ASML Holding N.V. (ASML) Q1 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2017 First Quarter Financial Results Conference Call on April 19, 2017. Throughout today’s introduction, all participants will be in a listen-only mode. After ASML’s introduction, there will be an opportunity to ask questions. I would now like to open the question-and-answer queue. [Operator Instructions] I would now like to turn the conference call over to Mr. Craig DeYoung. Go ahead, please sir.

Thank you, Peter, and good afternoon and good morning, ladies and gentlemen. This is Craig DeYoung, Vice President of Investor Relations at ASML. Joining me today from ASML’s headquarters in Veldhoven, The Netherlands is ASML’s CEO, Peter Wennink; and our CFO, Wolfgang Nickl. The subject of today’s call is ASML’s 2017 first quarter results. The length of the call will be 60 minutes and questions will be taken in the order that they are received. This call is also being broadcast live over the Internet at www.asml.com. A transcript of management’s opening remarks and a replay of the call will be available on our website shortly following the conclusion of the call. 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 the ASML’s Annual Report on Form 20-F and other documents as filed with the Securities and Exchange Commission. And with that, I’d like to turn the call over to Peter Wennink for a brief introduction.

Thank you, Craig. Good morning, good afternoon ladies and gentlemen, and thank you for joining us for our first quarter results conference call. And before we begin the question-and-answer session, Wolfgang and I would like to provide an overview and some commentary on the recent quarter as well as provide our view of the coming quarters. Wolfgang will start with a review of our first quarter financial performance with some added comments on our short-term outlook. And I will complete the introduction with some additional comments on the current business environment and on our future business outlook. Wolfgang, if you will.

Thank you, Peter, and welcome everyone. 2017 is off to a great start with a stronger-than-expected quarter. I would like to first highlight some of last quarter’s financial accomplishments and then finish with our view of the coming quarter. Turning to the Q1 results, net sales came in at €1.94 billion. Net system sales accounted for €1.22 billion, nicely balanced between logic and memory. With the addition of HMI products, we are now including metrology and inspection equipment in the system sales. We’re just previously reporting it as service and field option revenue. This also means that metrology and inspection systems orders are now from onwards included in our booking and backlog numbers. This provides more visibility of our current and future system business in this product group. Net service and field option sales for the quarter came in much stronger than expected at a level of €728 million, driven by major DUV and Holistic Lithography upgrades. As noted, YieldStar and HMI system revenue are now reported in net system revenue otherwise the service and field option revenue would have been even higher at approximately €790 million. Our gross margin for the quarter came in at 47.6%, slightly higher than guided, driven by a higher top-line and favorable mix. Gross margin includes the amortization of intangibles as well as the effect from the fair-value assessment of HMI’s inventory as of the closing date of the acquisition. Overall, OpEx came in as guided, although R&D expenses came in slightly lower at €315 million and SG&A expenses came in slightly higher at €99 million. Moving on to the order book, Q1 system bookings came in at €1.9 billion including orders for three 3400 EUV systems from two customers. Strong bookings continued in the logic sector in support of the 10 nanometer RAMs, and in support of the EUV insertion at the 7 nanometer node. Memory bookings strengthened further from its strong Q4 level, supporting expected year-on-year growth in the memory sector in 2017. The continuing order flow for EUV systems increases our EUV backlog with 21 systems valued at €2.3 billion. Our overall systems backlog now stands at €4.5 billion. In addition, we offer four EUV upgrade orders valued at approximately €200 million. This will bring these four NXE systems to NXE:3400 performance. In total, we have 14 3300 and 3350 systems in the field, which are candidate for upgrades. As a reminder, system upgrades are not included in our system backlog. Turning to the balance sheet, quarter-over-quarter cash, cash equivalents and short-term investments came in at €3.84 billion. As already mentioned in January, we saw a significant level of early payments from customers in Q4 of last year, which resulted in a negative free cash flow of €212 million in Q1. As a reminder in Q2, we have several extraordinary cash outflows, which will bring the overall cash balance back to our target level. Assuming approval at our AGM, we will pay a dividend of €1.20 per ordinary share or approximately €515 million in total to shareholders. We also have bond maturing in Q2 with an outstanding value of €238 million. And lastly, we expect to close the acquisition of 24.9% of Carl Zeiss SMT, during the quarter for €1 billion. Based on our current business view, we see a continued strong demand for DUV, Holistic Lithography and EUV products throughout the year in both memory and logic. Our view is supported by our highest backlog ever. With that, I would like to turn to our expectations and guidance for the second quarter of 2017. We expect continuing sales trends in Q2 with total net sales between €1.9 billion and €2 billion, including an estimated €200 million of EUV revenue. We plan to ship three NXE:3400 in the June quarter. Our EUV shipment plan for the full year includes 12 systems and is backend loaded. We expect our Q2 service and field options revenue to again came in above €650 million, driven by continued demand for Holistic Lithography options, high value upgrades, and our growing installed base. Gross margin for Q2 is expected to be between 43% and 44%, driven by the recognition of EUV system revenue, excluding the EUV revenue, gross margin would be approximately at the same level as Q1. Q2 gross margin also continues to carry the effect from the purchase price allocation for the HMI acquisition. The negative impact of these purchase price allocation adjustment for Q2 is more than one percentage point. The impact for the full fiscal year is about €90 million and will reduce to about €40 million per year from 2018 onwards. R&D expenses for Q2 will be about €315 million and SG&A is expected to come in at about €100 million. As a reminder, our share buyback program remains paused for the time being as we close our planned equity investment in Carl Zeiss SMT. The remaining approval from China is expected in time to close the transaction in Q2 2017. And finally, as mentioned before an increase of our annual dividend from €1.05 to €1.20 is submitted for approval at our annual general meeting of shareholders on April 26. With that, I’d like to turn the call back over to you, Peter.

Thank you, Wolfgang. As Wolfgang highlighted, our business continues to perform well. We started the year with a very strong quarter and we expect this positive momentum to continue throughout the year. While Wolfgang reviewed our current quarter performance and outlook for the current quarter, I would like to provide some additional commentary on our markets and our longer-term outlook, as well as provide a few highlights on our product portfolio. As seen in our first quarter results, logic demand remains solid and our memory demand continues to strengthen, with DRAM largely compensating for weak spending in 2016. Logic demand is driven by continued ramp of 10 nanometer with memory demand driven by DRAM 1x nanometer node and additions of 3D NAND capacity. The strength in shipments to China this quarter was driven by existing Chinese and non-Chinese customers. As for new China business, we are in discussion with multiple Chinese logic and memory customers regarding timing of system demand for their new fab projects. We expect shipments to support pilot production in these new fabs starting in 2018. While it is still too early to provide quantitative guidance for 2017, our directional view as expressed last quarter remains largely unchanged. However, in terms of potential magnitude of our business, it now appears that memory demand will be up significantly as compared to prior year. On the ASML product side, let me start with an update on our EUV business. We started shipment of our NXE:3400 system, which will be the EUV workhorse in volume manufacturing over the coming years. Furthermore, we continue to make progress towards our 125 wafers per hour productivity and 90% availability commitment. At the SPIE Advanced Lithography Conference in February, our customers presented their latest results confirming our progress on these metrics. The status of the EUV infrastructure was also presented by our customers. And while there is still work to be done on things like pellicle, there appear to be no major roadblocks for EUV insertion in the timeframes as indicated by our customers. Regarding demand, we took three EUV production orders from two different customers this quarter, bringing our total EUV backlog to 21 systems. And as Wolfgang mentioned, on top of this we booked four orders for a total value of around €200 million for upgrades of EUV systems currently in the field to NXE:3400 production specifications. And by the way, these orders are field upgrades and do not show in our reported order backlog. EUV order flow continues, while we work to finalize a VPA with at least one of our major customers, which will translate into additional orders over the next quarters. As customers continue to assess timing of their roadmaps and firm up the layer adoption, we’re beginning to get a clearer view of EUV demand for next year. The average analyst demand expectation stands at around 20 new systems shipped in 2018, which given our current view seems reasonable, while we still have the option to build up to 24 systems next year. In DPV lithography, demand for our TWINSCAN NXT:1980 immersion systems continues for both logic 10 nanometer and DRAM 1x nanometer nodes, bringing the install base to more than 60 systems. We’re also seeing strong demand on our KrF platform, where we boosted the productivity of our XT:860 system further to 250 wafers per hour. For our 3D NAND customers, we released new options that improve focus and alignment performance on the high-topography layers typical for this application. And to maximize capital efficiency a number of customers also upgraded their immersion systems through significant enhancements to productivity, imaging and overlay. And these upgrades drove significant growth in our option business, which will continue to drive growth through 2017. In Holistic Lithography, we continue to ship our most advanced YieldStar 350 metrology systems to our customers supporting qualification, and ramp up the 10 and 7 nanometer logic node as well as the 1x nanometer DRAM node. In addition to YieldStar metrology systems, we are also shipping HMI e-beam systems that are now reported as part of our systems revenue as Wolfgang mentioned. The integration of HMI is progressing well, and customer interest in our pattern fidelity products remains high. So in summary, great start of the year with a very solid quarter. Strong DUV demand, service and options business showing further growth momentum, and continued EUV order flow provides a clear indication that this technology has now become a part of our mainstream business. We expect the positive industry environment to continue resulting in a very good year for ASML. And with that, we would be happy to take your questions.

Thanks, Peter. Ladies and gentlemen, the operator will instruct you momentarily on the protocol for the Q&A session. Before I hand, I’d like - as I always do - to ask you to kindly limit yourself to one question with one short follow-up if necessary. This will allow us to get as many callers on as possible. Now, Peter, could we have your final instructions and then the first question, please?

Yes, sir. Thank you. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question comes from Mr. C.J. Muse. Please state your company name followed by your question.

Hi, C.J. Muse, Evercore ISI. Thank you for taking my question. I guess, first question, I was hoping to get an update from you on your expectations for adoption of EUV by DRAM. I saw on the slide deck that you reiterated 1Y [ph]. Would love to hear how your discussions are progressing, and how you’re seeing adoption, and what kind of layer count we should be assuming at that first part of the adoption curve?

Okay. Yes, like we said, we are talking to logic and memory customers. So on DRAM the expectation is indeed 1Y [ph] to be specific. It’s the mid-teens 16, 15 nanometer DRAM. That would be the introduction node. And that would involve one to two layers. So you have to remember that of course the DRAM market is quite a significant market, so one to two layers is a decent start for EUV technology at this node. And we are talking at least to one customer very specifically, but other customers have showed similar interest and they will follow suit.

Okay, very helpful. And then I guess as my follow-up, Wolfgang, if you could give us an update on how you’re seeing the trajectory for EUV gross margins. And, I guess, within that would love to hear how you see the cascade effect of 100% gross margin as it comes through this year. And then how we should see reaching that 20% target into the calendar 2018 timeframe? Thank you.

Yes, C.J. So the story there was pretty much unchanged from what we communicated at our Capital Markets Day in late last year. We were at minus 75% or so last year. Our objective is to get to 40% by 2020. We are targeting breakeven this year. There were several components to get this accomplished. One is simply volume, and we are shipping three times as much as last year, as you can imagine it’s the same factory producing that, so that will help. The second one was mix. Last year we shipped 3350s. This year we’re shipping 3400s. As you know from prior calls, the list price on those is approximately €20 million higher and the cost is not €20 million higher, so that will help. And then, of course, we have the service business, where we talked before that we are charging per wafer, which of course ultimately is a lucrative business model. But as we are not churning out a lot of wafers right now, but have to man the systems is a - had the significant dilutive effect on gross margin. And last but not least, we are progressing on the learning curve; as well as in our own factory, the number of hours it takes to put one of these things together; and also with our suppliers, as well as work that we have to do in the field to upgrade these systems, and bring them to the latest level. I think the expectation of 20% is still good for next year as we again go from 12 systems to around 20 systems as mentioned earlier. And then, we made some progress last year, where we can now do partial revenue recognition upon shipment. But again, it’s partial revenue recognition, because in case we have some performance criteria that will be met later, we got to defer some of the revenue. But on the other hand side, it will help that some revenue that we deferred in the past will come in at no cost. So that’s why we believe in this year the deferral and what’s coming in, it is roughly offsetting each other, that’s why we said also in our communication that the revenue should be somewhere in the €1 billion to €1.2 billion range. And again, I think we are on the right path to get to 40% and the volume is the biggest driver of this.

Peter, can we have the next call.

Okay. Yes. The next question comes from Mr. Farhan Ahmad. Please state your company name followed by your question.

Hi, this is Farhan Ahmad from Credit Suisse. Thanks for taking my question. My first question is on the orders that you had this quarter. The order level was pretty high and strong. I just want to ask how sustainable, do you think the order trend is, and in particular, on the memory orders - hello?

Yes, yes, go ahead. Okay.

Yes, in particular on the memory orders, the orders are significantly higher than any time in last two years. Can you just a bit more color on - is it driven by capacity additions of 1x nanometer, and any kind of visibility and whether it’s NAND or DRAM?

Yes. Just making a small note here, NAND or DRAM. Yes, orders in Q1, yes, I think that’s sustainable for the next few quarters. Given the fact that - I’d say, given the outlook that customers are giving us. Yes, it is significantly higher than the last two years. But you have to remember that what we saw over the last two years was especially weaker order flow from DRAM type customers, because the DRAM market was over the last 18 to 24 months not that strong. And it had to do with the fact that in 2014, we ended - beginning of 2015 and 2014 of high mix and by 2017 [ph] assumption came online which were big fabs that actually - we actually saw when you added them up was quite a significant step up in capacity. But we haven’t seen any new fabs coming online of that side since. But what we did see, that has to do with your NAND/DRAM question, what we did see is that given the economics of the DRAM markets over the last two years, we’ve seen leading edge litho capacity being used in NAND production. And that has actually happened. I think we mentioned that on previous calls also, bringing the wafer out capacity down with double-digit percentages. Now that has created a situation clearly where demand and supply of DRAM end products was somewhat unbalanced over the last nine months, which led to an increase in DRAM prices, which is not surprising that now our customers are in fact feeling that capacity that they actually use to basically produce NAND over the last couple of years. And it also is an entry into your question of NAND versus DRAM. It makes it all very opaque if you have NAND and DRAM sitting next to each other. And depending on the market situations, leading edge litho can be used for either or. And that’s why we look at memory now, and we set it also before as one segment. But looking at it - let’s say, from a big demand point of view, what we currently believe and also looking at last year’s big growth numbers, 30% in DRAM, 40%-plus in NAND, looking where the capacity situation is today, looking at the price situation, I can fully understand why memory customers are filling up the open spots in their fabs to make sure that they have sufficient capacity to fulfill the demand of their customers. Now, sorry for the very long answer, but you asked three questions, so that’s why I had a longer answer.

Okay. Thanks. And if I can just squeeze a quick question, last month ASML signed a MoU with Shanghai Micro Electronics Equipment company. I believe they are one of your new emerging competitors in China. So I just wanted to understand like what exactly the terms of the agreement, is it something where you’re just supplying the Cymer light source to them or is there more to it?

No, no, there’s a different kind of cooperation. We’re not competitors. They built lithography type machines for a different part of the market. They are largely in the packaging - they are largely active in the packaging market. What we have done is effectively created a memorandum of understanding to start working together, whereby we actually use them as one of our suppliers, one of our suppliers not so much in the lithography market but more in the metrology systems area. And we have a cooperation, which is focused on making sure that they will get a better understanding of how you manage a more than complex supply chain. So it is not directly focused on areas where there could be a logical competition between the two companies. It’s in different areas.

Thank you. That’s all I have.

The next question comes from Mr. Sandeep Deshpande. Please state your company name followed by your question.

Yes. Hi. My question is regarding your revenues for 2017. Peter, I mean when we look at the consensus I had up to date, it’s about approximately €7.9 billion. Last year, you did about €7.6 billion. Wolfgang, you’ve said that you’re going to do revenues between €1 billion to €1.2 billion in EUV. So if you took €1.1 billion at the midpoint, it would mean that this year the additional revenue outside EUV is about €100 million. With DRAM particularly looking much better, are you more positive that €100 million incremental revenues from the memory market this year? And I have a short follow-up.

Yes, I think…

I think, Wolfgang can answer this.

I’ll do the revenue piece. I mean, if you look at what we said last quarter and what we said this quarter, I mean on the - if I go exclude it, EUV first, I mean, we had a very strong year in logic. And we continue to believe that that is going to be flattish year-over-year. It’s good news. We have a memory business. I think we both use the word significantly, of course, that’s what we previously believed, last quarter we said. Right now, I think it’s flat, but it could be up. And now we think it’s significantly up. I think that’s more than €100 million definitely. And then, we have our EUV business, which was only €350 million or so, which we - like we said before, I think it’s going to be between €1 billion and €1.2 billion. And then don’t forget field options and services even with the adjustment that we made - we made €2.1 billion last year. And if you add up the two quarters, the actual and the guidance were almost at €1.4 billion. So we are at significantly higher run rate there. So I would without giving a quantitative guidance, I’d say the €7.9 billion is very much on conservative side. I’ll give you one other way to look at that, it may be helpful for you, Sandeep. If you look at the first-half the actual and the guidance, and you detect that we only have €200 million on EUV revenue in there, so you know in the second half the bulk of the EUV revenue will come in. And we have not indicated that our non-EUV business is going down. So if you do these two exercises, I think you’ll get the pretty good range that is quite a bit higher than €7.9 billion.

Thanks, Wolfgang. Peter, just one quick follow-up on EUV, I mean, market has been focused on the top-three customers. What about the next tier of customers in EUV? Are you engaged with them and when would they start placing significant orders? Thanks.

Yes, I think we have orders in our backlog of maybe more than the top-three. We have additional two, and so that makes it five. And we are in discussion with two others, very close. So I think that is now spreading. But it was clear, of course, that’s the top three is the leading back in terms of speed of EUV introduction, but the others are clearly following.

Thank you.

The next question comes from Mr. Pierre Ferragu. Please state your company name followed by your question.

Hi, it’s Pierre Ferragu from Bernstein. So if I kind of think about what I heard on the call is very positive developments about EUV. You have already 20, 21 orders in the backlog you will have more in the next couple of quarters. So next year like 20, 22 is also is for what we are going to see. And at the same time, I heard the DUV business is likely to do well in 2018 as well, because - mostly because of China generating like a new area of demand in DUV. And when I look at consensus expectations, basically if I assume there is about like €2 billion of EUV revenues with about 20 tools. Then that implies the DUV business would be down about €1 billion in 2018. Do you think that kind of pullback make sense, and would reflect maybe like sustaining of the rollout of the 10 nanometer node or do you think actually to 2018 it could be another very strong year in DUV?

Good question although what you’re asking me is to just give you some reasonable financial feedback on what we think 2018 is going to look like, which I’m not going to do. But qualitatively, I don’t see anything at this moment in time that would bring the DUV business significantly down. There is continued strength in the memory business, when I look at the strength of the logic business, and leading edge logic needs performance memory, so it needs DRAM. And that’s clear, I don’t see a major new DRAM fabs coming online within the next 12 to 18 months. That means that all available spots in - let’s say slots in factories that can take leading edge DPV will take leading edge DPV given the fact that I don’t see that dipped demand, and demand will go down significantly. So, and if memory will stay strong, you mentioned China, I think China longer term, and I think also in the last call, medium term, long term definitely is a big opportunity for the entire industry. However in 2018, what we’re seeing in terms of memory projects coming online, we will be focused on, let’s say finishing the construction and then putting the first pile of lines in, which will not drive a big, let’s say, a decision to installed memory capacity that will take time, I think all those memory projects are all new. You could call it greenfield, not only a greenfield fab, there are greenfield companies. It is going to take a bit of time. Now the positive thing is that of course all those choices for technology, and for wafer fab equipment will be made in the next 12 months timeframe. So it’s going to be strategically very important to be in China, and to actually have - and to sign up those Chinese customers. But the rollout of that capacity will not be in 2018, 2018 will be pilot production, and you see an acceleration of that rollout in 2019 and 2020. So but overall, we do not foresee a DUV market in 2018. I think, what we are currently seeing in the end market, simply does not support such a negative view.

Thanks. That’s okay. And on a very quick follow-up on China, how would you qualify demand you anticipate there? So it’s 19/20 [ph] story, okay. Is that mostly leading edge tools? Are we are going to look at high-end immersion tools mostly, or is it going to be more leading edge in terms of demand in China?

Well, I think you’ll see some of it - probably both, but I think the emphasis will be on the leading edge.

Okay.

We will be on leading edge logic and leading edge memory, but like China currently has a lot of installed capacity, which is currently 45 and 28 nanometer, and also 28 nanometer fabs will still take tools in 2018. So it will be a - it’s a bit of both, but I would say the emphasis will be on the leading edge.

Thank you.

The next question is Mr. Gareth Jenkins. Please state your company name followed by your question.

Yes, thanks. One question and a couple of follow-ups. Gareth Jenkins, UBS. The question I had is around the light source, I just wondered whether any of your customers are asking for Gigaphoton light source rather than your own Cymer solution on EUV. And just a couple of follow-ups if I could, Peter, on other issues.

Well, they would be interest within using EUV way into the next decade, it would be asking for a Gigaphoton, but most of them aren’t, so they want it now or they want to soon, so it’s the only available EUV source, and Gigaphoton is potential something for the future, but I would say way in to the next decade.

Okay, thanks. And Wolfgang something to clarify €200 million of EUV revenue in Q2, €800 million to €1 billion in H2. The €800 million to €1 billion that will come zero gross margin. Is that the expectation or allowing for some catch up, but they will come zero gross margin?

Yes, I would for modeling purposes, I would not distinguish between the first half and the second half making it too complicated.

Okay.

Yes, we take the next call - I think, Peter, thanks.

Yes, okay. The next question is coming from Mr. Mehdi Hosseini. Please state your company name followed by your question.

Yes, Mehdi Hosseini, Susquehanna International. Peter, can you please give us an update on HMI, when would you expect the dual-beam product should be available for evaluation? And I have a follow up.

Well, we will see the first integrated product that’s the combination of the ASML product and competencies with HMI. They ship to the first pilot customers by the end of the year - end of this year, beginning of next year. And [which at all we call] [ph] dual-beam is probably you will refer to multi-beam, well our plan is to have that available relatively soon, but we first need to finish the development. They won’t be this year. It will be 2018 at earliest. But more important is I think that we have the whole concept of using the ASML holistic lithography capability with the inspection capability of HMI and combine it into one product that will be available much sooner, I think that’s the most important part, and then multi-beam is just a natural extension of this product. And like I said, this combined product, the first shipment is starting to the end of the year to the first part of the customers.

Sure. And then, I have a follow-up on the EUV 12 system shipment this year, maybe as high as 24 next year. Would that be fair to assume that the systems are going to be for 7 nanometer maybe insertion for a few layers? And then shipment in 2019 and on will include maybe one or two layer for DRAM, and then as you look in to 5 nanometer logic, then the number of critical layers that would use EUV would go higher. And that’s how we got the doubling playing out, so 12 systems this year, 24 next year, the 7 nanometer introduction. And then as we go into 2019 and 2020, the doubling is driven by DRAM, and higher critical layer as you migrate to 5 nanometer logic, is that fair?

Well, I think it’s a little bit more complex than that because 7 nanometer is not ending in 2018, I think as you will see the production ramp for our customers in late 2018, 2019, and it will continue into 2020. That you will be see layers of - this node layers will be on top of each other like we discussed earlier on these calls. What we currently seeing is that you almost see an acceleration of a capacity ramp through a new node by the leading customers, because it’s almost like a camelback. It’s like a hump. And then you have a very long tail. Now, that long tail, only 7 nanometer will be extending into 2020 and 2021. But it’s not by the one or two leaders in logic, but there are also followers that will move into the 7 nanometer node, and they will start using EUV in that timeframe. So you will see layer upon layer, so this is not the nice clean cut end up 7 nanometer node followed by 5 nanometer. It’s going to be layered. On memory, you said 2019 DRAM one or two layers, yes, in production, but I think we’ll see probably earlier adoption of one or two layers in DRAM than 2019. And this will also be some of the system that you referred to, the 12 system in 2017 and potentially 24 systems in 2018 will be used for DRAM, one or two layer production on this mid-teen node.

Is that why they haven’t finalized the option part of the package, what they have booked so far is just for the equipment and options are finalized later?

Well, this is just specifically to one customer, where we have the tool prices we fixed, and then the options is really the commercial negotiations on what do you want in terms of options which is specific to the production process, and to the - you could say the design of the customer’s specific. And also our options were add-ons that they need in the production process, which of course for us is good business and for the customer always an area, where they think they can have some purchasing advantages. So that’s just a matter of - in all the time, but I don’t think you can go any conclusions other than that.

Got it. Thank you so much.

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

Good afternoon. Thank you. Andrew Gardiner from Barclays. Peter, I was just interested in following up a bit more on some of those comments you are making on the EUV decision making process, you highlighted there in your prepared comments - the public comments from all three of your lead customers, acknowledging the progress that’s been made on EUV not only by yourselves, but also across the ecosystem that was fairly well publicized SPIE. Yes, we’re still not seeing all three step up so equally in terms of orders, I think TSMC is being pretty clear and consistent with what they’re intending to do over the last couple of quarters we can see some of that in your backlog. Samsung also seem to have been clear in the statements. Yet, as you just highlighted we don’t yet have a volume purchase agreement or indeed the - so the volume orders that you’d highlighted or that you had has expected in the first quarter. And then finally Intel they were the first to sign the EPA two years ago now, and yet they still haven’t really acted on it. And they had publicly said they would do so when the technology was ready. And again publicly they seem to admit that it is yet they haven’t stepped up in terms of their order rates. And given what you’ve described in terms of the 2019 ramps. I was just wondering so why do you think we’re seeing such sort of a different positioning from these lead customers, and with a closing order when though later this year. Where is your conference level that indeed the two lagging are going to step up over the next, say, two quarters?

Well, two-course [ph], I don’t think customers are really lagging, one. But they have different areas of focus, and they have different road maps and timing of road maps which they would like to execute and also the size at which you want to do is also different. So this is not an homogeneous pack, this is heterogeneous three different customers, three different road maps, three different ways in which you want to execute this. But I think you’re actually correct, when you refer to the public statements which are very convincing. It’s only the public statements as you can imagine, we are in very close contact with them, and we are also seeing what they’re doing in preparation of that EUV. And that’s real tangible, I mean that those are factories, those are EUV better stores, those are that’s EUV infrastructure is being built and being put into place into those fabs. So that is also tangible, which is not that visible, but to us it is. On the negotiation process that’s also different per customer. For instance one of those customers doesn’t have a volume purchase agreement yet, but they have orders in our backlog. So they have order tools without of EPA. But the volume purchase agreement is ready to determine in their best interest. What their pricing is on a certain volume there is a commercial negotiation, which - as many asking the previous question is also a matter of how many options do you want or what do you want to pay for those options. So these things are commercial negotiations, which are not fully detached from the planning of what they want to do, but it is a different process, so you have the planning process for the production, which we’re pretty close to, which actually drives our own planning, our own production planning and you have the commercial process. That commercial process ends where it ends and this is where we are. So I think in summary, three different customers, not homogeneous in the way to look at the road maps, the timing of the road maps, not homogeneous in the way they negotiate. And not homogeneous also in the speed at which they want to do something and the speed of their ramp. So this is what we have to take into consideration, but again it’s try to put some color on what we said before is that we see this ramp up, we would be very clearly coming on the 7 nanometer, which means 12 units this year, which is now say around 20 units next year. And we could see a further doubling in the years thereafter when we look at the customer roadmaps and their execution planning. And I think that is the most important to mention, right now.

Okay. Yes, thank you for that detail. That’s very helpful. Well just a quick follow-up for you Wolfgang, the guidance you sort of the 1Q installed base revenue in the guidance you just gave for 2Q, clearly very rapid growth there. Are you still saying that sort of the revised installed base revenue of about €2.1 billion last year? Is that still 8% to 10% revenue growth target for 2017? You’re tracking significantly ahead of that at the moment given the one-half guidance as you’ve already mentioned. So what kind of growth you will be thinking there?

Yes, it certainly looks like, we said in average we think this business going to grow 10% over the next couple of years, but as customers are optimizing there in installed base. They are using some of these performance enhancing options is very capital efficient for them, and you are right. I mean, 728 plus 650 I don’t see this deteriorating much in the second half, you can do the math, it will very likely be quite a bit above 10% this year.

Okay, got it. Thank you.

The next question Mr. Timothy Arcuri. Please state your company name followed by your question.

Thank you very much. [Technical Difficulty]

Tim, we are getting some real bad feedback from your line. Is there anything you can do your end.

Or you have a horrible cold? Or it’s part of the two?

Is it better?

Yes, better.

Try again.

Okay. Great. Okay. So I wanted to ask about the 2018 EUV comments. I know you still have 24 slots, that has not changed. And I think last call you said that you’d be totally full for those slots and even have some backlog by the end of the year for 2019 shipments. So I guess I’m wondering why you’d only ship 20 systems next year versus 24. It would seem like you have to ship as - you’re like totally full on those slots, why wouldn’t you ship all those slots and versus only 20? I’m just getting some questions from investors that it seems like a down tick and I just wanted you to address that. Thanks.

Yeah, I think when you look at the 20, you have to remember that we also booked for upgrade orders. So there are customers that are taking those tools, those 3350s and 3300s out of the R&D. They want them upgraded and put them into production. So that adds another four. So we always had - when we look at our production capacity and we look at the roadmap and the timing of the roadmaps that our customers are currently talking about in terms of their roadmap ramps and look at that time, we said, we will have to use that 24 capacity. Well, four of them at least are now being upgraded. So that’s basically taking out of R&D and then put into production, which is probably an efficient use of that capital. It also means that we need to allocate some of our production people to upgrade in the field, not in our factory, but in the field, which also has an impact on our capability, because you actually have people in the field, confident people, production people that are in the field doing these open-heart surgeries.

Got it, Peter. Thank you. That’s helpful, very, very helpful. I guess my follow-up was just on how to think about China timing. I know you said that you expect shipments to support pilot production I think you said in 2018. Does that mean - for the indigenous China project, does that mean that you’ll ship tools in the second half of this year for pilot production for them next year? Or does that mean that you won’t ship tools to these fabs until next year? Thanks.

So it’s a bit of a mixed bag. I think the first tools will ship towards the end of this year. And then we’ll continue shipping in the first half of 2018. So before that’s all installed and the production process is qualified, you won’t see any output out of those pilot fabs, I would say, way in the second half of 2018.

Great, Peter. Thank you so much.

The next question, Mr. Amit Harchandani. Please state your company name followed by your question.

Thank you. Amit Harchandani from Citigroup, and good afternoon, gentlemen. I just wanted to come back to the topic of EUV shipments, orders and lead-times. And I was hoping if you could help me with some math here. You got 21 tools in your backlog at the end of the Q first quarter. My understanding is the lead-times are including the supply chain about 18 months. And if you’re looking at shipments cumulatively in 2017 for the rest of the year and what you said for 2018, it’s about 30 tools - 30, 32 tools to be shipped. So does that mean you need around 9 to 10 orders coming through by the end of June? Or is it okay if the orders come in later and your lead-times will get shorter, allowing you to fulfill or meet the shipment target by the end of 2018? Thank you.

First of all I think is the - independents of any VPAs is the - you obviously have decent order flow in the next quarter or the quarter we just started. And then it’s not a hard and fast rule, right, where you have 18 months. And it’s not just the order that’s the communication between us and the customer, I mean, we’re sitting together with these customers on a weekly basis. And just because we don’t have a piece of paper, that says VPA, because some final detail on a term and condition is not done, means that we don’t have a very good view on what these customers need, in which order in the next year. And then it comes down a little bit to trust as well, right, where you trust that the forecast is eventually translating into an order. Of course, in the long run you got to have the discipline to have the orders coming in, because we can certainly not be the inventory holder of the industry. But I think we’re in pretty good shape, where you’ll see orders in Q2. We have pretty good forecast on it.

Yes, and on - and I think in addition to what Wolfgang said on it, I said in earlier calls it is our focus to have the orders needed for shipment in 2018 in the backlog by the end of this year. I mean, it is exactly what Wolfgang said. It is not the piece of paper that drives us to start ordering lenses and the long lead-time items for the EUV source. It is really the weekly connection that we have with our customers and the almost weekly or you can say monthly updates that we’re getting on their EUV planning; that is driving this. So we will be looking at getting in 2017 all the orders that we need for 2018.

Thank you. And just maybe as a follow up on the lead-times, could you give us a sense of how we should think about the lead-times contracting as we look out over the next two, three years? And what are the key parameters that would help you get them down besides of course experiential learning?

Yes, I think it is experiential learning. It is the learning curve. And we will be looking at halving the lead-time over the next three years. So I said till the end of the decade, so by 2020 we should have the lead-time, which is by the time, this will be dealt with DPV. And with DPV, as a matter of fact, we are reducing the factory cycle time in our factory and the overall lead-time of a DPV system still. So I think it’s a continuous process, as well - but it is continuous learning. It’s almost exponential learning, that’s what it is, that will drive the lead-time down.

Thank you.

The next question is coming from Mr. Douglas Smith. Please state your company name, followed by your question.

Hi, it’s Agency Partners. The question I had actually is on High-NA. I saw on one of the slides that SPIE, a diagram of what High-NA looks like. It looks like a much larger machine than the current EUV systems. Then the specs are much higher and so on. And have you already thought what the price of such a machine is? Are we looking at like €200 million kind of number for High-NA?

Yes, €200 million plus.

Okay. And maybe went a little bit in the same direction, do you have people who are willing to do double-patterning for EUV or is that something they want to avoid and would prefer to use High-NA?

Yes, I think this is a very good question. I think this exactly goes down to the economics of high-end manufacturing. It is all about the cost per leading-edge transistor. And now the question is can you do that to multiple-patterning or double-patterning EUV, which would cut the productivity in half? Or would you do that with basically a shrink capability with high productivity through a High-NA tool? And the economics that we have calculated on the High-NA tool is clearly preferring a High-NA solution instead of double-patterning EUV, when you go to the three nanometer node. So as far as we are concerned, looking at the specs, High-NA is the preferred economical solution.

Right, and so just to - on to clarifying my first question, and more or less on EUV with 2x the price of Deep UV, and so you would expect High-NA to be about 2x the price of today’s EUV?

That’s a decent assumption.

Yeah, okay. Thanks.

The next question is coming from Mr. Adithya Metuku. Please state your company name, followed by your question.

Yes, it’s Bank of America. Thanks guys for taking my question. I have a quick follow-up. My questions have largely been answered. Wolfgang, could you give us some color on the total amount of deferred revenue that you have on the balance sheet, related to EUV that you haven’t still recognized in the P&L? Thank you.

I want to say, I have the overall deferred revenue is about €1.2 billion. I’d say EUV is probably somewhere in the €200 million range as well.

Okay. Thank you.

The next question is coming from Mr. Robert Sanders. Please state you company name, followed by your question.

Yes, hi. Good afternoon. Deutsche Bank. First question would just be on DRAM. If I understand it, Samsung is exploring DRAM insertion for EUV for performance DRAM only, and that they were deferring the decision on commodity DRAM. Is that something you recognize? And I’m just wondering is that what you’re factoring into your forecast?

Right, but we don’t know the exact application of what type of product is going to be used. And the only thing that we know is on this particular mid-teens node and whether that’s used for commodity DRAM or for performance DRAM, I suppose it’s going to be performance DRAM. That seems the most logical. But I cannot give you a definitive answer on this, because you really have to ask something. And obviously that you did, so we have to believe what our customers say, don’t we?

Got it. Yeah, I mean, I’m only asking, because performance DRAM is about third of the capacity in DRAM. So the second question would just be on TSMC and other customers. I mean, I think TSMC is the only customer, that have actually have moved EUV tools into the manufacturing line. I was just wondering when you thought Samsung and Intel would have to tools into the actual line to meet insertion at seven nanometer. Thanks a lot.

Yeah, I think this is really dependent on how they plan the introduction and the ramp of their nodes. So it is really - it’s a question that we can’t answer for the customers. If you ask them, and then they give you a timing and one timing looks more aggressive than the other timing, then you can probably draw a conclusion on what they believe the need of their customers is. And so it’s not up to us to draw any conclusions there. It’s really driven by how they look at their own roadmap and their customer demands that will determine when they start to ramp up, and put tools into production and start ramping capacity.

Got it. Thanks a lot.

Yes, thanks, Rob. Ladies and gentlemen, we have time for one last question. We’re going to squeeze one more. If you are unable to get through on the call and still have questions, feel free to reach out to the IR department. We’ll be around for a while. And, Peter, if we can have the last caller, I’d appreciate it.

Of course, sir. The last question is coming from Mr. Francois Meunier. Please state your company name followed by your question.

Hey, thanks for taking the last question. So I’m not going to ask why 20 or 21 or 22 next year, because if we roll back in time, probably no one would have believed you would have even shipped more than 10 next year. Now, the question really is about the gross margin 47.6% with no EUV revenues this year. If my calculations are correct, it’s something like 500 bps like higher than last year or something. So can you help us to understand what the bridge is between last year and this year? Is it really around the mix effect with more services revenues and more options and stuff like that? Or is it also because like even at the tool level your margins are going higher?

Yes, I think, Francois, there are two elements. First of all, our revenue in the first quarter were 46% higher this Q1 when compared to last Q1, so we had a quite a bit of volume effect there, plus of course our mix is developing, right? I mean, you see more Holistic Lithography as a percent of revenue. You see HMI with a full quarter in there. And you see, indeed as you mentioned, you see a lot of upgrade options that have very, very high margin. So it’s a combination of all of the above.

Okay. And, guys, well done.

Thanks.

Thank you, Francois.

Now, on behalf of ASML’s Board of Management, I’d like to thank you all for joining us today. And, operator, if you could formally conclude the call, I’d appreciate it. Thank you.

You’re welcome, sir. Ladies and gentlemen, this concludes the ASML 2017 first quarter financial results conference call. Thank you for participating. You may now disconnect.