Good day, and welcome to the Lam Research March 2023 Quarter Financial Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Tina Correia. Please go ahead.

Thank you, operator, 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'll share our overview on the business environment, and we'll review our financial results for the March 2023 quarter and our outlook for the June 2023 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time this afternoon. The release can also be found on the Investor Relations section of the Company's website, along with the presentation slides that accompany today's call. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosed in our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in the accompanying slides in the presentation. This call is scheduled to last until 3:00 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, Tina, and welcome, everyone. Lam's March quarter results reflect strong execution with revenues, operating margins, and EPS all exceeding the midpoint of our guidance. Foundry-related system revenues achieved record levels, demonstrating our solid progress in both leading edge and specialty technology segments. We continue to prioritize investments in long-term technology road maps, customer support, and operational transformation while prudently managing near-term spending and profitability. As our June quarter guidance indicates, the near-term demand environment remains challenging. We expect 2023 WFE spending to be in the low to mid $70 billion range, with additional weakness primarily from memory customers, partially offset by domestic China-related demand. On the China front, we see incremental strength in mature node logic and memory segments. Recently, the U.S. government notified us of a clarification to the rule issued last October governing exports to China. This notification allows us to ship certain products that we had originally excluded from our expectations. We expect to ship these tools in the second half of 2023. Overall, memory customers continue to lower fab utilizations, slow technology conversions, and reduce investments in capacity additions to limit bit output and drive inventory down to normalized levels. We expect memory spending for the year to decline approximately 50% from 2022, led by NAND. Memory spending in 2023 is at a historic low as a percentage of total WFE. We believe this level of investment is unsustainable to support long-term growth in bit demand, especially considering that data-intensive applications such as AI are still in the early stages of adoption and can have approximately 3x the DRAM and 8x the storage content of a regular server. In addition, advances in memory architectures such as DDR5 are driving process technology evolution and larger die sizes. As these trends accelerate, Lam's established leadership in memory positions us to outperform as we benefit not only from investments in new tools for capacity but also from the technology upgrades to our large installed base of tools. Our installed base for memory has increased close to 40% compared to the last down cycle. It is a valuable platform for growth when memory customers begin to ramp utilization back to normal levels and convert existing lines to next-generation nodes. While Lam clearly stands to benefit when memory conditions improve, this is the one aspect of our growth opportunity. Rising manufacturing complexity tied to key technology inflections is positive for both overall capital intensity and more importantly, Lam's areas of product strength. For example, EUV patterning and gate-all-around devices are two important inflections where Lam has made significant investments in new products for processing at the atomic scale. We are gaining traction with these new products, yet they are in the early stages of the ramp with the majority of growth still in front of us. If we look at patterning, it is already a multibillion-dollar opportunity for Lam. We have a leading share position in this segment, and we are broadening our footprint as EUV adoption scales. Lam's edge solutions have been developed to enhance the productivity of EUV by creating well-defined smooth patterns with minimal EUV photon exposure. Our pulse plasma capabilities help reduce line width roughness, which is a particularly challenging problem as EUV resist becomes thinner at future nodes. Lam's etch portfolio is on track to win close to 75% share of these EUV patterning applications. Also, as the pattern is etched into the film stack, the hardness and stress in the films has a strong influence on pattern fidelity. Precise control of film properties is a hallmark of our deposited hard mask films. We are already the process tool of record for critical applications in the foundry logic segment for EUV patterning with continued growth expected as EUV adoption expands. Addressing EUV scalability challenges is also the central goal behind our dry resist technologies. Last year, we saw the first adoption of our dry development and underlayer plus for EUV applications by a major memory customer. Our progress extended to include a second large memory player in the March quarter. Today, I'm pleased to provide another update. A key foundry logic customer is set to adopt our dry resist deposition, drive development, and underlayer solution for their EUV applications, and we will start recognizing revenues for these products in calendar 2023. Looking ahead, the challenges of EUV patterning will continue to grow at every technology node, and in particular, when high NA EUV adoption dictates the need for even thinner EUV resist. With our differentiated pattern etch, hard mask, and dry resist solutions, we see our product portfolio becoming increasingly vital to the industry's scaling roadmap. Moving to gate-all-around, this inflection introduces what we consider to be the first true 3D logic device from a processing perspective. It requires new etch and deposition capability to address the geometric complexity performing the all-around characteristics of the transistor. Processing for gate-all-around, just as the name implies, must take place on top of, underneath, and inside the device, where reactors need to reach spaces that are perpendicular to the usual reaction direction. The 3D nature of gate-all-around architecture is well suited to atomic layer deposition and atomic layer etching solutions, making a key inflection that plays to our strengths. For Lam, the transition to the gate-all-around node is close to $1 billion incremental opportunity per 100,000 wafer start per month capacity. Our expectation is for our share in this market to be at least as good as our overall goals for the company. To address the manufacturing challenges of gate-all-around devices, Lam has launched several new products including our Selis, Prevos, and Argos suite of selective etch tools with more to come in the future. These tools can etch and treat all surfaces of the device with ALE-like precision. Our selective etch tools have achieved process of record positions at multiple customers for gate-all-around applications, and we saw continued momentum in the March quarter with additional shipments to key customers. Atomic-level control is also increasingly critical in depositing films in the complex geometries very close to the transistor. Our differentiated approach uses a radical-based plasma ALD reactor to deliver high-performance films with high-volume manufacturing ready productivity. Multiple customers have now adopted Lam's ALD low-case spacer and nitride films, and we see this demand growing in future nodes. In summary, we are working through a lower WFE year in 2023 by managing near-term expenses, strengthening our operational capabilities, and prioritizing R&D investments tied to critical manufacturing inflections. Our focus remains on ensuring that when WFE growth resumes, the criticality of our products to our customers' plans and the value of our installed base, which has grown nearly 40% since the last downturn, put us in a strong position to outperform. Thank you. And now, I'll turn it over to Doug.

Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today. Our March 2023 quarter financial results came in at or over the midpoint of our guidance ranges for all financial metrics. We generated over $1.6 billion of free cash flow during the quarter, which was a record level for the company. Overall, we not only delivered financial performance in line with our guidance for the quarter, but we also made great progress on our business transformation and cost-saving initiatives. Let me now move to our revenue and profitability results. Revenue for the March quarter was $3.87 billion, down 27% from the prior quarter. Systems revenue was the main driver of the decrease given the decline in WFE investments, most notably in memory. As expected, with the improvement in supply chain constraints, we are exiting the March quarter having completed shipments for nearly all of our outstanding back order systems. Back orders are now at what I would characterize as normalized levels. However, our deferred revenue balance is higher than historic levels remaining flat with the prior quarter with a balance of $2 billion. This deferred revenue balance reflects the impact of increased customer cash and advanced deposits tied to orders from newer customers, which is offset by the decline related to the completed back orders. The advanced payments will remain in deferred revenue until we ship the related tools. And I would just mention that we do expect the majority of these deposits to convert to revenue during calendar year 2023. Looking at the revenue segment details for the March quarter, the percentage of systems revenue in memory was 32%, which is a decline from the prior quarter level of 50%. I would mention this is the lowest level of memory concentration for us in a decade. Within Memory, the NAND segment represented 23% of our systems revenue, down from the December quarter level of 39%. And DRAM decreased sequentially, coming in at only 9% of systems revenue compared with 11% in the December quarter. With the current weakness in memory investments, we anticipate a further decline in both NAND and DRAM revenue in the June quarter. In foundry, conversely, we had a record dollar level of revenue in the March quarter, representing 46% of our systems revenue, higher than the percentage contribution in the December quarter, which was 31%. We had positive momentum in both leading and mature node devices, and I'm pleased with the progress we've made in this segment of the market. We are seeing particular concentration in the mature node investments this year. The logic and other segment had continued strength with a contribution of 22% of systems revenue in the March quarter compared with 19% in the prior quarter. Investments were from a broad array of logic IDM in multiple regions. Let me now shift and discuss the regional contribution of our total revenue. Korea and China were at the top of the list, with each coming in at 22% of the total. The Korea region had a slightly higher concentration in the March quarter, up from 20% in the December quarter. China was down from 24% in the prior quarter, and the reduction was largely attributed to the U.S. government sales restrictions for certain Chinese domestic customers which were put in place in early October of 2022. Notably, in the United States, we had a record revenue from a dollar perspective in the March quarter, which represented 16% of our total revenues, an increase from the prior quarter level of 10%. And finally, Taiwan decreased to a concentration of 18% as compared with 19% in the December quarter. Our Customer Support Business Group generated revenue in the March quarter, totaling approximately $1.6 billion, which was a decrease of 7% from the December quarter but 14% higher than the March quarter in calendar 2022. CSBG continues to be a resilient part of our business model, representing over 40% of our March quarter revenue. We saw utilization levels decline at the memory customers, which negatively impacted both spares and service businesses, but Reliant Systems and upgrade revenues increased in the March quarter given the demand strength we're seeing in mature node devices. The specialty technology market is performing better than overall WFE, and I expect this part of the business to continue to perform well during calendar year 2023. Let me now pivot to our gross margin performance. The March quarter came in at 44%, right at the midpoint of our guided range and down from 45.1% in the December quarter. The quarter-on-quarter decrease was tied to lower business volumes as well as customer and product mix. The company is focused on improvements in cost and efficiency to enhance profitability which is aligned with our plan to expand gross margin by at least 1 percentage point exiting calendar year 2023. Operating expenses were $608 million in the March quarter, down 11% from the prior quarter amount of $686 million. We executed on cost savings actions and have managed spending across the company while prioritizing investments in support of our customers' road maps. R&D expenses comprised nearly 70% of our operating expenses, which is a high point for the company. The March quarter operating margin was 28.3% and above the midpoint of guidance, mainly because of the cost-saving actions and expense management that we undertook. Our non-GAAP tax rate for the quarter was 13.1% and in line with our expectations. Looking into calendar 2023, we believe the tax rate will be in the low to mid-teens with fluctuations expected quarter-to-quarter. Other income and expense came in for the quarter at $8 million in expense lower by approximately $30 million from the prior quarter. The decrease in expense reflects increased interest income due to the higher cash balances as well as rising interest rates. OI&E will continue to be subject to market-related fluctuations that will cause some level of volatility each quarter. On the capital return side of things in the March quarter, we allocated approximately $483 million to open market share repurchases. Additionally, we paid $234 million in dividends in the quarter. We continue to track towards our long-term capital return plans of returning 75% to 100% of our free cash flow. March quarter diluted earnings per share was $6.99 and at the higher end of our guided range. Diluted share count was down to 135 million shares on track with our expectations and obviously lower a little bit than the December quarter. For the balance sheet, cash and short-term investments, including restricted cash at the end of the March quarter totaled $5.6 billion, up from $4.8 billion at the end of the December 2022 quarter. The increase was largely due to collections offset by cash allocated to share buyback, dividends, and capital expenditures. Days sales outstanding were 77 days in the March quarter, an increase from 70 days in the December quarter. Inventory turns declined from the prior quarter to 1.9x, and we ended the March quarter with a slightly higher inventory dollar balance. We will continue to manage inventory balances during the calendar year. Non-cash expenses for the March quarter included approximately $74 million in equity compensation in depreciation and $14 million for amortization. Capital expenditures for the March quarter were $119 million, down from the December quarter level by approximately $44 million. March quarter investments were mainly for our Malaysia factory, the Korea Technology Center, and other product development activities. As we discussed in the January earnings call, we had a workforce reduction within the March quarter of approximately 1,400 people. Additionally, we reduced 700 temporary workers. We incurred a charge for the workforce actions in the March quarter of approximately $99 million, primarily reflecting severance-related payments. This charge was somewhat higher than our original estimate due to more impacted people with a somewhat higher seniority level. We also incurred other one-time charges in the quarter for product rationalization decisions as we prioritize technology investments within the company and for transformation costs related to projects to improve our systems and operations. We anticipate we'll incur one-time costs in the range of $250 million within calendar year 2023 and which is inclusive of the $144 million that we expensed in the March quarter. We ended the March quarter with approximately 18,700 regular full-time employees, which is a slight decrease in the prior quarter. Due to the timing of our quarter end and our restructuring actions, a significant amount of the headcount reduction we undertook won't be reflected in the headcount number until the June quarter. Now let's turn to the non-GAAP guidance for the June 2023 quarter. We are expecting revenue of $3.1 billion plus or minus $300 million. The sequential decline reflects a soft memory environment and the normalization of back order systems that occurred in the March quarter. Gross margin of 44%, plus or minus 1 percentage point; operating margins of 25.5%, plus or minus 1 percentage point; and finally, earnings per share of $5, plus or minus $0.75 based on a share count of approximately 134 million shares. So then let me summarize. 2023 is proving to be a challenging environment for our memory shipments, but I'm pleased with the progress we're accomplishing against this challenging backdrop. We continue to make progress on growing our technology leadership and focusing on our operational efficiencies. We will emerge from this memory-led downturn as a stronger, better positioned, more efficient company. In closing, I just mentioned one more thing that as we look at the profile of WFE spending this year, it now appears to be a little bit second half weighted.

The first question will come from C.J. Muse with Evercore.

I guess the first question would be on deferred revenues. Exiting last quarter, I think you talked about trying to get to $1.5 billion and then we'd normalize there, whereas on this call, you said you expected to revenue the majority of these deposits in calendar '23. So can you help us understand the moving parts there? And what kind of contribution in the June quarter guide will come from a deferred revenue line?

Yes. C.J., I got a little bit wrong last quarter is what I would tell you. The cash and bank deposits from some of our newer customers ended up being a little bit more than we expected. Offsetting that, to a certain extent, was the decline in back orders. So we got that part exactly right. But what I didn't give when I told you 1.5 would be the normalized level was this cash in advance deposits I think that is going to be around for a little while. And like I said, I think the majority of that will revenue during calendar year '23, clearly in the second half. I don't think a whole lot of it shows up in the June quarter, if any of it.

Okay. Very helpful. And then I guess to follow up on your last comment around WFE being a little bit more second half weighted. That seems like a seismic shift. I guess, is that just the magnitude of the cuts that you've seen kind of in the first half? Or has anything else changed? And I guess as you think about that, if you do have the benefit of deferred revenues in the second half and WFE higher, it certainly would suggest that second half total revenues should be nicely higher than the first half.

Yes. C.J., I mean, I think that commentary on the second half being a little bit higher, I think has something to do also with the effect that we talked about incremental weakness clearly, our June quarter has been weaker than what we probably thought as we came into the year. And so, some of that shows up in the back half. I think it is a case of customers continuing to make pretty aggressive adjustments, both to the utilization of tools as well as overall spending. That's what we're seeing here in the first half. We also talked about the fact that with some clarification on the time restrictions, there would be additional shipments that occur through China in the second half that weren't originally anticipated. So that does help us with WFE in the second half as well.

And the next question will come from Timothy Arcuri with UBS.

Tim, if I take your comments and I combine them with Applied and ASML earlier today, obviously, there's this huge explosion in demand coming from China lagging edge. How sustainable do you think this is? It sort of feels kind of like given the restrictions they're just taking what they can get, which is now they're pouring all their money into lagging edge. So does that worry you that maybe that's not sustainable? Or is there something going on there where there's real demand backing that?

I believe there is significant demand. Every region is working to develop its own capacity to manufacture various types of semiconductors. In China, for example, they have the ability to create this capacity and also the demand to use it. From that perspective, the demand is positive for us and others in the industry. More broadly, the regional self-sufficiency and resilience being established will likely have a long-term effect on spending in the industry. We're not focused on whether this demand is sustainable; instead, we're engaging with our customers, including those initiating new projects. We assess whether they can invest if they have the necessary technology. With developments in both U.S. and European chipsets, I believe this will lead to increased spending across the industry, affecting both advanced and specialty sectors for the foreseeable future.

Could you provide more details on the clarification of the export rules? Can you give an example of something that can now be shipped that previously was thought to be restricted?

It's exactly the same as what was issued in the October 7 rules in terms of technology limits. We want to be very clear on Lam staying compliant with the restrictions. And so, at the time we had given the guidance for the year, we said $2 billion to $2.5 billion of impact. We knew we were looking for clarification on how to determine whether some shipments that were in there could be made. That's why there was a range. And so now with that clarification on how you determine what can and can't ship, we've added those tools back into our forecast for the year. But if you look at the rules that are there, it's exactly what was printed on October 7.

Yes, Tim, just to put some numbers around it, it's a few hundred million dollars, I think, as we look at revenue for the year for Lam.

And our next question will come from Krish Sankar with TD Cowen.

I do the first one, just a follow-up on the China question. Doug, just like trying to put all the comments together with back half loaded WFE some of the relaxation of China constraints and strong demand from lagging in China. Is it that assumes June quarter is a trough quarter for you from a revenue standpoint? And heading into back up, your gross margin should improve as you start shipping more China? And then I have a follow-up.

Yes. I mean, Krish, what I said is it's a slightly second half-weighted WFE year. And by the way, I just clarify if there's any confusion about the deferred cash and advanced deposits that are sitting there, that's in the WFE number. So that's part of the second half weighting as well, just so everybody's clear about that. And then, Krish, yes, when I look at what we're doing with the cost structure and how we're sort of pivoting where we do what we do, I've been talking, I think, the second quarter about a view that we should exit the year at least a percentage point gross margin higher than where we are. I still believe that is the trajectory that we're on.

Got it. Super helpful. And then just a technology question for Tim. You had the slide on gate-all-around, and you spoke about the opportunity in ALD and ALE I'm kind of curious because ASM International is a leader in ALD. And why would customers shift to someone else versus the incumbent just because of gate-all-around? Is there any gate-all-around specific technology issues that your ALD is addressing that the incumbent is not? Thank you.

It's a good question because we have a very strong position in atomic layer deposition across various types of films. I wanted to highlight that there are new types of challenges to address. Ultimately, customers choose tools based on film performance, deposition capabilities, tool productivity, reliability, and many other factors. Over the years, Lam has excelled in these areas, and I believe we can do the same in atomic layer deposition. Thank you, Krish.

And the next question will come from Joe Moore with Morgan Stanley.

I think you mentioned you saw some impact from utilization on the CSBG business in the March quarter. Can you talk about what that looks like for the next couple of quarters? Are you seeing impact from lower memory utilization within those numbers? And then as a follow-up, can you give us some sense of as Reliant keeps getting presumably bigger, how much of what's in CSBG is actually kind of more on the Reliant tool side?

Yes. Let me address the utilization issue. You've likely heard a lot in the memory industry about cuts in utilization, which are impacting various market segments. This situation clearly affects our spares and services business as customers aim to save costs in the short term and reduce idle tools. They are also working through some of the inventory accumulated over the past couple of years. This trend is evident in our CSBG. Over time, this will level off, and we expect to see improvements in CSBG revenues, especially in the memory sector, likely before we discuss significant increases in WFE. As customers begin to bring tools back online, CSBG revenues should start to rise. Additionally, customers will begin to implement technology upgrades that they have postponed, which will also contribute to our CSBG revenue. Ultimately, we anticipate increases in WFE for capacity expansion. Therefore, we expect to see ongoing improvement in CSBG. While we cannot specify a timeline for this, we are currently seeing lower numbers, but we believe we will eventually return to a situation where we consider CSBG a growing business year-on-year, although that growth will not occur this year due to utilization cuts.

Great. And then sometimes of the Reliant as a release qualitatively, how much of the business is from Reliant now?

Yes, Joe, I'll respond to that. I mentioned last quarter that the two main components of CSBG are currently spares and Reliant, and that remains accurate for the latest quarter. Reliant is performing exceptionally well with the more established specialty note investments we've discussed. This is beneficial, while the utilization issues that Tim mentioned are somewhat challenging for spares. Nevertheless, they continue to be the two largest components of CSBG.

And the next question will come from Harlan Sur with JPMorgan.

Your North American business again experienced strong growth. Part of this is due to your share gains. However, how much of the growth can be attributed to the one significant U.S. customer that had not contributed to WFE intensity for six years due to being focused on one node? Now that they are back on track and aiming for five node migrations in four years, they are significantly contributing to foundry and logic WFE intensity. How much of the growth is from share gains versus this customer enhancing WFE intensity?

Yes, Harlan, I believe we're experiencing a combination of both share gains and growth from a key customer. Much of my earlier comments focused on our progress in expanding our Serviceable Available Market and product portfolio, particularly in foundry logic. We acknowledge that this has been a previously underrepresented area for us, which presents significant growth opportunities. We've introduced several new products, whether through the EUV inflection or the gate-all-around inflection. Therefore, our growth is driven by the expansion of our market and also by share gains within that expanded market, affecting all foundry and logic customers in some way.

I appreciate that. Tim, you also mentioned in your prepared remarks that you announced some new wins with your dry photoresists process module system solution. Can you talk more about that? When do you expect the customer adoption curve to start driving meaningful revenues for the team?

Yes, what I announced was that last year a memory customer adopted some aspects of our dry resist technology solution. In March, another memory customer joined in, and more recently, a large foundry logic customer has decided to adopt both the resist deposition drive development and the underlayer processes. This represents a significant expansion across both the memory sector, specifically DRAM using EUV, and foundry logic. I believe this positions us well for continued growth. It's widely recognized that EUV adoption is increasing, and as I noted, it is becoming more challenging as customers seek improved productivity and enhanced technology capabilities within the resist. These trends are favorable for us. I mentioned that we will start generating revenue from some tools this year, which is a significant milestone. Additionally, we have estimated this segment to potentially generate about $1.5 billion in revenue over a five-year period. As adoption continues to grow, the size of the market opportunity will also expand for us.

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

The first on just the memory market, is second half better or worse than the first half for you in terms of your memory shipments? I'm just trying to gauge whether June is also kind of a bottom for memory? Or is there more to fall on the memory side? And I think related to it, one of your customers has said that for them, their WFE and memory could be down even in the next fiscal year. And I know it's a fiscal and not a calendar year view. But do you think that's an industry-wide view or just in terms of how customers are thinking about 24 WFE on the memory side? So just kind of a near and longer term memory questions.

Yes. Vivek, I don't want to get into which segment is doing what in the first or second half. I mean memory is at a pretty low level right now. And we did say in the prepared remarks, June is even lower than March, and March was at a 10-year low in terms of our shipment and revenue anyway into that space. Hard to see a whole lot lower than we're seeing right now. I don't want to get into the parsing the little bit of growth in the second half where it comes from, but memory is at a pretty low point right now, I would say.

In 2022, we provided the outlook for 2023 about a quarter early, but I feel that offering guidance for 2024 now would be premature. Instead, I want to highlight that we have indicated a $23 million decline in WFE, mentioning this last September. We observed a decrease in memory, with our revenue falling 40% from December 2022 to the June forecast we just shared. We're well into this cycle, and as I've outlined, we expect utilizations to eventually rebound, technology conversions to start taking place, and WFE to gradually increase. The advantage of the cost reductions discussed is that we are in a strong position and do not need to pinpoint the exact quarter for this recovery. We are managing the company effectively at current levels and anticipate some positive developments ahead.

Right. And just a quick follow-up, Doug, maybe one for you. On the OpEx side, is this sort of reflecting all the OpEx actions? Or do you think that in September or December, OpEx could decline further? I mean that the last time you guys were at this OpEx level you were able to report revenues that were significantly higher. So kind of just two parts. Is this kind of the bottom in OpEx? And then should we see a lot more leverage, right, as the end markets start to grow?

Yes, Vivek. I think the majority of the cost actions we've taken, certainly, I talked about $99 million of non-related severance. That's largely complete. So I think a lot of it is already kind of in the run rate. Certainly, if you look at where we're at in June, it's down again quite a good amount.

So Vivek, I'd also just add to that. I spent a lot of time talking about the work we're doing to broaden our product portfolio and expand really Lam strength beyond memory into some of the fast-growing inflections that are occurring elsewhere. I think this quarter was nearly 70% of our OpEx spend in R&D. And so we're absolutely committed to supporting technology road maps to grow this company. And so we're watching that. Obviously, if we see further deterioration, I think you can count on us to manage this business prudently. But at this point, we want to also be prepared for when the market does come back, and we know it will come back that we are prepared to support our customers with the engineering capabilities and the new products and all the technologies that they're going to want to buy at that time. So we're really working that balance and that's what you see in our spending levels right now.

And moving on to Stacy Rasgon with Bernstein Research.

I want to revisit the new customers in the deferred balance. Are they all based in China? Can you provide insight into which end markets this additional deferred revenue is associated with? Is it primarily in foundry rather than memory? I know that one of the major Chinese memory companies is on the entity list, so I assume you can't sell to them. Please offer some clarity on whether all of this is related to China and which end markets are actually contributing to it.

Yes, Stacy, the end markets are primarily foundry and logic, the mature nodes, and I will acknowledge it's got a decent Chinese footprint to it.

I understand. So, I believe you are referencing $500 million, correct? Since the deferred amount is around $2 billion, and the $500 million reduction you mentioned is indeed accurate. This has created a balance of about $500 million. Will this return in the latter half of the year along with the revenue from China? I’m looking to clarify whether these are related. Is the additional revenue from China occurring because you can ship more due to the sanctions? Are these connected to the deferred balances? As we consider how this contributes to the latter half, I want to ensure I'm not double counting anything.

Yes, Stacy, there's a very large overlap is what I would say. And I said the majority of that cash and advance payment will revenue in the second half. I didn't say all. I said the majority. And then the other thing I said a moment ago, the incremental clarification we got from China was a few hundred million dollars. So you got to think through where I left.

Got it. That's very helpful. Could I ask one more quick question? I know you mentioned memory is down again sequentially, but there likely isn't much memory remaining, right? If your guidance for foundry plus logic this quarter is almost 1.6%, then equipment revenue can't vary much from that. Are we essentially just at the bottom of the barrel for memory in the June quarter at this point? While we don't know how long it will remain there, it presumably can't drop much lower than what we're expecting in June.

Yes, Stacy, I mentioned in March that we were at a decade-long low, and it's decreased further in June. Honestly, it's difficult to envision it declining much more than what we're seeing in June. It's at a very low level.

I want to add that we have noticed many customers delaying technology upgrades, not only to avoid making the investment but also to prevent adding more products to the market. This situation is quite unusual because technology investments typically happen because they lead to lower costs and enhanced capabilities. I agree with your observation; it seems like we're approaching the lowest point, which may even drop below maintenance levels. That's our perspective on memory.

And the next question comes from Toshiya Hari with Goldman Sachs.

As a follow-up to the last question, I'm curious how you're thinking about normalized levels of spending across the memory industry. When we look at your business, I think you did close to $7 billion in memory systems revenue in calendar. And given how things are going now, I don't know, maybe roughly $3 billion, this may be a little bit below that. Assuming, hypothetically, if you're customers are done shipping out of inventory exiting this year and DRAM bits are growing kind of in the mid-teens and NAND bits are growing kind of in the mid-20s. How significant how big would your memory business be in that sort of state? Is it kind of the midpoint between $7 billion and $3 billion? Or is it higher? How should we think about that?

It's difficult for me to picture it being lower than it is this year. It's down 50% in total memory. That's quite significant, and I can't recall it ever being down that much on a year-over-year basis. You might argue that last year was a bit inflated, but I'm not going to specify a precise number. However, it is definitely higher than it is this year, although perhaps not as large as it was last year.

I appreciate that. As my follow-up, Doug, just on gross margins, I appreciate the calendar year-end target of 45%. Curious, how you're thinking about gross margins beyond that. A couple of years ago, you guys were doing 47, some quarters close to 48%. You're introducing pretty differentiated product between EUV patterning and drive it. And I know those are pretty small businesses still, but you're putting out these products. You've got Malaysia, which hopefully with the recovery continues to ramp. Is there a path to, call it, 47-ish percent in calendar '24? Or are there headwinds that we should be aware of?

Let me take a shot and Doug can clean up as needed. I think the question about gross margin. We're not backing off on the financial models we put out in the past. And as you pointed out, we were getting big close to operating there while Malaysia was still a headwind. And so obviously, it will require a combination of some increased volumes. We've done tremendous work to transfer a lot of our volumes into lower-cost regions, really get a much more efficient supply chain. The COVID period was a real setback as you, again, sourced and grew in every possible location. But I think over the next period of time. And I hate to put a time frame on it again, to give a 24 outlook. But if we exit this year with the incremental improvement of 100 basis points, as Doug talked about or more and we have further volume and contribution coming through our new Asia facilities. I think that will drive right back towards those goals that we set back in 2020, which was in kind of that 47%, 48% gross margin range.

And the next question will come from Atif Malik with Citi.

Similar to the last question on gross margins, Doug, can you help us understand by the end of the year, what percentage of your manufacturing will be in Malaysia and what are the steps you're taking in terms of asset optimization?

I'm not going to put a number on it Atif growth when it resumes, whenever that is, and we know it will resume, likely, will pivot a little bit to that factory. We've said in the past, it will ultimately be the largest factory in the network. That is still absolutely the case. So that's part of what Tim just described as getting back to the financial model is we'll just have a more efficient manufacturing footprint.

Got it. And then generative AI is a topical topic these days. Are there products in your portfolio on high bandwidth memory or packaging side that you're seeing outside growth? Or is it roughly in line with your lodging exposure?

Well, I would say we haven't seen outsized growth. I think that I could attribute directly to generate AI at this point. But clearly, Lam has been a strong player in advanced packaging. And we continue to make investments in that area to expand our product portfolio and not only on a wafer basis, but also different formats as well to make sure we're prepared for whatever the future might be in advance packaging.

And we have a question from Blayne Curtis with Barclays.

I want to ask on leading-edge foundry. Clearly, you're seeing strength in the trailing edge. You've heard reports about maybe TSMC cutting, definitely, utilizations are quite low at the leading edge. So maybe just comment on what you're seeing from your leading-edge foundry customers.

Yes, I don't think we're going to comment about any specific customers, but I did make the comment that we see incremental weakness, I said, primarily from memory. And then I said we saw incremental strength in mature nodes. So obviously, primarily from memory, implies there's additional weakness elsewhere. So, I think leading edge foundry is a bit weaker. Obviously, our exposure and our insight into that market is a little bit less than it is in memory, but we are seeing some weakness there as well.

It's a perfect lead in. I guess I'm just trying to understand the second half comment. If memory players are kind of talking about second half spending being near zero, so I guess it could go lower. And I think prior question said kind of down 24, we'll see. But if foundry logic is just starting the correction that memory just saw, I mean, I guess, could you still be up if it's just trailing edge? I'm trying to understand those moving pieces.

Well, it's clear that forecasting WFE for the industry presents some challenges. We lack insight into every aspect of WFE, like tool lead times and demand across various markets. We aim to provide the best perspective we can. If we translate this to what truly matters in operating the company, we anticipate that memory utilization may start to recover in the second half of the year. Technology conversions in memory will be very beneficial for us in terms of capturing spending on these conversions. We also noted strong performance in mature node logic foundry, including advanced payments, and we discussed some trailing-edge shipments to China that we can now proceed with following the clarification of regulations. All of these factors contribute to our outlook for the second half. However, we cannot accurately break down the WFE for the industry in the low to mid $70 billion range.

And we have a question from Sidney Ho with Deutsche Bank.

First question is, can you give us an update on your expectations of revenue performance for the CSBG group? I think you previously said it will be down somewhat, but there seems to be some moving parts here with memory utilization lower, but China revenue being less restricted. Just want to get some color would be great.

Yes, Sidney. I think what I said last quarter, and I'll reiterate the same thing. We expect CSBG will be down a little bit this year, but obviously, a lot more resilient than overall WFE. No new statement relative to that outlook.

Okay. That's helpful. Maybe another question on the recovery in memory spending. Is the utilization level the first thing you monitor ahead of the CapEx recovery? And how much of a lag do you expect for memory CapEx to recover once utilization starts to improve?

Yes, maybe I'll come and then Tim, feel for to add on. Normally, the way this works, Sydney, the first thing I'd say is I cannot remember utilization being as low as it is right now. Usually, the fabs keep running, right, and other stuff gets adjusted. But right now, utilization is obviously down. The first thing the industry would do to get output growing again will be to move that utilization back up. That will benefit our spares business and probably a little bit of the upgrades, maybe a little bit. The next thing they will do is convert the installed base, which when that happens, the industry gets fairly cost-efficient output, and we get a disproportionate amount of that spending when it's in memory, obviously because we tend to be the bottleneck tools. We get that upgrade business first, and then WFE comes back. So you got to think of that progression showing up in that order. We will benefit first in CSBG before you'll see it in WFE.

Yes. I think it's challenging to establish a timeline from the beginning to when we begin to see WFE investments. This will largely depend on the nature of the recovery. We are confident that we will likely be the first and most significant beneficiary of the recovery. We'll have a clearer understanding of the recovery's shape once we have better visibility on demand.

Operator, we have time for one more question, please.

We'll take that question from Vijay Rakesh with Mizuho.

Just a quick question on the China side. I know you mentioned China revenues were 22%. But it looks like there are some U.S. restrictions. As you look out, do you expect that segment's exposure to go down or stay flat? Or if you can give some color to the puts and takes as to how you're approaching that?

I think it's probably down a little bit in the June quarter from a percentage standpoint, although don't hold me to that. We don't always get that exactly right, but I think it's probably down a little bit in June.

Got it. And on the Memory side, I know you mentioned spending is a 10-year low, probably comes in a little bit again in June. But in terms of where you see the bounds coming, do you think that's driven more by technology transition or capacity adds? How do you see that? Because I think broadly, memory OEMs are still hemorrhaging cash, I believe, but just wondering how you see that bounce?

Yes, as we've mentioned, technology conversions happen first because they offer a more capital-efficient way for customers to not only increase bids but also improve cost structures. Therefore, technology additions will clearly precede capacity additions.

So operator, I think that concludes our time here. We can wrap the call up.

Well, thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.