Ladies and gentlemen, thank you for standing by. Welcome to the ASML 20 16 4th Quarter and Annual Financial Results Conference Call on January 18, 2017. I would now like to turn the conference call over to Mr. Craig De Jong. Please go ahead, sir.
Thank you, Arnd, 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 Veldhoven, the Netherlands is ASML's CEO, Peter Wenning and our CFO, excuse me, Wolfgang Niccol. The subject of today's call is ASML's 2016 Q4 and annual results. As always, 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 asml.com, and a replay of the call will be available on our website. 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 at asml.com and in ASML's annual report on Form 20 F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wenig for a brief introduction.
Thank you, Craig. Good morning, good afternoon, ladies and gentlemen, and thank you for joining us for our Q4 2016 2016 annual results conference call. Before we begin the Q and A session, Wolfgang and I would like to provide you with an overview and some commentary on 2016, the Q4 and beyond. Wolfgang will start with a review of our annual 2016 Q4 financial performance with some added comments on our short term outlook, And I will complete the introduction with some additional comments on key 2016 accomplishments and some of our near term expectations.
Thank you, Peter, and welcome, everyone. 2016 was a remarkable year for ASML, both financially and strategically. I would like to first highlight some of our financial accomplishments and then finish with our view of the coming quarter. 2016 was a record breaking year in many financial respects, with total net sales, gross profit, net income and earnings per share all reaching record levels. In addition, we finished the year with the highest backlog ever, which combined with our current business view, allows us to look forward to another great year in 2017, where EUV becomes an integral and growing part of our system revenues, contributing significantly to our top line growth through the balance of this decade and beyond.
Turning to our Q4 results. Net sales came in at €1,910,000,000 Net system sales accounted for €1,220,000,000 driven by Logic, which represented 61 percent of net system sales with memory returning to strength versus Q3 accounting for 39% of net system sales. System sales included €144,000,000 of EUV revenue in line with the guidance given during our earnings call in October. Net service and field option sales for the quarter came in strong as expected at a level of €684,000,000 driven by ongoing strong demand for holistic lithography options, high value upgrades and our growing installed base. Furthermore, we closed the acquisition of HMI in November and net service and field option sales include about €25,000,000 for this new and exciting part of our business.
Our gross margin for the quarter came in at 47.2%. This includes starting the amortization of intangibles as well as the effects from the fair value assessment of HMI's inventory as of the closing date of the acquisition. The negative impact on gross margin for both of these purchase price allocation related items was approximately 1 percentage point. R and D expenses came in at €287,000,000 slightly higher than guided due to both the R and D expenses of HMI and the start of our partial funding of SeisSMT for our high NA UV program. SG and A expenses came in at €107,000,000 also slightly higher than guided due to the inclusion of HMI.
We also had an impact from foreign currency revaluations on transactions and balances relating to the HMI acquisition. You may remember that this was an unfavorable effect of about €28,000,000 in Q3 as reported during our last call. For Q4, we had a more than offsetting favorable effect of about €83,000,000 These effects are reported in the interest and other line in our P and L. Moving to the order book. Q4 system bookings came in at €1,600,000,000 for 44 systems, including 63400 EUV systems.
Strong bookings continued in the logic sector in support of the 10 nanometer ramps and in support of EUV insertion at the 7 nanometer node. Memory bookings strengthened further from its strong Q3 level, supporting expected strength in memory shipments continuing in 2017, driven by DRAM. Continuing order flow for EUV systems brings our total year end EUV system order book to 18 systems. Our overall systems backlog now stands at nearly €4,000,000,000 Turning to the balance sheet. Quarter over quarter cash, cash equivalents and short term investments came in at €4,060,000,000 A major driver was our free cash flow of €1,100,000,000 in Q4.
As we experienced in the last quarter 2015, we saw a significant level of early payments from customers, which will impact Q1 2017 cash flows. Also, as already mentioned before, we closed the HMI acquisition during the quarter and also issued a €750,000,000 bond to support part of our planned strategic investment in SAIS S and T, which is expected to close in Q2 of 2017. With that, I would like to turn to our expectations and guidance for the Q1 of 2017. We expect continuing sales strength in Q1 with total net sales of approximately €1,800,000,000 of which an estimated €30,000,000 will be deferred year over year revenue. Foundry shipment strength supporting 10 nanometer ramps will continue in Q1 and will be firmly supported by memory shipments.
We also expect to ship our first NXE 3,400 EUV system in the quarter. We expect to record the revenue for the system in the Q3 of the year since this system will ship in a non final configuration. I would also like to mention here that one of the EUV systems that we expected to ship early this year was found from Q4 last year due to a customer readiness issue will not ship this year as originally planned. Due to other extenuating circumstances, this customer has now decided to place a system upgrade order for this tool and will take delivery of it in 2018, where it will add to 2 other systems at the customer site to be shipped this year. This leaves our system output plan at 12 new systems and our shipment plan at 13 considering the one additional system that missed delivery for material availability reasons in Q4 2016.
We expect our Q1 service and field options revenue to again come in above €650,000,000 driven by continued demand for volutic lithography options, high value upgrades and our growing installed base. For now, we will report HMI revenues under field options and services. Gross margin for Q1 is again expected to be around 47%, including the effect from the purchase price allocation for the HMI acquisition. The negative impact of these purchase price allocation adjustments for Q1 is more than 1 percentage point. The impact for the full year is about €90,000,000 and will reduce to about €40,000,000 per year from 2018 onwards.
R and D expenses for Q1 will be about €320,000,000 and SG and A is expected to come in at about €95,000,000 The uptick in R and D spend is driven by the inclusion of HMI and accelerated investments in patent Fidelity Metrology. Our contributions to S and T's high NA developments, our own high NA development acceleration and the strong U. S. Dollar. As a reminder regarding our share buyback program, last year, we purchased €400,000,000 worth of our own shares before the program was paused during our acquisition of HMI.
It remains paused for the time being as we close our planned investment in SAIS SMT. The transaction is in the regulatory approval process in the required jurisdictions. We already received the approval in South Korea and expect the approval from Germany and China in time to close the transaction in Q2 2017. And finally, an increase of our annual dividend from €1.05 to €1.20 will be proposed at our Annual General Meeting of Shareholders in April. With that, I would like to turn the call back over to Peter.
Thank you, Wolfgang.
2016 was indeed a remarkable year for ASML, not only financially as highlighted by Wolfgang, but strategically and product technology wise as we continue to prepare ourselves for continued growth in the coming decade and beyond. I'd like to take a moment to highlight some of these key events. Firstly, our acquisition of HMI will enable us to move from simple imaging and imaging placement significantly in a direction of full patent fidelity control, which is a key requirement and value provider for our customers at 7 nanometer and below. This along with an expansion of our current products into broader types of applications allows us to lay the foundation for future growth in our Allistic Lithography Products Group. Secondly, we brought a key supplier partnership to the next level by agreeing to acquire a minority stake of Cart Size SMT, our major critical optics supplier for the purpose of not only securing the extension of EUV Imaging Technology, but also strengthening the current combined businesses of the 2 companies to improve cooperation and governance.
The co investment of about €760,000,000 over a 6 year period centers on the R and D investments of next generation lenses and related capital expenditure, also referred to as high NA, which is critical in meeting our customers' imaging roadmaps throughout the next decade. Lastly and probably most significantly, the industry has turned the corner on EUV. Throughout the year, we continue to execute on mutually agreed performance milestones, which allowed our customers to grow confidence in the technology and tool performance. This resulted in customer decisions to allocate their most critical layers of the next generation nodes to EUV beginning with the industry 7 nanometer logic node. With customers backing this confidence up with orders, we ended the year with an EUV backlog of 18 systems as mentioned.
Together with the anticipated Q1 orders, this will cover our 2017 early 2018 EUV output. As mentioned before, our output capability for 2018 will be around 24 systems. Based on the timing of high volume manufacturing introduction of the advanced logic and memory nodes as announced by our customers, it is realistic to assume that its production capability will be fully utilized by our customers. This means we would expect a continued order flow in the coming quarters. As we move into the next phase of industrialization of EUV, our focus will remain on continued improvement of key HVM performance metrics very much in line with what customers expect of our DPV offering, above 90% availability and productivity per tool specifications.
Furthermore, we are hyphening our focus on our supply chain to provide the required number of EUV systems on time and are preparing a competent and sufficiently sizable EUV field service organization capable of supporting our customers in a volume manufacturing insertion plants. With respect to our core product lines, we continue to develop industry leading imaging systems evidenced by the introduction of our latest Immersion product offering, the NXT 1980, which has demonstrated the fastest ramp of a new product in our history with 46 systems shipped in 2016. For our holistic lithography product line, 2016 was also a good year where we launched new products penetrating new large customer accounts promising significant new business in the years to come. Together with the aforementioned progress on the EUV product performance and related business opportunities, we feel confident in further anchoring our leadership position in the semiconductor equipment marketplace. And turning to the short term, as Wolfgang mentioned, we expect to build upon a record 2016 seeing further significant opportunities to grow in 2017.
We see a continued ramp of the foundry logic 10 nanometer node as recently confirmed by one of our large foundry customers with memory strength driven by expected stronger bit growth in 2017. In addition, service and field option sales are again expected to continue to grow in 2017. This will continue to be driven by sales of scanner system upgrades and our growing holistic lithography product offering. In 2017, we'll see the real first real impact of EUV system sales with recognition of systems shipped in the calendar year, as well as pieces of remaining revenue recognition from systems shipped in the past. For 2017, our opportunities and challenges are crystal clear.
The commitment of our customers to EUV is now apparent and evidenced by our significant and growing EUV backlog. Supporting our customers' intent, moving EUV into volume production in the coming 24 months will remain our number one priority in order to ensure that our customers can deliver their next node transitions as planned. ASML remains committed to do everything we have our capability and power to bring UV to manufacturing readiness as soon as possible. With that, we would be happy to take your questions.
Yes. Thank you for letting us take some extra time to review in some depth key events of 2016 and their impact on our future. The operator will instruct you momentarily on the protocol for the Q and A session. But beforehand, as I always do, I'd like to ask you kindly to limit yourself to one question and one short follow-up if necessary. This will allow us to get as many callers on in the hour as possible.
Now Aaron, could we have your final instructions and then the first question, please?
Of course, sir.
Thank you.
First question comes from Weston Twigg. Please state your company name followed by your question.
Hi, thanks. Pacific Crest. So my question is related to the memory strength. You mentioned that it should stay strong through 2017, particularly on the DRAM side with big growth. And I was just wondering if you're seeing new DRAM capacity being installed given the pricing trends or if these are tools that are being shipped in the end and then replaced in the DRAM fabs?
Yes, it's more of the latter. So we've seen significant relocations from DRAM capacity into NAND throughout 2016 or starting in 2015. And it's really filling it all back up. Like we said in the previous call, we saw quite a significant capacity drop in 2016 in terms of wave starts per month in DRAM, which is a double digit drop and that's being filled up with new DRAM capacity.
Okay. And then I guess as my follow-up, are those upgrades on the NAND side? Are those being upgrades that are contributing to your field and service options? Or is that a different revenue line? Or are those even being upgraded?
It is the first.
It's in the it's these are the upgrades that are in the field service and option line.
Got it. Thank you.
The next question comes from Kai Korchselt. Please state your company name followed by your question. Please go ahead.
Good afternoon. It's Bank of America. The first one was, Peter, just to clarify your commentary around the EUV shipments next year. So I think I heard you say, there's a it's realistic to expect 24 tools. What would be the sort of puts and takes on kind of whether you would ship capacity or maybe potentially slightly less in terms of adoption and capacity?
And second question was on the Chinese CapEx. And I think you said something on the video on your website. Some of the data points that have been making the rounds of the press suggests that there could be tens of 1,000,000,000 of dollars spent on new memory fabs in China. So I'm just wondering in terms of the phasing, timing or magnitude, how much visibility do you have on those projects? Thank you.
Okay. Thanks. On 2018, the determining factor is not so much our capability or the performance of the tool. It is really, as you can understand, the next nodes of our customers have complexities in there that are not only driven by our capability or our lithography capability. This is really based on the introduction timing of our customers.
So when our customers, all our major customers have made public statements about when they want to introduce their next nodes and start using EUV. We take those statements and actually we don't only take the public statements to be honest, we have very detailed discussions with those customers on those public statements and what that means. So we get very detailed plans of when they need, what tool, when. And that is really driving the, let's say, realistic assumption that when we have 24 units to sell, we will sell 24 units when they stick to their plans. So this is basically what it is.
There's nothing more to it than that. So customers will decide. And it could be that if one customer says, I need to, for whatever reason, need to do an introduction 6 months later, there will be a 6 month rescheduling. That's what really drives the business. China CapEx, yes, it's interesting.
I mean, we've also very a lot of interest following every comment that comes out China on the tens of billions that will be invested in all kinds of fabs all over the place. But you also have to look at what impact that will have on our On, let's say, Chinese, it's On let's say, Chinese owned companies, of course, there are the foreign companies that open fabs in China. But I think the reference to the tens of billions are really Chinese owned companies. That is definitely a promise. When we look at the next 12 to 18 months, it is good.
There are there's some good logic opportunity, there's some memory opportunity there, but it's all within the realms of good business and not the extraordinary growth that some people are portraying. That will very also going to take a bit more time than the 2017, let's say, 2018 timeframe.
Okay, great. Thank you. The next question comes from Sandeep Deshpande. Please go ahead. Stage company name followed by your question.
Hi. Sandeep Deshpande, JPMorgan. Just a quick question, Peter, on the order intake. I mean, in the Q4, you took orders for 6 EUV tools. At the same time, I mean, we have some expectation that you will sign volume purchase agreements with some of your large customers for these EUV tools.
So is it now that you will be taking these EUV orders as a normal part of the business as you seem to have done in the 4th quarter? Or are we to still expect volume purchase agreements in the next few months? And I have one quick follow-up question on the 2018 shipments.
Yes. On the order intake in Q4, that was based on a volume purchase agreement for the you could say the 3,400 delivery. It does not include yet the additional options the discussion the discussion what they need and the economics of it. But yes, those orders were indeed taken under the agreements that we have on the pricing and the pricing models. That's just for one customer.
I mean, other customers will follow suit as we continue in 2017. And for those who will introduce EUV later, those VPAs will be also signed later on in 2018. So it's as you said, it's the normal course of business.
And then following on, on the 2018 shipments, I mean you're going to have this capacity for 24 tools and potentially, and then you've already got 6 of those orders at this point. By which point do you need to get all your orders so that, that capacity will be readied for the customer? Because I mean, you've said in the past that you take almost a year to ship these tools and then there is a time which the customer takes to install the tool in their own facility and get it stabilized?
Yes. Well, the time to ship and install is about a year. So it's not plus plus. So it's not for us a time as a year ship the tool. What our time is, we can ship an EUV tool sorry, we can install an EUV tool in about 3 months, 3 to 4 months.
And we have currently an internal cycle time in the factory of about 6 months. So all in all, for us, takes about 9 months from start of the tool to get it installed at the customer side. Now then the customer needs to of course start to qualify the production. The issue is in the supply chain and in the supply chain we need lenses, we need large mechanical modules that need to be produced and this is limiting our output capability right now. However, having said that, to your earlier questions, we are in very intense and deep discussions with customers on volume purchase agreements.
And it is also clear that those customers need those tools at a certain moment, day and time. And taking into account our cycle time reduction plans, it is not absolutely necessary throughout 2017 that we need to keep onto this 2 year type line. That will go down, yes? That will be shorter because we will reduce the cycle time as volumes go up. However, to be able to ship 24 units in 2018, those systems need to be booked by the end of the year, so in this year.
Now if you don't ask me when should those orders come in, is it Q1, is it Q2 or early Q3, I don't know yet. And it's not that important. But what I do know is that for if we need to ship 24 units by in 2017, those orders need to be in.
Thank you.
Next question comes from CGM Muse. Please state your company name followed by your question.
Yes, good morning, good afternoon. I'm with Evercore ISI. So I guess first question, can you walk through how we should think about the gross margin for EUV through calendar 2017? And particularly interested how we should think about the inclusion of deferred 100% margins through the year? Thank you.
Okay. Yes, I'll take that, CJ. We painted the picture at our Investor Day as well. The starting point is a gross margin. If you take everything into consideration of about minus 75% in 2016, our objective is to get this business breakeven from a gross margin perspective in 2017.
And then in 2018, you would make another significant step forward. We are thinking somewhere in the 20s also. Of course, there are a few things that contribute to that. And you're right, some of the catch up revenue that essentially comes at no or low cost will help. But it also will help that this year we are shipping the 3,400, which has a list price that's about $20,000,000 higher than the 33.50s.
We're also going to continue to make progress on the cost side. We still have significant field that we're willing to do. We're making progress on that front as well. And if you then take into consideration also the service business, where, as you know, we are charging per wafer out. But we got to mind a growing installed base that is not productive in churning out a lot of wafers.
So we're still spending a significant amount of money on this without really revenue coming in. But if you take it all into consideration, we are targeting around breakeven. As it relates to the total business, we were about 45% gross margin in 2016. I think we're going to continue to make progress in both businesses, EUV going from minus 75 to about breakeven, but also the non EUV business, because the mix is shifting towards applications and more higher value systems, we'll make progress as well. But overall, I think for your modeling purposes, you should assume that the total company gross margin will somewhat go down because you're growing the revenue significantly on the UV line.
So I should expect a little bit of a step back there before then in 2018, we are marching towards the 50% plus that we're targeting for 2020.
Just as a quick follow-up there, are you thinking closer to like 43%, 44%? And then I guess as my follow-up on the foundry side, orders ex EUV came in fairly weak, I think sub $300,000,000 in the December quarter. And I guess how should we think about the timing of a pickup there? Is that where it's shipped for really an issue? And what's the trajectory as we contemplate 10, 7 nanometer ramp?
Yes. Without tying it down to a specific number, but I think with everything that we gave you between Peter and the shipments on EUV and the margin, and I think you're in the right zip code there on the gross margin. As it relates to orders, first of all, we are thrilled, be at an overall backlog of $4,000,000,000 Having said that, same story as in prior calls, We published the backlog because it gives you a decent structural view on what's happening in the business. You see memory picking up. You see a lot of EUV orders coming in.
But we always say that just merely looking at bookings or backlog should not be your main input parameter in the outlook because as you know, the order at the end of the day, in particular for the more matured business is merely an administrative act. We have BPAs with all of our customers and we get every other week, we get a detailed sales force in order to get what's giving us. So we were not the slightest bit disappointed about bookings last quarter.
Excellent. Very
The next question comes from Timothy Arcuri. Please state your company name followed by your question. Please go ahead.
Colin and Company. Thank you. I had 2 additional questions on EU, you've always continued availability. You had 2 tools that showed a 4 week average of greater than 90% versus 1 last quarter. But there was no improvement in productivity.
Is that because it's not your focus right now? I guess I would have thought maybe you'd seen more than just one tool producing 1500 wafers per day over that 3 day period?
Let me answer that, Tim. First of all, the reason why we put those metrics in there is 1, to be able to communicate to you, but also to our customers. What we believed at that time when we created those metrics, the most relevant milestones were that customers used to get convinced that EUV was going to be the choice of the next generation leading edge, little production. Having said that, meeting those targets, not only those targets, it was the continued, let's say, showing of those targets throughout the year that actually raised the customers' confidence to the level to also publicly state, we're going to use EUV. And they follow that up with orders as you have seen.
Now just for your information, we are over 200 watts, which will actually provide us way more than 1500 wafers per day. And that's what we've shown the customers. So it is about the confidence that we will be at a high volume production requirements by the time that customers need it. And that was shown with those targets. The targets going forward, I would like to relate to other targets that they need for high volume introduction, like I said in my introductory comments.
It's like with DUV, where we're moving into that the other direction. Like Sandeep said, it's business as usual. We will be over we have to be and we will be over 90% availability when they need it, when they start HVM production. And we will be at the productivity of waivers per day as specified by the tool specifications, I. E.
125 waivers per hour. This is where we are and this is why we're absolutely confident that we're going to get there and that's why it's the last time we're going to give you these targeted numbers because those milestones have been met evidenced by the customer orders.
Got it. Okay, Peter. Thank you. And then I guess just as it relates to backlog on EUV, so you had 18 systems in backlog, you have slots for 12 this year. So obviously, 6 of those are going to ship next year.
Since you have 24 slots, give or take next year, does that mean that backlog can only be 24 exiting this year? Or is the policy such that your if you get
an order, even if it's going
to ship 18 months from now, you're going to put it in backlog so that the backlog exiting this year can be actually a lot higher than the 24 slots that you have next year? Thanks.
That's correct. I mean, like I said, we have currently, if you would, in 2016, we had a 24 month lead time that will go down. But it's not going to be 12 months by the end of this year. So it's very likely that they're going to be 2019 orders in there.
Got it. Okay, Peter. Thank you so much.
The next question comes from Amit Hazlanesi. Please state your company name followed by your question.
Good morning and good afternoon. It's actually Amit Hachandani from Citigroup. And thanks for taking my questions. 2, if I may. Firstly, my question is with respect to the technical milestones that you referred to earlier, could you maybe talk about what are the key areas of improvement that you're working on within the tool that need to be completed this year or on the verge of being completed that would take you to the targets we've talked about for commercial introduction in terms of the technological progress?
And secondly, could you also give us a sense of what's happening in the wider ecosystem, particularly around defectivity and tape, pelicals and any other complements within the ecosystem?
Yes. I'll make some comments, make some yes, improvements on extensions, taking out some of the quality issues that we know what to do. That actually brings us to those targets that customers need for high volume introduction 90% plus availability and productivity at spec. The ecosystem, I think 2 things, resist and pellicles. Resist good progress and we get progress reports every now and then.
And over the last couple of weeks, we got some good progress reports on photoresist and on photoresist sensitivity on line edge roughness data and information that gives customers good confidence that by 2010 end of 2018, 2019 we're going to get what we want. On the Pelleco, Pelleco we have started to outsource the Pelican production to a supplier that actually should make the Pelican's for the industry, for our customers. Initially, there was a process that yielded low because Pelagos still had some defects on it on the Pelagos itself. As you can imagine, if the pellegal is a membrane sitting in front of the photo mask, you don't want any defects on that pellet because they're big, they will actually now that everybody is looking for. It is not our main concern.
What our concern is, yes, that the supply base of those pebbles will be maturing also. So we get a constant flow of defect free pedicles. But if you look at the progress that we have made over the last 6 months, that gives us the confidence that also by the time where we need the HVAC volume, the HVM requirements, we will be there.
Thank you, Peter. Just a couple of clarifications on what you said. Firstly, with respect to the technical progress with respect to your tool, So just so that I understand correctly, there are all incremental improvements really around lifetime extensions, There is no radical improvement that you need to do. All of that is behind us in 2016. Would that be a correct statement to make?
Correct. Okay. And secondly, is the topic of actinic inspection tool when it comes to EUV behind us? Or does that still come up in your conversations? Do you think the workaround is pretty much accepted now by all the customers who are looking to move on with EUV?
That's correct. I mean, we do not have any discussions on actinic inspection at this moment. And the workarounds that we currently have either through the pallet use or the on wafer inspection using e beam tools, That is really what the solutions are that customers are currently using. Now the discussion on an actinic inspection tool over time and in the next decade might come back, but we'll see how effective the current solutions are.
Thank you very much.
Next question comes from Gary Jenkins. Please state your company name followed by a question. Please go ahead.
Yes, thanks. It's Gary Jenkins, UBS. One follow-up please and one question. Just a follow-up on memory, your slightly more positive tone on this. Does this include in addition to the 1980s that you're talking about, some KRS business?
And secondly, I just wonder whether you could talk about your expectation in terms of conversion of the 7 nanometer node for your large foundry customers from 10. Thank you.
Gerrit, on the last question, could you be a bit more specific on your last question on the conversion? What do
you want to know? I'd just like to know the sort of level of conversion that you expect between the 10 and 7 node given the similarity, the commonality between the tools. So would you expect it to be more or less than kind of we saw at prior nodes?
Okay. The memory, predominantly, yes, it's going to be probably 1980s. We always ship if you add some extra capacity, some KRF, but going back to an earlier question, this is really backing up the installed capacity that was relocated to NAND, which were basically Immersion Systems, where they were upgraded in the NAND space. So it's predominantly NAND space, but we always have some level of capacity space that is in existing fabs, which also need some KRF, but it's largely NXTs. The level of conversion of 10 nanometer to 7, 10 nanometer, there's always a level of conversion from 10% to 7%, which would include upgrades.
So the level of commonality from a platform point of view is always there, but it's really the performance on overlay and focus that drives really upgrades. So when there is a reuse of an existing body in the 10 nanometer space or a previous node onto the new node, then you see upgrade business. And this is a part of the business that we are seeing that we see growing in 2017. We did see a number of upgrades in the logic space, but also in the memory space from, let's say, previous platforms to the newest specification of the NXT platform really happening. And that is part of the business growth that we see in service sales and options.
So not much different than previous notes. It does lead to a lot of new business in terms of system upgrades.
Can I just follow-up and just ask what your expectations for the sort of 10s I think you've always talked about wafer starts on the 10, 7 geometries combined? I wondered whether there's been any change in the thought process around the starts on
10, 7? No, no. Currently not. The only thing that we can say is that, of course, we invest with business, Lance. I only say that in flash anatomy, confidence that our customers have in being a big node, driven by more than just the smartphone applications.
I mean, they're all talking about and it's real because well about customers in the automotive space, customers in the space that is dealing with artificial intelligence and augmented reality, virtual reality, big data analytics. It's just they're seeing customer applications in that space and that is driving their confidence on the node sizes. And they keep repeating to us that they strongly believe based on what they see in tape outs that comes with big note. Great. Thank you.
The next question comes from Francois Mounier. Please state your company name followed by your question.
Yes. It's Francois from Morgan Stanley. So yes, I understand all the question around the gross margins and there are like zillions of effects around it. But there's one I would like to understand a bit more. I think you guys have been talking about PPA having a negative impact.
This year around €90,000,000 So it's actually a non cash impact. So like when you guide for 47% gross margin in Q1, actually the cash gross margin is more like 48, 48.2 or something for Q1. Is that the right way to look at it?
Yes. Be careful with the cash because there are other cash, noncash related items. But in principle, you're right. We're guiding to about 40 7%. And if you just look at the 2 elements, one being the amortization of intangibles, we said that's going to be about $40,000,000 per year.
That's linear, so it's about $10,000,000 And then we said there was $50,000,000 that results from the revaluation of the inventory to a fair value or market value at the time of closing. We got to walk ourselves through this. And as you can imagine, this is going to be a bit more skewed to the front of the year rather than the back of the year. And therefore, there is, as you state, a probably closer to 1.5% impact on the gross margin in Q1. Or in other words, had we not done the acquisition and to deal with the purchase price allocation, we would have been north of 48% in the first quarter.
You got that correct. But I wouldn't associate it with cash and non cash because of other stuff.
Other things going on. Okay. Okay, very interesting. Thank you very much.
Thanks.
Next question comes from Faran Ammar. Please state your company name followed by your question.
Hi, Credit Suisse. Thanks for taking the question. I have a question related to EUV. What are some of the risk factors that you see going forward? Is there anything that you have to deliver for EUV to be adopted?
Or should we take these orders as a sign that EUV is now at a point that we can count on its delivery in 2018? And also, can you remind us again on what the lead time is for EUV going forward?
Yes, I think ultimately the proof of the pudding is when give you an unconditional commitment to pay you a lot of money, which I think has happened. I think that decision, which I think most customers have been public about EUV, when they want to use it and how they want to use it, is following this up by orders. So I think it is true that said what could be what could happen to make 2018 a year where you're not going to fully ship your production capacity. And we I just answered, one of the things is, I don't know, customer roadmaps might change, but what they are telling us today and we know the number of layers that they want to use EUV on, that we have to use that capacity. And only if the customer change their minds, the things will change, but that's not the case today.
On lead time, yes, lead time, like I said, lead time 2016 was just a 2 year. We had a supply chain that we had to kick out of hibernation. Well, they are now awake, I can assure you. So lead times will also compress somewhat also throughout 2017. I'd love to have a lead time by the end of the year of about 18 months.
Got it. Thank you. And can you talk about how do you see the linearity of 2017? Do you see as some of your peers have indicated like there is a stronger first half relative to second half? Is that something you see also?
And related to the China 500 ks wafer starts, is any of it hitting this year or next year?
Two questions. So on the linearity, it's too early to say. I mean, generally, we have lead times of about 6 months for our tools. So customers probably give us a very clear indication of the next 6 months, which looks very good. The rest of the year is a bit driven by expectations.
And so that's always a bit more uncertain to a certain extent. So that might be the reason why some of our peers focus more on the first half. It's just visibility. On China, 500 ks waiver starts next year. We don't see 500 ks waiver starts next year.
It's too much. I mean, it will be there in here, but I said it earlier, it's going to take a bit of time. With some of our customers, we've been talking about building new fabs now for 2.5 years. In that same timeframe, our larger customers build the fab and we're shipping tools, but we're still talking about the others. So this has to kick into a different gear also.
The 500 ks wave starts next year is absolutely not what we expect. Good business, yes, we will expect shipments into new pedestals for our tools, into fab extensions and perhaps a new fab, but nothing to the level that you just mentioned.
Thank you, Ned for that. The next question comes from Jagadish Eyre. Please state your company name followed by your question.
Yes, Samit Redstone. I have two questions. First, Peter, if you look at your Immersion revenue systems, it has been pretty much stable through the last 3 years and in fact has trended up. So I just was wondering if as EUV starts to progress, how should we think about the Immersion system trajectory over the next 12 to 24 months? Then I have a follow-up.
Yes, the next 12 to 24 months, I do believe that when you look at what is driving our customers business, it is 10 nanometer logic and it's memory. That still needs those immersion systems. So I think next 12 to 18 months, I don't think you will see a lot of change. On the longer term, when complexity of chip design increases, the number of layers will also go up. Now the increase of the incremental layers are very much the critical ones, which is going to be EUV.
And as EUV progresses in terms of maturity and productivity, also EUV will grow into the realm of deep UV, leading edge deep UV. But I don't know how you look at it, there's also I think, clearly discussed at our Capital Markets Day, immersion and DPV will be with us forever. And also means over the next 10 years or so, we're going to be very significant part of our business. Over the next 12 to 18 months is going to be the majority part and the key part of our business, given the fact that those nodes that they are being designed into are the nodes that we're currently using and ramping, which is not in the UV node. 10 nanometer is an immersion node and high teens DRAM is an immersion node.
So that will be
with us for the next 12 to 18 months. Okay. Then briefly, so on the 6 EUV system orders that you got as a VPA, is it fair to conclude that you have met the 7 nanometer initial insertion specification with this key customer? Thanks.
Yes. Okay. Thank you.
Next question comes from Andrew Kanier. Please state your company name followed by your question.
Good afternoon, it's Barclays.
Thank you, guys. Just one on sort of your outlook for 2017. You've given fairly sort of clear messaging around what you see on the logic space and on the memory space and of course services and options continue to grow. Just the statement around significant revenue from EUV for the first time. If I go back to the Capital Markets Day in late October, you seem to be indicating at that point something on the order of sort of below €1,000,000,000 mark as a combination of rev rec at shipment as well as the deferred revenue coming through.
Is that still a reasonable assumption given sort of given a sort of better visibility into in how you see EUV trending for this year? And also within Services and Options for this year, now that HMI is closed and you're in the integration process, what are your expectations for that business over the next couple of quarters? Thank you.
Okay. I'll take that, Andrew. Hi. UV, yes, what we said before continues to apply. We said we can ship a maximum of 13 tools, which is the 12 plus 1 carryover.
Revenue recognition is now close to shipment, or with shipment for a majority. And yes, there will be some catch up revenue from last year where we shipped systems with no revenue recognition. So without tying it down too much, but I think the number will have a 1 in for sure and some will know of 1.2 is clearly within the realm of possibilities. Service and field options will continue to grow even if you start by with excluding HMI. We grew 7%, 8% this year.
And also based on some of Peter's comments on the upgrades, we think it will grow at least by that level. It could go 10% or so year over year. And then we have HMI, which was only in for like 2 months last year, and we're not intending to break this out in the future, but you know from their standalone reporting that this should be somewhere in the $200,000,000 ZIP code. That is incremental. I think you will see us announcing new products during the year, but they will not lead to any significant revenue in the year.
So EUV, field options and services and HMI are all growth drivers. And then you have the rest of the business that is stable and in some cases, up a little bit. So, like we said in our prior remarks, it should be a pretty good revenue year in 2017.
Thanks for the clarification.
The next question comes from Douglas Smith. Please state your company name followed by your question.
It's Doug Smith from Agency Partners. I'm wondering, can you break down the 18 EUV systems backlog into your foundry memory and IDM
groups? Yes, we could. But we generally say that we're not doing it, because it's very it will be very customer specific, because you could easily say who is who. So and that's not what I want. But there are a few memory orders in there and that's just less than a handful and the rest is mostly logic and IDM.
Okay. And just a clarification, were you saying that the 6 EUV orders in Q4 were all from 1 customer?
No, there were 5 from one customer, one was an additional one.
Okay. So 5
from 1 customer. 1 memory customer and 1 logic customer.
Okay. And the one that was in this group of 5 was what you called a kind of quasi PPN?
Sorry, I had to correct it. I think there was all was all logic, sorry, 6 were all logic, but with 2 customers from and 1 had 5, 1 had 1.
And on the 18 systems, we have said before that it's 5 customs in total. So it's not like only the 3. It's 5 customers in total that have orders and with us.
Right. And it's the one that had the 5, which were the thing that you called a kind of a quasi
VPN? Yes. Yes. Okay.
Thank you. Ladies and gentlemen, we have time for one last question. So if you are unable to get through, as always, feel free to contact the Investor Relations department and we'll get back to you as soon as we possibly can to try
to help. Now operator, if
we can have the last caller, please.
Of course, sir. The final question comes from Robert Sanders. Please state your company name followed by your question. Please go ahead, sir.
Yes, good afternoon. Just a question about the 3400. So the shipments that customers have ordered, are you going to upgrade the source to 250 watt at a later stage? And is that free upgrade? And then
the second question would just
be on the HMIs business. It does seem to be tracking below expectations from June when you acquired it. I was just wondering what's the update there on the outlook and how that business is tracking? Thanks.
On the 3400, no, there is no major source upgrade. It's just cranking up the power. And so that is not necessary. The source is the source. And we'll be capable of doing 2 50 watts.
But at least, it's going to be above 2 0 5 watts, where it's 2 50, it doesn't really matter because of 2 0 5, we're at 125 wafers per hour and that's the throughput specification. But 250 by the way is also not with this particular source design is not our end target. I think with this particular design we can go higher. We can go 300 watt and above. On HMI, below expectations?
Yes, I mean, there is no significant difference in what we have seen already during our due diligence time and since this is a growing business. More importantly, the road map going forward is well aligned not only within us and HMI more importantly, also with the technology folks at the customers. So, we're looking forward to a significant opportunity, like we said it at our October call, which could be up to $1,000,000,000 by 2020.
Yes, Rob, and you have to remember that in 2017, we still have the majority of the HMI sales are you would call the standalone HMI sales. What we're really looking at is when you may remember the presentation we had at the time of the acquisition that the area where we believe we will have a significant growth opportunity is the combination of the holistic lithography or the computational lithography competencies of ASML with the HMI capabilities creating a new product. That is where we think there is going to be a big market and a big growth opportunity. And that's not for 2017, that will be 2018 onwards.
Thanks a lot. Okay.
Yes. Thank
you. Good. Well, thank you everybody. On behalf of ASML's Board of Management, we'd like to thank you for joining us in the call today. And operator, if we could have your formal conclusion
to the call, we'd appreciate it. Thank you.
Of course, sir. Ladies and gentlemen, this concludes the ASML 20 16 4th quarter and annual financial results conference call. Thank you for participating. You may now disconnect your line.