艾司摩爾 (ASML) 2008 Q2 法說會逐字稿

Welcome to the ASML 2008 second quarter results conference call on July 16, 2008.

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 conference over to Mr.

Craig DeYoung.

Please go ahead sir.

Thank you Jose.

Good morning and good afternoon ladies and gentlemen.

This is Craig DeYoung, Vice President of Investor Relations and Corporate Communications at ASML.

I'd like to welcome you to our investor call and web cast.

The subject of today's call is ASML's 2008 Q2 results.

Hosting the call today is ASML's CEO, Eric Meurice and CFO Peter Wennink.

For your information, Eric and I are joining the call from San Francisco, California.

I mention this in case there are any technical difficulties and we get separated from the call, we will rejoin the call as soon as possible.

I'd like to draw your attention to our safe harbor statement contained within today's press release and presentation.

And you can find our Q2 results, press release and presentation on our website at www.asml.com.

The length of the call will be 60 minutes.

Now at this point, I'd like to turn the call over to Eric Meurice for a brief introduction.

Okay thank you Craig.

Good afternoon, good morning, thank you for attending our Q2 2008 results conference call.

Peter and I would like to say a few things about the quarter before we open up to -- the call to questions.

Peter will start with a review of our Q2 financial performance with added comments on our short term outlook.

I will complete the introduction with our assessment of the current environment and some details on our longer term view.

Following the introduction, we will open the call to questions.

Peter please.

Thank you Eric and welcome to everyone.

First of all, I would like to review the highlights of our second quarter results.

The second quarter ended on the high side of the expectations, with revenues of EUR844 million on shipments of 39 systems, 16 of which were immersion systems.

The second quarter ASP for all systems was EUR18.6 million, making this another record ASP quarter, which is due to the success of the ASML immersion systems.

A 40% gross margin along with operating expenses of EUR186 million resulted in operating margin on the quarter of 17.8% versus 20.5% in the first quarter of the year.

We booked 33 systems in Q2, 29 of which were new and, as guided at the time of the Q1 results, this represents a gradual increase of Q1's order intake of 26 units; and as predicted, a significant increase in order value, which brings the Q2 bookings value to EUR632 million versus EUR312 million in the first quarter.

This leaves the total system backlog value for the end of the quarter at EUR1.1 billion.

The second quarter orders were heavily dominated by orders for 20 immersion systems.

These requirements came largely from memory customers with an emphasis on Japan.

Looking forward, we anticipate the immersion bookings in the third quarter to be comparable to Q2, driven by essential technology transitions that are underway at flash and DRAM manufacturers.

Now, even though the demand for immersion systems remains very robust, the current macroeconomic weakness that reflects on our customers may be forcing them to postpone more leading edge capacity additions.

This is true in most applications, making it difficult for us to guide the orders for non-leading edge systems in Q3.

Now in case of a situation where these systems, these non-leading edge systems would not be ordered, we would likely see an impact on our Q4 shipments.

And this means that the previously announced 2008 sales, decrease of 10%, could potentially end up being as much as a 20% decrease.

On the positive side though, it appears that the factory utilization at all of our customers remains high.

Chip inventories are at a moderate level and the will to invest in the latest technology remains strong.

Our customers will resume ordering additional production capacity when they regain a higher level of confidence in the economic situation, which includes a healthier pricing environment for the memory devices.

Now, timing and size of such rebounds remains unclear, and although we do not exclude that this could happen in the course of the second half of this year.

I think a striking example of our customers' cautious stance at this moment is the fact that our two leading foundry customers are completely absent in our order book, with their factory utilization at high levels.

This has never happened before.

In Q3, we plan to ship 37 systems, slightly less than the 39 systems in Q2, but with an average selling price of EUR15.6 million versus the EUR18.6 million ASP in Q2.

The ASP decrease is simply due to the product mix in the quarter, which means a higher mix of used tools versus immersion systems as compared to Q2.

This level of sales was anticipated at the time of our Q1 order intake when we estimated the impact on this on our 2008 sales number.

Now on the lower Q3 sales number, our gross margin for the quarter will be approximately 38%, as we will experience a lower coverage of our fixed manufacturing cost.

As mentioned in Q1, given the current market weakness, we plan to trim manufacturing and SG&A cost for the second half, while keeping R&D stable at the current levels.

Therefore, R&D is planned at EUR130 million and SG&A will decrease to EUR52 million.

I must also mention that we posted the next tax benefit in the quarter, which resulted from a release of tax provisions, after we concluded some long-standing discussions with the Dutch tax authorities.

And these discussions focused on, amongst other things, the treatment of taxable income relating to ASML patents portfolio.

These concluded discussions have led to a benefit booked in the second quarter and will also result in a structurally lower effective income tax rate in the coming years, decreasing to an estimated 20% annual tax charge.

So in summary, we remain cautious against the backdrop of global economic weakness and a difficult pricing environment in the memory market.

However, we are also confident that lithography demand will resume its (inaudible) growth planned when overall economic uncertainty decreases, because no excess lithography capacity is currently being built and necessary technology transitions are progressing well.

Now as a last comment, we almost seem to forget amidst all the doom and gloom of today that ASML's a very healthy company.

We're growing market share; we are robustly profitable; and we're generating more than sufficient cash in a very tough environment and that's something that we're very proud of.

And now, I'd like to turn back to Eric for an outline of our technology progress, which is the key behind ASML's robustness.

Okay, thank you Peter.

So, Peter has highlighted the fact that we again posted strong sales for the ninth consecutive quarter.

We are arguably doing better than our competitors or peers in terms of sales decline this year, even if the market for capacity tools stalls as a result of the fear of a recession.

This is a testament again, as Peter said, to ASML's strong position in support of technology transitions, resulting in high system average selling prices and a continuous market share growth.

So, I'd like to spend a bit of time on talking about the fundamentals of the business in spite of the fact that we may be going into recession, because what makes a difference is technology strength of the Company.

The first issue, the first thing I'd like to underline is our immersion business.

The immersion business continues to show significant strength, as we shipped 16 systems this quarter, took an additional 20 immersion orders, leaving 27 systems in our backlog at the end of the second quarter.

We have shipped 30 systems year to date and have now more than 100 immersion systems delivered to over 20 individual customers worldwide.

We are well on our way, as we guided a multiple numbers of times, well on our way to near doubling our immersion revenue in 2008 versus 2007.

To maintain our competitive lead in immersion, we have unveiled a week -- I think this week, our new TWINSCAN XT:1950 immersion lithography system, which is the latest addition to our proven family of immersion systems that includes the XT:1900 and the XT:1700.

With the 1950, we are increasing the performance of our current world leading system by 25%, so a very large number, thereby making immersion lithography increasingly affordable for 55 nanometer and for 45 nanometer processors.

This tool is also the only toolkit able of supporting the development and the volume production implementation of the next node, in particular the 32 nanometer node with its unique 1.35NA and sub 4 nanometer over the specification.

There is no matching competitive tools in existence or even announced that can do this.

Thanks to this product development, in particular again in immersion, our market share in Japan is continuously increasing in the memory and non-memory segments.

Since early 2007, we have shipped more immersion tools in Japan than our competition and have won two new customer applications there alone.

The systems for this new -- two new logic applications will ship in Q4.

Beyond immersion, we achieved significant breakthroughs in our extreme ultra violet, the EUV program.

And the productivity of our EUV Alpha Demo tool is now reaching targeting throughputs and as light source suppliers are confirming roadmaps, enabling system performance well beyond 100 wafers per hour.

This is a significant performance, which has created additional momentum in the market for deliveries of the first pre-production tools in 2010, with production ramps anticipated already for 2011.

We expect to be well ahead of competition when the market, I would say even again, when the market transitions to EUV.

During this period of macroeconomic uncertainty, we plan to keep, as Peter said, our R&D investment at the current level, which is also a testament of what we think about the depth of the potential recession, while we plan to accelerate our operational efficiency program.

Indeed, the current business environment, including the strengths of the euro, forces our customers to push for better pricing obviously.

Price pressures will be dealt with through accelerated manufacturing and SG&A cost reduction, which we have already shown -- seen, using our embedded label flexibility and supplier base efficiency programs, as well as value enhancing system performance upgrades, including the TWINSCAN H version on one hand, a completely new architecture on the other hand, which will be introduced early in 2009, and the introduction of our lithography enabler library, resulting mainly from Brion's technology.

So after brushing, in fact, our technology progress in Q2, I think Peter and I are now ready to take your questions.

So ladies and gentlemen, the operator will instruct you momentarily on the protocol for the Q&A session.

Beforehand I'd ask to -- I'd like to kindly ask you to limit your questions to one, with one short follow-up if necessary.

This will allow us to get in as many callers as possible.

Jose, can we have your instructions please and then the first question?

Thank you.

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

(OPERATOR INSTRUCTIONS).

The first question comes from Mr.

Menon.

Please state your company name followed by your question.

Hello, it's Janardan from Dresdner Kleinwort.

Two questions or a short follow-up the second one is, I promise you.

You talked about accelerated price pressure.

Would you have any intention of increasing the level of discounts beyond what you've given in the past in order to secure business?

Or would that be -- ASML has always had a policy of not bending down to price pressure and giving much discount, would that policy be maintained in the future as well?

And my follow-up is if you have -- you have been taking in quite strong immersion lithography orders.

Even though you don't have much visibility on the dry orders, can you give us a feel for what increase in immersion shipments you can see next year at this point in time?

Okay Janardan, thank you.

On the price pressure, the reason why we mentioned this is that because in any recession or in any market environment where the volume is not there, there is always a price pressure.

This time, we have also a -- we say a profit pressure from most of our memory customers.

So, profit pressure will always result in the customers putting pressure on every supplier.

So, it's not a lithography issue.

So, the way to react to this is, as I said in my little introduction, is twofold.

One obviously, we have to give value to our customers, so when they have a genuine reason for price pressure due to the fact that there is not enough value generated, then we have to give away -- I will not say we give away discount.

I say we develop products, which are more cost effective.

And you've heard in my speech that we can be more cost effective further by improving on our cost structure, but also improving on the product itself.

And then what we also do, which is why you have seen this acceleration of the, I will say -- call it cannibalization of our products by bringing new versions.

We accelerate the introduction of new products with more value to them.

The XT:1950 is an enormous improvement.

It is about 15%-ish cheaper.

Very clearly, you've seen the press release.

But in addition, it is another 10% better value, you can shrink more.

So, you've got significant value generation option here, which solves the problem or addresses the problem of the customer price pressure.

And if that's not sufficient, we have the product, the next generation TWINSCAN, which comes early next year, which is another leapfrog to this.

So in other terms, we recognize price pressure, we recognize price pressure due to the customers having difficulties and we are addressing this with products which are significantly better.

In fact, our R&D investment is showing.

And the second bit is the immersion business for 2009.

I think you've got two questions in that.

It's not only the immersion business.

It's the whole 2009.

Everybody's waiting to see how 2009 is going to develop.

And, in fact, I think we should be at this moment optimistic, because of the following two things.

One is we just said that we are not seeing at this moment any capacity orders, we are only seeing immersion.

And with immersion, we are still developing a sales level which is, we say, appropriate.

But the fact that there is no capacity order at this moment means that if and when the economy start to pick up, we're going to have an enormous wave of capacity order.

You read the statistics from analysts that say there is, however, still in the semiconductor industry some unit growth.

And this is happening.

But when the unit growth will get back to a level of 10% or so after the recession, or when after the recession the industry gets more confidence, we fear, with pleasure by the way, that there could be a significant pick up.

And we are, in fact, preparing ourselves for this possibility in 2009.

So in other terms, we are confident that business pick up will be larger than expected, because at this moment there is no capacity being built.

Now to answer your question on immersion.

Immersion will be a big business in 2009.

We do not know if there is a -- what is a multiplying factor.

But we know it's going to be a big business for two reasons.

One, the new technology, the new nodes in DRAM 55 nanometer at this moment is just started at two players only.

And every other DRAM players will have to be in 55 nanometer.

This is the rule of the game, recession or not.

When the two leaders have 55, the other one have to have 55.

So we are going to have significant amount of business and it's probably more than 60% of the DRAM business customers will have to ramp.

And at this moment they haven't.

So, we expect that to be a major driver.

The second driver is the usual, flash.

As you know, flash today is having some difficulty, because of the end volume, which is not great, but at this moment they are not building a lot of capacity.

And again, they will need to build 45 nanometer capacity, in particular the guys who are not yet in this business.

And this is again, probably, I would say, at least 30% to 40% of market share in flash is not yet in this 45 nanometer node.

Then, the third engine is what's beyond 45 nanometer in flash?

What's beyond 55 nanometer in DRAM?

And what is the logic 45 nanometer immersion ramp?

This is going to be also significant, in particular, that for some of those nodes, we're going to talk about double patterning.

And double patterning means double numbers of tools to process the same amount of wafers.

So in other terms, there is a multiplier in immersion business for 2009, a bit too early to talk about, but it's going to be significant.

Eric, just to clarify a comment, when you said 15% cheaper the 1950 is, of course, meant not that the tool price is 15% cheaper, but that we have 15% more throughput, which actually makes the cost for our customers 15% cheaper.

Absolutely.

Thank you very much.

Thank you.

The next question comes from Mr.

Andrew Gardiner.

Please state your company name, followed by your question.

Thank you very much.

It's Andrew Gardiner from Lehman Brothers.

I was just interested in a bit more detail on the backlog composition at the moment.

Firstly, what is in there in terms of the memory names and just how you feel about the Tier 2 guys coming through in the third and fourth quarters of this year potentially, particularly around some of the delays that you'd cited earlier in the year?

And then finally, on the foundry side, which clearly is not in the backlog at the moment, what are the conversations that you are having there with those guys, given that, as you pointed out, utilization is high, and perhaps the frequency with which those conversations are going on?

Thank you.

Okay, thank you.

Peter, you may want to take the statistics stuff, and then I can give some color customer-wise?

Yes, it's -- the backlog composition, it's -- in terms of -- of course, it's shown in the presentation, but we lumped it together, which is on slide 27 of the presentation.

The end-use 65% memory, and 8% foundry, which I said, clearly does not include the two biggest foundry customers that we have, which is, by the way, for the first time in the history of the company that we don't have those two in the backlog, which actually pretty high utilizations there.

The IDM 27%, and if we split the memory business it is 50/50, DRAM and flash in the backlog.

So, we aren't going to go into customer details, clearly, but it's really spot on 50/50.

And to give some color, the reason why we have said today that we will oscillate between minus 10% and minus 20% in a worst case situations, for sure, is because there is a wait and see attitude about putting bookings for capacity orders.

And this is happening in most of the segments, even the segments which have significant volume growth, like the logic segment.

Even in the segment, the different players, foundry in particular, are saying, let's see how the world economy is developing before we put the orders.

And this is, I would say, the same on DRAM, where those people are waiting for the price of the chips to be firming up.

As you know, it has been firming up in DRAM so far, but firming up with a, I would say, single digit type numbers.

It will be more comfortable for them if it is double digit.

Flash, they are waiting for the end product to move up a bit, which is most of them is consumer driven.

So, it is most of them H2 rather than H1.

But a wait and see attitude.

So, we have that all over the place, which is not bad.

It doesn't mean that the business is disappearing.

It means that the business is taking its time to gauge the future.

So, it is why I said we are seeing the possibility of a fairly steep ramp up at the moment, uncertainty would weaken the [visibility].

And I would like to add that, Eric, that if you look at the utilization of our tools in every segment, memory, IDM, but also, clearly, foundry, for all our tools we are at utilization levels we have never seen before, which actually means that the customers are dealing with, clearly, the end growth demands in terms of units by sweating their assets.

And that's very, very visible.

So, I think that also gives them a little bit of breathing space to say, we can afford the wait and see approach.

Now, since all of them are at record utilization levels, and that has a natural limit, like Eric said, there must be a moment in time where it doesn't work any more, you cannot sweat the assets any further.

That's very clear, thank you very much.

The next question comes from Mr.

Nicolas Gaudois.

Please state your company name, followed by your question.

Yes, hello, it's Nic Gaudois from UBS.

The first question is on the behavior of clients you're seeing currently.

Obviously you had some (inaudible) as you said.

Your order guidance for Q3 is reasonably vague.

We have a backbone for immersion.

We don't really know much more about what will happen for volume production there.

Would you say that even some of your largest customers, which tended sometime to spend strategically right now, are still in wait and see mode, and probably more hesitant to confirm orders for Q3 for deliveries in H1 '09?

Or is that not a fair statement?

No, I think it's exactly as you said.

It's a wait and see attitude, but with usual game of telling us that they may want things in Q4 with very, very short lead time.

So you -- very clearly, everyone in the industry is still not seeing -- in the world economy -- is not seeing negative statistics about demand.

You are the specialist, you should know, most of the applications are still running.

PC is doing fairly good.

Consumer electronics is OK.

Cars, except for General Motors I guess, is still growing.

So, you have all this happening, but because of fear, everything that can be pushed out is pushed out at this moment.

And, as Peter used a very scientific term, at this moment they are sweating the installed base, which you can always do, until the decision becomes necessary.

So, most of our customers, in fact all of our customers, are still putting a forecast to us for Q4, which is above our guidance, let's be very blunt.

So, we are judging, as we've mentioned, between minus 10% and minus 20%, just as a statement of -- I would not say conservatism, but of the fact that the world at this moment has a period of thinking about where the business will go.

Yes, okay, fair enough.

And in terms of a follow-up, just I'm starting a little bit to understand the ASP for new orders, orders for new machines, in Q2, considering that you had 20 immersion orders.

I understand one of them was refurbished, so it leaves us with 19 immersion; 10 non-immersion.

And when I do the math, I have to plug in ASPs close to EUR27 million for immersion, and maybe around EUR12 million for non-immersion to get to your blended ASP.

That looks low.

Am I missing something?

Or in some cases you had to have pricing a bit lower from what you typically would have on a normal run rate basis?

I don't have the math with me.

Potentially Craig and Frankie will come back to you on this.

But no, there is no trend at all that you could see again, because every time at this moment when we would reduce the price of a tool, because every year you negotiate, and every year you give away a bit, this is normal business, we usually upgrade the machines with a higher speed and, therefore, we compensate for this.

So this is happening at this moment.

Sometimes you have by quarter, of course, a mix -- a customer mix impact, which could explain this.

This time, also, we have a lot of fuse order, I think.

I don't know.

But I'm -- at this moment you should not be able to see any ASP squeeze by segment or by customer.

The immersion ASP is on average between EUR27 million and EUR28 million, but it includes, by the way, too used tools.

So, that means that the new systems are about the same level as we had before.

Okay.

Okay, that's helpful, thank you very much.

Next question comes from Mr.

Atif Malik.

Please state your name, followed by your question.

Hello, this is Atif Malik from Morgan Stanley.

I have a question on your R&D profile.

If I look at your R&D spending over the last two or three years, it seems to me it's increased to 17% of the sales in 2008, or is an increase to about 7% level.

So, is it fair to see 2008 as your 2005 year, where you're coming up with a new platform, and R&D spending is going higher and then for 2009 it's going to come down to a more 14% level?

First of all, it's not a -- we cannot manage the business as a percentage of sales.

These R&D blocks are project-driven.

And the project will get into sales three years later or something.

So, you -- the R&D decision sizing is really much more about how many new projects we would want to introduce, and whether we can afford them.

So, we can take a decision to reduce or not.

But percentage of sales is remotely related to this.

What we've said, however, on a regular basis, is that our business could justify up to EUR140 million to EUR150 million per quarter, where we would be able to generate value.

We know that.

At this moment, we are about EUR130 million.

We do not expect short term to move it up, because of the current sales level, which will not justify the profits.

So, we've decided to cool down on some good ideas we may have.

But with EUR130 million, we are able to maximize our set of new products for efficiency costs and also for new generation, like EUV.

And we feel comfortable that EUR130 million would allow us to get EUV in business by 2010, as we said, for preproduction, and 2011 for ramp.

So, in other terms, we will probably stabilize at EUR130 million, except if two things happen.

One, a big accident, let's say it's 2009 is a terrible year, and we are going to show some profitability, so we would be able to reduce a bit, but that would cost, potentially, some months of delay of some products.

But again, at this moment, we don't see this to happen.

Or we get so rich in 2009.

As I said, the pick up is enormous, etc., and then we have two or three of our additional dreams, which will generate more value in 2012/2013, that we can afford.

Okay.

And I have a quick follow up.

If -- in your slide 29, you mention that you're going to be doing some cost reductions.

Historically, ASML's gross margins have been about 500 basis points lower than your US peers, and you lever some gross margin in the supply chain.

Are you guys thinking of doing something different in the current cycle to maybe offset the weaker pricing environment?

Or is it more of the steps that you have been doing in the past?

Certainly.

So, first of all, as we've said consistently, we're trying to manage the company around 40%.

And then by improving our efficiency, we will move up the 40% to 45% or so.

But these numbers, I remind you, are based on the fact that we are highly leveraged company, using a lot of suppliers.

We are an integrator of a lot of things.

And in there, you've got a major buy, which is a lens.

If you corrected for the margin of lens, you could probably correct this to be a model margin between 45% and 50%, not 40%.

So, be cautious when you compare us to peers or competitors.

But having said that, are we still on our plan to move the margin from 40% to 45%?

Yes and no.

Yes, because we are working all these efficiency program, which includes cost savings, which includes reduction of the lead time by a major factor.

We are in that moment putting together some ways of manufacturing differently, which will allow us to do that.

We're working with suppliers to get there.

We're putting suppliers into Asia, etc.

So, we are moving nicely toward this.

In addition, as I said since the acquisition of Brion, we are going to add more software value on our tool and software is a 70% to 80% margin.

So, the more we're going to sell of these lithography plus, as we call it, or (inaudible) lithography, we're going to move into higher margin.

So, all this is doing well, in fact.

We are adding nicely.

We're progressing.

There are no issues.

The bad news, however, at this moment, is, yes, there is a recession looming.

Yes, our customers are losing money.

So, the pressure is higher.

And yes, the euro is not helping us.

So, a lot of the savings that you should have seen already has been eaten up by the fact that, yes, we are under pressure because of the euro.

So, we don't expect this to last much longer, and therefore you should start seeing those margin number creep up again.

And Eric, I would like to add, if you look at this reference to our Q3 guidance, which if you add it all up, you come to lower than EUR700 million of sales, we guide at around 38% gross margin, which is, if you look at the relative sales decrease as compared to two quarters ago, this is a relatively modest decrease in gross margin, which is mainly attributable to the fact that we have lower coverage of our fixed cost.

So, that means that we are effective in driving down the cost reductions through the manufacturing supply chain.

And that will also be noticeable going forward.

So, of the programs that we have started will see -- clearly do have an effect -- already starting in Q4, so -- and that going forward is clearly our focus.

We will get these cost reductions through the supply chain, as was explained by Eric.

Next question, please?

Next question comes from Mr.

Schafer.

Please state your company name, followed by your question.

Yes, it's Simon Schafer with Goldman Sachs.

I wanted to ask a question, just to get the sensitivity right.

Am I right in assuming that maybe the lower end of your guidance, that is the 20%, effectively presumes that there is no capacity shipments in the next couple of quarters?

That's right.

That's correct.

Understood.

And then, if that's the case, just trying to understand, how would you describe the risk that some of the orders that are pending for immersion actually see some real cancellations, just given, as you actually remarked, some of the capital structures of your customers are not looking as strong as you may have liked them to be?

Maybe that's not the case for the first-tier customers on the NAND side and the DRAM side that have put in the orders, but even they are more subject to, perhaps, budgetary checks than you'd like them to be.

So, in simple terms, what are the risks that those actually get canceled in the next six to nine months?

No, the risk is extremely small.

In fact, the backlog is okay, it's not excessive.

So, what we have in there who are customers who really need those units.

Would the question becomes more the timing?

This is where the issue is at this moment, the timing, and often when you -- when they push out a bit they would say, yes, but now I want to change my mind, and I'd like a transition from this machine to this machine.

So, you've got that type of activities.

At this moment we have one or two customers who say, well, now that we look at this, why don't we have immersion tools instead of non-immersion.

So, we've got in fact two customers in the situation where we are discussing the possibility of upgrading their orders, basically, to immersion.

So, this type of things is happening, but I would be highly surprised if we have any requests for any cancellation from what we have.

Well, when I say any; more than standard two, three, four tools per quarter or something.

That's helpful.

Maybe just to clarify, so the down 20%, does that assume some type of risk that there's considerable push outs by the first tier memory company -- customers immersion or does that -- is that taken into your assumption?

No, that's baked into the assumption that there will be mostly emersion, as we said in Q3 and Q4.

Q3 I think was 80% of our business will be immersion.

Q4 I don't have the specific in my mind, but it's nearly to the same level.

And this does not include a lot of immersion.

So in other terms, in the normal circumstances when the business is booming, the leaders of the DRAM business and Flash business would try to outsmart the competitors by pulling in Q1 demand into Q4.

That we haven't assumed, because again we don't know when the business will become bullish again to get back into this way of doing business.

Understood.

And just a simple follow-up question; just given the cash situation now and the negative reaction in your share price, how's the Company looking at potential share buyback?

I know you've got authorization but what is the plan in that respect?

Well, I think, like we said at previous calls, we have a cash target of between EUR1 billion and EUR1.5 billion.

When we generate -- keep generating cash at this level we will be at the point where we could have say, cash in excess of our operational needs.

And we would use that cash to give back to the shareholders, which we think could not be through a regular share buyback program, as you know it, but probably is to take the form of what we did before last year, like a capital repayment and a reverse stock split.

Now, that is something that, because of all the logistics to that, we should need to call an Extraordinary Shareholders Meeting.

And you have fractions with the reverse stock split.

It's not something you would do for an insignificant amount of money.

You would really need to save up a decent amount of money.

And we would have that.

There is no change in our policy by giving that back through this -- I would call this kind of an instrument.

So, there's no change, and if we keep doing what we are doing today, then that will be almost an inevitable thing to happen.

Great guys, thanks very much.

Next question, Mr.

Jim Fontanelli, please state your company name followed by your question.

Jim Fontanelli, Arete Research.

I was just wondering about the risk to 1900i shipments in the fourth quarter, given that you expect to start shipping the 1950 in the beginning of '09.

And you talked about cannibalization within the product portfolio, and equally you talked about the risk that customers start to switch products within the backlog.

What risk does the launch of the 1950i present, both in terms of backlog push outs but also potentially 1900i shipment numbers into the fourth quarter?

No, that -- this is our usual business of ensuring flawless transfer from one machine to the other.

We do this every year or so.

The way to do this is that, of course, you keep the price where it is on the 1900, and the 1950 has a higher price.

So, customers usually accept that.

Now, what we have done in addition this year and we're going to be much more aggressive, in fact, it's one of the questions regarding margin.

We are developing packages very early on to upgrade the older generation.

So in other terms, at this moment we are telling the customer, you can buy a 1900 and we will upgrade you with a package in Q1 and that looks like a 1950 or you can buy a 1950.

So, therefore, by doing this the customers have no timing issue, they will be upgraded in the field.

And also Jim, you should not forget that if you get push outs of 1900s, which will be translated into 1950s later on, we are limited in the ramp up of the 1950s.

So, that means that you cannot create this big bubble, because we won't be able to ship to anybody.

So, if you start cancelling your 1900s, which you need in Q4, you might be on the up in Q2 and Q3 of 2009, which is not going to actually service your real needs.

And that's why you need those particular upgrade packages.

Okay that's clear.

And if I can, just a quick follow up on your capacity flex.

Obviously we're seeing the results of the flex from the downside now.

But you talked about the potential for a rapid shipment increase at some point, over the next whatever, 12 to 18 months.

Could you just maybe quantify that in a little more detail about what you can handle maybe on a quarter to quarter basis?

How aggressively you can flex upwards?

Yes, so we have done two things this year and last year, we've done the new factory, which is capable now of doing these new architectures and the EUV.

So, that's a fundamental.

So, now we've got more space which we didn't have before.

And then we have hired about 200 to 300 workers, which we are at this moment training.

And that capacity will be allowing us towards EUR1.3 billion to EUR1.4 billion per quarter.

And these are the type of numbers we think the -- our simulation tool will tell us we need if the market goes back to its historical track.

Great, thank you.

Next question comes from Mr.

Meunier.

Please state your company name followed by your question?

Hello there, it's Francois from Cazenove.

In terms of competition, we heard of this year's situation at Intel and probably you can't comment about it.

But what's your new target for market share for 2008/2009 versus 2007-ish?

If you could tell us if you feel there is any other account beyond Intel where you think you're a bit at risk?

Yes, that's a good question.

So, yes, we are bound by confidentiality here as you know so we're not able to address particulars of a competitor's contract etc.

So -- but what we can say is first of all, regarding Intel is, our relationship with Intel does continue, because Intel is, in fact, continuing to give us orders, we've shipped lately 1900s still.

And we are working on multiple nodes.

So, clearly here there is, whatever you may have heard may have to be taken with a grain of salt.

The value proposition that we have in immersion is still unique.

You can look at the specification of our customer -- of our competitors.

The 1900 even and of course the 1950 -- the 1900 has a 1.35NA.

It has 1.

-- 131 wafer per hour spec.

It has a 7 nanometer overlay.

These three points which allows you to do chips with a very tight shrink capability and cost effectively at 131 wafer per hour.

This is still fundamentally unique.

Nothing has changed in the market.

The nearest competitor has a 1.3NA, which doesn't allow the same CD, the NA -- the overlay is maybe 30% or 40% worse than we have.

And the speed is maybe 40% lower.

So, you are talking about -- that has not changed in terms of product.

If we had the 1950 you can even calculate the improvement to this position.

So, we're not overly worried in the situation of comparison of a respect to spec for very tight processes.

Now, if some customers may want to have, I would call, less critical lithography -- immersion lithography layers to be done.

In which case our effective -- better spec may not have the full value.

It would have the value of the speed, but the overlay and the NA would only be useful in critical layers or critical processes, not so much less critical.

So, on this one this will be always where we will be more vulnerable as we are in KrF, as we are in ArF, as we are in i-Line.

So, for these types of segments we have to be cautious and offer the market products, which are effective and still addressing those non-critical layers.

And this is where you usually would be at risk of losing a bit of market share and etc., etc.

But in total we will still think or we still think with our speed, we can be highly competitive and that we may -- the business, we may lose are probably more strategic type things, like when we -- spec was not the issue, or when our competitors is crazy in terms of price.

So, that could definitely happen.

But in view of the situation, we still reiterate our market share target of 70%.

At this moment, we are 65%-ish in value.

And we believe we can get to 70% within the timeframe we said, which is by 2010 or so and that hasn't changed.

Okay, thank you very much.

The next question comes from Mr.

Sandeep Deshpande.

Please state your company name followed by your question.

Hello, Sandeep Deshpande, JP Morgan.

Again talking about your market share, the other customer, the Japanese customer Elpida is making a decision on choosing a photography supplier.

You I believe have been qualified at Elpida.

At what timeframe should we expect orders from that customer to come through?

Or is there still doubt whether decisions have been made within that company about placing orders, as well of course associated companies with Elpida?

Yes, so the Elpida evaluation is going on.

I think what I said is that there was an internal plan by Elpida -- there is an internal plan by Elpida to close the qualification of our tool within weeks or so.

At this moment we expect it to happen by September-ish; so far so good.

Everything is okay.

And the question at this moment is threefold.

One is Elpida has now to decide when they ramp 5X nanometer.

And I will not tell you what it is because that's internal data.

So -- but you can understand that that date will tell us when we get the Pos.

It's more than now qualification.

It's more like when do they really want to ramp.

And this is being discussed internally.

And by the way one of the decision points is what is the DRAM price looking like etc., and how to get capital.

So, that is clearly on the mind of every DRAM vendors.

And two, there will be a conclusion of negotiations.

And I expect the negotiations to drag on, until the point where they have to put a PO, which would be normal behavior.

So, in other terms at this moment, looking good; negotiation ongoing until the customer needs to put the PO plus the lead time so that they're getting ramp in the 5X ramp.

And just one follow-up Eric, just to reconcile, you're talking about worst case situation of 20% revenue decline versus when you came to market in the second quarter you were slightly more bullish.

Have you seen your customers?

You said also that you have not seen real order cancellations.

But what is that you're seeing from the customers, that customers just don't want to order at this point?

Or they're telling you that we may push out orders into 2009?

How is -- what's the customer behavior you saw, which made you change your stance slightly?

Yes, this is a good question.

You remember that most of -- every time we speak, Peter and I, we try to relate to not a forecast but a simulation.

And then we put the simulation in front of our order activity to give you to some feedback.

So, the simulation means if the world was running with some statistics and growth that would be the number of tools necessary.

And this hasn't changed.

We believe that we were right -- we are still right that there is need for them to buy capacity if they have to make the numbers of chips necessary as per what the analysts say.

So, we are still bullish there.

There is growth opportunity.

What surprised us, however, during the period of three months is basically the economy is so uncertain that every customer, even the bullish ones, even the one who are just sitting on machines that are 110% of their capacity if you know what I mean, that they are running on the max, max, max, are telling us wait.

We just want to know how this economy is evolving.

So, nothing has changed at all on all the economics of litho, of our market share, of the need for them to have capacity and immersion of the transition nodes.

But everybody says you're not going to invest, not knowing if the consumer is going to do something.

If the banking sector and JP Morgan is going to collapse, sorry Sandeep, and demand a complete wait and see attitude.

But as I said be cautious.

There is still the same people are saying, however, I may come back and ask you for these tools.

And in fact we have some of them even with immersion tools for Q4, which are putting us into a situation of wait and see.

So, what has changed is the wait and see, nothing else.

Thank you Eric.

Next question Mr.

Ramel.

Please state your company name followed by your question.

Yes good afternoon, Jerome Ramel from Exane BNP Paribas.

Just to come back for the pricing pressure, you say you are facing pricing pressure.

But on the other hand, you say the pricing for the immersion tools remain the same.

So, I'd just like to understand what kind of pricing pressure you are seeing, if you could quantify it, and for which tools?

Okay, yes, that's a good question.

So, the mechanism of this type of business is to have negotiation on a yearly basis.

And each of the customers has its own cycles.

Most of them would be negotiating in the Q3 timeframe.

A lot of them are negotiating in the Q4 timeframe and some would be negotiating in the -- the [lagged] would be negotiating Q1-ish.

So, during this period of time, you close volume purchase agreement, like when you sell an Airbus or a Boeing.

And then you fix your price and that will be based on a one year or a two year basis or a technology basis.

Intel, for instance, is more on the technology basis and Samsung would be more on a one year basis, etc., that type of thing.

So when you will say price pressure, we don't mean like in the memory business, where you have a price pressure for next quarter.

You're talking about the price pressure for the next negotiation.

And this negotiation lasts three to six months.

And so, during the period you know that you are going to be hard pushed by your customer saying, well, I'm losing money, why shouldn't you?

And then you start from there.

And that's what we are talking about.

At this moment, therefore, it's difficult for me to say that we know what our price position will be 2009.

But because we are well prepared for this pressure, of course, we are here to offer value to customers.

So, when we -- they are going to confront us because they haven't yet fully done this, and ask us well we need to have a better solution from you.

We have to come up with a better solution all the time.

And that's where I am pretty proud with the type of effort.

What you've seen in my speech, I said we are introducing the TWINSCAN H.

It's the first time I say this by the way.

I usually hide to you the different versions of TWINSCAN.

But this one is a version which is 15% faster than the older one.

So, guess what?

That means I'm going to sell the customer that they are getting 15% price reduction from this by only keeping the same price.

But that machine, the H1950, in addition has a different lens and a different overlay capability, so that's even value.

So, you are now going to hit the customer who is pushing you and say look first of all cost-wise I'm really helping; 15% improvement of speed.

And secondly, I'm bringing value to the equation, because you can shrink further.

And that discussion will lead hopefully to us keeping margin or improving margin in the normal circumstances.

So, that's why we are -- I think we are well positioned.

But it would be stupid for me not to say that when you are a euro based company and when you are in recession you are not getting significant pressure.

Okay.

And just maybe a follow-up, when you say that in the worst case scenario you could have sales down 20%, did it compare to the adjusted sales you published today or to the previous sales of EUR3.8 billion you achieved last year?

It's the EUR3.8 billion multiplied by either 0.9 or 0.8, it will be somewhere in between.

Okay thank you.

Ladies and gentlemen we have time for one last question.

If you're unable to get through on the call and still have a question, feel free to call ASML's investor relations department either in the US or in Europe.

And now, Jose, may we have the last question please?

Yes, the last question is from Mr.

Odon de Laporte.

Please state your company name followed by your question.

Yes, good afternoon.

Most of my questions have been already answered, but maybe you can provide us with guidance for CapEx in Q3 and Q4 '08?

CapEx guidance for '08, we have split CapEx for this year evenly.

So, the first half CapEx you can take as the guidance for the second half.

Okay thank you very much.

Well, ladies and gentlemen I think that concludes the call.

We'd like to thank you for calling and listening in and we'll look forward to talking to you next quarter.

Operator, if you could close the call out officially we'd appreciate it.

Ladies and gentlemen, this concludes the ASML 2008 second quarter results conference call.

Thank you for participating, you may now disconnect.