Q3 2020 Earnings Call
[music].
Good day and welcome to the Lam Research is March quarter earnings Conference call. At this time I'd like to turn the conference over to China Korea, Corporate Vice President of Investor Relations. Please go ahead.
Thank you and good afternoon, everyone welcome to the Lam Research quarterly earnings Conference call with me today, our Tim Archer, President and Chief Executive Officer, and does that injure executive Vice President and Chief Financial Officer.
During today's call, we will share overview on the business environment and review our financial results for the March 2020 quarter and our outlook for the June 2020 quarter.
The press release detailing our financial results.
Lets 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 and Q in a includes forward looking statements that are subject to risks and uncertainties.
Reflected in the risk factors disclosed in our FCC 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 a made available later this afternoon on our website with that I will hand, the call over to Tim.
Great. Thank you gene and welcome everyone.
I Hope you and your families are doing well in these very challenging times.
Against evolving backdrop of the cold and 19 pandemic Lamb delivered solid financial results in the March quarter.
I want to start by discussing how we are managing through the current environment.
The impact from the globally spreading virus began to materialize in our manufacturing and supply chain operations in the latter part of the March quarter, a shelter in place orders went into effect across many regions.
We've responded effectively each of these disruptions and warm near term predictability remains more difficult unusual I am pleased to see that are essential manufacturing facilities and labs are operating allowing us to focus on critical customer deliverables.
I'm very grateful to our Lam employees and partners around the world, who with tremendous commitment and dedication have risen to meet extraordinary challenges.
Our focus at this time is concentrated in three key areas first our top priority remains the health and safety of over our employees or partners and their families.
From the start with actively sought the best available guidance to formulate our response plan and we are complying with all public health directives in the locations in which we operate.
All employees that can execute their roles remotely are doing so and through our expansion of our IP infrastructure capabilities. We have maintained a productive remote work cadence to.
To protect our employees that are working on site at Lamb locations, we have implemented rigorous safety practices, including onsite temperature monitoring mandatory uses personal protective equipment and strict social distancing protocols.
Second we are executing our business continuity plan throughout our manufacturing and supply chain network. Our capabilities are still limited compared to normal operation, but as depend demick has impacted different parts of the world at different times and to different degrees, we in our supply chain partners our success.
Fully leveraging our global footprint to support our customers most critical priorities.
Past investments, we've made to complement us production capabilities with operations in Korea, and Taiwan have proven valuable as both of those countries have reported earlier stabilization of local cope with 19 conditions.
Similarly, we have worked closely with our suppliers on their challenges in specific regions and we are beginning to see signs of improving material availability.
Third we are focused on increasing the capability and expertise of our regional field teams to meet our customers ongoing installed base needs, including installation of newly ship systems.
We anticipate the cross region travel will be discouraged for at least the near future and therefore, we are working closely with customers to significantly enhance remote support capabilities you just using advanced data collection and information sharing technologies.
Overall I am extremely pleased with how our teams have executed to mitigate the impact of this global pandemic on our employees our customers in our business.
I also recognize that we're very fortunate in this difficult time to be able to give back to our employees and the communities that have helped us build our strong company.
In early April we announced the creation of a $25 million relief fund to provide direct and immediate assistance to employees and others around us most impacted by the cold with 19 pandemic.
Im happy to say than and only three weeks more than half of our committed relief funds have already been deployed to help people affected by this crisis.
I'll now transitioned to our results and broader industry environment.
In the March quarter, we delivered revenue of $2.5 billion and earnings per share of $3.98.
Both results were below our original guidance, which we went through late in the quarter as we saw production and supply constraints emerge due to shelter in place orders.
Customer demand in the quarter was unchanged from our original view.
We believe that our revenue in the near term will be determined primarily by the capacity of our global manufacturing and supply chain network as social distancing restrictions are expected to continue for the next several months in locations in which we and our suppliers operate.
While we're currently seeing improvements in both our own operations and those of our suppliers risks and uncertainties related to the coated 19 prices remain.
Consequently, we will not be providing our usual financial guidance for the June quarter.
Doug and I will however, provide our best assessment of the environment in our comments in Q and aim.
From our perspective customer demand for equipment continues to remain very strong in the first half of 2020.
We believe a WSE spending is largely being driven by customers investing in strategic initiatives, including both foundry and memory technology transitions that will be critical to both capability and competitiveness. We're in global markets eventually emerge from the effects of the pandemic.
The equipment industry is currently supply constrained.
We exited the March quarter with record backlog and would expect to fulfill this unmet demand over the coming months.
Looking beyond the near term impact we remained strong believers in the underlying fundamentals and resiliency in the semiconductor industry.
Semiconductors, it becomes so embedded into nearly every industry that we expect broad portfolio semiconductor equipment companies, such as Lam to see offsetting areas of strength and weakness to help support results.
This was our experience to the trough of the recent industry cycle, where we saw increased foundry and logic spending offset memory weakness.
Despite a 40% decline in memory spending in calendar year 2019, our revenues held up well compared to prior cycles.
As we assess the potential future impact of cobot 19 on our business.
Recent customer commentary points to cloud and enterprise strength as an offset at least in part to the weakness that may be seen in more consumer oriented end markets like smartphones in auto.
The need for equipment and capacity to support work from home initiatives.
Is causing cloud service providers to increase capex, creating the potential for surgeons server demand.
Third party estimates suggest that cloud capacity would need to increased tenfold to service the peak workloads cienas shelter in place rules went into effect.
Although these heightened workloads are likely to short term phenomenon.
This event will underscore the need for companies to invest more in infrastructure and business continuity capabilities as the data economy and our dependence on technology continues to expand over time.
The PC in server markets account for nearly half of DRAM and NAND bit demand on average and when you also consider that memory customers under invested in capacity additions in 2019, causing the industry to exit the year was supply growth well below long term demand. We believe there is good.
Reason to be confident in the healthy fundamentals of the memory market.
Near term uncertainty notwithstanding.
Longer term our focus is on executing the strategy, we outlined at our Investor day event in March.
Our growing installed base business serves as a strong and stable Foundation for company performance and as we committed we have started disclosing our customer support business group or see SPG revenue this quarter.
Doug will cover this in more detail, but I wanted to highlight that in the March quarter. Our installed base revenues grew faster than installed base unit growth consistent with our objective to increase revenue capture per tool with additional value added service offerings.
Within say SPG. We also continued to see strong activity in our reliant business, which grew for the seventh consecutive quarter and reach yet another record level.
At this point, we see Rcs BG business poised for another growth year in calendar 2020.
From a share gain perspective, we are executing well on both penetrations and defensive so far this year.
In etch, we've seen wins across all segments, DRAM, NAND and foundry and logic.
At our Investor Day event, we launched our innovative new sense I edge platform targeted at both widening our lead and critical applications and strengthening our competitiveness in the semi critical space.
Cobot 19 related manufacturing and supply chain disruptions have set our scheduled backed by a month or two from our original plan.
The customer pull for sense site has strengthened since launch.
Since I was designed to deliver advanced equipment intelligence data analysis, and self maintenance capabilities to minimize required onsite human intervention with the system.
Customers have a heightened awareness of the value. These advanced capabilities can deliver and we expect to they will look to accelerate their adoption of smart fab technologies.
Since I is well positioned to deliver both the technology and data collection capabilities, our customers need to be successful.
In deposition, we're focused on served available market expansion opportunities that we believe can be accessed.
By accelerating conversions from older process technologies to our highly productive enhanced atomic layer deposition or ASV solution set.
We continued to execute on these opportunities in the March quarter with additional LD metallization wins for advanced logic nodes.
A new die electric gap fill penetrations in Threed NAND.
In both cases, we displaced older process technologies from our competitors with a more extendable Lamb solution.
Overall, we're confident in the strength of lamps position in the market and our opportunities for growth when the current crisis subsides.
So to wrap up the company is executing well during a very difficult time.
Our global teams are working tirelessly to mitigate operational impacts from Cowen 19, and while near term visibility is low we believe that long term secular demand for semiconductors, we'll continue to drive sustainable WSE growth across cycles.
Thank you all again for joining and for your support I'll now turn it over to Doug.
Great. Thank you Tim.
Good afternoon, everyone and thank you for joining us today, and what I know as a challenging time for all of us.
I hope all of you in your families are safe and healthy.
As you're aware given the uncertainties with business disruptions around the world related to covert 19.
We withdrew our March guidance on March 17th.
Despite the operational challenges, we delivered solid results in the March quarter.
Our revenues for the quarter came in at $2.5 billion.
$80 million from the December quarter.
The decrease was entirely due to production interruptions.
Customer demand remained strong through the quarter.
I'd point out that we're exiting the march quarter with a strong level of deferred revenue at $726 million.
This was partly due to shipments that occurred at the ended the quarter that had back ordered materials.
From an earnings per share perspective, the March quarter came in at $3 in 98 cents.
Which was driven by strong gross margin performance.
Both focused expense management as well as a favorable tax rate.
From a system segment perspective as expected memory investments increased in the March quarter.
The combined memory segment increased to 56% of system revenues rising from the December quarter at 52%.
We saw increases in demand spending with investments focused on 64, 96, and initial 128 layer devices.
DRAM spending continues to be focused on node transitions, primarily on conversions to one why and one zee.
Andrew is the majority of memory investments at 40% of systems revenue.
But DRAM coming in at 16%.
Foundry revenue strength continued with customer investments, they're focused on seven and five nanometer.
As a percent of system revenue foundry represented 31% of systems revenue as compared to 36% in the December quarter.
December quarter was the all time high systems revenue level for our foundry business.
March was the second highest.
The logic another segment was fairly flat in both dollar and percent concentration quarter to quarter coming in at 13% of system revenue.
Logic spending is driven by 10 nanometer image sensors and other specialty markets.
The China region continues to invest and came in at 32% of total revenues for the March quarter.
The majority of the China revenue again came from domestic Chinese customers.
Also as Tim noted our customer support business group revenue continued to grow in the March quarter.
This is the first quarter were disclosing the specific revenue amount you've likely seen the tables in our earnings release.
The installed base business came in at $856 million, which is an increase of approximately 3.5% from the same quarter a year ago.
Gross margin for the March quarter was 46.3%.
The strength in the March quarter gross margin is related to customer and product mix.
Gross margin was somewhat negatively impacted from lower than expected output as well as increased spending in manufacturing and the supply chain.
And just to remind our actual gross margins are a function of several factors such as business volume product mix and customer concentration.
And you should expect to see variability quarter to quarter.
Operating expenses for the March quarter were $486 million, which was essentially flat with the December quarter.
The March quarter has normal seasonal increases.
As it always does at the beginning of the calendar year.
We managed to other variable expenses down during the quarter as we address the code 19 impacts on our operations.
We maintained our focus in critical business projects for our customers with two thirds of our operating expense focused on research and development.
I also want to highlight for you that the benefits and cost of our deferred compensation program are no longer mismatched in our non-GAAP results.
As I've discussed in the past we hedged this plan to mitigate the exposure to the income statement.
With the up excuse me with the Opex offset to this historically showing up in other income and expense.
You can see the impacts of the market fluctuations related deferred compensation program and our GAAP reconciliation tables in the earnings release.
These hedging offsets remain mismatch in our GAAP results.
Operating income in the March quarter was $673 million and operating margin was 26.9%.
Our non-GAAP tax rate this quarter was 8.3%.
This rate was lower than expected due to incremental deductions from equity compensation related to exercises during the quarter.
We will have fluctuations in the tax rate from quarter to quarter, and we expect our rate for calendar year 2020 to be in the low teens level.
Other income and expense was up in the March quarter coming in at approximately $30 million and expense.
The main components of other income and expense line, our interest income from our cash and investment balance offset by interest expense related to our outstanding debt.
We did have a small amount of incremental interest expense from the drawdown on our revolving credit facility that occurred late in the quarter.
You should expect that other income and expense will fluctuate quarter to quarter based on several market related items like interest rates and foreign exchange.
Let me now move on to capital returns.
For the March quarter $164 million of cash was deployed in dividends.
And $146 million and share repurchase.
As we discussed at our Investor Day, we have a long term plan for capital to return of 75% to 100% of free cash flow.
We have approximately $1.8 million excuse me billion dollars remaining on our 5 billion dollar board authorized buyback plan.
In the current environment, we will be slowing our buyback activity.
It is likely we wont buy any stock back in the June quarter.
Diluted earnings per share again came in at $3.98.
We ended the March quarter with diluted shares of approximately 148 million shares which was down from the December quarter level.
This is the ninth consecutive quarter, where our diluted share count has declined.
The share count includes a dilutive impact of a little more than a million shares from the 2041 convertible notes.
And I'll remind you the dilution schedules for the remaining 2041 convertible notes visit is available on our Investor Relations website for your reference.
I mean, I'll move on to the balance sheet, our cash and short term investments, including restricted cash increased in the March quarter to $5.6 billion from $4.9 billion in the December quarter.
The quarter to quarter increase through due to strong cash flows from operations of $541 million.
As well as a $1.25 billion drawdown on our revolving credit facility.
We also had debt maturities and redemptions of more than $600 million in the March quarter that obviously reduced the cash balance.
Our strong balance sheet and cash generation capability continue to provide robust liquidity.
Dsos increased to 80 days versus 72 days in the prior quarter.
The increase is largely due to the timing of collections and invoiced, but not yet revenue shipments that occurred at the end of the quarter.
And I would point out on the first day of the June quarter, we collected more than $370 million.
Inventory turns were 3.2 in the March quarter compared to 3.7 turns in the December quarter.
Inventory was higher due to the fact that output slowed from the coated 19 situation.
Noncash expenses included approximately $40 million for equity compensation.
$50 million for depreciation and $17 million for amortization.
March quarter capital expenditures were $51 million, which was a decrease from $62 million in the December quarter.
Ending headcount as of the March quarter end was approximately 11000 regular full time employees.
Which is an increase from the December quarter of approximately 300 people may lead to support field and factory operations.
For the June quarter, although we're not providing official guidance.
I'll share some things for you to consider when thinking about our June quarter financial performance.
We are seeing the following dynamics.
Capacity limitations are coming from our supply chain as well as adjustments in factory operations to maximize output considering social distancing challenges.
We plan to add resources during the quarter to increase our output capability.
Demand remains strong.
We are output constrained.
This capacity challenges will negatively impact revenue and gross margins.
If our current assessment of our output capability turns out to be correct.
Revenue in the June quarter should be higher than March.
There is obviously uncertainty around that statement.
See SPG business remains resilient.
Our priorities are the health and safety of our employees and partners as well as taking care of our customers.
We will spend incrementally in these areas.
We will actively control costs and other areas.
Interest expense will be up from the revolver drawdown.
And share count is likely to be flat.
So to summarize.
We see continued strength in foundry and logic going into the June quarter. We also see dumb excuse me memory demand continuing to strengthen.
The long term outlook for our business continues to be solid and consistent with what you heard from us at our Investor day in early March.
That concludes my prepared remarks, operator, Tim and I would now like to open up the call for questions.
Thank you if you'd like to ask your question. Please signal by pressing star one on your telephone keypad.
Our using a speakerphone. Please make sure I mean function is trying to optimize signal to reach our equipment again press star one to ask a question annually well pause for just a moment to live on an opportunity to signal for questions. One moment. Please.
Our first question comes from seeding is I've Evercore. Please go ahead.
Yes. Good afternoon. Thank you, we're taking the questioning and glad to hear your all healthy.
First question I guess.
With balls rental demand side, obviously, you talked about supply constraints.
How are you I guess prioritizing.
Russia, and the demanding and have you seen any demand destruction, given the uncertainty to close the door or just purely just to see anything like that an effort.
Yes, I guess we.
Hey, Jay.
We are working very very closely with all of our customers to help prioritize shipments in the order of greatest need for the customer. So you can imagine critical R&D programs, where there's a technology conversion that requires a one of the kind tool.
Specific capacity bottlenecks that are critical to their factory outlet or deliver two specific customers of theirs and so one of the great things about.
Lamb, having built very strong customer relationships over all these years is that we're really partnered with them to understand their priorities and we do have.
Fair flexibility within our own operations to prioritize certain tools ahead of others for a specific customers. So.
I'd say through very very close coordination with the customers are trying to meet their needs.
It's I guess I would say maybe the simple answer as we've seen no demand destruction no change in demand.
One could say maybe thats, it's too early to see that that we really havent sensed in any conversation with customers today the change in demand.
Our focus is really on how to get the tools to them that they need.
Very helpful. As my follow up I guess.
On the simply trying to simplify the supply chain such.
Is that more upstream and your ability.
To produce the tools get parts, perhaps issues in Malaysia or is it more logistics of getting the tools actually to customers.
And then I guess as part of that Doug If you could help at all how do you think about the implications to gross margins.
As you, obviously, bringing on more resources to satisfy customers demand in this crazy world.
I'll take the first part of that it.
Yes, let's say some of the supply challenges there kind of across the board, but clearly the most people are quite aware of that control orders that are in place in Malaysia, which is tends to be for many equipment companies a large subsystem supplier.
Lamb Weve, one of our strengths of both operationally and financially as Ben said.
Supply chain operation that allows us to do what we call merging transit and so therefore, some of the subsystems never actually come to Lamb facilities, they arrive directly at customer sites.
If those don't derive obviously the system.
Cannot should complete so.
It's it's across the board materials coming into our facilities, which we fully feel are operating quite effectively right now, but also coming out of major sub system suppliers in places as you noted places like Malaysia numbers.
So that's.
Yes.
Give you a flavor of home or how we're running things in areas that are probably going to be a little bit of a drag on gross margin than I am I won't quantify specifically, but.
Give us some stuff think about basically what's happening is given the need to have social distancing worrying to space people out further away from one another in the factory environment and obviously that means we can generate less output per square meter per square foot what heavy so essentially what we're trying to do CJ is moving the incremental space, where we habit.
Take some incremental space, where we habit and bring incremental people into that other space.
Obviously in an environment like that you're doing everything you can't take care of the customer and generate revenue for that matter, but you're going to be less efficient in terms your ability.
To be Super efficient on the gross margin line other things that are going on as I'm sure you're aware freight logistics is more expensive right now it's.
It's up a decent amount in certain areas. So we're having to spend more to get materials coming into the factory as well as giving them to customers.
I'm not going to quantify it for you specifically, but the way I would want you to be thinking about it is you know we've been in the gross margin range over the last 567 years I think what you're going to see is where we will trend towards the lower end of where you've seen our gross margin over that timeframe.
I don't think we'll go below the range, we've been in but I think we will be towards the lower end given the dynamic I described.
Well thank you.
Thanks Vijay.
Well take our next question from John Pitzer from Credit Suisse. Please go ahead.
Yeah. Good afternoon, guys. Thank you let me ask the questions. Appreciate all the Kelly you had given the uncertainty.
It's kind of curious can can you quantify what the supply impact more revenue.
In the March quarter, and it kind of the larger in the June quarter, Despite revenue being up and do you expect to kind of get most of these behind you by the end of the June quarter. So they could go into the second half of the calendar year supplies less of an issue.
Yeah, John I'll take you back our original guidance Rose 2.8 billion plus minus 200.
And we kind of realized the last couple of weeks in the quarter in our limited ability we might end up ending below the low end of that range and we did.
So that was the impact we came into the quarter expecting to be able to deliver 2.8 and I'll remind you that as we began last quarter. We discussed said, Jim demands actually stronger than that but it was the beginning of things begin to breakout and will on and we knew there was going to be some supply chain impact.
So that's kind of what went on there John now obviously, we're getting much better operating in this environment. We brought the factory back on line, we've got people back to work.
We're hiring people were moving into incremental space. So I think we're going to be able to mitigate it better than when it just kind of fell in our lab.
And based on how we believe we're going to be able to operate and get more output and execute our business continuity plans.
Thank revenue will be higher in June demand continues to be much stronger than that this is a supply situation.
And Doug Button second half you think you won't get mitigated all these issues are not picking up a calendar year.
I hope so yeah, I mean, we're executing our business continuity plans just trying to take us.
Longer than a quarter to get those in place I hope and Tim can maybe comment on this as well.
No I think as as I commented, we are continuously seeing improvements.
Most important thing that we prioritize as well as I believe our supply chain did is first to establish a stable source of supply and production capability at a level that literally is less than 100%, but stability being the key we have customers as I mentioned that critical projects critical production bottlenecks and so the.
What we wanted to ensure that we were avoiding beyond of course.
In any way endangering employees or our supply chain partners, but beyond that was endangering somehow taking a step back and moving too fast and then having to come back and not actually build to supply at that stable level. So I think day by day, we're able to inch that that stable production level up and I think as we enter.
At this quarter will be at a higher production output capability for sure and.
And as Doug said, probably working off this this stronger customer demand.
Over the next several months and maybe just one other comment as I was sitting here thinking well Tim talked John.
Obviously.
We have a plan to execute to a number and we know what that number is the reason we decided not to formally provide guidance to a number is we're just concerned things could change this very dynamic and fluid situation. That's really why we decided not to give you a hard number right now.
That's helpful for for my follow up Tim you guys did a good job in the March quarter pulling some members on opex in bringing opex down, but clearly you still have a lot of investments on your plate for future growth. Some just kind of curious.
How you're going to manage opex through this environment should we think about a growing in line with revenue or are there more leveraged on SGN made that you can pull but keep R&D growth continuing how should we think about that dynamic.
Yeah.
Well, we're clearly we will continue to prioritize R&D, we we laid out some pretty aggressive plans.
We are where we see really great opportunities for the company at our Investor day related new system introductions.
Continued progress I mentioned, a couple of them today, new etch, new edge platform, New AOCI progress.
We will continue to fund those two to the fullest that weekend.
We are seeing of course, some some very nice opex offsets were not traveling and so.
There are elements of the the expense lines that are coming down quite dramatically. So we're going to be prudent we're not going to spend we don't have to a lot of discretionary spending around.
Meetings and events and other things that kind of normally take quarterly or the course of of our our normal business those will not be occurring and will be reallocating that money to R&D and other things too to ensure that come out of this stronger than we went in.
Thanks, John.
Yes.
Your next question comes from Timothy Arcuri of U.S. Please go ahead.
Hi, Thanks.
Doug I just wanted to follow on to that question and see if maybe you could quantify be constrained in it and obviously you know what the constraint live in March but if you could need all the demand in June can you give us incentive maybe where revenue would be would it be sort of in excess of through day, maybe to one or three too.
[laughter].
To provide I know you're going to covered with the question like that.
I'm not going to give you know look but demand is very strong and I'll simply remind you. What we originally guided March was $300 million higher than what we.
Delivered at the end of the quarter.
Demand Didnt change.
And I, specifically mentioned this 700 plus million dollars in deferred revenue because that's stuff that shifts, but it was an incomplete system. It wasn't a fully functional system.
Obviously that stuff's going to revenues. So there is you know decent upside to demand. It's just we're in a supply situation right now that were that we're working our way through.
Okay got it and then just on the suspension of the repo.
The fact is down a good bit you had a very strong balance sheet I get that maybe the topics of shares equal right now is not that great and maybe about the answer but you are typically pretty supportive of the stock and opportunistic on the stock. So can you maybe comment.
As to why you pulled all new come on maybe it is just the optics are that they can you give us some comments there. Thanks.
Yes, Tim little bit of his optics, a little bit of is just being prudent right. I think every CFO in the world today is focused on liquidity and making sure you have the utmost liquidity and I'm highly confident in the cash generation capability of the company.
But it just felt like the prudent thing to do to just kind of take a pause on the buyback a get focused on conserving cash.
Talk our head up to see where end demand to ends up I do think at the end of the day there will be some demand destruction, we're not seeing anything from customers yet.
When I look at the consumer facing semiconductor companies their business is beginning to be impacted so I, just I want to get a little more time behind us Tim and assess what what might actually this looks like at the end of the day.
And just trying to be prudent with the cash right now is all.
Sure Okay awesome. Thanks.
Yep.
We'll take our next question from my Harlan sur of Jpmorgan. Please go ahead.
Good afternoon, and great job on the business execution, just getting the supply chain challenges.
I'd characterize it demand environment here systems is remaining strong any any low you can somewhat qualitatively or quantitatively described this demand you did say did you started just put it looks like the backlog digital system bookings actually go sequentially in the March quarter.
Okay Thats it.
Sure.
Yes, I mean, they did I mean, it's a our comments about I mean, I guess the best way to look as we gave on our January call our outlook for the year now we're not really we're not reiterating the year because we recognize as Doug said Theres Theres, a fair bit of uncertainty about how things may play out with with the macroeconomic and.
Later, but.
The that that outlook for the year that we spoke of in the strong demand at the January call Thats. The demand, we're talking about being unchanged, which means through this first half of the year.
The continued strength in foundry and logic, the strengthening demand in memory, because recall memory under invested we exited the year really in a in a situation where we felt very good about the need to add.
In the demands space and also eventually in the DRAM space and we Havent seen those plans change in that demand remains kind of at the same level. It was in January.
And which means that we have a full order book and were really our challenges how to get these tools to customers and I'd say, 100% of my conversation customers right now about how to get the tools they need to them and I think that will continue for some period of time than as Doug said, we'll reassess.
After that period to see how how demand and is being affected.
And just maybe one incremental coming from your Harlan I mean, our customers are investing very long lead time items I wouldn't have expecting anything to change.
We're just monitoring and trying to be cautious about obviously.
Anything that has a consumer facing business at the end of the day isn't going to be a strong we haven't seen anything move through from our customers yet, but we're just.
We're trying to be aware of what's going on the environment. I think is how is how I'm thinking about attempts that component.
Yeah, I think mediated anything at this magnitude.
It would be it would it would.
We have to recognize that there could be some changes that we just don't see yet, but we're we're giving our look on the demand that is in front of us at this point.
Great. Thanks to the insights there and then on the ambition and design win pipeline just given the short term please share in the Bay area.
I mean, if it's a slow either internal projects or collaborative engagements with customers at your either your research facility in shame on for some of your other lab globally or is all the labs considered an essential business process under state or federal guidelines and they are being staffed by the land team.
Yes, they are and and they are staffed and as I mentioned in my comments there operational.
But just as Doug spoke to.
You'll lam is being our top priority safety and of our employees and others working in our labs and so we've implemented very strict social distancing protocols, which does limit to the overall number of people who can be it in the lab at any given time and.
So I would say, we're not operating the labs clearly in our full capacity.
Before as before this event, but we are operating we're able to prioritize critical R&D programs for customers.
Did mentioned in my comments some of these projects they probably have taken a one month delay or maybe a two month delay because of.
Not only that a couple of weeks, where we were shutdown due to shelter in place, but then the restart here through.
The local orders and social distancing, so, but we remain focused on them and I would say that in the in the long term sense of of R&D projects and how they play out over time. This is not a.
It's on a major disruption to their schedules now your other comment as just on how we're engaged with customers clearly travel is more difficult, but your one thing Lam is focused on over the years is building.
Strengthen our regions and so we do have a lot of.
Process engineers and hardware engineers that are deployed out into the region engage with customers and in most cases, our customers have continued to operate in a way does.
Not dramatically changed from before and so we're able to engage with them on site on those critical projects.
Thanks, gentlemen, thank you.
Well take our next question from Krish Sankar of Cowen <unk> Company. Please go ahead.
Yes, hi, Thanks for taking my question on the congressional now good execution at least uptime.
First question for Doug Doug.
China is a very strong is anything you can segmented between how much effect was.
Mmm, both is foundry how much it for the domestic business and multinationals, who had a follow up booking.
Yeah, I'll give you a little color Krish, yes, 32% in the China region.
I'm, a little bit over half of that local Chinese customers.
Maybe like 60% I'd be a reasonable way to think about it local versus the goal multinationals, we've got a broad base set of customers in China.
NAND DRAM foundry.
So it isn't one or the other krish its broad across all of that spectrum is the way you should think about it.
Got it goes it's helpful and then Tim just.
A big picture question, given that you're dealing with industry for why.
And Latam has a broad suite of products.
It seems than demands closed on there do you think you'd see close would be in the productivity projects like San Luis included be within.
I agree that the customer business group I'm, just kind of curious, where you think or rudolph happening between going to drill it doesn't matter Nit picking it.
Yeah, I know, it's a it's a great question I mean in fact, I think if we look just to last year as as a maybe an example.
Im not saying, who knows I mean, the future could be different than the past but.
When we saw things slow down say in the memory market and I talked about the fact of memory spend was down almost 40% last year, we actually see in those cases customers turn to.
How can they get and extract the most of the installed base. They have so we tend to see things like advanced services and upgrades actually increase during those periods. So.
Thats the strength of our installed base business and why we're so focused on it is because we believed that it is actually one of the areas that can help you.
Whether.
Worst market condition, obviously capacity additions would with fall away, but you know again a lot of what we're looking at or technology conversions ongoing strategic investments from customers. One of the investments we've talked about in China and other places is very long term and strategic and so I don't I think those are probably to the.
The last places to see.
R&D technologies strategic investments those would be to at least affected.
Okay.
That's correct.
Well take our next question comes in that area of Bank of America Securities. Please go ahead.
Alright, Thank you for taking my question.
I understand visibility is limited, but when I.
Hey, you're saying that capacity situation is slowly improving and your customers capex, but I'm not really changing I I'm curious.
What is your best guess on where Kevin is I think of land this year, even qualitative comments.
I would be very useful or are they set new ideas and your take it could be more resilient, they're not just any update.
You know say Directionally directionally right. It can be this year would be extremely useful Josh.
Yeah.
We were debating how much to say about this I mean, we came into the you're expecting you know the beginning memory recovery continued strength in foundry logic all of that is still how I see things, how how we see things I think.
But I think it would be remiss to just come in and tell you. It's exactly the same as it was a quarter ago something is going to get softer, although we're not seeing it yet honestly from what we're hearing from customers.
To quantify it.
Oh, I don't know kind of hard you, we said mid high Fiftys 90 days ago.
Probably low mid fiftys might not be an unreasonable way to think about it right now I do think we're going to see softness at some point and things that are facing the consumer.
I don't know, Tim I mean anything else.
No I think Thats I think thats a reasonable.
Way to look at it the other is and maybe I thought maybe where you're going with this is at some point.
We must resolve the supply issues otherwise they start to affect the actual Wi Fi that can be executed in the year right. We can we can't pile everything up off the customers in the in the back half of the year as a make up because that's not possible from our own manufacturing shipping and also the installation and the customers by.
Justin of that equipment, so I.
I don't think were quite at that point, yet, but we would be where at some point to a certain WP couldn't be executed simply because of the supply constraints, but if things continue to progress in as Doug said, we seeded the June revenue higher and less working through that backlog that I spoke to and I don't know, we see huge issues with a concern.
Thanks Lydia.
Okay and on the services side, thanks for providing that disclosure do you think that proportion kind of remains for Joel and the following quarters I kind of like apart from the services group or is this something about the current macroenvironment back impacts that.
Ratio running there another.
That's a hard when in fact, I mean, what I see happening over a multi year timeframe is equipment stuff has a little bit more volatility to it and sometimes can accelerate.
In which case I mean, the seems to be installed base businesses, just kind of a slow and steady grower in some ways along with the installed base.
So lot of stability there I think as total revenues tick up probably equipment will pick up a little a little bit more quickly or at least over the next couple of quarters I hope.
And so the percent would go down, but it'll ebb and flow I mean, historically Heller described it is 25% to 30% and obviously if you do the math on what we just saw its it's more than 30% but.
But I think that the reason why we've obviously, we finally felt is very important to disclose more details on this business is because.
The the new system shipments and CST gene any particular quarter not so directly linked that's why we like the business. So much and so yes, I would start to recommend people not think about it as the percentage of our business as much as it is a business that we've said we would expect to grow every year and is it.
Has multiple components that give us resiliency from the spares and upgrades and advanced services and reliant systems.
And so I think in of itself maybe.
It does depend on the growth of the installed base, but that comes a little bit there's a lagging there's a lagging time indicated there is tools have to ship. They have to go out of warranty than they start to consume parts and upgrades and such so.
I think we're disclosing as you can start to think about it as a business is growing kind of on it.
Thanks for that I get better.
Well take our next question from its economic of Citi. Please go ahead.
Hi, Thank you for taking my questions. The first one have no lead times stretch in the current environment and if yes by how much and isn't a follow up I bet, you talked about eight to 9 billion domestic.
China spending in January and given the strength in March I.
Those expectations looking up for the full year in terms of demand.
Thank you.
I'll, let Tim take the lead time, a question for Yeah, I guess [laughter], let me take on a they clearly have they clearly have stretched I mean, that's we're talking about relative to.
Supply challenges in our own on challenges to lead times and stretched out.
I don't actually wanted to quantify for you on this call, though I mean, it's something again and so.
For competitive reasons, but you can imagine its lead times have stretched out and that's why we're in conversation with customers about how to get them, they're high priority tools.
Closer to the original lead times, we wouldn't originally provided.
And not to if what we've said about local turn to Wi Fi is that in 2019. It was a little bit above 6 billion or above 6 million and we expect an incremental two to three.
Still kind of how I think about it honestly I don't know that a whole lot has changed in that in that regard.
Okay.
Thank you.
Well take our next question from Sydney, All the Deutsche Bank. Please go ahead.
Hi, Thanks, Thanks for taking my that's my question.
If you compare to the midpoint of the guidance there just at 300 million short shortfall what end market. Our geography was most impacted it looks like China is still have pretty decent growth, Taiwan was down quite a bit which is different than what the decline because of what they are saying.
Any any color there will be good thanks.
You know I don't I don't know that there's any unique geographic distribution between.
What what wasn't able to be supplied versus what we did ship.
Nothing nothing is in my head send it to give you an answer that said it was this or that specifically.
Yes, I think it the way I would think about it and maybe back to even the previous question a little bit is that each of our we have we have a lot of different products and the makeup of the supply chain for those products is not the same.
And even the manufacturing facilities for those products are not all the same and so.
I would say it was less about any particular customer.
Now receiving a big chunk of tools as much as certain tools the lead time, having pushed out a little bit in those tools kind of slipping out of the quarter. So certain tool types were impacted I would say more so than on.
As a result of.
Where their supply chain was was heavily concentrated.
Okay. That's helpful.
My follow up as it did the June quarter revenue does come into what do you expect which is what you think it's higher I guess, there still two more quarters ago put a year, but what are your thoughts on the CRO for DRAM and NAND, then maybe beating that Tom to capacity additions.
I guess it based on how you think that for the second half of the it's gonna be.
Hard to answer Sidney I mean.
First thing I'd tell you is our view of the long term good demand really is unchanged.
Now, having said that obviously a lot of bits are consumed in the mobile space and that's gotten probably softer given the more direct exposure to the consumer.
That's offset though by what you see going on that in the Hyperscale space, which is also.
Using consumer bits right the work from home or whatnot and the stuff Tim had in his script about the likely uptick there was too are going to offset I don't know that I'm ready to quantify it for you just because there's so many moving pieces.
Lets Tim wants to quantify.
We debated at but no.
I think the challenges as we said we do recognize there will be areas of strength and weakness in as Doug said, many times I think we need to see how obviously later in the year macro is really affecting consumer spending in other segments of the market. We we wouldn't sit here today and say that this is kind of economic disruption would have no effect and so.
So just hard hard to quantify I think we just have some comfort in knowing that.
Yeah, we feel like we came out of we come into this year and ended this economic disruption with without having been in a situation as like a lot of spending last year. So theres one silver lining is that there was under investment last year. So we entering a pretty good space.
From that perspective, yeah, the trajectory of bit growth was declining as we exit last year and that continues into the first half of this year and the second half will depend on the investments that occur so.
Maybe something to think about city.
Alright, Thank you very much.
Uh huh.
Well take our next question from Johns question Whats yet Wells Fargo. Please go ahead.
Yeah. Thanks for taking the question no going back to your prior Wses fixation expectations or could you kind of think color on just how we should think about you know what wasn't baked into that for capacity expansion versus technology transitions.
Yeah, Joe we Didnt I didn't break it down specifically.
What we said was continued strength in foundry and logic, but that is what we're saying.
And then some level of a recovery in NAND.
Read that to be <unk> last year in memory. The spending was was pretty much all about just node conversions almost no wafer capacity.
And that created a situation where the real supply growth continued to decline through the year such that.
Our view was it was below where demand growth, what's going to be in both NAND and DRAM right you had inventory adjusting pricing getting better all that kind of stuff.
I think the real question that's on all reminders, Okay, what does demand going to do this year I'm not going away into that one quite yet so.
That's what we saw we saw man beginning to pick up a little bit probably adding a few wafers DRAM no DRAM really was a continued trajectory.
That we saw 19 through most of 20, maybe a little bit of an uptick.
And I think we're just going to wait and see how this plays out to assess what's going to happen there, but that's what we're seeing a 90 days ago. That's what we described 90 days ago.
Okay, and then on the strength in China.
I mean, it sounds like it could have an even stronger and in the March quarter is that fair and then I guess, if that's true do you expect that's a growth further in the June quarter, just given that some of that could have slipped into this quarter.
I don't know that are would grown as a percent Andrew I mean the.
The supply issue was across every job geography quite honestly. So if you think in percentage terms I don't know that would have been all that different everything had challenges around supply.
And then just to frame, what we see going on a local China again, we expected not expected last year was a little above 6 billion.
We saw an incremental two to 3 billion in China, and that's still pretty much what we see from from local China in terms of WP that was a statement with WFP.
Okay. Thank you.
Yep, operator, we'll do one more question.
Your final question will come not from a Quinn Bolton of Needham and company. Please go ahead.
Thanks, guys for screen first question just trying to reconcile the.
Lower revenue for you guys that are Taiwan and foundry when she said she put up record capex number in that in the March quarters. That's just a timing Winchester, she recognizes capex or where do you have any thoughts on that and then the second question.
It's been seeing they can put in place in the manufacturing operations.
Slow your cycle times for an extended period of time and reduce your.
Quarterly revenue capacity or you think the.
Planning you put in place to try and expand footprints, Jim can get you back to where your manufacturing output was say before we went into the co the downturn. Thanks.
Okay great.
We take both of those the relative to Taiwan and your questions. There I think theres no story other than just timing I mean, it's.
As Doug said, we we had systems affected in that first quarter. So I don't think as anything there from a from the capacity perspective and social distancing.
That was part of what Douglas speaking to clearly within our factories. Once we've implemented strict social distancing. We can have fewer people in the same area in space and so that extends our cycle time to stretch out some some tasks take longer than would have otherwise and so our overall capacity out of an existing.
Space does decline from one of them pre coven now, we're finding ways to to reroute our lines and actually gain some of that capability back but at the same time as Doug also mentioned, where we have access to additional space and we're moving and expanding into some some other error.
He is to recapture that capacity.
You know that takes takes a little bit of time, but we clearly.
We will execute those plans and as we see if we see demand continued to hold up as we would expect and we need that capacity.
We will continue to grow our output.
Thank you.
Yes, Thanks Quinn.
Okay operator.
That.
Now I'll conclude our call today for Lam research. So thank you for outside joining.
Uh huh.
This concludes today's call. We thank you for your participation you may now disconnect your lines and have a wonderful to everyone take care.
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