科林研發 (LRCX) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Lam Research March quarter 2004 financial results conference call.

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.

If anyone needs assistance at any time during the conference, please press the star followed by the zero.

As a reminder this conference is being recorded today, Wednesday, April 14th, 2004.

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

Please go ahead.

Thank you, Rob.

Good afternoon and thank you for joining us to discuss the financial results for the quarter ending March 28th, 2004.

By now you should have received a copy of today's press release which was distributed by Business Wire at approximately 1:15 p.m. pacific daylight time and is posted on our website at www.lamrc.com.

Here today are Jim Bagley, Chairman and Chief Executive Officer, and Mercedes Johnson, Chief Financial 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 assessed that could cause results to differ materially and in ways not readily foreseeable and with the details in the company's SEC report.

We encourage you to read those reports in their entirety.

Lam would also like to disclaim any obligation 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 to Mercedes for a review of the financial results.

Thank you, Kathleen, and good afternoon to all our listeners today.

To start, I'll review the positive momentum in our new orders, backlog and revenue performance for the quarter.

At $350 million, our incoming orders for March exceeded the December quarter by approximately 29%, in line with the recent acceleration of capital spending plans by semiconductor manufacturers and above our expectations entering the calendar year.

Capitalizing on our established position and on recent wins, orders growth was significant in North America and Asia, at 17 and 60% of total bookings respectively.

As we anticipated last January, 300 millimeter purchases accounted for roughly two-thirds of total systems orders, with three-quarters of total demand targeted for 110 nanometers or below applications.

The positive constraints at the leading edge drove foundry customers to place orders amounting to more than half of our new bookings for March, while memory purchases returned to the more traditional 30% level.

Our backlog continues to build as orders outpaced shipments reaching $423 million at the end of the quarter.

Stronger market conditions resulted in customers accepting equipment faster, thus revenues for March of $231 million represented an increase greater than 20% over December.

Recently, Europe and Japan showed the most substantial percentage growth quarter over quarter.

The leverage in our business model was clearly evident in the profitability performance.

On 21% higher revenues, ongoing net income nearly doubled.

In fact, the March quarter is the third consecutive quarter when ongoing net income has sequentially doubled.

Ongoing gross margins as a percentage of revenues for March exceeded expectations entering the period, reaching 45.8% or 80 basis points higher than last December.

Expense management efforts combined with better utilization of factory and field resources more than offset the planned increases in employee compensation.

This outcome continues the positive progression in gross margin percentage for the fifth quarter in a row and highlights the earnings power of our outsourcing initiative.

Excluding restructuring charges, operating expenses of about $80 million increased at less than half of our revenue growth rate, reflecting continued focus on improving our productivity.

Variable compensation plans triggered by the higher levels of profitability contributed to the expense growth versus December.

As we anticipated in our January conference call, quarterly salary increases and incremental variable compensation for the total company amounted to approximately $6 million.

In spite of these items, ongoing operating profit for the quarter represent a 32% fall-through.

That is, every dollar of incremental revenue contributed 32 cents to profit.

Restructuring charges of $1.3 million for March are the result of further facilities consolidations in Japan, enabling us to establish presence in a more relevant location to our key customers.

After other income of $900,000 in March and a tax rate of 25% of profits, ongoing net income was $19.9 million, or 14 cents per share.

Including restructuring charges, net income was $19.2 million or 13 cents per share.

Our balance sheet remains strong and highly liquid.

Cash, short-term investments and restricted cash increased to $752 million at the end of March.

Proactive working capital management combined with higher profit yielded $41 million positive cash flow from operations.

Accounts receivable DSO increased to 71 days for the quarter, the result of significant growth in shipment volume and the delay in our revenue growth, a byproduct of our acceptance based recognition policy.

Our manufacturing outsourcing initiatives contributed to the acceleration in inventory turnover to 4.5 times, the best performance ever achieved in Lam's history.

With just $5 million in capital expenditures and $6 million in depreciation and amortization, net fixed assets declined to $37.5 million.

Deferred revenues and profits increased respectively to $101 million and $56.6 million, and our global employment levels remain at approximately 2100 employees at the end of March.

We can now move to Jim's comments on products, market, and customer activity which supports our guidance for the coming quarter.

Jim?

Thank you, Mercedes.

Good afternoon, and thank you for joining us today.

I'll comment on the market environment and our performance in it, I'll highlight some specific areas in our financial performance, then I'll conclude with guidance for the June quarter.

The market environment has continued to improve through the March quarter.

Generally, bookings grew by region, by technology node and by customer segmentation.

By that I mean foundries, memory producers, and high-performance logic.

Demand for legacy products, typically 250 to 350 nanometers, has been surprisingly strong and resulted in greater 200 millimeter bookings than anticipated.

During my Asian customer visits in March, lack of capacity for legacy products was identified as a problem area.

I believe our market environment will continue -- will show continued strength throughout the calendar year.

The result of analyzing industry data indicates that the capital expenditures currently forecasted for the industry will not support the growth that is projected for semiconductor revenue.

The capacity utilization at geometries greater than 150 nanometers is in the mid-90% range.

This capacity represents 75% of the industry's total wafer start capacity.

The markets served by this capacity are expected to grow by about 10% in calendar year '04.

To bring this capacity to a sustainable operating utilization, about 2%, and to accommodate the expected growth in '04 would require an additional 270,000 200-millimeter wafer starts per month.

This additional capacity, plus required upgrades, drives a wafer fab equipment investment of $7.5 billion.

The leading edge capacity, that is, for 150 nanometers and smaller, represents 25% of the wafer start capacity and is currently operating at an unsustainable near 100% utilization.

With growth forecast for microprocessors, memory, and high performance logic of 26% for this calendar year, an additional 360,000 300-millimeter wafer starts per month are required at a cost of $23.5 billion in wafer fab equipment.

The sum of these two investments is $31 billion.

The current forecast for wafer fab equipment expenditures is about $22 billion or about 50% growth '04 to '03.

My conclusion is wafer fab expenditures will exceed the forecasted 50% growth but will not reach the required $31 billion, and the industry will exit '04 at utilization levels they cannot sustain.

At this point, I see no reason that semiconductor growth won't continue in '05 if the world economies continue to grow.

The unfulfilled demand for wafer fab equipment that results from under spending in 2004, coupled with growth in the semiconductor industry should continue to drive demand for wafer fab equipment in 2005.

Now turning to our operating performance, our initiatives in this area are generating significant results.

For the June quarter, our shipments will be almost 120% greater than our shipments in December, while our ending inventory in June will be only 20% greater than our ending inventory in December.

The progress we're making on inventory turnover gives us confidence that we will meet or exceed our inventory turnover goal of five.

We are achieving this substantial growth in shipments with few issues.

On-time delivery is much better than in the last cycle, and our supply chain performance to this point is also better.

Our shipment performance, fab qualification program and receivables management, should enable us to generate at least $200 million in free cash, up from our previous discussions of about $150 million.

This improved outlook for cash generation gave us the confidence to initiate the retirement of our convertible bonds.

Moving to guidance for June, new orders are expected to grow 10 to 15% sequentially or between 385 to $400 million.

With a customer acceptance pattern similar to the quarter just ended, revenues should reach $300 million.

Gross margin as a percent of revenues will be about 47%.

We are forecasting operating expenses to be $92 million for June, a substantial increase over the March levels.

With the faster growth in revenue as well as greater bookings, our profit performance has improved substantially, and as a result, we have decided to pull forward projects in IT as well as in R&D.

These projects will add $6 to $7 million per quarter to our operating expenses for the next few quarters.

These projects should contribute to improve productivity across the company and return dividends when they are fully implemented.

We expect operating expense growth to decline substantially for the remainder of this capital -- calendar year.

Including the cost of these projects, we will still be within our model performance of $95 million in operating expenses at revenues of $385 million.

Our ongoing net profits are anticipated to be 25 cents per share with a share count of 148 million shares.

With that, I'll open -- well, I'm going to make one other comment.

This performance cannot be achieved without the contributions that our employees make, and I'd like to thank our employees for their contributions that made the stellar performance of this quarter possible.

Now with that, I'll open it for questions.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

If you have a question, please press the star followed by the 1 on your telephone keypad.

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Our first question today comes from Jay Deahna with JP Morgan.

Please go ahead.

Hello.

Jim?

Yes.

Hi.

Two questions.

The first one is, in terms of Japan, what do you see for demand patterns, bookings that would be out of Japan for the next several quarters, and do you believe that Lam is better positioned to generate higher market share in Japan this cycle versus last, especially with a lot of the spending being on logic and your Dielectric Etch edition, number one?

And number two, can you give us some details on what the projects are that you're increasing your op ex for?

Okay.

Let me answer the first one, first part of the question first.

The activity in Japan is going to continue to grow.

In this quarter for us it didn't grow as much as what had gone on in Asia, the rest of Asia, because we had substantial bookings for the foundries in the March quarter.

However, in the December quarter, the Japanese bookings were up and we're forecasting the Japanese bookings to continue to improve through the remainder of this year.

Our market share will be substantially higher in Japan in '04 than it was in the 2000 cycle.

It wouldn't -- it's not out of the question for us to have a market share in Japan of 22 to 25% for '04.

So we're very bullish on our efforts and the success that we've had in the targeting the key spenders in Japan.

Now, turning to the investments that we're making in -- and I'll talk about IT specifically.

First, we have some software upgrades that we want to put in place.

We have a network security program that we will initiate that provides enhanced security both at the server level as well as at the PC level, and we're going to do a very extensive PC refresh which will drive some capital expenditures but turns out that if you look at the cost of a PC, because of our good efforts in making this fine equipment that lowers the cost of semiconductors, the installation and software loading and check out of the PC's is almost equal to the cost of the PC's.

So we have those three activities.

One other activity that ties with our R&D issues is a product lifecycle management project that will provide software so that we can eliminate a large number of hand and -- or manual processes to track all phases of our product from the beginning of development all the way through to the point where the product is legacy and is about to be retired.

So these are -- some of these four represent a pretty substantial amount of effort and are adding to our BLE.

We had not -- we've been delaying these projects for sometime, and we had intended to initiate them later in the year but decided, as I said, because our profits had improved to the point that we could easily afford adding the cost of these to our operating expenses we decided to move forward with the projects and pull them forward.

But if you remember the model that you talked about in the past, the model at $385 million in revenue, which I believe generated something like 22.5% operating profit, it had a operating expense level in there at 24.6 or so -- yes, 24.6% op ex which is $95 million.

We expect to be below $95 million for the -- in operating expenses each quarter for the rest of the calendar year.

So we expect to do well with these projects, and be able to maintain growing operating profitability with growing revenue.

Next question.

Our next question comes from Shekhar Pramanick with SoundView.

Please go ahead.

Yeah, hi, Jim.

Good afternoon.

Two-part question.

There was a big bump in orders from North America.

Was that mostly 200 millimeter, or there has been some chatter that you have been successful in one of the leading logic manufacturers for the Dielectric Etch.

Is that helping, or if you can give us a little status update?

Yeah, most of that was -- most of that was 200 millimeter and was not tied to a specific logic customer.

Okay.

And since we are on the logic, maybe you can give us a sense what kind of dollar opportunity, Dielectric Etch tool have in the leading logic manufacturers, for example, what is eight levels of metal in terms of metal structures?

How many tools or some kind of a dollar number per fab on a standard fab opportunity?

I tell you what, we'll do that in a minute.

What we'll do is model it around about 10 levels of metal, because that is kind of the bogey now for advanced copper devices between 9 and 11 or 12 levels of copper, and so we'll bogey it at about 10 levels, and I'll answer that question on the number of Dielectric Etchers and what that, in just the back end.

Of course, you've got Dielectric Etchers in the front end but it's not as substantial.

So what I'll do is give you that number later in the broadcast, and I'll have someone bring it in to me in just one second, because we've got that modeled.

So let me have the next question.

And I'll get back to you, Shekar.

Our next question comes from Mark Fitzgerald with Banc of America Securities.

Please go ahead.

Hey, Jim, can you give us an idea how much you guys are spending on CMP at this point and is there any head way on CMP that makes you more confident on that product line?

I think we're still in the situation that I reported at the last quarter, Mark, that the -- we're working with several customers, we're continuing to do demonstrations and optimize our process to their slurries and to show them what the end performance is and we have customers in here now on a pretty regular basis.

So our progress is still moving forward.

We still have interest on the part of several customers that we're dealing with, and we expect that we'll understand what opportunities there are for us in CMP in the next --

Can you give us any idea what you're spending on that program at this point, dollar-wise?

Well, I know what we're spending but I don't think that's anyone concern but the people at Lam Research.

We don't give out R&D expenditures by program or marketing expenditures by account or anything like that.

We consider that highly proprietary.

Thank you.

Our next question comes from Suresh Balaraman with ThinkEquity.

Please go ahead.

Jim, regarding the market share gains that you talked about in Japan, would you attribute this to the continuing strength of 250 nanometers and 350 nanometers or do you think it's more share gains for Dielectric Etch for 130 nanometers and [INAUDIBLE]?

It's all for 130 and below, and it's -- we have some wins in Dielectric in D-RAM in Japan, but the lion's share, or the market share that we're gaining in Japan is Dielectric and Silicon Etch.

Silicon for both foundry -- for both logic as well as memory products, and Dielectric principally in interconnect, and most of it copper.

And also any thoughts on when you think the cycle could be peaking?

You sounded pretty bullish about prospect for 2004 and even early 2005.

I would love to be able to give you an answer to that, except that I am having a very difficult time forecasting -- or not I, but our company has a very difficult time forecasting the next quarter with substantial accuracy.

If you look at -- we gave you guidance in January for the March quarter and we missed every single important parameter.

We missed booking, revenue, profit, and earnings per share.

So my forecast is not great, what is that, 15 days into a quarter, so 11 weeks away from the end of the quarter, so I don't think I ought to comment on what I think the peak of the cycle will be, whether it's six months out, nine months out or a year and a half out.

I'm just not a good source for that kind of information.

Our next question comes from Gerald Fleming with WR Hambrecht.

Please go ahead.

Yes, Jim or Mercedes, with your improved profitability, what's going to happen to your tax rate in the coming year?

Jerry, we anticipate that our tax rate for the next fiscal year, based on what we know today about fiscal 2005, in terms of revenue growth and profitability, we anticipate our tax rate to remain at the 25% range.

Okay.

Thank you.

And the share count number for next quarter, that assumes that the converts are gone?

Is that correct?

Yes.

Thank you.

Next question.

Our next question comes from Robert Mayer with Semiequip.com.

Please go ahead.

Yes.

Congratulations on the nice numbers, by the way.

My question relates to your comments about the unusual strength in 200-millimeter which I'm hearing from other places.

Could you go into a little more detail?

Is this filling out of existing lines?

Doubling up on existing lines?

Are we seeing some sort of a dichotomy emerging here where we'll have the 300 millimeter haves and the 200 millimeter have nots for lower-end applications?

Do you see this continuing to sort of branch out going forward or do you see those people investing in 200 millimeter just being -- I wouldn't call it the last gasp, but is this kind of a surge of spending before more firms move over to 300 millimeter?

Robert, the -- I think it's kind of interesting the -- kind of the background for this growth at somewhere, 350, 250 nanometers.

It appears from my discussions with the wafer fab people that they have grossly underestimated the growth in LCD drivers.

And this is just consumed an enormous amount of capacity at the -- really at the point 35, 350 nanometer node.

There's real concern that you can't shrink LCD driver geometries because of the voltage that they have to deal with.

You might be able to shrink some of the logic and get it down to 0.18 but you can't shrink the driver itself because of the voltage level and the stand-off voltage that 0.18 will support.

So you can't go to smaller and smaller geometries.

Whether you would want to build, and I think it would be strange to build a 300 millimeter fab at 0.35 or 0.25 micron capability when all of the equipment that's available for 300-millimeter fabs is really now being focused at 110 to 90 nanometer to 65 to 45, so I think you'd be overbuying capability at 300 millimeter and the the cost of the LCD driver will get too high, so probably they'll stay on 200 millimeter.

The real dilemma that most of the people who make this is, do they go build a brand-new 200-millimeter fab at -- that's capable of, say, a quarter micron product, and I think everyone is just reeling at the thought of doing that, because to build a legacy new fab -- so they want to buy used equipment except there is none, or it's -- prices on used equipment on the market today are getting to the point that they rival new equipment prices.

So that's not a very good alternative.

So at this point I don't know what they're going to do, and I don't think they know.

They're trying to put in incremental capacity at 200 millimeters in order to meet this.

Now, you talked about this bifurcation of have nots, the 200 millimeter and the haves at 300, I don't think that's the situation at all.

I think you have companies, some of the large foundries have this capacity in place, it has served legacy products.

What has surprised them is the increased demand.

And I think it's -- in addition to LCD drivers there has been an up surge in demand for land-based telecommunications devices as well as automotive continues to grow.

So I think by not investing in quarter micron, because they had such a huge overcapacity earlier in -- at the end of '01, that everybody thought -- as a matter of fact, some people took apart their quarter micron capacity and sold it to other people.

I think most of the companies that did that are regretting that decision.

As I said before, the installed base, everything from 150-nanometer up is 75% of the wafer starts for the industry.

So it takes very modest growth in revenue before you need an awful lot of capacity, and I think that's what's happened to them.

Next question.

Our next question comes from Timm Schulze-Melander with Morgan Stanley.

Please go ahead.

Hi, Jim, congratulations on the quarter.

Just had one kind of -- two questions, actually.

The first is a follow-up on the train of thought we've just been following here.

You talked about -- you guys have obviously moved to a more outsourced business model, you've talked about the challenges that are facing some of these guys who are building devices at four micron, some of these trailing edge capacities.

How are people like Lam set up to still provide with them equipment if they need it?

You talked about this as a $7.5 billion revenue opportunity.

Well, we can sell them alliance products.

We offer alliance product in a range of capabilities going back to a standard pole system that we used to sell in '97, that's on the alliance platform, so it's a -- it's not ancient vintage equipment, that was designed to handle 0.35 quarter micron capability.

We range from that all the way up to the poly system that we call design for manufacturing which will cover down to probably 150 nanometers.

So we've got that pretty well expand in poly, in metal, as well as dielectric.

We've got various versions of the Exelan at 200 millimeter on the alliance platform that will handle product from quarter micron down to, again, about 0.15, and then we'd like to move customers.

We do have an Exelan product that goes down to about 130 nanometers because its being used on [INAUDIBLE], but what we'd like to do is start trying to move customers to the 300-millimeter platform because we believe that it has more life overall to allow you to make smaller and smaller devices.

Okay.

And the follow-up, I guess, if you look at your supply chain, you're saying that you really haven't seen any constraints in there and you're able to meet your ramp profile.

I guess my question is, in terms of sort of renegotiation cycle could you give us some insight as to how that takes place and I guess, you know, where there's trade-office are, because clearly you're putting through more volume but on the flip side you're pushing them to meet your delivery schedules so you can satisfy your customers' demands.

So where does the negotiation leverage lie right now? [INAUDIBLE]

We put in contracts that -- we didn't outsource to a demand for today only.

We put in a contract that says the demand should be about here today and as time goes forward with an industry begins to resume significant capital investments, we would expect the demand to go up, when the demand goes up their prices to us go down.

And we also have a provision in most of the contracts that if we do something that decreases their cost, we share that decrease 50/50.

They get half the cost reduction, we get half the cost reduction.

So we are currently at the volume of equipment -- materials that we are buying, sub assemblies and so forth, that we're buying from outsourced suppliers, we are getting each quarter a cost reduction on -- or cost decrease on that which we're buying, and that's part of what's contributing to our improving gross margin.

Our next question comes from Alanash Gant with Adams, Harkness & Hill.

Please go ahead.

Good afternoon, Jim and Mercedes.

The question I had was I know coming back to the visibility of the industry cycle you did talk in your last conference call about revenues going out in March and June, that was in December.

Would you be willing to talk about September quarter in terms of revenues at this point?

The September quarter revenues will be somewhat higher than they are this quarter.

And in terms of your -- at this point in times of whatever you see going forward, where do you see the backlog going forward, in September?

I think that the backlog will probably go up in the September time period if we need our bookings forecast.

Our next question comes from John Pitzer with Credit Suisse First Boston.

Please go ahead.

Yeah, good afternoon, Jim.

Couple of questions.

First, when you look at the mix of the June order book, are you seeing any significant shift either by geography, device type, or wafer size?

And then I have a follow-up.

John, as I was trying to point out, this thing is a ranking tide, and every boat's moving up.

If you go across this thing, yeah, you can find a little bit of shifts, but they look to me to be kind of inconsequential, other than the fact that we were surprised that we started getting so many inquiries about product for legacy devices, but memory orders are increasing, foundry orders are increasing, IDM orders are increasing, and they're increasing in all of the geometries.

There are some distortions that are continuing, and that is that North America and Europe are slowly but surely decreasing their percent of the investment, which is year-over-year, until they are getting down to be a much smaller part of our business, that our business is moving to the point that it's in the low 70s right now, percent, Asian business.

That is, everything but North America and Europe, and this trend has been going on now for self years, and it is continuing.

It may even be accelerating now with Japan even coming back at higher level than they have been, and the advent of China.

And then, Jim, just as a follow-up can you talk a little bit about the pricing environment out there in the market?

Can we expect later on as the cycle unfolds that there is some ASP increase potential to help the margins or are you kind of expecting to run the business with ASPs being kind of flat?

Well, I think ASPs will go up, not on the same product, because we are continuing to ship a richer mix of product and the price on, say, 65-nanometer systems is higher than a price on 130-nanometer systems, so we're going to see the ASP continuing to shift and get higher.

Now, our job is to get the costs on these advance systems down fast than we have in the past.

And I think we're doing a pretty good job and you can see that in the fact that our gross margin continues to increase and that our incremental margin is growing which says that as we are increasing our business, the content of that increase drives higher margins.

Our next question comes from Glen Young with Smith Barney.

Please go ahead.

This is Karen Wang.

Congratulations on a good quarter.

Had a question on backlog in June.

Jim, you mentioned that you think backlog can go up in September.

What's your outlook for June?

The backlog will go up because our bookings will exceed our shipments.

And you said shipments would be up 120% versus the December quarter?

That's a rounded number, but compared to December, shipments will be up a hundred-- I think it's actually 117% from the -- in June from the December quarter.

So we have more than doubled our output.

Now, that should not be news because we had said that on the conference call that by June we would more than double our output, and the reason we started talking about out-quarters is because it looked like there was a misunderstanding on the part of people who are following the company and what was going on, and it was hard for them to determine what our future was going to look like because our revenue lags so dramatically, in this kind of upturn, our shipments.

Our next question comes from Jim Covello with Goldman Sachs.

Please go ahead.

Thanks very much.

One quick housekeeping question then a follow-up.

On the op ex you indicated that it would decelerate at some point but I think I missed when we could expect a deceleration of the op ex as a result of the IT improvements.

Well, what I said was that the growth would substantially moderate, so we don't expect the op ex to grow very much in subsequent quarters.

The only growth will largely come from variable compensation and profit sharing accrual increases.

Most other things in the op ex should stay about where they are including our expenditures on a quarterly basis on the projects that I identified.

So it says that op ex flattened pretty much except for variable compensation and other things that are associated with growth in revenue, but those things are relatively small compared to the growth in revenue.

Okay.

That's helpful.

And, Jim, on this next question, I don't want to be too prickly about this but you had a very strong March quarter, you gave a very strong outlook for the next couple of quarters, it seems a little bit inconsistent with some of the insider selling we've seen.

I hope you can address that.

No, I'll be happy to address that.

I made a very substantial commitment to Mississippi State University.

I put in a 10B51 program so that I could begin to sell stock because since I defer my salary in Lam, that my only source of real income, other than other investments, is from stock option exercises, which I haven't done much until recent times.

So I put in place a 10B15 plan that has an algorithm for selling stock and that stock is being sold so that I don't get labeled a dead beat by the alumni of Mississippi State because I'm not living up to my commitment.

Our next question comes from Tad Berg with Lehman Brothers.

Please go ahead.

Thanks.

Could you give your operating cash flow that you report in your statement of cash flows and what the -- I missed the capex and depreciation for the March quarter, and then what you think capex will be for the full year in '04.

In fiscal '04.

I guess actually what you think it will be for fiscal '05 if you have an early read on that.

I will answer as much as I can of your questions.

We said that our working capital and increased profits resulted in $41 million positive cash flow from operations.

That was the March quarter performance.

The capital expenditures for March were $5 million, depreciation for the March quarter was $6 million, we have not fully completed our capital investment level for this calendar year, partly as a result of some of the comments that Jim made earlier in the call today.

We have just recently decided to pull forward some of our IT projects that were slotted for later in this calendar year and early 2005.

Now, we are pulling some of that investment in capital in the calendar '04 time frame, and as a result, the number that we have for capex for this year may change over the next couple of quarters, but at the moment, it is expected to be somewhat around 35 to $40 million for '04, and again, stay tuned, because these may change in the next two or three months.

What was the $200 million goal you gave?

Was that cash flow from operations, or was that free cash flow?

That was free cash flow, target for calendar '04 taking into consideration, as I said said, the capex number that I just mentioned, as well as the profitability of the company and our asset management target.

Thank you.

Our next question comes from Michael O'Brien with Bear Stearns.

Please go ahead.

Yeah, hi, good afternoon.

Just a couple of questions.

Jim, again, you made some pretty bullish comments, and then kind of stepped away from where the peak is.

Just with what has to come on, barring any, up, economic downturn, you wouldn't see a reason why this would peak out in 2004, would you?

I can't believe it will.

Everything that we're doing says that we're going to have a strong '04.

Just one follow-up question on North America and Europe lagging, do you think that's a trend that will continue, or will it be something that can happen that will have the North American guys turn back on, or the European guys turn on more aggressively?

I think the thing that has to happen for people in North America and Europe to start investing in wafer fabs is for the best environment to be conducive to those investments.

The one place where the government has made it -- has put in place an incentive to invest is in Dresden, and I think that's why M.D. is putting their 300-millimeter fab in Dresden.

They also have the benefit -- they've got one there, so they've got infrastructure, so that helps.

But I believe people look at the business environment and say that compared to most places in North America and Europe, why would you invest in a wafer fab there when you're not treated nearly as well in North America and Europe by the local and federal government as you are in some of the Asian countries.

So I think this is a money is going to travel to where people believe the returns are greatest.

And if you have a better business environment in a country, they attract capital, and I think that's exactly what is happening relative to wafer fab investment.

Our next question comes from Raj Seth with SG Cowen.

Please go ahead.

Thank you.

Just a quick one.

Jim, how much of the business today is from dielectric versus conductor versus poly, and how much faster is dielectric growing than the other segments?

Well, up, we forecasted sometime ago that we thought dielectric by '04, I think, was going to be about 56 or 57% of the etch market, and it is -- if anything that is an underestimate of the growth in dielectric, and that's because at the time we made this, we thought we were being very aggressive and forecasting eight levels of copper interconnect.

The customers have gone through eight levels of copper interconnect so rapidly and are now at 10 or 11 levels.

I talked to one customer that's making a device for a customer in the U.S. that's 12 levels of copper.

So we underestimated that growth in interconnect levels, and I think as a result, everyone has underestimated how rapidly the etch market would grow, because it takes two dielectric etchers to do every level, two dielectric etches, to do every level of interconnect, and the stacks on the interconnect are very complex, the throughput is not as high on the Dielectric Etch for the VIA as it was for an aluminum interconnect, and the trench etch is also, compared to metal etch, which you'd say that's kind of the target for metal etch, is also lower than metal etch.

So you combined these two and it says dielectric is growing, the levels being driven by just the change in eliminating metal and substituting dielectric and you're also growing as the rate of change in interconnect levels is growing.

So one of the things that has been expressed from time to time is that there's this huge capital efficiency that going to swamp the equipment industry because of the larger number devices that you can get off of a 300-millimeter wafer versus 200.

And I think that is going to be dramatically mitigated by the increase, at least for etch, because of the increase of number of layers of copper interconnect, so anyone in the interconnect business is going to see a substantial increase.

The idea, there was going to be a 30% capital efficiency gain but no one, I think.

Factored in the rate at which the interconnect was going to grow, so you may see at the end of the day for a device that there is a 10% capital efficiency gain, maybe a little bit more than that but the device is going to be a very different device than would could have been made on 200 millimeter.

So we're benefitting just like we have in every other wafer size change with process steps growing much faster than people had anticipated, and as a result, the capital required to have a wafer fab is going up dramatically.

It now, according to people in Taiwan, it now costs $60 million per 1,000 wafer starts for a 300-millimeter -- 1,000 wafer starts per month for a 300-millimeter fab.

That just dwarfs anything we saw at 200-millimeter.

That's copper fab, by the way, with 10 levels of metal.

Now, while I'm on this, for a 20,000 wafer start per month 10-level copper interconnect, there's going to be somewhere between 20 and 25 dielectric etchers in the back end.

That's for you, Shekar.

Our next question comes from Brett Hodess with Merrill Lynch.

Please go ahead.

Just want to clarify, on the $385 million revenue level with 22.5% operating margin, given the operating expense levels you talked about that would be a great margin of around 48% so are we starting to near sort of the plateau on the gross margin side and should we really, once we hit that level, just be modeling the operating leverage on that because of the outsourcing model?

No, I'm going to make sure -- I hope everyone's still on the call -- if we did an update, and we haven't done it on this model, based upon the performance that we see today, we would say that at $385 million in revenue, we would have about 49% gross margin, we would have operating expenses that are about $95 million, or 24.6%, so the result of that would be an operating profit of greater than 25%.

So the leverage is still there, and the leverage is continuing to grow.

We just haven't updated the model recently.

So our operating profit would increase, and the operating profit would be somewhere around 25%.

Very good.

That update really clarifies it.

Thank you.

Our next question comes from Mark Balkman with Pacific Crest Securities.

Please go ahead.

Following up on John's question he asked about June quarter bookings, I can completely understand why, with the strength coming out of Asia Pacific and Japan, that as a percentage North America and Europe will continue to shrink, but what about on a dollar level for the June quarter?

Where do you see bookings going for both North America and Europe on a dollar level?

Hold on just one second.

Let's -- have you got another question while we find the answer to that one?

Sure.

How about lead times?

Where were they in December, where are they now, and where are they going in June?

Lead times have actually decreased a little bit because we ramped our shipments very fast through these two quarters.

As a matter of fact, I think in the last conference call, Newberry said this is going to be the fastest ramp of shipments that he was aware of in the history of the industry, and I'm sure our other people in this industry are probably experiencing a similar ramp, but we -- those of us who are at Lam and have been other places have not experienced that ramp that fast.

And so while initially we've got this wave of bookings, the bookings, I think, were accelerated because everybody's lead time started going out.

So we've got this huge wave of bookings in December and in March, and what is happening is that with the ramp, our lead times are actually coming in.

As a matter of fact, we won some business at a customer in Asia, because one of our competitors could not ship dielectric etchers, and we were able to, so in the time frame that they needed them, which was July, so I think that our performance in this ramp and the concern about our ability to ramp, because we were outsourced and a lot of the other concerns that I think were rightly raised about the outsourcing, because it hadn't been done to the extent that we have done it, I think most of those concerns have been allayed by our ability to perform.

So can you quantify that at all?

Can you say they were at five months and now they're at four?

That's almost exactly right.

They were at five and right now we are booking four months -- we're slotting four months out.

Let me give you the answer to your other quarter.

In absolute dollars, North America is up, and Europe is up, but they are up marginally.

I mean, it's not -- let me see.

In absolute terms, North America is up about 8% and Europe is up about -- almost 10%, in absolute dollars, but the fall substantially as a percent of total bookings.

Our next question comes from Byron Walker with UBS.

Please go ahead.

Yeah, when I try to reconcile the backlog on order and ship data were there any other adjustments?

I can't quite get it to work.

Byron, as we have talked many times in the past, we perform backlog adjustments in the March quarter, the backlog adjustments happen to have been positive.

In fact we have returned into our financial backlog orders that we purged in the 2003 time frame which are now firmly scheduled to ship over the next few months.

So we had positive adjustments to the backlog, we nod cancellations, so I'm pretty sure you can come up with the appropriate number, [INAUDIBLE] consideration.

The second question is on, can you give us some granularity on the expense items related to the convert?

I think there's probably an extinguishment charge in the, perhaps, interest and I think you're going to do this sale at, what, 101% of par, is that correct?

Yes, we announced today the intention to retire the bond.

When we do that, which when we execute to that, which we'll not occur until the June time frame, we will be paying a premium, a small premium, on the bond, of about $3 million, and that, of course, is going to be hitting the other income expense line in our P&L.

Offsetting that, of course, we'll have the gain for our swap, which is attached to the transaction.

It was attached to the bond.

And the gains of that will be recorded sometime in the June quarter.

So from the overall profitability of the company I don't think you should expect a detriment to the bottom line of the company, but we will probably record a small gain overall on the conclusion of both transactions, retirement of debt, as well as the retirement of the swap.

Great.

Thank you.

Our final question today comes from Nick Tishenko with Fulcrum Global Partners.

When you said you gained business because the -- when your competitor is not able to deliver in time you gain the business but when the vendor of complimentary can enjoy time your ramp is being kept.

How high is Clarence Reese that somebody who is a vendor of complimentary tools for manufacturing line how high is the risk that they will not be able to comply with the current demand and this will make a natural cap for your ramp?

I think within of the issues that people have brought up is will stepper delivery hamper the ramp in -- for equipment, other equipment delivery, and at this point, we don't know.

We are watching and investigating as thoroughly as we can what's going on into the market with steppers.

We believe that one stepper company is struggling meeting demand, and we believe another stepper company is supplying the steppers that are not being met, so I think that at this point, it looks like while the stepper delivery is tight, that so far we can't see, and customers haven't told us, look this equipment is contingent on us being able to get steppers and you're at high risk.

We haven't heard that yet.

I think that if the stepper companies can come up to a reasonable shipment level, then they can deal with the -- the demand that I think will occur through this year.

But, you know, we can't be sure of that.

Thank you very much.

Thank you very much for attending our call.

We appreciate your continuing interest in Lam Research, and we appreciate your kind comments and support.

Thank you.

Ladies and gentlemen, this concludes the Lam Research March quarter 2004 financial results conference call.

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