ASML Holding NV Q2 2010 Earnings Conference Call

Jul.14.10 | About: ASML Holding (ASML)

ASML Holding NV (NASDAQ:ASML)

Q2 2010 Earnings Conference Call

July 14, 2010 09:00 am ET

Executives

Franki D’Hoore - IR

Eric Meurice - President & CEO

Peter Wennink - EVP & CFO

Analysts

Gunnar Plagge - Nomura

Jérôme Ramel - Exane BNP Paribas

Janardan Menon - Liberum Capital

Satya Kumar - Credit Suisse

Sandeep Deshpande - JP Morgan

Jagadish Iyer - Arete Research

Andrew Gardiner - Barclays Capital

Adrien Bommelaer - Piper Jaffray

Philip Scholte - Rabobank

Ben Pang - Caris and Company

Timothy Arcuri - Citigroup

Didier Scemama - RBS

Gareth Jenkins - UBS

Kai Korschelt - Deutsche Bank

Niels de Zwart - ABN AMRO

Operator

Welcome to the ASML 2010 Second Quarter Result Conference Call on July 14, 2010. Throughout today’s introduction all participants will be in listen-only mode. After ASML’s introduction there will be an opportunity to ask questions. (Operator Instructions)

I would like now to turn the conference over to Mr. Franki D’Hoore. Please go ahead, sir.

Franki D’Hoore

Thank you, thank you operator. Good afternoon and good morning ladies and gentlemen. This is Franki D’Hoore from Investor Relations at ASML. Welcome to our investor call and webcast.

As the operator mentioned, the subject of today’s call is ASML’s 2010 second quarter results. Joining from San Francisco, California and co-hosting today’s call is Eric Meurice, ASML’s CEO along with Peter Wennink, ASML’s CFO, who is with me today in our headquarters in Veldhoven, The Netherlands.

At this time I would like to draw your attention to the Safe Harbor statements contained in today’s press release and in our first quarter results presentation, both of which you can find on our website at asml.com. This Safe Harbor statement will apply to this call and all associated presentation materials.

The length of the call will be 60 minutes. And now I would like to turn the call over to Eric Meurice for a brief introduction. Eric, please.

Eric Meurice

Thank you, Franki. So, good afternoon, good morning, thank you for attending our second quarter 2010 result conference call.

As usual, Peter and I would like to provide an overview and some commentary on the quarter. Peter will start with a review of the financial performance and we’ll add comment on the short term outlook. We’ll complete the introduction with some further details as to the current position and as we close the second quarter and how the balance of 2010 will evolve. Following this introduction we will open for question. So Peter, if you will?

Peter Wennink

Thank you, Eric and welcome to everyone. As Eric mentioned I would like to take a moment to share observations on some of the events of last quarter as well as some details on our second quarter results.

Our second quarter sales were EUR 1.69 billion, further 742 in the first quarter which was just above the range of our guidance. We shipped a total of 43 systems, 35 of which were new. Our new system ASP remained strong at EUR 25.6 million and it reflects the continued demand for leading edge lithography. Our net service and field option sales came in at EUR 146 million, driven by an increased demand for our holistic lithography and service products.

The company’s second quarter gross margin was 43% versus just over 40% in Q1. The gross margin improved due to volume-driven coverage of our fixed manufacturing cost, cost reductions and a better mix of higher margin products. We continued our immersionary re-product developments with an R&D spend of EUR 125 million in the second quarter. SG&A came in at EUR 42 million, both slightly higher than Q1 but as guided.

Higher sales and improved gross margin in Q2, operating income significantly improved to 27.4%, up from 18.5% in the first quarter and the second quarter’s a new high for the company.

In the second quarter we generated EUR 193 million in operating cash flow and after deducting the CapEx spend and the dividend payment we added a EUR 100 million to our cash line ending just under EUR 1.2 billion at the end of the quarter.

Second quarter net bookings came in at 59 systems valued at close to EUR 1.2 billion. Net immersion bookings of 25 systems demonstrated again a continued focus on technology investments. But in addition, we also saw KrF bookings of 27 systems indicating an increased need for more non-critical systems in support of the leading edge production ramps which mainly happened in the non-memory applications. Second quarter bookings moved our backlog 200 to just over 100 systems in total, valued at EUR 2.4 billion. We continue to be encouraged by the success of our immersion products demonstrated by the fact that there are 58 immersion systems in the backlog, 38 of which are our newest immersion product, the TWINSCAN NXT 1950i. As for our outlook, we continue to ramp factory production capacity in order to meet the growing demand as indicated by our increasing backlog.

And our near term outlook indicates bookings in Q3 to be at around 1.3 billion. With this level of bookings and the ramp-up of our production capability, we now see our 2000 sales exceeding our previous peak of EUR 3.8 billion by about 10 to 15%. For the third quarter of 2010, we expect NXT sales to be about 1.1 billion. Gross margin for the second -- for the third quarter is expected to be approximately 43%, with R&D expenses rising EUR 237 million, which is basically to enhance the support of the EUV infrastructure and SG&A rising to EUR 50 million supporting the growing level of sales anticipated through the balance of this and next year. However, we have made sure that the increase of our cost structure remains flexible and have therefore managed 80% variability in our OpEx and manpower increase.

With that commentary, I would like to turn it back over to Eric for more on our view of the coming few quarters. Eric?

Eric Meurice

Thank you, Peter. So as you said, Q2 sales came a bit higher than planned and Q2 booking rose to nearly EUR 1.2 billion, a good number. We expect our bookings level to be higher in Q3, also at about EUR 1.3 billion. With this, it is appropriate to ask ourselves the question if the current positive trend will continue or if we are seeing the first signs of a macroeconomic slowdown of some sort.

At this point, we are confronted with request for capacity at a very brisk rate and we are discussing with customer the capacity increase plan which extend well into 2011. We therefore certainly see no weakening at all of the overall demand for lithography tools. This could be the result of an industry myopia, too much optimism, or could create a potential for build up of excess capacity, although we do not think so in view of the drivers which are very strong behind the demand.

The first driver is the 2010 IC unit demand growth expected to be at about 15% versus 2009 putting the industry back on its historical growth curve. There is nothing extraordinary with this 15% level, achieved thanks to a healthy Chinese market and the somewhat average US and European economic environment. The other growth drivers are structural. The first driver is a standard technology transition driver which fuel this industry, which have been fueling this industry and which is currently indeed in play, with an exceptional conversion of the ramp in the DRAM industry at 40-nanometer, in the Flash industry at 30-nanometer and also in the Logic industry at 40-nanometer. The 40-nanometer Logic ramp, volume ramp is now transitioning from market prototyping or an early adopter phase, to a higher share of the total Logic business.

And at the same time, the more mature 65-nanometer is continuing its, I would say, normal growth curve, that is the first structural driver. The second one is that the demand for new tools in the foundry and IDM segment is further increased due to several years of relative underinvestment and retirement of obsolete capacity by the IDM. The third structural driver has to do with technology transitions, which combined are resulting in an average doubling of the numbers of immersion layer exposures between 2009 and 2010. And this immersion layer exposure increase will continue well into 2011, as indicated in one of the slides that we have on our website, slide 21.

In view of these three structural drivers, and aware of the potential macroeconomic uncertainty, however, we believe still that our 2010 revenues could exceed our previous 3.8 billion peak annual revenue by 10 to 15%, with no excess capacity being built, and that we expect this trend to continue into 2011.

On the technology front, as immersion processes are extended by the use of complex double patterning techniques, customers are accelerating the adoption of our holistic lithography suite of products in order to widen manufacturing process windows, and allowing faster startup of production of chips. This capability further increases our market leadership by making our systems even more efficient.

In addition, our EUV program focus continues. As we speak, we are in the process of final integration testing of the first EUV pilot product in June, six of which we’ll ship within the next 12 months. Orders are being taken in this quarter by the way for delivery of production systems of -- EUV products systems in 2012.

In summary, we expect lithography system demand to be sustained by, one, the multiplicity of technology transition in all sectors; two significant wafer capacity addition in logic to make up for the low level of fast investment and re-target additional capacity. And three, the emerging demand caused by increased critical layer processing associated with our current technology transitions. Although we remain cautious as to the overall state of the world economy and its impact on the overall semi-conductor universe, we remain fairly optimistic about lithography opportunity throughout this year and the next.

So with this summary, I think Peter and I will be ready to take your questions.

Peter Wennink

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

Question-and-Answer Session

Operator

Yes sir. Thank you. (Operator Instructions) Mr. Gunnar Plagge, please state your company name followed by your question.

Gunnar Plagge - Nomura

Yes hello, it’s Nomura. I just wanted to ask a question with regards to the service revenues. I mean previously you have talked about a normal level of about a EUR 110 million, now about EUR 150 million. So to what extent is the increase in service revenues sustainable? And to what extent is that -- it’s probably at the moment mainly related to one particular product in Brion, probably FlexRay so how much opportunity is there with holistic products to sell further in to the installed base?

Peter Wennink

Yeah, the service revenue, yes there is a trend upwards on the service revenue, that’s because the service install base grows. But also the suite of our service products which include the holistic products that can be added on later to the tool is also growing. The FlexRay you referred to will be sold as part of the tool, and is not part of the service products. It’s in the integrated part of the tool. So it will increase the sales price of the tool. But we are seeing holistic litho products that can be you know retrofitted and those really leads to somewhat higher sales. So there is going to be a trend, we would say between 100-125. I think it is safe to say that over the next two years that could grow from 125 to 140, 150.

Gunnar Plagge - Nomura

A quick follow up and you have talked before that you ramped the emerging capacity by the year end to about 30 to 35 tools overall. So, with regard to the NXT capacity, clearly at the moment you are focusing on reducing the cycle time, but are you also actually expanding the capacity in the NXT fab itself, because I think there is probably another factor that needs to be enhanced to get above 20 probably per quarter.

Peter Wennink

What we are doing here is we are retrofitting the old XT factory to build the so called cabins, NXT cabins. So yes we are in the process of retrofitting that by increasing the NXT capacity for next year.

Operator

Next question, Mr. Jérôme Ramel. Please state your company name followed by your question.

Jérôme Ramel - Exane BNP Paribas

If I look at your backlog it is including significantly in the US and in the logic, should we draw any conclusion with one of your major customer doing microprocessor there?

Eric Meurice

We have a good set of customers in the US in processor business, in memory and in logic in general. So it is difficult to focus this improvement only to one customer, but indeed we think we make progress with every of our customers in terms of volume and sometimes market share.

Jérôme Ramel - Exane BNP Paribas

A follow-up on EUV, are you including R&D because of the EUV, and are you confident you can deliver the tools for production in 2012? And my last question is, if you don’t achieve 2009 – 2012 [ph] what could happen for the industry?

Eric Meurice

So clearly we’ve seen an opportunity to increase a bit of our R&D budget as you see and there is of course not in there only EUV investment. We can discuss that later but, yes, EUV is part of our increase and the reason for this increase is that we have seen in fact sort of acceleration of the interest by customers which should translate into the need to potentially prepare for say one EUV machine per month in 2012. So in this environment we have to prepare a part of our R&D budget. We have also to create this new infrastructure to prepare for this type of run rate.

As I have said last time, we hope to in fact close most of these orders for one-two per month or so, as early as this quarter and potentially we will announce at the next conference that we have those orders closed. Now the question is, is there a business impact if we were to delay deliveries of those. For ASML there would be no impact per se because if we are late with the new technology called EUV, there is still a requirement for capacity to do the appropriate technology nodes which will be done by complicated double patterning solutions, which in fact would allow us probably to claim a bit more revenue than if we were early with EUV.

However, we consider that we have to be on time because it has industry impact. EUV is a good technology that enables lower cost at our customers and more possibilities. So this would be definitely negative if we were not to ship on time. So we will focus our attention in doing so. But I repeat, if we were not able to do this in view of the complexity of this project then there would be no financial impact on ASML.

Jérôme Ramel - Exane BNP Paribas

Okay, thank you.

Operator

The next question is from Mr. Janardan Menon. Please state your company name followed by your question.

Janardan Menon - Liberum Capital

Yes, hi, it’s Liberum Capital. Peter, when you were on the conference call, in your Q1 results you had said that the pattern in terms of your order intake for Q2 in terms of where the orders will come from will be roughly similar to what you saw in Q1, or that was what your estimate was at that point in time. But the order sources changed quite a bit with the IDM percentage going up very sharply and the memory percentage coming down quite a bit. So I was just wondering, was there any specific factor, was that a surprise to you and what were the factors behind that in terms of the IDM orders coming in in this kind of volume? And what do you see happening in Q3? The $1.3 billion, will that be a similar pattern to Q2 or will there be much change in that? A follow up, if might, is on ASP, as you go forward, so far you have been very heavily on technology, and going forward we are seeing quite a few new fabs coming up and presumably those will ramp over the next 12 to 18 months. So, will there be a structural decline in ASP because of that, the sort of low 20s level from the sort of mid 20s, the new tool ASPs that we’ve been seeing so far?

Peter Wennink

Okay, to answer your first question, the order pattern of Q1, it is not a surprise to the people who follow ASML that the number of large customers is going down. That means that the timing at which we get the orders from those big customers becomes pretty important in a particular quarter, and has also happened. I mean we were looking at the IDM orders basically coming in in Q3, they came in in Q2, and some of the DRAM orders that we thought came in in Q2, will come in Q3. So that’s the simple answer.

On the order pattern, clearly we will see memory staying strong. We will see some foundry activity in Q3 but NANDs will be stronger than it was in Q2, which when you look at the Q2 order intake is not a big surprise. You see changes will be in foundry, will be in NAND.

On the ASP going forward, yes, you are right. When we look at this, also in one of the slides in the presentation, the number of officially announced new fabs in 2011 is eight. There is currently also, there’s a couple under discussion, more than a couple, it’s about, five are under discussion or six are under discussion, which means that if you have to fill up those fabs, you have to have the whole suite of lithography products there which includes dry products. And that’s why you see an increase in our KrF systems which is the 248 nanometer tool technology ramping up in our order book and this also will be noticeable in the next quarters to come. And that means that the ASP will go down. I wouldn’t call this a structural decline in ASP, because the structural trend in ASP will go up and not down. But it is clearly a reflection of where we are, and customers adding extra capacity means that they have a more broader mix of products order.

Janardan Menon - Liberum Capital

Thanks a lot.

Operator

Your next question is from Mr. Brandon Hyken [ph]. Please state your company name followed by your question.

Satya Kumar - Credit Suisse

Yes, hi, actually this Satya Kumar from Credit Suisse. A question on your 2011 outlook. If I look at your Q4 guidance implied by your 2010 revenue guidance, that’s a little over $1.3 billion. Your 2011 outlook…

Peter Wennink

Euros, you mean. EUR 1.3 billion, sorry to interrupt you, but it’s Euros.

Satya Kumar - Credit Suisse

Sorry. Euros. I am sorry, Euros. By 2011, you were talking about little more than EUR 1 billion. I just wanted to understand, is this a degree of conservatism in your 2011 projections…

Peter Wennink

I didn’t get your last part of your question, somebody was interfering.

Satya Kumar - Credit Suisse

I guess my question is, your implied Q4 revenue guidance is over EUR 1.2 billion and your 2011, you’re saying it’s a little over EUR 1 billion, so why that sort of decline in 2011, is that just conservatism?

Peter Wennink

We said on the 2011, we see similar levels of sales is expected to continue into 2011. So going into 2011 we see similar levels of sales as going out of 2010, that’s what we are saying.

Satya Kumar - Credit Suisse

Right. I guess my question is on a quarterly basis. If I look at Q4, you should be over EUR 5 billion and if that level is sustained in 2011, so just was trying to understand if you just…

Peter Wennink

You mean if you annualize Q4, that’s what you’re saying, net run-rate. Yes.

Satya Kumar - Credit Suisse

Yeah.

Peter Wennink

I mean that’s what would apply in 2011, not for the full year, because we don’t have that visibility, it is going into 2011. We see that same trend as going out of 2010. And that is driven by the three structural drivers that Eric talked about in the introduction of this call.

Eric Meurice

It is too early to guide precisely in 2011. We are very comfortable with that. The same drivers will exist and therefore there is a significant opportunity, chance that 2011 will be sustained or higher than 2010. But again, we do not want yet to be guiding the total year. It’s in this industry, as you know very difficult.

Satya Kumar - Credit Suisse

Understood. On book-to-bill ratios, your guidance for Q4 revenues is more or less in line with what you’re thinking about for bookings in Q3, maybe it’s a little bit more than your bookings in Q3. As you start ramping your capacity for immersion shipments, do you start seeing book-to-bill ratios start approaching parity from the Q4 quarter onwards? And as a follow up to that, what is the current lead time for NXT?

Eric Meurice

No, we didn’t say that the book-to-bill will stabilize at one. In fact I think the same comment which was confusing maybe for some last quarter is holding. But if these drivers continues to come in then we see nicely increasing booking trends. So quarter-to-quarter, it may be that one quarter we will see a book-to-bill a bit at one or below and some quarters we will see at above one. So at this moment we are more in a situation thinking that the business grows into 2011 than situation of stability.

Regarding our capability to address this possibility of growth in 2011, we need to have the two things happen. One, we need more capacity which is I think what Peter was referring to, so we are building up more capacity, more capability per quarter. This is being done by hiring of the flexible workers and updating certain numbers of our CapEx so that new machine can get in. And then second is we have to get our cycle times to be as fast as possible. And yes, in Q1 2011, we will have cycle times, I repeat, production cycle time in our factory, which are fairly, I would say standard, typical for about three months or so.

Satya Kumar - Credit Suisse

Thank you.

Operator

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

Sandeep Deshpande - JP Morgan

Yeah, hi, JP Morgan. Eric, sorry just to ask what are the follow-up to your three points in terms of your drivers. I mean for the past few quarters you have been talking about these flattish trends in orders and clearly it seems to have changed at this point. In that the orders have accelerated to some extent. I mean the acceleration which you are guiding to is mainly NAND Flash fab, new fab related or is it that you had always expected this acceleration? And also, if you could talk about -- historically you have not guided up, given numbers in terms of orders into the following quarter, so has your visibility changed substantially?

Eric Meurice

Yes. So on the DRAM segment, we are not surprised. It’s very similar to what we always expected. I can translate it as we expect to ship as many units necessary for about 50% bit growth. This has not changed. Everybody I think is now converging to, there will be 50% bit growth in this business in 2010, probably also in 2011. So based on that we had already planned the lithography business, which is nice going forward, we had this since about six months.

In Flash, we’ve always said that Flash was disappointing. But that was in the progression mood, because they were starting to move more Flash into dedicated applications, or call it application specific type Flash. So this is happening also. At this moment the industry would expect to deliver about 70% bit growth in Flash. As you know it’s much easier to do bits in the Flash arena than DRAM. And at this moment we are booking at a level a bit under the 70%. So, there could be, as we go into Q3, Q4, Q1 2011, an additional booking due to the fact that we are a bit south of I would say the expected demand. And what surprised us or what you can call is an acceleration, is the Logic arena. There are in fact two engine I mentioned briefly. One is 65-nanometer which is the standard work horse. This is getting in fact good, nice growth because of the countries like China and things, and this load is continuing its I would say mix improvement and you add to that the 40-nanometer which becomes now more mature which will probably grow from a mix of 10% of total business to potentially 20%. And this as I said would multiply the numbers of layers because you go from 10% of your business at 16 layers to 20% of the business at 16 layers, that’s a doubling of layers (inaudible). So this is happening in a stronger fashion than we expect in particular in view of the fact that all the customers in the areas of foundry or IDM find themselves a bit with the pants down. The demand is happening and it’s happening as we say in a normal way, but these guys have not invested enough in any capacity immersion or KrF and there is a bit of aggressiveness on that curve at this moment to try to meet their own customer demand.

Operator

Okay. Thank you. Next question is from Mr. Jagadish Iyer. Go ahead sir.

Jagadish Iyer - Arete Research

Yeah, question Eric. First question is that on the litho capital intensity, how do you see the capital intensity into 2011versus 2010? And I have a follow-up for Eric. How should we think about your OpEx going forward, given this increase in the third quarter? How should we think about it for going into 2011? Thank you.

Eric Meurice

This was a very good question. So on the CapEx intensity, I usually discount these questions because the CapEx intensity that you can calculate at the macroeconomic level, which is basically how much litho is being bought divided by the revenue is really…

Jagadish Iyer - Arete Research

I just wanted your view on ‘011 in terms of how you’re thinking in terms of litho versus your semi revenues, the ratio you usually measure, you usually mention?

Eric Meurice

Yes. So I usually don’t like that question in a sense that it’s very driven by the ASP of the industry. So when you see that ratio popping up very high, it’s really when the semiconductor industry has an ASP problem. This happens when they run business tanked with an ASP of 70% down. At this moment the intensity went up and then the intensity went back down in 2009 as you know a very, very low number. And in 2010-2011, we may go back to some normalized number based on history.

So what would be my expectation in 2010, I would think the intensity litho divided by total semiconductor sales would be in the 18-ish percent range and I would guess that 2011 would be probably in the 20-ish percent range. But again as I say, you’re asking me to look at the crystal ball about the ASP of our own customers, that’s a bit complicated to do.

But I don’t see this anywhere problematic at this moment. The second question is OpEx going forward. So we were clearly, clearly managing this company on scenarios, not on forecast. We’re not religious as to whether the industry has to go up or has to go down. We have to know that in an industry, there will be cycles and therefore we have to have OpEx on a very, very flexible nature.

So you will see from published numbers that we have always a very large amount of flexible workers and we leverage our business with a lot of external contractors. So today we have moved our OpEx to a certain level to sustain this business as you have noticed 1.2, 1.3 or more billion euro per quarter and being profitable on it.

If these numbers were to go down, we can reduce our OpEx again significantly. We of course have had to build up some structural OpEx in particular for the new factory that we are just starting on EUV which will cost us an amount of millions above I would say what which are not flexible. Yes, but this is still very measured.

Peter Wennink

Like I said in the introduction comments, the increase, the cost increase from Q4 last year to Q3 this year, 80% of that increase in OpEx is flexible, variable.

Jagadish Iyer - Arete Research

Thank you.

Operator

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

Andrew Gardiner - Barclays Capital

Good afternoon, it’s Barclays Capital. I was just interested in a bit more detail around the structural drivers you’ve highlighted for next year. You’ve clearly sort of outlined it from a top-down point of view. I am just wondering if you can give us any insight from a bottoms-up point of view from the customers’ standpoint as to your pipeline that perhaps hasn’t materialized into firm orders yet or discussions you are having, visibility, et cetera, that can give us a sense as to whether orders can indeed increase above the guided level for the third quarter? And then just a quick follow-up after that, on the gross margin structure given where you’ve guided revenue to for the fourth quarter around 1.2, 1.3 heading towards 1.4 billion, where do you see your gross margins at that point? Thank you.

Eric Meurice

We leave the gross margin discussion with Peter. Regarding giving you a bit more color on the driver, what can I say, so leaving things which I haven’t mentioned but which are part of the top-down and common is that most of this industries now, segments are getting into very, very complicated technologies. And, this complicated technologies have two significant impact at this moment for our customers. They have more difficulty to stabilize their yields, so you could estimate that the utilization of the machine and the yield of those dyes will be lower in other terms that this technology transition requires even more lithography to cover for this complexity. Also I have been told that the logic arena is developing 40 nanometer products which have on average a bigger die size than the 65 nanometer business, so that’s also another driver that we say. In addition to the numbers of layers, you also need more machinery to build the same amount of chips because they are of bigger size. So that you said you can see this happen also. Another color, when you do things in foundry business or in logic in general, you are more doing this by project rather than one at a time machine. So when you are in the DRAM business or Flash business, you can do one at a time machine. You build, you buy some this quarter. You build some chips, and business is good, you buy more, et cetera, so very flexible type of environment. And we see this in a way where the customers would react with very short-term orders and things. When you are in the IDM business or foundry business, you cannot this. These are big projects which have about a year to two year before they have real market impact. So what you see today which is why we are highly optimistic is not withstanding an economy downturn, the customer has to stick by their strategic moves. And the numbers of quite newcomers in the foundry business who are committed to building up factories and lines which are strategically going to be there no matter what the volume is. So these ones are the ones we see now which will cover 2010, 2011 at the minimum and has to happen. So I hope I gave you enough color on your question and I leave the other question on the gross margin at 1.4 billion for Peter. Peter likes simple questions.

Peter Wennink

Which is a simple question, so I will give a simple answer. And the answer is that clearly we don’t guide for Q4, otherwise it would have been in the press release. But I can only refer to what we said earlier is at 5 billion run rate we want to be at 45% gross margin levels. So that’s our target, it’s the only thing I can say. And we are working hard to reach those targets.

Andrew Gardiner - Barclays Capital

Thanks very much guys.

Operator

The next question is from Adrien Bommelaer, please state your company name followed by your question.

Adrien Bommelaer - Piper Jaffray

Hi, it’s Adrien Bommelaer from Piper Jaffray. Assuming the macro holds up and assuming you manage to ship EUV tools on time for 2012, essentially for the NAND segment, could you give us some color as to what 2012 would look like in terms of revenues? The reasons why I say that is if you take the last peak at 77 [ph], 2008 saw revenues down about 20%, now is there any reason to believe you do better or worse this time around.

Eric Meurice

This is a very complicated question. We don’t know at this moment if everything we’ve planned on 2010, ‘11, so imagine that things happen as they currently look which is a good 2010 and better 2011. Your question is, is 2012 going to be a recovery year or not, a down year in a sense of some digestion?

It’s very difficult to know because we are getting now into businesses where most of the mix will be of high-end level where each of the layers of lithography are very, very expensive. So we are at this moment simulating in fact a fairly long cycle opportunity for us.

Now if you add to this that 2012 may be a year of 12 EUV tools at about EUR 65 million per machine which we will be serving as a rule [ph] only R&D and we’ll not really split any wafers for production. So you have a new relay of R&D to a normal business. So that normal business is anywhere near sustained, 2012 could be again for us a growth year.

But again these are scenarios of opportunities, of possibilities, and I cannot at this moment declare that there will not be a negative point somewhere the volume goes down, the driver of the ICs and therefore it is some kind of two to three months delay into what I just said.

Adrien Bommelaer - Piper Jaffray

Okay, I just have a quick follow-up, the semi-cycle seems to be a bit stronger than some had anticipated and I was wondering if you knew or had a view, could this be due to a trending up we are seeing in technology spending, i.e. smart phones at the expense of low end phones or is this just a play that you think on unit growth being very strong?

Eric Meurice

No, no, it’s really, this is a smartphone issue. It’s mix driven activities at this moment. The volume part is mainly is due to China. I refer you to Morris Chang’s article I think about a month ago where he mentioned that, I’m not sure exactly, about 10% of this growth was due to China. It’s a volume type driven activity. But for the rest, smartphone, the SSDs are really moving up now. All these new PCs, I don’t know how you call them, the table thing and et cetera, PC type animals are growing like by 20% versus 10% before, so you’ve got all those new form factors, creates much more demand. So, we are in a very good situation of the volume is okay, but it’s not anything exciting. But the mix is rich enough to sustain these technology buys.

Adrien Bommelaer - Piper Jaffray

Great, thank you very much.

Operator

Mr. Philip Scholte, please state your company name followed by your question.

Philip Scholte - Rabobank

Yes, it’s Philip Scholte at Rabobank. In your presentation, I again see the famous ASML model, the simulation model which actually does extend into 2011. Would you be willing to share with us what kind of sales simulation would come out of that model? And the second…

Eric Meurice

We should sell results of the simulation model, what do you think? So, to that question, no, I think it’s too early. It’s a fair question. In fact for the community, the analyst community, we are looking at the possibility of inviting you sometime in the fourth quarter to answer those questions because this is a fair question, what is a structural set of opportunities in front of us and we need to tell you what would be the negative, what would be the positive, that scenario. So it’s a bit too early, but your question is valid and we’ve taken it at heart and we’ve got to address it at some point.

Philip Scholte - Rabobank

All right. Maybe a short follow-up for Peter, can you give us a bit more guidance on taxes and CapEx?

Peter Wennink

Yeah. CapEx for the first half was EUR 25 million, which was – it’s a bit of an underspend to the budget at several courses. We will spend between EUR 60 million and EUR 70 million in the second half of the year and that has to do also with the fact that we will start breaking ground of an extension to the EUV factory which we had finalized last year. Like Eric said, really in anticipation of the 2012 ramp of EUV, so between EUR 60 million and EUR 70 million in the second half of the year.

On the taxes, taxes are currently averaging about 17 to 18% of our profit before tax line. That could trend down one or two percentage points when our profit goes up. That has to do with arrangements that we have made with the Dutch Government with respect to the royalty boxes, which is a specific tax law here. So it’s going to be 17 to 18% good trend, one to two percentage points down when the profit goes up to levels of, let’s say based on 5 billion sales.

Philip Scholte - Rabobank

All right. Thank you very much.

Operator

The next question is from Mr. Ben Pang. Go ahead, sir.

Ben Pang - Caris and Company

Thanks for taking my question. Two questions, one on the lead times, are your lead times for the immersion tools going to change between, let’s say at the end of the third quarter and end of the first quarter of next year?

Eric Meurice

Yes, as I say, if you take the NXT which is now going to become the main immersion tool, we are moving towards an 18 to 20 week assembly time and test time, and as I said we are going to try to make it to a 12 to 13 week during the period you mentioned.

Ben Pang - Caris and Company

Okay. And the follow up, on the bit growth for NAND, can you quantify just for immersion lithography, what’s the correlation of the bit growth to the immersion market in terms of number of units?

Eric Meurice

So, we are going to take that question off site (inaudible) not for us to make any mistakes, so Craig DeYoung would be in contact with you or vice versa. We have that answer. We can give you some ideas about what does 10% type gross means in terms of capacity of litho. We have that somewhere, but I would prefer not to try to guess at this moment.

Ben Pang - Caris and Company

Sure, thank you very much.

Operator

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

Timothy Arcuri - Citigroup

Hi, Citigroup. Two things, one I just wanted to sort of go back to the question on the 2011 guidance. I mean it does seem conservative sort of in light of where the bookings are, and I guess would you agree that you could still meet that guidance, you know you could still sort of maintain this you know sort of revenue rate even if bookings were to fall like 50%. So, you know you’re booking about 1.3 billion, so you know bookings could go down to $700 million and you could still revenue you know sort of in the low 4 billions next year. So, I’m just trying to sort of understand that.

Eric Meurice

Yes, it is true that we have always said that the bookings trend per quarter is a strange animal, so sometimes there is good reasons why a customer would say that they want to delay the “decision”. It could be because we just finished negotiation on price, which by the way should happen now. We’re going to start lots of negotiation in Q3 and probably cruising in Q4. So you can have some delays to that. We can some delays because some customers would not know where we’re going to ship these products, et cetera, but all this is as you said irrelevant to the revenue number, which in fact is based on industrial requirements, not so much of a booking’s timing. But I’m not saying that at this moment we expect the bookings run rate to fall as you said to 700. This is beyond our understanding at this moment. So we don’t know more than that at this time.

Peter Wennink

And Tim, I would just like to have one clarifying question on your side. You say that our 2011 guidance is conservative but we are not guiding on 2011. The only thing that we are saying is that the sales levels that we are seeing going out of 2010, that will bring the total sales of this year to between 4.2 to 4.4 billion. That sales level going out of the year we think will continue into 2011, driven by the three main drivers. That is what we are trying to, we are not guiding on 2011 because we simply don’t know what is going to happen in 18 months from now. So, I’d like to understand why you think that was conservative?

Timothy Arcuri - Citigroup

Got it. So basically you are implying that sort of Q1 2011 revenue run rate will be similar to what Q4 is. You are not necessarily saying that that run rate is sustainable through the rest of the year.

Peter Wennink

Correct.

Timothy Arcuri - Citigroup

Okay. Got it. Other question is on capacity and when you think you’re going to get to 1.5 billion revenue capacity, it sounds like it’s probably more Q1 than Q4.

Eric Meurice

Yeah, Q1 is out. Q4 is start, if you know what I mean, but it’s Q1 out.

Timothy Arcuri - Citigroup

Okay. And what’s the sort of compression in lead times? So if I come right now and I want an XT, what’s the lead time today relative to what it would be if I ordered a tool later on this year?

Eric Meurice

If the supply chain is ready, if everything has been put on shelves, then the declines as what I said before, three months, because it takes three months to assemble from a lens basically. But if you have not enough lenses, then you have to create lenses from scratch or if the lenses are in the pipeline, then of course you will stop and you have to wait until that you have enough lenses.

But as I said if we get to a capacity of 1.5 per quarter out in Q1, we should have our eggs in the correct basket, which is three months lead time. That doesn’t mean however the customer will put three months lead time bookings if that’s what your question was. I think the customers will probably put the orders with about six months lead time as usual because they don’t want to take the risk of being surprised by a problem in supply chain. So don’t make a model that says because we are getting good at lead times. At some point the customer will take risk with the bookings lead time, which would be a bit dangerous.

Timothy Arcuri - Citigroup

Doesn’t that imply though -- just last point on that, doesn’t that imply though whenever you see a compression in lead times that much, doesn’t that imply that there…

Peter Wennink

Tim, I am sorry you got into your fourth question now so let’s give somebody else a chance.

Timothy Arcuri - Citigroup

Got it, thanks.

Operator

The next question is from Mr. Didier Scemama. Please state your name followed by your company. Go ahead, please.

Didier Scemama - RBS

Yes, good afternoon, gentlemen. Thanks for letting me ask a question. I would just like to talk about 2011 and the road of the smartphone and tablet industry, I think some of my colleagues have already touched upon that, but I was just wondering what you thought would be the impact of basically specs for tablets and smartphone, especially for DRAM increasing from 0.5 gig to 1 gigabyte? I mean we could have an incremental EUR 150 million units shipping next with 1 gigabyte of DRAM, do you think that the industry is capable of handling that, number one? And second of all, given the increasing complexity of those type of products, particularly as it comes to 3D graphics as well as a more content for data driven by Flash, again do you think the industry is capable of handling basically the growth that is expected next year for tablets when it comes to NAND Flash capacity?

Eric Meurice

Yes, in fact this is why we said that 2011 at this moment could look like sustained and could look like gross because of the mix which is rich. The industry is in fact I would say ready to address this. The DRAM activity is interesting because on one hand, you still have the need for having a 3 gig or 4 gig per PC on a normal PC. And then in parallel, you are going to create these new markets with 1 gig et cetera, but which still requires low power and forces then the suppliers to invest in 40-nano. But also and you are starting to see some of the readers going to a conversion to 30-nano. So all this richness of application drives in fact technology, technology is becoming more complicated. They need more machines, but they know that they are planning this and this is what we think is the driver of the current year and half to two year business.

Didier Scemama - RBS

But is that what’s driving your business today or is that potentially an incremental driver for bookings in the first half of 2011?

Eric Meurice

You can say this slightly differently, that is we are not at this moment planning a significant unit growth in general. We are telling you that we feel comfortable that 2010-2011 is driven by the mix discussion that you just talked about. If in addition to that, you have sort of volume growth situation which happens sometimes on the historical curve, then we have an upside. But it’s because my bottom up forecast is already with the mix, if you know what I mean.

Didier Scemama - RBS

But what do you see in terms of it -- I can’t be too specific I guess.

Franki D'Hoore

Yes, let’s move to the next guy, two questions.

Didier Scemama - RBS

Okay. Thank you.

Operator

Your next question is Mr. Gareth Jenkins, please state your company name followed by your question.

Gareth Jenkins - UBS

Yes, it’s UBS. Thanks, just a very quick one. You just about exploded in terms of cash generation over the next few quarters and I just wondered how your thinking is moving between dividends and cash returns and as a follow-up to just what opportunities you see beyond semis into LEDs or any other opportunities, thanks.

Eric Meurice

Peter, I think you want to take cash, I can take the LED stuff.

Peter Wennink

On cash, we just stick to what we said before. We have a policy to have gross cash balance within 1 to 1.5 billion. Like you said if you extrapolate the net profit, it is not, it is not difficult to see the cash flow of the company be very strong over the next 12 months. Now, over to 1.5 billion, we will return cash through the shareholders absent any major investment plans and that cash will be distributed through a mix of dividend and share buybacks.

Now how much the dividend will be, it will be the subject of the general meeting of shareholders next year, so I cannot comment on that, but clearly what is important I think in this context is that about 1.5 billion like I said again absent major investment plans, we will return that money in that mix, dividends and share buybacks.

Eric Meurice

Okay. And regarding the possibility to invest outside of semiconductors, I think we stay with the basic statement of five years ago is we still think that we have potential to grow at 5 billion of sales, et cetera, which as we told you last time twice that we will probably get to it during this current cycle. But it is important for us to always stay available, do something synergistic which will create another engine of growth. And yes, we are looking into some technologies. We have put more R&D into these technologies and we have put more people in scouting for alternative but nothing in the very short term and nothing of the very large scale that we should be discussing.

Gareth Jenkins - UBS

Thanks.

Operator

Next question is from Mr. Kai Korschelt, please state your company name followed by your question.

Kai Korschelt - Deutsche Bank

Yes, it’s Deutsche Bank. The first one is on the EUV, and Eric could you just please confirm when you will start booking tools and revenues and the backlog please whether that’s 2011 or 2012. And then on the ASP of 65, is that dollars or Euros? And my second question is on the NXT, I think you said the product is starting to mature on sort of the fab floor, do you get the sense that is maturing ahead of your competitors and secondly are you on track to hit that 200 wafer for our target, thank you?

Eric Meurice

So in terms of bookings we will, on our press release mentioned when we book those famous, say one a month type activity, but Peter in a conservative fashion will not recognize them because it is our way of booking only things which are shippable within a year. So what you see here on our published “backlog” is only bookings for delivery within a year, we don’t record bookings beyond that.

But you will know of these numbers and it will be put on the press release more as an information on technology. It is obviously EUR 65 million except if the Euro goes under one to $1 in which case, I will change my mind in after service [ph]. We are a Euro company, so it’s EUR 65 million. And the last question is, yes we are maturing the NXT.

Obviously, we are always paranoiac as to our competitor’s product. As you know they have announced on paper a product which is similar to our NXT. We are happy to report that we’ve got accelerating bookings on the NXT which means that in fact the NXT is recognized probably by our customers as being ahead of it, of the competitors’ product. And we haven’t heard at this moment any data that would confirm that this competitor’s product is ramping into production. We therefore hope to get to 200 wafer per hour. At this moment the spec which is agreed with the customer is 175 wafer per hour, so this is what we will achieve by the end of the year. We are at 150 at this moment which is the current same value as what we get on the XT, but the machines are upgradeable by software to 175. And 200 wafer per hour will be introduced in 2011.

Franki D’Hoore

Ladies and gentlemen, as we are approaching the end of the call, we have time for one last question. If you are unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations Department with your question. And now operator, may we have the last caller please.

Operator

Yes, sir. That is Mr. Niels de Zwart. Please state your company name followed by your question.

Niels de Zwart - ABN AMRO

That’s ABN AMRO. My question will be going back to your guidance or your statements and your view about 2011 in relation to the 5 billion target you’ve been mentioning, on the one hand you are saying that your trend is positive going into 2011, looking for a growth here in that respect. You also mentioned a couple of fabs which are under investigation. Do you believe that if those fabs would be actually built, would that generate the demand enough for you to generate this 5 billion revenues already in 2011?

Eric Meurice

Well, again, we do not guide on 2011, but we gave certain numbers of possible scenarios, which would be justified by a macroeconomic environment. So if the macroeconomic environment is there, which is the historical semi-conductor unit growth continues and if the fabs which have been announced do happen with the appropriate timing as announced, then the possibility of 5 billion within 2011 is there. But please do not mention this as my guidance. It is much too early to check all the parameters that will justify that.

Niels de Zwart - ABN AMRO

No, that was just to get some feel for the things that should happen in order to get you to that level, so that’s very clear. Thank you very much.

Franki D’Hoore

Thank you. All right. Now on behalf of ASML’s Board of Management I would like to thank you all for joining us today. Operator, if you could formally conclude the call for us please. Thank you very much.

Operator

Ladies and gentlemen, this concludes the ASML 2010 second quarter results conference call. Thank you for participating. You may now disconnect.

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