Good day and welcome to the Lam Research Corporation’s December Quarter 2021 Earnings Conference Call. At this time, I would like to turn the conference over to Tina Correia, Corporate Vice President, Corporate Finance and Investor Relations. Please go ahead, ma’am..

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 will review our financial results for the December 2021 quarter and our outlook for the March 2022 quarter. The press release detailing our financial results was distributed a little after 1 o’clock p.m. Pacific Time this afternoon.

The release can also be found on the Investor Relations section of the company’s website along with the presentation slides that accompany today’s call. Today’s presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings.

Please see accompanying slides in the presentation for additional information. Today’s discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation.

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

Thank you, Tina and Happy New Year to all that are joining us today. Calendar 2021 was another year in which companies and our communities had to respond to significant challenges on many fronts. Lam’s operations and results were impacted by the effects of COVID-19, labor shortages, freight and logistics cost escalation and supply chain constraints.

But I am proud and thankful for how Lam employees responded at every turn with commitment and agility to support our customers and business. As the digital transformation of both the global economy and our everyday activities accelerated throughout the year, demand for wafer fabrication equipment continued to strengthen.

Lam delivered record revenues and record earnings per share in calendar year 2021. Embedded in these results is record revenue in every area of our business, including NAND, DRAM and foundry logic and within every sub-segment of our customer support business.

Even in a year with relatively higher foundry logic spend versus memory, we gained market share in both etch and deposition. As we closed out 2021 and enter the new year, demand for Lam products has never been higher. Yet as we have discussed in prior quarters, the global supply chain remains severely stressed at these unprecedented output levels.

In the December quarter, unexpected shipment delays primarily for components from a critical supplier surfaced in the last two weeks of the quarter leaving us with insufficient time for full recovery despite the diligent efforts of our supplier and our global operations team.

The resulting shipment delays caused revenues to come in below the midpoint of our guidance range. Revenue for the tools that were impacted in December will be recognized in the March quarter.

Looking into the first weeks of 2022, we see that supply challenges have broadened with the COVID Omicron surge adding further disruption to freight and logistics operations as well as exacerbating skilled labor shortages. We also continued to encounter significant scarcity of certain components and parts, including semiconductors.

As a result, our March quarter revenue levels will be limited by the output constraints of our global supply chain. And this is reflected in our guidance. We are aggressively working on the issues with our suppliers and believe we will see progressive improvement as we move through the next few quarters.

Overall, for calendar year 2022, we expect to deliver strong across-the-board revenue growth. On the demand front, we are seeing continued momentum in wafer fabrication equipment spending. We believe that spending in calendar year 2021 ended consistent with the mid-$80 billion estimate we provided on our last call.

Strength was broad-based with NAND, DRAM and foundry logic all growing double-digits.

As we look to calendar year 2022, there are multiple themes underpinning our view for continued WFE growth, including powerful end market demand trends, rising device complexity, strong semiconductor industry operating profitability and regional government support and incentives.

In end markets, the technology landscape continues to build not only on the prevalent drivers of AI, IoT, the cloud and 5G, but also now along another vector as advances in virtual and augmented reality lay the groundwork for the metaverse over the coming decade.

Immersive gaming experiences will be a primary driver of metaverse development and adoption. And I have spoken on prior calls about how advanced processors and memory devices for gaming are favorable for WFE demand due to both leading edge performance requirements and semiconductor content growth.

Across the semiconductor industry, we see more than 20 new fabs being built and customers have already announced significant CapEx increases for the year. Consequently, we expect 2022 WFE spending to be in the $100 billion range with strong growth across all segments.

We believe that our performance in 2021 has strengthened our ability to win in the robust demand environment we see ahead. We launched innovative new etch and deposition products, gained market share at key technology inflections, and rapidly grew our installed base.

On this last point, our customer support business group continues to exceed expectations. Our chamber count grew approximately 13% in calendar year 2021 to approximately 75,000 units.

Our revenue per chamber, which we highlighted at our 2020 Investor Day as a key growth objective, increased nearly 24% year-on-year in 2021, or nearly twice the growth in chamber count. We expect calendar year 2022 to be another strong growth year for our CSBG business.

Our large and growing installed base also adds immense value through our product innovation process. The high volume of wafers running on our installed base everyday enable us to detect newly emerging challenges more quickly and accelerate our cycles of learning, both of which are critical in an era of increasing device and manufacturing complexity.

On the product front, 2021 was a year of significant milestones for Lam. To highlight just a few, our Vantex dielectric etch system became the fastest ramping new etch product in Lam history.

Built on our groundbreaking new Sense.i platform, Vantex helps customers reduce costs by enabling higher etch rates and improving fab footprint efficiency, while new process capabilities extend our technology leadership in high aspect ratio edge.

We expect continued growth in Vantex shipments in 2022, with overall revenues from this product roughly doubling year-over-year. Our VECTOR DT product for backside deposition, achieved process tool of record status at all customers for 3D NAND devices with more than 200 layers further demonstrating our leadership in 3D scaling enablement.

We achieved several important leading-edge wins with our selective etch, strip and surface treatment solutions, including applications for gate-all-around and foundry logic customer and our first selective etch win in DRAM.

As device complexity increases across logic and memory devices, the need for angstrom-level precision is driving greater adoption of Lam’s selective edge solutions compared to conventional wet etch methods.

This should enable selective etch revenues to double this year as customers adopt our innovative suite of products for current leading edge applications as well as for future device architectures.

And finally, we increased our deposition market share with wins in critical bit line and spacer applications for RC reduction and are now qualified at all leading nodes for this application.

To conclude, our product momentum and outperformance in our installed base business have put Lam in a great position to capitalize on the tremendous demand we see for wafer fabrication equipment.

Our top priority is to alleviate the near-term supply constraints that have impacted our output capacity, our delivery predictability and our financial results. With progress expected on this front over the next several months, we believe calendar year 2022 will be another outstanding period of growth for Lam. Thank you.

And now, he is Doug to cover the financial results and our outlook..

Great. Thank you, Tim. Good afternoon, everyone and thank you for joining our call today during what I know is a very busy earnings season. Calendar year 2021 was a record year for Lam Research in many respects. We closed the year with revenue at $16.5 billion, which includes record levels of revenue for both our systems as well as our CSBG businesses.

We also delivered an all-time high for earnings per share coming in at $32.46. I think it’s important to point out that we had 59% growth in earnings per share over calendar year 2020, which outpaced the growth in revenue, which was at 39%. We ended the year however on a bit of a down point.

As Tim spoke about, our revenue came in at the lower end of the guidance range due to supply chain issues that impacted us in the last two weeks of the December quarter. These delays primarily from one supplier for critical parts meant we were unable to recognize revenue for tools that we actually ship to customers, totaling more than $200 million.

You will notice this reflected in the increased level of deferred revenue on the balance sheet at the end of the December quarter of $1.46 billion. The vast majority of these parts have now shipped and the full value of the tools, will revenue in the March quarter.

While we continue to increase the output capacity of our own factories, we are seeing a broadening out of headwinds from the global supply chain, which is impacting the somewhat soft March quarter revenue and gross margin guidance.

These headwinds are partially Omicron and labor-related, partially supplier scaling-related and partially due to freight and logistics constraints.

Our expectations are that the broader supply chain issues in the industry will persist for a while and will exit the March quarter with incremental supplier shipment delays potentially causing another growth of as much as $500 million in deferred revenue.

I would just highlight that we often ship equipment to our customers on a modular basis, which accelerates deliveries and allows customers the ability to begin installation while waiting for the fully configured tool. As we get our suppliers caught up with our needs and these missing components ship, these tools will revenue in future quarters.

This is obviously a fluid situation right now. Let me now turn towards the details of our December quarter results. Revenue for the quarter came in at $4.23 billion, a slight decrease from the September quarter, but an increase of 22% from the same quarter a year ago.

From a segment perspective, Memory represented 58% of systems revenues in the December quarter, down from the prior quarter level, which was 64%.

The strength in Memory during the quarter was driven by investments in the DRAM segment, which increased both in terms of dollars as well as percent concentration at 23% of systems revenue versus 19% in the September quarter and 10% in the June quarter. The DRAM investments were primarily focused on the 1z and 1-alpha nodes.

The NAND segment was 35% of our systems revenue versus 45% in the prior quarter. We are seeing both capacity additions as well as conversions across our NAND customers, with investments in 128 through 192-layer devices. We expect we will continue to see a blend of additions and conversions as we go through calendar year 2022.

Broad demand across both leading edge and mature device nodes drove continued strength in the foundry segment, with the December quarter representing 31% of our systems revenue versus 25% in the September quarter.

Multiple customers are investing in the segment to meet end demand drivers such as AI, IoT, cloud and 5G, which is leading to significant unit growth and more silicon content in most technology devices.

We had another record quarter of system revenue dollars in the Logic and Other segment, which contributed 11% of systems revenue in the December quarter, which was consistent with the concentration in the prior quarter.

Our customers are investing to meet the demand requirements in the market for microprocessors, image sensors and heterogeneous silicon packaging technologies. Now, let’s switch to the regional composition of our total revenue. The China region came in at 26% of total revenues.

And while being the top region for December, it was down from the 30% plus levels we have seen for the last few quarters. This was an expected outcome and is related to the timing of customer investments. China domestic customers were the majority of the China regional revenue in the December quarter.

The Korea and Taiwan regions also had solid investment activity, representing 25% and 18% of revenues respectively in the December quarter. The revenue for our installed base business, CSBG, was nearly $1.5 billion, which was 29% higher than the December quarter in calendar 2020 and approximately 8% higher sequentially.

The continued strength of CSBG reflects a growing installed base of tools, customers operating at high utilization levels as well as our ability to monetize the growing installed base by offering more value-added advanced service solutions.

Each sub-segment of CSBG hit a new record in the quarter, but I want to specifically callout our Reliant product line for achieving its 12th consecutive record quarter, delivering value to a growing specialty market across numerous customers.

While the CSBG business can have quarterly fluctuations, we continue to see sustained and stable growth on an annual basis. Now, moving on to gross margin, the December quarter was 46.8%, above the midpoint of the guided range.

The increase in gross margins came from a favorable customer and product mix due to shipment timing as well as high field resource productivity due to greater customer installation activity. As we have discussed in the past, gross margins can fluctuate quarter-to-quarter due to overall business levels, along with customer and product mix.

And I would just mention, we have got incremental negative cost impacts from the supply chain constraints that we discussed earlier that are negatively impacting the March gross margin guidance. Operating expenses for December were $627 million, an increase from the prior quarter amount of $586 million.

The December quarter had higher variable compensation as we closed the calendar year as well as additional research and development investments. We have added headcount in R&D to support our growing product portfolio and we are focused on supporting our customers’ ongoing technology roadmaps.

December operating margin came in at 32% or approximately $1.4 billion. Our non-GAAP tax rate for the quarter was 11.9%, generally in line with our expectations. Looking into calendar year ‘22, we expect the ongoing tax rate to be in the low-teens level. We continue to monitor potential tax changes under consideration in the United States.

Given the uncertainty there, we have not yet reflected the impact of any changes in our financial modeling. And as we have discussed in prior calls, our tax rate may fluctuate from quarter-to-quarter. Other income and expense came in for the quarter at $19 million in income.

This amount is better than the prior quarter and resulted in income in the December quarter due to a gain in one of our venture investments that recently raised capital in a public offering.

As we have noted in last quarter’s earnings call, we did not include the estimated gain of approximately $50 million in our December quarter guidance and the amount in the results that you are seeing was reasonably close to that forecast. This gain added 26% – or excuse me $0.26 tax adjusted to earnings per share.

And I just have you note that overall OI&E is subject to market-related volatility that could cause a difference from our typical run-rate. We continue to buyback shares with our focus on capital return. And in the December quarter, we repurchased approximately $430 million worth of stock.

In addition, we paid $211 million in dividends during the quarter. For the calendar year, we allocated a total of $3.8 billion towards capital return, which was approximately 94% of free cash flow. During 2021, we reduced share count by more than 4 million shares at an average repurchase price of $593 per share.

Diluted earnings per share for the December quarter was $8.53. And the diluted share comp balance was slightly lower than the September quarter level coming in at 142 million shares, which was in line with our expectations. Let me now shift to the balance sheet.

Cash and short-term investments, including restricted cash, totaled $5.6 billion, up from the prior quarter level of $4.9 billion. We generated strong cash from operations in the December quarter of $1.4 billion, which was somewhat offset by the capital return activities that I just spoke about.

Day sales outstanding was essentially flat coming in at 73 days compared to 72 days in the September quarter. Inventory turns were down slightly from the prior quarter level coming in at 2.9x, which was pretty much as planned as we’ve grown inventory to increase the business volume.

Non-cash expenses for the December quarter included approximately $63 million for equity compensation, $62 million for depreciation and $20 million in amortization. Capital expenditures in the December quarter were flat with September coming in at $138 million.

Capital expenditures are mainly focused on expansion activities such as our silicon parts facility in Ohio and the Korea Technology Center that will be opening in the first half of 2022.

We have 16,300 regular full-time employees at the December quarter – at the end of the December quarter, which is an increase of approximately 900 people from the prior quarter. Our headcount growth was mainly in the factory and field organizations to support the growing output levels that we’re seeing.

Now let’s look at our non-GAAP guidance for the March 2022 quarter. We’re expecting revenue of $4.25 billion, plus or minus $300 million. As we’ve discussed earlier, the guidance reflects our expectation for a higher level of shipment delays in the March quarter, due to broadening out of supply chain constraints we’re seeing.

Customer demand is decently stronger than what we can currently supply. Backlog has grown for five consecutive quarters as we exited the December quarter. We’re expecting gross margin of 45%, plus or minus 1 percentage point.

Our guidance reflects a higher level of spending that we’re incurring for managing the execution of the supply chain as well as extra costs to secure critical semiconductor component parts. As we sit here today, I believe our gross margin will improve as we progress through the year.

We’re forecasting operating margins of 29.5%, plus or minus 1 percentage point. And finally, earnings per share of $7.45 plus or minus $0.75 based on a share count of approximately 141 million shares. We’re widening our ranges out a bit due to the supply chain uncertainties that we’ve discussed.

As we start calendar year 2022, we’re in the strongest investment year in the history of the semiconductor industry. It’s important to note that the demand is clearly there. We are dealing with broadening out of supply chain constraints, which we know we’re going to fix over time.

We’re laser-focused on addressing these supply challenges, and we’re confident that we will deliver improvements as we go through the year. We’re in solid market share positions. We’ve gained further traction across all market segments in 2021. And we’ve got a robust and growing installed base business.

Operator, that concludes Tim and my prepared remarks. We’d like to now open up the call for questions..

Thank you. [Operator Instructions] And we will go first to Harlan Sur of JPMorgan..

Hi, good afternoon. Thanks for taking my question. So can you guys just help us understand on the supply chain constraints? Is this more subsystems and part shortages or is it chip shortages? And I assume that you’re placing orders for both subsystems, parts and ships to the entirety of this year just given the extended lead times.

So looking at what your suppliers have committed to shipping to you this year, if all of this plays out, combined with the incremental systems capacity expansion from Malaysia, can the team meet its forward backlog and forecasted customer requirements this year or do you think that there is some likelihood that you exit this calendar year with your shipments below your customers’ demand requirements?.

So Harlan, I’ll start that and let Doug add if he wants to. As we mentioned, the December issue was primarily critical parts that you call them – I’ve called them probably subsystems, pretty large critical components that goes into our tool. But the underlying reasons for why certain suppliers are having challenges, shipping goes across the board.

We talked about broadening challenges. In some cases, it’s shortages of labor that have been driven and exacerbated by COVID-driven absenteeism. In some cases, it’s chip availability. In some cases, it has been freight and logistics. But I would say that we are working closely with these suppliers, and we have committed schedules.

We’ve said our lead times are quite extended versus normal. We have better visibility today into demand and customer schedules, I think, than we ever have. And therefore, to your point, we have placed those orders with suppliers. And I would say in both Lam’s case and our suppliers case, it’s about executing to that much higher demand plan.

Now what we’ve given you as an outlook for WFE that we do believe we can execute to. And as we said, we believe we will make progressive improvement in supply chain capacity in coming quarters. And that as we do that, you’ll see Lam output, the output of our supply chain increase and we will be meeting the customer demand at that point.

What I would also point out is that from the standpoint of our own capacity. This was a key area of focus in 2021, and we talked a lot about it. We significantly expanded our existing factories in the U.S., in Korea, in Taiwan. We ramped and started shipping from our new Malaysia facility, which ultimately will become our largest manufacturing site.

We increased our own employment both in full-time and temporary workforce. And I would say, right now, our focus is ensuring that every aspect of our supplier base has grown their capacity to match ours.

And that is something that we’re working on every day, and I do believe we will – as Doug said, we – this is a fixable problem, but it is our primary priority at this point..

And maybe the only thing I would add just so it’s crystal clear to everybody listening, the December slight miss below midpoint, really one supplier that emerged very late in the month of December. And we just didn’t have time to respond to it. So that’s one statement.

Second, what Tim just told you is there is a broadening out that we see beyond one supplier that we’re working to mitigate. And we’re doing lots of different things with lots of different suppliers to work our way through this, Harlan, but we know we’re going to fix this.

This is something that you can manage your way through, and we will manage our way through it. Demand is very strong..

And maybe just a final comment to note, obviously, on everybody’s mind is that we were fighting challenges all through 2020. I mean, it’s not as though supply chain has just become an issue.

But I would say that some of the things that have changed when we talk about the slight worsening that we’re seeing right now is also that in many cases, whether it’s Lam’s inventory or suppliers’ inventory they have been drawn down by these very high output levels to the point where our vulnerability to a miss that might only be just a few days, but at the output rate of our factories.

Those few days can actually translate into some pretty big revenue numbers, and that corresponding few days could be the same for our suppliers. So I think that what’s different right now is that we just have a little bit less room to respond to the challenges.

But I tell you, all through 2021, we are fighting these and in almost all cases, we were successful in mitigating them without them becoming misses in our financial results. But I think that – and that’s what gives us confidence that we will solve these as we go through ‘22 as well..

And I appreciate the insights. Then can you just – given the strong WFE backdrop and the potential strong growth backdrop for Lam. Can you guys just give us an update on the Malaysia manufacturing ramp? I believe that the target was to get to about $3 billion of annualized revenue output from Malaysia by the middle of this year.

Is the team still on track for that? And I’ve also heard that the team is trying to build out domestic supplier support around this facility, which is potentially a big benefit for you guys, right, especially during periods like this where having to procure materials from other geographies can probably be quite challenging.

So maybe you can also update us here on the strategy for building out the domestic support capability in Penang?.

Yes. Well, what I would say is that the ramp of the Malaysia factory is on track. And we’re quite happy with the progress we’re making there. Again, it’s ramping per schedule. Demand is somewhat outstripping the ramp rate. But coming back to your point about why we embarked on Malaysia and also expansions, as I mentioned, in Korea, Taiwan, the U.S.

and even in our factory in Europe. And that is we get the opportunity to tap into different talent pools. So I talked about labor shortages, not all COVID-related. These are just driven by serving demand in lots of parts of the industry. So by having factories in different locations, we tap into different talent pools.

And also, as you mentioned, we have the opportunity to qualify different supplier sets or even in some cases where we have global critical suppliers, they built factories in those same locations next door to us very close to our site. And they also tap into that different talent pool.

And so there is many ways in which this expansion of our global footprint, we think in the long-term, actually makes us less sensitive to disruption in any one particular region, whether it’s in freight and logistics or it’s in workforce or it’s in the supply chain. So it’s all part of our strategy.

We’re executing on it and we just need to get to that endpoint a little bit faster. Thanks, Harlan..

Thank you very much. Yes, thank you..

And so we will go to our next question from Krish Sankar of Cowen & Company..

Yes. Hi, thanks for taking my question. I had two of them. Doug and Tim, you mentioned the WFE to be $100 billion this year. But if I look at the current WFE run rate, it seems like it’s like more in the low to mid-$90 billion. So to get to $100 billion, the second half run rate has to be more like $105 billion to $110 billion.

And I understand the demand is strong, and it’s all about supply constraints today.

So if my math is right, does it mean that the WFE and the revenues have to step up in the second half? Is that kind of the implication of $100 billion WFE from where we are today? And is it fair to assume that Lam revenues had to head up – step up in the back half of this year? And then I have a follow-up..

Yes, Krish, I do think WFE is back half weighted this year. Maybe as much to do with where true demand is, but also a little bit because I believe the industry in the first half of the year is going to be somewhat supply constrained. So I think it’s going to be a second half weighted spending here, Krish..

Got it.

And then Doug, just to like quickly just follow-up on that, is that the implication that your revenue should also step up in the back half?.

Likely, yes..

Got it. Got it. Alright. Fair enough. And then my follow-up question is just quickly on China, you mentioned about domestic was pretty strong in December. It looks like the domestic China business is going to be strong this year, too.

Can you just help us understand what is driving it? There was some recent news about Tsinghua, the parent company of YMTC having some issues.

So some investors worry that’s going to cap YMTC’s CapEx or WFE this year? So I am kind of curious, what do you think is going to drive China WFE? Is this still the long tail of smaller trailing edge customers or do you expect the big guys like SMIC and YMTC to also be a big part of domestic China WFE this year? Thank you..

Yes. I think that from a China WFE perspective, we think it remains very broad demand across many different players, in fact, even some new fabs and new players that are entering the market there.

And while some of it, of course, are big players, a lot of it is our fabs that are addressing what we all know is a very tight trailing-edge technology landscape. And so I think that is a pretty big driver for WFE, and Lam participates well in that market.

And Doug mentioned our Reliant business that continues to show record after record in terms of business, and a lot of that stems from investments in places like China at the off leading-edge nodes..

Yes, the investment performance – I was just going to say, it’s a very broad set of customers was all I was going to add, Krish. A lot of whom you’ve probably not even heard of, frankly. So there is a long tail of people spending dollars in China..

Got it.

Just I mean, Tim and Doug, just want to clarify, you’re not too worried about all the China news on Tsinghua at this point?.

I’m not overly concerned. No. There is ample liquidity in China for the aspirations that they have to make the investments they are planning to make..

Thank you very much, guys. I really appreciate the info. Thank you..

You are welcome, Krish..

And we will go next to C.J. Muse of Evercore..

Yes. Good afternoon. Thank you for taking the question. I guess, first question, a derivative to the supply chain issues that you’re seeing and in higher freight costs. Curious your ability to pass along of your higher input cost to customers.

I understand there is a long tail in contracts, but would love to get a sense of how you’re seeing that play out here in 2022..

Yes. C.J., I’ll take a shot at it. I mean, first of all, I mean, we’re not going to go to the detail on conversations we may be having with customers on that point. But I guess I’d point to a couple of things.

One, it’s hard to see perhaps what we are doing, given the overwhelming cost challenges, Doug talked about, relative to the near-term projections. But longer term, Lam equipment is absolutely vital to ramping global semiconductor capacity. That’s important for every one of our customers and industry more broadly.

And we’re also – our equipment is also vital to achieving the technologies road map for the industry. So there is tremendous value in what we do for our customers in the industry, and we always fight to get paid fairly for that value delivered.

Right now, I would say that we’re focused squarely on solving these supply chain issues, having conversations with customers and suppliers about how we do that in the most efficient way. And I think as you see us work through that, you’ll see our financial results including gross margin continue to improve into the future..

Great. Very helpful. And I guess, as my follow-up, as you look at your installed base business, you talked about 24% chamber revenue growth per chamber, which is pretty impressive. Curious how we should think about growth beyond 2021? I think historically, you kind of talked about a 6% to 10% kind of anticipated revenue per chamber CAGR.

Has that changed? And should we be thinking a higher number going forward?.

Well, yes, I mean, if you project out these current growth rates, you get to a pretty big customer support business group in the future. But we – as I mentioned, exceeding expectations, the business is doing extremely well. I would say that we anticipate some mitigation in that growth rate.

I think at our Analyst Day, we kind of put out a model to say, look, our objective every year is to go in saying that we will outgrow – the revenue will outgrow the growth of the installed base, which means fundamentally, you’re moving forward the revenue capture per chamber. Right now, we’ve flowed those numbers away.

But some of it may be a little bit short-term. I mean, clearly, everyone is increasing held inventory that probably goes to our spare parts business as well. Over time, and I don’t know when that would be because I think people are going to be a little bit cautious for quite some time about supply issues as we’re talking about.

Eventually, they will draw those inventories back to probably more efficient numbers, and that would cause some mitigation in the spare parts business part of CSBG. We’ve also talked about the Reliant business and tremendous growth in upgrades and sales of tools for trailing edge.

I don’t know that, that will mitigate so much, but it’s been on a red hot pace the last year or two. And so I would expect some mitigation there. So maybe the best way to think about it is, again, our goal is always to outgrow the growth of the installed base, capturing more revenue per chamber.

And so you can model it Lam with expected Taber growth rate plus some – it’s probably best way to think about it..

And so we will move to our next question from Timothy Arcuri of UBS..

Hi. It’s actually Dana Chen on for Timothy Arcuri. I was wondering if you could touch based on – you previously talked about like the GM, gross margin headwinds from Malaysia.

Can you just help us quantify how should we think about the impact from there in the next few quarters? And is the timing for the new Malaysia manufacturing to shift from like headwind to tailwind maybe in the second half of this year? I just wanted to understand the gross margin impact over there?.

Yes. Malaysia will be a tail in the gross margin. Certainly, as we get into the second half of the year and in my scripted remarks, I basically said, as I look through the rest of calendar year ‘22, I expect gross margin will improve from the levels that we are at today. Part of that will be Malaysia.

Part of it will be the mitigation of the supply chain and part of it will be new products coming out and the positive mix factor of that. So, I will give you a few things to think about there..

Got it.

And maybe just touch base on the domestic China WFE, can you just talk about where you think 2021 that came in? And how do you think about that like into 2022 from domestic China?.

Yes. The way we have been talking about it is that it was a growth year in ‘21. We didn’t quantify how much, but it was very much in line with the expectations. We described 2020 is roughly $10 billion indigenous Chinese WFE grew last year. It’s going to grow again this year is what I would tell you..

Alright. Thank you very much..

You’re welcome..

And we will go next to Stacy Rasgon of Bernstein Research..

Hi guys. Thanks for taking my question. I had a question on your segment mix with regard to your WFE forecast for the year.

Just given where you guys do tend to focus, do you think that, that segment is a potential disadvantage with regard to your ability to grow in line with how you view the WFE market itself growing in 2022?.

Yes, Stacy, it’s a good question. I do think when I look at growth in ‘22 that you are going to see that the highest level of growth in foundry/logic. That’s just what’s going on. I think that’s pretty well understood.

And you are right in your observation, I think, inherent in your question is, historically, we been somewhat less represented there, I guess in terms of share of spend as compared to memory.

Having said that, though we have made a nice step up there in the last couple of years, we continue to – 2021 was a good share position year for us in foundry and logic. So, that’s going to benefit us. And also, when I look at ‘22 WFE, I think you are going to see nice growth in memory, and I will let Tim add on to..

Yes, Stacy, I guess I just wanted to mention, I mean we have maybe gotten that question a lot of times about how we are doing in foundry and logic and what our plans. I think we have done a nice job of, and it will play out over the next several years.

We focused on a lot of our product portfolio and product development on products that put us out in front of that technology roadmap. And just to name a couple of the products. I mean you look at what we have done in atomic layer deposition, selective etch, the low RC materials, dry EUV resist and heterogeneous 3D packaging.

All of those are quite tied to ramps in foundry/logic spending. Now the good news is, many of those also play over into our strength in memory like ALD does and selective etch will.

But again, we have been very cautious about trying to position the portfolio such that our exposure to foundry/logic ultimately is a positive for the company, and I think we are making progress and we will continue to fulfill..

Got it.

So, does that suggest you see the share gains that you saw in ‘21 in foundry and logic continuing into ‘22?.

Yes. I think the momentum is going to continue in ‘22, Stacy. Yes..

Got it. Helpful. Thank you, guys..

Thank you..

And we will go to our next question from John Pitzer of Credit Suisse..

Hi guys. Thanks for letting me ask a question like many I am juggling multiple calls. So, I apologize if it’s a little bit repetitive.

But just relative to kind of the first question and your ability to meet demand, Doug, and maybe this is a little bit longer term, but you have got a situation where the semi industry took 50 years to get to $0.5 trillion of revenue, and there is many models out there that suggest in the next 8 years, we will get another $500 billion and be $1 trillion in revenue.

What do you have to do incremental over a multiyear period to invest to make sure you have – should the support kind of that kind of demand for supply? And is that already in the backlog for what you guys are doing in Malaysia? And is it already sort of contemplated in some of the OpEx sort of targets you gave us at Analyst Day?.

Yes. Let me take a shot at it, and Doug can add. But as I kind of went – and you might not have heard this if you are jumping between calls. But our manufacturing strategy, we have been playing out for the last several years, I think, is really what gives us confidence that we can meet this demand going forward.

And that is Malaysia, as you pointed out, but also expansions across our Korea manufacturing facility. This past year, we bought out our joint venture for manufacturing in Taiwan. We expanded all of our U.S. manufacturing sites in a pretty big way. And we also grew our output from our Europe facility.

And so, I think that when you ask the question, what is it that prepares us for the industry to add another $500 billion in Lam to meet that output, it’s the ability to tap into this global supply chain, which gives us access to larger talent pools, larger supplier bases for many of our parts.

Some are very critical, but many of them are sourceable locally to those factories. And I think that’s going to help us increase not only our own capacity, which I think we are making good progress on, but also the capacity of our global supplier base.

And that’s something that I would say we are pretty far down that path, but clearly, as evidenced by the current limitations, we still have more room to go, and we will be making progress in the next coming quarters..

And then, Tim, as my follow-on, giving us visibility 90 days out, given all the logistical issues are hard enough, thinking about the entire year as you did with your WFE comment even harder.

But I am kind of curious, clearly, logic/foundry grows faster than memory this year, but we are sort of in this odd position where it kind of looks like from a cyclical perspective, the memory companies tend to be –seem to be spending at a much more constrained level than maybe their logic/foundry partners for the first time ever.

If you look at CapEx to rev ratios and growth of CapEx off the bottom, is that how you see it? I guess, importantly, if it is, what implications might that have for memory spending as we go from ‘22 into ‘23?.

Okay. Well, I mean it’s – constrained is always more in the eye of the builder for the customer perhaps. But I think you are right that we are seeing a fairly balanced in fact, maybe more balanced spending profile within the memory space, at least is our current view.

Maybe back to your original point though about visibility, our visibility at this point is much – we feel further out in terms of demand side. Our challenge is not understanding demand 6 months, 9 months, 12 months out, maybe even longer.

It really is about growing supply capability of our supply base and also our own capacity to meet that growing demand. But I think the implications are that we exit this year still perhaps with robust demand going into 2023.

It’s too early to – we are not going to give a guide at this point for 2023, but I would say is whether it’s in memory or it’s in logic/foundry, a lot of big investments planned, fabs under construction, many of those don’t take the equipment even until starting in ‘23 or maybe even beyond.

And so, I think we are going to see robust WFE for the industry for years to come at this point..

Thanks,Tim..

Thanks, John..

And we will go to our next question from Mark Lipacis of Jefferies..

Hi. Thanks for taking my questions. First question and I apologize, I am kind of new on the Lam call, so I apologize if this is elementary. But if we have the semiconductor shortages globally that are causing different vertical markets to lose tens, if not hundreds of billions of dollars in revenues.

And you guys make the equipment that actually can solve that problem.

Why aren’t Lam and your peers, the absolute number one priority customers for the semiconductors that can make the equipment that solve these challenges? It’s surreal to hear you guys talk about component shortages are preventing you from shipping product that can solve everybody’s problems. That’s the first question. I have a follow-up..

Okay. I am not sure it’s such an elementary question, it’s quite a complex one. But I – boy, I guess, I would say that we try to make that point quite clear.

And I think there has been a lot of discussion between companies like ours and the manufacturers just as there are many, many industries talking to those same suppliers about the urgent needs that they have. And so I don’t think we want to make this – we certainly did not say it’s all about chips, and that’s what’s limiting our supply.

It’s one element of some of the component shortages and subsystem shortages, but it has been several other things as well. But I do believe that as we increase both our supplier capacity and our own capacity and output goes up, then that is key to alleviating the problem.

And so maybe it becomes a virtuous cycle where more our output goes up, the easier the constraints get and therefore, our outlook goes up even faster. It’s certainly our objective to drive that and we are in close conversation with the semiconductor chip manufacturers who happen to be our customers as well about how they can help.

And I would say that in most cases, those customers are stepping in and doing everything they possibly can to help because they want the equipment that we are shipping to them..

Yes, Mark, I think the only thing I would add is, is typically, we wouldn’t be in the business of buying semiconductors, right. And that’s our suppliers or sometimes even the suppliers of our suppliers that would be procuring those chips.

And because we know that group of our customers, their suppliers really, really well, that’s why we are stepping in. Maybe that helps. And we clearly have access to those guys. So, we can make this better quicker, I think is why we are pointing this out right now..

Okay. Got it. That’s helpful. And a follow-up, if I may. I appreciate that you have – it sounds like you have very good visibility this year. What is – what kind of conversations do you have with your customers about 2023, appreciating that they may not be giving you hard orders that far out or maybe they do.

But I mean, do you have those kind of planning discussions with your customers about what 2023 might look like? Can you give us any sense of how those conversations go? That’s all I have. Thank you..

Yes, it’s a good question. I mean obviously, we have sufficient conversations for very long lead time decisions that we have to make. So, as I talk about our expansion of manufacturing facilities and hiring rates.

One of the components, it’s not a – that has a relatively long lead time is the hiring of engineers that go on site to support those new customer facilities and projects. And so I would say we are already having discussions with customers about 2023 in earnest.

But it’s a little too early to get as precise as many of you probably like in terms of what does the number for 2023 WFE looks like, and we are not going to have that conversation today. But I would say customers are giving a lot of just they want us to be ready.

We are having those same conversations with our suppliers because we need them to be ready. And so you can just believe that we are having those conversations quite frequently and quite some temp with customers today..

Thanks..

Yes. Thank you..

And we will go to our next question from Joe Moore of Morgan Stanley..

Great. Thank you. Certainly understand the gross margin pressures based on the costs that you guys are taking on to sort of deal with all these issues. But your customers are kind of dealing with some of the same stuff and are raising prices and passing that on to their customers.

If this ends up being a persistent situation where you have high freight costs and component costs and things like that, do you see gross margins kind of getting back to the level they were a couple of quarters ago?.

Yes, Joe, I do. I specifically – and you might have been jumping between calls as well. In my prepared remarks, I specifically said I believe gross margin will improve for us as the year progresses. Meaning the March quarter, I believe is a low point for the gross margin in the year.

A lot because of these freight logistics and other things in the supply chain that we just need to go fix it, and that’s what we are doing..

Okay. That makes sense.

I mean I guess, just – you are fixing it because those costs are going away, or are you able to actually charge your customers expedites and things like that to deal with all of it?.

I think our objective is probably to do a little bit of both. As you mentioned, some of the issues may become persistent and built into the cost structure of the history, in which case those ultimately have to be accounted for in the pricing for the industry.

And yes, obviously, we are very sensitive to the fact that customers in certain parts of our market are cost sensitive, and therefore, we will try to eliminate as many of the costs first.

So, we are not taking the easy way out of just trying to pass the costs on trying to first eliminate them and then those that are persistent will be dealt with on a case-by-case basis..

Great. Thank you very much..

Thanks Joe..

And we will go on to our next question from Patrick Ho of Stifel..

Thank you very much. Most of my questions have been answered. But maybe for Doug, with the supply chain issues that are going on right now, I know it’s difficult to give a granular answer.

But how do you look at the allocations between what’s needed for new shipments and new tools versus your installed base business, which also has a lot of those type of components as well. And obviously, a lot of the customers are at high utilization.

What’s the balance there that you are trying to do at least in the near-term to keep your customers as happy as possible on both ends?.

Yes, I am going to actually give this one to Tim, Patrick..

Well, I think that’s because what I am going to tell you is that the most valuable tool for the customer is the one that’s in this fab in running. And so – of course, it doesn’t – we prioritize today keeping the installed base operating and outputting.

And to one of the earlier questions, if we don’t do that, then problem just gets worse because chips aren’t being produced. So, we are having to make that call at certain points, but what I can tell you is that priority is the installed base and keeping tools in manufacturing and output in a way for us and have chips for the industry..

But Patrick, I can either or we are mitigating both at the same time, and it’s not exactly the same supply group that is creating a spare part and new equipment. So, it’s maybe as much an overlap as you might say..

Not yet. Not every constraint right now exists on a part that would be a spare. Certain subsystems and our tools are not field replaceable spares units. So, there is some overlap but not entirely, as Doug said..

Great. Thank you very much..

Thanks Patrick..

Operator, we have time for one more question, please..

And we will go to that last question from Atif Malik of Citi..

Hi. Thank you for taking my questions. Tim, you mentioned the gate all around selective edge revenues to double this year.

I am curious about the size of this opportunity this year?.

Yes. To be more specific, what I actually said was – yes. What I actually said was that the selective etch revenue would double. The selective ventures actually used in more applications than just get all around, and I don’t think we are going to quantify the exact size of the business yet..

Got it.

And then is it possible for you to kind of quantify your exposure of sales to advanced packaging, heterogenic computing just in the ballpark?.

Yes. We – I don’t know that we have actually quantified it. But what I would say is that we provide a number of the very critical steps there. Obviously, some of the processes that we have talked about in the past are electroplating.

Our etching processes are both critical to some of the high aspect ratio of processes like through-silicon via or other parts of the process to go into 3D packaging. So, it’s a priority market for us, and we have been doing quite well for a number of years in that space..

Thank you..

Thanks Atif..

And I will now turn the call back to Tina Correia for any additional or closing comments..

Thank you, operator, and thank you all for joining our call today. We appreciate your support..

And so this concludes today’s call. We thank you for your participation and you may now disconnect..