Lam Research Corporation (LRCX) Earnings Call Transcript & Summary

Great. Good morning, and again, welcome to the second day of J.P. Morgan's 52nd Annual Technology, Media and Communications Conference. My name is Harlan Sur. I'm the semiconductor and semiconductor capital equipment analyst for the firm. Very pleased to have Doug Bettinger, Chief Financial Officer of Lam Research, here with us today. Lam is the third largest semiconductor capital equipment company in the world, strong leadership in etch, deposition, patterning, with the fast-growing and emerging businesses like next-generation transistor, memory cell architectures, resist processing and advanced packaging. I'm going to hand it over to Doug, who's going to mention safe harbor, and he's got some opening comments. Doug, thank you for joining us this morning.

Harlan, thanks for having me. 52nd year, I didn't realize it's been going on that long. It's amazing. That's actually a little bit longer than Lam's been in business. Although we happily recently celebrated our 40-year anniversary of having been listed on NASDAQ. That was kind of cool to see us on the tower. But anyway, my attorneys like me to read some safe harbor language. So let me do that, keep them happy. And here it goes. 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 our actual results to differ materially from those forward-looking statements can be found in the risk factors disclosed in our public filings with the SEC, including our most recent 10-K and 10-Q. So I don't actually plan to announce anything new, so I probably didn't need to read that, but regardless. Anyway, thanks for being here. It's always good to be at this conference extraordinarily well attended every year and judging from the fullness of the room. It is again this year. So real quick, I wanted to make sure everybody saw a press release that we issued this morning. That's incremental new information. So the company was pleased this morning to announce a new buyback authorization from the Board of $10 billion that we plan to execute over an indeterminate time frame. This announcement is consistent with our ongoing plan to return 75% to 100% of free cash flow. So I want to make sure everybody saw that. And then second, we also announced this morning a 10 for 1 forward stock split. Now some people have looked at me and said, "Why did you do this? This doesn't matter to institutional investors. And obviously, I understand that well. But what it does matter to is the ability of our employees globally to participate in the company's stock ownership plans, including our share purchase plan. And so as the share price had begun to move higher and higher, the ability of some of our more junior employees as well as our Asia-based employee population, they were challenged to be able to participate. And we believe at Lam, stock ownership is an important part of what we like the employee base to be able to avail themselves to. And that was the motivation for the stock split, nothing more than that. So I want to just put that out there. We can then Harlan jump into the business, but I want to make sure everybody saw that. So anyway, that's -- those are my opening remarks, Harland and why don't you guide us through the Q&A that I know you've put together.

Yes. No, it was great to see the re-upping of the share buyback authorization. Just as a reminder, on calendar '23, the Lam team returned 80% of their free cash flow, $3.8 billion [indiscernible] start to this calendar year. I think in the March quarter, you guys bought back $1.1 billion. Bought back plus dividends, $1.1 billion. So stepping up from the run rate of calendar '23, which may be as good timing as we do see industry trends starting to improve. But great to see the team upping the buyback authorization.

Yes. Listen, as the CFO of the company, the capital allocation, I believe, is a critical component of the value creation model at the company in a critical way that we have delivered and will continue to deliver shareholder value. So anyway, let's jump into the business. Harlan.

Yes. So after 3 strong years of semiconductor industry growth, we did enter into a cyclical downturn back half of '22. In '23, semi industry revenues were down about 8%. WFE ex litho was down about 8% last year. That's according to Gartner. The long-term, particularly in leading-edge memory and foundry logic was steep, right, NAND and DRAM, peak to trough industry revenue declines or about 60% PC, server CPUs were down about 40%, 45% peak to trough. Take us through how all of this impacted WFE spend and Lam last year and so far this year.

Yes, let me talk a little bit about '23 and where I see things in '24. I guess looking back, last year was a challenging year for the industry, especially the memory component of the industry and our enablement of our memory customers showed up in our business in a pretty meaningful way. The secular downturn in NAND, specifically, I've never seen as dramatic as it was last year. NAND investment was nominally down 75-odd percent year-over-year in '23. DRAM was a little bit better, but also fairly soft, at least with the global customer base, a little bit of spending in China DRAM helped that. So anyway, stepping back, it was a pretty challenging year. We went through a period of restructuring the company, trying to get the company set up to be better when growth resumes. And I think we've done -- or last year, we did all the right things to benefit from whenever that growth does show back up. Now roll that into -- you kind of led into your eye, what's going on in '24. '24 WFE is a little bit stronger. Although in memory, it's still fairly muted, especially in NAND. It is a little bit more investment, but only a very little bit. I think though, Harlan, and you mentioned this to me as we were sitting down here. Some of the memory customers have been here at the conference talking about what they're seeing in their business. I guess when I look at what we see going on there and what we see relative to pricing, you're starting to see things getting a little bit better, right? Pricing is getting a little bit better. Profitability is getting a little bit better. I've been describing it as maybe some green shoots showing up but really not much in terms of real investment occurring maybe with one exception around high-bandwidth memory. And I know you're going to ask me about that later. So I won't go deeply into it. But yes, we see WFE this year in low mid-90s, up incrementally from last year, although still a fairly modest amount of investment on the memory side of things.

Perfect. Yes. We had Western Digital present yesterday. They presented a profile of continued price improvements and supply tightness in NAND pretty much through the second half of this calendar year, extending into calendar '25. We had the Micron team here today saying exactly the same thing about DRAM and NAND. And so from my perspective, what the memory players are seeing today and the strong sort of focus on profitability and supply discipline has been reflected in your comments on WFE in calendar '24. But the demand trends and the supply dynamics heading into next year seems to indicate the prospects for a stronger WFE spending year and Micron did take up their CapEx today to the upper end of the range. So maybe we're at the start of something here. But as you step into the second half of this year, it does feel like advanced node momentum is starting to accelerate. I talked about Micron and WD. But in foundry and logic, we've got some big technology transitions happening now, right? 3-nanometer, wafer starts are picking up pretty significantly because of all the AI and networking SoCs targeted for accelerated compute and AI, you've got Intel and TSMC putting in the groundwork for their next-generation 2-nanometer technologies and design starts at 2-nanometer appear quite strong, right? So given your broad share position in industry, your visibility, customer discussions, what does the outlook look like for calendar '25 WFE maybe from a qualitative perspective?

Yes, it's too soon for me to give you any numbers on things, but I agree with everything that you described. And maybe just unpacking a little bit. Yes, I think, talking to investors, as I have been today and over, since earnings, I think the view is '25 is going to be a decent year, and I agree with that. You're absolutely right in that. The entire world is excited about artificial intelligence, and I am as well. And the stuff you described, Harlan, around the gate all around not showing up. We're all talking about that around backside power showing up, around advanced packaging, around high bandwidth memory, all leads into the enablement of AI, which is a real thing. And so when we look at that, and maybe I'll just mention a few things. As you begin to look at leading-edge foundry and logic, you're beginning to see real 3D structures and gate all around is a great example of that. When we look at that node this year, we've described an expectation that revenue for that first gate all around node for us this year will be $1 billion in revenue and obviously growing into next year. We're excited about this because when you look at the architecture there because it is a 3D architecture, the intensity of etch and deposition in terms of creating those sheets, the gates, there's a decent amount of selective etching required there. A decent amount of our ALD tools, enabling that such that when we look at what this looks like to us, we've put numbers around it saying that for every 100,000 wafer starts of capacity the industry puts in place, the incremental opportunity for us is $1 billion. Now we won't get 100% of that market share, but that just, to have you understand a little bit about it, describes why business is going to be incrementally better next year. Capital intensity is going up and it's etch and deposition intensive. So maybe I'll pause there and let you redirect me, Harlan. But yes, we're excited about all the transitions that we see right now in the industry.

Yes. And we'll get into more details on some of those dynamics. But if you look back historically, which is quite interesting, wafer equipment spending intensity bottomed in that sort of 2013 time frame, right at about 9%. That was right at the cusp of transition from 2D to 3D NAND and conventional transistor architecture to FinFET architecture, right? And 9% spending intensity bottom 2013, 9% last year, a down year, it increased to 16% to 17% intensity, right? So another way to think about that is that over the past 10 years, including last year, wafer equipment spending has grown at a 12% CAGR versus semi industry revenue growth at a 6% CAGR. Over that period of time, Lam has grown its revenues total revenues at a 14% CAGR, right? So clearly, taking share, given the complexity challenges, technology inflections, the need for more installed capacity to support some of these strong demand trends, do you anticipate WFE and Lam continuing to outgrow semiconductor industry revenues? And maybe what -- within that, like what are going to be the biggest drivers?

Now Harlan, when I abstract this and look at what I see happening, your observation is right. WFE has grown at a faster rate than overall semi revenue. That's because of capital intensity growing. Now what I always point out to people, though, and this is important is, yes, as a percent of revenue capital intensity has gone up, capital intensity per wafer put in place has gone up. But if you look at capital intensity as a percent of the industry's operating profit, it actually has not gone up. So that's important, this is a metric I look at all the time through cycle because you got to normalize for, okay, where you had in the memory cycle, you have to ask yourself, is this affordable. And if you just look at revenue, you might say, maybe not. But industry profitability has never been better. And so that's an important metric I always look at and I just thought I'd mention that. And then, again, abstracting, when you look at what's going on the 50-plus year history of the semiconductor industry was largely all about just optical shrinking. Things got smaller and closer together. And that stopped happening, I don't know, 10 years or more ago. But Moore's Law didn't slow down in terms of enabling incremental performance. It's just happened in different ways. Architecturally, in the manufacturing processes. And the benefit relative to the share gain trajectory relative to share of wallet for us has been 3D architecture showing up. It's obvious in NAND flash that went from a planar to 3D structure. We benefited significantly from that in that our addressable market doubled, right? It's etch and deposition intensive. You have similar things kind of step back and think about, okay, in foundry and logic, we went from a planar gate to FinFET, now going to gate all around, that's an evolution of 3D structures, more etch and deposition intensive. We've also benefited in there from patterning being etch and deposition-intensive. One thing I'm really excited about right now, and it shows up in high-bandwidth memory, but it's the 3D architectures around advanced packaging, read this to be [ colos ] and other things, high-bandwidth memory again, you're starting to see some of these very large accelerator dye, especially GPUs approaching the reticle limits of how large [indiscernible] can be. And so to continue to drive transistor performance, advanced packaging has been a critically important 3D structure that shows up. Again, benefiting us because of the intensity of etch and deposition, specifically in something called deep silicon etching in electroplating, we largely enable a lot, a lot of that architecture. And so when I try to generalize it, I just see all of these things continue to evolve in terms of materials, in terms of architecture. We're only just beginning to see the industry working on DRAM structure that will eventually be more 3D like for similar reasons that you saw in these other places to continue to drive performance. And so I don't know, in business, sometimes, you got to be a little bit lucky, and we've been a little bit lucky at Lam in that we're in etch and deposition company. 3D structures need more and more etch and deposition equipment. Success in business, you got to be a little bit lucky, but you also got to be good. And you got to be able to execute and you have to anticipate these things and step into it. And I think we've done a nice job with that as well, and we intend to continue to do that as we look into the future. We're in the right place at the right time in a great industry is how I think about it.

Yes. And then from that perspective, given the unprecedented memory downturn that we are emerging from some strong share gains in advanced foundry and logic by the Lam team and to your point, whether it's foundry or logic or memory, I mean, everything is moving to a 3D-like architecture, right? And interestingly enough, the mix of your business has evolved over the past few years, right, from 20% to 30% foundry/logic mix to now 45% to 50% plus foundry/logic mix, much more balanced end market exposure. Now given the share gains in logic, the strong exposure to some of the 3D like architectures like gate all around, backside power distribution, does the team believe that it can sustain a more balanced mix even if memory WFE comes back strong starting next year?

Listen, you got to unpack this a little bit. We've made very nice progress in foundry and logic, right? We've talked about shared doubling, nominally note over node at a large logic customer that is happening. Some of the benefits of evolution about manufacturing process around things like patterning. We're extremely strong in the patterning module. And that's been a key enabler for device evolution in foundry and logic. We benefited from that. And so when you look and unpack at an application level, Lam has made very nice progress in terms of gaining larger footprint in foundry and logic that doesn't obviate the fact that we've got very strong memory footprint, and that's not changing. But I feel really good about the investments we're making in terms of gaining in foundry and logic. We've already talked about gate all around. Backside power is another example. The metallization scheme of moving power to the backside significantly benefits our [ plating ] business again. Our SABRE tool is going to drive opportunities there. We're excited about that. We're investing for that. It's been part of the reason why R&D investment is growing this year. When I look at the backside power, Again, we like throwing big numbers around, but these are big numbers. Again, similar to gate all around, backside power for every 100,000 starts again, we see an incremental opportunity of $1 billion again. We like billion numbers. So we're positioned well for that. I'm excited about where we're going there. I'm optimistic that next year is going to be a decently stronger investment year in memory. So relative to mix percentages, Heartland, there's a numerator and denominator moving around there, I don't know, which is going to do more or the other. But frankly, the momentum the company has in every component of the industry is actually good. That, to me, is the most important thing.

One of the large demand drivers that wasn't around or pervasive even 18 to 24 months ago was advanced packaging, right? Whether it's high bandwidth memory, for DRAM or 2.5D, 3D packaging for some of these very advanced logic, AI-based SoCs. And so all of a sudden, we're seeing a lot of adoption of these advanced packaging architectures and a lot of spending around it, right? And again, perfect example, HBM is just a 3D architecture. It's like a perfect fit for Lam's core competencies, right? And from that perspective on advanced packaging, the team said that on the last earnings call that you're going to drive $1 billion in advanced packaging revenues this year, which includes HBM. I believe this is about 2x, 2.5x growth versus last year. I believe you have 90% share in HBM through silicon via etch and copper fill for those TSVs. What other areas does Lam have a strong share position in either HBM or 2.5D packaging.

Yes. Thanks for all of your data is correct, Harlan. We enable a lot of what's going on in advanced packaging. So maybe take you back. If I was here talking to you 2 years ago, I would have been describing this is a business that was hundreds of millions of dollars in terms of the size. Fast forward to late last year, I began to suggest and Tim began to suggest, hey, this is a business we can see approaching $1 billion in a few years. On the last call, Tim actually said, "You know what? We see this as a $1 billion business this year. Unpacking that actually, a large piece of what's growing is high bandwidth memory. And we see that tripling year-over-year. So we're super excited about that. We sell lots of different tools into that, but the position is a real strength. You mentioned, Harlan, I -- tongue in cheek, call it the drill and fill, right? For the -- through silicon via, you need to etch spaces and then you need to deposit the conductive material. We pretty much own those applications everywhere. And looking at that, like I said, it's a real tailwind. And listen, as you think forward over the next several years, I see this continuing. The strength in this continuing. Everybody -- like I said, you're starting to see some of these large dye posing radical limits. These -- you need to keep driving performance forward. Everybody's talking about dye disaggregation and so forth that all means advanced packaging. So we're excited about this. I think the bright spot I see in memory right now is high bandwidth memory. You need more and more of this to feed the parallel compute engine and we're right in the middle of all of this stuff. So anyway, it's a key aspect of the growth of the company. There are some things we just do extraordinarily well in here, again, in the drill and fill and this isn't going to slow down for the next several years as far as I can tell.