科林研發 (LRCX) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to Lam Research September quarter 2005 financial results conference call. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded today, Wednesday, October 12, 2005.

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

Please go ahead.

Good afternoon, and thank you for joining us to discuss the financial results for the quarter ending September 25, 2005 and the business outlook for the December ending quarter.

By now should have received a copy of today's press release, which was distributed by Business Wire at approximately 1:00 PM.

We are webcasting a slide presentation in conjunction with today's commentary.

The presentation can be accessed through our website at www.lamrc.com.

Here today are Steve Newberry, President and Chief Executive Officer, and Martin Anstice, Chief Financial Officer.

Except for historical information the information Lam is about to provide, and the questions Lam answers during 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, management's plans for continuing the Company's stock repurchase program, global economic conditions, including consumer sentiment and customer spending, 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 until 3:00 PM.

We ask that you please limit your 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 September 2005 quarter financial results.

Highlights today include a positive new orders inflection point representing 3% growth sequentially, in line revenues at 321 million, earnings of $0.35 that were stronger than guided due in equal measure to our operational cost management, lower equity-based compensation expense, and higher other income, and cash from operations of 47 million, consistent with our plan and strongly correlated with our earnings performance this quarter.

New orders entered into backlog for the quarter, up 3% at 326 million.

Adjustments out of backlog were 13 million, and there were essentially no order cancellations. 300 mm applications represented approximately 78% of total systems new orders.

Our strength at leading-edge applications is reconfirmed by the proportion of orders at less than or equal to the 90 nanometer technology node of 76%.

Against our guidance of flat to down 5%, the 3% growth in new orders reported today was geographically concentrated in Asia, notably Korea, Taiwan and Japan.

As we anticipated, our systems new orders market segmentation was fairly balanced relative to overall wafer fab spending, comprising memory at 52%, IDM logic 26%, and foundry/other at 22% of the total.

Revenue of 321 million met the midpoint of our guidance range.

As a reminder, our typical customer acceptance cycle times have ranged between two and five months from the date of shipment to the customer.

Our marketshare successes generally, and particularly those in Japan, introduced the probability that first in fab installations trend to the longer end of that acceptance range.

For that reason, we remain focused on managing our equipment installations with customers.

Our revenue, guidance ongoing will continue to reflect our best estimate of likely outcomes.

Shipments in the quarter were generally where we expected, down approximately 22% -- 21% sequentially.

As we characterized in our prior earnings call, this change in our shipments level was an appropriate alignment of factory output to the pattern of orders over the last several quarters.

To illustrate this point, our shipment book to bill for the last 12 months is 1.01 on new orders of 1.3 billion.

Our September quarter book to bill was 1.16.

Our ending unshipped backlog increased by 31 million to 382 million.

For more complete details on orders and revenues geographic breakdown, please see our press release today, and our website for a reconciliation of new orders, shipments, revenues, deferred revenues and backlog.

Gross margins were approximately 48.6% in the September quarter, including approximately 1.1 million, or 0.3 percentage points, for equity based compensation.

This performance exceeds the model we shared with you a year ago.

Total operating expenses increased at a slightly slower pace than originally planned.

We continued to target and incur expenses related to discretionary investments in R&D focused on leading-edge plasma etch, strip and clean.

These investments were offset by lower equity based compensation expense, and higher than anticipated vacation benefits.

Accordingly, total R&D expenses were contained below our original estimates.

Worthy of note, our total Company equity based compensation costs were 5.2 million, less than our original estimate of up to 9 million.

This reflects our current intentions to grant equity to certain executive officers later than originally planned, pending shareholder approval for a minor incentive plan modification, and separately the challenge this new expense item with limited history of RSUs and specific knowledge of ground base in our share price forfeitures and expected lives, etc., etc. is bringing to forecasting.

As you might have expected, we were conservative with our equity compensation expense guidance in September, the first quarter of adoption.

Our effective tax rate was 27.4% for the September quarter.

Our current expectation for the fiscal 2006 year remains 27% plus or minus 1 percentage point.

If the R&D tax credit is approved again this year, our tax rate has the potential to reduce by 1 percentage point from this estimate.

Continuing the theme of prior quarters, the cash outlay for taxes was substantially lower than the income statement rate due mainly to the conversion of deferred tax assets into cash.

Our reported income tax expense was 19 million.

Our consumption of deferred tax assets in the quarter was 15 million.

We generated cash from operations of 47 million this quarter, driven primarily by profit levels and sustained industry-leading working capital performance.

We received 17 million from the exercise of employee equity plans, and we used 79 million to repurchase 2.6 million shares at an average price of $29.76.

For your convenience we are adding a cash-flow statement to our press release tables.

We hope you find this addition useful.

The total cash balance, including restricted cash, was 874 million at the end of September.

Deferred revenue and deferred profits were 107 million and 64 million, respectively.

These balances exclude approximately 54 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 5 million.

Depreciation and amortization amounted to 6 million for the quarter.

At the end of the period net fixed assets were 40 million, and we retained employment levels essentially flat at 2,200.

We will now move to Steve's comments.

Thank you for joining us.

This afternoon I will recap the financial highlights, comment on the Company's performance in the September quarter, and on the industry environment, and conclude with our guidance for the December quarter.

The Company delivered another quarter of excellent financial performance.

I am particularly pleased with our cash generation and operating margin results in a period that represents the bottom for revenue in this cycle.

On a revenue decline from the peak of approximately 100 million, or 24%, our operating margin performance remained above our target model presented in November 2004.

This is the first time in our history we have been able to handle a significant revenue decline and deliver strong operating profits throughout the downturn cycle.

While we are proud of what we have accomplished, it is where we're headed that has our complete focus and engagement.

Looking forward we believe we're positioned to continue to deliver excellent financial performance that meets or exceeds our target model of 19% operating margins at revenue levels of 350 million.

Our marketshare momentum continued in the September quarter.

Lam's products were selected by customers in a number of regions representing leading-edge marketshare gains that have positioned us well for fab expansions.

Our experience and deep knowledge base in etch sets our sales and support teams apart, and is often a key factor in both winning new share and extending our position.

Etch is one of the most critical applications in the fab due to the fact that etch can compensate for upstream process variations and optimize downstream processes, which can lead to improved yields.

In a sub 65 nanometer environment the value of incumbency in etch is increasingly important.

With our world-class support and product technology leadership, we expect to be successful at leveraging our current position to enable new marketshare wins.

Examples of this are seven new application wins in the past two quarters on sub 90 nanometer applications, and an expectation of five to seven additional new wins in the December quarter.

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

We have begun to see positive signs in demand for equipment resulting from the continued strength in semiconductor unit growth and higher utilization rates.

Most recent data shows unit growth in the high single digit percentage range.

Price declines in memory have recently firmed as bit growth from both DRAM and the NAND Flash markets have accelerated with this demand.

Lead times in the semiconductor device industry remain short from a historical perspective, as customers keep a tight leash on inventory.

Semiconductor manufacturers are holding relatively low levels of inventory, and managing supply to demand very carefully.

Utilization is rising in general, and in particular is greater than 90% at less than 130 nanometers.

We see an aggressive move to 90 nanometer technology in the foundries driven by demand from fabless companies and IDMs migrating to a fab light strategy who are supplying devices for the upcoming game console product cycle and various consumer wireless products, putting a significant load on leading-edge output.

Though foundries continue to remain cautious in placing new orders for equipment, we believe they will need to increase their level of investment in new capacity in the next three to six months.

This is supported by an analysis of foundry spending.

In calendar year '05 foundry CapEx will decline 34% versus '04.

If spending is averaged between calendar year '04 and calendar year '05 and then extended to '06, foundry spending needs to increase at least 20 to 25% to add the same capacity additions as were added on average in the calendar year '04 and '05 time frame.

There is reason to believe that demand in calendar year '06 will require capacity additions at least equal to the average of the past two years.

We expect to see continued strong investment for equipment in the memory sector.

In particular, the outlook for NAND/Flash is strong.

Flash bit growth is expected to be in the 100 to 120% per year range, while DRAM bit growth is expected to remain strong in the 50% per year range.

As Lam is well positioned in the largest NAND/Flash and DRAM producers, our memory business remains very healthy.

Lam has also achieved new marketshare wins in the expanding memory market in Korea, Taiwan and Japan, which drove orders in the September quarter above our forecast.

We expect our strong bookings to continue in the December quarter with memory customers representing around 60% of our bookings.

As for the remaining market, logic and IDM customers are continuing to invest at consistent levels, with year-over-year spending roughly flat.

I will now provide the guidance for the quarter.

Guidance on margins and earnings include the impact of equity based compensation.

We expect new orders for December to increase approximately 5 to 10% over September levels.

Shipments will increase approximately 30%.

We expect to post revenue levels between 330 and 350 million, with gross margins being approximately flat relative to September.

Operating expenses are expected to increase slightly to around 100 million.

And this will result in an operating margins estimate of 18 to 20%, which is at or slightly above our target model performance.

Earnings per share are expected to range between $0.34 to $0.39 per share on a share count of 140 million shares.

These financial numbers, again, include 8 to 9 million of equity compensation expense.

In summary, I am pleased with the strong performance our employees delivered in the September quarter.

We continue to execute to our objectives.

And I believe our results both recently, and those obtained over the last several years, represent a solid foundation upon which to achieve a level of performance that will result in enabling cost-effective solutions for our customers and the potential for strong returns for our shareholders.

With that I would like to turn the call back to the operator to poll for your questions.

(OPERATOR INSTRUCTIONS).

Bill Ong with American Technology Research.

Congratulations on a nice quarter.

I’d just like to get some update on what percentage of your product line is now fully outsourced to Solectron?

And maybe what areas of manufacturing is being done at the contract manufacturer versus done in-house, and your system built lead times?

I think you said what percentage of our product is outsourced to Solectron.

Well, actually, EMS in general, so it doesn't have to be Solectron.

Okay.

Good.

We have about 75 to 80% of the value of the product that is outsourced[k1].

Primarily the activity that we do at our factory here is a final integration for some customers who want to see the product in a final integration state prior to shipment.

For most customers we have the major modules shipped from our suppliers and then rerouted and just packaged together for shipment to our customers.

And the only thing we do here is a certain amount of high IP related technology component parts in the chamber that we want to maintain high control of, so we do that assembly work here.

And the vast majority of the product is outsourced and shipped either directly from the outsourced provider or merely routed through the factory here.

Any potential margin upside for any product outsourcing, or it will probably be more cost control and higher revenues?

I think that we are continuing the process to work with our outsource providers on strategies that involve year-over-year continuous cost reduction.

And our strategy as it relates to going to low-cost manufacturing regions has been built around going with our suppliers and having them utilize their networks and their organizations that exist overseas.

There is potential, and we're certainly pursuing it, that we're bringing some new suppliers into our activity.

These suppliers are ones that have a larger set of operations and experience base, already existing in -- whether it is Korea, Taiwan, China or Singapore.

And we're working with them to get our products built in lower-cost regions.

And I expect that to contribute to opportunities for us to have margin improvement as we go forward in conjunction with increased volumes that output from the factory.

Timothy Arcuri with Citigroup.

Actually I had one, and then I had a quick follow-up.

If I look at your foundry orders you were guiding the orders roughly flat sequentially, and they actually came in down a little bit.

Am I misreading that, or was there kind of a change there?

And then I had a quick follow-up.

No, Tim, you're not misreading it.

We had said that we thought that there was a situation as it related to the foundries, which for us was very strong in the June quarter, that we expected them to be flat, but we had a number of situations where what the foundries were going to do in the order environment was really sitting on a September, October time frame.

As it turned out some of the orders that we thought were likely to occur in the September quarter actually will go down in the December quarter.

And when you look at the amount of business on a systems basis, it is only really three systems or so, but because of the ASPs of the system and the low overall volume it kind of percentage-wise may look greater than the actual numbers are.

Understood.

Understood.

Thanks, Steve.

And then just really quickly, if I look at your guidance that you gave back in July, you gave kind of six months forward guidance back then.

You gave both revenue, and you gave shipment guidance out six months.

And if I look at what you're saying now, what you're going to do in December for shipments and revenue, both of them are about between 20 and $25 million higher than what you thought back in July.

Where is that pull-in coming from?

Is it memory being -- getting incrementally better, or where is that coming from?

That is coming from actually memory, and there are some logic related pull-ins.

We are seeing a general upturn -- uptrend I should say -- in bookings activity.

And as a function of the short lead times, and typical customer behavior with short lead times is they wait and they wait, then they order.

And they also want short delivery.

So we have been able to increment up our December output plan greater than the 15 to 20% that I had talked about last quarter.

And that has resulted in the second half of '05 being down versus the first half of '05 in shipments by only 6% as opposed to the 15% that we had expected.

But the pull-ins are occurring primarily in memory, but in other segments as well.

Suresh Balaraman with ThinkEquity.

Steve, wouldn't your customers have a fair idea of how the next year's CapEx would be based on -- wouldn't they be seeing that in your quote activity?

Can you share some of those thoughts with us?

Most of our customers today are in the process of working on what their CapEx is going to be for '06.

And with the lead times in the whole supply chains being as short as they are, the reality is that, if you can think about or look at the business in 6 months increments, that is where you can have a degree of accuracy.

And so we're sitting here at the October time frame and wanting to know what is the second half of '06 going to look like.

And there's so much that can occur between now and then, that the ability to predict that is really limited.

In the past lead times were long enough.

And when demand got way out in front of supply, then people would basically be committing to order environments and delivery environments that extended out to nine months.

Today all the cycles are so short, and the whole industry is far more consumer dependent that it is really not a situation where anything other than macro analysis can tell you what is going to go on in '06.

So our perspective, if we look at what is going on, is we're clearly seeing in uptick in bookings in December.

Our expectations would be that as we look forward that we ought to expect that things would remain positive in the March quarter.

And when we look at the fact that we're upping our shipments 30%, then we would expect that we're going to be able to output more in the March quarter, because our bookings will be up in the December quarter.

Gary Sue (ph) with CIBC World Markets.

Good job here in terms of gross margins in the quarter.

But I'm wondering about your clean chamber and your clean product.

And as you start to ramp shipments in Q4, how is that going to impact margins out in '06?

And then I have a quick follow-up.

You want to know how our clean product may affect our margins in the December quarter, is that the question?

Well, more in '06.

First off, let me try to put the clean product into context, because I think it is important that while we have created recognition of the activity that is going on there, one of the things I commented on last call was that we did not expect that there would be any revenue being reported by the Company until the June time frame at the earliest.

The second thing I think is important is the product is primarily being targeted as a technical solution to some cleaning application challenges at 45 nanometer and the potential for some 65 nanometer activity that it may be a needed solution or it may be a preferred solution, provided the product brings enough reliability and cost of ownership and production worthiness to the party.

We are going to -- we're in the process right now of going through evaluations with a number of customers.

We are increasing our beta shipments in the December quarter and in the March quarter.

None of those will end up hitting the P&L for revenue.

And we are expensing most of the cost for those.

It is part of the expense increase structure that we have talked about in R&D.

And we will be better able to answer the specific questions on the product's margin activity when we better understand the value it delivers, the pricing we will be able to achieve relative to the cost to produce the product.

A quick follow-on for Martin.

Martin, as you look out into '06, I know you gave guidance as to the financial model in '05.

Could you care to give some details on kind of a top down sort of model for '06, let's say on 1.6 billion or 1.7 billion?

Martin Anstice You know, there really is a good reason why we only give guidance at that level for one quarter.

So I am going to decline to give any specific commentary on that.

Mike O'Brien with Bear Stearns.

Just from your general talk about the memory being 60% or so, I think of orders is what you said.

So I assume that you’ve got the foundry uptick or meaningful uptick in your March quarter assumptions?

Would that be accurate?

One of the things I talked about is that I expect in the next three to six months that the foundries are going to need to come into the marketplace with higher order levels.

The reality is that that is not necessarily visible in a significantly meaningful way.

What we are seeing is each quarter there's always foundry activity, and it is currently being invested, as I said, at a level that is resulting in a CapEx spending of 34% less in calendar year '05 than in '04.

So at some point in time, whether it is the March quarter or the June quarter, my expectation is that the foundries are going to come in at higher levels than we see.

But currently right now based on what they are saying and what they're telling us they want to do, the foundry activity is going to be causing bookings to be in the similar area in the December quarter as they were in the September quarter.

I'm just forecasting from a general perspective that when I look at the foundry business as a whole, I think it is going to need to increase its spending, but that has not yet become visible.

C.J.

Muse with Lehman Brothers.

I guess sort of a similar question.

In your prepared remarks you talked about uncertainty in terms of timing of foundry, yet your confidence level in bookings guidance appears to be rather high.

So I'm wondering what gives you the visibility to such strength here in December.

When we look at the current quarter that we're in, we have a couple of things.

One, we are essentially two to three weeks into this quarter.

Customer activity in a stable demand environment, and one that is not in the bottom of a downturn or on the sharp rise of an upturn, can be very predictable, or at least relatively predictable, in the kind of circumstances that we're at.

So we have been in discussions with customers for a long time, and we calibrate and look at which customers are saying they are going to place orders in what time frame, which of those customers are on the bubble between a December placement and a January placement, and we look at all of those things, and we factor in where we are in the cycle.

And that results in a situation where when we place our guidance we feel that there is a strong likelihood that we can deliver the bookings in the range that we set.

But there are certain times in a semiconductor industry cycle where it becomes more difficult to predict with a high degree of accuracy what the customers' booking behaviors are going to be.

But I think we're in one of those more stable times right now.

Bill Lu with Piper Jaffray.

You guys had a pretty nice pickup in bookings in the U.S. in the September quarter.

And you also talked about some share gains in the quarter.

Are those two things related?

In other words, are any of the order pickup in the second quarter coming from the new customers?

There is some correlation to the share gains that I have talked about as it relates to North America.

And there is also just that the activity level in North America did pick up in terms of three relatively large customers ended up placing orders.

And again, in comparison to the prior quarter, it really wasn't that North America was necessarily exceptionally strong in the September quarter, they were slightly weak in the June quarter.

So when you combine those two you can end up with the kind of percentage changes that we saw.

But it is a result of increased customer activity and some marketshare wins.

Jim Covello with Goldman Sachs.

Steve, a quick question about Lam specifically, and then I have a follow-up on the industry.

I know Lam is gaining share.

We hear that from all the checks that everyone does.

Can you help me reconcile that with the fact that your year-over-year revenue growth is kind of flattish, which is sort of consistent with where the overall CapEx budget from.

Is that a function of customer exposure this year, or is it just coming off the higher base from '04?

Because I know -- we really all do believe that you're gaining share, but it didn't necessarily show up in the '05 revenue numbers.

I'm glad you asked that question because actually I think CapEx is going to be down 7 to 8%, with wafer fab equipment spending being down slightly more at around 12%.

And I think etch is going to be down closer to 15%.

And we went back, because I made these comments in the last conference call, that in downturns etch tends to fall further, and in upturns tends to grow faster.

And we went back and looked at the last four downturns and going back to 1997.

And not only is what I said true for etch, it is also true for other processing equipment segments in the front end.

And so when we go back and we look at the 1999 upturn, wafer fab equipment grew 22%.

Etch market grew 28%.

If we go back to 2003 -- 2004, the wafer fab equipment grew 69%, and the etch market grew 96%.

And just to kind of reinforce it, in the downturn environment, the downturn that occurred in '98 the market dropped 28% and etch dropped 36%.

The downturn in 2002, the wafer fab equipment dropped 32%, the etch market dropped 40%.

So we believe wafer fab equipment is down 12%, Etch is down 15%.

Therefore the fact that our revenue between '04 and '05 is flat, that represents a marketshare gain of 4 to 5 marketshare points.

That is a very helpful analysis.

Thank you.

If I could just ask you a question on the memory side of the equation relative to your comments about 60% of the orders, can you help us break that down between DRAM and NAND?

And then relative to the DRAM orders, some of the companies are profitable, some of them aren't.

Do you think the DRAM industry has to be profitable to keep ordering equipment, or do you think there are scenarios where they can continue to -- some of the customers can continue to lose money, but still make some orders?

I will try to give you a little perspective on what we see in the memory market, and some of the breakdowns between Flash and DRAM that have occurred that we can understand.

One, we think that DRAM represents around 66% of the total memory spending, and Flash about 33%.

There are mixed lines out there, but there are lines that are now being put up that are dedicated to DRAM or dedicated to Flash.

And a lot of that has to do with the fact that you end up in a mixed model that you'll have about a 10% loss in capacity output, depending upon whether -- if you set it up for DRAM and then you run Flash, you'll get 10% less out.

If you set it up for Flash and you run DRAM, you'll get 10% less out.

And it has to do with the need for more dielectric steps in DRAM and more gate and silicon application steps for Flash.

Having said that, I think that clearly in a market like memory it is a part of the business that is very cost driven.

And the players in this industry need to be able to continue to provide their customers with product, almost independent of what is happening to the pricing environment.

And the memory market has a tendency when there is too much memory out there to result in price drops, and that triggers increased memory being placed in the various products that use memory.

When memory supply falls behind demand and prices go up, the end use customers just cut back on how much memory they're putting in there.

So there is multiple regulator types of environments in the memory business.

And so if a customer is losing money in the short term, they are still going to have to continue to invest if they're going to play in this business because if they stop investing, they stop having the ability to continue to output to the device unit growth demands that are present every year.

They’ll lose marketshare, and they'll make their problems go from difficult to worse very quickly.

So I think that the players that are in memory, given the consolidation that we've seen, have a high degree of commitment.

But having said that, that doesn't mean that management teams at some of these companies aren't necessarily looking at what they want to with their lines in how much goes into DRAM, how much goes into Flash and whether they are considering looking at diversifying into other semiconductor activities as a function of cost competitiveness, technology, capability, etc.

David Duley with Merriman.

Just two very quick questions.

Given the decline in bookings in Japan, would you expect the revenue in that country to grow again sequentially?

And if my math is right when you gave us the order guidance for December, and then gave us the 60% in memory, I think that implies basically all the order -- that the DRAM orders are up nicely and the other sectors would be down.

Could you just clarify that and make sure my math is right?

I think that in Japan the spending continues to remain strong.

And again, I think that when we look at the percentages, we're really talking in many cases here, sometimes two systems, sometimes three, sometimes four systems that book one quarter, don't book the next.

And that creates a change in Japan being 28% in June and 22% in -- I'm sorry, 22% -- 28% in June and 22% in September -- I was right.

And then on a going forward basis we can be plus or minus that number by 5 percentage points, and it really doesn't necessarily constitute a trend.

You are correct about memory.

In the December quarter, being a higher percentage, there's clearly memory companies around the world in Korea, in Taiwan, in the United States that are making investments in memory.

We have very good marketshare in memory.

We have -- at the leading memory companies around the world, we have a higher marketshare with them.

It is a higher marketshare than our global average marketshare.

So when memory spends, it is beneficial to us as a function of our market position.

One follow-up.

The 4 to 5% increase in marketshare that I guess you're kind of citing for calendar '05, what geographic region was the biggest contributor to that?

We had a very good year in Japan, one that we have been investing in for really -- well, a long time, but we were successful in making some significant inroads last year that has accelerated to the point where Japan, which two to three years ago was really a drag on our overall global marketshare, we're now booking business in Japan at the same marketshare that we have on a global average.

Timm Schulze-Melander with Morgan Stanley.

Steve, just a quick question back on the DRAM and Flash memory segment.

And recognizing that some of these lines are mixed, but could you really just sort of compare Lam's competitive position in DRAM with that in Flash memory?

And are you guys seeing any differences between those two in terms of the pricing environment?

We took a look at our position in DRAM, as well as our position in the NAND Flash lines.

In the DRAM segment our marketshare is just slightly below 50%.

In the NAND segment it is above 50%.

So clearly with NAND being the fastest-growing segment, we are pleased that we have an even stronger marketshare position in that segment.

And overall our marketshare in memory as a total is, like I said, higher than our global average marketshare.

Can you repeat the second question?

Is that you see in the pricing environment between those two segments -- we have highlighted some of the challenges in DRAM pricing.

You have highlighted NAND Flash being a faster growing segment.

So I would assume there would be some differences that you see in the pricing environment.

You're talking about whether there are equipment pricing differences between NAND and DRAM, and there are.

The competitive environment that exists out there in the marketplace, whether it is foundry, whether it is logic, whether it is NAND, Flash or DRAM is not significantly different in any way.

Mark Fitzgerald with Banc of America.

Two quick questions.

I was wondering if you guys did any share buybacks in the quarter.

I will take that real quick.

Yes, we did.

We spent a sum of $79 million repurchasing 2.6 million shares at an average price of 29.76.

And that brings our year-to-date activity against the Board approvals to $246 million.

So since we began repurchasing stock we have spent 246 million.

We have repurchased in the range of 8.5 million shares.

So against the original Board approval we have $4 million available.

And obviously we have everything available in the latest $500 million approval that the Board gave us.

And then just on the gross margin guidance here, if you look back to your March quarter when you had a similar revenue level, you were doing up around 50% gross margin.

So I'm just a little concerned here, I am wondering why you're not getting a similar type of leverage.

I'm glad you asked that question, because we took a look at that too.

And the answer is a couple of things.

One, in the March quarter we did not have any equity based compensation in those numbers.

And that is a .5 margin point degradation contributor.

The other aspect is that the product mix that we're shipping is different.

And so too is the customer mix that we're shipping to.

But most importantly it is a product mix issue.

And what we have been doing in the last two quarters, and certainly accelerating in the December quarter, is increasing the shipments of our 65 nanometer capable products, our Versys Kiyo (ph) silicon-based product, which has been out in the marketplace since the summer of 2004, and has greater than 150 chambers that will have shipped by the end of the calendar year.

New next generation products have a tendency to have a higher material cost, and slightly greater installation and warranty costs as a function of their first in fab and their characterization activities.

In addition to the Kiyo 65 nanometer capable product, we have begun shipping Kiyo 45, which is the next generation beyond that.

And that is in our product mix and our margin mix in the December quarter.

In the dialectic arena, we have been shipping the Exelan Flex, which is a 65 nanometer capable chamber configuration.

We have been shipping that since the June time frame of 2004, with over 400 chambers of that product will have been shipped by the end of the calendar year.

But we have begun since June of '05 to ship our next generation product, the Flex 45, which is a 45 nanometer and below capable dielectric etcher.

And it is in our product mix, and it is in our margin mix.

It has the same introduction types of cost structures associated with it that I mentioned earlier.

So my expectation is that there is a bit of margin pressure as a function of the new products in terms of their material costs, in terms of their installation and warranty support costs, as we work with our customers on the very challenging aspects of what it takes to get them successful yield at 65 nanometer.

But I expect that we will work through all of those issues.

Our material costs will improve.

We will clearly establish the value in the product, which will enable us to maintain or even potentially improve our average selling price.

And then I would expect that our field-based cost to work through the 65 nanometer solutions with our customer will improve as well as we go into the '06 period.

Jay Deahna with J.P. Morgan.

Thanks for the detailed analyses.

The two questions I have is, first of all is your penetration of the two large Flash suppliers about the same?

Or are you more biased towards one or the other?

And the second question is it is pretty clear that you are indicating a cyclical turn here.

Talking about up orders in the December quarter, following a little bit of up in September, and possibly again in March.

Can you give us a sense as to what the potential magnitude or duration of this cycle could be?

If I could do that I would probably be doing pretty well in some other business making a lot of money.

I think, one, it is not very hard to call a cyclical turn when you go -- when your bookings come off the bottom and they're up 3% and your revenue has bottomed and goes up.

I think your question is the $64 million question, and the reality is that we just don't know.

And we are in the process right now of working through our forecasting activities for calendar year '06.

I'll have a comment on what I think the '06 year looks like on the next conference call.

I want to let the current environment play itself out a little bit.

See how the consumer deals with the post hurricane activity.

And I think that will give us a little better feel and maybe a little higher confidence that we're going to be able to find the right vicinity for '06.

As it relates to our marketshare in the big Flash players, we are doing very well at both of those Flash players.

I'm not going to break out the specifics between one or the other.

But we have a greater than 50% marketshare at both of those players.

And I think that is the relevant point.

Shekhar Pramanick with Moors and Cabot.

Congratulations on a good quarter.

I have a question more in the dielectric etch, how it applies to particularly the logic side.

And it seems like you folks have that whopping leap in terms of performance there.

And that might be somewhat bridging.

But could you maybe -- particularly on wafer performance -- but could you tell us are you still beating folks on the cost of ownership side, or what other areas you still have quite a lead on that side?

Logic we're talking about -- the critical applications that get everybody's attention is copper dual damascene, etching and in via trenches and the ability to do both via and trench all in one, including a strip application.

And what we have found is that while everybody in the industry continues to improve their products, that we still possess an ability from a production worthiness, from a predictability, from a defect control standpoint to deliver to our customers not only a very technically advanced result on the wafer, but one that brings a production worthy predictability and a yield benefit that most customers are still finding compellingly differentiated.

So we continue to have an opportunity to take that installed base position, to run just thousands and thousands of wafers through these chambers.

Our technical teams are very busy incorporating all of that learning into next generation design modifications that are going to satisfy the 65 nanometer needs for our customers.

And so the more wafers you can run, the faster you can learn.

And we are benefiting from that.

And it is helping us win the additional new application marketshare gains that I mentioned in my opening comments.

Patrick Ho with Legg Mason.

Congratulations also.

A two-part question, first on the bookings outlook, and then on your marketshare.

On the bookings front, in terms of your outlook, is that 5 to 10% range, would you say that the foundries are still the swing factor?

And on the marketshare question, are the opportunities for gains coming from new customer wins or are they being driven by, as you mentioned, extensions with current customers that are putting it towards new applications?

When I talk about a bookings guidance of 5 to 10%, 10% above where we are is 30 million.

If a foundry customer in our forecast were to not order, that is certainly going to affect whether we come in flat or 10%.

But by the same token if a memory customer should decide to delay, that can affect to an equal extent.

And so what we try to do is look at the totality of what is going on out there.

Put probabilities and expectations, and give our best estimate of what is going on, recognizing that somebody may fall out, but we may also have somebody come in that wasn't in the forecast.

So I don't think it would be right to say that only a foundry is really the swing factor.

I think that any one customer can be a swing factor.

But certainly we have foundry in that forecast.

We're expecting that those foundry orders will come through.

But they are not the only factor as to whether we achieve that 5 or 10% upside in orders.

And the marketshare question?

On marketshare, it is both.

We look at marketshare.

Obviously at the end of the day it is about revenue percentage versus all the money that is spent.

But we look at application wins.

We look at increasing our marketshare at existing customers, where we improve our marketshare position.

And we also have been successful at penetrating customers where we had maybe no dielectric business or no silicon business.

And in some cases we have penetrated customers where we had essentially no business.

And so it is a combination of both of those.

But we continue to win new applications at customers where we have significant marketshare because they have gained increased confidence as a function of the business that they gave us over the last two years, and they want to increase that level of business with us on different applications.

Brett Hodess with Merrill Lynch.

Just two quick ones.

First, on the interest income, the strength in that this quarter, were there any onetime items?

And how do you expect that to trend next quarter?

And second, when you look at the -- a lot of the discussion has been on marketshare today.

Where do you think ultimately your overall industry marketshare can go before the customers at some point say, hey, heck, we have got to have some balance so that we can have more than once supplier or whatnot?

Steve, where do you think the natural peak of that might be?

I will take the other income and expense question first there.

This is a real kind of plain vanilla P&L, which may explain the frequency of the questions I am getting today.

But there are really only two components to the item.

One is interest income.

And as is common for most people with the type of investment portfolio that we have, which is very conservative, a 3% yield is a pretty good yield.

We have $850 million of cash on average during the quarter.

So the interest income, the net interest income for the Company is going to range around $6 million.

The only other item in there of any significance this quarter is foreign currency.

And as I articulated in some detail last quarter, that number to a large extent is naturally hedged by the fact that more than 80% of our revenues and more than 80% of our costs are U.S. dollar-denominated.

The only significant exposure we have to that is yen-denominated revenues.

And we have contracts in place from order placement through cash collection to manage that risk.

So foreign currency for us ends up just being kind of a plus or minus 2 to $3 million that is kind of there as a function of the asset and liability positions of the Company.

And currencies have been reasonably volatile.

But for us it has actually been defined around the weakening of the Taiwan dollar on a liability position.

So you've really got kind of two things.

One is interest income, $6 million.

The other is gain on foreign currency, mostly Taiwan dollar.

Clearly in terms of outlook, the only real certainty is the cash position of the Company and the interest income.

FX largely self-managed, but our guidance assumes zero gain, zero loss on foreign currency.

On your question about how high marketshare can go.

Well, certainly there are companies and products out there with 70% type marketshare, so I would have to say that on a theoretical basis it is possible, but in our segment I think highly unlikely.

We have four major players, three of whom have about 90% of the market.

And what it takes to get marketshare in the 40 to 50% plus type ranges is a combination both of our excellence in terms of technologically differentiated capability that our competitors cannot achieve.

And at the end of the day that really has to do with whether we can create a yield benefit that the economics become so overpowering that the customer is not concerned about whether or not you have too much share.

They really are going to go your direction because the economics of yield dominate everything.

So if we look at what is going on today, if we look at the marketshare wins that we are continuing to generate this year, we stated that our objective for the next upturn, whenever it is, or however long it lasts, that we were targeting a 45% marketshare position.

I believe that when I look at the competitive landscape today that that potential is still readily available.

I think if we can execute to the opportunities, if we can continue to be seen by our customers as the fastest to their solution needs that they will reward us with that kind of marketshare.

So the potential is there.

The execution is really up to us.

And we have a plan, we have a road map, and we have ways in which we are attempting to get to that position.

And we'll keep you informed as we go.

Stephen O'Rourke with Deutsche Bank.

Just a follow-on to the marketshare discussion here.

With higher marketshare that you have in memory, how much of that is metal etch?

And how could that change for Lam as memory transitions to copper interconnects?

Metal is not very large.

It is about 10% of total etch market.

And over time that is going to trend down.

But even as the memory guys move more toward getting out of metal, there is typically one level of metal that still remains.

And I think that metal hard mask is a new application that has actually come into the marketplace, and so what you see is that metal has been hanging in there around that 10% range for quite a while.

And I think that we are going to see metal remain in the memory device structures for the next couple of generations.

And I think we actually may see that there is some small increase in metal, depending upon the adoption rate for metal hard mask.

So I don't think what you just talked about represents a concern.

John Pitzer with Credit Suisse First Boston.

A couple of questions.

Steve, first, when you talk about the clean market, you have sort of characterized it as niche type application.

And you used the words necessary versus preferred solution.

I'm wondering if you can just give us an understanding of how big of a market we should be thinking about Lam addressing with the clean application.

And then I have a follow-up.

I don't recall saying niche market.

But we are certainly targeting a need for a new technology solution as it relates to certain, primarily logic, cleaning activities around copper vias.

The product is designed initially to address certain issues in that area.

And the market that we're talking about in the first couple of years is a 2 to $300 million market.

And within three years from the time frame that we're talking about, is looking more at additional applications and a $500 million market.

To what degree we can address effectively the markets that I just mentioned, and to what degree we can expand those markets are certainly within our potential.

And what we want to do right now is get the product understood, get its performance established.

And we will talk more about the markets and the sizes and what we think the challenges and the issues are sometime in the early part of '06 when we're going to have more information.

And I think we will be able to provide you with a clearer picture of what we're trying to do.

I just don't want to say too much about that product at this point in time, because I think it is too early in the process.

That was helpful.

Secondly, Steve, you said you didn't want to talk about 2006 CapEx, but in your prepared comments you kind of went through an analysis that argued that foundries would need to increase at least 20 to 25% next year.

Foundries have been running about 20, 25% of the business, so that is an incremental sort of 4 to 6 -- on the incremental growth of about 4 to 6% for the overall business, which is good.

It is just not all exciting.

I'm just kind of curious, as it stands today when you look at the other two big segments, memory and logic, is your bias directionally flat, down or up for '06 CapEx?

Let me talk specifically about the foundry numbers that we just talked about because foundry in '05 is really going to be closer to about 15% of the total CapEx.

And back in '04 it was 21%.

But if you go back to '03 it was actually around 14 or 15%.

So foundry, if I average '04 and '05, is really in the 17.5, 18% of total CapEx.

And what I'm suggesting is that it is going to be in that vicinity in '06.

And as a function of that, if they are at 15% today, and they go and become 18% of a CapEx number in '06, that is essentially the same for total CapEx, they're going to go up 20, to 25% to go from 15 to that 18% type of range.

And then it might be 25, if it also includes the fact that overall CapEx is up a little bit.

So I don't think their percentage as a function of total CapEx is as high as what you were talking about.

Ben Pang with Prudential.

Just to follow-up on the foundry situation.

Two questions there.

Number one, what do you expect the foundries to spend in terms of technology nodes?

Is it 65 or 90 nanometer?

And the second question is that in one of the answers to an earlier question you mentioned that Lam because of marketshare gains in certain products, you have a better position per dollar on memory versus foundry.

Can you quantify what the difference is between memory versus foundry?

Let me talk about the 90 and 65 spending in the foundries.

The foundries are spending and booking orders today for 90 nanometer expansions.

And there are some -- and most of the equipment is 65 nanometer capable.

And the 65 nanometer buys are more along the lines of early pilot type of activities.

So the volume is 90 nanometer.

And I would expect that over the course of '06 we will see a switch in the amount of equipment that is ordered for 90 will go down and 65 will become more prevalent.

The exact timing of that, it is too early to tell.

When we talk about marketshare for memory and we talk about marketshare for foundry, I think the comment that I will make is, I have already said that our marketshare in memory is higher than our global average.

Our marketshare in foundry is also higher than the global average, which obviously leads to the fact that our marketshare in logic is below the global average.

And I think everybody knows that that is primarily driven by the fact that at a couple of key spenders in the logic arena we don't have a position.

And so I do think that our position in foundry and our position in memory are very good indicators of the competitiveness and the capability of our products and our service teams.

We have time for one more question.

Our final question comes from Manish Coyle (ph) with CREF Investments (ph).

My question has been answered.

Thank you.

Well in that case we would like to thank you for joining us today to discuss the results for the September quarter.

We appreciate your interest in the Company.

Ladies and gentlemen, that does conclude the Lam Research September quarter 2005 financial results conference.

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

[k1]Punctuation is not supposed to be marked as an error, but I think this paragraph needs to be fixed.