科林研發 (LRCX) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the Lam Research Corporation December 2009 quarterly results conference call.

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

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

(Operator Instructions).

I would now like to turn the conference over to Ms.

Carol Raeburn, Managing Director of Investor Relations.

Please go ahead, ma'am.

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

Here with me today are Steve Newberry, President and Chief Executive Officer, and Ernie Maddock, Senior Vice President and Chief Financial Officer.

Today we will discuss the financial results for the December 2009 quarter and Steve will share our business outlook for the March 2010 quarter before opening up for Q&A.

The press release detailing our financial results for the quarter ended December 27th, 2009 was distributed by Business Wire shortly after 1:00 this afternoon.

And is available on our website at LamResearch.com.

Today's call contains forward-looking statements including those relating to our forecast of market share, shipments, revenues, expenses, margins, and earnings per share, as well as other statements of the Company's expectations, beliefs and plans.

There are important factors that could cause actual results to differ materially from those described in these forward-looking statements, and a list of these factors can be found in the slide package accompanying this conference call and on our most recently filed Form 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 is scheduled to last until 3 and we ask that you please limit questions to one per firm with a brief follow-up.

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

Thank you, Carol.

I'm pleased to report that strong shipments in the December quarter led the Company to higher revenues, increased profitability and strong cash generation.

Turning to the details, December quarter shipments exceeded our guidance range at $519 million, up 46% over September quarter shipments at our Etch and Clean system shipments were up over 60% and our aftermarket business enjoyed incremental gains.

In the December quarter, application and market shipment breakout is as follows.

300-millimeter applications represent 96% of total system shipments.

Applications at less than or equal to the 65-nanometer technology node were 94% of system shipments.

Memory segment customers comprised about 45% of total system shipments, and as a subset, NAND shipments represented approximately 28% of total memory, and foundry customers were 42% of system shipments with logic and other at 13%.

Commensurate with our shipments commentary, December quarter revenue of $487 million exceeded our guidance range and represents an increase of 53% over September quarter results.

December quarter ongoing gross margin was 44.8% at the higher end of our guidance range, and represents an increase of over 350 basis points versus September quarter levels.

This improved gross margin performance is a result of higher revenue, improved product mix, and more favorable absorption from the factory.

Ongoing operating expenses for the December quarter were $142 million, and are a function of the previously planned restoration of employee salaries and benefits, as well as higher variable compensation expense associated with our improved revenue and profitability.

In addition, we expensed the cost of materials for accelerated new product introductions, associated with market opportunities arising from the improved business outlook.

December quarter ongoing operating profit was $76 million, and reflects an ongoing operating margin of 15.6%.

Other income was $900,000, and consists largely of interest income, offset by the expense of currency hedges.

The Company benefited from $21 million in non-ongoing income for the December quarter, attributable to the final release of the Company's 409-A reserves.

With this action, the Company has concluded all settlement negotiations associated with the 2007 voluntary options review.

As current and projected business levels have improved, our tax rate has returned to more normalized levels.

For the December quarter, the ongoing tax rate was 21.2%, and we are currently expecting a tax rate in the low to mid-20% range in fiscal year 2010.

Based on a share count of 129 million shares, GAAP earnings were $0.54 per share, and ongoing earnings were $0.47 per share, which exceeds our guidance.

Turning to the balance sheet, cash and short-term investments, including restricted cash totaled $831 million, an increase of approximately $70 million from the September quarter.

The increased cash balance represents stronger cash generation from operations, which was offset by increases in accounts receivable, and inventory associated with higher shipment volumes as well as ongoing capital expenses.

Non-cash expenses include $13 million for equity compensation, and $18 million for depreciation and amortization.

Accounts receivable days outstanding decreased from 93 days in the September quarter, to 79 days in the December quarter, and inventory turns were 4.4, up from 3.3 turns in the September quarter.

At the end of December, our deferred revenue balance was approximately $132 million, an increase of $44 million over the September quarter, and consistent with our higher shipment activity.

The deferred revenue balance does not include $11 million in shipments to Japanese customers that will revenue in future quarters.

Total capital expenditures were $7 million for the quarter, and employee headcount rose slightly to approximately 3,000, from 2,930 in the September quarter.

Now to Steve's comments.

Thank you, Ernie, and good afternoon, everyone and thank you for joining our call.

Well, what a difference a year makes.

Last year at this time, I was describing an environment in the semiconductor equipment industry as a category five hurricane, and expressing concerns that we may be looking at a downturn that could last for six to eight quarters.

I'm certainly pleased to have been excessively pessimistic on that concern.

And as Ernie just articulated it's nice that we ended 2009 on a much higher note than what was expected at the beginning of what we knew would be a tough year.

Relative to our shipment output in June of 2009, December represented an increase in total shipment output of over 100% in only six months.

A demand pattern much stronger in terms of speed and size than we had anticipated.

We are pleased that our flexible operations business model has once again proven its ability to respond to rapid increases in customer demand through the great work of our employees and suppliers worldwide.

While 2009 was overall a difficult year for every Company in our industry, at Lam Research, we continued to win application based market share in both Etch and Clean, positioning us for well above market growth as customer shipments increased in 2010.

In our Etch business, we won 12 net new applications in our shipped market share for calendar year 2009, it's estimated in the mid-40s, up 2.5 to 3 points from where we were in 2008, reflecting the positive trend from our new application wins.

As we look into 2010, we expect our Etch shipped market share to increase by another 5 to 6 percentage points, as customer mix becomes more favorable for Lam's Etch business and the development tool of record decisions we won over the past year or so move into volume production.

In single wafer Clean, we added a total of 11 net new application wins in 2009.

Lam's Spin Clean based DV prime tool had application penetration wins in High-k Metal Gate cleans as well as numerous post Etch and post ash cleans at major customers and foundry, logic and memory.

Our linear based confined chemical cleaning system won a number of tooler record decisions in post contact Etch, as well as copper dual-damascene cleans in the back end of the line applications in logic, foundry and memory applications as well.

In 2009, our dry bevel Clean tools increased by 32, the number of applications/levels where bevel Clean is utilized, providing us a nice growth opportunity in the bevel segment of the Clean market as we go forward.

We estimate we grew our shipped market share in the single wafer Clean business by 5 to 6 share points, resulting in a share around the low to mid-20s for calendar year 2009 and as we look at 2010, we expect that the applications we have penetrated over the past year and-a-half along with new application wins, plus an anticipated shift in customer mix to our favor, will allow us to post very strong shipped market share growth in single wafer Clean for 2010, likely in the range of an 8 to 10 share point increase.

As we look to the broader industry trends for 2010, we expect the recent strength in customer demand for new systems to continue, at least in respect to the first half of the year.

We estimate that in 2009, there was wafer fabrication equipment spending of approximately $13 billion, and we expect at this moment in time that the market for equipment purchases in 2010 will be somewhere in the range of $20 billion to $22 billion, likely up 55 to 70% over 2009.

We think that demand for DRAM in 2010 will largely come from corporate PC replacements, and the continued growth of of netbooks driving demand-based DRAM bit growth around the mid-40s.

In NAND we estimate that bit growth will be in the mid-90% range, driven largely by growth in SmartPhones and the start of increased shipments into a variety of SSD applications.

We anticipate that such bit growth rates in memory will be largely met by continued shrinks in fab line conversions with only a few memory companies adding capacity of any significance.

As we saw in the second half of 2009, we expect foundries to remain a key component of spending in 2010, since their customers continue to drive demand for high performance low cost chips, requiring investment in leading edge capacity expansion at the 45 and 40-nanometer nodes.

Capital intensity per foundry has been very low since 2004, running somewhere in the 5 to 6% of revenue range, and is expected to increase somewhat in 2010, and likely in 2011, to somewhere in the 9% range for WFE investment intensity.

Consistent with our expectations of strong share gains in Etch and Clean and relative to our expectations of a $20 billion to $22 billion wafer fab equipment spending environment, Etch shipments should be greater than 100% year on year, Clean shipments could be greater than 150% year on year.

With our midpoint estimate of WFE growth in the low to mid 60% range, this level of year on year system shipment growth for Lam Research is a strong indicator of the level of progress we are making in adding meaningful market share gains in both Etch and Clean in 2010.

We have continued to make significant investments in R&D over the past few years, and currently our new product portfolios are all shipping new designs at the beta development stage, or you might call it the preproduction phase.

Shipments started in December and will continue through June of 2010, and we have shipped to customers new products in the final stages of product development and release in dielectric, conductor and Through-Silicon Via Etch, spin and linear Clean and unannounced new product in an emerging market where customers are facing distinct challenges with new materials and structuring being introduced into smaller devices at 32-nanometer and below nodes.

Over the next couple of quarters, we will continue to ship into each of these markets a number of these development tools for customer R&D and evaluation purposes while expensing all the costs associated with the building and support of these products in the field.

By mid year, once we have established commercial in production viability of these products, we will begin capitalizing and inventorying the costs associated with these new products and our expense levels will be lessened going forward both above and below the line.

Calendar year 2010 is looking to be an exciting year for Lam Research with our new product introductions and strong market share gains in an improved wafer fab spending environment.

While it is not yet clear what the second half of 2010 will bring, we are confident in the strength of our products and the capability of our people to meet the challenges of the coming year.

Moving on to the March quarter, our guidance is as follows.

Shipments of $735 million, plus or minus $15 million.

Revenues of $620 million, plus or minus $10 million.

Gross margin at 46%, plus or minus 1%.

Operating profit, 22%, plus or minus 1.5%.

And earnings per share of $0.80, plus or minus $0.05.

With the volume we expect to ship in the first half, we are well positioned to meet any requirements in demand as the shipment patterns for the second half of 2010 become clearer.

However, as we move through the year, we plan to keep our expenditures tightly controlled, in line with the expectations at this time that we will likely be looking at shipping less systems in the second half of 2010 than we are scheduled to ship in the first half of 2010.

Regardless of the quarter on quarter progression of the wafer fab equipment spending dynamics in 2010, our planned shipments for the March quarter are a clear indication of our significant upward movement in market share for both Etch and Clean, and we plan to deliver year-on-year performance for shipments, revenue, and cash generation well in excess of the growth rate in the wafer fab equipment market in 2010.

With that, Ernie and I will take your questions.

Thank you, sir.

We will now begin the question-and-answer session.

(Operator Instructions).

Please limit yourself to one question and a brief follow-up question.

And our first question comes from the line of Patrick Ho with Stifel Nicholas.

Please go ahead.

Thanks a lot and congratulations guys on the good work.

Thank you.

In terms of the feedback that I've been getting on the wet Clean business and some of the wins you've been mentioning, aside from the technology and the differentiation you're providing, especially on the SZE side, what's the biggest I guess selling point and I guess the inflection that's helping you gain share and as a follow-up to that side of things, what's the biggest variable on that business in terms of margins at least on a qualitative basis?

I think that when you look at single wafer wet Clean market, customers are looking for finding a partner that as they move applications from wet benches to single wafer Clean, who do they trust that they can partner with to work with them, and given that in our spin Clean, having acquired SEZ products and brand name, have a very well-established reputation as an innovator and a market leader in spin Clean.

We've certainly then added to that the kinds of business model activities and partnering activities that we do with our customers in Etch.

We do real-time fast cycle problem solving for our customers.

So that's a significant source of differentiation.

We have drying technology on our spin tools that is very leading edge and we have excellent productivity with the ability to do a wide variety of applications in a very flexible manner which our customers really appreciate.

In the linear side of the business, we've been able to capture business where critical control of particles and feature replication after Clean, and that's enabled us to win a number of applications where the customer's very concerned about the impact to device reliability or device yield, and the short contact time capability and the ability to use dilute HF as opposed to other really strong chemicals provides us with a differentiated capability.

As it relates to margins, the big challenges for us as we've talked about for the last year is we have been in a redesign of product architecture, and a movement from a very vertically integrated manufacturing process, both from a build and supply chain standpoint, to a modified outsource model, similar to our Etch model, but not quite as extensive.

We said that we would expect to see that a lot of our cost reduction improvements would begin to hit the early ones by the end of 2009, the majority of them by the middle of 2010, and that sometime later in the second half of 2010 we would see a lot of the benefits of the product option architecture and the bringing on of new suppliers in a stronger outsourced model for our manufacturing activities in spin.

So we are on track for those progresses.

Our margins are improving.

We have to offset that with the fact that we've now introduced a new linear product, that's a low cost, high productivity product, we'll be formally announcing that product a little later in the year but certainly when Ernie and I talked about the expenses associated with increased new product introductions, that included products in the linear Clean as well as some new chamber configurations in the spin Clean and all of those things will put a little bit of margin pressure on us in the short term here on our positioning us very well for market share wins and ultimately increased profitability later in 2010 and then hopefully in 2011.

Great.

Thank you.

Thank you.

And our next question comes from the line of Jim Covello with Goldman Sachs.

Please go ahead.

Great, guys.

Thanks so much for taking the question.

I guess one of the key issues here is going to be any time shipments or revenue gets up to this level, everybody's always going to worry about sustainability and indeed you said at this point it looks like the second half is lower than the first half in terms of shipments.

But when we think about it from a broader cyclical context and take away some of the timing issues, are there people left to order or take delivery of shipments that aren't ordering today or does this look like as good as it can get at this point in the cycle?

Then my follow-up would be as you start to generate so much cash at this point in the cycle, any thought of doing a buyback?

Thank you so much and congratulations.

Thanks for the congratulations and one of the things that we've been tracking is what's the percentage of shipments that are going to kind of the top five customers, and over the course of the last couple quarters, the top five have taken 63% of the deliveries in the December quarter they're taking 80%.

So the good news is that in the March quarter, they're going to take about 59%.

And so we're starting to see the emergence of not such a significantly concentrated set of spending from the top five, relative to the others, and while it's early to really know what's going to happen in June, it looks like there will continue to be a similar pattern in June in terms of kind of more of a broad-based distribution of who's taking shipments.

I think that that's actually a good sign because it's reflective of the fact that the overall demand for integrated circuits across a broad range of DRAM, NAND, even NOR, but certainly the micro processor, logic and foundry is occurring and it supports the forecasts and the data that says that the unit output that's occurring in late 2009 and in the March quarter of 2010 are already up to the IC unit outputs that were shipping in the industry back in the peak time periods of 2008.

So all of that supports the fact that demand for integrated circuits is much, much healthier, much better and much stronger than I think most of us anticipated, and we're seeing the industry respond to that with the kind of shipment levels that you see us reporting, but as I noted in my comments, clearly the rate at which our shipments are increasing is a function of significant market share gains coming to manifestation, but also the fact that our operational response capabilities are really fast in this company and so we were able to ramp at rates that matched our customer's requested deliveries.

In terms of your second question, you asked the same question last quarter, Jim, about buybacks and my answer was that we're going to be in the cash accumulation mode for the next number of quarters for sure, so my answer is the same.

We're going to be in a cash accumulation mode.

We're going to certainly want to see how this cycle plays itself out.

We're going to remain cautious.

We're going to remain conservative.

I'm sure that we will have a discussion at our Board meeting, but we will not be in the share buyback mode certainly in the near term.

Thank you.

Our next question comes from the line of Satya Kumar with Credit Suisse.

Please go ahead.

You mentioned that the June shipments will be in a similar pattern.

Are you intend tending to say the absolute shipment level will be similar?

Secondly, when I look at shipments for ASML for example, the Company is guiding to book-to-bill of over 1.4 in Q1 and clearly looking at their bookings patterns and lead times, it looks like their second half shipments will be well in excess of their first half shipments.

Do you assume that little machines need to go with other machines, like Etch.

How do you sort of reconcile your shipments potentially being a lot higher in the first half than in the second half with that?

Okay.

First off, in terms of the shipment levels for June, I didn't really comment on it.

All I said was that the percentage mix that we see where the top five is 59% of the March shipments, I expected we would see a similar pattern in that they would be somewhere around 60%, but I didn't speak to what the absolute levels are.

And I'm not going to comment on that because reality is right now the volatility that is existing out here in the customer base is so significant that really just talking about one quarter has got enough risks in it and when I look at, when I was here talking just last quarter, where it looked like what we were going to ship in the first half of December was maybe up 10%, literally within a month to six weeks later the orders came just pouring in and demands for shipment in March changed dramatically.

So having said that, relative to ASML, I think that when you look at the rate at which shipments are increasing, not just for Lam but for the industry as a whole in the December quarter and in the March quarter, clearly, customers have to already have the litho tools that are going to go with that, either already installed or certainly out in front of the deliveries that they're going to take.

So when I looked at the order patterns for ASML, it was clear that their orders were way up but that they weren't going to from a lead time standpoint be able to up their output until the June quarter.

And again, if you think about what customers may be thinking or at least they indicate they're thinking, is that they expect that 2011 provided that the general global economic environment continues to improve, they expect that 2011 will be a good year for them.

It makes total sense to me that they are going to have to get their litho orders in place, given the long lead times for litho.

They're going to have to take delivery sometime late in 2010 if they are going to be able to ramp their output in 2011.

And so when I look at that, all that's really telling me is what the customers are positioning themselves to do, but with most of the rest of us, in the front end equipment business, our lead times are so short that in reality, what they're going to do with us is something that they decide literally four to eight to ten weeks before we actually ship them the tool.

Thank you.

Our next question comes from the line of Gary Hseuh with Oppenheimer and Company.

I think late last year you talked about shipment patterns in the first half of 2010 flattening out and now you're telling us that it looks like shipment patterns in the second half of 2010 have to start maybe subsiding a little bit.

I guess why should we believe you this time?

And what gives you confidence that you have better visibility or clarity now that far out?

And maybe just as a basis for that discussion, if you could just talk about shipment levels, most of us are modeling capital spending, wafer fab equipment spending, what have you in 2010, pretty much at a similar level to what it was in 2008.

Yet if I compare your shipment guidance here in the March quarter, 735 and the average kind of quarterly shipment number for 2008, which I think is the same CapEx environment of $420 million, I mean, I can't make that gap up just on market share alone.

So can you help me out on apples-to-apples comparison or am I just wrong on my CapEx assumption?

Okay.

Well, no disrespect intended, but what I would say, whenever I talk about what is going to happen, it's not what is going to happen, it's always predicated with based on what the customers are telling us today, based on what they are planning in terms of orders and shipments, this is what it looks like.

And clearly, with the lead times as short as they are, I wouldn't believe anything anybody says because nobody knows.

All you're really getting from me or from anybody else is what the current snapshot in time is, in terms of what the customers are saying they want to do, and what they're currently doing in this quarter.

And so relative to what's actually going to happen in the second half of 2010, I don't know.

I just know that if you take the current level of our shipment output on a systems basis, if we continue to ship at that rate, then the industry would have to spend about $28 billion in wafer fab equipment.

And I think that that's less likely to be what they do.

And so, therefore, when I look at what they're telling me they're planning on doing, they're telling me they're planning on taking less shipments in the second half than they are planning to take in the first half.

Whether that's actually how it plays out, I don't know.

So relative to our shipments in the March quarter, one, it's a function of the mix in terms of which customers are -- have come into that quarter and accelerated their buys.

They happen to be customers that we enjoy very healthy market share positions with.

Happens to be a situation where even beyond those customers, that many customers who were not spending in the December quarter, who held off from spending in the December quarter, came in at the last minute, wanted deliveries in the March quarter, our flexible operations model enabled us to dramatically ramp our factory late in the December quarter, and significantly increase our output in the March quarter.

I would suspect that a number of our other competitors or other companies in the wafer fab equipment space do not have that speed of ramp capability, so between market share, favorable customer mix, and the ability to ramp really fast, that's what's enabled us to have the numbers that we are.

And the other is that from a Clean standpoint, we're ending up in a situation where as a function of the market share that I talked about us gaining in 2009 and the application wins that we had in '09 that will manifest themselves into some pretty healthy share gains in 2010, those are coming into play in the March quarter as well as our shipment output level for Clean in March jumps up even higher than our shipment output levels jump up for Etch.

Okay.

And Steve, can I ask a follow-up?

Sure.

Actually for Ernie.

Just quick question here.

How much did accelerated expensing of cost and materials impact negatively the gross margin line in the December quarter?

Accelerated expensing of materials wouldn't have had an impact in the gross margin line, because that would all be below the line.

How about below the line, then?

Well, if you look at the delta between the imputed guidance for the December quarter and where we are, about half of that would have been attributed to materials and the other half to the variable comp that was a function of the higher profitability levels.

Got it.

Thank you.

Thank you.

Next question comes from the line of Stephen Chin with UBS.

Please go ahead.

Hey, thank you.

Hi, Steve, hi, Ernie.

I was wondering if you had any estimate, Steve, of what percentage of your March system shipments you think are for technology upgrade versus capacity expansion?

think are for technology upgrade versus capacity expansion?

My follow-up question was if you had any color you could share on customer type, that you would likely shift to in the March quarter?

Do you think we're kind of at the peak for foundry shipments?

Thanks.

Okay.

So in memory, this is true for both NAND and DRAM, the majority of what's shipping in terms of enabling conversion of wafer starts from 6X to 5X or 4X in DRAM and from 5X to 4X and 3X in NAND is going into conversions.

When a customer has to buy 10,000 wafer starts per month of all new equipment, in DRAM that will cost them typically about $275 million for those 10,000 wafer starts per month.

Right now, when we look at what they spent in 2009 and what it looks like they're going to spend in 2010, they're only going to have to spend about $130 million or $135 million for every 10,000 wafer starts.

And so that means that about two-thirds of the spending is probably going to conversions and a third's going into new and that's probably true for both DRAM and NAND.

In NAND, NAND's a little less expensive than DRAM.

Normally if you had to buy 10,000 wafer starts of new capacity you would have to spend about $240 million.

It looks like the NAND guys are going to spend about $100 million for every 10,000 wafer starts, this is on average.

And so we think that DRAM conversions are going to be about 500,000 wafer starts, probably about 400 are conversions.

We think that NAND's going to do about 450,000 of leading edge memory and about 350,000 of that will be conversions and about 100 will be with new equipment and so the overall increase in total capacity output, NAND's going to probably increase its total capacity output about 150,000 wafer starts.

Interestingly, DRAM's probably going to do about the same, about another 150,000.

Total increase in wafer start capacity, all of which reinforces that most of it's conversion, and so therefore, the capital asset intensity for DRAM and NAND are down at very low levels, about 20% of their revenue, which is much lower than the historical average of about 27% for memory.

And then you asked a question about --

Customer types.

Oh, customer types.

If you look at our mix of shipments for the next quarter, I mean, we're going to ship about 56% of our output will probably go to memory and -- actually, I'm sorry.

For the March quarter, output to memory's probably going to be closer to about 70%, and when you look at that, about three-quarters of that will be DRAM and a quarter of it will be NAND and I should point out that a lot of people talk about the fact that there has not been that much shipment into NAND and that's correct, but that changes where there's a significant increase in shipments into NAND but there's also a significant increase in shipments into DRAM.

Foundry will be strong in the March quarter.

But I also expect that foundry will be strong for most of 2010, if not all, but foundry and logic will be about 30%, with foundry being about 25% of the total shipments.

So you can figure out who the customers are that make up that spending, I think.

Thank you.

And our next question comes from the line of CJ Muse with Barclays Capital.

Please go ahead.

Yes, good afternoon.

Thank you for taking my question.

I guess, Steve, first question, can you talk a bit more about your underlying assumptions in your $20 billion to $22 billion wafer fab equipment and where you would see potential for upside?

Well, when we look at trying to guess what the customers will actually spend, kind of look at a whole variety of things, starting from what are all the basic forecasts for worldwide GDP and where is that spending going to occur and as a function of that spending, what's the percent of electronics in that particular country or region.

How does that ultimately manifest itself in terms of what do we think PC growth is going to be which we think is going to be 14% next year.

What do we think cell phone growth will be which we think it like 16% with SmartPhones being about 45% growth and ultimately making up 20% of cell phones.

So we roll through all these major segments and we look at the memory intensity, the NAND intensity and ultimately we look at what do we think that's going to generate in terms of unit demand and then we convert that into wafer starts and all that kind of stuff and then we cross check it with all the kind of macro things that we can and what we've kind of found is that if the macroeconomic environment stay reasonably stable in terms of being predictable, so in this case this forecast is built around an assumption of worldwide GDP growth, around 2.5 and upside, some people will tell you 3 to 3.5 and some people will tell you it's 2%, but we kind of built it around 2.5% and the reality is is that if the economy recovers better and it's stronger and if I see unit demand is stronger, then customers will spend more.

On the flip side, if worldwide GDP is less than that, if the recovery in the US stalls, if China bank policy ends up clamping down on spending in China, then you're going to see an impact on electronics, you're going to see an impact on unit growth, and so the reality is this is our best estimate, based on those kind of scenarios and based on looking at what customer behavior has been in the past, but the reality is is that if any major variable changes of substance, what the customers will actually spend can be quite different than any forecast.

Got you.

Very helpful.

I guess as my follow-up, trying to better understand the upside to shipments in Q1, I know -- and I know you talked on it briefly earlier but I guess could you help me maybe in percentage terms talk to the upside there.

The upside in March?

Actually, I thought you probably would ask me a question like gee, what's the risk to your margin, is there a down side?

No, no, no to your shipments, not your gross margin.

I know.

Not upside to that, no, I'm sorry.

Upside relative to kind of a 550, 600 run rate, what's driving that upside.

Is it share gains in Taiwan?

Is it your existing Etch customer base pulling into Q1?

Is it strength in Clean?

Is there a way to quantify each contribution from those three areas?

You're talking about the upside that we have in terms of our shipments going up 45% when probably most other people are not going to do that.

Exactly.

The answer to your question is all those things you mentioned, yes, it's Etch market share, it's Clean market share, it's customer mix, it's the ramp rate ability of the factory, it's -- I mean, it's literally all of those things and, you know, on one hand, you look at that and you go okay, it's great that, one, we have the operational flexibility to be able to ramp this fast.

Two, it's always nice when the customer mix turns favorable.

Three, it's always nice when your application wins, which I've been talking about for a long time, really start to manifest themselves in terms of what the customers are now buying in volume production are where those application wins have occurred and now we're really seeing the rewards of that.

And so what happens is every once in a while you get a quarter like this where it all seems to come together and our philosophy is we're going to do everything we can and if the customers want it, need it in a very short time frame, we're going to provide it to them and then we'll clearly have to go deal with what's on the other side of that and we'll just have to deal with that when it comes but that's kind of the best answer I can give you.

Thank you.

Our next question comes from the line of Edwin Mok with Needham & Company.

Please go ahead.

Hi, thanks for taking my question.

Regarding the margins, if you can help me out with here, if I look at what you're guiding for the third quarter and I compare it to your historical level, granted now you have a clean business, it seems like your Etch business margin is also below -- somewhat below your historical level.

Can you help us just talk about your Etch business and when do you think that part of the business can get back to 50% plus gross margin?

I have a follow-up with that.

Sure, Edwin.

This is Ernie.

I think it's fair to say the underlying Etch business margin performance is very comparable to past periods.

You do have quarter to quarter mix as to which customers are buying, because not all customers in fact have the same level of gross margin performance but if you look at it on a customer by customer basis and across the whole business, we're well within the norm range of the margin performance we've experienced in the past.

Okay.

Great.

Then just I guess just to reclarify what you mentioned, Steve.

You talked about a new product that you guys potentially will be announcing sometime in this year.

And just very quickly, I think you mentioned it's a linear product and you said it's in an emerging market.

Does that mean a new market, new market doesn't know what it's doing yet or is there a new area.

You guys try to enter there.

We actually have multiple new products.

We have a new linear Clean product that we just started shipping in December.

In addition to that, in a different emerging market, we have a new product that we have not talked about with any specificity.

We have shipped multiple units of that product to multiple customers who are now putting it into production and are production qualifying it.

Assuming that that goes well and that product continues to ship into this 32-nanometer application, then we'll come out and we'll speak to it.

The only reason we mentioned it -- and we've mentioned it kind of in generalities before is it's shipping now and as Ernie talked about we're expensing all the costs associated with those products.

We want people to understand that.

But the new linear product started shipping in December.

It will ship again and then we have a number of new Etch chambers that are addressing next generation processing capability at the 3X and the 2X nodes as well as the new Through-Silicon Via chamber so we've been very busy over the last couple years with our R&D investments and that pipeline is really coming to fruition and those products are shipping out now and it's a little bit -- puts a little pressure on the P&L in the short term, but these products are going to put us in significantly beneficial position for additional market share wins and productivity benefits to our customers that I think will be very valuable to the customer base and very important for Lam's future success.

Thank you.

And our next question comes from the line of Timothy Arcuri with Citigroup.

Please go ahead.

Thanks, Steve.

Couple things.

You know, your numbers on the back half of the year certainly match mine which I guess is nice.

First of all, you've been doing this for a long, long time and every time shipments roll over, if you look back 10, 15 years, the shortest it's ever lasted was four quarters in a row.

So I guess my first question is why would it be different this time that shipments if they do roll over in the back half of the year, if that's what happens, why would it last for any less than four quarters?

Is there something different this time?

Well, I think that when we look at kind of the -- if we go back and look at the 2002, 2003 time frame, kind of interesting that when the industry came off kind of interesting that when the industry came off the bottom back in really March of 2004 and you could even say December of 2003, kind of went up for four quarters and then it dropped down for a couple of quarters and it ran at a lower level but it wasn't really a downturn.

I would classify what was going on late 2004 and early 2005 as more of a consolidation of the gains in terms of kind of getting supply and demand and capacity and output back in sync with each other.

When I look at what's going on now, is we had a very sharp correction down.

If you look at the bookings were declining, the shipments were declining, and we fell into the hole so now -- and we climbed back up and you're right, we have a very accelerated level of shipments into the installed base, most of which in memory is going to wafer start conversions, not wafer start additions, and so I think that we will go through a period of consolidating our gains, where the shipment levels may very well be less than kind of the peak shipment levels that you're seeing right now, but I expect them to be at levels well above what you would call a downturn.

In other words, you come up and then you kind of settle in, consolidate your gains, run for two, three, maybe it is four quarters, and then depending upon the demand environment, you then move on up.

I think the one thing that I noticed when I was looking at this 2004, 2005 situation, is demand actually went flat for three quarters in a row back in that late 2004, 2005 time frame.

And that also contributed to why spending kind of stayed flat and so I think the key in terms of how long a consolidation phase, if it occurs, ends up lasting is really a function of what happens to IC unit demand.

If we get unit demand growth then the customers are going to start investing again at increasing levels, possibly as early as the end of 2010.

If we get a flat IC unit environment as a function of the economic situation, then this thing could last for the type of time frame you're talking about, Tim.

Okay.

Steve.

Thanks.

I guess just a quick follow-up.

Looking at the margins, if I compare operating margin guidance relative to last cycle, it's about 800 basis points lower and it's hard to believe if the Clean business is only 20 to 25% of the revenue, that it would be solely due to that, because that would imply that the Clean business would have zero margin, so is there some way to quantify some of these kind of extraneous expenses so that we don't conclude that there's some corrosion in your core Etch margins?

Thanks.

If you look at kind of many, many quarters of average as opposed to any one let's say peak quarter, our average gross margins are really around 50%.

And that margin that we were able to do at the high ends of upturns, a function of primarily being in the Etch business, the percentage of our business that was Customer Service business related where the margins are lower and now of course with the introduction of Clean coming into it, and the margins in Clean being one that we're growing on, one, I view that at 46% gross margin we're about 400 basis points below that 50% that we would normally be at.

I believe that as we go forward, and we continue to get more volume in terms of when that actually occurs, as this cycle plays out in totality over a multi-year period of time, I don't know, but our Customer Service business will become a smaller percentage of the total than it is today.

Our Clean cost structure will get beneficially improved as time goes forward.

So that margins will improve even if volume didn't improve but if you get volume and cost improvements you'll get a double leverage.

And as Ernie said, as we've worked through all the customer mix issues and we've looked at our market share growth and our competitiveness in Etch, fundamentally, our margins in Etch are essentially right where they've been for the vast majority of the past.

So I think we have a short-term situation, short-term being the next couple or three quarters where the industry has decided that it wants to accelerate shipments earlier than most of us would have expected.

I communicated to the investment community that if the ramp started earlier, relative to some of the things that we're doing in Clean, relative to some of the things that we're doing with new product introductions, that our ability to expand our margins in the first half or so of 2010 would be a little bit challenging, and that's the scenario that's played out and we've tried to explain that but I think that as we go forward over time, our ability to continue to deliver higher gross margins on higher levels of revenue and to leverage our OpEx investment better, I think where we're going to see the Company is where we've said we wanted to be, that as we accelerated our growth via our adjacent market strategy, that instead of being a 29% operating income, we said we were going to shoot to be a 27 to 27.5% and I still think we're on track to be able to achieve that with this adjacent market strategy.

Just takes some time to play itself out.

Next question comes from the line of Krish Sankar with Banc of America Merrill Lynch.

Thanks for taking my question.

I was trying to understand, given the fact that you have a $20 billion to $22 billion wafer fab equipment spending for this year, how high do you think the wafer fab spending can go before we hit the roadblock of building out new fabs or in other words, how high can capacity expansion take us in a wafer fab equipment spending level, and also once you get back to normalized margin run rate after the new product introductions, what do you think of the incremental margin going forward?

Is it going to be in the 40 to 50% range or could it be better?

Thank you.

I'll have Ernie talk about the incremental margin activities, but I mean, when I look at WFE, I mean, you raise a good question.

How much fab Clean room space is out there already built that people can wafer start into and that's really most applicable to the foundry business whereas the wafer start growth is occurring on the leading edge at 45 and 40, that's all new equipment.

There's interestingly because they're seeing increases in demand at actually 65 and 90, there's actually equipment that is being sold and going into those fabs where they still have some degree of room.

So I think that what's planned by customers in 2010 is certainly consistent with what they have fab Clean room space to accommodate.

If they were to spend $25 billion or $28 billion would they run out of space?

That's impossible to answer, because it would depend on which segment of the industry you're talking about.

Memory is spending a lot of money but not adding really very many wafer starts.

It's all conversions and so conversions don't take up more space, yet Samsung is continuing to build some additional lines, Charter has an ANX available, UMC has some space.

TSMC's building another fab, and Micron and Intel in Singapore have the ability to go and make an investment and get their Singapore fab ready to go, which could be expanded into.

So it's -- I think it's almost impossible to answer, but I think that the amount of WFE spending that we're talking about is not constrained by Clean room space or litho capacity.

Krish, relative to the gross margin question, if you assume a normalized environment and after we're through all of the new product introduction activities, depending on product mix, probably targeting somewhere slightly under to slightly over 50% is not a bad place to be for incremental gross margin.

You're obviously going to get the leverage on the OpEx side but that's a range to work with.

Thank you.

Thank you.

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

Could you comment on your outlook for the Taiwanese memory makers?

Are you seeing any changes there?

Secondly, what are tool lead times now for an order placed?

The situation in Taiwan is pretty stable and by that I mean the power chip and promas are continuing to take whatever cash they are generating and basically service their debt.

They're running their fabs.

They're bringing more wafer starts online.

As long as it's consistent with being able to generate cash.

And the current pricing environment is enabling them to do that.

Whether they will choose in 2010 to make investments to try to get some wafer starts converted or add some wafer starts that can operate at 5X, we'll have to see.

As it stands right now, they are evaluating that.

Certainly I think we all know that Rex chip and Elpita, they certainly have access to some amount of capital and there's a conversion process that's going on for them in memory and so they are investing, but how that plays itself out I think is a function of access to capital.

So that's kind of the situation in Taiwan.

What was the other question?

Did you have another question?

What are lead times now for an order placed?

Somebody ordered today, end of January, May.

It's about 12 weeks.

When things are kind of rolling along, steady state, we can do eight weeks, but we've been stressed pretty hard here in the short term.

Fair enough.

Thank you.

Thank you.

Our next question comes from the line of Atif Malik with Morgan Stanley.

Not to beat a dead horse but you comment on less systems in the second half I believe are quite consistent with the official comments by memory makers where DRAM is 70/30 first half loaded and foundry, 60, 40 loaded.

If you just run the math off of our 60% CapEx year-over-year assumption looks like second half could be down 30% in shipments.

First, does the math make sense the second half down 30%, and in terms of segments, relatively which segment is coming down in second half, foundry, NAND or DRAM?

I'm kind of chuckling because that's the answer everybody would like to know.

The reality is, no matter what I would say to you, based on what we know today, I only know one thing for sure.

It will be different.

And I will be wrong.

And so there really from my perspective, isn't any point in speculating about the second half.

Your numbers could be right.

I could come up with scenarios as to why it could be stronger.

I could come up with scenarios as to why it could be weaker.

Reality is we don't really worry about that, and I'll tell you why.

We build a business model here that as we demonstrated in the December and March quarters, if the customers decide after waiting and waiting and waiting they want it now, we deliver it to them.

If they decide that after we delivered all of them there isn't enough demand out there and they don't want anymore, we're going to adjust to that.

So we're just going to stay lean and mean and flexible, keep our expenditures under control, and really just don't know, just going to have to react to how it plays out.

That's fair.

Then I have a follow-up for Ernie.

I'm still intrigued by this new product.

Is it okay to assume this is alongside your core expertise of Etch and Clean and not in deposition or some sort of deposition and then Ernie, the model that you showed last year, $25 billion WFE and $4 in EPS.

This new product, is it fair to assume the model is still intact, $4 in EPS, $25 billion comps WFE run rate.

One important caveat to that -- we said that was a two to three year model, so Steve made some comments earlier today that the sooner $25 billion comes, the more challenge we're going to have and so certainly within the time frames and the perspective we gave, it's absolutely intact.

If $25 billion happens in 2010, we're going to be a little bit challenged relative to that model.

The new product question, we're not commenting specifically on what market this product's in and specifically what application it does.

It's a very interesting market and we have a very interesting product and sometime later this year if things continue to go well we'll come out and talk about that with more specificity.

But for now we're just talking about the fact that we've begun to ship it because it does affect our cost structure.

We have time for one more question.

Thank you.

Our last question comes from the line of Weston Twigg with Pacific Crest Securities.

Please go ahead.

Just two quick questions.

One is first on the R&D line I'm just looking at that and with the new product lion line you mentioned just wondered what level does R&D get to, does it stay in the low to mid 80s, or does it climb a bit higher over the next few quarters.

My second question is maybe one way to I'm trying to think about this market is if we fast forward to 2011, assume we get to some sort of more normal year, what percentage of the wafer fab equipment market do you think Etch and single wafer Clean would be.

Relative to the R&D line, you could see that move just slightly higher here over the short term as we talked about with the expensing materials and that's a quarter by quarter sort of activity, but as soon as that's done, you're going to see the R&D line drop to more normalized levels.

Okay.

So relative -- typically in an up market, Etch will increase as a percent of wafer fab equipment and we're kind of seeing that because we see in 2010 we think it's going to be somewhere around 12.7 to 12.8 and that's having to deal with the fact that litho is taking up a greater percentage of WFE.

So while Etch doesn't change so much as a percentage of WFE, the fact that it stays the same means that actually, relative to some other applications, it's actually growing which is what happens when you look at the total number of dollars that have to be spent, number of wafer passes that require Etch particularly in the double patterning area, increases the size of the Etch market.

Clean market's typically about 6% of wafer fab equipment as a whole.

We're seeing the single wafer clean move up to about two-thirds of that.

It's probably 55 to 60% today but it's probably going to be 60% of that market going forward.

So that will accelerate the growth opportunities for us as both single wafer clean segment grows faster than WFE and then our market share growth will cause us to accelerate that even more.

Okay?

Very helpful.

Thank you.

We would like to thank you for joining us today.

Please be advised that the Webcast of today's call will be available on our website later this afternoon.

Thank you for your interest in Lam Research and for participating.

Thank you.

Ladies and gentlemen, that does conclude today's Lam Research Corporation December 2009 quarterly results conference call.

Thank you for your participation and for using ATT conferencing.

You may now disconnect.