Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2016 second quarter financial results conference call on July 20th, 2016. Throughout today's introduction, all participants will be in a listen-only mode. After ASML's introduction, there will be an opportunity to ask your questions. I would now like to open the question and answer session queue. If you would like to ask a question, please press star one to register. If you would like to withdraw a question, please press star two at any time during the call. Your questions will be answered in the order that they are received. If any participant has difficulty in hearing the conference, please press star zero for operator assistance. I would now like to turn the conference call over to Mr. Craig DeYoung. Please go ahead, sir.
Thank you, Arnon, and good afternoon and good morning, ladies and gentlemen. This is Craig DeYoung, Vice President, Investor Relations at ASML. As per our usual habit, joining me today from ASML headquarters in Veldhoven, in the Netherlands, is ASML CEO, Peter Wennink, and our CFO, Wolfgang Nickl. The subject of today's call is ASML's 2016 second quarter results. The length of the call will be 60 minutes, and questions will be taken in the order that they are received. This call is also being broadcast live over the internet at 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 Wennink for a brief introduction.
Thank you, Craig. Good morning and good afternoon, ladies and gentlemen, and thank you for joining us for our second quarter 2016 results conference call. You might have noticed that I'm suffering from a bad cold, so if you wonder who's on the phone, it's me, Peter. Before we begin the Q&A session, Wolfgang 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. 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 EUR 1.74 billion, including system sales of EUR 1.25 billion, driven by logic, which represented 65% of sales, with memory representing the balance. Service and field option sales came in at EUR 486 million. System sales included partial revenue for two EUV systems of approximately EUR 100 million, as forecasted at the beginning of last quarter. During the quarter, we shipped an additional EUV 3350 system, which will lead to revenue in 2017. Gross margin for the quarter came in at 42.6%, slightly above our guidance. R&D expenses came in at EUR 270 million, and SG&A expenses came in at EUR 90 million, both essentially as we guided. Regarding the order book, Q2 system bookings came in at almost EUR 1.6 billion.
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 strength 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 logic-driven against a stable backdrop of memory spend. We took orders for four new EUV systems, bringing our total EUV production tool order book to 10 systems, valued at about EUR 1 billion. Our overall system backlog now adds up to approximately EUR 3.4 billion. Turning to the balance sheet. Quarter-over-quarter cash equivalents, and short-term investments came in at EUR 2.93 billion.
Our free cash flow for the quarter returned to a more normal level of EUR 381 million after two 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 worth EUR 446 million, and executed share buybacks worth EUR 164 million. With that, I would like to turn to our expectations and guidance for the third quarter of 2016. We expect Q3 total net sales of approximately EUR 1.7 billion. 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 one EUV 3350 system in Q3, leading to partial system revenue in Q4.
Last quarter service and field option sales came in at EUR 486 million. We continue to plan a year-over-year increase of approximately 10% in 2016 for this portion of our business. Here 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 EUR 500 million. 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 10/7 nanometer capacity at our logic customers. Gross margin for Q3 is expected to come in at around 47%. R&D expenses for the third quarter will be about EUR 275 million, and SG&A is expected to again come in at about EUR 90 million.
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 EUR 1.5 billion program for 2016 and 2017, which we announced earlier this year. Finally, a couple of comments on our intent to acquire HMI, as announced on June 16th. On July 4th, we placed two EUR bonds totaling EUR 1.5 billion. 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 2016, subject to customary closing conditions, including the approval of HMI shareholders scheduled to occur on August 3rd, and government regulatory approvals from Taiwan, Korea, Singapore, and the U.S.
With that, I'd like to turn the call back over to you, Peter.
Thank you, Wolfgang. As Wolfgang highlighted, our business continues to perform well. We took system orders of almost EUR 1.6 billion and posted sales of EUR 1.7 billion, 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 DRAM orders and shipments supporting continued shrink for cost, mostly to low 20 nanometer and sub-20 nanometer nodes. Meanwhile, NAND manufacturers continue to qualify their 3D NAND products and are ramping their processes through new fab constructions as well as older 2D 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 EUR 1.7 billion. 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 10/7 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. We have observed a peak wafer per day performance of 1,488 wafers and recorded system availabilities of over 80% on five 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 two EUV systems year to date and are on target to ship an additional four to five systems this year, for which we have purchase orders in hand. We believe that the intake of four EUV production orders from two different customers this quarter, when added to our existing six orders, strongly signals the intent of our customers to insert EUV into production at their next full node 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 logic sector's 7-nanometer node and the DRAM sector's mid-teens node. In Deep UV, 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 five systems at customer sites to NXT:1980 specifications. We've also installed an enhanced version of the TWINSCAN XT:1460 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 of the 10/7 nanometer logic node. We have also released a new version of our process window and enhancement software suite involving resolution enhancement techniques aimed at helping to maximize manufacturing yield for EUV and immersion-based lithography at the seven and five-nanometer logic, and the 1X memory nodes. Related to holistic lithography, as announced in June, we have submitted an offer to acquire Hermes Microvision. It is also our clear intent to create, through the combination of HMI's industry-leading EUV 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.
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 doing everything within our capability and power to bring EUV to manufacturing readiness. 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&A session. Beforehand, I'd like to ask that you kindly limit your question to one, with one short follow-up if necessary. This will allow us to get on as many callers as possible. Now, Arnon, 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 session. Again, if you have a question, please press star one to register for a question, and star two to withdraw a question from the queue. If you are using speaker equipment today, please lift the handset before making your selections. One moment, please, for the first question. 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, clearly, Peter, you're seeing very strong Applications sales trends into the third quarter. How do you see your sales trends into the fourth quarter in terms of EUV? Do you expect of these tools that you're going to ship this year, you just mentioned in the earlier conversation that there was some one tool to be recognized in Q4. Are there likely to be more of those tools which ship in Q4 recognized in Q4 itself, or is that going to be a 2017 phenomenon?
Secondly, regarding early part of 2017, with the foundry 10 nanometer ramp coming to an end by the end of this year, what do you see developing in the first half of next year? You probably will get a lot of EUV-related orders in the second half of next year, given that production starts in 2019. How do you see developments in the first half of 2017? Thank you.
I'll answer the second part of the question. I think on the revenue recognition part, I'll refer to Wolfgang Nickl. 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 let's say, bigger logic node, which you call the 10/7 nanometer node. What we will see in 2017, the seven-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 seven-nanometer node to happen. You're correct that for 2018 on EUV, we said it before, our production capacity in 2018 will double from 2017.
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, I think also the shipment demand from our customers in 2018.
As it relates to the 2016 EUV revenue recognition, as we mentioned, it's one of the areas that's not quite clear at this point yet. That's why we can't guide for the full year. I think there are several elements that I can summarize. First of all, we just recognized partial revenue for two systems last quarter. It is expected that we meet more of the performance metrics this year. There will be additional revenue coming in the fourth quarter. 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 three systems by the end of Q3, that leaves three to four systems in Q4. Amongst those systems are 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 fourth quarter, and namely, that those are the systems that were originally 3300s, where the customers have requested certain upgrades and have requested shipment. There, it depends a little bit on the timing. Those are the three main
Our revenue drivers for Q4. 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. Nothing in Q3, a more meaningful number in Q4. We'll focus on shipping and performing, the revenue in Q4 should be pretty healthy on EUV. I hope that helps, Sandeep.
Thanks a lot. Okay.
You're welcome.
Next question is from Mr. Kai Korschelt. Please state your company name, followed by your question.
Hi, it's Bank of America Merrill Lynch. I also had two. I wanted to just continue on the question on the fourth quarter. I think you laid out the kind of EUV puts and takes, but also you said the kind of lengths of the 10 nanometer and then 7 nanometer nodes. 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. I guess my question is, how conservative is the implied revenue run rate, which I believe is around EUR 1.6 billion for Q4 as you see things right now? 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? Also, what is the magnitude of potential further orders in the second half of this year? Will 2017 be a bigger year or meaningfully bigger year potentially for EUV orders? Just so we know what to look for. Thank you.
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 foundry customer that we're having and that is talking to us about leading edge, they talk about 7. 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. I think for Q4, we're not guiding for Q4. 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 10 tools, how many customers do we have in the backlog?
We currently have three customers in the backlog. 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. 2017, definitely, I think if you look at the customer roadmaps for the next generation logic node and also the mid-teens DRAM, 2018, beginning 2019, that will be where first-risk production will start. That means that tools need to be in. That means that 2017 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. Our capacity can actually double from 2018 as compared to 2017.
Yeah, 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.
Yeah, good afternoon. Thank you for taking my question. I guess first question, was hoping you could elaborate on the 1Y nm DRAM EUV orders that you received this quarter. As part of that, we'd love to hear, is that two, three tools? And when you expect to see follow-on orders, and whether that should come from just one chip maker, or you expect that from all as they migrate down to 1Y.
You're talking about the Deep UV tools?
No, EUV.
EUV tools, yeah. Yeah, I think that's clearly, EUV is focused on the mid-teens DRAM node. I'm not going to go into customer specifics, but you can imagine that leaders act first.
Yeah
how many tools will we ship? This is the first. It's clear that others will follow. We also need to put it into perspective. Our expectation is that EUV will be used at mid-teens DRAM node for about two layers. It's a sizable business, but the number of layers is limited. Yes, there will be more tool orders following. It will not stay with this one or two. It will be indeed more, but it's not a level of layer counts that we see in the advanced logic nodes for our logic customers.
Very helpful. If I could follow up on your 4Q outlook, can you, 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? As part of that question, do you expect DUV to actually decline Q1, Q2 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. In that sense, albeit to Peter Wennink's point, don't expect there huge upsides, but we will clearly view that at this point as some sort of a floor. You can see in the EUV, like I mentioned, the upgraded 3300s, if they're recognized or not recognized, I mean, that's a EUR 60 million-EUR 70 million tool, so it's pretty substantial. To the 10/7 nanometer ramp, somebody mentioned earlier that TSMC has raised their CapEx budget by EUR half a billion. They seem to be pretty confident. I'd like to just remind you that one of these tools is EUR 50 million, and it can very easily be that two, three tools go to the left or the right of a quarter, it's also pretty substantial difference.
As it relates to Q1, two, three, four, revenue recognition, again, we will guide you as we ship these tools. We ship, like we said, three to four tools in the last quarter of the year, so they will not all recognize the last quarter. 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. 2017 will make this all a little bit closer connected to the shipment dates. I hope this helps, C.J.
Very helpful. Thank you.
You're welcome.
The next question comes from Mr. Timothy Arcuri. Please state your company name, followed by your question.
Cowen and Company. Thank you. I had two. I guess the first question, Peter, is again around logic. I guess I'm wondering sort of how the transition's going to look between 10 and 7, and I'm trying to compare it back to the transition between 20 and 16. Sixteen wasn't really a real litho shrink, so of course, there was a lot of reuse from the litho side between 20 and 16. 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. Just sort of in general, what do you think the reuse will look like between 10 and 7?
I think it's a good question, but what we're currently planning is that, like you pointed out, the 10-nanometer node is not a very large node. It will not entirely go away. That the expectation for the 7-nanometer node are actually quite strong. 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, they will have a very limited percentage of tools that they will apply for what we call reuse to the next node. Others are less successful in a certain node, they do a lot of reuse for another node. It really depends on whether the installed capacity for the 10-nanometer node currently has enough customer base. You have to remember, it is not a lot. The 10-nanometer installed by the end of this year, maximum capacity with 35,000, 40,000 . That's not a lot. You have some big customers, and you're full. Then everybody moves to 7, which will be different customers. It's difficult to say, very customer specific, very specific to their customer base.
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. 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? Maybe, you need to ship X number of tools to have EUV be 30% margin. You need to ship Y number of tools to have EUV be 40% gross margin. Can you give us those mileposts again?
Yeah. 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 that today. There are several elements that contribute. I think the biggest one is using our production facilities. We've built a factory that can do many more tools than we're doing this year or next year or even in 2018. 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 hours it takes you to put one of these systems together, then the cost takedown curves at the suppliers. The third one is, as you learn, you're also having less E&O, excess and obsolete, due to redesigns.
Also, this is often getting overlooked, if you launch a product and you go from a NXE:3300 to a 3350 and to a NXE:3400, you often have to do a rework in the field that you cannot necessarily always charge, but it goes into your gross margin. That will go away over the next one or two years. I think as an orientation, we believe from a volume perspective, we should be in the neighborhood of 40 tools to be able to get to the 40% gross margin. Depending on the ramp for production for 7 nanometer or 5 nanometer respectively in 2019, and then the associated DRAM volume, I think that those sorts of volumes you could see in the 2019 timeframe. Well in time for our 2020 objective.
Thank you, Wolfgang.
You're welcome.
The next question is from Mr. Mehdi Hosseini. Please state your company name, followed by your question.
Thank you. Of the 10 EUV system you have in your backlog, can you help me with the mix between 3350 and NXE:3400?
Let me think. I want to say there is only one 3350 in there.
Three.
Three.
The rest is.
It's three. It's three 3350, seven NXE:3400.
NXE:3400. How does the ASP change as you go from next mature generation to the next generation, like from 3350 to NXE:3400? Should we assume there's a 10, 20% increase in ASP?
Yeah. List price NXE:3300 was somewhere between EUR 60 and EUR 65. 3350 is mid-EUR 90s. Then the NXE:3400 is about EUR 20 million higher than that.
Okay. Then my follow-up question. It's good to know that at 15 nanometer DRAM, EUV is going to be inserted for two-layer. Is there any update on the logic side, seven-nanometer logic? I think in the past you have talked about a range of two to six or eight layers. It will be great if you could provide an update.
Yeah, I think this is, of course, device-specific, Mehdi, but it's definitely not two. I think we're looking at layer count anywhere between six and nine.
Six and nine. Given the fact that there is a ton more DRAM wafer capacity, would it be possible, 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?
Well, that's a good point. If you look at it, the wafer capacity is a lot bigger. Going forward, you could also argue whether, let's say the mid-teens DRAM, the layer count will stay at two. That's indeed true that it's a much bigger market, so that means it's going to be 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. It also depends on the growth rate of the memory market.
Got it. Thanks so much.
Next question is from Mr. Francois Meunier. Please state your company name, followed by your question.
I'd like to have a bit more details about the previous question, actually. I think you said in the past that logic was 250,000 wafers per month, probably at 7 nanometers. I think given the layer of assumption, it's relatively easy to find the number of tools which are needed. I'm a bit struggling to do the same exercise for DRAM. Let's say if the addressable market is 60-80 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? If you could give us at least a few numbers that we can play with.
Well, I can give you any number to play with, and you can have several simulations. 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 very important. We don't have that information yet. That's why it's pretty difficult for us to make that particular assessment. Also, the growth of the memory market and the DRAM market is, of course, definitely of impact. What I think is most important here is that, by 2020, we would have a build capacity of a 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.
That memory is going to be a significant part of our EUV business. That is clear. Like Wolfgang said, to be profitable in 2019 to a 40% gross margin level, we need 40 systems. When we look at 2019, look at the logic part, 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 of the growth of the memory market and of the logic market. How it is divided between the 2, that still remains to be seen. 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&D budget, I was wondering if suddenly we are not under the scrutiny of the public market and maybe you were a private company, and you could maybe increase your R&D budget more than it is today, on what would you spend it on? Is there anything that would be great to make EUV happen even, don't want to say quicker, but in an even easier way for the customers?
I think whether we are a public company or a private company, we would spend the money wisely. That means that, yes, we have an R&D budget today of about EUR 1.1 billion. If we think we should, in the interest of our customers and in creating value for ASML, need to increase that to EUR 1.2 billion or EUR 1.3 billion, we would. We're not doing that. I don't think there'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 EUR 10 billion target, our R&D could be about 13%, so it's EUR 1.3 billion. What would we spend that money on? I can give you some indication there. There's the next generation EUV. We have a 0.33 NA EUV tool today, which is the NXE:3350 and the NXE:3400.
We will go to a higher NA, a higher numerical aperture tool in the next decade. Probably, seeing first shipment early next decade. We would start spending the money on that because the NXE:3300 or the NXE:3350 is just the first of a series. As the NA improvement will drive down, the geometries will push the shrink. That's definitely something that we would engage in. Don't worry, our engineers, when we look at EUV and we look at our holistic lithography focus, they will find ways to spend EUR 1.3 billion. If you would ask them, they will also find ways to spend EUR 1.5 billion, but we want them to spend EUR 1.3 billion.
Okay. Thank you, Peter.
Okay.
Get well soon.
Next question comes from Mr. Pierre Ferragu. Please state your company name, followed by your question.
Hi, it's Pierre at Bernstein. Thanks for taking my question. I'm trying to wrap up the overall picture of this EUV trajectory for logic. When I'm thinking about how much uncertainty is left in what's going to happen in the next, let's say, three years. I like to think about it in terms of timing, and when I hear you, it feels like timing is fairly nailed down and volume production is going to be 2019. My first question would be, am I right thinking that's the right timing? Very unlikely things happen earlier, very unlikely things happen later.
I would have the same question about the volume of insertion, six to nine layers, as you said, and in line with TSMC comments, feels like a fairly large volume insertion of EUV, maybe in the higher end of the range of what you've been talking maybe a year ago. 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 for the seven and five nanometer nodes. I think we talked in the past about capacities declining from one node to the next one around 10%, but with a fairly wide range of possible outcome there. How much more visibility do you have on that metric?
The first one is timing, the second one is volume of insertion, and the third one is production capacity ramped up at each node.
Yeah, I think Wolfgang. We'll leave the third question to Wolfgang. I think on timing, you're about right, 2019, 2020 volume introduction, which means for us, we have at least a year, 12 to 18 months earlier, you need to start shipping. Don't forget also, this is the first high volume ramps of a new lithography technology in high volume manufacturing. Customers will take a bit more time to get the tools installed, qualify the process. It'll just take a bit more time. From a customer perspective, 2019, 2020, high volume usage, that's about the right timing. The volume of insertion, yes, the high end of the range, six to nine layers. That could be. We have more insight now than we had one 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 on the critical layers with multiple patterning strategies is a very costly and very painful exercise. We're just closer to the, let's say, insertion points and to the decision points. Customers have done a lot more work. That's why we have a bit more clarity. It is indeed on somewhat of the higher end of that range that we talked about last year. It is what it is. Wolfgang, you want to take this?
On the volume assumptions, historically, we have always counted on 300,000 wafer starts per month. That certainly was still true for the 28-ish. Well, actually exceeded it. 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. 2016, 14 would be about 270, 10 including 10 equivalent would be in the 220s and 230s, and then 7 and 7 equivalent would be somewhere around 200. Don't forget that the litho intensity is going up for these nodes. That still enables us to have the revenue growth that we have forecasted. Those are our assumptions on the wafer starts.
I'd like to add to 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. We're still shipping 28 nanometer capacity. There is the move of those, let's say, second-tier logic makers to move to 14 and 16. 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. The lifetime of that node is much longer than we saw five, six, seven, eight years ago.
Okay. One very quick follow-up. 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 230 for that node still is the right ballpark assumption?
Yes.
Excellent. Thanks a lot.
Next question comes from Mr. Jagadish Iyer. Please state your company name, followed by your question.
Yeah, Summit Redstone. Two questions, Peter. First, on the post HMI, how realistic will you be able to intercept the seven nanometer with the actinic inspection product? Or should we think beyond seven nanometer with the HMI product? I have a follow-up.
Yeah. I think the 7 nanometer product, if you listen carefully, 7/5, what the customers are discussing, that's a 2020 timeframe, in high volume production. I think that's what we're focusing on. This is 2016. It's still three, four years from now. Yes, we are focusing on catching that node.
We also said in the announcement of the acquisition that we pegged that market at about EUR 200 million by 2020. That assumes that for these nodes, there would be a revenue opportunity there.
Okay. You had a big uptick in the foundry bookings. How would you characterize that between leading edge versus trailing edge? How should we think about your core immersion segment evolving over the next two to four quarters? Thank you.
Yeah, I think it's safe to assume that the majority of the bookings are for the leading nodes, the 10 nanometer, that's appropriately clear. To Peter's point just a minute ago, we do have the situation that nodes are stretching out. If I can remind you about the first quarter of this year, I think it was 35% of our system revenue came from China, a good chunk of that was driven by lagging nodes that are still very good business for our customers. In terms of forward-looking, the exposures on new nodes will go up. Just because we're doing more with EUV in the future doesn't mean that the DUV business is going away. We continue to invest, as you probably know, close to half of our R&D budget on non-EUV.
We keep advancing it so that customers can get the cost down on these layers as well. As a consequence, when you look at our EUR 10 billion 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. 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. That continues to be a very good business for many years to come for us.
Thank you.
Next question comes from Mr. Gareth Jenkins. Please state your company name, followed by your question.
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. Secondly, I wondered if you could talk about the market share expectations on the EUR 2.3 billion TAM that you see incremental from doing this deal, and then I have one more follow-up. Thanks.
I'll give.
I can do the regulatory, you want to do the market share assumption?
Yeah. Okay.
We haven't gotten any negative feedback from customers. Quite the opposite. 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&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 should go reasonably well. We also have a HSR 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.
Yeah, on your market share assumptions. I think we basically showed the entire market, which includes the wafer monitoring control, but also it's the high volume. All together, 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. We think that at sub-10 nanometer, the pattern fidelity control is going to be more important with the resolutions going down. That's why we need a different solution. That solution is, in a sense, new. 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. You have to realize also that we need an E-beam solution, we believe HMI is a leader, and we can then introduce it faster. We could have also chosen another E-beam supplier. We could have chosen to actually partner with another E-beam manufacturer. We could have chosen to acquire E-beam intellectual property and do it ourselves. That's all been a part of our assessment of how do we bring this new solution to the market. It's been driven by the uniqueness of ASML holistic lithography. E-beam in itself, it's a highly competitive market. HMI is a great company, and it just allows us to be faster.
It doesn't mean that's the only way to bring the solution that we have in mind to the market.
That's great. Could 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 pattern integrity products? Do you need to inject R&D into HMI to bring that to market? Thanks.
Yes, the R&D will grow. That is clear. It will grow both at ASML side and at HMI side. At the other hand, there is also a projected growth of the top line. I think it is too early to talk about the financial models. Yes, there will be additional R&D needed. I think that can be funded out of our projected business growth.
I think one addition probably on the timeline that is not completely nailed down. That is again, where one of the benefits comes in on combining the two solutions. Because you cannot 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 is one of the uniqueness of what we add to this combination.
Thank you.
Next question comes from Mr. Robert Sanders. Please state your company name, followed by your question.
Yeah, thanks for taking my question. First question would just be on Intel specifically. Do you agree that seven 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 three to six rather than the six to nine that you talked about generally before. Second question would just be around the possibility to sign Volume Purchase Agreements from TSMC and Samsung in the same way that you have with Intel. It would seem to me a very important thing to do in order to build confidence in the supply chain to expand capacity. Thanks a lot.
On your last comment, thank you for your business advice. 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. Listen, I made this comment of six to nine because we're in contact with customers and somebody else asked the question earlier on in the call. You seem to be at the higher end of your range as compared to one year ago. We just know more, I think customers also know more, and it's interesting to understand that you think it's three to six.
I would invite you to contact our investor relations department and discuss with them why you think it's three to six, while we, based on our customer interaction, think it's six to nine.
That was from IR this morning.
Three to six? Well, I look at IR here, and I look with amazement.
Okay, I'll follow up offline. Thanks.
Next question.
Operator, let me jump in here. I think we have time for just one last call. If anybody that was trying to get into the call and couldn't, I would offer IR time this afternoon or in the coming few days to answer any questions you might have. With that, Arnon, 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, 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. Given what you've described about transitions and what you know about happening with 3D 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 sort of more transition year?
That's a good question. I think there is no reason why we shouldn't. You just mentioned a couple of those drivers. I mean, 3D NAND is particularly strong. There will be new constructions, new 3D NAND constructions coming online next year. They need tools. The greenfield fabs, they need a lot more litho. That will drive the business, definitely. With respect to DRAM, you're correct. You could argue that we're in a bit of a slow period. What we mentioned on 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. It's technology transitions that are driving the DRAM demand currently.
3D NAND, we're expecting, as you said, for 2017, definitely an increase because of the new construction sites that are coming on stream. DRAM, yeah, 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.
Sounds good. Thanks very much, Peter.
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. Operator, if you could formally conclude the call, we'd appreciate it. Thanks.
Ladies and gentlemen, this concludes the ASML 2016 Second Quarter Financial Results Conference Call. Thank you for participating. You may now disconnect.