Lam Research Corporation (LRCX) Earnings Call Transcript & Summary

Good morning, everyone. Welcome back to the third and final day of our Annual Technology and Internet Conference. My name is Toshiya Hari. I cover the semiconductor and semiconductor capital equipment space here at Goldman Sachs. We're very excited and very honored to have Tim Archer, President and Chief Executive Officer from Lam Research, with us this morning. The fireside chat will be about 40 minutes long. I'll go through a list of questions, but also do my best to weave in any questions that may come through the webcast. With that, I'd like to get started. Tim, first of all, thank you so much for joining us and supporting the conference.

Sure.

I know you're busy, so appreciate the time. Before diving into specific questions, Tim, I wanted to give you the opportunity to sort of reflect on 2020. It was a very peculiar year, if you want to call it that, with its ups and downs. But if you kind of reflect on the year, and more importantly, talk about your expectations and key focus areas for 2021?

Sure. Well, thanks, Toshiya. It's great to be here. I actually don't know. I think we've probably shown the safe harbor statement for Lam. So anything I say about this 2021 and beyond is obviously forward looking. But reflecting back on 2020, it's -- as you mentioned, it's a busy time for us right now. 2020 was an incredibly busy year as we were dealing with what everybody was dealing with, the COVID pandemic within the semiconductor industry, dealing with China trade tensions, a lot of uncertainty. And I just want to say, Lam employees continue to impress me. I mean, it's just -- they were so great in terms of how they handle these challenges. And in the end, when we look back on 2020, it was the best year in the company's history. We delivered record revenue, we delivered record EPS. And even more importantly, kind of for the company's future, is that despite the challenges, we pressed forward with a number of really important long-term investment programs. We'll talk a little bit about some of these maybe later, but we pressed forward with the construction of our new manufacturing facility in Malaysia, which is going to give us tremendous scale to meet what we see as a continually growing future for the company. We pressed forward with some technology and R&D investments in Asia, putting us closer to our customers. And we also launched the first new etch tool in 20 years, and that's really establishes this foundation of new products in the etch side that really kind of will last for the next couple of decades. And then, maybe finally, is we tried to demonstrate technology leadership in some of the new inflections. And we launched the new ether dry resist product. We launched a new ALD product. And so not only did we deliver great results, but I think we laid this foundation of products and infrastructure that really is going to pay off in years to come for the company. And why did we do all that? It's to your point, what's 2021 and beyond look like for us? I mean, we just see our industry, and we see specifically Lam's story, just continuing to grow. We obviously have a strong WFE outlook. And for Lam, we have a strong expectation that etch and deposition, in particular, will continue to rise in their importance in the manufacturing of semiconductors. And so just a very optimistic outlook for the industry and for our company.

Tim, thank you very much for that overview. I definitely want to spend a little bit of time on some of the company-specific dynamics and some of your initiatives. But before we go there, I want to spend a little bit of time on how you're thinking about WFE. For 2021, I believe you guided the market to the sort of the high $60 billion to $70 billion range, up nicely off of the high 50s in 2020. Curious, based on the conversations you're having with your customers, based on the market intel that you have internally, what would you say are kind of the main drivers of growth in 2021 across Memory and Logic and foundry? And what do you see, at this point, as being sort of the larger swing factors, both to the upside and the downside?

Yes, sure. Obviously, as you just said, we guided for a pretty robust growth in WFE this year, high 60s to $70 billion. So that's up very nicely from where we saw 2020 finish. And maybe we're in somewhat of a unique period in that all of the device segments, we're seeing strength across every segment. And I think that might be one indication that these device segments are just -- they're just so interconnected. I mean, in any given device, you're just finding increases in content in -- whether it be a smartphone. And of course, it's got a lot more logic and foundry content, but now also driving significantly greater DRAM content, significantly greater NAND content. And so that move forward and push and growth in all segments is really what's characterizing 2021. We said it's going to be a very strong growth year for NAND. We see DRAM spending coming back and also growing nicely in logic/foundry, just because of its -- kind of being the heart of a lot of the brains of everything, it's -- it also continues to grow. And so strength across all markets. I don't know that we can really think of like one swing factor per se, to the upside or downside. Obviously, there's a -- other than to say, what we're seeing right now is this amplification of the demand. There's certainly rising demand as semiconductors get put into everything. And you don't have to turn on the news much more for a few minutes to hear about chip shortages and how chips are now in everything that we use on a daily basis. But what is amplifying that is this rise in complexity of manufacturing semiconductors. And I think that's what you're seeing today that might be a little bit of this swing factor or X factor is, you have rising demand amplified by rising complexity, rising capital intensity. And again, for Lam's story, as devices are all going 3D, the rise in etch and deposition capital intensity, we think is even rolling on top of the other 2 items. And so again, for us, that's probably what we see as the swing to the upside is complexity, acceleration of technology road maps and the role that equipment plays in enabling that move forward.

Got it. That's helpful, Tim. And then on NAND specifically, I think the market, to your point, was very robust in 2020. The outlook you gave remains pretty positive. It's the one sort of subsegment or device type where we get a lot of questions from investors, perhaps that lean a little bit more cautious just given how strong spending has been. That said, based on the comments you made on your earnings call, it didn't seem like you were too concerned at the moment. Can you speak to what your market intel is telling you in terms of 2021 NAND supply demand? And what level of capital intensity growth are you seeing or assuming as your customers transition from 64-layer to 96 and beyond?

Yes. It's -- certainly, we don't want to come across appearing unconcerned because we're not looking at what the market is doing. I mean, what we -- the way we think about the NAND market, it's probably -- it's something we've said many times, but it's worth repeating, I think, is this point of how we think about long-term demand, where we see it -- we really think long-term demand is in the high 30s bit growth. Of course, that will vary year-to-year. And certainly, you hear a lot of commentary from our customers on that point. But in that scenario, we see customers having to spend, on average, somewhere in the range of, say, $14 billion. And that might be rising a little bit kind of going forward as you think about the increasing complexity of building these devices. But if you say, $14 billion, when you look at 2019 and 2020 together, you start to think that spending profile actually looks pretty normal. And so while we are coming off a strong 2020, we see continued -- and we said very strong growth coming into 2021, again, driven by rising demand, rising capital intensity. And that's -- and also a view that this long-term demand is going to -- it's long term. It's going to be with us for a long time, year after year after year. And so what you're seeing this year is maybe some of the spending is going towards new greenfields. Eventually, you can get so much bit grow through conversions, but eventually, you've got to put in new equipment, you've got to build new fabs. And in that case, you see a little bit of a rise during those periods in spending because it's putting in a lot of the equipment that's required in the greenfield that doesn't need to be added when you do a conversion. And that's one of the things when we say why -- how does Lam look at the NAND market? Our view is a little bit unique, and it's because of the role that etch and deposition play in enabling the layer transitions. And so in a year of high greenfield spend and a year of high conversion spend, Lam's revenue profile doesn't change nearly so much as the WFE itself changes, and that's simply because we capture a much higher percentage of every dollar spent on conversion WFE because of the importance of etch and deposition. And we really have a strategy with some of the new products we've been launching. I talked about one of them on the earnings call, but last year, we launched a new product called Striker FE. It's for ALD gapfill. And that satisfies a new need that's emerged for 128-layer and beyond NAND to fill the dielectric gapfill application. Our strategy, from a product perspective, is try to position ourselves in all of the applications that effectively enable the layer transitions. And that way, we can continue to push our percentage of layer conversion WFE higher year-on-year node-to-node. And so maybe that's why we're not -- as I said, we don't want to come across not concerned, but we think we understand the market very well, and we're very confident in our leadership position in 3D NAND.

Thank you for the insight. It's very helpful. Tim, the other topic that comes up in conversations quite a bit is China. I'm sure you're getting a bunch of questions there as well. Can you kind of reflect on 2020? What you saw from a demand perspective across your leading Memory customers, also your Logic and, I guess, increasingly foundry customers? And walk us through your expectations for 2021 as well.

Sure. I mean, we've said -- I mean, China WFE continues to strengthen. I mean, we feel the 2020 domestic China WFE came in around the $10 billion range. And what we've said is that we think 2021, that strengthens somewhat. And that's in the face of, as I said, some of the uncertainty intentions that we saw in 2020. But I think that what's often lost when we think about China is the customer base and the breadth of applications is broadening every year. And it's really demand coming from a large set of customers. And now what's really changed in the last few years is across all the device segments. And so we've moved from trailing edge foundry to now more -- a little bit more advanced foundry logic to also DRAM and NAND investment. So all segments are kind of participating and contributing that WFE. And that's what we think drives incremental growth in domestic China WFE in 2021. The important point, though, is we're really, I believe, at the beginning -- if you look at the -- several of the market dynamics, we're at the beginning of a very long growth profile, I think, for China WFE. And that's simply because, one, stated objectives to build the semiconductor manufacturing capability long-term in China; and two, the fact that we just see semiconductor demand, especially in these -- the segments like automotive, and IoT, and all of these applications that don't require the absolute leading edge technology. Those are areas where there's demand worldwide. There's demand in China. And I think the domestic China WFE market is going to continue to grow to serve that part of the market. We've said that kind of that trailing edge business, we talk -- we think about our Reliant business, we think that part of the market, that trailing edge business actually outgrows normal overall WFE by 2 to 3x kind of in the -- in these next -- kind of the foreseeable future, and that's simply because of semiconductors in everything. China's market, I think, will grow to help try to satisfy that market.

Definitely want to come back to the Reliant business later in the presentation. But just a quick follow-up on China, or kind of the geopolitical environment backdrop, more broadly. I guess, this is pretty specific to one customer, but you have applied for licenses. Curious if you have an update on that front. And more importantly, to the extent these tensions persist, how do you see sort of the geopolitical backdrop impacting the broader semiconductor ecosystem? And how it potentially impacts how companies think about their strategy going forward?

Yes. It's -- well, first of all, on the specific license issue, we've -- as we said, we've applied for licenses. Up to this point, no update, no expectation set right now for when we will get an update, but we're in the process and following that closely. I think that if -- as you say, if the -- if tensions persist, if, let's say, they were to affect China more broadly, obviously, our view is there would be some short-term disruption, as we've talked about. I mean, it's -- we would have to react to that in some way. But the global semiconductor market, both from a demand perspective and the supply chain, proven to be very resilient over the years. And so my expectation is that over an extended period of time, kind of the time in which we drive our company strategy, I believe that customers and where things are manufactured and the products that we're providing, would adjust accordingly. And I don't think that our company strategy really has to be modified. We build products to create semiconductor chips across all these different technology nodes. We supply them globally to those markets, and I don't think it would change how Lam has to necessarily react. But it certainly would have some sort of near-term disruption.

And I guess somewhat related to that, I do have a question from an investor. As we -- I guess, given the trends toward localization of manufacturing, obviously, you have TSMC in Arizona and reportedly, Samsung in Texas, and I think there was a headline about that you -- thinking about a domestic foundry force, if you will. How do these trends sort of impact Lam in the broader WFE industry long term?

Yes. It's a great question because we've been doing a lot of thinking about this if -- and I've talked about it in the past is there was a period of time when WFE, for a rather extended period of time, did not grow. And while, of course, I don't know -- I'm probably not the expert on every reason for that. I believe one of the reasons was there was a consolidation of the industry from sort of less -- more customers, less efficient fab operations to the most highly efficient, lowest cost producers. And I think that, that over, say, a 10-year period drove kind of compression in WFE spending. I think if you were to now see regionalization, as you say, maybe the -- whether it's in the EU or it's in the U.S. or it's in -- any particular region decides that they would like to have that capability. And you're seeing the importance of it. These shortages are amplifying the importance of supply certainty. That will, I believe, reverse that trend. And you'll start to see now a little bit less efficient spending in some ways, I would say. And it's not less efficient because it's bad spending, it's just that you're now spending for some certainty. It's like when a company makes a choice about how much inventory to carry. You're trading off risk of finding yourself short if there's a disruption versus the cost of carrying that inventory. Carrying a little extra manufacturing capacity is the same choice that businesses will make. And I think that you take the combination of the pandemic and trade tensions, now some of the shortages we're seeing because of the inability to predict, say, demand and the cycle time to put that demand on, and I think that you almost, certainly, in my view, will see in the future, people being a little bit more, risk averse and perhaps wanting to have a little bit more supply certainty. That's my view. And I think that would lead to, is very likely, a period of maybe, again, one more layer on why WFE probably rises sort of over this next decade.

And Tim, I guess, given the lead times and given the time it takes for any one supplier to fully build out a fab and ramp capacity, this potential tailwind could be with us for the next 3-, 4-, 5-plus years? Right?

At least. If you sort of think right now, your businesses are reacting. They're making decisions about business continuity and business resilience, and they make these decisions to have that capability. You're talking about a couple of years to get that 18 months to 2 years to get that capacity online, and then it's a build-out from there in terms of starting to really add materially to the industry's capacity. So I think, like you said, it's a 5-year plus type of move.

Got it. And then, I guess, sort of related to that, I wanted to ask about your long-term view on WFE. It's been a little less than 1 year since you hosted your Analyst Day. It feels like it's been a long year since. Your 2021 WFE guidance is pretty close to the WFE range you provided for '23 and '24. This happens a lot in this industry, I think. I don't expect you to give us an update on this call, obviously. But how are you thinking about WFE over the next couple of years? We just talked about localization. Earlier in this meeting, you talked about some of the positive dynamics in the NAND market. But as a team, how are you thinking about sort of the 3- to 5-year outlook for WFE?

Yes. As you said, I don't know if it's common in the industry, but certainly, we put out the 2 models, sort of a low and a high-end scenario and all of a sudden, within 12 months, we're already at the high-end scenario for 2023. So we're not ready to reset those numbers just yet, but we are seeing -- and if you were to ask me very broadly on the range of -- as you just did kind of in 5 years, when I say that WFE was higher or lower, the same where it is today, I would say all of these dynamics give me the sense that WFE continues to rise, and it's higher. Now how it gets there? And what that path looks like? We know nothing rarely goes up in a straight-line up and to the right. And so harder to predict WFE in any one given year. But this longer-term view, long-term trajectory for WFE, you have rising demand, broadening of applications that are using semiconductors, these concerns about supply certainty. And then maybe the most important for equipment companies really is the rising complexity, a leading-edge company like Lam, we're right in the heart of this increasing complexity. And if you look at logic/foundry spending, for instance, where we've seen tremendous growth, a lot of that is driven -- it's demand, but it's also just the incredible complexity of building devices at 5 nanometers and 3 nanometers. And that doesn't revert. Those complexity trends absolutely don't reverse. Those complexity trends -- 3 is a lot harder than 5. 2 is a lot harder than 3 and 1 is going to be incredibly harder than 2. And same is true of 64 layer, 96 layer, 128, 196. And companies like Lam are right in the middle of helping press that -- those technology road maps forward. And I think those are all just drivers for not only WFE, but the increased value that companies like ours provide to a very healthy semiconductor industry.

Tim, on the competitive front, in etch and deposition, Lam Research has been a very consistent share gainer. I think depending on who's spending, who's not spending, year-to-year, there could be fluctuation. But when you think about how you guys have progressed through the cycle, you've been really, really consistent. I want to get your thoughts on sort of the forward 12, 18, 24 months, given your positioning and kind of the criticality of etch and dep for your customers and the long lead times, I'm guessing you have decent visibility into what you've won, perhaps what you haven't won. Can you kind of speak to the outlook from a market share standpoint?