Lam Research Corporation (LRCX) Earnings Call Transcript & Summary

Hi, welcome, everyone. My name is Atif Malik. I cover U.S. semiconductors and equipment stocks. It's my pleasure to welcome Doug Bettinger, CFO of Lam Research. We also have Tina and Ram from the IR team. The format of today's discussion is fireside chat. I'll go with my questions first after Lam Research reads the safe harbor statements. And then if you have any questions for the Lam team, please e-mail them to me. That's atif.malik@citi.com. Welcome, Doug.

Thanks for having me, Atif. Good to see everyone on the webcast here this morning, this afternoon.

Doug, before I talk about WFE and all that good stuff, a couple of topics that have kind of emerged from the conference yesterday and today. The first one is on lead times. It sounds like for a big part of the supply chain, the demand continues to outstrip the supply because of the COVID-19 disruption. How much more backlog normalization is left for you guys in the September into the December quarter? And where is the company at with respect to the COVID-19 disruption?

Yes. Atif, thanks for the question. First, let me remind everybody of our safe harbor language before I get started. I'm likely to make some forward-looking statements. Please have a look at the safe harbor language to understand that caveats behind that. So yes, Atif, good question to get us going. Maybe let me give you the chronology of how things transpired because there's a story here that I think is important to understand. It goes all the way back, I think, to oh, the end of the March quarter, quite honestly, when you COVID flared up. And I think all of us in the industry, you'll recall -- I recall quite vividly, shelter-in-place orders on the West Coast, supply chain disruption across Southeast Asia and Asia broadly speaking. And I think at that point, you'll remember, we pulled guidance and then decided not to guide for the June quarter because there was so much uncertainty in the environment. Fast forward then to the June quarter, we ended up performing quite well in the June quarter. I felt, and I hope everybody on the call felt the same way. We figured out how to operate a little bit differently with PPE in the factory and in the lab, social distancing in place where we needed to do that. We figured out how to optimize things in a different operating environment. And we got better at doing what we're doing. It's what I think Lam is really quite good at doing is kind of that continuous improvement focus. And that's very much what transpired to the June quarter. We got caught up to a certain extent in June, not completely. And as we guided the September quarter, I generally described, we're getting caught back up. We hired people in the factory. We expanded into adjacent square footage. Fortunately, we had that available to us, Atif, and we got better at meeting customer delivery dates and whatnot. Such that for the most part, we're not entirely caught up, but we're significantly caught up as we sit here today. So, I feel pretty good about how we've operated, how we've executed, how we've done what we do. I would tell you, we are prioritizing health and safety of the employees, first and foremost, making sure that is paramount. Similarly, health and safety of our supply chain partners and customers, right? We have to keep that in mind everywhere we're doing what we're doing. So priority one is that. Second then is taking care of customers, and that's very much what we're working to do, Atif.

Great. Doug, the second theme, and you can call it the elephant in the virtual chat room, has been the topic around China, the U.S. government looking at restricting China's ability to manufacture semiconductors. It is still speculative, and you guys don't comment on it. All your customers, it's not our base case, but it's election year, anything could happen. But it's important for investors to know how are you currently complying with respect to shipping equipment to China?

We're complying with all rules everywhere in the world where we operate. You don't -- that's not actually an option. You have to comply with all of the rules, and that is absolutely what we're doing to the best of our interpretation and understanding those rules. And yes, there's some headlines from last week about different reports coming out and different speculation. I don't really have anything new to tell you on that, Atif, independent of what's already out there, honestly. We're working through our trade association ourselves, quite honestly, to try to influence outcomes and whatnot in Department of Commerce and things like that to make sure everybody is well-educated and well-informed in terms of what's going on and what -- and how this industry operates. I think everybody in the industry is doing largely with the same things here, to be honest with you.

And let's talk about WFE. I feel like we made a full circle in WFE this year. We started with like up 20%, and then we came down, and now we're back up 20%. Can you just talk about what is driving a strong growth this year? Is any of this growth being borrowed from like, let's say, next year? And in terms of incremental strength, where are you seeing the most strength this year?

Yes. I mean, to frame kind of a sequential -- inherently as a sequential conversation, which is last year was down. It was down hard in memory. 2019 was a very reduced memory investment year. And some aspect of that has come back, maybe most notably in NAND, not really at all in DRAM. So our view of that as we've gone through the year, maybe changed a little bit. But like you said, we've come full circle to kind of see things today the way we saw them as the year began. Within that, we see strength in foundry and logic. It was strong last year. It continues to be pretty good this year. Some aspect of a recovery in NAND, not so much in DRAM. And so when you do all the puts and takes around that, mid-high 50s is what we see from a WFE standpoint. Coming off a pretty muted memory investment year, some aspect of a little bit of an uptick in NAND, not so much in DRAM. It is really what we see going on. And if I think about how the year transpired, honestly, we came in pre-COVID, things looked good. Obviously, COVID hit, the economy got weak. I had an opinion that as we reported March earnings that the consumer-facing demand was going to be weaker, and it turned out to be. As we went through the year, we kind of went from mid-high 50s to low mid-50s, back to mid-high 50s from a WFE standpoint. And the puts and takes are around maybe a little bit softer things. In consumer-facing semis, things that are more directly associated with discretionary income offset a little bit by enterprise-type activity, enabling a lot of what we're doing right now, which is being productive while working from home and working in different ways. That's really kind of how it unfolded from my vantage point.

Great. Good color on the NAND side of the memory. Doug, the question I'm being asked investors is like, how do you reconcile the memory prices, the elevated inventory versus equipment makers have been talking about improving memory investments in second half. And I thought ASML this morning had interesting color that the capacity that is being added in the second half is more for the demand recovery in the first half of next year. What is your view on the memory dynamics into second half this year?

Yes. Largely consistent. I don't think I would have a different viewpoint than what I think you just described the ASML is seeing. I mean you know investments that are occurring in the back half of this year aren't generating output until next year, right? And I think when the industry looks broadly at where supply growth is, where demand growth is, largely -- and we look -- I look at our internal models, supply growth this year will be below demand growth in memory. And investments that are occurring now are more with a view towards supply and demand into next year. So I think I would tell you I see things largely the same way.

Okay. And then on the foundry side, the CapEx from the Taiwan region was expected to be first half loaded. But we've had incremental strength coming from other regions in the second half. What do you see in the foundry logic market for second half?

Yes. That is what I see as a broadening out of investments in the foundry space. Beyond just maybe one large customer, there's a broader set of investment occurring. So yes, I think the second half spending in foundry is going to be continued quite good and a broader base of who's investing.

Okay. And then the question is about the microprocessor and outsourcing to foundry. How do you see that set up for play out for Lam in an event the processor, CapEx moves more towards foundries?

Yes. I mean, the way to think about something like that, and I'll answer it as a theoretical question because I always try not to talk about any one customer given how small the industry is. I mean, at the end of the day, the way I would think about a situation like you're describing, Atif, is probably at the end of the day, the demand for wafers is going to be about the same. Maybe not precisely the same, but I don't know. However, many CPUs, you think, are going to be sold, whether they're built on a wafer at 1 fab or another or multiple fabs in multiple geographies. The number of wafers is probably going to be largely the same probably. And at the end of the day, we sell to everybody in the industry, etch and deposition equipment. Probably not too different one to the next in terms of what they buy from us. And so whether someone is doing things all internally or partly internal, partly outsourced, it probably doesn't meaningfully impact the demand for our equipment at the end of the day. Because like I said, we sell pretty much to everybody in the industry.

Got it. Doug, if I go back to your Investor Day, you had a really powerful story on 2 new products, the new etch tool and then a new dry resist product. COVID-19 came. How -- I mean, can you update us the rollout of those 2 new products? Have they been impacted because of engineers not being able to come and work on them? And what are your expectations on the rollout of those 2 new products? And what has been the customer feedback?

Yes. It's created some challenges, but challenges that we've worked through. Like I said, when I described how we're operating in the factory, we're operating the same way in the lab environment, which is where we do all of our R&D on new products like Sense.i and the drivers that we talked about for the first time at the Investor Day. Listen, customer pull on both of these capabilities is very strong. The excitement, I clearly see there when I talk to people in the regions and people that are seeing the customer every day. Generally speaking, when you feel customer pull like we're seeing on both Sense.i as well as the drive resist capability we're bringing up, you know you got something pretty good coming out and that's very much what we're seeing. And I would tell you, COVID created some challenges, I think, initially for us. Maybe slowed some things down a little bit. But similar to what I described to you in the manufacturing environment, we're back in the lab. Lam is open for business. We're operating a little bit differently, right, with PPE on and maintaining distance from one another inside the lab, but we're absolutely driving the R&D agenda forward. We're on schedule for the most part with our R&D programs, maybe with some challenges, but we're working our way through it, very, very similar to what I described to you in the manufacturing environment.

And just on the manufacturing side, Doug, it appeared that you guys got hit a little bit harder because of manufacturing in California. Can you just talk about the plans for either dual manufacturing locations or around critical component suppliers in the future? What changes, if any, Lam is thinking of making longer term?

Probably not too many changes. I mean, the thing I think we were pleased with was the robustness of our business continuity plans as COVID popped up. I mean, nothing in this environment worked perfectly. But it worked pretty well. I mean, we have redundancy in the supply chain. We have an ability to move some things around. I think the importance of that became much more apparent as we worked our way through the COVID environment, and customer demand on a robust supply chain is clearly as high as it's ever been, although it's always been pretty high. Our local manufacturing footprint is part of how we try to manage risk, mitigate risk. Similarly, with our supply chain, our supply chain partners have multiple locations that they do things for us such that we can move some things around when we need to at times. Clearly, we stress tested all of this. But I don't think our manufacturing footprint -- our road map is going to be all that different than what it originally was. We're a global manufacturer. We have factories in California, in Oregon, in Ohio, in Austria, in Korea and in Taiwan. There's been some level of resiliency there. And we announced, not all that long ago the intention and we're actively constructing a new factory in Malaysia. I think the global footprint that we have will serve us well. The ability to do things in multiple locations will continue to serve us well. But that's always how we thought about things. We've always known we need business, resiliency business, redundancy in the footprint that we deliver things to our customers in, and it's very much what we do today and what we'll continue to do.

Great. Moving on to the services business, Doug. It's a business that you've definitely been able to communicate a lot better with investors. It's 1/3 of your sales. How much of this is like fixed annuity type versus variable? And can this business be a sustainable double-digit grower?

Yes, thanks for asking about it. This was always the business that I'd go through meetings with investors and people would forget to ask me about. And sometimes I forget to talk about it until the very end. And Ram or Tina would throw an elbow into my rib cage and say, don't forget to talk about CSBG. . But yes, it's an important part of what we do and how we make money and, quite honestly, how we generate cash. This is such a good business in my vantage point. So maybe let me talk about it a little bit because I'm sure there's a lot of people on the webcast that are new to the story. So let's make sure everybody understands what this business is. First, it's independent to a certain extent of what wafer fab equipment spending is in any given year. It's the money we generate from the installed base, the chambers that are in the customer's fab. And really, there's 4 things that go into this business. First, spare parts. Our tools need to have spare parts replaced periodically to continue to maintain uptime, yield and all the technical things that need to be done. So that's the biggest part of this business. There's pure service. Our tools need to be maintained. They need to be cleaned as an example. The chamber needs to be cleaned periodically, so there's pure service. Our equipment when we sell it can be upgraded to the next node capabilities. So it's a great part of business model. It's a great part of value we deliver to the customer base. Because you can upgrade a tool cheaper than you can buy a new tool. So that's a good ROI proposition for the customer. And then increasingly important is our refurbished equipment business, which is more directly related to WFE. But this -- think about trailing-edge-type capability, IoT, power devices, automotive, people in the industry, and we oftentimes will refer to it as the specialty market. Growing very rapidly, right? Our view is this part of the business, trailing of stuff grows 2 to 3x faster than WFE in general. And so when you roll all this together and you think about the life cycle of our equipment, our equipment will generate a profit stream for decades. Chambers in the field grow pretty much every single year. So if you think about, yes, fixed variable, the sustainable growth of this business is very strong. I've said consistently over the last several years that it's hard for me to imagine a year where this business doesn't grow every single year. In fact, last year, when memory investment was down fairly significantly, which, as you know, is our strongest business, this, the CSBG business, still grew last year such that -- you're right, it was 33% of revenue last quarter, north of $900 million. Really, really high-quality business. And I think almost all of this, Atif, is very recurring in nature. It's a great part of the business model.

Great. Doug, I get asked this question quite a bit is competition in kind of a domestic China market. There are some Tier 2, Tier 3 suppliers like AMEC. What do you see in the domestic China market with respect to competition?

Yes. There's a small industry emerging there. But for the most part, you think of the companies that you're referencing, they're not competing with us for the critical applications. They're not even really competing all that significantly with us for semi-critical applications. It's more in the noncritical space. . And so it's an emerging group, but let me tell you, we're really good at doing what we do. We invest a significant amount in R&D, getting better every single year. We've been doing what we do for 40 years. And it's really hard to do what we do. And so that's the way that I think about it, Atif, honestly.