ASML Holding N.V. (ASML) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to ASML 2016 First Quarter Financial Results Conference Call on April 20, 2016. [Operator Instructions] I would now like to open the Q&A queue. [Operator Instructions] I would now like to turn conference call to Mr. Craig DeYoung. Please go ahead.

Thank you, operator. Good afternoon and good morning, ladies and gentlemen. This is Craig DeYoung, Vice President of Investor Relations at ASML. Joining me today from our headquarters here in Veldhoven in Netherlands is ASML's CEO, Peter Wennink and our CFO, Wolfgang Nickl. The subject of today's call is ASML's first quarter 2016 results. Just as a reminder for this call and for subsequent calls. The Q&A queue starts with the operator’s instructions at the opening call and not before and just FYI. And as mentioned, questions will be taken in the order that they're received. As another reminder, the length of the call will be 60 minutes. This call is also being broadcast live over the internet at www.asml.com. And a replay of the call will be available on our website. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meanings of the Federal Securities Laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today's press release and presentation found on our website at asml.com, and in ASML's Annual Report on Form 20-F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wennink for a brief introduction. Peter?

Thank you, Craig. Good morning. Good afternoon, ladies and gentlemen. And thank you for joining us for our first quarter 2016 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 you our view of the coming quarters. Wolfgang will start with a review of the first quarter financial performance with added comments on our short-term outlook. And I will complete the introduction with some further comments on the current general business environment and on our future business outlook. Wolfgang?

Thank you, Peter, and welcome everyone. For Q1 our net sales came in at €1.33 billion. This included system sales of €856 million, of which memory represented 42% with logic representing 58%. Service and field options sales came in at €477 million. Our gross margin for the quarter came in that 42.6% slightly above our guidance. R&D expenses came in €275 million and SG&A expenses came in €89 million, essentially as guided. Regarding the order book. Q1 system bookings came in €835 million. At this level, it's 30% below our prior quarter bookings. I would guess that, some listeners might find this confusing relative to our guidance, which includes 30% increase in Q2 revenues. I would like to remind you that we're not an old [ph] driven company and that the order patterning varies from customer-to-customer. Therefore, our bookings are not always a real indication of our near term business opportunities. However, you can clearly see that our Q1 bookings have changed the complexion of our backlog. In a way, that the both our Q2 guide of growing strength and logic and flattening in memory. I can also tell you, that we had strong logic bookings in Q2. Just as a further reference in this regard, I would like to draw your attention to our consolidated statement of operations found on Slide 21 of our Q1, 2016 results presentation. Where you can see the lumpy nature of our bookings over the last five quarters as well. Turning to the balance sheet. Quarter-over-quarter cash, cash equivalents and short-term investments came in €3.14 billion. Our free cash flow for the quarter was negative €65 million. This was expected since we received a significant amount of customer prepayment on orders received in Q4, where free cash flow totaled €864 million. We expect free cash flow to return to a more normal level in Q2. Year-to-date, through 3rd, April we have repurchased 2.7 million shares of €223 million as part of our newly announced €1.5 billion share buyback program for 2016 and 2017 combined. With that, I'd like to turn to our expectations and guidance for the second quarter of 2016. We expect Q2 total revenue of approximately €1.7 billion. Due to recent demand forecast increases, we now expect continued stable memory shipments for the rest of this calendar year. Memory shipments for the second half of the year should be, roughly equal to shipments for the first half of the year. Logic shipments in Q1 were primarily for the 28 nanometer node. We expect some level of continued capacity ads throughout the year at this node. But as mentioned last quarter, we expect the strong pick up of total logic shipments in Q2 in support of 10 nanometer production ramp. Our current view of combined logic indicates that the second half of the year will be greater than the first half of the year. The extent being determined by ultimate 10 nanometer ramp levels in 2016. Last quarter service and field option sales came in €477 million and is anticipated to throw us well at the year. We continue to plan on a year-over-year increase of approximately 10% in 2016. This part of our business growth continues to be driven by strong demand for holistic lithography option, high value upgrades and a growing installed base. Gross margin for Q2 is expected to come in around 42%. Gross margin will be significantly influenced by revenue recognition of two EUV systems in the quarter. Our second quarter net sales guidance includes about €110 million for EUVs. As previously stated, we can only recognize part of the system revenue as much recognized, the forecast. This along with an initial low profitability on EUV will cause a negative impact of approximately 5 percentage points on the gross margin for Q2, which is included in our guidance. R&D expense for the second quarter will be about €270 million. And SG&A is expected to come in at about €90 million, rose roughly at the same level as the previous quarter. Peter will talk more about the status of our EUV program. But I would like mention, that we completed the shipment of one EUV system in Q1. This shipment will lead to revenue in 2017. We expect to ship one additional system in Q2. And finally, at our upcoming annual general meeting of shareholders on April 29. Shareholders will vote on our proposal to increase our dividend by 50% to a level of €1.05 per ordinary share. We fully expect that this proposal will be supported by our shareholders. With that, I'd like to turn the call back over to you, Peter.

Thank you, Wolfgang. As Wolfgang highlighted, our first quarter results were very much in line with expectations and our business is developing along the lines that we'd communicated on the last two quarters. While, Wolfgang gave a qualitative outlook for 2016 with combined memory appearing flattish half over half, with combined logic up in H2 over H1, and with combined services up half over half as well. We do see trends and developments that we believe are worthwhile mentioning. First of all, despite a difficult pricing environment in DRAMP. Our forecast has further strengthened a bit in support of a continued drive by our customers to keep shrinking costs and specifically for long [ph] 20 nanometer and sub 20 nanometer nodes. It is resulted in our current flattish half over half sales view for our combined memory business. For 3D NAND, shipments continue to new fabs and to fabs repairing for 2D to 3D conversions. And of course, we're watching with interest, the developments in the volume introduction of the cross-point architecture. As it will become quietly though intensive in time versus the 3D NAND architecture [ph]. Secondly, as mentioned in previous earnings calls and evidenced by our backlog. It is clear, that our sales to our combined logic customers will become more important starting in the second quarter. As we'll continue, as we're expecting a continued increase in logic orders in the coming quarter in support of initial 10 nanometer node Ramps. And as a result, we now forecast the significant increase in combined system and service and field option sales in Q2 to be at the level of €1.7 billion. Also of note in the first quarter, we saw shipments for 28 nanometer logic capacity additions continue and I would like to make an observation here regarding logic node ramp behaviour. Looking at the ramp speed, size and length of the latest most advance nodes. It appears to us, that the rollout pattern of such nodes is changing. Previously, node transitions followed each other in a rather unpredictable pattern throughout our entire logic customer base. Whereby new node ramp quickly in turn ending the capacity ramp of the previous nodes concurrently. What we see today, effectively starting with 28 nanometer node is that the initial new node ramp is done by a very limited number of customers, but with greater intensity meaning speed and initial size of the ramp. Then the rest of the node ramp is executed over a prolong period, where by the rest of the logic customer base follows the initial customers in phases. Current evidence of this trend, is the aforementioned continued shipments for 20 nanometer logic capacity additions. It is still continuing more than four years after the initial introduction. In discussions with our logic customers, we see similar capacity in expansion behaviour overtime for future nodes. With little intensity, rising significantly node by node, the initial node transitions are lengthening into three years, with the aforementioned longer tail end of previous nodes. This will likely make shipment and order patterns for a specific node, as well as the ultimate wafer capacities, less transparent overtime. However, based on the input from industry analyst forecast of end markets developments. We believe, that our long-term assumption of a 10% node on node reduction of the ultimate installed wafer capacity is still appropriate. As you'll know, this was one of the previous underlying [indiscernible] leading to our €10 billion sales target by 2020. As for the 10 nanometer node. Its introduction is clearly progressing. 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 prior node. The ultimate spend levels for logic in 2016 will depend on amongst other things. Both the level and demand and the rate at which our customers will be able to execute their ramps. This is why, it is still a bit too early to predict the overall 2016 spend levels today. For field options and services, we see continued strength in 2016 and this should show growth as previously estimated in the range of 10% over 2015. On the ASML product side, we continue to focus R&D spend on the quality products that are essential to the ramp of our current and advanced processes. In Deep UV addressing the growing little challenges of complex and lithography intense multi-pass patterning. Our recently launched, TWINSCAN NXT:1980 with significant improvements in all key performance metrics, has rapidly reached productivity of more than 4,000 wafers per day. Demonstrating the maturity of our latest NXT platform. In Holistic Lithography, we started rolling out our YieldStar 350E, integrated metrology system. YieldStar enables highly accurate metrology for subsequent analysis in ASML's Holistic Lithography software, which allows customers to control leading-edge production processes for increased yield. Holistic Lithography products are now extending into EUV processes. The customers evaluating our EUV source mask optimization software for development of 7 and 5 nanometer logic technologies. In EUV, you're all aware that our continued focus has been on improving EUV stability, availability and productivity. The key performance metrics that drive new technology production. Expect no changes in this focus, for the foreseeable future. In the past three months, we again demonstrated improved productivity and availably moving EUV towards manufacturing readiness. By way of example, we achieved productivity of more than 1,350 wafers per day in our factory on NXT:3350 bringing us closer to our 1,500 wafer per day target for 2016. Separately three customers showed availably of more than 80% on average for four weeks on the NXT: 3300's. In addition, industry leading customer presented an abundance of EUV results, at the SPIE Advance Lithography Conference this past quarter, that reinforced the need for EUV and demonstrated real and significant process in key two performance areas, making increased customer confidence in EUV for manufacturing insertion at that. ASML's commitment remains to do everything within our capability and power to bring EUV to manufacturing readiness. Now with that, we'll be happy to take the questions.

Thank you, Peter and ladies and gentlemen. The operator, will instruct you momentarily on the protocol for the Q&A. But beforehand, as I always do. I would like to kindly ask you to limit yourself to one question and one short follow-up, if necessary and of course, this will allow us to get as many callers onto the caller, questions on call as possible. Now operator, could we have your instructions and then the first question, please?

[Operator Instructions]. And it is Francois Meunier from Morgan Stanley. Please go ahead, sir.

I think you're making some comments about customers making improvement in terms of availability, which is the key metrics for EUV, this year. I was wondering, is there anyone making like pure DRAM maker, in those three customers improving the availability?

There's not a pure memory maker. These are customers that are, either doing both memory and logic already are focused on logic.

Okay, so actually, when in the video you talk about your customers ramping EUV from the end of 2018 in terms of production up to 2020. It is for logic and memory, not just for logic.

Correct.

Okay, very good. Thank you.

The next question comes from Farhan Ahmad. Please state your company name followed by your questions.

Hi, Farhan Ahmad from Credit Suisse. Thanks for taking my questions. My first question is on EUV, there was good progress demonstrated at the SPIE Conference and all the conference appear to be, working on it. In terms of the work that you're doing with your customers, can you talk about how many layers of adoption, do you expect at the 7 nanometer node and also on memory. How should we think about the number of layers progressing for different nodes?

The most relevant information in that sense we have on the node that's upcoming first, and that's 7 nanometer node. And the 7 nanometer node for logic and [indiscernible] 7 nanometer, not the 7 nanometer node that you need to look at in conjunction with 10. So it's what we call 7 or 5. That can be anywhere between 8 and 12, latest. It depends on the customer.

Thank you. And then, the second question is, I have is, in terms of your memory shipments. Previously, if I remember correctly you had indicated the first half shipments would be roughly flat from second half of last year. If I take your first quarter shipment level and I assume that second quarter is flat, maybe down a little bit. It appears the first half of the year is down about 20% from second half of last year. And then, it's going to remain at about that level for rest of the year. Is that a reasonable assumption on how I'm looking at the memory shipments and also if you could clarify, if there were any push outs on the memory that led to, the somewhat change in the linearity?

Farhan, it's Wolfgang. You're correct. The first half is going to be a little bit, lower than the second half of last year. But then the second half of this year is, higher than we originally expected. So overall, there's always like push and pull. But overall, it's actually slightly higher than we thought about last call and also in the call before that.

Got it. Thank you, that's all I had.

The next question comes from Mehdi Hosseini. Please state your company name followed by your question.

Peter, can you just remind us, when we're going to learn more about the 3350s that are been installed at the customer side? And what do we need to see or track or minus don't, to better assess the timing of the EUV insertion for 7 nanometer logic? And I have a follow-up.

The 3350s we started shipping, 3350s two in the fourth quarter all last year, one in this quarter. It takes about six months to install and to qualify. The process of somewhere in this quarter, the second quarter you'll see the first tools released, which actually drives the partial revenue recognition as we just guided. So when that is done, then customer start preparing their integration wafers and then basically running them in what they call marathon test for sometimes months, sometimes quarter. We've actually done marathon test with lot of our customers on the 3300 by the way. Which involved 13 weeks, so that's one quarter? Now this will - that starts in Q2 so somewhere in Q3 we will see the first results. And the results will be focusing on metrics that we just talked about. It's productivity, availability. That's what they will be looking at and we expect that the customers will repeat, what we have seen in our own factory simply because we have the 3350 there, since the second half of last year. We've done internal tests also. So what you need to track is, is really data coming out of the customers and we will support you also with that, by the time those marathon test have been run, you know customers who are all big with data and productivity.

And having 1500 throughput target?

Yes, I think that's throughput target, that we want to see in a marathon test and at least to see, to see the capability of that tool. Marathon test for customer work could be focusing at different productivity levels. But we would like to see, in the installed base the capability in all shown several times and we can do 1,500 wafers per day by the end of the year. Don't forget that customers don't run 1,500 wafers per day, at the current level of the N7 rollout. I mean, they don't have 1,500 wafers per day for 13 weeks. So it's the capability that we need to show on a regular basis. Plus the agreed upon results on our marathon test regarding availably and productivity.

Great and just one clarification for Wolfgang. I think in your prepared remarks, you said logic bookings will be up in Q2, but you didn't mention memory. Where you referring to booking and if so, any qualitative assessment on memory booking to Q2?

Yes, if you look at our total backlog, you see about a quarter is in, is in memory on a total of €3 billion that makes like the €750 million. And with what we shipped already and what our expectations with two equal halves. We will get some more bookings. So there will be memory bookings in Q2 as well. But you will see again the bookings way towards logic because the 10 nanometer ramp is continuing strongly in Q3. So you'll see progress there. But overall, you'll see strong bookings for the second quarter, Mehdi.

Got it. Thanks so much.

The next question comes from Timothy Arcuri. Please state your company name, followed by your question.

Cowen and Company. Thanks. I had two. I guess first of all. Wolfgang, I have a question about the customer co-investment program. And what happens when the program ends at the end of next year. And so, how to think about your development burden? Does the overall R&D spend decline after the end of next year or does your portion of that burden go up?

Yes and first of all, yes the CCIP is about €1.4 billion over five years and those contributions will end as you may recall there is, a portion of that recorded through the gross margin. There is a portion in other income and actually a portion that goes straight through the balance sheet. So none of it actually is recorded in R&D. Your expectation should be that we're currently running at the €1.1 billion level. We're pretty stable on that and I would expect that, it stays at that level, as we continue to invest in EUV, but then also in what prolongs EUV, INA, Holistic Lithography. So for planning purposes I would just keep it at that level and just to be safe in our €10 billion model by 2020. We have modeled 13% that would give us some room to grow and invest here, but for now I would just keep it flattish at the €1.1 billion, Tim.

Got it, right. But then, it may be reimbursed through other means. If the development spending isn't going to change, if you're not getting reimbursed anymore, then your burden definitely goes up. Is that right?

That's right. I mean, we got co-investment and for that co-investment, we meet our co-investors are also shareholders and when that period is over off the co-investment payments, we're getting in. We have to decide by ourselves, whether we keep the investment level and we look at our future business plan and feel it's justified to keep it that level.

And don't forget, Tim. That the co-investment program was designed to be a bridge R&D support until we started shipping EUV. And by 2018, you will see the ramp of the EUV start, which also has an impact on the topline. And we'll have an impact on the gross margin. So by that time, we should be able to stand on our own feet.

Got it and then as my second question. Do you still plan to ship six to seven EUVs systems this year? I think you had said six to seven, is that still the plan for the full year? Thanks.

Yes, that is still the plan.

Okay, thank you so much.

The next question comes from [indiscernible]. Please state your company name, followed by your questions. Ms. [indiscernible] goes ahead, please. The next question comes from Mr. Sandeep Deshpande.

My first question is on the short-term. I mean, you're talking about this flattish memory trend into the second half, which is what not what you were saying earlier. Clearly things look better than before, Wolfgang. So can you talk about, where you're seeing these positive trends in the memory market into the second half of the year given the difficult memory environment at this point and I have a small follow-up.

I mean, I'll start and then let Peter, chime in. But first of all, it's not one customer. I mean, we see forecast at multiple customers. It's also supporting like in DRAM. The new nodes 18 nanometer nodes. We'll start initial production on that. And then, we also see in NAND continued in investments in China, with new 3D factories in Singapore and in Japan. So it's not one customer, it's pretty much every customer. It's not like we see overall the same memory levels that we have last year. So our memory overall will still be down quite a bit year-over-year. But it came out a little bit better than we expected, was at the last two calls.

Thanks, Wolfgang. And following on from that, when you look at the third quarter, when you talk to us in January and you indicated €1.3 billion in the first quarter. You had indicated that you would see this significant ramp of revenues into the second quarter. How do you see the third quarter and fourth quarter developing at this point, in terms of revenue from the second quarter levels?

I mean, you got to just add up, what are the bits and pieces. I mean in logic, we were pretty clear in both mine and Peter's remarks, logic will be higher in the second half than the first half. The ramps not one quarter figure. Q3 is pretty strong. Q4, it remains to be seen. Our customers tape out with their customers and what the yields are so forth. Our memory is stable. And then you see, field options and services. We haven't talked about that yet. We'd a modest start into the year, but every quarter now it should be better than the prior quarter and that will lead us to, a 10% increase also year-over-year. So it's also a quite bit better in the second half than the first half. So it's relatively safe to assume, that the second half is going to be stronger than the third half of the year. Now if you know, we guide only if we have clarity and certainty and you also know, one of these systems is €50 million and it can go left or right in the quarter. So that's why we, rather not do a quantitative guide, right now. But we're looking pretty good for the year and now, for Q3.

Thank you, Wolfgang for the color.

Your next question comes from Jagadish Iyer [ph]. Please state your company name followed by your question.

Two questions, Peter. First, one of things if I look at it, why did you services revenue go down disproportionately, when your immersion sales went up quarter-over-quarter in Q1?

Yes, I can take this, this is Wolfgang. A little bit something that we got a considerable time. We actually call this, field option and services, that 477 bundle. What do you see is that and we got a quite frankly consider in the future, whether we record on this slightly different. The service portion which is dependent on certain projects like relocations, but mainly on the installed base, in a relatively stable slowing growing number. What brings the volatility into the combined installed base related revenue, are the field options and services. And those include ever tying from a software option to very, very complex SNEP upgrades that can go into €20 million or so, even higher than that. And that was very quarter-by-quarter. You've seen the exact same thing last year, by the way. Our Q1 in last year was also it was just a tad over €400 million. So we're up 20% year-over-year. So that the service portion is pretty stable and then, the field options is the one that brings a little bit volatility in it. Yes, but in summary we look at our forecast and we're very confident that we grow the number year-over-year by about 10% or so.

Okay, great. Thanks for the color. This is a follow-up question. Given how, your gross margin is going to be impacted because of the two EUV tools in Q2. And if bulk of the EUV revenue recognition happens next year. What kind of gross margin levels should we be thinking about broadly, as we look at in terms of your partial revenue recognition of, you know the six or seven tools that you shipped this year? Thank you.

First of all, I mean. The Q2 dilutive effect from EUV had probably the only dilution effect on gross margin that I like. That probably means that we're actually shipping the products and the customers are accepting, the products. And you're right, I mean the consequence of what we said is, if we have quarters now where we have partial revenue and forecast. We will have in the future quarters, where we have partial revenue and no cost. So it will be accretive to a level and in a future quarter. It's very difficult for us because it depends on various things and various customer-by-customer. It's very difficult for us to pinpoint that and therefore, we'd rather don't give you numbers, but directionally it will be accretive in the future of course.

Thank you.

The next question comes from [indiscernible]. Please state your company name followed by your question.

Hello, can you hear me?

Yeah, sure.

Thanks, sorry about that. Yes, C.J. Muse with Evercore ISI. I guess first question, now that you have pretty decent visibility into the 10 nanometer ramp. Curious, how you're thinking about litho intensity relative to 2016, 2014?

Yes, I think 10 nanometer looking at 10 versus 2016, we think about anywhere between 30% and 40% litho intensity. So take an average of 35%.

Okay, great. And I guess, as a follow-up here. It sounds like, not only 10 nanometer ramp, but also a nice fall through 2016, 2014 spend. And if we, I believe exited last year with about 250,000 wafer starts of equipment shipped. Plus, you know what you're expecting here, as well as you know the EDA guys talking about tape outs of 250, 300 to-date. I'm curious, that down 10% node to know that you're talking about. Is that something that you actually see in 2016, 2014 or does that start at 10 in your view, given the robust tape outs to-date at the 2016, 2014 level?

Well, it actually starts in our simulation, in our estimates. It starts at 2016. About, like I said in the comments in the early comments that we made, is that as of 28 nanometer. We see this pattern of this prolong node, in our 24% of our system sales in the first quarter was 28 nanometer. Which is of course more than four years after its initial introduction? It's a significant amount of units going to a relatively mature note. When we look at the current [ph] customer currently make about 20 and 16 nanometer node intensity rising. We expect the same thing. When we look at the 10 nanometer node. We see the initial ramp being relatively speedy by only a very few customers and that also means that when we talk to the other logic customers, their plans of going to 10 nanometer is couple of years down the road. So the same pattern that we've seen at 28, it's going to repeat itself. Now when we look at the industry analyst reports and we take couple of analyst reports of you know, the analyst firms Gartner [indiscernible] research and those. And we look at, what their current expectation is of the end market. So we currently know. And as all the products that, we currently know like to be seasoned tablets and the servers and the automotive and there's nothing new in there like IoT because nobody knows, what that is. So let's take what we know and we look at the conservative estimates and we change the estimates based on, the most current insights in for instance, the PC market. We can calculate the number of bits or the bit growth going forward. And the bit growth, we can then translate looking at the involvement of our customers into strategies, wafers that need to be processed. We add it all up and we look at the forecast. We just come to a number, that is for those nodes is about 10% node on node, no reduction. It's based upon what we currently know. And it's based on what we currently seeing, it's based upon customers product, which is corroborated by the analyst firms. And that is actually what we've used to calculate our €10 billion by 2020 in a number. And it is how we do it and everything we currently see, points into that direction that 10% node on node capacity, production. But the nodes will be extended, that's currently will be the message.

Makes sense. Thank you very much.

Your next question comes from Kai Korschelt. Please state your company name followed by your question.

Yes, good afternoon. It's Merrill Lynch. My first question was just on, the EUV revenue recognition. So it's clear that I think the technical cost. Only half the revenue and I think you also mentioned that certainly the EUV two is shipping in Q1 and you don't expect it to generate any revenues in, this year. So I'm just wondering, how should we think about the balance of this year, in terms of revenues. And then also, looking into 2017 because I think by then you probably would have filled up by backlog of I guess six or seven EUV tools for which you may have recognized half, possibly less in a gross margin diluted fashion. So I'm just wondering, how should we think about from a phasing perspective, about that?

Yes, I'll go into that Kai. First of all, we shipped one system in Q1, we're planning to ship one in Q2. That leaves four to five in Q3, Q4. If you recall, some of the systems are actually, the 3300, that customers that already paid for. Some of, there we're getting some enhancements. Those will lead to quicker revenue. So you can expect some revenue there in the second half. And then we're also making progress on the maturity of the products and the predictability of the installation process and you see for instance, we set of these two systems alone and previously said mid-year and now we're saying, if in Q2, so you see we're making some progress which also makes it easier for us to recognize, revenue. I won't give you a number here, but the additional units that we're shipping, plus some of the performance milestones on the revenue that we already recognized that we may achieve this year, will certainly lead to more EUV revenue, this year. And next year, you're right. There's going to be a carryover amount. I mean, we're shipping field and shipments, that have no revenue this year. But they'll have it next year. Plus then as Peter mentioned before. We're ready and to do like a system there on top that month, that will be bit second loaded from a shipment perspective, but if you go to a 7 nanometer insertion or 7 nanometer equivalent. And we talked to earlier about DRAM going to be around the same time. You look at the all the lead times, people will have to take delivery, starting end of 2017 and beginning of 2018. So yes, you'll have a carryover it's hard to tell you, what that number is. Plus we're going to ship more systems next year. So the revenue will be plus. The predictability of the installation will go up, which in general means you can recognize it earlier. So the EUV revenue should be quite a bit of next year versus this year.

Yes, I think I can help you only further, in that sense only to mention that 2016 and 2017 will be complex in terms of revenue recognition. And that's unfortunately what it is, you know it's a very strict accounting rules for new technology we have to follow them. And on top of that, the first customers that actually place the orders and put certain criteria in there, performance criteria. Those are not the same, for every customer. You know with first customer, actually it took the first, they gave us the first orders without knowing less than the second customer. So our ability to negotiate terms and conditions and certain performance conditions with the second customer are different than from the first, which will be different from the third. So and all those performance criteria's drive revenue recognition. So it is not only what Wolfgang just said, it's also the fact that, for customer it is different. We'll just have to guide you quarter-by-quarter and it's unfortunately also for us and always that simple to predict when we do, what level of revenue recognition at what margin. But I think for the next year two year 2016, 2017, it is what it is.

Okay, then I just had a quick follow-up because you mentioned it. So I believe the 3300s are already prepaid in terms of cash flow or cash collections on the 3350. How exactly does that work? Does it follow the revenue recognition pattern or how should we think about the impact on them?

We said this also earlier when we think about our EUV priorities, we think about order first, then shipments, then cash, then revenue recognition. And I don't want to sound sloppy, but the revenue recognition is what the revenue recognition is, for the new technology. But we have the cash flow much earlier. So it again depends customer by customer, but you can make an average assumption that there is, a significant portion of that the cash coming at shipment.

Okay, thank you.

The next question comes from Andrew Gardiner. Please state your company name followed by your question.

From Barclays, thank you. Just a bit of a follow-up on that, last one in terms of the sort of the planning for production next year. I mean, you reiterated your confidence in six to seven EUV tools this year with as we're gradual ramp the back half of the year and you know clearly this time last year, we had the sizable multi-year, order from Intel. I'm just wondering how the conversations are going with the others in the customer base in terms of planning for those production slots. You're clearly are planning on increasing the capacity to one a month as you said, but depending on how people demand the tools or plan for that. You could see some bottleneck. Just can you give us any insight as to how, 2017 is, so the planning is turning up.

Yes, I think we've also said it on the previous call I think for next year. Where we have a capacity to anywhere between 12 and 15 units. Now, your question how are the conversations going with the other customers. I think, an indication of - and you can imagine, how that goes if you still like to refer back to what we said on SPIE or what customer said on SPIE. There was a lot of good data coming out of customer base, that showed a lot of confidence in the fact that, EUV will reach manufacturing maturity. Now, you have to remember that those presentation that wasn't done by the R&D people of our customers. And then the people have to run the tools and have to commit uploads to their customers, other people in operations. So the discussion that we're currently having are with the operations people. And they are about availability and lots of productivity. Where they have given a certain targets and we've given them our internal targets and they would like to see them, they would like to see them running at 3350, which is going to be the production tool together with the 3400. And there is this, exactly the phase that we're in, we're shipping through the 350s, to the key customers. They're in installation or they're in this quarter, some of them will be turned over to the customer. And then we'll see the first results and that will drive, also the - in our order interaction with us and the customers. So to be very honest, I think it's just a matter of time this year that we'll see a follow-on, we're confident that we see in our factory, we can repeat at the customer side and that will drive orders just like you said, you know if you want to ship 12 to 15 units next year, orders need to come and they will come.

Okay, understood and then perhaps just a quick follow-up. Wolfgang, you mentioned that EUV tool, the 3350 that shipped in the first quarter. You're not going to recognize any revenue on that until 2017. If anything that seems like a slightly longer timeframe from ship and install to rev rec than you've just planned for with the first two shipments. Is that any reason for that?

Andrew, I can't go into much detailed there we're going through some of this stuff, is also customer specific.

So just refer to my answer on the previous question.

Fine, okay. Thank you guys.

The next question comes from Gareth Jenkins. Please state your company name, followed by your question.

Thanks, Gareth Jenkins from UBS. Couple if I could, follow-ups. Firstly, I just wondered if you talk about the applications of the three customers running 80% are they served intended applications for the process is for those customers. And secondly, I just want to Peter, whether you'd expect to step down and availability as you move from kind of ASML Veldhoven factory environment to a more production orientated customer size. And then I've got follow-up on something else, thanks.

Well to answer your last question. As I step down in the - it's not what we anticipate. We're running these tools here as much as we can and in the circumstances which are comparable to what the customer will do. So that's true probably the case. What you're referring to the 80%, I believe you're referring to availability, Gareth?

Yes, just the customers in terms of what applications they intend to take EUV two eventually. What are the trailing the 80% availability, what are they [indiscernible]?

Its logic, and also memory. I mean, it's also memory customer doing this. I mean, the 3300s that are currently running are running predominantly in the logic environment, but also its leading edge DRAM environment.

And then the last one, just on it on cross-point. I just wonder whether you could talk about the litho intensity cross-point that you see maybe excluding EUV as a factor in the potential step up there.

Yes, I think the cross-point is quite interesting. I mean, it's been introduced. It holds, if you listen to customers. It holds great promise in terms of speed and application space. Currently, those cross-point products are made with Deep UV immersion technology and ultimately we believe because it's a shrink, it will do or at least and X and Y and Z direction shrinkability [ph]. It gives us lot of space for EUV. And that is not going to happen before the end of the decade, but when you think with all these consideration and it would ramp on volume towards the end of the decade, then you would think about three times higher intensity for cross-point as compared to 3D NAND.

Thanks.

Your next question comes from Douglas Smith. Please state your company name, followed by your question.

Hi, it's Doug Smith from Agency Partners. For Wolfgang, you have continuously guided for around 10% growth in field options and services, but it's actually cautiously grown much faster than that. I'm not complaining, but since it's around the third of revenues now, can you provide a little more break down into that business. I think you hinted that you might want to or you needed to provide more detail.

Yes, you can roughly in average think about it, about half of it being service, like I said that's pretty stable and that is, that is growing with the installed base of course. And then the other half in average, sometimes a bit more than half, sometimes a bit less. Our various field options in all of our businesses will also be the case for EUV. But prominent one is the SNEP upgrade which is basically. Its stands for System Node Enhancement Package which is basically a complete open heart surgery on a skin. Where you for instance can make a 1950 and 1970 or you go even beyond that. Those have been introduced last year in volume. We'd quite a few there and that provided for one of the SNEP functions. We also get asked, why is your system revenue flattening out and part of the reason is because we're providing a win-win alternative to the customer. It helps them capital intent and we're getting an option where the economics for us are acceptable as well. And then in the past, you may remember. We had several one-time events that gave us closed births. For instance, we included Cymer at one-year that grew quite a big business as well. And now we're at pretty decent level, last year was one-third of our business, as well as €2 billion plus and we continue to believe that it's growing at least as strong as the rest of our business and that's pretty exciting for us.

Yes, can you say whether the services in field options have higher or lower margins than the systems business?

So obviously it's lower than the corporate average field options, are higher than the corporate average.

Right and.

But there is a lot of software in there, also.

Lot of software components.

Right and funny, a lot of that actually come from backlog. I mean, I would imagine for field upgrades, it's not like something you would do on the spur of the moment. It must have quite a bit of visibility to it.

Well that's correct. I mean, we think just for clarification for everybody on the call. I'll back you up, we record is just for system. So if we would report that, differently some of the options have longer or lead times and if you think about the SNEP, that I mentioned. I mean that's a six to seven week project and there's limited amount of teams and materials. So you get a sketch, so there we have more visibility in some of the software upgrades, we have a little bit shorter lead times. So yes, there are some visibility on some of the options.

Okay, great.

In the early comment you said, we might, if that becomes bigger and it becomes more relevant we just need to look at how we're going to involve that.

Right, right because if it keeps on growing at the previous rate, it will be €2.5 billion this year or something if it's just using the trend from the previous years.

Yes and Wolfgang said, there are sometimes there is, you know SNEP system upgrades could be anywhere between €20 million to €30 million a piece and that's €300 million, that's a lot of. A lot, I mean so we need to - how that's going to develop and if that, it becomes significant, then I think we need to start thinking about different way report it, so you guys can actually follow it.

Sure. Okay, thank you very much.

Your next question comes from Amit Harchandani from Citi and thanks for taking my question.

Amit Harchandani from Citi and thanks for taking my questions. Two quick clarifications, if I may? Firstly, with regards to the topic equipment re-use, we've again seen some comments from some of your larger customers that have reported Q1 results talking about reusing equipment. Just wanted to confirm, if you think the level of re-use in the industry being talked about still consistent with your longer term financial model. And then I have and also if you could share any updated thought on equipment pre-use. And then I have a follow-up. Thank you.

Yes, I think in our long-term financial model. We have included as you pointed out. We have included the possibility of our customers making use of the re-use capability. And what we're currently seeing is that is, it's still in line, with what we're planning. And that has, is because these like Wolfgang pointed out. These upgrades are open heart surgeries in the field and they're planned per node. So when we discuss a node with a customer 7 nanometer node for instance. There is an assumption in there, in the discussion with the customer because of the higher litho intensity. How much of that litho intensity will be split between increase of new systems versus upgrades of existing systems? So we have a pretty good view as to how do customers think and we work that thinking into our long-term planning. So it's pretty consistent, but there is no other surprise because we're actually [indiscernible].

And to add one thing, if I may. I mean, we're aware of the comments. But are also need to like you know for us, the 10 and the 7 for instance is in that application for instance the litho requirements are the same and that customer said that, exactly the same as 16 was to 20. So, that part we wouldn't even classify, as re-use.

And then, to be honest, we also and when we look at 28 nanometer, with some customers we actually planned re-use of the equipment, for given the strength of the 28 nanometer node, never got to any re-use. I mean, we never got to the point. While with other customer had 28 nanometer node but weren't that successful and we re-use it in 14 or in 16 or in 20. So it's a bit different for our customer, but also the ultimate size of the capacity in a particular note will also determine, how much re-use there will be. Older customers will keep using machine as is.

That's helpful. And in terms of the second clarification, if I may. You talked about memory or DRAM in particular shaping up to better in the second half versus the first half. You talked about second half being higher than the first half. Would you be willing to also comment and compare it to current market expectations out there for your full year revenue and say, whether you think that implies and increase in market expectation or are there any downward trends that we should we be aware of, that would deviate away from the market expectation? Thank you.

Yes, on the first part just to clarify. We said memory would be approximately the same in the second half than in the first half. If I would comment on the market expectations and I would essentially give guidance. So we'd better stay away from this and remain not just probably repeat it. Logic is going to be second half. Memory is going to be stable H1 versus H2. And like we just discussed with Doug service and field options will go up in the second half.

Thank you.

I'd like to jump here momentarily. Ladies and gentlemen, we have time for one last question. If you're unable to get through on this call. You still have a question. Feel free contact ASML Investor Relations department with your questions and we'll do our very best to get back to you as quickly as we can. Operator, if we can have the last caller please.

The last question comes from David O' Connor. Please state your company name, followed by your question. Mr. O' Connor? The next question comes from Amit Daryanani. Please go ahead sir.

Hi, Sean [ph] here for Amit and we're from RBC Capital Markets. So one question, and previous - wanted to logic and node transitions. Your bookings were at high levels for about three to four quarters and you know, given the 10% nodes and all the reduction you mentioned and also quicker ramp add a few customers, that you're seeing right now for 10 nanometer. Is this fair to assume that 10 nanometer ramp will be probably one to two quarters shorter than previous node transition and probably the booking Euro amount will be smaller?

I think because of the litho intensity goes up and it is unlikely the bookings amount will be smaller, it's not likely. So and also you have to remember - and I tried to explain in my introductory statements or that these nodes, if you talk about a ramp off a node a node to a total capacity, it takes a very long time, it has a very long tail end. So with initial ramp and since the pattern is changing it's very difficult to compare the initial let's say first, two, three, four quarters of a new node. With the nodes, with previous ones. But I would summarize it like this. I said, the number of customers that over the last couple of years have been able to start an initial new logic node and shrunk is only a very few. They are more aggressive in the ramping, the first part of the node because they have to make sure that they can provide their key customers with wafers. So that's what you will see. And they have a long tail end. So I don't think you can draw any conclusions from that other, than that the nodes will be longer and that litho intensity will go. Hence, when you also look at the need for EUV. ASML is looking to grow its top line and we still stick to our simulated number by 2020, €10 billion.

That's helpful and one follow-up. Last year, you had a EUV volume purchase agreement with at least 15 tools with US logic customer. I mean, given the discussion you have right now with this customer. Do you have any update on the number of the tools will be shipped on the disagreement?

We'll give you the update, when we get the orders. This is volume purchase agreement and we're purchases are [ph] issued according to pre-determined pattern, which is reflection of when the customers need the tools to put them into production. So we'll inform you when we get the orders.

Thank you.

You're welcome.

On behalf of ASML's board of management. I'd now like to thank you for joining us in the call today and operator, if you could formally conclude the call. I'd appreciate it. Thank you.

Thank you, sir.