Q1 2022 Lam Research Corp Earnings Call

Good day, ladies and gentlemen, and welcome to the Lam Research Corporation September quarter earnings call. At this time I would like to turn the conference over to MS. Tina Correia corporate Vice President, corporate finance and Investor Relations. Please go ahead.

In corporate finance and Investor Relations. Please go ahead.

Thank you 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 overview on the business environment.

And we will review our financial results for the September 2021 quarter. And our outlook for the December 2021 quarter. The press release detailing our financial results 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.

And our outlook for the December 2021 quarter.

The press release detailing our financial results was distributed.

So after one o'clock P M.

Civic 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 today's earnings press release.

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.

<unk> discussion of our financial results.

Will be presented on a non-GAAP financial basis.

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 made available later this afternoon on our website and with that I'll hand, the call over to Tim.

A replay of this call will be made available.

Ink later this afternoon on our website and with that I'll hand, the call over to Tim.

Thanks, Tina and welcome everyone. Lam delivered a solid September quarter with revenues in line and earnings per share above the midpoint of our guided ranges. These results represent our sixth consecutive quarter of revenue and earnings per share growth for the company. Over this time period, we have scaled our operations to support rapidly growing demand for our products and services and as we look forward, we see continued strengthening across both leading-edge device segments and specialty technology markets. In response, we have expanded our manufacturing capacity at existing facilities in the United States, Korea, and Taiwan, in the September quarter, we celebrated the Grand opening of our new Malaysia facility, which when fully ramped will be the largest factory in our global network. And just last month, we announced a new factory in Oregon.

Rhem delivered a solid September quarter with revenues in line and earnings per share above the midpoint of our guided ranges. These results represent our sixth consecutive quarter of.

Bailable to an earnings per share growth for the company.

Over this time period, we have scaled our operations to support rapidly growing demand for our products and services and as we look forward. We see continued strengthening across both leading edge device segments and specialty technology markets and.

In response, we have expanded.

Revenue fracturing capacity at existing facilities in the United States Korea, and Taiwan in the September quarter, we celebrated the Grand opening of our new Malaysia facility, which when fully ramped will be the largest factories and our global network and just last month, we announced a new factory in Oregon, primarily.

Primarily our mainline to meet increased demand for Lam tools in foundry logic and advanced packaging applications. With these investments we are building a solid foundation for delivering on our long term growth objectives. In the near term however, we are not immune to the widely reported supply chain constraints and elevated costs that continue to create new challenges for Lam and others across our industry. Our employees and supply chain partners are working tirelessly to meet the needs of our customers and I would like to sincerely thank them for their efforts. From a wafer fab equipment spending perspective, we now see calendar 2021 ending in the mid $80 billion range.

With these investments we are building a solid foundation for delivering on our long term growth objectives.

In the near term. However, we are not immune to the widely reported supply chain constraints and elevated.

<unk>.

To continue to create new challenges for Lam and others across our industry.

Our employees and supply chain partners are working tirelessly to meet the needs of our customers and I would like to sincerely thank them for their efforts.

From a wafer fab equipment spending perspective, we now see.

Costs are 2021 and being in the mid $80 billion range.

Overall there'll be a fee is higher in the second half versus the first half of the year with both DRAM and foundry logic up in the second half while NAND is more balanced. Demand remained strong and while it's a bit early to give a specific forecast for calendar year 2022, indications are that it will be another year of WFE growth. We believe sustained strength in WP spending is due to several factors we have previously highlighted, first, drivers of semiconductor demand continue to broaden and sectors such as automotive,  health care and security are increasingly dependent on semiconductor content to deliver the performance requirements of end users. As a result,  we're seeing a strong uptick in trailing-edge technology nodes served by our reliant business.

Overall there'll be a fee is higher in the second half versus the first half of the year with both DRAM and foundry logic up in the second half while NAND is more balanced. Demand remained strong and while it's a bit early to give a specific forecast for calendar year 2022, indications are that it will be another year of WFE growth. We believe sustained strength in WP spending is due to several factors we have previously highlighted, first, drivers of semiconductor demand continue to broaden and sectors such as automotive,  health care and security are increasingly dependent on semiconductor content to deliver the performance requirements of end users. As a result,  we're seeing a strong uptick in trailing-edge technology nodes served by our reliant business.

Demand remained strong and while it's a bit early to give a specific forecast.

Cowen for calendar year, 2022 indications are that it will be another year of <unk> growth.

We believe sustained strength in WP spending is due to several factors. We have previously highlighted first drivers of semiconductor demand continue to broaden and sectors such as automotive.

As health care and security are increasingly dependent on semiconductor content to deliver the performance requirements of end users.

As a result, we.

We're seeing a strong uptick in trailing edge technology nodes served by our reliant business.

Our reliant business has now posted 11 consecutive quarters of record revenues and in calendar year 2021, we expect reliant to outgrow the WP investment in this segment. Furthermore, high utilization rates across our installed base are driving strength in all sub-segments of our CSBG business and in the September quarter CSBG revenues. increased year over year by more than 30%.

Five quarters of record revenues and in calendar year 2021, we expect reliant to outgrow the WP investment in this segment.

Furthermore, high utilization rates across our installed base are driving strength in all sub segments of our <unk> business and in the September quarter CSC <unk> revenues.

<unk> increased year over year by more than 30%.

At the leading edge semiconductor content growth larger die and rising capital intensity are fueling increased wafer starts and strong WP spending. In foundry logic for instance, the next generation processor chip for topped smartphone maker with more than 20% larger than its prior a duration. In DRAM higher capital intensity is being driven by the increasing need to correct single bit errors through the addition of an extra on chip bit. NAND, increasing device layer counts in the result for the higher degree of manufacturing difficulty is requiring the addition of new deposition and etch processes to address stress management, defect control and multi-stack integration challenges.

In foundry logic for instance, the next generation processor chip.

Revenue topped smartphone maker with more than 20% larger than its prior a duration.

In DRAM higher capital intensity is being driven by the increasing need to correct single bit errors through the addition of an extra on bit chip.

Chip.

And <unk> NAND, increasing device layer counts in the rig.

<unk> for the higher degree of manufacturing difficulty is requiring the addition of new deposition and etch processes to address stress management defect control and multi stack integration challenges.

As a result, we see the WP investment required to achieve the same bid growth percentage over the next five years to be notably higher than the five year period just completed. However, as the leading equipment supplier to the 3D NAND market, we are investing in new and differentiated capabilities to ensure scaling remains cost-effective. As one example, lamb has developed a new high productivity cryo edge solution, which increases etch rates in high aspect ratio features required for NAND devices with greater than 200 layers.

As a result, we see the WP investment required to achieve the same bid growth percentage over the next five years to be notably higher than the five year period just completed. However, as the leading equipment supplier to the 3D NAND market, we are investing in new and differentiated capabilities to ensure scaling remains cost-effective. As one example, lamb has developed a new high productivity cryo edge solution, which increases etch rates in high aspect ratio features required for NAND devices with greater than 200 layers.

<unk> five years to be notably higher than the five year period just completed.

However, as the leading equipment supplier to the <unk> NAND market, we are investing in new and differentiated capabilities to ensure scaling remains cost effective.

As one example, lamb has developed.

a new high productivity cryo edge solution, which increases etch rates in high aspect ratio features required for NAND devices with greater than 200 layers.

We have installed this new capability in every major 3D NAND manufacturer for qualification with additional shipments systems now shifting to support planned ramps to high volume production next year. While initially developed to meet the demanding requirements of highest spec ratio of etch and 3D NAND. We believe the technology may also have benefits for foundry logic and DRAM at the leading edge. Where we are presently engaged with customers on critical applications. 

A new planned ramps to high volume production next year.

While initially developed to meet the demanding requirements of highest spec ratio of etch and <unk> NAND. We believe the technology may also have benefits for foundry logic and DRAM at the leading edge.

We are presently engaged with customers on critical applications.

To support.

Looking in more detail at the foundry logic segment, we see spending at record levels. Lamb's foundry logic revenues are likewise set to grow significantly in 2021, and we expect this expansion to continue in 2022 as well. Foundry and logic performance in the south side nanometer era is being driven by both device architecture innovation and traditional area scaling.

Foundry and logic performance in.

Vacation five nanometer era is being driven by both device architecture innovation and traditional area scaling.

We are prioritizing technology development in three areas, where we see the fastest growth in the greatest need, namely deposition and etch processes to support the efficient adoption of EV patterning. New edge capabilities to enable the formation of critical transistor features and new materials and deposition techniques to assistant in RC management. In patterning, we are using the learning we have acquired over many years of multi-patterning etch leadership to win new applications as the industry adapts and the EUV progresses.

So new.

New edge capabilities to enable the formation of critical transistor features and new materials and deposition techniques to assistant RC management.

In patterning, we are using the learning we have acquired over many years of multi patterning etch leadership to win new applications as the industry.

Turning option of <unk> progresses.

<unk> requires use of special photoresist materials, which given the material composition can amplify existing challenges with pattern roughness and beef activity. Unaddressed, these will lead to performance and yield loss, especially at smaller device dimensions. Lam has developed critical etch and deposition technologies to help solve these UV implementation issues. In etch we introduced earlier this year, a new cold plasma etch capability that has demonstrated an order of magnitude reduction in EUV related pattern of activity. This innovative etch solution is currently shipping to leading foundry and logic customers.

Unaddressed, these will lead to performance and yield loss, especially a smaller device dimensions.

<unk> has developed critical etch and deposition technologies to help solve these UV implementation issues in etch. We introduced earlier this year, a new cold plasma etch capability that has demonstrated an order of magnitude reduction in <unk> related pattern. This activity.

This innovative.

<unk> solution is currently shipping to leading foundry and logic customers and.

Deposition hard masks and transfer films require enhanced mechanical properties in order to maintain fidelity of extremely small features and minimize line roughness. Utilizing a combination of proprietary hardware design in RF power technology, we are depositing high quality films that have replaced incumbent technologies, such as PDD and spin-on materials at multiple foundry logic customers. Related to the formation of critical transistor features, including gates Thins and <unk>, we saw significant. <unk> <unk> in the September quarter.

Utilizing a combination of proprietary hardware design.

In RF power technology, we are depositing high quality films that have replaced incumbent technologies, such as PD and spin on materials at multiple foundry logic customers.

Related to the formation of critical transistor features including gates Thins and <unk>, we saw significant.

<unk> <unk> in the September quarter.

These wins continue to confirm the benefit of our unique plasma pulsing capabilities in conductor etch for gate, all around and Finfet applications.

For advanced device architectures, we also see ultra high selectivity isotropic edge increasingly required.

<unk> growing selective etch portfolio deliver superior results through a combination of process technologies and reactor innovations that include new chemistries and plasma sources.

This has helped us win a greater number of applications in recent quarters.

And finally, RC management continues to be limited.

<unk> performance scaling and we're seeing demand for our atomic layer deposition technologies as a result.

Our striker <unk> system deposits thin low K films that can withstand harsh integration steps and counter later in the process flow. These.

These films have demonstrated the ability to reduce capacity by <unk>.

<unk> on the 30% and striker is now the tool of record at leading foundry logic customers.

This technology is also extendable to gate all around devices, where there is an additional requirement of conformal coverage in recess cavities, which can then be selectively edged back.

In advanced packaging momentum.

'twenty remains strong with orders received in the September quarter from multiple foundry logic customers for through Silicon via etch and deposition systems, our experienced and high aspect ratio etch and has allowed us to deliver a production proven process with fast ACH rates and smooth profiles, helping to minimize the cost.

Cost with integrating TSV and the overall flow.

Similarly for copper mineralization, our sabre <unk> solution enables void free fill by employing an innovative advanced pre treatment and our high throughput electroplating process reduces cost of ownership.

So to wrap up we did.

Mentum a solid September quarter in an environment of ongoing supply chain challenges, we are seeing robust semiconductor demand across all segments.

Broadening of semiconductor applications across industries, and rising capital intensity.

We are excited about the healthy outlook for WP spending and believe.

Leave our innovative product portfolio is poised to capture new opportunities as semiconductor technology continues to advance.

Thanks again for joining now here is Doug to cover the detail quarter in more detail.

Great. Thank you Tim.

Good afternoon, everyone and thank you for joining us on our call today.

<unk> delivered another quarter of strong results with revenue operating income dollars and earnings per share coming in at record levels in the September quarter.

All financial metrics came in at or above the midpoint of our guidance.

Demonstrating our continued focus on operational execution.

We've achieved this performance while also navigating significant supply chain challenges.

We're pleased with <unk> ability to scale the company in this demanding environment.

September quarter revenue was $4 3 billion, an increase of 4% from the June quarter and more than 30.

35% growth from a year ago.

We're looking at the breakout of the systems revenue.

The memory segment represented 64% of systems revenue in the September quarter, which was up from the prior quarter level at 59%.

Memory growth.

Both was driven by investments in DRAM.

Primarily in the onesie and one alpha nodes.

DRAM systems revenue nearly doubled in dollar terms and grew from 10% in the June quarter to 19% in the September quarter.

Non segment concentration came in at 40.

5% of our systems revenue versus 49% in the June quarter.

And was flattish in dollar terms.

Our NAND customers are investing in both capacity additions and conversions.

With the equipment investments focused towards 128 layer three.

Through 192 layered.

Layer devices.

The boundary segment spending represented 25% of our systems revenue compared with 35% in the June quarter.

We're seeing investments in equipment for both leading edge.

And mature device nodes for multiple sources of end use demand such as AI.

Iot cloud and <unk>.

Logic and analog device companies are driving capacity additions at the foundries.

There was notable growth in the logic and other segment, which hit a record level of systems revenue per land in the September quarter.

Logic and other contributed <unk> 11.

11% of systems revenue in the September quarter, which is up from 6% in the June quarter.

And it was driven by leading edge in mature nodes ramping for microprocessors image sensors power management and <unk> demand.

Let me turn now to the regional composition of our total revenue.

The China region came in at 37% of total revenues, which was flat with the prior quarter percentage level.

The revenue from China domestic.

Customers excuse me and multinational customers with Fabs located in China was again fairly balanced in the September quarter.

Korea, and Taiwan regional spending represented 21%.

And 15% of revenues respectfully, respectively, excuse me in the September quarter.

I do expect that the December quarter revenue will have a lower China concentration.

The customer.

Support business group revenue was nearly $1 4 billion.

34% higher than the September quarter, and calendar 2020, and flat with the prior quarter level.

As Tim noted the reliant product line that serves as a specialty market delivered record results.

And we also had solid results in the spares service.

Service and upgrade side with a focus on maximizing the productivity and value of the installed base tools, while supporting the high fab utilization levels in the industry.

I continue to have confidence that <unk> will grow revenue consistently on an annual basis.

Let me now shipments.

Margin performance our.

Our September quarter gross margin was 46%.

At the midpoint of our guided range.

Just to remind you that our gross margin can fluctuate quarter to quarter due to overall business levels, along with customer and product mix.

The supply chain constraints discussed earlier.

Earlier have resulted in elevated costs broadly.

With freight and logistics costs continued to be one of the biggest headwinds.

Additionally, we currently have margin dilution from our new factory in Malaysia, which is not yet operating at full capacity.

We've included these costs in our December quarter guidance.

<unk> says, we expect they will remain for the near future.

Operating expenses for September were $586 million.

Slight increase from the prior quarter.

We've continued to manage our expenses as we scaled the company with a strong focus on operational efficiencies while prioritized.

<unk> R&D spending to deliver a differentiated product portfolio that supports our customers' technology roadmaps.

September operating margin exceeded the midpoint of our guidance range at 32, 4% or approximately $1 4 billion.

Our non-GAAP.

Tax rate for the quarter was 12, 2% generally in line with our expectations.

And as we've noted in previous quarter calls our tax rate may fluctuate from quarter to quarter.

And you should expect the ongoing tax rate to be in the low teens level for the 2021 calendar year.

We continue to monitor potential tax changes under consideration in the United States.

But we have not reflected the impact of any potential changes in our financial models at this point.

Other income and expense came in for the quarter at $36 million in expense.

This amount is high.

Higher than the prior quarter due to an unrealized gain we had in June for one of our private equity investments.

Partially offset by lower interest expense in the September quarter.

As a result of the pay off of our 2021 notes last quarter.

And just to note <unk> is subject to market related vol.

Utility that could cause a difference from our typical run rate.

We were active in our buybacks during the September quarter, allocating over $1 $2 billion towards share repurchases.

We deployed this cash in a combination of open market repurchases.

As well as an accelerated share repurchase program.

This ASR, we will continue to execute in the December quarter.

In addition, we paid $185 million in dividends in the quarter.

I'd also like to highlight that in August we announced a 15% increase in our quarterly dividend.

Growing it from a $1 30 to $1 50 per share which.

Which was paid in October.

We're tracking very well to our capital return plans.

With returns of over 100% of our free cash flow year to date in calendar year 2021.

Yeah.

Diluted earnings per share for the September.

Number quarter was $8 36.

Above the midpoint of the guidance range.

The diluted share count balance was down slightly from the June quarter level coming in at 143 million shares.

Generally in line with our expectations.

Let me now shift to the balance sheet.

Cash and short term.

Investments, including restricted cash totaled.

<unk> totaled $4 $9 billion, which is down from the prior quarter.

The decrease decrease in cash is attributed to the capital return activities that I described earlier.

Additionally, the timing of shipments and resulting impact on.

On accounts receivable.

As well as an increase in our inventory balance consumed cash in the quarter.

Days sales outstanding was up to 72 days from 66 days in the June quarter.

Inventory turns were down slightly from the prior quarter level coming in at three two.

Times.

Which was planned as we increased inventory levels to meet the increase in investments from our customers as well as to help mitigate the challenges that we see in our supply chain.

Okay.

Noncash expenses for the September quarter included approximately $58 million for equity compensation.

<unk> 60.

$61 million for depreciation and $19 million for amortization.

Capital expenditures for the September quarter were up versus the June level coming in at $136 million.

The increase in our expenditures is associated.

<unk> with capacity expansion in the network in particular at our critical spare parts facility in Ohio.

As well as spending for our Korea Technology Center that will be formally opening in 2022.

We expect to see elevated levels of capital expenditures and the remainder of calendar 2020.

'twenty one.

And into 2022, as we support the growth that we see in the business.

We ended the September quarter with approximately 15400 regular full time employees.

Which is an increase of approximately 1300 people.

To.

Increased output levels and to support customers with their technology and production requirements.

Let's now take a look at our non-GAAP guidance for the December 2021 quarters.

Yeah.

We're expecting revenue of $4 $4 billion plus.

Plus or minus.

$250 million.

We've continued to maintain a widened revenue range given the supply chain uncertainties that we mentioned.

Gross margin of 46% plus or minus one percentage point.

Operating margins up 32%.

Plus or minus one percentage point and finally.

Earnings per share of $8 45.

Plus or minus 50.

Based on a share count of approximately 142 million shares.

And just an additional note our guidance does not include an estimated.

Gain related to one of our private equity investments that recently raised capital in a public offering.

The game as of today is in the $50 million range and.

And is subject to market volatility.

The amount recognized in our financials as of the end of December 20.

'twenty one quarter may fluctuate.

And I'll, obviously give you an update at our next earnings release.

So then in closing.

We're experiencing ongoing output challenges and our global supply chain that are continuing to negatively impact both our revenue.

And gross margin.

We're improving known items.

While new items continued to emerge that we need to further work through.

Lead times remained stretched.

And we continue to have unmet demand.

Despite these constraints for operating at record levels in terms of revenue and earnings.

While delivering the technology solutions our customers require.

Industry demand remains strong as we look forward to growth in 2022.

I remain very excited about the multitude of opportunities for the company.

And I'd, obviously like to thank.

The dedicated Lam research employees for their tireless support in this environment.

Operator that concludes my prepared remarks, Tim and I would now like to open up the call for questions.

Okay.

Thank you if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.

The calling from a speaker phone. Please make sure your mute function is off to ensure your signal can reach our equipment.

Again star one to ask a question.

And first we'll go to Timothy Arcuri from UBS. Your line is open.

Thanks, a lot Doug.

I'm, hoping that you're not sick you sound a little bit sick, hopefully youre feeling okay.

So.

I guess I guess, the first thing I wanted to say it was.

That can you quantify Doug can you quantify what the gross margin headwind is right now you talked about Malaysia and freight.

Is that is that 50 bps 75 basis points I'm, just kind of wondering if if you could quantify that for us. Thanks, Doug.

Thank you Tim Thanks.

For a bit concerned about my health I'm doing quite well frankly, I don't know, maybe just a little scratchy throat.

I haven't quantified camera and im not going to know it.

What I've said in the past and I'll continue to say is it's a notable headwind.

From where once we get through this environment.

From where we will be.

I'm not going to quantify it though but it is noticed it's notable.

It is okay. Okay.

And then I guess.

So you talked about China domestic being down sequentially for December.

I assume some of that is memory related.

And I guess the question is.

<unk>.

Is that all sort of out of the system as you go into the first half of 'twenty two or.

Sure.

Is are there still some headwinds in China related to some particular projects that that may persist into the first half of 'twenty two.

Yes, Kevin I don't see anything new really relative to China or timing of anything that maybe I'm not quite getting at your question or maybe I don't understand the nature of the question you want to try to redirect me a little bit.

Yes, I guess, so there is a pretty big project in China that has had I mean.

It's been well publicized they've been having funding problems. They can't meet their commitments. So I'm just wondering if maybe that was part of of the NAND softness in the back half of the year that you cited last call and I'm wondering sort of is that sort of.

Has that all played out now such that there's not like that's got still a headwind into the <unk>.

Yes, I don't really see any change from a quarter ago of any major customer plans I won't refer to any one customer or another but no real change.

Awesome, Okay. Thank you.

Yep. Thanks.

And next we'll go to Harlan sur from Jpmorgan. Your line is open.

Good afternoon, and great job on the quarterly execution guys.

You know the market is concerned that we're heading into a multi quarter downturn in memory kind of similar to the 2018 2019 memory downturn.

It was a pretty severe six quarter downturn, but the one thing I clearly remember was that ahead of that downturn.

Your memory customers proactively cut their capex very very rapidly if I look at it this time around there's some near term pricing weakness in memory, but the overall memory demand environment remains pretty strong and I think most memory company you seem optimistic widen the batten I'll look for next year. So I guess the question is has the lab Kim's.

Seen any signs similar to the 2018 downturn of customers, either getting concerned or canceling or it's like pushing out of shipments due to a concern on a protracted memory downturn next year.

Yeah, Harlan let me, let me take that first.

I think the simple answer is no.

The vast majority of our conversations with customers today is still about delivering equipment that they they feel they badly need to meet their their near term requirements and as Doug mentioned in his prepared remarks.

I would say lead times have stretched out to the point, where our visibility.

<unk> into demand into 'twenty, two is better than.

Usual and so I don't think that the.

Initial indicators. So you are talking about or are things, we're seeing right now we feel much more constrained.

By supply chain challenges and ability to meet shipments.

And then over shipping situation.

Yes. Thank you for the insights there and then the one area that we continue to see demand, which you alluded to is obviously strong demand for mature and specialty processes analog microcontroller. RF. These guys are all dealing with supply issues I know back at the analyst day. The team said that specialty market is growing.

In about two to three times faster than Wi Fi. So as you know reliant business growing faster than that two to three X rate and whereas the team driving stronger than market growth as it etch deposition or is it more based on platform performance like throughput uptime or other productivity metrics. Thank you.

Yeah. That's a great question, so as I said in my my script.

The reliant business is growing faster than the WP investment in that segment. So so it would imply.

We're picking up share there.

I would say reasonably well balanced across our product portfolio and you are right in that market a lot of that is about Lam.

Ship in bringing both technology and productivity for customers, So where there are new decisions being made about tool sets or new fabs being established for those.

<unk> of specialty products.

We have a lot to offer relative to hitting.

Hitting the cost targets that those customers are looking for.

As leader in Q I'm sorry.

Yep.

Yeah.

And next we'll go to John Pitzer from Credit Suisse. Your line is open.

Yeah. Good afternoon, guys think so let me ask the question, Jim I get that it's a little bit too early.

To get too granular on next year's WSB, yet I know in your prepared comments, you said, it's going to be another growth year.

I'm wondering if you can give us some parameters of how you're viewing kind of the first half of next year.

The second half of this year.

Yes, I think we're not going to give first half and second half of 2022, but we.

What we would say is we're exiting this year with significant unmet demand.

We talked about a constrained environment, which means as we enter 2022.

With a lot of tailwind relative to the business.

But I tried to in my remarks lay out some of the trends that we think over a slightly longer term maybe through 2022 on into 2023.

NAND driving.

Not only demand, but really on the supply side of rising capital intensity larger die.

Different architectures, new processes that need to be inserted into process flows to deal with increased manufacturing complexity.

These will be drivers for WMC.

Our drum structurally for for a very long time so.

I think there are a lot of things that will be positive for WC in 2022 from an equipment perspective.

That's helpful and then Tim as a follow up pretty big milestone in the logic business I think this quarter's revenue was about a.

Higher than prior peak, it's the first time, you've been run rating over $1 billion other ever and I know you've kind of.

Talked about some of the things you're prepared remark comments that are driving that but to what extent do you believe that this is sustainable to what extent is it tam growth in logic versus kind of your market share and Sam growth starting.

Third kick in in any sort of view on sustainability from these levels.

Yeah, let's say, it's probably a combination of both us expanding into some new applications that I talked about related to emerging device architectures.

Gate, all around new new processes like selective etch technology.

<unk> are expanding our market opportunity, but also share gains I mean, it's.

<unk>.

We've seen the increase in spending in the foundry logic area for a number of years, we've been focused on developing products that bring real value to customers in that space.

What we always said was there can be a little patient because changes.

As in the foundry logic will come a little more slowly than it's been in the memory World and I would say youre starting to see the fruits of those qualification efforts starting to play out in our actual business results.

Perfect. Thank you thanks, Sean.

And next we'll go to C J Muse from Evercore.

Your line is open.

Yes. Good afternoon. Thanks for taking the question I guess first question, hoping to go back to supply constraints and Doug can you perhaps speak on the revenue side.

Where youre seeing the impact is it primarily.

Due to perhaps a slower ramping in Malaysia.

Are you seeing.

It across all products or limited to a few and then Im curious as part of that is it impacting <unk>, both for reliant and upgrades or less so there.

Yeah C J thanks for the question.

Frankly.

When I look at what we're doing with our own internal manufacturer.

Fracturing capability, but that's not what the biggest constraint is it's getting back into the supply chain.

I think we've done quite a nice job actually accelerating the ramp of the factory in Malaysia, Tim referred to all the places that we're opening new capacity, we're adding capability pretty much everywhere.

Internally in the network.

As we get further and further down the road and demand continues to be quite strong we're beginning to see constraints in the supply chain. So we're having to work our way back up through some of those things and Thats. The biggest thing we're dealing with right now so I don't know if you want to add any sense I guess I'd just I'd just reiterate we do.

Building.

Incredibly complex machines, they do amazing things on the wafer they require a lot of parts from a lot of different suppliers to do that including tremendous amount of semiconductors himself and so when we've heard so much about chip shortages.

That that hit some of our machines and it only takes a few.

Few of those critical chips to delay us being able to ship what otherwise is a very complex system. So.

As Doug said, just having to work down through the supply chain through lots of suppliers to find out where those pinch points are and it's a daily activity, but so far we're working through there.

And being able to deliver growth and also meet the most urgent needs of our customers and that's really our key focus.

Very helpful.

As my follow up.

I get the sense whenever I have conversations with the bulk of that.

Seal like investors under appreciate your foundry logic exposure.

So.

In your.

Slide deck, and then prepared comments.

You talked quite a bit about kind of new quality, new design wins and so curious.

Over the last three years your Sam or.

As a percentage of foundry logic is running around eight 9%.

When do you think we see an inflection based on these design wins and what.

Should we be looking for.

To gauge that thank you.

Yes, that's a great question and.

I'm glad you noted I spent a lot more time on this these prepared remarks talking about foundry logic I think our memory story in leadership, there is it's pretty well understood and we want to make sure that people.

People are understanding the progress we're making in foundry logic and also the new opportunities that are being created for us and so.

Many of those are for more advanced technologies, it's where device architecture changes or things like that.

New RC management requirement RC requirement drives need for new films are new deposition techniques.

Techniques and so I would just say at each technology node, we're seeing an inflection we're seeing more of our equipment have a chance to get inserted to qualify it and become part of the process of record and so I don't think youre going to see like.

A single point in time or a single node received a jump up but youre going to see the steady progression.

Progress on both Sam expansion and share gains.

Okay helpful. Thanks.

Thanks Sanjay.

And next we'll go to Krish <unk> from Cowen <unk> Company. Your line is open.

Yeah, Hi, Thanks for taking my question I had two of them first one I think I just wanted to clarify Tim a dog.

As we've made it seems like the supply chain constraints are impacting our revenue, even though demand is strong and it's impacting our margin. So should we assume this $4 4 billion revenue, 46% gross margin because the way youre going to be saturated until the supply constraints ease or do you think it's going to be more gradual.

Well recovery and then I had a follow up.

Yes, let me start and then I'll, let Tim.

Hey, Matt.

Krish I think some of the cost headwinds, we're seeing I'm going to be around for a while especially with what I intimated.

We're doing our best to work through it and our efficient and effective.

But frankly, we're just we're spending money to try to.

<unk> continued to increase our output capability.

And like I said in my prepared remarks, we're making progress on lots of different things, but we then see other things popping up.

Like I said, we're working our way back through the supply.

And then Tim referred to the fact that actually semiconductors are constraining us a little bit so.

We're doing our best to work through it we're mitigating problems.

We're incrementally.

Increasing capability as we go.

And I think it's going to get better bid by bid is what I would describe.

Chris I don't know, Tim you want to yes, I think thats.

Pretty good explanation it will it will continue to improve as we knocked down each of the problems that comes up and assuming that there arent a bigger surprises we would see ourselves gradually improving from this point forward just as we had supply constraints in the September quarter and manage.

Through those and we will have more in the December quarter. So it is constrained, but we are managing to knock enough Austin that we're showing some incremental growth and I think thats what.

You could probably expect to continue to see.

Got it very helpful and then a follow up for you Tim.

You know you spoke about the <unk> project, which kind of makes a ton of sense given.

The extremely long edge fans today in three D. NAND and you also said this also improves actually but is it a negative for you since customers would need should have your etch tools or does this needed to protect and grow your market share.

Well.

I think that like like all things win win.

You are providing the technology thats needed.

Needed to not only enables current nodes with future technology nodes.

We have an obligation to drive both technology and productivity and make sure the scaling is cost effective and.

The roadmap continues and so this is our effort to.

Not only differentiate our technology.

Further for many companies that they tried to develop similar technologies, but also too.

Help our customers with those transitions and accelerate kind of that's taken the RF NAND.

And Chris I'll, just remind yourself, Tim said in his scripted remarks that as we look at the NAND investment required to generate the bit growth over the next five years as compared to the previous five years, it's <unk>.

Increasing that.

That includes.

Brio Rolling out an increase in net rates as a result of that yes.

Got it I think thats, a very fair explanation. Thank you.

Thanks, Chris.

And our next question comes from Joe Moore with Morgan Stanley. Your line is open.

Great. Thank you I wanted to ask about NAND.

Tim in your opening remarks, you had mentioned that the five year spending in NAND needs to be higher than the last five years. I think is what you said in terms of.

Any quantification of how much that is and just any qualification of why layer count.

That much more capital intensive you were increasing layers in the last five years or increasing layers in the next five years, what is it that drives up the capital intensity.

Sure.

So are we.

We did say that the WP required to.

To achieve the same percentage of bit growth would be higher than X five years, and you know it's a number.

Of things one is the.

As the layer count continues to increase certain processes scale as we said non linearly. So it takes longer to etch a stack that's twice as high takes it takes more than two X longer and that's why we need to introduce new technologies like <unk> and other processes to keep.

That.

Escalation of process times to a reasonable level same thing can happen with deposition as youre trying to control uniformity and defects and stacks become much.

Higher in taller and so.

In addition to that I've mentioned several steps that get added so as you start to stack higher.

The wafer stress and Bo becomes a much bigger challenge and so now you have to add extra steps.

Like lambs stress management deposition tool.

Those additional steps and to the WP required to add.

Bit of NAND, and so that is a it's a combination of both new steps to deal.

It's like city as well as new processes required to deal with kind of non linear scaling process times.

Great. Thank you.

Thanks Chuck.

And next we'll go to Stacy Raskin from Bernstein Research Your line is open.

Hey, guys. Thanks for.

Taking my questions. My first one I wanted to take a look at the foundry business. So it was down like 25% sequentially and it looks like it was down year over year in what seems.

Seems to be a very very strong foundry spending environment. So why was that can you tell us a little bit what's going on in that end market why was it down.

Yes.

Nothing goes up every single quarter, there's ebbs and flows it's a second half weighted foundry logic spending profile.

Yeah, it's going to be a good quarter in December but when you got a concentrated set of a couple of really big customers you know it is.

Lumpy at times, So I think that's the only thing I would tell you about them.

Okay.

Just a follow up on that in terms of what's what might be implied for the trajectory into Q4. So you said foundry logic up.

Second half versus first half DRAM up second half versus first half NAND kind of more balanced.

I guess, Brian where where NAND is and given where DRAM is ready in order to have that.

Foundry is still to be up in the second half I need to be have DRAM down considerably in December quarter in order to get foundry up is that what you have in mind or when you say foundry logic rowing in the second half do you mean, just as a combination growing.

It's a combination when you registered.

Foundry logic and DRAM up in the second half and then more balanced.

Uh-huh I guess, what I'm asking is do you see foundry and logic, both up in the second half or just a combination because I can't really get foundry up in the second half unless they got DRAM down a bunch in the end of December quarter, just mathematically I guess I'm thinking about this right.

Yes.

Stacey we're combining for unearned logic together when I described it.

Okay guys. Thank you.

Yup.

And next we'll go to Blayne Curtis from Barclays. Your line is open.

Hey, good afternoon. Thanks, taking my question I have two as well just curious to a couple prior questions on the logic segment on the preamble you talked about really trailing edge kind of driving that big.

Hi.

To a prior question you kind of mentioned some of the future wins you have at the leading edge. So just maybe kind of just revisit that and when you talked about I think you said that it could maybe stay at this level to John's question.

Is that just the trailing edge or are you seeing that leading edge starting to come in even in the December quarter.

Yes, no maybe we didn't want to.

Mislead here I mean, we talked about the reliant business and trailing edge as a notable area of strength for Lam.

And sign of this broadening of demand across many many different use cases, including industries like our own where we're consuming a tremendous knowledge.

But that type of chip, but we do have significant business.

What we would call the current leading current leading edge.

And what I was trying to point out worse is how our Sam expands with new processes and our win rate is increasing we believe as new inflections come into into place. So that's all built.

Into our numbers today, but we do think that from a.

Yes.

Our share of <unk> going forward as these technology inflections in foundry logic take place.

We would see that.

Driving higher over the next several years.

Thanks, and then maybe a question for Doug on gross margin it sounded like.

There's still some variability in the outlook and questions about whether effectively to get better and just kind of curious of your foundry customers are raising pricing their customers are raising pricing everybody's raising pricing is there a lever that you and also a poll as an industry on pricing I was just curious your thoughts.

Yes Blayne.

We're doing our best to get paid fairly for what we're delivering to customers into paid for the value. We're delivering so that's an ongoing activity at the company and a lot of our pricing arrangements are.

On an annual basis renegotiated and clearly we're focused on trying to get the gross margin to improve over time, so that'll be a part.

Makes sense.

Thanks, Brian.

And next we'll go to Tahira Harry from Goldman Sachs. Your line is open.

Hey, guys. Thanks, so much for taking the question.

My first question is on 2022 I realize its early you guys talked about your expectations.

<unk> for the market to be up how are you thinking about the four device types. If you had to rank order before.

Would you go about doing that and more importantly.

How should we think about <unk> ability to outperform the market in 'twenty two I guess, the big concern is memories.

That to flattish maybe in logic and foundry.

<unk> continue to be the big drivers all else equal that would be a bit of a headwind for you guys. Just given your customer mix, but at the same time, you've talked about all of these design wins in your market share growth in foundry and logic. So net net how should we think about your performance visitor AWS fee.

Okay.

It's too soon for us to give you specificity.

In 2022, when we look into the year, though 2022, I'm very confident of the growth year.

I believe every segment of the business is actually going to be pretty strong next year, but I'm not really ready to parse one versus another quite yet obviously, we'll do that for you next quarter.

And I feel really good about where.

We're positioned Tim talked a lot about the.

The trajectory of our business in foundry and logic, we've always been strong in memory and I believe we're going to continue to do extremely well there.

So too soon for me to parse it.

And by the way I think she SPD is going to have a good year next year right.

When I put it all together I think we're very well positioned and going to continue to be.

Stay tuned we will give you a little more specificity on the December quarter call.

Got it and then.

Quick follow up on your last point, Doug on <unk>, you talked about the reliant business having.

Quarter.

Which I guess implies that your spare parts business in other parts of your business could have been it could have been down a little bit and I appreciate.

Your point about there being.

Some some lumpiness if you will on a quarter to quarter basis, but if you can speak to what youre seeing in the non reliant business and CSP junior.

Term.

That would be helpful. And then I guess you sort of.

Addressed this in your prior answer but.

How confident are you that calendar 'twenty two it could be another up year. After what's been a very strong year and CSP Jay.

Thank you.

Sure.

Youre right Theres lumpiness to different aspects of it.

Tim specifically said 11 consecutive quarters of record revenue reliant, obviously, there's ebb and flow and other stuff.

As inventory builds a little bit upgrades can be a little bit lumpy at times, depending on whats going on in the installed base, but.

But I will tell you when I think about <unk> go into next year.

It's been a very strong.

The year in terms of our chamber shipments. This year, that's the opportunity to continue to have CSB GE grow into next year and Thats why I have pretty high confidence that this business will grow every single year.

May not grow every single quarter, we were flat this quarter, but we're shipping a lot of chambers this year and I feel pretty good about what thats going to mean.

At SPG next year.

Thank you.

Yes. Thank you.

And next we'll go to Vivek Arya from Bank of America Securities. Your line is open.

Thanks for taking my question you mentioned the supply situation could improve.

Over the next several quarters I'm curious what do you think changes to help that.

Is that actions you're taking is that actions. Your suppliers are taking I'm just curious what's kind of behind your confidence that the supply situation can actually improve from here.

Yes, I think it would be.

Perhaps actions, we're taking with our suppliers I mean, it's it's about helping to prioritize.

Our critical supply chain partners towards the things that are most important to meeting output.

Output quarter by quarter.

The actions, we've taken ourself kind of detailed goes out if we look back six months.

Once again or more we were talking about physical capacity needing to open factories, expanding factories, and we've really taken care of a lot of our own actions.

But in a very complex supply chain.

Do the same work with all of our partners.

Been great through that but there is still more work to be done we just anticipate that over the next several quarters.

We're continuing to make progress.

Alright, Thanks, Tim and for my follow up you sound more confident about next year, both on the tools and the <unk> side.

Is that based on the backlog of orders is that based more on structural drivers.

This will make sense, where I'm coming from.

Problem is that.

Customers are seeing the current state of the industry and supply shortages. What gives you the confidence they're not over ordering given this environment that these orders are for real.

So if you look at your confidence about next year, how would you kind of contrast.

Those signals to what you usually have at this point in prior years.

Yes, that's a it's a very good question something we watch closely we want to make sure that demand is as real as possible.

I mentioned, our lead times, our conversations with customers our understanding of projects I would say is.

Better at this point, because our customers planning for very big projects Mega Fabs that are experiencing difficulties in getting equipment and so we are having much deeper conversations with them about how we can ensure that that equipment will be available when they need it and so I would say compared to normal.

We had a little bit longer visibility than they typically have had.

And obviously, we know every fab in the world.

<unk>, how much equipment. It can take and we think through that as we're talking to customers about when they want equipment in those cleaner spaces. So.

That goes into part of the thinking as well.

Thank you.

Yes. Thank you.

And next we'll go to Patrick Ho from Stifel. Your line is open.

Thank you very much and congrats on a really nice quarter, given the environment, Doug maybe just a follow up question on the customer support business group you guys have done a really really good.

<unk> growing the reliant business, obviously, the Tam of that marketplace is growing and you're capitalizing from that are you getting any quote share wins because customers, especially on that front are looking for more productivity near our new materials engineering, that's going on is.

<unk>.

You know I guess trailing edge processes are you actually gaining share also and getting placement.

And with the reliant business for some of those.

More mature nodes.

That's a good question Patrick.

Yes.

Some of our I mean, we go to market there through the reliant product line and as you know, which is refurbished equipment and increased and increasingly we're selling new equipment and when I look at some of the new customers or customers that are taking equipment. It's.

Our footprint is doing quite well.

Frankly in the specialty space.

Yeah, we already have some very specific things that were very strong at.

So yes, I think we're doing well I don't know, Tim if I guess, what I would just add as you.

As people were trying to work through supply constraints and increase their output out of a fab.

Most valuable part of our <unk> business to them as the productivity upgrades.

This amendment.

Our upgrades that can be applied to existing equipment.

Many times not even.

Really changing the process it might be software optimization to to optimize the wafer handling through the machine.

And thereby gain some small improvement in throughput.

We definitely see as.

Utilizations really hit like Max levels people looking for productivity upgrades that can implement to squeeze more out of installed base and so that part of our business does.

It always does quite well, but I would say in this environment doing quite well.

Great. Thank you.

Thanks, Patrick.

And next we'll go to.

Sidney Ho from Deutsche Bank. Your line is open.

Thanks for taking my question. My first question is going back to a supply constraint I got to give this a shy.

If you look at your revenue and year to date, how much more revenue do you think you could have shipped if there were no constraints.

If you add in you're not answering quantitatively.

There are some metrics that you can point to you can point to to help us think about how about that.

Deferred revenue orders I know you don't disclose orders anymore.

Okay.

Yes, Sidney we're not going to quantify it right now, but we are constrained our lead times are stretched.

<unk>.

So a decent amount of unmet demand I mean, there's a reason that.

Set of unmet demand lead time, and so forth, we're working our way through it but I'm not I'm not going to quantify it.

Okay.

Maybe I'll switch over to ask about the memory side, what are your thoughts about the discipline.

Apply growth run rate exiting this year for DRAM and NAND.

Like some of the Capex spending in the early part of this year should turn into output by the end of this year and kind of relate to that I assume most of the memory capex will be for technology transition, but how shall we think about what portion of the W. E is more driven by wafer additions.

And hence a more variable in nature.

Thanks, Yes.

When I look at both NAND and DRAM this year.

It's a combination of both wafer ads and you always get node conversions in both NAND and DRAM and that's very much what we see going on more wafer wafer adds this.

This year than last year, obviously.

Just the nature of where demand is in the industry.

When I think about supply growth.

You know both when I look at the investments that are occurring this year I think NAND is pretty balanced in terms of supply demand growth for the year I think DRAM is still a little bit constrained frankly.

So that's generally what I say, what we say Atlanta.

Okay, great. Thanks.

Thanks, Nick.

And next we'll go to Joe <unk> from Wells Fargo. Your line is open.

Yeah. Thanks for taking the question.

I wanted to go back to your comment around.

W. I think investment required to see the same bit growth demand I was curious how do you compare that growth and that required investment that DRAM is one growing faster than the other.

Sure.

Sure I got the question.

Try it one more time.

Yeah. So I mean, you talked about the increase in investment for to drive the same amount of bit growth in NAND I assume that that's a similar trend that we're seeing in DRAM, but I was curious of isn't and growing faster than DRAM that that level of investment.

Investment to drive that growth or is DRAM investment.

Growing faster.

Youre absolutely right that they are both growing in order to get the same amount of bit growth.

I'm not ready to compare one to the other necessarily but they're both growing it's getting more and more challenging capital intensity.

Growing up to get the same level of bit growth in both NAND and DRAM.

Okay Fair enough and then just as a follow up.

Three D DRAM seems to be kind of this a growing topic of interest I was just curious you know what's the lambs thoughts in terms of the timing of that and then just you know the opportunity.

Density is up for you guys looking out.

To that technology.

Well, it's it's.

It's still it's still pretty far out for me from a production perspective, but clearly we've always had is anything that the transitions devices.

Third dimension.

It requires a lot of etch and deposition equipment to build and create those complex three dimensional structure. So.

Clearly a great opportunity for Lam is that inflection takes place, but I can say is of course, we're engaged at this point in the early days of developing what those architectures and materials will look like.

You know as we get closer to defining those process flows I'm sure there'll be more discussion about that part of our business.

Helpful. Thank you.

Operator, we have time for one more question. Please.

Okay.

Thank you and our last question comes from Quinn Bolton with Needham your.

Your line is open.

Hey, guys. Thanks for squeezing me in Doug just wanted to come back to that unmet demand I know youre not going to quantify it but if you just look back over the past couple of quarters has that continued to grow even as you've been able to increase capacity and in revenue.

I'm not going to tell you how it's moved sequentially. It was there last quarter, it's better this quarter, we're working through.

To mitigate and work our way through but I am not going to compare one quarter to the next.

Got it and then second question just follow up on Malaysia, do you have any sense or can you give us any sense when you think that stops.

Being a drag is that still a couple of quarters out or is that something you'd rather not specify.

It'll get better as we ramp the factory and I think by the time, we get to the second half of 2022 it will begin to be a benefit to gross margin as opposed to a headwind. We just we just need to get a ramp there's fixed costs there.

We're working on that.

Thanks Chuck.

Thanks Quinn.

Okay, operator, I think I think that's it for us and you Wanna closest we just wanted to tell everyone. We appreciate your support and thank you for joining our call today.

And that does conclude our call for today. Thank you for your participation you may now disconnect.

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