Ladies and gentlemen, thank you for standing by. Welcome to ASML 20 17 Second Quarter Financial Results Conference Call on July 19, 2017. I would now like to turn the conference call over to Mr. Greg Young. Please go ahead, sir.
Thank you, Peter. Good afternoon and good morning, ladies and gentlemen. This is Greg De Jong, Vice President of Investor Relations here at ASML. Joining me today, as always, from our headquarters here in Beldhoven, the Netherlands is our CEO, Peter Wenig and our CFO, Wolfgang Nickl. As a reminder, the subject of today's call is ASML's Q2 2017 results.
The length of the 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 Internet@asml.com. A transcript of management's opening remarks and a replay of the call will be available on our website shortly following the conclusion of the call. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward looking statements within the meaning of the federal securities laws. These forward looking statements involve material risks and uncertainties.
For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today's press release and presentation found on our website atasml.com and in the ASML's Annual Report on Form 20 F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wenig for a brief introduction.
Good morning. Good afternoon, ladies and gentlemen, and thank you for joining us for our Q2 results conference call. Before we begin the question and answer session, Wolfgang and I would like to provide an overview and some commentary on the recent quarter as well as provide our view on the coming quarters. Wolfgang will start with a review of our Q2 financial performance with added comments on our short term outlook. And I will complete the introduction with some additional comments on the current business environment and our future business outlook.
Orkon, if you will?
Thank you, Peter, and welcome, everyone. I would like to first highlight some of the 2nd quarter financial accomplishments and then provide our view for the coming quarter. Q2 net sales came in at €2,100,000,000 Net system sales accounted for €1,380,000,000 showing another quarter of increasing memory business, which is now at 54% of net system sales and also a strong quarter of logic sales, which represented the remaining 46%. Installed base revenue for the quarter came in stronger when expected at a level of €717,000,000 driven by major upgrades. For the first half of the year, our total installed base revenue is already at €1,450,000,000 compared to the full year sales of €2,120,000,000 in 2016.
Alcoa's margin for the quarter came in at 45%, slightly higher than guided, driven by a higher top line and a favorable mix. Overall OpEx came in as guided, although R and D expenses came in slightly lower at €313,000,000 and SG and A expenses came in slightly higher at €102,000,000 driven by litigation expenses. Turning to the balance sheet. Quarter over quarter cash, cash equivalents and short term investments came in at €2,510,000,000 As a reminder, in Q2, we had several extraordinary cash outflows, which have brought the overall cash balance back to our target level. We've paid a dividend of €1.20 per ordinary share or approximately €517,000,000 in total to our shareholders.
We also have repaid a maturing bond with an outstanding balance of €238,000,000 And lastly, we have closed the acquisition of a 24.9 percent interest in calc size SMT during the quarter for €1,000,000,000 Moving on to the order book. Q2 system bookings came in at €2,370,000,000 including orders for 8 3,400 EUV systems from 2 customers. 6 of the EUV orders came from 1 customer for use in both logic and DRAM. Total bookings were almost €500,000,000 higher than in the previous quarter. The breakdown of the bookings of 60% logic and 40% memory is the same as in the previous quarter.
The strong bookings in the logic sector are in support of the 10 nanometer ramps and in support of the EUV insertion at the 7 nanometer node. Memory bookings, mainly in DUV, strengthened further from its strong Q1 level, supporting an expected 50% year on year revenue growth in the memory sector in 2017. The continuing order flow for EUV systems increases our EUV backlog to 20 7 systems valued at €2,800,000,000 Our overall systems backlog now stands at a record 5.3
€5,000,000,000
After 2 strong quarters in 2017, in combination with a record order book, we are now expecting full year's net sales, which are up approximately 25% from our previous record revenue of €6,800,000,000 in 2016. 2017 revenue is driven by continued strong demand for our entire portfolio, driven by both logic and memory. With that, I would like to turn to our expectations and guidance for the Q3 of 2017. We expect continuing sales strength in Q3 with total net sales of around €2,200,000,000 including an estimated €300,000,000 EUV revenue. We plan to ship 3 NXC 3400s in the September quarter.
Our EUV shipment plan for the full year remains at 12 systems and is back end loaded. We expect our Q3 installed base revenue to come in around €600,000,000 driven by continued demand for holistic lithography options, high value upgrades and our growing installed base. For the full year, we expect our installed base revenue to be up by approximately 20% versus the 2016 levels. Gross margin for Q3 is expected to be around 43%. Excluding EUV systems, gross margin is approximately going to be at the same levels as in Q1 and in Q2.
R and D expenses for Q3 will be around €315,000,000 and SG and A is expected to come in at about €105,000,000 SG and A includes expected increases in legal expenses. Finally, ASML will resume share buybacks in Q3. As a reminder, we had paused our share buyback program for about 1 year to acquire HMI and the minority share of 24.9 percent in calcized SMT. We have €1,100,000,000 remaining for 20 17 from our previously announced share buyback program. We do not expect to execute the entire remainder of the program in Q3 and Q4.
In line with our policy, we will return excess cash to our shareholders through share buybacks, and we will make announcements on future share buyback programs when appropriate.
Our business continues to perform very well. We expect our our business continues to perform very well. We expect our positive momentum to continue throughout the year based on the market environment and the related strong demand for our products. This should deliver another record year with net sales growth expected at about 25%, representing one of the strongest gains in annual revenues in our history. While Wolfgang reviewed our current quarter 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.
Let me start by making some comments on the market drivers and their impact on little demand. As we have moved further into the year, the demand for memory has continued to strengthen, especially noticeable in DRAM. We are on track to see our memory revenue grow by around 50% year on year, creating the highest memory demand in issue of ASML. However, we need to remember that this growth in spend is coming of a year and a half of wafer capacity reduction due to significant underspend in 2016 and relocations of leading edge tools to 3 d NAND and that combined with a significant end market demand growth this year. In 3 d NAND, the industry continues to witness a number of greenfield fabs that are ramping, which is driving very strong lithography growth.
Logic demand for our tools is expected to grow around 15% year on year, driven by the continued ramp of 10 nanometer as well as the start of the 7 nanometer node, which is particularly driving the logic growth this year as it concentrates adoption. With regards to China, we've been doing business in this region for over 25 years, and we currently have over 600 employees in 11 cities, supporting an installed base of more than 400 lithography systems. We also have 2 R and D centers in China and are working to deepen our relationship with Chinese semiconductor industry customers by collaborating with Industry Consortium. We signed a memorandum of understanding with the Shanghai Integrated Circuit Research and Development Center, ICRD, a public research consortium dedicated to the advancements of the semiconductor industry in China to set up a jointly owned world class applications and training center in Shanghai. We have seen continued revenue growth from China over the last 5 years by both domestic Chinese as well as non domestic companies, and we see a lot of opportunity for growth in this region going forward.
However, as we mentioned on earlier occasions, the speed with which this growth will translate into sales and earnings is dependent on the ability of our new Chinese semiconductor customers to effectively bring qualified and competitive products in volume to the market. This might take some time. We are currently in discussions with 5 domestic logic and memory customers, which per their published fab plans translates into a lithography opportunity of more than €3,000,000,000 This opportunity led last quarter to bookings from a new Chinese domestic memory customer for shipments later this year. In summary, we will see significant growth in memory demand versus prior year and logic will build further on the healthy demand levels seen in 2016, largely driven by EUV, with China providing a meaningful medium term growth opportunity. Installed base revenue continues to grow at an even greater rate than last year, driven by broad based adoption of high value field options and upgrades.
And finally, demand will be further accelerated with the EUV adoption as customers start ramping this technology in volume production. Our current view is that the positive business trends that we're seeing in 2017 are likely to continue as we enter 2018. On the ASML product side, let me start with an update on our EUV business. In EUV, we continue to make progress as planned. We now have demonstrated all key performance specifications on our NXE 3,400 system and this includes a throughput of 125 waves per hour.
We also demonstrated 2 50 watts of source power enabling productivity improvements beyond 125 waves per hour. Availability continues to make progress towards the 90% plus target with continued focus on reducing the variability. We now have a system configuration that provides all of the agreed product specifications, which will enable us to now focus our work on executing on the planned availability improvements that will drive broad based EUV insertion in mass production. In addition, clear progress on the ecosystem continues as communicated by many of our customers. We have produced 0 defect telecos and our customers continue to make progress on photoresist sensitivity, enabling higher wafer per hour productivity.
Based on this progress, customers are now more and more confident in inserting EUV technology in manufacturing as clearly indicated by the continued order flow. Our DTV business is expected to grow this year of a record revenue in 2016, fueled by the demand for our Immersion and KRF products in both logic and memory. We announced our latest TrinseKam NXT 2000 Immersion System at Semicon this past week. And this new DeepQV Immersion System features several hardware innovations that deliver improved imaging and overlay performance in support of aggressive lithography requirements on future nodes, including mix and match with EUV. We're also seeing exceptional demand for our KRF products notably in 3 d NAND.
In holistic lithography where we bring together scanner, metrology and software to provide high value process control solutions for our customers, we expect sales to grow about 50% from last year. We have announced our latest metrology system, the YieldStar 365, featuring new optics technology that generates more accurate data at a higher speed, providing increased quality data to feed the process control systems. In addition to YieldStar metrology systems, we're also shipping HMI e beam systems in support of 3 d NAND voltage contrast and defect inspection applications at both memory and logic customers. Product integration of HMI is progressing well with Pattern Fidelity metrology E beam tools being evaluated by customers which enables Pattern Fidelity control capability in support of the 7 nanometer node. To drive to further drive productivity improvements in the E Beam area, we're in the process of developing a multi E Beam system that combines leading edge e beam technology with ASML's unique stage and computational lithography technology.
Finally, we also closed the acquisition of a 24.9 percent interest in Carl Zeiss SMT. And the main objective of this agreement is to strengthen our long standing partnership with Carl Zeiss and facilitate the development of the next generation BUV lithography system, which we call high NA due in the 1st few years of the next decade. This technology should enable the semiconductor industry to produce much higher performance microchips at lower costs, supporting customer roadmaps throughout the next decade. So in summary, great first half of the year with strong industry demand across all market segments translating to very strong growth across our complete product and service portfolio for 2017. In previous quarters, we mentioned how we felt we passed an EUV inflection point.
We now see volume orders from all segments of the industry clearly marking an increased rate of adoption with order flow expected to continue providing significant EUV growth in the coming years. As mentioned earlier, our current view is that the positive business trends that we're seeing in 2017 are likely to continue as we enter into 2018. And with that, we'll be happy to take your questions.
Thank you, Peter. Ladies and gentlemen, the operator will you, Peter. Ladies and gentlemen, the operator will instruct you momentarily on the protocol for the Q and A sessions. But beforehand, I would like to ask that you kindly limit yourself to one question with one short follow-up if necessary. This will allow us to get to as many callers as possible.
Now, Peter, operator, Peter, could you we have the final instructions and then the first question, please.
Of course, sir. Thank you. The first question comes from David Mulholland. Please state your company name followed by your question.
Hi, thanks very much. It's David from UBS. Just a first question, just on EUV. Obviously, very good progress in the quarter, and you've put
a slide in the presentation showing potentially for 15 or 16
layers that you could see presentation showing potentially for 15 or 16 layers that you could see EUV adoption up to 7 nanometers. I just wonder if you could let us know, has there been any changes on your base case assumption for how many layers you could see EV adoption at 7 and maybe even 5 nanometer as well in Logic? And then I have a follow-up.
Okay. I don't think we currently have any reason to change our base case assumptions. We put that in there because the additional 5 or 6 layers that you have identified on top of the 10 that has been called and you get earlier are really layers that in the discussion with the customers we have identified as potential additional layers. Now that really depends on the speed with which we will be able to mature our EUV systems and drive the productivity up and the availability because it's all a matter of cost. I think the initial ten are driven, you could say, by the lithographic needs.
You just need to use EUV. The additional 5 to 6 will be a function of the productivity and maturity of the tool.
That's great. And thanks very much. And then secondly, just one on the commentary on the installed base and field auction sales. You've obviously had very strong growth in H1. And given the commentary that you've given for the full year, maybe my math is wrong,
but it was just a bit
of a slowdown in the absolute level in the second half. I wonder if you could just comment on why you feel that's the case or maybe correct if I've got something wrong on that.
No, David, this is Wolfgang.
First of all,
you're right. I mean, we had an extremely strong start into the year. We have had $1,450,000,000 versus $2,100,000,000 for the total last year. So it's an incredibly strong start. We think we'll be up 20%.
Be reminded, last year, we said we think we grow that business by approximately at the run rate of 10%, which we were very close to last year, but this year, it's 20%. Within that, you have approximately half service and half options. The service piece is pretty stable with an upward trend. As a function of the installed base to a large degree. The upgrades are a little bit more volatile, And that has largely to do with when our customers can afford to take the upgrade.
Because you got to remember, some of these upgrades take their machines down for 5 weeks or so. And when they're firing on all cylinders, they even though they see the great impact of the upgrade down the road, in the short run for their years, they can just simply not afford to take the machines down. And that is why in the second half, the options piece is coming down a little bit. But having said that, we are having a fantastic year there, 20% up year over year. And I think the trend of continuous growth there will also go into next year.
That's great. Thanks very much.
The next question comes from Mr. C. J. Mills. Please state your company name followed by your question.
J. Muse:]
Yes, good afternoon. Thank you for taking my question. I guess first question, as you look at the building EUV backlog, clearly confidence is rising with your customers. So we'd love to hear from you as to what kind of improvements you're showing, particularly on the reliability and uptime side, which I think is the clear factor that is causing these guys to come in. So we'd love to hear you over the last three months what kind of data you've seen?
Well, I think the most important factor that drives the confidence of the customer is actually in the key performance requirements that they need. It's in 2 50 watt, which we show, the 125 wave per hour. And of course, we make gradual progress in the availability and in the maturity of that system. But like we said on earlier occasions, that is going to bring us to a situation where we have that when they ramp in volume in 2019. So they know that will take some time just like the development of the ecosystem for them with photomask and with photologous will take some time also.
But the most important part that actually drove their conference calls down to meeting all the key lithographic performance criteria. That drove the confidence. We now have a system that actually has all that performance in it. We just have to make it a bit more reliable. And that will take a bit of time and we all know it's done.
There's a whole program driving it and it's as simple as that.
Very helpful. And I guess as my follow-up, in terms of your commentary around memory, in particular DRAM, can you specify how much of that strength you're seeing across the board on strengths versus 2 d NAND upgrades over to DRAM? Thank you.
Difficult question to answer. I'm not going to guess in this particular case. But what we are seeing, it's both a combination of filling up available spots, open spots in current DRAM fabs because of the market demand and the technology transitions that are happening across the customer base. And some customers are leading in that sense and other customers are followers, but all do technology migration. It's across the base.
So it's a mix whereby open spots in, let's say, open pedestals in factories are currently being filled because of the strong end market demand in DRAM, which is particularly driven by the data centers. So it's a combination of both. With DRAM that's strong, there are not that many 3 d NAND relocations happening, but that happened in the past. That happened over the last 18 months, which created this space to backfill with leading edge lithography systems to address the rising demand in the beer market.
Very helpful. Thank you.
The next question comes from Mr. Andrew Gardiner. Please state your company name followed by your question.
Good afternoon. Andrew Gardiner with Barclays. Thanks for taking the question. I was just wondering if we could revisit to the 2020 model, particularly in light of the strength you're now seeing in 2017 and your expectation heading into next year as well. If I go back to the scenarios you guys outlined at the Capital Markets Day last year, you gave us sort of 4 scenarios that supported the €10,000,000,000 revenue pre HMI.
But given what we've seen, some of the lower sort of end scenarios that you had there seem particularly unlikely. I mean, first of all, you guys have talked about the sort of layer count initial layer count expectations of EUV. You're now seeing sort of 10 layers. At the time, we were still between 6 10, so 6 layers quite a bit lower at the low end of that range. And then similarly, in terms of the end market assumptions you are using for your lower demand scenario, a 20% sort of node on node decline in wafer starts seems particularly cautious at this point given what we're hearing in terms of new compute applications and the greenfield build outs you've highlighted in China.
So given that, I mean, do you not think it's more fair to look at the 2 higher end scenarios that you've outlined there, we should sort of minimize the likelihood of the 2 weaker ones?
Well, you did a good job almost providing the answer along with your question. I think you're exactly right. I mean, we will not be standing there in New York last year telling you exactly where to pinpoint the revenue in 2020. We gave you a bit of a model with the key sensitivities. And as we have explained, the 2 major ones when we go through all of our sensitivities are end market demand.
And there we have shown a little bit of sensitivity and you see it's not been that much of an upside and a downside compared to the intensity of the EUV insertion where we have seen between the high insertion and a low insertion. That was quite a bit of a difference. I think the market assumptions provided another $1,000,000,000 to the upside and then there was another $2,000,000,000 or so in the EUV insertion. I think what we can say is that we're certainly more confident that we're not going to the bottom end of the scenarios because you're absolutely right with everything that you're hearing from the end markets, be it strength in memory, being it like autonomous driving or move towards autonomous driving, data centers, big data, analytics, whatever you hear is pointing that the market is not going to be soft. And then with the recent accomplishments on EUV, if we follow through, which is our intent, to now that we have the specs met, that we get the availability up.
And to Peter's earlier point, right now, we've highlighted 10 layers, for instance, in logic that will be initial layers. As we move this further up, we have an opportunity to overachieve that number. But it's too early to pinpoint a new number. That's we have given you these sensitivities. But we feel pretty comfortable right now.
Okay, understood. Thank you. Just a quick follow-up. Wolfgang, in terms of EUV rev rec this year, sort of earlier in the year, you were thinking, if I recall, sort of 1.1, 1.2. Is that still a reasonable number given sort of shipments and tool performance in the field?
Yes, it's a good question. I mean, at this point, I would say that it's going to be around $1,000,000,000 or so. I mean, it has to do with a whole bunch of things. Like since last year, we can recognize majority of revenue with shipments, but there are still a few things that we need to defer. For instance, if the installation with a little bit if we provide a longer warranty, we have to defer a little bit there.
And we also got to really look at whether the configuration at the factory test is exactly the same as when we retest the system at the customer site, which in a time when you're struggling to get all your material together, can sometimes small pieces are different than the final test at the customer. And there, we have to defer again by a quarter or so. So I'd be careful there. And so even though we ship 12 systems and even though we get some deferred revenue in from the past, we will still have to defer a bit of the revenue into 2018. So if you want to be on the safe side, I would count on €1,000,000,000 right now.
Of course, this has the effect. Now that we have a stable configuration next year, we are going to recognize in the same year plus, we then have a catch up. I mean, we'll have a deferred revenue balance at the end of this year. So next year, not only will the shipments go up from 12 to 20 plus 4 upgrades, but we're going to get a couple of $100,000,000 on deferred revenue. So I would plan on $1,000,000,000 right now, Andrew.
Okay. Thank you, guys.
The next question comes from Mr. Alex Duvel. Please state your company name followed by your question.
Yes. Hi, everyone. Alex Duval from Goldman Sachs and congrats on the strong quarter. Just a quick question on HMI. You've talked a bit more about the innovations ASML is driving to combine e beam with your computational lithography.
Wondered if you could give a bit more color on the key technical aspects you're working on. What's the feedback been from customers you've been discussing with it? And anything else important on the solution so far? Many thanks.
Yes. Thank you, The development that we're seeing there is that we're executing as planned as part of the acquisition on the combination of the ASML lithographic, let's say, the holistic lithographic computational competence with the e beam competence that HMI has in the field. Now the combination of those 2, the first product, will be shipped in the second half of this year and will be evaluated by 3 customers. With positive evaluation, we will then start to ship that product in 2018, which will be a single beam tool combined with the AS and L computational lithography competence. Now that will be an intermediate solution and will be focused on defect inspection or waiver inspection.
And that will be that will follow by a more, let's say, economic solution, which will involve multi beam. Multi beam, which actually has the advantage of being able to inspect the wafer much faster, which will bring the cost of inspection down. But also the you could give us an array or the service that you can inspect will also go up, which could have a very positive impact on the customer yields. So that is a product that is then scheduled for the year thereafter, so after next year, whereby it's not only the multi beam column because if you have a capability to move the wafer faster, you also need faster stages. And lo and behold, there is one company on this planet that's very good at fast stages and that's ASML.
So I think fast stage technology combined with good computational lithography, combined with a multi e beam solution will get a very powerful solution for wafer expansion going forward.
The next question is coming from Mr. Mehdi Hosen. Please state your company name followed by your question.
Yes, thanks for taking my question. Just going back to EUV revenue recognition, Wolfgang, how should we think or how should we model deferred EUV revenue by year end 2017? And as shipment starts in 2018, should we think of revenue recognition on these EUV system happening at a earlier time? Or in other words, would the deferred revenue start to go down? And I have a follow-up.
Yes, Mehdi. Yes, you're right. So for next year on the shipments, you should clearly think of the revenue in the same period as the shipment. And then we currently think that we'll have a deferred revenue balance of up to $500,000,000 at the end of this year. So again, next year, you will very likely see our revenue be higher than the number of times the price because all the deferred revenue is coming in next year.
Great. And then follow-up regarding the DUV business. Your booking for the June quarter was down about 4%, excluding the EUV. And in that context, should I assume that the BUV shipment in the second half of the year would be flat to down compared to the first half?
Yes. I think I mean, you can do the math if you take what we said was the 25% and then you take the EUV shipments and within installed base revenue a little bit down in the second half. I mean, the end of the story is DOV in the second half is not going to be too different from what it was in the first half. I think we said also on the call that this business was already very, very good last year and we were up another 15% or so. And I wouldn't put too much weight, albeit it gives you some info on the structure of the backlog, but I wouldn't put too much on the details on the bookings there.
And that we get asked a lot, well, is to probably over next year, but we see trends continuing in 2018. So the UV is also going to be strong next year.
Yes. And to add to that, I mean, a 4% down quarter on quarter, I mean, you know how our quarterly bookings vary. We have only a few customers and they tend to send those orders in by batches and then 4%, single digit, low single digit percentages, in my mind, are completely meaningless.
The next question comes from Mr. Farhan Ahmad. Please state your company name followed by your question.
Hi. This is Farhan Ahmed from Credit Suisse. Thanks for taking my question. My first question is on memory. The memory shipments are up 50% year on year.
Peter, can you just talk about how much of the growth is driven by increase in capital intensity and EUV? And how much of it is really going to drive the demand higher this year? And also if you could touch on what percentage of bit growth do you expect in NAND and DRAM market this year based on the shipments that you're supporting? That would be helpful.
And could you repeat the first question? Because I thought you talked about memory and then growth in capital intelligence. And I thought you said EUV?
So 50% growth that you have in memory shipment, there is some UV component in that as well, I'm imagining. Please correct me.
No, no, no. I think when you think about the growth in capital intensity or the 50% growth is really deep UV. I mean, we do take some EUV memory orders, but that is not for capacity additions. So that's really for ramping up and qualifying the product and the ramp will be at the end of the second half of twenty eighteen and going into 2019. So that is not driven by any EUV shipments.
It's really VPUV and particularly strong in DRAM and that is like I said in the prepared remarks also, but I'd like to repeat it. It. It's not a major surprise either if you think about it. I mean the DRAM supply and demand curves are and then I talk about the end product, the DRAM device, really driven by the capacity situation and the end demand. And in a situation like we had in 2014 going into 2015, where 2 major fabs in Korea, M14 and L17 came online, started to take as many tools as they could to fill up the fab, you get a big step up in capacity where, of course, the end demand doesn't follow that step curve.
And so you have a period in which there is a supply and demand imbalance that leads to lower DRAM prices, which actually at that moment in time, memory makers that could also see strong demand in 3 d NAND start to relocate capacity out of DRAM into 3 d NAND. Now that and demand driven by strong data center demand, when that goes up, we'll catch up. And that is actually happened the second half of last year leading to increased DRAM prices. And it's not a surprise then that those empty pedestals where previously they were little tools that are now in 3 d NAND are being backfilled with the technology transitions on top of that. And that is creating the strong demand this year, also driven by a strong end market where the data center demand is very strong for beating HDRAM.
Now what does it mean for bit growth? For bit growth, 26% is what market research firms say. Listening to customers, they might come up with some different numbers. But trying to predict those numbers is very dangerous because last year we saw market research firms talking about DRAM growth rates and I'm talking about the end demand growth rates of lower than 20%. Well, it ended up north in the high 20s.
So difficult to predict. I would suggest we keep looking at the DRAM prices. The DRAM price, it is a commodity. It's a reflection of the supply and demand balance. And currently, there is some undersupply, and that's for sure.
And I think for land, we expect around 40%.
Yes, around 40%. Well, we expect nothing. We just repeat what other people are saying, which is around 40%. But who knows? Got
it. And then on the UV, I saw in the presentation that you posted online that there is a mention of UD Directional and bidirectional design. And just based on the industry chatter also, it seems at least one of the customers has picked up the activity on doing bidirectional design. So I just wanted to ask you, in terms of the insertion of EUV, how does it affect the opportunity for you, whether it's bidirectional or uni directional? And is it fair to think that if it's bidirectional, then there will be a lot fewer steps that are needed for that and that?
No, I think it doesn't really matter. And what I can refer to Slide 17 and what you're referring to is that 2 d patterning, 1 EUV exposure. 1 d patterning, 1 EUV exposure, that's the same. So it doesn't really matter, yes? So it's I'm not going to comment on debt and hedge because we're not experts on it.
So but from a EUV point of view, it's no issue.
Got it.
Thank you. That's all I have.
Next question comes from Mr. Douglas Smith. Please state your company name and follow-up by your question.
Hi. It's Doug Smith from Agency Partners. From my tracking of the industry, it looks as though the percentage of litho spend versus total wafer fab equipment has dropped a little bit the last maybe 2 years or so. First of all, do you agree with that assessment? And second, do you imagine that going forward that litho intensity might go back up again?
Yes, Doug. This is Wolfgang. I got to disappoint you there a little bit. We are not big trackers of this metric. We're solely focused on our $11,000,000,000 and the potential upside to that.
And the reason why we're not focusing on this too much is twofold. Number 1, historically, the customer CapEx has not shown a strong correlation to our own revenue in a given year. But more importantly, it is something that is very difficult to normalize because you got to just think about FX, for instance. I mean, 2.5 years ago, the exchange rate was 1.40 dollars and then it went down to $1.10 to euro and all of a sudden, the LIFO expense looks lower, but it has nothing to do with our business. It's just a different exchange rate.
Secondly, as you heard earlier in the call, we have a very specific strategy to provide upgrades to our customers that we have in field options and services and that they don't necessarily count in the different people's calculation on adding up these numbers. I think from that perspective, we are not looking at it, but we're not worried about our share on the overall spend. We're worried about executing our roadmaps and getting to our revenue. And then it will be whatever share of whatever somebody puts together.
Got it. And then perhaps I can ask another question, like a more technical question, and that is, we're seeing a lot of chips made these days using full reticle sizes, 800 plus millimeters.
Is that going to be
a problem for the current generation of EUV to print such large chips? And how about for high NA where you're using anamorphic projection?
Yes. I think not for the current EUV generations, potentially for the high NA, but we don't think it's going to be a major issue In the discussion we've had with customers, so that's being addressed. It also has to is a matter of design parameters that you can take into consideration. So that's a sole part of the equation of why high NA is a economic solution or not and everything that we currently calculate. And I think our customers agree with us that the high NA specification, which includes indeed a different mask size or it's very likely, points into the direction that it's highly economical to do it.
Okay, great. Thanks.
The next question comes from Mr. Sandeep Deshpande. Please state your company name followed by your question.
Yes, hi, thanks. My question, Peter, is on 2019. I mean, clearly now you have orders in your book for 18 of the 20 orders that 20 tools that they're going to build next year. How do you see 2019? I mean, are you already talking to your customers about 2019?
Because some of your customers have indicated 7 nanometers starting with as much as 8 plus layers. So some of that will have to be shipping in the first half of twenty nineteen as well as some of the memory customers. So maybe you can make a comment on 2019 conversations you're having with customers. And I have a quick follow-up, Pafar.
Yes. Well, I think you're absolutely right. 27 systems in the order book with the shipping pattern that we gave you means that we're virtually done for 2017 'eighteen. So everything moved into 2019. And with the order lead times that we're currently having, yes, you're absolutely right.
The order discussion that we're currently having are about 20 19, and that's the case, yes.
And people are giving you indications in terms of what they might be building at this point?
Yes. I think when you add it all up, you see 2019 and what we ship in 2018. I think we're currently seeing where we're currently adding up. It's around 30 units, could be a bit more than that, that they need for 2019, which by the way, it could be almost similar to what we're currently looking at, what we can ramp in terms of our own capacity. We've said before we will ramp our capacity double, double from 2018 to 2019.
That is true for our build capacity here in Veldhoven, but we're seeing 1 or 2 quarter delays in that capacity in the supply chain. So that means that, that capacity buildup of, let's say, 45 systems capacity is really there in 2020. But in 2019, we see 1 or 2 quarters in overlay. So that around 30 demand, if I had it all up today, it's that we could probably nicely fit what our capacity is. Yes, it could be a bit more than 30, but it's a bit too early to give you a final number, but since you asked me the question I added up today, and that's what the number is.
Okay. Thanks, Peter. And just a quick follow-up for Wolfgang. I mean, Wolfgang, in terms of the numbers that you've given at the Analyst Day last year, I mean, the moderate case was €11,000,000,000 in sales and €9 plus in EPS. If you actually just roll out the numbers that you printed in 2Q, you're well ahead that on a full year basis already.
So would you need to give new guidance at this point? Or you think that you are at a much higher level in terms of demand? Or something else has changed in terms of demand at this point where we are in the cycle?
I'm not sure whether you were on early on the call. We tried to address that. I mean, we're not changing the $11,000,000,000 right now, but we pointed towards the sensitivities we showed last year in New York. And I think you can at least, at this point, conclude that the bottom end of these scenarios, both on the demand side and on the number of litho layers, seems more and more unlikely. And if there is any bias, I think everybody would say now that we have an upside opportunity.
But let's just get this year under our belt and next year and at the appropriate time, we'll give you a formal update on the model with new sensitivities. But we're like I said earlier, we're feeling pretty comfortable about those levels at this point.
Understood. And sorry about the
that question. Thanks. The next question comes from Mr. Amit Harshandani. Please state your company name followed by your question.
Good morning and good afternoon, everyone. Amit Harshandani from Citi and thanks for taking me on. Two questions, if I may. The first one really is a clarification to what was said earlier. So if I understood correctly, Wolfgang, did you indicate that the deferred revenue for next year would be around €500,000,000 and also the shipments next year would see revenues being fully recognized?
And so if I assume, say, dollars 100,000,000 per tool, does that imply $20,000,000 to $100,000,000 plus $500,000,000 we are looking at a revenue of $2,500,000,000
Your math reflects what I said.
Okay. Thank you. That's helpful. And also given that there is €500,000,000 of deferred revenue, wouldn't that have a one off implication for the gross margin because most of that would be at a fairly high gross margin?
Yes. Well, also there, it certainly helps, but we knew that. I mean, we have said we're coming on a journey from minus 75% last year to 40%. So now you can argue whether it makes the breakeven a little bit tougher this year and the 20% a bit easier. But in general, it has a little bit of a relocation left and right, but it doesn't change our trajectory that what we have in mind is really 40%.
We need that to get to our rate of 50%. And we always said the biggest variable there is the volume. And the 2nd biggest variable is the service ability of the tool. And then we have, of course, the learning curve and avoiding E and O. And with the tool now performing to the specs and that enabling us to freeze the spec and really work on availability that makes us really much more comfortable that also on the financial side, we can deliver on that 40%.
Thank you. And just for the second question, with respect to the supply chain, the comment I think Peter referred to earlier. Just wanted to understand, would you are you looking at potentially helping your suppliers or supply chain build up capacity to give you the flexibility to potentially ship more EUV tools by 2019? Or in other words, is that already starting to emerge as a constraint in your view?
I think the ramp up is a good question. I think the ramp up in the supply chain, of course, when we said customers turned the corner, but the order flow is also a good evidence of it and it also has ignited a lot of activity in the supply chain. However, going from a very low level to then ramping it up here and there, doesn't always go as smooth as we would want. That's why I alluded to a 1 or 2 quarter delay to the capacity ramp to, let's say, 40, 45 units. And that's where we are.
And I think it's not so much a matter of money. Money doesn't always help. It's just a matter of can you get the people on time, train them, can you get the materials on time with long lead times. And then you could argue money will help you to put to get people in faster, but the learning curve is the learning curve. So these are the kind of things that we are that we are driving together with our suppliers.
And this is what the current status is. Now rest assured, we do anything to get more out. If the demand is higher, then we'll just put everything that we can. But I'm afraid money alone will not do it. So it has to be people, knowledge and how far we can push it is too early to say.
Thank you, Peter. Thank you for the color.
The next question comes from Mr. Yagadish Iyer. Please state your company name followed by your question.
Yes. Thanks for taking my question. Two questions. First, Peter, one of the things that some of the companies who are involved in multi patterning have been saying is that EUV insertion will initially happen for Versus and cuts. But looking at the carton on Slide 17, it looks like your insertion is going to be for metal lines and spaces.
Just want to understand the disconnect where we are on that in terms of that?
Well, you should ask the other companies.
Okay.
So the second follow-up question I wanted to ask you is that you did mention in your prepared remarks about China, where you said there are about 5 fabs. How would you characterize between the need for leading edge versus the trailing edge there? Thank you.
Oh, I think that's a good question, an interesting question. But it is not the case that all 5 of those customers are all leading edge. And then you have to define what is trailing edge. If you would say in logic, 28 nanometer and below, you qualify as leading edge, then all the logic is leading edge. Now for memory, at 2 DRAM initiatives there, that are definitely, I would call them leading edge if I look at the nodes that they are focusing on.
And in 3 d NAND, in 3 d NAND, what's leading edge is a number of layers. And I think that is where they will start on the learning curve and will not be immediately at 64 or 72 layers, but it's going to be a learning curve. Now you have to put that into perspective of why China has taken this step. China has taken this step from a very strategic point of view in the discussion we have had, it became very clear that the reason why the stepping up this, let's say, investment in capacity and leading edge capacity is because of the dependence that they currently have on non Chinese companies to provide China with the right technology. And the geopolitical situation has not become more stable or more reliable or more trustworthy from their point of view.
So China has decided that leading technology and leading edge technology should also be local. And that fits perfectly in the 5 year plan. If you read that 5 year plan, that's what they want. So I don't think that the investment money will be allocated to those companies that are focusing on trading edge technology. That's not going to happen.
Generally, it's going to be on leading edge.
Thanks for the clarification, Peter.
The next question comes from Mr. Robert Sanders. Please state your company name followed by your question.
Yes. Hi, it's Deutsche Bank. Quick follow-up for Wolfgang on this deferral question. So how should we think about Q4 gross margin given the deferred revenue into 2018? And then I guess the flip of that is what how should we think about 2018 gross margin given this rather skewing effect?
And I have a follow-up. Thanks.
Yes. I think it's a little bit early to hash out given revenue guidance for Q4. And I think I'm not going to start with gross margin guidance. In general, it's clear next year, even if we I think I said before, if we defer revenue, it in general makes it a little bit more difficult to get to the breakeven, but it makes it more simple to get over the 20% next year. So it's a bit of a positive effect.
But next year, it just depends on we got to just see the overall business and it depends on the rest of the business, right? Because if I think Amit did did the math before, if you're going from $1,000,000,000 to over $2,000,000,000 And even if you go from around breakeven to 20 percent, it's still far below the average of the rest of the business. So without a specific number, which I'm not going to give today on the non EUV business for 2018, I can't answer the gross margin question either. But I think the most important thing for us is what I said earlier. Our confidence in EUV volume and EUV gross margin is growing.
Our gross margin in BUV, in CLS, in HMI, in applications is healthy. It's exactly where we need it to be. And therefore, we feel very comfortable that we get over 50% in 2020. But it's too early to talk about Q4 and next year specifics, Raul.
Got it. Fair enough. I just had a follow-up on the 250 watt demo. Looks like you're going to get that in the field by 2019. So given that that's beyond the performance spec, how will you monetize that?
I assume through a software upgrade, how should we think about the value of that software upgrade in terms of when you look out to 2019? Thanks.
Yes, I think it's a good question. One correction, I think 250 watt is not going to be 2019. We have 250 watt now. We have the modules that will be inserted in our tool shipments by the end of the year, which will provide our customers with 250 watts. So it will be available as of next year.
So 1. 2, as you know, we should be following the company for a long time. The value of our tool is really driven by the ability of our customers to keep cutting cost, the cost per wafer. And that the biggest driver there is productivity. So if going forward, we can improve, for instance, the transmission of the lens.
We can improve the transmission of the Pelleco, which all takes bay currently takes away a bit of light. Like I said in the prepared remarks, customers are progressing on the sensitivity of the photoresist. These are all things that are actually helping to get more light on the wafer. And when you get more light on the wafer, you move the wafer faster. When you move the wafer beyond 125 wafers per hour and you can guarantee that, then the tool provides more value.
And that's exactly how we're going to do this. And this is a general concept which customers accept. When we give them in 7 25, 145 wafers per hour, 145, then we'll charge a higher price because we basically split the value of that 20 extra wafers, 50% for the customer, 50% for AS and L. So that will also mean a higher sales price for the EUV system. But that happens after we can guarantee the over 125 wafer per hour performance, which is the function of the things that I just mentioned.
Ladies and gentlemen, I'm afraid we've run out of time today. If you're unable to get through onto the call and still have a question, feel free to contact ASML's Investor Relations department and we'll get back to you as quickly as we can to answer your questions. Now on behalf of ASML's Board of Management, I'd like to thank you all for joining the call today. And Peter, if we could formally conclude the call, that'd be great. Thank you very much.
Of course, sir. Ladies and gentlemen, this concludes the ASML 2017 Q2 financial results conference call. Thank you for participating. You may now disconnect.