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Lam Research Corporation (LRCX) Q3 2021 Earnings Call Transcript

LRCX Earnings Call – Final Transcript

Lam Research Corporation (NASDAQ: LRCX) Q3 2021 earnings call dated Oct. 20, 2021

Corporate Participants:

Tina Correia — Corporate Vice President, Investor Relations and Corporate Finance

Tim Archer — President and Chief Executive Officer

Doug Bettinger — Executive Vice President and Chief Financial Officer

Analysts:

Timothy Arcuri — UBS Securities LLC — Analyst

Harlan Sur — JPMorgan Securities LLC — Analyst

John Pitzer — Credit Suisse Securities (USA) LLC — Analyst

C.J. Muse — Evercore ISI — Analyst

Krish Sankar — Cowen and Company, LLC — Analyst

Joe Moore — Morgan Stanley & Co. LLC — Analyst

Stacy Rasgon — Sanford C. Bernstein & Co. LLC — Analyst

Blayne Curtis — Barclays Capital, Inc. — Analyst

Toshiya Hari — Goldman Sachs & Co. LLC — Analyst

Vivek Arya — BofA Securities, Inc. — Analyst

Patrick Ho — Stifel, Nicolaus & Co., Inc. — Analyst

Sidney Ho — Deutsche Bank — Analyst

Joe Quatrochi — Wells Fargo Securities LLC — Analyst

Quinn Bolton — Needham & Company, LLC — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Lam Research Corporation September Quarter Earnings Call.

At this time, I would like to turn the conference over to Ms. Tina Correia, Corporate Vice President, Corporate Finance and Investor Relations. Please go ahead.

Tina Correia — Corporate Vice President, Investor Relations and Corporate Finance

Thank you, and good afternoon, everyone. Welcome to the Lam Research Quarterly Earnings Conference Call. With me today are Tim Archer, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today’s call, we will share our overview on the business environment and we’ll review our financial results for the September 2021 quarter and our outlook for the December 2021 quarter. The press release detailing our financial results was distributed a little after 1:00 PM Pacific Time this afternoon.

The release can also be found on the Investor Relations section of the company’s website, along with the presentation slides that accompany today’s call. Today’s presentation and Q&A includes forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filing. 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 today’s earnings press release. This call is scheduled to last until 3:00 PM Pacific Time. A replay of this call will be made available later this afternoon on our website.

And with that, I’ll hand the call over to Tim.

Tim Archer — President and Chief Executive Officer

Thanks, Tina, and welcome, everyone. Lam delivered a solid September quarter with revenues in line and earnings per share above the midpoint of our guided ranges. These results represent our sixth consecutive quarter of revenue and earnings per share growth for the company. Over this time period we have scaled our operations to support rapidly growing demand for our products and services, and as we look forward, we see continued strengthening across both leading-edge device segments and specialty technology markets.

In response, we have expanded our manufacturing capacity at existing facilities in the United States, Korea and Taiwan. In the September quarter we celebrated the grand opening of our new Malaysia facility which when fully ramped will be the largest factory in our global network. And just last month we announced a new factory in Oregon primarily designed to meet increased demand for Lam tools and Foundry/Logic and advanced packaging applications. With these investments, we are building a solid foundation for delivering on our long-term growth objectives.

In the near term, however, we are not immune to the widely reported supply chain constraints and elevated costs that continue to create new challenges for Lam and others across our industry. Our employees and supply chain partners are working tirelessly to meet the needs of our customers and I would like to sincerely thank them for their efforts. From a wafer fab equipment spending perspective, we now see calendar 2021 ending in the mid-$80 billion range. Overall WFE is higher in the second half versus the first half of the year with both DRAM and Foundry/Logic up in the second half while NAND is more balanced.

Demand remains strong. And while it’s a bit early to give a specific forecast for calendar year 2022, indications are that it will be another year of WFE growth. We believe sustained strength in WFE spending is due to several factors we have previously highlighted. First, drivers of semiconductor demand continue to broaden in sectors such as automotive, health care and security are increasingly dependent on semiconductor content to deliver the performance requirements of end-users. As a result, we are seeing a strong uptick in trailing edge technology nodes served by our Reliant business.

Our Reliant business has now posted 11 consecutive quarters of record revenues and in calendar year 2021 we expect Reliant to outgrow the WFE investments in the segment. Furthermore, high utilization rates across our installed base are driving strength in all subsegments of our CSBG business and in the September quarter CSBG revenues increased year-over-year by more than 30%. At the leading edge, semiconductor content growth, larger die and rising capital intensity are fueling increased wafer starts and strong WFE spending. In Foundry/Logic, for instance, the next generation processor chip for a top smartphone maker is more than 20% larger than its prior iteration.

In DRAM higher capital intensity is being driven by the increasing need to correct single bit errors with the addition of an extra on bit chip, on-chip bit. In 3D NAND increasing device layer counts and the resulting higher degree of manufacturing difficulty is requiring the addition of new deposition and etch processes to address stress management, defect control and multi stack integration challenges. As a result, we see the WFE investment required to achieve the same bit growth percentage over the next five years to be notably higher than the five-year period just completed.

However, as the leading equipment supplier to the 3D NAND market we are investing in new and differentiated capabilities to ensure scaling remains cost-effective. As one example Lam has developed a new high productivity Kiyo etch solution which increases etch rates in high aspect ratio features required for NAND devices with greater than 200 layers. We have installed this new capability at every major 3D NAND manufacturer for qualification with additional shipments — systems now shipping to support planned ramps to high-volume production next year.

While initially developed to meet the demanding requirements of high aspect ratio of etch in 3D NAND, we believe the technology may also have benefits for Foundry/Logic and DRAM at the leading-edge where we are presently engaged with customers in critical applications. Looking in more detail at the Foundry/Logic segment, we see spending at record levels. Lam’s Foundry/Logic revenues are likewise set to grow significantly in 2021 and we expect this expansion to continue in 2022 as well. Foundry/Logic performance in the sub-5-nanometer era is being driven by both device architecture innovation and traditional area scaling.

We are prioritizing technology development in three areas where we see the fastest growth and the greatest need, namely deposition and etch processes to support the efficient adoption of EUV patterning, new etch capabilities to enable the formation of critical transistor features and new materials and deposition technique to assist in RC management. In patterning we’re using the learning we’ve acquired over many years of multi-patterning etch leadership to win new applications as the industry adoption of EUV progresses. EUV requires use of special photoresist materials which given the material composition can amplify existing challenges with pattern roughness and defectivity.

Unaddressed these will lead to performance and yield loss especially at smaller device dimensions. Lam has developed critical etch and deposition technologies to help solve these EUV implementation issues. In etch we introduced earlier this year a new pulse plasma etch capability that has demonstrated an order of magnitude reduction in EUV related pattern defectivity. This innovative etch solution is currently shipping to leading foundry and logic customers. In deposition hard masks and transfer films require enhanced mechanical properties in order to maintain fidelity of extremely small features and minimize line roughness.

Utilizing a combination of proprietary hardware design and RF power technology we are depositing high quality films that have replaced incumbent technologies such as PVD and spin-on materials at multiple Foundry/Logic customers. Related to the formation of critical transistor features including gates, pins and source string we saw significant etch wins in the September quarter. These wins continue to confirm the benefits of our unique plasma pulsing capabilities in conductor etch for gate all-around and FinFET applications. For advanced device architectures, we also see ultrahigh selectivity isotropic etch increasingly required.

Lam’s growing selective etch portfolio delivers superior results through a combination of process technologies and reactor innovations that include new chemistries and plasma sources. This has helped us win a greater number of applications in recent quarters. And finally, RC management continues to be limiter on performance scaling, and we are seeing demand for our atomic layer deposition technologies as a result. Our Striker ALD system deposits thin low k films that can withstand harsh integration steps encountered later in the process flow. These films have demonstrated the ability to reduce capacitance by 20% to 30%, and Striker is now the tool of record at leading Foundry/Logic customers.

This technology is also extendable to gate all-around devices where there is an additional requirement of conformal coverage and recessed cavities which can then be selectively etched back. In advanced packaging, momentum remains strong with orders received in the September quarter from multiple Foundry/Logic customers for through-silicon via etch and deposition systems. Our experience in high-aspect-ratio etching has allowed us to deliver a production-proven process with fast etch rates and smooth profiles, helping to minimize the cost of integrating TSVs in the overall flow.

Similarly, for copper metallization, our SABRE 3D solution enables void-free fill by employing an innovative advanced pretreatment, and our high throughput electroplating process reduces cost of ownership. So to wrap up, we delivered a solid September quarter in an environment of ongoing supply-chain challenges. We are seeing robust semiconductor demand across all segments, broadening of semiconductor applications across industries and rising capital intensity. We are excited about the healthy outlook for WFE spending and believe our innovative product portfolio is poised to capture new opportunities as semiconductor technology continues to advance. Thanks again for joining.

Now here’s Doug to cover the quarter in more detail.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining us on our call today. Lam’s delivered another quarter of strong results with revenue, operating income dollars and earnings per share coming in at record levels in the September quarter. All financial metrics came in at or above the midpoint of our guidance, demonstrating our continued focus on operational execution. We’ve achieved this performance while also navigating significant supply-chain challenges. We’re pleased with Lam’s ability to scale the company in this demanding environment. September quarter revenue was $4.3 billion, an increase of 4% from the June quarter and more than 35% growth from a year ago.

Looking at the breakout of the Systems revenue, the Memory segment represented 64% of Systems revenue in the September quarter, which was up from the prior quarter level at 59%. Memory growth was driven by investments in DRAM, primarily in the 1z and 1-alpha nodes. DRAM Systems revenue nearly doubled in dollar terms and grew from 10% in the June quarter to 19% in the September quarter. NAND segment concentration came in at 45% of our Systems revenue versus 49% in the June quarter and was flattish in dollar terms.

Our NAND customers are investing in both capacity additions and conversions with equipment investments focused towards 128-layer through 192-layer devices. The Foundry segment spending represented 25% of our Systems revenue compared with 35% in the June quarter. We’re seeing investments in equipment from both leading-edge and mature device nodes from multiple sources of end-use demand such as AI, IoT, cloud and 5G. Logic and analog device companies are driving capacity additions at the foundries.

There is notable growth in the Logic and Other segment, which hit a record level of Systems revenue for Lam in the September quarter. Logic and Other contributed 11% of Systems revenue in the September quarter which was up from 6% in the June quarter, and it was driven by leading edge and mature nodes ramping from microprocessors, image sensors, core management and 5G demand. Let me turn now to the regional composition of our total revenue. The China region came in at 37% of total revenues which was flat with the prior quarter percentage level.

The revenue from China domestic customers and multinational customers with fabs located in China was again fairly balanced in the September quarter. Korea and Taiwan regional spending represented 21% and 15% of revenues respectively in the September quarter. I do expect that the December quarter revenue will have a lower China concentration. The customer support business group revenue was nearly $1.4 billion, 34% higher than the September quarter in calendar 2020 and flat with the prior-quarter level.

As Tim noted, the Reliant product line that serves the specialty market delivered record results and we also had solid results in the spares, service and upgrades side with the focus on maximizing the productivity and value of the installed base tools while supporting the high fab utilization levels in the industry. I continue to have confidence that CSBG will grow revenues consistently on an annual basis. Let me now hit the margins performance. Our September quarter gross margin was 46% right at the midpoint of our guided range. I just remind you that our gross margin can fluctuate quarter-to-quarter due to overall business levels along with customer and product mix.

The supply chain constraints discussed earlier have resulted in elevated costs broadly with freight and logistics costs continuing to be one of the biggest headwinds. Additionally, we currently have margin dilution from our new factory in Malaysia which is not yet operating at full capacity. We’ve included these costs in our December quarter guidance as we expect they will remain in the near future. Operating expenses for September were $586 million, a slight increase from the prior quarter.

We’ve continued to manage our expenses as we scale the company, with a strong focus on operational efficiencies while prioritizing R&D spending to deliver differentiated product portfolio that supports our customers technology roadmaps. September operating margin exceeded the midpoint of our guidance range at 32.4% or approximately $1.4 billion. Our non-GAAP tax rate for the quarter was 12.2%, generally in line with our expectations. And as we’ve noted in previous quarter calls, our tax rate may fluctuate from quarter to quarter, and you should expect the ongoing tax rate to be in the low teens level for the 2021 calendar year.

We continue to monitor potential tax changes under consideration in the United States, but we’ve not reflected the impact of any potential changes in our financial models at this point. Other income and expense came in for the quarter at $36 million in expense. This amount is higher than prior quarter due to an unrealized gain we had in June for one of our private equity investments partially offset by lower interest expense in the September quarter as a result of the payoffs of our 2021 notes last quarter. And just to note, OI&E is subject to market-related volatility that could cause a difference from our typical run rate.

We were active in our buybacks during the September quarter allocating over $1.2 billion towards share repurchases. We deployed this cash and a combination of open market repurchases as well as an accelerated share repurchase program. This ASR will continue to execute in the December quarter. In addition, we paid $185 million in dividends in the quarter. I’d also like to highlight that in August we announced a 15% increase in our quarterly dividend, growing it from $1.30 to $1.50 per share which was paid in October. We’re tracking very well to our capital return plans with returns of over 100% of our free cash flow year-to-date in calendar year 2021.

Diluted earnings per share for the September quarter was $8.36, above the midpoint of the guidance range. The diluted share count balance was down slightly from the June quarter level coming in at 143 million shares, generally in line with our expectations. Let me now shift to the balance sheet. Cash and short-term investments including restricted cash totaled $4.9 billion, which was down from the prior quarter. The decrease in cash is attributed to the capital return activities that I described earlier. Additionally, the timing of shipments and resulting impact on accounts receivable as well as an increase in our inventory balance consumed cash in the quarter.

Days sales outstanding was up to 72 days from 66 days in the June quarter. Inventory turns were down slightly from the prior quarter level, coming in at 3.2 times, which was planned as we’ve increased inventory levels to meet the increasing investments from our customers as well as to help mitigate the challenges that we’ve seen in our supply chain. Non-cash expenses for the September quarter included approximately $58 million for equity compensation, $61 million for depreciation and $19 million for amortization. Capital expenditures for the September quarter were up versus the June level coming in at $136 million.

The increase in our expenditures is associated with capacity expansion in the network, in particular at our critical spare parts facility in Ohio, as well as spending for our Korea Technology Center that will be formally opening in 2022. We expect to see elevated levels of capital expenditures in the remainder of calendar year 2021 and into 2022 as we support the growth that we see in the business. We ended the September quarter with approximately 15,400 regular full-time employees, which is an increase of approximately 1,300 people, to meet the increased output levels and to support customers with their technology and production requirements.

Let’s now take a look at our non-GAAP guidance for the December 2021 quarter. We’re expecting revenue of $4.4 billion plus or minus $250 million. We continue to maintain a widened revenue range given the supply chain uncertainties that we mentioned. Gross margin of 46% plus or minus 1 percentage point, operating margins of 32% plus or minus 1 percentage point, and finally earnings per share of $8.45, plus or minus $0.50, based on a share count of approximately 142 million shares. And just an additional note, our guidance does not include an estimated gain related to one of our private equity investments that recently raised capital in a public offering. The gain as of today is in the $50 million range and is subject to market volatility.

The amount recognized in our financials as of the end of December 2021 quarter may fluctuate and I’ll obviously give you an update at our next earnings release. So then in closing, we’re experiencing ongoing output challenges in our global supply chain that are continuing to negatively impact both our revenue and gross margin. We’re improving known items while new items continue to emerge that we need to further work through.

Lead times remain stretched, and we continue to have unmet demand. Despite these constraints, we’re operating at record levels in terms of revenue and earnings while delivering the technology solutions our customers require. Industry demand remains strong as we look forward to growth in 2022. I remain very excited about the multitude of opportunities for the company, and I’d obviously like to thank the dedicated Lam Research employees for their tireless support in this environment.

Operator, that concludes my prepared remarks. Tim and I would now like to open up the call for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And first will go to Timothy Arcuri from UBS. Your line is open.

Timothy Arcuri — UBS Securities LLC — Analyst

Thanks a lot. Doug, I’m hoping that you’re not sick. You sound a little bit sick. Hopefully, you’re feeling okay. So I guess the first thing I wanted to say was that can you quantify, Doug. Can you quantify what the gross margin headwind is right now? You talked about Malaysia and freight. Is that 50 bps, 75 basis points? I’m just kind of wondering if you could quantify that for us. Thanks, Doug.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yeah, Tim. And thanks for the concern about my health. I’m doing quite well, frankly. I don’t know. Maybe just a little scratchy throat. I haven’t quantified it, Tim, and I’m not going to now except what I’ve said in the past and I’ll continue to say is it’s a notable headwind from where, once we get through this environment from where we will be. I’m not going to quantify it though. But it’s notable.

Timothy Arcuri — UBS Securities LLC — Analyst

It is. Okay. Okay. And then I guess also, you talked about China domestic being down sequentially for December. I assume some of that is Memory related. And I guess the question is, is that all sort of out of the system as you go into the first half of 2022? Or are there still some headwinds in China related to some particular projects that may persist in the first half of 2022?

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yeah. No, Tim. I don’t see anything new, really, relative to China or timing of anything. Maybe I’m not quite getting at your question or maybe I don’t understand the nature of the question. You want to try to redirect me little bit?

Timothy Arcuri — UBS Securities LLC — Analyst

Yeah. I guess, so there’s a pretty big project in China that has had — I mean it’s been well publicized they’ve been having funding problems. They can’t meet their commitments. Some I’m just wondering if maybe that was part of the NAND softness in the back half of the year that you cited last call. And I’m wondering sort of has that all played out now such that that’s not still a headwind into the first half of next year?

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yeah. I don’t really see any change from a quarter ago of any major customer plans. And I won’t refer to any one customer or another. But no real change, Tim.

Timothy Arcuri — UBS Securities LLC — Analyst

Awesome. Okay. Doug. Thank you.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Thanks.

Operator

And next we’ll go to Harlan Sur from JPMorgan. Your line is open.

Harlan Sur — JPMorgan Securities LLC — Analyst

Good afternoon, and great job on the quarterly execution, guys. The market is concerned that we’re heading into a multi-quarter downturn in memory kind of similar to the 2018/2019 memory downturn which is a pretty severe six-quarter downturn. But the one thing I clearly remember was that, ahead of that downturn, your memory customers proactively cut their capex very, very rapidly. Now if I look at it this time around, there’s some near-term pricing weakness in memory, but the overall memory demand environment remains pretty strong. And I think most memory companies seem optimistic, right, on the demand outlook for next year. So I guess the question is has the Lam team seen any signs similar to the 2018 downturn of customers either getting concerned or canceling or a slight pushing out of shipments due to a concern on a protracted memory downturn next year?

Tim Archer — President and Chief Executive Officer

Yeah. Harlan, let me take that first. I think the simple answer is no. And the vast majority of our conversations with customers today is still about delivering equipment that they feel they badly need to meet their near-term requirements. And as Doug mentioned in his prepared remarks, I would say lead times have stretched out to the point where our visibility into demand into ’22 is better than usual. And so I don’t think that the types of initial indicators that you’re talking about are things we’re seeing right now. We feel much more constrained by supply-chain challenges and ability to meet shipments than an over-shipping situation.

Harlan Sur — JPMorgan Securities LLC — Analyst

Yeah. Thank you for the insights there. And then the one area that we continue to see demand, which you alluded to, is obviously strong demand for mature and specialty processes analog microcontroller, RF. These guys are all dealing with supply issues. I know back at the Analyst Day the team said that specialty market is going about two to three times faster than WFE. So is your Reliant business growing faster than that 2-to-3 times rate? And where is the team driving stronger-than-market growth? Is it etch? Is it deposition or is it more based on platform performance like throughput uptime or other productivity metrics? Thank you.

Tim Archer — President and Chief Executive Officer

Yeah. It’s a great question. So as I said in my script, the Reliant business is growing faster than the WFE best investment in that segment so it would imply we’re picking up share there. It’s I would say reasonably well balanced across our product portfolio and you’re right, in that market a lot of that is about Lam’s leadership in bringing both technology and productivity to customers. So where there are new decisions being made about toolsets or new fabs being established for those types of specialty products, we have a lot to offer relative to hitting the cost targets that the those customers are looking for.

Harlan Sur — JPMorgan Securities LLC — Analyst

Thank you.

Tim Archer — President and Chief Executive Officer

Thanks, Harlan.

Operator

And next we’ll go to John Pitzer from Credit Suisse. Your line is open.

John Pitzer — Credit Suisse Securities (USA) LLC — Analyst

Yeah. Good afternoon, guys. Thanks for letting me ask a question. Tim, I guess that it’s a little bit too early to get too granular on next year’s WFE and I know in your prepared comments you said it’s going to be another growth year. I’m wondering if you can give us some parameters of how you’re viewing kind of first half of next year versus the second half of this year.

Tim Archer — President and Chief Executive Officer

Yeah. I think we’re not going to give first half and second half of 2022, but what we would say is we’re exiting this year with significant unmet demand. We talked about a constrained environment which means we enter 2022 with a lot of tailwinds relative to business. And what I tried to in my remarks layout, some of the trends that we think over slightly longer term maybe through 2022 on into 2023 are driving not only demand but really on the supply side rising capital intensity, larger die, different architectures, new processes that need to be inserted into process flows to deal with increased manufacturing complexity. Those will be drivers for WFE structurally for a very long time. So I think there are a lot of things that will be positives for WFE in 2022 from an equipment perspective.

John Pitzer — Credit Suisse Securities (USA) LLC — Analyst

That’s helpful. And then Tim, as follow up, pretty big milestone in the logic business. I think this quarter’s revenue was about a third higher than prior peak. It’s the first time you been run rating over $1.0 billion ever and I know you’ve kind of talked about some of the things you prepared comments that are driving that. But to what extent you believe that this is sustainable? To what extent is it TAM growth in logic versus kind of your market share and SAM growth starting to kick in? And then any sort of view on sustainability from these levels?

Tim Archer — President and Chief Executive Officer

Well, I’d say it’s probably a combination of both us expanding into some new applications that I talked about related to emerging device architectures, gate all around new processes like selective etch technology that are expanding our market opportunity. But also share gains. I mean we’ve seen the increase in spending in the Foundry/Logic area for a number of years. We’ve been focused on developing products that bring real value to customers in that space. And what we always said was they have to be a little patient because changes in a Foundry/Logic world come a little more slowly than in the Memory world and I would say you’re starting to see the fruits of those qualification efforts starting to play out in our actual business results.

John Pitzer — Credit Suisse Securities (USA) LLC — Analyst

Perfect. Thank you.

Tim Archer — President and Chief Executive Officer

Thanks, John.

Operator

And next we’ll go to C.J. Muse from Evercore. Your line is open.

C.J. Muse — Evercore ISI — Analyst

Yeah. Good afternoon. Thanks for taking the question. I guess first question hopefully we can go back to supply constraints and, Doug, can you perhaps speak on the revenue side. Where you’re seeing the impact? Is it primarily due to perhaps the slower ramp in Malaysia? Are you seeing it across all products or limited to a few? And then I’m curious as part of that, is it impacting CSBG both for Reliant and upgrades or less so there?

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yeah. C.J., thanks for the question. You know, frankly, when I look at what we’re doing with our own internal manufacturing capability, that’s not what the biggest constraint is. It’s getting back into the supply chain. I think we’ve done quite a nice job actually accelerating the ramp of the factory in Malaysia. Tim referred to all the places that we’re opening new capacity. We’re adding capability pretty much everywhere internally in the network. But as we get further and further down the road and demand continues to be quite strong, we’re beginning to see constraints in the supply chain so we’re having to work our way back up through some of those things, and that’s the biggest thing we’re dealing with right now, C.J. Tim, I don’t know if you want to add anything?

Tim Archer — President and Chief Executive Officer

No. I guess I’d just reiterate. We build incredibly complex machines that do amazing things on the wafer. They require a lot of parts from a lot of different suppliers to do that, including tremendous amounts of semiconductors themselves. And so when we’ve heard so much about chip shortages, clearly that hits some of our machine. And it only takes a few of those critical chips to delay us being able to ship what otherwise is a very complex system. So we’re, as Doug said, just having to work down through the supply chain through lots of suppliers to find out where those pinch points are. And it’s a daily activity, but so far we’re working through there and being able to deliver growth and also meet the most urgent needs of our customers. That’s really our key focus.

C.J. Muse — Evercore ISI — Analyst

Very helpful. As my follow up, I get the sense whenever I have conversations with you both that you feel like investors underappreciate your Foundry/Logic exposure. And so within your slide deck and in the prepared comments, you talked quite a bit about new quals, new design wins. And so curious. I think over the last three years your SAM or as a percentage of Foundry/Logic’s running around 8%, 9%. When do you think we see an inflection based on the design wins? And what should we be looking for to gauge that? Thank you.

Tim Archer — President and Chief Executive Officer

Yeah. That’s a great question. And I’m glad you noted. I spent a lot more time in these prepared remarks talking about Foundry/Logic. I think our Memory story and leadership there is pretty well understood. And we want to make sure that people are understanding the progress we’re making in Foundry/Logic and also the new opportunities that are being created for us. And so many of those are for more advanced technologies. It’s where device architecture changes or things like a new RC management requirement. RC requirement drives need for new films or new deposition techniques.

And so I would just say at each technology node we’re seeing an inflection. We’re seeing more of our equipment have a chance to get inserted, get qualified, and become a part of the process of record. And so I don’t think you’re going to see like a single point in time or a single node where you see a big jump up, but you’re going to see this steady progression as we make progress on both SAM expansion and share gains.

C.J. Muse — Evercore ISI — Analyst

Beautiful. Thanks.

Tim Archer — President and Chief Executive Officer

Thanks, CJ.

Operator

And next we’ll go to Krish Sankar from Cowen and Company. Your line is open.

Krish Sankar — Cowen and Company, LLC — Analyst

Yeah. Hi. Thanks for taking my question. I have two of them, too. First one, I think I just want to clarify, Tim or Doug. It seems like the supply-chain constraints are impacting your revenue even though demand is strong, and it’s impacting your margins. So should we assume this $4.4 billion revenue, 46%-plus in gross margin is where you’re going to be saturated until the supply constraints ease or do you think it’s going to be more a gradual recovery? And then I had a follow up.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yeah. Let me start, and then I’ll let Tim add on. Krish, I think some of the cost headwinds we’re seeing are going to be around for a while, especially what I intimated. You know we’re doing our best to work through it in an efficient and effective matter, but frankly we’re just spending money to try to continue to increase our output capability. And like I said in my prepared remarks, we’re making progress on lots of different things, but we didn’t see other things popping up. And like I said, we’re working our way back through the supply chain, and Tim referred to the fact that actually semiconductors are constraining us a little bit. So you know we’re doing our best to work through it. We’re mitigating problems. We’re incrementally increasing capability as we go. And I think it’s going to get better bit by bit is what I would describe, Krish. I don’t know. Tim, do you want to?

Tim Archer — President and Chief Executive Officer

Yeah. I think that’s a pretty good explanation. It will continue to improve as we knock down each of the problems that comes up and, assuming that there aren’t bigger surprises, we would see ourselves gradually improving from this point forward, just as we had supply constraints in the September quarter and managed through those, and we will have more in the December quarter. So it’s constrained, but we’re managing to knock enough off that we’re showing some incremental growth, and I think that’s what you could probably expect to continue to see.

Krish Sankar — Cowen and Company, LLC — Analyst

Got it. Very helpful. And then a follow up for you, Tim. You talk about the cryo etch product, which kind of makes a kind of sense given the extremely long etch times today in 3D NAND, and you also said this also improves etch rate. But isn’t it negative for you since customers would need sure of your etch tools or is this needed to protect and grow your market share?

Tim Archer — President and Chief Executive Officer

Well, I think that like all things, when you’re providing the technology that’s needed to not only enable the current nodes but future technology nodes, we have an obligation to drive both technology and productivity and make sure that scaling is cost effective, and the roadmap continues. And so, this is our effort to not only differentiate our technology further from any companies that may try to develop similar technologies, but also to help our customers with those transitions and accelerate kind of the state-of-the-art of NAND.

Doug Bettinger — Executive Vice President and Chief Financial Officer

And, Krish, I’ll just remind you something Tim said in his script remarks, that as we look at demand investment required to generate the bit growth over the next five years as compared to the previous five years, it’s increasing. That includes Kiyo rolling out and increasing etch rates as a result of that.

Krish Sankar — Cowen and Company, LLC — Analyst

Got it. I think that’s a very fair explanation. Thank you.

Tim Archer — President and Chief Executive Officer

Thanks, Krish.

Operator

And our next question comes from Joe Moore with Morgan Stanley. Your line is open.

Joe Moore — Morgan Stanley & Co. LLC — Analyst

Great. Thank you. I wanted to ask about NAND. Tim, in your opening remarks you had mentioned that the five-year spending in NAND needs to be higher than the last five years I think is what you said. In terms of any quantification of how much that is? And just any qualification of why layer count is that much more capital intensive? You are increasing layers in the last five years, are increasing layers in the next five years. What is it the drives up the capital intensity? Thanks.

Tim Archer — President and Chief Executive Officer

Yeah, sure. So we did say that the WFE required per, to achieve the same percentage of bit growth would be higher in the next five years and it’s a number of things. One is as the layer counts continue to increase, certain processes scale, as we’ve said, non-linearly. So it takes longer to etch a stack that’s twice as high, it takes more than 2 times longer. And that’s why we need to introduce new technologies like the Kiyo etch and other processes to keep that escalation of process times to a reasonable level.

The same thing can happen with deposition as you’re trying to control uniformities and defects as stacks become much higher and taller. And so in addition to that, I mentioned several steps that get added. So as you start to stack higher, the wafer stress and bow becomes a much bigger challenge. And so now you have to add extra steps like Lam’s stress management deposition tool. Those additional steps add to the WFE required to add a bit of NAND. And so that is the — it’s the combination of both new steps to deal with complexity as well as new processes required to deal with nonlinear scaling process times.

Joe Moore — Morgan Stanley & Co. LLC — Analyst

Great. Thank you.

Tim Archer — President and Chief Executive Officer

Thanks, Joe.

Operator

And next we’ll go to Stacy Rasgon from Bernstein Research. Your line is open.

Stacy Rasgon — Sanford C. Bernstein & Co. LLC — Analyst

Hi, guys. Thanks for taking my questions. My first one, I wanted to take a look at the Foundry business. So it was down like 25% sequentially, and it looks like it was down year-over-year in what seems to be a very, very strong foundry spending environment. So why was that? Can you tell us a little bit what’s going on in that end market? Why was it down?

Doug Bettinger — Executive Vice President and Chief Financial Officer

You know, Stacy, nothing goes up every single quarter. There’s ebbs and flows. It’s a second half weighted Foundry/Logic spending profile. And it’s going to be a good quarter in December, but when you’ve got a concentrated set of a couple of really big customers it’s lumpy at times. I think that’s the only thing I’d tell you about it.

Stacy Rasgon — Sanford C. Bernstein & Co. LLC — Analyst

Okay. I guess to follow up on that in terms of what might be implied for the trajectory in Q4, so you said Foundry/Logic up second half versus first half, DRAM up second half versus first half, NAND is kind of more balanced. I guess given where NAND is, and given where DRAM is, right, like in order to have that foundry still to be up in the second half I think we have DRAM down considerably in December quarter in order to get Foundry up. Is that what you have in mind or when you say Foundry/Logic growing in the second half do you mean just as a combination growing?

Doug Bettinger — Executive Vice President and Chief Financial Officer

It’s a combination, really, right. We said Foundry/Logic and DRAM up in the second half and NAND more balanced.

Stacy Rasgon — Sanford C. Bernstein & Co. LLC — Analyst

I guess what I’m asking is do you see Foundry and Logic both up in the second half or just the combination? Because I can’t really get Foundry up in the second half unless I got DRAM down a bunch in the December quarter just mathematically, like when I’m thinking about this [Indecipherable]

Doug Bettinger — Executive Vice President and Chief Financial Officer

Stacy, we’re combining Foundry and Logic together when I described it.

Stacy Rasgon — Sanford C. Bernstein & Co. LLC — Analyst

Okay, guys. Thank you.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yeah.

Operator

And next we’ll go to Blayne Curtis from Barclays. Your line is open.

Blayne Curtis — Barclays Capital, Inc. — Analyst

Hey. Good afternoon. Thanks for taking my question. I had two as well. Just curious to a couple prior questions on the Logic segment. You talked about really trailing edge kind of driving that big spike so I think the prior question you kind of mentioned some of the future wins you have at the leading edge. So just maybe kind of just revisit that and we talked about I think you said that it could maybe stay at this level to John’s question. Is that the trailing edge or are you seeing that leading-edge starting to come in even in the December quarter?

Tim Archer — President and Chief Executive Officer

Yeah. We didn’t want to mislead here. I mean, we talked about the Reliant business and trailing edge as a notable area of strength for Lam. And a sign of this broadening of demand across many, many different use cases including industries like our own where we’re consuming a tremendous amount of that type of chip. But we do have significant business at what we would call the current leading-edge and what I was trying to point out is how our SAM expands with new processes and how our win rate is increasing we believe as new inflections come into play. So that’s all built into our numbers today. But we do think that from our share of WFE going forward as these technology inflections at Foundry/Logic take place, we would see that driving higher over the next several years.

Blayne Curtis — Barclays Capital, Inc. — Analyst

Thanks. Maybe a question for Doug on gross margin. It’s kind of like there are still some variability in the outlook and question whether factories like Malaysia get better. I was kind of curious if your foundry customers are raising pricing, their customers are raising pricing, everybody’s raising pricing, is there a lever that you can ultimately pull as an industry on pricing? I’m just curious your thoughts.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yeah, Blayne, you know we’re doing our best to get paid fairly for what we’re delivering to customers and get paid for the value we’re delivering so that’s an ongoing activity at the company. And a lot of our pricing arrangements are on an annual basis renegotiated, and clearly, we’re focused on trying to get gross margin to improve over time. So that will be a part of it.

Blayne Curtis — Barclays Capital, Inc. — Analyst

Thanks, Doug.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Thanks, Blayne.

Operator

And next we’ll go to Toshiya Hari from Goldman Sachs. Your line is open.

Toshiya Hari — Goldman Sachs & Co. LLC — Analyst

Hi, guys. Thanks much for taking the question. My first question is on 2022. I realize it’s early. You guys talked about your expectations for the market to be up. How are you thinking about the four device types? If you had to rank order the four, how would you go about doing that? And more importantly, how should we think about Lam’s ability to outperform the market in 2022? I guess the big concern is Memory is flat to flattish maybe and Logic and Foundry continue to be the big drivers. All else equal, that would be a bit of a headwind for you guys just given your customer mix. But at the same time, you’ve talked about all these design wins and your market share growth in Foundry and Logic. So net-net, how should we think about your performance vis-a-vis WFE?

Doug Bettinger — Executive Vice President and Chief Financial Officer

Toshiya, it’s too soon for us to give you specificity on 2022. When we look into the year though, 2022, I’m very confident of a growth year. I believe every segment of the business is actually going to be pretty strong next year but I’m not really ready to parse it one versus another quite yet. Obviously, we’ll do that for you next quarter. And I feel really good about where we’re positioned. Tim talked a lot about the trajectory of our business in Foundry and Logic. We’ve always been strong in Memory and I believe we’re going to continue to do extremely well there. So too soon for me to parse it there. And by the way, I think CSBG is going to have good year next year, right? When I put it all together, I think we’re very well-positioned and are going to continue to be. Stay tuned. We’ll give you a little more specificity on the December quarter call.

Toshiya Hari — Goldman Sachs & Co. LLC — Analyst

Got it. And then a quick follow up on your last point, Doug. On CSBG, you talked about the Reliant business having a record quarter which I guess implies that your spare parts business and other parts of your business could have been down little bit. I appreciate your point about there being some lumpiness if you will on a quarter-to-quarter basis. But if you can speak to what you’re seeing in the non-Reliant business in CSBG in near-term, that would be helpful. And then I guess you sort of addressed this in your prior answer but how confident are you that calendar 2022 could be another up year after what’s been a very strong year in CSBG? Thank you.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Toshiya, you’re right. There’s lumpiness to different aspects of it. Tim specifically said 11 consecutive quarters of record revenue for Reliant. Obviously, there’s ebb and flow and other stuff. As inventory builds a little bit, upgrades can be a little bit lumpy at times depending on what’s going on in the installed base. But I’ll tell you. When I think about CSBG going into the next year, it’s been a very strong year in terms of our chamber shipment this year. That’s the opportunity, continue to have CSBG grow into next year. And that’s why I have pretty high confidence that this business will grow every single year. It may not grow every single quarter. Right? We were flat this quarter. But we’re shipping a lot of chambers this year, and I feel pretty good about what that’s going to mean for CSBG next year.

Toshiya Hari — Goldman Sachs & Co. LLC — Analyst

Thank you.

Tim Archer — President and Chief Executive Officer

Yes. Thank you.

Operator

Next will go to Vivek Arya from Bank of America Securities. Your line is open.

Vivek Arya — BofA Securities, Inc. — Analyst

Thanks for taking my question. You mentioned the supply situation could improve over the next several quarters. I’m curious. What do you think changes to help that? Is that actions you are taking? Is that actions your suppliers are taking? I’m just curious what’s kind of behind your confidence that the supply situation can actually improve from here?

Tim Archer — President and Chief Executive Officer

Yeah. I think it would be, perhaps, actions we’re taking with our suppliers. It’s about helping to prioritize our critical supply chain partners towards the things that are most important to meeting output quarter by quarter. The actions we’ve taken ourselves kind of detail those out. If we look back six months ago or more, we were talking about physical capacity, needing to open factories, expand factories, and we’ve really taken care of a lot of our own actions. But in a very complex supply chain, we’ve got to do the same work with all of our partners. And they’ve been great through that, but there’s still more work to be done, and we just anticipate that over the next several quarters we’ll continue to make progress.

Vivek Arya — BofA Securities, Inc. — Analyst

All right. Thanks, Tim. And for my follow up, you sound more confident about next year both on the tools on the CSBG side. Is that based on the backlog of orders? Is that based more on structural drivers? And where I’m coming from is that customers are seeing the current state of the industry and supply shortages. What gives you the confidence they are not over-ordering given this environment, that these orders are for real? So if you look at your confidence about next year, how would you kind of contrast those signals to what you usually have at this point in prior years?

Tim Archer — President and Chief Executive Officer

Yeah. That’s a very good question, something we watch closely. We want to make sure that demand is as real as possible. I mentioned our lead times, our conversations with customers. Our understanding of projects, I would say, is better at this point because our customers planning for very big projects, mega fabs, they are experiencing difficulties in getting equipment. And so we’re having much deeper conversations with them about how we can ensure that that equipment be available when they need it. And so I would say compared to normal we have a little bit longer visibility than we typically have had.

Doug Bettinger — Executive Vice President and Chief Financial Officer

And, Vivek, obviously, we know every fab in the world, how big it is, how much equipment it can take, and we think through that as we’re talking to customers about when they want equipment in those clean-room spaces. So that goes into part of the thinking as well.

Vivek Arya — BofA Securities, Inc. — Analyst

Thank you.

Tim Archer — President and Chief Executive Officer

Yes. Thank you.

Operator

And next we’ll go to Patrick Ho from Stifel. Your line is open.

Patrick Ho — Stifel, Nicolaus & Co., Inc. — Analyst

Thank you very much and congrats on a really nice quarter given the environment. Doug, maybe just a follow-up question on the Customer Support business group. You guys have done a really, really good job growing the Reliant business. Obviously, the TAM of that marketplace is growing and you’re capitalizing from that. Are you getting any “share wins” because customers, especially on that front, are looking for more productivity? There are new materials engineering that’s going on in some of those, I guess, trailing-edge processes. Are you actually gaining share also and getting placements with the Reliant business for some of those more mature nodes?

Doug Bettinger — Executive Vice President and Chief Financial Officer

That’s a good question, Patrick. Yeah. We are. I mean we go to market there through the Reliant product line, as you know, which is refurbished equipment. And increasingly, we’re selling new equipment. And when I look at some of the new customers or customers that are taking equipment, our footprint is doing quite well, frankly, in the specialty space. And we have some very specific things that we’re very, very strong at. So yeah, I think we’re doing well. I don’t know, Tim, if.

Timothy Arcuri — UBS Securities LLC — Analyst

Yeah. I guess what I would just add is as people are trying to work through supply constraints and increase their output out of the fab most valuable part of our CSBG business to them is the productivity upgrades segment. Those are upgrades that can be applied to existing equipment. Many times not even really changing the process, it might be software optimization to optimize the wafer handling to the machine and thereby gain some small improvement in throughput. We definitely see as utilizations really hit like max levels, people looking for productivity upgrades they can implement to squeeze more out of the installed base. And so that part of our business does — always does quite well but I would say in this environment, doing quite well.

Patrick Ho — Stifel, Nicolaus & Co., Inc. — Analyst

Great. Thank you.

Tim Archer — President and Chief Executive Officer

Thanks, Patrick.

Operator

And next we’ll go to Sidney Ho from Deutsche Bank. Your line is open.

Sidney Ho — Deutsche Bank — Analyst

Thanks for taking the question. My first question is going back to supply constraints, I’ve got to give this a try. If you look at your revenue year-to-date, how much more revenue do you think you could have shipped if there were no constraints? And I — if you are not answering quantitatively, are there some metrics that you can point to, help — you can point to, to help us think about that dynamic for the revenue orders? I know you don’t disclose orders anymore.

Tim Archer — President and Chief Executive Officer

Yeah. Now, Sidney, we’re not going to quantify it right now but we are constrained, our lead times are stretched, it’s a decent amount of unmet demand. I mean there’s a reason that I said unmet demand, lead time and so forth. We’re working our way through it but I’m not going to quantify it.

Sidney Ho — Deutsche Bank — Analyst

Okay. Maybe I’ll switch over to ask about the memory side. What are your thoughts about the byte supply growth run rate exiting this year for DRAM and NAND? It seems like some of the capex spending in the early part of this year should turn into output by the end of this year. And kind of related to that, I assume most of the memory capex will be for technology transitions. But how should we think about what portion of the WFE is more driven by wafer additions and hence are more variable in nature? Thanks.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yeah, Sidney. When I look at both NAND and DRAM this year, it’s a combination of both wafer ads and you always get node conversions in both NAND and DRAM and that’s very much what we see going on. More wafer ads this year than last year obviously, it’s just the nature of where demand is in the industry. And when I think about supply growth, you know the bulk when I look at the investments that are occurring this year I think NAND is pretty balanced in terms of supply/demand growth for the year. I think DRAM is still a little byte constrained frankly, so that’s generally what I see, what we see at Lam.

Sidney Ho — Deutsche Bank — Analyst

Okay, great. Thanks.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Thanks, Sidney.

Operator

And next we’ll go to Joe Quatrochi from Wells Fargo. Your line is open.

Joe Quatrochi — Wells Fargo Securities LLC — Analyst

Yeah. Thanks for taking the question. I wanted to go back to your comment around WFE investments required to achieve the same byte growth in NAND. I was curious, how do you compare that growth in that required investment to DRAM? Is one growing faster than the other?

Doug Bettinger — Executive Vice President and Chief Financial Officer

I’m not sure I got the question. Try it one more time.

Joe Quatrochi — Wells Fargo Securities LLC — Analyst

Yeah. So I mean you talked about the increase in investment for — to drive the same amount of byte growth in NAND, I assume that that’s a similar trend that we’re seeing in DRAM. But I was curious of is NAND growing faster than DRAM at that level of investment to drive byte growth or is DRAM investment growing faster?

Doug Bettinger — Executive Vice President and Chief Financial Officer

You’re absolutely right that they’re both growing in order to get the same amount of byte growth. I’m not ready to compare one to the other necessarily. But they’re both growing, it’s getting more and more challenging, capital intensity is going up to get the same level of byte growth in both NAND and DRAM.

Joe Quatrochi — Wells Fargo Securities LLC — Analyst

Okay. Fair enough. And then just as a follow up, 3D DRAM seems to be of this growing topic of interest. I was just curious what’s Lam’s thoughts in terms of the timing of that? And then just the opportunity for you guys looking out to that technology?

Tim Archer — President and Chief Executive Officer

Well, it’s still pretty far out from a production perspective, but clearly, we’ve always said is anything that transitions devices in the third dimension requires a lot of etch and deposition equipment to build and create those complex three-dimensional structures. So clearly, a great opportunity for Lam if that inflection takes place. What I can say is of course we’re engaged at this point in the early days of developing what those architectures and materials will look like. And as we get closer to defining those process flows, I’m sure there will be more discussion about that part of our business.

Joe Quatrochi — Wells Fargo Securities LLC — Analyst

Helpful. Thank you.

Tina Correia — Corporate Vice President, Investor Relations and Corporate Finance

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

Operator

Thank you. Our last question comes from Quinn Bolton with Needham. Your line is open.

Quinn Bolton — Needham & Company, LLC — Analyst

Hey, guys. Thanks for squeezing me in. Doug, just wanted to come back to that unmet demand. I know you’re not going to quantify it. But if you just look back over the past couple of quarters, has that continued to grow even as you’ve been able to increase capacity and revenue?

Doug Bettinger — Executive Vice President and Chief Financial Officer

I’m not going to tell you how it’s moved sequentially. It was there last quarter. It’s there this quarter. We’re working to kind of mitigate it, work our way through. But I’m not going to compare it one quarter to the next.

Quinn Bolton — Needham & Company, LLC — Analyst

Got it. And the second question, just follow up on Malaysia. Do you have any sense or can you give us any sense when you think that stops being a drag? Is that still a couple quarters out or is that something you’d rather not specify?

Doug Bettinger — Executive Vice President and Chief Financial Officer

It’ll get better as we ramp the factory. And I think by the time we get to the second half of 2022 it’ll begin to be a benefit to gross margin as opposed to a headwind. We just need to get it ramped. There’s fixed cost there, and we’re working on that.

Quinn Bolton — Needham & Company, LLC — Analyst

Thanks, Doug.

Doug Bettinger — Executive Vice President and Chief Financial Officer

Yes. Thanks, Quinn. Okay, operator. I think that’s it for us. Tina, you want to close us out?

Tina Correia — Corporate Vice President, Investor Relations and Corporate Finance

Yeah. We just wanted to tell everyone we appreciate your support and thank you for joining our call today.

Operator

[Operator Closing Remarks]

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