Lam Research Corporation (NASDAQ:LRCX) Credit Suisse 26th Annual Technology Conference November 29, 2022 12:15 PM ET
Company Participants
Doug Bettinger – EVP, CFO
Conference Call Participants
Robert Ruple – Credit Suisse
Robert Ruple
Good morning, and thanks everyone for joining us. My name is Robert Ruple. I’m the Technology Sector Specialist here at Credit Suisse. And very excited to have Doug Bettinger, the EVP and CFO of Lam Research. Thank you so much for joining us. Really appreciate it.
Doug Bettinger
You bet, Rob, thanks for having us. If you don’t mind real quick, putting my Safe Harbor language up, my attorneys always like me to flash this up and remind you that I doubt that I’m going to make any new statements today, but in the event that I do, it’s protected by the Safe Harbor language, which you can find on the Lam Research website.
So anyway, with that, Rob, why don’t we jump on into it.
Question-and-Answer Session
Q – Robert Ruple
Great. Doug, during your tenure as a CFO, and obviously, the stock has increased twelvefold, we’ve outperformed the S&P. And I guess really start with kind of the —
Doug Bettinger
Timing is everything, Rob. Timing is everything.
Robert Ruple
I guess, really to start, maybe more of an open-ended question. As you think about your company, the core IP, strategy in the markets that you kind of serve I guess what’s next? What are some of the key priorities? And what’s the value proposition for Lam, I guess, not only just for investors, but for your stakeholders as well?
Doug Bettinger
Yes, sure. Good. That’s a good open-ended question. That will let me say pretty much anything I want to say. I guess — everybody since earnings is — want to talk about where we at in the cycle. I’m not going to talk about that in the answer to this question. I’d encourage everybody to not lose sight of the long term because it’s easy when we’re looking into a year next year that seems like it’s going to be a down investment year in terms of WFE. It’s easy to lose sight of the big picture. And so I’m going to start with a big picture, Rob, if you don’t mind.
McKinsey published a study, I think it was April, talked about where the semiconductor industry is headed by the end of the decade. And they suggested that they see a path towards a $1 trillion industry. I believe that. We at Lam believe that. Industry revenue this year is probably about 600 maybe a little shy of 600 So that is a very bright future for this industry. In order for this industry to generate that much revenue, there’s a lot of equipment purchases that are going to need to occur. So WFE is going to be meaningfully higher than it was this year in support of that. So that’s great.
Lam’s unique position in the industry is such that we’re just in the right place, taking advantage of opportunities that we see. Our markets are getting larger. Every single process node, whether it’s in NAND, DRAM, Foundry and Logic, our addressable market gets bigger node to node, from 10 to 7 to 5 to 3 to 2 and beyond from 96 to 128 to 1 — 7x in NAND, our market opportunity gets bigger. It’s because the things we do are enabling the architectural evolution of the industry, right?
You’re beginning — not beginning, you are seeing things inflecting in the third dimension, right? Lam does 3D is a tagline that I’ve been saying for a few years, right? We’re in the right place at the right time in terms of the evolution of the industry, enabling the evolution of the industry. And so our share of WFE, I believe, over time gets bigger and bigger and bigger. And that’s what you’ve seen from us. And to your point earlier about the share price has done well over the time, it’s because business has been strong. And I believe that continues to be the case. So that’s what I’m excited about. I’m excited about where this industry is headed. I’m excited about Lam’s unique position in the industry, enabling the evolution of future architectures. So that’s my spin on where we’re going, Rob.
Robert Ruple
That’s great. And as you mentioned, you were generous off to kind of guide in kind of the fiscal ’23 WFE about a quarter earlier than normal. And I know — not going to get into specific expectations there, but maybe you can just delineate and talk a little bit about sort of the priorities between Memory and foundry and logic. I think Memory — looking back to the ’18/’19 downturn — was as high as 60% of WFE. Any sense on how you see that — trajectory of that going forward?
Doug Bettinger
I guess maybe let me talk about — you’re right. Normally, at this point in the year, we’re not talking about next year. We usually save that for the January earnings call. But because it’s been on everybody’s mind so much, we decided, Ram encouraged Tim and I to talk about, “Hey, let’s give a preliminary into next year.” And so we decided to do that on the earnings call.
And that preliminary view is we expect WFE next year to be down more than 20%. So that’s just — that’s what’s going on. That’s what we see happening. Within that mix of what’s going in which direction, memory will be down more than that. And I don’t think that surprises anybody. If you follow the industry, you’ve heard many of my customers describing their expectations for investment next year. We’re sort of at that point in the cycle where inventory is built up because consumption got soft during the last year, supply chain and kind of encouraged some participants in the industry to build some inventory. So it was almost a perfect storm in that regard.
And so when we look into next year, we see Memory WFE down more than anything else. We haven’t broken that out between NAND and DRAM, but I think you have similar dynamics between the two. Foundry logic, I think, will be somewhat more resilient, and that’s a statement on both leading and the trailing edge lithographic nodes. And that’s probably about as much as I’m going to say right now. We’ll give a lot more color like we normally do in the January call, but that’s kind of how we see things setting up next year.
Robert Ruple
On the foundry logic side, maybe correct me if I’m wrong, but it sounds like you’ve been a lot more positive on leading edge versus lagging edge. Any incremental thoughts or views that you think are interesting that we should share with the group here?
Doug Bettinger
I just — I mean, you can listen to what our customers have been saying about their plans. It’s not that maybe they’re going to lighten up in terms of spending a little bit next year. It’s just less than, I think, you’re hearing from the memory sectors. And I think almost everybody, if you follow Lam, knows, I think last quarter was an all-time record for our business in foundry. A couple of quarters before that, it was an all-time record for our business in logic. We’ve got some very definitive new opportunities, things like FinFET going to get all around that, again, every node, our opportunity gets larger, and we’re taking advantage of that and getting a greater share of wallet.
So we’re excited about where that’s going. I’m excited about the leading edge, but I’m also excited about the resiliency I see in the trailing edge as well. There’s a pretty robust investment that’s occurred this year, and I think that’s going to be somewhat more resilient as we go into next year as well.
Robert Ruple
Got it. Edge and deposition has grown, I think, low single digits as a percentage of WFE. You’ve talked a lot about share gains. How much of the outperformance do you think is attributed to etch and deposition becoming a larger percentage of WFE versus your relative performance within etch and deposition?
Doug Bettinger
Yes, Rob. It’s been a combination of both. I think maybe an anecdotal example, 3D NAND is the market that people know us most for. And frankly, when you look at how that architecture has evolved, we enable almost all of the critical applications in that structure. The stack gets taller, you need to deposit more films. That’s more of our equipment. The etches get more complex and the aspect ratios get higher and more difficult to do, which means etch times go up. We own all of the critical applications in that.
Similarly, the metallization grows across that structure as the device gets bigger. We own the metallization. And so if you just think about maintaining the applications we have, our share spending goes up because of the complexity that we enable goes up. You have similar things going on in DRAM as well as in foundry, I referred to get all around.
That’s another example of when I watch FinFET go to get all around our selective etch opportunity, all of a sudden emerges, and we’re excited about where that’s going, too. So like I began talking about, we’re just in a good spot in terms of how architectures are evolving.
Robert Ruple
Just — and from here, I mean, other areas or opportunities where you see incremental opportunities for share gains?
Doug Bettinger
We’re excited about several new products that we’ve got coming out. I’ve been talking about, heck, I think, a couple of years now about our new etch platform. We call it Sense.i, right? It’s the first complete redesign of our etch product offering in 20-plus years, the leader in etch completely redesigning the architecture and the structure. I’m excited about the opportunity, the incremental opportunities that creates for — I guess, I’d point to 3 reasons.
One, it’s a brand-new chamber redesign. We haven’t done that since the 300-millimeter transition. It is the chamber that will take us over the next 20 years in terms of the evolution, and it will enable these high aspect ratio etches that increasingly the industry needs from us. So it’s about technology. It’s about equipment intelligence. We are putting more sensors in this platform than anything we’ve ever delivered to the industry before. The tool, in some ways, is sort of self-aware of what’s going on within the footprint of the tool itself, and it’s able to predictively do certain things that is going to — well, not going to, has got the industry excited about what it’s going to be able to deliver.
And then the third is it’s extraordinarily footprint-efficient. So it’s got a nice cost of ownership, which will enable us to go after applications maybe that we would have chosen in the past not to go after because it’s got a very nice cost solution for the industry. So that’s one example, maybe the most notable example when I think about etch share gains and I look into the future that will deliver those things for us. We intend to gain several points of share over the next several years, and the Sense.i platform will be a key enabler of that.
Robert Ruple
Got it. More of a longer-term type of question. And Obviously, the industry has seen a high level of complexity. WFE has kind of doubled over the last 5 years. Sort of looking ahead, given the complexity and the lack of 450-millimeter, do you feel like we’re sort of in a permanent uptrend for WFE, albeit along kind of the cyclical patterns that we always see in this industry?
Doug Bettinger
Yes, I mean, this is a growth cyclical industry, it’s the way I think about it, right? And the $1 trillion opportunity for the industry, I firmly believe in. Like I said when I began the talk here, to enable that volume, there’s a lot more equipment than it’s going to need to be provided to the industry. So I’m excited about that. And like I talked about a little bit earlier, our unique position within that — the microphone — our unique position in that is enabling a greater and greater share of wallet. You’ve seen that over the last several years, frankly. And so yes, capital intensity is growing. The industry is growing. This is a great industry.
Robert Ruple
Yes, sure. I probably won’t be the first or the last person to ask this question, but what do you see as the potential impact of regionalization of [SIM] production, obviously, with the chips and some of the initiatives going forward?
Doug Bettinger
Yes. I think as this industry has come through, all of the supply chain challenges we’ve had over the last 12 months, all of us are looking at redundancy in the supply chain, trying to get a more robust supply chain. I think the regionalization is partly that. I think the world and governments around the world have woken up to the realization that the semiconductor industry is critical to almost everything that happens in the country, honestly. And so yes, you’re beginning to see a broadening out of where fabs are being announced and built. That’s good for the industry, I think. It’s good for my customers.
Relative to equipment purchases, it’s incrementally good for equipment purchases as well, right? All of these fabs that are being built — need to have equipment put in them at some point, some sooner rather than later. And if you’re building things in more locations, there’s an incremental need for more equipment. I wouldn’t view this as just pure upside to equipment purchases. Because at the end of the day, what matters more than anything is demand for semiconductors. Don’t lose sight of that. But if you’re building things in multiple locations, there’s an incremental need for more equipment.
So I’m excited about what’s going on. I’m excited for our customers. We are trying to figure out everybody’s ramp plans and what that means relative to the footprint we need to have, and we’re absolutely ready to support our customers wherever they go.
Robert Ruple
Got it. Another question, obviously, that’s of interest is supply constraints. And it’s an issue that many of us have trying to get arms around. You’ve had the Malaysian ramp. Obviously, that’s probably some opportunity to alleviate some of those concerns.
Doug Bettinger
It’s helped some, the fact that we had a factory there has helped some.
Robert Ruple
Yes. So just curious on sort of how things are progressing there from a supply chain perspective and how you’re ameliorating some of those challenges and the like?
Doug Bettinger
Yes. I would describe it as getting incrementally better. By no means what I tell you, we’re like through the challenges. We still have constrained parts. We’re still struggling to get certain things, most notably actually semiconductors. People sometimes shake their heads when I tell them, “Hey, the biggest thing that’s been constraining us for the last 12 months has been access to semis.” It’s a true statement. There are semiconductors that control a lot of things that go on in our equipment. And that’s sold tight right now. We’re still struggling to get some of the things we need.
But it’s gotten incrementally better. You’ve seen this in terms of our financial performance when you look at that deferred revenue balance. It grew again in the September quarter to $2.8 billion. I think the fact that the supply chain stuff is getting somewhat better, that number should come down in the December quarter as we go through what we’re working on.
Robert Ruple
Got it. Just a quick pause here to see if there are any questions in the room at all.
Doug Bettinger
Lights are bright. I see one hand up in the back. Do we have mic in the room?
Unidentified Analyst
Just wish — I wonder if you could comment on the situation with China right now and with some of the export restrictions. You summarized some of this in the earnings call. But also, to the extent that you cannot send equipment to China, do you believe that some of that demand will just materialize elsewhere, either that demand that can’t be fulfilled by China suppliers will be done by foundries elsewhere or the fact that you’re in a supply-constrained environment, if you just can’t ship a tool to China, you’ll just ship it to another customer that’s on the waiting list?
Doug Bettinger
Yes. I think, to directly answer the latter part of your question, at the end of the day, what really matters in terms of people — customers buying equipment is demand for semiconductors. And whether it’s supplied in Japan, Korea, Taiwan, China and the United States, largely to us, it doesn’t matter, right? The equipment is what’s needed to meet demand. And over the longer term, that will normalize itself out.
But coming back to the earlier part of your question. Yes, new restrictions came out in early October, I think it was October 7, if I remember the date right. That in foundry was really nothing new. It was 16-nanometer and below, you need a license, which presumptively will be denied. So that wasn’t a new item. What was new was the new requirements in memory, both in DRAM, which the line that was drawn there from a technology standpoint was 18-nanometer and below, the same kind of thing. You need a license presumptively, which won’t be granted. And in NAND, and 3D NAND, it was 128 layers and above, same kind of thing. And so yes, that’s a headwind for our business. That’s negative for our business.
When we looked into prior to these new regulations coming out, as we looked into 2023, that ends up reducing our revenue, we believe, by maybe as much as $2.5 billion. So that’s not a small number. And so it’s sort of disappointing that, that revenue and profit won’t be there for us to reinvest to continue to evolve the equipment, but it is coming down where it is. I would tell you that some of those customers in China are trying to figure out, does it make sense, can they actually invest at a node that doesn’t cross the technology line. Whether they will or won’t be successful there, I’m not sure at this point. We’ll see how that evolves. But I think some others in the industry have been talking about, maybe there’s an opportunity for that, and we’ll see how that transpires.
Unidentified Analyst
Just to follow up, to what extent are your tools reconfigurable such that a tool that was due to ship to a Chinese customer 3 months, 6 months from now, you can’t ship it, that there’s a U.S. or a Taiwanese customer that could accept delivery and, therefore, mitigate the impact of that from you on a revenue standpoint?
Doug Bettinger
Yes. From our ability to manufacture and supply, our manufacturing capacity is fairly fungible, meaning we can build for any one customer in the same factory footprint. We simply need to procure the right material and choose what to do there. So that part of it can be changed. It’s not to say that everybody buys the exact same tool, they don’t, but our ability to build a tool is fairly fungible across any of the end markets, any of the customers. Good question.
Robert Ruple
I think maybe as following to Chris’ question on how do you see your kind of ex China memory customers getting to some level of supply/demand equilibrium? What’s your sense there given the backdrop that we’ve seen?
Doug Bettinger
Yes, I think that’s — they’re all adjusting their plans to invest in equipment lower next year, such that when we describe that, down more than 20%, a big component of that down more than 20% is the plans of the memory segments to just invest less. As much as none of us in the industry like the cycle, it happens. You never see it around the corner, and then you see it and it’s here. And it looks the same every time to me.
I mean I’ve seen a lot of these over my time in semis invariably. What happens is inventory builds up for one reason or another. In this case, I think it’s because consumer discretionary spending softened this year, consumption of smartphones and PCs ended up being a lot less than any of us thought at the beginning of the year, and the industry procures material for a demand backdrop that weakens inventory builds. That’s an example of what’s happened.
And so invariably, what then happens is pricing adjust, right? When there’s more supply than demand, pricing comes down, until that equilibrium gets back in balance. And what happens in the meantime is investment slows, which is what we see happening into next year. And then as the inventory gets consumed and pricing stabilizes and begins to turn the other way, investment begins to happen again. It always happens this way, as much as none of us like the cycle, and I don’t think anybody intentionally creates it, it just shows up periodically.
What I do know is investment will come back at some juncture. I don’t know exactly when. I think some of this will be determined by, well, what is the macro economy going to do. Is it a soft landing that the Fed engineers I hope it is. I don’t know if it will or won’t be. But that will also determine consumption of electronics, which is where semiconductors go. So part of it, everybody wants me to tell them, “Hey, when is the cycle going to turn? I’m not sure because I’m not exactly sure what the economy is going to do. But what I do know is it will turn. It will turn back up like it always does. And investment will be higher when that happens. It’s just the way this industry works.
Robert Ruple
Moving on to the foundry side, business is, I think, in the September quarter, 40% quarter-on-quarter, cross over $1 billion run rate for the first time. Maybe you can spend a few minutes on the drivers and the inflection points here.
Doug Bettinger
I think the first thing I’d point to is there’s a lumpiness to quarter-by-quarter spending, right? I mean there’s only a handful of customers, certainly a handful at the leading edge. And when they’re investing for a seasonal profile or a technology road map, you see this bump up sometimes. And that’s kind of what you saw last quarter.
Having said that, though, I’ll go back to something I said earlier, is the opportunity for etch and deposition, every process node gets larger. And so that’s part of what you’re seeing, right, as we walk down the process nodes. On top of that, our share position, taking a bigger percentage of that growing market actually is happening as well. It’s happening in foundry. It’s happening at logic also. You have similar dynamics there as well. So that’s part of what you’re seeing from us.
Robert Ruple
Got it. Maybe actually just a quick check here if there are any questions at all. Another one?
Doug Bettinger
We’ve got another from Chris. One over here. Yes. We got a mic coming up.
Unidentified Analyst
I wanted to follow up one more question on the China restriction. For the mature tools for logic, just curious on these restrictions, if you’re seeing any hurdles that are starting to extend to mature tools.
Doug Bettinger
No, they’re not. It’s like I said, it’s 16-nanometer and below, equipment that enables that is where the license requirement exists, which presumptively will be denied. So that’s kind of how that stacks up.
Unidentified Analyst
Okay. Have you seen any acceleration where now, like if they were putting some focus on FinFET, that are doubling down or maybe getting more aggressive to pull in what they can still do so mature nodes, actually seeing a little bit more stepped-up logic investment?
Doug Bettinger
Not really. I think it’s possible that it happens over time, but I haven’t really seen, okay, a big pivot in a meaningful way just to buy something to buy it, right? I go back to something I said earlier. What — at the end of the day, what matters is demand for the wafer capacity in this case, right? And people won’t invest just to invest for the fun of it if they don’t have an eye towards selling the output of the fab. So we have to think about it that way.
Unidentified Analyst
Okay. And then did that U.S. person rule have much impact on your business?
Doug Bettinger
On us? No, not really. It didn’t. It didn’t. Anything else? I think Chris is going to come back again. It’s hard to see with the lights in your face.
Robert Ruple
Sorry to make you run back and forth. Just wonder if you could comment on something that ASML had to say at their Analyst Day. And it was an answer to your question, because ASML saw lesser impact on their business for calendar 2023. And their perception, just paraphrasing what they said, was — their perception was because their lead times are so long that their customers’ view of whatever kind of downturn that we’re likely to experience is just shorter than their lead times, meaning that — implying that 2024 probably shapes up pretty well. At least there’s a perception now that people are going to need the capacity for 2024 once we go through whatever we’re going through now. Do you agree with that comment?
And obviously, 2024 is a long time away. So — but your customers must be giving you some kind of visibility on that as view of kind of what they’re going to need because a capacity addition now isn’t really going to affect semiconductor production until 2023 — late ’23, ’24.
Doug Bettinger
Yes. Listen, I’m not ready to give you color on ’23, let alone 2024, at this point. But — and I hadn’t seen all of the comments from ASML that your reference. But what I will tell you for sure is you don’t just buy a litho tool without buying all the process tools that go along with it, right? And so yes, their lead times are certainly longer than ours are. And so that might be a leading indicator of where the rest of the industry might go because, like I said, you’re not just buying a litho tool and leaving it sit there without kind of putting the process tools around it, and that’s what we do.
Robert Ruple
Right. But your customer forecasts are not going that far out for you because your lead times are shorter? So you’re not getting that same degree of visibility.
Doug Bettinger
The visibility — the customer is always telling you what their plans are, but plans can always change, and so I’m always little hesitant that far away to tell you it’s going in this direction because things can change.
Robert Ruple
Maybe switching over to financials. Starting with gross margin. I mean, against a very challenging backdrop, you have a correction, you had some meaningful gross margin tailwinds. And clearly, the Malaysian ramp, the alleviating supply chain offsets and maybe a little less fixed cost absorption help. But any thoughts on how investors should think about things going forward?
Doug Bettinger
There’s a complicated set of things to think about relative to gross margin going into next year. Loss of that China business was negative for gross margin. Maybe some of that comes back, maybe it doesn’t. One thing you referenced, the reduction of some of the inflationary headwinds as supply gets caught up with demand should be beneficial. The ramp of Malaysia, if we’re able to ramp it, now in a down WFE environment, it’s unclear that we’re going to be ramping much next year. So that’s there.
And yes, while this is not a highly fixed cost business, there is some fixed cost here. The way to think about the fixed cost component of cost of goods sold in our business, it’s 2/3 to 3/4 variable. And so that’s important. That will provide some level of gross margin resiliency, but there is still some fixed costs there that if volume comes down, that will be a negative headwind for gross margin. So we’ll give everybody a little more color on that January call relative to how we’re seeing near term and longer term, I think as well, I’ll probably have to give you a little bit of color, but not quite ready to do it yet.
Robert Ruple
Got it. Understood. Maybe can you just spend a little bit talking about sort of capital allocation. I think target payout ratio of 75%, 100% free cash flow. What are your priorities? What are your thoughts around buybacks and other initiatives?
Doug Bettinger
Yes. Nothing really any different. Our plan at Lam is to return 75% to 100% of free cash flow. I think this year we’re going to be north of 90%. That’s kind of where we’ve been over the last several years. I don’t think that changes in the near term. In fact, it doesn’t. I’m comfortable saying that. In an environment where business flattens off or maybe declines a little bit. Actually, I’ll remind everyone, that’s actually good for cash generation. Why is that? It’s because cash comes out of working capital.
When inventory reduces, when business comes down, inventory almost always comes down, that generates cash. If business comes down next year, accounts receivable also come down, that generates cash. And so there’s an aspect of when business flattens or actually declines a little bit, cash is pretty positive, and I expect that likely shows up next year.
Robert Ruple
Got it. just a little more than a minute left here. Maybe just give the opportunity for any closing remarks or if there’s any questions or themes that you think we didn’t hit on that maybe you want to address?
Doug Bettinger
I think we covered it. Listen, this is a growth cyclical industry. We know that. The company has been around for 42 years. We’ve seen cycles before. We’ll manage the company in an appropriate way. One thing we haven’t talked a lot about here in the Q&A is the installed base business, CSBG, we call it, the Customer Support Business Group. That’s a business actually — there is a portion of it, the Reliant product line that is exposed to WFE. But the other components of it, spare parts, upgrades, service actually are more resilient when WFE declines. And so don’t lose sight of that relative to — if we’re going into some level of a downturn next year. CSBG will be more resilient.
And a metric we give — that we gave in the earnings call last quarter as well is the number of chambers in the field. That’s a very important metric to pay attention to. When we describe that to you, it’s important because it always grows, right? We always ship more equipment. WFE has been quite robust this year and quite strong this year. We’ve shipped a lot of chambers out into the industry. It was 80,000 as we closed last quarter. So that’s an opportunity for CSBG to continue to do well. And I think it will do well into the backdrop next year, rob.
Robert Ruple
Great. Well, Doug, we really appreciate you taking the time, and thanks so much for speaking with us here today.
Doug Bettinger
Thanks for having us. Good to see everybody. Yes, appreciate it.
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