Good afternoon, and welcome to the Lam Research March 2025 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. Please note this event is being recorded. I would now like to turn the conference over to Ram Ganesh, Vice President, 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 Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment and review our financial results for the March 2025 quarter. The press release detailing our financial results was distributed a little after 1 PM Pacific time. The release can 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 press 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 PM Pacific time. A replay of this call will be made available later this afternoon on our website. And with that, I'll hand the call over to Tim.

Great. Thank you, Ram, and thank you all for joining the call today. Lam's March quarter results reflect continued strength with revenues, gross margin, operating margin, and EPS all exceeding the midpoint of our guidance. We delivered a record quarter for foundry revenues, demonstrating our solid product momentum and leading-edge technology inflections. Gross margin percentage was also a record for the company since the Novelis merger, as the investments we have made over the past several years in our manufacturing and supply chain are contributing positively as we scale the business. As our guidance indicates, gross margins are set to expand again in the June quarter. On our January earnings call, we laid out what we saw as the fundamental drivers of WFE spending in the year ahead. To date, these have played out largely as expected, with strength in leading-edge foundry logic, technology-driven conversions in NAND, and a focus on high bandwidth memory and DDR5 in DRAM. From an overall industry perspective, we continue to forecast calendar year 2025 WFE spending in the $100 billion range. We recognize that the current tariff and global economic environment is dynamic, but thus far, we have not seen any meaningful changes for our customers' plans. We are closely monitoring the situation alongside our customers and ecosystem partners. We believe that the agile manufacturing and supply chain capability that we have developed in recent years provides us with the flexibility to lessen the direct impact of tariffs. Our strategic focus in this environment remains on delivering the new products, advanced services, and digital transformation initiatives required to achieve the growth and profitability outperformance goals we described at our Investor Day in February. As a reminder, we identified three key drivers that underpin our ability to outperform overall WFE growth over the next several years. First, we expect to expand our served market or SAM faster than WFE as deposition and etch intensity rises due to greater semiconductor device complexity. Second, we expect to gain share with the strongest product portfolio in the company's history, targeted at billion-dollar-plus technology inflections such as Gate All Around, backside power distribution, advanced packaging, and dry EUV photoresist processing. And third, we expect to grow our CSBG revenue faster than our installed base as customers look to Lam's upgrade, automation, and equipment intelligence offerings to enhance productivity and execution as they expand their global fab operations. Year to date, we are already witnessing incredible momentum in these areas. In deposition, Lam's atomic layer deposition or ALD products are making strong gains. Our Stryker Spark ALD tool delivers the industry's densest conformal low k carbide dilatate films. Leveraging this capability, we have secured multiple key wins for spacer applications at a leading-edge foundry. Our Altus Halo system enables barrierless atomic layer deposition of molybdenum, reducing the resistance of critical contact and interconnect layers by 50% compared to legacy technologies. In the case of 3D NAND, this reduction is critical to achieving the superior IO performance needed for AI applications. As a result, Lam's halo molybdenum process is seeing increased adoption across our leading 3D NAND customers. In etch, our new ACARA system has gotten off to a great start, rapidly solidifying and expanding our market-leading position in conductor etch. Featuring a proprietary industry-first innovation for ultrafast plasma control, ACARA delivers previously unachievable levels of performance in etch selectivity and profile patterning precision. We have previously announced leading-edge foundry logic momentum with this tool, and just since our investor day, ACARA has also won multiple critical etch applications in a major DRAM manufacturer. By enabling current DRAM and logic roadmaps with ACARA, we are setting the stage for Lam to make further gains as the industry looks to implement even more challenging device architectures like 3D DRAM and CFET over the next decade. Turning to CSBG, we saw record revenues in our Upgrades business. While the growth in upgrades was primarily driven by NAND technology conversions as forecasted at our Investor Day, key DRAM and foundry logic customers are also more actively upgrading and repurposing existing tools for new applications to optimize capital spending. Looking forward, we see the upgradeable architecture of our systems being a growing point of differentiation for Lam, enabling our customers to cost-effectively scale technology on the equipment they already own, while creating revenue and share gain opportunities for us. Our collaboration with customers on operating cost optimization extends across the entirety of our installed base business over a longer time horizon. For example, in the March quarter, we signed a new multiyear spares agreement with a large memory customer for their latest technology node. This enables us to deliver value to the customer through assured component quality, cost, and availability. Finally, in Specialty Technologies, we achieved a couple of key milestones recently. First, we displaced a competitor and shipped multiple 200-millimeter PCBD tools for silicon carbide-based wide bandgap power device fabrication. Second, our pulse laser deposition solutions are being extended into more use cases, and we will be shipping our latest tool this year for an advanced memory application. As customers look to accelerate R&D and scale manufacturing globally, we are finding new ways to add value. We've talked in the past about our semi-verse solutions capabilities, which apply advanced modeling, simulation, data science, machine learning, and artificial intelligence to enhance equipment performance and shorten the time required for process optimization. I am pleased to report that recently we signed new licensing agreements with three large customers for our virtual fabrication platform, Simulator 3D. For both its cost and performance benefits, we see virtual fabrication fast becoming a required discipline in advanced technology development, and Lam is leading the industry in this evolution. So to wrap up, when I look at our solid March quarter results and strong June quarter guide, I see Lam executing at a high level on all aspects of the outperformance strategy we described at our February Investor Day. This includes new product momentum and key customer wins, value creation from the installed base business, and innovation in equipment intelligence and virtual process development. Near term, we're taking steps to lessen the direct impact of tariffs, and closely monitoring for longer-term indicators of demand changes. Our priority is to continue delivering the technological innovations and world-class support that uniquely enable our customers to scale semiconductor manufacturing faster, more productively, and more cost-effectively. Simply put, our competitive differentiation is enabling our customers' competitive advantage. For this reason, we remain highly confident that Lam is in an excellent position to outperform overall semiconductor industry growth in the years to come. Thank you, and I'll now pass it on to Doug.

Great. Thank you, Tim. Good afternoon, everyone, and thank you for joining our call today. Lam is off to a strong start in 2025. The March quarter's performance exceeded the midpoint of all of our guidance ranges that we gave on the last earnings call. I was pleased with the company's continued solid execution. We've reached the highest quarterly gross margin percentage since Lam merged with Novelis in 2012. We achieved this by proactively delivering our operational efficiencies via our manufacturing strategy of being close to our customers. Let's look at the details of our March quarter financial results. Revenue for the March quarter was $4.72 billion, which was an increase of 8% from the prior quarter. Our deferred revenue balance at quarter-end was $2 billion, which was essentially flat from the December quarter. Within this number, though, advanced payments trended lower, while other components of the deferred balance trended higher. As we sit here today, I believe our deferred revenue balance will move lower by the end of calendar year 2025. From a market segment perspective, March quarter systems revenue in memory was 43%, a decrease from 50% in the prior quarter. Within memory, non-volatile memory accounted for 20% of our systems revenue, down from 24% in the prior quarter. And just a reminder, this segment includes a domestic China customer that we classified as a non-volatile memory producer and that we are currently limited from shipping to. On a dollar basis, NAND saw growth from non-China-based customers consistent with our expectations from earlier in the year. The non-volatile memory segment is being driven by customer spending on technology conversions from 1XX layer to 256-layer class devices. We currently expect this segment to represent the biggest percentage growth in systems revenue for Lam in the June quarter. DRAM represented 23% of systems revenue compared with 26% in the December quarter. Spending was focused on technology upgrades across One Alpha, One Beta, and One Gamma nodes to enable DDR5, LPDDR5, and high bandwidth memory. Foundry represented 48% of our systems revenue, up from the percentage concentration in the December quarter of 35%. This level represents a new record in dollar terms for Lam. Shipments for gate all around nodes and advanced packaging were strong. We also benefited from mature node spending with domestic Chinese customers. Just like to point out that the last time we were at these revenue levels, back in late 2022, foundry represented a concentration in the low to mid-30% range. We have clearly broadened and diversified our business since then. And finally, Logic and Other were 9% of our systems revenue in the March quarter, down from the prior quarter's level of 15%. The decrease was primarily driven by reduced leading-edge spending. Now I'll discuss the regional composition of our total revenue. The China region accounted for 31%, flat from the prior quarter. Most of our revenue from China continued to come from domestic Chinese customers. Our next largest geographic concentrations were Taiwan and Korea, at 24% of revenue each in the March quarter. Taiwan represented a new record level for us in dollar terms. The customer support business group generated approximately $1.7 billion in revenue for the March quarter, down a little bit from the December quarter. However, 21% higher than the same period in 2024. Sequentially, the decline was attributable to lower Reliant Systems revenue, partly offset by record upgrade revenue. Turning to the gross margin performance, the March quarter came in at 49%, at the high end of our guidance range and improving from the December quarter level of 47.5%. The increase reflects a stronger mix as well as the efficiencies we're delivering from our close-to-customer manufacturing strategy. Operating expenses in March were $763 million, up from the prior quarter level of $735 million. The increase was due to growth in R&D activities associated with our ongoing roadmap differentiation. R&D accounted for 70% of the total operating expenses. Operating margin in the March quarter was 32.8%, above the December quarter level of 30.7%, and near the high end of our guidance range primarily because of the higher revenue and the stronger gross margin performance. Our non-GAAP tax rate for the quarter was 13.3%, in line with our expectations. Our estimate for the June 2025 quarter is for the tax rate to be in the single-digit range due to an anticipated tax reserve release tied to a statute of limitations expiration. Beyond the June quarter, we continue to believe the tax rate will be in the low to mid-teens for the remainder of the calendar year. Other income expense for the March quarter came in at $7 million in expense compared with $11 million in income in the December quarter. The change in OI and E was due to lower gains in our equity investments and lower interest income. OI and E will continue to be susceptible to market-related fluctuations that will cause some level of volatility each quarter. I do believe O and E will have a slight negative bias in the June quarter. On the capital return side of things, we allocated $347 million to open market share repurchases, and we paid $296 million in dividends in the March quarter. As I indicated on the last earnings call, in the quarter, we retired $500 million of unsecured notes that reached maturity using cash from our balance sheet. We returned 63% of free cash flow in the quarter. This was a little lower than normal due to that cash that we allocated for the debt retirement. For the March quarter, diluted earnings per share came in at $1.04. The diluted share count was roughly 1.29 billion shares, about flat with the December quarter. We have $8.8 billion remaining on our board-authorized share repurchase program. Let me pivot to the balance sheet. Our cash and short-term investments totaled $5.5 billion at the end of the March quarter, down slightly from $5.7 billion at the end of the December quarter. The primary factors behind the cash decrease were the repayment of those notes, our capital spending, as well as our capital return activities. Total debt on the balance sheet obviously declined by that $500 million to $4.5 billion at quarter-end. Day sales outstanding were 62 days in the March quarter, which was a decrease from 69 days in the December quarter. Inventory at March quarter-end totaled $4.5 billion, a slight increase from the December quarter as we prepare for higher revenue levels in the June quarter. Inventory turns were 2.2 times compared with 2.1 times in the previous quarter. We will continue to manage inventory levels to align with customer demand. Our non-cash expenses for the March quarter included $87 million in equity compensation, $83 million in depreciation, and $14 million in amortization. Capital expenditures in the March quarter were $288 million, up $100 million from the December quarter. A major driver of this increase was a purchase of land in India to enable our planned lab expansions there. Our capital spending otherwise was focused on lab investments in the United States and global growth in manufacturing. We ended the March quarter with approximately 18,600 regular full-time employees, which was an increase of approximately 300 people from the prior quarter. We had headcount growth primarily in the factory and field to support increased tool installation, as well as growing manufacturing activities. We also saw headcount increases within R&D to support that long-term product roadmap. Now let's turn to our non-GAAP guidance for the June 2025 quarter. We're expecting revenue of $5 billion plus or minus $300 million. We expect systems revenue in foundry and NAND to be up in the June quarter. This business level is consistent with our expectations from the beginning of the year. I want to specifically point out that we don't see anything being pulled in from future quarters. We're expecting gross margin of 49.5% plus or minus one percentage point. This guidance includes our current assessment of the direct impacts of tariffs on our business. Operating margin of 33.5% plus or minus one percentage point. And finally, earnings per share of $1.20 plus or minus $0.10 based on a share count of approximately 1.28 billion shares. This guidance for gross margin and operating margin percentage would represent record levels since our joining of Lam and Novelis. I would also just point out that this would be the highest operating margin percentage that Lam has delivered since the late 1990s. These earnings would obviously represent an all-time record level of profit. When we wrap up, we're off to a strong start in 2025. We're executing well on our critical operational and financial objectives. While the tariff-related macro uncertainty is keeping the environment dynamic, customers are continuing to invest consistently with their planned technology roadmaps. At Lam, we're laser-focused on driving innovation and delivering new product and service capabilities while at the same time enhancing operational efficiency and managing our profitability goals. We believe we're well set up to outperform overall WFE growth in 2025 as well as in the years ahead. Operator, that concludes our prepared remarks. Tim and I would now like to open up the call for questions.

Pick up your handset before pressing the keys. Our first question today comes from C.J. Muse with Cantor Fitzgerald. Please go ahead.

Yeah. Good afternoon. Thank you for taking the question. I guess, first question, I was hoping to hit on the NAND upgrade. So the biggest growth driver into the June quarter. We'd love to hear your thoughts around the sustainability of that beyond June. Are you anticipating a broadening of spending beyond just the one or two customers in the first half of the year? As you think about the growth there, I guess, how much of that will come through tools versus CSPG upgrades? As well as is there a way to think about your share of wallet with the industry focusing so greatly on upgrades where it would appear that you're going from 30% to maybe 40 to 50%?

Yeah. C.J., this is Tim. I'll go ahead and start on this. It's, you know, as we've talked a couple of times on earnings calls recently, a significant portion said two-thirds of the industry's bits are still at around the 128 level, the 1XX generation. So we see a tremendous number of bits that ultimately have to get upgraded to 2XX plus. And so we don't know exactly what the rate and pace of that is. Right now, we see a strong move in that direction, and, obviously, we're watching for that. Lam is in an incredibly good position on two fronts. One is the fact that we are the ones who upgrade our own tools, and so we capture a tremendous amount of the wallet, the spend associated with upgrading the tools that are in place. At the same time, as we described at our investor day, as you extend beyond the 2XX to the 3XX and 4XX layers, you begin to need additional new tooling to enable that stacking. We talked about the sacrificial carbon gap fill that helps enable tier stacking. We talked about the backside deposition tool that helps with wafer stress as you move beyond 200 layers. We talked about the need to change the means of gap fill to an ALD gap fill. These are things that are new tools. So I think you're gonna see a mix. You're gonna see some of the mold and stack depth tools be upgraded. I think then you'll see new tools being added. And one of those most significant new tools from a technology perspective is what I talked about in my script, which is the halo molybdenum. And we're seeing strong momentum there. And eventually, because of the improvement it makes in terms of resistance, and that impact on device performance, we think that ultimately broadens out and is adopted across all customers.

Very helpful. I guess as my follow-up, your Taiwan revenues in the quarter were spectacular. I think the highest level that I can see over the last decade or more. And I guess, you know, curious on two fronts. One, you know, how sustainable is that contribution to Lam? And then how does that inform your thinking about what second half tool shipments could look like versus first half? Thanks so much.

Actually, C.J., let me just start from the standpoint of, you know, the comments we've made around leading-edge foundry logic strength. You know, it's been our stated strategy for the last several years to invest in new tooling to increase our exposure to leading-edge foundry logic. And so I think it should come as no surprise when we talk about record foundry revenues. We talk about strength in places like Taiwan. A lot of that is coming because, you know, we've been executing on the new product roadmaps. And, you know, I talked about the ACARA Conductor etch tool off to a strong start. We talked about Spark ALD in my prepared remarks. I mean, it goes well beyond that. Obviously, advanced packaging, a big portion of that as well. You know, Lam is really well situated in the technology inflections that are coming in leading-edge foundry logic, and I think that accounts for a lot of strength in Taiwan. I'll let Doug answer the second part of it.

Yeah. I mean, Tim covered it. It's sustainable, C.J. It's not going away. It's all about gate all around nodes. It's all about advanced packaging. It's all the stuff we've been talking about. So not much to add from Tim's comments.

Thanks so much.

Thanks, C.J. Sure.

The next question is from Timothy Arcuri with UBS. Please go ahead.

Thanks a lot. Tim, you made a comment on the call that you're, I think you said, quote, taking steps to limit the impact of tariffs. Can you talk about that? I guess you do have a free trade zone in Fremont, and then when you make the tools in Malaysia, the country I'm working in is Malaysia. So you should be fine there too. But you did say taking steps to limit the impact. So can you kind of go into some details on that?

Well, I don't know that I can go into a lot of details on, you know, as far as the specific steps. But what I can say is that, you know, we've worked hard over the last several years to build a very flexible manufacturing supply chain operation that's, you know, centered around our US operations, operations in Asia, as Doug said, close to our customers, close to the supply chain. And so when I say taking steps, it's no different than what we're always doing. We look at the environment, we look at the customers, and then we optimize that capability that we have that exists in many different places in the world to deliver our tools most efficiently and most effectively to our customers. And so it's kind of what we're always doing, and I think that that's a result. I mean, that flexibility is, again, part of the strategy we executed when we saw disruptions like COVID and things over past years. To really broaden out the global capability of our supply chain and manufacturing operations.

And, Tim, I'd just remind you, Doug. You know, we've got factories all over the world. Right? We've got factories in the United States. Factories in Austria, factories in Malaysia, factories in Taiwan, factories in Korea. And we've been talking about this for a while. The fact that we have that broad footprint enables us to have some level of flexibility, and I guess I'd just leave it there.

Cool. Okay, Doug. And then I had a question for you. So it sounds like NAND upgrades, you think, should continue. If we look at TSMC's CapEx, it looks like it does kind of flatten off as you get to the back. I know that you're that you don't track, you know, track it and then your business doesn't, you know, attract to their CapEx. But I think the feeling was that your revenue bias would be a little bit lower in the back half of the year. Is that still the case? If you can give us some sort of puts and takes into the back half of the year, that'd be great. Thanks.

Yeah. Tim, you're exactly right. You remember exactly what we intimated last call, and that's still the right way to think about it. It's a little bit of a first half weighted year. And you'll remember we talked last quarter about the fact we lost some of those Chinese customers that were, as we looked into the year, would have been second half weighted. We talked about a number of approximately $700 million of business that we had planned on being there that is no longer there. So thinking about it a little bit first half later is still the right way to have it, Tim.

The next question is from Harlan Sur with JPMorgan. Please go ahead.

Good afternoon. Thanks for taking my question. Maybe to follow up on Tim's question. So on the reciprocal tariffs that were levied on many countries including Malaysia and Taiwan, obviously, there's a 90-day reprieve through early July, but let's assume that somehow this doesn't get resolved or you still have some residual tariffs even post-resolution, like, does the Lam team have enough manufacturing capability in the US to service your leading-edge customers that are gonna be aggressively building out plants here in the US? I know before your manufacturing consolidation initiative, you did have manufacturing in Oregon and in California, but not sure how that footprint has changed as you brought on your Malaysia factory.

Yeah. So I would go back to what it's a good question. I would go back to what Dennis commented about, you know, our long-standing strategy of putting our capabilities close to our customers. And so, you know, you referred to this as, as we see customers expanding aggressively in the US, obviously, that will occur over a period of time in which we've already shown an ability to be agile within our manufacturing and supply chain. Like I mentioned, in response to COVID where we moved things to regions where we could, you know, meet our customers' needs more effectively. I think that if we continue to see more investment in the US, we still have operations, significant manufacturing capabilities and footprint in the US, and obviously, as each region grows, we reassess what local manufacturing we need to support that capability.

And Harlan, Doug, I'd just add, you know, we can't instantaneously change things, but given enough lead time, once you know what the rules are, you can adjust certain things with a period of time. So I think just think about that. It might take a little bit of time depending on what shows up. But we have an ability to be flexible.

Great. Thank you for that. And good to see the very strong performance in the gross margins. I assume near term, you have spares and subsystems inventories that, you know, were there before tariffs were put in place. Just wondering if there are some basic materials that you or your subsystem partners source from China, which could potentially be a cost headwind for the team. Maybe beyond the June quarter, either, you know, on spare parts or subsystem side of the business that could impact product costs if the tariff headwinds remain?

Listen, Harlan. I don't wanna get into everything, like, what do you have, where, and which country. We've got a global supply chain footprint. We've got a global manufacturing footprint. We have an ability to respond to different things depending on what the rules are and how they change. I guess I'd just leave it at that.

Okay. Thanks, Tim. Thanks, Doug.

Thanks, Harlan.

The next question is from Stacy Rasgon with Bernstein Research. Please go ahead.

Hi, guys. Thanks for taking my questions. First, it does sound to me like you're based on your comments that you still expect China revenues to be and mix to be down in the second half versus the first half. So I guess can you confirm that that is correct? And if that is true, does that have any implications for the sustainability of gross margins at this level given that China business has tended to have higher gross margins? Like, how do we think about gross margin sustainability into the back half of these levels given those dynamics?

Yeah. So, Stacy, I'm not gonna give details on next quarter by quarter. I still would tell you what we said last quarter was we expect the China concentration year over year to be down. That's still absolutely what we expect. Quarter by quarter, you know, things might bounce around a little bit. But I'm not gonna give you specific details on the quarter by quarter month. But you're right. You know, gross margin will go up and down depending on customer mix, product mix, overall revenue levels. It's a very complicated calculus when you look at all the things that move it around. So there will be variability there.

I guess, so then should I not be thinking about gross margins sustainable at these levels into the back half then? Or are you talking about variability around the cost level or what?

Yeah. There will be variability around the current level, Stacy. It won't go every quarter. It'll bounce around a little bit.

Okay. So, I mean, should I be thinking about it going down? Like, just to be direct?

Yeah. Variability means it'll go up sometimes, and it'll go down sometimes.

Okay. Okay. So my follow-up is very quickly. I think last quarter, you said you thought services as CFPG revenues would probably be flat year over year in the calendar year. Is that still expectation?

Yeah. Flat-ish is how I would describe it. Reliant will have some headwinds offset by the tailwinds that the upgrade part of the business has, Stacy.

Got it. That's helpful. Thank you.

Yep.

The next question is from Krish Sankar with TD Cowen and Company. Please go ahead.

Yeah. I had two questions. One is just to, you know, double-check on this overseas manufacturing. Doug, can you meet all of your non-US customer demand from your non-US manufacturing sites like Malaysia and Taiwan?

Hey. See, I'm not sorry, Krish. I'm not gonna get into the exact details. Right? We don't build every single tool at every single factory. But with enough lead time, we can adjust depending on what is where. And like I said earlier on the call, depending on, you know, what the rules end up being, we can move things around as necessary. Not instantaneously though.

Got it. Got it. Another question on China too. I understand many of your Chinese customers are probably not don't have much long tenure. But I'm curious what is the visibility into China? Because when you look at the last three years, it seemed like China surprised with the upside for WFE and demand. Do you think a similar scenario could play out this year or is the calculus different this time around?

Yeah. I don't know that it's really all that different. Hey, every customer, Krish, whether they're new or they've been around for decades, communicates plans on what they intend to do, where they intend to go. They all have roadmaps. They all tell you what they wanna do. It's no different in a region like China or Korea or Taiwan, frankly.

Got it. Got it. Thanks, Doug.

Okay, Krish.

The next question is from Sreeni Pajuri with Raymond James. Please go ahead.

Thank you. A question on the Foundry Logic. I know you get a lot of questions on NAND. It's up 60% sequentially, and I think you're guiding for growth again. You know, first, you know, we all know that advanced logic spending is coming back here. But if you could maybe parse it out to what extent is it just the spending coming back versus, you know, you talked about GAA being a driver and backside power being a driver. And also you talked about share gains in the past. If you could kind of help us understand what's driving that sequential strength and, you know, consumer strength into the June quarter.

Yeah. No. We, obviously, are like talking about the Foundry Logic story because you just highlighted a couple of really big drivers for us. We're talking about it as billion-dollar-plus technology inflections. You left out a couple, though. So, of course, we talk about gate all around nodes and how we're really a lot of new tools into support that transition. Backside power obviously plays well for an etching deposition company where you're looking at more metallization interconnect layers going on to the backside and those being thicker and generally requiring more tooling. What you left out was the advanced packaging and the important role that it's playing and the role that Lam has in really a very significant leadership position in steps like TSV etch, copper plating, many of the dielectric deposition films that are required for advanced packaging, that's an area where from both a served market as percent of total WFE spending, you know, we've kind of reset the mark for us relative to foundry logic. And so dense packaging is big. And then the one that's still small but coming is progress we're making on dry EUV resist processing, which you know, when you look out and you think about continued shrinking on the Foundry Logic roadmap and the challenges with the lithography, we think it has a big role to play and we are making progress there both on the DRAM side, which we previously announced at our investor day, but also make progress with advanced customers on the Foundry Logic side as well. So it's just a lot of technology opportunity for a company like Lam.

Yeah. That's helpful. Thanks, Tim. And then at a high level, Tim, I know you guided for mid-single-digit WFE growth and you're kind of maintaining that. But if I look at your first quarter results and also your second quarter outlook, you're growing north of 20%. So is this the level of outperformance that you expect, I guess, you know, for the rest of the year? I mean, how should we think about if WFE grows 5%, how should we kind of think about your level of outperformance expectation going forward?

Yeah. I don't think we're ready to quantify that number specifically, but, you know, we have talked about outperformance of WFE overall. Obviously, I mix and where the spending is occurring, how much of that spending is on those advanced technologies where Lam's served market has stepped up and we've got new tools going in. That comes into play as well. But overall, you know, I think I finished my prepared remarks with the comment about being highly confident in our ability to outgrow, and I think that's where we'll probably leave it. Thanks, Tim.

Trini.

The next question is from Atif Malik with Citi. Please go ahead.

Hi. Thank you for taking my questions. The first question is on WFE. I understand you guys are maintaining the $100 billion range as it's still early and there's no meaningful change in customer plans. One of your North American customers is going through some major restructuring and we get from investors if you guys have baked in kind of as a net neutral spending scenario for the logic customers in an event that customer tends to abandon the foundry plans or changes direction.

Atif, I guess what I would say, and, you know, I won't talk about any one specific customer. I mean, generally speaking, you guys hear about something. We've known about it well in advance of whatever you're hearing. Right? Because they gotta tell us what they're doing if we're gonna have people there, we're gonna have spare parts there to do installation and whatnot. So, yes, to the best of our ability, we've contemplated everything we've seen in the totality of the market.

Totally understand. Doug, I have a follow-up to you. In your prepared remarks, I think you mentioned that your outlook for June quarter you do not see any pull-ins from future quarters. So I'm just curious. Is that common based on the fact that the lead times are super long for your tools? Or your customer pipeline kind of, you know, has not changed much from what you were seeing 90 days ago? So if you could expand on what is that comment based on?

But if it's based on plans that we've known, these customers have had in place well in advance of even 90 days ago. Right? And if I think back to late last year, the outlook that we had for the current quarter that we just guided has not changed. Frankly, the whole year hasn't changed. Now I don't want you to communicate or I don't wanna communicate, hey. Could something change? Of course, anything can change, but we're not seeing anything change in the environment. We're staying very diligent on, you know, contemplating, okay. Tariffs are out there. Might that have a macro impact? Might the economy get softer? Of course, we're aware of those things. Could that negatively impact things at some point? It could. We're not seeing anything now. So I wanted to be very specific about saying that to you guys so you understand. Nothing's changing that we can see. Thank you.

Yep. Thanks. Thanks, Tim.

The next question is from Vivek Arya with Bank of America. Please go ahead.

Thanks for taking my questions. For the first one, if all China restrictions are already captured in your March results and June guide, why can't your second half sales be at or above first half levels? Like, I guess my real question is what non-restricted customer or end market could drop in the second half versus the first half?

No. Because just the totality of the market. Right? Nothing grows every single quarter. And when we look at everything that we going on relative to customers' plans and timing of things, it's a little bit first half weighted. It's not one customer or even one or two customers. It's just how the plans of our customers are laying out in total.

Yeah. We've talked about it in the past. I mean, a lot of these projects are quite lumpy and there's periods of large shipments and then spend a lot of time installing and the customer ramps those tools, and then the next phase of the expansion comes in. And I think that's especially true when you talk about upgrades that are occurring in some of these subs where they may not all be occurring over a very short period of time. They'll be spread out and they might be lumpy in particular quarters.

I guess what I'm trying to ask is, is this second half, right, is that impacted in any way from China restriction? Because, I mean, you should not be shipping to any restricted customers already. So what they do in the second half should not matter. And is it just conservatism about the non-restricted customers or lumpiness in the backup? I'm trying to understand how second half verification could look like.

Vivek, you're probably focused on China. What we did describe is, hey. If you go back to early December, there were some customers we were shipping to last year that all of a sudden became restricted. The plans those customers had were second half weighted. So that kind of went away from what we're looking at. So if not for that, right, we would be describing a second half that's different in profile than what we see right now. I don't know if we're confusing you or if I'm confusing you with that, Vivek.

No. Not at all. I just wanted to clarify. For the second one, on the gross margin upside, how much of a benefit could you get from just the CSPG being down in terms of mix? So kind of that being a headwind, you know, versus the benefit from, you know, perhaps shipping more from Malaysia. So is there a point at which CSPG starts to grow and that becomes a headwind to gross margins? I guess back to the can gross margin sort of sustain at these levels. What are the positives or negatives? And is a 50% line of sight for you right now?

Listen. CSPG moving around really doesn't do a lot relative to the variability in gross margin right now. That's not kind of when I go to the reconciliation, anything I'm seeing. Frankly, here's an interesting observation I had as I was prepping for earnings that might be interesting for you guys to think about too. If you go back to late 2022, and that was kind of the last time we're at these revenue levels, gross margin was 45 to 46% and now we're 48, 49%. At that period of time, the overall geographic mix was fairly similar to what we're seeing today. And so if you think about it, over that time frame, what's changed? What's changed is our close-to-customer strategy. Right? That's up with the gross margin, frankly, if you normalize for everything, I don't know, 200 basis points, maybe even a little bit more. It's come from what we've done with the company, frankly. So I think Tim and I feel really good about that. That's the strategy we executed. It's benefiting customers too because we're closer. We can turn things more quickly, and frankly, we can do it more affordably. So that's the big reason over the last several years that gross margin has performed the way it has. That's the most important thing to be thinking about from my point of view.

Thank you.

Yep. Thank you.

The next question is from Blaine Curtis with Jefferies. Please go ahead.

Hey, guys. Thanks for taking my question. I actually want to ask, I know you probably already know the answer. You said things hadn't really changed since the tariff. Just kind of curious your conversation with customers. I mean, there's some sense people think, hey. They'll pull in ahead of tariffs. The other sense is demand destruction and maybe we'll rethink their capacity for the second half. So can you walk through what your conversations have been? I know you said overall nothing changed, but I'm just kind of curious how customers are thinking about this.

Sure. I'll take a shot at it. Obviously, as I mentioned in my comments, we've been having a lot of conversations with customers to check in for changes. I think over the time frame though in which we've been operating, which is essentially kind of two months, less than two months with this session around tariffs. Customers really are not haven't thought about really what they would be looking for for the demand changes. Those are gonna occur over a longer period of time. These projects are multiyear investments. They've thought through them. In many cases, they're technology investments to ensure that they have the right products. We spent a lot of time on our February Investor Day talking about the debate around NAND bits and the need. And I think we were trying to make the case at that point of independent of end demand, you need a higher quality, more capable bit to compete for the types of applications that are needed in AI. I think you say that same thing on Foundry Logic. You see the same thing in for the investments being made in advanced packaging. And so maybe there's a little bit of a disconnect between a true end demand discussion and a technology positioning. And a fair bit of the momentum that we're talking about for our business is really coming from engaging customers at the leading edge. Where I think strategically, they feel they don't have as much of a choice but to continue to invest in those areas to make sure they're as competitive as they can be. That's a broad statement. It may vary customer by customer, but it's how we are engaged with our customers to make sure that however this plays out, they are competitive in their markets, and Lam is positioned with the tools that we've been investing for years to place in those fabs to help them.

Excellent. And then for my second, I just want to ask, Doug, in terms of the guidance on the gross margin, is there any impact from tariffs? It's a little bit confusing. A minimum tariff. I know we have the 90-day reprieve, but just kind of curious if you factored in anything.

Yeah. Blaine, there absolutely is an impact, but it's contemplating that based on everything we know and everything we understand, it's contemplated in that guidance of 49.5%. But I don't want to communicate there's not an impact. There is absolutely an impact.

Okay. But is there any way to quantify it or you don't want to go there?

I'm not gonna go there.

Appreciate it. Thank you.

Yep. You're welcome.

The next question is from Mehdi Hosseini with SIG. Please go ahead.

Yes. Thanks for taking my question. Two follow-ups. Is there any way we could think about WFE in terms of strategic investment versus technology upgrade, which could also be a strategic versus maintenance? And then separately, highlighting wafer capacity addition. And I'm asking you this question because if you think about all the questions that have been asked put to you over the past half an hour, it either has to do with China or sensitivity of the $100 billion WFE to macro picture. And I'm trying to understand how we could better think about the downside risk which could be mostly related to wafer capacity at. Any color will be great, and I have a follow-up.

Mehdi, I think, you know, I acknowledge what you're saying. We think most of the questions have come in this area, but, you know, if you look at where I focused most of my prepared remarks, it's on Lam's long-term outperformance and even outperformance in this year. And that's simply because what really matters, you know, from our company perspective and both the short term and long term is product alignment to the key technology roadmaps of our customers in the industry, how we enable that, how we get both products out. You know, we're only two months removed from our investor day, where we described an opportunity to significantly outperform the industry in terms of served market expansion as deposition and etch intensity grows, and also to gain share because we have a unique opportunity to increase our served market faster in some of the key markets like Foundry Logic. And so, you know, when we look at this year, and I think both Doug and I said, pleased with the execution of the company. I think a lot of it, of course, is around the financial performance, but even more so, it's around the seeds we're planting for future outperformance in the latest R&D fabs, the latest strategic investments, and I think that is ultimately what is more important to Lam's future regardless of where WFE happens to be in any given year. And so I like your question, and it's like, it's what we tried to address with our scripted remarks.

Sure. Thank you. And a follow-up for Doug. I just take the midpoint of the June quarter guide, it seems to me that the operating drop-through margin of like, almost 90% is reflecting all the investment of the past couple of years, and now there is limited increase in limited incremental increase in operating margin and this is how you're gonna scale incremental increase in revenue. Is that the right way to think about sustainability of the margin?

I guess maybe what I'd point out is that we're growing R&D. We're growing R&D because we see these amazingly unique opportunities for us to continue to outperform. Right? The intensity of etch and deposition is growing. And so we're putting our foot on the gas a little bit relative to growing R&D. Because we see an opportunity to continue to expand the addressable market as well as gain share. Absolutely not apologizing for this because as I pointed out, this is an all-time record level of operating margin for this company. I think, Kevin, I feel extraordinarily good about what we're delivering right now. So and we want to keep doing that. And so we're investing to make that happen.

Yeah. And that captures the incremental drop-through that you're capturing here.

It's part of it. Yes.

The next question is from Joe Moore with Morgan Stanley. Please go ahead.

Yeah. Thank you. I wonder if I could ask a little bit more on CSBG kind of flat for the year. You said Reliant is a headwind. Can you just give us a sense for the rank order of the subsegments within CSBG? How big is Reliant now? And is there also a headwind on the service spares from some of the restrictions in China?

Yeah. Of course. There's no customers that all of a sudden became restricted. We can no longer provide service and spares. So that factors into this too. But I mean, what you have going on is we described the point of view that China's down as a percent of total year over year. So that's the reliance statement. Right? A lot of the tools going in China are reliant. And then we have this amazing upgrade business right now that's showing up especially in NAND. Right? Not just NAND, but it's quite strong in NAND. And so when you think about those two things kind of offsetting each other, overall utilization year over year is stronger. So that's beneficial for spares and service. There's a lot of moving pieces in here. Spares continues to be the biggest individual component of CSBG, and then, you know, upgrades are growing a bunch this year and Reliant is down.

Yeah. And the only thing I would add is, again, just like for many years, we were viewed as strong in NAND, and we've certainly made investments to broaden our portfolio quite successfully in foundry logic and DRAM. In the services side as well, you know, we've talked a lot about Reliant. We've talked a lot about upgrades. But you're starting to hear us talk a lot more about intelligent services. Equipment intelligence, cobots, the types of capabilities that our customers are going to need especially as they think about expanding their global manufacturing presence. Where there might not be as many people who are skilled at bringing up and ramping an advanced manufacturing fab. And so we think things like cobots, equipment intelligence, use of AI to make sure our engineers are equipped to troubleshoot and repair those tools faster. Those are things that are gonna allow us to then perhaps grow our services business to be even a larger portion of that total CSBG. And that's a real focus for us.

That's helpful. Thank you. And within Reliant, you know, that used to be kind of a refurbished tools business. And then, you know, for a while, everything was so tight that there were no refurbished tools, so it was all new tools. Like, can you just is there anything changing in that business? Is that how much of that is kind of, you know, new tools? And are you seeing the refurbishment kind of come back in picture there on Reliant?

No. It's still all new tools. There's really not any refurbishment in the industry today. Not really.

That's right. There's very little. And in fact, I mean, this is the, you know, we refer a lot more to specialty technologies as well, which, you know, sometimes is the use of these tools for, you know, really new applications in those more mature fabs.

Appreciate it. Thank you.

Thanks, Joe.

The next question is from Tom O'Malley with Barclays. Please go ahead.

Hey, guys. Thanks for taking my question. I had a broader one. So I think you guys said at Analyst Day that if you look at the upgrades of existing equipment, you thought it was about a $40 billion WFE opportunity. Obviously, if you look at the NAND industry, like, the backdrop here is that you may have some impacts to consumer spend, etcetera. And when you look at, like, that handoff, how long do you think that you can continue to grow on the NAND front before you start to get some greenfield kick in or some new equipment? Kick in versus the replacements? Any context around that would be super helpful.

Oh, boy. That's a little bit of a difficult question. I thought you were going in the direction of how long will it take us to get through that $40 billion of upgrades, but which at the Analyst Day, we gave a range. I think we said it could be anywhere from a few years to more than that. But, you know, I think, again, some of these things are in market dependent and we've talked in the past about the importance of getting the NAND technology up to a point where it can play a significant role in the AI data center and some of the enterprise SSD. That's one of the areas where there is more demand, it seems, and more investment. So, you know, I think that it's a little too early for us to say. Like, say, we're two months beyond that view of $40 billion, and we think it still plays out over the next three, four, five years over that period of time. And I think that, you know, it's we're moving. I think the most important for Lam is it's not just upgrades, but as we talked, it's also a lot of the new tools that are needed to enable those higher layer counts. And that's really, I think, means we see both upgrades, but also really SAM expansion and share gain opportunities as a result of those technology investments.

Maybe just a tangent off of that question is maybe as demand declines, you'll see increases to capacity coming offline, so more underutilization. In your conversations with customers, is that a linear relationship with how much capacity is taken offline and the desire to do more upgrades, aka, like, if you see more underutilization from your customers, do you think that they will be more inclined to do more upgrades? Or is this the amount of upgrades that you're expecting kind of not gonna change depending on utilization?

Well, we've said that in the past, and I think in most instances, it has been true. Obviously, the last NAND down cycle was so severe that I think we saw the tools stay offline longer than we might have expected. But I do believe that generally, those things kind of are kind of countercyclical to each other. When you see utilization fall, the next up cycle will usually come up at a different technology node, which means upgrades will have occurred and Lam will have captured some of that revenue.

Thanks, Tom.

Operator, we're gonna take one more questioner.

And that question will come from Tim Scholes Milander with Redburn Atlantic. Please go ahead.

Yeah. Hi. Thank you so much for taking my questions. Maybe the first one just on CSBG. You've talked about upgrades up, relying down. Maybe you could just give us a little bit of color on the spares just kind of how that was tracking sequentially, and any color you have on the utilization rates of your fleet and then have a quick follow-up.

Listen. Spares are doing well. Right? I mean, timber con grew last year. The incremental opportunity to sell more spares is up. Utilization is trending favorably. So that drives spares to be doing reasonably well, Tim.

Okay. That's great. And then maybe just on the NAND upgrade opportunity, just as you look out maybe over a longer term, maybe one or two years, you just maybe kind of break that up for us? Just kind of how does that split between upgrades sales and OE sales? Is it like pretty equal, or is it skewed one way or the other? Over the next couple of years? Thank you.

Yeah. I think that as time progresses, I think you'll see, you know, it become more balanced. I mean, as we said, it's a combination of upgrades to the existing tools that are already there to be able to accomplish higher layer counts. And immediately, you need to also add additional tools to provide the types of technologies that are needed to deliver higher layer counts. And so already, it's a mix, and I think it will continue to be a mix for the next several years when we work through that $40 billion upgrade opportunity.

Got it. Pretty helpful. Thank you.

Okay. Thanks, Tim. Operator, with that, we're going to complete the call. Thank you, everybody, for joining us today, and I'm sure we'll see a lot of you guys during the remainder of the quarter.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.