Q2 2019 Earnings Call
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Yes, Matthew Davis.
The company name.
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Press Star one if you want to ask question. Okay. So conference call will include forward looking statements.
Meeting of the federal Securities laws.
These forward looking statements involve material risks and uncertainties.
For a discussion of risk factors I encourage you to review the Safe Harbor statement contained in today's press release and presentation found on our website at ASML Dot com.
And in animals annual report on form 20-F, and other documents as filed with the Securities and Exchange Commission.
With that I'd like to turn the call over to Peter Wennink for a brief introduction.
Thank you skip.
Good morning, and good afternoon, ladies and gentlemen, and thank you for joining us for our Q2 2019 results conference call.
And before we begin the question and answer session was and I would like to provide an overview and some commentary on the second quarter as well as provide our view of the coming quarters and the replay will start with a review.
Of our second quarter financial performance with some added comments.
On a short term outlook.
And I will complete the introduction with some additional comments on the current business environment and our future business outlook.
If you will.
Thank you Pierre and welcome everyone I will first highlight some of the second quarter accomplishments and then provide our guidance for the third quarter of 2019.
Q2, net sales came in at two point 57 billion euros within our guidance necessitate sales of one point 85 billion euros was more weighted towards logic at 61% with the remaining 39% from memory, representing a seminar splits as the previous quarter.
We reported easy system revenue of 764 million euros on seven shipments, which was won more than guided.
Installed base management sales for the quarter came in at 717 million euros, which was a bit higher than guided.
Gross margin for the quarter was 43.0%, which was above guidance due to better you ve manufacturing results in higher field upgrade sales more than compensating the negative mix effect in comparison to Q1.
Overall R&D in ESG any expenses came in at guidance with R&D expense at 487 million euros, and SGN expenses at 123 million euros.
Turning to the balance sheet 884 million euros was paid as dividends and 15 million euros worth of shares were repurchased in Q2.
We ended last quarter with cash cash equivalents and short term investments at a level of two point 34 billion euros.
Moving to the order book Q2 system bookings came in at two point 83 billion euros, which is 100% up from Q1 bookings, mainly driven by Uzi will be to 10, new orders in the quarter.
Logic order intake was 67% of total value with the remaining 33% from memory again, reflecting the strong logic demand expected this year.
Net income in Q2 was 476 million euros, representing 18.5% of net sales and an EPS of one point 13 euros. This was positively impacted by higher gross margin and a one time tax benefit.
With that I would like to turn to our expectations for the third quarter 2019.
We expect Q3 total net sales of around 3.0 billion euros.
Our total net sales forecast for Q3 includes around 750 million euros of ERP system revenue on seven planned shipments.
We expect our Q3 installed base management revenue to be around 700 million euros.
Gross margin for Q3 is expected to be between 43% and 44%, which is slightly higher than Q2.
The expected improvement in margin due to expected higher volume will be partially offset by customer configuration mix.
We continue to expect significant improvements in gross margin in the fourth quarter driven by higher system sales improved product mix increased field upgrades shipments of higher margin and exceed 3500 C systems as well as contribution of TV service revenue.
This will enable us to achieve a gross margin for Q4, which approaches or 2020 targets of over 50%.
The expected R&D expenses for Q3 are around 495 million euros and SGN is expected to come in at around 125 million euros.
Or estimated 2019 annualized effective tax rate is around 9% because of a onetime tax benefits in 2019.
We still expect our long term effective tax rate to be 14%.
With that I'd like to turn the call back over to Peter.
Thank you Jay.
As Jay has highlighted the although it wasn't all the models, but decent quarter results came in at or above guidance and we expect further strengthening in the coming quarters.
The macroeconomic environment continues to provide market volatility, which translates to a level of uncertainty in the semiconductor industry.
The demand for memory remains soft while excess inventories are being worked down in the supply chain and some of the second half memory demand risk that we discussed last quarter as Meanwhile, materialized and resulted in system push outs this year into 2020 .
With memory weakness is being compensated by strengthening of logic demand such as our view of 2019 total sales remains unchanged.
As such we expect 2019 to be a growth year with sales and profitability increasing throughout 2019.
In memory.
The market continues to digest the high level of capacity additions are put in place over the past few years.
The digester started last year was.
Extra data provided by the decelerating macroeconomic growth.
This will likely extend throughout most of this year.
Based on lower demand from our memory customers, we now see our memory sales.
Down around 30% year on year versus 20% indicated last quarter.
As discussed last quarter, we see two contributing components of memory demand this year.
We have characterized walnut strategic which we expect will happen largely independent of market conditions.
This includes both early Chinese domestic memory ramp and easy for DRAM.
This component is valued at approximately 1 billion euros.
Which we believe has low risk of push outs.
The second is the bit supply component, which we previously indicated as having a higher risk.
And if you remove the strategic components from our estimated 2019 memory demand.
You get a lithographic spent for memory bit supply of around 2.1 billion euros.
Which is around 45% lower than the comparable spent in 2018.
And as we have already shipped around 1.2 billion euros to memory bit supply in the first half of the year is leaves around 900 million euros in the second half of the year targeted for memory bit supply.
Which has an inherently higher risk profile than the strategic investments in memory.
On the positive side, though our memory customers continue to indicate they are making significant reductions in wafer output to an extent, we haven't seen in previous downturns.
This reduction in spend a lower wafer output will help in reaching a more normalized supply demand balance.
Logic will clearly be our growth driver in 2019 with the majority of the month linked to new technology transitions and advanced note additions.
We are seeing increased demand for our from our customers driven by accelerated ramp of seven nanometer nodes and beyond supporting amongst others. The introduction of Fiveg technology.
With this strengthening we now expect our logic business to be up around 65% for the year relative to last year, which is 15 percentage points up from the 50% that we communicated last quarter.
Along with increased system demand than second half, we also expect stronger demand for field upgrades, which translates to low single digit percentage growth of installed base management revenue.
Now, let me turn to regional product side I know that you all are you view business.
Any movie, we recently demonstrated more than hundred 70 wafers per hour on a first annex IV infusion on that system.
We have also run more than 2000 wafers per day, and the customer memory production conditions and this is a significant milestone in l. confirms the required capability for memory production.
Which means that our focus will be on stability and uptime.
To secure our customers ramp plans.
We plan to ship the first the energy efficiency system in Q3.
With a higher number of systems plant in Q4.
As Roger mentioned, we shipped seven systems in Q2, one more than guided and receive 10 orders.
As a confirmation of the potential of the NFC 3400 C for cost effective high volume memory production. We received a number of LTV orders this quarter for system slated for use in memory.
Customers are aggressively, bringing new technology to the market.
Which reflects on the solid demand for 30 systems this year.
The demand for energy through different systems has proven to be high.
Our 2019 shipment plan to significantly skewed towards the second half of the year into Q4, specifically.
Next to the backlog the plan. We're also transitioning to a new scanner model like I said earlier, the dependency, which suppliers need to ramp their production.
Taking both of these into account there is a risk of a few systems planned for Q4 moving into the first weeks of 2020.
However, it is risk has been taken into account in our comments regarding our full year 2019 sales outlook.
In any case, the strong demand for energy efficiency as well as the continued progress in the ramp of our production capacity is clear.
In summary, despite uncertainty in the current environment, we continue to see a stronger second half with the strengthening of both sales and profitability quarter on quarter.
Logic will be the primary driver of growth this year and demand has further strengthened from last quarter as customers accelerate the ramp of the advanced nodes.
Memory demand has more uncertainty and it's fair to weaken since last quarter. However, as mentioned before the stronger logic demand compensates for the weaker.
For the weaker memory demand and in total our overall sales or our overall sales outlook for the year as I mentioned before remains unchanged and we expect this has 19 to be another year of growth.
And with that we will be happy to take your questions.
Thank you Roger and Peter Ladies and gentlemen, the operator will instruct you instruct you momentarily on the protocol for the Q and a session.
Before hand, I'd like to ask that you kindly limit yourself to one question.
One short follow up if necessary.
This will allow us to get in to to get to as many as callers as possible.
Now operator could you have your final instructions and then the first question. Please.
Thank you ladies and gentlemen at this time, we will begin the question answer session.
Again, if you have a question. Please press star one to register for a question and start to withdraw a question from the Q.
If you're using speaker equipment today, please lift the handset before making your selections.
One moment please for the first question.
The first question comes from Mr., Mitch Steves RBC capital markets. Please state your company name followed by your question.
Hi, Rich this RBC I just had two quick ones. The first one just on you guys touched on that 33 to 35 units for 2020, I'm just curious to how much that added memory related UBI and Thats still on track and then secondly on the memory side I think you guys sector to be down 30% versus 20 regarding memory in general is that.
And our related revenues to be clear about that.
Yes on the.
Last one is 19, the 30% down is the total memory sales of HML into the memory segment as compared to 2018 and so thats.
That was what the 30%.
On the 30 to 35, yeah, that's our shipment capacity next year.
Memory related.
Interesting question that is like I said in earlier calls.
Memory.
As as clearly, giving us a kind of a as a breakeven point, where they want where they can move.
Into easy as it relates to DRAM production. It has to do with the productivity and we gave a target of 2000 wafers per day now we have shown.
In our factory under memory production conditions that we can get over 2000 wafers per day. So it's really about the uptime and the availability of.
The system now.
We're shipping to first see system. This quarter, we will install it so by the end of the year, we will be able to see really strong. So let's say you could you could say more marathon evidence of the 2000 wafer per day that will drive the demand for the next year.
Having said that.
I strongly believe that that 2022 will be dominated by logic in terms of UTI.
I mean, the three currency and I think currently when we talk to our logic customers.
As it is a very clear.
A roadmap path into 2024, seven nanometer and beyond.
So.
No matter, how you look at it is clearly an upside DRAM for next year, but the majority will still be driven by.
The logic demand from our customers.
Okay perfect recorder address.
The next question comes from Mr., David Mulholland. Please state your company name followed by your question Hi. Thanks.
It's David from Jvs, just two quick ones firstly on the bookings in the quarter and kind of following on from the last question, but can you, possibly help us understand how that breaks down between memory and logic in terms of what you're seeing so far.
And is it fair to assume those are all 3400 C. And then just secondly, I think last quarter. You commented the ASV bookings this year will be quite back end loaded.
Switching to kind of ready in Q2 is quite solid but is it fair to say that we shouldn't expect too much in Q3 that it will take about 30 453 in the field.
To then get more bookings in Q4 or should we think about the phasing.
So just a clarification question David you are really talking about the bookings now the let's say the booking sequencing in Q3 and Q4 going forward. That's what you mean, yes correct. Okay. Yes on the if your bookings I think the majority of the books that we see it in Q2, our for Logica. There's there's a there are there are a few systems, which are slated for memory production, which is understandable because Joe you want given the current state of the capability performance as logical that you would see solar system being.
Ship to go into into into a a DRAM pilot.
No production.
Sure. So the majority will be for our logic customers.
We had a good order intake in Q2.
It's my expectation that that will continue in Q3 and Q4, because like I said, we havent production capacity next year between 30 to 35 units.
And I think by the end of the year will be fully booked for for for for those tools.
Because I do believe also that by the end of the you will be able to to actually show.
In the in the longer test marathon test that the DRAM conditions that we were able to show here and there is a male.
We're not a unique.
Event that we'll be able to do basically replicate that.
So.
I don't think there will be a auto low I think it will be a gradual intake of orders towards the end of the year like we saw last year last year. We said the same thing you know by the end of 2018 will have 2019 booked it's my expectation that we will see the same thing by the end of this year.
Great. Thank you.
The next question comes from Mr. Mehdi Hosseini. Please state your company name followed by your question.
Yes, Thanks for taking my question just.
Two follow ups and Peter regarding the your confidence on the Q4 I'm just curious it seems to me that.
And.
Your confidence comes from.
The scenarios and that you have contemplated for instance, if the supply chain causes some.
The delay in the shipment of 3400, C. I assume that you have immersion tools that you can ship and therefore is that what gives you that confidence for Q4 shipment and I have a follow up.
Yes.
I mean, you got as a follow up because you are right. I mean, you gave me the answer and it was indeed thats what it is.
Sure and then if there is.
It's a few systems then or.
Pushed to Tony Tony then is that going to increase that 30 to 35 system.
Plan to be shipped next year.
So how should we think about the targets for next year.
Yes, I think we have this when we look at the production capacity 32 to 35 that is basically on a 12 month period. So if we have to shift a few of those systems into January of 2020, they'll they'll naturally would come on top of those 30 to 35 under the assumption that we can not have that same kind of.
Supply chain risk at the end of 2020, which you could argue there's a lot more learning curve. So we should be able to keep the production schedule or the supply chain schedule better than we could in 2019, because we're introducing a new machine. There. So yes normally it will be on top of that you know like I said 30 go to 30 Fiveish. They still a range of five to also.
I would stick to the 30 to 35.
Okay now in terms of the supply and demand for memory has continued to weaken what if it remains weak into Tony Tony I remember from the November Analyst day, you guided to and 15, 20% DRAM bit production growth and NAND bit production growth of 35% to 40%, but what if we we started Tony Tony very far from doors and targets would is there also asset sensitivity to your 2020 revenue target, where if DRAM im sorry, if memory were to remain weak there will be other areas that would help offset that.
Yeah, I think there's a lot of questions in one question.
But let me answer this a main 2020 , where we gave you. The 2020 number there was basically a mid market scenario.
That we gave you there and if it midmarket in area like you said had a certain percentage growth on.
No memory at the major 20 and 35%.
And that is indeed, the case, but what we've seen to what we've seen today is also that logic is a bit stronger than we anticipated. So there could be a compensating factor, but in all in all I think it's too early to to do make an educated guess on whether 2022 will be a moderate market or will be a low no market that I think it's too early.
I can only say that where we see a memory is today with indeed significantly lower growth, but growth numbers than the ones that you mentioned and the fact that our customers are cutting 45%.
Have there.
At at least a little purchases for.
Our bed capacity and they are lowering their there.
Wafer starts I mean, something will happen and so this is so it's too early I think the trends are clearly such that I believe.
Customers are doing everything try to.
Rebalanced, the supply and the demand and whether that will.
Beep at the end of the early 2020 simply too early to say.
Thank you Peter.
The next question comes from mR.C.J. Muse. Please state your company name followed by your question.
Hi, good morning.
Evercore ISI. Thank you for taking the question.
Yes, Peter.
The encouraging to see the DRAM you view orders in the quarter.
Curious if you could speak a little bit about.
What the total cost of ownership requirements are as we move to one Z and then one alpha.
The timeline of hitting those requirements juicy.
And if you're able to hit them what are you thinking.
Above layer count as we transition to one alpha.
Thank you.
Yes, I think the interesting question I mean it.
We are really looking at the introduction time of movie in DRAM and is driven by I think it just the economics and like I said previous calls is not only the economics I think we also get very clear feedback that the device performance using EUV is also significantly better. So it's a combination of the two.
And it will be it will be an introduction time, whereas in wamsi oriented so it's and so it's an all it's an it's an older.
Alphabetical letter it doesn't matter at that moment in time, if he is there to stay there and as you pointed out going forward.
With those next generations. After the introduction note there will be more layers added to the year. We currently think about.
You get whether its alpha or there's gamma whether it where it's either.
Three to four even five good is something that could happen.
Very helpful.
And then if you could speak to that.
Bloomberg business, you're seeing from logic in the second half how sustainable is that beyond Q4, and then as part of that considering you are likely building immersion tools for memory and having to build for logic are there any good if gross margin implications from from that change over.
Could you could you elaborate a bit on your last part of the question.
Obviously logic immersion tools hires be better gross margins right. Okay. Yes, I presume you are building initially immersion hey, your memory and now retrofitting to logic are there any negative implications for gross margins because of that.
No no that that question on the on the well the answer to the question to the last question is any no there are no real implications.
His logic sustainable in Q4, well to be honest I think.
Though the way that we look at it after having.
Discussions with our customers I think it is yes.
That.
Demand that we're currently seeing in the second half of the incremental I don't think it's a pull in.
I think that the majority of what we're seeing is incremental.
And is these are not borrowing for from 2020 . So in that sense I think is much more sustainable.
Very helpful. Thank you.
The next question comes from Mr. Shen at all Menon. Please state your company name followed by your question.
Hi, Ed So Jonathan from Liberum.
I was just.
I wanted to dive in a bit into the gross margins.
You said you your gross margins in Q3 were affected by them.
Cost of customization work would you be able to give us any any number as to in percentage terms as to what that is and you're also suggesting that your gross margin in.
Q4 is likely to be quite close to sort of the 50% range to the high Fortys fortys.
And would you be shipping any 3400 bees in that quarter or would that shipment to be.
Entirely.
A table wondered sees and one small one if I might push through his if DRAM work to improve I mean DRAM were to start adopting.
He will be after the first.
It runs over 3400 C and they do come in with orders would you be able to accommodate more than 35 machines for next year or is that sort of an upper limit or what you can do with your parent capacity. Thank you.
Pick up a couple of comments on the on the gross margin so.
In terms of composition at Q3 resembles Q2 quite a bit so in terms of the in terms of the of our sales mix. So that's why the basic the basic fund. His departure there is the its kind of similar it will be higher right. So the the total volume will be higher and therefore factory loading will be higher than that as an uptick in gross margin and then we also said that the that in the mix.
The configuration mix at Q3 is a little less favorable if you like than than Q2 as but that's you know that's that's minimal and just based on the configuration of the specific systems that we had that we provide.
And that's the reason why you why you Q3 is a little bit higher than that than Q2, but not dramatically. So if we then moved to Q4.
I think you will see that the company is really going to run a as going up going to fire on all cylinders. So then then you will have the impact of the of a number of us have a number of structural developments that are going to occur first the 30 to 100 seat to your point and.
Q4 will be still be a mix of b and C models, but to see model will be dominant in that in that in that total mix a bit. So you will have the the increased benefit of the 3400 to see pricing and margin.
At that point in time, we will also see that the service revenue on a on E.. We live will go up and service margin will go up.
For Q4, we also predicts.
Better a better field upgrades, which which is business that said that has a has a solid set from a gross margin.
We would also see higher factory loading as a result of the the significantly higher volume that we have there.
And Q4 as a result of all of the things that we just discussed also has a very significant portion of immersion in there. So at that stage. We have five very significant developments that indeed will position is such that we are going to approach the over 50% guidance or indication that weve given for gross margin in 2020.
Peter I think there was one question on the I think on the capacity I think we will be very hard stretch to get up more than 35 systems. I think this is 30 to 35 is there a little bit depending on.
On the speed of the ramp and and the issues that we are encountering home on the new model. The C., we stick the 30 to 35, I think 30 Fiveish the Max where we can do next year.
Got it thank you very much.
The next question comes from Mr., Andrew Gardiner. Please state your company name followed by your question.
Hi, Good afternoon, it's Andrew from Barclays. Thanks for taking the question.
Peter if I could just go back to some of the comments you were making on logic.
In particular brands fourth quarter and into 2020 .
And I can understand visibility is less so on the memory side, but it seems much greater in terms of logic.
If that for Q increase is indeed incremental rather than pull forward yeah.
Hi, how are you thinking about logic demand into 2020 , given the continued move down the process now Atlanta by foundry and microprocessors.
Any further insight there would be helpful. Thank you.
Yeah I think.
Answering that question also want to go back to last year. We basically said, we usually has turned the corner and I said it I think on on on earlier locations that I believe 2008 and was a very significant year for the simple fact that that the confidence that our customers had an easy as the key.
You know enabler for next generation.
You know device innovations that that confidence is got to a much higher level now where the terminal C and the results that we're seeing now I think that has only strengthened so when you look at the Roadmaps that our customers are now presenting to us very clearly see an acceleration as you can imagine that you can imagine that that there is if you look at the AD markets, which is not only highpower compute in the mobile market, but as much.
Much wider.
<unk> are actually increasing.
Looking at at at a competitive edge in a in a growing market is much wider application space. I think this is what drives the roadmaps of our customers and actually the robbers of our customers are more aggressive because of easy and because that it works I mean, they see the results. Today. So this is why I believe that what we're currently seeing I mean is ink is incremental and I think has has basically a runway on this is it and it makes sense.
If you if you look at where we are ever production technology that they can apply.
In terms of the innovation of the next generation nodes that customers need though so it is the it is I think it is the.
Additionally, more aggressive roadmaps that our customers are showing us are underpinning why I believe this is.
More sustainable.
Thanks very much.
The next question comes from Mr. Joel Quadracci. Please state your company name followed by your question.
Thanks, It's wells Fargo I was wondering if you could talk a little bit about the demand you're seeing in China.
Maybe.
Can you help us understand if as part of the in the memory side, the $1 billion a strategic revenue that you.
We expect to recognize this year how much of that is.
Been recognized this year and then how do we think about the trade negotiations between the U.S. in China, maybe impacting the timing of the equipment installations there.
Yeah.
Or just make some results on the.
Just writing down your questions.
Yes, I think on the on the the.
Memory side, there and especially China I mean, you have to realize that these are.
Greenfield.
Companies are grading Greenfield fabs.
Ramping their first knows the first device generations.
And they need a certain level off.
Output capacity that they need to put in place.
Thats happening this year and that's very strategic that will happen I don't have to have the 1 billion I mean.
Have have is a china you'll be roughly.
And it doesn't matter that much where how it's spread over the year, but that's roughly what it is and that is just happening I mean it is we're not that's not waning. That's that's not increasing it's just execution. According to plan.
Like we said last quarter I think you know the trade negotiations you know they are what they are.
And.
Currently.
There is there is no.
A limit on what we can ship to China, which is basically DPV is his 15 year old.
Technology.
And we've been shipping that for.
A long time more than 10 years to China, and that's what we still do so.
Oh, I don't know where wed trade negotiations will end up and I think we are in a state where.
Well, we know what is going on that business as usual the customers want the machines were able and capable and we are allowed to ship those systems. So we will.
Okay. That's helpful. And then just a quick follow up could you give us your thoughts on how we should think about free cash flow for the remainder of the year.
Free cash flow clearly, it's very back loaded I mean, if you. If you look at the way things are are composed this year sales are backloaded and therefore free cash flow is also very much back loaded that is also a result of the fact that and that.
On easy we have a payment schedule with our customers, which is which is very back loaded and as a result of that.
You know you really will see that the second half and in particular Q4, it will be very very cash rich and that will be a very significant generation of free cash flow, but all of it will be very back loaded this year.
Thank you.
The next question comes from Mr. Stefan only please state your company name followed by your question.
Yes, good afternoon to defend at least from the.
To.
I have a.
A question about to use the again.
I would like to discuss a bit about your lead times and to understand on the specifics you can understand what is the limits that you'd need to receive yonah. That's for me just amount to to make sure that you will.
Being the Rangel felt it fits fax machines are in 2020, and a short follow up piece about the opex that keep on rising.
Do you think you will continue on that so that trend going forward for the rest of the year and also for 2020 . Thank you.
[noise], Yeah, I will answer the question only really dumb and Russia was a question on the Opex.
On the lead time.
There is a order lead time, which we give our customers.
About 18 of about 18 months.
And.
Now having said that.
We are negotiating with our customers from time to time and.
They don't always hold to the 18 months you know sometimes depends on on some terms and conditions that are not that significant but you know we only have a deal when you have a signature so.
But at the lead time is 18 months. It was 24, where we're driving it down.
Have to because you have to realize that it's pretty difficult also for our customers to guess what they need in terms of capacity ramp and the size of the capacity ramp 18, or 24 months out nobody knows.
So it's it is essential that we keep reducing the cycle timing in the supply chain in the cycle time in our factory. So we make sure that we can deal with that flexible with our flexibility, we don't put a limit to it.
It's not that if you don't give an 18 month or what are you won't get the slot because we have all the ways to secure the shipment and as basically.
Knowing that we do the installation inspections when the factories built when the factory is finished.
We.
Work together with suppliers off.
The equipment that is attached to our tools, we work together with the suppliers are actually making all the facilities and all the piping and everything that goes with a semiconductor fab. So we know the customers are realistic and is real that they're planning those easy tools.
And that gives us a confidence that while some customers might not adhered to the 18 months for all kinds of commercial reasons and that they signed the order is a bit later the tool will ship and as hard works.
But on an opex.
As you know two main components in there as DNA as DNA as as you as you.
As you would have seen it fairly consistent over the quarters. If you look at 2018, 20 2019 fairly consistent than the guidance that we've given for next quarter 125, and that that's a number that I'm pretty comfortable with that where that we'll be able to.
To keep at that level for a for a little while.
As it relates to R&D are absolutely right, we push down the accelerator last year on on R&D, We've indicated why.
So this is on the pulling in of the of the low in a program really accelerating that program again. The fact that we're now talking about the the the first you be 3400 see shipments in this quarter and the fact that we've been able to in essence pull that end with a year. I think is the result of that of that effort and we'll continue to add two to two to two speed at the speed up in that in that process and the low any development high in a is a big big ticket item, obviously in R&D and also the continued development of multibillion. So those are the three main categories. As a result of which we told you last year and we're pushing down the accelerator.
What weve guided for next quarter for 95, I think its reasonable to assume that Thats. A number that you will also see Q4, and then gradually you will see with with an expected development of our business I would expect that let's say at the second half of 2020 that you will see us get back gradually to the 14% that we've earned that we've guided at the capital markets day. That's the that's the current plan.
Okay. Thank you that's very clear.
The next question comes from Mr. Sandeep Deshpande. Please state your company name followed by your question.
Hi, My first question is England equals Peter I mean, I want to just like you look longer term rather than pay trendy where everybody focused on how do you see I mean, you've talked about this again in your capital markets day, but do you see TSMC in the foundry market coming back in the following year as they begin to add more capacity in pretty tiny one and what do you think is going to be a long term capacity for you. We tooled up both Smith for any pending because you know the big initial ramp up of elite and then secondly, when we gave Mike a question for you on the gross margin.
Kevin can you just.
You know in your opening remarks, you said that.
Gross margin in the fourth quarter is going to be higher than 50% or is it going to be close to 50% I just was trying to clarify on that front. Thanks.
Okay. Let me, let me say I think on the longer term easy tools.
What you.
Individuals will be a first use the let's say the industry seven nanometer node.
Ill.
As I said layers ranging anywhere from between seven eight to 12, you know it depends on what customers are actually doing it with a tendency to go up.
But then the next node, which NSC five that's a significant increase I think you'll see like the more than 20.
Easy layers.
So, yes that will of course.
Great a.
Demand for more individuals. However, we also have a productivity.
Increased roadmap that should deal with part of it but it cannot only be taken up by productivity improvements or we need more easy tools. This is why we have a capacity.
Around 45 units in our factory.
If you look at.
Our our capital markets day presentation then.
What our with our mid market scenario, that's probably what we would need.
Taking into account the higher productivity now here if it turns out that the end demand that I talk about the customer customer and the model is even stronger than there are scenarios, where we have to go over 45, we are not planning that yet.
I think we have some time in terms of square meters that we need to build them. Because then we need to just.
Extend the factories.
We're not at that point, yet, but we'll watch that closely but but currently I would say 45 units.
For a system with a higher productivity capability that should be sufficient for next couple of years.
Thank you.
And Sandeep on the on your question there on the on the gross margin what I said in the introductory comments was that the Q4 gross margin approaches or 2020 target of greater than 50% sort of 20000 target is greater than 50% a little approached out in Q4, which are you should read as high Fortys. Therefore.
Okay. Thank you.
The next question comes from Krish Sankar. Please state your company name followed by your question.
Hi, its Chris from Colin Thanks for taking my question I had two of them first one or more than 2021st one for Rajiv. If you look at next year. It looks like you're going to do 2.3 to 4.4 billion also euros and you read revenue it looks like a unit that whole a revenue stream should come in at a 40% gross margin was 40% more the exit run rate for next year and then a question for follow up what Peter.
If youre a customer mix and demand is similar in 2020 and 2019.
And you're shipping more units should be as you Uli unit start coming down in 2020 because.
More you really do you think that transition is still further down the road.
Yeah. So to answer that question I think is further down the road I mean, the next year you are still see a very clear mix.
Don't forget let's take an example, there are logic makers that upsets you know we're going to ramp there's a seven nanometer product in 2020 watt, which means they need the tools and 2020.
But still you know they're ramping capacity of the previous Nols, which is real capacity that they need to ship. So it will be a bit of a mix next year I at the 2020.
I don't think I said at the 2020 E V mix is going to be similar to 2019, because that is dependent on I think the success you could call it already the.
Demand for DRAM.
The next year, which is a bit you know still needs to be proven like I tried to explain earlier.
But the margin that we've given for a for easy for 2020 is it 40%. That's the that's the margin that we've indicated and where it was where we're comfortable that we'll get there in 2020.
Thanks folks.
[laughter].
Oh, yes.
[laughter] next caller.
The next question comes from Mr., John Pitzer. Please state your company name followed by your question Yeah. It's credit Suisse. Thanks for let me ask the question Peter as always appreciate all the detail I'm just kind of curious you talked about in your prepared comments that the non do you the memory revenue for the back half of the year needs to be about $900 million I'm kind of curious if you could help us understand the profile between Q3 Q4 I'd how important is a memory pickup to kind of your Q4 implied outlook do you think the current run rate is kind of for better or worse, a bouncing along the bottom run rate and the risk is timing for an upturn or could you actually envision a scenario where the memory would actually go lower from these levels.
Yes, it's a good question so John I'll just answer the last one I need a crystal ball because I don't know no way you can be lower or not I mean.
Is it the bottom run rate well $900 million annualized $1.8 billion for capacity.
In an industry that is growing and also looking at where logic is going.
It's pretty tough ill do to see I do see that much lower than it than it is now I think the spread of the 900 million I don't have the exact details here, but I think it's about half half I mean, it's not that much different than looking at.
Thats.
Yes, I think it's about half half yeah. So it's always so its not skewed towards a one off or do Q3 or Q4.
But by any means $900 million for six months or 1.8 on an annualized basis for capacity for bit capacity.
In lift though is not a very large number if you analyze it.
If you annualize it so that's that's actually that's a low that's a relatively low number now is that a bottom I don't know I don't know what is going to happen.
But like I said earlier on the positive side.
Customers are also changing their wafer output plans.
To the downside. So all these things will of course help you know, it's like with whatever the memory cycle. You have to we have to you have you have to grind through it and and lowering capex and in this particular case, which is different than previous acquisition. As you know you know turning turning the closing.
The phosphates it basically.
Slowing down the number of wafer starts that is something that we haven't seen before is all these things will help those I'm not pessimistic on the on the on the length of this downturn. This memory downturn. It it will turn when it's the end of year or beginning of next year I mean, I don't think it's going to last a hell of a lot longer.
That's helpful for my follow up I, just wanted to go back to the impact of improving productivity already.
Tools shipped and it's pretty obvious that in the memory space.
DRAM space, there should be a pretty high correlation is productivity goes up economics make most more sense and even intra node insertion of more layers seems like very plausible for DRAM I'm kind of curious from a logic foundry side, just given that theres sort of a design cycle times are five and seven nanometers. If you start to exceed productivity targets does that actually drive more tool units or fewer total units for that my guess is injured node insertion would be a much more difficult timely costly thing for your customers' customers customers are we too focused on units because its productivity is going up I'm, assuming you're going to get better ASP. So should we be more focused on a revenue target for lift though instead of units are pretty easy to start the year to target.
Yeah, I'll, let me highlight a Roche Roche covenant on the last part.
Yes.
No I think when you look at customers and the uncertainty that have seen over the last couple of years. The fact that they actually have changed.
Layer adoption of the as we went.
As we as they gain more confidence in GAAP more information out of there.
R&D.
They actually changed the lay accounts it it wasn't stable I mean, it actually changed and actually there's a tendency to go up.
So that proves that the customers do take.
You know they they have alternatives not that they're completely the you know developing.
Two separate tracks I think there is some interchange ability there where they can swap.
Certain layers.
Two easy if the economics makes sense I think it's taken into account in their design process. I mean, that's what we've seen and although wise you know this this trend that we've seen by adding more or less issue.
Good could not have happened and we're seeing it. So it means that they are taking that taking account of it and they're designing probably.
In a manner, where they have some flexibility to either to do either or.
And Jonathan Ray So your last comment that was music to my ears, because you're absolutely spot on I think more and more we need to look at the at the business not in terms of units, but in terms of the the euro value that that is attributed to that because you're absolutely right. The the number of units is meaningless to the extent that you see the very significant uptake that we've been able to demonstrate and productivity and then translates into into higher ASP. So thats why on a go forward basis I do believe that we all need to think much more in terms of you we've easy revenue rather than easy easy units.
Thanks, guys.
The next question will come from Mr. Dominic will discuss go ahead. Please.
Please state your company name.
Hi, I'm from my understanding and good afternoon. Thanks for taking my question.
As you mentioned that Q4 will be a larger quota.
With key focus on execution on supply chain I. Appreciate obviously building towards your buys a lot of complicated steps, but just curious whether there is any particular color on specific aspects of execution that have greater risk than others. In Q4, we should watch for and then I would just quick follow up.
Yes, I think we are introducing several new features on the surface and see.
Which includes it ranges from optics to laser alignment systems to the modular vessel, which we which we're using to create the plasma.
It's all of the above an old needs to come together at the right time. So when you have one of these components a few weeks later then.
Few weeks.
The high the shipment schedule. So this is what and then this is normal when you introduce a new system, which has a quite a significant number as high a number off of a new parts in it. So this is what it is what it is it is a it can be all of the above and we just need to make sure that their supplies are which we know.
I just mentioned them.
Loss related to the laser related topics. They are all ramping as fast as they can they are at their maximum capacity and of course win with a new product.
You know the things got good don't go as planned because it takes a little bit longer to ship to us that we have in Italy, and thats pretty normal with this complex deck Ano and technology, but were pushing them, where we're sitting on top but you have to take into account. There is a level of risk there that we will might lose as a few systems that we need to push into January 2020.
Okay understood. So nice specific kind of mass and just broader kind of conservatism.
And then secondly from your vantage point Im curious, where do you have thoughts on.
DRAM and specifically have you quantified your perspective on.
DRAM utilization rates, whether you've seen anything and have you quantified that.
Well, where were whereas were seeing certain things but.
No, we're not and customer Fabs all door. We are we have some level of in form of information and.
I don't think we should mention on this call any utilization rates or our assessment of the usual.
Utilization rates of our customer that are that pretty confidential.
But you know that it's been their statements also you know that is a basically they have lowered the wafer starts and which is true I mean, we can our data that we see actually go from this so.
That's what it is and I think that's a good sign but how much. It is I don't think we should discuss in this call.
Okay understood.
Ladies and gentlemen, we have time for one last question. If you are unable to get through on this call and still have questions. Please feel free to contact the ESMO Investor Relations Department with your question.
Now operator may we have the last caller please.
Ladies and jumped on the last question will come from Mr., Amit Sean Downey. Please state your company name followed by your question.
And thanks for letting me on.
Two if I may from my side.
[noise] firstly.
It would be helpful to get an update from your side on how the E beam side of business is coming along.
In terms of its trajectory into the second half of the and into 2020 .
And and then I have a question please.
Yes, I think not much different as we said last quarter I mean, we're on track to ship. The first the systems to R&D sites all of our customers are talking about the multi beam systems.
Which actually means we should ship multi beam systems next year in volume too.
The market is in that sense, it's an update the debate is what we said last quarter is no change to the plan still intact.
Okay.
And secondly from me.
We obviously have a macro economic backdrop, but the trade off between us and China.
You clearly did not design a company to be supplying separately to U.S. and China.
But given in terms of the opportunity going forward from China longer term.
Instead anything strategically you're conceptually you need to think of in terms of how you're structured as an organization not in the supply chain.
To ensure you can keep on supplying both of these key geographies.
Going forward I guess, it's a bit hypothetical, but certainly something to consider.
Given what you've seen over the past one year.
I think it all.
I would say I mean that that's a very good question because it warm and the answer is it's too early.
I mean, we don't know how this is going to pan out.
This is a they will move roll it is a cold so it's more a strategic concern.
Yeah that that.
We need to start thinking off just like you said and I, it's absolutely not the time to take drastic.
Decisions because I don't know how this is going to pan out.
But we'll follow it very closely and you are right. It is our intention.
Two.
Service, our customers and our customers that are wanting to place orders and we're willing to where we are completely willing and wanting to ship those orders.
And and unless there are legal boundaries that that's that we can of course and we will not.
Then we will keep doing what we're doing but you are right you know.
Speculating, where it is where it might end up is a bit dangerous was definitely too early to start thinking of any.
Big strategic organizational moves into another direction to make sure that we can ship to our customers as a bit of a wait and see.
Thank you Peter.
Now on behalf of SNL I'd like to thank you all for joining US today, operator, if you could formally conclude the call I would appreciate it. Thank you.
Sir ladies and gentlemen, this concludes today's amount 2019 second quarter financial results Conference call.
Thank you for participating you may now disconnect.