LAM-RESEARCH Earningcall Transcript Of Q2 of 2024
Bettinger, executive vice president and chief financial officer. During today's call, we will share our overview on the business environment, and we'll review our financial results for the June 2024 quarter and our outlook for the September 2024 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time. The release can also be found on the Investor Relations section of the company's website along with the presentation slides that accompany today's call. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3:00 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. Timothy M. Archer -- President, Chief Executive Officer, and Director Thanks, Rob, and good afternoon, everyone. In the June quarter, Lam delivered another set of solid results with revenues, profitability, and earnings per share, all coming in above the midpoint of our guidance. Our CSBG business posted strong growth with revenues up 22% sequentially, led by Reliant and spares. On the manufacturing side, we achieved a key milestone in the quarter with our Malaysia factory shipping its 5,000th chamber. This is the fastest ramp of a new manufacturing facility in Lam's history, and we remain on track to achieve our long-term cost reduction goals through an expanded global manufacturing and supply chain footprint. As previously communicated, 2024 is a year of strategic investment for Lam, where we are prioritizing product development for key technology inflections, global R&D infrastructure close to our customers, and digital transformation for operational efficiency at scale. We believe these investments will put Lam in a position to outperform as the industry moves into a period of multi-year WFE spending expansion. Now, turning to WFE, we expect this year's spending to be in the mid $90 billion range. Our customer investment profile is generally unchanged from our prior view, apart from slightly stronger domestic China spending and additional demand related to the ramp of high-bandwidth memory or HBM capacity. We see Foundry/Logic, DRAM, and NAND investments all up on a year-on-year basis. Global spending on mature node technologies is expected to be roughly flat year on year. Looking ahead to 2025, we see a positive environment for continued growth in WFE spending. The power of AI is a transformative business tool is still yet to be fully realized. Today, the focus on AI model training is driving strong demand for GPUs and HBM. However, as AI use cases expand, we believe inferencing at the edge will spur content growth of low-power DRAM and NAND storage in enterprise PCs and smartphones. Investments for AI-enabled edge devices play particularly well to Lam's strengths. We anticipate that memory customers looking to scale capacity and lower bid cost will bias WFE spending toward technology upgrades of the installed base. For NAND, the etch and deposition intensity of upgrades is significantly higher than in a greenfield investment. When you consider Lam's sizable installed base in memory, including roughly 7,500 high aspect ratio dielectric etch chambers for NAND alone, we are positioned to outgrow overall WFE when customers upgrade existing memory production lines to next-generation nodes. Longer term, etch and deposition are set to play an increasingly vital role in the industry's efforts to develop faster, more power-efficient, and lower-cost semiconductors to serve AI-related applications by delivering critical solutions for atomic-level device scaling, new materials innovation, and advanced packaging integration, we see tremendous opportunity for Lam to expand our served market and increase our share at each successive process technology node. To this end, our R&D focus is yielding exciting new products, including this year, our first direct power coupled conductor etch tool with matchless power source and bias, known as Direct Drive. This new power source uses solid-state drivers to stabilize the plasma in the etch chamber 500 times faster than current industry standards. By combining direct power coupling with Lam's unique plasma pulsing capabilities, our latest conductor etch systems are delivering best-in-class performance for newly emerging 4F2 DRAM applications. In 4F2 devices, the nature of the bit line placement requires precise etching of ultra-small high aspect ratio of silicon structures to avoid device shorts or leakage. With direct power coupling and plasma pulsing, Lam connects to vertically oriented 4F2 transistor architectures with unprecedented depth uniformity and profile controller. Similarly, conductor etch is becoming a critical enabler for EUV patterning for gate-all-around and DRAM due to the need to reduce etch placement error. For nodes below two nanometers, the requirement is for roughly 40% tighter control than at five nanometers. Our new conductor etch tool delivers a 30% reduction in feature roughness, which is one of the main contributors to etch placement error. In addition, we can achieve one to two orders of magnitude improvement in defectivity for a given EUV dose, further helping customers reduce the overall cost and improve the capability of the EUV patterning process. Turning to NAND. AI applications are driving demand for faster, higher-capacity enterprise SSDs. NAND makers are pursuing both vertical and lateral scaling of NAND arrays as well as increasing bits stored per sell through implementation of QLC and PLC technologies. In support of these efforts, Lam is developing new dielectric etch and deposition capabilities. Earlier today, we announced Lam Cryo 3.0, Lam's third generation of cryogenic etch technology. Building on our learning from nearly 1,000 cryogenic etch chambers, running in NAND fabs worldwide. This new patented cryogenic etch process delivers industry-leading control of the NAND memory channel hole profile. When Lam Cryo 3.0 is deployed on our Vantex system, the etch are delivering the industry's highest available ion energy, we can create a 10-micron deep channel hole that has a top-to-bottom profile deviation of less than 10 nanometers or less than 0.1% relative to its depth. Such tight profile control allows customers to increase bit density by packing more cells per layer while also having the flexibility to add more layers per tier. Lam Cryo 3.0 also addresses our industry's need for more sustainable solutions, delivering a 40% reduction in energy consumption per wafer and a 90% reduction in greenhouse gas emissions per wafer compared to non-cryogenic etchers. Deposition technology is also advancing quickly to support increased bit density and lower cost through multi-tier stacking. Polysilicon and tungsten gap-fill materials have typically been used to enable tier stacking in high-layer-count NAND. Integration of these materials, however, has resulted in poor control of critical dimensions and overlay, negatively impacting yield and performance. Ram's innovative PECVD-based pure carbon and gap-fill process provides an attractive alternative material. With the unique combination of high etch selectivity, superior mechanical properties, and simplified dry post-process removability, it also reduces the number of process steps required in some cases by approximately 50% compared to traditional approaches. Overall, etch and deposition are becoming increasingly critical to addressing the complex semiconductor requirements of a growing AI environment. We are excited by the breadth of opportunities we see ahead for the company, especially those created by technology inflections to gate-all-around backside power delivery, advanced packaging, and dry EUV resist processing. All of these are etch and deposition intensive and each represents a $1 billion or higher growth opportunity for Lam. We look forward to sharing our progress on these fronts as well as our long-term financial model at our next Investor Day, which we are planning to hold in February 2025. With that, I'll turn it over to Doug. Douglas R. Bettinger -- Executive Vice President and Chief Financial Officer Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today. We executed well in the June 2024 quarter. Our June quarter results came in above the midpoint or exceeded our guidance ranges for all financial metrics. We were pleased with the company's strong execution. For fiscal year 2024, we achieved the highest gross margin percentage since the merging of Lam with Novellus in 2013, coming in at 48.2% and we generated quite strong free cash flow of approximately $4.3 billion or 29% of revenue. Let's look at the details of our June quarter results. Revenue came in at $3.87 billion, which was an increase from the prior quarter and over the midpoint of guidance. Our deferred revenue balance at the end of the quarter was -- or excuse me, $1.55 billion, which is a decrease of $194 million in the March quarter related to revenue recognized that was tied to customer advanced payments. As we sit here today, I believe deferred revenue remains stable at these levels for the foreseeable future. Let's turn to the revenue segment details. June quarter systems revenue in memory was 36%, which was a decrease from the prior quarter level of 44%. The decline in the memory segment was mainly attributable to DRAM. DRAM came in at 19% of systems revenue compared with 23% in the March quarter as investments in mature nodes declined in the June quarter. DRAM revenue reached a new record in fiscal year 2024 with spending focused on DDR5 and HBM enablement as well as on the 1Y node. Nonvolatile memory came in at 17% of our systems revenue, which was down from the March quarter level of 21%. And just a reminder, we are characterizing one customer's investment in specialty DRAM as a nonvolatile investment since it has a nonvolatile component in the device. NAND revenue was at a low point for this year, and I expect NAND investment to gradually improve as utilization rates return to more normal levels and our customers slowly increased spending in conversions to 2xx and 3xx layer devices into the next year. The Foundry segment represented 43% of our systems revenue, which was roughly flat with the percentage concentration in the March quarter of 44%. Growth in shipments for gate-all-around nodes was offset by a decline in mature node spending. The Logic and other segment were 21% of system revenue in the June quarter, up from the prior level of 12%. The increase was driven by strength in mature node spending in China. With respect to the regional composition of our total revenue, the China region came in at 39%, down slightly from the prior quarter level of 42% and a little bit higher than our expectations from the previous earnings call. This was driven by domestic China spending. The next largest geographic concentration was Korea at 18% of revenue in the June quarter, versus 24% in the March quarter. Taiwan was 15% of revenue in the June quarter, which was an increase from 9% in the March quarter. The customer support business group revenue in the June quarter pulled approximately $1.7 billion, an increase of 22% from the prior quarter level and 14% higher than the June quarter and calendar 2023. CSBG revenue represented 44% of our June quarter revenues and reached the highest point since the end of calendar 2022, driven primarily by an increase in Reliant Systems, followed by growth in spares. Our Reliant Systems revenue benefited from strength in domestic China spending for specialty and mature nodes. Spares revenue increased largely due to continued improvement in utilization at our memory customers as well as a little bit of inventory stocking. I do not think CSBG will grow modestly in calendar year 2024. Let's look at profitability. Our June quarter gross margin came in at 48.5% at the top end of our guided range and slightly down from 48.7% in the March quarter. June quarter gross margin benefited from continued improvement in factory efficiencies, which largely offset the headwind we saw in customer mix that we talked about on the last earnings call. Operating expenses for the June quarter were $689 million, down marginally from the prior-quarter amount of $698 million. As Tim mentioned, we continue to prioritize spending in research and development to extend our technology differentiation as well as expand our product portfolio. I'd just point out that more than 70% of our total operating expenses were concentrated in research and development. The June quarter operating margin was 30.7%, above the guidance range mainly because of that strong gross margin performance. Our non-GAAP tax rate for the quarter was 11.5%. We estimate the tax rate for the remainder of the calendar year 2024 to be in the low to mid-teens level, and this rate will fluctuate from quarter to quarter. Other income and expense for the June quarter was approximately $19 million in income compared with $10 million in income in the March quarter. The increase in OI&E was primarily the result of fluctuations in the fair value of our venture investments. And as we've talked about in the past, you will see variability in OI&E quarter to quarter. Let's look at the capital return. We allocated approximately $382 million to share repurchases, and we paid $261 million in dividends in the June quarter. During the quarter, we announced that our board of directors approved a $10 billion share repurchase authorization. We have $10.8 billion remaining in the plan at the end of the June quarter. For fiscal year 2024, we returned $3.7 billion or 88% of free cash flow, which was in line with our long-term capital plans of returning 75% to 100% of free cash flow. June quarter diluted earnings per share were $8.14, close to the high end of our guidance range. The diluted share count was 131 million shares on track with our expectations and down from the March quarter. Let's look at the balance sheet. Cash and cash equivalents totaled $5.9 billion at the end of the June quarter, up a little bit from $5.7 billion at the end of the March quarter. Days sales outstanding were 59 days in the June quarter, a slight increase from 57 days in the March quarter. June quarter inventory turns of 1.9x compared with 1.8x in the prior quarter. We are making progress in bringing inventory levels down, and we'll continue to work on this throughout the rest of calendar year 2024. Our noncash expenses for the June quarter included approximately $79 million for equity compensation, $74 million in depreciation, and $14 million in amortization. Capital expenditures were $101 million, flat with the March quarter level was spending mainly centered on lab investments in the United States and Asia as well as manufacturing facilities in Asia, supporting our global strategy to be close to our customers' development and manufacturing locations. We ended the June quarter with approximately 17,200 regular full-time employees, which was flat with the prior quarter. Let's turn to our non-GAAP guidance for the September 2024 quarter. We're expecting revenue of $4.05 billion, plus or minus $300 million. Gross margin of 47%, plus or minus one percentage point. This gross margin decline is reflective primarily of an unfavorable quarter-to-quarter change in customer mix. I expect this change to continue to be a slight incremental headwind in the December quarter. Operating margins of 29.5%, plus or minus one percentage point. Gross margin and operating margin included impact from ongoing transformation costs related to projects to improve our systems and operations. As we communicated at the beginning of the year, we're focused on reengineering our business processes and systems to drive operational efficiencies and to implement AI at greater scale. And finally, we're forecasting earnings per share of $8 plus or minus $0.75 based on a share count of approximately 131 million shares. Let me wrap up. As we finish the first half of calendar year 2024, I was pleased that we were able to execute to the objectives we shared at the beginning of the year. We prioritize investment to extend our technology differentiation while driving operational improvements. We're encouraged that the spares business recovery is beginning, and upgrade activity should improve as we exit the calendar year. Longer term, Lam is well-positioned to capitalize the increase in etch and deposition intensity by delivering new capabilities and multiple new manufacturing inflections that we see ahead. We look forward to talking to you in February at our planned Investor Day about the long-term opportunities for Lam to continue our outperformance in the semiconductor industry. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions. Operator Questions & Answers: |
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