科林研發 (LRCX) 2009 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Lam Research Corporation September 2008 quarterly financial results conference call.

Later, we'll conduct a question-and-answer session.

Instructions will be given at that time.

(OPERATOR INSTRUCTIONS.) We'll turn the call to our host, Ms.

Carol Raeburn, Senior Director of Investor Relations.

Please go ahead.

Thank you, operator.

Good afternoon, everyone, and welcome to Lam Research Corporation quarterly conference call.

Here today are Steve Newberry, President and Chief Executive Officer, Martin Anstice, recently appointed as Chief Operating Officer and joining us for the first time, Ernie Maddock, Lam's newly appointed Chief Financial Officer.

Since Martin served as the CFO until the end of September, he will discuss the financial results for this past quarter.

And Steve will share our business outlook for the December 2008 quarter before opening up for Q&A.

A press release detailing our financial results for the quarter-ended September 28, 2008 was distributed by business wire shortly after 1:00 p.m.

this afternoon and is available on our website at Lamresearch.com.

Today's call contains forward-looking statements including those related to our forecasts of shipments, revenues, expenses, margins and earnings per share as well as other statements about the Company expectations, beliefs and funds that are important factors that could cause actual results to differ materially from those described in these forward-looking statements which can be found in the slide package accompanying the conference call call and on our most recently filed From 10-K.

All forward-looking statements are based on information as of today's date and the Company assumes no obligation to update any of them.

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

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

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

Thank you, Carol.

This afternoon we'll speak to our September 2008 quarter financial performance on an absolute basis and also, relative to the June quarter and our expectations for the December quarter.

Highlights of the reported earnings which are generally in line with, or slightly stronger than, our earlier guidance are revenues of $440 million, down sequentially from our June 2008 quarter with shipments also down sequentially marginally below our guidance low point at $345 million.

Sequentially lower operating expenses, the positive results of various cost containment activity, additional non-ongoing charges to further improve the performance of our clean product group, a quarterly ongoing tax rates 28% with expectations of higher fiscal 2009 year ongoing tax rate in the coming quarters, a slowdown in generation of cash operations consistent with overall business levels and finally worthy of reinforcement, a quality balance sheet with a healthy cash balance and strong operational asset performance that will provide the foundation for weathering the storm of this down turn and in addition, support our commitment to the long-term profitable growth strategy of the Company.

Now to expand on those headlines.

Total Company shipments declined 30% sequentially, a system or two below our expectations at the beginning of the quarter.

In our customary applications and market segment shipments disclosure, we've now included clean with our edge products.

Accordingly, 300 millimeter applications and also, application at less than or equal to the [99 meter] nano technology mode, both represented slightly more than 91% of system shipments.

Memory segments customers in the quarter were 72% of the total with the nan component accounting for approximately 23% of total memory.

Foundry was 8% with logic, other at 20% of the total.

Our revenue level of $440 million was in line with expectations and generally consistent with our high level modeling which in the long-term, has seen prior quarter shipment levels be a directional indicator of current quarter revenues.

As a reminder, June quarter shipments were $495 million.

As the wafer fabrication equipment spending of our customers is increasingly focused on necessary technology buys and the overall level of investment decreases, the installed base components of our revenues continues to be an increasingly important part of the business.

In fact in an environment of significantly reduced systems revenues, our September quarter installed base revenues of spares, service, upgrades and refurbishments held more or less constant in absolute dollars and that is close to being true for our December quarter outlook at this time also.

Ongoing gross margin or 42.3% of revenues was in our targeted range, although down sequentially from June 2008 on lower business volumes.

We observed some easing in the quarter as a high customer concentration level and mix that has significantly impacted gross margins of the Company in the first half of calendar 2008, although the effect is clearly not totally behind us.

Again, if you consider our high level modeling counsel of the last several years, we'd normally expect on average a 1% change or so in gross margins for each $50 million change in business levels.

We performed slightly stronger than that baseline in the June to September quarter sequential.

The business climate is clearly more challenging.

In the September quarter, our shipments level was 78% of reported revenues.

In addition, shipments reduced faster sequentially than revenues.

Although responsive to changes in volume, our business model doesn't exclude us from the current economic challenges that can dominate our near term perspective.

Factory and field resources were less utilized in the quarter and that remains true today.

In the September quarter, we were able to mitigate this impact in part with actions to improve warranty performance and to lower variable compensation costs.

Marginally better product mix also contributed to offset the volume related cost challenges.

Steve will speak in a few moments to our guidance and also to general considerations for managing through the challenges ahead.

Total Company ongoing operating expense was $150 million in the September quarter, declining $11 million sequentially.

Through a series of management actions including the clean group restructuring, a significant reduction in all employee and senior executive variable compensation and a well-entrenched discipline to cost containments across the Company, we've been to generally sustain investments supporting our long-term etch and adjacent market growth plans.

Before moving to the balance sheet, our non-ongoing expense items this quarter are as follows.

We incurred approximately $14 million net of taxes in restructuring costs related to further streamlining in our clean product group.

Approximately one-third of the gross expense was noncash.

These actions were targeted as simplifying and streamlining our management structure, also at focusing our single wafer wet clean product portfolio.

A number of business integration actions remain ahead of us and these will further focus the business and are targeted to drive profitability levels in calendar 2009, even after significantly suppressed customer spending levels currently anticipated.

In addition, we incurred $9 million as we implemented a tax strategy that was targeted to leverage the benefits of our previously negotiated tax holiday to include future non-US earnings of SEZ.

Now turning to our income tax rates.

We reported an ongoing rate of 28% in the September 2008 quarter.

Our best estimate of taxes for the 2009 fiscal year including the R&D tax credit recently approved is an ongoing tax rate of between 35% and 40%.

This is meaningfully higher than our long-term targeted rates and will likely be somewhat volatile through the remaining three quarters of the year.

The principle reason for the higher rate in volatility both is a significant reduction in our earnings outlook and the difficulty, certainly in the very first quarter of fiscal year, of anticipating the countries that would ultimately have tax jurisdiction over those same earnings.

Accordingly, our guidance today for the December 2008 quarter assumes an income tax rate of between 70% and 80%.

Restating my earlier points; our best estimates, ongoing tax rate for fiscal '09 is in the range of 35% to 40% and is a core subject to risk should there be additional reductions in earnings from our current outlook.

Now turning to the balance sheet.

Cash and short-term investments, including restricted cash remains approximately flat at $1.2 billion.

Although there are pressures towards lengthening customer payment terms, we're executed well.

DSO remains in our targeted range.

Collections from customers to contracted terms has continued to be strong.

Particularly worthy of note, we reduced the SEZ past due receivables balance by more than $25 million or 50% in the last three months.

Although as we stated previously, the SIM division, formally SEZ, is expected to be dilutive to earnings in calendar '08, we are still on track to generate positive cash from operations in the year from that business; in large measure, a consequence of this operation asset performance.

Inventory turns for the total Company compare well to our peer group and remain strong at 3.8 turns.

After very strong cash from operations performance in the first half of calendar 2008, the current business climates in our reduced profitability level is inevitably placing pressure on second half cash performance.

In the second quarter, cash from operations was 10% of revenue.

We're currently targeting in the range of 15% to 20% for the full 2008 calendar year.

To consolidate the deferred revenue balance was $104 million.

In addition, there was approximately $41 million of anticipated future revenue balance for previously made shipments to Japanese customers.

In the quarter, there was insignificant stock repurchase activity by the Company against the recent $250 million Board authorization and in the current financial and credit climates, we remain appropriately conservative in exercising that approval.

Consolidated capital expenditures were $15 million.

Depreciation and amortization was $18 million.

Employee headcounts remains essentially flat versus June 2008 at approximately 3,700.

As always, for more complete details of the geographic breakdown of shipments and revenues, please see today's press release and the website for a reconciliation of our shipments, deferred revenue and cash.

To recap the important headlines.

The business climate is difficult and visibility is low.

In the September quarter, we delivered ongoing operating performance, generally in line with our expectations.

We have taken initial steps to lower certain costs in the Company and as will be clear from our guidance and comments through this call, the management team is very focused on exercising that same responsibility in the weeks and months ahead.

Now to Steve's comments.

Thank you, Martin.

As Carol mentioned about a month ago, we announced Martin's appointment to the Chief Operating Officer role, effective beginning in the current quarter.

This'll be his last call handling the finance discussion.

Ernie Maddock, our new CFO, is will us on today's call and will take Martin's seat here effective with our December quarter call.

I'm looking forward to working with Martin and Ernie in their new roles on the senior executive team.

Each of them has made a significant contribution to Lam's operations and finance organizations over a number of years.

They have a lot of experience in helping to build a business model that defines Lam today.

We've also experienced the ups and downs of wafer fab equipment investment cycles.

The senior team we have in place brings not only execution experience, but familiarity with many of the challenges we face in this industry.

Those are valuable attributes at a time when the current economic environment is so unstable and unpredictable.

The global economic outlook has clearly deteriorated in the past few weeks and our customers are facing an environment of reduced IC unit demand, combined with the already existing excess capacity.

The unprecedented events in the world's financial markets have severely restricted access to investment capital not only for our customers, but also for many of their customers who may have made technology investments and driven demand for additional IC units in the future.

With weakening consumer spending, electronics growth will not be as robust as in recent years.

It is clear in IC unit growth going forward will be weaker as well.

Supply, demand and balance in semiconductors, especially in memory, appears to have worsened over the past few weeks.

DRAM has fallen substantially in the past quarter and NAND pricing, while experiencing less pronounced decline, has nonetheless remained weaker and expected as the typically seasonal demand pricing improvement failed to materialize.

Memory pricing is not trending below cash cost at some manufacturing facilities, causing ICU manufacturers to close fabs, reduce output and delay investments in new capacity.

Foundries are running at lower utilization rates than in recent quarters, suggesting widespread weakness in demand for logic devices as well.

Recent announcements of new customer alliances suggest that their focus will be on consolidating their existing operations and investing in product consolidation and technology purchases, rather than investing in new facilities.

While these actions will ultimately lead to a healthier semiconductor industry, when combined with the weak consumer demand environment, it will likely push out the timing of a resumption of investment of wafer start expansions.

With such an array of factors influencing the macro economic environment, visibility to the order patterns and the timing of capacity additions in the semiconductor industry is extremely limited.

On our last call, we indicated September may represent the trough quarter for shipments, but that it was possible that weakness could persist for a of couple quarters or more.

Since our last earnings call, the response of the semiconductor manufacturing industry to the financial crisis has resulted in the near term outlook for wafer fab spending to deteriorate significantly.

We now expect wafer fab equipment and investment for 2008 to be down around 35% from the spending in 2007.

This reduction in spending is apparent across most segments, but microprocessor spending being the one segment of continuing strong investment in the December quarter.

To give you a feel for the rapid change in shipment request change for the December quarter since our June call, we have seen the customer requested shipments for the December quarter decline by greater than 50%, pushed out into March and beyond.

20% of that decline occurred in just the past two weeks alone and 80% of the change in requested shipment pushouts in the past six weeks.

With lead times so short and current IC demand continuing to weaken, equipment purchases in the December quarter appear to be limited to technology related purchases for leading edge devices, except as mentioned in the microprocessor segment where we have limited participation.

Based on the environment I described, our outlook for the December quarter is as follows.

We expect our shipments to be in the range of 250 million to 270 million.

Revenues are expected to be in the range of $285 million to $315 million.

Gross margins are forecasted at 39% of revenue, plus or minus one percentage point.

Operating margin is expected to be in the range of negative 8% plus or minus 1 percentage point.

And we expect a loss per share of $0.03 plus or minus $0.02 or essentially an after tax loss of approximately 1%.

The executive team as Lam is focusing on managing through this down turn as effectively as possible.

To date, we've reduced the operating expenses of the Company from $161 million in the June quarter to a planned $141 million for the December quarter.

We're currently investigating additional cost reduction actions to further lower break even revenue level.

To get there, we'll be evaluating all our investment projects thoroughly and reassessing near term priorities while giving full consideration to the achievement of our long term strategic objectives.

At this time, the specific nature and timing of those additional cost reduction activities remains undetermined.

As we look into 2009, our early preliminary expectations are that spending for wafer fab equipment could be anywhere between down 15% to 30% relative to 2008.

This suggests wafer fab equipment spending of $14 billion to $16 billion in 2009 in calendar year 2009 which on average, for a given quarter, represents an increase from the December quarter spending levels which we think is close to $2.5 billion for the industry.

Or essentially, a $10 billion run rate is where the industry is at as a function of expected spending in the December quarter.

While our customers are indicating they plan to take more deliveries for equipment in March versus December, we're in a period of such uncertainty that nothing going forward is able to be forecasted with any confidence.

Although there are significant challenges in the current marketplace, we believe we are operating from a position of strength.

Our cash balance of approximately $1.2 billion gives us the flexibility to make the investment decisions we need without compromising our future growth opportunities.

Our technology and operational execution over the last several years has helped us establish firm leadership in etch, along with very high levels of customer trust via our strong and capable employee base.

We have the resources to execute on our highest priority growth initiatives and we'll continue to do so.

Despite the uncertain current macro economic and industry environment, we believe in a positive, longer term outlook for wafer fab equipment spending in support of global ICU unit demand for all the reasons we've talked about in the past.

As we plan to be ready to take advantage of double patterning opportunities in etch and the move to single wafer and cleaning, and other adjacent market expansion activities when investment and wafer fab equipment resumes.

Customers are making tough financial decisions right now, but they are continuing to evaluate the system and service solutions they will need to achieve low cost high yield at next generation technology nodes.

That is where Lam Research excels and we expect to benefit from it in the future.

Thank you, all, for joining the call today, and now Martin, Ernie and I will take your questions.

(OPERATOR INSTRUCTIONS).

As a reminder, due to time constraints, please limit your question to one.

Please go ahead, Satya Kumar from Credit Suisse.

Thanks.

Given the unprecedented low levels of shipments in the December quarter, I think it will be really useful for us to know what is in that shipment, in terms of service and spares revenues and what the team's doing, just so we get a sense as to what capacity orders you're getting, if any, in December.

We don't segment our systems business versus our customer service business.

If you look at where we've indicated in the past that when we were at $550 million or so in shipments that are service and spares business was in the 20% to 25% range.

While the level of service and spares has come down slightly, it's relatively modest compared to the systems activity.

To give you a little feel for where we are in historical perspective, if you look at what it was like for Lam back in December '00 to December of '01, our shipments declined 80% and that was largely a decline in the systems business.

Our revenue declined 65% from March '01 to March '02.

Where we are today from a current standpoint is that from the peak in June of '07, our shipments have declined 62% and our revenues have declined 56%.

It would be fair to say that we're not yet in a situation that's as a big a decline in systems as what we saw in that '00 to '01 timeframe, but we're getting pretty close.

All right, thank you sir.

Our next question, just a moment -- is from Bill Ong of American Technology Research.

Please go ahead.

This is the first time in a long time that the companies are starting to lose money in the down turn.

I have more of an industry question, trying to define baseline.

If you look at the capital intense chip industries, historically it's about 20%, trending down to about 16%, 18%.

If we look at disc drive industries, it's about 8% of revenues.

Do you have a sense of what type of capital intensity level can we reach over the course of time?

It's clearly trending downwards.

Bill, it's clear that when you look at what makes up the capital intensity -- that when we look at what occurred in 2007 at about 22% of revenue that the dramatic growth in Namflash and DRAM in 2000 and 2007 contributed significantly to that capital intensity.

In 2008, we think the overall capital spending intensity is about 16%, as you suggested.

That's a function of the fact that memory spending, both in DRAM and NAND, are down significantly in '08 and all the other segments actually are down as well.

But dramatic changes in reduction, 20% in NAND and 50% plus DRAM.

The question is, on a going forward basis, what's the right level of equilibrium?

I think that that's a difficult thing to talk about in the short-term because we have -- what the economic environment being such that it's going to suppress demand for some significant period of time.

That capital intensity in 2009 is likely to drop even more and is likely to end up at a historical low given the level of excess capacity that we have going out of 2008 and a drop in demand environment.

But having said that, when demand returns and bit growth accelerates as a function of new products and new memory intensity, particular NAND intensity, I think that we'll end up in a situation where we'll be closer to a 16% to 18% type capital intensity.

I think that part of that is going to be a function of how much do we end up getting rid of the excess or nonproductive 200 millimeter capacity.

Which recently, we've seen just in the month of September alone, huge announcements of shut downs in 200 millimeter memory fabs.

We've seen companies announcing that they are significantly reducing wafer starts and we have the equivalent of about 240,000 wafer starts per month of 300 millimeter equivalent.

wafer starts, coming offline.

And that should do a lot to get supply and demand back in balance and then we can see where it goes from there on a going forward basis

Thank you sir.

Our next question from the line of Gary Hsueh from Oppenheimer.

Please go ahead, sir.

Quick question here just on the model, staying pretty well within the rule of thumb for gross margin decline on (inaudible).

Down the road, are there gradations in terms of revenue where --

Sorry, we couldn't hear you question.

Could you repeat it please?

Based on your incremental gross margin rule of thumb.

On the downside, it's 1% of gross margin for every $50 million of revenue.

Just in interest of model recover here -- in my model, I'm just wondering how you think that rule of thumb works in the opposite direction to the upside.

In the long-term and we've talked about this for a number of years now and I'm always extremely cautious about floating this model, because every time we do it someone claims a specific difference to it, but generally speaking, on the down and the up, it's a reasonably reliable metric.

The biggest disconnect that exists, whenever it does, is all about the inflection points and the speed at which the change happens.

I was very deliberate in my choice of words today, again, when I said 1% for a $50 million change in business levels.

What we tend to get focused on in this conversation is the relationship of margins to a change in revenue and obviously that's appropriate, but a big part of how we utilize the cost structure is the by-product of the shipments level.

Two things you have to be careful of when you're modeling.

One is the disconnect between shipments and revenues can sometimes cause that 1% to $50 million metric to get out of balance.

The second one is the speed at which any change happens.

When it happens very fast, then -- or going up, we are tending to invest ahead of that pace in order to stay with it as we expand.

It's imperfect, , but it's the best I could ever articulate for modeling purposes if you have a one or two year

Thank you, sir.

Our next question is from C.J.

Muse with Barclay Capital.

Please go ahead.

Good afternoon.

Thank you for taking my question.

Two part question.

First off, where is break even today if you were to exclude some of the higher margin deferred revenues that you're bringing in?

And then secondly, considering a weak outlook probably through at least the first half of '09, how aggressive will you be to cutting costs further to drive break even or better results?

I'll speak to the first part of the question.

and my presumption C.J.

is your statement around pulling in higher margin deferred of revenues is a by-product of the deferred profit balance being 75%, versus the 65% level we've seen the last couple years.

Is that a fair presumption?

I'm going to assume it is.

The headline, relative to the break even point is that that deferred revenue balance, when it's down at the level it is and deferred revenue in this range is low for us any mixed changes, whether it's mixed in the system's business, one customer to another or mixed between a refurbishment, upgrade type of environment can distort the relationships that show up in the deferred profit number.

I would categorically say don't read too much into that presentation.

The fact that they have a statement of deferred profitability that is a little higher than we've seen the last couple of quarters is not a statement around let modeling into earnings and profitability levels going forward, whether it's based on your thought of pulling higher margin business into revenues or indeed modeling independent of that.

Just be careful about that premise.

Relative to the break even point of the Company, obviously one of the best directional statements you have is the guidance that Steve just articulated which is not so very far away from giving you most of the answers to that question.

I think one of the things you have to be sensitive to when you think about interpreting that, if you're really focused on evaluating the break even point of the Company is that even though we've taken a significant set of actions around the variable cost structure of the Company in areas I would call easier to implement.

Like for example, reducing variable compensation levels, there are clearly discretionary elements of our spending embedded into today's cost structure, whether they're relative to the edge business expansion plans or our adjacent market gross strategies.

That's a very important factor.

Steve will speak to how aggressive we're going to be or where we're focused on evaluating in the coming weeks here.

I think you have to be very conscious of the level of discussion of the level of investment that is still in our cost structure.

You also have to be in the interest of modeling a pure break even point, conscious of mix.

Indeed what happens, and we've seen it a lot through this year, it's gotten better, at this level of suppressed spending, the concentration of spending too few customers is still significant.

And when that happens, those few customers tend to be your larger customers and tend to be the types of customers that we have overtime negotiated significant details with that have ong-term pricing.

There definitely is a mix element today.

I would not literally take the guidance that Steve has given and translate that into the specific of calculating a break even point.

I would at least range it and I would range it somewhere between 350 and 375 today, and that is before any actions that Steve will now speak to in terms of our outlook here.

Given that we've had this almost unprecedented acceleration of shipment push outs in the December quarter, and that we're ultimately in a situation where because of the nonlinearity of those shipments, our turns factors are at a historical low in December.

That when I look at what I think the future will be, it's certainly a reasonable expectation to think that where we are in shipments and where we are in revenue, has a lot more potential to be higher in the future than it is lower.

Having said that, we're in uncharted waters and our approach, relative to where we go from here, is that we're going to take a very conservative approach as to the speed at which recovery will occur from an economic IC unit demand standpoint.

We're going to assume a very conservative approach in terms of the availability of capital for investment.

We're fundamentally going to model that in the December and March quarters that we're basically looking at technology investments.

They may be higher than the levels that we're going to see in December.

We're going to be very aggressive at the review of all the activities that we have in the Company.

All options are on the table given the environment that we're in.

Our focus is going to be on continuing to invest in those key areas of the business that are going to facilitate our ability to have accelerated revenue and profitability growth, while we're clearly going to make decisions to either cut back or eliminate spending in areas that are not consistent with what we believe is essential for our future success.

If I could just supplement that so everybody's clear about the context of this comment that Steve just made.

He described an expectation as more likely to go up in terms of the shipments commentary.

The context is some of the comments in his prepared notes.

We specifically have given guidance to a mid point of shipments at the $260 million level.

Our best estimate of December wafer fab spending is in the range of $2.5 billion.

Now the more likely contact is in the context of the $14 billion to $16 billion of wafer fab framework that he outlined for 2009 so just to connect those dots.

That's important.

Thank you, sir.

The next question is from Timothy Arcuri with Citi.

Please go ahead, sir.

Couple things.

First , did I hear, Martin, you say that embedded in the guidance for December is a tax rate of 70%?

7-0?

And second question, Steve if I look at the net cash today, it's 35% to roughly 40% of the entire capitalization of the Company today.

You really -- you're losing money, but not much and I suppose it could get worse from here.

But there's lots of bad news on the tape.

Samsung is now talking about CapEx being down 50%, things like that.

Why not come in and buy back more stock down here?

You definitely have the money and you were buying back lots of stock up when it was 2 X what it is here.

I am just curious why you're not buying back stock down

I'll deal with the first thought.

Yes, I did say between 70% and 80% tax rate for the ongoing tax rate of the Company in the December quarter guidance.

And that obviously is a tax rate in benefit terms in the December quarter in the context of the performance that was guided.

Tim, it's a good question.

And that will certainly be a topic of discussion we're going to have with our Board.

Clearly, we're in a situation where what we're doing right now may not be what we do two months from now as we see what's happening with the financial crisis in terms of how it plays itself out.

Because as you said, we're probably in a period of the greatest uncertainty that at least in my 28 years I've had the opportunity to experience.

Clearly if things were to, in essence, just shut down in terms of investment, then you would run into a situation where instead of losing a couple of a million and a quarter like we're talking about here, after taxes that the potential to lose more certainly exists.

One of the things that, as Martin commented, we're going to be cautious in the near term until we get a better feel for how this thing's going to play out, Certainly the fact that we have the authorization in place, will enable us to move pretty quickly in a share repurchase activity when we feel like the environment is conducive in terms of the risk/reward relationships.

Thank you, sir.

Our next question is from the line of Edwin Mok from Needham and Company.

Please go ahead, sir.

Regarding the -- since you guys talked about this not much capacity spending, I was curious about your 2009 WF production, $14 million to $18 million, how much of that is actually factored into (inaudible).

Tied to that question, just curious in terms of conversion opportunity, one of your customers is converting a big fab from trench to stack.

Wondering how much opportunity would that be for Lam Research.

I think historically you end up in a situation where 20% of investment that's -- when you're at the levels of a 20% CapEx intensity, that when you get to wafer fab equipment and you're looking at that being say 10% to 12%.

You're looking at 20% of that.

If we had a spending of $30 billion in 2007, you're looking at 6 or 7 was probably pure technology investment.

When you talk about this $14 billion to $16 billion, I think you're talking about $7 billion or $8 billion of it is going to occur from the standpoint of absolute necessity for technology activity.

You're probably looking at $4 billion to $6 billion -- maybe $8 billion would be associated with capacity additions.

And clearly, depending on capacity additions, it's going to be a function of where's the demand coming from.

Some people may label a set of equipment that goes in for a 3X activity in NAND as a capacity addition.

It may be, if the wafer starts are actually going up, but it may also be just a technology transition if the wafers start -- output is just a technology note transition.

But that's why -- when I look at $14 billion to $16 billion in spending for 2009 and the fact that we're at a $2.5 billion spending rate in the December quarter, we're bouncing along there at those very fundamental low levels of investment where it's essentially almost no capacity, other than in microprocessor.

The rest of the spending is fundamentally technology.

Now, the second part of the question was, what was it?

Oh trends.

Clearly that was part of what I was directing my comments when you look at Microns activities with [Nan] which was on [key mon] trench technology, and now the purchase of [Enterra] by Micron which is on trench technology.

There's a lot of wafer starts that are on trench and overtime that's going to get ramped down and there'll be equipment purchases to convert.

Given that we have a strong presence with Micron, I think that will be favorable to Lam in terms of the market share that we would be able to capture out of those product consolidation and technology purchases that will be going into those DRAM fabs.

As you look at other consolidations that are occurring, as a lot of people take 200 millimeter offline and convert it to 300, our market share at 300 millimeters higher than 200, so those things are favorable to Lam as well

Thank you, sir.

Our next question comes from the line of Steve O'Rourke from Deutsche BAnk.

Please go ahead, sir.

Thank you, good afternoon.

When you consider a wafer fab equipment forecast of down 15% to 30% in 2009, how do you think about incorporating memory segment consolidation and the potential for idle memory capacity coming back on line?

That is, all things considered to date, could be it a lot worse?

Of course it could.

All right.

I think that -- here's the reality from my perspective.

We're in an environment where I think that when you put out a forecast of 15% to 30% which you can obviously drive a Mac truck through, what it's really saying is our ability to really be able to predict the future is essentially almost zero.

What we have to do with the Company is, we make a set of assumptions in terms of what we think a likely scenario is and get our investments and cost structure positioned so that we can operate from a financial perspective where we want to be and what's in the best interest of our customers, our shareholders and our employees.

When things change, if they get even worse than what we thought, we already have the plans that we can go and execute and move quickly.

As things get better, then we have the operational execution and the manpower to go and capitalize on those opportunities and not only deliver top line growth, but really accelerate the rate at which we can drop profitability to the bottom line.

We're really in that situation where we're clearly going to reduce are your break even point lower.

We're clearly going to be in a position that if things were to get worse, we would be ready to respond and if things get better, we're going have the ability to execute it.

But I don't really have a clue what's going to happen in '09.

Thank you, sir.

And our next question is from Jim Covello.

Please go ahead.

Just curious about whether your estimate incorporated any spending from the new foundry that we have entering the market next year.

And if not, just what your thoughts are in terms of what that entity could potentially spend and if you've had any preliminary discussions with them at all, would be very helpful.

Thank you.

I think that -- we can all sit around and we can -- we can take the public comments that the foundry industry, as well as the other IDM semiconductor manufacturers and we can see them talk in terms of CapEx reductions for '09, anywhere from 20% to 40%.

Then you have the potential players who may inject capital into a new fab, a new foundry, et cetera.

I think the reality is that, as we saw, in this December quarter, literally in a four-week period or six-week period from the first of September through the 17 of October, the change in requested deliveries for the December quarter was dramatically pushed out.

I'm talking hundreds of millions of dollars of requested deliveries in a very short time period.

That's a reflection of the fact that all the expectations that people had -- that demand was going to be there, and they weren't expecting obviously that we were going to have the financial crisis that we've seen.

But once that realization occurs, then they're just going to shut down and hunker down and redefine what it is they want to do.

Relative to the announced restructuring of AMD and the new foundry and government and the private equity investment of $6 billion, $8 billion over ex number of years, how much of that would be spent in 2009, I think absolutely will be a function of what's the demand environment.

What's the need for new fab capacity to be spent as opposed to utilization of the existing wafer start capability that exists in the A&D fabs that are already in existence.

Don't know what they're going to do.

Thank you, sir.

Our next question is from the line of Stephen Chin of UBS.

Please go ahead.

Just wanted to come back to how you can manage this strong balance sheet?

You say customers are still making technology purchases, will Lam look for more of the customers who really need equipment now, some extended payment terms to try to gain market share?

And how will you make those balances fit the balance sheet decision?

Clearly you want to be in a situation where you have cash available to fund any lost situations should that be where you're at relative to decisions that we want to make or need to make to continue to be positioned as a premier supplier of leading edge, productivity capable solutions.

The reality is that we don't know where this thing is going.

Even though we expect that it's more likely to get better from a run-rate standpoint in 2009 than where we are sitting here in the fourth quarter of 2008.

There may be periods in any given quarter where a customer may present us with an opportunity that -- for those who can afford it and a customer is trying to accelerate, perhaps a new technology design, accelerate a move to 3X product with say in NAND or 4X product in DRAM.

You want to be able in to be in a position that if you need to put a bunch of email tools out there, while they don't necessarily affect very much your P&L, they very much do affect your cash flow in terms of the amount of money you have to spend on material that ultimately ends up in an inventory situation.

you definitely want to have cash position for use in working capital situations.

Clearly, what happens historically in these down turns, particularly in really difficult down turns, is those companies who go into them with a strong financial position, typically come out of these things in an even stronger position as it relates to market share, accelerated revenue growth and accelerated profitability performance.

We expect that that will be the case for us without knowing, at this point in time what those specific opportunities are.

But as they present themselves, we'll have the ability to make the choices to execute to them.

Thank you, sir.

Our next question comes from the line of Steven Pelayo with HSBC.

Please go ahead.

Two questions.

First a clarification.

You're mix comment.

NAND was 23% of total memory shipment.

That suggests you're non-NAND, you're DRAM is still remaining at a relatively high level here.

What's your outlook for the mix of both of that going forward into the December quarter?

My second question is then going to be, just your thoughts on secular growth.

If you think capital intensity will fall down to 14%, 15% here next year and return to 16% plus, that probably doesn't even get us back to 2007 levels in 2010.

When you're thinking like longer term planning here, can Lam really still spend $80 million a quarter in R&D if that's the opportunity over the next few years?

Help me understand your thoughts on longer term growth.

Well, I think when we look at what may play itself out in 2009, that there will be a -- we are expecting a stronger environment in 2010.

How much stronger?

I think is clearly a function of how does this economic crisis play itself out throughout the world.

What really happens to the US consumer in terms of if 10% plus of the spending uh, in US GDP which is probably somewhere around $10 trillion to $12 trillion and -- a trillion to a trillion -- $1.5 trillion is debt related, how much of that spending goes away and what's the impact to global GDP and how does that play out in 2009.

When you look at 2010, what's the opportunity for electronic segment growth?

What's the innovation that comes out in the next 12 to 18 months that can be a stimulant to IC unit growth and bit growth, particularly in NAND, but also dragging DRAM along with it.

The reality is that I would expect that we will be making certain reductions in certain areas.

As we figure those out over the next three to four weeks or so, we'll be able to have discussions with the financial community about how we are repositioning our business model on a going forward basis.

And you may very well be right that we're going to be looking at a situation in 2010 that maybe the spending's $24 billion in wafer fab equipment which would be similar to where we were in 2005, I think.

What Lam has to do is our market share in etch is much higher today than it was in 2005.

Our customer service business is bigger by a significant amount in that timeframe in 2010 than it was in 2005.

And our adjacent market expansion strategy will add hundreds of millions of additional revenues so that even though the wafer fab equipment spending level may be similar to that I would expect that Lam's revenues will be significantly higher as a function of those elements I just mentioned.

Thank you, sir.

Our next question comes from the line of [Matit Malitt] from Morgan Stanley.

Please go ahead.

Hi, thanks for taking my question.

At your SEMICON presentation, you guys said your revenue growth opportunity will double the WSE growth by entering adjacent markets through 2010.

I understand the environment is significantly different now than then.

I want to know what your thoughts are now in terms of your revenue growth opportunities.

And then, can you giving the backlog number?

I think you guys disclosed it at the end of the last quarter.

Martin will answer that last part of it, but I -- when all of our assumptions were based on what we thought the growth rate would be from 2006 to 2010.

Certainly in the environment we're in now, all bets are off in terms of where that ultimately ends up.

If what we spend in 2006 was about 28.7 in wafer fab equipment, we may well be in a situation in 2010 that it's lower than that.

Could be equal to is that.

The growth in wafer fab equipment could be negative and Lam Research in 2006 is a $2.2 billion company so if the spending's similar, let's say at $28 billion in 2010, we will be at a revenue level that's hundreds of millions higher than that $2.2 billion.

We're going to grow relative to 2006 even if the spending is equal to 2006.

Relative to the backlog question, we don't specifically disclose it in the context of also not disclosing the orders.

But the last public disclosure was the June quarter, closing backlog and that was just below $400 million.

The best I can contribute to answering your question is that since that time by directionality, you know that the shipments in September trended down.

And the shipments in December are at least correlated to prior period bookings.

Our guidance for December shipments is also down against September shipments.

It would be fairly rational to conclude that if we ended a June backlog with 400, we're at something less than that today.

We have time for two more questions.

And our next question comes from the line of Jay Deahna with JPMorgan.

Hi, it's Jenny Dune in for Jay Deahna.

Just two quick questions.

How much of your revenues were generated from your Queens business and how much was from etch?

Can we get an update on the integration and execution of your Queens business with SEZ as it ramps with your Queens business overall?

We don't actually have that segment disclosure that would allow me to answer your question relative to etch and clean revenues unfortunately.

Relative to the integration, I think as we highlighted in our prior earnings call, and at some level, repeated today, by virtue of restructuring disclosure, we are continually accelerating our integration efforts.

We've made significant progress relative to the face to the customer and the integration of the sales organization and the field service organization into our pre-existing account structure.

That was one of the most important things to accomplish at the outset.

We've continued to build upon the substance of that integration effort.

We have, as we just highlighted -- having reduced the headcount of that combined organization view, made some further changes relative to the executive and leadership structure of the business.

Because of some elements of the restructuring charge in this quarter and we also have made some steps to streamline some of the single wafer wet product portfolio that again, realized some of the restructuring costs and anticipated ongoing benefits.

Directionally, I think there's a lot of positive momentum.

It is accelerating as we step into what I'll call the more infrastructure related aspects of integration.

That will be a big focus for the Company in the coming months and quarters and we'll provide updates as appropriate in the next earnings call.

Thank you, sir.

Our last question is from the line of Patrick Ho from Stifel Nicolaus.

Please go ahead, sir.

Thanks a lot.

Steve, at a heightened level, can you compare the current down turn from an industry perspective versus the last deal where we had in the '01, '02 time period?

Thanks a lot.

I think if we go back and look at the '00, '01, '02 down turn, we ended up in a situation where we started this decline coming off the peak of a huge speculative bubble of demand, coming off the dot com, the Y2 K, et cetera.

We were clearly in an excess supply versus demand environment.

But what occurred was we went negative in IC unit demand which was only one other time in the entire of the semiconductor industry in year-over-year ICU demand go negative, and that occurred in 2001.

Then we had 9/11 which created a huge economic issue.

You ended up with the triple storm where we had a normal excess capacity adjustment that you were going to have to deal with.

You had an unprecedented IC unit demand decline and then you add an economic decline.

So where are we here?

We have a typical excess capacity to demand and now we have an economic climate.

We have two out of the three.

The issue of how much IC unit demand declines from where we are, I think is really going to be a function of how bad is this economic situation?

As I commented in the first question, while we are not at the decline in shipment levels from peak to trough that we experienced back in December of 2000 to December of 2001, we're fairly close.

While I hope that what we're seeing here is a bottom from a shipment output standpoint, I think that the uncertainty in the economic environment that's present today makes -- how this thing's going to play out in the next two quarters very uncertain.

While we're not where we were in 2000, 2001, it doesn't mean we can't end up there in the next two or three quarters.

This is the second worst down turn, in terms of size and scale and scope, that I've had the opportunity to to witness.

We'd like to thank you for joining us today.

Please be advised a webcast of today's call will be available on our website later this afternoon.

We hope you'll join us for our next quarterly financial update in January of 2009.

Thank you for your interest in Lam Research and for participating in today's call

Ladies and gentlemen, that does conclude our conference today.

Thank you for your participation and for using ACT teleconference.

You may now disconnect.