LRCX - Lam Research Corporation (LRCX) UBS Global Technology Conference (Transcript)
2023-11-28 18:35:25 ET
Lam Research Corporation (LRCX)
UBS Global Technology Conference
November 28, 2023 4:15 PM ET
Company Participants
Tim Archer - President and Chief Executive Officer
Doug Bettinger - Executive Vice President and Chief Financial Officer
Conference Call Participants
Timothy Arcuri - UBS
Presentation
Timothy Arcuri
Okay. We're going to get started with our next session. I'm Tim Arcuri. I'm the semiconductor analyst here at UBS, and I'm very happy to have Lam Research with us and very happy to have both Tim Archer and Doug Bettinger with us. Rare to get both Tim and Doug on the stage together. So thank you. This is great.
Tim Archer
Thanks for having us. I think that tells you it's a big conference. It's the two of us.
Question-and-Answer Session
Q - Timothy Arcuri
Well, maybe let's start, Tim. So your competitor reported the week before last -- one of your competitors. Did you hear anything that surprised you and what they said that is different than what you're saying and sort of the outlook on the market? DRAM pricing certainly is getting a bit stronger. Any changes in the market that you might have seen over the past month or two?
Tim Archer
Yes. Well, first, thanks again for having us here. And I think you all caught the safe harbor statement that was up there since you dive right in with the -- what are you seeing in the market ahead.
No, I think that I kind of go back about 6 weeks ago when we had our earnings call, we talked about not yet our '24 guidance. We'll do that at our January earnings call. But we talked about how the year was playing out where we were seeing NAND being a little bit weaker, DRAM being stronger now, especially driven by HBM. We see foundry logic continuing to be pretty strong at the leading edge, maybe a little bit weaker at the mature node. And I think that's pretty much the view we're hearing from all of the equipment companies today. We meet the same customers. And so that is -- not a lot has changed. And I think that with that view, we see a really great opportunity for Lam ahead, just given in the short term, the markets where we're strongest happen to be the ones that we believe have fallen the furthest relative to the investment and therefore, should be coming back stronger in the year.
Timothy Arcuri
And just in terms of WFE, I mean, I asked this question I think, to every company so far.
Doug Bettinger
You come to Tim Arcuri question, by the way. You know what I'm talking about you are laughing.
Timothy Arcuri
So I look at the WFE this year and your share already, even if I assume 80 billion, your WFE share is going to be as low as it's been in 7 years because the mix is very unfavorable.
Doug Bettinger
It's all mix.
Tim Archer
Mix. Now if WFE really, if I include litho, it appears that WFE probably is going to end up to be closer to 90 this year, which would then mean that your share is even lower. So can you just talk about sort of as you deconstruct what's gone on in your share? Is it truly all mix?
Doug Bettinger
It's all mix. There isn't any meaningful change in share at an application level. And frankly, litho, if you buy in a litho tool because of how long the lead time is, we come afterwards. And so there's a little bit of that going on. And there's a little bit of why the sales into China being more than we realized because we're not participating into that part of the restricted marketplace. That's all that's going on, Tim.
Tim Archer
Yes. No, I think that when we look at the application basis, where we're winning and the increased use of vet and depth, I mean, I think we feel really, really good, actually. You can't do much about mix. And in fact, as I said, from a short-term setup perspective, the fact that NAND WFE is down more than 75% a year clearly hurts us quite a lot. But we also know that many of those tools that were shipped in '21 and '22 when the industry starts to come back, not only are you going to be adding sort of starting those up, you're going to be doing tech conversions, those tech conversions will come at higher layer counts. And for us in NAND, higher layer counts not only means more tools to build and etch the higher stack, but it also means additional tools to help with the added complexity of the stress on the wafer that's created by more layer accounts the additional steps needed to do multi-tier stacking. And so I think we're very positive that actually our share will continue to grow with tech and depth intensity increases given the complexity of 3D.
Timothy Arcuri
Yes. And a couple of other kind of idiosyncratic drivers off the bottom. Whatever happens to WFE, would you say it's fair that there's been all this litho capacity that's been bought and has been installed? And so the greater capture rate that you should have a greater capture rate of WFE moving forward because it's been so litho heavy and now you have to fill in around all the films tools around litho. Is that fair?
Tim Archer
Well, I think that's certainly true. And I think that was kind of Doug's comment about many of the litho capacity gets put in place. And I wouldn't say that necessarily that they're done with that, but there is a need to fill in with all the other steps that are needed to fully utilize those tools. In addition to that, we grew our installed base from 2019 until now by about 40%. And so there's also a very high capture rate that we get from the conversions that are going to be coming on the memory side. And so I think there's an element of etch and deposition have kind of suffered through this big build-out of the litho capacity and the infrastructure. And even as you look at CapEx overall, I mean, a lot of the building and the fab infrastructure. And I think our day is coming now as you look at tech conversions that are very etch and depth intensive, you look at new buys in memory, the mix starting to come back a bit in our favor. And I think that that's where we have captured a much higher percentage of WFE going forward.
In addition to that, in the last few earnings calls, we've used the opportunity to highlight a few tech inflections that you're really not seeing right now because of where we are in the cycle. But whether it's the impact of advanced packaging or -- which includes HBM, gate-all-around, the dry EUV resist product we have, backside power delivery. In the last 4 earnings calls, we've talked about those of us because they're all $1 billion plus SAM expansion/market share growth opportunities for Lam. And that's a really unique place to be in. And that's really partly because of the underexposure we've had in some of these marketplaces for a while, and we've made a conscious effort to invest in R&D to grow our portfolio into those inflections.
Timothy Arcuri
I want to ask you about that. So out of all those, is there any one of those that you're the most excited about? Or -- and in aggregate, how should I think about how that expands your stance.
Tim Archer
Yes. Well, I mean, actually, we're excited about all of them because they are great opportunities for Lam. But I think that each one is a bit of a different stage of sort of maturity/adoption. I mean we have a very strong position in advanced packaging at this point based on products that we already have in the marketplace and are very well proven. Electroplating, for instance, is a market in which we've had a very strong position for a couple of decades now. As it continues to play an ever more important role in advanced packaging schemes and in HBM, that's market share that's right there that we should -- that we fully expect to win as that -- those applications grow. So I'd say those are coming, their products are in place, products are being ordered, and our product position is really strong. Gate-all-around is a bit of a more unique application and that pulls in new tools from Lam like selective etch, ALD. And it's an opportunity for us to participate more fully in the foundry logic build-out. You look at backside power, again, leveraging a lot of Lam strength in interconnect one of the kind of the core of the company for a long time, a big opportunity for us.
Timothy Arcuri
And it's like backside power is something where you can -- if the incremental WFE specs, I mean, is the capture rate for backside power for example, is the capture rate going to be like 50% for you or some huge?
Tim Archer
I think in each of these -- when we look at the products that are needed to enable these inflections, we actually believe that our capture rate should be at least as high as our current market share within foundry logic, which in itself is good. Our challenge in foundry logic hasn't been market share of our served market. It's that we need a broader product portfolio to serve more of the market. And as I think we've been often identified as the 3D NAND company. But actually, the reality is, is we've used the learning from that 3D NAND experience over the last 5, 6, 7 years to really build out the capabilities to enable 3D inflections across all device types. And that's exactly all of those device sets I just talked about, gate-all-around is a 3D inflection in the transistor itself. Backside power is kind of a 3D build-out on the backside of the wafer you need etch and deposition to do that. Advanced packaging, it's 3D. It's things like chiplets. It's HBM, which is clearly 3D.
And so I think that we're kind of coming into our own relative to the use of 3D as a both performance scaler and frankly, a cost enabler. I mean, often, these new technologies are designed to help address the cost that would come if you try to just continue to scale in 2D itself. And so I think you're seeing just Lam's expertise in 3D playing out across a number of opportunities. And I think that's going to yield market share and served market expansion for us in the years to come.
Timothy Arcuri
So some people, there's the tailwinds, which you're talking about. There's the idiosyncratic pieces that you're now playing in pieces of the market that you're going to get a very big capture rate of. But then people say, well, NAND WFE is never going to go back to $17 billion, $18 billion, plus, plus, like it was. NAND, WFE, if you believe AMAT, they want you to believe that NAND will never go back to even $12 billion to $13 billion granted it was like $5 billion this year, but still, how do you handicap when people look peak to peak and they say, "Well, okay, your WFE share peaked at it, I think, 13.7, 14.1% when NAND was going crazy, maybe what you lose in NAND because the market never gets back to what it was, you're only barely even if making up for what you lose in the fact that the NAND market never gets back to where it used to be." How do you handicap the potential headwind of the NAND WFE not getting back to where it used to be? Or do you think that's the case?
Tim Archer
Well, I think we don't believe that -- I mean, first of all, never is a long time. I mean, we're fundamental believers in the continued growth of the semiconductor industry itself. And in that $1 trillion market, NAND will be higher in our view, much higher than the last peak. But for Lam, I think the most important thing is not just what is NAND WFE. But what is our capture of that WFE. And as time progresses, the installed base plays a larger and larger role in enabling bits going forward in NAND. And remember, Lam's capture rate in NAND tech conversions is a significantly higher percentage of WFE. So it can be true that WFE can be lower, but Lam's revenue actually continue to be higher. And that's simply because at every technology node, you need more etch and deposition equipment to help enable 200, 300, 400, 500 layer stacks, but you're doing it more efficiently. Grew tech conversions, which are highly efficient for the customer, but also a very high-end capture rate for Lam.
Timothy Arcuri
Well, we've made it 12 minutes into the presentation and I haven't asked about China at all. So maybe I'll start asking about China. So China this year, you haven't given a China WFE number within your [80], but it seems to me like it's in the low 20s, probably for the year, maybe it's 23. But in the back half of the year, and you can look at the export numbers, the Chinese government puts out these numbers and you can see them, it's easily in excess of 30 or the run rates in excess of 30%. And if you believe the export control numbers, it's even closer to 40% run rate.
So the back half of the year has just gone crazy. AMAT was sort of suggesting it well, that kind of comes off in the first half of next year. How do you see the trajectory of China? Is it something that you're like I don't know when it ends. I'm just going to ship what the customer wants. How do you kind of handicap that in terms of your model? Do you think that the market can sustain at $30-plus billion run rate per year.
Tim Archer
Yes, I mean, I guess, 2 things. One, the way we try to run the company is that we have to respond to what the customer wants or doesn't want. And so we try to be highly variable in the way we run the company. But to your point of the second half of this year, China being quite strong. I mean some of that was a factor of the DRAM component where we weren't sure and needed clarification whether we can ship tools. Those tended to pile up in the second half. And so I think there's some explanation of why there was so much in the second half of this year. We have talked about a digestion period that's kind of there. It's natural for any fabs, take a big project, you take a lot of equipment.
Your next job is actually to install qualify those tools rather than take the next big slug of tools. So I think there will be a period of time here, maybe it's the first half of the year. We'll give more color on that in January. We talk about first half, second half of '24. But I think -- in the end, we see some element of sustainability of spend in every region of the world given this drive that came out of COVID for a level of regional self-sufficiency. And that's true in China.
You see it in places like even Japan that's investing it, of course, in the U.S. and Europe. And I think much of that is still to come. Those -- many of those fabs are just being constructed, joint venture is just being set up -- and so whether it's China or elsewhere, I think you'll see this sustained spend for a period of time until people can menaces do we have the right amount to satisfy our supply chain resiliency goals or not. And if they -- once those are met, then we'll have to see where it goes from there. But I think this is a multi, multiyear event of this build-out.
Timothy Arcuri
Is it also fair to say that you -- or some of your peers that maybe have better DRAM WFE share than you. I mean a significant piece of what's going on here during the back half of the year in China, it's been DRAM. I mean, a big, big piece of it. And so you haven't captured as many of those dollars because your share in DRAM is not quite as high as some of your peers might be. I mean it's still pretty good it's good still. But I mean -- but DRAM, in particular, seems to be a big reason why you've seen this big increase here in the back half of the year.
Doug Bettinger
Yes, because of what Tim Archer just described, which is we couldn't ship in the first half or we were unclear and then we could. Likely that customer would have been spending through the year more steady if we knew that we could ship to them. And so that backpiled in the second half of the year. I think that's the dynamic that's showing up in everybody's numbers right now.
Timothy Arcuri
Got it. And how concerned are you there -- there's the local Chinese film companies that if you add up their revenue, they report their revenue and they're going to be probably 3% of WFE in 2024, maybe approaching 4% in 2025, if you believe what UBS is projecting any way for these Chinese companies. And then you consider, well, okay, China is, let's say, 1/3 of WFE and they don't serve the entire China market. They just served dep and etch. So they're actually a pretty big percentage of their SAM in domestic China. So is that something that, over time, do you see them more? Do you see that more as a competition or we spent the first 10 minutes talking about technology. And in the areas where technology wins, you don't see them or do you even see them pushing into those areas?
Tim Archer
I think that we're very realistic that the lower end of the market, I mean, they will make progress, and they have made progress. And more so, given the more recent situation and uncertainty about what could or could not be shipped in China. But I think in the long run, we'll compete against them just as we do everywhere else, which is to advance the technology faster. And one of the things that's unique about companies like Lam is -- and this is true when we compete against any -- I'm not sure -- I don't think that's me.
Doug Bettinger
I don't know who that is.
Tim Archer
When we compete against companies in whether it's China or anywhere else, Lam has access to every leading company worldwide. Many of these local equipment suppliers access a much smaller customer base and therefore, given how important those customer collaborations are to advancing the technology and not just can you etch something or created a uniformity profile. If it's often funny. The best uniformity profile that creates the best yield on a wafer, definitely is never a flat profile. It has to be customized to the customers' needs based on all the other accumulated steps that they run.
And so you need a very tight feedback loop with leading-edge customers in order to make sure that your tools and your hardware and your processes are not only ready for the technology, but really for mass production over an extended period of time on tens, if not hundreds of thousands of wafers. And so I think that always will -- the equipment suppliers that have more access to more customers and more engagement will innovate faster and therefore, in the long run win. And that's especially true. Many of those items I talked about, whether it's gate-all-around, it's dry EUV going to high NA EUV resist, I mean these are -- you need access to absolute leading-edge best-in-world customers.
Timothy Arcuri
Maybe we can shift and I'll direct the conversation to Doug, just because I know -- well, you're both so excited about CSBG. But Doug -- I mean, both love CSBG so much. But can you talk about your service business and maybe it is a bit different than your peers, the components of it. So can you talk about the components of the service business and maybe why you're so excited about it? I think by our math, service alone is $15 in earnings.
Doug Bettinger
Anyway, yes, that's working. Yes, I love the CSBG business in a lot of ways, it's my favorite part of the company's business model. When you decompose what in it. And by the way, customer support business groups, 4 things, spares, service upgrades and the Reliant product line, which goes into more of the specialty node investment area. It's a business that before this year, I used to describe as grows every single year. And it should, in a normal environment, grow every single year. The challenge this year is utilization on the memory complex is so low that that's a headwind for spares, service and upgrades, frankly. But it's part of the business model that just delivers cash generation and revenue over many, many, many years. On average, after we sell on average tool, we generate more revenue after we sell it than when it first shows up in WFE. I think people don't realize that and it's something we've been talking about for a few years, this business just keeps generating profit and free cash flow. It's a great part of the business model.
Prior to the real strength we saw at those specialty note investment spares, I used to describe as the biggest individual component. I now describe spares and Reliant as the 2 biggest components in CSBG, but it's a great part of the business model, Tim.
Timothy Arcuri
Great. And Doug, just a comment about you generating more revenue over the...
Doug Bettinger
On average, not every tool.
Timothy Arcuri
That's over the lifetime of the tool.
Doug Bettinger
These tools -- by the way, our tools run for decades. This isn't something that almost ever goes away. We have tools in the installed base that are 30-plus years. They don't go away. They'll get refurbished sometimes, they'll get redeployed from one application to another. They'll get moved from one fab to another sometimes, but they don't go away. And so that's why, like I said before, this year with the heavy utilization downtick, I would describe it as a business that grows every year usually because chambers grow every year. And that's a number -- Tim always gives at the end of the year, we'll give it at the end of this calendar year because that's an important part of what our monetization opportunity is.
Tim Archer
And I think, Tim, this is the number I gave earlier about since 2019, the installed base having grown about 40%. I mean that's 40% more chambers in our installed base generating fares and service opportunities. And it's why a lot of our focus is how to help the customers get maximum productivity from that installed base and at the same time, create new revenue opportunities for Lam. And we talked on our last earnings call about our new collaborative robot, COBOT.
Timothy Arcuri
I was going to ask you about that.
Doug Bettinger
And it's -- we recognize that there are economics to this business for our customers where, as tools honestly, as you deliver technology, they're becoming more complex and more costly. And so we want to find ways to help make those tools more productive such that it works for all of us and COBOTs is a way in which you can take kind of labor-intensive costly service that's also complex to do, meaning sometimes even a trained service in here cannot get it right first time. And you replace that with a COBOT that specialty programmed to do a certain maintenance task. And so far, our experience is really great in terms of improving that first-time right percentage, which saves you parts to get lost when you have to go back and redo a certain maintenance and also the lost productive time of that system from having it out of the manufacturing line.
Timothy Arcuri
So is that -- I thought that was pretty cool too. And is that something that you see becoming ubiquitous within the service offering?
Tim Archer
I think that what we would like to do is continue to work with customers to find those most labor-intensive, most challenging maintenance tasks and then see if a COBOT can help with that. Obviously, we've picked -- the first instance is our high aspect ratio etch process, which obviously has to be maintained at a really high level in order to ensure that we can do that 3D NAND etch. But I think over time, it will spread to more tool sets and applications.
Timothy Arcuri
And if you can keep the tool running longer, you can improve uptime, could you share in some of those economics?
Tim Archer
Well, I think that what we'd like to do is offer this as a service, as a replacement for the customer having to hire and train and deploy their own staff to do this. And so to a certain extent, in many ways, we've often been offering service contracts in what we call a results-based -- on a results-based basis. And so obviously, if we have high confidence that the COBOT can truly deliver higher uptime and therefore, more wafers out per day. I believe we can capture some of that benefit back to Lam and let the customer keep some of it as well.
Timothy Arcuri
So I had a question about the controls, the U.S. government controls for shipments into China. And it's our understanding that in the U.S., there's what's called long arm control, so the U.S. government can reach all the way into the service, how the tool is being used in the field. And the burden is on you as the supplier to then have your service people have a report back and say, well, the tool is being used for a process node that's an allowable process node.
Whereas for the non-U.S. companies in Japan and in the Netherlands, they don't have long arm control. So is that something where you where you do have to have your service people, the burden is on you where you have to report back to the government to basically prove that your tools are being used in a way that they're allowed to be used.
Doug Bettinger
Yes, we need a license for service and selling equipment. So it's one and the same in terms of what we're able to do, where we can service, what we provide. It's no different between service and the equipment itself. Tim, if you want to add anything.
Tim Archer
No. I think that first, we spent a lot of time and effort to ensure that we're compliant with all rules and one of those is to work closely with the customers to understand the applications. And there are many different ways in which the U.S. government has controls to ensure companies remain compliant. And I think that this is something that, over the last few years, we've built up a very strong team in our government affairs and foreign global trade to ensure that we follow all those rules.
Timothy Arcuri
And Doug, you -- there was a time when we were all talking about deferred revenue.
Doug Bettinger
We still are.
Timothy Arcuri
We still are, yes. What do you think is sort of a normal level of deferred revenue?
Doug Bettinger
Yes, I keep getting that question. Frankly, I wish I never started talking about deferred revenue back when we were shipping those incomplete systems because now everybody is asking where should it be, blah, blah, blah. Tim, I think it's about $1 billion, and we finished last quarter at $1.4 billion. The nature of what shows up in deferred revenue today is different than when we were shipping those incomplete systems during the supply chain challenges we had. Back then, it was literally that we were shipping in complete systems, shipping subassemblies that had to get installed in the customers' fab. They wanted that. That was good for them, but you couldn't recognize revenue if the tool wasn't functional. That is completely caught up now. It's not that any longer.
That's at a completely normalized level. However, we have a set of customers that I describe as power customers, some of whom are private that we're not sure of the creditworthiness sometimes like I can't see the balance sheet, they're private. And so in that environment, you do business with us 1 or 2 ways. You get a letter of credit from a bank or you pay us money upfront. Today, the incremental component in that deferred revenue is that cash upfront because some of these customers are newer. We aren't completely sure about the creditworthiness so you got to pay us in advance. That's what's in the number that's got it a little bit elevated today.
Timothy Arcuri
I think I ask you this -- both of you this every conference that I see you. But when you look at your stock price, do you think there are things that people are missing when you look at how the stock is valued, you look at the growth prospects of the company and you hear the questions being asked in these meetings. Are there particular things that you think investors really miss about the story?
Tim Archer
Well, I think that -- what I'd say is that difficult to talk about the stock price and you guys can establish what's fair or not. But in terms of the growth story of the company, I think there are some elements that are underappreciated. I spoke a little bit about that. Lam's in a very unique position, both short term and long term. Short term, obviously, we're coming out of the worst memory downturn in maybe ever, certainly recent memory. And so short term, I think we see a lot of tailwinds for the strongest parts of our business.
We've also used this downturn to do a couple of other things, and that is to ensure that we continue to invest in the R&D needed to expand our SAM in foundry logic. And there aren't many companies that are -- it sounds terrible, but it's underexposed in foundry logic as we are, which we look at as a lot of upside. And so I just ran through this these inflections, dry EUV resist and gate-all-around and advanced packaging and backside power. I don't think that the long-term growth opportunity there is fully appreciated. I think when we look at 2030, if we're at a $1 trillion semi industry, we were at $150 billion of WFE, and Lam has executed on the SAM expansion opportunities in foundry logic and held all of our positions in NAND, which we fully feel capable of doing.
The company will be -- will look very different from a revenue profile or resiliency to cycles, of profitability, the installed base will be dramatically bigger. And I'm not sure that people have quite done that math and see what a little bit longer picture looks like. Today, we really get tied up in a lot of the questions around 2024. And I think if you look longer, you realize there's an underappreciated growth story out there that is pretty unique to Lam because like I said, we serve mid-30s percent SAM of WFE today. And we have competitors who are probably north of 60%. It means we have a lot of white space to develop tools, grow in to identify new opportunities and really be pretty choosy about what we go after, and I think that's a great opportunity for us.
Timothy Arcuri
I agree. It's the best idiosyncratic growth story in the sector. So…
Tim Archer
Keep telling people.
Timothy Arcuri
I do. So anyway, thank you to you both.
Tim Archer
Thank you for having us.
Doug Bettinger
Thank you. Happy anniversary by the way.
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Lam Research Corporation (LRCX) UBS Global Technology Conference (Transcript)