Business Breakdowns
· Matt Reustle
[00:00:00] S0: Jumping a bit into the business model itself when a company buys one of these machines, what's the typical life cycle like? Is this something that -- and it's incredibly huge, as you mentioned, in terms of requiring three jumbo aircrafts to get it over. How long is that in operation for a customer?
· Tom Walsh
[00:00:00] S1: So once these machines are in operation, they tend to be there for a very, very long time. They recently gave out a stat that 90% of all of the lithography machines they've sold within the last 30 years are still in operation on the floors of wafer fabrication facilities around the world. Some of these are still in the same place they were originally sold. Some of them, when they reach the end of their natural life with one manufacturer, may be sent back, refurbished, and then sold secondhand. But these machines last forever. Well, not forever, but they last a very, very long time. That's the nature of the semi industry. Once -- the largest part of the cost of making semiconductors is in the capital cost of building the facility. Once you've depreciated that the cost of running these machines actually is relatively low, the actual marginal cost of production is pretty low. And what ASML has been very good at is ensuring that once these machines are installed, that's not the end of it. They're able to continue to service them and upgrade them in the field so they get ever more productive. So the machine that's installed 10 years ago, can have an upgrade put through that markedly improves its productivity. And that obviously is good for customers and that incentivize customers to keep buying from because they know they get a machine today that same machine can get better and better over the next 30 years.
· Matt Reustle, Tom Walsh
[00:00:00] S0: And do you have a sense of the breakdown of the revenue that they generate from new machine sales versus whether it's refurbishing, upgrading or anything else? [00:00:00] S1: Yes, their new machine sales account for about 75% of revenues. And the balance is from service and field options, which is essentially maintenance and upgrades in the field. [00:00:00] S0: And how cyclical is that revenue stream? I assume that they're developing these machines, but there might be major breakthroughs at certain points in time. Is there much cyclicality to it? What ends up driving the sales, whether it's a constraint on the amount of volume they can produce, demand or anything else?
· Tom Walsh
[00:00:00] S1: The industry is cyclical in ASML and its history has been very cyclical. If you go back and look at the company's history, well, from the '80s onwards, but even just since it was IPO-ed, its experience and has gone through the pain of vicious cycles in the industry. Those have tended to become less severe in recent years, partly that's thanks to the fact that they've emerged as the sole producer of lithography equipment. So the -- there is no one else to go to. There's no competition on price that they have to cope with in that sense at the very leading edge. if you want to build a wafer fab to produce the next generation of chips, you have to get your order in to ASML because there's no other sure in time to get that lithography machine. And if you cancel your order because things are a bit tough this year, you're to the back of the queue when things are starting to look better again, there's no avoiding that. So what you found in recent years is that ASML's revenues have become less cyclical. That's not to say it won't see another cycle. That's not to say you won't see machine orders pushed out. You've seen obviously across the semi-industry in the last few months, in particular, a series of companies coming out and confessing that things actually are a little bit tougher than they were expecting. TSMC recently cut their revenue guidance. So I would expect that there will continue to be cancellations and oscillations along the way. But these days, it's much more about that secular structural growth, I think, in terms of that ability to keep producing leading-edge machines that are needed for leading-edge logic manufacturing and memory manufacturing.
· Matt Reustle, Tom Walsh
[00:00:00] S0: I think you said they sold just north of 300 machines last year. What could they do? Is that the limit to the capacity that they could produce? Do you have any sense of how much they can ramp that up? [00:00:00] S1: They had a Capital Markets Day last year, and they've put out some pretty punchy numbers in terms of saying what they would like to be able to expand their capacity to. They are investing so that they can produce 90 EUV machines per year. That compares to about 40 or so sold in each of the last 2 years and 600 deep ultraviolet machines, the next generation of equipment. So a very material step up and also something approaching 20 high-NA EUV, the next-generation of EUV machines by around '27, '28. So they're investing very hard at the moment to expand capacity. And a lot of that is around ensuring that you don't get bottlenecks. They're conscious that at the very leading edge of the semi-industry, they are the bottleneck and they don't want to be the bottleneck. They don't want to incentivize their customers to start thinking about different ways of making semiconductors. So they're really being very explicit out there and saying, "Look, we're going to do what we have to do in terms of making sure we've got the manufacturing capacity to produce as many EUV machines, as many EUV machines as you need for as long as you can see forward into the future."
· Matt Reustle
[00:00:00] S0: And when it comes to the manufacturing capacity and the investment in that, when you mentioned before, a lot of this is actually completed on-site, so they might ship it in several different parts. When they invested in manufacturing capacity, are they actually investing in large facilities that are used to produce certain parts? Or are there other things that are playing a role just trying to bridge those 2 things together?