Lam Research Corp (LRCX) — Q2 2024 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 CEO; and Doug Bettinger, Executive VP 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 December 2023 quarter and our outlook for the March 2024 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time. The release can also be found on the IR 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 3:00 p.m. 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.

Thank you, Ram, and welcome, everyone. Lam delivered strong performance in the December quarter. Revenues, gross margin, operating margin and EPS all above the midpoint of our guided ranges. Our results for December closed out calendar year 2023, in which Lam executed well amid a decline in overall wafer fabrication equipment spending. Compared to the prior year cycle trough in calendar 2019, we achieved a near doubling of EPS. There are a few reasons why Lam has evolved stronger cycle to cycle. First, we have improved our positioning in the foundry, logic and specialty technology segments through sustained investments in innovation and new products. As a result, we have grown our total non-memory revenue share, and we continue to gain momentum at key technology inflections. Second, we have delivered tremendous growth in our customer support business group. Lam ended calendar 2023 with approximately 90,000 chambers in the field, an installed base almost 50% larger than in the previous cycle. CSBG revenue has grown by more than 80% from 2019 levels. And finally, we have further improved our ability to manage costs and drive operational efficiency through cycles, delivering operating margins in 2023 that were nearly 2.5 points higher than the prior trough. Turning to WFE. We estimate that 2023 spending ended in the low $80 billion range. This is up slightly from our prior view, driven by continued strength in domestic China spending predominantly in equipment segments where we do not participate. Overall, memory WFE was down nearly 40% year-on-year, led by cuts in NAND spending of more than 75%. Non-memory WFE decreased in the mid-single digits range with mature node growth in China, partially offsetting declines in leading-edge node spending in the rest of the world. As we enter 2024, the business environment remains muted. However, we expect a modest recovery in memory spending to drive a stronger exit to the year. Our early view of WFE spending for calendar 2024 is in the mid- to high $80 billion range. Growth in DRAM will be driven by capacity additions for high-bandwidth memory as well as node conversions. NAND spending increases will largely come from technology upgrades. We see foundry logic spend growing in 2024 with higher leading-edge investment, offset in part by declines in mature node investment outside of China. Overall, we believe domestic China spending will be stable in 2024. Longer term, the setup for WFE investment is robust. With semiconductor revenues widely expected to reach $1 trillion around the end of the decade and device manufacturing complexity continuing to rise, we believe WFE spending will need to roughly double from today's levels. Lam's served markets of etch and deposition should outpace growth in WFE overall. For this reason, we have been executing a series of strategic actions to best position the company for the growth opportunity ahead. Importantly, we have remained committed to these initiatives despite the challenging spending environment over the past several quarters. First is our commitment to R&D, including planned spending increases in calendar year 2024 to extend our differentiation in products and services targeted at next-generation semiconductor device inflections. This next era in semiconductors will be defined by the broad move towards 3D architectures and advanced packaging to solve scaling challenges. We believe this will, in turn, drive an increase in etch and deposition intensity over the long term. Our focus is on multiple billion dollar SAM expansion opportunities across memory and foundry logic. We have profiled our advances in gate-all-around, backside power delivery, advanced packaging and dry EUV patterning over the past several quarters, and our solutions are continuing to gain traction with customers. In the December quarter, we secured additional advanced packaging wins for high-bandwidth memory, which is critical for enabling advanced AI servers. Our SABRE 3D tools, best-in-class plating uniformity along with our ability to demonstrate an overall cost of ownership advantage made Lam the clear choice over a large competitor. In 2024, we expect our HBM-related DRAM and packaging shipments to more than triple year-on-year and outpace WFE growth in this segment by a significant margin. The specialty technology markets are also yielding a diverse set of new opportunities for Lam. For instance, we have recently delivered pulse laser deposition technology to customers targeting high-volume manufacturing of MEMS and next-generation high-frequency devices. We accelerated our entry into this market by integrating technology we obtained via a small acquisition onto a production-proven Lam platform. Compared to competing deposition methods, Lam's solution enables more highly doped scandium aluminum nitride films, which deliver the piezoelectric performance and cost our customers require. The second area of focus for Lam has been our investment in facilities close to our customers. By establishing process development capabilities near our customers' R&D fabs, we are maximizing collaboration and accelerating time to solutions. We have also made progress ramping supply chain and manufacturing operations within our customer ecosystems. These in-region capabilities enhance our responsiveness and resilience for customers and create significant economic value for Lam as we leverage the benefits of global flexibility. Our new manufacturing facility in Malaysia is poised to fully scale in the coming WFE upturn, providing us the capability to nearly triple the percentage revenue contribution from our lower-cost manufacturing locations versus a few years ago. And finally, Lam is concentrated on reengineering our business processing systems to drive operational excellence at greater scale. Investments in digital capabilities like virtual twinning, advanced simulation, and AI are helping us to accelerate problem solving, and we are building equipment intelligence capabilities and in-fab service automation into our most advanced product road maps. As we complete our reengineering efforts, we are also intent on achieving organizational agility. In this regard, we are announcing a small workforce reduction predominantly at the executive level to align our resources with our execution priorities and drive efficiency and speed of decision-making. In calendar 2023, Lam delivered solid results while investing to build strong capabilities for the future. Looking forward, I am confident that our strategic global infrastructure and differentiated technology portfolio provide Lam with the tools we need to capitalize on the robust semiconductor growth expected in the years ahead. Thank you, and now here is Doug.

Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a busy earnings season. We delivered strong financial results in calendar year 2023. Our revenue came in at $14.3 billion and diluted earnings per share at $27.33. We're pleased with the company's execution during the year where the memory WFE mix reached historic lows. Let's look at the details of our December quarter results. Revenue for the December quarter was $3.76 billion, which was up 8% from the prior quarter and down 29% from a year ago. Our deferred revenue balance at the end of the quarter was $1.93 billion, which was an increase of $238 million from the September quarter, which was mainly tied to growth in customer advanced payments. We continue to have a higher deferred revenue balance versus historic levels given these customer advanced payments. From a segment perspective, the December quarter, systems revenue in memory was 48%, which is an increase from the prior quarter level of 38%. The growth in the memory segment was led by DRAM, which was at record levels on a dollar basis, coming in at 31% of systems revenue compared with 23% in the September quarter. DRAM is benefiting from growth in high-bandwidth memory capacity and the move to DDR5, which is needed to address AI-related workloads, and it's also benefiting from shipments to China. As we've noted in prior quarters, nonvolatile memory WFE was at historic lows on a mix basis in 2023. For the December quarter, this segment represented 17% of our systems revenue, which was up a little bit from 15% in the prior quarter. The slight growth was predominantly related to investments in certain technology projects. NAND customers have aggressively reduced capacity throughout the year to bring inventory levels down. The Foundry segment represented 38% of our systems revenue, a little higher than the percentage concentration in the September quarter of 36%. Growth was driven by new fab shipments in various regions across several process nodes. The Logic and Other segment was 14% of our systems revenue in the December quarter, which was down from the prior quarter level of 26%. The decline was driven by general mature node softness as well as the timing of customer projects. Overall, in the Foundry and Logic segment, we performed well, delivering on the share gains that we've previously been discussing with you. Now I'll discuss the regional composition of our total revenue. The China region came in at 40%, which was down from 48% in the prior quarter. Most of our China revenue in the last 2 quarters was from domestic Chinese customers, and we expect spending from this region to be stable overall in 2024. China as a percent of our revenue is expected to stay relatively high in the March quarter, but it likely trends lower as the year progresses. Our next largest geographic concentration was Korea at 19% of revenue in the December quarter versus 16% in the September quarter. And finally, Japan and Taiwan rounded out the remaining of our top 4 regions. The customer support business group generated revenue in the December quarter of nearly $1.5 billion, up 2% from the September quarter and 16% lower than the December quarter in calendar year 2022. Overall, the business was steady, and we continue to see our memory customers operating the fabs at very low utilization rates. Given the strength of the installed base units, we have a strong foundation for growth with technology conversions and utilization rates resume growing. Spares followed by the Reliant product line continue to be the 2 largest components of CSBG. Turning to the gross margin performance. The December quarter came in at 47.6%, which is above the midpoint of guidance and generally in line with the September quarter level, which was 47.9%. We've improved elements of our cost structure during the year and delivered on our commitment to improve gross margin from the 2023 March quarter level by approximately 1 percentage point as we exited calendar year 2023 from those operational improvements. December quarter operating expenses were $662 million, up from the prior quarter amount of $622 million. R&D as a percent of spending was higher versus the September quarter, coming in at over 69% of total expenses. The increased spending reflects our ongoing focus on extending our product and technology differentiation across those critical inflections that Tim mentioned earlier. We will continue to grow investments across multiple market segments to support the long-term strategic objectives for ongoing company outperformance. Operating margin for the current quarter was 30%, in line with September quarter level of 30.1% and above the midpoint of our guidance primarily because of a stronger gross margin performance. Our non-GAAP tax rate for the quarter was 12.3%, generally in line with expectations. Looking into calendar 2024, we believe the tax rate will be in the low to mid-teens with the normal fluctuations quarter-by-quarter. Other income expense for the December quarter came in at $5 million in income compared with $7 million in income in the September quarter. The slight fluctuation in OI&E was mainly due to variations in exchange rates. OI&E will continue to be subject to market-related fluctuations that could cause some level of volatility each quarter. On the capital return side, we allocated approximately $640 million to open market share repurchases, and we paid $264 million in dividends in the December quarter. For the 2023 calendar year, we returned 79% of our free cash flow, totaling $3.8 billion, which was largely consistent with our long-term capital return plans of 75% to 100%. December quarter diluted earnings per share was $7.52 over the midpoint of our guidance. Diluted share count rounded down to 132 million shares on track with our expectations and down from the September quarter. During 2023, we repurchased nearly 5 million shares through our share buyback program. And I would just mention, we have $2.1 billion remaining on our Board-authorized share repurchase plan. Let me turn to the balance sheet. Our cash and short-term investments at the end of the December quarter totaled $5.6 billion, up from $5.2 billion in the September quarter. The increase was largely due to collections, offset by cash allocated to share repurchases, dividend payments, and capital expenditures. Overall, 2023 was a record year for cash flows from operations coming in at $5.3 billion. Days sales outstanding was 66 days in the December quarter, which was a decrease from 73 days in the September quarter. As a result of our operational focus and execution, I'm pleased to report that inventory turns improved to 1.8x from the prior quarter level of 1.5x. We will continue to work on bringing inventory down throughout calendar 2024. Our noncash expenses for the December quarter included approximately $70 million for equity compensation, $78 million for depreciation, and $13 million for amortization. Capital expenditures for the December quarter were $115 million, up $38 million from the September quarter. Spending was primarily centered on product development activities and lab expansions in the United States and Asia, supporting our global lab investment strategy. We ended the December quarter with approximately 17,200 regular full-time employees, which was flat with the prior quarter. Let's now turn to our non-GAAP guidance for the March 2024 quarter. We're expecting revenue of $3.7 billion, plus or minus $300 million. Gross margin of 48%, plus or minus 1 percentage point. This gross margin guidance is reflective of continued favorable customer mix. I do expect this favorable mix to mitigate somewhat as the year progresses. Operating margins of 29.5%, plus or minus 1 percentage point. I would again highlight that the March 2024 quarter will have higher spending as it includes an extra week in the quarter, which occurs every several years. It's a 14-week quarter. And I will also remind you we will be growing R&D spending this year. And finally, we're expecting earnings per share of $7.25, plus or minus $0.75 based on a share count of approximately 132 million shares. We continue to be focused on improving our business operations to optimize efficiency and effectiveness as WFE growth occurs. Our profitability metrics reflect the progress we made during calendar year 2023, with business realignment and transformational activities well underway. We'll see these activities continue in the first half of calendar year 2024. Including the cost incurred for these improvement activities and headcount reductions that we saw in calendar 2023, I now expect we'll spend in total $300 million for these actions, which will continue to be reported in our non-GAAP adjustments. I had previously told you we would spend $250 million over 12 months. It's now $50 million higher and 6 months longer. So let me conclude. Over many semiconductor cycles, Lam has established a proven track record of successfully managing our business. With the actions we've taken over the course of the last several quarters, we expect to strengthen our operations and technology leadership and further enhance our profitability profile. When revenue scales into the next upturn, Lam will be stronger, better positioned and more efficient.

I guess my first question for you, Tim, is I wondered if you could sort of translate. Obviously, you heard your big litho peer that reported today that had these huge orders and it looks like a couple of billion dollars in EUV orders for DRAM. So that sort of translates to an extra $9 billion to $10 billion, something like that. So it seems mostly for shipments during this year and even into next year for them. So like maybe you haven't seen that yet. But can you talk about what that tells you about the future of that segment? And I know you think it's going to be up, but it seems like it could be up a lot. And maybe any change in the planning outlook or the discussions that you're having with your DRAM customers?

Thank you, Tim. Forecasting WFE can be challenging because we have a clear understanding of various market segments. We aim to provide a comprehensive overview of WFE by engaging with peers, discussing with customers, and conducting our own evaluations. While we occasionally miss the mark, we are continuously adjusting our outlook. I don’t believe there is anything contradicting what we have previously stated. We mentioned that WFE is experiencing modest growth this year, largely due to memory, and we expect a stronger finish to the year. We will continue to monitor this and maintain conversations with our customers. The lead times for equipment and the processes for ordering and integrating certain equipment can vary among suppliers, which may influence our perspective. However, this situation further supports our optimism, as memory represents a historically low share of WFE. We have indicated that memory spending across both DRAM and NAND has been at unsustainable levels, which we noted throughout last year. Therefore, it's not surprising that a correction is occurring. It’s important to mention that we don’t overly focus on precisely timing these changes. In my remarks, I emphasized the importance of strategic actions that unfold over the years, which align with upcoming DRAM shifts. Our strong position in high-bandwidth memory and applications like DDR5 has come from recognizing DRAM opportunities in the past. We expect to continue seeing growth in this area and will maintain our long-term perspective on technology and spending trends.

And Tim, it's Doug. I'll just remind you something that I know you know very well that with those lead times are generally much longer than ours are in etch and deposition. And you never buy litho without eventually buying the process equipment that goes along with it. So if they're seeing something, we will see it, too.

Totally, Doug. Yes, for sure. So I guess for you, Doug, super quick. So there's kind of a lot of moving parts, I know going on in gross margin. I know that the mix is helping you. And I know you're probably getting some tailwinds from some cost relief and things like that. So what's the right normalized margin? I know maybe 48% is not the right normalized number, but is it like is the mix helping you by 50 basis points, and that's what sort of goes away. Can you sort of help us there?

Yes. Tim, I'll remind you what I said last quarter call too, still kind of the same thing. The customer mix is benefiting us again in the March quarter guide, maybe even a little bit more than it did last quarter. I took you back to that June quarter of last year before we had such a favorable geographic mix and that largely is what's driving the customer mix. We were around 46% gross margin, 45.7%, I think, if I remember the June quarter specifically. That's not a bad place to kind of start when mix normalizes back to maybe more normal levels. So think about it that way. Somewhere in between there and where we are here. These operational improved installs that we've been talking about are real things and as growth resumes and we know growth will resume at some juncture, we should benefit from repositioning the company to these lower-cost locations. So that's still on the come line, but it will require some level of growth in the business.

Again, going back to your large litho peer that reported this morning, right? They called out seeing an increase in customer utilization of their litho tools, both in memory and in Foundry and Logic, appearing that this is the early signal of a positive turn in cyclical dynamics. I know you guys are also tracking in real time utilization, activity rates of your customers. I know they're at very low levels, but are you guys starting to see some pickup in utilization rates across your customers? And is that also maybe giving you further confidence in your modest growth outlook for WFE this year?

Yes. We've mentioned before that we closely monitor utilization levels. Our customers have indicated increasing utilization and are seeing stronger pricing in those markets. In sectors like NAND, we expected that the offline utilization would lead to an increase in our spares business, and we're starting to see that reflected in upgrades. As I mentioned earlier, we project that a significant portion of the increase in memory spending this year will come from technology upgrades involving Lam equipment, meaning much of that WFE spending will benefit Lam. Additionally, spending will also include new equipment necessary for high bandwidth memory. Lam holds a 100% market share in the critical technologies for DRAM stacking in that area. While I’ll leave it to our customers to discuss their specific utilization rates, I can say that all indicators suggest the memory market is beginning to recover from a significant downturn over the past couple of years. That's our perspective for this year.

That's very helpful. And then you mentioned this, I mean, your CSBG business has grown at a 17% CAGR since 2019, right? That's significantly faster than I think it was a 10% to 11% CAGR target that you guys put out at your last Analyst Day. I know it's been weak over the past few quarters, just given some of the supply-side discipline of your customers, lower utilizations, slowing tech migration. But assuming that you will see the pickup in activity sometime this year. You combine that with a strong continued growth in the installed base business, number of chambers continues to grow at a low double-digit growth rate. Like how should we think about the growth profile, puts, and takes of CSBG this year and going forward?

Yes, I don't know that we're going to put a number on the growth rate for CSBG at this point. But clearly, that business has been heavily impacted by the utilization cuts that occurred within our customer fabs. And we saw that both in spares as well as a curtailment of many of the technology upgrades that typically would just occur year in, year out. And so that did have an impact on CSBG revenues. I think that going forward, I talked about how much larger the installed base is now. That's a much larger installed base that, because of the delay in technology upgrades, there's pent-up demand there. I mean those tools need to be upgraded to be operating at the latest and most efficient and most competitive technology node for our customers. And so I don't know the exact timing, but I do know that the installed base will be upgraded and will actually generate quite a lot of revenue for Lam going forward.

And Harlan, maybe just like to remind you, there's 4 components in CSBG: spare service upgrades, all of which will benefit from what Tim was describing. You also have the Reliant product line in there, which has just done amazing in the last year. That will ebb and flow to a certain extent with more mature nodes, specialty node WFE. So don't lose sight of that one. There might be a slightly different dynamic with the Reliant product line.

First one, Tim, historically, you have gained more than others when NAND spending occurs. If you consider your competitive position when NAND spending picks up again, I realize this year involves more technology upgrades. How should we view your competitive position coming out of this NAND downturn, especially regarding more layers than the entire edge process?

Yes, it's a good question. What we're seeing in the near term during these initial stages of recovery is that customers are very cost-sensitive. The most effective way to reach the next technology node is by upgrading existing equipment. At Lam, we invest a significant amount of time in technologies that facilitate the upgrade and extension of our equipment, which holds great value for our customers. This trend will likely continue for a considerable time. For example, we have about 6,500 chambers of high aspect ratio etch in the NAND market, allowing for a lot of next-generation technology through these upgrades. Additionally, the insights gained from running upgraded chambers at the next technology node often lead to understanding the challenges that must be addressed at subsequent nodes. This is a reason why established positions in the industry are hard to disrupt. We have attempted to penetrate other markets, and we understand the landscape well. Lam has excelled in collaborating closely with our customers. Our strategy of being near our customers with R&D labs ensures we meet their technology and cost requirements effectively moving forward.

Great. And then a quick clarification, Doug, on the OpEx. You said R&D will be up year-over-year. I wasn't sure if that implies total OpEx is also up or SG&A is down to offset the increase in R&D?

Total OpEx is probably going to be up, Atif, R&D will be up more, right? We had 69% of total spending in R&D in the last quarter. That's a high watermark. But we're purposefully growing R&D, primarily because of all those inflections that we've been talking about.

I think maybe the easiest way to think about it is the lead time for us to develop new products that we need to drive growth is unfortunately a little bit longer than the lead time for our spending revenue. So with an outlook that growth is coming and that we're entering this next upturn, where there are tremendous opportunities for the company, we feel very confident to invest ahead of that revenue showing up, and that's I think what we signaled through this year. But with the confidence that we're going to see that growth in new products and technology investment from our customers.

Doug, could you share if there’s a bias towards the first half or second half of the year regarding WFE as we look at its trajectory? Also, I’m interested in how we should view your outperformance compared to the market. You’ve mentioned growth in depth and etch intensity in the memory sector and advancements in packaging with HBM, including aspects like dry resist. If your WFE assumptions hold true and the market sees mid- to high single-digit growth, what level of outperformance should we expect from you in calendar year 2024?

Yes, Toshiya, I think this year is somewhat weighted towards the second half. It will likely start off slow, as we've guided to essentially flat revenues quarter-on-quarter. However, we anticipate stronger performance in the second half. We're not breaking down the individual components of growth between NAND, DRAM, Foundry, and Logic, but we expect all areas to see some growth. We observe increased intensity in etch and deposition as we move through the various nodes, and that remains consistent.

Got it. And then as my follow-up on China, Doug, you mentioned China as a percentage of your systems revenue to stay elevated in the March quarter. And then you went on to say that, that number should decline as you progress through the year. Is that just purely a function of your other businesses, other regions improving throughout the year? Or are you sort of sensing an absolute decline in your China business? And if so, what are some of the areas or device types or applications you're seeing a slowdown?

We are not seeing China slowdown. It's purely just timing of when spending is occurring, honestly. Toshiya, we've preferably been using the word, and I think you heard it in both Tim and my comments, stable, right? So that's a consistent description that we have been saying for a while.

Could you discuss your vision for the recovery of NAND and what a normalized state might look like, possibly in 2025? Additionally, considering a potentially lower normalized number, do you believe the new areas you are investing in, such as memory, advanced packaging, and changes in backside power gate-all-around, provide enough momentum to drive rich WFE intensity and return to the peak levels seen when 3D NAND was first introduced?

Sure, C.J. The straightforward answer is yes, we believe that. Let me first address the NAND question. This year, customers are mainly concentrating on technology upgrades that make sense to drive the long-term bit growth we anticipate. While there are some additions required, we’re not predicting them for this year. With each technology advancement, the intensity of etch and deposition rises due to the increasing number of layers. During a technology upgrade, Lam captures a larger percentage of wafer fabrication equipment (WFE) because etch and deposition play a crucial role in these upgrades. As we see NAND recovering and growing at a certain rate, Lam is expected to significantly outperform that rate since much of the growth comes from upgrades. In the long run, we’re focusing on building resilience in our business by seizing opportunities not just in NAND, where we are strong, but also in other markets that are becoming more etch and deposition intensive. We've identified areas like gate-all-around, backside power, advanced packaging, and dry EUV patterning, each representing a potential $1 billion-plus opportunity when scaled fully for Lam. These areas expand our serviceable available market (SAM), representing incremental growth beyond our previous capabilities. If we execute successfully, these advancements can lead Lam to achieve new heights in revenue and profitability.

Very helpful, Tim. I guess a quick follow-up, Doug. I know you're hesitant to guide OpEx for the full year, but perhaps you could help us understand maybe the impact of the extra week on the March quarter? And how you're thinking about driving that R&D growth through the calendar year?

Yes, C.J. I mean, it's 14 weeks versus 13. That's the right way to kind of think about it. You can just ratio it to understand kind of it's a longer quarter. So that's the piece from that. And then any delta to get to the 29.5% operating margin is part of that beginning to step up R&D. As we go through the year, though, we will purposely be growing the investment in R&D so that you might not see the historic leverage that we've delivered is what I described a quarter ago, and that's still very much how you should be thinking about it.

Tim, you mentioned that your trough EPS has essentially doubled, which is an impressive achievement and execution. I believe part of the reason for this is that your services business has increased as a percentage of the overall mix. This certainly helped in stabilizing the cyclicality. As we look ahead over the next couple of years and anticipate the business recovering, I’m curious about your thoughts on how the mix between systems and services might evolve. What implications do you see that having for your top line and margin profile? Also, if you’d like to discuss the next peak EPS, that would be great.

It's challenging to answer this question because we are actively investing in the growth of our systems business. We don't view it as one area competing with the other; rather, they complement each other. The strength of our systems business contributes to an expanding installed base, which has seen significant growth since 2019. We've shipped many new systems, increasing our installed base by nearly 50%. Looking ahead, we expect the proportion of CSBG revenue to overall revenue to remain within its historical range, supported by equivalent successes in both areas. The CSBG revenue not only provides stability but also creates new growth opportunities for the company. As I've mentioned before, we are leveraging artificial intelligence and data primarily within the installed base services business. We are also exploring the use of collaborative robots to carry out certain services that skilled engineers typically perform. Our customers need to innovate faster and reduce manufacturing costs, and we can achieve this by focusing on the installed base and developing new products and service offerings that foster more rapid growth than the installed base alone.

Yes, Srini. I guess what I described is you think about the advanced payment as when we have a new customer that we're just kind of understanding what their balance sheet looks like, especially if they're a private customer that we could see the balance sheet. It's not publicly reported. And the creditworthiness might be sort of questionable. We require cash upfront before we begin manufacturing the tool, and that's what's going on there. That's all it is.

For the first one, around the China business being stable in calendar '24. Do you see all market segments being stable? Or do you see some like being stronger and some being weaker? Like how do you see that interplay?

Stacy, I don't really see a big change year-on-year relative to end market. I'll remind you, when China DRAM was second half weighted last year. It's probably a little bit first half weighted in China, maybe more than a little bit this year. But year-on-year, I don't think I really think about a significant change in contribution for the entire year.

Got it. That's helpful. And I guess a follow-up on the China questions, and maybe it's a follow-up on one of the earlier questions. But it does sound to me like you are suggesting China mix should come down through the year. Maybe you can clarify that because if I've got overall stable China revenues like how does your China mix come down materially? It doesn't look like you're looking for overall like non-China WFE to grow a ton, right, in some of the other areas. So...

Yes. Let me remind you, in 2023, China was a more modest amount of WFE that grew in the second half of the year. And so the comments we're making are year-on-year, it's relatively stable. Kind of the half-on-half stuff probably looks different in '24 than it did in '23 in China specifically.

For my first one, I'm curious, what's your assessment of NAND supply-demand as it exists today? I think in your WFE view, you are assuming that NAND grows but more because of technology upgrades. But what are your customers telling you for as to when they want to start adding more tools? And what's Lam's opportunity to grow NAND right at a measurable pace in the second half of the year?

Yes. I think that, first of all, I wouldn't discuss what we are talking about with our customers in that regard. However, we are aware that the utilization cuts in NAND were quite significant last year. A large amount of capacity has been offline, and we have previously mentioned that it needs to be brought back online. The question we are discussing is what technology node that capacity should be restarted at. In many instances, there is a strong possibility that a technology upgrade will take place when that equipment is brought back into service. As a result, we may start to see a revival of some of the utilization-driven revenue from areas like spares and services, along with an increase in technology upgrade revenues. Therefore, from a NAND perspective this year, we believe that will likely account for the bulk of the spending in this segment.

Okay. And then, Tim, as many of the DRAM customers are saying that they plan to shift a bit more towards HVM from DDR. Does that have any positive or negative influence on your CSBG and the spares business?

No, I can't quite make that connection right now. I'll have to think it over. However, we do see an impact on our systems business, particularly in the advanced packaging steps related to the stacking of HVM itself. We're experiencing significant growth in that area. Given that we're shipping additional systems, there is also some incremental business from spares and services that accompanies that. However, the systems portion outweighs the dollars involved.

I guess maybe just to clarify, does your CSBG business start to kind of grow consistent with the growth in your tools business overall? Or do you think there is going to be a lag factor because it slowed down later? Does it start to regrow later also?

Depends on the rate of growth in WFE to be perfectly frank, that are coming. See, spare service upgrades chug along, and we think that's going to benefit as utilization and whatnot begins to come back. Then to really answer your question, you got to go figure out what you think the pace of WFE growth is. I'm not going to put numbers on that right now. We're going to kind of wait and see.

First of all, for Doug. I think Doug has mentioned about a gradual recovery in WFE this year, kind of more back half rated. So I'm kind of curious, and Doug, I'm not looking for like guidance. What I'm just wondering is, is this better assume Lam's revenues in the calendar second half of 2024 is going to be better than first half? That's for my first question and then I have a follow-up.

You're a little bit muffled, Krish, but I think you were asking about our performance along with WFE. And frankly, I think we will mirror whatever the trajectory of WFE looks like with an expectation that etch and dep outgrows to a certain extent. I think I answered your question, although you were a little bit muffled there.

Doug, I was just trying to wonder if calendar second half '24 revenue for Lam is going to be better than calendar first half similar to WFE?

Yes, I think it will be, Krish, I'm not going to put numbers on it yet, but we will mirror what goes on with WFE.

Got it. Okay. My follow-up is for Tim and Doug. You mentioned HBM and AI, and all the positive aspects. I'm curious if HBM and DDR5, two sets for deposition and etching, differ from DDR4 and legacy in terms of margins, or if they are similar in that regard.

I guess what I'd say, Krish, from a margin standpoint, you shouldn't think about any differential margin necessarily. The incremental piece for the stuff that goes in high-bandwidth memory is a bigger die, you know that. The die itself, building a DDR5 die is largely the same equipment that builds DDR5 that doesn't go into HBM. The incremental stuff comes when you go into the advanced packaging stuff, the Syndion deep silicon etch and the electroplating are areas where we are extraordinarily strong in addition to some other things. That is clearly incremental equipment.

Yes. And I think from an etch and dep intensity perspective, in general, I think you mentioned DDR5 to DDR4. I mean I think in general, with each technology node evolution, whether it's DRAM, NAND, Foundry Logic, we've said etch and dep intensity rises with technology advancement. And so I think you can imagine that there's more equipment being needed, and that's in addition to the fact that larger die sizes drive greater equipment per bid out. So there's a lot of factors that every time we move forward, there's more equipment and more Lam equipment required with those technology nodes.

If I can ask about your DRAM systems revenues in the December quarter. They were kind of back to the highs of a couple of years ago, but I know you had some China in there, I think there's some of the events packaging. Can you just give us a sense for what's kind of core DRAM within that? And then you're pretty constructive on where that's going. Can you give us a sense of the dynamics of China going forward versus other regions and other parts of DRAM?

I guess, Joe, I would just to take you back to what I had in my script. Two things are driving the strength in DRAM in the December quarter, and you mentioned both of them, frankly. It's high bandwidth memory in DDR5. In addition to the fact that we've got a China customer in DRAM in the second half of the year. That includes September and December, that wasn't in the first half. So each of those things contribute to the strength you saw in December.

Okay. And then looking forward, it seemed like you had more than 6 months of demand from that China customer in the second half going forward. Does that come down, but core DRAM comes up and HVM comes up?

Probably.

Maybe going back to NAND, the best-ever quarter for NAND spending was probably higher than the total level of NAND spending maybe for all of last year. And so even if it's off a low base, isn't it pretty logical that NAND WFE should exhibit the largest or highest rate of improvement in '24?

I wouldn't necessarily draw that conclusion, Brian. I think all we're going to tell you is that I think every segment WFE grows this year, NAND, DRAM, Foundry, Logic, it's all up to a certain extent. I'm not going to get into the business of quantifying each individual one because frankly, at the end of the day, we'll get it wrong. But I think everything will grow to a certain extent with peers.

Okay. Fair enough. And then just to kind of level set and DRAM and then also looking forward. How much did DRAM industry spending actually decline in '23? It seems to be better than what was initially thought based on HBM, et cetera. And also, can you give us a sense of the number of wafer starts or percent of the DRAM installed base that could be converted to more advanced 1-alpha or 1-beta like process nodes this year?

I guess, Brian, what I'd say and Tim, I think had this in his script, memory overall was down roughly 40%. NAND was down north of 70%. The differential to get to the number is DRAM. You can do that. And yes, I think the second part of your question, HBM and DDR5 has been a big part of the strength in DRAM.

Yes.

Okay. And that was actually the second part was kind of more towards, what is the potential number of wafer starts or the percent of the installed base that's sort of game for those conversions to 1-alpha, 1-beta light nodes?

For the most part, in memory, everything gets upgraded to the next node, all of it. That's always been the case. It's not a new phenomenon.

The question is on delivery times. And you had mentioned, obviously, your delivery times may be different than some others in the industry. Where do they sit right now? And as a consequence, how much visibility do your customers need to give you? And with that, when we start to see some stronger perhaps memory spending, how quickly will you be able to react to that and turn that for revenue?

Yes, we don’t publicly disclose our lead times. However, during the COVID pandemic, our lead times were significantly extended due to supply chain shortages. They have since returned to more normalized levels, but to fulfill shipments this year, we need to receive those orders and forecasts swiftly. One factor that has contributed positively is our investments in new manufacturing and supply chain operations within our customer ecosystems, which are bringing us closer to our suppliers and diversifying our base. This will enhance our responsiveness to customer needs in the upcoming upturn. Therefore, we focus less on lead time and more on our ability to effectively respond within the timeframe our customers require to place orders to support their production needs. We usually do not find ourselves in a bottleneck regarding lead times while planning a new fabrication facility.

Fair enough. As a follow-up question, I wanted to ask about backside power. And last quarter, you made some disclosures about the revenue impact to Lam as that happened. Could you give a little more color on that and specifically, we know that the different customers are having different implementations of backside power. At what point does that start to become a meaningful driver for Lam?

I believe that the significant role of both etch and deposition, along with our strong position in certain aspects of the backside power process, such as copper plating where layers are becoming thicker and processes longer, will soon become quite important for the company. This underscores how transitioning to 3D and utilizing etch and deposition to create more complex architectures can help reduce power consumption, enhance chip performance, and lower costs. We have discussed this regarding backside power, but similar trends are evident in chip stacking, HBM, and energy integration. Therefore, I think the upcoming era of semiconductors will be defined by these unique 3D architectures, which all align well with the types of products we offer.

I was interested to know your perspective on the HBM market. There are indications that the accelerator market is expanding rapidly, leading to concerns that the HBM market might see shipments exceeding peak levels in 2024 and 2025. Do you have any insights on the growth rate of HBM as a market segment? Additionally, could you share how much the timeline for tool development with customers focused on HBM has accelerated in the past six months compared to what is typically expected from a DRAM customer when they are in search of a tool?

Well, I think that as a real key supplier into the HBM market, as I mentioned, the strong position we have in the processes required before the stacking, this is an area where we're seeing very, very strong demand. I think that whether or not at some point, it's shipping above peak, I think that this AI market is continuing to evolve at a very, very fast rate. And all we're focused on right now is ensuring we are building out our own capacity and capabilities. And ensuring that we maintain that technology leadership that's allowing us to hold 100% market share of the TSV formation in HBM. And so really, that's our focus is hold the position and let the market grow as fast as the market grows.

Helpful. And then just one on the makeup of inventory. You guys have talked about working down inventory throughout the year. Is there any color you can give us on the makeup of that inventory? Is it more memory-related or foundry logic related? I know you don't want to give specifics, but just where do you see that inventory coming down through the first half of the calendar year?

Yes, Tom, the decline in memory as we entered 2023 was quite significant, and we ended up with more inventory than necessary, particularly for memory. Therefore, a larger portion of our inventory is focused on memory, and as memory improves, the inventory levels will decrease. Thank you for the question.