科林研發 (LRCX) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Lam Research Inc. financial results conference.

At this time, all participants are in a listen only mode.

Following today's presentation, instructions will be given for the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded today, Wednesday, January 21st, 2004.

I would now like to turn the conference over to Kathleen Bela, Director of Investor Relations and Corporate Communications.

Please go ahead, ma'am.

Thank you, Ross.

Good afternoon and thank you for joining us to discuss the financial results for the quarter ended December 28, 2003.

By now, you should've received a copy of today's press release which was distributed by Business Wire at approximately 1 PM Pacific daylight time and is posted on our web site at www.LAMRC.com.

Here today are Jim Bagley, Chairman and Chief Executive Officer, Mercedes Johnson, Chief Financial Officer, and Stephen Newberry, President and Chief Operating Officer.

Before we begin, please be advised that except for historical information the information LAM is about to provide and the questions LAM answers in this call may contain certain forward-looking statements including but not limited to statements that relate to the Company's future revenue and operating expenses, management's plans and objectives for future operations and product development, and the demand acceptance and competitiveness of the Company's products.

These statements are subject to various risks, uncertainties, and changes in conditions, significance, value, and effect that could cause results to differ materially in ways not readily foreseeable and which are detailed in the Company's SEC report.

We encourage you to read those reports in their entirety.

LAM would also like to describe any obligations to correct or update any of the information we are about to provide.

This call is scheduled to last for one hour.

Please limit questions to one per firm.

I'll now turn the call over to Mercedes for a review of the financial results.

Thank you, Kathleen.

This afternoon, our review of LAM's financial performance for the December quarter will provide tangible evidence of our successes at achieving our new business model objective.

Financial targets we have set and shared with you in previous communications are being met.

In some instances, earlier than anticipated.

Our profitability continues to improve faster than our revenue growth, supporting the attainment of [indiscernible] cash flow.

Our outsourcing strategies do provide provide the foundation for better financial performance in a downturn and increase leverage during upturns.

Our December results confirm these statements.

This review first, bookings and [indiscernible] performance.

New orders for the quarter rose 28 percent sequentially exceeding even our increased expectations in early December.

Grants (ph) in Japan and Europe were the main drivers for the higher results as focus in market penetration in targeted Japanese accounts began to bear fruit and successes continue as major European customers.

Each of the specific new orders were relatively flat from September and North America increased by approximately 10 percent.

For many quarters now, we have talked about the risk assessment analysis we performed for items in our backlog at the end of every quarter.

For December, this process yielded positive results as $5 million worth of items previously judged out are now expected to shift and be collectible shortly.

After this advance, backlog stands at 375 million at the end of December.

Revenue of 191.5 million grew 4 percent over September level.

Higher results than we anticipated, illustrating the current accelerating business environment.

A 4 million sequential improvement of utilization in factory and resources and assets, including savings related to seasonal holidays, was the major contributor to substantially better ongoing margins.

At 45 percent of sales, it represents the best performance since our revenue level exceeded 350 (ph) million reported by the contribution of our outsourcing and inventory management program.

R&D expenses rose modestly from September as higher levels of funding to key engineering programs more than more than offset the benefit of lower number of working days in the quarter.

SG&A expenditures were essentially even with last quarter levels.

Ongoing net income of 10 million almost doubled when compared to September, resulting in 7 cents earnings per share.

Including 4.9 million restructuring charges covering mainly the cost of decommissioned buildings, net income was 6.4 million or 5 cents per share.

The uptick in profitability combined with our continued focus on asset management and proceeds from stock option exercises of 31 million rose over low cash balances, up $61 million.

Cash, short-term investments on (indiscernible) cash balances currently exceed 700 million.

Accounts Receivable days of sales outstanding declined sequentially to 55 days.

Inventory fell by 3.4 million in spite of their ramp up in shipments experienced during December and expected to continue over the next two quarters.

Capital expenditures of 4.4 million to refresh our application's laboratory equipment were lower than quarterly depreciation, resulting in net fixed assets of 40 million.

A positive cash flow from operations achieved during the quarter continues to highlight the benefits of our outsourcing as well as our product platform's commonality strategy.

To conclude, a couple of housekeeping items for modeling purposes.

Depreciation and amortization amounted to 7 million for December.

Deferred revenue and profit were 47.6 and 29 million, respectively, and we employed approximately 2200 people at the end of December.

Before I conclude my remarks, I would like to add a few words to the press release announcing my decision to leave the Company at the end of 2004.

First, I would like to convey how much I have enjoyed working with each of you since 1997 and that I look forward to continuing to do so in the months ahead.

I have very much appreciated the opportunity to be a member of the awesome management team of this Company.

We are fortunate to have a world-class financial organization that will continue to contribute to the success of LAM under the leadership of Martin Anstice.

Many of you have already met Martin and I look forward to introducing him to many more of you over the coming months.

Having hired him and worked very closely with him over the last three years, I have no doubt he will be an outstanding chief financial officer.

We will move now to Jim's comments.

Thank you, Mercedes, and good afternoon.

I appreciate your joining us today.

I will comment on the industry and on our market position provide an update on CMP and conclude with our guidance for March.

The improvements in the industry that began in the September quarter strengthened in the December quarter.

After an unprecedented downturn, our customers have begun to request delivery of equipment to support their most advanced technology nodes.

Consumer spending on electronics is increasing, consistent with the improvement in the general economic conditions.

We expect that in an election year, economic improvement that will support additional consumer spending.

Our customers are executing their 300 nanometer (ph) plants.

Our outlook is for 300 millimeter to be approximately half of our new orders for calendar year 2004.

The preponderance of capacity being added is at the leading edge.

Over 60 percent of our etch orders for December were sub 130 nm and over 70 percent of our expected March orders will be sub 130 nm.

Our customers are prioritizing the expansion of existing 300 mm fabs.

That system's startup 300 mm fabs (ph) were 15 percent of our December orders while etch orders for the expansion of existing 300 mm fabs were 32 percent of our December orders. 300 mm fabs, customers are adding measured capacity increments, an interconnect area which represents largest investments in a wafer fabs [indiscernible].

With the implementation of copper, the interconnect area represents an even greater percent of total investment.

Throughout 2004, we should see additional investments and interconnect as 300 mm copper capacity is expanded to meet growing demand.

For etch these additions will increased dielectric [indiscernible] for the total etch market.

The convergence of an improved industry environment and our recent market wins have positioned the Company well as the upturn unfolds.

Our performance in the market is driven by our 2300 series of etchers.

This [indiscernible] deduction in November of 2000 the 2300 has steadily gained market position with many of the world's leading semiconductor makers as a result of its superior process results and excellent cost of ownership.

These gains placed LAM in a favorable position as the cycle strengthens and customers concentrate their efforts on wafers out not on evaluating [indiscernible].

In Japan, there are five major spenders.

Toshiba, Sony, [indiscernible], Matsushita and NEC.

Over the past year, we have prioritized our efforts at these accounts based on our estimate of their investment as the leading edge and the likelihood of our success.

We have penetrated each of these accounts and the growth in our orders from Japan in December is an early indicator of our success, winning new business in a region where our chief competitor has traditionally had dominant market share in dielectric etch underscored the strength in our market momentum.

During the last conference call, I gave an update on our new CMP system.

I said that we had received positive feedback from selected customers on the reliability and the potential of significant consumables cost reductions.

We now have engagements with six companies who are at different points in the evaluation of the system.

We expect two customers to make a decision on our system within the next few weeks.

The process of evaluation and qualification takes time and -- based upon our current status -- we would not expect to see meaningful revenues from the new system until the last quarter of the calendar year at the earliest.

We believe that the opportunities for our system are compelling enough for us to continue to address this market and that our prudent investments will yield positive return when we began volume shipments.

Over the last two years our Company has made significant progress.

I would like to commend our employees for the outstanding contribution they have made over what has been the most trying and difficult period for our industry.

Their willingness to lead and bring about change and their commitment to our customers have resulted in a strong performance we're now delivering.

For the March quarter, we expect our new orders to increase approximately 25 percent.

Revenues for March and June will be greater than I said in October.

March revenue will be about $215 million -- remembering that we pulled forward about $7 million from March into the December quarter as customers accepted our equipment faster than we had anticipated.

June should be about $270 million in revenues.

After nearly three years of salary reduction and salary freezes we will be adjusting employee based compensation.

We also expect to see payoff -- payouts from our variables compensation program.

The combination of these compensation changes and greater work days (ph) will increase cost of goods sold by $2 to $3 million when compared to December levels.

The impact of these items combined with some product mix changes will result in gross margin as a percent of revenue remaining essentially flat in March before resuming expansion in the June quarter.

Compensation changes and increased working days -- combined with certain key investments in engineering projects -- will increase absolute levels of overall operating expenses in March -- in the March quarter by about $5.5 million when compared to December.

This will result in an earnings per share of 10 cents on a share count of 143 million shares.

Now before we move on, I'd like to make a personal comment, it's with some sadness that those of us in the senior management team of the Company who have worked with Mercedes for various lengths of time for almost 20 years -- we hate to see her leave.

We have a great deal of confidence in Martin but Martin is not nearly as attractive as Mercedes is.

And -- but we will deal with that shortcoming over time and I am sure we will get used to looking at Martin instead of Mercedes.

We all wish Mercedes well.

She's more than an employee, she's also a friend and we know that over the coming years, she will be very successful in whatever she decides to do.

I would like for Steve Newberry to address some questions that have been raised about our ability to ramp our output and our ability to manage the supply chain with an outsourced business model.

So with that I'll turn it over to Steve.

Thank you, Jim.

One way to look at ramp readiness and ramp capability is to look at how fast a factory is able to grow output quarter over quarter over quarter at the start of an upturn.

As we look back in history to the last two major ramps in our industry, we can see that on average, back in 1994, '95 the best companies grew revenues which at the time equaled production output -- 25 to 30 percent quarter over quarter for the first few quarters and a total growth at that peak ramp acceleration of about 70 to 75 percent increase in a two quarter period.

In the 1999 -- 2000 upturn, revenue at the major companies ramped 35 percent quarter over quarter in the first-quarter off the bottom and about 20 to 25 percent in the next quarter for a maximum 65 to 70 percent ramp in a two quarter period.

LAM's current bookings of 28 percent in the December quarter over September and then 25 percent as guided by Jim in the March over December period is not particularly different than the start of previous upturns.

Production output ramp though is in fact for LAM going to be more aggressive.

The June quarter -- we will output approximately two times, or 100 percent, the output that we produced in the December quarter.

This will be to the best of my knowledge a faster ramp than any major equipment supplier produced in the last two major upturns.

Therefore, I believe that concerns about our outsourcing strategy potentially limiting our ramp capability will be put to rest as we execute this plan.

Our suppliers are totally signed up, they're ready to execute, they have been executing on time as we have started this ramp and could have ramped more if asked.

They can do this because they and we have spent the last six months in comprehensive ramp readiness, reviews and preparation activities and corrective action processes where needed.

The volume of the June output -- while significant -- is still below the peak output of the previous upturn and there is plenty of capacity expansion capability in place for our industry.

We will continue to work very closely with our key manufacturing suppliers to ensure an on-time flow of quality parts, modules and assemblies that will meet the delivery requirements of our customers.

And while our production output plan to double in the next six months is certainly aggressive, I believe that it's very achievable.

And as Jim mentioned, our revenue will grow at a more modest pace due to our revenue on acceptance policy.

Therefore, I expect December to June revenue growth to be around 40 percent and leading clearly to continued revenue growth in the September time frame as we achieve sign offs in September for our June shipments.

And with these comments we will now open the call for questions.

[Operator Instructions].

Mark Fitzgerald with Banc of America.

Jim, on your CMP guidance here, what's that say in terms of any sort of design windows that you need to attack this year?

Mark, I don't understand the question.

I assume people are designing in for 90 nm at this point and are you going to be ready -- is the tool ready for 90 nm design bake-offs at this point?

I understand now.

The answer to the question is yes.

The customers who have done the most extensive valuation so far and given us information have been working on 90 nm.

And one has done some work at 65 nm and it seems like the system is very capable at 90, and shows a great deal of promise at 65.

The 65 nm node is still pretty much up in the air for the requirements for CMP because we're still in the decision process on the type of dielectric that will be used.

And where you do stand on the 130 nm at this point?

Are you just -- basically missed that window?

Oh no, we got customers actually that are talking to us about getting the system in at 130 nm provided it does what we said it's going to do and we've got a couple of customers that are looking at it for that reason alone.

The -- I think the opportunity for us here is partially there because of customers' concerns of being limited to only one supplier and seeing one real supplier in CMP.

We got other companies working on CMP -- it's just no one has presented a viable solution that's competitive to the leading supplier.

So the encouragement I think that we're getting is, largely, because they would like to have another source for the safety of their manufacturing output.

Gerald Fleming (ph) with Oppenheimer & Co.

Yes.

On the Japanese activity are most of those wins in the oxide etch area and are your tools being used at most of the [indiscernible] levels or just down near level one and two?

The answer to the first part of a question -- it is, our success has been in dielectric as well as all of the conductor etch processes.

So it's been pretty much across the board and the answer to the second question is -- in general, customers will qualify an etcher for multiple levels, both at [indiscernible] as well as in trench (ph) and that's been the case in Japan.

[indiscernible] [inaudible]

Congratulations on this strong order inflow.

I was wondering how far your visibility is at this point and it appears it could be as high as six months or even more and was wondering if you could make some qualitative comments on the direction of the June quarter especially coming after two really strong quarters.

At this point we wouldn't make any projection on June.

If you will remember, in October, we gave guidance for September and missed it.

And that was -- for the December quarter and we missed it by 15 percent or another way to look at it we missed it by 2 1/2 times the increase.

The -- If you had asked us in September what our bookings would be in March we would have missed it even further, based upon the guidance that I just gave you.

So I think for us to try to look forward to June is we have proven that our ability to look forward is significantly flawed in this environment.

So there isn't any point in my commenting on it, because the accuracy of my numbers would be suspect.

Just to follow-up, Jim, you also said more than 60 percent of orders were 139 -- you said (indiscernible) 130 nanometers [indiscernible] [Inaudible question - highly accented language].

Actually, no, it is not.

It's below 130.

If you look at -- well, the only other way we try to correlate this is below well it's 180 nm and below, because that's really where capacity has typically been added so we know what the ads were at 180 and below and that represented essentially 100 percent about 97 percent of all of the orders that we booked was 180 and below.

So we didn't break out 130 exactly, because most of the facilities are buying for 130 and 110, or 130 and 90 with the equipment that they're purchasing today.

John Pitzer with Credit Suisse First Boston.

Congratulations.

As you look at the order growth in the March quarter can you help us understand what kind of geographic distribution you might see and as a follow-up can you give us a sense of what memories/DRMA represented December and how that might trend going into the March quarter?

Asia -- which includes Japan in the number I'm going to give you -- is about 75 percent of the business as we look forward so this is clearly a situation where Japanese IDBMs (ph) are trying to get back into a position where they can compete on a worldwide basis and probably compete with foundries.

The foundries are continuing to grow and I think it says something about the level of outsourcing from Europe into -- Europe and North America into Asia from a wafer processing standpoint.

In other words, the use of boundaries (ph).

So the business is essentially a European -- Asian activity for at least 75 percent of the business.

Relative to memory and logic, in the December quarter, memory represented 26 percent of our new orders and the boundaries (ph) represented 50 percent and IBM (ph) and others represented 24 percent.

In the March forecast it will be about the same for memory.

Mix between logic and boundaries is probably going to shift a little bit more towards boundaries because the boundaries are really emphasizing 300 mm and 300 by itself is going to be around 60 percent of the total orders.

Bill Loo (ph) with Morgan Stanley.

You've talked in the past a CapEx forecast of 4 (indiscernible) percent -- do you a new number for us now?

We're still evaluating that.

It's obviously going to be greater than 20 percent.

I think as a matter of fact, I believe that at our shareholders meeting that I said we expected the wafer fab business to be up 30 to 35 percent.

And that may be even short of what the actual growth and capital expenditures would be for the year.

Just a follow-up on that.

You've seen a huge growth in orders from your Asian customers last couple of quarters was (indiscernible) continue into March as well.

Where are you expecting growth past the March quarter?

I think that the year is going to look very much like what we have seen.

At some point, we would expect some of the North American companies to begin to order more aggressively but I think that if you just think in terms of how many new 300 mm fabs have you heard announced for North America?

Virtually none.

And if you think about how many have been announced for Europe -- in Europe, AMD has announced a fab but I'm not sure what level of equipment that they will be booking for that fab in '04.

It may be '05 before you see it or at least the tail end of 04. [indiscernible] will probably continue to expand [indiscernible] and at some point begin to book business aggressively for Katonya (ph) but that may be way late in the fourth quarter -- in fourth-quarter '04.

We don't know that yet and I think that's about the only activity in Europe.

There are 20 or 25 either operating 300 mm fabs or planned expansion or planned new fabs that we continue to track to look at opportunities and those are not located in North America.

So I think that we will continue to see a continuation of business in Asia.

Along the same levels that we see today -- that would be our forecast as we sit here and look at it at this point.

Jim Covello with Goldman Sachs.

Just quick question.

As lead times stretch out are you at all concerned about double ordering and do you think you're seeing any of that and what are you trying to do to mitigate that?

Thank you very much.

Jim, we talked about this several times.

Double ordering in our business is virtually nonexistent.

I am not aware of us or in in my former employer or here at LAM -- I'm not aware of a single time in the 20 plus years that I've been selling this business commercially, selling products commercially, that I have ever uncovered a case where somebody ordered the same systems for -- from two different companies for the same application.

So I just don't think it ever occurs.

It didn't occur when it was easier to do than today.

Today it's virtually -- it's uneconomical to do that because you think about the match set changes that have to be accommodated when you order two different kinds of equipment to do essentially the same process as well as the fact the processes will be different.

We don't make anything that (indiscernible) compatible with the competitors.

So double ordering is no real issue in the equipment arena.

Now if you move to a situation -- do we have customers or do our customers have customers who are placing orders on two accounts for similar devices?

That may be happening.

We have no way of knowing that.

Thanks for that explanation.

That question was probably a little more geared towards customers ordering more of your tools -- some making double orders of your tools, not double ordering with you and the competitor so that they can get a little bit higher in the slotting allocation but it sounds like you're not too concerned about that, either.

No but, again, this is a situation where you can count all the tools that are being ordered from us in a quarter on several people's hands and feet.

And we know where every one of them intend to go.

We know where the spot on the wafer fab (indiscernible) is that they will go so I'm not concerned about that.

The one area that you might be concerned about is are the customers ordering in advance of their need for what's going to ultimately turn out to be the demand sometime later in time and, again, we have no way of knowing that.

We look at the the length of the downturn, the severity of the downturn, the rapid rate of the ramp that Steve has talked about I think is absolutely consistent with the lack of investment that has gone on for basically two and a half years.

So it's -- the rate of the ramp of our output is not shocking.

I think it just shows that the customers have got to catch up and then we will move to a period of time where the customers are buying for the future as opposed to buying for this afternoon.

Timothy Arcuri with Deutsche Bank Security.

I actually had two questions.

Firstly, Jim -- if I were to come to LAM three months ago, and if I wanted to get a tool, what are the differences in the lead times three three months ago vs. today and then I'll ask you a follow-up?

Well, again, you would have to tell me who you are and how much money you've got and how many more fabs you're likely to build and what your likelihood of success is going forward before I can tell you exactly what the lead time will be because our lead times are variable and they vary by your past relationship with us and how much -- what level of business we've been doing.

But moving that aside and just looking at it as kind of a walk-in business, three months ago (MULTIPLE SPEAKERS) (indiscernible) and today we're slotting deliveries in five to six months.

So it's changed remarkably.

But we have done a very good job and this again ties back to the rate at which we ram.

We've don a very good job of meeting customer requirements.

Now the fact that a customer can't get a tool for six months does not mean that the customers are without a tool but they need it for six months.

We have done a very good job of accommodating customers' requirements.

What's happened is, customers are not ordering for immediate delivery.

They now are planning what their capacity needs will be two quarters out.

And they're trying to get equipment in the time frame that they expect to need it.

So that's -- we're slotted out, based upon our current plan to the end of June, early part of July.

And we can always change our plan up or down if it is required.

Okay, Jim, thanks and I guess as a follow-up -- am I thinking about it right, that there were actually a couple of large orders out of Asia-Pacific during the during -- kind of the December months or during that quarter that maybe since they didn't appear or doesn't look like they appeared in December, maybe they'll appear in March?

Is that the right kind of way to think about it?

Well I think one the things that we said over several times I think people may not think it -- about its impact.

We shut the Company down for all intents and purposes on the 19th at the end of the work day 19th of December and we opened again for business on the fifth day of January.

We had our field organizations continuing to work and our focus and our priority was not on orders because we knew we were doing very well on orders.

Our focus and our priority was to ensure we met our revenue numbers.

We probably should have spent more time focusing on orders and less on revenue and then we wouldn't have overshot our revenue.

But we got more sign offs than we expected but we had people focused on that and the focus was not on getting every single order that was on the street booked because the marketing organization was shut down from the 19th so they couldn't work to clean up orders that needed to be cleaned up so whatever came in or could have come in after the 19th very little of it would have been booked.

Glen Yeung with Smith Barney.

Jim, wonder if you could just talk about the dynamic that you're now seeing from your customers?

People have already asked questions about lead times for example and how that's changed but I wonder if you could address two issues.

One is the pricing environment that you're seeing and two, whether or not you're seeing polling activity in today's market and how that impacts you and then just beyond on that -- could I just ask one other housekeeping question?

If you could give us deferred revenue and deferred profit (ph) from the last quarter just on [indiscernible] .

Mercedes, why don't you give the deferred profit and revenue from the last quarter?

Glen, it hasn't changed meaningfully sequentially -- the deferred revenues in the September quarter were around $45 million also and profit -- deferred profits were in the same range that they were in the December quarter.

I think they were in the $28 million range.

On pricing, pricing is maybe modestly up, largely as a result of the way the equipment is being optioned as opposed to our raising prices.

The price on a -- let's say a standard poly etcher 2300 poly etcher really hasn't increased.

What has changed is that no one is buying a standard poly etcher, they're buying a poly etcher with several enhancements on it so that it will work not at 189 nanometer but 130 or 110 or 90 and there's an option for each one of those technology nodes.

And as they buy equipment to go further into the technology nodes the price is different, because the performance level we guarantee is different.

And on pull ins, I will let Steve talk about that rather than me give you my view of it.

Could you repeat the question relative to pull ins?

Operator, can you re-engage with the caller, please?

[Operator Instructions].

Just want to get a sense as to what kind of pull in (ph) activity you're seeing and how that changes your view about the shape of the year, given what you think are the right plans being acted upon in today's market?

The pull in environment is really not what the companies are really focused on.

We have a lot of customers who ordered in the September quarter and in the early part of the December quarter that we're looking for deliveries in the March and December March and June of '04 time frame.

And they've remained consistent in wanting deliveries in that time frame.

What we've seen then of course is with the order environment in December, many more customers coming in and wanting deliveries in that March and June time frame which has resulted in our production output going up dramatically as we talk.

So it's really not a function of pull ins it's a function of customers that were already getting deliveries in that time frame, then added onto by the additional orders that came in in December.

Jay Deahna with J.P. Morgan.

First of all I'd like to graduate Mercedes on doing a spectacular job for the finance group over the years at LAM.

Thank you, Jay.

In terms of the questions, is your perception of what your upside margin model can be any different now, any better than what you've been showing in your [indiscernible] investor presentations, No. 1?

And No. 2, Jim, what do you think your mix of revenues will be in 2004 and 2005 if you can hazard a guess for 200 mm vs. 300 mm?

Jay, this is Steve, and I'll answer the margin.

As we've been talking about really -- I guess for about a year and a half in terms of what we presented as a model in terms of the opportunity for increasing our gross margin performance during this cycle.

I would expect that with the environment that I see that we will exceed our best margin gross margin performance -- that we have had in the last upturn -- somewhere in the higher 40s range.

Also I believe that as a function of the leverage that we're getting that we will also deliver better operating profit and, most importantly, we're going to do this at significantly lower revenues than it took for us to accomplish peak margins and peak operating profits in the last upturn.

And I think that at the end of the day, what we are really focused on is and you see that with our results starting in December is that we're going to deliver more profitability faster in the cycle.

We're going to generate more total profitability over the cycle as a function of being able to get up to faster gross margins and leveraging our cost structure much better.

So I think that that's a key point that we want to make and as a result of that we will generate more total cash in the cycle as a function of the speed at which we can get our profitability up quarter over quarter.

[indiscernible]

Mix of 200 and 300 mm I suspect that by the end of this year 300 mm will have crossed over 200 on a quarterly basis but for the year it is probably going to be pretty close to 50-50 and '05, I think it will clearly be a year where 300 mm will be the predominant equipment that's being purchased and it will exceed 200 mm, I suspect, by a pretty significant margin.

Typically it takes a while to get to the crossover.

Once the crossover is done, then you quickly fall in a year or so, a year or two after crossover you're down to the old wafer sizes -- 25 percent of the total.

Avinash Kant from Adams, Harkness and Hill.

Quick question on SAB 101, I am trying to understand how revenues will ramp up.

Because of the SAB 101 impact I believe that has been very conservative in terms of recognizing revenue.

The question I had was that if you had a repeat shipment to a customer of the same tool that you've already shipped and that has been accepted, will you be able to recognize revenues right away or you will still wait for acceptance for that to be converted as a revenue?

Avinash, this is Mercedes.

Our revenue recognition practices state that we will take revenue when a customer accepts the piece of equipment that we are taking revenue on.

So if that occurs irrespectively of if the customer already has a similar unit in their facility that they had purchased at past events so we will continue to generally recognize revenue when we have obtained customer acceptance.

Avinash, the thing that's typically the case is that the first system -- the revenue recognition period is longer because there's more to ensuring qualification and meeting all the specifications and ensuring the customers that they are buying what they thought they were or they're getting what they thought they bought.

The second and third, then, become quicker.

But we still require that the customer sign an acceptance form before we will declare revenue.

Just a quick follow-up on that one, Jim.

So that means -- just to understand how would acceptance times change?

That will give me some idea -- like if you had first two out to a customer, typically, how much time does it take to qualify a dielectric [indiscernible] and of course on a repeat shipment, what kind of timing have you seen in the past?

How did it change?

I'll let Steve talk about that because he's been working on our fab qualification program and has been the driver of improving the length of time it takes us to get acceptance.

If you take a tool that's a first in fab tool for new application, that qualification period could typically run 9 to 120 days.

It depends on the amount of characterization and yield qualification work that the customer needs to do.

And how fast those things cycle through, but that's pretty typical.

Once that qualification has occurred then a typical acceptance time frame would be in the 30 to 60 day type of time frame -- depends on the application, depends on the customer but that's a pretty typical cycle.

Shekhar Pramanick with Prudential Securities.

Congratulations on a good quarter.

Two part question.

First one for Steve.

Steve, you talked about your shipment levels are essentially going to double in the June quarter from the December level.

Is it going to be happening more linearly or is it pretty much back end loaded?

And, lastly, the question for Jim -- oxide etch kit clearly the dielectric etch tool was not only better technologically but also cost of ownership significantly ahead of competition.

What do you see finally competition has offered tools out there -- are they making any progresses [indiscernible] GAAP is still increasing?

That is relative to the linearity of how we are ramping through the March quarter through the June quarter.

It's a pretty linear expansion.

You know when you work on trying to get that kind of output out, I think if you looked at trying -- it was back end loaded you would really be running at a rate that's even higher than that so it's a very linear expanded ramp throughout the next six months.

When you look at how our -- what our competitors are doing and what they're announcing, you've got to differentiate what they announced or what they are delivering for R&D application versus what we are delivering for production applications because that's basically the situation.

That most of our competitors' tools (ph) unless they have already won a position in a dielectric process in a customer.

They're trying to get their tools into R&D and they're talking about their leading edge tools not for production but for R&D and then for production.

We don't talk much about our leading-edge tools.

That's because maybe they'll work, maybe they won't work, maybe they're needed, maybe they're not needed and what we spend our time talking about is what we're delivering for our production.

If -- internally, when we compare what our competitors are saying about their leading-edge capabilities and we look at what we are currently demonstrating to customers and have in R&D in their R&D facilities, I think we're in very good shape.

I'm not concerned about our ability to compete in 90 or 65 nm at all.

We seem to be doing quite well.

Brett Hodess with Merrill Lynch.

I just wanted to touch on the gross margins, again, just to make sure the flat sequential margins on the rise is mostly because of gross margins is because of increasing salaries and expenses that have been held back a bit before we get into the revenue driven margin expansion in the June quarter.

Was that correct?

That's right, Brad.

And then based on the comments that Steve made, then we'll be looking for margins that perhaps move up into the high 40s as we move through the cycle on the gross margin line.

If we hit the 270 number in March will we be somewhere in between then the 45 and the high 40s, is that -- or will it be a more slow ramp up?

(indiscernible) about the 270 revenue in June that Jim talked about?

Correct.

Yeah.

Yes we would expect that as we move up from the 45 we will see that move up incrementally.

We won't see a huge jump up to the high 40s at that point in time.

It will occur later in the year as revenue continues to expand.

Brett, I think Steve's trying to negotiate his MBOs (ph) on the conference call and he and I haven't reached agreement what the gross margin ought to be at $270 million in revenues.

We will discuss that over the next week or two.

Ted Berg with Lehman Brothers.

Wanted to clarify what was the 300 versus 200 mm mix of both revenues and orders in the calendar fourth quarter and then, I have one other question?

Let me go back and find that sheet again.

The 300 mm in the December quarter was the -- let's see, that's not right.

It was 47 percent, 300 mm and 53 percent, 200 mm.

That's revenues or orders?

Orders.

Okay and where do the margins stand on both those tool sets?

Are they roughly equivalent right now?

Yes, the gross margin percent are equivalent -- the 300 mm is more expensive so there's more revenue dollars out, gross margin dollars than the 300 mm and the 200 mm.

Michael O'Brien with [indiscernible] SoundView.

Just a quick question.

Just on bookings trends, I know you've talked it's tough to say much about June qualitatively, Jim, do you see any reason why bookings would drop off as we get to mid year?

Seems like there's a lot of activity to keep growth going?

You have to make so many assumptions about what the environment will be like as people are placing orders for equipment they expect to receive in September and December.

But I don't see a reason for it to go down.

We have spent a lot of time trying to model what the business should look like, based upon what had passed changes in the economic environment.

We looked at the downturn that we experienced and tried to quantify the impact of 9/11 on what happened in the semiconductor industry.

We're reasonably sure [indiscernible] major impact on the economy although it may be difficult to measure.

And we know now that any time the economy suffers, then semiconductors suffer and then we suffer kind of as the derivative of the semiconductor company.

So at this point I don't see any reason why we should not see a healthy environment for equipment, because our customers certainly have aggressive plans in the second half of the year for increased capacity at the leading-edge.

One of the things I want to make sure that everyone takes away from this call from LAM's perspective is the industry has a tremendous amount of capacity.

And we sometimes -- when we talk about capacity we lump everything together as if all fruit is of the same variety and it's not.

The capacity that's being added today is to make product below 130 nm.

That's where most of the money is being expended.

Our past experience says that every technology node requires about a $40 billion expenditure in order to output the amount of wafers that are being processed at that node.

And we have only begun to invest significantly at 130 nm.

DRAM has invested at 110 and they will continue that investment.

There's been almost no investment that has been focused on 90 nm, specifically, for the foundries.

They are trying to bridge 130 to 90 nm with some of the tools they're buying and most of them understand that there is going to be additional expenditures that they have to make either in options, upgrade kits, etc. in order to make -- to bridge that gap.

So there's a huge investment that has to be made yet at the leading edge of technology in order to support the kind of revenues that we have seen historically.

I don't see any reason for that to change significantly as we go forward.

So I think that, given a good economic environment, we should see a good investment on the part of our customers for capacity to serve the consumer buying that will take place.

We have time for one more question.

Kevin Vassily with Susquehanna Financial Group.

First is when you comment on the shipment levels doubling from December to June, are you talking about units or systems?

Or are you talking about revenues?

The second question is are you guys doing any work on refurbished systems or machines to support demands for 200 mm tools?

Thanks.

What we do is we look at shipments in terms of the units that are going out then we dollarize it.

So the doubling is really in dollar terms in looking at the December output in dollars and what we expect to output in June quarter in dollars.

Certainly the unit output activity tracks similarly.

But relative to refurbs for 200 mm we've been active in the remanufacturing used equipment and refurb and upgrade market.

There's a certain amount of activity on the part of a number of customers, particularly in China, that's looking for equipment that they can get a hold of that gets refurbished and gets upgraded and then delivered in the 200 mm node and I would expect that as this upturn plays itself out that we will have a certain amount of activity in that market but we will also have a number of customers who clearly are not going to make the move to 300 mm.

They're going to take a fab that's fundamentally (indiscernible) Micron capable on a 200 mm chamber and we have process kits that will enable those chambers to be able to process at 130 nm or in some cases to go below that.

So I would expect that to be an active market that we will participate in.

Thank you.

Unfortunately, that is all the time we have for today.

We would like to thank you all for your good questions and we hope you will be with us next quarter when we discuss next quarter's results.

Thank you.

Ladies and gentlemen, that concludes the Lam Research December 2003 financial results conference call.

Thank you again for your participation on today's conference and you may now disconnect.