I cover the U.S. semiconductor and semicap space here at Bernstein, and it's my great honor to introduce our guest, the President and CEO of Lam Research, Mr. Tim Archer. Before I start, I want to mention, thank you. Before I start, I want to mention, if you have questions you'd like me to ask during the presentation, you have a link to the pigeonhole form where you can submit those. We will have time for Q&A at the end. Now, look, the semicap industry has really been enjoying a renaissance over the last several years. More recently, it really seems to have come into its own. It's still cyclical, we know that, but both, I'd say, industry growth and it seems industry capital intensity have inflected materially higher over those cycles. I think contributions from companies like Lam have become more important than ever to keep the industry going.
Lam's really transformed along with it. They both nurtured kind of their core franchises. They were kind of known as a NAND company, but they've also done a really good job diversifying the portfolio into new areas. They've taken strong advantage of new drivers of growth in the industry. I'd say the space and the company have been top of mind for my clients as well. There are lots of the near-term questions: trade and tariffs and NAND spending and upgrades and everything else, but I'm also increasingly getting people looking at the longer-term potential of this industry as they start to view it on more secular rather than the purely cyclical terms and around some of these new technology inflection points where I think Lam is really a key enabler and a beneficiary of them.
To tell us all about it, it's my great pleasure to welcome Tim to our session today. Thank you so much for coming.
Yep, got the mic. I guess these are on. Great. Thanks, Stacey.
You bet. No, so again, thank you for coming. I'm thrilled. We will get to some of the near-term stuff. I don't want to get to it right away. I want to talk a little broader. I mean, look, everybody clearly is concerned always over WFE, outlook, and wafer fabrication equipment for those of you who may not know. I'd say over the last couple of years, this industry shaped up far better than anticipated. I mean, spending, everybody wondered, "Oh, can we get to $100 billion?" We're kind of there, right? Things mostly look like they're even this year, they're kind of mostly at least hanging in that area. Again, capital intensity has been going up and everything.
I guess, just can you talk about some of the contributors to this strength of the last few years and what's kind of enabled the industry to get there, even in a semiconductor environment that has not, at least especially from a unit standpoint, has not really been that spectacular? We've had China, we've had packaging, we've had memory, we've had leading-edge growth. I mean, what are some of the things that have been driving that WFE growth and how is Lam benefiting from those?
Sure. Yeah. Again, thanks, Stacey, for having us. Since we're jumping right into Outlook, I think you all saw the safe harbor jump up here.
There we go.
I think.
Even Outlook, we'll get to Outlook in a minute.
Yeah, sure.
I'm more interested about sort of the.
How it's gotten here.
Yeah.
Yeah. No, I think that back to our investor day we did in 2020 right here in New York City. At that time, we saw the high end of our WFE outlook for around the 2024 range being $70 billion. We got a few incredulous looks, I think, in that conference just because really people could not see what would be the drivers of WFE. I think there are a number of different things we have to think about having transpired in the last few years. First and foremost, of course, I think going back to 2020, nobody quite saw the impact that AI would have on semis and semi demand in general, especially within very certain segments. I think more specifically for the semiconductor equipment companies, it was really the impact that the acceleration of leading-edge devices and performance requirements, what impact that would have on complexity.
We have clearly seen this acceleration of complexity in devices and architectures and materials that is ripe ground for equipment companies to benefit, especially leading-edge focused companies like Lam. You talked about our transformation. I became CEO six years ago, and at that time, we really were a very memory-focused company.
Yeah. 60%-80%, I think, depending on the year was memory.
Yeah. I saw that really to increase the value of the company, I felt we needed to better balance across all the segments of the devices as well as improve our positioning in the aftermarket and effectively the spares and services business as well. I think we made tremendous progress in the last five or six years in those areas. A lot of that improvement has come by focusing on the most complex applications. Those are the areas that I think we've seen WFE outperform probably what our expectations were years ago. The second item beyond complexity is also I do not think we predicted what would happen with die sizes.
If you take HBM as an example, if we went back five years ago and comparing today, an HBM device today requires about 3x, maybe even a little bit more on some of the latest generations of HBM to produce the same bit that it made just years ago. Of course, equipment companies, I mean, effectively, while we always work on productivity of our equipment, if you have to produce three times as many wafers per bit, you're going to sell more equipment. I think die size has driven up WFE capital intensity as well. You have, I think, the one that's been a little bit hard for any of us to predict, and that is this strategic government overlay. I mean, again, you went back five years ago when we thought it might be 70.
I don't think any of us quite saw the rush that got created for regionalization of the semiconductor industry in a way that clearly has driven more spending, more investment. I talk about it as strategic because a lot of it is driven not by the end market demand that people see today, but by this feeling that you need to have some amount of semiconductor manufacturing capability within your region for other reasons of economic security, et cetera.
Is that bad eventually, though? I mean, I always sort of thought about the regionalization and the government investments as not necessarily driving excess capacity, but more determining where those projects get started. It sounds like you're suggesting maybe it is driving excess, at least some amount of excess.
I think that there's always different phases of investment. I mean, if you start up a new region and some of those may be even new entrants into the semiconductor space, there's always a period of more investment for the same amount or even perhaps very little output during those initial years. Eventually, that begins to normalize out to the semiconductor demand is global and it gets satisfied globally. I would say that in the long run, a more regionalized semiconductor manufacturing footprint is likely a bit less efficient than a highly concentrated and consolidated footprint. Therefore, I think over time, it's likely a small ladder to the WFE and the capital intensity.
Got it. How do you think in general about capital intensity going up? If you're thinking about just WFE growth over the cycle versus semiconductor growth, how much is it in line? Is it above? Sounds like it should be above.
I think it's, yeah, we think it's above. I mean, obviously, there's a limiter of the economics of the semiconductor industry for that. What's most important for Lam is where capital intensity is really increasing. I mean, as we look at the technology trends at the leading edge, there's no doubt that every device type is becoming more etch-and-deposition intensive. If you think about the economics, there may be parts of that pie that have to shrink as a result, but etch-and-deposition is playing a more critical role in building these 3D devices, playing a more critical role in the latest trends, whether it's HBM or it's advanced packaging for the latest AI accelerators. Etch-and-deposition is at the center of that. It's expanding significantly faster.
In fact, we gave a number in our most recent analyst day just earlier this year where we said that as you transition from where we are today in foundry logic through the CFET transition, the Lam SAM per wafer would double. I do not think anybody expects WFE itself to double in that same time period. We are highly confident that the etch-and-deposition portion of the market will outgrow WFE for many, many years to come because of the technology changes.
Got it. You said CFET, which is by the complementary field effect transistor. These are N-type and P-type transistors that are stacked on top of each other.
Yeah. Essentially, the generation after gate-all-around.
Yes. Yes. I guess there really is a foundry logic kind of area, which is a, I would not say a new area for you, but on a relative basis, that is an area where you have seen a tremendous amount of growth relative to the memory focus that you had five, six, seven years ago. Maybe can you talk a little bit about some of the efforts that you have had in the logic and foundry space and maybe the drivers of that growth that we have seen? It sounds like you see that growth continuing pretty materially as we go forward.
Yeah. I guess if there's one advantage of being slightly underexposed in the market, you have a lot of white space to pick where those next areas are that you want to focus. We look to our strength. I mean, one thing that I guess I would say Lam has been successful in is staying true to where we believe our expertise really exists, and that's in the etch-and-deposition spaces. As I mentioned, etch-and-deposition itself is becoming more intense, but also the requirements are becoming much more complex. We've seen new requirements emerge in areas like atomic layer deposition, atomic layer etching. These are areas where we have invested and introduced new tools.
Even in what we would consider more traditional, like conductor etch, dielectric etch, the move to EUV and smaller, higher aspect ratio features is driving capabilities and the need for new chemistries that just did not exist before. Those are all opportunities where there is not really a strong incumbent for those markets. Therefore, they have been great opportunities for Lam to invest in new equipment, expand our market, and win those applications. I mean, Stacey, I know you have a lot of expertise in etching and in platforms.
One slot of time that I've forgotten more than I ever knew at this point.
Yeah, we just did not. I think if you look at a lot of Lam's earnings transcripts, I'm starting to feel like a broken record talking about the industry's first this, the industry's first that. We just did introduce what we said was the industry's first Matchless RF Plasma System.
No matching network?
No matching network. What it allows us to do is to cycle the pulsing within the plasma about 100 times faster than previous generations, which becomes incredibly important as those EUV pattern features become very small and very tall. It is a new requirement driven by this push below, say, 2 nanometer. Therefore, we can introduce a new tool that allows us to gain share in that.
It definitely does not sound like you are worried about EUV. I mean, there was always this bear case that as EUV comes on, you have fewer steps, you need less etch-and-dep. It definitely does not seem like it.
I think that in general, there's always, it's really, I guess I would say the mantra inside Lam is agility. We take the market for what it is and where the needs are, and then we pivot. Back in the EUV case, people were worried about multi-patterning going away, and that would be detrimental to Lam. In some ways, we did lose some multi-patterning opportunities, but it also opened up additional challenges and complexities that allowed us to innovate new tools, new capabilities, and strengthen our existing positions, but also grow into new ones. As I say, when one door closes and maybe one or two more open up for you, and that's really what we've seen.
Yeah. I mean, my general view on that was like, yes, without EUV, you'd use a lot more etch-and-dep, but without it, everything probably comes to a screeching halt anyways, right?
That's right. The most important thing to remember for equipment companies and specifically a company like Lam that's very focused at the leading edge is that we need technology transitions to occur at their regular cadence. Meaning if technology transitions slow down, that's not great for equipment companies. We work very hard with our customers to solve those problems. They can be technical problems, they can be cost problems, whatever they are, we work to solve those so that they can move forward on that schedule.
Got it. Got it. What are some of the, I guess, the things that you're most excited about within the logic? We'll talk about memory in a minute, but within logic and foundry that are driving things for you? Again, I can't remember, trying to remember where the mix was versus today. I mean, the memory mix is up a bit because the upgrades are starting again. In general, if I think back five, six, seven years, foundry logic was best case probably 40% of your revenue. It's 60% or 70% now, something like that?
Yeah. I mean, it's improved materially. And a lot of that is, of course, foundry logic spending is higher, but as part of our mix, it's gotten better because we've introduced new tools. I talked about, of course, we have growing strength in atomic layer deposition. And again, we're focusing on new emerging applications, new material types. We talked recently about some wins we had in low-k spacer films that help improve the performance transistors and gate-all-around. But also, I just talked about the conductor etch tools. There's more traditional things associated with small feature patterning. I think one area that is sometimes overlooked when we talk about foundry logic, we're often thinking the transistor and the device, but what's become incredibly important in foundry logic is advanced packaging.
This is an area where, again, highly etch-and-depth intensive and highly skewed towards types of technologies that Lam is incredibly good at, like copper plating, something that we have been a leader in copper plating for 20-plus years. We were really the company that sort of pioneered the transition from aluminum to copper way back in the 1990s. Advanced packaging plays an incredibly important role in all of these AI GPUs and advanced foundry logic. As foundry logic spending has increased, a larger portion of their equipment budgets have been allocated towards putting these chips all into these very sophisticated three-dimensional and 2.5-dimensional packages. That has been a huge area of growth for Lam as well. In fact, we had given an original forecast a few years ago that we would do $1 billion of revenue in the future.
We hit that a couple of years early just last year. This year, we said gate all around plus advanced packaging would be well over $3 billion revenue for Lam. It is a very fast-growing part of the business.
Now, some of that packaging will be in memory as well, right? I mean, the HBM and.
That's right. Packaging also includes the HBM portion where Lam has a very strong position for the through silicon TSVs that basically help connect the DRAM.
Got it. Got it. No, it's very exciting. Is there any difference for how you think about foundry versus logic? A lot of times we throw those together mentally, but I mean, they're not necessarily different customers, maybe different needs. How do we think about the differences between those?
Not specifically. From a technology requirement perspective, we don't think about them so differently. Clearly, kind of.
We won't mention any specific customers.
I think that's also why we lump them together, so we're never forced to speak to one specific customer. From a technology-wise, I'd say from an etch-and-dep perspective, very similar requirements.
Got it. Got it. I want to switch over to the memory side, though. Memory is an area that particularly has been very weak until very recent. And I'm trying to remember where it was at the trough for you. What did it drop? 4% of revenue or something like that? I mean, at the bottom, maybe even lower. I mean, it was.
Yeah, it was really low. I don't recall the exact percentage, but it's.
We came to a very important part of our business.
Earlier before we started, this is a company that was historically viewed as being NAND-focused. And memory, again, back in the days, could be 60%-80%, most of which, two-thirds of it back then was probably NAND. In the trough quarter for NAND, this is pre-stock split, but they had guided something like $5 for the, and you beat the number at the time, but it was quite, it was like a $20 annualized guide for a purportedly NAND-focused semiconductor with no NAND. It was not bad versus prior NAND cycles, which had never been that bad, but if they had been, you would have been bleeding, right? NAND is coming back now, right? It seems to be mostly upgrade spending rather than capacity spending.
Maybe you could talk a little bit about the difference between capacity spending versus upgrade spending and how Lam actually benefits from one versus the other.
Yeah, sure.
Yeah, no, I think it's important. Beforehand, Stacey and I were talking, sometimes you need to see your big market go away so you can just see the progress you're making in the other areas. Essentially, we did. We saw NAND go down more than 75%. In fact, in that year, we still delivered, I think it was about 27% operating income. The company has learned to adjust to these kinds of changes within big markets. I think it really showed the strength of the other markets as we just talked. Within NAND, it wasn't like we sat still during that time period. We continued to invest.
Even though the spending was kind of like, I think we said sort of mid-single digits, maybe mid to high single digits spending WFE in billions, we continued to invest, work with our customers because we knew that eventually you needed to advance the technology. Like I said, technology advancement is the way for our memory customers to lower their cost per bit and to improve performance. We knew the day would come when memory can fall off, but it always comes back. On the first earnings call of this year, I believe, we said that two-thirds of the bits produced were still stuck at the 1xx level. We gave a number, we said, eventually, nobody leaves all those bits behind. Over some period of time, customers would spend $40 billion to upgrade that capacity to nodes that were above 200 layer.
I think that we did not put a timeframe on it because ultimately that will depend on when our customers feel the need to deliver more bits, more of those higher quality, higher performance bits into the market. We know it will happen. It is a matter of how much of that opportunity is available for Lam. We said of that upgrade business, more than 75% of that spend is Lam's served market. We capture a very high percentage of that SAM. It is a really nice revenue stream that we can somewhat predictably anticipate coming in the next several years. What is most important is that the types of equipment that need to be purchased are things that enable the layer stacking. That is more etch-and-deposition equipment to build the stacks and to etch the features.
It also includes new types of equipment that are required to overcome the complexity of stacking. Again, it is back to this complexity argument. If you stack more than 200 layers on a wafer, the wafer begins to bow. You need to introduce another step, which deposits a film on the backside of the wafer to counteract that stress. A tool that did not exist for the 1xx layer, but now beyond 2xx, it creates another opportunity for us. Similarly, when you want to stack one tier of layers on top of another tier, you have to do something about the hole you have opened. You have to protect it. You have to deposit a sacrificial carbon gap fill film into that hole, which can later be removed. That is only needed once you start tier stacking above the 2xx level.
It's another new tool Lam sells. It's another new tool that we've developed with our customers. We have a very, very strong share in that application. It just shows how complexity creates new opportunities for the company that's most engaged and is kind of leading in those technology transitions. I would just say that the demand, given that our SAM itself expands and etch-depth intensity expands, the higher the layer count goes, we actually have said we don't need WFE to get back to prior peaks before Lam could conceivably reach new peak revenue levels.
Got it. How does your, I guess, your opportunity vary between upgrade spending in NAND versus pure capacity?
I think that we're realistic about the need to add pure capacity at this point. I mean.
It doesn't sound like we're going to be adding anything more.
I think ultimately that's something that we work closely with our customers, and I would say they're the best to comment on that, but that's driven by the economics and the demand of the market. We focus on really enabling our customers to get the capacity of higher performance bits in the cheapest way possible. That absolutely is by upgrading the installed base they have today. That is why we think that the majority of spending in NAND over the next couple of years will certainly be more upgrade-focused than really adding any additional capacity through Greenfield. As I said, on a relative basis, that's a great story for Lam in terms of output performance.
I guess what I was asking is if there's a billion dollars of spending capacity, I always think about Lam getting, I don't know, 25% of that. If it's a billion dollars of upgrade spending, how much of that is Lam capturing?
We have not broken that specific numbers up, but we said was.
Is it fair to say it's higher percentage?
It's higher. What we said was 75% of the upgrade SAM is our SAM, and we capture a very high percentage of that. You can imagine it's much higher.
Got it. I think this is a good pivot into the customer service business because actually a lot of this upgrade spending actually does not show up in your equipment segment. It shows up in service, which by the way is sort of a pain in the model. I wish you would do it a little bit differently. Can I ask a dumb question? Why do you include equipment sales, both 200 millimeter tools and, I guess, upgrade equipment in services versus in equipment?
I guess they say just to keep you working a little harder and keep you guessing. I do not know if there is a really good way, a reason to explain it. I think traditionally, long ago, we thought of all of this work as tied to the installed base, right? It is the power of the installed base. You have the tools already installed, already facilitated within the customer's fab. When we think about an upgrade, it really is, you can have a technology upgrade, you can have a productivity upgrade. These are things that just make the tools they have already purchased more efficient, more useful for the customer. I think it has always lived there. Once you start reporting it that way, it has been hard to probably make a change. It has become a much bigger part of our business, though.
With NAND being very upgrade-focused going forward, I think we're going to see more of that, more growth in that area. I think that upgrades is a big part of the CSBG business. Really, the CSBG, our installed base spares and service business, we see that as another tremendous growth driver for the company. We used to talk about it, and everybody would wait till the end of the year to see how many modules, how many new modules have been added or new chambers to the installed base and try to compute the growth. We've also been working hard the last five years to expand the market opportunity for us in that as well. We've talked recently back again to one of these industry firsts. The very end of last year, we introduced the industry's first Maintenance Cobot.
This is a cobot that basically does maintenance on our systems, essentially preventative maintenance type activities that would have previously been done by a person. They are very efficient and incredibly repeatable in the work that they do. Again, thinking about how you expand your services business in a way that is really a win-win for both us and the customers. As customers move fabs into regions where labor is not easily attainable, especially the skilled labor to do highly complex maintenance on the system, they really desire a lot more intelligent services. Those can be data services like our equipment intelligence that speed troubleshooting, or they can be these preventative maintenance cobots.
What is it doing? It's replacing the pumps and changing out the focus ring?
It depends on the piece of equipment, but first implementation was on a dielectric etch tool. Dielectric etchers at a regular frequency, you have to do a chamber cleaning, you have to replace the parts. As you know, etchers themselves consume themselves as part of the process. As you're etching the wafer, you're also etching the chamber. At a determined frequency, you need to replace those parts. The cobot basically, it can disassemble the tool, replace the parts, reassemble the tool, and effectively get you ready to go back into production.
Could have used one of those 20 years ago.
Our estimate is that cobots can improve machine availability in a fab by about 8%. If you can get 8%, presumably in a fab where you ultimately have all cobots, 8% could be worth over $100 million of running cost savings for a 100,000 wafer start fab. It is a big opportunity. It is at the very early stages, but we are right now from that first use case that is proven out running in production, now expanding the number of cobots we have for other applications.
Is everybody running that use case using the cobots now, or is it like at a single customer now?
It's expanding. It's at multiple customers now. Yeah.
Wow. Wow. How does the customer service business just break up by the different pieces? So we've got 200 millimeter tools, we've got upgrades, we've got spares, we've got services. I guess we have cobots. I do not know where those would be.
They would be in services. Yeah. Our customer support business group, which focuses on these installed base applications, effectively is comprised of the Reliant business, as you said, which is things like specialty technologies, 200 millimeter tools, the spares business, the services business, and the upgrades business.
Got it. You want to give me any sort of color on the splits or color on the rank order?
It's moved around a little bit, but the two largest segments tend to be spares and reliant. Then upgrades, obviously, can be strong in certain upgrade cycles. Then services after that. I would say nobody likes to be at the bottom. That is why we're working hard to innovate around the services and really see a huge opportunity to grow there. Like I said, in an area where customers have an identified need, I mean, just because there's a lot more fabs being built than there are engineers being created in some of these places.
Got it. One of your competitors talks a lot about service contracts and subscription and recurring revenue and that sort of thing. How do you guys think about that? Is that like a key focus for you, especially for the services portion of that business?
I think that the form of the contract can vary differently to each customer, but I mean, I would say there's probably no fundamental difference in the way that any of us engage with our customers. I mean, customers look to us to provide the services and spares for our systems, but as I say, it can take different forms with different customers.
Okay. Got it. To look at the 200 millimeter, and this has a number of branch-off topics into China and just the broader demand environment right now. I guess it's fair to say that the 200 millimeter has probably been weaker than it was. We've got the end markets that that tends to sell into are probably not so great right now, industrial and auto and some of the others. I'd like to use that actually as a lead-in to China and maybe the broader geopolitical situation that we've got now.
Sure. I think that if you look at sort of that lagging edge market outside of China, I'd say it's probably been weak for the last couple of years. I mean, probably for the reason you're talking about. Some of the end drivers, automotive, industrial, and such have.
Yeah. You came off of.
We're in a quarter industrial downturn maybe.
Yeah. You came off of COVID where clearly there was a lot of investment and a lot of demand. I think we know those kinds of cycles very well in the equipment business. I think we've seen that playing out. Obviously, strength in China at the trailing edge sort of filled in for some of that. It still maintained as quite a strong part of the market. Really, when we talk about what's leading semiconductors, WFE higher, it really is, I mean, again, back to our focus, it's about leading edge, the complexity and the expansion that's occurring there. We do extremely well in trailing edge. We've really turned a lot of our attention though towards, again, places where we think we can add technical value.
This isn't we sell a lot of equipment into that space, but I mean, I think where we're most excited is in the area where we refer to as specialty technology.
You're innovating there as well. It's not.
Yes.
Okay. In fact, it is one area where we have made in the past couple of years a couple of small acquisitions. I mean, these are things that, again, are places where we have talked, I think, publicly about our Pulse Laser Deposition Tool. It is a very small market, but again, a very highly specialized technology that has a specific application for 200 millimeter use. We would not have considered that years ago as the traditional trailing edge or lagging edge, which is just more of the same thing you bought 10 or 20 years ago. I think we have expanded our thinking to, of course, selling trailing edge tools, but really also innovating on new applications that just happen to be at a smaller wafer size.
Got it. Got it. I guess along those lines, how does China fit into all of this? Clearly, you guys have been impacted by sort of increasing waves of export controls, which have not been all that fun. China was still buying a lot of especially those kinds of tools. Sometimes it's unclear to me who's actually doing the buying in China. I guess just how do we think about the general environment in China, the geopolitical situation? I always worry what's the risk of further export controls? I mean, could our new president wake up one morning and after eating a bad burrito or something and decide to cut everything off? I mean, this is something I don't think it's likely, but I wish I could say I thought that risk was non-zero, and I'm not sure that it is.
How does Lam think about those kinds of risks?
Obviously, we're aware of the risks because we've been affected by export controls.
I said billions of dollars already.
That's right. We go back to October 2022. We were restricted to the tune of about $2 billion in the first wave of restrictions, primarily limiting our ability to sell to companies that did things like higher layer count NAND. That was a big impact for us. Obviously, even with that impact that exists in our numbers today, what we're really happy about is clearly we've been impacted, yet we're still posting extremely strong results. I think that shows that the strategy of diversifying the company years ago really is playing out.
This year, January of 2025, and again, we had another set of restrictions that took out about $700 million from our forecast, predominantly in the second half of the year, which is why we've been signaling through the last couple of calls that probably the second half is still a little bit weaker than the first half simply because of those restrictions that came in. We are well aware that there are export restriction risks. I think in some ways, our goal, again, back to how we think about our strategy is by really accelerating our investments and SAM expansion and share gains at the leading edge and really participating in this growing etch and depth intensity, which is really, like we've mentioned, advanced packaging and all these other applications that are coming and creating opportunity.
Over time, the impact of China and therefore the risk of further China restrictions tends to diminish. It does not become zero, but it tends to diminish as you grow the rest of your business. We are pressing hard on really this idea of expanding and growing at the leading edge as a way of addressing a risk that we otherwise do not really have a means to address.
Got it. China now is what, roughly 30%?
Roughly 30%. We said it would trend down, and we thought year over year from last year to this year, as a percent of the mix, it would be lower.
Yeah. No, that makes sense. How do you guys think about the risk of indigenous Chinese semicap players? Because I mean, I'll give you my view. I mean, I don't think they're as capable, but I mean, these are real companies, right, with real products, and they're selling to customers who in some sense have no choice but to use them. I think they're actually working together probably more than they used to before the export controls. How does Lam sort of judge the risk of those guys? How capable are they relative to what you're delivering?
I think in our business, scale and number of wafers you run equates to learning. As we have been restricted from selling into China, clearly those companies have grown because they are then the only other alternative for domestic Chinese companies. We have seen them grow, and we would assume therefore become more capable for those trailing edge applications. Now, again, back to there is not much we can do about that, but that is not core to Lam's future strategy. Again, it is back to maybe even just further confirmation that our future lies in expanding our SAM and growing our share at the leading edge.
Got it. That makes sense. I want to talk about some of the near-term environment. Not so much like WFE, right? I get your outlook for back half, and I understand that. Just this general environment, tariffs and everything else, sounds like I guess first I'd just like to remind us, what are you guys baking in or thinking about in terms of tariffs right now, both from a revenue as well as potentially a cost impact? Then I'd like to talk a little more about your global footprint, which is actually becoming more global and I think maybe benefiting you quite a bit recently. Just in general, what are you seeing right now just in this? Because I'll be honest, I don't know what the hell I'm seeing right now.
I mean, look, we can only factor in what we kind of do know. The only thing I can say is from a direct impact of tariffs, the tariffs that are in place today that do exist are factored into the forecast we just gave. You can see that we still have quite a good forecast throughout in terms of revenue and profitability. I think longer term, obviously, indirect impact of tariffs on demand. I have to listen to that. That is really something obviously we are working with customers on, but I think that those would play out in a longer timeframe.
With respect to how we're managing through and kind of as we think about how we manage this, we've been somewhat fortunate that if we went back again those five years ago and we talked about diversifying our product portfolio, really the COVID period taught us also that we needed to diversify our manufacturing footprint to be prepared and be flexible during periods of large demand increases or perhaps large demand decreases. On the demand increase side, we expanded manufacturing and supply chain closer to our customers to put us more within those regions so that we could be more responsive to what was taking place there. It means that given the investment that's made in Asia, we have a much stronger and larger Asia footprint now than we did back then. We still have a large U.S. presence as well. We have a European presence.
I think when I look at how Lam is situated today in terms of geographic footprint, I feel like we're, with this diverse capability of manufacturing and supply chain, quite well positioned, not to eliminate the risk of tariffs, but to be able to navigate through them as they come and try to be as responsive as possible.
Got it. Got it. I guess specifically, what is Malaysia doing for you? This is a facility you've been building out for several years. It looks like it's finally kind of coming into its own now. What's the purpose of it, and how is it actually helping the model?
I think that we have seen that flow through in our gross margin, clearly. Obviously, when you have the opportunity to build a facility at scale, close to your customers, close to your supply chain, a lot of costs come out of the system. One thing that we did years ago was we embarked on the plan to put in that facility in Malaysia. For a couple of years, we talked about it as a headwind. I mean, we put it in at scale so that at scale, it would be very beneficial to our operating efficiency. Until fall, I mean, it was a drag.
I think as now we went through the downturn and coming back out and really seeing significant output from that facility, you've seen our gross margins jump up about 200 basis points as a result of the investments we've made in new facilities like that. That has gotten us a lot closer already to our target margin that we just laid out at our financial investor day of 50%.
Right. I always ask you in this forum, why do your gross margins have to start with a four, given everything? It does not sound like they necessarily have to now. I thought it was really interesting. You have set out this longer-term 50% target. You guided next quarter 49.5%, and that was actually with, I guess, some amount of tariff cost impact. I almost feel like you would have been there next quarter if it was not for the tariffs. Is there any reason why we should not be thinking about this kind of level of margin, at least where we are sitting now, as sustainable? What are some of the headwinds? I mean, should it not be 50%? Maybe it is not. Maybe it is higher than it should be.
Yeah. We knew when we put out those numbers immediately, people would think that we had sandbagged our investor day target. I think just to explain, I mean, we recognize that the business, the levels will always vary with product mix and customer mix and whatever the scale might be in that particular quarter. I think what we put out, that longer-term model of 50%, we're really talking about that as becoming more of the new normal. If you went back a couple of years ago, we would have said we oscillated around kind of maybe the 46.5%-47% gross margin range. If we can get to where we're now sort of varying around the 50% margin range with product mix and customer mix kind of in there, it means you're going to have quarters above that. You're going to maybe have some quarters below that.
It will materially step us up in terms of what we consider to be the new model. And so you're right. This quarter right now, I mean, we guided 49.5, which would be the highest gross margin in the company's.
Ever?
The combined company history. We also guided for the highest operating margin for the company since the 1990s. I'd say from a profitability perspective, we feel like we're hitting on all cylinders right now.
Got it. What are your thoughts on using that cash that profitability is generating?
We have a strong track record of cash return to shareholders, and we're going to continue that. We upped our commitment to greater than 85% of free cash flow return through a combination of dividends and buybacks.
I feel like you've been doing that.
We've been doing more around the 100% range, but obviously, we committed 85% just in case there is something. Realistically, we've increased our dividend every year, and we've continued to be opportunistic and aggressive in the buyback. We have, I think, a little over $8 billion in authorized buybacks still remaining. I think that we'll find uses for the cash.
Got it. Got it. We've got seven or eight minutes left. Do you feel like going to the lightning round?
Sure.
Got quite a few.
I was thinking I couldn't imagine what you haven't already asked, but I guess we'll see.
I've got a lot more questions. Okay. Can you talk more in detail about the CryoEdge opportunity in Lam's positioning there? I know this tends to be a controversy. Tokyo Electron speaks a lot about CryoEdge. Anything about CryoEdge?
I think we're extremely well positioned. We launched what we call Cryo 3.0, our third-generation CryoEdge capability last year, doing extremely well. I think that we feel very strong about our positions. Also, remember, if the vast majority of spending is going to be on upgrades and Lam has the technical capability, the most cost-efficient way for our customers to get to that next technology node is to upgrade the tool they have today with Lam's Cryo 3.0.
Got it. What's been your pricing model historically, and do you see this changing amid technology inflections and increased capabilities of your tools, and what could that mean for gross margins?
I think obviously, pricing is something that we can't talk about in detail, but clearly, we believe that as we invest and strategically we're focused more on the leading edge, most complex, most enabling applications, we should and can get paid for that value delivered.
Got it. Okay. Are your customers different in what you call specialty technologies versus lagging edge? Again, I guess the question is, what's the difference between those two terms? Are they just being the same thing?
I think there are companies that truly I would classify as lagging edge in that they're really doing applications that are done by other companies, and they're just sort of competing in that application. There are companies that we would consider specialty technologies, new types of devices, new applications that haven't existed. We see them very differently. We're engaged with a research consortia, for instance, in Europe on these new emerging specialty technology applications and the types of equipment that are needed for those. They just happen to be done at 200 millimeters, so often they get lumped into that same bucket, but they are often new deposition or etch techniques that are required, things like atomic layer etching for ultra-low damage to certain types of materials. It's new deposition materials of basically very complex materials for RF applications.
We look at those somewhat differently, and the customers tend to be different as well.
Got it. Got it. Can you talk about the opportunity you see in Mali atomic layer deposition for Gate-All-Around? Is the Mali transition an opportunity to take share?
Mali itself first is being implemented into NAND, and Lam has a very strong position there. We're also engaged for Mali into Logic, which will come next. I think it is an opportunity for us to take share in places where we've not been the predominant supplier of, say, tungsten to those customers.
Got it. How quickly can the Chinese WFE companies catch up on leading edge? I guess I would add, can they catch up on leading edge?
I guess I would just speak to the challenge of it, which is, again, if you think about Lam's strategy at the leading edge, it is incredibly close collaboration. In fact, often through our close-to-customer labs, we have technology centers in both Korea and Taiwan and in the U.S. next to each of those leading-edge companies. We collaborate very closely to create those next processes and equipment that's needed for the leading edge. I think that the customer plays a huge role. You have to have a leading-edge customer to make fast progress. I think if we continue to execute, we can continue to maintain our lead.
Got it. I guess I would add to that, is Huawei a lead customer enough for them to try to develop? I know they have problems given what they're under right now, but.
I guess when I'm talking about customers, I'm specifically talking about the chip maker themselves. Therefore, deep in the technology of the chip market, the actual device manufacturing itself, not necessarily application.
Got it. Got it. Can you talk about dry resist?
Sure. We think dry resist becomes a critically enabling technology as you move below 2 nanometer, and especially as you move.
Do you want to talk about what it is, by the way?
Yeah, sorry. Yes. Dry resist. So dry resist is a new class of material for photoresist for EUV patterning. It basically both increases the productivity of EUV patterning and also, perhaps more importantly, improves the fidelity of the printed features. As you move to smaller and smaller EUV patterns, that fidelity, the line edge roughness, the elimination of potential defects that occur during patterning becomes that much more important, especially as you move into high NA where essentially you've invested a tremendous amount of money to be able to print very small features. You want those features to look like what you wanted them to look like as printed. Lam has been investing in this technology. It's deposited dry, which means that instead of wet on a track, it's very well suited to the type of equipment that Lam makes.
Dry resist actually is also really a suite of tools. It includes an underlayer that helps with photon absorption, includes the resist deposition itself, and it also includes dry develop. It is a suite.
Almost like an etch, right?
Yeah, exactly. It is really a suite of tools that's used to accomplish the patterning and development of that resist.
Got it. Have you guys—I can't remember what you've sized that opportunity at.
We said a billion and a half dollars over five years. We just.
We'll just make it bigger.
will see how it—we will see. Let us get there first, and then we will resize. We did announce that we just had our first production win and production implementation at a DRAM manufacturer. Again, we often talk about Foundry Logic, but DRAM also has significant EUV patterning challenges. That is our first implementation, and that will give us a lot of learning and I think accelerate our progress on that application.
Got it. Got it. Tim, we have about a minute left. As always, I will give you your soapbox. You have a big room here with lots of investors. Why should they buy your stock?
Sure. I think that when you think about investing in a company, I think the easiest way to think about it is, do they have natural tailwinds? I mean, things that are really supportive of whatever strategy is that the company might be executing. When I think about Lam, the rising capital intensity for etch and deposition equipment across every device segment, whether you look at Foundry Logic, you look at DRAM, you look at NAND, any of the new applications, they will use more etch and deposition equipment in the future. As I mentioned, in the trillion-dollar semiconductor industry, which is not really that far away.
We did 630 last year. It's pretty close.
Kind of best estimates might be that WFE grows roughly 50% or so from here. We said that our serve market in Foundry Logic grows by 2x. In DRAM and NAND, it also grows 1.8x and 1.7x. It means etch and deposition, Lam's markets will significantly outperform the growth rate of the industry overall. You look at all the new products we've introduced, all the industry first, we're gaining share. I think it's just we've got tailwinds that are basically supporting our own internal execution.
Got it. I think that's a good place to end it. Thank you so much. This has been great.
Yep. Thank you.