艾司摩爾 (ASML) 2007 Q2 法說會逐字稿

[Audio starts in progress] standing by and welcome to the ASML 2007 second quarter results conference call on July 18, 2007.

Throughout today's introduction all participants will be in a listen-only mode.

After ASML's introduction there will be an opportunity to ask questions.

(OPERATOR INSTRUCTIONS).

I would now like to turn the call over to Mr.

Franki D'Hoore.

Go ahead please, sir.

Thank you, operator, and good afternoon and good morning, ladies and gentlemen.

This is Franki D'Hoore from ASML Investor Relations.

Welcome to our conference call and webcast.

The subject of today's call is ASML's 2007 second quarter results.

Hosting this call today are ASML's CEO, Eric Meurice and CFO, Peter Wennink.

I would like to draw your attention to the Safe Harbor Statement contained in today's Press Release and Presentation.

You can find our Press Release and Presentation on our website, at asml.com.

The length of this call will be 60 minutes.

And now at this point, I would like to turn the call over to Eric Meurice for a brief introduction.

Thank you, Franki.

Good afternoon and good morning.

Thank you all for attending our Q2 results conference call.

As it was the case in last quarter's conference call, we will split the introduction in two parts.

Peter will start with a review of our Q2 financial performance with added comments on our short-term outlook, and I will complete the introduction with a longer-term view.

Following this introduction, we will open up the call for questions.

So please, Peter.

Thank you, Eric, and welcome to everyone.

First of all, I would like to review the highlights of our Q2 results and, in that regard, I am pleased to report that the second quarter developed as we anticipated.

In reviewing our results in detail, you have seen that we again reported healthy revenues, operating margins and net profit for the quarter.

Second quarter revenues were recorded at EUR935m, roughly averaging what we achieved in the past five quarters.

As announced earlier, we have taken a deliberate decision to invest further in R&D, and that's why the operating costs increased in Q2 by 4m to 177m [sic - see Press Release], while keeping our SG&A flat.

Posting a 41.1% gross margin resulted in an operating margin on the quarter of 22.2%, versus 20.5% in Q1.

We do remain highly flexible and adaptive to market cycles and, although we've continued to grow our operating -- our operational cost base to support our future growth in both our R&D spend and SG&A costs, we keep focusing on creating cost variability, such that we can manage the profitability in any market condition.

As a reminder, about 30% of R&D costs are variable within a quarter's time and approximately 10% of SG&A costs are variable.

Cash flows.

Cash flow for the second quarter remained well above our operating needs, with net cash from operations in the second quarter at EUR260m, versus EUR173m in Q1.

Also in Q2 we did an announcement on our plan to optimize our capital structure with the issuance of our benchmark Euro Bond, followed by a capital repayment and a reverse stock split which, in essence, is a synthetic share buyback.

And this will result in an 11% reduction in outstanding share count.

We successfully completed the Euro Bond issuance on June 13, raising a total of about EUR600m to be used to fund a EUR960m return of capital to shareholders.

This was approved yesterday at the Shareholders' Meeting.

This resulted in a quarter-end cash balance of EUR2.3b.

When the EUR960m return of capital is complete, which we expect to be before the end of the third quarter or by the end of the third quarter, a gross cash balance of EUR1.3b will remain.

Following four strong order quarters, we experienced an expected drop in net bookings in Q2.

Total system orders of 30 units, with a value of EUR400m, left us with a backlog value of EUR1.7b.

And as we predicted, our Memory customers hit a peak in terms of over-capacity in Q2 and did not need to order after several quarters of strong capacity ordering.

Our Foundry customers have seen clear improvements in their factory utilization, although not yet at the level that they needed to place orders in Q2.

All in all, Q2 was a quarter of order digestion, a clear pause in an otherwise healthy secular trend.

Order intake for leading-edge technology was good, especially focusing on our Immersion product offering, but it has led in Q2 to a record order average selling price of close to EUR17m per system for new systems.

And the total number of Immersion systems in the backlog is 25, with a total value of EUR728m.

Now, this all brings us to the outlook.

With regard to Q3, it is still difficult to call the exact timing of our bookings, as the exact speed of the order ramp will indeed be dependent on the semiconductor Christmas season pull and the resulting firming up of the Memory pricing.

However, we do believe that we have seen the bottom of the order cycle and our belief is based on several data points.

First, our internal simulation of excess capacity in the Memory segment for both DRAM and Flash has indicated for some time now a supply/demand balance by the end of the year.

We do see additional external evidence of this; a firmer pricing for DRAM and Flash products, higher than expected DRAM unit growth and recent increased customer enquiries into our ability to serve their additional capacity needs towards the end of the year.

Secondly, the increasing utilization trends of our Foundry customers is most noticeable in the 200mm segment, where we believe capacity is currently tight.

This is reflected in an increased customer [attention] for used equipment that will translate into orders.

For 300mm capacity, we have seen utilization clearly trending upwards, making the need for additional capacity in the Q4 to Q1 timeframe very plausible.

And thirdly, we have strong confidence in the execution of our leading-edge technology roadmap.

Our 1900i has shown solid performance, clearly meeting our expectations.

2008 technology transition for NAND customers to sub-50 nanometer features and DRAM and Foundry customers to sub-60 nanometer features will be a strong driver for leading-edge technology orders.

So in summary, we believe that we have seen the order [flat] in Q2 and we are looking at an increased order momentum, accelerating in the second half of this year.

With this, I'd like to end my part of the introduction and I'd like to turn back to you, Eric.

Thank you, Peter.

Peter basically confirmed that ASML is proving successful in managing through the cycle, as our activity is sustained by a long-term growth trajectory; the famous secular growth curve.

This growth trajectory is supported, among other things, by our execution on technology, value of ownership and lead time.

Regarding technology, we continue to reinforce our market-leading position, in particular, in Immersion.

To date, over 2m wafers have been imaged on ASML Immersion systems; almost double the total at the end of the first quarter.

This confirms our customers' steep 6x and 5x nanometer nodes production ramps.

It also solidifies our position as market leader through the significant experience accumulated in the industry on the ASML architecture.

To reinforce further our position in Immersion, we shipped our new TWINSCAN XT:1900, an Immersion tool, as planned early July.

This 1.35 NA machine is a world first 36.5 nanometer [half peech] exposure-capable tool at a unique 131 wafer per hour throughput; a major accomplishment.

We expect to ship about 35 Immersion tools this year, including more than 15 1900 machines.

This is supported by a strong Immersion portion of our total backlog, at about 42% in value.

To further strengthen our technology leadership position, ASML has again increased its R&D budget, this time to EUR120m per quarter.

This will support the development of next-generation machines, like double-patterning and EUV machines, but it also supports lower cost of ownership, ArF, KrF and i-line machines.

We have, for instance, announced the TWINSCAN XT:1000 at SEMICON West, in fact, two days ago.

This new high-NA KrF machine can save our customers up to 30%, in fact, 30% or more when processing less critical layers, like layers up to 90 nanometer features, at an unparalleled 165 wafers per hour.

These are awesome numbers.

We are also making good progress on the development of the successor architecture of our famous XT body, which is a current product in production, and this concept will address customer requirements for double-patterning, such as productivity and overlay.

Regarding cycle times, which is a key driver to reduce our working capital while offering customers a short lead time and capability to ramp up or ramp down fast with the cycle, we are making continuous progress.

We are now able to assemble our products between 10% and 25% faster than last year.

This, in combination with our renowned fast install time, is helping customers manage the market uncertainties, while allowing us to react quickly to turns business.

So in summary, we confirm our customer value generation proposition through technology, value of ownership and cycle time leadership.

We, therefore, feel confident in our ability to continue to grow market share.

We also believe that this strong proposition helps us deliver financial results through the cycles, swings of which are shallower and shorter than before.

On this point, we believe that our order momentum is set to rise, as Peter explained, on H2 2007 and we confirm our expected revenue growth forecast for the total year 2007.

So now, Peter and I will take your questions.

Ladies and gentlemen, when asking a question, please identify yourself and your organization.

We also kindly ask you that you would limit your question to one with one short follow up, and this would allow us to get as many callers as possible.

So operator, could we please have the first question now?

Of course.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question and answer session.

(OPERATOR INSTRUCTIONS).

The first question is from Mr.

[Slikers].

Please announce your company name, sir.

Go ahead, please.

Good afternoon, this is [Matthias Slikers] from Dow Jones.

I have a question regarding the sales development.

Now you expect orders to increase in the second half of this year, what does that mean for the sales projection of 2008 compared to 2007?

Can you just tell me a little bit more about that?

And there was -- and I would like to know what the market share is of ASML at the moment.

To answer your last question, the market share is, first half, we anticipate between 63% and 65%.

On 2008, Eric shall --

Yes, 2008, difficult to call, early to call.

We never call so early, but I can give you certain numbers of facts so that you can position 2008.

First important fact is the one that says we are confident that we are going to get out of 2007 with a balanced capacity demand.

So in other terms, we have often said that we are building a lot of capacity in the DRAM and Flash businesses, which will take until the end of year 2007 to be fully in balanced with demand.

So we expect that to happen, so we expect to get into 2008 with a basically fully-utilized optimum capacity level, so it's a clear plate.

Fact number two.

If you read all the analysts, from Gartner, VLSI, Insight etc., they all plan for a semiconductor unit growth in 2008 which will be higher than the one of 2007.

We go -- and the latest number, I think, called for all of them for above 10% unit semiconductor growth.

And this is the driver of our business so we, therefore, expect a -- if those analysts are correct on the IC business, we expect it to be, therefore, a good year on litho.

Third point of importance is one that concerns the technologies.

We, as you -- as we have said, we are ramping Immersion very quickly as of now.

Immersion is getting into production for the Flash nodes at the 5x level; that is 50 nanometer and above.

We expect, in 2008, that the Flash customers are going to ramp 4x nodes, so completely different nodes in high volume, and we expect the DRAM customers to start ramp, for the first time, Immersion into their business.

And as you know, DRAM today is still a -- is a business which is twice the size of Flash, so if they do ramp Immersion into this business we obviously feel very comfortable and optimistic.

So you add to this the fact that the foundries -- and these are my five points.

The foundries haven't been, I would say, fairly aggressive in capacity building in 2007 and this is in the plan and this is still within the numbers that we are quoting, which are good numbers.

But we do -- would expect that foundries may become more aggressive, because their utilization rate is now reaching fairly good levels.

So that's another color that says if they do buy, they may buy end of year or beginning of 2008 and that also would color 2008 as a good year.

So I think that's all the facts I know that tells you that, at this point, we are fairly optimistic.

Thank you.

The next question is from Mrs.

[Claire Vonaells].

Please state your company name, followed by your question.

Hello.

This is the question.

The earlier range for Immersion systems for 2007 was about 35 to 40.

It now says about 35.

Does that means the range has been narrowed?

Should I interpret it that way?

No.

It's a reading of uncertainties of life.

The nearer you get to reality, the more you get conservative in the fact that you can always slip two or three machines from one year to the other.

Remember, we are ramping the 1900.

It's a new machine.

The first machine shipped two weeks ago.

We are now going to commit 15 machines or more of that caliber.

This would be the first time ever we are able to ship so many.

If I remember, in six months, we've shipped less than that with the 1700, which is the predecessor.

So you're talking about technicalities here, a complexity to do this, but demand-wise we have a demand above 35.

Okay, thank you.

And the follow up, can you elaborate on new platform development?

What are the key differentiators that you're trying to establish with the new platform and how are you progressing on it?

Cheaper, better, nicer.

Okay.

There is faster, clearly.

We have a new concept that can run faster.

And better overlay.

If you do double-patterning, that if you have to image very tight designs very near each other, one on top of the other, you need an overlay capability which is a factor of magnitude better than what we do today.

Today, we do 7 nanometer overlay.

We would need to reach 4 nanometer or 3 nanometer overlay to do double-patterning, so there's a significant precision requirement.

In addition to that, we also want to add to our structures, our platform, a cost incentive.

We're moving our cost down.

We have some ideas about using sensors which are cheaper, etc., etc.

So you -- that is basically what we are putting in there.

How do we progress?

Well, thank you.

We cannot yet say when we will introduce those.

Okay.

And the pilots?

Could we go to the next question, please?

Okay.

Sorry.

Thank you.

The next question is from Mr.

Jerome Ramel.

Please state your company name, followed by your question.

Yes, good afternoon.

Jerome Ramel from Exane BNP Paribas.

I just -- I've got one question is concerning the 1900 Immersion, so it's shipping now in Q3.

And I was just wondering what could be the time lag between the EUV, because I'm just wondering if we're going to have a, let's say, one year, two years' timeframe between the 1900 Immersion and the EUV with no real new innovation in terms of tools, because in terms in [revolution], obviously, you're going to be limited.

So I just was wondering how that will fit into your roadmap.

No -- well, two questions.

The overall, call it, product roadmap, you are going to have the 1900 which you justly said is probably the most aggressive water-based machine ever scientifically possible, what we call 1.35 NA.

Maybe we can get to 1.37 or something, but that's the limit of the technology.

The next technology is double-patterning.

That is, you use the same NA, but you are able to expose twice.

The masks are cut in two and you expose nearer -- each of the pattern, you expose them nearer to each other.

And this is why I say that you do not have any more CD requirement, which comes from the numerical aperture, but you have an overlay requirement and that's what we are going to create with this new architecture we just talked about.

And this will be the next machine.

And then comes the EUV machine, which is a solution to the CD and for the next generation as low as, say, 15 nanometer or even lower.

Now, these roadmaps of machines, 1900, the double-patterning machine and then EUV machine, will be used differently at different times by the different segments of the market.

You are going to have people jumping immediately, or as fast as they can on EUV, because EUV will give them what they need in terms of cost and throughput and simplicity of design.

But some others may just say, no, I can do business with double-patterning because double-patterning is -- will be cheaper in their set of applications or will help them design.

So we expect, for a period of time, between, say, 2009, 10, 11, 12, a significant overlap of the different technologies and we at ASML will cover all the grounds.

We will cover these different technologies and we are not going to be thinking that one is going to win against the other.

They will all cohabit.

Okay.

And just a follow up on this, the double-exposure is an acceptable solution for the industry when we talk about the throughput?

Well, this is in fact the issue.

It is more expensive because you have to double-pass, but the good news is we are raising the throughput of our machine to reduce, in fact, the cost of each pass.

So you can say on one hand we are going to increase or reduce -- no, increase the speed of these machines so the double-patterning itself will be less costly than double-passing, but these machines are also going to be used in single-pass and that will cost-reduce the single-pass.

So if you try to understand what I'm trying to say is, when they double-pass, it's going to cost a bit more.

When they only single-pass the rest of the layers, it will be much cheaper.

So in total, it's not a bad proposition.

Okay.

Thank you very much.

The next question is from Mr.

Jay Deahna.

Please state your company name, followed by your question.

Can you hear me?

Yes.

Okay, JPMorgan.

Good afternoon, gentlemen.

I think it's pretty clear at this point that a lot of DRAM companies because of price weakness, it was pretty sharp in the first half of the year, have accelerated their move to 70 nanometer process technology this year, which means probably that the next half-node shrink is into the 55 nanometer or 60 nanometer range next year, which I believe would require the start of using Immersion tools.

So over the last 90 days or so, has your expectation for the number of Immersion tools that will ship into the market specifically to DRAM companies in the first half of next year changed at all?

Yes.

This is a very good point and you can see now an acceleration of the Immersion capacity discussions at this very moment, and it is driven by the three segments.

Flash, obviously, they want to do more at 5x, but they also want to develop 4x and introduce 4x, probably in the mid of 2008.

Then you have the DRAM people, as you said, who are going to really ramp the new nodes early in 2008.

But, obviously, the logic people are starting also to be ramping and the foundry people are getting aggressive.

So, yes, 2008 looks a bit more aggressive at this moment than we planned originally.

Okay.

Just a follow up on that, Eric.

In light of that change, have you provided an increase in your procurement forecasts for Immersion sub-systems to your supply chain recently to get ready for that?

And lastly, you mentioned something about better than expected unit demand for DRAM this year.

Could you expand on that comment, please?

Excuse me.

The last two questions, Jay, I could not hear.

Okay.

The first part is --

Is supply chain, yes.

-- in light of the fact that Immersion tools might ship more than you thought 90 days ago in the first half next year, have you begun to move your supply chain in terms of giving them a higher forecast for procurement of sub-systems for Immersion this year, to start setting up for the ramp in the first half of next year?

That's the first question.

And the second one is you mentioned earlier the DRAM units are running stronger than expected this year.

I was wondering if you could put some more details behind that comment.

Yes.

So, on the supply chain, yes, of course.

We are at this very moment moving up capacities at our fairly long-term component builders, in particular, [Lemms].

And, yes, we at this moment receive positive feedback that there is capacity.

So this, plus our own built-up of our new factories, for which you can see a photograph on the website, will allow us to be, hopefully, not capacity limited in 2008; our own as well as supplies.

Regarding DRAM, yes, the -- I think the official statistic says that the DRAM unit has grown by a factor 50% to 60% year to year in the past four months or so.

This is higher than anybody expected.

This was hidden, basically, by the fact that the price went down, so the total value DRAM business didn't grow as fast.

But the unit DRAM business was tremendous; 50% to 60% unit growth year to year.

Gartner and others think that the growth curve is going to be reduced a bit and that would be, I would say, natural from this 50%, 60% to levels of more 40%ish.

If you talk to others, they would go 35% or 30%, but in total still a significant growth on the total year.

So in other terms, all our calculations where we say we're going to have capacity filled by the end of the year are based on the lower number, that is the lower correction of numbers of DRAM sold at the end of the year and not a projected Q1 number, which is very high.

Just a last follow up there.

Do you actually see --

Can we please -- can [move on please]?

Okay, that's fine.

Thanks a lot.

Thanks, Jay.

The next question comes from Mehdi Hosseini.

Please state your company name, followed by your question.

Mr.

Hosseini?

(inaudible - microphone inaccessible) where you were talking about the semiconductor unit growth of more than 10%, that is projected for 10%.

And looking at what the unit -- Immersion unit bookings growth from 2006 into 2007, which was around 50 -- more than 50%, would you expect that kind of growth in Immersion unit shipment from '07 to '08, given those kind of semi unit growth?

Well yes, we expect high growth, but I would prefer you do not ask me so much at this moment.

Sure.

We don't want to guide precisely at this time.

But yes, obviously, there will be a higher mix of Immersion next year than there would be this year.

Sure.

And if you overlay this to the fact that there would be more units in general, then you (inaudible) --

Sure.

Just like Eric said, it's DRAM and NAND that will use it for ramping up volume production, as opposed to only being basically NAND or the Flash makers in 2007.

Sure.

Given the prospect of those kind of revenue growth from '07 to '08, would it be fair to say that there may not be as much margin expansion, it's just that the revenue growth prospects look good?

As we have said in previous calls also, margin expansion is driven by the fact that, yes, we do have a higher top line that contributes to a better coverage of our fixed costs.

Now, as you know, the impact of that is limited in the sense that more than 90% of our cost of goods is outsourced, so it means that our fixed cost as a percentage of total cost of goods is not that high.

So there is some positive impact on that.

But the longer-term margin expansion, as we have said during previous calls, is also driven by the fact that we, going forward, looking at our extended lithography strategy, are going to focus more on integrating [majority] solutions for our customers.

And also the computational lithography competencies that we have now in-house through the Brion acquisition that are going to lead to product offerings that, being healthy, have a higher gross profit.

Those will include more [software-related] sales and that will, over the next couple of years, have a positive impact on the gross profit.

So for 2008, yes, there will be some impact.

It won't be significant because of the higher level of sales.

And longer term, it is the product differentiation, let's say, as part of the extended litho strategy that is going to take care of that.

Great.

Thank you.

The next question comes from Mr.

Mark FitzGerald.

Please state your company name followed by your question.

Banc of America Securities.

When you look at the order recovery in the second half this year, is it strong enough, particularly on a value basis, to support year-over-year growth into the first half of next year?

So when we look at the January and the April quarters next year, are you confident enough that the bookings in the second half of this year will fuel year-over-year growth?

We know because any of these, how you say, return back of those plans usually take some time with the customers to be negotiated, understood, etc.

So it's always a gradual thing.

And remember, we are on a fairly high backlog.

Nobody -- it is last -- two quarters ago, 1.7b would have been considered anyway top, top, top of the range.

So you need to -- we're already covering a lot of this growth.

We're talking about an optimism in 2008 with some orders which are already in-house.

So we expect a gradual phasing of more orders into Q3 which will also -- which will be parallel to the customers taking their usual decisions about which product they take, etc., etc.

And that means that the total size of order intake in the second half of this year is still a bit unknown.

And with that it's also, I think, a bit too early to give you an exact guidance on how our sales levels will be as a result of that in the first half of 2008.

So it's a bit too early to answer that question.

It's probably more capable of answering that in the next one or two quarters.

Right.

And just a second follow on, can you give us some guidance in terms of 2008 for the R&D and some idea what share count's going to happen here with the changes that you just identified today.

That's a very good question, as we are giving ourselves a certain number of scenarios.

We clearly can develop a lot of our programs with the 120m per quarter.

But, of course, we have some appetite for even stronger market share gains as well as development into the, call it, software business around lithography, what we call diversified lithography, through expanding Brion and online metrology.

So these things may require a bit more money.

And at this moment we are assessing the best timing for that.

Obviously, if we grow our top line well and fast, we will put much more money in R&D faster than if we don't.

So there is a bit of a discussion at this moment internally about all these good ideas about diversified lithography and when we can afford it, to maintain a significant financial performance.

And on the share count, I would say Mark, we have over the last -- in 2006 and '07, when we have completed by the end of this quarter the synthetic share buyback that I've been talking about, we've bought back more than 20% of the outstanding share capital on a fully diluted basis.

Now that was done on the back of strong operating cash flows but also, let's say, restructuring the balance sheet of the Company, still leaving us by the end of the year with a cash balance that is right in the middle of our target.

So that means that any positive cash flow and cash generation in the years to come, we have said that earlier, we will use for further share buybacks.

Now how much that will be is, of course, dependent on the operational performance next year and the years to come.

But the direction of the Company is quite clear.

Thank you.

The next question comes from Mr.

Andrew Gardiner.

Please state your company name followed by your question.

Good afternoon, Andrew Gardiner from Lehman.

During some of your comments you've given us color on the Memory orders you've had as well as on the Foundry side and where you think things may be trending for the second half of the year.

I was just wondering if you could give us a little more insight into the third leg of the business, on the IDM side.

Based on the shipment data provided in the backlog, it looks as though orders did impact income in that area in the second quarter after what was quite a strong Q1.

I'm just wondering whether that's anything you're concerned about, particularly given you have highlighted in the past that the IDMs are some of your most predictable customers.

Is that second quarter weakness more a reflection of the very high levels of orders you saw in the first quarter?

And should it -- as that works through, should we see more stable trends in the second half of the year, or any other incremental information you can give us there would be helpful?

Yes, a very good question also.

Unfortunately, it's going to be harder and harder for us to answer for the following reason.

IDM does not exist any more.

As of Q1 you have basically Intel, AMD on one hand, and then you have the other guys who are now using more and more and more foundries.

So in other terms, we are now seeing more Foundry activities because they are ramping and building capacities for their new customers who are making use of them more.

TI, [Official], Freescale, ST, etc., are at this very moment discussing the appropriate capacity to be reserved at their privileged partner foundries.

So you are going to see the IDM sectors, this sector to become smaller with, I would say, legacy products and some duplicate products because some of them will want to have a fab replicating what the Foundry does, but at a much lower level.

So this transition is happening at this moment.

And it is very difficult for me to make a trend at this very moment.

But we don't care too much because it will be either there or at the foundry place.

Regarding Intel, AMD, now that is difficult for me to talk because I -- we're not giving information on customers' plans.

So it -- and we want to give you as much information as possible.

So the only thing I can say at this moment is, as you have heard from Intel directly, is that the PC business and their end products are doing good, so volume-wise, these businesses is highly sustained.

Obviously the two companies, AMD and Intel, are working hard on their own efficiencies.

And we are helping them build up an efficient capacity in their production environment.

So the only thing I can say, again, is volume is sustained in their business, which is good, and we are working very closely with them to build up more chips out of whatever we ship them.

Okay.

Thank you.

And just to confirm what you were saying about those that -- those vendors that are moving towards more of a Foundry model, that is something that you've actually started to see in the second quarter then and is expected to -- you should start to -- you should see that continue through the second half?

Well, it started in terms of discussions and negotiations and understanding of compatibilities and etc., yes.

Did it start in terms of us shipping?

No.

Okay.

Thank you very much.

The next question is from Rudolf Dreyer.

Please state your company name followed by your question.

Yes, Rudolf Dreyer from Morgan Stanley.

Good afternoon, gentlemen, just a further question on gross margins.

You did talk about it a bit about the capacity expansion and the impact on gross margins.

However, since the second quarter of last year you've managed to actually be above your 40%, or historical, 40% target.

Can you perhaps talk about what's been driving that, whether that's purely volume-related or whether there have been changes in the pricing environment or mix that have helped you up your margins?

It's all a bit of what you said.

But you forgot one thing and that's cost of goods reductions.

So it's a bit of mix.

Cost of goods reductions.

It's been pricing because of the fact that we have come out with products that have better value ownership propositions to our customers which we get a better price for.

It's basically all a bit of that.

Now, the capacity expansion going forward will, of course, add to our fixed cost base but also will create the opportunity to sell more tools.

Like we said on the previous call, when we run the numbers, the capacity additions here and the fixed cost to that, will not have an impact on our breakeven point for the simple reason that the average selling price increase is going to pay for that.

So the absolute amount, or the absolute amount of gross margin that we will get from the higher ASPs will cover our fixed cost.

There they are extra as a result of this capacity expansion.

So it's a bit of all of it.

And as you have seen, it's been -- let's say it's been a gradual increase with a couple of, you could say, with 20 to 30 basis points per quarter.

That is all the result of all the things that you just mentioned.

So it's a bit of everything.

Excellent.

And then just a follow up on M&A.

Historically, you've said probably about EUR0.5b of cash is being held in your war chest for M&A.

Has that changed and what's your thinking, or just update us on your thinking regarding M&A?

That has not changed.

I think it's still there.

And what Eric said, we talk more about an extended litho strategy which is really focusing on the computation lithography side of Brion and the online metrology solutions.

That -- in that area we are, of course, constantly looking for smaller, more technology-driven type of potential acquisitions.

Not that we have anything serious on the radar screen, but that is an area where that particular war chest is for.

Thanks.

Next question from Mrs.

[Marga Nordhouse].

Please state your company name followed by your question.

Good afternoon, gentlemen, or good morning, I think.

I just had a question on your sales target for 2010.

Is that still standing?

It is.

Good afternoon, and yes.

Okay.

You're still holding onto that?

Yes.

Okay.

That's all.

Thanks.

No other questions?

Are there more questions, operator?

Yes.

The next question is from Satya Kumar.

Go ahead, please.

Please state your company name, followed by your question.

Yes, hello.

Thanks for taking my question.

Can you hear me?

Yes, loud and clear.

Yes, Eric, I was hoping if you can give me some perspective on how this recovery looks.

I jumped on a little late, I might have missed a part of the discussion, I apologize.

If I look at ASML's orders, the last time it declined was back in Q4 of '04 when you had the foundries pulling back, back then.

Your orders went some 70 units to 19 units in the quarter.

Orders were up in the next quarter, in Q4 [of] Q1.

And it wasn't until Q2 of '06 that your orders actually exceeded the prior peak.

When I think of ASML, there is still an association that at least some of your products have longer lead times, so perhaps customers tend to pull in their orders.

When you think about that dynamic, can you give us a sense as to how the trajectory of the order recovery looks like this cycle as you -- as things pick up from Q3?

Well, I have seen myself, but my history is not as long as most of you guys, so you have to correct me if I am out of whack but I think it is -- we are more in the gradual situation.

Because customers, when they think their plan, will give us indications about what they need forecast-wise, and then they will negotiate their bookings.

So they will force us to build capacity so that we then be -- will be able to accept orders with a very, very short lead time.

So the restart after a digestion, which is what we see in the DRAM and Flash business, is happening, in some ways, in a controlled fashion where we have, in fact, that's why we show positive color today, is we have already some conversation with customers who say the train is coming, which is why we also guided for higher bookings in Q3 than in Q2.

So we know the train is coming.

But the train takes time to negotiate and get the right orders in and right products and these things.

But in the meantime they force us to be sure that we have enough components for activities.

So if it happens the same way it happened in 2005, I think, and when I arrived in 2004, when these things -- there was a bit of digestion for two quarters or so, it will be gradual, I guess.

And if I may add to that, I think you do mention that, yes, the lead times for our products are pretty long.

But if you look at what we've done on lead time reduction, on order lead time reduction, it's quite significant.

Over two years' time we have brought back that average lead time, from eight to nine months, back to six.

So that also has an impact on your timing when our customers can place this particular order.

Now, like Eric says, we are preparing for what we're seeing, like he says, we're preparing for this train because it is coming.

And one of the things that we have done to make sure that, at least we'll be able to meet that lead time ramp up, is that we have created already some buffers in the chain towards the end of the year to be able to deal with lead times that might be shorter than that six months.

Okay.

Just a quick follow up.

Apologies again if it's a repeat; I missed a part of the call.

Did you talk about what your expectation is for the size of the immersion market?

Assuming CapEx is, say, flat next year, could you give us a sense as to what the range might be for Immersion systems for the industry and also what you think the systems are for this year?

No, in fact, some -- one of you already tried that one and we said big, bigger and we'll come back to you.

Okay.

Thank you so much.

The next question is from Mr.

Matt Gable.

Go ahead, please.

Please state your company name followed by your question.

Hello, [Marney] and Partners.

I just wanted to be more clear on the [steep call] from the environment and the Memory sector, amongst your Memory customers.

It seems like they've pretty much digested what they have now, now they're getting ready for a reload in the second half in terms of bookings.

Is there any nervousness amongst any of your Memory customers in that they might -- they might not get the equipment they need in the time that they need it?

Well, first of all, an important statement here is that we have -- it takes a bit of time for our machines to be digested.

So any time we talk about end-of-year things being digested, that means the machines that we've shipped in Q1, Q2 and Q3 will be in full ramp in December.

So in December, on the assumption that the numbers of DRAMs and Flash are according to the analysts, then those machines will be fully loaded at economic load, which means at a good price, okay.

So that's what we say.

So because the customers are seeing this and they are able to project this six months of capacity gradual loading, they start talking about orders.

That's the dynamic of things.

So that's why it's happening and that's why they are starting to talk about us.

So if you are a negative, you would say yes, well, if the Christmas season is bad then the analysts at Gartner are wrong and then those machines installed are not going to be fully loaded economically and, therefore, the customers, while they see this during the Christmas season, will ask for not having so many units.

So that would be the negative view of life.

But the normal view of life is this evolution of Memory's unit growth is there, so it's about 40%, and it happens for the DRAM/Flash people.

[Better] have new machine in action as early as January 1.

If not, they will lose market share.

And that's the way they see it at this moment and you're starting to have some people thinking that they should not lose market share.

And, Matt, just to add to that, in terms of nervousness, if you would ask us level of nervousness a month ago as to now, I would say they're less nervous.

Exactly.

Okay.

Thank you very much.

The next question is from Mr.

Timothy Arcuri.

Please state your company name followed by your question.

Citi.

Hello guys.

You guys are saying things like the train is coming next year.

Regarding that train, have you done -- you have a very good read given that you have huge market share in litho.

You have a pretty good read on what capacity adds will be.

So if you look at what you're shipping today and you pretty much know what you're going to ship probably into Q1 next year at this juncture.

So that's going to account for capacity through probably the first half of next year, so you have -- probably have a pretty good visibility on what capacity adds will be at least to the middle of next year.

So what do you think, given your shipment outlook, that we will add in terms of raw wafer capacity in 2008 versus 2007?

[Peter].

It's just a long question.

We have 84% of our backlog is shippable this year.

So our visibility is really limited until the end of the year because that's what we ship now.

We might have marketing forecasts for the first half of next year but in terms of what we ship and we add in capacity, that's basically 84% of the backlog.

And that's our real visibility.

So anything beyond that is speculation.

Okay.

But that -- if you shipped me a tool in the December quarter, it wouldn't become capacity for me probably until the March, or even the June quarter.

So --

We install those tools in three to four weeks and then they're signed off and then they're running productions.

So it's faster than you think.

That is probably not the case for the leading-edge tools but for capacity-related tools, when we ship them, we can install them in four weeks' time.

Okay.

But given --

We get them signed off.

So there is -- there is a reasonable short time period between when we ship them and when they are actually producing wafers.

Okay.

Well, being that as it is, do you have a view as to what capacity will grow based upon your tool shipments, at least what the trajectory will be in '08 versus '07?

It seems to me that several companies at [semicon] were suggesting that capacity will grow in excess of 20%.

If you look at the [thickest] data, we're going to be probably growing 18% probably year over year, exiting the year.

And now the shipments really aren't coming down much at all.

So that argues that if bookings are going to reaccelerate, then shipments will also reaccelerate and, therefore, we're going to add more than 20% wafer capacity next year.

Well our numbers, because it's a complex mix issue, when you grow up your nodes, you need more machines because you have more layers.

So if you say what is the capacity increase in number of units, we would think we finish the year 2007 with an increased capacity of about 10% to 12%.

So that's what we see in litho.

Now Gartner says they expect, let me think -- next year or so, they expect to be at about 12%, I guess, unit growth or something of this nature.

So you could imagine that 2008 would be on a higher level because 2007 showed -- is showing an 8% unit growth ICs.

We would have done a 10% to 12% capacity -- litho capacity which is normal to have more because it's never an efficient use of capacity.

If, 2008, you have more unit growth of ICs than 2007, then you would probably project even a higher litho capacity growth in 2008.

A bit complicated here.

Okay.

Okay.

And then just one more quick follow up.

A, have you seen any signs -- if you're going to have a lot of wafer capacity next year, that's okay if you're actually removing wafer capacity so if you're decommissioning some old 8-inch factories.

A, have you seen any signs of that happening?

And B, can you give me some sense as to what your bookings, in terms of systems, will you book more systems in September than you'll ship?

Thanks.

We will not answer the second question.

We're not going to guide on the booking number.

At the beginning of the call we said we'll not -- it's difficult to call the timing of those negotiations.

But regarding your first question, I'm sorry -- yes, we haven't seen it happening today.

But we are in the process of discussing with multiple customers in the DRAM arena who've a lot of 200 millimeter capacity and will not convert the 200 millimeter capacity to the new nodes.

So it's another way of saying they are looking at what to do with it.

And a decommissioning question is being asked.

So it's not yet executed.

But I could imagine that -- in fact, I should have mentioned this at the beginning, it is also a potential engine for growth in 2008, but it's a bit too early to say it's going to happen.

It's a discussion item at this point.

I see.

And orders to replace that capacity have already been placed or not?

Let's move onto the next question, please.

Thanks.

The next question is from Mr.

Peter Testa.

Please state your company name followed by your question.

Hello, operator.

Peter Testa, One Investments.

You mentioned in the Release that your success in Japan in getting repeat visible -- visible repeat orders from multiple Japanese customers.

I was wondering if you could give us some feel for how broad that was in Japan and maybe also a feel for how rapidly these Japanese customers are adopting ASML's next-generation technology, maybe compared to customers in the similar segments outside of Japan.

And a short question to follow is, historically, when the mix has shifted significantly towards new technology, the gross margins temporarily come down a bit.

Would you expect that to happen this time, or not?

Thank you.

Okay.

I will let Peter talk about the margin evolution with new technology and I'll focus on the Japanese thing.

How wide acceptance do we have in Japan?

I would say, at this moment, we are not working with two Japanese customers.

We are not working with two -- only two.

And that means we are working with the others.

What's the speed of activity of ramping with them?

It is naturally slow at the beginning but then they ramp pretty fast.

Okay.

But do you compare their adoption and ramping versus outside of Japan, similar segments?

Would you say they are on par or they're --?

They are on par because they are in a competitive environment.

So they have no choice than going with the same rate of acceptance than their competitors.

Great.

New technology?

Well, the gross margin of new technology, the new technology is well within the bandwidth of the corporate average.

So it's a small bandwidth and it's no big difference with the other technologies.

Okay, that's good to hear.

Okay.

Thanks very much.

Thank you.

Operator, one last question maybe.

The last question from Mr.

Jim Fontanelli.

Please state your company name followed by your question.

Yes, hello.

I had a question on service revenues and the extent to which you think service revenue per tool, either on a percentage basis or absolute basis, steps up as you move to greater Immersion shipments, whether there's a structural move in your service revenue opportunity as we ramp Immersion.

It's more expensive, but Immersion is more expensive so the percentage is not too different, to be honest, at this moment.

Peter, do you have a better --?

I think the answer is you have seen service revenues over the years growing.

But that's basically the result of the installed base that is growing and customers signing up service contracts for those tools.

I think what you are seeing is that the more complex tools need more service and you see service contracts for the more mature tools, let's say, tapering off.

That's being replaced then by service products for the more expensive tools.

And the biggest driver, like I said, is the installed base.

Like two years ago we had about 80m on average, and service sales are now at 100.

So that's the biggest -- that is the biggest driver, the installed base.

So there's no new level of -- because I guess you have been looking to ramp the service option revenue and, equally, profitability over the last couple of years.

And I was wondering whether that's a new opportunity, particularly as you start shipping the 1900i, whether you have a series of options on the service contracts sitting around those tools that allows greater profitability per tool.

The first one or two years, the tools are under the service warranty that we give, so that doesn't give service revenue.

But afterwards, like I said, it's more complex.

But at the other hand, we're also trying to help our customers in reducing the cost of running their fabs.

So there's always an actual pressure on the service revenue once the tools become more mature tools.

So the way that we are improving the service top line is coming up with service options, that is, the enhancement of systems to make the tools run better.

And that is clearly -- with the increased complexity of the new tools, we have some more opportunities to do application-type sales where it's very often software-driven, which are better gross margin products.

But that is, for the future, a potential.

We are working on that.

And it's also part of what we call the extended litho strategy.

And secondly, on the option program, have you seen any step up in the take up of options in the second quarter?

What was the difference quarter on quarter?

No, I think those were largely taken in Q1.

Okay.

Thank you.

Can we here conclude, operator?

Yes, of course we can.

Thank you, sir.

Ladies and gentlemen, this concludes the ASML 2007 second quarter results conference call.

Thank you for participating.

You may now disconnect.

Thank you very much everybody.

Thank you.

Goodbye.