科林研發 (LRCX) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you so much for standing by and welcome to the Lam Research Corporation June 2010 quarterly results conference call.

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

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

(Operator Instructions).

As a reminder, this call is scheduled to conclude at 3 PM Pacific Daylight Time.

I would now like to turn the conference over to Miss Carol Raeburn, Managing Director of Investor Relations.

Please go ahead, maam.

Good afternoon, everyone.

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 June 2010 quarter, and Steve will share our business outlook for the September 2010 quarter before opening up for Q&A.

The press release detailing our financial results for the quarter ended June 27, 2010, was distributed by Business Wire shortly after 1:00 PM this afternoon, and is available on our website at lamresearch.com.

Today's call contains forward-looking statements, including those related 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 was scheduled to last until 3:00 PM, and we ask that you please limit questions to one per firm with a brief follow-up.

With that, I will turn the call over to to Ernie for a review of the June quarter results.

Thank you, Carol.

I'll be sharing the results of another strong quarter for the Company.

In June, we delivered record revenue together with strong operating profits and earnings.

Shipments for the June quarter were $694 million, down approximately 5% from the record shipment levels that we reported in the March quarter.

Application and market segment breakdown for the quarter were as follows.

Applications at 65 nanometer and below represented 96% of total system shipments.

[C ram] accounted for 37% of total system shipments, with NAND comprising 30%, and other memory customers approximately 2%, such that total memory segment customers were 69% of system shipments.

Foundry customers accounted for 23% of system shipments, while Logic and others were 8%.

June quarter revenue was $695 million, up 10% over the March quarter, driven by strengthening demand for our etch and clean products as well as related services and spare parts.

Ongoing gross margin was 46.7%, up 40 basis points from the March quarter.

This improvement was primarily the result of favorable product mix and initial benefits from our efforts to improve efficiencies in our clean products business.

Ongoing operating expenses for the June quarter were $152 million, and included the acceleration of R&D spending on new products as well as variable compensation expenses associated with the Company's higher revenue and profit levels.

Ongoing operating profit was $172 million, and reflects 16% growth over the March quarter resulting in ongoing operating margin of 24.8%.

Other income was $3.5 million, largely due to interest income and favorable impacts from currency movements.

We incurred net expenses of non-ongoing nature of $16.7 million during the quarter, which includes $13.3 million related to a reassessment of obligations associated with certain facilities arrangements, and $3.4 million related to asset impairments.

Our ongoing tax rate for the June quarter was 15.3%, primarily due to favorable geographic mix of operating income and adjustments related to non-US reserves.

For the full fiscal year, the ongoing tax rate was 18.8%.

For the September quarter, we expect an ongoing tax rate in the mid-teens and, at currently projected levels of business, we would expect the fiscal year 2011 tax rate to be similar.

For the June quarter, our ongoing EPS was $1.17, based on accounts of 128 million shares.

Relative to our expected performance of $0.94, approximately $0.9 of the incremental EPS was generated as a result of the favorable tax rate, while the remaining $0.14 was generated from our strong operating performance.

Turning to the balance sheet, our cash and short-term investments, including restricted cash, totaled $992 million.

In June, we generated $165 million in cash from operations, translating to 24% of total revenue.

During the June quarter, we continued making share repurchases to offset the dilution from employee equity plans, and repurchased approximately 700,000 shares at an average price of $39.56.

A portion of these shares purchased settled outside of the June quarter, and will be reflected in our September quarter cash flow statement.

Accounts receivable days outstanding were 65 days, a decline from 75 days in the June quarter, and inventory turns were 4.7 (days).

At the end of the quarter, deferred revenue was $207 million and, as usual, excludes shipments to Japanese customers that will revenue in future quarters.

These shipments totaled $52 million.

Non-cash expenses include, among other items, $12 million for equity compensation and $18 million for depreciation and amortization.

Capital expenditures were $12 million, and our employee headcount at June end was 3,150.

With that, I'll turn it over to Steve for his comments.

Thank you, Ernie, and thank you all for joining us on the call this afternoon.

Since today's calls comes close on the heels of our analyst event a couple of weeks ago at SEMICON West, I will keep my comments today relatively brief.

As we stated a couple of weeks ago, based on our customers' current requests for shipments, it looks like wafer fab equipment spending for the second half is currently at a run rate of approximately $30 billion to $32 billion.

When added to the first-half run rate of $24 billion to $26 billion, this will result in total estimated spending for calendar year 2010 of between $27 billion and $29 billion.

Certainly, a much stronger year than projected at the beginning of 2010.

Based on conversations we had with customers at SEMICON West, they believe that demand for ICs will remain strong for the foreseeable future.

And therefore, most indicated a need to continue a strong level of investment to support wafer start expansion and technology conversions through at least the middle of 2011.

Key drivers of demand for semiconductors appear to be broad-based strength in consumer electronics, as well as the beginning of a corporate refresh of both PC and IT server infrastructure.

The consumer electronic sector has been surprisingly robust despite broadly disseminated concerns over personal debt burdens and a persistently high unemployment rate in the United States.

With full-feature, high-end smartphones now containing up to $75 of semiconductor content, and semiconductor content in a 64-gigabyte tablet costing more than $150, the consumer segment is an increasingly important factor in semiconductor demand.

On the corporate side, we hear of more companies planning to initiate the PC [refresh] cycles and IT infrastructure upgrades starting in the second half of 2010, which will likely create strong demand for memory ICs for potentially the next eight quarters or more.

Despite record levels of profitability in many sectors and historically high cash balances, many corporations to date have been somewhat cautious in initiating major technology investments.

This situation appears to be changing, if spending forecasts are correct.

Therefore, if there is no deterioration in the macroeconomic environment and the corporate refresh cycle accelerates,and assuming consumer electronics continues to play a significant role in the demand for semiconductors, then it would appear that 2011 is likely to be another year of strong investment in wafer fab equipment.

As it relates to land shipments, as a comparative of first half versus second half 2010, we anticipate that over the next couple of quarters we will see increased strength in Foundry and Logic as a percent of our shipments and, proportionately, less of our total shipment activity coming from memory.

Overall, the shipment patterns in the second half have a little less customer concentration than we saw in the first half, with the additional Foundry, Logic and Memory customers taking the deliveries over the next couple of quarters.

However, the additional Memory customers are not yet adding significant new capacity, so it appears that [D ram] pricing is likely to remain above manufacturers' cash costs throughout the end of the year if the demand environment remains robust.

Given Lam's strong market position in both Memory and Foundry Logic, any shifts in buying between these groups over the next few quarters will have essentially no impact on our continued strong shipment and revenue performance.

We are on track to meet the 8 to 10 percentage points of shipped market share for 2010 in both our etch and clean businesses, and we continue to achieve application wins throughout calendar 2010.

The application wins, as we talked about at our analyst event, position us for additional market share gains in future years.

While market share gains are clearly the primary driver behind Lam's ability to grow faster than the rate of increased WFE spending, this level of shipment and revenue performance also reflects the ability of our manufacturing operations to respond rapidly to our customers' short lead-time needs for delivery.

During this period of robust new systems demand, Lam's strong field operational capability has allowed us to maintain our focus on supporting the installed base needs of our customers by providing fast start-ups, high levels of spares and service support, in addition to responding to refurbished equipment and upgrade requests.

These after-market support revenue streams provide a meaningful contribution to our overall financial performance, and offer a more stable source of revenue throughout the cycle.

Over the next several quarters, our focus for the business will be on meeting the strong level of demand for Lam Systems and installed base support, as well as continuing to focus on winning new applications and execute to our product road maps.

Turning to the September quarter, the guidance is as follows.

Shipments of $810, million, plus or minus $20 million, revenues of $790 million, plus or minus $15 million, gross margin at 46.5%, plus or minus 1 percentage point, operating profit at 26%, plus or minus 1 percentage point, and earnings of $1.35, plus or minus $0.07.

In closing, our performance achieved in Q June and our expectations for Q September performance are due in large part to the extraordinary commitment our Lam Research employees have for our customers and the Company.

Their willingness to go the extra mile is legendary in our industry, and I would like to express my thanks and appreciation for their great work.

With that, Ernie and I will take your questions.

All right.

Thank you, sir.

At this time, we will begin our question-and-answer session.

(Operator Instructions).

We ask that you please limit yourself to one question and one brief follow-up question and re-queue for additional questions.

Our first question is from the line of Satya Kumar with Credit Suisse.

Yes, hi.

Thanks.

Good quarter, guys.

Steve, I was just wondering if you had any thoughts on early outlook towards December in terms of shipments of [familiarity] can be maintained or not.

And the shipment run rate in September, is that above or below this $30 billion to $32 billion run rate you talked about.?

The $30 billion to $32 billion run rate is kind of an averaged run rate that we think will occur.

If the customers go forward with what they are currently asking us to ship to them in the December quarter, they are asking for more shipments in December than we are outputting in September.

And if that occurs, then I would expect that both shipments and revenue for December would be higher.

But I think that one of the things that everybody recognizes, is with lead times for most of the companies in the equipment industry fairly short, it's a pretty volatile environment when you get out three or four quarters.

But that's what they're telling us they want for December at this particular point in time.

And then a quick follow-up to that, Steve.

I was -- if you look at the [lithography] sector and look at the type of capacity additions that's happening in that sector, shipment profile for lithography, which as the longest lead times, appear to be going up through the middle of next year.

If that were to be the case, is it reasonable to think that shipment momentum continues into the first half of next year?

Well, I think that,as I've kind of mentioned many, many times, I think it's all about the demand.

Currently, we are certainly in a strong demand environment.

I think that if, in fact, the corporate refresh cycle for PC and server infrastructure accelerates as many predict, I think we're going to see Memory demand continue to strengthen as we go forward.

Clearly, in the foundries, they all talk about the fact that there is very strong demand at 180-nanometers and 150-nanometers, as well as 65-nanometer being a very dominant node.

In addition, there are leading edge Logic, companies, whether they're [fab-like] companies or foundries, are taking as much 40-nanometer product as they can get their hands on, and the lead times have gone out.

Their expectations for demand out of the foundries on the leading edge is that it's expected to be very sustainable through the first half of 2011.

And so, there's a lot of fundamental positive signs around semiconductor demand.

And if it continues to manifest itself, and there is no question in my mind that they will have to continue to spend at least at the rate that we're seeing for September and December in the first half of 2011 But, with the uncertainties that we have in the world today, when you get that far out, who knows.

But there's a lot of things you could point to as to why a sustained or even growing shipment rate could occur.

All right, thank you.

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

Please go ahead.

Thanks a lot and congratulations.

First off, on the etch side of things in terms of the application wins, can you say how many net application wins you had this quarter?

And what are some of the specific application wins, or at the very least can you characterize which customer segments they're coming from?

I think we had four total this quarter.

Most of the application wins activity in the first half of the year have been in [conductor.] We have ten net application wins to date total between conductor and etch.

And for competitive reasons, I'm not going to detail out the specifics, because in some cases, our competitors don't even know yet that they've lost.

But I will tell you that when you look at what's going on in the conductor space, it's things, it's wins that are the 28-nanometer, 32-nanometer node, both in the front-end -- well, primarily in the front end when you're talking about conductor.

When you go to dielectric, again, it's -- In the Memory space it's mostly some 4-X and 3-X activity and then in NAND, there's some 2-X activity associated with the double patterning.

So, it's what you would expect in terms of those things that are just going into production.

And so, we've begun to ship some of those application wins.

And in some case, when it relates to Memory, it's 3-X for D ram and 2-X for NAND, which I don't expect will really ship much volume until late 2010 and early 2011.

Great, and a follow-up question on the clean side of things.

You've been making a lot of progress on the front end, as you detailed at the analyst day.

Can you describe, I guess, what is the applications or what some of the technology process changes that are helping you garner these wins?

Well, one of the big areas that we have been focusing on is drying technology.

As you get into 3-X and 2-X types of environments, you end up in a situation where drying becomes very critical.

We've had a number of wins, both in Logic, but primarily in D ram, where drying has been a technical differentiator that's been beneficial for us.

We've also continued to expand our market share in other foundries beyond where we had application wins in the past.

And we've also now begun to increase our penetration wins at a number of memory companies, so that we expect by the end of the year that when we look at clean, clean will be about 55% of the shipments will go to Logic Foundry and 45% be will be going to Memory.

And that's an encouraging improvement for us, given that Memory spending tends to be 50% to 55% of total wafer fab equipment spending, so we like the positive aspects of penetration in Memory.

All right, thank you.

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

Please go ahead.

Great.

Thanks for taking my question, Steve and Ernie.

A follow-up question on the strong September shipment guidance, Steve.

What percentage of those shipments do you think will be for capacity expansion versus technology upgrades?

We're starting to see that if we look at D ram, we look at D ram and say we think that by the end of the year, there will be about 150,000, 160,000 wafer starts per month that's pure capacity, and another 500,000 wafer starts that are a function of being converted from 6-X or 7-X to 5-X or 4-X.

And early in the year, most of the work was conversions, and so some of that 160,000, 150,000 capacity-only are scheduled to ship in the second half, the bulk of it is scheduled to ship in the second half.

But there's still conversion activity going on, In NAND, you have kind of a similar story.

There's probably 150,000 to 160,000 of capacity additions.

Most of that is going to be shipping in Q3 to Q4, going into the 3-X and then the 2-X ramp.

The 2-X ramp is going to start in the Q3, Q4 and most of that's going to be from new capacity adds.

And just a follow-up question, Steve.

In Taiwan this week, we saw that the Taiwanese regulator pushed back at some of the applications for equity raising by a power [shift and so on].

Do you need these second-tier Taiwanese customers to spend on equipment to see [WFE] sustained at this $32 billion run rate?

Well, as I commented in the call, we've started to see that the request for shipments from a broader segment of customers is coming into play.

That's certainly true in Memory, but it's also true in Foundry and Logic.

I think it's pretty typical that, particularly in the Memory space, that companies that struggled from a financial standpoint and had some balance sheet issues and access to capital issues, are now returning to fairly strong levels of cash flow, some doing better than others.And as a function of that, we're seeing some investment in technology conversions in some of those other D ram memory companies.

I think that when you have a strong general upturn with demand for semiconductors being very broad based.

If you look at the growth in micro controllers, if you look at the growth in analog, if you look at the growth in just regular non-advanced logic, those growth rates are very strong in 2010 So, that causes the other foundries and other memory logic companies to start participating.

And this is what we expected, and I think we'll see them participate on an ongoing basis, and I think they'll contribute to a strong WFE spending environment over the next two to four quarters, would be something I have a high degree of confidence in.

What happens beyond that, we'll have to see how the economies are holding up.

Thank you.

Our next question is from the line of Peter Kim with Deutsche Bank.

Please go ahead.

Great.

Thank you very much.

With regards to your current shipment rate, this is a record pace.

And given that your shipments rate at this level, do you expect -- are you seeing a symbol of percentage of [turns] business in the quarter?

Or are you seeing customers booking further in advance?

Well, I'd like to tell you that we're seeing a lot more customers book [in advance], but the reality is if they don't need to, they don't.

One of the pluses of us having one of the fastest supply chain response capabilities in the industry, is that sometimes customers don't actually deliver the purchase orders until late.

So the turns environment is fairly high, and we basically reserve slots on the basis of quotation processes.

We're dealing a lot of work with the customers have well in advance of when they actually physically deliver the purchase order.

But, suffice it to say, most customers are delivering purchase orders 8 to 14, maybe sometimes 16 weeks in advance.

But they're talking to us typically six months in advance, sometimes even longer than that, and giving us an idea of what they're thinking about wanting from us in terms of deliveries.

You said earlier that you are expecting the Foundry and Logic to be an increasing mix going forward in terms of shipments, and Memory becoming a little less.

I was wondering if you could kind of quantify that for us?

What do you think is -- will Memory be less than 50% in the September shipment quarter?

In the September quarter, as Ernie talked about -- In our June quarter, 69% was Memory.

And so, what it's looking like now is that we're going to see Memory in the September timeframe drop to, I think it's about 50%.

What is going to happen in December, is something that -- oh, I'm sorry, so in September probably 57%, but it's dropping down from 69%.

And so, in December -- I mean the problem that we have is if we were sitting here three months ago on our conference call for September, our September shipment demand went up about 35% from the conference call that was one month into the June quarter.

And by the time the June quarter ended, September shipments had increased 35%.

And so, with the concentration of customers, I couldn't tell you exactly how it's going to play out for December.

But my sense is that it's going to be very strong for Logic and Foundry throughout the second half, and then we'll see how the percentages play out.

But, Memory is dropping as a percent as a function of the increase in Logic and Foundry spending.

All right, thank you.

Thank you, our next question is from the line of Krish Sankar with Bank of America Merrill Lynch.

Please go ahead.

Yes, hi.

Thanks for taking my question.

Steve, I just wanted to follow up on the September to December customer mix.

Do you think it's going to be the same customer spending into December?

Or do you see further broadening of the customer base into December?

I think we're in a -- there aren't that many customers any more in the industry.

So, we know the top ten is probably spending 80%, 85%, and you get to the next ten,and they're probably spending 95%-plus.

And so, I think that when we're looking at who's participating in the second half, you pretty much have all the players that are of any substance taking deliveries in the second half.

If I could have a follow-up for Ernie.

In terms of your transitional [performance in the clean] the supply chain towards your "outsource" model, is it complete or do you think it's still on track for the end-of-year completion?

And should we see any uptick in gross margin because of that?

Thank you.

Krish, it is on track relative to the products that we focused for the outsourcing effort.

Part of the phenomena of the current environment is that you're seeing a lot of customers reorder process-of-record tools that were not necessarily a focus of the outsourcing effort.

So, in terms of the operational execution, it's pretty much on track.

We would need to see a transition of our customers to that product.

And, yes, as we've talked about before, we would expect to see continuing improvements in our gross margin performance in the clean business as time progresses and we make those transitions.

I mean I think that one of the things that we should point out is as our -- we're absolutely ramping significantly our clean shipments in the second half.

As a percentage of our total shipments, it's growing faster than our etch shipments are.

And so, when we look at our margins, you might question why they're kind of flat on higher shipments and revenue.

And fundamentally, it's because we have mixed changes from where we were with clean at lower gross margins today dragging down margins a little bit.

And then we have some customer mix issues.

If we have what we are looking at for December occur, we're going to see some of those cost reduction benefits come into play in the clean business in December, a more favorable mix of customers.

And so, we're expecting that on higher shipments and higher revenue of some sort in December that we'll also see improved operating margin and gross margin as a function of the things I just mentioned.

Thank you, our next question is from the line of C.J.

Muse with Barclays Capital.

Please go ahead.

Good afternoon.

Thank you for taking my question.

I guess first question, when you think about likely pick-up and shipments in Q4 off of Q3, how much of that do you think is the cycle and how much of that is related to share gains, particularly in Etch as well as the expansion of etch, as we finally see kind of a pick-up in double patterning orders?

It's a combination of both.

There is no question, C.J., that we've got customers still wanting to come in and increase the deliveries of equipment, which I think is certainly related to the cycle.

But certainly, given the market shares that we outlined at the analyst event in terms of some of these emerging applications on 3-X and 2-X, you're starting to see shipments for those technology nodes occur later in the second half.

And so, our market share gains in those nodes are contributing to the pace at which you'll see our shipments increase relative to just the WFE market itself and perhaps some other competitors.

That's helpful.

And as a follow-up, there's been some noise out there about I guess guys wanting expedited delivery but [litho] constraints causing that just to move to normal delivery.

So my question is, are you still seeing litho constraints, I guess, impacting the timing of your shipments?

And I guess how should we think about that in the second half of this year and into 2011?

Well, I think that certainly in the June quarter, we saw in the last couple of weeks, we saw $25 million to $30 million of what we had planned to ship be asked to be held for two to three weeks.

That was a function of either facilities issues or not having the ability for delivery, some of which was litho, some was others.

So, as some of the issues in the supply chain that are occurring that are unrelated to our abilities to do things, we can actually have our shipments impacted for a variety of reasons.

And that's one of the reasons why our shipments weren't quite as strong as we had actually built and expected execute in June.

So, as we go forward in the second half, I think you can all see the extent which ASML is ramping litho.

I think that's going to become less of a concern as we go forward.

I think we've got a lot of new fabs that are coming online.

I think that all of us are potentially at some degree at risk, that if those fabs don't come up, don't get built, aren't ready, that you could see equipment suppliers ask to delay shipments from one period to another.

So, it's one of the reasons why our guidance range kind of goes up a little bit higher.

Another reason is that when you start getting up to revenues and shipments in the [$800 million] level, the error band gets a little bit -- needs to be a little bit wider, given the volume of that.

But, the other issue is, I mean if we have $50 million or $70 million in a quarter going to one customer and we do, and that customer decides that they don't really have the ability to swallow that much equipment for whatever reason, I mean we can easily have $20 million or $30 million pushed out into the next period.

And while it doesn't change anything in terms of ultimately our market share and ultimately the revenue we generate, it does create some choppiness that I think can sometimes be confusing.

Thank you.

Our next question is from the line of Jim Covello with Goldman Sachs.

Please go ahead.

Great, guys.

Thanks so much.

Appreciate the taking the questions.

You guys generated about $1.20 free cash flow per share this quarter.

Could you give us some idea of what you think the free cash flow generation might look like for the September quarter at the higher revenue and shipment level?

You're probably going to see cash flow really come close to mimicking our overall operating income, Jim.

There may be a small [proration], but in general, it's going to mimic the operating income guidance.

And then so is it fair to say if we have a few quarters of sustainable revenue and shipments like this, as Steve has been discussing here, we could be looking at a cash per share on the balance sheet of between $15 and $20 by the end of the next year.

Is that kind of the right level to be thinking about?

Well, certainly if you presume that the performance that we have and going to have in December continues throughout the year, yes, you can absolutely get there.

Okay, great.

And then if I could just ask, you have given a lot of color on the various segments, which has been helpful.

If we look at some of the big [NAND Flash] fabs that have been announced, where are those folks in their process timeline?

I mean is that what creates some of the sustainable visibility?

Or are those things starting to be aggressive already?

Thank you.

Well certainly, a couple of the big new fabs that everybody's aware of.

One, is it's going to be taking deliveries in the second half.

I think that the other one that's in Japan is still filling out the Y 4 wafer starts and the technology conversions.

I think WiFi will come online middle of 2011.

And if you look at what a lot of people think in terms of the supply/demand relationship in NAND, that it's going to stay in pretty tight balance for the rest of this year.

And a lot of people are forecasting that with a lot of new products that are coming out, that the demand for NAND is going to continue to rise at a rate that's faster than output is being put in place.

So, I think it's good news that there will be fabs that are available to be filled with equipment, and that's why you see a lot of customers really rushing around, putting a lot of effort into making sure they get their fabs ready.

Because they always have the choice not to equip them, but if the fab isn't' ready, you're in big trouble.

All right, thank you.

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

Please go ahead.

Hi, thanks for taking my questions.

Steve, on the comment that you made that there was some push-out at the end of June quarter, $25 million or $30 million into September, I'd just like to -- can you give some color on which segment were they in or just broadly across all segments?

There was four customers.

I'm not going to detail which ones they were because the customers kind of don't like us talking about specifics in terms of what they were doing.

But there were some in Memory, some in Foundry.

And so, it wasn't one customer, it was four, and they all had different reasons.

Thanks.

And then a bit of philosophical question here.

Has anything changed with the foundries this cycle where you think they are willing to run utilization at much lower levels, say 85%, 80% on a normalized basis, and not, give market share away?

Or do you think that once demand starts to slow down , they might stop spending on expansion?

Has anything changed with the foundries this cycle versus previous

Well, I think probably the best place to get that answer is really to talk to the foundries.

I do think that with Samsung clearly signaling that they're increasing their investments in their LSI and foundry business, with global foundries being created and having access to capital and building a new fab in New York, you certainly have the potential for increased competition on the leading edge.

And I think that contributes to some level of upfront investment by some of the foundry companies that are going to compete for some of that leading edge.

How that actually manifests itself in terms of how much supply is available relative to demand, we'll just have to kind of see.

But, I think probably the best answer you could get would be to ask the foundries if they've changed their philosophy and all.

I think the level of spending we're seeing right now is more a function of we're in a new wave of logic chip integration into consumer products.

I think we're in a situation where a lot of the previous logic companies that had their own fabs are now moving most of their leading edge, if not all of their leading edge, to the foundries.

So, you're seeing it as a concentrated visible expenditure.

And so, I think those are the dominant trends relative to foundry.

Thank you.

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

Please go ahead.

Hi, thanks for taking my question.

Steve, I remember a few weeks ago you laid out a scenario where WFE's $31 billion to $32 billon, and at that time you said that your revenue could be [$3.5 billion] and earnings of $6.

Now, I understand there is some share gain associated with that, but it seems like your shipment guidance is already approaching that level.

Is that because you see [accelerating]share gain?

Or are we seeing upside to that, even those targets?

Can you help us out in terms of [reconciling] those numbers?

Well, that is why I said that if you look at the second half, run rate is looking like $30 billion to $32 billion.

And if you look at kind of what we're guiding for September, that output in revenue is closer to $30 billion.

And if the customers do take the deliveries that they're looking for in December, given that I said that it's currently looking like it's going to be higher, that's going to be closer to $32 billion.

And then when you see what kinds of shipments and revenues we can generate at that level, if that were to be sustainable, and that is a big if, but if that were to be sustainable and we had a four-quarter period of -- a rolling four-quarter at that level, then I think you would see our revenues be right on that model that we presented at SEMICON.

Great, that was very, very helpful.

Thanks for clarifying that.

And then just one quick question on the spare and server side.

I think historically, you guys talked about that being around 25% of our sales.

With the ramp on clean, [is this still roughly around] that range, or is it lower?

Or can you help us out on that.?

And is that additional growth we [are going to] expect in that area?

Yes.

That's a good question, and you're exactly right.

It is lower as a percent of our total revenues now.

And so, probably a better model is to think in terms of in an accelerating upturn with big systems growth, we're really talking about probably closer to what, 17%, 18%?

Yes, you're going to still be maybe low-end 18%, high-end in the low 20%s.

And it does vary quarter-to-quarter based on customer order of patterns and things.

So, maybe a notch down fundamentally because the clean business is less spares-intensive than the etch business.

And as that becomes an increasing part of our revenue stream, you're going to see that percentage moderate a little bit.

Thank you.

Our next question is from the line of [John Gadishar] with [Olentangy] Research.

Please go ahead.

Thanks for taking my question.

First, is that how much of your market share will be impacted in 2011 [if there is] moderation in shipments and the challenges that [the industry] will face in terms of technology or [conversion]?

When you look at the market share gains that we're forecasting for 2010, the vast majority that's locked in relative to the technology nodes that are really at the heart of the demand in 2010.

So that means it's a 4-X leading edge in logic foundry.

It's 4-X, 5-X in D ram and it's primarily 3-X in NAND, which is where most of the purchases of technology conversions have gone.

And so, if for some reason things were to moderate on a going-forward basis relative to the ramp for the 3-X and 2-X nodes, I don't think it -- I mean market share is what you get as a percentage of what they spend.

And so, I don't think that if they slow down the total rate of spending that they're going to slow down the speed at which they attempt to put into production the next generation technology.

We always see, in fact, that acceleration of movement to the next technology in downturns because that's where lower costs are and higher performance.

And that's what they use to try to stimulate more demand from their customers.

Just as a follow-up, if you have to take a snapshot of the next four quarters, how will you characterize the wafer starts environment out there?

My crystal ball doesn't go out four quarters relative to wafer starts.

I think that if we look at the next couple quarters relative to what our customers think the demand environment is going to be, and we look at the shipment environment, I think we're looking at a situation where the wafer starts are probably going to go up maybe 50,000, maybe 100,000 in D ram.

And I think in NAND, you're probably going to get wafer starts that go up, let's see, maybe 100,000 in NAND.

So, it's about 100,000 increase in wafer starts per month in both NAND and D ram.

Thank you.

Our next question is from the line of Timothy Arcuri with Citi.

Please go ahead.

Hi Steve, a couple things.

Just sort on the point of how quickly things can change, there was a big back end [maybe it was O-Sat] that made some comments earlier today that they've seen a pretty broad fade in their business the last couple weeks.

So, I'm sort of wondering whether you've heard any sort of incremental change in tone out of specifically your foundry customers during the very recent, -- like last week or two?

I haven't talked to any of them since SEMICON, which was, what, a week-and-a-half ago or something, two weeks ago.

And I mean we talked extensively with a lot of different customers about where is the demand coming from?

What do they think about the sustainability?

Why do think it's sustainable?

What do they think the risks are, et cetera, et cetera.

And, I mean clearly, there is a lot of confidence that some of the fundamental drivers as to why the demand should be sustainable, at least over the next two to four quarters, is behind why they're wanting to bring this level of equipment in and somewhat higher over the next quarter or so.

But, when you start getting out beyond two to four quarters, there are so many wildcards, which they'll be the first to acknowledge.

And so, they have not talked to me about any near-term changes that would be different than what they talked about at SEMICON.

Okay, got that.

And then just second thing from me, Steve.

If I look at your gross margin guidance, it's about flat on a fairly big, up revenue quarter.

And if you look at the incremental margin, it's about 40% margin on a drop-through basis.

Is that all customer mix?

I know you were talking about some large customers taking some shipments.

Is that all mix or is there a very big [slug] cleans business also shipping in that quarter?

Tim, this is Ernie.

It's actually a customer mix story predominantly.

There is certainly some product mix that plays a role in that.

But the big story is customer mix, as Steve alluded to earlier.

You have significant customers who would represent $40 million or $50 million, as much as $70 million worth of shipments in a quarter.

And that can have an impact on the overall margin performance if there are significant differences of margins among customers.

Operator, we have time for two more questions.

Our next question is from the line of Gary Hsueh with Oppenheimer & Co.

.

Please go ahead,

Hi, thanks for taking my question here.

I think most of my questions have been asked.

But Steve, just to kind of circle back, I think I've heard this question asked multiple times, but let me just ask and be clear here.

But, it looks like what you're saying is in the second half, the Memory [bucket] in terms of shipments is starting to fade.

But given market share gains and given other sort of customers' foundry logic, logic [IDM], that you could can that back fill and maintain sort of an $800 million per quarter run rate for shipments.

Is that correct?

And exactly which bucket in the December quarter do you think it starts to fill in more meaningfully if Memory does start to fade even more in December versus September?

And I have got a quick follow-up for Ernie.

Well, I think you probably know me well enough that one part of my answer is going to be one quarter does not constitute a trend.

So, therefore, I don't look at the fact that the Memory request for shipment in December, which exists today, is necessarily going to be what actually ships when we get around to December and that's one.

Two, even if Memory were to decline on a relative basis because the absolute basis is rising, there is still a lot of Memory shipments going on.

And I really think that when you look out at what people are talking about for the first half of 2011, and I don't necessarily believe -- I don't necessarily put a lot of weight on what they're saying, and I think that the Memory guys believe that if the PC refresh and server infrastructure upgrade cycle is starting, I think if Memory happens to be down in December, it will not stay that way going forward into March and June if, in fact, the refresh investment cycle is occurring.

Okay, Steve, just to follow that up.

I thought I'd heard you say that the shipment forecast in September and your visibility in December suggests that the memory chip makers were adding roughly 100,000 wafer starts per month in terms of capacity.

And your visibility right now for 2011 suggests that for the full year 2011, those same memory chip makers shipments are adding roughly 100,000 wafer starts per month in terms of capacity for the full year.

So, doesn't that suggest that the trajectory is down and that the memory shipment numbers should start to fade as we get into 2011?

No, I apologize if I confused you.

What I was saying was, in the second half of 2010 in terms of new capacity, there's 100,000 wafer starts being added in D ram of new capacity, 100,000 wafer starts of new capacity being added in NAND.

There is also spending going on for continued technology conversion, but I didn't comment at all about what I thought the capacity additions would be for 2011.

Or at least I didn't think I did, and wasn't intending to.

It was answering a question about for the second half of this year, how much wafer start capacity increases were going to occur.

Does that clear it up, what we were talking about?

We have time for one more question.

It's from the line of Ben Pang with Caris & Company.

Please go ahead.

Thanks for taking my question, I hope I don't confuse it more.

You mentioned 150,000, I think, wafer starts per month of NAND capacity that's going to be added this full year, right?

I said 150,000 to 160,000, yes.

What is the etch market related to that number?

A lot.

Can you can give a dollar value on that?

I probably could, but I couldn't give you right now off the top of my head.

Okay.

So, I'll have somebody follow up with you and kind of give you an idea what we're looking at in terms of etch, specifically.

Because it will depend on if it's new wafer start capacity, it's one answer.

If it's a technology conversion, it's another answer.

So we'll break that down for you.

Okay, then one quick follow-up.

You mentioned that, I guess, if you had looked backwards, your shipment outlook is up 35% from a couple of months backwards, right?

On the third quarter?

Or the calendar 3Q?

Is that correct?

Yes, what I was saying was that if you take this point in time in the last quarter, the September quarter changed significantly as the June quarter played out .

And so, therefore, here we sit in September quarter, and if things hold true to form, what actually is going to occur in December could change quite dramatically.

That has been the trend going back to a year ago where,when we were in the September quarter talking about September guidance, the December quarter changed dramatically by the time we got there.

The March quarter changed dramatically by the time we got there in 2010.

Same thing for the June quarter, et cetera.

So, when we're in this rising environment, the next quarter out is pretty unpredictable.

And so, we'll just have to see how December actually plays out, because things could change pretty significantly between now and when we have this conversation

All right, thank you.

That does conclude our question-and-answer session.

Management, please continue with any closing remarks you may have.

Thank you for joining our call today.

The audio replay will be available on our website later this afternoon.

That concludes our call.

All right, thank you.

Ladies and gentlemen, this does conclude the Lam Research Corporation June 2010 quarterly results conference call.

You may now disconnect.

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Have a pleasant rest of your day.