Lam Research - Q2 2024
January 24, 2024
Transcript
Operator (participant)
Good afternoon, and welcome to the Lam Research Corporation December 2023 quarterly earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Ram Ganesh, Head of Investor Relations. Please go ahead.
Ram Ganesh (VP of Investor Relations)
Thank you, and good afternoon, everyone. Welcome to the Lam Research Quarterly Earnings Conference Call. With me today are Tim Archer, President and CEO, and Doug Bettinger, Executive VP 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 2023 quarter and our outlook for the March 2024 quarter. The press release detailing our financial results was distributed a little after 1 P.M. Pacific Time. The release can also be found on the IR 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, Ram, and welcome everyone. Lam delivered strong performance in the December quarter, with revenues, gross margin, operating margin, and EPS all above the midpoint of our guided ranges. Our results for December close out a calendar year of 2023, in which Lam executed well amid a decline in overall wafer fabrication equipment spending. Compared to the prior cycle trough in calendar 2019, we achieved a near doubling of EPS. There are a few reasons why Lam has evolved stronger cycle to cycle. First, we have improved our positioning in the foundry logic and specialty technology segments through sustained investments in innovation and new products. As a result, we have grown our total non-memory revenue share, and we continue to gain momentum at key technology inflections. Second, we have delivered tremendous growth in our Customer Support Business Group.
Lam ended calendar 2023 with approximately 90,000 chambers in the field, an installed base almost 50% larger than in the previous cycle. CSBG revenue has grown by more than 80% from 2019 levels. And finally, we have further improved our ability to manage costs and drive operational efficiency through cycles, delivering operating margins in 2023 that were nearly 2.5 points higher than the prior trough. Turning to WFE, we estimate that 2023 spending ended in the low $80 billion range. This is up slightly from our prior view, driven by continued strength in domestic China spending, predominantly in equipment segments where we do not participate. Overall, memory WFE was down nearly 40% year-on-year, led by cuts in NAND spending of more than 75%.
Non-memory WFE decreased in the mid-single digits range, with mature node growth in China, partially offsetting declines in leading-edge node spending in the rest of the world. As we enter 2024, the business environment remains muted. However, we expect a modest recovery in memory spending to drive a stronger exit to the year. Our early view of WFE spending for calendar 2024 is in the mid- to high-$80 billion range. Growth in DRAM will be driven by capacity additions for High-Bandwidth Memory, as well as node conversions. NAND spending increases will largely come from technology upgrades. We see foundry logic spend growing in 2024, with higher leading-edge investment offset in part by declines in mature node investment outside of China. Overall, we believe domestic China spending will be stable in 2024. Longer term, the setup for WFE investment is robust.
With semiconductor revenues widely expected to reach $1 trillion around the end of the decade and device manufacturing complexity continuing to rise, we believe WFE spending will need to roughly double from today's levels. Lam's served markets of etch and deposition should outpace growth in WFE overall. For this reason, we have been executing a series of strategic actions to best position the company for the growth opportunity ahead. Importantly, we have remained committed to these initiatives despite the challenging spending environment over the past several quarters. First is our commitment to R&D, including planned spending increases in calendar year 2024 to extend our differentiation in products and services targeted at next-generation semiconductor device inflections. This next era in semiconductors will be defined by the broad move towards 3D architectures and advanced packaging to solve scaling challenges.
We believe this will, in turn, drive an increase in etch and deposition intensity over the long term. Our focus is on multiple billion-dollar SAM expansion opportunities across memory and foundry logic. We have profiled our advances in Gate-All-Around, backside power delivery, advanced packaging, and dry EUV patterning over the past several quarters, and our solutions are continuing to gain traction with customers. In the December quarter, we secured additional advanced packaging wins for high-bandwidth memory, which is critical for enabling advanced AI servers. Our SABRE 3D tool's best-in-class plating uniformity, along with our ability to demonstrate an overall cost of ownership advantage, made Lam the clear choice over a large competitor. In 2024, we expect our HBM-related DRAM and packaging shipments to more than triple year-on-year and outpace WFE growth in this segment by a significant margin.
The specialty technology markets are also yielding a diverse set of new opportunities for Lam. For instance, we have recently delivered Pulsed Laser Deposition technology to customers targeting high-volume manufacturing of MEMS and next-generation high-frequency devices. We accelerated our entry into this market by integrating technology we obtained via a small acquisition onto a production-proven Lam platform. Compared to competing deposition methods, Lam's solution enables more highly doped aluminum scandium nitride films, which deliver the piezoelectric performance and cost our customers require. The second area of focus for Lam has been our investment in facilities close to our customers. By establishing process development capabilities near our customers' R&D fabs, we are maximizing collaboration and accelerating time to solutions. We have also made progress ramping supply chain and manufacturing operations within our customer ecosystems.
These in-region capabilities enhance our responsiveness and resilience for customers and create significant economic value for Lam as we leverage the benefits of global flexibility. Our new manufacturing facility in Malaysia is poised to fully scale in the coming WFE upturn, providing us the capability to nearly triple the percentage revenue contribution from our lower-cost manufacturing locations versus a few years ago. And finally, Lam has concentrated on re-engineering our business processes and systems to drive operational excellence at greater scale. Investments in digital capabilities like virtual twinning, advanced simulation, and AI are helping us to accelerate problem-solving, and we are building equipment intelligence capabilities and in-fab service automation into our most advanced product roadmaps. As we complete our re-engineering efforts, we are also intent on achieving organizational agility.
In this regard, we are announcing a small workforce reduction, predominantly at the executive level, to align our resources with our execution priorities and drive efficiency and speed of decision-making. In calendar 2023, Lam delivered solid results while investing to build strong capabilities for the future. Looking forward, I am confident that our strategic global infrastructure and differentiated technology portfolio provide Lam with the tools we need to capitalize on the robust semiconductor growth expected in the years ahead. Thank you, and now here's 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 delivered strong financial results in calendar year 2023. Our revenue came in at $14.3 billion, and diluted earnings per share at $27.33. We're pleased with the company's execution during the year, where the memory WFE mix reached historic lows. Let's look at the details of our December quarter results. Revenue for the December quarter was $3.76 billion, which was up 8% from the prior quarter and down 29% from a year ago.
Our deferred revenue balance at the end of the quarter was $1.93 billion, which was an increase of $238 million from the September quarter, which was mainly tied to growth in customer advance payments. We continue to have a higher deferred revenue balance versus historic levels, given these customer advance payments. From a segment perspective, December quarter systems revenue in memory was 48%, which is an increase from the prior quarter level of 38%. The growth in the memory segment was led by DRAM, which was at record levels on a dollar basis, coming in at 31% of systems revenue, compared with 23% in the September quarter. DRAM is benefiting from growth in high-bandwidth memory capacity and the move to DDR5, which is needed to address AI-related workloads, and it's also benefiting from shipments to China.
As we've noted in prior quarters, non-volatile memory WFE was at historic lows on a mixed basis in 2023. For the December quarter, this segment represented 17% of our systems revenue, which was up a little bit from 15% in the prior quarter. The slight growth was predominantly related to investments in certain technology projects. NAND customers have aggressively reduced capacity throughout the year to bring inventory levels down. The Foundry segment represented 38% of our systems revenue, a little higher than the percentage concentration in the September quarter of 36%. Growth was driven by new fab shipments in various regions across several process nodes. The Logic and Other segment was 14% of our systems revenue in the December quarter, which was down from the prior quarter level of 26%.
The decline was driven by general mature node softness, as well as the timing of customer projects. Overall, in the Foundry, Logic segment, we've performed well, delivering on the share gains that we've previously been discussing with you. Now I'll discuss the regional composition of our total revenue. The China region came in at 40%, which was down from 48% in the prior quarter. Most of our China revenue in the last two quarters was from domestic Chinese customers, and we expect spending from this region to be stable overall in 2024. China, as a percent of our revenue, is expected to stay relatively high in the March quarter, but it likely trends lower as the year progresses. Our next largest geographic concentration was Korea, at 19% of revenue in the December quarter versus 16% in the September quarter.
Finally, Japan and Taiwan rounded out the remaining of our top four regions. The Customer Support Business Group generated revenue in the December quarter of nearly $1.5 billion, up 2% from the September quarter and 16% lower than the December quarter in calendar year 2022. Overall, the business was steady, and we continue to see our memory customers operating the fabs at very low utilization rates. Given the strength of the installed base units, we have a strong foundation for growth when technology conversions and utilization rates resume growing. Spares, followed by the Reliant product line, continue to be the two largest components of CSBG. Turning to the gross margin performance. The December quarter came in at 47.6%, which is above the midpoint of guidance and generally in line with September quarter level, which was 47.9%.
We've improved elements of our cost structure during the year and delivered on our commitment to improve gross margin from the 2023 March quarter level by approximately 1 percentage point as we exited calendar year 2023 from those operational improvements. December quarter operating expenses were $662 million, up from the prior quarter amount of $622 million. R&D, as a percent of spending, was higher versus the September quarter, coming in at over 69% of total expenses. The increased spending reflects our ongoing focus on extending our product and technology differentiation across those critical inflections that Tim mentioned earlier. We will continue to grow investments across multiple market segments to support the long-term strategic objectives for ongoing company outperformance.
Operating margin for the current quarter was 30%, in line with September quarter level of 30.1% and above the midpoint of our guidance, primarily because of the stronger gross margin performance. Our non-GAAP tax rate for the quarter was 12.3%, generally in line with expectations. Looking into calendar 2024, we believe the tax rate will be in the low- to mid-teens%, with the normal fluctuations quarter by quarter. Other income expense for the December quarter came in at $5 million in income, compared with $7 million in income in September quarter. The slight fluctuation in OI&E was mainly due to variations in exchange rates. OI&E will continue to be subject to market-related fluctuations that could cause some level of volatility each quarter.
On the capital return side, we allocated approximately $640 million to open market share repurchases, and we paid $264 million in dividends in the December quarter. For the 2023 calendar year, we returned 79% of our free cash flow, totaling $3.8 billion, which was largely consistent with our long-term capital return plans of 75%-100%. December quarter diluted earnings per share was $7.52 over the midpoint of our guidance. Diluted share count rounded down to 132 million shares, on track with our expectations and down from the September quarter. During 2023, we repurchased nearly 5 million shares through our share buyback program. I would just mention, we have $2.1 billion remaining on our board-authorized share repurchase plan.
Let me pivot to the balance sheet. Our cash and short-term investments at the end of the December quarter totaled $5.6 billion, up from $5.2 billion in the September quarter. The increase was largely due to collections, offset by cash allocated to share repurchases, dividend payments, and capital expenditures. Overall, 2023 was a record year for cash flows from operations, coming in at $5.3 billion. Days sales outstanding was 66 days in the December quarter, which was a decrease from 73 days in the September quarter. As a result of our operational focus and execution, I'm pleased to report that inventory turns improved to 1.8 times from the prior quarter level of 1.5. We will continue to work on bringing inventory down throughout calendar 2024.
Our non-cash expenses for the December quarter included approximately $70 million for equity compensation, $78 million for depreciation, and $13 million for amortization. Capital expenditures for the December quarter were $115 million, up $38 million from the September quarter. Spending was primarily centered on product development activities and lab expansions in the United States and Asia, supporting our global lab investment strategy. We ended the December quarter with approximately 17,200 regular full-time employees, which was flat with the prior quarter. Let's now turn to our non-GAAP guidance for the March 2024 quarter. We're expecting revenue of $3.7 billion ±$300 million. Gross margin of 48% ±1 percentage point.
This gross margin guidance is reflected, reflective of continued favorable customer mix. I do expect this favorable mix to mitigate somewhat as the year progresses. Operating margins of 29.5%, plus or minus one percentage point. I would again highlight that the March 2024 quarter will have higher spending, as it includes an extra week in the quarter, which occurs every several years. It's a 14-week quarter. And I will also remind you, we will be growing R&D spending this year. And finally, we're expecting earnings per share of $7.25, plus or minus 75 cents, based on a share count of approximately 132 million shares. We continue to be focused on improving our business operations to optimize efficiency and effectiveness as WFE growth occurs.
Our profitability metrics reflect the progress we've made during calendar year 2023, with business realignment and transformational activities well underway. We'll see these activities continue in the first half of calendar year 2024. Including the cost incurred for these improvement activities and headcount reductions that we saw in calendar 2023, I now expect we'll spend, in total, $300 million for these actions, which will continue to be reported in our non-GAAP adjustments. I had previously told you we would spend $250 million over 12 months. It's now $50 million higher and six months longer. So let me conclude. Over many semiconductor cycles, Lam has established a proven track record of successfully managing our business.
With the actions we've taken over the course of the last several quarters, we expect to strengthen our operations and technology leadership and further enhance our profitability profile. When revenue scales into the next upturn, Lam will be stronger, better positioned, and more efficient. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question today is from Tim Arcuri from UBS. Please go ahead.
Timothy Arcuri (Managing Director of Equity Research)
Thanks a lot. I guess my first question for you, Tim, is, I wondered if you could sort of translate. Obviously, you heard your big, you know, litho peer that reported today. They had these huge orders and, you know, looks like a couple billion dollars in EUV orders for DRAM. So that sort of translates to an extra $9-$10 billion, something like that. So, it seems mostly for shipments toward the end of this year and even into next year for them, so, like, maybe you haven't seen that yet, but can you talk about what that tells you about the future of that segment? And, you know, I know you think it's going to be up, but it seems like it could be up a lot, you know.
And maybe any change in the planning outlook or the discussions that you're having with your DRAM customers?
Tim Archer (President and CEO)
Sure. Thanks, Tim. And obviously, WFE is a tricky thing to forecast because generally, we have a very good view of certain segments of the market, and, you know, we try to give an overall view of WFE, and, we do that based on listening to peers, talking to customers, and making our own assessments. You know, sometimes we get it wrong, and I guess, we're always in a period of adjusting that. I think, though I don't think there's anything out there that is completely inconsistent with what we've said. We've said WFE is up this year, modestly recovering because of memory. It's, we'd see a stronger exit to the year.
I think to the magnitude, I think we, you know, we're just going to keep watching it and having those conversations with customers. In this period, lead times of equipment and the framework in which certain pieces of equipment need to be ordered and brought into fabs can differ, equipment supplier to equipment supplier. Maybe there's something at play there. But I think it probably further reinforces our bullishness that memory has been at a historically low mix of WFE. We've said that memory spending across both DRAM and NAND, we felt was at unsustainable levels. We said that on pretty much every call last year. So I think that, you know, it's not a surprise that that eventually corrects itself.
What I would point out is that we don't spend a tremendous amount of time trying to get the timing accurate, exactly right. In my script, I talked a lot about strategic actions which, you know, play out over years, and in fact, to catch the DRAM inflections that are coming now.
The strength we have in High Bandwidth Memory, the positions we have in applications in DDR5 and beyond, you know, those were established by us seeing DRAM opportunities years ago. And I think we're continuing to report more and more growth in that segment, and I think we'll just continue to do that. So, we tend to take a long-term view of technology and spending patterns.
Doug Bettinger (EVP and CFO)
And, Tim to start, I'll just remind you something that I know you know very well, that litho lead times are generally much longer than ours are in etch and deposition, and you never buy litho without eventually buying the process equipment that goes along with it. So if they're seeing something, we will see it too.
Timothy Arcuri (Managing Director of Equity Research)
Totally, Doug. Yeah, for sure. So I guess, you know, you, Doug, super quick. So there's kind of a lot of moving parts I know, going on in gross margin. I know that the mix is helping you, and I know you're probably getting some tailwinds from some cost relief and things like that. So what's the right normalized margin? I know maybe 48's not the right normalized number, but is it, like, is the mix helping you by 50 basis points, and that's what sort of goes away? Can you sort of help us there? Thanks.
Doug Bettinger (EVP and CFO)
Yeah, Tim, I'll remind you of what I said last quarter, because it's still kind of the same thing. The customer mix is benefiting us again in the March quarter guide, maybe even a little bit more than it did last quarter. I took you back to that June quarter of last year before we had such a favorable geographic mix, and that largely is what's driving the customer mix. We were around 46% gross margin, 45.7, I think, if I remember the June quarter specifically. That's not a bad place to kind of start when mix normalizes back to maybe more normal levels. So think about it that way, somewhere in between there and where we are here. These operational improvements, though, that we've been talking about are real things.
As growth resumes, and we know growth will resume at some juncture, we should benefit from, like, repositioning the company to these lower-cost locations. That's still on the come line, but it will require some level of growth in the business.
Timothy Arcuri (Managing Director of Equity Research)
Thank you, Doug.
Doug Bettinger (EVP and CFO)
Thanks, Tim.
Operator (participant)
The next question is from Harlan Sur with J.P. Morgan. Please go ahead.
Harlan Sur (Managing Director, Equity Research)
Good afternoon. Thanks for taking my question. Again, going back to your large litho peer that reported this morning, right? They called out seeing an increase in customer utilizations of their litho tools, both in memory and in foundry and logic, appearing that this is an early signal of a positive turn in cyclical dynamics. I know you guys also track in real time utilizations, activity rates of your customers. I know they're at very low levels, but are you guys starting to see some pickup in utilization rates across your customers? And is that also maybe giving you further confidence in your modest growth outlook for WFE this year?
Tim Archer (President and CEO)
Yeah, we've said in the past that we, you know, obviously, we track that pretty closely. I think you've heard our customers talk about increasing utilizations. We've certainly seen and heard from our customers talk of strengthening in pricing in those markets. How we said it would affect us, I mean, in markets like NAND, we said, you know, we would. With so much utilization taken offline, we would see, you know, some uptick in our spares business. We would see that start to flow through upgrades.
As I mentioned in my script, you know, we anticipate that a big portion of the uptick in memory spending this year will be coming through technology upgrades, where, you know, the installed base is Lam equipment, and therefore, you know, the benefit, a lot of the benefit of that WFE spending will flow to Lam as we do those technology upgrades. The other element of the spending will be coming from the additional equipment that needs to get added to enable things like High-Bandwidth Memory. And we've talked about the fact that in High-Bandwidth Memory, Lam has 100% market share of the critical technologies needed for stacking the DRAM.
So, you know, I'll let our customers speak to what their utilizations are, but what I'd say is that all signs are pointing to the memory market beginning to come out of its, you know, pretty, pretty darn near historic downturn over the last couple of years. And so that's, that's what we're looking at for this year.
Harlan Sur (Managing Director, Equity Research)
Oh, that's very helpful. And then you mentioned this, I mean, your CSBG business has grown at a 17% CAGR since 2019, right? That's significantly faster than, I think it was a 10%-11% CAGR target that you guys put out at your last Analyst Day. I know it's been weak over the past few quarters, just given some of the supply side discipline of your customers, lower utilizations, slowing tech migrations. But assuming that you will see the pickup in activity sometime this year, you combine that with the strong continued growth in the installed base business, number of chambers continues to grow at a low double digits growth rate. Like, how should we think about the growth profile, puts and takes of CSBG this year and going forward?
Tim Archer (President and CEO)
Yeah, I don't know that we're gonna put a number on the growth rate for CSBG at this point, but clearly, that business has been heavily impacted by the utilization cuts that occurred within our customer fabs. And we saw that both in spares as well as a curtailment of many of the technology upgrades that typically would just occur year in, year out. And so, that did have an impact on CSBG revenues. I think that going forward, I talked about how much larger the installed base is now.
Harlan Sur (Managing Director, Equity Research)
Mm-hmm.
Tim Archer (President and CEO)
That's a much larger installed base that because of the delay in technology upgrades, there's pent-up demand there. I mean, those tools need to be upgraded to be operating at the latest and most efficient and most competitive technology node for our customers. And so, you know, I don't know the exact timing, but I do know that installed base will be upgraded and will actually generate quite a lot of revenue for Lam going forward.
Doug Bettinger (EVP and CFO)
Harlan, maybe just let me remind you, there's four components to CSBG, spares, services, upgrades, all which will benefit from what Tim was describing. You also have the Reliant product line in there, which has just done amazing in the last year. That will ebb and flow to a certain extent with more mature nodes, specialty node, WFE. So don't lose sight of that one. There might be a slightly different dynamic with the Reliant product line.
Harlan Sur (Managing Director, Equity Research)
Perfect. Thank you very much.
Doug Bettinger (EVP and CFO)
Thanks, Harley.
Operator (participant)
The next question is from Atif Malik with Citi. Please go ahead.
Atif Malik (Managing Director, Equity Research)
Hi, thank you for taking my question. First one, Tim, historically, you guys have benefited disproportionately when the NAND spending happens. If you were to think about your position competitively when the NAND spending recovers, I understand this year is more technology upgrades. But how should we think about your position coming out of this NAND downturn competitively, particularly on, you know, more layers and the whole etch process?
Tim Archer (President and CEO)
Yeah, I think that it's a good question, and that was why I pointed out. I mean, I think what we're looking at in the near term, in those first stages of recovery, is customers are, you know, very cost sensitive, and the best way to achieve that next technology node is by upgrading the equipment that you have in place. And so Lam, we spend a tremendous amount of time investing in technologies that enable the upgrade and extension of our equipment, and that's really of high value to our customers. I think that will actually go on for quite a long time. We have about 6,500 chambers of high aspect ratio etch, for instance, in the managed marketplace. That creates a lot of next-generation technology through those upgrades.
Beyond that, the learning you get from now running those upgraded chambers at that next technology node tends to seed all of the ideas and understanding of the challenges that need to be solved at the next node. I think that's why the, you know, installed base positions and incumbent positions tend to be very difficult to break in this industry. You know, we've tried to break many others, break into others, and so we know that very well. What Lam has done extremely well is to collaborate closely with our customers. I talked about our close-to-customer strategy, putting R&D labs in very close proximity to our customers. Again, that's just a way in which we ensure that we're adequately meeting both their technology and cost needs going forward.
Atif Malik (Managing Director, Equity Research)
Great. And then a quick clarification, Doug, on the OpEx. You said R&D will be up year over year. Wasn't sure if that implies total OpEx is also up or SG&A is down to offset the increase in R&D?
Doug Bettinger (EVP and CFO)
Total OpEx is probably gonna be up. But if R&D will be up more, right, we had 69% of total spending in R&D in the last quarter. That's a high watermark. We're purposefully growing R&D, primarily because of all those inflections that we've been talking about.
Atif Malik (Managing Director, Equity Research)
Thank you.
Tim Archer (President and CEO)
I think that maybe the easiest way to think about it is the, the lead time for us to develop, new products that we need to drive growth is unfortunately, a little bit longer than the lead time for our, for our spending revenue. So, you know, with a, with an outlook that growth is coming and that we're entering this next upturn where there are tremendous opportunities for the company, we feel very confident to invest ahead of that revenue, showing up. And that's, that's I think, what we signaled for this year. But with the confidence that, that we are, we're going to see that growth in new products and, and technology investment from our customers.
Doug Bettinger (EVP and CFO)
Thanks, Atif.
Operator (participant)
The next question is from Toshiya Hari with Goldman Sachs. Please go ahead.
Toshiya Hari (Managing Director, Equity Research)
Hi, guys. Thank you so much for taking the question. The first one on WFE. Doug, I forget if you mentioned this, but is there a first half, second half sort of bias that you're willing to share, as we think about the trajectory of WFE this year? And more importantly, curious how we should be thinking about, you know, your rate of outperformance, vis-a-vis the market. You guys have talked about, you know, obviously, dep and etch intensity growing, across the memory space. You know, you talked about advanced packaging and HBM, and you know, things like dry resist.
So, you know, assuming you're accurate with your WFE assumption and the market's up, you know, call it mid to high singles, what sort of outperformance can we sort of, you know, expect from you guys in calendar 2024?
Doug Bettinger (EVP and CFO)
Yeah, Toshiya, I guess the first, well, I think it's a little bit second half weighted year this year. I think it's gonna be sort of a slow start to the year, maybe, right? We just guided you, essentially flat revenues quarter on quarter, so that's part of what you're seeing. But we expect it'll be somewhat stronger in the second half. And then overall, you know, we're not gonna give you the individual components between NAND, DRAM, Foundry, and Logic, what grows more. I think everything probably grows to a certain extent. When we look at all these inflections, though, in all aspects of those end end markets, we see etch and deposition intensity stepping up as you walk from node to node to node. So that is unchanged.
Toshiya Hari (Managing Director, Equity Research)
Got it. Thank you. And then as my follow-up, on China, Doug, you mentioned, China as a percentage of your systems revenue to stay elevated in the March quarter. And then you went on to say that, you know, that number should decline as you progress through the year. Is that just purely a function of, you know, your other businesses, other regions, improving throughout the year? Or, are you sort of sensing an absolute decline in your China business? And if so, where are some of the areas or device types or applications you're seeing, a slowdown? Thanks.
Doug Bettinger (EVP and CFO)
No, we are not, we are not seeing China slow down. It's, it's purely just timing of when spending is occurring, honestly.
Toshiya Hari (Managing Director, Equity Research)
Okay, thank you.
Doug Bettinger (EVP and CFO)
We, yeah, Toshiya, we've purposely been using the word, and I think you heard it in both Tim and my comments, stable, right? So, that's a consistent description that we have been saying for a while.
Toshiya Hari (Managing Director, Equity Research)
Thank you.
Doug Bettinger (EVP and CFO)
Yep, thank you.
Operator (participant)
The next question is from C.J. Muse with Cantor. Please go ahead.
C.J. Muse (Senior Managing Director, Equity Research)
Yeah, good afternoon. Thanks for taking the question. I guess was hoping you could speak to kind of your vision for what a recovery might look like for NAND and where we might get to on a normalized basis, perhaps into 2025. And then, if you reflect on perhaps a lower normalized number and think about some of the new areas that you're investing in, whether it's memory or advanced packaging or changes, you know, in backside power gate-all-around. You know, is there enough kind of juice there to get you to where you can overall, you know, drive that rich WFE intensity and get us back to kind of those peak levels when 3D NAND was first adopted?
Tim Archer (President and CEO)
Sure, C.J. I think the simple answer is yes, we do believe that. I mean, let me address the NAND question first, which, you know, as I mentioned this year, customers are primarily focusing on technology upgrades that make sense. I mean, eventually, to drive the type of bit growth that we think we see longer term, obviously, there's some additions that need to be made, but we're not forecasting that this year. With each of those technology evolutions, etch-in-dep intensity rises simply because of the increasing number of layers. And in a technology upgrade, we've talked about the fact that Lam captures a much higher percentage of WFE because of the role that etch-in-dep should play in the technology upgrade.
So, you know, I think that as we see NAND growing, you know, recovering and growing at a certain percentage rate, Lam will actually significantly outperform that rate because of the fact that most of it is coming from upgrades. Now, longer term, I think we have turned our attention, and strategically, we've said we want to build resilience into our business by really capturing a lot of the opportunities that exist, of course, in NAND, where we're very strong, but really outside of NAND in some of these other markets that are becoming more etch and dep intensive. And, you know, we've talked about those, whether it's gate-all-around or backside power or advanced packaging, dry EUV patterning. And each of those, we've characterized as a billion-dollar plus opportunity, when fully scaled, for Lam.
And those are SAM expansion, meaning that they are incremental to where Lam has been before. So I think when you play those out, and obviously we have to be successful in execution, that's why we keep talking about we're gaining traction, but there's still, there's still a ways to go before these inflections and all, all decisions are made. But we think those, those can certainly drive Lam to new highs in terms of revenue and, and obviously profitability as well.
C.J. Muse (Senior Managing Director, Equity Research)
Very helpful, Tim. I guess a quick follow-up, Doug. I know you're hesitant to guide OpEx for the full year, but perhaps you could help us understand maybe the impact of the extra week on the March quarter, and, you know, how you're thinking about, you know, driving that R&D growth through the calendar year.
Doug Bettinger (EVP and CFO)
Yes, C.J. I mean, it's 14 weeks versus 13. That's the right way to kind of think about it. You can just ratio it to understand kind of it's a longer quarter, so that's the piece from that. And then any delta to get to the 29.5% op margin is part of that, beginning to step up R&D. As we go through the year, though, we will purposely be growing the investment in R&D so that you might not see the historic leverage that we've delivered is what I described a quarter ago, and that's still very much how you should be thinking about it.
C.J. Muse (Senior Managing Director, Equity Research)
Thank you.
Doug Bettinger (EVP and CFO)
Yeah. Thanks, C.J. Welcome back.
Operator (participant)
The next question is from Srini Pajjuri with Raymond James. Please go ahead.
Srinivas Pajjuri (Managing Director and Senior Research Analyst)
Thank you. Tim, you talked about your trough EPS, doubling essentially, which is a, you know, tremendous achievement and execution. I think part of the reason was your services business did increase as a percent of the mix. I think that helped for sure, you know, stabilizing, you know, the cyclicality a bit.
So as we go through the next, I guess, you know, as we kind of look out to the next couple of years, you know, as business recovers, just curious as to how you think about, you know, the mix shaking out between systems and services, and how, you know, what sort of implications that might have for your top line and also your margin profile, and I guess on the next peak EPS, if you want to talk about that. Thank you.
Tim Archer (President and CEO)
Sure. Well, here's why it's always a little difficult to answer this question is because we're certainly investing to grow our systems business tremendously as well. And so, you know, we don't look at it as one trading off versus the other. And so in fact, one kind of begets the other. The better our systems business does, the faster our installed base grows, and that's really the story from 2019, you know, in that until now, when we talk about how much the installed base has grown, we shipped a lot of new systems that grew that installed base by nearly 50%. So going forward, I think that, you know, we anticipate the ratio of CSBG revenue to overall revenue staying kind of in the historical range that it's been in.
That's, that's just gonna be driven by kind of equivalent success in both parts. But the CSBG revenue, the installed base business, not only gives us stability, but it also opens new channels for growth for the company. I've talked about this on previous calls, which is, I think that when we think about how Lam leverages things like artificial intelligence and, and data, it's in the installed base services business. On the last call, I talked about even cobots, the use of collaborative robots to start to do some of the service that today is done by skilled engineers.
Our customers in this industry have to find ways to be able to innovate faster and also provide manufacturing services at a lower cost. And I think that we can do that by innovating around the installed base and create new products and service offerings that help us grow at a faster pace than the installed base itself is growing.
Srinivas Pajjuri (Managing Director and Senior Research Analyst)
Got it. And then Doug, one clarification on the deferred revenue. I think it went up about $238 million this quarter. You talked about prepayments. I'm just curious, are customers still prepaying because of any supply constraints, or is this an ongoing, I guess, trend that you're seeing? Just if you can talk about how we should think about deferred revenue going forward, that'll be helpful. Thank you.
Doug Bettinger (EVP and CFO)
Yes, Srini. I guess what I described, you should think about the advanced payment is when we have a new customer that we're just kind of understanding what their balance sheet looks like, especially if they're a private customer, that we can't see the balance sheet, it's not publicly reported, and the creditworthiness might be sort of questionable. We require cash upfront before we begin manufacturing the tool, and that's what's going on there. That's all it is.
Srinivas Pajjuri (Managing Director and Senior Research Analyst)
Got it. Thank you.
Doug Bettinger (EVP and CFO)
Thanks, Srini.
Operator (participant)
The next question is from Stacy Rasgon with Bernstein Research. Please go ahead.
Stacy Rasgon (Managing Director, Equity Research)
Hi, guys. Thanks for taking my questions. For the first one, around the China WFE being stable in calendar 2024, do you see all market segments being stable, or do you see some, like, being stronger and some being weaker? Like, how do you, how do you see that interplay?
Doug Bettinger (EVP and CFO)
Stacy, I don't really see a big change year-over-year relative to end market. You know, I'll remind you, when China DRAM was second half-weighted last year, it's probably a little bit first half-weighted in China, maybe more than a little bit this year. But year-over-year, I don't really think of a significant change in contribution for the entire year.
Stacy Rasgon (Managing Director, Equity Research)
Got it. That, that's helpful. And I guess to follow up on the China questions, and maybe it's a follow-up on one of the earlier questions, but it does sound to me like you are suggesting China mix should come down through the year. Maybe you can clarify that, because if I've got overall stable China revenues, like, how does your China mix come down materially? It doesn't look like you're looking for overall, like, non-China WFE to grow a ton, right? And some of that-
Doug Bettinger (EVP and CFO)
Yeah, Stacy,
Stacy Rasgon (Managing Director, Equity Research)
other areas, so.
Doug Bettinger (EVP and CFO)
Yeah, let me remind you, in 2023, China was a more modest amount of WFE, and it grew in the second half of the year. And so the comments we're making are year-over-year, it's, it's relatively stable.
Stacy Rasgon (Managing Director, Equity Research)
Okay.
Doug Bettinger (EVP and CFO)
Kind of the half-on-half stuff probably looks different in 2024 than it did in 2023 in China, specifically.
Stacy Rasgon (Managing Director, Equity Research)
That's helpful then. So then exiting the year, you think you're back to that sort of normalized gross margin range as a result of that, as China falls off in the second half?
Doug Bettinger (EVP and CFO)
Yeah, the customer mix stuff, I think mitigates somewhat as we go through the year, and it, it continues to be quite strong in the March quarter guidance.
Stacy Rasgon (Managing Director, Equity Research)
Got it. That's helpful. Thank you, guys.
Doug Bettinger (EVP and CFO)
Thanks, Stacy.
Operator (participant)
The next question is from Vivek Arya from Bank of America Securities. Please go ahead.
Vivek Arya (Managing Director and Senior Equity Research Analyst)
Thank you for taking my question. For my first one, I'm curious, what's your assessment of NAND supply demand as it exists, today? I think in your WFE view, you are assuming that NAND grows, but more because of, technology, upgrades. But what are your customers telling you for as to when they want to start adding, you know, more tools? And what's, you know, Lam's opportunity to grow, NAND, right at a measurable pace in, the second half of the year?
Tim Archer (President and CEO)
Yeah, I think that, you know, first of all, I wouldn't necessarily talk about what we're discussing with our customers on that standpoint. But, you know, things that are out there, you know, we do know, and I think we know that the utilization cuts were pretty severe in NAND last year. And so there's a tremendous amount of capacity that is has been offline, and we've said in the past that needs to be brought back online. And I think the question and discussions we're having is, at what technology node should that capacity be restarted? In many cases, there's a very high likelihood that a technology upgrade cycle will occur as that equipment is brought back into service.
And so, you know, in that case, we would actually begin to see a restart of some of the utilization-driven revenue that we get from things like spares and services, as well as, at the same time, a restart of technology upgrade revenues. And that's why I think that from a NAND perspective, this year, we think that will effectively represent the majority of the spend that occurs in this segment.
Vivek Arya (Managing Director and Senior Equity Research Analyst)
I see. And then, Tim, as you know, many of the DRAM customers are saying that they plan to shift bits more towards HBM from DDR. Does that have any positive or negative influence on your CSBG and the spares business?
Tim Archer (President and CEO)
I can't quite make that connection right now. I'll have to give it some thought, but clearly we see an impact on our systems business, as I mentioned, where we're having to add the specific HBM-related, especially advanced packaging, steps related to the stacking of HBM itself, and we're seeing significant growth in that area. And so with that, given we're shipping additional systems, there is some incremental, you know, spares business and services business that goes along with that. But I think the systems portion of that kind of outweighs from a dollars perspective.
Vivek Arya (Managing Director and Senior Equity Research Analyst)
I guess maybe just to clarify, does your CSBG business start to kind of grow consistent with the growth in your tools business overall? Or, do you think there is going to be a lag factor because it slowed down later, does it start to regrow later also?
Doug Bettinger (EVP and CFO)
Depends on the rate of growth in WFE, to be perfectly frank, that are coming. See spare service upgrades chug along, and we think that's going to benefit as utilization and whatnot begins to come back. Then to really answer your question, you got to go figure out what you think the pace of WFE growth is. I, I'm not going to put numbers on that right now. We're going to kind of wait and see.
Vivek Arya (Managing Director and Senior Equity Research Analyst)
Yep. Thank you.
Doug Bettinger (EVP and CFO)
Thanks, Vivek.
Operator (participant)
The next question is from Krish Sankar with TD Cowen. Please go ahead.
Krish Sankar (Managing Director and Senior Research Analyst)
Yeah, hi. Thanks for taking my question. First of all, for Doug. Doug, I think, Doug and Tim mentioned about a gradual recovery in WFE this year, kind of more back half-weighted. So I'm kind of curious, and Doug, I'm not looking for, like, guidance, but I'm just wondering is it fair to assume Lam revenues in the calendar second half of 2024 is going to be better than the first half? That's my first question, then a follow-up.
Doug Bettinger (EVP and CFO)
You were a little bit muffled, Krish, but I think you were asking about our performance along with WFE, and frankly, I think we, we will mirror whatever the trajectory of WFE looks like, with an expectation that etch and dep outgrows to a certain extent. I think I answered your question, although you were a little bit muffled there.
Krish Sankar (Managing Director and Senior Research Analyst)
Sorry for that, Doug. I was just trying to wonder if calendar second half 2024 revenues for Lam is going to be better than calendar the first half, similar to WFE?
Doug Bettinger (EVP and CFO)
Yeah, I think it will be, Krish. I'm not going to put numbers on it yet, but we will mirror what goes on with WFE.
Krish Sankar (Managing Director and Senior Research Analyst)
Got it. Got it. Okay, and then my follow-up is for Tim or Doug. You know, when you spoke about HBM and, you know, AI and all the good stuff. I'm just wondering, does HBM DDR5 tool set for dep and etch differ from DDR4 legacy? Or in a way, is it more like accretive from a margin standpoint, or does it, is it like a neutral standpoint?
Doug Bettinger (EVP and CFO)
I guess what I'd say, Krish, from a margin standpoint, you shouldn't think about any differential margin necessarily. The incremental piece, first, the stuff that goes into High-Bandwidth Memory is a bigger die. You know that. The die itself, building the DDR5 die, is largely the same equipment that builds DDR5 that doesn't go into HBM. The incremental stuff comes when you go into the Advanced Packaging stuff. The Syndion Deep Silicon Etch and the electroplating are areas where we're extraordinarily strong, in addition to some other things. That is clearly incremental equipment.
Tim Archer (President and CEO)
Yeah, I think from a, from an etch and dep intensity perspective, you know, in general, I think you mentioned, you know, DDR4 to DDR5. I mean, I think in general, with each technology node evolution, whether it's DRAM, NAND, Foundry/Logic, we've said etch and dep intensity rises with technology advancement. And so I think you can imagine that there's more equipment being needed, and, and that's in addition to the fact that larger die sizes drive, you know, greater equipment per bit out. So there's a lot of factors that every time we move forward, there's more equipment and more Lam equipment required with this technology nodes.
Krish Sankar (Managing Director and Senior Research Analyst)
Got it. Thanks, Tim. Thanks, Doug.
Doug Bettinger (EVP and CFO)
Yeah, thanks, Krish.
Operator (participant)
The next question is from Joe Moore with Morgan Stanley. Please go ahead.
Joseph Moore (Managing Director, Head of U.S. Semiconductors Research)
Great, thank you. If I could ask about your DRAM systems revenues in the December quarter. They were, you know, kind of back to the highs of a couple of years ago, but I know you had some China in there. I think there's, you know, some of the advanced packaging. Can you, can you just give us a sense for what's kind of core DRAM within that? And then, you know, you're pretty constructive on where that's going. Can you give us a sense of the dynamics of, you know, China going forward versus other regions, and other parts of DRAM?
Doug Bettinger (EVP and CFO)
I guess, Joe, I'd just take you back to what I had in my script. Two things are driving the strength in DRAM in the December quarter, and, and you mentioned both of them, frankly. It's High Bandwidth Memory and, and, DDR5, in addition to the fact that, you know, we've got a China customer in DRAM in the second half of the year. That includes September and December. That wasn't in the first half. So each of those things contribute to the strength you saw in December.
Joseph Moore (Managing Director, Head of U.S. Semiconductors Research)
Okay. Then looking forward, it seemed like you had more than six months of demand from that China customer in the second half. Going forward, does that come down, but core DRAM comes up and HBM comes up?
Doug Bettinger (EVP and CFO)
Probably.
Joseph Moore (Managing Director, Head of U.S. Semiconductors Research)
Okay, great. Thank you.
Doug Bettinger (EVP and CFO)
Thanks, Joe.
Operator (participant)
The next question is from Brian Chin with Stifel. Please go ahead.
Brian Chin (Director and Senior Equity Research Analyst)
Hi, good afternoon. Thanks for letting us ask a few questions. Maybe going back to NAND. You know, the best-ever quarter for NAND spending was probably higher than the total level of NAND spending, maybe for all of last year. And so even if it's off a low base, isn't it pretty logical that NAND WFE should exhibit the largest or highest rate of improvement in 2024?
Doug Bettinger (EVP and CFO)
I wouldn't necessarily draw that conclusion, Brian. You know, I think all we're going to tell you is that I think every segment, WFE grows this year, NAND, DRAM, Foundry/Logic, it's all up to a certain extent. I'm not going to get into the business of quantifying each individual one, because frankly, at the end of the day, we'll get it wrong. But I think everything will grow to a certain extent this year.
Brian Chin (Director and Senior Equity Research Analyst)
Okay, fair, fair enough. And then just to kind of level set in DRAM and then also looking forward, how, how much did DRAM industry spending actually decline in, in 2023? It seems to be better than was initially thought, based, you know, on HBM, et cetera. And also, can you give us a sense of the, the number of wafer starts or % of the DRAM installed base that could be converted to, to more advanced 1-alpha or 1-beta-like process nodes this year?
Doug Bettinger (EVP and CFO)
I guess, Brian, what I, what I'd say, and Tim, I think, had this in his script. Memory overall was down roughly 40%. NAND was down north of 70%. The differential to get to the number is, is DRAM. You, you can do that. And yeah, I think the second part of your question, HBM and DDR5 has been a big part of the, the strength in DRAM.
Brian Chin (Director and Senior Equity Research Analyst)
Okay. And that was actually the second part was kind of more towards what is the potential number of wafer starts or the percent of the installed base that's sort of, you know, game for those conversions to 1-alpha, 1-beta-like nodes?
Doug Bettinger (EVP and CFO)
You know, for the most part, in memory, everything gets upgraded to the next node, all of it. That's always been the case. That's not a new phenomenon.
Brian Chin (Director and Senior Equity Research Analyst)
Okay, thanks.
Doug Bettinger (EVP and CFO)
Yep. Thanks, Brian.
Operator (participant)
The next question is from Chris Caso with Wolfe Research. Please go ahead.
Chris Caso (Managing Director, Equity Research)
Yeah, thank you. Good evening. The question is on delivery times, and you had mentioned, you know, obviously, your delivery times may be different than some others in the industry. Where do they sit right now, and as a consequence, how much visibility do your customers need to give you? And, you know, with that, when we start to see, you know, some stronger, you know, perhaps memory spending, you know, how quickly will you be able to react to that and turn that for revenue?
Tim Archer (President and CEO)
Yeah. So, you know, we don't obviously publicly telegraph our lead times, but we had talked about the fact that during the COVID pandemic, our lead times, due to supply chain shortages, had stretched out quite long, and those have now, you know, come back to a much more normalized level, although they still are such that, for us to make shipments within this year, we would have to know about those orders and have forecasts pretty quickly. The one thing that's helped is I talked about our investments in new manufacturing and supply chain operations within our customer ecosystems. You know, that's putting us much closer, it's diversifying our supplier base, and I think is going to, through this next upturn, make us much more responsive to customer needs.
So really, we worry less about lead time and more about our ability to respond in the timeframe which our customers need to place orders to meet their ramps. We tend not to be the bottleneck, let's put it that way, in terms of a lead time perspective, planning a new fab.
Chris Caso (Managing Director, Equity Research)
Fair enough. As a follow-up question, I wanted to ask about backside power, and last quarter, you made some disclosures about, you know, the revenue impact to Lam, as it happened. Could you give a little more color on that? And specifically, you know, we know that the different customers are having different implementations of backside power. You know, at what point does that start to become a meaningful driver for Lam?
Tim Archer (President and CEO)
I think given the important role that both etch and deposition play in that and our strong position, you know, in parts of the backside power process, like copper plating, where some of those layers are becoming quite thick, and therefore, the processes become longer, it's going to very rapidly become quite meaningful for the company. And again, it's just a further demonstration of how going 3D and essentially using etch and deposition to create more complex architectures allows you to reduce power and improve chip performance and also reduce cost. And you know, we talked about it in the sense of backside power. You're seeing the same thing with chip stacking and HBM and heterogeneous integration.
That's why I said, I think the next era of semiconductors is characterized by all of these more unique 3D architectures. They're all good for the types of products we sell.
Chris Caso (Managing Director, Equity Research)
Thanks, Chris.
Operator (participant)
Operator, yeah, we have time for one more question. That question comes from Thomas O'Malley with Barclays. Please go ahead.
Thomas O'Malley (Director, Equity Research)
Hey, guys. Thanks for taking my question. I was curious if you guys had a view on the HBM market. Clearly, with the accelerator market growing as quickly as some think, you know, there's concerns that the HBM market may actually be shipping above peak in 2024 and 2025. Do you guys have a view internally on, you know, just how fast HBM is growing as a market segment? And just, could you just give us the perspective of, you know, when you look at an acceleration of a tool roadmap with a customer on HBM, how much of that has pulled in in the last six months from what you would typically see from a DRAM customer when they're looking for a tool? Thank you very much.
Tim Archer (President and CEO)
Well, I, I think that, as, as a real key supplier into the HBM market, as I mentioned, the strong position we have in the, in the processes required for the stacking, this is an area where, you know, we're seeing, you know, very, very strong demand. I think that, you know, whether, whether or not at some point it's shipping above peak, I, you know, I, I think that, this AI market is, is continuing to evolve at a very, very fast rate. And all we're focused on right now is ensuring we are building out our own capacity and capabilities, and ensuring that we maintain that technology leadership that's allowing us to hold a 100% market share of the TSV formation in HBM.
And so really, that's, that's our, that's our focus, is hold the position and let the market grow as fast as the market grows.
Thomas O'Malley (Director, Equity Research)
Helpful. And then just one on the makeup of inventory. You guys have talked about working down inventory throughout the year. Is there any color you can give us on the makeup of that, of that inventory? Is it more memory-related or foundry logic-related? I know you don't want to give specifics, but just, where do you see that inventory coming down through the first half of the calendar year? Thank you very much.
Doug Bettinger (EVP and CFO)
Yeah, Tom, it's, you know, the rate of decline in memory as we went into 2023 was pretty dramatic, and we ended up taking more inventory than we needed, specifically for memory. So, there's a bigger component of it targeted at memory, and as memory recovers, the inventory will come down.
Thomas O'Malley (Director, Equity Research)
Thank you.
Tim Archer (President and CEO)
Thanks for the question.
Operator (participant)
This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.
