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

Thank you, operator, 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 2022 quarter and our outlook for the March 2023 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time this afternoon.

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

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

This call is scheduled to last until 3:00 p.m. Pacific Time. A replay of this call will be made available later this afternoon on our website. 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. Lam ended 2022 on a strong note. We posted record revenues and earnings per share for both the December quarter and the calendar year.

Systems revenue growth in our Foundry Logic segment exceeded foundry logic wafer fabrication equipment growth, demonstrating our continued progress launching new tools and winning applications in that space. In our installed base business, our CSBG revenues expanded faster than the growth in installed base units.

We also generated more than $3.5 billion in cash from operations and returned over 100% of free cash flow to stockholders in the form of dividends and share buybacks. Overall, Lam executed well in 2022. We delivered solid results in an environment of acute supply chain constraints and strong inflationary pressures.

Still, there are elements of our performance where we recognize the opportunity for additional focus, and with the pressures of the COVID pandemic and the global chip shortage of abating, our attention this year is on the actions needed to hit our long-term growth and profitability objectives we laid out in March 2020.

Beginning early in the COVID pandemic, Lam and others throughout the supply chain quickly ramped investments in infrastructure and resources to meet unprecedented demand driven by remote work trends and the accelerated digitization of the global economy.

As seen in our results today, these investments have enabled Lam to achieve revenues of greater than $5 billion per quarter, approximately 70% higher than what we saw in the last up-cycle.

As we look forward into 2023, however, we see a substantially weaker demand environment and the corresponding need to make prudent changes to our near-term operations and priorities. Customers across all segments are exercising caution, especially those in the memory markets.

Inventory levels in both NAND and DRAM remain very high, and customers are not only reducing new capacity additions, but also lowering fab utilization levels to bring excess inventory into balance as quickly as possible. In addition, the U.S.

government’s new restrictions on sales of equipment, parts and services for specific technologies and customers in China are further impacting equipment demand in a declining market. In 2022, WFE spending ended the year in the mid-$90 billion range, slightly higher than our prior view due to easing supply chain constraints.

As we indicated in our last earnings call, we expect calendar year 2023 WFE to be in the mid-$70 billion range. Given the decreased business levels expected this year, we have made the difficult decision to reduce our overall workforce by approximately 1,300 employees by the end of the March quarter, about 7% of our global employee base.

While the reductions are broad-based across the company, we have taken special care to preserve, and in some cases, increase our investments in the critical R&D efforts which I believe are key to Lam’s long-term growth and competitiveness.

Despite reductions in overall company spending, we expect R&D as a percentage of operating expenses in 2023 to increase compared to 2022.

We will also be taking specific actions to transform our business processes and enterprise systems to ensure that with stronger WFE spending returns, the company is well-positioned to scale quickly and efficiently across our global infrastructure.

These actions will contribute 100 basis points of improvement to our gross margin from March quarter levels as we exit calendar year 2023 and we expect the operating margin benefit to be slightly higher than that.

Over the past few years, we have been executing on a set of strategies that we believe strengthen our ability to capitalize on the robust secular demand trends we see ahead in our business.

In just the past 2 years, we have opened a state-of-the-art engineering center in India, brought online a new technology development center in Korea, and ramped our new manufacturing operation in Malaysia.

These strategic investments place critical Lam capabilities closer to customers and ecosystem partners, a benefit for stronger collaborations, greater scalability and increased resilience, all of which would be of greater importance as we see more than 50 new fabs being built over the next few years globally.

They also provide wider access to talent critical to supporting Lam’s growth longer term. We have also been drawing on learnings from our rapidly growing installed base to support our customers’ manufacturing roadmaps. Our installed base of approximately 84,000 chambers is more than 30% larger than in the prior down cycle.

A solid installed base business not only provides a platform for stable revenue growth long-term, but also delivers data and learnings that are key to an efficient product innovation process. At this scale, there is a tremendous opportunity to extract value for our customers and for Lam.

The data we generate from our installed base helps drive fab productivity improvements and the capabilities of our equipment intelligence products are helping us migrate from standard service offerings, like engineer onsite labor, to more comprehensive results based contracts and predictive smart solutions.

The number of chambers [Technical Difficulty] in 2022 with another strong growth year expected in 2023. We have been strategically focused on technology inflections, notably in foundry logic devices, with the goal of broadening Lam’s positioning in a market segment where we have been under-indexed. In 2022, we continued to make progress.

We have doubled our conductor Etch share node to node at a leading Foundry Logic customer through the success of our Kiyo product, which uses equipment intelligence to deliver best-in-class uniformity and improved yield. In the selective Etch business, our recently released Argos, Prevos and Selis tools, are gaining increasing traction.

Our Argos product is in roughly 20 applications and a leading foundry logic customer, and in adjacent selective applications at another customer, our Prevos and Selis tools, our production tool of record for gate-all-around applications.

Continued scaling of foundry logic devices from existing nodes is expected to increase etch and deposition intensity around 25% to 30%, thus creating tremendous opportunity for us to gain share through new innovations for future devices. Lastly, we have continued to make both organic and inorganic investments to expand our market.

Lam’s innovative dry-resist fabrication technology has on development tool of record positions at multiple customers for key steps in the patterning process and we are actively engaged with customers across both the Memory and Foundry Logic segments. We expect to announce more on this in 2023.

In Advanced Packaging, our recent acquisition of SEMSYSCO, we have expanded our capabilities within the leading-edge logic and chiplet segments. We are rapidly integrating SEMSYSCO technology with Lam’s market-leading capabilities in cleaning and wet processing and we have already achieved a key win in this area.

Customers view advanced packaging solutions in both wafer and substrate formats as critical to enabling future high-performance computing and AI applications and Lam is well positioned to benefit from this trend. So to wrap up, 2022 presented many challenges.

With our team’s focus and strong execution, we were able to meet our customers’ needs, deliver record revenues and expand our product and technology portfolio. This coming year represents a reset in the market and in our business, but it’s also an opportunity for us to make the changes needed to accelerate our strategic priorities.

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

Great. Thank you, Tim. Good afternoon, everyone and thank you for joining our call today during what I know is a busy earnings season. We had a record financial year in calendar 2022. And revenue came in at $19 billion and we delivered an all-time high for earnings per share of $37.31, which was a 15% growth in earnings per share over calendar year ‘21.

Overall, I am pleased with the operational performance we achieved this past year delivered while navigating a challenging business environment with global supply chain constraints, significant inflationary headwinds and fluid regulatory restrictions.

Lam also achieved record levels of performance in the December quarter across multiple metrics, including revenue, operating income dollars and earnings per share. Revenue for the December quarter was $5.28 billion, an increase of just over 4% from the prior quarter.

We delivered higher levels of system sales in deposition and etch offset somewhat by a decrease in CSBG revenue. Deferred revenue at the end of the quarter was $2 billion, a decline of $770 million from the September quarter.

Supply chain constraints have improved and we were able to fill shipments of many critical parts that’s required for revenue recognition. Our expectations are that the deferred revenue balance will continue to decrease in the March quarter as we fully complete shipments related to outstanding backordered systems.

The deferred revenue balance decrease I just spoke about was partially offset by some increases in deferred due to customer cash and advanced deposits, which I also noted last quarter.

As we sit here today, I expect to have some level of these type of deposits in the deferred balance throughout calendar 2023, keeping deferred revenue at somewhat higher levels than we have historically seen. I anticipate that the deferred revenue from backorders will be at a normalized level as we exit the March quarter.

Let’s turn to the revenue segment details for the December quarter. Memory represented 50% of systems revenue, which is slightly down from the prior quarter level of 52%. Included in memory, the NAND segment represented 39% of our systems revenue, flat with the September quarter. The spending was primarily focused on 192-layer and above class devices.

The DRAM segment concentration decreased sequentially from the prior quarter, coming in at 11% of systems revenue compared to 13% in the September quarter. The DRAM investments were mainly targeted towards 1z and 1-alpha nodes. I expect that we will see both NAND and DRAM revenue decline meaningfully in the March quarter.

For calendar 2023, I expect NAND spending to decline more than DRAM. We continue to see strength in the Foundry segment with the December quarter concentration comprising 31% of our systems revenues.

While this percentage is a little bit lower than September quarter level of 34%, the dollar amount was flat with a mix of investments in both leading and mature node devices.

The Logic and Other segment revenue came in at a high watermark for the company, contributed 19% of systems revenue in the December quarter compared with 14% in the prior quarter. Investments were focused on microprocessor, image sensor and advanced packaging technologies. Lam had strong momentum in Logic and Other throughout calendar 2022.

I expect we will continue to perform well in this segment. I’d mention that this was a record revenue level for us in microprocessor related revenue. We have been talking about momentum here for a while and it’s clearly showing up.

With respect to the regional composition of our total revenue, the China region was 24% of the total, down from the prior quarter level of 30%. This reduction was due to the U.S. government sales restrictions for certain domestic customers which were put in place in early October of 2022.

Rounding up the top region of revenue locations, Korea comprised 20% of total revenue, up from 17% in the prior quarter and Taiwan decreased to a concentration of 19% compared to 22% in the September quarter.

The Customer Support Business Group results in the quarter were approximately $1.7 billion, which was down 9% from the September quarter, though it was 16% higher than the December quarter of calendar 2021. As I have noted in the past, CSBG revenues will fluctuate on a quarterly basis.

And in the December quarter, we experienced declines in the CSBG product lines with reductions in utilizations and system spending. Going into calendar 2023, we have the impact of China regulatory work restrictions in addition to memory spending at well below historic levels and elevated customer device inventory.

These factors are resulting in customers having underutilized factories and taking actions to manage their supply levels in 2023, negatively impacting our spares and services business.

While we continue to believe the mature node segment will perform better than overall WFE spending, we are in an unprecedented business environment and expect the CSBG business could be down somewhat in calendar year 2023. Let me now pivot to our gross margin performance.

The September quarter came in at 45.1% over the midpoint of the guided range, but down from September quarter’s gross margin of about 46%. The decrease from the September quarter was tied to customer and product mix.

With the decline in business volumes in March 2023 quarter, we expect lower factory and field utilizations to unfavorably impact our gross margin on a sequential basis. Operating expenses were $686 million in the December quarter, up 6% from the prior quarter amount of $647 million.

The higher spending was mainly in R&D projects, which comprised nearly 67% of our total spending. Supporting our customers’ roadmap continues to be a top priority for us while we focus on managing other areas of discretionary spending within the company.

December quarter operating margin was 32.1% over the midpoint of guidance due to the higher level of revenue and gross margin. Our non-GAAP tax rate was 11.9%, in line with expectations. Looking into calendar 2023, we believe the tax rate will be in the low to mid-teens with some fluctuations quarter-by-quarter.

This rate estimate does not include any impacts from potential U.S. or global tax policy changes.

Other income and expense came in for the quarter at $38 million of expense, approximately $9 million higher from the prior quarter, mainly due to negative foreign exchange fluctuations which was somewhat offset by higher interest income because of increasing returns on our cash and investments.

OI&E will continue to be subject to market-related fluctuations that will cause some level of volatility quarter-by-quarter. On the capital return side in the December quarter, we allocated approximately $483 million to open market share repurchases. Additionally, we paid $236 million in dividends in the quarter.

For the 2022 calendar year, we returned 119% of our free cash flow, totaling $3.5 billion which was somewhat higher than our long-term capital return plans of 75% to 100%. December quarter diluted earnings per share, was $10.71, which was at the high-end of our guidance range.

Diluted share count was 136 million shares, which was lower than the September quarter and in line with our December quarter expectations. During 2022, we lowered share count by nearly 6 million shares through our share buyback program. Now moving to the balance sheet.

Our cash and short-term investments, including restricted cash, were up to $4.8 billion versus the prior quarter level of $4.6 billion. Operating cash flow of $1.1 billion in the December quarter was offset by cash allocated to share repurchases, dividend payments and capital expenditures. Inventory turns were 2.4x.

Days sales outstanding were 70 days, a decrease from maybe 2 days in the September quarter due to strong collections and improved linearity within the quarter. I would point out that we expect 2023 to be a strong cash-generating year as working capital comes down with lower business levels.

Our non-cash expenses for the December quarter included approximately $73 million for equity compensation, $73 million in depreciation and $12 million in amortization. Capital expenditures for the December quarter were $163 million, a slight increase over the September quarter spending of approximately $140 million.

The expenditures were in R&D and manufacturing, including our Korea Technology Center and our Malaysia factory. We ended the quarter with approximately 19,200 regular full-time employees, which was an increase of approximately 500 people from the prior quarter.

Our growth was in the factory and field to support the manufacturing as well as installation of tools at our customers’ fabs. Also included in this headcount growth were 150 employees from the SEMSYSCO acquisition that was completed in the December quarter.

As you heard from Tim and saw in our earnings release, we will be reducing our regular full-time headcount by approximately 1,300 employees. We expect these reductions to be largely reflected in our June quarter ending headcount.

In addition to the full-time reductions, we expect to be lowering our temporary workforce by approximately 700 people in the March quarter. We’ve already adjusted our temporary workforce down by 700 people in the December quarter. Let me now turn to our non-GAAP guidance for the March 2023 quarter.

We’re expecting revenue of $3.8 billion, plus or minus $300 million. I’ll also just mention that we currently think revenue will be somewhat first half weighted this year as we consume the reduction in deferred revenue in the March quarter. Gross margin of 44%, plus or minus 1 percentage point.

The decrease in this is the result of lower business volumes. Operating margin of 27.5%, plus or minus 1 percentage point; and finally, earnings per share of $6.50 plus or minus $0.75 based on a share count of approximately 135 million shares. We will be taking a charge of approximately $80 million in the March quarter from headcount reduction.

Including this impact, and the other near-term actions that Tim spoke about, we are anticipating a total of $150 million to $250 million in charges to be incurred over the next 12 months. In addition to headcount, we anticipate potential charges from facilities restructuring, business realignment and transformation and product rationalization.

On top of the cost savings activities, we are driving a greater focus from our senior leadership team through inclusion of additional profitability metrics in our annual incentive compensation structure. Currently, we’re at low volumes given the business environment. These initiatives will structurally improve our profitability.

As Tim already laid out, we expect gross margin to be higher by roughly 1 percentage point and to expand operating margins by a little more than that as we exit the calendar year and complete these activities. Over many years in cycles, Lam has established a proven track record of successfully managing this business.

With the actions we plan to execute throughout the year, we expect to strengthen our operations and technology leadership and further enhance our profitability profile with the company’s returning growth. When business improves, and we know it will, Lam will be a stronger, better positioned, more efficient company.

Operator, that concludes our prepared remarks. We would now like to open up the call for questions..

Thank you. [Operator Instructions] And we will take our first question from Harlan Sur with JPMorgan. Please go ahead..

Good afternoon. Thanks for taking my question.

Given the 20% pullback in WFE spend this year, significant memory spending pulled back within that, does the team still believe that the memory mix and spending expansion in memory will accelerate exiting this year? What’s your view? And then what’s your view on the supply-demand environment in memory and normalization of excess inventories in the industry?.

Yes. Harlan, I’ll start on that one. I think that the memory market and our market in general is difficult to predict from a timing perspective. So when you try to put a ending the year kind of time on it, it’s hard. But as Doug laid out, there is a couple of points.

I mean, one, we’ve seen extraordinary measures within the memory market in terms of reductions, not only in spending but also cuts and fab utilization, and in some cases, even delays of technology investments. I think these are somewhat unprecedented in terms of trying to bring this market into balance.

We also see memory as a percent of the total WFE mix that’s at levels that we haven’t seen in 25 years. And so I guess what we walk away with is a lot of confidence that memory spending will accelerate, but we’re not at this point ready to put an exact time frame on that.

A lot of the actions that we talked about that we’re taking in the company are to ensure that in the next up cycle, will actually be far more nimble to respond to changes in demand than we were when we were impacted by the ramp that came around the COVID pandemic.

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

Perfect. And then on the impact from China regulatory and export controls, YMTC was formally put on the entities list in mid-December.

Did this move change your prior view of a $2 billion, $2.5 billion impact to revenues this calendar year due to the China restrictions?.

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

No change at all, Harlan..

Perfect. Thank you..

Thanks, Harlan..

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

Great. Thank you. I guess I wanted to ask about the deferred. And if you draw it down to sort of normal levels in March, it implies shipments that are kind of well below the revenue level. I guess with CSBG running at close to $1.7 billion, it doesn’t seem like the June quarter could fall that much.

But can you just kind of give us a little bit more clarity on what it means that you’re drawing down that much deferred in March?.

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

Okay.

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

Yes, that’s right, Joe. What I see happening right now is we’ve got, I call them customer cash and advanced deposits, which we haven’t yet shipped the tools. And I think as we go through ‘23, it’s going to stay at a slightly higher level from that category than it’s been in the past.

So I think it’s a little bit higher, somewhat higher than that number that you just mentioned..

Great. Thank you very much..

Thanks, Joe..

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

Hi, thanks. Doug, I had two questions. First of all, is sort of on Joe’s question that you just asked. And it sort of is the profile, not in your revenue, but more in your system shipments through the rest of the year.

You said slightly first half loaded from a revenue perspective, but I would assume that your system shipments are going to be – like March is probably the bottom and it sort of like flattens off from there.

Is that fair?.

Yes, that’s fair, Tim. I think maybe I’ll answer a slightly different question. When I think about WFE in the mid-70s that Tim described, I think it’s fairly balanced through the year. Revenue somewhat first half weighted because we’re drawing down that deferred revenue balance. So I just wanted to point that out, which is why I scripted it that way..

Perfect, Doug. Thanks. And then just on that point, you guys are usually 13%, 14% of WFE and your system shipments in March would imply that WFE is sort of 16% to 17% in March. So that’s more like mid-60s versus the mid-70s number for the year.

So is the answer that litho was making up the difference because, obviously, all of us heard ASML today and systems are up 20% plus this year. So is the story this year really that you’re going to get to mid-70s predominantly because you’re adding an extra xxx billion is of litho year-over-year. Is that the math? Thanks..

Yes, Tim, I think that’s part of it. When I look at WFE down more than 20% this year, memory is down a good deal more than that. Foundry Logic, a lot less. Litho is a heavier percent of the Foundry Logic spend.

And I want to specifically point out the biggest decrease from a segment standpoint is in NAND, which, as you guys all know on this call, is our strongest segment and that is etch and deposition at Lam. So that’s kind of important to understand, I think, and why I specifically pointed to that as I went through the commentary..

Thank you, Doug..

Thanks, Tim..

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

Hey, good afternoon. Thank you for taking the question. I guess first question, I was hoping you could provide perhaps a little more granularity on the restructuring. You talked 100 bps gross margin and a little bit more than that.

Is there any way to kind of give a sense of how we should see that play out throughout calendar ‘23? And what kind of leverage should we see specifically on the OpEx side?.

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

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

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

Okay. Great. I guess a follow-up question. As you think about the moving parts for CSBG, obviously, you’ve got a year-over-year China headwind, you talked about Reliant.

I guess, how do you see the rest of that core business? Does that core business grow? And is there a way to maybe perhaps rank order what’s doing well and then what’s doing worse?.

Yes, C.J., let me take that. Just to remind people, four segments in CSBG spare, service, upgrades and Reliant.

And so I think kind of in terms of your impact really, if you think China impacted both spares and service, it made it impossible for us to provide spares and service to customers that previously had a pretty sizable chunk of tools in their installed base. So impact on both of those product lines from China.

Those same two product lines impacted by memory customers cuts in utilization. So you’ve seen and heard from our customers talking about the number of tools they have taken offline in their DRAM and main fabs.

Obviously, if you’re not running the tools, you don’t need spares and you don’t need service, so again, those same two product lines impacted by those changes.

The Reliant business, obviously, just in that trailing edge Foundry Logic, I would say, we’re pretty comfortable with that business that we see continued strength there, maybe not enough obviously to offset the other the other two impacts, and that’s why I do said.

We’re in a little bit of extraordinary times and that we would have previously thought that, that business couldn’t go down, but the combination of both China plus utilization hit those two product lines harder.

Now we know that as customers begin to spend again, the first thing to do is to bring the tools that they already have in their installed base back online.

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

Very helpful. Thank you..

Thanks, C.J..

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

Yes. Hi, thanks for taking my question. I have two of them. First one, either for Tim or Doug and thanks for the color on calendar ‘23 WFE and I understand it’s too early to talk about ‘24. But if you look at some of your memory customers, they have publicly spoken about taking the utilization rates down.

So could there be a scenario where next year, they could improve the utilization rates, improve wafer and bit output without necessarily adding WFE? Or do you think on a quarterly basis, WFE bottom sometime this year, and next year, hopefully, is a better year? And I have a follow-up..

Yes. Okay. I’ll start and let Doug add I think that, obviously, there have been utilization cuts.

I mean I think right now, if you look – at least by our estimate and listening to what our customers say, we’re at very low levels of supply growth this year as a result of the lack of additions and utilization cuts, so I don’t think you could quite get to the scenario you’re talking about where you just bring utilization – unutilized tools back online.

There is a second factor though, which is, remember, I mean, customers make investments also to move their technology forward. And that’s a pretty substantial portion of why WFE gets spent, not often just about capacity addition.

And so I think that customers are going to only go so long before you have to invest in the technology to move to that next node and gain the efficiencies that you do there.

So I think that, of course, we will work with our customers to bring tools back online and get utilization work on productivity, but I think there’ll be – I think spending will return at some point..

Got it. Got it. Thanks for that, Tim. And then a quick follow-up for Doug. I just – thanks for the color on the back-half revenue as first half. How do you think about gross margin, given the fact that the top line is decelerating you’re also ramping up Malaysia, China seems to be a mixed bag.

So I’m just kind of wondering how to think about gross margins or how to think about where they could potentially draw. Thank you..

Yes, Chris, I hope we’re kind of bouncing along the bottom right now. I can’t guarantee that, but specifically, what we try to describe both Tim and I, is that with these actions we’re taking, we believe there is upward momentum to gross margin as we exit the year.

We’re trying to get kind of capacity right staffing of the capacity rights so that as we exit the year, we think there is a point of gross margin upside, plus or minus where we’re at..

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

Yes. Thanks, Krish..

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

Hi, guys. Thanks for taking my questions. My first one, I just wanted to touch on the deferred again. I just want to make sure I have it right. So you’re running $2 billion now. It sounds like you think normalized deferred might be $1 billion.

So you got $1 billion that’s potentially coming out in March? Is that the right way to sort of think about the underlying demand, like where it is just like $1 billion like short of where we are or short of where the guide is and then going forward….

Stacy, I think deferred is going to be higher than that $1 billion because of these cash in advance payments I was referencing. It’s not going to go that well, I don’t think. And I think it’s going to stay. I think I’ve previously let everybody to believe deferred revenue would be in that high multiple hundred-million-dollar range.

I think it’s decently above $1 billion now because of this other category of stuff I see..

It’s like $1.5 billion? Or can you give us a little more color on that?.

Yes. It’s like $1.5 billion..

Okay. That’s helpful, thanks. My follow-up, I just – I do want to ask a little more philosophical question on the workforce reductions. And maybe as it relates to WFE, I mean, like we probably did, I don’t know, $40 billion in Memory WFE in ‘22 and it’s going to be down a lot in ‘23.

Like, even if it grows in ‘24, how long does it take to get back to that sort of ‘22 level, like if ever? And do the cost cuts that you’re doing, are they in some sense, a function of how you might view like that long-term sort of steady state WFE for memory versus where we’re coming off in ‘22?.

Yes, Stacy, maybe it combines a little bit maybe the last question we had as well, which is, we’re making these cuts and taking this action to make the company efficient and profitable at this level of business.

And so therefore, we’re not really looking and saying we need a big increase or rapid increase in business to justify what we keep afterwards.

But I did mention the focus that we have on ensuring that as we make cuts and as we reposition, especially the global operations infrastructure, we think about how quickly we can ramp up because we know when memory comes back, it often comes back much faster than people expect. And so I can’t tell you when it gets back to these numbers.

But what I want to make sure is that when it does return to stronger spending in the memory side, we’re able to ramp that up and do it efficiently. So we don’t have a lot of the profitability headwinds that we’ve been talking about for the last really 12 to 18 months.

And so that’s the way I think about it and get the company to the right size now for this level of business. But with the idea that we have, the infrastructure and the business systems available to us and the supply chain infrastructure to ramp more quickly, more efficiently should the market overshoot where our estimate is..

But why don’t you need to cut more than because the cuts only take you back to where headcount was like six months ago, right?.

Stacy, I am comfortable at the profitability levels of the business at these revenue levels. We are getting things structured in the right way so that the P&L looks acceptable..

I think Stacy, not all those heads were added in the volume side of the business as well.

And so I talked about – and I think you will see when you look at the P&L, where we are trying to preserve what is strategic spending on the R&D side and the products that we think are important for the future growth of the company and competitiveness of our business.

We are still committed, as I have said at the beginning, through our model of gaining market share in both the Memory and the foundry logic side of the business and some of the spending is there as well. So, these are the cuts we think that are appropriate for how we think the business seems to be run through this cycle..

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

Thanks Stacy..

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

Great. Thank you so much. I had one clarification and then a follow-up question. On the clarification, last quarter, I think you guys sized the potential impact from China export restrictions to your business in calendar ‘23 at $2 billion to $2.5 billion, I believe three quarters on the systems side, a quarter in services.

Are those numbers still your expectation for calendar ‘23? Any change there?.

Yes, no change..

Got it. And then my question probably for Doug in terms of gross margin, last year, you talked about freight and component costs being a headwind and you also talked about pricing as a potential lever to offset some of the headwinds. How should we think about those dynamics as we progress through ‘23, any progress? Thank you..

Yes. Toshiya, I guess what I describe is in some of the inflationary buckets I have been talking about for over long and talking about it, some of it’s getting somewhat better. And some of it, I think will get better, but we are not seeing it yet. So, that’s in what we have been talking about.

And then relative to pricing activity, we continue to work on that. There are some things that’s already showing up in the P&L in the March quarter, but we continue to have ongoing conversations with customers about the right level of pricing, and that will continue as we go forward..

And when you talk about the 100 basis point improvement exiting the full year, is that an all-in number, embedding all those factors?.

Yes. To the best of our recept as we sit here right now, yes, that’s all in of the pluses, the minuses, from business going down and the adjustments we are making in terms of the footprint of the company..

Got it. Thank you so much..

Yes. Thanks Toshiya..

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

Thanks for taking my question. I am trying to gauge what is kind of your trough quarter of this year conceptually, right? I understand that you don’t give exact forecast. But if I go through this deferred revenue math, so let’s say another $500 million comes out suggest that your March shipped revenue conceptually is about $3.3 billion.

Does that reflect all the China and Memory CapEx cuts so that is sort of pure trough revenue quarter, or do you think there is more to come? So, the trough revenue quarter might be later this year, closer to $3 billion or some other number.

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

Toshiya, I guess sorry – Vivek, the best I can do is just say what I have already said. Revenue is somewhat first half weighted, largely because we are pulling the deferred down in March. In March, it’s pulled down to where it’s going to be.

And so you got to kind of think about that plus the fact that I told you, we think WFE is fairly balanced first half, second half. And I think if you think that through, you will get it pretty close to where it should be..

Got it. And then second question that I have is, China sales were 24%, I believe of total in December.

But could you give us a sense for how much of that was China domestic? And then what do you expect China to be as a percentage of your sales in March and if you have a number roughly for calendar ‘23?.

Yes. In December, trying to remember the number. More than half of it certainly was domestic China. I forget the exact number, Vivek, to be honest with you, but more of it was domestic China. As we go through, China is going to be impacted to the $2 billion to $2.5 billion from the customers we can’t ship to.

I think – when I think about China WFE, that means China WFE is going to be down somewhat in ‘23..

Okay. So, this $2 billion to $2.5 billion, is that kind of run rate reflected in your March outlook? That’s what I wanted to just get a sense for..

Yes. The things that we have kind of lost from that $2 billion to $2.5 billion, there is nothing in the March quarter. So, that’s part of the $2 billion to $2.5 billion. There isn’t any more reduction from March as we go forward. I am not sure I am making it clear to understand it, but Vivek, there is always timing of different customers spending money.

It’s not that China is going to be up in China will be up and down as we go through the quarter, I expect. But the impact from the regulations is already fully in effect in the March quarter is what I am trying to describe..

Got it. So, basically, Doug, just to kind of nail it down.

If I take the March ex deferred $3.3 billion, right, and kind of assume quarterly run rate is at level, that’s sort of how the shape of calendar ‘23 revenue should be, right?.

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

Thank you..

Yes. Thank you..

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

Hi. Thank you for taking my questions.

Doug, is the equipment demand now below the supply that you can receive from your suppliers?.

Is it below – sorry, is the question about supply chain constraints?.

Right.

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

Yes. Well, as we said, we saw a significant improvement in the supply chain constraints in the December quarter, which is partly why we were able to deliver higher than the anticipated revenue. So, I would say that supply chain constraints are easing. There is always – and remain in some parts of the supply chain that are still not fully recovered.

But I would say that if you went back and compare where we are today versus 12 months ago, dramatically improved. I think that we will continue to work on that through probably the remainder of this year on those remaining issues..

Got it. And Tim, in your prepared remarks, you talked about conductor etch market share doubling node-to-node at one logic maker and gate all around, presumably is a big technology inflection that should help you guys.

Can you talk about the timing of the production ramp for gate all around? Is it second half, next year story, or is it more like a 2025-year event?.

Yes. I think that – I mean you see customers starting to talk about and announce kind of limited production. Yes, obviously, there is a qualification cycle, probably better for them to talk about their own timing. But it’s not a material issue for our 2023 numbers, let’s just say. So, it’s a 2024-and-beyond event.

But those are the types of things that, again, if we think about where we want to take this business. Part of this is about increasing our exposure into that market where there is tremendous need, and I talked about the increasing intensity for etch and deposition in that space and foundry logic.

And most of those big technology inflections where our tools are most suitable, things like selective etch, things like high-aspect ratio critical etch. The use of those tools are just increasing in these new 3D architectures.

The increased use of advanced packaging in foundry logic and AI applications, those are, again, areas where Lam can bring our etch technology to bear. So, timing again, hard to predict, but we are making great progress to development tool of record and early production tool of record stages.

And I think that as we see those markets ramp, that’s good for Lam..

Thank you..

Thanks Atif..

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

Hi. Good afternoon. Thanks for taking my question. Zaman Khan [ph] for Sidney. And just on CSBG, I apologies if I might have missed this, but can you guides us on how you see each of the buckets that play into CSBG? How these will contribute to the segment’s overall performance in 2023? And I have a quick follow-up..

Sure. Yes. I kind of hit on that a little earlier, but it was basically the four segments spare, service, upgrades and Reliant. And again, in a normal year, we would actually always see spares in particular, expanding with the growing installed base.

I talked about the fact that our installed base is substantially larger than it was during the last down cycle. We just grow the installed base, spares grow along with that.

And the impact this year to that business was somewhat unique, in that, the China restrictions did pull spares business immediately out of our revenue plan given that we cannot sell spares to certain customers and technologies in China. So, that’s a unique reset to that business.

And then the second thing that impacts spares is when customers cut utilization, those tools are idled, obviously, don’t need spares. So, I would say the spares business is impacted by those two impacts.

Service, similarly, we can’t service the tools in China that are restricted customers and technologies and also utilization customers tend to look to save money by doing the service themselves during these times or when tools are offline, they don’t need service.

And so those two product lines are kind of the most impacted, I would say, by these changes, reliant, again, growing because trailing edge still grows and upgrades. While I said some people might be delaying again, just to – from a CapEx sensitivity perspective, some upgrades I would say there is a less impact in that part of the business..

Got it. That’s pretty helpful. And then one more of a long-term question for me. I guess one of your major customers noted like very elevated infrastructure cost, roughly 4x to 5x when they build out fab capacity outside of Asia.

I guess what are the implications to equipment spend as customers try to obviously diversify capacity across the regions?.

It’s a good question. I mean obviously, there is – all customers are cost sensitive regardless of where they are building fabs. I mean we certainly know as people move into costlier regions, I think the story is the same. We compete and we win business based on building tools that deliver excellent technology with high productivity.

And I think that if I thought about what probably that means from an equipment trending perspective, I talked a lot about equipment intelligence.

You think about it, if you are moving into a region where already some of the base costs are higher, you are going to want tools that require less human interaction, less servicing tools that can do predictive work in order to try to keep them up and utilize more at a higher rate.

And so I think that you will see those types of customers pull for some of our smart solutions where you can kind of pull some of that labor content down if you can keep tools up and running more often and therefore, extract more from the capital that you have invested..

Thanks for the color. Tim, that’s very helpful..

Thanks..

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

Hey. Thanks for squeezing me in. I had two questions. One, I just wanted to – obviously, a lot has transpired over the last 12 months and clearly a huge correction in memory. You are saying foundry logic down something less than the group the overall is. I am just kind of curious how you are thinking about that.

I mean obviously, memory had to work through low utilizations and now they are pulling back on the capacity adds and same end markets.

So, kind of just how are you thinking about foundry kind of progressing over this year or next?.

Yes. I guess right now, obviously, we still see, as we said, memory or foundry logic being down substantially less than the memory this year. We have also made the comment that as a percent of total WFE memory is at levels that we haven’t seen in 25 years.

And so therefore, I guess we look at it and it’s either we see strong foundry logic spending, but we actually think that with that foundry logic spending in the devices and applications that are created, that will be another one of the drivers that pulls through memory usage and causes and perhaps accelerates a memory recovery.

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

Blayne, I guess what I would describe is – go ahead, ask your next question..

I want to hear what you would say, Doug..

I was just going to say at the end of the day, you need all of this in the system architecture. When you look at hyperscale architecture, you don’t just have logic devices and accelerators without memory, right. It’s all got kind of all go on the same motherboard, if you will.

What we have got going on, at least my perspective right now is we are sitting on excess inventory in the memory area to a significant extent, and it’s just got to get consumed. We are at a different point in the classic cycle is what I was going to describe Blayne..

Okay. I guess – I mean it’s a question – I am going to – I want to follow on to my own question, but it’s also one for yourself. I mean you look across the industry in semis inventories are going up.

I think you have seen this in memory, but also with semiconductor companies and your inventories as well, right? So, it suggests capacity exceeds demand, right? So, I guess one, I guess that’s why question why foundry logic can kind of continue and I think memory might be leading the show there.

But I guess as it relates to you, inventories are at a very high level.

So, I am just kind of curious as another play on gross margin, where do you think your inventories need to go? And if you have to dial back your production, is there any kind of headwinds to gross margin to think about?.

Yes. Blayne, our inventory is going to go lower, I guess is what I would describe, right. Business is coming down. We will need less inventory to supply a lower level of business, it will come down, that I can tell you for sure..

And does that have any impact to gross margin?.

Yes, a little bit. But when I describe an expectation, I mean I describe an expectation that as we exit the year, gross margin is a point higher, that contemplates the fact that factory absorption, utilization and so forth is going to be lower, and we will be bringing inventory down..

Awesome. Appreciate it. Thank you..

Thanks, Blayne..

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

Thank you. And we will take our last question from Joe Quatrochi with Wells Fargo. Please go ahead..

Yes. Thanks for taking the questions. Last quarter, you had talked about the Reliant business or kind of one does with the decline in WFE and just kind of weakness in consumer electronics that, that business could also be negatively impacted. And it sounds like maybe this quarter, you are a little bit more constructive on that business.

Is that, I guess the right way to think about it? And then two, maybe what’s driving that?.

Yes. No, Joe, we didn’t mean to describe it any differently. I think last quarter and this quarter, we said we expect that segment of foundry and logic to be somewhat better than overall WFE. I think we said that last time. I am pretty sure we did and we are saying that again..

I think they may have come across – Joe, just a little bit – maybe a little more constructive than the other product lines that were within CSBG, I think why I think there was a question about kind of ranking them or stacking those. It’s the least impacted by the changes like time restriction and utilization.

That was – that was maybe why it came across that way. No intention to send a different message from last quarter, though..

Got it. That’s helpful. And then just in terms of the total CSBG business, when we think about the impact from the China export restrictions, obviously, the utilization coming down just across the board is a negative impact.

But would that business be, I guess closer to flat, it’s just kind of like-to-like without the China export restrictions?.

It’s certainly being doing better and we described it as likely down somewhat. And historically, I have always said, this is a business that should grow every single year. I wish I wouldn’t have said that because I couldn’t envision the environment we are in with utilization in China and so forth.

So, we are just giving you kind of the lay of the land right now, Joe..

Okay. Thank you very much..

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

Thank you all for joining..

Thank you. This concludes today’s call. Thank you for your participation. You may now disconnect..