Earnings Call Transcript
ASML HOLDING NV (ASML)
Earnings Call Transcript - ASML Q1 2021
Operator, Operator
Thank you for joining us. Welcome to the ASML 2021 First Quarter Financial Results Conference Call on April 21, 2021. During today's introduction, all participants will be in listen-only mode. After ASML's introduction, there will be a chance to ask questions. I would now like to turn the conference call over to Mr. Skip Miller. Please proceed.
Skip Miller, Vice President of Investor Relations
Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call is ASML’s CEO, Peter Wennink; and our CFO, Roger Dassen. The subject of today’s call is ASML’s 2021 first quarter results. The length of this call will be 60 minutes and questions will be taken in the order that they are received. This call is also being broadcast live over the internet at asml.com. A transcript of management’s opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I’d like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of the Federal Securities Laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today’s press release and presentation found on our website at asml.com and in ASML’s annual report on Form 20-F and other documents as filed with the Securities and Exchange Commission. With that, I’d like to turn the call over to Peter Wennink for a brief introduction.
Peter Wennink, CEO
Thank you, Skip. Welcome everyone. Thank you for joining us for our Q1 2021 results conference call. And I hope all of you and your families are healthy and safe. Before we begin the question-and-answer session, Roger and I would like to provide an overview on some commentary on the first quarter, as well as provide our view of the coming quarters. Roger will start with a review of our Q1 2021 financial performance with added comments on our short-term outlook. And I will complete the introduction with some additional comments on the current business environment and our future business outlook. Roger?
Roger Dassen, CFO
Thank you, Peter. Welcome everyone. I will first review the first quarter financial accomplishments and then provide guidance on the second quarter of 2021. Net sales came in above guidance at €4.4 billion, primarily due to higher installed base business from upgrades. We shipped nine EUV systems and recognized €1.1 billion revenue from seven systems this quarter. Due to the delay in one of our customer's roadmaps, we jointly decided to buy back two of their new systems and ship these to another customer this year. This was accounted for as a revenue reverted in Q1 of 2021. For the system shipped in Q4 2020 with a new configuration, we were able to complete site acceptance and recognized revenue this quarter. We also shipped one system this quarter without factory acceptance testing so revenue will be recognized in the subsequent quarter after customer site acceptance. Again, the net result is seven EUV revenue systems in Q1. Net system sales of €3.1 billion was again more weighted towards Logic at 78%, with the remaining 22% from Memory. The strength in Logic drives both DUV and EUV revenue. The Memory business is mainly driven by DRAM. Installed Base Management sales for the quarter came in at €1.2 billion, above guidance, due to increased upgrade business as customers pull forward software upgrades that can quickly increase productivity of systems in this high semiconductor demand environment. Gross margin for the quarter was 53.9% and was above guidance due primarily to the additional software upgrade business. On operating expenses, R&D expenses came in at €623 million and SG&A expenses at €168 million, which was slightly above our guidance. Net income in Q1 was €1.3 billion, representing 30.5% of net sales and resulting in an EPS of €3.21. Turning to the balance sheet. We ended first quarter with cash, cash equivalents and short-term investments at a level of €4.7 billion. Moving to the order book, Q1 net system bookings came in at €4.7 billion, including €2.3 billion for EUV systems and another strong quarter of DUV demand. Order intake was largely driven by Logic with 76% of bookings, primarily due to EUV order intake, with Memory accounting for the remaining 24%. With that, I would like to turn to our expectations for the second quarter of 2021. We expect Q2 total net sales to be between €4 billion and €4.1 billion, the directionally lower guidance is primarily due to shipments in the quarter, both EUV and DUV, that will not receive factory acceptance testing due to customers' desire to bring systems into production as quickly as possible. Therefore we will recognize revenue in subsequent quarters after completion of acceptance testing at customer site. In addition, the Installed Base business is expected to be lower in Q2 versus Q1 as customers pulled forward installation of productivity software upgrades to quickly increase wafer capacity. We expect our Q2 Installed Base Management sales to be around €900 million. Gross margin for Q2 is expected to be around 49%. The lower gross margin quarter-on-quarter is mainly due to delayed revenue from immersion systems that we plan to ship without factory acceptance testing as well as lower Installed Base Management sales versus Q1. The expected R&D expenses for Q2 are €650 million and SG&A is expected to come in at €175 million, reflecting a continued investment in the future growth of the company. In support of our aggressive product roadmaps and opportunity to pull in some of our high value product developments, we plan to increase our R&D investments, primarily in EUV, via increased development capacity. Furthermore, this increase will allow us to compensate for remote work impact. We don't expect this increase to scale at the same level as our revised revenue increase, with R&D expenses for 2021 around 14% to 15% of sales. We expect SG&A to remain around 4% of sales for 2021. Our estimated 2021 annualized effective tax rate is expected to be between 14% and 15%. As mentioned last quarter, ASML intends to declare a total dividend with respect to 2020 of €2.75 per ordinary share. This is a 15% increase compared to the 2019 dividend. Recognizing the interim dividend of €1.20 per ordinary share paid in November 2020, this leads to a final dividend proposal to the General Meeting of €1.55 per ordinary share. The 2021 Annual General Meeting of shareholders will take place on April 29, 2021 in Veldhoven. In Q1 2021, ASML purchased 3.5 million shares under the 2020 through 2022 program for a total amount of over €1.6 billion. Our expected free cash flow generation enables the opportunity for continuation of significant share buybacks in the coming quarters and we expect to complete the execution of our current Share Buyback program early. With that, I’d like to turn the call back over to Peter.
Peter Wennink, CEO
Thank you, Roger. As Roger highlighted, we had a very strong quarter in both sales and profitability, driven by continued strength in both Logic and Memory as well as a significant demand for upgrades as customers look to bring additional capacity online as quickly as possible. The additional upgrades consisted primarily of software based productivity packages. We are seeing a significant increase in demand from our customers across all market segments and all nodes, mature and advanced, compared to 3 months ago and we expect another very strong year with demand across our entire product portfolio. The steeper than expected recovery in demand for semiconductors, amplified by the COVID-induced lower investments in the industry in 2020, has created significant upside to demand over the past quarter. This more cyclical demand sits on top of the secular growth from the accelerated build-up of the worldwide digital infrastructure and is fueling demand not only for advanced and mature Logic nodes but also for Memory. In Logic, customers continue to see strong demand across a broad application space for both advanced nodes as well as mature nodes. And last quarter we expected revenue from Logic in 2021 to be up 10% year-on-year. However, we now expect Logic to be up around 30% this year. In Memory, the applications that are driving the strong Logic demand are also fueling demand for Memory. As we mentioned in earlier calls, the Memory recovery started last year and continues to strengthen as customers’ plans to increase capacity is driving significant demand for our systems in the second half of the year. Compared to last quarter where we expected revenue from Memory in 2021 to be up 20% year-on-year, we now expect Memory revenue to be up around 50% this year. On our Installed Base business, service revenue will continue to scale with the growing installed base and with increasing contribution from EUV services as these systems run more and more wafers in volume production. We are also supporting our customers with upgrades to maximize performance of their installed base. In order to meet the high demand in the current tight chip supply environment, customers are prioritizing software upgrades to quickly increase capacity, as reflected by our higher upgrade number in Q1. And some hardware upgrades require extended machine time to be installed and in the current high demand environment customers will be less willing to take systems down which has a dampening impact on the 2021 growth profile of hardware upgrades. We therefore still expect growth of our Installed Base business of around 10% this year as mentioned last quarter. On EUV, we continue to see increasing customer confidence in this technology, which is translating to expanding layer counts in Logic and increasing deployment of EUV in Memory at multiple customers evidenced by a number of customer announcements around increases in their CapEx plans which will include spending on EUV for advanced nodes. To support this strong EUV demand, we are working to increase our output capability. At the same time, we are driving our product roadmap to produce higher productivity machines which will increase the effective EUV capacity per system and the wafer output capacity of our customers. We plan to transition to the NXE:3600D system in the second half of the year, which will provide customers with a 15% to 20% higher productivity compared to the NXE:3400C systems shipping in the first half of the year. Limited by the available modules and parts this year, we are still planning for growth of around 30% in EUV revenue this year. With the expanding adoption of EUV at our customers, we see increased demand building in 2022 and beyond. We are improving our manufacturing cycle time and are planning our supply chain for a capacity of around 55 systems next year. As a reminder, all of our planned shipments in 2022 will be NXE:3600D systems with the increased productivity capability. Our strengthened outlook on the year relative to last quarter is primarily driven by demand for DUV systems. With increased demand on leading edge nodes, as well as mature nodes running longer and ramping stronger, demand for both our immersion and dry systems is stronger than ever. We have put in place plans to increase our DUV capacity to help meet our customers’ increased demands. In our Applications business, as demand for scanners continues to increase, we expect a step up in demand for our YieldStar metrology systems, particularly in Logic. The newly released YieldStar 385 is beginning to ramp across our customer base as well. With the recovery in memory, specifically in 3D-NAND, we expect a substantial increase in e-beam inspection revenue this year. For the industry at a high level, we see three trends driving considerable growth this year and in the years to come. The first trend, in the shorter term there is a more cyclical or you could say a “catch-up” driven demand from decisions made in 2020 due to the global pandemic. These shortages were initially evident in the automotive market, but more recently there are also indications of supply tightness impacting other market segments. We expect this to drive considerable demand for lithography systems this year and into next year. The second, is a secular growth trend driven by the digital transformation taking place as we become a more connected world, across both people and machines. And this transformation was further accelerated over the past year with the increased remote activity and reliance on technology to stay connected. These secular trends are driven by expanding end market applications such as 5G, AI and High Performance Computing. These and other mobile, distributed applications drive demand for both advanced Logic as well as more mature technology required for the services and applications that drive the growth of the digital infrastructure. And along with increased Logic demand comes increased Memory demand. This in turn drives demand across our entire product portfolio. And the third trend, which we are starting to see now and which we will likely continue to see longer term, is the desire for more technology sovereignty which includes semiconductor and silicon-based technology, leading to a geographical decoupling as different governments put initiatives in place to localize supply chains and become more self-sufficient. This inevitably will create some level of inefficiency in the semiconductor supply chain and creates additional equipment demand as more fabs are strategically built across the globe. If you summarize the growth of the different segments and the trends just discussed, we now expect sales growth towards 30% this year. To achieve this growth, we are ramping up our capacity to support customer demand, resulting in a stronger second half. With the higher revenue and increased mix of DUV and upgrades, we now expect gross margin to be between 51% and 52% this year. For the industry as a whole, the long-term demand drivers only increase our confidence in our future growth outlook towards 2025. We plan to provide an update on our 2025 scenarios at our Investor Day in September. And with that, we would be happy to take your questions.
Skip Miller, Vice President of Investor Relations
All right. Thank you, Peter and Roger. The operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I would like to ask that you kindly limit yourself to one question with one short follow-up if necessary. This will allow us to get to as many callers as possible. Now, operator, could we have your final instructions and then the first question please.
Operator, Operator
Thank you. Our first question comes from Mehdi Hosseini of SIG. Please go ahead. Your line is open.
Mehdi Hosseini, Analyst
Yes. Thanks for taking my question. I want to follow-up on EUV revenue target for this year. I understand that you’re keeping it unchanged at 30%. But in case you're able to improve the supply chain and availability of subcomponent, could there be upside to the shipment, even though you may not be able to recognize revenue? And I have a follow-up.
Peter Wennink, CEO
Yes, Mehdi, you brought up two very important points regarding the issue we discussed in the last quarter about long lead time items. For instance, a lens has a manufacturing cycle that exceeds 12 months. While we are auditing the situation, we won't have it available in the immediate term. Looking ahead to next year, it seems virtually impossible to achieve more than what we had planned for 2021. Hence, this is why we've underscored the importance of collaborating with our supply chain and evaluating the roadmap for next year, as we are currently planning without full confirmation from the supply chain. Our primary focus remains on the 55 systems for next year. Additionally, it's worth noting that customers are effectively purchasing wafer capacity when they buy systems. Next year will see a transition that is expected to yield a productivity increase of 15% to 20%. If we consider a midpoint of 17.5%, that translates to an 18% productivity increase for our system, meaning the 55 systems could effectively represent 65 systems with a productivity capacity of 3400 C. This should provide a clearer perspective on the situation.
Mehdi Hosseini, Analyst
Great. Thanks for the detail and a quick follow-up. As I think about beyond 2021 and your operating margin, could there be a scenario where your key customers would share some of the development costs associated with High-NA similar to what happened to EUV almost a decade ago, so that could also help drive overall operating margin to above 33%? Thank you.
Peter Wennink, CEO
I don't think that's likely because it's not necessary. Looking back nearly a decade, our R&D expense at that time was €600 million per year. When you consider the size of the EUV program then, the total cost of the entire Low-NA EUV program would have been greater than the High-NA program if we had all ceased our efforts. The relative effort to bring EUV to fruition was so significant that it would have imposed a considerable financial burden on ASML's profit and loss statement, which we could not manage, though that’s not the case today. Regarding operating margins, it's more about the maturity of EUV, which will, of course, result in better performance tools that offer higher productivity and increased value from EUV service revenue, which will grow moving forward. Those factors are the key drivers for operating margin.
Roger Dassen, CFO
Yes, I agree. I mean, the gross margin components, I think, Peter, you just referenced them like it's the EUV ASP and as a result of that the EUV system gross margin and the EUV surplus gross margin, those are the major drivers on the margin side. And I think, also in the introduction we've been pretty clear on what the ambition is for OpEx, right, so 14% to 15% for R&D, and 4% for SG&A. And our longer term ambition at least on the R&D side is to try and model that back to around 30% over time. I think that's what we stated earlier.
Peter Wennink, CEO
Yes.
Mehdi Hosseini, Analyst
Thanks much.
Operator, Operator
Thank you. And our next question comes from the line of Pierre Ferragu of New Street Research. Please go ahead. Your line is open.
Pierre Ferragu, Analyst
Hey, thank you. Can you hear me right?
Peter Wennink, CEO
Very well. Good afternoon, Pierre.
Pierre Ferragu, Analyst
Good afternoon, Peter. Thank you for the information on how we are increasing capacity for this year and next year; that’s very clear. My question is more about the next 2 to 3 years. From my visit in Veldhoven, I understand that you’re set up to produce 60 EUV tools a year and 20 High-NA EUV tools. However, when I estimate the demand for the next 3 to 4 years, it seems like this capacity might be limited, and you could actually require more. I would like to hear your thoughts on whether it makes sense to consider increasing your overall capacity in the long term and what potential challenges we might face in doing so. I have a quick follow-up.
Peter Wennink, CEO
Yes, it's a very good question, Pierre, and I think it's a long-term strategic question. Let me try to answer it this way. When I talked about the three trends that the company will have to face in terms of demand cycles, that's of course the shorter term, which you could say, it's a catch up on the lower level of investments we saw last year because of the pandemic, which are catching up this year, and I think throughout next year, or in any case as a part of next year, then the sector growth trend, which we have underestimated. I think you can go back to the Capital Markets Day '16 and '18, I don't think we at that point in time anticipated the strength of the DUV market that we see today. And that's the third trend, which is basically the drive of technological sovereignty by different countries, different governments. Those are all at this moment in time, those will be the drivers. But it's also difficult to really get a very clear view on this. So your question is, taking that into consideration, should you folks be looking at increasing your capacity beyond the 60, the magical 60 that we've always mentioned? Good question. And I think this is actually the work that we're doing today. We're looking at what we need to do this. So now the lead time, now if you have to build a complete new factory. Let's take you need to build a new optics factory, then the lead time is 2 to 3 years because you need to build the factory, you need to procure the machines. And by the way when it comes to optics manufacturing, you have to build those machines yourself because they're not available. So that will be longer, but lot of ways to increase capacity and as to cycle time reduction that's through process optimization. And so it's this complexity of measures that we can take to see how we can drive the total capacity up, which by the way, all have lead times that are beyond the 55 units that we're planning for next year, which doesn't mean that it couldn't be higher in '23 and '24. But that's the work that we need to do today, which by the way we are doing, yes.
Pierre Ferragu, Analyst
That makes sense. I have a quick follow-up related to that. You mentioned the geopolitical situation, and when I consider the overall event chain and how much it relies on what's happening in Veldhoven where you've assembled your tools, it's concerning. This is a vulnerability for the global value chain, and it may be causing some anxiety for your clients and governments. Are you having discussions with others about diversifying your approach and creating supplies that would be less reliant on the Netherlands?
Peter Wennink, CEO
Yes, I think the current situation is not very different from what it was five years ago. You could argue that people's perceptions have changed, but that has always been the case. The same can be said for our customers, who are often concentrated in specific areas, similar to some of our peers who produce only a couple of hundred tools annually from one or two locations. The concentration of the semiconductor industry in various geographical regions is now prompting governments to take notice. This has never been a concern before, but it is becoming one as the nearly seamless ecosystem established across many borders faces potential disruptions. It’s important to note that this has always been the reality, and particularly in the last five years, there has been a high concentration of advanced technologies throughout the value chain. However, due to the current geopolitical landscape, people are becoming more aware and are now considering sales sufficiency levels that were not on anyone's radar just a couple of years ago.
Pierre Ferragu, Analyst
Thanks, Peter.
Operator, Operator
Thank you. And our next question comes from the line of Joe Quatrochi of Wells Fargo. Please go ahead. Your line is open.
Joe Quatrochi, Analyst
Thank you for taking my question. I wanted to ask for clarification on the updated guidance for 2021. Last quarter, you mentioned there might be some potential upside from domestic China, but we haven't observed any changes in the geopolitical situation or export controls. Could you clarify whether that upside is now included? If it is, how much are we looking at?
Roger Dassen, CFO
Yes, I think it's fair to say that upside is now included in the numbers that we've given. So it's clear. And Peter went through that also in the presentation at the beginning of this call that we've revised upwards, if you like the outlook for the full year. And further down into the year, we've now said, this is how we look at the full year. Of course, still expecting that the regulatory situation remains a little bit the way it is today. And therefore what previously was upside, and the way we talked about it, upside has now really been included in that number. Remember, last time, the expectation that we gave was that could be about €600 million upside coming from China. And that number is now included in the, let's say, close to €18 billion that we now talked about.
Peter Wennink, CEO
If you consider the risk profile, you might observe that if the regulatory environment changes and we are unable to ship to China, the current market situation is significantly different than it was three months ago, and in that case, we would redirect those systems elsewhere.
Joe Quatrochi, Analyst
Great. As a follow-up, I want to confirm my understanding of the two systems you are repurchasing from a customer on the EUV side, which you plan to ship this year. If that’s correct, is that included in the 30% EUV revenue growth?
Roger Dassen, CFO
Yes, it is. Yes.
Peter Wennink, CEO
So when you …
Roger Dassen, CFO
You have a reversal in this quarter, and you will see it come back in the subsequent quarters. For the full year, it's a - it's neutral, right. It's minus two and plus 2.
Joe Quatrochi, Analyst
Perfect. Thank you.
Roger Dassen, CFO
You’re welcome.
Operator, Operator
Thank you. And our next question comes from the line of Aleksander Peterc of Societe Generale. Please go ahead. Your line is open.
Aleksander Peterc, Analyst
Yes. Hi, good afternoon, and thanks for taking the question. So you gave us a pretty clear outlook on EUV for '22. I just wondered about the longevity of this stronger cycle that you see emerging and try it because that's where all of the upgrade today is coming through for '21. So I'm just wondering is all of that then carrying into '22 as well. And then just very quickly, if you could also provide a quick comment on ASPs, they were again very strong this quarter specifically the puts and takes there. Thanks a lot.
Peter Wennink, CEO
Yes, I believe this is an extension of what we discussed in the past two quarters. It is mainly driven by DRAM. However, we also anticipate that 3D-NAND will follow suit. What we observe is that it will align with the utilization of our tools in the field. For this quarter, the next quarter, and likely most of this year, the primary driver will be DRAM.
Roger Dassen, CFO
Yes, regarding the average selling price for EUV, it’s notable. You are correct. In this quarter, Q1, we anticipate an average selling price for EUV of approximately 160. This is partly due to configuration, which we've previously discussed. Over the last three quarters, we have been consistently seeing an average selling price around 145. This quarter, it has increased a bit for another reason that I'll explain shortly. Over the past year, we have been positively surprised by the options ordered for the tool, resulting in a richer configuration than expected. Consequently, we are consistently observing the average selling price range above the 130 we mentioned before, with consistent figures of 145 or higher. The increase this year can be attributed to a few accounting factors, including aspects related to VPAs that we’ve addressed in the past. This explains why the figure is 160 instead of 145. However, looking at the configurations we’ve observed on the tools over the past couple of quarters, the 145 anchor point for the average selling price for EUV likely remains appropriate. I would also note that this is about the last quarter where we are seeing a significant number of fees impacting revenue.
Aleksander Peterc, Analyst
Thank you.
Operator, Operator
Thank you. And our next question comes from the line of David Mulholland of UBS. Please go ahead. Your line is open.
David Mulholland, Analyst
Thank you for taking the questions. I want to revisit the increase in EUV capacity and the shift to a 55 tool capacity for next year. There were some changes made last year that limited what could have been higher shipments this year, and some of this impact is likely to be felt next year. In your conversations with customers, Peter, it's clear that there is a strong cyclical demand in the industry right now that is driving the need for increased capacity. However, customers are looking at EUVs with a long-term perspective, typically planning 18 months ahead rather than just 6 months. How do you believe their assumptions have evolved, leading to this demand? Is it mainly due to their confidence in the adoption of EUV technology in higher layers, or does the current push for larger nodes also contribute to the need for more capacity at this time?
Peter Wennink, CEO
I think we're observing a combination of factors. A comment from the CEO of one of our major customers highlighted that they plan to double the number of EUV layers in their next node. This reflects a trend we’re experiencing because the benefits of EUV extend beyond just economic cost per layer, as it helps eliminate multiple patterning. It also involves electrical characteristics and process simplicity, including narrower widths. There are many additional factors that encourage the adoption of EUV. Therefore, we're witnessing an increase in layer counts for both Memory and Logic. Furthermore, discussions with customers indicate a move towards larger nodes, which aligns with the secular trend I previously mentioned. The third trend, relating to technological sovereignty, will also persist over time, considering it typically takes 2 to 3 years to establish and operationalize a semiconductor factory. Hence, there's a combination of larger nodes, strategic investments, and higher layer counts that need to be accounted for. Some of these changes have been anticipated, raising questions about our capacity needs beyond 2022. If needed, increasing capacity would likely result from process optimization, cycle time improvements, different work schedules, and possibly additional square meters. So, it's all of these factors together.
David Mulholland, Analyst
And just one quick follow-up, obviously, from a financial perspective, at some point in the near future, you need to start building those tools through the supply chain, given the lead times. Are you requiring customers to place deposits and make the financial commitments that you've been starting to make before any of those tools get built? Or is there an element still this year, where you're going ahead and starting production before you've had firm deposit associated orders from the customer?
Roger Dassen, CFO
Yes, David, the policy hasn't changed there. So that means that when a customer has put in a PO, a down payment is required. And I think we mentioned in the past that the amount of the PO is a little bit dependent on the moment where the order is being placed, or the order is being placed nicely in line with the lead time, then the down payment is lower than when it's placed a little bit later than that. But you also know that the PO by itself is a bit of a non-event for us because we work so closely with the customer that we sort of understand what they're doing what they want and when they need it. So the PO is a bit of a non-event for us. But yes, the short answer is absolutely there will be down payments placed at the moment of the PO.
David Mulholland, Analyst
Great. Thanks.
Operator, Operator
Thank you. And our next question comes from the line of C.J. Muse at Evercore ISI. Please go ahead. Your line is open.
C.J. Muse, Analyst
Yes, good afternoon, good morning. Thank you for taking the question. I guess first question, Peter, can you speak to the sustainability of Memory? I think the headline above 50% might be a bit concerning. However, if I think about EUV in there as well as a strong pick up in EUV in both e-beam inspection voltage and contrast imaging. It certainly looks like Memory ex those two things is tracking more like 20%, 25%. So we'd love to hear your thoughts on the moving parts there, and how to think about sustainability into '22?
Peter Wennink, CEO
Yes, I think it's not unexpected for this year. If you look back at our conference calls over the last two quarters, we noted a recovery in DRAM, particularly three months ago when I mentioned we had a decent shipment in Q4 of last year, which would be utilized in production in Q1. With a projected bit growth of 20% this year, our estimates suggest that we will quickly reach the maximum output capacity of our DRAM customers, necessitating additional capacity. This is just the beginning, and it seems likely to extend into next year. In the Memory business, there tends to be occasional periods of overcapacity and undercapacity. I can't predict how long these will last, but I believe the strong demand in Logic also requires Memory. It will be interesting to see how rapidly Memory capacity is added throughout this year and early next year, along with the underlying bit block percentages. While Memory is generally more cyclical than Logic, I currently don't see any indications that we are approaching overcapacity. In fact, we're just starting.
C.J. Muse, Analyst
Very helpful. And then just a follow-up question on the DUV side of things. I think you guys have talked about growing your non-EUV tool business by about 40%. So that's roughly $7.7 billion this year. Is there a way to frame how much capacity you're planning to add on the non-EUV side relative to that $7.7 billion for us to kind of gauge what you're capable of into '22 and beyond?
Peter Wennink, CEO
Yes, I believe we would estimate it to be over 8, around 8.2. This would be pushing our production capacity for the year. If we had more capacity, we could likely produce more. To address your question, as I mentioned in my prepared remarks, we are focusing on increasing our DUV capacity across dry, mature, and emerging areas. This increase will not be just 5%; it will be in the double digits. However, further analysis is required to determine what needs to be done, whether that involves optimization, workforce additions, or capacity expansion in terms of factory space. These considerations are currently under review together with our supply chain. It's not solely about our capabilities; it's largely dependent on the supply chain. I emphasize this because we recognize the need for additional capacity, driven by the trends I mentioned earlier. So yes, achieving 40% would bring us just over 8; you might see 7.7 if you're being more conservative, but directionally, it's accurate.
C.J. Muse, Analyst
Great. Thanks so much.
Operator, Operator
Thank you. And our next question comes from the line of Andrew Gardiner at Barclays. Please go ahead. Your line is open.
Andrew Gardiner, Analyst
Good afternoon. Thank you for the question. Peter, I want to ask about the capacity planning issues you’ve discussed. Considering the recent changes from several of your lead customers and their public announcements over the last few months, I’m curious if you are reevaluating the need for additional capacity expansion at your facility or within the supply chain. Are customers indicating they need it sooner rather than later? It seems that way, yet you have considerable lead times, especially for EUV and somewhat less so for DUV, when it comes to expanding this capacity. Are you gaining better insight into what your customers will require in the next three to five years to help you confidently make such decisions?
Peter Wennink, CEO
Yes, that's a good question. Given your experience, you know that when we underinvest, there tends to be a quick reaction, as is usually the case. This situation represents a short-term correction due to current planning missteps. Customers are aware that our capacity and manufacturing lead times are lengthy, and they do share their long-term visions, although not extending five years into the future—two to three years is more realistic. For 2022 and 2023, we have engaged in serious discussions about their expansion needs, particularly regarding anticipated capacity increases related to their tape-outs on N5 and N3. This is not baseless speculation but rather solid conversations with customers about their design requirements, which are increasingly driven by high-performance computing, AI, and digital transitions. Therefore, we have greater clarity now, and our planning visibility has improved. We've requested the supply chain to align with this deeper level of discussion, although it's going to be costly since capacity doesn't come cheaply. Our customers understand this and have been quite transparent with the public regarding their plans, which are well-considered based on the feedback they receive from their own customers. This is why I mention these three trends as foundational for our visibility. However, we must be cautious about potential underestimations and overestimations when determining our needs. Over the past three to four months, the acceleration in this area has given us and our suppliers some time to figure out the right approach.
Andrew Gardiner, Analyst
Thank you. Thank you, Peter, for that insight. Even if I think you did call me old at the outset there, I still appreciate the color.
Peter Wennink, CEO
It's all relative. From my perspective, you're very young.
Operator, Operator
Thank you. Our next question comes from the line of Krish Sankar of Cowen and Co. Please go ahead. Your line is open.
Krish Sankar, Analyst
Yes. Hi. Thanks for taking my question, Peter, and also been around quite a bit. So let me ask you two quick questions. Clearly a nice jump in EUV bookings in the March quarter. Can you give some color on how that EUV bookings are trending for the current quarter? And what is your yearly backlog in terms of units? And then I had a follow-up.
Roger Dassen, CFO
Yes, in terms of order book, the current backlog is €7.4 billion for EUV. So that's pretty strong, and obviously also driven by significant intake in the last quarter. I'm not going to comment specifically on this quarter. But, in general, just listening to the commentary that we made on our expectations for next year, it's pretty clear that also for the next quarter, we do expect a healthy order intake for EUV, because at this stage €7.4 billion, and if you do the math, what you think system business is going to be next year, if you translate that at the 55 capacity that we've been talking about. It's pretty clear that we're still looking at the significant order intake expected for this quarter and for the next quarter.
Krish Sankar, Analyst
Got it. Well, that’s very helpful, Roger. And just as a follow-up, Peter, I know you gave some color on like the Memory outlook for this year. Can you just give little more insight in terms of how to think between DRAM and NAND in the context of your Memory growth of 50% for this year?
Peter Wennink, CEO
Yes, I think it's an extension of what we discussed in the previous two quarters, primarily driven by DRAM. However, we also anticipate that 3D-NAND will follow suit. What we observe is that it will align with the utilization of our tools in the field. This quarter, next quarter, and for most of this year, it will be primarily driven by DRAM.
Operator, Operator
Thank you. And our next question comes from the line of Alex Duval at Goldman Sachs. Please go ahead. Your line is open.
Alex Duval, Analyst
Yes. Hi. Good afternoon. Congratulations on the results. Just had a quick question on EUV gross margin. So you expected to get through that gross margins at the end this year to be a good gross margin levels. I wondered if you could just talk through the improvements as we go through the year. And you referenced related to this, that you will see higher ASP related to how people are on the C model. Just wondering the extent that we see better than expected ASPs of the D model could improve gross margin for EUV. Thanks.
Roger Dassen, CFO
Yes, Alex, at first it was a bit difficult to follow. Your question seems to be about how we foresee the gross margin evolving for EUV. As we mentioned earlier, we anticipate that in the second half, with the launch of the D model, the gross margin for EUV systems will align with our corporate gross margin. I can confirm that this is indeed the case. You're correct that we noticed a slight adjustment in the average selling price for the C model. We had been discussing around 130, but as I noted, the configuration has proven to be richer than we earlier expected. It’s reasonable to expect a 10% to 15% increase for the D model compared to the C model. Taking the approximately 145 for the C model as a basis, a low 10% increase in average selling price is what you should consider for your calculations. Additionally, if the results exceed expectations, that will also positively impact gross margins.
Peter Wennink, CEO
Yes, although the D model has also somewhat higher costs. So it's a 100% to the bottom line, we have some higher cost on the optics and also other parts, correct. But it will help.
Alex Duval, Analyst
Great. Thanks.
Operator, Operator
Thank you. And our next question comes from the line of Amit Harchandani of Citi. Please go ahead. Your line is open.
Amit Harchandani, Analyst
Thank you. Hello, everyone. Amit Harchandani from Citi. My first question is on the topic of DUV, if I try to collate all the data points you've shared with us, is it fair for me to say you would expect DUV sales to be up year-on-year in 2022, given that you're just getting started in Memory and cyclicalities can persist into 2022? And as a follow-up to that, if I may, you talked about building capacity for DUV. Your guidance suggests that you would expect this €8 billion to be exceeded? Or basically even a higher contribution from DUV? If not in 2022, then certainly beyond 2022. Thank you.
Peter Wennink, CEO
Yes, Amit, I hear you. Regarding your question about year-on-year DUV sales, I’m not certain about the specific year you’re referring to, but our plans to increase DUV capacity indicate that we expect sales to rise. While I can’t pinpoint a specific year, we have reassessed our need for DUV capacity in the medium to long term. Increasing capacity is a long-term strategy, not just a one-year initiative. Therefore, given that we anticipate reaching around €8 billion in DUV this year, we do expect sales to grow, as there would be no need to enhance capacity otherwise, since we could manage with our current resources.
Amit Harchandani, Analyst
Thank you for clarifying. Regarding geopolitics, there has been a lot of discussion. From what you've indicated today, it seems you view the overall geopolitical landscape as a net positive, although there may be some downside risks related to China that could be balanced by potential gains in Europe and the U.S. Is that a correct understanding? More generally, what is your current perspective compared to what you communicated at the end of January? Thank you.
Peter Wennink, CEO
Yes, I think we are where we are because we've completed Q1 and are now in Q2. We have accounted for the €600 million upside in our estimates. However, we cannot control the geopolitical situation and legislative developments. Given the current market conditions, if some of that €600 million is lost due to geopolitical barriers, the demand is strong enough that we will redirect those systems elsewhere. When considering how this impacts shipments to China compared to the long-term geopolitical effects, it mainly comes down to timing. The immediate impact could be short-term this year, while the orders represent a long-term perspective, as the decision on where to establish a new fabrication plant takes about two to three years. So, the addition of capacity will primarily come into play around 2024 and 2025, meaning that it all hinges on different timelines.
Amit Harchandani, Analyst
Thank you, Peter.
Skip Miller, Vice President of Investor Relations
We have time for one last quick question. If you're unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations Department with your inquiry. Operator, may we have the last caller, please.
Operator, Operator
Thank you. That is from the line of Didier Scemama of Bank of America. Please go ahead. Your line is open.
Didier Scemama, Analyst
Oh, thank you. Thanks for squeezing me in and good afternoon, gentlemen. I think the most important question was just asked and answered. So thank you. I wanted to ask you a question about Installed Base Management for EUV. Peter, if you would like to really share with us what you think the sort of revenues could be for EUV Installed Base this year? And how you're thinking about the slope of growth over the coming 5 years, the sort of things that we have a feel for the change in the mix towards the sort of more recurring revenues in Installed Base, that would be great. Thank you.
Roger Dassen, CFO
Yes. So on the more recurring side, I think what we've said in the past is that, the way to model that for EUV is to take the ASP as a tool and take about 6% for that. And that's when the tool is up and running at its envisaged capacity, then you would have 6% of the ASP as the recurring revenue for service and maintenance for that tool. So that excludes upgrades, but just for the regular service and maintenance 6% of the ASP is what you would see there. So again, the assumption do needs to be up and running as the envisaged capacity, and it should be out of warranty. As long as the tool is in warranty, the number is a bit lower. So that's really the way to model it. As it comes to upgrades, that's a little bit more difficult because upgrades is lumpy, upgrades is dependent on what the customer wants in terms of productivity gains, what they want to make available to us in terms of the machine time. So that's a little bit harder to predict. But at least on the regular service and maintenance side, this is the way to model the 6% of the ASP, once the tool is up and running and out of warranty.
Didier Scemama, Analyst
All right, thank you.
Peter Wennink, CEO
All right. Thank you.
Roger Dassen, CFO
Thank you.
Skip Miller, Vice President of Investor Relations
Before we sign off, I’d like to remind you that our Investor Day will be September 29, 2021. The event is currently planned to be held in London. We moved the date from June in hopes we can have a face-to-face meeting at the time. But of course, this will depend on the progress against the virus. More details will follow in due time, and we do hope you'll be able to join us. Now on behalf of ASML, I'd like to thank you all for joining us today. Operator, if you could formally conclude the call and I'd appreciate it. Thank you.
Operator, Operator
Thank you. This concludes the ASML 2021 first quarter financial results conference call. Thank you for participating. You may now disconnect.