艾司摩爾 (ASML) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the ASML second quarter 2005 conference call on July 13, 2005. [OPERATOR INSTRUCTIONS].

I would now like to turn the conference over to Mr. Franki D'Hoore.

Go ahead please sir.

Thank you.

My name is Franki D'Hoore from ASML Investor Relations.

Thank you for joining this analysts' conference call regarding our second quarter results.

With us today are Eric Meurice, CEO, and Peter Wennink, CFO, to answer your questions.

Please let me remind you of the protocol of this call.

The call will be one hour.

We ask you to confine your questions to one until everybody has had a chance to ask their question.

And in case there is time left at the end, we can do another round.

Also, I must remind you that the Safe Harbor statement, as you find it on slide two of the presentation in Q2 or at the bottom of our press release, is applicable to all matters discussed during this call.

At this point I would like to hand over to Eric for a summary of the presentation, followed by your questions.

Eric, please?

Thank you Franki.

Welcome.

Good morning for our U.S. participants.

Good afternoon for our European participants.

I do not want to take too much of the time here, as we would like to focus on question and answers.

But three key messages after Q2 '05 results.

The first message is one of excellent execution, as measured by the results in growth and market share, as measured by liquidity, as measured by profitability.

Profitability due to the fact that we have maintained a good gross margin, in particular due to a mix of products which have triggered a significant increase in average ASP.

So, in conclusion, we are very happy with the results themselves, in particular that they translate our robustness, our capability to make significant profit at the high end of the cycle.

But also to be robust, if and when the cycle volume cycle reduces.

So, again, happy.

A good result.

Good robustness.

Comfortable as to our execution of the fundamentals of the business.

Second message, bookings.

We did guide at the beginning of the quarter, Q2, we did guide for a low bookings level.

In fact, I said lower than what we have booked into Q1.

We booked, in fact, 24.

Very much within the range of our own expectations, very much within the range, in particular, because the different macroeconomic parameters played exactly as we had understood them to play.

One is we had a significant backlog at the beginning of the quarter.

It was highly normal that the low level of semiconductor sales, which has started in second quarter/third quarter of last year, that low level would, at some point, force a correction of our high backlog.

That was expected.

The second part is that we didn't expect very large projects, which customers would have planned for new fabs or new technology, as these various projects had already been executed by the foundry in the second half of 2004, by the memory customers that we have in the first half of 2005.

So we didn't expect that further large-scale projects would be negotiated so early in the game after those two sets of customers had built up significant capacity.

So, again, bookings level at 24.

Not a very high number but a number which corresponds to our expectations and very clearly understandable in view of the situation.

Third message, bookings outlook.

Again, you have seen in our release that we expect a pick up.

This is the good news.

We do not expect the pick up to be dramatic.

This is due to the fact that the industry still has a significant overhang of capacity which has been shipped but hasn't yet been fully installed or fully utilized.

And we have estimated this number to be about an increase of capacity of 10% or a bit less, at this moment, which will come on line in the next few months.

This should be viewed in relation with the increase of sales of semiconductors, which we now hear from the different market analysts will be in the range of 6% to 10%.

So, in other terms, the capacity overhang is there.

It is slowly being reduced by this improvement of semiconductor shipments but not to a level, as you can see from the mathematics, 10% overhang, 6 to 10% semiconductor.

So not dramatically enough to trigger a run for machines.

However, we are comfortable and confident about a pick up of orders above the number that we have achieved in Q2, in view of the fact that certain numbers of our customers who belong to the different segments of the industry - memory and foundry in particular - to start discussing, I would say, major projects for either technology or capacity.

And these are within sight at this very moment and thus confirms our capability or possibility to tell you that we are planning to book ahead of the number that we did book in Q2 time.

So, of course, in summary, a very optimistic view of our capability to manage the business, our execution, our strength in general as a company.

And our strengths in general, as a company that can deliver profit in the different phases of the cycle.

And a second point, a pick up.

Yes, not dramatic, but reasonably certain and confirmed.

Which again confirms our views that we will ship enough in 2005 to meet our profitability targets.

So on this, I would leave it to questions and answers.

[OPERATOR INSTRUCTIONS].

The first question is from Mr. Nav Sheera, Citigroup.

Go ahead please sir.

Thank you very much.

Good afternoon gents.

Eric, I just wanted to ask you about an update to your turns business potential, especially as you have been concentrating on reducing lead times since you have been CEO.

I just wanted to see what the potential upside is, if you had to receive -- or if you did receive a lot of turns business, what number of orders you could be able to book and ship within the quarter.

Thank you.

Yes.

Excellent question.

A short-term and a long-term view.

Long term, we are still in the process of getting to, growing our cycle times and lead times by a factor of 30% or more.

And we expect to have this capability efficiently in place by the beginning of 2006, and this is what we said.

And this has been our focus here, to build a structure that allows us to do this in an efficient fashion.

Short term, which is what do we do in the second half, we are, I think, a mixture of this improvement already, of cycle times.

We have improved by a single factor of 10 to 15% already, which is visible and significant.

But in addition, we do have enough visibility with some customers so that we have certain numbers of buffer stock of components, which allows us to turn certain numbers of machines extremely quickly.

And to give you an example of this capability, is we did have in the second quarter certain numbers of orders, like two or three, which we got early in the quarter, in April in fact, and shipped in the June timeframe.

So we do expect the possibility to move certain numbers of machines with a three-month lead time, up to a three-month lead time, of course.

We prefer not to do that too much.

That's great.

Thanks very much.

Thank you.

The next question is from Matthew Gehl, Goldman Sachs.

Go ahead please sir.

Good afternoon.

A question related to the mid-critical air tools that I think the plan currently is to roll out in Q4 of '05.

What are you expecting as far as an impact to your margins, given historically introductions of new tools, at least in the first one, two, maybe three quarters, has actually had a negative impact on margins?

Is there a risk with this introduction of the tool or is it going to be such a slow ramp we're not going to see it in the overall P&L?

You are correct in saying that we will, at the beginning, not have achieved all our cost reduction and therefore there is going to be a bit of a margin reduction on those tools.

But you are also correct in saying that we, somewhat unfortunately, will not have a significant number that will change the picture in the first six months or so of activity.

Just to clarify, that's a shipment -- this is for shipmenting in Q4 or will you start taking the orders in Q4 for shipment in '06?

Shipment in Q4.

So it's going to be a gradual ramp, Matt.

Okay.

So those orders are in the backlog?

There's some orders in the backlog already?

Correct.

And a significant amount of those units being negotiated, as we speak, for Q1 and Q2 of 2006.

Okay.

Great.

Thank you.

The next question is from Nicolas Gaudois of Deutsche Bank.

Go ahead please sir.

Yes.

Hi there.

A question for Eric.

You announced today that you are basically putting on the back burner plans for the FPD lithography market.

Are you basically completely turning the page there or just a question of assessing interest of customers going forward?

And by implication, what are the other strategic options you are considering to support growth going forward, either internally or externally?

Yes, very good question Nicolas.

No, we -- definitely we're not turning the page.

Our mousetrap, as we used to call it, has been accepted by the customers and confirmed as a good one.

The market, however, does not, I would say, support at this moment the numbers of units that we would want to have to make it an obvious choice.

Therefore, we will continue to monitor the volume curve, while continuing to do the basic work in R&D that we have been doing so far in the past two years or so, to hone the key technologies which, by the way, will lock that mousetrap for us to use at the right time.

One of the facets of our decision, in addition to the risk level volume to investment, was alternatives.

And clearly, we are using some of the R&D funds, which we had earmarked for possibly entry in the flat panel market, to do some other things.

And these are other things which we approve in the next two to three years for the Company.

At this moment, we do not want to divulge what those different projects are.

They are the normal projects that you keep in your basket for competitive reasons until you're near enough to introducing them.

Thank you.

The next question is from Mark Power, Redburn Partners.

Go ahead please sir.

Hi guys.

Could you give us some insight into your expectations for the immersion litho market next year?

And maybe could you hazard a guess at how many units are likely to be shipped to the overall market and your market share within that portion of the market?

Thanks.

So the negative news first.

Immersion yet has to be proven in production.

And this is what you hear from all the specialists who are suffering to confirm that every little items of the process issues are going to be resolved.

So clearly, nobody expects volume production to be started before second half of 2006.

And in between now and second half of 2006, certain numbers of customers, and significant numbers, are buying tools to basically qualify their own processes.

How many do we expect in 2006?

In fact, you may have heard about our introduction of the 1700i, which is the first 1.25 NA machine which allows 45 nano -- sorry, 1.2, I was more optimistic.

So 1.2, that allows 45 nanometer processes.

And the enthusiasm is high at this moment and this is part of the projects that I was talking about, which will firm up our bookings for Q3.

How does that translate competitively?

A bit early to say.

But I would guess that if you put a number of about 20 to 25 immersion tools next year, you should be in a realistic type of environment, I will not say conservative, realistic level.

We could even go higher than that, if you look at our own track record of introducing new technology.

We just introduced the 0.93 NA technology, the 1400, the 65 nano.

And we shipped 20 new machines in the first six months.

So clearly saying that we are shipping 25 units in one year of the 45 nanometer node is not a ridiculous assumption at all.

And that's just for ASML specifically?

What do you think the overall market size might be?

25.

No, no.

I don't know.

We do expect that our leadership, and the fact that we are now at our fourth generation of immersion technology, gives us a significant leadership.

The estimate that we gave you, the 25 machines, is based on customers we have, with whom we are working.

Honestly, I do not know and want to assess the possibility with customers we still don't have.

That's helpful.

Thanks.

The next question is from Mr. Orji, JP Morgan.

Go ahead please sir.

Just a couple of questions.

First please, can you just give us some insight as to what you're seeing with your memory customers, because your dependence, your backlog constitution from memory has gone down significantly between end of Q1 and end of Q2?

What are you seeing by way of order trends with your memory department?

That's an excellent question.

Clearly, as you know, we are a key supplier to the leaders in the memory segment.

Most of them had front loaded their investments in the first half of 2005 or even before, in Q4 of 2004.

So clearly the overhang, as you may call it, is significant in the memory environment, which is why we said we would not book too much of that in Q2.

Now, clearly, multiple memory companies are in the planning phase of their 45 nanometer nodes, which, as you can imagine from the timing of our 1700 product, will happen in the Q2 niche timeframe of '06, which then forces them also to take some decisions as to what to do in Q1 in terms of 65 nanometers of capacity orders.

So in other terms, the capacity orders and the technology orders of the key memory people are being discussed at this very moment.

And I confirm that the ramp up is now planned for Q1 for some additional capacity orders, and then Q2 and Q3 of '06 for the 45 nanometer nodes.

That's clear.

One more question --

Could you please do the other questions at the second round, please?

Alright.

Thank you.

Thank you.

The next question is from Mr. Shekhar Pramanick, Moors & Cabot.

Go ahead please sir.

Yes, hi.

Good afternoon.

Two-part question.

What we are hearing is that there is a definite additional engagement with one of the largest foundries.

Is that -- are you factoring that in, into your Q3 order guidance?

Or is that, at this stage, not factored in?

And if there is an engagement, would that mean maybe there's a shipment even possible in the absolute tail end of the Q4?

Also, the memory comment you just made, you were talking about the Korean fab called line 15, which will be starting a delivery early Q1, starting with.

Am I accurate on these assessments, without naming company names possibly?

I'm going to try to answer you specifically without being specific.

Foundry business, clearly utilization curves are now picking up seriously in some areas of the activities, in particular in the new technology, the new nodes.

And therefore, we are starting to have activities now with the foundry players.

And I would say it is spread, it is spread.

Which leads me to tell you that we are going to have some orders in Q3 for deliveries potentially in Q4, but also in '06.

Regarding the memory questions you have, I think I answered, which is yes, there was significant over -- sorry, including of our shipments in Q1, Q2 in the different lines you were talking about.

But I confirm again that this is now being put into production, ramped, and that we are now planning for the deliveries of Q1 and Q2 '06 with the different guys.

Okay.

Thank you.

The next question is from Ben Pang, Prudential.

Go ahead please sir.

Yes.

I was wondering, you mentioned the 10% capacity addition that you expect the industry still needs to install the tools that you've shipped.

How does that compare to the first quarter number?

Thank you.

It's about the same.

You've seen our shipment rate has been about the same numbers of units, 50 to 60.

So in our little model that created the same trend.

We also try to involve our competitors, Nikon and Canon.

So in our model, the calculation of the 10% overhang is somehow a calculation of the industry.

Obviously, it is not 100% precise.

It's in orders of magnitude, which is why you can't even judge whether it's 8 or 12.

But there is nothing significantly different between Q1 and Q2.

For our rolling build up of capacity, I understand that our competitors may not have shipped as much as we have.

So clearly we have been a bit, I would say, taken a bit more share than usual.

But then the semiconductor industry has now shown some pick-up of their own silicone production and orders.

And that is now eating into the 10% overhang.

So I would say I think we have reduced it, but I didn't -- we didn't want to quantify it.

We reduced the overhang from, say, 10-ish to 10 minus-ish.

Sorry to be not able to be more precise.

Thank you Ben.

The next question is from Ulrich Pelzer, Lehman Brothers.

Go ahead please sir.

Yes.

Hi there, gents.

Just looking for a bit of clarification as to when you plan to be introducing and then shipping the XT body on your i-line and then on your KrF product range.

If you could shed a bit of light on that, that would be great.

Yes, Q4.

And that's for both i-line and KrF?

Correct, yes.

Okay.

That's great.

Thank you.

The next question is from Kirsten Parker, Morgan Stanley.

Go ahead please ma'am.

Hi, Eric and Peter.

A question, just going back to the first question on buffer stocks.

Do you think that you've got sufficient buffer stocks in place such that unit shipments in Q4 could be greater than what they are likely to be in Q3?

Because that question is probably going to be asked 100 times, I am going to try to be as quantitative as we can be.

Thank you.

We have shipped, say, 110 units so far in the year.

Okay?

We said we have a backlog of 80 units, in which 75% are shippable this year, which says 60 units.

So we have now in the bank 170 units.

Okay?

We believe, in the normal environment, it would be not abnormal to book between, say, 10 and 20 units of used machines as well as new machines within a period of six months and still be able to manage it with the type of buffer stock that we are planning.

As you know, we are having those discussions with customers.

Some of those 10 to 20 units are, of course, things which we touched, so we know that it's a huge buffer stock to have.

So you then, you could imagine a range of 180 units to 190 units as an acceptable view of life at this moment.

We will keep a bit of upside potential to that.

Okay.

That's very clear.

Thanks very much.

Didier Scemama, ABN Amro.

Go ahead please sir.

Right.

Good afternoon guys.

Just coming back to slide 17, to your assessment of capacity overhang of 10%.

My question is simple.

Why would you -- what, in your view, would be the exit capacity utilization at the end of 2005?

And, if my calculation is right and we get below 80%, can you explain to me what you are going to do, any turns business, or any significant turns business in Q4?

This is very difficult to answer.

It can only be directional.

We do expect the semiconductor growth to be at the level of this overhang and to start eating into it, as we said, as of now, basically.

So the utilization is going to pop up a bit in the Q3, Q4 timeframe.

Now, each of the customers has its own trigger point about what is a decision-making point, where you have to get worried and start putting some orders.

And this is extremely difficult to call.

It will depend, in fact, on their own vision of 2006, whether they have hit the wrong -- they want to accelerate something.

So difficult to tell you, therefore, the level of excitement and fear that will be created in Q4, where people will say, "Oh God, I'm reaching the trigger point and I'm optimistic".

I give you an example.

Today, we have one or two customers who have reached the trigger point but have asked us for mercy, that is for a bit more time, because they wanted to be sure that the trigger point, whether it is their own orders, were solid.

Not only limited to one or two of their own customers.

So they wanted to know if the semiconductor growth itself was sustainable.

So, in other terms, it's very, very difficult to call your question so early in the game.

But Peter?

Yes.

I think, Didier, if you say, therefore, we don't have a look into your model that brings you to 80%.

But generally, you could say that when customers are at 80% that's not a trigger point, where they come back for capacity ordering.

Generally, what we have seen in the past cycle, past two cycles, that is that needs to be higher than that number.

So whether your number of 80% is correct, I cannot judge from this side.

It's basically your own responsibility.

But 80% in that particular case would not be sufficient to just call a general return to an upturn for the whole industry.

But if I understand, your own calculation is that we will be above 85%, since you expect those orders to come in.

When we wanted to say - and we want to stay there because we are not as good analysts of the total market than you are.

We are lumpy people with each customer being one special microeconomic discussion.

So we know exactly which customers are hitting those 85% or 75% or 95%, whatever.

But we all know that they have a decision-making process on each of them, which is why I don't really want to give you any hint that something is happening, that the curve is moving, etc.

It is important here that you take the message of uncertainty still from this meeting.

I know you always take it from us.

We don't want to call too far away when we don't -- we know that there are much more parameters than just an average market situation.

And on top of that, you have to remember the big part of our business is memory business, which is not that susceptible to the utilization that you are talking about.

It's much more susceptible to a shrink roadmap of that particular customer.

And that's a big part of our business too.

So the same goes for IDM customers, who have to do advanced process development, and some of them who have to go to 700 nanometer production.

So it's not all utilization driven.

It's particularly true for foundries but not always true for the other sides.

So, if I summarize, basically '05 we had a very specifically driven CapEx by big guys that had specific programs in mind.

And you think that '06 could be very similar, at least for you guys.

And this is now the start of the planning period to do exactly the same, yes.

But timing this move of orders is a bit complicated.

What I can also say, which I think is significant, is as much as we probably lumped a lot of orders together in 2004 because of tons of reasons.

Everybody jumped on the same quarters to book.

As much as we think that may not happen this time, that the ramp in 2006 will be, how do you call this, more spread.

We have a certain number of reasons to believe that.

So, in other terms, we don't expect a big booking wave.

We are expecting a continuous improvement wave, which is why we are comfortable with the fact that we said we were going to book more.

But we are not saying it's a dramatic move up.

Thanks.

The next question is from Jay Deahna, JP Morgan.

Go ahead please.

Hi guys.

Did you get any -- and by the way, the comment that we don't see a dramatic cycle is the same comment at the beginning of every cycle, so let's just see how that plays out.

But anyway, did you receive any orders in the second quarter from new customers?

And can you give us a sense as to what your momentum is in Japan?

Thank you.

Good question.

And I agree, Jay, unfortunately we will be wrong, but this time it's for the good.

Okay.

Yes, we did receive orders from new customers.

Yes, we already shipped to new customers, even in the second quarter.

The two customers in question are ProMOS and Winbond, which as you can imagine, strengthened our position in the memory business.

We expect this business to be continuous and we are, in fact, discussing the next follow-up orders with those two good customers.

And this is, again, one part of our market share satisfaction here, where we clearly measure our progress in an area where we were not.

Did you actually get those orders before the second quarter and ship them in the second quarter?

No.

We -- I think we took them, those customers, in April.

And we did ship one unit, I think one -- sorry, no, two of the orders but at least one to one and then the others [is not issued].

Okay.

The Japanese question, continuous progress with evaluation.

As you know, our entry in Japan, well, first of all, we are doing good business with the current four customers that we have.

And we are continuing the ramp of, I would say, R&D process development with Matsushita.

For the new customers, we are still in an evaluation mode.

And therefore, we do not expect any bookings of significant level for production, I would say, before 2006.

This would be production ramp in 2006 is our [indiscernible] plan to be production going in 2005.

Were there any progress?

Thank you, yes.

We do receive significant interest, of course, on immersion.

As you know, we think that we have leadership.

We know that Nikon is doing a good job in trying to develop their own architecture.

We still believe that our architecture has more experience to it and that it is designed more conservatively in terms of its capability for performance and cost effectiveness.

So, we feel comfortable with this.

And it seems to be confirmed again by the fact that our additional non-public Japanese customers who are evaluating those products are still doing so, and asking us or discussing the next generation shipment for R&D purpose.

Thank you Eric.

We have a question from Mr. [Samuel Daptadar] with Bramwell Capital Management.

Go ahead please sir.

Yes.

Is it possible you can just give us a sense about what customers are looking to buy in terms of foundries or memories or IDMs going into the next quarter and probably beyond that, what sense do you have in total for the quarter of this year, maybe of '06?

Excuse me, I didn't catch your question.

Could you please repeat?

Is it possible to give us a sense about what type of customers are looking to buy more products in terms of foundries or IDMs or memory makers into '03 -- into the third quarter of this year and into the fourth quarter of this year?

And what level of confidence do you have going into 2006?

I think you are asking a question on the end customer of our own customer.

So of course we are not extremely well positioned.

We also read the Wall Street Journal and that tells us that the mobility is a big thing, phone; mobile phone is driving some orders.

It is true that we see -- we confirm the trend when we basically speak with our own customers, and we hear some big names in this business.

Our customers are receiving lump orders from the Nokias and the Motorolas of the world and the Samsungs of the world, etc., etc.

So we can only confirm that mobility seems to be the big driver of some of those, I would say, optimism.

We also have, and this is where I mention the issue of customers saying we were very happy with the orders we got, but we need to know if it's sustained or not.

We have some orders from those - we should not say niche market, but the fashionable things, MP3 players and PlayStations and stuff, which we hear on a regular basis orders the big order.

Okay?

But these are the lumpy ones.

That's all now that we may have.

And again, we are not especially [favorable].

Okay.

Okay, thanks.

Mark Fitzgerald, Bank of America.

Go ahead please sir.

On your outlook for 2006 in terms of the modest recovery, I know it's speculative, is that based on basically that the correction in shipments and units in 2005 is relatively modest - 180 to 190 down from 216 in 2003?

Yes.

It -- well, in fact, it is a correction of overhang, basically, that we are seeing in 2005.

So our 180, 190 units is basically because we shipped a lot in 2004.

This is, in fact, very true for foundry, where foundry built significant capacity, if you take TSMC, if you take [Wimsy] or [Smit], very, very significant capacity in 2004.

[Indiscernible] digested it and made us have a lower number in the second half of this year, which is kind of natural.

And life is back in order in 2006.

So, in other terms, in a semiconductor industry, everybody should always look at inventory.

Inventory is a big problem.

If you lose inventory, then you create this extremely long, terrible cycle as you go down and up.

In our business, that's got to be overhang.

And the good news we are giving today, which I'm sure you're aware of, is inventory of semiconductor products is limited, is under control, is at appropriate level.

And overhang is being burnt, as we go into 2005.

So we are giving you the two reasons to believe that 2006 is back to normal.

Now what is back to normal?

And then, well, the big question is what's semiconductor growth.

And this is why we are saying we don't expect a problem quarter in 2006, like we still have to correct something, like inventory or overhang.

But we do expect to have as many orders as the semiconductor growth will justify.

And for that, I don't have any more understanding than you have, probably even lower than you have.

Basically, 2004 was a great year for you, with the 216 shipments, I assume?

That's correct.

And if -- you should not even say that in these terms.

You should talk in euros because the value of each of the machines and the capability, the capacity installed was enormous.

And these are big machines.

So 216, as a high end ArF, created a lot of capacity.

In terms of value, it was a good year. 2004 was close to €2.5b.

And also for this year, we won't be very far off.

And as well, you can say 2005 and 2004 are reasonably good years.

So, to have a good year in 2006 might be going back to the kind of unit shipments we had in 2004, which would be something north of 200?

No, no, let's not -- we don't know.

It's not, again, appropriate to think what you just said, but again, it's much too early to call these trends.

Yes, but I'm just saying if the semiconductor industry had a really good year, like it did in 2004, you could ostensibly be looking at 215 in shipments.

The positive person would say, we've been living now through, I would say, technology build up for so long.

We are going to have a technology build up in 2006 with the 1700.

So if the capacity build up coincides, 2006 could be a fairly good year.

Thank you.

Next question is from [Carsten Alsken], WestLB.

Go ahead please sir.

Yes, hello.

I was just wondering whether you could give us the booking, or maybe shipment sum up for your immersion tools in Q2, how many orders secure take for immersion?

So, in Q2 we have -- let me say differently, we have in backlog another seven to eight units to be shipping this year, which should cover a lot of R&D ground in terms of people developing their immersion processes.

And we have started to book in Q2, for 2006, still in the single-digit level, but you can start estimating how much you need to book now to be able to have 20 to 25 units, which we just talked about.

And are you willing to say how many tools you shipped in Q2?

Four, I think, four.

Great, thank you.

We have a question from Andrew Griffin, Merrill Lynch.

Go ahead please sir.

Hi.

Good afternoon everyone.

Just on slide 19 of your presentation, you mentioned that R&D is maintained at €80m per quarter, but also add that you're prepared for additional R&D investments.

Could you explain what you meant by that statement, and what the kind of time line on that is, please?

Yes.

That means we have now identified, to answer one of your questions about the LCD and the other products we have in mind, certain numbers of things which we would like to do for growth of the sales.

And therefore, we would find it appropriate to invest more in R&D to do these new things.

We want to do this only, of course, if we "can afford" this additional R&D within our profitability targets, which I repeat are 15% operating income on sales on the cycle, more than 5% at the low end of the cycle, and above 20% when things are good, as they were in Q1 and Q2.

In order, therefore, to hit those numbers, can we -- will we be able to afford another €5m to €10m investment in R&D per quarter?

The answer is we need to see how Q4 develops and see whether we would be able to time this additional investment within the Q4 timeframe.

Or if we have to wait a bit, in Q1, until we have enough volume, which is going to allow us to do this investment, as well as hitting our numbers.

You will also notice somewhere else in page 19 that we are going after SG&A.

Which is another way of saying if we go after SG&A with significant success, that the savings of SG&A will be reinvested in R&D.

Thank you.

Thanks very much.

The next question is from Mr. Menon, DRKW.

Go ahead please sir.

Yes.

Actually, I have a question for Peter, actually.

Peter, if I might ask you to go back memory lane a little bit, to your second quarter results there of 2003.

And you were looking at the outlook for your order book into the second half of 2003, and you contrast that with the way you are today.

Would you say that you're feeling more bullish or less bullish than what you felt at that point in time?

Going back in memory lane might be to the point we have some nightmares.

So you are only going back to the second quarter of 2003 then, yes?

That's correct.

I just want to see -- check how you felt about the second half then, and compare that with what you are seeing today.

Well, I think if you -- but I was jokingly -- I was a bit joking, but there is some truth in there.

The second quarter of 2003 was a very traumatic end of a long downturn dip.

At that moment in time, we didn't have a lot of trust and feeling in the market, simply because we were just at the end of the longest downturn that we, as a Company, or we as an industry, have experienced.

So, I think that basically tainted a lot of our feeling at the time.

But clearly, at that moment in time, which when you look back, because we came out of a very deep recession, we had a strong recovery starting in the second half of '03 and that leading to, let's say, a very strong performance in 2004.

Where we are now is that what we saw in 2004, the second half, is that when the downturn came in 2004, it was relatively mild.

The industry spotted the inventory build relatively quick.

Customers were quick to take action.

And actually, what we are seeing now is lower booking in Q2 and Q1, because customers did receive a lot of tools in Q4 and towards the end of Q4.

Where we currently are is what Eric said.

Currently, we have seen an overhang, of about 10 percentage points, that we expect will be eaten up by the growth of semiconductor shipments between 6 and 8%.

That will lead to a situation where we say -- it will be inevitable that we will see orders coming back, especially in those areas where the utilization is going to be tight.

We said it's going to be tight on leading edge foundries.

And that, combined with the fact that our memory customers have a very clear shrink roadmap, that will actually lead them to a situation where they need to order for next year, for the 45 nanometer minimum feature size, plus 65 nanometer ramp.

Brings us to a point where yes, we are more, I would say, confident at this moment in time about the future than we were in the second quarter of 2003.

But definitely the last part was also definitely influenced by the fact that we came out of a very traumatic period.

So, yes, it's a long answer, but I hope it is clear.

If I were to rephrase that, because your orders, from a bearish position in the second half 2003, had shot up very sharply in the second half of '03.

But what you're trying to say is, because you came out of a much deeper, longer recession, that is why the orders shot up so fast in the second half.

But because you're not so bad right now, you may not see that much of upside.

Correct.

If I might be granted one more question?

Janardan, can we do the first round first?

Sure.

Okay, thanks.

The next question is from Thomas Brenier, SG Securities.

Go ahead please sir.

Yes, good afternoon.

Very shortly, I'd like to have more details on the evolution of services and field option sales.

I think you were targeting something lower than that, and I just wanted to know how it should end in the second half, please.

The services, the service income, based on, let's say, hourly billing rates has been relatively stable.

It's always been around €50m.

And that's the service contracts, yes?

Field option sales is really a business that can turn pretty quick.

It can be specific projects customers are basically engaging in.

So that can vary between, let's say, €10m and €30 -- €10m and €25m to €30m.

So, we saw the lower end of that range in the first quarter and we saw the higher end of that range in the second quarter.

Difficult to predict.

The mean is €20m, €25m, which has been, let's say, something we saw in 2004.

But that's where it will be.

Difficult to predict.

It will be anywhere between €10m and €30m in terms of field options.

And the service contract has always had a standard of around €50m.

Thank you very much.

The next question is from [David Faline], CSFB.

Go ahead please sir.

Yes, hi.

Antoine Badel, Credit Suisse.

You talk about a capacity overhang of about 10%.

How many ASML machines would that represent?

I'm trying to understand the sensitivity of your unit shipments to capacity growth in the industry.

I don't think -- we could potentially give you data.

We don't have it with us at this moment, and it starts to be a bit complicated, [indiscernible] is very, very hard on the subject.

Or maybe, putting it another way, for argument's sake, assuming the industry needs 10% more capacity next year, how many unit shipments would that represent for lithography makers?

For the industry, 10 to 12, if I remember correctly, 450.

Thank you.

[Indiscernible] numbers if you --

In 200mm equipment?

It's an average of 450 of the current mix.

Which is why your question is complicated, because there are so many parameters in there, and then you have a mix of technology, as the question [indiscernible].

It's a complex thing, but in the mix that people will take next year, we would think that if the semiconductor industry grows by 10%, selling 450 machines or to 500 machines is not ridiculous in the industry.

Thank you.

The next question is from Mr. [Michel Fontana, Garnier].

Please go ahead sir.

Good afternoon.

Sorry, my question has been answered.

Thank you.

Thank you.

We have some follow-up questions gentlemen, is that okay?

Yes.

Ulrich Pelzer, Lehman Brothers.

Go ahead please sir.

Yes, thank you.

Can I just get one quick clarification around that immersion issue for next year?

The unit shipment number that you mentioned, did that relate to the 1700i exclusively, or do you still imagine to be shipping 1250i's and 1400i's?

And in that context, I think on slide number six or slide number seven, the way you phrase it there is that you have orders for immersion tools in the backlog from leading memory and IDM manufacturers.

Do I read into that there are several memory and several IDM companies, or just one each?

What exactly does that mean?

We will have to put a spellcheck to our slides, to be sure.

To answer your question first, the number of 20 to 25 units were, at this moment, 1700 only.

Okay?

Why - because we expect the 1400i to be used potentially as a second tool or as a tool on some nodes when the technology of immersion is proven.

Which means people will make use fully of the depth of focus, to improve yield in their normal environment.

So, in other terms, you go for 1700 because you need 45 nanometer, and you go for 1400i when you discover that immersion is a great thing, that will improve your yield at whatever you do.

Okay?

But that wave will come if and when people get comfortable with immersion.

So, that basically means you are looking to ship a limited number of, say, 1400i's on top of the 1700i that you have in mind?

That is exactly correct.

And can you shed some light on the spellcheck-related part of the question please?

On which one, sorry?

The customers.

Oh, the customers.

It's a spelling mistake.

Right, okay.

I think the manufacturer relates to one IDM, one memory, yes?

That's correct.

We cannot lie to you.

Okay, thank you.

Mr. Orji has a follow up question, JP Morgan.

Go ahead please sir.

Hi.

Just, Peter, two things.

One is on your cash flow.

Uche, can you speak up?

Yes.

Can you hear me now?

Yes.

Okay.

One is on your cash flow.

You've obviously generated cash quarter after quarter.

Can you just give us an idea of what you plan to do with this and if at any time you plan to look at dividends?

That's one.

And two, how shall we model your expenses going forward, given that you're deferring the LCD?

What's going to happen to R&D, and how should we think about SG&A for modeling now?

Yes.

I think, to answer the last question, we've always had -- the guidance that we have given is without any significant investment in LCD, so that remains unchanged.

As you know, we have used part of what we call the incubator fund, that we always have in R&D, to fund part of that development.

That money will be directed to all the programs that Eric alluded to.

On the cash -- so there is no difference in guidance there.

Basically we exclude that.

On terms of cash generation, we have said in the past also that we think that looking at the Company, our market share growth products, still the growth of this industry.

We think a Company of the size of ASML, bearing in mind that you need to have cash to deal with the up-cycles; that way you will have to put money to work in working capital.

But also the cash we have to do strategic programs, we think this Company should be around €1b in net cash.

We are not there.

We are around €680m, €700m.

So we are close, and once we hit that point, clearly we either use that cash for what I just said, for strategic issues.

And if we cannot find strategic alternatives to bring us at least a return on the investment capital we have in our current business, we didn't make a secret of it, that we think that money should go back to the shareholders.

Whether it's dividends or it's a focused buyback program, those are the things that we would need to consider.

And we'd like to consult our shareholders also from time to time on this.

So, I think that's where we are.

As you know, the cash balance of between €1.5b and €1.6b is a good gross cash balance.

We have €850m of loans on the balance sheet also, as you know.

So net, it's still not at our target.

Thank you.

Mr. Nicolas Gaudois, Deutsche Bank.

Go ahead please sir.

Yes.

Hi there.

Just a follow up on the immersion for the 1400i.

If we just go back to your analysts' presentation in September and also the TSMC Tech Symposium, clearly TSMC was thinking about using by '06 the 1400i for depth of focus improvement.

And from your comments, Eric, it seems like this is still up in the air.

Could you clarify why this is the case, and are you making any tweaks or improvements to the tools to actually convince TSMC and other customers to make batches of these tools for depth of focus?

Thank you.

Again, it's a good question.

My fault was only of timing.

My response was, I would say, theoretical because all this is being discussed and negotiated, depending on difficulties of putting the processes in place.

We see today an aggressive need to get to 45 nanometer from certain numbers of people.

So they will fight to get a 1700i slot and therefore, my answer was automatically 1700i will come quickly.

The 1400i, as I said, is exactly as you say, a depth of focus, yield improvement machine.

And the question then becomes, when will TSMC really ramp capacity immersion processes in their fab.

We can ask them.

At this moment, it is somewhere in 2006 or whatever.

But I did meant to or I believe that it would be more at the end of the year, rather than the beginning.

So the 1700 would take most of the capacity.

So, still the same message; timing unclear.

Okay.

Thanks for the clarification.

Final question, Mr. Menon.

Go ahead please sir.

Yes, thanks.

Can you tell me what the pricing of the 1700i is, I mean the [indiscernible]?

Very high.

Would €30m be --?

Yes, it's about €30m.

That's the list price, Janardan.

That's the list price.

But even on the discounted price, the upside in terms of price from the 1400i would be in the same percentage range?

It's clearly there, yes.

Okay.

And so, if the majority of your shipments are going to be of that ASP, then even if some capacity orders are going to ramp towards the end of 2006, you should be able to -- would you be able to keep a flattish ASP in terms of new tools from current levels in 2006?

Again, I'm just trying to avoid giving you guidance on 2006.

It is, however, true that you can put certain numbers of scenarios on an Excel spreadsheet, where you put 20, 25 products at -- the €30m-ish we [indiscernible].

And with some 1400 play, with two or three scenarios of capacity, because we don't know what the capacity plays will be.

And then you come up with certain numbers of average ASP.

But to answer your question, yes, there is a chance that this significant amount of immersion tools would raise the average ASP, of course.

But it's also very clear, Eric made that comment also quite clearly, it does depend on how strong 2006 will be, also in terms of the capacity orders.

Because the more capacity orders you will have, the more dilutive effect you might have on the ASP, which has a good positive side effect, in the sense that your volume will be, of course, a lot bigger.

And we are going to introduce the critical products, KrF and i-line, the famous [UHD] machine, 400 and 760.

So, if we get successful there, again, it will be huge rates.

Plus you will have a higher volume.

So it's really -- ASP question for next year, you also have to answer the question whether you think your capacity, whether your total shipments will be, what will be the mix.

So, it's a bit difficult but trends, like Eric said, it's not unreasonable to -- I expect what you basically just said.

Sure.

And you did comment earlier that you will get orders from foundries in Q3, which you will ship in Q4, right?

Or did I hear that wrong?

I said from customers.

From customers.

But foundries, could be.

Okay.

Thank you very much.

Mr. Meurice, there's --

I think we are ready for one last question, possibly, here.

There are no further questions sir.

Okay.

Then we thank everybody for being at this call and see you soon.

Thanks.

Bye.

Thank you very much.

Bye bye.

Bye bye.

Ladies and gentlemen, this concludes the ASML second quarter 2005 conference call.

Thank you for participating.

You may now disconnect.