Q3 2022 Lam Research Corp Earnings Call
Good day, ladies and gentlemen, and welcome to the March quarter of 2022 earnings Conference call. At this time I'll turn the conference over to Tina Korea. 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 wheelchair our overview on the business environment, and we will review our financial results for the March 2022 quarter and our outlook for the June 2022 quarter. The press release detailing our financial results was distributed a little after one o'clock P. M Pacific time this afternoon.
<unk> 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 includes forward looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see a comes.
Being 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.
Detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until three o'clock P. M Pacific time.
A replay of this call will be made available later this afternoon on our website and with that I'll hand, the call over to Tim.
Thank you Gina land.
<unk> reported revenues of 4.06 billion.
And earnings per share of $7 40 in.
In a severely supply constrained environment.
While we were able to deliver results within our guided ranges I am disappointed that were not performing better in a very strong demand environment for our equipment and services continued component shortages, along with new challenges that emerged including Covid related lockdowns, along with exacerbated an already stressed some.
<unk> situation.
As a result of the larger range of issues, our original expectation for the timing of output recovery proved to be optimistic.
In response, we have intensified the focus across Lam, we're committing the financial resources and workforce required to both meet our customers' priority tool needs in the short term as well as increase the long term resiliency of our global supply network.
Recovery efforts spanned from embedding Lam experts are key suppliers to collaborate on shortages to increasing field resources to accelerate installation of tools one shift.
Customers are partnering with us to qualify additional component suppliers and we have assigned more engineering resources to work on design and sourcing for alternative parts to improve supply chain flexibility.
Despite the issues, we still face I am thankful for the tremendous efforts from Lam employees, our suppliers and our customers through this challenging period.
While the near term pace of supply chain recovery is difficult to assess we are confident that our actions will result in progressive improvement in our performance on a go forward basis.
Our deferred revenue balance exiting the March quarter was over $2 billion as we ship systems to customers to accelerate tool installations, but could not recognize this revenue within the quarter due to the lack of certain critical components Douglas.
Doug will elaborate more on the deferred revenues in his prepared remarks.
On the demand side.
The environment remains very strong.
While continued supply related delays could potentially limit how much wafer fabrication equipment investment can be executed in 2022, our current <unk> view is still in the $100 billion range, we see unconstrained demand exceeding $100 billion in 2022 and any unmet demand.
Should flow into next year.
Our confidence is rooted in the fact that the powerful secular drivers of <unk> spending are unchanged greater semiconductor content rising device complexity and larger die sizes, all contribute to a healthy setup for sustainably strong wip levels.
An example of this can be seen in the smartphone segment, where unit growth may be flattening year over year due to inflationary driven softness in consumer markets, but the average NAND and DRAM content is increasing around 20% year over year driving demand for <unk>.
In servers, we see overall growth in both units and content with server DRAM content per CPU growing in the 20% range from the prior year.
On top of this the drivers of Lam specific growth are also unchanged.
<unk> deposition are critical technologies required to transition semiconductor manufacturing to higher performance and more scalable <unk> device architectures in memory foundry logic and advanced packaging.
<unk> leadership position in key enabling technologies for <unk> devices.
Evidenced by our installed base and leading edge Fabs worldwide is a solid foundation for long term outperformance.
And with our continuing investment in an exceptional pipeline of new products and services, we are increasingly well positioned to win at the <unk> inflections.
On the technology front, we are winning new applications across etch and deposition and across all device segments. We are strengthening our overall market position by delivering differentiated solutions that enable higher aspect ratio structures enhanced device performance and increased manufacturing productivity.
Over the past two calendar years.
<unk> total revenue growth has exceeded that of our large peers.
This is in part due to our gains in the foundry logic market, where we were historically under indexed.
And it is also a result of our success in expanding our <unk> installed base opportunities.
Through innovations like Lambs equipment intelligence solutions, we are helping address our customers' capacity constraints by utilizing vast quantities of tool data to improve system performance and enable faster tool installations.
In the March quarter, we expanded on our selective etch wins at a large foundry logic customer at.
At the same time, we've added new wins in our conductor etch business.
In one example, we are set to double our conductor etch share at our key foundry logic customer as they transition to their next node at.
At another leading foundry logic customer we have successfully replaced the competitor's tool at a critical step by helping the customer accelerate their move to the newer node.
Key to our traction in these wins as our ability to enhance our product offerings with equipment intelligence solutions to deliver the best get uniformity and improved yield, thereby addressing customers cost and performance requirements as they execute their scaling roadmaps.
In deposition, we continue to see significant momentum for both our <unk> metals and dielectric solutions for leading edge foundry logic nodes.
In DRAM, we are the highest performance devices are adopting more advanced Cmos technologies like high K metal gate transistors, we have leveraged our foundry logic success to win new applications in the DRAM <unk> nodes.
As customers ramp capacity on these nodes our etch share in this segment is set to expand.
In deposition are critical spacer applications enable lower capacitance thinner films to support further device size empower scaling.
In the March quarter, we secured two wins for critical spaces at a large DRAM customer for their leading node.
In the NAND segment, we also want a highly contested decision at a key customer where we demonstrated a superior <unk> solution for a critical transition to a next generation low resistance, enabling film for their word line applications.
Shifting to our <unk> business results were down modestly in the March quarter predominantly due to the global supply constraints that impacted our reliance upgrades businesses.
While <unk> is subject to quarterly fluctuations, we believe our expanding installed base over a longer period offers a stable platform for revenue growth.
During the March quarter, we secured.
Ferrous contracts at two of the world's largest ibms with the cumulative contract amount exceeding $1 billion.
We see calendar year 2022 to be another strong growth year for our <unk> business.
So to wrap up we believe we are making progress on the extraordinary industry supply challenges, but overcoming the breadth of issues that have emerged is taking longer than we initially expected.
We are focused on meeting the critical needs of our customers and are committed both the financial resources and workforce required to recover as quickly as possible.
With continued strength in the equipment demand environment and progressive improvements in our supply chain, we do expect Lam to post another solid year of revenue and EPS growth.
With that I'll turn it over to Doug.
Excellent. Thank you Tim.
Good afternoon, everyone and thank you for joining us on our call today during what I know is a busy earnings season.
In the March 2022 quarter, we delivered results within the guidance guidance ranges for all our financial metrics.
However, we missed the midpoint for all numbers.
As Tim discussed, we experienced broadening supply chain issues that negatively impacted our revenue as well as our profitability.
Delays in securing critical parts needed for shipments of our tools hindered our ability to meet our revenue objective and led to increased spending as we focused on initiatives to mitigate these constraints.
Deferred revenue grew by over $600 million.
The magnitude of the increase reflects the heightened degree of parts shortages that were experiencing which impacts our ability to recognize revenue on tools that we've actually shipped.
Our inventory balance also increased as we are procuring the parts that we can and building to meet the growing unmet demand that we see.
On the margin side with headwinds from adding resources to address the supply chain challenges as well as to be prepared for the higher volumes, we see in the second half.
Additionally, we have ongoing supply related inflationary pressures.
We were able to partially offset the gross margin headwinds through operating expense management during the quarter.
As a result March operating income and earnings per share came in closer to the midpoint of our guidance.
We see ongoing cost and supply constraint challenges continuing to impact our guidance for the June quarter.
Let me now turn to the details of our revenue for the March quarter.
Revenue came in at $4 6 billion.
A decrease from the December quarter.
The memory segment was sequentially stronger than the March quarter with concentration of 66% of systems revenues.
This was up from the prior quarter level of 58%.
The strength of memory during the quarter was led by the DRAM segment, where we had a record level of revenue for the company and a percent concentration at 27% of systems revenues.
This compares with 23% that we saw in the December quarter.
The DRAM investments were primarily for <unk> Z and one alpha node additions as well as conversions.
The NAND segment was 39% of our systems revenue higher than the 35% in the prior quarter.
Our NAND customers are investing in tools for 128 layer through a 192 layer devices.
And foundry March quarter revenue comprised 21% of our systems revenue versus 31% that we saw in December .
The decrease quarter over quarter is related to the timing of customer investments.
There continues to be solid investments in this segment to address and demand drivers such as AI Iot cloud high performance computing and <unk>.
I would expect to see increases in this segment as we progress through the year.
Weighted to both leading as well as matured nodes device investments.
We see continued progress in the logic and other segment, which contributed 13% of systems revenue in the March quarter and is a record in terms of revenue dollars.
We're seeing good traction here, notably in etch as.
We expect continued growth in this segment during calendar year 2022, as our customers invest to meet the demand requirements in the market for microprocessors image sensors and advanced packaging solutions.
I'll now turn to the regional composition of our total revenue.
The China region came in at 31% of total revenue.
The split of the China revenues was fairly balanced between the domestic.
And multinational customers that have fab locations in China.
There was also strong concentration of investments by our customers and the Korea, and Taiwan regions, which comprise 24% and 16% of our total revenues respectively in the March quarter.
Our customer support business group revenue was approximately one 4 billion, which was down 5% from the prior quarter.
<unk> was 8% higher than the March quarter of calendar 2021.
Our alliance and upgrade product line revenues were negatively impacted in the March quarter by the ongoing supply chain constraints.
Nonetheless, there continues to be healthy demand in the specialty market across numerous customers as well as investments by our customers for upgrades across their installed fleet of tools.
Our spares business remains strong given the high utilization levels in the industry and we're also seeing solid customer poll for services for the same reason.
As we've noted in the past <unk> can fluctuate on a quarterly basis on.
But our expectations continue to be that this business will grow annually.
Let me now shift to our gross margin performance.
The March quarter came in at 44, 7%.
We are experiencing a multitude of cost pressures with increases in freight and logistics rates.
We're all materials costs, driven by commodities, such as nickel and aluminum.
As well as increased integrated circuit costs.
Our June quarter guidance reflects our expectations for a sustained level of cost headwinds as.
As we manage through.
And adapt to.
This inflationary environment.
Getting expenses for March were $621 million down from the prior quarter level of $627 million.
We managed our overall spending levels during the quarter, while continuing our focus on supporting our emerging customers technology Roadmaps.
We are also deploying incremental R&D resources towards qualifying new supply sources to help improve our supply chain challenges.
Incentive compensation expenses that as you know are tied to the company's profitability were also lower in the quarter.
The March quarter operating margin was 29, 4%.
Our non-GAAP tax rate for the quarter was approximately 10%.
And as I've shared with you in the past the tax rate will have some fluctuations from quarter to quarter.
Looking into calendar year 2020 to expect the ongoing tax rate to be in the low teens level.
And I just mentioned that we continue to monitor potential tax changes in the United States that are under discussion, but given the uncertainty there we've not yet reflected the impact of any changes in our modeling.
Other income and expense came in for the quarter at approximately $44 million in expense.
And I'll just remind you in the December quarter, we had income for this line item due to a gain in one of our venture investments that had raised capital in the public offering.
We also had favorable results from our venture investments since the time, we set guidance that contributed positively in the March quarter by approximately 11 and earnings per share.
Hawaii is subject to market related fluctuations that will cause some level of volatility in this P&L line item.
We're forecasting a more negative or any impact guidance based on what we currently see in the equity markets.
We were active in our buybacks during the March quarter, allocating over $1 2 billion towards share repurchases.
The cash was deployed in a combination of open market repurchases as well as an accelerated share repurchase program.
The ASR will continue to execute during the June quarter.
We paid $211 million in dividends during the March quarter as well.
March quarter diluted earnings per share was $7 40.
Diluted share Count was 140 140 million shares excuse me, which was lower than in the December quarter and less than our March quarter expectation due to the increased share repurchase activity.
Let me shift to the balance sheet cash and short term investments, including restricted cash.
Ended at $4 6 billion, which was down from the prior quarter level of $5 6 billion.
The decrease was primarily driven by the capital return activities that I just spoke about.
Additionally, operating cash was at a somewhat lower level this quarter due in part to the investments, we're making in inventory to help mitigate some of the supply challenges.
Inventory turns were down from the prior quarter level coming in at two six times.
Also due to the timing of customer shipments occurring later in the quarter. Our days sales outstanding came in at 83 days, which was an increase from 73 days that we saw in the December quarter.
Noncash expenses for the March quarter included $69 million in equity compensation $64 million in depreciation and $20 million for amortization.
Capital expenditures in the March quarter were approximately $145 million, which was fairly flat with the December level.
Capital expenditures were mainly focused for growth activities such as our.
Our silicon spare parts facility in Ohio.
The Malaysia factory expansion.
And the New Tech Korea Technology Center.
We had approximately 16900 regular full time employees as of the end of the March quarter, which is an increase from approximately 600 people from the prior quarter.
We had head count growth growth, primarily in the factory and field organizations to address supply chain constraints, while supporting customer deliveries and installations.
Let me now shift and look at our non-GAAP guidance for the June 2022 quarter.
We're expecting revenue of $4 $2 billion plus.
Plus or minus $300 million.
While customer demand continues to be strong, we see ongoing supply chain constraints.
Gross margin of 44, 5% plus or minus one percentage point.
Our guidance reflects expectations of an inflationary cost environment and the continued need to very tactically manage the execution in the supply chain.
Operating margins of 29, 5% plus or minus one percentage point and finally earnings per share of $7 25, plus or minus 75.
Based on a share count of approximately 139 million shares.
So let me wrap things up our execution in the March quarter came in a little short of our expectations.
While we work through incremental challenges with our supply chain that is continuing to limit our output demand remains robust.
Exiting the March quarter, we had our sixth consecutive quarter of growing backlog.
Visibility to end demand is high.
We have a solid foundation in our share position with.
With strong traction to date and new opportunities going forward in all market segments.
Operator that concludes our prepared remarks, Tim and I would now like to open up the call for questions. Thank you, ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your telephone keypad star one for questions. Please make sure that mute function on your phone is turned off so the signal can be read by our equipment.
Darwin for questions, we'll pause a moment to assemble the queue.
We will take our first question from Harlan sur with Jpmorgan. Please go ahead.
Good afternoon. Thanks for taking my question, we tend to think about the supply chain challenges is slowing the growth of new capacity or new technology migrations, but.
As the supply chain challenges that continue to broaden out is it now to a point, where it's starting to potentially impact your customers installed manufacturing operations to Ust SPG business either.
<unk> shipments of spares target.
I know <unk> was down about 5% sequentially in a period where were.
Our customers continue to run pretty much full out of manufacturing Utilizations that I know that you said <unk> was mostly impacted by realized it upgrades, but so is it fair to assume that.
The services segment.
That part of it which support customers install manufacturing operation is not being impacted by supply chain challenges.
Yes, Harlan it's a good question and I guess I'd, just remind everybody that the <unk> business is made up of four different product lines. As we just mentioned spares services upgrades and then the reliant.
Which is the more mature node systems and each of those has kind of impacted differently.
If you look at what is the top priority for customers and the top priority for laminates to keep all of the installed base, which now number something over 75000 systems running every single day inside of those steps and so.
We're not going to compromise nor will our customers on spare parts for instance, and so as we think about priorities here you put the insured with spares and installed base runs services I talked a little bit about equipment intelligence. We're looking for ways, where you can work around some of the constraints I mean equipment intelligence using data to determine when do I really.
<unk> to replace parts, how do I, how frequently do I really have to do preventative maintenance to keep the performance of the tool where I needed to be.
So I would say services actually there's probably a little bit of an uptick in demand for us to do more services on the tool.
But what does get impacted reliant systems. Those are tools. They are affected by the same constraints is as our leading edge systems. They need all of those components they have.
Communications, they need chips they need other things. So those are impacted just the same way as leading edge and then upgrades. Similarly, most of the upgrades. We are doing are actually components that would also go into new systems. So we worked with customers to see which is which is the right priority call is it to put the new system on the floor or is it to upgrade.
And in this particular quarter you can see that we're talking about some impact to the upgrades business. So.
Hopefully that helps.
Explain how kind of those different segments get affected but as I said over the longer period. The installed base will continue to grow. It grows every single quarter and we expect to see SPG business to expand.
In line with that and Heartland, maybe the only other thing I would add is spares I think is in a better situation because our customers hold some inventory we hold inventory theres always been a historic level of inventory.
So I think thats part of the reason why we don't believe were impacted in the installed base I think we've got a little bit of inventory sitting there.
Great no. Thanks for the insights there very helpful.
And Doug I know the situation is still pretty fluid but.
Given yours and your suppliers purchase commitments on components.
Boosting support and logistical resources.
You've got the ramp of Malaysia, which I'm assuming is continue to go as planned and then you also have your capacity.
Shipments for the second half we put all of that together how should we think about gross margins through the second half of this year.
Yeah, Harlan as I sit here today I do believe that gross margin will improve as we progress through the year.
I'll remind you that I said that same thing last quarter, and then we ticked down a little bit Mr. Number a little bit of March saw acknowledged we don't always get it right, but as we sit here today I expect that will improve as we progress through the year and as we improve the supply chain.
Output capability Carlin.
Alright, thank you.
Thanks Harlan thanks.
And we'll take our next question from John Pitzer with Credit Suisse. Please go ahead.
Yes. Good afternoon, guys. Thanks for let me ask the question. My first one Doug is just implied in your June quarter Guide do you expect deferred revenue to go up flat or down and then I guess as you think about maintaining the $100 billion wf fee for the full calendar year does that sort of imply that the $1 billion buildup.
<unk> seen in deferred revenue in.
In December and March comes down by $1 billion in the back half of the year or just help me understand how that dynamic works.
Yes, John I mean, if I was guessing right now I think deferred probably grows in a little bit again in June .
And then I hope, we begin to work our way through some of it.
Supply chain gets caught up I mean, there is $2 billion sitting there at the end of the quarter that we just need to ship parts. The things we've already already shipped the base tool too.
Revenue will.
The benefit from that.
That's helpful. And then my follow up for Tim Tim I'm struck a little bit by in the Powerpoint you talk about maintaining the $100 billion for this year and you talked about unconstrained WMC being above that I guess, what's the risk that oftentimes constraints create its own demand and customer.
Tumors, because they can't get what they want they're just placing.
Significantly larger orders into your backlog than they would be otherwise and I guess is there a significant financial consequence, if a customer comes back and rescheduled delivery timing.
Later on.
Yes, it's a good question and yes, I think first of all I mean, we usually get the question around.
Whether that order is placed with multiple suppliers, which is not not very common in the equipment space. So to your point.
Perhaps instead is the demand being overstated to try to drive a sense of urgency I think thats kind of what you're pointing out we have very.
Close and frequent discussions with customers and I think what we're pointing out is that even if there is a little bit of that which I don't actually believe there is but if there were unconstrained demand is well over what can be supply this year and.
Therefore, we felt comfortable saying that.
We are driving to that execution to the $100 billion wip level from a financial implications perspective, either to Lam with customers. It depends on how close you are when the rescheduling occurs.
We're talking about tools that are in our forecast it now through the remainder of this year and some of these forecasts are now pushing into.
Second half of 2023, there's really no financial implication to Lam other than we're driving to ensure that our capacity in our supply chain would have capability to ramp up to those levels.
And so thats.
It probably depends on very much the timing of the change and that would affect kind of the implications.
Perfect. Thanks, guys appreciate it.
Thank you John .
We'll take our next question from C. J Muse with Evercore. Please go ahead.
Yes. Good afternoon, thanks for taking my question.
I'm trying to get an idea of what the second half calendar year ramp might look like if you assume you share just hold steady with WSJ at $95 billion to $100 billion, it's implying a tool ramp of 25% to 40% half on half and so I guess.
What are you capable of doing given the resources you have.
And should we be thinking about.
A pickup in Q3, and then a larger one in Q4 and how should we think about the progression of gross margins as the recovery unfolds.
Well I'll take the <unk>.
<unk> question I mean clearly.
Yes.
As I mentioned kind of feel like we're underperforming in the first half of this year to the capacity of laminates facilities, we invested in in expanding every factory we have around the world in 2021.
And we talked about the fact that we can ramp those factors further where we're constrained by supply we are qualifying additional suppliers, we're working and investing with our suppliers to ramp up their own capacity.
And maybe we need to distinguish a little bit too and I'll, let Doug confirm but it's <unk>.
As we look at the deferred revenue piece versus the work that's actually being done as Doug mentioned, we're actually shipping at a much higher rate than we are recognizing revenue in the first half of this year. So.
As we look to execute that 100 billion WMC for the entire year. The second half doesn't have to ramp up quite as much.
Lamb factory perspective.
Need to keep shipping show progressive improvement in output and also clear the the critical components that are needed to recognize revenue for that deferred balance yep exactly right.
C. J on the gross margin thing I tried to answer it when heartland as I sit here today.
I think it gets better in the second half as we increase our output capability our supply chain increases its output capability, we work to mitigate some of these constraints and absorb somewhat more of a fixed cost.
I think it gets better.
And then I'll remind you that I told you the same thing last quarter and I was a little bit wrong in March, but that's what I see right now C. J.
Great.
My follow up question.
<unk> you talked about expectations for another strong growth year.
Can we infer from that that you expect a.
Minimum of double digit growth.
Yes, im not going to quantify it for you.
All of the same dynamics are in place right Chamber counts grew nicely last year, it's going to grow nicely again this year given the strength in WSI utilization in the industry is very high.
Investment across all aspects of that business are.
Are doing well, we're just a little bit behind on the supply chain stuff.
Thank you.
Thanks C J.
We will take our next question from Timothy Arcuri with UBS. Please go ahead.
Thanks, a lot Doug I had two the first is a follow up from the prior question.
So if I just flow through the excess deferred revenue, which you have about $1 five with just excess deferred revenue because youre always going to have some differed. So if you assume that you get that all during the back half of the year, which maybe you don't but you should get most of it I would think.
Then that would assume that system's revenue would grow at least 30% and like the back half of the year half on half. So I know that you don't want to provide guidance for the year, but I'm. Just wondering if you can maybe hold our hand, a little bit.
And sort of what the back half of the year revenue would be is it reasonable to say that yes systems revenue will grow at least 30% something like that.
And Tim you know I'm not going to give you a number we always students dance with the numbers, but how youre thinking about it is consistent with what I see.
That deferred revenue is up above that amount that you described there is a run rate of it thats always there probably in the range that you're suggesting.
We need to get the supply chain cost caught up with it right we need to work our way through making it better get caught up with the stuff. That's sitting there improve what were shipping so that there's less of it and thats very much what we're investing dollars and resources to.
Thanks, and then I guess, Doug just a question on gross margin.
After the lowest since 2015 and it's triple the.
Revenue versus that and I'm wondering if maybe you can do two things one breakdown the headwinds I know, there's a lot of different things going on but if you could break down the headwinds and then also I guess the question is is it possible for you to pass some of these cost because youre going to have to now invest in your supply chain and whatnot can you pass some of this out of your customers or are you just going out to eat that.
Yes, Tim your observation is right.
The way I think about this is our long term profitability objectives from a margin standpoint are unchanged to what we had in that tunnel two plus years ago at this point.
So don't change your thinking on that.
Some of these upticks in inflation.
Our permanent and for that we must get paid right. We must get paid for the value, we're creating and what it takes to create that value.
We've done some of that and we need to continue working at that some of these cost increases are transitory in nature.
And for that we got to work our way through beating the cost back a little bit we have to be able to do both so when you go in and talk to your customers. You explained hey, we're doing our part in renewable help on this other part so that's very much how we're thinking about it you're right margins are below where we wanted to be part of it is.
Delivering fixed cost and part of it is freight logistics expensive integrated circuits are expensive right now.
We will get paid where we need to get paid and we will work the costs down we're going to work the cost stone Tim.
No I think thats.
Pretty much captures that I do believe we can get paid for value.
Also look at ways in which we can develop.
Era and in periods of rising costs, we can kind of find true win wins with the customers and so we are focused on solutions that drive productivity. Those are areas, where you can try to take cost out you can make the tool.
More productive for the customer and get paid a higher value for that as well.
Again back to mentioning equipment intelligence solutions. These are things, where again here you are truly removing some of the cost of operating the system by using data and.
That allows us to get paid for those services and also perhaps charge.
Fair value for whether it's the spares or the service work is being done and the customer also gets productivity and it feels like they came out.
Good into Venezuela.
Awesome. Thank you Bill.
Thanks, Tim.
We will take our next question from Toshi.
Harry with Goldman Sachs. Please go ahead.
Good afternoon. Thanks, so much for taking the question.
I guess I have two as well the first one I realize it's a supply constrained year.
Doug, but curious if you've seen any fluctuations and customer poll across different device types. If you can speak to DRAM NAND, leading edge logic foundry lagging edge to the extent you've picked up any changes to the upside or the downside I'd be curious to hear.
Yes, Tushar really no changes demand continues to be very strong across every segment of our business memory foundry logic haven't really seen any change in that.
At all.
Got it. Thank you and then as my follow up.
I wanted to ask about the logic IDM business really nice to see you guys make new highs here I think you spoke to microprocessors.
And in sensors, and I think advanced packaging.
In your prepared comments I think a lot of us are focused and looking forward to continued traction in the <unk> business and then I realize you don't want to talk about specific customers, but if you can kind of remind us where you are kind of in the progression there from a market share perspective, particularly in etch.
To the extent you can comment that would be super helpful. Thank you.
Especially as you said, we don't want to talk about any any one specific customer, but I gave you several proof points within foundry logic.
It's an area, we know that we have been underexposed because of our product portfolio and perhaps market share we've been working hard too.
Introduce new products to expand our opportunity, but also to <unk>.
Win more with the products, we have and I think thats exactly what youre seeing at every every time a transition.
Node transition occurs.
Our served market is getting bigger and we're gaining market share and that's that's not just true for.
Certain customers. It's true we think four for all the customers in terms of especially the opportunities of our portfolio, serving I talked about on the last call.
The work we've been doing in select dimension, the new portfolio of products Theyre targeting gate all around for instance, and I talked about that expanding this this quarter as well.
Those are the things that we're doing to try to make sure that our foundry logic futures is better than the past.
Thank you.
Thanks Tahira.
We will take our next question from Joe Moore with Morgan Stanley . Please go ahead.
Great. Thank you I Wonder if you could talk about what the supply constraints or.
Is it the same constraints that you saw in December or is it new stuff and how much of it is semiconductors versus non semiconductor products.
Yes, I can I can take a shot at it.
I mean, it's pretty broad based I mean, clearly we've talked about the fact that that Ics themselves are a big big component shortages.
And maybe one of the very long lead time parts of that of the shortages.
Our systems are incredibly complex and they use a lot of semiconductors.
Inside of subsystems that go into our tool. So that is a big part of it but we also talked about the broadening some of the broadening was in other.
Other other types of fabricated parts subsystems that go into our tools they require.
Materials and skilled labor that found itself in short supply and throughout the quarter and so we're just working with each of those suppliers to either shore up their capacity or working with those suppliers and customers to qualify alternative parts alternative components, and where necessary alternative suppliers and so that's what gives.
As confidence that as time moves on and those qualifications take place and customers can accept those those new suppliers in those new components that the flexibility and resiliency of our supply chain improves throughout the rest of the year.
Great. Thank you and then as my follow up.
The comment that you made a few minutes ago that differed.
Revenue would be up slightly in June .
I guess I'm, a little surprised by that given that your revenues are up $150 million.
And this quarter, you had $600 million of kind of unfulfilled demand so I would've thought.
Overall demand in June is at least flat and so with revenues up 150 that the deferred would again be up quite a bit is there something I'm missing there.
Like I said I'm not going to get into guiding a whole bunch of numbers on the balance sheet, because it's hard enough to.
To get the numbers that we just missed a little bit right.
I do think it will be up somewhat Joe that that's what I said I, just didnt put a number to it.
Okay, great. Thank you.
Thanks Chuck.
We will take our next question from Vivek Arya with Bank of America. Please go ahead.
Thanks for taking my questions for the first one I'm curious if the Lockdowns in China are playing a role and the constraints that you're seeing and I think Tim you mentioned that.
Some of the constraints are due to long lead time Ics.
What is your line of sight into that.
Any improvement on that side because I.
I guess my real question is should we be assuming a gradual improvement as we get into calendar Q3 or does this <unk> weighted kind of back half weighted large catch up.
Improvement so just any views on better China Lockdowns are playing at all and what these long lead times on the IC side tell you about when you can start to see any recovery on the supply side.
Yes.
We've talked about progressive improvement. So we do we do believe that things get better.
In the supply chain as a whole we break it down your question about the Covid Lockdowns in China anything that was a new issue anything to disrupt.
Freight and logistics in and out of an important location, where we do have suppliers, obviously you lose.
Time either.
Delays in getting parts in or out of those locations. So that did have some impact in the quarter.
But more broadly.
Think each component each constraints within the supply chain will likely recover in a slightly different pace, while I mentioned that predicting the exact pace for every component will be difficult.
But from a.
When I talked about the long lead time Ics is really what I was meaning was that I.
I think that the crew shortages in Ics.
It's a multi multi quarter sits.
Situation before we really feel that that anything new order has normal lead times as it used to in the past.
Other elements of the supply chain that were more related to either lockdowns or maybe labor shortages or some shortage in materials I think those recover more quickly and that's built into our.
Our outlook for the year, where we see this progressive improvement too.
Through the rest of the year.
And for my follow up maybe one on gross margins.
Two parts to it I.
I am very curious other than the semiconductor industry have been able to raise prices and pass along almost every kind of cost inflation. If you look at the gross margins, but all of the semiconductor companies that are doing better.
Before so what has prevented the equipment makers to pass along these higher cost if demand is so strong and so high like do you have flexibility to raise prices in the future.
Brian go to recover.
These costs then.
Are there certain aspects of costs that are more structural in nature that could prevent land from recovering the three or four points I think the delta in gross margins that you should be operating at at these revenue levels.
Yes, no nothing nothing.
Restricts us from.
Adjusting pricing or doing that I mean, if there's a cadence with which you talked to customers about things how youre outputs improving my inflation is doing our plans we need to work through this together.
But nothing restricts us from doing that and we have done some.
As if we haven't done some of that we have.
New things have emerged.
It's continued to be a challenge that should get better I mean, frankly, it's back to what I said earlier the costs that are more permanent in nature, we're going to get paid for the stuff that is transitory, we got to kind of work our way through managing the costs, we have responsibility to do both and we are doing both.
I wouldn't want you in the long term to think of our profitability objectives any different than we've communicated before we're.
300 basis points, where we want to be.
$2 50 to 300, we're going to work our way back to that level.
Thank you.
Thank you.
We will take our next question.
Jason Congrats Scott with Bernstein Research. Please go ahead.
Hi, guys. Thanks for taking my questions.
My first one I understand it's a very fluid environment and things are getting worse.
And I get what happened in the quarter, but I.
Looking forward given the overall environment is tougher.
Are you taking that higher level of potential caution in line when youre actually giving you guidance, maybe a better way to ask it is do you feel better about our June guidance now at this point.
Versus how you felt about your when you gave your March quarter guidance in December like you have more confidence in that June quarter outlook versus how you felt about the prior guidance just given the deterioration in the broader environment and how are you taking that into account.
Yes, I'll try first and then Tim can add.
Yes.
We never communicate some numbers, we intend to miss.
Let me describe that to best of our ability, we comprehend risk opportunity I look at ranges I look at things that could happen frankly, what happened in March as things got worse than we expected in the supply chain.
Some things we didn't anticipate.
They've got somewhat worse right.
And do I feel like the number I just gave you the $4. Two is a good number I do based on everything I see and the linearity of shipments and what we're doing with supply chain. All the task force, we have working through things with suppliers.
As we sit here today I am I have.
Companies in that number or we wouldn't have given it to you. So.
Things can change, though and thats, what happened to us last quarter.
We're working real hard to ensure that that doesn't happen in June .
Don't expect it to.
I don't know Tim anything you want to add on no I think I would just add.
To reiterate I mean the.
The amount of focus and attention and effort and investment to ensure that we're recovering the supply chain and recovering our output and supporting our customers.
<unk> never been higher and so.
I think that as Doug said, we have we have confidence that we have a good line of sight to the numbers that we.
And the tools and the parts and everything that's needed to make that up and Thats, what we plan to go execute.
Okay. Thank you guys.
For my follow up on.
Understanding you're obviously shipping below apparent demand and demand is obviously strong.
Way to quantify the gap between the apparent demand that is out there and your ability to supply that Dave I mean like is it is demand, 20% above where you're able to ship right. Now is it more is it any any kind of quantification or color you can give on above and beyond just where the deferred revenue is sitting.
Yes, So thats why we gave you an annual <unk> outlook because that actually is approximately in some ways for what demand on the entire industry looks like to the best of our ability. That's why we tried to communicate it and Thats. The 100 billion still somewhat supply limited, though as Tim said, we think demand is actually somewhat stronger.
Than that but the WP is what we are.
When we give you that annual number that's what we're trying to help you think or.
See what were seeing I guess is what I would say.
Got it that's helpful. Thank you guys.
Thanks, Patrick.
We will take our next question.
From Krish Shankar with Cowen <unk> Company. Please go ahead.
Yes, hi, Thanks for taking my question My first one is for Tim or Doug It.
It seems like land has been more impacted by the supply constraints.
Your large cap peers and is it because you are a <unk> company. So due to the vacuum nature more complex components, the dep etch products have.
You had more impacted and if so whether the supply. He says do you think there is a pent up demand for <unk> equipment relative to like process control of <unk>.
Since it seems like your customers are buying what are tools. They can get their hands on so I'm kind of curious would love to hear your thoughts on that and then I had a follow up.
Okay. So it's a good question I mean, obviously I can't speak in great deal sale to other People's supply chains that ours is quite complex and it's just as you said, we if you think about etch and deposition equipment.
It has.
A lot of requirements for very complicated gas delivery systems vacuum systems.
Generation and delivery systems.
And those things not only required as we've talked about a lot of Ics and control capabilities, but also just a tremendous amount of sub system fabrication.
<unk> high purity gas line fabrication, a lot of lot of complexity, there and so I don't know if we are or are not uniquely.
Impacted in that way, but clearly we are focused on shoring up each of those areas, where we see impact and as I mentioned that the main point is where we can find.
Qualification of additional suppliers, who can meet our requirements for.
The parts and quality.
Needed then.
Qualifying those net increases our capacity over the long run what it also does is it gives us flexibility as I look forward. This investment we're making today to increase the resilience of our supply chain will pay off in the long term because we will have more suppliers will have suppliers in the regions closer to where our factories are and I think in the future thats going to give us.
<unk> ability to respond to demand in a much.
More cost effective way as well.
The long term gross margin as I think about that the investments we're making today are actually good from that perspective.
Got it got it thanks simply I don't know I had a follow up for you Tim.
Clearly it seems like everyone is in the same boat.
No constraint that supply demand is much better than supply, but do you think that I'll take any market share shifts happening currently due to supply constraint Mrs.
Customers take a much longer time to make these shared decisions compared to the last nine months or so supply constrained environment, we've been living with.
Well I think obviously, it's hard to speak for what the customers would do but it is very difficult to do most of these decisions on pooling. The process qualification work is all done far in advance of that.
With production needs and so I think part of the reason why everybody is feeling so stressed in this environment from customers to equipment suppliers.
Maybe even to our own suppliers is all of those parts choices and tooling choices are made very far in advance and to requalify is incredibly difficult and that's even why our output recovery timing is longer is taking longer than we might have anticipated. It takes a while to qualify an alternative supplier I think the same thing.
Would be true for customers and so.
Semiconductor manufacturing equipment.
Long way of saying I don't believe Youre seeing market share shifts in this in this near term due to these these capacity constraints.
Got it thanks, a lot Tim.
Thanks, Chris.
We'll take our next question from Blayne Curtis with Barclays. Please go ahead.
Hey, Thanks for taking my question I have two just wanted maybe that's.
A strong wave.
You called out relying in spares and seeing the big source of the math I guess versus the mid point in FY 200 in March and June .
Since we do sound like 80 and products down so maybe just maybe I'm not understanding by reliance the biggest.
Issue.
Yes, Blayne, maybe you misunderstood us we didn't intend to communicate that I didn't specifically say, we missed because of one thing or another frankly, we missed because of.
Supply chain constraints for equipment across board Thats in new equipment. It's also in the reliant product line and see SPG as well as upgrades in <unk>. So it's across all of that is what we tried to maybe not very well, but that's what we tried to communicate.
And then just.
Broader question I think everybody asks everything they can on the supply constraints I'm just kind of curious I don't expect you to be the only one you haven't been this quarter already and you went first.
Im assuming this is going to be a massive supply chain problems for customers and I'm. Just curious if you've seen any indications that they've pushed their capacity addition, plans out to the right as well.
I don't know risks and try to figure out like the last question asked in terms of how each company lines up and I'm just kind of curious how things are handled do you think we'll just take whatever equipment. They can and try to piece it together or do you will you see.
Capacity addition has kind of pushed commensurate with equipment they can't get.
I guess, the simplest way for us to answer it is that we've seen no change in demand or no no change in the pressure we received from customers to deliver to their original schedule.
So that's why when we look at the investments, we're making to try to.
Accelerated recovery of our output to meet their demands us because their demand has not changed at all.
To your point of well they take different tools at different times.
I think that.
There's a lot of things that we're working on with customers too.
Tried to.
Meet their capacity constraints, if we can't get them the tooling on the exact date. The one we talked about accelerated installs I talked about increasing like services to get a little bit more output from tools. They might have already installed into that fab I think theres, just a lot of partnership and creativity going into.
How to work through these constraints over the next yes.
Is that have existed for a couple of quarters and likely will continue to exist as we move through the next couple.
Thanks, Tim.
Thanks, Brian I appreciate it.
Yeah.
We will take our next question from Mark.
Olympic assist with Jefferies. Please go ahead.
Okay.
Hi, Thanks for taking my question I have just one.
Do you guys have do.
Do you guys have a view about what industry.
<unk> and wafers.
Going to grow this year or next year.
Based on the wafer fab equipment.
Expectations, you have obviously, there's a debate out there about.
How much capacity could come online given the.
The magnitude today of wafer fab equipment versus five or seven years ago. So.
I'm wondering if you had a view on that if you don't have a view for the industry. I'm wondering if you have a view for maybe a subset or a subset of your largest customers. If you have some kind of sense about what <unk>.
Wafer capacity is growing this year and next year, yes, yes.
Mark I'll talk maybe a little bit about this year. These arent numbers, we normally give out but I would tell you when I look across the totality of our investments are occurring IC wafer capacity growing.
Everywhere almost everywhere.
In memory and foundry and logic.
<unk>.
Probably across nearly every process node in foundry as well alright, I mean things are tight.
The Ics, we're trying to get our across every different process node and everybody is investing to try to get caught up with demand. So while we don't share those numbers I think everything is picking up somewhat.
We're trying to anyway based on the investment plans they have.
Got you. Thank you.
Yes, Thanks, Mark operator, we'll do one more question and then I think we're about out of time, Okay. We will take our last question from.
<unk> Malik with Citi. Please go ahead.
Yes, thanks for taking my question.
Doug and John I believe you guys were talking about growth in wafer fab equipment next year.
All of the scenarios going on with global GDP contraction in macro corrections and even a recession next year curious what your thoughts are.
About <unk> next year.
Yes, if you know we don't do more than one year at a time I mean, clearly you've got a softening in the economy for a variety of different reasons and I do observe when we look across all of the semi industry the more consumer oriented.
On a consumption semi is probably softening a little bit and smartphone units arent as strong perhaps since we bought <unk> pro same thing.
Our high performance computing is still very strong so.
That's kind of what I see happening.
Tim and the sales guys talk to our customers, though everybody's full steam ahead with their investment plans in terms of equipment. So.
That's what I say I'm not going to quite tell you 23, yet.
But the fact that we're under shipping what customers want this year that stops I know, it's going to roll into next year. So.
So tight we'll talk about 'twenty three as we get a little further through the year.
And as a follow up.
Get that component and subsystem supplier can change are you seeing impact to your shipments from material shortages like neon and coolant using etch and deposition tools.
The availability of those materials impacting your shipments or your customers have enough buffer.
Those materials.
So far I would say that we haven't identified those get us significant constraints.
But we're obviously watching.
Every new new issue that comes up.
<unk> its impact.
So far.
We wouldn't identify doses.
The issue right now.
Thank you.
Yep. Thank.
Thank you Joseph.
<unk>.
Operator that that's about it for time for us.
I appreciate everybody joining us on the call today.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
Okay.
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