科林研發 (LRCX) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Lam Research December quarter 2005 financial results conference call.

At this time, all participants are in a listen-only mode.

Following today's presentation, instructions will be given for the question-and-answer session. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded today, December 18 -- January 18, 2006.

And as a reminder, this call is scheduled to run for one hour.

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

Please go ahead.

Thank you, Rob.

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

And the business outlook for the March quarter.

Our business press release today crossed the wire, on Business Wire at approximately 1:50 p.m.

California time.

We are webcasting this live presentation in conjunction with today's commentary.

The presentation can be accessed through our web site 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 one hour.

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

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

Thank you, Kathleen.

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

Highlights today include significant growth in new orders of 24% sequentially, increased R&D investment to support targeted revenue growth, strong operating income at 21.5% of revenues made possible by our responsive business model, leverage, strengthening earnings, and a corporate finance strategy that combined have resulted in an expectation of a lower fiscal 2006 tax rate of 21.5%.

And sustained operating asset managements in an environment of ramp driving cash from operations of over 100 million.

New orders entered into backlog for the quarter were up 24% at 403 million.

Adjustments into backlog were a net positive 11 million, reflecting our revised estimates for demand under spare part contracts.

The customer environment is clearly more biased to pull ins and compressed schedules at this time.

In view of that, we are pleased that our operational capability and the response from our suppliers continue to allow us to respond quickly and efficiently to these inflection points in the cycle. 300-millimeter applications represented approximately 79% of total systems new order.

The proportion of orders at less than or equal to than the 90-nanometer technology mode was 85%.

Against our guidance of up 5% to 10%, the 24% growth in new orders reported today was geographically concentrated in Korea and Japan.

For the quarter, our systems new order market segmentation comprised memory at 80%, IDM logic 15%, and foundry other at 5% of the total.

The split of memory new orders was approximately 55% Flash and 45%, DRAM.

Revenue of $358 million up 12% sequentially slightly exceeded the high points of our guidance range.

On increasing customer demand, shipments in the quarter accelerated beyond our initial expectations, up almost 40% sequentially to 392 million.

Ending unshipped backlog moved higher to 404 million.

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

Worthy of note this quarter was the responsiveness and leverage of the business model.

Particularly the gross margin line.

It is very satisfying to see that having trended off 354 million in revenues and $49.7% gross margin in June '05, to 321 million revenue and 48.6 in September '05, we have immediately returned to a 49.5% gross margin on the 358 million revenue reported today.

We have continued to target higher R&D investments, focused on supporting the Etch growth and new product growth opportunities previously discussed.

Steve will characterize for you in a little more detail later our expectation of this trend continuing in the coming quarter.

For December, we guided total company equity compensation costs of $8 million to $9 million.

This increase reflected our then current intentions to grant equity to certain executive offices in the Company.

We have not made that grant, and consequently, total company equity compensation costs were 6 million.

The company is in the process of modifying the executive compensation plan and stock ownership guidelines for certain executives.

Required disclosure of those changes will be made in our future 10-Q and 10-K reporting.

Turning to some specifics of our corporate finance strategy.

I had previously articulated a fiscal 2006 full-year tax rate expectation of 27% plus or minus 1% point, as outlined in our past 10-K disclosure.

In fiscal 2002, we implemented certain conservative and responsible strategies to limit our tax liability on the sale of our products worldwide.

In this quarter, resolution was reached on a number of rulings related to our foreign tax holiday that as a reminder is effective for a period of 10 years ending 2013.

In addition, our business and earnings environment is clearly trending positive which combined with our international jurisdiction mix has the effect of improving our expectations of the fiscal 2006 tax rate to 21.5%.

Although this rate has the potential to change as our business volumes, customer mix, and future tax negotiations conclude, we target over the next three years an effective tax rate each year of less than or equal to 25%.

A final note on taxes.

In understanding our reported financials today, please note that all other things being equal, at the guided tax rate of 27%, our December '05 quarter EPS, would have been $0.44, compared with our guidance range of $0.34 to $0.39.

Cash from operations was 111 million this quarter, concluding the second sequential calendar year of sustained, strong, economic performance.

Free cash flow for the calendar 2005 year was 375 million, compared to GAAP net income of 253 million.

In the quarter we received 62 million from the exercise of employee equity plans, and we used 62 million to repurchase 1.85 million shares at an average price of $33.50.

The total cash balance including restrict cash was 977 million at the end of December.

Deferred revenue and deferred profit balances both increased to 161 million and 98 million respectively.

These balances exclude approximately 46 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.

In the quarter, capsule expenditures were 5 million, depreciation and amortization was 5 million.

At the end of the period, net fixed assets were 42 million.

As we invest in our growth, employment levels increased meaningfully for the first quarter in almost two years by approximately 50 to close in the mid 2,200 level.

Now, we'll move to Steve's comments.

Thank you, Martin, and thank you all for joining us today.

I'm going to cover the following topics on today's call.

I'm going to comment on the December quarter and the market share gains that are behind the growth in new orders.

I'll provide our industry outlook for 2006, including our spending forecast by market segment.

And I'll present a financial model for a calendar year 2006 based on a scenario using an assumption for capital expenditures, wafer fab equipment spending, the Etch shipped market, and our market share gains achieved in 2005, which will manifest themselves in 2006.

Then I'll conclude with guidance for the March quarter.

I'm very pleased with the Company's performance throughout 2005, and in particular, the results of the December quarter which demonstrated our ability to deliver the profitability in cash generation, that Martin outlined in his remarks.

I'm particularly pleased with our growth in new orders in December.

This is the result of our new application wins, throughout 2005 that I have spoken of, which have resulted in an acceleration of bookings as those wins turned into volume orders.

We had nine new application wins in the first three quarters of 2005, and we were targeting five to seven additional new application wins in December.

We were successful in winning six of those targeted new applications and taken together these 15 new wins less four application losses in the year have resulted in an increase to our booked market share for 2005 to 40%.

As we go forward, we expect 10 to 12 net-new application wins in the first half of 2006, leading to overall booked market share growth of 43% to 44% in 2006.

Turning to our outlook for 2006.

We expect demand for electronic products to remain strong, supporting our outlook for semiconductor revenue growth in 2006 of 12% with unit growth slightly higher.

We are expecting similar end-market growth drivers to carry over from 2005 into 2006, such as cell phones, PCs, MP3 players and digital TV's, as well as game consoles.

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

Early indications are that the inventory at the end of 2005 is at healthy levels for the industry.

Exiting 2005, the trend for factory utilization is up with capacity additions and wafer output ramps scheduled throughout 2006.

Our outlook for 2006 capital spending is for growth of approximately 7% to 10% biased toward the higher end in light of recent announcements by Intel, Power Chip, and Promos.

And with the spending emphasis being on equipment to support production growth.

We are currently forecasting wafer fab equipment to grow around 15% to 17%, and for the Etch market to grow faster than the wafer fab equipment market coming in at around 22 to 24% higher than 2005.

Now for our industry outlook by market segment.

Let's start with the foundry market.

We believe overcapacity issues that impacted foundry spending for equipment in 2005 have now been corrected.

We see an aggressive move to 90-nanometer technology from fabless companies like Qualcomm, NVIDIA and ATI, from IDMs migrating to a fab-like strategy and from the emerging game console product cycle, which is beginning to put a significant load on the advanced capacity in the foundry.

Many key foundry customers are expected to be aggressive in the qualification of 65-nanometer processes with at least half a dozen of these fabless companies committed to generating revenues from 65-nanometer devices by the end of 2006.

Foundries will need to invest for this demand, and we are expecting spending on equipment to increase by more than 50% to 60% in 2006 compared with the under invested level we saw in 2005.

The $5 billion wafer fab equipment forecast for foundry spending should be in balance with the end market demand, and although this level is still notably below the $8 billion spent in 2004, it is moving closer to the average run rate of spending we would normally expect from the foundries.

For Lam, foundry order will grow strongly in the March quarter to approximately 21% of orders.

We expect to see continued growth in the memory sector.

The outlook for NAND Flash is excellent with forecast calling for this market to see, 150% to 200% bit growth, compared to about 55% bit growth for DRAM.

An increased focus on the NAND Flash market should stabilize a supply-demand cycle in DRAM for the near term.

We're expecting wafer fab shipments into the memory sector overall to increase approximately 15% in 2006, with investment in NAND Flash to grow roughly 80% to 100% while investment in other memory categories is flattish.

As well as Lam is positioned in the -- excuse me, as Lam is well positioned in the largest NAND Flash producers, our memory business remains healthy.

We have also gained significant market share in the expanding memory fabs in Taiwan to go along with our greater than 50% market share in NAND Flash.

Our order, strength, and memory is expected to be solid again in the March quarter at around 50% of our total new orders.

As for the remaining logic and IDM market, we see strong growth in bookings driven by 300-millimeter expansion plans, for us especially coming out of Europe and Japan.

Overall, we expect wafer fab equipment shipments into this segment to increase about 10%.

And for the March quarter, we are expecting our orders from logic and IDMs to more than triple from our December rate and account for approximately 30% of the mix.

Now I would like to provide perspective on our potential performance in 2006, through a financial model built around a scenario of 10% CAPEX growth, which results in 17% wafer fab equipment and 23% etch market growth.

Factoring in our four points of market share gain to 41%, under this scenario our revenue would grow about 30% to about 1.8 billion.

At that revenue level, we would expect at least one quarter at or above 30% operating profit, achieved by leveraging our business model and global infrastructure.

Consistent with our progress in the past two years, we would also expect in this scenario strong cash from operations of around 500 million closely aligned with our profit before tax.

This model included equity expense assumptions and a continued robust investment in new product development in etch, strip and clean.

I will now provide guidance for the March quarter.

Guidance on March and in earnings included the impact of equity-based compensation.

We expect new orders to increase approximately 25% to 30% over December levels.

Shipments will increase approximately 30%.

We expect revenues in the range of 410 million to 430 million with gross margins increasing to around 50.5%.

Operating expenses will increase to approximately 110 million, which combined results in approximately 24.5% operating profit and a 40% incremental operating margin flow through at the mid point of the revenue guidance.

Earnings per share are expected to range between $0.57 and $0.63 on a share count of 142 million.

I would like to close my comments by thanking and congratulating our employees on an outstanding quarter and year.

Their dedication to our customers' success and the Company's success is truly commendable.

With that, I will turn the call over to Kathleen for the q & a.

Thank you.

Operator, you can begin polling for the questions.

Thank you.

Ladies and gentlemen, at this time we will begin the question-and-answer session. [OPERATORS INSTRUCTIONS] Our first question from Jim Covella with Goldman Sachs.

Congratulations on the terrific results and guidance.

This is about the most bullish I've ever heard a semi-equipment company on one of these calls.

A couple of quick questions.

For the NAND investment for 2006, did I hear you say you thought it would be up 100% year-over-year in CAPEX?

In wafer fab equipment spending, we expect that the amount invested in 2006 for NAND Flash will be 80% to 100% more than they spent in 2005.

All right.

So a follow-up there.

I mean, there's only a couple producers of NAND Flash globally one of whom already gave us some guidance on the CAPEX.

Now they gave CAPEX and gave commentary around wafer fab equipment.

So it wasn't exactly -- there's interpretation to be made.

They were indicating flat or up a little bit.

They're a pretty big spender.

That would imply everybody else is up a couple hundred percent in terms of wafer fab equipment in order to get the whole market up about 100%, am I missing something?

Well, I think that one, specifically as it relates to Samsung's comments, that while their total capital expenditures was going to decline slightly or at least forecasted to, the percentage of their spending in terms of wafer fab equipment was going to be higher, and clearly they're going to be targeting more of that spending in NAND Flash in '06 than they did in '05.

I think if you look at the NAND Flash players that existed in '05, the numbers are increasing in '06.

You have the I M Flash technology joint venture with Intel and Mikron.

You have Hynix making significant additional investments, Powerchip just announced that they're intending to double their CAPEX with an additional $1 billion targeted at a Flash fab.

And I would expect 70% of that billion dollars to go into wafer fab equipment.

ST is accelerating its equipment in the NAND Flash equipment.

So you both the existing players continuing to make strong and increased investments in 2006, and you have a number of players that are coming to the market in 2006, spending much, much more than they did in 2005.

Thank you.

Our next question comes from Timothy Arcuri with Citigroup.

Please go ahead.

I had two things.

The first thing, Martin, if I look at the guidance and compare it to what the results were nine months ago, the revenue roughly the same, if I look at December results versus March quarter results.

The revenue is almost the same, but the margins are a little bit lower.

And R&D is up about 17%.

It -- can you help explain, is the entire increment in R&D on these new products?

It's not quite as simple as that, obviously, on the comparison you're making, Tim, because before the September, '05, quarter obviously there's no equity based compensation in the P&L.

So the first part of the story comparing to March or December where arguably you could ask the same question is that in today's P&L there is $6 million of equity compensation that wasn't there in the prior period.

To your point, we have made some very specific discretionary decisions to increase our investment in R&D.

And I think I've sized those at around about the $5 million level per quarter.

That's what we targeted, and it took us a little longer to kind of get to that level.

You'll remember in September, we -- we didn't spend quite as much as we guided, but we essentially got December dead on at the -- at the $100 million level.

In terms of margins, I think there's a very different story.

Obviously in December '04, March '05, the shape, where we were on the curve was quite different, right.

We were on a curve that was coming down in terms of investment, which means we have the opportunity to leverage coming down.

We clearly today are in -- at an investment point.

So at revenues of the 350 level, we have shipped 390.

So depending on where you are on the curve, the cost structure of the company is always kind of dealing with that point of inflection.

So that's kind of part of the margin story.

The other part of the margin story that I think Steve spoke to in the last call is that clearly in December '04, and to a lesser extent March, '05, we had some really phenomenal customer mix, configuration choice dynamics that really helped us in margin terms.

And about three months ago, we said very specifically that as we were increasing and rapidly expanding the base of shipments of leading edge products, we were under some amount of pressure initially but expected to kind of turn that around through the year.

And the headline of this earnings call, obviously, is we did better than we originally targeted by about a percentage point.

No, sure, I guess I’m just wondering, it seems the incremental margins are kind of coming down here.

We're at the heart of the cycle.

It seems the margin leverage is not what it could be if you weren't investing in these new products.

I guess I'm trying to figure out what's going to take the model to the next level.

I'm not sure I would conclude what you're concluding, Tim.

I think relative to where -- if we go back to November of 2004 when we first put some models out there for profitability for the Company, we put out two models, one was a year model.

And I think we were almost dead on in terms of the revenue and better in terms of profitability.

We also said if we have a $350 million revenue quarter, margins would be around 48%.

So we are, very, very pleased with the margin performance and in terms of operating income, the same is true.

Tim, we're just starting into the acceleration in this cycle.

And we will be growing our gross margin and, more importantly, as I commented in the financial model, if we get the kind of spending that we expect we will be going from an 18.5% operating income percent in the September quarter to 30% operating profit sometime in the 2006 time frame if that scenario plays out.

I think that's pretty good leverage.

And I think that that speaks to the fact that there are significant earnings to be coming forth in the future.

Thank you.

Our next question comes from Suresh Balaraman with ThinkEquity Partners.

Steve, in general you guys have rarely given guidance beyond one quarter.

Now you're making bullish projections for the year.

Even though the Japanese budgets-- for fiscal '07 will not be known for another two or three months, what has changed that gives you such confidence and visibility?

I think you need to be very careful at your assumptions.

I gave guidance for the March quarter.

What I did was give you a picture of what 2006 could be like under a set of assumptions if wafer fab equipment is up 17% on a CAPEX increase of 10%, then those numbers that I laid out is what you would expect to see.

So I have presented you a model of how we would expect to financially perform against an assumption, not a forecast but an assumption of what would happen should wafer fab equipment spending be 10%.

So I think that's a significant difference, and I think that you have to draw your own conclusions about what you think the CAPEX spending and the wafer fab equipment spending environment will be.

But as you make those assumptions and do calculations I want to give you a feel for how we think we would do in a 10% CAPEX increased spending environment.

Any thoughts of how Japan would fit in terms of the type of consumption you have -- [INAUDIBLE]

Sorry, how Japan would do what?

In terms of CAPEX spending in '06 versus '05?

Typically the Japanese, as they go through their cycle, which really comes about in the March-April timeframe, there has not been any particularly new information that's coming out of Japan, which is -- which is not unusual.

The assumption is that if we look at the health of the end demand markets and the positions of the major Japanese semiconductors that have been spending for equipment and adding capacity, the expectation is that they will be spending in a similar amount to what they spent last year, and like I said, our official forecast for CAPEX is somewhere in that 7% to 10% increased spending, and that -- that assumes a -- a Japan that's relatively flat year-over-year.

Thanks.

Next question comes from Gary Sue with CIBC World Market.

I want to clarify.

Under those assumptions, Steve, that you kind of outlined, 10% CAPEX growth, 17% wafer fab.

With market share gains, you believe that Lam could grow in calendar '06 by 30% or was that 27%?

If -- the assumption that I laid out is if CAPEX grows 10%, then I would expect that with our market share gains that I believe will occur as a function of the application wins, that we achieved in 2005, that we will grow by about 30%.

And that in that 30% growth that would take us to about $1.8 billion.

From the 1382 that we revenued in 2005.

Okay.

But if I look at your bookings guidance for March, it suggests kind of around 500, 510, it seems to suggest basically kind of a peak bookings quarter already.

And if I draw out bookings sequentially down and -- in June, September, December, I can kind of come up with 30% growth for bookings in '06 over '05.

So, does this suggest that bookings will be down in June?

No.

I think in fact from what we can see right now, I would expect that June, in fact, would be up from March.

And so I think that if you -- you have to remember, there will be a book-to-bill ratio.

And typically, in a strong upturn environment that could run 1.05 to 1 or could run 1.1 to 1.

Remember also that if you have a bookings environment at a certain level, a shipment environment at slightly less than your bookings or maybe somewhat equal depending upon how fast we can turn it, Lam is an sab101 revenue upon acceptance company.

And there is a delay that will occur to some degree that will have our revenues slightly lag our shipment output levels.

Thank you, our next question is from C. J. Muse with Lehman Brothers.

In terms of the six of the seven wins that you outlined for December and the ten to twelve that you're targeting for the early part of '06, could you give an outline of what percentage came from Japan.

Well, I think what I’d rather do if I could I'd is, kind of give flavor for the application wins in total for the 2005 year as a whole, and those wins came on a worldwide basis.

There were a number of wins in Japan.

There were wins in the US.

There were wins in Taiwan, China, and Korea.

When we look at the first half of 2006, you have the same pattern.

There will be wins expected in Japan, Taiwan, China, Korea, Europe, and the US.

These are broad based.

They go across memory, foundry, and logic IDM.

And they -- they really represent that if we are successful to the extent that we believe we will, that our booked market share in 2006 will approximate 43% to 44%.

So as a function of that high of a market share, you would expect that it's a very broad based penetration across a number of market segments.

Got you.

Second question, given the market share gains in '05 and presumably some of those contracts coming off of warranty, can you talk a little about how you see your spares and service business growing in '06.

Well, we think that wafer starts are going to be strong, and that with unit growth up 13%, 14%, we're going to have wafer start growth of about 10%, 12%.

We think that our spares and our service business will grow as a function of that environment.

We also expect that some activities that we're doing to work with customers on increasing our support level in the fab to increase their optimum utilization of our equipment, maximize the availability, lower the cost per wafer, along with we are and have been successful over the past six months in winning back market share in our spares consumables area, where some of the low-cost country local suppliers had taken some share away in the -- in the year before that.

We have been successful in winning some of that back.

So I would expect that we would see our spares and service business grow 20%, 25% next year.

Thank you.

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

Nice results.

Your assumption that etch grows faster than [wfe] is that based on a fact that etch always grow faster in an upturn?

Then I have a followup.

That's a good question.

We have done a study going back really 20 years of the past cycles.

What you see is a very consistent trend.

In a downturn, etch will have less money spent on it.

In an upturn, you will have more money spent on it.

So when we saw that, we said what's really the reason behind that?

And what you have is that etch is -- is a critical yield enabling tool, and it's a very difficult -- it's a tool that has to deal with some very difficult application steps.

Customers want to make sure in an upturn environment they do not run out of capacity to get through their etchers.

It’s somewhat of a similar pattern but to a lesser degree than what you see in photo lithography.

If you don't have your photo lithography tools in your fab and what you can ramp into, you're going to run yourself to a grinding halt.

And so etchers in an upturn are purchased at slightly higher rates, in our case we believe that they go from being 12% of wafer fab equipment to about 12.6% of wafer fab equipment.

And we expect that that will be exactly the trend that we see as we go into this capacity ramp.

As a followup, you talked a little bit about June visibilities.

And you said seeing what you see today, June is probably up.

Can you at least qualitatively tell us why you think that.

And I almost hate to ask the question, but doesn't that bode poorly for the second half bookings momentum of the calendar year, thanks.

Well, everybody wants to know if they could what September and December are going to do.

And the reality is in this business, we're normally operating where if we can see what's going to happen in the quarter we're in, we're happy.

I think what happens in some of these upturn environments is that you do tend to get more visibility out to a little longer as a function of the fact that lead times begin to move out some.

Customers get nervous about making sure that the supply chain's going to support them.

So you suddenly have a lot more conversations that are talking about what customers would like to do in terms of equipment deliveries over a -- a longer period of time.

So that's why I can talk about the direction of June.

I'm not going to talk about the specifics of June because there's still a fair amount of time to go in terms of how June will exactly shape up.

But clearly if -- if what occurs, in fact -- in other words what we see today, if that's what occurs, then June will have higher bookings than March quarter.

What does that mean for the second half?

I don't know.

I mean, one of the things that we look at clearly because we try to understand those kind of things as you do is, what's the demand environment that is likely to be present in 2007?

What's happening to the -- the amount of total capacity that's going into the industry, how is that stacking up against the demand environment, and what's happening to the -- the ratios of wafer fab equipment investment as a -- as a percent of semiconductor revenue?

And because most people believe that 2006 is going to be a 12% type semiconductor revenue environment with very modest wafer fab equipment investment in 2005, we are going to have a stronger wafer fab equipment environment at 17%.

But by historical means, that's not some super strong level of investment.

We've clearly seen periods where wafer fab equipment investment has gone up 40% to 50% year-over-year.

So when you look at the investment that might occur around a 10% CAPEX and 17% wafer fab equipment, it does not take the financial metrics and the efficiencies and productivities that are needed in the industry.

It will take them out of whack.

I think we're in a situation where clearly we're accelerating off of where we were in the June and September time frame, but I don't see that this acceleration is getting -- getting out of hand.

And I think that if -- if things continue to be healthy on a global consumption situation, then we should expect that the second half of 2006 will be fine.

Next question comes from Brett Hodess with Merrill Lynch.

Please go ahead.

Steve, two questions.

First on the -- you talked a bit before about the breadth of the new application wins across the different customers.

Are there particular product areas that you're doing better in?

Dielectric versus metal or poly?

Are there specific applications in dielectric for instance that you're seeing the best leverage in?

Well, clearly we have been targeting how to increase our application wins in the dielectric market as it represents 60% to 65% of the total spending in etch.

We've been pleased with the progress that we've made in -- in winning a number of -- of dielectric applications and we clearly saw our market share grow in dielectric.

But we still invest a significant amount of money and peoples time and effort into the conductor market which for us is both the silicon and metal market.

We had a number of important applications wins in both of those areas.

But it would be fair to say that the majority of those application wins in 2005 were dielectric.

And I think that we'll see a similar pattern in 2006 as the dielectric market share represent a greater opportunity for us than the very high market share that we already enjoy in poly, silicon, and metal.

And the quick followup, Steve, was can you give us some qualitative feel for when we might see some of the new strip and clean products you mentioned earlier.

We are -- I would expect that in our March analysts meeting -- have we announced that yet?

Not formally.

I guess this will constitute some kind of communication that we are planning to have an analysts conference in March in Shanghai, China, and we'll get that out officially I think shortly.

But at that time I want to talk more specifically.

We'll have our -- our product group management team and our technologist there.

And we're going to talk about our business opportunities, both in etch but also into the strip and clean market.

Talk more specifically about the applications that we are targeting.

We'll talk about the -- the size of the market opportunities.

And we'll look at how we see our business model shaping as a function of these new product activities.

And we'll lay out a road map so to speak of what we would like to do over the next 12 to 18 months with these products.

So maybe this is the classic teaser to good -- good reason to tune in to our -- our March meeting.

I think there will be some great information for you there.

Thank you.

Our next question comes from Jay Deahna with JPMorgan.

Please go ahead.

Thank you.

Good afternoon.

I've got two topics I'd like to discuss.

The first one is memory.

I believe you stated in the past that your share in Flash for total etch is over 50%.

I'm wondering what it is for DRAM.

I think you mentioned in your prepared remarks something about gaining share with Taiwanese memory suppliers.

And the follow on to that is our understanding is that Mikron, Samsung and Hynix are spending a lot of money on flash this year, high percentage of CAPEX.

But as we roll into the back half this year and next year, there's going to be the Visto ramp, which is going to be a DRAM peg.

I'm wondering, are you going to see exceptionally strong orders of Flash in the first half transitioning into more of a DRAM-centric scenario in the second half?

Then I have another topic to follow up on.

Okay.

Yes, I talked about our market share in the NAND-Flash segment is greater than 50%.

Our market share in DRAM is less than that.

It's in the mid to low 40s.

And we are expecting that if we continue to make good progress at some of the memory DRAM manufacturers that we can see that number move up in 2006.

But there are some decision points that have not yet been made.

So we're -- we're in that low 40% DRAM.

As it relates to what the kind of breakout might be as you look at spending for the quarter, certainly in the December quarter, there was some significant NAND Flash ordering.

I think that we're going to see some continued investment in the March quarter.

And I think we'll actually see in the June quarter a -- a good strong investment for memory.

And that will be both a mixture of Flash and DRAM.

In terms of the second half, again, you have this kind of visibility problem in terms of what's really going on.

But historically the December quarter is a major ordering quarter for memory manufacturers.

It's done that for the last two or three years.

And so I think that we'll see a sustained level of investment for memory mixtures of Flash and DRAM throughout the year.

But it's too early in the year to really know for sure what will the memory investment be in the second half.

Are your customers talking to you about long-range planning for the potential impact of big growth acceleration in DRAM next year?

Most of our customers are -- are very focused on what's happening in the near term.

And as you know, the activity in the NAND Flash area has presented some tremendous opportunities.

And you have certainly a lot of companies plowing into that space, and one of the interesting things is that when you look at the customer base and how the NAND Flash market lays out, for a semiconductor company they've got maybe 100 different outlets in terms of how they can sell their NAND Flash devices.

When you look at the DRAM market, it's selling into maybe, five major players who have enormous control of the pricing environment and -- and the balancing of supply and demand.

The NAND Flash market is -- is a market that the applications are just emerging.

I think many people who looked at what’s coming out of the consumer electronics show clearly got a hint of -- of some new Flash applications that are being designed in that if -- if they occur in a reasonable time frame like instant-on PCs, the amount of NAND Flash that would be absorbed would make what's currently being produced dwarfed.

So I think we're entering an era and what our customers do talk to us about is they're very bullish about the multi-year expectation of significant ongoing demand in NAND Flash in particular, but memory in general.

Thank you, our next question comes from Stephen O'Rourke with Deutsche Bank.

Please go ahead.

Thank you.

Just to follow up on a line of questioning tonight.

When you think about short lead times, the flexibility in business models, particularly yours, do you think the equipment industry is kind of showing a measure of seasonality that mirrors or maybe anticipates the semi industry?

Well, I think certainly the equipment industry as a whole and the supply base that serves it have been able over the last few years to really shorten up the cycle times and have really increased the ability to respond off of a given base by ramps of 30% to 50% in three months to -- to five-month-type time frames.

What this has done is certainly created a much closer linkage to what the semiconductor companies are trying to do and their response to their customers who have clearly shortened up their lead times to them.

So the whole entire supply chain by being shorter and faster I think actually creates the opportunity for us to stay in better balance relative to supply and demand.

When we have lead times that go out six months and nine months and we have these huge backlogs and we've got customers having to make investments in filling out wafer fab shells and spending that money, all well in advance of really knowing how well their customer demand will hold up, as we shorten that whole process, I think it's one of the reasons that we saw the cycle in '03 and '04 be one that ramped up, got itself in sync with the demand environment, and then slowed down, but a relatively modest slowdown, stayed in balance relative to supply and demand, and I think that if we can keep lead times short, that we're going to have an opportunity that we won't end up with these massive overshoots of excess capacity which then resulted in huge problems in spending a year or year and a half or two years to absorb that excess capacity.

Okay.

And you gave some fairly strong picture of 2006 and made it very clear that they were assumptions and not a forecast.

Can you handicap the confidence level that you have in your assumptions?

Well --

I thought I’d ask it a different way.

Let me put it this way.

I don't know whether or not CAPEX will go up 10%.

Because there's just too many variables that could lead to that being higher or lower.

But what I do have a high level of confidence in is if CAPEX goes up 10% and if wafer fab equipment goes up the 17%, and we get the kind of increased investment in etch and so that the etch market grows 23%, so if you just say if that's what happens, what's my confidence level that things will play out in terms of that financial model that I laid out, I have a high degree of confidence that if that's the level of spending we get in 2006, those are the kind of results you're going to see from Lam Research.

Thank you.

Next question comes from Mark Bachman with Pacific Crest Securities.

Hi, Steve.

You mentioned four application losses in 2005.

Can you discuss the difficulties that you face around these negotiations and maybe some of the primary reasons why you lost that business.

Well, I think like in any competitive situation, we -- when I define a loss is with the production tool of record.

And when I define a win, it's the competitor was and we took it away from them.

Etch is a very difficult business.

Each of the customers have a very unique structures and designs and different film stacks.

And in a couple of cases, as they change technology nodes, we had difficulty in getting our current configuration of hardware and process recipes to meet the needs that the customer had as they change their film structure at the next technology node.

Most customers keep other suppliers with chambers that are in various stages of evaluation.

So where we lost, it was a place where our competitors were able to deliver the customers' solution.

The customers felt that the solution worked better for them.

And the problem for us was we just didn't get them the solution fast enough.

Now, in two of those four cases, we've been able to demonstrate that, in fact, even though it took us a little bit longer we now have a superior solution.

And we may very well win back that -- that market share position.

But I think it's only appropriate that if I'm going to talk to you about the wins we have, I think we have to acknowledge we don't win every single thing going on out there.

But at the end of the day if we're winning more than we're losing, then it says that the competitiveness of the tool and the differentiated capability of both the tool and our people's capability is still strengthening relative to the competition.

Okay.

I guess that will lead me to the followup.

You also discussed 10 to 12 new applications here.

Do you expect to win in the first half of '06.

Can you give us more color on those, maybe the types of applications and the end markets that they serve.

I will give you only a brief kind of broad-brushed overview for a couple of reasons.

One is I don't want to be alerting my competition to the fact that they may be at greater risk than they realize.

And so those specific applications and customers I'm not going to talk about.

Second is in March, we will be providing more color on specific aspects of the market where when we look at our technology, when we look at our product offerings we want to help people understand better, why have we been winning, why are we still winning?

When we look at next generation tool sets at the 65 and 45-nanometer node, as we are shipping those flex 45 dielectric tools, the [Kio] 45 conductor tools, we want to help people get a better flavor for why those -- why those tools with their technologies are going to be very successful at not only defending our position but also continuing to increase our market share capability and so we'll talk about that more in March.

Thank you, our next question comes from Mark Fitzgerald with Bank of America.

Please go ahead.

Two questions.

Given that NAND is 50% of the mix and it's a big seasonal market with demand with this iPods and cameras selling largely at Christmas time and Chinese New Years, if you’re a chip manufacturer, why wouldn't you order very aggressively and install in the first half, then cut it off in the second half?

Well, I -- I think you probably have to ask them to give -- because I think they could give you a better answer in terms of how they plan their investments, their use of their capital dollars, and when they want to put capacity and at what time frames.

I think the reality is maybe somewhat different than -- than what you're characterizing because it's not that capacity additions only go in in the first half.

But certainly if we -- if we look at some of the seasonality aspects, if you get your equipment shipped in the first quarter, you get it up and qualified in the second quarter, then you're in an outstanding position that as the demand market unfolds for that next year, you can wafer start and output right into that demand environment.

So certainly a portion of that makes sense relative to the Christmas seasonality.

But the reality of NAND Flash is it is a market that today is characterized greater demand than what can be supplied in any given period of time, and that's because the overall market continues to grow, and it's the -- it's the far more dominant factor than the seasonality aspects of what's going on in some other markets that are growing at slower rates, and therefore are more mature and subject to seasonality demands.

All right.

Second question is, you said your internal model is for 7% to 10% growth.

I mean, is that a bottoms up, and did you have identified capital spending for each individual company at this point?

Our crack corporate marketing team, in fact, does that very thing.

They've got every major and most not-so-major semiconductor companies.

We track every announcement.

We track what they've said they were going to spend, what they have spent, and so that forecast of 7% to 10% is our estimate of what we think CAPEX spending will be.

So clearly we begin to position the Company in terms of resources that we need in various places.

It's why as Martin mentioned we added 50 people to our headcount which, for us, is a very significant addition.

We would anticipate that if things continue to expand over the year, as we expect, that we will add some additional headcount, particularly in our field-based engineering and technology capability.

So yes, we -- we look at this stuff very carefully, very specifically.

And -- and break things down into wafer fab equipment spending by foundry, by memory segment, etc.

So quite a detailed analysis.

Thank you, our next question comes from Stephen Chin with UBS.

Please go ahead.

Great.

Thanks.

Steve, the strength that you expect to see from the foundry segment in the March quarter, is the majority of that strength coming from one customer, or are multiple foundry customers contributing equally to the strength?

There are multiple foundry companies in Taiwan, in China, in -- which obviously are the biggest markets for -- for foundry.

But multiple companies and multiple regions.

Okay.

Just on the memory orders, it looks like they'll be down a little bit in the March quarter.

Can you share an idea how you think the Flash versus the DRAM split likely plays itself out.

Well, in the March quarter there is less NAND Flash spending or ordering, and the ratio is actually pretty strongly DRAM.

Probably 75% of the order are likely to be coming from DRAM in the March quarter.

And that could change obviously, but we had a big, strong investment in NAND.

It will be stronger in DRAM in the March quarter.

Then I would expect that we'll see NAND Flash investment increase in the -- the following quarters of '06.

Thank you.

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

Can you hear me?

Much better.

Great.

Congratulations on the quarter.

And also just on the open dialogue, definitely much appreciated.

Two quick questions.

The first is, on the ASPs for your products could you make a broad comment on what the pricing trends are – flat, up or down, and against that sort of maybe share with us how frequently you renegotiate pricing with your key suppliers.

Is it quarterly, semi annually, annually, then I've got a followup.

First up, before I have that, I want to thank all of the folks who have had kind words and congratulations to us.

It's hard to sometimes express that because if there's talking going on, you can't hear us say that.

I want to make sure that we -- we do appreciate the comments.

As it relates to ASPs, the environment at this point in the cycle is stable.

I think that we typically are in a situation today that etch is such a critically difficult activity that if are you getting a differentiated result on the wafer you're able to price for that value.

The reason for us it's stable is that we continue to maintain a very competitive capability across our various etch products.

I would assume and what will happen for us is that we'll continue to have some margin expansion as a function of efficiencies in the factory.

We'll also gain some benefit from our suppliers.

Where we have contracts with some of our suppliers, that as the volume goes up and their costs go down, they pass on additional savings to us.

We typically contract on an annual basis with our suppliers.

We have global agreements with them.

Those contracts are set up with levels of business that are expected and discounts from prior years that have enabled us to continue to stay very competitive on the cost side of the equation.

So I'm very pleased with the suppliers.

They have been ramping their output.

They've been maintaining their quality.

Their on-time delivery is phenomenal.

And it may be different than some people think.

Maybe it's happening to others, but our suppliers do not raise prices to us in the upturn.

And part of that is contractual.

The other is they want a long-term relationship with us because they see the benefits of that.

Great.

Then my followup is just you've had a number of questions here already dealing with the sustainability of the up cycle.

You mentioned two numbers.

CAPEX plus 10%, wfe plus 17.

Can you maybe share with us what the key assumptions that you -- that you see underpinning that sort of 1.7x growth of WFE when compared to the broader CAPEX number.

Thanks.

I think I heard you say 1.7x growth --

Yes, if you've got 17% WFE compared 10% CAPEX.

The wfe is growing almost twice as fast as CAPEX figure year over year.

Right.

That's fundamentally a function of on average in down cycles in particular, the investment percentage of CAPEX that goes into wafer fab equipment drops to the 50%, 51%, 52% range.

That’s because companies in downturns build shelves, get their properties and plants kind of set up.

In an upturn environment, that percentage moves to 55% of CAPEX going to wafer fab equipment.

Sometimes it can go as high as 56% or 57%.

So the assumption of 17% wafer fab equipment growth is based on an assumption of 55% of that CAPEX will go to wafer fab equipment.

And that's how you get that increase in growth.

And then if you take it to the next step, etch goes from being 12% of wafer fab equipment to 12.6%.

And that's how you get etch growth at 23%.

So you can see the leverage that occurs, and it's quite significant off of a 10% CAPEX.

Thank you.

We'd like to thank everyone for joining us on today's call.

And we look forward to speaking with you again in the next quarter.

Ladies and gentlemen, this concludes the Lam Research December quarter, 2005, financial results conference.

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