Lam Research Corporation (LRCX) Earnings Call Transcript & Summary

[Audio Gap] At of Citi Global TMT Conference. My name is Atif Malik, I cover U.S. semiconductors, semiconductor equipment and networking equipment stocks, and it's my pleasure to welcome Doug Bettinger, EVP, CFO, Lam Research; as well as Ram Ganesh, friendly neighborhood IR. I'm going to kick it off with my questions. And if you have any questions, feel to raise your hands and I'll call on you. Doug, appreciate you being here at the Citi conference. We are both on a red-eye flight.

We got in late, didn't we?

Exactly. So you definitely want to be in front of your shareholders. You can step back and talk about what's going on?

If you allow me, let me just point out to everybody the forward-looking statements, please have a look at this. I'd like to keep my attorneys happy. So have a look at this. It's on our IR website. So anyway, sorry to interrupt you.

No worries. I want to step back and talk about what we're seeing in the semiconductor equipment industry. And I've been doing sell-side research for 15-plus years, and I've never seen such a powerful confluence of spending drivers that are non-lithography driven, whether it's gate-all-around HBM or advanced packaging.

It's absolutely amazing. It's wonderful to be an etch and deposition company right now.

Yes, I get that. So I think -- and the second thing is that I've also never seen a divergence in performance around some of your peers, the way we're seeing given your exposure to all these 4 or 5 different drivers. Now when we look at the WFE outlook that you guys have given, which is $105 billion and then second half being flat half over half, you're outperforming WFE meaningfully 20-plus points this year. You talked about your SAM in mid-30s this year into next year and long-term goal of high 30s. So if you just kind of walk...

Maybe big picture, high level, and then we can get in -- I know you got a lot of detailed stuff. Basically, when we look at what's going on in the industry right now and you have an evolution of 3D device architectures occurring. You referenced some of it gate-all-around is one. We can talk about that. Advanced packaging is another one. We can talk about that. NAND flash, well, we're not back to the races in terms of peak investment levels, you're seeing conversion-related spending. That is a 3D device architecture, obviously. Backside power is beginning to show up or maybe more next year. When you think about these things, it's enabled by etch and deposition. And you absolutely have the high-level story right. We did an Investor Day back in February, where we described an outlook that suggests when we look at the spending on wafer fab equipment, we believe it evolves from the low 30% going towards etch and deposition to when you get to the latter part of the decade, call it, '28, '29, that being high 30% of overall wafer fab equipment going towards etch and dep intensity. So I describe it as we live in a good neighborhood, and we've got the nice house up on the hill because, frankly, right now, when Tim and I and the management team look at the strength of the product portfolio right now, it's never been stronger in our assessment. We've got a new metallization tool we call it Halo. We've got a new conductor etch tool, we call it Akara. We've got a new dielectric etch tool, we call it Vantex. These are brand-new bottoms-up designs of things we've done for a long time. And the customer pull on these is really very strong. And so when we look at this evolution of WFE going into the high 30% from the low 30%, we believe we're going to take 50% of that growing SAM because of the strength of the product portfolio. That's kind of what you're seeing us delivering on right now, and we believe into the next several years. Like I said, we live in a good neighborhood. So that's the big picture top level.

Great. And going back to Tim's comment on next year, I know it's early days but he sounded confident on some of the drivers like gate-all-around and your SAM kind of sustaining in this mid-30s next year and Lam to outperform whatever WFE is going to be next year. Is that the right that...

Still the way we think about it, right? These things I described continue into next year and the year after and the year after that. It's too soon for us to give you an assessment of, okay, what's WFE next year? Everybody's got their own opinion. We'll probably give you some color on that when we get to the next earnings call. But this continuation of etch and deposition intensity, we see over the next several years. So that's the confidence that you heard Tim referring to is these things aren't going to change.

Okay. So let's talk about some near-term topics that are coming up with investors. The first one, one of your U.S. peer reported earnings after you guys and talked about a weaker October quarter guidance driven by China being down and some kind of pushouts on leading-edge foundry. And I'm just curious why there's such a dichotomy and what they're seeing and what you guys are seeing?

Yes. Listen, it's hard for me to tell you what somebody else is seeing. I can tell you what we're seeing. Yes, we -- if you go back to our last call, we raised WFE because we saw a little bit of strengthening in China and maybe a little bit of DRAM, frankly, as well. And we had previously suggested, yes, it feels a little first half weighted. It now seems fairly balanced to us. And honestly, we see China strengthening into our September quarter, although I do think it's going to pull back a little bit in the December quarter. What they're seeing, I don't know, right? I didn't see any change in leading-edge foundry and logic, right? That's been pretty well understood for a while. I didn't see any change in China for -- I don't know what they were describing there, to be honest. Everybody's lead times are a little different. They have a broader portfolio, maybe losing a little bit of share to the local equipment suppliers in China, I would guess. But I don't know. You heard what we're seeing, and it does feel a little bit different.

Just sticking on China, Doug, you talked about China being stronger in the September quarter on domestic and then maybe down in December. But I think more interestingly, you saw strength in international China fabs in your June...

In the June quarter, we did, yes. that ticked up quite a good amount off a smaller base, still understand the vast majority of the spending in China is still local Chinese customers but there are multinationals there with fabs, and that was up sequentially in the June quarter for sure.

Okay. So if we look at the full year kind of picture, is it fair to say that the domestic could still be down from last year and international is up year-over-year?

Yes, I'm not going to break down what's what in China. We came into the year thinking China was going to be a little bit softer. It's probably flattish as a percent of overall spending this year. So that has strengthened a little bit. I'm not going to break down how much is the global multinationals because that's kind of only a couple of customers.

All right. And any initial thoughts on the recent news on the Commerce Department revoking the waivers for the international customers who will have to apply for the licenses. The news actually came out in June. That was before you reported but any initial thoughts on that?

Yes. Listen, I think our assessment, why they made this change, not entirely sure. I think the reality of it is we're now going to have to apply for licenses in partnership with our customers. We will do that. We have an expectation that those licenses are going to be approved. In fact, I think Commerce has suggested they will be approved. It will just require go apply and get the paperwork in. And we're beginning to do that as we speak.

That's good news. Let's talk about your foundry sales. I think most people have perceived Lam as more of a memory play historically but you guys have been quietly outperforming the foundry investments. So in terms of your foundry sales, if you can just kind of separate what's kind of...

Yes, let me unpack it a little bit for you. I think there's some things going on, some of which we've already spoken about. First, leading-edge foundry and logic. Gate-all-around is where the investment is going towards as well as maybe the very beginning of backside power. When you think about those things, we've described a growing addressable market for etch and deposition of $1 billion for gate-all-around for every 100,000 wafer starts of capacity that gets put in place. So that's a big deal. Similarly, with backside power, when that begins to show up, probably not until next year in a bigger way, that also is a growth in our addressable market of $1 billion for every 100,000 wafer starts that uses backside power. So at the leading edge, you're beginning to see that show up, obviously, right, gate-all-around for sure. On top of that, when you look at the evolution of architectures, advanced packaging has become a very important component of what's going on in foundry as well, right? When you look at how big some of these compute die are, they're frankly at the reticle limit, they can't get any bigger. So in order to drive performance forward, packaging has become a solution. We have a very strong product offering in the through silicon via process. I call it the drill and fill. It's the silicon etching and the copper electroplating. That's our Syndion tool and the SABRE 3D tool is what we call those 2, very strong presence there. So advanced packaging shows up there as well. In addition to the fact that, honestly, in the more mature foundries, and you're seeing this in our China footprint, we're doing extraordinarily well. In fact, we're growing share, I believe, in China in some of the more mature foundries. So when you put all of those things together, Atif, that's what you see going on. And you're absolutely right. One of the comparisons I was looking at when I was getting ready for earnings was the last time we're at these revenue levels at the end of '22. We -- I think the record revenue for the company was nearly $5.3 billion. At that point, December '22, Memory was half of the Equipment sales. Last quarter, foundry was 52% of system sales. So obviously, there's been a transformation in the composition of our business because of the things we're talking about. That's not to say we don't have a wonderful presence in Memory, NAND and DRAM. We absolutely do. We love our memory customers. I love our memory customers, but I also love the fact that some of these new products that I described earlier are getting real traction in foundry and logic as well.

Doug, on just the foundry spending gate-all-around 2-nanometer to 1.4. Are you seeing some sort of a peak in near term in terms of wafer starts with Rapidus layering on top of TSMC? Or do you think this is just seasonality and then the spending picks up in first half next year?

Again, I'm not going to give you an outlook for next year but this stuff isn't going away, Atif.

Great. Let's talk about NAND. You guys are outperforming the equipment spending market but it's still almost half the run rate it peaked at, which was around $20 billion, $21 billion a few years back. And so -- but you guys are particularly exposed to the NAND upgrade opportunity with moly and Halo, your product platform. Can you just talk about the momentum you have on that product across NAND makers? And how do you see the spending kind of normalizing in numbers you've given?

Let me describe what going on in NAND. You're absolutely right. We're nowhere close to prior peak investment levels. But that's not really what's going on in the NAND set of customers. When we look at what's happening, we believe over the next several years, it's going to be largely defined by conversion, converting the installed base. The good thing for Lam is we are the constrained tools in the installed base, that memory hole etch, the alternating film layers, the metallization, we kind of have all of that across the totality of the industry. When our customers go through a conversion, what they do is upgrade the installed base. Again, that's largely us. Our share of the spending, our SAM when that happens is nominally 2/3 of every dollar that's spent. We don't have 100% share but it's an etch and deposition SAM, very intensive in that. And that's largely what we see happening right now. We have an expectation that over the next several years, and we're in the early innings of this right now, the conversion-related spending will be roughly $40 billion over the next several years. So I can round that off to whatever number you think that is each year. It will not be exactly the same every year. But that's what's happening. The installed base getting upgrade, we're the constrained tool. Our share of spending is quite high. You always get a little bit of new equipment purchase when upgrades are happening, right? You have to buy new bottleneck tools and whatnot. And then layering on top of that is what you referred to in molybdenum, the metallization change. You're going to begin to see this layering in there as well over the next several years, especially as the industry evolves to being driven by QLC devices in enterprise SSDs, moly shows up there first. So when we step back and look at what's going on, that's largely what you see happening right now is conversions, the beginning of this several year $40 billion spending profile, and we get a very large share of that spending. That's what's happening.