Lam Research Corporation (LRCX) Earnings Call Transcript & Summary

Good morning, good afternoon, and thank you for attending JPMorgan's 49th Annual Technology, Media and Communications Conference. My name is Harlan Sur, semiconductor and semiconductor capital equipment analyst here for the firm. Very pleased to have Doug Bettinger, Executive Vice President and Chief Financial Officer for Lam Research, here with us today. I've asked Doug to start us off with Lam's view of the wafer equipment spending environment this year, Lam's growth outlook within that, and then we'll go ahead and kick off the Q&A. So thank you for joining us today, Doug, and let me turn it over to you.

Yes. Harlan, thanks, and thanks for hosting us. The 49th annual event, I'm looking forward to the 50th maybe face-to-face again, Harlan, I don't know. Let's keep our fingers crossed.

I hope so, I hope so.

Anyway, let me give you a little summary of what we saw as we began the year, what we updated on the earnings call and kind of the puts and takes relative to that. Yes, we came into the year, I guess, I'd call it beginning of the calendar year, seen a WFE outlook that was approaching $70 billion. And at that point, we described a view that it was going to be a first half-weighted spending year. Then as you fast forward to our March quarter earnings call, we updated our outlook. And basically, what happened, Harlan, is every segment of our business got stronger, and I almost described it as the second half filled in as we got a little bit better visibility in the second half of the year. So our update then became and is today, we expect WFE trending above $75 billion is what we described. And I think you're kind of hearing the same thing from everybody in the industry. That's what we're seeing. And in fact, that first half weighting became more of a second half weighting as we look at our end markets and our customers' plans. Semiconductors -- and we'll talk more about this in the Q&A, demand for semiconductors has gotten very, very strong as digital transformations have accelerated and the demand for semiconductor is very strong across all aspects of the industry, be it logic devices, the foundry business, low-latency DRAM, storage in NAND. When we look at our customers, every segment is stronger from a WFE spending standpoint in the second half now than in the first half. So demand is good. Things look really, really strong in the industry. And we're very excited about what this means for the next -- I guess, I'd call it for the foreseeable future. The demand for semis is enabling digital transformation of society today in a way that's accelerated from what I would have expected in the pre-COVID environment 12 to 18 months ago, Harlan.

Yes, I know. Thanks for that overview, Doug. And speaking about it. Let's talk about digital transformation and how that is driving sort of the long-term view on wafer equipment spending. If I look at wafer equipment spending intensity, that bottomed in 2013 at 9%. In other words, industry equipment spend as a percent of semi industry revenues was 9%. Now starting in 2014, which is actually the first year of 3D NAND production ramp. And up until last year 2020, WFE intensity rose to 14%. And so another way to look at it is that over the past 7 years, wafer equipment spending has grown at an 11% CAGR versus semiconductor industry revenue growth CAGR of 6%. Lam has grown its revenues at a 17% CAGR over that period of time. So very, very strong outperformance by the team. So given the complexity challenges, the need for more installed capacity to support strong demand trends, does the team anticipate WFE to continue to outgrow industry revenues? And what are going to be the major drivers?

Yes. A couple of things I think about relative to this, and I'll ramble on a couple of points, Harlan, and then maybe you can redirect me a little bit. So yes, your observation on capital intensity when you think about WFE as a percent of revenue, it's up. No question, it has ticked up a little bit. I think an important metric that I always looked at is WFE as a percent of industry's operating income or EBITDA is actually a more important metric to look at when you think about affordability of the industry and whatnot. And when you look at that metric, it's actually been pretty steady over the last 5, 6 years. So that's the metric I think that's most important because that frames the question of affordability for the industry. Pricing is good in semis, the industry is getting paid for the value that we're all creating, and that's a good thing for all of us. We all need to make the right level of profit to invest accordingly in the business. So that's one thing to think about capital intensity as a percent of OpEx -- or excuse me, operating income is more important in my mind. And then when I talk about capital intensity, I also will describe a CapEx per wafer metric because I think that's an important aspect, at least as it pertains to WFE. And we've consistently described, in particular, a lot of this is growing in our addressable market, right? We've described the view that as you walk down the process nodes in foundry logic from 14 to 10 to 7 to 5 to 3 and beyond, our SAM grows, our addressable market per wafer grows, every single node in foundry and logic, in NAND, as that stack gets taller and that etch gets longer as well as in DRAM as you have incrementally more patterning and at some point, DRAM, I think, will become a 3-dimensional device. And we get excited about that because when you look at all of that, capital intensity per wafer goes up, and it goes up more in our markets in etch and deposition when I look at it than anywhere else. So that's what gets me excited about what we're doing, the value we're adding for our customers, the investments we're making to take advantage of the opportunity that we see, Harlan.

That's great. And you gave us a great overview of the spending trends, and I would agree with you that I think we need to start looking at WFE versus industry profitability because you're absolutely right, because I often get asked that question around how can our semi companies continue to afford the rising capital intensity. And the answer that I give them is exactly the answer that you gave us. Well, look at it as a percent of their EBITDA and industry profitability and semiconductors has continued to rise much faster than revenues. And so that was a very good point. We know the team didn't provide a out-year WFE expectations for 2022. But at a high level, what reasons can you provide to us in terms of sustainability of the strong spending profile that we're seeing this year that should address investors' fears of some sort of peaking of spending this year?

Harlan, again, I get back to what I talked about when I first -- in your opening question to me, which is what is going on in the industry? I mean it's digital transformation we've all seen happening is accelerating, right? Everybody's business has changed in some way, shape or form. And maybe later, I'll talk about what it's meant for some aspects of our business. But increasingly, you're seeing business conducted the way we're conducting this conference. And it's enabled by our industry. And so when you think about that, do you believe there's growth in the semiconductor industry revenue stream? Of course, there is. Is it going to continue -- is, 3 to 5 years down the road, this industry going to be bigger? It is going to be bigger. And does that mean that there's a need to have more production capability in the industry? I believe that is absolutely the case. And so when I think about the multiyear direction the industry is heading, it's going to require a multiyear investment in wafer fab equipment, full stop. I mean that's just what I see happening. And I think anybody that understands this industry will describe it to you in a similar fashion. And so that's important not to lose sight of because when Tim and I are thinking about how we're positioning this company, how we're getting ready for what the future holds, how we're investing to enable the road maps we see our customers working on, you're thinking about where are we going 3, 4, 5 years from now. You have to have a long-term view because the investments -- the R&D programs that we're investing in this year are programs intended to generate revenue 3 to 5 years down the road. So you have to have that long-term view of the industry. And that's what I see. I see a growth industry that has just amazing opportunities in front of it. I've been telling people, I've been in the industry for a long time now. I've come through the PC era and then PCs had mobile on top of it. And we are now in the data era, is what I'd like to describe, right? Business model is being transformed by data, analytics, machine learning and artificial intelligence, increasingly monetized in the cloud in these very complex compute architectures that are heavily driven by logic devices, accelerators low latency memory and storage, and that's what we do in this industry. And so thinking about, okay, where are we going to be 3 to 5 years down the road? The industry continues to grow. By how much, we can debate it. But what I know is we need next-generation capability in our equipment. The spending on equipment is going to be bigger years down the road than it is today. And that's how we think about things. That's how we invest. That's how we run Lam Research. Now that doesn't mean every single year will be a growth year. I don't know any business where -- or any industry that that's how things play out. Inevitably, there will be a flat year or maybe even a down year. But what I do know is the long-term opportunity for the industry is really, really good right now.

I know you mentioned you came into this year with a view of WFE around $70 billion. Like you said, you revised that higher to greater than $75 billion in the last earnings call with strengthening in the back half of the year. In what segments of the market over that 3-month period of time did you see the incremental strengthening of the pipeline for 2021 versus your expectations at the beginning of the year?

Yes, Harlan, it was really every segment of the customer base. We saw strengthening in foundry, in logic, in DRAM and in NAND. And so when you look at all of it, everything got stronger in the second half of the year compared to our outlook as the year began. So there wasn't any one single area, it was pretty much everything, to be honest.

So looking at -- so then looking at the 2021 -- your new outlook, maybe what type of growth are you seeing across foundry, logic, DRAM and NAND? I don't know if you can prioritize it in terms of growth relative to 2020?

Yes. We haven't quantified it, Harlan, but maybe it will be helpful. I'll just talk about what I see happening in each segment of the customer base. First, I'll talk about NAND. This year, in NAND, I see a combination of investments in new wafers and in conversions. You always get a combination of things happening. But it's a blend of both. And really, where things are going in NAND is to move from kind of a 9x layer device, which is what the investment is today, later in the year to a 128 class device in the beginning of the investment beyond that a 17x or a 19x depending on the customer base, that's where the NAND investments are going. In DRAM, it's 1y and 1z. DRAM spending grew a little bit behind NAND. And so when I look at it, things are still really tight from a supply growth standpoint. And so you're getting a little bit of wafer adds there as well and a lot of conversion spending. And then in foundry and logic, you have investments in 2 areas. The majority of the spending is at the leading edge, kind of 10 going to 7 and 5 and 3 as well, right? You get a little blend, maybe 7, 5 and 3 this year at the leading edge. More concentrated set of customers, and I think everybody on the webcast knows who those customers are. But then you also have this strong investment at the trailing edge, right? Lagging edge nodes, let's call it, 28-nanometer and above with a broad geographic footprint in enabling markets like automotive, industrial, power image sensors. And so there's kind of these -- there's 2 nodes of where you see things in foundry and logic. And when you think about all of that, things are tight everywhere today. And so you're seeing growth enabling end markets in all of that. In technology evolution, some capacity coming in. Yes, it's just -- it's things look good right now, Harlan.

Well, in this strong demand environment and Lam historically has had relatively short lead times. And I've always been impressed that Lam's ability to scale up the business in times like we are right now. But how has the COVID-19, the industry-wide semi shortages, just overall strong demand impacted your lead times? I don't know if you can give us a percentage of maybe how much lead times have expanded, let's say, relative to last year? And you've discussed taking control of your Taiwan JV, continued to ramp up your Malaysia operations. So how do you expect lead -- do you expect -- or when do you expect lead times to sort of normalize for the Lam team?

Yes. Maybe I'll talk just a little bit about what's going on at the company and make some observations on the industry. The first thing I'd say is we haven't quantified where lead times are, but they are stretched out to a certain extent because of the strength of demand. And so your observation on the comments we made are spot on. We're doing our best to increase our output capacity pretty much across the entire global footprint of the company's manufacturing capability. We were fortunate in that we were already investing in a new manufacturing facility in Malaysia. Again, with an eye towards a multiyear need to have greater output capability. And so we're doing our best right now to pull that road map in to get more production sooner than the original plans there, and we're having some level of success there. So we're working on Malaysia to pull in the ramp, I guess, if you will. So that's one. Second, you're right, we commented about the fact that we bought out our joint venture partnership in Taiwan, where we serve the Reliant product line, the lagging edge product line, so that we can really more directly control the output capability of that facility. So that's another thing we're working on. And then when you look at the rest of our factory network as well as our collaboration with our supply chain partners, we're doing our best to expand our output capability everywhere else. And that means the output of our factory in California, the output -- which where primarily we build our etch equipment. The output capability of our manufacturing facility in Oregon, where we primarily are manufacturing our deposition equipment. And then we also have a factory in Korea that we're working on expanding our output capability there. So when you look at the whole network of manufacturing at Lam, including our supply chain partners, we're trying to expand a little bit everywhere to the extent that we're able to do that so that we can meet customer -- what customers are asking us for, Harlan.

Speaking of your Malaysia operations, we know that there has been some factory shutdowns in Malaysia due to the surge in COVID-19. Is this impacting your Malaysia operations, Doug?

We're managing things pretty well, Harlan. I'm actually pretty pleased with the performance of our global operations' organization in terms of just -- not just in Malaysia, but over the last year plus dealing with operating in this environment, right? We're working our way through things. There have been off and on travel restrictions in Malaysia, and we've needed to hire and train people. And so we figured out how to do it in a different way. We adapted our plans for how are we going to train our new workforce to manufacture our equipment. We adjusted things, right, with a different kind of travel profile, a different approach to training. And for the most part, even operating in that environment, we've been able to pull our schedule in to a certain extent, again, to meet that strong demand from the customer base. So I've been just really impressed with that portion of the organization at Lam. I mean they have risen to the occasion for what we've needed to take care of our customers.

Let's talk about some of the strong outperformance by the Lam team looking back historically and also I would assume on a go-forward basis. But Lam expanded. If we look at the market share statistics from 2020, Lam expanded its share of WFE by 120 basis points. You outgrew the market by 10 percentage points, that's according to Gartner. And at the 2020 Analyst Day, the team outlined its SAM opportunity continuing to grow for NAND, for DRAM, for foundry and logic down to 256-layer, the 1-beta node, the 3-nanometer node, respectively, that takes you out -- I think that takes us out another 2, 3 years for the industry. Beyond that, does the Lam team continue to see its SAM opportunity growing in all segments?

We do, Harlan. And that's the exciting part about kind of when you look at etch and deposition and how architectures are evolving from a -- if I could generalize it, you see things moving in the third dimension. You think about that in NAND, I observed when I see how foundry and logic is evolving, 3D-type structures in FinFET going to a gate all around. And DRAM evolving in the planar world enabled by patenting and eventually, the industry is beginning work right now on 3D evolution of DRAM. If you step back and look at all of that, it is enabled largely by etch and deposition. We're in the right place at the right time executing well. As an example, in NAND, as that stack gets taller, you're depositing more films, the etch time takes longer. It's just the physics of how the etch works. We're beginning work, like I said, on what is a DRAM 3D structure going to look like. Too soon for me to give you numbers, but it will be etch and deposition-intensive. And so when you think about those things, you're seeing more and more need for atomic level control in both deposition in dielectrics and metals, atomic-level etch, right, meeting atomic level precision, isotropic type, selective etches in the gate all around in management structure. So when you look at all of those things, we're just really excited about our opportunity because our addressable market gets bigger every node when I look at each aspect of our customer base. So that's what we're working on, trying to help enable customer road maps in all of these areas.

And back at your last Analyst Day, the team had put out a target of growing its -- or driving cumulative share gains in etch and deposition by 400 to 800 basis points by 2023. Is the team confident on being able to hit those targets?

Still feel really good about that, Harlan. And your observation of the third-party data is spot on. Good year last year, it's going to be a good year this year for us, I believe. Investing for those growth opportunities, like I said, in every aspect of our customer groupings in NAND, DRAM, foundry logic, in addition to looking at new opportunities. And drive-assist is a new area that we're working on extending into. And so that's very much how we think about the business, enabling growth, investing for growth, enabling for the success of the customer, doing the right thing for the customers such that we're enabling their road map. And the fortunate thing is, like I said, we see growth everywhere we look. So we're excited about this.

Absolutely. A big part of the share gains has been best-in-class tools. And #2, strategic vision in term -- and working with customers on technologies that are a few years down the road. You talked about some of the SAM expansion opportunities like dry EUV resist. You've also talked about atomic layer deposition as 2 large opportunities. For these particular opportunities, does Lam have clear line of sight to either process tool of record wins on any of these technologies? Or are we just still in the early stages for both dry resist as well as for ALD?

It varies by application. It varies by each segment. ALD has been around for a while. So it's further along in its evolution. We see ALD replacing what I'd characterize as legacy technologies batch in single wafer spin-on type dielectrics and whatnot. It's all about productivity and enabling a road map. Dry resist is earlier in its product life cycle, obviously. But I would describe -- excitement from the customer base is what I hear. I see every customer wanting evaluation tools and collaboration with Lam to enable this. So they see the value in it. So excited about that. And then you're probably going to ask me about our Sense.i platform, right? Our first bottoms-up redesign of etch in 20 years, really excited about that, too. So those are some of the things we're bringing to market to try to, again, help enable customer road maps.

Exactly. And as you mentioned, I mean, on Sense.i, which is a platform that the team is launching today, right? I mean more sensors, integrated process control, lower cost of ownership, higher throughputs. I mean where are we in the launch cycle with Sense.i? What types of applications are you guys seeing the most traction? And what types of customers have adopted the new Sense.i platform?

Harlan, we -- I guess we announced Sense.i at our Investor Day a little over a year ago now, right? And at this point, we've talked to every customer. Every customer has looked at it and said, "Well, I see the value there. We're excited about it." We have announced Vantex, our dielectric etch chamber on the Sense.i platform. And so we're in evolution with every customer, looking at this in various levels of some customers have evaluation tools. We're collaborating together with them to tweak things, fine-tune the performance of the tool, showing them and communicating here's a road map for conductor chambers and beyond and so forth. We're really excited about this. And the reason we're excited about this is Lam is the leader in etch. This is our first bottoms-up redesign of the etch platform in over 20 years. You have to go all the way back to the 300-millimeter transition for the last time we've actually done our complete redesign of the platform. And we've had many, many ideas over the years about if we weren't constrained by the configuration platform, what would we do? And so we're bringing all of those innovations. Again, the leader in etch, completely redesigning the platform to enable our growth for the next decade and beyond. So it's about technology, right? It's a chamber design in technology, in terms of subsystems, RF and so forth to enable the road map for the next decade and beyond. It's about the most intelligent etch tool that we've ever brought to market in terms of the number of sensors. The tool has some aspect of being self-aware in understanding the use condition in the platform and knowing when certain things need to be done as well as it's an extremely cost-efficient tool in terms of output per square meter of fab space. When you put all of these things together, we're really excited, and I would tell you our customers are really excited about what this tool is going to enable. And when I talk about 4 to 8 points of etch market share, this is a key aspect of how we intend to go get that market share, which is new capability from a brand-new design of a tool.

Absolutely. I appreciate that. Let's talk about your services business. Boy, this is a business that's been growing quite strongly, right? I mean it grew 22% in calendar year '20. It's up about 50% year-over-year in the first half of this year. And you guys have targeted your CSBG or your services business, cumulative revenue growth of greater than 40% by 2023. So that's like a 10%, 11% CAGR, right? So your -- the team is clearly tracking well ahead of that. So can you just help us understand, what has driven the growth of the business? I know there's a classical services part, is it spares? Is it upgrade? Is it the Reliant business? And off of the strong growth this year, I think there is some concerns by investors about the potential for some sort of sharp drop or deceleration in growth rates. But we do know that a big percentage of the business is also recurring revenues as well. So how should we think about the services business, let's say, off of a strong year if, let's say, WFE spending is flat to maybe even slightly down next year, can the services business continue to grow?

Yes, Harlan, I've described -- first, let me describe a little bit about CSBG, and you alluded to it, I think of 4 components. It's spare parts, it's service, its equipment upgrades and it's our Reliant product line. All of that is managed as 1 business unit at Lam. And so all 4 of -- I'd describe it as we're hitting on 4 cylinders here. Everything is doing really, really strongly. And the tailwind of the business is all about the fact that we're shipping a lot of chambers this year. And so that is -- we do disclose chamber count every year, and we'll give it to you at the end of this year. But given the strength in WFE this year, that will describe the opportunity to continue to grow this business as chamber growth is going to be strong. But if you think about the components and relative to what's going on this year, spares and services tend to be strongest when utilization is strong and right now, utilization in the industry is very strong. And so consumption of spares and services is doing really well right now. We've already talked about the strength in the lagging edge investment in 28-nanometer and above and the Reliant product line. We have an outlook, and we described it as the specialty foundry business. We have a view that, that will grow faster than overall WFE, maybe 2x faster, maybe 3x faster, but faster overall when you look at where things are going. And so that's what's going on there, right, the need for that trailing edge equipment. Now when you look at the upgrades piece of this, it's always a high return for our customers to upgrade the equipment from a productivity or a technology standpoint because they get incremental output in terms of productivity. They get next-generation technical capability from a technology upgrade. And so when I look at what's going on in our customer support business group, we just have it hitting on all cylinders right now. And I continue to believe that this business grows every year because of the growth in chambers and the opportunity for us to continue to grow dollar per chamber with some of the more leading-edge capability that our customers need from the installed base. So really, really pleased with -- and you rightly observed, that business from a quarter-on-quarter, up 15% from a year ago -- from the quarter a year ago. We delivered revenue last quarter of $1.3 billion. So just really, really solid performance of that recurring installed base revenue.

Yes. And whether it's the growth of the foundry and logic part of your business or growth in services, the common -- one of the common themes has been this sort of mature technology, specialty technology segment of the market. You said that it's been growing 2x to 3x faster than, let's say, the leading-edge part of your markets. And I mean, we're seeing strong demand for analog and mixed signal, microcontrollers, MEMS devices and so on. And so you've talked about the growth, but I'm curious as to know, what percentage of your overall business is mature in specialty technology nodes?

Yes. Harlan, I haven't given specific numbers, except that lagging edge, it's a portion of the $1.3 billion you saw in CSBG last quarter. Even though it's growing faster than overall WFE, the majority of the spending is still at the leading edge, given the capital intensity at 5 and 3 and so forth. So the majority of the dollars continues to be at the leading edge.

Target model. At your Investor Day, the team put out a target model at $60 billion in WFE, at $70 billion in WFE. In 2021, as you rightly pointed out, because you're targeting over $75 billion WFE. So if we look at fiscal 2022 consensus estimates, right, projected revenues of $16.8 billion, that's within the targets that you outlined at Analyst Day. However, consensus operating margins and EPS are below your targets put out at Analyst Day. Is this more a function of just some of the additional costs associated with COVID-19, higher costs associated with ramping new facilities? Help us, help investors bridge the operating margin and EPS GAAP target relative to what you're delivering to date.

Yes, sure. Thanks for the question, Harlan. Yes, the revenue is kind of in that model because WFE is stronger. And I just guided the June quarter to 32% operating income and the model implies 33% or maybe 34%. And so why the gap there? It's because there's a time component to some of the improvement in operating margin. And really, I think about two things. First is, right now, we have incremental costs associated with operating in the COVID environment, primarily due to freight and logistics costs. Right now, the volume of air freight available to fly our inbound and outbound freight, we fly things around relative to manufacturing in the U.S., where most of our manufacturing is on our customers, primarily in Asia. So we're flying stuff back and forth. And right now, because of the volume of airfreight, it's incrementally expensive to be flying this stuff around. So it's a noticeable headwind when I look at gross margin today from where we are today to where we will be whenever freight lanes normalize. So that's one thing. The second thing I would point to, Harlan, is that Malaysian manufacturing facility. We selected Malaysia for a couple of reasons. One, it's closer to the customer base. So even though we're still going to be flying things, we're going to be flying things a shorter distance. So there's some level of benefit there. And obviously, I think everybody on the webcast knows, Malaysia is a lower-cost location. So we're going to benefit from that in addition to the fact that we're bringing the supply chain along with us to Malaysia. And so there's a level of cost benefit associated with that as well. So when I think about those 2 things, the logistics headwind we're seeing as well as we're early in the ramp of a lower-cost manufacturing location. You put those 2 things together,and that is the differential in profitability right now from the model.

Perfect. Well, we're just about out of time, Doug. Thank you for joining us today. Looking forward to another very strong year by the Lam team, solid execution, keep up the great work. Thank you.

Harlan, thanks for having us.

Yes, absolutely. Thank you.