Lam Research Corporation

at this time I turn the conference over to Tina Correa please go ahead thank you and good afternoon everyone welcome to the lamb research quarterly earnings conference call with me today are Tim Archer president and chief executive officer and Doug Bettinger executive vice president and chief financial officer during today's call we will share our overview on the business environment and we'll review our financial results for the March 2022 quarter and and our outlook for the June 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.

Thank you, Tina. LAM reported revenues of $4.06 billion and earnings per share of $7.40 in a severely supply-constrained environment. While we were able to deliver results within our guided ranges, I am disappointed that we are not performing better in a very strong demand environment for our equipment and services. continued component shortages, along with new challenges that emerged, including COVID-related lockdowns, along with exacerbated and already stressed supply chain situation. As a result of the larger range of issues, our original expectation for the timing of output recovery proved to be optimistic. In response, we have intensified the focus across LAM. We are committing the financial resources and workforce required to both meet our customers' priority tool needs in the short term, as well as increase the long-term resiliency of our global supply network. Our recovery efforts span from embedding LAM experts at key suppliers to collaborate on shortages, to increasing field resources to accelerate installation of tools once shipped. Customers are partnering with us to qualify additional component suppliers, and we have assigned more engineering resources to work on design and sourcing for alternative parts to improve supply chain flexibility. Despite the issues we still face, I am thankful for the tremendous efforts from LAM employees, our suppliers, and our customers through this challenging period. While the near-term pace of supply chain recovery is difficult to assess, we are confident that our actions will result in progressive improvement in our performance on a go-forward basis. Our deferred revenue balance exiting the March quarter was over $2 billion. as we ship systems to customers to accelerate tool installations but could not recognize this revenue within the quarter due to the lack of certain critical components. Doug will elaborate more on the deferred revenues in his prepared remarks. On the demand side, the environment remains very strong. While continued supply-related delays could potentially limit how much wafer fabrication equipment investment can be executed in 2022, our current WFE view is still in the $100 billion range. We see unconstrained demand exceeding $100 billion in 2022, and any unmet demand should flow into next year. Our confidence is rooted in the fact that the powerful secular drivers of WFE spending are unchanged. Greater semiconductor content, rising device complexity, and larger die sizes all contribute to a healthy setup for sustainably strong WFE levels. An example of this can be seen in the smartphone segment, where unit growth may be flattening year over year due to inflationary driven softness in consumer markets, but the average NAND and DRAM content is increasing around 20% year over year, driving demand for WFE. In servers, we see overall growth in both units and content, with server DRAM content per CPU growing in the 20% range from the prior year. On top of this, the drivers of LAM's specific growth are also unchanged. Etch and deposition are critical technologies required to transition semiconductor manufacturing to higher performance and more scalable 3D device architectures in memory, foundry logic, and advanced packaging. LAM's leadership position in key enabling technologies for 3D devices evidenced by our installed base in leading-edge fabs worldwide, is a solid foundation for long-term outperformance. And with our continuing investment in an exceptional pipeline of new products and services, we are increasingly well-positioned to win at the 3D inflections. On the technology front, we are winning new applications across etch and deposition and across all device segments. We are strengthening our overall market position by delivering differentiated solutions that enable higher aspect ratio structures, enhance device performance, and increase manufacturing productivity. Over the past two calendar years, LAM's total revenue growth has exceeded that of our large peers. This is in part due to our gains in the foundry logic market, where we were historically under indexed. And it is also a result of our success in expanding our CSBG installed base opportunities. Through innovations like LAM's equipment intelligence solutions, we are helping address our customers' capacity constraints by utilizing vast quantities of tool data to improve system performance and enable faster tool installations. In the March quarter, we expanded on our selective etch wins at a large FoundryLogic customer. At the same time, we have added new wins in our conductor etch business. In one example, we are set to double our conductor edge share at a key Foundry Logic customer as they transition to their next node. At another leading Foundry Logic customer, we have successfully replaced a competitor's tool at a critical step by helping the customer accelerate their move to the newer node. Key to our traction in these wins is our ability to enhance our product offerings with equipment intelligence solutions to deliver the best edge uniformity and improve yield. thereby addressing customers' cost and performance requirements as they execute their scaling roadmaps. In deposition, we continue to see significant momentum for both our ALD metals and dielectric solutions for leading-edge FoundryLogic nodes. In DRAM, where the highest performance devices are adopting more advanced CMOS technology, like High-K metal gate transistors, we have leveraged our FoundryLogic success to win new applications in the DRAM 1B nodes. As customers ramp capacity on these nodes, our edge share in this segment is set to expand. In deposition, our critical spacer applications enable lower capacitance, thinner films to support further device size and power scaling. In the March quarter, we secured two wins for critical spacers at a large DRAM customer for their leading node. In the NAND segment, we also won a highly contested decision at a key customer where we demonstrated a superior ALV solution for a critical transition to a next generation low resistance enabling film for their word line applications. Shifting to our CSBG business, results were down modestly in the March quarter predominantly due to the global supply constraints that impacted our reliant upgrades businesses. While CSBG is subject to quarterly fluctuations, we believe our expanding installed base over a longer period offers a stable platform for revenue growth. During the March quarter, we secured FAERS contracts at two of the world's largest IDMs with the cumulative contract amount exceeding a billion dollars. We see calendar year 2022 to be another strong growth year for our CSBG business. So to wrap up, We believe we are making progress on the extraordinary industry supply challenges, but overcoming the breadth of issues that have emerged is taking longer than we initially expected. We are focused on meeting the critical needs of our customers and have committed both the financial resources and workforce required to recover as quickly as possible. With continued strength in the equipment demand environment and progressive improvement in our supply chain, we do expect LAM to post another solid year of revenue and EPS growth. With that, I'll turn it over to Doug.

Excellent. Thank you, Tim. Good afternoon everyone and thank you for joining us on our call today during what I know is a busy earnings season. In the March 2022 quarter, we delivered results within the guidance ranges for all our financial metrics. However, we missed the midpoint for all numbers. As Tim discussed, We experienced broadening supply chain issues that negatively impacted our revenue as well as our profitability. Delays in securing critical parts needed for shipments of our tools hindered our ability to meet our revenue objective and led to increased spending as we focused on initiatives to mitigate these constraints. Deferred revenue grew by over $600 million. The magnitude of the increase reflects the heightened degree of part shortages that we're experiencing, which impacts our ability to recognize revenue on tools that we've actually shipped. Our inventory balance also increased as we're procuring the parts that we can and building to meet the growing unmet demand that we see. On the margin side, we have headwinds from adding resources to address the supply chain challenges, as well as to be prepared for the higher volumes we see in the second half. Additionally, we have ongoing supply related inflationary pressures. We were able to partially offset the gross margin headwinds through operating expense management during the quarter. As a result, March operating income and earnings per share came in closer to the midpoint of our guidance. We see ongoing costs and supply constraint challenges continuing to impact our guidance for the June quarter. Let me now turn to the details of our revenue for the March quarter. Revenue came in at $4.06 billion, a decrease from the December quarter. The memory segment was sequentially stronger in the March quarter, with concentration of 66% of systems revenues. This was up from the prior quarter level of 58%. The strength in memory during the quarter was led by the DRAM segment, where we had a record level of revenue for the company and a percent concentration at 27% of systems revenues. This compares with 23% that we saw in the December quarter. The DRAM investments were primarily for 1Z and 1 alpha node additions, as well as conversions. The NAND segment was 39% of our systems revenue, higher than the 35% in the prior quarter. Our NAND customers are investing in tools for 128 layer, through 192 layer devices. In Foundry, March quarter revenue comprised 21% of our system's revenue versus 31% that we saw in December. The decrease quarter to quarter is related to the timing of customer investments. There continues to be solid investments in this segment to address end demand drivers such as AI, IoT, cloud, high performance computing, and 5G. I would expect to see increases in this segment as we progress through the year related to both leading as well as matured node device investments. We see continued progress in the logic and other segment, which contributed 13% of systems revenue in the March quarter and is a record in terms of revenue dollars. We're seeing good traction here, notably in etch. as we expect continued growth in this segment during calendar year 2022 as our customers invest to meet the demand requirements in the market for microprocessors, image sensors, and advanced packaging solutions. I'll now turn to the regional composition of our total revenue. The China region came in at 31% of total revenue. The split of the China revenues was fairly balanced between the domestic and multinational customers that have fab locations in China. There was also a strong concentration of investments by our customers in the Korea and Taiwan regions, which comprised 24% and 16% of our total revenues, respectively, in March quarter. The customer support business group revenue was approximately $1.4 billion, which was down 5% from the prior quarter. CSBG was 8% higher than the March quarter of calendar 2021. Our reliant and upgrade product line revenues were negatively impacted in the March quarter by the ongoing supply chain constraints. Nonetheless, there continues to be healthy demand in the specialty market across numerous customers, as well as investments by our customers for upgrades across their installed fleet of tools. Our spares business remains strong given the high utilization levels in the industry, and we're also seeing solid customer pull for services for the same reason. As we've noted in the past, CSBGs can fluctuate on a quarterly basis, but our expectations continue to be that this business will grow annually. Let me now shift to our gross margin performance. The March quarter came in at 44.7%. We are experiencing a multitude of cost pressures with increases in freight and logistics rates, raw materials costs driven by commodities such as nickel and aluminum, as well as increased integrated circuit costs. Our June quarter guidance reflects our expectations for a sustained level of cost headwinds as we manage through and adapt to this inflationary environment. Operating expenses for March were $621 million, down from the prior quarter level of $627 million. We managed our overall spending levels during the quarter while continuing our focus on supporting our emerging customers' technology roadmaps. We are also deploying incremental R&D resources towards qualifying new supply sources to help improve our supply chain challenges. Incentive compensation expenses that, as you know, are tied to the company's profitability were also lower in the quarter. The March quarter operating margin was 29.4%. Our non-GAAP tax rate for the quarter was approximately 10%. And as I've shared with you in the past, the tax rate will have some fluctuations from quarter to quarter. Looking into calendar year 2022, we expect the ongoing tax rate to be in the low teens level. And I just mentioned that we continue to monitor potential tax changes in the United States that are under discussion. But given the uncertainty there, we've not yet reflected the impact of any changes in our modeling. Other income and expense came in for the quarter at approximately $44 million in expense. And I'll just remind you, in the December quarter, we had income for this line item due to a gain in one of our venture investments that had raised capital in the public offering. We also had favorable results from our venture investments since the time we set guidance that contributed positively in the March quarter by approximately 11 cents in earnings per share. OINE is subject to market-related fluctuations that will cause some level of volatility in this P&L line item. We're forecasting a more negative OINE impact in June's guidance based on what we currently see in the equity markets. We were active in our buybacks during the March quarter, allocating over $1.2 billion towards share repurchases. The cash was deployed in a combination of open market repurchases as well as an accelerated share repurchase program. The ASR will continue to execute during the June quarter. We paid $211 million in dividends during the March quarter as well. March quarter diluted earnings per share was $7.40. Diluted share count was 140 million shares, which was lower than the December quarter and less than our March quarter expectation due to the increased share repurchase activity. Let me shift to the balance sheet. Cash and short-term investments, including restricted cash, ended at $4.6 billion which was down from the prior quarter level of $5.6 billion. The decrease was primarily driven by the capital return activities that I just spoke about. Additionally, operating cash was at a somewhat lower level this quarter due in parts to the investments we're making in inventory to help mitigate some of the supply challenges. Inventory returns were down from the prior quarter level coming in at 2.6 times. Also, due to the timing of customer shipments occurring later in the quarter, our day sales outstanding came in at 83 days, which was an increase from 73 days that we saw in the December quarter. Non-cash expenses for the March quarter included a $69 million in equity compensation, $64 million in depreciation, and $20 million for amortization. Capital expenditures in the March quarter were approximately $145 million, which was fairly flat with the December level. Capital expenditures were mainly focused for growth activities such as our silicon spare parts facility in Ohio, the Malaysia factory expansion, and the new Korea Technology Center. We had approximately 16,900 regular full-time employees as of the end of the March quarter, which is an increase of approximately 600 people from the prior quarter. We had headcount growth primarily in the factory and field organizations who addressed supply chain constraints while supporting customer deliveries and installations. Let me now shift and look at our non-GAAP guidance for the June 2022 quarter. We're expecting revenue of $4.2 billion, plus or minus $300 million. While customer demand continues to be strong, we see ongoing supply chain constraints. First margin of 44.5% plus or minus one percentage point. Our guidance reflects expectations of an inflationary cost environment and the continued need to very tactically manage the execution in the supply chain. Operating margins of 29.5% plus or minus one percentage point. And finally, earnings per share of $7.25 plus or minus 75 cents based on a share count of approximately 139 million shares. So then let me wrap things up. Our execution in the March quarter came in a little short of our expectations. While we worked through incremental challenges with our supply chain that is continuing to limit our output, demand remains robust. Exiting the March quarter, we had our sixth consecutive quarter of growing backlog. Visibility to end demand is high. We have a solid foundation in our share position with strong traction to date and new opportunities going forward in all market segments. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions.