科林研發 (LRCX) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the Lam Research Corporation March 2012 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'd like to turn the conference over to Ms.

Shanye Hudson, Director of Investor Relations.

Please go ahead.

Thank you, Camille.

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

With me today are Martin Anstice, President and Chief Executive Officer; and Ernie Maddock, Senior Vice President and Chief Financial Officer.

Shortly, Ernie will discuss financial results for the March 2012 quarter.

Martin will then share Lam's business outlook for the June 2012 quarter, before opening up the call for Q&A.

The press release detailing our financial results was distributed over the wire services shortly after 1.00 PM this afternoon, and is also available on our website at LamResearch.com.

Today's call contains certain forward-looking statements, including those related to our expectations for the global macroeconomic environment of market size, wafer fab equipment spending, market share changes, consumer demand, customer spending and behavior, and the factors that will influence those expectations, as well as our spending projections, our investment plans, our business strategies, our aspirations of the benefits of our planned merger with Novellus, our intentions for research and development activities, our contemplated tax rate, and our forecast of market share, shipments, revenues, expenses, margins, operating profit, share repurchase activities, earnings per share, and cash generation on both a GAAP and a non-GAAP basis, 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 those factors can be found in the slide package accompanying this conference call, and on our most recent Form 10-K, filed with the Securities and Exchange Commission.

All forward-looking statements are based on current information, and the Company assumes no obligation to update any of them.

This call is scheduled to last until 3.00 PM, and we ask that you please limit questions to one per firm, with a very brief follow-up.

With that, I'll turn the call over to you, Ernie.

Thank you, Shanye, and good afternoon, everyone.

Thanks for joining the call.

The March quarter represented a solid start to the calendar year, as Lam's shipments, revenue, gross margin, operating margin, and EPS results met or exceeded the midpoints of our guidance ranges.

Relative to the specifics, shipments for the quarter were approximately $713 million, up 27% from the December quarter, and indicative of improving customer demand across all product lines, and most notably, in the foundry space.

The breakdown by application and market segment was as follows; applications for the 4x technology node and below represented 91% of overall system shipments, and the memory segment accounted for 40% of all system shipments, with NAND at 30%, and DRAM at 10%.

Foundry accounted for 53% of overall system shipments, while logic and other constituted the balance of 7%.

March quarter revenues came in at the high end of our guidance range at $659 million, up 13% over the prior quarter.

Non-GAAP gross margin was at 40.9%, up sequentially from 40.1%, and is consistent with our expectations of customer concentration and mix, offsetting improvements in factory utilization from the increased business levels.

As planned, non-GAAP operating expenses for the quarter increased to approximately $197 million, versus $180 million in the December quarter.

More than 70% of this incremental spend was focused on next generation R&D, and the customer-facing activities that surround and support it.

The balance of the operating expense change was attributable to higher variable compensation expenses associated with higher profit levels, as well as expenses related to market appreciation of deferred compensation plan assets.

Lam attempts to mitigate overall exposure relative to market fluctuations impacting these plans, and this quarter is no exception.

The increased operating expenses related to these plans were substantively offset by increased income in other income and expense.

As we indicated on our last call, we remain committed to keeping Lam's stand-alone operating expenses at or below $200 million per quarter.

Non-GAAP operating income was $73 million, versus $54 million in the December quarter, and resulted in a non-GAAP operating margin of 11.1%, slightly better than the midpoint of our guidance range.

Our non-GAAP tax rate for the March quarter was 20.4% compared to 21.8% in the prior quarter.

On a Lam standalone basis, we estimate the June quarter tax rate to be in the mid-teens bringing our fiscal year non-GAAP tax rate to around 20%.

This rate would be favorably impacted by approximately 2%, should Congress extend the federal R&D tax credit prior to the end of our fiscal year.

Based on a share count of approximately 121 million shares, March quarter non-GAAP earnings per share were $0.50, exceeding midpoint of our guidance range for the quarter by $0.06.

Our EPS results were impacted primarily by the favorable operating results.

On a GAAP basis, our earnings per share were $0.38.

The GAAP results this quarter include both acquisition and integration costs associated with the Novellus transaction, as well as costs resulting from a customer bankruptcy filing.

As has been our practice, the amortization of convertible note discounts are also included.

A complete reconciliation of our GAAP to non-GAAP results can be found in today's press release.

Our balance sheet remains strong with cash and short-term investments, including restricted cash and investments of $2.6 billion, versus $2.4 billion last quarter.

During the quarter, we settled a structured share repurchase agreement, and received $79 million in cash, and we also delivered cash from operations of $146 million in the March quarter, versus $169 million in the December quarter.

DSO for the quarter were 65 days, down from 72 days in the prior quarter, and inventory turns of 4.2 represented an improvement from the prior quarter-end performance of 3.7 turns.

Our deferred revenue this quarter grew by $54 million to end March at $246 million, excluding approximately $19 million in shipments to Japanese customers that will revenue in future quarters.

Non-cash expenses include, among other items, $16 million for equity compensation, and $23 million for depreciation and amortization.

Capital expenditures were $28 million, and we exited the quarter with approximately 3,900 regular full-time employees.

In closing, and similar to the December quarter, our ability to buy back shares this quarter was very limited, due to restrictions relating to the pending Novellus transaction.

We repurchased approximately 300,000 shares of our common stock for about $12.5 million, and look forward to resuming more substantive share repurchases shortly after the May 10 Novellus shareholder vote.

With that, I'll now turn it over to Martin for his perspective on the quarter.

Thank you, Ernie.

As we just articulated, Lam successfully delivered on its financial commitments for the March quarter.

We achieved this performance while also executing key milestones towards our most important strategic objectives.

Specifically, this includes significant momentum on the integration planning with Novellus, and progress demonstrating results from continued investments designed to extend our technical differentiation and advance longer term growth.

This solid performance and execution, we believe, illustrate a high level of focus throughout the organization, and I would like to recognize and thank employees, and the Management Teams of both Companies for this extraordinary achievement, and for laying the foundation for what we believe will be a very important year for the combined Company.

I will share more with you on each of these subjects shortly, but first would like to refresh our views on the industry environments.

Our view of wafer fabrication equipment spending has not materially changed since our last earnings call.

We still expect spending within a range of $30 billion to $32 billion in 2012, and based on the plans our customers are communicating to us today, we would look for spending to be relatively balanced between the first and second half of the calendar year, with less customer concentration beyond the June quarter.

Demand for leading edge logic capacity continues to strengthen, as IDMs and fabless companies compete to supply power efficient and high performance devices for the mobile market.

For the foundries, given the strong demand environments, we now project they will add between 85,000 and 90,000 new wafer starts per month of 32-28-nanometer capacity this year, which would translate into ending 2012 with capacity at this node of 220,000 to 240,000 wafer starts per month.

Using 65-nanometer as the baseline, foundries will have added between 250,000 and 300,000 wafer starts per month of capacity throughout the life cycle of that node, associated with IDMs transitioning more of their leading edge capacity to foundries since the 45-nanometer node, and the broader demand profile for consumer devices, we would expect total lifetime capacity added for the 28-nanometer node will exceed the historical range.

Turning to the DRAM segments, our view of the demand drivers has not changed considerably.

We still anticipate muted PC unit growth, reflecting the hard disk drive shortages, a cautious corporate refresh cycle, and subdued content growth.

Consistent with our prior commentary, DRAM WFE spending will be comprised almost entirely from capacity conversions in 2012.

Considering this, we would expect that bit growth for 2012 is in the lower 30% range, versus our prior view of the mid-to-upper 30% range.

Needless to say, should PC volumes expand later in the year, supply shortages will likely lead to DRAM price increases, and manufacturers will typically begin adding new capacity at that time.

This could occur towards the end of the year.

For NAND, we continue to forecast bit growth in the range of 65% in 2012, with a higher proportion of capacity conversions versus new capacity additions relative to 2011.

As a result, we are still projecting a modest decline in NAND's WFE spend year over year, which reflects our customers' plans to maintain a healthy balance of supply and demand.

Combined, this supports a relatively stable total WFE spending outlook.

This is the result of several factors, including the broadening of semiconductor demand drivers, consolidation among the customer base, cycle time improvements from the equipment companies, and the prudent management of spending plans by the customer to align with the demand outlook.

As a result, cycles are potentially shaped less by industry induced supply-demand imbalances, and more by changes in the macroeconomic environments and consumer confidence.

At this point the current economic outlook for 2013 suggests a more likely slightly positive macro environment relative to 2012, supporting the potential for stability and growth in our markets.

Given that Lam's market share is relatively balanced across each of the market segments, with one exception, our continued execution would have us stand to benefit, should the upside scenarios play out.

Collectively, this is positive news; however, while the top down view of WFE spending is characterized by relative stability, there's quite a bit of change going on beneath the surface.

For our customers, the mounting cost challenges we've described previously are driven, in large part, by the levels of device complexity required to deliver lower power, longer battery life, and an increased functionality demanded by the consumer markets.

For equipment suppliers, these trends present both opportunities and challenges, whereby success is predicated on the ability to partner with customers to quickly solve these increasingly complex technical and productivity challenges.

Customer trust and partnership is ever more important.

As we have talked about for most of the past year, now is a critical time for us to leverage our strength in developing solutions that address our customers' most critical technical challenges.

We continue to see opportunities in each of our core product areas that should position us to execute against our three to five-year market share objectives of a 3 to 5 percentage point gain in etch, and 5 to 10 percentage point gain in single wafer clean.

In etch, we have held the leading position in the conductor space for more than a decade, and believe we are well positioned for future opportunities, with the expansion of patterning techniques, and the transition to FinFET structures.

In each of these areas, the ability to tightly control feature dimensions and depth uniformity across the wafer is crucial for device performance, and we believe Lam is currently the market leader for critical patterning, gates, and isolation applications across both memory and foundry segments.

In dielectric etch, we are focused on strengthening our product and process capabilities to expand share over the next several years.

Accordingly, in memory we continue to focus on the next generation of high aspect ratio structures.

We're leveraging our demonstrated strengths to position the Company for growth opportunities, as NAND's manufacturers plan to transition to 3D structures.

In foundry logic, we are targeting growth in back-end-of -line interconnect applications by advancing our capabilities to deliver solutions for both performance and productivity.

In single wafer clean, our ability to tightly control the cleaning process has lead to technical differentiation in a few key application areas.

As a result, we currently hold leading positions in the areas of wafer backside and bevel cleaning, and the back-end-of-line.

We're developing capabilities necessary to expand our share in the front-end-of-line by translating some of our process tuning capabilities in etch and applying them to clean processing.

We're also focused on enhancing the productivity of our clean systems to more effectively compete for a broader range of applications, and expect it to deliver differentiated process results to support accelerated market share momentum moving through the sub-20-nanometer node.

Our product strategy remains focused on delivering best-of-breed technology and productivity solutions to our customers.

This objective is core to our market share expansion strategy.

As we pursue these opportunities, we have communicated to you our commitment to keeping quarterly operating expenses below $200 million for this calendar year.

We are pleased to have delivered that in the March quarter, and are reiterating that commitment relative to Lam's standalone business as we move forward.

I'll share with you, now, our outlook for the June quarter.

Shipments of $725 million plus or minus $25 million, revenues of $710 million plus or minus $20 million, gross margin at 41.5% plus or minus 1%, operating profit at 13.5% plus or minus 1%, and earnings per share of $0.67 plus or minus $0.05.

In anticipation of closing the transaction with Novellus, I would like to clearly state that the guidance I just provided represents projections for Lam as a stand-alone Company.

We expect to present our view for the combined Company on our July conference call.

Prior to opening this call for Q&A, I'll provide a brief update on the status of the Novellus acquisition.

As you may have read in our proxy statement, we have scheduled our special shareholder meeting for May 10, and thus far, we have received regulatory approvals from all required countries, with the exception of China.

We continue to expect that the acquisition will close within the June quarter.

At this point, integration planning is well underway and is progressing as planned.

We've established an integration team comprised with executives and senior level employees from both companies, and supplement that, where valuable, with experienced external resources.

We have completed an assessment of each company's culture, organization structures, and business processes in detail, and determined there are more similarities than differences.

We have made and communicated decisions relative to these subjects through both companies already.

We have defined a set of objectives around prioritized areas of focus to begin immediately on day 1 following transaction closure, and as we've discussed in the past, ensuring this transaction is seamless for our customers remains a critical priority.

We have validated our opportunity to achieve our target of $100 million in annualized cost synergies exiting 2013, which we plan to commence at some level immediately on closing, and accelerate over the six-quarter period.

Through these activities, it is fair to say we are now more confident in the strategic rationale of this transaction, and the value proposition we believe it brings our customers and shareholders.

Given the expected timing for deal closure, and our immediate focus on both integration and our customers, we have decided to hold our 2012 analyst events in the November time frame, rather than during the SEMICON West conference this year.

This move will give us the opportunity to present to you a more comprehensive view of the combined Company, and our future growth plans.

We are excited about the opportunities that this transaction presents for the combined Company, and we look forward to keeping you updated over the second half of the calendar year on our progress.

I would like to express once more my tremendous satisfaction for the Company's accomplishments in the March quarter, a period which included a leadership transition, the start of significant integration planning for the single largest transaction in the Company's history, and an ever-challenging industry environment.

Our performance illustrates the strength of both our employee base and Leadership Team, which are obviously core to our success in the years to come.

With that, Ernie and I will open the call for questions.

Thank you.

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

(Operator Instructions)

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

Please go ahead.

Yes, hi.

Thanks for taking my question.

Martin, a couple of questions.

Firstly, on what's happening in terms of the June quarter shipment outlook.

It seems like relative to your commentary a quarter ago, perhaps the June shipments are a little bit lower than I would have expected.

Could you talk a little bit about what pull-ins and push-outs you might have seen by device segments in June, and specifically comment whether (inaudible) demand is temporarily affected by potential bottlenecks in lithography, or even grants to customers?

I'm not quite sure I get the second part of your question, but certainly on the first part, as is always the case, the subtleties of the timing of requests by our customers, frankly, from one month to another, and one week to another, or one day to another is such that it's a little bit unhelpful sometimes to try and extract meaningful conclusions, even from quarterly progressions.

So I don't think there's a fundamental message for us to be communicating today relative to shipments momentum in the guidance that we've given for June.

I do think that the shipments for Lam, certainly as we're modeling that against the wafer fab outlook that we've communicated, we're expecting that shipments for Lam are approximately kind of equal, first half and second half, and at a segment level, that would probably translate for us to have foundry logic first half maybe in the Mid 50s, so 55% to 45% split, approximately, and memory may be slightly in the opposite direction, so 47% to 48% range for first half, 52% to 53% second half.

So that's about the best that I can probably give you on the shipments at this time.

And a quick follow-up.

You said that your 32-nanometer, 28-nanometer capacity addition forecast by the foundries has increased to 85 to 90 relative to three months ago.

What were you thinking that they would add three months ago, and what exactly do you mean by modest decline in NAND CapEx?

Could you quantify that?

Thanks.

Yes, I think it will probably be about 10,000 wafer starts, is the estimate I give you an answer to the foundry outlook at this point, compared to three months ago, and I missed the second part, Satya, sorry.

What was that?

Can you quantify what you mean by modest decline in NAND CapEx?

Sure.

Why don't we pick up the next question, and I'll look up that exact number for you, and include it in the answer to the next question.

Thank you.

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

Please go ahead.

Great guys.

Thank you so much for taking my question.

Martin, you guys at Lam have spoiled us over the years with tremendous incremental operating leverage.

You've always had the best in the industry, and there is clearly operating leverage in the model, but not at the same rate that we've seen before.

Is that strictly, could we expect that kind of operating leverage, that same incremental drop-through to return as the customer base broadens out, or are there other factors at work?

Thank you.

So the answer to Satya's question is down about $1 million, so year over year, that's the modest statement.

Relative to leverage, Jim, I think that there's clearly two things going on today.

There's the conversation about leverage and the conversation about customer concentration, and we work really hard to deliver the same variability and cost structure today that we did last year, 2 years ago, 5 years ago, 10 years ago.

The outsourcing initiative is still alive and well in our Company, and to illustrate that point, when I look at the shipments momentum in the Company, March over December, we had a pretty sizeable increase in the shipments percentage of the Company, and yet the underlying gross spending in the Company associated with factory and fields increased only by a single digit percentage, so there's a very healthy statement of leverage in the kind of transactional based cost structure of the Company.

What is challenging for us, and perhaps even more challenging for us in the midst of our peer equipment companies, because of our relative lack of position in a certain segment, is customer concentration.

And we certainly were sitting here three months ago speaking to you about the fact that customer concentration was extraordinarily high in the March quarter.

The outlook at that time had us conclude that, by the time we got to June, that would be much more normalized, and we would expect some pick-up.

And as I think everybody on the call knows that since that time, the public announcements that have been made by customers have actually kind of stretched the concentration into the June quarter, and that's why the message is today what it is.

I feel pretty good about the margin up-tick for the Company.

I think when you look at the sequential performance, March to June, that we've guided, the absolute dollars of revenue, that pick-up is reasonable.

But the headline, still, for the first half is customer concentration is still meaningfully above the average of last year, and when we look at the full year, I don't know that I would conclude the full calendar year gets close to the participation levels, broadly, that we saw in 2011, meaning, in spite of the fact that things get better, I don't think they get back to the same level of participation that we saw in 2011, and maybe just to frame that, our assumption on wafer fabrication equipment spending.

So I kind of talked about an outlook of the year of $30 million to $32 million.

We're assuming the top three guys are in the $18 billion to $20 billion range combined.

Thank you so much.

Thank you.

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

Thank you.

Hi, Martin and Ernie.

Just a question, Martin, on the shipments to memory customers in the second half, I think you said, being about 55% of the total.

Is that kind of based on what the NAND customers are communicating to you now, and do you think there could be upside to that, based on, perhaps, Windows 8, and maybe Ultra Book releases in the second half of the year?

And I had a follow-up question, thanks.

Just to be sure that you interpreted the numbers I stated a little earlier correctly, and you might well have done so, I apologize here.

But I was saying, when I gave you some numbers on first half, second half memory that we were thinking about the 47% to 48% level for memory first half, and second half, 52% to 53% range.

And clearly, the outlook for the Company is based on the complete set of investments, DRAM and NAND when we look at the memory segments.

Clearly, DRAM is all about conversion and upgrades, and there's very little incremental capacity this year.

Certainly as we looked at plans today, 20,000 wafer starts of addition in DRAM would probably be on the optimistic side in outlook.

So clearly, when it comes to capacity adds, we're making an assumption today of about 130,000 wafer starts of additions, a decent amount of upgrades, and in terms of upside, I would say there are some obvious moving parts.

One of them is Ultra Books, and there appears to be, as best I can tell, some pretty helpful AFP trajectories that might be timed well to be a catalyst for Ultra Book demand around back-to-school season.

So I think we're sitting in the 800 to 900 range and maybe heading down to 800 or 700, is a health catalyst.

So there's plenty of room, clearly, for Ultra Books or SSD broadly, as a percentage of mobile devices, to gain momentum.

But the price point is maybe still not quite where it needs to be, so we're assuming you have to be in kind of the $100 range to be a catalyst against the hard disc and solid state drives, and we're probably at about $140 to $110, depending on whether you take a commercial view of configurations versus the consumer.

I think there is some upside in DRAM, but it's kind of too early to tell, frankly, and for me, feels much more about exactly what plays out second half in the hard disc space, how that plays out and impacts content, because it appears, as densities in hard discs have contracted to manage the supply issues, that it has had a content consequence on DRAM as well, and I think there's some, perhaps it can only get better, maybe that's a nice summary there.

Okay, and just a quick follow-up question.

Does the June shipment guidance include some customer push-outs or yield issues at the 28-nanometer node, and is that something that gives you some visibility in the second half of the year, once customers fix these yield issues?

Thanks.

It's always a little hard to tell frankly, Stephen, because the customers are motivated not to make yield-specific issues public, as anybody.

And so what we're communicating to you today is the full set of statements of demand from customers for whatever purpose, either getting ahead of capacity needs or executing timing.

I would say their motivations are, today, very much to add when they need it.

Thank you, Martin.

Thank you.

Our next question is from the line of Vishal Shah with Deutsche Bank.

Please go ahead.

Yes, hi.

Thanks for taking my question.

Martin, can you talk about your expectations for etch as a percentage of the overall WFE spending this year, as you think about some of the changing customer spending patterns?

And also, how do you expect your performance to compare versus last year, especially now that the larger customers are talking about spending less on equipment this year?

Thank you.

Yes, I think to the first part of that question, the message today is very similar to the message that we communicated in the last earnings call.

We do expect this to be a better year sequentially than last year around the proportion of wafer fabs that is assigned to etch.

Last year it was about a 12% year, and we're assuming about 13% this year, and that's a by-product of a bunch of things that we talked about previously.

So that, I think, in relative terms is positive for the Company.

To your other point, there are some customer mix dynamics that I think are kind of net positive for us this year, and I would say a point or so of momentum is certainly not unrealistic to assume at this point around shipments market share, or related to that.

And I think, secondarily, there are some emerging trends with many unanswered questions around, for example, which presents, perhaps not in this calendar year, but in the future calendar year some opportunities for us.

Thank you.

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

Muse with Barclays Capital.

Please go ahead.

Yes, good afternoon.

Thank you for taking my question.

I guess first question, Martin.

I'm curious on your thoughts on the breadth of foundry spending today, and what you expect into the second half of calendar '12.

And I guess the context of the question is Qualcomm post-closed tonight talking about shortages that they expect through the third quarter of the calendar year at 28-nanometer, not due to yield, but due to capacity shortage.

So curious what kind of impact that kind of comment is having on the breadth, and I guess your change in what shipments have looked like for foundry in the second half, versus I guess one month, two months, three months ago.

Yes, I think if your breadth question is a question related to participation in the community of guys that could be adding capacity, I think it's a very broad level of investment today.

And as I said a few moments ago, we're assuming a 55% to 56% first half, a 45% to 44% second half in terms of spending, and it's always extremely difficult, quite frankly, to separate capacity needs from yield needs, because they are kind of one of the same thing.

But we are assuming, for the calendar year, about 125,000 wafer starts of new capacity coming in, and a big part of that, obviously is the 28s, and we're assuming that there's a pretty healthy level of conversion by customers, maybe up to the 40,000 to 50,000 wafer start level, so that's kind of the outlook we have right now for foundry.

Okay, very helpful.

And as my follow-up, you talked about the May 10 vote, and I guess curious, how should we think about the timing of when you can get back into the market and repurchase, start repurchasing shares?

How does that fit in with the vote?

CJ, this is Ernie.

Provided nothing unusual happens subsequent to the vote, and by unusual, I mean that if we go into the vote without China approval, and it isn't obtained between the vote and two days after the vote, we expect to be in the market on Monday, May 14, I believe it is.

If something unusual happens, ie China approves after the vote, it would delay us by a day or two.

But we're talking a matter of days after the vote that we would be in the market.

Great.

Thanks, Ernie.

Thank you.

Our next question is from the line of Chris Blansett with JP Morgan.

Please go ahead.

Thanks, gentlemen.

Martin, I wanted to question you about the cost savings you see as you integrate the two companies.

You've had a lot of time, now, to really continue to work on the planning on that.

What are your thoughts on confidence that the $100 million number is still valid, or if there's actually more savings you're discovering.

My confidence is it's pretty solid, frankly, and that's a very strong statement in the context of the reality, and the reality is, we're not one Company yet.

So we still have some things to learn, despite the fact that we have integration teams working together.

We're certainly substantially working through concepts into very specific strategies and very detailed plans.

That process will conclude in the next month or so, and certainly the areas of cost reduction that we have identified and previously communicated still appear to be valid.

And until we communicate something different, then the presumption is the $100 million that we have stated is the plan and the commitment, and one of confidence by the Company.

And then the second question I had is related to your commentary about a very balanced year.

It seems like you may be a little more positive about the second half than maybe you were on the prior earnings call.

I wanted to get your feel.

Has your confidence in a balanced year improved since that time frame, just to get a relative comparison?

I think in relative terms it's actually quite similar.

I don't think there's, in the full year, a big story.

But the big customer concentration story that we're communicating today is the fact that June didn't quite play out in the way that we anticipated three months ago, due to the announcements that were in the public domain.

They kind of prolonged the concentration message, and I think for the calendar year, the outlook today is more or less the same, in terms of mix of participating customers, as it was three months ago.

Thank you very much.

Thank you.

Our next question is from the line of Terence Whalen with Citi.

Please go ahead.

Good afternoon.

Thanks for taking the question.

The first question is on longer-term discussions with your foundry customers.

Specifically, how are your conversations with foundry customers around 20-nanometer evolving, and what's your expectation for the initial ramping of foundry 20-nanometer?

Thank you.

Relative to the conversations, I'm not sure the conversations that we're having are that much different than the conversations that you're probably having reading public announcements.

I think certainly, the big guys are communicating emerging demand for them to kind of begin to install that capacity, and kind of tape-outs are certainly imminent.

The equipment selection decisions are right on us.

They are on us, some of them are behind us and some are ahead of us, so there's clearly an expectation that there is some 20-nanometer qualification activities towards the back of the calendar year, and I would expect production to occur in the '13 time frame.

But if there's a statement of momentum, my instinct is it's a fairly positive one at this point.

Okay, great.

That's helpful, and then my follow-up question is around single wafer clean.

Single wafer clean, in recent market share data from Gartner, was actually one of the fastest growing areas of equipment.

I wanted to understand what you feel like the dynamics are regarding competition in single wafer clean, and your margin of that business as well.

Thank you.

Well, one of the sad realities is there's almost no segment, or there is no segment in this industry which doesn't have a tough competitive dynamic.

So we have tough competitors, period.

You know, the rationale, obviously, for us having a play in clean is all about an adjacent strategy.

The marketplace is considerably more fragmented than the etch marketplace.

The competitive dynamic is tough.

The growth, as you quite rightly pointed out in your question, is occurring at a pace that is faster than overall WFE growth, and that reflects, to a large extent, the transitions that have been occurring, now, for the last two or three years, particularly at the front end from batch to single wafer processing.

That is a trend that is kind of reaching the end of its most obvious transition.

So I think maybe in the '13 or '14 timeline, we'll see a single wafer clean segment that is much more in tune with the pace of growth as the rest of wafer fab.

As I articulated in my prepared comments, I feel like we've got a very competitive product portfolio, and we have meaningful strength and presence in the back side, and bevel, and back end of line clean applications.

The area of focus for us, which unfortunately coincides with significant amounts of this batch-to-single wafer transition is we are addressing some gaps in terms of product capability that I think in the 20-nanometer or sub 20-nanometer nodes spending situations will give us a lot more upside.

But front end of line is clearly not the competitive strength for our Company today that it needs to be, and it isn't the competitive strength that our back end of line segment in clean is.

Okay, thank you.

Appreciate the insight.

Thank you, and our next question is from the line of Edwin Mok with Needham & Company.

Hi.

Thanks for taking my questions.

So just to be very clear in terms of your guidance, between foundry, logic, DRAM, and NAND, how do you see those customers.

Do you see, at least, sequentially, the direction that they are going to change in the coming quarter?

Well, relative to our shipments guidance, we didn't actually provide segmentation per se, but slightly more than 50% of the shipments guidance is in the foundry space.

NAND is approximately at the 25% level, and DRAM is approximately at the 20% level.

So that's kind of the segment story as it's reflected in the guidance today.

And I think you're generally aware of kind of the recent inflection points and progressions, and clearly the foundry is positive.

Clearly we've articulated a little bit more of a cautious outlook, in terms of bit growth in DRAM today than we did three months ago.

So those are the two things I would call out in terms of changes.

Okay, great.

And now, a follow-up question on gross margins.

You articulated that it's mostly due to just high-level customer concentration basically continuing through the June quarter.

I was wondering, is that a way for you to kind of think about, as we get into second half, maybe the concentration will be abated.

How do you see your gross margin trend, assuming that you're, let's say, running the same kind of revenue and shipment level for the Company?

I can see it trending up, does that help you?

There's, clearly, I try to answer a question like that, it's always a by-product of specific mix in products and in customers, and one that is fraught with risk and complexity, us speaking to.

But the obvious headline, I hope, for everybody is the single biggest influence over today's margins relative to those of, let's say, last year, at similar levels of output, is the customer concentration.

So if I were you attempting model an answer to that question, I'd be looking at the recent past, comparing it today, and extracting that the recent past is not an unreasonable data point for the second half of the year.

Now, I don't think calendar '12 overcomes the customer concentration that exists in the first half.

I think we'll still have customer concentration in calendar '12 that's greater than '11, and that shouldn't be a surprise to everybody.

I think we all know what's happened in that space in the industry, and it's the reality that every equipment Company is now wrestling with.

Great.

That's helpful, thank you.

Thank you.

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

Please go ahead.

Thank you.

Martin, just going back to memory in the second half of the year, are your thoughts still the same as it was last quarter, where if the tipping point is above the bit growth assumptions that you have for DRAM in 30%, or the mid-30% range, and for NAND at 65%, if it's above that, that's when they will start looking at adding capacity, or do you need more significant differences between those bit growth rates for new capacity additions?

I think, I mean, I think, technically, it's the same answer that I gave last quarter, although the number is slightly different.

I think I answered very specifically the last time, anything above the 40% bit growth drives capacity.

I think today I'd say anything above 35% drives capacity.

One of the interesting dynamics that I think we're all sensitive to is, although we're looking at this thing called DRAM, and saying bit growth of the 30% to 35% range, if you kind of get underneath that to each of the segments, PC DRAM bit growth this year is probably only about 15%.

And then you look at service workstations, cell phones, and set-top boxes, each one of those has a bit growth expansion of more than 60, and the DRAM bit growth in tablets is above 100%, at least in terms of the modeling that we have.

And so it's not going to take that much, but something needs to give, clearly, and there's a mix of consumer dynamics with Ultra Books, and a broader notebook conversation.

There's tablets.

And there's a supply uncertainty that makes it difficult to predict.

But I would certainly say we would expect, based on what we know, that capacity additions occur on bit growth above about 35%.

Great.

That's helpful.

And maybe moving on to EUV, and the potential implications for Lam as a whole.

Have you seen any changes in terms of your customer base, in terms of qualify additional tool sets, or their changes in recipes, given the delays in EUV over, say, the last three or six months?

No, I think we have not seen material changes, because clearly, as we've spoken to, I think now, for most of the last year, the level of uncertainty that exists, not just in the area of EUV and the resulting patterning scheme decisions, but materials playing out, to 3D structures, and if you want to throw in a wafer size, throw in that as well, there's clearly a ton of uncertainty, and the customers are parallel processing a whole range of things, including trying to manage the risk.

But they don't understand everything they need to understand on the economics of EUV, compared and contrasted with patterning, and making sure they are prepared to deliver what their customers asking for on time.

So that hasn't fundamentally changed in the last few months, and frankly, I don't expect it to for the rest of this year.

I think that reality of uncertainty will be with us right until the end.

Great.

Thank you.

Thank you.

Our next question is from the line of Mark Heller with CLSA.

Thanks for taking my question.

Just had a question on, looks like, at least according to Gartner, that silicon etch share, there was some share loss there in 2011.

How much of that was due to customer mix, and how much of that can be reversed, do you think, in 2012, and will it be entirely due to mix, or will there be true share gains there?

Yes, we're obviously, as I think probably we've consistently messaged in the last 5 or maybe even 10 years, we're not a big fan of trying to explain someone else's presentation of market share data, because there's so much complexity in the assumptions.

But as it turns out, the basic headline, in relative terms, not necessarily on an absolute basis, but comes out of data quest this year is not that different from our own, and to answer your question very specifically, the majority of what shows up on that slide is a by-product of customer mix, and as pending customer mix changes, then the effect is immediate.

Okay, and what's your view of, looking to 2012, but beyond just customer mix, do you expect any share gains beyond just mix effects?

Yes.

I mean, I have said in the prior call that we've had a great run over a 10-year period, frankly, of kind of picking up healthy chunks of market share.

I think we're in a more modest year, and I still believe that the plans are record for the Company, targeting 3 to 5 percentage points of share gain in etch over three to five years is as valid today as I did the first time we talked about it.

So we're very focused as a by-product of the investments we're making in establishing competitive differentiation, in technology terms and productivity terms, and I do expect that we will gain some share in the transition from N to N plus 1.

Great.

Thank you.

Thank you.

Our next question is from the line of Krish Sankar with Bank of America Merrill Lynch.

Hi.

Thanks for taking my question.

I have two of them.

Martin, not to harp on the customer concentration point, but just wondering, if in the second half the memory guys do not come back to place orders, is it fair to assume the June customer concentration continues into the back half?

Well, if the customer mix in the back half of the year is the same as June, then probably yes is the answer to that.

That's not what we expect.

That's not what our customers are telling us.

That's not what they're telling you, as best I can tell, in terms of the public announcements.

But technically, if the mix from the second half of the year is the same as the mix that we see in June and the March quarter, then mathematically, it plays out in the same way.

Now, we're going to work our butt off dealing with cost structures, should that play out, to try and minimize the effect.

But frankly that's not what we're seeing today as an outlook.

Got it.

And then on the NAND side, I mean, it seems like you are going to leave many of the NAND guys and start moving to the 3D structures.

Have you guys quantified what is an incremental opportunity for you when you go into NAND for both the etch and the clean product?

Yes, we have a view that etch and clean both stand to benefit from the transition, and that's a process time commentary, as well as a process steps commentary for 3D devices.

And it's always incredibly difficult to try and speak to a consequence in terms of size of marketplace, and the first thing that we can do, which is maybe the only thing I can speak to today, is to communicate how we believe the amount of process time will modify going from planar to 3D structure in NAND, and we believe that in etch and in single wafer clean, process times could increase by 15% or so on the device integration schemes that we're working with customers on today.

Now, whether that translates itself into a 15% increase in the SAN, really, is a by-product of what happens to other segments and their process times, and it's a by-product of the pricing on the systems that are sold to satisfy those capacity needs.

But at a very basic process commentary, all things being equal, we think it's beneficial, and we think it's beneficial to the tune of about 15%.

Got it.

Thank you.

That's helpful.

Thank you.

Our next question is from the line of Jagadish Iyer with Piper Jaffrey.

Please go ahead.

Thanks for taking my question.

Two questions, Martin and Ernie.

First one, this morning ASML was very cautious on NAND spending for the remainder of 2012.

Clearly, the NAND makers have had weak pricing environment.

What gives you the conviction that NAND makers will spend in the second half, and if so, are you seeing spending by all of the four major NAND spenders?

I have a follow-up.

Yes, it's a little difficult to kind of compare and contrast the commentary from one Company or another, because we know our own assumptions on spending, and we don't necessarily know ASML's.

We're confident about our own because we dialogue with customers, and the segment bit growth for cell phones is pretty solid.

It's probably around 100%, and the tablet bit growth is probably about the 60% level, and you've got some nice momentum in solid state drives, as well, with probably about slightly in excess of 100% bit growth in that area, as well.

So I think there's meaningful catalysts on the demand side of the equation, and I think the technical answer to your question, is everybody participating, is yes, and whether they are participating more or less than their perfect plans or their plans, I mean, to be determined.

There's still a lot of unanswered questions ahead of us in terms of economics, but to your point, it's a pretty healthy pricing and cost environment today, and people are making money, and long may that continue.

The second question is you talked about 13 application wins, I think, in your last quarter commentary.

I just wanted to find out on the foundries side, how much of that would likely translate into some meaningful share gains this year, or is it likely going to be next year?

Yes, this year, as I said a few moments ago, this year is a modest year for us in terms of share expansion.

There's a lot of uncertainty in the marketplace, and a lot of questions getting answered towards back end of the year.

Market share headline for me is very simple.

We're still absolutely committed to the 3 to 5 objective for etch and the 5 to 10 objective for clean over the next three to five years, so the previously communicated objectives, we still believe are valid, and I think we get some modest traction on customer mix this year, but we're focused on getting differentiated more in the future than in the past, and gaining share.

Thank you.

I think we have time for two more questions.

Okay, our next question is from the line of Ben Pang with Caris & Company.

Please go ahead.

Two questions.

One, on the 20-nanometer foundry applications, you commented that there is still some design wins that you had.

What area, in terms of etch application, do you think you have the biggest opportunity in terms of incremental design wins?

I think by virtue of the market share strength of the Company the incremental opportunities are undoubtedly going to be in dielectric.

So we're still focused on gaining share in conductor, and we're blessed at some level by the weighting of conductor against dielectric biasing the natural strength of the Company, but back end of line dielectric is clearly the focus area for the Company in market share expansion, and the reality is, a meaningful proportion of 20-nanometer decisions have been made, at least in terms of their DTOR selections, and how much of those selections are ultimately influenceable in the transition into a fab is anyone's guess at this point.

And my follow-up is, we seem to be seeing some acceleration in the node adoption for the foundries, and you had earlier commented on your run rate for your OpEx.

Do you see any change beyond 2012 or Fiscal '13, either way, in terms of your R&D, to accommodate the fact that it looks like these foundries are more aggressive in transitioning technology nodes?

I think it's way too early to tell.

Okay.

What was the non-GAAP R&D for this quarter?

Non-GAAP R&D, I'll have to get back to you on that, Ben.

Okay, thank you very much.

Thank you.

Our final question is from the line of Weston Twigg with Pacific Crest Securities.

Please go ahead.

Hi.

Thanks for taking my question.

Just real quickly, you gave us a three to five year share gain view for etch market share.

I'm just curious, in that same time frame, what do you view as the single biggest driver of an increase in etch demand, in terms of new process technologies, such as (inaudible) or thin fet or double patterning.

The biggest.

I mean I think the 3D scheme we touched on, at least already, in terms of the V-NAND structure, obviously the thin fet has a very similar profile, honestly, of kind of process expansion in the marketplace.

I'd probably pick those two, and I think patterning, generally, is an opportunity for the Company, given the segments that we participate in, and large part of that, particularly in the QPT space, is kind of still ahead of us.

So there's almost kind of nothing of substance, at least in the LE-LE scheme today, in the marketplace.

So I'd pick 3D transition, frankly, as the biggest catalyst.

Great.

By 3D, are you referring to 3D NAND vertical NAND structures, or are you sort of bucketing --

Yes.

And the planar thin fet transition for logic.

Okay, very helpful, thank you.

Thank you, and that does conclude the question-and-answer session.

I would now like to turn the call back over to Management for closing remarks.

I'd like to thank you all for joining us today.

I'll remind you that an audio replay of our call today will be available on our website later this afternoon, and with that I'll conclude the call.

Ladies and gentlemen, this concludes the Lam Research Corporation March 2012 quarterly results conference call.

You may now disconnect.

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