Lam Research Corporation (LRCX) Earnings Call Transcript & Summary

Welcome to day 2 of Citi Global TMT Conference. My name is Atif Malik. I cover U.S. semiconductors and semiconductor equipment stocks. It's my pleasure to welcome Doug Bettinger, EVP, Chief Financial Officer; Ram Ganesh, VP of Investor Relations at Lam Research. I'll it off with my 5 side questions first and then give an opportunity to the audience to ask their questions. If you have a question, please raise your hand, and the mic will come to you. Doug is going to open with some...

Yes. Let me -- I technically need to kick all of these things off with a reminder that the safe harbor language that is on our Investor Relations website is relevant to anything that I may say today. I may make forward-looking statements, but I'll be quite clear I'm not going to tell you anything new today. It will be consistent with everything you've heard from the company before. So if you have an expectation, something new is coming out, it's probably not. But please have a look at our safe harbor nonetheless. So my lawyers will be happy, Atif, how we are going.

All right. Let's get started. Doug, let's talk about the base facet outlook and next year's visibility with calendar expectations recently raised to the low $150 billion range on accelerating AI demand. Where is the upside coming from this year? And also, I forgot the objective you guys have used in terms of super exciting, whatever outlook you have into next year. Help us understand how next year is shaping up?

Yes. Listen, as we've gone through this year, we've moved our view of WFE up from 135 to 140 now to low 150s to your point. And basically, what has happened is everybody in the clean room is what's constraining the investment right now, right? The industry is fundamentally undersupplying demand. and clean room is a constraint. But what I observe has happened is every one of our customers or nearly every 1 of our customers has figured out how to do a little bit more with what they had, squeeze things a little bit closer together. Perhaps, frankly, we've done a lot of that, and we can talk about that Atif as well. maybe pull some things forward, maybe buy some clean room that was there and make it production-worthy a little bit quicker than anyone expected. And as the year has progressed, that's basically what has happened. However, the industry is still undersupplying demand. And that leads to our confidence in next year being a growth year. I think everybody that you listen to right now is communicating that. And we say that because we see clean rooms coming online. We have described Atif 8 to 10 new, what I would call Tier 1 fabs coming online over the course of the next year basically or through the end of '27. That reinforces our confidence in the fact that WFE is going to grow into next year. The constraint will still be there. However, it will get somewhat better. And when we look at that and when we do our own Topstone analysis, which Ram and his team do for the company, we continue to see AI demand remaining very strong, moving beyond training into inferencing into eventually physical AI, and that gives us confidence also in the need to invest more. So that is basically what is happening. It is a tops down and bottoms up assessment of what is going to be able to be supported next year. And frankly, I think a year after that probably continues to be even stronger than that.

All right. On that tops down, point that you made, Doug, a question for you, Ram. You guys introduced this kind of rule of thumb $400. Every $100 billion of AI data center CapEx could translate to roughly $8 billion of WFE, which was super handy for the sell siders. And recently, you suggested this number could now be $1 billion to $2 billion higher -- and what has driven this increase? Is it more silicon content or memory intensity? Or can you explain that?

Yes, it's a combination of both. We kind of looked at the timing of when we gave that number. It was the most pertinent thing, right? Everybody was talking about how many gigawatts of data centers are coming. We felt that was the most useful thing for you guys to think about the industry and specifically how the tiering between leading-edge foundry logic DRAM and NAND was. So we gave that number -- and you are correct, since then, we upticked that number by a couple of billion. When we first came out, actually people said, "Oh, you're being optimistic on that number, right? And then lo and behold, it's become even better than that. The uptick is all 3. If you look at it, we used the initial flavors of the hardware that came out, the large GPU maker had release some new versions of their latest GPU, and we use that as a benchmark and the industry pricing capital intensity to come up with that number. And since then, things have inflected higher both on the hardware content as well as on the intensity side. If you remember, we recently took up the NAND Sam per wafer from 1.8x that we gave at the Analyst Day to 2x. So the complexity of these devices also is a little bit higher than what we originally included in that model. So that was the gist of how we had taken that number up.

Great. Doug, you mentioned customer clean room space being the driver in terms of how much higher the WFE?

It's the constraining item and I think we'll be through next year for sure.

All right. Any other some supply restrictions around utilities or labor or your manufacturers of techy.

Listen, I think maybe let me describe sort of what's going on in the industry relative to conversations just to help you frame everything. First, we are having very deep conversations with every one of our customers about what do you need next quarter, what do you need next year, right? Give us an understanding of where you're going, so that we can get ready and we absolutely are getting ready. And so the intensity of those conversations and the conviction of those conversations, I've never seen stronger, frankly, in all my years in the industry. The conversation intensity is really, really high. Everybody wants to make sure that they're going to get what they think they need, right? So that's happening between us and our customers. Then we take that back and propagate that back to our supply chain with the same intensity to make sure that they're ready for what we're going to need. We're doing the same thing with our own bricks-and-mortar. We talked about the second facility in Malaysia. We're doing a bunch of things in existing facility footprints, densifying our ability to actually get more output from the same square footage of clean room that we previously had. Necessity is the mother of invention, and that's very much what's happening. We're trying to squeeze everything out, but we were fortunate in that we already had plans for a second ceiling in Malaysia, essentially a cookie cutter of the previous facility. So we're pulling hard on making that available sooner or hiring and training and focusing on making sure we're not going to be the bottleneck. I would tell you though, when you manufacture and make as many different tool types as we do that have thousands and thousands of parts in them, there's always something that is constraining us and then you work -- we've got an amazing supply chain organization that goes and works on things that pop up. It's very much manageable, but there's always something that's popping up. It's not easy, but we've got a great organization that knows how to do all these things. So that's very much what's happening. And I think all of us also are doing our own top stone modeling for -- where is this going? I'm fortunate to have Ram and his team, a great group of people that can do extraordinary modeling, so we can make sure bottoms up and tops down generally makes sense and it absolutely does.

Great. Let's talk about your products and end markets. I had the experience to travel with Tim last week and...

Were taking them on the road. I think it was a really good set of meetings.

Yes. So for me, it was really interesting that a historically has been viewed as more of a memory-centric company with a lot more memory exposure, but the progress that you've made on the foundry logic side, particularly with the conductor etch tool surprised me based on...

Yes, our tool is doing extraordinarily well. This is a great product.

Right. So I think the point that Tim was making was that historically, the cycles in spending have been more kind of more law driven. It's all about making incremental improvements in performance. But in this day of AI, you're getting -- the incremental performance in latency and any kind of change you can make is super important to your customers. And that's driving the adoption of some of these newer products like Akara and conductor etch. And so that's what's different this cycle. That performance is become the bigger kind of...

AI compute is driving everything. And any incremental performance in the parallel compute architecture that you can squeeze out is hugely valuable. And so frankly, greater tool performance contributes to greater silicon performance. And we are fortunate over the last, I don't know, 3 to 5 years, we've increased R&D investment such that these new products that are coming online like a car, like Vantex, like Halo, are hugely beneficial in that area. So I think that's probably what Tim was communicating in your meetings last week.

Right. If I may add one thing is -- if you look at our customers and the scale of AI, if they miss a product cycle or if they don't have the right products at the right time, the cost of missing that, given where industry spending is. I mean in the semiconductor industries demand is, then it's very high, which means if an equipment company can help them with the velocity of the execution in totality, right? Then that's a very good thing, right? So that's where you kind of deliver the value that our customers really kind of appreciate products like Acara in the market.

And then maybe you guys can you talked about high 30s SAM share of the market. And as we look into these products, particularly your momentum on the foundry logic side and maybe using some of these products in DRAM. How should we think about the upside to that SAM percentage over time.

Yes. Let me unpack it a little bit, and then I'll come back to your last question a little bit on why are we doing so well in foundry and logic. We had an Investor Day early last year where we talked about, hey, we see our SAM expanding from the low 30s to the high 30% of WFE. Frankly, this year, we're north of the mid-30s, probably north of 36%. So it's accelerated, right? We've moved forward a little more quickly perhaps than we had thought back then and what's contributed. Part of it's been foundry logic. It's also been an acceleration of different node migrations that have happened. And so let me come back to your last question a little bit, why are we winning in foundry and logic? Our SAM is expanding in foundry and logic because we're moving to gate all around. Gate all around is more etch and deposition intensive. It's got selective etch requirements. It's got ALD requirements. Those are things we do and things we do really well. It's got high aspect ratio etching, Acara as an example, we're doing well there. And frankly, if you remember things we've talked about, we said, hey, for every 100,000 wafer starts to get all around capacity, our SAM expands by $1 billion. Layer on top of that, when backside power eventually shows up and it will relatively soon. That is another incremental $1 billion SAM expansion opportunity for every 100,000 starts. So that is showing up. On top of that, advanced packaging is critically important in the foundry space, as you know, Atif, right? Our advanced packaging business is growing north of 70% this year. And big contributor to that is what is happening in foundry and logic. And honestly, you've not yet seen the move to the panel form factor, which you're going to, and that will show up in foundry and logic. So when you put all of these things together, it leads to the strength of the business and the performance that you've seen from us in foundry Atif.

Then just on the panel-level packaging, how close is the industry to meaningful volume adoption and what are the challenges around uniformity yield? And do you need to be looking at of inorganic growth to expand the market.

We don't need organic growth. No. Listen, the things we do well at at a wafer level, we will do well in panel, read that to be the TSV silicon at chain and copper electroplating. We're going to be extraordinarily strong there in addition to other things that we do in advanced packaging at a wafer level. We'll continue to do well in a panel form factor now. You may remember, we acquired a company a few years ago in Austria that actually did some of the panel form factor capability, and that's accelerated our R&D progress there. So we don't need anything new. We don't need anything incremental. It will all be organic. And we are very well situated for that transition when it happens. We are investing R&D right now to make sure we continue to be well positioned for this change.

And just to round up the discussion on the products. Tim spoke very highly on surface separation, just getting.

Select etch.

And then the dry resist is something you guys have talked about in the past, $1.5 billion cumulative 5-year revenue opportunity. Can you update us what's going on, on the e-DryResist program?

Yes. No, thanks for asking about that. Listen, you probably saw some announcements about high-end adoption over the last day or so from players in the industry that's going to be beneficial for us. Listen, the pull for drivers is really strong. I'm quite confident that $1.5 billion number is going to be higher than $1.5 billion. I'm not ready to give you a new number yet, but I'm highly confident we're going to do better than that. And I say that based on things I hear from customers, things I see from customers opportunity that's incremental to what we previously saw. We're going to upside that $1.5 billion. Pol is really, really good.

All right. And Ram, going back to you, NAND, you do a lot of work in thinking around the drivers of the NAND market, KV cash, how is this market changing? And you guys have laid out this JPY 40 billion upgrade opportunity historically through an -- can you help us understand what's changing in the NAND market from a demand perspective, if you have an updated number? Or how are you looking at the NAND opportunity?

Yes. I mean answering the latter part of your question, the $40 billion was given with the assumption on what it takes to go from sub-200 layers to over 200 layers. That's a fixed number, right? What has changed is not the number per se, but the rate at which we originally said that number and people assumed, we said several years and there was a range between 3 to 5 years. And since then, we have said it will be done by end of 2027, which is compressing it by 3 years. So the pace at which the change happened was the one that is the newer, not the amount because it's a fixed amount, right? How much you need to upgrade to the next layer. And if you take a step back in the first part of your question in terms of demand, clearly, when we came out a little bit more optimistic on the NAND at the Analyst Day, people were requesting now it's the other way around. I do understand, but then there is a supply and demand balance that people want to understand, hey, can then do conversions predominantly versus when do we need capacity. Look, from historically how capacity has been added, if you take that as a baseline, still '26 and '27 is conversion driven. There's a little bit of greenfield capacity in any given year that comes -- and that is the case for '26 and '27. But for majority, it's still conversion-driven for NAND. And if you tie that in with customer new fab announcement, we do think that beyond '27 if demand were to sustain, which we don't see a reason why it should be there. Given where AI is going and memory hierarchy is going, then you probably need some capacity and you shouldn't say maybe like second half of 2018 and beyond, right? At times with the fab announcement made by some of our leading customers.

Yes. And I'll just add on, when you look from peak capacity to where NAND is going to be the end of this year, raw wafer starts are probably going down 20%, Atif. So you got to supplement that at some point. There are some wafer capacity additions this year and into next year. It's just not that much.

Got it. The question is around the high bandwidth flash of the new generation NAND, there's a lot of buzz and beyond conventional enterprise SSD emerging high-performance NAND architectures, HP -- can you just talk about from your kind of vantage point? Are you seeing any momentum in these technologies, getting some sort of volume adoption or are we making a breakthrough or this is more of like a longer-term road map.

Listen, you're hearing a lot of my customers -- our customers talk about this. People are working on it. You're not seeing any volume yet. But to the extent that this does ultimately show up, this is going to be great for us. You know the strength that we already have in NAND. You know the strength we have in the -- through silicon via, -- this combines both together. So if this does actually begin to show up as part of the memory hierarchy in a more meaningful way, this can be great for us.