科林研發 (LRCX) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the March 2008 quarterly financial results conference.

During today's presentation, all parties will be in a listen-only mode.

Following the presentation, the conference will be open for questions.

(OPERATOR INSTRUCTIONS) If you're using speaker equipment please lift the handset before making your selection.

Conference is being recorded April 23, 2008.

I would now like to on turn the conference over to miss Carol Raeburn, Senior Director Investor Relations.

Please go ahead.

Thank you, operator, good afternoon, and welcome to Lam Research Corporation quarterly conference call.

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

Today we'll discuss the financial results for the quarter ended March 30, 2008, and share our business outlook for the June 2008 quarter.

A press release detailing our financial results for the March 2008 quarter was distributed by business wire at approximately 2:00 this afternoon and is available on our website at lamresearch.com.

Today's call contains forward-looking statements including those related to revenue, shipments, margins, and earnings forecast, customer demand and industry conditions as well as statements that express the Company's expectations, beliefs, plans and forecast.

There are important factors that could cause our actual results to differ materially from those discussed in these forward-looking statements.

Additional information concerning factors that could cause results to differ can be find on our annual report Form 10-K for the year ended June 24, 2007, now filled with the SEC.

This call is scheduled to last until 3:00 p.m.

and we ask that you limit questions to one per firm.

With that I'll turn the call over to Martin for a review of the March quarter results.

Thank you, Carol.

This afternoon, we have a lot to discuss as we resume more comprehensive financial disclosure at the Company.

It's been a difficult time for all of us working with only limited preliminary statements.

I would like to thank you all for your patience.

As we review the financial statements today we have a significant number of unusual items including the completion of the voluntary stock options review and the SEZ Group acquisition.

We have presented what we consider the key headlines in our earnings release, I'll supplement that with additional comments shortly.

Before we begin, I wanted to communicate our intentions related to financial statement disclosure for the SEZ business.

We are planning to aggregate the SEZ Group now known as the Spin Clean division into the existing Lam financials and accordingly, we will not be routinely separating out their numbers.

Our presentation of the March 2008 quarter includes full consolidation of the SEZ Group, although they reflect that there were slightly less than 2% minority interest.

Because we provided guidance for the March quarter without the Spin Clean division and the actual result we reported today have consolidated its performance since March 11, 2008, and includes certain one-time and non ongoing items, we'll be more extensive in our commentary today.

Highlights of reported ongoing earnings for the March 2008 quarter include revenues slightly above our mid range guidance at $614 million or $612 million excluding Spin Clean division.

Consolidate ongoing gross margin of 47.8% of revenue marginally stronger than expected but down sequentially due to challenging customer and product mix, or 47.9% excluding the Spin Clean division.

Consolidated ongoing operating income performance of 23.6% of revenues or 24.5% excluding the Spin Clean division rose cash and short-term investments including restricted cash in excess of $1 billion.

Shipment momentum in the quarter was positive representing approximately 6% gross sequentially, a little stronger than our earlier expectations.

Consistent with prior quarters, our applications and segment shipments disclosure is limited to the Etch business.

Accordingly 300-millimeter applications represented approximately 93% of the total shipments and applications at less than or equal to the 90 nanometer technology node represented 92%.

Memory segment customers in the the quarter represented about 76% of the total with the managed component accounting for approximately 51% of total memory.

Logic other was 8% and foundry was 16% of the total.

As just noted, revenue was slightly stronger than the mid point of our guidance range facilitated in part by strong same quarter shipments to revenue turns of Etch systems of more than 50%.

Our customers are working with us to qualify and utilize our equipments as fast as ever.

For more complete details the geographic breakdowns of shipments and revenues, please see today's press release and the website for a reconciliation of shipments revenues, deferred revenues and cash.

Generally consistent with our guidance, our March quarter gross margin of 47.8% decreased 2.6 percentage points sequentially as a result of unfavorable customer mix.

As discussed in January, the concentration around the large memory customers was significant.

Product mix also placed pressure on our gross margins notably in the Etch business this was the first quarter that our 4X series represented the majority of our system revenues.

These products are the foundation of our recent market share expansion, they provide the basis for our expectations going forward and so we're really pleased with the revenue momentum.

As we have articulated in the most recent couple of quarters, we have continued to invest in building customer trust by supporting where appropriate the current economic needs of our customers.

Our reported profitability level reflects those pricing decisions and also the relative immaturity of those same products as far as we've implemented the targeted cost reductions.

Ongoing operating expenses for the Company were $148.9 million in the March quarter, which includes $5.6 million incurred by the Spin Clean division.

In view of that, the preacquisition operating expense level is exactly as we projected.

As you will remember, one of the primary drivers for sequential operating expense increase in the March quarter is the seasonal impact of high payroll taxes.

It is also the quarter where Lam processes annual merit pay increases.

Normally, we would have approved the annual all employee equity grant in the quarter also but do to the stock options that was postponed and is now planned for the June, 2008 quarter.

Ongoing operating income was a healthy 23.6% of revenues or 24.5% on a preacquisition basis.

Again, in line with the guidance we provided in January.

Moving to the balance sheet our non ongoing P&L items are as follows.

As reported in our recently filed financial statements, the Company accrued $50.2 million of future cash compensation charges associated with anticipated employee internal revenue code 409A tax liabilities on certain gains from so-called misdated stock options.

This expense is a result of determinations by the Company in completing its independent stock option review.

As shown on the face of the P&L, $6.4 million of this compensation charge is classified in cost of goods sold, the remainder in operating expenses.

We incurred an additional $6 million in expenses associated with the stock option review in the March quarter, bringing the total cost in professional fees and other costs to $16 million.

Costs are reported as general and administrative, currently, we only anticipate nominal costs going forward.

We incurred a one-time $2.1 million charge related to the write-off of in process R&D following our acquisition of the SEZ Group.

This reflects the present value estimates of prior R&D investments made with no stand alone expectation of future revenue and is reported in operating expenses.

Included in other income, we realized a non-operating gain of $49 million related to our currency hedging and Swiss franc strengthening associated with the purchase price of the SEZ Group.

Finally, the income tax effect related to the aggregate's non ongoing item is a benefit of $2.9 million.

The financial consolidation of the SEZ Group into Lam Research in essence involves two significant process steps.

First, the conversion from international accounting standards to U.S.

GAAP including the alignment with Lam's corporate accounting policies and secondly, the completion of the purchase price accounting to determine the fair value of existing tangible and intangible assets, the new fair value assigned to separately identifiable intangible assets as a result of our acquisition and finally, the consequential good will.

Both of these process steps and their effects are ongoing.

The transition from international standards to U.S.

GAAP per se was largely insignificant.

Although only a short time has passed since the acquisition, our integration activities are becoming more meaningful.

Since the deal closed, we have implemented actions promoting a single face to the customer by integrating the field organization into our existing global account structure.

In addition, we have developed a road map for business process streamlining, including in the area of customer terms and conditions.

In that regard specifically, it became clear in recent weeks that it was appropriate to standardize the Spin Clean division business under our pre-existing revenue on acceptance model.

Because U.S.

GAAP purchase price accounting rules preclude us from creating an opening balance sheet position for revenues previously report on the shipment-based revenue model of the SEZ Group, this discussion to adopt an acceptance model has the effect of deferring revenues and cost of sales for an estimated one to three month period from the date of shipment to the process acceptance time line.

During this initial period of deferring more than is recognized, we continue to recall all operating expenses as a period expense consistent with U.S.

GAAP.

As a result of this accounting policy change and the very limited 19-day window since we closed the acquisition, the Spin Clean division shows an operating loss that in our view significantly exaggerates negatively the economic reality of the Spin Clean division in the quarter.

We would expect this condition to repeat in the June quarter, and largely be normalized by the September quarter as customer acceptances are anticipated to catch up, so to speak, with the level of shipments.

Finally, the allocations of purchase price in equity consideration transaction costs and assumed liabilities are preliminary, but the March quarter ending balance sheet allocation includes $65 million of intangible assets and $204 million of goodwill.

Our total consolidated gross cash balance including restricted cash is slightly more than $1 billion at end of March.

This represents an approximate $100 million increase in our gross cash balance after the net cash used to purchase the SEZ Group and as planned we repositioned our $250 million off-shore debt to the U.S.

The consolidated deferred revenue balance was $270 million, including $29 million for the Spin Clean division at the end of March.

In addition, there is approximately $43 million of anticipated future revenue value of our previously-made shipments to Japanese customers.

In the quarter, there was no stock repurchase activity by the Company and as a reminder we currently have no Board authorized repurchase plan in place.

Consolidated capital expenditures were $19 million, depreciation and amortization was $13 million.

As a result of the voluntary stock option review Lam suspended its employee (inaudible) plans and so we received no cash from the exercise of those plans during the March quarter.

Head count was more or less constant at slightly more than 3,000 employees at the end of March for Lam, the Company added approximately 900 employees with the acquisition of the SEZ Group.

Now I would like to provide a few words or the tax rate.

Our U.S.

GAAP income tax rate for the March 2008 quarter was 23.8%.

In large part this reduction from the level of 28.1% in the two quarters ended December 2007 is attributed to the tax deduction for the previously announced 409A related employee compensation liabilities.

As Steve will capture in our guidance for the June quarter, we currently assume a 28% tax rate for the 2008 fiscal year, which requires us to assume a 34% rate for the June, 2008 quarter.

Most of the rate volatility quarter to quarter is a function of the timing of the non-ongoing items, most of the fiscal year rate differential to our previously announced target of 25% long term effective tax rate is a consequence of this fiscal year being the most disadvantaged tax holiday year in our last five.

Further, the absence of the R&D tax credit beyond 2007 is a loss of 1 percentage point in the fiscal year.

In fiscal year 2009, and therefore the second half of calendar 2008, we would anticipate the rates fall on or below the 25% level again due to the resumption of improved tax holiday benefits which apply through fiscal 2013.

Excluding the Spin Clean division operating asset performance remains strong.

Accounts receivable collections performance had a DSO of 71 days.

Inventory performance was 5.4 turns.

As a status comment on the SEZ Group acquisition, we have at this point reached the 98 point ownership threshold that qualifies us for the more simplified administrative process to acquire the remaining shares of SEZ that we do not currently own.

We are targeting to realize our goal of 100% ownership within the calendar year.

Finally, to recap the important headlines.

We are pleased that through a period of significant adjustments in the industry, we delivered ongoing operating performance that met or slightly exceeded our previously-announced guidance in the March 2008 quarter.

We consolidated 19 days of SEZ Group performance into the financials and due in large part to our decision to apply an acceptance-based revenue recognition model results were slightly dilutive to earnings.

As previously highlighted, we have significant non-ongoing item his quarter, including our voluntary stock options review, $56 million pretax and a gain related currency of $49 million as part of the SEZ acquisition.

Our tax rate is generally in line with our expectations although more volatile than normal mainly due to the non-ongoing item or discrete events.

And finally our cash momentum is strong.

We closed the quarter with $1 billion in gross cash balances.

Now to Steve's comments?

Thank you, Martin.

And good afternoon, everyone.

Lam produced a successful quarter in a challenging environment with our March shipments, revenues, gross margins and operating income all meeting or exceeding our previously-stated expectations.

In addition to solid financial results, we completed our acquisition of the SEZ Group, a very important milestone in our strategy to expand into markets adjacent to Etch.

The independent committee of the Board of Directors completed its review of our historical stock option practices for accounting purposes in the quarter and now our 10-K and 10-Qs for past periods are now current.

We look forward to resuming our normal levels of disclosure transparency.

Since our last conference call when we shared our outlook, the macro environment has deteriorated significantly.

We enjoyed a strong shipment environment in the March quarter, but increasing uncertainty in the consumer electronic environment has negative in populations for previously planned capacity additions by semi manufacturers over the next few quarters.

Our previous commentary around wafer fab equipment spending has been focused on the supply, demand and balances in memory and the results of negative impacts to memory manufacturers' profitability.

Increasingly, the economy must be factored into our view as well and as a result of increased uncertainty around the demand side of the equation, we now believe that memory units, supply and demand imbalances may take longer to resolve than we previously thought.

We think the impact of these conditions will be felt through the next two quarters with supply and demand for memory likely reaching equilibrium sometime in the fourth quarter of 2008.

The level and timing of any resumption in increased capacity additions for memory is a function of improved profitability, cash flows, and the impact of the contraction in the credit markets that could effect access to capital.

Foundries for the most part continue to run at very high utilization rates, delaying as long as possible what looked to be required investments going forward for additional capacity.

While foundries strive to improve profitability by keeping utilization rates high, foundry investment in leading edge technology continues, but at a slower adoption rate than previously expected.

Foundries are shipping wafers at the 65-nanometer mode but adoptions rates are slower than the rates achieved for the 90 nanometer node.

Additional factors impacting investments in added capacity are the short delivery and installation lead times available for equipment and the current strategy by foundries to add small amounts of incremental capacity while waiting for demand signals from their customers.

As a result of the collected factors of memory units supply and demand balances and customer profitability issues and the macroeconomic issues potentially impacting consumer spending, our overall view of the semiconductor equipment industry is that CapEx for 2008 will now be down to around 20 to 25% relative to the spending in 2007, for Etch specifically we believe the reduction in equipment spending may be down 22 to 27% on a shipment stand basis relative to 2007.

Our analysis suggests that even a down 25% scenario requires a strong acceleration of shipments in the last three to four months of the year.

With the current view of customer spending for equipment, I would like to discuss how Lam is managing through this challenging near term environment.

Our longer term thesis for underlying IC unit demand growth and the related capital spending requirements remains unchanged and our strategy to target that opportunity through continued market share growth in Etch and expansion into adjacent markets remains the key focus in the Company.

As we've stated on several occasions in the past few months we're committed to investing in the long-term growth of the Company throughout the cycle and we plan to maintain spending to meet our long-term strategic goals while still generating acceptable operating income performance.

Despite the near term decline in wafer fab equipment spending, we continue to perform well in Etch, winning and defending applications at the leading edge.

We are encouraged by customer decisions that we believe validate our expectations to gain an additional couple points of market share in the transition from 6X to 5X to 4X technology nodes.

Our analysis suggests that most of the 4X tool selection decisions have been made for NAND flash and we expect that NAND production buys going forward will be for the 4X node throughout 2008 and the first half of 2009.

DRAM is in production on 7X and 6X technology, and decisions for tool selections at 5X are ongoing throughout the year.

Microprocessor is complete for 4X decisions and advanced logic timing decisions for 4X are ongoing throughout the year.

To further advance our adjacent market strategy we completed the acquisition of the SEZ Group on March 11 of this year.

This acquisition is a key achievement for our Company and we have turned immediately to the task of assuring a successful integration.

First and foremost, since the deal date, our additional discovery and strong collaboration have reinforced our belief in the value of our strategy and acquisition decision.

The combination of the Company's creates a broad set of highly competitive capabilities with the opportunity to leverage the leading installed base and single wafer claim, and the established customer relationships of both companies into an accelerated penetration of the rapidly-emerging transition to single wafer clean particularly in the front end of the line.

Integration activities are well underway and progressing to plan.

We're accelerating the collaboration activities between the Companies particularly in the areas of technology exchange and we reorganized the field organization around our existing global customer accounts to achieve a strong single face to the customer capability.

Comprehensive discussions with the top semi-companies are occurring and I'm expecting accelerating joint development projects and projects activity for both the new Spin Clean division's Davinci Prime and Esazi product lines as well as Lam's C3 Linear Cleaner.

In addition to our strategic commentary today with the acquisition closed and integration well underway we're aggressively focused on applying Lam's strong operating discipline to the SEZ business.

Opportunities for cost and operating asset improvements have been identified as well as other synergies and we will provide additional commentary on this topic over the next several quarters.

We remain committed to both Spin and Linear Clean technologies and our near term technology focus is to leverage the advanced process technology and integration knowledge existing in Lam's Etch and Clean businesses with the engineering and productivity expertise existing in the Spin Clean division to strengthen our overall differentiation across the product portfolio.

We expect this to result in a powerful capability which will enable strong share gains in the total wafer clean market going forward.

Turning to our guidance for the June quarter, this guidance reflects full integration of the new Spin Clean division into the Lam Research Corporate P&L on a revenue on acceptance basis.

We expect shipments to decrease to 490 million to $530 million down approximately 20 to 25% from the prior quarter.

Revenues are expected to be in the the range of 535 million to $565 million, down 7.5 to 12.5% from the prior quarter.

Gross margins are forecast at 43%, plus or minus 1 percentage point.

Operating margin guidance is in the range of 12.5%, plus or minus 1 percentage point.

GAAP EPS is expected to be in the range of $0.32 to $0.42 per share for the quarter.

In wrapping up, the current customer spending environment creates challenges for us in the near term.

However, our commitment to a long-term strategy for growing Lam at a significantly higher rate than the wafer fab equipment industry is still supported by a favorable IC unit demand outlook over the next several years.

Our strong balance sheet and profitability allows us to continue our investment in positioning products in multiple wafer fab equipment product for the next generation of yield-enabling solutions, providing a strong spring board to the Company's next leg of growth.

Thank you for your attention and we'll now open up the call for questions.

Thank you.

(OPERATOR INSTRUCTIONS) First question comes from the the line of Satya Kumar with Credit Suisse.

Please go ahead.

Thanks for taking my question, Steve.

Just because it's the first quarter that you're guiding with the impact of Spin Clean division, I was wondering if you could help us understand how much that is contributing to shipments, revenues in the June quarter and what we should think about it for rest of the year?

I'll have Martin talk about that and we'll try to help you through that because we realize it's confusing.

I'm going to start relative to the June quarter.

As Steve mentioned, if you take the mid point of that guidance range.

So just to recap Steve guided EPS $0.32 to $0.42.

So if you take the $0.37 -- of the middle of that range, I have the underlying business of Lam.

So by underlying I mean without SEZ, is in excess of $0.50, and to a meaningful extent as I indicated the revenue recognition model we took drives an SEZ EPS loss in the range of $0.10 to $0.15.

So when you think about $0.37 mid points, you should be thinking $0.50 or so underlying for the existing Lam business and then to a meaningful extent impacted by the revenue acceptance decision, $0.10 to $0.15 negative for the SEZ business.

That kind of attributes relative to acceptance is something I expect to see much more normalized in September and so the only comment that I'll really put on the table at this point in time is that if you look at that level of impact of SEZ, this is probably the worst of our outlook from a quarter's perspective as far as impact on the Company from a--.

Steve, looking at what you know from your memory customers at this point.

Shipments from memory was almost flat in the quarter.

Didn't seem there was a lot of adjustments from these customers, they're just for the oversupply.

Looking at the forecast you have from memory, just for the core Etch business can you give us a sense of how much you think memory shipments can be down this calendar year, year-over-year?

I think from a calendar year prospective, if we break it down into what do we think the impact will be for DRAM, I think we can expect that DRAM will be down 45, maybe even 50% on a shipments basis.

I think that NAND flash will be up 10%.

So when you look at memory as a whole, kind of comes out about down 30% for the year and we'll see that offset by some level of maybe slight increase in foundry, I think it all depends what did the foundries really decide they want to do in the second half the of the year but overall with memory down about 30%-something, that will take the total down about 20% for the year.

Steve, if I do quick math on that, it appears that perhaps September you could actually see a sequential decline in shipments and revenue.

Would you care to comment on that?

Well, the comment I would have is that with the volatility that's going on right now it's hard enough to really have a tremendous amount of confidence that what's in the shipment guidance for the quarter will actually be what it is and interestingly, not all negative momentum.

In any given quarter there's a number of customers that are well publicized to push out, the per of customers that pulled in, we certainly saw that in March.

When we look at the makeup for June, we have got a number of customers that pushed out.

We had a number of customers that came back in, and so when you think about September, in my view September is likely to be in the vicinity of June and I think that we're clearly dropping down to a level of shipments that, for us is down 20 to 25%.

My expectation would be that I would expect that we'll kind of bump along at that level for another quarter or so.

Potentially, if you want to think about that instead of being down 20% that the industry's down 25, 25 to 30.

If you kind of bumped along at the bottom at a similar level between the June quarter, the September quarter, the December quarter.

That's how you get down to a 20 to 25% scenario, and I honestly couldn't tell you right now because I think that with this industry being so much more consumer-dependent and certainly the macroeconomic signs relative to consumer confidence and what the consumer's going to do given the prices of oil are driving gasoline up to significant levels, while this is may be mostly dominated by the issues in the United States, we all know that the effect of the U.S.

consumer on worldwide GDP and consumer electronics can be significant.

So I think that we're just going to have wait to see how this plays itself out.

Thank you.

Thank you.

Our next -- (OPERATOR INSTRUCTIONS).

Our next question is from the line of Gary Hsueh with Oppenheimer and Company.

Please go ahead.

Thanks for taking my question.

Just another further question here on SEZ.

Can you explain whether or not there are any significant differences to SEZ's end market relative to Lam's core Etch business.

What do you mean by that?

In terms of DRAM, NAND, Logic, and foundry breakdown.

Is there any significant sort of delta in any of those percentages you presented in the March quarter for SEZ?

Haven't really specifically studied the specifics of their breakdown.

We do know that they tend to be -- they've had a very good position in foundry, but what we're really focused on is capturing a lot of the opportunities that are going to be decided over the next nine to 18 months, particularly in the front of the line and that is going to the opportunities that are in both NAND flash, DRAM, foundry, advanced logic, et cetera, but I do think that probably they have a little stronger percentage of their business that's foundry related today.

Okay, if I could sneak in one more question.

Just you peaked my interest here, Steve.

You talked about potentially an uptick in shipments in the September quarter on the premise that the Etch total markets shipments went down 22 to 27% year to year; is that what you said?

No, what I said was that even if you look at a 25% down scenario that it's going to require a strong uptick in shipments in the last three or four months of the year, and so I didn't say anything specific about September, but I understand where your question is coming from, but what I want people to understand is that shipments are coming down pretty sharply.

I think you're getting that kind of indication from all the companies in the industry.

And I think that even if we end up the year whether we're down 20% or 25%, that that includes a need for there to be a strong uptick in shipments sometime in the last three or four months and if we don't get good demand coming through the product streams from the consumer, then we all run the risk that instead of this thing being 20% down, it's going to be closer to 25% and if things really don't go well, that's how you can get to a 25 to even 30% down scenario.

I realize that it's a pretty large gap between 20% down to 30, but the reality is that there's that level of uncertainty in the marketplace today.

I think to add to that.

I think it's important to segue from the commentary around the last three to four months of this year in terms of shipments because I think as everybody understands with acceptance models in revenues, if that does take place, the potential to impact the revenue stream of the Company is something that's kind of prolonged and you've got to kind of model, if that does take place, a three-month or so delay from that curve happening in shipments to the same curve happening in revenues.

So that's an important thing from a modeling point of view.

Thank you, our next question is from the line of Bill Ong with American Technology Research, go ahead.

I have a foreign currency question.

So the SEZ group (inaudible) was sold in euro dollars.

Any plans of changing it into U.S.

dollars and also what is your foreign currency mix impacting revenue and cost?

And then I assume most of the manufacturing for SEZ will stay in Europe and then how will the R&D center be spread out between the two countries?

That's one very big question.

Sorry.

I think the headline on foreign currency from a best hedging strategy in the world, which is you have cost and revenues that match up.

That's the best way to manage currency exposure, the addition of SEZ to the Company has given us more of a challenge, but I would still say the currency exposures of the Company via natural hedging is pretty good actually.

Obviously, today's news with the euro at an all time high is something that we have to pay a lot of attention to.

Our biggest unhedged exposures are the Euro and the Taiwan dollar.

We're l spending bunch of time in the next couple of months getting our arms around that.

Relative to the question on manufacturing for SEZ , there are currently no plans to change the manufacturing locations for the SEZ business.

So your assumption there is correct.

And I think that was the core of your question.

If I missed anything, then someone will get in on a follow-up,

Thank you, our next question's from the line of Timothy Arcuri with Citigroup.

Please go ahead.

Hi, quick question, first of all Martin, are there any charges in the guidance and second of all, would it be fair to say that the shipments, if you strip out SEZ, the shipments for the core business in June are kind of in a 460 to 470 range?

No special charges in guidance.

Relative to shipments, the shipment profile for SEZ is not as strong as what you said.

So on a Lam-only business it's higher than that.

Thank you, our next question comes from the line of Jim Covello with Goldman Sachs.

Please go--.

Thanks very much guys for taking my question.

Steve, question for you, our models agree with what you said about a supply/demand balance in the commodities and memory in the fourth quarter.

Based on your experience, how many quarters do you think the customers would need to see an uptick in profitability before they would start to order again?

Would it be right away?

Would it be one quarter, two quarters?

What has history told us about that?

Well, with history at least from my prospective has told us that the first thing customers do when they get into this kind of environment is they try to anticipate and select a soft landing, and I think what we have seen is that the amount of spending in DRAM has been declining consistently, quarter over quarter and the effort to try to create a soft landing around the middle of 2008 has clearly not been successful and so now I think what you see is a realization that the rate of capacity additions for DRAM is going to have to come down some more, and that's largely what we see.

And I think that what happens is that you get into a situation where the market will respond ultimately to the fact that as supply's coming down and demand is rising that you'll get a crossover point and I think that what you end up having is probably -- my guess would be about a three-month effect before they see it, they know it's there and I think what happens in this environment now is they stop anticipating and they wait for the supply and demand to occur.

In the past, it would take six months, even nine months to respond to that.

With the lead times and the installation cycle times and speed to yields in terms of what the collective supply chain can do, I think once the real supply and demand gets in balance, you'll see it be adjusted to and responded to in a three to four month time frame.

Thank you, your next question is from the line of Steve O'Rourke with Deutsche Bank.

Please go ahead.

Thank you, good afternoon.

Steve, just a follow on to that last answer.

That would presuppose that we would see shipments come back in the first half of '09?

Q1 of '09, maybe?

Well, I think one of the other questions becomes when do the semiconductor guys start to see the signs and signals that with pricing that already on 1 gig has firmed up.

That it starts to climb up and I think that once it starts to climb up that everybody in the industry is well aware that the rate of shipments has come down pretty dramatically and is scheduled to come down pretty dramatically in this quarter.

So I think that's where you get this -- the last three or four months of the year.

You're going to see, if the scenario plays out, you would likely see shipments improve.

If the demand environment's softer and put pricing environment doesn't improve, then you wouldn't see the shipment environment improve until after the first of -- the start of 2009.

Our next question is from the line of Jay Deahna with JPMorgan.

Please go ahead.

Thanks very much.

Steve or Martin, assuming SEZ normalizes in the September quarter, do expect that to normalize at a profitable level?

That's number one and number two, Steve, can you characterize the differences between the SEZ cleaning products and the internally-developed Lam cleaning products.

Is one biased more towards transistor level, one versus Interconnect and can those synergize over time over time?

And then lastly, you reiterated in your press release your concept of $4 billion or Lam in 2010.

Can you give me more detail as to what has to happen to get there?

I'll take the first part that which deals with the expectations and outlook for profitability for the SEZ business.

I think the essence of answering that is still to say neutral to marginally accretive is an expectation when you kind of back out the effect of the acceptance model decision that we made.

The one exception to that is obviously, the size of the business and if you back up some time here and think about SEZ as a family-owned company, it was -- let's say a $275 million revenue Company in 2007 at today's rate it made a small amount of money.

At that time our expectations for wafer fab were $30 billion or so, expectations for wafer fab today are let's say 26, 25, something like that, so -- sorry, 25/24 -- and so with that change impacting their business, we transitioned from making the significant operating income levels that we've been reporting to some less, they transition from making a small amount of money to break even or slightly losing money.

So I think at today's expectations for wafer fab, we would expect slightly, slightly negative to our earnings, but not as much in the second half of the year compared to the levels that I spoke about in the June quarter because of the revenue acceptance decision.

I think to kind of amplify on that is that clearly for the industry as a whole the shipments have come down.

They don't have the same ability that Lam does to mitigate that with deferred revenued that were a function of what we came into the year with.

They don't have necessarily the new market and the new products that we have and they don't have a customer service business that has any similar degree of size, scale and scope, all of which we use to mute the effects of having a revenue that is going to be probably 10 plus points less reduction then the market as a whole.

The other thing is we have an outsource model in our factory that even though our shipment output from peak to trough is in the 30% down arena.

The total amount of impact to margin from what goes on with factory absorption is only two margin points, and clearly when their revenues drop or their shipments drop to that level, they don't have the same variable ability to deal with factory cost as we do so one of the things that we're going to work on obviously is as we go forward is how do we implement some of the operating efficiencies and processes that we run Lam with and how do we get those implemented as appropriate with SEZ.

Relative to synergies, kind of the simple answer, if I could is that SEZ has historically been a company where it had market share leadership in the back end of the line cleans and most of that volume as a function of the number of levels associated with logic -- that's one of the reasons why the foundry and the logic segment is a bigger percentage of their business because the number of levels requiring back into the line clean in logic.

The opportunity in front end of the line is both in logic and in memory and while in some respects there are less layers, there are still many process steps at transistor level that require critical clean applications and so relative to the harmony of the products, Lam's C3 linear cleaner was targeted at -- those applications where short contact time cleaning with robust chemicals would enable the ability to get a unique result in terms of profile control, line width control, and very strong uniformity across the wafer.

SEZ, with their front end of the line products, both the Davinci product and the Assante, they address different parts of the high volume, front of the line cleaning applications and they do it with very high throughputs, very high level of productivity and one of the things that SEZ has been doing for the last year to year and a half is developing the Davinci Prime, developing new Assante and one of the things that we've been very pleased with is as we've increased our discovery and we're able to engage in comprehensive discussions with the customer that when we looked at the competitive capability that's out there these two product lines from SEZ really looked to be very well positioned to compete very effectively in some of the volume applications and our C3 linear products continues to, while it addresses a smaller segment of the market, continues to gain acceptance at the customer interface.

And kind of in closing then there's one additional element is that we have technology that we have developed in the C3 group that we believe is very transferable and beneficial to enhance the competitiveness of the SEZ product line, and we will expect to do some of that technology transferring here over the next two quarters and end up with a very technically-broad and comprehensive set of solutions for the customers.

I just want to use your question, Jay, if I may to just give a little bit more specificity.

I said a few moles ago that the impact of SEZ performance on the EPS outlook for the June quarter was up to the [$0.15] number I gave.

Based on the current outlook for the year, which has a lot of moving parts.

Not just in the industry but also all of the assumptions that are still preliminary relative to the purchase accounting, my expectation is that there's up to about a $0.40 impact negatively on the Company for the full calendar year.

That's a $0.40 EPS impact negative SEZ.

My best estimate is that somewhere in the range of two-thirds of that simply relates to the revenue decision that we make and so when you kind of back out the revenue decision, kind of normalize it, a third of $0.40 dilutive, which, when you are take into the context, the change in the industry and the reduction in wafer fab kind of plays out and makes sense.

We've got a lot to learn and a lot of to learn in the kind of next number of week and months relative to the synergy and cost reduction opportunities and we're aggressively pursuing that but that's the best I can articulate at this point.

And we've been delivering without the guidance range, you'll notice a little bit of a wider range on guidance for that very reason.

Thank you.

Our next question is from the line of C.J.

Muse with Lehman Brothers.

Please go ahead.

Good afternoon.

Thank you for taking my question.

I was hoping to ask a couple of quick questions here.

First off, Martin, to get to that only slightly dilutive SEZ in September does that presuppose revenue run ate of getting to north of $55 million.

Just to push back here to the commentary I just gave, I just gave some specifics relative to the full calendar year.

What I tried to convey in my general response to Jay's question was that I didn't see the September and December quarters being as bad as the 15 or so that we articulate forth impact in the June quarter.

So my neutral to slightly dilutive comment was really kind of a more general, kind of philosophical decision.

That was our plan coming in.

We haven't made too many decisions that are fundamentally different from those decisions at the outset but the $0.40 number is my best estimate for impact on the Company's performance in calendar '08, that $0.40 dilutive impact and about two-thirds of that is revenue, and of course, some elements of revenue expansion are components of that.

Your next question is from the line of Edwin Mok with Needham & Co.

Hi, just following SEZ.

Is it fair to say that based on our accounting change that you recognized revenue in the June quarter?

Yes.

That's a fair assumption.

You should expect as a byproduct of getting process acceptances in the June quarter that we turn many of the shipments that are currently deferred and I mentioned that deferred revenue levels for the SEZ was in the $29 million range.

So turning that would get us to 29.

Turning any of the shipments that happened in the June quarter would take it above that.

Not turning with U.S., but that's the plan.

One of the things that I think that we're certainly operating with and it is certainly a challenge for the people at SEZ is when you are a revenue on shipment Company, the focus around processes and procedures and activity in the installation arena tend to be different, and so we, and they, do not know really what's the speed at which the cycle time from shipment to acceptance can be accomplished because they've never had to deal with it, and while we're very good at that we've go the many years of learning behind us and while we expect that we're going to be able to bring a beneficial perspective to bear, ultimately, some of the elements of conservativism that exist in trying to forecast what's going to happen are a function of we're changing a fair amount of what they're going to have do operationally and we don't really yet know exactly how that's going to play out.

Our next question is from the line of Harlan Sur with Morgan Stanley.

Steve, I'd like to hear your view on memory supply demand fundamentals, I think you mentioned on the last call in DRAM that industry exited '07 with about 50 to 70k wafer starts per month of excess supply.

Where are we now on that and then just a quick question for Martin on the June quarter guidance.

Martin, if you back out the impact from SEZ, what are Lam core gross margins in June?

Okay, so I'll work on the excess supply.

You're right.

We've looked at it and we felt like it was 60,000, 70,000, maybe even 80,000 wafer starts per month excess and we've just kind of relooked at that analysis again and updated it and I think, and I was a little bit surprised that it's really still sitting at about 70,000 and that's the delta between what we think is the real demand, which is less than the actual selling that's going on because the discounted price per bit is creating an divisional elasticity of demand, and so part of getting this supply and demand back in synch is to get some of that extra demand out of the system which will occur as pricing rises, and I think that when we look at the forecast that we're still going to be in about a 70,000 wafer starts per month excess demand through Q2 and then we see a move where that starts to narrow pretty aggressively as capacity additions really slow down and one of the things that exists between DRAM and NAND is what you might call the flex supply were there are some lines out there that can go either way.

We believe that the NAND s seasonality effect is going to result in some DRAM demand or some DRAM supply coming out of DRAM and going into NAND and that will contribute to getting DRAM moving more aggressively in the right direction in the next four to five months as this thing plays out.

So, flex demand or the flex supply aspect of this thing is one of the tricky parts of really trying to understand what's happening to output, but I think that with the way shipments are dropping that we're going to see some real positive movements that we're going to be able to see the pricing environment reflect and I think we should expect that that would be the case provided that the consumer demand plays out as forecasted and we all know how risky that is.

So Harlan to the second part of your question.

You get a one time deal answer here because normally I wouldn't kind of break this out, but I would expect the core Lam business to be a couple of margin points lower than what we reported for the March quarter in June and that couple of percentage points lower at the gross margin level reflects fact that in essence we come off a $614 million revenue to something, let's say at the mid point of 550, if you just assume that the revenue of the SEZ business is plus or minus a bit from what got deferred, that, which means you would be assuming a kind of three-month turn, then the Lam revenue stream is it in the kind of 515 range consistent with our 550.

So you've kind of come down $100 million on an apples-to-apples basis in revenues and a couple of percentage points of gross margin reduction with the mix that we anticipate as well as the relative adjustment of efficiency in the factory is kind of the expectation that's embedded in that guidance.

We have time to take two more questions.

Okay.

Our next question will then come from the line of Brett Hodess with Merrill Lynch.

Please go ahead.

Steve, just to be clear, on your comments on SEZ earlier, so SEZ you would expect to be down more than Lam this year because of the reason you said about service and product, et cetera, on revenues?

Yes, I think that is likely to be case.

Having said that, though, there is a wild card in the the equation.

Is that single wafer is going to grow in 2008 some degree and the reason for that is that wet bench supply that's dominated the front end of the line is beginning to start a conversion process.

I think that my best guess is that's not going to manifest itself in a lot of shipments but there will be a number of shipments and that provides the opportunities depending on how the customers play that out, that could offset favorably for the SEZ group, the amount of shipment and revenue decline for the year.

Thank you, our next question is from the line of Stephen Chin with UBS.

Please go ahead, sir.

Thank you, Martin or Steve, would you be able to give us an idea of the quarterly break-in revenue level that you're preparing the Company for in case of semiconductor CapEx worsens?

And then related question to that, I think in the past Lam has said that even if stand alone revenues had dropped to $500 million a quarter Lam could still hit a normalized operating margin of I think it was 20 to 22%.

Should we still think of that as still being the target when SEZ is fully financially integrated later this year?

One of the things we've said was that if the industry was going to be down 10 to 15, that we would expect we could be flat because we could offset that with deferred revenue.

We could offset that with growth in the services businesses, new products, et cetera .

SO now that things are dropping 20 or 25, then I would expect on a Lam normalized basis that we would be down maybe 10 points less than that and part of that is impacted by the fact if shipments come back late in the year how quickly can you actually turn those to revenue?

We're still on track for that.

One of the things I have talked about in public forums is that if we ended up in a situation where revenues declined 10 to 15%, I felt that the Lam normalized performance could remain above 20%.

I said that if it goes greater than 20, which is kind of the vicinity that we are now, that we would look to keep our profitability above 15% operating income, and without breaking out all of the specifics I can tell you that the Lam performance with the revenues declining the way they are is north of that 15.

It's somewhere between 15 and 20% exactly as we said.

Now, as we continue to incorporate SEZ there's no question that taking a Company that has operated to revenue on shipment and converting to revenue on acceptance, you create a whole in that three-month period, and then in the next quarters, still have to kind of catch back up.

So the reality is that if the shipments drop, which they have, and you have this acceptance hole.

It actually takes you two quarters to work through that and then once the shipments go up, you won't really see that for a quarter later.

So that will result in, and that's kind of what you see going on, where the combined impacts of that were an operating income guidance of 12.5% and I think that my expectation is that we can continue to operate north of 10% even in some of the difficult environments that are being played out because my expectation is that while we could certainly see the demand for equipment kind of bump along at the levels that things are coming down to for June, I think that the way you get to down 25 to down 30 is not that it drops significantly lower is that it just extends another quarter or so and that's what ultimately drives the total amount of spending down.

I think that we're reasonably close to bottom levels of shipments and therefore revenues.

So kind of what you see is an arena of profitability that I think we can operate to with those shipment and revenue levels.

So, I think that's the last question.

I want to thank everybody for joining the call and we'll certainly look forward to talking with you all and all of the investors on how we intend to go forward and just one final reiteration would be the near term is tough, there's no question about it, but we're very excited about the opportunities for growth in the Company and we're very excited about the SEZ acquisition, and we'll look forward to talking to you more about that in the

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation, and you may now disconnect.