Lam Research Corp 2027 Q1 Earnings Call

Please go ahead. Thank you, and good afternoon, everyone.

Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, President and Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment, and we will review our financial results for the September 2026 quarter and our outlook for the December 2026 quarter. The press release detailing our financial results was distributed a little after 1:00 P.M. Pacific Time. The release and the accompanying presentation slides for today's call can be also found on the investor section of the company's website. Today's presentation and Q&A include forward-looking statements based on our current beliefs, expectations, and assumptions. These statements are subject to risks and uncertainties, and actual results could differ materially from those expressed or implied in such statements.

For a discussion of factors that could cause actual results to differ materially, please refer to the risk factors in our most recently filed periodic reports on Form 10-K and Form 10-Q, and subsequent filings with the SEC and the cautionary statement in the accompanying presentation slides. 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 presentation slides. 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. With that, I will hand the call over to Tim.

Thanks, Ram, and thank you to everyone joining us today. In the September quarter, Lam again delivered record revenue and profitability. Gross margin, operating margin, and EPS all reached new highs, with operating margin topping 40% for the first time. Our performance throughout the year reflects the broad strength of our product portfolio and a relentless focus on operational execution as AI continues to drive unprecedented semiconductor demand and increasing device complexity. Including the midpoint of our December quarter guidance, we expect calendar year 2026 systems revenue to grow well over 40% year-on-year. Rising deposition and etch intensity across all device types and advanced packaging solutions is continuing to drive greater opportunity for Lam. Over the past few years, increasing device complexity and a push towards greater 3D scaling have driven a four-point expansion of our served available market, or SAM, as a percentage of WFE.

When combined with share gains from products addressing this growing SAM, we expect 2026 to mark our third consecutive year of WFE outperformance. For calendar year 2026, we expect WFE in the mid $150 billion range. Our preliminary 2027 WFE outlook is for more than $200 billion of spending, with percentage growth led by DRAM, followed by leading-edge foundry logic and NAND. As we move into calendar year 2027, we see clean room space availability and supply chain constraints for certain components continuing to limit chip makers and equipment companies' ability to fully meet end demand. We are actively working with our suppliers to accelerate their capacity expansion plans, and are confident Lam is well-positioned to deliver on the strong demand we see ahead. Underpinning our outlook for WFE growth is the continued rapid adoption of AI by enterprises and consumers.

It is reported that average weekly token usage is up roughly 250-fold in the past 18 months. As AI moves increasingly towards autonomous agentic workflows, demand for compute, memory, and storage solutions continues to expand. For example, in NAND, AI performance and economics are driving demand for multiple tiers of storage, each optimized for different workloads. QLC today provides cost-effective storage for rapidly growing AI data volumes. TLC storage is used as a high-bandwidth tier for context memory and KV cache workloads. And SLC class NAND is emerging for low latency, high-speed access in agentic AI. We believe adoption of an SLC storage tier could become a meaningful driver of NAND wafer capacity. Converting from TLC to SLC class devices reduces bits per device by roughly 3 times.

Said differently, for each percentage point mix shift of NAND bits to SLC class devices, approximately 2% more installed wafer capacity will be needed to support the same bit demand. Incremental growth in bit demand would further amplify wafer capacity requirements. We expect all three storage tiers to grow, increasing the value and strategic importance of NAND. We believe Lam is best positioned to benefit from this inflection. We have the industry's largest installed base of NAND systems and a comprehensive product portfolio spanning all critical deposition and etch steps. Any increase in NAND bit demand, whether satisfied through installed base upgrades or capacity additions, will generate additional need for Lam's tools and technology. Foundry logic and DRAM are seeing a similar device-level evolution to satisfy AI's emerging performance requirements.

From advanced patterning and backside power to next-generation packaging, we see billions of dollars of potential SAM expansion and share gain opportunities for Lam in the years ahead. We are seeing the impact of our targeted investments in foundry logic and DRAM products in our calendar year 2026 results. These two market segments have accounted for approximately 80% of Lam's systems revenue growth year-to-date. A good example is our focus on advanced patterning requirements for foundry logic and DRAM. With each technology node bringing more stringent EUV pattern fidelity and defectivity requirements, Lam's Akara etch, conductor etch and Aether dry resist tools are being paired to deliver unprecedented scaling capability. Importantly, these tools are also helping improve the productivity of DRAM scaling at a time when maximizing fab output is a critical priority for our customers.

Multiple chip makers are adopting Akara for its ability to etch very high aspect ratio features with exceptional profile control, while at the same time delivering up to a 50% reduction in wafer-to-wafer and lot-to-lot variability, and up to a 50% gain in wafer output per fab footprint. Similarly, Lam's Aether dry resist solution has demonstrated sub-10 nanometer resolution at the highest pattern density and fidelity with High-NA EUV. It helps achieve this result while requiring 10% lower exposure dose, improving scanner productivity and reducing patterning cost per wafer. Aether solutions are already ramping in HBM high volume manufacturing with Low-NA EUV, and we see additional insertion opportunities ahead across both DRAM and foundry logic customers. As a result, we now expect cumulative Aether-related revenue to reach approximately $2.5 billion by the end of the decade, roughly $1 billion above our prior expectations.

Backside power is another example of where Lam's strength in deposition and etch is evident. Separating power and signal routing allows for thicker backside metallization to reduce resistance and improve power efficiency. Implementation increases process complexity, driving the need for more deposition, plating, and etch steps. As customers ramp backside power at 2 nanometer and below, our production-proven Vector, Sabre, and Flex tools are well-suited to the task. Vector provides industry-leading footprint density and wafer-to-wafer repeatability with its unique quad architecture. Sabre is the global industry benchmark for electroplating due to its high productivity and superior on-wafer performance. Flex delivers high throughput dielectric etch with low defect levels, leveraging its differentiated small volume chamber design and confined plasma. New materials such as molybdenum are also being introduced to enable more efficient electrical connections between the backside and front side of the wafer.

For this emerging application, our Halo tool is gaining traction by enabling both plasma and thermal processes within a single chamber while delivering industry-leading productivity. We are gaining share in this expanding backside power SAM opportunity and recently secured tool of record wins for all four products at a leading customer. In advanced packaging, our market-leading Syndion product is winning advanced logic in HBM TSV applications. Syndion's differentiated hardware design enables rapid process switching to deliver highly uniform TSV profiles, smooth sidewalls, and high volume productivity. Recently, we attained four new positions across multiple customers. Our Striker ALD product also achieved multiple TSV liner wins due to the film's superior step coverage and low etch rate. Beyond TSV applications, we secured additional Vector and VECTOR TEOS 3D wins for high-adhesion bonding films and interdie gap fill applications by delivering lower defectivity for thick film deposition.

With its high deposition and etch intensity, advanced packaging has become a major growth driver for Lam. For next-generation AI and high-performance computing devices, customers are increasingly turning their sights towards panel-level packaging to scale manufacturing. Our panel-level packaging portfolio continues to gain momentum across fan-out packaging, glass core substrates, and emerging substrate and interposer architectures. To date, we have shipped panel plating systems to more than 20 customers worldwide across panel sizes ranging from 300 by 300 millimeter to 600 by 600 millimeter. Customers continue to select our Kallisto platform for its differentiated coplanarity and plating uniformity performance across bumps, pillars, and redistribution layers. Kallisto is also well-positioned to benefit from increasing adoption of glass core substrates through emerging through-glass via applications.

Given our customer engagement, installed base growth, and technology leadership, we expect to achieve panel-level packaging market share that surpasses the strong position we already hold in current wafer-level packaging. Finally, turning to CSBG, we are set to exit calendar year 2026 with solid momentum, with annual revenue expected to grow more than 30% year-over-year. This is more than twice the rate of our long-term target set at our last Analyst Day. Growth is broad-based across upgrades, spares, and services, supported by high fab utilization and customers' continued focus on installed base efficiency. The value we are delivering with Equipment Intelligence and Dextro Cobots recently helped us secure performance-based service contracts with multiple memory manufacturers. We expect CSBG momentum to continue in calendar year 2027, with revenue growing over 15% year-over-year.