Lam Research Corporation (NASDAQ:LRCX) Q1 2024 Earnings Call Transcript

Lam Research Corporation (NASDAQ:LRCX) Q1 2024 Earnings Call Transcript October 18, 2023

Lam Research Corporation beats earnings expectations. Reported EPS is $6.85, expectations were $6.07.

Operator: Good day and welcome to the Lam Research September 2023 Financial Conference call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today’s event is being recorded. I would now like to turn the conference over to Tina Correia, Corporate Vice President, Chief Accounting Officer, and Investor Relations. Please go ahead.

Tina Correia: Thank you, and good afternoon, everyone. Welcome to the Lam Research Quarterly Earnings Conference call. With me today are Tim Archer, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today’s call, we will share our overview on the business environment and we’ll review our financial results for the September 2023 quarter and our outlook for the December 2023 quarter. The press release detailing our financial results was distributed a little after 1 o’clock PM Pacific Time this afternoon. The release can also be found on the Investor Relations section of the company’s website, along with the presentation slides that accompany today’s call. Today’s presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings.

Please see accompanying slides in the presentation for additional information. Today’s discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3 o’clock PM Pacific Time. A replay of this call will be made available later this afternoon on our website. And with that, I’ll hand the call over to Tim.

Tim Archer: Thanks, Tina, and welcome, everyone. Lam produced solid results for the September quarter. Revenues came in above the midpoint of our guidance. And for the second quarter in a row, our gross margin, operating margin, and earnings per share, all exceeded the high end of the guidance range. Our revenue and earnings per share are expected to improve further in the December quarter, demonstrating our continued strong execution in a cyclically soft calendar year 2023. Turning to the wafer fabrication equipment environment, we see spending for calendar year 2023 in the $80 billion range. The adjustment in WFE from our prior view of mid $70 billion is based on updated checks on non-Lam related markets, as well as restricted fab spending in China.

It does not change our assumptions on Lam revenues for the year. On the device segment side, NAND weakness continued in the quarter as customers adjusted spending levels down and further lowered utilizations to drive a faster path to supply-demand balance. While NAND WFE is down significantly in 2023, supply actions are starting to have a positive impact. Customers have recently indicated that pricing trends have stabilized and NAND bit demand has increased from high single digits per cent year-over-year growth to high teens, as certain consumer markets are demonstrating greater demand elasticity in per unit content. DRAM spending is modestly up relative to our prior view, driven by better trends in high bandwidth memory related demand, as well as further upside from domestic China customers.

Meanwhile, the foundry/logic segment is down slightly versus our prior baseline due to weakness in both leading edge and non-China based mature node investments. Looking forward, it remains hard to call the timing and pace of WFE recovery, but we believe Lam is in a good position to benefit from both cyclical and structural drivers of demand. When memory investments begin to recover from current cyclical lows, we expect to see early benefits in our installed base business as fab utilization improves, driving increased demand for spares, services, and equipment upgrades. Longer term, Lam’s growth story is strong and is underpinned by the fact that etch and deposition are fundamental enablers of higher performance, more scalable semiconductor device architectures.

To address emerging technical challenges, customers continue to identify new innovative use cases for vertical scaling. Backside power delivery is a good example, as it is an emerging device architecture being developed to address the scaling limitations of traditional back end of line integration schemes. Etch and deposition play a critical role in enabling this transition, and backside power delivery is expected to add close to $1 billion of incremental SAM opportunity for Lam per 100,000 monthly wafer starts. Today, Power interconnects increasingly compete for space in the complex back end of line wiring, while also taking up considerable area at the transistor level. Additionally, managing power loss between the external source and the transistors is increasingly challenging due to resistance.

A backside power delivery architecture enables the separation of the signal and power delivery paths to free up valuable wafer real estate and minimize power loss. Furthermore, customers are implementing changes, including the use of thicker metal layers in order to efficiently integrate backside power with their advanced packaging schemes. New etch and deposition capabilities are needed, and the trends are favorable for Lam. Due to our existing strength in back end processes, we’ve been able to quickly extend the capabilities of our copper electroplating and [PCVD] (ph) deposition products to address the throughput and productivity requirements of backside power applications. We now have two record positions at a leading foundry/logic customer and expect these positions to continue to grow.

As we approach the end of the year, our installed base is closing in on 90,000 chambers. As semiconductor manufacturing is becoming increasingly complex, our customer support business group is seeing more opportunities to deliver innovation, productivity, and yield enhancement. In the September quarter, we expanded our equipment intelligence offering and multiple customers to include the first big data application of high resolution optical emission spectroscopy or OES. The equipment intelligence capabilities we are delivering with OES are highly differentiated due to the complexity of collecting and interpreting plasma spectra in manufacturing over time and across a large fleet of tools. Our solution allows customers to resolve performance issues that would otherwise remain undetected.

Recently, our CSBG team also put the industry’s first collaborative maintenance robot, or COBOT, into a production fab at a leading customer. COBOTs help execute complex maintenance tasks with precision and reliability, leading to improved tool-to-tool performance matching and higher equipment availability. Also, we believe COBOTs as a new service offering can play an important role in addressing anticipated skilled labor shortages as semiconductor manufacturing expands and becomes more regionalized. Overall, we see tremendous vectors of growth ahead for the semiconductor industry and for Lam. Scaling and complexity challenges are driving multiple inflections towards 3D architectures and in turn greater etch and deposition intensity. Lam has a strong track record of execution and we are committed to making the strategic investments needed to position the company to outperform as the industry and our markets grow.

Over the last two years, we’ve been laying the groundwork for greater scale and efficiency with the expansion of our manufacturing, supply chain, and warehousing capabilities in Asia in order to better serve our customers in that region. We are also increasing our R&D efforts to extend our technology differentiation and expand our product portfolio to capture new inflection driven applications. While the current business environment remains challenging, secular industry trends play extremely well to land strengths, and we are excited by the breadth of opportunities we see ahead for the company. Thank you, and I’ll now turn it over to Doug.

Doug Bettinger: Excellent. Thank you, Tim. Good afternoon, everyone, and thank you for joining the call today. We delivered strong results in the September 2023 quarter. Our revenue came in above the midpoint of our guided range, and gross margin, operating income, and earnings per share all exceeded the high end of guidance. We’re pleased with the company’s execution during a year where memory WFE investment has declined by unprecedented amounts. Let’s look at the details of our September quarter financial results. Revenue for the September quarter was $3.48 billion, which was up 9% from the prior quarter and down more than 30% from a year ago. Our deferred revenue balance at quarter end was $1.69 billion, which was a decrease of approximately $150 million from the June quarter, mainly related to revenue recognized tied to customer advance payments.

We continue to have a higher deferred revenue balance versus historic levels given these advanced payments. We expect to recognize revenue in the December quarter for a portion of these deposits, which is comprehended in our guidance. Within calendar year 2024, I believe the deferred revenue balance will trend to more normalized levels. Let’s now look at the segments. From a segment perspective, September quarter systems revenue and memory was 38%, which is an increase from the prior quarter level of 27%. The growth in the memory segment was driven by DRAM, which increased, sequentially coming in at 23% of systems revenue compared with 9% that we saw in the June quarter. As we noted in prior quarters, non-volatile memory spending is at historic lows in 2023.

And for the September quarter, the segment represented 15% of system for revenue, which was down from the 18% that we saw last quarter. The spending levels in NAND are at dollar levels we have not seen since [planar] (ph) NAND was the predominant technology. The foundry segment represented 36% of our systems revenue, lower than the percentage concentration in the June quarter of 47%. The decrease is related to timing of leading edge investments within calendar year 2023. We performed well in this segment during the year with this quarter’s spending coming mainly from mature node customers. And finally, the logic and other segments was 26% of our systems revenue in the September quarter, which was flat with the prior quarter level. Investments in this segment were heavily focused in the specialty device areas, including sensors, analog, and power devices.

I’ll now discuss the regional composition of our total revenue. The China region came in at a high water mark of 48%, up from 26% in the prior quarter. The majority of the China revenue this quarter was from domestic Chinese customers. And we currently expect we will have another strong China geographic concentration profile in the December quarter as well. Our next largest geographic region concentration was Korea, had 16% of revenue in the September quarter and that compares with the 24% that we saw in June. Our customer support business group generated revenue in the September quarter, totaling approximately $1.4 billion, which was down 5% from the June quarter and 25% lower than the September quarter in calendar year 2022. Memory customers continue to operate their fabs at very low utilization rates.

And customers are holding off on upgrading tools until there’s more digestion of the outstanding inventory that is in the industry. The specialty technology market has been a bright spot this year, and we see that part of our business up year-over-year as we close calendar year 2023. Spares and the Reliant product line continues to be the two largest components of CSBG. Let me now turn to the gross margin performance. The September quarter came in at 47.9% above our guided range and higher than the June quarter level of 45.7%. Our strong gross margin performance compared to the prior quarter was driven primarily by favorable customer mix. We’ve improved elements of our cost structure during the year and are on track with our plan to improve gross margin from the March quarter level by approximately 1 percentage point as we exit calendar year 2023.

September quarter operating expenses came in at $622 million, up from the prior quarter amount of $590 million. R&D as a percentage of spending was somewhat higher versus the June quarter, coming in at over 68% of our spending. The increased investment was focused on key technology inflections and development engagements with our customers. We will continue to invest in programs across multiple market segments to support our long-term strategic objectives for continued company outperformance. Operating margin for the current quarter was 30.1%, higher than the June quarter level of 27.3%, and more than 100 basis points over the high end of our guidance because of that strong gross margin performance. The non-GAAP tax rate for the quarter was 13.4%, in line with our expectations.

Our estimate for the December 2023 quarter as well as for calendar year 2024 is for the tax rate to be in the low to mid-teens range. Other income and expense for the September quarter came in at $7 million in income compared with $7 million in expense in the June quarter. The favorable fluctuation in OI&E was due to a variety of factors, including rising interest rates, generating income on our cash balance. OI&E will continue to be subject to market-related fluctuations that will cause some level of volatility quarter by quarter. Let me now pivot to the capital return side of things. We allocated approximately $830 million to open market share repurchases and paid $230 million in dividends in the September quarter. I’ll highlight that in September we announced a 16% growth in our dividend in line with our plan to deliver disciplined annual dividend growth.

Since paying our first dividend in 2014, we have now raised the dividend amount 9 times. We returned over 120% of free cash flow in the quarter, and we have $2.7 billion remaining on our board authorized share repurchase plan. Calendar year to date, we’ve returned 83% of our free cash flow to shareholders. September quarter diluted earnings per share was $6.85 over the high end of our guided range. Diluted share count was 133 million shares, on track of our expectations and down from the June quarter. Let me pivot to the balance sheet. Our cash and short-term investments at the end of the September quarter totaled $5.2 billion, down from $5.6 billion in the June quarter. The main driver of the cash decrease was obviously our capital return activity.

I’ll just mention, we also purchased buildings at our company headquarters as well as our Bay Area California factory for approximately $250 million, retiring the leases that were on the balance sheet. [indiscernible] cash was somewhat offset by improvement in days sales outstanding, which were 73 days in the September quarter down from the 80 days that we saw in the June quarter. Inventory turns were flat with the prior quarter level at 1.5 times. We continue to work to bring our inventory down, but as we’ve noted in prior quarter, we expect this to occur at a slower pace than we’ve done in the past. Our non-cash expenses for the September quarter included approximately $67 million for equity compensation, $76 million in depreciation, and $14 million in amortization.

Capital expenditures for the September quarter came in at $77 million, which was flagged with the June quarter. Spending in September was primarily centered on product development activities and lab expansions in the United States and Asia. We ended the September quarter with approximately 17,200 regular full-time employees, which was a decrease of 200 people from the prior quarter. Most of this decrease is related to the restructuring actions we took earlier in the calendar year with the timing of the headcount reduction occurring in the September quarter. Let me now turn to our non-GAAP guidance for the December 2023 quarter. We’re expecting revenue of $3.7 billion plus or minus $300 million. Gross margin of 47% plus or minus 1 percentage point.

This level of gross margin reflects a continued favorable customer mix, albeit not quite as favorable as we saw in September. Operating margin of 29.5% plus or minus 1 percentage point. The operating expenses embedded in this guidance increase from the September level due to growth in R&D. I’d also just mention that the June 2024 quarter will be higher as it includes an extra week in fiscal quarter which occurs every few years. It’s going to be a 14-week quarter in March. And finally, earnings per share of $7 plus or minus $0.75 based on a share count of approximately 132 million shares. With our December quarter guidance, we see solid performance in both revenue and profitability. Lam is delivering strong financial results and technology leadership to our customers as we develop solutions for the next industry inflections.

And before I wrap up, I’d just like to mention two things as you think about modeling our business into 2024. The first is that we’re currently experiencing favorable customer mix that may not continue at the same level going into next year. This may create near-term headwinds for gross market. Second, given all the opportunities we see in long-term technology inflections, like date all around, dry resist, advanced packaging, changing metalization schemes, and continuing the evolution of other 3D structures like DRAM. 2024 may be an R&D spending growth year to take advantage of these future opportunities that we see. As a result, it’s possible the historic leverage we’ve delivered takes a temporary pause. We will obviously continue to aggressively drive the operational efficiencies that we always have, and our longer-term profitability objectives remain unchanged.

Operator, that concludes our prepared remarks. Kim and I would now like to open up the call for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] And today’s first question comes from Timothy Arcuri with UBS. Please go ahead.

Timothy Arcuri: Thanks a lot. I had a question on China. So obviously, you’ve had a huge second half in China. Doug, it sounds like you think it’s going to remain pretty strong in December. It sounds like maybe it’s going to remain close to 50% of the mix. But it sounds like you’re a little worried about — sorry, not worried, but you think that it could actually come off a bit during the first half of 2024. Can you talk about that? What are the puts and the takes? I ask because, if you sort of back into where they’re running in terms of WFE, they’re running probably in the high 20s if I just take the back half of the year. So I’m wondering if that can sustain.

Tim Archer: Yes, Tim, let me start on that and then let Doug add. I think that when we think about China investment, clearly it has been strong as we’ve messaged. Part of the mix story and why it’s such a high percentage of our mix right now also has to do with the fact that other customers are not spending. We all know that memory and NAND in particular is at extreme lows. As we look into next year, and it’s a bit too early for us to give 2024 WFE, so we’re not going to do that. We think about longer term China and this overall move towards regionalization that you see people investing for long term demand in mature nodes. And so, we’re not going to comment on whether we think it’s sustainable in the first half or the second half of next year, but long-term, we do believe that there’s growing demand in mature nodes that will drive China investment in a rather sustainable manner for the next several years.

Doug Bettinger: And yes, Tim, just to parse my comments a little bit. I said, we believe China will continue to be strong, but I also said, albeit not quite as strong perhaps as we saw in September. And as Tim alluded to, the China investment is not going away. I don’t know if it’s up, down, sideways next year, but it’s not going away. They’re investing for opportunities in the market that they see. I think we’re hopeful that rest of the market begins to recover at some point, because it’s at pretty low points, and that will mitigate the China mix to a certain extent.

Timothy Arcuri: Thanks a lot for that. Can you just talk also, your major peer that makes litho talked this morning about there being a handful of fabs now with these new restrictions that they can’t ship into. It’s predominantly a litho thing, but can you just talk about sort of where we are in terms of restrictions? And then also, when you’re talking about that what’s the commonality in the etch and dep tool set for, let’s say, 28 nanometer versus let’s say 7 nanometer because technically you can buy tools for 28 nanometer and you can use them to pattern 7 nanometer from a dep/etch point of view. It’s not as efficient but you can do it. Can you just talk about that? Thanks.

Tim Archer: Yeah, Tim, I guess what I’d say is, we’ve reviewed the details of the regulations and our early assessment is we don’t see any material impact to our forecasted business. Now, some of that has to do with the fact that we’ve already been quite restricted into what we can ship into China relative to technology engagement. And I think to your other point about tools being purchased for one node and used for another. I mean, that’s something that obviously we’re — we have to follow very strict regulations to adhere to the US regulations. So I don’t know that that’s something that might be quite as common as what you’re saying. So, but it’s something that we make sure that we’re fully compliant.

Timothy Arcuri: Of course, Tim. Thank you so much.

Tim Archer: Thanks, Tim.

Operator: Thank you. And our next question today comes from Harlan Sur with JPMorgan. Please go ahead.

Harlan Sur: Good afternoon. Thanks for taking my question. CSBG down 8% year-over-year through the first nine months of the year. It did decline, as you mentioned, 5% sequentially. I assume the sequential decline was driven by continued utilization declines by your customers, especially your NAND customers, as you pointed out. You did talk about improving bit shipments for these customers in second half of the year, pricing stabilization, it sort of seems to be reflective of this sort of steadily improving supply demand environment. So does the team believe that utilizations have bottomed the cost of memory and foundry/logic customers? Have they started to at least stabilize at current levels?

Tim Archer: Yeah, Harlan. What we said was that, those are the comments that obviously our customers are out talking about their business. There’s clearly some time lag from when they start to see improvement in bit demand and in pricing before they start to bring some of that fab utilization back online. Our CSBG business, as we said, is affected by a couple of things. One is, clearly fab utilization are at levels that we really haven’t seen in terms of how much capacity has been taken offline in the NAND space. And that’s affected spares. But also, when you don’t need to add bits and you’re really trying to conserve your own spending, there’s been quite a significant delay in technology upgrades to the install base. You have those tools offline, you’re not really upgrading them at this point.

So that has also hit the CSBG business in terms of our upgrades component. We anticipate that as the memory business starts to improve, which is what it seems to be the leading indicators are planning to, we would think spares would start to come back and the technology upgrades would be done. Because in that next leg of growth, customers are going to want to be able to scale on that next technology node for their own efficiency of manufacturing. So we’re not seeing that yet, but the leading signs are that it will come.

Harlan Sur: Thank you. And then you talked about this on the last earnings call, but you’ve got a strong position in [stat] (ph) chip architecture, advanced packaging. You guys have talked about this segment as being $200 million per year for Lam, potentially with the path to $1 billion business. On HBM specifically, where you have very strong share, right, HBM to HBM2 to HBM3 to HBM4, I think that there’s a doubling of TSVs per chip, every new generation of HBM the DRAM stack height is also growing from like 8 to like 24 at some point. So this is — this all is sort of a very strong tailwind for the team. Do you guys anticipate strong growth next year for your HBM/advanced packaging business? And some of your DRAM customers are also talking about HBM driving 10% of overall industry DRAM wafer starts. Is that how you guys are seeing it as well?

Tim Archer: We’ll let them talk about how much it affects their business. But from what it affects ours, I mean, everything you just said, I think we’re generally aligned with, which is, we are trying to drive performance generally leads to more equipment needs and more sophisticated equipment needs. And so, we do see HBM. I talked about the uptick in our business that we’ve already seen from it. This appears to be an area right now that is still under-supplied, and we’re seeing strong demand. And so, I don’t anticipate, given the interest in AI that you hear so broadly in the industry right now, that our HBM business would grow pretty strong in the next year. To characterize our overall advanced packaging, you mentioned a couple hundred million.