ASML Holding N.V. (ASML) Q3 2007 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen, and welcome to the ASML2007 Third Quarter Results Conference Call on October 17, 2007. Throughouttoday's introduction, all participants will be in a listen-only mode. AfterASML's introduction, there will be an opportunity to ask questions. (OperatorInstructions). I would now like to turn the call over to Mr. Craig DeYoung.Go ahead please, sir.

Thank you, operator. Good afternoon and good morning, ladiesand gentlemen. This is Craig DeYoung of the Investor Relations Department atASML. I would like to welcome our investors to our investor call and webcast.The subject of today's call is ASML's 2007 third quarter results. Hosting thiscall today are ASML's CEO, Eric Meurice and CFO, Peter Wennink. I would like to draw your attention to the Safe Harborstatement contained in today's press release and presentation, and you may findthe press release and presentation on our website at www.asml.com. The lengthof the call will be 60 minutes. And now, I would like to turn the call over to Eric Meuricefor a brief introduction.

Thank you, Craig. Good afternoon, good morning and thank youfor attending our Q3 results conference call. As it is now our habit in ourquarterly conference calls, we will split the introduction in two parts. Peterwill start with a review of our Q3 financial performance, with added commentson our short-term outlook. I will complete the introduction with a longer-termview and following this introduction, we will open the call to questions.Peter, please.

Thank you, Eric, and welcome to everyone. First of all, I wouldlike to review, like Eric said, our Q3 result highlights, and, in that regard,I am pleased to report that again the quarter developed as we anticipated. Andin reviewing our results in detail, you've seen that we reported healthyrevenues, operating margins and net profit for the quarter. Q3 revenues were recorded at EUR940 million, which isroughly the average of what we have achieved in the past six quarters. A 41.2%gross margin and operating expenses of EUR176 million, R&D at EUR120million and SG&A at EUR56 million, resulted in an operating margin on thequarter of 22.4% versus 22.2% in Q2. ASML remains highly flexible and adapted to market cycles.Although, we have continued to grow our operational cost base to support ourfuture growth, in both our R&D spend and SG&A costs. We keep focusingon creating cost variability, such as we can match profitability in any marketconditions. As a reminder, about 30% of our R&D costs are variable withinone quarter's time and approximately 10% of the SG&A costs are variable. Cash flow also remains well above our operational needs,with net cash from operations in Q3 at EUR169 million. Also in an ongoingcommitment to return excess cash to shareholders, we returned EUR1 billion incash to our shareholders on October 4th. This is part of the capitalrestructuring, which we announced on the May 31st. The cumulative amountreturned to shareholders since June 2006 stands currently at EUR1.9 billion. In addition, we limited the dilutive impact of the 86%conversion of our 2010 Bond that took place in Q3, by using approximately 7million ASML treasury shares. Furthermore, and consistent with the terms of theconvertible bond, we decided to call the remaining 14% of the bond that had notyet been converted. We will also start the new share buyback program for amaximum of 14 million shares to cover for outstanding employee stock options tobe funded out of our cash flow and our ample liquidity buffer. The purchasingof those shares will take place at anytime during the nine months period endingJuly 17, 2008. We ended Q3 with EUR2.4 billion in cash and we maintainedcash reserve target of between EUR1 billion and EUR1.5 billion. As guided at the end of last quarter, we expected anincrease in net bookings from the 30 systems booked in Q2. We've clearly seen arebound in our net bookings number to the quarter to a level of 40 units. More importantly, the third quarter bookings confirmed ashift in demand towards our leading-edge immersion products. We booked 22 1900iimmersion systems, driving the total net value of our order intake to EUR863million. That's more than 200% increase as compared to the Q2 order intakevalue. We ended the quarter with an increase in the backlog to a level ofEUR1.77 billion, that's a 61%, of which reflects the value of our immersionproducts. Both the backlog average selling prices and the bookingsystems average selling prices are at record levels this quarter. This shifttowards immersion is significant and will be sustained as our NAND and DRAMcustomers are transitioning to new process nodes. As we predicted, NANDcapacity at the large manufacturers became tighter in Q3. This and the forecastof an improved NAND supply/demand balance for the remainder of the year haveresulted in 55-nanometer node capacity orders in this segment. In addition, prompted by the pricing environment, major NANDplayers are aggressively pursuing device shrinks to 45-nanometer. With respect to DRAM, the continued price pressure pushesmemory makers to more cost effective systems, the immersion systems get at 5xnanometer node for more affordable and more competitive 1 and 2-gigabit DRAMdevices. Our foundry customers continue to see improvements in theirfactory utilization. Although, at levels that could trigger significant300-millimeter capacity orders, they are holding off ordering until they canbetter read the 2008 application needs, so far, of their end customers. But all-in-all, Q3 saw the return of NAND orders, with DRAMtechnology transition orders and foundry capacity orders expected to fall overin the next few quarters, that is confirming our secular growth trend. And as usual it remains difficult to pull the exact timingand level of bookings. However, we do believe that the trends that I justdescribed will translate into another incremental increase in unit orders inQ4. This positive view is supported by our internal global utilization model,combined with full cash for market independent research analysts for 2008semiconductor growth. Our model predicts growth through our lithography businessin the first three quarters of 2008, on an assumption of a growth of 51% forNAND units, less than 10% for Logic units, and 18% for DRAM units. Inparticular for DRAM, technology transitions to immersion will compensate fullyanticipated reduction of the unit capacity growth rate as compared to 2007. Now, this ends my part of the introduction, and I will turnback to you Eric.

Thank you, Peter. So, basically Peter confirmed that ASML isproving successful in managing through the cycle, because we are sustained by along-term growth trajectory, which in fact dampens this cycle. At this time, in fact the dampened part or the reason of thegrowth is in fact the fact that we are sustained by a significant accelerationof technology transition in Flash and DRAM to immersion lithography. This transition required by the current very aggressivememory price competitive drive and compensating therefore, the lower plannedchip unit growth. This trend is very important, and plays very much to ourstrengths as a technology leader. And to further develop this technologyleadership, we are increasing our R&D spend further to EUR125 million perquarter, from EUR120 million this quarter. The focuses of our R&D funds are the development of nextgeneration platforms for dry and immersion applications, allowing a continuousincrease of the total throughputs across ArF, KrF and i-line products, as wellas enabling double patterning 2D, 3D designs, as well as EUV. Regarding immersion, our products are becoming the industrystandards. So with 60 tools shipped to date, and the latest XT:1900i unitbacklog currently exceeding our advanced drive XT:1400 unit backlog, which is asignificant event, as you can see. We expect to ship about 35 immersion tools in 2007, withapproximately 20 XT: 1900i system in the first six month after itsintroduction. We are encouraged by the fact that the XT:1900i is the onlyimmersion tool in the market, capable of exposing sub-40 nanometer node, andthat we have now processed more than 3.5 million wafers on our immersionplatforms, thus creating a significant experience base for the customerstransitioning into production. We have now 20 customers with active immersion manufacturingor process development programs in place. On the lower scale of our product range, our latest XT:400and XT:450 i-Line systems enable the fastest and most cost-effective solutionsfor processing non critical layer. As you know, we have announced recordperformance output of over 3,500 wafers in a single day and one million wafersprocessed per year on a single machine. Not surprisingly with these statistics, we've been able togrow our i-Line business by approximately 250% in the past two years. In the mid range side of the business, our TWINSCAN XT:1000,the new high-NA KrF machine to be introduced in H2, 2008, will be capable ofimaging 18 nanometer features at an unparalleled 165, 300 millimeter wafer perhour. With this tool our customers will save 30% cost or more versus today. We are currently also closing our fourth order for an EUVpilot production tool, with the first of the series to be delivered late in2009. This is a clear indication of the strong acceptance of EUV as a mosttechnically capable and cost effective solution for imaging 32 nanometer andbelow. This acceptance is reinforced by the passing of an important developmentmilestone on our alpha tool by imaging the first ever 14 nanometer dense linesusing a thin source. Operationally, we continue to drive down our cycle times andcost. In 2007, we have reduced our average cycle times by another 15% to 30%depending on the product line, and increased our value of ownership, acombination of cost and performance rendered or delivered to the customer bydepending again on the product by 10% or 15%. Our factory expansion needed for further improvement ofthese numbers, but as well as for capacity increases is on target to deliverproduct by mid 2008. So in summary, we confirm our customer value generationproposition through leadership and technology in value of ownership and inoperation or efficiency. In view of our progress on these, we feel confident inour ability to continue to grow our market share, while delivering finance forresult through the cycles, and as we say would say, swings of which areshallower and shorter than ever before. So now, on this summary of our messages, Peter and I wouldbe available for your questions.

Ladies and gentleman, the operator will instruct youmomentary on the protocol for the Q&A session. But before hand, I wouldlike ask that you kindly limit your questions to one with one short follow-upif necessary, and this will allow us to give as many colors in as possible. Nowoperator, can we have your instructions and then the first question please.

Yes, thank you, sir. (Operator Instructions). Today's firstquestion is from Mr. Simon Schäfer, please state your company name followed byyour question, sir. Simon Schäfer -Goldman Sachs: Yeah, hi, thanks very much. It's, with Goldman Sachs. I waswondering on the immersion print on the order intake 22 units, in your opinionis that represent a pull in, or do you think, can the book- to-bill for theimmersion systems to be above one again in the fourth quarter?

Yes, it is a pull in, in the sense that the NAND orders havecome a bit earlier than we expected, because in fact of this drive towards thisnew technology and cost. Whether we can project the same performance in Q4, Iwould say we've messaged very clearly today that the technology transitions areaccelerating in NAND, and this is now proven, but in DRAM and it is inprogress. And therefore, this acceleration will definitively generate growth inthe first three quarter of 2008. However, we will remain very cautious as to coding exactlywhen the booking are coming, we are not cautious. I mean we are able to callwith the billings, it is when the customer absolutely required the capacity toachieve the different transition they want to do, but we are still cautious asto the timing of the orders.

May be I can try and get that another way. In terms of orderprojection, are you thinking number of units up sequentially or how should wethink about mix on an order side?

We have yes lifted to bit on certain, by saying Q4 will seea better unit number than Q3. Obviously, Q3 has been exceptional in ASP, theaverage ASP.

EUR222 million.

EUR222 million. So we do expect this average ASP not to besustainable and therefore we left it a bit to uncertainty at what the averageASP will be in Q4. So unit-wise, yes, we clearly see and confirm that the bookingsunit will be higher in Q4 than in Q3, whether the ASP will be strong enough tomatch the Euro bookings of Q3, at this moment we would not know.

Understood, that's very helpful. And then my follow-upquestion would be, when I look at the segment of your order intake, obviouslythe foundry element is extremely low, the logic portion effectively beingcharacterized by some scrubbing of the backlog. Would you expect orders in thefoundry segment to rebound materially in Q4, or is this really a first half of'08 returnable to growth?

Yes, this is very important question. We are mentioning nowfor the past, where there were three years, there are multiple cycles in thisbusiness and, in fact, we are fortunate that at this moment the cycle seems tobe let's say compensating each other. So we've seen now the flash cycle backon, we are now sniffing the DRAM cycle, not in unit, but in ASP, intechnologies on exchange to showing its nose very much so as we have alreadysome bookings and it's starting. We do not see the foundry business to rebound in Q4 at thismoment. It may happen because as we say there is no inefficiency in capacityutilization, that is, utilization is at the good number, in fact it is at the goodnumbers since now about three to six months, you can even argue with this. Whatis happening, however, is the foundry customers are not fully comfortable as tothe volume outlook of 2008, so they are waiting, if and when the Christmasseason proves to be favorable then there will be immediate bookings.

Understood, thanks so much, great. Fantastic quarter,thanks.

Thank you.

Next question is from Mr. Nicolas Gaudois. Please state yourcompany name followed by your question.

Yeah. Hi, it's Nicolas Gaudois for UBS. Just thought to yourquestion looking at the mix just, you quantified that you would see the firstnine months of the year up year-over-year for your addressable markets. Couldyou maybe try to quantify a bit the delta of the addressable market for ASMLcould be vis-à-vis semiconductor capital spending taking into accomplishedshrinks trends you will portrait, and also, if you could give some color bysegments where you would see whether NAND, DRAM, foundries or IDMs will be upor down for this first nine months? Thank you.

I think, except your future adds to this, but I think it'sgoing to be difficult for us to say what lithography does versus others. Idon't think we can color that, we don't know. It is not our expertise.Regarding, however, Litho, obviously you've seen this fundamental message wegave today which in fact translates into this, this is a very positive call iswe are moving in terms of the technology content, so ASP increase. So that'swhere it is happening and we see this happen for the next six to nine monthsthrough flash and through DRAM. So that is what creates obvious growth, but as we usuallysay, we base our estimates on the basic assumptions from the semiconductoranalyst as to the numbers of semiconductor units which sustain this. And thecurrent numbers that you see more or less in the market calls for a flash unitgrowth of about 60%, 61%, as Peter said, and DRAM at about 18%, 18% is muchlower than what happened last year which is going to be in 2007. So it's going to be about 50% so 18% is much lower. So evenon an 18% lower unit growth, DSP is so big, large that it will compensate this,and therefore we call for growth in the first six to nine months of the year2008.

Okay. So just to clarify you are saying that for DRAM, forinstance, the ASP increase or the number of tools required for a given unitoutput by number of layers may be offset the decline in effective capacityinvestments, is what you believe?

We believe that that will offset, yes.

We believe, in fact, that because you transition frombasically 55 or say 65 to 55 and 45 in DRAM, sorry in flash, and the transfersay 70 issues, 7x to 6x in DRAM, that it will create obviously less tools atthe beginning, but much more expensive. But in addition, there are going to bemore critical layers. This is an area where there would be probably 10% to 15%more critical layers. So, these numbers of layers again will push for a muchricher mix. So, you've got two reasons of our mix richness for these duringthese transitions.

Okay, understood.

Nick, we are going to have to move on. Sorry about that. Iam sure we'll have more discussion on.

Sure.

Thanks.

The next question is from Mr. Jim Fontanelli. Please stateyour company name followed by your question.

It's Arete Research. I was just wondering, how you see the'09 immersion mark? And then what do you think the DRAM opportunity forimmersion in '09 will be greater than that for NAND in '09?

Guiding '09 is an art. Yes, technically DRAMs are going toramp slower in immersion than NAND because of the complexity of the productionchallenges. Everybody who manufactures DRAM will tell you how difficult it isto achieve the yield necessary. And therefore, we expect that customers in DRAMwill of course converge into immersion, but will have a slower ramp if youcompare unit-to-unit to Flash. But DRAM is much bigger. DRAM is double the size. So, wetherefore expect this DRAM cycle to have a, how do you call this, a dampingeffect on the crazy Flash cycle. So, in other terms we expect this Flash tocontinue growing by major than CapEx purchase six months, every 12 months. Then we expect this to dampen a bit because the unit growthwill not be as good. But that will be compensated by the larger and more stableDRAM business. And as I say it's larger and more stable, because it is moredifficult to achieve the [UMS] effect. In other terms, compensation in 2009 wasmore DRAM and less Flash, and probably it's going to happen.

Okay. Thank you.

The next question is from Mr. Mehdi Hosseini. Please stateyour company name followed by your question.

Yes, Friedman, Billings,Ramsey. My first question has to do with your commentary regarding NAND and thepulling. Can you help me to understand of the three to five NAND manufacturersout there to what extent you have been able to gain market share on immersion.And many you could offer a qualitative way of helping us understand, how manyof those NAND producers have moved on in adopting immersion. And a second or a short follow-up question is, help usunderstand the immersion opportunities between DRAM, NAND, Logic and foundries?How does the market changes, either in terms of dollars or revenue opportunityor units, among these various device type markets?

That's a good question, difficult ones of course. Our marketshare in immersions are good, thank you. Of course we have shipped a lot ofunits and we have created this, I would say experience of 3.5 million wafers.That’s a lot of wafers going through those machines. So we think that our market share in most of our customersin fact our traditional are obviously in the usual 100% of the critical layers,and on the new customers that you know who they are, the ramp is faster thanany ramp we ever had. So that's obvious that in immersion, our market share isabove our average market share, which is today in the 60ish percent range. Sowe probably are in the 80is percent range or more in this environment.

So if you have 80% market share and if they have pulled in,my concern is, then you can have a large void in the overall immersion bookingin Q4, Q1 if foundry doesn’t come back, because NAND is already behind us.

No, the current bookings for NAND is not at all. They don'tneed for 2008. I would not tell voluntarily at this moment, how much we've[improved] from the NAND business, but this is why we’ve told you that weexpect growth in 2008 in the first nine months, compared to 2007. So 2007 wasreally a big year for us, so 2008 is going to be even bigger. So no, we've not booked.

We have not booked everything that our NAND customers needfor next year.

In fact I could not tell you of these two very largeaccounts which are not yet [build]. So you asked about immersion adoptions bycustomer in NAND, and I think and I am trying to avoid telling you the wrongthing, but I guess 100% NAND customers are in immersion at of course differentlevel of production.

I was just trying to understand up market opportunitiesbetween DRAM, NAND and Logic.

So in DRAM, I think it's about the same question that Jimasked is, we expect DRAM to be slower, but because they are bigger, they willcatch up on NAND immersion in 2009 environment. But this is directional information, and so I would say,obviously NAND Flash was most of the immersion in to 2007. In 2008, they willbe towards the say 75ish percent, 60-75ish percent. And in 2009, if you couldmake a case then DRAM could be equal to NAND in terms of Flash need. But you are asking me, I mean this is very early simulationactivities which I will probably have to come back to at some point. Now, Logicin general will be much later than that. Logic immersion will be a fairly smallpart of the business of immersion for the next two years. Again you force me toguess, I would say in a directional fashion in the 10%ish of the business orless would be a Logic immersion in the next year and a half or so.

Just as -- I mean you really need the immersion technologywhen you go down lower than 60 nanometer feature size, which is currently thecase for the NAND product. NAND will move from 55 to 45 next year. DRAM willgrow from 70, which is above 62, lower than 60 next year, so that creates a newmarket opportunity. And you will see when Logic feature sizes will need 45nanometers which is not foreseen next year like Eric said; it's probably twoyears out. That’s where they will need the immersion solution. So it's a kindof gradual increase in the market opportunity driven by NAND, followed by DRAM,followed by, I would say Logic. But you could say, in the first instance, DRAM being a yearbehind NAND for first introduction and then fall out year to year and a half byLogic.

Great. Thank you for the detail answer.

Thanks.

Thank you.

Next question is from Jay Deahna. Please state your companyname followed by your question.

Thanks, can you hear me?

Yeah.

Very well.

?:

Yeah.

Okay. In the past you've had three, four, five quarter ordercycles. Your unit order declined from the third quarter of last year to thesecond quarter of this year, 66%, pretty high amplitude cyclical decline. Doyou believe that with up orders in 3Q and expectation for up unit orders atleast in 4Q, that you are in the midst of one of these three to five quarterupswings, and if so, why? And sort of a follow-on to that. Do you expect the totallithography market to be up, down or flat for units in 2008 and what does thatmean for overall wafer fab equipment spending?

Okay. Why an upswing of three, four quarters, because thememory business in general is basically taking now a dominant position in theCapEx of this industry. And memory, there is economics in to buying in one bigshot early in a new technology. So you would try to have all those customerswho competes on one given technology to try to buy everything on the same day,which translate in nine months. So they are trying basically to swing this way, andtherefore you have today two quarters where they basically digest and then therest they built up. So you have two digestion quarter, three quarters of builtup and that type of thing. And this is I would say typical from aggressiveCapEx technology needs which are necessarily memory business. So we would, at this moment see the same thing happen for theforeseeable future. Regarding, according to the fall of 2008, so we will not do,we've only guided on nine months and this is the first time we do so by theway, because we feel very comfortable about the mechanics behind the cyclewithin the next nine months. I mean we can't really call Q4, '08 at thismoment. But, if you therefore only focus on these nine months thatwe called, I would say we would expect less units and much higher ASP, which iswhy you can compensate. And therefore the spend will be higher value factor andthe unit will be low. Yeah.

Just so unclear. Are you saying that you do believe that youare in one of these sort of standard cycles that we've seen over the last halfdecade or whatever. And also in terms of the fact that your orders in the thirdquarter were so heavily skewed towards immersion, would we expect to see themid-critical and non-critical tools to plug in to that capacity ordered overthe next one or two quarters, which would probably be more units but a lowermix of ASP?

In fact yes. This is a very good point. So first of all, yeswe expected this 2008 to be about similar to 2007 in terms of cycles. Yes weare a bit more positive and optimistic about this one because we see multiplenodes at the same time in different segments. So there is good news for us because we have the technologyleadership edge with a high market share on this level. So the more new nodesin transaction the better. So obviously we are much better positioned in 2008than we were even in 2007. So obviously ASML is privileged in this current setof transitions. Yes, you could be bullish, and I’m trying to hint this as apossibility that the capacity orders will come back in the Logic arena. Wedidn't call it, we said they have to come theoretically at some point, andfoundry and the rest of the Logic including microprocessor business may come upduring the period of time I talked about, and yes it will create much more KrFbusiness and dry ArF. And this would be an upside. In particular if you aretalking about this to happen in the next nine months. But we did not even callthat.

Okay, thank you.

Next question is from Mr. Satya Kumar. Please state yourcompany name, followed by your question. Please go ahead, Mr. Kumar

Hello.

You may state your question.

Next caller please?

The next question is from Jonathan Crossfield. Please stateyou company name followed by your question.

Yeah hi, it's Merrill Lynch. Eric, you mentioned that thenon-players also they are one-fourth of the new equipment from the same day andreceive it from the same day. Do you think the same is still true with the DRAMcompanies, or are you seeing a sort of polarization between the sort of firsttier vendors and the second tier vendors at the moment?

That is correct. In fact I hinted the fact that DRAM is morecomplicated, and therefore there is much more differentiation in the DRAMbusiness as to how fast, each of them can really ramp the difficult newtechnologies. So, yes, you would be able to probably position all theplayers on a time scale of say one year to even 18 months time difference, whenthey succeed to introduce the technology at the appropriate yield.

Okay. And then just as a follow-up. Inventories increasedabout 168 days, is that a level that youexpect to maintain or could we see it increase further, or would you like tobring that down, as you ship the immersion tools that you just had ordered?

Yeah. I think when you talk about the inventory levels atASML which are driven by the success of our immersion product. The 1900i whenwe first introduced, that had cycle times, which are of course longer than theaverage cycle time of our matured products. And given the increase, 61% ofthe value in the backlog is immersion, which are still under longer cycle timesthan the average. It means that, that will have an impact on inventory. Butlike Eric said in his introduction, we are currently executing programs thatare focused on reducing cycle time from between 15% and 30% that will alsoapply to the immersion products. So in six to nine months fromnow, the immersion products are scheduled to be at the average of what we seefor our current raw material products and as we will bring the investment ininventory down. So, it's really a function of the fact that we are heavilyloaded towards our leading-edge products with lower cycle time. Okay.

Does that answer your question,sir?

Yes, that's very helpful. Thanks.

The next question is fromFrancois Meunier. Please state your company name followed by your question.

This is Francois from Cazenove. Ijust wanted to know what's your base case assumptions for the inventorysituation in Semis at the end of Q4 which is driving your guidance for the nextquarter.

We know what the inventory levelstoday and at this moment, the statistics that we have been reviewed which areindustry statistics says, that we are a bit, in fact, lower-ish as last year inthe same situation but basically call it normal. But nobody knows how Q4 lookslike in terms of end product sales and this is the big question about theseason and everybody has its own bet. I just mentioned that the foundrysector is conservative and is not calling anything until they see exactlywhat's happening. And you are starting to see Intel who have started to callthat they are doing a bit better than they expected and therefore they probably-- I am seeing their inventory going down a bit faster than expected. But we are not calling thesethings, we are just reading the analyst estimate and based on that we make acase which then becomes our guidance which is what we tell you. So we arebasing everything on the Gartner Dataquest et cetera analysts, which callconsensus, but not at all our own statistics. We do not have the capability todo so.

Which by the way is corroborated by the fact that we talk toour customers and our customers place orders and we clearly have pipeline oforders that we think we can book over in the foreseeable future and thosethings need to match, and our view that they do. So that's why we are confidentabout say the first three quarters of 2008.

Okay. And in terms of gross margins, it's been a few growthsales that you are above your guidance, is it because you are a bit cautious,or is it because you are doing extremely well in terms of execution?

We have a great CFO, I mean it's one of those things.

Both, I think, we are doing good in execution, but we don'twant to preempt that also, so we are a bit cautious, yes.

Okay. Thank you.

The next question is from Sandy Deshpande.Please state your company name followed by your question.

Hi, JP Morgan. Congratulations.Just a couple of questions, firstly on this immersion order intake, I mean ifyou look at your immersion order intake in the first three quarters of thisyear, it's already higher than it was last year. Do you have any idea from yourcustomer base, how the timing of the immersion orders into 2008 is going to beand on based on that, do you think your immersion orders in '08 are going to behigher than they are in '07?

The second question is easy. Yes, it will be higher in 2008than 2007, and this first question, the timing is, we don't know.

But the only thing we can say is that when we look backthree months ago or a quarter ago and say when we look at when, customers arenow asking for a immersion orders to be shipped, if anything, it's sooner andmore. That's what we are seeing.

Okay. And regarding the immersion orders you took in thethird quarter, does it already include DRAM related immersion orders and basedon that, when do you think that the early movers in DRAM will start moving tothe 5x node?

Yes. There is a significant part of our Q3 orders which arefor DRAM to be honest, I'd not say if it's 5x or whatever node. I don't want totell you because then you would know which customer it is. And so I would saythe two customers, who we have received orders, yes, are planning to rampproduction of this new generation nodes. I would say in the Q1ish timeframe.

Sorry. I didn't hear that?

Q1.

Q1. Okay. Thank you.

The next question is from Mr. Robert Maire. Please stateyour company name followed by your questions. Robert Maire - Needham & Co.: Yes, the company is Needham & Co. Congratulations on thenice report. By the way, you had two questions. Number one, we've had asignificant move of the dollar versus the Euro, if you could just update us asto its impact on ASML and pricing and that and such. And given that we are sortof coming off of the bottom here in terms of business and we are looking at anuptick going forward. Historically, one of your limiting factors has been lensesand I would assume that you may have perhaps a few more lenses in inventory ormaybe the ability to ramp a little bit faster coming off of the bottom here. Isthere a possibility that you would be willing to increase shipments at a fasterrate, or is it your view that you'd prefer to keep it at sort of moderated rateand maintain backlog at a more steady state basis?

Well, yes, to the last question, I think we'll ship when thecustomer needs it. And so, it is up for us to manage the backlog just when thecustomer needs we will ship the tools. Now, you are right that you want to beable to move and expect customer demand comes up. So, yes, we are keeping a certain number of lenses in whatwe call buffer, but those are buffers which are not at our balance sheet, whichare at the suppliers' balance sheet. And that's where we have good agreement onwhat we think is reasonable under the circumstances. So, yes, we have thatability for Trans business. On the dollar-Euro impact, it has two elements to it. Ithink from a competitive point of view, we are more concerned about Euro-Yenclearly, because our two competitors are not in dollar denominated areas. Forour clusters, clearly industry is calculating in U.S. dollar so that hasn'timpacted our true price in dollars, they go up, so it's more the relativemovement of the Euro against the YEN, that is from the competitive point ofview, something that we look at. From an operational point of view, we do source in U.S.dollars. We source lasers in U.S. dollars. We source some mechanical modulesfrom the U.S. to our Wilton operation and thatactually has a positive effect on the cost of goods. Robert Maire - Needham & Co.: Okay. So, overall, the impact would be positive.

Yeah. Robert Maire - Needham & Co.: Okay, thank you. Congrats again.

Thank you.

The next question is from Harlan Sur. Please state yourcompany name followed by your question.

Hi, Morgan Stanley, and congratulation on a well executedquarter. On the product side, and in keeping with your competitive leadershipon the technology side, may be can you just provide us with an update on thedevelopment status of your high throughput, high accuracy over the immersionsystem for double patterning?

Yes. But, I am going to make a bit of an editorial comment,I don't know if it is helpful for everybody. In the road map of semiconductorto make more as low, it is now obvious that there will be multiple ways ofdoing it. You can do a double patterning, which is a way of passing twice apiece of lithography to get to the next node. You can do what we call 3D geometry designs, where yousucceed to pack basically the bits on top of the other, and therefore you don’tneed to shrink as bad or you can do EUV. The position that we now are thinking that is highly clearin the industry is that the three technologies will be needed. There is noissues about that. It all depends about who needs it when. And as we've said,in fact for the DRAM people for instance, there is a difference of 12 months to18 months between the leader and the follower. There is going to be multipleopportunities to use any of those technologies. So it is important for ASML to use its muscle in R&D,basically to put differentiated machines, superior machines on the threesegments. And therefore we've put significant effort in building up machinesfor EUV. As you know, we are putting machines also in action for the doublepatterning. And in order to do double patterning, you need to have extremeprecision of what you call overlay, from today an overlay of 6 nanometer to 7nanometer, to an overlay of say two or three. Because you are going to pass twice. In order to make thistechnology economical, it would be a good thing if you succeed to pass a lot ofwafers per hour, so that you reduce a cost of the system. So therefore, we needto go north of 165 wafer per hour. So yes we are in progress of building up these machines, andat this moment we have also added the possibility to upgrade some of themachine that we have in the field to double patterning and high speed. So that's a new news which is due to the fact that we'll puta bit of R&D on the subject and this is extremely powerful as you can seeselling possibility, to say, to a customer, you buy a machine capable of onetechnology but within two years or so, we will be able to upgrade it to thenext one. This is highly powerful. So yes we are doing for the current machinery upgrade pass,and we are also developing a revolution concepts, which will replace in factthose machine in due time with another leap of technology.

Great, thank you that answer. And then as a follow-up, onthe immersion order in Q3, can you just let us know roughly what percent of theimmersion order mix was DRAM?

Do we have that? That might be less because --. I would say40-60 because we have what we call still the hybrid guys. It’s a bit difficultfor us to know what they are going to use with them forward, I would say.

So its 60 NAND as you would say in 40 DRAM max?

Yeah.

Okay. But nevertheless, it was fairly significant which isthe good start I guess, for the DRAM suppliers.

Correct? Yeah.

Thank you very much

The next question is come from Timothy Arcuri. Please stateyour company name followed by your question.

Citi. Hi, got a couple of things. First, do you guys haveany estimates as to what lithography is in '07 as a percentage of overallCapEx? And also moving into '08, it looks like Litho was gaining a much, muchbigger share of the overall CapEx budget. So I am wondering whether you had anyestimates there?

Again, we are not expert in understanding the rest of thebusiness. We know that they have, on one hand, growth opportunities, because asyou heard from the market is, if they go towards double patterning, there issignificant opportunities for Lam Research, for Applied etcetera, for KLA. So there is a growth opportunity. I do not know if theirgrowth opportunity is as big as ours. Ours is fundamental, as you know, in asense of, if you double patterning you multiply lithography by two. So theseare big things, but I can’t really comment on the other areas.

Overall average, Tim it’s around 20% of CapEx spent, butthat could be 21, it could be 19, and that is probably for you too big of adifference. So, of the equipment, not of the total CapEx sales, of the equipmentCapEx. And also CapEx for us, the CapEx numbers that customers give out for us,we take it as a data point, but we don’t really focus on it. We focus on whatour customer feel that they need, where they shrink growth maps. And we also know that, and history has actually shown thatvery, very clearly that CapEx number is almost as fluid as the water we use inour tools. I mean, it goes up when customers need it, and it goes down whenthey really don’t need it. But what they do need and that’s what we know, isthe shrink capability, and that is very clear, the road maps for that are veryclear for our NAND customers and DRAM customers, and also for the Logiccustomers following late next year. And that will happen.

I guess my point is that, you could grow 15% next year, butthat doesn’t necessarily mean that CapEx will be up. You could grow 15% even ifCapEx is down 10% because it --

Absolutely.

Because a disproportionate piece of the CapEx is actuallygoing now towards the Litho. So, and that was my point. I guess, the follow-upwould be, how much of your orders, or do you have any sense of how much of yourorders for NAND are going to replace old capacity?

That’s a very good question, and it is not a NAND question Iguess, it’s a DRAM 200 millimeter question. I think we passed it on thesilence, and there is also another engine of growth in 2008, is the DRAM peoplewho cannot continue doing business on 200 millimeter at these price points. So, now what will they do? Do they stop the factories? Isthe price going to go up or are they going to buy ASML tools? So there is atransition in DRAM from 200 to 300 which is economically required. In the freshenvironment, no, I think there is going to be zero --

Capacity replacement.

Capacity replacement. No they will be used on multiplelayers or layers which were critical, become less critical.

Next question.

The next question is from Peter Testa. Please state yourcompany name followed by your question.

It’s Peter Testa from One Investment. Sorry, there's someconstruction just to see (inaudible) put me on, excuse me for the noise. Two questionsplease. First one was; if you look at the orders for execution over the nextfew quarters, and compare them either to percentage of sales or an absolute.There seems to be somewhat less on-the-go for the next two quarters than youhave had say for Q3, Q4 when you spoke last time. And also, you make a comment on 2008 that for the firstthree quarters you expect some increase. Does that imply that you would expect,sort of, up and down phasing or whether you are not entirely sure of when thecapacity expansion orders will come which is somewhat absent from the orderintake at the moment?

You can look at the data, but also on the presentation onthe website.

I have seen it, yes.

69% of our order backlog is now currently for shipping inthe next six months, which is low as compared to what we have seen in the lasttwo years. But that has also been driven by the fact that the content of ourleading-edge immersion tools is very high. And when you are a customer and youwant to know all that you want to have those immersion tools which areabsolutely vital for your product growth map, you want to secure those. So, that actually means that and I think one of thequestions I think Jay Deahna asked a question. We would expect that some of theunits that are KrF and there are mid-critical layers that they would be orderedgoing forward to this quarter or the quarter to come. So, yes, this is particular to the situation that customerswant to secure the supply of their leading-edge tools, and it is my expectationthat when unit orders go up, as we've guided for this quarter that you couldsee a -- and you probably, we will see a different mix in the order intakebecause sustaining a over EUR22 million ASP in order intake that is not verylikely.

Okay. And then as a follow-up that's just on the KrF XT:1000machine being launched, if you could just give some comments as your perceptionof the market opportunity for that tool please?

Yes, it is a tool in fact that allows people to go and do inKrF some layers which used to be done in ArF. So, you can say it's a bit of acannibalization of the ArF business or you can say its way for ASML to takemuch more market share on KrF business, which belong to others. And we thinkthat we have a chance on the other one.

Right, okay. Thank you.

Next question is from Robert Sanders. Please state yourcompany name followed by your question.

Yeah, hi, it's a Dresdner Kleinwort. Just for a follow-upquick question on EUV actually. I see you've recently dropped Phillips andmoved to Cymer as a light source supplier. I am asking really just a longer termquestion how do you see your technology lead in months, maybe today againstNikon and Canon just from chatting to your customers.

Also in terms of source no, we always welcome multi sourcesand at this moment, I understand there are field for players and they havedifferent sense of urgency, and target, and spec, and timeframe, and et cetera.So, my understanding is it is still of Philips's interest to get into thebusiness. But it is true that Cymer is coming up with a new technology calledlaser-induced plasma, which shows how you potential power faster. But again, atthis moment it is a good thing that multiple players are trying differenttechnology to achieve cost and performance. Regarding our own performance, well it is not bad to havetwo tools at different place on which people work on, you may know that thosetwo tools are extremely difficult to make work and there's a lot of problemswith them but this is exactly why they are called alpha tools and there's a lotof learning and remember in this business, this is a business of learning. So,the more learning you have and experience you built, you create in fact anadvance on your own platform and architecture. So, whatever customers are going to invest like years one totwo years or three years of R&D on to ASML platform, it will be extremelydifficult for them then to transfer this knowledge onto something else. And now, obviously the something else looks like anotherASML platform because we think are the only one who first have committed end of'09 for shipment of the pre-production tools and we have already four ordersand at this moment I don't think we'll be finished with the numbers of ordersthat we will announce. So that's not a bad leadership position to be in and wedo expect our competition to come at some point, but as I say it is difficultto come late in the game of experience building.

Okay. Just a follow-up, just on the lengthening backlog youhad at the end of September. I mean, what led your customers to place so manyorders for delivery in Q2 and Q3 next year. Is it really just a question ofsecuring capacity, if it is, is there a limit that you might be getting closeto exceeding in terms of your capacity that you can support next year, is it 70the sort of number that you could support theoretically in 2008?

No when we say the timing of orders, timing of orders is adifficult science. We said there are multiple reasons to have orders early orlate or whether in that and the reason why we had a bit of early start onthings is that because the decisions made by the customers are strategic. Whenyou do a technology transition, you do a technology transition; you don't doshort-term technology transition. You don't think of this like tomorrow, when you all foundryand you wait for Christmas season, you are going to wait for the Christmasseason and then you want the order because you are going to have orders foryour chip, but when you are a guy who says I'm going to go and do a 55 or45-nanometer and I have decided that's my only way to gain or to getprofitability into DRAM, you are doing it, and at this moment you put theorder. So what we just discovered there was (inaudible) of coursewe expected something to happen but not as big. It is a way that the world hasdecided that the only way to make money on DRAM and flash is two acceleratemoves and guess what this is kind of helping ASML, it helps Litho and it issolid because it's not a cycle question, its' a question of building up theinfrastructure that is necessary. And that's also not an overspend in a sense of building toomuch capacity, because again it's a transition base thing, I think it's not acapacity thing. So it's a sound decision and therefore they could be longer, Imean, if we done with the restructure [lead time].

And sorry, can you just update us then on your capacity fornext year in terms of the amount of tools, immersion tools you couldpotentially ship or…?

We have a new factory, who will be online in Q2, withdelivery in Q3 and this factory is giving us plenty of opportunity for growth.

Thanks a lot.

Ladies and gentlemen, we are going to take one more call. Ifyou didn't get through and you would like to ask, you call the InvestorRelations Department in the Netherlands,we would be glad to receive your call and the number could be found in ourwebsite or at the top of the press release. So, operator, if we can have onemore call please, one more question.

Yes. The last question is from Mr. Peter Knox. Please stateyour company name followed by your question.

Yeah, I am Peter Knox from Pali International. Just in termsthe Q4 delivery schedule, from Bloomberg it was noted that you are expecting toship more than 10 or more than 1900s in the Q4 period. Does that mean to sayyou are looking at the potential and first movements in the sales mix if youexclude the 1900i in Q4 over Q3?

If you would want a clear answer on that question you wouldhave exclude all technology shipments from all the previous quarters also.Because clearly 1900i is the leading-edge product today, but a few quartersago, it was 1700i and six quarters ago, it was the 1400i, that is a part of ourbusiness. So, you cannot exclude let say number of shipments and letsay the remainder is high, the remainder indeed low. It is part of where weare, and where we are in the cycle is that our customers are in need of theshrink, the shrink from 55 to 45 in NAND and from 70 to 55 in DRAM, that's whatthe industry is. So, it's very difficult to answer that question because youdon't want to eliminate the technology, the leading-edge technology tools fromour shipment base because that's what we are all about. We are the technologyleader.

Okay. Thank you.

Okay. Thank you. Operator, if you close the call first, wewould appreciate it.

Yes, of course. Ladies and gentlemen, this concludes theASML 2007 third quarter results conference call. Thank you for participating.And you may disconnect your line now.