Lam Research Corporation (LRCX) Q2 2022 Earnings Call Transcript

Lam Research Corporation  (NASDAQ: LRCX) Q2 2022 earnings call dated Jul. 27, 2022

Corporate Participants:

Tina Correia — Investor Relations

Tim Archer — President and Chief Executive Officer

Doug Bettinger — Executive Vice President and Chief Financial Officer

Analysts:

Harlan Sur — JPMorgan — Analyst

Timothy Arcuri — UBS — Analyst

C.J. Muse — Evercore — Analyst

Joe Moore — Morgan Stanley — Analyst

Stacy Rasgon — Bernstein Research — Analyst

Krish Sankar — Cowen & Company — Analyst

Toshiya Hari — Goldman Sachs — Analyst

Atif Malik — Citi — Analyst

Vivek Arya — Bank of America — Analyst

Mark Lipacis — Jefferies — Analyst

Patrick Ho — Stifel — Analyst

Blayne Curtis — Barclays — Analyst

Joe Quatrochi — Wells Fargo — Analyst

Presentation:

Operator

Good day, ladies and gentlemen and welcome to the June 2022 Quarter Earnings Conference Call. At this time, I’d like to turn the conference over to Tina Correia. Please go ahead.

Tina Correia — Investor Relations

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 June 2022 quarter and our outlook for the September 2022 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 todays call.

Todays 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.

Tim Archer — President and Chief Executive Officer

Thanks, Tina. Good afternoon, everyone. We appreciate you joining us today. Lams June quarter results were much stronger than we originally anticipated. Revenue and non-GAAP earnings per share achieved new quarterly records and we are well ahead of our guidance for the quarter. Industry-wide shortages continue to impact output and the efficiency of our operations. However, specific actions we have taken in our supply chain in recent quarters are allowing us to execute more effectively in the supply-constrained environment. I want to thank our global Lam teams, including our supply chain operations and engineering groups as well as our suppliers and customers for demonstrating incredible dedication, agility and partnership in the face of significant challenges. In the June quarter, we continued to see good momentum with our product and installed base initiatives with foundry logic systems and CSPG revenues both reaching new highs.

Our performance this quarter adds to my confidence that Lam will emerge from this period of industry disruption, stronger, more resilient and even better positioned in our markets. As suggested by our guidance today, we expect to see incremental improvement in supply chain conditions in the September quarter, but our view is that industry-wide output will continue to be constrained through the rest of this year. Consequently, we are lowering our outlook for calendar year 2022 wafer fab equipment spending to be in the low to mid-$90 billion range.

Overall, semiconductor demand remains robust, but with some macro-driven pockets of weakness, particularly in consumer-focused markets. We see strong foundry logic spending outgrowing both NAND and DRAM investments. In the longer term, we expect industry growth to be driven by the increasingly vital role semiconductors play in the global economy. This, along with expanding semiconductor content in end devices, rising device complexity and larger die sizes will help sustain strong WFE levels.

Most importantly, for Lam, technology inflections will continue to drive greater etch and deposition intensity. Across our company, we have been prioritizing investments to benefit from these trends and prepare for the growth ahead. Over the last two years, Lam has devoted significant attention to the disruptions that have impacted semiconductor ecosystem, but at the same time, we have used this period to accelerate a strategic transformation of our operations and product focus.

We have significantly expanded Lams capabilities and resources closer to our customers and ecosystem partners, both in the U.S. and globally to deepen collaboration, accelerate the introduction of new products and drive greater operational flexibility. Compared to pre-pandemic times, Lam now has a more globally diverse manufacturing and supply chain infrastructure, designed to leverage unique regional capabilities while servicing worldwide demand. A notable example is Lams new Malaysia facility, which takes our manufacturing, supply chain and logistics operations to the next level in terms of scale, automation and efficiency. Over the last two years, we have also increased our technology infrastructure investments across the U.S., Asia and Europe, which has included a new development center in Korea and a soon to open engineering lab in India.

Our vision is to be the premier technology collaboration partner in the ecosystem, leveraging Lam innovation to bring customers, suppliers, peer companies and consortia, together to create disruptive solutions for the industrys grand challenges. Productivity and extendability of EUV patterning has been one such area of focus. And in the June quarter, we announced that SK Hynix has selected Lams innovative dry resist fabrication technology as a development tool of record for two key steps in the patterning process for advanced DRAM chips. We also announced the expansion of partnerships within the EUV ecosystem. In collaboration with Entegris and Gelest, we look to provide our customers with reliable access to precursor chemicals for Lams dry photoresist technology. Together, we will also be working to accelerate the development of dry resist solutions for high numerical aperture EUV patterning.

With customers, we are using data-driven equipment intelligence solutions to deepen our engagements. An enormous amount of equipment and process data is being generated from our installed base. And together with customers, we are using key learnings to drive fab productivity. Lams Sense.i platform was launched in early 2020 with the goal of combining Lams innovative equipment intelligence solutions with our market-leading edge technology. The Vantex dielectric etch system built on the Sense.i platform has seen tremendous momentum since launch and has become the fastest ramping etch tool in Lam history. We expect the installed base for this product to approximately triple this year alone.

Furthermore, we are seeing increased demand for Lam solutions in new advanced packaging architectures. Our Kiyo plasma etch products with Hydro have a proven record of delivering the productivity and uniformity requirements needed for cost effective front-end device scaling. Leveraging this expertise in high-volume manufacturing, we have now achieved multiple new etch tool of record positions for advanced packaging at a leading foundry logic customer. As customers further develop these architectures in support of greater system performance, we see a growing opportunity for Lams etch and deposition solutions.

And the final element in our transformation over the past several years relates to our emerging leadership in sustainability. In late June, we released our 2021 ESG report where we outlined how we integrate ESG throughout our operations. We are proud that we were one of the first in the semiconductor industry to set a net zero emissions goal. I encourage you to review the report to see the great progress we are making across several important areas, including environmental sustainability and our commitment to diversity and inclusion in our workforce.

So in summary, I am very pleased with the solid results posted by the company for the June quarter. Our results are an indication of our strong business foundation built on a large and growing installed base, a differentiated product portfolio and a commitment to ecosystem-wide collaboration and success. We are in a great spot to benefit as secular drivers push the semiconductor industry to new heights over time.

Thank you. And I will now turn it over to Doug.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Great. Thank you, Tim. Good afternoon, everyone and thank you for joining our call today during what I know is a very busy earnings season. I am pleased to share our June quarter results with you today. We had our second consecutive fiscal year of record levels of revenue and diluted earnings per share. Revenues increased year-over-year for the fiscal year by over 17% and diluted earnings per share rose by more than 21%. We delivered solid performance in the June 2022 quarter. Our results across all financial metrics came in at the high end or above our guidance ranges due to our improved execution and the continued strong demand for our equipment.

June quarter revenue was a record at $4.64 billion, which was an increase of more than 14% over the prior quarter and over the high-end of the guidance range. While we are making progress on addressing the supply chain challenges weve previously talked about, it will take more time for them to be fully resolved. Despite the supply chain improvements and higher factory output levels, we still exited the June quarter with $2.2 billion in deferred revenue, which was an increase of $129 million sequentially.

From a segment perspective, memory represented 54% of systems revenue in the June quarter, which was down from the prior quarter level of 66%. The NAND segment came in at 40% percent of our systems revenue, which was roughly consistent with the prior quarter. Our NAND customers are investing in tools for 17x layer and beyond devices. On the DRAM side, revenues were 14% of systems revenue, which is a decline from the prior quarter level of 27%. DRAM investments are focused on the 1z and 1-alpha node addition and conversions.

In the Foundry segment, June quarter revenues increased quarter-over-quarter and represented 26% of our systems revenue compared with 21% in the March quarter. The increase is related to the timing of customer investments with broad-based spending across both leading as well as specialty node devices.

The Logic and Other segment had record performance in the June quarter coming in at 20% of systems revenue higher than the March quarter amount of 13%. Our performance here not only reflects the demand in the market for microprocessors, analog components, image sensors, and advanced packaging solutions, but it also demonstrates the progress we are making in the leading-edge foundry logic inflections that Tim talked about earlier.

Let me now turn to the regional composition of our total revenue. The China region came in at 31% of total revenue, which was flat with the March quarter percentage. China domestic customers were the majority of the China regional revenue in the June quarter. There was also a strong concentration of investments by our customers in the Korea and Taiwan regions, which comprised 24% and 19% of our total revenues respectively in the June quarter.

The Customer Support Business Group revenue was also a record at approximately $1.6 billion which was up 16% from the prior quarter level and 18% higher than the June quarter in calendar 2021. There was strength across all parts of CSBG, but notably in spares with our customers fabs running at high utilization levels as well as in our Reliant business, with customers investing in specialty market areas such as RF and power devices. While quarter-on-quarter growth rates in CSBG can vary based on customer investment patterns, I believe CSBG is well positioned to again deliver annual growth in 2022.

Let me now pivot to our gross margin performance. The June quarter came in at 45.2% above the midpoint of the guided range. Our fixed cost absorption improved somewhat with the higher output levels. However, we continue to have cost challenges in the areas of freight and logistics, semiconductors as well as in other critical components. We will continue to drive progress on improving our operational efficiencies. However, we expect inflationary pressures to be a persistent headwind in the second half of the year. Our September quarter guidance embeds our views on these factors.

Operating expenses for June were $635 million, up slightly from March quarter. The increase was mainly in R&D across all of our business units as we are investing in development of technologies to support our customers long-term roadmaps as well as to mitigate some of the supply chain challenges we are having.

The June quarter operating margin was 31.5% coming in over the guidance range as a result of the stronger than expected revenue performance. Our non-GAAP tax rate for the quarter was 11%, generally in line with our expectations. We estimate the tax rate for calendar year 22 to be in the low-teens level. This estimate doesnt reflect any impact of any potential U.S. tax policy changes. And this is obviously something we continue to monitor closely and we will update you as appropriate. And just to remind you, as we have discussed in the past, you should expect the tax rate to fluctuate on a quarterly basis.

Other income and expense for the June quarter was approximately $87 million in expense consistent with what we noted on our call last quarter as well as what was included in the June quarter guidance. We had an increase in expense this quarter related to market declines in one our venture investments that recently went public. The OI&E P&L line item is subject to market-related fluctuations that will cause some level of volatility due to items such as foreign exchange as well as impacts in the equity markets.

We continue to execute on our capital return objectives during the June allocating $868 million towards share repurchases. We paid $208 million in dividends. Our share repurchase activity was a combination of open market repurchases as well as an accelerated share repurchase program. This ASR will continue to execute during the September quarter.

Id also like to highlight that since calendar year 2012, when we brought Lam and Novellus together, we have returned approximately 115% or more than $20 billion of our free cash flow to equity holders. Our stated plan is to return 75% to 100% of free cash flow through a combination of buyback and dividends. June quarter diluted earnings per share, was $8.83. Diluted share count was 138 million shares, which was lower than the March quarter and lower than our June quarter expectation due to the increase in share repurchase activity.

Let me turn to the balance sheet. Cash and short-term investments, including restricted cash, totaled $3.9 billion, which was down from $4.6 billion at the end of the March quarter. The decrease in the cash position was attributed to our capital return activity as well as our usage of cash for growth in working capital as well as continuing capital investments. We increased the level of inventory we are carrying to support our growing business volumes. Inventory turns were flat with the prior quarter level coming in at 2.6x. Days sales outstanding come in at 85 days, which was essentially flat with the March quarter. It again was a somewhat back-end weighted shipment quarter.

Non-cash expenses for the June quarter included approximately $70 million for equity compensation, $69 million in depreciation and $19 million for amortization. Capital expenditures for the June quarter came in at $126 million, down by roughly $20 million from the March quarter level. Capital expenditures are supporting the company growth in manufacturing in multiple geographies, including the United States and Malaysia as well as research and development infrastructure investment in California, Oregon as well as our new technology center in Korea.

We ended the June quarter with approximately 17,700 regular full-time employees, which was an increase of approximately 800 people from the prior quarter. We had headcount growth, primarily in the factory and field organizations to address the higher output levels, to manage supply chain constraints as well as to support increasing customer delivery and installation.

Looking ahead, Id like to provide our non-GAAP guidance for the September 2022 quarter. We are expecting revenue of $4.9 billion plus or minus $300 million; gross margin of 45%, plus or minus 1 percentage point. This gross margin outlook reflects ongoing inflationary challenges that we are seeing in the supply chain. Operating margins of 31.5%, plus or minus 1 percentage point; and finally, earnings per share of $9.50 plus or minus $0.75 based on a share count of approximately 137 million shares.

So then in summary, Lam demonstrated an improved operational execution in the June quarter and delivered record financial performance both quarterly as well as on a fiscal year basis. While the semiconductor industry is not immune from softening macro factors that we see, Lams technology leadership, along with our robust installed base is a solid foundation for continued long-term growth for the company.

And with that, operator, I will conclude my prepared remarks. Tim and I would now like to open up the call and take questions.

Questions and Answers:

Operator

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

Harlan Sur — JPMorgan — Analyst

Good afternoon. Thanks for taking my question and great job on the strong operational execution. As you mentioned in your prepared remarks, we have seen weakness materialize in the consumer-focused segments of the market, so PCs, smartphones, gaming. For your memory customers, that accounts for about 55% of their total revenue. So they are being disciplined here in the second half and into next year. They are focused on supply side discipline, a lower profile of capex spending. And then on the flipside, Foundry and Logic and IDM customers are seeing, I think a bit more diversified set of drivers, where demand is still relatively healthy. So given that your lead times are stretching into next year, if your customer base is becoming more cautious on the macro demand environment, I assume that they are modulating their orders down for shipments next year. Have you started to see this in your profile of your recent orders? And then maybe more near to mid-term, have you guys seen any major changes in cancellations or push-outs on scheduled deliveries for this year?

Tim Archer — President and Chief Executive Officer

Okay. I will take that question, Harlan. Its I think, as you said, we clearly are seeing some weaknesses in certain parts of the market, and we have customers in the memory space and others have been publicly sounding the tone on being a little bit more cautious about their capex and spending going forward. I believe that weve also been saying, though, for several quarters now that we believe the memory customers have generally been quite disciplined in their spending and how they look at the market. I think its one of the things that has made that particular segment of the industry quite healthy in recent years, and that is that they respond fairly quickly to changes that they see in pricing and in demand. So thats something I think weve become accustomed to dealing with. Frankly, what Id say though on the demand side is that we really havent seen any significant change in the demand signals from our customers. And some of that could be, as you pointed out, that lead times remain stretched and I think people want to take some time to look at how this market is evolving from different drivers. But we certainly acknowledge that 23, there is a fair bit of uncertainty and there are different scenarios that could play out. But I think that Lam is well prepared to execute through whichever those scenarios actually transpire.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes. The only thing I might add, Harlan, is we know how to run the company whatever the environment is. Weve been doing it for a really long time. We know what the playbook needs to be. When its up, down or sideways, we will respond accordingly. And then when I think about the things Tim talked about, our positions are in stronger. We feel really good about the business were winning, the growing installed base, the company is executing really well. Thats the stuff we feel great about. At the end of the day, the market will be what the market will be, and we will manage the company in the right way depending on whatever that looks like.

Harlan Sur — JPMorgan — Analyst

Yes. Great insights. Thanks for that. And then supply chain-wise, I mean, the team did a great job of unlocking more component availability and subsystems availability given the strong upside in June. So given more availability, do you anticipate deferred revenues coming down in the September quarter as a part of your strong revenue guidance? And where are you seeing the biggest supply improvement? Is it component availability? Is it subsystems availability, freight and logistics or maybe all of the above?

Tim Archer — President and Chief Executive Officer

Yes, Ill take the first part and let Doug speak specifically maybe the deferred revenue. I think that we talked in the last couple of calls about having somewhere in the order of about 40 task forces deployed out to our critical customers. So we said the constraints were pretty broad-based. I mean clearly, things like IC component shortages have gotten a lot of attention. But instead it was broader than that. Weve seen improvements across a number of those constrained commodities. But we still have constraints. And thats you see it in how were still spending, managing our supply chain in the numbers Doug talked about and also in the fact that deferred revenue actually continue to grow a little bit in the June quarter. So were nowhere near to where I would say that the supply chain overall is executing like it had in the past. But weve seen kind of broad improvements as a result, we think of specific actions Lam has taken. And Ill let Doug talk about the September deferred revenue.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes, Harlan, its hard enough to forecast a revenue number, let alone the deferred. But if I was going to give you some color around it, I kind of think its flattish, plus or minus a little bit. And again, it will depend on how well we progress with the supply chain, honestly.

Harlan Sur — JPMorgan — Analyst

Great. Thank you.

Tim Archer — President and Chief Executive Officer

Thank you, Harlan.

Operator

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

Timothy Arcuri — UBS — Analyst

Thanks a lot. So I had a question just on overall WFE. So Tim and Doug, you beat on June, youre guiding better in September, and youre getting a little bit, a bit of improvement in terms of some of these constraints, yet the full year WFE is coming down a bit. So can you sort of square that a little bit. Is some of that maybe some demand driven thats bringing the year down or is even that mid-90s still a supply-constrained number?

Tim Archer — President and Chief Executive Officer

Yes, Tim, its in our view, its primarily an adjustment weve made based on supply constraints and challenges. Since we gave our last guidance, which we had put at $100 billion of WFE, not only have we seen kind of how were performing, but weve also heard from others in the industry. And so we have to in trying to give a WFE number look to how the entire industry is executing and not just how Lam is performing. And so we felt it prudent to lower that WFE outlook based on what look to be still a lot of industry-wide constraints. And so from a demand perspective, as I just said in the last answer, I really havent seen any meaningful change thats really embedded in that lowering of WFE. There is always some tools and projects that move around. But right now, as you see with our deferred revenue and the fact that were not meeting all demand, if anybody slides out a little bit, somebody else is sliding right into that slot. So were fully utilized at this point at the numbers we just gave.

Timothy Arcuri — UBS — Analyst

Got it. Got it. Awesome. Thank you. And then, Doug, Id be remiss if I didnt ask about gross margin, someones going to ask about it. So I guess itll be me. So can you just.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Go ahead, Tim.

Timothy Arcuri — UBS — Analyst

Sorry, Doug. Can you just can you walk us through sort of maybe quantify the headwinds? And would we be at 48%, 48.5% if sort of absent some of these headwinds, can you sort of like normalize all that for us? Thanks.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes, Tim, the way Ive been describing it actually for a while now is the long-term profitability model of the company is unchanged. My expectation of where were going to perform isnt any different than it was pre-pandemic, pre-inflation coming through. The inflationary stuff thats permanent. We got to work on getting fairly paid for and the stuff thats temporary, maybe we get paid for a little bit, but then we got to go on the cost back. And so what was embedded in a financial model that we gave, I guess, over 2.5 years ago or something was kind of 200 basis points above where we are guiding right now, and thats still the way you should think about the long-term profitability of where were going to drive the business.

Tim Archer — President and Chief Executive Officer

And Tim, the only thing I would add on that point is there is a — there are a lot of questions obviously coming about is the industry slowing or there are some pockets that are going to ease up think if thats the case, some of the things that are headwinds to us in gross margin right now. I mean, a lot of the expedites and premiums that were paying on things like ICs, you would expect those to begin to moderate if some of the outlooks are that some of this demand either gets caught up or maybe or slows down a bit going forward. So I think there is room for gross margin improvement, as Doug said, over the longer run.

Timothy Arcuri — UBS — Analyst

Definitely, yes. Its a natural hedge. Thank you very much.

Tim Archer — President and Chief Executive Officer

Yes, thanks, Tim.

Operator

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

C.J. Muse — Evercore — Analyst

Yes. Good afternoon. Thank you for taking the question. A follow-up question on gross margins. Your favorite subject, Doug, would love to isolate just on your factory ramp in Malaysia. Can you speak to how thats going, whether thats a headwind or beginning to be a tailwind for you? And how we should think about that escalating into a real tailwind for you guys? Is that a first half 23, second half, 23 or later type of story?

Doug Bettinger — Executive Vice President and Chief Financial Officer

Maybe Ill let Tim talk about how the ramp is going and Ill describe the numbers a little bit, C.J.

Tim Archer — President and Chief Executive Officer

Okay. Yes, sure. So C.J. is actually just out there not too long ago. Id say from an execution perspective and a lot of the improvement were looking at, Id say the Malaysia ramp is going extremely well. Were still in a ramping phase there, still in the mode of building out and developing the supply chain. Some of that, especially the supply chain development might be a little bit behind where we would have wanted to be at the volumes. And thats simply because supply chain globally is struggling to ramp. And whether thats raw materials or component shortages or labor. But I think its coming up very nicely. And I think what Doug gives you the answer about how it contributes, I mean, what we have to remember is that Malaysia is ramping at the same time as were ramping all of our global facilities. And so perhaps in the short run, youre seeing an easily isolatable impact of Malaysia because were ramping all other global factories at the same time. But from a ramp perspective, I couldnt be happier that right now with the scale of output and the efficiency I see starting to come out of that facility.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes. And then C.J., just how to think about the numbers. I think maybe a year ago, I was talking about it being somewhat of a headwind to gross margin. It really isnt any longer. Were kind of at the point where its neutral-ish. And as Tim just told you, were ramping everywhere as eventually that will be the biggest factor in the network. And as it gets to be a bigger percentage of the total, it will become a benefit to gross margin, not just from cost of labor, but the fact that our freight lanes will be shorter and the supply chain will move along with us. So Ill keep you updated as we progress.

Tim Archer — President and Chief Executive Officer

Yes. I think actually just — I want to emphasize that one point Doug just made because in my prepared remarks, I made this comment about part of our strategic transformation over the last couple of years was to put capabilities closer to where they ultimately need to be. And thats — in the case of development, closer to customers. And in the case of the factories closer to supply chains and also customers. And in a period when were seeing high freight and logistics costs, I mean, I think that ultimately having a large factory close to our customers in Asia is going to be a big benefit for us. So that was a very conscious decision. And I think its going to pay off as — we dont know when freight and logistics costs normalize, but thats a hedge against those remaining high for a while.

C.J. Muse — Evercore — Analyst

Very helpful. Thank you. As my follow-up, I guess I was hoping you could speak a bit to Reliant. And to clarify, do you include Reliant when you break out the percentage of exposure logic, foundry memory? And then, I guess, bigger picture there, the trends youre seeing, particularly as it relates to 200-millimeter 40-nanometer and above and domestic China. Can you kind of walk through the trends youre seeing there? Thanks so much.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes, Ill take the beginning, and then Ill let Tim take the second part. Yes. C.J., when I talk about the percent of systems revenue in my scripted remarks, that includes Reliant as well as the more leading-edge equipment that were selling. So its all conclusive in terms of system revenue.

Tim Archer — President and Chief Executive Officer

Yes. I think just in terms of markets — end markets and the demand, I mean, I think we can speak as a user of many of those chips where we still see severe constraints and also very high premiums for those chips in the marketplace. I think customers are investing to try to alleviate what today is clearly a mismatch in terms of supply and demand. And thats across all different types of applications. I mean when I look at the list of ICs that that were looking for just as one user, its a broad list from a very broad number of manufacturers. So its hard for me to pin it down, but I feel like today, were still in a pretty broadly expanding and growing market.

C.J. Muse — Evercore — Analyst

Thanks so much.

Tim Archer — President and Chief Executive Officer

Thanks, C.J. Yes. You bet.

Operator

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

Joe Moore — Morgan Stanley — Analyst

Great. Thank you. I wonder if you could talk about any potential for export controls. There is been some press focus really on some incremental controls on exports to China for advanced logic and things like that. Do you guys get any kind of sense for whats coming on the pike there and how that might affect you?

Tim Archer — President and Chief Executive Officer

Yes, Joe. So to tell you, we were recently notified that there was like — there was to be a broadening of the restrictions of technology shipments to China for fabs that are operating below 14-nanometer. And so thats the change I think that people have been thinking might be coming. And our — were prepared to fully comply. Were working with the U.S. government and any impact on Lams business its contemplated in the September guidance that we just gave.

Doug Bettinger — Executive Vice President and Chief Financial Officer

September guidance as well as the full year WFE outlook, Joe.

Joe Moore — Morgan Stanley — Analyst

Great. And that — is a 14-nanometer logic that doesnt include DRAM?

Tim Archer — President and Chief Executive Officer

Yes, to the best of our understanding, its foundry focused, yes.

Joe Moore — Morgan Stanley — Analyst

Okay. Thank you very much.

Tim Archer — President and Chief Executive Officer

Yes. Thanks, Joe.

Operator

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

Stacy Rasgon — Bernstein Research — Analyst

Hi, guys. Thanks for taking my questions. I was wondering if you could give us a little more color on the drivers within the customer service business, particularly around strength in spare parts and 200-millimeter tools? Im just trying to get some feeling for those pieces, especially just given the broader environment and some of the other news that weve heard around the macro and potential customer order cuts and things like that?

Tim Archer — President and Chief Executive Officer

Okay. Ill take the first shot at that. The — maybe as best to step back and just remind everybody, the CSBG business is comprised of four components, spares, services, upgrades and Reliant. One of the nice things about this business and what said we really like about it is those often kind of move in somewhat of a non-correlated way. I mean, spares clearly just moves with our installed base. And as I look forward, lot of people wondering what does 2023 look like, were not going to give guidance, but one thing we always feel pretty comfortable about is we have a very strong equipment shipment year this year. There will be a lot more tools requiring spares and consumables next year. And so that part of the business, it grows.

And in fact, what weve said is, as devices become more complex, and our applications become more critical, the fact that the need for spares and the importance of spares just continues to grow. So spares is just a robust and growing. The services business has been also strong. I talked about the shift in strategic transformation were making towards more equipment intelligence type services. And as customers kind of look forward, if customers start focusing on productivity and costs and really trying to squeeze the output from their fabs without having to spend additional capex, they turn to things like productivity services, results-based contracts, use of data off of the tools. So I think services has been doing well. And I think can continue to do well even in an environment where maybe you see a little bit of impact of macro or spending pulled back.

Same for upgrades. Upgrades business actually, Ive often said over the years that upgrades tend not to do so well when customers are busy adding lots of capacity because they are actually adding capacity, new tools really focused on that. if they pull back a little bit, the way they save capex and still manage their technology road maps as they turn to upgrades and tech conversions. And so the upgrades business gets a little bit stronger. And so that business, we think, can continue to do well and maybe even improve in next years environment.

And then Reliant, as we just said, a lot of catch-up to do I think there have been significant underinvestment for quite some time in that area as evidenced by the fact that many of us cant get the chips that we actually need to meet demand. And so there is some catch-up still there. Eventually, maybe that gets caught up we dont really have a view on when that fully happens. Its a very diverse set of end markets and application drivers. So its hard to predict. But clearly, at some point, it probably moderates in terms of growth, and its back more towards the steady grower tied kind of to the overall application expansion in the economy that weve seen for in past years.

Stacy Rasgon — Bernstein Research — Analyst

I guess maybe I should have asked more explicitly what drove the sequential strength in services? So which one of these pieces was the biggest?

Doug Bettinger — Executive Vice President and Chief Financial Officer

It was both spares as well as Reliant, thats why I called that out in my script, Stacy.

Stacy Rasgon — Bernstein Research — Analyst

Got it. Got it. Thank you. For my follow-up, Im going to ask — this is going to come across a little snarky, but I think Im going to ask it anyways. I get the inflationary pressures on gross margins. But all of your customers seem at this point to be inflation proof in terms of their input costs going up and their ability to pass the long out. Why arent you?

Tim Archer — President and Chief Executive Officer

So Stacy, I think — and Ive been saying this, I think, for a quarter or two. I dont want you to believe that were not raising prices, because we are. I think maybe to our detriment, inflation has been bigger, stronger, more pronounced than we expected that it would be, honestly. And there is some latency to kind of renegotiating prices and whatnot, and thats very much whats going on. And it wasnt a star comment. I get the comment all the time. Its an appropriate comment. Were working on getting fairly compensated for what we need to and we will.

Stacy Rasgon — Bernstein Research — Analyst

So how much of a driver do you think of Im looking at like a year or two as that latency goes away? I mean, is it 100 bps? Is it more like how much can we be or is that what helps you kind of get back to the model range?

Tim Archer — President and Chief Executive Officer

Yes. Its what helps us get back to the model range. What I said earlier is the long-term profitability expectation for the company is unchanged, even though were working our way through this inflationary environment, its probably 200 basis points from where we are to where we need to be.

Stacy Rasgon — Bernstein Research — Analyst

Got it. Okay, thank you, guys. Appreciate it.

Tim Archer — President and Chief Executive Officer

Yes. Stacy, thanks.

Operator

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

Krish Sankar — Cowen & Company — Analyst

Yes. Hi, thanks for taking my question. I have two of them. The first one for Doug. Clearly, the last several quarters have been really strong. Youve grown your headcount a lot. Hypothetically speaking, if next year was down in terms of revenue, say, 5% or 10%, how should we think about the earnings model and operating leverage? And then I had a follow-up for Tim.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes, Krish, I guess the best thing I would point you to is just look at the history of the companys performance over the last decade, right? We know how to run the company in an up environment, in a down environment, we have a highly variable cost model here. We employ temporary resources, we outsource things. The best thing I would point to is just look at the last downturn and the same management team running the company, we will do the same things. Its a well-worn playbook that we know how to dust off and use when we need to.

Krish Sankar — Cowen & Company — Analyst

Got it. Got it. Fair enough, Doug. And then a question for Jim, maybe this is the first time. Im noticing youll talk about advanced packaging on the earnings deck. Im kind of curious on your advanced packaging strategy. Some of your peers have partnered with back in companies that were looking into panels. How should we think your advanced packaging portfolio should evolve? Are you looking at organic development, M&A or partnership with a back-end company?

Tim Archer — President and Chief Executive Officer

Well, I think that were looking at — look, advanced packaging is an important area for Lam to participate in and we have for quite some time. So I actually dont know if its the first time weve talked about it because I have to believe we have talked about it in the past. But weve talked about it primarily from the standpoint that etch and deposition play an incredibly important role in these new architectures. And we have a strong position, especially in applications like — well, both the etch as well as the copper electroplating. As form factors change, we look at that as still our market, and therefore, we will evaluate and pursue whatever the best means is to win in those emerging segments, whether thats organic or inorganic.

Krish Sankar — Cowen & Company — Analyst

Got it. Thanks, Tim.

Tim Archer — President and Chief Executive Officer

Thanks, Krish.

Operator

We will take our next question from Toshiya Hari with Goldman Sachs. Please go ahead.

Toshiya Hari — Goldman Sachs — Analyst

Great. Thank you so much for taking the question. Its really nice to see your action in logic and other show up in your numbers in the quarter. To level set, I was hoping you could sort of quantify where you are from a market share standpoint across those markets today vis-a-vis the corporate average in etch and dep? And where do you see that going in a couple of years, given the current application win funnel?

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes. If you look at logic specifically, its probably our lowest exposure across the markets that we described. However, I will remind you, Toshiya that we have been talking about a specific share gain customer that we continue to progress very nicely with, which is part of the strength you saw in the results from June.

Tim Archer — President and Chief Executive Officer

Yes. And Toshiya, I guess I would just add, I mean there is a couple of things to think about with respect to the foundry logic space. And one is our exposure is lower from a SAM perspective and has been. But actually, some of the technology inflections that are currently underway are actually allowing us to participate with some of our more advanced equipment to displace some of the older technologies that have typically been used in foundry logic. And so you are seeing a lot of traction for our selective etch. We didnt list all of the wins this quarter. We continue to see new selections for our selective etch tools. Thats only going to be used at very advanced logic and its kind of new markets, new opportunity for us, and we are doing well there. ALD of both dielectrics and metallization used to deal with like the RC inflection, the back-end interconnect inflection. Thats creating opportunities for us. And so I think that we are seeing a little bit of like share gain at certain customers, as Doug mentioned, but also an expansion of our opportunity, and thats driving a lot of our new product roadmap. We have an objective to improve our position in foundry logic for more advanced notes.

Toshiya Hari — Goldman Sachs — Analyst

Yes, thats helpful. Thank you. And then as my follow-up probably one for you, Tim, just on dry resist, its great to see you guys have traction there as well. Obviously, SK hynix is public. I am pretty sure you are working with other customers on this as well. But help us quantify how significant this business or this product could be in a couple of years? And as you partially sort of displace traditional track or coated developers. What percentage of the market do you think you can capture in a couple of years? Thank you.

Tim Archer — President and Chief Executive Officer

Okay. Well, I think I dont want to get out with sort of the new disclosures here, but I think we are — we have quantified it in the past is roughly about a $1.5 billion opportunity over a five year period. And you are just starting to see us — we talked about development tool of record wins. So, obviously, we are not yet putting this into a production fab and developing revenue, so we would be at the very first stage of that. But that should give you some kind of sense maybe in the next five years of kind of revenue impact you are talking about. But this is still a much longer play for us. And I talked about this idea of accelerating the development of the driver is for the high NA EUV. And so if you think EUV is going to be around for the next 10 years, 20 years as the primary patterning capability for advanced logic, then our opportunity just continues to grow throughout that period. So, it starts off in the next five years, about $1.5 billion and then just continues to grow with layer count and application. And we think that as you get to high NA EUV, I think its we have a good just to capture a lot of the market.

Toshiya Hari — Goldman Sachs — Analyst

And Tim, sorry, when you say five years, I know you guys initially talked about the, say, your 2022 Analyst Day, is it five years from then or five years from today?

Tim Archer — President and Chief Executive Officer

Well, I dont know — I guess I will just start the clock now because, as I said, we have only reported a development tool of record positions today, obviously, which we havent yet started to generate revenue from. So, its — yes, I think you could call it five years from today, its a safer bet than five years from our Analyst Day.

Toshiya Hari — Goldman Sachs — Analyst

Sounds good. Thank you.

Tim Archer — President and Chief Executive Officer

Thanks Toshiya.

Operator

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

Atif Malik — Citi — Analyst

Yes. Thank you for taking my question. I have a question for both of you. It looks like Senate has passed the CHIPS Act. Tim, you along with Intel and Micron CEOs, you spoke to Congress in March about the importance of passing this legislation. So, assuming it goes through Congress and the present signs off. Can you talk about what this bill means for the U.S. equipment makers? And Doug, if you can talk about what — how will it impact Lam in terms of tax breaks or in terms of market share growth in logic foundry areas? Thank you.

Tim Archer — President and Chief Executive Officer

Okay. Well, obviously, its a significant benefit for the U.S. semiconductor manufacturing industry overall. I think most directly, what I would say is that Lams benefit from this will come in two ways. One is as our customers invest in capabilities in the U.S. and capacity, and obviously, we are hopeful that we will garner a large share of the equipment thats purchased for those fabs. And so thats one way in which money is from that flow through ultimately into business for Lam. Specifically, when I was in front of the Senate, one of the things that I talked about is, I think long-term, if you think about long-term improvement for U.S. companies and U.S. semiconductor manufacturing has to do with some of the R&D money thats in that, I believe, in the CHIPS Act, which is going to fund longer term capabilities that help semiconductor device makers, but also equipment makers develop those next-generation technologies that keep us incredibly competitive on the global stage and allow us to create those technologies without having to necessarily fund and take on all of that risk ourselves as individual companies, which is always hard to do for technologies that might be seven years, eight years, 10 years into the future. So, thats the other way I would say that companies, both device makers and equipment makers can benefit. We need to see all the details, but thats my financial take.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Are there Atif any follow-up?

Atif Malik — Citi — Analyst

No, I am good, Doug.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Okay. Alright. Thank you.

Operator

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

Vivek Arya — Bank of America — Analyst

Thanks. I had two questions. First one, is this $4.9 billion that you are guiding to for September? Is this kind of the new quarterly baseline? So, all else being equal, should we expect December sales and gross margins to potentially be flat or up? I appreciate you are not giving December outlook, but is there anything that could make you deviate from this new trend line that you have June stronger and then September even stronger than that?

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes. Vivek, you are right. I am not going to guide the December quarter for you. Listen, I think we are pretty pleased with the progress from a supply chain standpoint we made in the June quarter. It continues to be reflected in the September quarter, barring something new coming up. I think our execution will continue. And that largely has been what has limited the revenue generation of the company. And you see — you heard me mention the $2.2 billion in deferred revenue. So, thats there for us to follow-up on. But I am not going to give you a number for December quite yet.

Vivek Arya — Bank of America — Analyst

Understood. And then the second one is just a clarification. What is your sub-14 nanometer exposure to China? I didnt think there was any or not that much. And do the restrictions apply to just China domestic, or do you think they could apply to the multinationals with fabs in China?

Doug Bettinger — Executive Vice President and Chief Financial Officer

At this point, we would assume that it applies to all sub-14 nanometer activity in China. And we are not going to quantify what we might have or had in our plans for sub-14.

Vivek Arya — Bank of America — Analyst

But Tim, just to clarify, September, you said is de-risked, i.e., there is zero sub-14 nanometer China business for you in your September outlook?

Doug Bettinger — Executive Vice President and Chief Financial Officer

Vivek, the guidance fully reflects everything that we just described.

Vivek Arya — Bank of America — Analyst

Okay. Thank you.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Youre welcome.

Operator

We will take our next question from Mark Lipacis with Jefferies. Please go ahead.

Mark Lipacis — Jefferies — Analyst

Hi. Thanks for taking my question. I had a clarification and a question. The clarification, Tim, I think it was an earlier question about whether you were seeing push-outs or cancellations. It sounded like you said that you are not seeing any impact on your demand, but I just want to make sure I understood your response to that question? And then my question is, can you help us understand the mechanics of your manufacturing operations or how you deal with the slots that you have before you allocate to your different customers as the orders have come in. If somebody — what kind of latitude do your customers have as they come in and say, well, I dont know if I want the tool now, I prefer it in three months, do you guys split up slots in the queue, or do you just send people back to the end of the line. If you could just kind of review the mechanics around how you treat the orders as they come in and what happens to customers who ask for the push-outs? That would be helpful. Thank you very much.

Tim Archer — President and Chief Executive Officer

Sure. I can try to address both of them. So, yes, just to be clear, my comment was at this point, we have seen no push-outs and changes in demand, no push-outs, no cancellations that are all meaningful. However, I mean I want to acknowledge, I mean its with long lead times and stretching through 23 and a cautious tone being struck by some of our customers quite publicly. I am not saying that we might not ultimately see those changes come. So, just saying that we have seen none doesnt mean that, that might not happen. And so at this point at — the commitments that we have today are being met, and that was what I was trying to signal. I think with those long lead times, it moves into your second question, which is, so what if a customer does come and say they would like to push a project by a few months or even longer or we treat it the same way we are doing right now when customers come and have asked us to pull in the slots. We work with all of our customers to see where people really are in their projects and their demand. And we have not ultimate flexibility within our manufacturing, but I talked about the fact that we are — we have invested in the last two years to try to create greater operational flexibility. And part of it is so that we can respond in that way. I mean we are — we treat our customers very much like partners and need to push for a couple of months because maybe its either demand or likely sometimes if the facilities arent quite ready or there is a change in their plans. We have got to work with them and make those adjustments, if its possible.

Mark Lipacis — Jefferies — Analyst

Got it. Thank you very much. Very helpful.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes. Thanks Mark.

Operator

We will take our next question from Patrick Ho with Stifel. Please go ahead.

Patrick Ho — Stifel — Analyst

Thank you very much and congrats on the nice quarter. Doug, maybe for you in terms of the supply chain, obviously, you have seen some improvements in the past quarter that will carry incidents next quarter. Are some of the issues now just related to the quantity of shipments because its still going to be a more second half weighted year for you guys. So, even with some of the incremental improvements on the supply chain, its now just trying to I guess, continue to keep pace with the high demand levels that you are seeing near-term? And thats why the deferred revenues are staying at the same levels at least as you are forecasting to the September quarter?

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes, Patrick. Thats clearly part of it, right. We have got unmet demand. We have got partial shipments that shows up as deferred revenue. Each supplier has a unique situation that we are working through with them to the extent that they are not meeting what we need from them. But yes, we increased — improved the output last quarter, and we see that continuing as we go into September.

Patrick Ho — Stifel — Analyst

Great. And as a quick follow-up, maybe for Tim. Obviously, you have been working with a leading MPU customer for some time now, and we are starting to see the share gains and the higher quantity of volume as they start ramping new products. But you have been working with them for some time. As you work with them and given their more accelerated roadmaps in terms of technology nodes, can you maybe not quantify, but qualitatively say that you have seen some incremental new market opportunities, and thats what gives you confidence with that customer on a going-forward basis?

Tim Archer — President and Chief Executive Officer

I guess I brought it to all customers. I mean to speak to the one, but I think what we have always said is that Lams greatest opportunities get created as those technology changes, those technology transitions occur. And I spoke to a couple of you, just as an example, you think about somebody implementing gate all around in, say, their next technology node or future technology. It does create new opportunities for us, and we have designed equipment kind of ahead of where the roadmaps are. And so the faster those technology changes come, the sooner we get the opportunity to insert those new applications into their production lines in a bigger way. And so we have talked about some of those selective etch, some of our new ALD tools. Of course, its some of our etch systems that are designed for — to really support the fine pitch patterning associated with EUV. So, EUV like at each technology node, we use more and more layers of EUV that grows for us. And so every customer, the faster they transition technology, the greater stems Lams sort of market is growing and the greater our share opportunity is increasing.

Patrick Ho — Stifel — Analyst

Great. Thank you.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Thanks Patrick.

Operator

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

Blayne Curtis — Barclays — Analyst

Hey guys. Thanks for taking my question. I just want to follow-up on the demand outlook. I mean I hear you said you havent seen much. I mean I am just looking at the areas that you mentioned being strong. And I think we have seen a lot of those same areas see weakness image sensors and MCUs, APs, I mean, Qualcomm that they are caught up on supply. So, I know thats not your forecast. You get them from the customers. But I am just kind of curious, you have been through this before. When you look downstream, you definitely see weakness. I am just kind of curious if you — what you have actually seen yet, obviously, memory same story, you are hearing about the capex cuts, just trying to fit all this into the picture versus I know you are still catching up. So, I dont know what the right starting point is, but clearly, you are seeing downstream weakness.

Tim Archer — President and Chief Executive Officer

Yes. Blayne, obviously, as we acknowledge, we are clearly hearing customers strike a more cautious tone. We see whats going on around — within the macro. And so we havent given the 2023 outlook, to be clear. And I think what we are saying is that if as demand — if demand changes and as demand changes, Lam is set up to operate effectively within whatever that environment is. And clearly, we have different scenarios. But the key is, as we look forward, things like our larger installed base business will be helpful for us, regardless of what the environment looks like. The improvements we have made, say, in our foundry exposure with new share gains and SAM expansion, that will be a positive regardless of what the end demand looks like. Higher etch and dep intensity due to the technology inflections, its true regardless of what the end demand is. And the fact that we have a more diverse and more efficient and more effective global manufacturing infrastructure. That will also be helpful regardless of what the demand is. So, I think what we are trying to highlight is we are not going to be the best at forecasting probably no better than anybody else and really know exactly what 2023 is going to be looking like. So, we do believe we have a pretty good view of how Lam can execute very well within whatever that environment is.

Blayne Curtis — Barclays — Analyst

Thanks for that. And then you might have answered this before, but just on the deferred revenue balance. I was just curious, you are seeing people start to catch up. I know you mentioned that it could be flat in September, but just trying to understand the challenges, are you still having certain subsystems that you cant get, or is it more like you are just getting high orders in the door and the balance keeps going up? Just trying to understand why that hasnt started to work its way down?

Tim Archer — President and Chief Executive Officer

Well, its just — one, its a higher volume of output we are trying to achieve. And quite frankly, its just all components. And I would say, everything is sort of improving. But in general, there is quite still a number of quantities that arent able to meet down that new higher level that we want for the output. And so it just continues to increase. So, I couldnt point to one specific thing, but I would say that in general, I am happy with the improvements we are seeing across a broad array of our suppliers. And so I said I thank them for their efforts because I do see that incremental improvement and expect further improvement as we move to September.

Blayne Curtis — Barclays — Analyst

Thanks so much.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Thanks Blayne.

Tina Correia — Investor Relations

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

Operator

Okay. We will take our final question from Joe Quatrochi with Wells Fargo. Please go ahead.

Joe Quatrochi — Wells Fargo — Analyst

Yes. Thanks for taking the question. Another question on the Reliant business, its pretty well known that the third-party reseller market for tools has been pretty limited on supply. How do we think about that market competing against the Reliant business? And then how should we think about that if that supply of tools, used tools maybe increasing if demand does start to slow from the end market semiconductors perspective?

Doug Bettinger — Executive Vice President and Chief Financial Officer

Joe, I guess the first thing I would point out to you was, yes, historically thats been a segment of a market service by a lot of used equipment today. There isnt any used equipment or very little. And as a result of that, we are selling older modeled new equipment into the Reliant product line, right? Demand is — there isnt anything coming to be refurbished today. So, I dont know, Tim do you want

Tim Archer — President and Chief Executive Officer

Yes. No. I think thats clearly the case. Most of that, if not all of that equipment at this point is being fully utilized.

Joe Quatrochi — Wells Fargo — Analyst

But I guess do you see that changing if demand were to slow from an end semiconductor perspective? Do you see the amount of tools coming in to be refurbished somewhat changing, or do you think customers maybe continue to kind of hold that capacity?

Tim Archer — President and Chief Executive Officer

I dont see that changing in a very significant way. I mean these assets once they are into these fabs, I mean we tend to see our tools used for 20 years to 30 years producing tips of some different technology nodes. So, I think as far as its been to get equipment, anything many of these customers will definitely keep hold of those systems.

Joe Quatrochi — Wells Fargo — Analyst

Thanks.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Thanks Joe.

Operator

This concludes todays question-and-answer session. I would like to turn the conference back to you presenters for any additional or closing remarks.

Tina Correia — Investor Relations

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

Operator

[Operator Closing Remarks]