Lam Research Q4 2022 Earnings Report

Lam Research EPS Results

• Actual EPS: $0.88
• Consensus EPS: $0.73
• Beat/Miss: Beat by +$0.15
• One Year Ago EPS: $0.81

Lam Research Revenue Results

• Actual Revenue: $4.64 billion
• Expected Revenue: $4.21 billion
• Beat/Miss: Beat by +$421.64 million
• YoY Revenue Growth: +11.80%

Lam Research Announcement Details

• Quarter: Q4 2022
• Date: 7/27/2022
• Time: After Market Closes
• Conference Call Date: Wednesday, July 27, 2022
• Conference Call Time: 4:34AM ET

Lam Research (NASDAQ:LRCX) is a semiconductor equipment company that designs, manufactures, and services systems used in the fabrication of integrated circuits and other electronic devices. Its equipment supports key steps in the wafer manufacturing process, helping semiconductor producers create increasingly small and complex features on silicon wafers.

The company’s portfolio includes systems for etch, deposition, wafer cleaning, surface preparation, and related manufacturing processes. Lam Research also provides equipment upgrades, technical support, spare parts, and other services intended to help customers improve productivity and maintain semiconductor production systems throughout their operating life.

Founded in 1980 by Dr. David K. Lam, the company is headquartered in Fremont, California, and serves semiconductor manufacturers and other customers through operations and support networks across North America, Asia, Europe, and other major technology markets. Tim Archer has served as Lam Research’s president and chief executive officer since 2018.

Lam Research Q4 2022 Earnings Call Transcript

Key Takeaways

• Record June quarter: Revenue reached $4.64 billion (up 14% sequentially) and non-GAAP EPS hit $8.83, both new highs, and the company guided September revenue of $4.9 billion ±$300 million with a 45% gross margin and $9.50 ±$0.75 EPS.
• Persistent supply chain constraints drove a $2.2 billion deferred-revenue balance and led Lam to lower its 2022 industry wafer fab equipment spending outlook to the low- to mid-$90 billion range despite robust semiconductor demand.
• Strong technology momentum was seen in record foundry/logic and CSPG revenues, the fastest ramp ever of the Sensei-based Vantex etch tool, SK hynix dry-resist development-tool wins, and new advanced-packaging etch/deposition positions.
• Accelerated strategic transformation included expanding global fabs and supply chain infrastructure (notably a new Malaysia facility), opening regional R&D centers, and deepening ecosystem collaboration to enhance resilience and agility.
• ESG leadership highlighted in the 2021 report, including a net-zero emissions commitment and strengthened diversity and inclusion initiatives across the company.

Presentation

[Operator]

Ladies and gentlemen, welcome to the June 2022 quarter earnings conference call. At this time, I'd like to turn the conference over to Tina Correia. Please go ahead.

[Tina Correia, Corporate Vice President of Corporate Finance and Investor Relations at Lam Research]

Thank you, operator, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, President and Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment, and we'll review our financial results for the June 2022 quarter and our outlook for the September 2022 quarter. The press release detailing our financial results was distributed a little after 1:00PM Pacific Time this afternoon. The release can also be found on the investor relations section of the company's website, along with the presentation slides that accompany today's call. Today's presentation and Q and A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information.

[Tina Correia, Corporate Vice President of Corporate Finance and Investor Relations at Lam Research]

Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3:00PM Pacific Time. A replay of this call will be made available later this afternoon on our website. With that, I'll hand the call over to Tim.

[Tim Archer, President and CEO at Lam Research]

Thanks, Tina. Good afternoon, everyone. We appreciate you joining us today. Lam's June quarter results were much stronger than we originally anticipated. Revenue and non-GAAP earnings per share achieved new quarterly records, and we're well ahead of our guidance for the quarter. Industry-wide shortages continue to impact output and the efficiency of our operations. However, specific actions we have taken in our supply chain in recent quarters are allowing us to execute more effectively in the supply-constrained environment. I want to thank our global Lam teams, including our supply chain operations and engineering groups, as well as our suppliers and customers for demonstrating incredible dedication, agility, and partnership in the face of significant challenges. In the June quarter, we continued to see good momentum with our product and installed base initiatives, with Foundry logic systems and CSBG revenues both reaching new highs.

[Tim Archer, President and CEO at Lam Research]

Our performance this quarter adds to my confidence that Lam will emerge from this period of industry disruption stronger, more resilient, and even better positioned in our markets. As suggested by our guidance today, we expect to see incremental improvement in supply chain conditions in the September quarter. Our view is that industry-wide output will continue to be constrained through the rest of this year. Consequently, we are lowering our outlook for calendar year 2022 wafer fab equipment spending to be in the low to mid-$90 billion range. Overall, semiconductor demand remains robust, but with some macro-driven pockets of weakness, particularly in consumer-focused markets. We see strong foundry logic spending outgrowing both NAND and DRAM investments. In the longer term, we expect industry growth to be driven by the increasingly vital role semiconductors play in the global economy.

[Tim Archer, President and CEO at Lam Research]

This, along with expanding semiconductor content in end devices, rising device complexity, and larger die sizes, will help sustain strong WFE levels. Most importantly for Lam, technology inflections will continue to drive greater etch and deposition intensity. Across our company, we have been prioritizing investments to benefit from these trends and prepare for the growth ahead. Over the last two years, Lam has devoted significant attention to the disruptions that have impacted semiconductor ecosystem. At the same time, we have used this period to accelerate a strategic transformation of our operations and product focus. We have significantly expanded Lam's capabilities and resources closer to our customers and ecosystem partners, both in the U.S. and globally, to deepen collaboration, accelerate the introduction of new products, and drive greater operational flexibility.

[Tim Archer, President and CEO at Lam Research]

Compared to pre-pandemic times, Lam now has a more globally diverse manufacturing and supply chain infrastructure designed to leverage unique regional capabilities while servicing worldwide demand. A notable example is Lam's new Malaysia facility, which takes our manufacturing, supply chain, and logistics operations to the next level in terms of scale, automation, and efficiency. Over the last two years, we have also increased our technology infrastructure investments across the U.S., Asia, and Europe, which has included a new development center in Korea and a soon-to-open engineering lab in India. Our vision is to be the premier technology collaboration partner in the ecosystem, leveraging Lam innovation to bring customers, suppliers, peer companies, and consortia together to create disruptive solutions for the industry's grand challenges. Productivity and extendability of EUV patterning has been one such area of focus.

[Tim Archer, President and CEO at Lam Research]

In the June quarter, we announced that SK hynix had selected Lam's innovative dry resist fabrication technology as a development tool of record for two key steps in the patterning process for advanced DRAM chips. We also announced the expansion of partnerships within the EUV ecosystem. In collaboration with Entegris and Gelest, we look to provide our customers with reliable access to precursor chemicals for Lam's dry photoresist technology. Together, we will also be working to accelerate the development of dry resist solutions for high numerical aperture EUV patterning. With customers, we are using data-driven Equipment Intelligence solutions to deepen our engagements. An enormous amount of equipment and process data is being generated from our installed base, and together with customers, we are using key learnings to drive fab productivity.

[Tim Archer, President and CEO at Lam Research]

Lam's Sense.i platform was launched in early 2020 with the goal of combining Lam's innovative equipment intelligence solutions with our market-leading etch technology. The Vantex dielectric etch system built on the Sense.i platform has seen tremendous momentum since launch and has become the fastest ramping etch tool in Lam history. We expect the installed base for this product to approximately triple this year alone. Furthermore, we are seeing increased demand for Lam solutions in new advanced packaging architectures. Our Kiyo plasma etch products with Hydra have a proven track record of delivering the productivity and uniformity requirements needed for cost-effective front-end device scaling. Leveraging this expertise in high-volume manufacturing, we have now achieved multiple new etch tool of record positions for advanced packaging at a leading foundry logic customer.

[Tim Archer, President and CEO at Lam Research]

As customers further develop these architectures in support of greater system performance, we see a growing opportunity for Lam's etch and deposition solutions. A final element in our transformation over the past several years relates to our emerging leadership in sustainability. In late June, we released our 2021 ESG report, where we outlined how we integrate ESG throughout our operations. We are proud that we were one of the first in the semiconductor industry to set a net zero emissions goal. I encourage you to review the report to see the great progress we are making across several important areas, including environmental sustainability and our commitment to diversity and inclusion in our workforce. In summary, I am very pleased with the solid results posted by the company for the June quarter.

[Tim Archer, President and CEO at Lam Research]

Our results are an indication of our strong business foundation built on a large and growing installed base, a differentiated product portfolio, and a commitment to ecosystem-wide collaboration and success. We are in a great spot to benefit as secular drivers push the semiconductor industry to new heights over time. Thank you, and I will now turn it over to Doug.

[Doug Bettinger, EVP and CFO at Lam Research]

Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a very busy earnings season. I'm pleased to share our June quarter results with you today. We had our second consecutive fiscal year of record levels of revenue and diluted earnings per share. Revenues increased year over year for the fiscal year by over 17%, and diluted earnings per share rose by more than 21%. We delivered solid performance in the June 2022 quarter. Our results across all financial metrics came in at the high end or above our guidance ranges due to our improved execution and the continued strong demand for our equipment.

[Doug Bettinger, EVP and CFO at Lam Research]

June quarter revenue was a record at $4.64 billion, which was an increase of more than 14% over the prior quarter and over the high end of the guidance range. While we're making progress on addressing the supply chain challenges we previously talked about, it will take more time for them to be fully resolved. Despite the supply chain improvements and higher factory output levels, we still exited the June quarter with $2.2 billion in deferred revenue, which was an increase of $129 million sequentially. From a segment perspective, memory represented 54% of systems revenue in the June quarter, which was down from the prior quarter level of 66%. The NAND segment came in at 40% of our systems revenue, which was roughly consistent with the prior quarter.

[Doug Bettinger, EVP and CFO at Lam Research]

Our NAND customers are investing in tools for 17x-layer and beyond devices. On the DRAM side, revenues were 14% of systems revenue, which is a decline from the prior quarter level of 27%. DRAM investments are focused on the 1Z and 1-alpha node addition and convergence. In the foundry segment, June quarter revenues increased quarter-over-quarter and represented 26% of our systems revenue, compared with 21% in the March quarter. The increase is related to the timing of customer investments with broad-based spending across both leading as well as specialty node devices. The logic and other segment had record performance in the June quarter, coming in at 20% of systems revenue, higher than the March quarter amount of 13%.

[Doug Bettinger, EVP and CFO at Lam Research]

Our performance here not only reflects the demand in the market for microprocessors, analog components, image sensors, and advanced packaging solutions, but it also demonstrates the progress we're making in the leading-edge foundry logic inflections that Tim talked about earlier. Let me now turn to the regional composition of our total revenue. The China region came in at 31% of total revenue, which was flat with the March quarter percentage. China domestic customers were the majority of the China regional revenue in the June quarter. There was also a strong concentration of investments by our customers in the Korea and Taiwan regions, which comprised 24% and 19% of our total revenues, respectively, in the June quarter.

[Doug Bettinger, EVP and CFO at Lam Research]

The customer support business group revenue was also a record at approximately $1.6 billion, which was up 16% from the prior quarter level and 18% higher than the June quarter in calendar 2021. There was strength across all parts of CSBG, but notably in spares with our customers fabs running at high utilization levels, as well as in our Reliant business, with customers investing in specialty market areas such as RF and power devices. While quarter-on-quarter growth rates in CSBG can vary based on customer investment patterns, I believe CSBG is well positioned to again deliver annual growth in 2022. Let me now pivot to our gross margin performance. The June quarter came in at 45.2% above the midpoint of the guided range. Our fixed cost absorption improved somewhat with the higher output levels.

[Doug Bettinger, EVP and CFO at Lam Research]

However, we continue to have cost challenges in the areas of freight and logistics, semiconductors, as well as in other critical components. We will continue to drive progress on improving our operational efficiencies. However, we expect inflationary pressures to be a persistent headwind in the second half of the year. Our September quarter guidance embeds our views on these factors. Operating expenses for June were $635 million, up slightly from the March quarter. The increase was mainly in R&D across all of our business units, as we're investing in development of technologies to support our customers' long-term roadmaps, as well as to mitigate some of the supply chain challenges we're having. The June quarter operating margin was 31.5%, coming in over the guidance range as a result of the stronger than expected revenue performance.

[Doug Bettinger, EVP and CFO at Lam Research]

Our non-GAAP tax rate for the quarter was 11%, generally in line with our expectations. We estimate the tax rate for calendar 2022 to be in the low teens level. This estimate doesn't reflect any impact of any potential U.S. tax policy changes, and this is obviously something we continue to monitor closely and will update you as appropriate. Just to remind you, as we've discussed in the past, you should expect the tax rate to fluctuate on a quarterly basis. Other income and expense for the June quarter was approximately $87 million in expense. Consistent with what we noted on our call last quarter, as well as what was included in the June quarter guidance. We had an increase in expense this quarter related to market declines in one of our venture investments that recently went public.

[Doug Bettinger, EVP and CFO at Lam Research]

The OI&E line item is subject to market-related fluctuations that will cause some level of volatility due to items such as foreign exchange as well as impacts in the equity markets. We continued to execute on our capital return objectives during the June quarter, allocating $868 million towards share repurchases. We paid $208 million in dividends. Our share repurchase activity was a combination of open market repurchases as well as an accelerated share repurchase program. This ASR will continue to execute during the September quarter. I'd also like to highlight that since calendar year 2012, when we brought Lam and Novellus together, we've returned approximately 115% or more than $20 billion of our free cash flow to equity holders.

[Doug Bettinger, EVP and CFO at Lam Research]

Our stated plan is to return 75%-100% of free cash flow through a combination of buyback and dividends. June quarter diluted earnings per share was $8.83. Diluted share count was 138 million shares, which was lower than the March quarter and lower than our June quarter expectation due to the increase in share repurchase activity. Let me turn to the balance sheet. Cash and short-term investments, including restricted cash, totaled $3.9 billion, which was down from $4.6 billion at the end of the March quarter. The decrease in the cash position was attributed to our capital return activity as well as our usage of cash for growth in working capital as well as continuing capital investments. We increased the level of inventory we're carrying to support our growing business volumes.

[Doug Bettinger, EVP and CFO at Lam Research]

Inventory turns were flat with the prior quarter level coming in at 2.6 times. Days sales outstanding came in at 85 days, which was essentially flat with the March quarter. It again was a somewhat back-end-weighted shipment quarter. Non-cash expenses for the June quarter included approximately $70 million for equity compensation, $69 million in depreciation, and $19 million for amortization. Capital expenditures for the June quarter came in at $126 million, down by roughly $20 million from the March quarter level. Capital expenditures are supporting the company growth in manufacturing in multiple geographies, including the United States and Malaysia, as well as research and development infrastructure investment in California, Oregon, as well as our new technology center in Korea.

[Doug Bettinger, EVP and CFO at Lam Research]

We ended the June quarter with approximately 17,700 regular full-time employees, which was an increase of approximately 800 people from the prior quarter. We had headcount growth primarily in the factory and field organizations to address the higher output levels, to manage supply chain constraints, as well as to support increasing customer delivery and installation. Looking ahead, I'd like to provide our non-GAAP guidance for the September 2022 quarter. We're expecting revenue of $4.9 billion ± $300 million. Gross margin of 45% ± 1 percentage point. This gross margin outlook reflects ongoing inflationary challenges that we're seeing in the supply chain. Operating margins of 31.5% ± 1 percentage point.

[Doug Bettinger, EVP and CFO at Lam Research]

Finally, earnings per share of $9.50 ±$0.75 based on a share count of approximately 137 million shares. In summary, Lam demonstrated an improved operational execution in the June quarter and delivered record financial performance both quarterly as well as on a fiscal year basis. While the semiconductor industry is not immune from softening macro factors that we see, Lam's technology leadership, along with our robust installed base, is a solid foundation for continued long-term growth for the company. With that, operator, I'll conclude my prepared remarks. Tim and I would now like to open up the call and take questions.

[Operator]

Thank you. Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star one on your telephone keypad. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment. Star one for questions. We'll pause a moment to assemble the queue. We'll take our first question from Harlan Sur with JP Morgan. Please go ahead.

[Harlan Sur, Executive Director of Equity Research at JP Morgan]

Good afternoon. Thanks for taking my question, and great job on the strong operational execution. You know, as you mentioned in your prepared remarks, we've seen weakness materialize in the consumer-focused segments of the market, so PC, smartphones, gaming. For your memory customers, that accounts for about 55% of their total revenue. They're being disciplined here in the second half and into next year. They're focused on supply-side discipline, a lower profile of CapEx spending. On the flip side, foundry and logic and IDM customers are seeing, I think, a bit more diversified set of drivers where demand is still relatively healthy. Given that your lead times are stretching into next year, if your customer base is becoming more cautious on the macro demand environment, I assume that they're modulating their orders down for shipments next year.

[Harlan Sur, Executive Director of Equity Research at JP Morgan]

Have you started to see this in your profile of your recent orders? Maybe more near to midterm, have you guys seen any major changes in cancellations or pushouts on scheduled deliveries for this year?

[Tim Archer, President and CEO at Lam Research]

Okay, I'll take that question, Harlan. I think as you said, we clearly are seeing some weaknesses in certain parts of the market, and we have customers in the memory space and others have been publicly sounding the tone on being a little bit more cautious about their CapEx and spending going forward. You know, I believe that we've also been saying though for several quarters now that we believe the memory customers have generally been quite disciplined in their spending and how they look at the market.

[Harlan Sur, Executive Director of Equity Research at JP Morgan]

Mm-hmm.

[Tim Archer, President and CEO at Lam Research]

I think it's one of the things that has made that particular segment of the industry quite healthy in recent years, and that is that they respond fairly quickly to changes that they see in pricing and in demand. So, you know, that's something I think we've become accustomed to dealing with. Frankly, what I'd say though on the demand side is that we really haven't seen any significant change in the demand signals from our customers. Some of that could be, as you pointed out, that lead times remain stretched, and I think people wanting to take some time to look at how this market's evolving from different drivers. You know, we certainly acknowledge that, 2023, there's a fair bit of uncertainty and there are different scenarios that could play out.

[Tim Archer, President and CEO at Lam Research]

I think that Lam is well prepared to execute through whichever of those scenarios actually transpire.

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah. The only thing I might add, Harlan, is we know how to run the company whatever the environment is. We've been doing it for a really long time. We know what the playbook needs to be when it's up, down, or sideways. We'll respond accordingly. When I think about, you know, the things Tim talked about, our positions are growing stronger. We feel really good about the business we're winning, the growing installed base. You know, the company's executing really well. That's the stuff we feel great about. At the end of the day, the market will be what the market will be, and we'll manage the company in the right way, depending on whatever that looks like.

[Harlan Sur, Executive Director of Equity Research at JP Morgan]

Yep. Great insight. Thanks for that. Then supply chain-wise, I mean, the team did a great job of unlocking more component availability and subsystems availability given the strong upside in June. Given more availability, do you anticipate deferred revenues coming down in the September quarter as a part of your strong revenue guidance? Where are you seeing the biggest supply improvement? Is it the component availability? Is it subsystems availability, freight and logistics, or maybe all of the above?

[Tim Archer, President and CEO at Lam Research]

Yeah, I'll take the first part and let Doug speak specifically to deferred revenue. I think that, you know, we talked on the last couple of calls about having somewhere on the order of about 40 task forces deployed out to our critical customers. You know, we said the constraints were pretty broad-based. I mean, clearly, things like IC component shortages have gotten a lot of attention, but it was broader than that. We've seen improvements across a number of those constrained commodities. But we still have constraints, and that's, you know, you see it in how we're still spending, managing our supply chain in the numbers Doug talked about, and also in the fact that deferred revenue actually continued to grow a little bit in the June quarter.

[Tim Archer, President and CEO at Lam Research]

We're nowhere near to where I would say that the supply chain overall is executing like it had in the past. We've seen kind of broad improvements as a result, we think, of specific actions Lam has taken. I'll let Doug talk about the September deferred revenue.

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah, Harlan, it's hard enough to forecast a revenue number, let alone the deferred. If I was gonna give you some color on it, I kind of think it's flattish, plus or minus a little bit. Again, it'll depend on how well we progress with the supply chain, honestly.

[Harlan Sur, Executive Director of Equity Research at JP Morgan]

Great. Thank you.

[Doug Bettinger, EVP and CFO at Lam Research]

Thank you, Harlan.

[Operator]

We'll take our next question from Timothy Arcuri with UBS. Please go ahead.

[Timothy Arcuri, Managing Director at UBS]

Thanks, operator. Thanks a lot. I had a question just on overall WFE. You know, Tim and Doug, you beat on June. You're guiding better in September, and you're getting a little bit, you know, a bit of improvement in terms of some of these constraints, yet the full year WFE is coming down a bit. Can you sort of square that a little bit? Is some of that maybe some demand-driven that's bringing the year down, or is even that mid-nineties still a supply constraint number?

[Tim Archer, President and CEO at Lam Research]

Yeah. Tim, it's in our view, it's primarily an adjustment we've made based on supply constraints and challenges. You know, since we gave our last guidance, which we had put at $100 billion of WFE, you know, not only have we seen kind of how we're performing, but we've also heard from others in the industry. You know, we have to, in trying to give a WFE number, look to how the entire industry is executing and not just how Lam is performing. We felt it prudent to lower that WFE outlook based on what looked to be still a lot of industry-wide constraints.

[Tim Archer, President and CEO at Lam Research]

You know, from a demand perspective, as I just said in the last answer, really haven't seen any meaningful change, that that's really embedded in that lowering of WFE. There's always some tools and projects that move around, but I, you know, right now, as you see with our deferred revenue and the fact that we're not meeting all demand, if anybody slides out a little bit, somebody else is sliding right into that slot. We're fully utilized at this point at the numbers we just gave.

[Timothy Arcuri, Managing Director at UBS]

Got it. Got it. Awesome. Thank you. Doug, I'd be remiss if I didn't ask about gross margin. You know, someone's gonna ask about it, so I guess it'll be me. So can you just-

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah. Go ahead, Tim.

[Timothy Arcuri, Managing Director at UBS]

Sorry, Doug. Can you walk us through, sort of maybe quantify the headwinds and, you know, would we be at $485 if, you know, sort of absent some of these headwinds? Can you sort of like, you know, normalize all that for us? Thanks.

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah, Tim. The way I've been describing it actually for a while now is, you know, the long-term profitability model of the company is unchanged. My expectation of where we're going to perform isn't any different than it was pre-pandemic, pre all the inflation coming through. The inflationary stuff that's permanent, we got to work on, you know, getting fairly paid for, and the stuff that's temporary, maybe we get paid for a little bit, but then we got to go pull the cost back.

[Doug Bettinger, EVP and CFO at Lam Research]

What was embedded in that financial model that we gave, I guess over two and a half years ago or something, was kind of 200 basis points above where we are guiding right now, and that's still the way you should think about the long-term profitability of where we're gonna drive the business.

[Tim Archer, President and CEO at Lam Research]

Tim, the only thing I would add on that point is, you know, there are a lot of questions obviously coming about is the industry slowing or, you know, are there some pockets that are gonna ease up? I think if that's the case, some of the things that are headwinds to us in gross margin right now, I mean, a lot of the expedites and premiums that we're paying on things like ICs, you would expect those to begin to moderate if some of the outlooks are that some of this demand either gets caught up or maybe or slows down a bit going forward. I think there's room for gross margin improvement, as Doug said, over the longer run.

[Timothy Arcuri, Managing Director at UBS]

Definitely. Yeah. It's a, you know, natural hedge. Thank you very much.

[Doug Bettinger, EVP and CFO at Lam Research]

Yep. Thanks, Tim.

[Operator]

We'll take our next question from CJ Muse with Evercore. Please go ahead.

[CJ Muse, Senior Managing Director at Evercore]

Yeah, good afternoon. Thank you for taking the question. A follow-up question on gross margins, your favorite subject, Doug. Would love to isolate just on your factory ramp in Malaysia. Can you speak to how that's going, whether that's a headwind or beginning to be a tailwind for you, and how we should think about you know, that escalating into a real you know, tailwind for you guys? Is that a you know, first half 2023, second half 2023, or later type of story?

[Doug Bettinger, EVP and CFO at Lam Research]

Maybe I'll let Tim talk about how the ramp is going, then I'll describe the numbers a little bit, CJ.

[Tim Archer, President and CEO at Lam Research]

Okay. Yeah, sure. CJ., I was actually just out there not too long ago. I'd say from an execution perspective and, you know, a lot of the improvement we're looking at, you know, I'd say Malaysia ramp is going extremely well. We're still in a ramping phase there, still in a mode of building out and developing the supply chain. You know, some of that, especially the supply chain development, might be a little bit behind where we would have wanted to be at the volumes, and that's simply because supply chain globally is struggling to ramp, and whether that's raw materials or component shortages or labor.

[Tim Archer, President and CEO at Lam Research]

I think it's coming up very nicely. I think when Doug gives you the answer about, you know, how it contributes, I mean, what we have to remember is that Malaysia is ramping at the same time as we're ramping all of our global facilities. Perhaps in the short run, you're not seeing an easily isolatable impact of Malaysia because we're ramping all other global factories at the same time. From a ramp perspective, I couldn't be happier right now with the scale of output and the efficiency I see starting to come out of that facility.

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah. Then CJ, just how to think about the numbers. I think maybe a year ago, I was talking about it being somewhat of a headwind to gross margin. It really isn't any longer. We're kind of at the point where it's neutral-ish. As Tim just told you, we're ramping everywhere. As you know, eventually that'll be the biggest factor in the mix. As it gets to be a bigger percentage of the total, it'll become a benefit to gross margin, not just from cost of labor, but the fact that our freight lanes will be shorter and the supply chain will move along with us. I'll keep you updated as we progress.

[Tim Archer, President and CEO at Lam Research]

Yeah, I think, actually, just I wanna emphasize that one point Doug just made, 'cause in my prepared remarks, made this comment about part of our strategic transformation over the last couple of years was to put capabilities closer to where they ultimately need to be. That's in the case of development, closer to customers, and in the case of the factories, closer to supply chains and also customers. You know, in a period when we're seeing high freight logistics costs, I mean, I think that ultimately having a large factory close to our customers in Asia is gonna be a big benefit for us.

[Tim Archer, President and CEO at Lam Research]

That was a very conscious decision, and I think it's gonna pay off as we don't know when freight logistics costs normalize, but that's a hedge against those remaining high for a while.

[CJ Muse, Senior Managing Director at Evercore]

Very helpful. Thank you. As my follow-up, I guess was hoping you could speak a bit to Reliant. And to clarify, do you include Reliant when you break out the percentage of exposure logic foundry memory? And then I guess bigger picture there, you know, the trends you're seeing, particularly as it relates to 200 millimeter, you know, 40 nanometer and above and domestic China. Can you kind of walk through the trends you're seeing there? Thanks so much.

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah, I'll take the beginning, and then I'll let Tim take the second part. Yeah, CJ, when I talk about the percent of systems revenue in my scripted remarks, that includes Reliant as well as the more leading-edge equipment that we're selling. It's all inclusive in terms of system revenue.

[Tim Archer, President and CEO at Lam Research]

Yeah. I think just in terms of end markets and the demand, I mean, I think we can speak as a user of many of those chips, where we still see severe constraints and also very high premiums for those chips in the marketplace. I think customers are investing to try to alleviate what today is clearly a mismatch in terms of supply and demand. That's across all different types of applications. I mean, when I look at the list of ICs that we're looking for just as one user, it's a broad list from a very broad number of manufacturers.

[Tim Archer, President and CEO at Lam Research]

It's hard for me to pin it down, but I feel like today we're still in a pretty broadly expanding and growing market.

[CJ Muse, Senior Managing Director at Evercore]

Thanks so much.

[Doug Bettinger, EVP and CFO at Lam Research]

Thanks, CJ.

[Tim Archer, President and CEO at Lam Research]

Yep, you bet.

[Operator]

We'll take our next question from Joe Moore with Morgan Stanley. Please go ahead.

[Joseph Moore, Managing Director at Morgan Stanley]

Great. Thank you. I wonder if you could talk about any potential for export controls. There's been some press focus lately on some incremental controls on exports to China for advanced logic, things like that. Do you guys get any kind of sense for what's coming down the pike there and how that might affect you?

[Tim Archer, President and CEO at Lam Research]

Yeah, Joe. So to tell you, we were recently notified that there was to be a broadening of the restrictions of technology shipments to China, for fabs that are operating below 14 nanometer. That is the change I think that people have been thinking might be coming. You know, we're prepared to fully comply. We're working with the U.S. government and any impact on Lam's business is contemplated in the September guidance that we just gave.

[Doug Bettinger, EVP and CFO at Lam Research]

September guidance as well as the full year WFE outlook, Joe.

[Joseph Moore, Managing Director at Morgan Stanley]

Great. That is 14-nanometer logic that doesn't include DRAM?

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah. To the best of our understanding, it's foundry focused, yes.

[Joseph Moore, Managing Director at Morgan Stanley]

Great. Thank you very much.

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah. Thanks, Joe.

[Operator]

We'll take our next question from Stacy Rasgon with Bernstein Research. Please go ahead.

[Stacy Rasgon, Managing Director and Senior Analyst at Bernstein Research]

Hi, guys. Thanks for taking my questions. I was wondering if you could give us a little more color on the drivers within the customer service business, particularly around strength in spare parts and 200-millimeter tools. I'm just trying to get some feeling for those pieces, especially given the broader environment and some of the other news flow we've heard around the macro and potential customer order cuts and things like that.

[Tim Archer, President and CEO at Lam Research]

Okay. I'll take the first shot at that. You know, maybe it's best to step back and just remind everybody, you know, the CSBG business is comprised of four components: spares, services, upgrades, and Reliant. One of the nice things about this business, and we've said we really like about it, is those often kind of move in somewhat of a non-correlated way. I mean, spares, you know, clearly just moves with our installed base. You know, as I look forward, you know, a lot of people wondering what does 2023 look like? We're not gonna give guidance, but one thing we always feel pretty comfortable about is we have a very strong equipment shipment year this year. There will be a lot more tools requiring spares and consumables next year.

[Tim Archer, President and CEO at Lam Research]

That part of the business grows. In fact, what we've said is, devices become more complex and our applications become more critical. The need for spares and the importance of spares just continues to grow. Spares is just robust and growing. The services business has been also strong. I talked about the shift in strategic transformation we're making towards more Equipment Intelligence-type services. As we kind of look forward, if customers start focusing on productivity and costs and really not trying to squeeze the output from their fabs without having to spend additional CapEx, they turn to things like productivity services, results-based contracts, use of data off of the tools.

[Tim Archer, President and CEO at Lam Research]

I think services has been doing well, and I think can continue to do well even in an environment where maybe you see a little bit of impact of macro or spending pullback. Same for upgrades. Upgrades business, actually, I've often said over the years that upgrades tend not to do so well when customers are busy adding lots of capacity because they're actually adding capacity, new tools, really focused on that. If they pull back a little bit, the way they save CapEx and still manage their technology roadmaps is they turn to upgrades and tech conversions, and so the upgrades business gets a little bit stronger. You know, that business we think can do can continue to do well and maybe even improve in next year's environment.

[Tim Archer, President and CEO at Lam Research]

Reliant, as we just said, a lot of catch-up to do. I think there have been significant underinvestment for quite some time in that area, as evidenced by the fact that many of us can't get the chips that we actually need to meet demand. There's some catch-up still there. Eventually, maybe that gets caught up. We don't really have a view on, you know, when that fully happens. It's a very diverse set of end markets and application drivers, so it's hard to predict. Clearly, at some point, it probably moderates in terms of growth and gets back more towards the steady grower tied kind of to the overall application expansion in the economy that we've seen in past years.

[Stacy Rasgon, Managing Director and Senior Analyst at Bernstein Research]

I guess maybe I should have asked more explicitly, what drove the sequential strength in services? Which one of these pieces was the biggest?

[Doug Bettinger, EVP and CFO at Lam Research]

It was both spares as well as Reliant. That's why I called that out in my script, Stacy.

[Stacy Rasgon, Managing Director and Senior Analyst at Bernstein Research]

Got it. Thank you. For my follow-up, I'm gonna ask—this is gonna come across a little snarky, but I think I'm gonna ask it anyways. I get the inflationary pressures on gross margins, but, you know, all of your customers seem at this point to be inflation-proof in terms of their input costs going up and their ability to pass along. Why aren't you?

[Doug Bettinger, EVP and CFO at Lam Research]

Stacy, I think I've been saying this for a quarter or two. I don't want you to believe that we're not raising prices, 'cause we are. I think maybe to our detriment, inflation has been bigger, stronger, more pronounced than we expected that it would be, honestly. There's some latency to kinda renegotiating prices and whatnot, and that's very much what's going on. It wasn't a snarky comment. I get the comment all the time. It's an appropriate comment. We're working on getting fairly compensated for what we need to, and we will.

[Stacy Rasgon, Managing Director and Senior Analyst at Bernstein Research]

How much of a driver do you think of, I'm looking at like a year or two, as that latency goes away? I mean, is it 100 basis points? Is it more? Like, how much can we be thinking, or is that what helps you kinda get back to the model range?

[Doug Bettinger, EVP and CFO at Lam Research]

It's what helps us get back to the model range. What I said earlier is the long-term profitability expectation for the company is unchanged, even though we're working our way through this inflationary environment. It's probably 200 basis points from where we are to where we need to be.

[Stacy Rasgon, Managing Director and Senior Analyst at Bernstein Research]

Got it. Okay. Thank you, guys. Appreciate it.

[Doug Bettinger, EVP and CFO at Lam Research]

You bet, Stacy. Thanks.

[Operator]

We'll take our next question from Krish Sankar with Cowen and Company. Please go ahead.

[Krish Sankar, Managing Director at Cowen and Company]

Yeah, hi. Thanks for taking my question. I have two of them, the first one for Doug. Clearly, you know, the last several quarters have been really strong. You have grown your headcount a lot. Hypothetically speaking, if next year was down in terms of revenue, say 5%-10%, how should we think about the earnings model and operating leverage? Then I had a follow-up for Tim.

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah, Krish, I guess the best thing I would point you to is just look at the history of the company's performance over the last decade, right? We know how to run the company in an up environment, in a down environment. We have a highly variable cost model here. We employ temporary resources. We outsource things. The best thing I would point you to is just look at the last downturn, and the same management team is running the company, will do the same things. It's a well-worn playbook that we know how to dust off and use when we need to.

[Krish Sankar, Managing Director at Cowen and Company]

Got it. Fair enough, Doug. a question for Tim. Now maybe this is the first time I'm noticing you talk about advanced packaging on the earnings slide deck. I'm kind of curious on your advanced packaging strategy. Some of your peers have partnered with backend companies or they're looking into panels. How should we think your advanced packaging portfolio should evolve? Are you looking at organic development, M&A or partnership with a backend company?

[Tim Archer, President and CEO at Lam Research]

Well, I think that we're looking at, you know, look, advanced packaging is an important area for Lam to participate in. We have for quite some time. I actually don't know if it's the first time we've talked about it because I have to believe we have talked about it in the past.

[Tim Archer, President and CEO at Lam Research]

We've talked about it primarily, you know, from the standpoint that etch and deposition play an incredibly important role in these new architectures, and we have a strong position, especially in applications like, well, both the etch as well as the copper electroplating. As form factors change, you know, we look at that as still our market and therefore, we'll evaluate and pursue whatever the best means is to win in those emerging segments, whether that's organic or inorganic.

[Krish Sankar, Managing Director at Cowen and Company]

Got it. Thanks, Tim.

[Doug Bettinger, EVP and CFO at Lam Research]

Thanks, Krish.

[Operator]

We'll take our next question from Toshiya Hari with Goldman Sachs. Please go ahead.

[Toshiya Hari, Managing Director at Goldman Sachs]

Great. Thank you so much for taking the question. It's really nice to see your traction and logic and other show up in your numbers in the quarter. To level set, I was hoping you could, you know, sort of quantify where you are from a market share standpoint across those markets today vis-a-vis the corporate average in etch and dep, and where do you see that going in a couple years, given the current application win funnel?

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah. If you look at logic specifically, it's probably our lowest exposure across the markets that we described. However, I'll remind you, Toshiya, that we've been talking about a specific share gain customer that we continue to progress very nicely with, which is part of the strength you saw in the results from June.

[Tim Archer, President and CEO at Lam Research]

Yeah. Toshiya, I guess I'd just add. I mean, there's a couple things to think about with respect to the foundry logic space. You know, one is our exposure is lower from a SAM perspective and has been. Actually, some of the technology inflections that are currently underway are actually allowing us to participate with some of our more advanced equipment to displace some of the older technologies that have typically been used in foundry logic. You're seeing a lot of traction for our selective etch. We didn't list all of the wins this quarter. We continue to see new selections for our selective etch tools. You know, that's only going to be used at very advanced logic, and it's kind of new markets, new opportunity for us, and we're doing well there.

[Tim Archer, President and CEO at Lam Research]

ALD of both dielectrics, and metallization used, to deal with like the RC inflection, the backend interconnect inflection. That's creating opportunities for us. I think that we're seeing a little bit of like share gain, at certain customers, as Doug mentioned, but also an expansion of our opportunity, and that's driving a lot of our new product roadmap. We have the objective to improve our position in foundry logic, for more advanced nodes.

[Toshiya Hari, Managing Director at Goldman Sachs]

Yeah. That's helpful. Thank you. As my follow-up, probably one for you, Tim. Just on dry resist, it's great to see you guys, you know, have traction there as well. Obviously, SK hynix is public. I'm pretty sure you're working with other customers on this as well. Help us quantify, you know, how significant this business or this product could be in a couple of years. As you partially sort of displace traditional track or coated developers, what percentage of the market do you think you can capture in a couple years? Thank you.

[Tim Archer, President and CEO at Lam Research]

Okay. Well, I think, you know, I don't wanna get ahead of sort of the new disclosure here, but I think we've quantified it in the past as roughly about a $1.5 billion opportunity over a five-year period. You're just starting to see us, you know, we talked about development tool of record wins. Obviously, we're not yet putting this into a production fab and developing revenue, so we'd just be at the very first stage of that. That should give you some kind of sense, maybe in the next five years, of the kind of revenue impact you're talking about. This is still a much longer play for us.

[Tim Archer, President and CEO at Lam Research]

I talked about this idea of accelerating the development of the dry resist for the high-NA EUV. You know, if you think EUV is gonna be around for the next 10, 20 years as the primary patterning capability for advanced logic, then, you know, our opportunity just continues to grow throughout that period. It starts off the next five years at that $1.5 billion, and then just continues to grow with layer count and application. We think that as you get to high-NA EUV, I think it's, you know, we have a good chance to capture a lot of the market.

[Toshiya Hari, Managing Director at Goldman Sachs]

Tim, sorry. When you say five years, I know you guys initially talked about this at your 2020 analyst day. Is it five years from then or five years from today?

[Tim Archer, President and CEO at Lam Research]

Well, I don't know. Yeah, I guess I'd just start the clock now, because as I said, we've only reported the development tool of record positions today, obviously, which we haven't yet started to generate revenue from. Yeah, I think if you call it five years from today, it's a safer bet than five years from our analyst day.

[Toshiya Hari, Managing Director at Goldman Sachs]

Sounds good. Thank you.

[Tim Archer, President and CEO at Lam Research]

Yep.

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah. Thanks, Toshiya.

[Operator]

We'll take our next question from Atif Malik with Citi. Please go ahead.

[Atif Malik, VP of Trade Product at Citi]

Yes, thank you for taking my question. I have a question for both of you. It looks like the Senate has passed the CHIPS Act. Tim, you along with Intel and Micron CEOs, you spoke to Congress in March about the importance of passing this legislation. Assuming it goes through Congress and the president signs off, can you talk about what this bill means for the U.S. equipment makers? Doug, if you can, talk about, you know, how will it impact Lam in terms of any tax breaks or in terms of market share growth in logic foundry areas? Thank you.

[Tim Archer, President and CEO at Lam Research]

Okay. Well, obviously, it's of significant benefit for the U.S. semiconductor manufacturing industry overall. I think most directly what I would say is that, you know, Lam's benefit from this will come in two ways. One is, you know, as our customers invest in capabilities in the U.S. and capacity, obviously we're hopeful that we will garner a large share of the equipment that's purchased for those fabs. That's one way in which monies from that flow through ultimately into business for Lam. Specifically, when I was in front of the Senate, one of the things that I talked about is think long term.

[Tim Archer, President and CEO at Lam Research]

If you think about long-term improvement for U.S. companies and U.S. semiconductor manufacturing, it has to do with some of the R&D money that's in that, I believe in the CHIPS Act, which is going to fund longer term capabilities that help, you know, semiconductor device makers, but also equipment makers develop those next generation technologies that keep us incredibly competitive on the global stage and, you know, allow us to create those technologies without having to necessarily fund and take on all of that risk ourselves as individual companies, which is always hard to do for technologies that might be seven, eight, 10 years into the future. That's the other way I would say that companies, both device makers and equipment makers can benefit.

[Tim Archer, President and CEO at Lam Research]

We need to see all the details, but that's my initial take.

[Atif Malik, VP of Trade Product at Citi]

Thank you.

[Doug Bettinger, EVP and CFO at Lam Research]

Are you there, Atif? Any follow-up?

[Atif Malik, VP of Trade Product at Citi]

No, I'm good, Doug.

[Doug Bettinger, EVP and CFO at Lam Research]

Okay. All right. Thank you.

[Operator]

We'll take our next question from Vivek Arya with Bank of America. Please go ahead.

[Vivek Arya, Managing Director at Bank of America]

Thanks. I had two questions. First one, is this $4.9 billion that you're guiding to for September, is this kind of the new quarterly baseline? All else being equal, should we expect December, you know, sales and gross margins to potentially be flat or up? I appreciate you're not giving December outlook, but is there anything that could, you know, make you deviate from this new trend line that you have, you know, June stronger and then September even stronger than that?

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah, Vivek, you're right. I'm not gonna guide the December quarter for you. Listen, I think we're pretty pleased with the progress from a supply chain standpoint we made in the June quarter. It continues to be reflected in the September quarter. Barring something new coming up, I think our execution will continue. That largely has been what has limited the revenue generation of the company. You heard me mention the $2.2 billion in deferred revenue, so that's there for us to follow up on. I'm not gonna give you a number for December quite yet.

[Vivek Arya, Managing Director at Bank of America]

Understood. Then the second one is just a clarification. What is your sub-14 nanometer exposure to China? I didn't think there was, you know, any or not that much. Do the restrictions apply to just China domestic, or do you think they could apply to the multinationals with fabs in China?

[Tim Archer, President and CEO at Lam Research]

At this point, we would assume that it applies to all sub-14 nanometer activity in China. You know, we're not gonna quantify what we might have or had in our plans for sub-fourteen.

[Vivek Arya, Managing Director at Bank of America]

Tim, just to clarify, September, you said is de-risked, i.e., there is zero sub-14 nanometer China business for you in your September outlook.

[Doug Bettinger, EVP and CFO at Lam Research]

Vivek, the guidance fully reflects everything that we just described.

[Tim Archer, President and CEO at Lam Research]

Yes.

[Vivek Arya, Managing Director at Bank of America]

Okay. Thank you.

[Doug Bettinger, EVP and CFO at Lam Research]

You're welcome.

[Operator]

We'll take our next question from Mark Lipacis with Jefferies. Please go ahead.

[Mark Lipacis, Managing Director at Jefferies]

Hi. Thanks for taking my question. I had a clarification and a question. The clarification, Tim, I think it was an earlier question about whether you were seeing pushouts or cancellations. It sounded like you said that you're not seeing any impact on your demand, but I just wanna make sure I understood your response to that question. Then my question is, can you help us understand, you know, the mechanics of your manufacturing operations or how you deal with the slots that you have before you allocate it to your different customers as the orders have come in? If somebody...

[Mark Lipacis, Managing Director at Jefferies]

You know, what kind of latitude do your customers have if they come in and say, "Well, I don't know if I want the tool now. I'd prefer it in three months." Do you guys flip-flop slots in the queue, or do you just send people back to the end of the line? If you could just kind of review, you know, the mechanics around how you treat, you know, the orders as they come in and what happens to customers who ask for, you know, the pushouts.

[Tim Archer, President and CEO at Lam Research]

Yep.

[Mark Lipacis, Managing Director at Jefferies]

That would be helpful. Thank you very much.

[Tim Archer, President and CEO at Lam Research]

Sure. I can try to address both those. Yeah, just to be clear, my comment was at this point we've seen no pushouts and changes in demand, no pushouts, no cancellations that are at all meaningful. However, I mean, I want to acknowledge, I mean, it's with long lead times and stretching, you know, through 2023 and a cautious tone being struck by some of our customers quite publicly, you know, I'm not saying that we might not ultimately see those changes come. I just, you know, saying that we've seen none doesn't mean that might not happen.

[Mark Lipacis, Managing Director at Jefferies]

Sure.

[Tim Archer, President and CEO at Lam Research]

At this point.

[Mark Lipacis, Managing Director at Jefferies]

Gotcha. Thank you. That's helpful.

[Tim Archer, President and CEO at Lam Research]

The commitments that we have today are being met, and that was what I was trying to signal. You know, I think with those long lead times, it moves into your second question, which is, so what if a customer does come and say they'd like to push a project by a few months, or even longer. We treat it the same way we are doing right now when customers come and have asked us to pull in slots. You know, we work with all of our customers to see where people really are in their projects and their demand.

[Tim Archer, President and CEO at Lam Research]

We have not ultimate flexibility within our manufacturing, but I talked about the fact that we've invested in the last two years to try to create greater operational flexibility, and part of it is so that we can respond in that way. I mean, we treat our customers very much like partners, and if we need to push by a couple of months because maybe it's either demand, or more likely sometimes it's the facilities aren't quite ready or there's a change in their plans, we try to work with them and make those adjustments if it's possible.

[Mark Lipacis, Managing Director at Jefferies]

Got you. Thank you very much. It's very helpful.

[Tim Archer, President and CEO at Lam Research]

Yep. Thanks, Mark.

[Operator]

We'll take our next question from Patrick Ho with Stifel. Please go ahead.

[Patrick Ho, Managing Director at Stifel]

Thank you very much and congrats on a nice quarter. Doug, maybe for you, in terms of the supply chain, obviously, you've seen some improvements in the past quarter that'll carry into this next quarter. Are some of the issues now just related to the quantity of shipments 'cause it's still going to be a more second half weighted year for you guys? Even with some of the incremental improvements on the supply chain, it's now just trying to, I guess, continue to keep pace with the high demand levels that you're seeing near term, and that's why the deferred revenues are staying at the same levels, at least as you're forecasting into the September quarter.

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah, Patrick, that's clearly part of it, right? We've got unmet demand. We've got partial shipments that shows up as deferred revenue. Each supplier has a unique situation that we're working through with them to the extent that they're not meeting what we need from them. But yeah, we increased, improved the output last quarter, and we see that continuing as we go into September.

[Patrick Ho, Managing Director at Stifel]

Great. As a quick follow-up, maybe for Tim. Obviously, you've been working with a leading MPU customer for some time now, and we're starting to see the share gains and the higher quantity of volume as they start ramping new products. You've been working with them for some time. As you've worked with them and given them more accelerated roadmaps in terms of technology nodes, can you maybe not quantify, but qualitatively say that you've seen some incremental new market opportunities, and that's what gives you confidence with that customer on a going forward basis?

[Tim Archer, President and CEO at Lam Research]

Like I said, broaden it to all customers. I mean, I speak to the one, but I think what we've always said is that Lam's greatest opportunities get created as those technology changes, those technology transitions occur. You know, I spoke to a couple of you, just as an example, you think about somebody implementing gate-all-around in, say, their next technology node or a future technology node. It does create new opportunities for us, and we have designed equipment kind of ahead of where the roadmaps are. The faster those technology changes come, the sooner we get the opportunity to insert those new applications into their production lines in a bigger way. You know, we've talked about some of those, the selective etch, some of our new ALD tools.

[Tim Archer, President and CEO at Lam Research]

Of course, it's some of our etch systems that are designed to really support the fine pitch patterning associated with EUV. As EUV, like at each technology node, you use more and more layers of EUV, that grows for us. You know, every customer, the faster they transition technology, the greater SAM's, Lam's sort of market is growing and the greater our share opportunity is increasing.

[Patrick Ho, Managing Director at Stifel]

Great. Thank you.

[Tim Archer, President and CEO at Lam Research]

Thanks, Patrick.

[Operator]

We'll take our next question from Blayne Curtis with Barclays. Please go ahead.

[Blayne Curtis, Managing Director at Barclays]

Hey, guys. Thanks for taking my question. I just want to follow up on the demand outlook. I mean, I hear you said you haven't seen much. I mean, I'm just looking at the areas that you mentioned being strong, and I think we've seen a lot of those same areas see weakness, image sensors and MCUs, APs. I mean, Qualcomm said they're caught up on supply. So I know that's not your forecast. You get them from the customers, but I'm just kind of curious, you've been through these before. When you look downstream, you definitely see weakness. I'm just kind of curious, if you know what you've actually seen yet. Obviously, you know, memory, same story. You're hearing about CapEx cuts.

[Blayne Curtis, Managing Director at Barclays]

Just trying to fit all this into the picture versus, you know, I know you're still catching up, so I don't know what the right starting point is, but clearly you're seeing downstream weakness.

[Tim Archer, President and CEO at Lam Research]

Yeah. Blayne, you know, obviously, as we acknowledge, we're clearly hearing customers strike a more cautious tone. We see what's going on around, within the macro. We haven't given a 2023 outlook, to be clear. I think what we're saying is that, you know, if demand changes and as demand changes, you know, Lam is set up to operate effectively within whatever that environment is. Clearly, we have different scenarios. But the key is, you know, as we look forward, things like our larger installed base business will be helpful for us regardless of what the environment looks like. The improvements we've made, say, in our foundry exposure with new share gains and SAM expansion, that will be a positive regardless of what the end demand looks like.

[Tim Archer, President and CEO at Lam Research]

The higher etch and depth intensity due to the technology inflections, it's true regardless of what the end demand is. The fact that we have a more diverse and more efficient and more effective global manufacturing infrastructure, that'll also be helpful regardless of what the demand is. I think what we're trying to highlight is we're not gonna be the best at forecasting, probably no better than anybody else at really knowing exactly what 2023 is gonna be looking like. We do believe we have a pretty good view of how Lam can execute very well within whatever that environment is.

[Blayne Curtis, Managing Director at Barclays]

Thanks for that. You might have answered this before, but just on the deferred revenue balance, I was just curious, you know, you are seeing people start to catch up. I know you mentioned that it could be flat in September, but just trying to understand the challenges. Are you still having certain subsystems that you can't get? Or is it more like, you know, you're just getting higher orders in the door and the balance keeps going up? I'm just trying to understand, you know, why that hasn't started to work its way down.

[Tim Archer, President and CEO at Lam Research]

Well, it's just that it's a higher volume of output we're trying to achieve. Quite frankly, it's all components. I mean, I would say everything is sort of improving. In general, there's you know still quite a number of quantities that aren't able to meet the new higher level that we want for the output, so it just continues to increase. I couldn't point to one specific thing, but I would say that in general, I'm happy with the improvements we're seeing across a broad array of our suppliers. That's why I said I thank them for their efforts because I do see that incremental improvement and expect further improvement as we move to September.

[Blayne Curtis, Managing Director at Barclays]

Thanks so much.

[Doug Bettinger, EVP and CFO at Lam Research]

Thanks, Blayne. Yep.

[Tina Correia, Corporate Vice President of Corporate Finance and Investor Relations at Lam Research]

Operator, we have time for one more question, please.

[Operator]

Okay, we'll take our final question from Joe Quatrochi with Wells Fargo. Please go ahead.

[Joe Quatrochi, Director of Equity Research Analyst at Wells Fargo]

Yeah, thanks for taking the question. Another question on the Reliant business. You know, it's pretty well known that the third-party reseller market for tools has been pretty limited on supply. How do we think about that market competing against the Reliant business? And then, you know, how should we think about that, if that supply of tools, used tools, maybe increasing if demand does start to slow from the end market semiconductors perspective?

[Doug Bettinger, EVP and CFO at Lam Research]

Hey, Joe, I guess the first thing I would point out to you is, yeah, historically, that's been a segment of the market serviced by a lot of used equipment. Today, there isn't any used equipment or very little, and as a result of that, we're selling older model new equipment into the Reliant product line, right? Demand is. There isn't anything coming to be refurbished today. I don't know, Tim, you wanna-

[Tim Archer, President and CEO at Lam Research]

Yeah, no, I think that's clearly the case. Most of that, if not all of that equipment at this point is being

[Doug Bettinger, EVP and CFO at Lam Research]

Fully utilized.

[Tim Archer, President and CEO at Lam Research]

Still new.

[Joe Quatrochi, Director of Equity Research Analyst at Wells Fargo]

I guess, do you see that changing if demand were to slow from an end semiconductor perspective? Do you see the amount of tools coming in to be refurbished somewhat changing, or do you think customers maybe, you know, continue to kinda hold that capacity?

[Tim Archer, President and CEO at Lam Research]

I don't see that changing in a very significant way. I mean, these assets, once they're into these fabs, I mean, you know, we tend to see our tools used for 20-30 years producing chips of some different technology nodes. I think, as hard as it's been to get equipment, I mean, I think many of these customers will definitely keep hold of those systems. At least in my view.

[Doug Bettinger, EVP and CFO at Lam Research]

Yeah. Thanks, Joe.

[Operator]

This concludes today's question and answer session. Now I'd like to turn the conference back to your presenters for any additional or closing remarks.

[Tina Correia, Corporate Vice President of Corporate Finance and Investor Relations at Lam Research]

Thank you, operator. We appreciate everyone joining our call today, and thank you all for your support.

[Operator]

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.

Participants

Executives

• Doug Bettinger, EVP and CFO
• Tim Archer, President and CEO
• Tina Correia, Corporate Vice President of Corporate Finance and Investor Relations

Analysts

• Atif Malik, VP of Trade Product at Citi
• Blayne Curtis, Managing Director at Barclays
• CJ Muse, Senior Managing Director at Evercore
• Harlan Sur, Executive Director of Equity Research at JP Morgan
• Joe Quatrochi, Director of Equity Research Analyst at Wells Fargo
• Joseph Moore, Managing Director at Morgan Stanley
• Krish Sankar, Managing Director at Cowen and Company
• Mark Lipacis, Managing Director at Jefferies
• Patrick Ho, Managing Director at Stifel
• Stacy Rasgon, Managing Director and Senior Analyst at Bernstein Research
• Timothy Arcuri, Managing Director at UBS
• Toshiya Hari, Managing Director at Goldman Sachs
• Vivek Arya, Managing Director at Bank of America