科林研發 (LRCX) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Lam Research Corporation June quarter 2006 financial results conference call.

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

Following today's presentation, instructions will be given for the question and answer session.

If anyone should require operator assistant during the conference, please press the star key followed by the 0.

This call is scheduled to last approximately one hour.

As a reminder, this conference is being recorded today, Wednesday, July 19 of 2006.

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

Please go ahead, ma'am.

Thank you, Mary.

Good afternoon and thank you for joining us to discuss the financial results for the quarter ending June 25, 2006, and the business outlook for the September 2006 quarter.

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

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

The presentation can be accessed through the IR section of 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, orders 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 p.m.

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

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

Thank you, Kathleen.

This afternoon we will discuss our June 2006 quarter financial results.

Before focusing on the quarter, a few words to characterize our 2006 fiscal year.

Company revenues exceeded 1.6 billion.

Gross margin performance exceeded 50% of revenues for the second straight year.

Incremental operating expense investments were focused on Etch market share expansion and the actions necessary to support multiple product growth.

Our effective tax rate adjusted for non-ongoing items was less than 20%.

Financing of 350 million provided liquidity to support a foreign earnings repatriation of 500 million, and our closing net total cash balance was 1.2 billion.

Highlights for the June quarter include: orders growth of 23% sequentially at 640 million, operating income as a percentage of revenue at a historical high point of 30.3%, a flow through of 56% from operating income growth of 45% and revenue growth of 20%, ongoing EPS of $0.96. 300 millimeter applications represented approximately 89% of total systems new orders and 89% of orders were for applications at less than or equal to the 90 nanometer technology note.

Orders upside to guidance this quarter occurred in the IDM logic and foundry segments.

Memory orders were essentially flat compared to the prior quarter.

In absolute dollars, Asia Pacific and Japan were the two geographies exhibiting strongest sequential growth.

Accordingly, systems new orders market segmentation for the quarter was memory at 40%, IDM logic/other 34% and foundry adds 26% of the total.

Dedicated manned applications represented approximately half of the memory orders.

Revenue of 526 million exceeded the high point of our guidance range.

On increasing customer demand, shipments at 543 million were up 6% sequentially, slightly less than we expected due principally to the timing of shipments between the June and July months.

This scheduling effect contributed to approximately half the inventory build sequentially.

The ending unshipped order backlog grew substantially, up approximately 29% to 521 million.

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

As presented last week in our investors and analysts meeting, we targeted operating income levels between 28.1% at 500 million and 30.5% at 550 million in revenues.

For that reason, we see today's reported results as on the higher end of those stated objectives.

Our gross margins for the quarter of 52.2% exceeded our guidance.

In general, this improvement is the result of favorable mix that is not expected in future periods, improving warranty performance, as well as leverage from higher factory volumes.

As we commented last earnings call, we are in the process of implementing our targeted spare parts price reductions to support our customers business plans.

Our implementation is ongoing.

Operating expenses increased as planned at 115 million, reflecting the impact of variable compensation driven by higher profits and also discretionary investments to support our growth and served market expansion plans.

This quarter, we finalized decisions related to foreign earnings repatriation under the provisions of the American Jobs Creation Act.

The June quarter earnings repatriation of 350 million brought the total in the year up to 500 million.

The non-ongoing tax expense consequence of this final decision was approximately 17 million in June.

As we fund growth in the business, we delivered cash from operations of 92 million this quarter, supporting our plan to deliver cash from operations of greater than 25% of revenues this calendar year.

Inventory performance continues to set a standard for the industry at six terms.

Our accounts receivable days outstanding was 71 days.

In the quarter, we received 49 million from the exercise of employee equity plans and we used 37 million to repurchase slightly less than 800,000 shares at an average price of $46.93.

We have 332 million remaining in our Board-approved stock repurchase authorization.

Our total net cash balance, including restricted cash, was 1.2 billion at the end of June.

Deferred revenue at 230 million continues to grow and exceeds our previous high watermark with the deferred profit balance at 140 million.

These balances exclude approximately 74 million of anticipated future revenue value for shipments made to Japanese customers where title has not yet transferred.

These shipments are currently recorded as costs in inventory.

In the quarter, adjustments from backlog were a net positive 30 million, reflecting a revision of estimates for installed base service contracts.

Order cancellations were approximately 10 million.

Capital expenditures, including purchase of intangible assets, were 26 million.

Depreciation and amortization was 6 million.

As we invest in organizational capabilities to support our expanding Etch market share and multi product growth opportunities, employment levels increased by 60 to approximately 2,400.

Now to Steve's comments.

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

I know that many of you attended our analyst and investor event held in conjunction with SEMICON West last week.

However, for those of you who may not have been there, I will spend just a few moments recapping the key themes of that meeting before moving on to industry comments and a review of our near term business outlook and expected business performance.

During our analyst and investor meeting at SEMICON West , we outlined the focus for the Company over the next few years.

Specifically, we stated that we are focused on executing to the near term production ramp requirements of our customers, expanding our leadership position in Etch, leveraging our Etch expertise into adjacent markets and delivering best-in-class financial performance.

I believe our June quarter results reflect our ongoing success in each area.

We are pleased with our continuing market share momentum in Etch.

For early positioning, we are achieving with our new products and our ability to achieve strong operating income and asset management performance.

Moving to the semiconductor market environment, we're currently seeing our customers respond to increasing demand and high utilization with steady, continued investment.

As this equipment is installed and moved into production, we expect our customer base to continue to approach the need for capacity additions in a measured way.

We believe that the September quarter will likely see higher orders than December, but expect that the second half 2006 orders will exceed the first half by approximately 15%.

We anticipate utilization will remain relatively high through this period as a result of this measured capacity expansion activity and the normal seasonal output ramp.

We expect to see continued strength in the memory device sector for this foreseeable future.

In particular, the outlook for NAND Flash remains solid with demand in supply expected to stabilize and price declines to slow in the second half of '06 due to increasing demand.

The increased production in the NAND Flash market has helped stabilize the supply demand cycle in DRAM for the near term.

Bit demand in DRAM is expected to grow about 50% for 2006 and supply constraints have kept pricing above expectations in the first half.

We are expecting capital spending in the memory sector overall to increase 25 to 30% in 2006 with CapEx in NAND Flash to double year-over-year and be about 45% of the memory mix with spending in the other memory categories expected to be slightly up year-over-year.

Our orders from memory suppliers in the June quarter were essentially flat quarter-over-quarter while declining as a percent of orders to 40% from 52% last quarter.

The mix was about 50/50 between NAND Flash and other memory.

Demand for foundry products remains solid through the second quarter and has been better than seasonally normal in the first half of 2006.

Utilization rates remain high at the leading edge and foundries have responded with orders for front end equipment to incrementally add capacity for production in the second half of calendar year '06.

We expect a 26% increase in CapEx spending in 2006 to about 7.2 billion, still notably below the 9.6 billion level of 2004 and slightly below the average spending from foundries for the years 2004-2005.

During the June quarter of 2006, our foundry orders were above expectations and increased more than 70% sequentially.

We have been successful in the past year at winning new applications at the foundries, particularly in dielectric Etch and are now receiving volume orders and are shipping many systems related to those wins.

As for the remaining logic IDM market, we saw strong June quarter bookings growth driven by 300 millimeter expansion plans from around the world.

Overall, we expect wafer fab equipment shipments to increase about 7 to 10% into logic IDM customers during 2006 with a total wafer fab equipment market growing 31% from 22.5 billion to 30 billion in calendar year 2006.

As Martin outlined, the June quarter for Lam Research achieved records and milestones as we exceeded gross and operating margin targets versus our model.

We were able to achieve our operating margin target of 30%, 1/4 faster than planned.

A record order level of 640 million is a strong indication of our customers trust and the capabilities of our people, products and services.

As I noted last week, we are expecting our market share gain momentum to continue in 2006 with seven to eight points of shipment share gain which will result in 44 to 45% total Etch market share.

We are expecting our booked market share to be higher than ship share in 2006, driving further share gain in 2007 as the 65 nanometer node begins to ship in greater volume.

Our target of 10 to 12 new application wins in the first half of 2006 was met with a gain of 11 new wins, making the total since the start of 2005 a net gain of 18 application wins.

We are gaining share in a broad based fashion across all regions, all device types and films, with a strong trend toward higher share at each advancing technology note.

We are continuing to make progress in positioning our new clean products and announced at SEMICON West our new bevel clean product which focuses on improving yield due to defects at the edge of the wafer.

Our strategy is to leverage our platform and product architectures with our global Etch knowledge to develop enhanced productivity solutions for our customers.

I am pleased with the progress we are making in getting these new products into the market.

These targeted adjacent markets represent an opportunity to expand our served available market to 19 to 22% of wafer fab equipment and add a potential 700 to 900 million in additional revenue in the next three to five years.

Now I'd like to move on to guidance for the September quarter.

We expect orders to be up 5 to 10%, revenue in the 580 to 600 million range.

Our shipments will be up 20 to 25%, and our gross margins will be around 51.5%.

Our operating margin will be greater than 30% at the revenue guidance midpoint, and our earnings per share will be between $1.00 and $1.05 per share, with a share count assumed at 145 million shares and a tax rate assumed to be 25%.

Having given this guidance, I want to announce that in the future, we will stop giving bookings guidance effective with our January, 2007 conference call.

We are going to stop giving bookings guidance as a function of the fact that our focus is on shipments, revenue, and operating profit, and that is consistent with how we run the business.

Our assessment of business momentum is defined by market share and new application penetrations.

As a Company, we are focused on short-term execution operationally and financially and the long term positioning of our new products in the new markets and how they affect the future of our business.

Lead times are now so short and our customers are leveraging that capability evidenced by the short-term nature of our backlog that as orders and backlog guidance becomes less valuable as a statement of cycle momentum and many of our investors have indicated that they see little benefit to bookings guidance and prefer us to talk about the execution performance of the Company in our longer term prospects in the business.

In closing, I want to thank and commend the efforts of our employees who are keeping our product and service offerings aligned to the needs of our customers while meeting the rigorous demands of a significant production ramp with outstanding on-time delivery of high quality products and services, and with that, I will now turn the call back over to Kathleen for Q & A.

Thank you.

Operator, we're ready for Q & A.

Thank you.

Ladies and gentlemen, at this time we will begin the question and answer session. [OPERATOR INSTRUCTIONS] Our first question comes from C.J.

Muse with Lehman Brothers.

Please go ahead.

Yes, good afternoon.

I guess first question is could you elaborate more I guess on what gives you the confidence that bookings in the second half can be 15% greater than the first half and whether or not visibility extends into the first half of '07?

And then I have a quick follow-up.

Well, what gives me confidence is that we have a pretty good visibility of what the customers are going to book in the September quarter.

Order activity in the first three weeks of the quarter has actually been very robust and so we believe that the September quarter will be in that 5 to 10% up range.

I think that when we look at what the customers are telling us they plan to do over the rest of the second half, while the order rate looks like it's going to come down from what is planned to book in September, it's still going to be a good quarter, just not as high as the September quarter.

I think that most customers, when they look at what's going on in the demand environment, in many of the segments, the demand for IC units has been pretty strong.

We're forecasting that we think IC unit growth in calendar 2006 is going to be about 18 or 19%, and I think that with that kind of demand, there's going to be a continuing need to make continuing, ongoing, prudent investments in wafer fab equipment and so I think that we should expect that December will be a quarter where there's good order volume, just not as high as September.

Gotcha.

I have a quick follow-up.

With Japan strengthening here in the bookings front, Martin, can you talk a little bit about how we should think about any at all impact in terms of deferred revenues and gross margins?

Yes.

It's a continuation of the message we've kind of talked about for some while.

You remember for the majority of the business, for the non-Japan business, the cycle from a shipment to a statement of revenue, the acceptance, ranges between one and four months for us.

And in the case of Japan, title does not transfer to our customers until that point of acceptance, and so what happens is the product that we ship gets recorded in our finished goods inventory until the point of acceptance.

Typically those acceptance cycles today are getting very close to the worldwide average, so in kind of pure, physical terms, I wouldn't expect a big disconnect between the shipment event and the revenue.

Just know that the accounting is slightly different.

The balance never gets into deferred revenue.

It just sits in inventory until it's accepted and then shows up on the face of the P&L.

I guess in terms of fixed cost absorption though, wouldn't that have an impact when you're building the tools for Japan?

No, absolutely no consequence at all.

All the product gets valued in just the same way.

The only nuance with Japan is the deferred revenue path that the underlying accounting, the value of the tools, the margins all gets accounted for in the same way.

Thank you.

Your next question comes from Jim Covello with Goldman Sachs.

Please go ahead.

Hi, this is Kate Gudbarstein on behalf of Jim Covello.

Just a quick question on the use of cash.

Given the record cash on the balance sheet, just curious what your thoughts are regarding share repurchases, dividends, etc.

The number one objective here, relative to use of cash, is clearly invest in the profitable growth of the Company, and directly to your question, we are executing today and generating cash from operations at record levels, and we're still absolutely focused on delivering cash from operations above 25% of revenues for the calendar year, and based on our performance in the first half of the year, we would have an expectation that we can generate cash from operations at a level that's greater than 30% of revenues in the second half of this calendar year.

We have, as you know, a Board-approved stock repurchase plan which is the chosen path by the Company to return excess cash to shareholders, and we continue to exercise that plan according to the approval and I have expectations that that will continue to be the path we'll pursue in the coming quarters.

Okay, great.

That's very helpful.

Thank you.

Next question comes from Satya Kumar with Credit Suisse.

Please go ahead.

Yes, hi.

I thought on analyst day you guys sounded fairly cautious in terms of the capacity additions for NAND Flash and I guess it looks like just looking at where December orders are coming in maybe down 4% or so based on whatever you said so far, but particularly when orders start declining for semicap, they can, historically they decline by 50 or 60%.

Do you think that the cycle is any reason to think that this pause may be any different?

Satya, I think that one, what we're seeing is that the investment in memory and the continued investment in both the NAND and the DRAM was steady this quarter and I would expect that in the September quarter we're actually going to see an increase in total memory investment with the ratios maybe being a little higher in the September quarter in terms of NAND Flash order content, but as the year goes on, due to the favorable pricing environment and strong demand in DRAM, I think we're going to see continued investment in DRAM from an ordering standpoint all the way through the end of the year.

I think that's driven by the fact that there's clearly positioning going on to pre-configure PC sales for the Vista operating system.

I think there's expectations that there will be strong PC demand in 2007 as a function of Vista and other elements of a upgrade cycle for servers and desktops, etc.

So I think that what we're looking at here is we've had a pretty good investment over the last four quarters.

I think it's going to represent that CapEx will be about 21% of semiconductor revenue.

I think that's a very healthy level.

I think that we've probably settled on the fact that maybe 20% of revenue is about the right point to be at, and so I see the industry beginning to make adjustments in their rate of how much capacity they're adding and beginning to bring that down slowly from the levels of equipment that they're bringing in right now.

I think that the industry, again, like they did in 2004 and 2005, is behaving very rationally.

The amount of capacity additions are rational and logical in this time frame based on unit demand growth and I see them slowing down that rate of investment as they work on keeping supply and demand in sync.

And so I don't expect to see a large correction.

I think that there's every reason to believe that 2007 from a demand standpoint will be a good year.

I think later in 2007, if we look at the historical behaviors of what the money supplies are operating in the year before a U.S. election and we've got China as an Olympic year in in 2008.

So I think that 2007 is going to be an interesting year and it's way too early to predict exactly what's going to happen, but I think the industry is behaving very prudently, and I think we're going to see some slowdown in the rate of investment, but I don't think it's going to be significant.

Okay, I mean I guess to ask it a different way, if you don't see the historical type of 50% decline but let's say we go with a 30 or 35% decline, your trough margins at the last cycle were something like 19%.

Is it reasonable to think that maybe the trough margin levels, if you look at two cycles ago, trough margins were negative, but is there a trend where the trough margins can actually get higher at the next trough for Lam?

Well, I think that's a good question, and before I answer specifically what we're going to be targeting to do, I think one) what occurred a couple cycles ago is fundamentally almost totally irrelevant in terms of looking at Lam Research because that cycle in 2001/2002, we were on a completely different business model.

We've completely restructured the Company and so the performance of the Company in the 2004/2005 cycle is far more representative of what we would be targeting to do.

So if we were in a scenario along the lines of what you talked about, just using your numbers, we would expect that we have the opportunity to apply decisions as to what we want to do with the variable cost structure of our P&L We can move our factory cost structure down very rapidly and therefore maintain good gross margins as a function of our outsourced strategy in our factory.

The key factor for us will be during this time period of whatever level of bookings, slowdown occurs or shipment and revenue slowdowns occur, we're using 2007 as a key year for positioning of new products, and so our expectation is that we're going to maintain our operating expense investment in this cycle and that might put potentially a little more pressure on our operating margin but that will be by choice.

If we decide that or if we look at the downturn and feel like it's going to be more severe than what we're talking about here, we have the flexibility in our financial model to make decisions with discretionary spending and to make the adjustments and my target would be that we would not drop below 15% operating income but that we have every opportunity to operate around 20% depending upon the magnitude of the trough situation.

Okay, if I could squeak one more thing in.

Given that you're not going to guide bookings going forward you said from the January month I guess, is there something else that you can give us in terms of trying to evaluate how well your progress or how much progress you're making in those new growth areas?

Would you be disclosing that separately or I guess to think about that in the future?

Thanks.

Sure.

We will be talking about the progress that we're making in positioning our new product activity so we will talk specifically about that.

We will also look at providing perhaps a little broader horizon on what we see as our shipment activity, our revenue activity, and how we would expect our operating margins will perform, but we will definitely be talking very specifically on a quarter by quarter basis, what kind of progress we're making in getting penetrations of our new products as we go forward.

Thank you.

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

Please go ahead.

Yes.

If I look at your guidance for the second half now talking about being up significantly, it sounds like most of that is on the foundry side.

There has been some concern among some industry watchers and other firms that we might have seen some weakness.

Is most of the increase you're expecting, is that share gain or do you think their overall spending is up or perhaps you could give us a little more detail on that?

Well, from an order standpoint, we expect the orders will be up about 15% second half versus first half and the reality is that that's not really coming from some accelerated amount of ordering in the foundries.

The foundries are actually going to be very steady investors in the second quarter and on a going forward basis, so again I think we've talked about the behavior of the foundries.

I think they've got a very good model now of how they try to add capacity in small incremental bunches and ordering pieces of equipment every three months or every six months, and they're operating to that model.

I think memory is going to be a place of strong and continued investment in the second half of the year, and I think that's a function of what's happening in the NAND markets and the fact that you still have 50% bit growth in DRAM.

So I don't think what I talked about in terms of second half versus first half is a foundry issue.

It's a combination of all the segments and again, they are going to be investing a little bit higher in the September or ordering a little bit higher in September and a little bit less in December.

Okay.

Just to clarify, if you're talking about being up 15%, you think overall spending or orders with you with perhaps the industry average being lower given your share gains?

Yes.

I'm glad you reminded me about that.

There's no question that when you look at the percentages that we're sharing that there's a significant aspect of it that's a function of our share gain.

Perhaps one way to illustrate that would be if we looked at the Etch market size in 2004 at about 3.3 billion and our expectations that the Etch market will, ship market will be about 3.9 billion in 2006.

That means the Etch market grew about 18% from '04 to '06.

We're going to grow 66% in that same time frame so we're going to grow about 3.66 times more than what the Etch market grew.

So if you translate that into market share points, back in 2004 we were about 34%.

Today, I had just recently commented on the fact that I believe we will be at 44 to 45% market share, so we have greater than 10 market share points of a gain.

On a $3.9 billion market, that translates to at least 390 million of incremental shipments and revenue as a function of that market share.

So clearly, there's an aspect of our bookings growth that's greater than the industry and greater than the competitors and certainly our revenue growth and our shipments growth will be more accelerated than our competitors as a function of those market share gains.

Okay so just, so if you're up 15% in the second half, it's safe to assume that the remainder of the market might only be up 5% or 10%?

Right.

Because the 15% is Lam and that's not the industry, and if you kind of calculate the impact of market share, the industry as a whole would be down much closer to the number that you just talked about.

Thank you.

Our next question comes from Gary Hsueh with CIBC World Markets.

Please go ahead.

Yes, Steve, since this is the last time you're going to be giving the out-quarter kind of commentary and guidance on orders, I thought I might try to pin you down a little bit more here.

So you talked about NAND Flash and memory generally growing as a percentage, the overall order content in September, and I have to presume that Korea is going to be coming back because of that.

Now if I look at your 15% up for the second half in terms of orders, that suggests that orders are down in December roughly 9 to 10%.

Is -- are the pull-ins actually sabotaging December and pulling into September?

Is that kind of what's driving your order outlook here for December?

Well, I mean, I want to make sure that I mean I've heard part of your commentary right, but memory in the September quarter is going to be about 68% of our order mix.

So there's clearly an increase in memory ordering in the September quarter, and memory will go down in the December quarter.

Most of that will be a reduction in NAND Flash ordering with DRAM and other memory actually being pretty consistent.

And so I think that while your overall perspective of what the orders for Lam might be down in December, there is an element of pull-in activity but there's also an element today of some push-out activity.

If we looked at the previous three quarters, they would be dominated by pull-in type of activities and we're now in a period where while there's still pull-ins, there's some push-out activity going.

It's still netting in favor of pull-ins but I would expect as we go forward for the next three or four months that we'll see those things kind of balance out a little bit but I wouldn't necessarily say that September is up because of orders being pulled forward from December.

Okay.

Well, the other thing I was trying to get at is a downward trend in orders in December.

Is that something that's a consistent trend that you see or is it because of sort of near term pull-ins and push-outs that's kind of driving that lumpiness in September going into December?

Well, I think that when you look at memory, part of our order situation for memory in September is because there was some orders we expected in June that the customer actually didn't place the orders until the September quarter, and one of the reasons that we're going to be moving away from bookings guidance is the fact that the future is always lumpy and we're sitting here today and I'm kind of giving you a picture of what September looks like and that December is going to be down slightly from September, but we could sit here and talk a month from now and all it takes is one customer decides to move a fab in and all of a sudden December looks different and maybe that pulled in for March but maybe it didn't.

So it's really hard to answer your question in terms of it having any validity because what has occurred in the last five days will, in fact, change over the next five or ten days in the future, and so I don't think you should draw too much from pull-ins and push-outs in terms of what the impact is of September over December and it's one of the reasons why I kind of talk about, you know, here is the order environment for the second half and this is what we kind of see they're going to do and the actual timing of when they actually place the orders, we can't control that and we don't really worry about it very much but in the second half, we would expect that when it's all said and done, our orders at Lam will be about 15% higher than what we booked in the first half of '06.

Thank you.

Next question comes from Timothy Arcuri with Citigroup.

Please go ahead.

Hi.

Two things.

I guess first of all, Steve, it would seem that with ASML this morning talking about orders being down roughly 30% sequentially for the calendar Q3, it would seem that the orders you're seeing in September and December are kind of a last gasp to kind of fill up all of that LIFO tools that have been ordered during the first half of the year, so it would seem that the conversation should shift to what the margins are going to look like during a down shift in shipments and in revenues.

So I'm wondering if you did $320 million in revenue, much like you did during the trough of '04, would your operating margin be, would you be able to hold it at that same 19%?

Well, I think that's a good question.

I think certainly the ability to do that exists in the flexibility in our model.

Whether we will choose to do that is another thing given the timing of whatever adjustments occur in this cycle because our focus in 2007 is going to be about getting our new clean product continually positioned, about getting our bevel cleaner out there and about getting our patterning tool.

So we're very focused that one of our big priorities in 2007 is on product positioning and we'll spend the necessary R&D and other operating expenses to achieve that.

Now, we would expect that our margin profile would be similar to what we were able to achieve from the highs in '04 and then to the lows in '05 where we kind of came off in terms of margins from the 52%.

We dropped down to about 48, 48.5% so I would expect our gross margins would stay up with potentially some impact in terms of how much revenue we take on some of the new product introductions which we would expect that some of them would be at potentially lower margins than our corporate average, but I think the real swing will be how much investment we need to continue to make to ensure that we get our products positioned the way we want to in '07 because we're really not going to be focused on the short-term in '07 as much as we are making sure that we can get the product positioning that will give us accelerated revenue and profitability growth in '08 as those new products gain traction and increase in volume.

Great.

So I guess it sounds like margins are going to scale, at least on the operating line, margins will scale down a little more, i..e, be a little worse, during this downturn than they were during the last 18 to 24 months.

Is that kind of the right way to read that?

I wouldn't read it that way.

What I said was that I would expect our margins to scale down exactly like we were able to do in the 2004 to 2005 time frame.

The only consideration that might possibly occur is as a function of some of those new product introductions, they may be at slightly less gross margins but we don't really know what their impact is going to be because we don't really know what the volume of revenues are going to be, but overall, they're likely to be a small revenue contribution, therefore a small impact to gross margin.

Thank you.

Our next question comes from Jay Deahna with JP Morgan.

Please go ahead.

Thanks, good afternoon.

Steve, if you look at 45 nanometers, compare your new products in Etch to the new products that are being introduced by your competitors, can you talk a little bit about what you think are your advantages that will keep your momentum going through 45 and into 32 nanometers specifically in Etch and then secondly, in terms of your new products, which ones are showing the most likelihood of actually delivering some sort of material ramp sooner rather than later?

Okay.

Relative to 45 nanometer, one of the things that we've done is been able to take our technology and our product architecture and continue to modify off of those base technologies and create next generation products.

So whether it's our 2300 Exelan that then went to Exelan Flex and now goes to Exelan 45, they're all built on the same fundamental technology that we have really had in the marketplace since about 1998, and if we look at our conductor products that are on the Versys that have moved from Versys to Versys Star to Versys Star T to Kiyo to Kiyo 45, they're on the same TCP technology that's actually been in place since 1990.

What that does is two things.

One, our learning loops as we go forward with each modification and iteration around those core technologies is faster and faster in terms of our ability to recognize problems, deal with those problems, and design solutions.

The second benefit is the customers are very familiar with these technologies and the ability for them to be able to continue to go forward from technology node to technology node with a chamber that operates with very similar fundamental characteristics allows them to take their own process integration learning capability and extend it more quickly in terms of delivering the kinds of results in the wafer that they need and helps them get up the yield curve faster.

So one of the keys to defending market share and giving yourself opportunities to grow market share is your ability to have a stable technology, a stable technology team, and a product set that the customers can utilize generation after generation.

I think that our competitors as a function of their technologies not scaling from 200 to 300 and then as they chose some new technologies to try to address the needs in the marketplace, are still in the mode of trying to find a technology that they can stabilize on and while every company can bring some interesting results early in the evaluation process, I think that the fact that our core technologies have been in production producing hundreds of thousands of wafers every year gives us a big advantage in terms of the customers confidence in us and gives us a big advantage in terms of the speed at which we can deliver ongoing solutions.

Okay.

Quick follow-up on Etch.

Are there any new chambers or new systems floating around out there that are perhaps six chamber systems from you or anyone else and wondering what that's looking like and then secondly which of the new products are showing the most early traction?

Okay.

As it relates to the six headed monsters or six headed chambers or such, my comment would be one, any new advanced tools that we ship out that have not been announced are done so under non-disclosure agreements with our customers and we don't comment on them when they're in their early time frame and when they're under non-disclosure so I won't comment on any potential new chamber configurations as they relate to Etch.

As it relates to our new products that we have announced, I think that we have a couple of interesting opportunities.

One, our bevel-Etch product, which we will begin shipping in the next couple of months, I think if it is successful at solving some of the yield issues that are occurring as a function of defects at the edge of the wafer could be a product that in '07 contribute some revenue that is going to be reportable and will kind of define the size potential of that a little bit later in the year, probably next quarter when we have more information about how that product would work, but I think it's one that has good potential.

And then our clean product, which we will have out about 8 to 10 of those in beta by the end of '06, will represent another product that depending upon the speed at which customers want to move forward and depending upon the degree of success it has, but it could be a good contributor to incremental revenues in '07.

I think the patterning market is one that's still emerging.

It's a market that we're developing.

It's a market that we're working with multiple customers on, and that one is potentially a very good market but it's not yet clear what the activity level for that product would be in '07.

Thank you.

Next question comes from Mark Bachman with Pacific Crest Securities.

Hi, guys.

Martin, I'd like to kind of revisit this options thing that we've been talking, or not options but margin question.

If I use the September 2005 quarter as a proxy versus your latest revenue model, it does appear that Lam wouldn't be able to hold the of margin of 19% and I know Steve has already answered it in his way.

I want to hear from you.

Has there been any change in the model to suggest that your cost structure may be on the fixed cost side can be more punitive at the lower revenue levels and then kind of what probability do you think that you could put on this that Lam could reach this level some time in the next four quarters?

I'm going to deal with the last part of your question first because it's easier.

I'm sure you can figure out the probability just as good as I can so I'm going to decline to respond on that one but specifically to a comparison, I think your question is right on.

If you look at the September 2005 quarter, we revenued $320 million, we had a margin of 49% and our offering was 18.6%.

The model that I have consistently shared in the last 18 months now has a operating income percentage in it at 19% at 350 and 14% at 300, and so if you try to kind of comp to the model, the mid point on the model is around 16.5%.

Now to Steve's earlier point.

The model is intended to be a statement of clearly articulating the leverage in the Company's business model and the financial performance that we can achieve under those circumstances.

Independent of a statement of volume, we make discretionary investments in R&D and the timing and pace and size of those investments is defined by our determination of growth potential and optimizing investments to the pace and needs of our customers to best leverage profitable growth.

Though one thing that has changed in the cost structure that is in today's model that wasn't in September '05 is the magnitude of equity based compensation, and if you go back to the transcripts in September '05, you'll remember that our equity compensation was in the range of $5 million and that cost structure was a partial cost structure because in September, the first all-employee grant in the Company occurred in August and so we had a kind of partial equity cost in the Company in September.

We also delayed all of the long term compensation for the executive offices in the Company for a six-month period and you'll remember in March of this year, I spoke to the financial consequence of that, and so the one cost structure that does exist today that did not exist in September '05 is that, is the equity and the cash comp for the executive offices but all of that is reflected in the model and the model says between the $300 million revenue and $350 million revenue, we have the capability to deliver operating income including all of these equity compensation costs and long term compensation costs between 14 and 19%.

Okay, excellent, and then I just had a final question for Steve.

Steve, you just kind of talked about the clean products, the bevel products.

I believe you said in the past that you think you can garner about 100 million in revenues from these new products outside of Etch in '07.

Does that still hold?

Yes, I hope that that will be the case.

Certainly that's our target.

I think that the potential for that to exist still holds and I think that would be what we would like to target and see happen.

Thank you.

Next question comes from Stephen O'Rourke with Deutsche Bank.

Please go ahead.

Thank you.

Question for you on orders.

Can you tell us which Etch segment in particular kind of drove the strength in orders and what you expect to and along those same lines, what kind of market share do you think you have in say dielectric Etch and silicon Etch?

Okay, some of the orders standpoint, our order activity in the June quarter was made up of about 40% of our orders were from memory, about 26% from foundry and about 34% for logic and other, and as we talked about at our analyst and shareholders call, we have at the 65 nanometer node, we expect that we will have 40% market share in dielectric and about 65% market share in conductor and when you look at the mix, dielectric being about 60% of the spending in Etch and conductor being about 40%, if you take those percentages, you will come up with a number that says we are about 49 to 50% market share at at the 65 nanometer node and we have slightly less than that at the 90 nanometer node and so the reason we're saying our market share in '06 is about 44 to 45% is because the shipments in '06 are largely and significantly 90 nanometer shipments and as we go forward in '07, we will see a shift to much more of a weighting to 65 nanometer which will give us a market share increase in '07 as a function of the mix of 65 nanometer going into the install base.

Was it dielectric Etch that drove the order strength in this past quarter, incremental strength?

Clearly, we had gained market share in dielectric in the foundries, and we saw a 70% increase in orders in the June quarter from the March quarter in foundry and certainly, our dielectric market share position in foundry was helpful in the orders from the foundry in June.

Thank you.

Next question comes from David Duley with Merriman.

Please go ahead.

Yes, could you just, one clarification is why were the Korean orders down during the quarter?

And I was wondering if you might be able to comment on if you think that 2007 based on your commentary now, is it a growth year for the industry, and finally, just a quickie, what are your lead times now?

I'll take the last one first so I won't forget it.

Our lead times are probably anywhere from 8 to 12 weeks.

They're very short.

They're very fast.

That's one of the reasons why you see our backlog is very short.

So we're able to deliver and ramp very quickly.

In terms of Korea being, orders being down, again, my comment would be it's really not very useful to look at any one quarter and try to make a judgment about whether anything going on is significant.

The order patterns out of the customers are lumpy and it just so happened that in the June quarter not as many memory companies decided they wanted to place orders and in the September quarter, a bunch more of them are going to.

I think that one thing about memory is whether you're talking NAND Flash or you're talking DRAM.

Memory players are in a significant bit growth environment.

The expectations for DRAM in 2007 is that it may actually increase its bit growth from the 50% in 2006 to maybe close to 60% in 2007 and certainly we are all aware that the bit growth in NAND Flash is still forecasted to be 150 plus percent in 2007.

So, I don't know exactly how much the spending in 2007 for memory will be relative to 2006 but I'm very comfortable that there will be a strong and sustained level of investment in memory throughout 2007.

So the one big Korean customer that tends to order I think in June and December quarters, it just looks like the timing of which would be September this time.

Is that kind of the message we should take away from the Korean order rate?

I think that's probably a pretty good way to look at it, the fact that -- because I don't comment about any particular customer, but I think that I wouldn't draw any conclusions about the June quarter as being any significant activity to draw any conclusions from, because the investment is going to be there in September and the investment is going to be there in December.

Thank you.

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

Please go ahead.

Martin, on the 521 million in backlog, what percent is shippable over the next six months?

You know, the headline on the backlog is -- it's a short-term backlog and that is evidenced by the fact that for I think the last three quarters now, the backlog at the end of the quarter have been less than the bookings of that quarter and that's true today.

We have bookings in the quarter of 640 and we have a backlog of 521, and so the headline when that reality exists is it is a short-term backlog.

Not all of it is scheduled to ship in the September quarter.

Some of it is scheduled to ship in December, but there's not a whole bunch that's scheduled into next year.

So given that the backlog is really short-term, you have short lead times, how can you guys argue that bookings isn't an important number to give to the street as a leading indicator at this point?

Because the reality is in that backlog as I just tried to say, there's some part of it that is in December.

Not much beyond that but it's a short-term deal and so the best way we can characterize cycle momentum, the best way we can characterize the economics of Company relative to things that we manage all day, every day are to focus on application wins, to focus on shipment events and to focus on revenue and cash cycles and that's really the decision that we've made.

Thank you, and we have time for one final question.

Our final question will come from Patrick Ho with Stifel Nicolaus.

Please go ahead.

Thanks a lot.

Nice job on the quarter.

In terms of your guidance and looking at the December quarter, relative to your peers, I think you give a lot more color than a lot of I guess your competitors.

What's giving you that visibility to basically comment on the December quarter?

Is it because you have the shorter cycle times and the shorter lead times that gives you more confidence to give that type of an outlook?

Well, I can't comment on why others are doing what they're doing.

There's been some people commenting on what they believe the CapEx spending will be for 2007 and I'm not going to comment on that at all because I don't have a clue what is going to happen in 2007.

I think that what I'm trying to do is give people a flavor for kind of what's going on with some specificity in September with the specific guidance and then some directionality in terms of December and so people can get a feel for what customer thinking is today over the next six months.

Now, this is a volatile industry.

We could sit here and talk three weeks from now and that view of what people are planning to do over the next six months could change.

I think that when we look at what's going on, all of us ought to be looking at what happens to the demand on a going forward basis over the next three or four months as we head into the Christmas season.

If the second half of '06 is as strong demand environment, then that's going to bode well for the utilization of the capacity that has been ordered and is going to be coming online.

If we have a weak demand environment, if we have economic situations in the U.S. and around the world where consumer spending is weak, then there will obviously be an adjustment in terms of how much additional equipment is ordered and how much additional capacity the IC manufacturers plan to bring on but the reality is none of us know or at least certainly we don't know what that's actually going to play out.

I'm just trying to share with people that this is what customers are telling us today what they're planning to do and I think we all have to take into consideration that those plans are certainly subject to change.

Fair enough and a final question.

Now that we've gotten through a lot of the 65 nanometer evaluations and a lot of your share gains have come with that technology node, as you're looking to 45 nanometers, what are some of the new challenges that the chip makers who will be getting those evaluations are coming to you now with at that technology node?

Well, I think consistent with what they want at every technology node is they want more capability for less cost and certainly, we are challenged to provide them with higher wafer outs, with greater capability and I think the big issue at 45 is going to really be two things.

One is defectivity is a big issue in terms of how it impacts device yield and so there's a lot of activity going on to understand the impacts of defects and to look at ways to reduce the number of defects that are produced in the processing and cleaning of the processing steps and the other will be what choices do the semiconductor device manufacturers make relative to new materials.

Will we see the introduction of metal gates?

Will we see the introduction of porous low k's?

A lot of those new materials will have significant challenges associated with them and we will be expected to find the solutions and find them quickly so that as they make the purchases, they can take that multibillion dollar investment in a leading edge fab and get good capital asset productivity results from it.

So, we'll be in the middle of that game and I would expect for us to continue to enjoy the trust from our customers and be a major player with the fab equipment processing.

Thank you.

Management, at this time I'll turn the conference back to you for any closing comments you may have.

Thank you, Mary.

We want to thank you again for joining us today for this quarter's conference call and we look forward to speaking with you again next quarter.

Thank you.

Ladies and gentlemen, that concludes today's teleconference.

We thank you again for your participation and at this time you may disconnect.