Lam Research Corporation

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.

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.

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.