科林研發 (LRCX) 2005 Q1 法說會逐字稿

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

And as a reminder this conference is being recorded today Wednesday, October 13th, 2004.

I would now like to turn the conference over to Kathleen Bela, Director of Investor Relations and Corporate Communications for 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 September 26, 2004.

By now you should have received a copy of today's Press Release which was distributed by business wire at approximately 1 p.m.

PST and is posted on our website at www.lamrc.com.

We also issued a release on our stock buyback program, this was released at 1 p.m. as well and 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 condition, 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 report.

We encourage you to read those reports in their entirety.

Lam would also like to disclaim any obligation to update or correct any of the information we are about to provide.

And with that I'll turn the call over to Martin Anstice.

Thank you, Kathleen.

This afternoon we will discuss the September quarter financial results that continue to significantly distinguish our performance today from that of prior years.

We will concentrate on areas that reinforce the fundamental value of Lam Research that from our perspective is best characterized by market share momentum and the impact of our outsourcing business model.

The highlights include: positive new orders momentum that we believe illustrates the favorable etch segments and Lam market share commentary that we have articulated for some time; revenue growth of 27% that exceeded the high points of our guidance range; ongoing operating profits of 121 million that established a new standard of performance for our Company.

As anticipated, new orders entered into backlog for the quarter increased 5% sequentially.

Regionally our new orders growth was concentrated in Japan, Europe, Korea and the U.S. in descending order of growth impact.

Asia new orders declined sequentially as expected.

We have previously stated a target to establish a booked market share position of at least 25% in Japan by the end of calendar year 2004.

We remain on track to achieve that goal and are pleased to report new orders in Japan that more than doubled in absolute dollars sequentially and for the first time represents 20% of total new orders for the Company.

Approximately 70% of total systems new orders were 300 mm and approximately 80% of total systems orders were for applications less than or equal to 130 nm.

New orders breakdown by customer segment was approximately memory, 57%; logic, 27%; and foundry other, 16%.

Our September ending unshipped backlog increased to 415 million not including Japan's shipments of 28 million that remain in inventory not yet included in deferred revenues because title has yet to pass to our customer.

These results delivered our targeted shipments book-to-bill of approximately 1, reflecting the high level of responsiveness in our supply chain and the value of our focus on cycle time.

This effort is best illustrated by our competitive lead times that facilitate our customer's ability to add capacity consistent with their needs.

Revenue of 420 million exceeded our 400 million to 415 million range of guidance as stated last quarter and this reflects the new system installation schedules and acceptance time lines of our customers.

For more complete details on orders and revenues geographic breakdown, please refer to our Press Release today.

Gross margins improved sequentially by more than 2 percentage points reaching 51.2% of sales, a record for the Company in any meaningful comparison.

Once more, our supply chain demonstrated robust service and cost performance as stated previously while more than doubling the output of the Company since the December '03 quarter, we have added no significant fixed cost infrastructure to the Company.

We have added no significant real estates and our total worldwide regular headcounts has only increased by approximately 5%.

These results demonstrate the execution of our new business model, plans to establish a more variable cost structure, and minimize infrastructure investments.

In addition, when the business environment contracts we will not be faced with eliminating the 1500 jobs that were added in the previous upturn, nor will our focus be diluted from technology and customers as a result.

As previously discussed, total operating expenses increased albeit less than originally anticipated.

A continuation of the theme of higher all-employee variable-compensation plans triggered by the higher levels of profitability was offset by our sustained efforts to manage discretionary cost additions and projects, particularly in IT.

Incremental revenues of approximately 90 million over the period supported incremental operating income of approximately 50 million, a flow through of 55%.

Since the beginning of calendar year 2001, we have generated cash from operations in 12 out of 15 quarters.

Amounting to approximately $440 million.

Cash, short-term investments, and restricted cash balances were 589 million at the end of September.

Leverage and Operational Asset Management both continue to be a strong focus in the Company.

Our industry leading inventory turns performance further strengthened in September to reach 7.3 times per year.

Accounts receivable days of sale was 72 days.

In this context, we announced today that our Board of Directors has authorized the repurchase of up to $250 million of the Company's common stock at Management's discretion over the next 3 years.

To conclude, Capital Expenditures were 5 million, depreciation and amortization amounted to 6 million for the quarter.

On the balance sheet, net-fixed assets were 42 million, deferred profits increased to 116 million, accompanied by a small decrease in deferred revenue to 195 million.

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

We'll now move to Jim's comments.

Thank you, Martin.

As we have seen from our Press Release -- as you have seen from our Press Release and from Martin's comments, our overall performance was outstanding.

The Management Team and all of the employees contributed to these results and I appreciate their efforts and their accomplishments.

Our operational execution capability will continue to be very important as we move into what appears to be a weaker business environment and will bolster our performance at lower levels of revenue.

At our upcoming Analyst and Investor Meeting Martin will talk about this subject in more detail with supporting models that should be indicative of our performance.

Expanding market share will also improve our relative performance in a weaker environment and I will comment on our market share position.

I believe that we have continued to make market share gains.

For 2004 our etch orders received as a percent of total etch orders placed, that is, our booked market share, should be about 35% plus or minus a percent or so.

That compares to just over 30% in 2003.

As a result of our ramp in shipments, you should see similar gains in shipped market share for 2004.

Japan is contributing to these share gains where we believe our book market share should exceed 25%.

Our market share numbers don't portray our strength in the total market adequately.

Intel represents 7 to 8% of the total etch market, and we have essentially 0 share in Intel.

Achieving 35% overall market share, but addressing only 92 to 93% of the market means that our market share in markets that we do address must be about 38%.

In Memory accounts our market share this year is about 39%.

Our 300 mm market share for 2004 is about 39% and adjusting the 300 mm market without Intel, recalling Intel is predominantly 300 mm, indicates that our 300 mm market share is about 43%.

We still trail the Dielectric market share leader, but adjust in our Dielectric share again, excluding Intel, puts us essentially on par with that competitor in the rest of the Dielectric market.

Bottom line, we've gained market share and the real story is our position now at 300 mm.

Now, let's turn our attention to guidance for the December quarter.

We've been in a strong business environment beginning in fourth quarter of 2003 and continuing through the third quarter of 2004.

We had growing bookings, shipments, and revenue.

We're moving into a weaker business environment, that when coupled with the fourth quarter, which is typically more volatile with respect to bookings, shipments, and revenue, complicates tight guidance for the December quarter.

In a robust business environment adjustments can be dealt with because there are -- they are pull-ins to offset push-outs.

In a weaker business environment there are fewer pull-ins and the bookings forecast is at higher risk.

I believe that's the situation we're in today and the result will be a broader range in our booking guidance than we would normally give.

For the December quarter, our bookings range will be down 5% to 15% from the September quarter.

The upside in revenue that we reported for September was a result of 2 systems that were accepted by a customer in the last couple of days in the quarter that were not forecasted for the September quarter, but for the December quarter.

That roughly $15 million will impact our December revenue unless we can pull forward in equal amounts into the December quarter.

That will be difficult.

As a result, we will give a wider guidance on revenue than we would normally give.

For the December quarter our revenue will be 375 million to 390 million with gross margins of approximately 50%.

Flat operating expenses with earnings per share ranging from 50 to 55 cents on 140 million shares with a tax rate of 25%.

I'd like to reiterate to the Lam employees my appreciation for their contributions and the outstanding performance that made this quarter possible.

So with that, we'll open the microphones for questions.

Kathleen?

You can go ahead, operator.

Thank you.

Ladies and gentlemen, at this time we'll begin the question-and-answer session. [OPERATOR INSTRUCTIONS] And our first question comes Suresh Balaraman with Think Equity.

Please go ahead.

Jim, can you give us your thoughts on how deep or how long this downdraft would be and also give more color on Japan?

Have you picked the easy cherries or is there some more room left for the market share gains?

Thanks.

The first question, we're not going to make any comments on the depth or breadth of the cycle, because frankly, we don't have anything to add to the industry discussion that's been going on.

We may have much better insight into this as we go through this quarter, see what actually the results of this quarter are, as well as the result of our planning process, which is -- are going to be kicked off next week.

So I think the best time for us to talk about what '05 looks like and what the business conditions might look like over the next several quarters is at our January conference call.

Relative to Japan, we have one share at places that we didn't expect to.

We have for the past year and a half been focused on between 5 to 7 accounts.

We are doing reasonably well in all of those accounts and we're doing extremely well in about half of those accounts.

So I think the short answer to your question is that the -- we expect to see additional gains and market share in '04 in Japan.

Thank you.

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

Please go ahead.

Okay.

Thanks.

Good afternoon, Jim.

Two questions.

First is Novellus just gave order guidance of down 22 to 24% you're down 5 to 15.

My sense is the difference is you're getting share to a more noticeable clip and you have a better positioning in Japan and second-tier Taiwan where there's going to be stronger orders.

I was wondering if that's the way you see it or if there's a different explanation?

And the second question is, where do you see utilization rate trends in semiconductor manufacturing in 4Q versus 3Q and where do you think those can go before it turns?

Thanks.

Jay, I can't really comment on Novellus's position overall.

What I can tell you is that our fourth quarter has a component of memory orders.

It has a component of logic orders.

The memory orders are going to be in Korea and in Taiwan.

The logic orders will be European and Japan.

And I just -- I can't make a comparison between us and and Novellus on share gains and other things of that nature and how well positioned they are someplace.

On the utilization rates, my expectation is that utilization rates will begin to go down in the fourth quarter.

They stayed relatively high through September, and the reason that I think they're going to go down is because I keep listening to all of you guys say they're going to go down.

You know, I don't have any more idea about whether they're going to go down.

I don't know what their bookings are.

I have a hard enough time keeping up with what our bookings are.

So for me to forecast foundry utilization rates is pretty difficult, but listening to what I hear on the street I would expect utilization rates to be down in fourth quarter from what they've been in third.

Thank you.

Our next question comes from Bill Ong with American Technology Research.

Please go ahead.

Yeah, sure.

If the equipment industry were to be flat next year just for argument sake how much growth can we expect from Lam simply on share gains?

And also on the more industry macrolevel what type of contributable growth can we expect to achieve in order to have equipment orders to have growth next year?

Let me answer the last question first.

And then I'm going to let Steve answer the first question about where the -- what our growth could possibly be if the market were flat for etch.

The -- wait just one second.

The -- I'm trying to get my thoughts squared away.

First, we've got to have some concept of what the economy's going to do for next year which in turn will determine what the demand growth is.

I think and I'll repeat, I -- this is going to be repetitive.

When you look at semiconductor growth, a part of semiconductor growth that is meaningful to us is 139 nm and below.

Because if there's modest growth, 2 or 3% growth, 4% growth, 5% growth in older technology they probably have the capacity and capability to achieve that growth almost through productivity gains on this very large install base that exists for older technology.

So the real question for us is how much will the leading edge grow?

Because that's where we sell equipment.

We don't sell equipment to a large extent in the trailing edge.

That was a relatively small market overall for us this past year.

So if there continues to be a drive in consumer products, particularly in the cell phones or higher and higher levels or densities of DRAM, as well as Flash in the cell phones.

And if there is growth at the leading edge for microprocessors that go into servers to PCs and essentially playstations -- game stations, then you could have a substantive growth at the leading edge which would then drive equipment purchases from us.

So our focus is not on the overall market.

Our focus is what's going on in microprocessors, what's going on in the memory market, because the memory market will move forward on higher performing equipment so they can shrink the die-size to meet the bid growth and high performance logic.

That's where all of our business essentially is coming from today and that's where we have to see growth.

That growth is going to be driven by innovative new products that are pretty heavily semiconductor weighted that either need high performance from speed standpoint or low power consumption for portability.

And if that area grows 15%, we'll see 15% growth in the equipment market.

Okay Bill, to answer your question about if the wafer fab capital spending is flat next year relative to '04.

If you look at what Jim's comments were in terms of our booked market share gains, we would expect that that's going to result in an opportunity for 3 to 3.5% market share which will translate into about an 8 to 10% growth increase opportunity.

Now part of that's dependent that even if you have flat capital spending that the mix of "who" spends that money stays the same.

If that mix changes and some of those customers that we have high market share with increase their spending then we could benefit from that.

If some of the customers that we have low market share in are increasers in their spending then that would mute that revenue growth a little bit.

But essentially you should think in terms of 8 to 10% if wafer spend -- wafer fab equipment spending was flat.

Thank you.

Our next question comes from Steve O'Rourke with Deutsche Bank.

Please go ahead.

Good afternoon.

Jim, what has changed your competitive advantage in Japan and what can you do to gain share at Intel?

The Intel story is a long complicated story and if you'll show up at one of the conferences where either Steve or Martin or I are presenting we can go into that.

But they just have a very arduous selection process and fundamentally -- I guess the short answer is the incumbent is favored and they have to fail to meet Intel's requirements for anyone else to win business.

Or you have to be so much better than the incumbent that they cannot afford to ignore you.

But that bar is set so high that it's difficult for me to believe that that's a way that you would ever get in.

You'd have to have some kind of tremendous break through that would put you at that difference in performance level.

I think the competitive advantage that we have in Japan is a little bit of product confusion on the part of TEL.

They've got several versions of etchers in the field to -- that they're focused on dielectric and I think the -- there's some loss of confidence on the part of Japanese customers because TEL has had to modify, try, and present a variety of models to solve problems.

Where we have been focused on the Exelan and its derivatives, depending upon the application, in order to solve problems.

And that's made us look like we have a much more solid road map and a better technical understanding for what's required in etch.

There's that and then I think that there may be an issue of wanting to open the market for more competitors.

We've been a very small competitor in Japan; that's changing.

I think the Japanese like what they see in our service, support and technical capability and that's -- we're being invited in as a result.

So is it fair to say that Intel's 65 nm is probably a long shot?

I have no idea.

I don't want to comment on that.

It's just -- because quite frankly we don't know.

I wouldn't put odds on it at this point.

Fair enough

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

Please go ahead.

Yeah, good afternoon Jim.

Congratulations.

Several questions.

And this one -- the first one might be a little bit difficult given the range of order guidance for December.

But by geography device-type of wafer size, do you anticipate any major mix-shift in the December quarter on the order book?

By geography -- wafer size I can answer that, that's no.

Geography -- well wait a minute -- and the other one was what?

Notes --

Device type.

Device type.

Memory is down a little bit from what it was in the previous quarter.

Logic is up.

Everything else is kind of flat.

Geography is pretty much the same.

All of Asia, relative to Europe and North America will be up.

And then Jim, given your exposure to memory right now about 57% of Q3 orders, it tends to scare investors that I've talked to a little bit.

Can you help us understand of that exposure what's Flash versus DRAM?

We may have to come back to you for just a minute because we've -- it's very difficult to say, quite frankly.

We've got customers who are putting in facilities that will do either.

So when you -- when you say is it a Flash or it's a DRAM facility, it's whatever the customer has orders for or wants to concentrate on.

So because of that, I think what you ought to think about is memory as a market as opposed to trying to segregate it into Flash and DRAM because the customers have -- our customers have the ability to respond to either market.

So if DRAM is soft, Flash is up, they can easily move into Flash.

If they're both soft, then they've got a problem.

If they're both strong they have to add more capacity and that's of course, that's been the situation.

So you know, they've got some isolated instances where Infineon's and their partner's investment you can discern the DRAM portion because it's got a [trench faster] in it and they haven't so far tried to have a mixed capability Flash and DRAM but everyone else has.

And then Jim, lastly on the oxide/etch side you've been making a pretty strong argument for awhile now that when you look at some of these advance logic chips there's another dynamic of growth in the oxide/etch market and that's just a number of processed steps each success of technology node kind of accelerating at a faster pace.

Can you make that same argument for the memory market or not?

I think there will be -- the answer is yes.

Because they continue to have to go to more and more oxide steps.

But I think that what I'd like to do is put off a further discussion of that.

All you've got to do is show up at the -- we're going to -- we're hyping this thing so I'm going to break in every so often and give another commercial about the Investor and Analyst Meeting.

But we're going to talk specifically about applications in etch that you haven't thought about before and we're going to try and explain the etch market because it's changing and old models in thinking about etch I think are not as relevant today as they were in the past and they won't be relevant at all going forward.

And so I think we'll have some interesting discussions about applications that are opening for etch that people don't think in terms of.

Thank you.

Our next question comes from Robert Maire with Needham & Company.

Please go ahead.

Yeah, in -- sort of a two-part question.

By the way, and congratulations on the continuing transformation.

Quite a change in the numbers from where we were years ago.

Very, very good leverage there.

In terms of some of the momentum exiting out of the third quarter, now we're a couple of weeks into sort of the fourth quarter, are you using that sort of near term momentum to extrapolate out what you think orders are going to look like or is there any particular data points that you're using to get to the down 5 -- down 15 guidance that you're coming up with here?

And I'm sorry -- and I'll ask my other question after.

Sorry.

Go ahead.

Yeah.

Steve, why don't you --

This is Steve.

When we look at our order guidance in the quarter that we're in there's a strong situation relative to a customer's ability to have had the capital approved, the Board set back, the decisions have been made, and typically, you're in the purchase order processing cycle.

And so while there's always -- when you're in a transition period, a difficulty in really understanding if all of the orders that you are forecasting to come in are actually going to come in.

Because all it takes is one customer who's going to place a 30 or a $50 million order deciding to put off that decision by even a matter of weeks and it falls out of our quarter.

So given that, we are in this change in business environment that we've talked about.

We -- even though we're in that 12 or 13 week period, we're in that situation where customers are evaluating what the demand is looking like, the supply chain is short.

Their customers are able to place their demands for semiconductors in much shorter time frames, so therefore everybody's reaction times are faster.

So I think that's why it's prudent for us to give a range of orders even when we're in the quarter like we are right now.

And my related follow-up question is I seem to be hearing from equipment companies more about let's say postponements or pushouts than in the previous weakness that we've seen in the market a few years ago where we heard about hard cancellations and things like that.

It seems that there's more of a predominance or bias towards pushing things or delaying things as compared to an outright cancellation.

Would you agree with that and maybe you could give us some of your expectation in that.

Specifically we've had no cancellations.

We've made no adjustments to our backlog and we've had a couple of customers that we've talked about in the September quarter who we were having discussions about.

What was it that they wanted to do relative to some deliveries that they had scheduled in the last 3 or 4 months of the calendar year.

We have been successful in having those customers take those deliveries for the most part.

And take those deliveries in this calendar year.

We have one customer who has pushed order deliveries into the mid '05 May/June time frame and beyond that, there has been little activity in terms of booked business moving.

What we do have is an environment where people who have not yet booked have begun to move around the timing of when they're going to place purchase orders and to some degree, the timing of when they want deliveries.

But we're in that arena where we're talking about 3 to 6 month type timing differences and no significant activity where things are just disappearing off the forecast visibility.

Thank you.

Our next question comes from Timothy Arcuri with Smith Barney.

Please go ahead.

Thanks a lot.

Actually I have about 2 questions.

First of all, Jim, I tried to calculate shipments 2 different ways and I got 2 different numbers.

So can you tell us what the factory production level was?

Tim, I'll take a shot at that.

I'll run you through the math it's probably easier to deal with this.

From a backlog point of view we opened the quarter at 403 million.

Our new orders were $430 million and I articulated our book-to-bill was approximately 1.

It was actually at 1.03.

So our shipments were 418 for the quarter.

So that's the math that should hopefully get you to a closing backlog of 415.

Perfect.

Perfect.

And you know, maybe a question for Jim.

As you look at maybe how this downturns a little bit different than some of the prior downturns we've seen.

Given that the whole industry and particularly Lam has much shorter lead times than ever before, are you seeing a change in customer behavior in the sense that they feel like maybe they can add capacity in a more realtime basis and thus, kind of manage the cycles a little bit differently?

Well, I feel very good that the business is softening now rather than continuing to grow and splitting up in free--fall later.

We may be in free-fall now.

We don't know.

We've just stepped out and we don't know where the bottom is yet.

It's not that we think the bottom is a long way away, we just don't know.

The other thing is that this is being characterized as a downturn.

To me a downturn is when the bookings, shipments, and revenue drops sequentially for a number of quarters, and then we end up with a bottom that lasts for some number of quarters, and then you see an acceleration out.

Well, since we haven't had bookings, revenue, and shipments drop for a number of quarters yet, I'm not even sure if we ought to characterize this as a downturn yet.

I mean, this is -- it may cast a shadow like a downturn, it may have the shape of a downturn, smell like a downturn, but until we actually see the thing and get a much better look at it, I wouldn't cast it in that light yet.

I'm not denying it.

I just -- you know, you -- if you look at things on the basis of what they might be, this is only kind of quacking like a duck.

We haven't seen it walk yet.

But if --

Go ahead.

You know, I guess kind of on that point given the lead times are shorter do you hear customers coming to you and saying, hey, we'll push out that total delivery faster than they otherwise might have reacted because lead times are actually shorter?

Well, I think that's the general situation in the industry today and it starts with our customer's customers.

Wal-Mart probably has a much shorter lead time to a VCR manufacturer than it used to be years ago and they have a shorter lead time with a semiconductor company who has a shorter lead time to us and we have a shorter lead time to our suppliers.

That's why we were able to ramp so quickly.

We never could have ramped like that early in this year if we hadn't had very short cycle times on everything.

So I am sure our customers believe that they saw how quickly we could ramp, it's given them confidence that they can adjust their equipment purchases with a lot more flexibility than they have in the past.

And hopefully that is going to mean that we will be in an adjustment of capacity rather -- and as long as the economy continues to grow and as long as demand for leading edge products continues to grow, this might turn out to be an adjustment and then we will continue on at some level for a few quarters and then get back into a growth environment again.

But at this point, I think it's -- everyone can have an opinion, and you're entitled to it, and you can write about it.

It doesn't necessarily mean it's true or false.

And I have an opinion and I'm not going to share it with you because it's just an opinion.

It's not backed up with anything factual.

Thank you.

Our next question comes from Avinash Kant with Adams Harkness.

Good afternoon Jim and Martin.

I had a quick question.

Would you be able to break down the services revenues during the quarter or maybe the bookings and eventually of course, you've been talking a lot about share gains in the dielectric etch?

Would you be able to give us some number in terms of what percentage of the total systems business was dielectric etch?

I -- we think that's a lot more helpful to all of our competitors than it is to you and so we'll decline to answer that on that basis.

We don't want to be recalcitrant.

But this is just giving a lot of competitive information away that I don't think does us -- it does us a lot more damage than it does you good.

Okay.

Then another question.

On the 300 mm project side, are the people who had announced 300 mm projects early during the year in so far, how is the body language right now?

Do you see them kind of pulling back a little bit or do they continue to go with their plans?

Well, I -- this is going to be kind of a broad-brush answer.

Since -- for this year we're going to come in pretty close to 70% of our total orders were 300 mm.

So anything we're saying about customers at least 70% of it applies to the 300 mm customers.

So I think the characterization of 300 mm customers is basically what we're talking about.

We've had customers who have delayed orders from what they had originally told us in the out quarters.

We've had some shipments that were rescheduled.

We've had some things pulled in.

And so by and large, you ought to treat what we're saying, unless we make a specific exception, what we're saying applies mostly to 300 mm.

Okay.

And if I may ask one more question.

How far do you think revenues have to fall off before you have to make a structural change in terms of your headcount and organization?

If you will come to the Investor and Analyst Meeting on November the 4th, starts at -- with lunch and the meeting starts at 1:00, we're going to provide that information and let you ask questions about it.

Thank you.

Our next question comes from Brett Hodess with Merrill Lynch.

Please go ahead.

I was wondering about the flat operating expense guidance for the coming quarter given the drop in revenue.

Is R&D going to stay up keeping it up or are there other programs that are in place that wouldn't cause you to gain some leverage on the operating expenses?

We're going to essentially have flat operating expenses because we are still going to be performing from a financial standpoint at a very high level.

And our variable compensation payouts as it relates to performance plus profit sharing and our management bonus structures are going to be paid out and they will -- they are still present and they will actually increase as a percent of revenue.

As it relates to R&D, we are going to maintain our investment in some of the critical projects that we are engaged in with our customers.

Because I think that while we may have a situation where wafer start activity may be slowing, the activity relative to 90 nm qualification, process characterization work, and the early 65 nm work is not slowing down at all.

And those challenges remain significant and need to be solved and we intend to retain our investment and maintain that with our customers as we go forward here at least for now.

And my quick follow-up to that was you talked about the shipments in the quarter just ended.

Do you have a feel for where the shipments will come out in the coming quarter?

Our shipments are going to be approximately running at a book-to-ship ratio of about 1.1 to 1.

If I can add something briefly to Steve's comments on the operating expenses.

You will all likely remember, we've been fairly consistent describing our discretionary investments decisions in projects like IT Security and Product Life Cycle Managements.

A number of months ago we were anticipating that that would cause us to have operating expenses in the range of $95 million a quarter for the final 2 quarters of this year.

So we've managed to compensate for some of those investments by other activities from a cost containment point of view that I spoke to earlier, and that's the primary reason why our operating expense guidance is essentially flat on the $93 million.

And our next question comes from Jim Covello with Goldman Sachs.

Please go ahead.

Good evening.

Thanks so much.

A couple quick questions.

I'm afraid the answer might be come to the analyst meeting to find out, but I'll ask anyway.

One, are there incremental levers that you can pull on the cost structure?

You guys have done a terrific job of creating leverage in the business.

You have a model that should be scalable on a downturn.

Is there anything else you can do?

Obviously, there are things we can do, Jim, but I -- back at -- I think it was Semicon '03 when we were talking about what the model would look like.

And what I said was we want to be able to move up in profitability on a curve and then as revenue -- as -- when revenue is going up, we move up this curve -- when revenue comes down we trace that curve with very little history.

In other words, we don't embed a lot of expenses.

We have added virtually a very small number of full-time regular employees.

I think it's 5% or so, something like that from December of '03, and that's not an inconsequential cost, but it's a relatively low cost because it's both above the line and below the line.

And part of it goes into the service organization where we'll be servicing a larger install base and which should generate revenue.

So we're moving up this cost -- revenue and cost or revenue and profitability curve and we're trying to retrace -- we want to retrace it.

And I -- when we get through and -- with this guidance which is totally independent of my analysis, I sat down and said, gee, did we follow the curve back down when we went from 131 up to 4 -- I'm sorry not 131.

When we went to 329 up to over 400 million and what were our earnings per share going up incrementally and then when are they coming back down to this 375, 390 number?

And it traces the curve very accurately.

So it says that the variable cost is doing exactly what we said it would do in December of '03.

So -- and we'll show that, again, in more detail at the conference that you may have heard mention of.

[Laughter] Two other quick follow-ups.

Over what time frame can we expect to see the share buyback taking place?

I know it's good for 3 years, but any thoughts on the intermediate or near term time frame?

I think that we'll be evaluating this all along.

I -- if we see an opportunity to go in and buy shares when we think it's right for the market and we can comply with all rules and regulations of a share buyback, we'll be in the market, but I wouldn't put a time frame on it at all.

Because we don't -- what we're not trying to do is list the share price artificially.

We want the share price to be where it is as a function of our performance and the value of the Company as opposed to us using cash to temporarily support the share price.

So we want to make sure that we're not in the market at the wrong time.

That's helpful.

And final question.

You're going to get mad at me for this one, but you make the comment in the Press Release that you're in a growth cyclical business.

Can you help me understand the data that you're using to drive that?

The first thing I do, Jim to reach that conclusion is I throw out 2000, because 2000 was by any measure aberrant.

It was aberrant in stock price.

It was aberrant in the amount of semiconductors that were built and shipped into inventory.

It was aberrant in the amount of equipment that was put in place.

So I think what you have to do is you have to use a little bit of judgment when you're looking at the situation and try and understand, is there -- are we talking about real growth or are we talking about growth that is the result of some kind of hyper-investment by either a particular government entity sponsoring growth in an area which we've had in the past, or it was just a collective mind numbing experience as we had in 2000?

So I think you -- if you throw out 2000 and look at it, you can see that we are above the expenditures and by our estimate, we're above the expenditures in 1996, 1997, 1995, and then of course, there's a dramatic difference as you go before 1995 where the industry took an enormous step-up in growth.

So I think we are growing.

I know we're growing.

We continue to grow where we've shipped roughly as many etchers in 2004 as we shipped in 2000.

Maybe not quite as many, but almost the same number when we believe that 2000 was probably off the mark by 30%.

So from our standpoint, compared to say '96 time period, the number of etchers that we've shipped and the value of the etchers is substantially up.

And I won't get mad at you because I heard you're a new father. [Laughter]

And our next question comes from Mark Fitzgerald with Banc of America.

Please go ahead.

Jim, I wanted to follow-up on that you're still a cyclical growth company.

I mean, if you look in the last 3 years here you're kind of the -- or post bubble, the decimation.

I mean one of the bull arguments has always been that the cycle had to go much longer because we were down so hard.

You yourself on your March -- coming of your March conference call gave us a bunch of fuzzy math why it wasn't over and yet we're sitting here today looking at a sharp decline in bookings across the industry after only 4 quarters of recovering revenue.

So I don't get how you can come up with, it's not -- it's still a growth business?

Well, I think that what you've got to do is we're never going to be a growth business if the semiconductor demand does not meet expectation.

Semiconductor demands started out the year with a forecast of -- I don't know -- 22% then it went to 25% and then it went to 27 -- to 28% and now it's falling back off as to what the demand for the year is going to be.

So we're not in a situation where the upturn lasted a short period of time.

Again, all the upturns occur and the downturns begin with a situation of demand for semiconductors or an overcapacity situation where we drive the industry into recession as a result of price.

This so far is not a recession that's driven by overcapacity and price.

This is a recession of demand slowing down dramatically from what people thought it was going to be in third and fourth quarter.

We wouldn't have -- have had all the PC forecast, the cell phone forecast, and other forecasts of growth that were driving the semiconductor growth and in turn driving equipment growth, if there hadn't been a substantial -- a view that the economy was going to be much better than it was for consumer spending.

And that just -- they may have bought something, but they're not buying as much as people expected them to.

And so I don't think the math was fuzzy.

Math is never fuzzy.

It's only the people that are looking at the math that think it's fuzzy.

And our next question comes from Shekhar Pramanick with Schwab Soundview.

Please go ahead.

Hi Jim, a different question.

Any kind of update, what you're seeing on silicon etch, and metal etch, conversion etch, and then I have one more.

Well, silicon etch is a growing part of the etch market because there's more -- there are more and more applications for silicon etch in the front-end of the wafer processing where you are doing transition formation.

In metal etch, metal etch is largely confined to the memory business, where still most DRAM products are made with aluminum interconnect and metal and most flash devices are made with aluminum interconnect.

So we'll see the metal market continue to be a reasonable market as long as you have roughly 40% of the -- in capital equipment investment in memory and that will hold true until memory begins to convert to copper.

So if you take the amount of conversion from copper to -- from aluminum to copper and -- as a percent of the total amount of money being spent and you look at the metal etch market it's tracking exactly with that.

So the metal etch market is still reasonably good.

We have great share at 300 mm.

The silicon market is growing as a percent or it's a larger business as a percent of the total amount of wafer fab being invested because we're growing the number of applications with silicon etch.

Right.

And the market dynamics in silicon etch, you're not seeing any kind of shifts at this point?

Other than I think we are continuing to gain share in all silicon etch outside of trench etch, for trench capacitors in memory.

We don't have a position there.

We've never had a position there so we don't see a market share gain there.

But any in STI etch, a lot of the mask opens, the gate etch, I think at 300 mm we have gained share and that's part of that share gain, of course, contributes to my calculation that outside of Intel, our share is 43%.

Right.

My other question was more a little big picture.

You know, sometimes you have talked about you've kind of given it a 2 quarter view.

I know that the economy is slowing and wafer starts weakening or bottomed or whatever.

But if we look at a first quarter mostly purely project view whether that really comes into orders or not nobody knows at this point.

But just looking at bottoms of project, does the first quarter look kind of flattish in terms of order activity or up or down any way you want to cut it?

Well, the difficulty with looking at the projects is we don't know when the projects are going to be done and that's part of our concern.

If the projects all go on schedule we'll have a very different view of first quarter than if we think 30% of the projects are going to slip.

And at this point, we don't know.

If the customer starts reducing their capital expenditures, starts slowing capacity additions because they're unsure about the near term, then first quarter will be dramatically different than if the customers change their mind.

So I just -- you know, if there's no point in me commenting on first quarter because I just don't know.

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

Please go ahead.

Yeah, hi Jim, thanks.

Maybe just a question -- well broad question.

Most of the others have been answered.

Jim, what have you seen really just over the last several weeks in terms of project changes?

Have -- has the caution accelerated, stayed about the same, has it broadened?

You know, we know it started with the foundries, went across to some of the IDMs.

Is it branching out to Japan, to memory or is it staying fairly concentrated?

Thanks.

I think if you talk to the customers you'll get a variety of different views as to what's going on.

I just recently talked to people in the memory business and in the foundry business and they are really perplexed as to what's happening.

The -- well, they can see that their bookings are getting soft.

They're not sure what the situation is.

Was it a case that people accelerated their demand in third quarter for the typical fourth quarter increase and they've got their units early, which resulted in some increase in inventory?

Has it been a downward adjustment because the demand is not what our customers' customers thought the demand was going to be for their product and I think they're still struggling trying to come with an answer to that.

And one of the people that I talked to over there gave me an outlook for fourth quarter that it's already changing and this is just a very short period of time ago that I talked to him, that their outlook for fourth quarter has changed from what he told me it was when I was there 2 or 3 weeks ago.

So I think the situation is very volatile and you can't make any kind of reasonable projection about what's going to happen over 6 months when we're having a problem figuring out what's happening in the first 2 weeks of a new quarter.

And of those changes have been to the downside?

By and large.

We've had a couple -- one customer that I'm aware of that's still pretty bullish, but I haven't talked to him this morning.

I've been preparing for the call.

So the situation may be different this afternoon.

Thank you.

We have time for one more question.

Our final question comes from Tim Schultzmolondo with Morgan Stanley.

Please go ahead.

Good afternoon, guys.

Congratulations on a great quarter.

I guess just 2 questions, if I may.

The first is Jim, could you characterize the frequency of the dialog?

I mean, if you just look over, you know, maybe the last months and then further back, the last 6 months, how would you characterize the frequency of dialog with your customers?

Has it been pretty stable or as things have changed has the frequency of that dialog changed as well?

And then I have a very quick follow-up.

We talk to our customers essentially every day.

There's hardly a day that goes by that we aren't in some kind of interaction with -- not every customer that's talked to the top Management every day.

But we have people talking to virtually every customer every day and there's top Management interaction with our customers on a almost everyday basis.

It may only be 1 or 2 customers so we have -- we are not disconnected from the customers at all.

Okay.

Great.

And then just looking at the kind of dollar value increase in the geography of your bookings in Japan, would it be fair to say that the majority of the increase in the bookings in Japan were DRAM and Flash related?

No.

There's almost no DRAM business in Japan.

It's only [El Pita] in Japan and there's fundamentally only 1 flash manufacturer in Japan.

That is Toshiba.

I mean there are other people in the business, but I'm talking about on the -- in the larger sense of the word.

So you've got [SanDisk] and Toshiba.

Well, [Spansion] is over there.

I shouldn't ignore Spansion, I was thinking about [Nan-Flash] instead of [Nor] because that's where most of the investment has been recently.

But Spansion is there and Toshiba in flash, so if you -- any time you get a pickup in Japan, there will be some impact from Toshiba in flash and Spansion, little from DRAM because El Pita is just not large enough to buy enough to make a big difference and the rest of it will be in logic because you've got a lot of logic manufacturers there.

At this time I'd like to turn the conference back to management for any concluding comments.

Please go ahead.

Thank you.

We'd like to thank you for joining us this afternoon and we look forward to seeing many of you at our Analyst and Investor Conference on November 4th.

Thank you.

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

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