艾司摩爾 (ASML) 2005 Q4 法說會逐字稿

[OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Mr. Tom McGuire. Sir you may start.

Good afternoon and good morning. This is Tom McGuire, Head of Communications at ASML. Welcome to today's investor and Media Call and Web cast. The subject is ASML 2005 annual and Q4 2005 results, according to U.S. GAAP. Here with me are Chief Executive Officer, Eric Meurice, and Chief Financial Officer, Peter Wennink. ASML draws your attention to the message on today's press release regarding forward looking statements. This call will be 90 minutes, before we begin question and answer, ASML reiterates its commitment to the most complete, consistent, and transparent information about the Company and its operations.

The message is, ASML will further continue transparency in public disclosures. In the United States, ASML conforms and will continue to conform to the Securities and Exchange Commission SEC. In the Netherlands the disclosure regime for publicly listed Company's such as ASML has recently changed. The Netherlands authority for the financial markets, AFM, is the newly appointed supervising authority for disclosure matters in the Netherlands. AFM says, there is only one legitimate way to disclose price sensitive information, that is by means of a press release. Until this new disclosure regime, ASML has followed SEC disclosure principals stating that price sensitive information should be widely disseminated. This includes, along side press releases, Web cast press and analyst conferences, as well as information available on the Company's website. To further ensure ASML's compliance with the new AFM regulations, we have amalgamated today's communication into a press release and this extended conference call and Web cast. Aimed at clarifying our press release, financial results or published information.

On our website at ASML.com, you can find our press release, a brief presentation, and financial reporting with figures in U.S. GAAP and in IFRS. ASML reiterates its commitment to openness and transparency. ASML will continue to conduct investor relations and media relations through appropriate Company channels, including conferences, meetings, and interviews. And now, ASML CEO Eric Meurice will speak.

Thank you, Tom. Good morning and good afternoon. I will not take too much of your time. I think the record of this conference is question and answer. I wanted to underline three key messages coming from the -- our execution in the year 2005. First message is in fact, yes, one of strong execution. In 2005, where we had, in fact, a near complete cycle of the semiconductor unit market. We have shown and confirmed that we are capable now to generate profit, of course over cycle, but also at the low end of the cycle. Clearly, we've achieved this through three facets. One is our capability to weather the volume drop. I may remind the audience that the unit semiconductor unit market that went down from Q3 or 4 and started to recover at the end of Q3 or 5, which is basically a bit more than four quarters. Well, if you look at our performance in the year 2004/2005, we only had two quarters of low sales.

So the first key message is such, we are now able to weather the volume cycles, in particular, in lieu of our strong performance in technology orders. That is, the possibility of shipping to our customers new technology tools, which are not volume dependent, which are not end unit or dependent, but which are dependent on the need to go and transition to new technology. So first, capability to keep the volume high during the cycle. Second point is one of basic profitability improvement. Our capability to deliver a stable margin in spite of cyclical sales, capability to reduce our cost structure or our cost of goods to follow any price (variation) has made us deliver to our profitability targets. Again, at the high end of the cycle or at the low end of the cycle. Third point, our key focus on our cash conversion cycle has also allowed to prove a very strong performance in cash generations. You've seen we've been able to generate above 700 million euros of cash during the year and in a very consistent fashion. Whether we are talking about the gross quarter or a quarter where sales were reduced.

So, first message, strong execution, good company which delivers whenever, wherever we are on the cycle. Second key message is we are now sitting -- or, I would say jumping on the springboard for the future. Clearly customers are preparing and accelerating their transition to new technology, namely, the sub 15 nanometer or the 5 nanometer node technology. This is driven by a flash industry, which requires integration for new applications. This is also required for one shipped new generation of mobile phones and consumer environment of key acceleration of customer needs. Which positions us in an extremely favorably (assemblies) at this moment. The only machine company capable of taking orders and preparing machines for 45 nanometer technology.

So second message, a springboard for growth. And third message, we are happy to confirm that we are in a semiconductor typical upswing as proven by our very good bookings level in Q4, which translates in a solid growth of billings Q1 compared to Q4. Which also is underlined by a significant activities in turns business, turns business, which materialized in Q4 which was responsible for our billings being above expectations. But also turns business which continue into Q1 to be negotiated, which puts us into a situation where we can guide positively on a sustained bookings trend, well into Q1. In other terms, we expect our bookings level in Q1 to be at least the level of bookings that we have achieved in Q4.

So my three messages were, we are a company with strong execution, delivering cash and profit, we are a company which sits on a major opportunity when the emersion/45 nanometer technology with the company, a unique machine to address this market. And we are happy to confirm that the cycle will sustain significant sales in the first half at least of the year 2006. So on this, I'd like to leave it to questions.

Ladies and gentlemen, at this time, we will begin the question and answer session. [OPERATOR INSTRUCTIONS] One moment please for the first question. First question is from Nav Sheera, Citigroup. Go ahead, please sir.

Thank you, good afternoon gentleman. Eric, just a very top level question, please. Just judging by the speed of ram of your Immersion technology, you could be shipping anything between 10 and 15% of your unit shipments in 2006 as Immersion systems. I just want to ask how you see this actually rolling out across 2007. Do you see this becoming the dominant technology over the next couple of years.? Because this is a much faster rollout. then we remember when TWINSCAN came out in 2000. Thank you.

Yes, thank you very much Nav for a very good question. Yes, we clearly see Immersion as the technology of choice for the next three or four years. Our long term forecast shows of a large share of the technology needs to be an Immersion in the next three years or so, you can probably assume about 40ish% of the market being Immersion. Clearly, we will not at this very moment guide on exactly when the ramp happens in 2007. Of course, you've seen our plan for 2006. We're planning to ship between 20 and 25 units and we do expect that 2007 will be a significant production ramp. However, this is a new technology. It is dependent as much on our machine capability as well as it is contingent on our customers I would say technology recipes. So none of us know exactly when the high volume ramp will start in 2007. Peter has something to had.

One comment to that. Should you compare this to the TWINSCAN introduction in 2000 which was a way precise change which is more a dramatic and takes more time to be accepted by the industry while the Immersion is a reduction in feature size change, which basically happens every 18 months. We look at the ramp of our 1400, which is the 65 nanometer product, which has actually been the fastest RAM for a leading edge technology we've seen of other companies. Yes, we have -- if you want to compare a 1700 introduction, you'd better do it with a 1400 introduction and not so much with the inspection of the TWINSCAN as a product.

Thank you for the answer, thats very clear. Just as a quick follow up. What's the lead time reduction on the Immersion systems now. Are you now looking at something close to six months, or is that ambitious still?

Well, yes. You understand that our target is to have everything under six months in terms of lead time. At this very moment, the first Immersion machine, the first 1700 Immersion machines are more in the nine months lead time environment. The difference between nine and six is only 30% and therefore, we are working to execute this extremely quickly.

Thank you very much.

The next question is from Matthew Gehl, Goldman Sachs. Go ahead, sir.

Just to follow up on that question there, you mentioned, Peter, that the 1400 would be a good guide to Immersions I was hoping to just get a little bit more detail there. Can you give us some sense of the number or percentage of your sales in 2005 that were 1400 and how that's ramping in it's second major year here in 2006 so we can get a bit of a proxy for the Immersion tool ramp?

If you look at, I have to refer to the presentation that's on the Web site where we give -- where we give the breakdown of the sales and you basically have to add up 2005 for four quarters. If you look at the fourth quarter, 48% will stay direct shipments. The majority of that was the 1400 which was also for Q3 and for Q2, because in Q2 we started to introduce the 1400. So you could say that when a new product is introduced, it quickly takes up the majority of the shipments. Now, what would that mean for 2006? It is clearly dependent on our ramp plants for our customers, we have seen memory customers starting to ship or us starting to ship to our memory customers in 2005. Some of that will clearly go (inaudible) in 2006 with other customers in the memory space that did not take those tools in the year 2005 and will be added IBM's and some foundries. So, yes, ARF in the field, the 1400 is going to be a very important product for us in 2006. And you can expect that the ramp that started in 2005 is continuing to 2006. I'm -- at this moment cannot give you further more details on the unit numbers, but an expectation on the further ramp is very, very real.

Okay. Just a quick follow up on a comment you made on turns. Can you give us an idea of how many turns orders you actually shipped then in Q4? And does the guidance for 48 in Q1 assume any turns -- I know you mentioned there could be some upside, but just interested in the actual 48 includes any assumptions on turns, or that would turns orders actually make the number higher than that?

In Q4, we had about six to seven turns.

And that's new turns?

That is five new. Four new. Sorry, four new and two used. And for Q1, we have assumed no turns. This is why we are guiding in our press release that this may happen.

Okay. Great. Thank you.

Next question is from Nicolas Gaudois, Deutsche Bank. Go ahead, please.

Yes, Ivan, I guess just a little congratulation on the cash flow performance this year or after the last three years, I would say. In terms of questions, just focusing back on the cost side for a while. There is no mention, so far, from you be the last year of any incremental COGS savings be there of what you've achieved in 2005. It is the reason that you expect to achieve less this year than last, or is it simply a function that is strategically wise. You're effectively intending to pass a large portion of potential Cost Of Goods Sold savings to the pricing in order to secure incremental market share gains and in the long run obviously at some point be able to defend consistently higher margins.

Thank you for your congratulations, Nicholas. No and yes. No we're not at the end of our curve of improvement on cost. In fact, we have significant number of projects on new frames. New frames mean new definitions of a frame which will yield even superior cost and value. We have also worked on the -- our cycle time, as you've heard two or three times, we are going for 30% savings on the cycle time. That definitely has an impact on cost. We also are running some projects of more aggressive sourcing, making use of worldwide sourcing on certain number of parts. So no, we are well into the project, but we do not see the end of it yet. We have significant curves savings for the next -- I'm reviewing -- for the next three years. Yes, we will use some of the savings to give back to our customers. And therefore, some of the savings will serve as being more aggressive price wise. And giving, I would say, volume opportunities through pricing. We are, and I repeat, managing the company at a target of about 40% gross margin. You will therefore see the gross margin oscillate between 38ish and 40% depending on mix and volume. But it is clear that if we do have cost savings, we plan to feed that back to customers for growth.

So for the time being, you targeting assuming 40% gross margin, 20% plus operating margin into the next couple of years, you will target you have essentially. Is that correct?

That is correct.

Okay. And as a follow up, just in terms of the reduction of the new noncritical (inaudible) tools, is there any way you could help us understand how many of these tools you achieved in Q4 and what is your initial view of acceptance of these tools in '06 as well.

We have, in fact, I will answer a question you haven't asked. It is clear in Q4 that we shipped more KRF than we even planned. KRF is a measure of the upswing. These are capacity basic machines and we shipped much more of that than we expected. That means customers are back in (inaudible) capacity. Within this KRF environment, yes we have introduced a one sector for (inaudible) new machines to address the noncritical layers and I guess we shipped to six of them in the last quarter, is that correct? That's correct.

So, it is a very good first quarter of life. If you see, our product was introduced in Q3, in time to take the orders and deliver six in the first quarter is a good number.

Would they tend to impact ASP's on the lower side or not , if you look purely at the TWINSCAN portion of KRF?

Absolutely correct. The whole KRF which I would call again the capacity business is at the lower level of ASP than the ARF. If you are in are cycle down where we ship more technology tools than capacity tools, you will have extremely high ASB biased by the ARF family. And when you get back into an upswing cycle, the KRF start taking a very larger share, even if you continue selling ARF, and that reduces your ASP. This is what we saw in fact in Q4 in our billings and our bookings. The good news, however, for what we are concerned is two things. One is KRF OER have a very high price. We're not talking about 1 or 2 million euro machine. You're talking near $10 million for KRF and around 20 for ARF. These are still big numbers. Both of them are above the same time margin. So ASP reduction due to mix is not economically a problem.

And perhaps to illustrate further on Eric's point, if you look at the average enterprise in the backlog at the end of the year, it has reached 15.1 million euros, which is the highest we've ever seen. That is clearly a reflection of the quality and as a mix really of also KRF demand, which includes the noncritical, but also the impact of the leading edge tools.

Thank you very much.

Thank you.

Next question is from Jonathan Dutton, UBS

I just wondered if I could start off with a broad based one, based on the improved momentum you seem to be seeing for Immersion, I just wondered if there's any updates on the type of revenue growth that you're looking for in 2006?

I would answer in two segments. One is yes. You have seen in our press release that we're still planning the shipment of 20 to 25 immergent tools, basically 1700. But we are planning for more. It's another way to say that we feel that there is enough buoyant demand and that we feel comfortable with our technology to start preparing the possibility of an up side above 25. But , it would be a bit earlier to commit these four a lot of reasons, in particular, the customer recipe, which have to be compatible and follow (inaudible). But, yes, there is an up side opportunity here above 25 and I remind everybody that these machines cost around $25 million each. The other aspect, however, of growth, is the buoyancy of the market itself. Which has nothing to do with Immersion. Immersion being the R&D of technology side, but we expect to growth from 2005. I would say basically based on the current reading of the markets, the overall market expectation.

Thanks. I wondered if I could just have a quick follow up. You've highlighted you increasing your R&D, including spending on EUV. I just wondered what level of EUV spending you're planning. And when that's slated to start a ramp. And also what sort of share buyback level you might be targeting in 2006.

Are these related questions? On the first question, I will not segment our R&D budget per product. I will answer differently. I will say we are now getting very significant confidence level as to our road map, which covers up to 2011, 2012. We have now a need for R&D money to cover these different machines. That includes Immersion and negative narration Immersions. That includes UV. That includes new architectures. And all this is packed into our significant R&D investment, which we feel , expect we will be able to afford to grow, to accelerate, in fact, the introduction in the market of those different new architectures. Regarding your share buyback plan, we are a company that say what we do and do what we say. We said when we reach a billion euro of net cash, which is basically cash minus our convertible at this moment, we will start implementing a share buyback plan. With the exception that if within the period of the (inaudible) buyback plan, a potential investment materialized, which make sense for our portfolio and these are investments which strengthen our position in lithography or which we can leverage our lithography capabilities in, in that case, of course, we will publish the fact that we would want to use the cash differently than the share buyback. But at this moment, we've reached our target cash. We think we are going to continue generating cash, so it is due time to organize a share buyback, but again, as you know, you will not know exactly when and how etcetera, all these depend on different numbers of conditions.

Great. Thanks very much.

Next question is from Mehdi Hosseini, FDR. Go ahead, please sir.

Yes. I have a couple of questions. When you talk about your attraction with flash market, especially, 45 nanometer. Could you please help us understand whether the opportunity in the larger as the larger migrates to 45 nanometer and than you talked about kind of capacity buys for Immersion happening 2007 and assuming six to seven month lead time. Would that imply that we should see the capacity booking for Immersion happening in the second half of 2006?

Yes. On the logic question, yes I hinted to you that our older book basically for 1700 is not only including the flash people. Clearly, (inaudible) are in there, but also multiple idea. The lead product at this moment seems to be mobile phone environment, but again, it's an anecdote, I think because other products are following. I would not be quoted to saying this is a 45 nanonode in logic. I use a 45 nanonode -- it is a flash node and a measure of the technology, but in logic, but we don't want to get in to technicality either, but in logic I don't think we will it call it a 45 nano at half pitch. It would be much to aggressive. But same technology -- same type of 1700 needed for the next integration of those. And again, I would not want to be specific because these are customer secretive products, but it is good to hear or to feel pressure on both sides of the spectrum, flash on one hand and logic on the other for this type of machine. And when I say pressure, I mean real pressure. On the second question, is yes certainly. We expect at the start of bookings for production of 1700 to happen early in Q3 of '06.

Just, if I may, just a follow up question. To follow up, first in terms of logic, we heard last night the largest logic company accelerating the move to 45 nanometer. If I understand correctly, they're using a different technology. So I want to get your opinion on using overetching to migrate to 45 nanometer. And in terms of Immersion capacity bookings for Immersion happening the second half, going back to analyst day November of 2005, there was a comment regarding overall bookings peaking in Q2 of this year, so would the capacity booking taken place in the second half of this year, would that imply we should see continued improvement in booking in the second half? Thank you.

Regarding a large customer in the U.S. who may have given some hints about their technology, I, of course, cannot comment. This is customer specifics. There are different ways of doing 45's, nanometers. You can do it by double patterning type things, using less critical machines. You can use the (inaudible) critical machine, you can do both. I am happy to confirm to everybody that we are participating to any of the options. And in fact, we are very comfortable that our R&D size allows us to participate in all those options always a very strong product. Regarding your question, I think, if I remember in the Analyst Today , I say that Q2 '06 would be a good billings quarter. I don't think I was talking too much about bookings. And I confirm at least, that we expect Q1 to be a good growth for the press release and we expect this to continue in Q2 again and I can confirm the old news that Q2 '06 is viewed by us a fairly significant gross quarter. In bookings levels and guidance it is fairly complex and difficult at this moment to guide. It is true that Immersion would start then, but if you remember, I told you at what levels depend on the recipes on the maturation of this thing, and then of course, the rest of the bookings depend on the cyclic cycle and it is a bit too early to guide on this.

Understood, thank you very much.

Next question is from Mark Fitzgerald, Banc of America.

Thank you. I was curious your comments in terms of what's driving business, flash, mobile, consumer, and these being heavy seasonal marketplaces, a big demand in the second half. And then looking at how strong your turns business is in the fourth and first quarter if this in fact, might just be a seasonal surge in demand for cap equipment. To meet the second half, and that there could be a falloff in the second half of the year, particularly on the turn's side of the business.

The key data that allows us to judge your question would be on utilization. Utilizations at this moment is very high on most of our customers. So we expect that the additional capacity that is being booked on turns as well as on normal orders for the first half is not going to create a utilization problem. And therefore, this industry has become very much mature in management utilization. Therefore, it will be one to one equivalent to the real needs for semiconductor and I will not want to guide on this. You've seen hundreds of different -- no, you've seen two hundreds of different analysis about whether it could be a growth of 22% highest to 3% semiconductor growth in '06, depending on who you talk. And again, we don't want to have opinions, we want to have facts. The facts are telling us that the first half is excellent. And that our Immersion dealership allows us to believe that we will have an extremely high market share in the non-volume related part of the business, which is the technology share. So, we feel comfortable about the volume business in (hedge one), we feel comfortable about the technology business in hedge two.

May I ask a quick following question? In terms of R&D expensing Did I hear in terms of that you will step it up and therefore could expect on an actual dollar base or euro basis '06 would be up from '05?

Absolutely. The commitment that we have to the market and to you is to grow R&D as fast as we can do which makes it, I would say still within our financial targets. So, we expect to grow, we expect to continue our execution and profitability. We expect to have more money able to be fed into R&D.

Dollar value, you associated with that? That you can talk about?

We try to avoid guiding too far away because a lot of parameters may happen. So we've guided on Q1 at 85 and I think we did Q2 (inaudible) 82. So three more million coming in Q1.

Thank you.

Next question if from Ben Pang, Prudential Go ahead, please, sir.

One question. On the turns business, the six pools that you mentioned. Is that, usually you would expect how many, one or zero?

This is an average good on an upswing.

So average, good, and why doesn't that impact your gross margin more favorably? That's a pretty significant number versus the number of total tools you're selling.

Yes. Before I answer that question, the fact that this average good is also for us considered fairly good news. That means the bookings increase that we have had in Q4 looks sustained. It doesn't look like a flaming white pan, so it's a solid customer utilization rate, neat machine, not too much, not exciting, the right thing. The right move for a continuous growth at this six months. That's good news. Regarding the margin, Peter.

Like Eric said earlier, we had about four new systems and two use. And especially the use systems can have a significant effect on the average gross margin on those incremental systems, which was the case in the fourth quarter. We were able to ship a few use systems which had very varying, (inaudible) those gross margins can vary from single digit to very high double digits. That is just a matter of that particular mix or that particular turns business in the fourth quarter. It's not indicative of any gross margin trend.

Okay. And on these turns business, what type of capacity are people, you know, using those tools for?

200 millimeter.

Yes, 200 millimeter, KRF (inaudible).

Okay. And the final question. On your R&D increase, is that all for semiconductor or are you still active in the flat panel market for development?

We are continuing the evolution of our technology for the flatpanel at the same level as we had in the past. Remind everybody that we have a dormant project in some ways, we continue by waiting and improving and looking the technology for this potential market, waiting for potential interests by customers. And that is we are staying at the same level. No, the increased is to accelerate all the great ideas we have in lithography, which as I mentioned at beginning of the call is getting more frozen and was a significant set of options in terms of different architectures, which we feel that we need to invest to continue increasing our leadership GAAP. It is true, also, as I mentioned in the share buyback question, that some money has been and is always invested by waiting technologies around lithography. And again, this is increasing a bit.

Thank you.

Next question is from Jay Deahna, JP Morgan. Go ahead, please, sir.

Thank you. Good afternoon, a couple of questions. The first one is, on your guidance that borders on Q will be equal to or better than 4Q. Is that in units or in euros and I have a couple of follow ups.

Both.

Okay. The next question is, in terms of your shipment profile of your '06. If you're orders are up in 1Q modestly or whatever verses 4Q, then potentially up again in Q2 that would suggest that your shipments of new systems should trend higher through 3Q and possibly in to the early part of 4Q, I think. Does that make sense?

This is not illogical. It is clear that our body language at this moment is positive.

So you don't see an overly front half loaded shipping situation like last year?

(The portfolio) of lead at this moment is more diverse than last year. Last year, we really had a major affront loading by memory, Flash in-particular. This year, you see a serious rebuilding or building of capacity and technology in all the three sectors, or the four if you will. Flash, Memory, IDM, and Foundry. Now, does that say that it is not going to be a catastrophe in the second half, we don't know. And with that we will continue. But the quality of the growth is more measured at the memory level and higher at the others. And therefore, yes, I have said, it's not illogical.

I meant to say that the data is making your assumptions possible. And on slide 15 of the presentation on the Web site, we give a further breakdown of the backlog where which you can read. Basically all quarters in 2005, 80% of the unit backlog carries shipment dates that are within six months. So if we'd guide on the order trends, which we did, and if those would materialize in Q1, I don't have any reason to believe that 80% mark would change. That it would automatically have an affect like you logically deducted for Q3.

Okay, and then two other quick ones. First of all, can you give us a quick update on Japan and have you received orders from the large Flash supplier in Japan, just kind of a general update on Japan, and that one in-particular. And then finally, have you considered a 10B51 type of stock buyback where it's automatic, or are you thinking discretionary for the time being?

Okay, Peter, do you want Japan and do the buyback?

I can be quick about the buyback. At this moment in time, we are not going to give details about the structure or what we want to do size and etcetera. That will be done in due course. That's a short answer. I kind of got the long answer to you Eric.

Regarding Japan, so as you've seen in our press release we have announced that we (fixed) the customer in Japan. As you know it's difficult for us to publish these names as not all of them want to be public. It is possible that this does not yet include a large Flash manufacturer in Japan and that may happen very soon. In other terms, additional leadership in Immersion makes it clear that people who are serious to grow in 45 nano type technology have to put an order on a machine. You clearly have an acceleration of our penetration in Japan and we officially have six and we expect a possibility to announce more soon.

Great. Thank you very much.

Next question is from (Joe Sacama, Lindberg) Go ahead, please.

Thank you. Hi, there. A couple small questions. First of all, as far as on the Company's latest sales outlook for this year is still flat unless A, B, C, and D would happen. Would your current be more optimistic, positive on the Immersion. Would you say that it is fair to say what analysts are already saying, that sales will indeed grow, more than 10%. That's the first one. The second one is on shippings, also linked to Immersion. How much litho tools do you expect will be sold globally to share and will (Asnau) have 50% again or less or more?

Thanks.

Okay, thank you Joe. Good question. I think we were strong last call because of the confusion of the of the wording that they may have used before. We said growth. And I think the question was asked three times, so I think I said three time gross. I'm going the to add one more time, gross in 2006. Maybe gross this time is written with bigger letter. So yes, Immersion is materializing. The orders, as you can see, show significant certain units, and we are negotiating, what, the finishing with another eight. We are above 20 already in bookings. This is significant. So Immersion happens. Second point is obviously the bookings is now confirming the basic capacity business. Foundry was good in Q4, showing good possibilities in the first half. So clearly, we are also saying yes to the overall market buoyancy. The other aspect was market share. And obviously our customer in Japan plus a potential X in Japan and our performance in new customers in Taiwan plus performance in other larger accounts in the U.S. And obviously our fix customer in Japan plus a potential X in Japan and our performance in new customers in Taiwan plus performance in other larger accounts in the U.S. Allows us to believe that the market share again will increase significantly. So we know the terms, we expect gross, and that is no issue. And we expect significant gross. But again, at this moment, we want to stay guiding along the first quarter because we all know that in this industry, cycles can change.

To your questions about the overall size of the market, here I want to make a safe harbor comment, please. We will -- I will give you some numbers based on a simulated tool. This is not a forecast. I cannot and will not want to be blamed for guiding things based on data that do not exist. But the simulation is the following. If you take an -- sorry, if you take a 10% unit semi conductor unit growth, 2006 versus 2005, which corresponds to with our own simulation tools about 8% value gross of semiconductors tools, end product semiconductor. So if you put this into our magnificent little simulation tool, which has a whole set of assumptions about technologies and (through goods) and 300 millimeter and 200 millimeters and etcetera, you'll get all sets of assumptions. We come up with a total market of about 500 little tools in this projected mix. Okay. On the 500 machines, we do expect our market share to be obviously above what it is today. Today, we are going to -- we're waiting of course for the statistics to be official. We expect to be above 67, 68% at this very moment in value, and not in unit. And we expect to be above that in 2006.

Thanks. One quick follow up on Immersion. How many Immersion tools would you be able to make? Like with current production capacity? You're saying you're reckoning with more than 25, but what will be the max?

I would -- I'm tempted to answer the sky is the limit, yes, but I don't think you'd want to write this in an article. Would you? I'd prefer not to guide on this. I think at the moment, we probably have enough capacity for the needs.

Okay, thanks.

Next question is from Antoine Badel, company Suisse Go ahead, please.

Yes. Hi, what do you think is the size of the Immersion market this year?

This is another way of asking the question. Now that I say - we can make the whole market. Can I pass on that question?

Sure. Let me ask a couple follow up on Immersion. You said you think there's a chance you might be --

Could you say please say your name and organization.

Antoine Badel from Credit Suisse. You said you might beat the 25 unit shipment for Immersion tools this year. There's a chance, what leads you to that? Is it incremental customers or is it more confidence that customers can transition the 45 nanometer tool into production fast enough. And following that, are you seeing any sort of price pressure in Immersion tools following the launch of the competitive tool?

I will answer the first two questions, I didn't hear the third one. The first two, yes, the first is a confidence level in our technology. And which has led to an adoption by new customers. So, clearly, no one in this industry, you boast your technical capability, you think you're better than the competition etcetera, and you hope. It seems now that we have enough factual piece of data that we better be ready to ship those machines to more customers than originally thought. So clearly, our technology is adopted. That's the first comment. The second comment which is another way of saying, do we believe that all these customers will be able to ramp Immersion. I would prefer to answer the opposite, and that is they need to. In fact, we are getting excited. The reason for the need of this new technology, 45. Sometimes you shrink the cost, here you shrink for future. In other terms, you do not get into Dr. Wang's dream of flash taking some (inaudible) business without really integrating. You do not get into (inaudible) view of life about what you should have by phones in terms of storage without shrinking. You cannot have dreams if you don't shrink and this clearly put an accelerator to the whole thing. I made on purpose -- because it's my industry duty to say -- but I am not judging the speed at which every problems will be ironed out in production and Immersion. This is for me a question mark, for all our technologies, a question mark. You have to realize that these are extremely complex machines. You put water into this, you're trying to do 45 nano, you've never done it because of (inaudible) issues, because requalification it is a very, very, complex environment and you operate within the industry. This is an experience curve, management. You have so many defects, which, by the way, we are really happy in our progression on that. We are not yet to the defective role of production and then you're working on this until you get there. And often, they're not 100% sure about how long it takes to get there. So, yes, positive on us, technology wise, for our old and new customers. Positive on the needs, and mutual on the difficulty of executing the recipe of diversion with our customers. Your third question was?

It was about pricing for Immersion tools. What's the ASP for the latest orders and are there any signs that you might be under a little bit of price pressure because there is a competitor out in the market now.

No, this is a joke. Yes, we really respect our competitor and we, but these are very complex machines for our competitor (inaudible), it creates a value which should sustain the current ASP of about 25ish maybe. That target price is based on making it economically voluble for customers to use.

You are saying 25ish. Is that down slightly from -- because I thought previous ASP for Immersion was sort of 29, or am I mistaken.?

You're talking about list. 29.5 is a list price. for a 1700. If you want one, we'll start discussing from 29.5. And for the American team, I mentioned this is Europe.

Thank you.

Next question is from Mr. (Punjae, Sosha De Janerio) Go ahead, please.

Yes, good afternoon. I'd like to have some indications from the big moves that we can see in Q4 in inventories, accounts receivables and current liabilities. I'd just like to understand what's behind these big moves, and where do you see inventories at the end of Q1. Given the guidelines that you gave for Q1 shipments and bookings.

The cash conversion cycle is high on our agenda. Peter and I, so we're working in full detail whether the 19 drivers to get this to performing. Clearly, we are making compromises on the inventor in particular between reductions or improving our efficiency so (inaudible). Also, increasing the inventor rate in areas of leverage. You've got a certain number of areas of leverage. One of them is demonstration machines where you show customers the exact capability of this machine and you make a lot of demonstration, etcetera. The more you have those type of machines, the faster you go into a customer. So that's one usage, I would say of cash. You have, of course, the building up of our (inaudible) machines, which gets themselves into inventory of some point. So that grows obviously and naturally - the inventories. So you've got a certain number of point of actions which we've taken which stays. On one hand, we increase the efficiency of our cash cycle, but we take a part of it in investment. And we anyway try to yield cash generated every quarter. That's a gain and at this moment, we're fairly satisfied with the improvement of the internal numbers, which have a hard time to see. And of course, you can see the external numbers.

If you view on the previous explanation of the major changes, I think we were very successful in making sure that our customer stayed (inaudible) towards the end of year. We ended up with accounts receivable of about 300 million. Which is compared to the sales number of that month, is a pretty good achievement, yes, inventories were up quite significantly, but that is a reflection of our guidance on Q1. Clearly, but also, the fact we are building two (inaudible ) tools. When you add it up, the aggregate amount of that is close to 100 million euros. Which is in inventory, but does not reflect yet on the sales of the first quarter. And correspondingly, if you increase your work-in-process, you have your accounts payable, your suppliers who are waiting for their money to be paid. So that goes up also. So in the terms of networking capital, I think we had a positive outcome in Q4. Largely driven by the fact that we were driving our accounts receivable down. And net -- the increase of inventories less accounts payable was not that significant, not for the first quarter. That was your question, what do we expect. We expect the further acceleration of growth, so we need to put money to work because in the absence of prepayments for our customers we need to prefinance work in process and inventory and accounts receivable first before we get cash back. That will happen, we will see the EUV investment not doing indication Q1. So in Q1, you will clearly see the effects of some investments for growth.

Okay. That's very good. Thank you. Just a very small follow up. Can you tell me how many Immersion units you expect to ship in Q1?

Your --

How many Immersion machines in Q1?

Yes.

To ship?

Yes.

Remember the 1700, which is the big, was now everybody expects is going to ship early Q2. This is our production ramp as it has been in Q2. In Q1, do we have another I think it's ($1400.00) which is the full (mercenaries).

And then we were waiting to ship both the 1700's which would start, like Eric says, in Q1 and will ramp from that moment on.

Thank you very much.

Next question is from Stewart Aidan, Morgan Stanley Go ahead, please.

Hi, there. I just wanted to go back to your simulation and just clarify, 500 tools in '06 you were talking about is new tools, that's correct, isn't it?

No, that is total. That is (inaudible) capacity you would need in the current mix of stuff.

So that's everything?

Correct.

Okay. And do you -- so you said $0.57 value. Do you know what your unit share would be, roughly, in '05?

In the 40ish, but again, we have to wait the last two months. I think we have no data yet official. I would guess 37ish, 36ish to 40ish. You have to wait.

It's probably a bit higher than the 37%. Stewart's -- but.

We can't say.

Somewhere in the 40s.

Okay. And similarly, as you said you expect market share to be higher in '06 on value, do you think that's going to be the case on the unit side as well?

Yes, definitely.

Let me ask one other question. Is there any implications of you cancelling your priority shares. I know you've got two forms of priority things. You've got your priority shares and I think your protective accumulative press shares as well. What does the impact of the priority shares being canceled have?

The priority shares give certain rights to the Management Board and the Supervisory Board Those will be canceled. The main (anti signal) for device is the (present) share foundation and that foundation is still intact and there are no plans to abolish that. It's only on the purity shares that gauge certain preference rights to certain decisions to be measured go to the Supervisory Board.

Okay. And then just a final one. SG&A, up about 10% sequentially in your guidance for the first quarter. Just to see where that flatlines from that level for the rest of the year.

That's a fair assumption.

Next question is from Dan Barkley, UBS. Go ahead, please.

Hi. Two clarifications. The first one going all the way back to the beginning about the press release, so just so we understand it, as far as the Company's interruption of the Netherlands's law, in order to stay on sides of that, you're going to be issuing press releases anytime before you make a statement that you think might be material on either a conference call, a Web cast or at an Investor Conference or meeting. Is that the correct interruption?

Hi, this is Tom McGuire again. Basically, what we're doing is what we said earlier and that is ASML will continue the openness and the transparency. And that means that our practices will conform with fair disclosure as prescribed by the SEC. What we have now in the Netherlands is a new regime which says that price sensitive information or material information, the only way to disclose that is by a press release. So, basically, what we're saying is, we, as a Company, are adapting to the new regime in the Netherlands. We're a globalling operating company. We participate in financial markets internationally and we will continue to conform with fair disclosure and whether it'sdefined in the U.S. or in the Netherlands. However, ASML encourages that different authorities align their rules for Fed disclosure of price sensitive information.

But until they do align, it seems like the tightest disclosure rule is now in the Netherlands, which requires a press release before anything material is disclosed. Is that the right interruption as ASML sees it?

Absolutely. Right now the most strict rule for disclosure of price sensitive or material information is by press release only. And that is in the Netherlands.

All right.

But with regard to material information, we, as a publicly traded company, in the U.S., in the Netherlands, have always been obliged to disclose material information in a timely way by a press release. We've always done that, we'll continue to do that.

I'm just saying now. So going forward, you're going to be doing a lot more press releases before or concurrent with Web casts and conferences? Would that be the way to look at it?

Yes.

The second clarification, you talked about the stock buyback once you reached a billion euros of net cash. I've got a couple clarifications on that. It looks like you're only about 50 million short now. Even if you burn some cash and working capital, you could probably still hit that number by the end of the first quarter, so that's the first question. Is that, you know, inaccurate assumption and should we be thinking about hearing about the share buyback program sometime after that first quarter release.

We said -- Eric said at the beginning, we have been quite clear in our communications to the market that once we hit our target level, about a billion net cash, which you are right, calculate we are about there now, that we would consider in the absence of investments into basically grow our own business, we would give that money back to the shareholder. And we have decided that we would start the preparation of a buyback plan. But we also said, we don't want to create speculation on what we're doing. So when we come to the point where we feel that we need to go out and we have concrete plans with respective sides and structures, then we would go out. So I'm not willing to speculate on when where we're willing to do that.

Okay. I have another follow-up along those lines. One of the things that's only partially in your control on that 5 3/4% bond is the soft call provisions. If the market likes today's release or likes your stock in general, you could actually call the 5 3/4 bonds earlier than the October maturity. And calling them, the economic thing would be for people to convert. So you could, in effect, go to net cash substantially over a billion, maybe even close to a billion and a half in the span of month or so. How should we think of the share buyback program if you were to call allied force conversion of the 5 3/4 bonds?

I think that is speculation about what we could do in the case share prices would go either way up or down. And at this moment in time, I'm not willing to be more informative about what our plans are. Like you say, it depends on a number of variables that are not under our control, and we will judge that when the timing is there. Because like you say, it depends on a number of variables that are not under our control. We will judge that when the timing is there.

Would there be any reason for the company not to call those bonds if you were to go through the soft call and force the convertible holders to move into stock?

No comment.

Okay. Thank you for your help. Good luck the rest of the year.

Thank you.

Next question is from Shekhar Pramanick, Moors & Cabot . Go ahead, please. Are you there?

Hello.

Go ahead, please sir. All right, we'll continue with Mr. Mino, DRKW Go ahead, please.

Hi there. This is one question. Since you will start shipping to 1700 in the second quarter, can I assume that the majority of the 25 or higher tool shipments will be in the second half of the year, which is that you'll get through a ramp, you'll ship a few tools in the second quarter and then you will get quiet a lower (bat) for the second half of the year. Essentially, where I'm coming from, from air speed modeling point of view. Should we be modeling just because of that 1700 shipment come through in the second half and increasing ASP to the second half of the year?

I think this is a good assumption. We plan to do ship, to ship a certain numbers of tools in Q2, probably more than you may think, we're trying. But, yes, the bulk obviously is going to be in the second half. Regarding ASP It all depends on how much capacity orders we'll get. If you get much more capacity orders and a lot of KRF, which adds up of course to the famous 25 million average price on the Immersion machine, then that makes a blend to which hits us somewhere. So it's very difficult to guide on the ASP in the second half.

Sure. But given that you should be getting some of your customers moving into commercial production in to 2007, can we assume that on a quarterly basis from here on with the 1700 will increasingly become a bigger and bigger portion progressively quarter by quarter in your mix?

Excuse me, could you repeat?

Just assuming that you will get some volume shipments of commercial production shipments on the 1700 in 2007, in a model, can we be continuously increasing quarter by quarter from the second quarter onwards, the number of 17 00 shipments in your mix?

As usual in these ramps, you have one or two quarters which represent a place where everybody wants a lot of units to set up. And then you have one or two quarters of relaxing time. So, no, you can't say that if you put a model together -- you don't want to say that it's all smooth and increasing of the you're going to see quarters high, and then going down for one or two quarters.

And just last clarification. Did I hear you correctly when you said that wireless is the key leading commercial production customer for Immersion? Or did I mishear that?

I would not say customers, but I would say applications. A lot of drive on getting to a mobile phone with more features than we are using in the next technology. It's probably the application of choice. But again, we're not (inaudible), I just report the number of pressure that we get from this segment.

Okay. And do you emphasize dropping prices on the 1700 as it becomes a more mature product in 2007?

Of course we envision all the time to reduce our prices. In fact, to reduce our costs and then give the benefit to our customers.

Okay. Thank you very much.

Next question is from Carson Yuka, WestLB Go ahead, please.

Hello. A question concerning your Japanese customer. I was just wondering why none of your Japanese customers as of yet showing up in the order bank. In the last two quarters, you didn't have any orders banked in Japan, is that right? To be expected.

I understand, you look at the statistics. I was looking all over trying to find out. It was first of all remember Japan is still -- our market share is small. Any orders we get, when you get a lot of orders, they are still looking at the small number in the rest of the world. They are part of this green on pages 16 of the presentation. They are in the 9% green, but they are there. Now you also have to be cautious with the book keepings on those orders. You've got some especially when you start a new customer, you report, of course, (in a letter to the FCC.) You recognize revenue as we go. Even if you book the whole machine, you may have some recognition of revenue which hit us a bit later. So what you see here is an accounting number. So, a bit difficult to read.

Plus these new customers aren't going to order a large quantities. They'll order first one or two tools. Which will of course have an affect it will not be, (assuming render) a first customer be a very significant part of the backlog. That will hopefully grow over time.

That's great. Thanks. One other question. You're guiding (20 to 25) plus Immersion shipments this year. You're saying you have nine months lead time. At the moment you have an order backlog of 13. If you order (sending), so that would mean that the current quarter, you would have to sign seven to 12 plus order for emergence, is that right? Is that your expectations?

Yes and no. We report bookings exactly when they are official accounting bookings and they are the appropriate paperwork and leave commitment. It is very possible in our business when we have extreme good relationship with customers that products are started and orders are coming later. This does happen regularly when you have a specification discussion. Often, in the process of building up your machine, you give some time to customers to amend the spec accordingly. We do not recognize orders in this condition. The machine is a start. It is within the time and you receive the orders a bit later.

Okay. So these eight orders you have pending at the moment, those would be orders in the way you just described?

No, not at all. What I just described is above the eight. The eight is real orders -- sorry, it's spending in the way that you 've got one coma and two dots and things that have to be done and we just received, (not that many through this process.) You've got some of that. What I meant, is in addition to the eight, that we have about -- in addition to that, the we know of customers who have asked us to start products, which is why I have guided to the fact that we are planning for more than 25.

That's great. Thanks a lot. Thank you.

Next question is from Bert Sundag, (Fields) Go ahead, please.

Good afternoon. The question regarding the share buyback you're preparing it for this year, but it's subject to what do you confine good investments, alternative investments. Is that just like lawyer talk for saying we would not exclude anything or are you currently really in talks with other parties?

We put, I think we said last year, we put a structured system to evaluate opportunities. We don't want to buy anything. We do not just want to buy because we have cash. We don't want to buy because we want to create a (preliminary), but we want to buy things that make sense. And therefore, we have a process, by which we review very, very regularly good business plan. We have nothing, I would say concrete in front of us at this very moment. Although in truth, there are two or three business plans which are being investigated a bit more. Which as a serious probability of getting need (of a bit of money). At this moment, there is nothing of material level that we are hiding behind, etcetera. There are certain numbers of good (ID), but not too significant.

So it's really fairly, fair to expect that the 1 billion will be used for a share buyback.

Not the whole billion. The excess cash. The excess cash. There's a high probability at this moment that we will execute at the opportunistic moment.

All right. Thanks.

Next question is from (Mr. Manzies with Jeffries). Go ahead.

(inaudible), two questions, I can ask you then. Firstly, in the Q4 period, in terms of of the four units. Could you give an idea roughly on the regions or the type of customers they were who made those orders?

You're talking about the turns?

Exactly.

How do I say this without telling you who the customers are. Let me be a bit clear. I think it's has been high.

Foundry. Could I be (a ) been spending, but has it be any other foundry in the Asian region who's also been ordering of recent.

No, we can't be that specific.

In terms of your booking orders for Q4 of 55 units, does that include any numbers coming in from the new joint venture between Intel and Micron.

(inaudible) The details are still being discussed. So I haven't heard and you may know more than I do, but I haven't heard that they are to the level of getting reorders.

Thank you very much.

Next question is from ( ) Go ahead, sir.

Good afternoon. Most of the questions I had were already asked. But can you give a reason why you're choosing a share buyback program instead of a regular program?

Yes. We've had that discussion several times with several people, including analysts, and the investors during shareholder meetings. The issue is that if you have a dividend policy, you want the dividend policy to least to provide stable dividends, because the shareholders that rely on the business (inaudible) want it to be stable. No matter how you look at it. This will remain a cyclical industry. We have targets of in the downturn that say single digits operating income levels and in upturns about 13%. It's quite a significant difference. So that is what you would then do for dividends. You would build in at least a buffer to make sure you can provide a stable dividend for that buffer, but it would mean that dividends would be very high. Now, and on top of that. If you look at the company and we have said that numerous -- at numerous occasions, that we think this company is still poised for growth. Growth because of the industry growth. Gross if you have attended the Analyst meeting. For the next five to seven years, we anticipate high single digit growth for industry and on top of that we're planning to increase our market share. In a gross company where from time to time we do need that cash and we talked about the possible repurchase for some time. That is less likely that you want to have a stable dividend policy. So those were the most important reasons to choose for, in this particular moment in time, for the Company, to choose for the potential of a share buyback.

What would be a fair amount of cash, excess cash you could use for the buyback, let's say in this year.

That would depend on how much cash we would generate, but clearly that is something which we said earlier. (inaudible) the further details will be made public in due course. But clearly, it's a function of the cash that you generate.

Let's say you would see how much cash you have currently minus the convertible bonds plus the cash that people expect you to generate and then minus one billion and whatever's left is what you could use, right?

You can do calculations.

Yeah, yeah, I still have my calculator.

It's the ability of the cash and we're not going to go any more detail about volume or timing. That will be done in due course.

One more if I may. You also write in the same press release about significant investments and acquisitions. What would be the fields that you're currently looking at for acquisitions or additional activities apart from the flat panel which we already know that you are looking at.

We're going to disappoint you again. I don't think we can answer your question except by saying it has to be either strengthening our business or that we bring experience and trade.

But it wouldn't be like you'd be interested in acquiring another semiconductor company?

If it makes technical sense, potentially. I do not so much believe that it makes commercial sense in some ways. There is so many (to do that.)

All right. Thank you.

[OPERATOR INSTRUCTIONS] We'll continue with Mr. Murray, Alliance Trust. Go ahead, please.

Good afternoon. Going back to your December slide back, the 2006 guidance is for baseline revenue at the same level of 2005 with expected upside from Immersion technology implementation at 45 nanometer volume. Does this suggest that there's no real (canalization) at the moment from Immersion or is that a misinterruption? When do you think that product starts canalizing the existing (product )?

(inaudible) R&D, companies buying one or two of those for the 45. They don't take the space of any other products. The rest of the products is more of the production type products. The Immersion then gets into production in '07. That's when quote unquote you can have (canalization). The good news for us. The Immersion is more expensive industry wide than machine that it would replace. And, we have the belief that our products will have even a higher share of market than what this is replacing. In any event for us,all of your ASP and more market share will yield further growth. Everything being equal in 2007.

Is it too simplistic to look at the revenue coming from Immersion this year and see that it's incremental and just add it on to slightly grown baseline?

It is too simplistic. The sophisticated calculation would be to take the 20 to 25ish machine multiply by the Delta price compared to the technology players last year that would be your side. Then you'll have enough side in market share and enough side in cycle. Unicycle, the unicycle this year was X%, next year it will be Y% (inaudible). It's a bit complicated, but I hope you're model will allow you to do that.

The Immersion technology is a technology that addresses 45 nanometer, which is on the (IBS) road map. What we're looking at is a technology that is addressing one node. The 65 nanometer node that we have been starting to ship this year, is also, you could ask the same question, was that an incremental part of the revenue. No, it is an essential part of what this Company and what the industry is all about as long as we stay on the wall to wall curve. Until that stops, then you could say that the last technology note was an incremental note. If as far as we're concerned, that's very far out.

Thanks.

Next question (inaudible) Go ahead, please.

Good afternoon. Just would like to know if you have many clients placing more than one order for the Immersion tools. I would like to understand if most of the customers for the time being are more for research and development or if they are there already for volume production?

A certain number of customers are buying two tools, but for R&D, when they have more than one process. A typical example is memory and logic in the same company. The -- certain numbers of forward-looking customers have already planned with us. This is in the complex questions that you guys have asked about the structure. Within this environment, a certain number of customers have said, I want one plus X for production. And you are starting to have that discussion happen.

Okay. So, if, let's say you are going to sell 25 unit this year. That mean it's half the number of clients or more?

It would be less than 25 customers, yes.

Okay. Thank you.

Final question.

All right. The final question is from Mr. Orgie, JPMorgan Go ahead, please.

Thank you very much. Can I ask a couple of questions to Eric? Last year you talked about 40% of gross margin as being where you want to cap this business and that for any market share. Is that the truth, especially for the second quarter?

Yes, exactly , so the nominal target is 40% and we will not hit it every quarter, depending on volume and mix and etcetera, but it is so the drive of the company to be of value for investors. To allow growth, but also to build value for customers. We think that 40% is a good compromise and can be managed at the moment.

Can we get that in the second quarter?

Well, we are ready to guide Q2 a bit later.

You said you have 12 new customers. They're probably some non-IC customers. Can you compare for us the profitability of those non-IC customers. Are they fairly the same?

So in our new customers, we've got a certain number in IC, accounting, I think we've got three or four, and the rest are as you know we have a business unique course called special applications, which is basically a way to use some of our technology to resolve problems from other segments. Unfortunately, sometimes very small, but at least we've got solutions for them. The typical one. This is where all those customers come from.

Okay. Finally, on revenues, we saw a jump in revenues in Q3 and Q4. Is this a (new rate or)?

No, it's an extremely complicated to find trends through this quarter to quarter. I would discourage, of course, there's a bit of trend, a bit of positive news and negative news, but I discourage all of us to try to time exactly those revenues. We've been burnt last year in Q1 where, in fact, some of the revenue didn't come in Q1, but in Q2 and I want to be a bit cautious.

The fact is about 75 million a quarter, 50 million through the contracted hours and the rest is incidental and field option sales. Our customers wanted to complete our budgets, so really it's like Eric said on some incidental factors. All leverage, I think the 75 million a quarter is a reasonable value.

Okay. Thank you very much.

Ladies and gentlemen, that concludes our Q&A and this concludes our conference call. Thank you for joining us and see you next time. Good-bye.

Thank you.

Ladies and gentlemen, this concludes the ASML2005 annual and fourth quarter 2005 conference call. Thank you for your participation. You may now disconnect.