Lam Research Corporation (LRCX) Management Presents at Bank of America 2022 Global Technology Conference (Transcript)

Jun. 07, 2022 2:10 PM ETLam Research Corporation (LRCX)
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Lam Research Corporation (NASDAQ:LRCX) Bank of America 2022 Global Technology Conference June 7, 2022 11:45 AM ET

Company Participants

Doug Bettinger - EVP & CFO

Conference Call Participants

Vivek Arya - Bank of America

Vivek Arya

Thank you for joining us the session, I'm Vivek Arya [Technical Difficulty] join us in person and really delighted to have Doug Bettinger, the CFO of Lam Research joining us this morning. So we'll go through a number of questions from my side, but we'll see if we have time for questions from the audience as well. But warm welcome to you. Doug, I really appreciate you joining us.

Doug Bettinger

Vivek, thanks for having us. Thanks for having me. It's really good to be back face-to-face with everybody. So welcome. And as I get started, please have a look at the screen and squint really hard and look at our forward-looking statements. My attorneys always like me to point that out.

Vivek Arya

And I'm glad I don't have read [indiscernible]

Doug Bettinger

You don't. Just putting it up is enough.

Question-and-Answer Session

Q - Vivek Arya

Yes, of course. So may be Doug, let just start with the few kind of questions about the near term and then we'll get to the medium and the longer-term. First, the impact of China lockdowns, semicap equipment -- the industry has been especially impacted by the situation in China. So maybe give us the state of play as you see it right now in terms of the impact. Do you see line of sight into improvement versus what you said a few weeks ago?

Doug Bettinger

Yeah, really no change with regard -- I'm going to step back and answer a broader question actually, because the China lockdowns are one piece of some of the challenges we're seeing in supply chain. So I'm going to describe that a little bit, that's been on everybody's mind, something everybody wants to hear about. So let me go through that a little bit, if you don't mind.

First, what I would tell you, is it's unfolding, it's heavy lifting now is what I'm describing. And just to paint a little bit of a picture, we're frankly in task force mode with, I don't know, probably our top 30 suppliers, and by that I mean we have Lam Research employees camped out at our suppliers manufacturing locations. So it's not just every supplier, it's every suppliers location, right? So multiple locations oftentimes.

Going through just what can we do to try to get more output, right, because right now the entire industry is constrained, and we are constrained, be it our ability to ship what customers want is pretty elongated in terms of lead times. I know you're probably going to ask me about that later on. But -- so we work our way through a variety of different issues, which the China lockdown is one, but there's other things like subsystem availability, frankly people chuckle a little bit when I say one of the big things that's constraining us is semiconductors, right? The industry needs more equipment, we can't get semiconductors that go into the equipment, it's a weird circular conversation, frankly. But there's a whole variety of things, labor, freight and logistics, third-party warehouse, a whole bunch of different things when you peel the onion back and try to understand what is the root cause issue. And so, in typical approach at Lam, once you understand the root cause, you can figure out how to make it better. And so, we're working our way through this, it's progressing, but it is really -- it's a game of [indiscernible], you're not one going down and something else gets pops up and then you got to go knock back down.

So we're managing our way through it. I don't have a new update to tell you it's better, it's worse, it's unfolding, I think, largely as we expected as we began the quarter, Vivek. And I think as we progress through the year, it gets better as we go through the remainder of the year. Certainly, if the industry is going to supply a $100 billion WFE, it has to get better as we go through the second half of the year.

Vivek Arya

Got it. So Doug is that happening just because the absolute level of semiconductor demand is so high, so you're always competing for a lot of the same components with a lot of the other end market, so if that is true, then is it then also true that if some end market slowdown that it frees up capacity for you or is it that you need something so specialized?

Doug Bettinger

No, this is nothing that is specialized, frankly this is our catalog parts that go into our [indiscernible] custom ASX, these aren't really high-end, it's stuff that controls RF power and gas delivery and power management. These are catalog parts that typically we buy in relatively low volume as compared to the rest of the semiconductor industry. We're not a high volume purchaser, and so this is stuff generally speaking that's procured through distribution, but it isn't any custom stuff, Vivek. And frankly, Lam generally isn't in the business of buying semiconductors directly, and it's a couple of layers deep in the supply chain usually speaking. But frankly we're not directly procuring semiconductors because we have an ability sometimes to get access to more than our suppliers are able to get.

Vivek Arya

Right. Again, I remember the last time we met a few weeks ago, you mentioned that [Technical Difficulty] your exposure to China domestic memory demand and if, let's say, there were a potential restriction on this customer, how would that impact Lam's?

Doug Bettinger

That's a good question. I've been getting that question a lot, but let me kind of unpack our China business just so you have a complete understanding of it. It's not a 30% to 33% of our business over the last, I don't know, call it, year or so, even longer than that, about 30%. Unpacking that 30% though, it’s fairly balanced between the multinational set of customers that have fabs in China and local Chinese customers, so call it, half-half. It's not quite, it's actually -- it skews a little more to local China, but just a little bit, so that's the way to think about it. In pretty much every one of the large multinational customers has something going on in China, right, where we ship equipment to. So that's important to understand, but 30% isn't all local Chinese customers.

Then if you unpack the piece that is local China, you've got one large NAND customer, probably you understand who that is, you've got one large DRAM customer, and I think everybody probably understands who that is, and then you've got a whole bunch of what I would characterize as specialty foundry logic sets of customers. A couple that are somewhat being and then a whole bunch of them that I guarantee you've not heard of before or maybe you've heard of one or two of them, but there is a bunch, and I say that because frankly every time I look at the list, I don't know who some of these customers are. They are new, they're emerging all over, doing things like image sensors, power management, analog stuff, right, legacy node from a lithographic standpoint. So that kind of unpacks what is our China business to describe it to you. [Technical Difficulty] the ability of CSBG and your question on maintenance CapEx and so forth, we've grown up over the years, variable -- having an ability to variabilize how many people are in the manufacturing location. How many people are in the field installing tools? We can flex, we know how to do that.

And so that is almost a core part of how we've created the company, but don't lose sight of the bigger picture. This is going to be a meaningfully bigger industry and a meaningfully bigger company, I believe, in the future than it is today.

Vivek Arya

That's what's important. Right? No absolutely to your point, I mean, we saw Apple, for example, launched a new product yesterday, right? Die sizes are 20% plus bigger, so even if number of units are the same, right, to your point, the complexity on the industry continues to grow die sizes, continue to grow.

Doug Bettinger

Die sizes are growing, density is growing, right? Even in a flat, let's say, smartphones this year are flat, up or down a little bit. The story for semis is, content is growing. Apps processor die sizes is getting bigger. The NAND content is growing. DRAM is growing, especially as 5G rolls out, right? It's a content story per unit less than a unit story as it used to be. It's always been a little bit of both, but you can't lose sight of that dynamic, and that's why WFE is where it is today.

Vivek Arya

All right. So then I think that just kind of put a button on this maintenance WFE question. Is it better instead of looking at it at an absolute level that look, this was the absolute dollars of WFE three, four years ago. Is it better to look at it as a percentage of semiconductor sales and given semiconductor sales are higher, then with -- like, when you start calculating the maintenance levels what kind of process are you using?

Doug Bettinger

I think we have the benefit of knowing the plans of every customer, and I don't have to do these macro level calculations. I know every fab location, every customer, what's going in, roughly speaking, right? How big they are cleaning spaces. We know where they're going. Now I never know exactly when, but we know how big it's going to be. And that's when I step back and think about the future, we have to be managing Lam to be a bigger company in the future than we are today. I'd say that based on what I see our customers doing, some of the government money that's coming in, the industry dynamics are quite positive right now.

Vivek Arya

Got it. You mentioned CSBG, so let's say, hypothetically WFE is down 10% next year or the year there after, right? As you said, they will be inevitably be recycled. What does that do to your -- for people who might not be as familiar with it, help us dissect that business? How much of that is tied to ongoing deliveries? How much of that is kind of long term models? And then what does it do in the case of, say, WFE going down 10% or so?

Doug Bettinger

Yeah. So let me describe the customer support business group where we use the acronym CSBG. It's the money we make from the installed base out in the field, out in the customer's fabs. So if you're new to the story or I'll remind some of you, because I see a lot of familiar faces in the room, this is the ongoing business not -- well, maybe a little bit is part of WFE. But first, what is it? It's spare parts, it's service, it's equipment upgrades, our equipment can be upgraded from previous capability to a next generation capability, technology, sometimes productivity. And then it's our reliance product line, which is the equipment we sell for the specialty nodes or the trailing edge nodes, if you will. You're right Vivek, it's about a third, 30% plus or minus of the company's revenue. Great business, frankly. It -- call it, steady business, but it is in many ways steady business, right? Because fabs are always running even in a period when the industry cycle is down a little bit, the equipment doesn't stop running, right? Fabs are always running, and so spares need to be replaced, service needs to be provided regardless of what's going on in the environment, and upgrades almost always continue to happen, because that's an economical way for the customer to get next generation capability.

It is great business. It doesn't require a huge amount of research and development investment. And so, when you look at the profitability and the cash generation of this part of the company, extremely strong, extremely good. We give a number out at the end of every calendar year that is the number of chambers that's out in the field, it grows every year. And part of the strategy of the company is to increase dollar per number of chambers every single year, and we've been extremely effective at doing that by using predictive maintenance, we call it, advanced services, right? Not just show up and do a task, but guarantees some kind of result to the customer. So anyway, in many ways this is my favorite part of the business at the company. It's just -- it's an extremely steady part of the business model.

Vivek Arya

Got it. So if WFE were down 10%?

Doug Bettinger

Yeah. I'm not going to quantify it. But, again, I would point you to just look at history, right? This is a -- I describe it as a business that should grow every single year. Why? Because chambers grow every single year, right? Our equipment never really goes away. It'll get repurposed from one application to another, sometimes from one fab to another, sometimes from one customer to another, right? We've got part of the business here that we will often repurchase, refurbish and resell the equipment. Although frankly today, there's nothing available to be repurchased, because everything is running pretty full out. So in fact, if you went back five years ago, we supported that reliant product line almost exclusively with refurbished equipment, today, it's new equipment. Older models of new equipment, because, frankly, that's where the demand in the industry is.

Vivek Arya

Got it. So on the topic of lead times, Doug, when are they today versus history? And do you think that gives you a good view into what next year demand might be?

Doug Bettinger

Yeah. Vivek, we haven’t quantified it except to say they're meaningfully stretched out is what I would describe. And yes, it's into next year.

Vivek Arya

It is into next year. So then why the hesitation in saying next year may or may not be a growth year? Because I imagine that -- So first, how do you ensure the quality of that demand, right? That backlog that your customers are putting on you? Why does the industry hesitate in saying the next year can actually be a growth year for WFE.

Doug Bettinger

I give next year's numbers when we get later in the year. That's just the way we do it. That's how I run the -- we run the company, that's why I don't need to tell you what it is next year. There's still some level of uncertainty in the latter part of next year. We'll give you the numbers when we always give them, which is later in the year. But frankly, if you think about the secular drivers of demand, pretty strong. The fact that we're going to as an industry exit this year with unmet demand. It could lead you to think it's going to be a decent year next year, but to put a specific number on it, I'm not going to do that right now.

Vivek Arya

Understood. So historically Doug, you mentioned, cycle that I think is the most popular word with semiconductor investors right now.

Doug Bettinger

It is.

Vivek Arya

We should probably do a Google trend search of the word cycle. But if you look historically, WFE has tended to grow two, at most three years, and then there was inevitably a 20%, 25% kind of draw down even over the long periods of time, right? Industry has managed to grow. But after every second or third year, there was always this draw down, right? Digestion phase or whatever you want to call it. This will be the third year, do you think we can actually have a fourth year? Shouldn't that kind of being far above the trend line make investors nervous that they are maybe right to be nervous about that?

Doug Bettinger

Again, if that's what you're nervous about, you're losing the forest for the trees, frankly, because the $1 trillion same industry is going to happen, capital intensity is going up, it has been for several years. It's a great industry, right? We're enabling so many things in society today beyond what we've historically done. I mean, this is the data era is how I think about it. The explosion of data in society is being fundamentally enabled by the semiconductor industry and being fundamentally enabled by the equipment industry. It's a great place to be. Now, yes, there is always going to be a cycle. We never know exactly when. It's not going to be a straight line from here to there. But to me, the important thing when Tim and I are thinking about how to set the company up, how to invest for the future, it it's more towards, okay, what does it look like five years from now? And it's very bright, frankly, when I look at it.

Vivek Arya

Got it. When we do get to the $1 trillion or so, do you think WFE intensity or WFE sales to semiconductor industry sales, which are in kind of the 15%, 16%. Do you think it stays there or does it go up or down from that number?

Doug Bettinger

Hard to pinpoint it. But one thing I would encourage you all to look at is, that's a metric we've been educator over the years to pay attention to. Why do we pay attention to it? Because people are worried about affordability, right? Can this industry afford to invest the amount that we're investing? And frankly, what I would suggest to you is, if that's what is on your mind, is the wrong metric to be looking at. The metric you need to look at is, WFE as a percent of industry profitability. Your 15%, 16% is at a relative high watermark, Vivek, frankly, if you go look at it as part of industry operating income, it's at a relative low point, right? Because profitability, if you look across the semiconductor industry, profitability is never been better. Now you can worry is profitability going to compress, is pricing higher than it can sustainably be, we can debate that. But that's a metric that I think all of us should begin to look more frequently at, because that's more important metric. As a CFO of the company what I think about is, when we're making investments, what's the affordability of it? Revenue isn't the metric that I think about, it is profitability.

Vivek Arya

Got it. A few financial questions, Doug. So on gross margins, margins seem to be at kind of a relative cycle low, so it'd be less than 45%, what are the next few steps in trying to getting them back to model? Will it take a certain amount of sales to get there? Are there other operational things that you can do to improve margins from here?

Doug Bettinger

There's operational things. I mean, you got an interest on two sides. The first thing I would tell you is, I don't want any way to think that we haven't been adjusting pricing because we have them. What's happened though is, the inflationary environment is higher than, I think, any -- certainly than I anticipate. And so, that means you have to go back and relook at things. And we are and we'll continue to do so. The way I’ve been describing it Vivek is, I wouldn't want anybody to think the profitability model of the company is any different because we're in the middle of working our way through some inflationary situation. Some of the inflation that I see is permanent, we will get paid for that. We have to get paid for that. Some of it is temporary. And so, you need to get paid maybe for some of that, but then you also need to work your way through how are you going to make sure you're managing costs. We have responsibility to do both things. And we are doing both things and we will continue to.

Vivek Arya

Got it. So how long do you think it takes for gross margins to start to get back to historical levels?

Doug Bettinger

I haven't put a time frame on it, except to tell you that it will get back. You shouldn't think of it as any different. And what I would tell you, as I think about how we progress through the year, assuming I'm right about the supply chain getting better that will be a benefit to gross margin. There's a decent amount of incremental costs that we're incurring right now and just managing the supply chain. Buying expensive components to get them because we need them, that's the most important thing. I've got people, like I described, this task force all over the place, traveling all over the place, doing incremental work, that'll go away at some point.

Vivek Arya

Right. Doug, I always find it interesting to talk with you because you have this unique perspective having worked at Broadcom before, right? And you have seen this distinction where the semiconductor companies without exception have all reported much better gross margin. So they have been more successful in passing along costs and inflationary pressures. Why do you think the equipment industry has not managed to do it to the same extent?

Doug Bettinger

I think there's just a timing aspect to working right through things. By that, it's not uncommon, in fact, it's quite frequent that there's long term volume purchase agreements on the equipment side of things, right? You negotiate things with customers, how much are you going to buy at what price? That's not to say that after you do that you can adjust it, but there's some level of latency as a result of having to peel that back. I think that's probably a part of it. And frankly, if you're an analog company, you can just pricing -- you just go change the catalog, frankly, right? And you can do that pretty quickly.

Vivek Arya

Got it. On the -- and I'm now just asking questions in some random order, just on the CSBG side, it's such an interesting and important part, of course, of Lam and on the industry. But for some reason it doesn't show up in trading multiple, right? We see in a lot of other parts on the market that recurring revenue businesses tend to get much higher multiples. So why do you think there is that -- is that the industry is not able to show the importance? Or is that you're not providing metrics such as long term backlog or RPO or what have you, like metrics at software industries provide?

Doug Bettinger

Frankly, I don't really answer that question. I could ask you, why do you think we [Multiple Speakers] I think increasingly you're hearing me and [indiscernible] Lam talk a lot more about this part of the business. We began reporting it externally almost two years ago now, I think, right? I'm doing everything I can to make it visible, right? And I think over time as people see, actually what they described does happen, it does grow every year. It is a very high quality business and it's very predictable. I think over time, perhaps it gets somewhat better. And maybe we do need to begin to provide more information around it. I need to go think about that.

Vivek Arya

Is it accretive to gross or operating margins or cash flow? How do you think about the contribution?

Doug Bettinger

That's a great question. So I describe what's in their business that grows every year, because chambers grow every year. It's maybe a little bit dilutive to gross margin, but it's nicely accretive to operating income because it doesn't require anywhere close to the level of investment than designing a new etch tool does as an example, right? All the research and development on a tool is pretty much sunk once it's designed and out into the field. So it doesn't require a whole lot in the way of research and development, there is some, right? We're innovating in service delivery models and things like that, in different ways we solve some of the operational challenges for customers. I don't want to suggest to you that there's no investment, but it’s not anywhere near as high as designing a new tool first. And as a result, it's also extremely cash generative. It generates a lot of free cash flow, a sustainable amount of free cash flow.

Vivek Arya

Got it. As the industry works towards that, semiconductor industry works towards that $1 trillion goal than semicap equipment industry, do you think the equipment industry will still remain kind of that the top five are going to still keep 70%, 75% or do you see any competition coming from China domestic? I understand today they might be far behind in their IP, but do you see new competitors come into the market, especially from China.

Doug Bettinger

Small emerging, but frankly, when I think about the industry, there's four or five big equipment companies today, in ten years it’s going to be the same four or five big equipment companies today. The barriers to entry are pretty high here. The things we're doing [indiscernible] the things our customers need two nodes from now are things that have never been done in the world before in terms of physics and chemistry and what the result on the wafer needs to be. It's really hard to do this stuff. And I don't want to be dismissive of could there be a new entrant? But what I'm trying to describe is, we've been doing this for a long time, 40 years. We're good at doing what we do. The leaders in the industry are good at doing what we do and we're not sitting still, right? At Lam, we are innovating and doing things better next year than this year, and it's very core to what we do. So, it's a moving target, and it's hard to get caught up when the barriers to entry are as strong as they are. Frankly, that installed base business provides real competitive advantage in terms of designing an external generation tool, because you see the problems the industry is having, you understand some of the constraints operationally, and that's really hard to replicate.

Vivek Arya

Got it. And then in just the last few minutes, Doug, there is a lot of investor concern about the potential for over investment in trailing edge capacity. How do you see that state of play today? Because we have seen very large CapEx announcements right, from all the analog and microcontroller and discrete. Does that worry you that maybe there could be a cliff, right, in their investment and that could impact the equipment industry?

Doug Bettinger

Like I said, again, I'd never say there can't be a cycle here, there won't be a cycle, because there always has been. But frankly, as -- I'll go back to something I said earlier in my conversation. We're a consumer of semiconductors, and we're a consumer of some of that lagging edge capacity. And frankly, I can't get what I need. I think that situation exists pretty much for every consumer of that kind of device. And so, I can't say at some point my investment levels adjust. But what I can tell you as I sit here today is, we can't get everything we need, right? There needs to be more right now.

Vivek Arya

Got it. So if you look out the next one or two years, is there a part of your business where do you think there is a huge level of under investment, right, from your customer perspective or -- and then conversely a level of over investment? Like, if you look at the mix today, and you had to forecast it one to three years out, do you think it stays the same? Or does it tilt towards DRAM, NAND leading lagging edge one way or another?

Doug Bettinger

Yeah. I never get the mix exactly right. What I can tell you, as I look across the totality of the industry today every aspect of the industry is trying to invest more, because the demand is stronger than the industry’s ability to supply this right now. Does that mean that that's going to be in place every year? No. It likely won't be, right? Invariably, the industry is sometimes over invested and has to adjust and that could happen and will in the future. But I don't have a crystal ball to tell you, oh, this is going to make stronger that way or another way. Frankly, at the end of the day, you need everything in a system. If you look at system architectures you need things coming out of leading edge foundry, you need things coming out of legging edge foundry. You need low latency DRAM, you need storage that's provided by NAND Flash. If you look at all of this, all of it comes together in a system at the end of the day. And so, the investment needs to be sort of equitable when you look at that. And frankly, that's what I see the industry is striving to do is, just get the level of investment right.

Vivek Arya

Got it. We heard a lot about this, US chips act or EU chips act, right? Lot of talk but not actual funding for it yet. But as you look out in terms of calendar ‘23, do you think any of that is predicated on these things being funded? Or will that be incremental to industry demand?

Doug Bettinger

I think we all believe at some point this -- the dollars become available. And I think in some of that location announcement you've seen have that built into the beat.

Vivek Arya

But you see demand from that already starting even though the things have not been funded.

Doug Bettinger

That For equipment, I don't think. Because the dollars seem to be available before equipment is purchased.

Vivek Arya

Got it. And then finally, I think your favorite topic over time has been free cash flow generation and returns. Now that the industry can't consolidate too much more and -- but free cash flow for you is sort of at the lower part of the cycle. How do you see that progressing and the uses for it?

Doug Bettinger

Really no change, right? 75% to 100% of free cash flow comes back to the equity holders through an annually growing dividend and it's supplemented by the buyback. If you're really good about the company's cash generation, we're in a growth phase right now and when a business is growing, especially a product business, it consumes cash. It consumes inventory, it can consume accounts receivable. And so when business grows like ours is right now, it needs cash. At the point that maybe it levels off a little bit cash will come back out of that. So that's how to think about what's going on right now. We're investing in working capital.

Vivek Arya

Got it. Perfect. Thank you so much, Doug. We really appreciate your time. Thanks a lot.

Doug Bettinger

Thank you, Vivek. Thanks, everybody.

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