Lam Research Corporation (LRCX) Earnings Call Transcript & Summary

I think we'll get started. Thank you all, and good morning. Thank you for coming. I'm Stacy Rasgon. I cover the U.S. semiconductor and semiconductor capital equipment space here at Bernstein. And it's my great honor today to introduce our guest, the President and CEO of Lam Research, Mr. Tim Archer. Before I start, I want to mention if you have questions you'd like to ask during the presentation, you should have a link to the pigeonhole form. I think there's a QR code in the program where you can submit those questions and we should have time for Q&A at the end. So look, I would say -- I have semi-cap in my blood. I used to -- this is what I did in a prior life, and I love this space long term. The industry itself has been enjoying a pretty significant renaissance over the last several years. I think it really is coming to its own both industry growth I think, industry capital intensity have continued to inflect higher, and we've been seeing it by leaps and downs in the numbers. I think the contributions from companies like Lam are more important than ever before, though, and people are starting to realize this, as materials-driven innovation moves to the forefront of process technology development as physical limits get closer and closer. And to that end, semi-cap has really been top of mind for many of my clients. They are, of course, in nearer-term questions, like NAND spending trajectory in China and everything else that we will certainly get in today. But I'm also increasingly getting people looking at the longer-term potential of this industry as they start to view it as more on secular rather than purely cyclical terms, which I think is a good thing. So to talk about that, it gives me great pleasure to welcome Tim to our session. So thank you so much for being here today.

Great. Well, thanks, Stacy. It's fantastic to be here. Appreciate you having us.

You bet.

So it's...

That's for the question, sorry. While you do that, people can notice our safe harbor is up on there.

Got it. So I do want to get -- I don't want to focus on the short term, but I do want to get it a little bit out of the way. Maybe if you could just review kind of what Lam saw in 2023? And maybe even how your view on the market as well as Lam Financials kind of changed? Because I think in the beginning of the year, like things were looking a little worse than maybe they did at the end. And you guys have gone through a bit of a cost-cutting exercise as well at that point when things were closer to the topic. How is the view of like what the industry and Lam did evolve as we went through the year and kind of where are we as we go into next year?

Sure. Look, I mean, 2023, as you said, it ended up a little bit better than we thought it would at the beginning of the year.

It ended up a lot better than I thought it would be.

Yes, okay. From our perspective, you have to think about the fact that our strongest market is NAND, and that was one market that really did not recover through the year. I mean NAND WFE in 2023 was down more than 70% year-on-year, which, again, from a Lam perspective, was that's a very severe downturn. And -- but we did see some improvement through the year. China got a little bit stronger, obviously, continued strength in mature node spending. There was some initial buys around the initial implementation of HBM DRAM with some of the early AI look in 2023. So we did see the year progressively get a little bit better. But again, from our perspective, that NAND -- lack of NAND recovery is really still what we are waiting for as we move into 2024 and really as we look forward to 2025.

Got it. And I have to say the trough, though, I think your trough EPS guidance was $5, you beat the number. But that was a $20 annualized number for a purportedly NAND focused semi-cap with almost no NAND in their model.

We have worked hard to strengthen the company structurally. And I think one thing we're very proud of in what was a very severe downturn for Lam from our strongest market perspective was that we, trough to trough it had improved our operating margin by 200 basis points. As you said, our trough earnings per share were quite nice. If there's one silver lining that you can see in a year in which there's almost no NAND spending is that the progress we've made structurally at our foundry logic positioning, our DRAM positioning becomes a lot more visible. And that's a strategy that we've been very deliberately driving for the last 5 years is to -- of course, we love the NAND business, and we're the leader in that space. But we recognize that to be the company we want to be and truly capture the opportunity that's ahead in this industry, we want to better balance the company with stronger positions in both foundry logic and DRAM.

So maybe that's a good segue. What are some of the areas that you're focusing on outside of NAND in foundry and logic and even in DRAM? And I guess, how is that influencing how you're viewing the market evolution into 2024 and beyond.

Yes. Well, what's great about our business. I mean, Lam is a company that is focused on etch and deposition. And etch and deposition are two of the fastest-growing segments within wafer fabrication equipment, primarily because these are the types of equipment that are needed to build all of these complex 3-dimensional structures. They are the types of equipment that are required to deposit all of these new materials and etch those materials. So they're really fundamental to several of the really critical technology inflections accruing about. We look at foundry logic. We've talked about the fact that Lam is focused and is a big player in the gate-all-around inflection. You think about this gate-all-around transistor structure, looks very 3-dimensional, requires lots of new process equipment in the etch and dep space, including ALD and selective etch. So we focused on those areas, introducing new products. You look at things like backside power delivery, another foundry logic inflection. I mean, Lam is very well positioned. Etch and deposition, you're now having very thick interconnect layers on the backside of the wafer, perfectly what we're great at, electroplating, thick film deposition with high productivity. You look at other inflections in DRAM, for instance, again, HBM, building 3-dimensional memory structures. And so we just look at the markets we're in, where we can focus and we see plenty of opportunity in foundry logic and DRAM to grow our business.

Got it. You guys ever given any sort of CAM sizing for some of those? I know one of your competitors have. I don't know if you guys have or not.

Well, we've talked about each of these inflections. We talked about 4 kind of $1 billion opportunities ahead of us. And so in many of those, in fact, even from when we put out those numbers, they're sort of accelerating a little faster. Gate-all-around, we said already this year, we're going to have $1 billion in shipments to gate-all-around nodes. We said our advanced packaging business is now $1 billion of shipments this year. And so we've kind of -- and then backside power, we said would be about $1 billion opportunity for us. And also we identified the last inflection which is dry EUV resist also is a $1 billion-plus opportunity for the company.

I want to come back to the dry photoresist.

And so we -- from this perspective of Lam's size, I think that maybe we can get to this a little bit later, but I think there's something that's very unique about Lam, which is that today, if you look at Lam as one of the large equipment suppliers, one of the largest. And yet we have a rather unique feature, which is we only address about mid-30s percent of WFE with our served market today. And that compares to some of our peers who are well over 50%. And so kind of when you take out litho, I would say that some companies don't have as much opportunity to find those new white spaces to grow into as Lam does. And so that means we can be very laser-focused on where we think the greatest opportunity is to apply our product and technical skills and expertise to these new areas. And that's what we've done. We have picked specifically those types of new markets where we think we can be very successful based on what our engineers know how to do and what types of tools we're good at building and that's those billion dollar opportunities that I talked about.

Got it. Got it. I guess to come back to the core business though, which is NAND. Clearly, we were doing $20 billion a year for quite a while during COVID, and it was like to your point, 6 or whatever it was last year, and it's probably up a little or not maybe this year, but I guess two questions, how are you viewing the prospect for a significant NAND recovery at some point? And on the competitive environment, as it starts to -- I get a lot of questions on Tokyo Electron and Cryo-X. And I was wondering if you could address the competitive environment in some of your key markets in NAND.

Sure. Well, as I said, we're excited about foundry logic and DRAM as new growth opportunities, but I mean, the heart of the company right now still is the leadership we have in NAND. And we look at that. And it's probably the best part of the story right now, which is our strongest -- and yet, we're showing really nice revenue and profitability in the company. And so as we look to 2024, NAND has improved a little bit. But from a equipment spending perspective, very little. What we talked about on our last earnings call was the fact that we had finally started to see some tick-up in fab utilization, but even there, that utilization is improving really at the leading -- only the leading edge of equipment. And so that really is still quite underutilized and in badly in need of technology upgrades. So we think that as we kind of move towards the end of this year, NAND demand is recovering, utilization starts to pick up, and what we're really going to see as we move into 2025 is an earnest effort by our customers to begin upgrading that installed base of systems to bring it to the leading edge where they're going to be able to make the devices at the most cost-effective technology node. And so we think that 2025 will be a strong year for NAND, but one that's characterized by technology upgrades to the installed base, and that plays right into the strength of the NAND.

Is that better than like greenfield capacity additions for you?

Well, for us, it's almost equivalent. And the reason being the majority of the -- the vast majority of the money spent on the technology upgrade is on the etch and deposition tools that are required to build the 3D stack and also to etch the features into the -- that stack. And so whereas in a greenfield, you need to buy a whole lot of ancillary equipment required to make the device in the upgrade, you're really talking about building the stack taller, and that really is Lam's equipment. And so...

I guess the installed base is fairly large as well.

It's -- and so maybe to address your question about the Cryo etch and competition. First of all, we've always had competition for every application. And it's -- we don't have any positions where we don't really have somebody trying to take those large positions away. But what we've done over the years is we have recognized that the installed base and the partnership with our customer on that installed base is an incredible learning vehicle for us. And so when we talk about Cryo. I mean, we feel very comfortable in the space because we have nearly 1,000 Cryo chambers running high-volume production today for that application. And we have about 6,500 high aspect ratio etchers out in the field. And that gives us this tremendous learning vehicle. And what we've done, and we've talked a little bit on previous calls and in some of our conferences about how we're using the information that's coming from that installed base as well as from our labs. We've now put that together into what we call Semiverse Solutions. Semiverse Solutions are our advanced simulation tools to use AI for recipe optimization. We've set an advanced etcher today has somewhere on the order of I think the number was something like $11 trillion possible recipe combinations now. And it's just an incredibly complex optimization task for engineers. So now we can use Semiverse Solutions. We can use our simulation capabilities to begin to optimize recipes.

Are you like simulating profile evolution?

Profile evolution.

Sorry, this is from my grad school days like 20 years ago, so this is...

And so when we apply that to Cryo and you're trying to build these incredibly deep etch profiles. We've now taken that 1,000 chamber installed base of learning, taking the ability to simulate profile evolution in our latest systems, and we've accelerated our cycles of learning. And that's allowed us to create some really extraordinary results. And if you wait just a couple of months, we're going to talk about those publicly. But the technology capabilities are accelerating very fast in the space right now. And we feel really comfortable with our leadership.

Got it. Got it. I want to ask about China. So it does seem to me that, again, the outlook for WFE got significantly better as we went through last year. And by the way, we did -- I know we were just having a discussion. We've think different baselines for what WFE actually was last year. But our numbers are somewhere in like the low to mid-90s, like Lam's going to be a little lower but fine. But we had started the year we thought it was going to be 70. I think there were a number of things we got, but I do think China was probably the thing that got the most better. And it is a controversy right now in terms of the sustainability of that China spend and it gets in lagging edge, logic and in DRAM and in other areas. I wonder if you could comment on your views on the sustainability of that spending environment at this point.

Yes. Well, we've said a number of times. We think the spend is sustainable. Certainly, all evidence right now points to that in that China spending has continued to remain strong this year, and perhaps even get a little bit stronger.

But why is that?

I think that partly, it's that -- it's the general environment of semiconductors, maybe is one, which is everybody is looking at this tremendous opportunity ahead. And you know you have to build that capacity ahead. You see this also push around the world for regionalization or localization of capabilities for all sorts of reasons, whether it's concerns about supply in sort of the next disruption or it's a localization from the perspective of just better partnering, as we say, sometimes being close to -- between -- with the ecosystem is effective for speed and learning. But we see that occurring all over the world and in China. And so we're strong believers in the $20 trillion, $30 trillion semiconductor industry, which means that from here to there, a lot of fabs have to be built, a lot of capacity has to be put in place. And you see that taking place with fab announcements in the U.S., and you certainly see that with fab announcements in China. Everybody sees that same end market opportunity in semis. And so I think at this point, there's sustainability of fab construction and capacity addition. And then you can just argue as to in what region will that take place? And who will the winners be ultimately in terms of which of those companies building the fabs to service that demand.

Who are these companies? You guys had talked about your deferred revenue. I don't know if it happened this last quarter or not, but it was going up still because you were selling to customers in China that you had never sold to before, you want to kind of cash on the barrel before you ship the tool.

That is true. Yes, we're cautious when there's new players in the market that we haven't done business with for a long time. So China is an emerging, still emerging region for semiconductor manufacturing as they add capacity. Some of it is with new companies, new fab projects in new parts of China that we're not so familiar with. And so we've required advanced payments before we would begin building the tools just to safeguard us and our shareholders. And I think that, that's not unexpected, though. You're going to see that in some other regions that have announced interest in growing their semiconductor ecosystem. There will be new companies that emerge. Now in developed countries like they have a long history in semiconductors, they already have well-developed companies that tend to be the ones we're putting in those investments. But in these other regions, I don't think it's a surprise to see new entrants to the market.

Where are yields in everything with these new factories, like do these companies know what they're doing? Do they have the expertise that they need to bring these things online?

I think it's a little early to speak to yields, and I probably couldn't do that anyway relative to our customers' information. But I think that there is a learning curve, clearly, from the time that a new fab is built and equipment is installed and those ramp to full yield. That's true regardless of where those fabs are built in the world. It's a tough process, but...

I'm amazed any of this works at all.

So I think though that over time, again, the experience is really key in our industry. And so there is -- it will take some time. But over time, you -- our customers do get there.

Got it. Are you guys servicing -- we'll talk about services a little later, but are you guys servicing those tools?

Worldwide or the specific?

These specific ones with these new customers in China.

We would be -- where we have no restrictions on us, we both sell and service our equipment. So I mean, the service is really -- and I think we should spend some time in a bit talking about the service business. It's become such an important part of the company. But you just talked about how difficult semiconductor manufacturing is and about that experience, the ability to service and maintain the equipment is not a simple task. I mean it's something that, again, is where many times the OEM really is the best party to do that type of work. And not only do we do it from the standpoint of traditional brake fix. But when we talk about servicing equipment, we're really talking about bringing a whole new level of database solutions, the types of analytics that allow us to very quickly understand how that equipment is operating. And in these fabs now, I mean, these very, very large fabs, you may have 50 different chambers -- 50 chambers of Lam etchers running the same process. And when you're trying to get yield, you need every one of those chambers to match each other very precisely. And that's where you bring in big data machine and the ability to identify chamber to chamber mismatches that ultimately could cause yield loss or distribution-wise.

Maybe that's a good segue to the services opportunity. So I mean, maybe talk a little -- and you're talking about the business already, but I mean like what are you doing there differently today versus, say, 5 years, right. I know it's evolved like pretty considerably. Like how do you address -- you talked a little bit how you address some of those customer needs through services. But what's the ultimate revenue opportunity there? Like how much of your installed base is on like, I guess, recurring contracts or subscription, how does that business works?

Yes. It -- well, first, I mean, you have to understand, we have about 90,000 chambers in the field. This is -- the nice thing about many years of high WFE is, I mean, that means we're shipping a lot more tools into that installed base.

What was that installed base like 5 years ago?

We're up about 50% in that time. And so the installed base business, therefore, has grown tremendously. It's a very important part of the company. It depends on the year, but it tends to run in about 30% of our range of our revenue, but we're really transforming what we think of as the services business. A key element of the services business, obviously, is maintaining the equipment in the fab. And as I talked, we're bringing new types of capabilities, AI-driven analytics to that service. . You think about a couple of items. I mean one is the cost of building a new fab, a $15 billion, $20 billion for a leading-edge fab. Time to money is how fast you can install those tools, get them qualified and running. And again, back to chamber matching. We've shown that you can use the data that comes off of those tools to dramatically shorten the time to get a fab, at least the Lam equipment in that fab up and qualified for production. And so we look at helping the customers save money in that way. Same thing with tool availability. You've paid a lot of money for this equipment. The need to keep that -- those tools up and operating ready for production at a higher rate now than it was even possible in the past, is that much more important. And so we've looked at that -- the use of that data. The second is when you talked about this regionalization of fabs, and one of the things that's going to happen with regionalization of fabs is there are fabs being built in areas where you mentioned, do they have the expertise? Even -- do they even have the labor required to operate some of these fabs. So we're looking at a lot more automation. And so one of the things that Lam has been focused on recently is looking at some of the more labor-intensive and also labor sensitive, meaning if you don't do the procedure correctly, the tool might not come back up into production, and we're automating those. And so we've introduced the use of collaborative robots, cobots to do some of the more labor-intensive tasks on our tool.

On the tool maintenance?

On the tool maintenance. And so these cobots engineer -- wheel this up to the tool. And basically then for the next 6, 7 hours, this cobot can do cleaning the pump, cleaning the chamber, replacing some of the parts. And then basically, the tool button back up and the qualification, the requalification success rate when the cobot does the work is significantly higher than when even our experienced engineers do that work.

You charge for that I assume.

And so when you talk about -- we're working on the model for that, but this would be something where, of course, we're not looking to get into selling the cobots, but we're looking to sell that service. That results-based outcome, which is -- that tool is now up at a higher percentage than it was without the use of the cobot. And the savings for the customers, obviously, is the need to hire and train and retain people to do what is not the most fun work. I mean cleaning an etch chamber...

Do a lot of customers do that, do that work themselves right now?

It's a combination, but often it is worth...

Cleaning chambers by the way. You're right, it's not.

I was going to say, sometimes it's done by us, sometimes it's something they contract out to others or sometimes they do themselves. But I think that -- yes, so we're really looking at that 90,000 chamber installed base as this tremendous opportunity for us to innovate new services that are really win-win for us and the customer. I mean they -- and in many places that need to find the workforce, it's not an easy task.

So it sounds like you're suggesting me that you do still see opportunity for not just installed base chamber growth, but like dollars per tool. I don't know how you have -- the right way to think about that...

Yes, if you think back to our last Investor Day, we talked about the fact that not only do we see expansion of the chamber count, but our goal is to capture greater revenue from every one of those chambers on the field through new offerings and new capabilities.

Yes, got it. And I know you've said historically, you generally see services growing even in a down year for WFE, correct?

That's right. So the services -- yes, because of this, but also we've said that services business, maybe I should just explain a little bit also goods and services also includes our spares business. So even in a down year, our installed base is getting quite a bit larger. And so what we've actually said is that we expect the revenue from our installed base business to grow faster than the growth of the installed base itself, which is an objective that implies just what you said, which is we'll capture actually a greater revenue from each of those chambers year-on-year-on-year through the introduction of new products and services. And so that's -- we've been traditionally doing that except for last year.

That was the export controls.

Export controls took out some of the installed base. Nobody ever really gets rid of tools that are in the installed base, but the export controls prevented us from be able to service certain customers that we've previously been doing business with. But also the second was, we had never seen in the past utilization cuts to the degree that we saw last year, especially in the NAND space. And so the spares business that usually is a year-on-year grower, actually took a step back. So the export controls and utilization cuts actually combined for sort of the perfect storm in the services business last year. But that's kind of behind us now. And I think that as you look forward, it's again, we're back to -- we would expect year-on-year growth in that business.

Remind us what the overall impact of the export controls were on the overall business.

We'd estimated them between $2 billion and $2.5 billion of impact. And so pretty meaningful for Lam. And so again, you combine in 2023 export control impact and NAND, let's say, NAND downturn, and it's why we think that actually, the company performed quite well in the face of those 2 setbacks.

Do you think there's any risk of like further export controls, I mean, moving to more trailing node stuff across the different markets? Or...

Yes. I mean, obviously, we can't forecast changes in U.S. export policy. It's something that we're in constant conversations about what it would mean both for U.S. equipment companies as well as just our general competitiveness. So we'll have to see, but it's something that is very difficult to forecast.