Q1 2023 Lam Research Corp Earnings Call

October 19, 2022

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Yes.

Good day and welcome to the Lam Research the September 2022 a quarter earnings conference call. At this time I would like to turn the conference over to MS. Dana Korea. Please go ahead ma'am.

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 wheelchair our overview on the business environment and will review our financial results for the September 2022 quarter and our outlook for the December 2022 quarter.

A 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 include forward looking statements that are subject to risks and uncertainties reflected 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, 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.

Thank you Tina and thank you to everyone joining the call today, our September quarter results reflect continued strong execution by now.

With revenues topping $5 billion for the first time in the company's history.

Margins came in at the higher end of guidance and the operating margin earnings per share both exceeded the guidance range as.

As you can see from our press release today, we also expect solid performance in the December quarter, despite the challenging environment.

Recently, the United States Government announced new export regulations for U S semiconductor technology, Saltman, China, including wafer fabrication equipment and related parts and services, we've taken the necessary steps to ensure full compliance with the rules and have ceased shipments in support as required.

Our financial guidance issued today for the December quarter includes the impact of these changes.

For calendar year 2023, we estimate the total revenue impact from these restrictions to be in the range of two to $2 $5 billion.

Turning to the broader demand picture, we see wafer fabrication equipment spending in calendar year 2022, and the low $90 billion range. This outlook includes the impact of new China, China related restrictions.

And lower demand, partially offset by improving supply chain conditions.

As some of our customers have indicated recently there has been a rapid deterioration in demand fundamentals, particularly within the memory segments.

Customers are adjusting investment plans into next year to bring channel inventory down to more normalized levels.

As a result, we see memory bit shipments tracking below end demand for the next few quarters.

In our normal cadence, we will provide our first view of 2023 DWP on our January earnings call.

However, given the current environment today, we are providing our preliminary estimate for calendar year 2023.

Inclusive of the China restrictions, we expect next year's <unk> to be down more than 20% with memory investments accounting for a large portion of that decline.

We will provide more detailed color on our outlook in our next earnings call, but for now we believe that customer actions to reduce memory bit supply growth will create a favorable setup for memory mix to increase as a percent of overall WMC beyond 2023.

As these cyclical adjustments play out the structural factors supporting a long term <unk> growth remain unchanged. These include expanding semiconductor content and devices rising device complexity and larger die sizes.

These factors create tremendous opportunity for Lam as they require greater etch and deposition intensity to enable higher performance and more scalable device architectures, including the transition to <unk> structures.

To ensure we are best positioned to win long term, we are focused on three key strategies.

First continued to demonstrate our commitment to customer success by ensuring that the rapidly growing installed base of Lam tools at our customers is operating at maximum efficiency.

Second via trusted R&D partner for our customers by sustaining our investment in the technology development that is most critical to their long term device scaling roadmaps.

And third accelerating innovation and deepen our customer and supply chain partnerships by fully leveraging <unk> recently expanded global R&D and manufacturing infrastructure.

Our installed base is now approaching 80000 chambers in the field.

This is over 30% higher than in the 2019 memory related pullback nwfp.

<unk> growing installed base continues to drive strong performance in our <unk> business, which hit another record in the September quarter with approximately $1 $9 billion in revenue.

While we won't hit New records every quarter, our installed base has become ever more important to our business model, particularly in wip spend in downturns.

During such times customers can continue to advance our technology, while optimizing capital efficiency through upgrades to their existing tools.

We are also engaging with customers to find other efficiencies, including yield enhancement and.

An example of the opportunities this creates can be seen in our corona product lines lamps Corona level etch process is employed by customers to help prevent process related defects, which can impair cost per bit scaling.

As a result, we have seen a steady increase in the number of <unk> passes used at each successive NAND technology node.

Another opportunity to help drive efficiency can be found in the enormous volume of equipments and process data being generated from our large and growing installed base.

Together with customers, we are using key learnings to deliver services and upgrades to positively impact our customers' operations. For example, we recently deployed equipment intelligence services to support new equipment installation at a large memory manufacturer.

Using these capabilities, we were able to shorten the time to release tools to production by more than 20%.

While the near term demand dynamics warrants and increased focus on operational efficiencies the strong pull for technology advancement from our customers and the growth opportunity. It creates for Lam continues we made solid progress in the September quarter with key technology wins across multiple customers.

For example, our ability to deposit critical films to lower device capacitance and improved lithography overlay performance led to wins for these layers, a leading DRAM customer.

For both applications, we leverage learnings from our <unk> NAND leadership position as well as ecosystem partnerships to bring innovative and cost effective solutions to our DRAM customers.

In foundry logic, we secured multiple new <unk> application wins at a key customer by delivering purpose modifications and film characteristics required for building and integrating gate all around structures.

Whether it is our focus on operational efficiency or our collaboration on the advanced technology. We believe our long term success will be rooted in R&D and manufacturing infrastructure close to our customers close to our ecosystem partners and with access to World class talent.

Consequently over the past two years, we have made strategic investments to expand our global footprint, including the addition of a manufacturing facility in Malaysia, and R&D lab in Korea, and just last month, the opening of Lam, India Center for engineering and <unk>.

This center is a valuable addition to our global lab network specializing in the design and testing of hardware and software used across our product lines.

So overall I am pleased with how we are continuing to strengthen our foundation and technology manufacturing and service. This foundation puts us in a very good position to both navigate the current cyclical dynamics and emerge stronger as we look to capture the exciting opportunities we see over time.

In the semiconductor industry.

You again for joining today and I'll now turn the call over to Doug.

Excellent Thanks, Tim.

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

Lam delivered solid results in the September quarter with record levels of performance across multiple metrics, including revenue.

Operating income and earnings per share.

The September financials reflect our focus on operational excellence and our ability to deliver and meet the needs of our customers in a dynamic industry environment.

Yes.

Revenue in the September quarter crossed the $5 billion Mark for the first time in our history coming in at approximately $5 1 billion.

We continued to rap output levels, delivering nearly 10% revenue growth over the prior quarter.

Supply chain issues have begun to ease somewhat.

They have not gone away completely however.

We continue to deal with certain inflationary pressures as well as output constraints.

Deferred revenue was $2 8 billion in.

<unk> grew in the September quarter by approximately $550 million.

This growth was primarily due to customer cash and advanced deposits.

Followed by the timing of shipments on outstanding orders.

With macro conditions weakening and.

In wafer fab equipment spending declining I expect deferred revenue and backlog levels will come down as we exit the December quarter.

I'll provide more information regarding our December guidance and focus for calendar year 2023.

Later in my scripted remarks.

Now I'll turn to the segment details for the September quarter memory represented 52% of systems revenue.

Which was slightly down from the prior quarters level of 54%.

Included in memory. The NAND segment represented 39% of systems revenue compared to 40% in the prior quarter.

We see capacity adds in convergence occurring by NAND customers, mainly for 192 layer class devices.

The DRAM segment concentration was consistent with the prior quarter coming in at 13% of system revenues compared with 14% in the June quarter.

The DRAM investments were primarily for onesie and one alpha node conversions.

Foundry investments are respectable in the September quarter, comprising 34% of our system revenues, reaching a record level from a dollar standpoint.

The increase in the quarter from the June quarter concentration of 26%.

As a result of the continued strength of investments for both the leading and mature node devices across a myriad of customers.

These investments are supporting areas, such as AI Iot cloud.

Automotive and 5%.

The logic and other segment contributed 14% of systems revenue in the September quarter, compared with 20% in the prior quarter.

I'll remind you that we had record results in this segment in the June quarter, and we continue to have positive momentum in the logic segment.

Our customer base years, investing and microprocessors image sensors as well as advanced packaging solutions.

I'll now turn to the regional composition of our total revenue.

The China region came in at 30% of the total relatively flat with the prior quarter level of 31%.

The China September revenue was more concentrated towards the domestic Chinese customer base.

And as Tim discussed, we now have additional restrictions for certain domestic Chinese customers and expect the revenue in this region will be significantly lower as we go into next year.

The Taiwan region increased to a concentration of 22% in September versus 19% in the June quarter.

Korea decreased to 17% of our total revenue from 24% in the prior quarter.

I expect these two regions to continue to be strong for us based on the plans of our customers in those regions.

Yes.

The customer support business group results were strong in the September quarter.

Revenue here reached a record of nearly $1 9 billion, which was up 16% from the June quarter, and 37% higher than the September quarter and calendar 2021.

All parts of the CSP.

<unk> business delivered good performance in the quarter.

Notably the reliant and spares product line revenues were at record levels.

Reliant was the biggest contributor to the sequential growth in September .

As we've noted in the past <unk> revenues will fluctuate on a quarterly basis.

While the macro setup creates the likelihood of a decline in trailing edge demand.

Strength of our installed base and value added services provide a platform to offset potentially softer specialty <unk> spending.

We do believe nonetheless that the specialty segment, whether next year relatively better than <unk> in total.

Moving to gross margin the September quarter came in at 46% at the high end of our guided range and an increase from june's gross margin of 45, 2%.

We benefited from higher output levels, as well as favorable customer and product mix.

We do continue to have cost pressures and freight and logistics as well as in certain raw material areas like semiconductors.

I see headwinds coming in our December quarter related to customer mix, which I'll talk to when I address our guidance.

Operating expenses for the September quarter were $647 million up from the prior quarter amount of $635 million.

The increase in spending was in R&D, which comprise nearly 68% of our spending.

Which was a high water concentration levels for the company.

We're focused on supporting our customers manufacturing plans for both the short and long term and investing with those objectives in mind.

We're committed to managing spending next year as we see decline in calendar year 2023, wafer fab equipment spending.

Which will obviously negatively impact our revenue levels.

The September operating margin was 33, 3% and was over the guidance range due to the higher levels of revenue.

Improved gross margin.

Our non-GAAP tax rate for the quarter was 13, 8% slightly higher than expected due to the.

Due to the geographic mix of income coupled with the impact of the required U S. R&D capitalization rules.

Our estimate for the December 2022 quarter and for 2020 threes for the tax rate to be in the low to mid teens level.

Please note this estimate does not reflect the impact of any potential.

U S and global tax policy changes being considered.

The minimum tax provisions of the inflation reduction act are not effective for us until the second half of calendar year, 2023, which is our 2020 for fiscal year.

We do not expect any meaningful impact to our tax rate related to this policy change however.

And also as a reminder, as we've discussed in the past you should expect the tax rate to fluctuate from quarter to quarter.

Other income and expense came in for the quarter at $30 million in expense.

This was an expected decrease compared with the $87 million of expense in the June quarter.

I'll, just remind you that we incurred a loss related to market declines in one of our venture investments last quarter.

We have now liquidated that position.

Other expense in the September quarter was a little bit better than we expected mainly because of higher interest rates on an increasing cash balance and slightly favorable foreign exchange impacts.

The <unk> line item is subject to market related fluctuations that will cause some level of volatility.

Items, such as foreign exchange as well as impacts from the equity markets.

From a capital return perspective, we allocated approximately $105 million to share repurchases during the September quarter.

The cash was deployed in open market repurchases.

The ASR from the June quarter also continued to execute in the September quarter.

We paid $206 million in dividends during the quarter.

And just to remind you we continue to target returning 75% to 100% of our.

Free cash flow as our long term capital return plan.

September quarter diluted earnings per share came in at $10 42.

Which was above our guided range because of the strong revenue and improve profitability performance that I spoke about.

Diluted share count was 137 million shares.

Was lower than the June quarter and was in line with September quarter expectations.

Let me now pivot to the balance sheet.

Cash and short term investments, including restricted cash totaled $4 6 billion.

Which was up from the prior quarter level of $3 9 billion.

We generated solid cash from operations in the September quarter of $1 2 billion, which was partially offset by the share repurchases and dividend payments.

Inventory turns were consistent with the prior quarter level coming in at two five times.

Days sales outstanding was 82 days, which was a slight decrease from the 85 days in the June quarter.

Okay.

Noncash expenses for the September quarter included approximately $71 million for equity comp.

$64 million for depreciation and $12 million for amortization.

Capital expenditures for the September quarter were $140 million, a little bit higher than June which was $126 million.

Capital expenditures are supporting growth in manufacturing facilities in the United States in Malaysia.

Additionally, we are investing in research and development infrastructure in California, and Oregon, as well as our new technology centers in Korea and India.

We ended the September quarter with approximately 18700 regular full time employees.

Which is an increase of approximately 1000 people from the prior quarter.

We had head count growth, primarily in the factory and field organizations and some in R&D.

To address higher output levels.

To manage the supply chain constraints and to support customer deliveries installations.

We've decided to slow down hiring to only critical positions.

As we assess the business trajectory going into 2023.

Overall, we're executing well in the short term.

While we plan to prudently manage the business for a down wf each year in calendar year 2023.

I'll remind you that we know how to manage this business during a down cycle.

Our operating model has been constructed and tested for many years in different business environments.

With that backdrop I'll provide our non-GAAP guidance for the December 2022 quarter.

We are expecting revenue of $5 1 billion.

Plus or minus $300 million.

This includes our current estimate of the impact of new regulations on our ability to supply products and services to certain customers in China.

This revenue guidance would have been decently higher if not for these new regulations.

Gross.

<unk> of 44, 5% plus or minus one percentage point.

This is down from the September quarter, primarily due to customer mix.

We have lost more profitable business from the China region.

Operating margins of 31, 5% plus or minus one percentage point and finally earnings per share of $10, even plus or minus 75 based on a share count of approximately 136 million shares.

So let me just wrap it up throughout 2022, we've demonstrated the ability to deliver record financial performance and profitable growth.

It's been a year of volatile supply chain constraints inflationary pressures and regulatory changes.

We're confident we're prepared for the challenges we see in the industry in calendar 2023, and we built a solid foundation for continued success evidenced in our technology leadership and robust installed base.

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

Sure.

Thank you, Sir Hey reminder, to the participants if you would like to ask a question. Please signal by pressing star one on your phone keypad, if you wish.

A speaker phone. Please make sure your mute function is turned off to allow your signal to reach a agreement.

First I wanted to ask a question maybe I'll take the first question.

On the Q from Timothy Acuity. Your line is open. Please go ahead.

Alright, Thanks, a lot different Jason on for 10 from UBS I'll just have a couple of questions. So my first question is on your December guidance.

Guided to keep our revenue to come down. So I was just curious whether you can quantify for us how much excess before revenue you're realizing in contemplating until December .

Thanks.

Yes, Im not sure I completely heard you I think you asked what we think deferred revenue in December is going to do and all I'm going to tell you is I expect it to go down and I'm not going to quantify it for you.

Yes.

Got it.

Thanks, a lot yeah. So my second question is on the gross margin for the same quarter.

Could you please quantify how much headway.

Headwinds you're still facing.

At December for things like elevate freight costs and laser Q&A when can we expect gross margin to normalize eventually thank you.

And I am not going to quantify that for you either.

It's still a headwind.

Otherwise I wouldn't have put it in the scripted remarks.

We go into next year, and I think supply gets caught up with demand in terms of some of the supply challenges, we're having I expect some of the inflationary headwinds there to mitigate I expect the same thing in freight and whatnot. So I.

I'm not going to put a number on it but I do expect that that will get better as we go into next year.

Thanks, a lot.

We will take the next question from.

Harlan sur.

From Jpmorgan. Your line is open. Please go ahead.

Yes, hi, good afternoon. Thanks for taking my question, Kevin given your commentary on up to 200 hospital $1 impact next year from the export controls in China.

Looks like near term you are offsetting some of that with.

With with your significant deferred revenue and order backlog with some of your non China customers, but I guess my question is could you quantify of the two to $2 5 billion dollar impact what percentage of the system and what percentage is services and then I have a follow up question.

Yeah go ahead, yeah, Harlan I guess.

We wanted to give some some sizing for that in 2023 since we knew that the questions that we're not we're not going to break out the difference.

Now that's inclusive of both systems and spares and service for those customers in China that are impacted by the restrictions.

I think we talked a little bit about improving supply chain conditions, and so where possible we talked about December including some impact of of course, China restrictions.

I'll set partially by supply chain easing offset as well by some decreases in the and other other customers due to the demand elements that we talked about so.

We're not prepared to break each of those items out, but we're doing the best we can to.

Essentially meet customer demand requirements, where we can.

Early as we can.

Well I appreciate that and then my follow up the <unk> only just started recently breaking out services legacy SPG business, obviously, it's becoming a more ratable base multiyear service contracts focused business.

Sure in terms of value added services and solutions I think you guys, putting a presentation like chambers shipments are up significantly over the past three years, so and thinking about a weaker WSB environment next year like if you look back over the last few for WSI downturns has the lab.

The services business remains stable or growing through most of those downturns and would you expect a similar profile and a weaker WSI environment next year.

Well Heartland in my comments I, specifically said, it's a very important part of our business model, especially during WP downturn. It's also been a.

Very deliberate strategy of Lam I think is the independent the last couple of Investor conferences, we've talked about.

An intention to increase revenue capture per chamber and so I mentioned that just just in the time from the last WP downturn in 2019. So now we've managed to grow the installed base in chamber count by more than 30% at the same time, we've also increased the breadth of our portfolio.

So that services that both in terms of the types of equipment intelligence services spares the upgrades.

That is also meaningfully improved our opportunity per each of those chamber sits in the installed base. So each element of the spares COPD, whether it's spares upgrade services reliant.

<unk> removes a little bit different through each of the WP up cycles or down cycles, but generally spares as we've said and holds up pretty well as customer customers continue to run all of the tools that they've got installed upgrades, sometimes can actually do a little bit better as customers have a little bit more time in the downturn to make the improvements that they want to make.

So that they come out of those downturn stronger with their installed base.

And then services.

Especially with our expanding offerings around equipment intelligence sources I talked about efficiency productivity. Those are all things that they are important to customers at all times, but the really important customers as their as they're thinking about.

Squeezing everything they can out of out of the installed base, they have and being able to then maybe delay additional capital purchases are expenditures for just a bit longer. So I would say that we see <unk> as a very important part of stabilizing the company's performance through cycles.

Charlotte and the only thing I would point out incrementally, yes, the only incremental thing I'd point out incremental to what Tim said as I've been talking about how how strong reliance has been the last several quarters and in fact last quarter. It was the biggest sequential grower and CSB G.

And as we look into two <unk>, we're not going to parse all the different components W. A few but I know theres some people out there.

Our specialty segment at WP will will soften next year and that would impact the ligand.

Along with the offset by the things that Tim talked about.

Okay.

No great insights. Thank you.

Thanks, Ron.

We will take the next question from.

C J Muse from Evercore. Your line is open. Please go ahead, yes.

Yes. Thank you for taking the question I guess first question relates to deferred revenues.

So when you gave us your early view for 2023 WMC.

How are you kind of reflecting deferred revenues for you as well as the rest of the industry.

Is that more than down 20% and as part of that.

Should we be thinking about your deferred revenue is getting close to zero exiting calendar 'twenty three.

Yes, let me let me take a shot at that first and then add in.

Obviously, our we've contemplated that.

You'll always when we're talking about the what we think the industry is able to do from a shift perspective, and ultimately from a revenue perspective, but.

So that number next year kind of think about it is a little bit of a like for like this year, but.

<unk>.

I believe that we will see ultimately.

A year play out in a way that.

Deferred revenues do come down and supply chain continues to ease and there is a normal level, though I'll, let them speak to that what that normal level of preferred is that we'd expect so won't come to zero, but we will see a meaningful portion of that deferred revenue that really represents the the systems that we've been unable to satisfy this year.

As that plays out next year as we have ramped our capacity supply chain capacity has caught up and therefore, we get caught up on deliveries and revenue recognition. So without countered some of the merger, yes, I mean <unk> you know that deferred revenue is never a zero number because we always have these cash in advance payments volume purchase agreement credits.

A whole bunch of different things, so spares and service credits that are there. If you look pre the supply chain challenges, we had a normalized level of deferred revenue would be somewhere between $501 billion. It bounces around its lumpy sometimes.

But that is kind of the normalized level that I think about.

Its elevated right now because of the back order and stuff and the incomplete tools that were shipping it will come down in December and then it will come down more as we go through 2020 threes is our outlook right now.

Very helpful and as my follow up.

You've grown your headcount by 30% over the last five quarters and I guess I'm curious as you contemplate.

They come in kind of correction how are you thinking about head count how are you thinking about opex.

Yes.

Operating leverage.

Well I think that.

Obviously as Doug mentioned in his comments, yes, it's not our first downturn and the reality is we haven't really had no choice, but to to expand the company as we tried to meet what was really unprecedented NAND over the last couple of quarters or a couple of years in that note.

No choice in doing that and as you see not only did we add head count. We also expanded our facilities. Obviously as you move through cycles. We then look at it.

At the resources that are required to meet the business level in the year and going forward and beyond but I've made a couple of comments one we think it's incredibly important that we sustain.

Technology development through any cycle.

Our customers expect for us to be continued to advance the products and technologies that can need on the other side of the demand cycle.

Q2, I talked about some very strategic investments that we've made to expand our global footprint put us closer to.

Where some of our key customers are to create capabilities closer to ecosystem partners and our supply chain and we think those investments are incredibly important to the long term business model of the company and so we will be sure that however, we're thinking about the resources in the company that we sustain those types of investments as well because.

It's not only how you act through downturn, how prepared you are for the next upturn and what performance you can deliver in that in that cycle as well.

Those things are all under consideration now and it's also why we gave you. Some look ahead to 2023 to give you a sense of how we're thinking about how this business is going to have to be run.

Through the near term.

Very helpful. Thank you.

Thank you Jay.

Yes.

The next question from Stacy <unk> from Bernstein Research. Your line is open. Please go ahead.

Hi, guys. Thanks for taking my question.

For my first question.

Obviously, you're you've got backlog and deferred carrying you through December but you've got calendar 'twenty three you're guiding WP down if I do the math like somewhere in the ballpark of $70 billion. How do we think about the transition from where we're running right now to that environment, but can you give us any color even qualitatively just on.

March quarter does March quarter sort of are you sort of at that run rate of where you expect <unk> to be next quarter like what does that transition looks like.

Yes, Stacy I mean, we gave you a color beyond what we would normally do at this point in the year and I'm not going to do any more than we've already provided that's the best we're going to be able to do for you right now.

Alright, I think I'll take that.

For my follow up.

If I look at the Wip guidance for next year, again down 20% or more from the low 90 puts at about $70 billion.

You said it includes that.

China sanctions would it have been higher without those trying to sanctions are you assuming that some of that China capacity gets redeployed to other players like what does that what are those puts and takes look like.

No.

<unk>.

That makes an assumption.

The vast majority of that China WMC just comes comes out at WPZ.

I don't.

My question is could somebody else spend what those customers, we're going to spend with the same equipment or capacity in place.

Our view right now.

Is that that probably wouldn't take place in 2023.

Yes, I guess, what I'm asking is if it wasn't for the China sanctions would you be looking for WP at like $80 billion or 75, instead of the 70, where it seems to be coming out.

Yes.

Would have been a little bit higher yes, yes, it would have been a little bit higher.

Got it okay. Thank you guys.

Okay. Thank you.

The next question from.

Krish Sanka. Your line is open. Please go ahead.

Yeah, Hi, Thanks for taking my question I feel them to close one thanks for the color on <unk> I'm, just kind of curious you shipped a lot of this year most of them are under one year warranty. So there wasn't necessarily a contributor to revenue.

<unk> gone, 20% or higher and the customers they can it come down.

Got a way to think about.

What utilization rate below which Ah <unk> revenues don't grow.

Well I think it's a tough question because as I, that's why I pointed out there's really four components.

<unk> and not all of them are are completely utilization driven but just to your comment about the number of tools. We have shipped I mean over the last two years as we mentioned our since 2019 up 30% a significant expansion in chamber count. So therefore, our opportunity has grown.

There are some components of the SPG and spare space and on consumables, but actually start kind of on customer usage and so that one year delay Chris doesn't quite exist for every part of <unk> spending.

But I don't think we've done the calculation of <unk>.

Youtube would have to come down utilization of that to come down in order for <unk>.

Certain elements not to grow I think we anticipate that again customers are going to be motivated to run the tools to a great extent or the tools that they already have installed and again you will see probably heightened interest in upgrades versus new capacity additions, which is also beneficial for.

Not only our <unk> business, but lamps capture rate per dollar of investment spend so.

Again, just see SPG being an important part of our business.

Pointing out Doug also commented some elements like reliant.

Our subject to kind of overall macro environment, and we except one sensory goes through next year.

Got it got it that's very helpful and then as a follow up it.

It seems like the first time, you'll foundry revenues crossed $2 billion in the quarter.

And you mentioned about from A&D wins will gate, all around etcetera, I'm curious how much of the foundry strength.

Jay gains versus just underlying cyclical trends from the foundry purchasing.

A little bit of both crush frankly, obviously I think you understand like I'm sure everybody on the call those foundry investments pretty strong this year.

So that's a part of it but there is incremental positions that we've won Tim every earnings call talks about some of those so and we've talked about a couple of just now Chris I'm, usually I'm, usually trying to focus on how we're doing versus what are some of the longer term inflections that we've highlighted you think about foundry logic, where we've been focused.

It's <unk>, which clearly we have made significant progress.

It's areas like <unk> patterning module, which includes heart masks and.

And the ability to to etch very fine pitch features with incredibly uniformity across the wafer and wafer to wafer tool tool camera timber.

And that's.

Usually I am talking about a little bit further ahead, but that gives you some sense of the momentum of the company that's independent of clinical it's really.

Those are positions were winning and when the customers buy has become a big opportunities for the company.

Got it thanks, Tim Thanks, Doug.

Thanks, Craig.

Next question from Joe Joe Moore from Morgan Stanley . Your line is open. Please go ahead.

Great. Thank you.

In terms of the business.

Impacted by the export controls.

You said two to two and ethylene for next year could you talk about what that is kind of like on a run rate basis, or just I'm trying to get a sense of is that two to two and a half was that projecting some growth relative to where the numbers have been I'm just trying to understand how much the ad.

The negative impact is versus the trailing numbers.

Yes, that's a good question, obviously, we're giving a 23 a little earlier that we'd probably have a great look at 'twenty three but in that number two to two 5 billion. We did anticipate some growth in.

In 2003 over over 2022 so.

We won't say how much but it is incorporate some growth from the run rate we see today.

Okay. Thank you and then within the service disperse in particular.

Part of that business I assume you'll be impacted your ability to ship spares going forward as well.

Should we think about those customers being similar in size to their overall capital spending or have they been sort of purchasing spares ahead of this and could they be outsized exposure within your services business because of that.

Yes, Joe there is not an enormous amount of it there's been a little bit of inventory I think the entire.

Customer base built up.

With some of the supply chain constraints this year, including the local Chinese customers, but it's not like a crazy amount.

Great. Thank you very much.

Thanks Chuck.

Okay.

Next question from <unk> from Goldman Sachs. Your line is open. Please go ahead.

Great. Thank you so much I was hoping Doug you could help us think about your systems revenue into 'twenty, three vis vis how youre thinking about Wi Fi.

Obviously, you are over indexed to memory, where.

You guys expect.

The bulk of the decline to comment in 'twenty three.

You've been really successful in China.

Chuck of that is coming out on the positive side you seem to have really strong momentum in both logic and foundry. So net net is it fair to assume you guys can kind of.

Perform in line with Wi Fi or do you think 'twenty three is going to be a relatively challenging year just given your mix.

Yes, I think in many ways, especially you answered your own question, we're a little bit over indexed to memory. We're very strong in terms of share there and that's going to be down more than overall there'll be a fee next year, but that's also offset by the strength of our <unk> business.

Which I believe to be the highest quality installed base business and the industry. So that's going to benefit us.

If you really want to kind of see what it might look like to go back and look at 19, where you had a similar profile.

Memory was quite soft in foundry logic was was pretty good and we weathered that that period pretty well.

That's helpful. Thank you and then as my follow up a question on gross margin.

So you are guiding December down 150 basis points and Doug you spoke to customer mix one of your competitors they've talked about.

Inventory write downs and costs associated with Repurposing tools curious if anything like that is negatively impacting your December quarter Guide.

And I guess more importantly, how should we think about March and beyond with volume declining gross margins declined further from here or do you think there are enough offsets.

Pricing and hopefully freight and semiconductor pricing that could that could help you on the upside. Thank you okay.

Yes, let me unpack it a little bit.

No I don't really think we're going to have a meaningful inventory exposure. So no there isn't anything from that.

We believe we're going to be able to meaningfully rework any inventory, we had that might've been targeted for those specific customers. We can no longer ship to and I don't think as I sit here today, that's a material number so the softness sequential softness in December gross margin just because we lost some very profitable customers.

China region, and that's going to persist obviously.

So that was kind of the first question Unpacking next year I mean, the way I think about it first I think you know as everybody in the call. Those this isn't really a fixed cost business, it's highly variable.

And so as volumes vary a lot of cost of goods sold various you've seen that from us over the years, so that hasnt changed the model here Hasnt changed.

As we go into next year.

Sure.

The benefit I think we'll see in gross margin is I believe we will see some mitigation on some of these inflationary pressures I think supply gets back caught up with demand in terms of our supply base in areas like semiconductors.

I believe freight gets better next year to what magnitude I'm not positive, but I think that gets better and then we.

We ramp supply chain in Malaysia, So we're flying thing shorter distances and whatnot and so we're going to see the benefit of that offset then by we've just lost some very profitable customers.

And yes volume will be down there is a little bit of fixed cost in the factory and field that we're going to have to have to deal with so I'm not going to quantify it for you, but those are the puts and takes.

The only thing I would add is is that a lot of our actions again I spoke to to some of the repositioning I mean effectively your questions about next year, but we're really thinking about again long term trajectory for profitability of the company, which.

Both Doug and I have said over time, we want to drive it meaningfully higher so.

Doug mentioned, the <unk> and <unk>.

Mentioned the investment in Malaysia, we talked about the engineering activities India.

With technology lab in Korea, all of these things are designed to make us faster and more efficient in our operations over the long term and so how much of that shows up next year and kind of how what the effect is going to see how next year plays out we're going to be focused on interest Doug sentiments go back and look at 2019.

We do pretty well in these in these periods, but really what we're trying to to message is that the investments. We've made over the last couple of years, taking advantage of this very strong growth period in the company really sets us up for for the remainder of this decade to really drive the strategy of the company towards again.

Speed of condition, and inefficiency and delivery of our products and services.

Thanks, guys.

Thank you.

Next question from Vivek Arya with Bank of America. Your line is open. Please go ahead.

Thanks for taking my question.

For the first one.

Curious when do you see your ex China memory customers getting to some level of supply demand equilibrium is it sometime in Q1 Q2 Q3.

Just what's your sense of how much inventory do they have and how much time will it take for them to clear it out so that your orders in Brazil.

Yeah, while now we're starting to talk a lot more about talking about 30, and so again, we we incorporated our view there into the 'twenty three guidance I think we'd like to wait until now until we get a little bit closer to the year to be able to speak to that.

The customers are taking action and I think that youre hearing from customers about some pretty aggressive action to try to bring those inventories.

And the supply demand better into balance.

Really want to speak for them, but I think that as I commented.

I think as we exit 2023, we're going to be set up in a pretty good place for memory spending as a percentage of total Wi Fi to actually rise from that point, how it plays out through 2023 collection, our view as we get little bit closer.

And then maybe just an observation for me these cycles have.

Similar time frames associated with them.

Almost just walk back in history and look at it with the caveat, though I think as we came through all the supply chain challenge. This time, maybe a little more inventory got built up when I look at things in the industry. So it might be a little bit longer than typical but these things are.

Pretty consistent on a historical basis. So you just go look at history Youll have to answer your question.

Got it and for my follow up.

Trying to reconcile.

The more optimistic comments about growth made by our lithography peer. This morning, who is expecting to grow next year with your comments that WEX equal declined over 20%. So if the little box.

Of the wallet is going to grow does it mean that the part that applies to you declines unlock more than 20% I'm just trying to.

Inside of such a big difference.

How two important players that thinking about next year.

Hard for me to tell you what another company is saying, especially because it was just this morning, and I haven't really been able to Kevin I haven't really been able to look at what they said.

But I think you understand you don't just buy one tool just for the front of it if you can buy all the process tools to complete the manufacturing line.

It makes no sense right.

And so it's about a litho tool eventually need a step and everything else to complete the wafer so.

I can't help you reconcile what they said because I haven't actually been able to dose study it but I think you understand what I just commented on.

Thank you Bob.

Thanks, Eric.

Next question from Blayne Curtis of Barclays. Your line is open. Please go ahead, hey, guys. Thanks for taking my question I just want to ask you on the restrictions I mean, I guess just optically looking at it. It seems like you are taking out the domestic memory vendors and I know theres very little leading edge logic.

Curious.

I think from some debate as to whether the multinationals, whether you can still ship to their Chinese facilities.

I know there were some licenses maybe for services. So just kind of curious if you could just quantify it.

You understand the restrictions and what you are taking out.

And whether includes multinationals and if you can still ship two facilities.

It may make leading edge foundry.

Processes, even if the equipment is not being used for.

Okay, a bunch a bunch of questions. There first first of all maybe the simplest is.

We've taken out.

Obviously, the shipments that were destined for applications, where customers that are restricted.

Primarily means right now domestic Chinese customers they are.

<unk> restricted technology switch.

In NAND DRAM have certain specifications and in foundry logic others.

The.

National is as you noted were given.

And authorization to receive shipments and service and so our business there effectively remains unchanged as.

As a result of that and so we are continuing.

Continuing to include that in our outlook for 2023.

To your point about a facility.

It's our understanding that a facility that would have mixed use would likely fall under the restricted category and so therefore, if a customer were to want to manufacturing <unk> shipments and received support from our restricted for our unrestricted technology. It would have to be in a facility that.

It was clearly.

Not also doing restricted activities.

Think that Thats something <unk> worked through by our customers, we've contemplated all of those as well as what we believe.

Happened in China into that two two to $2 5 billion estimate.

And so that's our view right now of the restrictions and health effects.

Customers in our business. Thanks, and then just on December I was little confused.

The impact you laid out.

100, plus million per quarter that you can't ship to.

Yes.

Sales are kind of flat. So I'm just kind of curious are you, making it up with other customers.

Just kind of curious how fungible with equipment that you thought youre going to be shipping to Chinese memory, whether it needs can be repurposed in the quarter and youre doing that and Thats why youre not seeing the impact or whether you are expecting to ship to some higher level and we just didnt know that and that's why the sales were flat.

Well I think that as you heard Doug say the December guide would have been.

Decently higher if the.

China restrictions have not been put in place so I think that.

That answers. The question there was a comment we made about perhaps we've made up a little bit because of easing supply chain conditions, but that would have happened independent so.

In any case December would have been higher at the Chinese restrictions have been put in place.

Okay. Thanks.

Yes, Thanks, Mike.

Okay.

Next question from Joe Mccourt ROTC Wells Fargo. Your line is open.

Yes, thanks for taking the question.

I just wanted to go back on the expectation that deferred revenue declines in the December quarter.

Is there any part of that is related to the export restrictions were.

Customers that are now restricted had tools that were incomplete that are now I don't know more or less stranded.

No Joe Theres, not we cannot ship anything to those restricted customers.

But tools I guess they were previously shipped it.

Incomplete like they were shipped.

Last quarter or two quarters ago.

If that situation existed and I'm, not saying it did or didn't we can't ship anything to them.

Got it okay.

Just.

Trying to think about.

Bit shipments in the cycle.

Relative to prior cycles, how do you think about your customers' willingness to hold more inventory on their own balance sheet.

Cycle relative to prior cycles does that change the way you think about maybe like the snapback in terms of like bit supply growth.

Yes.

It's a good question and definitely one that's better for them relative to their tolerance of holding that inventory.

Everybody's view of.

Inventory, probably changed a little bit as a result of shortages and the ability to respond to.

Over the last two years, we've seen us.

The sharp changes in demand.

But I really can't answer for them are out there.

Willingness to hold more inventory I think we're going back and as Doug said looking at kind of historical.

Behavior in these kinds of downturns, what we're experienced with them.

That's how we kind of project out what we think will likely happen.

Got it okay. Thank you.

Yes.

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

Understood.

One from Quinn Bolton.

Needham <unk> co. Your line is open. Please go ahead.

Thanks for squeezing me in tenders, some confusion or mis interpretation of the market. It seems like on the license requirements for U S citizens in China and I'm wondering if you could just clarify does it support license requirements affect just the same set of customers as the equipment license or is there a broader impact on U S citizens operating in China.

On the U S citizens operating in China not enough.

Yes, I mean, there is a restriction on U S citizens.

As defined by the government.

The <unk>.

Providing support for the development of restricted technologies.

Right, but is that just sort of the <unk>.

Same set of customers that.

Require export licenses on the equipment side. So the advanced NAND DRAM in 16 nanometer and below or is there a broader set of customers you cannot support under the export control.

No I believe it I believe it is that same the same set that's spelled out.

Fundamentally customers that are either on a restricted list or producing restricted technologies or those that are affected.

Got it thanks for the clarification and then just quickly you said youre going to manage Opex next year.

Kind of wondering if you might be able to write any sort of qualitative color is that sort of you expect it to.

Look similar to what happened back in 2018 2019 in the downturn or would you would you look to be more aggressive and try to manage opex more in line with the decline you see in WMC in calendar 'twenty three.

We'll give you that guidance in the January earnings call I think what we're just trying to signal is that we're well aware of what we believe is coming next year and therefore.

We'll take the appropriate actions as we see fit as I mentioned.

To manage the company through the downturn, but also to be ready for what we believe is a.

Robust future for the company in the industry.

Great. Thanks, Glenn.

Okay, operator that will conclude our call I'd like to thank everyone for joining us today.

Good day.

That concludes today Steven Thank you for your participation you may now disconnect.

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Good day and welcome to the Lam Research September 2022 a quarter earnings conference call. At this time I would like to turn the conference over to Mr. Correa. Please go ahead ma'am.

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 does that enter executive Vice President and Chief Financial Officer.

During today's call wheelchair overview on the business environment, and we will review our financial results for the September 2022 quarter and our outlook for the December 2022 quota.

Press release detailing our financial results was distributed a little after one o'clock PM Pacific time. This afternoon. The release can also be found on the Investor Relations section of the Companys website, along with the presentation slides that accompany today's call.

Today's presentation and Q&A include forward looking statements.

Risks and uncertainties.

Selected and the risk factors disclosed in our SEC public filings.

Please see accompanying slides in the presentation for additional information.

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 Tina and thank you to everyone joining the call today, our September quarter results reflect continued strong execution by Lam with revenues topping $5 billion for the first time in the company's history gross.

Gross margins came in at the higher end of guidance and operating margin and earnings per share both exceeded the guidance range.

As you can see from our press release today, we also expect solid performance in the December quarter, despite the challenging environment.

Recently, the United States Government announced new export regulations for U S semiconductor technology sold in China, including wafer fabrication equipment and related parts and services, we've taken the necessary steps to ensure full compliance with the rules and have ceased shipments in support as required.

Our financial guidance issued today for the December quarter includes the impact of these changes for.

For calendar year 2023, we estimate the total revenue impact from these restrictions to be in the range of two to $2 5 billion.

As some of our customers have indicated recently there has been a rapid deterioration in demand fundamentals, particularly within the memory segments customers are adjusting investment plans into next year to bring channel inventories down to more normalized levels.

As a result, we see memory bit shipments tracking below end demand for the next few quarters.

In our normal cadence, we would provide our first view of 2023 DWP on our January earnings call. However.

However, given the current environment today, we are providing our preliminary estimate for calendar year 2023.

Inclusive of the China restrictions, we expect next year's <unk> to be down more than 20% with memory investments accounting for a large portion of that decline.

As these cyclical adjustments play out the structural factors supporting a long term wip growth remain unchanged. These include expanding semiconductor content and devices rising device complexity and larger die sizes.

To ensure we are best positioned to win long term, we are focused on three key strategies.

First continued to demonstrate our commitment to customer success by ensuring that the rapidly growing installed base of Lam tools at our customers is operating at maximum efficiency.

Second via trusted R&D partner for our customers by sustaining our investment in the technology development that is most critical to their long term device scaling roadmaps.

And third accelerate innovation and deepen our customer and supply chain partnerships by fully leveraging <unk> recently expanded global R&D and manufacturing infrastructure.

Our installed base is now approaching 80000 chambers in the field.

This is over 30% higher than in the 2019 memory related pullback in WMC.

Land is growing installed base continues to drive strong performance in our <unk> business, which hit another record in the September quarter with approximately $1 $9 billion in revenue.

While we won't hit New records every quarter, our installed base has become ever more important to our business model, particularly in WP spending downturn.

During such times customers can continue to advance their technology, while optimizing capital efficiency through upgrades to their existing tools.

We are also engaging with customers to find other efficiencies, including yield enhancement and.

An example of the opportunities this creates can be seen in our <unk> product line.

<unk> Corona level etch process is employed by customers to help prevent process related defects, which can impair cost per bit scaling.

As a result, we have seen a steady increase in the number of <unk> passes used at each successive NAND technology node.

Another opportunity to help drive efficiency can be found in the enormous volume of equipment and process data being generated from our large and growing installed base.

The other with customers, we are using key learnings to deliver services and upgrades to positively impact our customers' operations. For example, we recently deployed equipment intelligence services to support new equipment installation at a large memory manufacturer.

Using these capabilities, we were able to shorten the time to release tools to production by more than 20%.

Example, our ability to deposit critical films to lower device capacitance and improved lithography overlay performance led to wins for these layers at leading DRAM customer.

For both applications, we leverage learnings from our three D NAND leadership position as well as ecosystem partnerships to bring innovative and cost effective solutions to our DRAM customers.

Whether it is our focus on operational efficiency for our collaboration on the advanced technology. We believe our long term success will be rooted in R&D and manufacturing infrastructure close to our customers close to our ecosystem partners and with access to World class talent.

This center is a valuable addition to our global lab network specializing in the design and testing of hardware and software used across our product lines.

So overall I am pleased with how we are continuing to strengthen our foundation and technology manufacturing and service. This foundation puts us in a very good position with both navigate the current cyclical dynamics and emerge stronger as we look to capture the exciting opportunities we see over time.

In the semiconductor industry.

You again for joining today and I'll now turn the call over to Doug.

Excellent Thanks, Tim.

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

Lam delivered solid results in the September quarter with record levels of performance across multiple metrics, including revenue up.

Operating income and earnings per share.

The September financials reflect our focus on operational excellence and our ability to deliver and meet the needs of our customers in a dynamic industry environment.

Yes.

Revenue in the September quarter crossed the $5 billion Mark for the first time in our history coming in at approximately $5 1 billion.

We continued to ramp output levels, delivering nearly 10% revenue growth over the prior quarter.

Supply chain issues have begun to ease somewhat.

They have not gone away completely however.

We continue to deal with certain inflationary pressures as well as output constraints.

Deferred revenue was $2 8 billion.

<unk> grew in the September quarter by approximately $550 million.

This growth was primarily due to customer cash and advanced deposits.

Followed by the timing of shipments on outstanding orders.

With macro conditions weakening and.

And wafer fab equipment spending declining I expect deferred revenue and backlog levels will come down as we exit the December quarter.

I'll provide more information regarding our December guidance and focus for calendar year 2023.

Later in my scripted remarks.

Okay.

Now I'll turn to the segment details for the September quarter memory represented 52% of systems revenue, which was slightly down from the prior quarters level of 54%.

Included in memory. The NAND segment represented 39% of systems revenue compared to 40% in the prior quarter.

We see capacity adds and conversions occurring by NAND customers, mainly for 192 layer class devices.

The DRAM segment concentration was consistent with the prior quarter coming in at 13% of system revenues compared with 14% in the June quarter.

The DRAM investments were primarily for onesie and one alpha node conversions.

Foundry investments are respectable in the September quarter, comprising 34% of our system revenues, reaching a record level from a dollar standpoint.

The increase in the quarter from the June quarter concentration of 26%.

As a result of the continued strengthen investments for both the leading and mature node devices across a myriad of customers.

These investments are supporting areas, such as AI Iot cloud.

Automotive and 5%.

The logic and other segment contributed 14% of systems revenue in the September quarter, compared with 20% in the prior quarter.

I'll remind you that we had record results in this segment in the June quarter, and we continue to have positive momentum in the logic segment.

Our customer base here is investing and microprocessors image sensors as well as advanced packaging solutions.

I'll now turn to the regional composition of our total revenue.

The China region came in at 30% of the total relatively flat with the prior quarter level of 31%.

The China September revenue was more concentrated towards the domestic Chinese customer base.

And as Tim discussed, we now have additional restrictions for certain domestic Chinese customers and expect the revenue in this region will be significantly lower as we go into next year.

The Taiwan region increased to a concentration of 22% in September versus 19% in the June quarter.

Korea decreased to 17% of our total revenue from 24% in the prior quarter.

I expect these two regions to continue to be strong for us based on the plans of our customers in those regions.

Yes.

The customer support business group results were strong in the September quarter.

Revenue here reached a record of nearly $1 $9 billion, which was up 16% from the June quarter, and 37% higher than the September quarter and calendar 2021.

All parts of the CSP.

<unk> business delivered good performance in the quarter.

Notably the reliant and spares product line revenues were at record levels.

Reliant was the biggest contributor to the sequential growth in September .

As we've noted in the past <unk> revenues will fluctuate on a quarterly basis.

While the macro setup creates the likelihood of a decline in trailing edge demand the strength of our installed base and value added services provide a platform to offset potentially softer specialty <unk> spending.

We do believe nonetheless that the specialty segment, whether next year relatively better than <unk> in total.

Moving to gross margin the September quarter came in at 46% at the high end of our guided range and an increase from june's gross margin of 45, 2%.

We benefited from higher output levels, as well as favorable customer and product mix.

We do continue to have cost pressures and freight and logistics.

As well as in certain raw material areas like semiconductors.

I see headwinds coming in our December quarter related to customer mix, which I'll talk to when I address our guidance.

Operating expenses for the September quarter were $647 million up from the prior quarter amount of $635 million.

The increase in spending was in R&D, which comprise nearly 68% of our spending.

Which was a high water concentration levels for the company.

We're focused on supporting our customers manufacturing plans for both the short and long term and investing with those objectives in mind.

We're committed to managing spending next year as we see decline in calendar year 2023, wafer fab equipment spending.

Which will obviously negatively impact our revenue levels.

The September operating margin was 33, 3% and was over the guidance range due to the higher levels of revenue and improved gross margin.

Our non-GAAP tax rate for the quarter was 13, 8% slightly higher than expected.

Year to date due to the geographic mix of income.

With the impact of the required U S R&D capitalization rules.

Our estimate for the December 2022 quarter <unk>.

And for 2020 threes for the tax rate to be in the low to mid teens level.

Please note. This estimate does not reflect the impact of any potential U.

<unk> and global tax policy changes being considered.

The minimum tax provisions of the inflation reduction act are not effective for us until the second half of calendar year, 2023, which is our 2020 for fiscal year.

We do not expect any meaningful impact to our tax rate related to this policy change however.

And also as a reminder, as we've discussed in the past you should expect the tax rate to fluctuate from quarter to quarter.

Other income and expense came in for the quarter at $30 million in expense.

This was an expected decrease compared with the $87 million of expense in the June quarter.

I'll, just remind you that we incurred a loss related to market declines in one of our venture investments last quarter.

We have now liquidated that position.

Other expense in the September quarter was a little bit better than we expected mainly because of higher interest rates on an increasing cash balance and slightly favorable foreign exchange impacts.

The <unk> 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 from the equity markets.

From a capital return perspective, we allocated approximately $105 million to share repurchases during the September quarter.

The cash was deployed in open market repurchases.

The ASR from the June quarter also continued to execute in the September quarter.

We paid $206 million in dividends during the quarter.

And just to remind you we continue to target returning 75% to 100% of our free cash flow as our long term capital return plan.

September quarter diluted earnings per share came in at $10 42.

Which was above our guided range because of the strong revenue and improved profitability performance that I spoke about.

Diluted share count was 137 million shares which was lower than the June quarter and was in line with September quarter expectations.

Let me now pivot to the balance sheet.

Cash and short term investments, including restricted cash totaled $4 6 billion, which was up from the prior quarter level of $3 9 billion.

We generated solid cash from operations in the September quarter of $1 $2 billion, which was partially offset by the share repurchases and dividend payments.

Inventory turns were consistent with the prior quarter level coming in at two five times.

Days sales outstanding was 82 days, which was a slight decrease from the 85 days in the June quarter.

Okay.

Noncash expenses for the September quarter included approximately $71 million for equity comp.

$64 million for depreciation and $12 million for amortization.

Capital.

Spend insurers for the September quarter were $140 million, a little bit higher than June which was $126 million.

Capital expenditures are supporting growth in manufacturing facilities in the United States in Malaysia.

Additionally, we are investing in research and development infrastructure in California, and Oregon.

As well as our new technology centers in Korea and India.

We ended the September quarter with approximately 18700 regular full time employees.

Which is an increase of approximately 1000 people from the prior quarter.

We had head count growth, primarily in the factory and field organizations and some in R&D.

To address higher output levels.

To manage the supply chain constraints and to support customer deliveries installations.

We've decided to slow down hiring to only critical positions.

As we assess the business trajectory going into 2023.

Overall, we're executing well in the short term.

While we plan to prudently manage the business for a down wf each year in calendar year 2023.

I'll remind you that we know how to manage this business during a down cycle.

Our operating model has been constructed and tested for many years in different business environments.

With that backdrop I'll provide our non-GAAP guidance for the December 2022 quarter.

We are expecting revenue of $5 1 billion plus.

Plus or minus $300 million.

This includes our current estimate of the impact of new regulations on our ability to supply products and services to certain customers in China.

This revenue guidance would have been decently higher if not for these new regulations.

Gross margin of 44, 5% plus or minus one percentage point.

This is down from the September quarter, primarily due to customer mix.

We have lost more profitable business from the China region.

Operating margins of 31, 5% plus or minus one percentage point and finally earnings per share of $10, even plus or minus 75 based on a share count of approximately 136 million shares.

Yeah.

So let me just wrap it up throughout 2022, we've demonstrated the ability to deliver record financial performance and profitable growth.

It's been a year of volatile supply chain constraints inflationary pressures and regulatory changes.

We're confident we're prepared for the challenges we see in the industry in calendar 2023.

And we built a solid foundation for continued success evidenced in our technology leadership and robust installed base.

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

Sure.

Thank you, Sir Hey reminder, to the participants if you would.

Todd a question do you see number of pressing star one on your phone keypad.

A speaker phone. Please make sure you made function is turned off to allow your signal to reach a agreement again, Bristol I wanted to ask a question maybe I'll take the first question.

Under Q from Timothy Acuity. Your line is open. Please go ahead.

Yeah.

Hi, Thanks, a lot different Jason on for Ken from UBS I'll just have a couple of questions. So my first question is on your December guidance.

<unk> guided to keep our revenue to come down. So I was just curious whether you can quantify for us how much of access before revenue youre realizing in contemplating until December .

As a follow up thanks.

Yes, Im not sure I completely heard you I think you asked what we think deferred revenue in December is going to do and I'll I'm going to tell you is I expect it to go down and I'm not going to quantify it for you.

Yeah.

Got it.

Thanks, a lot yeah. So my second question is on the gross margin with second quarter.

Just quantify how much of a.

Headwinds you're still facing.

At December for things like elevate quite cost emulator Q&A when can we expect gross margins to normalize eventually thank you.

And I'm not going to quantify that for you either.

It's still a headwind.

Otherwise I wouldn't have put it in the scripted remarks as we go into next year and I think supply gets caught up with demand in terms of some of the supply challenges, we're having I expect some of the inflationary headwinds there to mitigate I expect the same thing in freight and whatnot, so I'm not going to put a number on it but I do expect.

That will get better as we go into next year.

Thanks, a lot.

We will take the next question from.

Harlan sur.

From JP Morgan Your line is open. Please go ahead.

Hi, Good afternoon. Thanks for taking my question, Kevin given your commentary on a tier two in the hospital and the other impact next year from the export controls in China. It looks like near term you are offsetting some of that with.

With your significant deferred revenue and order backlog with some of your non China customers, but I guess my question is could you quantify of the two to $2 5 billion impact what percentage of systems and what percentage is services and then I have a follow up question.

Yes go ahead.

Yes, Harlan I guess, we wanted to give some some sizing for that in 2023 since we knew there'd be questions that we're not we're not going to break out the difference right now that's inclusive of both systems and spares and service for those customers in China that are impacted by the restrictions.

I think that we talked a little bit about improving supply chain conditions, and so where possible we talked about December including some impact of of course, China restrictions offset partially by supply chain easing offset as well by some decreases in the and other other customers do.

The demand elements that we talked about so we're.

We're not prepared to break each of those items out, but we're doing the best we can to.

Essentially meet customer demand requirements, where we can as early as we can.

Well I appreciate that and then my follow up the team only just started recently breaking out services in the CSD business, obviously, it's becoming a more ratable base multi year service contract focused business.

Sure in terms of value added services and solutions I think you guys, putting a presentation like chamber shipments are up significantly over the past three years, so when thinking about a weaker WSB environment next year like if you look back over the last few for WSI downturn has the lab has lab services business remains stable or growing through most of those down.

And would you expect a similar profile and a weaker WSI environment next year.

Well Heartland in my comments I, specifically said, it's a very important part of our business model, especially during WP downturn. It's also been a very.

Our deliberate strategy of Lam I think is the independent the last couple of Investor conferences, we've talked about.

Breadth of our portfolio that services that both in terms of the types of equipment intelligence services the spares the upgrades that.

That is also meaningfully improved our opportunity per each of those chamber sits in the installed base. So each element of the spares COPD, whether it's spares upgrade services reliant.

Moving moves a little bit different through each of the WP up cycles or down cycles, but generally spares as we've said it holds up pretty well as customer customers continue to run all of the tools that they've got installed upgrades, sometimes can actually do a little bit better as customers have a little bit more time in the downturn to make the improvements that they want to make.

So that they come out of those downturn stronger with their installed base.

And then services.

Squeezing everything they can out of out of the installed base behalf and being able to then maybe delay additional capital purchases are expenditures for just a bit longer. So I would say that we see <unk> as a very important part of stabilizing the companys performance through cycles.

Charlie the only thing I would point out incrementally, yes, the only incremental thing I'd point out incremental to what Tim said as you know I've been talking about how how strong reliance has been the last several quarters and in fact last quarter. It was the biggest sequential grower and CSB G.

And as we look into 2023, we're not going to parse all of the different components W. A few but I know theres some people out there.

Specialty segment Adobe a few will will soften next year and that would impact are aligned.

Along with the offset by the things that Tim talked about.

Okay.

No great insights. Thank you.

Thanks, Ron.

We will take the next question from.

C J Muse from Evercore. Your line is open. Please go ahead, yes.

Yes. Thank you for taking the question I guess first question relates to deferred revenues.

So when you gave us your early view for 2023 WMC.

How are you kind of reflecting deferred revenues for you as well as the rest of the industry.

Is that more than down 20% and as part of that.

Should we be thinking about your deferred revenue is getting close to zero exiting calendar 'twenty three.

Yes, let me let me take a shot at that first and then I'll add in.

Obviously, our we've contemplated that.

You'll always when we're talking about the what we think the industry is able to do from a ship perspective, and ultimately from a revenue perspective, but.

So that number next year kind of think about it is a little bit of a like for like this year, but.

I believe that we will see ultimately.

The year play out in a way that.

As that plays out next year as we have ramped our capacity supply chain capacity has caught up and therefore, we get caught up on deliveries and revenue recognition. So we dug underneath some of the broker.

Deferred revenue is never a zero number because we always have these cash in advance payments volume purchase agreement credits a whole bunch of different things. So spares and service credits that are there. If you look pre the supply chain challenges, we had a normalized level of deferred revenue would be somewhere between $501.

<unk>.

It bounces around its lumpy sometimes.

But that is kind of the normalized level that I think about.

Its elevated right now because of the backward stuff in the incomplete tools that were shipping it will come down in December and then it will come down more as we go through 2020 threes is our outlook right now.

Very helpful and as my follow up.

You've grown your headcount by 30% over the last five quarters and I guess curious as you contemplate.

They are coming kind of correction how are you thinking about head count how you're thinking about opex.

The operating leverage.

Well I think that.

Obviously as Doug mentioned in his comments on our first downturn and the reality is we haven't really had no choice, but to to expand the company as we tried to meet what was really unprecedented demand over the last couple of quarters or a couple of years a net neutral.

No choice in doing that and as you see not only did we add head count. We also expanded our facilities. Obviously as you move through cycles. We then look at it.

At the resources that are required to meet the business level in the year and going forward and beyond but I've made a couple of comments one we think it's incredibly important that we sustain.

Technology development through through any cycle.

Our customers expect for us to be continued to advance the products and technologies that can need on the other side of the demand cycle.

And two I talked about some very strategic investments that we've made to expand our global footprint to put us closer to where some of our key customers are to create capabilities closer to ecosystem partners and our supply chain and we think those investments are incredibly important to the long term business model of the company and so we will.

Be sure that in however, we're thinking about the resources in the company that we sustain those types of investments as well because it's not only how you act through the downturn itself. How prepared you are for the next upturn and what performance you can deliver in that in that cycle as well.

So those things are all under consideration now and it's also why we gave you. Some look ahead to 2023 to give you a sense of how we're thinking about how this business is going to have to be run through.

Through the near term.

Very helpful. Thank you.

Thanks C J.

Yes.

The next question from Stacy <unk> from Bernstein Research. Your line is open. Please go ahead.

Hi, guys. Thanks for taking my question.

For my first question.

For March quarter does March quarter sort of are you sort of at that run rate of where you expect <unk> to be next quarter like what does that transition looks like.

Yes, Stacy I mean, we gave you color beyond what we would normally do at this point in the year and I'm not going to do any more than we've already provided that's the best we're going to be able to do for you right now.

Alright look I'll take that.

For my follow up.

If I look at the Wip guidance for next year, again down 20% or more from the low 90 puts at about $70 billion.

You said it includes that.

No.

That makes an assumption that fare.

The vast majority of that China WMC just comes it comes out at WPZ.

I don't if.

To your question is could somebody else spend what those customers, we're going to spend the same equipment or capacity in place.

Right now I mean is.

Is that that probably wouldn't take place in 2023.

Yes, I guess, what I'm asking is if it wasn't for the China sanctions would you be looking for WP at like $80 billion or 75, instead of the 70, where it seems to be coming out.

Yes, it would have been a little bit higher states. It yes, it would have been a little bit higher.

Got it okay. Thank you guys.

Okay. Thank you.

The next question from.

Krish Sanka. Your line is open. Please go ahead.

Yes, hi, Thanks for taking my question I feel them to close one bank to the color on <unk> I'm just kind of curious you shipped a lot of this year most of them are under one year warranty. So there wasn't necessarily contribute at the SBC revenue.

<unk> gone 2000 person to hire and their customers because they can be it come down.

Is that a way to think about.

At what utilization rate below which Ah <unk> revenues don't grow.

Well I think it's a tough question because as I, that's why I pointed out there's really four components.

<unk> not all of them are are completely utilization driven but just to your comment about the number of tools. We shipped I mean over the last two years as we mentioned our since 2019 up 30% a significant expansion in chamber count. So therefore, our opportunity has grown.

There are some components of the SPG and despair space on consumables, but actually start kind of on customer usage and so that.

One year delay, which doesn't quite exist for every part of <unk> spending.

But I don't think we've done the calculation of <unk>.

UT will have to come down utilization of that to come down in order for <unk>.

Not only our <unk> business, but lamps capture rate per dollar of investment spend so.

Again, just <unk> being an important part of our business.

Pointing out Doug also commented some elements like reliant are subject to kind of overall macro environment and we expect to offset some of those for next year.

Got it got it that's very helpful and then as a follow up.

It seems like the first time Youll foundry revenues crossed $2 billion in the quarter.

And you mentioned about some and even for gate all around etcetera, I'm curious how much of the foundry strength.

Gains versus just underlying cyclical trends from the foundry purchasing.

A little bit of both crush frankly.

I think you understand like I'm sure everybody on the call those foundry investments pretty strong this year. So that's a part of it but there is incremental positions that we one Tim.

Every earnings call talks about some of those so and you talked about a couple of just not yes, Chris I'm, usually I'm, usually trying to focus on how we're doing versus what are some of the longer term inflections and we've highlighted you think about foundry logic, where we've been focused.

It's <unk>, which clearly we have made significant progress.

It's areas like <unk> patterning module, which includes heart masks and <unk>.

And the ability to to etch very fine pitch features with incredibly uniformity across the wafer and wafer to wafer tool tool chamber chamber and that's.

Usually I am talking about a little bit further ahead, but that gives you some sense of the momentum of the company that's independent of the cycle, it's really.

Those are positions were winning and when the customers buy has become a big opportunities for the company.

Got it thanks, Tim Thanks, Doug.

Thanks, Craig.

Next question from Joe Joe Moore from Morgan Stanley . Your line is open. Please go ahead.

Great. Thank you.

Of the business.

Impacted by the export controls.

Two to two and ethylene for next year could you talk about what that is kind of like on a run rate basis.

I'm trying to get a sense of is that two to two and a half was that projecting some growth relative to where the numbers have been I'm just trying to understand how much did the.

The negative impact is versus the trailing numbers.

Yes, that's a good question I mean, obviously, we're giving a 23 a little earlier that we probably have a great look at 'twenty three but in that number two to two 5 billion. We did anticipate some growth.

In 2003 over over 2022 so.

Don't say, how much but it is incorporate some growth from the run rate we see today.

Okay. Thank you and then within the service spares in particular.

Part of that business I assume you'll be impacted your ability to ship spares going forward as well.

Yes, Joe there is not an enormous amount of it there's been a little bit of inventory I. Thank the entire <unk>.

Customer base built up.

With some of the supply chain constraints this year, including the local Chinese customers, but it's not like a crazy amount.

Great. Thank you very much.

Thanks Chuck.

Okay.

Next question from Tahira here from Goldman Sachs. Your line is open. Please go ahead.

Great. Thank you so much I was hoping Doug you could help us think about your systems revenue into 'twenty, three vis vis how youre thinking about Wi Fi.

Obviously, you're over indexed to memory, where.

When you guys expect.

The bulk of the decline to comment in 'twenty three.

You've been really successful in China.

Think of that is coming out on the positive side you seem to have really strong momentum in both logic and foundry. So net net is it fair to assume you guys can kind of.

Perform in line with Wi Fi or do you think 'twenty three is going to be a relatively challenging year just given your mix.

Yeah.

Yes, I think in many ways, especially you answered your own question, yes, we're a little bit over indexed to memory and were very strong in terms of share there and that's going to be down more than overall there'll be a fee next year, but that's also offset by the strength of our <unk> business.

Which I believe to be the highest quality installed base business and the industry. So that's going to benefit us.

If you really want to kind of see what it might look like to go back and look at 19, where you had a similar profile.

Memory was quite soft in foundry logic was was pretty good and we weathered that that period pretty well.

That's helpful. Thank you and then as my follow up a question on gross margin.

Youre guiding December down 150 basis points, and Doug you spoke to customer mix one of your competitors.

<unk> talked about.

Inventory write downs and costs associated with Repurposing tools curious if anything like that is negatively impacting your December quarter Guide.

And I guess more importantly, how should we think about March and beyond with volume declining gross margins declined further from here or do you think there are enough offsets.

Pricing and hopefully freight and semiconductor pricing that could that could help you on the upside. Thank you.

Yes, let me unpack it a little bit.

No I don't really think we're going to have a meaningful inventory exposure. So no there isn't anything from that.

So the softness sequential softness in December gross margin does because we lost some very profitable customers.

The China region, and that's going to persist obviously.

So that was kind of the first question Unpacking next year I mean, the way I think about it first.

Thank you know as everybody on the call knows this isn't really a fixed cost business, it's highly variable.

And so as volumes vary a lot of cost of goods sold bearings and <unk> seen that from us over the years, so that hasnt changed the model here Hasnt changed.

As we go into next year.

The benefit I think we'll see in gross margin is I believe we will see some mitigation on some of these inflationary pressures.

As supply gets back caught up with demand in terms of our supply base in areas like semiconductors.

I believe freight gets better next year to what magnitude I'm not positive, but I think that gets better and then we ramp supply chain in Malaysia. So we're flying thing shorter distances and whatnot and so we're going to see the benefit of that offset then by we've just lost some very profitable customers.

And Thats really the only thing I would add is is that a lot of our actions again I spoke to to some of the repositioning I mean effectively.

Your questions about next year, but we're really thinking about again long term trajectory for profitability of the company, which.

Both Doug and I have said over time, we want to drive meaningfully higher so.

Doug mentioned and I mentioned the investment in Malaysia, we talked about the engineering activities India.

Our technology lab in Korea, all of these things are designed to make us faster and more efficient in our operations over the long term and so how much of that shows up next year and kind of how what the effect is going to see how next year plays out we're going to be focused on it and go back and look at 2019, we do pretty well in these in these <unk>.

But really what we're trying to to message is that the investments we've made over the last couple of years, taking advantage of this very strong growth period in the company really sets us up for for the remainder of this decade to really drive the strategy of the company towards again speed of condition.

And in efficiency and delivery of our products and services.

Thanks, guys.

Yes. Thank you.

Next question from Vivek Arya with Bank of America. Your line is open. Please go ahead.

Thanks for taking my question.

The first one I'm curious when do you see your ex China memory customers getting to some level of supply demand equilibrium is it sometime in Q1 Q2 Q3.

Just what's your sense of how much inventory do they have and how much time will it take for them to clear it out so that your orders can Brazil.

Neil.

The customers are taking action and I think that youre hearing from customers about some pretty aggressive action to try to bring those inventories.

And the supply demand better into balance I don't really want to speak for them, but I think that as I commented.

I think as we exit 2023, we're going to be set up in a pretty good place for memory spending as a percentage of total Wi Fi to actually rise from that point, how it plays out through 2023 Valencia knows our view is we can look that closer.

Maybe just an observation for me I mean these cycles have.

Similar time frames associated with them.

Pretty consistent on a historical basis. So you just go look at history Youll have to answer your question.

Got it and for my follow up.

I'm just trying to reconcile.

The more optimistic comments about growth made by our lithography peer. This morning, who is expecting to grow next year with your comments that WEX equaled declined over 20%. So if the little box.

Of the wallet is going to grill does it mean that the part that applies to you declines unlock more than 20% I'm just trying to.

Inside of such a big difference.

How two important players that thinking about next year.

Yes hard for me to tell you what another company is saying, especially because it was just this morning, and I haven't really been able to Kevin I haven't really been able to look at what they said.

But I think you understand you don't just buy one tool just for the funnel. If you can buy all the process tools to complete the manufacturing line.

It makes no sense right.

And so it's about a litho tool eventually need a step and everything else to complete the wafer so.

I can't help you reconcile what they said because I haven't actually been able to study it but I think you understand what I just commented on.

Thank you Bob.

Thanks, Eric.

Curious.

Fully from some debate as to whether the multinationals, whether you can still ship to their Chinese facilities.

I know there were some licenses maybe for services I'm just kind of curious if you could just quantify it.

I understand the restrictions and what you are taking out.

And whether includes multinationals and if you can still ship two facilities.

It may make leading edge foundry.

Processes, even if the equipment is not being used for.

Okay, a bunch a bunch of questions. There first first of all maybe the simplest is weak.

We've taken out.

Obviously, the shipments that were destined for applications, where customers that are restricted.

Primarily means right now domestic Chinese customers that are manufacturing restricted technology switch.

In NAND DRAM have certain specifications and in foundry logic others.

The.

The multinationals as you noted were given.

And authorization to receive shipments and service and so our business there effectively remains unchanged.

As a result of that and so we are continuing.

Continuing to include that in our outlook for 2023.

To your point about a facility it's.

It's our understanding that a facility that would have mixed use with likely fall under the restricted category and so therefore, if a customer were to want to manufacture and <unk> shipments and receive support for our restricted.

Our unrestricted technology it would have to be in a facility that.

Was clearly.

Not also doing restricted activities.

I think that Thats something <unk> worked through by our customers, we've contemplated all of those as well as what we believe.

What's happened in China into that two to $2 5 billion estimate.

And so that's our view right now of the restrictions.

Customers in our business.

And then just on December I was little confused.

The impact you laid out.

500, plus million per quarter that you can't ship to.

Yes, you are.

Sales are kind of flat. So I'm just kind of curious are you, making it up with other customers.

Yes, I was just kind of curious how fungible is equipment that you thought youre going to be shipping to Chinese memory, whether it needs can be repurposed in the quarter and youre doing that and Thats why youre not seeing the impact or whether you were expecting a shift to some higher level and we just didnt know that and Thats why the sales are flat.

Well I think that as you heard Doug say the December guide would have been.

Decently higher if the.

China restrictions have not been put in place so I think that.

That answers. The question there was a comment about we made about perhaps we've made up a little bit because of easing supply chain conditions, but that would have happened independent so.

In any case December would have been higher at the Chinese restrictions have been put in place.

Okay. Thanks.

Yes, Thanks, Mike.

Okay.

Next question from Joe Mccourt ROTC Wells Fargo. Your line is open.

Yes, thanks for taking the question.

I just wanted to go back on the expectation that deferred revenue declines in the December quarter.

Is there any part of that that's related to the export restrictions where customers that are now restricted had tools that were incomplete that are now I don't know more or less stranded.

No Joe Theres, not we cannot ship anything to those restricted customers.

But tools I guess they were previously shipped that Theyre just incomplete like they were shipped last quarter or two quarters ago.

If that situation existed and I'm, not saying it did or didn't we can't ship anything to them.

Got it okay.

And then just.

Trying to think about.

Bit shipments in the cycle.

Relative to prior cycles, how do you think about your customers' willingness to hold more inventory on their own balance sheets.

Cycle relative to prior cycles does that change the way you think about maybe like the snapback in terms of like bit supply growth.

Yes.

It's a good question, Brian it's definitely one that's better for them relative to their tolerance of holding that inventory.

Everybody's view of.

Inventory, probably changed a little bit as a result of shortages and the ability to respond to.

Over the last two years, we've seen us.

The sharp changes in demand.

But I really can't answer for them are out there.

Willingness to hold more inventory I think we're going back and as Doug said looking at kind of historical.

Behavior in these kinds of downturns, what we're experienced with <unk>.

That's how we kind of project out what we think will likely happen.

Got it okay. Thank you.

Yes.

Later, we have time for one more question please understand.

Understood.

The last one from Quinn Bolton.

Needham <unk> co. Your line is open. Please go ahead.

Thanks for squeezing me in tenders some confusion.

Deprecation of the market it seems like on the license requirements for U S citizens in China and I'm wondering if you could just clarify does it support license requirements affect just the same set of customers as the equipment license or is there a broader impact on U S citizens operating in China.

On U S citizens operating in China not enough.

Yes, I mean, there is a restriction on U S citizens.

As defined by the government.

The <unk>.

Providing support for the development of restricted technologies.

Right, but is that just sort of the same set of customers that.

Require export licenses on the equipment side. So the advanced NAND DRAM in 16 nanometer and below or is there a broader set of customers you cannot support under the export control.

No I believe it I believe it is that same the same set that's spelled out.

Fundamentally customers that are either on a restricted list or producing restricted technologies or those that are affected that's right.

Got it thanks for the clarification and then just quickly you said youre going to manage Opex next year.

I'm kind of wondering if you might be able to try at any sort of qualitative color is that sort of you expect it to look similar to what happened back in 2018 2019 in the downturn or would you would you look to be more aggressive and try to manage opex more in line with the decline you see in WMC in calendar 'twenty three.

We will give you that guidance in the January earnings call.

I think what we're just trying to signal is that we're well aware of.

We believe is coming next year and therefore.

We'll take the appropriate actions.

As we see fit as I mentioned.

To manage the company through the downturn, but also ready for what we believe.

<unk>.

Robust future for the company in the industry.

Great. Thanks, Glenn.

Okay.

Okay, operator that will conclude our call I would like to thank everyone for joining us today.

Good day.

That concludes today Steven Thank you for your participation you may now disconnect.

Q1 2023 Lam Research Corp Earnings Call

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