科林研發 (LRCX) 2004 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the Lam Research June 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 0.

As a reminder this conference is being recorded today, Wednesday, July 21st, 2004.

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

Please go ahead.

Thank you, Rob.

Good afternoon and thank you for joining us to discuss the financial results for the quarter ending June 27th, 2004.

By now you should have received a copy of today's press release which was distributed by Business Wire at approximately 1:00 p.m. pacific daylight time and is posted on our website at www.lamrc.com.

We also issued a release announcing our intention to cease further investment in CMP.

This release is also available on our website.

Here today are Jim Bagley, Chairman and Chief Executive Officer, Steve Newberry, President and Chief Operating Officer, and Martin Anstice, 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 effect that could cause results to differ materially, and in ways not readily foreseeable, and which are detailed in the company's SEC reports.

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 over to Martin for a review of the financial results.

Thank you, Kathleen.

This afternoon we will discuss the June 2004 quarter, our accelerating financial performance and the leverage demonstrated from our business model.

The highlights today include group and new orders reflecting market share gains and the level of customer spending, accelerating revenue driven by customer acceptance time lines, and strong leverage in cash generation from higher volumes and effective asset management.

Exceeding our earlier expectations, new orders for the quarter increased 17% sequentially, representing the fourth consecutive quarter of double-digit growth.

Broad regional momentum across Asia, particularly in Taiwan and China, combined with a similar sequential growth rate in North America were the main influences over these results.

Approximately 60% of total systems orders were 300 millimeter and approximately two-thirds of total systems orders were for less than 130-nanometer applications.

New orders break down by customer segment was approximately memory 30%, logic 15%, and foundry 55%.

There were no order cancellations and no significant schedule changes requested by customers this quarter.

Responding to these higher demands, our lead time and on-time delivery performance continue to be very encouraging, particularly noteworthy when as planned our quarterly factory output more than doubled in the six months from the December 2003 quarter.

Our June ending unshipped backlog stands at 403 million.

Revenue of 330 million grew in excess of 42% sequentially, higher than we originally anticipated, reflecting the priority of our customers in bringing capacity on-line and our success in meeting performance specifications and obtaining customer acceptances.

For more complete details on orders and revenues geographic breakdown please refer to our press release today.

Ongoing gross margins improved sequentially by more than 3 percentage points to 49% of sales.

Incremental revenues of approximately 98 million over the prior period supported levels of factory and field resource utilization that further demonstrated the leverage of our business model and the capability of our supply chain to ramp economically.

R&D and SG&A expenses rose as anticipated, reflecting all employee variable compensation plans triggered by the higher levels of profitability and our discretionary spending on information systems to streamline product lifecycle management processes and enhance security.

The four-quarter trend of at least doubling ongoing operating income sequentially is further reinforced by reaching 71.6 million in June, a flow-through from incremental revenues of 47%.

Cash, short-term investments, and restricted cash balances were 542 million.

Earnings leverage and our continued focus on working capital management generated an expansion of cash from operating activities of approximately 82 million in the June quarter.

Accounts receivable days of sales outstanding were 68 days and our ongoing inventory turns accelerated to 6.2 times per year.

Known ongoing items this quarter which are presented in its reconciliation table within our press release included our early repayments of debt and CMP decision.

We repaid in full our outstanding 4% convertible debt and settled the related interest rate swap agreement in the quarter as planned.

The combined transactions resulted in a net cash outlay of approximately 292 million and a contribution to other income of 4 million.

At this point we are essentially debt-free.

We announced today our decision to cease future investments in CMP.

The impact of that decision was recorded in total this quarter representing a 3 million asset impairments expense.

Resources previously focused on this project are being reassigned to other development activities accordingly ongoing R&D expenditures are planned to continue at recent levels.

To conclude, capital expenditures were 13 million, depreciation and amortization amounted to 6 million for the quarter.

On the balance sheet, net fixed assets were 42 million, deferred revenue and deferred profit substantially increased to 197 million and 108 million respectively.

At the end of the period we employed approximately 2200 people.

We'll now move to Jim's comments.

Thank you, Martin.

Good afternoon.

I'll cover three topics in my comments.

First our CMP decision, second the etch market and our performance within that market, and third will be the guidance for the September quarter.

When making the decision relative to CMP, we reviewed the current market size for copper CMP and its potential growth when we compared that with etch.

The estimate for the 2004 copper CMP market which we were addressing with our systems, is about $340 million.

Contrasted to the 2004 etch market which data quest estimates to be about $3.1 billion.

For every point of share in etch that we gain, we must win seven points of share in CMP to achieve the same revenue growth.

To reach an acceptable level of profitability, we would have to achieve about 25 to 30% market share in CMP.

Without a significant cost or performance advantage in our system, the cost to achieve that market share would be substantially greater than to achieve a three to four-point gain in etch.

The result would be equal revenue growth but a dramatic difference in profitability.

Our CMP employees have made dramatic progress in the reliability performance and process performance in our 300-millimeter CMP System.

However, they were hampered by the lack of availability of consumables, both slurry and polishing pads, which were optimized for linear polishing.

This situation limited their ability to achieve the overall results we believe necessary for success.

I would like to thank them for their efforts and I know they will make significant contributions on the programs to which they have been assigned.

Now I'd like to turn your attention to the etch market.

There is investor concern that the industry has added so much 300-millimeter capacity that wafer fab utilization will drop dramatically in the coming months.

I would like to address those concerns by comparing the cost to add 1,000 wafer start per month capacity in etch at 200-millimeter for aluminum devices and the cost to add 1,000 wafer starts per month equivalent 200-millimeter capacity for a 300-millimeter 65-nanometer wafer fab.

For a typical 200-millimeter fab with five levels of aluminum interconnect with 40,000 wafer starts per month capacity, the etch market is $50 to $55 million.

For a 65-nanometer, 300-millimeter fab, with 11 levels of copper interconnect with a 25,000 wafer start per month 300-millimeter capacity, the etch market is $210 to $230 million.

The cost of etch capacity for the aluminum fab is about 1.25 million per 1,000 wafer starts per month while the cost for the equivalent capacity in a 300-millimeter fab is 3.5 million per 1,000 equivalent 200-millimeter wafer starts per month.

The copper 300-millimeter etch cost is approximately 2.8 times the equivalent capacity for aluminum at 200 millimeters.

The investment for etch today for $1 of semiconductor revenue is nowhere near 2.8 times the historical investment rate.

For sure, 300-millimeter capacity is more capital efficient when compared to 200-millimeter capacity for the same type of device at the same technology node.

However, the industry has never invested at the new diameter for devices that were the leading edge at the previous diameter.

That's also true today.

Our etch business is about 60% 300-millimeter and more than 65% for applications less than 130-nanometer.

And there is virtually no investment for 200-millimeter copper capacity at less than 130 nanometers.

So to get a substantial addition in capacity, past the industry, a significant -- significantly larger investment than has been true historically.

We believe that the etch investment thus far should not produce an overcapacity condition since semiconductor growth rates reach forecasted levels for 2004.

We also believe we are growing faster than the wafer fab equipment industry and faster than our major competitors.

The market position and share gains that we have discussed in the past should be validated by our growth.

Moving to guidance for September, new orders are expected to grow about 5% sequentially.

With the accelerated customer acceptance pattern, our revenue should be from $400 million to $415 million with gross margin as a percent of revenue at about 50%.

We are forecasting operating expenses to be $95 million for September, earnings per share should be from 55 cents to 60 cents per share depending upon revenue achievement with a share count of 140 million shares.

As always I'd like to thank the Lam employees for their contributions and hard work and dedication that have made the stellar performance of this quarter possible.

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 star followed by 1 on your telephone keypad.

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Our first question comes from Mark Fitzgerald with Bank of America.

Please go ahead.

Thank you.

Great quarter.

I'm curious on the backlog standing at only 408 million at this point.

Can you give me a quick explanation given how strong the orders were, or 403 million on backlog?

The 403 million, Mark, is obviously straight math from where we opened the quarter at 423.

The bookings for the quarter and our shipments.

So the shipment and the bookings number were almost equal.

I think we came in with a ship book to bill of .96.

Mark, before we leave on that, you will remember that we booked in December, and again in March, at substantially higher levels than we could ship and we were committed to customers to get specific deliveries met in the June quarter.

So we shipped to our customer requirements for the quarter which was in excess of our new bookings level.

Okay. that.

Would explain it.

Thank you.

Before we go to the next question, my assistant pointed out I made a misstatement, that I said the estimate for the 2004 copper CMP market which we were addressing with our systems would be $330 million.

That's an error.

It's $430 million, and that's contrasted to the '04 etch market of about $3.1 billion, about 7 times -- the etch market is about 7 times the CMP market.

I'm sorry for that misstatement.

Next question.

Our next question comes from Suresh Balaraman with ThinkEquity Partners.

Please go ahead.

Good afternoon guys.

Jim, in terms of the backlog and in terms of the orders that you're anticipating do you get the sense that the subsequent quarter which is a calendar Q4 could be up sequentially or could we see some kind of flattening or a down tick?

So far most companies seem to have had at least one or two quarters of down tick's.

At this point I don't want to give guidance for the December quarter because I think it's difficult and it has proven difficult for us to give guidance for one quarter and retain some level of accuracy, and two quarters is I think stretching it.

At this point, the outlook for December is good.

So I would say that we'll just have to wait and see over the next couple of months whether the investment or the bookings by the industry in the December quarter continues to grow or is flat or is down, as some people are expecting to happen.

You talked about 65-nanometer and 300-millimeter fab and gave cost in 200 eight-inch equivalents can you tell us what it would be for 130-millimeter fab comparing to a typical aluminum fab?

If you look at the 130-nanometer fab, the number of layers are typically eight.

What we did was picked not the absolute maximum number of levels in any case but what we believe will be typical for a wafer fab.

The difference in the market for 130-nanometer product and the 65-nanometer is about -- it's about 70%, I believe, of the market size.

So if you -- it would be somewhere around $150 million to $155 million.

Thank you.

Our next question comes from Jay Deahna with J.P. Morgan.

Please go ahead.

Hi Jim.

You may have answered this in response to Mark's question.

If you look at your revenue guidance for the next quarter, you look at Novellus' shipment guidance for the next quarter it looks reasonably decent yet the sub system suppliers, for example MKS and Advanced Energy, have been providing guidance for basically flat revenues in the third quarter.

Is there, you know, how do you explain that discrepancy?

Well, again, Jay, what -- you have to think about this in terms of what the customers were asking to us do.

Because we could not respond immediately in the December quarter for shipments, we started growing backlog at a pretty significant rate relative to our output.

When we got to the June quarter our output got up to the point that we could meet customer requirements by -- as we go forward we should be more in the line of 1:1 book to ship.

We are -- we were over in shipments relative to bookings in the June quarter in order to meet customer requirements.

I don't think this has -- people can look at this and say this means that there's a change in requirements by the customer, it's not true.

What we were unable to do was meet their requirements when they wanted them for the first half of the year for the December and the March quarter, I mean, and we were able to catch up to those requirements and meet them.

But when you look at the ongoing business levels, shipments will begin to mirror what's going on in bookings because we have got the capacity up in place and we can respond to up side shipments and -- as well as downside.

You have to remember that we've told you that we were going to increase our shipments from the December quarter to the June quarter by 150% -- 115%, Steve tells me.

We're not going to have to do that.

We'd love to be able to do that for the next couple of quarters but we don't think that's the outlook.

One additional comment relative to the revenue growth.

Just to remind everybody that we take revenue upon acceptance.

So as our shipment levels have increased to the levels that Jim just talked about we have a delay relative to how quickly our revenue ramps.

So our revenue ramping significant from what we did in the June quarter, to the September quarter, is a function of the fact that our output was high in June and we will be accepting those systems and taking that revenue in September.

So does that imply that your production -- your shipments, for example, increased probably in the 5% range in the third quarter and if that's the case what can we expect in subsequent quarters?

Again, I'm not going to give guidance for subsequent quarters.

I'll tell you that your math works.

Or is reasonably accurate, Jay.

You're pretty close.

Thank you.

Our next question comes from Timothy Arcuri with Smith Barney.

Please go ahead.

Hi.

Great quarter.

I had two things.

When I look at the numbers looks like there was a little bit of backlog adjustment.

Is that correct?

We add very small backlog adjustment, Tim, not material.

Less than 5 million.

Not material.

Okay.

And,Jim, as I look at backlog it looks like you're down near, in terms of months you're down near -- well, you know, actually near historic lows.

Hasn't been this low since 1999.

So do you feel like you have to build backlog over the next couple quarters?

I don't think it does any good, Tim, to build backlog.

If you can ship to when the customer requires it, I think that's a better issue.

It's like -- I don't think it's useful to build inventory, I don't think it's useful to build backlog.

If you are able to -- we built backlog in the first half of the year.

It didn't do anything but cause us to have to increase our shipments dramatically because the customers want delivery soon.

I think we're out of the days of people having large backlogs because the customers know they don't have to book the systems that far in advance.

They believe that they were going to have to at the first part of the year just because the industry couldn't ramp their capacity essentially immediately.

And so they booked further out in time.

Today, they're booking within a reasonable shipment time which is consistent with our backlog.

Thank you.

Our next question comes from Tim Schultzmilander with Morgan Stanley.

Please go ahead.

Hi there guys.

Couple of questions if I may.

The first one is just relating to the CMP business.

Could you just give us a sense of the headcount that was in there that you're going to be transferring to other parts of your business?

The head count's already been transferred, Tim.

We've redeployed them, we started redeploying them in June, and accelerated once we finally made the decision then we redeployed the rest.

It's a non event relative to our headcount numbers overall.

Okay.

The -- I guess to follow up I just wanted to check one thing that I just understood it correctly here.

You were saying that the total dielectric tool purchased aluminum 200-millimeter was 50 to 55 million, is that correct, growing to 210 to 230 for the total etch opportunity 300-mm copper?

No, the total etch purchases for aluminum, including poly, metal, and dielectric, are 50 to 55 million for the size wafer fab that I described, 40,000 wafer starts per month, which is kind of the typical wafer fab that was being built for aluminum devices in pro logic in 2000, '99 and 2000.

Today the wafer fabs that we are delivering equipment to are more likely to be for a copper device, because I picked copper because I wanted to show the major difference in investment required because of the growth in levels, as well as the complex nature of the individual films that we're having to etch.

Today on our customers at 65-nanometer are all going to in situ etch.

I don't know if anyone who at this point plans -- well, maybe one company, that plans to do ex situ strip and multiple steps in their etch process in different tools, today almost all of the companies are going to in situ processing.

And the result is that in dielectric etch the throughput per chamber has dropped dramatically because we're doing so many etch steps in each chamber in situ, and that has driven dielectric etch up and has reduced other strip and non critical etch business as the -- these functions are being performed in situ and in advanced dielectric etch chamber.

Thank you.

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

Please go ahead.

Good afternoon guys.

Good quarter.

Jim, could you just talk about the geographic mix of the order book in September relative to June, are there any significant changes in either the order book from a geographic perspective or a wafer size perspective going into the September quarter?

Thank you.

From a geographic perspective, the U.S. and Europe are both up, the results of wafer fabs I think everybody knows about.

Japan is up pretty significantly, more than the other regions, and Asia in total is down, but in the down part, Korea is up, so there are places where the investment is still moving pretty rapidly, where there are some things are some things where projects in some of the other regions in Asia are not going to occur in September but are planned for December.

Our next question --.

I'm sorry, let me answer John's other question.

That's wafer size.

About 70% of our business is 300 millimeter, and that's up a little bit from the June quarter.

Thank you.

Our next question comes from Jerry Fleming with WR Hambrecht.

Please go ahead.

Yeah, Jim what should we be looking at as a tax rate for next year?

Martin why don't you answer that.

The tax rate I think Mercedes talked about last quarter no real significant changes, obviously the rate that we assume for taxes, a function of our outlook for the year, in terms of profitability and the governing tax roles and I think everyone is aware that the R&D tax credit has yet to be approved by Congress.

We do expect that to happen but currently our outlook on tax rate is 26% for the year.

Thanks.

And on future modeling, with CMP gone it looks like margin guidance should be moving up.

At a half a billion a quarter what sort of gross margin would you foresee?

Jerry, we haven't worried about half a billion dollar a quarter yet, so I don't -- it will be greater than what we're seeing now.

We haven't even modeled half a billion dollar.

We're not expecting to have to model that until March or June of next year.

Relative to the changing gross margin or any changes in gross margin as a result of CMP you will not see it.

We have discussed this many times before, that, number one, the CMP had very little impact and we said before that there was going to be no impact with the new system, if it were successful, until late in this year, probably fourth quarter, and we would see the impact in first.

Obviously that's not going to happen.

So since there's been very little revenue, there's been very little cost, and it gets lost in the rounding in our gross margin or our cost of goods sold.

Our next question from Avinash Kant with Adams, Harkness & Hill.

Please go ahead.

Good afternoon.

I have two questions.

Jim, if could you give us an idea about, in terms of revenues and orders what percentage came from 65 nanometer, or in terms of the guidance for September what are you expecting from that side of the business?

Then I have a follow-up.

First off, it's -- for us to get specific about 65 nanometer it's very difficult because we have -- etch business is 65 nanometer but most of that is developmental in nature.

And the same is true for most of the logic areas.

The customers are trying to buy equipment that they believe on the basis of demonstrations and evaluations will meet their etch requirements of 65 nanometers.

But it's still -- a lot of the equipment that's being bought that we would say was ordered for 65 is being deployed at 90 today with the expectation that it will move to 65 maybe by the middle to the end of '05.

So it's pretty difficult for us to quantify that.

Again if you look overall in this past quarter, as I said in my remarks, the less than 130, which would include 110 nanometer, DRAM and flash, 90 nanometer DRAM and flash, essentially 90 nanometer logic was about 65% of our business.

And in September it may move up a little bit, but I think it's, again, we're talking about maybe a 5 percentage point change.

Okay.

Now, you did talk about roughly 2.8 times per fab opportunity if I got it right for overall etch, at the 300 millimeter node.

Given the revenue that did you in the previous cycle, does that give you that confidence that you will be clearly able to get past that in this cycle?

The point that I was trying to make is not that there's 2.8 times the total opportunity in etch.

The point I was trying to make is that people are not spending 2.8 times the amount of capital on etch now compared to in the past.

Nor with 2.8 times the opportunity in a wafer fab has the etch as a percent of wafer fab expenditures gone up by 2.times.

There's been this discussion that's been raging that 300-millimeter is going to drown us in output because it's 2.4 times as efficient.

What I tried to point out if you look at where revenue will come from in the future it is not 2.4 times as efficient, it's not as efficient as it was for per dollar of revenue at the 250-nanometer node which means the capital intensity of the industry will probably continue to increase for a while.

This is the point that we've been trying to make, I've struggled with a way to demonstrate this, and I had this revelation last night which I'm beginning to wonder if I've done a good job.

But the point of this discussion is that the industry is spending, we believe, in wafer fab expenditures about $40 billion.

If they had spent $40 billion in '99 for etch capacity, the amount of output and the number of dollars that that output would represent is greater than what's happening today.

So if you believe in the growth of the industry, if you believe that the demand for semiconductors will continue to grow at some kind of reasonable rate, then the amount of money they're spending today is not going to put us in some kind of huge surplus of capacity and I think people are equating this to 2000.

This is not 2000.

There's nothing about this that looks like 2000, feels like 2000, or is probably going to be like 2000.

We're not going to have the same level of revenue this year that we had in 2000, peak revenue, although I think there's a good chance that we will come very close to the same annual revenue in 2000, because we've been shipping at such a high -- our shipments will be the same as our revenue was in 2000, which is an equivalent measure, because we've gained market share, and the industry is more capital intensive.

Our next question comes from Patrick Ho with Moors & Cabot.

Please go ahead.

Congratulations, first off.

Two questions.

First, on Japan, can you just give us your perspective on I guess your inroads there as well as a little more color on what you see industry spending trends over the next few quarters?

I'll answer the Japan market activity we've had a strategy over the last couple of years of concentrating our resources in terms of people and assets into a about five or six major accounts.

During the downturn we invested heavily in working with a number of the top Japanese suppliers to reinforce our poly position, which has always been strong, and more importantly to grow significantly in the opportunity that was present in dielectric.

Our business in Japan is very strong, our market share is up dramatically in Japan.

Largely on the basis of some significant dual damacin dielectric wins at leading Japanese account.

So we continue to have opportunities to expand our position in Japan at these accounts.

I believe that we will continue to build upon that success, and so our position in Japan today is very strong and dielectric is leading the way in that market.

Okay.

I guess just industry trends do you continue to see their spending trends continue to be relatively healthy and robust over the next few quarters?

You're speaking specifically about Japan?

Yeah, just the industry from your perspective.

I think that what we've seen in Japan, if we go back again a couple of years where Japan's investment as a percent of the total semi conductor revenue was below its historical percentage of revenue.

I think what we've seen this past year is that Japan has been successful with some of its product strategies and we're now seeing accelerated investment.

Based on plans that the Japanese have spoken to us about and if we assume they carry forward I would expect Japan to continue to be a strong market throughout the second half of this year.

Thank you.

Our next question comes from Brett Hoddes with Merrill Lynch.

Please go ahead.

Good afternoon.

Jim, I just want to be clear, when you were talking about product being sold today, it sounds like your systems being sold today are 65 nanometer capable, but you're selling them at 90 nanometers and then the customers will move down in the future but that they'll have to add additional units when they do that move for the increasing layers of metal.

Is that the right way to read your comments there?

We've got some customers who actually have somewhat of a problem going forward because they have designed their wafer fabs with the expectation that about 60% of the floor space in the wafer fab would be used for back end operation.

That is the entire metalization, CMP, dielectric, etch, and clean that's related to the inter connect process.

But that was modeled after maybe eight levels of metal, maybe even ten.

Today it looks like we -- the example I gave you was 11 levels of metal, but we're seeing many cases where the inter connect levels have gotten up to 12 levels.

And at 12 levels they have insufficient floor space to meet their wafer fab planned output.

In other words, wafer fab output will go down because the back end is too small, if they readjust the fab, consume more of the floor space for the back end, then they begin to reduce the capacity of the front end.

So there are many people who have planned fabs that have output originally planned around 20,000 wafer starts per month.

They're going to find out that at 65 nanometer they can't achieve that output because the number of levels have gone up in the back end and they have to reoptimize their floor space, and they'll see a 10 to 15% drop in their 300-millimeter output.

That's if you believe what we know today.

And that's -- that's somewhat different than what we thought was going to happen a year or so ago, so it could get worse.

Very good.

Thank you.

Our next question comes from Shekhar Pramanick with Schwab Soundview.

Please go ahead.

Hi Jim, good afternoon.

Two-part question.

You know, there's a lot of confusion on the semi line last couple of weeks here.

Are you seeing any change incrementally in the last couple of weeks your customers behavior?

Lastly, my second part question is, your biggest competitor in the dielectric etch say they are not losing market share.

Maybe if we could go over different geographies, not naming the customer but how many places you might have gotten incremental shares.

Thank you.

From the standpoint of overall customers, I would say there has been no significant change.

If you start going down through the list of customers, has a customer made a change, that is equivalent to reduced expectation on our part, the answer is yes.

By the same token, if you said, well, what about customer B, and customer B, the expectations are now higher than they were before.

So you can make a case that the market is more bullish if you only look at the customers that are accelerating their deliveries and increasing their cap ex, you can make a case that it is more bearish, if you only look at the customers who are not going to achieve their capital expenditures as planned.

So -- but you have to look at that the entire industry, because we're not limited to selling to one or two customers, we're selling to 25 customers or so that are going to invest over $400 million in wafer fab equipment .

So from my standpoint the situation looks pretty much the same as it has looked.

We're not going to see the growth that we saw in the March from December to March and from March to June.

We couldn't sustain that growth.

I mean, we'd be bigger than the U S GDP in about eight quarters if we grew at that rate for very long.

So the expectation should be that the growth is going to slow because we're getting to a very large number relative to our output.

Relative to the semiconductor output.

Now to --.

markets share.

Oh, market share against competitors.

I'm not going to answer that in the way that you would you love for me to where I go down and say, okay, at at Mel we won three etchers in fab two, and they've won half of an etcher, and go down to company B, C. I'm not going to do that, we don't do that, I don't think that's meaningful.

What I can ask you to do, is we only sell etchers.

That's all we sell.

And etch-related products.

Look at our growth and look at our competitor's growth, if they're growing slower than we, and compare our shipments with their revenue, because TELs revenue recognition is more like Applied's, which is largely based on shipment, except for Japan, and Applied has to do the same thing we do, which is have an acceptance policy, but if you just look at their revenue growth and our shipment growth and you tell me whether we've gained share or not.

I can't do the math that doesn't come up with we're gaining share.

Now, we may be misjudging the size of the etch market somewhat, and there may be somebody, maybe Hitachi is doing better than we think they are, but when we look at the -- our two competitors, their etch revenue or shipments are not growing as fast as ours.

And I don't think that's some kind of aberrant situation for a quarter or two, because it's been happening now for about quarters.

Right?

My only way to determine whether we're gaining share is I can look at each wafer fab, and we do that and we know exactly what people have won and what people haven't won, we know the situation in dielectric, we know poly, we though metal.

At 300 millimeter and 200 millimeter.

To probably a 85% confidence level and on that basis we think we're gaining share.

So I don't know how anybody can reach a conclusion that we're not gaining share if you look at our numbers.

Thank you.

Our next question comes from Nik Tishchenko with Fulcrum Partners.

Please go ahead.

Thank you.

Good afternoon.

Jim, I have two questions.

The first one is short and the second could be a little bit longer.

The short one is to clear your statement about book to ship about one.

Is this going to be the case for few next quarters?

Yeah.

I think what we would plan to have a book to ship very close to one because that's what our customers will pretty much demand.

They're not going to book a year in advance or six months in advance, nine months in advance, they're going to book basically our response, and so I would say book to ship will be pretty close to one.

Thank you.

And the second question, I'm not expecting you to elaborate a lot about this issue, but now with closing up operations in CMP you are back to the situation where you have one major product line, etch, and this is a large product portfolio because there are three types of etch processes.

What is your strategic provision for Lam, how and where you would like to see Lam, let's say one year from now?

Let me try and describe what our, how our strategy has shifted.

One of the major lessons that we learned from CMP was that desiring to be in a business doesn't put you in that business.

Having a unique and what turns out to be a pretty good technology does not necessarily mean that you can end up with a competitive product, all things considered.

So that's one lesson.

The other lesson I think, a corollary to that, is we know a lot about etch, we know a lot about etch processes and we also believe that etch is enabling lithography today.

If it weren't for our etchers in the front end of most of the semiconductor manufacturers, they could not make the devices with the speed that they are achieving today.

To get that speed they have to be able to have gate links much smaller, much shorter, than what they can reliably print.

So we have developed processes and some of our competitors have likewise developed processes, that allow you to take lithography that is at a much larger feature size than what the customer would like to have and we can etch by using a resist shrink process, we can etch a feature that's much smaller than printed.

And we have the capability to etch them to a repeatability level that exceeds what the lithography machine can do wafer to wafer.

The result is that our machines are being dedicated, the process applications that our machines are seeing are new and different and greater.

The result is that the etch market, I believe, is growing at a rate faster than the general wafer fab equipment market.

And it's because of this ability to enable lithography to do more than it's done in the past.

So that's one point.

The second thing is that we know a lot about the processes just before etch and just after etch.

So we will be concentrating on additional etch applications, we will be concentrating on products that will help enable our etch processes and that both prior to receiving the wafers and after we have etched the wafers and we'll describe those products as time goes forward because we are working on several different areas now.

But I think that for the near term, certainly by the end of next year, what you'll see is a company that's still largely focused on etch and 100% focused on activities that surround etch, and we'll have some innovative products that we expect to introduce over the next 12 months.

Our next question comes from Jim Covello with Goldman Sachs.

Please go ahead.

Thanks so much.

Jim, quick question.

Might be a little bit of a tough question to answer given your -- that you're in the etch segment but the comments you made relative to the increasing capital intensity of the etch market do you think those same dynamics apply to any other segments within semi equipment?

In other words, do you think you can wind up with excess capacity in other areas but not in etch?

What are your thoughts there?

Jim, I think if you classify processes, not by exactly the way they're done but what the intent of the end -- or the intent of the process is.

If you do it on the basis of deposition, not PECVD or electroplating, barrier seed, if you look at it on the basis of deposition products and etch product I think you'll see a similar situation.

Take the entire deposition market as a market, as opposed -- and that's not the way anyone addresses it, by the way.

But if you look at the entire deposition market, I think that market will grow just like etch is growing, with the one exception is that I think we are doing more processes in the front end that have nothing to do with layers deposited so as you deposit more layers, we have more etch processes that we have to accomplish.

But in addition to that, where we are enabling lithography capability, that's something that has nothing to do with deposition.

So that's a growing business for us, and so I think from that standpoint, etch may grow modestly faster than deposition.

But I think the whole deposition market will grow at a rate that's not dissimilar to what we are seeing for the entire etch market.

That's helpful.

Thank you.

One other quick question.

The cash levels down a little bit.

Are you comfortable with the lower cash level because of the model now that you don't expect to burn cash over the course of a cycle?

Well, of course -- just remind everybody, the reason the cash level is down we just paid off a 300-plus million dollar bond but I'm glad you brought that up.

We had said that we were going to generate, I don't know, $200 million this year when, you know, at that time we thought that was pretty aggressive.

Steve has whipped the organization -- and that's almost literal -- has whipped the organization into shape relative to asset management to the point that -- where probably in the last half of the year, I think we've generated $140 million in cash in the first half.

The second half will probably exceed that cash generation.

So by the end of the year, we'll probably have as much cash as we had going into the year but no debt.

And I think that's a pretty astonishing accomplishment for this year and for this team and what they have been able to do in asset management.

Thank you.

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

Please go ahead.

Yes, Hi Jim.

Can you tell me what your specific semi conductor unit growth rates are that you're using in 2004-2005 capacity analysis and did these assumptions change since June when you first started talking about this?

I think since I have started showing this analysis on capacity versus the growth in industry, we started using a growth on the first time of something like 20% then we finally moved up to, what is it 26%, was the last one we did.

So we moved up to about 26%.

We started with '05 at about 10% and I think we are still in the 10 to 15% range for growth in '05.

Okay.

Also, Martin, can you just kind of walk me through this steep increase in R&D?

Is this just related to the IT projects that you pulled in this quarter and then going forward will the division of operating expense be about the same for R&D and the SG&A lines?

Yeah, I think the operating expense story for us, period, R&D and SG&A is very, very consistent with our prior guidance.

We indicated earlier we intended to your point to accelerate some investments in product lifecycle management, IT infrastructure, and also security and a PC refresh.

Those decisions are purely discretionary.

We turn them on, we can turn them off and I think to Jim's earlier point we certainly, from a total operating expense level, we are a very -- very comfortable with the 95 million level, including those items for the next couple of quarters.

Thank you.

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

Please go ahead.

Hello, Mr. O'Brien?

Yeah, I'm sorry about that.

Just going -- Jim, going at the outlook one more time, you said some customers pulling in, some slowing down plans, so are you seeing customers in general a little more bearish, and what causes a change from your statement of growth slowing?

What's going to take for growth in your business to start to decline?

Well, I think the thing, based upon what we believe is happening in investments, and I can't emphasize this too strongly, that we believe that the investments in the industry is putting in place, is not driving us to an overcapacity.

And I read that we are going into overcapacity over and over and over from various analysts in the industry.

I just don't believe that's the situation.

Now, if someone says that the economy in 2005 or late 2004 is going to be down substantially, not substantially, but the growth is going to be much less, that we're going into much slower growth on a world GDP, then the capacity that's been put in place will be in excess for the demand for semiconductors in '05.

That is if GDP growth slows substantially.

If it doesn't slow substantially then I think our forecast for growth for the industry in '05 will require that we have a capital investment similar in size that we've had this year.

And you can't do anymore than that because what you're doing is you're trying to forecast GDP growth.

People who get paid to do that do a lousy job, and I don't even get paid for it so I'm not going to try and do the job.

So maybe I didn't understand your last statement.

You think capital investment for 2005 will be similar to 2004 or you think it's -- the growth is similar?

I wasn't sure what you said there.

You tell me with assurance what the GDP growth will be, and -- in 2005, then I can begin to predict for you what the capital spending for the industry will be and what our output will be.

But without that number, you know, I'm not -- not only am I not the smartest guy on the street, I'm not even in the upper quartile.

There are a lot of really smart people out there that are doing this, and you get conflicting opinions.

So, you know, my commenting on this is I think -- is not useful for anyone because I just don't know.

But if you tell me what the GDP will be then I can tell you what -- I can give you a sense of what the capital spending by the semiconductor industry will be, because GDP growth drives semiconductor demand, period.

Okay.

We have time for one more question before we conclude today's call.

And our final question comes from Ted Berg with Lehman Brothers.

Please go ahead.

With the gross margin guidance at 50% where do you think that can ultimately go to or have we kind of hit a peak there, because that's obviously a new record for you and above your financial target model.

Is there a new model you can share?

I think that I will let Steve Newberry who has gotten to us where we are, tell us where he can lead us to.

I think what we should think about as we go forward is how we, in fact, have gotten there.

And clearly, as we've changed our business model we've been able to leverage effectively our supply base as well as a lower fixed asset cost in terms of facilities and a dramatically lower period expense cost in the factory.

To kind of, you know, reinforce that point, I'll give you a couple of examples of performance in the factory, and then we'll get to what that might lead in to terms of improved gross margin.

In the last up-turn, when we were essentially vertically integrated as opposed to having 65 to 75% of our product produced by our outsource suppliers, our on-time delivery ran about 38 to 40%.

In the first six months of 2004, our on-time delivery has been 95%, and it improved to 98% for June.

We did that with a regular full-time employee base of 250 people as opposed to the 1,082 regular full-time employees that were working in manufacturing in the last up-turn.

Our inventory turns have grown from 3.6.

That was the best in the last upturn and we're currently at 6.2 and I think there's still room for improvement there.

And we've been able to essentially have the same material cost to a lower material cost as a percent of revenue even though we have moved that labor that our suppliers do today from our factory into them we've been able to keep that cost essentially the same or slightly lower.

So the result has been on much lower revenue the 49% margins that you saw and so as we move our revenue up we've talked about the fact that we're going to achieve 50% and depending upon how this business continues to evolve, I think there's most of the leverage that has come out of our business model is represented in that 50% number, but I think that if things stay the way that we expect them to, that the opportunity for us to add another point of gross margin improvement is something we would expect, and I think our organization has demonstrated that it can continue to wring out outstanding margins at the business levels that we're at.

Ted, I think there's one other thing that we can concentrate on and make some improvements in.

We think we're gaining market share and as I -- I'm not going to repeat what I said before about why we think that, and we believe that one of the underlying reasons we're gaining market share is we can produce capability and results on the wafer through etch processes that our competitors are having a difficult time achieving on a -- in a manufacturing environment.

Particularly in the most critical processes.

As our customers recognize this, and I think we have the opportunity for price increases that are the result of less discounting because our competitors cannot come in and win business by discounting prices.

There's some of that that has gone on even this year where we were in specific areas where our competitors were being very aggressive on price to keep from losing market share.

And we had to respond to some extent.

As the customers have learned that in some case where we didn't get the business, have learned that they've had to come back and get the business from us and there's a couple that did that, that had to come back and buy from us because the choice they made was not optimal, we have been able to discount less.

So I think there is a way that we can see further improvement in gross margin if this trend continues and that is through better pricing and pricing to the value that we're delivering to the customer.

Okay.

That is all the time we have for today.

We'd like to thank you for participating on this call.

And thank you for your interest in Lam Research.

Ladies and gentlemen, that concludes the Lam Research June quarter 2004 financial results conference.

Thank you again for your participation, and you may now disconnect.