Lam Research Corporation

Good day and welcome to LAM Research's June Quarter Earnings Conference Call. At this time, I would like to turn the conference over to Tina Correa. Please go ahead, ma'am.

Thank you, operator. Thank you and good afternoon, everyone. Welcome to the LAM Research Quarterly Earnings Conference Call. With me today are Tim Archer, President and Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment and review our financial results for the June 2020 quarter and our outlook for the September 2020 quarter. The press release detailing our financial results was distributed a little after 1 o'clock p.m. Pacific time this afternoon. The release can also be found on the investor relations section of the company's website, along with the presentation slides that accompany today's call. Today's presentation and Q&A includes forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings press release. This call is scheduled to last until 3 o'clock p.m. Pacific time. A replay of this call will be available later this afternoon on our website. With that, I will hand the call over to Tim.

Thank you, Tina, and welcome, everyone. The global pandemic, volatility in the macroeconomy, ongoing U.S.-China tensions, We are operating this year amid tremendous uncertainty and unprecedented challenges impacting people all over the world. We see technology playing a critical role, keeping people connected, enabling businesses to remain productive, and accelerating solutions to the myriad of problems the world is confronting. I am very pleased with how LAM's employees have demonstrated care for each other and our communities and have responded with great effort support our customers' success. As a result of their outstanding execution, today we are reporting strong performance for the June period and guiding to another quarter of solid growth. Specific to the COVID-19 pandemic, our teams have demonstrated agility and resolve in establishing safe and effective protocols to perform essential work in our facilities while also enabling the majority of our employees to remain productive while they continue working remotely. We have ramped and stabilized our supply and production capability after an initial period of disruption to support revenues greater than $3 billion per quarter. As you have seen from our guidance, we will be nearing record output levels for the company in the September quarter, highlighting the effectiveness of our business continuity plans, our global manufacturing network, and our trusted supply chain partners. We will continue to capture learnings to further improve business resilience and better serve our customers in the future. But overall, I am proud of what our employees and partners have accomplished during this challenging period. Before discussing our results for the quarter, I wanted to comment briefly on our review of the new rules regarding sales of semiconductor equipment into China. China remains an important part of the global semiconductor ecosystem, and LAM has a solid track record of business in this market. We are closely monitoring and complying with all regulatory directives, and based on our assessment, we currently see no material financial or business impact from the new rules. Turning now to the June quarter. Revenue in EPS came in above our expectations. Operating margins improved sequentially, and we generated over $800 million in cash from operations. As the September quarter guidance indicates, we see continued positive momentum as we move into the second half of the year. The results also represent sustained progress towards our long-term objectives. As mentioned earlier, our guidance indicates we are nearing prior record levels of revenue, but we believe that our opportunity for growth remains robust. Key points supporting our view include, one, Memory investments must continue to grow to meet secular demand drivers. LAM's memory mix year-to-date, at slightly below 60% of system revenues, is well below historic highs. We expect our strong memory position to drive outperformance in share of WFE spend as NAND and DRAM investment levels increase. Two, our actions to improve our foundry logic SAM and SHARE are yielding results. with our revenue growth in this segment outpacing FoundryLogic WFE growth cycle to cycle. And three, our customer support business group at 34% of total revenues year to date is an increasingly greater contributor to our top line than in the past. Looking at the broader WFE environment, our outlook remains strong. While COVID-19 has created volatility for the semiconductor industry, In a larger sense, it has underscored the rapidly growing reliance of individuals and businesses on semiconductors and the products and technologies they enable. For example, we are seeing accelerated growth in Internet video traffic as video becomes embedded in a broad range of business and consumer activities. This is manifesting currently in work from home, e-learning, telehealth, online gaming, and, of course, video streaming. Nearly two-thirds of global consumers cite video as their preferred medium for obtaining information. The demand that this places on data transport, analysis, and storage will continue to rise. Mobile networks are migrating to 5G, video quality is doubling from 4K to 8K, and cloud and enterprise data centers are expanding to support the enhanced data traffic. A 2X resolution improvement in mobile video drives roughly a 70% increase in NAND storage content. And newer server architectures are expected to have over 30% more memory channels versus prior generations. Despite the recent downtick in smartphone units, our own assessment of NAND content in smartphones in calendar year 2020 has trended higher versus our prior baseline due to a greater mixed shift towards 5G devices. We are also seeing increased NAND demand related to new product cycles in the game console segment, with some of the new platforms adding up to a terabyte of SSD-based storage. Launches of the new game consoles are expected to add low to mid single digit percent growth to overall NAND bit demand in 2020. These demand drivers, in combination with increasing semiconductor manufacturing complexity, create a compelling setup for sustained strength in WFE spending. In 2020, we estimate WFE to be in the mid to high 50 billions, driven by growth in both memory and foundry logic investment. Although we have seen underlying demand drivers fluctuate due to the challenges presented by the COVID-19 pandemic, our current WFE forecast in total is very close to what we expected at the beginning of the year. From a mix perspective, we see memory share of WFE growing in 2020 off a low 2019 level. This trend should continue into 2021, particularly in DRAM, where we believe inventory levels will be lower as we get to the end of 2020. In both NAND and DRAM, we see bit supply growth lower than long-term demand this year and NAND recovery progressing ahead of DRAM. By geography, Domestic China customers continue to be a strong source of WFE demand, with expected calendar year 2020 WFE spend in the $10 billion range. Year-on-year growth in China investment is predominantly driven by NAND and foundry segments. Looking more broadly at longer-term global WFE spend, we are increasingly confident that the accelerating digitization of the economy along with the rising complexity of semiconductor manufacturing at each technology migration, is establishing a higher base of WFE spending at the $60 billion level. With this outlook, we are focused on delivering on our objectives to drive greater than 50% growth in revenue and more than a doubling of EPS by 2023-2024 compared to our 2019 results. Key to achieving these goals is to execute on the SAM expansion, market share growth, and installed base revenue opportunities we laid out at our investor day in March. On the system side, we continue to see positive momentum across our businesses. The June quarter marked a record for net penetration and defense wins in our etch business. As measured by three-year forward revenue, which is a metric we began tracking internally few years ago. We achieved key wins in high aspect ratio mask open and contact edge applications in both DRAM and NAND, and leveraging unique hardware capabilities for RF control and edge yield enhancement that we introduced last year, we have further extended our technical leadership in high aspect ratio processes across both conductor and dielectric edge. We also combined these technologies with our hydropatterning system, which is enabled by LAM's equipment intelligence and uses FAB data inputs to improve customer yield. With this system, we were able to secure new positions in quad and EUV patterning for DRAM. In the June quarter, we also made good progress in our effort to disrupt older equipment segments with more innovative extendable LAM solutions. With our enhanced ALD family of products, we achieved two new wins for 3D NAND gap fill applications and a multi-layer application win in Foundry logic. Superior film quality, integration, and architecturally enabled productivity were instrumental to our success. In DRAM and Foundry, we are also seeing accelerated adoption of our ALD solutions for critical spacer applications, which have traditionally been done using furnaces. Overall, we believe our enhanced ALD solutions are helping to enable the performance and cost roadmaps our customers need. At the same time, we continue to help customers extract more value from their installed base of LAM equipment. In the June quarter, our customer support revenues grew approximately 8% from the March period, and our revenue growth has exceeded installed base unit growth year to date. Our Reliance Systems business posted its eighth straight quarter of record revenues, driven primarily by shipments to analog, mixed signal, CIS, and microcontroller segments. The challenges of the COVID-19 pandemic have also accelerated the deployment of important new technologies for remote equipment support. By enabling real-time, in-fab access to LAM service experts located worldwide, we have reduced installation and troubleshooting time without the need for extensive travel. In addition, increasing adoption of our machine learning-based analytics, leveraging big data at customer sites, is enabling faster detection and resolution of issues. These advances are the result of investments that, as we shared at our investor day, are targeted at delivering services innovation that creates value for our customers and also increases our revenue opportunity per chamber. So to wrap up, LAM delivered a very strong June quarter, and we see continued strength ahead. We are seeing positive momentum in our efforts to grow our installed base revenue, expand our served markets, and increase our market share. And as a result, we believe we are increasingly well positioned to benefit from the long-term secular growth drivers in the semiconductor industry. Thank you all for joining and for your support, and I'll now turn it over to Doug.

Awesome. Thank you, Tim. Good afternoon, everyone, and thank you for joining us today. I hope all of you and your families have been safe and healthy. Our operations steadily improved throughout the June quarter as we executed well in this COVID-19 environment. We've become increasingly more efficient and effective in our operations, which I think are well reflected in the results from the June quarter. Our revenues came in at $2.8 billion driven by broad-based demand. Our customers are investing in leading-edge technologies to service the growth they're seeing in 5G, data centers, and product cycle-driven demand in the gaming console market. LAM's solid execution is reflected in our revenue result, our gross margin performance, as well as our earnings per share that came in at $4.78. I'd also just point out that our deferred revenue balance is back to a more normal range as compared to the end of the March quarter. From a system segment perspective, the total memory segment in the June quarter increased to 61% of system revenues from the March quarter level, which was at 56%. We saw increases in NAND spending, which contributed 45% of our system revenue, which was up from 40% in the March quarter. NAND investments are broad-based, focused on 64, 96, and initial 128-layer devices. DRAM spending was consistent across the June and March quarters at 16% and continues to be focused on node transition, primarily conversions to 1Y and 1Z. The combined memory market remains in a healthy place due to proactive inventory management as well as a prudent investment cadence. In Foundry, demand across diverse end market applications continues to drive the investment profile. While Foundry has a percentage of our system revenue slightly declined from the March quarter percentage of 31% to the June quarter at 29%, revenue actually increased in dollar terms coming in at the second highest system revenue level for foundry in LAM's 40-year history. We continue to be pleased with our trajectory here. And finally, the logic and other segment contributed the remaining 10% of systems revenue in the June quarter as compared to 13% in March. China investments continue to be strong in the June quarter with 34% of our total revenue coming from that region. We're seeing investments from customers in all market segments within China. The majority of the revenue again came from domestic Chinese customers. We continue to expect solid investment levels in this region throughout the calendar year. China's obviously an important market for lamb, and we remain confident in the strength of our business there. The June quarter revenue for our customer support business group was a record at $927 million, representing an increase of 8% from the March quarter level and an increase of over 17% from the same quarter a year ago. We're delivering sustainable growth across the components of our customer support group in spare parts, service, upgrades, and our refurbished Reliant Tool business. Within the June quarter, we executed two significant longer-term spares contracts, further improving the recurring nature of the revenue streams in this business and demonstrating further evidence of the trust our customers have in us to continuously deliver value. Gross margin for the June quarter was 46.1%. At the start of the June quarter, driven by uncertainties related to the COVID-19 situation, we saw potential capacity limitations both from our supply chain partners as well as our own internal production capability. However, as the June quarter progressed, we were able to increase our production efficiency. The resulting expansion in production volumes yielded better factory performance that enhanced gross margin from our original expectations. In addition, gross margins fluctuate, as you know, based on customer and product mix, And in the June quarter, we ended up with a slightly more favorable mix than we anticipated at the start of the quarter. We are seeing higher costs due to COVID in several areas, most notably freight and logistics. We're doing our best to mitigate that headwind by managing other expenses in the factories and in the field. June quarter operating expense came in at $493 million, slightly higher than the March quarter. We focused our spending in the research and development area as we address our customers' most critical needs. Roughly two-thirds of our spending remains focused towards R&D. Our incentive compensation expense increased from the prior quarter, which is tied to our improved profitability levels. At the same time, we've managed expenses elsewhere, most notably travel, and they came down throughout the June quarter. Operating income in the June quarter was $795 million, and operating margin was 28.5 percent, which was an increase of 160 basis points from the prior quarter. Our tax rate this quarter was 7.6 percent. Our rate was low in the June quarter, primarily due to a more favorable mix of geographic income, and maybe more importantly, a one-time year-end adjustments we recorded as we closed our fiscal year. We will have fluctuations in the rate from quarter to quarter. You should continue to expect the ongoing tax rate to be in the low teens level for your models. Other income and expense increased slightly in the June quarter, coming in at approximately $33 million of expense. Within the June quarter, we were opportunistic with our capital structure. At the end of April, we completed an offering of $2 billion of investment-grade bonds with maturities of 10, 30, and 40 years. I was pleased with the demand for our paper as well as the pricing, which came in with coupons of 1.9%, 2.875%, and 3.125% respectively. We used $1.25 billion of the debt proceeds to pay down the revolving credit facility that was then outstanding. That facility is now completely paid down. As we discussed in last quarter's call, the cost of our employee deferred compensation plan and the offsetting hedging balances remain mismatched in the GAAP P&L. You can see these results in the GAAP reconciliation table of our earnings release. Given the volatility in the market in the June quarter, there were large fluctuations between our gap expenses and the OINE lines that the hedge essentially offsets at the net income level. And you should note, the other income and expense balance includes the interest expense of our outstanding debt amounts, obviously offset by the interest income from our cash and investment balances. You should expect that other income and expense will vary quarter to quarter based on several market-related items. You should think about things like foreign exchange. On the capital return side, we noted in our March quarter earnings call that we would be pausing our buyback activity during the June quarter until we had a better line of sight in the business environment. As a result, we had only a small amount of share repurchases in the latter part of the June quarter, and that, together with dividends, ended up having us deploy approximately $200 million towards capital return. Long term capital return of 75% to 100% of free cash flow remains our plan. Diluted earnings per share, as I said, was $4.78. I'll mention that the one time benefit from the tax items I referenced was roughly $0.14. Our diluted share balance for the June quarter rounded down to 147 million shares, only a very slight decrease due to the minimal share repurchase activity. The share count includes a dilutive impact of approximately 1 million shares from the 2041 convertible notes. The dilution schedule for the remaining 2041 convertible note is available on our investor relations website for your reference. Let me now move on to the balance sheet. Our cash and short-term investments, including restricted cash, increased in the June quarter to $7 billion from $5.6 billion in the March quarter. Cash flows from operations in the quarter were strong at $813 million due to healthy profitability and solid collections during the quarter. The remainder of the increased quarter to quarter was related to the debt issuance offset by the pay down of the revolving credit facility. DSO decreased in the June quarter to 68 days from 80 days in the March quarter, demonstrating strong collection performance and the resulting timing of customer payments. Inventory returns were flat with the prior quarter at 3.2 times. We have consciously increased our inventory balance to support the higher revenue level that we see in the September quarter. Non-cash expenses included approximately $50 million for equity compensation, $54 million for depreciation, and $17 million for amortization. June quarter capital expenditures were consistent with the prior quarter amount coming in at $51 million. Ending headcount as of the June quarter was approximately 11,300 regular full-time employees. This headcount reflects added resources in our factory and field operations, supporting increased volume, as well as additions in research and development to support ongoing critical deliverables like the new Sensei Edge platform and the Dry Resist program that we announced at our investor day in March. So now looking ahead, I'd like to provide our non-GAAP guidance for the September 2020 quarter. We're expecting revenue of $3,100,000,000 plus or minus $200,000,000. Gross margin increasing to 46.5% plus or minus one percentage point. Operating margins of 29.5% plus or minus one percentage point. And finally, earnings per share of $5.15 plus or minus 40 cents based on a share count of approximately 147 million shares. These ranges remain wider than normal due to the continuing uncertainty from COVID-19. We are well positioned for the second half of calendar 2020 as we expect continued healthy WFE investments. We see continued strength from memory, and foundry for that matter, driven by demand and more strategic technology oriented investments. The customer support business group is also expected to provide continued momentum for the company. Operator, that concludes my prepared remarks. Tim and I would now like to open up the call for questions.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. The first question will come from Timothy Akuri with UBS. Please go ahead with your question.

Thanks a lot. Doug, I guess the first question you're talking about now, you know, WFE being mid to high 50s this year, if I look at Q3 and I look at your guidance and you're sort of, you know, probably going to gain some WFE share this year, it would sort of assume that we're running maybe in the low 60s in, you know, Q3. So I guess if I assume your, you know, full year forecast and I assume maybe you, you know, gain 100 basis points of WFE share this year, something like that, It would sort of imply that December revenue will sort of flattish, and I'm not asking you to guide December, but I'm just kind of wondering whether you think that that math holds together where you should gain, you know, like a little bit of, you know, WFE share this year. Thanks.

Yeah, Tim, you're absolutely right. We're only guiding one quarter at a time, and I'm not going to give you a specific answer on December, but I will qualitatively say I think December will continue to be a strong quarter for us. I don't look at WFE on a quarterly basis. I'm sure you're doing the math right. But you're also right about the observation on share of spend and where memory is trending and all of those things. We're setting up, I think, for a pretty good second half, Tim.

Thank you for the question. The next question will come from CJ Muse with Evercore. Please go ahead.

Yeah, thanks for taking the question. I guess a question on the memory side of things and where are we in the cycle? You know, I know we're 30% above the recent trough, but still 40% below the prior peak. You know, and investors clearly have been focused on this aspect and would love to hear your view, particularly as it relates to the positive trends you highlighted into calendar 2021.

Sure. I'll start, CJ, and then let Doug add something if he wants to. Obviously, what we've been saying for quite some time is that memory is a story of one kind of coming off what was a very strong 2018 and a couple of years of then digesting that. But at the same time, there are underlying growth drivers that I think you're seeing everywhere for both NAND and DRAM that give us greater confidence in what we've stated as long-term bit demand growth in the high 30s for NAND and in the high teens for DRAM. If those are correct, and like I said, I gave you a few of the examples of where there are big consumers of NAND and DRAM from an application perspective on the horizon, we think that memory investment has to continue to grow for years to come. Obviously, at our investor day, we laid out a model of of a more normalized memory spending level in the context of total $60 billion WFE. And in that environment, we grow the company quite significantly.

Yeah, and CJ, maybe I'd just add, I mean, more near-term tactically relative to what's going on this year, I think NAND is a little bit ahead of DRM relative to PACE or Recovery. When I look at the market, both are kind of managing inventory, investing what I described as or tried to with a prudent cadence. That's got NAND up this year and DRAM maybe up a little bit, but not too much. I really do think DRAM will be more a 2021 story. So think about that near term. And then on top of that, as it relates to LAM, I mean, we're doing extremely well in foundry as well. So, you know, factor that in when you think about what's going on with our company.

Very helpful. And if I could follow up on the service side, You grew that business a stellar 17% year on year. Was there any catch-up there on the deferred side? And I guess thinking through that, how should we think about the potential for sequential growth into September, December? How do tools coming off warranty and upgrades look, at least based on your bill plan today? Whatever you can share. Thanks. Thanks.

Yes, CJ, in this part of the business, the deferred stuff we had at the end of March really wasn't impacting things. The deferred, if you remember what we described at the end of March, had to do with back-ordered shipment. That was really all about new equipment. So I don't think there's anything terribly unique going on in CSBG, Tim, unless there's something.

No, I think it's, again, it's just the efforts, as we've said, to continue to provide services to grow our revenue opportunity per-chamber And also just our business, as you pointed out, as our company continues to grow faster, the installed base grows faster and generates more opportunity. Thank you. I don't think there's anything unique. Yeah, thanks, CJ.

Operator, can we go back to Tim R. Curry for an additional question, please?

Yeah, I thought it was funny Tim only had one question.

Yes, ma'am, one moment. Your line is open, Tim.

Thank you. Thanks for that, Doug. Sorry, Tim.

Sorry.

Yeah, sure, sure. No worries. So second question, I guess. Can you go through a little bit about how the whole military end use thing has transpired? It seems like China WFE is a little higher. The domestic stuff is maybe a billion to a billion higher than you thought it would be. And it seems like now all these customers know that there's restrictions looming at some point, so they're going to keep on pulling stuff in. So can you just talk about how the export controls have transpired? Is commerce happy just as long as you do the due diligence with the customer on military end use? Can you just kind of talk about all that? Thank you.

Sure. I think, Tim, in my comments, I talked about our assessment. It was quite an extensive diligence process that we went through which consisted both of our own conversations and questioning of the customers and their certification, as well as the use of third-party research and also validation by outside counsel. And we arrived at our conclusions, as I stated, no material financial or business impact as a result of all of that work. Now, that is an ongoing activity for us, meaning that continually assessing uh, and doing that kind of research. And so, um, that's something that we have committed to, but at this point, that's, that is our conclusion. If by your question about, uh, and connection to domestic China, WFE, I don't think that's a connection that we're making. And basically we are saying that, uh, you know, China has, um, plans to invest. And, and I, I'm indicated that a lot of the investment is coming from NAND as well as foundry. And, uh, At least in our view right now, we have not made that connection that somehow domestic China WFE is in any way really affected by these rules one way or the other.

Tim, maybe a quick comment from you. My sense is there's nothing pulled in, honestly. Now, we maybe wouldn't know if it was or wasn't a little bit. But given we've concluded the rules are not impacting our ability to ship, I don't know why anybody would think they should be pulling things in, right? Awesome. Okay.

Thank you much.

Thanks, Tim.

Thank you. The next question will come from Harlan Sir with J.P. Morgan. Please go ahead with your question.

Good afternoon. Great job on the business execution and strong results. One of the large problems Logic Manufactures recently talked about the potential of moving to a more outsourced business model. Maybe just a continuation of the industry trend towards a fabless business model. At a high level, it would appear to be a zero-sum game, but wanted to get your views on the potential ramifications of your business in a structural move in the industry, you know, towards a more fab-like or fabless business model.

Yeah, okay, let me try to take that, Harlan, to start. Obviously, we don't want to comment about the specific plans of any one customer, but to your point of the industry moving to outsourced model, I mean, obviously, that's a more than 20-year story, and I think that anything that allows wafers ultimately to be produced with better technology at lower costs, however that's done, in-house or outsourced, is what's good for the industry, and that's good for LAMB. I'm quite certain that as a result of the advances that have happened on the foundry side, LAM's business has benefited tremendously in the last 20 years. And that just comes back to a statement that I've made a number of times, which is the best thing for LAM is that technology nodes continue to migrate. We have greater SAM at every technology node migration across NAND, DRAM, and foundry logic. You know, every company has to decide for themselves what's sort of the best answer to advancing technology at the best cost. And that can be in-house, it can be outsourced. What we care about is whether that technology advances and more wafers get produced. And so I think we obviously watch it and we look at the impact on our business, but ultimately foundry hasn't been bad for the industry or for lamb.

Yeah, and Harlan, maybe just one additional comment from you. The way I think about it is what matters to LAM is the number of leading-edge wafers in the entire industry that are put in place, whether it's insource, outsource, largely doesn't matter too much. Either way, it needs equipment, right, independent of where it goes. We're selling largely the same things to the industry.

Yep, great insights there. Good to see the recovery of the business and improvement in supply chain and logistical bottleneck. Just wondering, Doug, if the team is still, even with the strong September quarter guide, playing catch-up on the delinquent backlog as a result of the earlier bottlenecks? And if so, how much of that has yet to be worked out?

Yeah, Harlan, I think we got nicely caught up. I don't think we're completely caught up as we sit here today, but we made very nice progress during the quarter.

Great. Thank you.

Yeah, thanks, Harlan. Thank you. The next question will come from John Pitzer with Credit Suisse. Please go ahead.

Yeah, good afternoon, guys. Congratulations on the results. Thanks for letting me ask the question. Doug, just maybe a follow-on to Harlan's question. It sounds like COVID was still a cost headwind in the June quarter. I'm wondering if you can help us quantify that. And as you look out into September with the guide, how much sort of COVID logistical expense is still in there? And when do you think, you know, you might be able to take that out of the model?

Yeah, you know, John, the biggest individual item when I look at it is freight and logistics. I mean, freight lanes are more restricted than they were obviously pre-COVID. Things are more expensive. Really tough to mitigate that. I mean, to a certain extent, you take the price, you do your best to negotiate it, but you're somewhat of a price taker there. That does mean we're not, as I tried to describe, working to drive efficiency effectiveness elsewhere in the operation. That's what LAM is extremely good at doing, and we're doing that. but that is where the challenges are right now. I'm not going to quantify it, John, but it is impacting gross margin to a certain extent. I don't know, Tim, if you want to add anything.

No, the only thing I'd add is, you know, obviously Doug pointed out some near-term headwinds on the cost side. You know, we would expect those to eventually, you know, roll back as things normalize post-COVID, but I mentioned this point of the acceleration of remote support technologies, and I think that's you know, while we haven't fully quantified kind of what the benefit could be, clearly some of the benefits of less travel and more productivity of kind of worldwide engineers who can now connect into FABs and provide expertise via some new technologies, that actually will be likely a cost and kind of personnel benefit for us down in the future. And so, We're investing in that, and I think it's a positive tailwind just further down the road.

That's helpful. And then, Tim, you guys covered a lot of ground at the Analyst Day earlier this year, but you couldn't cover everything. I'm kind of curious if you can kind of spend a few minutes talking about your positioning in advanced packaging, because clearly there's not a lot of volume in sort of chiplets today, but as you look at Intel moving to their second-generation 10-nanometer parts sometime in the second half of next year, it seems like the tile slash chiplet strategy is really poised to accelerate starting in the back half of next year and going forward. And I know you guys have some good leverage there, but I'm just trying to get a sense of quantifying and how big you think that market opportunity is.

Sure. I don't know if we're prepared quite to quantify it for you on this call, but what I can tell you is it kind of follows on from my earlier comment about, you know, Customers and just the industry in general looks for the best way to achieve the performance that's required at the lowest cost. And sometimes that's by looking at total system performance and see advanced packaging, 3D chiplets, these sorts of technologies actually are one way to deliver system performance without having to necessarily utilize the most advanced node chips for every application. And our position is has been very strong. We were an early investor there. We have leading positions on both the etch and depth side in the TSV applications. And we think that we're extremely well positioned when that comes. And so every time we hear about acceleration, we're actually quite encouraged. But it's something that our high aspect ratio etching processes and our ability to I think most people recognize our leadership for 20-plus years in copper electroplating fill. Those are critical technologies for these 3D packaged heterogeneous integration applications.

Helpful. Thank you, guys.

Thanks, Gene.

Yep. Thanks, John. Thank you. The next question will come from Chris Sankar with Cowan & Company. Please go ahead.

Hi, thanks for taking my question. Tim, I have a question on memory. Clearly, memory, WFE, they're underspending right now, and your revenue has a lot of potential upside. If I look at the last cyclical peak, which was in March 2018, if you were to get back to those kind of WFE levels for memory, how will LAM's revenue profile look like in memory, given that you gained some shares? Is there a way to quantify it to see how much higher you could be versus the last cyclical peak? I'm going to add a follow-up.

I think Doug's signaling I can't quantify that. We, of course, have quantified it, and that's why my comment was, you know, we believe our opportunity. We knew there would be this peak question, but, you know, my comment was, regardless of the fact that our revenues are approaching the last time and, therefore, the peak question starts to come up, The setup is quite different, and in fact, that's why we pointed out our memory mix today is much lower, WFE's not back there. And so I guess probably you can do it just as easily as we can, but there is still a significant upside as memory growth continues, not only to return to prior levels, but also to continue to grow to meet all of these new application drivers that we've talked about.

Yeah, Chris, obviously when we put a financial model out not all that long ago in March, it comprehended some aspect of memory being at a higher investment level, CSBG growing, our strength and foundry continuing to grow. So you have the data points.

It's kind of all in there.

It's all in there.

Got it, got it. No worries. And then I have a question on your ALD traction. I'm just curious, like, you know, when you look at the ALD, like, clearly that market is going to continue growing. You guys are, like, you know... a number two player in that, I would probably say, how much of the growth in ALD is actually driven by technology versus the fact that productivity for ALD tools is still pretty low? Which is running the bigger upside in ALD?

Well, all of these new adoptions that I keep talking about, these are LAM's efforts to expand the application base for ALD, which means it's a technology-driven decision But usually what has, I mean, in the past, what has held back ALD from adoption in many of these cases was great technology, but the productivity wasn't affordable to put in at a certain node, so people pushed it out. What we've done is we've married both an expanding film set, more applications, with, as I said, architecturally enabled productivity, and we're getting a lot of traction across a number of different applications. I talked about 3D NAND gap fill, talked about a multi-layer application in Foundry Logic that's a different material, talked about critical spacers. And so it's just we've broadened, I think, the target market for ALD, and we're seeing good traction. Thanks, Tim.

Thanks, Chris. Thanks, Chris. Thank you. The next question will come from Toshia Hari with Goldman Sachs.

Please go ahead with your question. Hi guys. Thanks very much for taking the question and congrats on the strong results. Doug, you mentioned that for 2020 domestic China, you guys are expecting about 10 billion in spend. I'm curious, what's the rough split between memory versus logic and foundry? And on the memory side, I feel like both you and the broader industry is currently in a sweet spot where your customers are spending, but they're not really contributing to supply. At what point would you expect them to start to really move the needle on supply and, as a result, capital intensity come down in local China? Then I'll have a follow-up. Thank you.

Yeah, no problem, Tashia. You know, we haven't quantified what is in which segment in China, but I forget if Tim said it or if I said it in the script. It kind of blurs in my mind sometimes. We said it's broad-based in China in all segments, so it isn't just one. It's a broad set of customers that are investing. So think of it that way. It's not one or the other. And you're right, and I wouldn't characterize China's inefficient in the investment. It's just when customers are investing for the first time or are relatively new to investing in capacity, you've got to buy it. then you have to ramp it, and it takes time for that to happen. It's not unique to any one geography or any one customer. That is really what's going on. And over time, customers get more efficient as they ramp things. That's how I think about it, Tim. I don't know.

Yeah, no, and as you suggested in the earlier question, I think thinking about the model we put out just back at Investor Day, I think by the time you get to the 2023-2024 timeframe, we've comprehended that those additions in China are effectively the same as additions elsewhere in the world. So, you know, we don't think there's some extra inefficient spending in that case that's driving numbers higher for lamb. So I think if you just look back at that model, that's a relatively efficient spend across all segments in 2023, 2024.

Got it. Thank you for that. And then as a quick follow-up, Doug, in your prepared remarks, you talked about winning two service contracts in the quarter, I believe. I wasn't sure if you meant to highlight it as a meaningful dynamic here, but do those contracts at all drive incremental growth going forward, or does it change how we should be thinking about quarter-to-quarter, year-to-year volatility in your install-based business or profitability going forward? Thank you.

No, not really, Toshi. I mean, I just mentioned it because, one, they were a little bit longer term, and two, they were bigger than perhaps typical. And to me, it's very much part of how we run this business. It's, you know, the customer has faith and confidence in your ability to deliver and provide value. It is consistent with what we expect that business to do, and it has done in the past. I just mentioned it because it was notable when we were looking at the results this quarter. Thank you. Yeah, thanks, Toshio.

Thank you. The next question will come from Blaine Curtis with Barclays. Please go ahead with your question.

Hey, guys. Thanks for taking my question and great results. Just kind of curious from a high level, you know, the way from front end, you're keeping the same amount and you're catching up to it. Just kind of curious as you look at the way that you're shaking out, I think there's a lot of doubts whether you hit that number. Is it the same contribution and then Any comments on the strength in the second half by geography would be helpful.

Blaine, are you asking about WFE? Was that your question?

Just so I understand. I'm curious, as you're still seeing the same WFE forecast for the year, I'm kind of curious, is this a contribution as you thought of starting the year? And then any comments on geography, particularly into the back of the calendar year? Thanks.

Yeah, I think Tim specifically mentioned in his script, you know, there's puts and takes in here, right? It's ended up at the same level. I would suggest to you that more consumer-oriented stuff is a little bit weaker. Smartphones, as an example, smartphone units aren't the same as we thought at the beginning of the year. That is creating a little bit of a downtick, but that's offset by other things going on in hyperscale cloud, consumption of silicon. work-from-home type things. And net-net, one's up a little bit, one's down a little bit. We're in the same place that we began the year at.

I was just curious, Bob, from a geographic perspective, if you had any color into the growth into September.

No, we never forecast the GEO piece. I wouldn't expect it to be wildly different than what you've seen over the last couple of quarters, though, from a directional standpoint.

Thanks, Ben.

Yeah, thanks, Blaine. Thank you. The next question will come from Vivek Arya with Bank of America Securities. Please go ahead.

Thanks for taking my question. I'm curious about WFE growth outside of China, you know, because when I look at your first half, ex-China saved that down in the last fiscal year. So when do we see, you know, why are we seeing these trends? I understand, you know, this is probably a very short frame, time frame for looking at these trends, but I'm just curious qualitatively why are we not seeing the same kind of WFE growth growth outside of China because I imagine everyone is exposed to the same growth drivers.

Vivek, I mean, obviously the majority of WFE spending is outside of China. Two-thirds of it is outside of China, right? And so you're seeing the contribution of WFE across every geography, right? It's more about what's going on in the end markets. That's how you should be thinking about it, right? Foundry, is strong this year, NAND up from last year, DRAM maybe up a little bit. But to a large extent, that's geographically independent.

No, I guess my question is that, you know, when I look at last year, WFA was, I think, 50, 51. This year, you're getting it up 5 to 7 billion. But a big part of that growth is coming from China, right? The incremental growth is coming from China. So I'm just curious why we are not seeing WFE spending outside of China at that same pace, or is that just something we will see next year perhaps?

No, you are. I mean, there's three to four probably incremental in China, and the rest of it is outside of China. Vivek?

Okay. As a follow-up, CSPG, thanks for providing that info. So it grew, I think, about 7% or so last fiscal year. I'm curious how much it grew the prior fiscal year and what part of that should we think of that as kind of recurring? And this is such an important part of your business that I'm always very curious about how to correlate this to your growth in chambers. Is this correlated to your chamber growth from two years ago or three years ago? Just how should we, you know, take this 7% number and, you know, I don't know how to forecast your CSBG business. I guess that's really what I'm trying to ask.

If you're thinking about forecasting, we gave you data points at the investor day, which was Pat Lord, who manages his business for us, suggested that by 2023-24 it will have grown 40%. So there's your data point for how to forecast it. Uh, chamber count is critically important, but Pat and Tim talked about it's not just chambers, it's dollar per chamber growing from, I think we, I forget what year we indexed it back to, 2013 maybe. 2013. And it was one point, yeah, it was one point until then. It had gone to 1.5 and we had objectives to continue growing it to 1.7, um, which was what was baked in the model. So that's how you should think about it. Chamber count's important. Um, we're also driving, um, some of the innovative service offerings like Tim talked with remote diagnostic kind of equipment and things to try to add more value for the customers and get paid for it. Thank you. Yeah, thanks, Vic.

Thank you. The next question will come from Mehdi Hosseini with SIG. Please go ahead.

Yes, sir. Thank you for taking my question. Just as a follow-up to the prior question, how should we model the customer support over the next few quarters? Should we just track the memory investment you highlighted as doing better than Foundry, or would it be more in line with the overall revenue trend line that you described earlier?

Yeah, I think that, again, the beauty of the CSBG business is It probably doesn't change on the time scale that you're talking about here relative to any particular quarter's change in shipments. I don't think you're going to see that. Remember, we have an installed base in excess of 60,000 chambers, and we're driving revenue in our CSBG business off of tools that were shipped 20-plus years ago. And there's upgrade cycles, and there's service contracts that Doug talked about. There's consumable parts. And so I don't think you're going to see that But as I said, that's the beauty of this. It's a stabilizing function for the company's revenue, and that's why we're investing heavily in this. And it delivers value for the customers in reuse and extension of installed tools.

I believe this is the first quarter that you're actually breaking this out. And I was just trying to better understand whether the customer support business group would grow – faster with memory or with boundary, or would it be the same for different markets?

Yeah, I can, okay, okay. Well, I think it's the second quarter that we've actually put out the data, but I think the couple of pieces of information to think about, one is we've said that the business will grow every year, and that's simply because, again, the installed base is growing every year, And again, we're investing to try to create more services, value-added services and products for that installed base. We haven't really made a comment about does it grow every quarter? I mean, because it's, again, you can be influenced by certain service contracts, certain upgrade decisions that customers make in any given quarter. But year to year, you can think about it growing every year. You know, it's maybe a little bit less about segments. I've talked in the past about... You know, critical applications and LAM's focus on critical applications and the importance of that, I mean, one, you know, they're sticky, but two, they actually tend to drive more parts and service requirements because the customers have to keep those systems at absolute top performance because they're performing the most difficult applications in the customer's FAB. And so you tend to see a little bit more pull through on the CSBG business for the critical applications where LAM is extremely strong. And so maybe that's, you know, maybe it's a little less by device type but more by the application requirements. And also critical applications tend to drive a more frequent upgrade cycle as the customers need to keep the installed base kind of performing for that latest technology node.

Thanks, Matty.

Thank you. Thank you. The next question will come from Joe Moore with Morgan Stanley. Please go ahead with your question.

Great. Thank you. I know you guys said you were working your way through the supply challenges, but I wonder if you could help us with what the quarterly revenue progression might have looked like if you hadn't had those. You had said in March you had about $300 million of revenue deferred by the supply challenges. Should we view June as having caught up to that? And then the surge in September is more shipping direct to demand? What would that have looked like if you hadn't had the supply challenges that you had?

Yeah, Joe, I didn't quantify it. I'd say we got nicely caught up. I also said we're not completely caught up at the end of the June quarter, and that's as much as I think we're going to give you right now. You know, we're driving efficiencies. We're getting much better. You know, I think Tim and I are pretty happy with how the supply chain is performing.

All right, great. Thank you very much. Thanks, Joe.

Thank you. The next question will come from Joe Quattrocchi with Wells Fargo. Please go ahead.

Yeah, thanks for taking the question, and congrats on the results for me as well. I think you mentioned that your capacity from a manufacturing perspective is over $3 billion per quarter now with all the issues with the supply chain. Is there a scenario over the next few quarters where you see potentially demand outstripping what you can deliver?

Well, we have a – global manufacturing factory network that we were highly confident in. I think it's unlikely that that's the scenario. I did not give you a maximum output for our factory network. I was only wanting to indicate that clearly we were supply constrained in the last quarter. It was one of the reasons why we were unable to provide our normal guidance. Now, with capability beyond $3 billion, we're confident in our September quarter, and we're confident that over time we'll continue to ramp that higher and higher. So we're not going to divulge our exact manufacturing capacity, but I'm quite certain we can continue to meet higher demand. That's helpful.

And then, Doug, just a quick one on capital return. Should we think about your comments of reiterating your long-term target model for 75% to 100% of free cash flow is kind of indicative that we should start to see maybe some more or maybe a reacceleration of some of the share repo in the current quarter and into the end of the year?

Yeah, probably, Joe. I mean, we said last quarter we were pausing, and we actually came back into the market a little bit before the end of the quarter. So we're We're back looking at things, and I've always said it's opportunistic in terms of how we do what we do, and we'll continue to be opportunistic. Thank you. Yeah, thanks, Joe.

Operator, we have time for one more question, please.

Okay, the next question will come from Weston Twigg with KeyBank Capital Markets. Please go ahead.

Hi, thanks for taking my question. I just wanted to dig into the operating costs a little bit. Just understanding that people aren't really traveling right now. You're probably saving some money. You mentioned some tailwinds around remote servicing. But so we expect operating costs to ramp up meaningfully in 2021, assuming there's some sort of post-pandemic return to kind of a normal level of business and travel and marketing. And I kind of noticed that you added some headcount as well. So I would assume that that would roll in. And I don't know if that continues through next year, but just kind of wondering how next year looks from an operating cost standpoint.

Yeah, Wes, I don't know. I'm not going to give you a forecast for next year yet. I think there'll be plus or minuses. Assuming we get back to normal, we get a vaccine, a therapeutic regimen, what have you, I think we're going to learn from how we're operating right now and be better over time. I mean, that's what LAM is really very good at, looking at an opportunity, getting better, and systematically doing it that way. I think we will do that. And, yeah, if we get back to normal travel, we'll come back a little bit. I don't think it comes back to where it was. But, again, we'll keep managing the P&L in the right way.

Yeah, I think the only thing I'd add is, you know, at the same time, we've – obviously, I think we have a great track record of managing OPEX, and you can kind of look at the results to support that. But, you know, we are investing in – in our 2023-2024 plans. I mean, you've seen some of our announcements recently. The construction of a technology center in Korea, obviously there's expenses associated with that. It's a strategic investment to expand our R&D capabilities, put it closer to some of our largest customers. We're building a new manufacturing facility in Malaysia, which, again, is going to expand our global manufacturing network. provide additional business resilience, help take some cost out of the manufacturing structure. So there are some near-term investments that we're confident in our long-term plan, and so we are pushing those through even right now, probably seeing some of that reflected in our expenses as well. So maybe that's offsetting a little bit some of the savings that Doug's talked about, but I won't even get into the product and R&D. We continue to push more into R&D because we think it's the long-term growth engine of the company, And, you know, we're really confident in our product pipeline and new products coming out. Okay.

That's very helpful context. Thanks.

Yeah. Thanks, Wes.

Okay. Operator.

Yep. Thank you all for joining today. We appreciate it. And stay safe and healthy. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect. The End