, that to get the EUV tool into DRAM fabs, that do you need actually new DRAM capacity to be built or based on what your field application engineers know already that these existing fabs can be actually upgraded to EUV once the conversion starts? And how quick do you expect a memory DRAM conversion to happen?
And I have one quick follow-up after that.
Yes. I think on the first shipment to DRAM fabs will be to existing fabs. So we don't need to build new fabs to house in EUV-two. However, if you say we're going to use EUV more broadly and widely in DRAM in the next decade, I'm pretty sure it's going to be fast built that can accommodate larger number of EUV tools. Now as a matter of fact, when you said the last decade, no new DRAM fabs.
I may remind you that we had in Korea L17 and M14 which were completely new fabs which actually are very large fabs that actually drove up the available capacity couple of years ago, 3, 4 years ago to quite significant heights, which I think also led to a oversupply of DRAM at that time. Well, that's not happening today. We're not seeing the announcements of any major new DRAM fab. So that means that the EUV tools that we will be shipping will be shipping to existing fabs that we'll be able to take.
And quickly following up, I mean, you've taken a stake now in Kaesai and how Zeiss and then there is going to be outgoing payments from you regarding funding their CapEx plans for high NA as well as the R and D for high NA?
Okay. I'll take that, Sandeep. If you recall, we have entered into 2 separate contracts. We have an equity investment and then we have an high NA agreement. The equity investment is a $1,000,000,000 for 24.9 percent.
That is already showing on the line equity investments. If you look to our U. S. GAAP statement, you already see that there. And that will show a P and L contribution from Carl Zeiss's profit to us.
So there's basically 24.9 percent of the profit is going to show in our P and L. It will show for the first time in Q4. So you see the investment already, but you don't see any contribution in Q3. And that simply has to do with our close process being faster than SMT's close process. So the accounting rules allow us there to do a 3 month offset.
And for Q2, we only really had 4 days. So we didn't order to put that in Q3 because it's not material. We will walk you through the math on how that profit will show up in our P and L because it wouldn't be accounting if it would be easy because we'll have to do a lot of adjustments here. First of all, they are IFRS. We have to translate that into U.
S. GAAP. Believe it or not, the 24.9%, you need to do like a mini purchase price allocation. So there will be some amortization of intangibles, write up of inventories, all the good stuff that you know. So it will be slightly convoluted at the beginning, but the end result and from a cash perspective, SMT is a very, very healthy profitable business and we'll get solid returns on our investment there.
As it relates to the high NA agreement, we will make R and D contributions and we will make CapEx contributions. The R and D contributions will show up in our R and D line. Again, it gets complicated. Some of it has to go through the equity piece because we are partial owner as well. But the CapEx piece will be recorded on our assets, PP and E, prepayments.
And as a reminder, there, the return on our investment other than getting a high and a tool is that we get these investments back through adjustments to the price of the lenses later on when we take delivery of the lenses. That's similar to what we have done previously with our parcel there. So right now, you have just R and D in there, a couple of prepayments and the investment. And then starting next quarter, you'll have some of the profits in there as well. And we'll walk you through in more detail in January.
Thanks, Volker. You're welcome.
The next question comes from Mr. Aditya Mituku. Please state your company name followed by your question.
Yes. Good afternoon, guys. It's Bank of America Merrill Lynch. So I have a firstly, a quick question on EUV gross margins in the 3rd quarter. Maybe if you could give us some color around that and if you still expect EUV to be at a breakeven level this year, given you are deferring a lot more revenue EUV revenues than you were expecting to defer at the end of the last quarter?
And secondly, just as a follow-up, if you could give us some color on what drove these deferrals? Last quarter, I was thinking you'd be doing around €1,100,000,000 in EUV revenues and now it looks like it's going to be a bit lower than that? Thank you.
Yes. So first of all, objective is
still to get the call out of the year to break breakeven level. And then like we said 20% of next year, 40% in 2020. We've always said we will be above €1,000,000,000 I think at the beginning of the year we said $1,222,000,000 It always depends on which customer do you ship to and when do you ship. I mean admittedly the 12 shipments this year are back end loaded. And from that perspective, a little bit more goes into next year.
Deferrals in general are driven multiple different items. I mean, it could be that you have a new component in the system, which you can demonstrate in your factory, but you have to replicate in the customer factory to take full revenue. And that is the main reason why the revenue this year came down. We have made an adjustment to some systems. It's not a performance adjustment, it's a maintainability adjustment, which is good news because it will help us down the road with service profitability, which if you recall is a main contributor to get to the 14%.
But since it's a new feature, we cannot go straight to what we achieved last year, revenue recognition at shipment. We got a replicate it at what we call SOT, which is the site acceptance test at the customer. So it's a little bit deferred. That's the difference from the beginning of the year, but it's good news. I think the rest we said earlier, we have a deferred balance that we will start netting into the number in 2018.
Very clear. Just a quick clarification on the R and D next year. Did I hear you correctly? Did you say it was going to be 14% of revenues? Yes.
Yes, I said this year is around 15%, next year will be around 14%. So it will go up in absolute terms. But right now, if you model 14%, you should be okay.
This year, it's I mean, looking at it so far, it looks like it's more around 13.5%, not 15%, unless I'm actually, ignore me. That's fine. Thank you. Sorry, apologies.
We made progress,
Next question comes from Mr. Weston Twigg.
I
I had a couple of questions. First, just on the uptick in IBM revenue.
I was wondering if that
was more EUV revenue recognition related or you're seeing a pickup in the 10 nanometer ramp? And is that increase in demand level sustainable moving forward?
Mainly driven by 10 nanometer, but there was a system shift there as well in EUV for the full list.
Okay. Thanks. And then as a follow-up, the installed base revenue is coming down quite a bit in the second half from the first half. Just wondering if you can help us understand what kind of growth you expect in 2018 on that line item?
Yes. I don't think they were going to do that detail probably in general on 2018. There have been a lot of questions there as well lately. It can't be a there as well lately. Can't be completely quantitative on this right now, but I think we can give you a few pieces that help you form an opinion and certainly don't want to go down to a customer level here.
But we already talked about EUV. We get to $1,000,000,000 this year and then we get to $2,500,000,000 next year. So that's $1,500,000,000 increase. You will have seen an extremely strong installed base revenue this year. I mean, we're going to almost $2,700,000,000 which is up 25%.
And if you recall, we said in our longer term trajectory, we see that business going up in average by 10%. Of course, the service part of it is a pretty stable growth. That's a function of the installed base. But then the options and upgrades are a little bit more volatile. But I would right now assume that that business is flat to slightly up next year.
And then for the rest of the business, the combination of EUV, Holistic, in memory and in logic, we had experienced an extremely strong year, an extremely strong year this year. And we see 2018 at approximately the same level. And there's a bit of evidence there also when you look at our backlog, it was $5,700,000,000 in backlog. And even though we don't guide to backlog, I think the Street expectation was about just over $1,000,000,000 in new orders for last quarter, and we took almost twice as much, dollars 2,100,000,000 So I think without going into customer details, but you should expect another very strong 2018 from
That's very helpful. Thank you.
The next question comes from Mr. Douglas Smith. Please state your company name followed by your question. Yes. It's Doug Smith from Agency Partners.
Wolfgang, I was wondering if you could perhaps give us an approximate down of the R and D spend between EUV, metrology and inspection and
roughly you see about half of that being spent on BUV. I don't know how far we have gone, but then on the other half, you have good chunk of what I would call fundamental research that benefits all businesses. And then but it's less than $100,000,000 and then the balance of $500,000,000 is all the way towards the EUV. But from a directional perspective, we're still investing by the way because we still have significant innovation. You heard about the 2,000 coming out for instance now with us having upgraded the field system to 2,000 level.
But the rest is a bit more overweight to deep UV, which over the next couple of years will start to come down, but
pretty close to the anniversary of the analyst meeting last year where you provided a 2020 model update. I was wondering when would you expect to update that again? A lot of other companies have provided some 2020 models based on an upwardly revised WFE market.
Yes, I mean, we haven't scheduled that yet, but we did 1 in 2014, we did 1 in 2016. So it's probably a good assumption that somewhere in 2018, we're going to do one. I think we gave you quite a bit to work with because we pinpointed at $11,000,000,000 revenue, but we gave some sensitivities both around the market vector and the UV intensity vector and we're not updating this today. But I think what you can say is that the EUV adoption is well underway and the lay accounts are not on the low end as we talked before. And also, if anything, the market is very enthusiastic about end demand.
So without updating it today, I think the probability on the low, low or the lower combination has gone down since the year. But expect we haven't picked the date yet, but I would say somewhere next year we're going to do a session.
If I may add, Doug, I think we actually gave you also at the Analyst Day last year a few scenarios and Wolfgang alluded to it that you could argue that the let's say low scenario has become less likely. But I think you guys looking at where the market is, I think we gave you enough information to just pick whatever you feel is more appropriate right and right now. I think an update on that model is really something we will do next year. We don't think you have enough to work with. And by the way, we've started to talk about 2022 years ago.
I think it's good that we have some followers now, but no reason for us to come out with something different. May I remind you of the fact that a year, 1.5 years ago people were saying we were way too optimistic on our 2020 targets and now people seem to indicate that we're too pessimistic on that target. We just stay very consistent on what we've said and I think we've given you enough to work with to the upside if you believe in that.
That's very true. And that's quite correct. Okay. Thanks a lot. The next question comes from Mr.
Amit Auchandani. Please state your company name followed by your question.
Hello, everyone. Amit Arshundani from Citi, and thanks for taking my question. I really wanted to touch upon the topic of high NA EUV. Given the enthusiasm and the strong progress you have made around EUV, how are your conversations happening right now with your customers? What kind of traction or commitment are they showing towards high NA EUV?
Do they want you to accelerate adoption? If so, what would make you do that? And also, what would that mean in terms of the supply chain besides the Zaius deal that you've already carried out? Very keen to understand how the thought process is right now around high NA EUV adoption. Thank you.
Yes. I think it's a very good question. I think in the latest discussions we've had with customers, there is no doubt they see the benefit of EUV full stop. Now the question is about timing. And then we do see that from a timing point of view, there are some different requirements from customers from when they want to have the first tool.
Now some of those customers would indicate and we have some pretty decent and deep discussions with them on what we could do then. So those customers indicated they would like to have this capability rather sooner than later. And if that would mean that we would have to set up an accelerated program, that actually means that we will also ask our customers to commit also in the acceleration and the cost of that acceleration and that will be I think a precondition for us to accelerate. Now this is the level of discussion that we are having today. Now in and I think and it's not superficial.
Those are pretty deep and discussions and we're pretty clear also on what it would take to accelerate and what our commitments from the customers how that would have to look like, which by the way we haven't reached an agreement yet, so just for your information. Now on the supply side, the gating item here is really the new optics. The optics that comes from Zeiss, this is exactly why we did what Wolfgang explained earlier with the investment in Zeiss, we signed the R and D and the CapEx program. That's the gating item. Don't forget from an EUV source point of view, the EUV high NA tool will have the same EUV source, no source difference.
The tool will be bigger, but we know how to deal with that. The real challenge is in the optics and this is why we have started to go into this agreement with Carl Zeiss. I would say that from this point onwards and from this moment onwards that's really the gating item in the supply chain.
Thank you, Peter. And just maybe as an unrelated follow-up, you obviously had no EUV orders in this quarter, but I understand that you work on a commitment basis. Happened. But at what stage does it become a balance sheet risk and you say, okay, we really need these orders, otherwise we cannot just keep on working based on the conversation? Is there some kind of limitation or some hard line?
I guess, where it's coming from is what's the minimum level of orders I would need to see next quarter in order to ensure you're to still end up shipping 30 or at least 30 shipments in 2019?
Well, I think what you would then need to see is that 2018 is booked and the first part of 2019 also. And like I said, we're also working closely with our supply chain to get some of the cycle times down. And actually that should result over the next couple of quarters into at least a lead time reduction. Don't forget, I mean, the order pressure is really driven by the fact that we have a 24 month lead time in total, which is of course very, very long if you look at the planning process of our customers. So but I have no worry that we will be at that point where we close out 2018 and moving nicely into 2019 also in the as a result of the order intake in Q4.
Thank you for the clarification, Peter. Thank you for the questions.
Ladies and gentlemen, with that, we've run out of time. If you are unable to get on the call and still have a question, feel free to contact the ASML Investor Relations department with your question. And with that, I'd like to say it's been my great pleasure to host 60 or so of these quarterly conference calls over the last many years. But with this call, it will be my last. As previously shared, I will be turning over my Global IR management responsibilities with this quarter's results to Skip Miller, and therefore, you'll be hearing his voice instead of mine each quarter going forward.
With that, I'd like to thank you for your mostly strict adherence to my call instructions and your kind patience in any safe harbor references I might have made over these many years. Now on behalf of ASML's Board of Management, I'd like to thank you all for joining us today. Peter, if you
could formally conclude the call, I'd appreciate it. Sure. Ladies and gentlemen, this concludes the ASML 2017 Q3 financial results conference call. Thank you for participating. You may now disconnect your line.
Thank you.