Lam Research Corporation ($LRCX)

Good morning, everyone. My name is C.J. Muse, semiconductor equipment analyst here with Cantor Fitzgerald. Welcome to Cantor Global Technology and Industrial Growth Conference. Very pleased to have Lam Research and Doug Bettinger, CFO. Welcome.

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

Always great to have you. Yes. I know you have something to read, so I'll turn it over to you.

Yes. Let me start. I need to do a quick safe harbor. Have a look at this robust slide. I'll read a little bit, and then we can get started. Today's discussion may include forward-looking statements that are subject to risks and uncertainties. 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 on the risk factors disclosed in our public filings with the SEC, including our 10-K and 10-Q. So my lawyers are now happy, and now we can talk about what's going on with the company and the business, C.J.

Wonderful. So given we're in a significant upturn, and now this is the second time we're together, and I think the 3 weeks. I want to keep you happy.

Nothing's changed in the last 3 weeks. C.J.

To keep you in that good mood, I want to start with your favorite business that you've highlighted many times, CSBG. So currently...

Thank you for starting with CSBG.

1/3 of your total revenues and buttressed by an installed base of over 100,000 units. Why is this such an important business for Lam, particularly as you think about offering critical support and driving your relationships with customers as well as supporting your capital return plans?

Yes. So let's -- and by the way, thank you again for starting here. I've had 3 meetings this morning. No one's asked about CSBG in any of the meetings. So it's important. It's 1/3 of the business, as you point out, roughly speaking. The way to think about it is there's 4 components and CSBG is the customer support business group. It's spare parts, it's service, it's upgrading the installed base, and then it's the older products that we call the Reliant product line. So an important component of what we have going on. The important thing, and we give a number at the end of every calendar year, is the number of chambers in the installed base. It was 102,000 at the end of last year. The previous year was 96,000. Our installed base grows every single year. Why this is important is our equipment honestly runs for decades. It almost never goes away. And so over that time period, on average, we generate more revenue after we sell the tool than when we sell the tool itself. So as much as we're all super excited about WFE, and I am super excited about WFE. It's very strong, and I know we'll get into that, C.J. I often will describe CSBG as my favorite part of the company's business model because it just -- it goes for a very long time. It's nicely profitable and it's nicely profitable because it doesn't require a ton of investment, not anywhere near the level of R&D investment that designing a new etch tool, as an example, requires. It does require investment, but it's not a huge amount. And so that's important because it is nicely profitable, more profitable at an operating margin level than selling the new equipment, again, because of the more modest R&D investment. And it is also, to your point, about capital return, it is very cash generative for the same reasons. So it comfortably supports our annually growing dividend and contributes nicely to the capital return and share buybacks. We're also very excited about what we're doing in the advanced service area using equipment intelligence, and we've got all these cool videos using cobots to provide service that as we think through how we're trying to innovate here, we're beginning to deliver service in different ways. Service in this industry historically has been show up and do a task. We are innovating here by -- I almost -- I do call it results-based contracts, where we know we can do certain things using more predictive type AI algorithms and the cobots to be consistent in delivering the service where we know we can guarantee certain outcomes. And so that is a really exciting part of CSBG in the advanced service area because it's able to deliver something for the customers that oftentimes they can't get on their own.

So you've grown the business at a 13% CAGR over the last 5 years. You just talked about Dextro and cobots, bringing in artificial intelligence, trying to be predictive. Should we be thinking about a higher content kind of driver there and that over time, we could see potentially even faster growth.

I don't want to get out over my SKUs too much in terms of the faster growth, but yes, what we try to do in the areas like I described, Advanced Services is deliver dollar growth beyond just the growth rate of the chamber count. And we've been quite successful at doing that, and we'll continue to drive the innovation there to try to continue to do exactly that.

And just to kind of level set where we are this year, you've guided high single digits, low double digits for calendar '26. Are there still kind of headwinds within Reliant or is that kind of done?

Yes. If you think about the 4 components I described, spare service generally, when utilization in the industry is high consumption of spares and services is higher. Obviously, utilization is very high in the industry right now, given the strength of everybody's business. So that will benefit. The fact that chamber count grew last year will enable that to continue to do well, spares and service. Upgrades because of what is happening in the NAND set of customers is quite strong this year. It was quite strong last year. And then as I think through what Reliant may or may not do, you have to think about what is happening in the mature node investments globally. Flattish is probably the right way to be thinking about that, maybe up a little bit, but the fact that everything else is growing so strongly, that component probably is a little bit of a headwind, meaning Reliant.

Makes sense. So maybe moving to the current industry outlook. A lot has changed in the last 3 months. And U.K. started semi cap earnings with the first kind of WFE official outlook, up 22%, most aggressive of your peers. So what has changed? And what is driving this robust outlook?

AI -- the demand for AI compute is what's driving it. And obviously, I think everybody in the room and everybody listening to the webcast knows they're just real strength in hyperscale CapEx. That's what's driving it C.J. Yes. We described a view that WFE this year, $135 billion, up from $110 billion last year. The incremental growth vector largely all about AI compute. It's accelerators, it's high-bandwidth memory. It's KV cache driving the need for DRAM. And so when we look at all of that, that's kind of the incremental uptick. Now also what we've been describing, and I think pretty much everybody in the industry has been describing it this way is WFE is going to be constrained by the amount of clean room that's available in the industry. And so end demand right now is stronger than that $135 billion. But there's only so much clean room out there. And it takes time to expand that. So that, I think, is what's going to modulate the amount of investment this year.

So I think you've talked about already '27 being a pretty good year.

Well just because of what I described.

Exactly. So curious, as you think about kind of this pent-up demand, how are you kind of working your supply chain to be ready for this? And I wouldn't -- our house view is that lead times are likely going to be worse this cycle than COVID cycle. Curious how you're thinking about that.

Yes, listen, there's a large part of the organization at Lam whose job is to manage the supply chain, to manage our own internal manufacturing capability. And those guys and gals are very busy right now. We are communicating with all of our supply chain partners about our expectations for volume based on what we're hearing from our customers and the timing of that and what upside might be to make sure everybody is going to be prepared and ready for it. Our objective at the end of the day is not to be the constraining item in the industry, and I think we will succeed at that. It doesn't mean that it's easy. It doesn't mean that it just happens automatically, it doesn't, but we know how to do this. and I've got really capable supply chain organization that is working on this right now as we speak, and we'll manage it reasonably well, C.J.

Sounds good. So let's focus in on Lam and 2025 was a great outperformance year for you. I think you grew revenues 40%. The market was up 10%. And I go back to your intense focus on R&D during the COVID period that I think has really set yourself up for market share gains. And so you've already talked about being the best kind of house in the neighborhood for 2022.

I'd like to use that analogy.

So what are the key drivers of our performance in '26? And maybe compare and contrast versus what drove the outperformance in '25.

I think -- listen, I'll just make one observation relative to our performance in '25, which is almost 60% of our systems business was foundry and logic. People often think of Lam as the memory company, and we love our memory customers. We do very, very well there. It's not that we're not extremely focused on them. We absolutely are. But we made conscious efforts to expand the footprint of the company quite successfully, as you point out, during COVID. We grew R&D in a meaningful way because we saw some of the changes in the industry was going to experience in gate-all-around and backside power in advanced packaging that do have footprints in memory, but have very strong footprint growth in foundry and logic, right? 3D structure's evolving, which are etch and deposition intensive. So we were quite successful, I think, relative to the investments we made, the strength of the product portfolio. You saw it from us last year, and our expectation is you're going to continue to see it. And my comment on we live in a good neighborhood and maybe have one of the nicest houses in a good neighborhood is because architectures are inflecting in the third dimension, which grows our SAM, which grows our footprint, which grows our opportunity. And we're very excited about that. I think Tim and I were quite happy with how the company performed last year, and we believe we're going to continue to outperform this year.

So sticking with the foundry logic side of your business, we're now seeing signs of a second and maybe even a third kind of player emerge outside of the lead player. How is that kind of impacting your view of the world and WFE in '26 and '27?

Yes, it's absolutely -- when we communicate a view of $135 billion, it's all in for every -- all of our customers. There's not any exclusion anywhere for sure. And yes, it's good to have things broadening out. But what is most important, though, is just the end demand, right? End demand is very strong. And yes, it's good to have multiple customers supplying that demand and that certainly is what we see.

And I guess maybe sticking with gate-all-around, I think you talked about well over $3 billion in revenues there in calendar '25. Where are we in that?

For gate-all-around and advanced packaging put together was the disclosure.

So where are we in that kind of adoption curve? And then maybe to add to that story line, it certainly sounds like backside power will be adopted by high-performance compute potentially first for products in '28, I would think investments, at least by '27. How does that kind of inform your vision for growth and relative growth.

Yes, both are important. Both are 3D structures. And just to give you a rough order of magnitude on it. We have said as gate-all-around ramps because of the 3D architectures, our SAM expands by $1 billion for every 100,000 wafer starts of capacity that the industry puts in place for the gate-all-around sheets themselves. So obviously, we're excited about that. We've invested to do well there. We are doing well there. And so you're seeing that show up. by the way, curiously, we've said for backside power, it's also an incremental $1 billion SAM opportunity for us for every 100,000 wafer starts. And your observation on timing is correct. C.J., that's still kind of in the future on the come line, so to speak, but we're very excited about both and both played to the strength of what we're good at doing. Depositing material and removing material -- etching material.

And so final question on the foundry logic side, but really focusing on advanced packaging. I think you've got that business up 40% this year. Curious, how do you partition kind of your participation across foundry versus HBM?

Both are very important in -- obviously, and you know this, but I'll remind the audience. If you think about HBM growth and you think about advanced compute growing and AI, they all need to go together at a system level, system architecture level, right? You can't do the compute without feeding the compute engine with data. That drives the need for HBM capacity, it drives the need for advanced packaging and foundry and logic. We do the TSV extremely well, extremely strong in the through silicon via process. I call it the drill and fill, right? We etch the interconnect space, and then we deposit the copper conductor material using an electroplating process. That's a tool we call Syndion on the etch side and SABRE 3D on the electroplating side. And as capacity needs grow, we do well because we pretty much own those applications.

So maybe moving to DRAM. How are you thinking about contributions there, both from new capacity greenfield, 1C and beyond kind of transitions as well as the transition to HBM-4.

Yes. All of that is happening. And our position there is doing really well. And again, I think of the need for high bandwidth memory and DRAM specifically as being driven at least incrementally right now by AI compute. And our share there is strong. Our footprint there is strong. The fact that HBM is growing. There's a trade ratio that requires incremental capacity. Yes, it's meaningfully showing up. When I think about the growth drivers of WFE this year, DRAM is probably top of the list.

So when I think about kind of the tremendous demand for DRAM bits and really the lack of available clean room space and the undersupply, I'm hearing new tools being installed, ripping out rec rooms to bring in more clean room space within a facility, upgrading tools because they have better kind of throughput and can deliver incrementally more output. Are you seeing benefits from that? And is there a way to quantify that?

Only that it's the biggest contributor to WFE growth this year, C.J. I don't know we've given specific magnitude relative to anything beyond that. But yes, it's about investment in capacity in HBM. It's about yes, the move to more advanced nodes that enable bit growth with the installed base. It's about upgrading the installed base, which we do quite well when that happens, and it is happening in DRAM. So all of that together is driving the growth in WFE and the growth in our business.

Maybe last question on advanced packaging. How are you competitively positioned with the eventual adoption of hybrid bonding?

Hybrid bonding is enabling of all of the advanced packaging stuff. We don't have a specific hybrid bonding play per se, but we do things around it. And as that grows, obviously, the through silicon via stuff that we do extraordinarily well grows quite nicely.

So would there be anything disruptive by that or no?

Nothing that I would point to, no.

Got you. I skipped one. I want to go back to DRAM. You secured your first win for dry resist, that's low NA EUV with the DRAM player.

Ramping in production right now as we speak, generating real revenue this year.

So how is the customer reaction? And what more importantly is the reaction perhaps of the other 2 multinational DRAM players?

Listen, when everybody knows you're ramping something in production, if they're not the customer ramping it, they're looking at it and trying to understand, okay, am I missing something? Do I need to move more quickly. Listen, I still stand by the numbers that we've described for dry resist, which is as we look at this in total, we see an incremental opportunity cumulatively of $1.5 billion over a 5-year time frame. The fact that it is ramping in production as we speak is a clear demonstration on the value it delivers, a clear demonstration on the fact that actually there's real value here and it's going to get pulled through from everybody else.

And what does it say that it's 1 layer. Does that mean it's really comfortable with the technology, and we're going to bring it into HVM or is it where they found dry resist, particularly great for 1 area.

I think the fact that you're seeing it ramp in the production 1 layer. That was the highest value application, obviously. Everybody that uses EUV has our hardware in the lab and is evaluating the capability here. That doesn't happen if there's not value here. So again, when we look at it, this is going to broaden itself out. We've announced another tool of record decision from a second customer as well. So the future is good for this, C.J. and this is all incremental business for us. This is business we've never done before. And it's hard to find new addressable market in this industry. It's rare that you find like a brand-new thing outside of your existing SAM, and this is an example where we did.

So I know you're working very closely with ASML on this front. And they've kind of talked about 5 to 6 layers of EUV today in Korea, going to 10 by 2030. I'm not asking you to corroborate those numbers, but more -- do you think that this is a tool where you could secure all layers or would there be...

Probably not on all layers, but if those numbers are even directionally correct, the incremental opportunity grows.

And then maybe to go back to your prior comment, what are you seeing from a dry resist perspective on the foundry logic side?

Yes. Like I said, everybody that uses EUV's got our hardware in their lab and they're looking at the capability.

Got you. Okay. Well, maybe moving to NAND. We're 20 minutes in. First question on NAND, Doug.

Thanks, CJ for like getting to it, but also waiting.

You call for continued strength here. And I think the lion's share of spending is much more layer count increases. So where are we kind of in the upgrade cycle? And are you getting sort of any inkling of more meaningful greenfield investments?

Yes. So the way I've described it, I'll take you back, I don't know, roughly a year ago. Then we were describing a point of view that the industry would, over the next several years, invest $40 billion largely focused on upgrades to get the bit growth that was required. And I'll also remind you a year ago, I think the industry generally was coalescing around a view that bit demand was in the mid-high teens. And so the world is different now. I think everybody believes bit demand is higher than that. And so when we look at -- well, what happened last year, a lot of upgrades happened last year, C.J., right? Our upgrade business last year grew 90%. A lot of that focused on the NAND set of customers. I think fast forward to where we sit today, that $40 billion likely happens sooner than we previously expected because bit demand is stronger and at some juncture, what we've said is, yes, you're going to need some wafer capacity put in place. When we look at the industry this year, a lot of upgrades happening. When upgrades occur, actually, wafer capacity goes down, you lose wafer capacity because throughput extends. So that is what we see happening this year that you likely have a reduction in wafer capacity, but at some point, the industry is going to get around to adding capacity, C.J. is our point of view based on the strength of demand and especially related to KV cache driving the need for storage here.

That was the next question. KV cache, Jensen announced GTC Washington. What are your thoughts here? And any work in terms of the incremental bit growth for the industry?

Yes. We've looked at it. I haven't like articulated a bit demand is now this much higher, but it's clearly going to be that much higher. We've done some analytics around for every 2 million accelerators, a percentage of incremental demand for NAND based on this. And again, it's an estimate. Everybody's got slightly different numbers. I think you've got numbers that are also out there, but it's incremental, and we're excited about it. And I'll let my customers describe to what magnitude it ends up showing up.

Wow, so 5-plus points to industry growth potentially.

I guess we'll see. You'll do your own math, everybody would do their own math, but it's clearly incremental.

Maybe moving to margins. You've had multiple quarters now above your calendar '28 target model of 50%. I guess within that, can you discuss a pricing environment? B, what inning are we in, in terms of the benefit from Malaysia facility? And C, are there other tailwinds that we should be thinking about?

I guess the way you wouldn't want people to like jump too far ahead of the model. Yes, we've delivered on it. There's some puts and takes relative to gross margin. But I think we are quite pleased with -- yes, last year, we printed 2 quarters with gross margin above 50%. We just guided to 49%. So we're in that range of the financial model a couple of years ahead of time. And your observations on the contributors to it are exactly right. We developed a couple of years ago a strategy from a manufacturing supply chain standpoint that we wanted to be close to where the customers were. That's enabled a more efficient cost structure for us that is showing up in the P&L. It's pretty much in the P&L as we speak, C.J. There's not much left there because we've executed on this already. It's starting to asymptote in terms of that. But there's still incremental opportunity. Customer mix is probably a little bit of a headwind this year. If you think about the growth this year, it's the biggest customers, which tend to get the best pricing. And so that's a little bit of a headwind, but we're managing it pretty well right now, I think. The other thing with the close to customer strategy, the dollars we need to spend on freight logistics, inbound, outbound benefit from being closer. So that shows up as well. But we should still be thinking about 50% is the objective of the company.

And if you look at kind of your downstream customers, their margins are now extraordinary, particularly for the memory players. In this kind of environment and given the value that you add, is there potential willingness to deliver better margins on new products? Or is that challenging?

Listen, you're always working best you can to get paid for the value we're delivering. This year is no exception. Yes, that's part of the calculus certainly. And yes, we're in a good spot.

And we started off the conversation talking about CSBG. And so clearly, there's a bit of a razor, razor blade model for Lam. And so how does that kind of play a role in maybe putting a cap on where gross margins can go on the tool side?

Well, it's certainly part of the thought process, which is when you're winning a position, it's not just, okay, we're selling the tool, there's the spares and the service and the upgrade opportunity that's going to continue into the future. That's certainly part of how we think through, how to put a package for the customer together and make sure they're getting the value, that we're getting the value and it all generally work shot in the portfolio at the end of the day.

Makes sense. You talked earlier about putting development closer to customers. Curious how that might translate into actually knowing your customers' challenges and problems better and feeding back to kind of corporate Lam and being able to bring to market maybe higher productive, more valuable and therefore, higher margin kind of tool set.

Yes. Listen, I think we have for several years, had a lab strategy to also not just have the factory close to the customer but to have our lab footprint close to the customer. What that has meant is we've expanded. Certainly, we've expanded labs in the United States. It's still the focal point of what we do in both California and Oregon. But we've also expanded our lab presence in Korea. We're working in Taiwan. We've got lab footprint in India. The benefit of being closer to where the customers are, is the customer can show up in the lab every single day. You can move wafers between their facility and your facility very quickly as opposed to needing to fly it across the Pacific Ocean and back, you can drive it back and forth. And that has been very beneficial for the customer. The time to solution is much quicker. We've suggested that we can actually deliver time to the customer at twice the rate by being in closer proximity to where they are. So I think it is a very differentiated strategy that we've adopted versus some of our peers in the industry.

Maybe a very high-level question, looking out maybe kind of 3-plus years. If we continue on this kind of sustainable path for WFE and semiconductor revenues, I think McKinsey talked about $1 trillion by 2030. They've now raised it, I think at $1.6 trillion, $1.7 trillion.

And I think everybody generally thinks $1 trillion is going to show up this year.

Exactly. So if we are on that $1.6 trillion, $1.7 trillion, maybe even $2 trillion. And if you account for kind of lower WFE intensity given the higher margin stack in high-performance compute, you're still talking a $200 billion plus kind of number. What do you worry about either for Lam specific or for the industry to support that kind of growth?

It's execution, right? You have to deliver. You got to be ready for growth. And I don't know if those numbers are precisely right, but like I described, we live in a good neighborhood. You got to make sure your house looks good and the customers are coming to visit you and that you're delivering for what they need. It's all right now about head down execution, make sure you're taking care of the customer, managing your lead time, managing your supply chain, managing your quality, hiring people to install the incremental volume, getting them trained, getting them ramped up and being ready. And that's absolutely what we are laser focused on right now and what historically at Lam, we've been very, very good at doing.

So we've got 30 seconds left, low capital-intensive industry, low capital intensity from Lam, delivering great free cash flow, how should we think about kind of ongoing capital returns.

Really no difference. We've described a capital allocation strategy of returning 85% of free cash flow to shareholders. It's still what we intend to do, growing the dividend on an annual basis. That's still what we will continue to do. We've done it every year, I think, since 2014 when we first put the dividend in place. Should be a good free cash flow year this year, C.J., and we'll continue executing on what we've told everybody we're going to do.

Perfect. Well, thank you for the time.

Of course. Thank you, C.J.