Ladies and gentlemen, thank you for standing by. Welcome to ASML 2015 fourth quarter and annual results conference call on January 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 questions. I would now like to open the Q&A queue. If you'd like to ask a question, please press star one to register. If you'd like to withdraw your question, please press star two at any time during the call. Your questions will be answered in the order they are received. If any participant has difficulty 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, Aaron, and good morning and good afternoon, ladies and gentlemen. This is Craig DeYoung, Vice President of Investor Relations at ASML. Joining me today from our headquarters here in Veldhoven, in the Netherlands, is Mr. Peter Wennink, our CEO, and Wolfgang Nickl, ASML CFO. The subject of today's call is ASML's 2015 fourth quarter and annual results. Before we start, I'd like to take a brief moment to address some questions from previous calls about our Q&A queue. The process is you'll be advised that the Q&A starts upon the operator's instructions at the opening of the call and not before. Therefore, there's really no value in calling in too long before the call starts in an attempt to get into the queue. As the operator mentioned, questions will be taken in the order that they're received. The length of the call will be 60 minutes.
The call will be broadcast and is being broadcast live over the internet at asml.com, and a replay of the call will be available on our website for approximately 90 days. Lastly, before we begin, I'd like to caution listeners that comments made by management during the conference call will include forward-looking statements within the meanings of the federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of these 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.
Good morning. Good afternoon, ladies and gentlemen, and thank you for joining us for our fourth quarter and annual 2015 results conference call. Before we begin the question and answer session, Wolfgang and I would like to provide an overview and some commentary on the recent quarter and provide our view of the coming quarters. Wolfgang will start with a review of the Q4 financial performance with added comments on our short-term outlook. I will complete the introduction with some further comments on the current general business environment and on our future business outlook. Wolfgang, to you.
Thank you, Peter, and welcome everyone. For Q4, our net sales came in at EUR 1.43 billion. This included system sales of EUR 881 million, of which memory represented 44% and logic represented 56%. Service and field option sales came in strong at EUR 553 million. This part of our businesses growth continues, driven by strong demand for holistic lithography options, high-value upgrades, and a growing installed base. Our gross margin for the quarter came in at 46%, slightly above the guidance. Our R&D expenses came in at EUR 273 million. SG&A expenses came in at EUR 90 million, essentially as we guided. For the full year, our net sales reached a new record of EUR 6.3 billion, which is up 7% from the prior year and includes over EUR 2 billion for field options and services. Gross margin for 2015 was 46.1%, up from 44.3% in 2014.
Our basic earnings per share for 2015 were EUR 3.22, up 18% year-over-year. Turning to the balance sheet. Quarter-over-quarter cash equivalents, and short-term investments grew from EUR 2.68 billion to EUR 3.41 billion, driven by strong free cash flow, which was impacted by a significant amount of customer prepayments on orders received. In Q4, we repurchased shares worth EUR 141 million, bringing the total amount for repurchased shares in 2015 to EUR 565 million. Regarding the order book, Q4 bookings came in at EUR 1.2 billion, 31% above our Q3 bookings.
Strength in memory bookings continued to be notable, with a significant growth in our foundry bookings, leading to a strong and nicely balanced backlog across all industry sectors of approximately EUR 3.2 billion. I would like to turn to our expectations and guidance for the first quarter of 2016. We expect continued healthy memory shipments supported by a strong backlog.
Our service and field option sales will be around the EUR 500 million mark again. We expect relatively modest logic shipments in the first quarter of 2016, leading us to guide Q1 revenue at approximately EUR 1.3 billion. As indicated at this time last quarter, we do, however, expect our logic customers to take shipments in Q2, which will start the ramp of 10 nanometer. As a result, we expect Q2 sales to increase significantly from Q1. Based upon expected customer and product mix, a lower sales volume forecast, and lower field option sales, we expect gross margin for Q1 to come in at around 42%. R&D expenses for the first quarter will be about EUR 275 million. SG&A is expected to come in at about EUR 90 million. Both roughly the same as the previous quarter.
Our annualized tax rate for 2016 is expected to increase to around 13%, based upon a change in tax rules that transfer some tax benefits into R&D credits. Peter will talk more about our 2015 EUV accomplishments and 2016 key performance targets shortly. I would like to make a few points regarding 2016 EUV shipments, and explain a bit further the current and expected situation related to EUV revenue recognition. We completed three EUV shipments in 2015. Started the shipment of a fourth system before year-end. One of the three systems was recognized in revenue during 2015. The other two systems that shipped and the one system where shipment was started, should lead to a revenue of about EUR 110 million in the middle of 2016, with the balance booked in 2017. For 2016, we expect to ship between six and seven EUV systems.
The 2016 shipments will be a combination of NXE:3300B, NXE:3350B, and TWINSCAN NXE:3400B, going to both logic and memory customers. As a reminder, we will continue to guide expected revenue timing on additional EUV systems as they ship. Finally, but certainly not without significant importance, ASML paid EUR 302 million in dividends in 2015, and we purchased 6.3 million of our own shares for EUR 565 million, providing a total cash return to shareholders of EUR 867 million during the year. In 2016, we are proposing to our annual general meeting of shareholders on April 29th, to increase our dividend by 50% to a level of EUR 1.05 per ordinary share. Today, we have also announced a plan for an additional EUR 1 billion of share repurchases over 2016 and 2017, on top of the remaining EUR 500 million from our acquire program.
With that, I would like to turn the call back over to Peter.
Thank you, Wolfgang. As Wolfgang highlighted, we concluded a financially very satisfying year. Expectations for the first quarter sales are approximately EUR 1.3 billion, reflecting continued shipments for 28 nanometer, 16 nanometer, 14 nanometer logic capacity additions, albeit at a relatively low level, and shipments to memory customers consisting of a mix of advanced and more mature system types. While first quarter sales are expected to be relatively moderate, we clearly see, as Wolfgang said, a significant increase in combined system and service sales in the second quarter, largely driven by system shipments for the initial ramp of advanced 10 nanometer production processes at our logic customers. While it is still a bit too early to say anything quantitatively about 2016, we do see trends and developments that we believe are worthwhile mentioning.
In memory, as evidenced by the fourth quarter bookings and our current backlog strength, our customers have indicated that their system demand will continue throughout the first half of 2016, at levels roughly equivalent to those of Q4. Although we expect that two DRAM fabs will continue to install some additional tools, largely meant to support the next DRAM node, we also believe that 2016 shipments to this application will be down versus a strong 2015. On NAND, we believe that the capacity expansions will be focused on 3D NAND applications. With the announcement of the conversion of a Chinese fab to 3D NAND, that is now largely supported in our current backlog, we expect a flattish level of NAND systems revenues versus 2015. One additional memory development that appears to be worth following is the introduction of the 3D XPoint architecture.
While the full opportunity extent of this new memory architecture is still under evaluation, its potential seems significant and could therefore become important to our business as the advanced processes anticipated in this application are quite litho-intensive. As for logic, it has now become clear to us that the introduction of the advanced 10 nanometer node ramp is progressing well, hence the continued and clear customer commitment to ramp this node starting in Q2 2016. The speed and initial size of this ramp can be explained by the value proposition provided by the significant shrink of this node versus the 16 and 14 nanometer node. The ultimate spend levels for logic in 2016 will depend, amongst other things, above the level of end demand and the rate at which our customers will be able to execute their ramp, and it's therefore too early to accurately predict this today.
For field options and services, we see continued strength in 2016, and this should show growth previously estimated to be in the range of 10%. On the product side, ASML continues to focus R&D spend on lithography tools that are essential to ramp all of the current and advanced processes. With the growing litho challenges of complex and costly multi-pass patterning, our recently launched TWINSCAN NXT:1980Di immersion scanner, with significant improvements in all key performance metrics, started volume shipment last quarter. Now with its widespread acceptance, it is ramping at a rate greater than any other advanced system in our history. Our Holistic Lithography products continue to gain acceptance, and leading-edge customers were using our full suite of immersion process window enhancements and process control solutions to optimize yield at the most advanced product nodes.
Holistic Lithography products are now extending also into EUV processes, with customers evaluating our EUV source mask optimization software for the development of their 7 and 5 nanometer technologies. Finally, on EUV, as most of you are aware, our 2015 focus has been on improving EUV stability, availability, and productivity, the key performance metrics that drive new technology adoption. In several recent public presentations, our customers have clearly recognized our EUV progress in these areas. In a four-week customer run manufacturing readiness test at production conditions, we've seen 15,000 wafers exposed with comparable results achieved using the same power configuration at multiple customers. On the raw productivity side, we have a new system configuration, the NXE:3350B, that has demonstrated in our factory more than 1,250 wafers exposed in a 24-hour period.
Six out of eight systems at customer sites have achieved four-week average system availability of greater than 70%, with one system reaching the 80% mark. However, the worldwide average is currently still lower, indicating that performance stability in the entire installed base needs to be further improved. We believe that our 2016 performance targets of 1,500 wafers per day and 80% total system availability are achievable and will therefore be aggressively pursued over the course of this calendar year. Now with that, we would be happy to take your questions.
Thank you, Peter. Ladies and gentlemen, the operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, as I always do, I'd like to ask you to kindly limit yourself to one question with one short follow-up if necessary. This will allow us to get as many callers on today as possible. Operator, could we have your instructions and then the first caller, please?
Of course, sir. Ladies and gentlemen, at this time, we'll begin the question and answer session. If you have a question, please press star 1 to register and star 2 to withdraw your question from the queue. If you're using speaker equipment today, please lift the handset before making your selections. One moment please for the first question, and that comes from Kai Korschelt from Bank of America. Please go ahead.
Good afternoon, gentlemen, thanks for taking my question. The first one was just on the second quarter. I'm just wondering what level of visibility do you have? What could be the magnitude of, I guess, the snap back? The reason I'm asking is, I think if I just take your bookings in the fourth quarter, if I add maybe half a billion service sales, it looks like we should be well above EUR 1.6 billion. I'm just wondering if that's the right ballpark. Then I have a follow-up. Thank you.
Well, we don't want to lead you down any particular number, we chose the word significantly wisely. We wouldn't do that if it would be just a little bit of. We'll leave it at that today, it's all underpinned by a strong ramp in 10 nanometer. We also said that memory will be throughout the first half at Q4 levels. I think you can approximate it from there pretty well.
Okay. Just a quick one on the gross margin. I think the Q1 guidance is probably below where most people think it would be, even if we look back at quarters with similar revenue run rates. I'm just wondering broadly, what are the reasons? Should we kind of expect that if we do see the recovery in demand and revenues in the second quarter, that we should sort of settle back at the 47%-48% level that I think we've become used to that's obviously before EUV. Thank you.
Yeah. Kai, I can address it as well. First of all, there are no structural changes in a sense that you should be worried that pricing came down or we have any cost issues. This is purely a function of lower volume at one end, more so a change in mix between products and customers. Also within the service and field options. The service is a bit higher when compared to the field options, which come at higher margin. You can also read that when we say foundry is lower and memory is higher, foundry tools are usually in a richer configuration going to the customer.
If you want to look at Q2, we won't give you an exact number, but when you consider that the volume will go up and the foundry shipments will go up and it's 10 nanometer, it will be pretty nicely configured tools. You'll know in which direction the margin will go.
Okay, great. Thank you.
Thank you.
The next question comes from Sandeep Deshpande. Please state your company name followed by your question.
Yeah. Hi, I'm Sandeep Deshpande from JP Morgan. My question would be, Peter, on the memory market. You've said that you're going to have a flattish trend in the first half in the memory market. Do you see this into the second half? substantially correcting, or you don't have visibility at this point into this segment? Secondly, I have a quick question on EUV as well. Clearly, EUV is progressing much better at this point in terms of throughput, and you've given some of the statistics. What timeframe do you see EUV actually being built for production volumes? Thanks.
Okay. On the memory market, like I said in the introductory comments, we have very clear visibility given by our customers, also evidenced by our bookings that we received in the fourth quarter on what we are going to ship in the first half, which is focused on also the introduction of the new DRAM nodes. You could say it's clearly a technology transition that is driving the shipments in the first half. We don't have that visibility yet on the second half. This is our current thinking. I can only give you some indication of what was said by some of the market research analyst firms. If they are right, then 25% bit growth for next year would mean about flat wafer capacity year-over-year, 2016 versus 2015.
That means that if the initial shipments of the technology transitions happen in the first half, then the second half will be lower if there are no capacity additions needed. How much lower? That's a bit too early to say. Clearly, first half, technology transitions, and the second half, probably a lot less.
Thank you.
On EUV throughput, yes. We've made good progress. We've agreed with our customers the targets for 2016. We have good confidence that we're going to get there. You have to look at 2016 as, I would say, the last phase in the EUV introduction of where our customers are developing their next nodes for which they're planning their production output in 2018 and 2019. It's the last phase of the development node and the qualification of those architectures that we will see in 2018-2019 hitting the market. That means that 2017 will be the year where we will start to see the start of the EUV shipments for production. They will be used in 2018, and that will accelerate throughout 2018. 2017, we'll see the first start to make sure customers can do the output in 2018, which will accelerate in 2018 further on.
That's nothing different than we said, I think, last quarter. No change from that respect.
Thanks, Peter.
The next question comes from Gareth Jenkins. Please state your company name, followed by your question.
Yeah, a couple if I could, or rather one and one follow-up. I just wondered if we could talk about the 10 nanometer ramp. Now you've got maybe a bit more visibility around it. Should we still be thinking about 10% fewer wafer starts between the 2016, 14 nanometer nodes and the 7 nanometer and 10 nanometer nodes, but also a 40%-50% lithography intensity increase? Just wondered if we could kind of elaborate on that now you've got more line of sight. I have a follow-up on EUV. Thank you.
Yeah. Just for clarification, I just missed part of your question on your 10%. You referred to 10%. What was that exactly?
The lower wafer starts, Peter.
Okay. Sorry. Yeah.
2016, 2014, and 710.
Yeah. Basically, that's the assumption on the 10% that we still work with. We don't have any other data. I'll comment on that a bit later also. The 40% litho intensity, yes, node on node, that's still what we think is a realistic number. On the node on node wafer capacity reduction, the 10% is still what we are using. You have to bear in mind that starting from the 20th-nanometer node, we see those nodes extending a lot longer than what we saw in the past. You've been around a long time, so you know that between five and 10 years ago, nodes had a two-year life, and then the previous node stopped, next node came, and lasted about two years. Almost all logic customers moved in that same time period, which is less the case today or not the case today.
We see the initial acceptance of a new node being driven by leading-edge customers. They install rather swiftly and rather fast, quite a significant amount of capacity. Then you see the other customers in that segment, you could say the second-tier customers, following later. This is also what we see today, 20 nanometer still being shipped even in Q1 2016, which is more than four years after the initial introduction. You could see a kind of a camelback in the first phase of that node, but a much longer tail, which also makes it more difficult for us to say how much will that wafer capacity for that node be. We assume 10%, but over time, it needs to be proven whether this is the correct number.
That's great. Just one follow-up. It looks like your Chinese orders are very strong, somewhere around EUR 500 million, which I assume is mostly Dalian. Can you just give us a sense of your market share into China through the course of this year or rather on those orders?
Well, our market share in China has always been pretty good. It will stay pretty good. I'm not going to give you an exact number, we have no worries about our market share in China.
Okay, thanks.
The next question comes from Jérôme Ramel . Please state your company name, followed by your question.
Yeah. Good afternoon, Jérôme Ramel from Exane BNP Paribas. Peter, just want to come back to the point you made, that your clients seem to be keen on moving to the 10 nanometer node because that's a significant improvement compared to the 16/14 versus the 20. Could you just give us a sense of what is better? Is it the terms of yield? It's in terms of cost per transistor? What would make the 10 nanometer node more attractive than the 16/14?
Yeah. From a lithography point of view, the 16/14 node is very similar from a litho half pitch dimension point of view, very similar to the 20 nanometer node. You really should not go past 16 and 14 from a litho pitch point of view to 10, but really 20 to 10. That's a big shrink. As you know, shrink has a big impact on the cost per bit. It is driven by cost per bit. For some customers, actually, it's also value. Just putting more functionality on the same square surface. That's what driving it.
To make clear, you see the cost per transistor going down at 10 nanometer node?
Yes.
Okay. Maybe just one follow-up. You gave kind of a guidance for the full year, I mean, quantitative guidance for the memory, so flash being flat and DRAM going down. I'm not sure I understood for logic and foundry, what the trend are in term of qualitatively compared to 2015?
Well, I think Wolfgang said the first quarter is relatively benign, but we really see the ramp starting in Q2, and then also we're extending into IDM, not only for foundry, but also IDM on 10 nanometer, which will be the remainder of the year, which will drive the remainder of the year. If you just look at the size of that ramp, and the ultimate size for this year is always a bit difficult to predict in the third week of January, so as we were very early in this year. If you look at that, what customers are telling us is going to be a significant ramp and will be driven by the leading-edge players. Not so much by the followers, which will follow on, I said it as an answer to an earlier question, which will probably have a much longer tail.
The initial ramp what we are seeing will be significant, and that causes us to state that the 2016 logic market for us will be significantly higher than 2015.
For logic, that include logic and foundry, or that's just purely logic?
That is logic for us is foundry and IDM.
Okay. Thank you.
Yep.
The next question comes from C.J. Muse. Please state your company name, followed by your question.
Yeah, good afternoon. C.J. Muse with Evercore ISI. I guess first question, and I know there's a lot of moving parts here, but curious, what are the key milestones we should be watching for EUV to be designed in at the 7 nanometer node?
I think we mentioned those. I think for our customers, it's most important that they have a certain level of productivity. It's very important that when you start planning your production, the availability is critical. The 80% availability target is what we agreed with our customers. This is what we are at least following. I'd also like to refer to our presentation where you can see that. On productivity, quite interesting, one of our key customers in a question that was asked recently on whether 500 wafers per day would be sufficient for them to go into production, assuming a reliable or a, let's say, good availability of the tool. The answer was, yes, they would use it. You can draw a conclusion from that answer that is not so much now about the productivity, it is about the availability.
This is what we are really focusing on this year.
That's helpful. I guess as a follow-up, in terms of foundry logic spend this year, clearly, a very good year for 10 nanometer. Curious if you could share your thoughts on sort of the mix this year between 10 nanometer, China foundry spending year-over-year, as well as whether you're seeing any incremental capacity adds at the 14, 16 nanometer nodes. Then I guess to follow on to that, your expectations for that 10 nanometer ramp to continue into 2017.
Yeah. I make some notes. The 10 nanometer ramp is predominantly outside China, if you refer to China. When we see Chinese logic or foundry market, we're clearly focusing on the nodes before 10. The 20 nanometer node is still relatively strong in China, but also very clear indications of the move to 16 and 14. That is where we see Chinese foundries going. Like I said, the 10 nanometer ramp will be outside China. 2017. It's a good question. I think it's too early for us to say anything about 2017. I think what we'll have to go through is the next two, three quarters of the initial ramp, which we have a decent visibility of 2017 will be driven, I think, by the end markets. We're just a bit too early to comment on that, CJ.
directionally, for C.J., directionally for 2016, the 10 nanometer will make out the majority of the shipments.
Sure.
There'll still be 28 and 16 and 14 shipments as well.
Yeah, those are then predominantly in the direction of China and somewhat in Taiwan.
Great. Thank you so much.
The next question comes from Mr. Hussaini. Please state your company name, followed by your question. Mr. Hussaini, you can ask your question.
Sounds like he's not there, operator. You want to go to the next one?
The next question comes from Amit Harchandani from Citi. Please go ahead, sir.
Thanks. This is Amit Harchandani from Citigroup. Good afternoon, ladies and gentlemen. I've got two questions. Firstly, with regards to a topic that does come up often for discussion, which is equipment reuse. We've heard some of your peers talk about it or customers talk about it. Could you give us a sense of how you see equipment reuse impacting your prospects for this year as compared to last year? And more so looking forward towards your medium-term financial roadmap across the different end segments? That would be my first question, and I have a follow-up.
Okay. The equipment reuse, it appears to dominate some of our discussions lately, but it's always been there. Large IDMs have always done this, and it's a very sensible way to manage your capital efficiency. Now, with tool prices going up to where they currently are, advanced DUV prices are EUR 50 million. There is more and more focus of our customers on capital efficiency. The reuse program, which we have designed by adapting the architecture in such a way that we can upgrade from one node to the other, with little intensity going up with about 40% node on node. There's a very clear drive of our customers to say, "What part of my install base can we upgrade to the next node?" That's called a reuse. That doesn't cover the 40% litho intensity at all. It just covers part of it.
Yeah.
We have had situations whereby reuses, let's say, upgrades were planned on a previous node, but never happened because the previous node extended longer than the original planning. It's nothing new. I think it's going to be part of our business going forward. Very healthy part. If you think about an extensive upgrade from a 1950 to a 1970, for instance, is a EUR 20 million-plus upgrade with decent margins, which is good business for us, helps us. It increase our services and option sales business, and it helps our customers to manage their install base. I think it's going to be part of our business going forward. It might be new to some of our peers, but it isn't to us, because our tools have always been one of the most expensive in the customer fab. It's here to stay, and it's good.
Thanks, Peter. Just to clarify, the extent of reuse that you're seeing out there right now is in line with your 2020 financial roadmap?
Absolutely. Yes. In our 2020 roadmap, we have actually included that reuse. It is an inevitable event. The level of reuse that we are seeing is very much in line with our expectation.
Thank you. Just as a follow-up, if I may, Wolfgang, could you kindly just once again explain or elaborate upon your comment of EUV revenue recognition for this year? I'm afraid I did not catch it correctly. Was it EUR 110 million in the middle of the year? What are we looking for in terms of EUV revenues this year? If you could shed some light on that. Thank you.
You got that right. First of all, we told you that while we're in this transition period, where we can recognize not when the tool leaves our factory, we will give you guidance as we ship the tools. I said we shipped 3 tools last year, and of which only 1 recognized. On top of that, we started the shipment of another tool. Of the 2 tools that shipped and have not recognized last year and the tool that has started to ship, from these 3 tools together, you should expect approximately EUR 110 million in revenue, and that will be somewhere in the Q2, Q3, mid-year timeframe, and the balance of the revenue will likely recognize in 2017.
Thanks.
That's the starting point, we also said that we'll ship more tools this year. Those, of course, we also told you there is, for instance, a 3,300 amongst them, which we'll recognize faster because there the recognition rules are different because we just need to demonstrate that we can print the wafer. There's more to come. You got to bear with us as we make these shipments. Lastly, I'll say also that we will start to see some service revenue in the EUV field. We already had some last year of
Total revenue was about EUR 100 million or so, and only a little bit over EUR 60 came from systems. You have to bear with us, Amit. We'll give you information as we go through the year.
Just to confirm, a minimum of 110, but the actual number could vary depending on your updates as you go through the quarters now.
That is correct.
Thank you.
The next question comes from Mr. Sangani. Please state your company name, followed by your question. I'm sorry, one moment.
Memory is-
Go ahead.
Same level as Hello?
Hello?
Yes, memory. Hello?
Go ahead. We can hear you.
Can you hear me?
Yes. We can hear you now.
Yes. Okay. You said memory at similar level to Q4, which is about EUR 350 million, down 35%. First half at that level, and second half you said decline. That will indicate a significant down year-over-year. Did I understand that clearly?
Well, I referred to DRAM, since we don't split out DRAM in the fourth quarter results. DRAM shipments will be about equivalent to Q4. NAND will be over the year-on-year, will be about flat.
Okay. I want to follow up on the China. You had pretty strong orders on China. Somebody mentioned EUR 500 million, pretty close, and mostly probably on NAND side. Is that shipment to China mostly in Q2?
That shipment starts in Q1.
Starts in Q1.
And will-
Okay.
Will continue. Yep.
All right. Thank you.
Thanks.
The next question comes from Mr. Mehdi Hosseini. Please state your company name, followed by your question.
Sure, thank you. My question. Peter, going back to your 2015 performance, your foundry revenues were up 36%, emerging system shipment was down and ASPs were down too. Can you help me understand how did this mix change despite the fact that the foundries were up so much? I have a follow-up.
For 2016, you said?
2015.
2015. Yeah.
Go for it.
Foundry shipments are up. The ASP, we ship significantly more systems all together, and there were also KrF and other systems in there. Like for like, the ASP didn't go down, but because of the mix, the ASP went down. Yeah, it's KrF.
Does that reflect the foundry spend more on the trailing edge versus leading edge?
There is absolutely, like we said earlier, we are currently shipping at different node layers. We're shipping at 28 nanometer, 14, 16, the first 10 nanometer R&D tools. It's quite a mixed bag of those tools. To draw a conclusion on ASPs or ASP trends is a bit difficult because it's quite a mixed bag. What we can say is that with every node transition, the ASP goes up because of the richer configuration, including a lot more holistic litho options . Now, in 2015, which is true, we had a mixed bag of 20 nanometer node, 14, 16 nanometer node, and some early 10 nanometer node shipments. I think it's a bit difficult, and it did include, as we put in the presentation, there's a lot more KrF. Yep.
Okay. My follow-up question has to do with China. Can you elaborate more, what are the key end markets or device type that is driving such a strong growth in backlog as it relates to China?
It's both foundry and now also memory. It's ship to. It's the ship to region is indeed stronger, and that's because memory is now also adding on top of the logic shipments, which are predominantly driven by 28 nanometer.
There is a new NAND fab that is coming online, but also one of your Korean customers has a fab in Xi'an. How should we think about the mix, new fab, existing fab on the 3D NAND and also the foundry market? Is it evenly split or is one more than the others?
Well, I think there are existing fabs and the refurb fab. One of the existing fabs that you referred to is already full. That means that the refurb fab is going to take tools. That's what it is. It's as simple as that and not more difficult than that.
Got it. Thank you.
Yep.
The next question comes from Pierre Ferragu. Please state your company name, followed by your question.
Hey, good morning. It's Pierre Ferragu, Bernstein. I have a question on your gross margin for the back end of the year. If I understand you correctly, foundry is going to be very strong. That's a 10 nanometer node. It's very high-end tools, a lot of options and upgrades, and memory is going to be low. Should we expect like a very healthy gross margin development beyond Q2? Like Q3 and Q4, gross margin should be also heading in the right direction? That's one question. I have just a quick follow-up on EUV. I got at some point confused about insertion. My understanding is that both your IDM customers and your foundry customers are going to insert EUV at the 5 nanometer node. Not the next one, but the one after. Is that also how you see the world from where you are?
Maybe on this 5 nanometer node insertion, how much visibility do you have today on how heavy an insertion it is going to be? Are we going to use EUV tools only at a very, very low level for the first layers? Are we heading into a more massive adoption of EUV at this 5 nanometer node? Thanks.
Yeah. Let me answer that EUV question first. Whether it's called 5 nanometer or 7 nanometer, I don't want to go into that nomenclature, because there's a lot of confusion about what is what. I'm also not going to tell you what we believe the lithography pitch is, because that's what's probably going to make it easier to understand that we're talking about this same thing. What is most important, and that's what we should focus on, whether you call it 5 or whether you call it 7, yeah? Our customers, our leading-edge customers, make it very clear to us that they will start the output of their chip architectures that need EUV. Whether that's 5 or whether that's 7, I don't know how they call it, and I don't care. When they need EUV for output, it's 2018 starting, 2018, 2019.
Actually means that our shipments for production purposes need to start in 2017. Takes about a year to really qualify for a production ramp. This is what we are focusing on. This is what we're discussing with our customers, and this is also driving the decision points and the entry points for our customer for production insertion. Yeah, it's this 2018-2019 time frame.
Okay. In terms of the volume of insertion, do you have already visibility on how high in the architecture of the chip EUV is going to be used? Is it just going to be the most critical layers or more than that? Do you have that visibility already or is that still something that needs to be refined?
Yeah, we have visibility, reasonable visibility from our customers. It actually leads us to believe what we said in the past, that the first year of volume ramp, and as you know, with the lengthening of the nodes, we discussed it a couple of quarters ago. Everything is about six to 12 months later than we thought about a year ago. We believe that the initial year of the production shipment will be a dozen or so tools, and then this will double every year that we move on. We're still, all our simulation models still show the same thing. The first year of the production shipments, it's about a dozen tools, and then it will double the year after that and double the year after that.
Makes sense
the right model.
As it relates to the gross margin question, Pierre, yeah, you're right from the direction in the second half as logic will be a bigger part of it, directionally, margin goes up. Of course, we don't know the exact volume yet, so we can't describe that volume effect. Directionally, you're right. One caveat, if there's a concentration of EUV revenue recognition in a quarter, you will see some distortion. When we get to that bridge, we will explain to you how that works and show you the margin without EUV as well.
Excellent. Thank you very much.
You're welcome.
Next question comes from Andrew Gardiner. Please state your company name, followed by your question.
Thank you. It's Barclays. Good afternoon, guys. Just another one on EUV. In terms of the sort of looking at the milestones you're targeting for this year, I'm just trying to understand roughly when we might be able to sort of get a better idea as to how you're making progress. You seem to be in a bit of a gap at the moment. Clearly, the customers have the 3300 tools installed and running, and those are a lot of the metrics you're talking about. The 3350s are there or on their way. When can we expect to see some of the first news on the 3350 tools at the customer sites? Is SPIE too early or is it going to be a bit later than that?
Well, it's a good question, you pointed out the 3350 is really the tool that has the improvements on it that will give us the 1,500 waves per day and the 80% availability capability. Now, those tools are just starting to ship. They need to be installed. The installation normally takes a quarter or three months, which actually makes it too late for any, let's say, significant information on the SPIE conference, which is in February. It will be around mid-year. That's what you need to focus on.
Okay. Just a sort of quick follow-up. You've highlighted the six to seven EUV tool shipments this year. Can you give us any sense as to when those are coming? I know there's no revenue recognition for those tools, but just in terms of the rough timing of shipment for us to gauge when those are leaving the facility.
They have started to leave the facility this quarter, the first one. It will be throughout the year. There will be a tool shipping every quarter. As to revenue recognition, Wolfgang already said it. He gave some clear guidance for the revenue recognition of the tools that we shipped last year, and one that was in the process of shipping towards the end of the year. Of the six tools, seven tools that will ship in this year, there will be some revenue recognition because there's a 3300 in there, which will very likely two of them could be, which will book revenue. Also on the 3350s, it depends on the conditions or the order conditions, where we can take some revenue already in 2016.
That's why Wolfgang said it's the minimum, and there's very likely going to be EUV revenue on top of that in the course of the year.
Understood. Thanks very much, guys.
Next question comes from François Meunier. Please go ahead, sir.
Thanks for taking my question. I just wanted to have some technical details about this 3350B that you're currently running in your factory. First, congratulations for achieving the 1,250 wafers per day in Q4. That's a great achievement. What was the availability of this machine actually, during Q4? Maybe if you could give us some details about the laser which was used, if it was 120 watts or a different laser source for EUV. That's the first question. The second question is, I know it's a bit cheeky, it's good to announce the EUR 1 billion share buyback, why not more, given the progress made by EUV advancement and your confidence in the 2020 target of EUR 10 billion revenues? Thank you.
Well, I'll start with the second part and then Peter with the first part. This is just another layer. We have a very clearly stated financial policy that says we evaluate what our minimum cash needs are, then we service the dividend first, that we want to have at least stable, preferably growing. Last six years, we've always been growing it. Then all the balance will go towards share buybacks. Now, we just roll out light layers of these share buybacks, as soon as we have used up the money, we will introduce the next layer of buyback. You shouldn't be concerned by that at all. We're executing the financial policy. As we generate the free cash flow, once we're through with the remaining EUR 1.5 billion, you should expect us to announce the next tranche.
On your question on the technical details of the 3350. Well, we started shipping the 3350 in our factory, we measure availability at the customer site. Well, we haven't installed it yet, I was running it at the customer site, it would be a bit difficult to give you an answer there. It's too early. Also to the question of, as an earlier question, when are we going to see data on availability and wafers per day? Probably more towards the middle of the year. The technical details, there are some features in the 3350, like the in-situ cleaning, some other features that give us the confidence that we should have a higher availability and also a higher throughput. Not so much because we have a stronger laser. The laser is the same.
More because of the transparency of the illuminator and the optics. That gives us a better transmission, that's why we get a better throughput.
Okay, thank you.
The next question comes from Mr. Ahmad. Please state your company name, followed by your question.
Hello, this is Farhan Ahmad from Credit Suisse. Thanks for taking my question. Peter, my first question is regarding 3D NAND. I just wanted to make sure I understand correctly. Relative to your last call, it seems like you're upticking on the overall NAND CapEx. I wanted to understand whether the linearity of the CapEx is also more weighted like the DRAM CapEx in the first half, or do you expect the NAND CapEx to be more evenly split throughout the year?
Well, the 3D NAND guidance is up as compared to last quarter, where we thought we were going to be down in this year, but that's because we have this new refurb fab of 3D NAND in China. That actually came up, and it's relatively flat throughout the year, so there's not a big bias to one or the other half.
Got it. Relative to your NXE:3350B systems, they're supposed to get you to about 80% availability and 1,500 wafers per day. Where do you see the performance in the lab today, and what should we expect when the tools are at the customer site? Should we start getting 1,500 wafers per day from the get-go, or will that take some time to get demonstrated at the customer sites?
What customers will actually do, because they're very expensive machines, they will always ramp these tools slowly. They go through a process of qualification, and then they will start increasing the power. With increasing the power, they will get more wafers. It's going to be through cycles of learning. It is not to be expected that they will go gung-ho from day one. They will probably say, "Let's start where the NXE:3300B left off," and then they're going to gradually increase.
Got it. Thank you. That's all I have.
Thank you.
The next question comes from Patrick Ho. Please state your company name, followed by your question.
Thank you very much. Patrick Ho from Stifel. Peter, just in terms of the EUV insertion at the 7 nanometer logic node, do you believe the change in cadence with their tick-tock process, do you believe that buys you a little more time in terms of, I guess, guaranteeing the insertion for high volume production at 7 nanometers?
Well, I don't think they're that related. Customers have their plans on whether they follow a cadence A or cadence B. What they tell us is that they need that production output in a certain period, in a certain year, which is starting in 2018, you just calculate back using the cycle time that we need, we come to a moment where we need to start shipping the tool. What ultimately drives the decision of the customer to say, "I need that output in 2018 or 2019," there are many reasons. It is not only cadence, it's also time that they need to actually develop that next node. For us, it's not that relevant. The most relevant is when do they need the tool? When do they tell us that they need the tool?
That's clear, 2018, 2019 output, 2017 shipment starting for us.
Great. My follow-up question, in terms of the holistic lithography growth that you've seen over the last few years, how do you project the growth first in 2016 and maybe over the next couple of years, given that it's gotten strong adoption? Do you see the growth rates tapering out somewhat? Where do you expect to continue to see that growth in that segment of your business?
Yeah. In 2014, our holistic lithography business was just over EUR 500 million. Last year, it was over EUR 600 million. It's growing nicely. As previously talked about, by 2017, 2018, we want to be at EUR 1 billion for this business. As a reminder, it's a very largely software type of business with very healthy gross margins. Only the YieldStar being the hardware there. You can anticipate that it will continue to grow going into our 2020 plan. It's part of helping us on the accretion of the gross margin to a 50% level. We've also started to see and reported back to you that customers are evaluating some of the software features for EUV as well. It's not going to go away when the EUV is coming in.
Yeah, just to add to this, I think on the total service and option sales, which includes Holistic Lithography that Wolfgang referred to, in our model, we see that going from the EUR 2 billion, where we are today, to the EUR 3 billion-EUR 3.5 billion by that time, by 2020.
Great. Thank you.
Excuse me. Ladies and gentlemen, we have time for one last call, so if you were unable to get through on this call and still have questions, please feel free to contact the investor relations department with your question, and we will get back to you as soon as we can. Aaron, can we have the last caller, please?
The final question comes from Timothy Arcuri. Please state your company name, followed by your question.
Cowen and Company. Thanks. I had two questions. I guess, first of all, Peter, just on the overall 2016 outlook, I know you said that DRAM is going to be down a lot, NAND is flat, and logic is up a lot due to 10 nanometer. Where do you and Wolfgang think that leaves us for the year? Obviously, it is going to be up, but how much? Is up 10 a comfortable number for the year, at least?
We are all well-trained accountants, if you take 2015 and I would give you a percentage up, we would guide you for 2016, which we said we were not going to do. Unfortunately, we have to stick to what we call this qualitative guidance. I think throughout the year, we get to a better feel for how the back end of the year is developing. I am really talking about the Q4 back end of 2016.
Okay. I guess, just to follow up on China, I know that there were some questions asked about this, but the big order number of roughly EUR 500 million, sounds like this is really 3D NAND. If I divide the numbers, that suggests it's like 120,000 of wafer starts worth of capacity. We know that the Korea fab in China's full, and the only fab this big is the one that's still searching for a technology partner. I think the fab you talked about in the prepared remarks was half this size. Are we seeing orders for this other fab that's still looking for a technology partner, or is my math not right?
Let me make one thing clear. China is not only 3D NAND. That's a new feature of the Chinese market on this particular refurb fab. It's only part of the story. There's also Chinese foundries in there. There's also, once you send two of these shipments to a fab that are almost full. It's a mixed bag. It's definitely not only 3D NAND.
Okay. Thanks so much.
Yeah. Okay. Thanks.
Thank you, everybody. On behalf of ASML's Board of Management, I'd like to thank you for joining us on the call today. Now, operator, if you could formally close the call, we'd appreciate it. Thank you.
Ladies and gentlemen, this concludes the ASML 2015 fourth quarter and annual results conference call. Thank you for participating. You may now disconnect your line.