Lam Research Corporation (NASDAQ:LRCX) Q3 2024 Earnings Call Transcript April 24, 2024
Lam Research Corporation beats earnings expectations. Reported EPS is $7.52, expectations were $7.1. Lam Research Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, everyone. And welcome to the Lam Research March 2024 Earnings Conference Call. [Operator Instructions]. Please also note, today’s event is being recorded. At this time, I’d like to turn the floor over to Ram Ganesh, Head of Investor Relations. Sir, please go ahead.
Ram Ganesh: Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today’s call, we will share our overview on the business environment, and we’ll review our financial results for the March 2024 quarter and our outlook for the June 2024 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time. 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. We are having some technical difficulties posting our earnings call slides externally. We will try to post it as the call is going on, if not, we will post it on our website after this call. And with that, I’ll hand the call over to Tim.
Timothy Archer: Thanks, Ram, and thank you to everyone joining us today. Lam is off to a strong start in calendar 2024. With revenues, profitability, and earnings per share for the March quarter all exceeding the midpoint of our guidance. These results, as well as our outlook for the June quarter, point to Lam’s solid execution in an industry environment that is progressing much as we predicted in our January call. Today, we see industry WFE spending for calendar 2024 in the low to mid $90 billion range, with the modest increase from our prior view driven mainly by additional lithography shipments into China. We see no meaningful change to our outlook for Lam’s overall 2024 revenue profile. From an industry perspective, DRAM remains strong, with WFE spending driven by growing demand for high bandwidth memory and sustained investment in domestic China.
In Foundry Logic, growth and leading edge spending this year is being partially offset by a decline in mature node spending outside of domestic China. Domestic China spending is running higher than we had previously expected probably we still see it being first half weighted with Lam’s revenue contribution from China declining as the year progresses. In NAND, we continue to expect year- on-year growth in WFE spending in calendar 2024. Encouragingly, we’ve seen an uptick in fabulization and in the March quarter, this is translated into double digit percent growth quarter- over-quarter in our spares revenues. The supply and demand continue to normalize to the remainder of the year, we see a strong setup developing for 2025 NAND spending. As we move toward a broader WFE recovery, Lam stands to benefit from powerful secular drivers of semiconductor growth and innovation.
Generative AI and other emerging smart applications are built on a foundation of semiconductor technology and are expected to deliver trillions of dollars of economic benefit at a global level over the next decade. AI’s transformative use cases, foreseen in both consumer and enterprise markets, are only in the early stages of realization and we believe that significant investment in semiconductor manufacturing capacity will be required to satisfy the coming demand for advanced compute, memory, and storage. In this environment, the winners will be the equipment companies that can accelerate the pace of technology advancement while at the same time deliver innovations that disrupt the rising cost and complexity of semiconductor fabrication. To this end, Lam is investing in two differentiated approaches.
First, we are putting more capabilities and resources close to our customers to strengthen collaboration. And second, we are leveraging Lam’s proprietary semiverse solutions digital twin capabilities to reduce the time and cost of technology development. Already, we are seeing Lam’s distributed R&D footprint having a positive effect. In the past quarter, we’ve used our customer-centric lab investments in Korea, Taiwan, and the US to accelerate cycles of learning on new applications resulting in important wins for Lam in both DRAM and foundry logic advanced packaging. With respect to semiverse solutions, we leverage a portfolio of digital twins created at the scale of the device, the process, and the reactor to model complex interactions that influence tool performance and productivity.
Lam’s engineers now regularly use these capabilities to optimize multidimensional etch and deposition process recipes faster and with less on-tool wafer experimentation. Turning to demand related to AI, the early impact has been most prominent in DRAM and foundry logic. We believe, however, that AI’s impact on storage is still ahead and represents a key vector of long-term growth for our NAND business. More advanced AI applications need faster, more power-efficient, and higher density NAND storage. NAND-based enterprise solid-state drives, or ESSDs, are 50 times faster in read-write capability, 2 to 5 times more power efficient, and use 50% less space at the system level compared to hard disk drives or HDDs. Today, over 80% of enterprise data is stored on HDDs. And we expect this mix to shift in favor of SSDs as NAND capability and cost continues to improve.
This is where Lam is playing a key role by enabling technologies which are critical for both performance and cost scaling. In deposition, for example, Lam is leading the transition from tungsten to molybdenum in the worldwide to improve device access time and reduce stack height per storage cell. In etch, Lam is using high aspect ratio cryogenic etch to enhance productivity of memory hole formation. Today, we are approaching 1,000 Cryo Etch chambers in our high-volume manufacturing installed base. In partnership with our customers, we’re using the tremendous amount of data coming from this installed base to rapidly improve technology and cost at each successive layer transition in NAND. Recently, we combined the learning from the installed base with the capabilities of our semiverse solutions simulation tools to further strengthen our differentiation.
As a result of our accelerated innovation, we have defended every NAND high aspect ratio memory hole etch production decision made so far by customers. With respect to DRAM, AI servers use high bandwidth memory, or HBM, to increase read, write speed and reduce server power consumption. HBM stacks multiple DRAM dies using TSVs, enabling 15x more data throughput than standard DRAM. However, HBM also requires an approximate threefold increase in wafers per bit compared to conventional memory. With this in mind, it’s important that our SABRE 3D and Syndion tools not only provide best-in-class plating and etch capabilities, but also deliver industry-leading throughput and productivity to keep overall costs low for our customers. We are the leading player in TSV applications for HBM and expect our HBM-related shipments to grow more than three times in calendar year 2024.
Finally, on the foundry logic side, Lam tools, including selective etch and ALD, are well-positioned to help enable the move from FinFET to gate all-around, a key transition needed to improve transistor performance per watt by 15% to 20%. We see our shipments for gate all-around nodes in calendar year 2024 exceeding $1 billion. Lam tools are also enabling foundry logic inflections such as backside power delivery, molybdenum interconnects, and drive holders as processes for EUV patterning. Our traction with customers is strong on these inflections, and together, they represent a multi-billion dollar growth opportunity for Lam as AI drives a greater need for faster, more power-efficient devices. To conclude, the proliferation of AI, the global push for localized chip manufacturing capacity and the ubiquity of semiconductors in new consumer and commercial products represent powerful, secular drivers for Lam and the rest of the semiconductor equipment industry in the years ahead.
We are pleased with the company’s execution and our results in the March quarter and remain focused on our opportunity to outperform through this next leg of industry growth. Thank you, and I’ll now turn it over to Doug.
Doug Bettinger : Great. Thanks, Tim. Good afternoon, everyone, and thank you all for joining our call today during what I know is a busy earnings season. We delivered solid results in the March 2024 quarter. Our March quarter results came in over the midpoint of our guidance ranges for all financial metrics. I’m pleased with the company’s continued robust execution. We achieved the highest gross margin percentage since the merging of Lam with Novellus. We also continued to generate very strong free cash flow of $1.3 billion or 34% of revenue. Let’s dive into the details of our March quarter results. Revenue for the March quarter was $3.79 billion, which was roughly flat with the prior quarter. Our deferred revenue balance at the end of the quarter was $1.75 billion, which was a decrease of $182 million from the December quarter related to revenue recognized that was tied to those customer advanced payments.
I believe deferred revenue will continue to trend downwards as we continue throughout the year. From a segment perspective, March quarter’s systems revenue and memory was 44%, which is a decrease from the prior quarter level of 48%. The decline in the memory segment was attributable to DRAM coming in at 23% of systems revenue versus the 31% that we saw in the December quarter. DRAM spending was focused on the 1Y, 1-alpha, and 1-beta nodes, spending largely driven by DDR5 and high bandwidth memory enablement. As we noted in the last quarter, non-volatile memory WFE is increasing in 2024, but it remained at a subdue level on a mixed basis for the March quarter. This segment represented 21% of our systems revenue, up from 17% in the prior quarter.
I do just want to mention one thing. We are characterizing one customer’s investment in specialty DRAM as a non-volatile investment, since it has a non-volatile component to the device. This might be different than what others in the industry are doing. NAND investment was driven by very modest spending and conversions to 2XX and 3XX layer devices. The foundry segment represented 44% of our system’s revenue, a slight increase from the percentage concentration in the December quarter of 38%. Growth was driven predominantly by domestic China shipments. And finally, the logic and other segments were 12% of our system’s revenue in the March quarter down from the prior quarter level of 14%. The decline was driven by continued mature node softness.
Now, I’ll discuss the regional composition of our total revenue. The China region came in at 42%, up slightly from 40% in the prior quarter. While most of our China revenue continued to be from domestic Chinese customers, this was the largest quarter for multinational spending in China since mid-last year. We expect spending from this region to increase year-over-year in 2024. I believe it will, however, decline as we go through the year. Our next largest geographic concentration was Korea at 24% of revenue in the March quarter versus 19% in the December quarter. Japan and Taiwan rounded out the remainder of the top four regions. Our customer support business group generated revenue in the March quarter totaling approximately $1.4 billion. This was down 4% from the December quarter and 13% lower than the March quarter in calendar year 2023.
Our Reliant systems revenue decreased in the March quarter due to continued weakness in mature node investments, partially offset by a higher level of spares. Reliant is at the lowest revenue level in the last two years, and spares is at the highest revenue level since the end of 2022. The spares business is seeing very early signs of positive impact from utilization increases from our customers. Turning to the gross margin performance, the March quarter came in at 48.7% above the midpoint of our guided range, and above the December quarter level of 47.6%. The increase was primarily a result of favorable changes in product and customer mix, as well as improved factory efficiencies. March quarter offering expenses were $698 million, up from the prior quarter amount of $662 million.
This was due in part to expenses incurred for an extra week in the quarter. I’ll remind you, it was a 14-week quarter, as well as our conscious growth in R&D spending. As Tim mentioned, we remain laser-focused on investing in R&D to extend our product and competitive differentiation. R&D, as a percentage of spending, was at a high watermark coming in at 71% of total spending. Operating margin for the current quarter was 30.3% in line with the December quarter level of 30% and at the high end of our guidance range. This was primarily because of the strong gross margin performance, which was somewhat offset by the growth in R&D investment. Our non -GAAP tax rate for the quarter was 11.7% consistent with our expectations. Looking further into calendar 2024, we continue to believe the tax rate will be in the low to mid- teens with some possible fluctuations quarter by quarter.
Other income and expense for the March quarter came in at $10 million in income, compared with $5 million in income in the December quarter. The increase in OI&E was due to higher cash balances and higher interest rates. OI&E will be subject to market-related fluctuations that could cause some level of volatility quarter by quarter. On the capital return side of things, we allocated approximately $860 million to share repurchases and we paid $263 million in dividends in the March quarter. Our share repurchase activity included both open market repurchases as well as an accelerated share repurchase arrangement. The ASRs continued to execute into the month of April. And I would just mention, we continue to track towards our long-term capital return plans of returning 75% to 100% of our free cash flow.
March quarter diluted earnings per share was $7.79 towards the higher end of our guided range. The diluted share count was 132 million shares on track with expectations and down from the December quarter. We have $1.2 billion remaining on our board authorized share repurchase plan. Let me pivot to the balance sheet, our cash and short-term investments at the end of the March quarter totaled $5.7 billion, up a little bit from $5.6 billion at the end of the December quarter. The increase was largely due to collections with an extra week in the March quarter offset by cash allocated to share buyback, dividend payments, and capital expenditures. Day sales outstanding was 57 days in the March quarter, decreased from 66 days in the December quarter.
Inventory at the end of the March quarter totaled $4.3 billion, down $107 million from the December quarter level. Inventory turns remained flat from the prior quarter level at 1.8x. We are making progress in bringing inventory levels down, and we will continue to work on this throughout calendar 2024. Noncash expenses for the March quarter included approximately $77 million in equity compensation, $75 million in appreciation, and $15 million in amortization. Capital expenditures in the March quarter were $104 million, down $12 million from the December quarter. Spending was primarily centered on Lam expansions in the United States and Asia, supporting our global strategy to be close to our customers’ development locations. We ended the March quarter with approximately 17,200 regular full time employees, which was flat with the prior quarter.
Let’s now turn to our non-GAAP guidance for the June 2024 quarter, we’re expecting revenue of $3.8 billion, plus or minus $300 million, gross margin of 47.5%, plus or minus 1 percentage point. This gross margin decline from March is reflective of a quarter-to-quarter change in customer mix, operating margins of 29.5%, plus or minus 1 percentage point. This reflects our continued commitment to prioritize R&D spending. And finally, earnings per share of $7.50, plus or minus $0.75, based on a share count of approximately 131 million shares. So let me wrap up. 2024 is a year of continued transformation for Lam Research. We’re investing in our long-term strategy to extend our technology leadership and operational excellence while efficiently managing overall spending.
We’re encouraged that the long-term drivers of semiconductor growth, such as artificial intelligence, are seeing accelerated adoption. And we expect Lam to be a strong beneficiary of these trends. We are well-positioned for the architectural and material change coming, such as gate-all-around, advanced packaging, backside power delivery, and the move to dry photoresist. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions.
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