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ASML HOLDING NV (NASDAQ:ASML)
Q4 2019 Earnings Call
Jan 22, 2020, 5:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the ASML 2019 Fourth Quarter and Full Year Financial Results Conference Call on January 22, 2020. Throughout today's introductions, all participants will be in listen-only mode. After ASML's introduction, there will be an opportunity to ask questions.

I would now like to open the question-and-answer queue. [Operator Instructions].

I would now like to turn the conference call over to Skip Miller. Please go ahead, sir.

Skip Miller -- Head Investor Relations Worldwide

Thank you, operator. Welcome everyone. This is Skip Miller, Vice President of Investor Relations at ASML. Joining me today from ASML's headquarters in Veldhoven, The Netherlands, is our ASML CEO, Peter Wennink; and our CFO, Roger Dassen.

The subject of today's call is ASML's 2019 fourth quarter and full year results. The length of this call will be 60 minutes, and questions will be taken in the order they are received. The call is also broadcasting live over the internet at asml.com. A transcript of management's opening remarks and replay of the call will be available on our website shortly, following the conclusion of this call.

Before we begin,I'd like to caution listeners that comments made by management during this conference call, will include forward-looking statements, within the meaning of the federal securities laws. These forward-looking statements involve material risks and uncertainties. For a discussion of risk factors, I encourage you to review the Safe Harbor statement contained in today's press release, and presentation found on our website at asml.com and in ASML's Annual Report on Form 20-F and other documents, as filed with the Securities and Exchange Commission.

With that, I'd like to turn the call over to Peter Wennink, for a brief introduction.

Peter Wennink -- President and Chief Executive Officer

Thank you, Skip. Welcome everyone. Thank you for joining us for our Q4 and full year 2019 end year results conference call. Before we begin the Q&A session, Roger and I would like to provide an overview and some commentary on the fourth quarter and the full year 2019. As well as provide our view of the coming quarters. Roger will start with a review of our Q4 and full year 2019 financial performance, with other 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 -- Executive Vice President and Chief Financial Officer

Thank you, Peter, and welcome everyone. I will first highlight some of the fourth quarter and full year financial accomplishments, and then provide our guidance for the first quarter of 2020.

Q4 results were basically in line with our guidance. Net sales came in at EUR4 billion. Net system sales of EUR3.1 billion was heavily weighted toward Logic, at 83%, with the remaining 17% from Memory, clearly showing the continued strength of Logic business, as well as the ongoing digestion phase of the Memory business. We reported EUV system sales of EUR922 million from eight shipments.

Installed Base management sales for the quarter came in at EUR906 million. Gross margin for the quarter was 48.1%.

Overall, operating expenses came in above our guidance, with R&D expenses at EUR516 million and SG&A expenses at EUR148 million.High end guided SG&A is due to additional employee benefit costs and costs related to our IT implementation. Turning to the balance sheet; EUR186 million worth of shares were repurchased in Q4. We ended last quarter with cash, cash equivalents and short-term investments at a level of EUR4.7 billion. This amount is significantly higher than anticipated with most of the cash coming in the December period.

Moving to the order book; Q4 system bookings came in at EUR2.4 billion including EUR1.1 billion for nine EUV systems. Logic order intake was 79% of the total value, with the remaining 21% from Memory, again reflecting the continued strong Logic demand for leading edge lithography.Net income in Q4 was EUR1.134 billion representing 28.1% of net sales and resulting in an EPS of EUR2.17. For the full year, net sales grew 8% to EUR11.8 billion. The installed base management sales was EUR2.8 billion, which was a small increase compared to previous year.In 2019, we booked EUR6.2 billion of EUV orders, which is more than 50% of the total bookings value for the year, reflecting customer's strong demand for EUV technology. We continue to invest in the future of ASML and increased R&D spend to EUR2 billion in 2019. The increase was primarily driven by the acceleration of our EUV roadmap, low and High NA program, overall R&D investments as a percentage of 2019 sales was about 17%, SG&A was about 4% of sales.

In addition, ASML invested EUR886 million in CapEx, supporting our long-term growth opportunities, primarily around High NA capacity and infrastructure. Net income for the full year was EUR2.6 billion, resulting in 21% of net sales and an EPS of EUR6.16.

With that, I would like to turn to our expectations for the first quarter of 2020. We expect Q1 total net sales between EUR3.1 billion and EUR3.3 billion. We expect our Q1 installed base management sales to be around EUR950 million driven by a strong demand for field upgrades, especially EUV.

Gross margin for Q1 is expected to be between 46% and 47%. The lower gross margin relative to the strong Q4 number is primarily due to the EUV mix effect, fewer immersion and more drive systems with some positive EUV mix effect.

The expected R&D expenses for Q1 are around EUR550 million, and SG&A is expected to come in at around EUR140 million. Our estimated 2020 annualized effective tax rate is around 13%.

Regarding our capital return, ASML paid total dividends of EUR1.3 billion, made up of the 2018 dividend and 2019 interim dividend, and purchased EUR410 million worth of shares in 2019. Through December 31st, 2019, ASML acquired 9 million shares of the 2018-2019 program for a total amount of EUR1.6 billion.

Buoyed by our long-term business plan, ASML will submit a proposal at the 2020 annual general meeting of shareholders, to declare a dividend for 2019 of EUR2.40 per ordinary share. Recognizing the interim dividend of EUR1.05 paid in November 2019, this leads to a final dividend of EUR1.35 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 22 in Veldhoven.

ASML announced a three year share buyback program of up to EUR6 billion to be executed in 2020 through 2022. ASML intends to cancel these shares after we purchase, with the exception of up to 0.4 million shares, which will be used to cover employee share plans.

With that I'd like to turn the call back over to Peter.

Peter Wennink -- President and Chief Executive Officer

Thank you, Roger. As Roger highlighted, we had a very strong quarter, resulting in another solid year of growth, driven by Logic and EUV. We were able to achieve an 8% top line growth, despite an overall industry decline of around 10% due to a weak Memory market. There is always a reflection of our Logic customers drive, to continue to innovate and invest in technology for future nodes. For 2020, we currently expect the year of double-digit growth in both sales and profitability, primarily driven by EUV and installed base business.

Major innovation drivers, such as artificial intelligence, 5G, high performance compute, is driving a big data, creating new end user applications. And these applications require more high-performance Logic, fueling increased demand for leading edge nodes, and this is evident in several customer announcements regarding ramp plans with the 7 and 5-nanometer nodes, which will drive another strong Logic year and an increased demand for EUV.

In the memory market, customers have indicated they're seeing signs of demand recovery in some market channels and improvements in memory chip pricing, also support this view.

As customers have lowered a little tool utilization to reduce wafer output throughout the weak Memory demand periods, they will first use this underutilization to return to normal supply levels, which will take some time. Subsequently, this will also trigger equipment demand, albeit a bit later than the supply demand recovery for memory devices. Taking the slope of the recovery of our litho equipment utilization as a proxy, it seems likely that we will see stronger litho equipment demand for Memory in the second half of the year.

We expect significant growth in our installed base business, service business will continue to scale, as our installed base grows, and we will also see EUV contribute to service revenue, as these systems start running wafers and volume manufacturing now. We expect significant demand for upgrades, particularly in EUV, as customers utilize upgrades as a quick way to increase capacity.

In EUV, it was a breakthrough year, with the technology now starting in high volume production and producing consumer products that are already available in the market. As we continue to execute on our accelerated EUV roadmap, we were able to ship our first NXE:3400C in 2019, which provides higher productivity, translating to increased customer value, delivering higher ASPs and improved gross margins.

We shipped six 3400C systems in Q4, of the eight EUV systems total we shipped in the quarter, bringing the total to 26 EUV systems and the full year sales of around EUR2.8 billion in 2019. Increase in customer confidence in EUV is translating to more layers in Logic production, as well as expanding to new markets, with the adoption in Memory.

For full year 2020, we plan for EUV sales of around EUR4.5 billion on 35 systems. We continue to see demand building for next year shipments and expect a healthy order flow to continue.

In order to fulfill the expected strong demand increase, we're working on the cycle time reduction to enable the capacity of 45 to 50 systems next year. 2021 is shaping up to be a very busy year.

Regarding our current outlook for the year, we expect 2020 to be another growth year as mentioned before. Although it's too early to provide quantitative expectations, let me make a few qualitative comments. Major innovation drives and applications that require high performance Logic, are driving increased demand at the advanced nodes.

Logic demand is currently strong and we expect this demand to remain healthy, primarily driven by EUV. As previously communicated, we expect sales of EUR4.5 million on 35 systems this year, which translates to EUV sales growth of approximately 60%.

Memory is showing early signs of recovery, and although there is still uncertainty around exact timing of the recovery, it is likely we will see stronger demand for the second half of the year, and taking this into account, we expect stronger second half with strengthening sales throughout the year.

Certainly 2019 was another great year, with continued positive momentum in EUV, as well as solid demand across our entire product portfolio. We expect another growth year supported by healthy Logic demand, the likely recovery of the Memory market, with increased sales from our installed base business, as well as demand for EUV.

The positive industry momentum around innovation and expanding new markets further strengthens our confidence in 2021 outlook, and our 2025 growth scenarios.

With that, we'd be happy to take your questions.

Skip Miller -- Head Investor Relations Worldwide

Thank you, Peter and Roger. The operator will instruct you momentarily on the protocol for the Q&A session. Beforehand, I would like to ask that you kindly limit yourself to one question, with one short follow-up if necessary. This will allow us to get to as many callers as possible. Now operator, could we have your final instructions and then the first question please?

Questions and Answers:

Operator

Yes, thank you. At this time we will begin the question-and-answer session. [Operator Instructions]. The first question comes from Mehdi Hosseini. Please state your company name followed by your question.

Mehdi Hosseini -- Susquehanna International Group -- Analyst

Yes sir. Thanks for taking my question. My question has to do with your comment regarding EUV manufacturing capacity of 50 systems by 2021. Peter, do you think your backlog would reflect that capacity, as we progress through the year? In other words, would you be able to have a full commitment from your customer for full capacity. And my short follow-up has to do with your -- the multi-beam EUV wafer inspection. Are we still on target for the first shipment in the first half, and how should we think about -- the time it would take for your customers to evaluate the tool?

Peter Wennink -- President and Chief Executive Officer

Okay Mehdi, thanks. On the EUV capacity, yes, I think the backlog will reflect this. I think the order intake on the EUV is looking very healthy. So I have little doubt that we will have the backlog filled this year to support the capacity that we have lined out now for 2021.

I think the issue here is really, we need to reduce the cycle time, which we have good plans for. I mean we see progress. I think the focus is on cycle time reduction in this case.

And the multi-beam inspection. Yes, we will ship in the first half and I think the customers will probably take throughout this year to evaluate too, so that we can start shipping next year in higher volume.

Mehdi Hosseini -- Susquehanna International Group -- Analyst

Great, thank you.

Operator

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

David Mulholland -- UBS -- Analyst

Hi, it is Dave Mulholland from UBS. Just to follow-up some of the comments you made around Memory. Obviously, there are some indicators, things are improving. I think some of the checks we've been doing through the supply chain are certainly pointing to improved capacity plans, particularly potentially from Q2. When do you think you could start seeing that in orders? And I guess in some respects, why haven't we already seen some of that in Q4? And then I'll come back with a follow-up.

Peter Wennink -- President and Chief Executive Officer

Yeah, thanks David. It's a good question. I wish I had a definite answer, because that would make things easier. So I am basically saying, we are -- what I said in my prepared remarks, that we see the utilization of our tools going up and we just extrapolate the slope of utilization increase.And I think it would mean that, in the first half of this year, we will see likely a return to a normal supply demand balance with our customers. Now they see that also, and taking into account the order delivery times, the order lead times. Then I would expect orders have to come in somewhere in Q2, in order for us to make sure that in the second half of the year, we could see an increase of our Memory business.

Again, we're in this business for quite a long time and and in my experience, Memory always comes back with a vengeance. When it comes, it always comes quick. So we'll just have to wait. So I think it makes a big difference, whether they come back in Q2 or they come back in Q1 or in early Q3, I mean, it makes a big difference for the year.

So we have to wait and see, and I wish I had a final and definite answer.

David Mulholland -- UBS -- Analyst

And just once again, a follow-up on the installed base management business, obviously very strong run rate in Q1, at EUR950 million. How do you think about this on a full year basis? In the the past, you'd had a target I think of EUR3.7 billion, but been slightly more conservative run rate through the last couple of years. What's driving the pickup in Q1? How should we think about it on a full year basis?

Roger Dassen -- Executive Vice President and Chief Financial Officer

David, I think the, if you look at the Q1 and also if you look at Q4, you see that the momentum was already building up in Q4, where we already were slightly over EUR900 million, EUR950 million for the quarter. We expect that we will not be able to sustain it at this level for the entire year. I think the goal would be to say, that we're probably going to see a 20% increase over last year annualized. So that would, that would get to approximately EUR3.4 billion for the year. That's where we would see it for the full year.

David Mulholland -- UBS -- Analyst

That's great. Thanks very much.

Operator

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

C.J. Muse -- Evercore ISI -- Analyst

C.J. Muse with Evercore ISI. Thanks for taking the question. I guess I was hoping to hit on gross margins. Can you walk through where we exited on EUV in the fourth quarter, and that how you're seeing the trajectory for overall gross margins through the year increase EUV shipments, as well as likely higher immersion shipments in the back half for DRAM?

Peter Wennink -- President and Chief Executive Officer

Yeah. Thank you, C.J. So let me first talk about gross margin for EUV, and then give you the the wider picture on gross margin.

Roger Dassen -- Executive Vice President and Chief Financial Officer

So on EUV, what we said, as you know last year on the systems side, systems gross margin for EUV, we're looking at about 30%. This year, we're looking at about about 40%, four zero. So that's what, that's what we had in the plan, and that's what we're executing for and that's also in our models for this year.

On the wider picture for gross margin and I know that many of you are looking at the Capital Markets Day. At the Capital Markets Day, we mentioned 50%. So let me start there, let me start at a 50% and let's look at what the circumstances were at the time, what the circumstances are today, and then we will start talking about how we see this further unfold, and what the potential is that we see for this year.

So back in November at the Capital Markets Day in November 2018, I think there are three things that we should bear in mind. First off at that stage, what we modeled at that stage for you and that had the 50% in there, was what we called a mid-market growth scenario. And I think in all likelihood, if you look at the circumstances today, if we look at the circumstances of the the memory market today, then I think it will be hard to say that for the full year, we're looking at a mid-market scenario. It's definitely not what we're looking at today, depending on when it's going to come back and as Peter said, how it's going to come back, you could still on average, see a mid-market scenario. But at this stage, I think it's hard to say that we're looking at a mid-market scenario for that. At this stage, the memory market in these months is fairly flat. So that's one important circumstance I think to recognize.

The second thing that I think changed from November 2018, and I think Peter already responded to that in the first question, is the multi-beam. So the delay in the multi-beam where -- I think we're going to see commercial application and commercial sales of multi-beam, only in 2021, where at the Capital Markets Day as you know, and as we already told you so last year, we are still looking for 2020, as commercial application of multi-beam. So that's in essence shifted with a little under one year. So that's the second circumstance to bear in mind.

The third thing that deviates a little bit from what we told you in the Capital Markets Day in November 2018 is a bit of accounting issue and that has to do with the High-NA. We are preparing for High-NA, not just on the R&D side, but we're also preparing for High-NA on the manufacturing side and on the supply chain side. And we are incurring costs there that we cannot capitalize and have to run through cost of sales, which is a bit weird, because we're not selling High-NA. But nonetheless, that's for the accounting rules dictate you to do. And that represents a little short of 1% alone in gross margins.

So those are three things to bear in mind that might be different from the perspective and the model that existed in November 2018.

So now let's look at this year and let's look into 46% to 47% that we have for Q1, and let's look at the potential for the rest of the year. And I think there is a number of drivers in there, that I think could further drive the gross margin up. The first one obviously is related to the situation in the memory market, and that is pretty important, not just for the top line, but it's also very important for gross margin, because if we see a solid recovery in the second half of the memory market, that will have a significant impact on the sale of immersion tools, which as all of you know, comes with pretty high gross margin. And also with a good recovery in our voltage contrast business, which as you know, is also very much tied to the Memory business. And again, that is a very high margin product that we have.So if we get the recovery in the memory market, that will also have a significant impact on the gross margin on those two elements alone.

The second element that will -- that is expected to further drive up the gross margin throughout the year, is the EUV service. EUV service for the full year is still expected to be -- to have negative gross margin. But over -- quarter-over-quarter, you will see a sustained improvement in the gross margin that we have on EUV service. For two reasons; first off, because as you know, with the number of customers we have the paper wafer model, and to the extent that EUV continues to go into a high volume manufacturing, obviously we got more revenue. And secondly, the costs that we have per EUV machine goes down, because we get, we get more efficient in doing it and we also get scale effects as a result of that.

So quarter-over-quarter, you will see that the EUV service margin will improve. For the full year, it's still negative, but at least in Q4, maybe even a little before that, we will see it starts to become positive.

A third improvement that we expect to occur in the course of this year will be the introduction of our new immersion tool. The NXT:2050, which again comes with a good improvement of our gross margin. So those are three significant drivers that we have that we believe give us, give us a good shot at achieving a significant improvement of our gross margin, particularly in the second half, and a good shot at the 50%.

And then this 50%, we will be able to then sustain further into 2021, which as Peter already alluded to, we think is going to be a very busy year and a very busy year at that stage, would also come with a number of scale benefits in our gross margin and better fixed cost coverage. And also in 2021, we would see the introduction of a successor to EUV, that would also again come with gross margin improvement. So then we think the momentum that would be created in the second half around reaching the 50% would then be further sustained and elaborated on into 2021 time frame.

C.J. Muse -- Evercore ISI -- Analyst

Very, very helpful. If I may follow-up, I think the buyback announcement as we're moving into high volume manufacturing EUV, seems to be a bit of an inflection here for ASML moving into cash cow mode. So curious if there are metrics that we should be looking at, whether it's free cash flow margins or working on working capital or perhaps CapEx intensity coming down as you've invested in EUV capacity, High-NA, multi-beam. So curious if there is kind of metrics we should be looking at, to gauge free cash flow in the coming years?

Roger Dassen -- Executive Vice President and Chief Financial Officer

Yeah. And so -- in the short term, you will see that with the increase in EUV and EUV becoming increasingly important for the company, given the cycle time of EUV is significantly longer than Deep UV. In the short-term you may expect that inventory levels will continue to go up a little bit, that's a dynamic on the one hand. And also in the short term as you, as I think we've said before, you might expect that the CapEx level that you've seen for 2019, that will be above the CapEx level that you might expect for this year and for next year. So around EUR900 million to EUR1 billion is a CapEx number that we think is likely for this year and for next year. So those are dynamics in I would say the short-term.

In the years thereafter. I expect CapEx level to level off and actually go down, because then the significant preparation for our future I think CapEx wise, I think will have been done and we'll be able to go down. Also, I would expect that in a one to two year timeframe, you might expect inventory levels to go down for a number of reasons. First off, at that stage we talk about 2021; there is a significant buildup of our capacity for EUV. But once you are there and once you are at those levels, then the further build up of inventory will no longer have an impact on your inventory levels. And secondly, as we mentioned before, the way we believe we will be able to get an increase in our capacity from the 35%-ish that we have for this year to the 45%, 50%, that we talked about for 2021, will primarily be the reduction of cycle time, and of course the reduction of cycle time will then kick in and further reduce working capital requirement.

So in the short term, I think the burden on working capital will still there. In the longer run, so let's say 1.5, two years you will see that we will be able to get it under control better.

One final dynamic as far as that is concerned, we talked to you in previous calls on the introduction of down payments for EUV, which we're pushing and where we have the initial accomplishments on that in 2019, and will continue to drive that, and that will also be a mitigating factor, if you like, in our working capital burden.

So long winding answer, just to tell you that in spite of all of that, in spite of this preparation for the growth, we're still looking at a pretty healthy free cash flow development both this year and next year, and then the years thereafter, I think the free cash flow that we generate will further increase substantially. And all of that taken together gives us more than enough comfort to introduce this EUR6 billion program for the next three years.

Operator

Okay, next question, Krish Sankar. Please state your company name followed by your question.

Krish Sankar -- Cowen -- Analyst

Hi, it's Krish Sankar from Cowen. And Roger thanks for the detailed comments on gross margin. I had two questions, first one on EUV. So Peter, it looks like your commentary on 2020 EUV of 35 systems at EUR4.5 billion revenue next year, about 45 to 50 systems capacity, is similar to about three months ago. I was in the impression that over the last three months at the margin, there was more incremental demand from DRAM for EUV. So I'm just wondering, is that an issue that you are still capacity-constrained and that's why you cannot ship more, are you being conservative? And then my second question is, how do to think about DUV units this year relative to 2019? Would it be similar levels, lower or higher, any color would be helpful?

Peter Wennink -- President and Chief Executive Officer

Yeah, on your first question, actually I tried to answer that in an earlier question that, the issue with 2021 is to make sure that we can reduce the cycle time so much that we can create capacity between 45 and 50 units, which is a capacity issue, not a demand issue. So yes, DRAM will be there. I would just have to make sure that we can squeeze as many EUV systems out of our available square meters, so that we can fulfill the customer demand. Its not a demand issue, its a capacity issue. So in that sense, that's why the commentary is similar to what we did last quarter, because the capacity lead time unfortunately is a lot longer than just the customer order lead time.

Now on the DUV units, good question. Very much changes on and Roger said on the recovery of the memory market. Yeah so Memory is still very much driven by immersion. Of course, we are seeing with the increased number of EUV systems in Logic, some cannibalization because of multiple patterning schemes that will actually move on to single patterning EUV schemes. Now so it would not see a recovery of the Memory business, which I do not expect, because we do expect a recovery. Clearly, these regions would be down, but it's really the timing of the of the Memory recovery that will determine how much of the deep UV units we're going to see this year. As I said, it is really hinging on the timing of the Memory recovery.

Krish Sankar -- Cowen -- Analyst

Got it. Thank you very much, Peter.

Operator

The next question, Alexander Duval. Please state your company name followed by your question.

Alexander Duval -- Goldman Sachs -- Analyst

Yes, hi there. Alex from Goldman Sachs. Just wanted to ask or clarify on the extra R&D and SG&A for the first quarter, that you've guided to versus where the Street was, and just wondered if you could help decompose a bit, the most important drivers and sort of what underpins them? For example, to what extent is this more about investing in faster cycle times for those 50 or 45 to 50 units of 2021? To what extent is it about increasing functionality of future EUV versions, as we move beyond the 3400C? And to what extent does it hinge on any other key factors? Many thanks.

Roger Dassen -- Executive Vice President and Chief Financial Officer

So on R&D, last quarter, we were at EUR516 million this quarter, we're guiding EUR550 million, and I think that the vast majority of that increase is labor cost increase. As we mentioned before, at this stage, we have a broader capacity that we think we need, in order to accomplish the R&D objectives that we have, which are all of the things that you just mentioned, that primarily focused on the low-NA, high-NA roadmap, multi-beam, but also a number of developments in Deep UV obviously.

So we think we have the capacity that we need in order to get that done, and that's why we said on previous calls, expect the going-out rate for for the fourth quarter to be the basis and then obviously it needs to be, what we call inflation-adjusted, which is obviously linked to wage increases for that. And that's what you see. So the 6% increase increase from EUR516 million EUR550 million really is primarily the wage increase on the R&D department.

N terms of SG&A SG&A I think is modeled at EUR140 million, which is I think very much in line with with what you saw in previous quarters. Q4 had a little bit of a spike, and there were some accounting adjustments in there, in Q4 that had a little impact. And also in the process of implementing a new IT system, which has some impact on the SG&A number, but those are small things. But the guidance of EUR140 million I think is pretty much in line with what we were in previous quarters, and obviously there to the wage impact.

Peter Wennink -- President and Chief Executive Officer

On the wage impact, I don't think we give our people 10% wage increase, because that will probably raise a lot of questions and when people start listening to this call, it's the combination of the normally inflationary wage increase and the fact that, of course, we added people in 2019. So you see the full year effect now of that growth in R&D in 2020, which actually happened throughout 2019, but now you see the full year wage effect.

Alexander Duval -- Goldman Sachs -- Analyst

Very clear. Many thanks.

Operator

Next question is from Joe Quatrochi. Please state your company name followed by your question.

Joe Quatrochi -- Wells Fargo -- Analyst

Yeah, thanks. It's Wells Fargo. I had a question on the Memory side. I know that ASML has historically been more tied to DRAM than NAND. So I was hoping you could kind of help us kind of parse out the comments that you've made in terms of the recovery and seeing potentially improved bookings kind of looking into 2Q. Is that more of a NAND flash comment, or should we think about that from a DRAM perspective?

Peter Wennink -- President and Chief Executive Officer

Yeah, I think if you split the DRAM and NAND, and only, like I said the proxy [Phonetic] that we have is, basically looking at some utilization data. I think it is first noticeable in 3D NAND. I also think the slope of the recovery is a bit more aggressive in NAND than in DRAM. But they are both there. Having said that, I also mentioned in my prepared remarks that customers were creating underutilization, in order to make sure that they could rebalance supply and the demand in the memory space sooner, That underutilization correction was also deeper in 3D NAND. So that was also not a big surprise that of course the return slope back up is also a little bit steeper.

But that's where we are. I think as we had started a bit earlier, its a bit steeper slope, but both are trending in the upper direction.

Joe Quatrochi -- Wells Fargo -- Analyst

Okay, that's helpful. And then just for the March quarter guide. I was wondering in the past, you guys have given us kind of the EUV shipment and revenue expectation for the quarter. So I was curious if you could give us that for the March quarter, because I know there's four shipments systems rather that are included from 2019, and then maybe just any thoughts on the cadence for 2020, just now given that the 3400C is available for the full year?

Peter Wennink -- President and Chief Executive Officer

Yeah, I think we've indicated in the past that, as soon as we really see that EUV is in essence going into high volume manufacturer, and also at a point where we can take revenue upon shipment, that would be the time we are no longer going to give separate guidance on EUV shipments. So that is clearly the case by now. So that's the reason why starting this year, we no longer do that.

What we do however, is continue to indicate at least for 2020 for the full year, we gave you an indication of the euro value and also the number of units for EUV for the full year. And of course we will report quarter by quarter, we will report to you what the euro number and the unit number of that will be.

As it relates to your second question on how is it distributed over the year, it's not completely evenly distributed. Its a little bit tilted toward the second half, but only -- but modestly so. So it's not as exacerbated, if you like, as we had it in 2019. There's a better balance, but it is still, a little bit tilted toward the second to half of 2020.

Joe Quatrochi -- Wells Fargo -- Analyst

Thank you.

Operator

Next question, Janardan Menon. Please state company name followed by your question.

Janardan Menon -- Liberum -- Analyst

Hi, good afternoon. It's Janardan Menon from Liberum. I just had two follow-ups on the Logic side, especially on the EUV front -- sorry on the DUV front. So if I take your your growth number for this year, just calculating EUV revenues alone, you're going from EUR2.8 billion to EUR4.5 billion. I'm assuming that much of that is going to be Logic shipments. And so, if I put that EUR1.7 billion of additional revenue, which on the Logic revenue of EUR6.6 billion last year, that's about 25% of additional growth in Logic for this year. I'm just wondering, given that DUV shipments will probably come down during the year, what kind of a decline in DUV are we looking at? Is it three or four units, in which case you will still be growing your Logic revenues at about 20% or higher? Or will the DUV drop be a bit more than that, and you could be sort of in that 10% to 20% range of growth on your Logic side?

And a short follow-up on the EUV capacity, given that you're seeing so much of demand for EUV right now, and you're saying that in 2020, it's more a capacity issue, otherwise, you probably could ship 50 units. What can you do to add capacity further into 2022, if this kind of strength, and especially if the memory market, the DRAM market comes in more strongly for EUV in 2022 and the Logic strength continues. Is there scope to further reduce cycle time to take your unit shipments above 50%, or can you use some of the base in your High-NA, new facility for low-NA systems, if that were to be required? Is there ways you can go above 50 units by 2022?

Roger Dassen -- Executive Vice President and Chief Financial Officer

Let me take the first question and then Peter can go into the second question. If you piece together the data points that we gave you, I think you can find sort of an answer to your first question. So as Peter said in the video, we're looking at a double-digit growth. So if you do that math, and you have a number that you arrive at and then we gave you two other important components; on the one hand, indeed as you mentioned EUR4.5 billion for EUV. And also on this call, we gave you the 20% increase over the installed base, which would get you to approximately EUR3.4 billion. So then you can sort of calculate where DUV and apps [Phonetic] combined, where they would land for the year. And I think that's what you're looking at. And of course, as Peter said, it will be dependent upon the the timing and the extent of the of the recovery. But we believe that the number that you derive in that way is a safe number to go by, with some potential obviously, if the Memory recovery is significant and timely.

Janardan Menon -- Liberum -- Analyst

Peter second question on the...

Peter Wennink -- President and Chief Executive Officer

Second question on the -- when you look at the EUV capacity that we currently have and like I said, it will be driven by cycle time reduction, because the lead time reduction for capacity adds is longer. Yes, for 2020 -- beyond 2021, we are looking to bring the output capability above 50%. Now, which is what we're doing today, is really looking at how much should that be. If we have to go over 60%, we probably need to extend square meters of production capacity at ASML and add suppliers, which could be, like you said, using production facilities that we're currently building for High-NA, use that temporary use in low-NA. Although we'd like to prevent that, because you have been here Janardan. I mean, these days are different, the High-NA days are different than the low-NA base. So it would mean some extra costs. But if push comes to shove, you could probably do that. But I think we can -- with our [Indecipherable] probably we can go over 50%. But I think it will be very difficult to go over 60%. And so, if we have to go over 60%, then we probably need to quickly add some manufacturing capacity, at ASML and the supply chain.

Janardan Menon -- Liberum -- Analyst

Understood. Thank you very much.

Operator

Next question is Amit Harchandani. Please state your company name followed by your question.

Amit Harchandani -- Citigroup -- Analyst

Hello, everyone. Amit Harchandani from Citi and thanks for letting me on. A couple if I may? The first question goes back to the demand for EUV. You've talked about obviously the capacity for 2021. In terms of the drivers of demand from your customers, what really do you think is changing or accelerating from a customer standpoint? Is it the number of layers of adoption? Is it the pace of cadence down the nodes. Is it dead end customers push? Could you give us a sense for what really do you think is driving this optimism and acceleration toward the number that you've talked about for 2021, from a customer standpoint? And then I have a follow-up.

Peter Wennink -- President and Chief Executive Officer

Yeah, Amit, I mean, the easy answer is, all of the above. So yes, we are seeing increase of layer count. The fact that EUV is worse [Phonetic] also, gives the customer the confidence on their roadmap, and when they get confidence on the roadmap, you see a cadence change. There's a push, basically a pull-in. But also I think the discussion we're having with customers and customers having with us, although without going into very specific customer details, they will never do that. It's very clear that the number of tape-outs and the requests from their customers, our customers' customers on different types of end applications is going up.

So it is basically the combination of those three things, I mean, you've mentioned them all. And that's what it is, and I think we are responding to what our customers are asking us, based on those three drivers, and this is why we come to the problem of more the capacity issue in 2021 than, you know a demand issue.

Amit Harchandani -- Citigroup -- Analyst

Thank you, Peter. And secondly, if I may, could you maybe give us your latest thoughts on how you're thinking about demand from indigenous customers in China? There is obviously news flow around the EUV tool and you've commented on that very clearly. But more more broadly, as you think of your 2020 guidance and 2021, things have changed a bit since November 2018. Any clarity on demand from indigenous China, the various end markets, and what are baked into your assumptions right now?

Peter Wennink -- President and Chief Executive Officer

Yeah, I think things of course changed -- the markets changed since November 2018. But I would say on China, we're pretty much on target in terms of the strategic roll out, especially in the memory space, in Logic, and it's not so much a leading edge Logic, it's more the mature Logic systems. I think our current assessment of the market is a bit higher than it was at 2018. So if anything, at leading edge, we're on plan. On the trailing edge, in a more mature technology, I do see -- we see an upside, but no downside.

Amit Harchandani -- Citigroup -- Analyst

Okay. Thank you.

Operator

Next question, Achal Sultania. Please state your company name followed by your questions.

Achal Sultania -- Credit Suisse -- Analyst

Hi, good afternoon. It's Achal from Credit Suisse. Roger, maybe on EUV services gross margins. Just trying to understand, like how much of a headwind it has been on -- at a group level in 2019? Obviously, you made a comment that it will get to -- it will still be loss making this year. But basically, we have improvement through the year. So I'm just trying to understand, how much of it has been already a headwind in '19? And then how quickly can that business ramp up toward 40, 45 services gross margins, like you have, most likely in DUV? Does it take two years, three years? Any color around that would be helpful? And then secondly on the mix, when you talk about this 45 to 50 capacity for EUV in 2021, can you help us understand like, obviously Logic is -- foundry is a big part of that number, but what are you hearing from Logic and DRAM customers, in terms of the unit breakdown of that 45 to 50 unit number? Thank you.

Roger Dassen -- Executive Vice President and Chief Financial Officer

Thank you. So on the gross margin impact of EUV service, that was around 2% for 2019. So that's the gross margin impact of that in 2019. As I mentioned to you, we do see it coming to a positive number in the course of this year. I expect it to be at least Q4 -- maybe even before that, that it will turn positive.

Before we have EUV service gross margin and the corporate gross margin level. I think we're probably two, three years away from that. But the aspiration clearly is there to have it at that stage and the timeframe.

Peter Wennink -- President and Chief Executive Officer

And on the split, the 45 to 50 unit split. The math -- I am not going to give you any details, but the majority, I mean the -- it's above the 50% is going to go to the Logic space. So we are still dominated by Logic. But clearly, the 2021 numbers for DRAM will go up. It is logical. I mean we have -- in the Logic space we have several customers. In the DRAM space, we still have one. So that's also an issue that will drive the division between Logic and between DRAM. But it is going to be significantly -- above 50% is going to be Logic.

Achal Sultania -- Credit Suisse -- Analyst

Okay. Thank you, Peter and Roger.

Operator

Next question, Adithya Metuku. Please state your company name followed by your question.

Adithya Metuku -- Bank of America Merrill Lynch -- Analyst

Yeah. Good afternoon, guys. Its Bank of America. I had two questions. Firstly, just thinking about the Memory demand as we go through this year and into next year? Obviously, when we look at the last few years going into 2018, we had a very strong increase. We had a doubling in '17 and then another 50% increase in revenues from Memory customers in '18. Now when you look at the next two years. Obviously, things may be a little different and I know it's very difficult to give a pinpoint number. But I just wondered what do you have in your scenarios internally, and then where do you see -- if Memory was to come back in 1Q, where do you see memory revenues for this year, and if it were to come back in 3Q, where do you see that coming? Any color that you can give us to help us get a rough sense of where we might end up, would be very helpful? And then secondly, just a question for Roger, just on the OpEx. I just wondered if you could confirm whether the OpEx annualizing 1Q number would be a good proxy for the full year or whether there was anything else we need to think about? Thank you.

Peter Wennink -- President and Chief Executive Officer

Yeah, well, I think on the question on the Memory demand, I guess I did give you some indication. I can repeat myself. But when I look at it -- the best proxy we have, is to just look at how our machines are being used. And that's why I said, I do believe that in the first half, and it is a bit difficult to understand like the exact timing or to gauge the exact timing; because they will be -- in the first half, I think our customers will come back to this, more healthy supply demand balance, and they will see this coming, so they will place order. So for us, it's going to be -- likely going to be a second half event. But having said that, I mean 2019 was of course a weak memory market for us and also in the first half of 2020, could be not very strong. As Roger indicated, and but when it come back the second half, will have an impact on our business, also on our financial performance.

But whether memory goes, comes back, then I think you need to look into 2021. I think I said it earlier, 2021, we do see strong EUV demand. I see no reason why the demand of our customers for leading edge products in the memory space, 5-nanometer will kick in, then, will go down. But when the Memory recovery started in the second half of the year for us, is it will extend into 2021. So you then have had effectively a year and a half of a Memory downturn, which I think historically is not long, but not short either. So we just thought it all seems to fit. This is the kind of color that I can give you, based on top of what I already said.

Roger Dassen -- Executive Vice President and Chief Financial Officer

And Adithya, on your questions on OpEx. Indeed, I can confirm that what we have, so the EUR550 million for R&D and the EUR140 million for SG&A, those are good run rates for the quarters in this year.

Adithya Metuku -- Bank of America Merrill Lynch -- Analyst

Thank you, guys.

Operator

Next question, Sandeep Deshpande. Please state your company name followed by your question.

Sandeep Deshpande -- JP Morgan -- Analyst

Yeah hi. Sandeep Deshpande at JP Morgan. Most of my questions have been answered. But just actually a clarification, Peter. Firstly on -- whenever this Memory recovery occurs, I mean you can see how the customer utilization is doing. Your exposure to NAND is lower than your exposure in DRAM. But do you see that NAND utilization is rising faster than DRAM or vice-versa at this point, because that will determine the timing of when your orders come in? And then secondly, regarding these -- the multi-beam tools that you're working on, you think at this point, is the view that these will begin shipping in 2021, and thus be -- that there could be even further accretion to the margin in 2021? Thank you.

Peter Wennink -- President and Chief Executive Officer

I think I will do the recovery. Like I said earlier, with the slope of the utilization recovery, its a bit faster, bit steeper for 3D NAND. But they also come from a deeper point. So in that sense -- and yes, we have, as you mentioned, less exposure to the 3D NAND market. But the 3D NAND market needs a lot of exposure. So I mean this is what we are counting and this is what we're seeing.

So I think NAND, probably rising a bit faster. I think that could be the conclusion. Sorry, your second part was?

Sandeep Deshpande -- JP Morgan -- Analyst

The second part was on the gross margin and multi-beam tools.

Peter Wennink -- President and Chief Executive Officer

Oh, the multi-beam tools. Okay. Yeah.

Roger Dassen -- Executive Vice President and Chief Financial Officer

Sandeep, multi-beam as I mentioned; multi-beam is expected to be a high-margin product. So to the extent that when it will go into into commercial application, and that is expected for 2021. We do believe that it will be accretive to our gross margin.

Peter Wennink -- President and Chief Executive Officer

Because it is not always, if you look at the multi -- as you look at the leading tool. It's a machine that is very much -- it is compute power. So there's a lot of software also. That's why margins are generally higher in e-beam space than in the lithography space.

Sandeep Deshpande -- JP Morgan -- Analyst

Understood. Thank you.

Operator

Next question, Aleksander Peterc. Please state your company name followed by your question.

Aleksander Peterc -- Societe Generale -- Analyst

Yes, good afternoon. Thank you for taking my questions. This is Alex from SocGen. I'd just like to understand, as you now contemplate 45 to 50 EUV units in '21, does this in any meaningful way, accelerate your path to higher gross margins, more closer to DUV for your EUV business overall? Or there is nothing changed in terms of your gross margin scenario for this business unit? And then, just briefly, your comments regarding the timing of free cash flow generation. It looks like over the next three years, you will have an acceleration of free cash flow generation?

Roger Dassen -- Executive Vice President and Chief Financial Officer

Yeah. So let's first talk about the gross margin for EUV. I do believe a further increase in numbers will improve our gross margin, for three reasons. One is obvious right, to the extent that -- given the capacity that we have, we have a higher output of course, your fixed cost coverage will improve. And as we mentioned, the increase in capacity will be achieved by reducing cycle time. Will not be achieved by further CapEx. So that's why, more units will result in gross margin improvement. That's one element.

The second element is, to the extent that we have more of these tools in the field, that also means that our surface margin will in all likelihood improve, because the number of -- the more tools we have in one location, the more efficiency we have in having our service crews there. So then the efficiency per tool will further increase. And thirdly, not necessarily related to the number of units, but since you talk specifically to 2021, as I mention that, we will also see the introduction of the successor to the 3400C, which again we are hopeful will bring such value to our customers that the gross margin will benefit from that. So yeah, number of reasons why I think -- why we believe, gross margin for EUV will continue to further improve through 2021 and beyond.

On the free cash flow question, I think that is right as well. So I mentioned to you in the very short term, the working capital burden that we have from further growing to let's say, this capacity level that we talked about, will be there; because you know, given the cycle time, it will mean that we have to take significantly more inventory on board to get it done. But then at a certain stage, you will see the offsetting factor the fact that cycle times get reduced. So I think in this one-year window, you will see a spike and then a leveling off, as a result of the reduction of the cycle time. And as I also mentioned, we do want to get down payments more as the default in our commercial model, and that should also -- at some stage, lead to an offset in the working capital burden.

Skip Miller -- Head Investor Relations Worldwide

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. Now, operator, may we have the last caller, please.

Operator

Yes sir. Mitch Steves, please state your company name, followed by your question.

Mitch Steves -- RBC Capital Markets -- Analyst

Hey, it's RBC Capital Markets. Most of my questions are answered, but I just want to clarify a couple small points. So first of all, based on the tone of this call, it sounds like 2021, probably being a accelerated growth year relative to 2020. I want to make sure that that's a reasonable assumption? Then secondly, I realize you guys can't time the exact recovery of Memory, but from a historical perspective, when you look at when the memory market recovers, what type of sequential growth do you expect from the initial initial first batch of recovery, if I look at your Q-over-Q number?

Peter Wennink -- President and Chief Executive Officer

Well, I think the second question is almost impossible to answer. I mean you could say -- the Memory business is quite different than it was a couple of years ago. I mean six players in 3D NAND, three in DRAM. So those patterns will also be a function of the composition of that market, and individual position of those companies in that market. So, it is really difficult to use historical rates as a proxy for what's going to happen now. I think I'm yes, potentially what could be an accelerated growth here. However, Roger said it, I mean, even without the assumption on the recovery of the memory market and the growth of the memory market, where we see a double-digit growth is -- this year based on Logic and on the the installed base management, on top of that we could see a recovery of the memory market. So I think you could see an acceleration this year also.

Now that's not for the full year, granted, because we do expect that in this second half. So, but it will definitely continue like I said earlier, once this memory market recovers, it doesn't recover for two quarters. I mean it recovers a longer period, like it always does. On top of the Logic market. So yeah, I think we are looking forward to some acceleration.

Skip Miller -- Head Investor Relations Worldwide

All right, thanks. Now, on behalf of ASML, I'd like to thank you for joining us today. Operator, if you could formally conclude the call, I'd appreciate it. Thank you.

Operator

[Operator Closing Remarks].

Duration: 55 minutes

Call participants:

Skip Miller -- Head Investor Relations Worldwide

Peter Wennink -- President and Chief Executive Officer

Roger Dassen -- Executive Vice President and Chief Financial Officer

Mehdi Hosseini -- Susquehanna International Group -- Analyst

David Mulholland -- UBS -- Analyst

C.J. Muse -- Evercore ISI -- Analyst

Krish Sankar -- Cowen -- Analyst

Alexander Duval -- Goldman Sachs -- Analyst

Joe Quatrochi -- Wells Fargo -- Analyst

Janardan Menon -- Liberum -- Analyst

Amit Harchandani -- Citigroup -- Analyst

Achal Sultania -- Credit Suisse -- Analyst

Adithya Metuku -- Bank of America Merrill Lynch -- Analyst

Sandeep Deshpande -- JP Morgan -- Analyst

Aleksander Peterc -- Societe Generale -- Analyst

Mitch Steves -- RBC Capital Markets -- Analyst

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