Good afternoon, and welcome to the Lam Research Corporation December 2023 Quarterly Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Ram Ganesh, Head of Investor Relations. Please go ahead.

Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, President and CEO; and Doug Bettinger, Executive VP 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 December 2023 quarter and our outlook for the March 2024 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 IR 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.

Thank you, Ram, and welcome, everyone. Lam delivered strong performance in the December quarter. Revenues, gross margin, operating margin and EPS all above the midpoint of our guided ranges. Our results for December closed out a calendar year 2023, in which Lam executed well amid a decline in overall wafer fabrication equipment spending. Compared to the prior year cycle trough in calendar 2019, we achieved a near doubling of EPS. There are a few reasons why Lam has evolved stronger cycle to cycle. First, we have improved our positioning in the foundry, logic and specialty technology segments through sustained investments in innovation and new products. As a result, we have grown our total non-memory revenue share, and we continue to gain momentum at key technology inflections. Second, we have delivered tremendous growth in our customer support business group. Lam ended calendar 2023 with approximately 90,000 chambers in the field, an installed base almost 50% larger than in the previous cycle. CSBG revenue has grown by more than 80% from 2019 levels. And finally, we have further improved our ability to manage costs and drive operational efficiency through cycles, delivering operating margins in 2023 that were nearly 2.5 points higher than the prior trough. Turning to WFE. We estimate that 2023 spending ended in the low $80 billion range. This is up slightly from our prior view, driven by continued strength in domestic China spending predominantly in equipment segments where we do not participate. Overall, memory WFE was down nearly 40% year-on-year, led by cuts in NAND spending of more than 75%. Non-memory WFE decreased in the mid-single digits range with mature node growth in China, partially offsetting declines in leading-edge node spending in the rest of the world. As we enter 2024, the business environment remains muted. However, we expect a modest recovery in memory spending to drive a stronger exit to the year. Our early view of WFE spending for calendar 2024 is in the mid- to high $80 billion range. Growth in DRAM will be driven by capacity additions for high-bandwidth memory as well as node conversions. NAND spending increases will largely come from technology upgrades. We see foundry logic spend growing in 2024 with higher leading-edge investment, offset in part by declines in mature node investment outside of China. Overall, we believe domestic China spending will be stable in 2024. Longer term, the setup for WFE investment is robust. With semiconductor revenues widely expected to reach $1 trillion around the end of the decade and device manufacturing complexity continuing to rise, we believe WFE spending will need to roughly double from today's levels. Lam's served markets of etch and deposition should outpace growth in WFE overall. For this reason, we have been executing a series of strategic actions to best position the company for the growth opportunity ahead. Importantly, we have remained committed to these initiatives despite the challenging spending environment over the past several quarters. First is our commitment to R&D, including planned spending increases in calendar year 2024 to extend our differentiation in products and services targeted at next-generation semiconductor device inflections. This next era in semiconductors will be defined by the broad move towards 3D architectures and advanced packaging to solve scaling challenges. We believe this will, in turn, drive an increase in etch and deposition intensity over the long term. Our focus is on multiple billion dollar SAM expansion opportunities across memory and foundry logic. We have profiled our advances in gate-all-around, backside power delivery, advanced packaging and dry EUV patterning over the past several quarters, and our solutions are continuing to gain traction with customers. In the December quarter, we secured additional advanced packaging wins for high-bandwidth memory, which is critical for enabling advanced AI servers. Our SABRE 3D tools, best-in-class plating uniformity along with our ability to demonstrate an overall cost of ownership advantage made Lam the clear choice over a large competitor. In 2024, we expect our HBM related DRAM and packaging shipments to more than triple year-on-year and outpace WFE growth in this segment by a significant margin. The specialty technology markets are also yielding a diverse set of new opportunities for Lam. For instance, we have recently delivered pulse laser deposition technology to customers targeting high-volume manufacturing of MEMS and next-generation high-frequency devices. We accelerated our entry into this market by integrating technology we obtained via small acquisition onto a production-proven Lam platform. Compared to competing deposition methods, Lam solution enables more highly doped scandium aluminum nitride films, which delivered the piezoelectric performance and cost our customers require. The second area of focus for Lam has been our investment in facilities close to our customers. By establishing process development capabilities near our customers' R&D fabs, we are maximizing collaboration and accelerating time to solutions. We have also made progress ramping supply chain and manufacturing operations within our customer ecosystems. These in-region capabilities enhance our responsiveness and resilience for customers and create significant economic value for Lam as we leverage the benefits of global flexibility. Our new manufacturing facility in Malaysia is poised to fully scale in the coming WFE upturn, providing us the capability to nearly triple the percentage revenue contribution from our lower cost manufacturing locations versus a few years ago. And finally, Lam is concentrated on reengineering our business processing systems to drive operational excellence at greater scale. Investments in digital capabilities like virtual twinning, advanced simulation and AI are helping us to accelerate problem solving, and we are building equipment intelligence capabilities and in-fab service automation into our most advanced product road maps. As we complete our reengineering efforts, we are also intent on achieving organizational agility. In this regard, we are announcing a small workforce reduction predominantly at the executive level to align our resources with our execution priorities and drive efficiency and speed of decision-making. In calendar 2023, Lam delivered solid results while investing to build strong capabilities for the future. Looking forward, I am confident that our strategic global infrastructure and differentiated technology portfolio provide Lam with the tools we need to capitalize on the robust semiconductor growth expected in the years ahead. Thank you, and now here is Doug.

Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today during what I know is a busy earnings season. We delivered strong financial results in calendar year 2023. Our revenue came in at $14.3 billion and diluted earnings per share at $27.33. We're pleased with the company's execution during the year where the memory WFE mix reached historic lows. Let's look at the details of our December quarter results. Revenue for the December quarter was $3.76 billion, which was up 8% from the prior quarter and down 29% from a year ago. Our deferred revenue balance at the end of the quarter was $1.93 billion, which was an increase of $238 million from the September quarter, which was mainly tied to growth in customer advanced payments. We continue to have a higher deferred revenue balance versus historic levels given these customer advanced payments. From a segment perspective, December quarter, systems revenue in memory was 48%, which is an increase from the prior quarter level of 38%. The growth in the memory segment was led by DRAM, which was at record levels on a dollar basis, coming in at 31% of systems revenue compared with 23% in the September quarter. DRAM is benefiting from growth in high-bandwidth memory capacity and the move to DDR5, which is needed to address AI-related workloads, and it's also benefiting from shipments to China. As we've noted in prior quarters, nonvolatile memory WFE was at historic lows on a mix basis in 2023. For the December quarter, this segment represented 17% of our systems revenue, which was up a little bit from 15% in the prior quarter. The slight growth was predominantly related to investments in certain technology projects. NAND customers have aggressively reduced capacity throughout the year to bring inventory levels down. The Foundry segment represented 38% of our systems revenue, a little higher than the percentage concentration in the September quarter of 36%. Growth was driven by new fab shipments in various regions across several process nodes. The Logic and Other segment was 14% of our systems revenue in the December quarter, which was down from the prior quarter level of 26%. The decline was driven by general mature node softness as well as the timing of customer projects. Overall, in the Foundry and Logic segment, we performed well, delivering on the share gains that we've previously been discussing with you. Now I'll discuss the regional composition of our total revenue. The China region came in at 40%, which was down from 48% in the prior quarter. Most of our China revenue in the last 2 quarters was from domestic Chinese customers, and we expect spending from this region to be stable overall in 2024. China as a percent of our revenue is expected to stay relatively high in the March quarter, but it likely trend lower as the year progresses. Our next largest geographic concentration was Korea at 19% of revenue in the December quarter versus 16% in the September quarter. And finally, Japan and Taiwan rounded out the remaining of our top 4 regions. The customer support business group generated revenue in the December quarter of nearly $1.5 billion, up 2% from the September quarter and 16% lower than the December quarter in calendar year 2022. Overall, the business was steady, and we continue to see our memory customers operating the fabs at very low utilization rates. Given the strength of the installed base units, we have a strong foundation for growth with technology conversions and utilization rates resume growing. Spares followed by the Reliant product line continue to be the 2 largest components of CSBG. Turning to the gross margin performance. The December quarter came in at 47.6%, which is above the midpoint of guidance and generally in line with the September quarter level, which was 47.9%. We've improved elements of our cost structure during the year and delivered on our commitment to improve gross margin from the 2023 March quarter level by approximately 1 percentage point as we exited calendar year 2023 from those operational improvements. December quarter operating expenses were $662 million, up from the prior quarter amount of $622 million. R&D as a percent of spending was higher versus the September quarter, coming in at over 69% of total expenses. The increased spending reflects our ongoing focus on extending our product and technology differentiation across those critical inflections that Tim mentioned earlier. We will continue to grow investments across multiple market segments to support the long-term strategic objectives for ongoing company outperformance. Operating margin for the current quarter was 30%, in line with September quarter level of 30.1% and above the midpoint of our guidance primarily because of a stronger gross margin performance. Our non-GAAP tax rate for the quarter was 12.3%, generally in line with expectations. Looking into calendar 2024, we believe the tax rate will be in the low to mid-teens with the normal fluctuations quarter-by-quarter. Other income expense for the December quarter came in at $5 million in income compared with $7 million in income in the September quarter. The slight fluctuation in OI&E was mainly due to variations in exchange rates. OI&E will continue to be subject to market-related fluctuations that could cause some level of volatility each quarter. On the capital return side, we allocated approximately $640 million to open market share repurchases, and we paid $264 million in dividends in the December quarter. For the 2023 calendar year, we returned 79% of our free cash flow, totaling $3.8 billion, which was largely consistent with our long-term capital return plans of 75% to 100%. December quarter diluted earnings per share was $7.52 over the midpoint of our guidance. Diluted share count rounded down to 132 million shares on track with our expectations and down from the September quarter. During 2023, we repurchased nearly 5 million shares through our share buyback program. And I would just mention, we have $2.1 billion remaining on our Board-authorized share repurchase plan. Let me turn to the balance sheet. Our cash and short-term investments at the end of the December quarter totaled $5.6 billion, up from $5.2 billion in the September quarter. The increase was largely due to collections, offset by cash allocated to share repurchases, dividend payments and capital expenditures. Overall, 2023 was a record year for cash flows from operations coming in at $5.3 billion. Days sales outstanding was 66 days in the December quarter, which was a decrease from 73 days in the September quarter. As a result of our operational focus and execution, I'm pleased to report that inventory turns improved to 1.8x from the prior quarter level of 1.5x. We will continue to work on bringing inventory down throughout calendar 2024. Our noncash expenses for the December quarter included approximately $70 million for equity compensation, $78 million for depreciation and $13 million for amortization. Capital expenditures for the December quarter were $115 million, up $38 million from the September quarter. Spending was primarily centered on product development activities and lab expansions in the United States and Asia, supporting our global lab investment strategy. We ended the -- excuse me, the December quarter with approximately 17,200 regular full-time employees, which was flat with the prior quarter. Let's now turn to our non-GAAP guidance for the March 2024 quarter. We're expecting revenue of $3.7 billion, plus or minus $300 million. Gross margin of 48%, plus or minus 1 percentage point. This gross margin guidance is reflected -- reflective of continued favorable customer mix. I do expect this favorable mix to mitigate somewhat as the year progresses. Operating margins of 29.5%, plus or minus 1 percentage point. I would again highlight that the March 2024 quarter will have higher spending as it includes an extra week in the quarter, which occurs every several years. It's a 14-week quarter. And I will also remind you we will be growing R&D spending this year. And finally, we're expecting earnings per share of $7.25, plus or minus $0.75 based on a share count of approximately 132 million shares. We continue to be focused on improving our business operations to optimize efficiency and effectiveness as WFE growth occurs. Our profitability metrics reflect the progress we made during calendar year 2023, with business realignment and transformational activities well underway. We'll see these activities continue in the first half of calendar year 2024. Including the cost incurred for these improvement activities and headcount reductions that we saw in calendar 2023, I now expect we'll spend in total $300 million for these actions, which will continue to be reported in our non-GAAP adjustments. I had previously told you we would spend $250 million over 12 months. It's now $50 million higher and 6 months longer. So let me conclude. Over many semiconductor cycles, Lam has established a proven track record of successfully managing our business. With the actions we've taken over the course of the last several quarters, we expect to strengthen our operations and technology leadership and further enhance our profitability profile. When revenue scales into the next upturn, Lam will be stronger, better positioned and more efficient. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions.

[Operator Instructions]. Our first question today is from Tim Arcuri from UBS.

I guess my first question for you, Tim, is I wondered if you could sort of translate. Obviously, you heard your big litho peer that reported today that had these huge orders and it looks like a couple of billion dollars in EUV orders for DRAM. So that sort of translates to an extra $9 billion to $10 billion, something like that. So it seems mostly for shipments during this year and even into next year for them. So like maybe you haven't seen that yet. But can you talk about what that tells you about the future of that segment? And I know you think it's going to be up, but it seems like it could be up a lot. And maybe any change in the planning outlook or the discussions that you're having with your DRAM customers?

Sure. Thanks, Tim. And obviously, WFE is a tricky thing to forecast because generally, we have a very good view of certain segments of the market. And we try to give an overall view of WFE, and we do that based on listening to peers, talking to customers and making our own assessments. Yes, sometimes we get it wrong. And I guess we're always in a period of adjusting that. I think though -- I didn't -- I don't think there's anything out there that is completely inconsistent with what we've said. We've said WFE is up this year, modestly recovering because of memory. It's -- we'd see a stronger exit to the year. And I think to the magnitude, I think we're just going to keep watching it and having those conversations with customers. In this period, lead times of equipment and the framework in which certain pieces of equipment need to be ordered and brought into fabs can differ equipment supplier to equipment supplier, and maybe there's something at play there. But I think it probably further reinforces our bullishness that memory has been at a historically low mix of WFE. We said that memory spending across both DRAM and NAND. We felt was at unsustainable levels. We said that on pretty much every call last year. And -- so I think that it's not a surprise that, that eventually corrects itself. What I would point out is that we don't spend a tremendous amount of time trying to get the timing exactly right. In my script, I talked a lot about strategic actions, which play out over years and, in fact, catch the DRAM inflections that are coming now. The strength we have in high-bandwidth memory, the positions we have in applications in DDR5 and beyond. Those were established by us seeing DRAM opportunities years ago. And I think we're continuing to report more and more growth in that segment. And I think we'll just continue to do that. So we tend to take a long-term view of technology and spending patterns.

And Tim, it's Doug. I'll just remind you something that I know you know very well that with those lead times are generally much longer than ours are in etch and deposition. And you never buy litho without eventually buying the process equipment that goes along with it. So if they're seeing something, we will see it, too.

Totally, Doug. Yes, for sure. So I guess for you, Doug, super quick. So there's kind of a lot of moving parts, I know going on in gross margin. I know that the mix is helping you. And I know you're probably getting some tailwinds from some cost relief and things like that. So what's the right normalized margin? I know maybe 48% is not the right normalized number, but is it like is the mix helping you by 50 basis points, and that's what sort of goes away. Can you sort of help us there?

Yes. Tim, I'll remind you what I said last quarter call too, still kind of the same thing. The customer mix is benefiting us again in the March quarter guide, maybe even a little bit more than it did last quarter. I took you back to that June quarter of last year before we had such a favorable geographic mix and that largely is what's driving the customer mix. We were around 46% gross margin, 45.7%, I think, if I remember the June quarter specifically. That's not a bad place to kind of start when mix normalizes back to maybe more normal levels. So think about it that way. Somewhere in between there and where we are here. These operational improved install that we've been talking about are real things and as growth resumes and we know growth will resume at some juncture, we should benefit from like repositioning the company to these lower cost locations. So that's still on the come line. but it will require some level of growth in the business.

The next question is from Harlan Sur with JPMorgan.

Again, going back to your large litho peer that reported this morning, right? They called out seeing an increase in customer utilization of their litho tools, both in memory and in Foundry and Logic, appearing that this is the early signal of a positive turn in cyclical dynamics. I know you guys are also track in real time utilization, activity rates of your customers. I know they're at very low levels, but are you guys starting to see some pickup in utilization rates across your customers? And is that also maybe giving you further confidence in your modest growth outlook for WFE this year?

Yes. We've said in the past that we -- obviously, we track that pretty closely. I think you've heard our customers talk about increasing utilization. We've certainly seen and heard from our customers talk of strengthening in pricing in those markets. How we said it would affect us? I mean, in markets like NAND, we said we would -- with so much utilization taken offline, we would see some uptick in our spares business. We see that start to flow through upgrades. And as I mentioned in my script, we anticipate that a big portion of the uptick in memory spending this year will be coming through technology upgrades where -- the installed base is Lam equipment and therefore, the benefit -- a lot of the benefit of that WFE spending will flow to Lam as we do those technology upgrades. The other element of the spending will be coming from the additional equipment that needs to get added to enable things like high bandwidth memory. And we've talked about the fact that in high bandwidth memory, Lam has a 100% market share of the critical technologies needed for stacking the DRAM. So I'll let our customers speak to what their utilizations are but what I'd say is that all signs are pointing to the memory market beginning to come out of its pretty darn near historic downturn over the last couple of years. And so that's what we're looking at for this year.

That's very helpful. And then you mentioned this, I mean, your CSBG business has grown at a 17% CAGR since 2019, right? That's significantly faster than I think it was a 10% to 11% CAGR target that you guys put out at your last Analyst Day. I know it's been weak over the past few quarters, just given some of the supply side discipline of your customers, lower utilizations, slowing tech migration. But assuming that you will see the pickup in activity sometime this year. You combine that with a strong continued growth in the installed base business, number of chambers continues to grow at a low double-digit growth rate. Like how should we think about the growth profile, puts and takes of CSBG this year and going forward?

Yes, I don't know that we're going to put a number on the growth rate for CSBG at this point. But clearly, that business has been heavily impacted by the utilization cuts that occurred within our customer fabs. And we saw that both in spares as well as a curtailment of many of the technology upgrades that typically would just occur year in, year out. And so that did have an impact on CSBG revenues. I think that going forward, I talked about how much larger the installed base is now. That's a much larger installed base that because of the delay in technology upgrades, there's pent-up demand there. I mean those tools need to be upgraded to be operating at the latest and most efficient and most competitive technology node for our customers. And so I don't know the exact timing, but I do know that installed base will be upgraded and will actually generate quite a lot of revenue for Lam going forward.

And Harlan, maybe just like to remind you, there's 4 components in CSBG, spare service upgrades, all of which will benefit from what Tim was describing. You also have the Reliant product line in there, which has just done amazing in the last year. That will ebb and flow to a certain extent with more mature nodes, specialty node WFE. So don't lose sight of that one. There might be a slightly different dynamic with the Reliant product line.

The next question is from Atif Malik with Citi.

First one, Tim, historically, you guys have benefited disproportionately when the NAND spending happens. And -- if you were to think about your position competitively when the NAND spending recovers, I understand this year there's more technology upgrades. But how should we think about your position coming out of this NAND downturn competitively, particularly on more layers than the whole edge process?

Yes. I think that -- it's a good question, and that was what I pointed out. I mean I think what we're looking at in the near term in those first stages of recovery is customers are very cost sensitive. And the best way to achieve that next technology notice by upgrading the equipment that you have in place. And so Lam, we spend a tremendous amount of time investing in technologies that enable the upgrade and extension of our equipment, and that's really of high value to our customers. I think that will actually go on for quite a long time. We have about 6,500 chambers of high aspect ratio etch, for instance, in the NAND marketplace. That creates a lot of next-generation technology through those upgrades. And beyond that, the learning you get from now running those upgraded chambers at that next technology node, tends to seed all of the ideas and understanding of the challenges that need to be solved at the mix node. And I think that's why the installed base positions and incumbent positions tend to be very difficult to break in this industry. And we've tried to break many others -- break into others. And so we know that very well. What Lam has done extremely well is to collaborate closely with our customers. I talked about our close to customer strategy, putting R&D labs in very close proximity to our customers. And again, that's just the way in which we ensure that we're adequately meeting both their technology and cost needs going forward.

Great. And then a quick clarification, Doug, on the OpEx. You said R&D will be up year-over-year. I wasn't sure if that implies total OpEx is also up or SG&A is down to offset the increase in R&D?

Total OpEx is probably going to be up Atif, R&D will be up more, right? We had 69% of total spending in R&D in the last quarter. That's a high watermark. But we're purposefully growing R&D., primarily because of all those inflections that we've been talking about.

I think the maybe the easiest way to think about it is the lead time for us to develop new products that we need to drive growth is unfortunately a little bit longer than the lead time for our spending revenue. So with an outlook that growth is coming and that we're entering this next upturn, where there are tremendous opportunities for the company, we feel very confident to invest ahead of that revenue showing up, and that's I think what we signaled through this year. But with the confidence that we're going to see that growth in new products and technology investment from our customers.

The next question is from Toshiya Hari with Goldman Sachs.

The first one on WFE. Doug, I -- forget if you mentioned this, but is there a first half, second half sort of bias that you're willing to share as we think about the trajectory of WFE this year? And more importantly, curious how we should be thinking about your rate of outperformance vis-a-vis the market? You guys have talked about obviously, depth and etch intensity growing across the memory space. You talked about advanced packaging in HBM. HBM things like dry resist. So assuming you're accurate with your WFE assumption and the market's up call it, mid- to high singles. What sort of outperformance can we sort of expect from you guys in calendar '24?

Yes. Toshiya, I guess the first -- I think it's a little bit second half weighted year this year. I think it's going to be sort of the slow start to the year, maybe, right? We just guided to essentially flat revenues quarter-on-quarter. So that's part of what you're seeing, but we would expect it will be somewhat stronger in the second half. And then overall, we're not going to give you the individual components between NAND, DRAM, Foundry and Logic, what grows more. I think everything probably grows to a certain extent. When we look at all these inflections so in all aspects of those end markets, we see etch and deposition intensity stepping up as you walk from node to node to node. So that is unchanged.

Got it. And then as my follow-up on China, Doug, you mentioned China as a percentage of your systems revenue to stay elevated in the March quarter. And then you went on to say that, that number should decline as you progress through the year. Is that just purely a function of your other businesses, other regions improving throughout the year? Or are you sort of sensing absolute decline in your China business? And if so, what are some of the areas or device types or applications you're seeing a slowdown?

We are not seeing China slowdown. It's purely just timing of when spending is occurring, honestly. Toshiya, we've preferably been using the word, and I think you heard it in both Tim and my comments stable, right? So that's a consistent description that we have been saying for a while.

The next question is from C.J. Muse with Cantor.

I guess I was hoping you could speak to kind of your vision for what a recovery might look like for NAND and where we might get to on a normalized basis, perhaps in 2025? And then -- and if you reflect on perhaps a lower normalized number and think about some of the new areas that you're investing in, whether it's memory or advanced packaging or changes in backside power gate-all-around. Is there enough kind of juice there to get you to where you can overall drive that rich WFE intensity and get us back to kind of those peak levels when 3D NAND was first adopted?

Sure, C.J. I think the simple answer is, yes, we do believe that. I mean, we've -- let me address the NAND question first, which -- as I mentioned, this year, customers are primarily focusing on technology upgrades and what makes sense. I mean eventually, to drive the type of bit growth that we think we see longer term. Obviously, there are some additions that need to be made, but we're not forecasting that this year. With each of those technology evolutions, etch and dep intensity rises simply because of the increasing number of layers. And in a technology upgrade, we've talked about the fact that Lam captures a much higher percentage of WFE because of the goal that etch and deposition play in the technology upgrade. So I think that as we see NAND growing -- recovering and growing at a certain percentage rate, Lam will actually significantly outperform that rate because of the fact that most of that is coming from upgrades. Now longer term, I think we have turned to our attention and strategically, we've said we want to build resilience into our business by really capturing a lot of the opportunities that exist. Of course in NAND where we're very strong, but really outside of NAND and some of these other markets that are becoming more etch and dep intensive. And we've talked about those, whether it's gate-all-around or backside power or advanced packaging, dry EUV patterning. And each of those, we've characterized as a $1 billion-plus opportunity when fully scaled for Lam. So -- and those are SAM expansion meaning that they are incremental to where Lam has been before. So I think when you play those out and obviously, we have to be successful in execution. That's why we keep talking about we're gaining traction, but there's still a ways to go before these inflections and all decisions are made. But we think those can certainly drive Lam to new highs in terms of revenue and obviously profitability as well.

Very helpful, Tim. I guess a quick follow-up, Doug. I know you're hesitant to guide OpEx for the full year, but perhaps you could help us understand maybe the impact of the extra week on the March quarter? And how you're thinking about driving that R&D growth through the calendar year?

Yes, C.J. I mean, it's 14 weeks versus 13. That's the right way to kind of think about it. You can just ratio it to understand kind of it's a longer quarter. So that's the piece from that. And then any delta to get to the 29.5% op margin is part of that beginning to step up R&D. As we go through the year, though, we will purposely be growing the investment in R&D so that you might not see the historic leverage that we've delivered is what I described a quarter ago, and that's still very much how you should be thinking about it.

The next question is from Srinivas Pajjuri with Raymond James.

Tim, you talked about your trough EPS doubling essentially, which is a tremendous achievement and execution. I think part of the reason was your services business did increase as a percent of the mix. I think that helped for sure stabilizing the cyclicality a bit. So as we go through the next, I guess, as we kind of look out to the next couple of years as business recovers, just curious as to how you think about the mix shaking out between systems and services? And how -- what sort of implications that might have for your top line and also your margin profile? And I guess, on the next peak EPS, if you want to talk about?

Well, here's why it's always a little difficult to answer this question is because we're certainly investing to grow our systems business tremendously as well. And so we don't look at it as one trading off versus the other. And so in fact, one kind of begets the other. The better our systems business does the faster our installed base grows, and that's really the story from 2019 in that -- until now, when we talk about how much the installed base has grown. We shipped a lot of new systems that grew that installed base by nearly 50%. So going forward, I think that we anticipate the ratio of CSBG revenue to overall revenue staying kind of in the historical range that it's been. And that's just going to be driven by kind of equivalent on success in both parts. But the CSBG revenue, the installed base business, not only gives us stability, but it also opens new channels for growth for the company. And I've talked about this on previous calls, which is we -- I think that when we think about how Lam leverages, things like artificial intelligence and data. It's in the installed base services business. On the last call, I talked about even cobots, the use of collaborative robots to start to do some of the service that today is done by skilled engineers. Our customers in this industry have to find ways to be able to innovate faster and also provide manufacturing services at a lower cost. And I think that -- we can do that by innovating around the installed base and create new products and service offerings that help us grow at a faster pace than the installed base itself is growing.

Got it. And then Doug, one clarification on the deferred revenue. I think it went up about $238 million this quarter. You talked about prepayments. Just curious, are customers still prepaying because of any supply constraints? Or is this an ongoing, I guess, trend that you're seeing? Just if you can talk about how we should think about deferred revenue going forward, that will be helpful.

Yes, Srini. I guess what I described is you think about the advanced payment is when we have a new customer that we're just kind of understanding what their balance sheet looks like, especially if they're a private customer that we could see the balance sheet. It's not publicly reported. And the creditworthiness might be sort of questionable. We require cash upfront before we begin manufacturing the tool, and that's what's going on there. That's all it is.

The next question is from Stacy Rasgon with Bernstein Research.

For the first one, around the China BOP being stable in calendar '24. Do you see all market segments being stable? Or do you see some like being stronger and some being weaker? Like how do you see that interplay?

Stacy, I don't really see a big change year-on-year relative to end market. I'll remind you, when China DRAM was second half weighted last year. It's probably a little bit first half weighted in China, maybe more than a little bit this year. But year-over-year, I don't think I really think about a significant change in contribution for the entire year.

Got it. That's helpful. And I guess a follow-up on the China questions, and maybe it's a follow-up on one of the earlier questions. But it does sound to me like you are suggesting China mix should come down through the year. Maybe you can clarify that because if I've got overall stable China revenues like how does your China mix come down materially? It doesn't look like you're looking for overall like non-China WFE to grow a ton, right, in some of the other areas. So...

Yes. Let me remind you, in 2023, China was a more modest amount of WFE that grew in the second half of the year. And so the comments we're making are year-over-year, it's relatively stable. Kind of the half-on-half stuff probably looks different in '24 than it did in '23 in China specifically.

That's helpful. And so then exiting the year, you think you're back to that sort of normalized gross margin range as a result of that as China falls off in the second half?

Yes. The customer mix stuff, I think, mitigates some as we go through the year, and it continues to be quite strong in the March quarter guidance.

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

For my first one, I'm curious, what's your assessment of NAND supply demand as it exists today? I think in your WFE view, you are assuming that NAND grows but more because of technology upgrades. But what are your customers telling you for as to when they want to start adding more tools? And what's Lam's opportunity to grow NAND right at a measurable pace in the second half of the year?

Yes. I think that -- first of all, I wouldn't necessarily talk about what we are discussing with our customers on that standpoint. But things that are out there. We do know, and I think you know that the utilization cuts were pretty severe in NAND last year. And so there's a tremendous amount of capacity that is -- has been offline and we've said in the past that needs to be brought back online. And I think the question and the discussions we're having is that what technology node should that capacity be restarted. And in many cases, there is a very high likelihood that technology upgrade certainly will occur as that equipment is brought back into service. And so in that case, we would actually begin to see a restart of some of the utilization driven revenue that we get from things like spares and services, as well as, at the same time, a restart of technology upgrade revenues. And that's why I think that from a NAND perspective this year, we think that will effectively represent the majority of the spend that occurs in this segment.

Okay. And then, Tim, as many of the DRAM customers are saying that they plan to shift a bit more towards HVM from DDR. Does that have any positive or negative influence on your CSBG and the spares business?

No, I don't -- I can't quite make that connection right now. I'm off to give us some thought. But clearly, we see an impact on our systems business, as I mentioned, where we're having to add the specific HVM related especially advanced packaging steps related to the stacking of HVM itself. And we're seeing significant growth in that area. But -- and so with that, given we're shipping additional systems, there is some incremental spares business and services business that goes along with that. But the systems portion of that kind outweighs from a dollars perspective.

I guess maybe just to clarify, does your CSBG business start to kind of grow consistent with the growth in your tools business overall? Or do you think there is going to be a lag factor because it slowed down later? Does it start to regrow later also?

Depends on the rate of growth in WFE to be perfectly frank, that are coming. See, spare service upgrades chug along, and we think that's going to benefit as utilization and whatnot begins to come back. Then to really answer your question, you got to go figure out what you think the pace of WFE growth is. I'm not going to put numbers on that right now. We're going to kind of wait and see.

The next question is from Krish Sankar with CDT Cowen.

First of all, for Doug. I think Doug has mentioned about a gradual recovery in WFE this year, kind of more back half rated. So I'm kind of curious, and Doug, I'm not looking for like guidance. What I'm just wondering is, is this better assume Lam's revenues in the calendar second half of 2024 is going to be better than first half? That's for my first question and then I have a follow-up.

You're a little bit muffled, Krish, but I think you were asking about our performance along with WFE. And frankly, I think we will mirror whatever the trajectory of WFE looks like with an expectation that etch and dep outgrows to a certain extent. I think I answered your question, although you were a little bit muffled there.

Doug, I was just trying to wonder if calendar second half '24 revenue for Lam is going to be better than calendar first half similar to WFE?

Yes, I think it will be, Krish, I'm not going to put numbers on it yet, but we will mirror what goes on with WFE.

Got it. Got it. Okay. And then my follow-up is for Tim and Doug. You spoke about HBM and AI and all the good stuff. I'm just wondering does HBM and DDR5, 2 sets for dep and etch differ from DDR4 and Legacy in a way, is it more like [indiscernible] from a margin standpoint? Or does it -- is it like a mutual standpoint?

I guess what I'd say, Krish, from a margin standpoint, you shouldn't think about any differential margin necessarily. The incremental piece for the stuff that goes in high-bandwidth memory is a bigger die, you know that. The die itself, building a DDR5 die is largely the same equipment that builds DDR5 that doesn't go into HBM. The incremental stuff comes when you go into the advanced packaging stuff, the Syndion deep silicon etch and the electroplating are areas where we are extraordinarily strong in addition to some other things. That is clearly incremental equipment.

Yes. And I think from an etch and dep intensity perspective, in general, I think you mentioned DDR5 to DD -- DDR4 to DDR5. I mean I think in general, with each technology node evolution, whether it's DRAM, NAND, Foundry Logic, we've said etch and dep intensity rises with technology advancement. And so I think you can imagine that there's more equipment being needed, and that's in addition to the fact that larger die sizes drive greater equipment per bid out. So there's a lot of factors that every time we move forward, there's more equipment and more Lam equipment required with those technology nodes.

The next question is from Joe Moore with Morgan Stanley.

If I can ask about your DRAM systems revenues in the December quarter. They were kind of back to the highs of a couple of years ago, but I know you had some China in there, I think there's some of the events packaging. Can you just give us a sense for what's kind of core DRAM within that? And then you're pretty constructive on where that's going. Can you give us a sense of the dynamics of China going forward versus other regions and other parts of DRAM?

I guess, Joe, I would just to take you back to what I had in my script. Two things are driving the strength in DRAM in the December quarter, and you mentioned both of them, frankly. It's high bandwidth memory in DDR5. In addition to the fact that we've got a China customer in DRAM in the second half of the year. That includes September and December, that wasn't in the first half. So each of those things contribute to the strength you saw in December.

Okay. And then looking forward, it seemed like you had more than 6 months of demand from that China customer in the second half going forward. Does that come down, but core DRAM comes up and HVM comes up?

Probably.

The next question is from Brian Chin with Stifel.

Maybe going back to NAND, the best ever quarter for NAND spending was probably higher than the total level of NAND spending maybe for all of last year. And so even if it's off a low base, isn't it pretty logical that NAND WFE should exhibit the largest or highest rate of improvement in '24?

I wouldn't necessarily draw that conclusion, Brian. I think all we're going to tell you is that I think every segment WFE grows this year, NAND, DRAM, Foundry, Logic, it's all up to a certain extent. I'm not going to get into the business of quantifying each individual one because frankly, at the end of the day, we'll get it wrong. But I think everything will grow to a certain extent with peers.

Okay. Fair enough. And then just to kind of level set and DRAM and then also looking forward. How much did DRAM industry spending actually declined in '23? It seems to be better than what was initially thought based on HBM, et cetera. And also, can you give us a sense of the number of wafer starts or percent of the DRAM installed base that could be converted to more advanced 1-alpha or 1-beta like process nodes this year?

I guess, Brian, what I'd say and Tim, I think had this in his script, memory overall was down roughly 40%. NAND was down north of 70%. The differential to get to the number is DRAM. You can do that. And yes, I think the second part of your question, HBM and DDR5 has been a big part of the strength in DRAM.

Yes.

Okay. And that was actually the second part was kind of more towards, what is the potential number of wafer starts or the percent of the installed base that's sort of game for those conversions to 1-alpha, 1-beta light nodes?

For the most part, in memory, everything gets upgraded to the next node, all of it. That's always been the case. It's not a new phenomenon.

The next question is from Chris Caso with Wolfe Research.

The question is on delivery times. And you had mentioned, obviously, your delivery times may be different than some others in the industry. Where do they sit right now? And as a consequence, how much visibility do your customers need to give you? And with that, when we start to see some stronger perhaps memory spending, how quickly will you be able to react to that and turn that for revenue?

Yes. So we don't obviously publicly telegraph our lead times. But we had talked about the fact that during the COVID pandemic, our lead times due to supply chain shortages, it stretched out quite long. And those have now come back to a much more normalized level, although they still are such that for us to make shipments within this year, we would have to know about those orders and that forecast pretty quickly. The one thing that's helped is I talked about our investments in new manufacturing and supply chain operations within our customer ecosystems. That's putting us much closer, it's diversifying our supplier base and I think it's going to -- through this next upturn make us much more responsive to customer needs. So really, we worry less about lead time and more about our ability to respond in the time frame, which our customers need to place orders to meet their ramps. We tend not to be -- we tend not to be in the bottleneck, let's put it that way in terms of a lead time perspective, planning a new fab.

Fair enough. As a follow-up question, I wanted to ask about backside power. And last quarter, you made some disclosures about the revenue impact to Lam as that happened. Could you give a little more color on that and specifically, we know that the different customers are having different implementations of backside power. At what point does that start to become a meaningful driver for Lam?

I think given the important role that both etch and deposition play in that and our strong position in parts of the backside power process like copper plating where some of those layers are becoming quite thick and therefore the processes become longer. It's -- I would say, going to very rapidly become quite meaningful for the company. And again, it's just a further demonstration of how going 3D and essentially using those -- using etch and deposition to create more complex architectures allows you to reduce power, improve chip performance and also reduce cost. And we talked about it in the sense of backside power. You're seeing the same thing with chip stacking and HBM and energy integration. And that's why I said, I think the next era of semiconductor is characterized by all of these more unique 3D architectures. They're all good for the types of products we sell.

Operator, we have time for one more question. And that question comes from Thomas O'Malley with Barclays. Thomas O'Malley: I was curious if you guys had a view on the HBM market. Clearly, with the accelerator market growing as quickly as some think. There's concerns that the HBM market may actually be shipping above peak in '24 and '25. Do you guys have a view internally on just how fast HBM is growing as a market segment? And just -- could you just give us the perspective of when you look at an acceleration of a tool road map with a customer on HBM. How much of that has pulled in, in the last 6 months from what you would typically see from a DRAM customer when they're looking for a tool?

Well, I think that as a real key supplier into the HBM market, as I mentioned, the strong position we have in the processes required before the stacking, this is an area where we're seeing very, very strong demand. I think that whether or not at some point, it's shipping above peak, I think that this AI market is continuing to evolve at a very, very fast rate. And all we're focused on right now is ensuring we are building out our own capacity and capabilities. And ensuring that we maintain that technology leadership that's allowing us to hold 100% market share of the TSV formation in HBM. And so really, that's our focus is hold the position and let the market grow as fast as the market grows. Thomas O'Malley: Helpful. And then just one on the makeup of inventory. You guys have talked about working down inventory throughout the year. Is there any color you can give us on the makeup of that inventory? Is it more memory related or foundry logic related? I know you don't want to give specifics, but just where do you see that inventory coming down through the first half of the calendar year?

Yes, Tom, it's -- the rate of decline in memory as we went into '23 was pretty dramatic, and we ended up taking more inventory than we needed specifically for memory. So there's a bigger component of it targeted at memory and as memory recovers, the inventory will come down. Thanks for the question.

This concludes our question-and-answer session, and the conference has also now concluded. Thank you for attending today's presentation. You may now disconnect.