Lam Research Corporation (LRCX) Earnings Call Transcript & Summary

All right. Good morning, everyone. I am Sidney Ho. I cover semiconductor, semi-cap equipment and IT hardware at Deutsche Bank. The next company we have is Lam Research. Lam is a leading global supplier of wafer fab equipment and services and market leader in both etch and deposition tools. I'm sure I missed a few things. Today, we are excited to be joined by Lam's CFO, Doug Bettinger. Welcome, Doug.

Thanks, Sidney. Good to be here.

Great. Before we start, for those investors who are listening to the webcast through our portal, if you want to ask a question, there is a box on your screen where you can type in the questions. I will try to ask the questions as we go through our discussion. So with that out of the way, let me start with a few near-term industry-related questions.

Sidney, before we start, can you please put up my safe harbor slide? And I'll remind everybody I may make some forward-looking statements. Please refer to the safe harbor language on the Investor Relations website. My legal team always likes me to do that before we get going.

Well, as long as you don't spend 5 minutes reading it, I'm okay with that. So here we go. All right. I assume that the slide is on. I can see from my side, but I assume the slide is on. But let's start with near-term industry question. For calendar '21, clearly, the industry demand has continued to strengthen since the beginning of the year. And based on consensus estimates, Lam is expected to grow total revenue by 35% this year. We have you guys growing 40%. Can you give us a little bit of context as to how you view -- your view of the market? And maybe where are the areas that allowed you to outgrow the WFE market this year?

Sure, Sidney. Yes. Thanks for asking. It's a good place to start. Yes, business has strengthened through the year, obviously. And those of you that follow the sector and follow Lam know that, obviously, as we sit here today, we've described WFE market that is somewhat second half weighted. Things are strengthening as we go through the year. A lot having to do with the fact that this industry has been supply constrained. And I think we've figured out how to mitigate some of that stuff. So when I look at the market today, our view of things is wafer fab equipment spending this year trending about $80 billion. We'll see how that bottoms out at the end of the day. All segments growing, a second half-weighted spend profile driven by DRAM definitely. Foundry, logic seems pretty second half weighted, and NAND is fairly balanced and strengthen all of those things, and our position in each of those end markets feeling quite good. Then when you layer on top of that, and I'm sure you'll ask me more about this Sidney, what we call our CSBG business or Customer Support Business Group, that business or that segment of the business hitting on all cylinders, delivering consecutive record quarters. And I know you'll ask more about it, so I won't dive into it. But when you put all this together, it's a really, really good year for this company. Very happy about how we're executing. Very happy about the strength of demand of our customers and frankly demand for the entire semiconductor industry, which is what's driving a lot of the investment that's needed this year.

Great. That's a good overview. You mentioned, Doug, DRAM and NAND. So I'll dive right into those 2 areas. First, NAND -- and DRAM, there have been some concerns in the investor community over the past months about some DRAM inventory building at maybe PC OEMs and maybe at the cloud. Can you give us an update on what you're seeing in your DRAM business? And have you are seeing any changes in demand from an equipment standpoint?

No, I see strength. I see growth in investment in the second half of the year. From my vantage point, customers are investing for the medium and long term right now where they see the market going. I have a theory on perhaps what's going on in DRAM inventory, largely driven by constraints. The lead time to get a -- so this is interesting. I was talking to my CIO yesterday. The lead time to get a PC, if you're dropping in a new PC is 6 months. Obviously, that means there's some level of constraint in the bill of materials to build a PC. I don't believe it's DRAM. And so is there a little bit of inventory in the PC chain? Probably. But once whatever the constraints there are, I think, those lead times will come back in. Demand for PCs is very strong, and that's the important thing to think about. And when I look at our customers' investment plans in DRAM, it's stronger in the second half of the year than it is in the first half.

Excellent. If my math is right, DRAM WFE is close to last peak, and that happened in 2018. Yet, it seems like this production output is still -- is much lower than 3 years ago. How much do you think the strong WFE this year for DRAM is a catch-up of investment from those past 2 years? And how much is a reflection of rising capital intensity that we kind of all anticipated?

There's probably a little bit of catch-up, but it really is the rising capital intensity, right? I mean it's getting progressively more difficult to get bit supply growth from one node to the next to the next in DRAM, and that's driving that rising capital intensity. And so to get the same level of bit output that you got several years back, it requires more investment.

Okay. That's fair. Maybe switching to NAND, there has also been some concerns about NAND CapEx slowing down after a huge first half of this year. What are your thoughts on NAND WFE as we go through the second half and maybe into 2022? What are the key things that you monitor?

I see relative balance half-on-half in the investment profile of our NAND customers. And when we run our own model, Sidney, around what do we think supply growth looks like relative to demand growth, it spits out a fairly balanced view based on the investment that is occurring. And so that's generally where you want to be, I think, as an industry, and there will be an ebb and flow to this unquestionably. But we haven't provided a numeric view of the market next year. But I think NAND is going to be decent next year as we get into things. And we'll give you more of a quantification of that as we get further through the year. It's still a little early for us to do that. But I think it's strong right now, frankly. And I believe it will continue to be strong.

Okay. Maybe similar to my DRAM question earlier, NAND WFE is already above the last peak. And I know it's already exceeding how you described the NAND WFE should be assuming 40% bit growth of that little formula that you guys talked about earlier. But that's something you talked about 5 years ago. So maybe that's kind of outdated. Are there any reasons for us to be concerned at the current spending level that you can think of?

I don't know. People are concerned about a variety of different things all the time. I mean, when I look at it, yes, those numbers we gave, I don't know, probably 4 years ago at this point, are somewhat stale. Because you've got -- I think it's fairly intuitive to think about it. As that stack grows, capital intensity goes up, right? You're depositing more films to construct a higher stack, and the etch is down through it, where we're -- our position is very strong. It takes longer. So that grows over time as things get more complex. So don't lose sight of that. Those numbers we gave, I don't know, like I said 4 or 5 years ago, are stale at this point.

Okay. That's fair. Looking at the business, obviously, with supply constraint and whatnot, how does the visibility you have through the rest of the year or maybe in the first half of next year compared to other years at around the same time? Are customers coming to you early than normal just because of all the supply constraints?

Maybe a little bit, Sidney, but it's not all that different, quite frankly. I mean the way this business generally works is you've got a small set of customers, who communicate with us every single day. Somebody from my company is talking to our customers every single day. I've got employees at every fab location in the world that is buying equipment. So we kind of know what's going on. And that was true a year ago. It was true 2 years ago. It was true 3 years ago, right? And so you always have reasonable visibility, at least as customers communicate their plans. Now things can always change. So even though lead times right now are longer than we could like them to be, I don't know that, that really drives more visibility, because we always have pretty good visibility, right? The customer will communicate a road map, tell you where they're going. It doesn't mean it can't change. And heck, that's true today as well. Visibility might be a little better, but not meaningfully. We always have a reasonable visibility, Sidney, just because of how this industry works.

Excellent. We have an inbound e-mail, that's an inbound question about the DRAM side of things, just to follow up an earlier question. So in the last year downturn, you guys saw rapid cutbacks in DRAM CapEx. At the moment, that DRAM supply is expecting weakness 6 to 9 months out. The DRAM supplies react very rapidly to the forward views of the market. Do you see any of your DRAM supplies pulling back maybe a reflection of supply-demand concerns in 2022? It seems like the answer is no, but I'd love to hear your thoughts.

Yes. I already sort of tried to answer that. I mean you asked me a little bit ago, Sidney, DRAM investment is stronger in the second half than the first half. No change in any plans that I see at all.

Okay. That's fair. Now if you look in 2022, I know you guys are not ready to talk about WFE numbers and whatnot. But can you talk about how you're thinking about the market environment as we approach the end of the year? Where do you see some of the upside versus 2021? And are there any markets that might be at risk of slowing now?

Yes, Sidney. Yes, we haven't quantified next year. We generally give detailed WFE at the beginning of each year, and I'm going to stick to that cadence. But stepping back, we have described it looks like a pretty good year next year in terms of how things set up. The underlying demand for semiconductors is the important thing, and that looks pretty strong through next year from everything I can tell, frankly. When you layer on top of that rising capital intensity, when you layer on top of that -- and I'm sure you'll ask me about this later too, all this government discussion of the desire to localize the industry a little bit, that's going to drive a little bit of a bit under the semi industry as well. I feel pretty good about how things are setting up for next year. I'm not ready to give you numbers quite yet. We'll do that when we normally do it, but I feel pretty good about the setup going into next year, frankly.

Okay. That's fair. One more -- one more on the near-term stuff on the supply chain. When thinking about supply constraints and the higher logistical costs you are facing, do you think these issues will mostly resolve themselves as we move past the pandemic? Or are there some other issues also being driven by maybe stronger step-up in demand, maybe lot of issues won't be resolved just because the pandemic is over?

I think about 2 things. One, you're right to ask about the pandemic. I mean there are -- there's incremental cost right now in terms of the supply chain. Biggest area actually is in freight logistics, right? I mean it's just not the freight lift available that was here pre-pandemic. A lot of what we fly around the world, it used to be in the belly of commercial aircraft, right? And there's not a lot of flights going back and forth between U.S. and Asia. Our supply chain has a heavy footprint in Asia. Our factories, today anyway, have a heavy footprint in the United States and likely that continues, although maybe you'll ask me about the fact that we're ramping a new factory in Malaysia. It's just expensive right now to fly things, and that is how we move things around. And so that's a real headwind right now that we're just having to deal with. I think that mitigates itself once we did post pandemic in some way, shape or form. But right now, we're just having to deal with it. On top of that, Sidney, and maybe this is what you're implying in the question, too, given the strength of demand right now, our supply chain has a variety of different constraints in addition to the freight and logistics stuff that we're having to do different things to try to mitigate. That's also driving a little bit of an increase in spending in the cost of goods sold area as we work to try to pull our lead times back in, meet customer request dates and so forth. So when you put those 2 things together, there's a headwind sitting there. We'll figure out how to work our way through it. Some of it will naturally get better as we get through the pandemic and freight lines open backup. So anyway, that's how I see things right now.

Okay. That's good. Maybe jumping to a few longer-term questions, just starting again with maybe the industry. We clearly broke out the range for WFE. We're no longer in the $30 billion, $35 billion range for a while now. But how do you think about what WFE could look like over the longer term? Is there a way to think about between the size of semiconductor market, WFE capital intensity? How do you think -- what are the metrics that you look at?

I mean, frankly, what I look at is what customers tell us they're planning to do over the next several years, and I don't look at all of these markets. It's not true, actually. We do, but more importantly is what are customers telling us when they try to define their manufacturing process flows, the node -- 3 nodes from now, where is it going, what is capital intensity going to look like. What I would tell you when I look at this big picture is, I'm very optimistic on growth of the semiconductor industry. That's maybe one of the most important things to think about, right? Given the acceleration of the digitization of the way the world is working witnessed how we're interacting right now, right, this stuff has accelerated, which is good for all of us in this industry. When you layer on top of that, as you look at the complexity of manufacturing, the next process nodes in 3 device architectures and advanced packaging and all of that said, the rising capital intensity is providing an additional tailwind to the equipment sector. And then when you think about Lam, specifically, we're fortunate in that the segments of the industry we supply to enable those 3D device architectures, right? And so that's an incremental opportunity for us. And so that's what I think about when I look at where things are going. It's demand for semiconductors. Very strong rising capital intensity is happening -- has been happening. And then the fact that etch and deposition are largely enabling a lot of the architectural innovation in the industry puts us in just a really good spot to be. Great place to be in this industry and why I'm as optimistic I am about our business opportunity, Sidney.

Great. One of the core thesis for investing in Lam is that it's not only you guys exposed to the fastest-growing segment, but you also have potential for market share gains. I think you talked about 4 to 8 points in etch and deposition. Can you give us an update where you are today? And as we look forward, can you talk about what areas you think there remains a lot of opportunity to gain share?

When I think about it, it's all about new stuff coming into the industry. When we think through and talk as a leadership team about where are we going to go put the new R&D dollars, what bets are we going to make, what you need to do and try to figure out how to do is what are the big new applications coming, right? What's growing? What's new that plays to the strength of our company, and that's where things are differentiated. I mean you got to understand, okay, what is the customer looking for? What does the customer need from a technical differentiation standpoint, also from a productivity standpoint? And as we kind of profile that landscape, that's where the 4 to 8 points come from. And when I think it through is partly because of architectural innovation, like I've described, advanced packaging, 3D, device architectures, gate-all-around being more etch intensive and things like that. And then the bets we make or the investments we make, maybe better described these aren't bets, we have pretty good insight into where things are going around things like Sense.i, solving the customers' technical challenges in addition to the productivity challenges. Opportunistic things like the VECTOR DT offering that manages stress -- wafer stress, which is becoming an increasingly challenging thing as these architectures grow. We've talked about new investments in dry photoresist, a new capability that will help enable the productivity of EUV, which is a critical capability for this industry, specifically in foundry and logic, our enhanced ALD. It seems like that, Sidney, we see opportunities. We think about the strength of our company what we're going to do and how we're going to differentiate new tools, solving new customer challenges and things we believe we can do uniquely or better than others in the industry, drive the R&D profile, which then also drives our expectation for where we're going to see share gains. So that's the story of the company. And that's what we've done, frankly, over the last decade.

Excellent. Now speaking of foundry, oftentimes, investors associate Lam with memory CapEx, which obviously, you are overexposed. But you guys have made a lot of progress in foundry, logic as well in the last few years. Can you talk about how you're positioned in foundry and logic market? As we move through the next few generations of advanced nodes, will that be enough to shift your revenue mix to be more similar to the WFE market mix?

I feel really good about where we're at in foundry. You're right. Thanks for the observation. Several consecutive quarters of record revenue in the foundry customer segment of the business. The good news there in the story of the company is -- and I've said this before, I'll remind people, when we get every subsequent process node, our market opportunity is bigger than the one before it. And so that's part of the story is just things like FinFET going to gate-all-around patterning steps, 3D process flows, metalization schemes and things like that drive the need for things we're good at doing like high aspect ratio etch and increasingly selective etches are coming in when you look at that gate-all-around stuff. The dry photoresist that I described will be really important in the foundry space. So yes, we've got strength there. I would tell you, though, I see continued strength on the memory side. We're doing well in each of the segment of the customer base, frankly. But I feel really good about where things are in foundry, to be honest with you. And a lot of people have been asking me also about, we always talk about the leading edge in foundry. But increasingly, there's a pretty strong investment occurring at lagging etch. And I've described 10 consecutive record quarters of record revenues for what we call the Reliant product line, which is our lagging etch product lines. So when you layer that in, that's driving a lot of the strength you're seeing in foundry as well.

Yes. That's actually my next question is when I think about foundry and logic market, clearly, shortage in 200-millimeter capacity. There has been increasing focus on the lagging etch node. It sounds like -- have you quantified how much of that business is tied to 200 millimeters in lagging etch, which I assume Reliant is mostly in CSBG? And how do you see this opportunity for you guys playing out over time?

Yes. We've described a view that over several year horizon, that actually the lagging etch WFE grows faster than overall WFE. And I still see it that way. And your dynamics there, what drives that business are it's lagging -- it's IoT. It is RF. It's power devices. It's yes, automotive that you referred to. The demand for that segment of the semiconductor industry is very strong, and I don't see that changing either, right? And that's part of when I described 10 consecutive quarters of record revenue in Reliant, that's what's going on there, right? And maybe just a little bit about that. I mean we're making investments there in capability to supply more equipment. Historically, we've gone to market there with refurbished equipment, right? We buy used cars, refurbish it and resell it. And we're still doing that for sure, right? That's still a lot of the business. But increasingly, because of the strength in that segment of the market, we're also selling new tools into it, which historically hasn't necessarily been the case. So that's a good part of the market, something we're very focused on. We will frequently describe it as specialty semiconductors because even though it doesn't mean kind of leading-edge capability, it does require capability that we're taking advantage of.

Okay. That's good. As you predicted earlier, I'm going to ask about the CSBG. So very impressive growth with revenue increase, reaching 40%, 50% of the past few quarters. I was under impression this is the more stable part of your business. So clearly, I was wrong. As you look over the next few years, how sustainable do you think this business could grow? Maybe you can talk about the various segments within this business.

Yes. Let me just ramble on about this part of the business a little bit, and then you can ask me a few follow-ups maybe to redirect me. So here's the way to think about CSBG. It really is all about the installed base, right? And the important thing to understand if you're new to the story is our equipment is useful for a very long time, decades, frankly. And so that's an important metric. We will describe how big is the installed base. We usually do it once a year at the end of the year. How much of the installed base grow, and it grows every year. And obviously, with the strength in WFE this year, it's going to have nice growth this year. And so that defines the opportunity to continue to grow the business, which is largely why I say this is a business that should grow every single year. Because chamber comp grows every year. So what's in this business, I'll describe. There's really 4 things. Spare parts. Equipment in the installed base needs to be maintained, and that means spares need to be replaced, right? It's -- think of it as kind of your automobile, right? You got to take it in for maintenance, and that's true of the installed base in the field. So you got spares, driven by chamber count as well as utilization, both of which obviously are strong this year. So that segment of the business is doing really well. Service. The equipment needs to be maintained. When utilization is high, that is strong. And in addition to the fact that strategically, what we're trying to deliver to our customers is what I characterize as advanced services, right, guaranteeing performance to a certain aspect, which is a great part of the business as we bring that to market. So spares, service. Equipment upgrades. Our equipment is sold with the path to be upgraded as well as oftentimes we'll do productivity upgrades to things that have been out in the field for a while because it's something we've learned with new equipment, right? And so the upgrade part of the business always -- it's a high ROI for the customers. And then the Reliant product line, which I've talked about earlier, right, that's driven by lagging etch, IoT, power, things like that. 10 consecutive quarters of record revenue for that. So when you put all of this together, last quarter, the CSBG product line revenue was nearly $1.4 billion. We're really doing extremely, extremely well. And all aspects of it hitting on all cylinders. And the strength of growth in chambers make me very optimistic about where this business is heading into next year as well.

So maybe a couple of follow-up questions. One is what is the relative size of these 4 different segments, maybe qualitatively, you can talk about that? And then second part of the question is, I know in the past, we talked about some inventory build, and it seems like there could be a little bit of that in spare parts for this year. Any other areas that we should be monitoring individually -- as an individual business thinking going forward, if there could be some risk of slowing down?

Yes. Sidney, I haven't quantified the individual components. I have said spares is the biggest of the 4 things. So you can think about it that way. I mean an etch tool is pretty spares intensive. So because of the nature of what it's doing, it's a sort of destructive process, which means spares need to be replaced with the frequency level. And so anyway, that's a way to think about it. I get guess the question that you had sometimes, hey, is there some inventory build in spares? And my answer is maybe a little bit. But it's not so much that I'm overly concerned about it, frankly. I think all of us, including Lam, frankly, given the COVID environment we've been operating in, given the concern around supply chain and things like that, I'm striving to hold a little more inventory at Lam, and I think my customers are as well, to be honest with you, because the mitigation, thought process in the industry is higher than it used to be. So I'm not overly concerned about spares. It's probably a little bit of inventory build, but it's not -- it's not so large that I have a large concern about -- or a real concern about it, to be honest with you. And I feel good about the trajectory of the CSBG business going into next year. Like I said, chamber count is going to grow decently this year. I feel pretty good about the level of business in the industry next year. And so I think utilization is going to continue to be good, and that defines what drives a lot of CSBG.

Okay. That's fair. So maybe switch gears to talk about regional manufacturing, regional push. There's clearly a push in the industry for decentralization of these facilities. I would suspect that this benefits Lam in the short term, if there's likely some sort of inefficiency in the beginning. But how do you think about the opportunity that this model creates over the longer term? Maybe just to ask slightly differently, do you care whether it's a greenfield fab or upgrade fab? Is it a better opportunity or not?

Here's the way to think about it. Everybody is very excited in the industry about, call it, localization, I don't know you can come up with a variety of different words to describe what's happening. That's important, and we'll drive investment. But at the end of the day, what matters most in this business is end demand, consumption of semiconductor ICs, right? All of this discussion of, okay, this country or that country wants to localize the capability, it will drive some level of incremental investment. But frankly, it doesn't impact end demand much if at all, maybe a little bit. And so it will change the timing of investment potentially. It will drive a little bit of upside in the way I think about it because multiple locations inherently will be somewhat less efficient than one location or things that are closer together. So there's some level of perhaps higher levels of investment. But what really matters, and I've tried to describe this as we've talked, Sidney, is the demand for semiconductors, very strong, rising capital intensity happening, Lam's unique position in terms of etch and deposition growing happening. That's the most important thing to think about. Whether the fab is in one country or another or another likely doesn't really change the end demand too much.

Okay. That's fair. Now one more question on the demand side. In terms of China, how do you factor in risk with China to your financial planning since this region has been more than 1/3 of your revenue? And if you look at domestic China, it's probably like close to 20% of sales. Maybe you can help us understand the profile of domestic China sales to get a better understanding.

Yes. Sure, Sidney. Yes, you're right. Call it 1/3 of the business, it's actually more than that last quarter in terms of what we shipped into the country of China. Now last quarter, that was pretty balanced between the global customer base with fabs located in China and the Chinese customers, right? So think of it that way. There's a level of balance there. It ebbs and flows between a little more here, a little more there and so forth. Local China WFE, though, is pretty strong, like all of WFE is. It's grown, I don't know, last 3 years. I expect it continues to do so. A broad set of customers. It's not 1 or 2 customers, a lot of foundry customers, maybe 1 big NAND customer, 1 big DRAM customer, investing to compete in the Chinese market as well as aspirations to compete globally. And it's a robust set of customers that we do our best to support, like we support the global customer base. So that's how to think about China, Sidney.

Okay. Now speaking of all the growth opportunities, can you talk about your ability to serve the demand upside and maybe your general strategy in terms of your own manufacturing capacity? I know you talk about -- earlier you talked about a new factory in Malaysia. I noticed you put out press release this morning talking about the expansion of your facility in Oregon, but I'd love to hear your thoughts on that.

Yes. We've been fortunate in that we've known this industry is growing. We've known we've needed incremental capability, and we had plans in place to increase our manufacturing footprint, specifically with a large factory in Malaysia. So we've done our best to pull that forward as far as we can. And yes, thanks for paying attention to the company. This morning we issued a press release about a new capability in Oregon, right, to increase our domestic manufacturing capability. The reality of it is, when you look at all of our facilities worldwide, we're expanding everywhere to the extent that we have an ability to do it. So that's what's going on. We're trying to pull lead times back in. The biggest constraint, though, isn't necessarily Lam's facilities. It's a supply chain, right? We've got a complex supply chain, a lot of suppliers. And what is constraining us right now more than our own internal manufacturing is working through supply chain constraints. So -- and we're progressing on that. That's progressively getting better and we'll continue to as we work with our suppliers.

Got it. In terms of -- a couple of financial questions. You seem well on your way to exceed your target model given that your 2020 Analyst Day. Clearly, WFE has been much stronger than we all expected 1.5 years ago. I don't expect you to update that model, but what are some of the factors we should be thinking about when we try to come up with our own potential earnings power down the road?

Yes. Yes, the financial model is stale. Obviously, WFE is stronger than anything I expected when we put it out March of 2020, just before the pandemic kind of crashed upon us. There's a level of business aspect to the profitability, and that's part of why we're delivering such good profit profile right now is business is very strong. But there's also a time component to things we're driving that continue to enhance the profitability of the company, things like the Malaysian manufacturing location. That's in very early days. That isn't delivering benefit to profitability, but it will as we ramp it, right? And as we gravitate the supply chain to be more based in Asia, as we ramp the lab we announced in Korea, there's things like that, that deliver benefits that are based on time that still are to come, right? And so the way I would encourage you to think about profitability of Lam is one, we're in a good spot. Two, if you go back and look at that model I gave you and I'll update it at some point, it's a bit stale. I need to update it for you. But -- just look at -- there was a point or 2 improvement in profitability embedded in there from where we are today, and that's the time piece of it, Sidney, in terms of thinking about what's the [ process ].

I guess that means it's about time.

It's one of those emergency. Yes, that's how to think about it, Sidney.

Okay. Well, I think we're really out of time. So thanks for that alarm. But -- and thanks for -- Doug, for joining us.

Yes. Thanks for having us, Sidney. Be well.

Take care. Bye-bye.