Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2017 First Quarter Financial Results Conference Call on April 19, 2017. Throughout today's introduction, all participants will be in a listen only mode. After ASML's introduction, there will be an opportunity to ask questions. I would now like to open the question and answer would now like to turn the conference call over to Mr.
Greg De Jong. Go ahead, please, sir.
Thank you, Peter, and 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's headquarters in Belgrove in the Netherlands is ASML's CEO, Peter Wenig and our CFO, Wolfgang Nickell. The subject of today's call is ASML's 2017 Q1 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 the Internet at www.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 meanings 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 20F and other documents as filed with the Securities and Exchange Commission.
And with that, I'd like to turn the call over to Peter Wenwick for a brief introduction.
Thank you, Craig. Good morning. Good afternoon, ladies and gentlemen, and thank you for joining us for our Q1 results conference call. And before we begin the question and answer session, Wolfgang and I would like to provide an overview of some commentary on the recent quarter as well as provide our view of the coming quarters. Orkan will start with a review of our Q1 financial performance with some added comments on our short term outlook.
And I will complete the introduction with some additional comments on the current business environment and on our future business outlook. Wolfgang, you will?
Thank you, Peter, and welcome, everyone. 2017 is off to a great start with a stronger than expected quarter. I would like to first highlight some of last quarter's financial accomplishments and then finish with our view of the coming quarter. Turning to the Q1 results.
Net sales came
in at €1,940,000,000 Net system sales accounted for €1,220,000,000 nicely balanced between logic and memory. With the addition of HMI products, we are now including metrology and inspection equipment in the system sales, which was previously reporting it as service and field option revenue. This also means that metrology and inspection systems orders are from now onwards included in our booking and backlog numbers. This provides more visibility of our current and future systems business in this product group. Net service and field option sales for the quarter came in much stronger than expected at the level of €728,000,000 driven by major EUV and solidity lithography upgrades.
As noted, EOS Power and HMI system revenue are now reported in net system revenue. Otherwise, the service and field option revenue would have been even higher at approximately €790,000,000 Our gross margin for the quarter came in at 47.6 percent, slightly higher than guided, driven by a higher top line and a favorable mix. Gross margin includes the amortization of all as the effects from the fair value assessment of HMI inventory as of the closing date of the acquisition. Overall, OpEx came in as guided, although R and D expenses came in slightly lower at €315,000,000 and SG and A expenses came in slightly higher at €99,000,000 Moving on to the order book. Q1 bookings came in at €1,900,000,000 including orders for 3 3400 EUV systems from 2 customers.
Strong bookings continued in the logic sector in support of the 10 nanometer ramps and in support of the EUV insertion at the 7 nanometer node. Memory bookings strengthened further from its strong Q4 level, reporting expected year on year growth in the memory sector in 2017. The continuing order flow for EUV systems increases our EUV backlog to 21 systems valued at €2,300,000,000 Our overall systems business now stands at €4,500,000,000 In addition, we also have 4 EUV upgrade orders valued at approximately €200,000,000 This will bring these 4 NxC systems to NxC 3,400 performance. In total, we have 14 3300 and 50 systems in the field, which are candidates for upgrades. As a reminder, system upgrades are not included in our system backlog.
Turning to the balance sheet. Quarter over quarter cash, cash equivalents and short term investments came in at €3,840,000,000 As already mentioned, in January, we saw a significant level of early payments from customers in Q4 of last year, which resulted in a negative free cash flow of €212,000,000 in Q1. As a reminder, in Q2, we have several extraordinary cash outflows, which will bring the overall cash balance back to our target level. Assuming approval at our AGM, we will pay a dividend of €1.20 per ordinary share or approximately €515,000,000 in total to shareholders. We also have a bond maturing in Q2 with an outstanding value of €238,000,000 And lastly, we expect to close the acquisition of 24.9 percent of Carl's price SMG during the quarter for €1,000,000,000 Based on our current business view, we see a continued strong demand for BUV, holistic Then I would like to turn to our expectations and guidance
for 2017.
We expect continuing sales strength in Q2 with total net sales between €1,900,000,000 and €2,000,000,000 including an estimated €200,000,000 of EUV revenue. We plan to ship 3 NXE 3400s in the June quarter. Our EUV shipment plan for the full year includes 12 systems and is back end loaded. We expect our Q2 service and field options revenue to again come in above €650,000,000 driven by continued demand for holistic lithography options, high value upgrades and our growing installed base. Gross margin for Q2 is expected to be between 43% 44%, driven by the recognition of EUV system revenue.
Excluding the EUV revenue, gross margin would be approximately at the same level as Q1.
Q2 gross
margin also continues carry the effect from the purchase price allocation for the HMI acquisition. The negative impact of these purchase price allocation adjustment for Q2 is more than 1 percentage point. The impact for the full fiscal year is about €90,000,000 and will reduce to about €40,000,000 per year from 2018 onwards. R and D expenses for Q2 will be about €315,000,000 and SG and A is expected to come in at about €100,000,000 As a reminder, our share buyback program remains paused for the time being as we close our planned equity investment in calcized SMT. The remaining approval from China is expected in time to close the transaction in Q2 2017.
And finally, as mentioned before, an increase of our annual dividend from 1.05 dollars to 1.20 €1.20 is submitted for approval at our Annual General Meeting of Shareholders on April 26. With that, I'd like to turn
the call back over to you, Peter. Thank you, Wolfgang. As Wolfgang highlighted, our business continues to perform well. We started the year with a very strong quarter, and we expect this positive momentum to continue throughout the year. While Wolfgang reviewed our current quarter performance and outlook for the current quarter, I would like to provide some additional commentary on our markets and our longer term outlook as well as provide a few highlights on our product portfolio.
As seen in our Q1 results, logic demand remains solid, and our memory demand continues to strengthen, with DRAM largely compensating for weak spending in 2016. Logic demand is driven by continued ramp of 10 nanometer with memory demand driven by DRAM 1x nanometer node and additions of 3 d NAND capacity. The strength in shipments to China this quarter was driven by existing Chinese and non Chinese customers. As for new China business, we are in discussion with multiple Chinese logic and battery customers regarding timing of system demand for their new fab projects. We expect shipments to support pilot production in these new fabs starting in 2018.
While it is still too early to provide quantitative guidance for 2017, our directional view as expressed last quarter remains largely unchanged. However, in terms of potential magnitude of our business, it allocates with that lithium demand will be up significantly as compared to prior year. On the ASML product side, let me start the net rate on our EUV business. We started shipment of our NX ED 3,400 system, which will be the B2B workhorse in volume manufacturing over the coming years. Furthermore, we continue to make progress towards our 125 weighted power productivity and 90% availability commitments.
At the SBIE Advanced Recovery Conference in February, our customers presented their latest results confirming our progress on these metrics. The status of the EV infrastructure was also presented by our customers. And while there's still work to be done on things like Telco, there appears to be no major roadblocks for EUV insertion in the time frames as indicated by our customers. Regarding demand, we took 3 EUV production orders from 2 different customers this quarter, bringing our total EUV backlog to 21 systems. And as Walker mentioned, on top of this, we booked 4 orders for a total value of around €200,000,000 for upgrades of EUV systems currently in the field to annexe-three hundred production specifications.
And by the way, these orders are field updates and do not show
in our reported order backlog.
EUV order flow continues while we work to finalize a VPA with at least one of our major customers, which will translate into additional orders over the next quarters. As customers continue to assess timing of their roadmaps and firm up layer adoption, we continue to get a clearer view of EUV demand for next year. The average analyst demand expectation stands at around 20 new systems shipped in 2018, which given our current view, seems reasonable while we still have the option to build up to 24 systems next year. In DPP in the property, the model for our Tronscan NXT 9,080 Immersion Systems continues for both Logic 10 nanometer and DRAM 1x nanometer nodes, bringing the installed base to more than 60 systems. We're also seeing strong demand on our KRS platform, where we boosted the productivity of our XT860 system further to 2 50 Wigs per hour.
For our 3 d WAN customers, we released new options that improved focus and alignment performance of the high topography layers typical for this application. And to maximize capital efficiency, a number of customers also upgraded their Immersion systems through significant enhancements to productivity, imaging and overlay. And these upgrades drove significant growth in our option business, which will continue to drive growth through 2017. In holistic lithography, we continue to ship our most advanced GeoStar 350, Hydrology systems to our customers supporting quantification and ramp up the 10 and 7 nanometer logic node as well
as the 1x nanometer DRAM node.
In addition to yields to our metrology systems, we're also shipping HMI heating systems that are now recorded as part of our systems revenue, as Wolfgang mentioned. The integration of HMI is progressing well, and customer interest in our technical Fidelity products remains high. So in summary, a great start of the year and a very solid quarter. Strong EUV demand, service and options business showed further growth momentum and continued EUV order flow provides a clear indication that this technology has now become a part of our mainstream business. We expect the positive industry environment to continue resulting in a very good year for ASML.
And with that, we'd 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. Beforehand, I'd like, as I always do, to ask you to kindly limit yourself to one question with one short follow-up if necessary. This will allow us to get as many callers on as possible. Now, Peter, could we have your final instructions and then the first question, please?
Yes, sir.
Thank you. The first question comes from Mr. C. J. Mills.
Please state your company name followed by
your question. C. J. Muse, congrats. Hi.
Thank you for taking my question. I guess first question, I was hoping to get an update from you on your expectations for adoption of EUV by DRAM. I saw on the slide deck that you reiterated 1 why. Would love to hear how your discussions are progressing and how you're seeing adoption and what kind of layer count we should be assuming at that first part of the adoption curve? Okay.
Yes, like we said, we are talking to logic and memory customers. So on DRAM, the expectation is indeed on YIPD specific, it's mid teens, 2016, 15,000,000 DRAM. That's what we that will be the introduction node. And that would involve 1 to 2 rates. So you have to remember that, of course, the DRAM market is quite a significant market.
So 1 to 2 layers is a decent start for UV technology at this node. And we are talking at least to 1 customer very specifically, but other customers have shown similar interest and we will follow suit.
Okay. Very helpful. And then I guess as my follow-up, Wolfgang, if you could give us an update on how you're seeing the trajectory for EUV gross margins? And I guess within that, would love to hear how you see the cascade effect of 100% gross margin biz as it comes through this year? And then how we should see reaching that 20% target into the calendar 'eighteen timeframe?
Thank you.
Yes, C. J. So sorry, there was pretty much unchanged from what we communicated in our Capital Markets Day in late last year. We were at minus 75% or so last year. Our objective is to get to 40% by 2020.
We're targeting breakeven this year. There are several components to get this accomplished. One is simply volume, and we're shipping 3 times as much as last year. As you can imagine, it's the same factory producing that, so that will help. The second one was mix.
Last year, we shipped 33 50s. This year, we're shipping 3200s. As you know from prior calls, the list price on the lowest is approximately $20,000,000 higher not the cost of not $20,000,000 higher. So that will help. And then, of course, we have the service business where we talked before that we're charging per wafer, which, of course, ultimately is a lucrative business model as we are not churning out a lot of wafers right now, but to demand the systems has a significant dilutive effect on CRISPR genome.
Last but not least, we're progressing on the learning curve as far as in our own factory, the number of hours it takes to put one of these things together. And also with our suppliers as well as work that we have to do in the field to upgrade the existing ones and bring them to the latest level. I think the expectation of 20% is still good for next year as we, again, go from 12 systems to around 20 systems, as mentioned earlier. And then we made some buffers last year where we can now do partial revenue recognition upon shipment. But again, it's partial revenue recognition because in case we have some performance criteria that will be met later, we're going to defer some of the revenue.
But on the other hand side, it will help that some revenue that we deferred in the past will come in at no cost. So that's why we believe in this year, the deferral and what's coming in is roughly affecting each other. That's why we said also in our communication that that the revenue should be somewhere in the $1,000,000,000 to $1,200,000,000 range. And again, I think we are on the right path to that to 30%. And volume is the biggest driver of this.
Peter, can we have the next call?
Okay. Yes.
The next question comes from Mr. Farhan Ahmad. Please state your company name for your question.
Hi. This is Farhan Ahmad from Credit Suisse. Thanks for taking my question. My first question is on the orders that you have this quarter. The order level is pretty high and strong.
I just wanted to ask how sustainable do
you think the order trend is?
And in particular, on the memory orders
Yes, go ahead. In particular
on the memory orders, the orders are significantly higher than anything in the last 2 years. Can you just a bit more color on is it driven by capacity additions or 1x nanometer? And any kind of visibility on
whether it's NAND or DRAM?
Yes. Just making a small note here, net of TRM. Yes, we also in Q1, yes, I think we that's sustainable for the next few quarters given the fact that I'd say given the outlook that customers are giving us. And yes, it is significantly higher than the last 2 years. But you have to remember that what we saw over the last 2 years was especially weaker order flow from DRAM type customers because the DRAM market was over the last 18 to 7 months not that strong.
And it had to do with the fact that in 2014, we ended beginning of 2015, end 'fourteen of high mix and end 'seventeen of something came online, which were big fabs that we actually saw when you added them up was quite a significant step up in capacity. But we haven't seen any new fabs coming online of that site since. But what we did see that has to do with your NAND DRAM question. What we did see is that given the economics of the DRAM in our markets over the last 2 years, we've seen leading ash, liquid capacity being used in land production. And that has actually happened.
I think we mentioned that on previous calls also, bringing the wafer out capacity down with double digit percentages. Now that has created a situation clearly where demand and supply of DRAM end products was somewhat advanced over the last 9 months, which led to increase in DRAM prices, which is not unsurprising that now customers are backfilling that capacity that they actually used to basically help reduce NAND over the last couple of years. And it also is an entry into your question on NAND versus DRAM. It makes it all very opaque if you have NAND and DRAM sitting next to each other. And depending on the market situation, reading as little can be used for either or.
And that's why we look at memory now, and we said it also before as one segment. But looking at it, let's say, from a bit demand point of view, what we currently believe and also looking at last year's good growth numbers, 30% in DRAM, 40% plus in NAND, where the pricing situation is today. Looking at the price situation, I can fully understand why memory customers are filling up their open spots in their fabs to make sure that they have sufficient capacity to fulfill the demand of their customers. Sorry for the very long answer, but you have three questions, so I that's why I had it on Brett. Thanks.
And if I can just squeeze a
quick question. Last month, Yesilal signed a MoU with Shanghai Microelectronics Equipment. I believe they are one of your new emerging competitors in China. So I just wanted to understand like what exactly is the term business unit? Is it something where you're just supplying the Simon Life sources or is there more to it?
No, no. We're it's a different kind of cooperation. We're not competitors. They built lithography type missions for a different part of the market. They are largely in the packaging.
They're largely impacted in the packaging market. What we have done is effectively created a memorandum of understanding to start working together whereby we actually use them as one of our suppliers, one of our suppliers in not so much in the lithography market but more in dermatology systems area. And we have a corporation which is focused on making sure that they will get a better understanding of how you manage a modern complex supply chain. So it is not directly focused on areas where there could be a logical competition between the 2 companies. It's in different areas.
The next question comes from Mr. Sandeep Gershun. Please state your company then followed by your question.
Yes, hi. My question is regarding your revenues for 2017. Peter, I mean, when we look at the consensus ahead of today, it's about approximately €7,900,000,000 Last year, you said that €7,600,000,000 Wolfgang, you said that it will do revenues between €1,000,000,000 to €1,600,000,000 in EUV. So if you put €1,100,000,000 at the midpoint, it would mean that this year, the additional revenue outside EUV is about €100,000,000 With DRAM particularly seeing much better, are you more positive than €100,000,000 incremental revenues from the semiconductor this year? And I have a shortfall.
Yes. I think I'll do the revenue piece, Kevin. I mean, if you look at what we said last quarter and what we did this quarter, I mean, on the if I go exclusive EUV first,
I mean, we had a
very strong year end logic, and we continue to believe that, that's going
to be a flattish low. It's good news.
We have a memory business. I think we both used the word significantly, of course, as what we previously believed last quarter. We said we, right now, think it's flat, but it could be up. And now we think it's significantly up. I think that's more than €100,000,000 definitely.
And then we have our EUV business, which was only €350,000,000 or so, which we, like we said before, think it's going to be between €1,000,000,000 and €1,200,000,000 And then don't forget field options and services. Even with the adjustment that we made, we made €2,100,000,000 last year. And if you add up the 2 quarter of the actual lender guidance, we're almost at €1,400,000,000 So we are at a significantly higher run rate there. So I would without giving a quantitative guidance, I'd say the 7.9 is very much on the quantitative side. But if you one other way to look at that may be helpful for you, Sandeep.
If you look at the first half, the actual and the guidance and you deduct that we only have $200,000,000 in UVE revenue in there. So you know in the second half, the bulk of the EUV revenue will come in. And we've not indicated that our non EUV business is going down. So if you do these two exercises, I think you'll get the range that is quite a bit higher than
$1,000,000,000 Peter, just one quick follow-up on EUV. I mean, marketing focused on the top 3 customers. What about the next tier of customers in EUV? Are you engaged with them? And when they start placing significant orders?
Yes. We think we have orders in our backlog of it's more than the top 3. We have an additional 2. And so that makes it 5. And we are in discussion with 2 of us very close.
So I think that is now spreading. But it's clear, of course, that the top 3 is then leading the pack in terms of speed of EUV construction, The others are clearly following.
The next question comes from Mr. Pierre Ferragu.
It's Pierre Ferragu from Bernstein. So if I kind of think that what I heard on the call is very positive developments with RTDV. You have already 20, I think, 21 orders in the back. So you have more in the next couple of quarters. So next year, like, we'll see, 20 tools or so is probably what we're going to see.
And at the same time, I heard also that the DUV business is likely to do well in 2018 as well because mostly because of China generating like a new area of demand in the U. And when I look at consensus expectations, basically, if I assume there is about €2,000,000,000 of EUV revenues sorry, euros 2,000,000,000 of EUV revenues with about 20 tools, then that implies the EUV business would be down about 1 DIMB in 2018. Do you think that kind of pullback makes sense and would reflect maybe like a softening of the roll out of the 10 nanometer node? Or do you think it's 28% to be as a very stronger in the U.
V? Good question. Although what you're asking me is to just give you some reasonable financial feedback on what we think 2018 is going to look like, which I'm not going to do. But qualitatively, I don't see anything at this moment in time that will bring the DTV business significantly down. There is continued strength in the memory business.
When I look at the strength of the logic business, and leading edge logic needs performance memory, so it needs DRAM. And that's clear. I don't see major new DRAM fabs coming online within the next 12 to 18 months. That means that all available slots in or let's say, slots in factories that can take leading edge DPV will take leading edge DPV, given the fact that I don't see that bit demand end demand will go down significantly. So that means memory will stay strong.
You mentioned China. I think China longer term, and I think I also said it on the last call, leading to longer term asset opportunity for the entire industry. However, in 2018, what we're seeing in terms of memory, the projects from the mine will be focused on, let's say, finishing the construction and then putting the first pilot lines in, which will not drive a big, let's say, a vision to install memory capacity. It will take time. I think
all those memory types are all new.
You could call it greenfield and only a greenfield fact. There are greenfield companies.
It's going to take a better time.
Now the positive thing is that, of course, all those choices for technology and for laser fab equipment will be made in the next 12 months' time frame. So it's going to be strategically very important to be in China and to actually have and to sign up those Chinese customers. But the rollout of that capacity will not be in 2018. And 'eighteen will be pilot production, and you see an acceleration of that rollout in 2019 2020. So but all in all, we do not foresee a SUV market in 2018.
I think what we are currently seeing in the end markets simply does not support such a negative view.
That's very clear. And then a very quick follow-up on China. How would you
qualify demand you anticipate there?
So it's a 1920s story, okay? Is that mostly leading edge tools? So are we going to look at high end merchant tools mostly? Or is it going to be more lagging edge in terms of demand in China?
Well, I think you will see some of it Probably both, but I think the emphasis will be on leading edge, will be on leading edge logic and leading edge memory. But that, like China currently has a lot of installed capacity, which is currently 45 nanometer and 28 nanometer panels, so 28 nanometer fabs. Will still take tools in 2018. So it will be a it's a bit of a bit of both, but I would say the emphasis will be on the leading
litigation. The next question, Minister, Darrin Jenkins.
One question and a couple of
follow ups, Karate, in GBS.
The question
I have is around the light source.
I just wondered whether
any of your
customers are asking for gigafotone light source rather than your own Sienna solution on EUV. And just a
couple of follow ups, if
I could, on other issues.
Well, they would be interested in using EUV. Way into the next decade, they will be asking for a GigaPhoton, but most of them aren't. So they want it now or they want it soon. So it's the only available resource and DFO, but it's potentially something for the future, but I would say way into the next decade. Question.
Okay. And then, Wolfgang, I
just wanted to clarify. €200,000,000 of EUV revenue in Q2, €800,000,000 to €1,000,000,000 in H2. The €800,000,000 to €1,000,000,000
that will come at 0 gross margin.
Is that the expectation or allowing for some catch up, it
will come at 0 gross margin?
Yes. For modeling purposes, I would not distinguish between the first half and the second half, making it too complicated.
Next call, I think, Peter. Thanks.
Yes. Okay. The next question is coming from Mr. Mehdi Hosseini. Please state your company name followed by your question.
Yes. Mehdi Hosseini, Susquehanna International. Can you please give us an update on HMI? When would you expect the dual beam product to be available for evaluation? And I have a follow-up.
Well, we'll see the 1st integrated product, let's say, the combination of the ASML product with competencies with HMI, The shift to the 1st pilot customers by the end of the year, the end of this year, beginning of next year. And also blue beam is probably referred to multi beam.
Well, our plan is to
have that
available relatively soon, but we first need to finish the development. It will be this year. It will be 2018 and the year. But more important is, I think, that we have the whole concept of using the ASMR Holistic Authority capability with the inspection capability of HMI and combine it into one product, that will be available much sooner. I think that's the most important part.
And then multi beam is just a natural expansion of this product. And like I said, this combined product was the first time that they started to be the end of the year to the first time customers.
Sure. And then I have a follow-up on the EUV-twelve system shipment this year, maybe as high as 24 next year. Would it be fair to assume that the systems are going to be for 7 nanometer with the insertion for a few layers and then shipment in 2019 and on will include maybe 1 or 2 layer for DRAM and then we as you look into its 5 nanometer logic, then the number of critical layers that would use Eevee will grow higher and that's how we go to doubling claim out. So 12 systems this year, 24 next year, a 7 nanometer introduction and then as we go into 2019 and 2020, the doubling is driven by DRAM and higher critical layer as you migrate to 5 nanometer plus.
Is that fair? Well, I think it's a little bit more complex than that because 7 nanometer is not pending in 2018. I think as you will see, there are production ramp for our customers in late 20 eighteen-nineteen, and we'll continue into 2020. But you will be seeing layers of these node layers will be on top of each other like this just earlier on these calls. What we're currently seeing is that we'll see an acceleration of a capacity ramp for a new node by the leading customers.
It's almost like a camel duck. It's like a hump. And then you have a very long tail. Now that long tail on 7 nanometer will be extending into 2020 2021. But that's not guided by the 1 or 2 leaders in the logic, but also in the followers that will move into that 7 end of 7 nanometer node followed by a 5 nanometer node.
It's going to be layered. So this is not the nice, clean-cut M. 7 nanometer node followed by a 5 nanometer node. It's going to be layered. On memory, you said 2019 DRAM 1 or 2 layers.
Yes, in production, but I think we'll see probably earlier adoption of 1 or 2 layers in DRAM by 2019. And this will also be some of the systems that you referred to, the 12 systems in 2017 and the potential transport systems in 2018 will be used for DRAM 1 or 2 way in production on this mid teen node.
Is that why they haven't finalized the auction part of the package, what they have booked so far is just for the equipment and options are finalized later?
Well, this is specifically to one customer where we have the tool price is fixed and then the options is really the commercial negotiations of what do you want in terms of options, which is specific to the production process and to the, you could say, the design of the customer specifically. And those are options. There are add ons that they need in their production process, which, of course, for us is good business and for the customer always an area where they think they can have some purchasing advantages. So that's just a matter of time, but I don't think we can do any pro intuitions other than
that. The
next question is from Andrew Gardiner.
Good afternoon. Thank you. It's Andrew Gardner from Barclays. I think I was
just interested in following up
a bit more on some of
those comments you were making on the EUV decision making process. I mean, you highlighted during your prepared comments the public comments from all 3
of your lead customers acknowledging the progress that's been made on EUV, not only by yourselves but also across the ecosystem that was fairly well publicized with SPIE. Yet we're still not seeing all 3 step up sort
of equally in terms
of orders. I think TSMC has
been pretty clear and consistent with what they're intending to do over the last couple of quarters. We can see some of
that in your backlog. Samsung also seems
to have been clear in the statements yet. As you just highlighted, we don't yet have a volume purchase agreement or indeed the volume orders that you've highlighted or
that you had expected in the Q1?
And then finally, Intel, the first to sign
an EPA 2 years ago now and yet they still haven't really acted on it. And they had publicly said they would do so when the technology was ready. And again, publicly they seem to admit it is, yet they haven't stepped up in terms of their order rates. And given what
you described in terms of the 2019 ramps, I'm just wondering why you think we're seeing such different positioning from these lead customers and closing orders under window later this year. Where's your confidence level that in
the 2 who are lagging are going to step
up over the next, say, 2 quarters?
Well, it's I don't think that customers are really lagging 1, but they have different areas of focus. And they have different roadmaps and timing of roadmaps, which they would like to execute and also the size at which they want to do is also different. So this is not an homogeneous act. This is a heterogeneous, 3 different customers, 3 different roadmaps, 3 different ways in which you want to execute this. But I think you're absolutely correct when you refer to the public statements, which are very convincing.
There's only the public statements, as you can imagine. We are in very close contact with them, and we're also seeing what they're doing in preparation of that EUV. EVM. And that is that's real tangible. I mean those are factories, those are EV stores, those are that's EV infrastructure that's being built and being put into place into those fabs.
So that is also tangible, which is not that visible, but as it is. On the negotiation process, that's also different for a customer. For instance, one of those customers doesn't have a fully purchase agreement yet, but they have orders in our backlog. So they order tools without the DPA. But the voluntary purchase agreement is really to determine in their best interest what the pricing is on a certain volume.
It's a commercial negotiation, which, as Mehdi asked in the previous question, is also a matter of how many options do you want and what do you want to pay for those options. So these things are commercial negotiations, which are not fully detached from the planning of what they want to do, but it is a different process. So you have the planning process for the production, which we're pretty close to, which actually drives our own planning, our own production planning. And you have the commercial process. And that commercial process ends where it ends, and that's where we are.
So I think in summary, 3 different customers, not homogeneous in
the way that they look
at their roadmaps, the timing of
their roadmaps, not homogeneous in the way that they negotiate, and are not homogeneous also in the speed at which they want to do something and the speed of their ramp. So this is what we have to take into consideration. But again, it's I'm trying to put some color on what we said before. And what we said before is that we see this ramp up. We've been very clearly coming on the 7 nanometer, which we know is 12 units this year.
We should now say around 20 units next year, and we could see a further doubling in the years thereafter when we look at the customer road maps and their execution planning. And I think that is the most important to mention right now.
Okay. Thank you for that. That's very helpful. Also just a quick follow-up for you, Wolfgang. The guidance that you sorry, the 1Q installed base revenue and the guidance you just gave for 2Q, clearly, very rapid growth there.
Are you still saying that, that sort of revised installed base revenue was about £2,100,000,000 last year? Is that still an 8% to 10% revenue growth target for 'seventeen? Are you tracking significantly ahead of that at the moment given the one half guidance, as you've already mentioned? So what kind of ratio will be thinking there?
Yes. It certainly looks like we said in average, we think this business is going to grow 10% over the next couple of years. But as customers are optimizing their installed base, they're using some of these performance enhancing options, very capital efficient for them. And you're right. I mean, dollars 7.58 plus $650,000,000 I don't see this deteriorating much in the second half.
You can do the math. It will a little likely be about 10% this year.
The next question, Mr. Timothy Arcuri. Please state your company name followed by your question.
Tim, we have
been some real bad feedback from your line. Is there anything you can do your end?
Or you have a horrible cold. It's
Better?
That's better. I get it.
Okay, great. Okay. So I want to ask about the 2018 EUVATE comments. I know you still have 24 slots, that has not changed. And I think last call you said
that you'd be totally full
for those slots and even have some backlog by the end of the year for 2019 shipments. So I guess I'm wondering why you'd only ship 20 systems next year versus 24? It would seem like you have to ship as you're like totally full on those slots. Why wouldn't you ship all those slots versus only 20? I'm just getting some questions from investors that
it seems like a downtick and I just wanted you to address that. Yes.
I think when you look at the 'twenty, you have to remember that we also booked for upgrade orders. So there are customers that are taking those tools of 3350s and 3300s out of the R and D. They want them upgraded and put them into production. So that has another 4. So we always said when we look at our production capacity and we look at the road map and timing of the road maps that our customers are probably talking about in terms of their road map rents and look at that time, you said we will have to use that 24 capacity.
Well, 4 of them, at least, are now being upgraded. So it's basically taken out of R and D and they put into production, which is probably an efficient use of the capital. It also means that we need to allocate some of our production people to
upgrade in
the field, not in our factory but in the field, which also has an impact on our own capability because you actually have people in the field, competent people, important people that are in the field doing these open heart surgeries. So it is a mix now of, let's say, new systems and customers wanting those upgrades because it's capital efficient.
Got it, Peter. Thank you. That's helpful. Very, very helpful.
I guess my
follow-up was just on how to think about China timing. I know you said that you expect shipments to support pilot production, I
think you said in 2018.
Does that mean for the existing China projects, does that mean that you'll ship tools in the second half of this year for pilot production for them next year? Or does that mean that you won't ship tools to
these plants until next year? Thanks.
It's just a mix bag. I think the first time tools will ship towards the end of this year, and then we'll continue shipping in the first half of twenty eighteen. So before that's all installed and the production process is qualified, we won't see any output out of those pilot fabs, I would say, way in the second half of twenty eighteen.
The next question, Mr. Amit Ashlandani from Citigroup.
Thank you. Amit Ashandani from Citigroup. Good afternoon, gentlemen. I just wanted to come back to the topic of EUV shipments, orders and lead times. And I was hoping if you could help me with some math here.
You put 21 tools in your backlog at the end of Q1. My understanding is the lead times are increasing the supply chain about 18 months. And if you're looking at shipments cumulatively in 2017 for the rest of the year and what you said for 2018, it's about 30, 32 tools to be shipped. Does that mean you need around 9 to 10 orders coming through by the end of June? Or if it will keep the orders coming later and your lead times will get shorter, largely to see if you meet the shipment target by the end of 2018?
Thank you. So first of all, I
think you see independent of any PPAs, you'll see a decent order flow in the next quarter or the quarter we just started. And it's not a hard and fast rule, right, where you have 18 months. It's not just the order that the communication between us and the customer. I mean, we're sitting together with these customer on a weekly basis. And just because we don't have a piece of paper that says DPA because some final detail on the German condition is not done, means that we don't have a very good view on what these customers need in which quarter in the next year.
And it comes down a
little bit to trust as well, right, where
you trust that the forecast is eventually translating into an order. Of course, in the long run, you better have the discipline to have the orders coming in because we can certainly not be the inventory holder of the industry. But I think we're in pretty good shape. We will yield the orders in Q2. With pretty good forecast on it.
Yes. And I think in addition to what Wolfgang said on it, I said in earlier calls, it is our focus to have the orders needed for shipment in 2018 in the backlog by the end of this year. I mean it is exactly what Wolfgang said. It is not a piece of paper that drives us to start ordering lenses and the long lead time items for the EU resource. It is really the weekly connection that we have with our customers and the almost weekly or you could say monthly update that we're getting on the EUV planning.
That is driving this. So we will be looking at getting in 2017 all the orders that we need for 2018.
And just maybe as a follow-up on the lead times, give us a sense of how we should think about the lead times contracting as we look forward over the next 2, 3 years? And what are the key parameters that will help you get them down the size of those experiential learning?
Yes, I think it is. It is exponential learning. It is the running curve. And we will be looking at halving the lead time over the next 3 years. So I said till the end of the decade.
So by 2020, we should have the lead time, which is, by the way, that's what we did with DTV. And with DQV, as a matter of fact, we're reducing the factory cycle time in our factory and the overall lead time of our DQV system still. So it's a continuous process. So but it is continuous learning. It's almost exponential learning.
That's what it is. That will drive the rebound down.
The next question is coming from Mr. Becca Smith. Please state your company name followed by your question.
Hi. It's a big PC partner. The question I had actually is on IMA. I saw on one of the slides FTIE a diagram of what Hi NA looks like.
It looks like a much larger machine
and concurrent UV systems and suspects are much higher and so on. Have you already thought
what the price of such a
machine is? Are we looking at like a $200,000,000 kind of number for IMA?
Yes. Dollars 200,000,000 plus.
Okay. And maybe like a little bit in the same direction, do you have people who are willing to do double patterning for EUV? Or is that something they want to avoid in the preferring to use China?
Yes, I think this is a very good question. I think this is exactly goes down to the economics of high end manufacturing. It is all about the cost per leading transistor. And now the question is can you do that through multiple patterning or double patterning EUV, which would cut the productivity in half? Or we should do that with basically a shipping capability with higher productivity to a high NA tool.
And the economics that we have calculated on the high NA tool is clearly preferring a high NA solution instead of double tapping in EUV when you go to the 3 nanometer node. So as far as we're concerned, looking at the specs, high NA is the preferred economical solution.
And so just to clarify
my first question, more or less, EUV was 2x the price for DTV. And do you expect I and A to be about 2x the price of today's EUV?
That's a decent assumption. Yes. Okay. Thanks. The next question is coming from Mr.
Aditya Mitchelko. Please state your company name followed by your question. Yes. It's Frank for America. Thanks so much for taking my question.
I have a quick follow-up. My questions have largely been answered. Wolfgang, could you give us color on the total amount of deferred revenue that you have on the balance sheet related to EUV that you haven't recognized in the P and
L? I want to say it's I had the overall deferred revenue €1,200,000,000 I'd say it's probably somewhere under €200,000,000 range or so.
The next question is coming from Mr. Robert Sanders.
Deutsche Bank. First question would just be on DRAM. As I understand it, Samsung is exploring DRAM insertion for EUV or performance DRAM only and that you are deferring the decision on commodity DRAM. Is that something you recognize? And I'm just wondering, is that what you're factoring into your forecast?
Well, we don't know the exact application of what type of product is going to be used. The only data we know is on this particular mid teens node And whether that's used for commodity DRAM or for common DRAM, I suppose it's going to be it's going to be closed DRAM. That seems the most logical. But I cannot give you a definitive answer on this because you really have to ask something and obviously that you did. So we have to believe what our customers say, don't we?
Got it. I mean I'm only asking because performance DRAM is faster than the capacity in DRAM. So the second question would just be on TSMC and other customers. I mean, I think TSMC is the only customer that actually moved UV tools into the manufacturing line. I was just wondering when you thought Samsung and Intel would have to move tools into the actual line to meet insulation at 7 nanometer?
Yes.
I think this is really dependent on how they plan the introduction and the ramp of their nodes. So it is really it's a question that we can't answer for customers. If you ask them and then they give you a timing and what the timing looks more aggressive than the other timing, then you can probably draw a conclusion on what they believe the need of their customers is. And so it's not up to us to draw any conclusions there. It's really driven by how they look at their own roadmap and their customer demand that will determine when they start to ramp up and put tools into production and start ramping capacity.
Yes.
Thanks, Rob. Ladies and gentlemen, we have time for one last question. We're going to squeeze one more. If you're unable to get through on the call and still have questions, feel free to reach out to the IR department. We'll be around for a while.
And Peter, if we can have the last caller, I'd appreciate it.
The last question has come from Francois Mignon. Please state your question. So I'm not going to ask why 'twenty or 'twenty one or 'twenty two next year because if we roll back in time, probably no one would have believed you would have even shipped more than 10 next year. So the question really is about the gross margin, 57.6% with no EUV revenues this year. If the calculations are correct, it's something like 500 bps like higher than last year or something.
So can you help me to understand what the bridge is between last year and this year? Is it really around the mix effect with more services
revenues and more options
and stuff like that? Or
Yes.
Yes. I think there are 2 elements. 1st of all, our revenue in the Q1 was 46% higher this Q1 when compared to last Q1. So we had quite a bit of a volume effect there. Plus, of course, our mix is developing, right?
I mean, you see more holistic lithography as a percent of revenue. You see HMI with the 4th quarter in there. And you see indeed, as you mentioned, you see a lot of upgrade options that have very, very high margin. So it's a combination of all of the above.
Above. Now on behalf of ASML's Board of Management, I'd like to thank you all for joining us today. And operator, if you could formally conclude the call, I'd appreciate it. Thank you.
You're welcome, sir. Ladies and gentlemen,
this concludes the ASML Truth Conference 17