科林研發 (LRCX) 2013 Q4 法說會逐字稿

Good day ladies and gentlemen.

Thank you for standing by.

Welcome to the Lam Research Corporation June 2013 Quarterly Results Conference Call.

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

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

(Operator Instructions)

I would now like to turn the conference over to Shanye Hudson, Senior Director of Investor Relations.

Please go ahead ma'am.

Thanks Sherelle.

Good afternoon everyone, and welcome to our quarterly conference call.

With me are Martin Anstice, President and Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer.

During today's call, we will discuss our financial results for the June 2013 quarter, and share our business outlook for the September 2013 quarter before opening up the call for your questions.

The Press Release detailing our financial results was distributed over the wire services shortly after 1.00 p.m.

this afternoon, and can also be found in the Investor Relations section of the Company's website, along with the presentation slides accompanying today's call.

Today's presentation and Q&A includes statements addressing our plans, strategies, expectations, beliefs, forecasts and projections about Company and industry performance, growth, and opportunities, and the factors affecting them.

In addition, we're providing guidance.

These are forward-looking statements based on current information, and are subject to risks and uncertainties, including those stated today and those described in our 10-K and 10-Q filings with the SEC that may cause actual results to differ materially.

We encourage to you review the Risk Factor Disclosure in our public filing, and the Company undertakes no obligation to update forward-looking statements.

This call is scheduled to last until 3.00 p.m.

Pacific time, and as always we ask that you limit questions to one per firm with a brief follow-up, such that we can accommodate as many questions as possible.

And with that, I'll turn the call the over to Doug.

Okay, thank you Shanye.

Just before I get started, as a reminder, the results I will be discussing today are primarily our non-GAAP results.

A reconciliation of our GAAP to non-GAAP results can be found in today's Earnings Press Release, and it's also available on the Lam Research website.

The June quarter marked the successful completion of our first full year as a combined Company with Novellus.

We delivered strong performance, with fiscal year shipments of $3.7 billion, and revenue of $3.6 billion.

Shipments, revenue, and operating profit were all up between 30% and 40% for the fiscal year.

We are truly operating as a single Company today, thanks to a substantial effort from our dedicated work force.

For the June quarter, total shipments were up 21% sequentially to $1.1 billion, a record high for Lam Research.

This result was driven by strength in the memory segment, and particularly in DRAM where our system shipments more than doubled quarter over quarter.

For our system shipments, the entire memory segment made up 46%, which was up from 31% in March.

Of that 46%, DRAM was 28%, and NAND constituted the remaining 18%.

Foundry shipments accounted for 43% of total system shipments, which is down from 56% last quarter, but it's actually relatively flat on an absolute dollar basis as customers continued adding 28-nanometer capacity.

The remaining 11% was comprised of logic and other shipments.

So now let me turn to revenue, which was also a record high.

Revenue was $986 million in the quarter, up 17% from the March quarter.

Gross margin was 44.5%, a little bit better than we expected, due to a richer mix, mainly from our installed base businesses.

Gross margin was up from the prior quarter, which was 43.9%.

The financial model that we presented during our Investor Event earlier this month, I think provides a good medium to long term view of our targeted gross margin performance over time.

But I think it's important to point out and to remember that we will see quarterly variations around that model.

Operating expenses for the quarter came in $297 million, this was up $1 million sequentially, but it was lower than we expected due to a variety of factors, including the timing of certain R&D programs, as well as targeted and purposeful savings in the administrative areas.

I would like to point out that we continue to grow our R&D spending, while doing our best to contain SG&A.

And just a related note, I know you guys have heard us speak about the ERP system integration project that we've been working on for a while now.

As we sit here today, we're about a week away from the completion of that event.

I'd personally like to take this opportunity to thank the people that have been focused on insuring that this project be successful.

Operating income was $142 million, and operating margin was 14.4%.

These results show a continued progression to the model that we presented during our Investor Event.

Our tax rate for the quarter was approximately 1%, slightly lower than we expected.

Contributing to this lower effective tax rate was the jurisdictional mix of income, and the closure of certain worldwide tax audits.

This tax result is compared with a negative 5.6% in the prior quarter.

For the full fiscal year 2013, the tax rate was approximately 8%.

And as we look forward to fiscal year 2014, our current expectation is for a tax rate in the mid-teens.

Based on a share count of 170 million shares, earnings per share for the June quarter was $0.80.

This is up from $0.44 in the March quarter, and it exceeded our guided range.

I'd like to point out that the share count includes the dilutive impact of approximately 4.5 million shares related to our 2041 convertible notes.

And just to remind you, we've posted a Convertible Note Dilution Schedule on our Investor Relations website for your reference, as well as to help you in your modeling.

There were no share repurchases last quarter against our $250 million authorization, due to the timing of approvals, and program implementation.

We are planning to begin executing on the program during the September quarter, and we continue to have plans to complete the authorization by the end of 2014.

So now let me turn to the balance sheet.

We ended the quarter with gross cash and short term investments, which includes our restricted cash of $2.7 billion.

This is up from $2.5 billion in the March quarter.

Approximately 25% of the June quarter end balance was on shore.

DSO was 56 days, and inventory turns were 4.1.

We ended the quarter with deferred revenue of $389 million, which excludes approximately $70 million in shipments to Japanese customers that will revenue in future quarters.

Cash from operations was $175 million.

Company non-cash expenses include, among other items, $25 million for equity comp, $43 million for amortization, and $33 million for depreciation.

Capital expenditures were $43 million in the quarter, and it was spent primarily on lab equipment, facility improvements, and tool evaluation equipment for our customers.

We exited the quarter with approximately 6,600 regular full-time employees, the slight head count growth is consistent with our increasing R&D investments on the technology inflections.

With that, I'll conclude my remarks and turn the call over to Martin.

Thanks Doug, and good afternoon everyone.

We appreciate all of you joining today's earnings call.

As the initial headline, we're really pleased with our performance for the June quarter, and the solid financial and operational results we delivered for the fiscal year.

This quarter, we reported 48% non-GAAP operating income flow-through on incremental revenue growth sequentially, and 18% cash from operations.

Achievements both that form substance and value in our vision.

Reflecting back on these past 12 months, I'm inspired by this organization's execution to our integration plans, and the progress we've made towards delivering on our growth strategies.

Stated simply, our recent performance is generally consistent with our expectations, our stated market share ambitions, and the financial model reiterated earlier this month.

During our Investor Analyst Meeting a few weeks ago, I remarked that Lam has transitioned from a mode of integrating two companies to competing successfully as one.

As we embark on this next fiscal year, defense of past successes remains our foundation, but we are optimistic of our growth prospects and competitive strength long term.

There is no doubt in my mind we are stronger together than we were separately.

Our ability to mitigate risks and exploit opportunities is greater today than our pre-merger operating states.

Now let me offer a few perspectives on the industry relative to our forecasted wafer fab equipment spending range of $30 billion plus or minus $2 billion for calendar year 2013.

Proportionately, we still expect more than 50% of WFE spending to occur in the second half of this year.

As is more customary than not, we've seen slight changes in the composition of those investments over the past several weeks, as customers adjust their individual investment plans to align more closely with their demand profiles.

But the basic headline of $30 billion plus or minus $2 billion range still seems a reasonable outlook for calendar year 2013.

And although it is way too early to quantify 2014, we do consider our market opportunity increasing next year.

Changes have been most prevalent in the foundry space where certain leading edge capacity investments, predominantly for the 20-nanometer node, are now expected in 2014 rather than second half of 2013, as originally expected.

We still anticipate at least one foundry customer to add 20-nanometer capacity this year, and shipments starting to ramp this quarter.

However, accounting for these adjustments, we now forecast foundry WFE spend at slightly over $12 billion, approximately 5% to 10% lower than our view last quarter.

We anticipate these changes will be partially offset by increased investments in the memory space, where supply conditions have remained very tight amidst strong demand for mobile products and connectivity generally.

We currently estimate memory's WFE in 2013 at the $11 billion level.

As was apparent from our June quarter results, DRAM shipments increased sharply as manufacturers accelerated the pace of their capacity conversions to support strong demand for mobile DRAM.

Based on our understanding of customer's plans today, we expect additional investments to occur later in the year.

However, given the timing of these tools to come online, our projection for supply bit growth is still approximately 30%.

For NAND, our customer spending forecast has not substantially changed, with estimates for supply bit growth in the mid-40% range.

We still project spending weighted to the second half of calendar 2013 with a split of roughly 40% and 60% first half versus second half.

Although Planar Investments represent the majority of NAND spend in 2013, initial shipments for 3-D device capacity is still expected to begin in the December quarter, with Phase I equipment selections at varying stages of conclusion at this time.

We have consistently forecasted a decline in microprocessor logic spend this year compared to 2012, which we believe aligns reasonably well with our customers' capital plans, and expectations for investments to pick up in the second half of this year, predominantly for 14-nanometer capacity expansion.

Given the influences over the second half noted here today, we would expect the December 2013 quarter to have stronger shipments than September.

Against this reasonably stable and positive industry back drop, all of our efforts are focused on continuing to execute on our strategic growth objectives, which collectively are designed to enable us to outperform the industry over the next several years.

First, we are driving growth across our product portfolio by capitalizing on market expansion and technical inflexion opportunities, and innovating of the leading edge to deliver market share gains.

For multiple years now, Lam has been steadfast in its commitment to sustain our levels of investments in new technology capabilities, and to partner closely with our customer's development teams to address next generation device requirements.

Earlier this year, we began shipping our fifth generation Kiyo conductor X system, which further extends our leadership in CD and depth uniformity.

Lam is the industry benchmark in this area, which has enabled us to maintain critical transistor level applications, and extends multiple [pathiling] process steps, including 20-nanometer PTOR positions.

For several quarters now, we've talked about gaining momentum in dielectric edge high aspect ratio process steps for DRAM devices.

Last year, we introduced the capability enabling differentiated profile control of these [beat] structures, which enabled us to win PTOR selections for the majority of two XD RAM device floats.

These same capabilities have enabled us to capture a broad range of 3-D NAND development positions, and give us confidence in our ability to capture production tool decisions in the coming year.

Given our strong edge market share today in NAND, the market expansion in the 3-D transition creates accelerated growth opportunity, as we maintain our overall share position, while at the same time focusing on capturing upside.

Our latest vector strada PE CVD platform, enabled significantly higher wafer outward processing density than any other system on the market today.

Lam's complete portfolio of high productivity, 3-D NANDs multi layer film stacks, positions us well for the anticipated production tool selections.

For Lam, this represents one of the single largest application and product specific growth opportunities, defined by a very large market expansion, accompanied by our high confidence market share plans.

As market share leader for both of the metal deposition segments in which we compete, we focused on widening our competitive gap.

In Tungsten deposition, we are poised to benefit from the transition to 3-D devices.

Our Altus products provide low resist (inaudible) films, which offer performance advantages for logic devices, and our extreme felt capabilities support some of the complex reentrant profiles used in 3-D NAND devices.

In copper electrofill, we are expanding into the advanced packaging space, having won a few applications already this year with our Saba 3-D products.

Lam's long held strategy has focused on the most technical and productivity critical applications, and the sample of successes I've just described are the result of addressing our customer's needs on time, not early or late, and in a manner they can trust for the long term.

As stated many times, we don't win or defend everything all of the time.

But we have, and plan to continue, winning more than we do not.

That history and belief in the substance of the competitiveness of our product road map today provides us the confidence in our ability to capture 1 to 2 points of shift market share gains in both etch and deposition this calendar year.

Also to achieve our long term growth targets.

In single wafer clean, we remained the market share leader for back end processes, and now have commitments from two of the top three capital spenders to ship our next generation single wafer clean system.

The first of which will ship in the coming weeks.

Minimally, these customer decisions are a recognition that we have eliminated our productivity disadvantage, and have the vision to optimize their running costs.

It is also our belief that they represent a critical building block to extend our successes in back end of line clean processing to front end of line applications.

These new applications are more technically challenging, where the value of Lam as a provider of etch, deposition, and clean solutions combined can present differentiated value to our customers.

As a compliment to growing our systems business, we are also strengthening our competitiveness through our customer support and service offerings.

As previously stated, this component of our business can represent a quarter of our total revenues across the cycle, and provides a solid base for building competitive differentiation over the lifetime of our customer's investments, not just at the point of equipment selection.

In addition, it creates an income stream that is as close to an annuity as possible in this business, and with an increased level of focus and innovation at Lam, we believe it represents an exciting opportunity for growth.

We are targeting to create value for our customers, and in turn deliver compound annual revenue growth in excess of 5% over the next five years in our installed base business.

Our customer services and installed base business have served to strengthen our competitive profile through technical differentiation, productivity, and capital efficiency solutions.

As an example, we recently developed a proprietary parts cleaning process for some etch components that are critical and used in leading edge logic manufacturing.

These efforts improved the meantime between chamber cleans by more than a factor of three, which translates to a significant improvement in availability for our customers.

Lam has an installed base business of more than 30,000 semiconductor equipment process modules globally.

Our supports and improvements of this installed base not only provides us with rapid cycles of learning, but also a source of revenue commensurate to the value of solutions provided to our customers.

Moreover, we offer an upgrade path for our family of etch, deposition, and clean products, which provides capital efficient means for our customers to extend the life of their installed base of Lam equipment, and capability never worked more to our future differentiation.

Combined, we believe these actions can provide in excess of $1 billion of incremental revenue for Lam in the 2016 time frame, assuming a WFE spend environment of approximately $35 billion.

As we look ahead, we continue to invest in new technology and productivity capabilities, in order to keep pace with our customers evolving needs, and remain focused on achieving the growth potential associated with the Novellus merger.

We are already realizing synergies from some major projects, we've previously talked about our 450-millimeter development program, and the significant savings we have been able to recognize in terms of resources, development time, and driving commonality across products.

We were also able to leverage design elements from our copper electroplating products, including the robotics to reduce development cycle time for our next generation clean products by an estimated 30%.

Today, our etch products utilize pulsing technology for processes requiring very high selectivity to underlying materials.

We are benefiting from Novellus's knowledge and experience with atomic flare deposition to further enhance our etch capabilities, and extend our differentiation to meet future technology needs.

I would like to take the opportunity to thank each of our employees for their dedication and tireless efforts over this past year to integrate both Companies.

I would also like to thank our customers and suppliers for their continued partnership and trust through a significant period of change at Lam.

Our opportunity for growth is significant, and I believe more than ever that the substance of our vision, the quality and innovation of the Lam team, and the operational execution of our Company together will prevail competitively.

Turning now to our outlook, non-GAAP guidance for the September 2013 quarter is as follows -- shipments and revenues both of $1 billion, plus or minus $30 million; gross margin at 44%, plus or minus 1%; operating profits at 14%, plus or minus 1.5%; and earnings per share of $0.68 plus or minus $0.07 based on a share count of approximately 170 million shares.

With that, Doug and I would be happy to take your questions.

Thank you.

Ladies and gentlemen, will now begin the questions-and-answer session.

(Operator Instructions)

Patrick Ho with Stifel Nicolaus.

Thank you very much, and congratulations to a really nice quarter and a nice fiscal year.

Martin, first in terms of the outlook you provided.

On the memory side, can you give us a little bit of color in terms of what you're going to see in the September quarter in terms of the mix between DRAM and NAND?

Do you see any shifts there, or is it still going to be a little stronger towards the DRAM side for the September quarter?

I'll actually take it, it's Doug, Patrick.

I'll actually take it.

When you look at the back half of the year broadly, it's going to be strongly in NAND than the first half was.

DRAM was actually, we think, a little bit stronger in the first half than the second half.

So when you go through the remainder of the calendar year, our expectation is memory is going to be stronger in the second half, but it's going to be a NAND story more than anything else.

Right, thanks for that color.

And maybe specifically for you on the terms of the operating model, you did a pretty good job in terms of the June quarter on the OpEx line.

I guess, how do you balance the continuing investments in R&D, particularly with a lot of these process technology transitions that we're seeing today?

And offsetting it on the SG&A line to keep that OpEx around that $300 million level mark you've talked about in the past?

Yes Patrick, it's a good question, and it's a delicate balancing act that the Management team of the Company really gets paid to execute to.

You've got to trade things off all the time.

We do the best that we can to rationalize what we need to absolutely need to spend and not any more on the administrative side, such that we can spend a little bit more in R&D to invest in these technology inflections where we see market opportunity that have nice return.

But you kind of work your way through it each quarter, and you've got to make trade-offs, and that's what we're doing today.

Great.

Thank you.

Thanks Patrick.

Jim Covello with Goldman Sachs.

Great, thanks so much for taking the question.

I appreciate it.

Martin, I guess first question, just in terms of reconciling the bullishness that we heard from the whole industry at Semicon West, we fast forward a couple of weeks to earnings, and now a couple companies maybe give guidance that doesn't quite meet the street, September quarter numbers.

Is that just a function of the street being ahead of itself?

Is it a function of the timing?

Because you did refer to the fact that the December quarter would be better, has something changed?

Has there been some movement since Semicon West?

Just, and I think we're all struggling a little bit with the difference between what we all thought we heard then and what we're seeing in the numbers now.

Yes.

I think as is pretty normal.

The subtleties of one quarter to another are pretty complex for any of us to get precisely right.

But from our perspective, the tone that we're communicating today qualitatively and quantitatively we don't regard in any way, shape or form as different from the conversation that we had three to four weeks ago in our Analyst Meeting.

I do think, and I kind of made a qualitative statement in my prepared comments about the December outlook.

We don't specifically give guidance for December, and I don't really want to do that today.

But if it helps put the September guidance in context, I would expect that the shipments of our Company to exceed $1.1 billion in the December quarter.

And in large part, that reflects the momentum in memory.

And to Doug's point, the dollars of investment to memory are very biased to NAND flash.

But the strength that we're seeing that showed up in the June quarter first and foremost that also repeats at some level in the second half is DRAM being driven by the mobile requirements there.

That's helpful.

Thank you.

And then, just in terms of pricing, particularly in etch.

As always, when we go to see all the different companies, everybody in that says they're gaining share.

And obviously, the proof is in the pudding, and you guys have demonstrated that in the numbers that you are actually gaining share.

But in an environment where everybody is trying to gain share, are you seeing any more -- everybody is trying to gain share, is there any more pricing than normal in that area?

I don't know if I would say frankly that the biggest influence over pricing is a competitive dynamic.

I think the bigger influence over pricing frankly is the consolidation of a semiconductor industry, and the fact that 65% to 70% of wafer fabrication equipment spending is in the hands of three companies today.

So on a case by case basis, I'm sure any one of us feels an ebb and a flow of pricing intensity.

But my fundamental impression today is that the competitive environment is exactly where it has been and where we'd expect it to be.

And nothing fundamental to report in terms of pricing for that reason today.

Thanks a lot.

Good luck.

Thank you.

Thanks Jim.

Krish Sankar with Bank of America Merrill Lynch.

Yes, hello.

Thanks for taking my question.

I had two of them.

If I look at your September quarter guidance, what is the reason for the gross margin or op margin being slightly below your June run rate?

I think the simple answer is the -- it isn't that much different from the June run rate.

If we want to have a discussion about 0.4%, I guess we can.

But the complexity of individual products really kind of has us approaching this in much the same way we did last quarter, and we've got a range on the guidance for that reason.

We've got 1 point or so around the 44%.

And certainly the most important message, is a message of consistency to the model that Doug presented at our Analyst Meeting.

And so we feel that at the $1 billion dollar level of shipments and revenues, the 44% in points is a very good place for us to be.

Against the objective which really is kind of six months from now, this end of December run rate performance of 45% that's in our model.

So we actually feel pretty good about it frankly.

Yes Krish, this is Doug.

I'd just add, in my view we're consistent with that model.

You always have ebbs and flows as Martin was pointing out, different things have different profitability, and you sell more or less of one quarter-to-quarter.

It's hard to predict that sometimes, but within a range, we're pretty comfortable with where we are.

Got it.

All right.

And then just to follow up on that, it looks like you guys are still working on lowering the cogs working with suppliers to boost your gross margin.

So if I just take your September, June revenue run rate, roughly $1 billion dollars, assuming the same mix of products between legacy Lam and Novellus.

How will the gross margin look like let's say a year, year and a half from now?

That's a pretty hard question to answer Krish, because mix is never exactly the same.

The synergies that I showed you earlier this month are coming to fruition.

We're on track with the things that we expected.

So if everything else was equal, every single tool, percentage was the same, and go on down the pricing stack, we would be a decent amount, call it maybe a percentage point higher in gross margin.

Again, consistent with that model.

But I'd caution you on that, the mix is never the same every single quarter.

Things ebb and flow every quarter, but that's where we're at.

Got it.

Thank you.

Thank you Krish.

Tim Arcuri with Cowen and Company.

Hello guys, thanks.

I had two questions.

First Martin, you've pretty consistently been talking all year about the year being 55%, 45% back half loaded.

So if I just do that math, your shipments in Q4 should be even better than 1-1, they ought to be 1-2.

So I'm wondering whether that 55%, 45% math still holds?

And then I had a follow up.

I think I have tended more often than not to say high 40%s, low 50%s, rather than the specific numbers you've described.

So maybe there's 1 point in 10 where I've done exactly what you've just said.

As I said, it is rather unusual for us to put a stake in the sand for December.

I've done it, because I think it's relevant to communicating the outlook of the Company, certainly in light of the questions that have already been raised today.

And certainly when we approach signaling our outlook for December, we're doing it with a level of risk, which is different than the outlook for September and our commentary is consistent with that.

So whether it is higher than 1.1 or not, time will tell, but at a minimum, we can see 1.1 on the horizon.

Got it, okay.

And then a follow up on NAND, specifically 3-D NAND.

Is there a way that you can determine what portion of the bookings as you look out into next year, what portion, whatever the NAND industry orders and whatever WFE is next year, what portion of NAND WFE will be 3-D versus planar?

It sounds like there's another customer, not just the big one, that is now pushing forward with some plans on 3-D, so I'm wondering if you can give us some mix commentary next year.

Thanks.

Yes, that's a really tough one.

I'm not sure that there's sufficient public disclosure from our customers to really do that, Tim.

Unquestionably, there's a learning experience for everybody here in front of us with the first set of investments in a very complex transition.

And as is true in every complex transition, it's all about yield, and it's all about the performance delivered from the devices.

And there isn't obviously today production evidence of any of that.

And so presuming that all plays out, presuming there's demonstrative performance advantage from the device, presuming it is yielding in a manner consistent with delivering the economics, then I'd expect the proportion to go up.

And whether it's more than half, or less than half, time will tell.

But it is easy to visualize it in that area.

But as you guys all know, the public commentary from customers around transition from planar to 3-D devices in NAND/memory tracks over a one to three year timeline.

So there's a lot of questions still outstanding I think.

Got it Martin.

Thanks a lot.

Thanks Tim.

John Pitzer with Credit Suisse.

Hello this is Fahim Rahman asking the question on behalf of John.

I wanted to talk to you about the foundry shipments in second half.

As you look into the second half, how do you see the foundry shipments tracking in your September and December quarter?

Well I think the biggest message is the one that has been talked about I think for the last three or four weeks.

The 28-nanometer spending is broadening, and the 20-nanometer transition is beginning.

And we kind of expected more than one customer to be transitioning to 20-nanometer, and we now expect there to be essentially one.

And I did put a range out there originally of 30,000 to 50,000 wafer starts of investments at 20-nanometer.

And I would say in light of what we've communicated today, we'd be at the low end of that range in terms of our expectation.

And that's the basis of the guidance that's given for September, and the outlook that I shared for December.

Got it.

Then in regards to your NAND shipments, should we just based on the commentary, is it fair to expect that shipments would be up in September and again in December as well?

Yes, they very likely will be up sequentially each quarter.

I'm not going to quantify it for you, but that's the direction we expect it to go.

Thank you.

That's all I had.

Yes, thank you.

Vishal Shah with Deutsche Bank.

Hello.

This is [Shen Yan] for Vishal.

Could you just talk about what your expectations are for 15-nanometer?

Are you seeing any pull into 2013 or is it going to be more of a 2014 phenomenon?

You're going to have to ask that again.

I didn't catch it.

What are your expectations for 15-nanometer?

Are you seeing any pull ins into 2013, or will it be just be a 2014 phenomenon?

You're talking transition in the foundries?

Is that the question?

Correct.

Okay.

I think frankly, I guess they have to deliver those headlines.

But certainly one of the things I'll share with you is that when a customer dialogues with us today, and I suspect this is probably quite true for every equipment company, the separation in the conversation between the final planar generation and first [finset] generation is very subtle.

And so we're almost indifferent to it.

There are clearly some new application areas, there are clearly some process times that go up, and the stam of the Company increases in a planar to finset transition.

But it doesn't increase for any of us to the same extent that the 28-nanometer -- 20-nanometer conversion was.

So I would say that there is clearly a race in the family community to a finfest, but certainly the spending that's in front of us is a 20-nanometer planar biased spending.

Got it.

And it may be a little bit too early, but maybe you could talk about how you expect the spending mix to trend between foundry and logic versus memory when you're thinking about 2014 versus 2013?

Yes.

I think that the first part of your question was right on.

It's too early.

But at risk of being held to this, certainly we see for a bunch of reasons the discipline of our customers through a process of adding capacity, particularly a memory, where clearly the pricing environment tells us all how imbalanced supply and demand is today.

And also, a more positive outlook in terms of general consumer electronic demand and adoption of various technologies.

But 2014 is a stronger WFE year than 2013.

Now, usually the math can change between now and then, but as a basic outlook in the middle of calendar 2013, that would be our commentary.

And consistent with the first part of my answer, we would expect that the memory proportion of spending increases.

And certainly, for Lam Research, that's a net positive because the bias -- the strength of the Company historically has been more in memory than in logic.

Although, that is normalized a little bit through the integration of Lam and Novellus.

But still, we are more memory biased as a Company.

And so as the expectation for a higher memory content in WFE exists, that's positive for the Company.

If that assumption is wrong, then the positive I just described doesn't exist.

Great.

Thank you.

Thank you.

Mahesh Sanganeria with RBC Capital Markets.

Thank you very much.

Martin, I have question on the comments you made on clean in your opening remarks.

You said you have commitment from two customers to evaluate the new clean system for the front of the line.

Did I hear that correctly?

And if you can provide some more color on that, that would be helpful.

Yes, I didn't actually articulate the specific application areas in my prepared comments, and nor will I just to preserve the competitive component of things.

But certainly, it's a very big milestone for the Company being able to make the statement that I just did as you all understand.

We're in a critical juncture relative to the economics of the clean business, and we have had a productivity disadvantage for the last five years, we've been essentially the only large clean Company limited to an 8 chamber platform.

And we've been able to address that to a level of satisfaction, at least to accomplish the first result, which is getting a couple of very large customers committed to partner with us to evaluate and hopefully qualify that capability.

And the product has been designed with the objective in mind to open up the front end of line application space, which is a huge part of the clean market space.

Which has more generally not been available to us with the Da Vinci prime product.

And so, we will in an R&D environment be validating on a mix of back end of line, and front end of line application areas, I expect.

And certainly, the business objective is we're successful in both segments of single wafer clean.

Okay.

Thank you.

That's helpful.

And just wanted to follow up on your foundry commentary again.

I guess you mentioned that you had multiple -- you were expecting multiple customers to start ramping 20-nanometer, and now you're down to one.

I'm just -- the question I have is, is it related to more your, the customers making the decision to skip 20-nanometer and go directly to 14-nanometer, or is it difficulty with the 20-nanometer ram?

Can you give us some --

I think only to the economy can answer question, my impression is it's not a statement of jumping, but that's just an impression.

Okay.

All right.

Thank you.

Thanks Mahesh.

Stephen Chin with UBS.

Thanks, hello Martin and Doug.

Just a follow-up question on the operating expenses.

So if Lam's December shipments could possibly hit this $1.1 billion level, do you think Lam could come close to the target model for OpEx, which is I think 28% in that December quarter since I think ERP's system will fully implemented and --?

Yes, there's upward bias on the numbers certainly, and yes, I think we have a decent shot at getting to the target in the December quarter.

We've got some work left to do, but I think we've got a shot at getting there.

Okay, thanks Doug.

And then a follow up question on the growing NAND shipments that you're suspecting in the second half of the year.

Could you share some color on the split that you think you'll see across technology upgrades, versus any capacity additions for NAND in the second half of this year?

Thanks.

I think you're still going to see a lot of conversion spending, which has been what you've seen over the last, I don't know, several quarters, several years actually, probably.

There will be some capacity additions and some conversions, so it will be a blend.

Thanks Doug.

Thanks Stephen.

Mehdi Hosseini with Susquehanna International Group.

Thank you.

I have two questions.

One for Doug, when you look at your internal capacity and given what you have in place, what kind of a maximum revenue can you generate before having to add more head count?

More head count?

More head count or more overhead.

Well, volume does -- or head count does scale to a certain extent with head count.

Now from a facility standpoint, we can add a lot of volume before we need to add any facilities.

But that's one statement.

And then second, you need to understand that lot of manufacturing is outsourced, so it varies with volume.

I would estimate that probably one-third of the head count of the Company is flex, it's evolving.

Okay.

So in terms of total expense, it is just the R&D and investment that maybe you're adding this rest of the overhead and head count is pretty much flexible.

And you have plenty of head room in terms of how much revenue you can generate.

Is that the right way of thinking about it?

Yes, that's true.

Martin's comment is right about the manufacturing volume.

We are investing more in R&D resources, because we see opportunities for profitable growth.

And then we do our best to squeeze the administrative functions, or let revenue grow without adding anything in that area.

That's kind of how we think about it.

So obviously one of the things we have the benefit of is a lot more information about Lam Research than you to.

And so we ask the same question that you do and try to share our best perspective with you using the financial model.

So all of the questions that are relevant to the future economics of the Company are incorporated to the best of our abilities in the financial model.

So I would encourage you and others to keep referring back to that model presented by Doug in the Analyst Meeting.

Got it.

And then, one other question in terms of the big picture.

As you commented in the prepared remarks, or early on, you said that yes there was one or two foundry order or customer that were going to do 20-nanometers.

But now things have changed over the past couple of weeks since Semicon West, and now that has been pushed out to next year.

And how quickly things change, especially since your customers have consolidated.

If I were to take that and apply it to a 3-D NAND, which a subjective debate is coming out over the past month, there are two groups.

One group, Koreans, they keep talking about adding power line on 3-D, and then the others outside of Korea they think the 1Z should be doable for the next couple of years.

So to that extent, what gives confidence that all of this hype around 3-D is nothing but hype, and we're going to have working samples out by Q1 or Q2 of next year?

Well I think the only thing that we can ever do, and whether it's a transition commentary or not, whether it's memory or logic, is dialogue with our customers and trust that their communication to us is authentic.

And what we're communicating to you today is our interpretation of messages from the customer.

So I think there's legitimacy, I think even the most committed customer in the world would say it's a complex transition, and there's a lot to learn in a pilot line.

And based on the learning, in production and in the marketplace relative to performance benefit, this will either speed up, it will either slow down, or it will either hold the projections that are commonly anticipated.

But right now, our belief is that we're shipping products into a 3-D environment this calendar year.

And do we know for sure that these equipments are going to be used for 3-D and not just planar?

Well again, I can only believe what I'm told by my customer.

Okay.

Thank you.

Thanks Mehdi.

Edwin Mok of Needham and Company.

Hello, thanks for taking my question.

So a question on the foundry side, and I think you talked about this year shaping up to be a little bit less than what you have previously forecast.

Should we read that as some of these 20-nanometer projects that you were expecting got pushed out in 2014, and potentially even in the first half of 2014 or are these just on hold until there are some challenges there?

How do you think about that?

My impression is push.

Great, okay.

Okay, great.

That's helpful getting a straightforward answer there.

I guess second question I have on the [wet] clean side, I think you talked about new products there.

That you guys positioning in the marketplace.

With this new product, do you believe that you've closed a gap and maybe a different way of asking that is if this new product takes more time to get adopted by the customer, is there any risk that your customer will qualify a competitor product even in the back end of the line, which you -- like you said, historically you guys are stronger?

Well, there's always a risk, but there's always an opportunity.

At the fundamental level, I believe the decisions by our customers are about as influential as anything I could share with you around the fundamental capability of the Company and differentiation that's available in some productivity, and then results on wafer.

And if results on wafer is defined around particle removal efficiency.

It's defined around collapse free drying.

And a lot of the market transitions and technical inflections that we've talked about today and in our Analyst Meeting create very significant challenges in the cleaning segment.

And so I think, again, consistent what we've said previously, the clean business unit in the portfolio of our three, we have etch, we have depth, we have clean, simply stated.

The clean market share progressions, the long term progressions are likely to be more hockey stick than the other two, which are likely to be more linear in their expansion.

So that's about the best I guess I could share at this point.

Okay.

Actually, that's helpful.

Thank you.

Mark Heller with CLSA.

Thanks.

Good afternoon.

Doug, I just had a quick question, you gave some guidance on the shipments for the fourth quarter -- the calendar fourth quarter.

But looking back at the presentation from the Analyst Day, you were talking about maybe about $4.1 billion in revenue in context of a $30 billion WFE.

Does that still hold, or would you come in below that model?

Yes, that's commentary Mark, and sorry if I wasn't clear about describing it.

It was kind of a 2013, 2014 statement, in a $30 billion WFE we would expect to be around $4.1 billion for the year.

It's not necessarily a statement around the current year.

So I'll supplement that comment, I think if you take the guidance and you take the December reference that I had provided on shipments, you're going to see mathematically a number that looks very similar to the one that Doug stated.

And the timing of revenue acceptance is all about specific shipment days and weeks in the quarter, and that's a little hard to predict at this point, and the timing of the acceptance cycles.

Frankly, we don't worry so much about that.

We worry about taking orders from our customers as soon as they're available, and we worry about shipping products and meeting their demand, and getting the systems installed.

Acceptance cycles take care of themselves usually.

Got it.

And did you disclose a backlog number?

No.

No, we didn't Mark.

Can I ask one more question then?

You talked about previously a competitive limb in the logic side of the business.

How should we expect the logic shipments to trends over the next quarter or two?

Well I think it's a trend you should assume is highly correlated to the outlook of our customers.

The foundry components of logic is a reasonably evenly distributed first half/second half, not precisely today, but reasonably so, and the microprocessor environment increases.

And so you should expect to trend for Lam (technical difficulty).

Obviously at a product level, the other side of the memory strength for the Company is a little less than normal profile in microprocessor logic.

But I think you guys have -- are well practiced in modeling that at this point.

Thank you.

Thanks Mark.

Terence Whalen with Citigroup.

Hello.

Thanks for fitting me in.

This question goes back to questions on the clean market.

I believe the product introduction for front end of line clean against DNS is slated for perhaps later this year.

Also wanted to just understand the correct timing of that.

And then also wanted to understand your perspective on D&S's introduction of its back end of line product as well, which I think is slated for end of year.

Thanks.

Well I think relative to our competition in any of our markets, we regard D&S with respect.

They have a tremendous history in batch cleaning, and have successfully leveraged that strength into the front end of line cleaning space.

Particularly, I think the installed base and the history of Lam Research is a tremendous value proposition in the back end of line space.

And frankly, we're winning business today with the Da Vinci prime product.

And so, I think there's only upside to the Company in terms of the competitive strength with the next generation product there.

But, we have to be sensitive to all competitive threats, wherever they come from.

Whether it's a D&S whether it's a [Tell], and certainly our really most important focus right now is on making a success given that our customers have voted and accepted our next generation system into their R&D environments, and to take advantage of that opportunity to demonstrate the substance of our vision.

And we've got a lot of people invested in the success of this, and we'll do our very best to deliver on that promise.

Thanks for that Martin.

And just the final aspect, I just wanted to understand timing of when we'd begin to see revenue progress from the newer product?

Thank you.

Well we're shipping the first of a few in weeks, and quite when that translates itself from an R&D environment into a production buy it's frankly a little early for us to communicate right now.

But ask the question again, if you still think it's important three months from now, and we'll see if we're any closer to answering it.

Fair enough.

Best of luck.

Thanks.

Thanks Terence.

Jagadish Iyer with Piper Jaffray.

Thanks for taking my question.

Two questions, Martin I just wanted to clarify, you heard some remarks about the PTOR positions in 3-D NAND.

I just wanted to make sure, are all decisions for 3-D NAND finalized as of now?

No.

And second question, is one of your peer group companies indicated that the memory shipments or memory orders could go back to some normalized levels probably in the Q4 time frame -- calendar Q4 time frame.

I was just wondering, how sustainable is the memory spend going into the first half of 2014?

Thank you.

Yes, I'm already sure these days to make a references to normalized, but I do think we'd deliver a very consistent message in terms of strengthening of memory spending.

And, for all of the reasons that we've been communicating pain in the last 12 months, the discipline of our customers, we'd expect in that discipline to continue.

So I think sustainability in an environment to discipline is usually pretty good.

And certainly, the penetration road maps and the adoptions, and the replenishment cycles, and bit growth assumptions in and around mobile and connectivity related electronic products, I think kind of bodes reasonably well for our future, but we'll see.

Thank you.

Thank you.

Thank you.

There are no further questions in the queue.

I would like to hand the call over to Shanye Hudson for closing remarks.

Great.

I'd like to thank everyone on the call for spending this last hour here with us today.

As a reminder, a webcast replay of this call will be available later this afternoon on our website.

And on behalf of the entire management team, we appreciate your interest in Lam Research.

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

We thank you for your participation, and at this time you may now disconnect.