Q2 2020 Earnings Call

This time I would like to turn the conference over to Mr. Korea, corporate VP of Investor Relations Ma'am. Please begin.

Thank you and good afternoon, everyone welcome to the Lam Research quarterly earnings Conference call with me today, our Kim Archer, President and Chief Executive Officer, and does that injure executive Vice President and Chief Financial Officer.

During today's call, we will share our overview on the business environment and review our financial results for the December 2019 corridor and our outlook for the March 2020 corridor. The press release detailing our financial result was distributed a little after one o'clock PM 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 in Q in a includes forward looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SCC public filings.

Please see accompanying slides in the presentation for additional information today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified.

A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings press release.

This call is scheduled to last until three o'clock PM Pacific time, a replay of this call will be available later this afternoon on our website with that I'll hand, the call over to Tim Thanks, Dean and welcome everyone in the December quarter Lamb delivered revenues and diluted earnings per share bulk the midpoint of guidance Mark.

Can you another quarter solid execution in closing out a year of strong performance in calendar 2019.

Consistent with our common throughout this year, we enter 2020 with increasing momentum and an improved spending mix environment, which we believe will lead to outperformance by Lam.

Well completed my first year as CEO of Lam research and I am incredibly proud what are people have achieved.

Underpinning are strong financial results. This past year has been a companywide focus on execution and an emphasis on our culture. We're all employees can perform their best.

I want to think Lams employees across our global organization for their efforts and of course or partners and customers for their valued support.

I also want to take a moment to address the Corona virus situation.

Our concern first and foremost is with that health and wellbeing of our employees customers and partners and with this in mind, we have implemented precautionary measures within our global business operations. Additionally, we are donating to Chinese relief efforts to support the people in communities impacted by the Corona virus outbreak.

Now turning to our business results in calendar 2019, we generated solid operating cash flows and at the same time, we invested a company record in research and development dollars to fuel technology innovation and product differentiation.

Our EPS performance the second best in the company's 40 year history was especially noteworthy given that memory spending declined significantly year over year in 2019, the impact of lower memory spending was partially mitigated by record revenue from our customer support business group highlighting the.

Importance of our recurring spares and service opportunities to the overall quality of earnings of the company.

In 2019, we also saw outstanding execution in our product organizations. We grew our revenue share of WSE spend in memory and foundry logic and we laid the foundation for additional gains as we recorded our best ever performance in net penetration in defense application wins as measures.

New potential over the next three years.

We are winning by focusing on high volume manufacturing solutions for emerging technology flexion challenges, including those associated with new scaling architectures, new memory technologies and new materials.

We're capitalizing on the learning from our installed base of tools that today enable some of the industry's most critical etch and deposition applications.

Example, for the three most critical applications in Threed NAND, our Strada, altice and flex tools each process well over 1 million wafers per month in high volume manufacturing, allowing us to partner early and in a unique way with our customers on next generation needs.

In 2019. This led to the addition of new products to our portfolio such as the vector DT, which is designed to address wafer stress problems encountered during the high volume production of Threed NAND stacks of 96 layers and above.

Similarly, we enhanced the capabilities of our corona's product family to improve device yielded the wafer edge on depositing encapsulating layers for beveled protection.

Performance scorecards.

In part this improvement is due to our investment in productivity enhancing upgrades for our installed base.

For instance, corpus wafer edged solutions and become key differentiators for our conductor and die electric catch system in high volume manufacturing and have been instrumental in helping our customers reduced cost of ownership.

Announced in 2019, a corpus enable self maintaining edge tool that ran for one year in high volume manufacturing without human intervention.

Multiple customers are now upgrading their installed base tools to include this high value added capability.

In 2019, we highlighted heterogeneous integration in advance packaging as new areas of opportunity to leverage our product portfolio in three d. learning to drive growth.

And the December quarter, we built on our growing momentum in this space with additional wins for our saber three to D. electroplating system and multiple advance packaging customers.

With these latest wins, we estimate that we have gained more than 15 points to market share in the last two years and we have firmly established ourselves as the technology leader in the increasingly important through silicon via market.

Another girl's for the company has been in atomic layer deposition or A.L.D.R.A.L.D. solutions are gaining significant traction in the market by delivering best in class film properties, along with high productivity and low defects.

Due to the inherent advantages of higher film quality income for malady are strike or you know the oxide systems are replacing older process alternatives such as spin on dialectic N.S.A.C.V.D. for critical applications pulling more W.F. he's spending into our served market.

Similarly, R.C. scaling requirements are driving increase demand for our single way for striker carbide, an office A.L.D. metallization systems.

When used for located carbide liner space or applications are striker system has been able to achieve 30% better R.C. properties versus competing batch tools.

<unk>, we closed out 2019 on a high note was significant wins and logic foundry for our also systems as customers look to replace the conventional barrier fill sequence with an integrated L.D. approach to lower device resistance in a cost effective way.

Across all products, we exited 2019 with approximately 61000 chambers in our installed base.

Are installed base revenues grew year over year and reached record levels in 2019 with significant contribution from our reliance business, which also reached record levels.

Productivity upgrades and solutions grew more than 30 per cent year over year as we have worked to help customers enhance the performance of their existing assets.

Furthermore, we signed several new multi year customer support contracts.

These multi year contracts enable lamb to significantly reduce customers running costs, while generating a recurring revenue stream for lamb.

Now turning to W.F. fee.

We estimate 2019 W. a fee ended in the 46 to 47 billion dollar range.

Slightly higher than our prior mid 40 billion dollar estimate.

The increase was driven predominantly by higher foundry logic spending.

Per calendar 2020, assuming no material impact from Corona virus on our full your outlook our view calls for W. a few spend in the mid to high 50 billion dollar range supported by sustained strong spending and foundry logic and significantly for lamb improve spending in memory.

First finance.

Overall, we expect spending in memory and foundry logic segments to be up year on year and 2020.

To wrap up.

Land delivered strong financial performance and calendar 2019, and as our March quarter guidance suggests wearing a great position to drive hiring 2020, the improvement in memory spending.

<unk> product pipeline is very strong with more innovation on the way and we look forward to sharing more with you at our upcoming Investor day on March 3rd.

Thanks, now here's Doug.

Great. Thank you Tim good afternoon, everyone and thank you for joining us today in the middle of what I know is very busy earning Susan.

We concluded calendar year 2019, with a strong December quarterly performance.

Results ended up better than we expected primarily due to a little bit stronger Nan investment.

Well as an uptick in our installed base business.

Are installed base business delivered another record your and continue to be a stable profitable business for us.

And there's 10 mentioned from an earnings per share perspective. It was the second best year in our 40 or history.

December <unk> quarter results came in over the mid point of gardens for all financial metrics <unk>.

<unk> for sure essentially at the high end or forgotten syringe.

Let's Tim also noted for pleased with our performance and counter you're 2019 and were delivered solid profitability liberal levels within a challenging memory environment.

As we discussed that earnings call last quarter. There were continued strong investments in the boundary in logic segments in the December quarter.

We had the highest system revenue dollars for the boundary segment in our history.

And the revenue concentration was at its highest level since the September 2016 quarter.

Boundary spending continues focus on the seven and five nanomenter nodes and it represented 36% of our December quarter system revenue.

[noise] Palogic. Another segment grew in dollar terms and was essentially flat with the prior quarter intensity level coming in a 12% of system revenues.

It was the highest logic another revenue level in dollar terms in two years.

Driven by 10 animator.

Image sensors and other specialty markets.

From memory, the combined segment decrease the 52% of system revenues from the September quarter, which was at 64%.

We had a decrease in the summer quarter and the non volatile memory segment going from 38% to 35%.

I work from a dollar perspective revenue in the segment actually increase.

Yeah.

DRAM segment decrease for 26% to 17% of system revenue.

Yeah and investment continues to be focused on 60, 496, and initial 128 layer devices.

DRAM spending continues to be primarily focused on no transitions.

[noise] [noise] revenues for the quarter were $2.584 billion, which was about the midpoint.

In addition to the leading edge boundary in logic strength I mentioned.

Continue to investments in the China region.

The majority again coming from domestic Chinese customers.

Trying to geographic revenue came in at 29% of total revenue in December .

Course margin came in at 45.7% 70 basis points above the mid point.

Strengthen the summer quarter gross margin is related to customer product mix as well as increased factory utilization levels relative to the prior quarter.

Oh remind you as I always do that actual gross margins are function of several factors such as business volumes product mix and customer concentration and you should expect to see some variability quarter to quarter.

Operating expense or for the summer quarter came in at $481 million.

Are variable compensation spending was higher in the corridor as it's tied to the increase the level of profitability.

Spending and the December quarter also increased due to the appreciation of the market during the quarter and the resulting impact on the cost of our deferred compensation plan.

As I mentioned in the past we do has this to mitigate the exposure to the income statement.

However, because of the accounting rules the offset to this expense shows up in other income and expenses.

Basically a neutral impact earnings per share at the end of the day Huh.

We continue to invest in our critical research and development programs.

And you'll hear more about our commitment to technology and productivity leadership.

Upcoming investors day in March.

I'd also remind you that as we look ahead of the 2020 calendar year, we'll see the normal seasonal spending increases related to the marsh quarter.

Operating income in the summer quarter of a $700 million, an operating margin was 27.1%.

Essentially out the midpoint of guidance.

Or non got tax rate in the quarter was 12.5%.

I would like to highlight that the difference between the non-GAAP tax rate and the December quarter gap tax rate, which was 23.5%.

What is related to the reversal of the tax benefit from the L. Paris stock based compensation case.

I think you're seeing this from from lots of companies in the technology <unk>.

You should expect it fluctuations in the tax rate will occur quarter to quarter and as a we look into the rate for the calendar year 2020, I expected to be in the low teens level.

Other income expense was up slightly from the park horror at a total of approximately $13 million an expense.

The main components of July any our interest income from our cash and investment bounces.

Offset by interest expense related to the outstanding debt.

You should expect that other income inexpensive fluctuate quarter to quarter based on several market related items things like <expletive> exchange or when I'm talking about.

Moving out of capital return.

Summer quarter $167 million cash was deployed in dividends and.

And a billion dollars in share repurchase.

As we frequently down in the past to share repurchases, we're done through a structured share repurchase program a cover repurchases through the June 2020 quarter.

Remain on track with our commitment to Capitol return.

For counter you're 2019 completed $3 million of our current 5 billion dollar buyback authorization.

In total our capital and return activities represented approximately 158% free cash flow in 2019.

<unk> was $4 in one sense.

Or deluded shares continue to decline and we ended the December quarter with deluded shares at approximately 150 million shares.

This is the eighth consecutive quarter work alluded sure account has declined.

Sure Count includes dilute of impact of approximately 5 million shares from the 2041 convertible notes.

And I remind you that the delusional schedule for the 20 or 41 converts is available on or I or rubber website for your reference.

I mean, not move to the balance sheet or cash in short term investments, including restricted cash decrease in the December quarter to $4.9 billion from $5.8 billion in the September quarter.

The decrease quarter to quarter was due to the share repurchase and dividend activity offset by cash flows from operations up $308 million.

And as I mentioned before when you see business levels grow working capital levels, generally increase which impacted our cash flow from operations in December .

We concluded calendar year 2019, with the second highest level of free cash flow in the company's history at over $2.3 million.

I believe is truly demonstrates the sustainability of our business through a lower industry spend period.

Yes, so increased slightly due to the timing of collections to 72 days versus 69 days in the prior quarter.

Inventory terms improved to 3.7 turns from 3.2 in the September quarter.

Well, it's receivables an inventory grew in dollars during December .

As business levels increased.

Doncaster expenses, including approximately $46 million for equity compensation $49 million for depreciation and $17 million for amortization.

December quarter capital expenditures increased to $62 million from $39 million in the September recorder.

Ending headcount as of December quarter was flat with the prior quarter at approximately 10700 regular fulltime employees.

We expected as <unk> revenue levels are growing we'll add headcount to support the increase in business.

So looking ahead I'd like to provide or non-GAAP guidance for the March 2020 corridor.

We're expecting revenue of $2.800 billion.

Plus or minus $200 million.

Gross margin of 46.5% plus or minus one percentage point.

Operating margins of 28% plus or minus one percentage point.

And finally earnings per share of $4.55, plus or minus 40 cents based on a share account approximately 149 million shares.

We see continued strength and foundry logic spending going into the March quarter.

And Additionally, we see non spending continued to increase going into 2020.

Yeah.

Marked quarter guidance reflects our current view of the business environment, including our assessment the potential impact from the public health situation in China.

Well see business <unk> disruptions potentially with both customers and suppliers that are essentially extending the lunar new year holiday through February 9th.

<unk> this situation their numbers would have been somewhat higher.

We also increase the revenue any P.S. ran just to take into consideration the uncertainty of the impact from these activities.

We believe this is temporary but the issue is developing day by day.

I think we're taking a prudent approach to what we're doing with the numbers.

So to conclude or well positioned heading into 2020.

We're on a strong trajectory to have performed based on our product portfolio as well as operational strategies.

And that concludes my prepared remarks, operator, 10, when I would now like to open up the call for questions.

<unk>.

<unk> you would like to ask a question you may Prescott on on your telephone keypad.

I cannot stop one last question.

And are questionable come from John can tell it cracks me.

[laughter] solved well, let me ask the question.

Squash and just.

Focusing on the domestic China market <unk>, you were kind enough to toss. It was the majority of the <unk> I wouldn't get you can help us understand how how much of a majority it wasn't in what was the split it transaltas memory on logic and then as you look out T. are you happy forecast growable or at least 20.

<unk> in county, or 20, <unk>, how important domestic China marketing, how should we think about the memory personal sort of a logic found beside the bed.

[laughter], Yeah, I'll I'll answer it and then I'll, let Tim add on yeah, John I'm, not going to get into the habit every quarter of giving a precise quantification except to tell you. The majority into December quarter was from domestic China.

And that's been the case the last couple of quarters.

And the reason I've been mentioning that over the last couple of course is it's different than the last several years have been where the majority is actually come from the global multinationals.

That in your your question relative to how we're looking into 2020 and China. You know I think 2019, probably finished with W.F.C. from the local China customers, a little bit above $6 billion, some something like that.

And it's growing and 2020 and as we look into 2020, I I think John probably it's up to to $3 billion is is my best guess from local China.

And that spending as broad based it's <unk>. It's DRAM, it's founded in logic. So it's not one or the other it's broad based set of customer spending time, you want to add anything no I think that pretty much covers it.

And then guys as my follow on just on W.S.P., and and kind of your share T. He talked about in your car comments you tell them next job.

Of gaining your share of W.L.C., <unk> 2020, a year or that becomes a little bit more difficult with sort of the addition of U.U.V. or how important E.D.U.V.T. across projections. This year and asked me think about easy deployment is that a good leading indicator for for your future business or how should we think about that.

Yeah.

Well, Yeah, I think that you know we've talked about U.V., a number of times and so I guess, maybe I'll just repeat a few things have said and maybe at a couple of comments in general you. What we've said is that technology transitions themselves are very good for Lamb, we have highlighted a number of times that lambs.

Served the market actually grows at each technology node within foundry logic, even with the introduction of U.V.. So really what we want is we want the market in our customers to to be able to keep moving their technologies forward yeah specific to patterning as you move from say seven to five centimeters.

Even in that case of a U.V., what you're starting to see is the.

Increased use more high quality hard masks moving away from spin on dialect tricks towards deposition methods like P.C.D., where land must have very strong position and so you know in many cases are Sam is actually increasing because we're pulling in applications that before actually done with older processes and now they're coming in.

Two are more critical space and so with that we see Sam increase in there for even with the V.C. a growing market for ourselves I'm done talked about you'll highest dollars from foundry logic and that's just I think further evidence because we're seeing we're seeing technology investments right now at those he he knows now as far as.

Leading indicator sure. What we said is that E.V. is obviously those shipments are signs of these more complex technology nodes and.

And again, our Sam grocery opportunity gross.

And in John nearly only thing I would add that as you think about wallet share of W.F., you're going into 2020, I I think you know our salmon Sharon man is very good.

Clearly 2020, our view is going to be a a stronger investment period for the Nan industry as we've seen kind of pricing and profitability stabilized. So our Cheryl wallet actually in addition to the lead commentary Tim had it is actually going to have a talent from the fact that man spending I think we'll be stronger that's right.

Okay. Thanks, guys congratulate you again.

Accents.

Alright, thank you.

Question comes from she came here <unk>.

Yeah could have no. Thank you for taking the question I guess first question I definitely think about I mean, you know roughly eight to 10 billion dollar increase your on your into 2020 <unk> can you tell us how much of that is his memory versus boundary logic, you know that kind of the 80 20 split and and then as part of that Oh.

Are you, including the material uplifting and DRAM within that or is that so the thing that could be a source of a further upside.

Okay great.

Great Great question I don't think we're going to give you the exact breakout, but I think we've characterized it as I think you know maybe you can look back to what we said as we were exiting last year. What we what we said was that we were seeing very strong spending in comedy logic and that we were just starting to see the early signs of improvement in the end and we felt.

The D. Ram would come after the Nan marketed improved and so I think what you're seeing in our outlook for 2020 is that starting to play out except for again sustained strong spending in foundering logic.

So maybe the emphasis on sustained and a and a a strong uptick and spending which done just comment and is is a significant tailwind for us in terms of.