ASML Holding's CEO Discusses Q3 2011 Results - Earnings Call Transcript

| About: ASML Holding (ASML)

ASML Holding NV (NASDAQ:ASML)

Q3 2011 Earnings Call

October 12, 2011 9:00 AM ET

Executives

Craig DeYoung – VP, IR

Eric Meurice – President, CEO and Chairman

Peter Wennink – EVP and CFO

Analysts

Sumant Wahi – Redburn Partners

Gareth Jenkins – UBS

Gunnar Plagge – Citi Group

Simon Schäfer – Goldman Sachs

Janardan Menon – Liberum Capital

Mehdi Hosseini – Susquehanna International

Satya Kumar – Credit Suisse

Jagadish Iyer – Piper Jaffrey

Jagadish Iyer – Piper Jaffray

Ben Pang – Caris & Company

Sandeep Deshpande – JP Morgan

Didier Scemama – RBS

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the ASML 2011 Third Quarter Results Conference Call on October 12, 2011. For our today’s introduction, all participants will be in a listen-only mode. After ASML’s introduction, there will be an opportunity to ask questions. (Operator Instructions)

I would now like to turn the conference over to Mr. Craig DeYoung. Go ahead please sir.

Craig DeYoung

Thank you, operator, and good afternoon and good morning, ladies and gentlemen. This is Craig DeYoung, Vice President of Investor Relations at ASML, and I’d like to welcome you to our investor call and webcast.

As the operator mentioned, the subject of today’s call is ASML’s third quarter 2011 financial results. And joining us today from the Silicon Valley of the Bay area of California is and co-hosting the call is Mr. Eric Meurice, ASML’s CEO. And here in our headquarters along with in Veldhoven in Netherlands is Peter Wennink, ASML’s CFO.

Given that we’re in two different locations, you know, should there be any kind of technical difficulties that would separate one of the parties the separated party will rejoin the call as soon as we possibly can get them back on.

So at this time, I would like to draw your attention to the Safe Harbor Statement contained in our press release today and in our second quarter results presentation, both of which you can find on our website at www.asml.com. This Safe Harbor Statement will apply to this call and all associated presentation materials. As a reminder, the length of the call will be 60 minutes.

And now I’d like to turn the call over to Eric for a brief introduction.

Eric Meurice

Thank you, Craig. Good afternoon, good morning everybody. Thank you for attending our conference call. Now that I’m in the city currently, I realize how much courage it is for all of us or you to wake up at 6 o’clock to listen to us.

But before we begin the Q&A session, Peter and I will provide as usual an overview and some commentary on our third quarter and our view forward. As usual, Peter will start with a review of our financials in Q3 with added comments on our short term outlook. I will complete the introduction with some specific comments early on current status and planning regarding immersion and EUV. So Peter, please.

Peter Wennink

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

Our third quarter sales came in over EUR1.4 billion and we’re evenly distributed across all sectors. Again as in the second quarter, they included roughly equivalent unit shipments of non-critical KrF and Island systems and critical level ArF immersion systems. I would like to highlight that we have now shipped more than 100 TWINSCAN NXT 1950 immersion systems bring the total number of ASML immersion systems sold to over 320.

The average selling price of all systems in the third quarter was EUR23.2 million, that’s an increase of EUR2 million per unit, first to second quarter with an average selling price of new systems of EUR27 million, which is EUR4.4 million increase over the second quarter.

Service and field option sales for the quarter came in at EUR185 million, which is not substantially different than the second quarter. We also recognized sales for the first time of EUV systems for a total amount of EUR80 million.

Our third quarter net income was EUR355 million, which is 24% of sales, creating an earnings per share of EUR0.84 for the quarter, excluding the margin EUV business net income would have been 26% of sales.

Updating our previously announced share buyback program, as of September 25, 2011 ASML has repurchased roughly 21 million shares for EUR560 million giving an average buyback price of around EUR27. As stated before ASML intends to cancel the repurchased shares. And at the end of third quarter, we have about EUR2.8 billion in cash and cash equivalents.

Third quarter net bookings, excluding EUV, came in at 23 systems valued at EUR514 million, which is essentially one system above our guided level. Booked ASPs declined from EUR24.7 million in the second quarter to EUR22.4 million in third quarter, which is due to a product mix shift towards some lower ASP non-critical tools especially KrF.

Bookings strength was in the foundry sector, 41% of total booking forward by NAND Flash 30% with 18% from DRAM and the rest came from IDM.

Our order backlog exiting Q3 was EUR2 billion, excluding EUV, which totaled 74 systems with an average selling price of nearly EUR27 million per unit. For the fourth quarter of 2011, we expect net sales to be above EUR1.1 billion, includes revenue recognition of one EUV system and NXE:3100 at EUR40 million. This system will be recognized again with zero profit margins. And resulting in a gross margin of the total expected sales for the quarter of about 41%, but excluding this EUV system the gross margin that would be about 42%.

R&D expenses are expected to be EUR150 million, giving support to our dual product leader, to our dual product leadership strategy with focus on the EUV system development and also on immersion platform announcements. SG&A will be at EUR56 million in the quarter.

We expect fourth quarter bookings to be at level above the third quarter, reflecting customer’s clear and continuing need for new technology capability in support of the aggressive shrink roadmaps for new product development and lower manufacturing costs. However, it’s too early to understand how overall semiconductor demand will contribute to our business in 2012. And to what extent our business will benefit from what appears to be a solid technology transition year.

At this point, our customers are starting to place orders for these next generation technology upgrades but are currently not yet capable of calling the total capacity needs for 2012. They will most certainly wait for macroeconomic and industry specific market developments before confirming the full extent of their investment plans for next year.

And with that, I would like to turn back over to Eric.

Eric Meurice

Thank you, Peter. So, Peter has addressed our short-term and mid-term perspective. I would like myself to focus my introduction on the next four to five years which we will see one of the industry’s most extensive technology transition. The transition for critical layers from immersion, lithography and it’s multiple versions, spacer, double patterning, double-double patterning etcetera to EUV. These next generation technology has been chosen unanimously by the industry. It is based on EUV light, the wavelengths of which is not limited, not a limiter to further geometrical shrinks up through 2020 or even longer.

As you know, immersion lithography, which is currently the leading edge technology will not be able to carry the industry’s geometric scaling on critical layers beyond say, 15 to 20 nanometer in the DRAM segment and beyond 10 to 15 nanometer in the NAND and the Logic segment, even by stretching immersion lithography with self aligned or double-double patterning or any of these techniques.

These immersion technologies will have a hard stop for use in critical layers. But of course immersion will however be used for many non-critical layers well into the 2020 along with KrF technology. The transition from immersion to EUV on the critical layers will however and this is important, this is our key message, will be gradual. First, customers with a huge installed base in immersion lithography systems in the fabs and all the dedicated process equipment will use amortized equipment for as long as possible. And we’ll bring EUV system in only after maximum technically utilization of the installed base first.

The second question is that each layer at each new node will have more or less complexity for which EUV transition will be more or less economically and technically obvious. So, it’s not a question of node, it’s a question of layers per node. And each of the layers have I recall, it’s a personality. So, for instance, key enabling wires or contact layers for Logic DRAM and even NAND are currently the most insertion layers for EUV. The EUV helps manufacturing, control yield while providing the possibility of better shrink factors dye on the EUV could be as small as 10% smaller than dye made by an alternative technology and also making use of less design restriction.

The third point, third aspect which explains gradual is that the suppliers providing EUV systems and infrastructure like us, will provide continuously improved equipment. Adapted first to the most complex challenges until a time when the product capacity and the product development allows the shipment, of larger number of system at improved specifications and cost for all critical layers. So, in other terms, our machines will improve as we go and as it improves, its economics are better and better and they are better and better, they will move into different set of layers.

So these three factors, the use of current installed base, ever more technically challenging image requirement and progressive availability of EUV system is better economics will make EUV transition gradual. Most customers are proceeding today on this with the development of some layers to be either processed with immersion and or with EUV, thus having the security of a known technology as a backup. But the full use of EUV and its enabling capability if and when it works.

At ASML we support this gradual ramp with an aggressive dual product switched (ph) of course. We continue innovation on our immersion platform concurrent with the huge development of EUV platform.

Regarding critical layers which will use immersion, we are developing the next generation machine, the next generation NXT, which will set new throughput and overlay standards. And we are also in parallel, strengthening our suite of holistic lithography software and hardware products which enable the process window enlargement. And to improve the process drift management and the capability of matching the machine which becomes more and more requirement.

Our customer’s processed complexity and our associated product solution will contribute to ASML revenue growth of course. But also will ensure leadership as, for instance machine matching and compatibility is becoming ever, ever growing requirement. So, if you have an installed base of ASML machine, it becomes natural and necessary to adapt more ASML machines for this important compatibility.

Regarding EUV, we have shipped five EUV pre-production NXE:3100 at this moment, with six shipping in fact as we speak. Integration has become on the first NXE:3300 which is a new generation product tool slated for delivery on the second half of 2012.

Our current EUV throughput roadmap has been updated. So, we indeed incurred a cumulative one and half year delay on this development. In large part, due to the investment in the EUV source development area which was not commensurate with the complexity of the task.

After several months of heavy involvement with the three potential source suppliers, we now clearly understand the key issues to be addressed and are intensively cooperating with the suppliers on sub programs, on numbers of sub programs to drive execution of this roadmap. We now plan to achieve commercially viable throughput of our target, 60 wafers per hour in the field, in the summer of 2012. And we will achieve our target 125 wafers per hour on the 3300 a year later.

We are currently building capacity for one system per month from mid-2012 out through end of 2013 ramping to two per month in 2014 and then three per month in 2015 in anticipation of the gradual demand curve which I described before.

So, in summary, in the perspective of the development of on one hand multi-patterning immersion and on the other hand the gradual insertion of EUV, we see the next four to five years as the past to good secular growths.

So, with this, Peter and I would be pleased to take your questions.

Craig DeYoung

Ladies and gentlemen, thank you, Eric. Ladies and gentlemen, the operator will instruct you momentarily on the protocol for the Q&A session, but beforehand I’d like to ask that you to kindly limit yourself to one question with one short follow up, if necessary. And this will allow us to get to as many callers as possible.

Now operator, could you please give your instructions and then the first question, please?

Question-And-Answer Session

Operator

Thank you, Mr. DeYoung. (Operator Instructions) The first question comes from Mr. Sumant Wahi, please state your company name followed by your question.

Sumant Wahi – Redburn Partners

Hi, thanks for taking my call. This is Sumant from Redburn Partners. I think the question is actually for Eric. And the question is basically that in Q2 conference call you kind of pointed out that the minimum spend by industry for technology upgrade will be about EUR750 million per quarter which was excluding EUV. Now if I add about 5 EUV tools to that I get to about a EUR3.35 billion or EUR3.4 billion of sales for 2012 which is kind of the minimum spend you were pointing to. I was wondering that looking at the famous fab model, where do you see the semiconductor industry today. I mean, is it looking purely as a tech upgrading happening in 2012 or is there some capacity addition as well? And I have a quick follow-up.

Eric Meurice

Well, we would like to be disciplined today and not a guide on 2012 because we don’t have enough facts. We usually report to U fact, meaning, when our customers are ready to put orders for our machines which have long lead time. And we usually give those facts. This time we don’t have facts. So, we cannot really guide on 2012. What we said however, what Peter said is that there is a good technology transition wave in 2012.

As we also mentioned before, a lot of our partners in the DRAM business and in the Logic business are improving or reducing their usual cycles of transition. We see DRAM now every year. And we see Logic even better than the usual two years going to 18 months. So, we know this is positive. But again, we cannot, at this moment comment at all on the total picture for 2012, which we’ll have to include a capacity.

Sumant Wahi – Redburn Partners

Okay. And I guess my follow-up is looking at the current capacity. I mean, in the beginning of this year, you were talking about building up the capacity at ASML to suffice EUR2 billion per quarter of revenue. But looking at the order pattern right now, it looks like, 2012 you would have much lower sales. So, would you be considering any sort of cost cuts at this point of time and what are you fixed factory costs at this current moment?

Eric Meurice

Absolutely, we commit to the world to scale our OpEx to the level of sales. But indeed as you say, we also have such a large market share that we need to provide for the customers if they have short term demand. So, we are playing between this maximum flexibility up in terms of output and the possibility of always providing a P&L which creates value. So, we do have this variability on OpEx. We can exercise it between three to six months. And we can go to what’s a very low OpEx if necessary.

Most of the activity on OpEx would be the reduction of contracted work, which will be because we leverage a lot of activities R&D as well as development or I mean the support with companies. But we also have a large flex workforce. So, again today, we are still running our business to have in 2012 a good year because we need to be capable of delivering. But we also have a scenario which we need to reduce our OpEx to adapt to the possibility of a lower year.

Sumant Wahi – Redburn Partners

And could you give any sort of figures on cogs for example, fixed factory costs within the cogs or not at this point?

Peter Wennink

Yeah, I think we don’t do that. We’ve done that when our sales dropped to almost zero. And then the people were still counting with the gross margins as were in the 30s, well if you have no sales and if you have fixed costs that where we started to talk about fixed cost, which of course makes sense. So, you know, today’s an obligated view if you want to know, what particular levels of gross margins you can expect, I would take the last, let’s say seven quarters as a proxy of the different levels of sales and the gross margins that would be good for your model.

Sumant Wahi – Redburn Partners

Okay, thank you.

Peter Wennink

Yep.

Operator

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

Gareth Jenkins – UBS

Yeah, thanks, its UBS, just a few on, if I may, fairly quick ones. I wanted Eric, what really gives you the additional confidence that, you know, in terms of the EUV, the customers will take EUV for, you know, the 1X node and DRAM and NAND. And just as to two quick follow-ups. I was wondering if you could give us a sense of how many layers you see as being critical with EUV? And then the last one, probably one piece on R&D, what percentage of R&D is EUV currently, is it kind of EUR20 million to EUR30 million step up of kind of abnormal R&D currently in these projects that will then step back down as it matures? Thanks.

Eric Meurice

Okay. We believe that further NAND business around 18 nanometer will have a contact layer which is extremely, extremely, extremely difficult to manage with EUV. As usually in light source we’ve done differently. But we have huge push on NAND 18 nano one layer contact in NAND. In the DRAM arena, we have two layers in the 20ish, 20-22 nanometer environment which has same opportunity. So, to be clear on this one, it’s for us to take. So, if the machine runs well enough, we will take those layers. And they will justify fairly ramp up by the way.

If we delay this indeed and there will be a significantly difficult process using double patterning, triple patterning or whatever, and which also we will contribute with about the same level of with lead source spend. So, we’re not considering the EUV introduction as being an economic issue for us but it is for our customers because EUV is more cost effective. So, we are working extremely hard to get this, to happen on time.

The R&D effort in EUV at this moment is I would say about simplify more than one third of our business, of hours spent. We are building up a bit more than that again for another year or so. And after that we could stabilize. But again, as we’ve noticed in this business, the R&D curve can go down if we only go to maintenance but good for us. We always see another opportunity, so in other terms, if I’m right with the secular growth options which we’re starting to see. We will need in fact to upgrade our EUV machines to new generations for the good of creating growth.

And so, on one hand I see the possibility of going down in R&D if and when the business matures. But if the business doesn’t mature as we could start-in now between 2015 and 2020, then we would probably maintain the current level of R&D.

Gareth Jenkins – UBS

Thanks.

Operator

The next question comes from Mr. Gunnar Plagge, please state your company name followed by your question.

Gunnar Plagge – Citi Group

Eric, you provided a bit longer term outlook. And I was wondering, I understand clearly from a customer perspective EUV is a preferable solution given that it gives you profitability advantages through shrinking compared to pure efficiency gains from 450 millimeter. But I mean, at what stage would you expect to make expenses for EUR450 million is whether when you see some companies now in the supply chain starting to spend next year?

And my follow-up for Peter would be, is it possible to qualify slightly the sequential Q4 order increase that you’re expecting. Is it purely seasonal effect, could you give a little bit more color on that? Thanks.

Eric Meurice

So, let me start with 450 and then Peter will handle the bookings question. On 450, so, clearly we believe that the top four to top six largest manufacturer semiconductors will develop, will push for 450 transition in due time. We think at this moment, the due time is probably a real prototyping around 2016, 2017 and potential production around 2018. Before that there could be some demonstration units and you’ve seen and heard some reports on consortium particularly in the New York state, discussing the possibility of demonstration and visibility.

But I would say, this is minimum investment, this is more demonstration than it is industrialization. So, I would think at this moment, the whole industry would agree with what I said which is in the best case CIS prototyping beyond 2016, serious production beyond 2018.

On these dates, I guess, most suppliers, equipment suppliers are working and discussing with the largest customers to confirm that there is an insertion point and obviously to share the economics. This is not yet, we haven’t yet reached an agreement on that. The whole industry hasn’t yet reached to an agreement on that. But we’re very, and we’d say, open book on this question. And we expect that it would be conversions in due time.

Peter Wennink

Okay, thank you Eric. On the question on the, qualitative statement on the order intake on Q4 and question on whether there is any seasonality there. Now, we did mention on previous occasions that what we normally see is indeed I think Q4, you know, customer budgets are actually set. And the whole and purchase agreements are signed with us. And that means that the purchasing people then have a proxy to start negotiating and placing the orders.

But I want to make it quite clear that what I said also in the opening statement that we are of course focusing on the next generation technology upgrades for next year, which customers have taken, you know, their decisions on. And as just what we see as a start of placing the orders for that, you know, next generation technology upgrade. And having said that that it is logical that we would see that that’s a next generation upgrade order coming in Q4. But it’s hard to imagine that it would stop in Q4 because that would mean customers would place everything that they need for 2012 in only three months time, which they won’t.

So, I don’t think there is any seasonal trend. It is just a method at that time of the year as a logical time for our customers to actually start thinking and acting on what they need, you know, the next year.

Operator

The next question comes from Mr. Simon Schäfer. Please state your company name followed by your question.

Simon Schäfer – Goldman Sachs

Yes, thanks so much. It’s Goldman Sachs. My first question was also on EUV actually. I think I understood Eric that as you said before, the second half of 2012 would be revenue recognition for the initial 3300 set. But when would that revenue actually show up in orders. Would that be a Q2 issue when that you would actually be able to print that in your order book?

Eric Meurice

Peter.

Peter Wennink

Sorry, could you?

Simon Schäfer – Goldman Sachs

Revenue recognition booking?

Eric Meurice

EUV bookings, the timing.

Peter Wennink

The timing of the EUV bookings for the next generation for yes. No, it’s clear that, you know, timing of those bookings we would indeed expect when the EUV program delivers the results that we are currently planning for. Like we said, we will see the upgrade to the mid-teens as we have said that we’ll actually drive clearly the needs for our customers to take into account. The fact that order lead times for EUV tools are beyond ‘12, you know, months they are actually quite a bit longer.

So, that means that bookings for the 3300s beyond what we currently see need to come in clearly I would say in the first half of next year. Taking into account that the first 10 tools have already been ordered. And we have about the capacity to do 18 units until the end of 2013 that’s about one per month starting from July 2012 onwards. So, that means that there are only a few systems that we can book until the end of 2013. And we would expect that those orders would have to come in the first half of 2012.

Simon Schäfer – Goldman Sachs

Got it. But just to clarify, a bit – I know the initial 10 orders that have already been placed. But you haven’t necessarily printed those in your order intake. Is that right for the 3300?

Peter Wennink That’s correct. I mean, like we said, we actually have viewed the EUV systems as the R&D systems for the 3100 series. And clearly, these are you know, the production series. So, this would be a time that we are considering internally to say when are we going to show them in the backlog? Everybody knows, it’s about EUR70 million EUR75 million average, and we have 10 units or EUR700 million to EUR75 million of EUV orders that we currently have that is not reflected in the backlog yet.

Where we anticipate that we will start shipping in the third quarter of next year with, you could say, with a speed of 1-2 per, you know, month going forward for the next 18 months. So, this is clearly a time when we need to start considering, taking the mean to the regular backlog. Like I said earlier, there are orders that we take for EUV, they have somewhat longer time because the order lead time that we actually need for a total chain for our supply chain and our own bill time goes beyond 12 months. So, where we are set, we want to show the order backlog actually reflecting what we think we can sell over the next 12 months or we need to decide in what is the right moment to starting putting the EUV orders in, but it won’t be far away.

Simon Schäfer – Goldman Sachs

Got it, thank you very much. And my second question would be, just on the balance sheet. You know, in share buyback program this up-cycle but still sitting there with EUR2.1 billion net cash. For the first, you know, as usual at this point in the cycle you’ve actually seen of course an increased amount of M&A overall. And I wonder whether you can maybe just update us as to how you are thinking about potential opportunities. Perhaps venturing out of our core expertise areas of lithography and historically that’s something you’ve contemplated in the past. And then perhaps, you know, overtime sort of abandon again. But maybe you could update us on your latest thoughts? Thank you.

Peter Wennink

Yeah, I think in the EUR2.8 billion cash balance in the context of M&A you can rest assure we have no specific plans there. So, that means that’s taking into account on the EUR2.8 billion we have about EUR800 million of prepayments on EUV for which clearly we still need to invest. We are actually starting to invest in work in process we will have a receivable balance sheet that we need to finance. So, the 2.8, that’s about EUR800 million of currently prepayments in there. But clearly, you know, we will, given that the 2012 profitability profile, we will generate cash.

So, we have said clearly that about our cash balances we will keep returning cash back to the shareholders. And which would be in the form of dividends and of share buybacks. And I think that is the most obvious use of the excess cash balance that we currently see.

Simon Schäfer – Goldman Sachs

Thanks Peter, thank you.

Operator

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

Janardan Menon – Liberum Capital

Hi, it’s Janardan from Liberum Capital. Actually, it’s another question on EUV if I might. You said that you’re getting a new light source which will take you up to the mid-teens of wafer throughput in Q4. I was just wondering going forward from there up to about 50 to 60 wafers per hour by the second half of next year. And then to 125 wafers per hour in second half of 2013. What are the milestones and what are the expectations you have from light source suppliers or any other and how do you expect to ramp that up? If you could give a little bit of color to give us a feel on how that’s going to happen.

And just to clarify, if a leading DRAM manufacturer he says is going to go to say, to a low 20 nanometer production on DRAM by the second half of next year. I was a bit confused. Do you think that he will use EUV for at least two layers or is EUV for commercial production clearly going to be pushed into 2013?

Eric Meurice

Okay. So, on the reason why we feel now that more comfortable about the roadmap is and the understanding of what we need to do is, as we have identified that there are a number of things that are difficult to do and a number of things which are not that difficult to do. They are more deterministic, they just take time. So, today, you see us showing good body language because there are two or three things of difficulty that we have to prove by December. They are in, I would say, the critical areas of generation of the radiation. But then, there is a lot of activities which is just multiplying. I would say the results of this radiation by improving effectiveness of the delivery of this radiation to the wafer.

And this is, I would say, just work. So, we see a step by step approach by which in the end of December as we said we will get between say 15, 20 wafers per hour proven. And then from there, we will have those multipliers coming in on a regular basis in 2012. So that we achieve what I just said, the 60 wafers per hour by mid-year and then, going further with even more efficiency move towards the 120-125 wafers per hour. So, in other terms, the separation now of complex stuff from less complex things is giving us this confidence level that we are now much more under control of the development of these efforts.

Regarding market timing, you know, the machines that are used today the 3100s will be used only for recipe. And that is starting, in fact started this year. And we’ll continue until the end of 2012. And the 3300s are the preproduction machines that could be used on some layers. So, you could see them being delivered in mid-2012 on and starting to ramp production of some layers in first half of 2013.

Peter Wennink

Janardan, on the slide 22, we have a few of the examples mentioned which gives us the higher confidence level that you noticed. Now, we’re not going to go into the technical detail because it is clear that some of it also has some comparative elements there. But it gives you an indication that we do clearly know where we need to look for that increase, you know, productivity and what the reason is for that higher confidence.

Janardan Menon – Liberum Capital

Okay. And a small follow-up if I may. I know, you’re not saying anything at all about 2012 today. But which segments would you be more confident about for next year and where would you be less confident. I mean, would your confidence be higher on the NAND and the foundry side and less on the DRAM, would that be a characterization of how you would look at 2012?

Eric Meurice

Yeah, definitively NAND is a good business for everybody. And as you know, there is more and more excitement about the product, NAND products and, the creation of more opportunity of NAND in PCs as well as in tablets. So, as you know, NAND was driven by tablets and mobile phone. Tomorrow it will be driven by mobile phone again by tablet but also by PCs, where this is easy and more effective user facilities. So, indeed NAND is going to be a growth business I would say in 2012.

DRAM wasn’t so bad today in 2011. We think there is an opportunity to create a good litho business, not so much because of the wafer starts. It is possible that the wafer starts in 2012 would not be so good. But the technology is a big user of lithography. So, we could expect a growth of DRAM from a fairly low base 2011. Foundry is in fact the key segment which will make 2012 a good year or an average year. And this is what we have a bit more difficulty to cope.

Janardan Menon – Liberum Capital

Okay. Thank you very much.

Operator

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

Mehdi Hosseini – Susquehanna International

Yes, thank you. This is Mehdi Hosseini from Susquehanna International. Eric, going back to late ‘08, ‘09, it seems to me that your customers cut through the maintenance level and everything just froze. And this time around, it’s quite different than back then. So, I mean, we’re not in a safe environment as 2008, is that correct or do you have any thoughts? And I have a follow-up.

Eric Meurice

I cannot even – I didn’t even think we are going to be questioned. Yes, indeed we have in 2008/2009 a freeze of six months because the world was stunned by the banking crises. Remember this was the time when people thought that the whole economy would implode. And this created the sense of – we don’t need to take a long-term decision now. And we can delay decision. So it was not a rational view of life, it was an absolute life stop until things become normal.

So, today, indeed we have a crisis, which is not yet obviously consumption driven. It’s a crisis on our confidence due to the too high leverage and of the world in general, deficits, management, foreign debt credibility etcetera. But we do not have yet a feeling at all at our customer that there is a freeze of decision. Indeed this is why Peter mentioned that we expect more bookings in Q4. Because in fact the customers are saying, well, at least we can take the decisions which are the obvious decisions, which are the technology decisions. And we need these numbers. And then from there, we gain time before we can take the decisions on the capacity. So, we are in a completely different environment at this moment.

Mehdi Hosseini – Susquehanna International

Sure. And then, just a follow-up rather more like a clarification. When we look into the first half of next year as bookings for 3300 come in, and assuming like a worst case scenario your customers, would they still be focused on R&D and the non-EUV orders would be more maintenance CapEx. Then ASML could see an order environment that could be quite different than the rest of the equivalent industry because of the 3300. And I’m not asking for guidance on Q1 or Q2 of next, it’s just qualitatively.

Eric Meurice

Indeed, we are proud of our model which survives from the increase of lithography intensity. And EUV is going to be a key factor to this lithography intensity. So, no matter what the macroeconomic picture is, we have an underlying rich opportunity here. And EUV again will underline that. And as a measure of this performance, you can see 2011, 2011 has been already shaken since April, as we all know. Since April, the market has started to be concerned about the total need for semiconductors. But 2011 for us will one, be a record year. And two, even our guidance early into the year has not really vivid. We are able to make that number. So the litho intensity comes no matter what is sustaining the business model indeed.

Peter Wennink

And I would like to add that Mehdi, that you might remember what I said earlier that four let’s say leading edge, double patterning NXTs which are now coming 200 wafers per hour. Lead times are as six to maximum eight months, but I would say six. While the EUV 3300 has significantly higher lead time, it could be a year longer. So, that you could say, if you look at the order time when do they need to place the orders and when would they need to get the shipment of the tool, then the order placement could be about the same time. While the shipment of that R&D tool, if it relates to EUV it could be about 12 months later. So, yeah, that could indeed happen.

Mehdi Hosseini – Susquehanna International

Great. That’s very helpful, thank you.

Operator

The next question comes from Mr. Satya Kumar. Please state your company name followed by your question.

Satya Kumar – Credit Suisse

Yeah, hi, thanks, Credit Suisse. Eric, I was wondering if the order levels stay at sort of the 600ish level than Q4. Do you have a sense as to what type of bit supply growth we could see from the memory industry for DRAM and NAND in 2012?

Eric Meurice

What sort of split you mean?

Satya Kumar – Credit Suisse

No, no, what sort of bit supply growth?

Peter Wennink

Based on the 600, let’s say, if it’s 600, he says that’s what 600 plus 150 that’s what you mean. It’s the 750 maintenance level. And say, what would that support, that’s what you’re asking. Is it correct?

Satya Kumar – Credit Suisse

Right, yeah.

Eric Meurice

You mean, in terms of mix of DRAM, NAND and Logic?

Satya Kumar – Credit Suisse

What kind of bit supply growth?

Eric Meurice

Sorry, bits, sorry I could not. I cannot answer that question now you’re saying. So, if we go into a low only technology transition activity which is this famous 750 or whether a quarter what is a bit level by segment? Unfortunately I don’t remember this. And if nobody on the phone does and I decide we should have that discussion with you as a follow-up.

Peter Wennink

Satya, we do have that information. But I don’t want to start guessing or give you the wrong number. You know, I just made a note to ask the reservations people Craig and Frankie, they will have that data.

Satya Kumar – Credit Suisse

Okay. A couple of follow-ups, one on the foundry side, what type of utilization rates are you seeing on your emerging machines in the foundry segment?

Eric Meurice

We’ve seen in the foundry segment a reduction in the third quarter. And we’ve seen a pick up in the last month. But all this is still at fairly good level. Remember that fairly good level in foundry means it’s still low because you have such a difficulty to process those new nodes. That the machines are running but of course the numbers of wafers and dyes that gets out of it is not huge again, due to these complexities. So, you’re talking about sort of down, I would say starting from June, July, August and then up, September and until now from numbers which are good but which shows that technologically why these processes are difficult.

Satya Kumar – Credit Suisse

Okay, that’s really useful. And lastly on the OpEx front, the fact, that you’ve not really changed your OpEx in Q4, on a couple of quarter of back to back low orders. Is that a sign that perhaps you’re seeing a pipeline of orders that might improve a bit more meaningfully in the first half of next year? And if the orders stay at the current second half levels, and you feel that might be the case into Q1, would you make a decision to perhaps throttle back on the OpEx at some point in Q4?

Peter Wennink

Let me answer that question. Yeah, I think OpEx is not and it’s never proxy for us on where we think the business is going. It’s just the other way around where we see the business is going in a certain direction, we will adjust the OpEx. Like Eric said earlier, we have a flexibility to take close to 20% of our total cost base which includes fixed costs down within three to six months. So, indeed, you know, we have still ample time to review what’s going to happen next year in order to be able to bring the cost levels down. So, OpEx is not the proxy I would say orders and business expectations are.

Satya Kumar – Credit Suisse

Okay, thank you.

Operator

The next question comes from Jagadish Iyer. Please state your company name followed by your question.

Jagadish Iyer – Piper Jaffrey

Thanks, Piper Jaffray. Two questions, first Peter, where do you think backlog could potentially draft please.

Peter Wennink

Well, you know, the issue with backlog is that’s from where we currently is the difference between what we will book and what we will ship. And you know, since it is difficult for us to give you an exact statement of what we will book, it’s difficult to give you an exact statement of where we think the backlog will go. So, it’s a kind of a function of the fact that one of the two elements of that equation, we don’t know. So, that’s I think is a very difficult question to answer.

Jagadish Iyer – Piper Jaffray

Okay. Second one, on the foundry side, Eric, you had mentioned that it is kind of a wildcard for 2012. So, what needs to happen for resurgence in orders is it going to be demand or is it the yield issues that these foundries have to overcome before they start to place orders? Thank you.

Eric Meurice

I think it is the demand on new nodes. The foundries are now seeing a new business model I would say which is this transition node to node, which would happen not every two years but every 18 months. And there are some planning that says the ramp itself within this period when the node happens, it happens earlier 18 months. But in addition the volume seems to be going faster into this business. This model is in fact what we all want to be proven. If indeed, the customers see an application push to do these transition faster and go and ramp immediately in production.

Then we are going to see a sustained logic business and the foundry business. And if it is sustained 2012, is in fact, and indeed a very good year because as I said at the beginning, DRAM and NAND will probably be higher in 2012. Therefore Logic, if it would be sustained, we’ll make 2012 a good year. But again, this is a theoretical question. We have to wait to see whether the demand factor for these new nodes justifies that.

Jagadish Iyer – Piper Jaffray

Thank you.

Operator

The next question comes from Mr. Ben Pang. Please state your company name followed by your question.

Ben Pang – Caris & Company

Caris & Company, thank you for taking my question. First, on 2011, your, you know, forecast has held up pretty well versus the rest of the industries. Do you think there is any over capacity of lithography tools in the DRAM space right now?

Eric Meurice

In the DRAM space, no, not at all – should say, should be cautious, not in the critical layer arena. Because as we said the ramping of the new nodes in DRAM are complicated, they require these new machines. So, we’re shipping these new machines. We know, I mean, there are no other machines on the install base that are capable of doing this. So, therefore on these critical layers, we have no concern at all that there is excess capacity. Of course you could always have excess capacity on some non-critical layers on the installed based. But I would say this is a bit irrelevant to sell, these are old machinery and things. Although I even think the old machineries are transferred to NAND.

Ben Pang – Caris & Company

Okay. And my follow-up in regards to the EUV program and the roadmap for throughput that you commented on, are those going to be, you know, completely step functions, in other words 60 wafers and then the next release goes directly to the 125?

Eric Meurice

No, not at all, not at all. In fact, this is one of the confusion that we’ll all have you’ll all have in the price and different communications. There are so many factors that yield throughput that you can this time have on one experiment achieving 60 wafers per hour. And another, you’re not, you had half this. And another experiment you are you know a bit better. So, you are going to have a, I would say a continuous gradual set of positive data coming in towards to 60 and in fact real number 125 I want to give you the truth. I think, we calculated number 69 wafers per hour and then we’ll go from there. So, you will see that every quarter. I think we will be able to report a gradual improvement towards those targets and then beyond.

Ben Pang – Caris & Company

That’s very helpful, thank you very much.

Operator

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

Sandeep Deshpande – JP Morgan

Yeah, hi. Thanks for the question, just one quick question on your customers, Peter. I mean, talking about your customers, I mean, how do you see them reacting if things, I mean, when it’ll get even worse in the next couple of months. I mean, how they talk to you upon what they think in terms of 2008 and now. Are they saying the things are well, I mean, you highlighted the financial difference between the situations in 2008. But I mean, I just want to understand how you’re customers are talking in terms of what they are talking to you at this point?

Peter Wennink

Well, I think I can repeat what Eric said earlier. The situation between now and 2008 and 2009 is different, it’s quite different. In 2008 and 2009, we were all surprise taken by a surprise. And there was an absolute freeze for at least six, you know, months where doing nothing was the best option. That’s absolutely not the case today. Customers have very clear cost reduction roadmaps and the technology node transitions are also very clearly, actually quite strong in every segment.

So, they talk to us about the latter, they talk about what they need to do to get to the next nodes to get the cost down. And they seem all to be quite firm on that particular transition. And that of course, you know, against the background that we are currently not in a situation whereby we have to, you know, doubt the viability of the whole financial industry like we did in the first few months of 2009. Despite the fact that clearly we have issues and that – I think the overall uncertainty. But I don’t think there is, that the customers at the same. As a matter of fact, they show a high level of confidence in what absolutely we need to do.

Sandeep Deshpande – JP Morgan

And then, a follow-up Eric. I mean, in terms of I mean, you know, there have been some investors worried about, you know, the foundry spending, well, foundry spending in 2011 is the highest it has been for 10 years. I mean, is it because, I mean, there is a change in capital intensity in these new generation processes, 28 nanometers. Or is there a real, I mean, underlying, you’ve said previously that there is no underlying issue. So, are you suggesting, I mean, clear changes in capital intensity in the business?

Eric Meurice

Yeah, absolutely, absolutely. And so, first of all there was a sort of catch. Clearly the foundry business has under invested for a period of time. So, 2011 includes a bit of a catch up. Secondly, as I said, the Logic business seems to have accelerated from the two year to an 18 months transition, so you get that to be done. The third aspect is that you are now getting to nodes which have significant amount of critical layer increase. So, for instance, when you are in the DRAM business, the next node would force you to do say, two to three layers which are very, very complicated, which are, what you call the EUV critical. And these are the layers which drive in fact the buy of new machines.

Well, in the Logic arena, when you go to 22-nanometer, from 22 days 28, so you get to 22, 20, 14 then you have the numbers of critical layers. You’re talking about 10, 15, so you’re five times bigger than memories. So, these transitions are hugely additional incentives. And that helps us consider that the foundry could in fact become foundries. And Logic in general would become a continuous engine in the next few years. But again, there will be digestion as we go on some period, six months to one year indeed. But the secular growth on foundry is probably significant.

Sandeep Deshpande – JP Morgan

Yes.

Operator

Thank you very much.

Craig DeYoung

Ladies and gentlemen, we’re coming to very near our end time here for the call. But I’d like to suggest, we squeeze in one more question. Operator, I’ll, if you didn’t get a chance to ask a question on the call, please feel free to give Investor Relations Department who’s available for a lot of the rest of the day here. Call and we’ll attempt to get to back to you as soon as physically possible.

So, operator, with that, may we have the last question please.

Operator

Of course, Mr. DeYoung. The last question comes from Didier Scemama. Please state your company name followed by your question.

Didier Scemama – RBS

It’s RBS. Many thanks for taking my question. Actually, just coming back to EUV bookings, hello, Peter, can you be maybe a bit more specific. Is it possible that to tell us whether if you’re going to book that in Q1 or Q2? And I’ve got a very quick follow-up.

Peter Wennink

We have a very quick answer, it’s no. We cannot be very specific. But we will be in that timeframe. And you’re follow-up was?

Didier Scemama – RBS

My follow-up was, to the extent that you’re going to start to see critical layers moving to EUV in addition to double patterning and immersion. And that’s more and more of the end markets are adopting those technologies. Would it be reasonable to assume that your longer term market share could actually go even slightly above 80%?

Eric Meurice

We think that we came from a natural 70% market share when I tried to explain what would be the proper economic decisions of the customers between critical and non-critical. We think that we’re now 80% or 75% to 80% could become the next natural in what you just said. You know, in terms that company like ours if we’re ahead of our competition would benefit of critical layers. But the critical layers as I explained to Sandeep, we present a bigger share. So, indeed, so we go from 70 to 80ish. But I would not venture that this would go above 80. I think we mathematically saw our natural market share to 75 and 80 is probably correct at this moment.

Didier Scemama – RBS

Great, thanks.

Eric Meurice

Thanks.

Craig DeYoung

All right, thanks Didier. So, now on behalf of ASML’s Board of Management I would like to thank you all for joining in the call today. And operator if you could formally conclude the call, I would appreciate it. Thank you very much.

Operator

Of course, Mr. DeYoung. Ladies and gentlemen this will conclude the ASML 2011 third quarter results conference call. Thank you for participating. You may now disconnect. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!