Lam Research Corp

NASDAQ:LRCX

Q1-2026 Earnings Call

[Operator]

Good day, and welcome to the Lam Research Corporation September Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Ram Ganesh of Investor Relations. Please go ahead.

[Ram Ganesh, executive]

Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, President and CEO; 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 2025 quarter and our outlook for the December 2025 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time. The release can also be found on the Investor Relations section of the company's website, along with the presentation slides that accompany today's call.

Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the Risk Factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information.

Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation.

This call is scheduled to last until 3:00 p.m. Pacific Time. A replay of this call will be made available later this afternoon on our website.

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

[Timothy Archer, executive]

Thanks, Ram, and good afternoon to everyone on the call.

Lam delivered a solid September quarter, highlighted by record revenues of $5.3 billion, gross margin of 50.6% and record operating margin of 35%. We also achieved record combined spares and services revenue, and growth in total CSBG revenue outpaced the increase in installed base units.

Inclusive of our guidance for the December quarter, we expect to close calendar 2025 with 3 consecutive quarters of greater than $5 billion in revenue. Our performance reflects strong company-wide execution and the critical role that our products and services portfolio plays in enabling the industry's technology road map and in addressing the rapid increase in semiconductor manufacturing complexity.

Our December quarter guidance does contemplate roughly a $200 million revenue impact from the recently announced 50% affiliate rule restricting shipments to certain domestic China customers. Currently, we expect this rule to impact our calendar year 2026 revenues by approximately $600 million. This impact, together with the strong growth anticipated in worldwide fabrication equipment, or WFE spending, leads us to expect the China region to represent less than 30% of our overall revenues in calendar year 2026.

Turning to WFE. Spending in calendar year 2025 is shaping up to be slightly better than our prior view of $105 billion, predominantly due to better-than-expected high-bandwidth memory, or HBM, related investments. As we look ahead, we see a robust setup for equipment spending in calendar year 2026.

AI-related demand should support sustained strength in leading-edge foundry logic and DRAM as well as continued NAND upgrade spending. The strong leading-edge growth we see across all 3 device segments is forecasted to be partially offset by a decline in domestic China related investments.

We plan to provide our detailed 2026 WFE spending outlook and subsegment color on our January call for our usual practice. AI and its impact on the semiconductor industry continues to be a major topic of interest. And the data center CapEx investments already announced are expected to drive significant expansion of manufacturing capacity over a multiyear period.

In recent months, we have seen an acceleration of activity. AI data centers require the most advanced CPU and accelerator capabilities; low latency, high-bandwidth memory and high-speed eSSD storage, all integrated through 2.5D and 3D advanced packaging. We estimate these needs translate to roughly $8 billion of WFE spending for every $100 billion in incremental data center investment.

Most importantly, deposition and etch, the area of Lam's core product differentiation, play an increasingly critical role enabling the higher performance, more scalable semiconductor devices required for AI. We see the surge in AI data center demand creating billions of dollars of served available market expansion and share gain opportunity for Lam in the coming years.

I will share a few areas of strength we are seeing. In NAND, customers are continuing to upgrade existing fabs to meet the need for higher layer count, higher performance devices. We have estimated that these conversions will require $40 billion of WFE spending over the next several years. And as we have previously said, Lam should capture a high percentage of this conversion spend due to our large installed base position.

Our upgrades business is projected to remain strong into 2026, as NAND bit demand looks to be trending higher than prior expectations. Device makers have already announced enterprise-grade SSDs with 256 terabytes of storage capacity to satisfy growing data center demand for high-capacity storage.

Availability of clean room space will likely act as a limiter to the pace of NAND supply growth, but we believe the capacity additions to meet rising bit demand may be needed sooner than previously thought. Lam is in a great position for both upgrade activity in the near term and new capacity builds in the future.

We have the industry's largest installed base of NAND systems and our comprehensive NAND product portfolio features several industry-first advances. Notably, Lam recently earned the 2025 semi award for our pioneering Lam Cryo 3.0 dielectric etch technology, a process that has quickly become the industry standard for advanced NAND devices.

We are also seeing solid demand for our atomic layer deposition, or ALD, products, including a recent key win at a major NAND manufacturer for a critical high aspect ratio dielectric deposition application. Lam's differentiated conformal fill capability using a higher temperature process was fundamental in securing this win.

On the metal side, Lam's Halo Moly ALD tool has been selected as the tool of record for 3 consecutive nodes at a leading customer, including for devices with more than 500 layers. This further reinforces our leadership in the 3D NAND word line application, a step that is fundamental to building the higher performance devices required for eSSDs.

The performance demands of AI devices are also spurring investment in foundry logic and DRAM manufacturing inflections. Over the last several years, we have focused our -- on expanding our product portfolio to target these opportunities and believe we will benefit as the technology transitions unfold. For example, Lam's ether Driesist EUV patterning solution has demonstrated the ability to resolve features of less than 15 nanometers at the highest density and pattern fidelity.

Ether also enables a more than 10% reduction in EUV exposure dose boosting scanner productivity and reducing the cost of patterning per wafer. Lam's Ether technology is already ramping in the HBM high-volume production line of a major memory manufacturer, and we see more opportunities ahead as we look further out on the road map.

For instance, we believe high NA EUV in combination with Ether for single patterning of sub-10-nanometer features will be critical to addressing the complexity and cost challenges associated with the transition from gate-all-around transistors to CFET in foundry/logic, as well as the anticipated migration from 6F squared to 4F squared in DRAM.

In September, we announced a key partnership with JSR Corporation, an innovative semiconductor materials company to collaborate on the integration of our Ether technology with novel EUV patterning materials and metal oxide resists. In addition, Lam and JSR are partnering to explore new precursor materials for advanced ALD applications, which we believe can further enhance our capabilities and differentiation for future technology inflections.

In the case of low K ALD films, Lam's high-productivity single-wafer solutions are enabling our customers to move past traditional furnace-based approaches. As logic transistor sizes scale down to achieve greater compute power, higher capacitive coupling in the gate module to grades overall performance.

Similarly, as DRAM devices shrink, there is a detrimental increase in capacitance between the bitline and capacitor contact. To resolve these issues, deposited low-k films must be very thin, 5 nanometers or less, and conformal in high aspect ratio structures. Furnace-based films at these thicknesses are often fragile and unable to withstand the harsh chemistries used in subsequent process steps.

Lam's low-K ALD solution employs a unique single wafer remote plasma reactor and a novel precursor to deposit thin defect-free films with the desired silicon carbon bonding structure. As a result, Lam's ALD films have demonstrated superior durability on the remainder of the chip making process. and we recently secured critical wins at foundry logic and DRAM customers for low applications using this process.

Beyond traditional device inflections, Lam is also benefiting from healthy growth in advanced packaging. Our SABRE 3D plating and Syndion etch systems are industry leaders and should continue to see strong demand in 2026 as AI-related spending grows.

Looking further ahead, we are investing in new advanced packaging opportunities. Today's packaging production lines primarily use 300-millimeter diameter wafers. But as AI and high-performance computing demand larger chips to integrate more accelerators, memory and interconnects panel-level packaging is emerging as a scalable solution.

By processing multiple units on larger format panels, it significantly improves manufacturing efficiency and supports the integration of increasingly complex and larger semiconductor devices. Lam's SABRE 3D, Calisto and Phoenix tools are being engineered to meet future panel packaging needs.

We are collaborating across the ecosystem to drive industry-wide standardization and co-development, both of which are essential for scaling high-volume manufacturing and next-generation integration solutions. We expect to end this year with tools shipped to or install at 20 customers worldwide. Our growing installed base of panel packaging tools is rapidly building experience and maturity that should prove valuable as this technology becomes mainstream in the future.

So to wrap up, Lam is poised to close out a record calendar year 2025, and our setup is strong heading into 2026, where we expect solid WFE growth. The technology requirements of AI play extremely well to Lam's product strengths, and we are excited by the breadth of opportunities we see ahead for the company.

Now here's Doug.

[Douglas Bettinger, executive]

Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a busy earnings season. We executed well in the September '25 quarter, delivering gross margin performance of 50.6%, which is a record in the post Novellus period.

Financial results for the quarter came in above the midpoint of all of our guidance ranges. We also delivered many financial records throughout the P&L. The company truly performed well in the quarter.

Let's turn to the details of our September quarter results. Revenue for the September quarter came in at an all-time record of $5.3 billion, which is up 3% from the June quarter. Deferred revenue balance at quarter end was $2.77 billion, up slightly from the June quarter due to increases in services and system-related transactions where revenue recognition was not yet complete.

This was partially offset by approximately $100 million of reduction in customer advanced down payments. We do expect to see these down payments continue to decline in the December quarter. From a market segment perspective, foundry accounted for 60% of our systems revenue in the September quarter, up from 52% in the June quarter.

This marks our third consecutive record quarter underscoring the strength of our strategic focus and execution in foundry. Foundry strength came from investments at the leading edge in addition to mature node spending in China.

Memory was 34% of systems revenue, which was down from 41% in the prior quarter due to the timing of customer investment plans. Within Memory, nonvolatile memory contributed 18% of our systems revenue, which was down from 27% in the June quarter. The trajectory of the NAND spending this year is broadly consistent with our expectations coming into the year.

And as the industry transitions to devices of up 200 layers, we continue to estimate over $40 billion in upgrade spending will be required over the next several years. DRAM increased from the June quarter accounted for 16% of systems revenue compared to 14%. Investments in high-bandwidth memory continue to remain strong, driven by AI-related customer demand.

We're also seeing traditional node migrations to the 1B and 1C nodes, enabling the transition to DDR5. The Logic and Other segment came in at 6% of systems revenue in the September quarter, roughly in line with the 7% we reported in the June quarter.

Let's turn to the regional breakdown of our total revenue. China came in at 43%, an increase from the prior quarter level of 35%. While the multinationals in China remain steady, the domestic Chinese customers grew and the majority of our China revenue continued to come from them. The next largest geographic concentrations were Taiwan at 19%, which was flat sequentially and Korea at 15%, down sequentially from 22%, again due to the timing of customer investment plans.

The customer support business group generated approximately $1.8 billion in revenue for the September quarter, slightly higher sequentially and year-over-year. This is being driven by continued strength in spares and upgrades. CSBG remains a key part of our growth strategy given the expanding installed base and our innovation in advanced services.

We expect CSBG to deliver year-over-year growth in 2025. And I just mentioned that in the 13 years since we brought Lam and Novellus together, CSBG has grown every year except for one.

Let's look at profitability. Gross margin in the September quarter was 50.6% at the higher end of our guided range and improving from the June quarter level of 50.3%. The increase is primarily driven by favorable customer mix, partially offset by the impact of tariffs. I expect the impact from tariffs to continue to increase somewhat in the December quarter.

Operating expenses for September were $832 million, which was up from the prior quarter level of $822 million. The increase is primarily due to increased headcount and incentive compensation, which is tied to the company's improved profitability. R&D accounted for 68% of the total operating expenses.

We're investing in innovations like Vantex, Okara, Halo and Dextro, to continue our leadership in providing a differentiated product portfolio for our customers. The September quarter operating margin was 35% at the high end of our guidance. This operating profit represents a record level for land in both dollars as well as percentage terms.

The non-GAAP tax rate for the quarter came in at 14.2%, generally in line with our expectations. We continue to see the tax rate in the low- to mid-teens for the near term. We do expect, however, with the increase in the guilty rate in the United States as well as the advent of the global minimum tax regime outside of the United States, you will see a slight increase in our effective tax rate as we get into calendar year 2026.

Other income expense for the September quarter was approximately $8 million in income compared with $4 million in income in the June quarter. The slight increase in OI&E was primarily the result of increased interest income tied to a higher cash balance. As we've talked about in the past, you should expect to see variability in OI&E quarter-to-quarter.

Let's look at capital return. In the September quarter, we allocated approximately $990 million through share buybacks through open market share repurchases. Our average buyback price in the quarter was approximately $106 per share. Year-to-date, we've repurchased nearly 30 million shares at an average price of a little more than $88 per share. We also paid $292 million in dividends in the quarter. I'll remind you that we increased the dividend from $0.23 to $0.26 per share earlier this month.

Moving forward, we remain committed to returning at least 85% of free cash flow to our shareholders over time. The September quarter diluted earnings per share were $1.26 above the midpoint of our range. The diluted share count was 1.27 billion shares, which was a reduction from the June quarter and consistent with our guidance. We have $6.5 billion remaining on our Board authorized share repurchase plan.

Let me pivot to the balance sheet. Cash and cash equivalents totaled $6.7 billion at the end of the September quarter, an increase from $6.4 billion at the end of the June quarter. The main reason for the cash increase was cash generated from operating activities, which was partially offset by cash allocated to capital return as well as capital expenditures.

Days sales outstanding was 62 days in the September quarter, which was up slightly from 59 days in the June quarter. September quarter inventory turns improved to 2.6x compared with 2.4x in the prior quarter and up from the levels 2 years ago of 1.5x.

We've remained focused on driving asset utilization during this time frame, and I was pleased to see us deliver this outcome. Our noncash expenses for the September quarter included approximately $97 million for equity compensation, $89 million for depreciation and $13 million for amortization.

Capital expenditures in the September quarter were $185 million, which was up $13 million from the June quarter. Spending was primarily focused on lab investments in the United States along with expansion of manufacturing sites in Asia. This remains consistent with our global strategy to be close to our customers' development and manufacturing locations.

We ended the September quarter with approximately 19,400 regular full-time employees, which was an increase of approximately 400 people from the prior quarter. Headcount increases were in R&D to support our long-term product road map. Additionally, we had increases within the field organization to support customer growth and a higher volume of tool installations.

Let's turn to our non-GAAP guidance for the December 2025 quarter. We're expecting revenue of $5.2 billion, plus or minus $300 million. We expect a decline in China revenue offset by stronger spending from the global multinationals. We're expecting gross margin of 48.5%, plus or minus 1 percentage point.

I expect customer mix and tariffs will be contributing to the sequential decline in gross margin. We're expecting operating margins of 33%, plus or minus 1 percentage point. And finally, earnings per share of $1.15, plus or minus $0.10 based on a share count of approximately 1.26 billion shares.

I want to give you a few things to think about as you build your 2026 models. While we are not yet quantifying the level of growth in WFE, I will tell you that calendar '26 looks somewhat second half weighted as we sit here today. The newly restricted China entities would have been weighted to the first half of next year.

Customer mix will be a headwind to gross margin a bit next year, as the China mix normalizes. And the tax rate will likely tick up very slightly, as I previously mentioned. We'll give you better color on all this during the December quarter call.

So let me wrap up. Lam delivered another strong quarter, highlighted by record levels of revenue, record gross and operating profit. Inclusive of our December quarter guidance, we're on track to deliver calendar year 2025 at an all-time high watermark in financial performance closing with 3 consecutive quarters of revenue above $5 billion.

We remain focused on strategic investments that extend our technology leadership, operational efficiencies and long-term value creation.

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

[Operator]

[Operator Instructions] And the first question comes from the line of CJ Muse with Cantor Fitzgerald.

[Christopher Muse, analyst]

I guess, first question, very helpful guidepost for thinking through incremental WFE tied to AI infrastructure spending. But I guess over the last 6, 8 weeks, would love to hear how your conversations with customers have progressed? Are you seeing expedited meetings? Are you seeing actual orders? Would love to see how the announcements around infrastructure spending is translating into visibility on your business?

[Timothy Archer, executive]

Sure, C.J. Let me take that. I mean, obviously, when we talk about announcements that are made recently, there's not physical space, there's not near-term demand for those. Those are things that give you a guidepost as to where demand is going further in the future.

I think to look at the conversations that we're having today about near-term needs for equipment, it's a lot of the things I talked about, which is enterprise SSDs and the impact on NAND. You've heard some of our customers, I believe, speak to bit demand that might be a little bit higher than expectations. I just said that our view of NAND upgrades is well on track for '25 and a strong '26.

So it's really down when we talk about our equipment demand, it's near-term needs with those longer-term announcements as opportunity in the future. But they're along the same technology transitions. Those data center investments are going to require faster GPUs made at smaller nodes for foundry/logic. They're going to be made with higher capability HBM.

And that's where all of our products come into play, how we participate and gate all around, our ALD tools, high aspect ratio conductor etch. On the DRAM side, the work we're doing in HBM to enable higher stacking of HBM devices. And so again, we're seeing very robust demand, as we mentioned, going into 2026, but it's for things that are real and here today.

[Christopher Muse, analyst]

Very helpful. And then maybe thinking through your relative outperformance to WFE. Based on your guide, it looks like you're tracking on a tool shipment basis, up 40%. And I think many investors think we're growing 10% overall. So tremendous outperformance. I guess, how are you thinking about 2026? And as part of that, what would be the critical drivers to drive relative outperformance?

[Timothy Archer, executive]

Yes, sure. I'll let Doug add in here as well. But I guess I would just say that you have to remember that as fabs get built and equipment is brought in, there often are timing issues. And so it's a little bit hard to speak to any near-term like outperformance, underperformance for certainly because it depends on what other suppliers are going to be doing and when they're shipping and what their lead times are.

But what we can say with quite a bit of confidence and I think we laid it out at our Investor Day earlier this year, is that over the longer term, Lam's markets, etch and deposition, will outgrow WFE because of nearly every trend is taking place technology-wise in semiconductor manufacturing, whether that's 3D devices, in foundry/logic, in NAND, whether it's a smaller, higher aspect ratio devices and stacking, using advanced packaging in DRAM, whether it's advanced packaging itself. They're all deposition and etch-intensive products. And therefore, I think over the longer term, confidence to outperform WFE is very high.

[Douglas Bettinger, executive]

Nothing to add, Tim, you nailed it. Thanks, C.J.

[Operator]

The next question comes from the line of Tim Arcuri with UBS.

[Timothy Arcuri, analyst]

Doug, when we talked 3 months ago, you were thinking that December would be like 4 7. You were saying it'd be sort of back to where March was, and now it's coming in at 5 2. So the incremental $400 million to $500 million, where did that come from? It sounds like maybe a little bit of it pulled in from the first half of next year. Can you just sort of give us a sense like what's actually better than what you thought 3-or-some months ago?

[Douglas Bettinger, executive]

Yes. Listen, I think Tim pointed in fact that WFE is a little bit stronger. We think high in DRAM is a little bit stronger. And maybe everything else was just a little bit stronger, Tim, it's not any 1 thing that I would point to. I would tell you, though, honestly, it would have been even higher if not for the restricted entities in China. So things did strengthen for sure. As we look into next year, clearly, next year is a growth year. .

And whether we pulled anything in from the first half, I honestly don't think so, Tim, because as we sit here today, I think the first half of next year is flat to maybe slightly up from the second half of this year. So it's going to continue to be pretty good.

[Timothy Arcuri, analyst]

Got it. Great. And then on the 2026 WSE in China, I know you and everyone else has the same message that it's going to be down. But to be honest, that's what everybody said at this time last year, too, and you're growing like 20% this year. I know that there are some others that are more close to flat. But I mean, Europe a time and virtually everyone else is up a ton too.

So it seems like we keep thinking that China will digest and it will be down, but they keep finding ways around these bands. So like why would China be down next year? I guess I'm just trying to figure out, is there something different next year that you're seeing that maybe gives you the confidence that finally, China is going to be down because it hasn't happened yet?

[Douglas Bettinger, executive]

I guess what I'd say, Tim, it's twofold. First, the global multinationals outside of China are going to be pretty strong next year. So that's part of it, right? Everything else is going to be stronger in '26, I think, than it was in '25. And honestly, as we sit here right now and look at the stack up of everybody's plans in China, it's going to be less.

That's the best I can tell you. And yes, you're absolutely right, a year ago, when we were sitting here, we would have seen the same thing and then to strengthen through the year. I guess, right now, don't see where that's going to come from next year, Tim.

[Operator]

The next question comes from the line of Vivek Arya with Bank of America Securities.

[Vivek Arya, analyst]

For the first one. Tim, you gave this interesting statistic $8 billion of WFE for, I think, every $100 billion in data center. How much of that $100 billion of data center spend is in semiconductors? Basically, what is the WFE intensity in an AI data center versus kind of the mid-teens WFE intensity for all semiconductors? And then of that $8 billion, what is Lam's opportunity?

[Timothy Archer, executive]

Okay. Go ahead on here. But I guess just to clarify, the $8 billion was WFE for $100 billion of data center investments. So that would be -- that would represent the equipment portion that we could target. And again, given that data centers and especially those focused on AI applications require leading edge across all 3 device segments.

Again, that's an area where Lam's SAM as a percent of WFE continues to increase with every technology node. And so all the things I'm talking about, whether it's high aspect ratio etches, it's either, dry EUV resist, it's ALB, all of those are growing our opportunity in that $8 billion. And so that's where a lot of our focus is these days is the products that are required to do well through that spend.

[Douglas Bettinger, executive]

Vivek, was that your question? Did I answer the question? I'm not sure we got it...

[Vivek Arya, analyst]

No. My question is different. Because if you look at WFE overall as a percentage of semiconductors, it's about mid-teens percent. And when we talk about $100 billion in data center spend, there's a lot of non-semiconductor spend as part of that. So my question is, of that $100 billion, how much is semiconductor spend and what does that imply for WFE intensity in an AI environment? And of that $8 billion, how much is Lam's opportunity?

[Douglas Bettinger, executive]

Yes. Listen, Vivek, if I'm honest, I don't know the precise answer to your first question, how much is semiconductor content as part of that $100 billion? It's a decent amount, right? This GPUs, it's HPM, it's enterprise SSDs. I don't know the precise number, but I know it's a decent amount.

And then relative to our intention in all these things, it's very similar to what you've seen from us across the rest of semis, which is you've got the move to gate-all-around, you've got high bandwidth memory, you've got a growing stack in NAND. It's part of the contribution of our share of WFE going from the low 30s to the high 30s, this would be representative of it to the best of my ability to answer your question.

[Timothy Archer, executive]

Yes. I think that would be the best way to think about it is at the Investor Day, we said that as you move to these leading-edge nodes, Lam SAM as a percent of WFE our opportunity would grow from the low 30s to the high 30s through those transitions. So assuming these are at the leading edge, then you're starting to create an opportunity that's at that high 30s level.

[Vivek Arya, analyst]

Okay. For my follow-up, I think in the past, you have mentioned the $40 billion TAM for NAND upgrade. How much of that will be completed by the end of the year? Like will the third be completed, will half be completed? Just any rough sense of where we are in the journey of that conversion.

And as you look at next year, I know you're not giving a specific WFE view, but what would cause NAND growth to be different, higher or lower than what you saw in -- what we have seen so far in '25?

[Timothy Archer, executive]

Well, here's what we said. So when we were at the Investor Day back in February, we said that $40 billion would be spent. And obviously, we didn't exactly put a date on it, but we said over several years to satisfy the upgrade of the installed base to the 200-plus layer level.

What I said in my remarks today is that demand being a little bit higher than prior expectations, we've likely seen a little bit of an acceleration of that upgrade. I also said that in our 2026, our upgrade business in NAND would remain strong. So I -- we're not going to tell you exactly how far we are through that several year period, but compared to February, it's accelerated.

And as I also mentioned, I think that if this demand for high-capacity storage continues and the $40 billion when we gave that in February, targeted kind of a mid-high teens bit demand. And I think that what you're hearing publicly right now is maybe demand that's a little bit higher than that. So that would suggest it's being accelerated. And all we can speak to is our demand would suggest the same thing.

[Operator]

The next question comes from the line of Harlan Sur with JPMorgan.

[Harlan Sur, analyst]

Maybe as a follow-up to C.J.'s question. Given all of these data center infrastructure announcements, I think, for example, Sam Altman's recent trip to Asia. DRAM and advanced foundry supply requirements over the next several years would the X amount, right, which positively surprised all of us.

And it actually does imply significantly more capacity requirements across advanced foundry, memory and advanced packaging you would think that your customers would want to start to put this in place as quickly as possible, maybe starting next year. But Tim, I think you did bring up a good point, right, which is on NAND, for example, that growth might be limited by tight clean room space.

So do you think that overall growth in calendar '26 WFE might be limited by availability of clean room space, not only in NAND, but across DRAM, advanced foundry and advanced packaging?

[Timothy Archer, executive]

Well, I would say that -- look, I can't speak for the customers, this would be a much better thing to ask them. They can do amazing things. But I would say that generally, there's a time that it takes to put in physical infrastructure. We suffer from the same thing, whether we're expanding labs or expanding manufacturing.

And so depending on what the demand is, it could be limited. I think what we're trying to respond to is the point of how much could you accelerate and that's a function of probably more physical space than it is ability for like the equipment supply chain to respond, and that's simply because our lead times are generally within the lead time of building a facility. That was kind of my general comment.

Maybe we're not going to be the bottleneck. But yes, clearly, we've seen some accelerated demand as a result of the current demand, but also in anticipation of those future opportunities, I would imagine this year, you'll see some of those plans come to fruition. But I would suggest you talk to the customers and find out what their physical plan -- investment plans are.

[Harlan Sur, analyst]

Right. That's a fair point. And then maybe for Doug. Good to see the CSBG dynamic still on track to drive growth this year. I think first 9 months of this year, CSBG was up 7% year-over-year, but this includes Reliant. I assume that core spare services and upgrades are growing at a faster rate.

Anyway, can you maybe quantify how much faster it's growing? And then maybe if you could just true us up. I believe CSBG has been neutral to accretive to your overall operating margins, but you've had similar cost benefits as you move CSBG support posted to your customers, especially with the Malaysia buildout. Given all of this on a relative basis, where do CSBG up margins currently sit relative to corporate average?

[Douglas Bettinger, executive]

Yes, Harlan, let me unpack that a little bit. Just to remind everybody on the call and Harlan, I know you know this, but for others, there's 4 components to CSBG, spare service upgrades and then Reliant. Three of these components of CSBG are clearly growing, one is not, which is Reliant, largely because of a mature node spending across the whole world.

Tim mentioned in his scripted remarks, record spares and service combination. I said in my script remarks, hey, upgrades are pretty strong given what you got going on in NAND. So look, that's the way to think through all of the kind of ups and downs and CPG is going to grow this year. You're right, CSBG is accretive to operating margin. I've never quantified that for anybody, but that continues to be the case.

[Operator]

The next question comes from the line of Jim Schneider with Goldman Sachs.

[James Schneider, analyst]

I was wondering if you could maybe just give us a little bit of color on the NAND market and what you're seeing. I think, clearly, given all the announcements that are out there in the market, there's the expectation that could accelerate at some point. And I'm sort of wondering your view on you're seeing that yet? Whether you're seeing any kind of initial signals from customers in terms of longer-term forecasts? And when we might start to see that show up in the numbers?

And maybe as a follow-on to that, maybe comment on whether you expect '26 growth in NAND to be led by upgrades or whether you see any potential for new tools starting to lead that?

[Timothy Archer, executive]

Yes. Thanks for the question. I think that I addressed some of that in my comments about NAND, but just to kind of go back and say that of the $40 billion of conversion spend that we had anticipated, I think the demand signal right now is a little bit accelerated to what we originally saw and that's based on the fact that bit demand is -- people are speaking about bit demand that's a little bit higher than probably prior expectations. .

I think our business is going to continue to be predominantly upgrade focused not only in 2025 but through 2026. And that's primarily because there was a very large installed base that had not been upgraded for a number of years. So there are quite a few tools that can still be upgraded to provide those higher layer count devices.

Now as you do those upgrades, you tend to lose wafer out capacity. And so at some point, if demand remains as high as maybe people anticipate with these data center announcements, then I would think you transition to capacity additions. But my comment about floor space, physical infrastructure, again, a better question for our customers, but I would anticipate that everyone will remain focused on upgrades since it's the lowest cost and likely easiest way to achieve higher performance growth in bits through 2026 and then beyond that, it's again, a better question for all the NAND providers to speak to their plans.

[Operator]

The next question comes from the line of Krish Sankar with TD Cowen.

[Sreekrishnan Sankarnarayanan, analyst]

I just want to follow up on the NAND thing. I understand clean room space is limited, maybe a new fab. But it also seems like the NAND utilization rate for most of our customers is heading towards 100%. So I'm kind of curious in that scenario, should we assume that there might be a quarter or 2 where your NAND orders or shipments drop off or do you think it's going to be not like lock it's going to be a pretty small transition?

[Douglas Bettinger, executive]

Maybe I'll jump in and then, Tim, you can add. Krish, nothing goes up into the right every single period. In fact, if you looked at the most recently reported quarter, NAND was actually down a little bit. It's going to continue to kind of trend towards that $40 billion, maybe a little bit more. But every quarter, we'll have some level of variability depending on who's investing in what, all these guys or most of these guys also have DRAM investments. So they're going to modulate what happens in what quarter. But things have strengthened somewhat relative to what we were describing a quarter ago.

And Tim, I don't know if you want to add anything?

[Timothy Archer, executive]

Yes. No, I think that's fair. I mean I think the important thing to remember is that as we move above 200 layers the drivers for our business aren't just the increased bit demand. It basically is to produce each of those bits. Our -- the intensity of Lam's equipment actually rises. And so again, above 200 layers, we've talked about the fact that we start introducing several new types of products to deal with wafer stress, to deal with the higher gap fill requirements from the higher layer count devices.

I talked a little bit about in my prepared remarks. And so for us, as we see more interest and perhaps a bit of acceleration in those upgrades. We think that it's a combination for us of upgrades to existing installed base and the addition of some new tools. So you'll see it within our business, both in systems and in upgrades.

[Sreekrishnan Sankarnarayanan, analyst]

Got it. Got it. And then a follow-up for Doug. Maybe it's a hypothetical question for you. You said next year, WFE is going to grow, kind of makes sense. It seems like most folks assume mid- to high single digits growth in calendar '26. I'm assuming in that set up, I understand Lam's revenues are going to grow year-over-year. But with less China being a gross margin headwind and higher tax rate, can Lam's EPS also grow year-over-year in that situation or outgrow revenue?

[Douglas Bettinger, executive]

You're funny, Krish. You know I'm not going to answer that question. Listen, you have it right. And I don't want to over position tax rate. Tax rate is going to go up just a little bit, okay? Don't go too far with it. Instead of low mid-teens, maybe it's approaching mid-teens or maybe a little bit towards the higher end of low mid-teens don't go too far with that. The reduction of customer mix, though will be a headwind for gross margin, right?

We just took you down to 48.5%. Depending on how each quarter progresses, we're probably in that range for a while. As things grow, that's going to be beneficial from a fixed cost standpoint. We don't have huge fixed cost. There's going to be a customer mix headwind. And then probably the next year, tariffs are a little bit of a headwind, too. So I don't know, anchor yourself plus or minus where we just guided you in December, I think, and that will be a good spot for you to start your models.

[Operator]

The next question comes from the line of Stacy Rasgon with Bernstein Research.

[Stacy Rasgon, analyst]

Doug, my first one, I wanted to zero into something you said about next year. So you said a second half loaded year, but then you said the first half will be sort of flat to maybe up a bit versus the second half of '25. But then if it's a second half of the year, it feels to me like the second half ought to be up more materially than that? Am I sort of characterizing that trajectory correctly?

[Douglas Bettinger, executive]

No, I haven't given you any numbers for the second half, Stacy. I just said it's a second half weighted year, and I said the first -- said second half weighted, Stacy, and that the first half was flat to slightly up from the second half of this year.

[Stacy Rasgon, analyst]

The second half weighted meaning at least the second half of next year should be higher than the first half of next year, correct?

[Douglas Bettinger, executive]

That's what that means. Yes.

[Stacy Rasgon, analyst]

Okay. Got it. So then I want to dig into the implications of that with regard to China. You said China drops below 30% next year. It's probably going to be what, I don't know, 36-or-something like this year. So that drop would have dropped to like 29, it would be something like $1.5 billion headwind, maybe more. It's probably a high single-digit headwind to revenue growth.

But from what we just heard, like revenue overall should be growing, I mean, it should be -- it feels like it should be growing okay given the trajectory you just laid out, at least qualitatively. Again, I just want to -- do I have that dynamic, correct? And like can you give us maybe a little more color on the non-China offsets that are enabling you to overcome like a headwind from China like you said, it has to be at least $1.5 billion, probably something in that range?

[Douglas Bettinger, executive]

Yes, Stacy, what you just described is largely consistent with what I believe is going to happen next year. So yes, China is going to be down. Your numbers probably aren't too far off. Global multinationals, though, are going to offset that, right?

More than offset that is our as we sit here today, right? And just think about what's going on, right? We've been talking about NAND a ton on the call. We've been talking about high bandwidth memory. We've been talking about accelerators and all that kind of stuff go into more advanced nodes. So that's what's going to be offsetting it, Stacy.

[Stacy Rasgon, analyst]

I was actually just hoping to get a little more color on the granularity there, but maybe you're saving that for next quarter.

[Douglas Bettinger, executive]

Yes. Let us leave a little bit in our pocket for next quarter.

[Stacy Rasgon, analyst]

All right. Sounds good. I appreciate it.

[Douglas Bettinger, executive]

You bet, Stacy. Thanks for trying.

[Operator]

The next question comes from the line of Blayne Curtis with Jefferies.

[Blayne Curtis, analyst]

I just wanted to ask on China. Maybe I had it wrong. I was -- you didn't really answer it last quarter, but I thought the strength that you've highlighted for September was going to be multinational spending in China. That's clearly not the case. So maybe you could just walk through why such a big bump to China revenue in September now that it's done?

[Douglas Bettinger, executive]

Yes. No, Blayne, if it came across that we were suggesting it was the multi-assets in China that wasn't what we intended to communicate. If we did, apologies from misrepresenting it. Listen, the multinationals in China stayed relatively steady, so call it, flattish. The growth in China was largely driven by the domestic Chinese customer base.

[Blayne Curtis, analyst]

Got you. And then just the driver of the second half weighted, is that across all your segments or is that more of a foundry/logic comment?

[Douglas Bettinger, executive]

It's -- listen, we'll give you more granularity. I know everybody wants it now, but we'll give you more granularity on the December call. It's just a description of what we see across the totality of the spending in the industry. WFE in total.

[Operator]

The next question comes from the line of Melissa Weathers with Deutsche Bank.

[Melissa Weathers, analyst]

I wanted to check in on some of the new products that you introduced at the start of the year at your Analyst Day. Now that it seems like we're getting a little bit more momentum on the WFE side. Have you seen any like acceleration and engagements on those new products, the Akara and the ALTUS Halo products?

[Timothy Archer, executive]

Yes, it's a great question. And we have. I mean Akara and Halo, these are both products that are very focused on inflections that are taking place in foundry/logic DRAM and NAND. Akara for conductor etch, high aspect ratio, very well suited as we scale it all around and also heavily used in DRAM. We've talked about a couple of wins since February in some key DRAM conductor etch applications.

Again, remember, we introduced some of these products specifically to improve our performance and revenue growth in some logic and DRAM because of the drivers there. Halo, I talked about on this call, again, continuing to make progress in securing 3D NAND wordline applications, which is an important step for the ESS DRAM performance.

And so I would say, where I sit right now, there's a long way to go to deliver on the Investor Day a full model, but I think from a product perspective and how we see the transition is playing out, we're feeling pretty good about the progress we've made since February. .

[Melissa Weathers, analyst]

And then maybe 1 more on the backside power side of things. It looks like backside power nodes are going to start to ramp in volume next year, maybe the year after. So has anything changed on either the timing or the magnitude of what you're expecting for backside power contributions in the next couple of quarters or years?

[Timothy Archer, executive]

No, no, not really. I think in terms of change, I think, again, as you move forward, and you hear all about the requirements for -- and challenges of power in these very compute-intensive devices just gives us further confidence that you need solutions like backside power.

I mean is it directly addresses some of the issues that customers have in scaling performance of high compute devices. So it's an edge dip intensive inflection and therefore, it's important for us and we're focused on it and I think we'll do well as those nodes ramp.

[Operator]

The next question comes from the line of Mehdi Hosseini with SFG.

[Mehdi Hosseini, analyst]

All the good questions have been asked. So I have a quick follow-up. Going back to your Slide #6. Interesting observation, I understand the facility construction lead times are in a 1 to 2 year. And that's almost in the ballpark as fab. But I would also argue that there is increased concentration within that $8 billion of WFE for every $100 billion of incremental AI.

And that increased concentration would, in my opinion, give your customers some leeway, you don't have to rush to secure capacity or to release all their POs. And I'm just wondering if you have any additional thoughts to it. Is that a factor?

[Douglas Bettinger, executive]

Well, Mehdi, that's a good question. I'm not exactly sure how to answer it. I think Tim's been meeting with a lot of customers over the last couple of weeks and having conversations about, okay, what do you think next year looks like, where are you going and so forth.

I don't know that lead times have been all that different, so to speak, at least not yet. I'm not sure I'm answering your question. I'm just kind of rambling here a little bit. you don't have to worry about running out of capacity among their suppliers.

[Timothy Archer, executive]

Well, I think that, look, whether it's us and how we work with our customers or I'm sure our customers how they work with theirs, everybody wants to make sure they have what they need. So we spend a lot of time with our supply chain, making sure they have the capacity, their ramp, they understand their plans.

You can anticipate that our customers do the same thing with us to ensure that when they take an order, they can deliver it. I think we're in a period right now, as we talked about, some acceleration. I think I don't believe most people anticipated the number of announcements that have come in recent months for AI infrastructure. It will take time for those.

But I can guarantee when people hear those announcements, it ripples through the supply chain to make sure that capacity is going to exist. And I think everybody goes to work. And if there's 1 thing that Lam has been good at is executing to the needs of our customers, and that continues to be our focus.

[Operator]

The next question comes from the line of Vijay Rakesh with Mizuho.

[Vijay Rakesh, analyst]

Just just a quick question on 2026. As you look at the strength that you mentioned into next year, is that being driven by memory or foundry as well? Because DRAM NAND pricing have been especially strong. So just wondering what you're seeing on the memory side as well.

[Douglas Bettinger, executive]

I think it's probably going to come from both. And again, we'll give you more color on the December call.

[Vijay Rakesh, analyst]

Got it. And then as you look at '26, obviously, there's a U.S. -- it looks like a U.S. ITC that kicks in December 31 for higher investment tax credits, like 35% and looks like some money is starting to flow again. Are you seeing that as a tailwind for WFE into next year or...

[Douglas Bettinger, executive]

Maybe only on the margin, Vijay. No, what's driving WFE next year is end demand at the end of the day. Yes, I'm sure the investment tax credit is going to maybe influence a little bit of the geographic distribution of that, maybe a little bit, but end demand is what matters right now. .

[Operator]

And the final question will come from the line of Brian Chin with Stifel.

[Brian Chin, analyst]

The maybe first one, going back to that popular slide in the slide deck, of the $8 billion in WFE spending, on a kind of rough cut, could you partition that across on a percentage basis, advanced logic, DRAM and NAND?

[Douglas Bettinger, executive]

Brian, more than half of it is coming from memory. Enterprise SSDs is a high bandwidth memory. And clearly, the great bit GPU accelerators, the ASC 6 and what not are part of it, but more than half is memory.

[Brian Chin, analyst]

Okay. That's helpful. And going back to the $40 billion mass in terms of upgrades over several years, do you view that as having -- the industry having to sort of exhaust that and then capacity spending occurs? Or can they be somewhat concurrent maybe towards the back end of that, maybe kind of more customer-by-customer basis, I suppose...

[Timothy Archer, executive]

Yes, I'll take that. Yes. I think just as you said there, it's going to be a customer-by-customer situation. And already today, we're seeing some capacity additions. And that has nothing to do with end demand. That was the customer's plan all along. And so I think you find different customers at different points of where they are with their installed base. where they are with the needs of their customers and end markets.

And the great thing for Lam is that we can work with customers in a very agnostic way as to whether they're gaining the bits and performance they need through upgrades or through capacity adds. We participate in both and in a meaningful way. And so I think you'll see both. However, what I said was upgrades to installed base tend to be the fastest and lowest cost means of achieving bits of the higher performance.

And so I think that most customers will prioritize that first before they get to capacity, but there will be some concurrence and, as I said, maybe towards the back end of that upgrade rollout.

[Douglas Bettinger, executive]

Yes. Thank you, Brian. Operator, with that, we're going to conclude the call. Thank you, everyone, for joining today. I know Tim and I will be talking to a lot of you during the remainder of the quarter before we get into the quiet period. But thanks for your interest in Lam Research.

[Operator]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.