Q4 2023 Lam Research Corp Earnings Call
Good day, everyone and welcome to the Lam Research Corporation June 20th twenty-three quarterly financial conference call.
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At this time I'd like to turn the floor over to China Korea Ma'am. Please go ahead.
Thank you and good afternoon, everyone welcome to the Lam Research quarterly earnings Conference call with me today are Tim Archer, President and Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer.
During today's call wheelchair our overview on the business environment and will review our financial results for the June 2023 quarter and our outlook for the September 2023 quarter. The press release detailing our financial results was distributed a little after one o'clock P. M Pacific time. This afternoon the release can.
Also be found on the Investor Relations section of the Companys website, along with the presentation slides that accompany today's call today's presentation and Q&A includes forward looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying.
Being slides in the presentation for additional information today's discussion of our financial results will be presented on a non-GAAP financial basis, unless otherwise specified a detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call.
It 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 welcome to everyone joining the call today.
Lamb posted strong results for the June quarter, with gross margin operating margin and earnings per share well above the guided ranges.
<unk>, a 47% of revenues in the quarter continues to standout as a key area of strength and stability for Lam in an otherwise weak wafer fabrication equipment spending environment.
Operationally, we achieved significant improvement in on time delivery and critical back order performance in the quarter and now see these metrics back at normalized pre pandemic levels are.
Our focus on the resiliency of our global manufacturing and supply chain network is delivering greater predictability in the short term, but more importantly positions us to scale more efficiently when Wi Fi growth inevitably resumes.
Looking near term, we see WP spending in 2023 tracking to the mid $70 billion range with the upside coming from domestic China related spending as well as strong growth in high bandwidth memory or HBM related demand.
By device segments, we expect overall memory wip to be down in the mid 40% range compared to last year and non memory segments to be down approximately 10%.
We continue to see second half 2023, Wi Fi tracking higher than first half.
While 2023 is a down year for WC, the long term growth dynamics for the semiconductor industry are strong.
Merchant growth drivers such as generative AI are only in their initial stages of adoption and will be fundamental to driving increased investment in both memory and foundry logic fabs over the next several years.
Advanced AI servers have significantly higher leading edge logic memory and storage content versus traditional servers and every incremental 1% penetration of AI servers and data centers is expected to drive one to $1 $5 billion.
Of additional wip investment.
This creates tremendous opportunity for Lam is greater etch and deposition intensity as needed to enable higher performance and more scalable device architectures.
To ensure we are best positioned to win long term.
We have been making significant investments to broaden our product portfolio for processing at the atomic scale.
Lamb is the established leader in <unk>, NAND, and we are well positioned to benefit from the move underway to three D and other device segments.
Gate, all around three D DRAM and advanced packaging are an important <unk> inflections that are expected to drive strong Sam and share growth for Lam.
Advanced packaging is becoming vital to the performance power and cost Roadmaps of high performance applications, including generative AI.
Customers are increasingly adopting a wide variety of packaging scheme to enable logic and memory integration.
Some of these schemes enable up to 50% improved memory density 10 times improvement in bandwidth and 60% gain in power efficiency.
Lam has a track record of excellence in the advanced packaging segment with a strong set of manufacturing proven products.
Overall, we have greater than 50% market share in deposition and etch solutions required for advanced <unk> stacking of high bandwidth memory.
More specifically, our sabre <unk> electroplating tool and Cindy and etch system hold 100% market share across all leading memory customers for through Silicon via formation as a result of our long established expertise in etching and filling I aspect ratio geometry structures.
Overall, we expect our packaging Sam to double in the next five years, we also see our market position strengthening as we bring technology and productivity innovation to address emerging opportunities.
For example in the June quarter, we had a critical win for a new inter die gap fill application at a key foundry logic customer for their triplet architecture.
As this latest win ramps into production, we will have secured a leading share position for this application across the top three foundry logic customers.
We won this application for a couple of reasons first we delivered higher productivity relative to the competition by leveraging our unique triple Quad platform architecture, and multi station sequential deposition chamber design.
This enables film deposition of greater than 20 microns in a single pass, allowing the customer to run more wafers between chamber cleaning steps.
Second we delivered superior on wafer performance, including better film stress management improved deep activity and enhanced wafer to wafer uniformity versus the competition.
As we expand our position in newer high growth markets like three D packaging and specialty technologies, we have looked to leverage existing R&D and tools within the land portfolio to broaden our product offerings most efficiently into.
And the recent example, our long established co etch platform has proven to be highly suited to applications, which are critical to enabling new die to wafer hybrid bonding schemes by.
By delivering better etch profile than the competition, we secured a key win in the June quarter at a leading foundry logic customer.
We're currently the tool of record for a suite of edges and resist strip steps at this customer and expect to start recognizing revenue for the new application in 2023.
As this customer continues to shrink packaging dimensions with future hybrid bonding iterations, we have the opportunity to double our revenue with them over the next several years.
In another instance, Lam has been working with customers within the specialty segment.
Port key 300 millimeter etch solutions, including atomic layer etch to 200 millimeter to overcome challenges in the manufacturing of gallium nitride devices adopt.
Adoption of Gan technology is accelerating across multiple applications ranging from high efficiency charging devices for consumer electronics and automotive to five G RF infrastructure.
However, the fabrication of such devices is complex and requires ultra low damage etch processes with atomic scale precision.
With our suite of solutions, we can deliver again etch process that improved surface roughness and other material properties the impact device performance. These.
These solutions were developed as a result of lambs deep understanding of the required technology as well as key partnerships with customers and research institutions.
Longer term, we look to outperform in the trillion dollars semiconductor industry forecasted for the end of the decade Atlas.
At Lam, we are executing our strategy to create competitive differentiation by focusing on what we see as three key vectors of rising complexity first is the technical complexity associated with enabling the transition to <unk> device and packaging architectures across all market segments.
Second is the support and workforce complexity arising from the expanding geographic footprint as regionalization efforts build momentum.
And third is the sustainability complexity as we responsibly manage the carbon impact of the semiconductor industry as the output grows to a trillion dollars.
This quarter, we detailed one component of our strategy in our press release for our semi versus solutions portfolio of advanced simulation and modeling products.
These products are designed to help engineers get to process solutions faster develop new products at lower cost and collaborate across the global ecosystem with greater effectiveness.
We believe that by combining the physical advantages of lambs diverse global R&D and manufacturing footprint with the virtual development and digital twin and capabilities of our semi versus solutions, we will be in an excellent position to innovate and outperform as our industry grows into the future.
With that I will turn it over to Doug. Thank you excellent. Thank you Tim.
Good afternoon, everyone and thank you for joining our call today during what I know is a very busy earnings season.
We executed well in the June 2023 quarter with revenue coming in above the midpoint of our guided range and our property profitability metrics exceeding the high end of guidance.
But we continue to work through a challenging WP investment year.
Notably with very little memory spending.
Our focus on improving our operational efficiencies to showing up favorably in our results.
We're laser focused on what's in our direct control and executing well.
Let me dig into revenue.
Third quarter revenue came in at $3 2 billion a decrease from the prior quarter as we expected.
Systems revenue declined quarter over quarter, as we had reduced levels of deferred revenue with the improvement in supply chain constraints.
We closed the June quarter with $1 8 million in deferred revenue on the balance sheet, which was a decrease of $165 million sequentially.
We've got all the deferred revenue related to outstanding back order parks completely back to normal levels.
As we discussed last quarter, though our deferred revenue balance is currently still at higher than historic levels.
So the deferred revenue balance includes increased customer test an advanced deposits tied to orders from newer customers.
We expect a significant portion of these deposits to convert to revenue during the second half of calendar year 2023.
Let me now turn to the revenue segment details.
Memory as a percentage of systems revenue in the June quarter was low at 27%, which was a decline from the prior quarter level of 32%.
And our lowest concentration percentage for this segment in the last decade.
The DRAM segment within memory remained flat at 90% of systems revenue and.
And NAND came down to 18% of systems revenue down from the March quarter level of 23%.
We continue to expect NAND spending to remain at low levels for the remainder of the 2023 calendar year.
And then just mentioned NAND spending is at the lowest levels, we've seen since the advent of the <unk> NAND architecture.
Consistent with the prior quarter, we see strong concentration of systems revenue in <unk> segment with the June quarter revenue percentage at 47 versus 46% that we saw in the March quarter.
Investments were biased towards leading edge devices.
We're also continues to be robust spending to support more mature specialty notes.
We had a record level of concentration in the logic and other segment was 26% of systems revenue in the June quarter, compared with 22% in the prior quarter.
There was broad based spending in areas such as advanced packaging are processors analog image sensors and power applications.
These are areas, where we have demonstrated strong momentum with our technology solutions and I'd just point out that there are broadly distributed geographically.
With respect to the regional composition of our total revenue the China region was 26% of the total which was up a little bit from the prior quarter, which was 22%.
China domestic customers, where the majority of the China original revenue in the June quarter.
The result of a strong concentration of investments for our customers and the Korea.
Taiwan region, which comprised 24% and 20% of our total revenues respectively in the June quarter.
The U S region declined from the record level that we saw last quarter.
Largely due to the timing of customer projects.
Customer support business group revenue in the June quarter totaled approximately $1 5 billion.
Which was a decrease of 7% from the prior quarter level.
8% lower than the June quarter and calendar 2022.
<unk> represented 47% of our June quarter revenue.
This is a historically high concentration percentage driven largely by continued strength in the specialty note investments, which are serviced by our reliant systems business.
Ah reliant and spares businesses continue to represent the largest individual portions of CSP revenues.
Both our spares and service businesses have been negatively impacted by low fab utilization levels.
Particularly at our memory customers.
On the profitability side of things our June quarter gross margin came in at 45, 7% above our guided range and up from 44% that we saw in the March quarter.
The quarter on quarter increase was related to cost and efficiency improvements as well as a favorable product mix.
We continue to expect to make further progress on our operational execution as we go forward.
Operating expenses for June came in at $590 million, which was down from the $608 million in the March quarter, Although it was a little bit higher than our original estimates coming into the quarter.
Investing in research and development continues to be a top priority for lab with over two thirds of our operating expense concentrated in R&D.
We're focused on extending our product differentiation and ensuring that our competitiveness remains very strong.
The June quarter operating margin came in at 27, 3%, which was over the guidance range largely because of our strong gross margin performance.
The non-GAAP tax rate for the quarter came in low at seven 5%.
Due to a more favorable jurisdictional mix of income.
And provision true ups that occurred at the end of our fiscal year.
We estimate the tax rate for the remainder of the 2023 calendar year will be in the low to mid teens level.
And as always this rate will have some fluctuation quarter to quarter.
Other income and expense for the June quarter was approximately $7 million in expense consistent with the prior quarter amount and primarily related to our strong cash balances as well as higher interest rates.
And I'll just point out from a return on cash standpoint are now realizing higher interest rates on our cash balances and we're paying on the longer term duration debt in our capital structure.
And as we've discussed in the past 11 years subject to market related fluctuations that will cause some level of quarterly volatility.
From a capital return activities, we allocated approximately $906 million to open market share buyback.
Page $232 million in dividends in the June quarter.
We have $3 5 billion remaining on our board authorized share buyback plan.
For the June quarter, we returned 109% of free cash flow.
And we're very much in line with our long term capital return plans of returning 75% to 100% of free cash flow.
Okay.
June quarter diluted earnings per share came in at $5 98.
Over the high end of our guidance range.
This was enabled from stronger revenue.
Group gross margin ended up lower tax rate.
Diluted share count was 134 million shares.
On track with our expectations and down from the March quarter.
Let me now pivot to the balance sheet cash and short term investments, including restricted cash totaled $5 6 billion.
Which was flat with the March quarter.
The sales outstanding were 80 days in the June quarter.
June quarter inventory turns came down from the prior quarter level of one nine times to one five times.
While we did bring inventory down slightly during the June quarter. The balance is elevated from historic levels.
As business as business volumes reduce we needed to cancel a significant volume of purchase orders with our suppliers.
As we work through these cancellations were taking more inventory than we need in the near term.
This ongoing process will keep inventory and higher than we'd like this year frankly.
We do expect inventory to come down, though, albeit more slowly than we may have historically been able to drive to.
Non cash expenses for the June quarter included approximately $68 million in equity compensation.
$76 million in depreciation and $14 million for amortization.
Capital expenditures were $79 million.
Which was down from the March quarter by approximately $41 million.
Spending mainly centered on product development activities and our global web infrastructure.
We ended the June quarter was approximately 17400 regular full time employees, which was a decrease of approximately 3500 people from the prior quarter.
Most of this decrease is related to the restructuring actions you took earlier in the calendar year with the <unk>.
Timing of the head count reduction is showing up in the June quarter.
Overall, we're on track with our transformation initiatives to improve our operations.
And as we stand at the end of the quarter, we incurred approximately $143 million year to date.
Out of an anticipated $250 million estimated range for calendar year 2023.
Let me now turn to our non-GAAP guidance for the September 'twenty, two 'twenty three quarter.
We're expecting revenue of $3 4 billion, plus or minus $300 million.
Gross margin of 46, 5% plus or minus one percentage point.
This improvement in gross margin is a function of our operational efforts as well as well as a beneficial mix.
Operating margins of 28% plus or minus one percentage point.
We're purposefully spending a little more on R&D in the second half of 2023.
And finally earnings per share of $6, five plus or minus <unk> 75.
Just on a declining share count of approximately 133 million shares.
Okay.
So let me summarize the results this quarter demonstrated I think that we're on a solid path to strengthen our operations and our profitability profile.
We're improving and optimizing all elements of the company.
And solidifying lamps business foundation to ensure we are well positioned for outperformance from WSI growth resumes.
And I'll just reiterate what Tim said, we continue to see <unk>, a little bit second half weighted this year.
Operator with that that concludes.
My prepared remarks, Tim and I would now like to open up the call for questions.
Ladies and gentlemen at this time well begin the question and answer session.
To ask a question you May press star and one using a touch tone telephone.
Using a speaker phone we do ask you. Please pick up the handset prior to pressing the keys to ensure the best sound quality.
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Once again that is star and then wanted to join the question queue.
Our first question today comes from Harlan sur from Jpmorgan. Please go ahead with your question.
Hi, good afternoon, and congratulations on solid execution.
Progressed through this weaker period for the industry right the activity level can be quite noisy, but there will come a period of stabilization of fundamentals and business trends right fundamentals being.
Things that you can track like your customers' utilization.
Business wise the level of push outs rescheduled and cancellation. So I guess what that has the team.
<unk> seen utilization starting to stabilize albeit at low levels and has the right magnitude of shipment push outs rescheduling also come down to more normalized levels.
Yes, Thanks Harlan.
I think that we've it probably varies by market segment, but clearly we've heard some of our customers. Even just recently talking about more utilization cuts within certain device segments, clearly I would say, it's it's slowing down as the majority of the cuts that were made in the first half of the year kind of taking effect.
I do feel like can I made a comment about in some ways normalizing our operations is allowing the business to be more predictable I think the same thing is happening on the end markets and customer side as well where people are getting a sense of of how the cuts that have already been made and how the capex reductions that have already been made are starting to flow through so.
I do feel like we're in that position just as we at this point ticked a little bit up on.
<unk> from our prior guidance of low to mid <unk> to mid seventies.
Starting to see a little strength in certain parts of the market <unk> being one of them and as also we mentioned some of the domestic China spending so.
Would feel like things are getting to the point, where people are able to predict their business, a little bit better than say six months ago.
Harlan This is Doug maybe the only thing I would add to what Tim said is we haven't really seen utilization is getting any better quite frankly, you'll remember on the call last quarter, we talked about you'll see that from us in our spares and service components of <unk>.
And as we sit here today, you're not seeing that at this point so.
It's at a fairly low level, and we really don't see it getting any better in the near term and the only other thing.
We have said that when you think about especially utilization improvements in the memory space, We would anticipate land being the first to sort of benefit from utilization turning back on.
Just given our exposure in that space and the impact that it's had on our spares and service business through the first half of this year.
I appreciate that.
And then I also appreciate you guys highlighting the advanced packaging opportunity I think it's quite timely way because you guys called out.
Slightly better memory wf fee trends due to strong HBM DRAM demand. So you guys benefit both in your core memory Silicon tools and now your advanced packaging portfolio as you outlined but just given the overall sort of recent and strong demand pull for accelerated computing.
And AI capabilities I mean, this is driving advanced packaging demand across CPU GPU networking memory right and so <unk>.
Customers are capacity constrained here. So do you guys anticipate the advanced packaging segment to grow this year and can you just give us some sense on how big This segment is for Lam.
Yeah, I don't think we've we haven't exactly size to this business.
Externally.
It is it is growing and as said in certain areas, especially as I highlighted things like.
Etch for Tvs contemplating fulfilling of those dsv's pretty much anything related to the building.
And packaging structure to etch and deposition. So it is a strong area of our business right now, especially given the.
The relative weakness as seen in the other parts of the market.
Thank you Anton.
Our next question comes from.
Muse from Evercore. Please go ahead with your question.
Yes. Good afternoon. Thanks for taking the question I guess first question Doug.
Last quarter, you talked about expectations for 100 bps improvement at least exiting the year, you've clearly blown that away. So curious how much of that in the guide for September is due to mix versus kind of greater efficiencies that you've garnered and what is kind of a new exit rate that we should be thinking.
<unk>.
For calendar 'twenty three.
Yes, C J actually I think.
If you talk to the leadership team, we're all pretty pleased that where we've been able to drive the operational efficiencies in the company and it's gone quicker I think unexpected certainly we're obviously beyond that 100 basis point improvement, having said that though I would point to we do have a component of the September numbers that are mix related.
Not going to quantify it precisely for you.
But we're doing real well operationally and are not quite ready to guide in December for you yet.
Except I would say I think we're pretty pleased where we're at and we're well beyond that 100 basis point improvement that we talked about I think on the January call. If I recall, the first time, we started talking about it.
Great. Thank you.
I guess the second question relates to <unk>.
And.
How are you thinking about sustainability of reliant.
And then as you kind of contemplate the timing of it.
Utilization picking up for memory.
How do you see kind of a handoff, maybe from one part of the business to the other and how we should be modeling cspan's into September and beyond.
Yeah, I think that.
As you pointed out I mean, obviously there is theres a relying component. That's right now is quite strong I talked about so the specialty technologies I mean, we're seeing still quite strong demand for our products across all of those different segments utilization driving spares and service to low much lower levels than we've historically seen and so.
I think as people talk and worry about roll off in the specialty technologies, maybe that does come at the time that that the.
Utilization picks up and the leading edge in the memory.
Fabs, but actually at this point I would say, we haven't yet seen demand for those trailing edge technologies to really be rolling over.
Land is still quite strong for us we're focused on new applications new tool types.
It's just it's just not something that we are ready to forecast yet although again as we've said nothing nothing grows forever.
But it.
With the broadening it feels pretty good to us right now.
So we should be modeling <unk> up in September .
[laughter] CGI guidance due to $3 4 billion in revenue you could do whatever you'd like to do with the company.
You've got the total number yes, thank you Doug and Tim appreciate it.
Yes.
Thanks C J.
Our next question comes from Krish Shankar from TD Cowen. Please go ahead with your question.
Yes, hi, Thanks for taking my question I have two questions first one.
Maybe for Jim or Doug.
Kind of curious at Semicon West a few weeks ago.
Okay, I'll, let Ron spoke about a clear edge product.
I remember you had spoken about it a couple of years ago. So I'm kind of curious how to think about your high aspect.
The ratio ex market share and my understanding was a lot of it is that geared towards <unk> NAND and obviously NAND spending is at very low levels. So I'm kind of curious and number one how to think about Europe .
High aspect ratio market shares and the class.
Which product that sits right in that row, and then I had a follow up.
Okay, great well, thanks Christian I'll take it first.
I think that relative to NAND as you pointed out I mean, its spending is at very low levels down more than probably more than 75% year on year right now, but to this point of cryo inch I mean, I guess I would just say that at this point Lam is the only company with <unk> in high volume production. So it's an area.
Where we do have strengthened hundreds of chambers the experience right now.
As a leader in high aspect ratio etch.
I know that.
The recent conference competition has been talking about it a <unk> positions for one pass at a memory customer.
For future node.
But I think as probably everybody on this call knows customers regularly engage more than one vendor when youre in the R&D stage for these critical applications.
And in this case production decisions are still quite a ways off.
I look at Lam and our competitiveness I mean, we take all of that experience that we have from years of leading in this space. We've developed a robust technology roadmap for engage with the customer on a variety of different hardware and process innovations.
But I think most importantly, when I think about our long term competitiveness.
We're still the only vendor that has this.
Huge installed base from which every day, we're getting learning about how to take processes from the R&D stage into high volume production.
And that's ultimately what really counts for affecting market share and so.
We've said in the past we don't win every decision certainly not always at the <unk> stage, but.
I think given where we are and where we've come from we're very confident about maintaining leadership and market share in this space.
Got it got it very helpful and then just.
Follow up on the advanced packaging.
Understand you did mention the packaging some could double and.
You spoke about the thing beyond for DSV at Sabre.
For metal that Nathan number when I went back and looked at my notes and.
In 2015, you said it would be like a $215 million of opportunity and then I think last year folks updated look in 2020, what he had said Cindy.
<unk> stable, but actually doubled since then.
Can you kind of move I understand a lot of it goes to <unk> and all the things so from Google.
The realm of advanced packaging, how to think about like the opportunity from here and also for the AI. My understanding is you know some of your ALR depot hiking metal gate for DRAM can also be used so if I put it altogether is there a way to quantify where youll Cindy unstable revenue numbers are today.
And how to think about it and also how to think about AMD for high K metal gate. Thank you.
Yes.
You threw out a couple of numbers when we used to talk about a couple of hundred million dollars opportunity doubling from there puts it in the one hundreds I mean, it's growing from that point I mean, it's becoming a sizable business for us.
We just haven't we just haven't quantified specifically for those two products I think what you can take away is we talked about our market share position.
We know I think everybody knows HBM and <unk> chip stacking.
Those products also play into other elements of advanced packaging.
It's a very fast growing part of our business and so without without giving you our forecast for those markets. I think you can you can apply what you think about how chip stacking and three D packaging is building momentum.
We have 100% market share I think just to.
We're very happy to see what's what's transpiring in that part of the market.
Chris I would just add you are right about I don't know how long that group, we've quantified it as suits few hundred million dollars not billions of dollars just to kind of frame. It for you, but it is a very fast growing component of the business as Tim pointed out so.
Maybe that's a good way to think about it as something when you list number to talk and everybody is very excited about high bandwidth memory and it's implemented.
We're right in the middle of all of that stuff from a packaging Christian what I would say is in this environment.
Those are the tool sets that people were actually pulling forward in terms of accelerated deliveries and so I think that gives you some sense of demand in that market.
Got it thanks, a lot Doug.
Okay.
And our next question comes from Tim <unk> from UBS. Please go ahead with your question.
Thanks, a lot.
Tim there's been a lot of debate.
Did I hear on NAND at WP, and obviously you have the highest share of all the major vendors and you used to give this model.
That suggested $14 to $15 billion per year to drive sort of mid 30% bit growth and there was some sensitivity around it but since then.
Of the.
Producers have been basically down ticking on long term NAND bit growth micron's, now, saying low twenties.
<unk>. So if you kind of use that old model, you get to something like $11 billion to $12 billion per year to drive the low twenty's bit growth.
I know you've talked about more steps and so that number has gone up but that's just optically it's not a ton higher than the $9 billion or so that we're spending this year and so I keep on getting a ton of it.
Of debate in terms of just how much NAND at WSI is going to come back. So I'm not asking you for a new model that can you sort of handicap.
What's changed.
That old model.
Market, where <unk> seems to be lower going forward. Thanks.
Thanks.
Well I think there probably is equal debate about what long term bit growth is in the manned space with.
Some of the new applications coming out, but I, certainly not going to take at crossways with our customers in terms of their forecasts versus ours.
Again, it's a market, where we have such strong position that that ultimately.
We look to satisfy the technology roadmaps and the volume requirements of our customers and that's kind of where we are so right. Now we know this year NAND is extremely low.
Without giving you a number I mean, it's.
I would say, even if it gets back to something close to that model, it's a lot higher spending and where we are today.
I think what's happened to us for Lam, specifically is not only.
Have we taken.
What might be different from that that model of how much we capture of that Sam is.
The complexity of doing multi tier stacking has increased our opportunity through a whole bunch of other steps that we've talked about in the past in terms of backside depth for stress management and GAAP till ALG capsules for <unk> carbon sacrificial plug sales lots of different types of applications and so.
I think even in an environment, where you didn't do a lot better than that model Lambeth do a lot better and we do a whole lot better than where we are today in such a low NAND spending environment. So I think we will get timber of new model out once we see a better view of the end demand picture, but that's the best I can I can do for you right now.
Thanks, Tim and then Doug I guess, just as a follow up.
Does your inventory situation play out I imagine.
But it's still kind of a drag on gross margin and you said, it's going to come down.
Said pretty slowly as you kind of get to the back half of the year. So.
Can you quantify how much of a drag it is as you're as you still have pretty high cost I would imagine on these on.
On these parts and then when do you think it gets back to some sort of normalized level and it's not a headwind anymore margin. Thanks.
Yes, Tim I don't really think of it right now is a drag on gross margin honestly it will prevent improvement in gross margin as we have to consume some of the inventory shipping their right to the extent that we're negotiating cost of some of the stuff down the stuff that we have is already on the balance sheet right. So you've got a consumer that first so that is the right way to think about it I don't really.
Think of it as a drag in the near term and it will come down although what I tried to say in my script was it's going to come down a little bit more slowly than perhaps you've seen us be able to drive it to in the past.
Because we canceled a lot of purchase purchase orders a lot of material that is party negotiating through that you end up taking perhaps a little bit more than you need in the near term will consume it over time.
But it's just going to create a little bit of a delay in the reduction of inventory than you've seen us be able to do.
In the past so it's going to be a little bit sticky I think Tim through the year.
And then I think it will.
It will come down through the year, but I think it's going to be a little bit sticky and then youll see it improve as we get into next year.
Thanks, Doug.
Yes, Thanks, Tim.
And our next question comes from Brian Chin from Stifel. Please go ahead with your question.
Hi, there good afternoon, and thanks for letting us ask a few questions maybe just to backtrack on the increased Wi Fi this year.
Call it $2 billion to $3 billion increase.
Is that mainly situated in second half how should we think about I guess timing between calendar <unk> and <unk> and I guess, how much of that upside is HBM oriented.
Yes, Brian I guess, what I'd say is it is a little bit second half weighted and the things we pointed to in our scripts were.
Little bit of upside in China, China, domestic and a little bit of high bandwidth memory I don't think were going to put a quantification between the third quarter and the fourth quarter of the calendar year accepted to say, it's a little bit second half weighted.
Okay fair enough and maybe.
My follow up yes.
Currently there is a lot of focus on high bandwidth DRAM, but.
Tim I was wondering could you interject, maybe your thoughts on the role of SSD.
SSD and flash storage might play and generous AI.
I'm sure that's factored into sort of that 1% penetration for AI servers, and kind of that one to one 5 billion.
WSI investment.
It is and I think that was even in my answer to the last question was I think there is still a lot of debate as to how much storage really gets driven in this but we were a believer that there is some element of demand driven there.
I think that when we think about DRAM. There's a couple of things at play in terms of what drives it one is.
Of course, the HBM also increases die size I think as you know and.
That that leads perhaps to even even greater WP increase associated both with the silicon side of that as well as the packaging side.
Not sure that same dynamic exists on the NAND side, but in terms of consumption.
Consumption it feels like there should be some but.
I'm willing to sort of let this play out a little further to see what the new model should be.
Talk closer to their customers see what they're seeing in the marketplace as well.
Yes, Brian This is Doug I don't know if this helps but when I look at the composition of some of these AI servers nominally there's roughly eight times the DRAM versus an enterprise class server.
And three times.
Yeah.
From a storage standpoint, I don't know if that will help you get your head wrapped around the DRAM is clearly a little bit more enabling on the compute side with storage picks up also.
Okay got it and probably scale out of these language.
Our model is probably also could increase that storage potential and so over time, but thanks for your inputs I appreciate that.
Okay, great. Thank you Ben.
Yes.
Our next question comes from <unk>.
Hershey.
<unk> from Goldman Sachs. Please go ahead with your question.
Hi, guys. Thanks for taking the question.
Tim or Doug just on China, I was hoping you guys could give a little more color in terms of.
What youre seeing on the ground.
Doug I think you said, China was 26% of revenue and a big chunk of that was domestic.
What sort of the makeup by application foundry and memory and other.
Importantly, how should we think about sustainability going forward, it's really hard to.
From our.
Standpoint, just Kevin.
The spend is so strategic right is this is not necessarily tied directly to near term economics. So it's hard for us but.
In terms of what Youre hearing from customers what is the feedback and how much visibility or are they giving you going forward.
Yes, I think that.
It's split I mean, obviously.
Domestic China side between some memory investments as well as.
A lot of specialty technologies trailing edge.
Focus on end markets I think we're all familiar with automotive and industrial and those types of markets.
Sure.
As you mentioned is strategic I mean, these are customers that are getting a long term forecasts.
Southwest last quarter about deferred revenues are impacted by.
The down payments.
At least within the visibility horizon that we need we feel we have a pretty good view of a fair bit of investment there.
This continues in China, especially in those specialty technology markets, where new fabs are emerging to to try to capture some element of those trailing edge and markets.
That's helpful. Thank you and then as a follow up maybe one for Doug on gross margin you talked about operational efforts and initiatives a couple of times.
What exactly are you doing today.
I know, there's no ending to things like this but which inning are you in in terms of reaping some of the benefits and.
You used to talk about Malaysia, as a headwind a year ago or year and a half ago where are you.
With the ramp there and.
How should we think about the tailwind as volumes recover going forward. Thanks.
Yes, I think you'll see the way that the way to think about it is.
Business is down right now, we're not really growing anywhere.
I think as we see growth come back whenever that is the pivot to that Malaysia factory, which which has an opportunity to do more than is doing today.
Will be largely what youll see from us.
Now maybe to help with the restructuring activities, we embarked on plans to kind of restructure the cost footprint of the company.
And maybe the best way to think about it.
I've given you a forecast so we think we're going to take charges of $250 million at this point, we've taken 143 at the end of last quarter. So we still have some things we're working on.
Although I would tell you the workforce portion of it is complete and we're done with that aspect of it. So that's behind US. We believe so there are just some of the things we're doing around looking at product repositioning inventory, maybe a little bit of infrastructure stuff we're embarking.
Upon what will be a multiyear digital transformation initiative at the company, which will deliver efficiencies over the next several years.
So there's a handful of things that are that are still.
Coming in the future I guess is what I would describe.
I.
The color. Thank you.
Thank you Sacha.
Our next question comes from <unk> Malik from Citi. Please go ahead with your question.
Hi, Thank you for taking my questions I have two.
Two questions on leading edge.
Investments.
I thought you gave an interesting data point that 1% AI server adoption leads to one to $1 5 billion incremental Wi Fi M&A listen to major foundry in Taiwan, They talked about 50%.
Growth rate in the next few years.
But we did not really raising capex this year.
We believe AI adoption is probably like high single digit to eight 9% So what explained.
The discrepancy in terms of not seeing a lift in leading edge investments from the higher.
Adoption and maybe it's just that any utilization in other end markets.
I guess I think about it <unk>.
Our longer term statements we are making.
I think youre right about the competition.
AI servers in the short term youre, not really going to see a meaningful uptick in WP frankly, because this is going to occur over the next several years.
As more of and you're right I think server volumes largely I don't know mid <unk>.
I would call it mid single digit should.
Percentage of total servers I think that grows over time.
But in the short term.
It doesn't really show up as quickly as you might think it requires sort of.
Capital investments to occur for future demand, but doesn't really happen in a meaningful way in the short term.
Got it.
And then as my follow up you guys.
Leverage to gate, all around particularly on the Ed side, and we have been waiting for this technology inflection for the last three years.
Your opinion in Europe is talking about pile.
Pilot line orders in the December quarter, this year, and Tim spoke about having better visibility versus six months ago. So my question to you is when do you see the gate all around opportunity kind of grow meaningful for you is it the first half of next year or second half next year.
Well I think I think it starts.
In line with the timeline.
Just talked about and it's the first through the first half and second half of next year. I mean, these things tend to ramp and I think we are at the point where gate all around this is going to become more meaningful we'll see that in growth in.
Some of the traditional products that are sort of lumped in with everything else, but then our specialized products that we've talked about like selective edge.
Those that suite of tools that is.
Specialized for applications like gate, all around well see faster growth in those segments I think as we move.
Through 'twenty four and on into 'twenty five so.
Yes, maybe we're at that key inflection point, how that overcomes in the rest of the market dynamics in 'twenty four we're not ready to guide 2040, yet.
Some of those technology trends are starting to move moved in our favor.
Thank you.
Thanks, Alex.
Our next question comes from Joe Moore from Morgan Stanley . Please go ahead with your question.
Great. Thank you I wanted to follow up on the China question.
I guess, how have you seen the impact of last year's export controls is that your China business has obviously done pretty well since then given the headwinds.
Have there been.
Have the restriction has been what you thought it would be is there anything thats different and then there continue to be rumblings of additional controls do you have any visibility into what that could look like.
Yes, Joe.
We had talked last at the end towards the end of last year right around the October 17th.
The announcement that the impact to our business. This year would be two to $2 $5 billion with.
We clarified earlier this year that.
Because we were able to make some shipments for trailing edge memory that we have not we werent sure whether we could that impact is going to be closer to the $2 billion Mark that is still what we estimate the impact of last year's restrictions that over 70 restrictions on our business $2 billion of revenue now in the same time.
As China has shifted its focus towards the areas. They can invest these these trailing edge foundry logic and some of the trailing edge memory, we've seen that uptick a bit as we've moved through this year and Thats. We just spoke about so.
Can't really speak to future regulations.
What may or may not be contemplated where we have a team in Washington D. C. This regularly engage with the government make sure they understand our business and in the.
The details of the semiconductor industry.
That's about the best we can do right now.
Okay. Thank you very much.
Thanks, Jeff.
Our next question comes from Vivek Arya from Bank of America. Please go ahead with your question.
Alright, Thanks for taking my question.
Tim I'm curious what should be defined we should look for when memory utilization starts to pick up and when orders do you guys start to improve.
So if you look at historical trends should we be waiting for like one quarter of pricing improvement two quarters of pricing improvement just what are kind of the external metrics, we should be keeping an eye on to try and predict when memory WSI you should start to pick up.
Okay.
Yes, a little bit difficult I guess, just from the standpoint that.
Obviously pricing improvement in memory with tend to attend to start to get customers interested in our greater utilization.
<unk> is a fab I think easier I was going to answer relative to what you'd see in Lam obviously.
We start reporting an uptick in our <unk> spares and service businesses.
It's an indicated that fabs are starting to.
Be utilized more and therefore consuming spares and service.
That's why I mentioned earlier that we are expecting to be really one of the first beneficiaries of a recovery in memory, because so much of the <unk> been such.
Deep utilization cuts in the memory fabs that the spares and service side of our business has been impacted to a greater degree than we would've expected.
When they turn those back on that revenue should come back and Thats that will probably be your first indications from lambs reported numbers of what what's going on.
I guess that was really the origin of the question because from what I heard on the call. I think you were suggesting that if the scenario and <unk> revenues do start to pick up sequentially in the next quarter, but then you mentioned that the visibility around memory utilization guidance.
Not there from an industry perspective.
Is there still a delta between the two.
We did not suggest yesterday is picking up in the next quarter that was not a statement anybody on the comment. So if we said some of that budgeted that conclusion, maybe we misspoke or perhaps misinterpreted something else.
Okay, sorry, maybe I misheard.
Then maybe for my second question.
The gross margin upside in Q3.
I think it was quite a sizable I don't remember the last time, you had such a strong gross margin upside I think you mentioned something along the lines of mix.
Is that mix unsustainable is that likely to reverse.
At some point what is the right way to think about the sustainability of gross margins at these levels. So that's if you assume that your sales continue to grow sequentially then can gross margins.
<unk> to be at plus minus these levels or is that something that would dramatically change in the mix to change the trajectory of gross margins.
Vivek I don't know if theres anything that I would point to that is dramatic.
I suggest with two things one our operational efforts in terms of just sufficient suits and whatnot, it's maybe a little further ahead of.
I thought it would have been.
And I did point to favorable mix in the current quarter, you always see mix up and down both products as well as customer mix, we're benefiting a little bit in the September quarter, I don't know if youll see that same magnitude a mixed benefit in December the operational steps we will.
I wouldn't run too far away from where we are right now into the near term anyway.
But I would tell you I'm very pleased with what we've been able to execute and the things that are in our own control we've done extremely well.
Yeah.
Okay. Thank you.
Thank you.
Our next question comes from Stacy <unk> from Bernstein Research. Please go ahead with your question.
Hi, guys. Thanks for taking my questions.
For my first one you talked about the bulk of the China, One 8 billion in deferred selling through in the second half and how much of that $1 8 billion actually is coming.
From China, and how much of that do you actually see yourself recognizing in the second half is it more in Q3 Q4 do you have any idea of the timing of that.
We sat down with.
Yes, I've never said, how much of your China I've described it as newer customers right customers that are new that were not exactly sure of the credit worthiness, we require cash in advance before we build the tools I haven't put a number on how much of it as churn although.
Some amount of it.
<unk>.
And what I've said on how much that turns to revenue as I've said the majority of it turns to revenue in the second half of the year.
So like you have $1 $8 billion of revenue that will be recognized in the second half from that deferred like what would be the normal amount.
Got a few in the Delta.
Especially if there is a normalized level of deferred revenue Thats always here always has been here and you should expect to always be here.
It's probably 750 to a $1 billion.
On a regular basis I think is what you've seen from us in the past I wouldn't expect it to be $2 two different in that we've just had a lot of this cash in advance.
Payments right now that's why it's relevant.
Got it. Thank you for my second question.
Talk to your memory WP down in the mid Forty's can you give us a feeling for how you see DRAM versus NAND breaking out in that and whether or not your views on both of those.
Have changed over the last 90 days versus like where we were.
Quarter ago.
We've said that NAND is obviously by far worse, we said about 70 down about 75%.
Year on year so.
Obviously.
That was my bad I mean, DRAM, and obviously less than down mid forties.
And I think that in terms of change.
We've seen a little bit of improvement as we've just talked about with the HBM and.
Some some signs of at least at least a little bit more optimism on our part that DRAM would be the first to recover as a result of some of these trends and again just listening to our customers and tucking them referred some customers talked about further cuts in men.
In the last 24 hours so.
But keeping that utilization still falling.
Yes.
Still at pretty low levels.
Okay got it thank you.
Welcome. Thanks.
Yes.
Our next question comes from Blayne Curtis from Barclays. Please go ahead with your question Hey, Thanks for squeezing me in maybe just following back up on what states. You. Just asked that I was just kind of confused you raised.
I'll look for WP by a couple billion dollars.
Seemed like it was memory there was an inflection.
But then when he talked about memory and it seems like NAND kind of flattish and I'm just kind of curious how much of the increase is there in DRAM or is it really the growth youre seeing in September more kind of this China part that Stacy was just asking about.
Yes, Blayne, Tim pointed to two things.
Little bit more in China and high bandwidth memory.
As.
It's not a huge uptick in WPS, but those are the contributors.
Got you and then I guess I just wanted to understand Theres, two moving pieces in foundry logic and you've seen some delays at the leading edge can just some commentary between those moving pieces kind of the non China piece, what are you seeing for the back half of this year.
We described it in general when you look at WPZ down where it is memory's down mid forties, and you probably know kind of where that is run rating.
Adjusted foundry logic, it looks like it's down roughly 10%.
And youre right to spend a little bit of a softening in leading edge foundry logic, we talked a little bit about that last quarter I'm not sure. We're describing anything incremental perhaps we saw some things others didn't see sooner than they did.
But that's how we see things setting up right now.
Okay. Thanks, Scott.
Thanks, Mike Operator, we have time for one more question. Please.
Yes.
And ladies and gentlemen, our final question will come from Vijay Rakesh from Mizuho. Please go ahead with your question.
Yes, Hi, this is Chris.
A question on if you look at WPZ.
The beauty of FIFA mixed it any thoughts on how much some of these onshore.
Greenfield Fabs could contribute to capex for next year.
Well I think it's.
We're just in the middle of this year, it's too early to talk about 'twenty four from a absolute number but clearly as we as we move through the next couple of years.
Talked about this regional these regionalization efforts building momentum I do think that we'll see that becoming a meaningful contributor to spending not only here, but in other parts of the world.
Got it and then on the AI side obviously.
You have mentioned packaging is a big roadmap that.
When you look at cost.
Any thoughts on how much.
And what your exposure is that and how you see that growing next year I guess.
Thanks, Yes.
Every everything related to advanced packaging is growing right now.
I'd say land exposure.
Across the board in Etch and deposition is is very strong so I called out specifically HBM, but youre right I mean, when you look at the.
The importance of things like <unk> and AI package system.
Our exposure there even broadens further to the types of tools that we sell in there.
And I mentioned this point.
People call it even in the advanced packaging, we're having to invest in new technologies for atomic scale processing and so you can see things like <unk> being used in advanced packaging now so we're really in a world where.
<unk> is being used for advanced packaging.
<unk> is being used for 200 millimeter again.
I think that it is creating tremendous opportunity for lam to leverage our <unk>.
Really broad portfolio of technologies for all these new emerging growth opportunities and it's pretty exciting.
Alright, thank you.
Yes. Thank you thanks Roger.
And with that ladies and gentlemen, we will be turning the floor back over to the management team for any closing remarks.
And management are you able to hear me.
Okay.
Yes.
Ladies and gentlemen, we'll be closing today's conference call. We thank you for joining you may now.
Now disconnect your lines.