Deciphering DRAM cycle from Lam Research's Q3 2023 Earnings Call
In the cyclical semiconductor industry, it is crucial to comprehend supply and demand dynamics and accurately evaluate our position within the cycle. One effective method is to carefully analyze earnings calls from equipment suppliers, which can provide insight into the performance of their customers. During a downturn, if earnings calls indicate a decelerating decline in year-over-year revenue, it typically signifies that we are approaching the trough. This can instill confidence in potential investors, as it may represent an opportune moment to invest in producers, particularly when their price-to-book (P/B) ratios remain near historical lows.
Equipment suppliers in the semiconductor industry possess unique strengths. The top five suppliers, as determined by revenue, are:
Applied Materials: Offers a diverse range of semiconductor equipment, excluding exposure machines, such as deposition, etching, measurement, inspection, and heat treatment systems.
ASML: Specializes in extreme ultraviolet (EUV) and other photolithography exposure systems.
Tokyo Electron Limited (TEL): Provides thermal processing, deposition, and etching equipment.
Lam Research: Focuses on deposition and etching systems.
KLA Corporation: Excels in metrology and inspection technologies.
Lam Research's etching equipment is particularly vital for dynamic random-access memory (DRAM) manufacturing. By closely monitoring the tone of their earnings calls, we can glean valuable information about the current state of the DRAM supply and demand cycle. When combined with recent news, such as Samsung's decision to cut DRAM production, it becomes increasingly evident that we are nearing the bottom of the cycle.
Lam Research guided a revenue decline of approximately 20% quarter-over-quarter in Q4, falling to a range of $2.8 billion to $3.4 billion. This figure is notably below the Q2 guidance of $3.8 billion.
From Q2 2023
Let me now turn to our non-GAAP guidance for the March 2023 quarter. We're expecting revenue of $3.8 billion, plus or minus $300 million. I'll also just mention that we currently think revenue will be somewhat first half weighted this year as we consume the reduction in deferred revenue in the March quarter.
From Q3 2023
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.
CFO Doug commented on the significant downturn, emphasizing its historical magnitude, and suggested that it is unlikely to witness another major decline in the near future.
Toshiya Hari
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 '22 and, given how things are going now, I don't know, maybe roughly $3 billion this year, maybe 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?
Douglas Bettinger
Yes. I'll give it a quick response, Toshiya. It's hard for me to envision it being lower than it is this year. I mean it's down 50% memory in total, right? Tim, I think, had that in his scripted remarks. That's down a lot. I can't ever remember it being down that much on a year-over-year basis. You might say, "Hey, last year might have been a little too high or somewhat too high." Probably true. I'm not going to get into a precise number, but it's certainly higher than it is this year, maybe not as high as it was last year, though.
CEO Tim expressed confidence in the demand for lagging-edge technology from China is real. I think a strategic move for China to acquire lagging-edge equipment in anticipation of potential policy changes makes sense.
Timothy Arcuri
Tim, if I take your comments and I combine them with Applied and ASML's 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?
Timothy Archer
Well, I believe that there is real demand. I mean every region, I think, is trying to build up a regional capability to manufacture all types of semiconductors. And as you just said, I mean, in China, this is one area that they have the ability to create that capability and also they have the demand to consume it as well. And so I think from that standpoint, it's good demand for us and for others in the industry. But I think in a bigger sense, this regional, call it, self-sufficiency, regional resilience that's being built, I think, is going to have a long-term impact on spending in the industry.
And so we're not trying to sort of play the game of is it or is it not sustainable. We're talking to our customers. And in some cases, these are new projects that are coming up. We do our own assessment of whether or not they will be able to invest if they have the technology. And I think that with not only U.S. chipset but recent news on the European chipset, I think that this is something that is going to have a positive impact on spending to the industry across both leading-edge and these trailing-edge specialty technology segments for quite some time.