Q4 2022 Lam Research Corp Earnings Call

July 27, 2022

Good day, ladies and gentlemen, and welcome to the June 2022 quarter earnings Conference call. At this time I'd like turn the conference over to Tina career. Please go ahead.

Thank you operator, and good afternoon, everyone welcome to the Lam Research quarterly earnings Conference call with me today are Tim Archer, President and Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer.

During today's call, we will share our overview on the business environment and we will review our financial results for the June 2022 quarter.

And our outlook for the September 2022 quarter.

The press release detailing our financial results was distributed a little after one o'clock P. M Pacific time this afternoon.

The release can also be found on the Investor Relations section of the company's website, along with the presentation slides that accompany today's call.

Today's presentation and Q&A include forward looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings.

Please see accompanying slides in the presentation for additional information.

Today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified.

A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until three o'clock P. M Pacific time.

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. Thanks.

Thanks, Gina and good afternoon, everyone. We appreciate you joining us today Lam.

<unk> June quarter results were much stronger than we originally anticipated revenue and non-GAAP earnings per share achieved new quarterly records and were well ahead of our guidance for the quarter.

Industry wide shortages continued to impact the output and the efficiency of our operations. However specific actions we have taken in our supply chain in recent quarters.

Allowing us to execute more effectively in the supply constrained environment.

To thank our global land teams, including our supply chain operations and engineering groups as well as our suppliers and customers for demonstrating incredible dedication agility and partnership in the face of significant challenges.

In the June quarter, we continued to see good momentum with our product and installed base initiatives with foundry logic systems, and <unk> revenues, both reaching new highs.

Our performance this quarter adds to my confidence that Lam will emerge from this period of industry disruption stronger more resilient and even better positioned in our markets.

As suggested by our guidance today, we expect to see incremental improvement and supply chain conditions in the September quarter, but our view is that industry wide output will continue to be constrained through the rest of this year.

Consequently, we are lowering our outlook for calendar year, 2022, wafer fab equipment spending to be in the low to mid $90 billion range.

Overall semiconductor demand remains robust, but with some macro driven pockets of weakness, particularly in consumer focused markets. We see strong foundry logic spending outgrowing, both NAND and DRAM investments.

In the longer term, we expect industry growth to be driven by the increasingly vital role semiconductors play in the global economy.

This along with expanding semiconductor content and devices rising device complexity and larger die sizes will help sustain strong WC levels.

Most importantly for Lam technology inflections will continue to drive greater etch and deposition intensity.

Across our company, we have been prioritizing investments to benefit from these trends and prepare for the growth ahead.

Over the last two years Lam has devoted significant attention to the disruptions that have impacted semiconductor ecosystem.

But at the same time, we've used this period to accelerate our strategic transformation of our operations and product focus.

We have significantly expanded lambs capabilities and resources closer to our customers and ecosystem partners. Both in the U S and globally to deepen collaboration accelerate the introduction of new products and drive greater operational flexibility.

Compared to pre pandemic times Lamb now has a more globally diverse manufacturing and supply chain infrastructure designed to leverage unique regional capabilities, while servicing worldwide demand or no.

<unk> example is lambs, new Malaysia facility, which takes our manufacturing supply chain and logistics operations to the next level in terms of scale automation and efficiency.

Over the last two years, we have also increased our technology infrastructure investments across the U S Asia and Europe , which has included a new development Center in Korea and assumed to open engineering lab in India.

Our vision is to be the Premier technology collaboration partner in the ecosystem let.

Leveraging lamb innovation to bring customers suppliers peer companies in consortia together to create disruptive solutions for the industry as Grand challenges.

Productivity and extend the ability of <unk> patterning has been one such area of focus and in the June quarter, We announced that SK Hynix has selected lambs innovative dry resist fabrication technology as a development tool of record for two key steps in the patterning process for advanced DRAM chips.

We also announced the expansion of partnerships within the <unk> ecosystem and.

In collaboration with Integra, and <unk>, we look to provide our customers with reliable access to precursor chemicals for lambs dry photo resist technology <unk>.

Together, we will also be working to accelerate the development of drivers this solutions for high numerical aperture EOG patterning.

With customers, we are using data driven equipment intelligence solutions to deepen our engagements.

An enormous amount of equipments and process data is being generated from our installed base and together with customers. We are using key learnings to drive fab productivity.

Lamb <unk> platform was launched in early 2020 with the goal of combining lamps innovative equipment intelligence solutions with our market leading edge technology.

The van text dielectric etch system built on the <unk> platform has seen tremendous momentum since launch and has become the fastest ramping etch tool and Lam history.

We expect the installed base for this product to approximately triple this year alone.

Furthermore, we are seeing increased demand for <unk> solutions in new advanced packaging architectures, our keel plasma etch products with hydro <unk> have a proven track record of delivering the productivity and uniformity requirements needed for cost effective front end device scaling.

Leveraging this expertise in high volume manufacturing, we have now achieved multiple new etch tool of record positions for advanced packaging at a leading foundry logic customer.

As customers further develop these architectures in support of greater system performance, we see a growing opportunity for Lam etch and deposition solutions.

And a final element in our transformation over the past several years relates to our emerging leadership and sustainability.

In late June we released our 2021 ESG report, where we outlined how we integrate ESG throughout our operations.

We are proud that we were one of the first in the semiconductor industry to set a net zero emissions goal.

I encourage you to review the report to see the great progress, we're making across several important areas, including environmental sustainability and our commitment to diversity and inclusion in our workforce.

So in summary, I am very pleased with the solid results posted by the company for the June quarter. Our results are an indication of our strong business Foundation built on a large and growing installed base the differentiated product portfolio and our commitment to ecosystem wide collaboration and success we are in a great.

Spot to benefit as secular drivers pushed the semiconductor industry to new heights overtime.

Thank you and I will now turn it over to Doug.

Great. Thank you Tim.

Noon, everyone and.

Thank you for joining our call today during what I know is a very busy earnings season.

I am pleased to share our June quarter results with you today.

We had our second consecutive fiscal year of record levels of revenue and diluted earnings per share.

Revenues increased year over year for the fiscal year by over 17%.

And diluted earnings per share rose by more than 21%.

We delivered solid performance in the June 2022 quarter.

Our results across all financial metrics came in at the high end or above our guidance ranges.

Due to our improved execution and the continued strong demand for our equipment.

Third quarter revenue was a record at $4 64 billion.

Which was an increase of more than 14% over the prior quarter and.

And over the high end of the guidance range.

While we're making progress on our addressing the supply chain challenges. We previously talked about it will take more time for them to be fully resolved.

Despite the supply chain improvements and higher factory output levels, we still exited the June quarter with $2 $2 billion in deferred revenue, which was an increase of $129 million sequentially.

From a segment perspective memory represented 54% of systems revenue in the June quarter, which was down from the prior quarter level of 66%.

The NAND segment came in at 40% of our systems revenue, which was roughly consistent with the prior quarter.

Our NAND customers are investing in tools for $1 seven next layer and beyond devices.

On the DRAM side revenues were 14% of systems revenue, which is a decline from the prior quarter level of 27%.

DRAM investments are focused on the <unk> Z in one alpha node additions and convergence.

In the foundry segment June quarter revenues increased quarter over quarter and represented 26% of our systems revenue.

Paired with 21% in the March quarter.

The increase was related to the timing of customer investments with broad based spending across both leading as well as specialty node devices.

The logic and other segment had record performance in the June quarter coming in at 20% of systems revenue higher than the March quarter amount of 13%.

Our performance here not only reflects the demand in the market for microprocessors analog components image sensors and advanced packaging solutions.

But it also demonstrates the progress we're making in the leading edge foundry logic inflections that Tim talked about earlier.

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

The China region came in at 31% of total revenue, which was flat with the March quarter percentage.

China domestic customers, where the majority of the China original revenue in the June quarter.

There was also strong concentration of investments by our customers and the Korea, and Taiwan regions, which comprised 24%.

19% of our total revenues respectively in the June quarter.

The customer support business group revenue was also a record at approximately $1 6 billion.

Which was up 16% from the prior quarter level, and 18% higher than the June quarter and calendar 2021.

There was strength across all parts of CSP G.

But notably in spares with our customers' fabs running at high utilization levels.

As well as in our reliant business with customers investing in specialty market areas, such as RF and power devices.

While quarter on quarter growth rates since the SPG can vary based on customer investment patterns I believe <unk> is well positioned to again deliver annual growth in 2022.

Let me now pivot to our gross margin performance.

The June quarter came in at 45, 2% above the midpoint of the guided range.

Our fixed cost absorption improved somewhat with the higher output levels.

However, we continue to have cost challenges in the areas of freight and logistics.

Semiconductors as well as in other critical components.

We will continue to drive progress improve.

Improving our operational efficiencies.

However, we expect inflationary pressures to be a persistent headwind in the second half of the year.

Our September quarter guidance Embeds, our views on these factors.

Operating expenses for June were $635 million up slightly from the March quarter.

The increase was mainly in R&D across all of our business units.

As we're investing in development of technologies to support our customers' long term roadmaps as well as to mitigate some of the supply chain challenges we're having.

The June quarter operating margin was 31, 5% coming in over the guidance range as a result of the stronger than expected revenue performance.

Our non-GAAP tax rate for the quarter was 11%.

Generally in line with our expectations.

We estimate the tax rate for calendar year 'twenty two to be in the low teens level.

This estimate does not reflect any impact of any potential U S tax policy changes.

And this is obviously something we continue to monitor closely and we'll update you as appropriate.

And just to remind you as we've discussed in the past you should expect the tax rate to fluctuate on a quarterly basis.

Other income and expense for the June quarter was approximately $87 million in expense.

<unk> with what we noted on our call last quarter as well as what was included in the June quarter guidance.

We had an increase in expense this quarter related to market declines in one of our venture investments that recently went public.

The Hawaii P&L line item is subject to market related fluctuations that will cause some level of volatility due to items, such as foreign exchange as well as impacts in the equity markets.

Yeah.

We continued to execute on our capital return objectives during the June quarter, allocating $868 million towards share repurchases.

We paid $208 million in dividends.

Our share repurchase activity was a combination of open market repurchases as well as an accelerated share repurchase program.

This ASR, we will continue to execute during the September quarter.

I'd also like to highlight that since calendar year 2012, when we brought Lam and novellus together.

We've returned approximately 115% or more than $20 billion of our free cash flow to equity holders.

Our stated plan is to return, 75% to 100% of free cash flow through a combination of buybacks and dividends.

Third quarter diluted earnings per share was $8 83.

Diluted share count was 138 million shares, which was lower than the March quarter, and lower than our June quarter expectation due to the increase in share repurchase activity.

Let me turn to the balance sheet cash and short term investments, including restricted cash totaled $3 9 billion, which was down from $4 6 billion at the end of the March quarter.

The decrease in the cash position was attributed to our capital return activity as.

As well as our uses of cash for growth and working capital as well as continuing capital investments.

We increased the level of inventory, we're carrying to support our growing business volumes.

Inventory turns were flat with the prior quarter level coming in at two six times.

Days sales outstanding came in at 85 days, which was essentially flat with the March quarter.

That again was a somewhat backend weighted shipment quarter.

Noncash expenses for the June quarter included approximately $70 million for equity compensation.

$69 million in depreciation and $19 million for amortization.

Capital expenditures for the June quarter came in at $126 million.

By roughly $20 million from the March quarter level.

Capital expenditures are supporting the company growth in manufacturing in multiple geographies, including the United States and Malaysia.

As well as research and development infrastructure investments and California, Oregon, as well as our new Technology Center in Korea.

We ended the June quarter with approximately 17700 regular full time employees, which was an increase of approximately 800 people from the prior quarter.

We had head count growth, primarily in the factory and field organizations to address the higher output levels.

To manage supply chain constraints as well as to support increase in customer delivery and installation.

Looking ahead I'd like to provide our non-GAAP guidance for the September 2022 quarters.

We're expecting revenue of $4 $9 billion.

Or minus $300 million.

Gross margin of 45% plus or minus one percentage point.

This gross margin outlook reflects ongoing inflationary challenges that we're seeing in the supply chain.

Operating margins of 31, 5% plus or minus one percentage point and finally earnings per share of $9 50, plus or minus 75.

Based on a share count of approximately 137 million shares.

So then in summary, Lam demonstrated improved operational execution in the June quarter, and delivered record financial performance with quarterly as well as on a fiscal year basis.

While the semiconductor industry is not immune from softening macro factors that we see.

<unk> technology leadership, along with our robust installed base and a solid foundation for continued long term growth for the company.

And with that operator, I'll conclude my prepared remarks, Tim and I would now like to open up the call and take questions.

Ladies and gentlemen, if you'd like to ask a question you may do so by pressing star one on your telephone keypad. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment.

Star one 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 and great job on the strong operational execution as you can.

Mentioned in your prepared remarks, we've seen weakness materializing, the consumer focused segments of the market. So PC smartphones gaming.

Memory customers that account for about 55% of their total revenue so.

They're being disciplined here in the second half and into next year. They are focused on the supply side discipline.

Your profile of Capex spending and.

And then on the flip side foundry and logic and IBM customers are seeing I think a bit more diversified set of drivers where demand is still relatively healthy. So given that your lead times are stretching into next year. If your customer base is becoming more cautious on the macro demand environment I assumed at modulating the orders down four shipments next year.

Have you started to see this in your profile of your recent orders and then maybe more near to midterm have you guys seen any major changes and cancellations.

<unk> on scheduled deliveries for this year.

Okay I'll take that question Harlan.

Yes, I think as you said.

We clearly are seeing some some weaknesses in certain parts of the market and.

We have customers in the memory space and others have been publicly.

Rounding the tone on being a little bit more cautious about.

Our capex spending going forward I believe that we've also been signal for several quarters now that we believe that memory customers have generally been quite disciplined in their spending and how they look at the market. We think it's one of the things that has made that particular segment of the industry quite healthy in recent years and that is that they respond fairly quickly to changes.

What they see in pricing and in demand so.

That's something I think we.

Become accustomed to dealing with.

Frankly, what I would say, though on the demand side is that we really haven't seen any significant change in the demand signals from our customers and some of that could be as you pointed out the lead times remain stretched.

Peter I wanted to take some time to look at how this market is evolving from the different drivers, but we certainly acknowledge that.

Three there's a fair bit of uncertainty and there are.

Different scenarios that could play out, but I think that Lam is well prepared to execute through whichever of those scenarios.

Actually transpire.

Yes, the only thing I might add.

At Heartland as we know how to run the company whatever the environment is we've been doing it for really long time, we know what the playbook needs to be when it's up down or sideways.

Respond accordingly.

And then when I think about things.

As Tim talked about our positions are growing stronger we feel really good about the business, we're winning the growing installed base.

The company is executing really well thats the stuff, we feel we feel great about at the end of the day the market will be what the market will be in momentum as a company in the right way, depending on whatever that looks like.

Yep, great insight thanks for that and then supply chain wise I mean, the team did a great job of unlocking more component availability and subsystems availability given the strong upside in June so given.

More availability do you anticipate the FERC revenues coming down in the September quarter is a part of your strong revenue guidance.

And where are you seeing the biggest supply improvement the component availability is at sub systems availability and freight and logistics or maybe all of the above.

Yes, I'll take the first part and let Doug speak specifically to the deferred revenue I think that we talked in the last couple of calls about having somewhere on the order of about 40 task forces deployed out to our critical customers. So we said this the constraints were pretty broad based I mean, clearly things like IC component shortages have gotten a lot of attention but.

Instead, it is broader than that we've seen improvements across a number of those constrained.

Commodities, but we still have constraints in that you see it in how we're still spending managing our supply chain in the numbers that you talked about and also in the fact that deferred revenue actually continuing to grow a little bit in the June quarter. So we're nowhere near to where I would say that.

The supply chain overall executing like we've had in the past, but we've seen kind of broad.

Improvements as a result, we think of specific actions <unk> taken and I'll, let Doug talk about the September deferred revenue, yeah, Harlan, it's hard enough to forecast revenue number let alone the deferred.

Sure.

If I was going to give you some color on it I kind of think it's flattish plus or minus a little bit.

And again, it will depend on how well we progress with the supply chain honestly.

Great. Thank you.

Thank you Harlan.

We'll take our next question from Timothy Arcuri with UBS. Please go ahead.

Thanks, a lot.

So I had a question just on overall Wi Fi so.

Tim and Doug you beat on <unk>.

On June you're guiding.

Better than September and Youre getting a little bit.

A bit of improvement in terms of some of these constraints yet the full year wip is coming down a bit so.

Can you sort of square that a little bit is some of that may be some demand driven that's bringing the year down or is even that mid 90 is still a supply constrained number.

Yes.

In our view, it's primarily an adjustment we've made based on supply constraints and challenges since we gave our last guidance, which we had put at a $100 billion Adobe a fee not only have we seen kind of how we're performing but.

We've also heard from from others in the industry and so we have two in trying to give OWS fee number look to how the entire industry is executing and not just sell Lam is performing so well.

We felt it prudent to to lower that WMC outlook based on what looks to be still a lot of industry wide constraints.

And so from a demand perspective suggested in the last answer really haven't seen in a meaningful change.

So its really embedded in that lowering of WMC.

Theres always some tools and projects that move around.

Right now as you see with our deferred revenue and the fact that were not meeting our demand if anybody's slides out a little bit somebody else's sliding right into that slot. So.

We're fully fully utilized at this point at the numbers, we just gave.

Got it got it awesome. Thank you and then Doug I'd be remiss, if I didn't ask about gross margin someone's going to ask about it so I guess so.

So can you just yes go.

Go ahead.

Sorry, Doug can.

Can you just.

Can you walk us through sort of maybe quantify the headwinds and <unk>.

Yeah.

Will we be at 48 48 five.

Sort of absent some of these headwinds can you sort of like.

Normalize all of that for us. Thanks.

Yes, Tim the would've been describing it actually for a while now.

The long term profitability model of the company is unchanged my expectation, where we then perform isn't any different than it was pre pandemic PLD inflation coming through.

The inflationary stuff, that's permanent and we've got to work on getting fairly paid for and the stuff that's temporary and they will get paid for a little bit, but then we've got to build upon the cost back.

And so what was embedded in our financial model that we gave I guess over two and a half years ago or something was kind of 200 basis points above where we are guiding right now and thats still the way you should think about the long term profitability of where we're going to drive the business.

And Tim the only thing I would add on that point is.

There is a.

There are a lot of questions, obviously coming about as the industry slowing or are there. Some some pockets that are going to ease up seeing if thats. The case some of the things that are headwinds to us in gross margin right now I mean, a lot of the expedites and premiums that were hanging on things like Ics you would expect those two to begin to moderate.

Some of the outlooks are that some of this demand either gets caught up or maybe.

Or or slows down a bit going forward. So I think there is room for gross margin improvement as Doug said over the longer run.

Definitely yes natural hedge thank you very much.

Yes, Thanks, Tim.

We'll take our next question from C J Muse.

With Evercore. Please go ahead.

Yes, good afternoon, and thank you for taking the question a follow up question on gross margins your favorite subject.

We'd love to isolate just your factory ramp in Malaysia can you speak to how thats going.

Whether thats a headwind.

Or beginning to be a tailwind for you in and how we should think about it.

Escalating into a real tailwind for you guys is that a first half 'twenty three second half 'twenty three or later type of story.

Okay.

Maybe I'll let.

Tim talk about how the ramp is going that I'll describe the numbers a little bit Susan Okay, Yes sure. So.

So C. J is actually actually just out there not too long ago, I would say from from an execution perspective, and there are a lot of improvement we're looking at I'd say, the Malaysia ramp is going extremely well.

Still in the ramping phase there still in the motive of building out and developing the supply chain some of that especially the supply chain development might be a little bit behind where we would have wanted to be at the volumes and that's simply because supply chain globally as is struggling to ramp and whether that's raw materials or component shortages or labor.

Sure.

Well I think it's coming up very nicely.

And I think we've done gives you the answer about how it contributes I mean, what we have to remember is.

That Malaysia is ramping at the same time as we're ramping all of our global facilities and so perhaps in the short run youre seeing youre, not seeing and easily isolatable.

Impact of Malaysia, because we're ramping all of our global factories at the same time, but.

From a ramp perspective, I couldnt be happier that right now with the scale of output and efficiency IC starting to come out of that facility and then C. J.

How to think about the numbers I think maybe a year ago I was talking about it being somewhat of a headwind to gross margin. It really isn't any longer we're kind of at the point, where it's it's neutral ish.

And as Tim Tim just told you were ramping everywhere.

Eventually that will be the biggest factor in the network and as it gets to be a bigger percentage of the total.

It will become.

The benefit to gross margin not just from cost of labor, but the fact that our freight lanes will be shorter and the supply chain to move along with us. So I will keep you updated as we progress yes, I think actually just I want to emphasize that one Doug just made because in my prepared remarks I made this comment about part of our strategic transformation in the last couple of years was too.

<unk> capabilities closer to where they ultimately need to be and thats.

In the case of development closer to customers and in the case of the factories closer to supply chains and also customers and in a period, when we're seeing high freight and logistics costs.

I think that ultimately having a large factory close too.

Our customers in Asia, it's going to be a big benefit for us So that was a very conscious decision.

And I think it's going to pay off as well.

Don't know when freight and logistics cost normalized but that's a hedge against those remaining high for a while.

Very helpful. Thank you.

Follow up I guess I was hoping you could speak a bit to reliant.

And to clarify do you include reliant when you.

Breakout.

<unk> has exposure logic foundry memory.

And then I guess bigger picture there.

The trends Youre seeing particularly as it relates to 200 millimeter.

40 nanometer and above and domestic China can you kind of walk through the trends youre seeing there. Thanks so much.

Yeah, I'll take the beginning and then I'll, let Tim.

The secondary part, yes C J when I talk about the percent of systems revenue in my scripted remarks that includes reliant as well as the more leading edge equipment that we're selling so it's all conclusive in terms of system system revenue.

Yes, I think just in terms of markets end markets and the demand I mean.

I think we can speak as a user of many of those chips, where we still see.

Severe constraints and also very high premiums for those chips in the marketplace I think customers are investing to try to alleviate.

What today is clearly a mismatch in terms of supply and demand and that's that's across all different types of applications I mean, when I look at the list of Ics.

But we're looking forward just as one user.

Broadly from very broad number of manufacturers so.

It's hard for me to pin it down, but I feel like today, we're still in a.

A pretty broad broadly expanding and growing the market.

Thanks, so much.

Yes, you bet.

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.

Any potential for export controls theres been some press focus lately on some incremental controls on exports to China for advanced logic things like that you guys get any kind of sense for what's coming down the pike, there and how that might affect you.

Yes, Joe So to tell you. We were recently notified that there was like it was to be a broadening of the restrictions of technology shipments to China. Four fabs that are operating below 14 nanometer and so that is.

The change I think that people have been.

Thinking might be coming in.

Our.

Sure.

We're prepared to fully comply with work in DSW and any impact on <unk> business as it is contemplated in the September guidance that we just gave <unk> guidance as well as well as the full year <unk> outlook Youre right.

Great and then.

Is 40 nanometer logic that doesn't include DRAM.

Yes to the best of our understanding it's found refocused yes, okay. Thank you very much.

Okay. Thanks, Sean.

We will take our next question from Stacy <unk> with Bernstein Research. Please go ahead.

Hi, guys. Thanks for taking my questions I was wondering if you could give us a little more color on the drivers within.

The customer service business, particularly around <unk>.

Strength in spare parts and 200 millimeter tools I'm, just trying to get some feeling.

For for those pieces, especially just given the broader environment and some of the other news flow we've heard around the macro.

Potential customer order cuts and things like that.

Okay.

Take first shot at that.

Maybe it's maybe it's best to step back and just remind everybody. The <unk> business is comprised of four components spare services upgrades and reliant one of the nice things about this business and we said we would like about it is those often kind of move in somewhat of a non correlated wave.

Spares, clearly just moves with our installed base.

Look forward.

People wondering what does 2023 look like we're not going to give guidance, but one thing we've always felt pretty comfortable about is we have a very strong equipment shipments here. This year, there will be a lot more tools, requiring spares and consumables next year and so that's part of the business.

It grows and in fact, what we've said is as.

Devices become more complex and our applications become more critical factor the need for spares and the importance of spares just continues to grow so spares is just.

Robust and growing.

The services business has been.

Also strong I talked about the shift in strategic transformation, we're making towards more equipment intelligence type services and as customers as would be the kind of look forward and if customers start focusing on productivity and cost and really trying.

Trying to squeeze the output from their fabs without having to spend additional capex. They turned to things like productivity services results based contracts use of data off of the tools. So I think services has been doing well and I think can continue to do well even in an environment, where maybe you see a little bit of impact of macro or us spend.

<unk> pulled back same for upgrades upgrades business actually I've, often said over the years that upgrades tend not to do so well when customers are busy adding lots of capacity because they are actually adding capacity new tools really focused on that.

If they pulled back a little bit the way they save Capex and still manage their technology roadmaps as they turned to upgrades in tech conversion. So the upgrades business gets a little stronger and so.

That business, we think can do continue to do well and maybe even improve.

Next year's environment, and then reliant as we just said a lot of catch up to do.

There've been significant underinvestment for quite some time in that in that area as evidenced by the fact that.

Many of US can't get the chips that we actually need to meet demand and so there is some catch up still there eventually maybe that gets caught up we don't really have a view on when that fully happens it's a very diverse set of.

End markets and application drivers.

It's hard to predict but clearly at some point.

Probably moderates in terms of growth and it gets back more towards the steady grower tied to kind of to the overall application expansion in the economy.

And we've seen in past years.

Maybe I should have asked more explicitly what drove the sequential strength in services, so which one of these pieces was the biggest.

It was both spares as well as rely on and Thats why I called that out in my script.

Got it got it thank you.

For my follow up I'm going to ask this is going to come across a whole snarky, but I think I'm going to ask it anyways.

I get the inflationary pressures on gross margins, but.

All of your customers seem at this point to be inflation proof.

In terms of their input costs going up on their ability to pass along a why aren't you.

So stacy.

I think.

<unk> been saying this I think for a quarter or two.

Don't want you to believe that we're not raising prices.

Because we are I think maybe.

Our detriment inflation has been bigger stronger more pronounced than we expected that it would be honestly and theres, some latency to kind of renegotiating prices and whatnot and that's very much what's going on.

And it wasn't a start to comment I get the comments all the time, it's inappropriate comment we're working on getting fairly compensated for.

What we need to and we will.

So how much of a driver do you think if I'm looking at like a year or two as that latency goes away.

I mean is it a 100 bps is it more of like how much can we be thinking or is that what it is that what helps you kind of get back to the model range.

Yes, it's what helps us get back to the model range, what I said earlier.

Is the long term profitability expectations for the company is unchanged, even though we will work our way through this inflationary environment, It's probably 200 basis points from where we are to where we need to be.

Got it okay. Thank you guys I appreciate it.

You guys specialty thanks.

We will take our next question from Chris <unk> with Cowen <unk> Company. Please go ahead.

Yes, hi, Thanks for taking my question I had two of them the first one for Doug.

The last several quarters have been really strong you've grown your headcount a lot.

Hypothetically speaking if next year with down in terms of revenue see fiber 10%.

How should we think about the earnings model and operating leverage and then I had a follow up for Tim.

Yes, Chris I guess, the best thing I would point you to just look at the history of the company's performance over the last decade.

Know how to run the company in an up environment.

In a down environment, we have a highly variable.

Cost model here, we employ temporary resources, we outsource things.

The best thing I would point you to is just look at the last downturn and the same management team is running the company will do the same things.

It's a well worn playbook.

We know how to desktop in use when we need to.

Got it got it fair enough and then a question for Tim.

Maybe this is the first time I'm noticing you talk about advanced packaging on the earnings slide deck.

I'm kind of curious on your advanced packaging strategy. Some of your peers have partnered with backend company developing into panels. How should we think your advanced packaging portfolio should evolve or you're looking at organic development M&A or partnership with the backend company.

So I think that we're looking at.

If you look at advanced packaging is an important area for Lam to participate in.

And we have for quite some time, so I actually don't know if it's the first time, we've talked about it because I have to believe we have talked about it in the past.

But we've talked about it primarily from the standpoint that etch and deposition play an incredibly important role in these new architectures and we have a strong position, especially in applications like well, both the etch as well as a couple of electroplating.

As form factors change, we look at that is still our market and therefore, we will.

Valuate and pursue whatever the best means is too.

Wind in those dosing, Virginia segments, whether that's organic or inorganic.

Got it thanks, Tim.

Thanks, Chris.

We will take our next question from <unk> Hari with Goldman Sachs. Please go ahead.

Great. Thank you so much for taking the question.

Really nice to see Youre attraction in logic and other.

So up in your numbers in the quarter.

To level set I was hoping you could sort of quantify where you are from a market share standpoint across those markets today vis vis the corporate average and etch and depth and where do you see that going in a couple of years.

Given the current application win funnel.

Yes.

At logic, specifically, it's probably our lowest exposure across the markets that we've described however, I will remind you to assure that we have been talking about.

Specific share gain customer that we continue to progress very nicely with which is part of the strength you saw in.

And the results from June .

Yes, Toshi I guess I'd just add I mean, there's a couple things to think about with respect to the foundry logic space and one is our exposure is lower from a Sam perspective, and has been but actually some of the technology inflections that are currently underway are actually allowing us to participate with some of our more advanced equivalent to displace.

Some of the older technologies that have typically been used in foundry logic, and so youre seeing a lot of <unk>.

Traction for our selective edge, we didn't list all of the wins this quarter, but we continued to see new selections for our selective etch tools.

That's only going to be used at very advanced logic, and it's kind of new markets new opportunity for us and we're doing well there.

Both dielectrics and metallization used to deal with like the RC inflection.

The backend interconnect inflection that's.

Creating opportunities for us and so I think that we're seeing a little bit of like share gain at certain customers as Doug mentioned, but also an expansion of our opportunity and thats driving a lot of our new product roadmap, we have an objective to improve our position in <unk>.

Foundry logic.

More advanced nodes.

Yeah. That's helpful. Thank you and then as my follow up.

Probably one for you Tim just on dry resist it's great to see you guys.

How traction there as well, obviously SK hynix as public I'm pretty sure Youre working with other customers on this as well but.

Help us quantify how significant this business or this product could be in a couple of years and as you as you partially sort of displace traditional track or quota developers what percentage of the market do you think you can capture and a couple of years. Thank you.

Okay, well I think I don't want to get out with sort of the new disclosure here, but I think we are.

We've quantified it in the past is roughly about a $1 $5 billion opportunity over a five year period.

And you are just starting to see us.

We talked about development.

The development tool of record wins, so obviously, we're not yet.

Putting this into a production fab in developing revenues will be at the very first stage of that but that.

That should give you some kind of sense maybe in the next five years at the kind of revenue impact you are talking about but this is still a much longer play for us and I talked about this idea of accelerating the development of the drivers just for.

The high end AE and so if you think he's going to be around for the next 10 to 20 years is the primary patterning capability for advanced logic.

Our opportunity just continues to grow.

Throughout that period, so starts off in the next five years about $1 5 billion and then just continues to grow with layer counts and application.

And we think that as you get to high <unk> I think it's we have a good chance to capture a lot of the market.

Tim Sorry, when you say five years I know you guys. Initially talked about the favorite 2020 analyst day that five years from that are five years from today.

Well I don't I don't know I guess I would just.

Start the clock now because it was just said we've only reported development tool of record positions today, obviously, which we haven't yet started to generate revenue from so it's.

Yes, I think you could call it five years from today, it's a safer bet and five years from our analyst day.

It sounds good thank you.

Yes, Thanks Toshi.

We will take our next question from.

<unk> Malik with Citi. Please go ahead.

Yes. Thank you for taking my question I have a question for both acute it looks like Senate has passed the chip tact.

Tim you, along with Intel and Micron fields.

You spoke to Congress in March about the importance of passing this legislation so assuming it goes through Congress and the President signed off and can you talk about what this deal means for the U S equipment makers.

If you can.

Talk about what it how will it impact lab in terms of any tax breaks or into the market share growth in logic foundry areas. Thank you.

Okay well.

Obviously, it's a significant benefit for the U S semiconductor manufacturing industry overall, I think most directly what I would say is that.

Lamb's benefit from this will come in two ways one is as.

As our customers invest in capabilities in the U S and capacity of obviously, where we're hopeful that we will garner a large share of the equipment.

Purchased for those Fabs and so that's that's one way in which.

Moneys from that flow through ultimately in the business for Lam.

Specifically when I was in front of the Senate one of the things that I talked about is I think long term. If you think about long term improvement in for.

U S companies in U S semiconductor manufacturing has to do with.

Some of the R&D money that's in that I believe in the chips Act, which is going to fund longer term capabilities that help.

Semiconductor device makers, but also equipment makers develop those next generation technologies that keep us incredibly competitive on the global stage and <unk>.

Allow us to two.

Create those technologies without having to necessarily fund and take on all of that risk ourselves as individual companies, which is always hard to do for technologies that might be seven 810 years into the future. So.

The other way I would say that companies device makers and equipment makers can benefit.

We need to see all the details, but that's that's my and my initial take.

Okay are you there.

And a follow up.

Non good day.

Okay alright, thank you.

We will take our next question from Vivek.

With Bank of America. Please go ahead.

Hi, Thanks, I had two questions first one.

Is this $4 9 billion that you're guiding to for September is this kind of the new quarterly baseline.

So all else being equal should we expect December sales and gross margins to potentially be flat or up I. Appreciate youre not giving December outlook, but is there anything.

That could make you deviate from this new trend line that you have.

June stronger and then September even stronger than that.

But you're right I'm not going to guide in the December quarter for you.

I think we're pretty pleased with the progress from a supply chain standpoint, we made in the June quarter. It continues to be reflected in the September quarter, barring something new coming up I think our execution will continue.

And that largely has been what has limited the revenue generation of the company.

You heard me mentioned, the $2 2 billion and deferred revenue. So that's there for us to to follow up on but I'm not going to get to.

A number for December quite yet.

Understood and then the second one is just a clarification.

What is your 40 nanometer and exposure to China I didn't think there was any or not that much and do the restrictions apply to just China domestic or do you think that could apply to the multinationals that fabs in China.

At this point, we would assume that it applies to all sub 14 nanometer activity in China.

We're not going to we're not going to quantify what we might have.

Or having our plans for 14.

But Tim just to clarify September you said does de risk I E that is zero sub 14 nanometer China business for you.

No.

So the guidance fully reflects everything that we just described yes.

Okay. Thank you.

Youre welcome.

We will take our next question from Mark <unk> with Jefferies. Please go ahead.

Hi, Thanks for taking my question I had a clarification and a question.

Clarification, Tim I think it was an earlier question.

Whether you were seeing push outs or cancellations.

It sounded like you said that youre not seeing any impact on your demand by I just wanted to make sure I understood.

Your response to that question and then and then.

And then my question is can.

Can you help us understand.

The mechanics of your of your manufacturing operations or how you deal with that.

With the slots that you have.

Before you allocated to your different customers. That's the orders have come in and what kind of latitude your customers have they come in and say well I don't know if I want the tool now performing.

Three months, Keith you guys flip flopped.

<unk> in the Q or do you just send people back to the end of the line if you could just.

Kind of review the mechanics around how you treat the orders as they come in and what happens to customers, who ask for the push outs.

That would be helpful. Thank you very much sure I can try to address both of them. So just to be clear my comment was at this point, we've seen no no push outs and changes in demand and will push outs no cancellations.

Our call meaningful however, I want to acknowledge with long lead times stretching.

Three and a cautious tone being struck by some of our customers quite publicly.

Not saying that we might not ultimately see those changes come so.

Saying that we have seen none doesn't mean that that might not happen and so I'll start at this point in castle rock commitments that we have today are being met and that was what I was trying to signal.

I think with those long lead times it it moves into your second question, which is so what if a customer does come and say they'd like to push a project by a few months.

Or.

Or even longer or.

Treat it the same way we are doing right now when customers come and have asked us to pull in slots.

We work with all of our customers to see where people really are in their projects and their demand and.

We have.

Not ultimate flexibility within our manufacturing, but I talked about the fact that we're investing we've invested in the last few years to try to create greater operational flexibility and part of it is so that we can we can respond in that way.

We treat our customers very much like partners.

<unk>.

Need to push for a couple of months, because maybe it's either demand or will likely sometimes it's the facility's arent quite ready or there's a change in their plans.

To work with them and make those adjustments if it's possible.

That's it thank you very much very helpful.

Yes, thanks Mark.

We will take our next question from Patrick Ho with Stifel. Please go ahead.

Thank you very much and congrats on a nice quarter, Doug maybe for you in terms of the supply chain, obviously, you've seen some improvements in the past quarter that will carry into the next quarter or some of the issues now just.

Related to <unk>.

The quantity of shipments because it's still going to be a more second half weighted year for you guys. So even with some of the incremental improvements on the supply chain. It's now just trying to.

<unk> continued to keep pace with the high demand levels that youre seeing near term and Thats why the deferred revenues are staying at the same levels at least as you're forecasting into the September quarter.

Yes, Patrick that's clearly part of it we've got unmet demand we've got partial shipments that shows up as deferred revenue. Each supplier has a unique situation that we're working through with them to the extent that they are not meeting what we need from them.

But yes, we increased improve the output last quarter and we see that continuing as we go into September .

Great and then as a quick follow up maybe for Ken.

Obviously, you've been working with a leading.

MCU customer for some time now and we're starting to see the share gains.

And the higher quantity of volume as they start ramping new products.

But <unk> been working with them for some time.

<unk> worked with them and given them more accelerated roadmaps in terms of technology nodes.

Can you, maybe not quantify but qualitatively say that you've seen some incremental new market opportunities that thats, what gives you confidence with that customer on a going forward basis.

So like I said brought it to all customers.

Can you speak to the ones that I think what we've always said is that <unk> greatest opportunities get created is as those technology changes.

Technology transitions occur and I spoke to a couple of years just as an example, you think about somebody implementing gate all around.

So their next technology node or future technology, it does create new opportunities for us.

We have designed equipment kind of ahead of where the roadmaps are and so the faster those technology team has come.

The sooner we get the opportunity to insert those new applications into their production lines in a bigger way and so we've talked about some of the selective edge some of our new <unk> tools.

Of course, some of our etch systems that are designed for to really support the fine pitch pattern associated with <unk>.

Like at each technology node to use more and more layers of EV that grows for us and so.

Every every customer faster they transitioned technologies.

Greater sands lambs sort of market is growing and the greater our share opportunities increasing.

Great. Thank you.

Yes, Thanks Patrick.

Okay.

We will take our next question from Blayne Curtis with Barclays. Please go ahead.

Hey, guys. Thanks for taking my question I, just wanted to follow up on the demand outlook.

Here you said you haven't seen much I mean, I'm just looking at the areas that you mentioned being strong.

I think we've seen a lot of it.

Maryann see weakness image sensors, and <unk> Qualcomm they are caught up on supply.

So I know that's not your forecast you get them from the customers, but I'm just kind of curious you've been through this before when you look downstream you definitely see weakness I'm just kind of curious.

What you've actually seen.

Obviously memory same story Youre hearing about Capex cuts I'm, just trying to fit all of this into the picture versus I know you are still catching up I don't know what the right starting point is but clearly youre seeing downstream weakness.

Yes Blayne.

As we acknowledged we're clearly hearing customers strike a more cautious tone, we see what's going on around within the macro and so we haven't given the 2023 outlook to be clear and.

I think what we're saying is that.

As demand.

If demand changes in that as demand changes.

<unk> is set up to operate effectively within whatever that environment is clearly we have different scenarios, but the key is.

As we look forward things like our larger installed base business will be.

Helpful for us regardless of what the environment looks like.

The improvements we've made say in our foundry exposure with new share gains and Sam expansion that will be a positive regardless of what the end demand looks like.

Higher etch and dep intensity due to the technology inflections true regardless of what the.

The end demand is and the fact that we have a more diverse and more efficient and more effective global manufacturing infrastructure.

That will also be helpful. Regardless, what the demand is so I think what we're trying to highlight is we're not going to be the best at forecasting probably know better than anybody else. It really know exactly what 2023 is going to be looking like but we do believe we have a pretty good view of how lam can execute very well within whatever that environment is.

Thanks for that and then you might have answered this before but just on the deferred revenue balance was just curious.

You are seeing people start to catch up I know you mentioned that it can be flat in September but just trying to understand the challenges are you are you still.

Are you still having certain subsystems that you can't get or is it more like youre, just getting higher orders in the door and the balance keeps going up I'm just trying to understand.

Why that Hasnt started to work its way down.

Well, it's just that one it's a higher volume of output, we're trying to achieve and quite frankly, it's just it's just all components I mean, I would say everything is sort of improving.

But in general those.

Quite is still number of quantities that aren't able to meet that new higher level that we want for the for the output. So it just continues to increase so.

I Couldnt point to one specific thing, but I would say that in general I'm happy with the improvements we're seeing across a broad array of our suppliers and so I said I. Thank them for their efforts because I do see I do see that incremental improvement we expect further improvement as we move to September .

Thanks, so much thanks, Brian .

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

Okay. We will take our final question from Joe <unk> with Wells Fargo. Please go ahead.

Yes, thanks for taking the question.

Question on our reliant business.

It's pretty well known that the third party reseller market for tools has been pretty limited on supply how do we think about that market competing against they rely on business and then.

How should we think about that.

If supply that supply of tools used tools.

Maybe increasing if demand does start to slow from the end market semiconductors perspective.

Joe I guess, the first thing I would point out to you is yes, historically, that's been a segment of the market service, but a lot of used equipment today, there isn't any used equipment or very little and as a result of that we're selling older model new equipment into the rely on product like demand is.

There isn't anything coming to be refurbished today.

So I don't know Tim No I think Thats I think thats clearly the case most of that if not all of that equipment. At this point is is being fully utilized.

But I guess do you see that changing.

If demand were to slow from an in semiconductor perspective, do you see the amount of tools coming in to be refurbished somewhat changing or do you think customers maybe continue to kind of hold that debt.

Capacity.

I don't I don't see that changing in a very significant way I mean these assets once they are into these fabs I mean.

We tend to see our tools used for 20% to 30 years, producing chips with some different technology nodes. So I think.

As far as it has been to get equipment is anything many of these customers will.

Definitely definitely keep hold of those those systems.

At least my view.

Thanks, Joe.

This concludes today's question and answer session I would like to turn the conference back to your presenters for any additional or closing remarks.

Thank you operator, we appreciate everyone joining our call today and thank you all for air supply.

Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.

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Good day, ladies and gentlemen, and welcome to the June 2022 quarter earnings Conference call. At this time I'd like to turn the conference over to Tina <unk>. Please go ahead.

Thank you operator, and good afternoon, everyone and 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 over beyond the business environment, and we will review our financial results for the June 2022 quarter and our outlook for the September 2022 quarter.

A press release detailing our financial results was distributed a little after one o'clock PM Pacific time this afternoon.

<unk> can also be found on the Investor Relations section of the company's website.

Long 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.

In the risk factors disclosed in our SEC public filings. Please.

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 and.

Unless otherwise specified.

A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until three o'clock PM Pacific time.

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

Thanks, Tina good afternoon, everyone. We appreciate you joining us today <unk>.

Industry wide shortages continued to impact output and the efficiency of our operations. However specific actions we have taken in our supply chain in recent quarters are allowing us to execute more effectively in the supply constrained environment.

I want to thank our global land teams, including our supply chain operations and engineering groups as well as our suppliers and customers for demonstrating incredible dedication agility and partnership in the face of significant challenges in.