Lam Research Corp

NASDAQ:LRCX

Earnings Call Transcript 2022-Q3

[Operator]

Good day, ladies and gentlemen, and welcome to the March quarter 2022 earnings conference call.

At this time, I'd like to turn the conference over to Tina Correia. Please, go ahead.

[Tina Correia]

Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer.

During today's call, we will share our overview on the business environment, and we'll review our financial results for the March 2022 quarter and our outlook for the June 2022 quarter.

The press release detailing our financial results was distributed a little after 1:00 PM Pacific Time this afternoon. The release can also be found on the Investor Relations section of the company's website, along with the presentation slides that accompany today's call.

Today's presentation and Q&A 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 PM Pacific Time. A replay of this call will be made available later this afternoon on our website.

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

[Tim Archer, President & Chief Executive Officer]

Thank you, Tina. Lam reported revenues of $4.06 billion and earnings per share of $7.40 in a severely supply-constrained environment. While we were able to deliver results within our guided ranges, I am disappointed that we are not performing better in a very strong demand environment for our equipment and services.

Continued component shortages, along with new challenges that emerged, including COVID-related lockdowns, along with exacerbated an already stressed supply chain situation. As a result of the larger range of issues, our original expectation for the timing of output recovery proved to be optimistic.

In response, we have intensified the focus across Lam. We are committing the financial resources and workforce required to both meet our customers' priority tool needs in the short term, as well as increase the long-term resiliency of our global supply network.

Our recovery efforts span from embedding Lam experts at key suppliers to collaborate on shortages, to increasing field resources to accelerate installation of tools once shipped. Customers are partnering with us to qualify additional component suppliers, and we have assigned more engineering resources to work on design and sourcing for alternative parts to improve supply chain flexibility.

Despite the issues we still face, I am thankful for the tremendous efforts from Lam employees, our suppliers and our customers through this challenging period. While the near-term pace of supply chain recovery is difficult to assess, we are confident that our actions will result in progressive improvement in our performance on a go-forward basis.

Our deferred revenue balance exiting the March quarter was over $2 billion, as we shipped systems to customers to accelerate tool installation, but could not recognize this revenue within the quarter due to the lack of certain critical components. Doug will elaborate more on the deferred revenues in his prepared remarks.

On the demand side, the environment remains very strong. While continued supply-related delays could potentially limit how much wafer fabrication equipment investment can be executed in 2022, our current WFE view is still in the $100 billion range. We see unconstrained demand exceeding $100 billion in 2022 and any unmet demand should flow into next year. Our confidence is rooted in the fact that the powerful secular drivers of WFE spending are unchanged. Greater semiconductor content, rising device complexity and larger die sizes all contribute to a healthy setup for sustainably strong WFE levels. An example of this can be seen in the smartphone segment, where unit growth may be flattening year-over-year due to inflationary-driven softness in consumer markets, but the average NAND and DRAM content is increasing around 20% year-over-year, driving demand for WFE.

In servers, we see overall growth in both units and content with server DRAM content per CPU growing in the 20% range from the prior year. On top of this, the drivers of Lam-specific growth are also unchanged. Etch and deposition are critical technologies required to transition semiconductor manufacturing to higher performance and more scalable 3D device architectures in memory, foundry/logic and advanced packaging. Lam's leadership position in key enabling technologies for 3D devices, evidenced by our installed base in leading-edge fabs worldwide, is a solid foundation for long-term outperformance.

And with our continuing investment in an exceptional pipeline of new products and services, we are increasingly well positioned to win at the 3D inflections. On the technology front, we are winning new applications across etch and deposition and across all device segments. We are strengthening our overall market position by delivering differentiated solutions that enable higher aspect ratio structures, enhanced device performance and increased manufacturing productivity.

Over the past two calendar years, Lam's total revenue growth has exceeded that of our large peers. This is in part due to our gains in the foundry/logic market, where we were historically under-indexed. And it is also a result of our success in expanding our CSBG installed base opportunities. Through innovations like Lam's Equipment Intelligence solutions, we are helping address our customers' capacity constraints by utilizing vast quantities of tool data to improve system performance and enable faster tool installations.

In the March quarter, we expanded on our selective etch wins at a large foundry/logic customer. At the same time, we have added new wins in our conductor etch business. In one example, we are set to double our conductor etch share at a key foundry/logic customer as they transition to their next node. At another leading foundry/logic customer, we have successfully replaced a competitor's tool at a critical step by helping the customer accelerate their move to the newer node.

Key to our traction in these wins is our ability to enhance our product offerings with Equipment Intelligence solutions to deliver the best etch uniformity and improve yield, thereby addressing customers' cost and performance requirements as they execute their scaling roadmaps.

In deposition, we continue to see significant momentum for both our ALD metals and dielectric solutions for leading-edge foundry/logic nodes. In DRAM, where the highest performance devices are adopting more advanced CMOS technology like high-K metal gate transistors, we have leveraged our foundry/logic success to win new applications in the DRAM 1b [ph] node. As customers ramp capacity on these nodes, our etch share in this segment is set to expand.

In deposition, our critical spacer applications enable lower-capacitance thinner films to support further device size and power scaling. In the March quarter, we secured two wins for critical spacers at a large DRAM customer for their leading node. In the NAND segment, we also won a highly contested decision at a key customer where we demonstrated a superior ALD solution for a critical transition to a next-generation low-resistance enabling film for their Worldline applications.

Shifting to our CSBG business, results were down modestly in the March quarter, predominantly due to the global supply constraints that impacted our reliance and upgrades businesses. While CSBG is subject to quarterly fluctuations, we believe our expanding installed base over a longer period offers a stable platform for revenue growth.

During the March quarter, we secured fairs contracts at two of the world's largest IDMs with the cumulative contract amount exceeding $1 billion. We see calendar year 2022 to be another strong growth year for our CSBG business.

So, to wrap-up, we believe we are making progress on the extraordinary industry supply challenges, but overcoming the breadth of issues that have emerged is taking longer than we initially expected.

We are focused on meeting the critical needs of our customers and have committed both the financial resources and workforce required to recover as quickly as possible. With continued strength in the equipment demand environment and progressive improvement in our supply chain, we do expect Lam to post another solid year of revenue and EPS growth.

With that, I'll turn it over to Doug.

[Doug Bettinger]

Excellent. Thank you, Tim. Good afternoon, everyone, and thank you for joining us on our call today during what I know is a busy earnings season. In the March 2022 quarter, we delivered results within the guidance ranges for all our financial metrics. However, we missed the midpoint for all numbers.

As Tim discussed, we experienced broadening supply chain issues that negatively impacted our revenue as well as our profitability. Delays in securing critical parts needed for shipments of our tools hindered our ability to meet our revenue objective and led to increased spending as we focused on initiatives to mitigate these constraints.

Deferred revenue grew by over $600 million. The magnitude of the increase reflects the heightened degree of part shortages that we're experiencing, which impacts our ability to recognize revenue on tools that we've actually shipped. Our inventory balance also increased as we're procuring the parts that we can in building to meet the growing unmet demand that we see.

On the margin side, we have headwinds from adding resources to address the supply chain challenges as well as to be prepared for the higher volumes we see in the second half. Additionally, we have ongoing supply-related inflationary pressures. We were able to partially offset the gross margin headwinds through operating expense management during the quarter. As a result, March operating income and earnings per share came in closer to the midpoint of our guidance. We see ongoing cost and supply constraint challenges continuing to impact our guidance for the June quarter.

Let me now turn to the details of our revenue for the March quarter. Revenue came in at $4.06 billion, a decrease from the December quarter. The memory segment was sequentially stronger in the March quarter with concentration of 66% of systems revenues. This was up from the prior quarter level of 58%. The strength in memory during the quarter was led by the DRAM segment where we had a record level of revenue for the company and a percent concentration at 27% of systems revenues. This compares with 23% that we saw in the December quarter.

The DRAM investments were primarily for 1z and 1-alpha node additions as well as conversions. The NAND segment was 39% of our systems revenue, higher than the 35% in the prior quarter. Our NAND customers are investing in tools for 128-layer to 192-layer devices.

In foundry, March quarter revenue comprised 21% of our systems revenue versus 31% that we saw in December. The decrease quarter-to-quarter is related to the timing of customer investments. There continues to be solid investments in this segment to address end demand drivers such as AI, IoT, cloud, high-performance computing and 5G. I would expect to see increases in this segment as we progress through the year related to both leading as well as mature node device investments.

We see continued progress in the Logic/Other segment, which contributed 13% of systems revenue in the March quarter and is a record in terms of revenue dollars. We're seeing good traction here, notably in etch, as we expect continued growth in this segment during calendar year 2022 as our customers invest to meet the demand requirements in the market for microprocessors, image sensors and advanced packaging solutions.

I'll now turn to the regional composition of our total revenue. The China region came in at 31% of total revenue. The split of the China revenues was fairly balanced between the domestic and multinational customers that have fab locations in China. There was also a strong concentration of investments by our customers in the Korea and Taiwan regions, which comprised 24% and 16% of our total revenues, respectively, in the March quarter.

The Customer Support Business Group revenue was approximately $1.4 billion, which was down 5% from the prior quarter. CSBG was 8% higher than the March quarter of calendar 2021. Our reliance and upgrade product line revenues were negatively impacted in the March quarter by the ongoing supply chain constraints.

Nonetheless, there continues to be healthy demand in the specialty market across numerous customers as well as investments by our customers for upgrades across their installed fleet of tools. Our spares business remains strong, given the high utilization levels in the industry, and we're also seeing solid customer pull for services for the same reason. As we've noted in the past, CSBG's can fluctuate on a quarterly basis but our expectations continue to be that this business will grow annually.

Let me now shift to our gross margin performance. The March quarter came in at 44.7%. We are experiencing a multitude of cost pressures with increases in freight and logistics rates, raw materials costs driven by commodities such as nickel and aluminum, as well as increased integrated circuit costs. Our June quarter guidance reflects our expectations for a sustained level of cost headwinds, as we manage through and adapt to this inflationary environment.

Operating expenses for March were $621 million, down from the prior quarter level of $627 million. We managed our overall spending levels during the quarter, while continuing our focus on supporting our emerging customers' technology road maps.

We are also deploying incremental R&D resources towards qualifying new supply sources to help improve our supply chain challenges. Incentive compensation expenses that, as you know, are tied to the company's profitability, were also lower in the quarter.

The March quarter operating margin was 29.4%. Our non-GAAP tax rate for the quarter was approximately 10%. And as I've shared with you in the past, the tax rate will have some fluctuations from quarter to quarter.

Looking into calendar year 2022, we expect the ongoing tax rate to be in the low teens level. And I just mentioned that we continue to monitor potential tax changes in the United States that are under discussion. But given the uncertainty there, we've not yet reflected the impact of any changes in our modeling.

Other income and expense came in for the quarter at approximately $44 million in expense. And I'll just remind you, in the December quarter, we had income for this line item due to a gain in one of our venture investments that had raised capital in a public offering.

We also had favorable results from our venture investments since the time we set guidance that contributed positively in the March quarter by approximately $0.11 in earnings per share.

OI&E is subject to market-related fluctuations that will cause some level of volatility in this P&L line item. We're forecasting a more negative OI&E impact in June's guidance based on what we currently see in the equity markets.

We were active in our buybacks during the March quarter, allocating over $1.2 billion towards share repurchases. The cash was deployed in a combination of open market repurchases, as well as an accelerated share repurchase program. The ASR will continue to execute during the June quarter.

We paid $211 million in dividends during the March quarter as well. March quarter diluted earnings per share was $7.40. Diluted share count was 140 million shares, which was lower than the December quarter and less than our March quarter expectation due to the increased share repurchase activity.

Let me shift to the balance sheet. Cash and short-term investments, including restricted cash, ended at $4.6 billion, which was down from the prior quarter level of $5.6 billion. The decrease was primarily driven by the capital return activities that I just spoke about.

Additionally, operating cash was at a somewhat lower level this quarter due in parts to the investments we're making in inventory to help mitigate some of the supply challenges.

Inventory turns were down from the prior quarter level, coming in at 2.6 times. Also, due to the timing of customer shipments occurring later in the quarter, our days sales outstanding came in at 83 days, which was an increase from 73 days that we saw in the December quarter.

Non-cash expenses for the March quarter included approximately $69 million in equity compensation, $64 million in depreciation and $20 million for amortization. Capital expenditures in the March quarter were approximately $145 million, which was fairly flat with the December level.

Capital expenditures were mainly focused for growth activities such as our silicon spare parts facility in Ohio, the Malaysia factory expansion and the new Korea Technology Center. We had approximately 16,900 regular full-time employees as of the end of the March quarter, which is an increase of approximately 600 people from the prior quarter. We had headcount growth primarily in the factory and field organizations to address supply chain constraints, while supporting customer deliveries and installations.

Let me now shift and look at our non-GAAP guidance for the June 2022 quarter. We're expecting revenue of $4.2 billion, plus or minus $300 million. While customer demand continues to be strong, we see ongoing supply chain constraints. Gross margin of 44.5%, plus or minus one percentage point. Our guidance reflects expectations of an inflationary cost environment and the continuing need to very tactically manage the execution in the supply chain. Operating margins of 29.5%, plus or minus one percentage point. And finally, earnings per share of $7.25, plus or minus $0.75 based on the share count of approximately 139 million shares.

So then let me wrap things up. Our execution in the March quarter came in a little short of our expectations. While we work through incremental challenges with our supply chain that is continuing to limit our output, demand remains robust. Exiting the March quarter, we had our sixth consecutive quarter of growing backlog. Visibility to end demand is high. We have a solid foundation in our share position, with strong traction to-date and new opportunities going forward in all market segments.

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

[Operator]

[Operator Instructions] We'll take our first question from Harlan Sur with JPMorgan. Please go ahead.

[Harlan Sur, JPMorgan]

Good afternoon. Thanks for taking my question. We tend to think about the supply chain challenges as slowing the growth of new capacity or new technology migrations. But as the supply chain challenges have continued to broaden out, is it now to a point where it's starting to potentially impact your customers' installed manufacturing operations to your CSBG business, either capping shipments of spares, targets? I know CSBG was down about 5% sequentially in a period where your customers continued to run pretty much full out of manufacturing utilizations. And I know that you said CSBG was mostly impacted by reliant and upgrades. So, is it fair to assume that the services segment, that part of it which supports your customers' installed manufacturing operations, is not being impacted by supply chain challenges?

[Tim Archer, President & Chief Executive Officer]

Yes, Harlan, that's a -- it's a good question, and I guess I'd just remind everybody that the CSBG business is made up of four different product lines, as we just mentioned, spares, services, upgrades and then the reliant, which is the more mature node systems. And each of those is kind of impacted differently. If you look at what is the top priority for customers and the top priority for Lam is to keep all of the installed base, which now numbers something over 75,000 systems running every single day inside of those fabs. And so we're not going to compromise normal customers on spare parts, for instance. And so as we think about priorities here, you put the -- in terms of the spares and installed base runs services.

I talked a little bit about Equipment Intelligence. We're looking for ways where you can work around some of the constraints. I mean, Equipment Intelligence, using data to determine when do I really have to replace parts? How do I -- how frequently do I really have to do preventative maintenance to keep the performance of the tool where I need it to be? And so I would say services actually, there's probably a little bit of an uptick in demand for us to do more services on the tool.

But what does get impacted, Reliant Systems, those are tools. They are affected by the same constraints as our leading-edge systems. They need all of those components. They have communications, they need chips, they need other things. So, those are impacted just the same way as leading edge.

And then upgrades, similarly, most of the upgrades we're doing are actually components that would also go into new systems. So, we work with customers to see which is the right priority call. Is it to put the new system on the particular quarter, you can see that we're talking about some impact to the upgrades business.

So, hopefully, that helps explain how kind of those different segments get affected. But as I said, over the longer period, the installed base will continue to grow. It grows every single quarter, and we expect the CSBG business to expand in line with that.

[Doug Bettinger]

And Harlan, maybe the only other thing I would add is spares, I think, is in a better situation because our customers hold some inventory. We hold inventory. There's always been a historic level of inventory. And so I think that's part of the reason why we don't believe we're impacting the installed base. Probably has got a little bit of inventory sitting there.

[Harlan Sur, JPMorgan]

Great. No, thanks for the insights. That's very helpful. And Doug, I know the situation is still pretty fluid, but given yours and your suppliers' purchase commitments on components, you're boosting support and logistical resources and then you've got the ramp of Malaysia, which I'm assuming has continued to go as planned, and then you also have your forecasted shipments for the second half. You put all of that together, like how should we think about gross margins through the second half of this year?

[Doug Bettinger]

Yes. Harlan, as I sit here today, I do believe that gross margin will improve as we progress through the year. I'll remind you that I said that same thing last quarter and then we ticked down a little bit and missed our number a little bit in March, so I'll acknowledge we don't always get it right. But as we sit here today, I expect it will improve as we progress through the year and as we improve the supply chain output capability, Harlan.

[Harlan Sur, JPMorgan]

All right. Thank you.

[Doug Bettinger]

Thanks Harlan.

[Operator]

We'll take our next question from John Pitzer with Credit Suisse. Please go ahead.

[John Pitzer, Credit Suisse]

Yes, good afternoon guys. Thanks for letting me ask the question. My first one, Doug, is just implied in your June quarter guide, do you expect deferred revenue to go up, flat or down? And then I guess as you think about maintaining the $100 billion WFE for the full calendar year, does that sort of imply that the $1 billion buildup you've seen in deferred revenue in December and March comes down by $1 billion in the back half of the year? Just help me understand how that dynamic works.

[Doug Bettinger]

Yes, John, I mean, if I was guessing right now, I think deferred probably grows a little bit again in June, and then I hope begin to work our way through some of it as the supply chain gets caught up. I mean, there's $2 billion sitting there at the end of the quarter that we just need to ship parts to things we've already shipped. The base tool, too, in revenue will benefit from that.

[John Pitzer, Credit Suisse]

That's helpful. And then my follow-up for Tim. Tim, I'm struck a little bit by, in the PowerPoint, you talked about maintaining the $100 billion for this year but you talk about unconstrained WFE being above that. I guess, what's the risk that oftentimes constraints create its own demand and customers, because they can't get what they want, they're just placing significantly larger orders into your backlog than they would be otherwise? And I guess, is there a significant financial consequence if a customer comes back and reschedules delivery and timing later on?

[Tim Archer, President & Chief Executive Officer]

Yeah. So it's a good question. And I think first of all, I mean, we usually get a question around whether that order is placed with multiple suppliers, which is not very common in the equipment space. So to your point, perhaps instead is the demand being overstated to try to drive a sense of urgency. I think that's kind of what you were pointing out. We have very close and frequent discussions with customers. And I think what we're pointing out is that even if there is a little bit of that, which I don't actually believe there is, but if there were, unconstrained demand is well over what can be supplied this year. And therefore, we felt comfortable saying that, we're driving for that execution to the $100 billion WFE level.

From a financial implications perspective, either to Lam or the customers, it depends on how close you are when the rescheduling occurs. If we're talking about tools that are and a forecast that's now through the remainder of this year, and some of these forecasts are now pushing into second half of 2023. There is really no financial implication to Lam other than we're driving to ensure that our capacity and our supply chain would have capability to ramp up to those levels. And so that's – it probably depends on very much the timing of the change and that would affect kind of the implications.

[John Pitzer, Credit Suisse]

Perfect. Thanks, guys. Appreciate it.

[Tim Archer, President & Chief Executive Officer]

Yep. Thank you, John.

[Operator]

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

[C.J. Muse, Evercore]

Yeah. Good afternoon. Thanks for taking the question. I'm trying to get an idea of what the second half calendar year ramp might look like. If you assume your share just holds steady with WFE at $95 billion to $100 billion, it's implying a tool ramp of like 25% to 40% half-on-half. And so I guess, what are you capable of doing, given the resources you have? And should we be thinking about a pickup in Q3 and then a larger one in Q4 and how should we think about the progression of gross margins as the recovery unfolds?

[Tim Archer, President & Chief Executive Officer]

Well, I'll take the ramp question. I mean, clearly, we – as I mentioned, kind of feel like we're underperforming in the first half of this year to the capacity of Lam's facilities. We invested in expanding every factory we have around the world in 2021, and we talked about the fact that we can ramp those factories further. We're constrained by supply. We are qualifying additional suppliers. We're working and investing with our suppliers to ramp up their own capacity. And maybe we need to distinguish a little bit too, and I'll let Doug confirm, but it's – as we look at the deferred revenue piece versus the work that's actually being done.

As Doug mentioned, we're actually shipping at a much higher rate than we're recognizing revenue in the first half of this year. So as we look to execute that $100 billion WFE for the entire year, the second half doesn't have to ramp up quite as much from a Lam factory perspective. We need to keep shipping, show progressive improving in output and also clear the critical components that are needed to recognize revenue for that deferred balance.

[Doug Bettinger]

Yes, exactly right. Nothing to add on that. And C.J., on the gross margin thing, I tried to answer it when Harlan asked. As I sit here today, I think it gets better in the second half. As we increase our output capability, our supply chain increases its output capability.

We work to mitigate some of these constraints and absorb somewhat more of the fixed cost. I think it gets better. And then, I'll remind you that I told you the same thing last quarter and I was a little bit wrong in March, but that's what I see right now, C.J.

[C.J. Muse, Evercore]

Great. And I guess as my follow-up question, for CSBG, you talked about expectations for another strong growth year. Can we infer from that, that you expect a minimum of double-digit growth?

[Doug Bettinger]

Yes, I'm not going to quantify it for you. All the same dynamics are in place, right? Chamber counts grew nicely last year. It’s going to grow nicely again this year, given the strength in WFE. Utilization in the industry is very high. Investment across all aspects of that business are doing well. We're just a little bit behind on the supply chain stuff.

[C.J. Muse, Evercore]

Thank you.

[Doug Bettinger]

Thanks, C.J.

[Operator]

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

[Timothy Arcuri, UBS]

Thanks a lot. Doug, I had two. The first is a follow-up from this prior question. So if I just flow through the excess deferred revenue, which you have about $1.5 billion worth of just excess deferred revenue, because you're always going to have some deferred.

So if you assume that you get that all during the back half of the year, which maybe you don't, but you should get most of it, I would think, then that would assume that systems revenue would grow at least 30% in like the back half of the year, half-on-half.

So I know that you don't want to provide guidance for the year, but I'm just wondering if you can maybe hold our hand a little bit on, sort of, what the back half of the year revenue would be. Is it reasonable to say that, yes, systems revenue will grow at least 30%, something like that?

[Doug Bettinger]

Yes. Tim, you know I'm not going to give you a number. We always do this dance with the numbers, but how you're thinking about it is consistent with what I see. Yes, that deferred revenue is up above that amount that you described. There is a run rate of it that's always there, probably in the range that you're suggesting.

We need to get the supply chain caught up with it, right? We need to work our way through making it better, get caught up with the stuff that's sitting there, improve what we're shipping, so that there's less of it, and that's very much what we're investing dollars and resources to do.

[Timothy Arcuri, UBS]

Thanks. And then I guess, Doug, just a question on gross margin. That's the lowest since 2015 and it's on triple the revenue versus then. And I'm wondering if maybe you can do two things: one, break down the headwinds.

I know there's a lot of different things going on, but if you could break down the headwinds. And then also, I guess, the question is, is it possible for you to pass some of these costs, because you're going to have to now invest in your supply chain and whatnot? Can you pass some of this on to your customers or are you just going to have to eat that?

[Doug Bettinger]

Yes. Tim, your observation's right. The way I think about this is, our long-term profitability objectives from a margin standpoint are unchanged to what we had in that model two-plus years ago at this point, right? So don't change your thinking on that.

Some of these upticks in inflation are permanent, and for that, we must get paid, right? We must get paid for the value we're creating and what it takes to create that value. We've done some of that and we need to continue working at that.

Some of these cost increases are transitory in nature. And for that, we've got to work our way through beating the cost back a little bit. We have to be able to do both. So when you go in and talk to your customers, you explain, hey, we're doing our part and we need a little help on this other part. So, it's very much how we're thinking about it. You're right, margins are below where we want it to be. Part of it is absorbing fixed cost and part of it is freight and logistics are expensive, integrated circuits are expensive right now. We'll get paid where we need to get paid, and we'll work the cost down where we need to work the cost down. I don't know, Tim, anything you want to add?

[Tim Archer, President & Chief Executive Officer]

No, I think that pretty much captures it. I do believe we can get paid for value. We also look at ways in which we can develop, in this era and period of rising costs, we can kind of find true win-wins with the customers. And so, we are focused on solutions that drive productivity. Those are areas where you can try to take cost out, you can make the tool more productive for the customer and get paid a higher value for that as well.

And again, back to mentioning Equipment Intelligence Solutions, these are things where again, you're truly removing some of the cost of operating the system by using data. And that allows us to get paid for those services and also perhaps charge fair value for whether it's the spares or the service work that's being done. And the customer also gets productivity and it feels like they came out on the good end of that as well.

[Timothy Arcuri, UBS]

Awesome. Thank you.

[Doug Bettinger]

Thanks Tim.

[Operator]

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

[Toshiya Hari, Goldman Sachs]

Good afternoon. Thanks so much for taking the question. I guess I had two as well. The first one, I realize it's a supply-constrained year, Doug, but curious if you've seen any fluctuations in customer pull across different device types, if you can speak to DRAM, NAND, leading edge, logic, foundry lagging edge. To the extent you've picked up any changes to the upside or the downside, I'd be curious to hear?

[Doug Bettinger]

Yes, Toshiya, really no changes. Demand continues to be very strong across every segment of our business, memory, foundry, logic. We haven't really seen any change in that at all.

[Toshiya Hari, Goldman Sachs]

Got it. And then as my follow-up, I wanted to ask about the Logic IDM business. Really nice to see you guys make new highs here. I think you spoke to microprocessors and image sensors and I think advanced packaging in your prepared comments. I think a lot of us are focused and looking forward to continued traction in the MPU business. And I realize you don't want to talk about specific customers. But if you can kind of remind us where you are kind of in the progression there from a market share perspective, particularly in etch. To the extent you can comment, that would be super helpful? Thank you.

[Tim Archer, President & Chief Executive Officer]

So Toshi, as you said, we don't want to talk about any one specific customer, but I gave you several proof points within foundry/logic. I mean, it's an area we know that we've been underexposed because of our product portfolio and perhaps market share. We've been working hard to introduce new products to expand our opportunity, but also to win more with the products we have. And I think that's exactly what you're seeing in, every time a transition -- a node transition occurs, our served market is getting bigger and we're gaining market share. And that's not just true for certain customers. It's true, we think, for all the customers in terms of -- especially the opportunities and our portfolio is serving.

Yes, I talked about -- on the last call, the work we've been doing in selective etching, the new portfolio of products there, targeting gate all around for instance, and I talked about that expanding this quarter as well. Those are the things that we're doing to try to make sure that our foundry/logic future is better than the past.

[Toshiya Hari, Goldman Sachs]

Thank you.

[Tim Archer, President & Chief Executive Officer]

Thanks Toshiya.

[Operator]

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

[Joe Moore, Morgan Stanley]

Great. Thank you. I wonder if you could talk about what the supply constraints are. Is it the same constraints that you saw in December or is it new stuff? And how much of it is semiconductors versus non-semiconductor products?

[Tim Archer, President & Chief Executive Officer]

Yes, I can take a shot at it. I mean, it's pretty broad-based. I mean, clearly, we've talked about the fact that ICs themselves are a big component of the shortages and maybe one of the very long lead-time parts of that -- of the shortages.

Our systems are incredibly complex and they use a lot of semiconductors inside of subsystems that go into our tools. So, that is a big part of it. But we also talked about the broadening. Some of the broadening was in other types of fabricated parts, subsystems that go into our tools, that require materials and skilled labor that found itself in short just working with each of those suppliers to either shore up their capacity or working with those suppliers and customers to qualify alternative parts, components and where necessary, alternative suppliers.

And so that's what gives us confidence that as time moves on and those qualifications take place and customers can accept those new suppliers and those new components, that the flexibility and resiliency of our supply chain improves throughout the rest of the year.

[Joe Moore, Morgan Stanley]

Great. Thank you. And then as my follow-up, the comment that you made a few minutes ago that deferred revenue would be up kind of slightly in June, I guess I'm a little surprised by that, given that you -- your revenues are up $150 million. And this quarter, you had $600 million of kind of unfulfilled demand. So, I would have thought that the overall demand in June is at least flat. And so with revenues up $150 million, that the deferred would again be up quite a bit, is there something I'm missing there?

[Doug Bettinger]

Like I said, I'm not going to get into guiding a whole bunch of numbers on the balance sheet because it's hard enough to get the numbers that we just missed a little bit, right? I do think it will be up somewhat, Joe. That's what I said. I didn't put a number to it.

[Joe Moore, Morgan Stanley]

Great. Thank you.

[Doug Bettinger]

Thanks Joe.

[Operator]

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

[Vivek Arya, Bank of America]

Thanks for taking my questions. For the first one, I'm curious if the lockdowns in China are playing a role in the constraints that you're seeing. And I think, Tim, you mentioned that some of the constraints are due to long lead time ICs. What is your line of sight into that? Any improvement on that side?

Because I guess my real question is, should we be assuming a gradual improvement as we get into calendar Q3, or is this more of a weighted -- kind of, backup weighted large catch-up improvement? So, just any views on whether China's lockdowns are playing a role, and what these long lead-times on the IC side tell you about when you can start to see any recovery on the supply side?

[Tim Archer, President & Chief Executive Officer]

Yes. Well, we've talked about progressive improvement, so we do believe that things get better in the supply chain as a whole. We break it down -- your question about the COVID lockdowns in China, anything that was a new issue, anything that disrupts freight and logistics in and out of an important location where we do have suppliers, obviously, you lose time, either due to delays in getting parts in or out of those locations. So, that did have some impact in the quarter. But more broadly, I think each component, each constraint within the supply chain will likely recover at a slightly different pace, though I mentioned that predicting the exact pace for every component will be difficult. But from a – when I talked about the long lead time ICs, really, what I was meaning was that I think that the few shortages in ICs, it's a multi, multi-quarter situation before we really feel that anything you order has normal lead times as it used to in the past.

Other elements of the supply chain that were more related to either lockdowns or maybe labor shortages or some shortage in materials, I think those recover more quickly and that's built into our outlook for the year where we see this progressive improvement through the rest of the year.

[Vivek Arya, Bank of America]

All right. And for my follow-up, maybe Doug, one on gross margins, kind of two parts to it. I'm very curious, others in the semiconductor industry have been able to raise prices and pass along almost every kind of cost inflation, right? You look at the gross margins for all the semiconductor companies, they are doing better than before. So what has prevented the equipment makers to pass along these higher costs if demand is so strong and so high? Like do you have flexibility to raise prices in the future, right, to recover these costs? And are there certain aspects of costs that are more structural in nature that could prevent Lam from recovering the three or four points, I think, the delta in gross margins that you should be operating at, at these revenue levels?

[Doug Bettinger]

Yeah. No, Vivek. Nothing, like, restricts us from adjusting pricing or doing that. I mean, there's a cadence with which you talk to customers about things, how your output's improving, my inflation is doing X, Y and Z, we need to work through this together. But nothing restricts us from doing that. And we have done some, right? It's not as if we haven't done some of that. We have. New things have emerged. I mean, freight rates continue to be a challenge. That should get better. I mean, frankly, it's back to what I said earlier.

The costs that are more permanent in nature, we're going to get paid for. The stuff that is transitory, we got to kind of work our way through managing the cost. We have a responsibility to do both and we are doing both. I wouldn't want you, in the long term, to think of our profitability objectives any different than we've communicated them before, right? We're 300 basis points where we want to be, 250 to 300, and we're going to go work our way back to that level.

[Vivek Arya, Bank of America]

Thank you.

[Doug Bettinger]

Thank you.

[Operator]

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

[Stacy Rasgon, Bernstein Research]

Hi, guys. Thanks for taking my questions. My first one, look, I understand it's a very fluid environment and things are getting worse, and I get what happened in the quarter. But I guess looking forward, given the overall environment is tougher, are you taking that higher level of potential caution in line when you're actually giving your guidance? Maybe a better way to ask is, do you feel better about your June guidance now at this point versus how you felt about your – when you gave your March quarter guidance in December? Like do you have more confidence in that June quarter outlook versus how you felt about the prior guidance, just given the deterioration in the broader environment? And how are you taking that into account?

[Doug Bettinger]

Yes, Stacy, I'll try first and then Tim can then add. We never communicated some numbers we intend to miss, let me describe that. To the best of our ability, we comprehend risk, opportunity. I look at ranges. I look at things that could happen. Frankly, what happened in March is things got worse than we expected in the supply chain.

Some things we didn't anticipate. Just they got somewhat worse, right? And do I feel like the number I just gave you, the $4.2 billion is a good number? I do, based on everything I see and the linearity of shipments and what we're doing with the supply chain and all the task force we have working through things with suppliers.

As I sit here today, I’m -- I have confidence in that number or we wouldn’t have given it to you. So things can change though and that's what happened to us last quarter. We're working real hard to ensure that, that doesn't happen in June, and I don't expect it to. I don't know, Tim, anything you want to add on?

[Tim Archer, President & Chief Executive Officer]

No, I think I would just reiterate, I mean, the amount of focus and attention and effort and investment to ensure that we're recovering the supply chain and recovering our output and supporting our customers has never been higher.

And so, I think, that as Doug said, we have confidence that we have a good line of sight to the numbers that we -- and the tools and the parts and everything that's needed to make that up, and that's what we plan to go execute.

[Stacy Rasgon, Bernstein Research]

All right. Thank you, guys. For my follow-up, understanding you're obviously shipping below apparent demand and demand is obviously strong, do you have any way to quantify the gap between the apparent demand that is out there and your ability to supply that data?

I mean, like is it -- is demand 20% above where you're able to ship right now? Is it more? Is it -- any kind of quantification or color you can give on somewhat above and beyond just where the deferred revenue is sitting?

[Doug Bettinger]

Yes. Stacy, that's why we give you an annual WFE outlook, because that actually is a proxy in some ways for what demand on the entire industry looks like to the best of our ability. That's why we try to communicate it and that's the $100 billion, still somewhat supply-limited, though, as Tim said.

We think demand is actually so much stronger than that. But the WFE is what we're -- when we give you that annual number, that's what we're trying to help you think or see what we're seeing, I guess, is what I would say.

[Stacy Rasgon, Bernstein Research]

Got it. That’s helpful. Thank you, guys.

[Doug Bettinger]

Thanks, Stacy.

[Operator]

We'll take our next question from Krish Sankar with Cowen and Company. Please, go ahead.

[Krish Sankar, Cowen and Company]

Yes. Hi. Thanks for taking my question. My first one is for Tim or Doug. It seems like Lam has been more impacted by the supply constraints versus your large-cap peers. And is this because you're a dep etch company? So due to the vacuum nature, more complex components the dep etch products have, you're more impacted?

And if so, whenever the supply eases, do you think there's a pent-up demand for dep etch equipment relative to like process control or CMP or Epi, since it seems like your customers are buying whatever tools they can get their hands on? So I'm kind of curious, would love to hear your thoughts on that. And then I had a follow-up.

[Tim Archer, President & Chief Executive Officer]

Okay. So it's a good question. I mean, obviously, I can't speak in great detail to other people's supply chains, but ours is quite complex. And it's just as you said, we -- if you think about etch and deposition equipment, it has a lot of requirements for very complicated gas delivery systems, vacuum systems, power generation and delivery systems.

And those things not only require, as we talked about, a lot of ICs and control capabilities, but also just a tremendous amount of subsystem fabrication, high-purity gas line fabrication, a lot of complexity there.

And so, I don't know if we are or are not uniquely impacted in that way. But clearly, we are focused on shoring up each of those areas where we see impact. And as I mentioned, the main point is where we can find qualification of additional suppliers who can meet our requirements for the parts and quality that's needed, then we're qualifying those and that increases our capacity. Over the long run, what it also does is, it gives us flexibility.

As I look forward, this investment we're making today to increase the resilience of our supply chain will pay off in the long term because we'll have more suppliers. We'll have suppliers in the regions closer to where our factories are. And I think in the future, that's going to give us some ability to respond to demand in a much more cost-effective way as well. And so, to the long-term gross margin, as I think about that, the investments we're making today are actually good from that perspective.

[Krish Sankar, Cowen and Company]

Got it, got it. Thanks, Tim. And then a follow-up for you Tim is, clearly it seems like everyone is in the same boat. Constrain that supply demand is much better than supply. But do you think there are like any market share shifts happening currently due to supply constrained misses, or do your customers take a much longer time to make the shared decisions compared to the last nine months or so, supply-constrained environment we've been living with?

[Tim Archer, President & Chief Executive Officer]

Well, I think obviously, it's hard to speak to what the customers would do, but it is very difficult to -- most of these decisions on pooling, the process qualification work is all done far in advance of the production needs. And so, I think part of the reason why everybody is feeling so stressed in this environment, from customers to equipment suppliers, maybe even to our own suppliers, is all of those parts, choices and tooling choices are made very far in advance, and to requalify is incredibly difficult.

And that's even why our output recovery timing is longer -- is taking longer than we might have anticipated. It takes a while to qualify an alternative supplier. I think the same thing would be true for customers and semiconductor manufacturing equipment. So, a long way of saying, I don't believe you're seeing market share shifts in this near term due to these capacity constraints.

[Krish Sankar, Cowen and Company]

Got it. Thanks a lot, Tim.

[Tim Archer, President & Chief Executive Officer]

Thanks, Krish.

[Operator]

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

[Blayne Curtis, Barclays]

Hey, thanks for taking my question. I had two. Just one, maybe I'm looking at this the wrong way, but you called out reliant and spares as being the big source of the miss. I guess, versus the midpoint, you missed by 200 in March and June. I think CBG is down like 80 and products down. So maybe just -- maybe I'm not understanding why reliant is the biggest issue?

[Doug Bettinger]

Yes, Blayne, maybe you misunderstood us. We didn't intend to communicate that. I didn't specifically say we missed because of one thing or another. Frankly, we missed because of supply chain constraints for equipment across the board that's in new equipment. It's also in the Reliant product line in CSBG as well as upgrades in CSBG. So it's across all of that is what we tried to, maybe not very well, but that's what we tried to communicate.

[Blayne Curtis, Barclays]

Got you. And then just a broader question. I think everybody's asked everything they can on the supply constraints. I'm just kind of curious, I don't expect you to be the only one, you haven’t than this quarter already and you went first. I'm assuming this is going to be a massive supply chain problem for your customers.

And I'm just curious if you've seen any indications that they've pushed their capacity addition plans out to the right as well. I don't know everybody is going to try to figure out like the last question asked, in terms of how each company lines up? And I'm just kind of curious how things are handled. Do you think they'll just take whatever equipment they can and try to piece it together, or do you -- will you see capacity additions kind of push commensurate with the equipment they can't get?

[Tim Archer, President & Chief Executive Officer]

I guess the simplest way for us to answer it is that, we've seen no change in demand or no change in the pressure we receive from customers to deliver to their original schedule. And so that's why when we look at the investments we're making to try to accelerate recovery of our output to meet their demands, that's because their demand has not changed at all.

To your point of, will they take different tools at different times, I think that there's a lot of things that we're working on with customers to try to meet their capacity constraints if we can't get them the tooling on the exact date they want. We talked about accelerated installs. I talked about increasing like services to get a little bit more output from tools they might have already installed into that fab.

I think there's just a lot of partnership and creativity going into how to work through these constraints over the next -- that have existed for a couple of quarters and likely will continue to exist as we move through the next couple.

[Blayne Curtis, Barclays]

Thanks Tim.

[Tim Archer, President & Chief Executive Officer]

Thanks Blayne. Appreciate it.

[Operator]

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

[Mark Lipacis, Jefferies]

Hi, thanks for taking my question. I have just one. Do you guys have a view about what industry capacity in wafers is going to grow this year or next year based on the wafer fab equipment expectations you have?

Obviously, there's a debate out there about how much capacity could come online, given the magnitude today of wafer fab equipment versus five or seven years ago. So, I was wondering if you had a view on that. If you don't have a view for the industry, I'm wondering if you have a view for maybe a set or a subset of your largest customers, if you have some kind of sense about what wafer capacity is growing this year and next year.

[Doug Bettinger]

Mark, I'll talk maybe a little bit about this year. These aren't numbers we normally give out. But I would tell you, when I look across the totality where investments are occurring, I see wafer capacity growing everywhere, almost everywhere; in memory, in foundry, in logic and probably across nearly every process node in foundry as well, right? I mean, things are tight.

The ICs we're trying to get are across every different process node and everybody is investing to try to get caught up with demand. So, while we don't share those numbers, I think everything is ticking up somewhat or trying to anyway, based on the investment plans they have.

[Mark Lipacis, Jefferies]

Got you. Thank you.

[Doug Bettinger]

Yes, thanks Mark. Operator, we'll do one more question and then I think we're about out of time.

[Operator]

Okay. We'll take our last question from Atif Malik with Citi. Please go ahead.

[Atif Malik, Citi]

Yes, thanks for taking my question. Doug, in January, I believe you guys were talking about growth in wafer fab equipment next year. With all the scenarios going on with global GDP contraction and macro corrections and even recession next year, curious what your thoughts are about WFE next year?

[Doug Bettinger]

Yes, Atif, you know we don't do more than one year at a time. I mean, clearly, you've got a softening in the economy for a variety of different reasons. And I do observe when we look across all of the semi industry, the more consumer-oriented kind of consumption in semis is probably softening a little bit.

Smartphone units aren't as strong perhaps as we thought. PC is probably the same thing. High-performance computing is still very strong. So, it's kind of what I see happening. When Tim and the sales guys talk to our customers though, everybody is full steam ahead with their investment plans in terms of equipment. So that's what I see. I'm not going to quite tell you at 2023 yet. But the fact that we're under shipping what customers want this year, that stuff's I know is going to roll into next year. So sit tight. We'll talk about 2023 as we get a little further through the year.

[Atif Malik, Citi]

I understand. As a follow-up, I get the component and the subsystem supply constraints. Are you seeing impact to your shipments from material shortages like neon and coolant using etch and deposition tools are the – is availability of those materials impacting your shipments or your customers have enough buffer on those materials?

[Tim Archer, President & Chief Executive Officer]

So far, it's – I would say that, we haven't identified those yet as significant constraints. But we're obviously watching every new issue that comes up and assessing its impact. But so far, we wouldn't identify those as key issues right now.

[Atif Malik, Citi]

Thank you.

[Doug Bettinger]

Yeah. Thank you, Atif. Operator, that's about it for time for us. Appreciate everybody joining us on the call today.

[Operator]

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.