Lam Research Corporation
Q2 2021 Earnings Call Transcript

Published: 27 Jan 2021

[Operator:]

Good day and welcome to the Lam Research's December Quarter Financial Conference Call. At this time, I would like to turn the conference over to Ms. Tina Correia, Corporate Vice President of Finance and Investor Relations. Please go ahead, ma'am.

[Tina Correia:]

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.

[Tim Archer:]

Thanks, Tina, and good afternoon everyone. 2020 was a remarkable year for Lam Research. Our global teams rose to meet the unprecedented challenges of the COVID-19 pandemic and delivered the best year in our history. Total revenue of $11.9 billion and earnings per share of $20.45 were both record highs for the company, driven by served available market, market share, and customer support business growth. Through the year, we also launched new products and announced breakthrough technology solutions that we believe lay the foundation for our continued success. Before going into details, I want to express my sincere thanks to our teams for their incredible execution in an extraordinarily difficult environment and to our customers and suppliers for their partnership and support as we all adapted to the unforeseen events of 2020. We entered the New Year with hope that the world will soon emerge from the COVID-19 health crisis and move towards a global recovery. From our view, WFE spending in 2020 ended in the high $50 billion range. This is about what we estimated at our Investor Day in March just before the extent of COVID-19 impact was known. We saw spending growth across all segments of the market led by a recovery in NAND, continued expansion in Foundry/Logic, and a slight pick-up in DRAM. China's domestic spending for the year was in the $10 billion plus range.

[Doug Bettinger:]

Excellent. Thank you, Tim. Good afternoon, and thank you all for joining us today on what I know is a very busy earnings time. I hope you and your families have been safe and healthy since we last spoke with you. I'm really quite pleased to be reporting these outstanding results. We came in at the high-end or exceeded the range for all guided metrics in the December quarter. Despite the challenges we face during 2020 related to the global pandemic, Lam delivered record financial performance in revenue, operating income dollars and earnings per share. Our December quarter revenue came in at $3.46 billion at the high end of our guidance range, and represented an increase of 9% from the September quarter. The strength in our performance was driven by investments in all device segments, as our customers ramped to meet the demands of a diverse set of end markets such as data centers, smartphones, PCs, gaming consoles, IoT and automotive. Overall, our revenue increase was not only driven by the wafer path equipment needs of the industry, but also by the continuous growth of our installed base. We continue to add value to our customers by delivering extra spare parts, equipment upgrades, refurbished tools and advanced service offerings. Looking at the details of our systems revenue, the memory segment was strong in the December quarter coming in at 68% of systems revenue. This strength was driven by the NAND segment which represented 51% of our systems revenue versus 39% in the prior core. December was a record revenue level of NAND quarterly revenue dollars for the company. We have clear leadership positions in the NAND segment, with customers investing in equipment for 64, 96 and 128 layer devices. DRAM investments contributed 17% of our system's revenue. DRAM spend was spread over the one y, one z and one alpha nodes. The revenue percentage was down slightly from the 19% in the September quarter. We expect continuing healthy investments in the combined memory market as we see proven inventory and profitability management. On the Foundry segment side spending remains robust. We concluded 2020 with a record level of revenue dollars in this segment. The majority of the investments in the December quarter were concentrated at the leading edge seven and five nanometer nodes. Foundry represented 26% of our systems revenue for the quarter versus 36% in the September quarter. Rounding out the system revenue picture Logic and other contributed the remaining 6% of systems revenue in December quarter, which was flat with the prior quarter level.

[Operator:]

Thank you. And we'll take our first question today from John Pitzer with Credit Suisse.

[John Pitzer:]

Congratulations on the great results. Tim, I just want to go back to your WFE target guide for this year of high 60s to 70. Now, if you harken back to the Analyst Day, almost a year ago, your three to four year target out was sort of a range of 60 to 70. And so, I'm curious, how should we think about how quickly we've gotten here? Do we worry about cyclical overheating? And in a similar vein, as you think about this year being perhaps a little bit more first half weighted, is that really a commentary on normal seasonality, you want to add capacity in the first half, the demand in the second half? Or as you look at the bottoms up, are you worried about any areas that are kind of perhaps cyclically heating up a little bit too much?

[Tim Archer:]

A lot of questions in there John. Maybe there was a comment in my script even that said, in many cases, the outlook, we gave at Investor Day, that was formulated before we really knew about COVID-19, before we saw all of these tremendous work-from-home drivers, a lot of things that just really have kind of changed, maybe the way semiconductors have and the role semiconductors have played kind of in the world in the last 12 months. And so, we gave our best view when we gave it, and at that time, we thought our range of 60 billion to 70 billion seemed pretty reasonable given what we thought about demand. Clearly, some segments of the market have been growing a lot faster as we just mentioned from those demand trends. When we look at it -- there is an urgency to get tooling to meet demand. And that's not just our customers, that's also us as we look, Doug talked about investment in our Ohio facility to build critical spare parts as factories are running at very high levels of utilization. So, we're investing, our customers are investing. I think the outlook is, it's difficult to say, we're telling you right now, it looks like it's first half, somewhat the first half weighted. But I also talked about long-term demand drivers that we think fundamentally continue to become growth drivers for this industry in the long-term. And you've just seen growth and I gave you a couple of examples, 5G, gaming consoles, everybody has read about the shortages in automotive image sensors. There's just such a role that semiconductors play today. I don't think there's any segment we would point to that we feel is overheating relative to the long-term trends we've talked about. Just one example, because I know we'll get the question at some point on NAND. We talked about the recovery in NAND. But if you look at the spending on NAND over the last three years and you average that out, it's actually very close to the average annual spending that we've outlined for a couple years at the Flash Memory Summit, which says that you need roughly $70 billion over a five-year period to hit the high 30s demand in bit growth rate. And so, we feel reasonably comfortable with demand profiles across all the segments right now, and there'll be changes quarter-to-quarter and such, but long-term we think they're in line with the demand we are seeing.

[Operator:]

Next, we'll hear from Krish Sankar with Cowen & Company.

[Krish Sankar:]

Just to follow up on the WFE commentary. Is there a way to quantify it how much of it is front half versus back half? And is there any upside to back half, where do you think it is going to come from memory, domestic China or anything? Then, I have a quick follow up.

[Tim Archer:]

Yes. Well, we haven't quantified it and I don't think we're going to do so right now. Doug is shaking his head, no, and not going to right now. But, I think that to your point and Doug kind of mentioned, it's like, this is our view now, you can always feel the demand and the urgency for the next couple of quarters much, much stronger than the quarters further out. So, I think to your question which is where might we see changes later in the year? I think you have to look at some of the demand drivers. And again, there's a broadening of demand across -- it's not just driven by leading edge. In fact, we were looking at the amount of foundry spending for instance that's coming from 28-nanometer and above. It's a very high level these days. You see that in strength that gets reported into our CSBG business, the Reliant business. I think you can continue to see strength there. It's how semiconductor is being incorporated into everything. The content in cars and such, it's just increasing at quite a rapid rate. And those tend to drive kind of that off-leading-edge business at a very rapid pace. Where that gets manufactured? I mean, there is a fair bit of investment in China, for instance, that is at those trailing-edge nodes. And I think that's why we have seen strength in China, and why we actually believe that China, especially at those trailing-edge nodes, continues to be an area of strength as they satisfy a lot of that domestic demand for those kinds of applications like 5G and cars and other things. So, I guess you could say there might be -- might be added strength in those broader demand drivers that could surprise us later in the year.

[Krish Sankar:]

Got it. That's super helpful Tim. Just a quick follow up in your WFE assumption for this year, what are you modeling for domestic China? You think it's 10 billion last year? I'm just kind of curious where you are shaping it out to this year? Thank you.

[Tim Archer:]

I don't think we're ready to give like an exact number. But what we've said is 10 billion plus this year, and we expect growth this year. I don't know if Doug wants to add anything.

[Doug Bettinger:]

Probably in the same range, Krish, plus minus a little bit is kind of how we're thinking about it.

[Operator:]

Next, we'll hear from Timothy Arcuri with UBS.

[Timothy Arcuri:]

I guess, Doug, I wanted to ask the prior question maybe a little bit differently. You said WFE this year, it's probably, 58, I'm sorry, not this year, last year, probably about 58.5. So your share grew about 100 basis points up to like 13.6%. So if I assumed that the service business, maybe you could help tell me if this is right, but it seems like service is going to be maybe 12.25 or 12.50 in March. So if you use that same share numbers, you get like an 18.5, 18.3, 18.5 billion worth of WFE in Q1. So that's almost $74 billion annualized. So, I sort of look at the full year number regarding high 60s to 70. So that was sort of implied that the back half of the year has to be -- at least for the industry has to be down pretty substantially off of for the first half of the year is? Or at least talk about Q1's running. So I'm just kind of wondering if you can comment on that and sort of like double-click on and I have a follow up. Thanks.

[Doug Bettinger:]

Tim, I'm not going to unpeel the whole number. And I can't go through all the numbers, as I sit here that he just spit out, I'm sure you're doing the right math or close. As we look into the year, it does look like the first half related year, things move around, things change. I think probably NAND is first half related, I think Foundry/Logic probably a little bit also. And I think DRAM, probably through the year is fairly steady. But things move around, things change, we always have pretty good visibility at this point into the first half, and the second half is far enough away that it can move around. So that's why we kind of tried to put some ranges, you guys will do the math to kind of take it through an open company here. But that's generally what I'm seeing, and then how I'm thinking about it.

[Timothy Arcuri:]

Okay, cool. And then, I guess my second question is on NAND. So it looks like CapEx is going to run about EBITDA this year for the industry. I mean, you're going to -- the industry probably does 19 billion in NAND, I don't know if you'd agree with that, 19 billion WFE this year. So that's pretty substantially above the 14 billion run rate that you get when you divide your 70 billion by five. So I guess when you take those two factors, and you look at CapEx being about EBITDA, usually that's not all that sustainable. So I guess, what's do you tell your customers, does that concern you at all? I'm just sort of curious on that. Thanks.

[Doug Bettinger:]

Tim, when you look at this, it'll go up, it'll go down, nothing goes up every quarter. It ebbs and it flows and if you go back to '19, it was pretty low. Go to '20, it went up a little bit, '21, flat to up a little bit? Maybe? Yeah, probably. And then, it'll course correct based on whatever demand looks like. I mean, when we step back to on the reason, Tim and I both talked about these long-term demand drivers is that the important thing to think about over the next several years for the industry, it won't go up to every quarter. It never does, you know that better than I do or as well as I do. In timing, a fab investment, when things come in, it'll go up, it'll go down. That is what always happens and is what will happen in 2021 most likely.

[Tim Archer:]

Yes. I think probably just to add Tim, I mean, the absolute spending in NAND any given year is somewhat out of our control. But I mean what we do control is, how we continue to expand share of every dollar WFE spent. And that's why I talked about, how we've leveraged the learning we're getting from being the company that runs the vast majority of the critical applications in NAND. So identify new opportunities and new applications and grow into those so that the next node, our share of WFE Fi goes higher. And I talked about Striker FE, the ALD tool for gapfill, brand new application for us compete in the space where we didn't compete before. And, as trend node transitions occur into the future, means that our share of WFE increases. It's also important to remember that our share of every dollar WFE spent on node transitions actually is the highest. And that's simply because of the role that action deposition play in those transitions. So if you end up in a year, let's say and I'm not characterizing any given year in this way, but at the end of the year, where you do have lots of wafer starts, people become concerned that that might be a bit of overheating with new capacity. But actually we look at it as adding to what we would consider to be kind of our 3D annuity, the 3D NAND annuity, which says installed base is larger, which means that the next transition, RAM will get an even greater share of the spending that is required to move that entire 3D NAND installed base forward to the next node. So, that said any given year, something happens, but in the long-term trend, we think Lam's opportunity continues to grow in 3D NAND.

[Operator:]

We will now hear from CJ Muse with Evercore.

[C.J. Muse:]

Question is on CSBG business. Is your commentary on the first half weighted year reflected for that business as well? And as part of that, if I hold the business just flat at Q4 level, that business would run about 16% in calendar '21. So how should we think about the growth rate this year? And I'm going to have a quick follow up.

[Doug Bettinger:]

Yes, CJ. My commentary on first half, second half was very much targeted at WFE, not necessarily installed base. Now the installed base won't necessarily grow every single quarter will grow every single year like we've been saying. We feel really good about where we're at, I mean, it's we're record after record. And Tim shared the chamber count with you. It's kind of like it's been over the last several years. So the tailwind there is, it's really very good.

[Tim Archer:]

Yes. And I guess, just to add at our Investor Day we talked about the goal, we had to expand that number. The number of products and services available for the installed base is way of increasing revenue per chamber. And I think you've seen our progress in that area in this past year, and we'd expect that to continue to increase going forward as we focus on equipment intelligence and remote services and a lot of database productivity enhancers.

[C.J. Muse:]

That's great. And as a quick follow up, on your last call, you talked about how -- given the preponderance of manufacturing in Fremont, you couldn't ship to one large logic player in China. Curious if you've been able to get a license and as part of that, are you including the spend there in your 2021 domestic China outlook? Thank you.

[Doug Bettinger:]

That's where we're at right now CJ. We're still in the application process for license haven't heard back. When we look at China, that's plus or minus how we described flat to up. There's a range around it. But at this point, we haven't heard back on the license. We have applied and we're waiting.

[Operator:]

Next, we'll hear from Harlan Sur with JPMorgan.

[Harlan Sur:]

And congratulations on the solid results and execution. For all of the leading growth, leading edge growth trends that you highlighted in your prepared remarks, Tim, there's no corresponding significant attach rate of analog and mixed signal semiconductors to these applications. Additionally, some of your customers are moving to 12-inch analog manufacturing. And then, we know that there's pretty significant tightness in boundary capacity for lagging edge 28 and 40 nanometers seam also, approximately, and obviously, I think you mentioned this in driving some of the strength in your business. Approximately what percent of your overall business is lagging edge technology nodes? And do you see this expanding as the year unfolds?

[Tim Archer:]

We don't break out exactly what percentage of our business is in that segment. But I did say we do see that area continuing to grow again. And it's -- that's like what we would almost consider to be the strongest secular growing part of our market, because it's being driven by almost every aspect of the economy in terms of the types of products that semiconductors going into, that are manufactured with those trailing edge nodes. And so, we've seen, I don't, maybe I think it's something like I could get along with eight or nine quarters, I think in a row that we've now had reported record revenues in that trailing edge space. So one, we feel like we know how to compete and address that market. And we think that it's going to be just one that just continues to grow, maybe not quarter-over-quarter-over-quarter, but records every quarter, but certainly year-to-year-to-year, it will continue to be an area of strength for us.

[Doug Bettinger:]

And Harlan, I'll just remind you what we said back at the Investor Day in March and still believe that this segment of WFE will outgrow the rest of the market by -- I don't know, two times, maybe three times, although the leading edge stuff has picked up since then. But it's still a very good growth area for us.

[Harlan Sur:]

Thanks for the insights there. And then, to kind of follow up on CJ's question in calendar year 20, as you mentioned, services grew 22% that's not only double your installed base, growth CAGR over the past few years. But it's double the trend line target of around 10% as it relates to your 2023/2024 financial model. And if you just look at the continued complexity on these next generation leading edge tools, the strong demand for lagging edge nodes, it appears that the service business is going to continue to grow faster than this 10% growth targets that you guys have put out there, upgrades, the VAN services, Reliant, refurbished flows. So would you broadly agree with that? Or are there some offsets that we should be thinking about that could dampen the year-over-year services trajectory, back to that kind of normalized kind of 10% to 12% level?

[Tim Archer:]

Yes, I don't think we're ready to up our long-term objective just yet. But I think you're pointing out some of the things that are doing quite well in that part of the business around advanced services. And we talked about a 6x increase in remote support engagements. I think if we look, one, we put out that model, Investor Day, as I mentioned, as COVID environment kind of evolved, some of the advanced services, the database services, the poll for the idea of like less people related maintenance, using data and remote capabilities, clearly caught a lot more traction in the second half of the year. We need to see how much of that sticks as we kind of come out of this environment. But we believe that, that those things are -- those capabilities are now kind of demonstrating their value and a lot of that will stay, those will be strong drivers. Another thing happened in 2020 is, there probably were some instances of spares being ordered a bit ahead of normal trend. And as you know, everybody, including Lam, seeing some of our inventory numbers, tried to hedge against disruptions due to COVID-19. So you might see some moderation if you're looking for offsets in that space. So, we feel as Doug said, very comfortable about hitting the objective we put out at the Investor Day, but we're not ready to set a new growth target for the business until we see a little bit more of the trend this year.

[Operator:]

We will move on to Vivek Arya with Bank of America.

[Vivek Arya:]

For the first one, I'm curious, what do you think is the right way to gauge the utilization of your NAND shipments last year? Is there some engagement with those customers on the CSBG side that gives you insight into what that installed base utilization is because I imagine the NAND number, at least to us was somewhat of an upside surprise? And I just wanted to understand what's driving that?

[Tim Archer:]

Well, I guess if I understand the question about, you're kind of asking how much the tools that we've shipped are being utilized in our customer fabs and that's not something I can really comment on. Obviously, to our engagements with customers, we have good insight into fab but not something we can really talk about. If I misunderstood the question maybe...

[Vivek Arya:]

Or maybe if, Tim, what do you think is the supply demand balance for NAND right now among your customers?

[Tim Archer:]

Well, I think if you consider that we talked about further strengthen the NAND market in 2021, I would say that there is a sense that more equipment is needed to bring on additional capabilities in NAND at this point in time, for sure.

[Vivek Arya:]

And as a quick follow up, Doug I think you alluded to some cost headwinds from air freight. Some of your semiconductor peers, I think have managed to kind of pass on increasing costs in other areas, foundries and wafers and substrates and so forth. Do you think this is the kind of cost you could pass on? I'm trying to think, how do you go from your operating margins right now to the 32% to 34%, kind of range you had outlined at your analyst day at similar level of annualized sales?

[Doug Bettinger:]

Yes, Vivek. We're always trying to get the best pricing that we can get. It's hard at times, though that it kind of passed up like this through -- we're doing our best. And it is a bit of a headwind. So I guess we're not able to push it through at this point. I do think just part of things will mitigate at some point, as the world gets back to normal and freight lanes get back to normal. Things are just constrained right now, we fly things in and out of our factory, a lot, oftentimes, or at least we used to in the belly of our commercial aircraft carrier at times. And they're just not flying at the volume that they used to be. I do think that comes back at some point, once we get COVID under control in the world.

[Vivek Arya:]

Any way to quantify the headwind, Doug? Is it like 100 basis points to gross margin, 50 basis points?

[Doug Bettinger:]

Vivek, I haven't given a hard number, but I would tell you, it's noticeable, it's meaningful. It's a meaningful headwind, I wouldn't be talking about it and we're doing our best to manage it. And I do believe it will get better over time. But I haven't quantified it.

[Operator:]

Next, we'll hear from Joe Moore with Morgan Stanley.

[Joe Moore:]

You talked about the drivers of the higher WFE in calendar '21. He talked about migration to higher layer counts. In NAND as well as DRAM and Foundry, I guess, in the NAND side, does that mean you think NAND spending is higher for the year? Or are you not going to go that far? And then, for DRAM, it seems like the economics are improving. Do you think that's -- where people spending sort of independent of that just thinking they need to get a technology migration? Or have you seen sort of stronger spending because the market has been stabilizing and improving.

[Doug Bettinger:]

Joe, I will start and then I will let Tim add on as well. As we look into 2021, right now, pretty much we see every segment of our business up, right, it's up in Foundry/Logic, it's up in NAND, it's up in DRAM, to different degrees, and like I kind of alluded to earlier, things can change but that's our outlook right now. And again, we see these longer term demand drivers as a large part of what's going on. And Tim, if you want to add anything?

[Tim Archer:]

No. I think you pretty much get it. I mean, I think, you started with the question about NAND, I mean, again, it's again, this layer transition is a way for customers to reduce their costs. And that those transitions are complex from perspective. So creating a lot of demand for our tools to help enable those transitions.

[Joe Moore:]

Yes. To the extent that a lot of NAND spending is on layer count migration, rather than adding incremental wafers. I mean, does that wouldn't Lam normally outgrow the WFE in that kind of environment, assuming there isn't like a lot of capacity being added in NAND?

[Doug Bettinger:]

In a conversion, as Tim alluded to earlier, when you're just doing layer count conversion, that's the sweet spot for us in terms of the percent of spend. So the answer is yes. With the caveat that everybody's installed base is a little bit different. There's always a handful of new wafers coming in, and you got to kind of peel the onion back to the next layer and look at what's going on in any one period. But I would agree with your comment that in a layer count conversion, that's a good spot for us.

[Operator:]

Toshiya Hari with Goldman Sachs has the next question.

[Toshiya Hari:]

Hi, guys, thanks for taking the question and congrats on the strong results. I have two as well. My first one is somewhat related to Joe's question, wanted to get your thoughts on your ability to outperform WFE in 2021. Tim, given sort of the application wins that you have in the bag, and given sort of the device type mix that you guys are assuming internally, would it be fair to assume kind of a similar magnitude of outperformance in your systems business in 2021 vis-à-vis 2020. Or do you think 2020 was a little bit unique given how strong NAND was in the year?

[Tim Archer:]

So that's a lot of information you're asking for. As we look, I mean, Doug just mentioned, I mean, clearly we see strength across all parts of the business. NAND expansion is clearly good for us. As I mentioned in my comment, you're more than 50% share in DRAM etch, we're expanding our deposition. So DRAM is good. Foundry/Logic is an area where, obviously, from an exposure perspective, Lam has -- it's been less in the past, but we've talked about our improvements there. And so I think even there, as the nodes move forward, some of these new products we're talking about, whether it's dry resists, that might not be a 21 story, maybe, but more of a 22 and beyond story. But you know, we're working hard to increase our SAM as a percent of WFE and so, I guess what I just say is in terms of outperformance, you get to go back to what we said at investor day, which is the way our past outperformance is to expand our SAM and coming from where we are in the high 30s. We said we're going to get to 40% SAM as a percent of WFE. That's increasing our opportunity. And then, we do think with new products like the Vantex and Sense.i, and other products that are kind of in the pipeline to come in later this year. Those will be market share drivers for us. And so, combination SAM expansion and market share gains will hopefully to continued outperformance in the market.

[Toshiya Hari:]

And then, Tim, as my follow up, you just mentioned Vantex, pretty fascinating technology. Wondering if you could kind of give us some color on areas or points of differentiation, vis-à-vis your nearest competitor in Asia. And if you can remind us what your market share aspirations are and dielectric etch over the next couple of years, that would be super helpful, just given how, relatively speaking, you've been stronger in conductor. So I think the opportunity set is bigger in dielectric. Thank you.

[Tim Archer:]

Well, just a couple things. I mean, one, the Vantex story is really like two parts. One is, it is the first module on the new Sense.i platform. So again, when you're thinking about Sense.i, you're thinking about a tremendous amounts of data collection and using that, not only to improve the productivity of the platform and the maintenance and such, but also process control. And as you look at now in that dielectric high aspect ratio etch, which is where Vantex is targeting, those etch's are becoming incredibly difficult both in NAND and DRAM where that product is really targeted. We've leveraged the learning from all of those wafers I talked about, we've been running relative to the competition in 3D NAND to really understand what it takes to build the world's class high aspect ratio etch and that's what we think we've delivered to the market. We do really well in dielectric etch, quite honestly, in both DRAM and NAND already, but we're not going to -- we haven't quantified, I believe our dielectric etch ambition, but clearly it's higher in years to come. And we think Vantex and Sense.i is the platform to do that.

[Operator:]

Now we will from Blayne Curtis with Barclays.

[Blayne Curtis:]

Wanted to go back to the last quarter you talked about, obviously, you wanted to guide WFE because guideposts and obviously DRAM was the strongest. Now fast forward and we've all seen big foundry CapEx numbers, but your NAND came in strong as well. Can you talk us through over the last three months, what kind of improved for you? I know you don't want to for the year but just trying to get a better feel as to what you're expecting between those two segments.

[Doug Bettinger:]

I know Blayne, obviously, one large foundry customer upsized their CapEx. I think everybody understands what happened there. I don't think any of us saw the totality of that coming. So clearly, that was a bit of the upside. Maybe that would be the only thing I would specifically point to.

[Blayne Curtis:]

And then, just back on gross margin, obviously, you have the higher freight costs, you are guiding it down a bit, revenue up, can you just kind of walk us through the March guide. And then, there's opportunities for leverage, either gross margin or even on OpEx, for rest of the year.

[Doug Bettinger:]

I think everybody knows this isn't really a huge fixed cost business. So when revenue goes up, it matters but it's not what matters as much as in like our customers business, product mix matters, customer mix matters. Customer concentration moves gross margin around. That's happening probably a little bit in the March quarter. A little bit of a headwind, if I think about the longer term, getting to that financial model that we put out for '23. Two things I would point you to on the gross margin and operating income for that matter. One is this freight headwind that we're dealing with. Second, I referred to ramping the factory in Malaysia, that's going to be somewhat more efficient, a little bit bigger factory, a little bit more cost efficient factory. So there's some upside that we're going to see in gross margin there. And that's really from where we are today to where we're trying to get to or where we're going to get to, what gets you there.

[Operator:]

Our next question will come from Atif Malik with Citi.

[Atif Malik:]

Tim, you guys have seen strong growth in 3D devices, particularly in NAND area and are announcing the new technology for high aspect ratio. My question is in the logic side, the logic devices are now moving in three dimensions. For example, nanosheet, the three nanometer Korean foundry this year. And how does that impact the definition etch opportunity? And should we be looking at that as a major inflection?

[Tim Archer:]

I would hope you would be. We've been talking about really at some point along the roadmaps, every device ultimately is inflecting to 3D simply because that's how you get continued scaling. And so, I talked about our Kiyo GX tool. One of the -- you start seeing new types of technologies come in the etch and also deposition space. I mentioned that tool with its atomic layer etch capabilities, those tools are well suited to the types of 3D devices that you're going to see in nanosheet, or nano wire architectures. There will also be other tools, which we haven't really talked about so publicly that they are in the hands of our customers around selective etch that will become much more prevalent within 3D logic foundry devices. And then a whole slew of new deposition films that also help, I mentioned some of the and such so, I think it's an area where we can continue to expand our SAM by catching kind of those 3D inflections in logic and foundry. Our R&D that Doug talked about is really targeted towards growing our opportunity in that space.

[Atif Malik:]

Okay. And we have heard about supply constraints in chips and printed circuit boards. Is the availability of chips impacting your capability to be able to present for your customers?

[DougBettinger:]

In any supply chain is complex as ours is with as many suppliers as we'd have. There's always something that you're working your way through. And certainly there's a handful of those things today, given volume is inflecting up, but we're managing through it pretty well.

[Tina Correia:]

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

[Operator:]

Certainly, our final question will come from Joe Quatrochi with Wells Fargo.

[Joe Quatrochi:]

On your expectations for domestic China being flat up? How are you thinking about the efficiency of spending this year as the customers continue to ramp up their technology curves?

[Doug Bettinger:]

In China, specifically, Joe, is that's your question?

[Joe Quatrochi:]

Yes. For your domestic China customers, I think in the past, you talked about there's some level of inefficient spend just given that they're still kind of learning.

[Doug Bettinger:]

Our domestic China customer base is very broad. It's much broader, I think, perhaps than all of you realize. And you've got people at all kinds of different points along ramping technology, some are been doing it for a really long time. Some are brand new to certain technologies. When a customer is new to a technology takes a little while to get to an efficient ramp point. So it's a broad set of customers that are at different points, I think is what I would describe. Again, depending on how long they've been doing, what they're doing.

[Joe Quatrochi:]

Okay, fair enough. And then, quickly on just the CSBG side, how are you thinking about the improvement of memory fab productivity last year contributing to the growth? And then, how do we think about that this year? Because I assume that the spare parts business would be more of a modest contributor to growth for that business this year.

[Doug Bettinger:]

Let me think about that question. I don't know, Tim, if you have anything you want to add. I mean, consumption of spares will ebb and flow across every one of our end markets with utilization and utilization size spare part consumption is somewhat higher? It's just the nature of how -- it's a consumable part, obviously. So it needs to go along with volume. I don't know if I'm answering your question but that's true and the memory fab is true in foundry and logic as well. As Tim suggests, maybe there was a little bit of by head in spares maybe a little bit, but I don't think that was huge. I don't know.

[Tim Archer:]

And I don't think that it was something that needs specific memory. But in general, a couple of comments we've made about spare parts, maybe just to come into, we have always focused on the critical applications, because critical application, you have to keep those chambers in very pristine condition in order to be able to deliver the result the customer needs. They tend to be bigger drivers of spare parts. And so, I think as each of these technology nodes gets more complex, spare parts and the capability of those spares continues to grow. That's good for our business. But the flip side of that, of course, is that's customers cost. And so, that's why we are continuously looking for things like the new Sense.i platform to help our customer reduce maintenance cost and running cost of the systems. I mentioned Sense.i and Vantex, the first adopters and the first one to ramp up that production are going to be in the memory space. And that's simply because it delivers technology, productivity and that's really the key. How do you find that balance of getting the results on the wafer without consuming too many spare parts and without consuming too much of the tool equipment time? I think Lam has become very good at that. And I think that again, we point to the volume of learning we have in high volume production, cross and endearing cost sensitive applications. I think we may be the best at that.

[Operator:]

That will conclude today's question-and-answer session. I will now turn the call over to Ms. Correia for any additional closing remarks.

[Tina Correia:]

We just wanted to thank everyone for joining today and we will talk to you all again soon. Thank you.

[Operator:]

That will conclude today's conference. Thank you for your participation. You may now disconnect.