Good day, and welcome to the Lam Research's March Quarter Earnings Conference Call. At this time, I would like to turn the conference over to Tina Correia, Corporate Vice President of Investor Relations. Please go ahead..

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 review our financial results for the March 2020 quarter and our outlook for the June 2020 quarter. The press release detailing our financial results was distributed a little after 1:00 o'clock PM Pacific Time this afternoon.

The release can also be found on the Investor Relations section of the Company's website. along with the presentation slides that accompany today's call. Today's presentation and Q&A includes 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 today's earnings press release.

This call is scheduled to last until 3 o'clock PM Pacific Time. A replay of this call will be made available later this afternoon on our website. With that, I will hand the call over to Tim..

Great. Thank you, Tina, and welcome everyone. I hope you and your families are doing well in these very challenging times. Against the evolving backdrop of the COVID-19 pandemic, Lam delivered solid financial results in the March quarter. I want to start by discussing how we are managing through the current environment.

The impact from the globally-spreading virus began to materialize in our manufacturing and supply chain operations in the latter part of the March quarter as shelter-in-place orders went into effect across many regions.

We've responded effectively to these disruptions and while near-term predictability remains more difficult than usual, I am pleased to say that our essential manufacturing facilities and labs are operating, allowing us to focus on critical customer deliverables.

I'm very grateful to our Lam employees and partners around the world, who with tremendous commitment and dedication, have risen to meet extraordinary challenges. Our focus at this time is concentrated in three key areas. First, our top priority remains the health and safety of our employees, our partners and their families.

From the start, we have actively sought the best available guidance to formulate our response plans and we are complying with all public health directives in the locations in which we operate. All employees that can execute their roles remotely are doing so.

And through our expansion of our IT infrastructure capabilities, we have maintained a productive remote work cadence.

To protect our employees that are working on-site at Lam locations, we have implemented rigorous safety practices, including on-site temperature monitoring, mandatory use of personal protective equipment and strict social distancing protocols.

Second, we are executing our business continuity plans throughout our manufacturing and supply chain network.

Our capabilities are still limited compared to normal operation, but as the pandemic has impacted different parts of the world at different times and to different degrees, we and our supply chain partners are successfully leveraging our global footprint to support our customers' most critical priorities.

Past investments we have made to complement US production capability with operations in Korea and Taiwan have proven valuable as both of those countries have reported earlier stabilization of local COVID-19 conditions.

Similarly, we have worked closely with our suppliers on their challenges in specific regions and we are beginning to see signs of improving material availability.

Third, we are focused on increasing the capability and expertise of our regional field teams to meet our customers' ongoing installed base needs, including installation of newly-shipped systems.

We anticipate the cross-region travel will be discouraged for at least the near future and therefore we are working closely with customers to significantly enhance remote support capabilities using advanced data collection and information sharing technologies.

Overall, I am extremely pleased with how our teams have executed to mitigate the impact of this global pandemic on our employees, our customers and our business. I also recognize that we are very fortunate in this difficult time to be able to give back to our employees and the communities that have helped us build our strong company.

In early April, we announced the creation of a $25 million relief fund to provide direct and immediate assistance to employees and others around us most impacted by the COVID-19 pandemic. I'm happy to say that in only three weeks, more than half of our committed relief funds have already been deployed to help people affected by this crisis.

I'll now transition to our results and the broader industry environment. In the March quarter, we delivered revenue of $2.5 billion and earnings per share of $3.98. Both results were below our original guidance, which we withdrew late in the quarter as we saw production and supply constraints emerge due to shelter-in-place orders.

Customer demand in the quarter was unchanged from our original view. We believe that our revenue in the near term will be determined primarily by the capacity of our global manufacturing and supply chain network as social distancing restrictions are expected to continue for the next several months in locations in which we and our suppliers operate.

While we are currently seeing improvements in both our own operations and those of our suppliers, risks and uncertainties related to the COVID-19 crisis remain. Consequently, we will not be providing our usual financial guidance for the June quarter. Doug and I will however provide our best assessment of the environment in our comments and Q&A.

From our perspective, customer demand for equipment continues to remain very strong in the first half of 2020.

We believe that WFE spending is largely being driven by customers investing in strategic initiatives, including both foundry and memory technology transitions that will be critical to both capability and competitiveness when global markets eventually emerge from the effects of the pandemic. The equipment industry is currently supply constrained.

We exited the March quarter with record backlog and would expect to fulfill this unmet demand over the coming months. Looking beyond the near-term impact, we remain strong believers in the underlying fundamentals and resiliency of the semiconductor industry.

Semiconductors have become so embedded into nearly every industry, so we expect broad portfolio semiconductor equipment companies such as Lam to see offsetting areas of strength and weakness to help support results.

This was our experience through the trough of the recent industry cycle where we saw increased foundry and logic spending offset memory weakness. Despite a 40% decline in memory spending in calendar year 2019, our revenues held up well compared to prior cycles.

As we assess the potential future impact of COVID-19 on our business, recent customer commentary points to cloud and enterprise strength as an offset at least in part to the weakness that may be seen in more consumer-oriented end markets like smartphones and auto.

The need for equipment and capacity to support work from home initiatives is causing cloud service providers to increase CapEx, creating the potential for a surge in server demand. Third-party estimates suggest that cloud capacity would need to increase 10-fold to service the peak workloads seen as shelter-in-place rules went into effect.

Although these heightened workloads are likely a short-term phenomenon, this event will underscore the need for companies to invest more in infrastructure and business continuity capabilities as the daily economy and our dependence on technology continues to expand over time.

The PC and server markets account for nearly half of DRAM and NAND bit demand on average.

And when you also consider that memory customers under-invested in capacity additions in 2019 causing the industry to exit the year with supply growth well below long-term demand, we believe there is good reason to be confident in the healthy fundamentals of the memory market, near-term uncertainty notwithstanding.

Longer term, our focus is on executing the strategy we outlined at our Investor Day event in March. Our growing installed base business serves as a strong and stable foundation for Company performance. And as we committed, we have started disclosing our Customer Support Business Group or CSBG revenue this quarter.

Doug will cover this in more detail, but I wanted to highlight that in the March quarter, our installed base revenues grew faster than installed base unit growth, consistent with our objective to increase revenue capture per tool with additional value added service offerings.

Within CSBG, we also continue to see strong activity in our Reliant business, which grew for the 7th consecutive quarter and reached yet another record level. At this point, we see our CSBG business poised for another growth year in calendar 2020. From a share gain perspective, we are executing well on both penetrations and defenses so far this year.

In etch, we've seen wins across all segments, DRAM, NAND, and foundry and logic. At our Investor Day event, we launched our innovative new Sense.i etch platform targeted at both widening our lead in critical applications and strengthening our competitiveness in the semi-critical space.

COVID-19 related manufacturing and supply chain disruptions have set our schedule backed by a month or two from our original plan, but customer pull for Sense.i has strengthened since launch.

Sense.i was designed to deliver advanced equipment intelligence, data analysis and self-maintenance capabilities to minimize required on-site human intervention with the system.

Customers have a heightened awareness of the value these advanced capabilities can deliver and we expect they will look to accelerate their adoption of smart fab technologies. Sense-i is well positioned to deliver both the technology and data collection capabilities our customers need to be successful.

In deposition, we're focused on served available market expansion opportunities that we believe can be accessed by accelerating conversions from older process technologies to our highly-productive enhanced atomic layer deposition or ALD solution set.

We continued to execute on these opportunities in the March quarter with additional ALD metallization wins for advanced logic nodes and new dielectric gap fill penetrations in 3D NAND. In both cases, we displaced older process technologies from our competitors with a more extendable Lam solution.

Overall, we are confident in the strength of Lam's position in the market and our opportunities for growth when the current crisis subsides. So to wrap up, the Company is executing well during a very difficult time.

Our global teams are working tirelessly to mitigate operational impacts from COVID-19, and while near-term visibility is low, we believe that long-term secular demand for semiconductors will continue to drive sustainable WFE growth across cycles. Thank you all again for joining, and for your support. I'll now turn it over to Doug..

Great. Thank you, Tim. Good afternoon everyone and thank you for joining us today in what I know is a challenging time for all of us. I hope all of you and your families are safe and healthy. As you're aware, given the uncertainties with business disruptions around the world related to COVID-19, we withdrew our March guidance on March 17.

Despite the operational challenges, we delivered solid results in the March quarter. Our revenues for the quarter came in at $2.5 billion, down $80 million from the December quarter. The decrease was entirely due to production interruptions. Customer demand remained strong through the quarter.

I'd point out that we're exiting the March quarter with the strong level of deferred revenue at $726 million. This was partly due to shipments that occurred at the end of the quarter that had backordered materials.

From an earnings per share perspective, the March quarter came in at $3.98, which was driven by strong gross margin performance, focused expense management as well as a favorable tax rate. From a system segment perspective, as expected, memory investments increased in the March quarter.

The combined memory segment increased to 56% of system revenues, rising from the December quarter at 52%. We saw increases in NAND spending with investments focused on 64, 96 and initial 128-layer devices. DRAM spending continues to be focused on node transitions primarily on conversions to 1y and 1z.

NAND was the majority of memory investments at 40% of systems revenue, with DRAM coming in at 16%. Foundry revenue strength continued with customer investments there focused on 7 and 5-nanometer. As a percent of system revenue, foundry represented 31% of systems revenue as compared to 36% in the December quarter.

December quarter was the all-time high systems revenue level for our foundry business. March was the second highest. The logic and other segment was fairly flat in both dollar and percent concentration quarter-to-quarter, coming in at 13% of system revenue. Logic spending is driven by 10 nanometer image sensors and other specialty markets.

The China region continues to invest and came in at 32% of total revenues for the March quarter. The majority of the China revenue again came from domestic Chinese customers. Also as Tim noted, our Customer Support Business Group revenue continued to grow in the March quarter. This is the first quarter we're disclosing the specific revenue amount.

You've likely seen the tables in our earnings release. The installed base business came in at $856 million, which is an increase of approximately 3.5% from the same quarter a year ago. Gross margin for the March quarter was 46.3%. The strength in the March quarter gross margin is related to customer and product mix.

Gross margin was somewhat negatively impacted from lower-than-expected output as well as increased spending in manufacturing and the supply chain. And just a reminder, our actual gross margins are a function of several factors such as business volume, product mix and customer concentration and you should expect to see variability quarter-to-quarter.

Operating expenses for the March quarter were $486 million, which was essentially flat with the December quarter. The March quarter has normal seasonal increases as it always does at the beginning of the calendar year. We managed other variable expenses down during the quarter as we address the COVID-19 impacts on our operations.

We maintained our focus in critical business projects for our customers with two-thirds of our operating expense focused on research and development. I also want to highlight for you that the benefits and costs of our deferred compensation program are no longer mismatched in our non-GAAP results.

As I've discussed in the past, we hedged this plan to mitigate the exposure to the income statement with the up - excuse me, with the OpEx offset to this historically showing up in other income and expense.

You can see the impacts of the market fluctuations related to deferred compensation program in our GAAP reconciliation tables in the earnings release. These hedging offsets remain mismatched in our GAAP results. Operating income in the March quarter was $673 million and operating margin was 26.9%. Our non-GAAP tax rate this quarter was 8.3%.

This rate was lower than expected due to incremental deductions from equity compensation related to exercises during the quarter. We will have fluctuations in the tax rate from quarter-to-quarter and we expect our rate for calendar year 2020 to be in the low teens level.

Other income and expense was up in the March quarter, coming in at approximately $30 million in expense. The main components of other income and expense line are interest income from our cash and investment balance, offset by interest expense related to our outstanding debt.

We did have a small amount of incremental interest expense from the drawdown on our revolving credit facility that occurred late in the quarter. You should expect that other income and expense will fluctuate quarter-to-quarter based on several market related items like interest rates and foreign exchange. Let me now move on to capital return.

For the March quarter, $164 million of cash was deployed in dividends and $146 million in share repurchase. As we discussed at our Investor Day, we have a long-term plan for capital to return of 75% to 100% of free cash flow. We have approximately $1.8 million - excuse me $1.8 billion remaining on our $5 billion board authorized buyback plan.

In the current environment, we will be slowing our buyback activity. It is likely, we won't buy any stock back in the June quarter. Diluted earnings per share again came in at $3.98. We ended the March quarter with diluted shares of approximately 148 million shares, which was down from the December quarter level.

This is the 9th consecutive quarter where our diluted share count has declined. The share count includes a dilutive impact of a little more than 1 million shares from the 2041 convertible notes. And I'll remind you, the dilution schedules for the remaining 2041 convertible notes is available on our Investor Relations website for your reference.

Let me now move on to the balance sheet. Our cash and short-term investments, including restricted cash increased in the March quarter to $5.6 billion from $4.9 billion in the December quarter.

The quarter-to-quarter increase was due to strong cash flows from operations of $541 million as well as a $1.25 billion drawdown on our revolving credit facility. We also had debt maturities and redemptions of more than $600 million in the March quarter that obviously reduced the cash balance.

Our strong balance sheet and cash generation capability continue to provide robust liquidity. DSO increased to 80 days versus 72 days in the prior quarter. The increase was largely due to the timing of collections and invoiced, but not yet revenue shipments that occurred at the end of the quarter.

And I would point out on the first day of the June quarter, we collected more than $370 million. Inventory turns were 3.2 in the March quarter compared to 3.7 turns in the December quarter. Inventory was higher due to the fact that output slowed from the COVID-19 situation.

Non-cash expenses included approximately $40 million for equity compensation, $50 million for depreciation and $17 million for amortization. March quarter capital expenditures were $51 million, which was a decrease from $62 million in the December quarter.

Ending headcount as of the March quarter end was approximately 11,000 regular full-time employees, which is an increase from the December quarter of approximately 300 people, mainly to support field and factory operations.

For the June quarter, although we're not providing official guidance, I'll share some things for you to consider when thinking about our June quarter financial performance. We are seeing the following dynamics.

Capacity limitations are coming from our supply chain as well as adjustments and factory operations to maximize output considering social distancing challenges. We plan to add resources during the quarter to increase our output capability. Demand remained strong. We are output constrained.

These capacity challenges will negatively impact revenue and gross margins. If our current assessment of our output capability turns out to be correct, revenue in the June quarter should be higher than March. There is obviously uncertainty around that statement. CSBG business remains resilient.

Our priorities are the health and safety of our employees and partners as well as taking care of our customers. We will spend incrementally in these areas and we will actively control cost in other areas. Interest expense will be up from the revolver drawdown and share count is likely to be flat.

So to summarize, we see continued strength in foundry and logic going into the June quarter. We also see - excuse me, memory demand continuing to strengthen. The long-term outlook for our business continues to be solid and consistent with what you heard from us at our Investor Day in early March. That concludes my prepared remarks.

Operator, Tim and I would now like to open up the call for questions..

Thank you. [Operator Instructions] Our first question comes from C.J. Muse of Evercore. Please go ahead..

Yes, good afternoon and thank you for taking the question and glad to hear you're all healthy. First question, I guess, revolves around demand side, obviously, you talked about supply constraints.

How are you, I guess, prioritizing customer demand and have you seen any demand disruption given the uncertainty to COVID? Or just too early just to see anything works out on that front?.

Yes. I guess we, C.J., we are working very, very closely with all of our customers to help prioritize shipments in the order of greatest need for the customer.

So you can imagine critical R&D programs, where there's a technology conversion, it requires a one of a kind tool, specific capacity bottlenecks that are critical to their factory output or delivery to specific customers of theirs.

And so one of the great things about Lam having built very strong customer relationships over all these years is that we really partnered with them to understand their priorities. And we do have fair flexibility within our own operations to prioritize certain tools ahead of others for a specific customer.

And so I'd say through very, very close coordination with the customers who are trying to meet their needs. It's - I guess, I would say, maybe the simple answer is, we've seen no demand disruption, no change in demand. One could say maybe that's - it's too early to see that.

But we really haven't sensed in any conversation with the customers today a change in demand. So our focus is really on how to get the tools to them that they need..

Very helpful.

As my follow-up, I guess, on the supply - supply chain side, is that more upstream in your ability to produce the tools, get parts, perhaps issues in Malaysia? Or is it more logistics of getting the tools actually to customers? And then I guess as part of that, Doug, if you could help at all, how do we think about the implications to gross margins as you obviously bring on more resources to satisfy customers' demand in this crazy world?.

I'll take the first part of that. It - I'd say some of the supply challenges, they're kind of across the board, but clearly, I think most people are quite aware of the control orders that are in place in Malaysia, which is - tends to be for many equipment companies, a large subsystem supplier.

Lam, we've - one of our strengths, both operationally and financially, has been a supply chain operation that allows us to do what we call merging transit. And so therefore, some of the subsystems never actually come to Lam facilities. They arrive directly at customer sites. If those don't arrive obviously, the system cannot ship complete.

So it's across the board. Materials coming into our facilities, which we feel are operating quite effectively right now, but also coming out of major subsystem suppliers in places, as you noted, places like Malaysia and others. So that's….

C.J, I mean I'll give you a little flavor of how we're running things in areas that are probably going to be a little bit of a drag on gross margin. And I won't quantify it specifically, but I'll give you some stuff to think about.

Basically, what's happening is, given the need to have social distancing, we're needing to space people out further away from one another in the factory environment. And obviously, that means we can generate less output per square meter, per square foot, what have you.

So essentially, what we're trying to do C.J., is moving to incremental space where we have it, take some incremental space where we have it and bring incremental people into that other space.

Obviously, in an environment like that, you're doing everything you can to take care of the customer and generate revenue for that matter, but you're going to be less efficient in terms of your ability to be super-efficient on the gross margin line.

Other things that are going on, as I'm sure you're aware, freight and logistics is more expensive right now. It's up a decent amount in certain areas. So we're having to spend more to get materials coming into the factory as well as giving them to customers.

I'm not going to quantify it for you specifically, but the way I would want you to be thinking about it is we've been in the gross margin range over the last five, six, seven years. I think what you're going to see is, we will trend towards the lower end of where you've seen our gross margin over that time frame.

I don't think we'll go below the range we've been in, but I think we will be towards the lower end, given the dynamic I described..

Very helpful. Thank you..

Thanks, C.J..

We'll take our next question from John Pitzer of Credit Suisse. Please go ahead..

Yes, good afternoon guys. Thanks for letting me ask the questions. Appreciate all the color you have given the uncertainty.

Doug, I'm just kind of curious, can you quantify what the supply impact was to revenue in the March quarter? And is it going to be larger in the June quarter despite June revenue being up? And do you expect to kind of get most of these behind you by the end of the June quarter, so as you go into the second half of the calendar year, supply is less of an issue?.

Yes. John, I'll take you back. Our original guide was $2.8 billion, plus/minus $200 million. And we kind of realized the last couple of weeks of the quarter and our limited ability, we might end up ending below the low end of that range, and we did. So that was the impact. We came into the quarter expecting to be able to deliver $2.8 billion.

And I'll remind you that as we began last quarter, we basically said, demand is actually stronger than that, but it was the beginning of things beginning to break out in Wuhan, and we knew there was going to be some supply chain impact. So that's kind of what went on there, John.

Now obviously, we're getting much better at operating in this environment. We brought the factory back online. We got people back to work. We're hiring people. We're moving into incremental space. So I think we're going to be able to mitigate it better than when it just kind of fell in our lap.

And based on how we believe we're going to be able to operate and get more output and execute our business continuity plans, I think revenue will be higher in June. Demand continues to be much stronger than that. This is a supply situation..

And Doug, by the second half, do you think you will have mitigated all these supply issues or not? Second half of the calendar year?.

I hope so. Yes. I mean, we're executing our business continuity plans. It's not going to take us longer than a quarter to get those in place. I hope, and Tim can maybe comment on this as well..

Yes. No, I think as I commented, we're continuously seeing improvements. Most important thing that we prioritized as well as I believe our supply chain did is, first, to establish a stable source of supply and production capability at a level that clearly is less than 100%. But stability being the key.

We have customers, as I mentioned, with critical projects, critical production bottlenecks. And so what we wanted to ensure that we were avoiding beyond, of course, in any way endangering employees or our supply chain partners.

But beyond that was endangering somehow taking a step back and moving too fast and then having to come back and not actually build the supply at that stable level. So I think day by day, we're able to inch that stable production level up. And I think as we exit this quarter, we'll be at a higher production output capability for sure.

And as Doug said, probably working off this stronger customer demand over the next several months..

And maybe just one other comment as I was thinking while Tim talked, John. Obviously, we have a plan to execute to a number, and we know what that number is. The reason we decided not to formally provide guidance to a number is, we're just concerned things could change. This is a very dynamic and fluid situation.

That's really why we decided not to give you a hard number right now..

That's helpful. And then for my follow-up, Tim, you guys did a good job in the March quarter, pulling some levers on OpEx and bringing OpEx down. But clearly, you still have a lot of investments on your plates for future growth.

So I'm just kind of curious on how you're going to manage OpEx through this environment? Should we think about it growing in line with revenue? Or are there more levers on SG&A that you can pull, but keep R&D growth continuing? How should we think about that dynamic?.

Yes, well, clearly, we will continue to prioritize R&D. We laid out some pretty aggressive plans, where we see really great opportunities for the Company at our Investor Day related to new system introductions, continued progress. I mentioned a couple of them today, new etch platform, new ALD progress.

We will continue to fund those to the fullest that we can. We are seeing, of course, some very nice OpEx offsets. We're not traveling. And so there are elements of the expense lines that are coming down quite dramatically. So we're going to be prudent. We're not going to spend where we don't have to.

A lot of discretionary spending around meetings and events and other things that kind of normally take the course of our normal business, those will not be occurring and we'll be reallocating that money to R&D and other things to ensure we come out of this stronger than we went in..

Thanks, John..

Thank you..

Your next question comes from Timothy Arcuri of UBS. Please go ahead..

Hi, thanks. Doug, I just want to follow-on to that question and see if maybe you could quantify the constraint in June. And obviously, we know what the constraint was in March.

But if you could meet all the demand in June, can you give us a sense of maybe where revenue would be? Would it be sort of in excess of $3 billion, maybe $3.1 billion or $3.2 billion [ph]?.

Tim, I know you were going to come with a question like that. I'm not going to give you a number, but demand is very strong. And I'll simply remind you, what we originally guided in March was $300 million higher than what we delivered at the end of the quarter. Demand didn't change.

And I specifically mentioned the $700 plus million in deferred revenue because that's stuff that shipped, but it was an incomplete system. It wasn't a fully functional system. Obviously, that stuff is going to revenue. So there is decent upside to demand. It's just - we're in a supply situation right now that we're working our way through..

Okay, got it. And then just on the suspension of the repo. The stock is down a little bit based on the balance sheet. I get that maybe the topics of share repo right now is not that great. And maybe that's the answer, but you are typically pretty supportive of the stock, and opportunistic around the stock.

So can you maybe comment as to why you could retail now and maybe it is just the opposite, but if you could give us some comments there. Thanks..

Yes Tim, a little bit of is OpEx [ph], a little bit of it's just being prudent, right? I think every CFO in the world today is focused on liquidity and making sure you have the utmost liquidity. And I'm highly confident in the cash generation capability of the Company.

But it just felt like the prudent thing to do to just kind of take a pause on the buyback, get focused on conserving cash. Hook our head up to see where end demand ends up. I do think at the end of the day, there will be some demand disruption. We're not seeing anything from customers yet.

But when I look at the consumer-facing semiconductor companies, their business is beginning to be impacted. So I just - I want to get a little more time behind us, Tim, and assess what might actually this look like at the end of the day. And just trying to be prudent with the cash right now is all..

Sure. Okay, awesome. Thanks..

We'll take our next question from Harlan Sur of J.P. Morgan. Please go ahead..

Good afternoon and great job on the business execution just given the supply chain challenges. You guys characterized the demand environment to your system is remaining [ph] strong. Any way you can somewhat qualitatively or quantitatively describe this demand. You did say that you started this quarter with record backlog.

Did you systems bookings actually grow sequentially in the March quarter?.

You want to take that, Tim?.

Yes. I mean, they did. I mean, it's - our comment about - I mean, I guess the best way to look at it is we gave on our January call, our outlook for the year. Now we're not reiterating the year because we recognize, as Doug just said. There's a fair bit of uncertainty about how things may play out with the macroeconomic environment later.

But that outlook for the year that we spoke of and the strong demand at the January call, that's the demand we're talking about being unchanged, which means through this first half of the year, the continued strength in foundry and logic, the strengthening demand in memory because recall memory under-invested, we exited the year really in a situation where we felt very good about the need to add in the demand space and also eventually in the DRAM space.

And we haven't seen those plans change and that demand remains kind of at the same level it was in January. And which means that we have a full order book, and we're - really, our challenge is how to get these tools to customers. And I would say 100% of my conversation with customers right now are about how to get the tools they need to them.

And I think that will continue for some period of time. And as Doug said, we will reassess after that period to see how demand is being affected..

And just maybe one incremental comment for me, Harlan. I mean, our customers are investing in very long lead time items. I wouldn't have expected anything to change. We're just monitoring and trying to be cautious about, obviously anything that is a consumer-facing business at the end of the day isn't going to be as strong.

We haven't seen anything move through from our customers yet, but we're just - we're trying to be aware of what's going on the environment, I think, is how I'm thinking about how Tim is thinking funny [ph]..

Great. Thanks for the insights there.

And then on the innovation of design win pipeline, just given the short-term place here in the Bay Area, wondering if this has slowed either internal projects or collaborative engagement with customers at our research facility in Fremont or some of your other labs globally? Or are the labs considered an essential business process under state or federal guidelines and they are being staffed by the Lam team?.

Yes, they are and they are staffed. And as I mentioned in my comments, they're operational. But just as Doug spoke to, Lam is being - our top priority is safety of our employees and others working in our labs.

And so we've implemented very strict social distancing protocols, which does limit the overall number of people who can be in the lab at any given time. And so I would say we're not operating the labs clearly at our full capacity for this event. But we are operating. We're able to prioritize critical R&D programs for customers.

I did mention in my comments some of these projects, they probably have taken, say, a one-month delay or maybe a two-month delay because of not only the couple of weeks we're shutdown [indiscernible], but then the restart here through the local orders and social distancing.

So - but we remain focused on them, and I would say that in the long-term sense of R&D projects and how they play out over time, this is not a - it's not a major disruption to their schedules. Now, your other comment is just on how we're engaged with customers. Clearly, travel is more difficult.

But one thing Lam is focused on over the years is building strength in our regions. And so we do have a lot of process engineers and hardware engineers that are deployed out into the region and engaged with customers. And in most cases, our customers have continued to operate in a way that's not dramatically changed from before.

And so we're able to engage with them on-site on those critical projects..

All right. Thank you..

And we'll take our next question from Krish Sankar of Cowen and Company. Please go ahead..

Yes, hi. Thanks for taking my question and congrats on the good execution in these tough times. First question for Doug. Doug, China sales were very strong. Is there anything you can segment it between how much of it was memory versus foundry? How much of it is domestic versus multinational? Then I have a follow-up for Tim..

Yes. I'll give you a little color, Krish. Yes, 32% in the China region, a little bit over half of that local Chinese customers. Maybe like 60% might be a reasonable way to think about it local versus the global multinationals. We've got a broad-based set of customers in China, NAND, DRAM, foundry. So it isn't one or the other, Krish.

It's broad across all of that spectrum. This is the way you should think about it..

Got it. That's helpful. And then, Tim, just a big picture question, given that you have been in this industry for a while, and Lam has a broad suite of product. If and when demand slows down, where do you think you'd see [indiscernible] in the productivity products like single-wafer clean, would it be within upgrades of the customer business group.

I'm just kind of curious where you think or would it all happen at the same time and it really doesn't matter nitpicking it?.

Yes. No, it's a great question. I mean, in fact, I think if we look just to last year as maybe an example, and I'm not saying who knows, I mean, the future could be different than the past.

But when we saw things slow down, say, in the memory market, and I talked about the fact that memory spend was down almost 40% last year, we actually see, in those cases, customers turn to how can they get and extract the most out of the installed base they have.

So we tend to see things like advanced services and upgrades actually increase during those periods. So that's the strength of our installed base business and why we're so focused on it is because we believe that it is actually one of the areas that can help you weather worse market condition. Obviously, capacity additions would fall away.

But again a lot of what we're looking at are technology conversions, ongoing strategic investments from customers, a lot of the investments that we've talked about in China and other places, is very long-term and strategic.

And so I don't - I think those would probably be the last places to see R&D, technology, strategic investments, those would be the least affected..

Thanks, Tim..

Thank, Krish..

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

Thank you for taking my question. I understand visibility is limited. But when I hear you saying that capacity situation is slowly improving and your customers' CapEx plans are not really changing, I'm curious, what is your best guess on where WFE can land this year? Even qualitative comments would be very useful.

Are there certain areas where you think it could be more resilient than others? Just any way to say, directionally where it can be this year would be extremely useful to us?.

Yes, Vivek. We were debating how much to say about this. I mean, we came into the year expecting the beginning of memory recovery, continued strength in foundry and logic, all of that is still how I see things, how we see things, I think. But I think it would be remiss to just come in and tell you, it's exactly the same as it was a quarter ago.

Something is going to get softer, although we're not seeing it yet, honestly, from what we're hearing from customers. To quantify it, I don't know, kind of hard. We said mid-high-50s, 90 days ago, probably low mid-50s might not be an unreasonable way to think about it right now.

I do think we're going to see softness at some point and things that are facing the consumer. I don't know. Tim, anything else you'd….

Yes. No, I think that's a reasonable way to look at it. The other is, and maybe I thought maybe where you're going with this is, at some point, we must resolve the supply issues, otherwise, they start to affect the actual WFE that can be executed in the year.

We can't pile everything up on to customers in the back half of the year as a makeup because that's not possible from our own manufacturing, shipping and also the installation and the customers' digestion of that equipment.

So I don't think we're quite at that point yet, but we would be where at some point to a certain, if it couldn't be executed simply because of the supply constraints.

But if things continue to progress, and as Doug said, we see the June revenue higher and us working through the backlog that I spoke to, then I don't know that we see huge issues with the constraints on WFE..

All right.

And on the services side, thanks for providing that disclosure, do you think that proportion kind of remains for June and the following quarters, so kind of one-third from the services group? Or is there something about the current macro environment? That impacts that ratio one way or another?.

That's a hard one, Vivek. I mean, what I see happening over a multi-year time frame is the equipment stuff has a little bit more volatility to it and sometimes can accelerate in which case - I mean, installed base business is just kind of a slow and steady grower in some ways along with the installed base. So a lot of stability there.

I think as total revenues tick up, probably equipment will pick up a little bit more quickly, at least over the next couple of quarters, I hope. And so the percent would go down, but it will ebb and flow. I mean, historically, how I've described it as 25% to 30%. And obviously, if you do the math on what we just saw, it's more than 30%..

But I think that the reason why we - I mean, obviously, we finally felt it was very important to disclose more details on this business is because the new system shipments and CSBG in any particular quarter are not so directly linked. That's why we like the business so much.

And so I would start to recommend people not think about it as the percentage of our business as much as it is a business that we've said we would expect to grow every year. And it has multiple components that give it resiliency from the spares and upgrades and advanced services and Reliant systems.

And so, I think in and of itself, maybe it does depend on the growth of the installed base, but that comes a little bit, there's a lagging time indicator there as tools have to ship. They have to go out of warranty, then they start to consume parts and upgrades and such.

So I think we're disclosing it, so you can start to think about it as a business that's growing kind of on its own..

Thanks, Vivek..

Thank you. Good luck..

We'll take our next question from Atif Malik of Citi. Please go ahead..

Hi, thank you for taking my questions. First one, have your lead times stretched in the current environment? And if yes, by how much? And as a follow-up, Doug, you talked about $8 billion to $9 billion domestic China spending in January.

And given the strength in March, are those expectations looking up for the full year in terms of demand? Thank you..

I'll let Tim take the lead time question, first..

Yes, I guess - let me take it on. They clearly have stretched. I mean, that's what we're talking about relative to supply challenges and our own challenges. So lead times have stretched out. I don't actually want to quantify it for you on this call, though.

I mean it's something - again, it's competitive reasons, but you can imagine, it's - lead times have stretched out, and that's why we're in conversation with the customers about how to get them their high priority tools closer to the original lead times that we would have originally provided..

Yes and Atif, what we've said about local China WFE is that in 2019, it was a little bit above $6 billion or above $6 million, and we expected an incremental $2 million to $3 million. Still kind of how I think about it, obviously. I don't know that a whole lot has changed in that regard..

Thank you..

We'll take our next question is from Sidney Ho of Deutsche Bank. Please go ahead..

Thanks for taking my question. If you compare to the midpoint of the guidance there, there's a $300 million shortfall. What end market or geography were most impacted? It looks like China still have pretty decent growth, but Taiwan was down quite a bit, which is different than what the big foundry guys over there saying. Any color there would be great.

Thanks..

I don't know that there's any unique geographic distribution between what wasn't able to be supplied versus what we did ship. Nothing is in my head, Sidney, to give you an answer that said [indiscernible]..

Yes. I think it's - the way I would think about it and maybe back to even the previous question a little bit is that each of our - we have a lot of different products. And the makeup of the supply chain for those products is not the same. And even the manufacturing facilities for those products are not all the same.

And so I would say it was less about any particular customer not receiving a big chunk of tools as much as certain tools the lead time having pushed out a little bit and those tools kind of slipping out of the quarter. So certain tool types were impacted, I would say, more so than us as a result of where their supply chain was heavily concentrated..

Okay, that's helpful. My follow-up is, if your June quarter revenue does come in the way you expect, which you think is higher, I guess they're still two more quarters to go for the year.

But what are your thoughts on bit growth for DRAM and NAND and maybe leading edge foundry capacity additions, I guess, based on how you think that the second half of the year is going to be?.

Hard to answer, Sidney. I mean, first thing I'd tell you is our view of the long-term good demand really is unchanged. Now having said that, obviously, a lot of bits are consumed in the mobile space, and that's gotten probably softer given the more direct exposure to the consumer.

That's offset, though, by what you see going on in the hyperscale space, which is also [indiscernible], right? The work from home, whatnot and the stuff. Tim had in his script about the likely uptick there. Those two are going to offset.

I don't know that I'm ready to quantify it for you just because there's so many moving pieces unless Tim wants to quantify?.

No, we debated it, but no. I think the challenges we said, we do recognize there will be areas of strength and weakness. And as Doug has said many times, I think we need to see how, obviously, later in the year, macro is really affecting consumer spending in other segments of the market.

We wouldn't sit here today and say that this kind of economic disruption would have no effect. And so just hard to quantify. I think we just have some comfort in knowing that we feel like we came out of - we come into this year and ended this economic disruption without having been a situation of like a lot of spending last year.

So if there's one overlining, it's that there was underinvestment last year, so we enter in a pretty good space from that perspective?.

Yes. The trajectory of growth was declining as we exited last year, and that continues into the first half of this year and the second half will depend on the investments that occur. So maybe something to think about Sidney..

All right. Thank you very much..

We will take our next question from Joe Quatrochi of Wells Fargo. Please go ahead..

Yes, thanks for taking the question.

Going back to your prior WFE growth expectations, could you provide us any color on just how we should think about - what was it baked into that for capacity expansion versus technology transitions?.

Yes, Joe, we didn't - I didn't break it down specifically. What we said was continued strength in foundry and logic. That is what we're seeing. And then some level of a recovery in NAND read that to be - last year in memory, the spending was pretty much all about just node conversions, almost no wafer capacity.

And that created a situation where the rate of supply growth continued to decline through the year such that our view was it was below where demand growth was going to be in both NAND and DRAM, right? We had inventory adjusting pricing getting better, all that kind of stuff.

I think the real question that's on all of our minds is, okay, what is demand going to do this year. I'm not going to wait into that one quite yet. So that's what we saw. We saw NAND beginning to tick up a little bit, probably adding a few wafers. DRAM, no.

DRAM really was a continued trajectory that we saw in '19 through most of '20, maybe a little bit of an uptick. And I think we're just going to wait and see how this plays out to assess what's going to happen there. But that's what we were seeing 90 days ago. That's what we described 90 days ago..

Okay. And then on the strength in China, I mean, it sounds like it could have been even stronger in the March quarter.

Is that fair? And then I guess if that's true, do you expect that to grow further in the June quarter, just given that some of that could have slipped into this quarter?.

I don't know that it would have grown as a percent, Joe. I mean, the supply issue was across every geography, quite honestly. So if you think in percentage terms, I don't know that would have been all that different. Everything had challenges around supply. And then just to frame what we see going on in local China, again, we expected - not expected.

Last year was a little above $6 billion, and we saw an incremental $2 billion to $3 billion in China, and that's still pretty much what we see from local China in terms of WFE - that was a statement of WFE..

Okay. Thank you..

Operator, we'll do one more question..

Okay. Your final question will come from Quinn Bolton of Needham & Company. Please go ahead..

Thanks, guys for squeezing my in. First question, just trying to reconcile the lower revenue for you guys out of Taiwan in foundry when TSMC put up a record CapEx number in the March quarter.

Is that just sort of a timing when TSMC recognizes CapEx? Or do you have any thoughts on that? And then the second question, the social distancing that you put in place in the manufacturing operations, does that slow your cycle times for an extended period of time and reduce your sort of quarterly revenue capacity? Or do you think the plan that you put in place to try and expand footprints can get your back to where your manufacturing output was, say, before you went into the COVID downturn? Thanks..

Okay, great. Let me take both of those. The - relative to Taiwan and your questions there, I think there's no story other than just timing. I mean as Doug said, we had systems impacted in that first quarter. So I don't think there's anything there. From the capacity perspective and social distancing, that was part of what Doug was speaking to.

Clearly, within our factories, once we've implemented strict social distancing, we can have fewer people in the same area, I mean space. And so to that extent, our cycle time does stretch out. Some tasks take longer than they would have otherwise and so our overall capacity out of an existing space does decline from what would have been pre-COVID.

Now, we're finding ways to reroute our lines and actually gain some of that capability back. But at the same time, as Doug also mentioned, we have access to additional space, and we're moving and expanding into some other areas to recapture that capacity. That takes a little bit of time, but we clearly will execute those plans.

And as we see - if we see demand continuing to hold up as we would expect and we need that capacity, we will continue to grow our output..

Thank you..

Yes. Thanks, Quinn..

Okay, operator. I think that will conclude our call today for Lam Research. So thank you all for joining..

This concludes today's call. We thank you for your participation. You may all disconnect your lines, and have a wonderful day, everyone. Take care..