Okay, hello. I'm Tim Arcuri. I'm the semiconductor analyst here at UBS.
Listen, I have no idea who Forrest Norrod is, but that's not me.
That is not Doug Bettinger. This is Doug Bettinger. He's the CFO of Lam Research. Forrest is with AMD, so we.
AMD, so we confuse it. Anyway.
You got it.
I'm not Forrest. I'm Doug.
We got that a little confused. So, anyway, I think you have a statement.
I do. I have a quick safe harbor that I don't know if we have a slide. I hope we do. You put it up real quick. Anyway, I encourage you to go to our website, have a look at it. I don't plan to say anything new. I don't plan to change any forward-looking statements. But in case Tim asks some crazy thing, this cautionary statements kinda gives me a little air cover for that. So have a look at that, and Tim, let's just jump into it.
Great. Okay, Doug. So, let's talk about the 200-and-some pages that got dropped yesterday, the export controls. You already said, "Hey, listen, it doesn't impact our current quarter. Guidance is the guidance.
Yep.
So I don't know if there's anything else you wanted to say about that.
No, nothing, really new. It was largely what came out was what we expected, for the most part, right? And so we actually issued a press release yesterday before we showed up here 'cause I knew I was gonna be talking to people. I wanted to make sure we had that air cover. Guidance is good. No, no impact to anything we put out in the earnings or, or anything like that. It was largely expected what showed up in the 200-odd page document yesterday.
And.
Two documents, I should say, but 200 total pages.
Yeah. And part of what was unique in this one was, yes, there were chip makers added to the Entity List, but there were a lot of equipment companies added to the Entity List.
There were. Yeah, that was new.
That was new. And I think you and others have been saying, "Look, the playing field is not level because the incremental growth is in China. The government is enticing them to buy from domestic sources even though it's inferior product." And so they've been gaining share. So.
Well, listen, here's the thing, right? There's prior customers that we can't sell to any longer, right? They got put on the Entity List. So those companies haven't gone out of business necessarily, but they're doing the best they can with what they can get. That's where those Chinese equipment companies are showing up more than any place else, which is you can't get equipment from Lam Research anymore because the government restricted it. So get what you can get and make do with it the best you can. That, that's the nature of that.
But it's good. I mean, you would say it, it's competitively, you know, you have been saying that, yes, in China, the domestic equipment companies have been gaining some share. So the fact that some of them got added to the list is net-net good for you.
It's gonna make it harder for them, yes, to continue to do what they're doing, right? They can no longer source from a supply chain outside of China.
Yeah. Doug, so can you talk about: I'm not asking you for a 2025 WFE number, but I'm asking you for some puts and takes.
Kinda how we think about it. Yeah. So what we did also say on our earnings call, and still absolutely what I'm saying today, is we expect 2025 to be a growth year for WFE. And I'll unpack that a little bit. I'm not giving a number yet 'cause it's too soon for us to do that. We'll do that after the December call or on the December call, but from where we are this year, and maybe let me unpack this year briefly, right? We think WFE in 2024 is roughly $95 billion. Call it mid-90s. That's how we've been describing it. And so as we look across kinda what happened this year and what's happening next year, we see some level of growth, and we'll quantify that soon, but if I unpack it, then I'll give you a little bit of color.
We're coming up two consecutive years of very little investment in the NAND segment of the business. I believe next year is gonna be largely characterized by NAND investments and conversions, meaning upgrading the installed base that's already in the fabs. And it's gotta be more than it's been this year and the year before 'cause it's been, frankly, I think of it below maintenance level. So that's one thing to think about. Second, I believe leading edge foundry logic is gonna continue to be pretty strong, pretty good, right, and I think if you listen to some of my customers talk, they're describing that. So, you know, the gate-all-around node looks pretty compelling. By the way, I would also point out relative to that, that's incremental addressable market for us.
I should mention, when you think about NAND upgrade, we get a very good share of wallet when the upgrades happen because we are the constraint tools in a NAND fab. That's important to think about. Leading edge foundry logic, gate-all-around node, we should have good performance there as well. DRAM will continue to, I think, be strong, right? Largely characterized by investment to enable DDR5 and, more importantly, high bandwidth memory. Those are bigger die and high bandwidth memory. You need more equipment to do what I call the drill and fill. That's the TSV that we enable. You've got that there. Trailing edge foundry logic probably is a soft year next year characterized by likely a softening investment in China, all right?
So you got a lot of spending there in addition to the fact that the global industrial automotive analog guys are still moving their way through an inventory cycle, so they're not spending a ton on equipment right now. And so those are the puts and takes to think about going into next year. When we pack it all together, it looks like a growth year in WFE for us or for the industry, frankly.
One of your competitors or peers, we'll say, said, "Hey, the NAND WFE now granted off of a low base could go up 2x next year off of a low base." You know, I, I wrote a big piece on NAND upgrades, and I concluded that it's, you know, $40 billion over the next three years if you look at how much stranded old capacity there is. So you can get some pretty decently sized numbers off of where we are today in the.
Mm-hmm.
The NAND WFE market. Do you generally agree with that?
I don't know if 2x is the right number, but growth, could it be 2x? It could be. Could it be less? Could it be more? Maybe. But what I know is gonna happen next year is largely gonna be characterized by spending upgrades. And to, to your point, our share of that spend is really good when that happens. And for the simple reason that we own pretty much all of that mold stack deposition, that long etch down through what's called the channel hole. We pretty much own all of that, do own all of that. And then the metallization, tungsten, we pretty much own all of that. So when you think about having to upgrade the installed base, that's largely what needs to be upgraded.
In addition to the fact that we see the beginning implementation next year of molybdenum beginning to replace tungsten, and that also will be good for us. So when you put all that together, I feel pretty good about our ability to outperform, certainly in NAND for sure.
I did wanna ask you about molybdenum because all of the installed base needs to upgrade.
Eventually. Now, that's not all gonna happen next year.
Yeah. But it seems like it's gonna start maybe middle of next year and maybe SSD first and maybe consumer later.
I think that's right.
And you're the incumbent, so you're gonna get that business. We're.
We're well positioned for this. Yeah. We feel really good about it. So yeah, this is gonna be a good transition, and it's gonna layer on top of just the normal upgrades 'cause it's a new piece of equipment to deposit moly instead of tungsten.
I know you love to talk about CSBG, so I wanted to make sure I got to talk. I asked you.
Thank you for asking early. It's usually the very last question.
Yes, right. I wanted to get to it early. So maybe you can talk about CSBG. You've done a really great job. Yes, the Reliant component has been a bit of a drag this year 'cause it's more of a wafer fab equipment.
But it's done okay.
Business.
Yeah. Let me unpack CSBG. So for us, that's the customer support business group is the acronym if you haven't followed the company for a while. And there's four components that go into that: spare parts. All of our equipment needs spares to be replaced with some frequency. Service, right? All the equipment needs to be serviced, needs to be taken down, cleaned, and so forth. Equipment can be upgraded frequently, both technology upgrades as well as productivity upgrades. That's part of CSBG. And then what we call the Reliant product line, which is the mature tools. Sometimes it's stuff that we refurbish, but increasingly it's just older new equipment. So when you put all that together, actually the last several quarters, that's been north of 40% of the company's revenue. Now, the thing to understand is our equipment runs for decades. You'll sell it, install it.
It'll need to be serviced. Spares will need to be changed. At some point, it can be upgraded to the next tool capability. Sometimes the customer will then move it to a different application, wanna move it around in the fab. Sometimes we'll assist with that. That's part of the service profile. And then it used to be the case, although it's not been for quite a long time, that sometimes we would buy used equipment back, refurbish it, and resell it. When you think about that cycle, on average, equipment that we sell generates more revenue over the life of the tool than when we actually sell the tool itself. This industry and investors are always so focused on what's WFE, how big is WFE. But frankly, this is the generation of profit after WFE occurs, except in Reliant, in the case of Reliant.
So anyway, so we give a number at the end of every calendar year, which is the number of chambers in the installed base. It grows every single year. So the opportunity to continue to generate growth in business from CSBG continues to grow at least partly or maybe largely because chambers grow every single year. So the ability to sell more spares, more service, and upgrade things gets bigger every year.
Any color you can provide or remind us of what you said, about the relative size of each of the pieces within CSBG?
Yeah. What the company said is the biggest individual component is spare parts. An etch tool actually is pretty spare parts intensive. So spares is a big piece. And then more recently, I've been describing Reliant is now the second biggest piece. At least this year it is.
Got it.
Followed by the other two.
Got it. Can you talk about margins, Doug, and just how to think about the puts and takes on gross margin?
Sure. Yeah. Let me see where to start. We've had some what I would describe favorable customer mix that has benefited margin over the last three or four quarters, call it. Last quarter, the reported number was north of 48%. We guided the December quarter to 47%. We've been benefiting from a favorable customer mix. Read that smaller customers as a greater percentage of the total revenue of the company. As we move into next year, I think that dynamic likely mitigates a little bit in 2025, and so becomes a little bit of a margin headwind as we go into next year. Offsetting that, though, is we've actually pivoted the company's manufacturing footprint to have a greater Asia manufacturing profile.
And so, as business grows, if we're right about WFE growing next year, and I think we are, and we outperforming next year, the incremental volume will show up manufacturing-wise in that factory, those factories in Asia. It will benefit from a better cost structure. The supply chain has got better cost and freight and logistics because most of the fabs in the world are in Asia. Because you are flying these large pieces of capital equipment a shorter distance, you save dollars on freight and logistics spending as well. So that will show up as a tailwind as we go into next year, assuming we are right about the growth next year.
So do the Malaysia tailwinds, which, you know, Malaysia now is net neutral to gross margin, becomes a tailwind next year. Do the Malaysia tailwinds offset the headwinds from China and mix?
I'm not ready to put numbers on it yet. Clearly, I'll do that when we guide the next quarter. But it'll depend on the relative, how much goes each direction, right? So I'm, I'm not ready to guide you there quite yet. But the two will offset. I want to make sure people are thinking about that aspect.
Great. I wanted to ask you about deferred revenue, which you probably didn't think you were gonna get asked about that, but.
I know you're gonna ask that one, but that's okay. Go ahead.
So one thing that was interesting last quarter was that deferred was up.
It was.
You know, because of down payments from what seems like new customers in China. So, my question is really about, like, the pace of the new customers in China because this is not a new phenomenon that these new customers come to you and you say, "Well, I don't know who you are, so, you know, I need to take a bigger down payment," and that's what's been driving, you know, a lot of your deferred. Now, it seems to me when I was, you know, looking through your results that deferred went up, but that it's a larger percentage on a smaller number of customers. So, like, is it fair to say that the pace of the new, the new customers in China is slowing?
Slowing. I don't really think it is necessarily. The level of spending might be, though. Frankly, right as we think through, okay, I think China WFE is down next year. I don't, you know, not too many customers are no longer there. They're all still there. They're just probably spending a little bit less, which would also drive the same dynamic you're asking about.
But it's not, yeah. I guess my question is, like, there's been this tailwind of new entity, you know, let's say 15 new entities per year spending a couple hundred million dollars each. Small number, but a big incremental number of customers.
Yeah. There's a lot of customers in China, for sure.
Is the number of incremental customers that are coming out of the woodwork every year, is that slowing?
Yeah, maybe a little bit. Yeah.
Do you think that that's, and where I'm going with this is, do you think that there's a process of consolidation in China that's begun, either by government forces or by natural forces, that we saw this expansion in the customer base and now it's beginning to contract where the government or, like I said, natural forces of economics drive some consolidation of this explosion of these?
No, I don't think that's happening. To my knowledge, it's not happening.
That's not happening yet. Okay.
Not to my knowledge.
Okay, and then I wanted to ask you just about sort of the competitive dynamic, you know. You know, one of your competitors talks about Cryo a lot. And.
They've been talking about it for years.
For years. Yeah. And can you just talk about sort of your position there?
Extremely good, right? We recently announced we call it Cryo 3.0. It's incremental performance beyond Cryo 2.0, which was incremental beyond Cryo 1.0. We are the only company in the industry that has Cryo in production, right? Almost 1,500 chambers today. And yes, one of my competitors, peers, whatever you wanna call them, has been talking about, "Hey, we're gonna win business," and so forth and so on. And so far, they have not. And they keep talking about winning business. And when they talk about it showing up, it continues to be later and later and later. So we're in great position. The best ROI for the industry and for our customers is to upgrade what's already there. And that is Lam Research. So we're good at what we do. We're defending things extraordinarily well, and we intend to continue to do that.
I wanted to ask you also something from last quarter. So you guided December. You guided China down $250 million.
We guided it to approximately 30% revenue. Yeah. So you do the math you're doing. Yeah.
So it's okay. It's down. Yet you're guiding revenue up $150. So something else is making up the difference. Something else is an incremental for $100 million. That's roughly the math. So it's and then you talked about Taiwan being a little stronger. I know that advanced packaging has been stronger recently. Is that sort of like a harbinger of what you're talking about, that leading-edge foundry logic is gonna really be strong next year? And you're seeing it maybe like under the surface, you're seeing it already in the December.
Yeah. Listen, really if you step back, the global part of the industry outside of China is growing, offsetting China going down. I mean, at a simplistic level, that's what's showing up. Yes. Leading-edge foundry continues to be strong. DRAM continues to be strong. That's a large part of what you, what you have going on, Tim.
Can you talk about just fan-out panel-level packaging, which is gonna ultimately replace CoWoS? How are you acquired SEMSYSCO, I think.
SEMSYSCO is the name of the company we acquired, I think, a year and a half ago. Yeah.
That, you know, gets you into that more.
Yes, it does. It helps accelerate us into that. Listen, almost everybody in the industry is looking at whether it makes sense at some juncture to begin to package devices in a panel form factor. It can be bigger. Theoretically, it can be done at a lower cost. And so the industry is working on this. When we acquired SEMSYSCO for us, it played to the fact that, one, they already had a tool out there, and it also leveraged the strength of something we're really good at doing at Lam, which is electroplating. So bringing those two things together, we looked at it and we saw technical synergies, which is almost always why we do some kind of an acquisition. And then today, the whole industry, like I said, is trying to figure out what is this gonna look like?
What is the form factor gonna be? Each customer is kinda thinking about it a little bit differently today. But I think eventually this will show up as business in the future. It's not there yet.
Yeah. I mean, you know, TSMC's talking about, you know, panel-level packaging 2027, 2028, so.
Yep, so you gotta invest today to figure that out 'cause this is a fundamentally new, new way of doing things.
Doug, can you to talk just a bit about DRAM? There was, I think, your view's a little different than maybe what, you know, ASML presented a slide that showed that, you know, 3D DRAM may never get to the cost scaling of some other things without new materials. So how do you think about some of these technology vectors in DRAM that if DRAM begins to go more vertical, that really works in your favor?
Well, listen, when everybody in the industry is working on a problem and working on a similar thing like 3D DRAM, I would tell you everybody's working on this. It always happens at some point. It's a question of when it happens. In the meantime, you're gonna see something called 6F squared going to 4F squared. The intensity of the etch in that goes up. So that'll be a good thing. But that's not really a 3D structure. When you think about things going 3D, it tends to be a lot more etch and deposition intensive 'cause you're depositing material, you're removing material. We really benefited when NAND did that, went to 3D NAND. 3D DRAM is gonna do that. It's a question of at what point. To us right now, it seems like late in the decade, maybe 2030.
But, you know, we can debate what year, but I'm highly confident it's gonna happen.
In the vein of DRAM, I wanted to ask you about HBM. You said that advanced packaging is over $1 billion in revenue today.
Yep.
and HBM's a portion of that?
It's a portion. We've said HBM this year for us actually is tripling 3X from last year.
Can you talk about your, I think of your position in, in the advanced packaging part of HBM as being number one? There's the front-end part of HBM where, you know, maybe your share's not quite as high as your peer is because they just have higher share in DRAM generally than you do. But in the HBM, in the advanced packaging part of HBM.
Yes.
You have the top share. Is that correct?
I believe we do. Right. The through-silicon via, which are the most enabling applications, we pretty much own all of it, right? I call it the drill and fill, the silicon etching. It's a tool we call Syndion. Extremely strong position. And then the conductive material, you need to put a copper metallization down. It's done with an electroplating process, which is the tool we call Sabre 3D. Those are the most enabling applications in HBM, in my opinion. It's the through-silicon via, and we pretty much have the critical steps in there. Same in CoWoS, by the way, right? And so when you think about all of this together, the TSV is some of the most enabling applications that show up in both of those spaces.
I wanna go back. I'm just getting a question here from the audience that I wanna try to get to the bottom of. So the China commentary, you sort of made some generic commentary about China next year, just a mix. Does that take into account, I mean, you had a view on export control?
We did, and it's largely what showed up yesterday, and so it's consistent.
Consistent. Okay. And then can you talk about NAND? Are you seeing, there have been some other companies that are saying, "Hey, you know, NAND actually is showing signs of really, like, it's game on now in NAND, spending"?
I don't know if I'd call it game on. I mean, I observe our customers still being cautious, prudent. Use whatever word you want, right? It's not back to peak investment levels by any means next year. But it's been such a low-level investment now for two years, that when we look at it, we'll be through the inventory cycle mid-year or early mid-year, and the demand is out there. Profitability has improved in such a fashion that we think we're gonna move into the phase of upgrading what's in the installed base.
How do you think, Doug? I wanna ask you about the balance sheet and, you know, capital return?
Yep.
You have some debt coming due next year. I would think you'll just pay that off with cash, rather than refi it. But I.
I'm waiting to see, frankly. Yeah. We certainly have the flexibility to do that. There's a $500 million maturity, April, May of next year. So yeah, I'm trying to figure out what to do with that. There's a maturity of the year after that as well. So it's possible we'll just pay it off and wait and see what happens with interest rates. It's good to have the option to do that. And frankly, we may exercise that option that way.
And then in terms of capital return, how are you thinking about maybe how that could evolve over time?
Yeah. Listen, I don't think it's gonna change much from what it's always, well, it's been since 2017-ish, which is, we plan at the company to return 75% to 100% of free cash flow. The board recently authorized a $10 billion buyback, which was above the previous authorization, which was $5 billion. We'd been pretty much all the way through that. We intend to grow the dividend on an annual basis. I know that's what shareholders wanna see happen, and that's what we plan to do. And when you put all that together, we end up doing a reasonable amount of cash allocated to buying the stock back. So in last quarter, we bought back $1 billion of stock.
One thing that has struck me is how much WFE share ASML's gained over the past few years. They've gained a.
EUV finally showed up.
EUV's here, so there's been a lot of litho capacity added, but there seems to be a mismatch. If the industry requires that much litho capacity, then it doesn't seem sustainable that we're buying this little depth in etch.
Well, here's the thing to understand, and you know this, but I'll remind everybody in the room. You can't buy one thing without the other, right? If you're gonna put a pattern down on the wafer, you have to deposit the material to create the features, and then you need to remove the material to shape things. That's etch and deposition. Now, always you buy the lithotool first 'cause lead times are a good deal longer than they are with what we provide to the industry. But it all has to go together. And you buy litho first, etch and deposition follows, later on 'cause our lead times are much shorter.
So you would say that, I mean.
This will ebb and flow year by year.
Two years. Yeah. Yeah.
This ebbs and flows year by year, and it also depends kinda which end market is buying, right? If it's a foundry year, that's more litho-intensive. If it's a NAND year, it's not, and so that mixed thing, right, I talked about the fact that NAND has been depressed for two years. That's also skewed a little bit of that, from what it may be in the future.
Doug, when you look at, like, where your gross margin could go to, I know that one of your peers has been talking about increasing price. But at the same time now, there's probably gonna be some used tools on the market because Intel's gonna be selling some used tools, and.
We'll see.
Microchip might be selling used tools as well. Who knows? But, how do you think about, like, why can't you push gross margins higher? What is it like, what's the customer discussion? Do the customers push back so hard already on your gross margin?
Not necessarily. Listen, the fact that we just printed a 48.3% last quarter, that's pretty good, right? That's the committed financial model of the company from back in 2020. You're always trying to make sure you're getting paid fairly for everything you do, right? Do the best you can with profitability cost structure. It's why we kinda pivoted a little bit to the Malaysia footprint. Price is always a negotiation, right? It happens every single year with every single customer, right? You're always trying to do your best there, and listen, I feel pretty good about where profitability is right now at 47% in the current quarter, and it was north of 48% last quarter. So, and you know we're gonna do an investor day in February, and, you know, come see us, and we'll talk about what that new financial model might be.
But I'm not ready to give you something new right now.
I know you, Doug. You the last analyst that you had, which I think was before COVID.
I think it was like a week before COVID. It was, yeah, a strange, strange time.
And you gave us some metric that people have always tried to hold you to, but you've since said that doesn't hold anymore about an incremental. So for a given amount of big growth, that requires X amount of spending. For a given amount of big growth.
Yeah.
Are you gonna?
That information's not current.
It's, it's.
Current anymore.
It's old. But I mean, are you gonna at the analyst day is the thought to sort of, like, refresh all that because?
I don't know. I don't know that we'll do that or not. We're still debating what we're gonna do. That was good data for a while, and then it wasn't. And so when it was good data, it was helpful to everybody. And then when it wasn't, I spent every meeting talking about why maybe it's not the right information to be thinking about anymore. So I saw a benefit for a while, but then it was actually a negative. So I don't know if we're gonna go back and kinda give you a new set of information that's similar to that or not.
And maybe last question, Doug. You meet with investors all the time. Is there something about Lam's story that you feel like people don't understand that is sort of miss.
Listen, I think there's a couple of things that I always feel like people underappreciate. And thank you for asking about CSBG 'cause often in a meeting, it'll be not asked, and I'll try to remember at the very end to say, "Hey, don't forget about 40% of the business you haven't even asked me about." So I think the quality of that business is underappreciated. I think people also historically have perceived that, "Hey, we're the memory equipment company." And frankly, if you look at the success we have had in Foundry and Logic over the last several quarters, frankly, we're doing great in Foundry and Logic, and we'll continue to.
So I think people have long memories in this business, in this industry, and sometimes you have to come out to events like this and keep reminding them, "Hey, things aren't the same as they always have been.
Absolutely. Okay, Doug. Thank you.
Thanks for having me, Tim.
Thanks.
Appreciate it.