Lam Research Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
July 27, 2021

There are 13 speakers on the call.

Operator

Good day, and welcome to the June 2021 Quarter Financial Conference Call. At this time, I would like to turn the conference over to Tina Correa, Corporate Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, 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 will review our financial results for the June 2021 quarter and our outlook for the September 2021 Quarter. The press release detailing our financial results was distributed a little after 1 o'clock p.

Speaker 1

M. Pacific Time this afternoon. The release can also be found on the Investor Relations section of the 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. Today's discussion of our Financial results will be presented on a non GAAP financial basis unless otherwise specified.

Speaker 1

A detailed reconciliation between GAAP and non GAAP results can be found in today's earnings press release. This call is scheduled to last Until 3 pm Pacific Time. A replay of this call will be made available later this afternoon on our website. And with that, I'll hand the call over to Tim.

Speaker 2

Thank you, Tina, and welcome, everyone. Our June quarter results reflect continued strong execution Across our Systems and Services businesses. The quarter came in well above expectations with record revenues of $4,150,000,000 and earnings per share of $8.09 We also generated record cash from operations in the quarter of $1,400,000,000 The June quarter marked the end of Lam's fiscal year. And despite a challenging operating environment, we delivered the highest revenue in the company's history. Compared to the prior fiscal year, revenues grew more than 45% to $14,600,000,000 Earnings per share increased at an even faster pace to a record $27.25 in fiscal year 2021, More than 70% higher than in fiscal year 2020.

Speaker 2

The demand environment for semiconductor equipment remains strong And we now see wafer fabrication equipment spending in calendar 2021 trending above $80,000,000,000 While absolute WFE spending levels have risen to new highs, we remain confident in the health and sustainability of the industry at these levels. Wafer fab equipment spending as a percentage of semiconductor industry operating profit Remains within historical ranges and semiconductors continue to enable critical technology transformations such as AI, 5 gs, High Performance Computing and IoT. We believe robust semiconductor demand, Rising device manufacturing complexity and strategic regional investments are powerful drivers for multiyear WFE Spending. By device segments, we see strength across NAND, DRAM and found the backdrop of broad demand, Increasing device manufacturing complexity plays well to Lam's strength in critical applications and continues to create new growth opportunities. Looking at the past 5 years, as manufacturing complexity increased in NAND with the transition to 3 d, Lam gained over 6 points of share of WFE in this segment and leads the next closest supplier by about 8 points of customer spend.

Speaker 2

In the June quarter, we secured another win for a critical deposition application and are now the tool of record For all NAND manufacturers for this process, instrumental to our success has been the differentiation afforded by our Claude Station Chamber Design. Our multi station architecture refined over many years allows us to use sequential processing to precisely tailor film properties to meet the needs of next generation devices without compromising the productivity required for for high volume NAND, DRAM and foundry logic manufacturing. Another example where we believe we are well positioned The benefit from rising complexity is through our enablement of higher quality surface conditioning. Surface properties have been shown to greatly impact And existing surface preparation methods are in many cases insufficient to meet the stricter requirements for new materials and tighter dimensional control at Advanced Nodes. For the Foundry Logic segment, we recently introduced a range of novel, Selective etch, strip and surface treatment solutions that use our ultra high selectivity, 0 damage process To remove unwanted materials with minimal impact to other layers.

Speaker 2

We are gaining significant momentum with this new approach, With multiple LAM tools selected by a large customer in the June quarter as tool of record for leading edge applications. We plan to share more details on this innovation in the near future. Additional opportunities for Lam are being driven by the need for Higher pattern fidelity as foundry logic pitch tolerance is tightened. For extremely small features, the relationship between change in resistance The change in dimension is exponential, therefore necessitating an extreme level of precision in device fabrication and advanced nodes. Even small variations in pattern roughness can degrade RC and transistor speed.

Speaker 2

In response, We have developed etch solutions such as our ARIA plasma pulsing capability to reduce line roughness by up to 30%. This technology has proven to be a key enabler for many critical etch applications and when combined with our proprietary uniformity and RF Power Solutions has helped Lam maintain our overall market leading position in multi patterning etch. As the industry transitions to even more demanding EUV patterning, we are seeing success applying these technology solutions to win new EUV patterning steps. Solving complex scaling challenges, including transitions to 3 d structures in foundry logic And DRAM will not be accomplished without deeper collaboration across the ecosystem. Our customers are increasingly highlighting the need for closer partnerships with the equipment industry to meet their overall device performance and cost roadmaps.

Speaker 2

As a result, We continue to expand R and D investments closer to customers with the aim of accelerating new application development, Shortening cycles of learning and strengthening our understanding of the customers' most difficult problems. In addition to these regional R and D investments, I am pleased to announce that we recently shipped our first modules from our new Malaysia factory. This new facility adds resiliency To our global manufacturing network, create capability closer to key customers and supply chain partners and provides us with urgently needed capacity to support our continuing growth. I would like to acknowledge the tremendous efforts of the Lam employees and partners that completed the Malaysia project on time despite the challenges of the COVID-nineteen pandemic. In our customer support business, June quarter revenue growth again outpaced growth in chamber count.

Speaker 2

Our service, upgrades and Reliant businesses all delivered record quarters. Reliant has now shown growth for 10 consecutive quarters, Driven by strong investments in power, CIS and non leading edge foundry. We achieved in the quarter a key edge penetration one of the top 5 gs RF providers exhibiting our technical leadership in this space. Also, the spares team executed a major contract At a key customer in Asia, which secures a stream of revenue from our installed base. While quarter on quarter CSBG growth Can vary based on customer investment patterns, we are very well positioned to deliver strong calendar year growth with a portfolio of products and services focused on our customers' operational success.

Speaker 2

We are increasing the productivity of our customers' tools and extending the life of their equipment, which contributes to lowering the overall environmental impact of semiconductor manufacturing. On the topic of sustainability, I would like to share a few highlights for the company. In June, we released our annual environmental, social and governance report. I am very proud of our organization's efforts last year to support the needs of the communities in which we work and live, to keep our employees safe through the COVID-nineteen pandemic And to advance inclusion and diversity across our global workplace. This year's report introduced our goals of operating on 100% renewable energy by 2,030 in achieving carbon net 0 by 2,050.

Speaker 2

We are driving innovations in products and process solutions in support of our sustainability objectives. For instance, our new Sensai etch platform improves power efficiency and requires less aluminum raw material for pool construction. Our new Drive Resist technology uses 5 to 10 times less chemistry and 2 times less energy than the current process of record. Our parts cleaning, repair, refurbishment and recoating services are enabling more reuse and lessening waste. These solutions drive sustainability and make Lam products more competitive in the marketplace.

Speaker 2

I encourage you to check out the report on our website to learn more. So to wrap up, we had an outstanding quarter and fiscal year. Most importantly, as we look to the future, we see rising device complexity and continuing transitions to 3 d architectures Driving Growth for Lam. Thank you all for listening today. And now here's Doug.

Speaker 3

Thank you, Jim. Good afternoon, everyone, And thank you for joining our call today on what I know is a very busy earnings season. As the world continues to face challenges with the pandemic, I hope you and your families have been safe and healthy since we last spoke with you. Lab continued to deliver outstanding performance with record quarterly revenue, Operating income and earnings per share in the June 2021 quarter. Our revenue, gross margin and operating income Came in at or above the midpoint of our guidance and earnings per share were above our guidance range.

Speaker 3

We're extremely pleased with our operational execution and we thank all of our customers, suppliers and employees for their dedication and support. Our revenue for the June quarter was $4,150,000,000 represented an increase of 8% from the March quarter. We had record revenue in both our systems and our customer support business group. So let me now turn to the details on systems revenue. The memory segment continues to be an area of strength for And represented 59% of systems revenue in the June quarter.

Speaker 3

The NAND segment concentration was essentially flat with prior quarter at 49% of our systems revenue and again hit another record level in terms of revenue dollars. We saw customer investments in both capacity adds and conversions, spending primarily on 128 layer class devices. In the DRAM segment, we had 10% of our June quarter systems revenue versus 14% in the prior quarter. The DRAM investments were concentrated mainly in the 1Z and 1 Alpha nodes. And I would just mention, we do see DRAM spending Strengthening into the second half of this year.

Speaker 3

For the Foundry segment, we had our 2nd consecutive quarter of record revenues Coming in at 35% of our June systems revenue as compared with 31% in the March quarter. Foundry spending is occurring in both leading edge and mature technologies to meet the end demand for various market drivers like AI, 5 gs and gaming, as well as specialty chips needed for things like IoT, image sensors and power devices. And finally, logic and other contributed the remaining 6% of systems revenue in the June quarter, which was essentially flat to the prior quarter percentage. Now looking at the regional profile of our total revenue. The China region came in at 37% of our total revenues, Up from 32% in the March quarter.

Speaker 3

The spending profile for the China region was generally balanced between the domestic and multinational customers with their fabs that are located in China. The Korea region also Continued to be very strong in the June quarter, representing 30% of revenues. CSBG, which is our installed base business came in at nearly $1,400,000,000 which as I noted is another high point for this group. The revenue level is an increase of 6% from the March quarter and 49% higher than the same quarter in 2020. All of the sub segments of this business are delivering excellent performance.

Speaker 3

The Reliant product line that serves specialty market, Upgrades where we're extending the life of our customers' tools as well as spares and service that are supporting the high industry utilizations. All sub segments strongly contributed in the quarter. So now let me shift to profitability. June quarter gross margin was 46.5%, right at the midpoint of the guided range. I'll remind you that our gross margins There continues to be elevated air freight and logistics costs due to the COVID environment impacting us in the current quarter, Which are also reflected in the September quarter guidance.

Speaker 3

Operating expenses for June were $574,000,000 slightly higher than the prior quarter. You may note in our earnings release that we did incur a charge during the quarter of approximately $6,000,000 related to an asset impairment of the product line that we're shutting down. This charge was excluded from our non GAAP operating expenses. We've demonstrated our ability to scale the company profitably as we've continued to decrease operating expenses as a percent of revenue. I'll also note that we've continued to prioritize R and D spending to ensure that we have the resources to continue to build Our technically differentiated leadership positions and we maintained an emphasis on R and D spending and it continues to represent approximately 2 thirds of our operating expenses.

Speaker 3

3rd quarter operating margin showed solid performance coming in over the midpoint of our At 32.6 percent, reflecting strong gross margin and operating expense management. This operating income percentage represents an all time high watermark for Lam Research. Our non GAAP tax rate for the quarter was 12.6 percent, generally in line with our expectations. And as we've noted in prior calls, our tax rate will fluctuate from quarter to quarter. We expect the ongoing tax rate to be in the low teens level for the 2021 calendar year.

Speaker 3

I would just mention, we're continuing to monitor potential tax changes that are under discussion in the current United States administration. Other income and expense was approximately $23,000,000 in expense, which is lower than the prior quarter as a result of a $30,000,000 market gain in one of our venture capital investments. As we previously noted, OI and E is subject to market related volatility that could cause a difference from any typical run rate. And also just to remind you, beginning in the March quarter of 2020, the benefits and costs of our employee deferred compensation plan are no longer mismatched in our non GAAP results. This mismatch was $17,000,000 for the June 2021 quarter.

Speaker 3

And if you're interested, you can see the details in the GAAP reconciliation tables in the earnings release. So now let me shift to capital return. We paid $185,000,000 in dividends and allocated $440,000,000 towards share buyback. This is in line with our long term capital return plans of 75% to 100% of our free cash flow. Earnings per share came in at $8.09 above the guidance range.

Speaker 3

The outperformance is due to the higher revenue and expense management as well as the favorability I noted in OI and A. The diluted share count balance was down slightly from the March quarter level coming in at 144,000,000 shares. During the June quarter, we redeemed the remaining 2,041 convertible notes, which I'm happy to tell you is the last Convert that was in our capital structure. Let me shift to the balance sheet. Cash and short term investments, Including restricted cash totaled $6,000,000,000 which is flat with the prior quarter.

Speaker 3

We had record performance in the June quarter for cash flows from operations, which came in at $1,400,000,000 During the quarter, our cash generation was deployed to the pay down of $800,000,000 of senior notes that were due in June, As well as cash outlays for the capital return activities that I mentioned. Days sales outstanding was flat to the March quarter at 66 days. Inventory turns were up slightly from the prior quarter level coming in at 3.3x. 3 quarter non cash expenses included approximately $56,000,000 for equity compensation, dollars 60,000,000 for depreciation and $18,000,000 for amortization. We're investing in increasing our capacity and support of customers And as a result, capital expenditures for the June quarter were up from the March level and came in at $105,000,000 We have investments occurring around the globe with our new Malaysia factory, which is formally opening this quarter, Expansion in our U.

Speaker 3

S. Critical spare parts facility in Ohio and R and D investments in our new Korean lab facility. We expect to see somewhat levels somewhat elevated levels excuse me of capital expenditures in the remainder of calendar year 2021 as we support these growth initiatives. The headcount level ending the June quarter was Approximately 14,100 regular full time employees. Resources have been added in our factories and in the field to meet the increased output levels and to support customers in their technology evaluations as well as tool installation requirements.

Speaker 3

My final commentary to touch on for the June quarter is a follow-up in the ESG space, which obviously is strategically important for Lam Research. In June, we extended and upsized our revolving credit facility to $1,500,000,000 We transitioned this facility to a sustainability linked revolver, which includes a pricing structure that is linked to certain performance metrics for Energy Savings and Employee Safety. In addition to the ESG focus areas that Tim noted, This credit facility is further demonstration of our commitment to integrate ESG principles into all aspects of how we operate as a company. So now looking ahead, I'd like to provide our non GAAP guidance for the September 2021 quarter. We're expecting revenue of $4,300,000,000 plus or minus $250,000,000 Gross margin of 46%, plus or minus 1 percentage point.

Speaker 3

Operating margins of 32% Plus or minus one percentage point. And finally, earnings per share of $8.10 plus or minus 0.50 dollars Based on a share count of approximately 143,000,000 shares. We continue to maintain A widened revenue range as we work to mitigate ongoing output challenges in our global supply chain. These supply chain challenges are also driving a modest headwind in our guided gross margin. Customer demand continues to look strong in the second half of twenty twenty one as well as into next year.

Speaker 3

Lam is operating at record levels of financial performance as a result of the tireless efforts of our operational organizations and supply chain partners. We continue to progress on our longer term share gain objectives with investments in new platforms like Sensei and DRi Resist. We'd like to thank the company for rising to the challenge and delivering on these objectives. Operator, that concludes my prepared remarks. Jim and I would now like to open up the call for questions.

Operator

Thank

Speaker 2

Correa.

Operator

We'll take our first question from John Pitzer of Credit Suisse.

Speaker 4

Yes. Good afternoon, guys. Thanks for letting me ask the question. Tim, notwithstanding your comments and your prepared commentary about Still feeling comfortable that the industry is spending at healthy levels. For us out here, it's all too seductive to kind of look at where your NAND quarterly revenue run rate is today and go back and look at where that peaked in 2018 to see that it's higher.

Speaker 4

And I guess maybe you can help us out. If you think about just The overall growth in complexity of NAND since 2018 and I guess more importantly, your market share gains, How do we look at this number in the June quarter and compare it to sort of the 1.287 you did in the March 2018 quarter?

Speaker 2

Yes. It's obviously a question that we spend a lot of time thinking about. And I think you hit on the most important point, which is what does it meant Lamb to see not only the transition to 3 d, which I gave some elements of how it changed our position in terms of share of WFE over the last 5 years. That was my comment. Over 6 points of share gain of WFE.

Speaker 2

And but more importantly, what are we doing going forward to ensure kind of durability in this business, Meaning defending the positions we've worked hard to gain, but also benefiting from the complexity that's occurring because of layer scaling. And that's really our And so maybe to talk about complexity, number of layers increasing clearly is Driving a strong demand for the tools that deposit those film stacks, etch the holes in those film stacks and backfill them with the metal station. Those are the strongest positions Lam has within NAND and we feel extremely good about their Our defensibility of those positions. But even those are seeing changes. And so it's different materials, for instance, to reduce line resistance.

Speaker 2

We're seeing new opportunities for new tools. We've talked about the Vector DT dealing with stress issues as layers layer counts increase. Those things didn't exist just that application didn't exist just years ago. We're seeing the transition to ALD gap fill. Again, it didn't That application did not exist as an ALD film, therefore, not within Lamb's Wheelhouse at the last peak.

Speaker 2

And so Not only have we grown our existing positions because of more layers, we've actually added more critical steps to the process. And I think that just it bodes well. At every peak, our goal is to expand our served market in a way that We come out stronger and bigger peak to peak.

Speaker 4

That's helpful. And if I could follow-up, Doug, in your commentary, you talked about expectation for DRAM growth to accelerate from here. I think year to date, You guys are up about 13% versus the same period last year. You've had guys like ASML talk about DRAM CapEx being up as much as 60% for them. Now clearly, they're benefiting from some EUV assertion, but any numbers you can put around by How big of an acceleration do you expect in the back half of the year?

Speaker 3

Yes, John, I'm not going to quantify it, because I never do when we're looking in the out segments, but it's going to grow nicely in the second half. It's going to grow nicely because of our patterning positions. And I feel really good about the trajectory when I look into the second half It's going to be a good second half. Let's leave it at that.

Speaker 2

Perfect. Thanks guys. Thanks, John.

Operator

Thank you. We'll take our next question from C. J. Muse of Evercore.

Speaker 3

Yes, good afternoon. Thank you for taking the question. I guess first question on gross margins. Doug, can you give us a little more granularity on what's driving The headwind sequentially. And I guess as part of that, we would love to hear how we should be thinking about the ramp of Malaysia capacity and the impact of gross margins over time.

Speaker 3

Yes. Thanks for the question, CJ. I expected this one pretty quickly in the call. Listen, when I look out over the next quarter, there's challenges in the supply chain. And some of those challenges as we work to mitigate them requires incremental spending.

Speaker 3

When I look at what happened in June and what happened in September, Maybe the incremental downtick in gross margin is primarily a result of that. So that's one thing to kind of put Put in the quiver there a little bit to think about as we go forward. We'll work our way through that. It'll get better over time. It will also get better over time as you rightly asked about as we ramp Malaysia now.

Speaker 3

Right now, when I look In the September quarter, it's not a benefit to gross margin because we're too early in the ramp of that facility. You got the fixed costs sitting there and you got startup costs. So that actually is driving a little bit of a headwind right now too. And over time that headwind will shift to a tailwind as we get the benefit of the Asia based cost structure. So, I'd look forward, we've got trajectory on gross margin that will get better over time.

Speaker 3

And really right now, we're just dealing with supply chain as we work to mitigate some of the challenges that we see out there. That's great. And as a follow-up question, I guess perhaps could you provide a little more granularity on Reliant? It certainly sounds like trailing edge demand is robust this year, but also should be robust for some time. So Would love to hear your thoughts on how we should be thinking about the contributions there over time.

Speaker 2

Sure. I don't think we're going to quantify Reliant But what we can tell you is, as you pointed out, it's specialty technologies, it's trailing edge foundry, extremely strong. In fact, you hear From many in the industry, that's where a lot of the chip shortage exists today. And so, that is an area that's seen tremendous growth. But in many ways, the growth in that area has also been limited by the ability of those companies to ramp and equipment to get out to them.

Speaker 2

And we I would fully expect that that's an area of trailing edge foundry that continues to ramp strongly really on into 2022 And maybe even beyond.

Speaker 3

Yes. And Sujit, I'd just remind you, if you remember back at our Investor Day in March of last year, it seems like so long ago, but we Talked about a viewpoint that we still have today that, the trailing edge or the Reliant exposed WFE grows 2 to 3 times faster than overall WFE, That's still how we see things. Great. Thank you.

Speaker 5

Thanks, TJ.

Operator

Thank you. We'll take our next question from Timothy Arcuri with UBS.

Speaker 3

Thanks a lot.

Speaker 6

Doug, I know you've seen the headlines in China as to some delinquencies from some of your biggest customers and some of the debt that they've Yes, but they'd be faulted on. So I'm just wondering whether that's having any impact for you, whether there's any Seeing that you're doing there, whether you're seeing anything that's getting pushed out or any project timing that's changing?

Speaker 3

I guess I'd say 2 things, Tim. Obviously, in a situation like you're alluding to, first thing I do is get until I talk My guys in China make sure I understand what's going on. I'm comfortable with where we sit today. I would tell you that most of the business we do with Customers in the China region are under letters of credit. So it's money good.

Speaker 3

We know it's money good. So that's one thing I'd also Have you think about and relative to the plans of our customers in China, I got to be careful about talking about a specific customer, Tim. But we haven't seen any change in anybody's plans as a result of anything.

Speaker 6

Cool, Doug. Thanks. And then I'll ask the same question on the last quarter. This math that you gave, the $70,000,000,000 over 5 years to add 35% bit growth, which is like $15,000,000,000 a quarter and then you gave the number of Every $350,000,000 adds another 100 basis points. So if you sort of look at where NAND is running right now, you'd sort of conclude, well, maybe you're adding More like mid-40s bit growth, but I know you've also said, hey, those numbers don't really hold anymore because capital intensity has gone up as well.

Speaker 6

So I wonder if you've had time to put pen to paper on maybe brushing up those numbers, if we could try to correlate where we are back to bid growth. Thanks.

Speaker 2

Yes, Jim.

Speaker 3

I'm not ready on the call right now to update any of those longer term numbers. That would be something we do in, I don't know, the Investor Day kind We will do at some point in the future, I think. And you're right, the observation that over time, capital intensity grows In that device architecture and NAND, and when we gave those numbers, they were kind of broad averages over long periods of time To try to be helpful and it's not a static number. So I agree with you, we do need to update it. I'm not ready to do it on the call right now.

Speaker 3

Like Tim said, we're pretty comfortable with the strength of investment in NAND. It looks pretty rational to us. And it's going to be a good year for investment in VAND. And actually, I think next year is going to be a pretty good year too, Tim.

Speaker 2

Yes. If I can just add something, Tim. I mean, it's Yes. Well, I agree with the comment and we made it that the rising capital intensity probably means those numbers need to be updated on an absolute basis. I want to point out, As the layer count increases and complexity increases, we're taking actual share as well, meaning we're converting Applications that had previously been done with older legacy technologies and we're moving those over to newer technologies like ALB.

Speaker 2

And so We're actually winning new applications as well. So even within whatever that new number is, we're benefiting from an expansion of that Expansion of spending per bit added, but also from actual application wins. And we pointed one out that Yes. It's been a pretty big deal for us, which is the conversion to ALD for dielectric gap fill. So I think it's Another point being Lam's strong positioning and close collaboration with customers in the space really does give us great insight into what those next Application opportunities are for our company.

Speaker 2

Great. Thank you. It's very helpful. Thanks, Tim.

Operator

Thank you. We'll take our next question from Krish Sankar with Cowen and Company.

Speaker 2

Yes. Hi. Thanks for taking

Speaker 7

my question. I had 2 of them. First one, either for Tim or Doug.

Speaker 2

Just a follow-up on the NAND.

Speaker 7

I think you articulated pretty well compared to the prior peak. Clearly, the layer count has gone up, capital intensity has gone up and also Your market share has gone up. I'm just kind of curious, when you look to like the 2018 peak versus today, If I just dig one level below, can you just say the mix of dielectric and conductor etch then versus today? Because it seems to me that dielectric etch Process dams

Speaker 2

have gone up. That's also a big factor in it. So I'm just kind

Speaker 7

of curious, A, is that right? And if so, is there a meaningful Difference in the split between Dialectic and ConductoEdge for LAN in NAND today versus in 2018? And then I had a follow-up.

Speaker 2

Sure. Well, a number of things have changed. I mean, as you mentioned, the dielectric etch is fundamentally Tied to and its process time is fundamentally tied to layer count. So clearly, it's scaling pretty dramatically as these as layer counts grown. The other element, and you tied process time is relative to consumables and therefore growth in our installed base business as well, which also scales Nicely with layer count growth.

Speaker 2

So there are a number of changes, but sure, dielectric etch Plays a very critical role in reading and layer count expansion.

Speaker 7

Got it. Thanks, Just a follow-up. I just wanted to share on the Sensory Edge platform, the smart platform that you have. I'm just kind of curious, as you roll out the platform, Is this the risk of losing the installed base advantage? Since the customers have to look at Sensai, why don't they look at another platform like Cynthia, whatever it might be.

Speaker 7

So would since I actually be a slight negative for you given the fact that your installed base That's yours of me.

Speaker 2

Well, I mean, there's 2 elements to what makes a great tool. 1 is the platform, 1 is the process module And so I think that when we're enhancing the platform capability, adding all of this equipment intelligence, We're certainly not giving up the incumbency power that's been developed. I mentioned even today proprietary RF systems, Proprietary Uniformity Solutions. The new Vantex module that's on the Sensai platform kind of marries up all of that Equipment intelligence and use of data to make our market leading etch chamber even that much better. And so Certainly, we thought a lot about the power of incumbency, but if you stagnate, you also Leave an opportunity for your competitors to catch up and that's not our plan.

Speaker 2

Thanks,

Speaker 3

Thanks, Chris.

Operator

Thank you. Our next comment comes from Stacy Rasgon with Bernstein Research.

Speaker 8

Thanks for taking my questions. My first question, I wanted to ask about leverage. And I know operating leverage, and I understand what's

Speaker 2

Going on with gross margins next quarter and everything, but

Speaker 8

I was going to look at the Analyst Day model, like the midpoint, I think, was something like mid $33,000,000 is an EPS on a $16,000,000,000 revenue number. Your run rating revenue right now over $17,000,000,000 which is the high end of that guide and your run rate and EPS were Below the midpoint of the Analyst Day guide. So I guess how do we think I think EPS is like 10% below or even more. So how do we think about, I guess, progression of operating leverage from here as we go forward, like even if revenues don't grow, should we think about over what time frame do we think about EPS kind of like reaching Those kind of model levels that were that you talked about not that long ago.

Speaker 3

Yes, Stacy, I would tell you that there is a revenue level component to the leverage. There is also a time element to it. The high element is dictated by some things like ramping a new factory in Malaysia that's got a better cost structure. It's also driven by ramping a new etch platform like Sensei that we think will have a better profitability profile Than the one before because it delivers incremental benefit to it. So when I look at the leverage that we had in that model, I still feel quite good When I think through and look at the time aspects of how we deliver the benefit, it is still the right thing The right way to think about it, the financial model we put out in March of last year is the right way to think about the profitability opportunity for Lam.

Speaker 8

Got it. Thank you. And for my follow-up, again, I want to hit on the NAND point again. Last quarter, you were explicit about saying that you thought NAND would grow, I guess, half over half in the second half. And you seem to be suggesting that pretty strongly for DRAM now, but you didn't you weren't About NAND, but you also I think I did hear you say that you thought NAND would be in general strong this year, would be strong next year.

Speaker 8

So you still think NAND grows in the second half the calendar year. And I guess you sounded like you expect NAND in calendar 2022 to be up from calendar 2021. Is that what you're trying to say?

Speaker 3

Not trying to really say anything about 2022 with the exception that it looks like it continues to be strong. It is a qualitative statement I made. It's too soon for us to put numbers around 22, Stacy. And when we look at WFE, So a quarter ago, we were talking about trending above 75. Tim now said we see it trending above 80.

Speaker 3

I think overall, it's a second half Weighted the WFE profile. DRAM looks solid in the second half. Foundry logic looks pretty good in the second half I think NAND probably as I sit here today is more balanced half on half. And a quarter ago, we said looked like it was a little bit I can still see that potentially happening, but there's some customer investment timings that might occur more in the first half of next year. Right now, it looks kind of balanced half on half as we sit here today.

Speaker 8

Got it. Got it. I guess that's still a couple of quarters ago you were saying those will be down. You're kind of like dialing it in as we go forward.

Speaker 3

Yes. I mean, as the year unfolds, obviously, we get better visibility to what's happening and we're now halfway through the year. If you include the guide for September, we're 3 quarters of the way through the year. So we just have better visibility on what's going on relative to timing as well as the supply challenges the industry has had.

Speaker 8

Got it. That's helpful. Thank you so much.

Speaker 3

Yes. Thank you.

Operator

Thank you. We'll take our next question from Harlan Sur with JPMorgan.

Speaker 2

Good afternoon. Thanks for taking my Good

Speaker 9

to see the team ramping its new Penang systems manufacturing facility and unlocking a

Speaker 2

little bit more revenue capacity here in

Speaker 9

the second half. My understanding is The team is targeting $3,000,000,000 of potential annual systems revenue capacity by the middle of next year out of Penang. So A pretty meaningful part of your future revenue profile. And I think the goal is also to source more raw materials, machining and other support service locally over the next few years in Malaysia. So all of this should provide the team with some pretty strong gross margin tailwinds.

Speaker 9

Was most of This tailwind encompassed in the 2023, 2024 target financial model? Or is this a source of margin upside above your target you grow revenues into this new facility over the next few years.

Speaker 3

Yes, Harlan, what I would say is, we always knew we were ramping A factory in Malaysia. So when we put that model out, a year and a half ago, it was comprehended. We knew how big the factory was going to be we knew when it would be ramping and so forth. So it was all in, in terms of the profitability and I kind of referenced that with Stacy's question. So there isn't upside, but it is how we continue to deliver leverage that we see.

Speaker 3

I don't know, Tim, if you'd Add anything or want to add anything?

Speaker 2

Yes. No, I think it's just that the current demand environment we're in today, that The ramp rate for Malaysia is kind of flat out. And while we haven't given any numbers for 2022, so I'm not sure Sure, you got those. But clearly, we're ramping it. It will be a big facility for us and it will eventually take on a large Position within our global manufacturing network.

Speaker 9

Yes. Thanks for the insights on that. And then on some of the uncertainties on supply chain and therefore Slightly wider revenue range on the guidance. Your systems have very advanced capabilities, right? Compute, Storage systems, complex sensor networks are power circuitry, graphics, user interface capabilities.

Speaker 9

Is the team being impacted By

Speaker 2

the chip shortages with some of

Speaker 9

your advanced platforms that have a lot of these processor, memory RF type content.

Speaker 2

Yes, Harlan. When we sat here probably a quarter or 2 ago, we were thinking capacity constraints. We were really thinking about physical space and labor. And Quite honestly, I think we've done a really nice job expanding we've expanded in our Littlemore, California facility, our Oregon facility, Korea, As we had just said, shipping from Malaysia. So that physical capacity we're really starting to sort of free up.

Speaker 2

We've hired a tremendous number of people also across the globe. And now we're being hit with that next level. We have very complex supply chain. And you're right, it's ship shortages of other components as well. And Because it can affect many different players within our supply chain, it's a little bit more unpredictable and that's leading to Some of the increased guidance that Doug spoke to.

Speaker 2

Again, I think that Lam is very proud of our ability to execute. And I think these are issues that just every day we're working through. And with time, we would expect that these Just like for the rest of the industry, we'll begin to be resolved.

Speaker 9

Great. Thank you.

Speaker 3

Thank you, Harlan.

Operator

Thank you. We'll take our next question from Vivek Arya with Bank of America Securities.

Speaker 10

Thanks for taking my question. The first one, I'm curious, what is your estimate of China as a percentage of WFE this year versus last? Is it in line with what you thought at the start of the year? And have you heard of any potential restrictions on shipping to any Chinese customers from a U. S.

Speaker 10

Regulatory perspective.

Speaker 3

Vivek, I'll take it and then Tim can feel free to add on. I think from a percent of WFE, Probably fairly consistent. I mean, WFE overall this year is up nicely. China is up nicely too. And we have talked about License requirements for one of our foundry customers in China.

Speaker 3

No new update for you there, Tim, unless you want to share something. But it doesn't impact anything else that we see going on in China.

Speaker 2

Yes. We're actively engaged. As Doug said, we haven't seen significant movement on the licensing front. We will say we've seen the approval of a few licenses for spares and upgrades for mature technology nodes. So I guess if we were any update that we would say some small progress, but we're actively engaged with the licensing agencies within the government.

Speaker 2

1, to ensure we're fully compliant with everything they have in place today, but also to be advocating for moving forward with additional approvals on the shipments that are pending. All

Speaker 10

right. And for my follow-up, you sound Sort of optimistic about the growth opportunity for spending next year. I'm wondering of your markets, is there one market do you think that will have kind of a greater rise in capital Right, going into next year, is it foundry logic, is it DRAM, is it NAND? And conceptually, how does that impact your share gain potential as you look at next year. I realize you're not giving a specific WFE number, but let's say if you're in a growth environment, Is there one market where you think given all the technology changes that there is going to be a greater than average rise in capital intensity?

Speaker 10

Thank you.

Speaker 2

Sure. Yes. No, no, it's I guess, you can interpret from all the comments I've made about multiyear Impact to WFE Spending. We see strong regional investments in many places, government supported, rising device complexity. And then, Actually, we think the demand environment still remains good overall for semis.

Speaker 2

So those are while we're not giving 2022, right now, we don't see Great clouds on the horizon. We see a lot of positives. When I think about different areas of opportunity for Lam, to your point about what Where might capital intensity be rising the fastest or maybe just spending, really think about Lam and therefore, where is etch and depth We're really going to play a bigger role. Where does Lam have the opportunity? I see that across the board.

Speaker 2

We spent a lot of time on this call talking about NAND complexity, But you're seeing 3 d transitions, foundry logic space, gate all around, advanced packaging, very etch and depth intensive. Next year, if you're looking I'm not saying it's flat WFE, but if you're looking at flat WFE, Lam's opportunity would be growing in those spaces because of Etch and debt capital intensity increases. And where we really are spending our time and effort this year Maybe it's 2 places. Doug talked a lot about operational improvements, making sure we come out with infrastructure that's better off from that perspective. And what I tried to highlight was where we are investing in products so that as these transitions occur to 3 d in foundry logic and DRAM over the next several years that Lam is going to be in the same position to benefit from those as what I highlighted Happens for us in 3 d NAND.

Speaker 2

And that's I think it's places I just talked about selective etch, it's things like drive resist, The position we have in high aspect ratio etchanddepth relative to 3 d packaging. I would just say It's a very opportunity rich environment for a company like Lam right now.

Operator

Thanks very much.

Speaker 3

Yes. Thank you.

Operator

Thank you. We'll take our next question from Toshiya Hari with Goldman Sachs.

Speaker 11

Hi, good afternoon. Thanks so much for taking my questions. I had 2 as well. I guess this one is probably for Doug. I historically you guys have spoken to your thoughts on DRAM and NAND supply growth exiting the year.

Speaker 11

I was hoping you can update us how you're thinking about that exiting 2021 based on what you've shipped in the first half and What your expectations are for the second half, supply growth exiting the year relative to demand growth for both DRAM and NAND?

Speaker 3

Yes. DRAM, I think this year supply growth is still going to be below where demand growth is. I think Pretty well chronicled from the industry. The demand for DRAM bits is probably 20, low 20s. I think supply is probably high teens approaching 20 in DRAM.

Speaker 3

I think on the NAND side, probably more in balance. I think supply demand mid high-30s, and it feels fairly balanced for the year in NAND.

Speaker 11

Got it. And then as a quick follow-up, wanted to ask a question about your opportunity In Leading Edge Logic, I think in the past you've talked about your application wins, I guess initially at 14 And how that's expanded at 10% and your expectations as we sort of eventually transition to 7%. I guess despite some of those comments, we haven't really seen that show up in numbers. And I realize You disclosed logic and other, so there's an other component in that line. But what are you missing?

Speaker 11

I think that one I realize you don't want to talk about a specific customer, but that customer is ramping CapEx, yet we're not seeing the uplift in your numbers. Thank you.

Speaker 2

Yes. I think I'd say

Speaker 3

2 things. You've got the story right, 14 to 10, we talked about a nice growth in application footprint, 5x is what we described in terms of number of applications and then that growing again from 10 to 7. That is absolutely what we see happening. And I got to be careful talking about any one customer. I think when you look at logic and other, you're absolutely right.

Speaker 3

There is The other component in there and things like image sensor and other logic devices, but also you have to think about the timeframe in which Any one customer is investing in a technology? Is it in a concentrated 2 or 3 quarters or is it over a longer period of time? And if it's over a longer period of time, you won't see it in any one quarter. And so I would encourage you to think about both of those things when you look at the logic and other stuff. And then I'd also suggest, I think, logically, another is going to look pretty good in the second half also.

Speaker 2

Yes. And I think the only thing I would add is, Yes, maybe we need to transition that. The story before was a lot about progress we were going to make in Etch and the ad hoc. Now we step up, we say logic or logic and foundry, basically similar devices, similar trends. As we move to gate all around our NanoShoot structures, Many of the products I talked about dealing with selective etch and the processes that are required to create those complex structures, The challenges that foundry and logic customers at that leading edge see with RC and its impact And therefore, the need for evolving the metallization structure, we talked about dry resist and the potential to impact the cost Performance of EUB at future nodes, not only current node, but also high NA.

Speaker 2

These are ways in which Lam Ensuring that we have the right product portfolio, so whether it's advanced foundry or advanced logic, whichever customer you might be talking about, that we have Very strong products to offer to help with those transitions. And so, I think over the years, our opportunity to engage those customers has Just gotten stronger and broader.

Speaker 11

Great. Thank you.

Speaker 2

Thank you, Tishit.

Operator

Thank you. We'll take our next question from Joe Moore of Morgan Stanley.

Speaker 12

Great. Thank you. You had a couple of quarters now of the installed base business growing 50% year on year and We don't have a long time series of that, but I mean is that I assume that's kind of a historically unusual growth rate and Anything in that, that sort of makes you think, I think you mentioned last quarter people accumulating spares, inventory a little bit. And obviously, that's a growth a really good growth business, and you've been vocal about that. But is there any cyclicality when you start talking about these types of growth rates that we should be aware of?

Speaker 2

Yes, I'll take that. I included in my prepared remarks one line that said, was supposed to be hinting, Please don't count on this kind of growth every single quarter, quarter on quarter. Yes, there are components. I mean, and this kind of went back to the question about Trailing Edge Foundry and how do we see that going forward? We don't see that abating, but that is an area where we're seeing tremendous demand right And eventually that may not kind of keep pace quite with the growth in the installed base.

Speaker 2

But No, the elements you think about what's in there, spares continues to grow with installed base. And as we've seen this tremendous growth in installed base, That becomes a recurring revenue stream going forward that really is just based on customers continuing to utilize what they've already bought. So we feel very good about that. So if there's one part that you might see a little bit of investment timing impact, it would be specialty technologies and trailing edge or non leading edge Foundry, but our near term outlook for that remains quite strong.

Speaker 12

Great. Thank you.

Speaker 2

Thanks, Joe.

Operator

Thank you. We'll take our next question from Patrick Ho of Stifel.

Speaker 5

Thank you very much and congrats on a nice quarter. Doug, maybe for you in terms of the component and supply constraints that you're facing, I know there's a lot of moving parts, but what are you trying to do to kind of mitigate it? And I guess what I'm looking for is a little more detail. Are you working with additional suppliers? Are you working with your main component suppliers of getting those parts at a certain period of time?

Speaker 5

What are some of those, I guess, initiatives and efforts you're doing to try and, I guess, mitigate that situation?

Speaker 3

I'll come and actually give it to Tim.

Speaker 2

Yes, I'm actually pretty close to this one. And what I would say is that there maybe it's Everything. And when you have your major customers really clamoring for on time shipments, We're leaving no stone unturned. So in some cases, it's working with different suppliers. But again, we have complex supply chains.

Speaker 2

And in many in maybe the Many cases, we're looking at where those suppliers have additional facilities in other parts of the world. So if we're impacted, say, by Issues throughout the COVID pandemic in one part of the world, we transitioned to that same supplier in a different factory in That's usually the most expeditious means of getting additional supply. But at times, we are Finding additional suppliers. We're also I talked about refurbishment and recoating and reuse. That's another area where we're working with customers to She qualify refurbishment processes that allow us to shorten the time.

Speaker 2

So rather than having to procure brand new parts, for instance, We do a refurbishment and that part can go back into the machine and that from the fewer parts you use within the installed base, More you have available for build forward out of your factories. And so I would just say between us and the customers, very close collaboration and collaboration with our supply chain partners, we're getting very creative about Try to mitigate these risks and it's many, many, many different things.

Speaker 5

Great. Thank you very much.

Speaker 1

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

Operator

Thank you. We'll take our last question from Joe Quatrochi with Wells Fargo.

Speaker 2

Yes. Thanks for taking the question. I just want to try to understand the kind of updated WSE guidance and your commentary around NAND, Dave, maybe a little bit more balanced half on half. I guess, can you help me understand just What, I guess, increased to maybe offset some of that, including going to over $80,000,000,000 for WFE? Was it just More foundry logic or is that your comments around DRAM being stronger?

Speaker 2

Just any comments there would be helpful.

Speaker 3

I think the practicality of it, Joe, is we're just furthest through the year, right? We're halfway through the year. We got pretty good visibility into the September quarter because We just guided it and so is that, right? It's an understanding of customers' plans. It's an understanding of what we think the industry is going to be able to supply.

Speaker 3

We still see a second half weighted WFE spending profile. We ticked it up somewhat as a result of this better visibility is what I would

Speaker 2

Okay. That's helpful. And then just a quick question on the services business, another quarter of a major spares contract win. I was wondering if you could quantify how much of your spares revenue is based on long term contracts?

Speaker 3

No.

Speaker 2

No, no. We obviously, we look at that quite a bit. But I would say that A large portion of it, whether it's under long term contracts or it's in I talked about our complex supply chain. I mean, in many ways, for spare parts, It's very similar, which means regardless of the length of contract, we tend to be the primary supplier for the vast majority of those spares. And so, I would say that the majority of our parks are under contract, but then the length of contract we're not really ready to talk about at this point.

Speaker 2

Fair enough. Thanks. Thank you, Joe. Okay. Thanks.

Speaker 3

Okay, operator. I think that was our last call. Tina, do you want

Speaker 7

to close this off?

Speaker 1

Yes. I just want to tell everyone we appreciate your support and thank you for joining our call today.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Lam Research Q4 2021
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