Lam Research Corporation

Please stand by. Today, welcome to the Lamb Research's December Quarter Financial Conference Call. At this time, I'd 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 Lamb 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 we'll review our financial results for the December 2020 quarter and our outlook for the March 2021 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. And with that, I'll hand the call over to Tim.

Thanks, Tina, and good afternoon, everyone. 2020 was a remarkable year for Lamb Research. Our global teams rose to meet the unprecedented challenges of the COVID-19 pandemic and delivered the best year in our history. Total revenue of $11.9 billion and earnings per share of $20.45 were both record highs for the company, driven by served available market, market share, and customer support business growth. Through the year, we also launched new products and announced breakthrough technology solutions that we believe lay the foundation for our continued success. Before going into details, I want to express my sincere thanks to our teams for their incredible execution in an extraordinarily difficult environment, and to our customers and suppliers for their partnership and support as we all adapted to the unforeseen events of 2020. We enter the new year with hope that the world will soon emerge from the COVID-19 health crisis and move towards a global recovery. From our view, WFE spending in 2020 ended in the high $50 billion range. This is about what we estimated at our investor day in March, just before the extent of COVID-19's impact was known. We saw spending growth across all segments of the market, led by a recovery in NAND, continued expansion in Foundry Logic, and a slight pickup in DRAM. China domestic spending for the year was in the $10 billion plus range. As we look to 2021, we see strong momentum across all parts of our business. Our early view is for substantial WFE growth to the high 60s to $70 billion range, supported by the ongoing migration to higher layer counts in NAND, a strong spending environment in DRAM, and increased investment in foundry logic, as indicated by recent customer commentary. Currently, we are seeing spending bias somewhat towards the first half of 2021. While today's absolute levels of WFE are significantly higher than a few years ago, we believe the rapid digitization of the global economy, combined with rising capital intensity due to greater process complexity, supports robust multi-year WFE spending. In fact, if there's a common theme that underpins our outlook for the next several years, it is that sustainable growth throughout the semiconductor value chain will be driven by the proliferation of artificial intelligence, high-performance computing, IoT, 5G, and the incredible societal advances in user experiences these technologies enable. We expect strong demand from a diverse set of end-use markets to positively impact semiconductor and semiconductor equipment growth in 2021 and beyond. Take, for example, the $200 billion global online gaming market. Nearly 3 billion people worldwide actively play video games across a variety of platforms, generating over the last five years more than a 50% tager in data growth. as users embrace realistic experiences enabled by more powerful processors, faster memory, and higher graphics resolution. If you just look at a sub-segment of the broader gaming market, namely gaming consoles, the number of these units shipped annually is much smaller than the number of smartphones sold. However, when you consider that a GPU for a gaming console is approximately four times the size of a smartphone application processor, This is an important driver of incremental WFE. From a memory and storage perspective, newer consoles utilize approximately twice the DRAM bits and employ SSD-based storage versus HDD in prior generations. Add rising capital intensity trends on top of this semiconductor content growth, and the impact on WFE increases further. We estimate that a 5% upside in the game console market has the potential to drive about $500 million of incremental WFE. And this is just one end-use market example. If we similarly look at the impact of a 5G phone market, we see that 5% incremental demand in 5G units has the potential to drive close to a billion dollars in incremental WFE. It is demand drivers such as these that have strengthened our conviction around the sustainability of WFE spending over a multi-year period. It is against this positive backdrop that LAM remains focused on executing to our long-term objectives for SAM expansion, market share gains, and install-based business growth we described at our Investor Day last March. In NAND, we continue to extend our strong leadership position. We estimate that our tools have now cumulatively processed approximately 37 million more wafers than our nearest competition through the three most critical 3D NAND applications. Since we first provided this metric at our investor day less than one year ago, we have widened the wafers process experience gap by more than 40%. The accelerated learning that comes from our installed base of 3D NAND systems puts LAM in the best position to deliver the solutions needed to meet our customers next-generation manufacturing challenges. It also allows us to gain early insight into new opportunities being created by technology inflections. For example, in 2020, we announced our new Stryker FE atomic layer deposition system, which employs a unique ice fill capability for high aspect ratio dielectric gap fill. This tool addresses a new technology need for 3D NAND devices scaling to 128 layers or more. and production ramp of Striker FE is underway at multiple customers. 2020 also saw the launch of Sensei, our next generation edge platform. And today we announced our new Vantex high aspect ratio dielectric edge module on Sensei. Vantex features advanced RF technology and new uniformity enhancements to enable next generation device roadmaps. Vantex and Sensei together collect more data per wafer than ever before, enabling advanced equipment intelligence and to deliver new levels of productivity and process control. The timing of our VANTEX launch intercepts DRAM and NAND roadmaps facing increasingly complex node-to-node scaling challenges. As a result, VANTEX is already in qualification with both DRAM and NAND customers, and repeat orders have been received to ramp this system into high volume production in 2021. For CountryLogic, we continue to target new technology inflections to expand our opportunity and position. Our TOGX conductor etch system has been engineered with an advanced RF pulsing capability to meet the unique requirements of extremely narrow high aspect ratio features. It also provides extendability to future devices featuring nanowire or nanosheet architectures. Leading edge Foundry Logic customers are increasingly adopting Keogx for their most critical front end of line applications at 5 nanometer and beyond, where the need for atomic level precision edge becomes more acute. Moreover, as devices scale, parasitic RC degrades transistor performance. As a result, we are seeing increasing customer pull for LAM's etch and deposition solutions designed to reduce RC effects, including atomic layer etch for self-aligned contacts, new functional films, and optimized metal solutions which reduce via and line resistance by simplifying middle-of-line and back-end-of-line process flows. In DRAM, we are seeing incremental share and SAM growth also coming from growing complexity of node transitions. We assess that we have greater than 50% etch market share in DRAM, and due to the importance of high-quality hard masks and mask-open etches with EUV, we expect additional patterning share gains in etch and deposition as EUV passes increase at future nodes. Adoption of EUV in foundry logic and DRAM is also creating a significant SAM expansion opportunity for LAM's dry photoresist solutions. Using this new technology, we believe we can accelerate our growth in both Foundry Logic and DRAM by disrupting the existing wet photoresist equipment market. Our solution is gaining significant traction with leading customers as they look to improve the cost metrics of EUV patterning. Changes of this magnitude do take time to realize, but with tools now being installed and wafers being run for top DRAM and Foundry Logic customers, We are pleased with our progress readying this innovative technology for production. And finally, 2020 was another outstanding year for our customer support business group. Our installed base has now reached nearly 66,000 chambers, and CSBG revenue growth exceeded chamber growth by a factor of more than 2x for the 2020 calendar year. We generated record revenues for all subsegments within CSBG, Growth in our Reliant business was driven by automotive, 5G, and consumer electronics, and we expect these areas to continue to outpace overall market growth in coming years. Meanwhile, we delivered on the expectations we set on our last earnings call for calendar year growth of 25% in productivity-focused services and 6X growth in remote support engagements. We are excited about the trajectory and broad strength of this business and especially its proven ability to deliver world-class support of complex technologies in high-volume manufacturing. To wrap up, Lamb marked its 40th anniversary in 2020 with record financial performance, a strong slate of innovative new products and services, and solid execution on our strategy to expand leadership across markets. As our March quarter guidance suggests, We are optimistic about the opportunities that lie ahead for LAM and believe we are in an excellent position to win. Thanks again, and now here's Doug.

Excellent. Thank you, Tim. Good afternoon, and thank you all for joining us today on what I know is a very busy earnings time. I hope you and your families have been safe and healthy since we last spoke with you. I'm really quite pleased to be reporting these outstanding results. who came in at the high end or exceeded the range for all guided metrics in the December quarter. Despite the challenges we faced during 2020 related to the global pandemic, LAM delivered record financial performance in revenue, operating income dollars, and earnings per share. Our December quarter revenue came in at $3.46 billion at the high end of our guidance range and represented an increase of 9% from the September quarter. The strength in our performance was driven by investments in all device segments as our customers ramped to meet the demands from a diverse set of end markets such as data centers, smartphones, PCs, gaming consoles, IOT, and automotive. Overall, our revenue increase was not only driven by the way-for-path equipment needs of the industry, but also by the continuous growth of our installed base. We continue to add value to our customers by delivering spare parts, equipment upgrades, refurbished tools, and advanced service offerings. Looking at the details of our systems revenue, the memory segment was strong in the December quarter, coming in at 68% of systems revenue. This strength was driven by the NAND segment, which represented 51% of our systems revenue versus 39% in the prior quarter. December was a record revenue level of NAND quarterly revenue dollars for the company. We have clear leadership positions in the NAND segment, with customers investing in equipment for 64, 96, and 128 layer devices. DRAM investments contributed 17% of our system's revenue. DRAM spending was spread over the 1Y one Z, and one alpha nodes. The revenue percentage was down slightly from the 19% in the September quarter. We expect continuing healthy investments in the combined memory market as we see prudent inventory and profitability management. On the foundry segment side, spending remains robust. We concluded 2020 with a record level of revenue dollars in this segment. The majority of the investments in the December quarter were concentrated at the leading edge 7 and 5 nanometer nodes. Foundry represented 26% of our systems revenue for the quarter versus 36% in the September quarter. Rounding out the systems revenue picture, Logic and Other contributed the remaining 6% of systems revenue in the December quarter, which was flat at the prior quarter level. From a regional revenue perspective, we continue to see solid levels of investment in the China region, coming in at 35% of total revenues. Different from the last several quarters, the majority of the China spending this quarter came from our global multinational customers investing in their China-located fabs. As Tim noted, we achieved another record quarter of revenue for our customer support business group, coming in at $1.1 billion. which is an increase of 12% from the September quarter and over 35% higher than the same quarter in 2019. The growth we've seen in each of the sub-segments of this business is a testament to the value we're providing to our customers for technology and productivity enhancements. We remain very comfortable with our commitment to deliver greater than 40% cumulative CSBG revenue growth between 2019 and 2023, as we outlined at our investor day in March of last year. The December quarter gross margin was 46.6%, generally in line with our expectations. As I've noted in the past, gross margin can fluctuate quarter to quarter due to overall business levels, along with customer and product mix. In the quarter, our factory utilization levels improved with the increased business volume. I would mention we do have continued headwinds to gross margin related to elevated costs for air freight that will impact us until freight planes get back to more normalized levels. Operating expenses for December came in at $563 million, which is an increase from the prior quarter, largely as a result of increased incentive compensation expense that was tied to our higher profitability levels. During calendar year 2020, we spent over $1.3 billion in research and development, which represents approximately two-thirds of our operating expenses. The R&D focus is a fundamental part of offering differentiated products and capabilities like Sensei and Vantex, Enhanced ALD, and Dry Resist that deliver on our long-term growth objectives. We had over a billion dollars in operating income in the December quarter, for the first time in company history, with operating margin at the high end of the guidance range coming in at 30.3%. This was due to our strong revenue and gross margin. Our non-GAAP tax rate for the quarter was 11.5%. As we've discussed in the past, we will have fluctuations in the tax rate from quarter to quarter, and you should continue to expect the ongoing tax rate to be in the low teens level for the 2021 calendar year. I would mention we are monitoring potential tax changes that may arise from the new administration in the United States. Other income and expense was approximately $53 million in expense, fairly flat with the prior quarter. I would like to remind you that beginning in the March 2020 quarter, the benefits and costs of our employee deferred compensation plan are no longer mismatched in our non-GAAP results. They are mismatched in the GAAP results. This mismatch was $24 million in the December quarter. You can see this in the gap reconciliation table of our earnings release. The fluctuations were higher this quarter due to the volatility in the market. Let me now turn to our capital return activity. For the December quarter, we paid $188 million in dividends and allocated $703 million towards share repurchase. During the quarter, our board approved an additional $5 billion share repurchase authorization. For calendar year 2020, we repurchased 3.8 million shares deploying $1.4 billion at an average repurchase price of approximately $360 per share. We also paid out dividends totaling approximately $686 million during the year. In total, our capital return activities represented close to 100% of our free cash flow. I'd also mention that since we increased the level of our capital return back in 2017, we've paid out $2.1 billion in dividends and deployed $9.3 billion towards buybacks, repurchasing 47.3 million shares at an average price of $198 per share. Diluted earnings per share came in at $6.03, a little above the guidance range, and more importantly, at an all-time high for the company. Our diluted share balance was down slightly from the September quarter, coming in at 146 million shares, pretty much as we forecast. The share count includes the dilutive impact of approximately 800,000 shares from the 2041 convertible notes. Let's now look at the balance sheet. Cash from short-term investments, including restricted cash, decreased to $6.3 billion from $6.9 billion in the prior quarter, largely due to the capital return activities that I discussed previously. Day sales outstanding increased to 76 days in the December quarter from 66 days in September. The increase is largely due to revenue linearity and the timing of collections that fell in the March fiscal quarter. I just mentioned that we collected $136 million on the first day of the March 2021 quarter and over $570 million during the first week. Inventory turns were slightly up from the prior quarter level coming in at 3.2 times. Cash flows from operations came in at $345 million, which is somewhat depressed as a result of the growth in accounts receivable and inventory. We've grown inventory to support the higher expected March business volumes and to mitigate supply chain risks from any potential disruption from the COVID-19 environment. Non-cash expenses included approximately $52 million for equity compensation, $59 million for depreciation, and $17 million for amortization. Capital expenditures for the December quarter increased from September to a total of $92 million. We are investing to support the expanding operations at our new Malaysia factory, a manufacturing facility in Ohio that's focused on critical spare parts, and the recently announced Korea Technology Center. We expect to see somewhat higher levels of capital expenditures in 2021 as we support these critical initiatives. And the headcount for the December quarter was approximately $12,000. 200 regular full-time employees. Resources have been added to support the increased business volume in our factories, to service our customers in the field, and to further enhance our R&D capabilities. Now looking ahead, I'd like to provide our non-GAAP guidance for the March 2021 quarter. We're expecting revenue of $3.7 billion, plus or minus $200 million. First margin of 46%, plus or minus one percentage point. Operating margins of 30.5%, plus or minus one percentage point. And finally, earnings per share of $6.55, plus or minus 40 cents, based on a share count of approximately 145 million shares. Tim's already given you our outlook for 2021 WFE. I just reiterate, we do think it will be a somewhat first-half weighted spend. although things could change as the year unfolds. You should take that into account as you build your models for the year. So in summary, we just concluded the best financial year in LAM research's history. Additionally, we provided guidance for March that represents another record level of financial performance. The company is executing well in a challenging environment. We're delivering on our near-term objectives while laying the framework for continued long-term execution. This is a testament to LAM's leadership team and our dedicated employees. 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're using a speakerphone, please make sure your mute function is turned off to allow us to not treat your equipment. Again, press star 1 to ask a question. We'll take our first question today from John Pitzer with Credit Suisse.

Good afternoon, Tim. Doug, thanks for letting me ask the questions, and congratulations on the great results. Tim, I just want to go back to your WFE target guide for this year of high 60s to 70. You know, if you harken back to the analyst day almost a year ago, your three- to four-year target out was sort of a range of 60 to 70, and so I'm curious. You know, how should we think about, you know, how quickly we've gotten here? Do we worry about cyclical overheating? And in a similar vein, as you think about this year being perhaps a little bit more first half weighted, is that really a commentary on normal seasonality? You want to add capacity in the first half for demand in the second half? Or as you look at the bottoms up, are you worried about any areas that are kind of perhaps cyclically heating up a little bit too much?

A lot of questions in there, John. But maybe there was a comment in my script even that said, in many cases, the outlook we gave at Investor Day, that was formulated before we really knew about COVID-19, before we saw all of these tremendous work-from-home drivers, a lot of things that just really kind of changed maybe the way semiconductors have and the role semiconductors have played kind of in the world in the last 12 months. And so, you know, we give our best view when we give it. And at that time, we thought a range of $60 to $70 billion seemed pretty reasonable, given what we thought about demand. Clearly, some segments of the market have been growing a lot faster, as we just mentioned, from those demand trends. You know, when we look at it, you know, there is an urgency to get tooling to meet demand. And that's not just our customers. That's also us as we look. Doug talked about investment in our Ohio facility to build critical spare parts as factories are running at very high levels of utilization. So we're investing. Our customers are investing. I think the outlook is difficult to say. We're telling you right now it looks like it's somewhat first-half weighted. But I also talked about long-term demand drivers that we think fundamentally continue to – become growth drivers for this industry in the long term. And, you know, we've just seen growth in, I gave you a couple of examples, 5G, gaming consoles. Everybody's read about the shortages in automotive image sensors. There's just such a role that semiconductors play today. I don't think there's any segment we would point to that we feel is overheating relative to the long-term trends we've talked about. Just one example, because I know we'll get the question at some point on NAND. We talked about the recovery in NAND. But if you look at the spending on NAND over the last three years and you average that out, it's actually very close to the average annual spending that we've outlined for a couple years at the Flash Memory Summit, which says that you need roughly $70 billion over a five-year period to hit a high 30s demand bid growth rate. And so we feel reasonably comfortable with the demand growth. profiles across all the segments right now. And, you know, there'll be changes quarter to quarter and such, but long-term, we think they're in line with the demand we're seeing.

Very helpful. Thank you.

Next, we'll hear from Chris Sankar with Cowden & Company.

Yeah, hi. Thanks for taking my question. Tim, just to follow up on the WSU commentary, Is there a way to quantify it? How much is it pumped up versus back up? And is there any upside to back up? Anything that's going to come from memory, domestic China, anything? And then I had a quick follow-up. Yeah. Well, we haven't quantified it, and I don't think we're going to do so right now. Doug's shaking his head no. Not going to right now. But, you know, I think that to your point, and Doug kind of mentioned it, it's like this is our view now. You can always deal with demand – and the urgency for the next couple quarters much stronger than the quarters further out. So I think your question is a good one, which is where might we see changes later in the year? I think you have to look at some of the demand drivers. And, again, there's a broadening of demand across, you know, it's not just driven by leading edge. In fact, we were looking at the amount of foundry spending, for instance, that's coming from 28 nanometer and above. It's at very high levels these days. You see that in strength that gets reported into our CSBG business, the Reliant business. I think you can continue to see strength there. It's how semiconductors are incorporated into everything. You know, the content in cars and such is just increasing at quite a rapid rate, and those tend to drive kind of that off-leading edge business at a very rapid pace. Where that gets manufactured, I mean, there is a fair bit of investment in China, for instance, that is at those those trailing edge nodes. And I think that's why we have seen strength in China and why we actually believe that China, especially at those trailing edge nodes, continues to be an area of strength as they satisfy a lot of that domestic demand for those kinds of applications like 5G and cars and other things. So, you know, I guess you could say there might be might be added strength in those broader demand drivers that could surprise us later in the year. Got it. That's super helpful, Tim. Just a quick follow-up. In your WTA assumption for this year, what are you modeling for domestic China? You told us $10 billion last year. I'm just kind of curious where you're shaking off for this year. Thank you. I don't think we're ready to give an exact number, but what we've said is it's $10 billion plus this year, and we expect growth this year. I don't know if Doug wants to add anything to that.

Probably in the same range, Chris, plus, minus a little bit is kind of how we're thinking about it.

Thanks, Doug. Thanks, Chris.

Next we'll hear from Timothy R. Curry with UBS.

Hi. I guess, Doug, I wanted to ask the prior question maybe a little bit differently. You said WFU this year. It's probably, you know, 58, sorry, not this year, last year. probably about 58.5. So your share grew about 100 basis points up to like 13.6%. So if I assume that the service business, you know, maybe you could help tell me if this is right, but it seems like service is going to be maybe 12.25 or 12.50 in March. So if you use that same share number, you get like an 18.5, 18.3, 18.5 billion worth of WFE in Q1. So that's almost $74 billion annualized. So So I sort of look at the full year number of, you know, you're guiding high 60s to 70s. So that would sort of imply that the back half of the year has to be, at least for the industry, has to be down pretty substantially off of where the first half of the year is or, you know, at least off of where Q1 is running. So I'm just kind of wondering if you can comment on that and sort of like double-click on that and then I have a follow-up. Thanks.

Yeah, Tim, I'm not going to unpeel the whole number set. We do – And I can't go through all the numbers as I sit here that you just spit out. I'm sure you're doing the right math or close. As we look into the year, it does look like a first half-weighted year. Things move around. Things change. I think probably NAND is first half-weighted. I think Foundry Logic probably a little bit also. And I think DRAM probably through the year is fairly steady. Things move around things change you know we always have pretty good visibility at this point into the first half and the second half is far enough away that it can move around so that that's why we kind of try to put some ranges you guys will do the math to kind of think it through and I don't know if I'm helping you here but that's generally what I'm seeing and how I'm thinking about it.

Okay cool Doug thanks and then I guess my second question is on man so It looks like CapEx is going to run above EBITDA this year for the industry. I mean, the industry probably does $19 billion in NAND. I don't know if you'd agree with that, $19 billion WFE this year. So that's pretty substantially above the $14 billion run rate that you get when you divide your $70 billion by five. So I guess when you take those two factors and you look at CapEx being above EBITDA, usually that's not all that sustainable. So I guess, you know, what's the tone of your customers? Does that concern you at all? I'm just sort of curious on that.

Thanks. Tim, when you look at this, it'll go up, it'll go down. Nothing goes up every quarter. It ebbs and it flows. And if you go back to 19, it was pretty low. You go through 20, it went up a little bit. 21, you know, flat to up a little bit, maybe, yeah, probably. Okay. and then it'll course correct based on whatever demand looks like. I mean, would we step back on the reason Tim and I both talked about these long-term demand drivers? Is that the important thing to think about over the next several years for the industry? It won't go up every quarter. It never does. You know that better than I do or as well as I do. In timing a FAB investment, when things come in, it'll go up, it'll go down. That is what always happens and is what will happen in 2021 most likely.

Yeah, and I think if I was just to add, Tim, I mean, it's, you know, the absolute spending in NAND in any given year is somewhat out of our control. But, I mean, what we do control is how we continue to expand share of every dollar of WFE spent. And that's why I talked about, you know, how we've leveraged the learning we're getting from being the company that runs the vast majority of the critical applications in NAND to identify new opportunities and new applications and grow into those so that the next node, our share of WFE goes higher. And I talked about Striker FE, the ALB tool for Gap Fill, brand new application for us, competes in a space where we didn't compete before. And as node transitions occur into the future, it means that our share of WFE increases. It's also important to remember that our share of every dollar of WFE spent on node transitions actually is the highest. And that's simply because of the role that etch and deposition play in those transitions. So if you end up in a year, let's say, and I'm not characterizing any given year in this way, but if you end up in a year where you do have lots of wafer starts, people become concerned that that might be a bit of overheating with new capacity. But actually, we look at it as adding to what we would consider to be kind of our 3D annuity. the 3D NAND annuity, which says install base is larger, which means that the next transition, LAM will get an even greater share of the spending that is required to move that entire 3D NAND install base forward to the next node. So, you know, as Doug said, any given year something happens. But in the long-term trend, we think LAM's opportunity continues to grow in 3D NAND. Totally. Thanks.

Thanks, Tim. Thanks, Tim. We'll now hear from BJ Muse with Evercore.

Yeah, hi. Thanks for taking the question. Question three on CSBG business. Is your commentary on the first half weighted year reflective for that business as well? And as part of that, you know, if I hold the business just flat at Q4 level, that business would run about 16% in calendar 21. So how should we think about the growth rate this year? And then I have a quick follow-up.

Yeah, CJ, my commentary on first half, second half was very much targeted at WFE, not necessarily installed base. Now, the installed base won't necessarily grow every single quarter. It will grow every single year, like we've been saying. We feel really good about where we're at, though. I mean, we're record after record, and Tim shared the chamber count with you. It's kind of like it's been over the last several years. So the tailwind there is really very good.

Yeah, and I guess I'd just add that yesterday we talked about the goal we had to expand the number of products and services available for the installed base as a way of increasing revenue per chamber, and I think you've seen our progress in that area in this past year, and we'd expect that to continue to increase going forward as we focus on equipment intelligence and remote services and a lot of database productivity enhancers. That's great. And as a quick follow-up, On your last call, you talked about how, given the abundance of manufacturing in Fremont, you couldn't ship to one large logic player in China. Curious if you've been able to get a license as part of that. Are you including the spend there in your 2021 domestic China outlook? Thank you.

So where we're at right now, CJ, is we're still in the application process for the license. Haven't heard back. You know, when we look at China, that's plus or minus how we describe flat to up. You know, there's a range around it. But at this point, we haven't heard back on the license we have applied, and we're waiting. Thanks, Doug. Yeah, thanks, CJ.

Next, we'll hear from Harlan Sir with J.P. Morgan.

Good afternoon and congratulations on the solid results in execution. For all of the leading edge growth trends that you highlighted in your prepared remarks, Tim, there's a corresponding significant attach rate of analog and mixed signal semiconductors to these applications. Additionally, some of your customers are moving to 12-inch analog manufacturing. And then we know that there's pretty significant tightness in boundary capacity for lagging edge 28 and 40 nanometer CMOS. Approximately, and obviously I think you mentioned this is driving some of the strengthening of business, approximately what percent of your overall business is lagging edge technology nodes, and do you see this expanding as the year unfolds? Yeah, we don't break out exactly what percentage of our business is in that segment, but I did say we do see that area continuing to grow. Again, and it's... That's what we would almost consider to be the strongest secular growing part of our market because it's being driven by almost every aspect of the economy in terms of the types of products that semiconductors are going into that are manufactured at those trailing edge nodes. I think it's something like, I could get it wrong, it's eight or nine quarters, I think, in a row that we've now had reported record revenues in that trailing edge space. So one, we feel like we know how to compete and address that market, and we think that it's going to be just one that just continues to grow, maybe not quarter over quarter over quarter, but records every quarter, but certainly year to year to year it will continue to be an area of strength for us.

And Harlan, I'll just remind you what we said back at the investor day in March and still believe that this segment of WFP will outgrow the rest of the market by, I don't know, two times, maybe three times, although the leading edge stuff has picked up since then, but it's still a very good growth area for us.

Yeah, no, thanks for the insights there. And then to kind of follow up on CJ's question, in calendar year 20, as you mentioned, services grew 22%. That's not only double your installed base, you know, growth trigger over the past few years, but it's doubled the trend line target of around 10% as it relates to your 2023, 2024 financial model. And if you just look at the continued complexity on these next generation leading edge tools, the strong demand for lagging edge nodes, it appears that the service business is going to continue to grow faster than this 10% growth target that you guys have put out there. Upgrades, advanced services, reliant refurbished tools, So would you broadly agree with that, or are there some offsets that we should be thinking about that could dampen the year-over-year services trajectory back to that kind of normalized kind of 10% to 12% level? Yeah, I don't think we're ready to up our long-term objective just yet, but I think you're pointing out some of the things that are doing quite well in that part of the business around advanced services, and we talked about a 6X increase in remote support engagements. You know, I think if we look, one, we put out that model, Investor Day. As I mentioned, as the COVID environment kind of evolved, you know, some of the advanced services, the database services, the pull for the idea of, like, less people-related maintenance, you know, using data and remote capabilities, clearly caught a lot more traction in the second half of the year. We need to see how much of that sticks as we kind of come out of this environment, but we believe that those things are, those capabilities are now kind of demonstrating their value, and a lot of that will stay. Those will be strong drivers. Another thing that happened in 2020 is, you know, there probably were some instances of spares being ordered a bit ahead of normal trend, as You know, everybody, including land, you see it in some of our inventory numbers, tried to hedge against disruptions due to COVID-19. And so you might see some moderation if you're looking for offsets in that space. So, you know, we feel, as Doug said, very comfortable about hitting the objective we put out at the investor day, but we're not ready to set a new growth target for that business until we see a little bit more of the trend this year. That's great. Thank you.

Thanks, Ronald.

We'll move on to Vivek Arya with Bank of America.

Thanks for taking my question. For the first one, I'm curious, what do you think is the right way to gauge the utilization of your NAND shipments last year? Is there some engagement with those customers on the CSBG side that gives you insight into what that install-based utilization is? Because I imagine the NAND number at least to us, was somewhat of an upside surprise, and I just wanted to understand what's driving that.

Well, I guess if I understand the question about, you're kind of asking how much the tools that we've shipped are being utilized in our customer staff, and that's not something I can really comment on. Obviously, through our engagements with customers, we have good insight into that, but it's not something we can really talk about. If I misunderstood the question, maybe...

Or maybe if, Tim, what do you think is the supply-demand balance for NAND right now among your customers?

Well, I think if you consider that we talked about further strength in the NAND market into 2021, I would say that there is a sense that more equipment is needed to bring on additional capabilities in NAND at this point in time, for sure.

And as a quick follow-up, Doug, I think you alluded to some cost headwinds from air freight. You know, some of your semiconductor peers, I think, have managed to kind of pass on increasing costs in other areas, foundries and wafers and substrates and so forth. Do you think this is the kind of cost you could pass on? I'm trying to think how do you go from your operating margins right now to the 32% to 34% kind of range you had outlined at your analyst day? at similar level of annualized sales.

Yeah, Vivek, I mean, we're always trying to get the best pricing that we can get. It's hard at times, though, to kind of pass stuff like this through. We're doing our best. And it is a bit of a headwind, so I guess we're not, you know, able to push it through at this point. I do think this part of things will mitigate at some point as the world gets back to normal and freight lanes get back to normal. Things are just constrained right now. You know, we fly things in and out of our factory a lot. Oftentimes, or at least we used to, on the belly of a commercial aircraft carrier at times, and they're just not flying at the volume that they used to be. I do think that gets back at some point once we get COVID under control in the world.

Any way to quantify the headwind? Is it like 100 basis points to gross margin, 50 basis points?

Yeah, Vivek, I have... I haven't given a hard number, but I would tell you it's noticeable. It's meaningful. It's a meaningful head vendor. I wouldn't be talking about it. And we're doing our best to manage it, and I do believe it will get better over time. But I haven't quantified it.

Understood. Thank you.

Thanks, David.

Next we'll hear from Joe Moore with Morgan Stanley.

Great, thank you. You talked about the drivers of the higher WFE in Counter 21. You talked about migration to higher layer counts in NAND, as well as DRAM and Foundry. I guess in the NAND side, you know, does that mean you think NAND spending is higher for the year, or are you not going to go that far? And then for DRAM, you know, it seems like the economics are improving. Do you think that's, you know, were people spending sort of independent of that, just thinking they needed to get a Technology migration, or have you seen sort of stronger spinning because the market has been stabilizing and improving?

Yeah, Joe, I'll start, and then I'll let Tim add on as well. You know, as we look into 2021 right now, pretty much we see every segment of our business up, right? It's up in Foundry Logic. It's up in NAND. It's up in DRAM. To different degrees, and like I kind of alluded to earlier, things can change, but that's our outlook right now. And, again, we see these longer-term demand drivers as a large part of what's going on. Tim, if you want to add anything.

No, I think you pretty much got it. I mean, I think, you know, you started the question about NAND. I mean, again, it's, again, this layer transition as a way for customers to reduce their cost and, again, But those transitions are complex from an edge and depth perspective, so creating a lot of demand for our tools to help enable those transitions.

To the extent that a lot of the NAND spending is on layer count migration rather than adding incremental wafers, wouldn't LAM normally outgrow the WFE in that kind of environment, assuming there isn't a lot of capacity being added in NAND?

Yeah, Joe, and a conversion as Tim alluded to earlier, when you're just doing a LayerCon conversion, that's a sweet spot for us in terms of the percent of spend. So the answer is yes, with the caveat that, you know, everybody's installed base is a little bit different. There's always a handful of new wafers coming in. You've got to kind of peel the onion back to the next layer and look at what's going on in any one period. But I would agree with your comment that in a LayerCon conversion, that's a good spot for us. Great.

Thank you very much.

Thanks Joe.

So Shia Hari with Goldman Sachs has our next question.

Hi guys. Uh, thanks for taking the question and congrats on the strong results. Um, I had two as well. My first one is, uh, somewhat related to Joe's question. Um, wanted to get your thoughts on your ability to outperform WFC in 2021. Uh, Tim, um, given sort of the application wins that you have in the bag, And, you know, given sort of the device type mix that you guys are assuming internally, would it be fair to assume kind of a similar magnitude of outperformance in your systems business in 2021 vis-a-vis 2020? Or do you think 2020 was, you know, a little bit unique given how strong NAND was in the year?

That's a lot of information you're asking for. You know, as we look, I mean, Doug just mentioned, I mean, clearly we see strength across all parts of the business. I mean, NAND expansion, you know, is clearly good for us. As I mentioned in my comment, you know, more than 50% share in DRAM etch. We're expanding our deposition, so DRAM's good. You know, Foundry Logic is an area where, obviously, from an exposure perspective, LAM has been less in the past, but we've talked about our improvements there. And so I think even there, as the nodes move forward, some of these new products we're talking about, whether it's dry resists, that might not be a 21 story, but more of a 22 and beyond story. But, you know, we're working hard to increase our SAM as a percent of WFE. And so, you know, I guess what I'd just say is in terms of outperformance, you know, you've got to go back to what we said at Investor Day, which is the way our path to outperformance is – to expand our SAM and coming from where we are in the high 30s, we said we're going to get to 40% as percent of WFE. That's increasing our opportunity. And then we do think with new products like the Bantex on Sensai and other products that are kind of in the pipeline to come later this year, those will be market share drivers for us. And so combination SAM expansion and market share gains will hopefully lead to continued outperformance of the market.

Yeah, that's helpful. And then, Tim, as my follow-up, you just mentioned Zantec's pretty fascinating technology. Wondering if you could kind of give us some color on areas or points of differentiation vis-a-vis your nearest competitor in Asia. And if you can remind us what your market share aspirations are in dielectric catch over the next couple of years, that would be super helpful, just given how, relatively speaking, you've been stronger in conductor X. So I think the opportunity set is bigger in dielectric.

Thank you. Yep. Okay, great. Well, just a couple things. I mean, one, you know, the Vantech story is really like two parts. One is it is the first module on the new Sensei platform. So, again, when you're thinking about Sensei, you're thinking about tremendous amounts of data collection and using that not only to improve the productivity of the platform and the maintenance and such, but also process control, And as you look at now in that dielectric high aspect ratio etch, which is where Vantex is targeted, those etches are becoming incredibly difficult, both in NAND and DRAM, where that product is really targeted. We've leveraged the learning from all of those vapors I talked about. We've been running relative to the competition in 3D NAND to really understand what it takes to build the world-class high aspect ratio etcher, and that's what we think we've delivered to the market. You know, we do really well in dielectric etch, quite honestly, in both DRAM and NAND already. But, you know, we're not going to – we haven't quantified, I believe, our dielectric etch ambition, but clearly it's higher in years to come. And we think Antec's OnSensei is the platform to do that.

Got it. Thank you so much.

Thanks, Toshio.

We're now here from Blaine Curtis with Barclays.

Hey, guys, thanks for taking my question and my results. I just wanted to go back to the last quarter you talked about, you know, obviously you want to guide WPP. You gave us some guideposts, and obviously DRAM was the strongest. Now fast forward, we've all seen big, sound RecapX numbers, but your NAN came in strong as well. Can you talk us through over the last three months what kind of improved for you? I know you don't want to dial them perfectly for the year, but just trying to still get a better feel as to what you're expecting between those three segments.

Oh, I don't know, Blaine. Obviously, one large foundry customer upsized their capex. I think everybody understands what happened there. I don't think any of us saw the totality of that coming. So clearly that was a bit of the upside. Maybe that would be the only thing I would specifically point to. Gotcha.

And then just back on gross margin, you know, obviously you have the higher freight costs. You're guiding it down a bit, revenue up. Can you just kind of walk us through the March Guide and then just opportunities for leverage, either gross margin or even on op-eds as you look for the rest of the year?

Yeah, Blaine, thanks for the question. I think you know and everybody knows this isn't really a huge fixed-cost business, so when revenue goes up, it matters, but it's not what matters most. as much as in like our customer's business. Product mix matters, customer mix matters, customer concentration moves gross margin around. That's happening probably a little bit in the March quarter, a little bit of a headwind. If I think about the longer term, getting to that financial model that we put up for 23, two things I would point you to on the gross margin and operating income for that matter. One is this freight headwind that we're dealing with. Second, I referred to ramping the factory in Malaysia. That's going to be a somewhat more efficient, a little bit bigger factory, a little bit more cost-efficient factory. So there's some upside that we're going to see in gross margin there. And that's really from where we are today to where we're trying to get to or where we're going to get to, what gets you there. Gotcha. Thank you.

Thanks, Glenn. Our next question will come from Atif Malik with Citi.

Thanks for taking my questions. Tim, you guys have seen strong growth in 3D devices, particularly in the NAND area, and are announcing a new technology for high aspect ratio. My question is on the logic side, as the logic devices are now moving in three dimensions, horizontal nanosheets, a three nanometer Korean foundry this year. How does that impact the definition edge opportunity and should we be looking at that as a major inflection?

I would hope you would be. We've been talking about really at some point along the roadmaps, every device ultimately is inflecting to 3D simply because that's how you get continued scaling. I talked about our KEO GX tool. You start seeing new types of technologies come in in the etch and also deposition space. I mentioned that tool with its atomic layer etch capabilities, those tools are well-suited to the types of 3D devices you're going to see in nanosheet or nanowire architectures. There will also be other tools, which we haven't really talked about so publicly, but they are in the hands of our customers today. around selective etch that will become much more prevalent within 3D logic foundry devices, and then a whole slew of new deposition films that also help. I mentioned some of the RC and such. So, yeah, I think it's an area where we can continue to expand our SAM by catching kind of those 3D inflections in logic and foundry. Our R&D that Doug talked about is really targeted a lot towards So it's growing our opportunity in that space.

Great. And Doug, we have heard about supply constraints in chips and printed circuit boards. Is the availability of chips impacting your ability to build equipment for your customers?

Yeah, you know, in any supply chain, as complex as ours is with as many suppliers as we have, there's always something that you're working your way through, and certainly there's a handful of those things today, given volume is inflecting up, but we're managing through it pretty well. Thank you. Yeah, thank you.

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

Certainly. Our final question will come from Joe Quattrochi with Wells Fargo.

Yeah, thanks for taking the question. On your expectations for domestic China being slapped up, how are you thinking about the efficiency of spending this year as the customers continue to ramp up their technology curves? In China specifically, Joe, is that your question? Yeah, for your domestic China customers. I think in the past you talked about there's some level of inefficiency just given that they're still kind of learning.

Yeah, our domestic China customer base is very broad. It's much broader, I think, perhaps, than all of you realize. And you've got people at all kinds of different points along ramping technologies. Some have been doing it for a really long time. Some are brand new to certain technologies. When a customer is new to a technology, it takes a little while to get to an efficient ramp point. So it's a broad set of... Customers that are at different points, I think, is what I would describe. Again, depending on how long they've been doing what they're doing.

Okay, fair enough. And then quickly on just the DSGB side, how are you thinking about the improvement of memory fab productivity last year contributing to the growth? And then how do we think about that this year? Because I assume that the spare parts business, you know, would be more of a modest contributor to growth for that business this year.

Let me think about that question. I don't know, Tim, if you have anything you want to add. I mean, consumption of spares will ebb and flow across every one of our end markets with utilization. When utilization is high, spare part consumption is somewhat higher. It's just the nature of how it's a consumable part, obviously, so it needs to go along with volume. I don't know if I'm answering your question, but that's true in the memory fad, just true in foundry and logic as well. As Tim suggested, maybe there was a little bit of buy ahead in spares, maybe a little bit, but I don't think that was huge. I don't know.

Yeah, no, and I don't think that it was something that would be specific to memory, but in general, a couple comments we've made about spare parts, maybe just to comment is, you know, we have always focused on the critical applications, because critical applications, you have to keep those chambers in a very pristine condition in order to be able to deliver the on-wafer results the customer needs. They tend to be bigger drivers of spare parts, and so I think as each of these technology nodes gets more complex, spare parts and the capability of those spares continues to grow. That's good for our business, but the flip side of that, of course, is that's customer's cost, and so That's why we are continuously looking for things like the new Sensei platform to help our customer reduce maintenance cost and running cost of the systems. I mentioned Sensei and Bantex. The first adopters and the first ones to ramp that to production are going to be in the memory space, and that's simply because it delivers technology at high productivity, and that's really the key. How do you find that balance of getting the results on the wafer without consuming too many spare parts and without consuming too much of the tool equipment time. I think LAM has become very good at that. And I think that, again, we point to the volume of learning we have in high-volume production, cross-band and DRAM, cost-sensitive applications. I think we may be the best at that.

Thank you.

Thank you, Jeff. That will conclude today's question and answer session. I will now turn the call over to Ms. Correa for any additional closing remarks.

We just wanted to thank everyone for joining today, and we will talk to you all again soon. Thank you.

That will conclude today's conference. Thank you for your participation. You may now disconnect.