Earnings Call Transcript - ASML Q1 2020

Operator, Operator

Thank you for your patience. Welcome to ASML's first quarter financial results conference call for 2020 on April 15, 2020. During the introduction, all participants will remain in listen-only mode. Following ASML's introduction, there will be a chance to ask questions. I will now begin the question-and-answer segment. I would like to hand the call over to 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 2020 first quarter results. The length of this call will be 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 presentations found on our website at asml.com, and in ASML's 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. I thank you for joining us for our Q1 2020 results conference call. I hope all of you and your families are healthy and safe. And before we start our normal quarterly results review, I would like to first talk about the topic on everybody's mind, which is the COVID-19 pandemic and the situation. While these are unprecedented and challenging times, and the COVID-19 pandemic affects all of us. Our primary goal at ASML continues to be to ensure as best we can that our colleagues and their families stay safe. Our second goal is to ensure that we continue to serve our customers and to secure the delivery of our product roadmap, including the continuity of our supply. We have been taking and continue to take precautionary measures to limit the risks. Most of our non-manufacturing employees now work from home and travel is restricted. In China, our colleagues are returning to the office but also there we remain vigilant. In our own facilities, we have implemented restricted access to our manufacturing facilities worldwide, and in particular our clean rooms to ensure our colleagues can work safely. We’ve put in place measures to help ensure isolation between shifts. We've also implemented additional safety and cleaning protocols to minimize contamination risks. We work closely with our customers, suppliers, and partners to share information and determine best practices. We see a lot of creativity, resilience, and dedication at ASML, and the industry overall as we work to manage through this crisis. To date, we have experienced limited impact on ASML's manufacturing capability, although there have been additional challenges with absenteeism, transportation, and support logistics that we have had to manage. Some of the quarantine requirements have had an impact on our efficiency, while travel restrictions have posed a challenge for installations and major upgrades. We're working with our customers to plan ahead and find creative solutions, such as the use of remote monitoring, augmented reality solutions, and diagnostic technologies to aid in the service and repair of systems. With regard to our supply chain as some of our suppliers have experienced temporary closures resulting from governmental lockdown and shelter in place orders. At this stage, we've either been able to work around these temporary disruptions or the closure has been resolved. We are managing risk via alternative sourcing and again a lot of creativity. We're closely monitoring the status and we'll use safety stock as much as possible to ensure minimum interruption. At this point in time, we've been able to find solutions for these challenges. Regarding customer demand, we’ve currently not seen a reduction in demand this year and we have seen a strong order intake. I will talk more on this later. On cash management, although we have a very healthy balance sheet as well as flexibility in our cost structure, we feel it's prudent to preserve cash should the situation continue for an extended period of time. Not just around our own operations, but also in order to be able to support our suppliers as best we can in these extraordinary circumstances, and Roger will talk more on the detailed actions. You will all understand that in this environment it’s difficult to determine how things will develop, how long it will last, and the impact this will have on the global GDP development that can affect our entire industry. We're taking the necessary steps in terms of safety, risk mitigation, and financial measures to best manage through these challenging times. It's very encouraging to see the creativity, resilience, and dedication at ASML and the industry overall. Now, I would like to turn to our normal quarterly results process. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the first quarter. Roger will start with a review of our Q1 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 on our future business outlook. Thank you. Roger?

Roger Dassen, CFO

Thank you, Peter. Welcome everyone. I hope you're all safe and healthy. And I will first review the first quarter financial results and then make some comments on the second quarter of 2020. I would also provide more detail around measures we are taking with regards to cash management. Net sales came in at €2.4 billion below our original guidance of €3.1 billion to €3.3 billion, which was primarily related to COVID-19's impact. Net system sales of €1.6 billion was again heavily weighted toward Logic at 73% with the remaining 27% from Memory, clearly showing the continued strength of the Logic business. We actually shipped four EUV systems in Q1, but were only able to recognize revenue on two systems, which I will explain in more detail later. Installed base management sales for the quarter came in at €857 million. This was around €100 million lower than guided due to lack of access to machine time as well as a delay in acceptance of upgrades. We expect these upgrades to translate to revenue in Q2. Let me provide a bit more detail on the items that occurred in the quarter that resulted in a system revenue shift of around €700 million, consisting of a Deep UV related revenue shift of over €200 million and EUV related revenue shift of over €500 million, primarily related to COVID-19's impact. First, we experienced some delays in Deep UV shipments to customers in Wuhan, China, as well as other customers due to operational and travel restrictions regarding COVID-19. We are working with our customers to prepare for these shipments in the next quarters. Second, we experienced some issues in our supply chain as a result of a temporary disruption from EUV component suppliers that encountered operational restrictions due to COVID-19 regulations. These supply chain issues have been solved for now. Also, we experienced longer-than initially planned EUV cycle times for the first NXE:3400C models in final configuration, primarily driven by the complex deployment of inline tin refill as part of the modular vessel. Cycle time related to this aspect is now being reduced every week, and we are on track to achieving the aspired cycle time reduction envisaged for the end of this year. As you know, this is an important element in achieving the capability of 45 to 50 EUV tools in 2021 and beyond. As a result of the longer-than-expected cycle times as well as COVID-19 related supply issues, we saw some delays in EUV shipments for the quarter resulting in fewer system shipments than originally planned. Third, due to concerns around the continued ability to ship systems in the current circumstances, some customers have asked us to expedite the delivery of EUV systems in the quarter by shipping the systems before the normal factory acceptance tests. The implication of this is a delay in our revenue recognition as final acceptance will now take place after a successful installation at the customer sites. We expect the revenue that we were not able to recognize for Q1 as a result of the issues listed above to shift to Q2 and Q3 of this year. Gross margin for the quarter was 45.1%, also below our original guidance, primarily due to a combination of delayed field upgrades, as well as delayed DPV systems revenue related to COVID-19 impact. Overall, operating expenses came within guidance with R&D expenses at €544 million and SG&A expenses at €130 million. Turning to the balance sheet, €507 million worth of shares were repurchased in Q1. We ended last quarter with cash, cash equivalents and short-term investments at a level of €4.1 billion. Moving to the order book, Q1 system bookings came in at a strong €3.1 billion, including €1.5 billion from 11 EUV systems. Logic order intake were 66% of the total value with the remaining 34% for memory, again reflecting the continued strong logic demand for leading edge lithography for this year and next year, but also indicating a recovery of the demand for memory. Net income in Q1 was €391 million, representing 16% of net sales and resulting in an EPS of €0.93. With that, I would like to make some comments on Q2 of 2020. As Peter mentioned, we have not seen a reduction in demand this year and we continued to see a strong order intake, up around 28% from Q4. Based on current plans without any COVID interruption, Q2 can be a strong shipment quarter with revenue up potentially over 50% from Q1 and a significant improvement of gross margin. We are still planning to execute to current plan. However, due to significant uncertainty in this COVID-19 environment, we decided it is prudent to refrain from giving formal guidance for Q2. Finally, on cash management. Although, we have a very healthy balance sheet, as well as flexibility in our cost structure, we like many of our peers and customers, are dependent on the short and longer-term implications of the COVID-19 outbreak. Due to these uncertainties, we feel it is prudent to preserve cash should the situation continue for an extended period of time, not just for our own operations but also in order to be able to support our suppliers as best we can in these extraordinary circumstances. We have decided not to execute any share buybacks in Q2 2020. This decision follows the pause and the execution of the program in the first quarter, after having already performed share buybacks under the new program for an amount of approximately €507 million. The previously announced three-year share buyback program of up to €6 billion to be executed in the 2020, 2022 timeframe is still in place. We have also implemented measures to limit our growth in the workforce. Non-business critical vacancies have been put on hold. We continue to hire for business critical positions. This way, our workforce will grow less than originally planned this year. We are also postponing any non-business critical OpEx and CapEx. However, we will continue to invest in the development of future technology roadmaps, including High-NA at an unadjusted pace in order to allow our customers the continuation of their roadmaps once the situation has been normalized. As communicated last quarter, ASML has submitted a proposal at its 2020 Annual General Meeting of shareholders to declare a total dividend for 2019 of €2.40 per ordinary share. Recognizing the interim dividend of €1.05 paid in November 2019, this leads to a final dividend payment of €1.35 to be paid in the second quarter. This is a 14% increase compared to the 2018 dividend. The 2020 Annual General Meeting of shareholders will take place on April 22nd in Veldhoven. With that, I'd like to turn the call back over to Peter.

Peter Wennink, CEO

Thank you. Roger. As Roger highlighted, our order intake is strong and we have not yet seen any significant push outs or cancellations this year. Many investments of our customers are strategic and support their technology roadmaps, functioning as a lifeline for our leading-edge customers. These strategic investments are therefore primarily related to leading-edge equipment, such as EUV and high-end immersion scanners, requiring longer lead times and qualification schedules. This was also confirmed recently by leading-edge customers that have also told us that they see an unabated demand for leading-edge devices at least throughout this year. Keep in mind the lead time and the qualification of lithography systems are the longest in the fab and customers will not want to jeopardize any adjustment to their technology and capacity ramps that will negatively affect their ability to keep serving the leading-edge customers. As the current situation is very fluid, we’re meeting with our customers on a more frequent basis to understand any changes they may be seeing regarding demand outlook. In general, most customers are still indicating that they are continuing relatively normal fab operations so far. Logic customers are currently continuing to ramp their seven and five nanometer nodes in support of end market applications like 5G, AI, and high-performance computing. There are also some positive signs being reported on data center demand, as well as demand from notebook and communication infrastructure, driven by the significant increase in work from home and virtual learning activities. These applications drive the demand for both Logic and Memory. However, it can also be expected that consumer-related electronics, for example, smartphones may be under stress, in addition to the potential negative impact the COVID-19 crisis will have on GDP. We expect install base businesses to continue to scale with growing install base numbers and will also see EUV contribute to service revenue as these systems start running wafers in volume manufacturing. We currently have plans for upgrades at several customers, however, with the realization that there is a supply and a demand risk in the current environment. Our bookings show an increase in memory over the prior quarter driven by DPV, while logic continues to show a transition from DPV to EUV, ordering as customers’ confidence in EUV increases, translating into more layers in logic production. On the EUV, along with the industry, ASML continues to make progress in ramping EUV technology in high-volume manufacturing, as was recently showcased at the SPIE lithography conference in February. Our customers continue to adopt and ramp EUV in high-volume manufacturing in both Logic and Memory, and one of our memory customers recently announced that they have successfully shipped 1 million of the industry's first 10-nanometer class DRAM modules based on EUV technology. They also stated EUV will be fully deployed in future generations of DRAM starting with its fourth generation 10-nanometer D1a next year. We continue to target EUV revenue of around €4.5 billion on 35 systems this year, thereby assuming that we will not face any significant supply-demand risks as mentioned before. Our margins for EUV, we continue to drive profitability in both the systems and the service business. And we're still on track to achieve at least 40% system gross margin this year and breakeven with our EUV service business by the end of the year. Increased customer confidence in EUV technology is translating to strong EUV demand in both Logic and Memory. This is reflected in the strong order flow in the first quarter in support of our 2021 output. As mentioned in earlier calls, we're currently working towards the capacity of 45 to 50 systems in 2021, which we feel can be achieved through reductions in cycle time. We continue to make progress on our next generation EUV technology, High-NA, and are on track to shift the initial development systems in 2022. Now regarding our outlook on the quarter and on the year. Based on the current customer demand plans and without any COVID interruption, Q2 can be a strong shipment quarter with significant improvement of gross margin as Roger mentioned. We're currently in execution of this plan. On the full year, customer demand is currently strong as well. The current shipment plans would position us well for another year of growth. However, there is significant uncertainty about how the current COVID-19 crisis will impact the global GDP development, end markets, our manufacturing capability, and supply chain. And in light of these risks and uncertainties, we decided it's prudent to refrain from giving formal guidance for Q2 and for the full year 2020. Again, these are unprecedented and challenging times but we will get through it. The world looks a lot different today than it did three months ago. So it is hard to make predictions and we’re certainly not adding opinions. We continue to look at the facts day by day and act accordingly. We're taking the necessary steps for the safety of our employees, the community, and our customers, as well as the necessary risk mitigation and financial steps. I would like also to take the opportunity to thank the entire ASML team and their families, as well as our many partners who stepped up in these challenging times in support of our company and our stakeholders. I've seen great examples of teamwork and incredible creativity to make sure that we can continue our work, serving our customers, while keeping our people and partners safe. Despite the fact that the current environment provides clearly near-term challenges and uncertainties, the positive industry momentum around innovation and expanding new markets further strengthens our confidence in our future growth scenarios. With that, we'd be happy to take your questions.

Skip Miller, Vice President of Investor Relations

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 as many callers as possible. Operator, could we have your final instructions and then the first question please.

Operator, Operator

Thank you. We will now start the question-and-answer session. The first question comes from Mr. Sandeep Deshpande. Please state your company name and then ask your question.

Sandeep Deshpande, Analyst

Thank you for having me on the call. My first question is for you, Peter. You've reported strong order strength in the first quarter. Is this primarily due to the memory orders you mentioned in January, or could it be that customers are concerned they might not receive tools from you and have expedited their orders from later in the year? Additionally, regarding your indication of a 40% gross margin in EUV for the year, given the potential impact of social distancing measures in manufacturing, could this affect cycle times and, consequently, the gross margin? Thank you.

Peter Wennink, CEO

Let me address the first question. The order strength is as Roger mentioned, with about two-thirds of the order intake from Logic and one-third from memory. I don’t think this indicates any acceleration; it aligns with our expectations, driven by a sustained rise in utilization within the memory sector of our machines. Essentially, these orders are consistent with our forecast for 2021 and were planned. You could interpret this as a validation of the technology roadmap our customers are following, which is a positive sign. Regarding the 40% gross margin indication, we have managed the cycle time impact effectively. While we experienced an increase in absenteeism in our factories due to government health guidelines—where individuals stayed home at the first sign of symptoms, even if mild, leading to some shortages—we have successfully adjusted our shift patterns. Additionally, we have brought in eligible workers from our R&D division to help with factory output. Therefore, I believe we can handle these challenges and maintain the 40% gross margin guidance we provided.

Operator, Operator

The next question is from Mr. David Mulholland. Please state your company name followed by your question.

David Mulholland, Analyst

It’s David from UBS. Just following up on one of the comments that Roger made in terms of how you're looking to I guess, in some respect, support your supplier base, can you just give us a little bit more detail about what you're considering there? And are there any particular suppliers that you might be worried about where a particular other part of their business might be, I guess, heavily exposed to autos that we’ve seen a very sudden downturn? Just a little more color on how you're planning to support your supplier base.

Peter Wennink, CEO

I would like to address that. We are closely managing our suppliers on a daily basis, and right now, the supply chain is primarily experiencing delays in module deliveries. These delays are often due to lockdowns or shelter-in-place orders, which require us to seek alternative solutions that lead to parts delays. As you mentioned, if this situation continues, some of our suppliers, who are also affected in other industries, might seek assistance from us, likely in the form of prepayments. While we haven't encountered that yet, I expect it could arise if these conditions persist and our demand remains strong. It's important to consider our entire supply chain, which includes our customers. What affects our suppliers also impacts us. Therefore, we are engaged in discussions with our customers regarding the continuity of the supply chain. If we need to provide prepayments to suppliers, we may need prepayments from our customers as well. This creates a connection in terms of potential financing requests. I'm confident that some requests will emerge, particularly from those suppliers facing significant business losses in other sectors. While we haven't seen this develop yet, I have experience navigating crises like the Internet bubble burst, the financial crisis, and 9/11, and I know that challenges can arise within the supply chain. We must keep an integrative view, as our customers are crucial in this equation. We are having productive discussions with them, and I'm optimistic that we can support the critical areas of our supply chain going forward.

David Mulholland, Analyst

And just one follow up on the R&D side of the business. As you said, many can work from home, I presume you haven't closed down R&D facilities, because I guess a lot of the work you do still needs to be physical tests, particularly in the case of High-NA and work that's going on there.

Peter Wennink, CEO

Yes, I think, if you really talk about the physical tests, I mean, that is done in clean rooms and we build modules, so that's an agreement which we talked about this. I mean, we have very strict regulations there now almost for, I would say, almost for two months. And they are effective on the R&D side itself. It is when we look at the latest productivity numbers, which we follow on a day-to-day basis, I think 90% of our R&D engineers, they work from home. But with the current possibilities that we have in creating virtual teams, they’re working offsite, I can say that I'm pleasantly surprised with the productivity numbers that I see whether it's the number of design signups, whether it's the number of software builds, the software compilations, our IT infrastructure is holding up very well, which we prepared by the way. So that's going well. And when we look at those productivity numbers, they actually are very similar to the productivity numbers that we saw before starting to work at home, which I think is very good, which is also attributed to the flexibility of our people. You see also, in the log on numbers that people make much longer hours. I mean, they log on the same time but they log off much later. So, there's a lot of working in the evening, and we check very regularly with our managers across the company on how we are doing and there's a lot of virtual teamwork going on, even leading to virtual drinks on Friday afternoon where they all sit together in front of the camera with a glass of beer.

Operator, Operator

The next question is from Mr. Joe Quatrochi. Please state your company name followed by your question.

Joe Quatrochi, Analyst

Yes, thanks. It's Wells Fargo. I was hoping you could give us some more color on the strong memory bookings that you've reported. Can you help us understand, are you starting to see demand largely driven by NAND or DRAM? And then to the extent that you can help us understand what was EUV in terms of the memory bookings, and was that also a driver this quarter?

Peter Wennink, CEO

Yes, the last question is about EUV, and it's primarily related to Logic. There are very few EUV orders for Memory, so it's mostly Logic. The strong memory bookings are due to the increased utilization of our systems in the memory sector, both in DRAM and NAND. The cautious trend we noticed at the end of Q4 last year has continued, with increased utilization throughout Q1, up until last week. This upward trend explains why memory bookings are rising, as customers are also observing this.

Roger Dassen, CFO

Yes, I think we mentioned why Q1 was about 100 million below our guidance, and we gave you the reason for that. It is the lack of machine time that we had on particular upgrades that we were doing, and as a result of that that will translate for Q2. Other than that in the install base business still looks good. So the number that we talked about in the past is a number that has still relevance with all the caveats that we talk about in the entire call around the current uncertainty. And the 3.4 billion is the number that we talked about on the Q4 call, so that's a good recollection of what we mentioned there.

Operator, Operator

The next question is from Mr. C. J Muse. Please state your company name followed by your question.

C. J Muse, Analyst

Yes, Evercore ISI. Good afternoon and good morning. Thank you for taking the question. I guess Peter, first question just to follow up on the memory side of things. It looks like ex-EUV, your orders were up like 80% Q-on-Q and so curious on that front. Is that more NAND versus DRAM? And then on the last call, you talked about optionality for a stronger DRAM recovery into the second half of the year. I'm curious what your thoughts are as it relates to that potential reality?

Peter Wennink, CEO

Yes, I think the memory intake is driven by DRAM, with some relocation from DRAM to NAND. However, I would emphasize that the focus is on DRAM.

C. J Muse, Analyst

My follow-up, can you speak directly to how you're thinking about cycle time improvements on EUV. And as part of that, what will it take to get the ability for you to have double-digit shipments on a quarterly basis, which it looks like you need to do to hit that 35 unit forecast? And I guess as part of that, should we be thinking about the potential for customers to expedite again in the coming quarters and therefore perhaps maybe revenue on one or two tools gets delayed into '21? Thank you.

Peter Wennink, CEO

Well, on the last point, I mean, it's April 15, I don't know what's going to happen in December. So that's not what our customers tell us today. Our customers tell us today that they want the 35 systems. On the cycle time improvement and our ability to ship double-digit numbers, we are planning and without any supply chain or capacity disruptions because of COVID, we will ship double-digit numbers in this quarter, in Q2 of 2020. So we have that capability. And when you look at this and let's say customers have a number of 36 units that they want, it's not 9, 9, 9, 9 every quarter, that's not how it works. And it works whether the customers need it, because it's their rep schedule that is going to determine when we ship. For instance in Q1, we only shipped four systems. But what we plan to be for the COVID-19 impact 6 in Q1, not that we couldn't make more. It just, it also has to do with when the customers need the machines. So we will do double-digit in this quarter and actually it means that we have the capability, which is of course very important to get to the 35 number. I think the cycle time reductions was, and was one earlier comment, you have some absenteeism in the factory. We're dealing with that. I think we'll get to the cycle time reductions as planned and we will have the capability to do 35 systems this year.

Operator, Operator

And our next question is from Mr. Krish Sankar. Please state your company name followed by your question.

Krish Sankar, Analyst

It’s Krish from Cowen. Thanks for taking my question, I have two of them. First one, Peter, to the extent you can answer this. What do you think you would ship in terms of DUV units this year in absolute unit numbers or relative to 2019?

Peter Wennink, CEO

Relative to 2019, you will see that's just a general comment. I’m not going to guide you on a specific DPV number. But as we said before and I’ve said for some time now that when you look at EUV, EUV is cannibalizing you could say multiple patterning layers. So there will be a reduction of DPV systems in 2020, and that will be more than compensated by the sales number in EUV, and that's logical that's what we've always said. EUV is there to cannibalize multiple pattern or layers. Now how much that in the end will be is going to be somewhat now lower. It’s not going to be significant, but that is the trend. It's a trend going forward. As you can also see from our 2025 capital markets day information where you also see that in 2025 the DPV numbers are lower than what they used to be and that's because EUV is going to replace those.

Krish Sankar, Analyst

If I look at your memory shipments from the last two quarters and compare them, they are very similar to the sales into China. So, is most of your memory shipment in the last two quarters primarily coming from China? Additionally, how do you expect that to trend over the next couple of quarters?

Peter Wennink, CEO

Well, it's as you know and is that we actually mentioned that, the shipments in Q1 were impacted by the COVID-19 crisis in China, especially Wuhan where you know as I said, memory customer there. Well, if you can imagine, we didn't ship anything to that customer. The other customer took a few tools according to plan but the majority of course of everything that we ship was outside China.

Operator, Operator

The next question comes from Mr. Pierre Ferragu. Please state your company name followed by your question.

Pierre Ferragu, Analyst

It’s Pierre at New Street. So Peter and Roger from your prepared remarks, I understand like the near-term of COVID-19 plays out clearly not so bad for you and your value chain, and you’re managing very well logistics disruption and or like the supply side of the story. Now of course, my next concern is what happens next and I hear you that we have very little visibility so it's very, it’s impossible to make a near-term forecast. But my question would be like what is question. So let's assume that in the second half of the year, given for PCs, servers and smartphones are down 20%, 25% year-on-year and if that happens at the high level. How do you see your clients impacted and how do you see that impacting ASML? And I have two specific question marks in mind. One is in that kind of scenario would your clients push out EUV orders, or do you think they need to take orders anyway, because they need to secure supply of the technology? And then the second one I had in mind was what about the very steep decline or risk in DUV, because I imagine that if volumes are not where they were expected when roll out plans were made six months ago, I would expect a lot of reuse of the DUV tools as node migrations continue?

Peter Wennink, CEO

Let me first answer your question. How has it impact ASML on a certain scenario? Basically, I couldn't answer that. I mean I could be a bit mean if I say that's your work, not mine, yes. So, but what I would answer is that, if you don't know where you're going, you'd better be flexible, and this is what we're organizing. We're organizing for flexibility in the supply chain. As you know, 80% or 80% plus is in their supply chain. That means that we've been like with like with every crisis we hardly ever saw cancellations. We saw push outs. So it basically means you would be looking at in the supply chain financing of working capital, which is also particularly important in the context of the answer I gave to a question earlier what do you want to do in the supply chain, which I think is an integral supply chain problem, which includes our customers. I mean, they cannot do without supply in the end either. So it's working capital issue, which I think is manageable. I think from a flexibility point of view, we have a lot of cost flexibility here with our variable cost on labor, and it was a lot of variable cost. It is like variable income to our people, which of course when the business goes down that will go down also. I don't think there will be a lot of push outs for EUV orders. What our customers are telling us now and when I listen well to them, they're not blind. They see that the impact on GDP will be recessionary and that will very likely have an impact on consumer spending and on the consumer electronics. What they do notice is that the customers of our customers are not blind either, that the demand on the leading edge logic, which includes 5 and 7 nanometers, is still strong. I mean, our customers tell us every time, every week to week that we talk to them, please stay on target with your shipments of your leading edge machines. Well, if data centers would require 25% less service, which by the way if you think about it, it's probably that it's something very bad has actually happened, because we need more data-centric capacity and not less and then that's where the high compute goes. So, I think push out of EUV orders, it can always happen. I don't think it's going to be significant. We're not planning for an Armageddon scenario where the entire world economy crumbles into an abyss, we’re not planning that. I don't think it's got to happen either. I think that there's a low likelihood. So, all-in-all, I think we’re flexible enough. I think EUV with the key focus on leading edge solutions that our customers’ customers need, is going to be relatively safe and I think reuse of DPV tools, the story of reuse of DPV tools has always been very prominent in every cycle. But you need to realize that when you look at leading edge, it’s not only EUV it’s leading edge DPV, but you need DPV not so much for the geo-medical shrink, you need it for overlay. And that is very important for those new leading-edge devices. So the overlay requirements for an NXE2050, which will be our leading-edge immersion tool, is significantly different than an 1980 because an 1980 we will not be able to do what a 2050 should be doing. We make sure that they can support our leading-edge nodes. So reuse will be limited, it simply has to do with the fact that the requirements that are needed for leading edge nodes for DPV tools are different and they're also more difficult for the older generations to achieve.

Operator, Operator

The next question is from Mr. Mehdi Hosseini. Please state your company name followed by your question.

Mehdi Hosseini, Analyst

Peter, going back to the topic of where we go into, I'm still confused. You talked about improving the supply chain. You talked about sequential revenue growth that could exceed 50%, but you're not providing a guide, not even for Q2. What is it out there and we're halfway through April? What is it out there that makes you uncomfortable given what you see in the next few months? I'm not asking about the second half, I'm asking about just the Q2 and I have a follow-up.

Peter Wennink, CEO

If I fully understand your question, Mehdi, because we always say, well, we have very long lead times in the supply chain, which is true for the critical supplies like, for instance, ZEISS. We have, in the end if you take to also thousands of suppliers, which some of them have lead times which are a lot shorter. We've had delays in EUV in Q1 of a couple of weeks, because one particular supplier couldn't provide rings, your flow rings, which is not the most advanced part that we need, but if you don't have it, you don't have it. So, this is where our concern comes from. It's the tiered supply chain, which is not always that visible to us. We have tiered suppliers coming from Malaysia, Mexico, you name it and they are supplying to our Tier 1 suppliers. And if that supply basically stops then even apart that has a relatively short lead time, doesn't arrive on time and we get a delay. I think ultimately we get those parts, it’s just a delay. And if we tell you and give you a number and we get a significant delay in some of those short lead time parts, we cannot ship tools and that can be significant. You may remember that a 3500C now is a €130 million tool, that's a big number. And I don't want to give you a range from X billion to Y billion, that doesn't make sense. So, this is where it comes from. And I think it is really based on the experience that we've had in Q1 where we were able to manage it, but we did see some delays. And since we cannot judge what the impact will be of these governmental orders in different parts of the world, we cannot assess what that risk is, but it's there because we've seen it. We've been able to manage it with a lot of creativity. It doesn't give me any assurance or certainty that we will be able to manage it going forward always. So this is where it comes from.

Mehdi Hosseini, Analyst

And if you could give us an update on Hermes multi-beam shipment, I think the beta tool was supposed to be shipped to the customer in Q1 and what’s the update there?

Peter Wennink, CEO

Yes, I think it was ready. It was in packing and then the shelter in place in the Bay Area, because that's where it comes from, it comes from San Jose, just stopped the tool. So it was a, the trucks were pulling up and they had to return.

Mehdi Hosseini, Analyst

But do you think the trucks are going to resume their destination in Q2, or will there be more delays?

Peter Wennink, CEO

I mean, what we are doing now, we are assessing whether we and this particular tool falls under the definition of a critical business. And actually, we're looking into what the possibilities are to actually ship the tool. And I would love to ship the tool ASAP, because it's ready and the customer wants it, so let's see how things go.

Operator, Operator

The next question is from Mr. Mitch Steves. Please state your company name followed by your question.

Mitch Steves, Analyst

This is Mitch Steves from RBC. I just had a question on the services business I’m trying to understand it a little better. So I'm guessing you guys are able to do some of this remotely. But can you maybe walk us through how much revenue you guys think will come back, how much revenue you may have lost in Q1 and then how it would work if like we get out of the shelter in place, let’s say earlier. Would that be a lot of pent up demand where you see a snap up, or whether the services business kind of actually get hit and some of the revenues are lost?

Roger Dassen, CFO

I think the revenue, Mitch that we lost in Q1 as we mentioned is around 100 million and it's primarily related to certain upgrades. I would say it's not even related to COVID-19, in particular, it was related to the fact that we didn't get sufficient machine time from customers. So that revenue we missed for Q1 will get us in Q2. There's hardly any doubt in my mind we will get that in Q2. And other than that I don't think, as far as we can see right now, we don't see any anomalies so at this stage, still on track for the 3.4 billion in IBM revenue that we talked about in the previous quarter. As we also mentioned in the video and as Peter talked about in the introduction, we are deploying new technologies. So of course, we're less able than we were in the past to have people go from Veldhoven from Wilton, etc. and go to the customer locations for obvious reasons before the travel restrictions and what have you. But by using artificial, by using virtual reality, augmented reality type technology, we are able to support the huge local support teams that we have with very specialized knowledge that we have at our different hubs. And in that way, so far, we think we're still well positioned to keep up providing the service and the upgrade work that we need to do.

Peter Wennink, CEO

One additional comment is more anecdotal that’s actually we were preparing, as a kind of a prototype project somewhere deep in the organization, how can we support remotely through augmented reality and HoloLens’s. Basically, people setting 6,000 kilometers from the actual service action and then we have now over the shoulder 3D augmented reality support that service engineers with six months of training that would normally have to do this after two to three year training were now operating and doing service actions with the support of experts that were sitting 6,000 kilometers away. And basically providing them with 3D images, how they should do the service actions and it works. So, this is also something that amazes also. And actually, our service levels, we keep up all our service levels up in terms of maintenance and servicing of our tools, which I think is a really good achievement.

Operator, Operator

The next question comes from Mr. Achal Sultania. Please state your company name followed by your question.

Achal Sultania, Analyst

Hi, good morning, it's Credit Suisse. Peter, maybe one question from my side on the services you mentioned that so far you tried to do a lot of remote working and local team assisting to get maintenance and upgrades done. How should we think about the EUV installation part? Do you have teams in place at customer fabs or customer locations to make sure that EUV installation can still go ahead as per plan at least during Q2, if the restrictions are not lifted?

Peter Wennink, CEO

Yes, that's a very good question. Luckily, we have three main sites where we do EUV and that's also the sites where we have most of our service engineers. I mean, we have to think of thousands plus. So there is lot of experience there. And this is exactly where this remote support comes in. We do send people across the globe but that's where we have hundreds of people, hundreds of people traveling. It's now probably not more than 50, 60. They have to go into two weeks of quarantine. They have to get special travel visa. So we need to plan and prepare this much more rigorously than we did in the past. And this is where we do set experts. But I think a lot of these service actions that are not of the really top-notch expert level are being trained and being done with the kind of novel remote support technologies that I just mentioned. So it's a combination of both, and I think we'll be able to do all the installations. We've been able to actually do that and we are. So, yes, we still do travel. It's not if it goes back to CRO, but it's a fraction of what we were able to do, but it works.

Achal Sultania, Analyst

And maybe one follow-up for Roger. Roger, on the services side you mentioned 3.4 billion is still in sight for the full year. Can you help us understand like how much of that, within that will be EUV specifically and also how much of losses for EUV services can we expect? I know you mentioned breakeven, hopefully, by the end of the year. Because the thing that I'm trying to understand is how much of a drag on services gross margin has EUV been last year or maybe this year, just to help us get to what the number should be going forward.

Roger Dassen, CFO

For this year, if you compare the last quarter to today, the improvement in EUV is expected to contribute about 0.5% to gross margin. In general, the services division is split roughly evenly between regular service and maintenance, and upgrades. EUV still represents a relatively small figure due to the significantly larger install base for DPV, but the impact on the gross margin percentage is about 0.5%.

Skip Miller, Vice President of Investor Relations

All right, we have time for one last question. If you were 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

And our last question is from Mr. Andrew Gardiner. Please state your company name followed by your question.

Andrew Gardiner, Analyst

It's Andrew from Barclays. Thanks for squeezing me in here at the end. Just a follow-up really on the comments you guys have been making on the memory tool utilization. Peter, you said you've seen it improve sort of from late fourth quarter into the first quarter and just out this quarter. I'm just wondering how much flex do you think the industry still has to continue to grow bit output by raising utilization and when are they going to get close to full utilization, again based on the current trends? Obviously, I know we've got the global caveats, but just if trends were to continue. How close are we to that full utilization where they need to start adding capacity again?

Peter Wennink, CEO

I believe that will happen this quarter. Looking at the trend, it’s quite close. There is still some under-utilization, but it will be this quarter.

Skip Miller, Vice President of Investor Relations

Thank you. Now on behalf of ASML, I would 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

This concludes the ASML 2020 first quarter financial results conference call. Thank you for participating. You may now disconnect.