Earnings Call Transcript
ASML HOLDING NV (ASML)
Earnings Call Transcript - ASML Q3 2020
Operator, Operator
Thank you for joining us. Welcome to the ASML 2020 Third Quarter Financial Results Conference Call on October 14, 2020. During the introduction, all participants will remain in listen-only mode. After ASML's introduction, there will be a chance to ask questions. I will now open the question-and-answer queue. I would like to turn the call over to Mr. Skip Miller. Please proceed.
Skip Miller, Vice President of Investor Relations
Yeah. 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 2020 third quarter results. The length of this call will be 30 to 60 minutes, and questions will be taken in the order 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, and thank you for joining us for our Q3 2020 results conference call. I hope all of you and your families are healthy and safe. Before we begin the Q&A session, Roger and I would like to provide you with an overview and some commentary on the third quarter, as well as provide our view on the coming quarters. And Roger will start with a review of our Q3 financial performance with 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 regime. Roger?
Roger Dassen, CFO
Thank you, Peter. Welcome everyone. I will first review the third quarter financial results and then provide guidance on the fourth quarter of 2020. Net sales came in above guidance at €4 billion, primarily due to additional EUV system revenue. We shipped 10 EUV systems and recognized revenue from 14 systems this quarter. For the four systems that shipped in Q2 but did not receive factory acceptance testing before shipment, we were able to complete customer site acceptance tests and recognize revenue this quarter, bringing the total to 14 EUV revenue systems in Q3. EUV system revenue this quarter was 66% of total system revenue, which is the first time EUV was higher than DPV system revenue. This further confirms EUV has entered the realm of high-value manufacturing and is an integral part of our core operational activities. Net system sales of €3.1 billion were again more weighted towards Logic at 79% with the remaining 21% from Memory. The strength in Logic is driven by the high EUV revenues. Installed base management sales for the quarter came in at €862 million, showing continued strength in our service and field option business from the beginning of the year. Gross Margin for the quarter was 47.5%, coming in at the midpoint of our guidance, which is a good outcome considering the significant EUV revenue. On operating expenses, R&D expenses came in at €534 million and SG&A expenses at €132 million, which was slightly better than guided. Net income in Q3 was €1.061 million, representing 26.8% of net sales, resulting in an NPS of €2.54. Turning to the balance sheet, we ended the third quarter with cash, cash equivalents, and short-term investments at a level of €4.4 billion, which is the same level as last quarter. Moving to the order book, Q3 system bookings came in at €2.9 billion, including €595 million for EUV systems. We saw some EUV demand reduction due to a delay in customer’s node timing, resulting in a net booking of four EUV systems. Order intake was largely driven by Logic with 86% of bookings and Memory remaining at 14%. With that, I would like to turn to our expectations for the fourth quarter of 2020. We expect Q4 total net sales of between €3.6 billion and €3.8 billion. We expect our Q4 installed base management sales to be around €900 million, which is driven by strong demand for field upgrades and growing service revenue with an increase in contribution from EUV service. Gross margin for Q4 is expected to be around 50%, which is significantly higher than Q3, driven by higher immersion volume and improved DPV product mix. The expected R&D expenses for Q4 are €550 million, and SG&A is expected to come in at €140 million. Our estimated 2020 annualized effective tax rate is still expected to be around 14%. Finally, I would like to talk about capital allocation and working capital. As mentioned last quarter, we are in a transition period with customer contracts as we work to move towards new contracts with improved payment terms. We do see some of these new contracts starting to materialize and expect to improve our free cash flow generation in the coming quarters. The interim dividends over 2020 will be €1.20 per ordinary share. The ex-dividend dates, as well as the fixing dates for the euro-U.S. dollar conversion, will be November 2, 2020, and the record date will be November 3, 2020. The dividend will be made payable on November 13, 2020. Conditions in the COVID environment have improved around our ability to operate and our assessment of our supply chain. Taking this into account along with our improving free cash flow generation, we will resume executing share buybacks this week in line with the plans that we have communicated earlier this year for a total of €6 billion over three years. 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 with €4 billion in revenue and good profitability, driven by strong growth in Logic. We expect Q4 to be a solid finish to the year in both sales and profitability. And in spite of added macro uncertainty in the first half of the year due to COVID-19, our view on growth this year is largely unchanged from what we believed at the start of the year. This is a clear reflection of our customers' drive to innovate and continue to invest in future technology nodes. In Logic, customers continue to see strong demand for advanced nodes in support of the build of the digital infrastructure, which includes secular growth drivers such as 5G, AI, and high-performance computing. And as we’re still in the early stages of this digital transformation, we expect Logic demand to remain healthy and continue to drive demand for our products. In Memory, customers are continuing to indicate that they’re seeing healthy demand in data centers, with improving demand for consumer electronics. With customers' expectations for higher bit growth next year and taking into account the longer lead times and qualification schedules for advanced lithography, we are starting to see a recovery in lithography demand for DRAM, with strong growth expected in Q4 this year. Based on a continuation of this improving end market environment, we expect this Memory recovery to continue into next year. Sales to China continue to grow and accounted for 21% of our system’s revenue this quarter. We expect sales to our domestic Chinese customers to grow to above €1 billion this year, which includes sales to both Logic and Memory customers in China, with a mix skew toward Logic this year, but trending to higher memory sales next year. Regarding U.S. export rules to China, we are aware of the requirements set by the U.S. Commerce Department for specific companies in China, and as such, according to the current regulation, ASML can continue to ship DPV lithography systems from the Netherlands. ASML requires a U.S. export license for systems or parts that are shipped directly from the U.S. to customers affected by the rules. While it is not our policy to comment on individual customers, we aim to serve and support all of our customers around the world to the best of our abilities while being, of course, compliant with laws and regulations set by the jurisdictions where we operate. On our installed base business, we still expect significant growth this year. Through the first three quarters, we realized revenue of around €2.6 billion, and as Roger mentioned, we expect another solid quarter in Q4. Service business will continue to scale as our installed base grows, with increasing contribution from EUV service revenue as these systems run more wafers in volume manufacturing. We expect significant demand for upgrades as customers utilize upgrades to increase capacity and improve imaging and overlay performance required on future nodes. On EUV, although our customers are still climbing the maturity curve, we continue to see increasing customer confidence in the technology, which is translating into expanding layer counts in Logic, initial deployment of EUV in Memory, and increasing service revenue. With 10 shipments this quarter, we have shipped 23 EUV systems year-to-date. With the completion of customer site acceptance tests and revenue recognition of the four systems shipped last quarter, we achieved a remarkable €2 billion of EUV system revenue from 14 systems in Q3. We’re still planning to manufacture 35 systems this year, but due to the base of customer node ramps and their fab readiness, a few systems may end up being shipped early next year. Despite this potential shift of shipments to early next year, we’re still targeting EUV revenue to approach €4.5 billion this year. We continue to drive profitability of our EUV systems and service business. We are on track to achieve at least a 40% system gross margin, and we started to break even on service business this quarter. We will continue to drive margin improvement in both systems and service costs, through cost reductions and delivering more value. And as we said before, we expect EUV margins to reach margins comparable to DPV margins over the next two to three years. We’re on track with our EUV cycle time reduction plan to get to 20 weeks by the end of the year, enabling a capacity of 45 to 50 systems. With respect to demand for next year, we currently have an EUV systems backlog of €6.2 billion exiting Q3, with around 65% of this backlog planned for shipment next year. While we expect more orders in Q4, we did see some EUV demand reduction for next year due to a delay in customer node timing, which resulted in net bookings of four systems in the quarter. Although there is clear uncertainty due to the current macro environment, as well as the exact timing slope of RAM and the ultimate size of the customer nodes, we currently expect EUV system revenue growth of around 20% next year.
Roger Dassen, CFO
In our DPV business, we qualified the first NXT:2050i in Q3, which shipped early Q4. This immersion system is based on a new version of the NXT platform where the reticle stage, the wafer stage, the projection lens, and the exposure laser all contain performance enhancements. With these innovations, the systems deliver increased customer value via improved performance in overlay and productivity, and are therefore critical in support of their next node introductions. To summarize 2020, in spite of macroeconomic uncertainty in the first half of the year, we see the outlook playing out quite similarly to what we saw at the start of the year. We expect to end another strong year in Logic, Memory growth of over 30%, and significant growth of over 20% in our installed base business. With this, we expect double-digit growth in both sales and profitability leading to estimated revenue of at least €13.3 billion. As we look to 2021, it’s too early to provide any detailed guidance, as we are working with customers to determine demand plans going forward.
Peter Wennink, CEO
While there are still significant uncertainties, we expect another year of low double-digit growth, largely driven by our current view of expected EUV system revenue growth of around 20%. There are a number of elements that will determine the degree of growth and uncertainty, of course. First, is the macro environment, because nobody can predict the global economic impact of COVID and how this will impact the end markets that we serve. On top of this, there’s also the geopolitical environment, predominantly the U.S.-China dynamics that create additional uncertainty. In Memory, demand will depend on bit growth next year. Customers seem to broadly believe the inventory issues will be normalized by the end of the year and expect stronger bit growth in 2021. We currently see stronger litho demand for Memory next year, which is consistent with customers' comments. However, the degree of growth will of course depend on continued technology transitions and how much capacity will be added. In DRAM specifically, we see support for this expectation from the high utilization of our litho systems in the field at the moment. While we expect to see more EUV systems go to DRAM next year in support of the 1 alpha node, Memory is still a key driver for our DPV demand. In Logic, we expect demand will remain healthy. However, final demand will depend on timing and the slope of node ramps driven by the end demand curves. Customers are continuously recalibrating their roadmaps leading to changes in their shipping requirements, which will likely have an impact on our demand next year. The other aspect of demand timing is around the slope of the node ramps and this will be determined by how many wafers will move into each of the 5G nodes and AI, as I mentioned before, a fraction of the health of the end demand next year. Lastly, on our installed base business, we expect continued growth, but the real growth will be more dependent on upgrade businesses as the service business is pretty predictable and grows with the installed base. In summary, there are a lot of dynamics at play, both at the macro level, geopolitical level, as well as market-specific circumstances. However, the ongoing transformation of the digital infrastructure, along with secular end market drivers, such as 5G, AI, and high-performance computing, will continue to fuel demand for advanced process nodes, both in Logic and Memory, which drives the demand for our products. Therefore, although we are currently going through a period of near-term uncertainty, the long-term demand drivers only increase our confidence in our future growth outlook towards 2025. With that, we’ll be happy to take your questions.
Skip Miller, Vice President of Investor Relations
Thank you, Roger and Peter. 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 you have your final instructions and then the first question, please.
Operator, Operator
Our first question is from Mr. Krish Sankar.
Krish Sankar, Analyst
Yeah. Hi. It’s Krish from Cowen. Thanks for taking my question. I have two of them. First one, Peter, on the 20% EUV growth for next year in terms of revenue, what does it imply for units? Is it around 40%? I’m just trying to figure out what the unit number would be for next year for EUV and then I had a follow-up.
Peter Wennink, CEO
Yes, Krish, it's important to recognize that we frequently receive inquiries about unit numbers. Likewise, questions often arise regarding the reasons behind the changes in average selling prices (ASP). For example, last quarter we reported €145 million, which stemmed from the specific configuration sets and fab upgrades included in our shipments. The ASP is significant because when you multiply the number of units by the ASP, you arrive at the euro sales figure, which is why we focus on presenting that number. The actual unit shipments rely on the configuration and the specifications of the setups we provide. We're not providing guidance on unit numbers; instead, we project a euro sales figure that we expect to see a 20% increase from this year, reaching approximately €4.5 billion. Therefore, we anticipate at least a 20% growth. Based on our analysis of demand, we've managed the risks associated with adjustments to node timings and recalibrations, leading us to this euro estimate. Moving forward, we plan to maintain this approach as we do with DPV, focusing on total company sales without disclosing the number of units sold but rather communicating our euro sales expectations.
Krish Sankar, Analyst
Got it. Peter, that makes sense. Thanks for that. And then as a follow-up on the DRAM side, clearly, you’re seeing continuing strength from DRAM for DPV. There were some concerns in the marketplace that the DRAM makers might scale back some of their near-term CapEx because of Huawei going away. Have you guys seen any of this nuance or just because of your long lead times you’re kind of agnostic to such noise?
Peter Wennink, CEO
I believe we have a question regarding the potential impact of Huawei no longer being a key customer for our clients. Even if Huawei ceases selling smartphones or digital infrastructure, other companies will step in to fill that gap. Therefore, I do not see this as a significant issue, but rather as a temporary disruption. While demand may decrease and shift to other suppliers, this transition will take time. I don’t view this as a long-term concern. We need to assess the current situation. Our DRAM customers are providing us with insights, and our tool utilization rates support this. Utilization has risen gradually throughout the year. Furthermore, our customers indicate that they expect inventory levels to stabilize by year-end. Given our current utilization is close to maximum capacity, it is reasonable to anticipate that they will require more capacity next year, particularly considering the demand from the server sector and the growth in consumer electronics. Overall, this leads us to feel more optimistic alongside our customers about the DRAM business in the future.
Krish Sankar, Analyst
Thank you. That’s very informative and helpful. Thank you.
Operator, Operator
Our next question is from Mr. Joe Quatrochi. Please state your company name followed by your question.
Joe Quatrochi, Analyst
Yeah. Thanks. It’s Joe Quatrochi from Wells Fargo. Just back on the 20% EUV growth for next year, can you help us understand if that assumes a few tools slip from 2020 and are shipped actually in early 2021? And then, secondly on that, is there a scenario that as we get into January and you get better visibility, there are actually some upside drivers of that 20% growth, excluding the systems that could potentially fall from 2020 into 2021?
Peter Wennink, CEO
That's a great question. As we stated in 2020, we are maintaining our estimate of around €4.5 billion. The guidance reflects over 20% growth from that amount, which includes all shipments that transition from 2020 into 2021. You can infer from this that our forecast for average selling price at the start of the year, which relates to the richness of the configuration, has turned out better than we expected. We've had two upgrades. This situation carries over into next year, which is why I mentioned that unit numbers are not as crucial because the average selling price can vary significantly based on configuration. We are guiding you in euros, but this will carry into 2021. Regarding your second question about potential upsides, we've clearly adjusted our demand outlook based on the recalibration within our customer base concerning node timing and ramp-up. This adjustment occurs first, as we are aware of it, but you need to view it as interconnected: what decreases on one side increases on the other. While this typically happens simultaneously in a closed system, there is a time lag between when you lower expectations and when you see demand rising later. This is the potential upside that we have not included in our 20%. We've gathered all current information, factoring in all uncertainties and node calibrations, and this is what we are qualitatively seeing today. It's evident that there is potential for upside as well, because, as I mentioned, what decreases can also increase somewhere else, albeit with a time difference. That’s why we are anticipating and preparing for increased capacity in 2021, targeting 40 to 45 systems, and perhaps even 45 to 50 systems. We are organizing our supply chain accordingly. So yes, there could be upside based on the reasons I've outlined, and we are ready for it.
Joe Quatrochi, Analyst
Perfect. That’s helpful. And then just a quick follow-up. On the low double-digit revenue growth for next year, how do we think about OpEx growth?
Roger Dassen, CFO
OpEx growth, particularly on the SG&A side, is expected to develop similarly to what we've observed in the past quarter, with no significant increase anticipated. On the R&D side, we are significantly ramping up our efforts across various programs, including High-NA and EUV, and we are also focusing on the successor to the D tool, which is expected to deliver tangible benefits for our customers. This will require substantial R&D investment, and there is still considerable work to be done on the DPV roadmap. We previously discussed adjustments to the numbers you've seen for this year due to salary increases. However, the overall program's scale is likely to be somewhat higher than initially projected. We are currently finalizing the budgets, so we will be able to provide more precise guidance in three months. It is reasonable to expect that the increase in the R&D budgets will exceed just the salary adjustments.
Joe Quatrochi, Analyst
Thank you.
Operator, Operator
Our next question is from Mr. Sandeep Deshpande. Please give your company name followed by your question.
Sandeep Deshpande, Analyst
Thank you for taking my question. I have a couple of topics to discuss. First, you've indicated some order delays and have reported net EUV order intake for the recent quarter. One of your customers has pushed out their order, but they could still place orders, as could other customers. Have you seen any developments in that area or do you expect to see any changes in the coming months? Additionally, can you meet short-term demand given that EUV tools have a 12-month lead time? My quick follow-up is regarding gross margin. You've mentioned a 20% revenue growth forecast for EUV into next year, which is positive. However, it seems that there may be some unit reductions due to the order pushout from one customer. What impact does this have on next year's gross margin for ASML in relation to achieving significantly improved EUV gross margins? Thank you.
Peter Wennink, CEO
You all have combined several questions into one, and we were somewhat prepared for that, so Roger will respond to that. Regarding the net four systems and whether all customers are engaging, it’s a situation that resembles communicating vessels. This is not like a retail scenario where if you can't find a product at store A, you simply go to store B. It's a bit more complicated. For us, we could likely manage it for our customers. If one customer's timing is off, it takes time for all of us to understand what that means and how to approach it. That's why I mentioned earlier that I see potential for growth due to this timing difference. Think of it like a balance between things declining and other aspects rising again. I definitely see that opportunity. This is also why we're preparing to ramp up our capacity. If we only tracked order intake and added a 12-month lead time, it wouldn’t be effective. We need to be ready for more because there’s a good possibility for upside next year. That 12-month lead time is more accurately around 18 months. If we don’t prepare adequately, we risk accepting deals with delivery times that fall within that 18-month period. So yes, we are getting ready for increased demand, and we’ll see if customers need it by 2021. I believe they might, but only time will reveal that. There’s a significant opportunity ahead.
Roger Dassen, CFO
Sandeep, regarding the gross margin for EUV, that's somewhat broader. You're correct about the 3600D showing an increase in gross margin. We have previously mentioned our expectation to approach the corporate gross margin with the 3600D. This suggests an improvement over the 40% target we set for this year, and we likely will exceed that target slightly. Consequently, we can anticipate an improvement in gross margin for next year. However, there's a downside with EUV as next year's gross margin will reflect some operating expenses for High-NA. Although we won't be selling High-NA next year, these expenses will contribute to the cost of sales and impact gross margin. We estimate this will result in approximately a 1% reduction compared to this year's gross margin, just to provide a rough idea. On the positive side, there will be an increase in the gross margin for the 3600D and the EUV service margin we've discussed, but there is that minor negative aspect to consider. Additionally, as we look at the DPV business for next year, the mix and the level of field upgrades will play a role in our performance. Overall, the target for Q4 and moving forward is to reach close to 50%. With the various factors at play, we expect to be in that range for the full year and the 50% target we have envisioned. That summarizes where we anticipate standing with all the factors I mentioned.
Sandeep Deshpande, Analyst
Thank you, Roger.
Operator, Operator
Our next question is from Mr. Andrew Gardiner. Please state your company name followed by your question.
Andrew Gardiner, Analyst
Good afternoon, everyone. I appreciate you taking my question. This is Andrew Gardiner from Barclays. I have another question regarding EUV. Specifically, I would like to understand the differences in customer plans for next year. While we recognize the adjustments needed for node migration, I am curious about the commitment to the technology, especially from those leading in deployment. Can you provide insights on the current layer count for EUV as we look towards the next node compared to previous expectations? Peter, you mentioned that customers are displaying increased confidence in the technology. Even though the ultimate capacity may take longer to ramp up in terms of wafers, are you noticing that the layer count is gradually increasing, particularly in Logic and similarly in Memory? I saw a report that one of your major customers visited this week to discuss EUV and their commitment. So, what are the current expectations for layer counts in DRAM? Thank you.
Peter Wennink, CEO
I believe that regarding layer counts, there is clear evidence that customers have fully adopted the technology, which offers numerous advantages, including reduced work in process and faster turnaround times in research and development. When we consider everything, we see that for N5 in Logic we’re exceeding 10 layers, and for N3, we expect to surpass 20, with this number gradually increasing. This is largely due to the advantages of single patterning, reducing reliance on multi-patterning DPV strategies, a trend that also applies to DRAM. While DRAM is lagging a bit in terms of high-volume manufacturing introduction compared to Logic, we observe similar movements there as well. The simplification of processes is what’s driving the increase in layers. In DRAM, we may start with one layer, but we clearly foresee strategic advancements, such as 1 alpha and beyond, adding five or six layers. However, this depends on how much productivity we can achieve with our tools. Customers are currently pushing us hard for increased wafer output. We are launching EUV tools designed for higher productivity and more wafers per hour. We’ve introduced the C version and are now developing the D version, along with plans for another version aimed at further productivity increases. In discussions with customers, the main request is for us to accelerate the maturity of the tools so that our EUV tools match the productivity, reliability, and uptime of our DPV tools. They understand it’s a long process, but they are asking for more EUV wafers consistently. This demand is driven by the substantial economic and technical advantages they see in adopting EUV, which will consequently boost layer counts in both Logic and DRAM. As I mentioned, N3 is already exceeding 20 layers, and this trend is only expected to grow.
Andrew Gardiner, Analyst
Thank you, Peter. And just quickly, Roger, if I could just ask a follow-up to the prior question, when you talk about your gross margin, I just want to make sure I was clear on what you were saying; you are saying gross margin for next year somewhere between the 2020 level, which based on the guidance you’ve given us, the 4Q is going to be around 48%, and the 50% that you’re aiming for in terms of fourth quarter, is that right, somewhere sort of in that range?
Roger Dassen, CFO
That’s correct. So, 48% reflects the math based on the 50% guidance we provided for Q4. For the full year, you would see approximately 48%. What I mean is that considering all the factors we discussed, the anticipated gross margin for next year will fall within that range. We will provide more guidance as the year progresses, offering more clarity in about three months, but directionally, that’s where you can expect us to be.
Peter Wennink, CEO
Yeah. That’s based on the let's say low double-digit growth, as compared to this year, so any upside on the additional business, of course, will have an impact on the margin profile. And as Roger said, we just have to take care of this accounting issue on High-NA where we don’t sell High-NA, but we simply cannot capitalize anything in inventory. We just have to write it off. So this is what is, which by the way will give us better High-NA margins once we start shipping High-NA.
Andrew Gardiner, Analyst
Thank you, guys.
Operator, Operator
Our next question is from Mr. David Mulholland. Please state your company name followed by your question.
David Mulholland, Analyst
Hi. I am Dave Mulholland from UBS. And I just want to follow up on the comments you made around China, Peter. Obviously, it’s clear you’re still able to ship particularly if it’s out of the Netherlands to particular customers. But for those that have been facing sanctions from everything we’ve read, are you assuming any shipments into those customers for 2021, because whilst you may be able to ship yourself, they will obviously face some indirect impact if they’re unable to buy from some of the other semi-cap equipment space? And I’ve got a follow-up afterwards.
Peter Wennink, CEO
I appreciate the question, David. In discussions with our Chinese customers, it's important to note that there are various alternatives available, especially when considering tools from Japan and a European company located in Singapore. In terms of metrology, there are options both in the Netherlands and outside the U.S., including Japan and increasingly other regions. However, lithography presents more challenges for Chinese companies in finding alternatives. It's crucial for them to secure their litho tools. We abide by the current agreements, which prevent us from shipping to certain companies on the specified lists, and we strictly adhere to those. Fortunately, we have been in talks with one of our major Logic customers in China, who has order rules that allow us to deliver litho tools. This is essential for Chinese companies to obtain their litho technology, as finding solutions for other tools comes second. Litho is the most vital equipment in a fabrication facility. Therefore, it's not surprising that these customers continue to reach out, ensuring we provide them with the necessary tools, as capital expenditures typically begin with the most significant investment in the fab, which is lithography.
David Mulholland, Analyst
That’s great. Thanks for that. And then just a quick follow-up, you obviously said you’re keeping the door open to more shipments potentially for next year, if you do see upside elsewhere. How long and how much balance sheet are you willing to keep that door open for? Obviously, you’ve got the funding to do it, but are you making customers commit by the end of this year or how long are you leaving that flexibility?
Peter Wennink, CEO
I appreciate the question. We are actively pushing for growth, but I also want to acknowledge that our customers are paying attention to this call, so I need to be cautious. There is a notable difference between the current bottom-up projections and the increasing risks we are facing, which affects our capacity for production. We are committed to allowing some extra flexibility in our plans. Our goal is to maximize our output, but we will ensure we can adjust to meet demand within a realistic range of units. I understand that it may take time for customers to fully recognize our approach, but we believe they will respond if needed, and we will follow through with shipments.
Operator, Operator
Our next question is from Mr. Amit Harchandani. Please state your company name followed by your question.
Amit Harchandani, Analyst
Thank you. Good afternoon, and good morning, everyone. Amit Harchandani from Citi. Two questions if I may. My first question relates to the ramp on the Logic side for EUV. Could you give us a sense of where we are in terms of technological readiness that is playing a part in how customers are thinking about ramping, say, beyond the N5 towards the N3? I appreciate the demand dynamics are one factor, but if you could help us give us a sense of the overall technological readiness of the ecosystem? And secondly, if I may on a separate note, you have given us some perspective on contribution from China, could you maybe quantify that and give us a sense of how derisk that number is or what’s the puts and takes if there was a potential change in U.S. legislation? Thank you.
Peter Wennink, CEO
I'm not going to speculate on the decisions of governments because it's impossible to mitigate risks in that area. We need to focus on the specific circumstances of our company in Europe and our ability to comply with regulations regarding tool shipments. There are many factors that influence this situation, which are beyond our control, making it challenging to predict outcomes. I'm dealing with the reality we face today without guessing about potential upsides or downsides. Our approach to the Chinese market is straightforward; we have several major customers there, and I can't predict government actions. Regarding EUV technology, it's technically ready, and the ecosystem for N5 and N3 is in place. The main challenge is to match the maturity of our EUV tools with that of our DPV immersion tools, where our customers are achieving 98% to 99% uptime. Currently, some of our tools exceed 90% uptime while others do not, so we are focused on improving stability and maturity, which is normal for new technology in high-volume manufacturing. Historically, similar situations occurred when we introduced dual stages and immersion technologies; it takes time to ensure all solutions are fully implemented. Customers are eager for faster progress because their clients are demanding more EUV wafers. The primary discussion we are having with them is about increasing the supply of EUV wafers quickly, along with improving tool maturity. The market's demand for capacity is evident, and I'm confident about our technological readiness. This was a crucial topic a few years back, but it's less of a concern today.
Roger Dassen, CFO
If you look at the typical factors being discussed regarding ecosystem readiness, they include mask and mask inspection, where the technology is clearly advancing. There have also been positive developments related to pellicle transmission, benefiting us and others in the industry. Photoresist will always be relevant, although significant advancements will occur when everything transitions into high-volume manufacturing. Overall, there is notable progress in the usual areas. This sentiment is reflected in the EUV conferences, where our customers present slides demonstrating the evolution of the ecosystem. Comparing their assessments from two years ago, which showed many elements in amber and red, today all indicators are green, showing a marked improvement in readiness.
Amit Harchandani, Analyst
Yeah.
Peter Wennink, CEO
So, you also gain an advantage from being around for a while. We've seen this with dual stages and immersion, where there is a wavelength change. Our customers' production processes are significantly different, and this needs time to mature. It’s not just about our exposure tool; everything associated with it matters. We started with an 82% transmission rate for the pedicles, and now we've qualified at 88%. Furthermore, in research institutes, the transmission rate exceeds 90%. The same applies to photoresist, as Roger mentioned. This is quite normal for our industry. The entire ecosystem is essentially advancing along the maturity curve, and we expect this to continue for the next one or two years before we see maturity levels similar to those we experienced with DPV. It will take some time.
Operator, Operator
Our next question is from Mr. Alexander Duval. Please state your company followed by your question.
Alexander Duval, Analyst
Yeah. Hi, everyone. It’s Alex from Goldman Sachs. Many thanks for the question. You talked about the progression in terms of EUV models and how you continue to invest in that direction. And I wondered if you could talk a bit about the average selling prices effectively well, they go up to on the D and E models and is it fair to assume 50% of the mix in the next year is going to be coming from the D model and when do we see the E model rough the numbers? Many thanks.
Roger Dassen, CFO
So, Alex, regarding the average selling price increase for the D model, we estimate that it will be between 10% and 15%. Additionally, there’s a 19% improvement in the productivity of that tool, along with an improvement in overlay from 1.5 to 1.1. This adds significant value for the customer, which supports the ASP increase I mentioned. As for the E model, since it’s still some time away, we won’t provide specifics on its ASP development, but there are substantial improvements and value enhancements planned for it. We’ll share more details as we get closer to the launch date. Concerning the D model and next year's unit composition, we plan to introduce the D model for high-volume manufacturing around the midpoint of next year, which gives an indication of the distribution for next year.
Operator, Operator
Our next question is from Mr. Mehdi Hosseini. Please state your company name followed by your question.
Mehdi Hosseini, Analyst
Yes. Mehdi Hosseini with Susquehanna. I have two questions with a few follow-ups. It would be great if you could give us the mix of the EUV upgrade that is embedded in the field option. And also, if you could give us an update on the multibeam e-beam, I believe the data tool was shipped earlier this year. What’s the update and how do you see acceptance into next year? Thank you.
Peter Wennink, CEO
Okay. I don’t think we can provide the mix between upgrades and system prices that you’re asking about, Mehdi.
Mehdi Hosseini, Analyst
Yes. Yes. Yeah.
Peter Wennink, CEO
Yeah. So it was above $100 of our EUV sales; how much is upgrade business and how much is system business? Is that what you want?
Mehdi Hosseini, Analyst
Yes. Yes. You have highlighted upgrade opportunities with the older models and I wanted to see how much of that is driving it in the field option.
Peter Wennink, CEO
You have various types of upgrades. For example, the average selling price in Q3 was slightly higher. Some upgrades are already included in the tools we ship, while others are upgrades for tools currently in use. The difference depends on the specific upgrade, such as moving from model B to C, which can be a significant refurbishment in the field and comes with added costs. Customers are evaluating all these options, so the mix of upgrade types is important.
Mehdi Hosseini, Analyst
Yeah.
Peter Wennink, CEO
You have 3500B upgrades, which are positioned between the original B and the current C in terms of productivity. It’s challenging to provide a forward-looking outlook on this because it heavily relies on customer plans and capacity planning regarding wafers per day. We’ll share the total number and timing, though plans can change. I recently spoke with a large customer interested in exploring different upgrade scenarios. Depending on how those scenarios develop, the revenue from upgrades will vary. Therefore, I hesitate to offer any guidance, as it could be inaccurate. We are planning to ship two improved multibeam tools this year. Customers will use these tools, and integration into their yield management processes is crucial. This integration will take the next six months to a year and will influence the adoption of the tools. We believe we are in the initial integration phase for the first tool we delivered last quarter. We are eager to see how the advantages of a tool that's six times faster can translate into real value for customers. However, we will need to wait and see how that unfolds. We are optimistic, but this optimism needs to be validated by our customers during the integration process. So, Mehdi, patience is required; we expect it will take another quarter or two to gain clarity on this matter.
Operator, Operator
Our next question is from Mr. Aleksander Peterc. Please state your company name followed by your question.
Aleksander Peterc, Analyst
Yes. Good afternoon. Thanks for the question. This is Aleks from Societe Generale. Just one on the balance sheet first, could you now give us an idea of where we’ll land in terms of net cash for the year and what will happen with working capital in the fourth quarter, if you could quantify that for us? And then just secondly, coming back to your comment, Peter, on these communicating vessels in EUV orders, so given the push outs by one customer, is there a realistic scenario whereby we get a big jump then in orders as that progression starts to materialize and we get then a very strong ‘22, is that a realistic scenario? Do you see things more smoothed out in the future? Thanks.
Roger Dassen, CFO
Thanks, Aleksander. On free cash flow, we’re not guiding on a free cash flow; I can tell you that there will be a very significant free cash flow generation in Q4. For a couple of reasons, one reason is, the free cash flow generation this quarter was rather low; as a matter of fact, it was slightly negative. One main reason there is that, many, many tools shipped in the last month of the quarter as a result of which the cash generation of that will fall into Q4. So there will be significant free cash flow generation in Q4. That’s also the reason why we communicated that we will resume the share buyback, why we announced the interim dividend. So we’re very confident on the free cash flow generation in Q4, but we’re not guiding that.
Peter Wennink, CEO
Yes. Regarding your question about communicating vessels, that was actually part of my introduction. The main question is whether this could lead to a significant increase in orders, considering the time difference you mentioned. We are preparing for output in 2021 because I believe it could happen then. As for your inquiry about 2022, although we are currently in 2020, I anticipate that by 2022 we will see the impact of the communicating vessel movement. There is also a possibility that some effects could occur in 2021, which is why we are gearing up for increased shipments from a manufacturing and supply chain perspective. More importantly, I foresee that in 2021 we will witness the introduction of the next nodes in Logic and DRAM. In any case, 2021 will be significant as it will experience node transitions, unlike 2020. For instance, with N3, we expect over 20 relays, adding to what I expect to be a normal increase in EUV volumes.
Aleksander Peterc, Analyst
Very clear. Thanks.
Skip Miller, Vice President of Investor Relations
Okay. We have time for one last question. If you are unable to get through on this call and still have questions, please feel free to contact the ASML Investor Relations Department with your question. Now, Operator, may we have the last caller, please.
Operator, Operator
Yes, sir. The final question is from Mr. Adi Metuku. Please state your company name followed by your question.
Adi Metuku, Analyst
Yeah. Good afternoon, guys. It’s Bank of America. I had two questions. First question just on the assumptions you have embedded into your low double-digit growth guidance for revenue in 2021. Can you talk about what you are assuming in terms of domestic Chinese demand? Secondly, also found with this Logic demand and Memory demand and services? Just to get a sense for what exactly you’re embedding? And secondly, there’s been a lot of discussion in the market around how the number of customers of leading edge could go down over the next few years. If you could give us some sense based on your discussions and any order trend, et cetera, that you might be seeing, how likely do you think that is? I think that would be much appreciated. Thank you.
Peter Wennink, CEO
What exactly would you like to know? Are you asking about the trend in the number of customers in the leading edge?
Adi Metuku, Analyst
No. If you look at two years to three years out, do you think the number of customers producing leading edge devices could go down?
Peter Wennink, CEO
Okay. Yeah. Yeah. I think on the…
Roger Dassen, CFO
On the first questions…
Peter Wennink, CEO
I think regarding the first question, we've provided you with the top-line figure for both the total business and for EUV. As Peter mentioned, there are several uncertainties that have influenced that number, and there are various factors that could swing it in different directions. I suggest that in three months, during our discussion on the full year’s results, we'll also gain our first real insight into the next year. At that time, we can talk about the main drivers. It will be useful to review the different segments of the markets and identify the growth drivers as we did at the start of this year. I think I'll address your two questions regarding domestic China. It may seem a bit dismissive, but it's important to understand that the Chinese customers in Logic and Memory are in a growth phase; all their wafers are sold and directed to their customers who incorporate them into devices. If for any reason the business in China were to cease, those customers would still require wafers and would turn to other sources to obtain them. Regarding Memory, particularly in DRAM, we are observing very high utilization rates nearing capacity, which raises the question of where these wafers will come from. They will need to come from increased capacity elsewhere. This situation acts like a communicating vessel; when one group of customers doesn't need certain capacity tools, another group will. The time frame for transitioning with DPV is much shorter than with EUV, so I believe this will be resolved relatively quickly. Now, regarding customers in the leading edge, it's clear that things are becoming more challenging. The upcoming nodes will involve greater complexity, and only very large customers will be able to manage that. Over the past two decades, we've seen a significant decrease in the number of leading edge customers, and this trend is likely to continue, leaving us with less than a handful of key players. I won’t speculate on who those might be, as they are all important to me. They'll need to excel in design, production technology, and cost efficiency. Ultimately, what matters is the volume of wafers, devices, and chips needed for digital transformation, which must be produced somewhere in the world. Consequently, I believe our large customers will grow larger and dominate chip production, a sector that is only expected to expand. This is why I stated at the conclusion of my prepared remarks that our confidence in our outlook for 2025 has strengthened. Additionally, the COVID crisis has highlighted the critical importance of digital infrastructure. So yes, while the number of customers may decrease, they will be substantially larger than they are today.
Adi Metuku, Analyst
All right. Thanks again.
Skip Miller, Vice President of Investor Relations
Before we sign off, I’d like to remind everyone that due to COVID-19, we have moved our Investor Day to June 23, 2021. The event will be held in London, and we hope by that time we can have a face-to-face meeting. More details will follow in due time. We 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, I’d appreciate it. Thank you.
Operator, Operator
Thank you, sir. This concludes the ASML 2020 third quarter financial results conference call. Thanks for your participation. You may now disconnect your line.