Lam Research Corporation (LRCX) Earnings Call Transcript & Summary

Good morning, everybody. Welcome to the Goldman Sachs Communacopia and Technology Conference. My name is Jim Schneider. I'm the semiconductor analyst here at Goldman Sachs. And it's my pleasure to welcome Lam Research and CFO, Doug Bettinger, to the stage today. Welcome, Doug.

Jim, thanks for having me. First, if you don't mind popping up my safe harbor slide. I just want to remind everybody I may make forward-looking statements that we haven't made before, although I highly doubt that. But everything I say today is guided under the safe harbor language you can find on our Investor Relations website. So anyway, I'd like to keep my lawyers happy, so they should be now happy. So why don't we jump into it?

Excellent. So before we get rolling, maybe start out on the strategic side for a second. What do you think are 1 or 2 really critical strategic imperatives for Lam over the next 12 to 18 months? And what's going to sort of dictate your success in achieving them?

Yes. I think, Jim, frankly, it's a lot of the stuff we've been talking about for a while, right? We did our first Investor Day that we had -- it's had been 5 years that we did in February, and we brought a lot of new messaging out about how we see etch and depth intensity growing from where it was in '24 in the low 30% of WFE to the high 30s. So I always say we live in a good neighborhood. So that's great. We've got several new products that we announced back then. In fact, we announced a new product this morning, I think, in Taiwan -- SEMICON Taiwan, TEOS 3D, which is an inter-die gapfill packaging solution. So we have a variety of new products coming to market. We're very excited about the things we announced back in February, the Akara conductor etch tool, first new conductor etch chamber that we've brought out in 20 years or longer. The Halo tool, the molybdenum tool, the biggest metallization change since the industry went to copper, frankly. So executing on the product road map, I think, Jim, is just what we're going to continue doing. Right now, we're at that point in the corporate calendar where we're trying to figure out what is next year going to look like? What are we going to fund into next year. I don't anticipate much, frankly. The other thing you're going to see us continuing to do is the close to customer, both lab strategy as well as manufacturing strategy. There will be a continuation of that. So I don't expect, Jim, there's new stuff coming out necessarily, but a continuation of the things that we've been doing in the last couple of years that has made us as successful as we are right now.

Fair enough. So thinking back to your last earnings report in July, what do you think are the kind of 1 or 2 most incremental takeaways? Obviously, maybe not a lot of things changing, there's still always things that change on a month-to-month basis.

Yes, there's always kind of new stuff. I mean, thinking about what we communicated, we upticked a little bit on WFE, and you may want to ask me about that later, but we went from, call it, 100 to 105. So a little bit of strength in China, maybe a little tiny bit in DRAM beyond what we had previously expected. So that was one. Two, man, we put up amazing financial numbers, I think, right? We're close to all-time record levels of revenue, not quite there, but almost. It's the first time we printed a 50% gross margin number since we brought Lam and Novellus together in 2012. So I was super excited as the CFO of the company to see that. We printed a 34.4% operating margin number, all-time record level for the company. That was awesome, all-time record earnings per share. Those, I hope, resonated with people, and certainly for me, jumped out. Yes, I think those are the messaging. One thing I've been pointing out to people, and if you'll allow me, maybe I'll also go through. I do a lot of homework when I get ready for earnings, just kind of studying things, what are people going to want to ask or what do I want to talk about. So Jim, I went back to the last time we were at these revenue levels and compared it to this time, right? And so you got to go back to like the December '22 time frame when we were at almost $5.3 billion in revenue. We almost got there in the June quarter and guided pretty close to there again. The interesting comparison, first, the profitability of the company is meaningfully higher. Back then, we were 46% gross margin. We're now 50%. So that's great. We've improved the profitability. And we did that consciously with the strategy of the company to get closer to the customer. So I feel really good about that. Equally important, when you look at the composition of our systems revenue, it's actually fairly different. Back in the end of '22, memory was half of the business. In the June quarter, Foundry was 52% of our systems revenue. That's a pretty big change, and that didn't happen on accident. That happened with the product strategy. It happened with the intentional positioning of these very strong products. So I think when I think about that, I feel great about what we've executed, and it didn't happen by accident. It was because of the purposeful strategy of the company.

Now since then and maybe even a little bit before, I think some of your peers have sort of delivered a little bit of an inflection in their view on the forward, whether that be a significant degradation or maybe even a bit of an uptick. So maybe can you talk about just since you reported, any meaningful directional changes in what you're seeing in terms of business.

Not really any change, Jim. I mean still very comfortable with the guidance we put out, with the color we provided, with how we see things, really no change. And I think we're all just trying to confuse you. Sometimes people saying things are a little bit stronger, some saying it's a little bit softer. Listen, we see a little bit stronger. We see strength in China beyond what we had expected coming into the year. So that's good. And everything else is pretty much as expected from everything I can think about.

Now as go into '26, I was wondering, I mean, I don't think you're going to provide a quantitative outlook for us. But can you maybe just kind of give us sort of at the high level, some rough qualitative color on the end markets you're expecting, which ones you expect to be up, down, sideways heading forward?

Yes. I'm going to stay away from like giving too much quantitative color, but I'll tell you how I think about it. Tim and I have been describing an expectation that for the foreseeable future, we believe we are going to outperform. And we believe that because of the things that I've already alluded to, which is etch and depth intensity is growing, right, low 30s to the high 30s over a several year time frame. '26 is just a guidepost along that journey. So I expect that will continue. And when we think about that, you've got gate-all-around ramping in advanced foundry. You probably have some level of backside power showing up next year. Advanced packaging, which plays to the strength of our Syndion and electroplating business in TSV. You've got an early ramp of dry photoresist. So we're excited about that. I don't know that, that's hugely material quite yet, but it's meaningful. And I know you'll ask me more about that later. So when I think about the things going on in the industry, I believe we're just really well positioned. What the quantitative number is for WFE next year, give us a quarter or so, and we'll give you some indication of kind of how we see that. But right now, I think the important thing is we believe we're just positioned to perform really well on a relative basis. To me, that is the most important thing.

But any color on sort of directionally foundry, logic, memory, et cetera?

I guess if you go through it, I think advanced foundry is going to continue to be strong. Can't imagine it's not, right, given all the excitement around AI and compute and heck I walked by Hawk's room yesterday, and I was just blown away by the number of people trying to get in to see Hawk. That drives a lot of leading-edge foundry. It drives a lot of requirement for high bandwidth memory, right? You've got a journey in HBM from 3 to 3E, to eventually 4, 8, [indiscernible] to 12 to 16. That evolution is continuing. It plays to the strength of our TSV, like I said. We've got a view that there's a multiyear upgrade cycle happening in NAND. I think that's kind of what you're going to see continuing into next year, Jim.

Fair enough. Maybe just philosophically, maybe level set us going forward, where do you think the normalized level of WFE intensity is for the industry overall? Do you think something in the mid-teens is pretty reasonable? Or is there any reason to expect we could be significantly above or below that?

I don't know. That's not an unreasonable way to think about it, I think, from my point of view. I never really even look at that metric, though, if I'm honest. The metric I think is most important that everybody should pay attention to is CapEx as a percent of operating profit. And actually, if you look at that, that's been trending down over the last, I don't know, 3, 4 years, frankly, because profitability in the industry has frankly never been better. Pricing is as good as it's been. I don't know, Jim, if I think about that metric and people are like really fixated on it. I think it will largely depend on does the revenue growth come from pricing or does it come from unit volume. If it comes from pricing, it probably turns down. If it comes from unit volume, it probably turns up. And frankly, I'm not smart enough to know the answer to that. But I don't know, that's kind of how I think about it. When I think about capital intensity, the way I think about it is more capital intensity per wafer unit output, right? That's a metric that I do look very closely at, and that is going up. It's going up in foundry and logic. It's going up in NAND. It's going up in DRAM. That drives the need for more equipment. That's the thing that's most important for our business when I think about how I look at capital intensity.

Yes. Fair enough. So let's talk a little bit more about your business in detail. I want to make you happy. So let's talk about CBSG.

CSBG. CSBG.

Fair enough. When you think about the moving pieces in that business, directionally, what's kind of come in above or below your expectations over the past several quarters? And do you expect that trend to continue?

Thanks for asking me about it. If you listen to me talk, I always say or I often say anyway, it's my favorite part of the business at Lam. And it's the part of the business that people always forget to ask about when I'm in a one-on-one meeting. And I usually need to jam it in at the end of the meeting. So first, let me -- if you're new to the story, let me explain to you what CSBG is. It's the customer support business group. We have 4 components that go into this business. It's spare parts, it's service, it's equipment upgrades and then it's what we call the Reliant product line, older equipment, equipment that's been around for, I don't know, a decade or longer sometimes. The great part about this part of the business, and people are surprised when they hear me say this, on average, we generate more revenue after we sell the tool than when we sell the tool itself. It's not true for every single tool, but on average, it is true. Our equipment runs for decades. It really never goes away. That's an overstatement. But we give a number at the end of every calendar year that is the number of chambers in the field. So you can hear us talk about this. It grows every year. That's an important thing to not lose sight of because this is a business that just kind of keeps chugging along, no matter what WFE is doing, fabs are running. So anyway, that's just to kind of think about it. We came into the year, this year, thinking CSBG was going to be modestly down. Well, we now think it's modestly up, driven maybe a little bit by -- utilization is probably a little bit better, which drives a little more consumption of spares, maybe a little more consumption of service. China is a little bit stronger. So Reliant has ended up being a little bit stronger. And listen, one of the things we're really excited about and if you've been listening to us talk about service, I don't know, over the last 6 months is what we describe as advanced service or service that uses equipment intelligence or we're really excited about these cobots, right, where we're delivering service in a more predictable fashion and kind of changing how service is delivered at least with our equipment. And frankly, I think you're going to see the whole industry beginning to do more and more of this. What that enables us to do is deliver service in a different way. And historically, in this industry, and I know you know this, but for the people in the room, service has been show up and do a task, right? You need to do preventive maintenance, you need to clean the chamber, you need to -- things wear out in the installed base. And so that's not super profitable business. It's kind of cost plus because the customer can do that service themselves as well. What changes with this advanced service type delivery is you're no longer like showing up and doing a task, you're delivering incremental value. You're making commitments on some level of performance. And so that changes the conversation with the customer from what does it cost to do this to more what is the value of what we're delivering. And so we're really excited about what this looks like. The pull from customers for this is actually amazingly strong. And it, generally speaking, can be more profitable, Jim, because, again, you're doing something unique to what you're able to do. So we're very excited about this, and you're going to hear us talking more and more about it.

Great. So let's talk about the core etch and deposition markets for you. You have a very strong presence there, especially in etch. Maybe talk about which of these kind of subproducts or sub-areas are you most excited about over the next few years in terms of growth?

Yes. Listen, I'm super excited. We as a management team are super excited about the new conductor etch tool. We call it Akara, uses a direct drive, which enables us to more precisely control kind of how the etch works down through structures. It is fairly unique in the industry. And I think when you look at the evolution of some of the changes in architecture in DRAM and foundry and logic, the need to have this capability is getting more and more. And so we're very excited about it. And I can tell you the customers seem to be very excited about it, too. And I measure that by the pull I see in terms of wanting hardware in the lab to evaluate what the capability of this tool is. So you're going to hear us talking more and more about the strength of that offering. Second, the Halo tool, right? The evolution in the industry towards using molybdenum in different metallization layers, it's showing up first in NAND, where for the most part, it's replacing what we used to do with the tungsten tool. Now this is going to happen over, I don't know, a multiyear time frame, but we are extraordinarily well positioned with the MLE tool in NAND. That is going to benefit us to get early learning relative to others in the industry who have aspirations to do this as well. We're doing extraordinarily well in NAND, and I'll be surprised if we don't have all of the business at the end of the day. We've announced 2 wins for MLE in foundry and logic. So again, this is another example of something I think we're uniquely positioned to benefit from over the next several years. And it's got a lot to do with how we've architected the platform, the QSM platform, the cloud station is a very productive way of depositing MLE. And so that's important given the challenges around cost here.

One sort of other product question from a competitive point of view, can you talk about your progress in cryo etch and maybe where you believe your closest competitor is relative to you and sort of the performance gap you see?

Yes. Our closest competitor has been talking about winning business, I don't know, for 3, 4 years at this point. And I don't know if they're still talking about it, but what they described over the last 3 or 4 years hasn't come to fruition. We've defended everything in NAND and frankly, continue to be the only company in the industry that has a cryo tool, a cryo etch tool in production today. So I feel good about where we're positioned here.

Fair enough. And then relative to NAND, within that market, you talked about $40 billion of NAND upgrade spending over the next several years. Now if you think about overall NAND WFE, sort of what's your sense of the upgrade mix within that? Could that be as high as like 3/4 of the market? Or how do you think about the percentage?

Yes, I'm not going to give a hard percentage, but I'll describe it so people understand. And again, it will vary by customer, which is why I'm not going to describe it. It will depend on what's in the installed base. But just to unpack it a little bit, we see -- I don't know, the NAND set of customers largely evolving bit growth by upgrading what's already in the fab for the most part. And we've described, like you said, Jim, a view that, that will cost roughly $40 billion over the next several years, upgrading the installed base. So thinking about that, what happens in an upgrade cycle is the constraint tools need to get upgraded to the next-generation capability. For the most part, we are the constraint tool in the NAND fabs, right? It's that big high aspect ratio etch down through the structure. We pretty much own all of that. It's the film stack. We pretty much own all of that, and it's the metallization. Today, tungsten go into MLE. We pretty much own all of that. So when the customers go through an upgrade cycle, we come in and depending on what's in the customers' fab, upgrade what's there to get the next-generation capability. Now when that happens, you always need a few new tools, right? You open bottlenecks, constrained tools and so forth. You have to adjust the capacity of what's in the given fab that you're coming into. And so there is always a little bit of new equipment and the MLE tool is a new purchase. So you'll get a mix of both, but it will very much depend on what's in the customer's fab.

Talking about DRAM for a second. To what extent do you think Lam is beneficiary of the move in the industry to 4F2 cells? And I guess, do you have an estimated timing for when that might happen and to what extent you benefit?

Yes. I think we're going to do really, really well with 4F2. And just to describe it, it's a very high aspect ratio cell, simply stated. Generally speaking, that Akara tool that I've been talking about, I think, is going to do really well in the move to 4F2. I think we're going to be extraordinarily well positioned. And there's some ALD spacers in there that I think we're going to be well positioned for in addition to that. Timing, I don't like getting out in front of the customers, but I don't know, it's probably '27-ish in that range. I don't think really next year yet, although possible, but probably '27, Jim, if I'm guessing.

Yes. Fair enough. Doug, as you know from your investor meetings, there's been growing investor attention relative to the progress of local competitors in China. I guess, what's your view on -- from what you see today, their capability to sort of not just kind of compete more aggressively within China, but potentially move internationally outside the country?

Yes. Listen, the local equipment companies in China have been growing. When I step back and think about, analyze why is that? Well, it's because there are a bunch of customers in China that we're restricted from selling to anymore. And the only choice those customers have is to buy what they can buy. And a lot of that is the local equipment companies. It's some from non-U.S. companies as well. But a lot of the growth you see from the Chinese equipment companies is there, Jim. Where we are still competing and frankly, it's a lot in China where we're still able to compete. Our market share is actually quite high. The Chinese set of customers still want to buy the best equipment they can buy, and that's more often than not is us. The other thing I think about is relative to competing globally, that set of customers for the most -- or excuse me, suppliers, for the most part, does not have access today to leading-edge customers. And so that's where you learn how to do some of the most challenging things that the industry needs to be done. And just the fact that they don't have visibility into that, we're moving very fast, and we can move fast because we have access to those leading-edge customers.

Fair enough. Then related to China as well, we got an announcement from the U.S. government a couple of weeks ago that the exemption for multinationals operating in China, including Samsung, Hynix, Intel, TSM has been rescinded starting at the beginning of the year. Just wondering how you view the impact on your business, if any?

There isn't any. So here's the way to understand this. There was -- it was called the verified end user. What the U.S. government did was say, you can't have that designation any longer. You need to apply for licenses. And those licenses for the most part, will be granted is our understanding. So there is a level of work that is required in the collaboration with customer to apply for those licenses and go through and make sure licenses are current and so forth. But best I understand things, it won't impact business. It's just going to require us to apply for licenses, Jim.

Okay. Fair enough. And then I guess, just broadly speaking, if you think about the NAND industry again, I think you've expressed -- well, I think there's a view out there in the investor community at least that the NAND industry needs consolidation. You've got like quite a few players. Curious as to even if there isn't, whether you think that the industry can kind of maintain prudence in terms of supply additions on a go-forward basis and kind of maintain the sort of healthy level of profitability going forward to the extent that it can sort of sustain ongoing spending in the space because we've seen, as you know, a heck of a lot of volatility and we're coming off of a pretty sharp decline.

Yes. Listen, at the end of the day, nobody in the industry tries to drive volatility or tries to spend more than is necessary relative to market demand. But what inevitably happens is sometimes we just get it wrong as an industry, right? And that happened in '21, '22, right, as everybody came through COVID. I think the industry collectively mistook demand that was pulled forward in COVID to some level of secular demand. And so there was a level of overinvestment that frankly took several years to get through. And I think we're finally just getting through it, Jim, to be honest. And so I think when I observe the behavior of our customers, they're trying to be quite prudent, trying to like not create that environment where things overshoot and then undershoot and bounce up and down. Inevitably, sometimes we get it wrong collectively. But it's never like somebody did it on purpose. It's just we misread things. So -- and then for us, frankly, when I think about does the industry need consolidation or not, I don't know. What matters at the end of the day relative to people that sell equipment is what is the end demand? Because if that end demand is supplied from 5 of our customers or from 3, it almost doesn't matter because we sell largely the same thing to everybody, largely, not precisely. So end demand is the most important thing in every aspect of the industry, frankly, I get that question a lot in foundry, "Hey, does it matter if there's one leading foundry or 3?" Not that much because end demand is the same regardless. The same is true in NAND. Same is true in DRAM.

Fair enough. So I'd be remiss if I didn't spend some time on financials. So maybe let's go there for a second.

I love talking about financials, Jim. I'm the CFO.

So gross margins, you mentioned it before, you're seeing around 50% right now. I mean, clearly, like anybody looking at your financials objectively would conclude that you've done a great job extending margins cycle to cycle. Kind of curious, what needs to happen for you to drive gross margins sustainably above 50%? And maybe just kind of help us think about the puts and takes from here, either from a customer or mix or otherwise perspective.

Listen, we just put out a long-term model for '28 in February that said the model for the company is 50% gross margin and mid-30s, 34%, 35% operating margin. I don't want anybody running away ahead of that right now. Even though we just printed a 50%, there are going to be some puts and takes in the medium term. Right now, we have a very favorable customer mix. And by that, I mean, the mix of the total business, there's a lot of smaller customers, Jim, I guess, is the way to think about it, generally paying a little bit more than the bigger customers. I think that stands logically to people when I describe it that way. So I don't know that we can maintain that favorable customer mix over the medium term. Offsetting that, though, is that close to customer manufacturing strategy that we're going to continue to execute on as hopefully business grows over the near term. So that will drive a positive bias towards margin. The customer mix is probably a little bit of a headwind. And so as I think about that dynamic, I don't want people running ahead of 50% gross margin, at least quite yet. I'll give you an update if our outlook changes on that, but we'll keep thinking about it that way.

Yes. Fair enough. And then relative to your manufacturing footprint. I mean, there's a bunch of things going on here. And clearly, there's a bunch of moving parts around tariffs. And obviously, President Trump has kind of put at least an initial framework in place around semiconductor sectoral tariffs going forward. As you examine your manufacturing footprint, maybe, first of all, remind investors of what that looks like? And then do you anticipate any potential changes to that footprint going forward?

Yes. Listen, I think we are fortunate in that we have a very global manufacturing footprint. So let me describe it, manufacturing facilities in California, in Oregon, in Ohio, in Malaysia, in Taiwan, in Korea and in Austria. So we are a global company. We've got things all over the place. To the extent that tariffs get finalized and we understand what the final rules of the road are, we can adjust things if necessary, and we will. It's maybe a little too soon to make big changes to do that quite yet, but we have an ability to respond. Now what I've also been pointing out is we can't respond immediately. It will take some time because we don't manufacture everything everywhere today. And moving something that's built in one factory to another, you can't do it instantaneously. There's an aspect of a supply chain that we'll need to adjust and so forth. But we have an ability to respond, I guess, is what I would describe, Jim. And it doesn't mean that tariffs go away relative to impacting the business, but we can optimize it, I guess, is the way I think about it.

Finally, we were talking about before the session started about Novellus and sort of what that meant for the company. And maybe just kind of give us a sense about -- remind us about the upsides and some of the difficulties you saw with that integration. And then prospectively, how does Lam think about M&A in terms of tuck-in capabilities and potential to do something transformational again?

Yes. Boy. That deal was so long ago. Actually, 2012. Frankly, to me, it seems like only yesterday. I joined the company in early 2013, and I vividly remember going through the integration and systems and moving stuff around. But anyway, it is still at this point. You cannot tell when you're walking around the company, what came from Novellus, what came from Lam. We're all one integrated company today, as you would expect in 2025. Frankly, in my opinion, when I look back in hindsight, best deal in the history of semi-cap M&A, Lam and Novellus. The changes that we saw coming with 3D architectures, with multi-patterning, the interrelationship of etch and deposition being hand in glove together just made sense. And frankly, we've been able to do some things over the years that we probably would have not been able to do as 2 separate companies. So I love that, right? And when I look at members of the leadership team today, some came from former Lam, some came from former Novellus. Some came from somewhere else like me. But anyway, great deal. Now when I think prospectively, I think M&A, Jim, is largely behind this industry, honestly, if you look at the last big deals that were attempted to be done, they didn't get regulatory approval. I think the last one was when we tried to come together with KLA, I think, in 2016. It's been a while at this point. But the fact that the last several big deals didn't get regulatory approval, it probably means we're done as an industry with the big stuff. It doesn't mean there might not be a tuck-in or 2 or some smaller things. That's possible. And so what that then ends up meaning is what do you do with the cash that you generate beyond the level of investment you need in the business? Well, we talked in February about planning to return 85% of free cash flow to shareholders, growing the dividend on an annual basis and then supplementing that with a share buyback program. So 2 weeks ago, I think, we raised the dividend. I think we've done that annually since we first put the dividend in place in 2014. And then we continue to buy a reasonable amount of stock back with the free cash flow of the company.

Very good. I mean you've done a bunch of investor meetings over the past -- since you reported, but I'm kind of curious, do you think there's anything that people are sort of misunderstanding about the Lam story from here? And maybe talk about if we're back on stage 5 years from now, what do you think is one thing that's going to surprise investors?

Well, I hope it's the amazing execution of the company. And I hope -- frankly, I hope that doesn't surprise people. I hope everybody just looks at it and like, yes, Lam said that we're going to do that, and we did it, right? We just put a financial model out for 2028 that suggests $26 billion in revenue. That's a reasonable amount of growth. Etch and depth intensity is growing, right, with these 3D structures. That's going to evolve. Advanced packaging is going to continue to evolve. I hope that doesn't surprise people, but I hope with hindsight, we all sit here 5, 6 years from now and say, yes, great execution from Lam, just like the last 10 years' execution has been. Because frankly, when I look at what we've done and the growth that we've been able to deliver, I feel really, really good about how we have executed what we have done, how we've invested, how we have differentiated ourselves, I believe that is going to continue.

Yes. Anything misunderstood?

I think it's what you asked about. I don't know it's misunderstood, but I think underappreciated is CSBG. Everybody -- and I guarantee, I got a bunch of meetings today. Everybody is going to come in and want to talk about WFE, tell me about next year. What about China, WFE, WFE, WFE. That's critically important, by the way. But don't underappreciate CSBG. It is a recurring part of the business model. It is a very high-quality part of the business model. It is very cash generative relative to -- it just doesn't need an enormous amount of investment, right? When the equipment is designed initially, the R&D is deployed. And then spares and service, it just continues to go. I don't know that it's misunderstood. I just feel like, Jim, it continues to be somewhat underappreciated. And so I keep trying to talk about it more and more and more, and I will all day today, try to talk about it more and more and more. And thank you for asking about it. But that -- I don't know that it's misunderstood, just maybe underappreciated.

Very good. I think with that, we're out of time. Thanks, Doug, for being here. Appreciate it.

Awesome. Good to see everybody this morning. Thank you.