艾司摩爾 (ASML) 2006 Q1 法說會逐字稿

Morning.

This is Tom McGuire, Head of Communications at ASML.

Welcome to our investor and media call and webcast.

The subject is ASML’s 2006 first-quarter 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 60 minutes.

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.

And now, ASML CEO, Eric Meurice, will speak.

Thank you, Tom.

Good afternoon.

Good morning.

Thank you all for attending our call.

Before we start the Q&A session, I would like to spend a bit of time on four messages.

The first message is a disappointment.

The other three messages are positive pieces of news.

The disappointment first.

We, indeed, missed our Q1 expectations on the top line and the net income by about 10%, as you have noticed.

However, the issue responsible for this miss was a delay -- the technical delay of the production of two 1400 machines which were supposed to be delivered in the quarter, which in fact were delivered respectively on April 5 and April 13.

The issues were technical.

One of the machines was delayed because of a tight special specification requested by the customer, and the other machine had a [validity] problem, which got resolved within a week.

Clearly, therefore, we are not happy having missed our top line expectations.

But in other terms the reasons for it is well understood and not recurring.

These two machines’ prices are above €20m.

That explains the full burden.

But this is the first of four messages, the disappointment.

But now, the three positive pieces of news.

First one is that our execution in Q1, apart from the two machine slip, was in fact much better than expected.

First of all, we did mention at the beginning of the quarter that we were expecting some turns, which is business with a very, very short lead time, much smaller than the production lead time.

We were able to capture, in fact, three to five of those.

And this is why we have reported 51 units shipment in the quarter, although we guided on 48.

So we are very, very happy with the possibility that we have had to meet additional strong demand and got additional sales, but also increased customer satisfaction.

Second good news here on Q1 execution is the gross margin.

We guided that 38 to 39, and we have executed at 40%, which shows a fairly good profitability on a lower ASP mix.

Again, that’s a message of robustness of our profitability and capability to make money on a different volume or different mix.

Also happy in Q1 we are on our performance on the 1700.

You have heard that we have now delivered the first 1700 machine, which is the only machine in the industry capable of 45 nanometer node.

This machine was completed in Q1 and we were able to ship early April.

The other point of execution is visible also in the market, where we are now counting seven customers in Japan.

We got a significant order by a new Japanese account during Q1.

And the last point I’d like to talk about in terms of execution is our success in implementing, in less than nine months, a shift program in production, which enables us to work 24 hours a day, seven days a week or will enable us to do so.

This shift program required approval by trade unions and our employees, required significant hiring, and still requires significant training.

This program was set in motion on February 2 per plan.

So, again, the first piece of good news is good execution in Q1, apart from these two machines.

The second piece of good news concerns the outlook for Q2.

Indeed, the outlook for Q2 is strong to very strong, particularly if you measure by our billings expectations.

We are guiding at 64 units, which translates in total sales, including service, of above €850m for the second quarter.

This would make it a record quarter for the Company in its 20-year history.

Clearly this quarter will be good sales and obviously profitability.

But also good news in this quarter is that we expect a sustained level of bookings for a continued positive trend into the second half.

We are not expecting an overheating set of orders.

We are expecting, in fact, the trend to continue, thus building slowly the expected growth on the total year.

Why are we so confident about this sustained trend?

First of all, we have significant amount of quoting activity.

We have to come back to 2004 to compare the same level of quoting activity as what we are facing today.

We also do not believe in the overheating as these quoting activities are based on requests by customers for very short lead time projects.

And usually this is a measure of customers requiring capacity for identified demand.

And when the demand [for a customer] is identified, this is a proof, basically, of minimum overheating, just CapEx investment for leads.

And this is what is happening now

Additionally, less than 50% of this quoting activity is memory-driven.

And I understand that all of us are concerned about potential flash overinvestment.

And clearly we confirm that, at this moment, this is not what we are looking at and that the level of quote activity and the level of bookings that we expect in Q2 will have a normal profile which covers the different segments - DRAM, flash, foundry and IDM.

This was the second piece of good news, of the Q1 execution.

Q2 outlook is strong.

The third piece of good news, before I lead it to questions, is our future.

And we are fairly happy, fairly comfortable, fairly optimistic, due to two measurable factors.

One is on our execution.

We are seeing now a maturation of the immersion process development at our customers.

This was publicized by certain numbers of those customers who are recording now a stable and low level of defect density of immersion process using our different machines shipped in the past year.

As you may remember, we have 14 immersion tools in the market at this moment.

And we’re very happy to see a maturation of the usage of those machines by our customers, which bids very well for the future and confirms a first half ’07 production ramp of immersion in semiconductor business.

The second bit of good news is the fact that we are facing discussions to supply on 21 out of 24 fab line -- or new fab line projects which are being planned for 2006, 2007.

So I repeat, 24 new fabs, new fab lines.

Out of this 24 we are bidding on 21 of them.

This is a very good number, a very high number.

This is also a quality number.

Out of those 24 projects, 16 are memory, out of which eight of those projects are 100% flash, three are hybrid, that is equal to flash or DRAM, and five are DRAM.

So, again, a very balanced portfolio of new projects, very high numbers of new projects, on which we expect a significant market share.

So on these four messages, one disappointment, three pieces of good news, I would like to leave it to Tom to introduce the Q&A session.

Tom?

Okay.

When asking a question, please identify yourself and your organization.

Also, please ask one question and limit it to a short follow-on question.

Can we have the first question, please?

Thank you, Mr. McGuire. [OPERATOR INSTRUCTIONS].

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

Go ahead please, sir.

Thank you very much.

Good afternoon, gentlemen.

Nav Sheera from Lehman.

I have a question about your gross margin.

The first quarter gross margin of 40% was way above expectations.

And I just wanted to ask whether you feel there’s a limit to that 40% because you’re shipping a lot more tools in the second quarter and your guidance is yet again to 39 to 40%.

And just a quick follow on to that is are you still seeing conservative ordering patterns from foundry and IDM customers, which is what you said in previous phone conferences?

Thank you.

Thank you very much, Nav.

A good question.

First of all, regarding the gross margin, clearly we are managing the Company with a target of 40% gross margin.

We have said this now for nearly two years.

The objective is to create growth and to maximize what we call our natural market share.

And this will be our focus for the next set of quarters.

We are, of course, having a little difficulty to manage to a target of 40%.

Sometimes makes it a bit difficult.

Sometimes it helps.

Sometimes it doesn’t.

In Q1 we were very happy, in fact, to perform on the mix and also on the cost structure.

In Q2 our mix will be a bit less rich, theoretically, on the margin as we introduce the 1700 in significant volume, the 1700 being a new product, carrying with it a bit more cost warranty-wise and, I would say, start-up cost-wise which leads to have an average margin of the portfolio, at least at the beginning, to be a bit less than our 40% margin.

Regarding our conservatism, it looks that, as I said, most of the -- not most, a large part of the quote activity is concerning the IDM and the foundry.

Clearly the IDM and the foundry statistically are still ordering less as a percentage of sales than their historical best.

So, in other terms, you could argue with some statistics that IDM and the foundry are under investing.

And again, I repeat, you could argue and you have to look at some historical curves to say that.

And we are seeing more activity on those two segments at this moment, which hasn’t yet translated into firm orders, but could.

And that is part of our optimism for the rest of the year.

Thank you very much.

Next question, Matthew Gehl, Goldman Sachs.

Go ahead please, sir.

Yes.

Actually, I wanted to ask a question about immersion, but just first a clarification.

Was there an immersion tool actually recognized as revenue in Q1?

No, we have -- and I know there was a bit of confusion here, probably our fault.

We said that we will be ready for delivery of the 1700 in Q1, which is the case.

We made the tool available to the customer.

The customer has to agree and sign up every aspect of the spec.

We never dared guide on this tool and in particular because it depended on the customer signing the specification.

So we didn’t guide to have it in the revenues for the quarter.

Okay.

And then, that leads to my --

But it did ship in the first week of April.

Okay.

Great.

That leads to the next question then, because if I look at the increase in backlog attributed to immersion, it’s just under 120m in the year, equate to an ASP in your backlog for immersion tools, it looks to be just under €24m.

If I look back at the backlog at the end of Q4, you had a backlog ASP for immersion of over €26m.

So just interested if there were some dynamics going on in Q1 where the immersion tools you were booking were actually lower ASP.

Is that €24m figure closer to what the long-term ASP is going to be in the initial tools, or higher ASP, or what exactly was going on there?

We have seen average ASP -- the tool list price is 29.5.

And at this moment we expect to ship only the 1700i tools for the time, and only a bit later in the game we will come back to the 1400i and we can explain why the production logic.

So I would say at the beginning we will get into a 29.5m list price discounted.

Therefore, the price for customers will hover around €23 to €25m.

However, it’s going to be highly difficult for you to figure that out in the different bookings and billings numbers that we may publish, because some of the revenue recognitions will be different depending on the different conditions of specifications and payment terms that we allow the customers.

So you may have sometimes recognition of 80% of it for a period of six months, and then 20% later, etc., etc.

This type of accounting necessities may be necessary, depending again on the specification requirements of the customer.

Okay.

So you’re not expecting, as immersion becomes more of a volume runner order for your customers, that they’re going to be able to push the ASP even below the €24m level?

No.

At this moment -- well, again, life is an issue of competition.

But, as you know, we at this moment are under competitive pressure, not so much on price but on specifications.

When our competitors will be able to introduce machines for the same nodes, which we expect to be in 2007, the discussion will be whether their machine has advantages or not compared to our specification.

And we will discuss and start the activities on spec improvement and that type of work, rather than thinking that there is going to be a price war in this market sector.

Thank you.

The next question is from Nicolas Gaudois, Deutsche Bank.

Go ahead please.

Yes.

Hi there.

It’s Nicolas Gaudois from Deutsche Bank.

First question on immersion markets and then I’ve got a question on lead times as follow up.

On immersion, Eric, effectively now you’ve got good visibility for the year with your backlog and orders at hand, and your guidance, your competitor, Nikon, is guiding to 15 unit shipments this year.

I’m just curious if you could refine for us what you see as the total available market for immersion tools in ‘06/’07 which we view as being comprised of those IDMs in memory and logic will need to be of R&D and [pilot] line capacity, and then some NAND flash volume production requirements as well for sub-55 nanometer.

Of course, Nicolas, a very difficult question, as usual.

The 15 units that Nikon has announced would be supposedly an R&D project, as nobody will be in production in ’06.

So this adjusts to our 20, 25 forecast.

And as we maintained last time, we plan even for more depending on the results of the current ramping.

This would be -- the additional 15 from Nikon will certainly be a duplication by customers or customers needing to have security.

Say, 25 to 32, they’re probably good enough to satisfy the R&D needs of the world.

So the additional 10 to 15 from Nikon will be, I repeat, a way to secure the technology.

The production, however, ramping on such machines is not any different than normal technology and normal node ramping.

It’s not because it’s immersion that you will see a different view of that.

Last experience we have on the 1400 machine is, correct me if I’m wrong here, but the certificate says we shipped about 70 units in a year and a half.

That is right?

Yes, yes, [69].

So, 70 units in 15, 16 months.

And I think it would not be ridiculous to use the same approach here of assessing the market in the -- as these machines, immersion machines, may have a throughput which is similar or a bit lower than the 1400s which I compare with at this moment.

And when I say we did 70 units in the first 15 months of activity, I also meant not 100% share.

Probably 70%-ish share on this segment.

So I suppose you should take a calculator, take 70 units, divide it by seven and have an opportunity to understand what would be a total market within 15 months of start of production.

Right.

So that would be ’07 overlapping in ’08, I am assuming, yes?

That is correct.

And at this moment we feel very optimistic about the fact that the customers are now going to ramp.

They will ramp -- some of them may ramp as early as Q4 ’06.

Some of them will ramp as late as Q2 ’07.

And, of course, you have a mixture of when do they really start production.

Okay.

And I guess one major difference is still, correct me if I’m wrong, but there were 1400, so dry, or maybe [6NA] effectively was used for logic ramp as well as all of memory, while I would assume that for immersion we’re again talking really about NAND flash here for a good year or more before DRAM gets even closer to this immersion in ’08 and beyond?

I would make a bet with you that IDM will start fairly fast.

Today, to achieve integration for mobile phones, we are getting significant requests on our 1700s, and we have the same things in graphic control.

Much more than ever.

In fact, at this very moment, we are having significant customer pressure to be re-slotted ahead of some memory people -- sorry, some IDM requesting to be slotted ahead.

So I would not bet on them being late.

Okay.

And just to close on that, we see logic IDMs for 45 nanometer or is it still 65?

No, it’s impossible for me explain on the phone, and I need a specialist on that one.

But it’s not node, it’s pitch, and it’s the design critical dimension.

If you take an equivalent, when you talk 45 nano nodes, you may talk a pitch of 60 to 70 nano nodes for a logic guy.

However, they still require a 1700 because of some critical dimension in which they can’t handle with current technology.

So it’s a bit complicated.

But for these reasons, even if they have a much, much laxer pitch, they still need these capabilities in orders.

Okay.

Great.

We can take that offline.

And then briefly on the lead time side, if you just make calculations on your backlog, minus what you plan to ship in Q2, it’s about 26 units basically to be delivered in Q3 already booked.

That would be below forecast or consensus, yet if using more activity, as we think you are for non-critical layer tools, are you actually seeing a lowering of lead times and maybe of some programs contributing to that, actually allowing you to ship much more turns or book orders in Q2 effectively for Q3 shipments than in the last quarter that is past?

Well, in fact, very insightful.

The answer is absolutely yes.

We are, in fact, in some ways astonished by how fast our customers are taking our project of lead time reduction.

It’s probably due to us doing a good sales job, but also to them having serious needs in the current environment.

We are seeing extreme requests for short turn business.

And this is why, although we have guided a, let’s say, a sustained level of bookings in Q2, we believe that most of these will be Q3 shipments and not much Q4.

And we have to now become accustomed to a backlog which will be not covering the usual six to nine months that we used to have, but a backlog which covers three to six theoretically.

Yes.

And can I answer that, Nicolas, in the sense that if you look at the backlog composition, the backlog grew to about 1.6b.

But 85% of the backlog is shippable in the next six months, which is clear evidence of the lead time going down.

And 85% in a situation where there is pressure on the delivery and a backlog that is growing we have not seen before.

Okay.

That’s very clear.

Thank you very much.

The next question is from Timothy Arcuri of Citigroup.

Go ahead please, sir.

Hi.

I’m a big believer, obviously, that there’s a rise in capital intensity over time.

But I guess, as I’m looking at your shipments and if I assume that the tool shipments in the second half of ’05 become capacity in the first half of ’06, and if I assume that the tool shipments in the first half of ’06 become capacity in the back half of ’06, it appears that if I look at that shipment compare that the shipments in the first half of ’06 are up roughly 35% versus the back half of ’05.

So, if I annualize that, I’m getting an annualized capacity addition of roughly 70%, something like that.

And historically that’s up in the range where we typically have a peak in industry utilization rates.

Is that not the right way to look at it?

And is there some reason why it could be different this time?

Thanks.

At this moment, your analysis will be probably to be done by segment and trying to get out all these R&D tools.

So if you take all our numbers without that, we could probably start seeing if there is a trend.

You also potentially take annualized things which are usually not to be annualized.

The memory guys, flash in particular, would book in one or two quarters, and nothing in the next ones.

So you can’t also trend that.

So today the only piece of data we can give you is the following.

First is we are still having utilization curve which improves.

In fact, you will probably hear from some customers that they are above their theoretical 100%.

So we’re still really hitting those guys in this particular foundry environment, but also in DRAM for some reason.

So we are having a serious need for capacity.

Now, if you take -- if you calculate, which you probably just did and I could not follow exactly your math, but if you calculate the overhang of everything we’re planning to ship in Q2 -- Q1 and Q2, you take out the 1700 which is a significant amount of business, you will see that still is compatible to a 10% unit growth of semiconductors.

So you will have to trust me on that because we have done that to be sure.

And if, if is a big word, the unit growth of semiconductor continues at about 10%, then we are not building overhang.

Okay.

I guess I’ll have to trust you on that one.

I guess, as a follow up, do you think that your memory customers are front-half loading their CapEx?

So, if you look at a customer like Samsung, do you think that these customers are spending and ordering more tools in the first half of the year than they will during the second half of the year, based upon what they’re talking about with you?

Thanks.

Absolutely.

Okay.

Thanks.

The next question is from Mehdi Hosseini, FBR.

Go ahead please, sir.

Yes.

Good morning.

I have a couple of questions, actually as a follow up to the question -- last question.

You talked about 16 new fab lines that you’re bidding on, 16 out of 24.

These 16 fab lines are memory.

And talking about the difference this year compared to 2004, in the sense that bookings could be sustainable, what gives you the confidence that these fab lines, these new 16 fab lines, would actually turn into orders?

You just said that ’06 CapEx was front-end loaded, so would that imply that these 16 fab lines would begin to place orders in the second half or early ’07?

And again, what gives you the confidence that we won’t run into overcapacity as some of the new pessimists are arguing?

And I have two other follow-up questions.

Okay.

Good.

Let me repeat the numbers first.

So we’ve got in front of us 24 new fab lines, which have been discussed.

Out of 24, we are working on 21.

Out of those 21, 16 are memory -- sorry, out of the 24, 16 are memory, eight are flash, three are hybrid, five are DRAM.

So in fact we are working on 21 products, just to correct you.

Okay.

So now, on those 21, by memory, this is the first time, at least in my history which is short here, a year and a half or so, that I see so many projects.

I’m going to have to probably come back to you but, by memory, I think we were talking mostly on about 10-ish new fab lines about a year ago.

So here, the first message that you get from those statistics is there are much more new fab lines than before.

Okay?

So at least you’ve got a factor of double.

Your next question was what is our degree of confidence to translate those fab lines into the order.

And how much of that order has already been placed?

Yes.

And clearly, at this moment, no orders have been placed.

When I say no, not significant, say five or ten units.

They are being discussed now, mainly.

First shipments will be end of Q3 to the beginning of Q4.

Q4 is really when you start having real volume.

We believe that they will translate into between 10 and 20 units per quarter.

And that is additional to the normal business, I would say, that we usually do, which is not having new fab per se but just improving or increasing the capacity of existing fab.

What’s the probability of success?

I can’t answer but if you see my body language, it’s positive.

Sure.

You cannot judge this with the history.

You have to judge.

The question, however, is are those fab lines really going to happen, that is again overheating and at some point they will pull the plug or they will delay for six months to a year or something.

Our degree of confidence that they would not [hit this] high.

Whoever is not memory, we understand need the capacity.

This is the IDM and the foundry.

We think they can do and continue without capacity.

Regarding the memories, we think that if there is an overheating in flash because a lot of people are going in this market, the potential investment will happen in Q4, or Q1 or Q2 ’07.

And probably, if there is an overheating, which you will be the judge here to understand whether the flash growth curve will or will not cover this capacity installed, this problem may have to be resolved at the end of ’07 or ’08.

But we don’t see this overheating in capacity to be a short-term one.

Sure.

And just two other follow-up questions.

One of your major equipment -- or, actually, component vendor, [Frimer], was talking about microprocessor customers and some foundries are actually evaluating immersion.

I want to put a focus on microprocessor.

Do you see any kind of a change in their strategy in terms of dry at 45 nanometer versus immersion?

First of all, I don’t think I will be able to comment for Intel, if that is a bit your question.

Let me, however, clarify that for us.

We are very happy with a different approach to the next generation architectures.

Either you use immersion to get there, and obviously we are shipping tools -- immersion tools to everybody, clearly.

And the second thing is if you can do a new generation by double patterning, you basically therefore do not need immersion but you need double numbers of machine.

So either/or, we feel pretty happy with the different versions of life.

On immersions we have a leadership, as you know, from our 14 machine already shipped, and our NA.

On double patterning, we think we also have leadership because our overlay is second to none.

So, all in all, we feel -- we will feel very, very happy to be -- to go both ways.

I just have one more --

Excuse me, sir.

We’re going to have to move on to someone else.

We said one follow-on question.

We’ll take the next question, Operator.

It’s from Titus Menzies, Jefferies & Company.

Go ahead please.

Good morning, guys, or good afternoon.

Just some color on the end customer market right now.

Looking at the backlog, there’s a shift between IDMs to the foundries, is that a result of foundry spending picking up momentarily at the expense of IDMs, or is it just a significant pull-back in terms of maybe a [PC store] as to why IDM spending has curtailed in foundries or remaining benign, just picked up in terms of overall booking orders for the Q2/Q3 period?

I don’t think we can answer that question.

We have not -- in fact, we haven’t looked too much in this.

We only can tell you that both segments is firm.

But it is true, they are not the same size as memory, so you clearly would expect seesaw in demand of those.

The second point to notice is foundry is very, very, very, very, very short term at this moment.

So sometimes you see them in the bookings number or the backlog, but that’s not even relevant to the billings.

In other terms, we have turned so many foundry business in Q4 within the quarter, but it’s never happened to be in the backlog.

And we did the same in Q1, and we expect to do the same in Q2.

So very, very complicated for you to look at the backlog trend on foundry as is.

But it is clear, I’d like to add there, that foundry was particularly weak in ordering in the second half of, let’s say, in Q2 and Q3 of last year.

They were about 17% of the backlog in Q4 because we noticed very clearly that at the end of Q3 the utilization of foundries went up, and you saw the immediate reaction.

Now it’s 22% of the backlog.

And again, that is a reflection of their high utilization rates.

So it is not uncommon to see coming out of, let’s say, downturn quarters, which we clearly had last year, that foundry was the overflow of the semiconductor industry in that sense grows in the backlog that we are currently seeing.

Thank you.

I have one more follow-up question.

Going forward from here, when you talk about immersion versus double patterning, just [inaudible] of patterning, obviously you’ll need, as well as more marks, you also need more powerful lasers.

Have you already got a flavor or feel on the pricing environment that you will have to price into your ASPs or new machines which will incorporate double patterning?

Would you pass the entire higher ASP onto the end customer or do you have to absorb that into your own costs?

Well, let me try to answer this one.

We think at this moment, and again, it’s ASML and this may change depending on customer pressure and push, and as you know, we are very flexible to customer demand but, at this moment, we believe that 2007 is an immersion year.

And I think double patterning will be useful potentially for some R&D tests and checking, etc.

But production-wise, we expect it to be an immersion year.

2008 we expect it to be another immersion year because we will have introduced in 2007 our new 1.35 NA type machine, which we expect will continue the immersion success. 2009 will be a time where EUV and double patterning will give options to customers.

And by then the double patterning machines should be extremely sophisticated in terms of throughput and overlay, and this is our new generation question.

So, in other terms, to answer your question, double patterning in production before two years may not be an [inaudible] bet at this moment.

And on top of that, customers will only need it for their critical layers.

And this means that double patterning will not be done on the whole device, but only on a, I would say, small percentage of [total] layers.

That’s on the triple layers only?

And, of these, late ’08, so ’09 at best for laser?

Yes.

So the impact, your suggested impact, that will have a big impact on our cost base, according to our own calculations, [positive].

Thank you.

Thank you very much, gentlemen, for your time.

The next question is from Jan Willem Berghuis, Kempen & Co. Go ahead, please.

Yes.

Good afternoon.

You mentioned volume production of -- or 70 units of volume production tools in the next 15 months in immersion.

I was wondering if you could shed some light on the timing of these orders.

You also mentioned in the press release that some of the acceleration might take place already in 2006, so do you expect a significant amount of these 70 units to be booked already in 2006, or does that depend on customer evaluation in the second half of the year, or does that depend on the customer ramp-up plan specifically?

Can you shed some light on that?

Yes.

Thank you very much for allowing me to clarify this, because this is important.

We do expect customers to play with our 1700 for the whole of Q2 and a big part of Q3 before they jump into planning production and putting more orders on the 1700 or its successor.

So do not expect Q2 immersion orders, and we probably will start having some orders for immersion to ramp at the end of Q3.

That will be the natural way.

In order to manage this, we will have to plan ahead enough supply chain to cover very short leads on those products, which would allow us, and this is why we have been consistent here, to ship another five units in ’06 for production, and of course start the planning of the famous 70 units in ’07.

So, in other terms, booking very, very low Q2 or none for immersion, Q3 continuous development, some orders coming, and then potential deliveries still in Q4 on short lead-time projects.

Okay.

Maybe one follow-up on the planned R&D immersion tools.

Are they expected to ship, let’s say, evenly divided between Q3 and Q4, or do you expect another distribution?

Q3 is a big quarter.

Q3 -- that is Q2 is one, Q3 is 1X and Q4 is less than one.

I don’t have to give you any -–

Yes.

Q3 will shipment-wise be the biggest quarter for the 1700.

Okay.

So it will be more than 10 and then the remainder is in Q4, correct?

Yes.

Thanks very much.

The next question is from [Herman Betten] [inaudible].

Go ahead please.

Yes.

Thank you.

Good afternoon.

Just a small follow-up question about the foundries.

Can you speak up, Herman?

Yes.

I’m working with a strange microphone on top of my head.

I don’t think it’s working.

But anyway, let’s try.

In foundries in Q1, with €50m of revenue, were 8% [inaudible].

I understood that that was partly due to the orders in Q2 and Q3 of last year, and I was wondering if you could [inaudible] give me guidance for the percentage of revenue [inaudible].

As you can see, the timing difference between when we get an order from a foundry customer and when it’s shipped is five to six months.

So that means that what you see as shipped in Q1 is actually booked in Q2 and Q3 of last year.

So there is going to be -- going forward, clearly when you look at the backlog where the foundry is now 22% of the backlog value, therefore Q2 and Q3 you will see an increased level of foundry shipments in our sales.

Just a follow-up.

The expectations you have for, let’s say, capacity orders in Q2, is that also based on the expectations in foundries or do you have capacity?

Foundries are not the only customers that have more capacity.

But you’re right.

In fact, Q4 was a bit higher than expected in foundry.

Q1 is a bit lower, and Q2 is going to be back high.

Okay.

Thank you.

The next question is from [Jas Ackerman], Bloomberg.

Go ahead please.

Hi there, gentlemen.

Just, Mr. Meurice, to go back to your statements on the positive outlook going into the second half, I’m just curious.

I missed a bit at the beginning, so I do apologize if this has been asked before.

On the gross margin, 40% was a good level.

What’s the level you see in the quarters ahead in ’06?

And, linked to that, if you look at shipments, Q1/Q2 was more round 110.

Should we look at a similar number in Q3/Q4 or what’s your feeling there?

For the margins, yes, we said we try to manage to come in at 40% margin.

So in case the volume or the mix is adverse, we would expect a lower case at 38, but we don’t want to go above 40 because we are still delivering growth.

So we do expect Q2 to be at between 38 and 40, and we expect the rest of the year to be again guided in the same type of range.

Your second question on the 110 at the beginning?

Well, if you shipped 51 in Q1, if I’m not mistaken, and you expect to ship 64 in Q2, and link that to all your statements on being positive going ahead, the trend is continuing, I think you said, should we look at a similar level of shipments in the second half of the year, i.e. another 110, give or take, or is there something else at play here?

It’s too early to guide on the total year.

Clearly we feel comfortable that, on the total year, there is going to be significant growth compared to last year.

So, we did €2.5b.

We will have significant growth compared to that.

So I prefer not to tell you what significant growth is, but it’s above 10%.

Jas, you can find some links into the fact that we received orders for 62 units in Q1.

Like I said, there is a five to six month delay between ordering and between shipment, so you can extrapolate more or less that good order intake in Q1 and Q2 will have an effect on the total year.

Without being very specific on what the total year is going to be, but clearly the order intake is driving good shipments going forward.

Clearly.

At least more than 10% sales growth.

That’s helpful.

Thanks very much.

The next question is from Ben Pang, Prudential.

Go ahead please.

Mr. Pang, are you there?

In terms of the 16 projects that you mentioned for the various memory applications - hybrid, DRAM, flash - is there a difference in the served available market for -- specifically for immersion between those different projects?

They are all different.

First of all, remember immersion is only one or two layers.

Right.

I want to find out, like in the hybrid, do they use more immersion or it’s still going to be one or two layers?

A very complicated question.

I can’t answer.

Yes, it is depending on numbers of layers and numbers of machines.

As you know, DRAM is a very, very specific production environment which is a bit more complex to tune, and flash seems to be easier to tune, with designers, etc., etc.

So I don’t think I can answer the question.

Okay.

A quick follow-up.

The 42 nanometer resolution images that you mentioned in your release there, is that done at a customer site?

The 42 is done at our site.

Okay.

And the final question, again, just a follow-up, on the 1700i that you have shipped to your customer, when is the expectation that you will actually receive data back in terms of the imaging, like how will you know that you have been able to achieve the customer [expects]?

What’s the earliest expectation?

I have a gun on my head on that one, so the answer is extremely soon.

End of Q2 is possible?

Well, clearly it has to be in Q2, yes.

Okay.

Thank you very much.

The next question is from Mark FitzGerald, Banc of America.

Go ahead please.

Thank you.

I was curious your i-line seems to be hanging in there incredibly strongly.

Are you guys taking market share, and is there any explanation for the strength, given the technology shift that’s going on?

Absolutely.

About last year, same time, we said that we will introduce two lower-cost machines.

One was the KRF760 is the code name, one was the 400 i-line.

And we said we had a chance for success in the i-line business at a higher rate than we used to, because of the customers’ need for better overlay in i-line.

Again, the resolution is given, but in order to put the layers on top of the other, overlay becomes important even on the lower resolution type machine.

So our TWINSCAN i-line became, from one day to the other, in addition to the cost savings activities that we had on it, a machine which had more potential.

This took about six months; nine months for us to go and execute the sales job.

And at this moment, we are very, in fact, encouraged by the win which you are seeing only the start of.

Okay.

And is that share basically coming at the expense of Canon, which basically that’s the only thing they’re really offering at this point?

Yes.

We are potentially gaining more market share out of Canon and out of Icom, etc.

Thank you.

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

Go ahead please.

Yes.

Hi, good evening.

Two questions.

One, how you’re planning to price 1900i.

Are we going to see a €40m number on that?

My more important question is, one of the interesting data coming out of this laser supplier yesterday is they are thinking that laser, or so-called [DPV] shipments could grow 25% year-over-year, the DPV portion of the [steppers] in ’06 over ’05.

Is that remotely possible from your point of view?

Sorry.

On the 1900i, the price will be a 40% margin, so we will try to continue this.

We are very happy.

We have made some calculation on cost per layer.

And we -- whatever price we can do on the 1900, it will still continue giving a cost scaling to our customers.

So, in other terms, the price of the transistor or the price of the structure continues down at the same speed it used to.

So, whatever the price is, throughput and scaling allows that.

The bit on movie information that you got, on, you said ARF growth?

No, it’s not really ARF, just DPV stepper growth.

Somehow, the consensus, the viewpoint is that there could be -- DPV number of steppers could grow 25% in ’06 over ’05 and of course --

It looks a bit high to me in units.

Remember we are -- be cautious here.

We are the successful player trying to introduce products which have a higher price and a higher throughput, so we are not in the unit business so much.

So what you got from any outside player is that there may be some unit growth somewhere else.

We expect ASP growth and revenue growth more than we expect units of those types of products.

Would you be open to a 20% unit growth on DPV portion?

We cannot answer that.

This is again directional on the year.

We have to be -- to wait a bit until uncertainty [inaudible].

Thank you.

We just have time for one more, final question.

Antoine Badel, Credit Suisse.

Go ahead please.

Yes.

Hi.

I want to ask a question about shipments in the second half.

You said in your introductory comments that you were looking for continued trends throughout the year.

I think [Simer] said yesterday they expected continued quarterly growth in laser shipments.

And also your indication that Q2 bookings would ship in Q3 seems to suggest that Q3 could be flat, at least over Q2.

So I guess my question is are you considering any other scenario for shipments this year other than continued, steady quarter-over-quarter growth until the end of the year?

You are starting to put words in my mouth, quarter-to-quarter growth.

We are clearly seeing a good Q2 and good Q3, which would be natural to say when we are able to guide on bookings.

We cannot guide on Q4 at this moment.

There is a lot of parameters on it.

But I gave you two positive parameters.

One is those new fabs or fab lines are clearly going to hit Q4, Q1, Q2, etc.

I also gave you a hint that we are still planning our additional immersion, and that that would only be Q4 if ever.

But I also -- I gave you even if, and at this moment we have to give it a bit more time before we solidify.

So in other terms, I confirm to you a good Q2, I confirm to you a good Q3.

I’m not saying if it’s above or lower than Q2, but these are significant numbers.

And I have to not comment on Q4 at this time.

Okay.

And a quick follow-up, if I may.

Could you please tell us where you stand on lead times for i-line KRF, ARF and immersion, and when do you close the book on immersion shipments for ’06?

The theoretical answer is following immersion we are still in a nine month lead time.

In standard machines - ARF, KRF - we are getting now to the six months that we discussed last year, and we have now this capability in place.

But that is the theory.

In practice, as I hinted at the beginning of the call, customers are overplaying this, and we have to try to hit now three months lead time also on a percentage of our production.

And you still take immersion orders for this year, for shipment in ’06?

Certainly, certainly.

And, as I said, we will take orders in Q3 for delivery in Q4.

Thank you.

That concludes the Q&A session.

Thank you for attending.

Thank you, everyone.

Ladies and gentlemen, this concludes the ASML 2006 first quarter conference call.

Thank you for participating.

You may disconnect now.