Lam Research Corp (LRCX) — Q1 2022 Earnings Call Transcript

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 2021 quarter and our outlook for the December 2021 quarter. The press release detailing our financial results was distributed a little after 1:00 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 today's earnings press release. 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.

Thanks, Tina, and welcome, everyone. Lam delivered a solid September quarter with revenues in line and earnings per share above the midpoint of our guided ranges. These results represent our sixth consecutive quarter of revenue and earnings per share growth for the Company. Over this time period, we have scaled our operations to support rapidly growing demand for our products and services. And as we look forward, we see continued strengthening across both leading-edge device segments and specialty technology markets. In response, we have expanded our manufacturing capacity at existing facilities in the United States, Korea, and Taiwan. In the September quarter, we celebrated the grand opening of our new Malaysia facility, which when fully ramped, will be the largest factory in our global network. And just last month, we announced a new factory in Oregon, primarily designed to meet increased demand for Lam tools and Foundry/Logic and advanced packaging applications. With these investments, we are building a solid foundation for delivering on our long-term growth objectives. In the near-term, however, we are not immune to the widely reported supply chain constraints and elevated costs that continue to create new challenges for Lam and others across our industry. Our employees and supply chain partners are working tirelessly to meet the needs of our customers, and I would like to sincerely thank them for their efforts. From a wafer fab equipment spending perspective, we now see calendar 2021 ending in the mid $80 billion range. Overall, WFE is higher in the second half versus the first half of the year, with both DRAM and Foundry/Logic up in the second half, while NAND is more balanced. Demand remains strong, and while it's a bit early to give a specific forecast for calendar year 2022, indications are that it will be another year of WFE growth. We believe sustained strength in WFE spending is due to several factors, we have previously highlighted. First, drivers of semiconductor demand continue to broaden and sectors such as automotive, healthcare, and security are increasingly dependent on semiconductor content to deliver the performance requirements of end-users. As a result, we are seeing a strong uptick in trailing edge technology nodes served by our Reliant business. Our Reliant business has now posted 11 consecutive quarters of record revenues. And in calendar year 2021, we expect Reliant to outgrow WFE investment in this segment. Furthermore, high utilization rates across our installed base are driving strength in all sub-segments of our DSPG business. And in the September quarter, CSBG revenues increased year-over-year by more than 30%. At the leading edge, semiconductor content growth, large die, and rising capital intensity are fueling increased wafer starts and strong WFE spending. In Foundry/Logic, for instance, the next-generation processor chip for a top smartphone maker is more than 20% larger than its prior iteration. In DRAM, higher capital intensity is being driven by the increasing need to correct single bit errors through the addition of an extra on-chip bit. In 3D NAND, increasing device layer counts and the resulting higher degree of manufacturing difficulty is requiring the addition of new deposition and etch processes to address stress management, defect control, and multi-stack integration challenges. As a result, we see the WFE investment required to achieve the same bit growth percentage over the next five years to be notably higher than the five-year period just completed. However, as the leading equipment supplier to the 3D NAND market, we are investing in new and differentiated capabilities to ensure scaling remains cost-effective. As one example, Lam has developed a new high-productivity cryo etch solution, which increases etch rates in high-aspect ratio features required for NAND devices with greater than 200 layers. We have installed this new capability at every major 3D NAND manufacturer for qualification with additional systems now shipping to support planned ramps to high-volume production next year. While initially developed to meet the demanding requirements of high-aspect ratio etch in 3D NAND, we believe the technology may also have benefits for Foundry/Logic and DRAM at the leading edge, where we are presently engaged with customers on critical applications. Looking in more detail at the Foundry/Logic segment, we see spending at record levels. Lam's Foundry/Logic revenues are likewise set to grow significantly in 2021 and we expect this expansion to continue in 2022 as well. Foundry/Logic performance in the sub-five nanometer era is being driven by both device architecture innovation and traditional area scaling. We're prioritizing technology development in three areas where we see the fastest growth and the greatest need, namely deposition and etch processes to support the efficient adoption of EUV patterning, new etch capabilities to enable the formation of critical transistor features, and new materials and deposition techniques to assist in RC management. In patterning, we're using the learning we have acquired over many years of multi-patterning etch leadership to win new applications as the industry adoption of EUV progresses. EUV requires the use of special photoresist materials which, given the material composition, can amplify existing challenges with pattern roughness and defectivity. Unaddressed, these will lead to performance and yield loss, especially at smaller device dimensions. Lam has developed critical etch and deposition technologies to help solve these EUV implementation issues. In etch, we introduced earlier this year a new pulse plasma etch capability that has demonstrated an order of magnitude reduction in EUV-related pattern defectivity. This innovative etch solution is currently shipping to leading Foundry/Logic customers. In deposition, hard masks and transfer films require enhanced mechanical properties in order to maintain fidelity of extremely small features and minimize line roughness. Utilizing a combination of proprietary hardware design and RF powered technology, we are depositing high-quality films that have replaced incumbent technologies such as PVD and spin-on materials at multiple Foundry/Logic customers. Related to the formation of critical transistor features, including gates, pins, and source streams, we saw significant etch wins in the September quarter. These wins continue to confirm the benefit of our unique plasma pulsing capabilities in conductor etch for gate all around and FinFet applications. For advanced device architectures, we also see ultra-high selectivity isotropic etch increasingly required. Lam's growing Selective Etch portfolio delivers superior results through a combination of process technologies and reactor innovations that include new chemistries and plasma sources. This has helped us win a greater number of applications in recent quarters. And finally, RC management continues to be a limiter on performance scaling, and we're seeing demand for our atomic layer deposition technologies as a result. Our Striker ALD system deposits thin locate films that can withstand harsh integration steps encountered later in the process flow. These films have demonstrated the ability to reduce capacitance by 20% to 30%, and Striker is now the tool of record at leading Foundry/Logic customers. This technology is also extendable to gate all around devices where there is an additional requirement of conformal coverage in recess cavities, which can then be selectively etched back. In Advanced Packaging, momentum remains strong with orders received in the September quarter from multiple Foundry/Logic customers for through-silicon via etch and deposition systems. Our experience in high-aspect ratio etching has allowed us to deliver a production-proven process with fast etch rates and smooth profiles, helping to minimize the cost of integrating TSVs in the overall flow. Similarly, for copper metallization, our SABRE 3D solution enables void-free fill by employing an innovative, advanced pre-treatment, and our high throughput electroplating process reduces cost of ownership. So to wrap up, we delivered a solid September quarter in an environment of ongoing supply chain challenges. We're seeing robust semiconductor demand across all segments, broadening of semiconductor applications across industries, and rising capital intensity. We are excited about the healthy outlook for WFE spending and believe our innovative product portfolio is poised to capture new opportunities as semiconductor technology continues to advance. Thanks again for joining. Now, here's Doug to cover the quarter in more detail.

Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining us on our call today. Lam delivered another quarter of strong results with revenue, operating income dollars, and earnings per share coming in at record levels in the September quarter. All financial metrics came in at or above the midpoint of our guidance, demonstrating our continued focus on operational execution. We’ve achieved this performance while also navigating significant supply chain challenges. We're pleased with Lam's ability to scale the Company in this demanding environment. September quarter revenue was $4.3 billion, an increase of 4% from the June quarter, and more than 35% growth from a year ago. Looking at the breakout of the systems revenue, the Memory segment represented 64% of systems revenue in the September quarter, which was up from the prior quarter level at 59%. Memory growth was driven by investments in DRAM, primarily in the 1z and 1-alpha nodes. DRAM systems revenue nearly doubled in dollar terms and grew from 10% in the June quarter to 19% in the September quarter. NAND segment concentration came in at 45% of our systems revenue versus 49% in the June quarter and was flat in dollar terms. Our NAND customers are investing in both capacity additions and conversions with equipment investments focused towards 128 layers through 192 layer devices. The Foundry segment spending represented 25% of our systems revenue compared with 35% in the June quarter. We're seeing investments in equipment for both leading-edge and mature device nodes from multiple sources of end-use demand, such as AI, IoT, cloud, and 5G. Logic and analog device companies are driving capacity additions at the foundries. There was notable growth in the Logic and Other segment, which hit a record level of systems revenue for Lam in the September quarter. Logic and Other contributed 11% of systems revenue in the September quarter, which is up from 6% in the June quarter and was driven by leading-edge immature nodes ramping from microprocessors, image sensors, power management, and 5G demand. Let me turn now to the regional composition of our total revenue. The China region came in at 37% of total revenues, which was flat with the prior quarter percentage level. The revenue from China domestic customers and multinational customers with fabs located in China was again fairly balanced in the September quarter. Korea and Taiwan regional spending represented 21% and 15% of revenues, respectively, in the September quarter. I do expect that the December quarter revenue will have a lower China concentration. The Customer Support Business Group revenue was nearly $1.4 billion, 34% higher than the September quarter in calendar 2020, and flat with the prior quarter level. As Tim noted, the Reliant product line that services the specialty market delivered record results, and we also had solid results in the spares service and upgrade side with the focus on maximizing the productivity and value of installed base tools while supporting the high Fab utilization levels in the industry. I continue to have confidence that CSBG will grow revenue consistently on an annual basis. Let me now shift to margin performance. Our September quarter gross margin was 46%, right at the midpoint of our guided range. I would just remind you that our gross margin can fluctuate quarter-to-quarter due to overall business levels along with customer and product mix. The supply chain constraints discussed earlier have resulted in elevated costs broadly, with freight and logistics costs continuing to be one of the biggest headwinds. Additionally, we currently have margin dilution from our new factory in Malaysia, which is not yet operating at full capacity. We included these costs in our December quarter guidance as we expect they will remain for the near future. Operating expenses for September were $586 million, a slight increase from the prior quarter. We've continued to manage our expenses as we scale the Company with a strong focus on operational efficiencies, while prioritizing R&D spending to deliver a differentiated product portfolio that supports our customers' technology roadmaps. The September operating margin exceeded the midpoint of our guidance range at 32.4% or approximately $1.4 billion. Our non-GAAP tax rate for the quarter was 12.2%, generally in line with our expectations. And as we've noted in previous quarter calls, a tax rate may fluctuate from quarter-to-quarter. You should expect the ongoing tax rate to be in the low teens level for the 2021 calendar year. We continue to monitor potential tax changes under consideration in the United States, but we've not reflected the impact of any potential changes in our financial models at this point. Other income and expense came in for the quarter at $36 million in expense. This amount is higher than the prior quarter due to an unrealized gain we had in June for one of our private equity investments, partially offset by lower interest expense in the September quarter as a result of the payoff of our 2021 nodes last quarter. And just to note, OI&E is subject to market-related volatility that could cause a difference from our typical run rate. We were active in our buybacks during the September quarter, allocating over $1.2 billion towards share repurchases. We deployed this cash in a combination of open market repurchases, as well as an accelerated share repurchase program. This ASR will continue to execute in the December quarter. In addition, we paid $185 million in dividends in the quarter. I'd also like to highlight that in August, we announced a 15% increase in our quarterly dividend, growing it from $1.30 to $1.50 per share, which was paid in October. We're tracking very well to our capital return plans, with returns of over 100% of our free cash flow year-to-date in calendar year 2021. Diluted earnings per share for the September quarter was $8.36 above the midpoint of the guidance range. The diluted share count balance was down slightly from the June quarter level coming in at 143 million shares, generally in line with our expectations. Let me now shift to the balance sheet. Cash and short-term investments, including restricted cash, totaled $4.9 billion, which is down from the prior quarter. The decrease in cash is attributed to the capital return activities that I described earlier. Additionally, the timing of shipments and the resulting impact on accounts receivable, as well as an increase in our inventory balance consumed cash in the quarter. A Day sale outstanding was up to 72 days from 66 days in the June quarter. Inventory turns were down slightly from the prior quarter level coming in at 3.2 times, which was planned as we've increased inventory levels to meet the increase in investments from our customers, as well as to help mitigate challenges that we see in our supply chain. Non-cash expenses for the September quarter included approximately $58 million for equity compensation, $61 million for depreciation, and $19 million for amortization. Capital expenditures for the September quarter were up versus the June level coming in at $136 million. The increase in our expenditures is associated with capacity expansion in the network, in particular, at our critical spare parts facility in Ohio, as well as spending for our Korea Technology Center that will be formally opening in 2022. We expect to see elevated levels of capital expenditures in the remainder of calendar 2021 and into 2022 as we support the growth that we see in the business. We ended the September quarter with approximately 15,400 regular full-time employees, which is an increase of approximately 1,300 people to meet increased output levels and to support customers with their technology and production requirements. Let's now take a look at our non-GAAP guidance for the December 2021 quarter. We're expecting revenue of $4.4 billion, plus or minus $250 million. We continue to maintain a widened revenue range given the supply chain uncertainties that we mentioned. Gross margin of 46% plus or minus one percentage point. Operating margins up 32% plus or minus one percentage point. And finally, earnings per share of $8.45 plus or minus $0.50 based on a share count of approximately 142 million shares. And just an additional note, our guidance does not include an estimated gain related to one of our private equity investments that recently raised capital in a public offering. The gain as of today is in the $50 million range and is subject to market volatility. The amount recognized in our financials, as of the end of the December 2021 quarter, may fluctuate. And I will obviously give you an update at our next earnings release. So that in closing, we're experiencing ongoing output challenges in our global supply chain that are continuing to negatively impact both our revenue and gross margin. For improving known items while new items continue to emerge that we need to further work through, many times remained stretched and we continue to have unmet demand. Despite these constraints for operating at record levels in terms of revenue and earnings while delivering the technology solutions our customers require. Industry demand remains strong as we look forward to growth in 2022. I remain very excited about the multitude of opportunities for the Company. And I'd obviously like to thank the dedicated Lam Research employees for their tireless support in this environment. Operator that concludes my prepared remarks. Tim and I would now like to open up the call for questions.

Thanks a lot, Doug. I'm hoping that you're not sick; you sound a little bit under the weather. Hopefully, you're feeling okay. The first thing I wanted to ask is if you can quantify the current gross margin headwind? You mentioned Malaysia and freight; is that around 50 basis points or 75 basis points? I'm just curious if you can provide that information for us. Thanks, Doug.

I'm doing quite well, frankly. I might have a slightly scratchy throat. I won't quantify it, but as I've mentioned before, it's a significant headwind. Once we get through this environment, it will be noticeable, but I won't provide specific numbers right now. Just know that it's substantial.

It's true. You've mentioned that China domestic has decreased sequentially in December. I assume part of that is related to Memory. My question is whether that issue will be resolved as we enter the first half of 2022 or if there are still some specific challenges in China that could continue into that period.

No, Tim. I don't see anything really relative to China or timing of anything. Maybe I'm not quite getting at your question or maybe I don't understand the nature of the question; you want to try to redirect me a little bit?

There is a significant project in China that has been widely reported to be facing funding issues, which has led to difficulties in meeting commitments. I'm curious if this has contributed to the NAND softness you mentioned last call and whether that situation has been resolved, or if it could still pose a challenge in the first half of next year.

Yeah. I don't really see any change from a quarter ago of any major customer plans, and I won't refer to any one customer or another but no real change, Tim.

Awesome. Okay, Doug. Thank you.

Yeah. Thanks.

Good afternoon and great job on the quarterly execution, guys. You know, the market is concerned that we're heading into a multi-quarter downturn in Memory, kind of similar to the 2018/2019 Memory downturn, which is a pretty severe 6-quarter downturn, but the one thing I clearly remember was that ahead of that downturn, your memory customers proactively cut their CapEx very, very rapidly. Now, if I look at it this time around, there's some near-term pricing weakness in memory. But the overall memory demand environment remains pretty strong, and I think most memory companies seem optimistic right on the baton outlook for next year. So I guess the question is, has the Lam team seen any signs similar to the 2018 downturn of customers either getting concerned or canceling or slight pushing out of shipments due to a concern on our projected memory downturn next year?

Yeah. Harlan, let me take that first. I think the simple answer is no. When the vast majority of our conversations with customers today is still about delivering equipment that they feel they badly need to meet their near-term requirements. And as Doug mentioned in his prepared remarks, I would say lead times have stretched out to the point where our visibility into demand in '22 is better than usual. So I don't think that the types of initial indicators that you're talking about are things we're seeing right now. We feel much more constrained by supply chain challenges and ability to meet shipments and an overshifting situation.

Yeah. Thank you for the insights there. And then the one area that we continue to see demand which you alluded to is, obviously, strong demand for procuring specialty processes, analog microcontroller, RF. These guys are all dealing with supply issues. I know back at the Analyst Day, the team said that specialty market is going about 2 to 3 times faster than WFE. So is your Reliant business going faster than that 2 to 3x rate? And where is the team driving stronger than market growth, is it etch, is it deposition, or is it more based on platform performance like to put uptime or other productivity metrics? Thank you.

Yes, that's a great question. As I mentioned earlier, the Reliant business is growing at a faster rate than the WFE investment in that segment, which suggests we are gaining market share. This growth is well distributed across our product offerings. You are correct that in this market, Lam's leadership in providing both technology and productivity to our customers plays a significant role. Additionally, there are new decisions being made regarding toolsets and the establishment of new fabs for specialty products. We have a lot to contribute when it comes to meeting the cost targets sought by those customers.

Thank you.

Thanks, Harlan.

Yeah. Good afternoon, guys. Thanks for letting me ask a question. Tim, I get that it's a little bit too early to get too granular on next year's WFE. And I know in your prepared comments, you said it's going to be another growth year. I'm wondering if you can give us some parameters of how you're viewing first half of next year versus the second half of this year.

I think we won't provide specifics on the first half and second half of 2022, but we will say that we are finishing this year with considerable unmet demand. We've mentioned a constrained environment, which offers us many advantages as we head into 2022. I attempted to outline some trends that we believe will drive demand and, on the supply side, the increasing capital intensity, larger semiconductor devices, different architectures, and new processes that need to be integrated into the process flows to manage the increased complexity in manufacturing. These factors will support WFE for a long time. Therefore, I believe there are many positive elements for WFE in 2022 from an equipment standpoint.

That's helpful. And then, Tim, as a follow-up, pretty big milestone in the Logic business. I think this quarter's revenue was about a 1/3 higher than prior peak. It's the first time you've been run rating over $1 billion ever. And I know you've kind of talked about some of the things, you prepared comments that are driving that, but to what extent do you believe that this is sustainable? To what extent is a TAM growth in Logic versus kind of your market share and SAM growth starting to kick in? And any sort of view on sustainability from these levels?

It's likely a combination of us expanding into new applications related to emerging device architectures and the enhancement of new processes like selective etch technologies that are broadening our market opportunities, along with gaining market share. We've noticed an increase in spending within the Foundry/Logic sector, and for several years, we've been dedicated to developing products that deliver significant value to customers in that area. We've always mentioned the need for some patience, as changes in the Foundry/Logic market tend to occur more gradually than in the Memory sector. Now, we are beginning to see the positive impacts of those qualification efforts reflected in our actual business results.

Thanks, John.

Good afternoon and thanks for taking the question. I guess first question, I'm hoping to go back to supply constraints. And Doug, can you perhaps speak on the revenue side where are you seeing the impact? Is it primarily due to perhaps a slower ramping in Malaysia? Are you seeing it across all products or limited to a few? And then I'm curious as part of that, is it impacting CSBG both for Reliant and upgrades or less so there?

Yeah, C.J., thanks for the question. Frankly, when I look at what we're doing with our own internal manufacturing capability, that's not what the biggest constraint is. It's getting back into the supply chain. I think we've done quite a nice job actually accelerating the ramp of the factory in Malaysia. Tim referred to all the places that we're opening new capacity. We're adding capability pretty much everywhere internally in the network. But as we get further and further down the road and demand continues to be quite strong, we're beginning to see constraints in the supply chain. So we have to work our way back up through some of those things. And that's the biggest thing we're dealing with right now, C.J. Tim, I don't know if you want to add anything?

No, I guess I'd just reiterate. We build incredibly complex machines. They do amazing things on the wafer. They require a lot of parts from a lot of different suppliers to do that, including a tremendous amount of semiconductors themselves. And so when we've heard so much about chip shortages, we're clear that hit some of our machines and it only takes a few of those critical chips to delay us being able to ship what otherwise is a very complex system. So we, as Doug said, just have to work down through the supply chain through lots of suppliers to find out where those pinch points are. And it's a daily activity, but so far we're working through there and being able to deliver growth and also meet the most urgent needs of our customers. That's really our key focus.

Very helpful. As my follow-up, I get the sense whenever I have conversations with you both that you feel like investors under-appreciate your Foundry/Logic exposure. And so, within your slide deck and then prepared comments, you talked quite a bit about new design wins. And so, I'm curious, I think over the last three years, your SAM or as a percentage of Foundry/Logic's running around 8%, 9%, when do you think we see an inflection based on these design wins and what should we be looking for to gauge that? Thank you.

Yeah, it's a great question, and I'm glad you noted. I spent a lot more time in these prepared remarks talking about Foundry/Logic. I think our Memory story in leadership there is pretty well understood. And we want to make sure that people understand the progress we're making in Foundry/Logic and also the new opportunities that are being created for us. And so many of those are for more advanced technologies. It's where device architecture changes or things like a new RC management requirement. RC requirement drives need for new films or new deposition techniques. And so I would just say, at each technology node, we're seeing an inflection, we're seeing more of our equipment have a chance to get inserted, get qualified and become part of the process of record. So I don't think you're going to see like a single point in time or single node greasy big jump up or you're going to see the steady progression as we made progress on both SAM expansion and share gains.

Helpful. Thanks.

Thanks, C.J.

Thanks for taking my question. I had two of them. First one, I think I just want to clarify, Tim or Doug, it seems like the supply chain constraints are impacting your revenue even though demand is strong and it's impacting your margins. So should we assume this $4.4 billion revenue, 46% gross margin, is where you're going to be saturated until the supply constraints ease? Or do you think it's going to be more gradual recovery? And then I had a follow-up.

Let me start, and then I'll let Tim add on. Krish, some of the cost challenges we've been facing have been around for a while, especially as I mentioned. We’re making efforts to address it effectively. However, we are investing to enhance our production capacity. As I noted earlier, we are making progress in various areas, but other issues have arisen. We're navigating through our supply chain, and Tim pointed out that semiconductor shortages are also a limiting factor for us. We're doing our best to address these challenges and incrementally improve our capabilities. I believe things will gradually improve over time, Krish. Tim, do you want to add anything?

Yeah. I think that's a pretty good explanation. It will continue to improve as we knock down each of the problems that come up and assuming that there aren't bigger surprises, we would see ourselves gradually improving from this point forward. Just as we had supply constraints in the September quarter and managed through those and we will have more in the December quarter. It's constrained but we're managing to knock enough off that. We're showing some incremental growth, and I think that's what you could probably expect to continue to see.

Got it. Very helpful. And then a follow-up for you, Tim. You spoke about the cryo etch product, which kind of makes a ton of sense given the extremely long etch times today in 3D NAND. And you also said, this also improves etch rate. But isn't it a negative for you since customers would need sure of your etch tools, or is this needed to protect and grow your market share?

Well, I think that's like all things when you're providing the technology that's needed to not only enable current nodes but future technology nodes, we have an obligation to drive both technology and productivity and make sure scaling is cost-effective and the roadmap continues. And so, this is our effort to not only differentiate our technology further for many companies that may try to develop similar technologies, but also to help our customers with those transitions and accelerate in the state of the art of NAND.

Hey Krish, I will just remind you something. Tim said in the scripted remarks that as we look at the NAND investment required generating the bit growth over the next five years as compared to the previous five years, it's increasing. That includes cryo rolling out and increasing etch rates as a result of that.

Yes.

Thank you. I wanted to ask about NAND. Tim, in your opening remarks, you mentioned that the five-year spending in NAND needs to be higher than the last five years. Can you provide any details on why the increased layer count is more capital intensive? If you are increasing layers now or in the next five years, what factors contribute to the higher capital intensity? Thank you.

We mentioned that the wafer fabrication equipment required to achieve the same percentage of bit growth will be higher in the next five years due to several factors. One factor is that as the layer count increases, certain processes scale in a non-linear manner. For instance, it takes significantly longer to etch a stack that is twice as high than just double the time. This necessitates the introduction of new technologies such as cryo etching and other methods to manage the increase in process times. The same applies to deposition, as controlling uniformities and defects becomes more challenging with taller stacks. Additionally, as we stack higher, the stress on the wafer and its bowl becomes a larger concern, requiring additional steps like stress management deposition tools. These extra steps contribute to the increased wafer fabrication equipment needed to add bits of NAND, reflecting a combination of new steps to address complexity and new processes needed for managing non-linear scaling of process times.

Great. Thank you.

Thanks, Joe.

Hi, guys. Thanks for taking my questions. My first one, I wanted to take a look at the Foundry business. So it was down like 25% sequentially and it looks like it was down year-over-year, what seems to be a very, very strong foundry spending environment. So why was that? Can you tell us a little bit what's going on in that end market? Why was it down?

Yes, Stacy, nothing goes up every single quarter. There's ebbs and flows. It's a second half weighted Foundry/Logic's spending profile. It's going to be a good quarter in December. But when you got to concentrate instead of a couple of really big customers, it's lumpy at times, so I think that's the only thing I'd tell you about it.

I would like to follow up on what that might suggest for the trajectory into Q4. You mentioned that Foundry/Logic is expected to improve in the second half compared to the first half, DRAM will also be better in the second half, and NAND is more balanced. Given the current state of NAND and DRAM, I need DRAM to drop significantly in the December quarter to see an increase in Foundry. Is this what you are suggesting? When you refer to growth in Foundry/Logic in the second half, do you mean it as a combined growth?

It's a combination with you, right? You said Foundry/Logic and DRAM up in the second half and NAND more balanced.

I guess what I'm asking is, you see Foundry and Logic bulk up in the second half or just the combination. Because I can't really get Foundry up in the second half unless they've got DRAM down a bunch in the end of December quarter, just mathematically. Like thinking about this, or what?

Stacy, we're combining Foundry and Logic together when I described it.

Okay, guys. Thank you.

Yes.

Good afternoon. Thank you for your question. I have a couple of my own regarding the Logic segment. You mentioned that the trailing edge is driving a significant spike. However, in response to a previous question, you also highlighted some of the feature wins at the leading edge. I would like to revisit that point. When you mentioned that it could possibly maintain this level in response to John's question, are you referring solely to the trailing edge, or are you seeing some contributions from the leading edge, even as we approach the December quarter?

We want to clarify that the Reliant business and trailing-edge technology represent significant strengths for Lam, indicating a growing demand across various use cases, including our industry, which relies heavily on that type of chip. However, we also have substantial business in the leading-edge sector. My point was to highlight how our serviceable available market expands with new processes and how we believe our win rate is improving as new technology developments occur. This is reflected in our current numbers. We expect that as technological advancements in Foundry and Logic continue, our share of the wafer fabrication equipment market will increase over the coming years.

Thank you very much, and congratulations on a strong quarter given the current environment. Doug, I have a follow-up question regarding the Customer Support Business Group. You have done an excellent job in growing the Reliant business, and it's clear that the team is benefiting from the growth in that marketplace. Are you seeing any market share gains as customers, particularly in that area, seek increased productivity with our new materials engineering in some of the trailing etch processes? Are you also gaining share and securing placements with the Reliant business for some of those more established nodes?

That's a good question, Patrick. Yes, we are active in that market through the Reliant product line, which includes refurbished equipment, and we are increasingly selling new equipment as well. Our footprint is performing quite well in the specialty space, and there are specific areas where we are particularly strong. Overall, I believe we are doing well. I'm not sure if Tim has anything to add.

I guess what I would just add is, you know, as people are trying to work through supply constraints and increase their output out as a fab, most valuable part of our CSBG business to them is the productivity upgrades segment. Those are upgrades that can be applied to existing equipment. Many times, not even really changing the process. It might be software optimization to optimize the wafer handling through the machine and thereby gain some small improvement in throughput. We definitely see as utilizations really hit max levels, people looking for productivity upgrades they can implement to squeeze more out of installed base, so that part of our business always does quite well, but I would say in this environment doing quite well.

Hi, guys. Thanks so much for taking the question. My first question is on 2022. I realize it's early. You guys talked about your expectations for the market to be up. How are you thinking about the 4 device types? If you had to rank order the four, how would you go about doing that? And more importantly, how should we think about Lam's ability to outperform the market in '22? I guess the big concern is, you know, Memory is, you know, flat to flattish maybe, and Logic and Foundry continue to be the big drivers. All else equal, that would be a bit of a headwind for you guys just given your customer mix. But at the same time, you've talked about all these design wins and your market share growth in Foundry/Logic. So other than that, how should we think about your performance for the WFE?

Yeah, Toshiya. It's too soon for us to give you specificity in 2022. When we look into the year though of 2022, I'm very confident on the growth here. I believe every segment of the business is actually going to be pretty strong next year, but I'm not really ready to parse it one versus another quite yet. Obviously, we'll do that for you next quarter. And I feel really good about where we're positioned, right. Tim talked a lot about the trajectory of our business in Foundry and Logic. We've always been strong in memory and I believe we're going to continue to do extremely well there. So too soon for me to parse it there. And by the way, I think CSBG is going to have a good year next year, right? When I put it all together, I think we're very well-positioned and going to continue to be. And stay tuned. We'll give you a little more specificity on the December quarter call.

Thanks for taking my question. You mentioned the supply situation could improve over the next several quarters. I'm curious. What do you think changes to help that? Is that actions you are taking, is that actions your suppliers are taking? I'm just curious, what's kind of behind your confidence that supply situation can actually improve from here?

I believe the improvements in our supply situation will come from the actions we are taking with our suppliers. We are focused on prioritizing our critical supply chain partners to ensure we meet our output needs on a quarterly basis. We have already implemented several measures ourselves, as discussed before. Six months ago, we identified the need to expand our physical capacity by opening new factories, and we have made significant progress on that front. However, given the complexity of our supply chain, it’s essential that we collaborate closely with all of our partners, who have been supportive throughout this process. There is still more work ahead, and we expect to continue making progress over the next few quarters.

All right. Thanks, Tim. And for my follow-up, you sound more confident about next year, both on the tools and the CSBG site. Is that based on the backlog of orders? Is that based more on structural drivers? And where I'm coming from is that customers are seeing the current state of the industry and supply shortages. What gives you the confidence there, not over-ordering given this environment that these orders are for real? So if you look at your confidence about next year, how would you contrast those signals to what you usually have at this point in prior years?

Yeah, that's a very good question. Something we watch closely, we want to make sure that demand is as real as possible. I mentioned our lead times, our conversations with customers, our understanding of projects, I would say is better at this point because our customers are planning for very big projects, mega fabs. They're experiencing difficulties in getting equipment. And so, we're having much deeper conversations with them about how we can ensure that that equipment be available when they need it. And so, I would say compared to normal, we have a little bit longer visibility than we typically have had.

And Vivek, obviously, we know every fab in the world, how big it is, how much equipment it can take. And we think through that as we're talking to customers about when they want equipment in those clean room spaces. So that goes into part of the thinking as well.

Thank you very much, and congratulations on a great quarter given the circumstances. Doug, I have a follow-up question regarding the Customer Support Business Group. You've done an excellent job growing the Reliant business, and it’s clear that the team is benefiting from the expansion of that marketplace. Are you experiencing any market share gains as customers, particularly in that area, seek increased productivity with our new materials engineering related to some of the trailing etch processes? Are you also gaining market share and securing placements in the Reliant business for those more established nodes?

That's a good question, Patrick. Yes, we are. We go to market through the Reliant product line, which includes refurbished equipment, and we're increasingly selling new equipment. Our footprint is performing well in the specialty space, and we have some specific areas where we are very strong. Overall, I believe we are doing well.

I guess what I would just add is, you know, as people are trying to work through supply constraints and increase their output out as a fab, most valuable part of our CSBG business to them is the productivity upgrades segment. Those are upgrades that can be applied to existing equipment. Many times, not even really changing the process. It might be software optimization to optimize the wafer handling through the machine and thereby gain some small improvement in throughput. We definitely see as utilizations really hit max levels, people looking for productivity upgrades they can implement to squeeze more out of installed base, so that part of our business always does quite well, but I would say in this environment doing quite well.