Lam Research at Cantor Fitzgerald: Strategic Growth and Challenges

On Tuesday, 11 March 2025, Lam Research (NASDAQ: LRCX) participated in the Cantor Fitzgerald Global Technology Conference. The company’s CFO, Doug Bettinger, provided a strategic overview highlighting Lam Research’s growth prospects in the Wafer Fab Equipment (WFE) sector, while also addressing challenges such as the impact of US-China relations. The company aims to increase its market share and enhance revenue, despite regulatory hurdles.

Key Takeaways

• Lam Research anticipates modest growth in the WFE cycle, with a focus on NAND, foundry, and logic.
• The company targets revenue between $25 billion and $27 billion, with operating margins of 34% to 35%.
• New products like the Acara conductor etch platform and Altus Halo Moly ALD tool are expected to drive significant revenue.
• US-China relations have led to a $700 million revenue reduction, but Lam remains confident in navigating these challenges.
• Lam plans to return at least 85% of free cash flow to shareholders through dividends and buybacks.

Financial Results

• WFE Outlook: 2024 WFE was approximately $95 billion, with 2025 projected around $100 billion, indicating slight growth. Long-term growth is expected in mid-high single digits.
• Gross Margin: Targeting a margin with a five handle.
• Operating Margin: Aiming for 34% to 35%.
• CSBG Growth: Expected to grow 1.5 times the WFE growth rate, with a 17% CAGR since 2012.
• China Impact: New regulations are expected to reduce revenue by $700 million this year.

Operational Updates

• NAND: Expected to see modest growth, driven by upgrades, with a two-thirds share of wallet on these upgrades.
• Foundry and Logic: Investment in gate-all-around technology and backside power presents billion-dollar opportunities per 100,000 wafer starts.
• DRAM: Continued strong performance expected.

Future Outlook

• Product Portfolio: The Acara conductor etch platform and Altus Halo Moly tool are key growth drivers, with the latter expected to generate $2 billion in revenue.
• Regional Strategy: Expansion of the Azure factory network aims to enhance customer proximity.
• Digital Transformation: Initiatives are projected to improve operating margins by 150 basis points.
• SAM Expansion: The company expects to gain a 50% share of the growing SAM from 3D architecture inflections.

Q&A Highlights

• Dry Resist: A $1.5 billion opportunity over the next five years, with momentum building.
• China Competition: Growth of local competitors due to sales restrictions, but Lam remains focused on its strengths.
• Capital Allocation: Continuation of dividend growth and share buybacks, having returned nearly 100% of free cash flow since 2012.

For further details, readers are encouraged to consult the full transcript of the conference call.

Full transcript - Cantor Fitzgerald Global Technology Conference:

Operator: Okay.

CJ Muse, Analyst, Canner: Alright. Well, good morning, Stella. My name is CJ Muse with Canner, covering semiconductor, semiconductor equipment space. Very pleased to host Lam Research. And this morning, we have Doug Bettinger, CFO.

Thank you for coming, Doug. CJ, thanks for having me. I appreciate it. So I think Doug has initial statement to make, and then we can

Operator: push I always seem to start with my safe harbor to keep the attorneys happy, so permit me. Today’s discussion may include forward looking statements that are subject to risk and uncertainties, and actual results may differ materially. Additional information concerning factors that could cause actual results to differ materially from those forward looking statements can be found in the risk factors section disclosed in our public filings with the SEC, including our 10 ks and 10 q. By the way, I don’t plan to tell you anything new today. So if if you’re looking for some new forward looking statements, I’m gonna probably disappoint you.

But, yeah. Everybody’s getting up and leaving the room now. But anyway

CJ Muse, Analyst, Canner: I’m planning to ask.

Operator: You you could ask, but you won’t get me to say that they do, CJ. This is a game we play with each other.

CJ Muse, Analyst, Canner: Yes. So Doug, your favorite question, I figured I’d start there and then we could get really to the meat of the Q and A. But where are we in the cycle? And so I know this is your favorite ask. Most management teams talked about enough 5% WFE for ’25 and everyone taking share, which means we’re probably growing 5% to 10% when all is said and done.

Operator: It’s a great industry when we all take share.

CJ Muse, Analyst, Canner: Yes. It is indeed. So, you know, I I just to understand kind of your your frame of mind, you know, small growth this year. On top of that, what what’s your early look into next year?

Operator: You know, I’m not gonna say anything about next year yet, CJ. But I will unpack this year for you a little bit. So first, the baseline last year, ’24 WFE was, I don’t know, mid 90s, call it 95. And we’ve suggested we see a 100 this year. So little bit of growth, CJ.

But more importantly, the things that we do well in are going to be growing this year. So I think you’re going to see nice performance from land this year. First, unpacking. Okay. Where is the growth coming from?

Maybe start with my favorite end market, NAND. NAND is up a little bit this year. And frankly, what’s going to happen in NAND this year is an upgrade year, which we love when upgrades happen because the constraint tools in the fab need to get upgraded and by and large that, that’s our equipment. So, NAND up a little bit. And listen, by no means am I telling you we’re back to peak investment levels, not, not even directionally close to that.

But the reason we love upgrades is when you go through an upgrade year, our SAM is roughly two thirds of the spending in an upgrade cycle. And so we do well. That’s the stack needs to get upgraded. A lot of the very difficult etches down through the structure need to get upgraded. And then the metallization needs to get upgraded.

And what you’re going to see on top of the normal upgrade cycle this year is the beginning of the transition to molybdenum. And I’m sure you’ll ask me more about that later. So then, going outside, foundry and logic is going to be decently strong this year, especially at the leading edge. You’re going to have spending in gate all around, which we’ve described is very beneficial for etch and deposition. So we’re excited about that.

And nominally, when you look at a gate all around investment for every 100,000 wafer starts, our SAM grows by a billion dollars roughly speaking. Now, we won’t win all of that, but we will do well. So that’s what we see happening in Fondering Logic in addition to advanced packaging, which shows up there, as well as in DRAM. And looking at DRAM, you’re going to have a continued strong year this year. Last year was pretty strong.

The composition of who’s spending this year’s is gonna be a little bit different. China’s certainly down in DRAM this year. Everybody else is up. And what you got going on there is one beta to one gamma. You’ve got high bandwidth memory continuing.

And so when you think through all those things, we’re pretty excited about our performance this year because everything I just ticked through are things that are etching deposition intensive and should be good for us. Us. Perfect. I’ll catch my breath for a minute.

CJ Muse, Analyst, Canner: So maybe a few follow-up questions to that. Within the NAND bucket, is there a way to think about contributions to tools versus CSBG?

Operator: That’s a great question. So maybe unpack when we talk about upgrades, what the heck are we talking about? First, the installed base can get upgraded. And basically, what happens there is the stuff that’s already in the fab can get the next generation capability added to it by replacing certain components of the tool. So that piece is in CSPG as you know, CJ.

But what also always happens in an upgrade cycle is a few new tools get purchased, right? The constraint tools need to have bottlenecks removed and whatnot. And so there’s always some level of new equipment purchase as well. So you get a little bit of that. And then layering into that as well as the MOLLE tool is a brand new tool, Altus Halo, which we announced a couple weeks back at our Investor Day, the name of the tool.

But MOLLE, as you think through, you’ll begin to see the transition from tungsten to MOLLE, and then, next year, that will be new equipment. So it’ll be it’s a long winded way of me telling you it’ll be a little bit of both, CJ. Heavy focus in CSBG on the upgrades and then some new equipment buys as well.

CJ Muse, Analyst, Canner: And we’re upgrading to cryo. Is that an upgrade or is that new tool?

Operator: Again, little bit of both, but probably more upgrades. Right? Okay. And relative to opportunity to upgrade to cryo, we’ve talked about the fact that if you look at the installed base of NAND equipment, we’ve got 7,500 high aspect ratio etch tools there, of which, we’ve we’ve said we are the only company that’s actually shipped cryo in production and, the cryo shipments, so far are 1,500. So the opportunity to upgrade that is pretty strong.

CJ Muse, Analyst, Canner: And you talked about two thirds share of wallet or share of market.

Operator: Same percent of overall WFE

CJ Muse, Analyst, Canner: on upgrades. I think if I look back, your share of overall NAND WFE has kind of been around 30%. And so if I think about an upgrade world, is it fair to say that your share of overall NAND WFE is probably more like 40 plus percent this year?

Operator: Yes, CJ, we haven’t put a hard number on it, but it’s higher. Certainly, our share spend is higher in an upgrade cycle. We’ll leave it at that, I guess.

CJ Muse, Analyst, Canner: All right. So your Analyst Day was just three weeks ago, still very Still pretty fresh. Nothing’s changed relative to So I thought maybe we’d start with what are the key takeaways investors should have top of mind. And I think you’ve talked about performance scaling to three d, CSPG, etcetera. If you could elaborate on those.

Yeah.

Operator: Let me unpack it a little bit, and I’ll come at this because I’m the CFO from kind of how do you unpack the numbers. Right? We were pretty excited to update the financial model for both ’28 as well as we did that trillion dollar industry model, CJ. And I know you remember that. First, I guess, the way I start with it is, you know, semis are a great place to be.

It’s a good neighborhood to live in. Right? You got AI growing. You’ve got, automotive growing semi content. You’ve got just the broad secular growth, from all aspects of semi.

So it’s a great neighborhood to be in. Equipment’s even better. Right? And capital intensity is, is growing per wafer for sure. So that’s important to to think about.

Right? We described a point of view that WFE grows mid high single digits, roughly speaking, to kind of get to the numbers that we put out there. So that’s important. And So that’s important. And then, etch and deposition intensity because of three d device architectures, such as a growing, NANDstack.

You’ve got in DRAM, 6F squared going to 4F squared, eventually going to three d DRAM. You’ve got gate all around, backside power, advanced packaging. All of these things are three d architectures. And so, when we step back and look at that, we believe our SAM share of WFE goes from the low 30% range to mid high thirties. So that’s the secular outperformance.

We believe of that growing SAM, we’re going to gain a decent amount of share of that. Right? We’ve suggested, with the strength of the product portfolio, 50% of that, we believe, is is gonna be what shows up at Lam. And we say that because of the strength of the product portfolio. We announced two new products at the Investor Day, a new conductor etch platform we call Acara, first bottoms up redesign from the leader in conductor etch in over twenty years.

So we’re super excited about that. Customer pull, is very strong, for that tool in on top of that, we also announced Altus Halo, which I referenced, which is our Moly tool. So when you look at the strength of the product portfolio, we feel good about the opportunity to share, which is how you get to those top line numbers, that we put out there, dollars 25,000,000,000 to 27,000,000,000. Adding to that, again, I’ll keep building the P and L for you a little bit. The Asia factory strategy as business grows increasingly will be delivering the incremental growth from that factory footprint.

That coupled with the new products that are coming out, believe enables us to deliver a gross margin. First time we put out with a five handle, right, 50% gross margin, which I believe is largely within our control here. Building through that, we, we suggested 34% to 35% operating margin. So pretty good, feel good about that. And then when you look at the portfolio of the business here, including, the growth in CSBG, which I failed to mention 1.5 times, we believe CSBG grows.

We generate a lot of free cash flow. This is a great business relative to cash flow generation. And the new plans that we communicated relative to we plan to return at least 85% of the free cash flow. So when you layer in everything that I rambled on about already, we believe we’ll be able to lower share count through the buyback. So when you put it all together, it’s a nice growth in earnings per share, $6 to $7 in earnings.

CJ Muse, Analyst, Canner: It’s a good overview. I have a few follow-up areas to focus on. So the first one is Acara, which is, I believe, first conductor etch new product platform in twenty years? Over twenty years, CJ. And it’s a direct drive RF system, multi chamber configuration.

Can you kind of walk through why that’s important? Yeah. I mean, you hit on some of

Operator: it already. We are the leader in conductor edge. But honestly, when you design a platform, you’re constrained by what the platform can do. So this is a complete bottoms up redesign, important thing to understand is this is a very intelligent tool. And when I say that equipment intelligence has been designed into the capability of the tool.

A lot of sensors, a lot of predictive capability coupled with the fact that it’s a complete redesign of the chamber itself. And so when we look at the capability and you reference direct drive, this enables very quick plasma switching inside the chamber. And so the ability to do some of the very high aspect ratio requirements that our customers have coupled with the equipment intelligence aspect of the tool. This is a real winner. And honestly, customer feedback has been resoundingly positive.

So this is going to come through very strongly in Foundry and Logics as well as DRAM, and NAND honestly. But just listening to when I sit through the quarterly business reviews of all of my account teams, customer response to this tool has been resoundingly positive.

CJ Muse, Analyst, Canner: You you now you guys don’t preannounce tools, so this means it’s been out for years.

Operator: It’s been it’s been around for a while. Yeah. This isn’t the first time the customers have heard about it for sure.

CJ Muse, Analyst, Canner: So is there a framework for thinking about kind of the incremental growth we can think about for conductor x for Lam, ’25, ’20 ’6, ’20 ’7?

Operator: I think it’s all in as part of that financial model that I just shared with you. It’s part of the SAM expansion. It’s part of the confidence in telling you of that SAM expansion, we’re going to get 50% share of that growing SAM. The ACAR tool is a key component of that. Okay.

Great. Maybe moving to

CJ Muse, Analyst, Canner: the MALDI ALD tool, the Altus Halo, targeting NAND, DRAM, and logic, but NAND is just the first market. DRAM at 4F squared. Is there a framework for thinking about the incremental growth that we can see here? It’s similar to Acara, right, the customer pull

Operator: for this tool is extremely strong as well. And you hit on it right. It’s first going to show up in NAND, already have line of sight to that. It’ll then closely follow that in DRAM and Foundry, frankly. Yeah, we’ve described the view that over the next several years, we use the term several years, this is $2,000,000,000 of new revenue for us, replacing some of what we already have.

But the fact that this is a brand new tool, this is new purchases from customers. And this transition to moly is going to be around for the foreseeable future. It’s maybe the biggest metalization change we’ve seen in the industry for, oh, I don’t know, since the industry moved to copper, frankly. So it’s a big deal.

CJ Muse, Analyst, Canner: And do you have a vision of perhaps what increase that does to overall WFE intensity or this is more of a share of wallet gain for you relative to Tungsten? It’s a share of wallet gain. Yeah. Perfect. I guess within foundry logic, gate all around, backside power, advanced packaging, is there sort of a rule of thumb that we should be thinking about here?

I think you talked about each being a billion dollars and 24.

Operator: Yeah. Maybe let me put a few numbers around it, unpack it a little bit, and then you can redirect me a little bit. Yeah. I think it’s your foundry and logic. There’s some inflections that are really very to the etching deposition intensity that I described.

First is the move to gate all around. And you got the number right, CJ. When we look at this, for every 100,000 wafer starts to capacity the industry invests in, this is an incremental SAM growth opportunity of $1,000,000,000 for etching deposition. This is selective etch ALD, spacer based ALD stuff, and a variety of different things that go into there. So that’s one of the billion dollar numbers that we’d like to share.

The second, and different customers will be on different timing cadences with this, but backside power, right, the move to power delivery at the backside of the wafer It was very good for our plating business, our Sabre tool. Again, this is another incremental billion dollar opportunity for every 100,000 wafers charge at capacity that gets put in place. So obviously, we’re, we’re excited about that. We like these billion dollar numbers. So I’ll give you another one, which is advanced packaging.

We’ve been talking about advanced packaging for a while. It really inflected last year, and we see that continuing. Last year, our advanced packaging business, both high bandwidth memory as well as some of the chiplet stuff, was more than $1,000,000,000 in revenue. So different, right? I’ve been talking about $1,000,000,000 SAM opportunities.

This was more than a billion dollars in revenue. And that’s growing nicely this year. And one new multibillion dollar number that we put out at the Investor Day, when you combine Git all around plus Advance Packaging, that those clubbed together, we believe are comfortably above $3,000,000,000 this year for us. So we’re excited about this. We like these big numbers.

We like throwing big numbers out. And we put the big numbers out simply to demonstrate to you, you know, things are inflecting in the third dimension in Foundry and Logic, in NAND, obviously, and in DRAM to the benefit of the things that we do because that’s all we do is create three d structures.

CJ Muse, Analyst, Canner: Perfect. And maybe the last of the four horsemen that we call them, dry resist.

Operator: Dry photoresist. Yeah. We’re excited about that one too. Thanks for asking about that one.

CJ Muse, Analyst, Canner: I forgot about that one. So your last Analyst Day, you kind of gave us the same $1,500,000,000 over five years reiterated at this time. But I think what’s missing is that you are truly gaining momentum here. Absolutely. This is not a high NA, EUV insertion.

This is low NA. And he’s not telling you this, but when I was at SPY three weeks ago, Tokyo Electron confirmed to me that they got product tool record at Samsung, and they did put out a press release saying direct D2R at at Hynix. So if we take a step back, the more photons you get on a wafer, the higher productivity EUV, and that’s what dry resist does. And so can you walk through where we are today, how you see kind of adoption, and obviously, you’re targeting DRAM first. How should we think about kind of initial wafer, not initial layer count kind of adoption out of total layers, for low end AUV?

Yeah. It’ll be smaller first, CJ. But, yeah, let me

Operator: go back through and and you put some of this out there already. Yeah. We we reiterated, with a little bit of a delay. But when we look at the opportunity here over the next several years, cumulatively, we believe this to be a $1,500,000,000 incremental yep, you got it right. We announced one PTR decision in DRAM and we had previously announced a DTOR position.

I can’t say which customers they are. You speculated on it. I won’t confirm or deny what you speculated on. But it’s got real momentum. And you’re absolutely right.

By putting the photoresist on using dry chemistry, which is essentially what we do from the angle we’re coming at this, you can more efficiently absorb the photons, we believe, right, which makes the EUV tool that much more productive. The higher the dose, the more beneficial it is. So, it will be more beneficial for high NA, CJ. But you’re right, the DRAM things we’ve announced are yes, it’s got real traction now. I think I’d go as far as to say, and you hosted a dinner for us at SPIE.

I had my CTO there and his statement and

CJ Muse, Analyst, Canner: I’ve been using this is, it’s a matter of when, not if. And you’re really beginning to see the momentum building here. Is there a framework for thinking, you know, per layer, per hundred thousand wafer starts?

Operator: We haven’t given metrics like that out yet. We’ve only put out the the billion and a half over the next five years. So I can’t jump off that. But stay tuned. We’ll probably have more to say about this as things unfold.

Okay. Perfect.

CJ Muse, Analyst, Canner: So we’ve hit on kind of the incremental tech portfolio. I want to hit on now, I think, some of the more important takeaways from your 2028 new target model. So the first one, implicitly, you’re telling The Street that you’re going to grow your share of WFE by 200, two 50, three hundred bps. And I guess, is there a framework for thinking about rank order of what’s driving that to help investors? Best I can do for you is just go back

Operator: to what I’ve already said a little bit here earlier. It’s three d architecture inflections occurring. And we’ve talked about some of it. It’s good all around in backside power and advanced packaging and 6F to 4F squared. These three d inflections are growing our Samshare WFE, like I said, from the low 30s to the mid high 30s.

That’s the most important component coupled with, again, the strength of the product portfolio where when we look at this inflecting SAM, we’re pretty confident in telling you we’re going to gain 50 Sam because of the strength of the product portfolio, Acara, Halo, other things.

CJ Muse, Analyst, Canner: Perfect. I guess the second point on CSBG, you outlined growth of 50% from 24% to 28% despite kind of a challenging 2025 environment. So that’s a 10% CAGR. And if you put it off at 2025%, it’s even higher. And so that’s a change statement from when you first guided CSBG at your last Analyst Day.

So I guess what gives you the confidence in kind of the relative growth, particularly kind of in a world where Reliant is depressed? Yeah. I think if you unpack it, maybe let me make a backward looking statement and then tell you how

Operator: that goes into the future. I guess, if you look back over the time frame from Lam and Novellus coming together, and I guess it was June of twenty twelve, chamber count nominally has grown by 10% ish roughly. Right? That’s an important component of the opportunity in the CSPG or customer support business group. Right?

Chamber count grows every single year. So, the opportunity to do more grows every single year. I think people are surprised sometimes when, when you make statements like our tools were run for decades. They really do run that long. And so there’s a very long life cycle to the installed base, I guess, first thing I’d say.

Looking back also, if you look at the revenue growth over that time frame, revenue has grown roughly 17% CAGR. Now, part of that has been growth in Reliance. So if you unpack that from the growth, it’s still 12%, thirteen %, something like that. So several hundred basis points above the growth in chamber count. We see an opportunity to continue to be able to do that.

And we’re doing it through things like innovating in equipment intelligence, innovating with results based type contracts more so than just traditional services show up and do a task. We’re increasingly using the data coming off our equipment to do more results based contracts is the best way to describe it, using things like cobots and more predictable maintenance as an example. So that is beneficial for us. It’s beneficial for the customer frankly because you can help them get more out of the installed base out of the fleet of equipment that’s already out there. So we’re excited about that.

I mean, the pull on this cobot service delivery has become quite strong. I think the complexity of what’s going on, the broadening out of the industry across, I don’t know, the global footprint has been part of that. Perfect.

CJ Muse, Analyst, Canner: Maybe on the gross margins, knowing your conservative nature, nature, I wasn’t sure that you put a five handle out. So, you know, I I I took that to be, you know, pretty much a done deal. And and so curious Listen.

Operator: I guess what I would say, done deal. I don’t know. We we have a line of sight to it. We have a strategy. And honestly, I feel really good about the company’s ability to execute the strategy.

And I’m actually quite proud of how the company has done what we told you we were going to do. For those of you that follow the company, you’ll remember when business turned down in early ’twenty three, we embarked on this strategy. And I told you, have some patience. This will ultimately go from being a headwind to gross margin to being a tailwind. And frankly, you’re already seeing that tailwind.

I told you on the last earnings call, a tailwind from this manufacturing strategy has already delivered about 100 basis point improvement to gross margin. So you’re already seeing it. So maybe to follow on that, I know

CJ Muse, Analyst, Canner: how focused you are on CSPG and the growth there and kind of the razor blade model. I sometimes describe it as my favorite part of the business model of the company. In many ways, it is. And the very long tail. And so I find it interesting positive that you can hit a 50% world while you are focused on this razor blade razor model.

So I guess, can you help me understand, are you delivering even more kind of upside from Malaysia and you’re still kind of willing to take certain business to get the service revenue, twenty, thirty year service revenue? Absolutely. I mean, listen, we’ve got a business model here that delivers growth, I think outperforming growth because of architectural changes. We’ve got close to the

Operator: customer strategy that’s helping enhance profitability. Frankly, having CSBG grow helps, obviously to both of those things. So when you put it together, yeah, this all has to kind of fit together in a way that delivers those numbers that we talked about, and it does.

CJ Muse, Analyst, Canner: And I guess maybe just following last comment on CSPG. If I look at what you’ve historically returned via dividend as kind of a percentage of operating profits for CSPG, and I look at kind of the number that you put out for 2028 over the next four years, it kind of underwrites an 85% increase in your dividend. Obviously, that’s my number, not your number, but I guess speaks to the tremendous free cash flow growth that we should see in the coming years. And I guess, should we assume that you maintain the same kind of dividend approach or would buybacks be more aggressive in that kind of world?

Operator: It will be a combination of both. It would be a combination of both. We’ve I think we put the dividend in place for the first time in 2014, and we’ve pretty much grown it every year since then. I think the last two or three years, we’ve grown in, if I remember the numbers right, 15% a year, so decent. But free cash flow has grown a lot in that timeframe as well.

And so we supplement that with the share buyback. And frankly, if you look at what we’ve done, we’ve returned close to 100% of free cash flow since we brought Lam and Novelis together in 2012. That’s meaningfully lowered share count. I think we’ve benefited from that being an enormously helpful return metric, right? We’ve I think the average buyback price over that timeframe has been something like $18 I haven’t looked at what stock prices today, but it’s comfortably above that.

So it’s been a good use of cash for shareholders for sure.

CJ Muse, Analyst, Canner: How about U. S. China relations? Sitting here today, do you view domestic China as derisked from your current business plan? I don’t know if I’d say derisked, but

Operator: we’ve told you, hey, listen, we think China’s percent of revenue is down this year. The new regulations that came out ended up impacting us to the tune of $700,000,000 ish this year, largely in the second half, a lot of which was in the second half. Yeah. I don’t know. Maybe you can think of it as de risk, CJ.

I just kind of think of it as this is what we see. It is down year on year. So I don’t know.

CJ Muse, Analyst, Canner: And did you give us a percentage for the 700 tools versus CSPG?

Operator: We didn’t. It’s got a large reliant footprint to it though obviously.

CJ Muse, Analyst, Canner: Got you. And I guess sticking on China, how do you think about AMEC and Nora? Is that principally local domestic China competition? Or are you seeing them anywhere on a multinational perspective?

Operator: I mean, those guys are growing, but you have to understand, there’s a lot of customers and some fabs in China that we can no longer sell to. And so if you think about, okay, where is equipment coming from? Well, it’s probably coming from a lot of China. That’s why they’re doing as well as

CJ Muse, Analyst, Canner: they’re doing CJ. Makes sense. I guess maybe to kind of close our conversation focusing on margins. We talked briefly about kind of Malaysia factory ramp and hitting the 50%. Is there anything that you want to kind of spend time expanding on in terms of the expansion of your Azure factory network and how that’s driving performance improvements?

Operator: Yes. I guess, the way I would describe it is the incremental growth increasingly is going to come from that Azure factory footprint. It just makes sense. It’s closer to the customer. 90 odd percent of our revenue is outside of The U.

S, Eighty ish percent of it is in the Asia region. And so, it just makes sense to be closer to where the fabs are. It’s beneficial because freight logistics is a big part of the spending at the company and being closer to the customer, closer to the supply chain helps mitigate some of the costs there. You’re just flying things shorter distances. We have localized the supply chain too.

I think that’s an important part of it. So, to the extent that we’ve been able to, we’re procuring things locally closer to where these factories are. So, that’s beneficial. And then, gross margin expansion story. Perfect.

CJ Muse, Analyst, Canner: And then maybe something that you talked about at the Analyst Day, but I’m not sure investors walked away really focused on it. And it’s kind of digital transformation and modernizing ERP and bringing in AI capabilities. And I think you’ve kind of talked about that over time being 150 bps improvement to operating margins. Could you expand

Operator: on that? Sure. Listen, we also started this in early ’twenty three when you know, we looked at re architecting kind of how the company did what it was doing. And so we began this journey in that timeframe. Some people may remember us being in and talk about it.

And yes, every once in a while, maybe not every once in a while, every twenty years ish, you need to upgrade your ERP and that’s part of what we’re doing. But we view this as an opportunity to also re architect how the company does what it does. The last time we made an investment of the scale and scope, we were a single product company in a single factory location. And we now have, I don’t even know how many product lines, quite a few, with a very global factory footprint. And so just looking at how we do what we do, how we run the company, how we manage the business, we said, hey, listen, let’s unpack this a little bit.

Let’s make the company better. Let’s go through these investments. Let’s restructure things to a certain extent and just relook at how we do everything we do. So that’s very much when I’m now talking about digital transformation. It’s re architecting of the business process.

It’s re architecting systems. It’s reconfiguring the global footprint of the company a little bit, so that you’re doing things in areas that make sense. And so this will be a multi year journey. Right now, we’re in the investment phase of that. But eventually, in a few years time, this will go from being dilutive to profit to being accretive to profit.

And you get the number exactly right. The change from where things are this year to where it will be in several years is about 150 basis points. So when you unpack, okay, how are you going to get to that mid-30s operating margin In addition to the gross margin expansion, digital transformation is going to be another key component of moving from where we are today to where we’re going to be.

CJ Muse, Analyst, Canner: I guess maybe one last question. I think also in terms of kind of the manufacturing strategy, you’re putting development closer to customers. So we’d love to hear about how the feedforward feedback loop is improving by co locating and how that is helping, I would imagine, not only service revenue growth, but also better understanding what knobs on the tools are desired. No, this

Operator: is a key part of our strategy is not just to be close to customer with the manufacturing footprint, but also with the lab network. And so we’ve got a large lab in Korea. We’ve announced incremental investment in India. We’re doing things in Taiwan. So this is part of the company’s strategy.

And the benefit is, when you’re closer to the customer, you get quicker information turns, you can move material from one place to the other. The customer can come and see you without having to jump on a plane and fly across the Pacific Ocean to get your facility. So that’s very much part of kind of a differentiated strategy at Lam.

CJ Muse, Analyst, Canner: Well, perfect. Well, I think we’ve run out of time. Doug, thank you very much. Thanks for having me, CJ. Good to see everybody.

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