Q2 2023 Lam Research Corp Earnings Call
Posted record revenues and earnings per share for both the December quarter in the calendar year.
Systems revenue growth in our foundry logic segment exceeded foundry logic wafer fabrication equipment growth.
Constraining, our continued progress launching new tools and winning applications in that space.
Our installed base business <unk> revenues expanded faster than the growth in installed base units.
Also generated more than $3 $5 billion in cash from operations and returned over 100 percentage of free cash flow to stockholders in the form of dividends and share buybacks.
Overall Lam executed well in 2022.
<unk> delivered solid results in an environment of acute supply chain constraints.
<unk> inflationary pressures.
Still there are elements of our performance, where we recognize the opportunity for additional focus and with the pressures of the Covid pandemic and the global chip shortage abating. Our attention. This year is on the actions needed to hit our long term growth and profitability objectives, we laid out in March 2020.
Beginning early in the Covid pandemic.
<unk> and others throughout the supply chain quickly ramped investments in infrastructure and resources to meet unprecedented demand driven by remote work trends and the accelerated digitization of the global economy.
As seen in our results today. These investments have enabled lam to achieve revenues of greater than $5 billion per quarter.
Ultimately, 70% higher than what we saw in the last up cycle.
As we look forward into 2023, however, we see a substantially weaker demand environment and the corresponding need to make prudent changes to our near term operations and priorities.
Customers across all segments are exercising caution, especially those in the memory markets.
Inventory levels in both NAND and DRAM remained very high and customers are not only reducing new capacity additions, but also lowering fab utilization levels to bring excess inventory into balance as quickly as possible.
In addition, the U S government's new restrictions on sales of equipment parts and services for specific technologies and customers in China are further impacting equipment demand in a declining market.
In 2022, <unk> spending ended the year in the mid $90 billion range slightly higher than our prior view due to easing supply chain constraints.
As we indicated in our last earnings call, we expect calendar year 2023, BWXT to be in the mid $70 billion range.
Given the decreased business levels expected this year.
We have made the difficult to decision to reduce our overall workforce by approximately $1 300 employees by the end of the March quarter about 7% of our global employee base.
While the reductions were broad based across the company, we've taken special care to preserve and in some cases increase our investments in the critical R&D efforts, which I believe are key to <unk> long term growth and competitiveness.
Despite reductions in overall company spending we expect R&D as a percentage of operating expenses in 2023 to increase compared to 2022.
We will also be taking specific actions to transform our business processes and enterprise systems to ensure that when stronger WC spending returns. The company is well positioned to scale quickly and efficiently across our global infrastructure.
These actions will contribute.
100 basis points of improvement to our gross margin for March quarter levels, as we exit calendar calendar year 2023, and we expect the operating margin benefit to be slightly higher than that.
Over the past few years, we have been executing on a set of strategies that we believe strengthen our ability to capitalize on the robust secular demand trends, we see ahead in our business.
In just the past two years, we have opened a state of the Art Engineering Center in India.
Brought online and new Technology Development Center in Korea.
And ramped our new manufacturing operation in Malaysia.
These strategic investments placed critical lam capabilities closer to customers and ecosystem partners a benefit for stronger collaborations greater scalability and increased resilience all of which will be a greater importance as we see more than 50, new fabs being built over the next few year.
<unk> globally.
They also provide wider access to talent critical to supporting <unk> growth longer term.
We have also been drawing on learnings from our rapidly growing installed base to support our customers' manufacturing roadmaps.
Our installed base of approximately 84000 chambers is more than 30% larger than in the prior down cycles.
Our solid installed base business not only provides a platform for stable revenue growth long term, but also delivers data and learnings that are key to an efficient product innovations process.
At this scale there is a tremendous opportunity to extract value for our customers and for Lam.
The data we generate from our installed base helps drive fab productivity improvements and the capabilities of our equipment intelligence products are helping us migrate from standard service offerings like engineer on site labor to more comprehensive results based contracts and predictive smart solutions.
The number of chambers.
Sure in 2022.
With another strong growth year expected in 2023.
We have been strategically focused on technology inflections, notably in foundry logic devices with the goal of broadening lamps positioning in a market segment, where we have been under indexed in.
In 2022, we continued to make progress we have doubled our conductor etch share node to node at a leading foundry logic customer through the success of our co product, which uses equipment intelligence to deliver best in class uniformity and improved yield.
And the selective edge business, our recently released Argos pre booths and seller tools are gaining increasing traction.
Our Argos product is in roughly 20 applications at a leading foundry logic customer.
In the adjacent selective applications at another customer or <unk> tools, a production tool of record for gate all around applications.
Continued scaling in foundry logic devices from existing nodes is expected to increase etch and deposition intensity around 25% to 30% thus.
Thus, creating tremendous opportunity for us to gain share through new innovations for future devices.
Lastly, we have continued to make both organic and inorganic investments to expand our market.
<unk> innovative dry resist fabrication technology has won development tool of record positions at multiple customers for key steps in the patterning process.
And we are actively engaged with customers across both the memory and foundry logic segments.
We expect to announce more on this in 2023.
And advanced packaging, our recent acquisition of some Cisco.
We have expanded our capabilities within the leading edge logic and shifted segments.
We're rapidly integrating some Cisco technology with <unk> market, leading capabilities in fleeting in wet processing and we have already achieved key wins in this area.
Customers view advanced packaging solutions in both wafer and substrate formats as critical to enabling future high performance computing and AI applications.
Lamb is well positioned to benefit from this trend.
So to wrap up 2022 presented many challenges.
And with our team's focus and strong execution, we were able to meet our customers' needs deliver record revenues and expand our product and technology portfolio.
This coming year represents a reset in the market and in our business, but it is also an opportunity for us to make the changes needed to accelerate our strategic priorities I.
I am confident that by taking the difficult actions that we've announced today, we're putting land in a stronger position to capitalize when industry spending growth returns.
With that I'll pass it on to Doug.
Great. Thank.
Thank you Tim.
Good afternoon, everyone and thank you for joining our call today during what I know is a busy earnings season.
We had a record financial year in calendar 2022.
Revenue came in at $19 billion, and we delivered an all time high for earnings per share of $37 31.
Which was a 15% growth in earnings per share over calendar year 'twenty one.
Overall im pleased with the operational performance, we achieved this past year.
<unk> delivered while navigating a challenging business environment with global supply chain constraints.
Significant inflationary headwinds and fluid regulatory restrictions.
I am also achieved record level of performance in the December 22 quarter across multiple metrics, including revenue operating.
Operating income dollars and earnings per share.
Revenue for the December quarter was $5 billion to $8 billion, an increase of just over 4% from the prior quarter.
We delivered higher levels of system sales in deposition and etch.
Offset somewhat by a decrease in <unk> revenue.
Deferred revenue at the end of the quarter was $2 billion a decline of $770 million.
From the September quarter.
Supply chain constraints are improved and we were able to fill shipments of many critical parks that's required for revenue recognition.
Our expectations are that the deferred revenue balance will continue to decrease in the March quarter, as we fully complete shipments related to outstanding back ordered systems.
The deferred revenue balance decrease I just spoke about was partially offset by some increases in deferred due to customer cash and advanced deposits, which I also noted last quarter.
As we sit here today I expect to have some level of these type of deposits and the deferred balance throughout calendar 2023, keeping deferred revenue at somewhat higher levels than we've historically seen.
I anticipate that the deferred revenue from back orders will be at a normalized level as we exit the March quarter.
Let's turn to the revenue segment details for the December quarter.
Memory represented 50% of systems revenue, which was slightly down from our prior quarter level of 52%.
Included in memory, the NAND segment represented 39% of our systems revenue.
Flat with the September quarter.
The spending was primarily focused on 192 layer and above class devices.
The DRAM segment concentration decreased decreased sequentially from the prior quarter coming in at 11% of systems revenue.
Compared to 13% in the September quarter.
The DRAM investments were mainly targeted towards one Z and one alpha notes.
I expect that we will see both NAND and DRAM revenue decline meaningfully in the March quarter.
For calendar 2023.
Expect NAND spending to decline more than DRAM.
We continue to see strength in the foundry segment, what the December quarter concentration comprising 31% of our systems revenues.
While this percentage is a little bit lower than September quarter level of 34%.
A dollar amount was flat.
With a mix of investments in both leading and mature node devices.
The logic and other segment revenue came in at a high watermark for the company contributed 19% of systems revenue in December quarter, compared with 14% in the prior quarter.
Investments were focused on microprocessor.
Image sensor and advanced packaging technologies.
Lamb had strong momentum in logic and other throughout calendar 2022.
I expect we'll continue to report.
Excuse me to perform well in this segment.
I'd mentioned that this was a record revenue level for us and microprocessor related revenue.
We've been talking about momentum here for a while and it's clearly showing up.
With respect to the regional composition of our total revenue the China region was 24% of the total down from the prior quarter level of 30%.
This reduction was due to the U S government sales restrictions for certain domestic customers, which were put in place in early October of 2022.
Rounding out the top regional revenue locations Korea comprised 20% both total revenue.
Up from 17% in the prior quarter, and Taiwan decreased to a concentration of 19% compared to 22% in the September quarter.
The customer support business group results in the quarter were approximately $1 7 billion.
Which was down 9% from the September quarter. So it was 16% higher than the December quarter of calendar 2021.
As we've noted in the past <unk> revenues will fluctuate on a quarterly basis.
In the December quarter, we experienced declines in the <unk> product lines with reductions in utilization and system spending.
Going into calendar 2023, we have the impact of China regulatory restrictions.
In addition to memory spending at well below historic levels.
And elevated customer device inventory.
These factors are resulting in customers, having underutilized factories and taking actions to manage their supply levels in 2023 <unk>.
Negatively impacting our spares and services business.
While we continue to believe the mature node segment will perform better than overall <unk> spending.
We are in an unprecedented business environment and expect the <unk> business could be down somewhat in calendar year 2023.
Let me now pivot to our gross margin performance. The September quarter came in at 45, 1% over the midpoint of the guided range, but down from September quarters gross margin of 62 up 46%.
The decrease from the September quarter was tied to customer and product mix.
With the decline in business volumes in March 2023 quarter, we expect lower factory and field Utilizations to unfavorably impact our gross margin on a sequential basis.
Operating expenses were $686 million in the December quarter up 6% from the prior quarter amount of $647 million.
The higher spending was mainly in R&D projects, which comprised nearly 67% of our total spending.
Supporting our customers roadmap continues to be a top priority for us while we focus on managing other areas of discretionary spending within the company.
December quarter operating margin was 32, 1% over the midpoint of guidance due to the higher level of revenue and gross margin.
Our non-GAAP tax rate was 11, 9% inline with expectations.
Looking into calendar 2023, we believe the tax rate will be in the low to mid teens with some fluctuations quarter by quarter.
This rate estimate does not include any impacts from potential U S or global tax policy changes.
Other income and expense came in for the quarter at $38 million of expense approximately $9 million higher from the prior quarter.
Mainly due to negative foreign exchange fluctuations.
Which was somewhat offset by higher interest income because of increasing returns on our cash and investments.
<unk> will continue to be subject to market related fluctuations that will cause some level of volatility quarter by quarter.
On the capital return side in the December quarter, we allocated approximately 480.
$483 million to open market share repurchases.
Additionally, we paid $236 million in dividends in the quarter.
For the 2022 calendar year, we returned 119% of our free cash flow.
Totaling $3 5 billion.
Which was somewhat higher than our long term capital return plans of 75% to 100%.
December quarter diluted earnings per share was $10 71.
It was at the high end of our guidance range.
Diluted share count was 136 million shares which was lower than the September quarter and in line with our December quarter expectations.
During 2022, we lowered share count by nearly 6 million shares through our share buyback program.
Now moving to the balance sheet, our cash and short term investments, including restricted cash were up to $4 8 billion versus the prior quarter level of $4 6 billion.
Operating cash flow of $1 $1 billion in the December quarter was offset by cash allocated to share repurchases dividend payments and capital expenditures.
Inventory turns were two four times.
Days sales outstanding was 70 days a decrease from 82 days in the September quarter due to strong collections and improved linearity within the quarter.
I would point out that we expect 2023 to be a strong cash generating year as working capital comes down with lower business levels.
Our noncash expenses for the December quarter included approximately $73 million for equity compensation $73 million in depreciation and $12 million in amortization.
Capital expenditures for the December quarter were $163 million, a slight increase over the September quarter spending of approximately $140 million.
The expenditures were in R&D and manufacturing, including our Korea Technology Center.
In our Malaysia factory.
We ended the quarter with approximately 19200 regular full time employees.
Which was an increase of approximately 500 people from the prior quarter.
Our growth was in the factory and field to support the manufacturing as well as installation of tools at our customers' fabs.
Also included in this head count growth or 150 employees from the San Francisco acquisition that was completed in the December quarter.
As you heard from tenants on our earnings release, we will be reducing our regular full time head count by approximately 1300 employees.
We expect these reductions to be largely reflected in our June quarter, ending head count.
And in addition to the full time reductions, we expect to be lowering our temporary workforce by approximately 700 people in the March quarter.
We've already adjusted our temporary workforce down by 700 people in the December quarter.
Let me now turn to our non-GAAP guidance for the March 2023 quarter.
We're expecting revenue of $3 8 billion, plus or minus $300 million.
I'll also just mentioned that we currently think revenue will be somewhat first half weighted this year as we can consume the reduction in deferred revenue in the March quarter.
Gross margin of 44% plus or minus one percentage point.
The decrease in this is the result of lower business volumes.
Operating margin of 27, 5% plus or minus one percentage point and finally earnings per share of $6 50, plus or minus <unk> 75 based on a share count of approximately 135 million shares.
We will be taking a charge of approximately $80 million in the March quarter from the head count reduction.
Including this impact.
The other near term actions that Tim spoke about.
We are anticipating a total of $150 million to.
To $250 million in charges to be incurred over the last the next 12 months.
In addition to head count.
We anticipate potential charges.
From facilities restructuring.
Business realignment and transformation and product rationalization.
On top of the cost savings activities, we are driving a greater focus from our senior leadership team through inclusion of additional profitability metrics and our annual incentive compensation structure.
Currently we're at low volumes given the business environment.
These initiatives will structurally improve our profitability.
As Tim already laid out we expect gross margin to be higher by roughly one percentage point and to expand operating margins by a little more than that as we exit the calendar year and complete these activities.
Over many years in cycles Lam has established a proven track record of successfully managing this business.
With the actions we plan to execute throughout the year, we expect to strengthen our operations and technology leadership and further enhance our profitability profile with the company returning to growth.
When business improves.
And we know it will.
<unk> will be a stronger better positioned more efficient company.
Operator that concludes our prepared remarks, we would now like to open up the call for questions.
Thank you.
I would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow the signal to reach our equipment again press star one to ask a question and we will take our first question from Harlan sur with Jpmorgan. Please go ahead.
Good afternoon. Thanks for taking my question, given the 20% pullback in WMC spend this year significant memory spending pullback within that.
Does the team still believes that the memory mix and spending expansion in memory will accelerate exiting this year. What's your view and then what's your view on the supply demand environment in February and normalization of excess inventories in the industry.
Yes, Harlan I'll start on that one.
I think that the.
Memory market in our market in general is difficult to predict.
Timing perspective, so when you try to put it ending the year kind of time on its hard but.
Doug laid out Theres a couple a couple of points one we've seen extraordinary measures within the memory market in terms of reductions not only in spending but also cuts in fab utilization.
And in some cases, even delays of technology investments.
They're somewhat unprecedented in terms of trying to bring this market into balance we also see.
Our memory as a percent of the total Wi Fi mix Thats levels.
The levels that we haven't seen in 25 years and so.
I guess, what we walk away with us.
A lot of confidence that memory spending will accelerate.
We're not at this point ready to put an exact time frame on that.
A lot of the actions that we talked about that we're taking the company to ensure that in the next up cycle will.
Actually be far more nimble to respond to changes in demand.
When we were impacted by the ramp of the.
It came on the Covid pandemic, so that's really where we're spending a lot of our time thinking about less on timing, but more about how is the company going to be prepared to respond to that ramp in memory spending when inevitably comes and how do we ensure we can do that in the most efficient and profitable way possible.
Perfect.
Then.
On the impact from China regulatory and export controls.
Mtc was formally put on the entities list in mid December .
Move change your prior view.
For that $1 billion impact to revenues this calendar year due to the China restrictions.
No when we when we put out the <unk> two 5 billion fundamentally have comprehended and inability to ship to the customers that at that point, where.
Operating at the technologies the restricted by China. So it didn't change it I would say today. Our view is still in that two to two <unk> billion dollars range. Okay. In fact, no change at all Harlan.
Perfect. Thank you.
Thanks Harlan.
We will take our next question from Joe Moore with Morgan Stanley . Please go ahead.
Great. Thank you.
I guess I want.
Want to ask about the deferred.
If you draw it down to sort of normal levels in March.
It implies shipments that are kind of well below the revenue level.
Sure.
I guess with SPG running at close to a $1 7 billion. It doesn't seem like the June quarter could follow that much but can you just kind of I.
Yes, a little bit more clarity on what it means that you are drawing down that much deferred in March.
It just means there is no more or less at the end of the March quarter, Joe I don't really have any more than that to tell you in shipments or are lower than that revenue number as we get the deferred kind of back to what I would describe it as.
A normalized level.
From a back order standpoint.
Okay, and I think you've described normal in the past as being around $700 million and you said it would be a little higher than that is that the right math.
Yes, that's right Joe what I see happening right now is we've got a column customer cash and advanced deposits, which we haven't got ship the tools and I think as we as we go through 'twenty three it's going to stay at a slightly higher level from that category than it's been in the past. So I think it's a little bit higher somewhat higher than that number that you just mentioned.
Great. Thank you very much.
Thanks, Joe.
We will take our next question from Timothy Arcuri with UBS Securities. Please go ahead.
Hi, Thanks, Doug I had two questions first of all is sort of.
Jos question that you just asked and it sort of is the profile.
Not in your revenue, but more in your system shipments through the rest of the year.
You said slightly first half loaded from a revenue perspective, but I would assume that your system shipments are going to be like March is probably the bottom and it's sort of like flattens off from there is that fair.
Yes, that's fair, Tim I think maybe I'll ask a slightly different question when I think about <unk> in the mid Seventy's that Tim described but I think it's fairly balanced through the year.
Revenue somewhat first half weighted because we're drawing down that deferred revenue balance.
Just wanted to point that out which is why scripted it that way.
Perfect. Thanks, and then.
Just on that point you guys are usually 13, 14% of Wi Fi and your system shipments in March would imply that <unk> is sort of 16 to 17 in March so that's more like mid <unk> versus the mid Seventy's number for the year. So is the answer that.
Litho is making up the difference because obviously all of us heard SNL today and systems are up 20% plus this year. So is the story this year really that youre going to get to mid seventies predominantly because youre, adding.
An extra X X X billion dollars of litho year over year is that the is that the math. Thanks.
Yes, Tim I think thats part of it when I look at GW of feed down more than 20%. This year memory is down a good deal more than that foundry logic, a lot less litho is heavier percent of foundry logic spend.
And I wanted to specifically point out the biggest.
Decreased from a segment standpoint is in NAND, which as you guys. All know on this call is our strongest our strongest segment in etch and deposition that ramps. So that's kind of important to understand I think and why.
Specifically pointed to that as I went through the commentary.
Thank you Doug.
Thanks, Tim.
We will take our next question from C. J Muse with Evercore ISI. Please go ahead.
Yes, good afternoon, and thank you for taking the question I guess first question I was hoping you provide perhaps a little more granularity on the restructuring you talked 100 bps gross margin and a little bit more than that is there any way to kind of give a sense of how we should see that play out throughout calendar 'twenty, three and what kind of leverage should we see specifically.
On the Opex side.
Yes, theres some in Opex, Tim obviously, we are taking.
Reductions in every spending category.
So youll see it everywhere that's why.
And I said operating margin would be more than the improvement in gross margin.
Is there any way to quantify what that might look like.
That's all we're going to give you right now C J.
I mean, the other thing you can back into obviously is the implied spending guide in the March quarter to comprehend some of this head count activity that we're describing so thats youre seeing some of it in March quarter, I think if you go to decompose the guidance.
Okay great.
And I guess follow up question as you think about the moving parts for CSP G. Obviously, you've got a year over year, China headwind you talked about reliant.
I guess, how do you see the rest of that core business is that core business grow and as Youre aware it may perhaps rank order.
What's doing well and then what's the awards.
Yes T J, let me, let me take that.
To remind people four segments since the SPG spare service upgrades and reliance <unk>.
So I think kind of in terms of your impact.
If you think China impacted both spares and service it it made it impossible for us to provide spares and service to customers that previously had a pretty sizable chunk of of tools in the installed base. So impact on both of those product lines from China. Those same two product lines impacted by.
Memory customers Hudson utilization, so you have seen and heard from our customers talking about the number of tools. They have taken offline in their in their DRAM and NAND fabs.
Obviously, if you're not running the tools you don't need spares and Youll need service. So again those same two product lines impacted.
By those by those changes the reliant business, obviously, just in the trailing edge foundry logic I would say.
We're pretty comfortable with that business that we see continued strength sooner.
Not enough, obviously to offset the other the other two impacts to limit some of them soon.
We're in a little bit of.
Extraordinary times and that we would have previously bought that that business Shouldnt go down but the.
The combination of both China, plus utilization hit those two product lines.
Harder now we know that as customers begin to spend again first thing is to bring the tools that they already have in the installed base back online and so we would expect that the spares and service business that was impacted by utilization cuts to recover quickly and we can immediately service that as soon as the business starts to improve.
Very helpful. Thank you.
Thanks C J.
We will take our next question from Chris <unk> with Cowen <unk> Company. Please go ahead.
Yes, hi, Thanks for taking my question I feel of them first one either Tim or Doug and thanks for the color on calendar 'twenty GWA.
And I understand it's too early to talk about 'twenty four but if you look at some of your memory customers publicly spoken about taking the utilization rates down.
Could there be a scenario next year, they could improve their utilization rates improve a bit output without necessarily adding Wi Fi or do you think.
On a quarterly basis WP bottomed sometime this year and next year hopefully the better you had a follow up.
Yes, Okay, I'll start and Doug add.
I think that obviously there have been utilization cuts I mean, I think right now if you look at at least by our estimate and listening to what our customers say.
We're at very low levels of supply growth. This.
This year as a result of the lack of additions and utilization cuts. So I don't think you could quite get to the scenario you are talking about where you just bring utilization unutilized tools back online.
There is a second back to though which is remember I mean customers make investments also to move their technology forward.
That's a pretty substantial portion yw. If he gets spent not often just about capacity addition, so I.
<unk>.
Customers can easily sold.
So long before you you have to invest in the technology to move to that next node and gain the efficiencies that you do there so.
I think that of course will work with our customers too.
Bring towards back online and get utilization work on productivity, but I think there'll be I think spending will return at some point.
Got it got it thanks for that Tim and then a quick follow up for Doug.
Thanks for the color on the back half revenue first half.
How to think about gross margins given the fact that the topline with visa rating.
Also ramping up Malaysia, China seems to be a mixed bag I'm just kind of wondering how to think about gross margins or how to think about ways you could potentially draw. Thank you.
Yes, Chris I hope, we're kind of bouncing along the bottom right now I can't guarantee that but specifically what we tried to describe both Tim and is that with these actions we're taking.
We believe there's upward momentum to gross margin as we exit the year, we're trying to get kind of.
Capacity right.
Staffing of the capacity right. So that as we exit the year. We think there is a point of gross margin upside.
Plus or minus where we're at.
Got it got it thanks good luck. Thank you.
Yes, Thanks, Chris.
We will take our next question from Stacy <unk> with Bernstein Research. Please go ahead.
Hi, guys. Thanks for taking my questions. My first one I just wanted to touch on the deferred again I just want to make sure I have it right. So you are running 2 billion now it sounds like you think normalized deferred might might be 1 billion. So you got $1 billion with potentially coming out in March is that the right way to sort of think about the underlying demand like wherever wherever.
It is just like a $1 billion short of where we are shorter.
Sort of where the where the guidance.
And then go where stores that kind of perfect.
Stacy I think deferred is going to be higher than that $1 billion because of these cash advance payments I was referencing.
It's not.
We're going to build out while I don't think I think it's going to stay I think ive previously led everybody to believe deferred revenue would be in that high multiple hundred.
$1 million range I think its decently above a 1 billion now because of this this other category this stuff I see.
I mean, it's like 1 billion and a half or can you give us a little more color on that.
It's like 1 billion and a half.
Okay. That's helpful. Thanks.
My follow up.
I just wanted to ask a little more philosophical.
A quick question on the workforce reductions.
And maybe as it relates to <unk> I mean, like we probably get out I don't know 40 billion in memory EWC in 2002, and it's going to be down a lot in 'twenty three but even if it grows in 'twenty for how long does it take to get back to that sort of 'twenty two level like if ever.
And to the cost cuts that youre doing.
Are they in some sense a function of how you might view like that long term sort of steady state <unk> for memory versus where were coming off in 'twenty two.
Yes, Stacy maybe it combines a little bit of maybe the last question as well, which is we're making these cuts in taking this action to make the company.
Efficient and profitable at this level of business and so therefore, we're we're not really looking and saying we need a big increase in rapid increase in business to justify what we keep afterwards.
But I did mentioned the focus that we have on ensuring that as we make cuts and as we reposition, especially the global operations infrastructure.
About how quickly we can ramp up because we know when memory comes back.
It often comes back much faster than people expect.
So I can't tell you when it gets back to these numbers.
What I want to make sure is that when it does.
Return to stronger spending in memory side, we're able to ramp that up and do it efficiently. So we don't have a lot of the profitability headwinds that we've been talking about for the last really.
12 to 18 months. So that's the way I think about to get the company to the right size now for this level of business.
But with the idea that we have the infrastructure and the business systems available to us.
And the supply chain infrastructure to ramp more quickly more efficiently.
Should the market over overshoot, where our estimates.
But why don't you need to cut more than because they constantly take you back to our head count was like six months ago right.
So I'm comfortable that the profitability levels of the business at these revenue levels.
We didn't have been structured in the right way so the P&L looks.
<unk> I think Sanjay.
Not all of those heads were added in the volume side of the business as well and so I talked about.
And I think Youll see when you look at the.
The P&L, where we are.
Lying to preserve what is strategic spending on the R&D side in products.
That we think are important for the future growth of the company and competitiveness of our our business. We're still committed as I said at the beginning to a model of gaining market share in both the memory and the foundry logic side of the business and some of the spending is there as well. So these are the these are the cuts we think that are appropriate for.
How do we think business seem to be run through the cycle.
Got it that's helpful. Thank you guys.
Okay. Thanks doses.
We'll go next to Toshi Hari with Goldman Sachs. Please go ahead.
Great. Thank you so much I had one clarification and then a follow up question on the clarification last quarter. I think you guys size the potential impact from China export restrictions to your business in calendar 'twenty three at two to two 5 billion I believe three quarters on the system side a quarter in <unk>.
Services are those numbers still your expectation for calendar 'twenty three any change there.
Yes, no change.
Got it.
And then my question probably for Doug in terms of gross margin.
Last year, you talked about freight and component costs being being a headwind and you also talked about pricing as a potential lever to offset some of the headwinds how should we think about those dynamics as we progressed through 2003 and any progress. Thank you.
I guess, what I would describe as in some of the inflationary buckets have been talking about for however, long it and talking about it some of it's getting somewhat better.
Some of it I think will get better, but we're not seeing it yet.
And what we've been talking about.
And then relative to pricing activity.
We continue to work on that Theres, some things thats already showing up in the P&L in the March quarter, but we continue to have ongoing conversations with customers about the right level of pricing.
And that will that will continue as we go forward.
And when you talk about the 100 basis point improvement exiting the full year or is that an all in number embedding all of those factors.
Yeah to the best of our supplement as we sit here right now yes, that's all in of the pluses and minuses from business going down and the adjustments, we're making in terms of the footprint of the company.
Got it thank you so much.
Yes, Thanks Peter.
We will take our next question from Vivek Arya with Bank of America Securities. Please go ahead.
Thanks for taking my question I'm trying to gauge what is kind of your trough quarter of this year conceptually I understand that you don't get it.
Exact.
Forecast, but if I go through this deferred revenue, Matt So, let's say another $500 million comes out so that that Youre March shipped revenue conceptually is about $3 3 billion does that reflect all the China memory Capex cuts. So that is sort of your trough.
Quarter or do you think there is more to come so the trough revenue quarter. It might be later this year closer to pay or some other number I'm just trying to conceptually gauge what is the trough.
Quarter four this year. So we can get a sense of what trough earnings power could be.
I guess sorry.
Sorry tissue.
The best I can do is.
Just say what I've already said revenue is somewhat first half weighted.
Largely because we're pulling the deferred down in March and March it's pulled down to where it's going to be.
And so.
<unk> got to kind of think about that.
That plus the fact that I told you. We think <unk> is fairly balanced first half second half and I think if you think that through you'll get it pretty pretty close to where it should be.
Okay.
Got it.
And then.
Second question that I have is.
China sales were 24% I believe of total in December .
Could you give us a sense for how much of that was China domestic and then what do you expect.
China to be as a percentage of your sales in March and if you have a number for roughly for calendar 'twenty three.
Yeah in December .
<unk>.
I don't remember the number.
More than half of it certainly was domestic China I forget the exact number.
To be honest with you, but more of it was domestic China.
As we go through.
China is going to be impact to the tune of two two to $2 $5 billion from the customers we can't ship to.
I think when I think about China there'll be a few that means China WTO is going to be down somewhat.
'twenty three.
Okay. So this domestic $1 5 billion is that kind of run rate.
Reflected in your March outlook, that's what I wanted to just get a sense for it.
Yes, the things that are of the year.
Yes, the things that we've kind of lost in that two to two 5 billion. There is nothing in the March quarter.
So thats part of the two to $2 5 billion there isn't any any more reduction from March as we go forward.
I'm not sure I'm, making it clear to understand it but.
There is always timing of different customer spending money its not that China is going to be.
Up in China will be up and down as we go through the quarter I expect.
But the impact from the regulations is already fully in effect in the March quarter is what I'm trying to describe.
Got it so basically bad debt to kind of nail it down if I take the March exit for $2 3 billion guide and kind of assume quarterly run rate at that level, that's sort of how the shape of <unk>.
Calendar <unk> revenue should be okay.
Listen, we only guide revenue one quarter at a time.
Our guide June when we get to the next quarter earnings numbers.
Okay. Thank you.
Yep. Thank you.
We will take our next question from <unk> Malik with Citi. Please go ahead.
Hi, Thank you for taking my question.
Is the equipment demand now below the supply that you can receive from your suppliers.
Is it below sorry carriers the question about supply chain constraints right.
Alright.
We move now and the demand has fallen below the supply line.
Yes, well as we said we saw a significant improvement in the supply chain constraints in the December quarter, which is partly why we were able to deliver in the higher than anticipated revenue.
So I would say that supply chain constraints are easing.
Theres always.
And remain in some parts of the supply chain that are still not fully recovered and but I would say that if you went back and compared to where we are today versus 12 months ago on dramatically improved in.
But I think that will continue to work on that through the over the remainder of this year on those those remaining issues.
Got it and then Tim in your prepared remarks, you talked about conductor etch market share doubling node to node.
John .
Logic makers.
And gate all around.
<unk>.
I think already infection that should help you guys.
Can you talk about the timing of the production ramp or gate all around is it second half of next year.
Or is it more like a 225 event.
I think that I mean, you see you see customers starting to talk about and announce kind of limited production.
Obviously, there is a qualification cycle, probably better for them to talk about their own timing, but it's not it's not a material issue for our 2023 numbers, let's just say so.
Beyond 2000, 22024 and beyond event.
But those are the types of things that again, if we think about.
Where we want to take this business.
Part of this is about increase.
Increasing our exposure into that market.
There is tremendous need and I talked about the increasing intensity for etch and deposition in that space and foundry logic.
And most of those big technology inflections, where our tools are most suitable things like select events things like high aspect ratio of critical etch.
The use of those tools are just increasing in these new <unk> architectures.
The increased use of advanced packaging in foundry logic and.
AI applications those are again areas, where lam can bring our interest in tech.
Apologies to bear so.
Timing again hard to predict but we are making.
Great progress.
Development tool of record in early production tool of record stages.
I think that as we see those markets.
<unk> that's good for them.
Thank you.
Thanks Sarah.
We will go next.
Next to Sidney Ho with Deutsche Bank. Please go ahead.
Hi, Good afternoon. Thanks for taking my question, Jim a lot of.
Sidney.
Just on the SPT I apologies, if I might've missed this but can you guide us on.
How you see each of the buckets that play into the SPG. How these will contribute to the segment's overall performance in 2023 and have a quick follow up.
Sure.
I kind of hit on that a little earlier, but it was.
Basically the four segments spare service upgrades and reliant and again.
In a normal year, we would actually always see.
Spares in particular, expanding with the growing installed base I talked about the fact that our installed bases.
Substantially larger than it was during the last down cycle.
Just grow the installed base spares grow along with that.
The impact this year to that business, though is somewhat unique in that.
The China restriction did pull.
Spares business immediately out of our revenue plan given that we cannot sell spares to certain customers and technologies in China. So that's a unique.
<unk> to the business and then the second thing that impacts spares is when customers cut utilization those tools are Ireland, obviously don't need spares. So I would say the spares business is impacted by those two.
Impacts.
Service.
Similarly, we can't service the tools in China that are restricted customers and technologies and also utilization.
Customers tend to look to save money by doing the service themselves.
These times or when tools are offline, we don't need service.
Those two product lines are going to be most impacted I would say any changes reliant again growing because foundry trailing it still grows and upgrades.
While I said some people might be delaying again just to from a capex sensitivity perspective, some upgrades I would say vendors theres less impacted in that part of the business.
Okay.
Got it that's pretty helpful. And then one more of a long term question for me I guess one of your major customers.
Very elevated infrastructure costs.
Roughly four to five times when they build out fab capacity outside of Asia, I guess, what are the implications to equipment spend as customers try to obviously diversify capacity across regions.
Okay.
It's a good it's a good question I mean, obviously.
<unk>.
All customers a cost sensitive regardless of where they're building fabs.
We certainly know.
As people move into cost of their regions.
I think the story is the same we we compete and we win business based on building tools that deliver excellent technology with high productivity and I think that if I thought about what probably that means from a equipment trend perspective, I talked a lot about equipment intelligence.
You think about it if you are moving into a region, where already some of the the base costs are higher you're going to want tools that require less human interaction less servicing.
Tools that can do predictive.
Work in order to try to keep them up and utilized more.
At a higher rate and so I think that youll see those types of customers pull for some of our smart solutions, where you can kind of pull some of that labor content out you can keep tools up and running more often and therefore extract more from the capital of investing.
Okay. Thanks for the color that's very helpful. Thanks.
Thanks Darren.
No that wasn't soon.
We will take our next question from Blayne Curtis with Barclays. Please go ahead.
Hey, Thanks for squeezing me in.
Question, one I just wanted to obviously a lot has transpired the last 12 months and clearly a huge correction in memory.
You are saying foundry logic down something less than the group.
Overall as I am just kind of curious how you're thinking about that I mean, obviously <unk>.
Murray had to work through low Utilizations and now they are pulling back on.
The capacity adds and same end market. So can you just how are you thinking about foundry.
Kind of progressing over this year or next.
Yes, I guess right now obviously, we still see as we said memory or foundry logic being down.
Substantially less than the memory this year.
We've also made the comment that as a percent of total Wi Fi memory is that and levels of that.
That you just that we haven't seen in 25 years and so therefore, I guess, we look at it and it's either.
We see strong foundry logic spending, but we actually think that with that foundry logic spending in the devices and applications that are created that'll.
That will be another one of the drivers that pulls through memory usage and causes and.
And perhaps accelerates.
Murray recovery.
And so I think that the two are intricately tied in terms of.
If the end applications, but sometimes the timing of the capacity additions and such are out of sync and I think that's what we see right now.
Yes, sure, Brian I guess, what I would describe it.
Go ahead ask your next question.
I want to hear what you're going to say Doug.
I was just going to say at the end of the day you need all of this in the system architecture. When you look at our Hyperscale architectures, you don't just have logic devices and accelerators without memory right. It's all got it.
Kind of all go on the same motherboard, if you will what we've got going on at least my perspective right now.
Were sitting on excess inventory in the memory area to a significant extent and it's just got to get consumed were at a different point in the classic cycle was what I was going to describe.
Okay.
I guess the question I want to follow on in my own question and that is also one for yourself I mean, you look across the industry and <unk> inventories are going up.
I think <unk> seen this in memory, but also with navigate our company is in your inventories as well right. So it suggest capacity exceeds demand right. So I guess.
One I guess, that's why question why foundry logic can kind of continue and I think my memory might be leading the show there, but I guess as it relates to your inventories are at a very high level I'm just kind of curious.
As another play on gross margin, where do you think your inventories need to go and if you have to dial back. Your production is there any kind of headwinds to gross margin to think about.
Yes, Blaine our inventory is going to go lower.
I guess is what I would describe.
Business is coming down.
We will need less inventory to supply a lower level of business.
Will come down.
That I can tell you for sure.
That have any impact to gross margin.
Yeah, a little bit.
But when I describe an expectation coming I described an expectation that as we exit the year gross margin as a point higher.
Higher that contemplates the fact that fact.
Factory absorption and utilization and so forth is going to be lower and we will be bringing inventory down.
Awesome I appreciate it thank you.
Thanks, Paul Operator, we have time for one more question. Please.
Thank you and we will take our last question from Joe <unk> with Wells Fargo. Please go ahead.
Yes, thanks for taking the question.
Last quarter, you had talked about the reliance or kind of wanted to ask.
With the decline in Wip, and just kind of weakness in consumer electronics that that business can also be negatively impacted and it sounds like maybe this quarter you are a little bit more constructive on that business is that I guess, the right way to think about it and then.
Maybe what's driving that.
Yes, Joe.
I didn't mean to describe it any differently I think last quarter and this quarter. We said we expect.
That segment of foundry and logic to be somewhat better than overall there'll be I think we said that last time I'm pretty sure we did and we're seeing that again.
Hi.
Okay, Yes, I think your incident may have come out cross.
Joe just a little bit maybe a little more constructive than the other product lines that we didn't see STG is I think why and I think there was a question about kind of ranking them.
Stacking those.
It's the least impacted by the changes like tenure restriction the utilization numbers that was maybe when it came across that way no no intention to send a different message from last quarter.
Got it that's helpful. And then just in terms of the total <unk> business.
When we think about the impact from the China export restrictions, obviously, the utilization coming down across the board is has a negative impact but would that business be I guess closer to flat.
It's just kind of like for like without the China export restrictions.
It certainly would be doing better than we are.
Described it is likely down somewhat and historically I've always said this is a business that should grow every single year.
Which I wouldn't have said that because I couldnt.
Envision the environment, we're in with utilization in China, and so forth. So we're just giving you kind of the lay of the land right downturn.
Okay. Thank you very much.
Alright. Thank you. Thank you operator, I think that concludes the call for us.
We're wrapped up here.
Thank you all for joining.
Thank you. This concludes today's call. Thank you for your participation you may now disconnect.
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