科林研發 (LRCX) 2005 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Lam Research Q2, 2005 conference call.

All 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 any assistance, please press the star, followed by the star followed by the zero.

As a reminder, this conference is being recorded today, Wednesday, July 20, 2005.

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

Please go ahead.

Thank you, Rob.

Good afternoon, and thank you for joining us to discuss the financial results for quarter ending June 26, 2005.

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

Today we are introducing a new format for our call with PowerPoint slides coinciding with our commentary.

The slides are accessible from the Investors section of Lam's website, by selecting the calendar webcast button under the Investors section.

Here today are Steve Newberry, President and Chief Executive 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 report.

We encourage to you 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 until 3 p.m.

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

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

Thank you, Kathleen.

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

Highlights today include new orders, revenue, gross margin and operating profits, all consistent with our guidance.

Earnings quality and outstanding asset management performance that delivered cash from operations of $134 million, more than double the reported after-tax profits.

New orders entered into backlog for the quarter were flat at $315 million, adjustments out of backlog were $5 million and there were no order cancellations.

Due to our market share successes, 300-millimeter continues to dominate our systems business at approximately 81% of total systems new orders.

Our strength at leading edge applications is reconfirmed by the proportion of orders at less than 130-nanometer technology node of 88%.

Geographically, new orders entered into backlog were by and large as expected with slightly more strength in Japan, offsetting some softness in North America.

Early signs of strengthening foundry demand are reflected in our highest level of foundry new orders since the June 2004 quarter and a 3x improvement sequentially.

New systems orders, by customer segment, comprise memory at 53%, IDM logic 18% and foundry other at 29% of the total.

Revenue of $354 million met the upper range of our guidance.

Shipments in the quarter exceeded our expectations, driving a lower June, ending unshipped backlog of $351 million.

Our new orders and shipments book-to-bill was effectively constant sequentially at 0.88.

For more complete details on orders and revenues geographic breakdown, please refer to our press release today and reconciliation of new orders, shipments, revenues, deferred revenues and backlog on our web site.

Gross margins were approximately 50% in the June quarter.

As we previously outlined, we have selectively increased our R&D investment, focused on leading edge Plasma Etch and certain post-etch multi-sequence processing.

Total operating expenses were maintained within the targeted range.

Our effective tax rate was 25% for the June quarter and fiscal 2005 year.

The cash outlay for taxes was substantially lower than the income statement rate due mainly to the conversion of deferred tax asset into cash.

We are continuing to evaluate non-ongoing opportunities to apply certain provisions of the American Jobs Creation Act relating to non-U.S. earnings repatriation in fiscal 2006.

We elected none in fiscal 2005.

We've generated cash from operations of $134 million this quarter, driven by profit levels and significantly the outstanding results from our focus on customer payment discipline.

We achieved this improvement at the same time we discontinued the use of our accounts receivable sales program.

At this point, we have achieved approximately two-thirds of our previously modeled cash goal for the 2005 calendar year.

Consistent with high shipment levels and the quality of our supply chain, the benchmark performance of inventory turns improved to 6.5.

We received $24 million from the exercise of employee equity plans, and we used $99 million to repurchase common stock at an average price of $27.54.

The total cash balance, including restricted cash, increased to $894 million at the end of June.

As outlined in our prior earnings call, the sale of unoccupied facilities reduced the required level of restricted cash to $85 million.

Deferred revenue and deferred profits were $151 million and $90 million, respectively, at the end of June.

These balances exclude approximately $53 million of anticipated future revenue 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 $4 million, depreciation and amortization amounted to $6 million for the quarter.

At the end of the period, net fixed assets were $41 million, and we retained employment levels essentially flat at 2,200.

Based on the financial results presented today, that again reinforce our operational execution, the decisions to accelerate R&D investments, and the reality that in the September 2005 quarter we are required to expense equity-based compensation, I would like to update the financial model of Lam performance that we presented in our November 2004 analyst meeting.

You will remember that with certain assumptions, including constant market share, constant pricing, and constant etched segment spending as a percentage of total wafer fab we modeled Lam revenue and earning prospects under certain wafer fab investment scenarios.

To recap, assuming a flat wafer fab year 2005 over 2004 we said Lam could achieve revenues after proximately $1.5 billion and generate EPS of $2.07.

In a down 10% scenario, revenue of $1.4 billion, and EPS of $1.77.

In a down 20% scenario, revenue $1.3 billion and EPS $1.51.

The impact of higher R&D investments on the full calendar 2005 year is anticipated to be in the range of $10 million pre-tax.

The impact of equity-based compensation for the second half calendar 2005 is approximately $18 million pre-tax.

Accordingly, the revised Lam model for the calendar 2005 year at each of the three wafer fab scenarios presented is reduced from the prior presentation by approximately $0.15 EPS.

Our September quarter guidance that Steve will speak to more comprehensively in a few moments includes equity-based compensation expense of $9 million pre-tax.

Worthy of note, we regard the higher R&D investment as purely discretionary, but prospectively, the equity-based compensation expense is fundamentally fixed.

Accordingly, under these new accounting rules, our operating break-even point has been increased to approximately $210 million from the $190 million reported last November.

We'll now move to Steve.

Thank you, Martin, and thank you to all of you for joining us today to discuss our business and our outlook.

I will recap some of the financial highlights that Martin discussed in greater detail, and make a few comments on the company's performance in the June quarter, as well as the current business environment and conclude with our guidance for the September quarter.

The June quarter's financial performance highlights the ongoing strength of our business model, and supports our expectation that we will generate over $300 million in cash from operations, during the course of calendar year 2005.

This performance has enabled to us execute to an aggressive stock repurchase program.

This program is intended to reduce the number of shares outstanding, beyond the dilution rate as a way to return cash to our shareholders, and I am pleased we were able to repurchase 3.6 million shares in the June quarter.

We are committed to exercising, at our discretion, and in future periods, the remaining $83 million of Board-approved repurchase of Lam common stock.

Martin noted that we have increased R&D investments and intend to maintain a higher level of total R&D spending in the next several quarters.

We believe the current challenges facing our customers in pre- and post-etch applications are presenting compelling opportunities for Lam.

Many of these challenges are new and the result of the transition to sub 90-nanometer device structures.

Lam has extensive production experience in etch, strip, and clean applications and we expect to be able to successfully leverage this knowledge into new products and new capabilities for our customers at the 65, 45, and 32-nanometer nodes.

In the June quarter we had several significant market wins.

We were successful at winning both new customer penetrations and extending our position at 65-nanometers to customers where we are currently process tool of record for 90-nanometers.

During the quarter, we increased and strengthened our position in every region and gained share in next generation dielectric and silicon applications in memory and logic devices.

We were successful at winning multiple new advanced front end of the line silicon applications around the world with notably a successful new penetration for sub 65-nanometer silicon applications at a major logic IDM customer.

At a major foundry, we were able to win new 65-nanometer dual damascene copper applications, as well as win 65 nanometer applications by successfully defending our existing 90-nanometer positions.

These are just a few highlights from a very strong quarter from a market share and market positioning perspective.

I will turn now to the overall business environment, and outlook before concluding with our September guidance.

It appears that the U.S. and global economies are demonstrating continued modest growth.

Consumer confidence in the U.S. has improved recently.

Employment is increasing and inflation remains in check.

This environment is positive for a key driver in semiconductor units, the consumer.

Strength in portable electronics such as laptop PCs, hand sets, and digital storage, along with an upcoming game console product cycle provide confidence that underlying unit demand for semiconductors is likely to grow in the near term.

We expect that most semiconductor manufacturers will adhere to their stated capital spending plans for 2005.

We do see a few exceptions where firms could spend less than planned, but these adjustments will not have a significant impact in the overall capital spending outlook for 2005.

Based on current order rates and market conditions we believe capital spending is likely to be down close to 10% year-over-year, with wafer fab equipment down closer to 12% year-over-year.

Recently, foundry demand has been impacted by inventory issues in the chip supply chain which should be fully corrected by the fourth quarter of this year.

Within memory we expect to see continued investment as we go forward.

The outlook for memory consumption is strong and recent price strengthening in DRAM is a positive sign for the industry.

Last, expansion plans at major IDMs and logic makers are expected to continue to progress.

Overall, industry conditions are fairly stable, supporting our view that supply and demand are currently roughly in balance with the potential for bookings growth in late 2005.

Near term, the environment is being impacted by a specific customer investment timing and reflects the strength in first half deliveries.

Moving on now to guidance for the September quarter.

We expect new orders for September to be flat, to down 5%, due to uncertainty of customer order placement timing.

Shipments will be down approximately 22%, to $280 million, reflecting prior quarter bookings and customer requested delivery schedules.

Looking into December, we expect shipments to increase 15% to 20%, which will result in total second half shipments, down roughly 15%, versus the first half of calendar year '05.

Revenue will be approximately $310 million to $330 million, as a function of favorable shipments in the first half.

December revenue levels should be similar.

Gross margins will be approximately 48% prior to the effect of $3 million in equity compensation expense.

Including this expense, gross margins will be approximately 47%.

Operating expenses will be essentially flat at $100 million, which includes $6 million of equity compensation expense.

This will result in earnings per share in a range of $0.26 to $0.30, which includes $0.05 of equity compensation expense per share.

This is calculated on a share count of $142.5 million.

Our tax rate for fiscal 2006 will be 27%, plus or minus a percentage point.

This is a result operating profit being lower due to the inclusion of equity compensation expense and reduced R&D tax credits going forward due to its expiration in December 2005.

And, with that, I will open the call to questions.

Operator, please poll for the Q and A segment.

Thank you, sir.

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

If you have a question, please press the star, followed by the one on your telephone keypad. [Operator Instructions.] And our first question comes from Robert Maire with Needham & Co. Please go ahead.

Yes.

In listening to your guidance going forward for the second half of the year, you seem to be guiding, or talking about the year being down 10% and orders, shipments being down somewhat.

Is that suggesting that your business will be roughly in line with the overall WFE business?

Is that to suggest that you are not gaining or losing share?

Is that your view?

Well, I think that when we talk about CapEx down 10%, wafer fab equipment down 12%, our view is that actually the etched segment itself is down slightly more than that, probably close to 15%, which is a pretty typical situation.

What you find, and if we look at the '04 data, the etched segment grew much faster than the wafer fab equipment spending did and, in downturns, it's historically true that the etched segment will decline a little bit more than wafer fab equipment.

So as a result of that, with our output ultimately being in line with wafer fab equipment, we think it actually supports the fact that we're picking up a few market share points in 2005.

Okay, great.

Thank you.

And our next question comes from Bill Lu with Piper Jaffray.

Please go ahead.

Yeah, hi there.

Good afternoon.

If you look at your bookings from the foundry, it's pretty robust in the quarter, probably a little more than your peers.

Can you talk about what is going forward in the third quarter what that might look like from the foundries and the other segments.

Talk about relative to the September quarter?

Yes.

You know, for us, again, I think reinforcing the fact that we're -- we're continuing to make penetrations on specific application increases, and I think our view is that while the September quarter is a little bit uncertain because of a lot of activity that appears to be centered in terms of order placement somewhere in the September, October timeframe,of course, we'll have to see how this thing plays out a little bit, as the quarter goes on, but as it relates to us, we're certainly seeing a -- a good order placement rate from the foundries, as Martin noted in his comments, foundry for us was a -- a good improvement in this quarter, and I would expect that we will see that in the September quarter as well.

Thank you.

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

Please go ahead.

Steve, just to follow up on that question, when you said [inaudible] in the September quarter, as well, do you mean foundry orders should remain relatively flat at that 90 million level?

I think the foundry will be relatively flat in September, relative to the June quarter.

I think we may have done a little bit better in the June quarter than what you hear some people talk about in terms of foundry, but I think that, you know, foundry is clearly picking up and I think that for us being relatively flat June to September is still indicative of the fact that things are beginning to pick up in the foundries.

Then as a follow-up question, guys, this is the first quarter that I can remember where you didn't have a little bit of upside on the gross margin line, in the June quarter.

Most of the upside came from the other income line.

What do you want to model for other income going forward and help me understand why after giving us upside on gross margin this was a more difficult quarter to give us that upside?

Thanks.

I will take a shot at that, John.

Maybe we are getting better at forecasting is one answer to the question.

We don't set out to sandbag the guidance.

We set out to get it right.

So we feel pretty good coming in close to our expectation for -- for margin performance.

And clearly the operational momentum that we had targeted in terms of -- in terms of pricing, in terms of the installation and the warranty performance is still a very significant part of the performance in the quarter.

Relative to other income, and expense, you know, there are essentially two core components to that item.

One of them is the net interest income for the company and the expectation for that is obviously consistent with the absolute value of cash and rates at any point in time.

So, you know, when you are looking at a cash balance in the quarter that's averaged about $850 million or so, and you assume a 3% rate, you are going to be looking at a $5 million interest income number as a matter of -- a matter of routine.

The second component of other I&E is foreign currency.

As we said on a couple occasions in the past, one of the attributes of the Company is we are very well naturally hedged.

So something more than 80% of our revenues are denominated in U.S. dollars and something more than 80% of our costs are denominated in U.S. dollars.

So we are very well naturally hedged and where we have some exposure, which in any significance is in Japan, we actually have a hedge program on the yen from all the placement all the way through cash collection.

So with those two things we manage the effect side of other I&E within a tolerance of a couple million dollars, and we give guidance assuming our ability to predict currencies within a tolerance any closer than that either way is pretty limited.

So plus or minus $2 million to $3 million is the way I approach F.X.

We'll take the next question.

Our next question comes from Suresh Balaraman with ThinkEquity Partners.

Please go ahead.

Steve, regarding the equity-based compensation, is the $9 million number something that's likely to change meaningfully for 2006?

Yes, I -- it's going to change a little bit but I would say not materially.

I would expect you to see movement plus or minus $1 million, and the reason that's the case is that the expense that we have included in our guidance, of $9 million actually consists of three components.

So one component is the cost of the employee share purchase program, which depending on where that program is in its contract window, will expense up and down a little bit.

We also, as I spoke to the in the last call, inherited an amount of stop-based compensation by virtue of unvested options outstanding coming into the September quarter and that number will trend down over time.

The third component of equity-based compensation expense is the fact that we are still planning on having a restricted stock grant to certain employees in the mid-August time frame.

And our target for that plan is something less than 1% of total shares outstanding RFU units.

So, you know, you are going to see some movement.

It is going to be plus or minus $1 million, but there are three components.

And is the tax rate applicable to the equity compensation-- is that similar to the overall [inaudible] average?

Yes.

Okay.

Thanks.

And our next question comes from Timothy Arcuri of Smith Barney.

Please go ahead.

Hi, guys.

Actually, I have two things.

Number one, clearly, the operating model here has been proven during this upturn and you bought back an extraordinary amount of stock this quarter.

You know, I guess, moving forward what are your feeling about potentially paying a dividend?

Because, obviously, it's pretty unforeseen that you will lose money during a downturn.

And you are generating lots of free cash.

So, number one, what is your feeling on a dividend.

I have a follow-up question, actually, as well.

Tim, we have been pretty consistent about conveying our thought process relative to returning excess cash to our shareholders.

And the logic goes something like, the most flexible way we can offer an opportunity to our shareholders to realize value is to give them the choice about participating, and we best do that with stock repurchase over dividends, and I think you are aware of the tax consequences, as well that for some can be favorable.

So the headline is there's a reason why we have elected the strategy we do.

It's mostly defined around it being most attractive for our key shareholders, and we have no plans for instituting a dividend.

Okay, Martin, thanks for that.

And then I guess as a second follow-up, you know, regarding this new tool that's in development, when can we expect some revenue for that tool?

Tim, you know, where the tool is right now is in a, you know, very early evaluation environment, where as a function of it being a new technology, we really want to do a robust confirmation that, one, the technology delivers the results in a variety of ways, both in terms of technical capability, but also that it can produce those results repeatedly, as more volumes of wafers are put into effect.

I would expect that we will get the answers to a lot of that over the next six months.

We're doing some very limited additional demonstrations for some customers, but I would think that from a revenue standpoint, assuming that we make it through these gates for capability, that we wouldn't see something until the middle of '06 from this potential product.

Thank you.

Our next question comes from Jay Deahna with JP Morgan.

Please go ahead.

Hi.

Thanks.

Two questions, Steve.

The first one is you mentioned that you had some sort of sub 65-nanometer silicon-etched design win for the major IDM.

Is that a microprocessor application?

That's the first question.

And then the second question, can you talk about the psychology of the memory customers at this point completely different pricing situation, or trend in what we saw in the March/April time frame.

What is that doing in terms of the way they are articulating their plans to you?

Thank you.

In our comments, we very specifically were non-specific about who that customer may be.

Primarily, because that's what's been requested of us by the customer.

So I'm not going to add any more specificity to it other than just to re-emphasize that it's a major customer.

It's a new penetration for us.

And, hopefully, as we go forward, this will be an opportunity for us to -- to generate some good levels of business.

As it relates to the memory peoples' mindsets, I think coming out of SemiCon West, we had a chance to meet with a lot of our customers.

I think that without exception, they were all bullish about what they thought the second half pricing environment and, therefore, profitability environment for them would be.

I think they all reiterated their commitment to going forward with their capital investments.

I think if there were anything that I took away from those conversations, was that a number of them were going to go off and look at what they thought their needs were going to be in the first half and were looking at whether or not they might be coming back for orders in the marketplace late in '05, so that they could be in a better position to increase output in the middle of '06.

So I think that with everything that I'm sure you are reading out there, and in our face-to-face conversations with the customers, there's a lot of confidence in the memory segment, both DRAM, and flash, that things are strengthening and I think that will bode well for us in terms of order rates going forward.

Thank you.

Our next question comes from C.J.

Muse with Lehman Brothers.

Please go ahead.

Yes, hello there.

You said an improvement in your foundry business.

Can you talk a little bit about your breadth there, whether that was isolated to one large customer or a handful of customers?

It was not related to one customer it.

It was a function of a number of customers, with a little bit of concentration in a couple customers in more so than the rest, but it was not one customer that constituted a -- an overwhelming portion of the foundry activity.

Okay, and just to follow-up on the foundries.

In terms of your guidance of bookings, flat to down 5%, in your view, the foundries could come back in the September to October time frame, does the guidance include the foundries coming back in in the third quarter?

The guidance makes an assumption that the foundry bookings activity will be relatively flat in September relative to June.

If the foundries are going to change their decisions in terms of their timings, then that's why you see a guidance between down 5% to flat.

Thank you.

And our next question comes from Steven Work (ph) with Georgia Bank.

Thank you.

First, quick question.

Do you partition out DRAM and flash as a percent of orders?

No, we don't partition them out.

And there's a couple of reasons for that.

One being that today, when a memory customer buys equipment, it is very often going to go into a line that's going to produce both flash and DRAM.

And so it's really, essentially, impossible to know exactly how much capacity is going into flash and how much is going into DRAM, and, in fact, they -- they move that back and forth as a function of where the demand drivers are in any given quarter.

Fair enough.

On a follow-up, you mentioned some design wins and are you seeing any changes in the competitive front in either dielectric or silicon etch market, particularly from a competitor in Japan?

Well, the competitive environment in etch is always challenging and always somewhat fluid.

I think that what's going on for us is an activity that really has been occurring for a couple years now, when we -- when we look at dielectric, we were fortunate to come into the marketplace with a very strong offering on our 2300 Exelan.

We were able to win a number of new positions at 130.

We were able to win more position at 90.

And now with our 2300 Exelan flex configuration, we continue to strengthen our dielectric capability.

We continue to strengthen our ability to control defectivity, which has a big impact on yield, and so we continue to gain the customers' confidence that our capabilities in dielectric really built upon 10 years of characterization activity with dual frequency confined technology.

We're able to solve their problems faster.

We're able to create a process window that is more readily usable by them, and so while our competitors continue to evolve their product offerings and continue to try and create a capability that is equal or, obviously, they are trying to create a capability that's better, our technical team has been able to respond to those challenges and that's why you hear us talking about what's going on in 65, because that's where the battleground is being fought.

And for us, we were very successful in logic, in dual damascene type of market share wins at 130 and 90 for dielectric.

In this last year, we have been focused on memory penetrations for both dielectric and silicon in critical front end applications where our market share was not -- not quite as strong as it was in logic.

Thank you and our next question comes from Avinash Kant with Adams, Harkness & Hill.

Please go ahead.

Good afternoon.

I wanted find out, did you give out some mix for the order guidance that you have, flat to down 5%.

What kind of mix do you expect from the memory, logic and the foundry guide?

We didn't give out any guidance, and I wouldn't want to talk about it, specifically, but I would say that if we looked at some aspects of what's going on in the September quarter, memory is going to be likely -- is likely to be slightly weaker than it was in June, logic is going to be stronger.

Foundry is going to be about the same as we talked about.

And so, you know, what we're -- what we're really seeing is a balancing of order strength within the three primary segments that we talk about, which, again, I think is indicative of a growing health in the industry overall, and that we're -- we're not seeing a situation where over the last couple of quarters we're pretty much the beneficiaries of very strong memory spending.

I think we're seeing logic and foundry begin to strengthen.

And if I may, on the 65-nanometer side and just trying to get an idea of the share wins and the new customer wins that you have been having, do you think most of the decisions have already been made, or what percentage of decisions have already been made roughly on this side?

I -- I would say that -- well, if you look at the industry as a whole, you can't say that most of the 65-nanometer decisions have been made because what's really going on now is the leading edge companies who are the ones that have been first to 90-nanometer, and are looking at beginning a number of wafer starts at 65 -- they are the ones that are making those decisions, and so I think that -- I don't know, 40% of the decisions -- I -- I think that would just be a guess.

But clearly, there are more 65-nanometer decisions to be made, but, you know, the 5 or so, biggest companies in the world quickly expanding to the 10 leading edge-type companies in the world, they are the ones making decisions now and in the next quarter or so.

Thank you and our next question comes from Ben Pang with Prudential Equity.

Please go ahead.

A quick question on the follow-up in terms of the memory.

The orders that you are expecting in the third quarter, are those for shipments in the -- in the calendar year '06?

Typically, with the lead times that we are seeing right now, orders that occur in the September quarter, some will be for delivery in the December quarter and some will be for delivery in the March quarter.

I think that there's very few customers and there's very few systems -- although there are some, that really go out and order for delivery in that nine-month out time frame.

I think that if we see a significant strengthening in bookings then you will see customers, in order to get themselves lined up to the slots that they want, they'll start ordering further out.

But right now, most of the volume is for delivery within the next six months or so.

Okay.

Thank you.

And our next question comes from Michael O'Brien with Bear, Stearns & Co. Please go ahead.

Yes, hi.

Just two quick questions.

On the swing orders, you know, that could potentially make the flat to down side, either the upper end of that or even better, would some of the swing orders be more memory, foundry or logic, or across the board?

And then I have a follow-up.

It is across the board.

Where we are now, if you think about it, 5% represents 15 million. 15 million represents three or four systems.

So all it takes is one foundry company, one memory company, one logic company who decides to come in with an incremental increase of, you know, 5,000 wafer starts per month and that can cause that kind swing.

So I think it is across the board in terms of potential.

Okay.

So it sounds like there's a few -- there's a few swing orders that could even make the scale that flat, conservative if -- if the fundamentals continue to get better?

There is always that possibility, yes.

And just as a follow-up.

I assume that you still subscribe to Jim's (ph) memory, whatever you want to call, it the intensity model, which would suggest that while memory, you know, is weakening a little bit, it's still staying very strong and you would expect it to stay strong in 2006, absent of a big decline in demand?

Yeah, I think that we expect that memory is going to be strong in '06.

The demand for, you know, the variety of memory capabilities across a -- a segment of the digital products that are expected to be a major part of consumer spending in '06 is -- it's going to stay strong.

And while the capital intensity of the industry is going up, a lot of that is a function of the fact that at the logic level, you are going from a eight levels to 10 levels to 12 levels, and potentially at 45 nanometers even16 levels, and so that's clearly going to provide additional capabilities in the logic segment for etch equipment, but memory from a device being designed into the products should remain very strong.

Thank you.

Our next question comes from Patrick Ho with Legg Mason, please go ahead.

This is Blake Fischer on for Patrick Ho, just a couple of quick questions.

What could you say has the pricing environment been like for the current quarter?

The pricing environment is -- has really not changed much.

In any given place you can have an intense pricing activity, and other places, you know, less so.

And so I would say, overall, there's not been much change in the nature of the pricing environment.

Okay.

And just another question here.

As far as orders right now, are you still seeing technology buys or are you starting to see capacity buys start to return?

Well, I think we're seeing a mix of both.

You know, clearly with 80 something percent going into less than 130, most of what's being purchased is for 90-nanometer expansion and then some 65, that's really related to putting in pilot capability and early learning for 65, but it's a mix.

What we are not seeing yet is just the -- you know, the huge buys across a wide range of customers.

That begins to add, you know, thousands and thousands wafer starts across the broad spectrum.

We're not seeing that yet.

Thank you.

Our next question comes from Jim Covello with Goldman Sachs.

Please go ahead.

Good afternoon.

Thank you so much.

I apologize, I hopped on to the call a little late so I may have missed some of facts and figures here, but if foundries came back pretty strongly this quarter, and we think they will stay strong in the September quarter, and memory you're saying, the memory customers are still pretty strong, you haven't really seen any big delta there, how do we get this big pickup in orders in the industry, and I mean something more than 5%.

How do we get a big industry upturn if memory customers have stayed really strong and foundry customers are starting to come back in order, where does the big pickup in orders come from out in the future?

That's a good question, Jim.

One, we need to put into context, the improvement in the foundry orders for us is a relative improvement.

If you go back to the prior quarter in March, foundry was very low, I mean, 9% or something of our orders.

And so while it's 3x, it's still, you know, 26%, 27%.

So if you look at that, on an historical basis, when the foundries really come back in the foundries will represent 40% or 45%, not the 26%.

So the foundries are in the market, and they are beginning to play to a little -- to a greater extent than where they were a quarter ago, but there's still a significant amount of foundry order placement activity that would be appropriate if they were to approach their normal spending patterns relative to capacity that's needed to support the industry.

Then what would you say the normalized breakdown is then between -- you know the logic customers, the foundry customers, and the memory customers?

I would say if you look at -- let me get a piece of data here for just a second.

If we look at, kind of, year-over-year for the last few years, I think if you -- if you looked at memory being 40%, foundry being, I don't know, 37%, 38% and then logic being about 30.

Now one of the -- one of the things we have to think about is for the industry, there's one profile, and there's a slightly different profile for Lam because our market share is in the 40s for memory, it's in 40s for foundry, but for logic, it's in the mid-20s.

And so our order profile looks a little bit different than the industry, as a whole, but for the most part, foundry and memory are pretty close in terms of their percentages, and if you took an industrywide breakout, probably something like 35, 35, for memory and foundry, and then 30 for logic would be about right.

Thank you.

Our next question comes from Brett Hodess with Merrill Lynch.

Please go ahead.

I was just wondering if you could talk a little bit about Applied's offering last week where they have the new etcher out that has the smaller edge exclusion, 2-millimeters versus 8-millimeters do you see that as a real issue for your customers and if so, are you already there or do you have plans to have a competitive technology?

Brett, I guess on the one hand, I would love to make some comments about it, but for the most part we -- we basically don't want to comment too much about a specific customer competitive offering, particularly when what's really known about that product is not yet known, given that it's very new to the marketplace.

What I will say is that if you look at some of the issues that are important to the customers, you see the uniformity across the wafer, out to two or three millimeter edge exclusion has been a -- an important determining decision-making criteria for customers for the last year and a half or so.

The reason that our product, the 2300 versus what really has now moved to the versus Keough version.

The reason that we have the world's leading market share position and the reason that we've continued to pick up some additional application wins is because we have the best CD control capability to 2 to 3-nanometer type of control and we have excellent performance out to the applicable edged exclusion area that matters to the customer.

And so while we'll be keeping an eye on this, I think our capabilities are very strong in this area and I would expect that we will remain very competitive going forward.

Good answer.

Thank you.

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

Please go ahead.

Two questions.

First is, Steve, on your guidance, you went out to December, giving revenue guidance, of the flattish guidance for revenues, is that reflective of how you are thinking about orders for the December quarter, as well, or is that just you can't connect the dots there?

You can't connect the dots and really the only reason that we kind gave a flavor for what was going on in December is because I recognize that, you know, if we come out and say, look, our shipments in September are down this 22%, I didn't want people to get the impression that that was something that was going to continue.

So we gave the guidance and said the shipments will be back up 15% to 20% and that when you look at the revenue implications because we are an SAB-101 company, you know really the decline in our revenues going from 353 to this 310 to 330 is a function, one, that at some point, we need to take our output levels down, as a function of the fact that we have been booking 315 million for the last two quarters, and that with the significant mark share wins that we have made in Japan, we have a lot of first shipments going into Japan and we have a traditional situation with Japanese customers where there's a longer acceptance time as part of the installation qualification process, and so, that's why you see the revenue in that 310 to 330 range, but because of the strength and the size of our deferred revenue backlog, and the fact that we have a lot of Japan inventory that technically may not be deferred revenue but in reality is future revenueable business we expect and intend that we will improve our ability to shorten the cycle time from qualification and acceptance in Japan and that's why we guided that our revenues should be relatively flat compared to the September quarter.

And if I could add a couple of comments.

I think, you know, Steve's commentary in terms of the acceptance cycles is really important because we have talked in the past about the ebb and the flow of acceptance cycles that range between two months and five months, depending on first in fab repeats and a large part of why we guided what we did was a function of the contents of the first in fab business.

But in terms of expectation of future revenues, for me, one of the best ways -- and hopefully, I spoke to this in my script, but the best way to think of the future revenue potential of the company and how to correlate that with the orders in any one period, remember that we've got something in the bank.

We have a backlog.

We have a backlog of unshipped orders.

That is in the range of $350 million.

We have deferred revenues of $150 million, so those are shipments to customers not yet accepted, and we have for very technical accounting reasons another $50 million of product that was shipped to customers in Japan but they have yet to take title to.

That all means that there's $550 million of future revenue potential.

And I think that's one of the reasons why we answer the question the way we do.

It's incredibly important for you when you think about future revenue and the future cash generating potential of the company, and Steve talked in his script about the -- the reality that our cash performance in the future is much more closely correlated around the earnings of the Company, and I spoke to that in November, as well.

And when we describe acceptance cycles slowing as a function of first in fab that has repercussions on cash collection as well.

So you need to be thinking about both of those things.

We'll take the next question.

Could I just follow up with -- a quick comment here.

When you talk about the foundry strength at this point, is it broad based?

I mean we have companies like U.M.C, whose utilization continues to lag here, and SMI is already forecasting a down 2006.

Are we really just talking about the premier companies in the foundry business coming back, or is it broad based?

To date, with the exception of one of those that you mentioned, the other foundries have been placing orders.

Now let's not confuse the fact that they are placing orders that, you know, it's off to the races and you know, we are getting $50 million a quarter type of orders.

The environment for the foundries is they are being cautious.

They are adding small, incremental amounts of capacity, and because we have a very good position across the -- the foundries throughout the world, when they do that, then we are able to generate the kind of bookings that we had in June and I expect that we'll see the similar type of environment in September.

And, again, when we talked earlier about the overall order levels for foundries, relative to what they historically have done, or could do, we are still operating well below that so there's still a lot of upside order potential for the foundries if they decide that they want to add capacity in greater amounts than what's going on right now.

Thank you.

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

Please go ahead.

Hi, good afternoon, guys.

Two questions, if I may, one for us and one for Steve.

Martin, and again, apologies if you touched on this, but just looking through the balance sheet there was a pretty significant move under other assets, went from $143 million to about $78 million, I was wondering if you could give us some detail as to, you know, what underlies that move.

And, then the second question was really a follow-on from the question about dividends, just ignoring the mechanism of whether a share buyback with dividends, but just looking at returning capital to shareholders, as we go forward, you have proven that you can make -- you remain profitable through down cycles, what percentage, what proportion, or range of your free cash flow would you anticipate returning to shareholders through the cycle going forward?

Thank you.

I will take them in order.

In terms of the other current assets and other asset progression, the primary message in that is consumption of deferred tax assets, and there are two reasons why we consume deferred tax assets.

One of them is we are able to convert them into cash effectively and about half of the story in terms of DTA consumption is conversion to cash, and the other half of the story is the function that at the end of a tax year, when we are preparing our filing, we make certain elections relative to the sequencing of deductions and the discrete rates that are appropriate to each of those deductions and that's the other half of the DTA story, you know, there's no statement of, you know, we think our assets are less than they were, but it's a function of pure -- pure consumption, and the year-end processes around preparing tax returns.

And, related to the second question, the most obvious way to characterize my response is the answer to the question has been answered that the Board has yet to determine.

I'm not in a position to speak to that today, and as Steve spoke to earlier in the call, we have about $83 million of our currently approved repurchase plan available at the end of the June quarter and we're still committed to exercising that at our discretion.

Operator, we have time for two more questions.

Thank you.

And our next question comes from Steven Pelayo from Fulcrum Global Partners.

Please go ahead.

Yes, two quick ones on clarification.

Martin, you said shipments exceeded expectations in the June quarter.

Did you give an actual number there?

No.

Okay.

We can -- we had guided that we would be at 345, and we actually shipped 358.

Okay.

And, you know, just to add a little flavor to that if you think about that, with our shipment guidance for September of 280, that results in 22% change from the prior quarter.

The reason that we ship the additional $13 million was as a function of some requests from our customers to accelerate some deliveries that they had earlier wanted in the early part of the September quarter, so we accommodated them, which is a good example of the flexible response capability of our factory.

But, in doing so, we actually created a bigger gap between June and September.

So if we had shipped the 345, we would now be outputting 293 from September and we would be down 15% between the June and the September quarters.

So it's kind of an example how with some relatively small numbers you can create percentage changes that at the end of the day really don't mean a whole lot, but we were attempting to accommodate some desires on the part of a couple of customers and we were happy to do so.

Okay.

One more clarification in my question.

You mentioned 50 million from Japan being revenueable.

I thought those were carried at cost, Martin, so your 60% deferred profit margin that you're having, isn't that really about 130 million worth of revenueable?

No, the -- I'm glad you asked the question.

The 53 is the future revenue value from those systems that have been shipped.

They are held in our inventory at cost.

So the relationship that you just spoke to, the doubling of the reasonable relationship, except you went the wrong way.

So instead of going from 60 to 120, go from 50 down to about half of 50 in terms of the cost side.

Thank you our next question comes from David Duley with Merriman.

Please go ahead.

Yes, could you -- when you talked about your market share gains, could you describe for us on the dielectric side what you think your market share was at the different technology nodes, 130, 90, and 65 nanometers.

Then I have a quick follow-up.

We do not, for competitive reasons, break that out specifically, but what I will say is that if you look at the momentum we have in the marketplace, we are continuing to improve our market share between 130, the 90-nanometer node and we are also continuing to improve that when we go to the 65-nanometer node.

Okay.

Maybe just remind us what you think your numbers were in '04 in dielectric, and what you think they will be in '05 for the total market and I realize you don't have a lot of Intel exposure.

We have not broken that out specifically.

What we have said is that for '04, we believe our shipping-based market share in etch is 34%.

And, we expect that when we look at our booked market share, as a leading indicator in '05, that we will see that ship-based market share rise to 37.5%, maybe 38% in '05.

Thank you, ladies and gentlemen, that concludes the question-and-answer session.

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

Please go ahead.

We'd like to thank you for joining us today on today's call and we look forward to speaking with you again next quarter.

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

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