艾司摩爾 (ASML) 2005 Q3 法說會逐字稿

Welcome to the ASML third quarter 2005 conference call on October 12, 2005. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Mr. Craig DeYoung.

Mr. Craig DeYoung, go ahead please.

Greetings everyone.

This is Craig DeYoung from ASML's Investor Relations department.

On behalf of ASML's Board of management and Investor Relations I would like to welcome you to ASML's Q3 results conference call.

Joining us today is Eric Meurice, ASML's Chief Executive Officer, and Peter Wennink, ASML's Chief Financial Officer.

Before I turn the call over to Eric for a brief summary of the results followed by your questions, please let me remind you that the duration of the call is one hour.

We kindly request that you ask just one question to allow for maximum participation, should we have a second round of questioning -- should we have time, a second round of questioning will take place.

Lastly, let me draw your attention to our website at ASML.com where you can find today's press release accompanied by our consolidated financial statement and a Q3 PowerPoint presentation.

The matters discussed in this call may include forward-looking statements that are subject to risks and uncertainties identified in the Safe Harbor statement and posted on our website, as included in our Form 20F, and as contained in our other SEC filings.

And now let me turn it over to Eric.

Good morning and good afternoon.

Thank you for attending our call.

I am not going to summarize in fact the presentation that you have on the Web, but I am going to extract three key messages and earnings from our Q3 execution.

The first message is one of robust robustness and good financial results, in view of the relatively low sales level that we have achieved in Q3, and which was expected.

In other terms Q3 has been for us the proof that ASML has now the capability to deliver good operating income, good net income in a low point of cycle.

We have never, or for a long time at least, been able to deliver a level of 13% operating income on sales with sales level of 500 to EUR530 million.

So this quarter basically is proof of our capability to deliver now regularly within the cycle to our targets, which I repeat are a minimum of 15% operating income on average on the cycle, above 20% operating income on the top side of the cycle, and at worst case, 5% at the low level of the cycle.

This robustness comes from two areas.

One is our capability to maintain price.

And this is a measure of the performance of our machine.

And in spite of the fact that the volume is not very high customers are still willing to pay the appropriate price to get our machines.

The other part of robustness is with cost, our capability to reduce costs on one hand and variablize cost to volume on the other.

So the first message is robustness of our financial capabilities.

Second message is the definite business pick up.

We guided before the beginning of Q3 that we would have higher bookings than Q2 in Q3.

And effectively we declared 46 net bookings for Q3, which compared to the 26 of Q2.

It is a significant improvement.

And as you notice, we have shipped 39 units in Q3.

That is also a significant book to bill.

If you added to this -- for the 6 net booked in Q3 the fact that we believe that we will be about the same level of bookings in Q4, you will probably calculate the resulting fairly strong start of '06.

And this is what, again, we feel fairly optimistic about.

We feel optimistic about this order picking up and stabilizing also in Q4 because most of the bookings of Q3 has been achieved with the memory -- in the memory sector and in the IDM sector, but not so much through foundry sector.

And we expect the foundry sector to start picking up in Q4.

You add to this that in addition to unit the average ISP of our net bookings is fairly high, which again confirmed the quality of the bookings level.

So that was the second message after robustness, the business pick up, and the first outlook I would say of '06 which looks positive.

The third message learnings from Q3 is the materialization of our share increase -- market share increase.

Clearly three items are contributing to this.

First is the one or two customers that we have started to deliver to in Q2, in particular the memory suppliers -- or manufacturers in Taiwan.

These are now continuously purchasing, and they are starting to make a difference on the numbers.

And that is very positive news.

The second positive news is immersion.

We have now in the market nine immersion tools.

As you know, some of them at research labs, some of them in the memory sector, some of them in the IDM sector, some of them in the foundry sector.

And we are starting -- we are in fact seeing a continuous booking.

And we are declaring now to have a backlog including 10 units, and a significant amount of them being 1,700.

So here again a proof that ASML is at the lead of immersion, and in particular, at the lead of any development of our customers in the 45 nanometer rate.

The third item, after the new customer ramping, the immersion ramping and success, the third is Japan.

We are very happy here to, in addition to I would say solidifying our business with securing customers, we're able to announce the fifth customer.

Although I won't announce a name, of this account, but we are very happy to announce a first order of an immersion tool by a fairly large Japanese semiconductor firm, which is again a way to materialize our success.

So again three messages.

Robustness, business pickup, and share increase, which gives us an optimistic view of 2006.

And I would like here to apologize a bit for our messages of the Analyst Day in which we tried to be scientific about giving you a first outlook of 2006 to be sure that everybody would be in the same understanding.

So let me try to repeat what we said at the Analyst Day in a way that I hope will dispel any confusion, if there are still some -- there is still some.

What we think is that in 2006 now we're able to identify I would say three buckets of sales.

The first bucket is one that you will derive from a capacity requirement by our customer based on their own needs for machines in view of increase of business units that they have to deliver.

And for that we do not expect, we just assume, a total number of units semiconductor growth 2006 versus 2005 at the level of 5%.

So again it is not an expectation.

We're not a specialist for that.

They are certain numbers of research houses who are publishing different numbers.

I would say they are between 5 and 10%, but they are probably at the single digit level.

And we want to signal by this that we are not building up a cathedral on a dream above some percent.

We are assuming at this moment in our own internal planning 5% unit range.

And if we do our models shows that we would be at about the same level of sales than 2005 -- in 2006 only sustained by these 5% unit growth.

But to this first bucket we would add a second bucket, which is one which we would call market share increase.

And clearly I already mentioned that we're fairly happy to see certain numbers of new customers, bookings more and solidifying our first entries I would say.

And this, we clearly expect this to happen in 2006, and therefore create growth for us.

The third bucket is the immersion bucket.

So the immersion bucket has two facets.

One that makes the ASP increase.

In fact, immersion tool is a higher priced tool than a standard tool.

And therefore even if you deliver the same amount of R&D tools than we would do in 2005, these tools would cost more than 2005.

So there is an upside due to ASP.

But there is also an upside due to the fact that immersion may ramp, in fact, significantly at the end of 2006, creating per se an area where we have a very high market share, and would create again significant growth.

In summary what we meant to say at the Analyst Day, and nothing has changed there, is that we have a baseline which is basically some level of sale driven by normal capacity growth, which would justify, if we assume 5% unit, about the same level of sales of 2005.

On which we will add bucket one, which is market share increase, on which we will add bucket two, which is immersion ASP/market share increase or volume increase.

But to those two buckets we have asked you to be a bit patient.

We will be able to quantify a bit more those two additional buckets at the end of the year within our process of budgeting.

And we just wanted to give in fact a fairly positive news then that says in any event we expect to grow basically sales from 2005 to 2006.

On this I would like now to leave it to questions.

And Peter Wennink and myself would be very happy to try to address.

(OPERATOR INSTRUCTIONS).

Nav Sheera, Citigroup.

I just wanted to ask with regards to the trade-off.

In the presentation pack and in terms of also the ASP guidance for fourth quarter of '05, it does seem that you are gaining market share in noncritical layer machines, i-line and the ArF.

But that increased market share could be coming at the expense of ASP erosion.

I know in the past you have said 70% market share of the whole litho market is tenable for yourselves.

Is there potentially a disconnect between these two, i.e. how you might actually continue to gain market share, and at the same time also support the ASP level you are currently at?

Thank you.

Thank you very much.

This is an excellent question.

You cannot take quarter to quarter as being symbolic of any trend.

You may be right.

You may be wrong in the whole of 2006 depending on this, I would say, fight between the capacity requirements, whether the customers are going to ask for more units because they need, in fact they would grow more than 5% unit per year, or whether they will ask for more ArF because they're doing more R&D work.

That issue -- that equation is unknown even from us.

What you see in Q4 is very basic mathematics.

There was a lot of R&D purchases, as you can see from the little pie chart that you have on our ArF due to R&D buildup, Q4 is one where we have more KrF -- I would say even just mathematically, or we have less ArF.

That is why you get this little erosion of price, but in fact I'm looking at my own current preliminary ASP for Q1 and Q2 '06, and you see that that trend of reduction in Q4 is not sustained.

That is also, by the way Nav, that is also evident by the average selling price we have in the backlog.

That is basically an indication of where the prices are going, and they're going up.

And like Eric said, it is an incidental mix in the Q4 that happens to favor 300 nanometer KrF.

Thank you very much.

That's quite clear.

Just a very quick follow-up.

Are you able to turn ArF systems yet, or is that predominately KrF turns business you have been looking at?

In the quarter, you mean?

Yes.

ArF in the quarter is going to be a bit difficult, but KrF we can, yes.

Matthew Gehl, Goldman Sachs.

I had just a question on regarding the comment you made about Q4 bookings likely being flattish sequentially with the level of Q3.

First of all, could you just confirm that comment relates to units?

Yes.

What do you expect as far as the ASP of the bookings in Q4?

Q3 appears to have a significant benefit from ArF bookings.

Is this a trend where we can see a flat ASP in bookings in Q4, or what level would you be expecting?

Probably a bit lower, because of the KrF content of the foundries.

But again, it is a bit hard, because when we give you a guidance on bookings we have a lot of pluses and a lot of minuses in our models.

So this is why in fact when we guided to you -- when we guide billings we give you a very clear number.

When we guide bookings we give a range.

And this is because we have a bit of difficulty to time exactly which one comes when, so you have to be cautious with our business that we have sometimes very large orders of high content which comes a bit late, etc., etc.

So a bit complicated to guide on ASP at this moment on the bookings in Q4.

In general, I would say if we see customers from the memory segment driving the shrink road map orderings, they order at the leading edge side.

When, like we say at the press release when we would expect foundry customers to start ordering for their capacity additions, they will order some leading edge, but they definitely also are going to order, let's say, mix critical layer tools to support their capacity ramp.

So that has a mitigating effect on the ASP growth.

That is in general that is what you would see extract (ph).

Is there a chance to throw in a quick follow-up or --?

I thought --.

Next question please.

Nicolas Gaudois, Deutsche Bank.

You are saying in your guidance that effectively the bookings flat Q over Q in Q4 implies some recovery in ordering from foundries.

Would you qualify that this recovery you are foreseeing is already for incremental capacity additions next year vis-a-vis this year?

And is it also generalized?

We're talking about Taiwan, Singapore, plus China, specifically on China I note that your backlog was pretty much in existence in the first quarter.

Would you expect some catch-up coming back in Q4?

Yes, yes and yes.

We do expect a capacity increase by all of those continents.

We are seeing this because when they're talking about their own order book, which is now stabilized, and then they are seeing some good orders and good shipments in the September time frame.

They wanted to spend a bit of time checking that this would be sustained.

And it seems that it is the case in the different countries we're talking about.

We have already started to pick up some of these orders, by the way, at the beginning of the quarter.

So we feel that it is now time for them, and also in view of most of their capacity utilization percentage, that it is the right time for them to book I would say capacity investment.

And these increments basically are still you would qualify on the moderately cautious side vis-a-vis what you would have expected?

I'm assuming what is happening really is that foundries are a bit more positive -- your memory customers have booked already quite a bit in the previous quarter for H1 '06.

But more enthusiasm from a foundry standpoint would, I guess, push bookings higher sequentially.

Is that the right way to look at it?

No, in fact, I think the key point is we see a pick up but we do not see a major change of trend.

Remember that we started the discussion with we expect only 5% unit growth in the world.

And we expect -- sorry, we assume -- and this is where also the foundry people are.

So they are just being a bit more capacity.

You cannot say that the wave is back and we go back up to a major upturn.

This is absolutely not the message we want to give at this moment.

Jay Deahna, JPMorgan.

How many immersion tools did you book in the third quarter?

Jay, can you please speak up because we can't hear you?

How many immersion tools did you book in 3Q, and how many do you expect to book in 4Q?

We have 8 booked in the third quarter.

And I would not like to give you guidance on the fourth quarter.

But to give you a hint, out of the 8 a lot -- like 100% -- near 100%-ish are 1700.

And Q4 will be probably the rest of the 1700 to cover Q1, Q2, Q3, so that could be significant.

So you're indicating it should be up, is that what you're saying?

It could be.

From 8 there is a possibility for that, but you cannot -- again, this is what I was referring when the question on ASP was asked.

These are serious negotiation, commitments.

It is one by one.

And therefore I can't really permit to date when these things happen booking-wise.

And we said earlier that we would expect 20 to 25 tools to be shipped in 2006.

And we have 10 in the books.

So we still have one quarter to go for 2005.

So it is going to be either Q4 or Q1.

It is very difficult to really time these things on the dot.

Robert Maire with Needham.

In terms of your outlook going forward about foundry spending increasing, could you give us some more color to that as to have customers shared with you their plans or their sort of roll out to the next generation of technology?

What is it that makes you confident in terms of order increases out of the foundries over the next quarters?

It is a bit difficult, of course, to speak about customers' internal plans.

I would refer you to them, of course.

What I can say, however, which is known is those major foundry companies, particularly in Taiwan, are now serious about technology transition.

And as you know publicly from GSMCs, they are are investing heavily in immersion.

And this of course creates a symbol and an example for others to follow.

So clearly on this side of technology you see more R&D investment than you have probably ever seen.

Also, foundries are now starting to move their capacity utilization on the high end, on the leading edge of the technology to levels that requires additional bookings.

So in another terms they succeed to sell more and more of their high-tech part of their product.

I also would not give you any secret here if I say that (indiscernible) Rick Sigh (ph) has been vocal in saying that he feels that he's getting more involved in that, but there is a price of technology which we have to address.

And so with him, and with the foundry, we're working on finding economic solutions to the leading edge environments.

And they are very much a leader into this effort.

In terms of memory outlook going forward over the next few quarters I would assume, though I didn't hear an explicit comment, that you expect the current strength of memory to hold up as is, or would you expect that to back off?

What is your view of the memory market demand?

What I meant to say is that the first half of '06, which we call the strong, will have a similar pattern than the first half of '05, where it was very highly dominated by the memory work.

And this in fact is sustained by the order book that we have solidified in Q3.

In addition to that, if you would ask, are you going to expect more orders from memory makers, yes, we are.

I don't think they have booked their full requirement for 2006.

So over the next couple of quarters we will see the memory bookings clearly.

And it will be focused on addressing their technology needs because of the shrink road maps.

Their shrink road maps are pretty aggressive, and they need the leading edge tools, our 1400s and 1700s to cope with that.

So this is definitely not the end of memory bookings.

I would expect that your memory bookings should be a higher ASP because they seem to be perhaps a little bit more aggressive in terms of feature size reduction?

And that is correct.

Shekhar Pramanick, Moors and Cabot.

Just a question on the immersion unit view for 2006.

If I recall previously you have talked about mid-20s kind of immersion -- number of immersions you're going to ship in 2006.

Has the that view changed at this point?

And secondly what is the lead time on the immersion units?

We said 23 to 25.

And we said a possibility of an upside if the immersion process technology gets qualified in time by our customers.

The lead time is about nine months.

The question I am really asking is given in your backlog currently you have about ten immersion booked.

And even if you have to come in at the low end of immersion units, you must really going to be still bookings almost incrementally 14 units over the next four months to five months.

Six months.

That is a point -- when you ask me the nominal question about what is the nominal lead time, it is nine months.

It is possible that for some accounts it takes a bit of time to agree with the different specs and different conditions, different commercial conditions, whereby we have a gentleman's agreement that the product is started a bit ahead of the finish of those official purchase orders being put in.

So which is why -- and to Jay's question when he was asking how much do you think we're going to book, there is a difference in digital (ph) bookings and real booking, which we really don't want to get into that discussion.

But it is timing that is for us a bit unsure.

For next year it is still another six months.

I understand.

But what about -- are you more incrementally positive relative to three months ago that the number of immersion units shipped in '06 could be higher than the number you just stated?

I don't remember what we said three months ago, but not -- we are exactly at the level we discussed at the Analyst Day.

We are, as you can see, bullish on own performance.

We feel comfortable about the quality of our product.

We feel comfortable about the fact that of course 1700 is a product without competition.

The only product with which you can do 45 nanometer.

That is the obvious thing.

And the industry is making progress on qualifying the processes, as you have seen from iMac.

I think iMac has now published a certain number of good data showing (indiscernible) density improvement, etc., etc.

So all this looks positive, but at the same level as what we had at the Analyst Day.

Jan-Willem Berghuis with Kempen & Co.

I also had a question on immersion.

I understand the lead time is nine months.

But technically speaking when will customers be able to really say the system has been qualified for the 45 nanometer node?

Will it also mean that within six months you expect to have some kind of clarity on when the customers are ready to do follow-up orders for real volume production?

Or would it take longer before you really know the real demand for immersion, because obviously there's a lot of built up interest, but that there still need to be a production environment test.

Would it also take six months or longer would you say?

I would say in an old-fashioned way you would take a machine, do a R&D eval work.

It would take you six months to nine months to make your work done and then you would buy the machines, which takes another nine months of free time.

That is the old way.

We expect that old way not to happen, in particular because of in the flash environment you better take some risk to be the first one introducing the next level of integration.

And so we have at this moment, at this very moment, the first negotiation on the second buy.

So they haven't yet seen the first, of course, but they are already negotiating the to slot some production machine in 2006.

Of course, it is a commercial nightmare for both sides, and therefore we want to stay conservative as to whether that happens, which is why you heard me say 20 to 25 is a standard.

I mean it is an appropriate numbers to believe in.

And above 25 or above the average is whether we succeed with those production ramps.

Okay.

That is also clearly meant with the guidance so it flat, but additional orders above the 20, 25 will be the upside for you in 2006?

That's -- (multiple speakers).

No, I was even -- again, I was not clear enough.

You have already an upside even at 23 units because of the ASP.

Because basically you ship maybe 10 or 15 this year and next year you ship more, so you had an increase from that perspective?

That's correct.

Plus the ASP is a big driver.

Sure.

Thanks very much.

It is very clear.

Andrew Griffin, Merrill Lynch.

I wonder if you could talk about the order linearity across the quarter?

Did the big increase come towards the end of the quarter, or was it fairly smooth across Q3?

And how is it progressing into Q4?

Is it remaining strong, which is why you are so confident about the Q4 level of orders being flat?

We booked everything after the Analyst Day.

No, no.

We are always having a hockey stick in the quarter on bookings.

You are taking me a bit aback, because I usually like to respond in scientific ways to your questions.

I haven't compared with the other quarters, but remember when you get -- in fact, because it was a good quarter in terms of units, bookings, and because it comes lumpily, yes, in some ways the last week has been significant.

We had two memory guys come in with significant bookings in the last week.

And that is where you get your hockey stick in question.

But again as I say, I would not qualify this as a difference or as a trend or anything.

It is negotiations that takes place, and then you go through, and then you negotiate price, and you get there, etc., etc.

So nothing special does happen, but it is true most of the orders have been officially booked the last two weeks.

Given you suggested that orders will be flat into Q4.

Does that mean there will be less of a hockey stick in the fourth quarter?

I'm assuming you must have more confidence than normal to make this assertion.

You are very well versed into our body language.

Yes.

Yes, it is a bit more stability now, and it is because some of the memory bookings that Peter was talking about, which we still expect, are being followed up on the big hockey stick of Q3.

And because foundry people are a bit more linear in terms of (inaudible).

Matthew Gehl, Goldman Sachs.

Just a follow-up question on margins for Peter.

The midpoint of your guidance for Q4 being 37% would be a very impressive performance, given this large drop off in revenues.

And I am just trying to get a sense of what type of upside potential there is as revenues again ramp going into next year, particularly in Q1.

Is there any way you could share with us for every 100 million of revenue increase what would be your incremental margin of that?

What could we see dropping down to the gross profit line, or some way we could get a sense of how leveraged you are to a volume and a revenue ramp going into next year?

I would like to reverse that.

You can calculate what the margin decrease was when we went from Q2 to Q3, for instance.

So I think that gives a reasonably good indication.

On the reason of the margin guidance and that we basically upped our guidance for Q4 as compared to the previous quarter was that we are seen the effect of the cost of goods program coming through, which is true for the whole line, for the mechanical parts, for the optical parts.

And that is basically the main driver, so it is execution.

And clearly when the volume goes up like we expect it to do in Q1, there will be an effect because we just have better coverage of our fixed costs.

And if you want to have indication, just look back, look at the history of this year and you get a reasonably good indication.

On the other hand, you'll have some difficulties to make a cost model because as we often say, we want to manage the Company between 38 and 40% no matter what in some ways to ensure that we grow on the market share towards the natural market share.

If we do have some leeway you will see us investing more in demo units, etc., and more customer service investment, which will impact negatively the margin, but again (multiple speakers).

The margin potential.

The margin potential between 38 and 40.

We are still in that mode of management.

We hope to continue this in 2006.

That should help us still deliver operating income correctly, and allow us to grow.

We are offering here a model of a minimum profitability of, we hope, a good level, and the capability to grow.

And remember, our target is to be 5 billion soon.

Just to clarify, Peter, going from Q2 to to Q3 you had more than a 200 million drop-off in revenues, and you are down 200 basis points in gross margin.

You are saying you need to get back up to that 750 level of revenues to get back to 39% gross margin?

That is a reasonable assumption.

Even with the benefits of cost of goods sold?

There could be some upside there, but just like Eric said, we are very much focused on gaining the market share, because we think that is an essential part of the Company's strategy.

You know very clearly where we are going to penetrate, in what areas.

And that will -- we have always said that we are willing to sacrifice percentage points of our gross margin to make sure that we get that.

So it depends on let's say the speed with which we will do the market penetration and where we'll do it, where we will consume some of that margin upside that we are creating.

We are creating that upside in our cost of goods to make sure we can execute this strategy.

And the strategy of the Company is to actually be, as I said, at 38 to 40% gross margin, but grow and then leverage our SG&A base and our R&D base to basically get a better operating income up.

That's what we focus on.

Mark Fitzgerald with Bank of America.

I was just wondering on the good expense control in the third quarter, it is sustainable into the ramp into the first quarter on revenues?

Will you be at the same expense level?

What we are doing is in times when we, let's say, cannot afford the spending because we want to maintain our financial performance, which is Q3 and Q4 where we have lighter shipment quarters clearly.

You will see that level of spend.

We are also guiding our SG&A spends down in the fourth quarter.

And you will see that when we have good quarters, some of the projects that we're not executing on we will execute, so that might have an impact on the SG&A level going up.

But the focus of the Company for 2006 is to have a SG&A level in 2006 that is not going to exceed the 2005 level.

And when I say it is not going to exceed, you can read into that that we have internal targets that are more aggressive than just staying par.

Is it the same for the R&D line?

The R&D line, what we have said -- what we will save in SG&A we will want to put into R&D.

We have very clearly a challenge because our competitors are not sitting still.

They announce products with new specifications.

We just want to make sure that we have the right level of R&D spend to come out with those products that make us a competitive company.

And what you will see is that the R&D, which is now at around an $80 million level could be between 80 and 85 going forward.

And that is depending on when we spend on the particular project that we have in mind to secure our competitive position.

Matt Gable, Calypso Capital.

Real quick, in terms of --.

Speak up, because it is difficult to hear.

In terms of new units booked, what percent of that was 300 mm roughly?

Units booked that was 300 mm, that is the majority.

I just have to look that up.

It was the majority, the vast majority. (multiple speakers).

There is now color on how many immersion units you think you can book in Q4?

Like we said, I think we can ship between 20 and 25.

We have done all the books now, so with a lead time of another nine months we need to book another 10 to 15 over the next five to six months.

So the timing of when we will book that is very much dependence on what Eric said.

It is the negotiation with our customers about specs, about delivery time.

So it is difficult to really pinpoint down to a number, which is going to be single digit per quarter, to say it is going to be higher, it is going to be lower than what we booked in Q3.

Too much things going on in the negotiation with our customers.

Steward Adrienne, Morgan Stanley.

You talked about 2006 potentially shaping up a little like 2005 in terms of the first half of the year looking pretty strong.

Is there anything you are expecting in order trends as you go into the beginning of '06 that would imply a weakening in the second half of 2006?

Or are you basically just saying, we just don't know what is happening in the second half '06?

It is too early.

We really don't know.

The driver of the second half will be this famous numbers of units of semiconductor growth, which none of us really are in control or know of.

And the second bit is the speed at which immersion is going to ramp into production, which again requires a bit more time before we can address the question.

Maybe just a quick follow-up.

On the -- I think the one customer that we really haven't talked about much at all is the IDMs.

Could you maybe just discuss what you have seen recently, and what your expectation is going through Q4 and into the first part of next year?

In fact, 2005 has been a good year for IDMs in general.

Their utilization rate has been constant.

We are getting nice orders on a regular basis.

And we expect this to be continuing.

So there is a mixture of capacity and leading edge equipment, which is being ordered by each of them.

So again, nothing earth shattering, nothing very different from 2005.

But again, 2005 IDM-wise was an appropriate year.

Of course, for us in the IDM issue involved with processor guys, you could see potentially the possibility for us to improve sales in there, if we were to increase market share in some of the processor companies.

Mehdi Hosseini with FBR.

When you look at your customers -- IDM customers, the ones that have capacity for both logic and memory, especially with flash, do you expect those customers to install immersion in flash lines first and then migrate that to logic?

For some of those customers we have the opportunity to selling two immersion tools, one for each department, and for some only one.

Yes, it is expected that the ones in flash will ramp first.

But I repeat, we have been happy to receive double orders for some of them.

One R&D for flash, one R&D for logic.

Just as a follow-up, there is a new customer that you signed up in Japan.

Does it happen to be on the logic or memory side?

It would it be interesting for you to figure out who it is.

No, I can't say.

Jonathan Dutton, UBS.

My question has been answered actually.

Thanks.

Tom Abpenay (ph), Society General.

Sorry to ask a very basic question, but I would really like to understand this outlook for 2006 and your -- especially what is within your baseline scenario with the 5% unit growth in semiconductor units leading to flat revenues for ASML?

Is the additional (ph) flat units and flat ASP, or is it something very different from that?

The first part.

And I would really like to understand is the 23 to 25 units part of this scenario, or is it kind of one of the possible bonuses?

You are getting now into modeling questions which may be a bit complicated for the call.

Let me try to help you however.

No, there is a bit of ASP increase and a bit of unit down on the "base scenario", which again as I repeat is a bucket.

It is not a base scenario like the minimum.

It is in the area of business we talk about.

And we still see an ASP increase of some level, not as highest as 10%.

And again, in our model, is the way we have done it.

Then the 20 to 23 additional units -- and I say again it is a bucketing question.

They do replace the 1400 basically, so the 1400 units are in the base scenario and the upsides ASP is in the upside scenario.

I hope I make myself clear.

But again you're talking about how you make your models compared to ours

So the upside to the base plan included immersion ASP in addition to immersion units in case we get into production soon.

And then in addition to that you've got the bucket of market share increase, which to be honest with you, we've got a little set of customers' names, and we know exactly how many units -- what? we know exactly -- we believe that we have for the numbers of units coming, which is the third bucket.

And we add them all and we say that is higher than current sales.

Did I help you?

Mostly, yes.

Thank you.

Sorry.

Did I dishelp anybody else?

No, okay.

Mr. Mennon (ph), go ahead, please.

Please state your company name, sir, followed by your question.

I am from Dresdner Kleinwort Wasserstein.

Just to understand the order intake in Q3 and Q4, when you are guiding at the beginning of Q3 that you would be up in the quarter, was what you were expecting somewhat near where you though, which is up from 19 new orders to 38, or was it -- were you expecting a smaller jump in the order book?

We got a bit more.

Was that bit more from the sort of Taiwanese DRAM companies in last week of the quarter?

The bit more was on the memory segment.

Yes.

All over.

Just looking into the fourth quarter, to a previous question you were saying that you have sort of more visibility into the fourth quarter and that it won't be exactly like a hockey stick, because of the fact that the memory orders, which started in the late part of Q3 is continuing into Q4, and the foundries are more linear.

Does that mean you have already started getting the foundry orders?

Or would it be fair to say that the foundries as still holding off, and they will order towards the end of the quarter?

We got a part of the foundry orders.

You have already started.

And --.

A part of it.

And don't -- let's not get the cake and celebrate now.

It is still highly difficult to predict those different things.

So we don't have then in the pocket yet.

I don't want to be understood.

Is there a chance that you could end up in the order book being higher in Q4, or do you rule that out altogether at this point in time?

We can be higher or lower.

It is -- again these are -- I am learning my job now -- is granular stuff, and you have plus or minus 10 units without you seeing them coming.

Because -- not because you lose them, but because the timing gets a bit scary.

So we are on the one hand taking a bit -- a position to guide you on bookings, because we thought it was important that your model reflect as much as possible the reality.

But on the other hand you understand that we are taking a risk here plus or minus 10 units is not inappropriate to have this without changing so much the trend of 2006.

You also have to remember that because it is becoming more difficult for us to predict exactly when things come in.

We're talking about between now 20 and EUR30 million tools that are all landing on the desk of the CEO.

And he is going to ask questions.

These things take time, and that is why it is very difficult to say I'm going to get that order on the 24th of a particular month.

That is not the case.

Just one last short question, if I can, which is when we model your ASP trend into Q3, what actually happened in your shipment ASP where you reported a new (indiscernible) of EUR15 million, you had an improving product mix in the quarter.

Quite a sizably improving product mix in terms of the ArF tools.

And even if we keep pricing flat, assuming certain pricing, I agree which you're getting because you're giving both the revenue and the units in your presentation so we can get at least an approximation of that.

But as you keep those pricing flat and we model the mix shift, we seem to be coming to a higher ASP.

So what I am trying to get at is did you actually discount, especially on your KrF tools in the quarter at all, or is there something else happening which we're not entirely getting to?

I think what you are seeing in the quarter is that a very significant part of our bookings were was our 1400 and our 1700.

Those are all tools that we have which have list prices between 25 and EUR30 million.

So a very significant part of our bookings was in that category.

And that drives up the ASP specifically for this quarter quite up.

Now if you say, what is that -- the impact it has on the next quarter.

Clearly where we have foundry customers coming, they will not book the same level of 1400 and 1700.

They are also going to make book mid critical layer tools which is KrF.

That means that ASP will go down, because it is more foundry weighted.

And foundries don't order that aggressively unless they have 45 nanometer and 65 nanometer tools.

In other terms, they will be more KrF in the first half of the year before we kick in the 1700.

So you cannot think that the ASP is nicely increasing quarter to quarter now.

It is going to be a bit bumpy until the 1700 goes back in and start moving ASP up.

So be cautious with your model here.

It is a bit complicated (inaudible).

Mr. Mandries (ph), Jefferies.

Two questions if I may.

Firstly, in terms of your -- the immersion tool for next year, your 20 to 25 range, is that purely on the XT-1700, or is that also incorporating XT-1400 as well?

It is mainly 1700.

Mainly -- you are 80, 90% 1700 and the remaining being 1400?

Yes.

Secondly, we know that the XT-1700 for the 45 nanometer node there is one other customer out there who is currently at 65, and we would assume 45 over the medium term in the logic microprocessor space.

Are they in that sort of forecast for 20, 25 or would that be an additional customer if they were to order for the 1700?

Those guys are in the 23 forecast.

In the 20 to 25.

20 to 25, yes.

So the flash -- narrow flash chip makers plus the one microprocessor guy has already incorporated in the 20, 25 range?

Yes, certainly.

Last question, if I may, is for the KrF tool, the XT-760 and the XT-860, could you give an idea roughly of the bookings you expect for next year and their lead times?

It is much too early.

This is now the granularity of our budget process, and I don't think we can even with any good certainty give you a feeling.

But lead times I could say we have a clear target for six months, so we're not going to exceed six months.

Six months on both the 760 and the 860?

Yes.

Yes.

And I guess, if I can, one last question.

On the SG&A and R&D is that -- the change you're expecting in the lowering of SG&A and increasing R&D, is that on absolute terms or --?

Absolute terms.

Absolute terms.

Thank you, guys.

Jim Fontinalli (ph) of Rater (ph).

Just wondering, within the backlog two memory customers that you report, whether you can give a little more granularity as to the split between DRAM and NAND?

I know some of your customers will be doing both, but I guess you will have a pretty specific idea about what lines you are shipping into?

It is a bit complicated here to say.

But again the truth is that flash is now clearly ahead of DRAM in terms of the R&D development.

But do they do separate R&D development, is it right?

In fact, at this moment surprisingly we only talk about logic and flash (indiscernible).

In fact today we have a conference with Advanced Technologies (indiscernible).

And clearly you talk about an R&D for flash or you talk about an R&D for logic, some how DRAM kind of gets lost into this.

In fact, I suppose they are just behind the flash guy.

May I refer Jim to the presentation of last quarter, where I think we had a shrink road map on there of many of our customers, where you clearly saw that flash customers where the most aggressive, or rather flash products were most aggressive in the shrink road map.

It is also logical to assume that that is where the biggest drive will be for that product.

It would be fair to assume that over 50% of the backlog is going to be exposed to NAND, but for production and preproduction R&D?

No.

No.

No, because R&D, in fact, as we said -- one of you asked a question whether some guys who have flash and logic are buying one or two machines.

And most of them are buying two machines.

So that means even if the logic will develop later, or the logic will take less units, they also I think the development at the same time.

So in our R&D backlog, although flash is going to run probably faster and with a higher volume, that would be in the second wave of 1700.

But in the first wave of 1700, you will have a -- I don't know where the percentage is but clearly not the level that you would expect in production.

And although in our backlog, 56% of our backlog value is memory customers, it is very much also a very rich mix between 1400 and 1700.

So it is 65 nanometer tools and 45 nanometer tools.

And definitely customers that are more focused on DRAM are also ordering the 65 nanometer tool.

So it is it not only in exposure to the most leading edge, it is broad based in DRAM and in flash, both addressing you could say the -- I would say R&D needs in the DRAM area and the R&D needs in the flash area, and also addressing the first capacity needs for those leading edge products.

Costa Egan (ph) with LB.

I just need some help for modeling your immersion order intake during the year.

Is it right that you shipped two immersion tools in Q3?

Yes, we shipped two immersion tools in Q3.

Yes.

And you said earlier in the call that you booked 8 and had a backlog of 10?

No, we booked -- yes, we booked 8 in immersion, yes.

And if I remember right at the end of -- in July during the last call you said you had your backlog run 7 or 8 systems?

One of these numbers you give me is incorrect.

We may have said it, or we may have -- I don't know.

I don't remember.

Sorry for that.

Perhaps you could follow up with the (indiscernible).

That's fair enough.

Thank you.

Mr. Van Gogh (ph), Exxon BNP (ph).

Just a clarification on the previous question.

Did you also put NOR flash in memory?

NOR flash is in memory, yes, of course.

Also can you give us guidance for service revenue in the current quarter?

Can we assume flat?

What we have always said is the concert (ph) revenue with basically billable contract hours based on the contract with our customers is about 50 million a quarter.

And then the range of the field options, which is a very bumpy business, is between 15 and 30 million a quarter.

So you did 74 million in Q3.

We did 83 million in Q2.

And I think we did high 60s in Q1.

So that is where -- the average is around 70, 74, 75 a quarter.

Operator, I think we have time for one more.

Mr. Sheera, Citigroup.

Just a quick question just referring back to your earlier comments about 13% EBIT margin on a shipment base of 39 systems.

And two quarters ago you were giving us an update as to how you were lowering the breakeven within the Company.

How far are you along the curve flowing from the 130 units (indiscernible) breakeven that you said previously, say, along towards the 100 units that have been often quoted as a target?

I think what I said, and we will continue with the same concept, is now the good news is we're not looking at breakeven anymore, we're looking at 5%, maybe a minimum of (indiscernible) return.

And you have seen that we are above that significantly at 530 million of sales.

And you have heard me also now not talk about unit anymore, but the dollar of sales which is more realistic.

So you could assume that you can start calculating the breakeven or either the 5% fully breakeven to be significantly under 500.

I think it is a better way of talking now because the ASP is so high or can change.

And the good news, however, in our modeling is our margin is not significantly different by ASPs in some ways.

Even if we sell a product at 12 million, or we sell a product at 24, the percentage margin is not that different.

So you could use the dollar now as a way to make a proxy of the breakeven.

Now you've got two types of breakeven.

One is a short-term breakeven, one is a long-term breakeven.

We have -- what that means -- that means how much we can get cost out of our business if we discover a long-term trend down, and that we have a significant value utilization of our cost structure.

We can take easily 20% out, 25% out of our fixed cost through the fact that we are using a significant amount of subcontractors.

That is a long-term breakeven.

On the short term which is management decision.

We do this or not.

And you'll see us over time looking at the total picture and the total cycle before we would use our 20, 25% cost reduction method, which has of course an impact on the future.

Operator, I think we are prepared to shut the call.

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

Thank you for participating.

You may now disconnect.

Thank you.

Thank you.