Lam Research Corporation (NASDAQ:LRCX) Credit Suisse 24th Annual Technology Virtual Conference December 1, 2020 10:50 AM ET
Tim Archer – President & CEO
Conference Call Participants
John Holland – Lam Research Corporation, Etch
Q – John Holland
Great. Why don’t we go ahead and get started. I’d like to welcome everyone to the fireside chat. It’s my pleasure this morning to introduce Tim Archer, the Chief Executive Officer of Lam Research. We have about 30 minutes in this session to go through Q&A. I’ll kick things off. If you have any questions from the audience, please feel free to email them to me and I’ll to incorporate them in.
But with that Tim, I want to first thank you for participating again at this year’s conference. I wish it wasn’t virtual and that we were in the desert but such is life in 2020. I always find it useful as sort of a first question in these fireside chats to help you set the tone to give you the opportunity to talk from a broader perspective, what is Lam’s overarching strategy and then most importantly, what’s the value proposition that you provide for investors?
Great. Okay, we’ll thanks for having me this morning John. I think most of the participants are looking at the safe harbor here. So we will reference that. Everything I say today obviously covered by that safe harbor, so that we can take that down and then I can get into your question.
The overarching strategy for Lam is I guess when you’re inside the company, you think it’s pretty simple, but I’ll quickly run through that and we laid it out at our Investor Day earlier this year and it’s about how we grow the company across really three different angles and the first is we really like the markets we’re in. Etch and deposition have been some of the fastest-growing segments of WFE really because of this, this trend in the industry to convert all device architectures, whether it’s in logic foundry, DRAM, NAND, even now we see waste packaging to 3D and that move is increasing the capital intensity of Etch and deposition and we see our SAM growing at every device node across every one of those segments and that gives us a nice tailwinds for expanding our addressable share of the WFEs. So the markets are good and we talk a lot about SAM expansion as part of our growth story. We’ve demonstrated that over the last 700 years.
We also talk about share gains and in fact we do that, we continue to innovate on platforms and we talked — we have objectives to grow another four to eight points of market share through innovative new platforms and you’ve seen one of those this year in the Sense.i etch tool that we’ve launched, the first ground-up etch system from Lam in 20 years and we think it brings in lot of the new advanced capabilities that are offered by Big Data and machine learning. We call it Lam’s Equipment Intelligence Solutions and it really goes to the heart of what our customers need at this point, which is productivity delivered for those very advanced, complex manufacturing nodes and so we have an angle of growth around share gains.
And then the one piece we’ve started talking a lot more about and we have some additional disclosures this year is the power of our installed base to really serve as a platform for us to build an entirely I wouldn’t say separate but kind of somewhat separated portion of our business, which delivers services and spares and upgrades and really value to our customers on the 60,000 plus chambers that Lam has sold in the past and our customers still want to extract more and more value from as time goes by and just in the past quarter, we had our first $1 billion revenue quarter from that installed base business and so when we look and we combine an increasing served market in etch and deposition, share gains from new products and then this powerful platform for building an installed base recurring revenue stream, we just think it’s a business that one has been performing well and has a great future in front of it.
That’s a great intro. I want to try to organize my questions today Tim into two main buckets. The first is kind of some of the top down drivers for WFE and the ecosystem. The second half I really want to talk about some of the bottoms-up drivers for Lam, but starting with the tops down, you and I have had discussions about this just about every quarter. We’ve seen in the public stock market massive multiple expansion of [indiscernible].
I would argue that you and your semi cap equipment brother have benefited to less from that multiple expansion. There has been a lot of skepticism really about whether or not we should think about this industry as cyclical or actually as growers and you had a great start at your Analyst Day earlier this year that looked at WFE over very long period of time from 1990 through I think about 2020 and that charge is either a thing of duty or its .
So depending upon whether or not you’re looking at it through a purely cyclical lens or one that’s a little bit more structural. To the investors out there that are worried that that current WFE things feel sloppy [ph]. Why shouldn’t they be worried in your patent?
Well John I think you that chart really is great for somebody who wants to look at power of this semiconductor equipment industry over a long period of time and there is no doubt from that chart, those who unfortunately I wish to show the chart here but it shows tremendous growth. I think it was almost like a 10X growth in the WFE spent over that period, growth of the equipment business and inside of that, we’re a whole lot of small cycles that you saw occurring, especially in the late 90s and mid 2000.
But stepping back you see this is a growth industry without a doubt and all of our companies, we’re much big for now. I’ve been in this industry for nearly that entire chart. I joined in 1994 to the equipment industry and so when you’re in it, you feel those cycles that when you step back you realize the companies are getting — the opportunity just continues to get larger.
Now I can’t really speak to the multiple expansion and when that will be recognized, but I’ll come back to the quality of the business because if you look at how companies like Lam have performed over that period, again you don’t find many 40-year old technology companies that are actually today performing at their absolute peak and that’s the power of the equipment business is as the electronics industry the semiconductors expands, that business really aggregates into the demand for semiconductor equipment and demand for us to continue to innovate and I think that’s why on that 30-year chart, you just saw the equipment business being a steady, I would say steady grower if you look pass those cycles, but I think couple things that happened.
And maybe just within that chart that’s a little bit hidden, first in 1990 when you go back to that beginning, I looked it up because the penetration of PCs into the US market was only about 15% at the start of that chart. We know now that’s like 90%, really 90% plus. 1990 nobody knew about smart phones, nobody knew really about the cloud, nobody knew about any of these things, artificial intelligence, machine learning, big data and so you’ve seen an explosion of applications over that period and I think today we see that just accelerating into the future.
And so I’m not saying there won’t be some element of cycles. In fact 2019 was a bit of a downturn, but again the quality of our business and the dependence on semiconductor equipment meant even though WFE was down about 10%, Lam delivered its second best earnings-per-share in its company’s history in a downturn. So I would say that the cycles while they may still exist in the short term, the long-term picture is extremely great for growth.
Well Tim, I’d like to try to drill down specifically into some of the investor’s concerns at the industry level and I think one of the big ones is from that period between 2000 and 2015 as were trying to transforming from 200 millimeter wafers to 300 millimeter waivers there just wasn’t a lot of WFE growth out there. I’m kind of curious if as to whether or not you believe that given that 450 is not going to happen if you look at long-term capacity or capital intensity occur, they tend to reset every 10 years with that wafer stock, with that wafer size transition. The fact that we don’t have one today, what does that mean for cost and capacity and capital intensity in your mind?
Yeah, well first let me take the first part of that which is during that period of which is called no WFE growth, there was a lot going on. One was the 300 millimeter wafer transition you talked about, that delivered tremendous productivity simply because of the additional efficiencies gained from the large wafer size. As you said right now 450 doesn’t appear to be happening and so that productivity boost that we saw in the 2000s that really meant that the equipment companies were sort of running in place introducing new products that are not really seeing a lot of growth in end spending from our customers, that’s kind of played its course now. There is not a wafer transition on that horizon.
The second thing that happened during that period was there was massive consolidation in the industry. If you look at the memory market, significant number of players exited the market and that demand consolidated into much more efficient larger scale players and so there was a productivity boost from that aspect. Same thing on the IDM side and the foundry outsourcing and so there are really two big productivity drivers. It was the consolidation in the 300 millimeter wafer transition in my opinion that in the 2000s drove this lack of WFE growth.
Those are behind us now and what you’re seeing is now an acceleration of complexity of manufacturing. You don’t have those productivity tailwinds and you’ve seen now WFE really start to rise and capital intensity rise as a result, but make no mistake, productivity is extremely important. It’s a number one conversation I have with customers and so that’s why I mentioned Sense.i. It makes great use of the customer’s footprint.
Let’s say we think the most productive etch tool that’s going to be in the marketplace uses equipment intelligence to lower maintenance and service costs, faster startups, faster ramp yield using big data and machine learning algorithms. Those are things — that’s how you’re going to get productivity in this new era when you don’t have wafer transitions and industry consolidation helping you.
Well I’d argue that, that we’ve precise transition tool productivity becomes even that much more important to your customers.
Correct and that’s like if you look at much of our market share gain objectives, I don’t think investors often worry about is when you have some of your element to your growth focused on market share gains, they will say, how do you do that? Our strategy is one of technology combined with disruptive productivity and the productivity really comes from this innovation around platform design and how you make the equipment innately more productive through the design of the equipment and that’s something that I think Lam has had a long track record on both the deposition and the etch side of delivering productivity for customers.
So the other concern that I am sure is not new to you is just the emergence of China as a major player in WFE and to be clear, you saw entrance has never been — it isn’t something that’s new in the industry and Japan in the 80s, Korea in the late 80s early 90s, Taiwan in the 90s, but I think one of the things that investors are worried about is a new sub entrant tends to have different strategic objectives than just financials and they tend to go through periods of overbuilding. Can you talk a little bit just given the strength we’ve seen in China at the industry level and specifically for you rational, do you think this NDA and to the extent that investors are concerned that US-China trade relations might be causing your Chinese customers to buy ahead, what are your concerns in your mind?
It’s not a large concern in my mind. We’ve said that from the standpoint of spending today, we’ve generally said that we don’t believe that pull-ins is a big part of this, meaning spend ahead, but to your point, we would acknowledge and so little bit I just about in the 2000s as any new entrant comes into the market and doesn’t matter where they’re located, there’s a learning curve. There is something that when we look at players that have been in the market for a long time and have built up a tremendous learning, there is an efficiency that it is gained in that. There is efficiency also from scale and so to the extent that any new player has to you might call it overspend, but effectively you’re spending because you’re still getting your yields up to those mature levels. You’re still getting the equipment to operate at maximum efficiency in a fab that might be still ramping to the scale that the larger players have in their fabs.
And so you might look at that as an overspend, but I look at it as is the necessary spent for where a customer is at a point in their cycle and we’ve seen that just play out over and over in the decades as new players come into the market. So I guess the reason we’re not worried about it is we think we’ve seen this — we’ve seen this story and we know how it plays out and therefore our views and the model we’ve built for 2023, 2024 anticipate new players becoming more efficient and therefore spend kind of I wouldn’t miss I would say moderating, but effectively modifying according to their progress.
You can’t talk about China without talking about regulatory concern and there’s a lot of different aspects to this. Specifically on the near-term any more comments you can make about some of the actions that US Government has taken towards SMIC and the way it might impact your business, but I guess the broader question is how do we think about the regulatory risk in China? If geopolitics comes into play and China becomes a more difficult geo to do business, is a zero-sum gain or do you think a lot of that capacity will need to be reconstituted in other goes?
Yeah I think — there is not much more we can say from what we just said on our earnings call about six weeks ago as we’ve said we’ve applied for licenses and for the types of equipment and parts that require licenses. We’re waiting to hear response to those applications. Not much I’ll speak there. It’s difficult to speculate on what might happen as you say. Geopolitics is probably not any semiconductor equipment CEOs area of expertise but I think in general, we look at the market and you probably just laid it out best.
We’ve seen over the years both demand and manufacturing move globally and whether it was Japan or it’s Korea or it’s Taiwan or now it’s China moving into this, for the most part they’re all intending to satisfy what we look at as the global WFE, global semiconductor demand and so what our answer has been and still is, is there maybe near-term disruption.
You can’t move capacity overnight and activity overnight, but the demand we’re talking about, the digitization of the global economy will be satisfied by some player — some manufacturers somewhere and it’s only a matter of how you get that demand to be manufactured. So it’s in the long term again come back to that 30-year chart, come back to that 10-year chart, it’s a growth industry because of the digitization of the global economy period.
The glass half full part of this geopolitical tension concern that doesn’t get a lot of talking about is this has really shown a lot I think on the strategic importance of semiconductor production and the fact that Europe and the US is heavily dependent upon Asia right now as a geo region and you’re seeing that chips acts go through the US Congress. I’ve talked to people on the EU who are contemplating similar incentives to build domestically. You’ve seen TSMC announce a fab in Arizona. How do you think the geopolitical tension plays out from a distribution of capacity over time?
Well I think as you said, it’s certainly highlighted the importance of this industry and something to those of us in the industry have probably always believed, but the strategic nature of manufacturing, its more than just about jobs. It’s about having that very important high-tech knowledge base within your shores and you see countries now competing and continuing to compete aggressively to bring manufacturing into their country for a lot of reasons.
Again they’re great high-tech jobs based on education, all sort of things that are good for country’s economies and now you add on top of that the strategic importance has become so obvious lately. I think you just see incentivization, it’s difficult for certain countries that haven’t done it in a while, but now you see as you just mentioned the Chips Act on the trading side, I think you’ll continue to see this move and for us, I don’t know that it changes again we’re a global player exposed to all geographies and so I think we will be ready for wherever the manufacturing is occurring.
My last sort of industry question, we all mostly tend to focus exclusively on the leading edge of Moore’s Law, but as you mentioned earlier, in an earlier comment about the memory consolidation that happened from 2000 to 2015, one of the things that that provided was cheap capacity for trailing. We bought some of that equipment at pennies on the dollars. We don’t view that anymore in the world where IoT is consuming more and more silica that’s not on the leading edge, how do you think about selling HWFE both the 300 millimeter and quite frankly 200 millimeter, we can go back to a world where you’re actually building brand-new 200 millimeter equipment again to satisfy some of this demand.
Well in fact we just had announcement this just about past quarter or so on a new 200 millimeter tool, reporting some of our more advanced photoresist strip capability back to 200 millimeter to satisfy demand. Our Reliant business which serves a lot of that specialty technologies which we call the off-leading edge market, that business has had record after record after record revenues and it’s simply because as you said this is explosion of applications whether it’s the wearables or it’s all sorts of electronics that are now into our daily lives and that we see growing, its expanding. There aren’t a lot of tools out there to be repurposed as they were there for a long time and so we sell both refurbished as well as new equipment into that market and we just see demand growing.
And it’s really again the growth there is interesting because it’s not about certainly big projects. It’s about everything you touch starting to contain semiconductor, it’s and people forget that for every one advanced like smartphone application process it gets so much pressed because it’s manufactured with the latest foundry node. There is like 30 or 40 trailing edge which you call trailing edge chips that have specialized capabilities that have to surround that in order to make that one leading-edge chip function and so I think that’s an expanding market. Its material to our business, it’s a good business, it’s growing and we tend to continue to compete there with as I said both used and new equipment.
One of transition to some of the bottoms-up drivers for Lam specifically and at the Analyst Day really this year, you really hit upon three growth drivers. You wore them as install base share growth and SAM growth. I am going to mix it up a little bit. I wanted to start a little bit with your share growth and if you look over the last 10 years, you’ve more than doubled your share of WFE from 7% 10 years ago to what’s just under 15% today, but in vain that Wall Street is always asking what have done for me lately, how do we think about share growth from here especially given that there’s some concern that you had some tailwinds over the last decade like the move to 3D and NAND, like the delay of EUV that accelerated multi-patterning that might not to reoccurring today. What’s the share growth expectation and what drives that share growth in the years to come?
Yeah no it’s great. So let me just take for a second like the ability to thank you for acknowledging the success we’ve had. It does get harder, there is no doubt. You’ve doubled it and I know that as we get to the patients out there for continued growth, but that’s why again we’re really focused on a couple of things. One is you just mentioned big tailwind 3D NAND conversion, no doubt. Etch and deposition was the right place to be.
I just mentioned everything is going 3D. We’re seeing — you look at logic foundry transistors becoming more 3D, go to [indiscernible] much more three-dimensional structure. Three DRAM while still pretty far out there on the horizon, it’s on the horizon now. Look at 3D chip packaging all those things are driving etch and debt capital intensity to a higher level and so I think that you’ll see continued tailwinds for etch and deposition from those aspects.
At the same time, you talk about share of WFE, which means that pulls in some of the SAM expansion and we talked at the Investor Day about a couple of things where we look at parts of the SAM — parts of the market we don’t compete in today and we think about how we disrupt those with etch and deposition solutions, places where we’re really strong technologically and we’ve highlighted two; the wet resist market that we think is right for disruption in the EUV transition to a dry resist and we don’t do wet resist spin-on equipment, but we do dry deposition equipment and so pulling that SAM in helps us grow our share of WFE with that technology. Really happy with the launch and initial engagement of that product.
And then enhanced AOB where we don’t compete in certain parts of market like furnace, but we do compete very effectively in atomic layer deposition and so there are segments of that furnace market or the SACBD market or some of these other technologies even the spin on dielectric market that can be pulled into our enhanced ALD Sam through technology innovation. So we’re just looking at many different ways and we think there are a lot of opportunities for us to grow our serviced portion of WFE and also the share of that WFE that we’re capturing. And so I’d say the story is not done with the doubling that we’ve had in the last few years.
I think one of the things I was very impressive at the Analyst Day was your commentary around the dry resist market and your expectations that it can actually be over a five-years period kind of a $1.5 billion incremental business opportunity for you. As we think about the ramp of dry resist for you and how we acquainted to kind of EUV systems that are being shipped out in this deal?
Yeah well we gave that number $1.5 billion cumulative revenue over a five-year period. Obviously, we’ve just started shipping the first of those systems into the EUV leaders. Now I think most people are familiar with the foundry logic world know, it’s a pretty long cycle to get qualified into R&D and then go to the pilot line and finally get to HVM and so you’re really talking about revenue impacts that’s pretty back end weighted on that. It’s the 2022 and beyond type of impact but what it will do is it will scale effectively it start to scale with EUV layers and we think that EUV is at the point where it is a very solid solution for a lot again cost and scalability challenges that the industry has to solve and Lam wants to help enable that because scaling is good for us.
Again as nodes move forward, you need more Lam equipment and so we want to make those transitions happen, but also EUV, the dry EUV resist, it’s a perfect example what I talked about the disruptive productivity, it will lower the customer’s cost to implement EUV and therefore should actually accelerate some of the EUV adoption, it makes it easier for the customer to pull in for more layers and take the benefit of the EUV and that’s why we think it’s an attractive solution and its meaningful for Lam from a revenue perspective.
So I want to ask you of the services business, I think the investment community applauded the fact that you were finally breaking that out on quarterly reports and integrate the business. I think that the overall growth of the business is well understood. Perhaps what’s less well understood is how well you’ve done just growing your revenue per chamber over the last several circle years and your expectations going forward? What’s driving that and how do we think about the growth in services versus the growth in WFE?
Okay. So it’s a great point and that business I’m glad we’re now disclosing it simply because it makes it easier for us to talk about what we think is a really important part of our business going forward. I mentioned this idea, the install base is a platform. I mean it’s 60,000 plus chambers and growing. As our new system business does even better, we add to that install base. It gives us more chambers on which to generate revenue. And like you said, we have a strategy to increase revenue derived from each of those chambers and the way we do that is we partner with customers and we look at how we can lower their cost of manufacturing through productivity upgrades, things that makes the tools run faster, require less service, consume less parts.
Those productivity upgrades are we’ve been doing extremely well in selling those to customers based on the results they deliver from a cost perspective for the customers. So it’s a simple ROI evaluation that the customer does. Technology upgrades allow the customers to take those 60,000 chambers and continue to advance them forward and get more life out of those assets that they’ve already invested in and so we’ve seen very strong demand always for how do you extend the life of my tool? I’ve already purchase it, I want the technology upgrades.
And then the services side, I mentioned the advanced services equipment intelligence, this idea of how do you install things on the tools on the tool that allow them to ramp to yield faster require fewer people and fewer labor hours, less time to match all the chambers. Now you’re going to install 50 to 100 chambers trying to do the same thing inside one of these mega fabs. If we use big data and machine learning algorithms and other types of advanced database services, we can help the customer ramp and that’s again it’s a productivity benefit for them and so as I mentioned underlying almost everything we do is about how to bring technology to bear on this node to node cost reduction challenge that the customer fact and much of it is just because as you started out without wafer transitions, without consolidation, you have to get it through innovation around the equipment and the services business is just one of those areas that customers look for productivity by definition.
And so but maybe the final comment on this, when I talk about this as a platform for growth, what’s great about this business we’re really the only provider of those services and upgrades because we’re the experts on the equipment that we’ve sold and so it becomes a large sea of tools, sea of opportunity for us that’s only limited by how much we can innovate around one upgrades and services we can add for that 60,000 plus chamber install base.
Tim, we’re up to the end of this session but I wanted to ask one questions to at least try and at least on qualitative basis maybe steal some of your thunder from the January conference call, and that is how should we as investors be thinking about WFE for next year? Clearly, you saw another strong year overall this year led by foundry, led by a recovery in NAND in the back half of the year, DRAM still kind of that cyclical lows. But how do you think about sustainability or even further growth next year in broad strokes?
Yeah I mean in broad strokes we normally use the January earnings call as you know to give our annual WFE outlook. So I probably won’t give the actual numbers but when we said and you’re hearing from our customers about their optimism and positivity about demand, so that’s a pretty good sign for us, but we said foundry logic, the explosion of demand we see foundry logic continuing to be strong as we go into 2021.
NAND has definitely picked up in 2020 and we’ve said that we still exit the end of the year though below what we believe is long-term demand on a supply basis. So we think NAND is still entering the year strong. In DRAM, I think we’ve made is like you cyclical low, it’s two years of relatively little investment and we think 2021 is setting up to be a much stronger DRAM year and so if you have good foundry logic end of the year, good NAND and DRAM recovering, I think it tells you that we’re fairly optimistic about 2021 WFE without previewing our January 21 earnings call too much just yet.
Well I had to try. With that, I’d like to thank you for joining us this morning and having this conversation. I want to express all of our wishes that you, your immediate family and the extended Lam family stay safe and healthy in what’s been a very challenging and trying 2020, but thank you very much.
Thank you, John and same to you. Thanks.