ASML Holding N.V. (ASML) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2018 Third Quarter Financial Results Conference Call on October 17, 2018. Throughout today's introduction, all participants will be in a listen-only mode. After ASML's introduction, there will be an opportunity to ask your questions. I would now like to open the question-and-answer queue. [Operator Instructions] I would now like to turn the conference call over to Mr. Skip Miller. Go ahead please, sir.

Thank you, operator. Good afternoon, good morning, ladies and gentlemen. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today from ASML headquarters in Veldhoven, The Netherlands is ASML's CEO, Peter Wennink; and our CFO, Roger Dassen. The subject of today's call is ASML's 2018 third quarter results. Length of this call will be 60 minutes and questions will be taken in the order they are received. This call is also being broadcast live over the Internet at 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 this 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 meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today's press release and presentation found on our website at ASML.com and in ASML's annual report on Form 20-F and other documents as filed with the Securities and Exchange Commission. With that, I'd like to turn the call over to Peter Wennink for a brief introduction.

Thank you, Skip. Good morning and good afternoon, ladies and gentlemen, and thank you for joining us for our Q3 2018 results conference call. Before we begin the question-and-answer session, Roger and I would like to provide an overview and some commentary on the third quarter as well as provide our view of the coming quarters. Roger will start with a review of the third quarter financial performance and 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 our future business outlook. And, Roger, if you will?

Thank you, Peter, and welcome, everyone. I will first highlight some of the third quarter accomplishments and then provide our expectations for the fourth quarter of 2018. Q3 net sales came in at €2.78 billion, which was towards the higher end of our expectation. Net systems sales of €2.08 billion, was a bit more weighted towards Memory at 58% with the remaining 42% from Logic. EUV revenue of €513 million was from 5 shipments. Installed Base Management sales for the quarter came in at €695 million. Gross margin for the quarter was 48.1%, just above our expectation, reflecting the strength of our Deep UV and Applications business as well as the progress in EUV profitability. Overall, R&D and SG&A expenses basically came in as expected, with R&D expenses at €397 million and SG&A expenses at €122 million. Turning to the balance sheet, €362 million worth of shares were repurchased in Q3. This leaves around €1.7 billion of the 2018/2019 share buyback program remaining. We ended last quarter with cash, cash equivalents and short-term investments at a level of €2.95 billion. Moving to the order book, Q3 system bookings came in at €2.20 billion, Memory order intake continue to strong, 64% of total value. Logic made up the remaining 36% of the bookings. We took 5 new EUV orders in the quarter, which contained a mix of both Logic and Memory. We expect Q4 total net sales of about €3 billion, leading us to expect another record year with close to €11 billion of revenue. Our total net sales forecast for the quarter includes around €500 million of EUV system revenue from 5 EUV systems. We currently expect to ship 6 systems in Q4, including 1 EUV system to a collaborative research center, imec, which will not be recorded in revenue, but will be used to settle R&D services from imec. Q4 will be our highest EUV shipment quarter to date, bringing the total to 18 systems in 2018. Due to a combination of end-of-year production challenges and customer readiness, we now expect a couple of the originally planned 2018 systems to ship in early 2019. We expect the EUV order flow to continue next quarter, such that we will basically have our 30 systems planned for 2019 covered by purchase orders by the end of this year. We expect our Q4 Installed Base Management revenue to be similar to last quarter, at around €700 million. Gross margin for Q4 is expected to be around 48%. Taking Q4 guidance into account, gross margin for the full year will be around 47%, which is a step up from last year's 45% gross margin. This reflects the strength of our Deep UV and Applications business as well as continued progress in EUV profitability. The higher R&D expense for Q4 of about €420 million are due to an acceleration on the NXE:3400 roadmap and the High-NA EUV program. SG&A is expected to come in at about €135 million. We remain excited about 2018 as the customers' demand for our products continues to be strong. We look forward to delivering another record year of continued strong growth in both sales and profitability. With that, I would like to turn the call back over to Peter.

Thank you, Roger. And as Roger highlighted, we have another good quarter and we expect the fourth quarter to be even stronger. With the current guidance, we expect that our sales for the year to be close to €11 billion and that our profitability will improve over last year. Now, we continue to see strong demand for our products in both Logic and Memory as witnessed by our strong order book. Logic customers continue to ramp to 10-nanometer node and are also starting to ramp 7-nanometer. As customers prepare the ramp of 7-nanometer node, it not only drives DUV demand but also drives significant demand increase for EUV. In DRAM, customers are continuing with technology migrations as well as adding wafer capacity additions to meet bit demand growth, as evidenced by our strong third quarter order intake for Memory. Now, we believe that the limited number of wafer capacity additions by a limited number of customers, combined with a healthy demand for DRAM bits, should not lead to a structural overcapacity in this industry segment. In NAND, significant 2D to 3D conversations have taken place next to investments in several greenfield fabs. This is likely creating a period of some digestion, as we mentioned in prior quarters. With regards to China, we continue to see strong demand for a broad suite of our products. The China region has delivered around 20% of our sales this year; is on track to set another record revenue number. This is driven by both multinational customers as well as domestic China customers. In all five domestic customers that we discussed in prior quarters have at least some pilot capacity in place now and are looking to begin ramping next year. We believe this region presents a significant growth opportunity under the assumption that these ramps of the domestic customers are successful, and that the nondomestic customer will follow through with their investment plans. On the ASML product side let me start with an update of our EUV business. In EUV, we continue to make good progress. We have multiple NXE:3400 systems at customer sites that are running at 125 wafers per hour or higher and are ready for high volume manufacturing. Availability is progressing in support of customers' volume ramp with a clear focus on machine consistency. The overall progress has led to the decision to accelerate our EUV roadmap and we are, as a result of this, now planning the introduction of our next generation 0.33 NA EUV system is called NXE:3400C in the second half of 2019. This system will deliver a productivity of over 155 wafers per hour. We will talk more about the performance specifications and roadmap during our Investor Day next month. As Roger mentioned, we continue to increase our shipments per quarter and plan to ship six systems in Q4, bringing the total to 18 systems in 2018. As we mentioned in earlier calls, this year our production output is heavily backend loaded, which has led to some production output challenges combined with customer fab readiness logistics. We now plan to ship a couple of systems originally planned in 2018, now in early 2019. Our shipment plan for 2019 remains at 30 systems as we now have an increased mix of NXE:3400C systems in the second half of 2019, which will enable a significantly higher wafer output capability than the earlier specified 125 wafers per hour. With this higher productivity we expect to be able to meet our customers' current EUV capacity plans in 2019. And as Roger mentioned, we expect order flow to continue next quarter and expect to have our 2019 demand for EUV covered by orders by the end of the year. In Deep UV, the introduction of the NXT:2000 system into the market is making significant progress and will be used in volume manufacturing for both Memory and Logic. We are also seeing significant demand for our dry products in support of a number of greenfield fab ramps in China and other regions. In our Applications business, we continue to see growth across our full portfolio of software and metrology products, notably related to the adoption of our YieldStar 375 expanding from Logic and DRAM now also into 3D NAND manufacturing. To summarize 2018, we expect the growth to continue from Q3 to Q4 and set us up for another record year in both sales and profitability. Now regarding 2019, it's a bit too early to provide detailed guidance, but I'll provide some qualitative comments regarding our initial views. We continue to see strong demand for our products in both Memory and Logic, supported by our bookings. And Deep UV demand continues to be healthy in Memory, as discussed earlier, and we expect Deep UV demand in Logic to further strengthen in 2019 driven by the 10- and 7-nanometer ramp. Furthermore, we expect continued growth of our Applications business with expansion of both metrology as well as software products. EUV demand continues to be driven by Logic, but also with a clear opportunity in DRAM, when we meet our availability and productivity targets. EUV revenue growth is expected from both a significant increase in unit shipments as well as a higher ASP of the NXE:3400C, for which shipments are planned starting as we said earlier in the second half of 2019. Our Installed Base will continue to grow, driving increased service revenue. Furthermore, we expect customers to take advantage of system performance upgrades on their installed base to maximize capital efficiency. Our current view of the overall business next year remains positive. We expect the first half to be somewhat similar to the second half of this year, with business strengthening in the second half of 2019. Putting this all together, we expect another year with a good growth opportunity. I think, we are well on track to achieve our 2020 targets with significant growth potential beyond 2020. And we plan to communicate the size and extent of this growth opportunity through 2025 at our Investor Day which will hold on November 8 this year. And with that, we'll be happy to take your questions.

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

Of course, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. [Operator Instructions] The first question comes from Mr. Krish Sankar. Please state your company name, followed by your question.

Hello, Krish.

Krish, do you…

Hello, can you hear me?

Yeah, yeah.

Now we can hear you, Krish, loud and clear.

All right, thanks for taking my question. Two of them; first one, Peter, it looks like your demand from your Memory customers has been very strong so far. And you're also - both in terms of bookings and sales, and you're also guiding to strength into 2019. Just try to help, can you reconcile what's been going on in the memory industry with NAND pricing weakness and potential CapEx cuts in NAND and DRAM? And how do you reconcile that with your numbers and where do you see the strength in 2019? Is it going to be DRAM or NAND in the first half? And then I have a follow-up.

Okay. Well, I think we all saw in Memory of the one big hit, which, of course, you need to separate as you indicated between NAND and DRAM, so let me talk about those separately. On DRAM, we haven't seen CapEx cuts. We have seen in this year some push-outs, but also pull-ins from different customers. So you could argue it is customer specific, but we haven't really seen a change in the DRAM memory demand for our products this year. And we don't see it also in 2019. Now, we all seem to forget recent history. So let me talk about DRAM, you have to put it all into perspective. Up to and including 2016, there has been a significant conversion of DRAM into 3D NAND, which resulted in reduced DRAM capacity, which actually also led to a reduced DRAM memory spend of about 30% in litho, and also a 10% to 50% reduction in the wafer capacity at our customers. Now, in 2017 and 2018, customers have been working to recover this wafer capacity and to increase the bit supply. The bit demand also was higher than anticipated. So this required indeed a much higher litho spend per unit [get-go] [ph]. And it's due to a combination of increasing litho intensity at these new nodes due to, say, an increasing number of critical layers and which includes that was happening now. And the slowly of the shrink roadmap, which actually means you don't get the bits, the same number of bits to shrink, you actually get less, both leading to higher wafer capacity additions to meet this 20% to 25% demand bit growth. So this is what we have seen. So in that context, the high investments in DRAM from our customers is not a surprise. And it's also what we are seeing in 2019, now on 3D NAND, over last couple of years almost all the 2D to 3D conversions have taken place. They have actually happened. And those were very significant. Now, we have not participated in that litho supply, because we basically use the same litho. And next to that were investment in greenfield fabs. And if you add those two together, with the 3D conversions and then the greenfield fabs, and that has indeed led to a level of capacity. And don't forget these are big fabs or the step-ups in capacity, who had temporary weakness of the 3D NAND price, and which we've all witnessed. That is the digestion that we're going through as we speak. That's logical and especially if you look at the number of greenfield fabs that we opened and the capacity - the wafer capacity has been added to the industry is quite normal. Don't forget that the growth rates of 3D NAND are particularly good at 40% plus. So I think this is how we look at the market. And this is why I also think that it's not a big surprise that our customers are still significantly spending on increase in wafer capacity both for DRAM and to a lesser extent today 3D NAND.

Got it, got it. Peter, that's very helpful. And then, just as a follow-up, if I look at your commentary on calendar first-half 2019 similar to the second half of this year, and strengthening the second half of next year, and the fact that DUV should be strong in memory and further in logic, is it fair to assume that DUV units next year should be higher than this year?

Well, I think the DUV units will be at least at the same level as this year. Whereby, I think the mix which was this year will be skewed towards memory, will probably skew a bit more towards logic, although it's too early to say which part of the industry segment is going to be logics. But in Deep UV I think we will see at least same number of Deep UV shipments and sales in 2019 as in 2018.

Thanks, Peter. Thank you very much.

The next question comes from Mr. David Mulholland. Please state your company name, followed by your question.

Hi, it's David from UBS. Just coming through the comments you made on EUV and good to see the progress on the 3400C. I just wanted to clarify a couple of things. Firstly, of the bookings that you've seen in the quarter for EUV, are those still the 3400B or booking the 3400C? And then as we look into 2020, I wondered if you'd comment just on what impact in the way that this is potentially slightly dampening the number of tools needed in H2 2019 what they might mean on 2020. Obviously, where we assume some of that's made back on pricing, but where do you end up in kind of revenue expectations for 2020 from EUV as you kind of net those two at higher productive systems, but potentially higher value.

Okay, good. Well, I think everything where booking is 3400C. I mean, we're not taking any orders for Bs, because the only thing we will sell as of the middle of next year is Cs. And, yes, there will be a higher potential productivity coming out of the systems, which of course, will have an impact on the number of systems that customers potentially want if they look at the wafer capacity that they are planning for. Now, having said that, there is also a flipside of higher productivity and higher uptime and which is cost. And cost is actually going down with these higher productivity tools, which actually means that it opens also a possibility to have, one, in logic more layers; and two, in memory DRAM we start using EUV in DRAM. Generally, you could say we have 2,000 wafers per day productivity on the DRAM system. It becomes attractive at - to basically start using EUV for several layers in DRAM. And that will drive the 2020 number. So I think what's important for us is that we execute as well we put the R&D in, because we want the 3400C ASAP, because it will, one, as you indicated provide us with a higher value; and two, it will also provide the higher value, i.e., lower cost to our customers, which will drive the demand for EUV, which means that we still stick to our production capacity of 40 units in 2020. And I think the final 2020 number will be a function of our successful introduction of the productivity and the availability metrics that we have currently in our targets.

Maybe one just quick follow-up, you haven't commented as directly in numbers in terms of the progress and availability for EUV. Obviously, it seems like you're saying it's at the level you need for insertion with customers. But [at last] [ph] what you're saying, you had to get to over 90%.

Yeah.

Can you quantify where you are and where you're heading?

Yeah. Yeah, I think we said we want to have a total of 88% availability by the end of the year. This is where we're heading to. I think with the 3400C we will go over 90%. I think we have a target of 92%. I think what I said earlier, we need that 90% threshold, that's what we said in earlier calls. It's that our opinion today that with the current availability targets, customers will use EUV in [HVR] [ph]. And it's very simple - in logic it's very simple, because without EUV, and I just refer to comments that was made by some of our customers, without EUV simply won't work. And there is so much 7-nanometer demand - or if you want, or 7-plus and/or 5-nanometer demand, that you cannot escape using EUV. They will use EUV at 88%. We love it to be higher. It will be higher. But that is not a make-or-break number.

That's right. Thanks very much.

The next question comes from Mr. C.J. Muse. Please state your company name, followed by your question.

Yeah, good afternoon. Thank you for taking my question. I guess, the question, if I could go back to your 2019 outlook for DUV, it sounds like you're now saying kind of first half similar to second half and its already growth into the second half of 2019. And just curious, is that a changed statement from your views, 3, 6 months ago? And if so, what has changed, I guess, vis-à-vis DRAM contribution, advanced logic in China?

Well, I think it has not changed. I think it is - one, we haven't quantified the guidance any trends for 2019 until today. So I think this is the first time, but internally of course, we have this outlook. I don't think it has changed that much, absolutely not. And in China, nothing changed in the sense that what Chinese customers were planning, let's say, this time a year on 2019, they're actually executing on. So you could argue that their execution of their first lines and pilot lines. And actually it's going well.

No. I think it's - there is no change. I think, no significant change, nor in Memory, nor in Logic.

Okay. Very helpful. And I guess, as my follow-up. Can you talk to how you're expecting linearity of shipments for the 30 EUV tools in 2019? And how we should think about the progression of gross margins in that same timeframe? Thank you.

Yeah. The linearity is what you would expect with a ramp. I mean, this year we - if you look at the quarter, we do three, four, five, six and I think this is the kind of linearity that you would also expect next year whereby the 3400C of course is the model that customers really like. So we would clearly see also the second half of the year to demand of that product going up. Now on the - Roger, on gross…

On gross margin, I think, we've articulated the target of 40% there for 2020, I think, we are on track to get there. And I think, as we've mentioned before four levers to get there. The first lever obviously is ASP - higher ASP, which is to very large extent correlated with the productivity and the throughput of the machine, so that's the major driver of the gross margin. Second volume, fixed cost coverage obviously increases to the extent that volume the ramps. Third, learning curve and we're already experiencing that and we continue to experience that's into the next couple of years. And four, service revenue and service margin will go up as well. And the combination of those four levers, we believe gets us to the 40% target that we've articulated before for 2020.

Great. Thank you.

The next question comes from Mr. Mitch Steves. Please state your company name followed by your question.

Hey, thanks. Mitch Steves from RBC. I just had a quick question on EUV. So basically because you guys are off by about two units here in 2020 - 2018 and you're still re-guiding to 30. Is it 40 units still the right number of 2020. And then second, I guess, why doesn't the 2019 number go up by two units? Thanks.

Yeah. To answer your last question, we are introducing by the middle of the year, the 3400C, which has a productivity, which is over 155 wafers per hour, which is significant improvement in terms of productivity, which means that customers are not planning systems, they're planning wafers. So when you get more wafers out of their machine that you might potentially use less machines, so that's why the 30 unit is still good, where we - and it's not more than that. you could argue that the two units are then cannibalized by the higher productivity of the 3400C. Okay, I mean, that's good, because the 3400C is also a higher value to and just price at higher. So from the sales point of view, I think, it's a good progression. On the 40 units, I said it earlier in the previous answer. I think, the 40 units is the capacity that we have. I think, that is - whether we will sell it all is really a function of the success with, which we're going to introduce the 3400C, and we're able to start running up the availability of the machine over the 90%. That will drive down cost for our customers significantly and cost is the main driver for our customers to buy tools. Yeah. And I think the opportunity here is in the memory space, in the DRAM space, and also somewhat in the Logic space, because there you can add few more layers to EUV, because the cost is just better. And in DRAM, like I said, with over 2000 wafers per day, we come in to real where customers are really seeing the economic benefits of EUV application in DRAM. So 40 is the capacity, let's go after it by executing on our 3400C in a program.

All right. Thank you.

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

Good afternoon. It's Andrew from Barclays. Thanks for taking the question. I just had a few more quick ones on the EUV program. Firstly, Peter, you just mentioned it briefly there again, the question of layer count within Logic. If I go back to this time last year, we were talking about in layers at 7-nanometer node. To your point, the improved productivity and specs on the 3400C suggest it's going to be higher than that. Can you give us any initial indication from you customers as to how much higher the layer count maybe relative to that initial number of 10?

Yeah, I think, it's really different numbers. But again, like I said earlier, I assume a successful execution of our 3400C specification targets. You could look at it between 12. That's 14.

Okay. Thanks. And then, just quick follow-ups on EUV. Can you give us some idea of mix between Logic and Memory in the 30 tool shipments next year? Clearly, again, if I go back kind of a couple of quarters, Logic was going to dominate, but just sounding a bit more optimistic about DRAM and NAND. And also correspondence is there going to be any EUV deferred revenue left to recognize in 2019, or is the [rev rec] [ph] next year purely on the 30 tool shipments? Thank you.

On the - I think the mix is predominately Logic. Like I said, there is an opportunity there. And of course, throughout 2019, when we see the first module results, the test results of the critical modules of the 3400C. We can probably engage with our customers at that time - the Memory customers we will see - whether they would like an increased number of memory tools. And there is an opportunity, I would say, but it's predominantly Logic.

In terms of revenue recognition, as you know, at this stage, the systems revenue gets recognized upon shipments, and that will obviously continue for this model into 2019. Introduction of 3400C at this stage, again, we believe that we will recognize revenue at shipments at this stage.

Okay. Thank you very much.

The next question comes from Mr. Alex Duval. Please state your company name followed by your question.

Yes. Hi, Alex Duval from Goldman Sachs. Many thanks for question. Just a quick one on Logic spending in 2019. You obviously talked about most Memory and Logic spending remaining on high levels in 2019. But talked about DUV Logic actually being up even the revenues that already on a high level. So I wondered, if you could just talk about what the key swing factors are - that are driving that? And as a brief follow-up, you talked about 2H weighted year for your overall group revenues in 2019. And you just talked about flattish half-and-half growth rate in the first half. So how should we be thinking about the step up into the second half? What is the key reason to that step up? And are we talking low-single-digits growth half-and-half or something of greater magnitude? Many thanks.

Okay. The Logic spending in 2019 is - but don't forget, I mean, the majority of the spend this year was in Memory. And Logic will be ramping 10-nanometer and macro processors have 7-nanometer in the foundry space. And that's happening, because when we listen to the customers statements are there, customer orders are there. That will happen and that will increase. Now - like I said earlier, that's why, I think that the Deep UV business for 2019 will be at least as good as in 2018. But by a lit bit more skewed towards Logic, and it's driven by 7- and 10-nanometer. Now on the half-and-half, I said it in earlier answer that our view as to 2019 and the - let's say the shipment levels, first half, second half haven't changed that much from where we were two quarters ago. But effectively means with our customer plans, which is a result also of when that fabs are ready, when can they take the tools, yeah. That hasn't changed that much. So I would say, the half-and-half is more a function of when the customers need the tools. So when do they ramp what? That's the main reason, so there is nothing magical behind it. There is no other reason why there would be this particular cyclicality if you want to call it this way. No, I think, it's just a way how customers plan and this means that the first half of 2019 will be somewhat same as the second half of 2018, which was a pretty good half. So and then the acceleration you will see in the second half also the EUV numbers will go up, yeah, the 3400C will be there in the second half skewed. So that's probably the only answer I can give.

Great. Many thanks.

The next question comes from Mr. Stephane Houri. Please state your company name followed by your question.

Yes. This is Stephane Houri from ODDO BHF. Actually, I have a question on about the OpEx lines, because we saw really an increase in R&D and SG&A. As you said it's to ramp to EUV tool, but the pace is accelerating throughout the year. We are now at 26% year-on-year on R&D. Where do we go and how to we model it for 2019? Thank you.

I think, we said before also on the Q2 call, I think, we've mentioned that we believe in the short-term there will be an uptick in R&D, and there is uptick is to a very large extent or is uniquely related to two things. It's the acceleration of the 0.33 EUV roadmap as we mentioned before, the 3400C and also the High-NA program acceleration. So that's why we set mid-term, we expect that - so we set short-term that will need to an uptick of the numbers. We also start that medium-term, we expect that to go back to the model that you've seen before and that we've given to you for 2020, which is 30% sales.

All right. And the follow-up is about metrology and inspection, you had a very good quarter, this quarter. Is it a trend that we should we push forward? Or is there anything special this quarter?

No. I think, it's just a trend that metrology and inspection will become more important. There is a couple of drivers there. I think, the introduction of YieldStar 375 is a metrology system that is not only being used in Logic and in DRAM, but now also is introduced into 3D NAND with very clear about our customers. On top of that we see a good growth - very clear growth in HMI in the e-beam business. We are planning to ship the first [3/3] [ph] multi-beam tool in 2019 that will also help the top line. And as a whole suite of software products that were helping our customers deal with the complexities and intricacies of 7-nanometer and the 5-nanometer development nodes. So there's a whole suite of products are actually helping our customers to basically deal with increased cost of the next nodes. And that's particularly helpful when you look at our metrology and inspection business. That's the trend.

Okay. Thank you very much.

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

Yes. Thanks for taking my question. Mehdi Hosseini from SIG. Peter, I just want to go back to your comments about 2019 - first half of 2019 versus second half. And I appreciate the details still the same with a couple of quarters ago. I'm just wondering, does that reflect the finalized CapEx plans by your key customers. Or if there is a change those CapEx plans later this year or early next year that could either something that could have an impact on your view that has not yet materialize?

Mehdi, What you're asking me is looking at my crystal ball of customer CapEx plans are going to be going forward. I don't know.

Yes.

I mean, They're going to change. But there is nothing today that leads us to believe that they're going to do that. Yes, when you look at that plans it's about technology transition in Logic. Trust me, it's going to happen, yeah. If you then look at the DRAM expansion plans, we have a limited number of customers, only three and two of them had some capacity expansion plans with fabs are being build. And in order to this industry to understand that once you have the DRAM structure there, you're going to fill it up, because it's the only way going to cover your fixed cost is to bring out as many DRAM business as you can in this new fab. So these are all plans that are really cost installed, yeah. And whether they are going to cut or to slowdown that ramp, I don't know. But the current plans are what they are, which means that the shipments that we're seeing in H1 and H2 that's being planned for some time now. There are still valid. And what changes in future, I don't know.

Sure. Thanks for the sincerity and the fact that your customer mix has increasingly consolidated does make it more challenging to forecast. Just moving…

All right makes it easier.

Yes. Your - it's easier for you, because your crystal ball is better than mine.

That's absolutely true.

Right. One thing with EUV, I'm just very intrigued. We started the year with commentary that you can ship 22, it is now down to 18. I appreciate the improved throughputs with the 3400C coming out second half of next year. But on the flip side, your customer mix has also consolidated. One of the key foundries is no longer pursuing leading edge and the leading foundry is now the leading semiconductor manufacturer, and they're well ahead of others, and perhaps the DRAM industry is waiting for 3400C before they finalized their plans. And I'm just trying to better understand when we dialing 30 unit system into our expectation and 40 into 2020. What are the key wafer capacity targets that you're looking at? In the past, you've talked about certain foundry capacity for leading edge. Is there any metric that you could provide us, so that we could have a more realistic set of expectation? And if there is a change, we know what are the key parameters that have changed?

Okay. Well, I think, the more realistic expectation is the expectation that I gave you. But I think, it is realistic, yeah. And it has to do with the fact that, yes, our customer base is consolidating, which in itself generally leads to a better capable efficiency in the industry, because every customer plans for winning business and multiple customers all planning for the same business, yeah. That might be a reason - or that might be a very good reason why you ship few more systems. In this particular case, it's not the case, because like you said there is one customer that has stepped out of 7-nanometer GlobalFoundries and in that basis now goes to Taiwan. But the real question is, if that's a 7 plus or 5-nanometer type business, yeah. What is the size of that 7 plus and 5-nanometer business for that customer. And that is a significant, I can only repeat what the CEO of company said a couple of times 7-nanometer, 7 plus and 5 is going to be big. And that's based on what their customers are telling them what they need in terms of wafer capacity. Since they're the only one really in that space. And we're going to tell you anything about that wafer capacity should ask them that's not my role. But I can tell you that is big driver for 2019 EUV shipments, yeah. And that's only for the foundry business. On top of that you have the microprocessors and you have the first start also by the production on DRAM. You see those plan and you see the roadmaps and the 30 number we think it's a realistic number, yeah. Now, if there is some upside, if the 3400C turns out to be there is a very good tool. And we'll figure it out and of course of 2019 given our module testing in all level it could be output, one or two or three potentially, but then we have the customers decide. And I would not think it is going to be in Logic that upside will probably be in Memory and in DRAM. So that's the situation today. And we're giving you clear guidance on the 30 units. That's really based on the realistic scenario that's presented to us with our customers.

Got it. Thanks for detailed and look forward to see you in few weeks.

Surely.

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

Yeah. Hi, JPMorgan. Thanks for letting me on. Peter, my question is, I mean, I'm trying to understand what you've been saying about 2019. Clearly, EUV is up to 30 tool is what you're guiding, your metrology business is growing into next year, your Installed Based Management business is growing into next year? So I don't think that are questions about that. So the question is about the DUV business, I mean, for what I'm hearing you're saying into in response to earlier questions that you're looking for a flattish trend and I mean, that is dominated by the growth in Logic and Memory not that strong. But I mean, is still have a flattish trend in the next year, I mean, I think everybody's estimate for your on revenue for ASML around.

Well, it's not my responsibility because of - with that estimate. But what I said at these means, I see a bottom for our Deep UV business to be at these for same, yeah. Now, Deep UV business has a lead-time that is a bit shorter, so there are changes from time to time. So our customers could still change from the second half of 2019 to go up. And I just called a bottom, which actually means that there could be upside. And yes, and I would not be surprised if there would be. But how big that upside would be I don't know. So that is a bit where I have to stay qualitative and cannot be quantitative, yeah.

Because, I mean, I'm just looking at the consensus ahead of today and the market is looking at about 7% revenue growth for ASML. So are you suggesting, because we know approximately from the other three line items, where your growth would be for 2019. But if you have flat DUV, we're looking at well into double-digit growth, so would you say that you should - you could potentially grow well into the double-digits into 2019?

I think, you've done the math for us.

Okay. Thank you.

The next question comes from Mr. John Pitzer. Please state your company name followed by your question.

Yeah, it's Credit Suisse. Peter, good afternoon. Thanks for the question. Peter, you mentioned in your prepared comments that China is going to end up being about 20% of business in calendar year 2018. What's domestic China going to be this year? And as you look at your 2019 forecast, is China domestic a breakout year in 2019? Or is it more in line with trend line growth?

Well, I think, what I said in my prepared comments that five of those domestic customers are now planning to ramp in 2019, which actually means that we see our business in 2019 from China also growing. Now beyond that I think everything, I said it also in the prepared comments, how big the goals will be also depends on how successful all those ramps are going to be. Because the first pilot lines are being installed and they're actually executing on that 2019 ramp plans. But as we all know, some of these companies are greenfield companies, are they all going to be successful, we don't know. But if there would and they're executing on their plans as we currently see it, then our business in China will be up next year.

And then, Peter, my second question is just managing through the transition on EUV as you bring out these higher-NA more productive tools. You mentioned in earlier question that you thought about two tools next year got cannibalized on productivity. And the third EUV tools you have, what's potentially at risk for further cannibalization? I think, customer's future proof, can you upgrade an EUV tool to a higher-NA once you've installed it or that not an option. And to the extent that 30 number don't get cannibalize, so that's just upside or 2020 number for you guys?

So I think, the - you cannot upgrade to higher NA. The higher-NA EUV tools completely tool, different dimensions. It doesn't work. But you can upgrade from, I say, 3350 to 3400 if you would like to that. That is a big open heart surgery in the field. That could happen in 2020, where we see some of those upgrades. But I generally would say that there is not much downside to further cannibalization than what we just said. I think there is some upside if the 3400C turns out to be quicker, meeting the performance targets. And we could lure in one or two or three more systems in 2019, going into 2020, as a start for higher adoption in the DRAM market. But it's too early to speculate any further beyond the 30 units. We'd certainly not speculate down. I wouldn't speculate of it yet. But if there is a chance for a change I would say, it depends on the performance of the C, especially always have the possibility in the DRAM space.

Perfect. Thank you very helpful.

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

Good morning and good afternoon, all. Amit Harchandani from Citigroup and thanks for taking my question. I really wanted to just circle back on the broader topic, Peter, if I could, this whole talk about trade wars that's going on right now and potential implications for supply chain. Could you maybe give us a sense of, if you have done any assessment that you are likely to be impacted by the second tranche of tariffs? And if you see any need within your own supply chain to make any changes based on what's already been in the public today? Then I have a follow-up. Thank you.

We can be pretty short on this. We don't see any significant impact, not for our business, not for our supply chain either.

Okay. And secondly, in terms of just - without trying to belabor too much on the point for the 30 tools, so you said that the capacity would be 30 tools. And then of course, it depends on the output for the 3400C. So would it be fair to assume that in terms of the production output or the demand that your customers are seeing out there right now, it's as strong as it was 3 months ago? If anything, it has gotten even stronger, which is why you're saying there is more likelihood of numbers being up and down. Would that be a fair assessment to make?

Yeah, first, there is a little correction. I mean, so you have - the capacity is indeed around 30 systems. But if you add the 2, so you could do 32. But so - but what we're saying, we are shipping 30, which includes the 2 that they are shipping from 2018, because the wafer capacity that customers are needing, yeah, only - because we have a higher productivity tool, that they - that needs 30 units, 28 plus 2. Yeah. So it's driven by the higher wafer capacity output, that's coming out of the [wafer and the sheet] [ph]. Now, that actually means that there could be from a manufacturing point of view, there is a few, one or two or three upside. That will only materialize if we get our customers convinced that productivity of our EUV 3400C number is also - is good enough and is reliable enough what is meant to earlier production for memory for DRAM in this space. So I said it a couple of times, I hope it's clear now. So that - this is why I said, I don't think from a demand point of view there is a big change. But what we said before is that when we looked at the overall demand for EUV, we did include for instance customers like GlobalFoundries, which of course have fallen off. That could have driven the demand over 30 units. Now, they're not there anymore. That is consolidated into one other customer. So that's the only thing that, for that probably changed. It's the consolidation in the industry. And it doesn't have an effect on our shipment plan.

And then, just if I could very quickly ask, have you - of course, talked about the productivity of the 3400C, have you decided what level of markup in price would you decide for 3400C over the 3400B or is that still to be fixed?

Yeah, they're just still to be fixed. We're talking to a few customers on the final pricing. So let's not do the price negotiation over this conference call. And we conduct this in the private rooms of the customers.

All right, Peter. Thank you.

The next question comes from Ms. Tammy Qiu. Please state you company name, followed by your question.

Hi, Tammy Qiu from Berenberg. Thanks for taking my question. The first one is, Peter, you mentioned that next year, Deep UV spending is mainly skewed towards the logic foundry side. I'm just wondering, because when logic foundry maker like TSMC moving to new generation, their reuse percentage can be as high as 95%. I'm just wondering to what extent you are actually reflecting high re-usage in your estimation. And also, at the same time, would you say in your backlog of EUV shipment, has anyone already got full allocation of tools for ramping up next generation 7-nanometer-plus equivalent or they are still ordering for that generation? I have a short follow-up.

I think for anything beyond N7, let's say 7-nanometer or N7, there are still orders to be taken, whether that's - now, is it reuse, you have to define reuse. What customers are mentioning when they talk about reuse is that the existing installed base can be reused for the next node. Yeah, but the next node needs more capacity. And so, what we're looking at for next year for logic is through capacity additions and extra wafers out. And when I said 2019, I didn't say it was mainly skewed towards logic, as yet logic is going to increase in terms of its share in the Deep UV shipment as compared to 2018, yeah. Memory is still going to be strong. But logic is also going to be a higher component of Deep UV shipments than it was in 2018.

Okay. Thank you. And also, you mentioned last quarter that you are accelerating your R&D process for High-NA. I'm just wondering has your accelerated R&D been impacting a number of layers EUV can be used by the time of High-NA is available?

Sorry, could you…

So basically, last quarter, you have been accelerating your R&D process for High-NA EUV tool, right? So I'm just wondering, with your accelerated R&D process for High-NA, had chip makers been making decision about introducing EUV for more layers when High-NA is available, because it's available for…

Okay, okay, sorry, so yeah.

Yeah.

Yeah, I think what you will see going forward is that High-NA will be introduced in high volume manufacturing towards the middle of next decade. Then you will see a very clear mix of 0.33, you could say our Low-NA layers and the use of High-NA layers. They're going to be used next to each other. So High-NA is not going to cannibalize that much of the Low-NA, but they're going to address the additional critical layers of the N3 and N2 nodes. So this is how it actually works. So, yes, on EUV, if you think about EUV in total, of course, it will be more layers allocated to EUV in a combination of Low-NA and High-NA.

Okay. Thank you.

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

Yeah, good afternoon, guys. It's Adi Metuku from Bank of America. I have two questions. Firstly, it's a clarification on the OpEx. So obviously your OpEx is ramping up a lot into 4Q. And when we look at the run rate, quarterly run rate for 2019, should we assume that the 4Q run rate would be a reasonable number or do you think that will start to trickle down as we go through 2019? And secondly, just looking at 5-nanometer demand and how the ecosystem is developing, I wondered, Peter, if you could comment a bit on how the system is progressing especially from a pellicle and inspection tool viewpoint. Thank you.

Yeah, I can take the last question and Roger can take your first question. On the 5-nanometer development, if anything, it's accelerating. And I think the issue with pellicle, it's a function of defectivity. Yeah, so the defectivity numbers and defectivity control is increasing significantly, so we have made a lot of progress this year together with our customers on defectivity control. And I think on the 5-nanometer node, the current use or the use of the current pellicles and defectivity measures are sufficient to support 5-nanometer. That's what we believe. At 3-nanometer, which is a couple of years beyond that, we might want to look into whether we need additional inspection tools. That is really depending on how successful we are in defectivity control at the 7-plus and the 5-nanometer node, which looks to be very good. So whether we need that inspection tool going forward is still a question that needs to be answered. Then perhaps it's negative that we don't need it. It depends on the progress that we will make on defectivity with the current generations.

As it relates to CapEx, it's in essence the same logic as we had for R&D, which is over time and particularly when you talk about acceleration that you can see a bit of an uptick. And you won't be surprised that CapEx to a certain extent correlates with R&D. So with R&D going up there is logic that certain CapEx goes up as well. So that will go hand in hand. And that's something that we see in the short-term. Medium term, long term, you will once again see that it models back to what we presented to you in our 2020 model, which is 4% of our CapEx. 4% of sales would be assumed in CapEx.

Sorry, Roger, I apologize if I said CapEx. I mean OpEx, so when I look at 4Q 2018 OpEx as a proportion of revenues, obviously, when I take your guidance, it's - you're seeing a pretty strong uptick and - and the OpEx run rate is significantly higher than what consensus modeling for 2019. So I just wondered - you made a comment earlier on OpEx, taking up short-term but coming down medium-term. So as we go through 2019, should that - when should we expect that uptick to come down? When should we expect that downtick?

Well, you can - you can expect that downtick and that going back to the model that we present it to you in the course of 2019, early in 2019. So there are reasons for SG&A in particular, because I think we need to distinguish here between SG&A and R&D. I mentioned to you R&D as it relates to SG&A, you see a bit of an uptick in what we expect for Q4. You will see that come down to the 4% model that we guided for - in the course of 2019.

And a lot of - yeah, I think you already answered it. You said, we're driving the High-NA introduction and a bit of a C which will mean that we see an elevated level of R&D spending in 2019, which is actually we get a very clear indication in Q4 of what the levels could be. But medium term, that will come down again. And where will that be? I think somewhere in the 2020, 2021 timeframe you will see that, because that's where we have the peak of the High-NA program will have happened. Yeah, and because I - we are going to - we're planning to ship High-NA starting 2022. So end of 2021, beginning of 2022. So that peak will be for the next two years and then it will level off.

Understood, very clear. Thank you.

All right. Thank you. Before we sign off, we'd like to remind you that we will be hosting our Investor Day here at our headquarters in Veldhoven in the afternoon in November 8. As the event is currently fully booked, we ask those that have not already confirmed to please join us via webcast. We will provide the webcast details in advance to the event. You can contact Investor Relations with any questions. Now, on behalf of the ASML's Board of Management, I would like to thank you all for joining us today. Operator, if you could formally conclude the call, I would appreciate it. Thank you.

Of course, sir. Ladies and gentlemen, this concludes the ASML 2018 third quarter financial results conference call. Thank you for participating. You may now disconnect.