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spk09: Good day and welcome to the LAM Research December 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tina Correa, Corporate VP of Investor Relations and Corporate Finance. Please go ahead.
spk11: Thank you, Operator, and good afternoon, everyone. Welcome to the LAM Research Quarterly Earnings Conference Call. With me today are Tim Archer, President and Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment and we'll review our financial results for the December 2022 quarter and our outlook for the March 2023 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.
spk08: Thank you, Tina, and Happy New Year to all that are joining us today. LAM ended 2022 on a strong note. We posted record revenues and earnings per share for both the December quarter and the calendar year. Systems revenue growth in our FoundryLogic segment exceeded FoundryLogic wafer fabrication equipment growth, demonstrating our continued progress launching new tools and winning applications in that space. In our install-based business, our CSBG revenues expanded faster than the growth in installed base units. We also generated more than $3.5 billion in cash from operations and returned over 100% of free cash flow to stockholders in the form of dividends and share buybacks. Overall, LAM executed well in 2022. We delivered solid results in an environment of acute supply chain constraints and strong inflationary pressures. Still, there are elements of our performance where we recognize the opportunity for additional focus, and with the pressures of the COVID pandemic and the global chip shortage abating, our attention this year is on the actions needed to hit our long-term growth and profitability objectives we laid out in March 2020. Beginning early in the COVID pandemic, Lam and others throughout the supply chain quickly ramped investments in infrastructure and resources to meet unprecedented demand driven by remote work trends and the accelerated digitization of the global economy. As seen in our results today, these investments have enabled LAM to achieve revenues of greater than $5 billion per quarter, approximately 70% higher than what we saw in the last upcycle. As we look forward into 2023, however, we see a substantially weaker demand environment and a corresponding need to make prudent changes to our near-term operations and priorities. Customers across all segments are exercising caution, especially those in the memory markets. Inventory levels in both NAND and DRAM remain very high, and customers are not only reducing new capacity additions, but also lowering FAB utilization levels to bring excess inventory into balance as quickly as possible. In addition, the US government's new restrictions on sales of equipment, parts, and services for specific technologies and customers in China are further impacting equipment demand in a declining market. In 2022, WFE spending ended the year in the mid $90 billion range, slightly higher than our prior view due to easing supply chain constraints. As we indicated in our last earnings call, we expect calendar year 2023 WFE to be in the mid $70 billion range. Given the decreased business levels expected this year, we have made the difficult decision to reduce our overall workforce by approximately 1,300 employees by the end of the March quarter, about 7% of our global employee base. While the reductions are broad-based across the company, we have taken special care to preserve and in some cases increase our investments in the critical R&D efforts, which I believe are key to LAM's long-term growth and competitiveness. Despite reductions in overall company spending, we expect R&D as a percentage of operating expenses in 2023 to increase compared to 2022. We will also be taking specific actions to transform our business processes and enterprise systems to ensure that when stronger WFE spending returns, the company is well positioned to scale quickly and efficiently across our global infrastructure. These actions will contribute 100 basis points of improvement to our gross margin from March quarter levels as we exit calendar year 2023. And we expect the operating margin benefit to be slightly higher than that. Over the past few years, We have been executing on a set of strategies that we believe strengthen our ability to capitalize on the robust secular demand trends we see ahead in our business. In just the past two years, we have opened a state-of-the-art engineering center in India, brought online a new technology development center in Korea, and ramped our new manufacturing operation in Malaysia. These strategic investments place critical LAM capabilities closer to customers and ecosystem partners, a benefit for stronger collaborations, greater scalability, and increased resilience, all of which will be of greater importance as we see more than 50 new fabs being built over the next few years globally. They also provide wider access to talent critical to supporting LAM's growth longer term. We have also been drawing on learnings from our rapidly growing install base to support our customers' manufacturing roadmap. Our installed base of approximately 84,000 chambers is more than 30% larger than in the prior down cycle. A solid installed base business not only provides a platform for stable revenue growth long term, but also delivers data and learnings that are key to an efficient product innovation process. At this scale, there is a tremendous opportunity to extract value for our customers and for land. The data we generate from our installed base helps drive fab productivity improvements, and the capabilities of our equipment intelligence products are helping us migrate from standard service offerings like engineer on-site labor to more comprehensive results-based contracts and predictive smart solutions.
spk03: The number of chambers in 2022 with another strong growth year
spk08: expected in 2023. We have been strategically focused on technology inflections, notably in FoundryLogic devices, with the goal of broadening LAMS positioning in a market segment where we have been under-indexed. In 2022, we continued to make progress. We have doubled our conductor edge share node-to-node and leading FoundryLogic customer through the success of our Keo product, which uses equipment intelligence to deliver best-in-class uniformity and improved yield. In the selective edge business, our recently released Argos, Prevost, and Celus tools are gaining increasing traction. Our Argos product is in roughly 20 applications at a leading FoundryLogic customer, and in adjacent selective applications at another customer, our Prevost and Celus tools are production tool of record for gate all-around applications. Continued scaling of Foundry Logic devices from existing nodes is expected to increase edge and deposition intensity around 25% to 30%, thus creating tremendous opportunity for us to gain share through new innovations for future devices. Lastly, we have continued to make both organic and inorganic investments to expand our market. LAM's innovative dry-resist fabrication technology has one development tool of record positions at multiple customers for key steps in the patterning process. And we are actively engaged with customers across both the memory and foundry logic segments. We expect to announce more on this in 2023. In advanced packaging, our recent acquisition of SEM Cisco, we have expanded our capabilities within the leading edge logic and chiplet segments. We are rapidly integrating SEM Cisco technology with LAM's market-leading capabilities in plating and web processing, and we have already achieved a key win in this area. Customers view advanced packaging solutions in both wafer and substrate formats as critical to enabling future high-performance computing and AI applications, and LAM is well positioned to benefit from this trend. So to wrap up, 2022 presented many challenges. With our team's focus and strong execution, we were able to meet our customers' needs, deliver record revenues, and expand our product and technology portfolio. This coming year represents a reset in the market and in our business, but is also an opportunity for us to make the changes needed to accelerate our strategic priorities. I am confident that by taking the difficult actions that we have announced today, we are putting LAM in a stronger position to capitalize when industry spending growth returns. With that, I'll pass it on to Doug.
spk02: Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a busy earnings season. We had a record financial year in calendar 2022. Our revenue came in at $19 billion, and we delivered an all-time high for earnings per share of $37.31, which was a 15% growth in earnings per share over calendar year 21. Overall, I'm pleased with the operational performance we achieved this past year, delivered while navigating a challenging business environment with global supply chain constraints, significant inflationary headwinds, and fluid regulatory restrictions. We have also achieved record levels of performance in the December 22 quarter across multiple metrics, including revenue, operating income dollars, and earnings per share. Revenue for the December quarter was $5.28 billion, an increase of just over 4% from the prior quarter. We delivered higher levels of system sales and deposition and etch, offset somewhat by a decrease in CSBG revenue. Deferred revenue at the end of the quarter was $2 billion, a decline of $770 million from the September quarter. Supply chain constraints have improved and we were able to fill shipments of many critical parts that's required for revenue recognition. Our expectations are that the deferred revenue balance will continue to decrease in the March quarter as we fully complete shipments related to outstanding back-ordered systems. The deferred revenue balance decrease I just spoke about was partially offset by some increases in deferred due to customer cash in advance deposits, which I also noted last quarter. As we sit here today, I expect to have some level of these type of deposits in the deferred balance throughout calendar 2023, keeping deferred revenue at somewhat higher levels than we've historically seen. I anticipate that the deferred revenue from back orders will be at a normalized level as we exit the March quarter. Let's turn to the revenue segment details for the December quarter. Memory represented 50% of systems revenue, which is slightly down from the prior quarter level of 52%. Included in memory, the NAN segment represented 39% of our systems revenue, flat with the September quarter. The spending was primarily focused on 192 layer and above class devices. The DRAM segment concentration decreased sequentially from the prior quarter, coming in at 11% of systems revenue, compared to 13% in the September quarter. The DRAM investments were mainly targeted towards 1Z and 1 alpha nodes. I expect that we will see both NAND and DRAM revenue decline meaningfully in the March quarter. For calendar 2023, I expect NAND spending to decline more than DRAM. We continue to see strength in the foundry segment with the December quarter concentration comprising 31% of our system's revenues. While this percentage is a little bit lower than September quarter level of 34%, the dollar amount was flat with a mix of investments in both leading and mature node devices. The logic and other segment revenue came in at a high watermark for the company, contributed 19% of systems revenue in December quarter, compared with 14% in the prior quarter. Investments were focused on microprocessor, image sensor, and advanced packaging technologies. LAM had strong momentum in logic and other throughout calendar 2022. I expect we'll continue to perform well in this segment. I'd mention that this was a record revenue level for us in microprocessor-related revenue. We've been talking about momentum here for a while, and it's clearly showing up. With respect to the regional composition of our total revenue, the China region was 24% of the total down from the prior quarter level of 30%. This reduction was due to the US government sales restrictions for certain domestic customers, which were put in place in early October of 2022. Rounding up the top regional revenue locations, Korea comprised 20% of total revenue, up from 17% in the prior quarter, and Taiwan decreased to a concentration of 19% compared to 22% in the September quarter. The customer support business group results in the quarter were approximately $1.7 billion, which was down 9% from the September quarter, though it was 16% higher than the December quarter of calendar 2021. As we've noted in the past, CSBG revenues will fluctuate on a quarterly basis, And in the December quarter, we experienced declines in the CSBG product lines with reductions in utilization and system spending. Going into calendar 2023, we have the impact of China regulatory restrictions in addition to memory spending at well below historic levels and elevated customer device inventory. These factors are resulting in customers having underutilized factories and taking actions to manage their supply levels in 2023, negatively impacting our spares and services business. While we continue to believe the mature node segment will perform better than overall WFE spending, we are in an unprecedented business environment and expect the CSBG business could be down somewhat in calendar year 2023. Let me now pivot to our gross margin performance. The September quarter came in at 45.1% over the midpoint of the guided range, but down from September quarter's gross margin of 46%. The decrease from the September quarter was tied to customer and product mix. With the decline in business volumes in March 2023 quarter, we expect lower factory and field utilizations to unfavorably impact our gross margin on a sequential basis. Operating expenses were $686 million in the December quarter, up 6% from the prior quarter amount of $647 million. The higher spending was mainly in R&D projects, which comprised nearly 67% of our total spending. Supporting our customers' roadmap continues to be a top priority for us while we focus on managing other areas of discretionary spending within the company. December quarter operating margin was 32.1% over the midpoint of guidance due to the higher level of revenue and gross margin. Our non-GAAP tax rate was 11.9% in line with expectations. Looking into calendar 2023, we believe the tax rate will be in the low to mid-teens with some fluctuations quarter by quarter. This rate estimate does not include any impacts from potential US or global tax policy changes. Other income and expense came in for the quarter at $38 million of expense, approximately $9 million higher from the prior quarter, mainly due to negative foreign exchange fluctuations, which was somewhat offset by higher interest income because of increasing returns on our cash and investments. OINE will continue to be subject to market-related fluctuations that will cause some level of volatility quarter by quarter. On the capital return side in the December quarter, we allocated approximately $483 million to open market share repurchases. Additionally, we paid $236 million in dividends in the quarter. For the 2022 calendar year, we returned 119% of our free cash flow totaling $3.5 billion, which was somewhat higher than our long-term capital return plans of 75% to 100%. December quarter diluted earnings per share was $10.71, which was at the high end of our guidance range. Diluted share count was 136 million shares, which was lower than the September quarter and in line with our December quarter expectations. During 2022, we lowered share count by nearly 6 million shares through our share buyback program. Now moving to the balance sheet, our cash and short-term investments, including restricted cash, were up to $4.8 billion versus the prior quarter level of $4.6 billion. Operating cash flow of $1.1 billion in the December quarter was offset by cash allocated to share repurchases, dividend payments, and capital expenditures. Inventory turns were 2.4 times. Day sales outstanding were 70 days, a decrease from 82 days in the September quarter due to strong collections and improved linearity within the quarter. I would point out that we expect 2023 to be a strong cash generating year as working capital comes down with lower business levels. Our non-cash expenses for the December quarter included approximately $73 million for equity compensation, $73 million in depreciation, and $12 million in amortization. Capital expenditures for the December quarter were $163 million, a slight increase over the September quarter spending of approximately $140 million. The expenditures were in R&D and manufacturing, including our Korea Technology Center and our Malaysia factory. We ended the quarter with approximately 19,200 regular full-time employees, which was an increase of approximately 500 people from the prior quarter. Our growth was in the factory and field to support the manufacturing, as well as installation of tools at our customers' fabs. Also included in this headcount growth were 150 employees from the San Francisco acquisition that was completed in the December quarter. As you heard from Tim and saw in our earnings release, we will be reducing our regular full-time headcount by approximately 1,300 employees. We expect these reductions to be largely reflected in our June quarter ending headcount. In addition to the full-time reductions, we expect to be lowering our temporary workforce by approximately 700 people in the March quarter. We've already adjusted our temporary workforce down by 700 people in the December quarter. Let me now turn to our non-GAAP guidance for the March 2023 quarter. We're expecting revenue of $3.8 billion, plus or minus $300 million. I'll also just mention that we currently think revenue will be somewhat first half-weighted this year as we consume the reduction in deferred revenue in the March quarter. Gross margin of 44% plus or minus 1 percentage point. The decrease in this is the result of lower business volumes. Operating margin of 27.5% plus or minus 1 percentage point. And finally, earnings per share of $6.50 plus or minus $0.75, based on a share count of approximately 135 million shares. We will be taking a charge of approximately $80 million in the March quarter from the headcount reduction. Including this impact and the other near-term actions that Tim spoke about, we are anticipating a total of $150 million to $250 million in charges to be incurred over the next 12 months. In addition to headcount, We anticipate potential charges from facilities restructuring, business realignment and transformation, and product rationalization. On top of the cost savings activities, we are driving a greater focus from our senior leadership team through inclusion of additional profitability metrics in our annual incentive compensation structure. Currently, we're at low volumes given the business environment. These initiatives will structurally improve our profitability. As Tim already laid out, we expect gross margin to be higher by roughly one percentage point and to expand operating margins by a little more than that as we exit the calendar year and complete these activities. Over many years and cycles, LAM has established a proven track record of successfully managing this business. With the actions we plan to execute throughout the year, we expect to strengthen our operations and technology leadership and further enhance our profitability profile with the company's returning growth. When business improves, and we know it will, LAM will be a stronger, better positioned, more efficient company. Operator, that concludes our prepared remarks. We would now like to open up the call for questions.
spk09: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, press star 1 to ask a question. And we will take our first question from Harlan Sir with JP Morgan. Please go ahead.
spk15: Good afternoon. Thanks for taking my question. Given the 20% pullback in WSE spend this year, significant memory spending pullback within that, does the team still believe that the memory mix and spending expansion in memory will accelerate exiting this year? And then what's your view on the supply-demand environment in memory and normalization of excess inventories in the industry?
spk08: Yeah, Harlan, I'll start on that one. You know, I think that the memory market and our market in general is difficult to predict from a timing perspective. So when you try to put a ending the year kind of time on, it's hard. But, you know, as Doug laid out, there's a couple points. I mean, one, we've seen extraordinary measures within the memory market in terms of reductions, not only in spending, but also cuts in FAB utilization. And, you know, in some cases, even delays of technology investments. I think these are somewhat unprecedented in terms of trying to bring this market into balance. We also see, you know, a memory as a percent of the total WFE mix that's that's at levels that we haven't seen in 25 years. And so I guess what we walk away with is a lot of confidence that memory spending will accelerate, but we're not at this point ready to put an exact time frame on that. A lot of the actions that we talked about that we're taking in the company are to ensure that in the next up cycle, we'll actually be far more nimble to respond to changes in demand than we were when we were impacted by the ramp that came around the COVID pandemic. So that's really where we're spending a lot of our time thinking about less on timing, but more about how is the company going to be prepared to respond to that ramp in memory spending when it inevitably comes, and how do we ensure we can do that in the most efficient and profitable way possible.
spk03: Perfect.
spk15: And then on the impact from China regulatory and export controls, You know, YMTC was formally put on the entities list in mid-December. Did this move change your prior view of a $2, $2.5 billion impact for revenues this calendar year due to the China restrictions?
spk08: No, when we put out the $2, $2.5 billion, fundamentally it comprehended an inability to ship to the customers that at that point were operating at the technologies that were restricted by China, so it didn't change it. I would say today our view is still in that $2 to $2.5 billion range. No change at all, Harlan.
spk15: Perfect. Thank you. Thanks, Harlan.
spk09: We will take our next question from Joe Moore with Morgan Stanley. Please go ahead.
spk12: Great. Thank you. I guess I wanted to ask about the deferred. And if you draw it down to sort of normal levels in March, it implies shipments that are kind of well below the revenue level. You know, I guess with CSBG running at close to $1.7 billion, it doesn't seem like the June quarter could fall that much. But can you just kind of give us a little bit more clarity on what it means that you're drawing down that much deferred in March?
spk02: It just means there's no more left at the end of the March quarter, Joe. I don't really have any more than that to tell you. And yeah, shipments are lower than that revenue number as we get to deferred. Kind of back to what I would describe as a normalized level from a backorder standpoint.
spk12: Okay, and I think you've described normal in the past as being around $700 million, and you said it would be a little higher than that. Is that the right math?
spk02: Yeah, that's right, Joe. What I see happening right now is we've got, I call them customer cash and advanced deposits, which we haven't yet shipped the tools. And I think as we go through 23, it's going to stay at a slightly higher level from that category than it's been in the past. So I think it's a little bit higher, somewhat higher than that number that you just mentioned.
spk12: Great.
spk02: Thank you very much.
spk12: Thanks, Joe.
spk09: We will take our next question from Timothy R. Curry with UBS Securities. Please go ahead.
spk10: Hi, thanks. Doug, I had two questions. First of all, it's sort of on Joe's question that he just asked, and it sort of is the profile, not in your revenue, but more in your system shipments through the rest of the year. You said slightly first half loaded from a revenue perspective, but I would assume that your system shipments are going to be like March is probably the bottom, and it sort of like flattens off from there. Is that fair?
spk02: Yeah, that's fair, Tim. I think maybe I'll answer a slightly different question. When I think about WFE in the mid-'70s that Tim described, I think it's fairly balanced through the year. Revenue is somewhat per-separated because we're drawing down that deferred revenue balance. I just wanted to point that out, which is why I scripted it that way.
spk10: Perfect, Doug. Thanks. And then just on that point, you guys are usually 13%, 14% of WFE. And your system shipments in March would imply that, you know, WFE is sort of 16 to 17 in March. So that's more like mid-60s versus a mid-70s number for the year. So is the answer that, you know, Litho is making up the difference because obviously all of us heard ASML today and, you know, systems are up, you know, 20% plus this year. So is the story this year really that you're going to get to mid-70s predominantly because you're adding, you know, an extra XXX billion dollars of litho year-over-year. Is that the math? Thanks.
spk02: Yeah, Tim, I think that's part of it. You know, when I looked at WFE down more than 20% this year, memory is down a good deal more than that. Foundry logic, a lot less. Litho is a heavier percent of the foundry logic spend. And I want to specifically point out the biggest decrease from a segment standpoint is in NAND. which, as you guys all know on this call, is our strongest segment in nitrogen deposition at RAM. So that's kind of important to understand, I think, and why I specifically pointed to that as I went through the commentary.
spk03: Thank you, Doug. Thanks, Tim.
spk09: We will take our next question from CJ Muse with Evercore ISI. Please go ahead.
spk17: Yeah, good afternoon. Thank you for taking the question. I guess first question, I was hoping you'd provide perhaps a little more granularity on the restructuring. You talked 100 BIPs, gross margin, and a little bit more than that. Is there any way to kind of give a sense of how we should see that play out throughout calendar 23, and what kind of leverage should we see specifically on the OPEX side?
spk02: Yeah, there's some in OPEX, Tim. Obviously, we're taking... reductions in every spending category. So you'll see it everywhere. That's why Tim and I said operating margin would be more than the improvement in gross margin.
spk17: Is there any way to quantify what that might look like?
spk02: That's all we're going to give you right now, CJ. I mean, the other thing you can back into, obviously, is the implied spending guide in the March quarter comprehends some of this headcount activity that we're describing. So you're seeing some of it in the March quarter, I think, if you go decompose the guidance.
spk17: Okay, great. I guess a follow-up question. As you think about the moving parts for CSBG, obviously, you've got a year-over-year China headwind. You talked about reliance. I guess, how do you see the rest of that core business? Does that core business grow? And is there a way to maybe perhaps rank order, you know, what's doing well and then what's doing worse?
spk08: Yeah, TJ, let me take that. Just to remind people, four segments in CSPG, spares, service, upgrades, and reliance. And so I think kind of in terms of your impact segment, Really, if you think China impacted both spares and service, it made it impossible for us to provide spares and service to customers that previously had a pretty sizable chunk of tools in their installed base. So impact on both of those product lines from China. Those same two product lines impacted by memory customers' cuts in utilization. So you've seen and heard from our customers talking about the number of tools they've taken offline in their DRAM and MAN fabs. Obviously, if you're not running the tools, you don't need spares and you don't need service. So, again, those same two product lines impacted by those changes. The Reliant business, obviously, you know, just in that trailing edge boundary logic, I would say we're pretty comfortable with that business that we see continued strength there. Maybe not enough, obviously, to offset the other... The other two impacts, though, and that's what Doug said, were in a little bit of extraordinary times in that we would have previously thought that that business couldn't go down, but the combination of both China plus utilization hit those two product lines harder. Now, we know that as customers begin to spend again, the first thing they do is they bring the tools that they already have in their installed base back online, and so we would expect that the spares and service business that was impacted by utilization cuts to recover quickly, and we could immediately service that as soon as the business starts to improve.
spk03: Very helpful. Thank you. Thanks, Sujit.
spk09: We will take our next question from Krish Sankar with Cowan & Company. Please go ahead.
spk13: Hi, thanks for taking my question. I have two of them. First one is for Tim or Doug, and thanks for the call out on calendar 23WFE, and I understand it's too early to talk about 24th, But if you look at some of your memory customers, they've publicly spoken about taking the utilization rates down. So could there be a scenario where next year they could improve the utilization rates, improve wafer and bit output without necessarily adding WFE? Or do you think on a quarterly basis, WFE bottom sometimes this year and next year hopefully is a better year and add a follow-up?
spk08: Yeah, okay. I'll start and let Doug add. I think that obviously... There have been utilization cuts. I mean, I think right now, if you look at, at least by our estimate, and listening to what our customers say, you know, we're at very low levels of supply growth this year as a result of the lack of additions and utilization cuts. So I don't think you could quite get to the scenario you're talking about where you just bring utilization, you know, unutilized tools back online. There's a second factor, though, which is, remember, I mean, customers make investments also to move their technology forward. And that's a pretty substantial portion of why WFE gets spent. It's not often just about capacity addition. So I think that customers can only go so long before you have to invest in the technology to move to that next node and gain the efficiencies that you do there. So I think that, of course, we'll work with our customers to bring tools back online, get utilization, work on productivity. But I think spending will return at some point.
spk13: Got it, got it. Thanks for that, Tim. And then a quick follow-up for Doug. You know, just thanks for the call in on the back half revenues, this first half. How do you think about gross margins, given the fact that the top line is decelerating? You're also, you know, ramping up Malaysia. China seems to be a mixed bag. So I'm just kind of wondering how to think about gross margins or how to think about where they could potentially draw. Thank you.
spk02: Yeah, Chris, I hope we're kind of bouncing along the bottom right now. I can't guarantee that. But specifically what we try to describe, both Tim and I, is that with these actions we're taking, we believe there's upward momentum to gross margin as we exit the year. We're trying to get kind of capacity right, staffing of the capacity right, so that as we exit the year, we think there's a point of gross margin upside, plus or minus, where we're at.
spk13: Got it, got it. Thanks a lot, Gus. Thank you.
spk03: Yeah, thanks, Chris.
spk09: We will take our next question from Stacey Rasgon with Bernstein Research. Please go ahead.
spk16: Hi, guys. Thanks for taking my questions. My first one, I just wanted to touch on the deferred again. I just want to make sure I have it right. So you're running $2 billion now. It sounds like you think normalized deferred might be a billion. So you've got a billion that's potentially coming out in March. Is that the right way to sort of think about the underlying demand, like wherever it is, just like a billion dollars, like short of where we are, short of where the guide is?
spk02: And then going forward, that kind of... Stacey, I think deferred is going to be higher than that billion dollars because of these cash advance payments I was referencing. It's not going to go that well, I don't think. And I think it's going to stay. I think I've previously led everybody to believe deferred revenue would be in that high, multiple hundred...
spk16: million dollar range I think it's decently above a billion now because of this this other category of stuff I see it's like a billion and a half or can you give us a little more color on that yeah it's like a billion and a half okay that's helpful thanks um my follow-up you know I just I do want to ask a little more philosophical question the workforce reductions And maybe as it relates to WFP, I mean, like we probably did, oh, I don't know, $40 billion in memory WFP in 2022, and it's going to be down a lot in 2023. Like even if it grows in 2024, how long does it take to get back to that sort of 2022 level, like if ever? And do the cost cuts that you're doing, are they in some sense a function of how you might view like that long-term sort of steady state WFP for memory versus where we're coming off in 2022?
spk08: Yeah, Stacey, maybe it combines a little bit of maybe the last question we had as well, which is we're making these cuts and taking this action to make the company efficient and profitable at this level of business, and so therefore we're not really looking and saying we need a big increase or rapid increase in business to justify what we keep afterwards. But I did mention the focus that we have on ensuring that As we make cuts and as we reposition, especially the global operations infrastructure, we think about how quickly we can ramp up because we know when memory comes back, it often comes back much faster than people expect. And so I can't tell you when it gets back to these numbers, but what I want to make sure is that when it does return to stronger spending in the memory side, we're able to ramp that up and do it efficiently so we don't have a lot of the profitability issues headwinds that we've been talking about for the last 12 to 18 months. And so that's the way I think about it. Get the company to the right size now for this level of business, but with the idea that we have the infrastructure and the business systems available to us and the supply chain infrastructure to ramp more quickly, more efficiently, should the market overshoot where our estimate is.
spk16: But why don't you need to cut more then? Because the cuts only take you back to where headcount was like six months ago.
spk02: Stacey, I'm comfortable at the profitability levels of the business at these revenue levels. We're getting things structured in the right way so that the P&L looks acceptable.
spk08: I think, Stacey, not all those heads were added in the volume side of the business as well. And so I talked about, and I think you'll see when you look at the P&L where we are trying to preserve what is strategic spending on the R&D side and products that we think are important for the future growth of the company and competitiveness of our business. We're still committed, as I said at the beginning, to our model of gaining market share in both the memory and the boundary logic side of the business, and some of the spending is there as well. So these are the cuts we think that are appropriate for how we think the business needs to be run through this cycle.
spk16: Got it. That's helpful. Thank you, guys. Thanks, Stacy.
spk09: We will go next to Tashiya Hari with Goldman Sachs. Please go ahead.
spk01: Great. Thank you so much. I had one clarification and then a follow-up question. On the clarification, you know, last quarter, I think you guys sized the potential impact from China export restrictions to your business in calendar 23 at $2 to $2.5 billion, I believe, three quarters. on the system side, a quarter in services. Are those numbers still your expectation for calendar 23? Any change there?
spk08: Yep, no change.
spk01: Got it. And then my question, probably for Doug, in terms of gross margin, you know, last year you talked about freight and component costs being a headwind, and you also talked about pricing as a potential lever to offset costs. some of the headwinds. How should we think about those dynamics as we progress through the 23? Any progress? Thank you.
spk02: I guess what I described is in some of the inflationary buckets I've been talking about for however long I've been talking about it, some of it's getting somewhat better. And some of it, I think, will get better, but we're not seeing it yet. So that's in what we've been talking about. And then relative to pricing activity, we continue to work on that. There's some things that's already showing up in the P&L in the March quarter, but we continue to have ongoing conversations with customers about the right level of pricing, and that will continue as we go forward.
spk01: And when you talk about the 100 basis point improvement exiting the full year, is that an all-in number, embedding all those factors? Yes.
spk02: Yeah, to the best of our self and as you sit here right now, yeah, that's all then of the pluses, the minuses from business going down and the adjustments we're making in terms of the footprint of the company.
spk01: Got it. Thank you so much.
spk02: Yeah, thanks.
spk09: We will take our next question from Vivek Arya with Bank of America Securities. Please go ahead.
spk04: Thanks for taking my question. I'm trying to gauge what is kind of your trough quarter this year conceptually, right? I understand that you don't give exact forecast. But if I go through this deferred revenue math, so let's say another $500 million comes out, suggest that your March shipped revenue conceptually is about $3.3 billion. Does that reflect all the China and memory capex cuts So that is sort of your trough revenue quarter, or do you think there is more to come? So the trough revenue quarter might be later this year, closer to three or some other number. I'm just trying to conceptually gauge what is the trough quarter for this year so we can get a sense of what trough earnings power could be.
spk02: Tashia, I guess the best, or sorry, Tashia, Vivek, the best I can do is just say what I've already said. Revenue is somewhat first half weighted, largely because we're pulling the deferred down in March. In March, it's pulled down to where it's going to be. And so you've got to kind of think about that, plus the fact that I told you we think WFE is fairly balanced, first half, second half. And I think if you think that through, you'll get it pretty close to where it should be.
spk04: Got it. And then, you know, the second question that I have is, you know, China sales were 24%, I believe, of total in December. Could you give us a sense for how much of that was China domestic? And then what do you expect China to be as a percentage of your sales in March and if you have a number for roughly for calendar 23?
spk02: Yeah, in December, I'm trying to remember the number. More than half of it certainly was domestic China. I forget the exact number, Vivek, to be honest with you, but more of it was domestic China. As we go through, China is going to be impacted to the $2 to $2.5 billion from the customers we can't ship to. When I think about China WFE, that means China WFE is going to be down somewhat in 2023.
spk04: Okay, so this $2.5 billion, is that kind of run rate reflected in your March outlook? That's what I wanted to just get a sense for.
spk02: Yeah, the things that we've kind of lost from that $2.5 billion, there's nothing in the March quarter. So that's part of the $2.5 billion. There isn't any more reduction from March as we go forward. I'm not sure I'm making it clear to understand it, but there's always timing of different customers spending money. It's not that China is going to be up and down. China will be up and down as we go through the quarter, I expect. But the impact from the regulations is already fully in effect in the March quarter is what I'm trying to describe.
spk04: Got it. So basically, Doug, just to kind of lay it down, If I take the March X deferred, you know, 3.3 billion, right, and kind of assume, you know, quarterly run rate is that level, that's sort of how the shape of, you know, calendar 23 revenue should be, right?
spk02: Listen, we only guide revenue one quarter at a time. I'll guide June when we get to the next quarter earnings numbers.
spk03: Thank you. Yep, thank you.
spk09: We will take our next question from Atif Malik with Citi. Please go ahead.
spk05: Hi, thank you for taking my question. Doug, is the equipment demand now below the supply that you can receive from your suppliers?
spk03: Is it below?
spk08: Sorry, is the question about supply chain constraints?
spk05: Right, I mean, are they fully removed now and the demand has fallen below the supply line?
spk08: Yeah, well, as we said, we saw a significant improvement in supply chain constraints in the December quarter, which is partly why we were able to deliver higher than we had anticipated revenue. So I would say that supply chain constraints are easing. There's always and remain some parts of the supply chain that are still not fully recovered. But I would say that if you went back and compared where we are today versus 12 months ago dramatically improved. But I think that we'll continue to work on that through probably the remainder of this year on those remaining issues.
spk05: Got it. And Tim, in your prepared remarks, you talked about conductor edge market share doubling node to node at one logic maker. And gate all around presumably is a big technology inspection that should help you guys Can you talk about the timing of the production ramp for Gator all around? Is it a second half of next year story or is it more like a 2025 event?
spk08: Yeah, I think that, I mean, you see customers starting to talk about and announce kind of limited production. Yeah, obviously there's a qualification cycle. probably better for them to talk about their own timing, but it's not a material issue for our 2023 numbers, let's just say. So it's a beyond 2024 and beyond event. But those are the types of things that, again, if we think about where we want to take this business, part of this is about increasing our exposure into that market where there's tremendous need, and I talked about the increasing demand intensity for edge and deposition in that space in Foundry Logic. And most of those big technology inflections where our tools are most suitable, things like selective edge, things like high aspect ratio critical edge, the use of those tools are just increasing in these new 3D architectures. The increased use of advanced packaging in Foundry Logic and AI applications Those are, again, areas where LAM can bring our edge-depth technology to bear. So, you know, timing, again, hard to predict, but we are making great progress at the development tool of record and early production tool of record stages.
spk03: And I think that as we see those markets ramp, that's good for LAM. Thank you. Thanks, Howard.
spk09: We'll go next to Sydney Ho with Deutsche Bank. Please go ahead.
spk06: Hi, good afternoon. Thanks for taking my question, Gianmarco, on to Sydney. Tim, just on CSBG, apologies if I might have missed this, but can you guide us on how you see each of the buckets that play into CSBG, how these will contribute to the segment's overall performance in 2023, and I have a quick follow-up.
spk08: Sure. Yeah, I kind of hit on that a little earlier, but it was basically the four segments, spare, service, upgrades, and reliance. And, you know, again, in a normal year, we would actually always see spares in particular expanding with the growing install base. I talked about the fact that, you know, our install base is substantially larger than it was during the last down cycle. You know, we just grow the install base, spares grow along with that. And the impact this year to that business, though, is somewhat unique in that the China restrictions did pull spares business immediately out of our revenue plan given that we cannot sell spares to certain customers and technologies in China. So that's a unique reset to that business. And then the second thing that impacts spares is when customers cut utilization, those tools are idled, obviously don't need spares. So I would say the spares business is impacted by those two impacts. Service Similarly, we can't service the tools in China that are at restricted customers and technologies and also utilization. Customers tend to look to save money by doing the service themselves during these times or when tools are offline, they don't need service. And so those two product lines are kind of the most impacted, I would say, by these changes. Reliant, again, growing because Trailing Edge still grows and upgrades. You know, while I said some people might be delaying, again, just to, from a CapEx sensitivity perspective, some upgrades, I would say there's less impact in that part of the business.
spk06: Got it. That's pretty helpful. And then one more of a long-term question for me. I guess one of your major customers noted, like, very elevated infrastructure costs, roughly four to five times when they build out fab capacity outside of Asia, right? I guess, what are the implications to equipment spend as customers try to, obviously, diversify capacity across regions?
spk08: It's a good question. I mean, obviously, you know, all customers are cost-sensitive regardless of where they're building fabs. I mean, we certainly know as people move into costier regions, you know, I think the story is the same week. We compete and we win business based on building tools that deliver excellent technology with high productivity. And I think that if I thought about what probably that means from an equipment trend perspective, I talked a lot about equipment intelligence. You think about it, if you're moving into a region where already some of the base costs are higher, you're gonna want tools that require less human interaction, less servicing, tools that can do predictive work in order to try to keep them up and utilized at a higher rate. And so I think that you'll see those types of customers pull for some of our smart solutions where you can kind of pull some of that labor content out. You can keep tools up and running more often and therefore extract more from the capital that you've invested.
spk06: Thanks for the call, Tim. That's very helpful. Thanks.
spk03: That wasn't Sydney.
spk09: We'll take our next question from Blaine Curtis with Barclays. Please go ahead.
spk14: Hey, thanks for squeezing me in. I have two questions. One, I just wanted to, you know, obviously a lot has transpired over the last 12 months and clearly a huge correction in memory. You're saying Foundry Logic down something less than the group, the overall is. I'm just kind of curious how you're thinking about that. I mean, obviously... you know, memory had to work through low utilizations, and now they're pulling back on, you know, the capacity ads, and, you know, same in markets. So kind of just how are you thinking about Foundry, you know, kind of progressing over this year or next?
spk08: Yeah, I guess, you know, right now, obviously, we still see, as we said, memory or Foundry logic being down substantially less than memory this year. You know, we've also made the comment that as a percent of total WFE memory is at levels that you just haven't seen in 25 years. And so therefore, you know, I guess we look at it and it's either we see strong Foundry logic spending, but we actually think that with that Foundry logic spending and the devices and applications that are created, that'll be another one of the drivers that pulls through memory usage and causes and perhaps accelerates a memory recovery. And so I think that the two are intricately tied in terms of the end applications, but sometimes the timing of the capacity additions and such are out of sync, and I think that's what we see right now.
spk02: Yeah, Blaine, I guess what I would describe is... Go ahead, ask your next question. I want to hear what you're going to say, Doug. I was just going to say, at the end of the day, you need all of this in the system architecture. When you look at a hyperscale architecture, you don't just have logic devices and accelerators without memory, right? It's all got to kind of all go on the same motherboard, if you will. What we've got going on, at least in my perspective right now, is we're sitting on Nexus and inventory in the memory area to a significant extent, and it's just got to get consumed. We're at a different point in the classic cycle, was what I was going to describe, Glenn.
spk14: Okay. I guess, I mean, it's a question, I want to follow on to my own question, but it's also one for yourself. I mean, you look across the industry in semis, inventories are going up. You know, I think you've seen this in memory, but also with semiconductor companies and your inventories as well, right? So it suggests exceeds demand, right? So I guess, one, I guess that's why I question why Foundry Logic can continue, and I think memory might be leading the show there. But I guess as it relates to you, inventories are at a very high level. So I'm just kind of curious, as another play on gross margin, where do you think your inventories need to go? And if you have to dial back your production, is there any kind of headwinds to gross margin to think about?
spk02: Yeah, Blaine, our inventory is going to go lower. I guess is what I would describe, right? Business is coming down. We'll need less inventory to supply a lower level of business. It'll come down.
spk14: That I can tell you for sure. And does that have any impact on gross margin?
spk02: Yeah, a little bit. But when I describe an expectation, Tim, when I describe an expectation that as we exit the year, gross margin is a point higher, that contemplates the fact that factory absorption, utilization, and so forth is going to be lower and we'll be bringing inventory down.
spk14: Awesome. Appreciate it. Thank you.
spk11: Thanks, Bob. Operator, we have time for one more question, please.
spk09: Thank you. And we will take our last question from Joe Quattrocchi with Wells Fargo. Please go ahead.
spk07: Yeah, thanks for taking the question. Last quarter, you had talked about the reliant business or kind of warned us that, you know, with the decline in WFE and just kind of weakness in consumer electronics, that that business could also be negatively impacted. And it sounds like maybe this quarter, you're a little bit more constructive on that business. Is that, I guess, the right way to think about it? And then two, maybe what's driving that?
spk02: Yeah, no, Joe, we didn't mean to describe it any differently. I think last quarter and this quarter we said we expect that segment of boundary and logic to be somewhat better than overall WFE. I think we said that last time. I'm pretty sure we did, and we're saying that again.
spk08: Okay. Yeah, I think the reason it may have come across, Joe, just a little bit – maybe a little more constructive than the other product lines that were within CSBG. I think there was a question about kind of ranking them or stacking those. It's the least impacted by the changes like time restriction and utilization. That was maybe why I came across that way. No intention to send a different message from last quarter, though.
spk07: Got it. That's helpful. And then just in terms of the total CSBG business, When we think about the impact on the China, you know, export restrictions, obviously the utilization coming down just across the board is a negative impact. But would that business be, I guess, closer to flat? You know, it's just kind of like-to-like without the China export restrictions?
spk02: It'd certainly be doing better. And, yeah, we described it as flat. likely down somewhat. And historically, I've always said this is a business that should grow every single year. I wish I wouldn't have said that because I couldn't envision the environment we're in with utilization in China and so forth. So we're just giving you kind of the lay of the land right now, Jeff. Okay.
spk07: Thank you very much.
spk02: All right. Thank you. Thank you, operator. I think that concludes the call for us. We're wrapped up here. Thank you all for joining.
spk09: Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.
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