ASML Holding's Management Presents at Bank of America Merrill Lynch 2012 Global Technology Conference (Transcript)

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ASML Holding N.V. (NASDAQ:ASML)

Bank of America Merrill Lynch 2012 Global Technology Conference Call

May 8 2012 6:30 pm ET

Executives

Peter Wennink – Executive Vice President and Chief Financial Officer

Analysts

Krish Sankar – Bank of America/Merrill Lynch

Krish Sankar – Bank of America/Merrill Lynch

Sankar from BofA/Merrill Lynch. I’m the analyst who covers ASML, which is the next company presenting. They are one of the leaders in lithography for semiconductors industry and we have Pete converted as the IR, Manager who is here to give a short presentation. Then we are going to open it up for Q&A. And Pete has been here around for a while and he is very knowledgeable on the industry, so feel free to ask difficult questions.

Peter Wennink

Thank you, Krish. So, I’m going to go over a few things today briefly over our Q1 results, a bit on the market to talk about the market environment and our technology strategy and then we’ll go for some Q&A there.

In terms of business summary, so our Q1 results as you probably know from our call, I’ll go through these quickly. We did about $1.2 billion in revenue of which about $1 billion was system sales, gross margins on the order of little over 41%; that was on our total business. There was one EUV tool recognition that brought our gross margins down a little. Excluding EUV we are at little over 43%, which is about where we should be for our $1.2 billion revenue. Our net bookings was about $865 million and our backlog is about $1.6 billion.

In terms of revenues, they are out of the blocks, we met our expectations is about $1.2 billion and we’ve guided similar results for Q2 and probably carrying into Q3. In terms of our sales, the breakdown was heavily immersion and about 60% foundry, which is indicative of the strong growth in 28 nanometer Foundry at this point, so mostly driven by Foundry and IDM.

In terms of bookings, our bookings are, again 74% of the bookings business was Foundry, so very strong Foundry business. Backlog again heavily weighted with Foundry at 53%, good mix of IDM there at 24%, but heavily weighted with ArF Immersion, but a good amount of KrF, which is indicative of capacity adds. The combination of ArF Immersion and KrF being capacity added in the foundry and a good spread across all regions Taiwan, U.S. and Korea.

In terms of cash return, since the quarter was the approval by our Board for 0.46 Euro cents per share dividend, so we grew that somewhat this year. In terms of the buyback that we announced last year, 74% of that $1.1 billion buyback has been executed already. And again our cash return policy saved the same in terms of any cash generated over the $1.5 billion to $2 billion will be returned whether it be through dividend and share buybacks or whatever else we need to do to return cash.

In terms of our history, over the past six years we’ve returned about $3.5 billion in cash, including both share buyback and dividend about 31% of our outstanding shares. And for the first time last year ASML became the number one equipment supplier in terms of revenue and market capitalization. In terms of market, as I said before, our litho sales was driven mainly by Logic and Foundry and IDM, which represented a majority of the sales last quarter and going through the next two quarters. Heavy structural demand for 28 nanometer and continuing into some early demand and buys for 20 nanometer late this year.

In terms of memory, we expect to see technology demand to come back towards the end of the year in sub-20 nanometer NAND and a little bit in DRAM, but again DRAM we expect to be flat. And our sales include both to TWINSCAN and Immersion and KrF tools.

In terms of our technology strategy, we are continuing down our dual product strategy with Immersion and EUV beginning to (Inaudible) in its introduction. In terms of TWINSCAN, we continue to extend the capability of that tool as needed for double patterning and multiple patterning requirements for all applications and we are preparing EUV for volume production.

In terms of the expendability of the Immersion tools, right now we’ve upgraded our NXT platform that is due 230 wafers per hour and added some overlay improvements and you can see we’re still doing extensions of that up to 250 wafers per hour with an improved overlay required for the multi-pattering requirements of our customers. So we continue to invest in immersion to maintain our product leadership there. We are doing this about a 140 little over a 140 of these tools in the field and production are ready.

This chart is a little bit of an eye chart, but what I did want to indicate is that our customers do have roadmaps that go down below some 10 nanometer shrink, whether it’d be through different 3D technologies, but their roadmap is going down below 10 nanometers, so we have a road map that meets the demands of our customers. Then it’s a combination of expanding sale of immersion and bringing in EUV into production. We can see EUV insertion will vary across different customers, starting with DRAM as they have a technology driver for a few layers that they probably need in the low 2x nodes, the 19 nanometer node that’d be followed by the foundry section that’s looking to bring in around the 14 nanometer node, and there is the combination of a technology and an economic driver, and then the last adopt will be NAND, which will be more of an economic driver when throughput of and the productivity of EUV is acceptable to them and brings the cost lower than immersion and (inaudible) transition.

So as shrink continues we are expanding our immersion technology this is just an example of logic to show you, if you look at this chart you will see the 32 slide, 28 nanometer node there is about 37 layers and as you go to 20 nanometers the progression is a normal progression and the increase of layers on the order of 8% to 10% increase 8% in this case, so layers go to about 40 litho layers. In terms of exposures about logic only had across the average processes of the foundries, there is only about one double exposure layer there.

Going to 20, it goes to multiple exposure levels about 10 double exposures and one single exposures. So the exposures grow by about 37%, which is driving a strong need for immersion – the immersion tool, but for 45,000 wafer start fab in this case for 28 is about 10 tools and that grows anywhere from 16 to 19 tools depending on your process going into 20 nanometers. So strong structural driver and growth in immersion lithography.

On the other had EUV simplifies the process and reduces the costs cycle time and number of steps. This chart happens to show in the vertical access to process steps, but we’ve also highlighted some of the costs and we compare EUV versus the different double patterning technologies for the same process node, and you can see with EUV that the process steps come down anywhere from 2X to 5X depending upon the double patterning process you’re at and cost can be anywhere to 50% to half of what they would be for double patterning.

In terms of EUV process, we shipped all six of our 3100 Phase III development tools out to the field. They are running wafers. They are exposed about I think about 9,000 wafers at this point. So they are out and doing process development at the various customers and the various applications. Either just some nice photos of some of the imaging, we are getting and you can see down a 16 nanometer features on different devices.

In terms of highlights on the status of EUV, our source supplier, which obviously is a big driver for the throughput and getting acceptance of EUV and insertion have demonstrated 30 watt laser power at a high duty cycle running through extended period of time, so basically double the power that you see on tool that are in the field right now. And in addition they’ve also shown progress and demonstrated powers up to 50 watts successfully with their new (inaudible) technology, so again another milestone that shows the power increases it’s on its way for EUV.

And EUV is extendable I showed you that roadmap of our customers down to sub 10 nanometers and you have a roadmap with EUV that through optics extensions and [OpEx] elimination, that will take us down to seven nanometers and we’ve been looking beyond seven nanometers with all the developments.

So final pass on the EUV as the first shipment of the 3300 which is our next generation manufacturing tool for EUV will come out at the end of this year. We tend to start shipping in Q4, with the remaining of the tools that we have on order at this point, shipping through the middle of 2013. Program has plans all in placing to find to achieve 60 wafer per hour that we have talked about sometime in the middle segment after 2012. And we are currently in negotiations for the next batch of orders for 1100. So that really shows the confidence our customers are gaining in EUV that there is about 11 tools on order already and then negotiating follow on orders. We expect introduction of EUV. They come in for few critical layers as DRAM at the low 2x node in 2013, 2014 timeframe and beyond.

In terms of outlook again just to reiterate next quarter we expect sales around $1.2 billion. Gross margin is back at the 43% that they should be for the base business. We will continue to spend on R&D at rate of a $145 million, which we’ve been doing in the past. And continue to spend on both EUV and immersion and we expect to see the similar type levels through Q3.

Question-and-Answer session

Krish Sankar – Bank of America/Merrill Lynch

Thanks Steve. Let me start with few questions. One of the things we’ve seen is on the foundry side especially, it seems the sentiment in the back half of last year was more like interest longer turn to a very bigger raise of et cetera. And the main push for EUV came from the DRAM drives. It seems like in the last few months, the sentiment in the foundry side have changed, bring more to the EUV. Can you talk about what’s happening there and do you think it’s more of push pedals from in the foundry, there is more like come from your customers have look like.

Peter Wennink

So we are obviously seeing a push for EUV from DRAM and as you said with the foundries. And with the foundries what we are seeing is at 14 nanometer node, their basic we say we need to get EUV in at that point. And that being driven by that showed – they showed the multi-patterning that comes in a 20 that just get even worse at 14 nanometers. And the number of masks and the design restrictions that are being put on the masks and the design restrictions that puts on their customers when they lay out there – their product design is just becoming expensive, complex and prohibited.

So we are going to get a push from foundry. We are going to push from the foundry customer. The customers of the foundries basically saying please get EUV and so we don’t have to deal with breaking up a pattern into four by different patterns for one layer. So there is definitely that push. And in terms of wafer size, there is a industry suppose in my asses I think it was last year where lot of the industry executives got up and the customers are basically saying EUV before 450 and that’s what we are hearing and that’s where we are driving to.

Unidentified Analyst

And then in terms of the foundry, the slide you showed NXT (inaudible) going to 20 nanometer and most like 10 immersion tools going to 19. At 20 nanometer, I think, I believe some of them are doing a one double patterns everything was single pattering but one set of double.

Peter Wennink

Right on average. There is our average.

Unidentified Analyst

(Inaudible) and then that goes into mostly double in multiple of 20 nanometer.

Peter Wennink

Yeah, you pick up like (inaudible) 10 multiple patterning and one that’s even triple patterning.

Unidentified Analyst

So my question is does – do every foundry at 28 hours maybe one or two step of double patterning, which goes into multiple at 20 nanometer or one foundry is actually more double patterning on the rest of the single patterning. Well, I am going ask is the intensity similar for all foundries then we migrate unlike some of them have more restrictive designs and then more intense.

Peter Wennink

Obviously there is some variation across the customers, but for the most part, they are all going to see the intensity of double patterning going up. That’s right I said it can be anywhere from 16 to 19 tools depending upon the customer book, in the most part they are seeing, all of them mostly significant multiple patterning steps with the critical layers.

Unidentified Analyst

And one of the questions I had when you look – when you said that you guys are – you speak to your customers. Customers are fabulous guys and you have on the one end you have guys like Qualcomm, having issues at 28 nanometer, but historically through the SPGA guys, who actually been the leading edge of technology like either of the 20 nanometer like other ones who drive it versus Qualcomm, why do you think like your fabulous customers like Qualcomm is talking about 28 and trying to leapfrog SPGA guys?

Peter Wennink

I’m not sure that I can talk to the specifics of the different devices. But one other things we have noticed in our analysis when we look at the market is that, if you look at the various devices that 40-nanometer, the die size is continue to grow, which is kind of a little bit kind of intuitive and going to 28-nanometers let the die sizes come back down, which is what the one of the things they’re looking to do. So I think you see some people there looking to get that die size break down going to the 28-nanometer earlier in our business.

Unidentified Analyst

And so you think that trend will continue into 20, where the die size comes down, or what do you guys using your modeling for these tool sets?

Peter Wennink

I don’t know at this point, I’d have to look at that from that point.

Unidentified Analyst

So could you say that EBITDA was a single source supplier for the EUV…?

Peter Wennink

For the source?

Unidentified Analyst

Yeah. Source, yeah.

Peter Wennink

No, our plan and our customers plan and desire to have multiple players and probably room for two. At this point there is three that are working in the technology, when we buying those Cymer, Giga and Ushio stream. We continue to work with all three on our 3,100 there both, but Cymer and Ushio extreme sources out there in both operating about the same level and they’re both making improvements in power level.

For the next set of tools that we only have orders for. We are going with the one supplier at this point, more. They’re are more industrial ready at this point with service in place, service people in place, then it out source. So that’s really only driver behind that and what we needed in the timeframe, we needed for those tool. But we’re still planning and looking at multiple products resource.

Unidentified Analyst

And second part of the question, given that you are work closely with Cymer for example, clearly you have some IP rights on the lights, is that going limit your competition from getting access to the lights as I guess?

Peter Wennink

Well, each of them have kind of their own IP in different areas. Ushio’s got some interesting IP in other parts of the source as well, so each kind of have their own expertise that they bring to it. At this point, we’re just trying to get the best source we can to bring it to manufacturing readiness and then we will go from there.

Unidentified Analyst

Follow-up on that question, I understand your need for having more than one vendor for the light source, because that gives you obviously more pricing leverage and more choices. I’m still confused why would your customers want multiple vendor for the light source, it appears that there is only one vendor for the EUV product itself. I mean why would you really worry about the light source, it is a much smaller ticket item than the EUV system itself?

Peter Wennink

Not only do you have the source itself, but consumable and support client for those sources as well. So that’s something we don’t supply in prices. It’s the source suppliers they are supplying prices, so there is always the desire to have to two venders for that.

Unidentified Analyst

So for the, like all the tier 1, tier 2 all kind of semiconductor manufactures today are used to the Cymer or the Gigaphoton as a source supplier. Do you think that would be really open to ensure the new entrants because they really don’t have the track record with them?

Peter Wennink

I think they would be open obviously to second source supplier. They have to prove out their capability in to do that just as Gigaphoton have to prove out their capability in the later sources as well.

Unidentified Analyst

And then in terms of the IP, obviously each of them has a different IP you said relating to the first supplier, but you guys are definitely helping any other source price. Let’s assume the scenario where you actually work with time as we get (inaudible) in a great product for EUV. And the guys who uses the laser process obviously here is Gigaphoton. Is that IP transformable to Gigaphoton or is it more, because since it primary (inaudible) I mean I don’t understand the complexity because of the IP you guys can transfer and finally you can’t?

Peter Wennink

Yeah, I don’t know the answer to that at this point. Like I said in terms of the IP and what we’re putting into the various suppliers, who owned it and where it goes it’s all in the negotiation at this point. The drive for us is really to get the productivity where it needs to be and various negotiations going on about that, but I generally comment on where it is and where it’s going.

Unidentified Analyst

Thanks. A couple of questions, maybe financial nature. First of all, when do you see EUV ramping and see more meaningful volumes in the second half of next year? Do you think that at that point it will still be negative for gross margins or do you think that you will be already back to corporate gross margin? And the second question is, if you were to look at the sort of bad case, if we have to have a recession globally, another financial crisis, can you just remind us how much of your OpEx is sort of [variable EG] using contractors also into cost of sales so that we can get the idea of how effect you could cost? Thank you.

Peter Wennink

Right. So I’ll touch the first part on EUV first. So we shipped the six 3100s and those are basically shared cost between us and our customers. So zero gross margin and that obviously brought our Q1 down a bit from 43.3% to just under 43%. Going forward, the initial 3100s we see being mid-to-high 20s gross margin tools. So they will have some effect, but at a much higher ASP as well.

And typically for a leading edge product like that it takes about 18 months to two years to bring those tools up to the corporate level gross margins in the 45% range. So under the normal demand that we are looking at, the overall demand we think will be there. That’s about the time frame to bring those back.

One of the things, in the last downturn we were able to do was right size the company in terms of OpEx and R&D and SG&A and we do have the ability to flex that on the order. I don’t remember offsetting any order by 20%. But of the things that help us through that downturn was that at least R&D maintaining a healthy level of R&D, so that when you come out of it your technology is there. So a lot of that would come in SG&A and our flexible workforce, which will allow us to bring our cost down, if there were some type of macroeconomic downturn.

Unidentified Analyst

Just to quickly follow-up on that question, so we have a gross margin expense in the mid-to-high 20s to like total cost of levels of two years (inaudible). What is your input to the assumption on the sourced ASP there or is this something you can share?

Peter Wennink

Well, the initial source is we bought at a relatively high price in terms of supporting the development that was needed for those, but you can expect that to come out, come down substantially as we go forward further. We comment on what the price we expect to be in volume, but it will come down substantial.

Unidentified Analyst

Is the 50% has got a fair enough assumption?

Peter Wennink

I don’t want to go too far into what it is, but that’s probably not too far.

Unidentified Analyst

Some specific numerical questions. So as of today most of the NAND makers already implementing one extra NOT and then maybe one [line NOT]. However, I’m not really yet tend to use EUV and the DRAM still one generation or behind the NAND Flash. So my question is, from which node you think the memory makers will start to use EUV in their actual chip production?

Peter Wennink

Okay. So we expect that DRAM, as I said, one of the chart to be in the low-to-high one extra called 1980 nanometer. They’ll bring in now one or two layers, they’re really, and it’s technology driven. They’re basically seeing there’s one or two layers that DRAM needs to bringing it on. So they’re really pushing for it.

On the other hand, the NANDs at the other end of the spectrum, NAND, they are not driven by a patterning need by at this point. They can use double patterning, space or double patterning to do what they need with emergent. For them it will be more of a economic driver for them. So when the EUV gets to a productivity level that makes it economically more beneficial for them to transition to that versus the cost of patterning with double patterning and multiple patterning, triple patterning is when they will bring it in. So, it will be more in the mid-to low teens front NAND. It’s no driven, but it’s more economic driven for them.

Unidentified Analyst

Just quickly, triple patterning where’s it coming for NAND Flash you think?

Peter Wennink

Excuse me?

Unidentified Analyst

Double patterning is already naturally available right, but how about the triple patterning?

Peter Wennink

In NAND?

Unidentified Analyst

Yeah.

Peter Wennink

Well, they’re doing double patterning, space of double patterning. So you can call that I guess triple patterning. If you look at how they do it, there is, (Inaudible) space of it is the patterning step and then there is a deposition in that step. But there is still other patterning that’s on top of that for (inaudible) and other features. So, while at space there really is two to three patterning steps and (inaudible) but it’s two patterning steps, three litho stems in there.

Unidentified Analyst

How about your view on the Logic area of Foundry, it’s like something in systems already saying 28 node and then maybe 20 node I’m not hearing at the any EUV uses?

Peter Wennink

Right, so for the foundries their real push now is 14 nanometer that’s what they’re looking to introduce it and actually say they needed as 14 nanometer level.

Unidentified Analyst

So overall you found the DRAM is around 20 node NAND Flash mid-teen and the Logic to maybe 10, 14 historically, mid-teen?

Peter Wennink

Right.

Unidentified Analyst

Okay, great. Thank you very much.

Krish Sankar – Bank of America/Merrill Lynch

One of the other things I want to find out is that when you look at the EUV, you showed that chart about how the cost comes down for the chip maker, (Inaudible) EUV versus doing multiple patterning? I’m trying to figure out, but it seems like the litho components still goes out within the total frameworks, I wanted to find out. So, the overall cost comes down. Where is the saving coming from, what happens from the [debt guys] to edge guys, the inspection guys, the mask guys, I even like the [EDA] guys.

Peter Wennink

And can I go back with that. Okay, anyway, there was one chart I showed that shows the process steps of EUV debt versus other patterning technologies and what you’ll find is that when we looked at a particular process using a double patterning technique versus EUV is that the EUV or the patterning cost for the double pattering with Immersion where across 38% of the cost per layer.

And when you went to EUV, the cost of that layer came down almost 40%, so a big reduction in cost per layer if you will by going to EUV, but the litho cost as a percentage of that went up to maybe went up to maybe 50%, 60% and that’s driven by the reduction of the other process steps that are required. So, less action, less deposition, less (inaudible). So the total cost per layer goes down and it’s probably mostly at the stake of the deposition and edge. It’s not required when you go back to single patterning.

Krish Sankar – Bank of America/Merrill Lynch

So right now, most of the work you guys are doing with the chip makers clearly understand it is to get EUV up and running, our system is really got a up time and a very high reliability and throughput, are you guys on the hook for any process integration related issues, whether it is like mass inspection or anything else down the road?

Peter Wennink

So if you went back say two years ago, a couple of things that would have been looked at in some of this is easy EUV symposiums when it was a question of, was EUV the next technology? Was mass effectively, mass inspection in addition to source power. And those pretty much are acceptable now, I mean there is, at that time some of that put a program in place to put some funding out there for mass inspection. There is a couple of vendors out there that have tools now that are being used on these development fabs and are meeting the challenge they need for doing a mass inspection and the defectivity levels has come down, you know orders of magnitude are at acceptable levels. So, really right now the thing is getting the productivity up towards economically manufacture the technology.

Unidentified Analyst

Just sort of mentioning for your customer specific name like [Elpida] they are still operating pretty big (inaudible) and RET fab, but it any memory to make us (inaudible), is it to combine the point on U.S. to make or rate [Toshiba fell] (inaudible) I just refer to it, I mean that your machines?

Peter Wennink

Well, I don’t want to comment too much about another customer who is looking at the what I’m going to do with it. From an installed base perspective, your (inaudible) do have some critical level tools of ASML, so the critical level tools are already there, that leave us other vendors for the non-critical level tools, so we have someone that acquires them, use them I don’t know that leave to them.

Unidentified Analyst

Well may be a little bit beyond, how about the using [TM Litho] tool for the NAND Flash, is no need of big adjustment going forward. If (inaudible) capacitor can be converted into the NAND Flash.

Peter Wennink

Right.

Unidentified Analyst

All the equidistant installed or litho tools can be used NAND Flash without any…

Peter Wennink

The immersion litho tools could be used.

Unidentified Analyst

How about the old guideline, KrF line?

Peter Wennink

I can’t really comment on that, I mean it’s good to be the comfort of what the customer wants to do with it. And there you certainly need the KrF and the i-line in the process that’s just a matter of having want to operate. There’s others that do the same thing Toshiba uses, there is other customers that use our critical level tools with competitors of non-critical tools we’re doing (inaudible).

Unidentified Analyst

And my final question is run through the capacity between, I mean along the XT, NXT and then EUV, could it be, how much you will charge versus the…

Peter Wennink

So the ASPs on our immersion tool is now that EUR 40 million and the ASPs on the EUV tool is going up to EUR 65 million, EUR 70 million.

Unidentified Analyst

(Inaudible) EUR 40, actually it should have been much lower than it.

Peter Wennink

HTs

Unidentified Analyst

Yeah, yeah.

Peter Wennink

Normally, yeah, so non critical tools yeah, are less expensive, but nobody really virtually all are, I think it was in fourth quarter where all our immersion sales went to the NXT platform.

Unidentified Analyst

The EUR 40 million, EUR 65 million, the overall ASP will remains stable even the industry is quite less price is critical.

Peter Wennink

For the critical levels. Well, the ASPs goes up, I mean, as they go EUD, the ASPs will go up to EUR 65 million, EUR 70 million.

Unidentified Analyst

Yeah, great. Thank you very much.

Unidentified Analyst

May be I will follow up on business. Yeah, let's be in a scenario there where there is a DRAM fab using XT. How much service can be used in XT and how much -- how little can we run the technology curve. And if they want to NXT, do they have to operate it or do you have to (inaudible) for DRAM, how much local -- amount?

Peter Wennink

All our tools, whether it be XT or NXT or modulate design and upgrade -- a design to be upgradeable. Basically its the same lines on an NXT 19 accessories of the design NXT, its really a matter of the productivity of its own and the overlay capability. So if you have multiple patterning processes that you are got to run for a particular note, its more cost effective with the NXT because its higher productivity and early challenges in this multiple patterning of the NXT, so as people are going to drive down, they are going to go with the NXT, but you can use the XT.

Unidentified Analyst

A cover up question on, one is on the (inaudible) acquisition, you clearly benefited from it in terms of your gross margins. I was just wondering if could elaborate a little bit on the benefits of one from the customer spend point, what did they get out of using Brian conjunction with the NXT machines and going forward using and secondly if you could give us may be a magnitude of the price increasing substrate when you move from say1968 to 3300 that would be my first question, I could (inaudible).

Peter Wennink

Yeah, so the acquisition of Brion obviously was a good work for us, and it got a good traction and good penetration in that customer as a whole holistic lithography suite that Brion as a part. And what we’re finding is becoming more-and-more important to customers as we go into multiple patterning to use the Brion’s operative to optimize the tool for multiple patterning, optimize their designs as they break up and did involve one layer patterning to multiple layers and that’s exactly what the Brion software enables as to help view those in those map designs and optimize our system for doing that. So it’s been a benefit for us. It’s a higher gross margin product and it’s a definite help to the customers and it’s a competitive differentiator for us. It’s actually in the multiple patterning increasing.

Unidentified Analyst

And then I know that Eric and Peter have been always just talking down potential market share expansion from the current levels for this reason. But still when you look the advantage there or to lead that is NAND has got in double patterning and going forward in multiple patterning in EUV? Can you maybe just explain whether you’ve got any pressures from your customers to abandon some of the maybe KrF business or even ArF drive, there is any business left in the ArF drive, so that your market share doesn’t go out structurally about 80%?

Peter Wennink

No, our customers always look for the complete suite of tools from ASML, especially if there an ASML EUV fab already. I mean there is always competition on the different levels from the different – probably different vendors. But the ability to switch vendors are in part is becoming increasingly more difficult. And that’s really driven by matching tools. We know our own tools and coming overlay standpoint, as overlay becomes increasingly more important with multiple patterning.

We can fingerprint one tool to the other tools of a lot of the best overlay performance, so that’s were aligning performance of that tool. So switching vendors and mixing different vendors is becoming increasingly difficult. So there’s always going to be vendors, there are customers out there that buy critical tools from some and non-criticals from others and that probably is hard to change just in their culture. But in general, it’s becoming increasingly difficult to do that.

Unidentified Analyst

And my final question would be, if you look at these five years out or three years out depending on really when EUV is really high volume and you get to your €7.5 billion, €7 billion revenue target. I was just wondering in terms of gross margin and EBIT margins. in the past, the company has talked about gross margins potentially expanding a little bit, partially because depreciation work on a rollover after the expansion of your factory and capacity?

And also on the EBIT line, I remember that company was taking in the past, but maybe R&D and being flat then down in the medium term, because EUV was such a massive R&D investment. and there was no real need to invent in any significant technologies going forward. So is it possible to envisage that EBIT margins would be in the 35% or 40% level ones you reach your €7 billion to €7.5 million revenue line?

Peter Wennink

Yeah. So I mean going forward, we haven’t really set a target of what we think, we can be three or four years out, I mean that’s something we’re in the process of looking at now or even how that can we grow out there. So €7 billion to €7.5 billion based on the target we put out there, but in terms of ASP growth, in terms of R&D spend. We are continuing to spend around the same level of €145 million. And with the dual product strategy that we have, we will continue to invest at those levels as we need to bring EUV to maturity. So, it’s a combination of both immersion and the EUV spend in there.

I mean as I showed you the roadmap we have for immersion that even continues out with products improvement in 2013, we’re still using some R&D. So we will continue to spend at that level. You’ll just probably see, immersion start to come with lowest spend in immersion, but higher spend on EUV to get us through EUV. So I don’t think we have given an outlook of any reduced R&D spending. And in terms of margin, there is always operating margin capability as EUV matures.

Unidentified Analyst

I’ve got a final question, if you have enough time. More of a short-term question, given a very strong Q1 from orders stands for about €65 million. There is really no guidance or quantifiable guidance versus June, but I understand the lumpiness in the customer concentration. Is it part of June that the range would have been like flat plus or minus 20% kind of a range? Give us a fair enough assumption or is it like really up or really down?

Peter Wennink

We’re not going to guide orders going forward is what we expect that we’re going to it. We think it’s better to guide on revenues and like I said probably the number one-on-ones you guys have said and Peter has talked about this a lot on the call. This again the lumpiness of the orders, the timing of when those come versus the end of the quarter and beginning another quarter could drive, what’s the bookings are substantially. So, we’re going to stay away from guiding orders and just guide revenue.

Unidentified Analyst

Got it.

Krish Sankar – Bank of America/Merrill Lynch

Got it, all right. Thank you very much. I really appreciate the information you provided.

Peter Wennink

Thanks.

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