Lam Research - Q2 2023

Transcript

Operator (participant)

Good day, and welcome to the Lam Research December 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tina Correia, Corporate VP of Investor Relations and Corporate Finance. Please go ahead.

Tina Correia (Corporate VP of Investor Relations and Corporate Finance)

Thank you, operator. Good afternoon, everyone. Welcome to the Lam Research Quarterly Earnings Conference Call. With me today are Tim Archer, President and Chief Executive Officer, and Doug 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 December 2022 quarter and our outlook for the March 2023 quarter. The press release detailing our financial results was distributed a little after 1:00 P.M. Pacific Time this afternoon. 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. With that, I'll hand the call over to Tim.

Tim Archer (President and CEO)

Thank you, Tina, and Happy New Year to all that are joining us today. Lam ended 2022 on a strong note. We posted record revenues and earnings per share for both the December quarter and the calendar year. Systems revenue growth in our Foundry/Logic segment exceeded Foundry logic wafer fabrication equipment growth, demonstrating our continued progress, launching new tools and winning applications in that space. In our installed base business, our CSBG revenues expanded faster than the growth in installed base units. We also generated more than $3.5 billion in cash from operations and returned over 100% of free cash flow to stockholders in the form of dividends and share buybacks. Overall, Lam executed well in 2022. We delivered solid results in an environment of acute supply chain constraints and strong inflationary pressures.

Still, there are elements of our performance where we recognize the opportunity for additional focus. With the pressures of the COVID pandemic and the global chip shortage abating, our attention this year is on the actions needed to hit our long-term growth and profitability objectives we laid out in March 2020. Beginning early in the COVID pandemic, Lam and others throughout the supply chain quickly ramped investments in infrastructure and resources to meet unprecedented demand driven by remote work trends and the accelerated digitization of the global economy. As seen in our results today, these investments have enabled Lam to achieve revenues of greater than $5 billion per quarter, approximately 70% higher than what we saw in the last upcycle.

As we look forward into 2023, however, we see a substantially weaker demand environment and a corresponding need to make prudent changes to our near-term operations and priorities. Customers across all segments are exercising caution, especially those in the memory markets. Inventory levels in both NAND and DRAM remain very high, and customers are not only reducing new capacity additions, but also lowering fab utilization levels to bring excess inventory into balance as quickly as possible. In addition, the U.S. government's new restrictions on sales of equipment, parts, and services for specific technologies and customers in China are further impacting equipment demand in a declining market. In 2022, WFE spending ended the year in the mid-$90 billion range, slightly higher than our prior view due to easing supply chain constraints.

As we indicated in our last earnings call, we expect calendar year 2023 WFE to be in the mid-$70 billion range. Given the decreased business levels expected this year, we have made the difficult decision to reduce our overall workforce by approximately 1,300 employees by the end of the March quarter, about 7% of our global employee base. While the reductions are broad-based across the company, we have taken special care to preserve, and in some cases increase, our investments in the critical R&D efforts, which I believe are key to Lam's long-term growth and competitiveness. Despite reductions in overall company spending, we expect R&D as a percentage of operating expenses in 2023 to increase compared to 2022.

We will also be taking specific actions to transform our business processes and enterprise systems to ensure that when stronger WFE spending returns, the company is well-positioned to scale quickly and efficiently across our global infrastructure. These actions will contribute 100 basis points of improvement to our gross margin from March quarter levels as we exit calendar year 2023. We expect the operating margin benefit to be slightly higher than that. Over the past few years, we have been executing on a set of strategies that we believe strengthen our ability to capitalize on the robust secular demand trends we see ahead in our business. In just the past two years, we have opened a state-of-the-art engineering center in India, brought online a new technology development center in Korea, and ramped our new manufacturing operation in Malaysia.

These strategic investments place critical Lam capabilities closer to customers and ecosystem partners, a benefit for stronger collaborations, greater scalability, and increased resilience, all of which will be of greater importance as we see more than 50 new fabs being built over the next few years globally. They also provide wider access to talent, critical to supporting Lam's growth longer term. We have also been drawing on learnings from our rapidly growing installed base to support our customers' manufacturing roadmaps. Our installed base of approximately 84,000 chambers is more than 30% larger than in the prior down cycle. A solid installed base business not only provides a platform for stable revenue growth long term, but also delivers data and learnings that are key to an efficient product innovations process. At this scale, there is a tremendous opportunity to extract value for our customers and for Lam.

The data we generate from our installed base helps drive fab productivity improvements, and the capabilities of our Equipment Intelligence products are helping us migrate from standard service offerings, like engineer on-site labor, to more comprehensive results-based contracts and predictive smart solutions. The number of chambers in 2022, with another strong growth year expected in 2023. We have been strategically focused on technology inflections, notably in Foundry Logic devices, with the goal of broadening Lam's positioning in a market segment where we have been under-indexed. In 2022, we continued to make progress. We have doubled our conductor etch share node to node at a leading Foundry Logic customer through the success of our Kiyo product, which uses Equipment Intelligence to deliver best-in-class uniformity and improved yield. In the selective etch business, our recently released Argos, Prevos, and Selis tools are gaining increasing traction.

Our Argos product is in roughly 20 applications at a leading Foundry/Logic customer, and in adjacent selective applications at another customer, our Prevos and Selis tools are production tool of record for gate-all-around applications. Continued scaling of Foundry/Logic devices from existing nodes is expected to increase etch and deposition intensity around 25%-30%, thus creating tremendous opportunity for us to gain share through new innovations for future devices. We have continued to make both organic and inorganic investments to expand our market. Lam's innovative dry resist fabrication technology has won development tool of record positions at multiple customers for key steps in the patterning process, and we are actively engaged with customers across both the memory and Foundry/Logic segments. We expect to announce more on this in 2023.

In advanced packaging, our recent acquisition of SEMSYSCO, we have expanded our capabilities within the leading-edge logic and chiplet segments. We are rapidly integrating SEMSYSCO technology with Lam's market-leading capabilities in plating and wet processing, and we have already achieved a key win in this area. Customers view advanced packaging solutions in both wafer and substrate formats as critical to enabling future high-performance computing and AI applications, and Lam is well-positioned to benefit from this trend. To wrap up, 2022 presented many challenges. With our team's focus and strong execution, we were able to meet our customers' needs, deliver record revenues, and expand our product and technology portfolio. This coming year represents a reset in the market and in our business, but is also an opportunity for us to make the changes needed to accelerate our strategic priorities.

I am confident that by taking the difficult actions that we have announced today, we are putting Lam in a stronger position to capitalize when industry spending growth returns. With that, I'll pass it on to Doug.

Doug Bettinger (EVP and CFO)

Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a busy earnings season. We had a record financial year in calendar 2022. Our revenue came in at $19 billion, and we delivered an all-time high for earnings per share of $37.31, which was a 15% growth in earnings per share over calendar year 2021. Overall, I'm pleased with the operational performance we achieved this past year, delivered while navigating a challenging business environment with global supply chain constraints, significant inflationary headwinds, and fluid regulatory restrictions. Lam also achieved record levels of performance in the December 2022 quarter across multiple metrics, including revenue, operating income dollars, and earnings per share.

Revenue for the December quarter was $5.28 billion, an increase of just over 4% from the prior quarter. We delivered higher levels of system sales in deposition and etch, offset somewhat by a decrease in CSBG revenue. Deferred revenue at the end of the quarter was $2 billion, a decline of $770 million from the September quarter. Supply chain constraints have improved, we were able to fulfill shipments of many critical parts that's required for revenue recognition. Our expectations are that the deferred revenue balance will continue to decrease in the March quarter as we fully complete shipments related to outstanding back-ordered systems. The deferred revenue balance decrease I just spoke about was partially offset by some increases in deferred due to customer cash in advance deposits, which I also noted last quarter.

As we sit here today, I expect to have some level of these type of deposits in the deferred balance throughout calendar 2023, keeping deferred revenue at somewhat higher levels than we've historically seen. I anticipate that the deferred revenue from back orders will be at a normalized level as we exit the March quarter. Let's turn to the revenue segment details for the December quarter. Memory represented 50% of systems revenue, which is slightly down from the prior quarter level of 52%. Included in memory, the NAND segment represented 39% of our systems revenue, flat with the September quarter. The spending was primarily focused on 192 layer and above class devices. The DRAM segment concentration decreased sequentially from the prior quarter, coming in at 11% of systems revenue, compared to 13% in the September quarter.

The DRAM investments were mainly targeted towards 1Z and 1-alpha nodes. I expect that we will see both NAND and DRAM revenue decline meaningfully in the March quarter. For calendar 2023, I expect NAND spending to decline more than DRAM. We continue to see strength in the Foundry segment with the December quarter concentration comprising 31% of our systems revenues. While this percentage is a little bit lower than September quarter level of 34%, the dollar amount was flat with a mix of investments in both leading and mature node devices. The Logic and other segment revenue came in at a high water mark for the company, contributed 19% of systems revenue in December quarter, compared with 14% in the prior quarter. Investments were focused on microprocessor, image sensor, and advanced packaging technologies.

LAM had strong momentum in logic and other throughout calendar 2022. I expect we'll continue, excuse me, to perform well in this segment. I'd mentioned that this was a record revenue level for us in microprocessor-related revenue. We've been talking about momentum here for a while, and it's clearly showing up. With respect to the regional composition of our total revenue, the China region was 24% of the total, down from the prior quarter level of 30%. This reduction was due to the U.S. government sales restrictions for certain domestic customers, which were put in place in early October of 2022. Rounding out the top regional revenue locations, Korea comprised 20% of total revenue, up from 17% in the prior quarter, and Taiwan decreased to a concentration of 19% compared to 22% in the September quarter.

The customer support business group results in the quarter were approximately $1.7 billion, which was down 9% from the September quarter, though it was 16% higher than the December quarter of calendar 2021. As we've noted in the past, CSBG revenues will fluctuate on a quarterly basis, and in the December quarter, we experienced declines in the CSBG product lines with reductions in utilization and system spending. Going into calendar 2023, we have the impact of China regulatory re-restrictions in addition to memory spending at well below historic levels and elevated customer device inventory. These factors are resulting in customers having underutilized factories and taking actions to manage their supply levels in 2023, negatively impacting our spares and services business.

While we continue to believe the mature node segment will perform better than overall WFE spending, we are in an unprecedented business environment and expect the CSBG business could be down somewhat in calendar year 2023. Let me now pivot to our gross margin performance. The September quarter came in at 45.1% over the midpoint of the guided range, but down from September quarter's gross margin of 46%. The decrease from the September quarter was tied to customer and product mix. With the decline in business volumes in March 2023 quarter, we expect lower factory and field utilizations to unfavorably impact our gross margin on a sequential basis. Operating expenses were $686 million in the December quarter, up 6% from the prior quarter amount of $647 million.

The higher spending was mainly in R&D projects, which comprised nearly 67% of our total spending. Supporting our customer's roadmap continues to be a top priority for us, while we focus on managing other areas of discretionary spending within the company. December quarter operating margin was 32.1% over the midpoint of guidance due to the higher level of revenue and gross margin. Our non-GAAP tax rate was 11.9%, in line with expectations. Looking into calendar 2023, we believe the tax rate will be in the low to mid-teens with some fluctuations quarter by quarter. This rate estimate does not include any impacts from potential U.S. or global tax policy changes.

Other income and expense came in for the quarter at $38 million of expense, approximately $9 million higher from the prior quarter, mainly due to negative foreign exchange fluctuations, which was somewhat offset by higher interest income because of increasing returns on our cash and investments. OINE will continue to be subject to market-related fluctuations that will cause some level of volatility quarter by quarter. On the capital return side in the December quarter, we allocated approximately $483 million to open market share repurchases. Additionally, we paid $236 million in dividends in the quarter. For the 2022 calendar year, we returned 119% of our free cash flow, totaling three and a half billion dollars, which was somewhat higher than our long-term capital return plans of 75%-100%.

December quarter diluted earnings per share was $10.71, which was at the high end of our guidance range. Diluted share count was 136 million shares, which was lower than the September quarter and in line with our December quarter expectations. During 2022, we lowered share count by nearly six million shares through our share buyback program. Moving to the balance sheet. Our cash and short-term investments, including restricted cash, were up to $4.8 billion versus the prior quarter level of $4.6 billion. Operating cash flow of $1.1 billion in the December quarter was offset by cash allocated to share repurchases, dividend payments, and capital expenditures. Inventory turns were 2.4x.

Day sales outstanding were 70 days, a decrease from 82 days in the September quarter due to strong collections and improved linearity within the quarter. I would point out that we expect 2023 to be a strong cash-generating year as working capital comes down with lower business levels. Our non-cash expenses for the December quarter included approximately $73 million for equity compensation, $73 million in depreciation, and $12 million in amortization. Capital expenditures for the December quarter were $163 million, a slight increase over the September quarter spending of approximately $140 million. The expenditures were in R&D and manufacturing, including our Korea Technology Center and our Malaysia factory. We ended the quarter with approximately 19,200 regular full-time employees, which was an increase of approximately 500 people from the prior quarter.

Our growth was in the factory and field to support the manufacturing as well as installation of tools at our customers' fabs. Also included in this headcount growth were 150 employees from the SEMSYSCO acquisition that was completed in the December quarter. As you heard from Tim and saw on our earnings release, we will be reducing our regular full-time headcount by approximately 1,300 employees. We expect these reductions to be largely reflected in our June quarter ending headcount. In addition to the full-time reductions, we expect to be lowering our temporary workforce by approximately 700 people in the March quarter. We've already adjusted our temporary workforce down by 700 people in the December quarter. Let me now turn to our non-GAAP guidance for the March 2023 quarter.

We're expecting revenue of $3.8 billion ±$300 million. I'll also just mention that we currently think revenue will be somewhat first half-weighted this year as we consume the reduction in deferred revenue in the March quarter. Gross margin of 44% ±1 percentage point. The decrease in this is the result of lower business volumes. Operating margin of 27.5% ±1 percentage point. Finally, earnings per share of $6.50 ±$0.75, based on a share count of approximately 135 million shares. We will be taking a charge of approximately $80 million in the March quarter from the headcount reduction.

Including this impact and the other near-term actions that Tim spoke about, we are anticipating a total of $150 million-$250 million in charges to be incurred over the next 12 months. In addition to headcount, we anticipate potential charges from facilities restructuring, business realignment and transformation, and product rationalization. On top of the cost savings activities, we are driving a greater focus from our senior leadership team through inclusion of additional profitability metrics in our annual incentive compensation structure. Currently, we're at low volumes given the business environment. These initiatives will structurally improve our profitability. As Tim already laid out, we expect gross margin to be higher by roughly 1 percentage point and to expand operating margins by a little more than that as we exit the calendar year and complete these activities.

Over many years and cycles, Lam has established a proven track record of successfully managing this business. With the actions we plan to execute throughout the year, we expect to strengthen our operations and technology leadership and further enhance our profitability profile with the company's returning growth. When business improves, and we know it will, Lam will be a stronger, better positioned, more efficient company. Operator, that concludes our prepared remarks. We would now like to open up the call for questions.

Operator (participant)

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, press star one to ask a question. We will take our first question from Harlan Sur with JPMorgan. Please go ahead.

Harlan Sur (Managing Director and Senior Equity Research Analyst)

Good afternoon. Thanks for taking my question. Given the 20% pullback in WFE spend this year, significant memory spending pullback within that, does the team still believe that the memory mix and spending expansion in memory will accelerate exiting this year? What's your view on the supply-demand environment in memory and normalization of excess inventories in the industry?

Tim Archer (President and CEO)

Harlan, I'll start on that one. You know, I think that the memory market and our market in general is difficult to predict from a timing perspective. When you try to put a ending the year kind of time on it's hard. You know, as Doug laid out, there's a couple points. I mean, one, we've seen extraordinary measures within the memory market in terms of reductions, not only in spending, but also cuts in fab utilization, and, you know, in some cases, even delays of technology investments. I think these are somewhat unprecedented in terms of trying to bring this market into balance. We also see, you know, a memory as a % of the total WFE mix that's at levels that we haven't seen in 25 years.

You know, I guess what we walk away with is, you know, a lot of confidence that memory spending will accelerate, but we're not at this point ready to put a exact timeframe on that. A lot of the actions that we talked about that we're taking in the company are to ensure that in the next upcycle, we'll actually be far more nimble to respond to changes in demand than we were when we were impacted by the ramp that came around the COVID pandemic.

That's really where we're spending a lot of our time thinking about less on timing, but more about how is the company gonna be prepared to respond to that ramp in memory spending when it inevitably comes, and how do we ensure we can do that in the most efficient and profitable way possible.

Harlan Sur (Managing Director and Senior Equity Research Analyst)

Perfect. Then on the impact from China regulatory and export controls, you know, YMTC was formally put on the Entity List in mid-December. Did this move change your prior view of a $2 billion-$2.5 billion impact to revenues this calendar year due to the China restrictions?

Tim Archer (President and CEO)

No. When we put out the $2 billion-$2.5 billion, fundamentally it comprehended an inability to ship to the customers that at that point were operating at the technologies that were restricted by China. It didn't change it. I would say today our view is still in that $2 billion-$2.5 billion range of impact.

Doug Bettinger (EVP and CFO)

Yeah. No, no change at all, Harlan.

Harlan Sur (Managing Director and Senior Equity Research Analyst)

Perfect. Thank you.

Doug Bettinger (EVP and CFO)

Thanks, Harlan.

Operator (participant)

We will take our next question from Joe Moore with Morgan Stanley. Please go ahead.

Joe Moore (Semiconductors and Software analyst)

Great. Thank you. I guess I wanted to ask about the deferred. If you draw it down to sort of normal levels in March, it implies shipments that are kinda well below the revenue level. You know, I guess with CSBG running at close to $1.7 billion, it doesn't seem like the June quarter could fall that much. Can you just kinda give us a little bit more clarity on what it means that you're drawing down that much deferred in March?

Doug Bettinger (EVP and CFO)

It just means there's no more left at the end of the March quarter, Joe. I don't really have any more than that to tell you. Yeah, shipments are lower than that revenue number as we get the deferred kind of back to what I would describe as a normalized level from a backorder standpoint.

Joe Moore (Semiconductors and Software analyst)

Okay. I think you've described normal in the past as being around $700 million, and you said it'd be a little higher than that. Is that the right math?

Doug Bettinger (EVP and CFO)

Yeah, that's right, Joe. What I see happening right now is we've got I call them customer cash and advance deposits, which we haven't yet shipped the tools. I think as we go through 2023, it's gonna stay at a slightly higher level from that category than it's been in the past. I think it's a little bit higher, somewhat higher than that number that you just mentioned.

Joe Moore (Semiconductors and Software analyst)

Great. Thank you very much.

Doug Bettinger (EVP and CFO)

Thanks, Joe.

Operator (participant)

We will take our next question from Timothy Arcuri with UBS Securities. Please go ahead.

Timothy Arcuri (Managing Director)

Hi, thanks. Doug, I had two questions. First of all, is sort of on, you know, Joe's question that he just asked, and it sort of is the profile, not in your revenue but more in your system shipments through the rest of the year. You said slightly first half loaded from a revenue perspective, but I would assume that your system shipments are gonna be like March is probably the bottom, and it sort of like flattens off from there. Is that fair?

Doug Bettinger (EVP and CFO)

Yeah, that's fair, Tim. I think maybe I'll answer a slightly different question. When I think about WFE in the mid-seventies that Tim described, I think it's fairly balanced through the year. Revenue's somewhat first half weighted because we're drawing down that deferred revenue balance. I just wanted to point that out, which is why I scripted it that way.

Timothy Arcuri (Managing Director)

Perfect, Doug. Thanks. Just on that point, you guys are usually 13%-14% of WFE, and your system shipments in March would imply that, you know, WFE is sort of $16 billion-$17 billion in March. That's more like mid-$60 billion versus a mid-$70 billion number for the year. Is the answer that, you know, litho is making up the difference? Because obviously all of us heard ASML today and, you know, systems are up, you know, 20%+ this year. Is the story this year really that you're gonna get to mid-$70 billion predominantly because you're adding, you know, an extra $XXX billion of litho year-over-year? Is that the, is that the math? Thanks.

Doug Bettinger (EVP and CFO)

Yeah, Tim, I think that's part of it. You know, when I look at WFE down more than 20% this year, memory is down a good deal more than that, Foundry/Logic a lot less. Litho is a heavier percent of Foundry/Logic spend. I wanna specifically point out the biggest decrease from a segment standpoint is in NAND, which as you guys all know on this call, is our strongest segment in etch and deposition at Lam. That's kinda important to understand, I think, and why I specifically pointed to that as I went through the commentary.

Timothy Arcuri (Managing Director)

Thank you, Doug.

Doug Bettinger (EVP and CFO)

Thanks, Tim.

Operator (participant)

We will take our next question from C.J. Muse with Evercore ISI. Please go ahead.

C.J. Muse (Senior Managing Director)

Good afternoon. Thank you for taking the question. I guess first question, I was hoping you'd provide perhaps a little more granularity on the restructuring. You talked 100 basis points gross margin and a little bit more than that. Is there any way to kinda give a sense of how we should see that play out throughout calendar 2023, and what kind of leverage should we see specifically on the OpEx side?

Doug Bettinger (EVP and CFO)

There's some in OpEx, Tim. Obviously we're taking reductions in every spending category. You'll see it everywhere. That's why Tim and I said operating margin would be more than the improvement in gross margin.

C.J. Muse (Senior Managing Director)

Is there any way to quantify what that might look like?

Doug Bettinger (EVP and CFO)

That's all we're gonna give you right now, C.J. I mean, the other thing you can back into obviously is the implied spending guide in the March quarter to comprehend some of this headcount activity that we're describing. That's. You're seeing some of it in March quarter, I think if you go decompose the guidance.

C.J. Muse (Senior Managing Director)

Okay, great. I guess follow-up question. As you think about the moving parts for CSBG, obviously you've got a year-over-year China headwind. You talked about Reliant. I guess how do you see the rest of that core business? Does that core business grow? Is there a way to maybe perhaps rank order, you know, what's doing well and then what's doing worse?

Tim Archer (President and CEO)

C.J., let me take that. Just to remind people, four segments in CSBG, spares, service, upgrades and Reliant. I think kind of in terms of your impact, you know, really if you think China impacted both spares and service, it made it impossible for us to provide spares and service to customers that previously, you know, had a pretty sizable chunk of tools in their installed base. Impact on both of those product lines from China. Those same two product lines impacted by memory customers' cuts in utilization. You know, you've seen and heard from our customers talking about the number of tools they've taken offline in their DRAM and NAND fabs. Obviously, if you're not running the tools, you don't need spares and you don't need service.

Again, those same two product lines impacted by those by those changes. The Reliant business obviously, you know, exists in that trailing edge Foundry/Logic. I would say we're pretty comfortable with that business that we see continued strength there. Maybe not enough obviously to offset the other the other two impacts though, and that's why Doug said, we're in a little bit of extraordinary times in that we would've previously thought that that business couldn't go down. You know, the combination of both China plus utilization hit those two product lines harder. We know that as customers begin to spend again, first thing they do is they bring the tools that they already have in their own installed base back online.

We would expect that the spares and service business that was impacted by utilization cuts to recover quickly, and we could immediately service that as soon as the business starts to improve.

C.J. Muse (Senior Managing Director)

Very helpful. Thank you.

Tim Archer (President and CEO)

Thanks, C.J.

Operator (participant)

We will take our next question from Krish Sankar with Cowen and Company. Please go ahead.

Krish Sankar (Managing Director)

Hi. Thanks for taking my question. I have two of them. First one either for Tim Archer or Doug Bettinger. Thanks for the color on calendar 2023 WFE. I understand it's too early to talk about 2024. If you look at some of your memory customers, they've publicly spoken about taking the utilization rates down. Could there be a scenario where next year they could improve the utilization rates, improve wafer and bit output without necessarily adding WFE? Do you think on a quarterly basis, WFE bottom sometime this year and next year hopefully is a better year? I had a follow-up.

Tim Archer (President and CEO)

Yeah. Okay. I'll start and let Doug add. You know, I think that obviously there have been utilization cuts. I mean, I think right now, if you look at least by our estimate and listening to what our customers say, you know, we're at very low levels of supply growth this year as a result of the lack of additions and utilization cuts. I don't think you could quite get to the scenario you're talking about where you just bring utilization, you know, unutilized tools back online. There's a second factor, though, which is, remember, I mean, customers make investments also to move their technology forward, and that's a pretty substantial portion of why WFE gets spent. It's not often just about capacity addition.

I think that, you know, customers can only go so long before you have to invest in the technology to move to that next node and gain the efficiencies that you do there. You know, I think that, of course, we'll work with our customers to, you know, bring tools back online and get utilization work on productivity. I think there'll be, I think spending will return at some point.

Krish Sankar (Managing Director)

Got it. Got it. Thanks for that, Tim. Then a quick follow-up for Doug. You know, just, you know, thanks for the color on the back half revenues versus first half. How to think about gross margin, given the fact that the top line is decelerating, you're also, you know, ramping up Malaysia. China seems to be a mixed bag. I'm just kind of wondering how to think about gross margins or how to think about where they could potentially draw. Thank you.

Doug Bettinger (EVP and CFO)

Yeah, Chris, I hope we're kind of bouncing along the bottom right now. I can't guarantee that, but specifically what we try to describe, both Tim and I, is that with these actions we're taking, we believe there's upward momentum to gross margin as we exit the year. We're trying to get kinda capacity right, staffing of the capacity right, so that as we exit the year, we think there's a point of gross margin upside, plus or minus where we're at.

Krish Sankar (Managing Director)

All right. Got it. Thanks a lot, Doug. Thank you.

Doug Bettinger (EVP and CFO)

Yeah. Thanks, Krish.

Operator (participant)

We will take our next question from Stacy Rasgon with Bernstein Research. Please go ahead.

Stacy Rasgon (Senior Analyst)

Hi, guys. Thanks for taking my questions. For my first one, I just wanted to touch on the deferred again. I just wanna make sure I have it right. You're running $2 billion now. It sounds like you think normalized deferred might be $1 billion. You got $1 billion that's potentially coming out in March. Is that more the right way to sort of think about the underlying demand, like where revenue is just like $1 billion, like short of where we are, like short of where the guide is? Then going forward, that kind of-

Doug Bettinger (EVP and CFO)

Stacy, I think deferred is gonna be higher than that $1 billion because of these cash advance payments I was referencing. I. It's not gonna go that well, I don't think. I think it's gonna stay. I think I previously led everybody to believe deferred revenue would be in that high multiple hundred million dollar range. I think it's decently above $1 billion now because of this other category stuff I see.

Stacy Rasgon (Senior Analyst)

It's like a billion and a half, or can you give us a little more color on that?

Doug Bettinger (EVP and CFO)

Yeah. It's like a billion and a half.

Stacy Rasgon (Senior Analyst)

Okay. That's helpful. Thanks. My follow-up, you know, I just, I do wanna ask a little more philosophical question on the workforce reductions, and maybe as it relates to WFE. I mean, like we probably did, oh, I don't know, $40 billion in memory WFE in 2022, and it's gonna be down a lot in 2023. Like, even if it grows in 2024, how long does it take to get back to that sort of 2022 level, like if ever? Do the cost cuts that you're doing, are they in some sense a function of how you might view, like, that long-term sort of steady state WFE for memory versus where we're coming off in 2022?

Tim Archer (President and CEO)

Yeah. Stacy, maybe, you know, it combines a little bit of maybe the last question we had as well, which is, you know, we're making these cuts and taking this action to make the company, you know, efficient and profitable at this level of business. Therefore, we're not really looking and saying we need a big increase or rapid increase in business to justify what we keep afterwards. I did mention, you know, the focus that we have on ensuring that as we make cuts and as we reposition, especially the global operations infrastructure, we think about how quickly we can ramp up because we know when memory comes back, it often comes back much faster than people expect.

you know, I can't tell you when it gets back to these numbers, but what I wanna make sure is that when it does return to stronger spending in the memory side, we're able to ramp that up and do it efficiently so we don't have a lot of the profitability headwinds that we've been talking about for the last really 12 to 18 months. That's the way I think about it. Get the company to the right size now for this level of business, but with the idea that we have the infrastructure and the business systems available to us, and the supply chain infrastructure to ramp more quickly, more efficiently, should the market overshoot where our estimate is.

Stacy Rasgon (Senior Analyst)

Why don't you need to cut more then? Because the cuts only take you back to where headcount was like 6 months ago, right?

Doug Bettinger (EVP and CFO)

Stacy, I'm comfortable at the profitability levels of the business at these revenue levels. This, you know...

Tim Archer (President and CEO)

Yeah.

Doug Bettinger (EVP and CFO)

We're getting things structured in the right way so that the P&L looks acceptable.

Tim Archer (President and CEO)

I think, Stacy, you know, not all those heads were added in the volume side of the business as well. I talked about, you know, and I think you'll see when, you know, you look at the P&L, that we are, you know, trying to preserve, you know, what is strategic spending on the R&D side and products that we think are important for the future growth of the company and competitiveness of our

Our business. We're still committed, as I said at the beginning, to our model of gaining market share in both the memory and the Foundry/Logic side of the business, and some of the spending is there as well. These are the cuts we think that are appropriate for how we think the business needs to be run through this cycle.

Vivek Arya (Managing Director)

Got it. That's helpful. Thank you, guys.

Doug Bettinger (EVP and CFO)

Thanks, Stacy.

Operator (participant)

We'll go next to Toshiya Hari with Goldman Sachs. Please go ahead.

Toshiya Hari (Managing Director)

Great. thank you so much. I had one clarification and then a follow-up question. On the clarification, you know, last quarter, I think you guys sized the potential impact from China export restrictions to your business in calendar 2023 at $2 billion-$2.5 billion, I believe three quarters on the system side, a quarter in services. Are those numbers still your expectation for calendar 2023? Any change there?

Doug Bettinger (EVP and CFO)

Yep, no change.

Toshiya Hari (Managing Director)

Got it. My question, probably for Doug in terms of gross margin. You know, last year, you talked about freight and component costs being a headwind, you know, you also talked about pricing as a potential lever to offset some of the headwinds. How should we think about those dynamics as we progress through 2023? Any progress? Thank you.

Doug Bettinger (EVP and CFO)

Yeah, Tashi, I guess what I described is in some of the inflationary buckets I've been talking about for however long I've been talking about it, some of it's getting somewhat better, and some of it I think will get better, but we're not seeing it yet. That's in what we've been talking about. Relative to pricing activity, we continue to work on that. There's some things that's already shown up in the P&L in the March quarter, but we continue to have ongoing conversations with customers about the right level of pricing and that will continue as we go forward.

Toshiya Hari (Managing Director)

When you talk about the hundred basis point improvement exiting the full year, is that an all-in number embedding all those factors?

Doug Bettinger (EVP and CFO)

Yeah. To the best of our assessment as we sit here right now, yeah, that's all in of the pluses, the minuses from business going down and the adjustments we're making in terms of the footprint of the company.

Toshiya Hari (Managing Director)

Got it. Thank you so much.

Doug Bettinger (EVP and CFO)

Yeah. Thanks, Tashi.

Operator (participant)

We will take our next question from Vivek Arya with Bank of America Securities. Please go ahead.

Vivek Arya (Managing Director)

Thanks for taking my question. I'm trying to gauge what is kind of your trough quarter of this year, conceptually, right? I understand that you don't give the exact, you know, forecast. If I go through this deferred revenue math, let's say another $500 million comes out, suggest that your March shipped revenue conceptually is about $3.3 billion. Does that reflect all the China and memory CapEx cuts so that is sort of your trough revenue quarter? Do you think there is more to come, the trough revenue quarter, you know, might be later this year, you know, closer to $3 billion or some other number?

I'm just trying to conceptually, you know, gauge what is the trough quarter for this year so we can get a sense of what, you know, trough earnings power could be.

Doug Bettinger (EVP and CFO)

Tashi, I guess the best. Or sorry, Tashi. Vivek, the best I can do is just say what I've already said. Revenue is somewhat first half weighted, largely because we're pulling the deferred down in March. In March, it's pulled down to where it's gonna be. You got to kind of think about that plus the fact that I told you, we think WFE is fairly balanced first half, second half. I think if you think that through, you'll get it pretty close to where it should be.

Vivek Arya (Managing Director)

Got it. You know, the second question that I have, is, you know, China sales, were 24%, I believe, of total in December. Could you give us a sense for how much of that was China domestic? What do you expect China to be as a percentage of your sales in March, and if you have a number for roughly for calendar 2023?

Doug Bettinger (EVP and CFO)

Yeah. In December, I'm trying to remember the number. More than half of it certainly was domestic China. I forget the exact number, Vivek, to be honest with you, but more of it was domestic China. You know, as we go through, China is gonna be impacted to the tune of $2 billion-$2.5 billion from the customers we can't ship to. When I think about China WFE, that means China WFE is gonna be down somewhat in 2023.

Vivek Arya (Managing Director)

Okay.

Doug Bettinger (EVP and CFO)

Domestic China.

Vivek Arya (Managing Director)

Two and a half billion, is that kind of run rate reflected in your March outlook? That's what I wanted to just get a sense for.

Doug Bettinger (EVP and CFO)

Yeah. The things that are...

Vivek Arya (Managing Director)

Like is it gonna be spread throughout the year?

Doug Bettinger (EVP and CFO)

Yeah. The things that we've kind of lost from that $2 billion-$2.5 billion, there's nothing in the March quarter. That's part of the $2 billion-$2.5 billion. There isn't any more reduction from March as we go forward.

Vivek Arya (Managing Director)

Understood.

Doug Bettinger (EVP and CFO)

Not sure I'm making it clear to understand it. There's always timing of different customer spending money. It's not that China is gonna be up and down as we go through the quarter, I expect. The impact from the regulations is already fully in effect in the, in the March quarter is what I'm trying to describe.

Vivek Arya (Managing Director)

Got it. Basically, Doug, just to kind of nail it down. If I take the March X deferred, you know, $3.3 billion, right? Kind of assume, you know, quarterly run rate is that level, that's sort of how the shape of, you know, calendar 2023 revenue should be, right?

Doug Bettinger (EVP and CFO)

listen, we only guide revenue one quarter at a time. I'll guide June when we get to the next quarter earnings numbers.

Vivek Arya (Managing Director)

Thank you.

Tim Archer (President and CEO)

Yep. Thank you.

Operator (participant)

We will take our next question from Atif Malik with Citi. Please go ahead.

Atif Malik (U.S. Specialty Semiconductors Analyst)

Hi. Thank you for taking my questions. Doug, is the equipment demand now below the supply that you can receive from your suppliers?

Tim Archer (President and CEO)

Sorry, Terry, is the question about supply chain constraints?

Atif Malik (U.S. Specialty Semiconductors Analyst)

Right. I mean, are they fully removed now and, and the demand has fallen below the supply line?

Tim Archer (President and CEO)

Yeah. Well, as we said, we saw a significant improvement in the supply chain constraints in the December quarter, which is partly why we were able to deliver, you know, higher than we had anticipated revenue. I would say that supply chain constraints are easing. You know, there's always and remain some parts of the supply chain that are still not fully recovered. I would say that, you know, if you went back and compared where we are today versus 12 months ago, dramatically improved. I think that we'll continue to work on that through the, probably the remainder of this year on those remaining issues.

Atif Malik (U.S. Specialty Semiconductors Analyst)

Got it. Tim, in your prepared remarks, you talked about conductor etch market share doubling node to node at one logic maker. Gate-all-around, presumably is a big technology inflection that should help you guys. Can you talk about the timing of the production ramp for gate-all-around? Is it a second half of next year story, or is it more like a 2025 event?

Tim Archer (President and CEO)

I think that I mean, you see customers starting to talk about and announce kind of limited production. Obviously there's a qualification cycle. Probably better for them to talk about their own timing. You know, it's not a material issue for our 2023 numbers, let's just say. It's a beyond 2024 and beyond event. Those are the types of things that, again, if we think about, you know, where we want to take this business, part of this is about increasing our exposure into that market where there's tremendous need. I talked about the increasing intensity for etch and deposition in that space in foundry logic.

Most of those big technology inflections where our tools are most suitable, things like selective etch, things like high aspect ratio, critical etch, the use of those tools are just increasing in these new 3D architectures. The increased use of advanced packaging in Foundry/Logic and AI applications, those are, again, areas where Lam can bring our etch depth technology to bear. You know, timing, again, hard to predict, but we are making great progress at the development tool of record and early production tool of record stages. You know, I think that as we see those markets ramp, that's good for Lam.

Atif Malik (U.S. Specialty Semiconductors Analyst)

Thank you.

Tim Archer (President and CEO)

Thanks, Atif.

Operator (participant)

We will go next to Sidney Ho with Deutsche Bank. Please go ahead.

Gianmarco Bonacina (Equity Research Analyst)

Hi. Good afternoon. Thanks for taking my question. Gianmarco on for Sidney. Tim, just on CSBG, I apologies if I might have missed this, but can you give us some how you see each of the buckets that play into CSBG, how these will contribute to the segment's overall performance in 2023? I have a quick follow-up.

Tim Archer (President and CEO)

Sure. Yeah. I kind of hit on that a little earlier, but it was basically the four segments, spare, service, upgrades and Reliant. You know, again, in a normal year, we would actually always see spares in particular expanding with the growing install base. I talked about the fact that, you know, our install base is substantially larger than it was during the last down cycle. You know, we just grow the install base, spares grow along with that. The impact this year to that business though is somewhat unique in that the China restrictions did pull spares business immediately out of our revenue plan, given that we cannot sell spares to certain customers and technologies in China.

That's a unique reset to that business. The second thing that impacts spares is when customers cut utilization, those tools are idled, obviously don't need spares. I would say the spares business is impacted by those two impacts. Service, similarly, we can't service the tools in China that have restricted customers and technologies and also utilization. Customers tend to look to save money by doing the service themselves during these times, or when tools are offline, they don't need service. Those two product lines are kind of the most impacted, I would say, by these changes. Reliant, again, growing because Foundry, trailing edge still grows and upgrades.

You know, while I said some people might be delaying, again, just to, from a CapEx sensitivity perspective, some upgrades, I would say that there's less impact in that part of the business.

Gianmarco Bonacina (Equity Research Analyst)

Got it. That's pretty helpful. One more of a long-term question for me. I guess one of your major customers, like, very elevated infrastructure cost, roughly four to five times when they build out fab capacity outside of Asia. I guess, what are the implications to equipment spend, as customers try to obviously diversify capacity across regions?

Tim Archer (President and CEO)

It's a good, it's a good question. I mean, obviously, you know, all customers are cost sensitive regardless of where they're building fabs. I mean, we certainly know, As people move into costlier regions, you know, I think the story's the same. We, we compete and we win business based on building tools that deliver excellent technology with high productivity. I think that if I thought about what probably that means from a Equipment Intelligence trend perspective, I talked a lot about Equipment Intelligence.

You know, you think about it, if you're moving into a region where already some of the base costs are higher, you're gonna want tools that require less human interaction, less servicing, tools that can do predictive work in order to try to keep them up and utilized more at a higher rate. I think that you'll see those types of customers pull for some of our Equipment Intelligence where you can kind of pull some of that labor content out. You can keep tools up and running more often and therefore extract more from the capital that you've invested.

Gianmarco Bonacina (Equity Research Analyst)

Yeah. Thanks for the color, Tim. That's very helpful.

Tim Archer (President and CEO)

Yeah.

Gianmarco Bonacina (Equity Research Analyst)

Yep. Thanks.

Doug Bettinger (EVP and CFO)

Thanks, sir. That was from Sidney.

Operator (participant)

We'll take our next question from Blayne Curtis with Barclays. Please go ahead.

Blayne Curtis (Managing Director)

Hey, thanks for squeezing me in. I had two questions. One, I just wanted to, you know, obviously a lot has transpired over the last 12 months and clearly a huge correction in memory. You, you're saying Foundry/Logic down something less than the group, the overall is? I'm just kind of curious how you're thinking about that. I mean, obviously, you know, memory had to work through low utilizations and now they're pulling back on, you know, the capacity adds and, you know, same end markets. Kind of just how are you thinking about Foundry, you know, kind of progressing over this year or next?

Tim Archer (President and CEO)

I guess, you know, right now obviously we still see, as we said, memory or foundry logic being down substantially less than memory this year. We've also made the comment that as a percent of total WFE, memory is at levels that we haven't seen in 25 years. I guess we look at it and it's either, I mean, we see strong foundry logic spending, but we actually think that with that foundry logic spending and the devices and applications that are created, that'll be another one of the drivers that pulls through memory usage and causes and perhaps accelerates, you know, a memory recovery.

I think that the two are intricately tied in terms of the end applications, but sometimes the timing of the capacity additions and such are out of sync, and I think that's what we see right now.

Blayne Curtis (Managing Director)

Got you.

Doug Bettinger (EVP and CFO)

Yeah, Blaine, I guess what I would describe is... Go ahead, ask your next question.

Blayne Curtis (Managing Director)

I wanna hear what you're gonna say, Doug.

Doug Bettinger (EVP and CFO)

I was just going to say, at the end of the day, you need all of this in the system architecture. When you look at a hyperscale architecture, you don't just have logic devices and accelerators without memory, right? It's all gotta kinda all go on the same motherboard, if you will. What we've got going on, at least in my perspective right now, is, you know, we're sitting on excess inventory in the memory area to a significant extent, and it's just got to get consumed. We're at a different point in the classic cycle, was what I was going to describe, Blayne.

Blayne Curtis (Managing Director)

I guess, I mean, it's a question I wanna follow on to my own question, but it's also one for yourself. I mean, you look across the industry and semis, inventories are going up. You know, I think you've seen this in memory, but also with semiconductor companies and in your inventories as well, right? It suggests capacity exceeds demand, right? I guess, one, I guess that's why I question why Foundry/Logic can continue and, you know, I think memory might be leading the show there. I guess as it relates to you, inventories are at a very high level. I'm just kinda curious, as another play on gross margin, where do you think your inventories need to go?

If you have to dial back your production, is there any kind of headwinds to gross margin to think about?

Doug Bettinger (EVP and CFO)

Yeah, Blayne, our inventory is gonna go lower, I guess, is what I would describe, right? Business is coming down. We'll need less inventory to supply a lower level of business. It'll come down. That I can tell you for sure.

Blayne Curtis (Managing Director)

Does that have any impact to gross margin?

Doug Bettinger (EVP and CFO)

Yeah, a little bit. When I describe an expectation, Tim and I describe an expectation that as we exit the year, gross margin is a point higher. That contemplates the fact that factory absorption, utilization, and so forth is gonna be lower, and we'll be bringing inventory down.

Blayne Curtis (Managing Director)

Awesome. Appreciate it. Thank you.

Doug Bettinger (EVP and CFO)

Thanks, Blayne.

Operator (participant)

Operator, we have time for one more question, please. Thank you. We will take our last question from Joseph Quatrochi with Wells Fargo. Please go ahead.

Joseph Quatrochi (Executive Director and Senior Analyst)

Yeah, thanks for taking the question. Last quarter you had talked about the Reliant business or kind of warned us that, you know, with the decline in WFE and just kind of weakness seen in consumer electronics, that business could also be negatively impacted. It sounds like maybe this quarter you're a little bit more constructive on that business. Is that, I guess, the right way to think about it? Two, maybe what's driving that?

Doug Bettinger (EVP and CFO)

Yeah, no, Joe, we didn't mean to describe it any differently. I think last quarter and this quarter, we said we expect that segment of foundry and logic to be somewhat better than overall WFE. I think we said that last time, I'm pretty sure we did, we're saying that again.

Joseph Quatrochi (Executive Director and Senior Analyst)

Okay.

Tim Archer (President and CEO)

I think the reason it may have come across, Joe, just a little bit, maybe a little more constructive than the other product lines that were within CSBG is I think why there was a question about kind of ranking them or, you know, stacking those. It's the least impacted by the changes like China restrictions and utilization. That was maybe why it came across that way. No intention to send a different message from last quarter, though.

Joseph Quatrochi (Executive Director and Senior Analyst)

Got it. That's helpful. Then just in terms of the total CSBG business, when we think about the impact from the China, you know, export restrictions, obviously the utilization coming down just across the board is a negative impact. Would that business be, I guess, closer to flat, you know, if just kind of life to life without the China export restrictions?

Doug Bettinger (EVP and CFO)

It'd certainly be doing better. You know, we described it as likely down somewhat. Historically, I've always said this is a business that should grow every single year. Wish I wouldn't have said that because I couldn't envision the environment we're in with utilization in China and so forth. We're just giving you kind of the lay of the land right now, Joe.

Joseph Quatrochi (Executive Director and Senior Analyst)

Okay. Thank you very much.

Doug Bettinger (EVP and CFO)

All right.

Tim Archer (President and CEO)

Thank you.

Doug Bettinger (EVP and CFO)

Thank you, operator. I think that concludes the call for us. We're wrapped up here.

Operator (participant)

Thank you all for joining. Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.