ASML Holding N.V. Q1 2009 Earnings Call Transcript

| About: ASML Holding (ASML)
This article is now exclusive for PRO subscribers.

ASML Holding N.V. (NASDAQ:ASML) Q1 2009 Earnings Call April 15, 2009 9:00 AM ET

Executives

Eric Meurice - Chief Executive Officer

Peter Wennink - Chief Financial Officer

Craig DeYoung - Vice President, Investor Relations and Corporate Communications

Analysts

Nicolas Gaudois - UBS.

Simon Schafer - Goldman Sachs

James Crawshaw - S&P Equity Research

Sandeep Deshpande - JP Morgan

Timothy Arcuri - Citi

Odon de Laporte - Cheuvreux

Satya Kumar - Credit Suisse

Mehdi Hosseini - FBR Capital Markets

Weston Twigg - Pacific Crest

Kai Korschelt - Deutsche Bank

Jane Cole - Martin Kelly

Guna Papan - Nomura

Operator

Thank you for standing by and welcome to the ASML 2009 first quarter results conference call, on April 15, 2009. Throughout today’s introduction all participants will be in a listen-only mode. After ASML’s introduction there will be an opportunity to ask questions. (Operator Instructions)

I would now like to turn the call 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 and Corporate Communications at ASML. 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 2009 first quarter results. Hosting today’s call are Eric Meurice, ASML’s CEO and Peter Wennink, ASML’s CFO.

At this time, I’d like to draw your attention to our Safe Harbor statement contained in today’s press release and the fourth quarter results presentation, both of which you can find on our website at www.asml.com. This statement will cover today’s call, as well as today’s ASML publications. The length of the call will be 60 minutes.

Now, I’d like to turn the call over to Mr. Meurice for a brief introduction.

Eric Meurice

Thank you, Craig. Good afternoon and good morning. Thank you all for attending our Q1 2009 results conference call. Peter and I as usual would like to provide you an overview, some commentary on the quarter before we open up for questions.

Peter will start with a review of our performance in Q1 with added comments as to the short term outlook and I will conclude and complete the introduction with some further details on our near term strategy. So following this introduction we will then open the call to questions; so Peter please.

Peter Wennink

Thank you, Eric and welcome to everyone. First of all I would like to review some of the events of the last quarter, as well as some details on our first quarter results. The collapse of the semiconductor equipment demand continued in the first quarter due to the reduced end demand for semiconductor devices and the associated industry response of utilization reductions, capacity adjustments and inventory corrections.

In spite of these exceptional economic circumstances, we were able to maintain our business focus in generating cash, while continuing our high level of R&D commitment, by creating and delivering all intended new products. Our first quarter sales of EUR 184 million were within our guided range.

We shipped a total of 11 systems, seven of which were new and four used. Amongst the new systems, there was only one immersion tool causing a moderate new system ASP of 13.8 million, with the ASP of all systems being EUR 9.2 million. Limited purchases of performance upgrade options for systems installed in the field and reduced tool utilization impacted our service revenues this quarter, as our total net service and field option revenues came in at around EUR 83 million.

Unit orders in Q1 remained low at eight systems, but provided a book-to-bill in value terms of about two, with a net bookings total of EUR 207 million. The net average sales price of orders booked was EUR 25.8 million, including seven immersion systems. This leaves our order backlog as of March 31 at EUR 853 million, with a total of 38 systems, 25 of which are immersion. The company’s first quarter gross margin was close to 7%, which was the direct result of the extremely low level of sales.

We maintained our focus on R&D with a spend of EUR 180 million, which is a 7% efficiency reduction from the fourth quarter of 2008, with SG&A expenses coming in at EUR 41 million; that’s a 12% reduction from the fourth quarter last year and a 30% reduction as compared to the run rate in the middle of last year.

Net cash from operations was EUR 82 million; cash flows were positively impacted by a management of our working capital and the cost structure, which was offset somewhat by lengthening receivable collection periods and continued capital expenditure for the completion of a new manufacturing facility. This facility is needed for future generations of lithography, most notably EUV. We ended the quarter with EUR 1.15 billion in cash, an increase as expected over the fourth quarter of last year.

To support the financing of our activities in EUV development and production ramp, ASML have signed a EUR 200 million loan facility with the European Investment Bank. This floating rate facility can be drawn on the trenches within the next 18 months and is repayable in annual installments after four years, with the final repayment seven years after drawdown.

As far as for our outlook; although we do not expect to see a full blown recovery at this time, we are beginning to see the first sign of the return of lithography technology base. It is most evident in the area of 45 nanometer technology transitions of our foundry customers, and a 5x nanometer transition of our DRAM customers.

The facts that some of our customers have been able to access the capital markets may also prove to be helpful. This cautious return to some level of technology bias enables to shrink roadmaps as defined by our different customer segments. The litho spends to support these roadmaps is modeled at the quarterly revenue level of between EUR 400 million and EUR 500 million, which could potentially be reached somewhere in the second half of this year. In this respect, our Q2 immersion bookings, and the current order growth activities gives us some level of comfort.

We expect Q2 2009 net sales to fall in a range of EUR 210 million to EUR 230 million, with gross margins expected at around 9%; again reflecting at very low level of sale level. R&D and SG&A expenses are again expected to be at the EUR 118 million and EUR 41 million respectively. We expect cash from operations and investments to be neutral over the first half of 2009.

As a closing remark we’d like to inform you that our proposal presented at our 2009 general meeting of shareholders to declare a dividend of EUR 0.20 per share, which is approximately EUR 86 million, was accept as meanwhile been paid.

Now I’d like to turn it back over to Eric for more on our strategy for the coming quarters.

Eric Meurice

Thank you, Peter. So, indeed Q1 provided an extremely challenging environment for all semiconductor capital equipment companies, not only ASML. Our customers froze new equipment purchases. They basically, literally waited for market directions as to their own end demand; led to their inventory of semiconductors correct to the current demand level; optimize their installed base usage, either idling or transferring some of the capacity to a more aggressive set of processing layers of notes, which although not very, very efficient, was possible in view of the low overall capacity, the utilization rates.

We have now started however to see some signs where overall need for capacities catching up with the installed based. There is indeed some spurt semiconductor demand you would have heard from China at this point. There is some inventory catch-up leading to increase utilization, but most importantly, we see the technology transition activity not yet orders, but activity is picking up.

Certainly, the fact that the end customer semiconductor demand is starting to stabilize with an every growing mix towards a new product, and that means transition to new notes, is forcing installed based upgrades.

As of last year only the leaders had invested a bit of capacity in 45 nanometer flash, 55 nanometer DRAM or 45 nanometer foundry and Logic. The rest of the market is now organizing their conversions during this year, 2009, and during this year the leaders themselves, who had already started these conversions, are now involved in even more aggressive conversion, mainly 75 nanometer Flash and 45 nanometer DRAM development and these things will materialize also this year.

The founding of TMC in Taiwan, although certainly not resolving the DRAM industry consolidation that some have expected, is in any event clarifying the playing field and is triggering technology investment planning by the different players, who have been holding their investment waiting to see what TMC’s influence would be.

We have modeled the market needs for the lithography technology transition. As you know it’s our old traditional model and as Peter confirmed again today, we believe, that in our revenues between EUR 400 million and EUR 500 million per quarter, would support these technology transitions that we expect this year. We believe that we will receive this level of lithography equipment revenue, therefore which is reached within the second half of 2009.

In other terms, we confirm our viewers voice at the beginning of the global economic crisis, that after numbers of months of extraordinary low level of sales, like we are having in Q1, ASML will stabilized on technology buy levels, until capacity picks up. So in other terms we saw three phases; a very low sales phase that we are currently suffering through; a stabilization at a higher level when the industry even through recession, if you need a minimum number of technology transitions, which are the numbers we just mentioned, EUR 400 million to EUR 500 million per quarter; and then only after we get out of recession the capacity is picking up and adding up to these basis.

We are certainly not seeing the capacity pickup at this time, but we see the broad technology buy backs. We are therefore continuing our investments in new products, targeting introduction of our new cost effective platform called the XT4, and the new Double Patterning platform called the NXT this year, as well as delivery of five EUV tools that we have on order for 2010.

We are also introducing a new suite of lithography, designing and manufacturing tools supported by our Brion subsidiary, and to making full use of the litho hardware architectures that we have provided. This quarter we have even proved a first in the industry. We’ve proved an EUV imaging, with first full field system at image size of 28 nanometer dense lines, which were presented at the SPIE Advanced Lithography Conference in February.

In summary we’ve been confronted with a demand freeze in the very short term and we now see the first signs now preparing for a pick-up of technology purchases. These sales levels will enable us to continue our downturn management strategy, while we prepare for a broader recovery of the semiconductor industry in general. During this period we intend to not burn cash, maintain our technology investment leadership and work on our cost structure efficiency for the future.

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

Craig DeYoung

Ladies and gentlemen, the operator will instruct you momentarily on the protocol for the Q-and-A session. Beforehand, I’d like to ask that you kindly limit yourself to one question, with one short follow-up if necessary. This will allow us to get in as many callers as possible in the time allotted.

Now operator, could we have your instructions and then the first question please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Nicolas Gaudois - UBS.

Nicolas Gaudois - UBS

First questions is a clarification; on over 25 immersion tools in backlog, how much is new and how much is refurbished; and if you could remember or recall for us what it was for 19 in Q4?

A follow-up question is, where we look at your at least EUR 400 million to EUR 500 million from these quarter run rate at some point and its true that the orders at hand for immersion, plus refurbished business non-immersion, plus refurbished revenues basically should secure you about EUR 400 million per quarter of revenues in Q3, Q4.

I guess anything incremental from here into Q3 could be incremental and effectively give revenues towards the higher side or one could say about the lower end for at least 400 to 500. I assume that quite comparatively any orders coming there would be effectively offset by push-outs. So if you could comment on that, then of course you may clarify back for immersion. Thank you.

Peter Wennink

Yes, 25 immersion tools are split between 23 new tools and two refurbs.

Eric Meurice

And then I think your question was, should we go under 400 or would there be tons in Q2 that we would materialize in Q3. At this moment, we do not expect at all any push out. We understand of course every of those key projects for Q3 and Q4, so we are pretty solid as to above 400 and yes, we are expecting certain numbers of tons, but we do not know how many, which is why we’ve guided between 400 and 500. Those tons mean some orders which would be received into Q2 and into Q3, for deliveries in Q3 and Q4.

Nicolas Gaudois – UBS

Okay. I guess the reasonable vagueness of what you said on revenues, is basically a timing issue moreover than anything else on these things coming back and whatever done in Q3, Q4, that potentially slipped in Q1.

Eric Meurice

Yes. Again, in the mobilization of flights that we have, we see no real possibility for customers to delay those ramps. You know what I’m talking about when I say leaders already converted in 55 nanometer DRAM, which means the second payers definitively have to be in the business of 55 nanometer this year. We would not expect significant slips into Q1 of these things, but again we’ve brushed a guidance between 400 and 500 to have some levy into what it could, but we’ll be highly surprised; in fact we do not expect it to be lower than that.

Operator

Your next question comes from Simon Schafer – Goldman Sachs

Simon Schafer – Goldman Sachs

Just kind of the same vein of question really. In order to get this 450 of between 400 and 500 in quarterly revenue; are you expecting your Q2 backlog to be up? You need your Q2 backlog to be up sequentially to achieve that?

Eric Meurice

Yes, it would be natural yes, but even in the Q2 timeframe, we are seeing some customers with requests for turns within three months. So, you could imagine a certain number of orders which will be discussed with the customers within Q2; which will not be booked into Q2, because we would still negotiate in as specification are something and we will shipped immediately in Q3.

So you cannot mathematically, immediately say that we will book in fact all the order for Q3 into Q2. I could expect in the current situation discussions, but there would be more technical discussions then the need discussion.

Peter Wennink

And also Simon I would like to add to that, that coming out of this period every customer assumes that we’re drowning in inventory; and that also puts a bit of a pressure on us to actually ship quick, which actually drive this turns business as Eric calls it also.

Now that’s otherwise the case to sometimes the tools that we have in inventory; different configuration that they want, so we need to remodel them, but that is also one of the reasons why customers have the impression that they don’t need to honor our standard lead times.

Simon Schafer – Goldman Sachs

My follow-up question would be, just wondering what the instruments ASML model is saying about supplying demand in DRAM and in NAND for the second half of 2009.

Eric Meurice

The famous model has an input which is in fact your question, which is what is the rate of growth of DRAM and flash, and then from that rate of growth we input in the model we find out how many machines we need and then we can issue the guidance.

Okay, if you asked the question differently; if we shipped 450 million in Q3 and 450 million in Q4, how much capacity will we have created in the world of DRAM, logic and flash; and the answer is basically near zero growth, because these machine will be doing the new critical layers of the new nodes.

So in other terms the new node will take 10% more layers roughly, and these machines will suck out of the current installed base, machines which will be used for the same node, but non-critical layers and those machines will be less efficient in the new usage.

So the total numbers of wafers out will be smaller or in fact say about the same. So in other terms, 450 million twice would not add the wafer capacity. Of course it will add bit capacity and to be honest, I don’t know the exact number at this moment, but we’re not concerned about bits, as you know we’re concerned about square meter.

Simon Schafer – Goldman Sachs

Right, but may be I didn’t make such my question appropriate. Just in terms of what the install base is today, do you think the industry is undersupplying compared to what demand may yield in the fourth quarter, which is allowing you think that capacity orders may in deed return sometime in early 2010 or is that to mature?

Eric Meurice

Yes. Not because I know anything about the numbers of units, but because I know they are in the mix to what’s in your nodes that shrinks in fact the capacity available. So I know that at this moment, if you project another six months and if you project those transitions to tighter nodes, there would be not enough capacity in the world.

Operator

Your next question comes from James Crawshaw - S&P Equity Research.

James Crawshaw - S&P Equity Research

Thanks for taking my question; it’s James Crawshaw, S&P Equity Research. The question was on the impact on gross margins from the shift in mix towards immersion. I can see that really it’s a high ASP products, but interested to know what the sort of variable margin is, if I look at your guidance for the second quarters, the 9% gross increase margins, and look at the revenue that your guiding to, it’s looks like an EUR 8 million increase in gross profits, on a EUR 36 million increase in sales, which is a variable margin of just 22%.

Perhaps you should help explain why we wouldn’t see a bigger increase in gross profits, given that revenue uptake in the second quarter?

Eric Meurice

Well, you cannot project with any certainty the gross margin on such a very, very, very, very exceptionally low level of sales, which we are having in Q1 and Q2. You can imagine that if you sell one more used unit or one less or you have a slight change of mix, and I told you that there was a bit of a discussion at this moment, which customers knows about, which specification they really want.

If you take of course a machine for which we have inventory, versus a machine that we have to rush with new components, on a 10 machine business, it will make your margin go up or down by five points or so, without you being able to make the transaction and the trend.

So, I would like to go back to a normalized margin, when we are above 500/600 and by then we’ll get back to a business as I said all the time, which will be managed beyond 40% gross margin, but as I said, at such a level of sales, you really cannot project.

Peter Wennink

And on top of that, 45% of that number for Q2 is based on service sales and spare part sales and option sales, which of course is currently our planning, but it can also change in terms of the mix. So the granularity that you want to put into lets say trying to ascertain the gross margin like I guess is very low sales level; that is not very useful.

James Crawshaw - S&P Equity Research

Okay, perhaps as a follow-up then, if we reach your targeted level by the fourth quarter of EUR 400 million or EUR 450 million sales, what was the gross margin would you expect to be generating on that?

Peter Wennink

Last quarter call, we explained a bit of our cost base. We said we have a cost base of about 280 million, as a matter of fact it’s a bit lower today, but as we said 280 million, which was split between the 120 million of, you could say fixed cost, which is people, running cost of the factory, cost of our service, 120 million which is in cost of goods; the remainder 160 million is R&D and SG&A. Now you can see if our R&D and SG&A were a bit lower than that 160 million.

So, when we are then at EUR 400 million or EUR 500 million levels, we are targeting what we call a direct material margin of anywhere; let’s say about 55% to 60%. Now if you then take the material margin of that sales number and you subtract the 120 million of those fixed costs, you can calculate the area of where we will be in our gross margin target.

James Crawshaw - S&P Equity Research

Which at the end, translate to as about breakeven at 250?

Eric Meurice

At the operating level.

Operator

Your next question comes from Sandeep Deshpande - JP Morgan.

Sandeep Deshpande - JP Morgan

Eric, with respect to the orders, would you now say that in terms of the technology buys at least, that the order intake in technology buys has bottomed out than you expect now for the rest of the year, and technology buys to be improving?

Eric Meurice

Yes, I think it’s so bad to-day that I can answer with a big wholehearted, yes; we expect to pick-up from there.

Sandeep Deshpande - JP Morgan

In terms of the order intake, is it across the board within the DRAM and NAND companies or is it mainly the DRAM, because they haven’t really bought tools as yet; and within the DRAM companies itself, do you see them across the board making shift towards the next level node, or is it still just touching the feet into the new waters really?

Eric Meurice

Yes, I think it’s mainly DRAM. Although it is true that as you may know, some Korean companies make it a bit difficult for us, to know if those machine goes at the last moment to DRAM or flash. But from what we know and in particular, because potentially the ones I’m talking about early on are not Korean, I would say the immersion will be driven by DRAM 55 nanometer nodes.

But clearly the leaders as I say who have already invested in 55 are starting to develop the new nodes which is 45’ish nanometer DRAM and 35 nanometer flash and those one will probably trigger the second batch of orders.

Sandeep Deshpande - JP Morgan

And then to follow-up, in terms of the second batch of orders, you expect them to come in the next couple of quarters; in this current quarter and the next quarter.

Eric Meurice

That is exactly were the uncertainty of life is now. Where we would not be surprised by about 450/450, but we could be surprise with 500/400, we could be surprise with 400/500, of this nature, and all these depend on these different timings we were just talking about.

Operator

Your next question comes from Timothy Arcuri - Citi.

Timothy Arcuri – Citi

A couple of things; first of all, if you look at your backlog and if you look at it relative to your current business level, and certainly your business level is depressed below typical downturns, but you have a much greater backlog relative to your current business level than you have during virtually every other prior cycle.

So I’m wondering, does that make you worry that customers will pull from backlog, at least kind of out of the gates, so when you’re kind of getting to that EUR 400 million to EUR 500 million level in Q3 and Q4, that they are pulling from backlog upfront and that your booking don’t in fact lead the industry, that they might lag a little bit.

Eric Meurice

This is a bit what I was telling you about, the difficulty of reading the booking number; not so much because the customer will take from backlog. At this moment, I would expect the backlog to be remaining fairly consistent, around this 800 million or even growing, but I expect turns. So I expect completely the opposite of what you just said, that is, the customers for which we have backlog, we know where they are spread. In fact they are more spread than normal on the next three quarters and you’re going to have in addition to that, a lot of turns.

So, that’s how its going to work, which is not that normal in a recession of that nature, when as Peter said, most of the customer said “Hey, you guys have inventory and you have capacity, so we’re going to take the last moment before we shoot you some orders.” So, that’s probably scenarios of the next six months.

Timothy Arcuri – Citi

Okay, so I guess kind of that comes down a bit to the fairly big slot rate now that’s in backlog from the Taiwan DRAM companies, because that probably doesn’t ship in the back half of the year. So if you strip that out, then there have to be some turns on the kind of other stuff to kind of get you to that level.

Eric Meurice

If you are trying to hint to me that in the backlog we had anything from Taiwan, the answer is, you maybe wrong.

Timothy Arcuri - Citi

Okay and then I guess my next question is, can you update us on breakeven and on any further plans, maybe to take it lower?

Peter Wennink

Yes, we are targeting a breakeven level at about 450, that’s for the second half of the year. We are currently in a process of reviewing all activities in pretty granular detail. All activities in the company, the outcome of that process, still leads to be internally discussed, so that’s something which I’m not going to comment on today, but that’s clearly an activity that is ongoing as we speak.

Timothy Arcuri - Citi

Okay and then just one more; can you give just a little bit of clarity in terms of the 4D bookings, what were there? Were they ArF?

Peter Wennink

They were dry systems.

Operator

Your next question comes from Odon de Laporte - Cheuvreux.

Odon de Laporte - Cheuvreux

Yes, I was wondering when you are going to effect EUV growth, bookings of EUV tools; because I understand you blend to ship some in 2010, but that’s not yet in the backlog?

Eric Meurice

That is correct. I think we are conservative in our bookings in an overall situation. The rule is such; we would not take bookings no longer than the 12 months lead time for security purposes. So, it is true that we are having to get into the 12 months lead time for EUV.

I will probably have a discussion with Peter here. It’s the first time the question is asked. I think we’re going to take a conservative view as to us being certain of shipping on time, because we still have to prove a certain number of concepts with EUV; and when we are reasonably certain that those machines are meeting the target in their aspect, then we probably will recognize that.

Peter Wennink

By that time they will be in the 12 month window, but just to make sure that we have orders for five systems. So those orders are already in, they are not sure of any backlog, because they are outside the 12 month window, but where we get more absolute certainty about shipment time that we’re likely within that 12 month window and then they will pop up. Well, we will stick them out, so you’ll see it.

Operator

Your next question comes from Mark Bower - Unidentified Company.

Mark Bower - Unidentified Company

Two questions; first one is just on the backlog yet again. I just wondered if you could give any additional granularity on the maturity profile of the immersion backlog in terms of age in particularly and delivery date, if indeed that’s know to you I guess on the next two quarters, thanks?

Eric Meurice

Yes, the reason why I think that backlog is certainly more spread than usual. If I’m not mistaken, 60% of the backlog to be shipped in six moths which is normally, we’re better than that usually when it’s a bit more spread, is because we have a large order of immersion machine, which is spread longer than that for Flash; the rest is pretty natural.

Mark Bower - Unidentified Company

But there is no question of orders lingering in the backlog and customers are refusing to take delivery and you not being know when you can be in a position to deliver them?

Eric Meurice

Well, you always have one or two lingering funds, but I’m looking at the numbers here. There is no more lingering in this industry.

Mark Bower - Unidentified Company

Just a follow up on NXT; could you give us an idea quantitatively if need be on your expectation for the ramp up of demand for NXT and how frequent it could be in 2010, please?

Eric Meurice

Yes sure. NXT as you know, about three months before shipment we should ship early into July. We are starting to have the normal white hair, where we discover the latest and greatest issues and the nagging problems. So, therefore the first shipments we will do in Q3 will be within Q3 and I think it will be in that high volume.

The NXT will prove its overlay, which is supposedly two nanometer, which by the way we have already proven. So we are pretty comfortable with that and this two nanometer will make it the only tool in the world capable of this buyer factor, probably two to three multipliers. That should get it a 100% market share in all series that are pattering businesses.

So that would be 22 nano Logic, 35 Flash, 40 nanometer DRAM. Therefore then the volume rent will depend on when those three nodes are really ramping, and at this moment we don’t really know.

Peter Wennink

But it will be in 2010.

Operator

Your next question is comes from Unidentified Participant.

Unidentified Participant

My question would just be one slide of clarification. The EUR 400 million to EUR 500 million revenues you’re hinting at for the second half of this year on a quarterly basis, they do include your expected shipments of the NXT 150i?

Peter Wennink

Yes, it does.

Operator

Your next question is comes from Unidentified Participant.

Unidentified Participant

I just like to have a clarification. On the cash flow I can see you’ve taken a charge for inventory absolutions, I believe of about 23 million or 24 million. Did you book that in the cost of sales, and therefore did that sort of depress your gross margins, and will that basically flatten out perhaps your gross margins at least to a certain degree when these equipment is shipped in maybe the second half or maybe ’10? That is my first question.

Eric Meurice

Yes, that was a self explanatory question in the sense that yes, your assumption is indeed correct.

Unidentified Participant

What kind of equipment is that?

Eric Meurice

That’s basically the equipment that we’re not selling much at these moment in time. So it’s largely on dry equipment. So that’s Krf, dry ArF and that type of equipment.

Unidentified Participant

Can you say how many units?

Eric Meurice

No, it’s just been large modules. So those are not tools, but they are parts of the tools, most of it we used to assemble the tools.

Unidentified Participant

Great and a follow-up maybe; I mean that’s the $100 million question that everybody is looking for an answer, so I’d like to have of your opinion. You’ve lowered your cost base, you’ve done some restructuring, but the key keep equipment industry peak-to-peak with slabs in 2000 to 2007, and if you address for currencies there was no difference, obviously as you made some market share gain from your position. So my question would be, everything else being equal, do you think that your next peak EPS will be higher or lower or the same as 2007?

Peter Wennink

It’s a $1 billion question, but the answer is yes we expect the EPS to be higher, because we expect this crisis to lead us to be more effective on the cost structure. I would prefer not to answer any quantitative question at this moment and we expect the euro to remain at this current level.

If you remember our history for five years, the euro has appreciated versus the yen by 60% or something and we had to eat this 60% in efficiency. So on a stable euro we would expect that we would gain. So first of all our cost structure would be better; secondly, our euro should be stabilized and third, we are having new products, in particular the one coming from Brion, which allow us to think that we sell more value for a tool. So these three things should converge in bringing us a better EPS.

Peter Wennink

I would add that when do our intermits or famous modeling on the technology node transition on the increased number of layers and on the need for that NXT Double Patterning technology and from 2012 onwards EUV, we are still highly confident that we can reach our 5 billion sales mark, which of course is higher than our previous peak, so that adds to that significantly also.

Unidentified Participant

And 5 billion, how much market share is that and what’s the size, the time that your looking and then?

Eric Meurice

Its 70% market share; we don’t think that we would go further than that. I think a stability of 70/30’ish. So we’re not more hungry than that at this moment, and therefore the market would be about 7 billion or a bit more.

Operator

Your next question comes from Satya Kumar - Credit Suisse.

Satya Kumar - Credit Suisse

More of a longer term question. I was wondering if you could give an update on what do you think is the impact for lithography from self aligned Double Patterning? Does this have any impact on how to think about the lithography opportunity as we shrink the 32 nanometer for NAND and 55 for DRAM?

Eric Meurice

As you have heard, a lot of our activities by our customers who try to find ways around putting more bits onto a piece of silicon without using the most expensive lithography tool. So some of them have used a self aligning, double patterning which we also call Spacer, which is a way to do simple structures, one dimensional structures by using lower cost lithography, but more of them.

So, when you are having a lot of installed base and you do not have utilization, this is the best think you can do on earth, because you use more of the old stuff which is fully amortized, so it’s zero cost and you self align, so you shrink, so everybody is happy. So we see some of that and some of our customers are using this techniques in fact to solve the problem of utilization, which is why also potentially we’ve seen here some customers able to delay.

However self alignment has two problems, one it is still having a lot of processing steps, so it is costly and secondly it is using a lot of capacity. So when the business comes back or when you want to shrink further, you can even do self alignment with the newest lithography tool and then your even better.

So in other terms, we see a bit of negative impact if you will when there is no utilization, when there is utilization, when self aligning Double Patterning or normal Double Patterning or single patterning etc is above the same business for us.

Satya Kumar - Credit Suisse

Okay, just the follow-up of that, most of the time DRAM and NAND factories run at 100% utilization rates? So is this comment more applicable for Logic? I mean from what I here this technology is more applicable for NAND Flash. What are the NAND companies having 100% utilization and leverage?

Eric Meurice

For the first time in history, in the December timeframe and built-in Q1, NAND and DRAM did not run at 100% capacity, the first time in a history; and therefore you have heard the noise about customer saying “Well, let’s use this opportunity to do a bit of shrink using the available capacity,” but the moment demand comes back they get in trouble, because they loose market share.

So, you may have heard one or two of those players starting to complain that during the slight pickup that they are loosing market share. Of course it’s good in the sense that the price goes up, but there are at this moment some “activity” to rebuild it.

Peter Wennink

The reason why of course actually tools didn’t run the [fabs] at 100% utilization, because the sales price for the devices was lower than their cash cost.

Satya Kumar - Credit Suisse

So then lastly, do you guys see any activity on lithography repurchases from the used market, given that there’s at least two or three DRAM factories that are going to come offline from the market?

Peter Wennink

Yes. So on 200 millimeter this has already started, but the wave of valuable machinery is so large, the supply is much, much higher than the demand. So, we believe that this would be a good market for us to participate into, because we are refurbishing companies. We refurbished about five to 10 machines per quarter. So the market at this moment is more like in the 5’ish range. There is going to be a lot of huge machine available and when they find homes, we will be there to refurbish them, but again at this moment the demand is weak.

On the 300 millimeter, you are probably referring only to one company at this moment who is under protection and they have I think 300 millimeter fab and I guess they will try our sell the equipment.

Satya Kumar - Credit Suisse

We also have Taiwan selling equipment.

Eric Meurice

Yes, but pretty whole thing…

Peter Wennink

Yes, it’s not 300 millimeters. I think the major 300 millimeter facilities that are up for sale is from the company that’s going off the end in its leadership.

Operator

Your next question comes from Mehdi Hosseini - FBR Capital Markets.

Mehdi Hosseini - FBR Capital Markets

In your booking for Q1, it seems to me that the ASPs went up significantly, and I’m just wondering, did you have any EUV tools that were booked in Q1?

Eric Meurice

No, those were immersion tools.

Mehdi Hosseini - FBR Capital Markets

So, units are pretty much similar to Q4, so you just higher ASP immersion that drove the 200 and some…?

Eric Meurice

Correct, like we said also during this call and in the press release. If you would look at the total bookings it’s definitely significant. The demand for immersion tools is driven by the need for the technology transitions that we’ve talked about; that is about nanometer Logic, that’s 55 nanometer DRAM conversions and even a 40 nanometer Flash, and that needs immersion. So that’s why the relative part of the immersion bookings in the booking of Q1 was that high and they simply carry high value of prices.

Mehdi Hosseini - FBR Capital Markets

So as a follow-up to that, in you comment you said that Taiwan was in presence. It seems to me that maybe it’s all driven by the one X company in Korea and maybe one company in Japan. So should we assume that that number of immersion tools booked in Q1 was just primarily from two companies?

Eric Meurice

The companies that you suggest are not in there.

Peter Wennink

It’s really one to see to these. You can’t really write any significance trying with what we’ve seen, so it’s one at a time. Most of the companies are having significant activities in note bookings. When any of the big names that you mentioned comes, that will be coming with a bit bigger numbers.

Mehdi Hosseini - FBR Capital Markets

Okay, and then when will we expect to see the bookings with these 10 EUV to that I think you said it will be revenue in 2010?

Eric Meurice

As I said we have going to take a conservative approach when we assure that they need spec. So it can be in Q4, it can be in Q1, even if we have to ship in Q2, Q3. I want to take my time. Anyway we will be fully visible. The tool price is not the final price. These are five preproduction tools. They don’t have the market price yet, but you will see what we’ve agreed as a prototype price, etc, so all this we’ll be publicizing in due time.

Peter Wennink

Yes and then we have to also for our revenue recognition purposes we have to take account for the goal; it should be one on one, which means there is this new technology that needs to be proven for us at the customer sides. So that means that there’s a major movement of revenue recognition with new technology. That’s something we’ll still need to look at and also based on the maturity levels of the tools whilst they ship. So, it could be like I said; we could be shipping the tools in 2010 and recognize revenue only in the first quarter of 2011.

Mehdi Hosseini - FBR Capital Markets

Okay and just one quick follow-up, actually more to do with the cash flow in Q2. Would you expect to be cash neutral in Q2 or burning cash?

Peter Wennink

We would say our expectation is to be cash neutral for the first half. So that we could be burnish slightly in Q2, but clearly our focus would be on not burning cash.

Eric Meurice

Remember that when we burn cash, sometimes it’s for the good reason, because we have six to nine months lead times. So if we were to burn more cash than necessary, you may get happy.

Operator

Your next question comes from Weston Twigg - Pacific Crest.

Weston Twigg - Pacific Crest

Just one of the follow-up on something I believe I heard earlier. I think you said in your backlog you have a large order of immersion tools for Flash customer. I’m just wondering what’s your level of confidence there and then that those go out over the next two months or two quarters and which model would it be to meet the resolution requirements down at this 3x nanometer node.

Eric Meurice

So, we are fairly comfortable with the shipment of the orders we have obviously and then they are staged. At this moment in lieu of the DRAM business and the price and the end product which improves, we feel pretty okay that the schedules will be set. In addition, those products are compatible with a 3x transition that is being planned.

So, the idea at this moment is that these installed base, which I’ll remind you has an NA of 1.35, we didn’t even talk about this for a year and a half or something, but we are also unique in the industry with a very large lens and that large lens makes this installed base compatible to 3x flash.

I didn’t say the customers we will use this as a base, because they are hesitating between this machine called DXT and the NXT, but the XT could definitively be doing some of the layers of 3x and the whole question will be cost effectiveness and in fact we are in the middle of the discussion.

Weston Twigg - Pacific Crest

Okay, so it sounds like some of those tools may convert to NXT orders?

Eric Meurice

Remember, if you were completely focused on one node, it would make sense for you buy NXT for say four layers and XT for the other six, but customers would say that’s fine for day one and then in day two, I prefer NXTs. These type of things we don’t really control.

Weston Twigg - Pacific Crest

Okay and then just a quick follow-up; you mentioned a customer in Singapore. I’m just wondering what technology node that’s for in and if they’re ordering any immersion tools yet?

Eric Meurice

They are doing drive and immersion.

Operator

Your next question comes from Kai Korschelt - Deutsche Bank.

Kai Korschelt - Deutsche Bank

My first question is on TMC. I mean given the kind of course of events over the last few weeks, what is your impression of the timing and potential size of any order mentioned there.

Then my second question, just to follow-up on the cash flow question, obviously you pay your dividend in the second quarter and in order to make the first half cash neutral, are you actually expecting to generate positive operating cash flow or is that really just referring to the combined H1 levels? Thank you.

Peter Wennink

Just the last question, it’s referring to the combined H1 level. So that includes indeed the 86 million of dividend payment that we have done recently.

Eric Meurice

To refer to TMC, as you know the business model I think of TMC is still being discussed by TMC and at this moment these alignments at TMC are in terms of serving certain numbers of technology processes together; Micromania aligning as a competitor to TMC and requesting equal treatment by the Taiwanese Government.

So the issue is not so much what TMC is, the issue is that they have now triggered a clear set of decision that has to taken by Micromania and one hand and by Elpida on the other. So, we are now discussing with those two companies as they erect; and this is what is being done at this moment and not at all a direct TMC purchase.

Kai Korschelt - Deutsche Bank

Okay. Could I ask just one quick follow-up please on the cancellations that you see in both in Q4 and Q1, were those mainly non-immersion?

Eric Meurice

Correct

Operator

Your next question comes from Jane Cole - Martin Kelly.

Jane Cole – Martin Kelly

In terms of the TMC or certainly the Taiwanese DRAM situation, can you maybe quantify the potential orders upside from this? Maybe give us some idea as to the timing that you anticipate in terms of MSC first orders and backlogs from this sort?

Eric Meurice

I would prefer not. How can I answer you constructively? Because again remember those two customers are working on competitive ramps and any statement is would be awkward for me, but I would guess an order of a new player into a new fab putting one line, would go for say at least four tools in the first batch. So how can I answer that better? So four would be a minimum than how many batteries or how many lines you want.

Jane Cole – Martin Kelly

Okay and also cover the average selling price that you’ve been discussing?

Eric Meurice

Yes, it will be an immersion tool. So you could multiply all these between say EUR 25 million and EUR 30 million.

Jane Cole – Martin Kelly

So it’s quite substantial?

Eric Meurice

Yes. Well, these are very cheap machines. You have the value that they have.

Operator

Your next question comes from Guna Papan - Nomura.

Guna Papan - Nomura

I wanted to ask a question about R&D. I understand that you have the specs of the business models that through efficiency you can even reduce R&D without touching strategic programs, but in the last part of the overall R&D you had contributed by the supply chain. So do you have the feeling what the aggregated R&D budget looks this year compared to last year and could you describe how the supply chain is coping with the difficult situation this year?

Eric Meurice

Yes, this is a good question. So we were on a run rate last year. I would say about EUR 125’ish million per quarter. We’re trying to grow now EUR 115 million, EUR 118 million, so it’s about a EUR 10 million savings. It is not the full impact on what you call the supply chains; that is the contractors.

In a sense that we do about EUR 5 million of the savings just by our own self, using less wafers, being more efficient at the numbers of prototypes that we’re building which costs a lot of money. The other EUR 5’ish million is an impact on our contractors, who are in fact at this moment to be honest, half of it EUR 2.5 million per quarter would be contractors which are temporary workers basically.

So they’re not really contractors in a sense of adding value; they are contractors in helping us source engineers. Then the rest of the EUR 2.5 million will be from those very large institutions. So in other terms our EUR 10 million saving per quarter has been spread and it should not have any strategic impact on them.

Peter Wennink

Just to clarify, I mean when we talk about flexibility in R&D, it is not that we source the R&D from our supplier base that also provides modules for manufacturing. So it is R&D flex, but it is from temporary agencies, like you have engineers that are in a kind of a superman power kind of organization that we source. So that is not R&D that we pay through the regular supply chain. There’s only one instance where it is really significant and that is with our supplier. They do R&D, but that R&D is basically in the cost of lens.

Guna Papan - Nomura

Okay and just coming back on services, could you give us a little more granularity on whether it’s more the upgrade revenues all the time and material side which is like its timing?

Peter Wennink

Well, the time and material is the biggest part of sales; it’s about 75% of total service revenue, perhaps more stable. The spare parts and the field upgrades, that is much more dependent on where the customer needs are and also more subject to cost reduction projects that are run by our customers.

Craig DeYoung

Ladies and gentlemen, I think we’ve used up a lot of time. If you were unable to get through on the call and still have a question, please feel free to contact the Investor Relations department. On behalf of Eric and Peter I’d like to thank you for joining the call. We look forward to talking to you next quarter. Operator if you could formally close the call out for us, we would appreciate it.

Operator

Of course sir, thank you. Ladies and gentlemen, this concludes the ASML 2009 first quarter conference call. Thank you for participating and you may disconnect your line now.

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!