Citi Global TMT Conference. My name is Atif Malik. I cover U.S. Semiconductors, Semiconductor Equipment, and Networking Equipment Stocks. It's my pleasure to welcome Doug Bettinger, EVP, CFO, Lam Research, as well as Ram Ganesh, Friendly Neighborhood IR. I'm going to kick it off with my questions, and if you have any questions, feel free to raise your hands and I'll call on you. Doug, appreciate you being here at the Citi Conference. We are both on a red-eye flight.
We got in late, didn't we?
Exactly. You definitely want to be in front of your shareholders. You can step back and talk about what's going on.
If you allow me, let me just point out to everybody the forward-looking statements. Please have a look at this. I like to keep my attorneys happy. Please have a look at this. It's on our IR website. Sorry to interrupt you.
No worries. I want to step back and talk about what we're seeing in the semiconductor equipment industry. I've been doing sell-side research for 15+ years, and I've never seen such a powerful confluence of spending drivers that are non-lithography driven, whether it's straight all around HBM or advanced packaging.
It's absolutely amazing. It's wonderful to be an etch and deposition company right now.
I was going to get to that. I think that, and the second thing is that I've also never seen a divergence in performance around some of your peers the way we're seeing given your exposure to all these four or five different drivers. Now, when we look at the WFE outlook that you guys have given, which is $105 billion, and second half being flat, half over half, you're outperforming WFE meaningfully, 20+ points this year. You've talked about your SAM in the mid-30% this year into next year and long-term goal of high 30%. If you just kind of walk us through.
Maybe big picture, high level, and then we can get it. I know you got a lot of detailed stuff. Basically, when we look at what's going on in the industry right now, you have an evolution of 3D device architectures occurring. You referenced some of it. Gate-all-around is one. We can talk about that. Advanced packaging is another one. We can talk about that. NAND flash, we're not back to the races in terms of peak investment levels. You're seeing conversion-related spending. That is a 3D device architecture, obviously. Backside power is beginning to show up, or maybe more next year. When you think about these things, it's enabled by etch and deposition. You absolutely have the high-level story right.
We did an investor day back in February where we described an outlook that suggests when we look at the spending on wafer fab equipment, we believe it evolves from the low 30% going towards etch and deposition to when you get to the latter part of the decade, call it 2028, 2029, that being high 30% of overall wafer fab equipment going towards etch and deposition intensity. I describe it as we live in a good neighborhood. We've got the nice house up on the hill because, frankly, right now, when Tim and I and the management team look at the strength of the product portfolio right now, it's never been stronger in our assessment. We've got a new metalization tool. We call it Halo. We've got a new conductor etch tool. We call it Akara. We've got a new dielectric etch tool. We call it Vantex.
These are brand new bottoms-up designs of things we've done for a long time. The customer pull on these is really very strong. When we look at this evolution of WFE going into the high 30% from the low 30%, we believe we're going to take 50% of that growing SAM because of the strength of the product portfolio. That's kind of what you're seeing us delivering on right now. We believe into the next several years. Like I said, we live in a good neighborhood. That's the big picture, top level.
Great. Going back to Tim's comment on next year, I know it's early days, but he sounded confident on some of the drivers like gate-all-around and your SAM kind of sustaining in this mid-30% next year and Lam to outperform whatever WFE is going to be next year. Is that the right gist?
It's still the way we think about it, right? These things I describe continue into next year and the year after and the year after that. It's too soon for us to give you an assessment of, OK, what's WFE next year? Everybody's got their own opinion. We'll probably give you some color on that when we get to the next earnings call. This continuation of etch and deposition intensity we see over the next several years. That's the confidence that you heard Tim referring to is these things aren't going to change.
OK. Let's talk about some near-term topics that are coming up with investors. The first one, one of your U.S. reported earnings after you guys and talked about weaker October quarter guidance driven by China being down and some kind of push-outs on leading-edge foundry. I'm just curious, why is there such dichotomy in what they're seeing and what you guys are seeing?
Yeah, listen, it's hard for me to tell you what somebody else is seeing. I can tell you what we're seeing. If you go back to our last call, we raised WFE because we saw a little bit of strengthening in China and maybe a little bit of DRAM, frankly, as well. We had previously suggested it feels a little first half weighted. It now seems fairly balanced to us. Honestly, we see China strengthening into our September quarter, although I do think it's going to pull back a little bit in the December quarter. What they're seeing, I don't know, right? I didn't see any change in leading-edge foundry and logic, right? That's been pretty well understood for a while. I didn't see any change in China for, I don't know what they were describing there, Atif, to be honest. Everybody's lead times are a little different.
They have a broader portfolio, maybe losing a little bit of share to the local equipment suppliers in China, I would guess. I don't know. You heard what we're seeing, and it does feel a little bit different.
OK. Just sticking on China, Doug, you talked about China being stronger in the September quarter on domestic and then maybe down in December. I think more interestingly, you saw strength in international China, perhaps in your June.
In the June quarter, we did, yeah. I mean, that ticked up quite a good amount. Off a smaller base, though, understand the vast majority of the spending in China is still local Chinese customers. There are multinationals there with fabs, and that was up sequentially in the June quarter, for sure.
OK, if you look at the full year kind of picture, is it fair to say that the domestic could still be down from last year, and international is up year over year?
Yeah, I'm not going to break down what's what in China. We came into the year thinking China was going to be a little bit softer. It's probably flat-ish as a percent of overall spending this year. That has strengthened a little bit. I'm not going to break down how much is the global multinationals because that's kind of only a couple of customers.
All right. Any initial thoughts on the recent news in the U.S. Commerce Department revoking the waivers for the international customers who have to apply for the licenses? The news actually came out in June. That was before you reported. Any initial thoughts on that?
Yeah, listen, I think our assessment, why they made this change, not entirely sure. I think the reality of it is we're now going to have to apply for licenses in partnership with our customers. We will do that. We have an expectation that those licenses are going to be approved. In fact, I think Commerce has suggested they will be approved. It'll just require, you know, go apply and get the paperwork in. We're beginning to do that as we speak.
That's good news. Let's talk about your foundry sales. I think most people have perceived Lam as more of a memory play historically, but you guys have been quietly outperforming the foundry investments. In terms of your foundry sales, if you can just kind of separate what's kind of.
Let me unpack it a little bit for you. I think there's some things going on, some of which we've already spoken about. First, the leading-edge foundry and logic, gate-all-around is where the investment is going towards, as well as maybe the very beginning of backside power. When you think about those things, we've described a growing addressable market for etch and deposition of $1 billion for gate-all-around for every 100,000 wafer starts of capacity that gets put in place. That's a big deal. Similarly, with backside power, when that begins to show up, probably not until next year in a bigger way, that also is a growth in our addressable market of $1 billion for every 100,000 wafer starts that uses backside power. At the leading edge, you're beginning to see that show up, obviously, right? Gate-all-around, for sure.
On top of that, when you look at the evolution of architectures, advanced packaging has become a very important component of what's going on in foundry as well, right? When you look at how big some of these compute die are, they're frankly at theoretical limit. They can't get any bigger. In order to drive performance forward, packaging has become a solution. We have a very strong product offering in the through-silicon via process. I call it the drill and fill. It's the silicon etching and the copper electroplating. That's our Cindian tool and the SABRE 3D tool is what we call those two. Very strong presence there. Advanced packaging shows up there as well. In addition to the fact that, honestly, in the more mature foundries, and you're seeing this in our China footprint, we're doing extraordinarily well.
In fact, we're growing share, I believe, in China in some of the more mature foundries. When you put all of those things together, Atif, that's what you see going on. You're absolutely right. One of the comparisons I was looking at when I was getting ready for earnings was the last time we were at these revenue levels at the end of 2022. I think the record revenue for the company was nearly $5.3 billion. At that point, December 2022, memory was half of the equipment sales. Last quarter, foundry was 52% of system sales. Obviously, there's been a transformation in the composition of our business because of the things we're talking about. That's not to say we don't have a wonderful presence in memory, NAND and DRAM. We absolutely do. We love our memory customers. I love our memory customers.
I also love the fact that some of these new products that I described earlier are getting real traction in foundry and logic as well.
Doug, on just the foundry spending, gate-all-around, 2 nm , 1.4 nm, are you seeing some sort of a peak in near term in terms of wafer starts with Rapidus layering on top of TSMC, or do you think this is just seasonality and then the spending picks up in first half next year?
Again, I'm not going to give you an outlook for next year, but this stuff isn't going away, Atif.
Let's talk about NAND. You guys are outperforming the equipment spending market, but it's still almost half the run rate it peaked at, which was around $20.1 billion a few years back. You guys are particularly exposed to the NAND upgrade opportunity with Vantex and Halo, your product platform. Can you just talk about the momentum you have on that product across NAND makers and how do you see the spending kind of normalizing in the number you're given?
Let me describe what's going on in NAND. You're absolutely right. We're nowhere close to prior peak investment levels. That's not really what's going on in the NAND set of customers. When we look at what's happening, we believe over the next several years, it's going to be largely defined by conversion, converting the installed base. The good thing for Lam is we are the constraint tools in the installed base. That memory hole etch, the alternating film layers, the metalization, we kind of have all of that across the totality of the industry. When our customers go through a conversion, what they do is upgrade the installed base. That's largely us. Our share of the spending, our SAM, when that happens, is nominally 2/3 of every dollar that's spent. We don't have 100% share, but it's an etch and deposition SAM, very intensive in that.
That's largely what we see happening right now. We have an expectation that over the next several years, and we're in the early innings of this right now, the conversion-related spending will be roughly $40 billion over the next several years. You can round that off to whatever number you think that is each year. It'll not be exactly the same every year. That's what's happening. The installed base spending upgrade, we're the constraint tool. Our share of spending is quite high. You always get a little bit of new equipment purchase when upgrades are happening, right? You have to buy new bottleneck tools and whatnot. Layering on top of that is what you referred to in molybdenum, the metalization change.
You're going to begin to see this layering in there as well over the next several years, especially as the industry evolves to being driven by QLC devices in enterprise SSDs. Mali shows up there first. When we step back and look at what's going on, that's largely what you see happening right now is conversions, the beginning of this several-year $40 billion spending profile, and we get a very large share of that spending. That's what's happening.
Right. Let's talk about advanced packaging. You guys don't really break it out in terms of your sales, but if you can just talk about the growth you're seeing in that end market, the number that caught my attention was Tim mentioning that it's 1% of WFE, but it's growing like 6x or something.
Going to 6%. Yeah, exactly right. You picked up on everything. That's good. Yeah, so advanced packaging. Last year, we described advanced packaging as a business that was a little more than $1 billion in revenue for us. Describing it this year, we combined it with that gate-all-around note and said, putting those two together, it's north of $3 billion. Obviously, you see decent growth there. It's showing up really in two places, advanced packaging and foundry. Think about CoWoS and the big GPU compute tiles and ASICs and all of those type things. It also shows up in high-bandwidth memory, right? When you've got HBM3 going to 3E, going to 4, you've got an 8-die stack going to 12, eventually going to 16. That's all interconnected with that through-silicon via process.
Again, our drill and fill, our silicon etching, and copper electroplating, those two areas are driving a lot of the spending that we're seeing in advanced packaging, HBM, and CoWoS. It's all about AI compute, right? HBM layers on top of those parallel compute tiles in an integrated package solution. We do that through-silicon via. We do other things there as well. The TSV is what we're just having extraordinarily strong presence.
Great. Let's switch on to the model and the gross margins. You've done a great job in getting it to 50%.
Thank you.
Guide for the September quarter. If you can just kind of parse through the margins, you said December could be down in the gross margins. What's driving the mix and the shift?
Yeah, first, if you'll allow me, again, that comparison that I was referring to earlier, right? If you go back to the last time we were at these revenue levels, gross margin was roughly 46%. We just printed a 50%. Really proud of the execution of the company in terms of how we've delivered that. If you've been following the company for a while, we told you we were going to do this. We suggested to you back in 2022 when memory turned down that we were going to more aggressively adopt a close-to-customer both R&D and manufacturing strategy when business growth came back. Business ticked on for a couple of quarters, and then we've grown every quarter since then. That incremental volume has been more closely manufactured where the customers are, which tends to be in Asia. We ramped our new factory in Malaysia, not really new anymore.
The factory is five years old at this point. That's a lot of what has transformed gross margin. We're also benefiting from a favorable customer mix. The execution of the company with that close-to-customer strategy, think about it. We were 46%. We now printed a 50%. A lot of that had to do with us driving manufacturing to be closer to the customers. Yes, you're right. When we went out of our way to describe in the December quarter that customer mix is probably going to be somewhat less favorable. I suggested you should be thinking about a 48% for December, roughly. I just didn't want people to run ahead with the fact that we printed a 50% in June and guided a 50% in September. I wanted to kind of set expectations properly, Atif. That's what we got going on right now.
Super. Let me pause here and see if there are any questions in the audience. If you have a question, please raise your hand.
It's a full room, but everybody's quiet this morning.
All right, I'll continue. CSBG, a great business.
My favorite part of the company's business.
Right. This year, there was a little bit of upside when you talked about modest growth for CSBG.
Yep, more correct.
For this year, curious what is driving the modest upside to the CSBG outlook. Also, if you can share any preliminary thoughts on next year.
Yeah, so if you're new to the story, let me describe what the Customer Support Business Group is. CSBG is the acronym. Four things to think about: spare parts, service, equipment upgrades, and then what we call the Reliant product line. Think of this as older tools, tools that have been around for, I don't know, 10 plus years in some cases. That's what's in CSBG. We came into the year thinking or suggesting CSBG is probably going to be down a little bit. We reset that on the last call to suggest it's going to be, I think I used the word modest growth. Unpacking that a little bit, frankly, utilization is a little bit stronger. Higher utilization drives a little higher consumption of spare parts as well as service. That's kind of what has moved it from slightly down to slightly up.
We're also really excited about, and you hear Tim talk about this a lot, cobots or advanced service offerings, equipment intelligence. Increasingly, what we're trying to do with the service portion of CSBG is pivot to be more, I guess I'd call it results-based outcomes as opposed to show up and do tasks in terms of service. We're using equipment intelligence and cobots to deliver a more consistent service outcome. Honestly, when we look sometimes at what we see fabs running and outcomes, we realize that with some of this advanced service, we can deliver a better outcome for the customer. That's what we're doing. We're pivoting how we're delivering service to be more outcome-based. Frankly, the customers like this because they get something that they might not have been able to get on their own.
It moves the conversation from being more about what's the value of this as opposed to, you know, what's the cost of it, if you will, Atif. That's also part of what we're excited about relative to the future as we look forward with CSBG is advanced services. You're going to hear us talking more and more about this. Customers really like it.
Great. Part of your business that you've talked about in the last few years, dry strip, it has been.
Aether dry-resist solution, yep.
Yeah, Dry Resist, Dry Strip. I know recently you guys had some kind of meeting with ASML in terms of the progress of the Dry Strip. If you can share with us, where is the adoption going for the Dry Resist?
Yeah, we're very excited about this Aether dry-resist solution. It's putting resist on using a more deposition-like process as opposed to wet chemistry. When we look at it, you can control it better. Yes, you're absolutely right. We are collaborating and have been collaborating with ASML for quite a long time on this capability. What I would describe to you is when we look at the business, we believe over the next five years, call it, that this cumulatively has an opportunity to deliver for us $1.5 billion in revenue based on where we see it being adopted. What I would also describe to you is every one of our customers that uses EUV has our hardware in the lab evaluating what this is capable of doing. That's a strong statement. Customers don't allocate lab space to hardware unless they see something of value.
We've announced two tool of record decisions, and we have one ramping into production as we speak with the leading DRAM customer. We're excited about it. It's showing up. It's all incremental for us. This is the most exciting thing when I look at it from the financial standpoint. It's really hard in this industry to find something that's quote unquote greenfield or brand new space, and this is for us. We're very excited about what it's going to deliver. Like I said, ramping into production with one leading customer. I see Erik's hand up over here. If we can get a mic.
If you think about the spares or services, are there any different horizon utilization of lagging edge versus leading edge?
Yeah, on the webcast, the question was, is there a different, I'd call it attach rate, Erika, between leading and lagging edge from a service and spares? What I would describe to you, leading edge is somewhat more spares and service intensive. That's where a lot of this advanced service is targeted at more leading edge customers today. We can propagate it over time, and we often do this from leading customers back to more mature customers. The intensity, Erika, is higher in the leading edge, at the leading edge.
Great. On the same lines, the mature logic you mentioned earlier that you guys could be gaining a bit of share in China, the mature logic. Outside China, your peer was talking about some green shoots where the companies outside China have started to maybe invest more in the mature logic.
A little bit.
A little bit. You're seeing the same thing.
Yeah, I mean, what you need to think about is that set of customers, we're still, maybe we're getting to the tail end of the inventory cycle. When you're sitting on inventory, you generally aren't investing in equipment. When I look at the totality of what's going on, analog, power, all of those places, we seem to be coming through the back part of the inventory cycle. Inevitably, what happens is a little bit more equipment investment.
On the topic of tariffs, you guys have a manufacturing presence in Malaysia as well as in the U.S. How are you juggling your manufacturing? How are you thinking about the long-term footprint around manufacturing?
Listen, the good part about the way we've got the company structured is we have manufacturing globally. What that means is we've got factories in California, in Ohio, in Oregon, in Malaysia, in Taiwan, in Korea, and in Austria. Once you understand whatever the tariff enviroent is, you can adjust things if you need to to optimize. You can't make, it's not going to go away. If tariffs are here and enforced, it'll never be zero. You can minimize, I don't know if minimize is the right word, but set the structure of the company up to support where the customer wants certain things. You can't do it instantaneously, Atif. Once you understand what the final rules of the game are, so to speak, you can adjust.
Part of that gross margin that I was describing in December at 48% also contemplates the fact that tariffs are probably going to be somewhat higher in December, certainly than they were in June and in September as well. That's part of also describing that.
Let me see if there are any other questions in the audience. Doug, on the capital allocation, you were very clear on your earnings call that you will continue the ASR into the September quarter. Can you just walk us through your most recent thoughts on capital allocation?
Yep. I mean, it really is unchanged from that February. In February, at the investor day, we updated the plans for the company or basically described it in a way that suggests we plan to return at least 85% of free cash flow to shareholders through a combination of dividends and buyback. I don't know if you saw our announcement last week, but we raised the dividend by $0.03 a share on a quarterly basis. I think that's a 13% increase, fairly consistent with what we've done over the last five or six years, kind of a low mid-teens raise in the dividend. I know that's what a lot of shareholders really want to see from us is grow that dividend on an annual basis. We plan to do that. I always point out to people that level of dividend is comfortably supported by the cash generation in CSBG.
That's something to kind of have in the back of your mind. We supplement it with a share buyback. You're absolutely right. In the June quarter, we entered into an accelerated share repurchase agreement with a couple of banks that executed in June and will continue executing into the September quarter. We supplement it with open market or 10B51 share buyback plans. That's very much kind of how we manage the buyback portion of things.
We have a few minutes. If you have any questions for Doug, you can come up and ask Doug. With that, let me close out. Thank you, Doug, for coming to the Citi Conference.
OK, Atif, thank you.