Lam Research - Earnings Call - Q3 2025

Executive Summary

• March quarter delivered broad-based beats: revenue $4.72B (+8% q/q, +24% y/y), non-GAAP gross margin 49.0% (+150 bps q/q), operating margin 32.8% (+210 bps q/q), and non-GAAP EPS $1.04, all ahead of midpoints; management highlighted record foundry revenue and the company’s highest quarterly gross margin percentage since the Novellus merger.
• Guidance implies further margin expansion in June: revenue $5.0B ±$300M, gross margin 49.5% ±100 bps, operating margin 33.5% ±100 bps, and EPS $1.20 ±$0.10; tax rate guided to single digits on a reserve release, with OI&E slightly negative; foundry and NAND systems revenue expected up q/q.
• Strategic drivers intact: management reiterated ~$100B 2025 WFE and continued outperformance driven by gate-all-around, advanced packaging, dry EUV resist, and NAND conversions (molybdenum and carbon gap fill), with record foundry revenues and strong Taiwan strength underscoring share gains.
• Watch items/H2 setup: second-half skew modestly lower vs first-half given removal of ~$700M China-restricted business that had been H2-weighted; gross margin sustainability will vary with customer/geo mix and tariffs, though close-to-customer ops add structural uplift (~200 bps vs late-2022 at similar revenue).

What Went Well and What Went Wrong

• What Went Well
  • Record foundry revenue and record corporate gross margin since Novellus merger; management called out strong product momentum at leading-edge nodes and advanced packaging.
  • Systems strength: foundry 48% of systems revenue (new dollar record) with NAND conversions progressing; Taiwan and Korea each 24% of total revenue, with Taiwan at a dollar record.
  • Upgrades robust within CSBG (record upgrade revenue), powered by NAND conversions; multi-year spares agreement signed; structural margin lift from close-to-customer supply chain and Malaysia ramp.
• What Went Wrong
  • China restrictions continue to weigh: China at 31% of total revenue (flat q/q), but management expects China concentration down y/y in 2025; loss of a subset of China customers removes ~$700M that had been H2-weighted.
  • Gross margin sustainability: management flagged “variability” around current levels as mix shifts; tariff headwinds are contemplated in the June guide but remain a risk.
  • CSBG mix: Reliant (mature-node tools) faces headwinds (especially China), keeping CSBG roughly flattish for 2025 despite strong upgrades; service/spares to restricted customers also curtailed.

Transcript

Operator (participant)

Good Afternoon, and Welcome to the Lam Research March 2025 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. Please note, this event is being recorded. I would now like to turn the conference over to Ram Ganesh, Vice President, 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 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 March 2025 quarter and our outlook for the June 2025 quarter. The press release detailing our financial results was distributed a little after 1:00 P.M. Pacific time. The release can 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)

Great. Thank you, Ram, and thank you all for joining the call today. Lam's March quarter results reflect continued strong execution across the company, with revenues, gross margin, operating margin, and EPS all exceeding the midpoint of our guidance. We delivered a record quarter for foundry revenues, demonstrating our solid product momentum in leading-edge technology inflections. Gross margin percentage was also a record for the company since the Novellus merger, as the investments we have made over the past several years in our manufacturing and supply chain operations are contributing positively as we scale the business. As our guidance indicates, gross margins are set to expand again in the June quarter. On our January earnings call, we laid out what we saw as the fundamental drivers of WFE spending in the year ahead.

To date, these have played out largely as expected, with strength in leading-edge foundry logic, technology-driven conversions in NAND, and a focus on high-bandwidth memory and DDR5 and VRAM. From an overall industry perspective, we continue to forecast calendar year 2025 WFE spending in the $100 billion range. We recognize that the current tariff and global economic environment is dynamic, but thus far, we have not seen any meaningful changes to our customers' plans. We are closely monitoring the situation alongside our customers and ecosystem partners. We believe that the agile manufacturing and supply chain capability that we have developed in recent years provides us with the flexibility to lessen the direct impact of tariffs. Our strategic focus in this environment remains on delivering the new products, advanced services, and digital transformation initiatives required to achieve the growth and profitability outperformance goals we described at our Investor Day in February.

As a reminder, we identified three key drivers that underpin our ability to outperform overall WFE growth over the next several years. First, we expect to expand our serve market, or SAM, faster than WFE, as deposition and etch intensity rises due to greater semiconductor device complexity. Second, we expect to gain share with the strongest product portfolio in the company's history, targeted at billion-dollar-plus technology inflections such as Gate-All-Around, backside power distribution, advanced packaging, and Dry EUV photoresist processing. Third, we expect to grow our CSBG revenue faster than our installed base as customers look to Lam's upgrade, automation, and Equipment Intelligence offerings to enhance productivity and execution as they expand their global fab operations. Year to date, we are already witnessing incredible momentum in these areas. In deposition, Lam's atomic layer deposition, or ALD, products are making strong gains.

Our Striker SPARC ALD tool delivers the industry's densest conformal low-k carbide dielectric films. Leveraging this capability, we have secured multiple key wins for spacer applications at a leading-edge foundry. Our ALTUS Halo system enables barrierless atomic layer deposition of molybdenum, reducing the resistance of critical contact and interconnect layers by 50% compared to legacy technologies. In the case of 3D NAND, this reduction is critical to achieving the superior I/O performance needed for AI applications. As a result, Lam's Halo molybdenum process is seeing increased adoption across our leading 3D NAND customers. In etch, our new Akara system has gotten off to a great start, rapidly solidifying and expanding our market-leading position in conductor etch. Featuring a proprietary industry-first innovation for ultra-fast plasma control, Akara delivers previously unachievable levels of performance in etch selectivity and profile patterning precision.

We have previously announced leading-edge foundry logic momentum with this tool, and just since our Investor Day, Akara has also won multiple critical etch applications at a major DRAM manufacturer. By enabling current DRAM and logic roadmaps with Akara, we are setting the stage for Lam to make further gains as the industry looks to implement even more challenging device architectures like 3D DRAM and CFET over the next decade. Turning to CSBG, we saw record revenues in our upgrades business. While the growth in upgrades was primarily driven by NAND technology conversions as forecasted at our Investor Day, key DRAM and foundry logic customers are also more actively upgrading and repurposing existing tools for new applications to optimize capital spending. Looking forward, we see the upgradable architecture of our systems being a growing point of differentiation for Lam.

We are enabling our customers to cost-effectively scale technology on the equipment they already own while creating revenue and share gain opportunities for us. Our collaboration with customers on operating cost optimization extends across the entirety of our installed-based business and over a longer time horizon. For example, in the March quarter, we signed a new multi-year spares agreement with a large memory customer for their latest technology node. This enables us to deliver value to the customer through assured component quality, cost, and availability. Finally, in specialty technologies, we achieved a couple of key milestones recently. First, we displaced a competitor and shipped multiple 200 mm PECVD tools for silicon carbide-based wide-bandgap power device fabrication. Second, our pulse laser deposition solutions are being extended into more use cases, and we will be shipping our latest tool this year for an advanced memory application.

As customers look to accelerate R&D and scale manufacturing globally, we're finding new ways to add value. We have talked in the past about our Semiverse Solutions capabilities, which apply advanced modeling, simulation, data science, machine learning, and artificial intelligence to enhance equipment performance and shorten the time required for process optimization. I am pleased to report that recently we signed new licensing agreements with three large customers for our virtual fabrication platform, SEMulator3D. For both its cost and performance benefits, we see virtual fabrication fast becoming a required discipline in advanced technology development, and Lam is leading the industry in this evolution. To wrap up, when I look at our solid March quarter results and strong June quarter guide, I see Lam executing at a high level on all aspects of the outperformance strategy we described at our February Investor Day.

This includes new product momentum and key customer wins, value creation from the installed-based business, and innovation in equipment intelligence and virtual process development. Near term, we're taking steps to lessen the direct impact of tariffs and closely monitoring for longer-term indicators of demand changes. Our priority is to continue delivering the technological innovations and world-class support that uniquely enable our customers to scale semiconductor manufacturing faster, more productively, and more cost-effectively. Simply put, our competitive differentiation is enabling our customers' competitive advantage. For this reason, we remain highly confident that Lam is in an excellent position to outperform overall semiconductor industry growth in the years to come. Thank you, and I'll now 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. Lam is off to a strong start in 2025.

The March quarter's performance exceeded the midpoint of all of our guidance ranges that we gave on the last earnings call. I was pleased with the company's continued solid execution. We've reached the highest quarterly gross margin percentage since Lam merged with Novelis in 2012. We achieved this by proactively delivering on our operational efficiencies via our manufacturing strategy of being close to our customers. Let's look at the details of our March quarter financial results. Revenue for the March quarter was $4.72 billion, which was an increase of 8% from the prior quarter. Our deferred revenue balance at quarter end was $2 billion, which was essentially flat from the December quarter. Within this number, though, advanced payments trended lower, while other components of the deferred balance trended higher. As we sit here today, I believe our deferred revenue balance will move lower by the end of calendar year 2025.

From a market segment perspective, March quarter systems revenue in memory was 43%, a decrease from 50% in the prior quarter. Within memory, non-volatile memory accounted for 20% of our systems revenue, down from 24% in the prior quarter. Just a reminder, this segment includes a domestic China customer that we classified as a non-volatile memory producer and that we are currently limited from shipping to. On a dollar basis, non-volatile memory growth from non-China-based customers is consistent with our expectations from earlier in the year. The non-volatile memory segment is being driven by customer spending on technology conversions from 1xx-layer to 256-layer class devices. We currently expect this segment to represent the biggest percentage growth in systems revenue for Lam in the June quarter. DRAM represented 23% of systems revenue compared with 26% in the December quarter.

DRAM spending was focused on technology upgrades across 1-alpha, 1-beta, and 1-gamma nodes to enable DDR5, LPDDR5, and high-bandwidth memory. Foundry represented 48% of our systems revenue, up from the percentage concentration in the December quarter of 35%. This level represents a new record in dollar terms for Lam. Shipments for Gate-All-Around nodes and advanced packaging were strong. We also benefited from mature node spending with domestic Chinese customers. I would just like to point out that the last time we were at these revenue levels, back in late 2022, foundry represented a concentration in the low to mid 30% range. We have clearly broadened and diversified our business since then. Finally, logic and other were 9% of our systems revenue in the March quarter, down from the prior quarter's level of 15%. The decrease was primarily driven by reduced leading-edge spending.

Now I'll discuss the regional composition of our total revenue. The China region accounted for 31%, flat from the prior quarter. Most of our revenue from China continued to come from domestic Chinese customers. Our next largest geographic concentrations were Taiwan and Korea at 24% of revenue each in the March quarter. Taiwan represented a new record level for us in dollar terms. The customer support business group generated approximately $1.7 billion in revenue for the March quarter, down a little bit from the December quarter, however, 21% higher than the same period in 2024. Sequentially, the decline was attributable to lower reliant systems revenue, partly offset by record upgrade revenue. Turning to the gross margin performance, the March quarter came in at 49%, at the high end of our guidance range and improving from the December quarter level of 47.5%.

The increase reflects a stronger mix, as well as the efficiencies we're delivering from our close-to-customer manufacturing strategy. Operating expenses in March were $763 million, up from the prior quarter level of $735 million. The increase was due to growth in R&D activities associated with our ongoing roadmap differentiation. R&D accounted for 70% of the total operating expenses. Operating margin in the March quarter was 32.8%, above the December quarter level of 30.7%, and near the high end of our guidance range, primarily because of the higher revenue and the stronger gross margin performance. Our non-GAAP tax rate for the quarter was 13.3%, in line with our expectations. Our estimate for the June 2025 quarter is for the tax rate to be in the single-digit range due to an anticipated tax reserve release tied to a statute of limitations expiration.

Beyond the June quarter, we continue to believe the tax rate will be in the low to mid-teens for the remainder of the calendar year. Other income expense for the March quarter came in at $7 million in expense, compared with $11 million in income in the December quarter. The change in OI&E was due to lower gains on our equity investments and lower interest income. OI&E will continue to be susceptible to market-related fluctuations that will cause some level of volatility each quarter. I do believe OI&E will have a slight negative bias in the June quarter. On the capital return side of things, we allocated approximately $347 million to open market share repurchases, and we paid $296 million in dividends in the March quarter.

As I indicated on the last earnings call, in the quarter, we retired $500 million of unsecured notes that reached maturity using cash from our balance sheet. We returned 63% of free cash flow in the quarter. This was a little lower than normal due to that cash that we allocated for the debt retirement. For the March quarter, diluted earnings per share came in at $1.04. The diluted share count was roughly 1.29 billion shares, about flat with the December quarter. We have $8.8 billion remaining on our board-authorized share repurchase program. Let me pivot to the balance sheet. Our cash and short-term investments totaled $5.5 billion at the end of the March quarter, down slightly from $5.7 billion at the end of the December quarter. The primary factors behind the cash decrease were the repayment of those notes, our capital spending, as well as our capital return activities.

Total debt on the balance sheet obviously declined by that $500 million to $4.5 billion at quarter end. Day sales outstanding were 62 days in the March quarter, which was a decrease from 69 days in the December quarter. Inventory at March quarter end totaled $4.5 billion, a slight increase from the December quarter, as we prepare for higher revenue levels in the June quarter. Inventory turns were 2.2x compared with 2.1x in the previous quarter. We will continue to manage inventory levels to align with customer demand. Our non-cash expenses for the March quarter included approximately $87 million in equity compensation, $83 million in depreciation, and $14 million in amortization. Capital expenditures in the March quarter were $288 million, up $100 million from the December quarter. A major driver of this increase was a purchase of land in India to enable our planned lab expansions there.

Our capital spending otherwise was focused on lab investments in the United States and global growth in manufacturing. We ended the March quarter with approximately 18,600 regular full-time employees, which was an increase of approximately 300 people from the prior quarter. We had headcount growth primarily in the factory and field organizations to support increased tool installation, as well as growing manufacturing activities. We also saw headcount increases within R&D to support that long-term product roadmap. Now let's turn to our non-GAAP guidance for the June 2025 quarter. We're expecting revenue of $5 billion, plus or minus $300 million. We expect systems revenue in foundry and NAND to be up in the June quarter. This business level is consistent with our expectations from the beginning of the year. I want to specifically point out that we don't see anything being pulled in from future quarters.

We're expecting gross margin of 49.5%, plus or minus 1 percentage point. This guidance includes our current assessment of the direct impacts of tariffs on our business, operating margin of 33.5%, plus or minus 1 percentage point, and finally, earnings per share of $1.20, plus or minus $0.10, based on a share count of approximately 1.28 billion shares. This guidance for gross margin and operating margin percentage would represent record levels since our joining of Lam and Novelis. I would also just point out that this would be the highest operating margin percentage that Lam has delivered since the late 1990s. These earnings would obviously represent an all-time record level of profitability. To wrap up, we're off to a strong start in 2025. We're executing well on our critical operational and financial objectives.

While the tariff-related macro uncertainty is keeping the environment dynamic, customers are continuing to invest consistently with their planned technology roadmaps. At Lam, we're laser-focused on driving innovation and delivering new product and service capabilities, while at the same time enhancing operational efficiency and managing our profitability goals. We believe we're well set up to outperform overall WFE growth in 2025, as well as in the years ahead. 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 comes from CJ Muse with Cantor Fitzgerald. Please go ahead.

CJ Muse (Senior Managing Director)

Yeah, good afternoon.

Thank you for taking the question. I guess first question was hoping to hit on the NAND upgrade cycle that you're seeing. You talked about that being the biggest growth driver into the June quarter. We'd love to hear your thoughts around the sustainability of that beyond June. Are you anticipating a broadening of spending beyond just the one or two customers that you're seeing in the first half of the year? As you think about the growth there, I guess, how much of that will come through tools versus CSBG upgrades, as well as is there a way to think about your share of wallet with the industry focusing so greatly on upgrades where it would appear that you're going from 30% to maybe 40-50%?

Tim Archer (President and CEO)

Yeah, CJ, this is Tim. I'll go ahead and start on this.

As we talked a couple of times on earnings calls recently, a significant portion, we said two-thirds of the industry's bits are still at around the 128 level, that the 1xx generation. We see a tremendous number of bits that ultimately have to get upgraded to 2XX+. We do not know exactly what the rate and pace of that is. Right now, we see a strong move in that direction, and obviously, we are watching for that. Lam is in an incredibly good position on two fronts. One is the fact that we are the ones who upgrade our own tools, and we capture a tremendous amount of the wallet spend associated with upgrading the tools that are in place.

At the same time, as we described at our Investor Day, as you extend beyond the 2XX to the 3XX and 4XX layers, you begin to need additional new tooling to enable that stacking. We talked about the sacrificial carbon gap fill that helps enable tier stacking. We talked about the backside deposition tool that helps with wafer stress as you move beyond 200 layers. We talked about the need to change the means of gap fill to an ALD gap fill. These are things that are new tools. I think you're going to see a mix. You're going to see existing tools like our etchers, some of the mold and stack depth tools be upgraded. I think then you'll see new tools being added.

One of those most significant new tools from a technology perspective is what I talked about in my script, which is the Halo Molly. We are seeing strong momentum there. Eventually, because of the improvement it makes in terms of resistance and that impact on device performance, we think that ultimately broadens out and is adopted across all customers.

CJ Muse (Senior Managing Director)

Very helpful. I guess as my follow-up, your Taiwan revenues in the quarter were spectacular, I think the highest level that I can see over the last decade or more. I guess curious on kind of two fronts. One, how sustainable is that contribution to Lam? How does that inform your thinking about what second-half tool shipments could look like versus first half? Thanks so much.

Tim Archer (President and CEO)

Actually, CJ, let me just start from the standpoint of the comments we have made around leading-edge foundry logic strength.

It's been our stated strategy for the last several years to invest in new tooling to increase our exposure to leading-edge foundry logic. I don't think it should come as any surprise. When we talk about record foundry revenues, we talk about strength in places like Taiwan. A lot of that is coming because we've been executing on the new product roadmaps. I talked about the Akara conductor etch tool off to a strong start. We talked about SPARC ALD in my prepared remarks. I mean, it goes well beyond that. Obviously, advanced packaging, a big portion of that as well. Lam is really well situated in the technology inflections that are coming in leading-edge foundry logic, and I think that accounts for a lot of the strength. I'll let Doug answer kind of the second part of it.

Doug Bettinger (EVP and CFO)

Yeah. I mean, Tim covered it.

It's sustainable, CJ. It's not going away. It's all about the Gate-All-Around node. It's all about advanced packaging. It's all the stuff we've been talking about. Not much to add from Tim's comments.

CJ Muse (Senior Managing Director)

Thanks so much.

Doug Bettinger (EVP and CFO)

Thanks, CJ. Sure.

Operator (participant)

The next question is from Timothy Arcuri with UBS. Please go ahead.

Timothy Arcuri (Managing Director)

Thanks a lot. Tim, you made a comment on the call that you were, I think you said, "taking steps to limit the impact of tariffs." Can you talk about that? I guess you do have a free trade zone in Fremont, and then when you make the tools in Malaysia, the country of origin is Malaysia. You should be fine there too. You did say taking steps to limit the impact. Can you kind of go into some details on that?

Tim Archer (President and CEO)

I don't know that I can go into a lot of details as far as the specific steps, but what I can say is that we've worked hard over the last several years to build a very flexible manufacturing supply chain operation that's centered around our U.S. operations, operations in Asia, as Doug said, close to our customers, close to the supply chain. When I say taking steps, it's no different than what we're always doing. We look at the environment, we look at the customers, and then we optimize that capability that we have that exists in many different places in the world to deliver our tools most efficiently and most effectively to our customers. It's kind of what we're always doing. I think that that's a result.

I mean, that flexibility is, again, part of the strategy we executed when we saw disruptions like COVID and other things over past years to really broaden out the global capability of our supply chain and manufacturing operations.

Doug Bettinger (EVP and CFO)

Tim, I'd just remind you, it's Doug, we've got factories all over the world, right? We've got factories in the United States, factories in Austria, factories in Malaysia, factories in Taiwan, factories in Korea. We've been talking about this for a while. The fact that we have that broad footprint enables us to have some level of flexibility. I guess I'd just leave it there.

Timothy Arcuri (Managing Director)

Cool. Okay, Doug. I have a question for you. It sounds like NAND upgrades you think should continue.

If we look at TSMC's CapEx, it looks like it does kind of flatten off as you get to the back half of the year. I know that you do not track exactly, that your business does not track to their CapEx. I think the feeling was that your revenue bias would be a little bit lower in the back half of the year. Is that still the case? If you can give us some sort of puts and takes into the back half of the year, that would be great. Thanks.

Doug Bettinger (EVP and CFO)

Yeah, Tim, you are exactly right. You remember exactly what we intimated last call, and that is still the right way to think about it. It is a little bit of a first-half-weighted year.

You will remember we talked last quarter about the fact that we lost some of those Chinese customers that, as we looked into the year, would have been second-half-weighted. We talked about a number of approximately $700 million of business that we had planned on being there that is no longer there. Thinking about it a little bit first-half-weighted is still the right way to have it, Tim.

Timothy Arcuri (Managing Director)

Okay, Doug. Thanks.

Doug Bettinger (EVP and CFO)

Thanks, Tim.

Operator (participant)

The next question is from Harlan Sur with JPMorgan. Please go ahead.

Harlan Sur (Executive Director and Equity Research)

Yeah, good afternoon. Thanks for taking my question. Maybe to follow up on Tim's question. On the reciprocal tariffs that were levied on many countries, including Malaysia and Taiwan, obviously, there is a 90-day reprieve through early July. Let's assume that somehow this does not get resolved or you still have some residual tariffs even post-resolution.

Does the Lam team have enough manufacturing capability in the U.S. to service your leading-edge customers that are going to be aggressively building out plants here in the U.S.? I know before your manufacturing consolidation initiative, you did have manufacturing in Oregon and in California, but not sure how that footprint has changed as you brought on your Malaysia factory.

Tim Archer (President and CEO)

Yeah. I would go back to what, it's a good question. I'd go back to Doug's comment about our long-standing strategy of putting our capabilities close to our customers.

You referred to this as, as we see customers expanding aggressively in the U.S., obviously, that will occur over a period of time in which we've already shown an ability to be agile within our manufacturing and supply chain, like I mentioned, in response to COVID, where we moved things to regions where we could meet our customers' needs more effectively. I think that if we continue to see more investment in the U.S., we still have operations, significant manufacturing capabilities and footprint in the U.S. Obviously, as each region grows, we reassess what local manufacturing we need to support that capability.

Doug Bettinger (EVP and CFO)

Harlan, Doug, I'd just add we can't instantaneously change things, but given enough lead time, once you know what the rules are, you can adjust certain things with a period of time. Just think about that.

It might take a little bit of time depending on what shows up, but we have an ability to be flexible.

Harlan Sur (Executive Director and Equity Research)

Great. Thank you for that. Good to see the very strong performance in the gross margins. I assume near-term you have spares and subsystems inventories that were there before tariffs were put in place. Just wondering if there are some basic materials that you or your subsystem partners sourced from China, which could potentially be a cost headwind for the team, maybe beyond the June quarter, either on spare parts or subsystem side of the business that could impact product costs if the tariff headwinds remain?

Doug Bettinger (EVP and CFO)

Listen, Harlan, I do not want to get into everything. What do you have where in which country? We have got a global supply chain footprint. We have got a global manufacturing footprint.

We have an ability to respond to different things depending on what the rules are and how they change. I guess I'd just leave it at that.

Harlan Sur (Executive Director and Equity Research)

Okay. Thanks, Tim. Thanks, Doug.

Doug Bettinger (EVP and CFO)

Thanks, Harlan.

Operator (participant)

The next question is from Stacy Rasgon with Bernstein Research. Please go ahead.

Stacy Rasgon (Managing Director and Senior Analyst)

Hi guys. Thanks for taking my questions. First, it does sound to me like you're, based on your comments, that you still expect China revenues to be in mix to be down in the second half versus the first half. I guess can you just confirm that that is correct? If that is true, does that have any implications for the sustainability of gross margins at these levels given that China's business has tended to have higher gross margins? How do we think about the gross margin sustainability into the back half at these levels given those dynamics?

Doug Bettinger (EVP and CFO)

Yeah, Stacy, I'm not going to give details in the next quarter by quarter. I still would tell you what we said last quarter was we expect the China concentration year-over-year to be down. That's still absolutely what we expect. Quarter by quarter, things might bounce around a little bit. I'm not going to give you specific details on the quarter by quarter month. You're right. Gross margin will go up and down depending on customer mix, product mix, overall revenue levels. It's a very complicated calculus when you look at all the things that move it around. There will be variability there.

Stacy Rasgon (Managing Director and Senior Analyst)

I guess so then should I not be thinking about gross margin sustainable at these levels into the back half then? Are you talking about variability around the current level or what?

Doug Bettinger (EVP and CFO)

Yeah, there will be variability around the current level, Stacey. It won't go up every quarter. It'll bounce around a little bit.

Stacy Rasgon (Managing Director and Senior Analyst)

Okay. I mean, should I be thinking about it going down? Just to be direct?

Doug Bettinger (EVP and CFO)

Yeah. Variability means it'll go up sometimes. It'll go down sometimes.

Stacy Rasgon (Managing Director and Senior Analyst)

Okay. Okay. So my follow-up is very quickly. I think last quarter you said you thought services at CSBG revenues would probably be flat year-over-year in the calendar year. Is that still your expectation?

Doug Bettinger (EVP and CFO)

Yeah, flat is just how I would describe it. Reliant will have some headwinds offset by the tailwinds that the upgrade part of the business has, Stacey. Yeah.

Stacy Rasgon (Managing Director and Senior Analyst)

Got it. That's helpful. Thank you.

Doug Bettinger (EVP and CFO)

Yep.

Operator (participant)

The next question is from Krish Sankar with TD Cowen. Please go ahead.

Krish Sankar (Managing Director)

Yeah, I had two questions. One is just to double-check on this overseas manufacturing.

Doug, can you meet all of your non-U.S. customer demand from your non-U.S. manufacturing sites like Malaysia and Taiwan?

Doug Bettinger (EVP and CFO)

Stacey, I'm not—sorry, Krish. I'm not going to get into the exact details, right? We don't build every single tool at every single factory. With enough lead time, we can adjust depending on what is where. Like I said earlier on the call, depending on what the rules end up being, we can move things around as necessary. Not instantaneously, though.

Krish Sankar (Managing Director)

Got it. Got it. Another question on China. Do I understand many of your Chinese customers are probably not—don't have a much long tenure. I'm curious, what is the visibility into China? Because when you look at the last three years, it seemed like China surprised to the upside for WFE and demand.

Do you think a similar scenario could play out this year, or the calculus is different this time around?

Doug Bettinger (EVP and CFO)

I don't know that it's really all that different. Every customer, Krish, whether they're new or they've been around for decades, communicates plans on what they intend to do, where they intend to go. They all have roadmaps. They all tell you what they want to do. It's no different in a region like China or Korea or Taiwan, frankly.

Krish Sankar (Managing Director)

Got it. Got it. Thanks, Doug.

Doug Bettinger (EVP and CFO)

Okay, Krish.

Operator (participant)

The next question is from Srini Pajjuri with Raymond James. Please go ahead.

Srini Pajjuri (Managing Director)

Thank you. Question on the foundry logic. I know you get a lot of questions on NAND. It's up 60% sequentially, and I think you're guiding for growth again. First, we all know that advanced logic spending is coming back here.

If you could maybe parse it out, to what extent is it just the spending coming back versus you talked about GAA being a driver and backside power being a driver. Also, you talked about share gains in the past. If you could kind of help us understand what's driving that sequential strength and continued strength into June quarter.

Tim Archer (President and CEO)

Yeah. No, we obviously are like talking about the foundry logic story because you just highlighted a couple of really big drivers for us. We talked to them about it as billion-dollar-plus technology inflections. You left out a couple, though. Of course, we talk about Gate-All-Around nodes and how we're really putting a lot of new tools in to support that transition.

Backside power obviously plays well for an etch and deposition company where you're looking at more metalization interconnect layers going onto the backside and those being thicker and generally requiring more tooling. What you left out was the advanced packaging and the important role that it's playing and the role that Lam has in really a very significant leadership position in steps like TSV etch, copper plating, many of the dielectric deposition films that are required for advanced packaging. That is an area where from both a served market as % of total WFE spending, we've kind of reset the mark for us relative to foundry logic. Advanced packaging is big.

The one that's still small but coming is progress we're making on Dry EUV resist processing, which, when you look out and you think about continued shrinking on the foundry logic roadmap and the challenges with lithography, we think it has a big role to play. We are making progress there both on the DRAM side, which we previously announced at our Investor Day, but also making progress with advanced customers on the foundry logic side as well. It is just a lot of technology opportunity for a company like Lam.

Srini Pajjuri (Managing Director)

Yeah, that's helpful. Thanks, Tim. At a high level, Tim, I know you guided for mid-single-digit WFE growth, and you're kind of maintaining that. If I look at your first quarter results and also your second quarter outlook, you're growing north of 20%.

Is this the level of outperformance that you expect for, I guess, for the rest of the year? I mean, how should we think about if WFE grows 5%? And how should we kind of think about your level of outperformance expectation going forward?

Tim Archer (President and CEO)

Yeah, I don't think we're ready to quantify that number specifically. But we have talked about outperformance of WFE overall. Obviously, the mix and where the spending is occurring, how much of that spending is on those advanced technologies where Lam's served market has stepped up, and we've got new tools going in, that comes into play as well. Overall, I think I finished my prepared remarks with a comment about being highly confident in our ability to outgrow, and I think that's where we'll probably leave it.

Srini Pajjuri (Managing Director)

Thanks, Tim.

Timothy Arcuri (Managing Director)

Thanks, Srini.

Operator (participant)

The next question is from Atif Malik with Citi. Please go ahead.

Atif Malik (Analyst)

Hi. Thank you for taking my questions. The first question is on WFE. I understand you guys are maintaining the $100 billion range as it's still early and there's no meaningful change in customer plans. One of your North American customers is going through some major restructuring, and we get asked from investors if you guys have baked in kind of a net-neutral spending scenario for the logic customers in an event that customer tends to abandon the foundry plans or change its direction.

Doug Bettinger (EVP and CFO)

Atif, I guess what I would say, and I won't talk about any one specific customer. I mean, generally speaking, when you guys hear about something, we've known about it well in advance of whatever you're hearing, right? Because they got to tell us what they're doing. If we're going to have people there, we're going to have spare parts there to do installation and whatnot.

Yet, to the best of our ability, we've contemplated everything we see in the totality of the market.

Atif Malik (Analyst)

Totally understand. Doug, I have a follow-up for you. In your prepared remarks, I think you mentioned that your outlook for June quarter, you do not see any pull-ins from future quarter. I'm just curious, is that common based on the fact that the lead time is super long for your tools, or your customer kind of pipeline kind of has not changed much from what you were seeing 90 days ago? If you could expand on what is that common based on?

Doug Bettinger (EVP and CFO)

Atif, it's based on plans that we've known these customers have had in place well in advance of even 90 days ago, right?

If I think back to late last year, the outlook that we had for the current quarter that we just guided has not changed. Frankly, Atif, the whole year hasn't changed. Now, I don't want you to communicate or I don't want to communicate, "Hey, could something change?" Of course, anything can change, but we're not seeing anything change in the environment. We're staying very diligent on contemplating, "Okay, tariffs are out there. Might that have a macro impact? Might the economy get softer?" Of course, we're aware of those things. Could that negatively impact things at some point? It could. We're not seeing anything, no. I wanted to be very specific about saying that to you guys so you understand. Nothing's changing that we can see.

Atif Malik (Analyst)

Thank you.

Doug Bettinger (EVP and CFO)

Yep. Thanks, Atif.

Operator (participant)

The next question is from Vivek Arya with Bank of America. Please go ahead.

Vivek Arya (Managing Director and Senior Analyst)

Thanks for taking my question. For the first one, if all China restrictions are already captured in your March results and June guide, why can't your second-half sales be at or above first-half levels? I guess my real question is, what non-restricted customer or end market could drop in the second half versus the first half?

Doug Bettinger (EVP and CFO)

Vivek, it's just the totality of the market, right? Nothing grows every single quarter. When we look at everything that we see going on relative to customers' plans and timing of things, it's a little bit first-half weighted. It's not one customer or even one or two customers. It's just how the plans of our customers are laying out in total.

Tim Archer (President and CEO)

Yeah. We've talked about it in the past.

I mean, some of these projects are quite lumpy, and there are periods of large shipments, and then we spend a lot of time installing, and the customer ramps those tools, and the next phase of the expansion comes in. I think that is especially true when you talk about upgrades that are occurring in some of these fabs where they may not all be occurring over a very short period of time. They will be spread out, and they might be lumpy in particular quarters.

Vivek Arya (Managing Director and Senior Analyst)

I guess what I am trying to ask is, is this second half, right, is that impacted in any way from China restrictions? Because, I mean, you should not be shipping to any restricted customers already. What they do in the second half should not matter. Is it just conservatism about the non-restricted customers or lumpiness in the backup?

I'm just trying to understand how second half could look like.

Doug Bettinger (EVP and CFO)

Vivek, you're overly focused on China. What we did describe is, "Hey, if you go back to early December, there were some customers we were shipping to last year that all of a sudden became restricted. The plans those customers had were second-half weighted." That kind of went away from what we're looking at. If not for that, right, we were describing a second half that's different in profile than what we see right now. I don't know if we're confusing you or if I'm confusing you with that, Vivek.

Vivek Arya (Managing Director and Senior Analyst)

No, not at all. I just wanted to clarify. For the second one, on the gross margin upside, how much of a benefit, Doug, could you get from just the CSBG being down in terms of mix?

Kind of that being a headwind versus the benefit from perhaps shipping more from Malaysia. Is there a point at which CSBG starts to grow and that becomes a headwind to gross margin? I guess back to the, can gross margin sort of sustain at these levels? What are the positives or negatives? Is it a 50% line of sight for you right now?

Doug Bettinger (EVP and CFO)

Listen, CSBG moving around really does not do a whole lot relative to the road building and gross margin right now. That is not kind of when I go through the reconciliation, anything I am seeing. Frankly, here is an interesting observation I had as I was prepping for earnings. That might be interesting for you guys to think about too.

If you go back to late 2022, and that was kind of the last time we're at these revenue levels, gross margin was 45%-46%. In our 48%-49%, at that period of time, the overall geographic mix was fairly similar to what we're seeing today. If you think about it, over that timeframe, what's changed? What's changed is our close-to-customer strategy, right? That's uplifted gross margin. Frankly, if you normalize for everything, I don't know, 200 basis points, maybe even a little bit more, it's come from what we've done with the company, frankly. I think Tim and I feel really good about that. That's the strategy we executed. It's benefiting customers too because we're closer, we can turn things more quickly, and frankly, we can do it more affordably.

That's the big reason over the last several years that gross margin has performed the way it has. That's the most important thing to be thinking about from my point of view.

Vivek Arya (Managing Director and Senior Analyst)

Thank you.

Doug Bettinger (EVP and CFO)

Yep. Thank you.

Operator (participant)

The next question is from Blayne Curtis with Jefferies. Please go ahead.

Blayne Curtis (Managing Director)

Hey, guys. Thanks for taking my question. I actually wanted to ask you, I know I probably already know the answer. You said things hadn't really changed since the tariffs. I'm just kind of curious your conversation with customers. I mean, there's some sense people think, "Hey, they'll pull in ahead of tariffs." The other sense is demand destruction, and maybe they'll rethink their capacity for the second half. Can we walk through what your conversation with them? I know you said overall nothing changed, but I'm just kind of curious how customers are thinking about this.

Tim Archer (President and CEO)

Sure.

I'll take a shot at it. Obviously, as I mentioned in my comments, we've been having a lot of conversations with customers to check in for changes. I think over the timeframe, though, in which we've been operating, which is essentially kind of two months or less than two months with this discussion around tariffs, customers really haven't thought about really what they would be looking for for the demand changes. Those are going to occur over a longer period of time. These projects are multi-year investments. They've thought through them. In many cases, they're technology investments to ensure that they have the right products. We spent a lot of time on February Investor Day talking about the debate around NAND bits and the need.

I think we were trying to make the case at that point of independent of end demand, you need a higher quality, more capable bit to compete for the types of applications that are needed in AI. I think you say the same thing on foundry logic. You see the same thing for the investments being made in advanced packaging. Maybe there's a little bit of a disconnect between a true end demand discussion and a technology positioning. A fair bit of the momentum that we're talking about for our business is really coming from engaging customers at the leading edge, where I think strategically they feel they do not have as much of a choice but to continue to invest in those areas to make sure they're as competitive as they can be. I mean, that's a broad statement.

It may vary customer by customer, but it's how we are engaged with our customers to make sure that however this plays out, they are competitive in their markets, and Lam is positioned with the tools that we've been investing for years to place in those fabs to help them.

Blayne Curtis (Managing Director)

Thanks for that. For a second, I just want to ask Doug, in terms of the guidance on the gross margin, is there any impact from tariffs? It's a little bit confusing. There's a minimum tariff. I know we have the 90-day reprieve, but I'm just kind of curious if you've factored in anything.

Doug Bettinger (EVP and CFO)

Yeah, Blayne, there absolutely is an impact, but it's contemplated based on everything we know and everything we understand, it's contemplated in that guidance of 49.5%. I don't want to communicate there's not an impact. There is absolutely an impact.

Blayne Curtis (Managing Director)

Okay.

Is there any way to quantify it, or you don't want to go there?

Doug Bettinger (EVP and CFO)

I'm not going to go there.

Blayne Curtis (Managing Director)

Okay. Appreciate it. Thank you.

Doug Bettinger (EVP and CFO)

Yep. You're welcome.

Operator (participant)

The next question is from Mehdi Hosseini with SIG. Please go ahead.

Mehdi Hosseini (Senior Equity Research Analyst)

Yes. Thanks for taking my question. Two follow-ups. Is there any way we could think about WFE in terms of a strategic investment versus technology upgrade, which could also be a strategic versus maintenance, and then separately highlighting wafer capacity addition? I'm asking you this question because if you think about all the questions that have been asked, put to you over the past half an hour, it either has to do with China or sensitivity of the $100 billion WFE to macro picture. I'm trying to understand how we could better think about the downside risk, which could be mostly related to wafer capacity add.

Any color would be great. I have a follow-up.

Tim Archer (President and CEO)

Sure, Mehdi. I think I acknowledge what you're saying. Most of the questions are coming in this area. If you look at where I focused most of my prepared remarks, it is on Lam's long-term outperformance and even outperformance in this year. That is simply because what really matters from our company perspective in both the short-term and long-term is product alignment to key technology roadmaps of our customers in the industry, how we enable that, how we get those products out. We are only two months removed from our Investor Day where we described an opportunity to significantly outperform the industry in terms of served market expansion as deposition and etch intensity grows, and also to gain share because we have a unique opportunity to increase our served market faster in some of the key markets like foundry logic.

When we look at this year, and I think both Doug and I said, we're pleased with the execution of the company. I think a lot of it, of course, is around the financial performance, but even more so, it's around the seeds we're planting for future outperformance in the latest R&D fabs, the latest strategic investments. I think that's ultimately what is more important to Lam's future regardless of where WFE happens to be in any given year. I like your question, and it's what we tried to address with our scripted remarks.

Mehdi Hosseini (Senior Equity Research Analyst)

Sure. Thank you. A follow-up for Doug.

If I just take the midpoint of the June quarter guide, it seems to me that the operating drop-through margin of almost 90% is reflecting all the investment of the past couple of years, and now there is limited increasing, limited incremental increase in operating margin, and this is how you're going to scale incremental increase in revenue. Is that the right way to think about sustainability of the margin?

Doug Bettinger (EVP and CFO)

I guess what I'd point out is that we're growing R&D. We're growing R&D because we see these amazingly unique opportunities for us to continue to outperform, right? The intensity of etch and deposition is growing. We're putting our foot on the gas a little bit relative to growing R&D because we see an opportunity to continue to expand the addressable market as well as gain share.

Absolutely not apologizing for this because, as I pointed out, this is an all-time record level of operating margin for this company. I think Tim and I feel extraordinarily good about what we're delivering right now, and we want to keep doing that. We are investing to make that happen.

Mehdi Hosseini (Senior Equity Research Analyst)

Yeah. That captures the incremental drop-through that you're capturing here.

Doug Bettinger (EVP and CFO)

It's part of it, yes.

Mehdi Hosseini (Senior Equity Research Analyst)

Yeah. Okay. Thank you.

Doug Bettinger (EVP and CFO)

Thanks, Mehdi.

Operator (participant)

The next question is from Joe Moore with Morgan Stanley. Please go ahead.

Joe Moore (Research Analyst)

Yeah. Thank you. I wonder if I could ask a little bit more on CSBG kind of flat for the year. You said Reliant is a headwind. Can you just give us a sense for the rank order of the subsegments within CSBG? How big is Reliant now?

Is there also a headwind on the service and spares from some of the restrictions in China?

Doug Bettinger (EVP and CFO)

Yeah, of course. There are those customers that all of a sudden became restricted. We can no longer provide service and spares. That factors into this too. I mean, what you have going on is we described the point of view that China's down as a % of total year-over-year. That's the Reliant statement, right? A lot of the tools going in China are Reliant. We have this amazing upgrade business right now that's showing up, especially in NAND, right? Not just NAND, but it's quite strong in NAND. When you think about those two things kind of offsetting each other, overall utilization year-over-year is stronger. That's beneficial for spares and service. There's a lot of moving pieces in here.

Spares continues to be the biggest individual component of CSBG, and then upgrades are growing a bunch this year, and Reliant is down.

Tim Archer (President and CEO)

Yeah. The only thing I would add is, again, just like for many years, we were viewed as strong in NAND, and we've certainly made investments to broaden our portfolio quite successfully in foundry logic and DRAM. In the services side as well, we've talked a lot about Reliant. We've talked a lot about upgrades, but you're starting to hear us talk a lot more about Intelligent Services, equipment intelligence, cobots, the types of capabilities that our customers are going to need, especially as they think about expanding their global manufacturing presence, where there might not be as many people who are skilled at bringing up and ramping an advanced manufacturing fab.

We think things like cobots, equipment intelligence, the use of AI to make sure our engineers are equipped to troubleshoot and repair those tools faster. Those are things that are going to allow us to then perhaps grow our services business to be even a larger portion of that total CSBG. That is a real focus for us.

Joe Moore (Research Analyst)

That is helpful. Thank you. Within Reliant, that used to be kind of a refurbished tools business, and then for a while, everything was so tight that there were no refurbished tools, so it was all new tools. Is there anything changing in that business? How much of that is kind of new tools, and are you seeing the refurbishment kind of come back into the picture there on Reliant?

Doug Bettinger (EVP and CFO)

No, it is still all new tools. There is really not any refurbishment in the industry today. Not really. That is right.

Joe Moore (Research Analyst)

That's helpful. There's very little.

Tim Archer (President and CEO)

I mean, this is the, we refer a lot more to specialty technologies as well, which sometimes is the use of these tools for really new applications in those more mature fabs.

Joe Moore (Research Analyst)

Appreciate it. Thank you.

Doug Bettinger (EVP and CFO)

Thanks, Joe.

Operator (participant)

The next question is from Tom O'Malley with Barclays. Please go ahead.

Tom O'Malley (Director and Equity Research Analyst)

Hey, guys. Thanks for taking my question. I had a broader one. I think you guys said at the end, I'll say that if you look at the upgrades of existing equipment, you thought it was about a $40 billion WFE opportunity. Obviously, if you look at the NAND industry, the backdrop here is that you may have some impacts to consumer spend, etc.

When you look at that handoff, how long do you think that you can continue to grow on the NAND front before you start to get some greenfield kick-in or some new equipment kick-in versus the replacements? Any context around that would be super helpful.

Tim Archer (President and CEO)

Oh boy. That is a little bit of a difficult question. I thought you were going in the direction of how long will it take us to get through that $40 billion of upgrades, which at the end of the day, we did not say all of the, yeah, we gave a range. I think we said it could be anywhere from a few years to more than that.

I think, again, some of these things are in-market dependent, and we've talked in the past about the importance of getting the NAND technology up to a point where it can play a significant role in the AI data center and some of the enterprise SSD. That's one of the areas where there is more demand, it seems, and more investment. I think that it's a little too early for us to say, like I say, we're two months beyond that view of $40 billion, and we think it still plays out over the next three, four, five years, over that period of time. I think that we're moving. I think the most important for Lam is it's not just upgrades, but as we talked, it's also a lot of the new tools that are needed to enable those higher layer counts.

That really, I think, means we see both upgrades, but also really SAM expansion and share gain opportunities as a result of those technology investments.

Tom O'Malley (Director and Equity Research Analyst)

Maybe just a tangent off of that question is maybe as demand declines, you'll see increases to capacity coming offline, so more underutilization. In your conversations with customers, is that a linear relationship with how much capacity is taken offline and the desire to do more upgrades, a.k.a. if you see more underutilization from your customers, do you think that they will be more inclined to do more upgrades, or is the amount of upgrades that you're expecting kind of not going to change dependent on utilization?

Tim Archer (President and CEO)

We've said that in the past, and I think in most instances, it has been true.

Obviously, in that when customers have the tools offline, that is the most ideal time before they start those back up to perform the upgrades. Obviously, the last NAND down cycle was so severe that I think we saw the tools stay offline longer than we might have expected. I do believe that generally, those things kind of act kind of countercyclical to each other. When you see utilization fall, the next up cycle will usually come up at a different technology node, which means upgrades will have occurred, and Lam will have captured some of that revenue.

Doug Bettinger (EVP and CFO)

Thanks, Tom. Operator, we're going to take one more questioner.

Operator (participant)

That question will come from Timm Schulze-Melander with Redburn Atlantic. Please go ahead.

Timm Schulze-Melander (Equity Research Analyst)

Yeah. Hi. Thank you so much for taking my questions. Maybe the first one just on CSBG. You've talked about upgrades up, Reliant down.

Maybe you could just give us a little bit of color on the spares, just kind of how that was tracking sequentially, and any color you have on the utilization rates of your fleet, and then have a quick follow-up.

Doug Bettinger (EVP and CFO)

Listen, spares are doing well, right? I mean, Tim, our company grew last year, so the incremental opportunity to sell more spares is up. Utilization is trending favorably, so that drives spares to be doing reasonably well, Tim.

Timm Schulze-Melander (Equity Research Analyst)

Okay. That's great. Maybe just on the NAND upgrade opportunity, just as you look out maybe over a longer term, maybe one or two years, can you just maybe kind of break that up for us? Just kind of how does that split between upgrade sales and OE sales? Is it pretty equal, or is it skewed one way or the other over the next couple of years? Thank you.

Tim Archer (President and CEO)

Yeah.

I think that as time progresses, I think you'll see it become more balanced. I mean, as we said, it's a combination of upgrades to the existing tools that are already there to be able to accomplish higher layer counts. Immediately, you need to also add additional tools to provide the types of technologies that are needed to deliver higher layer counts. Already, it's a mix, but I think as you move forward, and I think one of the previous questions is eventually customers might even start developing new sites as they get better line of sight to stronger demand in the future, then new equipment sales would kick in as well. It's already a mix, and I think it will continue to be a mix kind of for the next several years while we work through that $40 billion upgrade opportunity.

Timm Schulze-Melander (Equity Research Analyst)

Got it. Very helpful. Thank you.

Okay. Thanks, Tim. Operator, with that, we're going to complete the call. Thank you, everybody, for joining us today, and I'm sure we'll see a lot of you guys during the remainder of the quarter.

Operator (participant)

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.