Ladies and gentlemen, thank you for standing by. Welcome to the ASML 20 16 Second Quarter Financial Results Conference Call on July 20, 2016. I would now like to open the question and answer session I would now like to turn the conference call over to Mr. Craig De Jong. Please go ahead, sir.
Thank you, Arnon. Good afternoon and good morning, ladies and gentlemen. This is Craig De Jong, Vice President of Investor Relations at ASML. As per our usual habit, joining me today from ASML Headquarters in Veldhoven, The Netherlands is ASML's CEO, Peter Wenig and our CFO, Wolfgang Nickl. The subject of today's call is ASML's 2016 Q2 results.
The length of the call will be 60 and questions will be taken in the order that they're 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 atasml.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, Greg. Good morning and good afternoon, ladies and gentlemen, and thank you for joining us for our Q2 2016 results conference call. And you might have noticed that I'm suffering from a bad call. So if you wonder who's on the phone, it's me, Peter. So before we begin the Q and A session, Joaquin and I would like to provide an overview and some commentary on the recent quarter and provide you our view on the coming quarters.
Wolfgang will start with a review of the Q2 financial performance with some added comments on our short term outlook. Then I will complete the introduction with some further comments on the current general business environment and our future business outlook. Wolfgang, if you want.
Thank you, Peter, and welcome, everyone. For Q2, our net sales came in at a very strong €1,740,000,000 including system sales of €1,250,000,000 driven by Logic, which represented 65% of sales with memory representing the balance. Service and field option sales came in at €486,000,000 System sales included partial revenue for 2 EUV systems of approximately €100,000,000 as forecasted at the beginning of last quarter. During the quarter, we shipped an additional EUV 3,350 3,350 system, which will lead to revenue in 2017. Our gross margin for the quarter came in at 42.6 percent, slightly above our guidance.
R and D expenses came in at €270,000,000 and SG and A expenses came in at €90,000,000 both essentially as we guided. Regarding the order book, Q2 system bookings came in at almost €1,600,000,000 This represents a near doubling of orders from the previous quarter and demonstrates again the lumpy nature of our bookings that we discussed in April. As suggested in our last call, our booking strengths came from the logic sectors, supporting the 10 nanometer volume ramp plans of our customers. The growing strength in logic and flattening in memory also supports our previous commentary that the balance of 2016 will be a logic driven against a stable backdrop of memory spend. We took orders for 4 new EUV systems, bringing our total EUV production tool order book to 10 systems valued at about €1,000,000,000 Our overall system backlog now adds up to approximately €3,400,000,000 Turning to the balance sheet.
Quarter over quarter cash, cash equivalents and short term investments came in at €2,930,000,000 Our free cash flow for the quarter returned to a more normal level of €381,000,000 after 2 quarters of quite varied cash flows due to significant amount of customer prepayments on orders received in Q4, in turn resulting in a negative free cash flow for Q1. During Q2, we paid our 2015 dividend was €446,000,000 and executed share buybacks was €164,000,000 With that, I would like to turn to our expectations and guidance for the Q3 of 2016. We expect Q3 total net sales of approximately €1,700,000,000 As indicated by our backlog, logic shipment strength in Q2 is set to continue in Q3. We do not expect any EUV system revenue in Q3. We expect to ship 1 EUV-three thousand three hundred and fifty system in Q3, leading to partial system revenue in Q4.
Last quarter service and field option sales came in at €486,000,000 We continue to plan a year over year increase of approximately 10% in 2016 for this portion of our business. Care growth continues to be driven by strong demand for holistic lithography options, high value upgrades and the growing installed base. For Q3, we expect field options and services revenue of well above €500,000,000 For the full year, we expect overall sales to exceed our 2015 record year. The ultimate level will depend on the timing of EUV revenue recognition, as well as the size of the initial ramp of tenseven nanometer capacity at our Logic customers. Gross margin for Q3 is expected to come in at around 47%.
R and D expenses for the Q3 will be about €275,000,000 and SG and A is expected to again come in at about €90,000,000 Regarding share buybacks, I would like to mention that we will pause our share buyback program for a few quarters while we are in the midst of the HMI acquisition process. At this time, we however expect to complete the €1,500,000,000 program for 2016 2017, which we announced earlier this year. And finally, a couple of comments on our intent to acquire HMI as announced on June 16. On July 4, we placed 2 euro bonds totaling €1,500,000,000 The proceeds have been received after quarter end and are intended to be used for partial financing of the acquisition. We expect the acquisition to close in Q4 of 2016, subject to customary closing conditions, including the approval of HMI shareholders scheduled to occur on NOx 3rd and government regulatory approvals from Taiwan, Korea, Singapore and the United States.
With that, I'd like to turn the call back over to you, Peter.
Thank you, Olga. As Olga highlighted, our business continues to perform well. We took system orders of almost 1 €6,000,000,000 and posted sales of €1,700,000,000 which were very much in line with the prior expectations. Hence, our business is developing along the lines that we communicated over the last few quarters. While Wolfgang reviewed our outlook for the balance of 2016, there are a couple of things I believe are worthwhile highlighting.
First, our memory business continues to remain fairly robust with PM orders and shipments supporting continued shrink for cost, mostly to low 20 nanometer and sub-twenty nanometer nodes. Meanwhile, NAND manufacturers continue to qualify their 3 d NAND products and are ramping their processes through new fab constructions as well as all the 2 d NAND fab conversions. Secondly, as seen in our second quarter results, evidence of the 10 nanometer logic ramp is now clear as our sales to our combined logic customers has developed as expected. This will continue in Q3 supported by strong orders in Q2. As a result, we see combined sales in Q3 at the level of €1,700,000,000 And as mentioned on previous occasions, the ultimate spend levels for Logic in 2016 will depend on, amongst other things, both the level of end demand and the rate at which our customers will be able to execute their tenseven nanometer ramps.
On the ASML product side, let me jump straight into a discussion on the development of our EUV business. In EUV, you're all aware that our continued focus has been on improving EUV stability, availability and productivity, which are the key performance metrics that drive new technology adoption. The latest progress on these metrics was shared at Semicon West last week, and we have observed the peak wafer per day performance of 1488 waivers and recorded system availabilities of over 80% on 5 field installed systems. These are encouraging results showing continued progress in EUV industrialization, allowing for a growing customer confidence towards production adoption. We've shipped 2 EUV systems year to date and are on target to ship an additional 4 to 5 systems this year for which we have purchase orders in hand.
We believe that the intake of 4 EUV production orders from 2 different customers this quarter, when added to our existing 6 orders, strongly signals the intent of our customers to insert EUV into production at their next full load transition. We expect our order book for production systems to continue to grow in the coming quarters, filling up our 2017 shipment capacity of approximately a dozen systems. The tools shipped over the next 12 to 18 months will support integration and device qualification using EUV technology for production insertion at the Logix sector's 7 nanometer node and the DRAM sector's mid teens node. In DeepUV, the rollout of our TwinScan NXT 1980 Immersion System is progressing well. Since introduction, we've shipped a total of 23 systems and upgraded an additional 5 systems at customer sites to NXT 1980 specifications.
We've also installed an enhanced version of the TwinScan XT-fourteen sixty ARF dry system with a 40% improvement in matched machine overlay, demonstrating our commitment to continue to improve the performance of our dry lithography product portfolio. In Holistic Lithography, we have shipped multiple YieldStar 350 metrology systems to our leading customers to support the qualification and ramp up the 107 nanometer logic node. And we have also released a new version of our process window enhancement software suite involving resolution enhancement techniques aimed at helping to maximize manufacturing yields for EUV and immersion based lithography at the 7 5 nanometer logic and the 1x memory nodes. Related to Holistic Lithography as announced in June, we have submitted an offer to acquire Hermos Macrovision. It is also our clear intent to create through the combination of HMI's industry leading e beam metrology technology and our unique holistic lithography product offering a new class of products for patterning control, creating customer value through improved yield and time to market in their pursuit of the extension of Moore's Law.
And finally, as suggested last quarter, expect no changes in our business focus for the foreseeable future. Support of our customers' clear intent on moving EUV into production is our number one priority. Increasing customer confidence in EUV for manufacturing readiness is critical at this point in time. ASML remains committed to do everything within our capability and power to bring EUV to manufacturing readiness. And with that, we would be happy to take your questions.
Thanks, Peter and Wolfgang. Ladies and gentlemen, the operator will instruct you momentarily on the protocol for the Q and A session. Beforehand, I'd like to ask that you kindly limit your question to 1 with one short follow-up if necessary. This will allow us to get on as many callers as possible. Now, Hernan, could we have your final instructions and then the first question, please?
Thank you, sir. Ladies and gentlemen, at this time, we will begin the question and answer The first question comes from Mr. Sandeep Deshpande. Please state your company name followed by your question.
Hi, JPMorgan. Thanks for letting me on. My question is, I mean, clearly, Peter, you're seeing very strong audit sales trends into the Q3. How do you see EUV, I mean, your sales trends into the Q4 in terms of EUV, do you expect to of these tools that you're going to ship this year, is there you just mentioned on in the earlier conversation that you mentioned that there was some one tool to be recognized in Q4. Are there likely to be more of those tools that ship in Q4 recognized in Q4 itself?
Or is that going to be a 2017 phenomenon? And then secondly, regarding early part of 2017, with the foundry 10 nanometer ramp coming to an end by the end of this year, how do you see what do you see developing in the first half of next year before the whole you would probably will get a lot of EUV related orders in the second half of next year given that production starts in 2019. So how do you see developments in the first half of twenty seventeen? Thank you.
Okay. I'll answer the second part of the question. I think on the revenue recognition part, I'll ask I'll refer to Wolfgang. Yes, you said the foundry 10 nanometer ramp ending towards the end of the year. As we know, the 10 nanometer ramp for Foundry is in fact a part of a, let's say, bigger logic node, which you call the tenseven nanometer node.
So what we will see in 2017 and at the end, the 7 nanometer node is expected to be as a strong and a large node. We expect that in 2017, the continuation is almost a logical evolution from 10 nanometer into the 7 nanometer node to happen. Now and you're correct that for 2018 on EUV, we said it before, our production capacity in 2018 will double from 2017. And with the current customer focus on the introduction of EUV in the next logic nodes. Yes, we do expect that we will see an order flow in 2017 for EUV to support the shipment capacity and I think also the shipment demand from our customers in 2018.
And as it relates to the 2016 EUV revenue recognition, as we mentioned, is one of the areas that's not quite clear at this point yet. That's why we can't guide for the full year. But I think there are several elements that I can summarize. First of all, we just recognized partial revenue for 2 assistants last quarter. It is expected that we meet more of the performance metrics this year.
So there will be additional revenue coming in the Q4. Secondly, we have a shipment that's going out in Q3 that will also have partial revenue recognition in Q4. Thirdly, we will have shipped 3 systems by the end of Q3. So that leaves 3 to 4 systems in Q4. And amongst those systems, our systems where we have the opportunity to recognize revenue, if we ship it in time and the customer accepts it in time that would enable us to recognize revenue also in the 4th quarter and namely that those are the systems that were originally 33 100s, where the customers have requested certain upgrades and have requested shipment.
So there it depends a little bit on the timing. So those are the 3 main revenue drivers for Q4. And on top of that, you'll have a little bit of option service and other EUV related revenue. That's also relatively difficult to predict at this point. So nothing in Q3, but then a more meaningful number in Q4.
And we'll focus on shipping and performing, and then the revenue in Q4 should be healthy on the UE. I hope that helps Sandeep.
Thanks a lot, Wolfgang.
You're welcome.
Next question is from Mr. Kai Korsheld. Please state your company name followed by your question.
Yes. Hi, it's Benk Vermeika, Merrill Lynch. Yes, I also had 2. So I wanted to just continue on the question on the Q4. So I think you laid out the kind of EUV puts and takes, but also you said the kind of length of the 10 nanometer and then 7 nanometer node.
And I think you also just said that you expect that to continue into next year. I think TSMC raised CapEx. They also said they have more customer interest at 7 than they had previously expected. So I guess my question is, how conservative is the implied revenue run rate, which I believe is around $1,600,000,000 for Q4 as you see things right now? And then my second question was on EUV.
You have a backlog of 10 tools now. Could you just kindly let us know how many customers make up those 10 tools? And also, what is the magnitude of potential further orders in the second half of this year? Or will 2017 be a bigger year or meaningfully bigger year potentially for EUV orders? Just so we can we know what to look for.
Yes. To answer your first question on the 10 7 nanometer continuation, we said it's going to be in 2017. I think what we're hearing our foundry customers say is that 7 nanometer is what they're focusing on. It's not only a single customer, every founding customer that we're having and that is talking to us about leading edge, they talk about 7. So yes, I do think we will see that continuation in 2017.
I don't think it has a major impact yet in Q4. It will have an impact in 2017 onwards. So I think for Q4, we're not guiding for Q4, but I don't think you should see a significant upside in that particular quarter that in our upside and that 7 nanometer ramp will definitely happen next year. Now the backlog of the Dent Tools, how many customers do we have in the backlog? We currently have 3 customers in the backlog.
And the magnitude for orders in the second half of the year. I said it in my prepared comments, I believe that by the end of the year, we'll have an order book that will be at a level whereby we can ship our entire production capacity for 2017, which is about a dozen tools. So 2017, definitely, I think if you look at the customer roadmaps, if you look at the customer roadmaps for the next generation logic node and also the mid teens DRAM, Then 2018, beginning 2019, that will be where first risk production will start. That means that tools need to be in and that means that 20 70 must see more orders than in 2016 for EUV because that ramp profile, I think our capacity is probably a good indication of the customer demand and our capacity can actually double from 2018 as compared to 2017. So yes, then we must also see more orders and we will.
Thank you.
Next question comes from Mr. C. J. Muse. Please state your company name followed by your question.
Yes, good afternoon. Thank you for taking my question. I guess first question, I was hoping you could elaborate on the 1Y nanometer DRAM EUV orders that you received this quarter. So as part of that, we'd love to hear, is that 2, 3 tools? And when you expect to see follow on orders?
And whether that should come from just one chipmaker or you expect that from all as they migrate down to 1Y?
You're talking about the deep UV tools? No, EV. Yes. I think that's clearly, EUV is focused on the mid teens DRAM node. And I'm not going to go into customer specifics, but you can imagine that leaders act first.
And how many tools will we ship? This is the first. It's clear that others will follow. But we also need to put it into perspective. I mean, our expectation is that EUV will be used at mid teen DRAM node for about 2 layers.
So it's a sizable business, but number of layers is limited. So yes, there will be more tool orders following. It will not stay with this 1 or 2. It will be indeed more, but it's not a level of lay accounts that we see in the advanced logic nodes for our logic customers.
Very helpful. And then if I could follow-up on your 4Q outlook. Can you kind of, I guess, help us out in terms of thinking, in terms of the uncertainty, how much of it is related to the timing of EUV recognition as opposed to uncertainty as to what demand will look like for 10 and 7 nanometer DUV tools? And as part of that question, do you expect DUV to actually decline Q on Q and Q4 as there is a pause at the Tier 1 foundry maker as they move from 10 to 7 nanometer? Thank you.
I'll take that. First of all, let me in my script, I said that the record level of 2015, that we would exceed that. So in that sense, albeit to Peter's point, don't expect there huge upsides, but we will clearly view that at this point as some sort of a floor. And you can see in the EUV, like I mentioned, the 3,300s, the upgraded 3,300s, if they recognize or not recognize, I mean, that's 60,000,000, 70,000,000 tool. So it's pretty substantial.
And to the tenseven nanometer ramp, somebody mentioned earlier that TSMC has raised their CapEx budget by €500,000,000 They seem to be pretty confident. I'd like to just remind you that one of these tools is €50,000,000 and it can very easily be that 2 or 3 tools go to the left or the right of a quarter end and it's also pretty substantial difference. As it relates to Q1, Q2, Q3, Q4 revenue recognition, again, we will guide you as we ship these tools. But we ship, like we said, 3 to 4 tools in the last quarter of the year. So they will not all recognize in the last quarter.
So you should assume that we're going on to a more regular EUV revenue flow. Also quite frankly, as we show that we can reliably install these tools and we can therefore like we discussed on prior calls, hopefully recognize at least portions of it much closer to shipment date rather than waiting for the complete installation in the field. So 2017 will make this all closer connected to the shipment dates. I hope this helps, V shape.
Very helpful. Thank you.
You're welcome.
And the next question comes from Mr. Timothy Arcuri. Please state your company name followed by your question.
Colin and Company, thank you. I had 2. I guess the first question, Peter, is again around logic. I guess I'm wondering sort of how the transition is going to look between 10/7 and I'm trying to compare it back to the transition between 2016. 2016 wasn't really a real litho shrink.
So of course there was a lot of reuse from the litho side between 2016. So I'm curious what you think the reuse will be for what gets ordered for 10 to get reused at 7. Obviously, I know that there's going to be some EUV tools used at 7 that aren't being used at 10. But just sort of in general, what do you think the reuse will look like between 10 and 7?
Yes, I think it's a good question, but what we're currently planning is that, like you pointed out, that the 10 nanometer node is not a very large node. It will not entirely go away. And the expectation for the 7 nanometer node are actually quite strong. So there's always going to be some level of reuse is actually planned. We don't think that percentage reuse is going to be anything significantly different than what we saw in the past.
Having said that, reuse is not something that you can generically apply over the Logic or the Foundry customers. I mean some customers that are extremely successful at a certain node or are very successful at a certain node get also follow on orders on that node. We've actually seen that also in the past. And they will have a very limited percentage of tools that they will apply for what we call reuse to the next node. And others are less successful in a certain node and they do a lot of reuse for another node.
So it really depends on whether the installed capacity for the 10 nanometer node currently has enough customer base. And you have to remember, it is not a lot. The 10 nanometer installed by the end of this year, maximum capacity of 35,000, 40000 ks. So that's not a lot. So you have some big customers and you're full.
And then everybody moves to 7, which will be different customers. So it's difficult to say very customer specific, very specific to their customer base. And what we're currently planning also in our longer term planning is that we don't see it as a major shift or a major impact of that reuse model going forward.
Great, Peter. Thank you. And then second question for Wolfgang. Wolfgang, now that obviously EUV is going to I think be inserted at least partially at 7 nanometer, that's clear. Can you again remind us of what the margin targets will be?
So maybe you need to ship X number of tools to have EUV be 30% margin, you need to ship Y number of tools have EUV be 40% gross margin. Can you give us those mileposts again?
Yes. So in order to get to our 2020 target of 50% overall gross margin, we would have to arrive at 40% for EUV. Of course, we are much lower than the net today. There are several elements that contribute. I think the biggest one is using our production facilities.
We have built a factory that can do many more tools than we're doing this year or next year or even in 2018. So that is a big thing. The second thing is, of course, the learning curve, both at us and our suppliers, for instance, the number of our suppliers, for instance, the number of hours it takes you to put one of the systems together. And then the cost takedown curves at the suppliers. The third one is, as you learn, you're also having less E and O, excess and obsolete, but due to redesigns.
And also and this is often getting overlooked. If you launch a product and you go from a 3,300 to a 3,350 and to a 3,000 400, you often have to do rework in the field that you cannot necessarily always charge, but it goes into your gross margin. And that will go away over the next 1 or 2 years. I think as a orientation, we believe from a volume perspective, we should be in the neighborhood of 4 d tools to be able to get to the 40% gross margin. And depending on the ramp for production for 7 nanometer or 5 nanometer respectively in 2019 and then associated DRAM volume.
I think those sorts of volume you could see in the 2019 timeframe, so well in time for our 2020 objective.
And the next question is from Mr. Mehdi Hosseini. Please state your company name followed by your question.
Thank you. After 10 EUV system you have in your backlog, can you help me with the mix between 3,350 and 3,400?
Let me think. I want to say there is only 13,350 in there. 3. 3. It's 33,350,73400.
3400. And how does ASP change as you go from mix mature generation to the next generation like from 33,050 to 3400, should we assume like there's a 10%, 20% increase in ASP?
Yes. List price, 3,300 was somewhere between $60,000,000 $65,000,000 $3,350,000,000 is mid-90s and then the $3,400,000,000 is about 20,000,000 dollars higher than that.
Okay. And then my follow-up question. It's good to know that at 50 nanometer DRAM EUV is going to be inserted for 2 layer. Is there any update on the logic side, 7 nanometer logic? I think in the past, you have talked about a range of 2 to 6 or 8 layers.
It will be great if you could provide an update.
Yes, I think this is of course device specific, Mehdi, but it's definitely not 2. I think we're looking at lay accounts anywhere between 6 9.
6 9. But given the fact that there is a ton more DRAM wafer capacity, Would it be possible or would it be would it make sense that by 2020 DRAM actually would account for a larger mix of EUV demand than logic just because there is more wafer capacity?
That's a good point. I mean, if you look at the the wafer capacity is a lot bigger. So and going forward, you could also argue whether a sub, let's say, the mid teens DRAM, the lay account will stay at 2% and also could go. But that's indeed true that it's a much bigger market. So that means it's going to be it's a very substantial part of the EUV business.
Now how big it will be also depends on the aggression with which customers are going to add EUV layers and it also depends on the growth rate of the memory market.
Got it. Thanks so much.
Next question is from Mr. Francois Munier. Please state your company name followed by your question.
Hey, sorry, it's Francois.
Yes, so I'd like to
have a bit more details about the previous question actually, because I think you said in the past that Logic was 250,000 wafer per month, probably at 7 nanometer. So I think given the layoff assumption, it's relatively easy to find a number of tools which are needed. I'm a bit struggling to do the same exercise for DRAM. So like let's say, if the addressable market is 60 to 80 EUV tools for Logic, how much would it be for DRAM? Is it like 25%?
Is it 50% of that market? Is it more? Is it less? It's just like if you could give us at least a few numbers so then we can play with.
Well, I can give you any number to play with and you can have several simulations. But it's what I said earlier, I think it is important to understand that the 2 layers will be 2 layers or will be more going forward. That is a very important and we don't have that information yet. So that's why it's a bit it's pretty difficult for us to make that particular assessment. And also, the growth of the memory market and the DRAM market is, of course, is definitely of impact.
Well, I think it's most important here is that I think by 2020, we would have a capacity, a build capacity of maximum 60 units. I'm not saying that we're going to sell all those 60 units because like I said earlier, we don't have all the information yet to understand what our customers are planning. But that memory is going to be a significant part of our EUV business. That is clear. And like Wolfgang said, to be profitable in 2019 to a 40% gross margin, we need 40 systems.
Now when we look at 2019, look at the LogicMark, look at the memory market, I don't think that that 40 systems is a big challenge or a big stretch when you look at our current assumptions on the growth of the memory market and of the logic market. But how it is divided between the two, it still remains to be seen. So you have to give us a break on this and I can give you a couple of numbers so you can play with those numbers, but I think you can do that yourself also.
Okay. Just a quick follow-up. On your R and D budget, I was wondering if suddenly you were not under the scrutiny of the public market and maybe you were a private company and you could maybe increase your R and D budget more than it is today. On what would you spend it on? And is there anything that would be great to make EV happen even not necessarily quicker, but like in an even easier way for the customers?
Well, I think whether we are a public company or a private company, we would spend the money wisely. And that means that, yes, we have an R and D budget today of about SEK1.1 billion. If we think we should for the in the interest of our customers and in creating value for ASML, they need to increase that to 1.2 or 1.3, we would. But we're not doing that. So I think it's a big difference between whether we're public or whether we're private.
We're spending the money as wisely as we can. We've also said that when we look at the €10,000,000,000 target, our R and D could be about 13%, so it's €1,300,000,000 What will we spend that money on? I can give you some indication there. That's the next generation EUV. We have a 0.33NA EUV tool today, 0.33NA EUV tool today, which is the 3350 and 3400, we will go to then a high NA, a higher NA, a higher in order to make a aperture tool in the next decade, probably seeing 1st shipment early next decade.
We would start spending the money on that because the 3300 or the 3300 and 50 is just the first of a series as the NA improvement will drive down the geometries, will push the shrink. So that's definitely something that we would engage in. And don't worry, I mean, our engineers, when we look at EUV and we look at our holistic lithography focus, they will find ways to spend €1,300,000,000 And if you would ask them, they will also find ways to spend €1,500,000,000 But we want them to
Thank you, Peter. Get the rest of it.
Next question comes from Mr. Pierre Ferragu. Please state your company name followed by your question.
Hi, it's Pierre Bernstein. Thanks for taking my question. So I'm trying to wrap up like the overall picture of this EUV trajectory for Logic. And when I'm thinking about how much uncertainty is left in what's going to happen in the next, let's say, 3 years. So I like to think about it in terms of timing.
And when I hear you, it feels like timing is fairly nailed down and like volume production is going to be 2019. So my first question would be, am I right thinking that's the right timing? Very unlikely things happen earlier, very unlikely things happen later. And then I would have the same question about the volume of insertion, 6 to 9 layers, as you said, and in line with TSMC comments, feels like a fairly large volume insertion of EUV, so maybe in the higher end of the range of what you've been talking maybe a year ago. And then my last question, of course, is the volume of production, like the capacity that is going to be ramped up for the 10 nanometer node and the 7 sorry, for the 7 and 5 nanometer nodes.
I think we talked in the past about capacities declining from 1 node to the next one around 10%, but with a fairly wide range of possible outcome there. So how much more visibility do you have on that metric? So the first one is timing. The second one is volume of insertion and the third one is production capacity ramp up at each node.
Yes. I think, Wolfgang, I will leave the third question to Wolfgang. I think on timing, I think you're about right, so that's 'nineteen, 'twenty volume introduction, which means for us, you have at least a year, 12 to 18 months early you need to start shipping. Don't forget also this is the first high volume ramp of a new lithography technology in high volume manufacturing. So customers will take a bit more time to get the tools installed, qualified process.
It will just take us a bit more time. But from a customer perspective, 2019, 2020 high volume usage, that's about the right timing. The volume of insertion is the high end of the range, 6 to 9 layers, that could be. I mean, it's we have more insight now than we had 1 year ago. Customers have more insight now.
I think also customers have also found out, we suppose, and that's basically what we hear from them that trying to do 7 nanometer with all the critical layers with multiple patterning strategies is a very costly and very painful exercise. So which we're just closer to the, let's say, to the insertion points and to the decision points, customers have done a lot more work. That's why we have a bit more clarity. And it is indeed somewhat of the higher end of that range that we talked about last year. But it is what it is.
On the volume assumptions, historically,
we have always counted on like 300,000.
We've counted on like 3 On the volume assumptions, historically, we have always counted on like 300,000 wafer starts per month. Certainly was still true for the 28 ish, actually exceeded it. And our assumptions haven't changed. We assume that over time, the semiconductor growth rates will come down a little bit from what they have been in the last 10 years, potentially approach GDP at one point in time. That's why we have modeled a 10% reduction node over node.
So 2016, 2014 would be about 2.70, 10 including 10 equivalent would be in the 220s and 230s and then 7 and 7 equivalent would be somewhere around 200. But don't forget that the litho intensity is going up for these nodes. So that still enables us to have the revenue growth that we have forecasted. Those are our assumptions on the wafer stuff.
And I'd like to add to that. I'd like to add to that that last quarter we also made it clear, I at least hope that you see, especially in Logic, that you have layers of nodes that are now on top of each other. I mean, we're still shipping 28 nanometer capacity. And there is the move of those, let's say, 2nd tier logic makers to move to 14 and 16. So these are not nodes that have ended.
There is a much longer tail life of those nodes, which makes it more difficult to also predict how big nodes are going to be and how because the lifetime of that node is much longer than we saw 5, 6, 7, 8 years ago.
Okay. And one very quick follow-up. So far, in the ramp of the 10 nanometer node, when you talk planning with your clients, you feel that your assumption of a capacity of 2.30 for that node still is the right ballpark assumption.
Yes.
Excellent. Thanks, Alex.
Next question comes from Mr. Jagdish Iyer. Please state your company name followed by your question.
Yes, Samit Redstone. So two questions, Peter. First on the post HMI, how realistic will you be able to intercept the 7 nanometer with a reticle inspection product? Or should we think beyond 7 nanometer with the HMI product? And then I have a follow-up.
Yes. I think the 7 nanometer product, if you listen carefully, sevenfive, what customers are discussing, that's a 2020 timeframe in high volume production. I think that's what we're focusing on. I mean, this is 2016, it's still 3, 4 years from now. So yes, we are focusing on catching that note.
And we also said in the announcement of the acquisition that we had that market at about $200,000,000 by 2020. So that assumes that for these nodes, there would be a revenue opportunity there.
Okay. And then you had a big uptick in the foundry bookings. So how would you characterize that between leading edge versus trailing edge? And how should we think about your core Immersion segment evolving over the next 2 to 4 quarters? Thank you.
Yes, I think it's safe to assume that the majority of the bookings for the leading nodes, 10 nanometer and that's pretty clear. But to Peter's point, just a minute ago, we do have the situation that nodes are stretching out. And like if I can remind you about the Q1 of this year, I think it was 35% of our system revenue came from China and a good chunk of that was driven by lagging nodes that are still very good business for our customers. And in terms of forward looking, I mean, the exposures on new nodes will go up. And just because we're doing more with EUV in the future, doesn't mean that the BUV business is going away.
We continue to invest, as you probably know, close to half of our R and D budget on non EUV. So we keep advancing it so that customers can get the cost down on these can get the cost down on these layers as well. And as a consequence, when you look at our $10,000,000,000 plan by 2020, the DUV business will not look much different than it does today. Somebody asked earlier about reuse. What you do see is that we help customers significantly in bringing their costs down.
And instead of necessarily shipping a scanner, we're also helping them to upgrade the scanners that they already have, which is capital efficient for them and very good business for us. So that continues to be a very, very good business for many years to come for Okay.
Thank you.
Next question comes from Mr. Gareth Jenkins. Please state your company name followed by your question.
Yes, thanks. It's UBS, Gareth Jenkins. Could
I
just ask a couple of questions on the HMI deal in particular? I wondered if you could talk about feedback from customers with regard to regulatory approval. And secondly, I wondered if you could talk about the market share expectations on the €2,300,000,000 TAM that you see incremental from doing this deal? And then
I have one more follow-up. Thanks.
I'll give the so the I
can do the regulatory and you want to do the market share assumption?
Yes, okay.
So on the regulatory, we haven't gotten any negative feedback from customers, quite the opposite. I mean, I think customers see the uniqueness of a combined solution, in particular, bringing the software aspects in there and that helping them to bring this from the R and D into the production environment and go much more to a control solution rather than just a monitoring or qualification solution. On the regulatory front, we have submitted our applications in Taiwan, in Korea and Singapore. I think that will should go reasonably well. We also have a filing in the U.
S. That's due to be filed before this month is over. We so far don't see any hurdles on that front.
Yes. On your market share assumptions, I think we basically showed the entire market, which includes the wafer monitoring control, it's but also it's the high volume. Altogether, we think it's about 2.3%. The market share assumptions that we have, I think, are not for public disclosure now. I think what is the most important is to realize that what we're trying to do is to create a product that does not exist today.
It's we think that at sub-ten nanometer, the patent fidelity control is going to be more important with the resolutions going down. And that's why we need a different solution. And that solution is in a sense new. It's and it's driven by the uniqueness of the holistic lithography capabilities of ASML. That is something that you will not find in any other place.
Now if you can combine that with Leading E Beam, that is a very good opportunity to actually help our customers manage their yield. But you have to realize also that it's that we need an Ebim solution and we believe HMI is a leader and we can then introduce it faster, yes? So but we could have also chosen as another e beam supplier, we could have chosen and we could have chosen to actually partner with another e beam manufacturer. We could have chosen to acquire e beam and intellectual property and do it ourselves. I mean, that's all been part of our assessment of how do we assessment of how do we bring this new solution to the market.
It's been driven by the uniqueness of ASML Holistic Lithography and EV Mini itself. It's a highly competitive market and HMI is a great company and it just allows us to be faster. But it doesn't mean that that's the only way to bring the solution that we have in mind to the market.
That's great. Can I just ask one follow-up on that, Peter? What's the timetable for combined products between your litho and their e beam solution for the sort of patent integrity products? And do you need to inject R and D into HMI to bring that to market? Thanks.
Yes, the R and D will grow. That's clear. It will grow both at the ASML side and at HMI side. At the other hand, there's also projected growth of the top line. So I think it's too early to talk about the financial models.
But yes, there will be additional R and D needed. And I think that can be funded out of our projected business growth.
And I think one addition probably on the time line that's not completely nailed down, but that's again where one of the benefits comes in on combining the two solutions, because you can't wait all the way for multi beam. If you use the software to guide the beam to areas of interest, you potentially get a solution faster to the market. That's one of the uniqueness of what we add to this combination.
Next question comes from Mr. Robert Sanders. Please state your company name followed by your question.
Yes, thanks for taking my question. First question would just be on Intel specifically. Do you agree that 7 nanometer design rules are fairly well locked down now, therefore your EUV opportunity is more limited in terms of the number of critical layers? I'm talking about sort of 3 to 6 rather than the 6 to 9 that you talked about generally before. And then second question would just be around order to in order to build confidence in the supply chain to expand capacity.
Thanks a lot.
On your last comment, thanks for your business advice and we will definitely do that. The VPAs are going to be particularly important, not only for the supply chain, but also to guide the EUV business with these two names that you just mentioned. Now I'm not going to be specific on any customer. And I made this comment of 6% to 9% because we're in contact with customers and somebody else asked a question earlier on in the call, you seem to be at the higher end of your range as compared to 1 year ago, yet we just know more. And I think customers also know more.
And it's interesting to understand that you think it's 3% to 6%. So I would invite you to contact our Investor Relations department and discuss with them why you think it's 3% to 6%, while we based on our customer interaction think it's 6% to 9%.
That was from IR this morning.
3% to 6 I look at IR here and they look with amazement here and they look with amazement.
Operator, let me jump in here. I think we have time for just one last call. And if anybody that is was trying to get into the call and couldn't, I would offer IR's time this afternoon or in the coming few days to answer any questions you might have. And with that, Arnaud, can we have the last caller, please?
Last question comes from Mr. Andrew Gardiner. Please state your company name followed by your question.
It's Barclays. Good afternoon, guys. Thanks for taking the question. We spent quite a bit of time talking through what's happening on the foundry side and particularly with 7 nanometer growing into next year. I'm just wondering if you could help us with a bit more detail on memory as well.
Clearly, it's been a slightly tougher year in terms of revenue from that customer group, particularly on the DRAM side. And it looks like we're going to be down somewhere in sort of the mid 20% range in 2016. But given what you've described about node transitions and what you know about what's happening with 3 d NAND and sort of filling some of these facilities, why wouldn't we see memory spending come back up to some of the levels that we've seen in prior years after this more transition year?
That's a good And I think there is no reason why we shouldn't. You just mentioned a couple of those drivers. I mean, 3 d NAND is particularly strong. There will be new constructions, new 3 d NAND constructions coming online next year. They need tools.
They're greenfield fabs. They need a lot more little. So that will drive the business definitely. And as with respect to DRAM, you're correct. I mean, you could argue that we're in a bit of a slow period.
And what we mentioned on the EUV insertion in DRAM is clearly again driven by the necessary technology transitions to reduce cost. Everything that we're currently shipping into DRAM is with those customers really focused on their next node. So it's technology transitions that are driving the DRAM demand currently. At 3 d NAND, we're expecting, as you said, for 2017, definitely an increase because of the new construction sites that are coming on stream. And DRAM, yes, it's been a slow period.
I would be with you if you would say, well, there's an opportunity next year for the memory space. I would agree with you.
Okay. On behalf of ASML's Board of Management, I'd like to thank those that joined us today for taking the time to do so. And operator, if you could formally conclude the call, we'd appreciate it. Thanks.
Ladies and gentlemen, this concludes the ASML 20 16 second quarter financial results conference call. Thank you for participating. You may now disconnect.