Lam Research Corporation

Good day and welcome to LAM's Research September Quarter Earnings Conference Call. At this time, I would like to turn the conference over to Ms. Tina Correa, Corporate Vice President of Finance and Investor Relations. Please go ahead, ma'am.

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 of and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment and we'll review our financial results for the September 2020 quarter and our outlook for the December 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 made available later this afternoon on our website. With that, I will hand the call over to Tim.

Thank you, Tina, and welcome everyone. LAM delivered very strong September quarter results. Revenues and gross margin came in above the midpoint of the guided range. Operating margin and diluted earnings per share exceeded the high end of the range. Our performance reflects solid execution across the company. The operating environment remains challenging due to the COVID-19 pandemic, but the tremendous dedication of LAM's employees and our partners worldwide is enabling us to perform at a high level. Notably, the September quarter marked record revenue and diluted earnings per share for the company and was also the first quarter in which we have exceeded $1 billion in revenue from our customer support business group. At the midpoint of our December quarter guidance, we will be growing EPS more than 35% year over year in 2020. Investments we are making in manufacturing and supply chain resilience are enabling us to meet customers' critical needs in a period of strong demand and are preparing us for the continued growth we see ahead. Before I talk about market and product trends, I want to touch upon China-related trade regulations. As has been widely reported, U.S. regulations have impacted our ability to ship wafer fab equipment and parts to a large foundry customer in China. We are working with regulators on this issue and have applied for licenses to ship equipment and parts that are subject to restrictions. As a result of the current situation, our December quarter guidance reflects an impact to sales to this customer. From a market perspective, we see positive momentum in the underlying drivers of semiconductor growth and believe this translates into a healthy outlook for Lamb's business. Work and learn-from-home trends continue to drive demand in key electronics categories, including PCs, storage, and networking. Third-party data suggests that growth in PC, notebook, and workstation shipments in the calendar third quarter surpassed a 10-year high to reach record levels. Moreover, some memory manufacturers have noted shipping record levels of consumer solid-state drive bits in their most recent quarter. We believe that many of the changes brought about by this year's shift to remote working and learning environments will be structural. The net result will be a pull forward of key long-term secular growth themes for the semiconductor industry, including accelerated build-out of cloud data centers and expansion of high-speed communication networks. Against this backdrop, we see WFE spending growing across NAND, DRAM, and Foundry logic, supported by demand fundamentals that should drive continued WFE strength into 2021. Overall, our expectation for WFE in calendar year 2020 remains unchanged from our prior outlook of the mid to high $50 billion range with an improved memory mix compared to 2019. Leading edge spending in Foundry logic remains robust with rising capital intensity and the secular growth drivers discussed earlier effectively resetting equipment spending expectations to a higher level in this segment for the foreseeable future. We were also experiencing strong pull for trailing edge Foundry logic nodes due to a pickup in the automotive, IoT, and image sensor markets. This helped us deliver in the most recent period another quarter of record sales for our Reliant business. In MAN, we see spending increasingly focused on 9X layer and beyond devices, where higher capital intensity for etch and deposition, combined with LAM's strong market share positions, create even greater opportunity for the company than at prior nodes. Year on year, total NAND installed wafer capacity is expected to remain flat, with NAND bit supply growth still tracking below long-term demand as we exit calendar year 2020. In DRAM, customers continue to invest cautiously, and supply growth remains below long-term demand. As a result, we see a positive setup for next year and believe DRAM spending will increase as we progress into 2021. We expect to provide our full 2021 WFE outlook in our January earnings call. Turning now to our business updates. We recorded solid progress in the September quarter towards our long-term growth objectives. A fundamental part of our strategy is to deliver broad innovation in equipment, process, and support capabilities to help our customers accelerate the transition of next-generation 3D devices into high-volume manufacturing. We are developing a pipeline of differentiated products and services to address what we believe is one of the most pressing challenges for our customers, the need to drive on ever more complex leading-edge devices, the node-to-node cost-per-bit and cost-per-transistor reductions that have been the key to our industry's success. With this goal, we are investing significant focus this year in two areas. One, accelerating our vision for equipment intelligence solutions. And two, extending our technology leadership in critical high aspect ratio processing. First, land equipment intelligence is a suite of capabilities, including data-driven modeling, state-of-the-art sensing, adaptive feedback algorithms, augmented reality remote support, and self-maintenance hardware aimed at shortening process development time and delivering predictable manufacturing ramps at lower cost with fewer resources. Our groundbreaking Sensai Edge platform introduced earlier in 2020 is a great example of a tool designed to leverage our holistic approach to our equipment intelligence offerings. On Sensai, these capabilities are used to enhance RF and temperature control improve edge yield, automate routine maintenance activities, and reduce chamber matching times across large fleets of tools. In the September quarter, we continued to gain traction for this new product with initial shipments to two additional memory customers. We have aligned roadmap insertion plans with the top memory manufacturers and expect to ship multiple repeat systems in the next few months. While new platforms like Sensei are designed for equipment intelligence from initial concept, we have also demonstrated this year that customers can realize significant value by deploying select elements of our equipment intelligence solution set as options or upgrades for their current generation systems. For example, our Corvus R automated self-maintenance feature, available on our Keo Conductor Edge system, has been proven to shorten maintenance cycles and improve process repeatability on critical and semi-critical applications. As a result, the installed base of KeoEdge systems equipped with Corvus R technology is on pace to expand by more than four times in calendar year 2020. LAN equipment intelligence is also enabling new types of remote support that have proven vital to business resilience during the COVID-19 pandemic. Big data analytics approaches to enhance troubleshooting and simplify process optimization are seeing growing adoption. In 2020, our data enhanced service activities are on track to grow 3x over the prior year. Virtual reality technologies are allowing us to continue training engineers across the globe to further develop their skills on our latest systems without the need for international travel. Similarly, The latest innovations in augmented reality headset devices are allowing us to connect to engineers at customer sites to real-time expert support in our factory, often as much as halfway around the world. Our customer support business group is projecting 6x growth in remote support engagements this year. We believe building an ecosystem of smart tools and intelligent services will help drive sustainable cost reductions across the semiconductor manufacturing process and generate growth for our install-based business. Revenue from our productivity-focused offerings, including advanced services, is expected to grow approximately 25% in this calendar year. In the area of process technology, the continued vertical scaling of 3D device and packaging architectures across all market segments creates a compelling long-term growth story to CLAM. Over the past decade, we have built a winning track record in etch and deposition at the 3D inflections, most notably in the transition to 3D NAND. In the September quarter, we further extended our lead in 3D NAND with favorable high aspect ratio conductor etch decisions for devices beyond 200 layers and new application wins in dielectric ALD gap fill and carbon hard mask depositioning. Our high aspect ratio processing expertise also applies to emerging 3D packaging architectures. In Foundry logic, it has been estimated that 3D heterogeneous integration solutions can enable cost reductions of approximately 20% for leading edge nodes. In addition, 3D chip stacking is delivering performance advantages for advanced image sensors and high bandwidth memory. We expect etch and deposition intensity and advanced packaging and our corresponding revenue opportunity to continue to increase as more integration schemes leverage 3D scaling. In the most recent quarter, we received multiple follow-on orders for our Sabre 3D electroplating and Cindy and Edge tools for this market. And since 2015, our installed base for both tools has doubled. Looking forward, I am more confident than ever that LAM's capabilities and strategic investments are well aligned with the fundamental needs of our customers and our industry. The complexity and cost-scaling challenges for future technology nodes require comprehensive innovation in products and services that drive efficiencies from the very beginning of the design process all the way through to the support and maintenance activities in a high-volume manufacturing fab. This focus is fast becoming the thread that ties together our strategic growth objectives, and we are pleased that we are beginning to see the results of our efforts reflected in our strong financial performance. Thank you again for joining today's call, and now here's Doug.

Thanks, Jim. Good afternoon, everyone, and thank you for joining us today. I hope everyone has continued to remain safe and healthy. We're extremely pleased with our operational and financial execution in the September quarter. We delivered record performance in multiple areas, including total revenue, which came in at $3.18 billion. And as Tim mentioned, as part of that revenue, we achieved over a billion dollars of revenue in our customer support business group. These results are clear evidence of our ability to grow the company and meet the needs of our customers while further improving our business resiliency. Our September revenues increased 14% from the June quarter, driven by customers' technology investments to meet long-term growth opportunities. These opportunities range across multiple vectors such as data centers, 5G networks, smartphones, gaming consoles, and personal computers. In the September quarter, we also had a record level of earnings per share coming in at $5.67, the results of our solid revenue and gross margin performance. Let me now move on to provide some color on our systems revenue. There were continued strong investments in the foundry segment, and we had the highest system revenue dollars for foundry in our company's history. Our customers invested broadly with spending targeted at 14, 7, and 5 nanometers. Foundry represented 36% of our systems revenue for the September quarter. The memory segment was also strong in the September quarter, coming in at 58% of systems revenue. NAND represented 39% of our system quarter revenue, with investments spanning 64, 96, and 128 layer devices. We saw increases in DRAM spending, which contributed 19% of our systems revenue, which was up from 16% in the June quarter. Customer investments focused primarily on no transitions to 1Y and 1Z. We continue to see memory bit supply growth in the near term below long-term demand growth, supporting our belief that the memory market remains in a healthy place from an inventory management as well as investment standpoint. And finally, the logic and other segment was down quarter to quarter and contributed the remaining 6% of systems revenue in the September quarter compared to 10% in June. For regional revenue concentration, as we discussed last quarter, we see solid levels of investment in the China region, which came in at 37% of total revenues in the September quarter. The majority of that revenue, again, came from domestic Chinese customers in the quarter. We have a broad base of customers in the China region, and despite the trade regulations that have impacted us with certain customers, We see continued strength in this region for our business from both domestic and multinational customers. We achieved another record quarter of revenue for our customer support business group at just over $1 billion, as I previously mentioned. This was an 11% increase from the June quarter level and over 28% higher versus the same quarter in 2019. In addition to the strength of our advanced service offerings, We're optimizing the capabilities of our installed base through technology and productivity upgrades. We also continue to see strong demand in the refurbished tool business driven by growth in various applications within the specialty technology markets. You should think about things like IOT, RF, and power devices. We're on track to deliver the growth objective of over 40% cumulative revenue growth between 2019 in 2023 for CSBG that we outlined at our investor day earlier this year. Our gross margin for the September quarter was 47.5% at the high end of our guidance range. Customer and product mix are always factors impacting our gross margin. We also experienced favorable impacts in the quarter related to increased factory and field utilization. We made more progress on our production efficiencies as we operate with COVID-19 related safety protocols. We are experiencing higher costs in the global freight and logistics area and expect these elevated costs will continue until broader air freight availability becomes available. September quarter operating expenses were $523 million. Over two-thirds of our spending remains focused on R&D, as we continue to make progress in our growth initiatives for market share and technology disruptions to expand our shared available markets. Incentive compensation was higher as well during the quarter related to our higher profitability levels. We are maintaining travel and other expenses at lower levels as we continue to work remotely in many locations. Our operating margin in the September quarter came in over the guidance range at 31.1%, with operating income of $988 million. Our non-GAAP tax rate for the quarter was 10.9%. We will have fluctuations in our tax rate from quarter to quarter, and you should continue to expect the ongoing tax rate to be in the low PIMS level. As we've noted before, we expect other income and expense will vary quarter to quarter based on several market-related items. Think about things like foreign exchange and the level of interest rates. Other income and expense was approximately $51 million in expense, which was higher than in the June quarter. The increase was driven by lower interest income on our cash and investment balances, as well as the impact of a full quarter of interest expense associated with the $2 billion debt offering that we completed at the end of April. Let me now shift gears and move on to capital return. We continue to drive strong cash flow and remain committed to the targets we lay out at our investor day earlier this year to have our capital return at 75 to 100% of free cash flow. We were active in our buyback activity during the September quarter and repurchased approximately $450 million of stock. In addition, we paid $167 million in dividends in the quarter. I would also like to highlight that we announced in August a dividend increase from $1.15 to $1.30 per share each quarter, which was paid in October. Deliverance per share came in at $5.67, above the guidance range we provided for the September quarter. Our delivered share count was essentially flat for the September quarter at 147 million shares, as we expected. The share count includes the dilutive impact of approximately 900,000 shares from the 2041 convertible notes. The dilution schedule for the remaining 2041 convertible notes is available on our investor relations website for your reference. Let me now move on to the balance sheet. Cash and short-term investments, including restricted cash, decreased slightly in the September quarter to $6.9 billion from $7 billion in the June quarter. Cash flows from operations came in at $643 million, which is solid performance in an environment where we continue to deploy cash towards working capital to support increased business volumes. CSO decreased slightly in the September quarter to 66 days from 68 days in the June quarter. Inventory returns were also slightly down from the prior quarter, coming in at 3.1 times. Inventory balances are somewhat higher as we are growing inventory to support higher business levels, as well as to mitigate risk from potential supply chain disruptions. Non-cash expenses were approximately $56 million for equity compensation, $56 million for depreciation, and $17 million for amortization. Capital expenditures in the September quarter increased from June to a total of $63 million. We are slightly ramping up capital spending to support things like the Sentai platform development, our new Malaysia factory, and the technology lab that we announced in Korea. Ending headcount for the September quarter was approximately 11,700 regular full-time employees. We added resources to support the higher levels of customer activity in the factory and in the field. Additionally, we're supporting new activities in research and development areas like Sensei, Enhanced ALB, and Dry Resist. Looking ahead, I'd now like to provide our non-GAAP guidance for the December 2020 quarter. We're expecting revenue of $3,300,000,000 plus or minus $200,000,000. Gross margin of 46% plus or minus one percentage point. First margin is a bit lower as we see a less favorable mix, as well as ongoing COVID-related expenses. Operating margins of 29.5% plus or minus one percentage point. And finally, earnings per share of $5.60 plus or minus 40 cents based on a share count of approximately 146 million shares. Now, in an effort to address a question I know everyone has concerning our business with a large Chinese foundry, I'll just give you a direct update relative to the guidance. As Tim mentioned, we are fully complying with all regulations and have applied for licenses to allow us to ship tools and parts to them. The status of the license approval is uncertain. The revenue and earnings guidance I just provided is lower than it otherwise would have been as a result of this uncertainty. With the results we've delivered and the guidance we've provided for the December quarter, the 2020 calendar year is expected to be the strongest ever in the 40-year history of land research. We're well positioned to gain from the continued strength and investments across all segments of the semiconductor industry. That concludes my prepared remarks. Operator, Tim and I would now like to open up the call for questions.

Thank you very much. If you would like to ask a question on today's call, please press star 1 on your telephone keypad. If you're listening today using a speakerphone, please pick up your handset before pressing the corresponding digits. If you do find that your question has already been addressed, you may press star 2 to remove yourself from the queue. Once again, that is star 1 to join the question queue. We'll go ahead and take our first question from CJ News with Evercore. Please go ahead.

Yeah, good afternoon. Thank you for taking the question. I guess first question, on the NAND side, I think there's a notion that perhaps we might be nearing a peak on spending. So we'd love to hear your thoughts on, you know, A, how do you think about your revenue opportunity on just node migration versus new wafer starts? And then, B, can you kind of walk through the revenue opportunity, which sounds like it's increasing as we migrate from the 9X layer node to 128 layers and above?

Sure, let me start, CJ. Yeah, I think that you probably called out the most important point right there at the end. What we have continuously said is that because of the role that etch and deposition play in building devices, our opportunity is growing quite significantly at each of those node migrations. And so from our revenue perspective, you know, we clearly see that revenue continues to grow in 3D and into the future. You know, from a spending perspective, obviously, Anytime we continue to see higher and higher numbers, people start to think about a peak. But again, if you looked at and thought about what I said about supply growth, we still see ourselves exiting this year with supply growth remaining below the long-term trend line. And also, if you go back and reference the data point we've given a couple times at the NAND Flash Memory Summit, about five-year spending requirements to meet what we see as long-term demand growth in the high 30% range. That is... we're kind of nearing those spend levels right now after a couple years previously of underspending that. And so I think that, you know, we're still quite confident about how we enter 2021 from a NAM spending perspective. That's very helpful.

As my follow-up, on the CSBG side, you saw great acceleration on a year-over-year basis, I think, you know, up 29%.

So I'm curious, is that a function of higher utilization rates of customers? Is there kind of one-time upgrades in there? Or is that tools coming off warranty? And as part of that, how should we kind of think about the growth trajectory of that business for all of fiscal 21? Thank you. Sure. Well, maybe the last part first, which is, as Doug pointed out, probably the best way to think about is future growth is still Same as what we said in March, which is 40% growth out to 2023. But we did see an acceleration, and I think what you're seeing is, in some ways, the power of that business, which is made up of several different components. You pointed out some of them. A sensitivity to utilization, which is primarily in the spares business. And then also, as customers look to get more out of their existing installed base. I mean, a lot of my script... talking about how customers are looking for ways to enable these transitions and enable high volume manufacturing ramps, but we are sensitive to how much it costs to do that. And so customers continue to look for technology and productivity upgrades to make that install base as valuable to them as possible. So we have seen upgrades increase in terms of that. And then I also mentioned spending on refurbishment and other systems as well. And so It's a multifaceted business, and I think that right now we're hitting all of the angles that are very important to our customers.

Thanks, AJ.

And we'll go ahead and take our next question from Harlan Sir with J.T. Morgan. Please go ahead.

Good afternoon. Good job on the quarterly execution and strong results. Yeah, it's been two years of sort of weak, flattish D-RAM spending, but As the demand profile looks strong next year and you have the early move to one alpha node, 2021 is looking like a growth year for DRAM spending. And on top of that, memory architecture has always been very 3D-like and similar to NAND, like aspect ratios are increasing, tighter tolerances on material thicknesses, and so on. So ahead of the strong DRAM year, how do you view your STEM and share expansion potential on some of these next generation one alpha DRAM architectures. Yeah, just to kind of reiterate comments we've made in the past, I mean, we, as you pointed out, every time you move forward in technology, whether it's 3D NAND, we just spent time talking about our here in DRAM, you know, the features are getting taller, the aspect ratios are getting more difficult, and that is requiring more etching deposition technology, and it tends to expand our SAM. What we've said is every technology node in DRAM, NAND, and Foundry Logic, our SAM grows as the technology moves forward. So your question about DRAM is no different. We do anticipate, and we said that we think we enter 2021 with a good setup for rising DRAM spending. As you pointed out, a couple years of flattish DRAM spending where we've kind of been undergrowing long-term demands. And so we combine increased spending with what we see as higher intensity due to these technology changes that require more etch-and-deposition equipment. We think it's a good setup for LAM going into 2021. Great. Thanks for that. And then, Doug, you know, obviously very strong gross margin performance by the company, and that's even still with the higher logistics and transport and freight-related costs due to COVID-19. Can you just give us an update here and maybe give us a sense on How big that impact is to your gross margins, either in the just reported September quarter or in the December quarter guide?

Yeah, Harlan, I haven't quantified it, but it's noticeable. Let me put it that way. I mean, freight logistics spending is quite expensive right now simply because there's just not enough air freight flying across the Pacific Ocean where a lot of our stuff comes and goes. But I haven't quantified it. Harlan, the right way, maybe just thinking back longer term to the financial model, but the right way to think about it is still the numbers that are embedded in there. Right now, when I think about the revenue levels we're at, we're trending a little bit below what might be in that model, and it's because of the COVID inefficiencies, in particular freight and logistics. I'm not going to quantify it for you to know, but that's how you should be thinking about it. Then we had a really positive mix in September. We don't have quite as positive mix in December. So that's the commentary around sequential gross margin. Yep, great insights. Thank you. Thanks, Harlan.

Go ahead and take our next question from John Pitzer with Credit Suisse. Please go ahead.

Yeah, good afternoon, guys. Congratulations on the strong results. Thanks for letting me ask the question. I guess, Tim, Doug, you know, you talked about SMIC in the December quarter. being a hit, but I was hoping you'd quantify that, and as you do, kind of help us understand how China might trend as a percent of revenue in the December quarter. It's been well above trend, and I know you've talked about broad-based strength, but do you see that kind of well above trend representation in the December quarter as well?

Yeah, John, I'm not going to quantify the large Chinese foundry impact to the guide. I think the numbers I've seen people suggest percent of revenue, WFE, in a longer-term basis, the right way to kind of think about where that particular customer might have been and could continue to be if we are all in the industry able to get licenses. In any given quarter, it can be up or down, as all customers are. So I'm not going to specifically quantify it in December, but I think you know roughly how big they are.

That's helpful. And I apologize for the follow-up, but you guys clearly understand the concern out there is, you know, how much of the China strength is related to customers there being worried about, you know, full bans going into China by the U.S. government. Tim, I'd like to get your kind of thoughts. In a worst-case scenario, if the U.S. were to ban equipment going into China, how much of the China CapEx and WFE today do you think would need to be reconstituted in other geographies to support demand? And how much of it do you think could be lost in just representative of kind of China building an anticipation of demand multiple years out as they, you know, pursue their domestic semiconductor strategy?

Well, I think it's a very difficult question to answer from the standpoint that, you know, in many ways what you just implied in the question was that Some of that may be building in China in anticipation of demand they see several years out. We think that demand, I mean, for all of the reasons that we talked about, whether it's – I mean, it's just the digitization of the global economy. That's occurring everywhere. And so we think that demand remains. And so to your point of how much of it gets reconstituted, how much of it gets satisfied, I think China demand, global demand, has to be satisfied by somebody. And so – I think ultimately a lot of it gets reconstituted and the only part that might not be is what we have acknowledged and I think most people recognize is as you're coming up the learning curve, there can be in the short term some overspending as you're learning and you're building yield and you're gaining efficiencies. But even in the long run, we've seen that play out over every region. What ends up happening is that turns in ultimately to business for our for our installed base business where we go back years later and we're making that installed base productive. And so, you know, this industry is so efficient that I don't think there's ever really anything that gets lost, quite honestly. And that's – but, I mean, there's a lot of – there were probably a lot of pieces to your question that require assumptions. But I think that, you know, it would cause some disruption, as you said, in the short term, but in the long term – demand drivers and the need to supply semiconductors and semiconductors equipment to meet them doesn't fundamentally change in our view.

Yeah, and maybe, John, I just had a couple of things the way I think about it. When I look at the revenue in China for us, it's split fairly evenly between the multinational customer base and the local Chinese customer base. So, you know, to help you frame it a little bit, that multinational stuff obviously was a decision to put in a country that could have gone anywhere, quite honestly. And then, as Tim alluded to, you know, a lot of the Chinese customers are relatively new in their process ramps, so maybe they're a little bit inefficient or somewhat inefficient. But at the end of the day, they're building capacity to support long-term demand that somebody else will step into over a period of time. So, anyway, hopefully that's helpful.

Very helpful.

Thanks, guys. Thanks, John.

And we'll go ahead and take our next question from Timothy Arkery with UBS. Please go ahead.

Thanks a lot. I have two. I guess the first one, Doug, is on service. And I guess the question is, how much of any inventory stocking of spares do you think is going on? I know you try to put controls around that, but it seems pretty clear how much service has, you know, taken on for the past six months that maybe that is actually happening. You've been pretty clear that you can't run the tool if you don't get the spare, so it wouldn't make any sense to pull the tool in. But we have heard that there is some communal stocking happening in China for parts and whatnot. So can you speak to how much of a factor that is? Do you actually see that happening?

Yeah, Tim, it's hard to know, to be perfectly honest. One thing I looked at in anticipation of this question coming up is from the beginning of the quarter to the end of the quarter, did any customer meaningfully increase their spares, orders with us in China? And the answer to that was no, not really. That doesn't mean that maybe they weren't planning to stock a little bit ahead. It would be pretty hard at times to know, but I don't see a big – stocking going on in China for spares is maybe the way I'd summarize. I don't know, Tim, if you think any differently about it.

No, I think that's fair. I mean, obviously, you know, just as you see even sometimes in our own numbers, as you're building for growth, I mean, there's no doubt the inventories themselves, you know, the number of parts that have to be stocked and maybe what we'd call the safety stock levels, I mean, those may rise. I mean, when you're in the early days of a manufacturing fab, you aren't as concerned about, like, the the time to get another part shipped in, but as you really start working towards efficient mass production, you know, you do that. So, you know, I think we have seen, you know, clearly we have seen that shipments have increased, but whether they're increasing more than the growth plans of those customers is a little bit more hard to say. And I'd say just across the board, there's a little bit of a, you know, Everybody's focused on business resilience. But, you know, as we talked about things that may be structural, I think for quite a long time, people are going to be looking at what do I have to do to ensure my business can run. And so I don't think those, you know, you see those immediately like turn on and off. Got it. And then, Doug, I guess a follow-up just on the balance sheet. You did start to repo back up, you know, $450 million is definitely stuck in my number, but you still have $7 billion in cash. And I think in the past you said maybe you need $4 billion. That's kind of the optimal cash. You definitely have a lot of excess cash.

So maybe can you update us there on your thoughts and, you know, what you're thinking with the excess cash? I think it seems a little hard to be able to do M&A and, you know, semis to get some reasons to improve that. So can you talk to the excess cash level folks?

Yeah, Tim, I specifically reiterated the 75% to 100% return to free cash flow as the company's plan's objective. I don't know. Think of it however. That's what we're planning to do. Now, over the last couple of years, we've done more than that. We've done more than 100, and your observation's right. We probably have a little more cash than we need sitting on the balance sheet right now. We'll be looking at that periodically over time, but I don't have anything new to tell you right now relative to any change in our plans or thinking.

Okay.

Thanks, Tim.

And we'll go ahead and take our next question from Chris Sankar with Talon & Company. Please go ahead.

Hi. Thank you for taking the question. First one for Tim. On the NAM side, you know, when your customers go from 96 to 128 layers, as you move organically, you know, the edge times went up, and it is a big positive for LAN. But going beyond 128 layers, if customers start stacking layers, is there a slight negative? All I'm trying to figure out is, is stacking neutral or negative for death and etching . I mean, the simple answer is, no, SAM still grows under every scheme to build more layers. it translates into different parts. Again, I've talked about this where you kind of pick your battle whether you're trying to build ever taller stacks in one shot or you're trying to build efficient stacking, but the simple answer is etching depth intensity rises in either case. Just perhaps differently between different applications. Thanks. And then a follow-up for Doug. Will you be willing to share how much of your service or CSBG revenue is from domestic China or overall China?

I don't know that I'm willing to share it, Krish, because up top I'm not sure I know what the number is. You know, the way to think about it, over time is consistent with equipment shipment with a lag. Right, and the way we've generally been talking about the business for us from a system standpoint in China is it's been pretty evenly split between multinational customers and local China. And over time, the CSBG business kind of would get caught up to a similar footprint, if you will. Maybe not immediately, but, of course, that's just an off-the-cuff reaction to the question.

Thanks, Doug. Thanks, Chris.

We'll go ahead and take our next question from Vivek Arya with Bank of America. Please go ahead.

Thank you for taking my question. I was hoping if you could give us some directional view on the China versus non-China and the foundry logic versus memory mix for the December quarter guidance.

You're asking, Vivek, about December specifically?

That's right. Just directionally, how do you see those mixed things trending in December?

Yeah, I think China's going to remain strong in December is how I view it right now as we sit here today. And I think the broad-based set of customers in China that I tried to describe will continue to be what it looks like.

And on the foundry logic versus memory mix?

Well, the large China foundry customer likely isn't going to get much from us, if anything, unless we get a license in December. So that will probably trend down a little bit in December.

And as my follow-up, I wanted to revisit this DRAM question. I understand, you know, DRAM sales are still below their peaks, but they are still back to the levels you had in the second half, 18th. How are you thinking about your DRAM growth over the next several quarters? What are the signs that you're looking for to say that, you know, now we are at a trough and now we can get back to some normalized trend?

I mean, Vivek, what we look at is we run our own models of bid supply growth and do our best to try to understand inventory that's out there, what the customers are holding, what the customers' customers are holding. what's going on with pricing, what's going on with profitability. And as we look at all of those things, our view is right now the investment levels that are occurring in DRAM are generating supply growth below long-term demand growth. And at some point, that will need to get itself caught up. And we think it's sometime in 2021. I think it sets up to be a pretty – Decent year for DRAM in 2021 is as much as I can tell you right now. I don't know, Tim, you want to add anything?

No, I think also just you referred back to like 2018, and I think that, again, for us, we look and there are across all semiconductor segments, I mean, significantly greater drivers and broadening of drivers that we're seeing today. And we pointed out a couple of those on previous calls, but just even the difference in DRAM content in the high-end smart phones, and the dramatic jump that takes, you know, from into the 5G phones. And then, of course, we talk about the build-out of data centers and everything else. There's a demand element to it. There's the supply element, and I think we just see it as a positive into 2021. Thank you.

Yeah, thanks, Luke.

And we'll go ahead and take our next question from Toshi Yahari with Goldman Sachs. Please go ahead.

Thanks for taking the question, and congrats on the strong results. I had two as well. First one, I guess, is very much a follow-up to the last question on Deere and the NAND supply group exiting the year. Doug, you just talked about, you know, your internal models, your intel, suggesting that – the supply growth exiting the year is below the long-term trend line as you see it. Is there any way you can give kind of quantitative color around that? For DRAM, are you looking at kind of 15% to 20%-ish supply growth exiting the year? And, man, is it kind of around 30% or below 30%? And I guess related to that, you talked about your expectations for DRAM into 2021 being positive. Any directional guidance you can give on the NAN side?

Those numbers you referenced probably are fairly consistent with what I think is the consensus view as well as our own models. I don't have anything incremental to add there. Your second question, sorry, ask it again.

Yeah, directional guidance on NAND into 2021, if any.

You know, my view, NAND is pretty decent right now, and I think it'll be pretty decent next year. Again, based on our view of the industry, inventory, investment plans, I think it'll be a pretty decent year for 21 next year. We're not going to give you numbers on 21 yet. We'll do that in next quarter's earnings, but I think it sets up pretty well.

Got it. And then a quick follow-up in terms of market share. You guys talked about four to eight percentage points of share growth, kind of your 2023 target. Your analysts say, if I take the midpoint of your December quarter guidance and make assumptions around your CSBG business, I think your systems business is going to be up close to 25-ish percent in calendar 20. So you're clearly gaining share there. What's sort of the outlook into next year based on, you know, wins that you have already, both on the memory side and logic and boundary side? Do you think you can sustain this level of shared growth momentum, or could that accelerate? Could that slow down a little bit? Any color would be great.

Thank you. Well, we're certainly going to try. And I think that, you know, in our business, you know, we've described this in many ways, you know – Every quarter we come in and we talk about wins and new applications, and I know it kind of starts to sound like we're a broken record there, but the reality is it takes a couple of years for those wins to start to translate into the numbers that you're starting to see now. And so if you go back and you kind of look at the old transcripts, you'll see us talking about pretty significant momentum that started really in the 2019 timeframe. and it's been building through 2020, and that's what you're going to start seeing, I think, play out as those wins at those future nodes start to roll in through high-volume manufacturing. Yeah, I'd make the same caution. You know, we're extremely happy with Sensai momentum right now as it's winning sort of those slots and sockets in future nodes, but I know the time for those to then become the main driver of revenue and market share growth won't be until those nodes that are in development now and moving into pilot become high-volume nodes. So I would say that we look back two years to our progress, and that's kind of what we're starting to see, and we look at wins we're making now, and that's our pipeline to hit the 2023-2024 objectives. And I think we, as I said, we feel we're on track and almost couldn't feel better about the strength of the product portfolio and the pipeline right now.

Great, thank you. Yeah, thanks for sharing.

And we'll go ahead and take our next question from Joe Moore with Morgan Stanley. Please go ahead.

Great, thank you. I wonder if we could get some additional color on the restrictions in China. You know, when exactly did they kind of go into place? And just so I understand from my application, if it happens again, What happens to product that's being installed on site to product that's shipped on the way there, that stuff that's in backlog, are you still able to ship against that?

Maybe I'll make a couple of comments, and then, Tim, you can add on. Sure. I mean, the incremental item that came out was really an application of a rule that was previously out there around military end use requirements. that basically said, you know, you're enabling that. One of our customers is, you need a license. And so what ended up happening is, I guess, guidance, if you will, from the Department of Commerce that you need the license to ship to at least one customer, the foundry customer in China. I mean, that's really the only thing that was new, Joe. And so we're applying for licenses is basically what's going on. I don't know how long it's going to take to find out whether those licenses will be granted or won't. We're kind of in sort of uncharted territory, and, you know, we're waiting to see how it plays out. So timing, I don't know that I can help you much with.

Okay. And then in terms of the backlog and anything that might be assembled on site?

Yeah. Generally speaking, when these rules come out, you get a little bit of a lead time so you can adjust whatever is, like, in the very near term going on. But it's hard to know, quite honestly. So at this point, we are complying with all regulations that are out there relative to this one customer, which means we're, you know, we're derating the shipment plan for the December quarter, basically, is what's going on until we know more. Great. Thank you very much. Thanks, Joe.

And we'll go ahead and take our next question from Blaine Curtis with Barclays Capital. Please go ahead.

Hey, thanks for taking my question. I was just going to love a little more color on just the trailing edge strength, how much of a contributor that was. Obviously, we've heard about tightness and clearly seeing a rebound, but a lot of the markets are kind of still down a bit. I noticed your perspective is a different mix, particularly in markets with higher content. And, you know, kind of just perspective, is this just a little bit of a catch-up or is it some more sustainable trend?

No, I think this, I mean, at least from our view, I mean, I mentioned it was another record quarter for our business group that satisfies that demand. You know, we've just seen tightness in this market and kind of a broadening of those activities quarter by quarter by quarter. So, And if you go back and look, we've recorded record quarters now for quite a number. So I think it's just tightness. It's difficult. In fact, we just had a – very strangely, but a new product release where we talked about, you know, releasing a product now for 200-millimeter photos to strip. And, you know, so I think you can kind of get a sense from that when we're going back and basically refreshing 200-millimeter products that the demand is out there and it cannot be solved or served just by – refurbishment of the existing base. It's the requirement that's actually standing beyond that.

Yeah, Blaine, I mean, I know you know this market really well. I kind of think of the analog-y IoT edge kind of devices that are out there. You know what's going on there. I mean, that's really what's going on with this part of our business as well. Back at our investor day in March, we suggested that we think WFE in this space could grow two to three times faster than WFE broadly, and that's what's going on. Gotcha.

And then maybe as a follow-up, you mentioned that WFP would grow next year. You're not giving the specific guidance. You mentioned memory, but I didn't hear you say boundary. So I guess I'm just curious, you know, obviously you don't know what's going to go on with SMIC and licenses in China in general, but just kind of curious with the strength, the trailing edge, is boundary going to be up next year as well, kind of the exogenous factors there?

Yeah, Blaine, our normal practice at this point in the year is not to give specific numeric, here's what next year looks like. We'll do that a quarter from now. We're giving you a little bit of color that we think it's going to be a good year next year, but it's too soon for us to quantify it. Our practice is to wait until the December quarter earnings to give you that, and we will give it to you then. Thank you. Thanks, Blaine.

And we'll go ahead and take our next question from Atis Malik from Citi. Please go ahead.

Hi, thanks for taking my question. Doug, you have talked about a 10 billion domestic China WFP number in the past. Is that still the right number within the mid-50s WFP for the market?

Yeah, our view is still mid-high 50s from a WFP standpoint and China roughly 10 plus or minus a little bit. You know, we're three quarters of the way through the year, so if the one customer that everybody is thinking about right now isn't able to spend in the fourth quarter, we're still in that range.

Okay. As a follow-up, has the backlog normalized due to COVID-19 impact in the March quarter and now fully reflected in your Q4 revenue guide, or do you still have some carryover?

We're pretty much caught up at this point. Thank you. Yep, thank you.

And we'll go ahead and take our next question from Sidney Ho with Deutsche Bank. Please go ahead.

Thanks for taking my question. My first question is, going back to China, given the strengths you've seen last quarter, are there any risks of customers pulling in purchases? I think you addressed the spare part side earlier, but the question is not just from the one-family customer. but also maybe other customers on the memory side as well.

Well, I guess you addressed it. Is there a risk? Do you mean the backward-looking risk in the September, the risk that pull-ins occurred? I think Doug kind of answered that, which is we really haven't seen or felt, you know, anything that feels out of the ordinary relative to the growth plan for these customers. Going forward... You know, I think, again, in many ways you see us guiding to yet another record for the company, and I don't think that we'll be – I don't think that any of that right now factors in what we would, again, think is abnormal pulling activity.

Okay. I think you guys were talking about spare parts earlier, but I guess the new system itself. Sorry. I mean, no.

I think the question maybe was about spare parts, but it's really more of – I think it's a broader statement.

Yeah, I agree.

Okay. Okay. Maybe my follow-up question is on Intel. I think last quarter you guys pretty much said there's no impact. It doesn't matter who makes the chips. But on the memory side, now that Intel sold the main business to Hynix, given they have very different architecture, do you think there will be a net impact for you guys going forward?

Well, hard to know. That's a pretty recent announcement, and it would be a little bit of speculation. I mean, Sidney, you know, long-term, the way I think about this is at the end of the day, demand is what matters, right? Our customers are putting wafer capacity in place to supply demand, and things can get pulled in, pushed out a little bit on the margin. But at the end of the day, when I think about where I think the industry heads, supply and demand have to be in relative equilibrium, right? over the medium or longer term. And whether that means you have five customers in NAND or three, it largely doesn't matter. They're going to invest to satisfy demand in my mind.

Yeah, and the question was, is it all targeted towards, like, strength? I mean, we basically have talked, I think, in the past, we're strong across all flavors of 3D NAND.

Okay, great. Thanks. Thanks, Sidney.

And we'll go ahead and take our next question from Joe Kutroshi with Wells Fargo. Please go ahead.

Yeah, thanks for taking the question. On the NANSA, I was curious, within your bid supply growth model or expectations, how do you think about the growth from node transitions or technology transitions in terms of if bid demand is closer to 30% next year versus kind of a long-term of high 30%, do you think the install base needs to grow to support that?

You know, any given year, Joe, when we look at it, there's always a blend of both. It's always in the best interest of the customer to do the node conversions first because it's a very cost-effective way to do it. And then generally, that means you lose wafer capacity and it needs to get topped up a little bit. In any one year, the mix is different one year to the next, but it's always a blend. Okay, that's helpful.

And then just I saw your comments in the prepared remarks around support engagements being remote. That was interesting, obviously, with COVID. So I was curious, how do you see that trending, you know, over the next few years?

Maybe what percentage of engagements are remote now? And maybe how do we think about the cost savings potential there?

Yeah, well, I guess what I would say is we featured the equipment intelligence solutions. You imagine if we're launching Sensai, designed around equipment intelligence, we started that activity long before COVID was ever even something we could imagine. So, you know, we feel very fortunate now that we're driving that aggressively. And, you know, it really is designed to do things like remove the need for people to be physically located at the tool in order to troubleshoot and repair the tools. And so we have seen, I mentioned a 6x increase in remote support engagements year over year. A lot of that is because you know, our engagement with customers is kind of like not many other choices at this point to bring the kind of expertise you need to the tool. And I think that what, just as we're seeing with work from home and other things, a lot of that will remain structural. It does save money for the customers by allowing us to repair the tools and get them back into production more quickly. And it saves money for LAM because we don't have to deploy as many people flying all over the world trying to service these tools. So, I think a lot of that, I hope, and I believe will be structural and long lasting.

And we'll go ahead.

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

Perfect. We'll go ahead and take our last question from Weston Twigg with KeyBank Capital Markets. Please go ahead.

Hey, thanks for squeezing me in. Two questions. First, advanced packaging, you talked about it in the opening remarks.

Can you help quantify what that is as a percent of systems revenue or how relevant it is to the overall top line?

You know, Wes, right now it's small, but with nice growth trajectory, and we're excited about what the future looks like. It's not huge right now, but when you listen to the industry and our customers talk about it over time, it's clearly part of their roadmap to drive Moore's Law forward. So we're excited about it. It's not huge now. We hope it will be over time.

I think, though, it also is – you've been around a long time, so you recognize the Sabre nameplate, and the point there is, In many cases, these are, I mentioned, this is about leveraging a lot of the expertise we've already built for other applications into new areas where we can gain high share. And it doesn't require, in those cases, for those markets to be quite so big to have, you know, start to have an impact. So Sabre 3D, very, very strong position, very long track record, a lot of that R&D already kind of being done for larger markets. Cindy and same thing in terms of very high, very strong market position. And then, as Doug pointed out, what we're really trying to say is we have those positions and we actually see the market coming to us as more of these integration schemes continue to go 3D. So we highlighted it just as it's one other example of 3D helping drive incremental growth for the company. I see. Okay, that makes a lot of sense. And then the other question I had was just, The U.S., it was remarkably low in terms of revenue contribution last quarter.

I was wondering if you could offer any commentary on that, if that's a trend that you see here. It's just an abnormally low quarter.

There's not a lot of fabs in the U.S. taking equipment. I mean, that's what's going on. This is a shift-key statement, and most of our customers' fabs are outside the United States, Wes. Do you know that?

Yeah, I do.

I guess it had dropped a lot quarter over quarter as well, so it seems like investment is declining, and I don't know if that's a sustainable trend. It could be, but that's the commentary I was looking for.

No, it's just, you know how this works. Equipment can be lumpy to any one FAB. It'll come one quarter, and then it needs to ramp, and it's lumpiness, but you know the FABs are in the U.S., and that's what's going on. It's just timing. Understood. Thank you, and Thanks, Wes.

And that does conclude today's question and answer session. I'd like to turn the call back over to today's speakers for any additional or closing remarks.

No more closing remarks. Thank you, everyone, for joining today. We appreciate it.

Once again, that does conclude today's conference. We do appreciate your participation. You may now disconnect your phone lines.