All right. Good morning still. My name is C.J. Muse with Cantor, covering semiconductors, semiconductor equipment space. Very pleased to host Lam Research. This morning we have Doug Bettinger, CFO. Thank you for coming, Doug.
CJ, thanks for having me. I appreciate it.
I think Doug has an initial statement to make, and then we can push this in.
I was going to start with my safe harbor to keep the attorneys happy, so permit me. Today's discussion may include forward-looking statements that are subject to risk and uncertainties, and actual results may differ materially. Additional information concerning factors that could cause actual results to differ materially from those forward-looking statements can be found in the risk factor section disclosed in our public filings for the SEC, including our 10-K and 10-Q. By the way, I do not plan to tell you anything new today, so if you are looking for some new forward-looking statements, I am going to probably disappoint you. Yeah, everybody's getting up and leaving the room now. Anyway.
I'm planning to ask.
You could ask, but you won't get me to say anything new, CJ. This is a game we play with each other.
Yeah. Doug, your favorite question. I figured I'd start there, and then we could get really to the meat of the Q&A. Where are we in the cycle? I know this is your favorite ask. Most management teams talked about an up 5% WFE for 2025 and everyone taking share, which means we're probably growing 5%-10% when all is said and done.
It's a great industry when we all take share.
Yes, it is indeed. Just to understand kind of your frame of mind, small growth this year. On top of that, what's your early look into next year?
You know, I'm not going to say anything about next year yet, CJ, but I will unpack this year for you a little bit. First, the baseline. Last year, 2024, WFE was, I don't know, mid-90s. Call it 95. We've suggested we see 100 this year. A little bit of growth, CJ. More importantly, the things that we do well in are going to be growing this year. I think you're going to see nice performance from Lam this year. First, unpacking, okay, where's the growth coming from? Maybe start with my favorite in market, NAND. NAND is up a little bit this year. Frankly, what's going to happen in NAND this year is an upgrade year, which we love when upgrades happen because the constraint tools in the fab need to get upgraded. By and large, that's our equipment.
NAND up a little bit. By no means am I telling you we're back to peak investment levels. Not even directionally close to that. The reason we love upgrades is when you go through an upgrade year, our SAM is roughly two-thirds of the spending in an upgrade cycle. We do well. That's the stack needs to get upgraded. A lot of the very difficult etches down through the structure need to get upgraded. The metalization needs to get upgraded. What you're going to see on top of a normal upgrade cycle this year is the beginning of the transition to molybdenum. I'm sure you'll ask me more about that later. Going outside, foundry and logic is going to be decently strong this year, especially at the leading edge.
You're going to have spending in Gate-A ll-A round, which we've described is very beneficial for etch and deposition. We are excited about that. Nominally, when you look at a Gate-A ll-A round investment for every 100,000 wafer starts, our SAM grows by $1 billion, roughly speaking. We will not win all of that, but we will do well. That is what we see happening in foundry and logic, in addition to advanced packaging, which shows up there, as well as in DRAM. Looking at DRAM, you are going to have a continued strong year this year. Last year was pretty strong. The composition of who is spending this year, CJ, is going to be a little bit different. China is certainly down in DRAM this year. Everybody else is up. What you have going on there is 1- beta to 1- gamma. You have high bandwidth memory continuing.
When you think through all those things, we're pretty excited about our performance this year because everything I just ticked through are things that are etch and deposition intensive and should be good for us.
Perfect.
That all cuts my breath for a minute.
Maybe a few follow-up questions to that. Within the NAND bucket, is there a way to think about contributions to tools versus CSBG?
That's a great question. Maybe unpack when we talk about upgrades, what the heck are we talking about? First, the installed base can get upgraded. Basically what happens there is the stuff that's already in the fab can get the next generation capability added to it by replacing certain components of the tool. That piece is in CSBG, as you know, CJ. What also always happens in an upgrade cycle is a few new tools get purchased, right? The constraint tools need to have bottlenecks removed and whatnot. There's always some level of new equipment purchase as well. You get a little bit of that. Layering into that as well is the Moly tool, a brand new tool, Altus Halo, which we announced a couple of weeks back at our investor day, the name of the tool.
MOLLE, as you think through, you'll begin to see the transition from tungsten to MOLLE in NAND next year. That will be new equipment. It's a long-winded way of me telling you. It'll be a little bit of both, CJ. Heavy focus in CSBG on the upgrades and then some new equipment buys as well.
When we're upgrading to Cryo, is that an upgrade or is that a new tool?
Again, a little bit of both, but probably more upgrades, right? Relative to opportunity to upgrade to Cryo, we've talked about the fact that if you look at the installed base of NAND equipment, we've got 7,500 high aspect ratio etch tools there, of which we've said we are the only company that's actually shipped Cryo in production. The Cryo shipments so far are 1,500. The opportunity to upgrade that is pretty strong.
You talked about two-thirds share of wallet or share of market?
SAM percent of overall WFE.
Of upgrades.
Yep.
You know, I think if I look back, your share of overall NAND WFE has kind of been around 30%. And so if I think about an upgrade world, is it fair to say that your share of overall NAND WFE is probably more like 40-plus % this year?
You know, CJ, we haven't put a hard number on it, but it's higher. Certainly, our share of spend is higher in an upgrade cycle. Leave it at that, I guess.
All right. Your analyst day was just three weeks ago. Still very.
Still pretty fresh.
Fresh.
Nothing's changed relatively to last year.
I thought maybe we'd start with what are the key takeaways investors should have top of mind? I think you've talked about performance, scaling to 3D, CSBG, etc. If you could elaborate on those.
Yeah, let me unpack it a little bit. I'll come at this because I'm the CFO from kind of how do you unpack the numbers, right? We were pretty excited to update the financial model for both 2028 as well as we did that trillion-dollar industry model, CJ. I know you'll remember that. First, I guess the way I start with it is semis are a great place to be. It's a good neighborhood to live in, right? You've got AI growing. You've got automotive growing semi content. You've got just the broad secular growth from all aspects of semi. It's a great neighborhood to be in. Equipment's even better, right? Capital intensity is growing per wafer for sure. That's important to think about, right?
We described a point of view that WFE grows mid-high single digits, roughly speaking, to kind of get to the numbers that we put out there. That's important. Etch and deposition intensity because of 3D device architectures such as a growing NAND stack. You've got in DRAM, 6F squared going to 4F squared, eventually going to 3D DRAM. You've got gate all around, backside power, advanced packaging. All of these things are 3D architectures. When we step back and look at that, we believe our SAM share of WFE goes from the low 30% range to mid-high 30s. That's the secular outperformance. We believe of that growing SAM, we're going to gain a decent amount of share of that, right? We've suggested with the strength of the product portfolio, 50% of that we believe is going to be what shows up at Lam.
We say that because of the strength of the product portfolio. We announced two new products at the investor day, a new conductor etch platform we call Akara, first bottoms-up redesign from the leader in conductor etch in over 20 years. We are super excited about that. Customer pull is very strong for that tool in particular. On top of that, we also announced Altus Halo, which I referenced, which is our MOLLE tool. When you look at the strength of the product portfolio, we feel good about the opportunity to gain share, which is how you get to those top-line numbers that we put out there, $25 billion-$27 billion. Adding to that, again, I will keep building the P&L for you a little bit. The Asia factory strategy, as business grows increasingly, will be delivering the incremental growth from that factory footprint.
That, coupled with the new products that are coming out, we believe enables us to deliver a gross margin. First time we put out with a five handle, right? 50% gross margin, which I believe is largely within our control here. Building through that, we suggested 34-35% operating margin. Pretty good. Feel good about that. When you look at the portfolio of the business here, including the growth in CSBG, which I failed to mention, 1.5 times we believe CSBG grows, we generate a lot of free cash flow. This is a great business relative to cash flow generation. The new plans that we communicated relative to use of cash, CJ, we plan to return at least 85% of the free cash flow.
When you layer in everything that I rambled on about already, we believe we'll be able to lower share count through the buyback. When you put it all together, it's a nice growth in earnings per share, $6- $7 in earnings.
It's a good overview. I have a few follow-up areas to focus on. The first one is Akara, which is, I believe, first conductor etch new product platform in 20 years.
Over 20 years, CJ.
It's a direct drive RF system, multi-chamber configuration. Can you kind of walk through why that's important?
Yeah. I mean, you hit on some of it already. We are the leader in conductor etch. Honestly, when you design a platform, you're constrained by what the platform can do. This is a complete bottoms-up redesign architecturally on the Sense.i platform, which we announced at the previous investor day. I think the important thing to understand is this is a very intelligent tool. When I say that, equipment intelligence has been designed into the capability of the tool. A lot of sensors, a lot of predictive capability, coupled with the fact that it's a complete redesign of the chamber itself. When we look at the capability and you reference direct drive, this enables very quick plasma switching inside the chamber.
The ability to do some of the very high aspect ratio requirements that our customers have, coupled with the equipment intelligence aspect of the tool, this is a real winner. Honestly, customer feedback has been resoundingly positive. This is going to come through very strongly in foundry and logic, as well as DRAM and NAND, honestly. Just listening to when I sit through the quarterly business reviews of all of my account teams, customer response to this tool has been resoundingly positive.
Now, you guys don't pre-announce tools, so this means it's been out for years.
It's been around for a while. Yeah. This isn't the first time the customers have heard about it for sure.
Is there a framework for thinking about kind of the incremental growth we can think about for conductor etch for Lam 2025, 2026, 2027?
I think it's all in as part of that financial model that I just shared with you. It's part of the SAM expansion. It's part of the confidence in telling you of that SAM expansion, we're going to get 50% share of that growing SAM. The Akara tool is a key component of that.
Okay. Great. Maybe moving to the MOLLE ALD tool, the Altus Halo, targeting NAND, DRAM, and logic, but NAND is your first market.
Yep.
DRAM at 4F squared. Is there a framework for thinking about the incremental growth that we can see here?
Similar to Akara, right? The customer pull for this tool is extremely strong as well. You hit on it right. It is first going to show up in NAND. I already have line of sight to that. It will then closely follow that in DRAM and foundry, frankly. Yeah, we have described a view that over the next several years, we use the term several years, this is $2 billion of new revenue for us, replacing some of what we already have. The fact that this is a brand new tool, this is new purchases from customers. This transition to MOLLE is going to be around for the foreseeable future. It is maybe the biggest metalization change we have seen in the industry for, oh, I do not know, since the industry moved to copper, frankly. It is a big deal.
Do you have a vision of perhaps what increase that does to overall WFE intensity? Or this is more of a share of wallet gain for you relative to Tungsten?
It's a share of wallet gain. Yeah.
Perfect. I guess within foundry logic, gate all around, backside power, advanced packaging, is there sort of a rule of thumb that we should be thinking about here? I think you talked about each being a billion dollars in 2024.
Yeah. Maybe let me put a few numbers around it, unpack it a little bit, and then you can redirect me a little bit. Yeah, I think it's through foundry and logic. There's some inflections that are really very important to the etch and deposition intensity that I described. First is the move to gate all around. And you got the number right, CJ. When we look at this, for every 100,000 wafer starts of capacity the industry invests in, this is an incremental SAM growth opportunity of $1 billion for etch and deposition. This is selective etch, ALD, spacer-based ALD stuff, and a variety of different things that go into there. That's one of the billion-dollar numbers that we'd like to share. The second, and different customers will be on different timing cadences with this, but backside power, right?
The move to power delivery to the backside of the wafer is very good for our plating business, our Sabre tool. Again, this is another incremental billion-dollar opportunity for every 100,000 wafer starts of capacity that gets put in place. Obviously, we're excited about that. We like these billion-dollar numbers. I'll give you another one, which is advanced packaging. We've been talking about advanced packaging for a while. It really inflected last year, and we see that continuing. Last year, our advanced packaging business, both high bandwidth memory as well as some of the chiplet stuff, was more than $1 billion in revenue. Different, right? I've been talking about billion-dollar SAM opportunities. This was more than $1 billion in revenue. That's growing nicely this year.
One new multi-billion dollar number that we put out at the investor day, when you combine gate all around plus advanced packaging, that those club together, we believe, are comfortably above $3 billion this year for us. We are excited about this. We like these big numbers. We like throwing big numbers out. We put the big numbers out simply to demonstrate to you things are inflecting in the third dimension in foundry and logic, in NAND, obviously, and in DRAM to the benefit of the things that we do because that's all we do is create 3D structures.
Perfect. Maybe the last of the four horsemen that we call them, Dry Resist.
Dry photoresist. Yeah, we're excited about that one too. Thanks for asking about that one. I forgot about that one.
At your last analyst day, you kind of gave us the same $1.5 billion over five years, reiterated it this time. I think what's missing is that you are truly gaining momentum here.
Absolutely.
This is not a high NA EUV insertion. This is low NA. He's not telling you this, but when I was at SPIE three weeks ago, Tokyo Electron confirmed to me that they got product tool record at Samsung. They did put out a press release saying direct DR at Hynix. If we take a step back, the more photons you get on a wafer, the higher the productivity EUV, and that's what dry resist does. Can you walk through where we are today, how you see kind of adoption? Obviously, you're targeting DRAM first. How should we think about kind of initial wafer, not initial layer count kind of adoption out of total layers for low NA EUV?
Yeah, it'll be small at first, CJ, but yeah, let me go back through and you put some of this out there already. Yeah, we reiterated with a little bit of a delay. When we look at the opportunity here over the next several years, cumulatively, we believe this to be a $1.5 billion incremental opportunity for us. Yep, you got it right. We announced one PTOR decision in DRAM, and we had previously announced a DTOR position. I can't say which customers they are. You speculated on it. I won't confirm or deny what you speculated on. It's got real momentum. You're absolutely right. By putting the photoresist on using dry chemistry, which is essentially what we do from the angle we're coming at this, you can more efficiently absorb the photons, we believe, right?
Which makes the EUV tool that much more productive. The higher the dose, the more beneficial it is. It will be more beneficial for high NA, CJ. You're right. The DRAM things we've announced are low NA. We're excited about this. This is all new space for us, something that is entirely incremental. Yeah, it's got real traction now. I think I'd go as far as to say, you hosted a dinner for us at SPIA. I had my CTO there. His statement, and I've been using this, is it's a matter of when, not if. You're really beginning to see the momentum building here.
Is there a framework for thinking per layer, per 100,000 wafer starts?
We have not given metrics like that out yet. We have only put out the $1.5 billion over the next five years. I cannot jump off that. Stay tuned. We will probably have more to say about this as things unfold.
Okay. Perfect. We have hit on kind of the incremental tech portfolio I want to hit on now. I think some of the more important takeaways from your 2028 new target model. The first one, implicitly, you are telling the street that you are going to grow your share of WFE by 200, 250, 300 basis points. I guess, is there a framework for thinking about rank order of what is driving that to help investors?
Best I can do for you is just go back to what I've already said a little bit here earlier. It's 3D architecture inflections occurring. And we've talked about some of it. It's gate all around and backside power and advanced packaging and 6F to 4F squared. These 3D inflections are growing our SAM share of WFE, like I said, from the low 30s to the mid-high 30s. That's the most important component, coupled with, again, the strength of the product portfolio, where when we look at this inflecting SAM, we're pretty confident in telling you we're going to gain 50% or more of that growing SAM because of the strength of the product portfolio, Akara, Halo, other things.
Perfect. I guess the second point on CSBG, you outlined growth of 50% from 2024 to 2028, despite kind of a challenging 2025 environment. That is a 10% CAGR. If you put it off of 2025, it is even higher. That is a change statement from when you first guided CSBG at your last analyst day. I guess, what gives you the confidence in kind of the relative growth, particularly kind of in a world where Reliant is depressed?
Yeah. I think if you unpack it, maybe let me make a backward-looking statement and then tell you how that goes into the future. I guess if you look back over the timeframe from Lam and Novellus coming together, and I guess it was June of 2012, chamber count nominally has grown by 10%-ish, roughly, right? That's an important component of the opportunity in the CSBG or customer support business group, right? Chamber count grows every single year. The opportunity to do more grows every single year. I think people are surprised sometimes when we make statements like, "Our tools will run for decades." They really do run that long. There is a very long life cycle to the installed base, I guess, first thing I'd say. Looking back also, if you look at the revenue growth over that timeframe, revenue's grown roughly 17% CAGR.
Now, part of that has been growth in Reliant. If you unpack that from the growth, it's still 12-13%, something like that. Several hundred basis points above the growth in chamber count. We see an opportunity to continue to be able to do that. We're doing it through things like innovating in equipment intelligence, innovating with results-based type contracts more so than just traditional services show up and do a task. We're increasingly using the data coming off our equipment to do more results-based contracts is the best way to describe it, using things like cobots and more predictable maintenance as an example. That is beneficial for us. It's beneficial for the customer, frankly, because you can help them get more out of the install base, out of the fleet of equipment that's already out there. We're excited about that.
I mean, the pull on this cobot type service delivery has become quite strong, I think. The complexity of what's going on, the broadening out of the industry across, I don't know, the global footprint has been part of that.
Perfect. Maybe on the gross margins, knowing your conservative nature, I was not sure that you'd put a five-handle out. I took that to be pretty much a done deal. I am curious.
Listen, I guess what I would say, done deal, I do not know. We have line of sight to it. We have a strategy. Honestly, I feel really good about the company's ability to execute the strategy. I am actually quite proud of how the company has done what we told you we were going to do. For those of you that follow the company, you will remember when business turned down in early 2023, we embarked on this strategy. I told you, have some patience. This will ultimately go from being a headwind to gross margin to being a tailwind. Frankly, you are already seeing that tailwind. I told you on the last earnings call, a tailwind from this manufacturing strategy has already delivered about 100 basis point improvement to gross margin. You are already seeing it.
Maybe to follow on that, I know how focused you are on CSBG and the growth there and kind of the razor-blade model.
I sometimes describe it as my favorite part of the business model of the company. In many ways, it is.
The very long tail. I find it interesting, positive that you can hit a 50% world while you are focused on this razor-blade razor model. I guess, can you help me understand, are you delivering even more kind of upside for Malaysia and you're still kind of willing to take certain business to get the service revenue, 20-30 year service revenue?
Absolutely. I mean, listen, we've got a business model here that delivers growth, I think, outperforming growth because of architectural changes. We've got close to the customer strategy that's helping enhance profitability. Frankly, having CSBG grow helps, obviously, to both of those things. When you put it together, yeah, this all has to kind of fit together in a way that delivers those numbers that we talked about, and it does.
I guess maybe just following last comment on CSBG, if I look at what you've historically returned via dividend as kind of a percentage of operating profits for CSBG, and I look at kind of the number that you put out for 2028, over the next four years, it kind of underwrites an 85% increase in your dividend. Obviously, that's my number, not your number, but I guess speaks to the tremendous free cash flow growth that we should see in the coming years. I guess, should we assume that you maintain the same kind of dividend approach, or would buybacks be more aggressive in that kind of world?
You know, it'll be a combination of both. It'll be a combination of both. I think we put the dividend in place for the first time in 2014, and we've pretty much grown it every year since then. I think the last two or three years, we've grown it, if I remember the numbers right, 15% a year. Decent. Free cash flow has grown a lot in that timeframe as well. We supplement that with the share buyback. Frankly, if you look at what we've done, we've returned close to 100% of free cash flow since we brought Lam and Novellus together in 2012. That's meaningfully lowered share count. I think we've benefited from that being an enormously helpful return metric, right? I think the average buyback price over that timeframe has been something like $18.
I haven't looked at what stock price is today, but it's comfortably above that. It's been a good use of cash for shareholders, for sure.
How about U.S.-China relations? Sitting here today, do you view domestic China as de-risked from your current business plan?
I don't know if I'd say de-risked, but we've told you, hey, listen, we think China's % of revenue is down this year. The new regulations that came out ended up impacting us to the tune of $700 million-ish this year, largely in the second half, a lot of which was in the second half. Yeah, I don't know. Maybe you can think of it as de-risked, CJ. I just kind of think of it as this is what we see. It is down year on year. So I don't know.
Yeah. Did you give us a percentage for the 700 tools versus CSBG?
We didn't. It's got a large reliant footprint to it, though, obviously. Yeah.
Gotcha. I guess, sticking on China, how do you think about AMEC and Naura? Is that principally local domestic China competition, or are you seeing them anywhere on a multinational perspective?
You know, those guys are growing, but you have to understand there's a lot of customers and some fabs in China that we can no longer sell to. And so if you think about, okay, where is equipment coming from? Well, it's probably coming from a lot of China. That's why they're doing as well as they're doing, CJ.
Makes sense. I guess maybe to kind of close our conversation, focusing on margins, we talked briefly about kind of Malaysia factory ramp and hitting the 50%. Is there anything that you want to kind of spend time expanding on in terms of the expansion of your Asia factory network and how that's driving performance improvements?
Yeah. I guess I would describe it as the incremental growth increasingly is going to come from that Asia factory footprint. It just makes sense. It's closer to the customer. Ninety-odd percent of our revenue is outside of the U.S. Eighty-ish percent of it is in the Asia region. It just makes sense to be closer to where the fabs are. It's beneficial because freight and logistics is a big part of the spending at the company. Being closer to the customer, closer to the supply chain, helps mitigate some of the costs here. You're just flying things shorter distances. We have localized the supply chain too. I think that's an important part of it. To the extent that we've been able to, we're procuring things locally closer to where these factories are. That's beneficial. Obviously, there's a small labor component to it.
When you put all of that together, that's a key aspect of the gross margin expansion story.
Perfect. Maybe something that you talked about at the analyst day, but I'm not sure investors walked away really focused on it. It's kind of digital transformation and modernizing ERP and bringing in AI capabilities. I think you've kind of talked about that over time being 150 basis points improvement to operating margins. Could you expand on that?
Sure. Listen, we also started this in early 2023 when we looked at re-architecting kind of how the company did what it was doing. We began this journey in that timeframe. Some people may remember us being in a talk about it. Yes, every once in a while, maybe not every once in a while, every 20 years-ish, you need to upgrade your ERP. That is part of what we are doing. We viewed this as an opportunity to also re-architect how the company does what it does. The last time we made an investment of the scale and scope, we were a single product company in a single factory location. We now have, I do not even know how many product lines, quite a few with a very global factory footprint.
Just looking at how we do what we do, how we run the company, how we manage the business, we said, "Hey, listen, let's unpack this a little bit. Let's make the company better. Let's go through these investments. Let's restructure things to a certain extent and just re-look at how we do everything we do." That is very much when I am now talking about digital transformation. It is re-architecting of the business process. It is re-architecting systems. It is reconfiguring the global footprint of the company a little bit so that you are doing things in areas that make sense. This will be a multi-year journey. Right now, we are in the investment phase of that. Eventually, in a few years' time, this will go from being dilutive to profit to being accretive to profit. You get the number exactly right.
The change from where things are this year to where it will be in several years is about 150 basis points. When you unpack, okay, how are you going to get to that mid-30s operating margin? In addition to the gross margin expansion, digital transformation is going to be another key component of moving from where we are today to where we're going to be.
I guess mayb`e one last question. I think also in terms of kind of the manufacturing strategy, you're putting development closer to customers. Would love to hear about how kind of the feedforward feedback loop is improving by kind of co-locating and how that is helping, I would imagine, not only service revenue growth, but also kind of better understanding kind of what knobs on the tools are desired?
No, this is a key part of our strategies, not just to be close to customer with the manufacturing footprint, but also with the lab network. We've got a large lab in Korea. We've announced incremental investment in India. We're doing things in Taiwan. This is part of the company's strategy. The benefit is when you're closer to the customer, you get quicker information turns. You can move material from one place to the other. The customer can come and see you without having to jump on a plane and fly across the Pacific Ocean to get to your facility. That's very much part of kind of a differentiated strategy at Lam.
I think we've run out of time. Douglas, thank you very much.
Thanks for having me, CJ. Good to see everybody.