Lam Research Corp (LRCX) — Q4 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 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 June 2024 quarter and our outlook for the September 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 Investor Relations section of the company's website along with the presentation slides that accompany today's call. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3:00 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.

Thanks, Ram, and good afternoon, everyone. In the June quarter, Lam delivered another set of solid results with revenues, profitability, and earnings per share, all coming in above the midpoint of our guidance. Our CSBG business posted strong growth with revenues up 22% sequentially, led by Reliant and spares. On the manufacturing side, we achieved a key milestone in the quarter with our Malaysia factory shipping its 5,000th chamber. This is the fastest ramp of a new manufacturing facility in Lam's history, and we remain on track to achieve our long-term cost reduction goals through an expanded global manufacturing and supply chain footprint. As previously communicated, 2024 is a year of strategic investment for Lam, where we are prioritizing product development for key technology inflections, global R&D infrastructure close to our customers, and digital transformation for operational efficiency at scale. We believe these investments will put Lam in a position to outperform as the industry moves into a period of multiyear WFE spending expansion. Now turning to WFE, we expect this year's spending to be in the mid $90 billion range. Our customer investment profile is generally unchanged from our prior view, apart from slightly stronger domestic China spending and additional demand related to the ramp of high-bandwidth memory, or HBM capacity. We see foundry logic, DRAM, and NAND investments all up on a year-on-year basis. Global spending on mature node technologies is expected to be roughly flat year-on-year. Looking ahead to 2025, we see a positive environment for continued growth in WFE spending. The power of AI as a transformative business tool is still yet to be fully realized. Today, the focus on AI model training is driving strong demand for GPUs and HBM. However, as AI use cases expand, we believe inferencing at the etch will spur content growth of low-power DRAM and NAND storage in enterprise PCs and smartphones. Investments for AI-enabled etch devices play particularly well to Lam's strengths. We anticipate that memory customers looking to scale capacity and lower bid costs will bias WFE spending toward technology upgrades of the installed base. For NAND, the etch and deposition intensity of upgrades is significantly higher than in a greenfield investment. When you consider Lam's sizable installed base in memory, including roughly 7,500 high aspect ratio dielectric etch chambers for NAND alone, we are positioned to outgrow overall WFE when customers upgrade existing memory production lines to next-generation nodes. Longer term, etch and deposition are set to play an increasingly vital role in the industry's efforts to develop faster, more power-efficient, and lower-cost semiconductors to serve AI-related applications. By delivering critical solutions for atomic-level device scaling, new materials innovation, and advanced packaging integration, we see tremendous opportunity for Lam to expand our served market and increase our share at each successive process technology node. To this end, our R&D focus is yielding exciting new products, including this year, our first direct power coupled conductor etch tool with a matchless power source and bias, known as DIRECTDRIVE. This new power source uses solid-state drivers to stabilize the plasma in the etch chamber 500 times faster than current industry standards. By combining direct power coupling with Lam's unique plasma pulsing capabilities, our latest conductor etch systems are delivering best-in-class performance for newly emerging 4F2 DRAM applications. In 4F2 devices, the nature of the bit line placement requires precise etching of ultra-small high aspect ratio silicon structures to avoid device shorts or leakage. With direct power coupling and plasma pulsing, Lam connects to vertically oriented 4F2 transistor architectures with unprecedented depth uniformity and profile control. Similarly, conductor etch is becoming a critical enabler for EUV patterning for gate-all-around and DRAM due to the need to reduce etch placement error. For nodes below 2 nanometers, the requirement is for roughly 40% tighter control than at 5 nanometers. Our new conductor etch tool delivers a 30% reduction in feature roughness, which is one of the main contributors to etch placement error. In addition, we can achieve one to two orders of magnitude improvement in defectivity for a given EUV dose, further helping customers reduce the overall cost and improve the capability of the EUV patterning process. Turning to NAND. AI applications are driving demand for faster, higher-capacity enterprise SSDs. NAND makers are pursuing both vertical and lateral scaling of NAND arrays, as well as increasing bits stored per cell through the implementation of QLC and PLC technologies. In support of these efforts, Lam is developing new dielectric etch and deposition capabilities. Earlier today, we announced Lam Cryo 3.0, Lam's third generation of cryogenic etch technology. Building on our learning from nearly 1,000 cryogenic etch chambers, running in NAND fabs worldwide, this new patented cryogenic etch process delivers industry-leading control of the NAND memory channel hole profile. When a Lam Cryo 3.0 is deployed on our Vantex system, the etcher delivers the industry's highest available ion energy, allowing us to create a 10-micron deep channel hole that has a top-to-bottom profile deviation of less than 10 nanometers or less than 0.1% relative to its depth. Such tight profile control allows customers to increase bit density by packing more cells per layer while also having the flexibility to add more layers per tier. Lam Cryo 3.0 also addresses our industry's need for more sustainable solutions, delivering a 40% reduction in energy consumption per wafer and a 90% reduction in greenhouse gas emissions per wafer compared to non-cryogenic etchers. Deposition technology is also advancing quickly to support increased bit density and lower costs through multi-tier stacking. Polysilicon and tungsten gap fill materials have typically been used to enable tier stacking in high-layer count NAND. Integration of these materials, however, has resulted in poor control of critical dimensions and overlay, negatively impacting yield and performance. Lam's innovative PECVD-based pure carbon and gap fill process provides an alternative material with a unique combination of high etch selectivity, superior mechanical properties, and simplified dry post-process removability, which also reduces the number of process steps required in some cases by approximately 50% compared to traditional approaches. Overall, etch and deposition are becoming increasingly critical to addressing the complex semiconductor requirements of a growing AI environment. We are excited by the breadth of opportunities we see ahead for the company, especially those created by technology inflections to gate all around backside power delivery, advanced packaging, and 3D NAND processing. All of these are etch and deposition-intensive, and each represents a $1 billion or higher growth opportunity for Lam. We look forward to sharing our progress on these fronts as well as our long-term financial model at our next Investor Day, which we are planning to hold in February 2025. With that, I'll turn it over to Doug.

Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today. We executed well in the June 2024 quarter. Our June quarter results came in above the midpoint or exceeded our guidance ranges for all financial metrics. We were pleased with the company's strong execution. For fiscal year 2024, we achieved the highest gross margin percentage since the merging of Lam with Novellus in 2013, coming in at 48.2%, and we generated quite strong free cash flow of approximately $4.3 billion, or 29% of revenue. Let's look at the details of our June quarter results. Revenue came in at $3.87 billion, which was an increase from the prior quarter and over the midpoint of guidance. Our deferred revenue balance at the end of the quarter was $1.55 billion, which is a decrease of $194 million in the March quarter related to revenue recognized that was tied to customer advanced payments. As we sit here today, I believe deferred revenue remains stable at these levels for the foreseeable future. Let's turn to the revenue segment details. June quarter systems revenue in memory was 36%, which was a decrease from the prior quarter level of 44%. The decline in the memory segment was mainly attributable to DRAM. DRAM came in at 19% of systems revenue compared with 23% in the March quarter as investments in mature nodes declined in the June quarter. DRAM revenue reached a new record in fiscal year 2024 with spending focused on DDR5 and HBM enablement, as well as on the 1Y node. Non-volatile memory came in at 17% of our systems revenue, which was down from the March quarter level of 21%. Just a reminder, we are characterizing one customer's investment in specialty DRAM as a non-volatile investment since it has a non-volatile component in the device. Net revenue was at a low point for this year, and I expect NAND investment to gradually improve as utilization rates return to more normal levels, with our customers slowly increasing spending in conversions to 2XX and 3XX layer devices into the next year. The Foundry segment represented 43% of our systems revenue, which was roughly flat with the percentage concentration in the March quarter of 44%. Growth in shipments for gate-all-around nodes was offset by a decline in mature node spending. The logic and other segments were 21% of system revenue in the June quarter, up from the prior level of 12%. The increase was driven by strength in mature node spending in China. In terms of regional composition of our total revenue, the China region came in at 39%, down slightly from the prior quarter level of 42% and a little bit higher than our expectations from the previous earnings call. This was driven by domestic China spending. The next largest geographic concentration was Korea at 18% of revenue in the June quarter, versus 24% in the March quarter. Taiwan was 15% of revenue in the June quarter, which was an increase from 9% in the March quarter. The customer support business group revenue in the June quarter pulled approximately $1.7 billion, an increase of 22% from the prior quarter level and 14% higher than the June quarter in calendar 2023. CSBG revenue represented 44% of our June quarter revenues and reached the highest point since the end of calendar 2022, driven primarily by an increase in Reliant systems, followed by growth in spares. Our Reliant systems revenue benefited from strength in domestic China spending for specialty and mature nodes. Spares revenue increased largely due to continued improvement in utilization at our memory customers, as well as some inventory stocking. I do not think CSBG will grow modestly in calendar year 2024. Let's look at profitability. Our June quarter gross margin came in at 48.5%, at the top end of our guided range and slightly down from 48.7% in the March quarter. June quarter gross margin benefited from continued improvement in factory efficiencies, which largely offset the headwind we saw in customer mix that we talked about on the last earnings call. Operating expenses for the June quarter were $689 million, down marginally from the prior quarter amount of $698 million. As Tim mentioned, we continue to prioritize spending in research and development to extend our technology differentiation as well as expand our product portfolio. More than 70% of our total operating expenses were concentrated in research and development. The June quarter operating margin was 30.7%, above the guidance range mainly because of that strong gross margin performance. Our non-GAAP tax rate for the quarter was 11.5%. We estimate the tax rate for the remainder of calendar year 2024 to be in the low to mid-teens level, and this rate will fluctuate from quarter to quarter. Other income and expense for the June quarter was approximately $19 million in income compared with $10 million in income in the March quarter. The increase in OI&E was primarily the result of fluctuations in the fair value of our venture investments. You will see variability in OI&E quarter to quarter. Let's turn to the capital return. We allocated approximately $382 million to share repurchases, and we paid $261 million in dividends in the June quarter. During the quarter, we announced that our Board of Directors approved a $10 billion share repurchase authorization. We have $10.8 billion remaining in the plan at the end of the June quarter. For fiscal year 2024, we returned $3.7 billion, or 88% of free cash flow, which was in line with our long-term capital plans of returning 75% to 100% of free cash flow. June quarter diluted earnings per share were $8.14, close to the high end of our guidance range. The diluted share count was 131 million shares, on track with our expectations and down from the March quarter. Let’s turn to the balance sheet. Cash and cash equivalents totaled $5.9 billion at the end of the June quarter, up a little bit from $5.7 billion at the end of the March quarter. Day sales outstanding were 59 days in the June quarter, a slight increase from 57 days in the March quarter. June quarter inventory turns of 1.9 times compared with 1.8 times in the prior quarter. We are making progress in bringing inventory levels down, and we'll continue to work on this throughout the rest of calendar year 2024. Our noncash expenses for the June quarter included approximately $79 million for equity compensation, $74 million in depreciation, and $14 million in amortization. Capital expenditures were $101 million, flat with the March quarter level, with spending mainly centered on lab investments in the United States and Asia, as well as manufacturing facilities in Asia, supporting our global strategy to be close to our customers' development and manufacturing locations. We ended the June quarter with approximately 17,200 regular full-time employees, which was flat with the prior quarter. Let's turn to our non-GAAP guidance for the September 2024 quarter. We're expecting revenue of $4.05 billion, plus or minus $300 million. Gross margin of 47%, plus or minus 1 percentage point. This gross margin decline is reflective primarily of an unfavorable quarter-to-quarter change in customer mix, which I expect will continue to be a slight incremental headwind in the December quarter. Operating margins of 29.5%, plus or minus 1 percentage point. Gross margin and operating margin included impact from ongoing transformation costs related to projects to improve our systems and operations. As we communicated at the beginning of the year, we're focused on reengineering our business processes and systems to drive operational efficiencies and to implement AI at greater scale. Finally, we're forecasting earnings per share of $8, plus or minus $0.75 based on a share count of approximately 131 million shares. Let me wrap up. As we finish the first half of calendar year 2024, I was pleased that we were able to execute to the objectives we shared at the beginning of the year. We prioritized investment to extend our technology differentiation while driving operational improvements. We're encouraged that the spares business recovery is beginning, and upgrade activity should improve as we exit the calendar year. Longer term, Lam is well-positioned to capitalize on the increase in etch and deposition intensity by delivering new capabilities at multiple new manufacturing inflections that we see ahead. We look forward to talking to you in February at our planned Investor Day about the long-term opportunities for Lam to continue our outperformance in the semiconductor industry. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions.

Thanks a lot. Doug, I wanted to ask about the service system mix in the guidance. You mentioned that the service is expected to grow modestly this year. However, if I keep service steady in September and December, it's up 8% year-over-year. Can you clarify your thoughts on service in the guidance? Thanks.

Yes, Tim, we don't decompose the individual components of the guide. I was clarifying, we now expect service to be up a little bit for the year. It was particularly strong in the June quarter. Whether it is up, down, or sideways from that as we go forward, I'm not going to give you individual components of the forecast. But I do think for the year, it's going to grow a little bit.

Sure. Doug, could you discuss the current enthusiasm around DRAM WFE among investors and its potential during the upcoming peak? While you're performing well in NAND, you've mentioned several investments in DRAM. Could you elaborate on your limited exposure to DRAM and share insights on where you're focusing your investments and opportunities to gain market share in this area?

Thank you, Tim. As you mentioned, we are performing well in NAND, and we believe the future of NAND is bright. We've noticed some comments regarding enterprise SSDs, but when it comes to DRAM, we want to emphasize the advancements we're making, particularly with conductor etch. We've introduced a new tool that offers exciting capabilities for the industry, specifically aimed at the ultra-small structures expected in future DRAM nodes. Lam is the leading global player in conductor etch, and we are leveraging our expertise to address upcoming challenges in DRAM. There is significant potential for us in these applications. Additionally, much of the enthusiasm surrounding DRAM is linked to HBM. As you mentioned, we maintain a strong position in both TSV etching and TSV electroplating, and we anticipate that this will continue. We will benefit from the ongoing scaling and architectural advancements in DRAM as well as the growth in advanced packaging and HBM. These factors, combined with the reality that fewer bits can be processed per wafer, highlight the need for an increased number of DRAM wafers, ultimately leading to higher equipment demand from LAM.

Thank you, Tim.

Thanks, Tim.

Hi, thanks for taking the question. My first one is for Doug. I think, Doug, you gave some color on China. Kind of curious how to think about China into the back half of this calendar year and into calendar 2025? And along the same path, you kind of mentioned that December quarter, there could be a slight more gross margin headwind. Is there a way to quantify how many basis points of headwind would it be in December compared to the 47% in September? And then I have a follow-up for Tim.

Yes, sure. Krish, I'll just remind you what we said last quarter. It hasn't really changed in this quarter, and that statement was that for the year, 2023-2024, China is up. However, it is a somewhat first-half weighted year this year, as opposed to last year, it was somewhat second-half weighted. I'm not communicating that it's going away. It's not going away. It's too soon for us to quantify things for next year, but I do think it's going to be a pretty solid year, right? Again, it's not going away. It's too soon for us to quantify things for next year, but 2025 should be a pretty decent year in China, Krish.

And then, Doug, any color on the December quarter gross margin?

I'm not going to give you a number, Krish, but I've been signaling for a while that because of customer mix, margin will have a little bit of a headwind going into the second half of the year. I just guided you to 47% in September and suggested that there might be a little bit of incremental headwind into December because of customer mix, as I said in the script.

Got it. Got it. Thank you for that Doug. And then, Tim, just a quick follow-up. When I look at all the upcoming tech inflections, like gate all around, backside power delivery, maybe down the road more DRAM. You spoke to the transition to 4F2 DRAM from 6F2. I'm kind of curious, is this really that material? And if so, is there a way to size the opportunity for Lam at 4F2? You spoke a little bit about the etch process; just kind of wondering if you can give some more color around how to quantify that number for the 4F2 architecture transition. Thank you.

Sure. I can't provide specific numbers today, but I believe my previous comment indicated that we recognize these technology shifts. The transition from 6F2 to 4F2 involves changes in the architectural design of the device, which creates new demands in etching. We are well-equipped to meet these requirements, and that's why we've been enhancing our conductor etch capabilities. There are definitely additional opportunities here. The move to 3D NAND represents a more significant increase in etching depth and intensity, but our objective is to expand our serviceable addressable market and increase our share across all technology nodes. We assess the new requirements and how to effectively address them. Regarding DRAM, whether it’s 6F2 or 4F2, we're seeing more EUV layers being integrated and the role that Lam plays in EUV technology. As feature sizes decrease, the need for precision in pattern transfer etching becomes crucial. Lam excels in these high-tech etching processes, and we aim to be involved in them. Additionally, we’ve discussed our dry EUV resist process and its relevance as DRAM and foundry logic shift from EUV to advanced AUV. We're viewing each technology node as a chance for us to grow.

Thank you.

Thanks, Krish.

Thank you. Tim, I have a question on DRAM. Obviously, the recovery has been ongoing, and HBM is a secular driver that you talked about, and you do have a very strong position in that market as well. Then I look at your revenue, I think it peaked around December of 2023, and it has been kind of declining on a sequential basis. I'm guessing some of that is maybe mature now DRAM. Just wondering if you're kind of at the bottom and then given all the talk about HBM spending, I would think that it should, at some point, come back strongly. So I just want to hear your thoughts on why it's been declining? And how should we think about, in particular, in DRAM revenue?

Yes, I believe your assessment is mostly accurate. We previously mentioned that mature DRAM spending was quite concentrated in the latter half of last year and the early part of this year. As that spending decreased, we saw a reset in what we refer to as traditional or conventional DRAM. This is being somewhat offset by the growth in HBM, although HBM itself is still in the ramping stage. Looking ahead to 2025, HBM is expected to become an even more significant driver of wafers in DRAM. This likely explains the current trends. As we consider the long-term growth potential of HBM, we must also account for the wafer requirements needed to produce these bits, which are influenced by die size and the complexity involved in stacking the DRAMs. Therefore, we anticipate a continued increase in demand for DRAM equipment through 2025 and likely extending beyond that.

Okay. Got it. Thank you. And then on the CSBG business being up 20% sequentially, 22%. I know you don't want to give us guidance going forward, at least for the next quarter. I'm just curious about the sustainability of some of the trends that you're seeing, Tim. And what does that mean for the overall WFE? Is this a prelude to something? And is this just the utilization improving? And does this usually follow in terms of WFE increasing in terms of new tech migrations or capacity additions? So any color on that would be helpful.

Sure. It's a good question. And I guess, again, reminding people that the CSBG business includes our Reliant business, which sells into mature nodes. It includes spares, it includes upgrades, and services. Each of those components move somewhat differently. We talked about this quarter, particularly being strong as a result of Reliant and spares. We are starting to see a pickup in utilization in the memory fabs, as we've talked about. I've talked a little bit about the fact that, as we look forward, we think that upgrades will begin to become a much more prominent part of our customers' WFE spending as they look to upgrade memory fabs that they haven't upgraded in quite some time because of the severe downturn that we've seen in those markets over the last few years. I do think, going forward, you see a little bit more of a balance between those different segments. Upgrades coming up stronger and spares continuing to grow as our installed base itself continues to get bigger. Traditionally, we would have always said that we would expect the CSBG business to grow every single year, and that's simply effective every year we ship more tools, and those tools then require services and spares, basically presenting new opportunities for Lam to capture revenue from those systems. So I think long-term, CSBG will be returning back to that growth, and next year probably much more biased toward the upgrades business as customers start to do brand new fab upgrades.

Thanks, Tim.

Yes, good afternoon. Thank you for taking the question. I guess first question I was hoping to focus on gross margins. A couple of quarters ago, Doug, you talked about looking back to the June 2023 quarter as normalized. But given the guide today, it sounds like that was conservative and it's a higher number. So just as you think about calendar 2025, as you get to a normalized China mix and you normalize to Reliant, what would be kind of the base level we should be thinking about for gross margins? And then can you talk to what kind of accretion we should be thinking about related to Malaysia and/or some of these higher-margin upgrade drivers?

Yes, CJ. I mean, you've alluded to some of the things that move gross margins on, obviously. Yes, I had previously anchored you and others with respect to that June quarter before the China mix improved or strengthened. As the baseline, I guided it down a little bit in September, describing customer mix softening a little bit relative to moving that. I'm not suggesting, hey, a little bit more in December potentially. It's all about customer mix. Too soon for me to guide you for next year, but the things you should be thinking about is what does that customer mix look like next year? I'm not sure yet, and I'm not ready to point you to numbers, but what we will begin to show up in a more significant fashion is the accretion from those Asia factories as we ramp output; that will be a benefit to gross margins. Those are the moving pieces to be thinking about. The customer mix, I'm not entirely sure, but as we see a likely WFE environment next year, that's somewhat stronger; increasingly, the incremental volume will be supported from those Asia factories, which should be beneficial to gross margins, CJ.

Very helpful. And then I guess as my follow-up, in your prepared remarks, you spoke to the 7,500 high aspect ratio etch chambers installed in demand industry. Just curious as you see upgrades there, what kind of growth could that add to overall NAND WFE specifically to you guys? Is there a kind of percentage we should think about? Any help there would be great.

We haven't quantified that, but the reason I included it was simply to point out that the installed base itself becomes a powerful driver of revenue during those upgrade cycles. We do think that the next phase, we've seen higher memory fab utilization, particularly when we talked about NAND beginning to improve last quarter, and that seems to be continuing as we move through the remainder of this year. When we get to next year and the upgrades start in earnest, those tools represent opportunities for Lam to help our customers achieve both a technology upgrade and a bid cost reduction as they move forward, accruing quite a lot of revenue for Lam relative to the amount of WFE spend. I remind people, Lam's capture rate of spending in an upgrade is significantly higher because etch and deposition represent so much of the upgrade. The size of our installed base.

Thanks so much.

Thanks, CJ.

Hi, guys. Thanks for taking my question. First, I wanted to ask if the NAND business next year is primarily driven by upgrades, what does that imply for growth? Like would it be conceivable that NAND WFE could double year-over-year in calendar 2025 that was purely upgrade-driven? Or would you need capacity additions to get there? And are you seeing any signs at all of capacity additions right now? It doesn't sound like it.

Well, Stacy, what I would say is that obviously, we're not going to guide what NAND WFE is next year. Frankly, I think it's still a developing story. But what we're trying to say is that as customers move to upgrades, whatever WFE is spent, Lam will be the primary beneficiary of that WFE spend. That's a year in which my comment was, we would be confident that we would outgrow WFE in the NAND space if it was primarily upgrade spend. Upgrades represent a tremendous efficient way for customers to advance their technology and lower their costs. We do think that will be the next phase of NAND investment based on our thoughts.

Got it. Got it. I mean maybe to follow-up on that just a little bit. I mean, if you look at your current NAND outlook for this year, would you say that this outlook has gotten better or worse or stayed the same versus 90 days ago?

It probably hasn't changed much, Stacy. This is Doug. Maybe a little bit better. We're certainly seeing a little bit of an uptick in utilization. But I don't think it's meaningfully different, Stacy.

So got it. So it's kind of a noise.

Yes, kind of a noise.

Got it. Okay, that's helpful. Thank you, guys. I appreciate it.

Yes. Good afternoon. Thanks for taking my question. Given the strength in CSBG, it looks like utilization by your customer base continues to rise. Did that also broaden out to start to include not just leading etch logic foundry, DRAM, and NAND, but maybe also start to include mature and specialty fabs as well? Or are at a minimum, mature and specialty utilization at least stabilizing in line with some of the cyclical improvements that we're seeing in the semi-industry?

Harlan, maturing that stuff is still pretty soft, frankly. And I think you understand what's going on. If you just listen to everybody else's earnings calls in the analog, industrial, and automotive space, there's still a lot of inventory out there, it's still relatively soft. The statements we're making on utilization have more to do with what we're seeing in the memory fabs.

I appreciate that. And then on HBM and advanced packaging. I mean last night we heard AMD talk about supply dynamics being tight on their AI GPU supply next year and HBM. On the custom ASIC front, we hear companies like Broadcom keep getting upside orders from their AI customers like Google. Last quarter, you talked about doing $1 billion in advanced packaging and HBM revenues this year. Has that number moved higher, and is the team capacity constrained on advanced packaging systems, and are your lead times here for those tools starting to stretch out?

It has increased, and we won’t quantify it just yet, but we are seeing very strong demand in those areas. I mentioned the expansion of our global manufacturing supply chain, which is providing us with more flexibility than we had during the last ramp. Our goal with these investments is to respond better in the upcoming years of expansion than we did during the expansion around the time of COVID. I believe this will position us well. Although we sometimes find ourselves a bit short when customers request tools within our lead time, which keeps us busy, I think we are managing well in responding to urgent customer requests. We actually appreciate this environment where all parts of our business are somewhat supply constrained. Many customers express caution about adding capacity, while others face challenges in acquiring tools. I see this as positive for us, as it suggests a more manageable long-term demand ramp instead of a short spike followed by chaotic digestion periods in the industry.

Thank you, Tim. Thanks, Doug.

Thanks, Harlan.

Hi. Thank you for taking my question. Doug, when I look at the year-over-year sales growth in China for 2023 among the five major equipment makers, all of them saw significant increases. One company is up about 250%, while U.S. competitors are up in the teens or 20%. However, your total China sales were down 11% in 2023, and this year you anticipate an increase in China sales. I'm trying to understand the factors that contributed to last year's performance. Was it mainly due to reduced NAND spending and the inactivity of the NAND project, or are there competitive challenges in China that posed difficulties for you?

Atif, I'll remind you that perhaps our largest customer got restricted when the regulations came out, our NAND customer in China. That customer was pretty strong in 2022 and went away in 2023. The year-over-year comparisons you're making, you've got to factor that in. The strength we're seeing in 2023 to 2024 is a different mix entirely, really not any NAND in China to speak of, at least not domestic China. I don't know if that helps you, but make sure you're thinking about that.

Yes, it all makes it. That's helpful. And then on the cryo improvement, Tim, that you mentioned, are those improvements or process tools of record going to solidify your market share next year or the year after?

I believe that when we introduce something new, people often overlook that we typically collaborate with our customers on research and development several years in advance. I've mentioned the investments we're making, such as building labs near our customers in various locations. This is because we often engage with them around five years before production implementation. While it doesn't mean that Lam Cryo 3.0 will take five years to enter production, it is not about scaling down technology this year; it's really about anticipating our customers' needs for the future and addressing their challenging etching requirements. When the benefits are substantial, as I've noted with our 2.5 times etch rate and excellent profile control, customers may want to adopt it sooner. This technology is intended for applications with over 400 layers, but it could be integrated earlier, which illustrates the demand for this capability.

Exactly, I was asking about it. Is it 400 layers or 200 layers, but it sounds like it 200 layers.

Yes. In our press release today, we discussed how we are navigating both etch and deposition films in order to align with the industry's goal of achieving 1,000 layers. We believe that over the next decade, this will be crucial for meeting the increasing demands for bit density and cost efficiency, especially as NAND demand grows alongside AI advancements.

Great. Thank you.

Thank you.

Hi, everyone. Thank you for your time and for taking my questions. I joined a bit late, so I apologize if my questions have already been answered. Regarding the third-generation cryo tool that Tim mentioned, how does this technology differ from or improve upon what your closest competitor offers? I know you've discussed some features, but if you could provide further clarification, that would be very helpful. My second question, likely for Doug, pertains to the CSBG side. Again, you may have already covered this. For the full calendar year, I believe you previously indicated a flattish outlook. Is that still your perspective, or given the strong performance in June, should we anticipate a higher growth rate for the entire year? Thank you.

Maybe I'll take that one first, and then I'll let Tim comment on the 3.0 stuff. Yes, you might have missed my scripted statements. As we sit here today, we now expect that for 2024 CSBG, the word I used was modestly growth this year versus last year. Part of that is we saw particular strength in the June quarter in Reliant; a little bit of an improvement in spares. As we think about the utilization trends that are likely occurring with our memory customers, I think spares continues to be decent, and we're optimistic that we'll start to see some of the upgrade spend that we've been talking about for a while. I’ll hand it over to Tim on the 3.0 stuff.

Sure, Doug. The key difference between Lam Cryo 3.0 and our competitors lies in the results on the wafer. We have achieved impressive 10-micron deep holes with less than a 10-nanometer variance from top to bottom, and our etch rates are 2.5 times higher than conventional methods. The remarkable results stem from new surface chemistries enabled by our tool, along with specific hardware configurations and capabilities. Although I can't share all the details today, one notable aspect is our Vantex system, where the chamber design allows for significantly higher ion energy than any other system in the semiconductor industry. This contributes to our ability to etch exceptionally deep and nearly perfect holes.

Thank you. Appreciate that.

Thank you. I wanted to ask about the recent press concerns regarding export controls, specifically the foreign direct product rule and the entity list. While it doesn't seem like these would impact you, I'm curious if you've noticed any changes in behavior from your customers in China. Are they adjusting their orders or timelines due to these concerns?

Yes. Joe, I think that obviously, we don't know exactly what's going to happen either, just as you said, and so we can't really speculate on that. I have mentioned in the last couple of calls that there are ongoing discussions all the time with the U.S. government and regulatory agencies. We're part of those discussions and will continue to be. I think in terms of a change in behavior by any of our customers, I don't think it's something that's noticeable, nor would it be something that we would be able to easily react to. We've talked about how we deal with some of these new customers that emerge with down payments and other things to make sure that we understand those customers as viable. But beyond that, we service them like others at this point, as long as we can ship to them; I would say, lead times and responsiveness from our perspective are the same as we treat any customers of those size.

Very helpful. Thank you.

Thanks, Joe.

Thank you for allowing me to ask a question. Doug, I'm curious about the China business. You mentioned a solid year ahead, but I wasn't clear on what that entails. I know you've been careful about your outlook for China, referring to it as flat, plus or minus, possibly increasing or decreasing last time. Do you feel more confident in that outlook now, particularly beyond June? If you could elaborate a bit, it would be helpful. Do you think June was more of a cleanup month, and might there be fluctuations, or is China showing signs of improving for you?

I don't think I'm trying to communicate anything different from what we said on the last call. We mentioned this year as being somewhat weighted towards the first half, and that's still the case. The June quarter was slightly stronger in China, but just a bit. It's too early for us to quantify what's happening in 2025. However, I do expect next year to be a strong year for spending in China. I’m not providing a specific number yet because I’m not entirely certain, but I want to assure everyone that it's not disappearing.

Got you. And then I'm just kind of curious, the broad strokes were growth for next year. I know you don't want to give a forecast. But in terms of the moving pieces there, I mean, it's pretty clear leading etch is strong, DRAM spend is strong. I'm just kind of curious as you look into that forecast, if you're willing to venture kind of a view on the NAND business.

Yes, I believe NAND spending next year will need to exceed this year's levels. We've experienced two years of relatively low NAND spending. I'm unsure of the exact increase, but we anticipate significant upgrades in NAND next year. While I can't provide a specific figure at this time, I would be surprised if the spending isn't stronger than this year; it absolutely must be.

Thanks, Doug.

Yes. Thanks, Blayne.

Yes, thank you for taking the questions. I wanted to try on the NAND side again. If we just think about your prior peak NAND revenue ex customers that are obviously now restricted, can capacity upgrades to higher layer counts support your return to those levels, just given your higher share of higher etch and depth intensity for the transitions?

Joe, if it’s just an upgrade year, spending will be lower than when capacity gets added, obviously, our share of wallet will be greater. The fact that we lost a pretty large NAND customer in the China region is hard to replace that. I'm not ready to tell you what kind of next year it is relative to previous peaks. But I know next year is going to be a stronger year in NAND than it is this year for sure.

Yes. And Joe, I think that obviously, we're talking next year; it’s very specific to the demand environment and the upgrade business in 2025. Longer term, we've laid out, in our view, that NAND spending rises. It’s just a matter of the time frame you're looking at. From the standpoint of Lam's business, the etch and depth components and the complexity of tier stacking and the precision that's required for implementation of QLC and PLC technologies, all of these skew towards Lam's technical strengths and also SAM expansion opportunities. I talked about the PECVD pure carbon gap fill process, which is a new addition to the portfolio for NAND scaling technology going forward. If I go back and look at where we were in the portfolio, we had to sell, when people used to think of NAND as a very, very strong business for Lam, we've expanded that portfolio quite substantially with the gap fill, backside stress management, the ALD oxide gap fill process, plus the etch and stack debt that we've always had, as well as metallization. It’s one of growth in NAND demand, but also growth in Lam's portfolio and served market expansion opportunities ahead. I think that bodes well for us once the NAND business itself starts to recover.

That's helpful color. And just as a quick follow-up. You talked about global mature node spending being roughly flat this year. Can you just help us understand just kind of how does that break down? I mean, I think clearly, the non-China piece is pretty weak. But just any kind of color there you could help us parse that out.

Yes, you answered your own question, Joe. China is decent right now. Outside of China, it's pretty soft. I think you understand what's going on. There’s inventory that's built up, and these inventories still need to come down in the mature node, analog, industrial, and automotive space. Investment won't meaningfully occur until that gets adjusted. So that's kind of what's going on. You sort of answered your own question.

Fair enough. Thanks.

Thanks, Joe.

Hi. Thanks for taking my follow-up. Doug, I just had a quick follow-up. It's a question on inventory. You spoke about bringing on inventory turns down. I was just kind of curious like how to think about inventory next year, especially you're planning for a strong WFE year in 2025? Or do you think most of this inventory would be in a bin? How to think about inventory next year? Thank you.

Yes. Listen, if you think back to when business declined for us last year, a big part of what fell off pretty rapidly was our NAND business. A lot of the inventory that we still have sitting on the balance sheet will support NAND. Assuming NAND is stronger next year, and it will be, we will consume that NAND inventory that's been sitting on the balance sheet for a while. What will offset that to a certain extent is growth elsewhere, where we'll need to procure new inventory. I'm not ready to give you an inventory forecast quite yet, but we're continuing to work as we go through the remainder of this year to bring it down, and what we do with next year will depend largely on the timing of business, the mix of business, the geographic distribution of business. We'd like to get turns back to where they historically have been, and they're not there yet. That's how you should be thinking about it, Krish.

Thank you. Very helpful. Thanks, Doug.

Thanks.

Hi, there. Thank you for taking my questions. I wanted to ask on the leading etch and specifically gate all around nodes. I don't think I heard an update to your $1 billion gate all-around revenues in 2024 target. So is that still the case? And then as we think about those nodes ramping through next year, what's the trajectory of that ramp that we should be thinking about as you move from pilot lines into high-volume manufacturing?

Thank you, Melissa. We consistently make decisions about what to include in our prepared remarks, and gate all around was not included this time, without any specific message intended. Looking at the quarter, Lam is well-positioned with our forward-looking etch and depth portfolios. We focused on new tools in selected etch, a market we had not previously entered. During the quarter, we achieved additional selected etch wins for gate all around with multiple customers. We invested in ALD films specifically required for applications such as spacers and gate all around, and we also secured more wins in that area this quarter. Although gate all around involves different technologies, they are relevant to the same node, particularly in backside power delivery, which aligns well with our expertise in deposition and etch. In this quarter, we made progress in backside power with ALD oxide. Overall, considering these successes and feedback from the end markets regarding the rising demand for high-power computing driven by AI, I believe our $1 billion forecast for next year could increase. This is attributed to both growing demand and an expanding product portfolio where we are gaining market share.

Okay. Thank you. That’s all my questions there.

Awesome, operator, I think that concludes our call. I want to thank everybody for joining us today. We look forward to seeing you at a variety of conferences and interactions as we go through the remainder of the quarter. Appreciate it.

Thank you.