Lam Research Corporation (LRCX) Management Presents at Bank of America Securities Global Tech Conference (Transcript)
Lam Research Corporation (NASDAQ:LRCX) Bank of America Securities Global Tech Conference June 3, 2020 5:30 PM ET
Doug Bettinger - Executive Vice President & Chief Financial Officer
Conference Call Participants
Vivek Arya - Bank of America Securities
Hello. Good afternoon, everyone. This is Vivek Arya, senior semiconductor analyst at Bank of America Securities. I'm really delighted to have Doug Bettinger, Executive Vice President and Chief Financial Officer of Lam Research; along with Tina Correia and Ram Ganesh from the Investor Relations team, join us this afternoon to share their insights about Lam and the industry. So warm welcome to all.
And in terms of the format, I'll go through some Q&A, but please, if you have any questions, please feel free to send them to me through that console in front of you, and I'll be sure to put them in.
So with that, Doug a very warm welcome to you really appreciate your joining us in this conference. And maybe if I could just kick off the Q&A session.
Q - Vivek Arya
The last time we heard from Lam, I think the message was that demand conditions have been pretty strong. But you were supply challenged because of all the COVID headwinds and the shelter-in-place orders. Could you give us an update on the supply side? What is this kind of the state of the union right now from a supply perspective?
Yeah. Sure. That's a great place to start, Vivek. And by the way thanks for having us. Good to do this virtually in some way, shape or form, at least. Yeah. I'll remind you what we said, Vivek and everybody on the call, at last earnings, and then I'll tell you, we're kind of executing as I thought we would be able to. So I'll remind you, first, in the March quarter, I think we got to, I don't know, mid-March and all of the shelter-in-place orders began coming down, different countries where we had parts of the supply chain began to have similar type things going on.
In particular, we were impacted from what was happening in Southeast Asia and Malaysia, so we ended up needing to pull our guidance. We had a couple of weeks where we just weren't able to generate output, which was at the end of the quarter, which can be heavy shipment time.
So anyway, what ended up happening in the March quarter is we pulled the guidance. I'll remind you, the original guidance was for revenue to be $2.8 billion. And we ended up coming in at $2.5 billion. So we under-shipped that original guidance by $300 million. And what we said was said was, demand remained actually quite strong, particularly, strong in foundry, logic. We were coming off a year in 2019 where memory had underinvested to a certain extent, as we worked our way through the cycle. So yeah, we were supply constrained, and we exited with record backlog and a good amount of deferred revenue.
And what I said was, although we didn't provide formal guidance, again, because I was – we were somewhat uncertain, hey, is this COVID thing going to keep happening? Are we going to keep having countries pop-up and impact the supply chain. I was just somewhat uncomfortable giving a hard number. But what I said was that, if we executed the plans that we had in front of us, that I expected the June revenue would be higher than March. I said, I also expect us to get better over time as we learn to deal with this. And for the most part, Vivek, we're executing our plans, honestly. And maybe I'll give you a little color on what does that mean? What are we doing? The first thing, I would tell you is Lam is open for business, and that I want to be very clear. We are open for business. People that need to be in the office are in the office. That is true from a manufacturing standpoint. It's true from a research and development standpoint. But we're in the office in different ways, and we're in the office in a less efficient manner. And really, what we're doing is totally completely prioritizing health and safety of our employees as well as our partners, our suppliers and customers.
And so what that means is if you show up for work at Lam, there's a protocol that we have in place before you can get into the building, where you put a mask on, you're wearing gloves, you're answering affirmatively, I think it's five questions about your health and whether you've traveled and things like that. We're taking your temperature to make sure you're not exhibiting symptoms. And then you go -- and if you're in manufacturing, you then work your way towards the gowning room to get ready to go into the clean room.
In the facility itself, we're restricting where people can move around, maintaining six feet of social distancing. And so while we're open, we're open somewhat less efficiently as a result of just what we're needing to do there to make sure health and safety is paramount. So that's generally what's going on. I don't know if that helps, Vivek. But for the most part, we've executed as I expected we would as we enter the quarter.
Got it. Is there a way to get a sense for how much of that $300 million you missed can be delivered in the June quarter like -- or what is the best metric to gauge where you are from a supply perspective?
I mean you're just going to have to listen to the words we use when we talk about the results. I firmly expect all $300 million to be shipped in the June quarter, right? It delayed in March, it delayed because of activities that didn't happen at the end of the March quarter, so all that's going to ship in June, Vivek. The real question then becomes, okay, how quickly can you ramp back up in the June quarter. And so there aren't a lot of companies in the United States hiring people. We are hiring people. We are hiring people, and we are extending in areas where we can. The clean room space. And we were fortunate to actually have some square footage were we could extend into.
And so after health and safety, the second priority that we have as a company is to try to take care of our customers to the absolute best of our abilities. And that means supplying the demand that they've asked for, right? The shipments that they've asked for. And we're getting better at this as we go. Like I said, we're hiring people. We're extending into incremental clean room space to try to generate more output. Inherently until -- and hopefully, it's a when question, when we can relax the social distancing, we'll become more efficient again. I think that's going to be facts and circumstances. It's going to be different by country and state. And obviously, we're monitoring things very, very carefully and doing our best to take care of the customer. That's a super high priority for us.
Got it. So all else being equal, can June be about $300 million better than March?
Well I didn't give any specific number. All I said, Vivek, was that you should expect the June quarter to be stronger than March. Again, it'll depend on how we're able to execute through the quarter. I didn't give any specific numbers. I just said it should be higher if we execute our plan.
Understand. The next…
Actually, Vivek, I would just say one thing. The vast majority of that $2.5 billion was generated when we were operating somewhat normally, right? I mean, things didn't change until the very end of the quarter. So there's puts and takes relative to our ability to output. But like -- I just want to reinforce, executing the plan, assuming things don't pop-up that we didn't comprehend, revenue in June should be higher than it was in March, right? I haven't quantified it though.
Of course, got it. Next topic, that's been top of mind is all the U. S.-China trade tensions and the new restrictions the Department of Commerce wants to put on the industry. What is your interpretation of what that means for Lam? What do you need to do differently? And how much of this is just perception in terms of the impact versus reality in terms of the impact on your industry?
I think the answer is the whole industry isn't entirely sure at this point. And maybe I'll describe what everybody is going through to assess it, and I don't know you can ask clarifying questions as we go through it.
There's two sets of rules that are on people's mind. One is the Huawei stuff, and that's not really what you're asking, I don't think, although you can come back to me if you want that one. The one, and I think this came out end of April, Tina was reminding me earlier today.
And really what the rules say, subject to interpretation, but what they say is if you're supplying equipment from the United States to a military end user or a customer that is enabling military end use in three countries; Russia, Venezuela and China, you need to have a license from the Department of Commerce to supply that equipment. Basically what it says.
And if you think about that, that's a fairly vague statement, which was how do you interpret that? What is a military end user? What is military end-use? Do commodities apply to this? And how broadly or narrowly should this be interpreted?
And I think that's what we're all trying to figure out right now. And we're trying to figure it out through a couple of different mechanisms; one, is talking to Department of Commerce directly to try to get some guidance and clarification on how to interpret what the rules are written and intended -- what the intended interpretation should be. I think we're all using our trade associations, semi, SIA to get some level of clarity around it.
I think we're all probably talking to -- I don't know if it's the same law firm, but Washington based law firms to help provide some guidance to us as we go through this. And we're in the process. So what we're doing right now is we're asking customers, hey, do you think you fall into this category? Can you confirm or not that you are a military end user or enabling military end use? That's one vehicle to try to work through this.
Secondarily, we're doing third-party research places like Dow Jones and whatnot, to collect information, to help us make an assessment. And that invariably will create clarifying questions, we'll go back to the customer with and so forth.
So that's the process we're going through right now. And too soon for me to tell you what I think it looks like at the end of the day. These rules are effective, I think it's the 29th of June, if I remember the date, and that's we're going through.
I would tell you that everybody in the industry's going to come, I think, to the same conclusion at the end of the day, either this is or it isn't. I'll be surprised if that's not the case. And we'll all be impacted the same way.
And we all have factories outside of the United States in addition to in the United States. And if we needed to or chose to, we could move things over a period of time, if that made sense to do. But that's really what we're working through, Vivek. And I probably won't communicate conclusions on this until we get to our next earnings release is my most likely outcome here.
Understand. Just one thing that I'm curious about, Doug is, logistically, is there any way for an industry to know whether or not an XYZ customer in China has a relationship with a military end user. Like, as a company in your position, do you have any ways to certify that? Because some of your customers in China are saying, they have no relationship with the military. So do you like just take their word for that. I'm just trying to understand how the industry just even goes through this process.
Yeah. It's the right question. I think, Vivek, at the end of the day, we're going to come at it a couple of different ways. And we need to do real diligence on this to make sure we've done our homework to substantiate; hey, we did proper diligence here, right? To the extent somebody comes in and asks, hey, how did you come to this conclusion? Hey, you’re right. The first is you ask the customer, right, directly. Do you fall into this bucket or that bucket? What your customers are use specifically? So that’s one mechanism.
And then like I said, we're also using third-party research to understand or assess whether there's incremental questions, we need to go back and talk to our customers about. That's how we're going at it. We got to make sure we're doing the right diligence. We got to make sure we're using good business judgment here.
And that's where I'm trying to figure out. We're trying to get clarification from commerce to make sure we're interpreting things properly. We're trying to utilize our trade association to help with that. And like I said, we're using the best law firm, we can find to help us interpret this stuff. And we'll let you know.
Got it. One final one on that, kind of more specific to Huawei. So, one scenario -- so, if there is a scenario where Huawei just cannot be supported by TSMC or other foundry, I imagine TSMC will have to kind of curtail some spending because of it. And it might just be a short-term issue, and then demand hopefully shifts to other players.
Have you seen any impact from that yet, because there have been some media reports about TSMC perhaps pushing out 5-nanometer production, for example, because of lower Huawei demand. So basically, summary question is that, is the impact of Huawei sort of conceptually built into how you're thinking about the year already?
Yeah. I can't talk about any one customer or another, Vivek, you know that. So I can't comment on TSMC's plans or what have you. But I think your information about medium, longer term is the right one, which is, at the end of the day, this will all self-correct.
If Huawei can't get access to leading-edge silicon in a longer-term horizon, over a period of time, I don't know what the period of time is, but over a period of time, they will cease to be as competitive in the marketplace as they are today. And there are competitors who can get access to leading-edge silicon, will be able to bring superior products to market, and market share will shift. I know that just intellectually. That's the way things will transpire.
And so in the longer term, while there may be a perturbation here or there, as this works its way through, in the longer term, demand is demand. Smartphone units are smartphone units. And share will move around. Smartphones are designed every year. As you know, it's a quick design cycle. So phones can adjust quicker. I think base station probably takes somewhat longer. But at the end of the day, this will all self-adjust. So it's just how the market works.
Got it. Did you notice any evidence of kind of pull-in from China customer? We, for example, recently heard SMIC increase its CapEx plan. So without just being any specific to SMIC, was there any evidence of Chinese customers pulling in demand, because of what they might have perceived in terms of new regulations or restrictions coming on them.
Here's the thing, Vivek. It's almost impossible to of new pull things in when the industry is supply constrained, right?
If somebody wanted more, they're not getting what they wanted at the beginning of the March quarter anyway. And so, no, I don't believe anybody is pulling anything in. And even if they did or wanted to, we wouldn't be able to supply it right now. The whole industry wouldn't be able to supply it right now. We're all dealing with the impact of COVID on our operations. So, no, I don't think anything's being pulled in, and it couldn't be supplied even if it was.
All right. And then, the final topic, there is more talk of bringing more manufacturing back to the U.S. So TSMC has made some announcements. And Intel has been public about their desire to bring about some foundry business in the U.S. What does this mean longer term for your industry, Doug, and for Lam specifically? Does it matter?
I mean, because -- I mean, it is a global industry, so just the fact that things are just shifting from one place to another conceptually, say, as the demand curve doesn't really change, but just the fact that there is probably more stranded capacity here or there. Is that a positive or a negative for Lam from a longer-term perspective?
Yes. And Vivek, I mean, you're thinking about it the same way I think about it, which is at the end of the day, this doesn't impact demand for silicon. It doesn't impact demand for leading-edge manufacturing capacity. It's just a geographic redistribution of where supply is occurring.
And so, does it mean there is upside with WFE? I'm getting feedback. All right. Let me try it again. I'm getting an echo. There might be a little bit of upside, Vivek, because if you're running more factories than fewer, there may be some level of inefficiency, but it's only marginal upside.
You're thinking about it right, that demand for a 5-nanometer wafer whether it comes 5-nanometer wafer, whether it comes from Taiwan, Korea, the United States or Timbuktu doesn't matter all that much, end demand is end demand.
Right. Got it. Okay. So I think we have discussed China and reassuring enough. So let's go to more Lam-specific questions. So when the year started, you know, at that time, I think the expectation was for a very strong year for WFE -- kind of going to the mid to high $50 billion or so for this year. Could you help us just conceptually contrast, now that we are sort of at the midpoint of the year, what does the year look like overall from that assumption perspective versus what you thought at the start of the year?
Yes. I don't really have anything new to say. But I'll remind you what we said on our last earnings call. I mean, the first thing I would tell you is demand remains very strong. Customers haven't really meaningfully changed their plans in any way, shape or form relative to demand for equipment. So that's the good news.
Now maybe you wouldn't expect them to, given we're supply constrained, but there haven't really been changes in expectations. But what I know in my gut is there's clearly -- there has to be puts and takes at the end of the day. And that's where, on the earnings call I forget, who asked me the question. But I acknowledged, hey, that expectation from an end of the year is probably less than -- that was given what's going on in the macro economy. While, I don't have a bottoms-up WFE forecast for you, I said, it wouldn't surprise me and I'll remind you, we said, you know, our view beginning in the year was WFE would have been mid, high 50s.
What I said given weakness in the economy and the likely impact on consumer-oriented devices, discretionary purchases like smartphones and whatnot, low to mid-50s probably seems more logical, but we really haven't seen a change in articulated demand from customers. I do think there's also some offset to the weakness that we're going to see in consumer, which is the spending in enterprise and cloud and hyperscale.
I mean, the fact that we're all working from home, I think, IT budgets are probably up somewhat. I think people are probably buying more clients given the work-from-home situation. So there's puts and takes. But -- at the end of the day, the economy is going to be weak that will impact demand to a certain extent. So it'll be somewhat softer at the end of the day.
Got it. The other topic, Doug, that comes up frequently is, I think, people conceptually get -- the memory industry went through a down cycle last year, it's supposed to kind of stabilize somewhat this year, but foundry logic was exceptionally strong last year. How are you thinking about the foundry logic market this year? And how sensitive is it to the number of 5G smartphones that are going to be produced?
Yes. No. Listen, I've been describing a view on foundry logic that our expectation is it's going to be steady. And it's going to be steady because of some of the things you're referencing, which is 5G is coming. Even though I think smartphones in total, are down, my guess, and I say this based on things I've heard kind of the leaders in the mobile space talk about like a Qualcomm that their expectation on 5G units really isn't all that different, if it's different at all.
And to enable that -- and obviously, we're in the early, early innings of 5G base station infrastructure investment and rollout. So when you think about that, that drives a lot of that leading-edge investment, 7 and 5-nanometer. And all of those secular tailwinds, trends continue to be quite strong.
And again, I -- even if I kind of put the 5G stuff aside, just think about the way all of us are working today and what we're doing today. I'd tell you, it's kind of funny in my own home, maybe a great example today. So, it's my -- the first day of my kids' summer vacation and while they were all online going to school, I kind of erroneously thought, I'm going to get my bandwidth back, so I don't need to be kind of managing things. It's actually gotten worse today. Because my darn 13-year-old son's on his bloody Xbox all day. My daughter is sitting in her room -- my 16-year-old daughter playing Fortnight with all of her friends. If anything, the demand for silicon -- even if we get back to some level of level of normalcy, whatever that means, we're all consuming more and more silicon, I think.
And my conviction in this industry and what this industry is enabling around a data economy is stronger today than maybe it's ever been, quite honestly. I think you're going to see systematic changes in how business is done.
I was never a big believer in work from home, at least not across the board. Actually, it's working pretty well. I'm much more of a believer today than I ever had been. So, I think you're going to see shifts and changes as a result of some of that, and that's going to drive the need for more and more leading-edge silicon and foundry, logic, NAND, and DRAM.
Got it. Maybe just to carry it one step further, if we go again by industry expectations. This year, 5G smartphones are supposed to be, I don't know, 175 million, 200 million, right, somewhere in that range. But next year, they are supposed to go up even more, right, 400 million or 500 million, I've heard numbers bigger than that.
If that turns out to be true, do you think we could have another strong year of foundry logic spending next year as well? Or you think that industry's already prepared to support that level of increased demand for next year?
Well, I don't think all the investments have been comprehended relative to what demand in 2021 looks like in foundry and logic, in no way, shape or form, right? A lot of those purchase decisions, investment decisions will be made until early next year, right? Because the mobile market is largely a seasonal back half of the year kind of profile in terms of silicon consumption, so the investments wouldn't need to be made until early 2021 or even late 2020, you would expect to see it beginning -- people don't need to make those decisions yet.
Got it. Maybe moving on to the memory side, Doug. How are you thinking about the state of inventory and the state of supply/demand balance on the memory side of your business.
Yes. No, that's a good question. I mean, obviously, all the macroeconomic discretionary-type purchases that we've been talking about will impact the demand for memory bits at the end of the day, some positively, some negatively probably.
But what I would tell you is, we came into 2020 what I would characterize in 2019 as an underinvestment in memory during last year, during 2019. And we went through the inventory consumption -- it was a classic cycle, Vivek, at the end of the day. Things got oversupplied, investment reduced, while pricing came down, profitability contracted, investment reduced as a result, such that, as we exited last year, the rate of supply growth was less than demand growth. And that was continuing to decelerate into the beginning of 2020 based on the investment set were made last year, right?
So that was the setup, and actually still is the setup, honestly. And so we felt like coming into 2020, it's set up to be somewhat of a recovery year in memory. I still believe that will be the case to what magnitude is the debate right now, right, what's going to happen in the second half. But fortunately, we came into the year with an industry that was in a pretty healthy environment, healthy situation.
Got it. So if -- let's say, Doug, if all else being equal. If, let's say, the macro economy starts to improve in the second half, would you expect your memory business to be better than the first half?
Yes, too soon for me to give a half-on-half, even color, Vivek, because I still think things haven't completely rippled through relative to the macro backdrop. So I'm going to decline to talk about first half, second half. I think the potential downdraft in the second half will be macro. I think the potential strength in the second half could be the simple fact that we're all under-shifting demand in the first half. And like I said, customer demand remains strong. So I think those two things offset to some magnitude to what specific numeric quantification, I'm not ready to give that to you right now, because I'm not sure yet.
I understand. The last one on memory, Doug, is, again, when the year started, it was supposed to be a very good year for NAND, of course, but then also recovery in DRAM later in the year, but what we have seen is a very good recovery in DRAM almost to an extent that people are starting to get concerned about it and for the second half. But the NAND recovery has been pushed out to the second half with the phone market being pushed out. Is that consistent with your thinking? Or do you have a better way to kind of describe the interplay between DRAM and NAND demand that you are seeing conceptually?
Yes. Again, I'm not going to get into the numbers, but I would tell you, relative to end demand drivers, generally, I think of DRAM as being more critical for hyperscale and cloud and enterprise. That's not entirely true, but I do think of it that way. And NAND more kind of smartphone related. And that description is an oversimplification, because both are important in both devices. But that I think might be what you're thinking about perhaps is the puts and takes is hyperscale and cloud and enterprise investment, server investment has been stronger than I think we all thought, because this work-from-home, school-from-home situation. And mobility probably will be negatively impacted from a unit standpoint, again, because of what's going in the economy.
A smartphone at the end of the day for many people is a discretionary purchase, you can delay it and like in a weak economy that likely is what's going to happen.
Got it. Then one other very attractive parts of your business, Doug, is the services business, many other parts of technology, these kind of recurring revenue businesses get a much higher multiple. What do you think Lam needs to do or your industry needs to do to get better recognition for such an attractive and recurring aspect of your business?
Yeah. No. It's a great question, Vivek. What I try to do is just talk more about it, try to get people to pay more attention to it. It's actually a couple of things to think about. It's why, if you go back to our Investor Day in early March, the first presenter after Tim was a gentleman named Pat Lord, who runs this business simply because we wanted to put a this business simply because we wanted to put a this business simply because we wanted to put a focus on it.
In a lot of ways, this business is independent of WFE, as long as the fabs are running. Spare parts are needed and consumed, services needed, upgrades are always important. So we're trying to talk more and more about it. It's why we talk about chamber count every year and tell you, hey, chambers grow every single year. I have a hard time envisioning a year where this business doesn't grow. It grew last year in a pretty weak WFE environment, certainly a weak memory WFE environment.
Pat described, again, I'm reminding you of what we said at the Investor Day, we expect – we call this CSBG, the customer support business group. We expect this to grow 40% between 2019 in that financial model in 2023, 2024. That's a lot of growth. It's going to grow, because of growth in chamber count. And we showed that on a slide. It's going to grow, because as we go to market in this space, we're doing everything we can to continue to grow dollars per chamber through how we do upgrades, through how we deliver we deliver advanced service using more big data analytics and whatnot. And if you remember, Pat showed the growth in chambers but he also showed a normalized revenue level. I think he went back to 2013, if I remember, that by 2019, had gone to 1.5 times, so call it a 50% growth in dollars per chamber. And he suggested if it can get to 1.7 times by 2023, 2024. So that's an important aspect. Its chambers grow every year. It's a proactive approach to delivering service in a different way or it's not just engineer on-site activity, like historically it has been. But more – I almost think of it, Vivek, as results-based type commitments that we make using data analytics. It's the self-maintaining tool that we've talked about in the past. It's a whole variety of things where we're thinking a lot more holistically about how to deliver value to customers and get paid for it.
Got it. And finally, Doug, at your Analyst Day, you provided a longer-term target model of getting to $30 to $32 in pro forma earnings per share and $14.5 billion to $15.5 billion in sales. From what the industry has gone through over the last few months because of the corona pandemic, do you think that changes that long-term view? Does it accelerate it? Does it accelerate it? Does it do anything to your longer-term target model?
Yean. Now, I've been getting that question here and there a little bit. And it's a good question, Vivek. I would tell you, if anything, I'm more convicted in this industry, and more convicted in the criticality of semiconductors and our place in the ecosystem and our place in the ecosystem than I was in early March.
Now, clearly there is going to be some near-term puts and takes, we talked about that on this call already. But it's only been three months or something since we gave the model. So there's really no change to speak of. And if anything, maybe I'm a little bit more convicted just because how critical the semiconductor industry has been demonstrated to be.
I'll remind you, I centered that '23, '24 number that you're referencing, the $14.5 billion to $15.5 billion around a $60 billion WFE. I still like that's a very reasonable, achievable number to be thinking about. And then all through the materials we talked about growing our SAM, growing the installed base, investing to gain market share in things like our advanced ALD like the Fin-Si platform that we introduced, that is a game-changing platform by the way. We're not going to have time to talk extensively about it. But it's the first bottoms-up redesign of our etch architecture that we've done in the last 20 years.
Rick, our CTO, talked about the dry resist capability we're bringing to the industry. And I would tell you the customer pull on Fin-Si, the customer pull on the dry resist, customer pull for our advanced ALD, all of those things has been very strong, right? And you know you have something good in this industry when customers are pulling hard for it. And in all 3 of those situations, customers are pulling for it. All of those things were part of the basis for the revenue basis for the revenue upside that I see, and I feel good about all that stuff right now.
Excellent. With that, I think we are actually over the time. I really want to thank you, Doug, for spending a little bit of your afternoon with us and sharing your insights. I want to thank Tina and Ram as well for supporting the event. And thank you to all the investors for dialing in. Thanks, everyone.
Yes. Be safe, be healthy, everyone. Hope to see you face-to-face next time
Yes, likewise. Thank you, Doug. Bye-bye.
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