ASML Holding N.V.'s (ASML) CEO Peter Wennink on Q3 2020 Results - Earnings Call Transcript

October 14, 2020

ASML Holding N.V. (NASDAQ:ASML) Q3 2020 Results Earnings Conference Call October 14, 2020 8:30 AM ET

Company Participants

Skip Miller - Vice President, Investor Relations
Peter Wennink - Chief Executive Officer
Roger Dassen - Chief Financial Officer

Conference Call Participants

Krish Sankar - Cowen
Joe Quatrochi - Wells Fargo
Sandeep Deshpande - JP Morgan
Andrew Gardiner - Barclays
David Mulholland - UBS
Amit Harchandani - Citi
Alexander Duval - Goldman Sachs
Mehdi Hosseini - Susquehanna
Aleksander Peterc - Societe Generale
Adi Metuku - Bank of America

Operator

Thank you for standing by. Welcome to the ASML 2020 Third Quarter Financial Results Conference Call on October 14, 2020. 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.

I would now like to -- wait for the moment. I would now like to open the question-and-answer queue. [Operator Instructions]

I would now like to hand the conference call over to Mr. Skip Miller. Please go ahead, sir.

Skip Miller

Yeah. Thank you, Operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call is ASML’s CEO, Peter Wennink; and our CFO, Roger Dassen. The subject of today’s call is ASML’s 2020 third quarter results.

The length of this call will be 30 -- 60 minutes and questions will be taken in the order they are received. This call is also being broadcast live over the internet at asml.com. A transcript of management’s opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call.

Before we begin, I’d like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning 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.com and in ASML’s annual report on Form 20-F and other documents as filed with

With that, I’d like to turn the call over to Peter Wennink for a brief introduction.

Peter Wennink

Thank you, Skip. Welcome, everyone, and thank you for joining us for our Q3 2020 results conference call. I hope all of you and your families are healthy and safe. Before we begin the Q&A session, Roger and I would like to provide you with an overview and some commentary on the third quarter, as well as provide our view on the coming quarters. And Roger will start with a review of our Q3 financial performance with comments on our short-term outlook. And I will be -- I will complete the introduction with some additional comments on the current business environment and our future business outlook regime. Roger?

Roger Dassen

Thank you, Peter. Welcome everyone. I will first review the third quarter financial results and then provide guidance on the fourth quarter of 2020. Net sales come in above guidance at €4 billion, primarily due to additional EUV system revenue. We shipped 10 EUV systems and recognize revenue for -- from 14 systems this quarter.

For the four systems that shipped in Q2 but did not receive factory acceptance testing before shipment, we were able to complete customer site acceptance tests and recognize revenue this quarter bringing the total to 14 EUV revenue systems in Q3.

EUV system revenue this quarter was 66% of total system revenue, which is the first time EUV was higher than DPV system revenue. This further confirms EUV has entered the realm of high value manufacturing and as an integral part of our core operational activities.

Net system sales of €3.1 billion was again more weighted towards Logic at 79% with the remaining 21% from Memory. The strength in Logic is driven by the high EUV revenues. Installed base management sales for the quarter came in at €862 million, showing continued strength in our service and field option business from the beginning of the year.

Gross Margin for the quarter was 47.5% coming in at the midpoint of our guidance, which is a good outcome considering the significant EUV revenue.

On operating expenses, R&D expenses came in at €534 million and SG&A expenses at €132 million, which was slightly better than guided.

Net income in Q3 was €1.061 million representing 26.8% of net sales, resulting in an NPS of €2.54.

Turning to the balance sheet. We ended third quarter with cash, cash equivalents and short-term investments at a level of €4.4 billion, which is the same level as last quarter.

Moving to the order book, Q3 system bookings came in at €2.9 billion, including €595 million for EUV systems. We saw some EUV demand reduction due to a delay and customer’s node timing resulting in a net booking of four EUV systems. Order intake was largely driven by Logic with 86% of bookings and Memory remaining 14%.

With that, I would like to turn to our expectations for the fourth quarter of 2020. We expect Q4 total net sales of between €3.6 billion and €3.8 billion. We expect our Q4 installed base management sales to be around €900 million, which is driven by strong demand for field upgrades and growing service revenue with an increase in contribution from EUV service.

Gross margin for Q4 is expected to be around 50%, which is significantly higher than Q3, driven by higher immersion volume and improved DPV product mix. The expected R&D expenses for Q4 are €550 million and SG&A is expected to come in at €140 million. Our estimated 2020 annualized effective tax rate is still expected to be around 14%.

Finally, I would like to talk about capital allocation and working capital. As mentioned last quarter, we are in a transition period with customer contracts as we work to move towards new contracts with improvement payment terms. We do see some of these new contracts starting to materialize and expect to improve our free cash flow generation in the coming quarters.

The interim dividends over 2020 will be €1.20 per ordinary share. The ex-dividend dates, as well as the fixing dates for the euro-U.S. dollar conversion will be November 2, 2020, and the record date will be November 3, 2020. The dividend will be made payable on November 13, 2020.

Conditions in the COVID environment have improved around our ability to operate and our assessment of our supply chain. Taking this into account along with our improving free cash flow generation, we will resume executing share buybacks this week in line with the plans that we have communicated earlier this year for a total of €6 billion over three years.

With that, I’d like to turn the call back over to Peter.

Peter Wennink

Thank you, Roger. As Roger highlighted, we had a very strong quarter with €4 billion in revenue and good profitability, driven by strong growth in Logic. We expect Q4 to be a solid finish to the year in both sales and profitability.

And in spite of added macro uncertainty in the first half of the year due to COVID-19, our view on growth this year is largely unchanged from what we believe it at the start of the year. This is a clear reflection of our customers drive to innovate and continue to invest in future technology nodes.

In Logic, customers continue to see strong demand for advanced nodes in support of the build of the digital infrastructure, which includes secular growth drivers such as 5G, AI and high performance compute. And as we’re still in the early stages of this digital transformation, we expect Logic demand to remain healthy and continue to drive demand for our products.

In Memory, customers are continuing to indicate that they’re seeing healthy demand in data centers, with improving demand for consumer electronics. With consumer -- with customer’s expectations for higher bid growth next year and taking into account the longer lead times and qualification schedules for advanced litho, we are starting to see a recovery in lithography demand for DRAM, with strong growth expected in Q4 this year. Based on a continuation of this improving end market environment, we expect this Memory recovery to continue into next year.

Sales to China contribute -- continue to grow and accounted for 21% of our system’s revenue this quarter. We expect sales to our domestic Chinese customers to grow to above €1 billion this year, which includes sales to both Logic and Memory customers in China, with a mixed skew towards Logic this year, but trending to higher memory sales next year.

Regarding U.S. export rules to China, we are aware of the requirements set by the U.S. Commerce Department for specific companies in China, and as such, according to the current regulation, ASML can continue to ship DPV lithography system from the Netherlands.

ASML requires a U.S. export license for systems or parts that are shipped directly from the U.S. to customers affected by the rules. While it is not a policy to comment on individual customers, we aim to serve and support all of our customers around the world to the best of our abilities, whilst being, of course, compliance with laws and regulations set by the jurisdictions where we operate.

On our installed base business, we still expect significant growth this year. Through the first three quarters we realize revenue of around €2.6 billion, and as Roger mentioned, we expect another solid quarter in Q4. Service business will continue to scale as our installed base grows, with increasing contribution from EUV service revenue as these systems run more wafers in volume manufacturing. We expect significant demand for upgrades as customers utilize upgrades to increase capacity and improve imaging and overlay performance required on future nodes.

On EUV, although, our customers are still climbing the maturity curve, we continue to see increasing customer confidence in the technology, which is translating into expanding layer counts in Logic, initial deployment of EUV in Memory and an increasing service revenue.

With 10 shipments this quarter, we have shipped 23 EUV systems year-to-date. With completion of customer side acceptance test and revenue recognition of the four systems shipped last quarter, we achieved the remarkable €2 billion of EUV system revenue from 14 systems in Q3.

We’re still planning to manufacture 35 systems this year, but due to the base of customers node RAMs and their fab readiness, a few systems may end up being shipped early next year. But despite this potential shift of shipments to early next year, we’re still targeting EUV revenue to approach €4.5 billion this year.

We continue to drive profitability of our EUV systems and service business. We are on track to achieve at least 40% system gross margin and we started to break even on service business this quarter.

We will continue to drive margin improvement in both systems and service costs, the fire cost reductions and delivering more value. And as we said before, we expect EUV margins to -- we expect EUV to reach margins comparable to DPV margins over the next two years to three years.

We’re on track with our EUV cycle time reduction plan to get to 20 weeks by the end of the year, enabling a capacity of 45 to 50 systems. With respect to demand for next year, we currently have an EUV systems backlog of €6.2 billion exiting Q3 with around 65% of this backlog plans for shipment next year.

While we expect more orders in Q4, we did see some EUV demand reduction for next year due to a delay in customer node timing, which resulted in net bookings of four systems in the quarter. Although, there is clear uncertainty due to the current macro environment, as well as exact timing slope of RAM and ultimate size of the customer nodes, we currently expect EUV system revenue growth of around 20% next year.

In our DPV business we qualified the first NXT:2050i in Q3 which shipped early Q4. This immersion system is based on a new version of the NXT platform where the reticle stage, the wafer stage, the projection lens and the exposure laser all contain performance announcements. With these innovations, the systems deliver increased customer value via improved performance in overlay and productivity, and are therefore critical in support of their next node introductions.

To summarize 2020, in spite of macroeconomic uncertainty in the first half of the year, we see the app playing out quite similar to what we saw at the start of the year ago. We expect to end another strong year in Logic, Memory growth of over 30% and significant growth of over 20% in our installed base business. With this, we expect double-digit growth in both sales and profitability leading to estimated revenue of at least €13.3 billion.

As we look to 2021, it’s too early to provide any detailed guidance, as we are working with customers to determine demand plans going forward. While there are still significant uncertainties, we expect another year of low double-digit growth, largely driven by our current view of expected EUV system revenue growth of around 20%.

There are a number of elements that will determine the degree of growth and uncertainty of course. First, is the macro environment, because nobody can predict the global economic impact of COVID and how this will impact the end markets that we serve. On top of this, there’s also the geopolitical environment, predominantly the U.S.-China dynamics that creates additional uncertainty.

In Memory, demand will depend on bid growth next year. Customers seem to broadly believe the inventory issues will be normalized by the end of the year and expect stronger bid growth in 2021. We currently see stronger litho demand for Memory next year, which is consistent with customer’s comments. However, the degree of growth will of course depend on continued technology transitions and how much capacity will be added.

In DRAM specifically, we see support of this expectation to high utilization of our litho systems in the field at the moment. While we expect to see more EUV systems go to DRAM next year in support of 1 alpha node, Memory is still a key driver for our DPV demand.

In Logic we expect demand will remain healthy. However, final demand will depend on timing and the slope of node ramps driven by the end demand curves. Customers are continuously recalibrating their roadmaps leading to changes in their shipping requirements, which will likely have an impact on our demand next year.

The other aspect of demand timing is around the slope of the node ramps and this will be determined by how many wafers will move into each of the 5G nodes and AI, as I mentioned before, a fraction of the health of the end demand next year.

Lastly, on installed base business, we expect continued growth but the real growth will be more dependent on upgrade businesses as the service business is pretty predictable and grows with installed base.

In summary, there are a lot of dynamics at play, both at the macro level, geopolitical level, as well as market specific circumstances. However, the ongoing transformation of the digital infrastructure, along with a secular end market drivers, such as 5G, AI and high power compute, will continue to fuel demand for advanced process nodes, both in Logic and Memory, which drives the demand for our products. Therefore, although, we are currently going through a period of near-term uncertainty, the long-term demand drivers only increase our confidence in our future growth outlook towards 2025.

With that, we’ll be happy to take your questions.

Skip Miller

Thank you, Roget and Peter. The Operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I like to ask that you kindly limit yourself to one question with one short follow-up if necessary. This will allow us to get to as many colors as possible. Now Operator, could you have your final instructions and then the first question, please.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Mr. Krish Sankar.

Krish Sankar

Yeah. Hi. It’s…

Operator

Please state your company name followed by a question.

Krish Sankar

Hi. It’s Krish from Cowen. Thanks for taking my question. I have two them. First one, Peter, on the 20% EUV growth for next year in terms of revenue, what does it imply for units? Is it around 40%? I’m just trying to figure out what the unit number would be for next year for EUV and then I had a follow up.

Peter Wennink

Yeah. Krish, you need to understand, and I mean, we always get this question on the unit numbers. But at the same time, we always get the question on what -- why is the ASP and that grow the higher lower, for instance, last quarter it was like 145 million, which was last quarter result of the specific configuration sets and the fab upgrades that were included in the shipments.

So this ASP, because what you’re asking is the number of units times the ASP gives you the euro sales number and this is why we just gave you the euro number, yeah. And it depends on the configuration and the richness, you could say, of the configuration that actually determines ultimately who -- how many of those units we will ship.

So we’re guiding any units, we just give you a euro number that we believe is going to be 20% up from this year, which is around €4.5 billion this year. So, yeah, I think, it’s going to be at least 20%, as I think, we’ve looked at the demand picture. I think we derisked it for some of the recalibrations of the nodes and the nodes timing and we’re coming up with that euro number and I think going forward also we will do that, just like we do with DPV. And with the total company sales, we don’t tell you how many units we sell. We just tell you what we think how much euros we will sell.

Krish Sankar

Got it. Peter, that makes sense. Thanks for that. And then as a follow up on the DRAM side, clearly, you’re seeing continuing strength from DRAM for DPV. There were some concerns in the marketplace that the DRAM makers might scale back some of their near-term CapEx because of Huawei going away. Have you guys seen any of this nuance or just because of your long lead times you’re kind of agnostic to such noise?

Peter Wennink

Yeah. I think we have this question on the impact of a potential drop of Huawei as a key customer for our customers. When Huawei doesn’t sell those smartphones or the digital infrastructure, somebody else will.

So I think that in itself is not going to be a driver. It can only be a short-term disruption in timing. Demand might fall away and might move to somebody else, but that probably takes some time before it pops up. So I don’t think that’s a structural issue.

No, I think, we just need to look at what the situation is. We get a push from our DRAM customers we corroborate that push with what we see in the utilization of our tools and our -- the utilization of our tools is high. And it’s grown, I would say, relatively gradually to this level throughout the year.

Yeah, and I think, if you then listen to our customer said, well, we think that the inventory situation will normalize towards the end of the year, with a utilization position that we’re currently seeing that is pretty close to what we think is kind of the maximum capacity, then it’s not strange to conclude that they need more capacity next year, especially if you look at the demand coming out of the server business, and also the uptake that we’re seeing in consumer electronics. So, all in all, that makes us more optimistic together with our customers on the DRAM business going forward.

Krish Sankar

Thank you. That’s very informative and helpful. Thank you.

Operator

Our next question is from Mr. Joe Quatrochi. Please state your company name followed by your question.

Joe Quatrochi

Yeah. Thanks. It’s Joe Quatrochi from Wells Fargo. Just back on the 20% EUV growth for next year, can you help us understand is that assuming in a few tools slip from 2020 and are shipped actually in early 2021? And then, secondly, on that, is there a scenario that as we get into January and you get better visibility, there’s actually some upside drivers of that 20% growth ex the systems that could potentially fall from 2020 into 2021?

Peter Wennink

Yeah. That’s a good question. Well, as we said, 2020, we are always said about €4.5 billion, which we stick to that. And then, so the guidance over 20% up from that €4.5 billion, of course, includes all shipments that go from 2020 into 2021.

You can draw a conclusion from that the -- that our forecast in ASP at the beginning of the year, i.e., the configuration richness, yeah. That’s been a bit better than we anticipated. We’ve seen two upgrades, yeah.

So, yes, that’s -- that moves into next year and that’s why units, I said on as an answer to the question of Krish also. Units are not that important because it’s -- really it’s the ASP that can really vary because of the configuration. So we guide you euros. But just it will move into 2021.

Now as the upside, that’s your second question. I think what we have -- what we clearly said also in our prepared remarks that we have adjusted our demand picture based on the recalibration that has happened within the customer base on the node timing and on the ramp of that node. That, of course, happens first, because we know that.

But it’s also like you’d have to look at this almost in a way of communicating vessels [ph], what goes down also goes up at the other side. Now, in a communicating vessel, it all happens at the same time, whereas there’s a bit of a time lag between when you adjust downwards and when you see that demand later in time coming back up. That is the upside. That is not what we have put into our 20%, yeah.

So you could actually say, we’ve taken all the information off today, taking into account all the uncertainties that we see, taking into account the node calibrations and this is what we have actually tell you, what we qualitatively see today, that there is upside is also clear, because like I said, it’s a communicating vessel, what comes down comes up somewhere, there’s going to be time difference and that’s why we’re preparing for a potential upside also in 2021.

That’s why we still talk about a build capacity, yeah, that is higher. It’s 40 to 45 systems, I’d say, 45 to 50 systems even, yeah, and that’s what we’re organizing for in the supply chain, yeah. So, yes, there could be upside for the reasons that I just mentioned and we’re prepared.

Joe Quatrochi

Perfect. That’s helpful. And then just a quick follow up. On the low double-digit revenue growth for next year, how do we think about OpEx growth?

Roger Dassen

OpEx growth, I mean, on the SG&A side, I think, it will -- that will continue to develop as we’ve seen in the past quarter, so no major uptick there. On the R&D side, we are pushing down the accelerator quite a bit in terms of different programs both on High-NA, also on EUV, I mean, we’re also, obviously, looking at and working on the successor of the D tool, which will have some demonstrable progress and value to our customers, which obviously requires quite some R&D work and also on the DPV roadmap this is still quite something to be done.

So there we talked in the past about adjusting the number that you’ve seen for this year with the salary increases. In fact, if we look at the magnitude of the program, it’s probably going to be a bit higher. We’re in the process of finalizing that right now, because we’re right now in the finalization of the of the budgets, so more precise guidance will be able to provide you with in three months time, but I think it’s fair to assume that the increase in the R&D budgets will be a bit higher than just the salary and the salary of it.

Joe Quatrochi

Thank you.

Operator

Our next question is from Mr. Sandeep Deshpande. Please give your company name followed by your question.

Sandeep Deshpande

Yeah. Hi. Thanks for letting me on from JP Morgan. My question is regarding a couple of things. Firstly, you’ve already indicated that you’ve seen some push outs and you’ve reported a net EUV order intake in the recent quarter. I mean, there has been a push out from one of your customers, but then that same customer could place orders and another customer of yours and so have you seen any movement on that front or you expect to see movement on that front in the next few months? And the question there which arises is that, can you satisfy short-term demand, because you’ve talked about in the past that EUV tools are 12 monthly time, so whether that pick. And my quick follow up to that question is on the gross margin, you’re indicating this 20% revenue growth number into next year for EUV which is a good number. But clearly, I mean, you imply some amount of unit cuts because of this push out from one customer. Does this have an implication on gross margin at -- for ASML next year on EUV from the 40% of this progress, from the 40% towards a much better EUV gross margin? Thanks.

Peter Wennink

Okay. So, you guys are all squeezing five questions into one, which we are -- we’ve been a little bit prepared for, so Roger is going to answer that one. On your question of the push of the net four systems, have we then see all the customers then stepping in?

Well, it’s a bit just the story of the communicating vessels and this is what you’re asking, in fact, yeah. Which by the way, is not retail, when you cannot get it with retail shop A, you move to retail shop B, it’s a bit more difficult not so much for us, because we could probably do that, at least for the customers.

If one customer just their no timing, yeah, it takes time for all of us to see what that means and how that needs to be digested. So, this is why I said in an earlier answer, yes, I see upside, because there’s a timing difference. If you think about communicating vessel between things going down and the other part going up again, yeah. So I definitely see that.

This is why we’re preparing also to be able to hit more. Because to your point, if you would really only follow the order intake and then add 12 months lead time it is never going to work. So you have to prepare for more, because you would expect that there is a decent chance that you see some upside next year and you will be ready. So this is where the 12 month lead time is actually -- that’s it -- it’s -- actually that is more than 12 months or more like 18 months, yeah.

But that -- so, that if you don’t prepare yourself, yeah, because you do expect this, then you could of course, accept deals with a delivery time that’s way within that 18 months. So, yes, we are preparing for more and time will tell whether when the customers need it in the timeframe 2021. I think they could, but time will tell. There’s a real opportunity there.

Roger Dassen

Sandeep on the gross margin for EUV and that maybe a little broader than that. So on EUV, you are absolutely right. So the 3600D will see an increase in gross margin and I think we have said in previous calls that we hope with the 3600D to approach the corporate gross margin. So, an improvement over the 40% that we targeted for this year, and as we already said, we’re probably going to even slightly exceed the -- that target for this year.

So, yeah, from that advantage point, there will be an improvement in the gross margin for next year. The downside on EUV is that in the gross margin for next year, you will also see that we already have some operating expenses for High-NA. That is a little bit accounting and with the CEO and the CFO of this company, both holding degrees in accounting, we say with a bit of pride. But the downside is that even though we’re not selling High-NA next year, we already have some operating expenses in there which find their way into the cost of sales and therefore in the gross margin. And that we assume will be about a 1% reduction in comparison to the gross margin that we have this year, just to give you an order of magnitude.

So, a clear plus from the increased gross margin on the D, also an increase in the gross margin of EUV service margin that we talked about and then a little bit of a negative there. And then if you look at everything, also for -- into the DPV business, for instance, that then becomes a little bit of a swing factor for next year, the mix in DPV for next year and also the level of field upgrades.

All in all, target that we had four or that we have for Q4 and also the target that we have a little bit moving forward to 50%, with all the pluses and minuses we’re probably going to be somewhere in that range of the gross margin that we had for this year for the full year and then the 50% target that we’re envisaging. That’s where you’re going to find yourself in that mix with all the pluses and minuses that I just discussed.

Sandeep Deshpande

Thank you, Roger.

Operator

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

Andrew Gardiner

Good afternoon, gentlemen. Thanks for taking the question. It’s Andrew Gardiner from Barclays. Just another one on EUV, please. Just in terms of some of the distinction over what you’re seeing with customer plans for next year. I think we can all appreciate some of the, as you said, node migration recalibration, but in terms of the commitment to the technology, particularly by those who are leading the way in deployment, you should -- where are we in terms of EUV layers -- layer count looking to the next node in three node relative to earlier expectations. Peter, you made a comment that customers are more confident in the technology. So you -- even if ultimate capacity may be taking a little longer to ramp in terms of wafers, are you seeing the layer count continuing to creep higher and I suppose that Logic but also similarly in Memory, with DRAM press reporting one of your major customers visited you this week talking about EUV and commitment there. So similarly around DRAM, where are we in terms of layer count expectations? Thank you.

Peter Wennink

Yeah. I think on the layer counts. I mean, it’s clear -- clearly evidence given to us that that tech -- that the customers have embraced the technology and that the technology gives a lot of advantages and simplification in lower -- with low work in process, faster turnaround times in R&D.

So that’s -- when you take it all together then, I think, on the N5 in Logic we’re over 10 layers and in N3 we will be over 20 and we actually see that creeping up. So -- and that has just the fact that it gives so much more advantage to go to single patterning and take away these multi patterning DPV strategies, which is also true for DRAM.

Of course, DRAM is a bit behind in terms of HVM introduction as compared to Logic, but also there we see the same trend. And it’s this -- it is the process simplification is actually driving the additional layers.

And in DRAM, although, we start with one, yeah, we can see -- clearly we can see strategies going forward, 1 alpha and beyond that will add up to five, six layers, yeah. And that’s -- but it’s really dependent also on how much productivity can we get out of the tools? You have to realize that customers are currently pushing us extremely hard to get more wafers out.

I mean, we are introducing EUV tools with more productivity, with more wafers per hour. We have the C version introduced. We’re now looking at the D version and beyond the D version there is going to be another version with increased productivity.

But today, when we have our customers discussion, it’s really a discussion about, could you please speed up the maturity of the tool, get your EUV tools at the same level of productivity and of reliability and uptime as you have your DPV tools and they know it is going to take time, because we need more EUV wafers. We need more. That is the consistent question that we are getting.

So -- and I think it’s driven by the fact that they see the big economic and technical benefits of using EUV and that will drive the layer count up both in Logic and DRAM. Like I said, N3 are over 20 layers, so it has only creeping up.

Andrew Gardiner

Thank you, Peter. And just quickly, Roger, if I could just ask a follow up to the prior question, when you talk about your gross margin, I just want to make sure, it was -- I was clear on what you were saying, you are saying gross margin for next year somewhere between the 2020 level, which based on the guidance you’ve given us the 4Q is going to be around 48% and the 50% that you’re aiming for in terms of fourth quarter, is that right, somewhere sort of in that range?

Roger Dassen

So -- that’s right. So 48% is, if you do the math and you take the 50% guidance that we gave for Q4 then you will probably see this year, for the full year and for the full year you would see about 48%. What I’m saying is, if you take all the pluses and minuses that we just talked about, you’re going to be in that range for the anticipated gross margin for next year. Of course, more guidance on that, to -- where the year is firming up, so more clarity on that in three months time, but directionally I think that’s what you -- that’s what you’re looking at.

Peter Wennink

Yeah. That’s based on the let’s say low double-digit growth, as compared to…

Roger Dassen

Yeah.

Peter Wennink

… this year, so any upside on the additional business, of course, will have an impact on the margin profile. And as Roger said, we have to just have to take care of this accounting issue on High-NA where we don’t sell High-NA but we simply cannot…

Roger Dassen

So it could be left forward on the gross margin.

Peter Wennink

We cannot capitalize anything in inventory. We just have to write it off. So this is what is, which by the way will give us better High-NA margins once we start shipping High-NA.

Andrew Gardiner

Thank you, guys.

Peter Wennink

Thanks.

Operator

Our next question is from Mr. David Mulholland. Please state your company name followed by your question.

David Mulholland

Hi. I am Dave Mulholland from UBS. And I just want to follow up on the comments you made around China, Peter. Obviously, it’s clear you’re still able to ship particularly if it’s out of the Netherlands to particular customers. But for those that have been facing sanctions from everything we’ve read, are you assuming any shipments into those customers for 2021, because whilst you may be able to ship yourself, they will obviously face some indirect impact if they’re unable to buy from some of the other semi cap equipment space? And I’ve got a follow up afterwards.

Peter Wennink

Yeah. I think it’s a good question, David. When we talk to our Chinese customers and you have to understand that, when they look at some of the other process tools, there are some alternatives here and there is a lot of tools in Japan, when you talk about EUV or you talk about deposition tools. There is a European company, which is in Singapore that can be an alternative. So on metrology, there are alternatives both in the Netherlands and outside the U.S., in Japan and even increasingly in other parts of the world.

So if you’re a Chinese company and there’s one thing that that the alternative is more difficult on and it’s on litho, yeah. So you just want to make sure that you get your litho tools. And of course, companies that are on a list, where under the current agreements, we cannot ship to, we won’t ship to. I mean, it’s -- there wasn’t our agreement, I mean, our -- we just have to go for and we have to look at those lists and we follow those lists.

But currently, the customer that we’ve been talking about our Logic customer, one of a major Logic customer in China actually allows order rules allow us to ship litho tools and it’s for those Chinese customers very important to actually get their litho tools and then find the solution for the other process tools, but litho is critical. It’s the most critical tool in your fab.

So it -- so that’s why it’s not change -- that’s why it’s not strange that they still talk to us and said, hey, just make sure that you ship us the tools that we need, because it all starts with -- in terms of CapEx, it is all starts with the most expensive tool in the fab and that litho.

David Mulholland

That’s great. Thanks for that. And then just a quick follow up, you obviously said, you’re keeping the door open to more shipments potentially for next year, if you do see upside elsewhere. How long and how much balance sheet are you willing to keep that door open for. Obviously, you’ve got the funding to do it, but are you making customers commit by the end of this year or how long are you leaving that flexibility?

Peter Wennink

Yeah. I think it’s a good question. Of course, we try to push it, but at the other hand, and I know customers are listening into this call also there, so I’m not doing myself a favor. So -- but that part of the difference between the bottom-up numbers that we currently see and it is risky under these circumstances that are obtaining more risk and our build capacity.

Anywhere in between, yeah, we are going to make sure that we have some extra leeway, some extra room, yeah. So we’re going to go all out and then try to completely maximize our output. But between what we currently think in terms of units and that maximum number somewhere in between we’re going to make sure that we will be able to react.

And like I said, I’m not doing myself a favor, because customers are listening in, so it will probably take a bit of time for them to get the appeal. But if they need it, they will come and we will ship actually.

David Mulholland

Thanks, Peter.

Operator

Our next question is from Mr. Amit Harchandani. Please state your company name followed by your question.

Amit Harchandani

Thank you. Good afternoon, and good morning, everyone. Amit Harchandani from Citi. Two questions if I may. My first question relates to the ramp on the Logic side for EUV, could you give us a sense for where we are in terms of technological readiness that is playing a part in terms of how customers are thinking about ramping, say, beyond the N5 towards the N3? I appreciate the demand dynamics is one factor, but if you could help us give us a sense for the overall technological readiness of the ecosystem? And secondly, if I may on a separate note, you have given us some perspective on contribution from China, could you maybe quantify that and give us a sense for how derisk that number is or what’s the puts and takes if there was a potential change in U.S. legislation? Thank you.

Peter Wennink

Yeah. On that last part, Amit, I’m not speculating on the behavior decisions of governments, because that’s basically what it is, it is -- I -- you cannot derisk, the only thing that you know, if you look at the current situation, you have to look at the specific situation that this company is in the geographical area that we operate in, which is Europe, yeah, and the ability of us within the rules and the regulations to ship tools. That’s what we’re planning for, yeah.

Now, there are a lot of powers at work, which are beyond ASML, yeah, and it’s very difficult. I’m not going to speculate on what that is, what that upside is, what the down -- what a downside is, I am trying to just deal with reality as we see it today and that’s what it is, how we derisk or that’s just how we look at the Chinese business, yeah, which, of course, is just more than there is several customers there, we have four or five major customers there. So I’m not going to speculate there, because I don’t know what governments are going to do.

On the EUV, the technical readiness of EUV, it’s technical ready. There’s an ecosystem on N5 and N3 is there. It’s got to do it. It has to do with how quickly can we bring, for instance, EUV maturity up to the maturity of our DPV immersion tools, which in -- as all of our customers are reaching 98% to 99% uptime. Well, we are not at 98%, 99% uptime, and it by the way varies, we have tools that are over 90%, we have tools that are under 90%. So it is a stability which has to do with the maturity of the tools.

So this is why our customers and the discussion that we’re having with them are really saying, okay, first things, they will focus on the maturity of those tools, which we will do, which is normal. I mean, it is a new technology and high volume manufacturing, completely normal. We saw the same thing when we introduced dual stages, we saw the same thing when we introduced immersion, it’s very logical, will take some time, before we get all the solutions on lifetime of parts, all implemented in the field. That’s not an issue just customers want it faster.

Why did they want it faster, because their customers, yeah, are just pushing them on more EUV wafers. That’s what we see today. The only -- the key discussion that we’re having with our customers, give us more EUV wafers, yeah. And preferably by improving the maturity of tools faster, yeah, and then on top, at the end market turns out to be, okay, give me more capacity, yeah, and that’s the order, yeah. So this is how it actually works. I have no doubts about the technological readiness at all. This was a question that I -- we could go into a lot of detail a couple of years ago but not today.

Roger Dassen

And I mean, if you look at typically the things that are being referred to in terms of readiness for the ecosystem, it’s the typical list, right? So you’re talking about mask and -- mask inspection, I think it’s pretty clear that the technology is sort of developing there to cater to that. You’re looking at pellicle and actually there I think you’ve also recently seen some good breakthroughs in transmission that they’re both for ourselves and also for some others.

Photoresist, which we all know is only -- is always going to be there. It’s just that -- it is -- the massive development there will happen at the point in time where the whole thing is going into HVM. That’s what you see. So, on the typical elements there, you see that’s a good progress is being made. And I think that’s also echoed at the EUV Conferences by our customers and they show these slides…

Amit Harchandani

Yeah.

Roger Dassen

… where they talk about the progress in the ecosystem and to Peter’s point, if you look at that were they had their assessment two years ago, there was actually quite some amber and red on the slides. And if you look at the slides that are present today about the readiness of ecosystem, the red is gone and it’s all green.

Amit Harchandani

Yeah.

Peter Wennink

So -- and you have to also -- which is the advantage of being around for a little while. I mean, we’ve seen this also when we did dual stages, when we did immersion, where you have a wavelength change. Things are very different for our customers in their production process, yeah. And that needs to mature also, it’s not only our exposure tool, it’s everything that goes with it, is that -- it’s the pedicles where we started with 82% transmission, now we have qualified 88% and we have, like, we said there are in research institutes the transmission is far over 90%. The same is true for, like, Roger said for photoresist. This is very normal, yeah. It’s very normal. The entire industry, the ecosystem is up, basically…

Amit Harchandani

Yeah.

Peter Wennink

… climbing…

Amit Harchandani

Yeah.

Peter Wennink

… the maturity curve and that is going to be there with us for the next one year or two years before it really starts hitting home on maturity levels that we saw with DPV. So it’s just going to take a bit of time.

Amit Harchandani

Brilliant. Thank you for the confidence to form gentlemen.

Operator

Our next question is from Mr. Alexander Duval. Please state your company followed by your question.

Alexander Duval

Yeah. Hi, everyone. It’s Alex from Goldman Sachs. Many thanks for question. You talked about the progression in terms of EUV models and how you continue to invest in that direction. And I wondered if you could talk a bit about the average selling prices effectively well, they go up to on the D and E models and is it fair to assume a 50% of the mix in the next year is going to be coming from the D model and when do we see the E model roughly end the numbers? Many thanks.

Roger Dassen

So, Alex, in terms of the ASP increase for the D, what we’ve -- what we -- what we’ve indicated there is somewhere between 10% and 15% is a good estimate of the increase in ASP. You see -- in terms of productivity, you see a 19% increase in the productivity of that tool and also an overlay you see an improvement of 1.5 to 1.1. So some pretty good value that is being provided to the customer, which justifies the uptick in ASP I just talked about.

On the E, as -- that’s quite a while out, so we’re not going to give any indications on the ASP development there, but as I said, that -- there is some pretty significant improvements and value enhancements that are being planned on that tool. But more to talk about that when we’re approaching the launch date of that.

On the D model and the composition of next year in terms of units, as we’ve indicated, we plan on really introducing the D model for HVM at the midpoint of next year. So that kind of gives you a bit of an indication of how the spread is going to be for next year.

Alexander Duval

That’s very clear. Many thanks.

Operator

Our next question is from Mr. Mehdi Hosseini. Please state your company name followed by your question.

Mehdi Hosseini

Yes. Mehdi Hosseini with Susquehanna. I have two questions with a few follow ups. It would be great if you could give us the mix of the EUV upgrade that is embedded in the field option. And also, if you could give us an update on the multibeam e-beam, I believe the data tool was shipped earlier this year. What’s the update and how do you see acceptance into next year? Thank you.

Peter Wennink

Okay. The -- I don’t think we’re going to -- we can give you at least I don’t have it the mix between upgrades and the system prices? That’s what you’re asking Mehdi, I mean…

Mehdi Hosseini

Yes. Yes. Yeah.

Peter Wennink

Yeah. So it was above $100…

Mehdi Hosseini

[Inaudible]

Peter Wennink

…of our EUV sales, how much is upgrade business and how much is system business? Is that what you want?

Mehdi Hosseini

Yes. Yes. You have highlighted upgrade opportunities with the older models and I wanted to see…

Peter Wennink

Yeah.

Mehdi Hosseini

… how much of that is driving it’s -- in the field option.

Peter Wennink

Okay. Okay. Yeah. You have these yet different types of upgrades, you have an upgrade, like, for instance, while ASP in Q3 was a bit higher. You have upgrades that are already included in the tool that we ship, so that is one.

But we also have upgrades of tools that are in the field and that depends on what upgrade do you want, you have upgrade from B to C and that’s -- there is a different upgrade there when you have the 3350 going into a 3400C. I mean that’s almost like a complete refurb in the field and adds significantly more expense and customers are looking at all of them. So there also you have the mix of what kind of upgrade do you want them, yeah.

Mehdi Hosseini

Yeah.

Peter Wennink

And you have 3500B upgrades, which actually are in the -- from a productivity point of view that are in the midpoint between the original B and the current C. So this is also what you -- which you can choose. So it’s very difficult to give you as a forward looking outlook on what that is, because it very much depends on the customer plans and all the capacity planning in terms of wafers per day.

So we’re just going to give you the total number, yeah, and when that happens and these things -- these great plans also change. I had a very recent discussion with a very large customer, who really wants to look at an upgrade plan where they want different scenarios. Well, depending on how the scenario pans out, yeah, the upgrades revenue is going to be different than another scenario. So I wouldn’t even dare to give you any guidance there, because I would be wrong.

Mehdi Hosseini

Sure.

Peter Wennink

Yeah.

Mehdi Hosseini

Yeah.

Peter Wennink

So the MBI, the multibeam tool, I mean, we are going to ship another two better tools this year. And like I said, is -- it is this -- it is really customers are going to use those tools. It is not just the tool, it’s also how do you integrate a multibeam wafer inspection tool into your entire yield management process. And that will happen over the next half year to three quarters of a year and that will determine the uptake of that toll and appeals for that tool.

So what we are seeing is that, at least that’s what we believe and we are now in the first integration phase of the first tool that we shipped last quarter, yeah. We just have to see that that what we believe the advantages of a tool that is six times faster, yeah, how much of that can translate into real deal value for the customer. That’s going to be a bit of a wait and see.

But we have people there and we’re optimistic, but ultimately, that optimism needs to be confirmed by the customer that’s us putting in appeals. So you have to be a bit patient, Mehdi on that news, so it’s going to be another one quarter or two quarters before we get some clarity on this.

Mehdi Hosseini

Got it. Thank you so much.

Operator

Our next question is from Mr. Aleksander Peterc. Please state your company name followed by your question.

Aleksander Peterc

Yes. Good afternoon. Thanks for the question. This is Aleks from Societe Generale. Just one on the balance sheet first, could you now give us an idea where we’ll land in terms of net cash for the year and what will happen with working capital in the fourth quarter, if you could quantify that for us? And then just secondly, coming back to your comment, Peter, on these communicating vessels in EUV orders, so given the push outs by one customer, is there a realistic scenario whereby we get a big jump then in orders as that progression starts to materialize and we get then a very strong ‘22, is that a realistic scenario? Do you see things more smoothed out in the future? Thanks.

Roger Dassen

Thanks, Aleksander. On free cash flow, we’re not guiding on a free cash flow, I can tell you that, that there will be a very significant free cash flow generation in Q4. For a couple of reasons, one reason is, the free cash flow generation this quarter was rather low, as a matter of fact, it was slightly negative. And one main reason there is that, many, many tools shipped in the last month of the quarter as a result of which the cash generation of that will fall into Q4. So there will be significant free cash flow generation in Q4.

That’s also the reason why we communicated that we will resume the share buyback, why we announced the interim dividend. So we’re very confident on the free cash flow generation in Q4, but we’re not guiding that.

Peter Wennink

Yeah. And on your communicating vessels question? Well, it was actually was my introduction on the communicating vessel. But the question is, could that then give a big jump in orders, because there’s a time difference and you rightly asked the question, how big could that time difference be? And I know, like I said, we’re preparing for output in ‘21, because I think it could happen in ‘21.

But you asked the question about what about ‘22? Well, that you could say, well, we’re in 2020 and so what do I know about 2022? But in the context of your question, I do believe that in any case 2022 we will see the effects of that communicating vessel movement. I think there’s also an opportunity that it can be pulled into ‘2021. This is why we’re preparing for more shipments from a -- let’s say from a manufacturing and supply chain point of view.

But more importantly in 2021, I think we will see then the introduction of the next nodes in Logic and in DRAM. I think 2021 in any case will be, you could say, the recipient of the node transitions, yeah, they will -- 2021 will be a year whereas no transition happening, which as we talked about N3 will have over 20 relays. So it’s -- that would then be on top of what I would see as a normal progression of the EUV volumes.

Aleksander Peterc

Very clear. Thanks.

Skip Miller

Okay. We have time for one last question. If you are unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations Department with your question. Now, Operator, may we have the last caller, please.

Operator

Yes, sir. The final question is from Mr. Adi Metuku. Please state your company name followed by your question.

Adi Metuku

Yeah. Good afternoon, guys. It’s Bank of America. I had two questions. First question just on the assumptions you have embedded into your low double-digit growth guidance for revenue in 2021. Can you talk about what you assuming in terms of domestic Chinese demand? Secondly, also found with this Logic demand and Memory demand and services? Just to get a sense for what exactly you’re embedding? And secondly, now there’s been a lot of discussion in the market around how the number of customers of leading edge could go down over the next few years. If you could give us some sense based on your discussions and any order trend, et cetera, that you might be seeing, how likely do you think that is? I think that would be much appreciated. Thank you.

Peter Wennink

Yeah. You’re -- actually, so what do you want to know exactly? Your -- the number of customers in the leading edge? You mean, are you asking a question on how that is trending?

Adi Metuku

No. If you look at two years to three years out, do you think the number of customers producing leading edge devices could go down?

Peter Wennink

Okay. Yeah. Yeah.

Adi Metuku

Is that something, how do you think about that when you…

Peter Wennink

Yeah.

Adi Metuku

… do your planning, et cetera?

Peter Wennink

Yeah. Yeah. I think on the…

Roger Dassen

On the first questions…

Peter Wennink

I will take the second one.

Roger Dassen

On the first question, Adi, I think it’s, we’ve given you the topline figure both for the total business and for EUV. As Peter mentioned, of course, there are many -- there are quite some uncertainties that have fact -- have been factored into that number and there are quite some swing factors going left and right.

I think what we should do is in three months time when we have a discussion on the full year’s results, but also going to have our first real insight into next year. I think that’s what I suggest is that at that point in time, we’re going to talk about what are the main drivers. So at that stage, I think, it would be good to say, just as we did at the beginning of this year, if we look at the different segments of the markets, how do we look at those and what growth drivers do we see there? I think that’s the way I would suggest we do that and leave it at the topline indications that we’ve given for now.

Peter Wennink

Yeah. And I think I’ll answer your two questions on domestic China. I think it’s almost not relevant. It sounds a bit arrogant. But you have to realize that the Chinese customers in Logic and in Memory, they are in ramp, they have customers, all their wafers are sold. They go to their customers that put them into devices.

So if for whatever reason that China business does not exist, those customers still need wafers, yeah, and then they will buy those wafers somewhere else, yeah. And I think when we just said, a Memory for instance in DRAM, we see the very high utilization towards the max, so where do those wafers come from, they need to come from added -- so they need to come from added capacity somewhere, yeah.

And I think this is again, it’s a question of this communicating vessel, yeah, when one set of customers might not for whatever reason need those capacity tools and another while need this and I think with DPV, that time period, yeah, is much shorter than with EUV, yeah. So I think that is -- it will resolve itself relatively quick.

Now on the customers -- number of customers in the leading edge, as one thing is absolutely certain. Things are not getting easier. The next nodes will see an increased complexity. And I think only the very large customers can deal with that. As we’ve seen over the last 20 years a significant reduction in number of leading edge customers.

And I think it’s going to continue with less than a handful, yeah, less than a handful and I’m not going to speculate who those are going to be, because I -- they’re all dear to my heart and I think they have to figure it out with the best designs, the best production technology, with the most efficient and the lowest cost. But in the end, it doesn’t matter.

Because in the end, it is what we always talk about is the number of wafers and device and chips are needed in a digital transformation that need to be made somewhere on the planet, yeah, and that means that I do believe that our large customers are going to be larger, yeah, and they’re going to be dominant in areas of chip production, which is only going to grow, that’s why I said at the end of my prepared remarks, our confidence in our 2025 outlook has only grown.

That’s only relatively you could argue also bit as a result of what we’ve seen as part of the COVID crisis, how important this digital infrastructure is. So in that sense, yes, I think, it will be fewer and fewer customers, but it will be much bigger than they are today.

Adi Metuku

All right. Thanks again.

Peter Wennink

Adithya, thanks.

Skip Miller

Before we sign off, I’d like to remind everyone that due to COVID-19, we have moved our Investor Day to June 23, 2021. The event will be held in London and we hope by that time we can have a face to face meeting. More details will follow in due time. We hope you’ll be able to join us. Now on behalf of ASML, I’d like to thank you all for joining us today. Operator, if you could formerly conclude the call, I’d appreciate it. Thank you.

Operator

Thank you, sir. This concludes the ASML 2020 third quarter financial results conference call. Thank you for your participation. You may now disconnect your line.