科林研發 (LRCX) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Lam Research March quarter 2005 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. [Operator Instructions].

And as a reminder, the conference is being recorded today, Wednesday, April 13, 2005; and this call is scheduled to end at 3:00 P.M.

Pacific time.

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

Please go ahead.

Thank you, operator.

Good afternoon and thank you for joining us to discuss the financial results for the quarter ending March 27, 2005.

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

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.

We ask that you please limit questions to one per firm.

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

Thank you, Kathleen.

This afternoon we will discuss our March, 2005 quarter financial results.

Highlights today include, new orders and revenue within guidance at 315 million and 349 million, respectively.

Gross margin and operating profits that exceeded our earlier expectations and targeted range.

Earnings quality and asset management performance that again delivered cash from operations greater than 100 million.

And, lastly, two unrelated non-ongoing items that included a tax refund and unoccupied facilities expense that I'll further clarify in a few moments.

Now turning to the details of our ongoing performance.

New ordered entered into backlog of the quarter were 315 million, back log adjustments were 9 million, and there were no order cancellations; resulting in net bookings of 306 million.

Approximately 75% of total systems new orders were 300 millimeter and approximately 87% of total systems new orders were for applications less than 130 nanometer.

New orders declined sequentially across all customer segments and comprised memory at 64%, IDM logic 27% and foundry other at 9% of the total.

Geographically, the sequential decline we expected and realized in Korea was tempered by new orders growth in Japan, Europe, and Taiwan.

North America was in essence flat sequentially.

Revenue of $349 million met guidance reflecting improved system installation performance and was accompanied by a 30 million increase in our deferred revenue balance.

The March ending unshipped backlog of 399 million continues to represent approximately four months of new orders.

Shipments of 363 million increased 10% sequentially.

Our new orders and shipments book-to-bill was approximately 0.87.

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

Although no additional information is provided, a complete current and prior four quarter reconciliation of our new orders, shipments, revenues, deferred revenues and back log will be posted in the Investor Relations section of our website.

Gross margins were 50% this quarter.

These results exceeded the model that I presented in the November, 2004 analyst meeting.

The trend of high quality installation and warranty performance and our focus on field resource utilization were notable contributors to this quarter's healthy performance.

At slightly less than 90 million, our total operating expenses were maintained within the targeted range.

Our effective tax rate continues to be planned at 25% for the fiscal 2005 year.

Again, the cash outlay for taxes was substantially lower than the income statement expense as certain tax assets were consumed.

As outlined in our December 10-Q filing, we may elect to apply certain provisions of the American Jobs Creation Act related to non-U.S. earnings repatriation to fiscal 2005 or 2006.

We are currently evaluating specific opportunities and plan to report any tax consequence of related future decisions as a non-ongoing item.

In the March quarter, we generated cash from operations of 101 million, driven by our profit levels and sustained focus on working capital management; including accounts receivable and inventory.

We used 68 million to repurchase common stock at an average price of $30.13.

Our overall closing cash balance was 839 million.

Deferred revenue was 153 million and deferred profits were 87 million at the end of March.

Consistent with my presentation in January, these balances exclude approximately 49 million of invoice value for shipments made to Japanese customers where title has not yet transferred.

These shipments are currently recorded at cost in inventory.

Capital expenditures were 5 million, depreciation and amortization amounted to 6 million for the quarter.

At the end the period, net fixed assets were 43 million and we retained employment levels essentially flat at the 2,200 level.

As noted in our earnings release today, we recorded two unrelated non-ongoing items in our reconciliation of net income.

Both items were tax affected.

The first a California state tax refund of 8 million for previously paid sales and use tax.

The second, an expense of 14.2 million for unoccupied facilities.

These facilities were vacated over the last several years and we previously recognized a restructuring expense equal to the synthetic lease payments due through 2008.

Since that time, we have been unable to sublease the buildings and for that reason we decided to instruct the lessor to actively market them for sale.

This expense today reflects our estimated guaranteed residual value obligations.

Accordingly, upon completing a sale we will avoid future cash lease payments.

To conclude, we believe that our ongoing financial results presented today meet or exceed our model and underpin the quality of the operational execution in the Company and that of our outsourcing partners.

We'll now move to Jim's comments.

Thank you, Martin, and good afternoon.

March was on target and the first half should come in about where we expected when we put our plan together at the end of last year.

At that time, we had no visibility into the last half of the year, and only a little today.

Our annual operating plan for calendar year 2005 was based on CapEx down 15%, which was below prevailing sentiment of flat at that time.

The prevailing sentiment was largely confirmed by customer announcements early in the year.

Our December, 2004 and March, 2005 bookings, when combined with a no-growth booking scenario for June and September-- by the way, this isn't a forecast, it's an exercise; but this level of bookings would support our operating plan of shipments down 10% and revenue and earnings about the same calendar year as 2004.

This back-of-the-envelope analysis indicates to me that we should be able to meet this plan.

This commentary was provided as background to support my next statement.

Given the projected shipments to the customer base in the first half of calendar year 2005, there must be an acceleration of orders and shipments in the last half of the year, or CapEx will decline in 2005 compared to 2004.

We have said that without an acceleration in orders and shipments our customers will underspend their capital investment announcements.

My main concern is the effect of elevated oil prices on the demand for semiconductors.

With over 50% of the semiconductor output going into consumer products, continued high oil prices could suppress growth.

When we finished our 2005 operating plan in early December, oil prices had been declining and were about $43 a barrel.

Our assumptions for semiconductor growth in 2005 took that positive trend into account for our projections on 2005.

Oil prices today may not have a negative affect on the semiconductor industries, but oil at these prices doesn't help.

Turning to products and market share, we are maintaining the differentiation in our products that has allowed us to gain share as the industry has converted to 300 millimeters.

We have concluded our assessment of our market share for etchers used to add silicon wafers.

Using shipments to customers as the measurement for the etch market, which I believe is fundamentally the most accurate representation of market share in any time frames, we have concluded that for calendar year 2004 our etch market share was above 34%; in line with our expectations.

As we have discussed in the past, our 300-millimeter share is greater than our 200-millimeter share.

Based upon the size of the 300-millimeter market and our 300-millimeter shipment, our market share at 300 millimeters is greater than 37%.

This is important as the industry continues its migration to 300-millimeter processing with 300 millimeter the leading edge of processing capability.

Now let's move to guidance for the June quarter.

Our bookings should be about flat compared to the March quarter.

Shipments should be down about 5% to approximately $345 million, revenue of 340 to $360 million and gross margins of approximately 50%.

Our operating expenses will increase to 93 to $94 million as a result of accelerated R&D investments, with an earnings per share range of $0.41 to $0.45 on 144 million shares at a tax rate of 25%.

Our employees continue to exhibit outstanding performance.

I'd like to express my appreciation as well as that of the Lam management team for their continued efforts and loyalty.

With that, we'll open the floor for questions.

Thank you, sir.

Ladies and gentlemen, at this time we'll begin the question-and-answer session. [Operator Instructions].

Bill Lu, Piper Jaffray.

Jim, you went through this exercise where the capital spending is down 15% and your outlook for acceleration and bookings later on the year.

It's kind of a top down forecast.

If you look at your own forecast from the business groups, would that jive with that?

I'm concerned that, Bill, that you're confusing what I said.

I said that at the beginning of the year when we were putting together our planning process that we had concluded that CapEx would be down 15% in 2005 from 2004, and I made that statement in our March conference call.

The point that I was trying to make is that if you take our December bookings, our March bookings, and just for a scenario purposes; this is not a forecast of what we expect to happen in June and September.

But let's say they are both flat, you add those together, those bookings form the basis for our shipments in 2005 to within a couple of percent.

So it's good enough for a scenario.

If you look at that, that's sufficient bookings to support our shipments of down 10%, which again was part of our plan.

And this is what we talked about at the November analyst call.

That plan would support revenue about the same as 2004 and our earnings per share of about what we accomplished in 2004.

Now-- now, do you still have a question?

Is there something you didn't understand?

Yes, I guess I didn't make myself clear.

I guess my question is, if you look at your own forecast, do you still think -- do you think that June you see your guidance or do you think September bookings could be flat again will it support that scenario?

We-- as I said, our outlook and ability to forecast the last half of 2005-- and the reason we don't give guidance for it is because it's still pretty limited.

The point of all of this is if all of the semiconductor executives, in concert, when they gave guidance on their capital expenditures; if they are right and they're going to do what they're going to do, what they said they were going to do, they have to place more orders, they have to accept more shipments or they're going underspend CapEx.

That's the whole point of this.

It's not that they will or they won't, it's just, so everybody understands, that for CapEx to be flat-- and most of the analysts are still saying that CapEx-- unless they changed it this morning, CapEx is flat down five.

It isn't going to be flat to down five unless bookings and shipments accelerate in the last half.

That's not a forecast.

That's a statement of math.

Bill Ong, American Technology Research.

What do you think is your practical limit on market share position?

And the reason I ask is you have two very committed etch competitors; and each runoff tends to be very fierce.

If you look at an example, like the lithography segment, we have three major competitors; the leader there has about 40 to 45% market share and they've been at it for quite sometime.

So do you think Lam could max out at similar levels in the 40, 45% range?

So, Bill, one of the things that we talked about-- this is Steve Newberry-- in our November analyst meeting, was that as we go forward, with the continued differentiation that we have today and with our efforts to continue to strengthen the competitive capability of our products, particularly in dielectric where we've been making significant share gains; we believe the opportunity to be in that 45% market share range exists.

I think that it's important that people understand that winning market share and-- and penetrating new business is a significantly challenging exercise.

But having won the 37% market share position that Jim talked about in his earlier comments, it is extremely difficult for competitors to take that away provided that we continue to perform and to give to our customers a competitive product.

So we are clearly targeting and have targeted, as we go forward in 2005, customers as well as applications that we believe that if we can successfully execute to their requirements, we'll have an opportunity to be in the 45% market share range if we execute successfully.

Brett Hodess, Merrill Lynch.

Jim, I'm wondering if you could talk about the memory being at 64% and-- of the business this quarter, as the orders flatten out here going into the next quarter or so, how do you see the mix from your-- the different markets memory, IDM and foundry trending?

The bookings in the June quarter should come in around 40 to 45% memory.

And the foundry and IDM?

Together?

They will come in around 60 to 55%.

Steve Pelayo, Fulcrum Capital.

My question is, is relative actually to the foundry outlook here, foundry represented 9% of bookings and it's kind of dovetailing on Brett's question there, you just said the total of what logic and foundry can represent.

I guess, how does that break up and are you expecting the foundries to be there.

Yes, the foundries are going to be about 30-- 30 to 35%.

Logic is obviously the remainder which would be somewhere in the 20s.

Okay.

Fair enough.

And when we-- we shouldn't call that logic.

It's really IDM's less their memory business.

And if I could just sneak one quick one in for Martin.

The gross margins that you have on deferred revenues, if I just kind of divide deferred profits by revenues, roughly 57%, it was down a little bit.

I'm curious what the gross margin is on those deferred revenues for Japan.

Is it also right around that mid to upper 50s?

I would caution you just on-- on-- on one thing, be real sensitive to the progression of deferred revenue and deferred profit percentages.

And the best way to illustrate the point that you raised is if you calculate, as you've done, the deferred profit percentage from September through-- through to December, it actually went up a point and in that time frame our margins -- our P&L margins didn't change to the same extent.

So be cautious as you extrapolate deferred profit percentages through to the P&L because it's only part of the story of the underlying period expenses related to things like factory utilization are not in there.

But specifically to your point, it's reasonable to assume that that deferred profit percentage is appropriate to Japanese revenue as well.

But be careful how you use it.

Just a second.

I want to make sure that somebody doesn't walk out here with a misunderstanding.

And as part of my last few days here on the poop deck.

There is no Japanese revenue in the deferred-- or very little Japanese revenue in the deferred revenue number.

We -- when we -- the Japanese shipments are carried in inventory at cost and they essentially ship and revenue simultaneously; and never go into deferred revenue.

There are a couple of exceptions to that, so it's not 100%.

But by and large, what I just said is accurate.

So don't try and determine Japanese margins or any other margins by trying to divide two numbers that may have little impact in a time frame out in the future, depending upon how they roll out.

Suresh Balaraman, ThinkEquity Partners.

Jim we have talked in the past that there should be more tools used per fab, I thought below 90 nanometers compared to the last cycle.

And since we seem to be getting a large portion of your bookings from 90 nanometers and below, I'm wondering how that prediction has turned out to be in terms of DRAM and logic.

Well, what we basically said is accurate in spite of some comments to the contrary.

We've got customers who operate at very high utilization rates at 300 millimeters-- very high yield at 300 millimeters and they use more dollars of etchers at 300 millimeters than they did at 200 millimeters for essentially the same revenue output.

Which says that the capital efficiency concerns that you have had about us may not be warranted.

I'm not going to say are not warranted, but may not be warranted because the early evidence suggests that it just isn't true.

And certainly if you-- if you took 300-millimeter product-- a 300-millimeter fab, and you ran quarter-micron in it, it would be much more efficient from a capital standpoint, that is capital expenditure per dollar of revenue that you generate, than a 200-millimeter fab that we would have done at-- back at quarter-micron.

But we don't do that.

We run leading edge in 300-millimeter fabs and we run trailing edge basically in 200-millimeter fabs, when you're below 130 nanometers; and the comparison, looking back, is an interesting exercise but doesn't yield anything of much value.

Avinash Kant, Adams, Harkness.

My question will be for Jim.

Jim, you ran through the exercise of trying to kind of run some numbers and see where CapEx for the full year '05 could be.

Now, my question was a bit qualitative.

When you spoke on the conference call last quarter, given what your assumptions were for the full year '05 CapEx were at that time, where do you stand now, has it changed?

And, if yes, then in which direction?

Well, I'm kind of perplexed about the CapEx for the year.

Our customers have said, in aggregate, that the CapEx will be essentially flat.

You take all of the announcements made, add them up and they come out to be about flat-- for the industry.

At the last conference call, I said we thought CapEx would be down 15%.

We have -- that's the way we planned.

We planned for it to be down 15%.

We planned for our shipments to be down less than 15% because we thought we would continue to benefit by market share gains when you look at a shipment base, and while all the information that you're seeing come out by research firms is not on the shipment base, it's kind of a mixed bag of things which I don't think tells anyone anything.

But the -- we thought shipments would be down 10% or so, CapEx down 15, our customers said CapEx would be flat.

So I don't know what to tell you about CapEx.

If CapEx is going to be flat, we have to have an acceleration in the last half of the year.

If the acceleration does not occur in the last half of the year, CapEx can be down.

And if it's down to what we thought, 15% down year-on-year, we'll-- we still should be able to do shipments down around 10% year-on-year, but our earning -- but our revenue, because of deferred revenue, and our earnings as reported-- GAAP earnings as reported-- excluding special items, would be essentially flat year-on-year.

John Pitzer, Credit Suisse First Boston.

Couple questions.

First, you talked about June bookings in relationship to device type.

I'm kind of curious if you look at it from a geographic perspective, what you're seeing?

Are there any major changes by geography?

And then secondly, earlier today the market got a little disappointing news out of ASM Lithography and you bring a lot of industry knowledge to the table; and I'm kind of curious, do you think that litho is a good leading indicator of CapEx trends over the year and does the announcement out of ASML make you any more or less cautious about the way the year is going to unfold?

John, let me answer the last question first and I'm going to let Steve Newberry answer the bookings by geometry.

I don't know what the announcement from ASML means.

I'm pretty sure ASML has very low exposure to Intel.

So if -- in our case in June we have -- of course, they missed March and so we didn't.

I don't have any idea what that means.

Going forward, they have low exposure to Intel.

I'm not sure that they have much exposure in Japan.

So as we reach our numbers in the June quarter and we book in Japan, if ASML doesn't have exposure in Japan to offset their lack of exposure in Intel, then I think their bookings could be down and it doesn't mean anything.

There's one other thing that to consider is that ASML has a lead time of seven months.

It may be-- they did very well in bookings in 2004.

It may be that they have booked the leading edge products that they needed in to support the-- the customer's requirements for the first part of the year and the customers are reluctant to place additional orders because they may believe that the lead times won't be as great in the later quarters.

But, without hearing from Canon and without hearing from Nikon, so that you can put the story together, I don't know what it says other than ASML is going to have a-- a lousy bookings quarter next quarter.

That's the only conclusion I can draw.

So, John, let me give you some flavor about what's going on in the orders in June, relative to March and what their type is, et cetera.

There's going to be a little bit of an increase in orders coming from Asia, in particular Korea and Singapore.

And then Europe will be down a little bit with North America flat.

When you look at what's happening to etch orders by 200 versus 300, we were about 75% 300 millimeter.

We're going to see that start to climb a little bit.

We'll see that move up to over 80% being 300 millimeter and we would expect to see that-- that trend continue with 300-millimeter bookings in the 80 to 85% range as we go forward.

And then from a geometry standpoint, as Martin had commented, 87% being less than 130 nanometers and that's going to move up to 90%.

And I-- I don't expect that is going to be any different as we go forward.

David Daglio, Boston Company.

I guess my first question just had to do with the DRAM or the memory, can you tell us how much is going to DRAM or even estimate?

One of the things that we know is from a semiconductor revenue standpoint, flash represents 33% of memory revenue.

But in terms of specifically from a wafer fab equipment break down, other than the fact that there's obviously a ratio in there, a lot of times because we may initially ship a piece of equipment into a memory line, but that line gets converted at any given point in time to be outputting flash.

So, it's really difficult and maybe not even helpful to try to understand exactly what the break down is of wafer fab equipment into DRAM versus flash, because it's a pretty dynamic environment in terms of customers running different product sets through the same tool sets.

The other thing is, you've got at least Micron and Samsung who are in the flash market and I'm sure Hynix will do something similar as they become stronger in the flash market.

Modifying their wafer fab facility so they can run both flash and DRAM in the same fab-- and change month-to-month.

And they'll do this as their customer loadings change.

So it's-- they won't do it in every wafer fab because it's somewhere 5 to maybe 8%, depends on who you're-- which company you're talking to.

But it's-- the capital investment is about 5 to 8% higher to run both products in one fab.

But if you think in terms of taking some of your capacity and making it completely flexible, that 5 to 8% of additional capital for a single fab might be a great idea, but you-- I don't think that you'd want to burden your cost structure across both product areas with that additional capital just so you would have complete flexibility.

So it's really hard for us to determine when we ship something whether it's for fab -- for flash or for-- for DRAM.

That's why we have quit talking about DRAM and quit talking about flash as separate entities.

We talk about them now as a single product just like we don't differentiate DSPs from microcontrol-- high speed microcontrollers because it's just too difficult to tell, you can run either on the same line.

Timothy Arcuri, Smith Barney.

I actually had two questions.

Jim, the first question kind of is on the breadth of the spending going on right now in the memory market.

If I look at your orders, you had about 155 million of your 200 million-ish orders from Korea.

If I look at the same number in-- in-- in the-- this-- this current quarter, it was down to about 40 of that same 200 million out of Korea.

So it suggested there was a big broadening of the customer base in memory during the March quarter.

You know, lots of folks are really worried about memory falling off during the back half of the year.

What-- what does that broader customer base mean to you and is it sustainable into June and kind of into the back half of the year.

We're going to have to-- we're going to have to think about the math that you just used, Tim.

It was-- yes-- we had a substantial fall-off in Korea from December to March and that's essentially 100% -- well, actually December may not have been completely DRAM or memory.

And then we're-- Korea is up modestly in the June quarter.

But when you look at memory as a percent in June, it's falling off by a third.

So we're expecting to pick up some orders for memory-- may not be DRAM, memory in Taiwan, principally-- a little in Japan.

So when you look at memory total, we've got business in Japan, business coming out of Taiwan in the June time period, and that's helping to bolster our overall bookings.

But, again, as we had said, the-- on flat bookings, DRAM is falling by roughly a third.

Okay.

And then maybe as a quick follow-up, did you mean to imply when you were giving guidance before for what you thought foundries would be in June?

If you run those numbers it implies that the foundry orders will go up in June back up to like a fourth quarter high, so it'll be up pretty significantly from March to June.

Is-- is that what you meant to imply, number one?

And is there really a much better tone coming out of your foundry customers today?

All we're doing is reporting what we expect to book. so, yes, the foundry business is going to be better in June and it's up substantially from what it has been.

And so the math works again.

Jay Deahna from JP Morgan.

Couple of quick ones here.

First of all, your order guidance last quarter and this quarter, is that net-to-net or gross-to-gross?

Gross to gross.

And then on your June orders, you suggested in the January call that perhaps they could be down because of weakness in memory.

Now you're giving guidance for flat.

Is that an improved outlook from Japan and Japan like you were just talking about, or something else?

I went back-- because someone else raised this before the conference call.

I went back and read what I said in the conference call.

I never said June was going to be weak.

I never said June was going to be down.

I went back and read specifically.

What I said in answer to a question from Tim is that the memory business was going to be down in June, which it is.

So-- relative to the December time period, I'm sorry, yes, because we talked about-- we were giving conference call on the December business, talking about March, and a question came up about June.

And at that time we said that the memory business would be down in the June quarter relative to March.

As it turns out, as we just went through this discussion, it is down slightly.

Well, it's down by memory all over-- I was thinking about DRAM.

Memory in total is down about a third from our March actuals to our June guidance that we just gave.

But I never gave guidance that the June quarter would be down from March.

I didn't give guidance at all for June.

Jim Covello, Goldman Sachs.

Quick question, I guess, first on the revenue line.

Is -- you're doing about 310 or so million in net orders.

Is there--do we -- when we're modeling this, should we think about revenues that we're getting to that?

Or because of the deferreds the revenues are going to remain higher or because the kind of P&L is goofy just because of all the SAB 101stuff, not yours, just the industry's P&L.

Should we-- when we're thinking about modeling it, should we think about modeling revenues down to 310 or is there a reason to believe it's going to be higher.

I think, Jim, I think that's a good question because as we've talked about our shipments falling off a little bit, in fact, because we have deferred revenues as well as our Japan shipments in inventory; we are expecting that we will, at least for this quarter and the next, see our revenues be in the similar vicinity that they've been.

As our shipments are slightly down this quarter, and then we'll see what our shipments will be in the September quarter.

But there's-- there's no question that our SAB 101 practice of revenue upon acceptance is a situation that allows us to keep our revenues running at a rate slightly higher than our shipment output.

Jim, a way to think about this is, if you look at our deferred revenue, which we started giving because deferred profit which we're supposed to put on the -- show on the balance sheet was not illuminating enough.

But you ought to add-- what we tell you is revenue in-- potential revenue or-- it's systems shipped that are in our inventory that will eventually turn revenue in Japan, and I think that number is $49 million or something of that nature-- then if you take the deferred revenue and then you take our backlog; you add all of that together, you get $602 million.

So coupling $602 million with $310 million, if we want to ship 345, that means we have, I think, that's 20 quarters at 325 -- I mean 345.

So we don't have a problem.

Yes, I don't think you need to start worry about modeling down to 310 million for sometime because we've got a healthy backlog.

Now, given enough quarters and if the bookings drop dramatically, then of course the situation will change.

But if we're booking at 310, 315, 320, somewhere in that neighborhood, there's -- and we don't have substantial backlog calculations, you take all of that and put it together, we can run at 345 million in revenue for quite sometime.

Michael O'Brien, Bear Stearns.

Two questions, I guess.

One, if you could just maybe qualitatively talk about the disconnect between flat CapEx and what the customers are currently ordering at.

Maybe who -- what areas are underordering?

Or are all customers underordering?

And then secondarily, a lot of worry out there about memory spending overall rolling over pretty aggressively with DRAM prices coming down.

Have you seen any hesitation that would cause you to worry about a severe drop in memory spend in the back half of the year?

Mike, relative to where the industry is off, the-- we expected the foundries to be weak and they are.

We expected them to be weak for a couple of reasons.

One is that they had-- they took a lot of deliveries in the last half of the year, as well as we have a couple of foundries that are in a -- an under-utilization even at the leading edge and it's for a variety of reasons.

And-- that are specific to those-- those particular foundries.

The-- you can't -- I can't sit here and tell you, well, is it-- is the CapEx going to be down based upon the first half the year?

If they just raise their order placement as well as begin to take deliveries in the last half of the year, they can spend all of the money.

If the -- if they stay at the levels that they are ordering now and we are shipping now, then our expectation is that CapEx is going to be down between 10 and 15%.

I think that if it stays like it is now, the areas of weakness would be foundries as well as, to some degree IDMs; although Intel kind of pulls that up.

But I think overall, if you looked at IDM from '05 and compare it to '04, the IDMs would be down and so would foundries would be down and memory would be flat to up.

Now, relative to memory spending, I've heard all of the discussion about the memory people not spending and I've heard all of the discussion about pricing and I think that it is entirely possible-- this is not a forecast again, I am speculating here.

It's entirely possible that the memory people will spend right through this.

The reason I give for that, there's still a great amount of memory capacity at 200 millimeter which is pretty unproductive from a cost standpoint relative to 300 millimeter.

That's one.

Number two, if you're a memory supplier and you have a lot of 200-millimeter capacity, you can't build the leading edge devices today because we don't have much 300 -- 200-millimeter equipment that will operate at 90 nanometer and below.

It wasn't designed to do that and most people when they designed the 300-millimeter equipment, designed it as solely 300; in some cases it's design is 2 and 300 millimeter, but it is expensive to do 200 millimeter on 300-millimeter equipment because it is more expensive and your cost base will go up.

So all of that's-- even-- even that is cheaper than building a new wafer fab.

The one caveat is that a lot of the companies are still running flash, at least today, on 200 millimeter.

There are a lot of segments in flash that aren't as-- under as much technical pressure, in other words, technology change pressure as there are DRAM.

There are more niche markets in flash that you can serve with a larger feature size device where you're not competing solely on price in the commodity market.

So I -- I look at the situation and I don't think there is a clear answer that suddenly the DRAM people are going to quit spending money.

Timm Schulze-Melander, Morgan Stanley.

Question, I guess for Martin here, couple of quarters now you've referenced the installation and warranty expenses as well as some improved field resource utilization as being the driver where gross margins are coming in better than assumed in your financial model.

Could you just give us some insight as to what it is that you've done or are doing differently?

And, secondly, are those margin improvements, is that a step change or is that something that is expected to continue to reoccur in the coming quarters?

I think the first thing to say is that the model that I used, the annual model and the quarterly models that I presented in November are still appropriate and, at this point in time, we are not choosing to revise those.

Relative to what I've-- what I've articulated in prior quarters, you're correct to say that we've spoken to installation and warranty and you're correct to say that we've spoken to resource utilization in the field.

What that means is-- and it's always a valuable thing, if we can install our systems faster, it costs us less and it accelerates our potential to get an acceptance from a customer and record revenue on the face of the P&L.

So operationally we give it a lot of priority.

It leverages both parts of the P&L, the statement of revenues as well as cost performance in the Company.

In terms of resource utilization, as is relevant for everybody, we exist in a global marketplace, and our operational challenge is to make sure that the resources are in place in the fabs around the world consistent with there being systems to install.

And that is a significant operational challenge and we give it a lot of focus and we're making progress.

So would those benefits do you expect them to -- are they sort of one-off benefits that are being sustained or sort of continues improvement benefit that should affect future quarters as well?

First of all, probably the best way of answering that is to-- is to direct you back to the guidance because the guidance assumes whatever is appropriate for installation or warranty and resource utilization we have reflected what we think we can achieve in our June guidance related to those and other things.

Ted Berg, Lehman Brothers.

I had two questions.

One was just a clarification on the earnings numbers that you reported on your press release.

And the second is on market share.

In terms of the earnings, you've posted GAAP earnings of 41 but you mentioned a couple items that were one time in nature and I'm wondering what the pro forma earnings were excluding this pre-tax restructuring charge of 14 million?

The-- probably the best way to do that is if-- if you look at the page after the balance sheet in the press release, there's a full reconciliation of the GAAP income to the ongoing income.

But to try and do it verbally, there were two non-ongoing items, I spoke to.

The first was a tax refund that is recorded in our SG&A and that's a-- an $8 million gross number.

The second is an ongoing item related to facilitates restructuring and that is recorded, again, in our operating expenses and it's-- it shows up on the face of the P&L as restructuring; that's the 14.2 million item.

Both are tax affected and we've applied the 25% rate to those items.

So the ongoing net income per diluted per share is $0.44, and that's in the-- in the reconciliation table.

Okay.

And then on the market share situation, looking at the-- the orders growth in etch for the industry last year, this is data that Semi publishes on a monthly basis.

If you add up all the months, orders in etch, I think, were up 66% last year and wafer fab equipment orders were up, I believe it was something like 82%.

So etch was up less than that.

You grew-- you guys grew your orders substantially above the industry so obviously gained some share.

I was wondering what the-- the trend in '05 is.

Is there is any reason that etch orders would grow in excess of overall wafer fab equipment this year or any explanation for any type of trend that you anticipate?

Ted, we did a-- a study on the number of etch steps as well as new uses for etchers in order to help customers achieve the sell structure in the memory business as well as the gate performance-- the gate length -- the feature side of the gate so that they could achieve their-- the speed of their-- of their logic devices.

In addition, the industry is moving to hard mask etching.

So it's entirely possible that we'll see etch steps grow faster than-- than, say, lithography because you-- you will print the feature, then we have to etch the hard mask and then we have to etch the feature underlying the hard mask and then you have some process for removing the hard mask and that can be etch related or stripper related.

So it's entirely possible that we'll see etch grow faster than, say, lithography.

Now, when you look at some of the other deposition areas, it's also possible that it would grow faster, say, than metal deposition but probably not faster than dielectric deposition since some of the hard mask will be done with dielectric machines.

But I think it's entirely possible that we'll see etch grow disproportionately to some of the mainstreams in the wafer fab equipment market.

We'll just have to see if that plays out as people are migrating to some of these more complex structures in order to get the features that they want on the device.

Patrick Ho, Legg Mason Wood Walker.

Two part question.

Jim, from the January earnings call to now, what do you feel is the confidence level from your customers?

Do you see a big change there?

And in terms of your June quarter booking guidance, how much do you think of it is driven by your own market share gains in the etch market or just basically an industry pickup?

Let me answer the second question first.

The market share-- I think my concern is that we may not show as much market share growth in '05 as we did in 04 largely because some of our major customers may be spending less.

And-- even if-- even if CapEx is flat, some of our major customers may be spending less and some of the customers that-- where we have little or no presence may be spending more.

So that-- we could do just as well from a -- on a competitive basis in different accounts.

But where we haven't a presence or a low presence and we're not gaining share there, we could still be gaining share other places and we could come out net flat, maybe even down.

I really think we'll come out-- that we'll grow either equal to the market or slightly better than the market even though we are at some disadvantage in who will be spending money; because we are making some progress in some customers where we haven't had a significant presence in the past.

Then on the first question of which customers have confidence-- more confidence than the others, I just can't answer that.

There isn't anyway for me to judge that.

Mark Fitzgerald, Bank of America.

Martin, given the guidance for flat share count here and the aggressive buy-backs you've been doing, is this kind of $68 million level what you have to do to keep the option dilution neutral for the share count?

And just a follow-on derivative question, can you give us any guidance on expensing of options here?

Is it expected to run the 20, $25 million range that you've been running at?

I'll deal with that in sequence.

The 144 is obviously just a stake in the ground.

It's not intended to be a wonderfully precise set of guidance related to our stock repurchase plans or the impact of options exercise.

It's just relatively consistent with our diluted share count for the March quarter.

So I would say that I would like to reemphasize the point we made in our press release today, we had a Board-approved approval to repurchase common stock of the Company and intend to exercise that approval in the coming quarter.

So that's the plan and we'll certainly continue to be in the market in a way that is not disruptive.

Related to options expensing, the first thing to say is that, relatively speaking, we've been in a fairly quiet environment for the last couple of years related to issuing stock options to our employees.

And the best evidence of that is the pro forma options expense for the Company.

And if you-- as I'm sure you noticed, take a look at the 10-K footnotes, you'll see that the average quarterly expense in pro forma in fiscal year '03 was $11 million, by the time we got to FY '04 it was down to 7, and in our most recent 10-Q our pro forma expense for our stock purchase program and stock options was down to $4.2 million.

So we are required, as you know, to adopt the new accounting pronouncements and record options expense in our P&L in our September, 2005 quarter.

And the first part of that is the stock options that are unvested at that point in time that we essentially inherit into that new accounting process and I would indicatively guide you to something similar to the number that we reported in our December 10-Q and that's in the $4 million range.

So the inheritance number, if you like, is $4 million; by virtue of divesting schedule on that stock, most of that rolls off within a 12-month period anyway.

The next part of answering the question is to emphasize that we are, as a company, committed to stock-based compensation for our employees.

And we would expect to grant a number of options and/or restricted stock to our employees mid-calendar 2005.

And consistent with almost every company in the U.S., we're evaluating options valuation models, we're evaluating volatility assumptions; and until I conclude that, I'm loathe to give you direction except to say pending that evaluation I would not expect our September, 2005 expense level to exceed the quarterly average of fiscal 2003, and that's something less-- the 10 or $11 million level.

The other-- the other part of this thing I think, and maybe this is an addition to my-- my answer to the first part of the question is to speak to the reality of the cash transaction related to options exercised and I could kind of paint a hypothesis here.

As you know, we have essentially 17 million stock options outstanding.

The cash consequence of that, assuming there is 100% exercise tomorrow, is that we would receive as a company somewhere in the range of $270 million.

If we elected, and certainly directionally consistent with our approval to repurchase, if we elected to maintain our dilution constant, we would have to spend about $100 million more than that.

So the relationship of options exercised to repurchases, if every single option is exercise at today's price I'm going to receive $270 million, I will have to spend something in the order of $100 million more than that to get back to the same statement of dilution.

Steve O'Rourke, Deutsche Bank.

Just a follow on to a previous comment.

Jim, do you foresee 200-millimeter equipment being used for flash memory at 65-nanometer technology?

And, if so, are you spending any significant R&D dollars to help develop these processes?

I don't think there'll be any flash devices of any consequence manufactured at 65 nanometers on 200-millimeter equipment.

There's just too many holes in the 200-millimeter equipment when you're going to that feature size that would make it really difficult to do that.

And I think we'll see most 200-millimeter fabs relegated to products that are maybe from 150-- 150 nanometer is about the last aluminum devices that were made outside of memory.

And so as you go forward in memory, even the-- some of the memory people are looking at moving to copper in the near-term.

So I think we'll start to see memory transfer to copper.

So there's just not a good 200-millimeter equipment base, from a technological standpoint, to be able to support much manufacturing at the 65 nanometer node on almost anything.

Okay.

And just a follow-up, can you give us an update on new product expansion efforts?

You've alluded to this in the past.

We're continuing -- one of the reasons that we are accelerating our R&D is because of customer interest that's growing on some things that we're doing which I'm unwilling to discuss at this time.

But the-- I think that we've got a plan developing technology for new applications that will be, in the broad sense, in support of what we do in etch, pre and post-processing in etch.

And we are excited about some and we are very excited about some things that we're doing from a technological standpoint, but they are some way from being an operating product in customer sites.

So we've still got a lot of work to do, but we are moving forward, maybe at a little bit higher rate than 3 or $4 million a quarter than we've been spending.

Ben Pang, Prudential.

I want to follow-up on your market share comments.

You mentioned that in 2005 one of the concerns that you have that in customers where you have a low market share, if they don't spend-- or if they spend proportionately more your market share numbers will-- will not be as good.

Can you give us an idea of what type of market share opportunities are available?

In other words, are there still accounts that can be turned around this year, in 2005?

I think so.

I outlined this in an earlier conference call when I talked about where some of our market opportunities are.

And talked about what market share we had, by microprocessor, IDM, to a degree memory; and which IDMs we had low share.

And the top of our list is Japanese IDMs.

We're doing well in Japan on a relative basis.

We still have a great deal of opportunity with some IDMs in Japan.

We also have opportunities with memory companies in Japan.

So those would immediately come to the top of our list.

Some other accounts where we, in the past, have not had great market share, we are still working on those and we see opportunities for them also.

There are some significant customers where we don't have market share that I think in the near term it's unlikely we will make progress.

Are the Japanese opportunities something that can occur within the next two quarters?

I think we -- the realization of things that we've done over the last two or three quarters that will turn into possibilities this quarter is very real.

Stephen Chin, UBS.

First just a quick one for you, Jim, back to your comments on the foundry business in June likely growing materially quarter-over-quarter, is this foundry strength due to more than just one customer?

Yes, yes.

But there's-- there is a large order in there from one customer.

Okay.

Fair enough.

And-- and just as a follow-up to that, when you do talk to your customers most recently, what kind of feeling do you get that they will indeed go ahead and accelerate their pace of placing orders to hit this current CapEx forecast of flat to down 5%?

And what do you think the gating factor is for them to free up these budgets.

Let me break the customers down into two categories who we talk to on a regular basis.

In the memory accounts, they are not nearly as pessimistic as I read the analysts to be relative to the memory market.

They were quite prepared for memory prices to decline in first and second quarter.

They didn't decline as fast in first quarter as expected.

They may have declined a little bit more in second quarter.

But they believed that the-- that the overall demand in first and second quarter for memories would be down relative to the recent past which has-- has been going on for now a number of years.

They fully believe that the memory bit consumption will grow dramatically in the last half of the year.

And, again, my only concern is so much of this stuff goes in consumer products that oil could have an impact on that.

But at the times that I've talked to them, that hasn't been on the foremost -- that's not one of the things that they look at most critically.

With the foundries, the foundries are a little bit perplexed because they, in general, they need 90 nanometer capacity because there's a pretty significant movement to 90-nanometer processing.

At the same time they have under-utilization at some of the trailing edge foundries where they expected to generate cash.

So they would prefer, obviously, to have the older products running at higher volumes, generating more cash so that they have a more comfortable financial position to invest at 90 nanometers.

So they are a little bit more concerned than the DRAM people and that's about all I would characterize the situation to be.

Operator we have time for one more question.

Timothy Summers, Stanford Financial Group.

I was curious to know if you are beginning to see inflationary pressures on some of the components that you purchase and some of the aluminum for your chassis'?

And does that present a risk for your gross margin outlook as you look into the second half of this year?

No.

We're-- we're not seeing that kind of price increase pressure.

In fact, we continue with our supply chain management organizations to make significant progress in working with our existing suppliers and new high capability suppliers that we've brought into our supplier group at reducing cost in a variety of ways.

And so while there may be some elements of raw material that in fact can experience inflationary pressures, there are opportunities via design activities and other types of sourcing location activities and manufacturing expertise being applied that allow for us to continue to have cost reduction opportunities and offset any of these types of pressures that you talk to.

And so one of the things that I think is a good representation of that is, in a declining revenue environment that we've experienced from our peak revenues of a couple quarters ago; our ability to maintain our margins at significantly better margin levels than what we had in the past been able to do is a function of how well our suppliers are responding to the challenges of continued cost reduction in a declining volume environment.

But also it's reflective of the fact that our variable cost structure can move down very quickly and not be as impactful to gross margin as it has in the past.

So we're very comfortable that our ability at these revenue levels to maintain margins in this vicinity ought to occur.

Steve, is merge-in-transit something that you guys might be looking at as you go into the latter half of this year or '06 to perhaps help improve margins?

What was that term you referred?

Merge-in-transit?

Merge-in-transit?

I'm looking around the room trying to see if there's somebody who knows what that means.

So if you could explain that a little bit more maybe I could answer the question.

We can take it offline.

That's all right.

Ladies and gentlemen, at this time we have no further questions.

I would like to turn the conference back to management for any concluding comments.

We'd like to thank all of you for participating in today's conference call.

This does conclude the call for this quarter.

Thank you.

Ladies and gentlemen, that concludes the Lam Research March quarter 2005 financial results conference.

If you'd like to listen to a replay of today's conference, you may dial 303-590-3000 using passcode 11026811#.

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