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spk08: Ladies and gentlemen, welcome to the June 2022 Quarter Earnings Conference Call. At this time, I'd like to turn the conference over to Tina Carrera. Please go ahead.
spk27: Thank you, Operator, 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 June 2022 quarter and our outlook for the September 2022 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 include 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 the accompanying slides in the presentation. 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.
spk14: Thanks, Tina. Good afternoon, everyone. We appreciate you joining us today. LAM's June quarter results were much stronger than we originally anticipated. Revenue and non-GAAP earnings per share achieved new quarterly records, and we're well ahead of our guidance for the quarter. Industry-wide shortages continue to impact output and the efficiency of our operations. However, specific actions we have taken in our supply chain in recent quarters are allowing us to execute more effectively in the supply-constrained environment. I want to thank our global LAM teams, including our supply chain operations and engineering groups, as well as our suppliers and customers for demonstrating incredible dedication, agility, and partnership in the face of significant challenges. In the June quarter, we continued to see good momentum with our product and installed base initiatives, with FoundryLogic systems and CSBG revenues both reaching new highs. Our performance this quarter adds to my confidence that LAM will emerge from this period of industry disruption stronger, more resilient, and even better positioned in our markets. As suggested by our guidance today, we expect to see incremental improvement in supply chain conditions in the September quarter. But our view is that industry-wide output will continue to be constrained through the rest of this year. Consequently, we are lowering our outlook for calendar year 2022 wafer fab equipment spending to be in the low to mid $90 billion range. Overall semiconductor demand remains robust, but with some macro-driven pockets of weakness particularly in consumer-focused markets. We see strong FoundryLogic spending outgrowing both NAND and DRAM investments. In the longer term, we expect industry growth to be driven by the increasingly vital role semiconductors play in the global economy. This, along with expanding semiconductor content in end devices, rising device complexity, and larger die sizes will help sustain strong WFE levels. Most importantly for LAM, technology inflections will continue to drive greater etch and deposition intensity. Across our company, we have been prioritizing investments to benefit from these trends and prepare for the growth ahead. Over the last two years, LAM has devoted significant attention to the disruptions that have impacted the semiconductor ecosystem. But at the same time, we have used this period to accelerate a strategic transformation of our operations and product focus. We have significantly expanded LAM's capabilities and resources closer to our customers and ecosystem partners, both in the US and globally, to deepen collaboration, accelerate the introduction of new products, and drive greater operational flexibility. Compared to pre-pandemic times, LAM now has a more globally diverse manufacturing and supply chain infrastructure. designed to leverage unique regional capabilities while servicing worldwide demand. A notable example is LAM's new Malaysia facility, which takes our manufacturing, supply chain, and logistics operations to the next level in terms of scale, automation, and efficiency. Over the last two years, we have also increased our technology infrastructure investments across the US, Asia, and Europe, which is included a new development center in Korea, and a soon to open engineering lab in India. Our vision is to be the premier technology collaboration partner in the ecosystem, leveraging LAM innovation to bring customers, suppliers, peer companies, and consortia together to create disruptive solutions for the industry's grand challenges. Productivity and extendability of EUV patterning has been one such area of focus. And in the June quarter, we announced that SK Hynix had selected LAM's innovative dry resist fabrication technology as a development tool of record for two key steps in the patterning process for advanced DRAM chips. We also announced the expansion of partnerships within the EUV ecosystem. In collaboration with Integris and Gelest, we look to provide our customers with reliable access to precursor chemicals for LAM's dry photoresist technology. Together, we will also be working to accelerate the development of dry resist solutions for high numerical aperture EUV patterning. With customers, we are using data-driven equipment intelligence solutions to deepen our engagements. An enormous amount of equipment and process data is being generated from our installed base. And together with customers, we are using key learnings to drive fab productivity. LAM Sensei platform was launched in early 2020 with the goal of combining LAM's innovative equipment intelligence solutions with our market leading edge technology. The Vantex dielectric edge system built on the Sensei platform has seen tremendous momentum since launch and has become the fastest ramping edge tool in LAM history. We expect the installed base for this product to approximately triple this year alone. Furthermore, we are seeing increased demand for LAM solutions in new advanced packaging architectures. Our Keel Plasma Edge products with Hydra have a proven track record of delivering the productivity and uniformity requirements needed for cost effective front end device scaling. Leveraging this expertise in high volume manufacturing, we have now achieved multiple new edge tool of record positions for advanced packaging at a leading FoundryLogic customer. As customers further develop these architectures in support of greater system performance, we see a growing opportunity for LAM's etch and deposition solutions. And a final element in our transformation over the past several years relates to our emerging leadership in sustainability. In late June, we released our 2021 ESG report, where we outlined how we integrate ESG throughout our operations. We are proud that we were one of the first in the semiconductor industry to set a net zero emissions goal. I encourage you to review the report to see the great progress we are making across several important areas, including environmental sustainability and our commitment to diversity and inclusion in our workforce. So in summary, I am very pleased with the solid results posted by the company for the June quarter. Our results are an indication of our strong business foundation built on a large and growing installed base, a differentiated product portfolio, and a commitment to ecosystem-wide collaboration and success. We are in a great spot to benefit as secular drivers push the semiconductor industry to new heights over time. Thank you, and I will now turn it over to Doug.
spk15: Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a very busy earnings season. I'm pleased to share our June quarter results with you today. We had our second consecutive fiscal year of record levels of revenue and diluted earnings per share. Revenues increased year over year for the fiscal year by over 17%, and diluted earnings per share rose by more than 21%. We delivered solid performance in the June 2022 quarter. Our results across all financial metrics came in at the high end or above our guidance ranges. Due to our improved execution, and the continued strong demand for our equipment. June quarter revenue was a record at $4.64 billion, which was an increase of more than 14% over the prior quarter and over the high end of the guidance range. While we're making progress on addressing the supply chain challenges we previously talked about, it will take more time for them to be fully resolved. Despite the supply chain improvements and higher factory output levels, we still exited the June quarter with $2.2 billion in deferred revenue, which was an increase of $129 million sequentially. From a segment perspective, memory represented 54% of systems revenue in the June quarter, which was down from the prior quarter level of 66%. The NAND segment came in at 40% of our systems revenue, which was roughly consistent with the prior quarter. Our NAND customers are investing in tools for one 7X layer and beyond devices. On the DRAM side, revenues were 14% of systems revenue, which is a decline from the prior quarter level of 27%. DRAM investments are focused on the 1Z and 1 alpha node addition and convergence. In the foundry segment, June quarter revenues increased quarter over quarter and represented 26% of our system's revenue compared with 21% in the March quarter. The increases related to the timing of customer investments with broad-based spending across both leading as well as specialty-node devices. The logic and other segment had record performance in the June quarter coming in at 20% of systems revenue, higher than the March quarter amount of 13%. Our performance here not only reflects the demand in the market for microprocessors, analog components, image sensors, and advanced packaging solutions, but it also demonstrates the progress we're making in the leading edge foundry logic inflections that Tim talked about earlier. Let me now turn to the regional composition of our total revenue. The China region came in at 31% of total revenue, which was flat with the March quarter percentage. China domestic customers were the majority of the China regional revenue in the June quarter. There was also a strong concentration of investments by our customers in the Korea and Taiwan regions, which comprised 24%. and 19% of our total revenues respectively in the June quarter. The customer support business group revenue was also a record at approximately $1.6 billion, which was up 16% from the prior quarter level and 18% higher than the June quarter in calendar 2021. There was strength across all parts of CSBG. but notably in spares with our customers' fabs running at high utilization levels, as well as in our reliant business with customers investing in specialty market areas such as RF and power devices. While quarter-on-quarter growth rates in CSBG can vary based on customer investment patterns, I believe CSBG is well positioned to again deliver annual growth in 2022. Let me now pivot to our gross margin performance. The June quarter came in at 45.2% above the midpoint of the guided range. Our fixed cost absorption improved somewhat with the higher output levels. However, we continue to have cost challenges in the areas of freight and logistics, semiconductors, as well as in other critical components. We will continue to drive progress improving our operational efficiencies. However, we expect inflationary pressures to be a persistent headwind in the second half of the year. Our September quarter guidance embeds our views on these factors. Operating expenses for June were $635 million, up slightly from the March quarter. The increase was mainly in R&D across all of our business units as we're investing in development of technologies to support our customers' long-term roadmaps, as well as to mitigate some of the supply chain challenges we're having. The June quarter operating margin was 31.5% coming in over the guidance range as a result of the stronger than expected revenue performance. Our non-GAAP tax rate for the quarter was 11%, generally in line with our expectations. We estimate the tax rate for calendar year 22 to be in the low teens level. This estimate doesn't reflect any impact of any potential US tax policy changes. And this is obviously something we continue to monitor closely and we'll update you as appropriate. And just to remind you, as we've discussed in the past, you should expect the tax rate to fluctuate on a quarterly basis. Other income and expense for the June quarter was approximately $87 million in expense, consistent with what we noted on our call last quarter, as well as what was included in the June quarter guidance. We had an increase in expense this quarter related to market declines in one of our venture investments that recently went public. The OI&E P&L line item is subject to market-related fluctuations that will cause some level of volatility data items such as foreign exchange, as well as impacts in the equity markets. We continued to execute on our capital return objectives during the June quarter, allocating $868 million towards share repurchases. We paid $208 million in dividends. Our share repurchase activity was a combination of open market repurchases as well as an accelerated share repurchase program. This ASR will continue to execute during the September quarter. I'd also like to highlight that since calendar year 2012, when we brought Lamb & Novellis together, we've returned approximately 115% or more than $20 billion of our free cash flow to equity holders. Our stated plan is to return 75% to 100% of free cash flow through a combination of buyback and dividends. June quarter diluted earnings per share was $8.83. Diluted share count was 138 million shares, which was lower than the March quarter and lower than our June quarter expectation due to the increase in share repurchase activity. Let me turn to the balance sheet. Cash and short-term investments, including restricted cash, totaled $3.9 billion which was down from $4.6 billion at the end of the March quarter. The decrease in the cash position was attributed to our capital return activity, as well as our usage of cash for growth in working capital, as well as continuing capital investments. We increased the level of inventory we're carrying to support our growing business volumes. Inventory turns were flat with the prior quarter level coming in at 2.6 times. The sales outstanding came in at 85 days, which was essentially flat with the March quarter. It again was a somewhat back-end weighted shipment quarter. Non-cash expenses for the June quarter included approximately $70 million for equity compensation, $69 million in depreciation, and $19 million for amortization. Capital expenditures for the June quarter came in at $126 million, down by roughly $20 million from the March quarter level. Capital expenditures are supporting the company growth in manufacturing in multiple geographies, including the United States and Malaysia, as well as research and development infrastructure investment in California, Oregon, as well as our new technology center in Korea. We ended the June quarter with approximately 17,700 regular full-time employees, which was an increase of approximately 800 people from the prior quarter. We had headcount growth primarily in the factory and field organizations to address the higher output levels, to manage supply chain constraints, as well as to support increasing customer delivery and installation. Looking ahead, I'd like to provide a non-GAAP guidance for the September 2022 quarter. We're expecting revenue of $4.9 billion plus or minus $300 million. Gross margin of 45% plus or minus one percentage point. This gross margin outlook reflects ongoing inflationary challenges that we're seeing in the supply chain. operating margins of 31.5% plus or minus one percentage point, and finally earnings per share of $9.50 plus or minus 75 cents based on a share count of approximately 137 million shares. So then in summary, LAM demonstrated improved operational execution in the June quarter and delivered record financial performance both quarterly as well as on a fiscal year basis. Well, the semiconductor industry is not immune from softening macro factors that we see. SLAM's technology leadership, along with our robust installed base, is a solid foundation for continued long-term growth for the company. And with that, operator, I'll conclude my prepared remarks. Tim and I would now like to open up the call and take questions.
spk08: Thank you. Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star 1 on your telephone keypad. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment. Star 1 for questions. We'll pause a moment to assemble the queue. We'll take our first question from Harlan Sir. Which AP Morgan, please go ahead.
spk07: Good afternoon. Thanks for taking my question and great job on the strong operational execution. You know, as you mentioned in your prepared remarks, we've seen weakness materializing the consumer-focused segments of the market, so PC, smartphones, gaming. For your memory customers, that accounts for about 55% of their total revenue, so they're being disciplined here in the second half and into next year. They're focused on supply-side discipline, a lower profile of CapEx spending. And then on the flip side, Foundry and Logic and IDM customers are seeing, I think, a bit more diversified set of drivers where demand is still relatively healthy. So given that your lead times are stretching into next year, if your customer base is becoming more cautious on the macro demand environment, I assume that they're modulating their orders down for shipments next year. Have you started to see this in your profile of your recent orders? And then maybe more near the midterm, have you guys seen any major changes in cancellations or push outs on scheduled deliveries for this year?
spk14: Okay, I'll take that question, Harlan. It's, I think as you said, we clearly are seeing some weaknesses in certain parts of the market. And we have customers in the memory space and others have been publicly sounding the tone on being a little bit more cautious about their CapEx and spending going forward. I believe that we've also been saying, though, for several quarters now, that we believe that memory customers have generally been quite disciplined in their spending and how they look at the market. I think it's one of the things that has made that particular segment of the industry quite healthy in recent years, and that is that they respond fairly quickly to changes that they see in pricing and in demand. So that's something I think we've become accustomed to dealing with. And frankly, what I'd say, though, on the demand side is that we really haven't seen any significant change in the demand signals from our customers. And some of that could be, as you pointed out, that lead times remain stretched. And I think people want to take some time to look at how this market's evolving from different drivers. But we certainly acknowledge that at 23, there's a fair bit of uncertainty, and there are different scenarios that could play out. But I think that LAM is well prepared to execute through whichever of those scenarios actually transpire.
spk15: Yeah, the only thing I might add, Harlan, is we know how to run the company, whatever the environment is. We've been doing it for a really long time. We know what the playbook needs to be when it's up, down, or sideways. We'll respond accordingly. And then when I think about the things Tim talked about, our positions have grown stronger. We feel really good about the business we're winning, the growing installed base. The company is executing really well. That's the stuff we feel great about. At the end of the day, the market will be what the market will be, and we'll manage the company in the right way depending on whatever that looks like.
spk07: Yep, great insight. Thanks for that. And then supply chain-wise, I mean, the team did a great job of unlocking more Component availability and subsystems availability given the strong upside in June. So given more availability, do you anticipate deferred revenues coming down in the September quarter as a part of your strong revenue guidance? And where are you seeing the biggest supply improvement? Is it component availability? Is it subsystems availability, freight and logistics, or maybe all of the above?
spk14: Yeah, I'll take the first part and let Doug speak specifically to deferred revenue. You know, I think that, you know, we talked in the last couple calls about having somewhere on the order of about 40 task forces deployed out to our critical customers. So, you know, we said the constraints were pretty broad-based. I mean, clearly things like IC component shortages have gotten a lot of attention, but instead it was broader than that. We've seen improvements across a number of those constrained commodities, but We still have constraints, and that's, you know, you see it in how we're still spending, managing our supply chain in the numbers Doug talked about, and also in the fact that deferred revenue actually continued to grow a little bit in the June quarter. So we're nowhere near to where I would say that the supply chain overall is executing like it had in the past. But we've seen kind of broad improvements as a result, we think, of specific actions LAM has taken. And I'll let Doug talk about the September deferred revenue.
spk15: Yeah, Harlan, it's hard enough to forecast a revenue number, let alone the deferring. But if I was going to give you some color on it, I kind of think it's flattish, plus or minus a little bit. And again, it'll depend on how well we progress with the supply chain, honestly.
spk07: Great. Thank you.
spk15: Thank you, Harlan.
spk08: We'll take our next question from Timothy Akuri with UBS. Please go ahead.
spk05: Thanks a lot. Um, so I had a question just on overall WFE. So, um, you know, Tim and Doug, you beat on, uh, on June, you're guiding, you know, better in September and you're getting a little bit, you know, a bit of improvement in terms of, uh, you know, some of these constraints yet the full year WFE is coming down a bit. So can you sort of square that a little bit as some of that, maybe some demand driven that's bringing the year down or is even that mid nineties still a supply constraint number?
spk14: Yeah, Tim, in our view, it's primarily an adjustment we've made based on supply constraints and challenges. Since we gave our last guidance, which we had put at $100 billion to WFE, not only have we seen kind of how we're performing, but we've also heard from others in the industry. And so we have to, in trying to give a WFE number, look to how the entire industry is executing and not just how LAM is performing. We felt it prudent to lower that WFE outlook based on what looked to be still a lot of industry-wide constraints. You know, and so from a demand perspective, as I just said in the last answer, really haven't seen any meaningful change that's really embedded in that lowering of WFE. There's always some tools and projects that move around, but I, you know, right now, as you see with our deferred revenue and the fact that we're not meeting all demand, if anybody slides out a little bit, somebody else is sliding right into that slot. So we're, we're, we're fully, fully utilized at this point at the numbers we just gave.
spk05: Got it. Got it. Awesome. Thank you. And then Doug, I'd be remiss if I didn't ask about gross margin, you know, someone's going to ask about it. So I guess it'll be me. So, so, so can you just, sorry, Doug, can you just, can you walk us through sort of maybe quantify the headwinds and, you know, would we be at 48, 48.5 if, you know, sort of absent some of these headwinds? Can you sort of like, you know, normalize all that for us? Thanks.
spk15: Yeah, Tim, the way I've been describing it actually for a while now is, you know, the long-term profitability model of the company is unchanged. My expectation of where we're going to perform isn't any different than it was pre-pandemic, pre-all the inflation coming through. Um, the inflationary stuff that's permanent, we got to work on, you know, getting fairly paid for and the stuff that's temporary. Maybe we get paid for a little bit, but then we got to go palm the cost back. And so what was embedded in that financial model that we gave, I guess over two and a half years ago or something was, was kind of 200 basis points above where we are guiding right now. And that's still the way you should think about the long-term profitability of, uh, of where we're going to drive the business.
spk14: And Tim, the only thing I would add on that point is, you know, there are a lot of questions obviously coming about is the industry slowing or are there some pockets that are going to ease up. I think if that's the case, some of the things that are headwinds to us in gross margin right now, I mean, a lot of the expedites and premiums that we're paying on things like ICs, you would expect those to begin to moderate if some of the outlooks are that some of this demand either gets caught up or maybe... or slows down a bit going forward. So I think there's room for gross margin improvement, as Doug said, over the longer run.
spk05: Definitely, yeah. It's a natural edge. Thank you very much. Yeah, thanks, Tim.
spk08: We'll take our next question from CJ Muse with Evercore. Please go ahead.
spk16: Yeah, good afternoon. Thank you for taking the question. A follow-up question on gross margins, your favorite subject, Doug. We'd love to isolate just on your factory ramp in Malaysia. Can you speak to how that's going, whether that's a headwind or beginning to be a tailwind for you, and how we should think about that escalating into a real tailwind for you guys? Is that a first half 23, second half 23, or later type of story?
spk15: Maybe I'll let... Tim, talk about how the ramp is going, then I'll describe the numbers a little bit, CJ. Okay, yeah, sure.
spk14: So CJ is actually just out there not too long ago. I'd say from an execution perspective and a lot of the improvement we're looking at, I'd say the Malaysia ramp is going extremely well. We're still in the ramping phase there, still in the mode of building out and developing the supply chain. Some of that, especially the supply chain development, might be a little bit behind where we would have wanted to be at the volumes, and that's simply because supply chain development globally is struggling to ramp, and whether that's raw materials or component shortages or labor. But I think it's coming up very nicely. And I think when Doug gives you the answer about how it contributes, I mean, what we have to remember is that Malaysia is ramping at the same time as we're ramping all of our global facilities. And so perhaps in the short run, you're not seeing an easily isolatable impact of Malaysia because we're ramping all other global factories at the same time. But from a ramp perspective, I couldn't be happier right now with the scale of output and the efficiency I see starting to come out of that facility.
spk15: Yeah, and then, CJ, just how to think about the numbers. I think maybe a year ago, I was talking about it being somewhat of a headwind, the gross margin. It really isn't any longer. We're kind of at the point where it's neutral-ish. And as Tim just told you, we're ramping everywhere. you know, eventually that'll be the biggest factor in the network. And as it gets to be a bigger percentage of the total, it'll become a benefit to gross margin, not just from cost of labor, but the fact that our freight lanes will be shorter and the supply chain will move along with us. So I'll keep you updated as we progress.
spk14: Yeah, I think actually just I want to emphasize that one point Doug just made, because in my prepared remarks, I made this comment about part of our strategic transformation over the last couple of years was to put capabilities closer to where they ultimately need to be. And that's in the case of development, closer to customers, and in the case of the factories, closer to supply chains and also customers. And in a period when we're seeing high freight and logistics costs, I mean, I think that ultimately having a large factory close to our customers in Asia is going to be a big benefit for us. So that was a very conscious decision, and I think it's going to pay off We don't know when freight logistics costs normalize, but that's a hedge against those remaining high for a while.
spk16: Very helpful, thank you. As my follow-up, I guess was hoping you could speak a bit to Reliant. And to clarify, do you include Reliant when you break out the percentage of exposure, logic, boundary, memory? And then, I guess, bigger picture there, the trends you're seeing, particularly as it relates to 200 millimeter, you know, 40 nanometer and above and domestic China. Can you kind of walk through the trends you're seeing there? Thanks so much.
spk15: Yeah, I'll take the beginning and then I'll let Tim take the secondary part. Yeah, CJ, when I talk about the percent of systems revenue in my scripted remarks, that includes reliance as well as the more leading edge equipment that we're selling. So it's all conclusive in terms of system revenue.
spk14: Yeah, I think just in terms of markets and the demand, I mean, I think we can speak as a user of many of those chips where we still see severe constraints and also very high premiums for those chips in the marketplace. I think customers are investing to try to alleviate what today is clearly a mismatch in terms of supply and demand, and that's across all different types of applications. I mean, when I look at the list of ICs that that we're looking for just as one user, it's a broad list from a very broad number of manufacturers. So it's hard for me to pin it down, but I feel like today we're still in a pretty broadly expanding and growing market.
spk08: Thanks so much.
spk23: Thanks, CJ. Yep, you bet.
spk08: We'll take our next question from Joe Moore with Morgan Stanley. Please go ahead.
spk22: Great, thank you. I wonder if you could talk about any potential for export controls. There's been some press focus lately on some incremental controls on exports to China for advanced logic, things like that. Do you guys get any kind of sense for what's coming down the pike there and how that might affect you?
spk14: Yeah, Joe. So to tell you, we were recently notified that there was to be a broadening of the restrictions of technology shipments to China. for fabs that are operating below 14 nanometer. And so that's the change, I think, that people have been thinking might be coming. And our, you know, we're prepared to fully comply. We're working with the U.S. government. And any impact on lamb's business, it's contemplated in the September guidance that we just gave.
spk15: September guidance as well as the full year WFE outlook, Joe.
spk22: Great. And that... Is 14-nanometer logic that doesn't include DRAM?
spk15: Yeah, to the best of our understanding, it's boundary-focused, yes.
spk21: Great. Thank you very much.
spk15: Thanks, Joe.
spk08: We'll take our next question from Stacy Rasgon with Bernstein Research. Please go ahead.
spk04: Hi, guys. Thanks for taking my questions. I'm always wondering if you could give us a little more color on the drivers within the, um, the, the customer service business, particularly around, um, strength in, in spare parts and 200 millimeter tools. Um, I'm just trying to get some feeling, uh, for, for, for those pieces, especially just, just given the broader environment and some of the other news that we've heard around, um, the macro and potential customer order cuts and things like that.
spk14: Okay. I'll, uh, I'll, I'll take the first shot at that. Um, the, uh, You know, maybe it's best to step back and just remind everybody, you know, the CSBG business is comprised of four components, spares, services, upgrades, and reliant. One of the nice things about this business and what we said we really like about it is those often kind of move in somewhat of a non-correlated way. I mean, spares, you know, clearly just moves with our install base. And, you know, as I look forward, you know, a lot of people wondering what does 2023 look like, we're not going to give guidance, but one thing we always feel pretty comfortable about is We have a very strong equipment shipment year this year. There will be a lot more tools requiring spares and consumables next year. And so that part of the business, it grows. And in fact, what we've said is as devices become more complex and our applications become more critical, in fact, the need for spares and the importance of spares just continues to grow. So spares is just robust and growing The services business has been also strong. I talked about the shift in strategic transformational making towards more equipment intelligence type services. And, you know, as customers, as we kind of look forward, if customers start focusing on productivity and costs and really, you know, in that trying to squeeze the output from their fabs without having to spend additional capex, they turn to things like productivity services, results-based contracts, use of data off of the tools. So I think services has been doing well and I think can continue to do well even in an environment where maybe you see a little bit of impact of macro or spending pullback. Same for upgrades. Upgrades business, actually I've often said over the years that upgrades tend not to do so well when customers are busy adding lots of capacity because they're actually adding capacity, new tools, really focused on that. If they pull back a little bit, the way they save CapEx and still manage their technology roadmaps is they turn to upgrades and tech conversions. And so the upgrades business gets a little bit stronger. And so that business, we think, can continue to do well and maybe even improve in next year's environment. And then Reliant, as we just said, a lot of catch-up to do. I think there have been significant underinvestment for quite some time in that area, as evidenced by the fact that Many of us can't get the chips that we actually need to meet demand. And so there's some catch-up still there. Eventually, maybe that gets caught up. We don't really have a view on when that fully happens. It's a very diverse set of end markets and application drivers, so it's hard to predict. But clearly, at some point, it probably moderates in terms of growth and gets back more towards the steady grower type kind of to the overall application expansion economy that we've seen in past years.
spk04: I guess maybe I should have asked more explicitly, what drove the sequential strength in services? Which one of these pieces was the biggest?
spk15: It was both spares as well as reliance. That's why I called that out in my script, Stacy. Got it.
spk04: Got it. Thank you. For my follow-up, I'm going to ask, this is going to come across a little snarky, but I think I'm going to ask it anyways. I get the inflationary pressures on gross margins, but, you know, All of your customers seem at this point to be inflation-proof in terms of their input costs going up and their ability to pass along.
spk17: Why aren't you?
spk15: So, Stacey, I think, and I've been saying this, I think, for a quarter or two, I don't want you to believe that we're not raising prices because we are. I think maybe to our detriment, inflation has been bigger, stronger, more pronounced than we expected that it would be, honestly. And there's some latency to kind of renegotiating prices and whatnot, and that's very much what's going on. And it wasn't a snarky comment. I get the comment all the time. It's an appropriate comment. We're working on getting fairly compensated for what we need to, and we will.
spk04: How much of a driver do you think, if I'm looking at like a year or two, is that latency goes away? I mean, is it 100 bps? Is it more? Like how much can we be thinking? Or is that what helps you kind of get back to the model range?
spk15: Yeah, it's what helps us get back to the model range. What I said earlier is the long-term profitability expectation for the company is unchanged. Even though we're working our way through this inflationary environment, it's probably 200 basis points from where we are to where we need to be.
spk17: Got it. Okay, thank you, guys. Appreciate it. You got it, Stacy. Thanks.
spk08: We'll take our next question from Chris Sankar with Cowen & Company. Please go ahead.
spk25: Yeah, hi. Thanks for taking my question. I have two of them. The first one for Doug. Clearly, you know, the last several quarters have been really strong. You've grown your headcount a lot. Hypothetically speaking, if next year was down in terms of revenue, say 5% or 10%, How should we think about the earnings model and operating leverage? And then I had a follow up for Tim.
spk15: Yeah, Krish, I guess the best thing I would point you to is just look at the history of the company's performance over the last decade, right? We know how to run the company in an up environment. In a down environment, we have a highly variable Cost model here, we employ temporary resources, we outsource things. The best thing I would point you to is just look at the last downturn and the same management team is running the company. We'll do the same things. It's a well-worn playbook that we know how to dust off and use when we need to.
spk25: Got it. Got it. Fair enough, Doug. And then a question for Tim. Now, maybe this is the first time I'm noticing you talk about advanced packaging on the earnings slide deck. I'm kind of curious on your advanced packaging strategy. Some of your peers have partnered with back-end companies that are looking into panels. How should we think your advanced packaging portfolio should evolve? Are you looking at organic development, M&A, or partnership with a back-end company?
spk14: Well, I think that we're looking at, you know, look, advanced packaging is an important area for LAM to participate in, and we have for quite some time. I actually don't know if it's the first time we've talked about it because I have to believe we have talked about it in the past. But we've talked about it primarily from the standpoint that etch and deposition play an incredibly important role in these new architectures and we have a strong position, especially in applications like both the etch as well as the copper electroplating. As form factors change, you know, we look at that as still our market and therefore evaluate and pursue whatever the best means is to win in those emerging segments, whether that's organic or inorganic. Got it. Thanks, Tim.
spk25: Thanks, Chris.
spk08: We'll take our next question from Toshiya Hari with Goldman Sachs. Please go ahead.
spk32: Great. Thank you so much for taking the question. It's really nice to see your traction and logic and other show up in your numbers in the quarter. To level set, I was hoping you could, you know, sort of quantify where you are from a market share standpoint across those markets today vis-a-vis the corporate average in edge and depth. And where do you see that going in a couple of years, given the current application wind funnel?
spk15: Yeah, if you look at Logic specifically, it's probably our lowest exposure across the markets that we've described. However, I'll remind you, Toshio, that we've been talking about a specific share gain customer that we continue to progress very nicely with, which is part of the strength you saw in the results from June.
spk14: Yeah, and Toshio, I guess I'd just add, I mean, there's a couple things to think about with respect to the Foundry Logic space, and one is Our exposure is lower from a SAM perspective and has been, but actually some of the technology inflections that are currently underway are actually allowing us to participate with some of our more advanced equipment to displace some of the older technologies that have typically been used in foundry logic. And so you're seeing a lot of traction for our selective edge. We didn't list all of the wins this quarter. We continue to see new selections for our selective edge tools. only going to be used at very advanced logic, and it's kind of new markets, new opportunity for us, and we're doing well there. ALD, both dielectrics and metallization, used to deal with like the RC inflection, the back-end interconnect inflection. That's creating opportunities for us. And so I think that we're seeing a little bit of like share gain at certain customers, as Doug mentioned, but also an expansion of our opportunity And that's driving a lot of our new product roadmap. We have the objective to improve our position in Foundry Logic for more advanced nodes.
spk32: Yeah, that's helpful. Thank you. And then as my follow up, probably one for you, Tim, just on dry resist, it's great to see you guys. you know, have traction there as well. Obviously, SK Hynix is public. I'm pretty sure you're working with other customers on this as well. But help us quantify, you know, how significant this business or this product could be in a couple of years. And as you partially sort of displace traditional track or coded developers, what percentage of the market do you think you can capture in a couple years? Thank you.
spk14: Okay. Well, I think, you know, I don't want to get out with sort of a new disclosure here, but I think we're We've quantified it in the past as roughly about a $1.5 billion opportunity over a five-year period. And you're just starting to see us, you know, we talked about development tool of record wins, so obviously we're not yet putting this into a production fab and developing revenue, so we'd just be at the very first stage of that. But that should give you some kind of sense maybe in the next five years of the kind of revenue impact you're talking about. But this is still a much... longer play for us. And I talked about this idea of accelerating the development of the dry resist for the high NA EUV. And so if you think EUV is going to be around for the next 10, 20 years as the primary patterning capability for advanced logic, then our opportunity just continues to grow throughout that period. So it starts off the next five years at that $1.5 billion and then just continues to grow with layer count and application. And we think that as you get to high NAEV, I think it's, you know, we have a good chance to capture a lot of the market.
spk32: Tim, sorry, when you say five years, I know you guys initially talked about this at your 2020 analyst day. Is it five years from then or five years from today?
spk14: Well, I don't know. Yeah, I guess I would just start the clock now because, as I said, we've only reported development tool of record positions today, obviously, which we haven't yet started to generate revenue from. So it's, yeah, I think if you call it five years from today, it's a safer bet than five years from our analyst day.
spk02: Sounds good. Thank you. Yeah, thanks, Tosha.
spk08: We'll take our next question from Atif Malik with Citi. Please go ahead.
spk06: Yes, thank you for taking my question. I have a question for both of you. It looks like Senate has passed the CHIPS Act. Tim, you along with Intel and Micron CEOs, you spoke to Congress in March about the importance of passing this legislation. So assuming it goes through Congress and the president signs off, can you talk about what this bill means for the U.S. equipment makers? And Doug, if you can talk about how will it impact LAM in terms of any tax breaks or into the market share growth and logic foundry areas? Thank you.
spk14: Okay. Well, obviously it's of significant benefit for the U.S. semiconductor manufacturing industry overall. I think most directly what I would say is that, you know, LAM's benefit from this will come in two ways. One is, you know, as our customers invest in capabilities in the U.S. and capacity, obviously we're hopeful that we will garner a large share of the equipment that's purchased for those fabs. That's one way in which monies from that flow through ultimately into business for LAM. Specifically, when I was in front of the Senate, one of the things that I talked about is think long-term. If you think about long-term improvement for U.S. companies and U.S. semiconductor manufacturing, it has to do with some of the R&D money that's in that, I believe, in the CHIPS Act, which is going to fund longer-term capabilities that help semiconductor device makers but also equipment makers develop those next generation technologies that keep us incredibly competitive on the global stage and allow us to create those technologies without having to necessarily fund and take on all of that risk ourselves as individual companies, which is always hard to do for technologies that might be seven, eight, ten years into the future. That's the other way I would say that companies, both device makers and equipment makers, can benefit. We need to see all the details, but that's my initial take. Thank you.
spk24: Are you there, Atif? Any follow-up? No, I'm good, Doug.
spk15: Okay. All right. Thank you.
spk08: We'll take our next question from Vivek Ari. with Bank of America. Please go ahead.
spk29: Thanks. I had two questions. First one, is this $4.9 billion that you're guiding to for September, is this kind of the new quarterly baseline? So all else being equal, should we expect December sales and gross margins to potentially be flatter up? I appreciate you're not giving December outlook, but is there anything that could make you deviate from this new trend line that you have, you know, June stronger and then September even stronger than that.
spk15: Yeah, Vivek, you're right. I'm not going to guide the December quarter for you. Listen, I think we're pretty pleased with the progress from a supply chain standpoint we made in the June quarter. It continues to be reflected in the September quarter. Barring something new coming up, I think our execution will continue. And that largely has been what has limited the revenue generation of the company. And you see, you heard me mention the $2.2 billion in deferred revenue. So that's there for us to follow up on. But I'm not going to give you a number for December quite yet. Understood.
spk29: And then the second one is just a clarification. What is your sub 40 nanometer exposure to China? I didn't think there was, you know, any or not that much. And do the restrictions apply to just China domestic, or do you think they could apply to the multinationals with fabs in China?
spk14: At this point, we would assume that it applies to all sub-14 nanometer activity in China. And, you know, we're not going to quantify what we might have, you know, or had in our plans for sub-14.
spk29: But, Tim, just to clarify, September you said is de-risk, i.e., There is zero sub-40 nanometer China business for you in your September outlook.
spk15: The guidance fully reflects everything that we just described.
spk08: Yes. Okay.
spk15: Thank you. You're welcome.
spk08: We'll take our next question from Mark Lipikas with Jefferies. Please go ahead.
spk20: Hi. Thanks for taking my question. I had a clarification and a question. The clarification, Tim, I think it was an earlier question. about whether you were seeing push-outs or cancellations. It sounded like you said that you're not seeing any impact on your demand, but I just want to make sure I understood your response to that question. And then my question is, can you help us understand the mechanics of your manufacturing operations or how you deal with the slots that you have? before you allocate it to your different customers as the orders have come in. What kind of latitude do your customers have if they come in and say, well, I don't know if I want the tool now. I prefer it in three months. Do you guys flip-flop slots in the queue, or do you just send people back to the end of the line? If you could just kind of review the mechanics around how you treat the orders as they come in and what happens to customers who ask for the push-outs. That would be helpful. Thank you very much.
spk14: Sure, I can try to address both of them. So, yeah, just to be clear, my comment was at this point we've seen no pushouts and changes in demand, no pushouts, no cancellations that are at all meaningful. However, I mean, I want to acknowledge, I mean, it's with long lead times and stretching, you know, through 23 and a cautious tone being struck by some of our customers quite publicly, I'm not saying that we might not ultimately see those changes come. Saying that we've seen none doesn't mean that that might not happen. But at this point, the commitments that we have today are being met and that was what I was trying to signal. I think with those long lead times, it moves into your second question, which is, so what if a customer does come and say they'd like to push a project by a few months or even longer or We treat it the same way we are doing right now when customers come and have asked us to pull in slots. We work with all of our customers to see where people really are in their projects and their demand. We have not ultimate flexibility within our manufacturing, but I talked about the fact that we've invested in the last two years to try to create greater operational flexibility. Part of it is so that we can respond in that way. We treat our customers very much like partners. need to push for by a couple of months because maybe it's either demand or more likely sometimes it's the facilities aren't quite ready or there's a change in their plans.
spk18: We try to work with them and make those adjustments if it's possible.
spk19: Gotcha. Thank you very much. It's very helpful. Yeah. Thanks, Mark.
spk08: We'll take our next question from Patrick Ho with Stifel. Please go ahead.
spk10: Thank you very much, and congrats on a nice quarter. Doug, maybe for you, in terms of the supply chain, obviously you've seen some improvements in the past quarter that will carry into the next quarter. Are some of the issues now just related to the quantity of shipments? Because it's still going to be a more second-half weighted year for you guys. So even with some of the incremental improvements on the supply chain, it's now just trying to, I guess, continue to keep pace with the high demand levels that you're seeing near term, and that's why the deferred revenues are staying at the same levels, at least as you're forecasting into the September quarter?
spk15: Yeah, Patrick, that's clearly part of it, right? We've got unmet demand. We've got partial shipments that shows up as deferred revenue. Each supplier has a unique situation that we're working through with them to the extent that they're not meeting what we need from them. But, yeah, we increased, improved the output last quarter, and we see that continuing as we go into September.
spk10: Great. And as a quick follow-up, maybe for Tim, obviously you've been working with a leading MPU customer for some time now, and we're starting to see the share gains and the higher quantity of volume as they start ramping new products. But you've been working with them for some time. As you work with them and given their more accelerated roadmaps in terms of technology nodes, can you maybe not quantify but qualitatively say that you've seen some incremental new market opportunities and that's what gives you confidence with that customer on a going forward basis?
spk14: Like I said, brought it to all customers. I mean, I'm going to speak to the one, but I think what we've always said is that LAM's greatest opportunities get created as those technology changes, those technology transitions occur. And I spoke to a couple of you just as an example. You think about somebody implementing GATE all around in, say, their next technology node or future technology node. It does create new opportunities for us. And we have designed equipment kind of ahead of where the roadmaps are. And so the faster those technology changes come, the sooner we get the opportunity to insert those new applications into their production lines in a bigger way. And so, you know, we've talked about some of those at Selective Edge, some of our new ALD tools. Of course, it's some of our Edge systems that are designed for, to really support the fine pitch patterning associated with EUV. So it's EUV, like at each technology node, you use more and more layers of EUV. That grows for us. And so, You know, every customer, the faster they transition technology, the greater SAM's, LAM's sort of market is growing and the greater our share opportunity is increasing.
spk09: Great. Thank you.
spk24: Thanks, Patrick.
spk08: We'll take our next question from Blaine Curtis with Barclays. Please go ahead.
spk31: Hey, guys, thanks for taking my question. I just want to follow up on the demand outlook. I mean, I hear you said you haven't seen much. I mean, I'm just looking at the areas that you mentioned being strong, and I think we've seen a lot of those same areas see weakness, image sensors and MCUs, APs. I mean, Qualcomm said they're caught up on supply. So I know that's not your forecast. You get them from the customers, but I'm just kind of curious. You've been through these before. When you look downstream, you definitely see weakness. I'm just kind of curious if you, you know, what you've actually seen yet. Obviously, you know, memory, same story. You're hearing about CapEx cuts. Just trying to fit all this into the picture versus, you know, I know you're still catching up, so I don't know what the right starting point is, but clearly you're seeing downstream weakness.
spk14: Yeah, Blaine, you know, obviously, as we acknowledge, we're clearly hearing customers strike a more cautious tone We see what's going on around within the macro. And so we haven't given a 2023 outlook, to be clear. And I think what we're saying is that, you know, if demand changes and as demand changes, you know, LEM is set up to operate effectively within whatever that environment is. And clearly we have different scenarios. But the key is, you know, as we look forward, Things like our larger installed base business will be helpful for us regardless of what the environment looks like. The improvements we've made, say, in our foundry exposure with new share gains and SAM expansion, that will be a positive regardless of what the end demand looks like. The higher etch and depth intensity due to the technology inflections is true regardless of what the end demand is. And the fact that we have a more diverse and more efficient and more effective global manufacturing infrastructure, that'll also be helpful regardless of what the demand is. So I think what we're trying to highlight is we're not going to be the best at forecasting, probably no better than anybody else at really knowing exactly what 2023 is going to be looking like. But we do believe we have a pretty good view of how LAM can execute very well within whatever that environment is.
spk31: Thanks for that. And then you might have answered this before, but just on the deferred revenue balance, I'm just curious, You are seeing people start to catch up. I know you mentioned that it could be flat in September, but just trying to understand the challenges. Are you still having certain subsystems that you can't get? Or is it more like you're just getting higher orders in the door and the balance keeps going up? Just trying to understand why that hasn't started to work its way down.
spk14: Well, it's just that, one, it's a higher volume of output we're trying to achieve. And quite frankly, it's just all components. And I would say everything is sort of improving. But in general, there's quite a still number of quantities that aren't able to meet that new higher level that we want for the output. And so it just continues to increase. So I couldn't point to one specific thing. But I would say that, in general, I'm happy with the improvements we're seeing across a broad array of our suppliers, and so I said I thank them for their efforts because I do see that incremental improvement and expect further improvement as we move to September. Thanks so much. Thanks, Brian.
spk27: Yep. Operator, we have time for one more question, please.
spk08: Okay. We'll take our final question from Joe Quattrochi with Wells Fargo. Please go ahead.
spk11: Yeah, thanks for taking the question. Another question on the Reliant business. It's pretty well known that the third-party reseller market for tools has been pretty limited on supply. How do we think about that market competing against the Reliant business? And then how should we think about that supply of used tools maybe increasing if demand does start to slow from the in-market semiconductor perspective?
spk15: Joe, I guess the first thing I would point out to you is, yeah, historically that's been a segment of the market serviced by a lot of used equipment. Today there isn't any used equipment or very little. And as a result of that, we're selling older model new equipment into the Reliant product line, right? Demand is, there isn't anything coming to be refurbished today. So I don't know, Tim.
spk14: Yeah, no, I think that's clearly the case. Most of that if not all of that equipment at this point is being fully utilized.
spk11: But I guess do you see that changing if demand were to slow from a semiconductor perspective, do you see the amount of tools coming in to be refurbished somewhat changing, or do you think customers maybe continue to kind of hold that capacity?
spk14: I don't see that changing in a very significant way. I mean, these assets, once they're into these fabs, I mean, we tend to see our tools used for 20 to 30 years producing chips of some different technology nodes. I think as far as it's been to get equipment, I think many of these customers will definitely keep hold of those systems.
spk18: At least my view. Thanks, Joe.
spk08: This concludes today's question and answer session. I would like to turn the conference back to your presenters for any additional or closing remarks.
spk27: Thank you, operator. We appreciate everyone joining our call today, and thank you all for your support.
spk08: Ladies and gentlemen, this concludes today's conference. We appreciate your participation.
spk24: You may now disconnect. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
spk08: Good day, ladies and gentlemen. Welcome to the June 2022 Quarter Earnings Conference Call. At this time, I'd like to turn the conference over to Tina Carrera. Please go ahead.
spk27: Thank you, Operator, 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 June 2022 quarter and our outlook for the September 2022 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 include 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 the accompanying slides in the presentation. 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.
spk14: Thanks, Tina. Good afternoon, everyone. We appreciate you joining us today. LAM's June quarter results were much stronger than we originally anticipated. Revenue and non-GAAP earnings per share achieved new quarterly records, and we're well ahead of our guidance for the quarter. Industry-wide shortages continue to impact output and the efficiency of our operations. However, specific actions we have taken in our supply chain in recent quarters are allowing us to execute more effectively in the supply-constrained environment. I want to thank our global LAM teams, including our supply chain operations and engineering groups, as well as our suppliers and customers for demonstrating incredible dedication, agility, and partnership in the face of significant challenges. In the June quarter, we continued to see good momentum with our product and installed base initiatives, with FoundryLogic systems and CSBG revenues both reaching new highs. Our performance this quarter adds to my confidence that LAM will emerge from this period of industry disruption stronger, more resilient, and even better positioned in our markets. As suggested by our guidance today, we expect to see incremental improvement in supply chain conditions in the September quarter. But our view is that industry-wide output will continue to be constrained through the rest of this year. Consequently, we are lowering our outlook for calendar year 2022 wafer fab equipment spending to be in the low to mid $90 billion range. Overall semiconductor demand remains robust, but with some macro-driven pockets of weakness particularly in consumer-focused markets. We see strong FoundryLogic spending outgrowing both NAND and DRAM investments. In the longer term, we expect industry growth to be driven by the increasingly vital role semiconductors play in the global economy. This, along with expanding semiconductor content in end devices, rising device complexity, and larger die sizes will help sustain strong WFE levels. Most importantly for LAM, technology inflections will continue to drive greater etch and deposition intensity. Across our company, we have been prioritizing investments to benefit from these trends and prepare for the growth ahead. Over the last two years, LAM has devoted significant attention to the disruptions that have impacted the semiconductor ecosystem. But at the same time, we have used this period to accelerate a strategic transformation of our operations and product focus. We have significantly expanded LAM's capabilities and resources closer to our customers and ecosystem partners, both in the US and globally, to deepen collaboration, accelerate the introduction of new products, and drive greater operational flexibility. Compared to pre-pandemic times, LAM now has a more globally diverse manufacturing and supply chain infrastructure. designed to leverage unique regional capabilities while servicing worldwide demand. A notable example is LAM's new Malaysia facility, which takes our manufacturing, supply chain, and logistics operations to the next level in terms of scale, automation, and efficiency. Over the last two years, we have also increased our technology infrastructure investments across the US, Asia, and Europe, which is included a new development center in Korea, and a soon to open engineering lab in India. Our vision is to be the premier technology collaboration partner in the ecosystem, leveraging LAM innovation to bring customers, suppliers, peer companies, and consortia together to create disruptive solutions for the industry's grand challenges. Productivity and extendability of EUV patterning has been one such area of focus. And in the June quarter, we announced that SK Hynix had selected LAM's innovative dry-resist fabrication technology as a development tool of record for two key steps in the patterning process for advanced DRAM chips. We also announced the expansion of partnerships within the EUV ecosystem. In collaboration with Integris and Gelest, we look to provide our customers with reliable access to precursor chemicals for LAM's dry photo resist technology. Together, we will also be working to accelerate the development of dry resist solutions for high numerical aperture EUV patterning. With customers, we are using data-driven equipment intelligence solutions to deepen our engagements. An enormous amount of equipment and process data is being generated from our installed base. And together with customers, we are using key learnings to drive fab productivity. LAM Sensei platform was launched in early 2020 with the goal of combining LAM's innovative equipment intelligence solutions with our market leading edge technology. The Vantex dielectric edge system built on the Sensei platform has seen tremendous momentum since launch and has become the fastest ramping edge tool in LAM history. We expect the installed base for this product to approximately triple this year alone. Furthermore, we are seeing increased demand for LAM solutions in new advanced packaging architectures. Our Keo Plasma Edge products with Hydra have a proven track record of delivering the productivity and uniformity requirements needed for cost-effective front-end device scaling. Leveraging this expertise in high-volume manufacturing, we have now achieved multiple new edge tool of record positions for advanced packaging and a leading FoundryLogic customer. As customers further develop these architectures in support of greater system performance, we see a growing opportunity for LAM's etch and deposition solutions. And a final element in our transformation over the past several years relates to our emerging leadership in sustainability. In late June, we released our 2021 ESG report, where we outlined how we integrate ESG throughout our operations. We are proud that we were one of the first in the semiconductor industry to set a net zero emissions goal. I encourage you to review the report to see the great progress we are making across several important areas, including environmental sustainability and our commitment to diversity and inclusion in our workforce. So in summary, I am very pleased with the solid results posted by the company for the June quarter. Our results are an indication of our strong business foundation built on a large and growing installed base, a differentiated product portfolio, and a commitment to ecosystem-wide collaboration and success. We are in a great spot to benefit as secular drivers push the semiconductor industry to new heights over time. Thank you, and I will now turn it over to Doug.
spk15: Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a very busy earnings season. I'm pleased to share our June quarter results with you today. We had our second consecutive fiscal year of record levels of revenue and diluted earnings per share. Revenues increased year over year for the fiscal year by over 17%, and diluted earnings per share rose by more than 21%. We delivered solid performance in the June 2022 quarter. Our results across all financial metrics came in at the high end or above our guidance ranges. Due to our improved execution, and the continued strong demand for our equipment. June quarter revenue was a record at $4.64 billion, which was an increase of more than 14% over the prior quarter and over the high end of the guidance range. While we're making progress on addressing the supply chain challenges we previously talked about, it will take more time for them to be fully resolved. Despite the supply chain improvements and higher factory output levels, we still exited the June quarter with $2.2 billion in deferred revenue, which was an increase of $129 million sequentially. From a segment perspective, memory represented 54% of systems revenue in the June quarter, which was down from the prior quarter level of 66%. The NAND segment came in at 40% of our systems revenue, which was roughly consistent with the prior quarter. Our NAND customers are investing in tools for one 7X layer and beyond devices. On the DRAM side, revenues were 14% of systems revenue, which is a decline from the prior quarter level of 27%. DRAM investments are focused on the 1Z and 1 alpha node addition and convergence. In the foundry segment, June quarter revenues increased quarter over quarter and represented 26% of our system's revenue compared with 21% in the March quarter. The increases related to the timing of customer investments with broad-based spending across both leading as well as specialty-node devices. The logic and other segment had record performance in the June quarter coming in at 20% of systems revenue, higher than the March quarter amount of 13%. Our performance here not only reflects the demand in the market for microprocessors, analog components, image sensors, and advanced packaging solutions, but it also demonstrates the progress we're making in the leading edge foundry logic inflections that Tim talked about earlier. Let me now turn to the regional composition of our total revenue. The China region came in at 31% of total revenue, which was flat with the March quarter percentage. China domestic customers were the majority of the China regional revenue in the June quarter. There was also a strong concentration of investments by our customers in the Korea and Taiwan regions, which comprised 24%. and 19% of our total revenues respectively in the June quarter. The customer support business group revenue was also a record at approximately $1.6 billion, which was up 16% from the prior quarter level and 18% higher than the June quarter in calendar 2021. There was strength across all parts of CSBG. but notably in spares with our customers' fabs running at high utilization levels, as well as in our reliant business with customers investing in specialty market areas such as RF and power devices. While quarter-on-quarter growth rates in CSBG can vary based on customer investment patterns, I believe CSBG is well positioned to again deliver annual growth in 2022. Let me now pivot to our gross margin performance. The June quarter came in at 45.2% above the midpoint of the guided range. Our fixed cost absorption improved somewhat with the higher output levels. However, we continue to have cost challenges in the areas of freight and logistics, semiconductors, as well as in other critical components. We will continue to drive progress improving our operational efficiencies. However, we expect inflationary pressures to be a persistent headwind in the second half of the year. Our September quarter guidance embeds our views on these factors. Operating expenses for June were $635 million, up slightly from the March quarter. The increase was mainly in R&D across all of our business units as we're investing in development of technologies to support our customers' long-term roadmaps, as well as to mitigate some of the supply chain challenges we're having. The June quarter operating margin was 31.5% coming in over the guidance range as a result of the stronger than expected revenue performance. Our non-GAAP tax rate for the quarter was 11%, generally in line with our expectations. We estimate the tax rate for calendar year 22 to be in the low teens level. This estimate doesn't reflect any impact of any potential US tax policy changes. And this is obviously something we continue to monitor closely and we'll update you as appropriate. And just to remind you, as we've discussed in the past, you should expect the tax rate to fluctuate on a quarterly basis. Other income and expense for the June quarter was approximately $87 million in expense, consistent with what we noted on our call last quarter, as well as what was included in the June quarter guidance. We had an increase in expense this quarter related to market declines in one of our venture investments that recently went public. The OI&E P&L line item is subject to market-related fluctuations that will cause some level of volatility data items such as foreign exchange, as well as impacts in the equity markets. We continued to execute on our capital return objectives during the June quarter, allocating $868 million towards share repurchases. We paid $208 million in dividends. Our share repurchase activity was a combination of open market repurchases as well as an accelerated share repurchase program. This ASR will continue to execute during the September quarter. I'd also like to highlight that since calendar year 2012, when we brought Lamb and Novelis together, we've returned approximately 115% or more than $20 billion of our free cash flow to equity holders. Our stated plan is to return 75% to 100% of free cash flow through a combination of buyback and dividends. June quarter diluted earnings per share was $8.83. Diluted share count was 138 million shares, which was lower than the March quarter and lower than our June quarter expectation due to the increase in share repurchase activity. Let me turn to the balance sheet. Cash and short-term investments, including restricted cash, totaled $3.9 billion which was down from $4.6 billion at the end of the March quarter. The decrease in the cash position was attributed to our capital return activity, as well as our usage of cash for growth in working capital, as well as continuing capital investments. We increased the level of inventory we're carrying to support our growing business volumes. Inventory turns were flat with the prior quarter level coming in at 2.6 times. The sales outstanding came in at 85 days, which was essentially flat with the March quarter. It again was a somewhat back-end weighted shipment quarter. Non-cash expenses for the June quarter included approximately $70 million for equity compensation, $69 million in depreciation, and $19 million for amortization. Capital expenditures for the June quarter came in at $126 million, down by roughly $20 million from the March quarter level. Capital expenditures are supporting the company growth in manufacturing in multiple geographies, including the United States and Malaysia, as well as research and development infrastructure investment in California, Oregon, as well as our new technology center in Korea. We ended the June quarter with approximately 17,700 regular full-time employees, which was an increase of approximately 800 people from the prior quarter. We had headcount growth primarily in the factory and field organizations to address the higher output levels, to manage supply chain constraints, as well as to support increasing customer delivery and installation. Looking ahead, I'd like to provide a non-GAAP guidance for the September 2022 quarter. We're expecting revenue of $4.9 billion plus or minus $300 million. Gross margin of 45% plus or minus one percentage point. This gross margin outlook reflects ongoing inflationary challenges that we're seeing in the supply chain. operating margins of 31.5% plus or minus one percentage point, and finally earnings per share of $9.50 plus or minus 75 cents based on a share count of approximately 137 million shares. So then in summary, LAM demonstrated improved operational execution in the June quarter and delivered record financial performance both quarterly as well as on a fiscal year basis. Well, the semiconductor industry is not immune from softening macro factors that we see. FLAM's technology leadership, along with our robust installed base, is a solid foundation for continued long-term growth for the company. And with that, operator, I'll conclude my prepared remarks. Tim and I would now like to open up the call and take questions.
spk08: Thank you. Ladies and gentlemen, if you'd like to ask a question, you may do so by pressing star 1 on your telephone keypad. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment. Star 1 for questions. We'll pause a moment to assemble the queue. We'll take our first question from Harlan Sir with JP Morgan. Please go ahead.
spk07: Good afternoon. Thanks for taking my question and great job on the strong operational execution. You know, as you mentioned in your prepared remarks, we've seen weakness materializing the consumer-focused segments of the market, so PC, smartphones, gaming. For your memory customers, that accounts for about 55% of their total revenue, so they're being disciplined here in the second half and into next year. They're focused on supply-side discipline, a lower profile of CapEx spending. And then on the flip side, Foundry and Logic and IDM customers are seeing, I think, a bit more diversified set of drivers where demand is still relatively healthy. So given that your lead times are stretching into next year, if your customer base is becoming more cautious on the macro demand environment, I assume that they're modulating their orders down for shipments next year. Have you started to see this in your profile of your recent orders? And then maybe more near the midterm, have you guys seen any major changes in cancellations or push outs on scheduled deliveries for this year?
spk14: Okay, I'll take that question, Harlan. It's, I think as you said, we clearly are seeing some weaknesses in certain parts of the market. And we have customers in the memory space and others have been publicly sounding the tone on being a little bit more cautious about their capex and spending going forward. I believe that we've also been saying, though, for several quarters now, that we believe that memory customers have generally been quite disciplined in their spending and how they look at the market. I think it's one of the things that has made that particular segment of the industry quite healthy in recent years, and that is that they respond fairly quickly to changes that they see in pricing and in demand. So that's something I think we've become accustomed to dealing with. And frankly, what I'd say, though, on the demand side is that we really haven't seen any significant change in the demand signals from our customers. And some of that could be, as you pointed out, that lead times remain stretched. And I think people want to take some time to look at how this market's evolving from the different drivers. But we certainly acknowledge that at 23, there's a fair bit of uncertainty, and there are different scenarios that could play out. But I think that LAM is well prepared to execute through whichever of those scenarios actually transpire.
spk15: Yeah, the only thing I might add, Harlan, is we know how to run the company, whatever the environment is. We've been doing it for a really long time. We know what the playbook needs to be when it's up, down, or sideways. We'll respond accordingly. And then when I think about, you know, the things Tim talked about, our position's ever been stronger. We feel really good about the business we're winning, the growing installed base. You know, the company's executing really well. That's the stuff we feel great about. At the end of the day, the market will be what the market will be, and we'll manage the company in the right way depending on whatever that looks like.
spk07: Yep, great insight. Thanks for that. And then supply chain-wise, I mean, the team did a great job of unlocking more Component availability and subsystems availability given the strong upside in June. So given more availability, do you anticipate deferred revenues coming down in the September quarter as a part of your strong revenue guidance? And where are you seeing the biggest supply improvement? Is it component availability? Is it subsystems availability, freight and logistics, or maybe all of the above?
spk14: Yeah, I'll take the first part and let Doug speak specifically to deferred revenue. You know, I think that, you know, we talked in the last couple calls about having somewhere on the order of about 40 task forces deployed out to our critical customers. So, you know, we said the constraints were pretty broad-based. I mean, clearly things like IC component shortages have gotten a lot of attention, but instead it was broader than that. We've seen improvements across a number of those constrained commodities, but We still have constraints, and that's, you know, you see it in how we're still spending, managing our supply chain in the numbers Doug talked about, and also in the fact that deferred revenue actually continued to grow a little bit in the June quarter. So we're nowhere near to where I would say that the supply chain overall is executing like it had in the past. But we've seen kind of broad improvements as a result, we think, of specific actions LAM has taken. And I'll let Doug talk about the September deferred revenue.
spk15: Yeah, Harlan, it's hard enough to forecast a revenue number, let alone the deferring. But if I was going to give you some color on it, I kind of think it's flattish, plus or minus a little bit. And again, it'll depend on how well we progress with the supply chain, honestly.
spk07: Great. Thank you.
spk15: Thank you, Harlan.
spk08: We'll take our next question from Timothy Akuri with UBS. Please go ahead.
spk05: Thanks a lot. Um, so I had a question just on overall WFE. So, um, you know, Tim and Doug, you beat on, uh, on June, you're guiding, you know, better in September and you're getting a little bit, you know, a bit of improvement in terms of, uh, you know, some of these constraints yet the full year WFE is coming down a bit. So can you sort of square that a little bit as some of that, maybe some demand driven that's bringing the year down or is even that mid nineties still a supply constraint number?
spk14: Yeah, Tim, in our view, it's primarily an adjustment we've made based on supply constraints and challenges. Since we gave our last guidance, which we had put at $100 billion to WFE, not only have we seen kind of how we're performing, but we've also heard from others in the industry. And so we have to, in trying to give a WFE number, look to how the entire industry is executing and not just how LAM is performing. we felt it prudent to lower that WFE outlook based on what looked to be still a lot of industry-wide constraints. And so from a demand perspective, as I just said in the last answer, really haven't seen any meaningful change that's really embedded in that lowering of WFE. There's always some tools and projects that move around, but right now, as you see with our deferred revenue and the fact that we're not meeting all demand, if anybody slides out a little bit, somebody else is sliding right into that slot. So we're, we're, we're fully, fully utilized at this point at the numbers we just gave.
spk05: Got it. Got it. Awesome. Thank you. And then Doug, I'd be remiss if I didn't ask about gross margin, you know, someone's going to ask about it. So I guess it'll be me. So, so, so can you just, sorry, Doug, can you just, can you walk us through sort of maybe quantify the headwinds and, you know, would we be at 48, 48.5 if, you know, sort of absent some of these headwinds? Can you sort of like, you know, normalize all that for us? Thanks.
spk15: Yeah, Tim, the way I've been describing it actually for a while now is, you know, the long-term profitability model of the company is unchanged. My expectation of where we're going to perform isn't any different than it was pre-pandemic, pre-all the inflation coming through. The inflationary stuff that's permanent, we've got to work on getting fairly paid for, and the stuff that's temporary, maybe we get paid for a little bit, but then we've got to go pound the cost back. And so what was embedded in that financial model that we gave, I guess over two and a half years ago or something, was kind of 200 basis points above where we are guiding right now, and that's still the way you should think about the long-term profitability of where we're going to drive the business.
spk14: And Tim, the only thing I would add on that point is, you know, there are a lot of questions obviously coming about is the industry slowing or are there some pockets that are going to ease up. I think if that's the case, some of the things that are headwinds to us in gross margin right now, I mean, a lot of the expedites and premiums that we're paying on things like ICs, you would expect those to begin to moderate if some of the outlooks are that some of this demand either gets caught up or maybe... or slows down a bit going forward. So I think there's room for gross margin improvement, as Doug said, over the longer run.
spk05: Definitely, yeah, it's a natural edge. Thank you very much. Yeah, thanks, Tim.
spk08: We'll take our next question from CJ Muse with Evercore. Please go ahead.
spk16: Yeah, good afternoon. Thank you for taking the question. A follow-up question on gross margins, your favorite subject, Doug. We'd love to isolate just on your factory ramp in Malaysia. Can you speak to how that's going, whether that's a headwind or beginning to be a tailwind for you, and how we should think about that escalating into a real tailwind for you guys? Is that a first half 23, second half 23, or later type of story?
spk15: Maybe I'll let... Tim, talk about how the ramp is going, then I'll describe the numbers a little bit, CJ. Okay, yeah, sure.
spk14: So CJ is actually just out there not too long ago. I'd say from an execution perspective and a lot of the improvement we're looking at, I'd say the Malaysia ramp is going extremely well. We're still in the ramping phase there, still in the mode of building out and developing the supply chain. Some of that, especially the supply chain development, might be a little bit behind where we would have wanted to be at the volumes, and that's simply because supply chain development globally is struggling to ramp, and whether that's raw materials or component shortages or labor. But I think it's coming up very nicely. And I think when Doug gives you the answer about how it contributes, I mean, what we have to remember is that Malaysia is ramping at the same time as we're ramping all of our global facilities. And so perhaps in the short run, you're not seeing an easily isolatable impact of Malaysia because we're ramping all other global factors at the same time. But from a ramp perspective, I couldn't be happier right now with the scale of output and the efficiency I see starting to come out of that facility.
spk15: Yeah, and then, CJ, just how to think about the numbers. I think maybe a year ago, I was talking about it being somewhat of a headwind, the gross margin. It really isn't any longer. We're kind of at the point where it's neutral-ish. And as Tim just told you, we're ramping everywhere. you know, eventually that'll be the biggest factor in the network. And as it gets to be a bigger percentage of the total, it'll become a benefit to gross margin, not just from cost of labor, but the fact that our freight lanes will be shorter and the supply chain will move along with us. So I'll keep you updated as we progress.
spk14: Yeah, I think actually just I want to emphasize that one point Doug just made, because in my prepared remarks, I made this comment about part of our strategic transformation over the last couple of years was to put capabilities closer to where they ultimately need to be. And that's in the case of development, closer to customers, and in the case of the factories, closer to supply chains and also customers. And in a period when we're seeing high freight and logistics costs, I mean, I think that ultimately having a large factory close to our customers in Asia is going to be a big benefit for us. So that was a very conscious decision, and I think it's going to pay off We don't know when freight logistics costs normalize, but that's a hedge against those remaining high for a while.
spk16: Very helpful, thank you. As my follow-up, I guess was hoping you could speak a bit to Reliant. And to clarify, do you include Reliant when you break out the percentages, exposure, logic, boundary, memory? And then I guess bigger picture there, the trends you're seeing, particularly as it relates to 200 millimeter, you know, 40 nanometer and above and domestic China. Can you kind of walk through the trends you're seeing there? Thanks so much.
spk15: Yeah, I'll take the beginning and then I'll let Tim take the secondary part. Yeah, CJ, when I talk about the percent of systems revenue in my scripted remarks, that includes reliance as well as the more leading edge equipment that we're selling. So it's all conclusive in terms of system revenue.
spk14: Yeah, I think just in terms of markets and the demand, I mean, I think we can speak as a user of many of those chips where we still see severe constraints and also very high premiums for those chips in the marketplace. I think customers are investing to try to alleviate what today is clearly a mismatch in terms of supply and demand, and that's across all different types of applications. I mean, when I look at the list of ICs that that we're looking for just as one user, it's a broad list from a very broad number of manufacturers. So it's hard for me to pin it down, but I feel like today we're still in a pretty broadly expanding and growing market.
spk17: Thanks so much.
spk23: Thanks, CJ. Yep, you bet.
spk08: We'll take our next question from Joe Moore with Morgan Stanley. Please go ahead.
spk22: Great, thank you. I wonder if you could talk about any potential for export controls. There's been some press focus lately on some incremental controls on exports to China for advanced logic, things like that. Do you guys get any kind of sense for what's coming down the pike there and how that might affect you?
spk14: Yeah, Joe. So to tell you, we were recently notified that there was to be a broadening of the restrictions of technology shipments to China. for fabs that are operating below 14 nanometer. And so that is, that's the change, I think, that people have been thinking might be coming. And our, you know, we're prepared to fully comply. We're working with the U.S. government. And any impact on lamb's business, it's contemplated in the September guidance that we just gave.
spk15: September guidance as well as the full year WFE outlook, Joe.
spk22: Great. And that... Is 14-nanometer logic that doesn't include DRAM?
spk15: Yeah, to the best of our understanding, it's found refocused, yes.
spk21: Great. Thank you very much.
spk15: Thanks, Joe.
spk08: We'll take our next question from Stacy Rasgon with Bernstein Research. Please go ahead.
spk04: Hi, guys. Thanks for taking my questions. I'm always wondering if you could give us a little more color on the drivers within the, um, the, the customer service business, particularly around, um, strength in, in spare parts and 200 millimeter tools. Um, I'm just trying to get some feeling, uh, for, for, for those pieces, especially just, just given the, the broader environment and some of the other news that we've heard around, um, the macro and potential customer order cuts and things like that.
spk14: Okay. I'll, uh, I'll, I'll take the first shot at that. Um, the, uh, You know, maybe it's best to step back and just remind everybody, you know, the CSBG business is comprised of four components, spares, services, upgrades, and reliant. One of the nice things about this business and what we said we really like about it is those often kind of move in somewhat of a non-correlated way. I mean, spares, you know, clearly just moves with our installed base. And, you know, as I look forward, you know, a lot of people wondering what does 2023 look like, we're not going to give guidance, but one thing we always feel pretty comfortable about is We have a very strong equipment shipment year this year. There will be a lot more tools requiring spares and consumables next year. And so that part of the business, it grows. And in fact, what we've said is as devices become more complex and our applications become more critical, in fact, the need for spares and the importance of spares just continues to grow. So spares is just robust and growing The services business has been also strong. I talked about the shift in strategic transformational making towards more equipment intelligence type services. And, you know, as customers, as we kind of look forward, if customers start focusing on productivity and costs and really, you know, in that trying to squeeze the output from their fabs without having to spend additional capex, they turn to things like productivity services, results-based contracts, use of data off of the tools. So I think services has been doing well and I think can continue to do well even in an environment where maybe you see a little bit of impact of macro or spending pullback. Same for upgrades. Upgrades business, actually I've often said over the years that upgrades tend not to do so well when customers are busy adding lots of capacity because they're actually adding capacity, new tools, really focused on that. If they pull back a little bit, the way they save CapEx and still manage their technology roadmaps is they turn to upgrades and tech conversions. And so the upgrades business gets a little bit stronger. And so that business, we think, can continue to do well and maybe even improve in next year's environment. And then Reliant, as we just said, a lot of catch-up to do. I think there have been significant underinvestment for quite some time in that area, as evidenced by the fact that Many of us can't get the chips that we actually need to meet demand. And so there's some catch-up still there. Eventually, maybe that gets caught up. We don't really have a view on when that fully happens. It's a very diverse set of end markets and application drivers, so it's hard to predict. But clearly, at some point, it probably moderates in terms of growth and gets back more towards the steady grower tied kind of to the overall application expansion economy that we're we've seen in past years.
spk04: I guess maybe I should have asked more explicitly, what drove the sequential strength in services? Which one of these pieces was the biggest?
spk15: It was both spares as well as reliance. That's why I called that out in my script, Stacy.
spk04: Got it. Got it. Thank you. For my follow-up, I'm going to ask, this is going to come across a little snarky, but I think I'm going to ask it anyways. I get the inflationary pressures on gross margins, but, you know, All of your customers seem at this point to be inflation-proof in terms of their input costs going up and their ability to pass along.
spk17: Why aren't you?
spk15: So, Stacey, I think, and I've been saying this, I think, for a quarter or two, I don't want you to believe that we're not raising prices because we aren't. I think maybe to our detriment, inflation has been bigger, stronger, more pronounced than we expected that it would be, honestly. And there's some latency to kind of renegotiating prices and whatnot, and that's very much what's going on. And it wasn't a snarky comment. I get the comment all the time. It's an appropriate comment. We're working on getting fairly compensated for what we need to, and we will.
spk04: How much of a driver do you think, if I'm looking at like a year or two, is that latency goes away? I mean, is it 100 bps? Is it more? Like how much can we be thinking? Or is that what helps you kind of get back to the model range?
spk15: Yeah, it's what helps us get back to the model range. What I said earlier is the long-term profitability expectation for the company is unchanged. Even though we're working our way through this inflationary environment, it's probably 200 basis points from where we are to where we need to be.
spk17: Got it. Okay, thank you, guys. Appreciate it. You bet, Stacy. Thanks.
spk08: We'll take our next question from Chris Sankar with Cowan & Company. Please go ahead.
spk25: Yeah, hi. Thanks for taking my question. I have two of them. The first one for Doug. Clearly, you know, the last several quarters have been really strong. You've grown your headcount a lot. Hypothetically speaking, if next year was down in terms of revenue, say 5% or 10%, How should we think about the earnings model and operating leverage? And then I had a follow up for Tim.
spk15: Yeah, Chris, I guess the best thing I would point you to is just look at the history of the company's performance over the last decade, right? We know how to run the company in an up environment. In a down environment, we have a highly variable cost model here. We employ temporary resources. We outsource things. The best thing I would point you to is just look at the last downturn and the same management team is running the company. We'll do the same things. It's a well-worn playbook that we know how to dust off and use when we need to.
spk25: Got it. Fair enough, Doug. And then a question for Tim. Now, maybe this is the first time I'm noticing you talk about advanced packaging on the earnings slide deck. I'm kind of curious on your advanced packaging strategy. Some of your peers have partnered with back-end companies that are looking into panels. How should we think your advanced packaging portfolio should evolve? Are you looking at organic development, M&A, or partnership with a back-end company?
spk14: Well, I think that we're looking at advanced packaging as an important area for LAM to participate in. And we have for quite some time. I actually don't know if it's the first time we've talked about it because I have to believe we have talked about it in the past. But we've talked about it primarily from the standpoint that etch and deposition play an incredibly important role in these new architectures and we have a strong position, especially in applications like both the etch as well as the copper electroplating. As form factors change, you know, we look at that as still our market and therefore evaluate and pursue whatever the best means is to win in those emerging segments, whether that's organic or inorganic. Got it. Thanks, Tim.
spk25: Thanks, Chris.
spk08: We'll take our next question from Toshiya Hari with Goldman Sachs. Please go ahead.
spk32: Great. Thank you so much for taking the question. It's really nice to see your traction and logic and other show up in your numbers in the quarter. To level set, I was hoping you could, you know, sort of quantify where you are from a market share standpoint across those markets today vis-a-vis the corporate average in edge and depth. And where do you see that going in a couple of years, given the current application wind funnel?
spk15: Yeah, if you look at Logic specifically, it's probably our lowest exposure across the markets that we've described. However, I'll remind you, Toshio, that we've been talking about a specific share gain customer that we continue to progress very nicely with, which is part of the strength you saw in the results from June.
spk14: Yeah, and Toshio, I guess I'd just add, I mean, there's a couple things to think about with respect to the Foundry Logic space, and one is Our exposure is lower from a SAM perspective and has been, but actually some of the technology inflections that are currently underway are actually allowing us to participate with some of our more advanced equipment to displace some of the older technologies that have typically been used in foundry logic. And so you're seeing a lot of traction for our selective edge. We didn't list all of the wins this quarter. We continue to see new selections for our selective edge tools. only going to be used at very advanced logic, and it's kind of new markets, new opportunity for us, and we're doing well there. ALD, both dielectrics and metallization, used to deal with the RC inflection, the back-end interconnect inflection. That's creating opportunities for us. And so I think that we're seeing a little bit of share gain at certain customers, as Doug mentioned, but also an expansion of our opportunity And that's driving a lot of our new product roadmap. We have the objective to improve our position in Foundry Logic for more advanced nodes.
spk32: Yeah, that's helpful. Thank you. And then as my follow up, probably one for you, Tim, just on dry resist, it's great to see you guys. you know, have traction there as well. Obviously, SK Hynix is public. I'm pretty sure you're working with other customers on this as well. But help us quantify, you know, how significant this business or this product could be in a couple of years. And as you partially sort of displace traditional track or coded developers, what percentage of the market do you think you can capture in a couple years? Thank you.
spk14: Okay. Well, I think, you know, I don't want to get out with sort of a new disclosure here, but I think we're We've quantified it in the past as roughly about a $1.5 billion opportunity over a five-year period. And you're just starting to see us, you know, we talked about development tool of record wins, so obviously we're not yet putting this into a production fab and developing revenue, so we'd just be at the very first stage of that. But that should give you some kind of sense maybe in the next five years of the kind of revenue impact we're talking about. But this is still a much... longer play for us. And I talked about this idea of accelerating the development of the dry resist for the high NA EUV. And so if you think EUV is going to be around for the next 10, 20 years as the primary patterning capability for advanced logic, then our opportunity just continues to grow throughout that period. So it starts off the next five years at that $1.5 billion and then just continues to grow with layer count and application. And we think that as you get to high-end AUD, I think it's, you know, we have a good chance to capture a lot of the market.
spk32: Tim, sorry, when you say five years, I know you guys initially talked about the, say, your 2020 analyst day. Is it five years from then or five years from today?
spk14: Well, I don't know. Yeah, I guess I'll just start the clock now because, as I said, we've only reported development tool of record positions today, obviously, which we haven't yet started to generate revenue from. So it's, yeah, I think you can call it five years from today. It's a safer bet than five years from our analyst day.
spk02: Sounds good. Thank you. Yeah, thanks, Joshua.
spk08: We'll take our next question from Atif Malik with Citi. Please go ahead.
spk06: Yes, thank you for taking my question. I have a question for both of you. It looks like Senate has passed the CHIPS Act. Tim, you along with Intel and Micron CEOs, we spoke to Congress in March about the importance of passing this legislation. So assuming it goes through Congress and the president signs off, can you talk about what this bill means for the U.S. equipment makers? And Doug, if you can talk about how will it impact LAM in terms of any tax breaks or into the market share growth and logic foundry areas? Thank you.
spk14: Okay, well, obviously it's of significant benefit for the U.S. semiconductor manufacturing industry overall. I think most directly what I would say is that, you know, LAM's benefit from this will come in two ways. One is, you know, as our customers invest in capabilities in the U.S. and capacity, obviously we're hopeful that we will garner a large share of the equipment that's purchased for those fabs. That's one way in which monies from that flow through ultimately into business for lamb. Specifically, when I was in front of the Senate, one of the things that I talked about is think long-term. If you think about long-term improvement for U.S. companies and U.S. semiconductor manufacturing, it has to do with some of the R&D money that's in that, I believe, in the CHIPS Act, which is going to fund longer-term capabilities that help semiconductor device makers but also equipment makers develop those next generation technologies that keep us incredibly competitive on the global stage and allow us to create those technologies without having to necessarily fund and take on all of that risk ourselves as individual companies, which is always hard to do for technologies that might be seven, eight, ten years into the future. That's the other way I would say that companies, both device makers and equipment makers, can benefit. We need to see all the details, but that's my initial take.
spk24: Thank you. Are you there, Atif? Any follow-up? No, I'm good, Doug.
spk15: Okay. All right. Thank you.
spk08: We'll take our next question from Vivek Ari. with Bank of America. Please go ahead.
spk29: Thanks. I had two questions. First one, is this $4.9 billion that you're guiding to for September, is this kind of the new quarterly baseline? So all else being equal, should we expect December sales and gross margins to potentially be flatter up? I appreciate you're not giving December outlook, but is there anything that could make you deviate from this new trend line that you have, you know, June stronger and then September even stronger than that.
spk15: Yeah, Vivek, you're right. I'm not going to guide the December quarter for you. Listen, I think we're pretty pleased with the progress from a supply chain standpoint we made in the June quarter. It continues to be reflected in the September quarter. Barring something new coming up, I think our execution will continue. And that largely has been what has limited the revenue generation of the company. And you see, you heard me mention the $2.2 billion in deferred revenue. So that's there for us to follow up on. But I'm not going to give you a number for December quite yet. Understood.
spk29: And then the second one is just a clarification. What is your sub 40 nanometer exposure to China? I didn't think there was, you know, any or not that much. And do the restrictions apply to just China domestic, or do you think they could apply to the multinationals with fabs in China?
spk14: At this point, we would assume that it applies to all sub-14 nanometer activity in China. And, you know, we're not going to quantify what we might have, you know, or had in our plans for sub-14.
spk29: But, Tim, just to clarify, September you said is de-risked, i.e., There is zero sub-40 nanometer China business for you in your September outlook.
spk15: The guidance fully reflects everything that we just described.
spk08: Yes. Okay.
spk15: Thank you. You're welcome.
spk08: We'll take our next question from Mark Lipikas with Jefferies. Please go ahead.
spk20: Hi. Thanks for taking my question. I had a clarification and a question. The clarification, Tim, I think it was an earlier question. about whether you were seeing push-outs or cancellations. It sounded like you said that you're not seeing any impact on your demand, but I just want to make sure I understood your response to that question. And then my question is, can you help us understand the mechanics of your manufacturing operations or how you deal with the slots that you have? before you allocate it to your different customers as the orders have come in. What kind of latitude do your customers have if they come in and say, well, I don't know if I want the tool now. I prefer it in three months. Do you guys flip-flop slots in the queue, or do you just send people back to the end of the line? If you could just kind of review the mechanics around how you treat the orders as they come in and what happens to customers who ask for the push-outs. That would be helpful. Thank you very much.
spk14: Sure, I can try to address both of them. So, yeah, just to be clear, my comment was at this point we've seen no pushouts and changes in demand, no pushouts, no cancellations that are at all meaningful. However, I mean, I want to acknowledge, I mean, it's with long lead times and stretching, you know, through 23 and a cautious tone being struck by some of our customers quite publicly, I'm not saying that we might not ultimately see those changes come. Saying that we've seen none doesn't mean that that might not happen. But at this point, the commitments that we have today are being met and that was what I was trying to signal. I think with those long lead times, it moves into your second question, which is, so what if a customer does come and say they'd like to push a project by a few months or even longer or We treat it the same way we are doing right now when customers come and have asked us to pull in slots. We work with all of our customers to see where people really are in their projects and their demand. We have not ultimate flexibility within our manufacturing, but I talked about the fact that we've invested in the last two years to try to create greater operational flexibility. Part of it is so that we can respond in that way. We treat our customers very much like partners. need to push for by a couple of months because maybe it's either demand or more likely sometimes it's the facilities aren't quite ready or there's a change in their plans.
spk18: We try to work with them and make those adjustments if it's possible.
spk19: Gotcha. Thank you very much. It's very helpful. Yeah. Thanks, Mark.
spk08: We'll take our next question from Patrick Ho with Stifel. Please go ahead.
spk10: Thank you very much, and congrats on a nice quarter. Doug, maybe for you, in terms of the supply chain, obviously you've seen some improvements in the past quarter that will carry into the next quarter. Are some of the issues now just related to the quantity of shipments because it's still going to be a more second-half weighted year for you guys? So even with some of the incremental improvements on the supply chain, it's now just trying to, I guess, continue to keep pace with the high demand levels that you're seeing near-term, and that's why the deferred revenues are staying at the same levels, at least as you're forecasting into the September quarter?
spk15: Yeah, Patrick, that's clearly part of it, right? We've got unmet demand. We've got partial shipments that shows up as deferred revenue. Each supplier has a unique situation that we're working through with them to the extent that they're not meeting what we need from them. But, yeah, we increased, improved the output last quarter, and we see that continuing as we go into September.
spk10: Great. And as a quick follow-up, maybe for Tim, obviously you've been working with a leading MPU customer for some time now, and we're starting to see the share gains and the higher quantity of volume as they start ramping new products. But you've been working with them for some time. As you work with them and given their more accelerated roadmaps in terms of technology nodes, can you maybe not quantify but qualitatively say that you've seen some incremental new market opportunities and that's what gives you confidence with that customer on a going forward basis?
spk14: Like I said, brought it to all customers. I mean, I'm going to speak to the one, but I think what we've always said is that LAM's greatest opportunities get created as those technology changes, those technology transitions occur. And I spoke to a couple of you just as an example. You think about somebody implementing GATE all around in, say, their next technology node or future technology node. It does create new opportunities for us. And we have designed equipment kind of ahead of where the roadmaps are. And so the faster those technology changes come, the sooner we get the opportunity to insert those new applications into their production lines in a bigger way. And so, you know, we've talked about some of those at Selective Edge, some of our new ALD tools. Of course, it's some of our Edge systems that are designed for, to really support the fine pitch patterning associated with EUV. So it's EUV, like at each technology node, you use more and more layers of EUV. That grows for us. And so, You know, every customer, the faster they transition technology, the greater SAM's, LAM's sort of market is growing and the greater our share opportunity is increasing.
spk09: Great. Thank you.
spk23: Thanks, Patrick.
spk08: We'll take our next question from Blaine Curtis with Barclays. Please go ahead.
spk31: Hey, guys, thanks for taking my question. I just want to follow up on the demand outlook. I mean, I hear you said you haven't seen much. I mean, I'm just looking at the areas that you mentioned being strong, and I think we've seen a lot of those same areas see weakness, image sensors and MCUs, APs. I mean, Qualcomm said they're caught up on supply. So I know that's not your forecast. You get them from the customers, but I'm just kind of curious. You've been through these before. When you look downstream, you definitely see weakness. I'm just kind of curious if you, you know, what you've actually seen yet. Obviously, you know, memory, same story. You're hearing about CapEx cuts. Just trying to fit all this into the picture versus, you know, I know you're still catching up, so I don't know what the right starting point is, but clearly you're seeing downstream weakness.
spk14: Yeah, Blaine, you know, obviously, as we acknowledge, we're clearly hearing customers strike a more cautious tone We see what's going on around within the macro. And so we haven't given a 2023 outlook to be clear. And I think what we're saying is that, you know, if as demand, you know, if demand changes and as demand changes, you know, LEM is set up to operate effectively within whatever that environment is. And clearly we have different scenarios. But the key is, you know, as we look forward, Things like our larger installed base business will be helpful for us regardless of what the environment looks like. The improvements we've made, say, in our foundry exposure with new share gains and SAM expansion, that will be a positive regardless of what the end demand looks like. The higher etch and depth intensity due to the technology inflections is true regardless of what the end demand is. And the fact that we have a more diverse and more efficient and more effective global manufacturing infrastructure, that'll also be helpful regardless of what the demand is. So I think what we're trying to highlight is we're not going to be the best at forecasting, probably no better than anybody else, and really knowing exactly what 2023 is going to be looking like. But we do believe we have a pretty good view of how LAM can execute very well within whatever that environment is.
spk31: Thanks for that. And then you might have answered this before, but just on the deferred revenue balance, I'm just curious, You are seeing people start to catch up. I know you mentioned that it could be flat in September, but just trying to understand the challenges. Are you still having certain subsystems that you can't get? Or is it more like you're just getting higher orders in the door and the balance keeps going up? Just trying to understand why that hasn't started to work its way down.
spk14: Well, it's just that, one, it's a higher volume of output we're trying to achieve. And quite frankly, it's just all components. And I would say everything is sort of improving. But in general, there's quite a still number of quantities that aren't able to meet now that new higher level that we want for the output. And so it just continues to increase. So I couldn't point to one specific thing. But I would say that, in general, I'm happy with the improvements we're seeing across a broad array of our suppliers, and so I said I thank them for their efforts because I do see that incremental improvement and expect further improvement as we move to September. Thanks so much. Thanks, Brian.
spk27: Yep. Operator, we have time for one more question, please.
spk08: Okay. We'll take our final question from Joe Quattrochi with Wells Fargo. Please go ahead.
spk11: Yeah, thanks for taking the question. Another question on the Reliant business. It's pretty well known that the third-party reseller market for tools has been pretty limited on supply. How do we think about that market competing against the Reliant business? And then how should we think about that supply of used tools maybe increasing if demand does start to slow from the in-market semiconductor perspective?
spk15: Joe, I guess the first thing I would point out to you is, yeah, historically that's been a segment of the market serviced by a lot of used equipment. Today there isn't any used equipment or very little. And as a result of that, we're selling older model new equipment into the Reliant product line, right? Demand is, there isn't anything coming to be refurbished today. So I don't know, Tim, do you want to?
spk14: Yeah, no, I think that's clearly the case. Most of that If not all of that equipment at this point is being fully utilized.
spk11: But I guess do you see that changing if demand were to slow from a semiconductor perspective? Do you see the amount of tools coming in to be refurbished somewhat changing? Or do you think customers maybe continue to kind of hold that capacity?
spk14: I don't see that changing in a very significant way. I mean, these assets, once they're into these fabs, I mean, we tend to see our tools used for 20 to 30 years producing chips of some different technology nodes. I think as far as it's been to get equipment, I think many of these customers will definitely keep hold of those systems.
spk18: At least in my view. Thanks, Joe.
spk08: This concludes today's question and answer session. I would like to turn the conference back to your presenters for any additional or closing remarks.
spk27: Thank you, operator. We appreciate everyone joining our call today, and thank you all for your support.
spk08: Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.
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