ASML Holding NV

AEX:ASML

Earnings Call Transcript 2021-Q1

[Operator]

Thank you for standing by. Welcome to the ASML 2021 First Quarter Financial Results Conference Call on April '21, 2021. [Operator Instructions] I would now like to turn the conference call over to Mr. Skip Miller. Please go ahead, sir.

[Skip Miller, Vice President of Investor Relations]

Thank you, operator. Welcome, everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today on the call is ASML's CEO, Peter Wennink; and our CFO, Roger Dassen. The subject of today's call is ASML's 2021 first quarter results. The length of this call will be 60 minutes, and questions will be taken in the order that they are received. This call is also being broadcast live over the internet at asml.com. A transcript of management's opening remarks and a replay of the call will be available on our website shortly following the conclusion of this call. Before we begin, I'd like to caution listeners that comments made by management during this conference call will include forward-looking statements within the meaning of these forward-looking statements and 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 [indiscernible] submission. I'd like to [indiscernible] for a brief introduction.

[Peter T. F. M. Wennink]

Well, thank you for joining us for our Q1 2021 results conference call. And I hope all of you and your families are healthy and safe. Before we begin the question-and-answer session, Roger and I would like to provide an overview on some commentary on this quarter as well as provide our view of the coming quarters. Roger will start with a review of our Q1 2021 financial performance with added comments on our short-term outlook, and I will complete the introduction with some additional comments on the current business environment and our future business outlook. Roger?

[Roger J. M. Dassen]

Thank you, Peter. Welcome, everyone. I will first review the first quarter financial accomplishments and then provide guidance on the second quarter of 2021. Net sales came in above guidance at EUR 4.4 billion, primarily due to higher installed base business from upgrades. We shipped 9 EUV systems and recognized EUR 1.1 billion revenue from 7 systems this quarter. Due to the delay in 1 of our customers' road map, we jointly decided to buy back 2 of their new systems and ship these to another customer this year. This was accounted for as a revenue reversal in Q1 of 2021. For the system shipped in Q4 2020 with a new configuration, we were able to complete site acceptance and recognized revenue this quarter. We also shipped 1 system this quarter without factory acceptance testing, so revenue will be recognized in the subsequent quarter after a customer site acceptance. Again, the net result is 7 EUV revenue systems. Net system sales of EUR 3.1 billion was again more weighted towards logic at 78%, with the remaining 22% from memory. The strength in logic drives both DTV and revenue. The memory business is mainly driven by DRAM. Installed base management sales for the quarter came in at EUR 1.2 billion above guidance due to increased upgrade business as customers pull forward software upgrades that can quickly increase productivity of systems in this high semiconductor demand environment. Gross margin for the quarter was 53.9% and was above guidance due primarily to the additional software upgrade. On operating expenses, R&D expenses came in at EUR 623 million and SG&A expenses at EUR 168 million, which was slightly above our guidance. Net income in Q1 was EUR 1.3 billion, representing 30.5% of net sales and resulting in an EPS of EUR 3.21. Turning to the balance sheet. We ended the first quarter with cash, cash equivalents and short-term investments at a level of EUR 4.7 billion. Moving to the order book. Q1 net system bookings came in at EUR 4.7 billion, including EUR 2.3 billion for EUV systems and another strong quarter of DPV demand. Order intake was largely driven by logic with a 76% of bookings primarily due to EUV order intake with Memory accounting for the remaining 24%. With that, I would like to turn to our expectations for the second quarter of 2021. We expect Q2 total net sales to be between EUR 4 billion and EUR 4.1 billion. The directionally lower guidance is primarily due to shipments in the quarter, both EUV and DPV that will not receive factory acceptance test due to customers' desire to bring systems into production as quickly as possible. Therefore, we will recognize revenue in subsequent quarters after completion of acceptance testing at customer site. In addition, the installed base business is expected to be lower in Q2 versus Q1 as customers pull forward installation of productivity software upgrades to quickly increase wafer capacity. We expect our Q2 installed base management sales to be around EUR 900 million. Gross margin for Q2 is expected to be around 49%. The lower gross margin quarter-on-quarter is mainly due to delayed revenue from immersion systems that we plan to ship without sector acceptance testing as well as lower installed base management sales versus Q1. Expected R&D expenses for Q2 are EUR 650 million, and SG&A is expected to come in at EUR 175 million, reflecting a continued investment in the future growth of the company. In support of our aggressive product road maps and opportunity to fill in some of our high-value product developments, we plan to increase our R&D investments primarily in EUV via increased development capacity. Furthermore, this increase will allow us to compensate for remote work impact. We don't expect this increase to scale at the same level as our revised revenue increase with R&D expenses for 2021 around 14% to 15% of sales. We expect SG&A to remain around 4% of sales in 2021. Our estimated 2021 annualized effective tax rate is expected to be between 14% and 15%. As mentioned last quarter, ASML intends to declare a total dividend with respect to 2020 of EUR 2.75 per ordinary share. This is a 15% increase compared to the 2019 dividend. Recognizing the interim dividend of EUR 1.20 per ordinary share paid in November 2020. This leads to a final dividend proposal to the general meeting of EUR 1.55 per ordinary share. The 2021 Annual General Meeting of Shareholders will take place on April 29, 2021 in [indiscernible]. In Q1 2021, ASML purchased 3.5 million shares under the 2020 through 2022 program for a total amount over EUR 1.6 billion. Our expected free cash flow generation enables the opportunity for continuation of significant share buybacks in the coming quarters, and we expect to complete the execution of our current share buyback program early. With that, I would like to turn the call back over to Peter.

[Peter T. F. M. Wennink]

Thank you, Roger. As Roger highlighted, we had a very strong quarter in both sales and profitability, driven by continued strength in both logic and memory as well as significant demand for upgrades as customers look to bring additional capacity online as quickly as possible. The additional upgrades consisted primarily of software-based productivity packages. We are seeing a significant increase in demand from our customers across all market segments and all modes, mature and advanced, compared to 3 months ago. And we expect another very strong year with demand across our entire product portfolio. The steeper-than-expected recovery in demand for semiconductors, amplified by the COVID induced the lower investments of the industry in 2020. That created significant upside to demand over the past quarter. This more cyclical demand sits on top of the secular growth from the accelerated buildup of the worldwide digital infrastructure and assuring demand not only for advanced and mature logic nodes, but also for memory. In logic, customers continue to see strong demand across the broad application space for both advanced node as well as mature nodes. And last quarter, we expected revenue from logic in 2021 to be up 10% year-on-year. However, we now expect logic to be up around 30% this year. In Memory, the applications that are driving the strong logic demand are also fueling demand for memory. As we mentioned in earlier calls, the memory recovery started last year and continues to strengthen its customer plans to increase capacity is driving significant demand for our systems in the second half of the year. Compared to last quarter, where we expected revenue from memory in 2021 to be up 20% year-on-year. We now expect memory revenue to be up around 50% this year. On our installed base business, service revenue will continue to scale with the growing installed base and with increasing contribution from EUV services as these systems are more and more wafers in volume production. We're also supporting our customers with upgrades to maximize performance of their installed base. In order to meet the high demand in the current tight chip supply environment, customers are prioritizing software upgrades to quickly increase capacity as reflected by high-grade Memory in Q1. And some hardware upgrades require extended machine time to be installed. And in the current high amount environment, customers will be less willing to take systems down, which has a dampening impact on the 2021 growth profile of hardware upgrades. We still expect growth or is for basics of around 10% this year, as mentioned last quarter. On EUV, we continue to see increasing customer confidence in this technology, which is translating to expanding layer counts in logic and increasing deployment of EUV in memory at multiple customers, evidenced by a number of customer announcements around increases in their CapEx plans, which will include spending on EUV for advanced nodes. To support the strong EUV demand, we are working to increase our output capability. At the same time, we are driving our product road map to produce higher productivity machines, which will increase the effective EUV capacity per system and the wafer output capacity of our customers. We plan to transition to the NXE:3600D system in the second half of the year, which will provide customers with a 15% to 20% higher productivity compared to the NXE:3200C systems shipping in the first half of the year. Limited by the available modules and parts this year, we're still planning for growth of around 30% in EUV revenue this year. With the expanding adoption of EUV at our customers, we see increased demand building in 2022 and beyond. We are improving our manufacturing cycle time and are planning our supply chain for a capacity of around 55 systems next year. And as a reminder, all of our planned shipments in 2022 will be [indiscernible] T-Systems with the increased productivity capability. Our strength and outlook on the year, relative to last quarter, is primarily driven by the demand for DPV systems. With increased demand on leading-edge nodes as well as mature nodes running longer and ramping stronger, demand for our emulation and dry systems is stronger than ever. We have put in place plans to increase our DPV capacity to help meet our customers' increase demands. In our application business, as demand for scanners continues to increase, we expect a step-up in demand for our yield stomatology systems, particularly in logic. The newly released YieldStar 385 is beginning to ramp across our customer base as well. And with the recovery in Memory, specifically 3D NAND, we expect a substantial increase in e-beam inspection revenue this year. For the industry at a high level, we see 3 trends driving considerable growth this year and in the years to come. The first trend: in the shorter term, that's a more cyclical or, you could say, a catch-up driven demand from decisions made in 2022 due to the global dynamic. These shortages were initially evident in the automotive market, but more also indications of supply tightness impacting other market segments. We expect this to drive considerable demand for [indiscernible] systems this year and into next year. The second is a secular growth trend driven by the digital transformation taking place as we become a more connected world across both people and machines. And this transformation was further accelerated over the past year with the increased remote activity and reliance on technology to stay connected. The executive trends are driven by expanding end market applications such as 5G, AI and heart force computing. These and other mobile distributed applications drive demand for both advanced logic as well as more mature technology required for the services and applications that drive the growth of the digital infrastructure. And along with increased logic demand comes increased memory demand. This, in turn, drives demand across our entire product portfolio. And the third trend which we're starting to see now and which we will likely continue to see longer-term is the desire for more technology sovereignty, which includes semiconductor and silicon-based technology, leading to a geographical [indiscernible] as different governments put initiatives in place to localize supply chains and become more self sufficient. Inevitably, we'll create some level of inefficiency in the semiconductor supply chain and creates additional equipment demand as more fabs are strategically built across the globe. If we summarize the growth of the different segments and the trends just discussed, we now expect sales growth towards 30% this year. To achieve this growth, we are ramping up our capacity to support customer demand, resulting in a stronger second half. With the higher revenue and increased mix of DPV and upgrades, we now expect gross margins to be between 51% and 52% this year. Within the industry as a whole, the long-term demand drivers only increase our confidence in our future growth outlook towards 2025. And we plan to provide an update on our 2025 scenarios at our Investor Day in September. And with that, we'll be happy to take your questions.

[Skip Miller, Vice President of Investor Relations]

All right. Thank you, Peter and Roger. The operator will instruct you momentarily on the protocol for the Q&A session. [Operator Instructions] Now operator, could we have your final instructions and then the first question, please.

[Operator]

[Operator Instructions] And our first question comes from the line of Mehdi Hosseini of SFG.

[Mehdi Hosseini, Senior Analyst]

Yes. I want to follow-up on the EUV revenue target for this year. I understand that you're keeping it unchanged at 30%. But in case you're able to improve the supply chain and availability of subcomponent. Could there be upside to the shipment, even though you may not be able to recognize the revenue? And I have a follow-up.

[Peter T. F. M. Wennink]

Yes, Mehdi, you just used 2 very important words in case, which is the problem because we said it last quarter, we have very long lead time items. I mean the lens as a manufacturing cycle time or I would say them over 12 months. So if you haven't audit, that is not going to be there. So I think when we look at capacity increase, we really need to look at next year. I think it's virtually impossible to get more out of 2021 as we have planned today. So really, it's going to be -- that's why we also mentioned that working with our supply chain and looking at the demand next year, we are now planning and we haven't received full confirmation yet. Of the supply chain on it. But our focus is on the 55 systems next year. Bearing in mind also that, I think we said it before, customers are buying systems, but effectively, they're buying wafer capacity. And with next year, only 3400B, which already provides you with a 50% to 20% productivity increase. Well, if you then multiply, let's take the average of 15% to 20%, 17.5%, or let's say, 18% as a part of the increased payer system. And the 55 systems, actually translated into 65 systems were delivers productivity. So it's -- this is the way that you need to look at it.

[Mehdi Hosseini, Senior Analyst]

Great. And a quick follow-up. As I think about beyond 2021 and your operating margin, could there be a scenario where your key customers would share some of the development costs associated with High-NA, similar to what happened to almost a decade ago, so that, that could also help drive overall operating margin to above 33%?

[Peter T. F. M. Wennink]

Well, I think I don't think it's likely because it's not necessary. I mean, when we go back almost a decade ago, our R&D expense at that time was EUR 600 million per year. And then when you looked at at the size of the EUV program at that time and still you need to consider that the entire loan EUV program will, of course, more, if we don't end it than the High-NA program. So if I look at it, then the relative effort to bring EUV to life was so large that it would have put a significant financial strain on the P&L of ASML which, of course, we could not afford, which is not the case today. And I think if you think about operating margins, it is more a matter of maturity of EUV, which will, of course, lead to better performing tools with higher productivity with higher value. EUV service revenue that will grow going forward. And I think those are the most important drivers for operating margin. Roger?

[Roger J. M. Dassen]

I agree. I mean the gross margin components, I think, Peter, you just referenced them, I think with the ASP and as a result of that EUV system growth margin and the EUV surface gross margin. Those are the major drugs on the gross margin side. And I think also in the introduction, we've clear on what the ambition is for OpEx, right? So 14% to 15% for R&D and 4% for SG&A. And our longer-term ambition at least on the R&D side is to try and model that back to around 13% over time. I think that's what we stated in R&D. And those are the major drivers, I would to get the operating margin further on.

[Peter T. F. M. Wennink]

Yes.

[Operator]

And our next question comes from the line of Pierre Ferragu of New Street Research. .

[Pierre C. Ferragu, Global Team Head of Technology Infrastructure]

Can you anyway?

[Peter T. F. M. Wennink]

Very well.

[Pierre C. Ferragu, Global Team Head of Technology Infrastructure]

My question would be more over 2, 3 years, if I recall correctly, like about my visit in wonder. You guys are sort of to be able to do [indiscernible] per year and [indiscernible] High-NA Btus. And when I took a shot at looking at how much would be needed over the next 3, 4 years, I feel like this was actually a bit a delimited and that you might actually need more capacity. And so I would love to hear you state on that in the longer term, do you think it will make sense to think about increasing your overall capacity? And if that's the case, what kind of let times are we talking that for that kind of endeavor? And I have a follow-up.

[Peter T. F. M. Wennink]

It's a very good question, Pierre. I think it's a long-term strategic question. Let me try to answer it this way. When I talked about the 3 trends that the company will have to face in terms of demand cycles. That's, of course, the shorter term, which you could say it's a catch-up. But the lower level of investments we saw last year because of the pandemic, which is -- which are catching up this year. And I think throughout next year or I guess as a part of next year, then that's a secular growth turn which we have underestimated. I think you can go back to the Capital Markets Day in 2016 and '18. I don't think we -- at that moment in time, anticipated the strength of the DPV market that we see today. And that's the third trend, which is basically the driver of technological sovereignty by different countries and different governments. Those are all at this moment in time -- those will be the drivers, but it's also difficult to really get a very clear view on it. So your question is, taking that into consideration, should you guys be looking at increasing your capacity beyond the 60, the magical 60 that we've always mentioned. Good question. And I think this is actually the work that we're doing today. We're looking at it and say, what do we need to do this? So now the lead time, now if you have to build a complete refractory, let's take, you need to build a new optics factory and the leadtime is 2 to 3 years. Because you need to do the factory, you need to procure the machines or the, by the way, when it comes to optics manufacturing, you have to build those machines yourself because they're not available. So that will be longer. But a lot of ways to increase capacity and as to cycle time reduction, that's to process optimization. And so it's complexity of measures that we can take to see how we can drive the total capacity up, which, by the way, all have lead times that are beyond the 55 units that we're planning for next year, which doesn't mean that it couldn't be higher in '23 and '24 but that's the work that we need to do today, which a we are doing.

[Pierre C. Ferragu, Global Team Head of Technology Infrastructure]

That makes sense. And a quick follow-up is very much related to that. You mentioned like the geopolitical situation, when I look at the overall value chain? And how much it depends on what's happening in vendor on a single side, where you have some your [indiscernible] which almost scary it's a weak point for the global value chain and probably a place where your clients and governments are getting maybe a bit nervous that -- so do you have conversations with people around you about diversifying your size and creating supply that would not only tile less dependent on the Netherlands.

[Peter T. F. M. Wennink]

Yes. I think the -- that's the situation of today is not very different than the situation 5 years ago. Because we can only argue that the realization of people is now different but has never changed. It's what it is. But the same can be said for our own customers that are basically concentrated in 1 particular area or our peers that with some of their production facilities only make, yes, a couple of hundred tools per year in 1 or 2 single sites. It is the concentration of the semiconductor industry in different geographical areas that actually now starts to make governments think has never been an issue, yes? It's only becoming an issue when this an almost seamless ecosystem that has been built across many, many borders are now being -- that ecosystem is now being threatened, I would say, almost by blockages of that seriousness. And then you get an issue. So but I think it's nothing different. It's always been this way. And especially over the last 5 years, I would say, there's high concentration of leading-edge technology across the value chain. But given the geopolitical situation, people are more aware of it and they start now thinking of self -- of levels of self-sufficiency that a couple of years ago, nobody bought up.

[Operator]

And our next question comes from the line of Joe Quatrochi of Wells Fargo. .

[Joseph Michael Quatrochi, Senior Equity Analyst]

Was wondering if you could help us on the updated 2021 guidance. And I think last quarter, you had talked about there being potential upside from domestic China we hadn't seen any change in the geopolitical situation or export controls. So just curious, can you help us understand, is that now included, that upside included? And if so, how much is that?

[Roger J. M. Dassen]

Yes. I think it's fair to say that, that upside is now included in the numbers that we've given. So it's clear, and peter went through that also in the presentation at the beginning of this call that we've revised upwards, if you like, the the outlook for the full year. And further down into the year, we've now said this is how we look at the full year. Of course, still expecting that the regulatory situation remains a little bit the way it is today. And therefore, what previously was upside. And the way we talked about upside has now really been included in that number. Remember, last time, the expectation that we gave was that could be about EUR 600 million upside coming from China, and that number is now included in the, let's say, close to EUR 18 billion that we've now talked about. And if you really want to think about the risk profile, you could say, well, when the regulatory situation changes and you could not ship to China. When you look at the market situation today, then -- which is quite different than 3 months ago, then we would ship those systems somewhere else.

[Joseph Michael Quatrochi, Senior Equity Analyst]

Great. And then just as a follow-up. I just want to make sure I understand the 2 systems that you repurchased from a customer, those were on the EUV side and then you plan to ship those this year. And I guess, is that -- if that's correct, is that embedded in the 30% EUV revenue growth?

[Peter T. F. M. Wennink]

Yes, it is. Yes, it is.

[Roger J. M. Dassen]

So you have a reversal in this quarter. And you will see it come back in the subsequent quarters. For the full year, it's neutral price. It's minus 2 and plus 2.

[Operator]

And our next question comes from the line of Alexander Peterc of Societe Generale.

[Aleksander Peterc, Equity Analyst]

So you gave us a pretty clear outlook on EUV for '22. I just wondered about the longevity of this strong cycle do you see in emerging entry because that's where all of the upgrade today is coming for '21. So I'm just wondering is all of that then carrying into '22 as well. And then just very quickly, if you could also provide a quick comment on that on ASPs were again very strong in this quarter, so you put some things there.

[Peter T. F. M. Wennink]

I'll do the -- Roger will do the ASPs. And your question on the -- on the sustainability, yes. And especially DPV and apps. I think I said it on as an answer on an earlier question, when we look at how we see the DPV market and the aftermarket today as compared to 3 years ago, 2018, I think we have a different view. And that's driven by the fact that, of course, our entire GPV portfolio, which is emulsion and dry, we have -- we cannot fulfill the demand of our customers all the time. And that has to do with the fact that our analysis shows that with the combination of, let's say, advanced sensing technology, 5G the ability to process all the data through high performance compute. And then in a distributed fashion, basically leading edge compute also goes to the edge. I call that distributed systems and the distributed system is, for instance, a car. But it's also one of our machines in the field. And then increasingly, requires collection of data, transport of data, processing of data, not only to the most advanced high-performance compute but as part of the distributed system. And that system, inevitably includes mature technology, which could be image sensors, power ICs, MEMS, analog solutions. It's the whole thing. And that means if we would have a high line system available today, it will be sold yesterday. So it's everywhere. And that has to do with the proliferation of chip technology and a distributed computing and distributed systems that we are seeing. That is something that will not go away in our minds. This is why I said also in my prepared remarks that we are also planning and looking into what is the level of our DPV capacity increase that we need, both in mature and in emerging. And is it going to be double-digit increase as from where we are today. Now how much can we stretch that or how much is needed. That's exactly what we're doing with EUV. We need to land up with the supply chain. And we need to go deeper into what it takes in terms of capacity lead time, do they need to build square leaders, so they need to hire people, it's going to be possible to cycle time reductions through process optimization. This is the work that we're doing today. Because remember, 5 months ago, we were looking at a completely different world. So this is a ramp-up, but we do believe that this has a long runway.

[Roger J. M. Dassen]

Yes. On the ASP for EUV, it's well noted. You're absolutely right. So this quarter, in Q1, we're looking at an ASP for EUV of about $160 million. Part of that is configuration. We've talked about that in the past. If you look at the last 3 quarters, we've consistently been looking at at an ASP of around 1 45 and this time it's a little bit up for another reason I'll come to in a moment. So in fact, what you see is that -- in fact, in the last year, we've been positively surprised by the options on the 2 and the options that were ordered on the 2 as a result is that the consecration was richer than anticipated. And as a result of that, your fairly consistently see now that the as ranges above the 130 that we talked about in the past and it's fairly consistent. We've seen 1 45 or up. The reason that is extra of this this year, there's a few accounting things. We talked about accounting for for VPAs in the past. So there's a few accounting reasons why it's [indiscernible] higher to it 160 11 and 1 45. Reality, just looking at the configuration that we've seen on the tools in the past couple of quarters. The 1 45 tanker point, [indiscernible] for EUV is probably the right way to go. And I say that recognizing that this is about the last quarter that we're really looking at a large number of fees in the revenue.

[Operator]

And our next question comes from the line of David Mulholland of UBS.

[David Terence Mulholland, Director and Equity Research Analyst]

Just coming back on the EUV capacity increase and shifting to 55 tool capacity for next year. Obviously, there were some changes made last year that ended up limiting what potentially should have been higher shipments this year and some of that probably kicks in next year. But in your discussions with customers, Peter, just -- obviously, there's a very, very strong cyclical tailwind for the industry today that's driving appetite for capacity increase. But the EUV is on a very, very long time horizon for customers 18 months rather than 6 months planning. How do you feel like their assumptions have changed that's driving that upside? Is it primarily because of their confidence and penetration of EUV in higher layers? Or is there an element of actually just building bigger nodes now that's driving the need for more capacity at this point?

[Peter T. F. M. Wennink]

I think, David, it's both. I think we're seeing -- I only -- what I referred to as a comment that was made by the CEO of one of our large customers. And actually, man, you know we're going to double the number of layers on our next node. I think that's a trend that we are seeing. Simply because the advantages of EUV are not only, you could say, the pure economic cost per layer because you can eliminate multiple patterning. But it's also the electrical characteristics and the simplicity of the process, lower risk. That's 1 of them. So there's many other side effects that actually lead people to go for EUV. So yes, it's higher layer counts, that's what we're seeing, which is true for memory and for logic, but also when we talk to customers, we all talk about bigger nodes, it has to do with this secular trend. Trend #2 that I talked about. And that number -- trend number 3, the technological sovereignty, will just be a layer on top, which will not go away, which will take time. It takes 2 to 3 years to build this semiconductor factory and we put it into action. So -- but I think this is -- so it is bigger nodes. It is strategic investments. It's high lay accounts. And this is what I asked to a previous question, we only to take this into consideration. Some of it we already saw coming, but what does it mean? For our capacity needs beyond 2022, which, by the way, solve that capacity if that would be needed, would be the result of, like I said, process optimization, cycle time improvement, [indiscernible] work schedules and potentially square and meters, that could be. But it's all of the above.

[David Terence Mulholland, Director and Equity Research Analyst]

And just one quick follow-up. Obviously, from a financial perspective, at some point in the near future, you need to start building those tools through the supply chain, given the lead times. Are you requiring customers to place deposits and make the financial commitments that you've been starting to make before any of those tools get built? Or is there an element still this year where you're going ahead and starting production before you've had firm deposit associated orders from the customer?

[Roger J. M. Dassen]

Yes, David, the policy hasn't changed there. So that means that when customers put in a PO, a down payment is required. And I think we mentioned in the past that the amount of the deal is a little bit dependent on the moment or what the order is being paced. So the order is being placed nicely in line with the lead time, the down payment is lower than 1 has placed a little bit later than that. But you also know that the PO in and by itself is a bit of a non-event for us because we work so closely with the customer that we sort of understand what they're doing what they want and when they need it. So the CEO is a bit of a nonevent for us. But yes, the short answer is absolutely. There will be down payments to date at the moment of the [indiscernible]

[Operator]

And our next question comes from the line of C.J. Muse at Evercore ISI.

[Christopher James Muse]

I guess first question, Peter, can you speak to the sustainability of memory? I think the headline above 50% might be a bit concerning. However, if I think about EUV in there as well as the strong pickup in EUV and voltage and contrast imaging. It certainly looks like Memory ex those 2 things is tracking more like up 20%, 25%. So I would love to hear your thoughts on the moving parts there. And how to think about sustainability into '22?

[Peter T. F. M. Wennink]

Yes. I think for this year, it's not a surprise. I mean, you just need to go back to our conference calls the last 2 quarters. Where we actually saw a recovery of especially DRAM starting. And I think I gave some color 3 months ago where he basically said, we had a decent shipment core in Q4 of last year, which basically goes into production in Q1. But if you look at a bit growth of 20% this year, then our calculations show that we very quickly at the next output capacity of our DRAM customers in this year, and we would reach that pretty quick. So we need more capacity addition. That's exactly what we have seen. So I think it's just the beginning. These things -- so yes, I think, yes, it will move into next year. Now you've been around also long. So that -- in the memory business, yes, there is more tendency to have from time to time some overcapacity and some under capacity. How long that will last, I don't know. But still, this is -- [indiscernible] telling me. This secular trend, when there's such a high demand in logic, all this stuff doesn't only work we only logic. It also needs memory, yes? So it's going to be quite interesting to see how quickly the memory capacity will be added throughout this year, early next year. And what the underlying bit growth percentages will be. Now I think having said that, you notice also memory is more cyclical than logic, but nothing that indicates to me at this moment in time that we are looking at building an overcapacity. And there's nothing I can see at this moment in time. We're just starting.

[Christopher James Muse]

Very helpful. And then just a follow-up question on the EUV side of things. I think you guys have talked about growing your non EUV tool business by about 40%. So that's roughly $7.7 billion this year. Is there a way to frame how much capacity you're planning to add on the non-EUV side relative to that $7.7 billion for us to kind of gauge what you're capable above into '22 and beyond?

[Peter T. F. M. Wennink]

Yes. It's -- I think we -- if we should calculate it the way that we would calculate but, for example, we would just be over it, about 8.2. And that's really stretching it. In terms of our production capacity this year. I would have more capacity, we could probably do more. Okay. Likely, we would be able to do more. So your question really is answered. In a sense that I already said in my prepared remarks, we're looking at increasing our BP capacity, both dry, mature and immersion and that's not going to be 5%. I mean, it's going to be double digit. But that will take some further analysis of what needs to be done. Is it through optimization? Things like process optimization and added workforce or cycle time action or has it to do with square meter capacity like factories. That is something that we as under consideration today, and we're looking into that and together with our supply chain. It's not so much for us. It is really in the supply chain. So the reason why I say this is because we believe that we need extra capacity. And it has to do with the underlying trends. The trends that I talked about earlier. So yes, the 40% rate bases to just over 8%, you have 7.7%, so you're a bit more conservative. But this is -- directionally, it is correct with. This is the answer.

[Operator]

Our next question comes from the line of Andrew Gardiner at Barclays.

[Andrew Michael Gardiner, Director]

Another one, Peter, on the sort of capacity planning issues that you guys have been talking about. I'm wondering, given the changes that we've seen from a number of your lead customers or at least the public announcements from your lead customers over the last 3 or 4 months. And the fact that you are now having to rethink the need for additional capacity expansion, whether it's your site or within the supply chain. Are they now giving -- and I presume they're launching it sooner rather than later. It always seems to be the way. And yet you've got fairly extensive lead times, particularly so for EUV, perhaps slightly less so for DUV in terms of building out this capacity. Are you getting better visibility today in terms of what those customers are going to need looking out over the next 3, 4, 5 years in order to give you that confidence in making such a decision?

[Peter T. F. M. Wennink]

Yes. It's a good question. I mean, also, you've been around also. I think all these people have been out for a long time. So that -- yes, when we underinvest, there's also going to be a knee jerk reaction, like it always happens. So this is is more the shorter-term correction of a MIS planning, that's happening today. That's what I call if the trend number one, but clearly, customers understanding that our capacity lead times in our manufacturing items are all. So they do share with us a longer-term vision. Now not 5 years out, that's a bit too much to ask. But certainly 2, 3 years out. So I mean, I would say, for 2022, 2023, we definitely have the discussions about what they need in terms of expansion plans in terms of what they see when we talk about logic, the anticipated capacity ramp in terms of the tape-outs that they have on the shelves that they see coming on and 5 and then the so it is not just some pie in the sky thinking. It is real underlying discussion that they have with their customers and their design requirements that they get from an increasing customer base, which has to do with high-power compute, there it AI and with all the applications that we talked about because of the whole digital transition. So yes, there's more visibility to the point that the planning visibility is, I would say, deeper. And this is also where we base our our request to the supply chain on, it's on that discussion. And which is going to be -- it's a costly discussion because you not add capacity for nothing. So this is and it is also true for our customers. It's going to be colo, but they've been very explicit to the outside world and to the media about what their plans are. And it's it's well thought through based on what they see for their customers and the customers of their customers tell them. So that's why I talk about these 3 trends. And this basically is the base for the visibility. But how much it in the end will be or we will need. There's always a risk of underestimation, but also risk of overestimation. And that's what we need to take into consideration when we say what's wise? And then like I said, this is just something of the last 3 or 4 months where it starts to accelerate, it gives us a bit of time and our supplies particularly to figure out what is with them.

[Andrew Michael Gardiner, Director]

Thank you, Peter, for that insight, even if I think you did call me old at the outset there, I still appreciate that.

[Peter T. F. M. Wennink]

It's all relative. And from my perspective, you are very young.

[Operator]

Our next question comes from the line of Krish Sankar of Cowen and Co.

[Krish Sankar, MD & Senior Research Analyst]

So let me ask you 2 quick questions. Clearly, a nice jump in EUV bookings in the March quarter. Can you give some color on how the EUV bookings are trending for the current quarter? And what is your EUV backlog in terms of units? And then I have a follow-up.

[Roger J. M. Dassen]

I could take it. So in terms of order book, the current backlog is EUR 7.4 billion for EUV. So that's pretty strong and obviously also driven by significant intake in the last quarter. I'm not going to comment specifically on this quarter, but in general, just listening to the commentary that we made on our expectations on our [indiscernible]. It's pretty clear that also for the next quarters, we do expect a healthy order intake for EUVs because at this stage, EUR 7.4 billion. And if you do the math, what you think system business is going to be next year. If you translate that at the 55 capacity that we've been talking about, it's pretty clear that we're still looking at a significant order intake expected for the next -- for this quarter and for the next quarter.

[Krish Sankar, MD & Senior Research Analyst]

Got's it. Very helpful, Joe. And then just as a follow-up, Peter, you -- I know you gave some color on like the memory outlook for this year. Can you just give little more insight in terms of how to think between DRAM and NAND in the context of a memory growth of 50% for this year?

[Peter T. F. M. Wennink]

Yes. I think we -- I think we also -- it's an extension of what we said in the previous 2 quarters. It is primarily driven by DRAM. But we also see that 3D NAND will follow. I mean, what we see is basically following the utilization of our tools in the field. That will follow. But it is primarily driven this quarter, next quarter. And I think the majority of [indiscernible] DRAM.

[Operator]

And our next question comes from the line of Alex Duval at Goldman Sachs. .

[Alexander Duval, Equity Analyst]

Just have a quick question on you gross margin. So we expected trajectory there in the gross margin stolen this year to be at good gross margin levels. I wonder if you could just talk through the drivers of improvement as we go to the end of the year. Then new reference related to this, that you're seeing higher ASPs related to a particular area the CMO. I was just wondering to the extent that we see an expected ASPs on the DMO could atone the gross margin [indiscernible]

[Roger J. M. Dassen]

Yes. Like at the beginning, you were a little bit tough to understand, but I think your question really was, how do you expect the gross margin to further develop on EUV. And as we mentioned before, we do expect in the second half with the introduction of the D model, we expect EUV system gross margin to be at the level of the corporate gross margin. So -- and I can confirm that that's exactly what's going on. You are right that we did see a little bit of a reset on the ASP for the C model, right? So we've been talking about 1 30. But as I mentioned, the configuration quarter after quarter turned out to be richer than we previously anticipated. And I think it's fair to say that the 10% to 15% uptick that we've been talking about on the -- for the demo in comparison to the C model, still hope, right? So if you take the the 145-ish basis for the C model, then I think a low low TAM increase over that in terms of a probably what you should be looking at for the ad calculation. And of course, to the extent that, that is better, that, of course, is also helpful a little bit on the gross margin side as well. Although the D has also somewhat higher cost. So it's 100% to the bottom line that we have some higher cost on the optics and also other parts correct. But it will help.

[Operator]

And our next question comes from the line of Amit Harchandani of Citi.

[Amit B. Harchandani, Director & Head of EMEA Technology Research]

I'm Amit Harchandani from Citi. My first question is on the topic of DTV. If I try to collect all the data points you've shared with us is it fair for me to say you would expect DPV sales to be up year-on-year in 2022, given that you are just getting started in memory and cyclicality trend could persist into 2022. And as a follow-up to that, if I may, you've talked about building capacity for detailing. You are stretched at EUR 8 billion. And you talked about double digit, I think earlier in the call, is it fair to say that you would expect this EUR 8 billion to be exceeded or basically even a higher contribution from DTV, if not in 2022, then certainly beyond 2020?

[Peter T. F. M. Wennink]

Yes. You've listened carefully, Amit, and that is true. Everything you just said, do we expect difficult sales to be up year-on-year I don't know about the year that you are imagined, but the fact that we are looking into increasing our DPV capacity means that we believe DPV sales will be up and in what year and is year-on-year. But I think into the long term, we have, indeed, reassessed the need for DPV capacity going forward. And when you talk about capacity increase, you don't do this for 1 year. You do this because you feel medium to long-term that is needed. So yes, and it also means that if we do that, then -- and we say we'll be around EUR 8 billion this year on DPV, yes, that we would expect that, that would increase because otherwise, you don't need to build capacity because we could do with what we have today.

[Amit B. Harchandani, Director & Head of EMEA Technology Research]

Okay. I just wanted to clarify that. And secondly, very quickly on on geopolitics. We've heard a lot of noise. Based on what you have said today, it seems like you expect the whole geopolitical dynamic to be a net positive. It may be some downside risk to China potentially being offset by potential upside in Europe and the U.S. Is that a fair assessment? Or more broadly, what are the latest -- what is the latest in your view versus what you shared at the end of January?

[Peter T. F. M. Wennink]

Yes. I think Roger said it, is that I think we are now where we are because we're through Q1, we're in Q2 now, we have included that EUR 600 million upside into the number that we gave you. However, we don't control the geopolitical situation and the lawmaking. But given the market situation where we are today, if some of that EUR 600 million would not be there because of geopolitical roadblocks, then the demand is such that we will ship those systems somewhere else. And if you then look at how that affects shipments to China versus the longer-term geopolitical impact. It's just a matter of timing, yes? That's -- the first one could be short-term this year, the others are definitely long-term because when you -- they all -- it is all about where do we build a new fab well, it takes 2 to 3 years. So when you really look at adding capacity at the time frame, 24, 25. Is that capacity starts coming to the market. So it's all -- that's all matter of different timing, a different time perspective.

[Skip Miller, Vice President of Investor Relations]

All right. We have time for 1 last quick question. So if you were unable to get through on this call and still have questions, please feel free to contact ASML Investor Relations department with your question. Now operator, may we have the last caller, please.

[Operator]

That is the line of Didier Scemama of Bank of America.

[Didier Scemama]

I think the most important question was just asked and answered, so thank you. I wanted to ask you question about installed base management for EUV, Peter, if you would like to really share with us what do you think the sort of revenues could be for EUV installed base this year? And how you're thinking about the slope of growth over the coming 5 years, the sort of things. So we have a feel for the change in the mix towards the sort of more recurring revenues in installed base, that would be great.

[Peter T. F. M. Wennink]

Yes. So on the more recurring side, I think what we've said in the past is that the way to model that for EUV is to take the ASP of a 2 and take about 6% of that. And that's when the tool is up and running at I envisage capacity, then you would have 6% of that ASP as the recurring revenue for service and maintenance for that tool. So that excludes upgrades, but just for the regular sort of a maintenance, 6% of the APE is what you would see there. So again, the assumption to needs to be up and running at the visit capacity, and it should be out of warranty. As long as food is important, the number is a bit lower. So that's really the way to model it. As it comes to upgrades, that's a little bit more difficult right, because upgrade is lumpy, upgrade is dependent on what the customer wants in terms of productivity gains. What they want to make available to us in terms of the machine plan. So that's a little bit harder to predict. But at least on the regular service and maintenance side, this is the way to model the 6% [indiscernible] up and running and out of warranty.

[Skip Miller, Vice President of Investor Relations]

Before we sign off, I'd like to remind you that our Investor Day will be September 29, 2021. The event is currently planned to be held in London. We move the date from June and hope we can have a face-to-face meeting at the time, but of course, this will depend on the progress against the virus. More details will follow in due time. And we do hope you'll be able to join us. Now on behalf of ASML, I'd like to thank you all for joining us today. Operator, if you could formally conclude the call, I'd appreciate it. Thank you.

[Operator]

Thank you. This concludes the ASML 2021 First Quarter Financial Results Conference Call. Thank you for participating. You may now disconnect.