Lam Research Corporation (LRCX) Earnings Call Transcript & Summary

Good morning, and welcome to JPMorgan's 51st Annual Technology Media and Communications Conference. My name is Harlan Sur, semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Doug Bettinger, Chief Financial Officer of Lam Research, here with us today. Lam is the third largest semiconductor capital equipment company in the world, strong leadership in etch, deposition, with fast-growing and emerging businesses like next-generation transistor and memory cell architectures, resist processing and advanced packaging. So Doug, thank you very much for joining us today, and I think you have something to read.

Okay. Let me hit the safe harbor real quick, so my attorneys are happy about that. Today's discussion may include forward-looking statements that are subject to risks and uncertainties, and actual results may differ materially. Additional information concerning factors that could cause actual results to differ materially from those forward-looking statements can be found in the risk factors enclosed in our public filings with the SEC, including our 10-K and 10-Q.

Again, thanks for joining us today. I appreciate it.

Thanks for having me, Harlan. It's good to be here.

The Lam team supplies into all of the global semiconductor manufacturers, right? So you have great visibility on supply dynamics of the industry. And I know that you have a team actually does a great job at looking at semiconductor industry demand trends as well. So I think a good way to start off is overlaying the 2 dynamics, supply, demand, what's Lam's view on the global semiconductor supply demand dynamics? And are all of your global customers acting in a disciplined fashion.

Yes, that's a great setup for me to tell you how we view the market right now. Frankly, big picture. I think the semiconductor market is a growth cyclical industry, an emphasis on growth. and an emphasis on the cyclical piece of it. And we're in the middle of the cyclical downtick from -- at least from a memory standpoint, for sure, relative to where I see investment this year. But let me maybe paint big picture, sort of how we see the market this year. We came into the year suggesting that wafer fab equipment investment would be in the mid-70% range, Harlan. And when we began the year, we thought it was going to be a little bit first half weighting. Fast forward to our recent earnings call and market got a little bit weaker. We are now describing an outlook that it's low mid-70s, so a little bit softer, softness primarily coming from memory. A little bit of a downtick maybe in foundry as well. But low mid-70s is how we see it now. And it pivoted a little bit to -- a little bit second-half weighted relative to how we see spending coming in. And I know you'll ask me, Harlan, as we go through about, hey, what's going on in China, it's very topical. We actually ended up with a little bit more spending in China, I think, than we previously had thought as we got some clarification on a specific process node from a specific customers. So that contributed to the little bit second half weighting outlook that we have right now.

I actually want to rewind back a little bit before we jump into the current near midterm dynamics of the industry because the Gartner calendar '22 market share numbers were published just very recently, right? And not surprisingly, the Lam team gained share as you grew your total systems business, about 600 basis points faster than WFE last year, you grew your dry etch business, 400 basis points faster than the market. You grew your deposition business, 1,300 basis points faster than the market. What areas, critical layers, technology differentiation drove the strong growth and strong share dynamics for the Lam team?

Yes. No, it's a great question. I never pay that much attention to the Gartner numbers. But obviously, we are gaining share, and we intend to continue to do so. And I think we've been extraordinarily successful over the last several years in delivering that performance. And so to understand it, you got to parse it a little bit and maybe I'll go through foundry, logic, NAND and DRAM as well. We're making excellent progress, I believe, in each segment of our business, frankly. And maybe let me unpack it, Harlan, just a little bit. In NAND, it was a very strong year for us last year. And frankly, we own all of the critical applications in NAND manufacturing in terms of building up the stack that very high aspect ratio, enabling etch down through the structure and the metallization. And so if you think about it from that standpoint, as that stack, it's taller and the etch gets more difficult to do. We just benefit from that by the simple fact that we own all of those applications. So that's one aspect of it. If you unpack foundry and logic, you got to kind of parse it between leading etch and a little bit of the trailing, from a leading etch standpoint, there's multiple things going on there that have driven our performance. One of the things we've been talking about for the last several years, it feels like is strong share gains in conductor etch at a leading logic customer. You can read into that whomever you think that might be. I talk and code about this a little bit. But Tim, our CEO recently described a doubling of market share node over node as a result of that progress. And so that is really showing up now as that specific customer is investing. So that's a key component of that. Also in that logic segment, I think about things like advanced packaging growing even though it's a relatively small level of investment, the growth from our Syndion product line and our SABRE 3D product line and enabling advanced packaging is driving nice share uptick. And then if you think about leading etch foundry, we continue to make really good progress there as well. And frankly, some of the stuff, Harlan, we've been talking about are still sort of on the comp line a little bit. We're super excited right now about progress we see ourselves making around the gate-all-around structure as FinFET and Flex to gate-all-around. That is a meaningful uptick and is going to contribute in a big way to share gains you're going to see from us as we go forward. And I can talk more about that as you go through the rest of your questions, Harlan. But I think overall, very pleased with the progress the company has made. Our execution is extremely strong, and our technology road map has never been stronger.

Tim alluded on the call. Given the unprecedented excess inventory situation, your memory customers are taking drastic actions, right, to rein in supply, even delaying or pushing out their technology migration road maps. We had the Micron team earlier today, and that was clearly something that they talked about and continue to focus on to try to rein in industry supply here. Typically, in downturns, we wouldn't see your customers pulling back on technology migration, right, capacity add, yes, technology migration, not so much. So is the tech migration pullback and associated higher capital intensity a big contributor to the WFE pullback this year in memory? And just as importantly, though, does this mean the potential for our shopper spending recovery as memory fundamentals start to normalize.

Yes. I'm going to leave that last part of the question alone, Harlan. I'm not going to -- I can't put a time frame on anything. But if I unpack the comments I made on WFE, the biggest contributor to the reduction in WFE this year's memory. Memory is down in a meaningful fashion, call it, 40%, 50% year-over-year from last year to this year. And in fact, when you look across totality, the industry, utilization is as low as I can ever remember seeing it on the memory side of the house. You normally see memory fabs run even in downturns. And in this case, utilization has dialed back and perhaps slowing some of the tech migrations down, Harlan. And when I look at the individual components within memory, NAND is down even more. So that's our strongest business. Spending is meaningfully down. Utilization is down, with hindsight, I can sit here and look back over the last year and explain to you how we ended up where we are. But regardless, this is where we are. As I think about the cadence of things like improving, I'm not going to put a time frame on it. I can't remember actually seeing as much inventory as is out there right now, having been out there before. So it's probably going to take a little bit longer. And when I think about what's going to show up in our business, when things do begin to solidify, I think the first thing you're going to see, Harlan, is utilization will come back up a little bit. For Lam that will show up in our customer support business group, the installed base business in the spares and service component of it, right? As the tools begin to be more highly utilized, the consumption of spares and service will come back up a little bit. So that will be the first indication to me anyway, in our own business when things begin to come back around. The next thing, and you know this, Harlan, but I'll remind everybody in the room, you'll start to see node conversions occurring again, right? And generally, when that happens, the constrained tools in the fab needs to get upgraded or moved forward. Generally speaking, that is a really good thing for Lam Research because we tend to be the constrained tools in a memory fab, right? If you think about that 3D NAND stuff, the stack, the memory hole etch and so forth on through that stuff. That's the stuff that will need to get upgraded. And so the customer, when that begins to occur, we get a very large share of wallet in that situation because we tend to be the stuff that needs to get upgraded. And then eventually, the industry will get back to putting incremental wafer capacity in place. So that's kind of the cadence I'm looking for whenever it begins to show up. That's how it will show up in our P&L.

Any questions from the audience? If you do, raise your hand and wait for a microphone. We have one right.

I see one upfront here in row 4. Do we have a mic in the room?

Yes, we have a mic.

Yes, curious to, if you can talk about share gains as we transition to gate-all-around both from your own perspective against competitors in etch and dep depot, but also from other areas within WFE, for example, lithography get into really high levels, wondering if that will be a headwind for H&E position as we transition to new architecture.

Yes. Let me talk specifically about gate-all-around, and then I'll generalize it relative to architecture and innovation that we see happening. I think we gave some incremental disclosure in our last earnings call about the gate-all-around opportunity that we see in front of us. And what our CEO talked about was when we look at the structure and how it's going to be created, it's relatively etch intensive from a selective etch standpoint. Those are new tools that we brought to market that have actually done extraordinarily well. It's our Selis, Prevos and Argos tools. If you want to go have a look at the website to see what I'm talking about. There's also a good amount of new film deposition, some [indiscernible] stuff in there, some ALD applications. So when we look at this opportunity for our company, we see an incremental $1 billion of revenue opportunity for every 100,000 wafer starts of capacity that the industry puts in place. So we're excited about this. When we look at tool of record decisions that have already been made, our momentum is extremely good here. So this is going to be an exciting opportunity as the industry pivots from FinFET to gate-all-around. It is fairly etch and deposition intensive. So anyway, that's how we see that. And then if I was going to step back and generalize relative to the business that we do etch and deposition, you see these 3D architectures evolving all over the place in the industry. I mean I think planar to 3D NAND is pretty well understood. We did extraordinarily well in that transition. For similar reasons, we're very excited about what we see with gate-all-around, right? It's a true 3D structure in foundry and logic. And at some point, the industry is beginning to look at how the DRAM architecture is going to evolve and potentially that and Flex in the 3D structure at some point as well. When you think about all of these changes architecturally, we are in the sweet spot of all of these changes. So very excited about the evolution of 3D device architectures. Advanced packaging is another example of a 3D structure. When I think about it, and again, we're extremely well positioned for that. So I'll pause there, see if there's anything else.

Any other questions?

So you were going through the different segments and you didn't touch on what's happening with trailing logic...

Trailing logic.

Yes. And then if you just go into what you think about on leading etch, right, you mentioned there have been high inventory for memory. But if you look at how much leading logic went through the pandemic, right? I mean is there inventory building up there? And what's your thoughts there?

Maybe I'll talk about the mature node and then make sure I understood the leading etch question. But when you look at the totality of what's going on in WFE this year, one of the most resilient areas of spending is actually in the mature node foundry logic space. And if you think about, I guess, demand drivers, secular demand drivers in there, think about things in the industrial, automotive, power, analog side of the industry, that's what really is driving the investment profiles there. And it's actually quite resilient, quite strong and fairly broad-based honestly, when I look at the number of companies making investments in capacity there, it's not 1 or 2. It's a broad swath of the industry, honestly. With a little bit of a footprint in the U.S., Europe, some in Japan and some in China. So it's very broad-based, I guess, is what I would describe, driven by what I see as secular demand drivers in the industrial automotive side of the house. And then I'm not sure I completely got the leading etch question. Can we bring the mic back up?

So when you parse semiconductor revenue into, let's say, memory, logic and leading logic and trailing, you saw the memory uptick and you realized that this was way above trend and then you know what was going to come in the end. When you look at the leading logic specific, right, if you look at SIA data of this [ already ] try to break it out. We saw the same way above trend growth in logic, right? Leading logic can be, say, it's AI and its other factors, right? But is there a point that we may face this -- say that, we seen memory from an inventory perspective?

Yes. Listen, I do see inventory across the totality of the industry, but nowhere near like I see in the memory side. There's an ebb and a flow to business, right? Nothing grows every single year here. and there is inventory out in the channel, but there's also a rising capital intensity. If you think about the cost to put a leading etch wafer in place, it gets progressively more and more expensive. So there's an aspect of the investment in the leading etch that is driven by that in addition to just overall demand drivers like generative AI and AI servers and autonomous driving and things like that, that we all get excited about.

Any other questions? Talk a little bit more about your -- some of the new products that you're bringing to bear on the EUV process flow. I think as we move to high NA EUV in 2025, there's a lot of sensitivities, a lot of more optimization that has to be done. I think you guys are bringing to market some dynamics around the EUV process cell that could actually help improve a lot of these dynamics.

Yes. Let me talk a little bit about our drivers as product offering. I think we first, Harlan, started talking about those, just before the pandemic actually. And what it is -- it's a new tool type for us, something that historically we haven't had tools in this space. But what we're collaborating with ASML to do is to bring out the dry photo resist, which actually helps enable the productivity of the EUV tool. It's a depth of field thing in terms of what we're able to do with depositing a dry resist on the wafer as compared to wet photoresist, which is historically what the industry has done. So when we look at this opportunity actually, you will see it from a timing standpoint, paired with high NA in some aspect of things. And what I would describe to you is, it's a new business for us, incremental opportunity. Every customer in the industry that uses EUV has some of our hardware in their lab, evaluating what this is capable of doing. And one of the things we were excited about, and again, we announced in the last earnings call is an announcement of a second memory customer in DRAM and our first large foundry and logic customer has selected our hardware as DTOR for this capability. So like I said, new business for us, it's a meaningful opportunities. And when we look at how big the opportunity is cumulatively over a 5-year horizon, we believe this is $1.5 billion of incremental revenue for us back half weighted in that 5-year time frame and growing beyond that, frankly, Harlan, as high NA becomes a bigger and bigger portion of the process flow. So I'm very excited about this. Our engineering team has executed extremely well on this. And I think the customer pull is a great demonstration of that.