Lam Research Corporation (NASDAQ:LRCX) Citi’s 2020 Global Technology Virtual Conference September 9, 2020 2:25 PM ET

Company Participants

Doug Bettinger – EVP and CFO

Conference Call Participants

Atif Malik – Citi

Atif Malik

Hi, welcome everyone. My name is Atif Malik, I cover U.S. Semiconductors and Equipment stocks. It’s my pleasure to welcome Doug Bettinger, CFO of Lam Research. We also have Tina and Ram [ph] from the IR team. The format of today’s discussion is fireside chat. I’ll go with my questions first after Lam Research reads the Safe Harbor statements.

And then if you have any questions for the Lam team, please email them to me that’s atif.malik@citi.com. Welcome Doug.

Doug Bettinger

Hey, thanks for having me Atif. Good to see everyone on the webcast here this morning, this afternoon.

Question-and-Answer Session

Q – Atif Malik

Okay. Doug before I talk about WFE and all that good stuff, there’s a couple of topics that have kind of emerged from the conference yesterday and today. The first one is, is on lead-times. It sounds like for a big part of the supply chain, the demand continues to outstrip the supply because of the COVID-19 disruption. How much more backlog normalization is left for you guys in September into the December quarter? And where is the company at with respect to the COVID-19 disruption?

Doug Bettinger

Thanks for the question. First, let me remind everybody of our Safe Harbor language. Before I get started, I’m likely to make some forward-looking statements. Please have a look at the Safe Harbor language to understand the caveats behind that.

So, yeah, Atif, sorry, good question. Maybe let me give you the chronology of how things transpired because there’s a story here that I think is important to understand. It goes all the way back, I think, to the end of the March quarter, quite honestly, when COVID flared up, and I think all of us in the industry, you’ll recall — I recall quite vividly shelter-in-place orders on the West Coast, supply chain disruption across Southeast Asia, and Asia broadly speaking. And I think at that point, you’ll remember we pulled guidance and then decided not to guide for the June quarter because there was so much uncertainty in the environment.

Fast-forward then to the June quarter, we ended up performing quite well in the June quarter, I felt and I hope everybody on the call felt the same way. We figured out how to operate a little bit differently with PPE in the factory and in the lab, social distancing in place where we needed to do that. We figured out how to optimize things in a different operating environment.

And we got better at doing what we’re doing. It’s what I think Lam is really quite good at doing is kind of that continuous improvement focus and that’s very much what transpired to the June quarter.

We got caught up to a certain extent in June, not completely. And as we guided the September quarter, I generally, described — we’re getting caught back up. We hired people in the factory. We expanded into adjacent square footage. Fortunately, we had that available to us, Atif. And we got better at meeting customer delivery dates and whatnot such that for the most part, we’re not entirely caught up, but we’re significantly caught up as we sit here today.

So, I feel pretty good about how we’ve operated, how we’ve executed, how we’ve done what we do. I would tell you we are prioritizing health and safety of the employees, first and foremost, making sure that is paramount. Similarly, health and safety of our supply chain partners and customers, right. We have to keep that in mind everywhere we’re doing what we’re doing. So, priority one is that.

Second thing is taking care of customers and that’s very much what we’re working to do, Atif.

Atif Malik

Great. Doug, the second theme, and you can call it the elephant in the virtual chat room has been the topic around China, the U.S. government looking at restricting China’s ability to manufacture semiconductors. It is still speculative, and you guys don’t comment on it. All your customers, it’s not our base case, but it’s election year, anything could happen. But it’s important for investors to know how are you currently complying with respect to shipping equipment to China?

Doug Bettinger

We’re complying with all rules everywhere in the world where we operate. You don’t — that’s not actually an option. You have to comply with all of the rules and that is absolutely what we’re doing to the best of our interpretation and understanding of those rules.

Yes, there’s some headlines from last week about different reports coming out and different speculation. I don’t really have anything new to tell you on that, Atif, independent of what’s already out there, honestly.

We’re working through our credit [ph] association, ourselves, quite honestly, to try to influence outcomes and whatnot in Department of Commerce and things like that to make sure everybody is well-educated and well-informed in terms of what’s going on and what — and how this industry operates. I think everybody in the industry is doing largely the same things here, to be honest with you.

Atif Malik

Let’s talk about WFE. I feel like we made a full circle on WFE this year. We started with, like up 20% and then we came down and now we’re back up 20%. Can you just talk about what is driving a strong growth this year? Is any of this growth involved — from like, let’s say next year? And in terms of incremental strength, where are you seeing the most strength this year?

Doug Bettinger

Yes, I mean, to frame kind of a sequential — inherently sequential conversation, which is last year was down, it was down hard and memory. 2019 was in a very reduced memory investment here. And some aspect of that has come back maybe most notably in NAND not really at all in DRAM.

So, our view of that, as we’ve gone through the year, maybe changed a little bit, but like you said, we’ve come full circle to kind of see things today the way we saw them as the year began.

Within that, we strength in foundry and logic. It was strong last year, continues to be pretty good this year. Some aspect of a recovery in NAND, not so much in DRAM. And so when you do all the puts and takes around that mid-high 50s is what we see from a WFE standpoint coming off a pretty muted memory investment here, some aspect of a little bit of an uptick in NAND not so much in DRAM. It is really what we see going on.

And if I think about how the year transpired, honestly, we came in pre-COVID, things look good. Obviously, COVID hit, the economy got weak. I had an opinion that as we reported March earnings that the consumer facing demand was going to be weaker and it turned out to be.

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As we went through the year, we kind of went from mid-high50s to low mid-50s, back to mid-high 50s from the WFE standpoint and the puts and takes for around — maybe a little bit softer things in consumer facing semi these things that are more directly associated with discretionary income.

Offset a little bit by enterprise-type activity, enabling a lot of what we’re doing right now, which is being productive while working from home and working in different ways. That’s really kind of how it unfolded from my vantage point.

Atif Malik

Great. Good color on the NAND side of the memory. Doug, the question I’m being asked by investors is like, how do you reconcile the memory prices, the elevated inventory versus equipment makers been talking about improving memory investments in second half.

And I thought ASML, this morning, had interesting color that the capacity that is being added in second half is more for the demand recovery in the first half of next year. What is your view on the memory dynamics into second half this year?

Doug Bettinger

Largely consistent. I don’t think I would have a different viewpoint than what I think you just described ASML is seeing. I mean you know investments that are occurring in the back half of this year aren’t generating output until next year, right. And I think when the industry looks broadly at where supply growth is, where demand growth is largely and we look — I look at our own internal models, supply growth this year will be below demand growth in memory. And investments that are occurring now are more with a view towards supply and demand into next year. So, I think I would tell you, I see things largely the same way.

Atif Malik

Okay. And then in the foundry side, the CapEx from the Taiwan region was expected to be first half loaded, but we’ve had incremental strength coming from other regions in second half. What do you see in the foundry logic market for second half?

Doug Bettinger

That is what I see as a broadening out of investments in the foundry space beyond just maybe one large customer if there’s a broader set of investment at current subset? Yes, I think the second half spending in foundry is going to be continued quite good. And a broader base of who’s investing.

Atif Malik

Okay. And then the question is about the microprocessor and outsourcing to foundry, how do you see that setup for playout for Lam in event that the processor and CapEx moves more towards foundries?

Doug Bettinger

Yes, I mean, the way I think about something like that. And I’ll answer it as a theoretical question, because I always try not to talk about any one customer given how small the industry is. I mean at the end of the day, the way I would think about a situation like you’re describing Atif is probably at the end of the day, the demand for wafers is going to be about the same. Maybe not precisely the same, but I don’t know. However, many CPUs you think are going to be sold, whether they’re built on a wafer in one fab or another or multiple fabs and multiple geographies, the number of wafers is probably going to be largely the same, probably.

And at the end of the day, we sell to everybody in the industry, Etch and deposition equipment, probably not too different one to the next in terms of what they buy from us. And so whether someone is doing things all internally or partly internal, partly outsourced, it probably doesn’t meaningfully impact the demand for our equipment at the end of the day, because like I said, we sell pretty much to everybody in the industry.

Atif Malik

If I go back to your Investor Day, you had a really powerful story on two new products and the new Etch 2 and then a new dry resist product. COVID-19 came, how — I mean, can you update us the rollout on those two new products? Have they been impacted because of engineers not been able to come in and work on them? And what are your expectations on the rollout of those two new products? And what has been the customer feedback?

Doug Bettinger

Yes, it created some challenges, but challenges that we’ve worked through. Like I said, when I described how we’re operating in the factory, we’re operating the same way in the lab environment, which is where we do all of our R&D on new products like Sense.i and the dry resist that we talked about for the first time at the Investor Day.

Listen, customer poll on both of these capabilities is very strong. The excitement I clearly see there when I talk to people in the regions and people that are seeing the customer every day. Generally speaking, when you feel customer poll, like we’re seeing on both Sense.i and as well as the dry resist capability we’re bringing out, you know, you got something pretty good coming out. And that’s very much what we’re seeing.

And I would tell you COVID created some challenges, I think, initially for us, maybe slowed some things down a little bit. But similar to what I described to you in the manufacturing environment, we’re back in the lab. Lam is open for business, we’re operating a little bit differently, right? With PPE on and maintaining distance from one another inside the lab, but we’re absolutely driving the R&D agenda forward.

We’re on schedule for the most part with our R&D programs, maybe with some challenges, but we’re working our way through it very, very similar to what I described to you in the manufacturing environment.

Atif Malik

And just on the manufacturing side, Doug, it appeared that you guys got a bit a little bit harder because of manufacturing and in California. Can just talk about the plans for — either dual [ph] manufacturing locations or around critical components suppliers in the future, what changes if any Lam, is thinking of making longer term?

Doug Bettinger

Probably not too many changes. I mean, the thing I think we were pleased with was the robustness of our business continuity plans as COVID popped up. I mean, nothing, nothing in this environment worked perfectly. But it worked pretty well. I mean, we have redundancy in the supply chain. We have an ability to move some things around. I think the importance of that became much more apparent as we worked our way through the COVID environment and in customer demand. A robust supply chain is clearly as high as it’s ever been, although it’s always been pretty high.

Our local manufacturing footprint is part of how we try to manage risk mitigate risks. Similarly with our supply chain, our supply chain partners have multiple locations that they do things for us, such that we can move some things around when we need to at times. You clearly we’ve stress tested all of this, but I don’t think our manufacturing footprint — our roadmap is going to be all that different than what it originally was. We’re a global manufacturer. We have factories in California, in Oregon, in Ohio, in Austria, in Korea, and in Taiwan.

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There’s been some level of resiliency there and we announced not all that long ago and the intention and we’re actively constructing a new factory in Malaysia. I think the global footprint that we have will serve us well. The ability to do things in multiple locations will continue to serve us well. But that’s always how we thought about things. We’ve always known we need business resiliency, business redundancy in the footprint that we deliver things to our customers, and it’s very much what we do today and what we’ll continue to do.

Atif Malik

Great. Moving on to the services business, Doug, it’s a business that you’ve definitely been able to communicate a lot better with investors, it’s one-third of your sales. How much of this is like fixed annuity type versus variable? And can this business be a sustainable double-digit grower?

Doug Bettinger

Yes, thanks for asking about it. This was always a business that I’d go through meetings with investors and people would forget to ask me about and sometimes I forget to talk about for the very end and Ram [ph] and team would throw an elbow into my ribcage and say; don’t get to talk about CSPG.

But yes, it’s an important part of what we do and how we make money and quite honestly how we generate cash. This is such a good business in my vantage point. So, maybe let me talk about a little bit because I’m sure there’s a lot of people on the webcast that are new to the story. So, let’s make sure everybody understands what this business is.

First, its independent to a certain extent of what wafer fab equipment spending is in any given year. It’s the money we generate from the installed base, the chambers that are in the customers’ fab and really there’s four things that go into this business.

First, spare parts, our tools need to have spare parts replaced periodically to continue to maintain uptime yield in all the technical things that need to be done. So, that’s the biggest part of this business.

There’s pure service, our tools need to be maintained, they need to be cleaned as an example, the chamber needs to be cleaned periodically. So, there’s pure service. Our equipment when we sell it can be upgraded to the next node capabilities. That’s a great part of the business model, it’s a great part of value we deliver to the customer base because you can upgrade a tool cheaper than you can buy a new tool. So, that’s a good ROI proposition for the customer. And increasingly important is our refurbished equipment business, which is more directly related to WFE, but this — think about trailing edge type capability, IoT, power devices, automotive, people in the industry — and we oftentimes will refer to it as the specialty market, growing very, very rapidly, right?

Our view is this part of the business, [Indiscernible] of stuff grows two to three times faster than WFE in general. And so when you roll all this together and you think about the lifecycle of our equipment, our equipment will generate a profit stream for decades.

Chambers in the field grill pretty much every single year. So, if you think about, yes, fixed variable, the sustainable growth of this business is very strong. I’ve said consistently over the last several years that it’s hard for me to imagine a year where this business doesn’t grow every single year.

In fact, last year when memory investment was down fairly significantly, which as you know is our strongest business, this — the CSPG business still grew last year such that, you’re right, it was 33% of revenue last quarter north of $900 million. Really, really high quality business and I think almost all of this, Atif, very recurring in nature. It’s a great part of the business model.

Atif Malik

Great. Doug I get asked this question quite a bit is competition in kind of a domestic China market? There are some Tier 2, Tier 3 suppliers like AMEC, what do you see in the domestic China market with respect to competition?

Doug Bettinger

Yes, there’s a small industry emerging there. But for the most part, you think of the companies that you’re referencing, they’re not competing with us for the critical applications. They’re not even really competing all that significantly with us for semi-critical applications. It’s more in the non-critical space.

And so it’s emerging group, but let me tell you, we’re really good at doing what we do. We invest a significant amount in R&D getting better every single year. We’ve been doing what we do for 40 years and it’s really hard to do what we do. And so that’s the way that I think about it, Atif.

Atif Malik

Okay. And then just longer term China, important driver for equipment spending, $9 to $10 billion investments this year. Just putting aside the near-term noise, I mean, how do you see the growth in that part of the market?

Doug Bettinger

Yes, I mean, let’s put the trade stuff aside for a minute. I think over time, it grows unless trade gets in the way, in which case, that will potentially impact it. But what I’ve been reminding people of this week, given all the headlines from last week is don’t lose sight of the following item that everything we’re talking about relative to investment in China is generating supply, not generating end demand.

End demand for semiconductors at the end of the day is really what drives the industry. And if for one reason or another supply doesn’t occur in one geography, it’ll occur in another geography.

Demand is demand at the end of the day. So, I think it’s important with everybody worried about trade, friction, tension, and so forth, don’t lose sight of that right long-term. What matters is the growth of data. Long-term, what matters is 5G and high performance computing. And all of the buzzwords that everybody in the industry gets really excited about and talked a lot about. That’s what matters.

So, just keep that in the back of — everybody should keep that in the back of your mind when you think about where supply is being generated. It’s being generated supply and demand at the end of the day.

Atif Malik

And then another question I get asked is on EUV and we had ASML this morning talking about maybe in DRAM, EUV steps go from like one, two, four, what is your view on the growing use of EUV in the DRAM part of the market?

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Atif Malik

Largely consistent, no different than one go in three or four, as you go from 1Z, 1A — one alpha or whatever the industry is referring to it as. It’s completely consistent with that.

And what we’ve consistently described is our market grows every single node. It grows in DRAM as you go from 1X to [Indiscernible] to 1Z to 1A and 3D NAND as you go from 64 to 96 to 128 and so forth, right on market configure. It grows with the EUV coming in most prominently as you know, Atif, in foundry and logic. Our market still grows every single node with EUV coming in.

The other thing and you’ve asked about it already is EUV also creates new opportunity for Etch in our position. And we’re really excited about this driver — this capability we’re bringing out, try to help enable EUV through a partnership at IMAC with ASML. So, don’t lose sight of that too, right? We’re attentive to what’s going on in the industry and taking care of challenges customers have very much how I see it.

Atif Malik

Okay. Move on to the capital allocation, what the plans for the next 12 to 18 months, the macro could be choppy, given on where the stock is at right now. Can you just give us some thoughts on capital allocation?

Doug Bettinger

Yes, it’s really not different than — no. Again, I’ve taken you back a couple of times to the Investor Day and messaging, it’s the same largely which is 75% to 100% of free cash flow going back to equity holders through a combination of buyback and dividend.

Now, when COVID first came out, we paused the buy for a period of time, wanted to get a better view into demand in the second half of the year. We worked our way through that fairly quickly such as in the June quarter, we were already backfiring, a little bit of stock back and we’re back in the market again in September. We just raised the dividend again not all that long ago. I look at that every year with the Board.

So, yes, it’s a continued execution of the same capital allocation plan that we’ve had in place and for the last several years, I guess, but more recently, reiterating the 75 to 100% in March.

Atif Malik

Okay. Doug, I’m going to move to the audience questions. I’m getting a few questions here. The first one, again, on competition. What about competition outside of China with Japan and Korea? And is there a chance on leading edge that you could see some share shifts, if China decides to move away from U.S. chipmakers?

Doug Bettinger

Yeah, sure it moves around a little bit in any given year depending on who’s spending money. But listen I don’t know what might happen relative to U.S.-China trade tension numbers, anything that moves around there. I’m not really seeing anything right now, to be honest.

Doug Bettinger

Okay. And then a question on any appetite for M&A and any segment of the market that you believe needs further consolidation or you can play a role in?

Doug Bettinger

I think when I look at on our last five, six years of M&A in the equipment space, I think large scale M&A is largely behind this industry and the last two big deals, one of which we tried to consummate didn’t get regulatory approval. So, I think the big step is done now. There’s four, maybe five big equipment companies today. I think that’s what the industry is going to look like.

It doesn’t mean there’s not maybe a tucking here or there or something that is enabling to our core market. But I like the portfolio of products we have I like the markets we’re in there organically growing very nicely.

Our Sam Excel is still expanding. I like the portfolio of products that we have, there isn’t anything that we don’t have that we need to have. So, that’s how we think about M&A.

Atif Malik

Okay. I think there’s a question — like a clarification. Have you needed to get a license to ship to China over the past couple of years?

Doug Bettinger

I think it — we used to need to get licenses to ship Etch. I think that the industry lobbied and that went away. I think it was in 2015. It’s been gone for quite a while. So, no, we don’t need any licenses as we sit here today to sell anything in China.

Atif Malik

Okay. And if hypothetically an entity gets put on — a company gets put on the entity list, how different would it be getting license for them?

Doug Bettinger

Hard for me to know that’s a theoretical question. If Huawei as an example, I think, some things can still be sold there and some things can’t. I would guess it would look similarly. But again, it’s a theoretical question, because it’s not there yet. So, I don’t know for sure.

Atif Malik

Yeah. And then another one, Lam shared their long-term growth drivers including expansion of its Sam gaining market share, benefit from growth install base services. Is it possible to create a bottom-up model or view on long-term growth in Etch, deposition, and cleaning businesses over the next three to five years?

Doug Bettinger

Well, that’s the financial model that we tried to put out there in March. Yes, I mean, to the best of my ability, I didn’t quantify every single growth driver in the midpoint of that financial model that showed that a $60 billion WFE a view that given the growth drivers that you just articulated that we become a $15 billion company from growth in the installed base, Sam and share. I didn’t decompose the individual drivers of that growth, but that is what constitutes it.

Atif Malik

Okay, and then one on NAND WFE, calendar year 2020, WFE is probably up 30% to 40% led by your largest customer, would you expect NAND WFE be up again next year, as you said, supply growth is less than demand growth this year and looking at your customer inventory levels?

Doug Bettinger

I’m not going to give you an outlook for next year quite yet. It’s too soon for me to do that because we haven’t done bottoms up work. So, come back to me after next quarter’s earnings and ask that question.

Atif Malik

Okay. I think I received one more. It is on the same lines competition from Japan, and how you’re tackling it. So, we’ve covered it already.

Doug, thank you so much for coming to the Citi’s conference. Those are the all the questions I have received and good luck.

Doug Bettinger

Okay. All right. Good to see everybody. Be healthy. Be safe. Atif, thanks for having us.

Atif Malik

Thank you, guys.



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