Lam Research Corp

NASDAQ:LRCX

Good afternoon, and welcome to the Lam Research March 2025 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded.

I would now like to hand over to Ram Ganesh, Vice President, Investor Relations. Please go ahead.

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 have reviewed the results for the March 2025 quarter and our outlook for the June 2025 quarter. The press release detailing financial results was distributed a little after 1:00 p.m. Pacific Time. The release can be found on the Investor Relations section of the website, along with the presentation slides that accompany today's call.

Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides the presentation for additional information. Today's discussion on 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 to 3 p.m. 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.

Thank you, Rob, and thank you all for joining the call today. Lam's March quarter results reflect continued strong execution across the company, with revenues, gross margin, operating margin and EPS all exceeding the midpoint of our guidance. We delivered a record quarter for foundry revenues, demonstrating our product momentum in leading-edge technology inflections. Gross margin percentage was also a record for the company since the Novellus merger. As the investments we have made over the past several years in our manufacturing and operations are contributing positive as we scale the business. As our guidance indicates, gross margins are set to expand -- in the June quarter.

On our January call, we laid out what we saw as fundamental drivers of WFE spending in the year ahead. To date, these are about largely as expected, with strength in leading-edge foundry logic technology-driven conversions in NAND and a focus on high bandwidth memory and DDR5 in DRAM.

From an overall indicative, we continue to forecast calendar year 2025 BFE spending in the $100 billion range. We recognize that the current tariff and global economic environment is dynamic, but thus far, we have not seen any meaningful changes for our customers' plans. We are closely monitoring the situation alongside our customers and ecosystem partners. We believe that the agile manufacturing and supply chain capability that we have developed in recent years provides us with the flexibility to lessen the direct impact of tariffs. Our strategic focus in this environment remains on delivering the new products, advanced services and digital transformation initiatives required to achieve the growth and profitability outperformance goals we described at our Investor Day in February.

As a reminder, we identified 3 key drivers that underpin our ability to outperform overall WFE growth over the next several years. First, we expect to expand our served market, or SAM, faster than WFE as deposition and etch intensity rises due to greater semiconductor device complexity. Second, we expect to gain share with the strongest product portfolio in the company's history, targeted at $1 billion-plus technology inflections such as gate-all-around backside power distribution, advanced packaging and dry EUV photoresist processing. And third, we expect to grow our CSBG revenue faster than our installed base as customers look to Lam's upgrade, automation and equipment intelligence offerings to enhance productivity and execution as they expand their global fab operations.

Year-to-date, we are already witnessing incredible momentum in these areas. In deposition, Lam's atomic layer deposition or ALD products are making strong gains. Our Striker Spark ALD tool delivers the industry's densest conformal low-k carbide dialect films. Leveraging this capability, we have secured multiple key wins for spacer applications and a leading-edge foundry. Our ALTUS Halo system enables barrierless atomic layer deposition of molybdenum, reducing the resistance of critical contact and interconnect layers by 50% compared to legacy technologies.

In the case of 3D NAND, this reduction is critical to achieving the superior I/O performance needed for AI applications. As a result, Lam's Halo molybdenum process is seeing increased adoption across our leading 3D NAND customers. In etch, our new Akara system has gotten off to a great start, rapidly solidifying and expanding our market-leading position in conductor edge, featuring a proprietary industry-first innovation for ultrafast plasma control Akara delivers previously unachievable levels of performance in edge selectivity and profile patterning precision. We have previously announced leading-edge foundry logic momentum with this tool. And just since our Investor Day, the car has also won multiple critical etch applications and NAND manufacturer. By enabling current DRAM logic road maps with the , we are setting the stage for Lam to make further gains industry looks to implement even more challenging device architectures like 3D DRAM and CFET over next decade.

Turning to CSBG. We saw record revenues in our upgrade business. While the growth in upgrades was primarily driven by technology conversions, as forecasted at Investor Day, key DRAM and -- logic comers are also more actively upgrading and repurposing existing tools for new applications to optimize capital spending. Looking forward, we see the upgradable architecture of our system being a growing point of differentiation for Lam. We are enabling our customers to cost-effectively scale technology on the equipment they already own while creating revenue and share gain opportunities for us. Our collaboration with customers on operating cost optimization extends across the NP of our installed base business and over a longer term horizon.

For example, in March quarter, we signed a new multiyear spares agreement with a large memory customer for their latest technology node. This enables us to deliver value to the customer through assure component quality, cost and availability.

Finally, in Specialty Technologies, we achieved a couple of key milestones recently. First, at least -- a competitor and shipped multiple 20-millimeter PECVD tools for silicon carbide-based wide-bandgap or device fabrication. Second, our Pulse laser deposition solutions are being extended into more use cases, and we will bring in our latest tool this year for an advanced memory application. As customers look to accelerate R&D scale manufacturing globally, we're finding new ways to add value. We have talked in the past about our semi versus solutions capabilities, which apply advanced modeling, simulation, data science, machine learning and artificial intelligence to enhance equipment performance and shorten the time required for process optimization. I am pleased to report that recently, we signed new life agreements with 3 large customers for our virtual fabrication platform, simulator 3D. For both cost and performance benefits, we see virtual application -- fast becoming a required discipline in advanced technology today and Lam is leading the industry in this evolution.

So to wrap up, when I look at our solid March quarter results and strong June quarter guide, I see Lam executing at a high level of all aspects of the [ Alcami ] strategy we issued at our February Investor Day. This includes new product momentum and keeper wins, value creation from the installed base business and innovate in Equipment Intelligence virtual process development. Near term, we're taking steps to lessen the direct active tariffs and closely monitoring for longer-term indicators of demand changes. Our priority is to continue delivering the technological innovations and world-class support that uniquely enable our customers to scale semi -- into manufacturing faster, more productively and more cost effectively. Simply put, our competitive differentiation is enabling our customers' competing. For this reason, we remain confident that Lam is in an excellent position to outperform overall semiconductor industry growth in the years to come.

Thank you, and I'll now pass it on to Doug.

Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today. Lam is off to a strong start in 2025. The March quarter's performance exceeded the midpoint of all of our guidance range that we gave on the last earnings call. I was pleased with the company's continued solid execution. We've reached the highest quarterly gross margin percentage since Lam merged with us in 2012. We achieved this by proactively delivering on our operational efficiencies, our manufacturing strategy of being close to our customers.

Let's look at the details of our March core financial results. Looking at the March quarter was $4.72 billion, which was an increase of 8% from the prior quarter. Our deferred revenue balance at quarter end was $2 billion, which was essentially flat from the December quarter. Within this number -- the advanced payments trended lower all the components of the deferred balance trended higher. As we sit here today, I believe our deferred revenue balance will move lower by the end of 2025.

From a market segment perspective, March quarter, system -- memory was 43%, a decrease from 50% prior quarter. Within memory, nonvolatile memory -- for 20% of our systems revenue, down from 24% in the prior quarter. And just a reminder, this segment includes a domestic China customer that we classified as a nonvolatile memory producer and that we are currently limited from -- doing too. On a dollar basis, Lam saw growth from non-Chinese customers, consistent with our expectations from earlier in the year. The nonvolatile memory segment is being driven by customer spending on technology conversions from 1xx layer to 256 class devices. We currently expect this segment represent the biggest percentage growth in systems revenue for Lam in the June quarter. DRAM represented 23% of systems revenue compared with 26% in the December quarter. DRAM spending was focused on technology upgrades, [ alpha ], 1 beta and 1 [ nodes ] to enable DDR5 LPDDR5 and high-bandwidth memory.

Foundry represented 48% of our systems revenue up the percentage concentration in the December quarter, up 35%. This level represents a new record in dollar terms for Lam. Shipments for gate all around nodes and advanced packaging were strong. also benefited from mature node spending with domestic Chinese customers.

I'd just like to point out that the last time we're at these revenue levels back in late 2022, Foundry represented a concentration in the low to mid-30% range. We have clearly broadened and diversified our business since. And finally, Logic and Other were 9% of our systems revenue in the March quarter, down from the prior quarter's level of 50%. The decrease was primarily driven by reduced leading-edge spending.

Now I'll discuss the regional composition of our total revenue. The China region accounted for 31%, flat from the prior quarter. Most of our revenue from China continue to come from domestic Chinese customers. Our next largest geographic concentrations were Taiwan and Korea at 24% of revenue each in the March quarter. Taiwan represented a new record level for us in dollar terms. The Customer Support Business Group generated approximately $1.7 billion in revenue for the March quarter, down a little bit from the December quarter, however, 21% higher than the same period in 2024. Sequentially, the decline was attributable to lower Reliance Systems revenue, partly offset by record upgrade revenue.

Turning to the gross margin performance. The March quarter came in at 49% at the high end of our guidance range and improving from the December quarter level of 47.5%. The increase reflects a stronger mix as well as the efficiencies we're delivering from our close to customer manufacturing strategy. Operating expenses in March were $763 million, up from the prior quarter level of $735 million. The increase was due to growth in R&D activities associated with our ongoing road map differentiation. R&D accounted for 70% of the total operating expenses.

Operating margin in the March quarter was 32.8% above the December quarter level of 30.7% and near the high end of our guidance range, primarily because of the higher revenue and the stronger gross margin performance. Our non-GAAP tax rate for the quarter was 13.3%, in line with our expectations. Our estimate for the June 2025 quarter is for the tax rate to be in the single-digit range due to an anticipated tax reserve release tied to a statute of limitation expiration.

Beyond the June quarter, we continue to believe the tax rate will be in the low to mid-teens for the remainder of the calendar year. Other income expense for the March quarter came in at $7 million in expense compared with $11 million in income in the December quarter. The change in OI&E was due to lower gains on our equity investments and lower interest income. OI&E will continue to be susceptible to market-related fluctuations that will cause some level of volatility each quarter. I do believe OI&E will have a slight negative bias in the June quarter.

On the capital return side of things, we allocated approximately $347 million to open market share repurchases, and we paid $296 million in dividends in the March quarter. As I indicated on the last earnings call, in the quarter, we retired $500 million of unsecured notes that reached maturity using cash from our balance sheet. We returned 63% of free cash flow in the quarter. This was a little lower than normal due to that cash that we allocated for the debt retirement. For the March quarter, diluted earnings per share came in at $1.04, the diluted share count was roughly 1.29 billion shares, about flat with the December quarter. We have $8.8 billion remaining on our board-authorized share repurchase program.

Let me pivot to the balance sheet. Our cash and short-term investments totaled $5.5 billion at the end of the March quarter, down slightly from $5.7 billion at the end of the December quarter. The primary factors behind the cash decrease were the repayment of those notes, our capital spending as well as our capital return activities. Total debt on the balance obviously declined by that $500 million to $4.5 billion at quarter end.

Days sales outstanding were 62 days in the March quarter, which was a decrease 69 days in the December quarter. Inventory at March end totaled $4.5 billion, a slight increase from the December quarter as we prepare for higher revenue levels in the June quarter. Inventory turns were 2.2x compared with 2.1x in the previous quarter. We will continue to manage inventory levels to low customer demand. Our noncash expenses for the March quarter included nearly $87 million in equity compensation, $83 million in depreciation and $14 million in amortization.

Capital expenditures in the March quarter were $208 million, up $100 million on the December quarter. A main driver of this increase, the purchase of land in India to enable our planned lab expansion there. Our capital -- otherwise was focused on Lam investments in the United States, and global growth in manufacturing. We ended the March quarter with approximately 18,600 regular full-time ways which was an increase of approximately 300 people from the prior quarter. We had headcount growth primarily in the factory and field organizations to support increased tool installation as well as growing manufacturing activities. We also saw headcount increases within R&D to support long-term product road map.

Now let's turn to our non-GAAP guidance for the June 2025 quarter. We're expecting revenue of $5 billion, plus or minus $300 million. Expect systems revenue in Foundry and NAND to be up in the June quarter. This business level is consistent with our allocations from the beginning of the year. I want to specifically point out that we don't see anything being pulled in from future quarters. We're expecting gross margin of 5.5%, plus or minus 1 percentage point. This guidance includes our current assessment of the direct impacts of us on our business. operating margin of 33.5%, plus or minus 1 percentage point; and finally, earnings per share of $1.20, plus or minus $0.10, based on a share count of approximately 1.8 billion shares. This guidance gross margin and operating margin percentage would represent record levels since our joining of Lam and Novellus.

I would also just point that this would be the highest operating margin percentage that Lam delivered since the late 90s. These earnings would obviously represent an all-time record level of profitability.

To wrap up, we're off to a strong start in 2025. We're executing well on our operational and financial objectives. While the tariff related to uncertainty is keeping the dynamic, Customers are continuing to invest consistently with their planned technology road maps. At Lam, we're laser focused on driving innovation and delivering new product and service capabilities, while at the same time, enhancing operational efficiency, and managing our profitability goals. We believe we're well set up to outperform overall [ WF ] in 2025 as well as in the years ahead.

Operator, we're done in prepared remarks Tim and I would now like to open up the call for questions.

[Operator Instructions]. Our first question today comes from C.J. Muse with Cantor Fitzgerald.

I guess first question I was hoping to hit on the NAND upgrade cycle that you're seeing. You talked about that being the biggest growth driver into the June quarter. Would love to hear your thoughts around the sustainability of that beyond June. Are you anticipating a broadening of spending beyond just the 1 or 2 customers in the first that you're seeing in the first half of the year? And as you think about the growth there, I guess, how much of that will come through tools versus CSBG upgrades as well as -- is there a way to think about your share of wallet with the industry focusing so greatly on upgrades where would appear that you're going from 30% to maybe 40% to 50%?

Yes, C.J., this is Tim. I'll go ahead and start on this. As we talked -- depends on earnings calls recently, a significant portion said 2/3 of the industry's bits are still at around the 128 level. That's the 1xx expiration. So we see a tremendous number of bits that ultimately have to get upgraded to 2xx plus. So we don't know exactly what the rate and pace of this. Right now, we see a strong move in that direction. And obviously, we're watching for that. But Lam is an incredibly good position on -- one is the fact that we're the ones who upgrade our own tools. And so we capture a tremendous amount of the wallet, the spend associated with reading the tools that are in place.

At the same time, as we described at our Investor Day, as you extend beyond the 2xx to the 3xx and 4xx layers, you begin to need additional new tooling to enable that stacking. We talked about the sacrificial carbon gap fill that helps enable tier stacking. We talked about the backside deposition tool that helps with wafer stress as we move beyond 200 layers. We talked about the need to change the means of gap fill to an ALD gap fill.

These are things that are new tools. So I think you're going to see a mix. You're going to see existing tools like our etchers. Some of the old and stack depth tool be upgraded. I think then you'll see new tools being added. And one of those most significant new tools from a technology perspective is what I talked about in my script, which is the Halo moly, and we're seeing strong momentum there. And eventually, because of the improvement it makes in terms of resistance, and that impact on device performance, we think that ultimately broadens out and it is adopted across all customers.

Very helpful. I guess as my follow-up, your Taiwan revenues in the quarter were spectacular. I think the highest level that I can see over the last decade or more, and I guess, curious on kind of 2 fronts. One, how sustainable is that contribution to land? And then how does that inform your thinking about what second half tool shipments could look like versus first half?

Actually, C.J., let me just start from the standpoint of the comments we've made around leading-edge foundry logic strength it's been our stated strategy for the last several years to invest in new tooling to increase our exposure to leading-edge foundry logic. And so I don't think it should come as any surprise when we talk about record foundry revenues. We talked about strength in places like Taiwan. A lot of that is coming because we've been executing on the new product road maps and I talked about the a car, conductor etch tool off to a strong start. We talked about Spark ALD in my prepared remarks. I mean it goes well beyond that. obviously, advanced packaging, a big portion of that as well. Lam is really well situated in the technology inflections that are coming in leading-edge foundry logic. And I think that accounts for a lot of the strength. And I'll let Doug answer kind of the second part of that.

Yes. I mean Tim covered it, it's sustainable, C.J. It's not going away. It's all about the gate all around now, and it's all about advanced packaging. It's all the stuff we've been talking about. So not much to add from Tim's comments.

The next question is from Timothy Arcuri with UBS.

Tim, you made a comment on the call that you were -- I think you said taking steps to limit the impact of tariffs. Can you talk about that? I guess you do have a free trade zone in Fremont. And then when you make the tools in Malaysia, the country margin is Malaysia. So you should be fine there, too. But you did say taking steps to limit the impact. So can you kind of go into some details on that?

Well, I don't know that I can go into a lot of details on -- as far as the specific steps. But what I can say is that we've heard -- over the last several years to build a very flexible manufacturing and supply chain operation that's centered around our U.S. operations, operations in Asia, as Doug said, close to our customers, close to the supply chain. And so when I say taking steps, it's no different than what we're always doing. We look at the environment. We look at the customers and then we optimize that capability that we have that exists in many different places in the world to deliver our tools most efficiently and most effectively to our customers. And so it's kind of what we're always doing. And I think that, that's a result. I mean, that flexibility is, again, part of the strategy we executed when we saw disruptions like COVID and other things over the past years to really broaden out the global capability of our supply chain and manufacturing operations.

And Tim, I'd just remind you, it's Doug. We've got factories all over the world, right? We've got factories in United States, factories in Austria, factories in Malaysia, factors in Taiwan, factories in Korea, and we've been talking about this for a while. The fact that we have that broad footprint enables us to have some level of flexibility. And I guess, I'd just leave it there.

Cool. Okay, Doug. And then I had a question for you. So sounds like NAND upgrades you think should continue. But if we look at TSMC's CapEx, it looks like it does kind of flatten off as you get to the back half of the year. I know that you don't track your business -- doesn't track to their CapEx. But I think the feeling was that your revenue bias would be a little bit lower in the back half of the year. Is that still the case? You can give us some sort of puts and takes into the back half of the year, that would be great.

Yes, Tim, you're exactly right. You remember exactly what we -- into maybe the last call, and that's still the right way to think about it. It's a little bit of a first half weighted year, and you'll remember, we talked last quarter about the fact that we lost some of those Chinese customers that were -- as we looked into the year, would have been second half weighted. We talked about a number of approximately $700 million of business that we had planned on being there that is no longer there. So thinking about it a little bit first half weighted, is still the right way to have it, Tim.

The next question is from Harlan Sur with JPMorgan.

Maybe to follow up on Tim's question. So on the -- with levy many countries, including Malaysia and Taiwan. Obviously, there's any day reprieve early July, but let's assume that somehow this doesn't get resolved or you still have some residual tariff post resolution? Like does Lam team have enough manufacturing capability in the U.S. to service your Lean Edge customers that be aggressively building out plans here in the U.S.? I know before your manufacturing consolidation initiatives? You did have manufacturing in Oregon and in California, but not sure how that footprint has changed as you brought your Malaysia factory.

Yes. So I would go back to what -- it's a good thing. But back to Doug's comment about long-standing strategy of putting our capabilities close to our customers. And so you referred to this as we see customers expanding aggressively in the U.S. Obviously, that will occur over a period of time in which we've already shown an ability to be agile within our manufacturing and supply chain, like I mentioned, in response to COVID, where we moved things in regions where we could meet our customers' needs more effectively. I think that if we continue to see more investment in the U.S., we still -- operations significant manufacturing capabilities and footprint in the U.S. And obviously, as each region grows, we reassess what local manufacturing we need to support that ability.

Harlan, I'd just add, we can't instantaneously change things. But given enough once you know what the rules are, you just -- certain things with a paradigm. So just think about that. It might take a little bit of time depending on what shows up. But we have an ability to be flexible.

Great. And good to see the very strong comments on the gross margins. Are you seeing near term? You have shares and subsystems inventories that was there before tariffs were put in place. Just wondering if there are some basic materials that you or your subsystem partners sourced from China, which could quickly be a cost headwind for the team, maybe beyond the June quarter, either on spare parts or subsystem side of the business could impact product costs if the tariff headwinds remain?

Listen, Harlan, I don't want to get into everything like what do you have where in which country. We've got a global supply chain footprint. We've got a global manufacturing footprint. We have an ability to respond to -- things depending on what the rules are and how they change. I guess I'll just leave it at that.

The next question is from Stacy Rasgon, Bernstein Research.

First, it does sound to me like your -- based on your comments that you still expect China revenues to be in mix to be down in the second half versus -- so I guess, can you just confirm that, that is correct? And if that is true, does that have any implications for the sustainability of the gross margins at this level given that China has tended to have higher gross margins? Like how do we think about the gross margin sustainability into the back half at these levels, I guess, dynamics?

Yes, Stacy, I'm not going to give details on mix quarter-by-quarter. Still would tell you what we said last quarter was we expect the China concentration year-over-year to be down. That's still what we expect quarter-to-quarter, things might bounce around a little bit. But I'm not going to give you specific details on the quarter-by-quarter amount. But you're right, gross margin will go up and down depending on customer mix, product mix, overall revenue levels, it's a very complicated calculus as you look at all the things that move it around. So there will be variability there.

I guess, so should I not be thinking about gross margin sustainable at these levels in the back half then? Or is the variability around the current level or what?

Yes, there will be variability around the current level, Stacy. It won't go up every quarter. It will bounce around a little bit.

Okay. So I mean, should I be thinking about it going down just to be direct?

Yes. Variability means it is up, sometime it will go down sometime.

Okay. Okay. So my follow-up just very quickly, I think last quarter, you said you thought a [ CD ] revenues would probably be flat year-over-year in the calendar year. Is that still your expectation?

Yes, flattish is how I would describe it. Reliant will have some headwinds offset by the tailwinds that the upgrade part of the business has, Stacy, yes.

Next question is from Krish Sankar with TD Cowen & Company.

I had 2 questions. One is just to double check on this overseas manufacturing. Can you meet all of your nonnew customer demand from your non-U.S. manufacturing sites like Malaysia and Taiwan.

Krish, I'm not -- sorry, Krish, I'm not going to get into the exact details, right? We don't build every single tool at -- factory. But with enough lead time we can adjust depending on what is where. And like I said earlier on the call, depending on what the rules end up being, we can move things around as necessary, not instantaneously though.

Got it. Got it. And a question on China, too. I understand many of your Chinese customers are probably not -- don't have much long tenure. But I'm curious, what is the visibility into China? Because when you look at the last 3 years, it seemed like China surprised at the upside for WFE and demand. Do you think a similar scenario could play out there or the calculus different this time around?

I don't know that it's really all that different. Every customer, Krish, whether they're new or they've been around a decade, communicate plans on what they intend to do, where they intend to go. They all have road maps. They'll tell you what they want to do. It's no different in a region like China or Korea or Taiwan, frankly.

The next question is from Srini Pajjuri with Raymond James.

Question on the foundry logic. I know you get a lot of questions on NAND. It's up 60% sequentially and I think you're guiding for growth again. We all know that advance logic spending is coming back here. But if you could maybe put it out to what extent this is just the spending coming back versus your [ GAA ] being a drawer and backside power being a driver. And also, you talked about share gains in the past. If you could kind of help us understand what's driving that sequential strength and customer strength into the June quarter.

Yes. No, we obviously are like talking about the Foundry logic story because weighted a couple of really big drivers for us. We're talking about it as billion-plus technology inflections. You left out a couple, though. So of course, talk about gate all-around nodes, and we're putting a lot of new tools into support tension. Backside power obviously plays well for a deposition company where you're looking at more metalization, interconnect layers going on to the backside and those being thicker and generally requiring more tooling. What you left out was the advanced packaging and the important role that it's making and the role that Lam has in really a very significant leadership position steps like TSB etch, completing many of the dialectic induction films that are required for advanced packaging and that's an area where, from both a served market as a percent of total WFE spending, we've kind of reset the mark for us relative to foundry logic. And so advanced packaging is big.

And then the one that's still small, but coming is progress we're making on dry EUV resist processing, which when you look at about continued shrinking on the foundry logic road map and the challenges with lithography, it has a big role to play, and we are in progress there, both on the DRAM side, which we previously announced at our Investor Day, but also making progress with advanced customers on the Foundry logic side as well. So it's a lot of technology opportunity for a company like Lam.

Yes. That's helpful. And at a high level, Tim, I know you guided for single-digit WFE growth and you're kind of maintaining that. But if I look at your first quarter results and also your second outlook, you're growing north of 20%. So is this the level of outperformance that you are, I guess, for the rest of the year? I mean, how should we think about it if WFE growth 5%? And how should we kind of think about your performance expectation going forward?

Yes, I don't think we're ready to that number specifically, but we have talked about outperformance of WFE overall. Obviously, the mix and where the spending is occurring, how much of that spending is on those advanced technologies were Lam's served market has stepped up and we've got new tools going in, that comes into play as well. But overall, I think I finished my prepared comment about being highly confident in our ability to outgrow. And I think that's where we believe it.

Next question is from Atif Malik with Citi.

The first question is on WFE. I understand you guys are maintaining the $100 billion range as it's still -- there's no meaningful change in customer plan. One of your North American customers going through some major restructuring and we get asked from investors if you guys have date kind of a net neutral spending scenario for the customers in an event that customer tends to abandon the Foundry plans or change this direction?

I guess what I would say -- I won't talk about 1 specific customer. I mean generally speaking, you guys hear about something we've known about it well in advance of whatever you're hearing, right, because they got to tell us what they're doing. If we're going to have people there, we're going to have spare parts there to do installation and whatnot. So yes, to the best of our ability, we've contemplated everything we've seen in the totality of the market.

I totally understand. Doug, I have a follow-up for you. In your prepared remarks, I think you mentioned that your outlook for June quarter, you do not see any pull-ins from future quarters. So I'm just curious, is that comment based on the fact that the lead times are super long for your tools or your customer kind of pipeline kind of has not changed much from what you were seeing 90 days ago. So if you could just expand on what is that comment based on if.

It's based on plans that we've known these customers have had in place well in advance of even 90 days ago, right? If I think back to late last year, the outlook that we had for the current quarter that we just guided has not changed. Frankly, the whole year hasn't changed. Now I don't want you to communicate -- or I don't want to communicate, "Hey, could something change?" Of course, anything can change. But we're not seeing anything change in the environment. we're staying very diligent on contemplating, okay, tariffs are out there, might that have a macro impact, might the economy gets softer. Of course, we're aware of those things. Could that negatively impact things at some point? It could we're not seeing anything else. So I wanted to be very specific about saying that to you guys so you understand. Nothing is changing that we can see.

The next question is from Vivek Arya with Bank of America.

For the first one, if all China restrictions are already captured in your March results and June guide, why couldn't your second half sales be at or above first half levels? I guess my real question is what nonrestricted customer or end market could drop in the second half versus the first half?

Vivek, it's just the totality of the market, right? Nothing grows every single quarter. And when we look at everything that we see going on relative to customers' plans and timing of things, it's a little bit first half weighted. It's not 1 customer or even 1 or 2 customers, just how the plans of our customers are laying out in total.

Yes. We've talked about it in the past. I mean, our -- some of these projects are quite lumpy, and there's periods of large shipments, and then we spend a lot of time installing and the customer ramps those tools and then the next phase of the expansion comes in. And I think that's especially true when you talk about upgrades that are occurring in some of these fabs where they may not all be occurring over a very short period of time. They'll be spread out, and they might be lumpy in particular quarters.

I guess what I'm trying to ask is, is this second half right is that impacted in any way from China restrictions? Because, I mean, you should not be shipping to any restricted customers already. So what they do in the second half should not matter. And is it just conservatism about the nonrestricted customers or lumpiness in the back up? I'm just trying to understand how second half -- good local.

Vivek, you're overly focused on China. What we did describe is, hey, if you go back to early December, there were some customers we were shipping to last year that all of a sudden became restricted. The plans those customers had we're second half weighted. So that kind of went away from what we're looking at. So it's not for that, right? We were describing a second half that's different in profile than what we see right now. I don't know if we're confusing you or if I'm confusing you with that, Vivek.

Not at all. I just wanted to clarify. For the second one, on the gross margin upside, how much benefit that could you get from just the CSBG being down in terms of mix? So kind of that being a headwind versus the benefit from perhaps shipping more from Malaysia. So is there a point at which CSBG starts to grow and that becomes a headwind to gross margin. So I guess, back to the can gross margin sort of sustain at these levels. What are the positives or negatives? And then is 50% line of sight for you right now?

Listen, CSBG really doesn't do a whole lot relative to the variability in gross margin right now. That's not kind of when I go through the reconciliation, anything I'm seeing, frankly. Here's an interesting integration I had as I was prepping for earnings. I'd be interested for you guys to think about, too. If you go back to late 2022, and that was kind of the last time we're at these revenue levels. Gross margin was 45% to 46%. And our 48%, 49%. At that period of time, the overall geographic mix was fairly similar to what we're seeing today. And so if you think about it over that time frame, what's changed? And what's changed is our close to customer strategy, right? That's uplift to gross margin. Frankly, if you normalize for everything, I don't know, 200 basis points, maybe even a little bit more, it's come from what we've done with the company, frankly. So I think Tim and I feel really good about that. That's the strategy we executed. It's benefiting customers, too, because we're closer, we can turn things more quickly, and frankly, we can do it more for -- so that's the big reason over the last several years that gross margin has performed the way it has. That's the most important thing to be thinking about from my point of view.

The next question is from Blayne Curtis with Jefferies.

I actually want to ask, I know I probably already know the answer, you said things haven't really changed since the tariffs. I'm just kind of curious your conversation with costing there's some sense people think, hey, they'll pull in ahead of tariffs. The other sense is demand destruction and maybe a little rethink their capacity for the second half. So can maybe walk through what your conversations have been? I know you said overall, nothing changed, but I'm just kind of curious how customers are thinking about this.

Sure. I'll take a shot at it. Obviously, as I mentioned in my comments, we've been having a lot of conversations with customers to back in for changes I think the time frame which we've been operating, which is essentially kind of 2 months, less than 2 months with this discussion around tariffs. Customers really haven't thought about really what they would think for the demand changes. Those are going to occur over a longer period of time. These projects are multiyear investments. They've fought through them. They, in many cases, their technology investments to ensure that they have the right products.

We spent a -- Investor Day talking about the debate around NAND bits and the need. And I think we were trying to make the case at that point of independent of end demand you need a higher quality, more capable bit to compete for the types of applications that are needed in AI. I just say that the same thing on foundry logic, you see the same thing for the investments being made in advanced packaging. And so I think there's a little bit of a disconnect between a true end demand discussion and a technology positioning and a fair bit of the momentum that we're talking about our business is really coming from in customers at the leading edge, where I think strategically, they feel they don't have as much of a choice but to continue to invest in those areas to make sure they're as competitive as they can be -- statement, it may vary customer by customer. But it's how we are engaged with our comers to make sure that, however, this note they are competitive in their markets, and land is positioned the tools that we've been investing for years to place in the Lams to help them.

And then for a second, I just want to ask, Doug, in terms of the guidance on the gross margin, is there any impact from tariffs, it's a little bit confusing. There's some minimum tariffs. I know we have the 90-day reprieve, but I'm just kind of curious if you factored in anything.

Yes, Blayne, there absolutely is an impact, but it's contemplating -- based on everything we know and everything we understand, it's contemplated in that guidance of 49.5%. But I don't want to communicate there's not an impact. There is absolutely an...

Okay. But is there any way to quantify it or you don't want to go there?

I'm not going to go there.

The next question is from Mehdi Hosseini with SIG.

Yes. Two follow-ups. Is there any way we could think about fee in terms of strategic investment versus technology upgrade, which could also be a strategic versus men's? And then separately, highlighting with -- addition. And I'm asking this question because if you think about all the questions that have been asked, put to you over the past half an hour. It either has to do with China or sensitivity of the [ 100 billion ] WFE to macro picture. And I'm trying to understand how we could better think about inside risk, which could be mostly related to wafer cap. Any color would be great. And I have a follow-up.

Sure, Mehdi. I think I acknowledge what you're saying most of the questions have come in this area, but if you look at where I focused most of my prepared remarks, it's on Lam's long-term outperformance and even outperformance in this year. And that's simply because what really matters from our company perspective, what the short term and long term is product alignment to key technology road maps of our customers in the industry, how we enable that, how we get those products out. We're only 2 months removed from our Investor Day where we described an opportunity to significantly outperformed the industry in terms of served market expansion as deposition and etch intensity grows and also to gain share because we have a unique opportunity to increase our served markets faster in some of the key markets like Foundry logic. So when we look at this year, and I think both Doug and I said, we're pleased with the execution on I think a lot of it, of course, is in the financial performance, but even more it's around the seeds we're planting for future outperformance in the latest R&D fab, the latest investments. And that's ultimately what's more important to Lam's future regardless of where WFE happens to be in a year. And so I like your question, and it's like it's what we try to address with our scripted remarks.

Sure. And a follow-up for Doug. If I just the midpoint of the June quarter guide, it seems to me that the operating drop through margin of like almost 90% is reflecting all the investment of this couple of years. And now there is a limited increase in -- limited incremental increase operating margin. And this is how you're going to scale incremental increase in revenue. Is that the right way to think about sustainability of the margin?

I guess, what I'd point out is -- we're growing R&D. We're growing R&D because we see these amazingly unique opportunities for us to continue to outperform, right? The intensity of action deposition is growing. And so we're putting our foot on the gas a little bit relative to growing R&D because we see an opportunity to continue to expand the addressable markets gain share. Absolutely not apologizing for this because as I pointed out, this is an all-time record of operating margin for this company. I think Tim and I feel extraordinarily good about what we're delivering right now. And we want to keep doing that. And so we're investing to make that happen.

Yes. And that captures the incremental drop-through that you're capturing here?

It's part of it, yes.

The next question is from Joe Moore with Morgan Stanley.

Yes. Thank you. I wonder if I could ask a little bit more on CSBG kind of flat for the year. You said Reliant is a headwind. Can you just give us -- for the rank order of the subsegments within CSBG, how big is reliant now? And is there also a headwind on the service and spares from some of the restrictions in China?

Yes, of course, as those customers that all of a sudden became restricted, we can no longer provide service and spares. So that factors into this, too. But I mean, what you have going on is we described the point that China's down as -- per total year-over-year. So that's the reliance statement, right? A lot of the tools going in China are reliant. And then we have this amazing upgrade business right now that's showing up, especially in NAND, right, not just NAND, but it's quite strong in NAND. And so when you think about those 2 for offsetting each other, overall utilization -- stronger, so that's beneficial for spares and service. There's a lot of moving pieces in here -- bars continues to be the biggest individual move CSBG. And then as growing a bunch this year and Reliant is down.

Yes. The only thing I would add is -- just like for many years, we were viewed as a [ NAND ] we've certainly made investments to broaden our portfolio quite successfully in foundry, logic and DRAM. In the services side as well. We've talked a lot about Reliant, we've talked a lot about upgrades. But you're starting to hear us talk a lot more about intelligent services, equipment intelligence, cobots, the types of capabilities that our customers are going to need, especially as they think about expanding their global manufacturing presence, where there might not be as many people who are skilled at bringing up and ramping a advanced manufacturing fab. And so we think things like cobots, equipment intelligence the use of AI to make sure our engineers are equipped to troubleshoot and repair those tools faster. Those are things that are going to allow us to then perhaps grow our services business to be even a larger portion of that total CSBG. And that's a real focus for us.

That's helpful. And within Reliant, that used to be kind of a refurbished tools business. And then for a while, everything was so tight that there were no refurbish tools so as all new tools. Like can you just -- is there anything changing in that business? How much of that is kind of new tools? And are you seeing the refurbishment kind of come back into the picture there on Reliant?

Joe, it's still all new tools. There's really not any refurbishment in the industry today, not really.

That's right. It Is very little. And in fact, I mean, this is the -- we refer a lot more to specialty technologies as well, which sometimes is the use of these tools for really new applications in those more mature fabs.

Our next question is from Tom O'Malley with Barclays.

I had a broader one. So I think you guys said at the Analyst Day that if you look at the upgrades of existing equipment, you thought it was about a $40 billion opportunity. Obviously, if you look at the NAND industry, like the backdrop here is that you may have some impacts to consumer spend, et cetera. And when you look at like that and how long do you think you can continue to grow on the NAND front before you start to get some green kick in or some new equipment kick in versus the replacements? Any context around that would be super helpful.

Tom, that's a little bit of a difficult question. I thought you were going in the direction of how long will it take us to get through that $40 billion of upgrade which at the Analyst Day, we don't -- we did. I think we said it could be over a few years to more than that. But I think, again, some of these things are in market dependent, and we've talked in the past about the importance of getting NAND technology up to a point where it can play a significant role in the AI data center and some of the enterprise SSD. That's one of the areas where there is more end it seems and more investment.

So I think that it's a little too early for us to say. Like I say, we're 2 months beyond that view of $40 billion, and we think it still plays out over the next 3, 4, 5 years, over that period of time. And I think we're moving. I think the most important for Lam is it's not just upgrades, but as we talked, it's also a lot of the new tools that are needed to enable those higher payouts. And that's really, I think means we see both upgrades but also really SAM expansion and share gain opportunities as a result of those technology investments.

Maybe a tangent of that question is maybe as demand declines, you'll see increases to capacity coming offline, some more underutilization, conversations with customers, is that a linear relationship with how much capacity is taken offline and the desire to do more upgrades, a.k.a. like if you see more annualization from your customers, do you think that they will be more inclined to do more upgrade? Or is this the amount of upgrade spec kind of not going to change depending on utilization?

Well, we've said that in the past, and I think in most instances, it has been true. Obviously, the -- in that when cash the tools off-line, that is the most ideal time before they start those back up to perform the upgrade. Obviously, the last NAND down cycle was so severe, but I think we saw the tool stay offline longer than we might have did. But I do believe that generally, those things kind of a kind of countercyclical to each other when you see utilization fall, the next up cycle will usually come up but a different technology nodes means upgrades will have occurred and Lam captured some of that revenue.

Thanks, Tom. Operator, we're going to take one more question.

And that question will come from Tim Schulze-Melander with Redburn Atlantic.

Maybe the first one just on CSBG. You've talked about upgrades relying down. Maybe you could just give us a little bit of color on the spares just kind of how it's tracking sequentially? And any color you have utilization rates of your fleet? And then I have a quick follow-up.

Listen, it's doing well, right. I mean, [ Timbercon ] grew last year. So the incremental opportunity to sell more spares is up, utilization is trending favorably. So that drives fares to be doing reasonably well, Tim.

Okay. That's great. And then maybe just on the NAND upgrade opportunity. Just as you look out maybe over a longer term, maybe 1 or 2 years, can you just maybe kind of break that up for us just kind of how does that split between upgrade sales and OE sales? Is it like pretty equal? Or is it skewed one way or the other over the next couple of years?

Yes. I think as time progresses, I think you'll see it become more balanced. I mean, as we said, it's a combination of upgrades to the existing tools that are already there to be accomplished higher layer counts. And immediately, you need to also additional data tools to fight the types of technologies we needed to deliver higher layer counts. And so already, it's a mix. But as you move forward, and I think one of the previous questions is eventually customers might even start developing new sites as they get line of sight to stronger demand in the future. the new equipment sales would kick in as well. So it's already a mix, and I think it will continue to be a mix kind of for the next several years when we work through that $40 billion upgrade opportunity.

Okay. Thanks, Tim. Operator, with that, we're going to complete the call. everybody for joining us today, and I'm sure we'll see a lot of you guys during the remainder of the quarter.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.