LRCX - Lam Research Corporation (LRCX) Management Presents at Bernstein 39th Annual Strategic Decisions Conference (Transcript)
2023-05-31 14:02:09 ET
Lam Research Corporation (LRCX)
Bernstein 39th Annual Strategic Decisions Conference Transcript
May 31, 2023, 10:00 AM ET
Executives
Tim Archer - President and CEO
Analysts
Stacy Rasgon - Bernstein
Presentation
Stacy Rasgon
Good morning, everyone. Thank you so much for coming. I am Stacy Rasgon. I cover the U.S. semiconductor and semiconductor capital equipment sector here at Bernstein. It’s my great honor to introduce our guest, the President and CEO of Lam Research, Mr. Tim Archer.
Before I start, I want to mention, if you have questions you would like to ask during the presentation, in your program there’s a QR code, you can scan it, that will take you to our -- what’s called our pigeon hole form where you can submit those questions and we will leave time at the end for that Q&A.
So semi cap; look, semi cap has really been top of mind for many of my clients, especially as the strength of the last years a couple of years now sort of turns into the first kind of real cycle we have had since 2019.
But even amid all of that, though, there are, of course, nearer term questions, things like memory spending trajectory and the impact of export controls and when things might trough and when they might peak.
But I am -- I get all that, but I am also increasing getting people looking at the longer term potential of this industry, especially as they start to view it on secular terms in addition to the purely cyclical as they look for like the long-term growth of the semiconductor industry and what is going to be needed to support it with which is this.
And so to answer that, and hopefully, in many other questions, it gives me great pleasure to welcome Tim to our session today. So, thank you so much for joining us today. I really appreciate it.
Tim Archer
Thanks. Thank you.
Question-and-Answer Session
Q - Stacy Rasgon
And I want to start with a little near-term history, clearly, through COVID, both semis, as well as semi cap have just been through a lot and there have been shortages and supply constraints in even the guys building the tools to build the chips have not been immune from the chip shortages themselves. And I was wondering, maybe if you could just discuss I guess both the supply and the demand disruptions that we have seen in semis and semi cap, as we have gone through the last couple of years through COVID sort of landing to where we are today?
Tim Archer
Okay. Sure.
Stacy Rasgon
You would like to start things.
T”
Thanks, Stacy. And just to point out, I think, you all saw Safe Harbor -- our Safe Harbor up there and take a look at that real quick. But thanks for having us and thanks for letting me relive COVID just one more time before, hopefully, we put that in the rearview mirror.
It’s -- it created a lot of, obviously, disruption on both the supply and demand side. Of course, if you look at it as a good side, I mean, the demand clearly spiked as a result of all of the electronics demand required to enable people to work from home and you saw PC growth, you saw smartphone, from a chip perspective just growth across the foundry, logic memory.
And I think it was the urgency with which that demand came on the industry that caused a tremendous push to add supply throughout the industry and we saw, therefore, equipment demand surge.
And just as you pointed out, from the supply side, actually, companies like ours had a number of global supply constraints. I mean one was and the most ironic, perhaps, is inability to get some of the chips that were needed to manufacture the equipment that was needed to manufacture the chips and so that sort of exacerbated the problem.
But it went far beyond that, it was labor constraints, difficult bringing on enough people in the places you needed them to supply the equipment. And then on the cost and efficiency side, we talked a lot about freight and logistics and…
Stacy Rasgon
Yeah.
Tim Archer
… the impacts that those inflationary costs had on the financial model of the company. And while we still delivered quite strong financials, it wasn’t as good as where it should have been for the volumes we were seeing in the business as those inflationary costs going to hit the company.
Hopefully, that’s in the rear mirror now. We are using this slow period to actually make a lot of structural improvements to the company. We have seen us really accelerate the move of our manufacturing and supply chain towards Asia.
Stacy Rasgon
This is in Malaysia.
Tim Archer
Yeah. We have a big factory coming up in Malaysia. We are locating a lot of our supply chain in that same region.
Stacy Rasgon
Okay.
Tim Archer
Which allow us to respond more quickly in the future to big surges in demand, but also at a more cost-efficient close to customer perspective and so I think that’s an important learning. We also mentioned that we are using this period to upgrade a lot of our business processes and business systems. Again, using the learnings from COVID to identify how can we be more resilient the next time we end up having to respond to sudden surges in demand.
Stacy Rasgon
Got it. Let’s talk a little bit about that resilience and then I want to talk about maybe some more trends in the broader market, but you bring up a good point. So, Lam is typically viewed as like a memory focused semi cap company. There doesn’t seem to be a whole lot of memory at least near term in the model.
Tim Archer
Yeah.
Stacy Rasgon
But my own numbers, I have services bigger than equipment this quarter and memory is very small and you are still guiding to $5. So on an annualized basis, call it, $20. Doesn’t feel that bad like in the grand scheme of things, given -- I have seen prior memory peak cycles, remember it could have been 70% or 80% of your revenue and it doesn’t seem to be there. Maybe talk a little bit about some of the broader dynamics on some of the areas that you have been pushing for us, things you have been pushing much bigger into things like foundry and logic, the services business has certainly grown a lot. It doesn’t seem like you are quite as dependent at least for like trough economics on memory anymore as you used to be?
Tim Archer
Yeah. Well, I would agree with you. We don’t think $5 next quarter is a bad guide given that -- if you look at WFE dynamics, I mean, our strongest segment, as you pointed out, memory is down more than 50%.
Stacy Rasgon
Yeah.
Tim Archer
We said NAND is down in the range of 75%.
Stacy Rasgon
Yeah.
Tim Archer
So our largest markets are really seeing a...
Stacy Rasgon
But that was a full year statement, that was this quarter?
Tim Archer
Those were year-on-year.
Stacy Rasgon
Okay.
Tim Archer
And so we are seeing significant reductions in spending in those areas. We also have seen significant cuts as a result of China restrictions. We said this year impact north of $2 -- of about $2 billion in terms of impact from those restrictions, hitting both the WFE, as well as spare as a service as part of our business and so we are pretty happy with the resiliency of the company. Now we have taken quick action and we saw…
Stacy Rasgon
Yeah.
Tim Archer
We saw as the downturn was coming with the need to reduce costs, and so unfortunately, we had to take some actions in the company to reduce costs. But I think at this point, we are starting to see the benefits of some efforts we started a few years ago to kind of build some additional resiliency into the business to not be quite so memory cycle dependent and that’s part of -- partly playing out there.
Stacy Rasgon
Yeah.
Tim Archer
One of those was, as you mentioned, the power of the installed base business and if you just think the installed base from the last trough, we have grown that installed base 40%.
Stacy Rasgon
Okay.
Tim Archer
The installed base itself.
Stacy Rasgon
Yeah. And I guess even in a downturn, the installed base…
Tim Archer
Yeah. Yeah.
Stacy Rasgon
… as well you are still selling some tools...
Tim Archer
And so the installed base has grown and that becomes year-on-year-on-year a bigger source of spares revenue, of upgrades revenue, of services revenue and that has started to really contribute to the company in a meaningful way and that’s showing in that $5 guide, a lot of that is coming from that annuity being created from the installed base and year-on-year that will continue to grow.
We also made a concerted effort a number of years ago to increase our product portfolio and attention to the foundry logic space and we are starting to see that pay off, especially you need those more advanced nodes to begin to ramp.
Stacy Rasgon
Yeah.
Tim Archer
But we have been talking about share gains within the foundry logic space, and I think, we are going to continue to see those we -- as we introduce new products for AL, atomic layer deposition. We have been talking about our EUV for drive resist…
Stacy Rasgon
Driver, like, yeah.
Tim Archer
…selective etch for gate-all-around. These are areas, again, where -- the field is kind of open, meaning these are new applications being -- that are being created by these more complex 3-dimensional devices that are existing now in foundry logic and it’s right in Lam’s wheelhouse.
Stacy Rasgon
Yeah.
Tim Archer
3D devices means etch and dep, increased intensity, and therefore, opportunity for us.
Stacy Rasgon
Got it. So I want to talk about that, but I do actually want to talk about the memory space?
Tim Archer
Yeah. Sure.
Stacy Rasgon
Thank you. So, look, it’s under pressure, a lot of pressure this year. But the industry spent $40 billion give or take on memory WFE in 2021 and 2022, which were very high numbers, and I mean, we might do $20 billion this year, a lot of the forecasts have memory down at least 50%, and presumably, you can’t stay here forever, so it has to grow and hopefully grows next year. But I mean, does it ever get back to $40 billion, like, I am trying to get some feeling for like that’s part of the reason we have got the oversupply now as we were spending so much then. And like does it ever, like, even qualitatively, like, how do you think about the longer term trajectory of memory vis-à-vis the prior peak levels that we have seen over the last couple of years and given the current dynamics?
Tim Archer
Well, Stacy, ever is a really long time.
Stacy Rasgon
Yeah.
Tim Archer
So I think that, maybe the more fundamental. I mean to take this a little bit to the longer term. I think there’s pretty good consensus now around semiconductor industry that grows to the range of $1 trillion by the end of this decade.
And when you think about capital intensity, you end up with a lot of WFE, and therefore, a good portion of that is going to go to memory. So I think whatever time frame you want to put on this, you do ultimately end up back at levels of spending that are quite high.
You also have drivers, clearly, that are AI being one of the big topics of the day that may end up accelerating the consumption of memory and you have heard our customers in the memory space. So they are better talking about their end markets.
But clearly, they have been signaling perhaps increased demand from some of the newer AI applications as well, both on the memory side, the DRAM side, as well as on the NAND side and so I think we have to see how those play out.
But from our perspective, we think the right strategy is, of course, defending the very high share position we have in memory, building that installed base, building the annuity that comes through that and then also growing our share positions and expanding our SAM and foundry logic. It just feels like that’s a very well-rounded strategy for that.
Stacy Rasgon
No. That makes sense. And I mean, to be clear, this is certainly from an industry and a utilization standpoint, this is the worst memory cycle certainly since the tech since financial crisis and maybe even since the tech bubble, possibly, although, I guess, the customers are not going bankrupt this time, so that’s good. I guess, I could argue that like the current run rate, I mean, if NAND is down 75% year, I mean, I don’t know if it gets back to, memory gets back to $40 billion, but it probably cannot stay here forever presumably you have to start building. I think you talked a little on the earnings call about maybe the qualitatively the trajectory, and I think, Doug, you see if I would talk about probably seeing it in services first as it comes back. And then maybe the equipment takes a little longer because the utilizations are low. I guess offsetting that, though, we also have a lot of capacity in China and we will talk about export controls, I think, I can’t be remiss to leave those out, there are a lot of multinationals in China with a lot of memory capacity there that they can run right now under waiver, is like one year to. At some point, presumably, well, I got to imagine, none of them are putting a single dollars worth of incremental investment into China now presumably, I don’t know why wouldn’t. At some point, does that have to get rebuilt. I mean, is that really what if we are looking to kind of come off of this prophesies that really what leads it or I guess maybe the $1 million...
Tim Archer
I don’t think that definitely. I don’t know if that’s what leads it, but I do -- maybe just to highlight what we said on the earnings call around the trajectory.
Stacy Rasgon
Yeah.
Tim Archer
I do think that thinking about one of the reasons Lam is we are feeling good about ultimately when memory recovers and our ability to outperform in that, especially the initial cycle of that recovery is, you will see -- right now customers have taken unprecedented actions really to cut utilization…
Stacy Rasgon
Yeah.
Tim Archer
… within fabs and that’s impacted our spares and services business, pretty rare that customers take so much capacity offline. But that will be the first thing to come back, customers start to reutilize the fabs they have, the equipment they already have, and therefore, spares and service business will actually improve and the predominant beneficiary of that will be Lam, because of our large installed base.
Second is customers will begin to upgrade the installed base. A tool that was installed in 2021 for a critical application doesn’t have exactly the same capabilities you need to manufacture a leading edge memory in 2024, if that’s when the recovery starts. And so, therefore, those tools will have to receive technology upgrades and so that will be sort of the second evolution of the recovery.
And again, one thing we said about Lam, especially in the NAND space that may be somewhat lost is, Lam gets from a revenue perspective, about the same amount of money for an upgrade per bit added in capacity as we do from a greenfield at.
Stacy Rasgon
Really?
Tim Archer
And so -- and that’s primarily because if you think about what the upgrade is doing in a NAND device, we are primarily wanting to create a taller stack, more layers. And what you need to do to create a taller stack is you need to add etch and deposition tools to do that.
Stacy Rasgon
Yeah.
Tim Archer
And so, therefore, we capture a much higher percentage of every dollar of WFE spend from an upgrade than we do for a greenfield.
Stacy Rasgon
That’s an interesting question. So like what -- in terms of the lifetime like value or lifetime revenue of the tool, so you are saying like the initial like purchase price, it’s only maybe 50% of that lifetime value or is it even less?
Tim Archer
Yeah. We have said that the lifetime value is quite high in those systems through both upgrades…
Stacy Rasgon
Yeah.
Tim Archer
… as well as spares and services. And so now back to your China question about the upgrade -- upgrading that installed base versus rebuilding elsewhere, that’s ultimately going to be their decision and going to look at the U.S.-China situation and licensing.
But I think from Lam’s perspective, whether it gets upgraded or rebuilt elsewhere, both of those represent tremendous opportunities for us from a revenue perspective. Neither are happening right now because the industry just doesn’t need the capacity.
Stacy Rasgon
Yeah.
Tim Archer
But whichever of those plays out, both are very positive for Lam.
Stacy Rasgon
Got it. Maybe that’s a good segue into China and there’s a couple of aspects of this. So there’s the export controls, there’s the lagging edge demand, which -- I mean, even you guys are calling it out, which gives you an indication of how strong that is right now. Maybe to start with the export control, so just to remind everybody, you talked about $2 billion to $2.5 billion in -- I think it was $2 billion to $2.5 billion.
Tim Archer
Yes. Correct.
Stacy Rasgon
More recently, you talked about maybe like the through a rereading of the rules and nailing it down maybe the impact was a little smaller than that.
Tim Archer
Yes.
Stacy Rasgon
Maybe could you talk about that a little bit?
Tim Archer
Sure. So the restrictions affected the NAND segment, DRAM segment and foundry logic, and what we said was that the impact of all of those would be $2 billion to $2.5 billion. There was some uncertainty around one particular part of that, though, and that was why we had this range of $2 billion to $2.5 billion.
I would say that with the clarification we received and our ability now to ship some tools we thought might not have been shippable is, probably, more closer to the $2 billion and…
Stacy Rasgon
Okay.
Tim Archer
… the lower end of that range.
Stacy Rasgon
Yeah.
Tim Archer
And...
Stacy Rasgon
Yeah. I think this is in the memory -- on the memory side.
Tim Archer
It’s in what we would consider to be just trailing edge memory, yes.
Stacy Rasgon
Trailing. Okay. Got it. Maybe on the foundry logic in China. So this is something that I was in, you talked about on the call, you are sort of selling to Chinese customers that you have never sold to before. And in fact, you were actually collecting revenue upfront, I guess, precautionary action. What is driving that and just given that these are new customers, like, how do we think about how sustainable that demand actually is?
Tim Archer
Well, I think that, clearly, if you look at this next five years, six years, seven years of semiconductor revenue growth, that trailing edge business, because of growing demand for things like electric vehicles and CMOS image sensors and MEMS devices, power devices, everything that you are seeing in this -- what’s in the specialty technologies segment as we referred to it.
It is a -- there is strong growth there and a lot of that is tied to activities within those regions. I mean China is -- has a big push for electric vehicles, for instance, electric vehicles double the semiconductor content in vehicles.
And so, my feeling is that many of these regional investments, because of what happened in COVID and the impact people saw from not being able to get the chips needed, you are seeing people building for domestic demand in a much bigger way.
And so, whether that’s ultimately sustainable on a global basis, there’s a certain global spend that’s needed to fuel this trailing edge demand and the chips in all sorts of things and I think that we will see that build out for a number of years.
Stacy Rasgon
Got it.
Tim Archer
Automotives and those types of devices or those trailing, that’s one of the fastest growing segments…
Stacy Rasgon
Yeah.
Tim Archer
… of the semiconductor industry over the next number of years.
Stacy Rasgon
Are these new companies or the like have never built fabs before or like what kind of companies are they?
Tim Archer
There are new entrants. Clearly, within this regionalization, I think, you are going to see new companies coming in that some of which received government money, I mean, obviously, or -- and would set up in the trailing edge space where they think that, that technology is accessible and they see demand.
Stacy Rasgon
Got it. To be clear that the trailing node demand that you are seeing, it’s not just China, though, is it?
Tim Archer
No. No. This is a -- it’s a worldwide effect. Clearly, China is one area of strength for that market, but I think you are seeing similar trends in terms of the dependence on those trailing edge chips fuel so many other products within the global economy and I think this will be the source.
When you talk about regionalization and government subsidization, this is the market that likely will be targeted, because governments have now seen the impact of not having those chips on much broader parts of their economy.
You can’t get very simple trailing edge chips and you shut down an automobile factoring, that’s something that’s very impactful for governments in Europe, in the U.S., in Japan and so you are seeing investment in those locations driven by those needs and those resiliency concerns.
Stacy Rasgon
Do you think we have to be worried about a broadening of the export controls to start to hit some more of those lagging edge? There were some new stores or rumors not that long ago about the potential, we haven’t heard anything since, is this something we should be thinking about?
Tim Archer
I think we always have to watch any risk closely, but the reality is the line right now is drawn at foundry logic…
Stacy Rasgon
Yeah.
Tim Archer
… 16-nanometer and below, the vast majority of this spending when you are talking about industrial or automotive applications, et cetera, are significantly higher than that. And so it’s something we watch, but at this point, we don’t have any indication that there will be an expansion of those restrictions.
Stacy Rasgon
What about the threat longer, again, probably, longer term, but like broader decoupling? So everybody always worries about the potential for like local Chinese players to start to build equipment. There are a few players got AMEC and does at and there’s a few, some of it I think I put on the entity list recently, so maybe we don’t have to worry as much about them. But like how possible or especially now if they have to focus 100% of their effort on trailing node and lagging edge. Is that something that becomes viable, I mean, maybe it’s 10 years from now, can they build a local ecosystem?
Tim Archer
I think that many of these companies actually have been around for over 10 years, 20 years.
Stacy Rasgon
This been around, I mean, I left school in 2004. They were there then I think.
Tim Archer
And so, what I would say is that, the companies over time can make progress. I mean, it requires an ecosystem, requires partners within the industry to sort of help you. We get a tremendous amount of help from our customers, telling you what problems need to be solved. I mean, what would make your tools more valuable to them.
And in many ways, I think that, we worry a little bit less about them than just, again, moving our company and our technologies that much faster. And so a big focus inside our company right now is when I talked about reengineering some of our business processes.
How do we go faster? How do we innovate faster, introduce new products? And at the end of the day, customers that want to be -- our customers that want to be successful, they will buy the best equipment. I mean because that’s fundamentally how they compete and they -- I think that those local industries, they can have some success at the very low end of the market, but the real push for us is to continue to grow our position at that leading edge.
Stacy Rasgon
Got it. For all the lagging in stuff, is that all what you call Reliant or is there -- is it broader Reliant that 200-millimeter tools, right? The…
Tim Archer
Reliant includes can also include 300.
Stacy Rasgon
It can. Okay.
Tim Archer
Yes.
Stacy Rasgon
Okay.
Tim Archer
So, yes, it’s mostly comprised within the Reliant business.
Stacy Rasgon
Okay. How big is -- I know you include Reliant within services, right? Not...
Tim Archer
Within the CSBG business, yes.
Stacy Rasgon
Yeah. I should call that. Why is that by the way, why do you, I mean, even in there?
Tim Archer
I think it’s probably a little bit historical. If you think about where that business came from, primarily, the trailing edge business was serviced through mostly the sale of refurbished equipment.
Stacy Rasgon
Oh! Oh!
Tim Archer
And so, therefore, it was quite tightly coupled with the installed base, because you looked at what the install -- the way customers tend to purchase in that market was, if you looked at the tools that were in the installed base and you called up and you said, I need one or two more, and by the way, if you could find me a used one…
Stacy Rasgon
Okay.
Tim Archer
…that would be best, right?
Stacy Rasgon
Okay.
Tim Archer
Because you are really just buying a little bit of extra capacity, today that world is quite different, because now as you just pointed out, there’s greenfield fabs being built specifically for these applications and so, to that extent, it’s a little less tied to the installed base and...
Stacy Rasgon
Yes.
Tim Archer
… but that’s, I think, the historical evolution of that.
Stacy Rasgon
So that’s an interesting segue into the whole question around capital intensity. So there’s a thesis which kind of makes some sense that part of the reason capital intensity is going up is on lagging etch. Historically, there was a thriving used equipment industry and people didn’t really add a whole lot of greenfield lagging edge capacity. And now I mean they are still used tools, but a lot fewer than they were.
Tim Archer
Yes.
Stacy Rasgon
And a lot of the factories that are out there fall, because there’s content increase stories in auto and in industrial and so a lot of these installations now are greenfield at much higher capital intense. And just, Texas Instruments, for example, they bought a ton of used equipment 10 years or 15 years ago and they have been running 4% of revenue CapEx and now they are going to be doing 18% to 20% for the next like five years or whatever. Now I guess nobody you agree with that, is that a driver of capital intensity? And do you have a view long term on where capital intensity can go? So maybe two-part question. We did 16% to 16.5% last year, maybe it’s 15% this year, and obviously, it doesn’t go up every year bubbles around. But if we are going to do $1 trillion, even to 15%, that’s $150 billion. Is it $1 trillion and like a 20% capital intensity, which used to sit there if you go back 15 years, 20 years. Is that a plausible number, if I am looking out 10 years, 15 years, do we have a $200 billion WFE?
Tim Archer
Well, it’s a great number for Lam. If that were the case. But I think we are more comfortable in the…
Stacy Rasgon
Yeah.
Tim Archer
We are more comfortable in the 15%.
Stacy Rasgon
Okay.
Tim Archer
I think when you look at this, it’s, of course, we are always focused on our customer’s ability to afford the equipment and the processes…
Stacy Rasgon
Yeah.
Tim Archer
… of the technology moves forward and we are very sensitive to that. And so our job really is, we look at it is two-fold. One is to deliver the technology and to deliver the productivity that allows them to be successful with it.
And that’s clearly, you have seen capital intensity inching up, partly I think your specialty technologies that trailing edge piece certainly has played a factor. But even there, when we were offering refurbished equipment, it was because we thought that was the best most cost-effective solution for customers and they agreed.
And today, I think, you are still seeing even in that segment where they now have much higher capital intensity, we are starting to now look and say, well, how do we bring some of the newer higher productivity tool sets that maybe have been delivered for 300-millimeter or those back to 200-millimeter.
We are trying to bring things like looking at platforms that use like equipment intelligence, the data and artificial intelligence capabilities, we have that are used at 3-nanometer and beyond. Some of those may have productivity benefits even back in trailing edge fabs to help them lower cost do maintenance at a lower cost.
And so I think that just throughout this, we focus on how to bring productivity. That will trade off capital intensity somewhat in the short-term, but over the long-term, I think, is great for the long-term health of the industry and $150 billion WFE in 2030 would be great.
Stacy Rasgon
Doesn’t sound all bad.
Tim Archer
Doesn’t sound all that bad. So…
Stacy Rasgon
Yeah.
Tim Archer
I think that we are…
Stacy Rasgon
Yeah.
Tim Archer
We focus very much on the long-term sustainability…
Stacy Rasgon
Yeah.
Tim Archer
… of the industry, as well as our position…
Stacy Rasgon
Yeah.
Tim Archer
… within it.
Stacy Rasgon
And I’d argue the industry is more sustainable. So I know people are getting worried it’s a downturn, I mean, fine. Even in then we might do 70, 75, maybe more like who knows. I mean it wasn’t that long ago. I think you may have even been here we were talking like a $50 billion like long-term normalized WFE. Now it’s could be $100 billion, it could be $150 billion and like I think capital intensity bottomed in, I can’t 2012 or something like it was probably under 10% and it’s gone up a ton. Maybe if you want to talk about some of those? What I am trying to get at is like can those continue, I guess, like, maybe some of the drivers of that improvement, almost 300-millimeter wafers reaching saturation in some ways NAND going from 2D to 3D. There’s still tons of other like structural changes that are happening?
Tim Archer
Well, the best -- I think there are, clearly, complexity continues to grow.
Stacy Rasgon
Yeah.
Tim Archer
And that’s why I say the challenge for us is how to deal with that complexity without…
Stacy Rasgon
Yeah.
Tim Archer
… adding in kind of an undue level of cost.
Stacy Rasgon
Yeah.
Tim Archer
And…
Stacy Rasgon
And is that where the share gains are coming from like...
Tim Archer
That’s…
Stacy Rasgon
…long?
Tim Archer
Exactly.
Stacy Rasgon
Okay.
Tim Archer
So I think that what we are what we are focused on and pick, for example, the work we are doing right now in dry resistant EUV. It’s a perfect example of…
Stacy Rasgon
Yeah.
Tim Archer
… kind of solution for a customer, which adds productivity from the standpoint of changing the resist, makes EUV more productive, means you spend less money on EUV and we pulled some of that spending over into our area.
Stacy Rasgon
Yeah.
Tim Archer
Customer’s capital intensity may not change at all. It’s just we have shifted that…
Stacy Rasgon
Yeah.
Tim Archer
… from one part of the market to another and save the customer money through a more productive process. And I think that’s how we really look at in many of these steps and those do turn into share gains for us and I think that’s -- when you can solve both the technology challenge and the cost challenge, you definitely win.
The other thing that we look at is over time capital intensity doesn’t necessarily have to rise for the whole industry, it just has to rise for etch and deposition for Lam to be happy. And if you look at what the trends are over the next five years, six years, seven years, definitely it’s in the direction of more 3-dimensional devices.
You see gate-all-around coming, which is -- we think it’s the industry’s first true 3D device in foundry logic requires a lot of new processes in etch and deposition, things like ALD, selective etch. Those are all processes that are kind of open field. I mean there’s no incumbents.
They increase etch and dep intensity, and Lam has a chance to win those positions and gain share. Maybe by the end of the decade, you have 3D DRAM programs coming. Again, increases etch and dep intensity quite dramatically. There are other elements of equipment segments that then go down in the 3D DRAM space to keep capital intensity at an affordable level…
Stacy Rasgon
Yeah.
Tim Archer
…but Lam can be the winner in that case. You see advanced packaging. Advanced packaging again, maybe that’s an area of increased capital intensity…
Stacy Rasgon
Yeah.
Tim Archer
In the packaging space that allows them to save in the chip manufacturing at the leading edge in the -- on the other equipment side foundry logic and things like, I know maybe you will have an AI question, but...
Stacy Rasgon
We will talk about. We will talk about AI.
Tim Archer
But advanced packaging is one that is a big beneficiary there and we will see growth.
Stacy Rasgon
So let’s talk about some of these efforts in foundry logic. That probably will lead into AI. So you talked about gate-all-around in some of these new processes…
Tim Archer
Yeah.
Stacy Rasgon
… and you play in a lot of those areas, atomic layer deposition, selective etch. Have you guys ever quantified, I am not sure in terms of like the value like per 100,000 wafer starts, like, what is the incremental opportunity from gate-all-around for you?
Tim Archer
We just -- we are talking about the fact that it’s a $1 billion incremental opportunity for us.
Stacy Rasgon
Overall or…
Tim Archer
From foundry logic perspective for our equipment in around, that -- through that transition.
Stacy Rasgon
Okay.
Tim Archer
And it’s primarily coming from new applications we said from ALD selective.
Stacy Rasgon
Is that an annual number, by the way, or like or just an overall or…
Tim Archer
That is a...
Stacy Rasgon
I know how it’s defined.
Tim Archer
Yeah. The -- we have defined it. It’s incrementally as those processes were placed. I mean could be an annual incremental.
Stacy Rasgon
Okay.
Tim Archer
Yeah.
Stacy Rasgon
Okay.
Tim Archer
So I think that again and it results in market share gains for us, because those are areas like ALD, where again they are replacing older technologies, other...
Stacy Rasgon
What gets replaced as some of these new processes like come in?
Tim Archer
No. It’s -- as you go and build, I mean, basically, ALD is replacing older, more conventional types of CVD processes, for instance, selective etch is replacing certain types of more conventional etch. But they are also all quite additive, because if you think about in that device now that to build this device with nanosheet…
Stacy Rasgon
More layers.
Tim Archer
More layers, more steps.
Stacy Rasgon
Yeah.
Tim Archer
And so, in some cases, a direct replacement. I mean, in some cases, just new steps that are required because of the complexity of that device. And so it’s really a SAM expansion as much as anything.
Stacy Rasgon
And so you talked about more going to etch and dep. It’s sort of funny because logic over the last couple of years, it really seems like more of it’s been going to litho as EUV has become more deployed. Are we looking at the case where like EUV at this point becomes more mainstream, because the issue is that we have got more and more layers as you go to three and then the prior nodes and the EUV layers are going up? Are we reaching the point pretty soon where like that stops going up and then etch and dep now has room to grow? Is that what you see?
Tim Archer
I think that’s the trend we see. When I think about that drive resist process.
Stacy Rasgon
I want to ask about that one, too. I love that.
Tim Archer
But that process, it’s -- we refer to as a drive resist this process, but actually it’s an entire stack that’s designed…
Stacy Rasgon
Yeah.
Tim Archer
… to make the EUV process more productive. One of the unique parts of it is and it’s an under layer deposited film that also helps with it goes under the resist. So it’s not even part of the resist itself, but that under layer process helps with EUV photon absorption.
Stacy Rasgon
Okay. So I guess your reflective coating or…
Tim Archer
Kind -- that kind of idea, and therefore, it can reduce the EUV dose required for exposure.
Stacy Rasgon
Okay.
Tim Archer
Makes the EUV tool more productive. So your point of how do you make it such that the EUV portion of the total WFE spending doesn’t just keep rising to the point you can’t afford to purchase any other equipment you have to make the EUV more productive.
Stacy Rasgon
Yeah.
Tim Archer
And we do that by adding these new dep steps, deposition steps and that helps us pull some of that SAM over into our market.
Stacy Rasgon
I got to remember it was a few years ago, did you do size that was, I can’t remember, $2 billion, I can’t remember.
Tim Archer
We said -- when we sized that a couple of years ago, we said $1.5 billion incremental a five-year period.
Stacy Rasgon
Over a five-year period, okay.
Tim Archer
But obviously ramping through that…
Stacy Rasgon
Yeah.
Tim Archer
… five years so more back end loaded.
Stacy Rasgon
Where does that come from? Is that -- does that come out of track or like where does...
Tim Archer
Yeah. It would be a replacement of that type of market.
Stacy Rasgon
Okay.
Tim Archer
Yes. So the equipment is sold to do wet-resistant tin and treatment.
Stacy Rasgon
Okay. Got it. So given all this talk about like leading edge logic, let’s talk about AI, because everybody is going to talk.
Tim Archer
Sure.
Stacy Rasgon
So, I mean, clearly, we are seeing a surge of demand right now and I can make the argument that we are very early. And these chips, I mean look, this is something that does require like the most advanced logic and the at least from NVIDIA, like, they are enormous dies and I mean -- and they can get paid for this, I mean, this whole question of like in the industry of Ford this stuff if you are selling these chips for $30,000 or $40,000 a piece like you can probably worth it. I guess what are your thoughts on what AI does? I get the question a lot, when everybody is look at this $1 trillion semi number. Is all this like push on AI, is it additive to that number or is that what helps us get there? Just, in general, like what are your broad thoughts on what AI means for the industry and for semi cap?
Tim Archer
Yeah. I think longer term, what it does to the $1 trillion a little harder to answer. I mean just because that’s number still pretty far out there and…
Stacy Rasgon
Yeah.
Tim Archer
But I think in the near-term, I mean, one area that we know is and we really feel as incremental is advanced packaging. As you look at a cross-section of one of these AI systems now that incorporates…
Stacy Rasgon
Yeah.
Tim Archer
… not only the GPU, but a tremendous amount of high bandwidth memory stacks, a tremendous amount of other DRAM, NAND. All of that is packaged up inside of a 2.5D or 3D advanced package.
And so just from Lam’s perspective, where we provide processes like the etch and the deposition for those advanced package steps. We see our SAM doubling in just the next three years to four years…
Stacy Rasgon
Okay.
Tim Archer
…because of AI…
Stacy Rasgon
Okay.
Tim Archer
… for advanced packaging.
Stacy Rasgon
Okay.
Tim Archer
For advanced packaging SAM. And so that’s a increment -- direct incremental increase as a result of AI needing these advanced packaging processes that really -- the high bandwidth memory has been around for a while…
Stacy Rasgon
Yeah.
Tim Archer
…but it hasn’t had a big driver because of some of the cost issues associated with that and -- but now that it actually has end market application. We are seeing increased demand for high bandwidth memory related tools for the silicon interposer related tools, everything that’s needed to put all those chips together in an AI system.
Stacy Rasgon
Got it. Have you guys ever quantified your advanced packaging exposure?
Tim Archer
I don’t think we have.
Stacy Rasgon
I want to ask you to if you haven’t.
Tim Archer
No. I don’t think we have. But it’s becoming -- it’s a meaningfully growing area for us.
Stacy Rasgon
Okay.
Tim Archer
And our position especially when you think about the process steps that are required to create like through silicon ways and other important steps, you need Lam matches, you need Lam copper plating tools.
Stacy Rasgon
Okay.
Tim Archer
Those are two of the big steps for us.
Stacy Rasgon
Got it. Got it. I wanted to ask about the chip act and the broader question of like regionalization of manufacturing. And I get the question a lot, like, is that -- you -- like, does it make you worried about like the risk of oversupply and overbuild because of this? And I guess what are your views on, I guess, number one, just clearly the drivers of this and the geopolitical issues. But also that question, does it lead to like more capacity than we need is the overbuild risk? What are your thoughts on that?
Tim Archer
Well, I think that, as I spoke earlier, the -- some of the regionalization, some of that’s going to be leading edge, some of it’s going to be specialty technologies. So each of those probably has a slightly different answer.
But, from our perspective, let’s take maybe the trailing edge piece first, which is from a specialty technology perspective, we see that part of the market continuing to grow. So when you talk about the $1 trillion market, a lot of that growth will be -- some of that will be in specialty markets, you are going to need to add fabs.
Whether those fabs are added all in one location through a foundry as it has been done in more recent years or it’s done much more geographically dispersed, probably, for us from an equipment perspective doesn’t really matter.
I think the one thing that actually does matter and we have been thinking about is what new opportunities get created by this. I think one area is going to be, as I mentioned, those fabs now that are more geographically dispersed, one, they may be smaller, workforce development is one of the big issues that is being talked about in all of these regions.
Stacy Rasgon
I wanted to ask about talent.
Tim Archer
And…
Stacy Rasgon
Yeah.
Tim Archer
And so we are looking at employing now some new, like, our equipment intelligence services. If you can use data base service -- data services, data analytics, machine learning to do predictive troubleshooting, we can do some of the remote support capabilities we developed during COVID when we couldn’t travel.
These may be the perfect types of advanced services that we can sell to those smaller geographically remote sites that are going to have more difficulty to maintain their equipment and keep it on rational when they don’t have Lam or other companies’ personnel right there on site to help them and so we do think it creates opportunities in our services business by having these separate fabs?
Stacy Rasgon
I guess within services along those lines, like, is there more opportunity for you guys to do more value add, are you moving more customers towards subscription and your competitor talks about this norm a lot, like, what’s Lam doing along those lines?
Tim Archer
Yeah. We haven’t used the term subscription per se, but we often talk about results based contracts, which is somewhat similar to the extent that we get the customer focused on the result that’s being created and through those main added services and we have seen an uptick in that.
And I think that when we talk about workforce and customers trying to expand some of these customers that haven’t done those types of expansions. I think there is an opportunity for us to provide more value-added services in making sure those fabs can run at high levels of availability and utilization.
Stacy Rasgon
Okay. Got it. I think I asked you this question last year, but talking about that value add, it’s -- to me it’s amazing like the value that you and many of your competitors had and I look at why do your gross margins start with a four, like, why can’t they be higher?
Tim Archer
Yeah. Well, I think, as you know, we have put out a long-term model that has our margins in the high 40s. I think we are still driving towards that. Obviously, COVID set us back, we felt -- pre-COVID we were on a nice trajectory.
Stacy Rasgon
And I guess the China issue, too, like, they were paying, seems like they were willing to pay more for the equipment than Samsung was.
Tim Archer
And so, clearly, now we are a little bit off of those numbers. But, again, we are in a pretty significant transformation right now of our global manufacturing and supply chain. I talked about some of the business transformation…
Stacy Rasgon
Yeah.
Tim Archer
… investments we are making. I think that those are -- as those execute over the next couple of years, we are going to be back on track to that.
Stacy Rasgon
Is Malaysia online now by the way, is that?
Tim Archer
It is.
Stacy Rasgon
Okay.
Tim Archer
It’s still ramping and we are still completing some of the transformation of the supply chain to put and develop the suppliers much closer to that large facility, but it’s progressing very nicely.
Stacy Rasgon
Got it. When does that sort of like reach full scale?
Tim Archer
Well, we need, I think the WFE market to improve a little bit to fill up all of our factories.
Stacy Rasgon
Yeah. Yeah.
Tim Archer
But as we think about the next ramp, we will have moved a significant portion of our manufacturing capacity into…
Stacy Rasgon
Okay.
Tim Archer
… Malaysia, as well as our factories in Taiwan and Korea, which I think positions us very nicely for where we think geographically the next ramps come.
Stacy Rasgon
Okay. How are you positioned, though, for presumably, hopefully, if the CHIPS Act does what it’s supposed to, we will see more building here in the U.S. Are you positioned for that as well?
Tim Archer
Sure. We have always had a significant U.S. manufacturing presence and I think that this -- we are using this transformation to kind of rebalance…
Stacy Rasgon
Okay.
Tim Archer
… to ensure that, one, the global supply chain and manufacturing footprint is a little bit more resilient than it was. During COVID, what you learned was, again, not only is it necessary to have supply chain and physical infrastructure, but also access to workforce and we kind of are managing the risk in that way now.
Stacy Rasgon
Is the workforce available? I mean just -- maybe there’s a broader question like what are your thoughts on sort of the progression of the CHIPS Act so far and where it’s going and like what are the biggest risks like to accomplishing its goals, workforce has to be one of the…
Tim Archer
I think, of course, workforce is one. I mean it’s a tractable problem though. I mean it’s, again, it’s an area that, again, back to thinking about distant fabs. Our fabs that aren’t all located just within driving distance of each other as some of the big concentrated regions are today. I do think you are going to need to employ more tools, as I mentioned, like equipment intelligence…
Stacy Rasgon
Yeah.
Tim Archer
… like remote support. In fact, Lam, we have even transitioned to a good portion of our equipment training to virtual reality now. And that was, certainly, because it was too expensive to build physical training centers close to these customers and as the customers continue to spread out into new areas, you need to find less expensive ways to get that workforce up and trained.
And so a lot of our equipment training now is done using VR technology and it’s quite effective and only in rare instances do those customers or our engineers that need to travel to an actual physical location for training.
Stacy Rasgon
Got it. So how do you guys differentiate versus the competition in etch and dep? Again, a lot of investors they have never been in a fab. They don’t know what these tools look at. They don’t know what they do. Like what’s -- like how do you take share, you are clearly taking share in areas like foundry and again the market hopefully is going to. But like what is it that you are doing like specifically around like the tools and the technology that lets you like take sure, like, where do you differentiate?
Tim Archer
Yeah. I mean it’s a technology business. So the reality is its speed to solutions for the -- for what the customer needs. And that sounds pretty simple, but it’s -- we all kind of have similar visibility to what the customer’s next challenge is…
Stacy Rasgon
Yeah.
Tim Archer
… whether it’s like I mentioned, ALD or it’s.
Stacy Rasgon
How far out do you look by the way?
Tim Archer
We are engaged, probably, four years, five years…
Stacy Rasgon
Okay.
Tim Archer
… at this point, which is also why we have been mentioning it, foundry logic gains. These are the result of investments we made three years, four years, five years ago and you are just starting to see those come to fruition now and we have talked about having a very rich pipeline of new products. That’s really what we are -- those products are intended to drive and fuel growth four years or five years out from now.
And so how do we differentiate? Again, it’s very close, obviously, very close engagement with the customer on those most difficult challenges. But then, again, it’s about the speed with which we can then innovate, something that both solves that problem, but does it in a way that the customer recognizes is affordable for them for the long-term.
Stacy Rasgon
Got it. We have got some questions here. We got about 5 minutes or 6 minutes left.
Tim Archer
Sure.
Stacy Rasgon
We go to the audience. I will let you.
Tim Archer
Yeah. Sure.
Stacy Rasgon
Some of these are longer term, some of these a little shorter term.
Tim Archer
Okay.
Stacy Rasgon
So it is what it is. Maybe the longer term, how much more etching deposition is needed for gate-all-around the 3D architecture? Is it 50%? Is it multiple? Like approximately how much?
Tim Archer
It’s a hard question to answer, because within the gate-all-around, I mean, it does -- the device itself, it adds a number of steps that, as I mentioned, either it’s ALD or it’s selective etch, quite a few new steps within the formation of the gate-all-around structure itself. I don’t think we have quantified it in a percentage basis. But for us, a number of new applications and a number of new tool sets that we can now sell.
Stacy Rasgon
And to be clear, that’s not really what’s been driving the share gains that we have seen...
Tim Archer
No, no, no.
Stacy Rasgon
Yeah.
Tim Archer
Gate-all-around is still to come.
Stacy Rasgon
When does it come?
Tim Archer
I think you are going to see data around begin to ramp in the next one year or two years right? I mean this is -- the gate-all-around story is the next couple of year story. What has been driving a lot of the share gains up to this point has been applications like ALD, but not related to gate-all-around, but other things related to technology inflection needs like resistance capacitance delays.
So things like ALD for lower case base type films. We have been doing quite well. The small pattern edge. I mean basically you are having -- as you are implementing EUV, you need ever better etch to define those patterns. And so we have been gaining share in that space as well. So a number of different areas, but to gate-all-around gains…
Stacy Rasgon
Got it.
Tim Archer
… is still to come.
Stacy Rasgon
Maybe a related question for memory, like is 3D DRAM eventually rolls out. Is your opportunity in 3D DRAM as significant as your opportunity in 3D NAND clearly was?
Tim Archer
No. We are still sort of sizing that. But it is a significant -- it’s hard to compare the two, but it is a significant increase in our opportunity compared to conventional DRAM, especially on the deposition side.
Stacy Rasgon
Got it. Another question.
Tim Archer
Okay.
Stacy Rasgon
How do you square NVIDIA’s revenue guide with your current outlook and depressed demand, is it just a timing issue? I have got my own views on this but...
Tim Archer
Okay. I guess the easy answer is a timing issue, but I think, clearly, it’s, again, we are levered to a much broader industry and so while we clearly see increased demand, I mentioned already starting to emerge in things like the advanced packaging, where people realize now I need to add capacity to meet that, that’s a relatively narrow part of our demand profile.
Stacy Rasgon
Yeah. Yeah. My own view, by the way, is just, it’s a lot of -- I don’t think it’s that much wafers at this point, right? I think the cycle is much bigger, although, that may change as we go forward.
Tim Archer
Yes.
Stacy Rasgon
Another one a little near-term. AMED suggests we are close to a bottom with memory with your memory customers, what’s your view on that?
Tim Archer
I think we have said we think we are sort of bouncing along that.
Stacy Rasgon
Yeah.
Tim Archer
Bouncing along.
Stacy Rasgon
I hope it can’t get any worse.
Tim Archer
It feels like, as I mentioned, more than 50% down and NAND down more than 70% -- about 75%. It’s doesn’t feel like it much work here.
Stacy Rasgon
Yeah. Yeah. What are your priorities for use of cash and how might that be different in the current environment?
Tim Archer
We really haven’t changed. I mean we are generating a lot of cash. We generated about $1.6 billion in cash last quarter. So incredibly cash generative company. We have said, look, the uses of cash, invest in the business as much as we need.
We are building our facilities in places like Malaysia, we have built a new R&D center close to our customers in Korea. So we use the cash as we need to, but then still have tremendous amount of extra free cash flow.
Stacy Rasgon
Yeah.
Tim Archer
I said we will return 75% to 100% of that to customer -- to shareholders…
Stacy Rasgon
Yeah.
Tim Archer
…through buybacks and dividends.
Stacy Rasgon
To be clear, I guess, if I know it’s lumpy year-to-year, but if I sort of take a five-year average, you have been returning 100% plus.
Tim Archer
Right.
Stacy Rasgon
It’s been -- hasn’t been 75%.
Tim Archer
That’s right. It’s been closer to 100%.
Stacy Rasgon
Much closer. Got it.
Tim Archer
We leave ourselves room and look we have said that where we think that some small tuck-in technology type M&A can help us accelerate new products and SAM expansion.
Stacy Rasgon
Yeah.
Tim Archer
We will make those, but there just really aren’t that many, many...
Stacy Rasgon
And I guess, long -- large-scale M&A in this industry is pretty much impossible at this point. It’s been trying to -- you guys tried it as well.
Tim Archer
We tried it, competitors tried it. I think large scale is pretty tough at this point.
Stacy Rasgon
Yeah.
Tim Archer
…given the regulatory environment.
Stacy Rasgon
Got it. So, Tim, thank you so much for coming. We have got about 1-minute left. I will give you a soapbox. Why should investors buy your stock?
Tim Archer
Okay. Sure. I need more than a minute. But, no, it’s -- look, I think, first, we start with the fact that. I think we are in a great industry. We talked a lot about the fact that the underlying driver for our business is growth in semiconductors themselves.
I think there’s no doubt right now that semiconductors are on a long-term secular growth path and whether it’s a $1 trillion, $1 trillion plus, it’s going to drive growth in the WFE market overall.
And our view is when you look at the technology that’s coming, it’s heavily levered towards these vertical integration, 3-dimensional scaling of the devices, which plays very heavily to the etch and deposition markets.
And so we think about within that growing WFE market, etch and dep intensity continues to grow and then couple that with the installed base business that will grow and continues to grow, generate cash in the business, our cash return policies just feels like a great place for our company to be right now and in years to come.
Stacy Rasgon
Got it. I think we will close it out there.
Tim Archer
Great.
Stacy Rasgon
Thank you so much.
Tim Archer
Thank you.
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Lam Research Corporation (LRCX) Management Presents at Bernstein 39th Annual Strategic Decisions Conference (Transcript)