科林研發 (LRCX) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Lam Research Corporation December 2013 quarterly result conference call. During the presentation, all participants will be in a listen-old mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

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

Thank you. Good afternoon, everyone, and welcome to our quarterly conference call. With me today are Martin Anstice, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer.

During today's call, we will share our outlook on the business environment and review our financial results for the December 2013 quarter and our outlook for the March 2014 quarter. The press release detailing our financial results was distributed over the wire services shortly after 1 p.m. this afternoon. It 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 will include statements about our expectations and beliefs regarding certain future outcomes and including our guidance. A more thorough list of forward-looking topics that we expect to cover is shown on the slide accompanying my remarks.

All statements made that are not historic facts are forward-looking statements based on current information, and are subject to risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factors in our disclosures and public filings including our 10-K and 10-Qs. The Company undertakes no obligation to update forward-looking statements.

Today's discussion of our financial results will be presented on a non-GAAP financial basis unless other side specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings press release. This call is scheduled to last until 3 p.m. Pacific time, and as always we ask that you limit questions to one per firm with a very brief follow up, such that we can accommodate as many questions as possible. As a reminder a webcast replay of this call will be available later this afternoon on our website. With that, I'll turn the call over to you, Martin.

Thank you, Shanye, and good afternoon, everyone. Thank you for joining us today. I'll start by sharing the highlights of 2013 Company performance and then discuss our outlook for 2014, which provides our perspective on Lam's opportunities and areas of focus over the next 12 months. Doug will then follow with our financial results and guidance commentary before turning the call to Q&A.

2013 was an extraordinary year for Lam Research which establishes a platform for our future and unifies more than 6,500 global employees around the achievement of an exciting vision. We achieved nearly $4 billion of revenues and delivered in excess of our targeted gross margins for the 2013/2014 time frame of approximately 45%, representing an increase of 170 basis points year-over-year.

We grew operating profit dollars twice as fast as revenues, illustrating our ongoing focus on strong operational execution and profitable growth. We delivered on time our committed synergy targets with $100 million in annualized cost savings and approximately $130 million in revenues, both achieved with strong collaboration and ownership across the Company.

Accelerated by our reenergized commitment to install base performance, we closed the largest service contract in the Company's history tailored to support a broad range of customer specific needs. We defended our positions or gained market share in all of our business units through a period of ever more challenging customer requirements and competitive intensity. Combined, our performance in 2013, enabled us to outpace industry growth by a healthy margin with system shipments up about 10% year-over-year for Lam and Novellus combined, compared with wafer fabrication equipment spending up around 3% to approximately $29 billion.

This 2013 performance demonstrates solid execution against our near-term financial models at a pace that we consider slightly ahead of schedule. As we move into 2014, we're continuing to aggressively pursue opportunities to drive further efficiencies in support of our growth objectives.

We continue to position next generation products targeting increased competitive differentiation and lower cost, both critical for the achievements of next level profit performance defined by our 2015/2016 financial model. We kicked off a multiyear plan to consolidate our real estate footprints which we expected will drive incremental operating improvements.

These plans serve to increase efficiency of our R&D activities and further promote collaboration across the organization, a key differentiator leveraging our culture and core value of customer, Company, and individual. We also established comprehensive three-year plans across our integrated manufacturing and supply chain which are based on an in-depth perception of performance over the past 18 months.

Our plans are built on our sustained commitment to pilot line and high volume manufacturing strategic locations and strategic partnerships, outsourcing, and localization. We target cost, quality, and service benefits through these plans, which serve to increase our focus and strengthen competitive differentiation going forward.

In summary, through performance that meets or exceeds commitments made and the establishments of plans for execution for our future vision, 2013 was an extraordinary year and one which we hope serves to continue to come compel our full shareholder community, our shareholders, our customers, our suppliers and last but not least, our employees to invest in Lam for the long-term.

With our guidance and commentary today, we believe that we are off to a great start this year and look forward to discussing more with you in the months ahead. Our growth outlook for 2014 is enabled by our customers' transition to next-generation logic and memory devices that make the much anticipated inflections tangible and expanding opportunities for the Company as customer adoption broadens through 2015. We continue to forecast 2014 WFE spending of $32 billion, plus or minus $2 billion with an incrementally broader participation of customers assumed relative to 2013.

More than ever, the landscape of this year's investment pattern is influenced by the timing of inflection specific activities. Although overall, we expect a reasonably balanced year first half compared to second half, we do see variability quarter-to-quarter, resulting from the influence of a consolidated customer base, and remaining uncertainty around the ultimate scope and timing of spending at the four inflections FinFET, 3D NANDs, patterning, and packaging.

In the Foundry segments, we saw the pace of 20-nanometer investments accelerate at the end of 2013, signaling a robust commitment in the demand for devices using 20-nanometer technology. As of today, spending is more heavily concentrated between a couple of customers with capacity additions and conversion activities planned primarily for the first half of this year.

In the recent period, the Foundry space is arguably grown more competitive with new entrants challenging the delineation of traditional pure play Foundries and Logic manufacturers. For Foundries, the race to develop FinFET devices has led to multiple pilot line projects starting in the first half of this year.

We expect those investments to continue through the year with total capacity additions dependent on end user demand and the pace at which production ramps yield. Taken together, our prior forecast for Foundry spending between $13 billion and $14 billion still seems reasonable for 2014. Similarly, we maintained our forecast for microprocessor and other Logic spending of around $6 billion, or relatively flat with 2013 levels. Continuing the 2013 theme, embedded in our forecast is the expectation that significant leading edge logic production capacity can be satisfied through equipment reuse and capacity conversions.

Looking at the memory markets, we continue to see stable pricing conditions and tight supply entering 2014 with customers who continue to exhibit due rigor in evaluating their capital spending decisions. DRAM manufactures are accelerating transitions to the mid 2X technology nodes and the broader participation of customers are entering 20-nanometer pilot production. We forecast bit supply growth in the low 30% range led by mobile device demand, and this is accomplished largely through equipment upgrade, albeit with capital intensity higher than prior generations.

In the NAND segments, remaining planar capacity additions seem clear, and the initial 3D NAND production ramp is progressing largely in accordance with our expectations. Over time, as the 3D devices move to structures with more layers, our customers appear to anticipate cost and performance benefits, the support of broad industry conversion which underpins their plans this year.

We currently project between 80,000 and 100,000 wafer starts of 3D NAND shipped capacity will be installed by the end of calendar 2014. In addition in recent weeks, 2014 planer NAND investment plans to transition to 16-nanometer devices have solidified for more than one customer. Overall, we still expect supply bit growth to be in the low 40% range.

On a combined basis, we forecast Memory spending will increase by 10% to 20% year-over-year with wafer fab spend between $12 billion and $13 billion, representing an increasing proportion of WFE year-over-year and approximately 40% of the total. Adding this all together, our outlook for 2014 wafer fabrication equipment spending with a midpoint of $32 billion would represent the fifth consecutive year with relatively healthy and disciplined equipment spending.

It's always important to note that visibility beyond this quarter and especially into the second half is clearly more limited than the near term. Where we ultimately end up in our WFE range will largely depend on production readiness and market acceptance of the technology inflections just highlighted.

In this positive industry environment, which for Lam is supplemented by inflection-led addressable market size expansion and target market share growth, I'm very encouraged by our industry outperform opportunity. With the transition to 3D NAND we've gained strong production tool decisions, maintaining our lead in etch while driving significant gains in deposition. Our pipeline of new products were key to our success including our next generation dielectric edge model, our new highly productive dielectric deposition platform, and our differentiated tungsten CVD system.

We are well positioned with each of the 3D NAND pilot lines we believe and are focused on achieving, at a minimum, the same degree of success production tool decisions are finalized. We believe that we have additional opportunities to gain applications through the transition to second and third generation 3D NAND devices, where the increased number of alternating films also proliferates the complexity of the etch and deposition processes. We're actively engaged with our customers to address those challenges.

In the area of multi-patterning our conductor etch business benefiting from the increased number of multi-patterning steps required with the transition to smaller device geometries. Although device dependent, we see emerging evidence of slightly more than our early estimates of 8 to 10 new multi-patterning steps, in a 20-nanometer logic device for foundries, compared to a 28-nanometer baseline and the 12 to 13 steps for 16- to 14-nanometer devices.

In DRAM, the number of multi-patterning steps more than doubles with the transition to 20-nanometer, going from 3 or 4 in a mid 2X device to between 8 and 10 at 20-nanometer with the same evidence on up side of number of passes. You should expect more specificity from Lam on this in the coming quarters.

This transition also presents growth opportunities for our deposition business. Many of the spacer-base, multi-patterning deposition steps can be done with batch furnaces today, however, customers are evaluating or starting to transition these steps to single wafer atomic layer deposition, or ALD, tools as the film conformability and uniformity requirements increased. We're engaged with multiple memory manufactures with our off-side ALD tool, and based on the feedback received so far, believe with continued hard work we are well positioned for production tool decisions expected this year.

In Logic, we often talk about the transition to FinFET structures and the complexity around the transistor. However, the complexity in the back end is growing at a rapidly accelerating pace also. As transistor densities in these devices increase, the wiring schemes required to connect these transitions become more and more complicated. Starting around the 32-nanometer node, customers introduced a metal hard mask etch scheme for a couple of wiring layers. The number of layers has grown with each successive node, and Lam stands to benefit as the clear market leader for this application.

To maintain device reliability and performance, customers began adopting film treatments and other processes that play into a few of Lam's strengths. Our solar ultraviolet thermal processing tool is the market leader used to improve the integrity of ultra low-key films, predominantly for leading edge logic devices.

The number of layers requiring UV cure of low-k dielectric films is also increasing with each successive node, again a positive opportunity for Lam. With thinner and more closely packed films, reliability of the top lines is becoming more of a challenge.

Lam has developed a unique film pretreatment module which enhances reliability and reduces resistance, a factor in device speed. Our solution was recently selected for next generation logic devices, and we expect to ship production tools through this year. In single wafer clean, we will have shipped our third next generation spin clean system as planned in the next couple of weeks. These tools are being installed at leading memory and logic device manufacturers and are being evaluated for a broad range of applications including front-end-of-line.

It's still early, but the initial progress and process data we've received is in line with their expectations and the intensity of managing yields to a higher definition access for our customers clearly very relevant in evaluating that opportunity. We would expect to have broader reliability and process data towards the middle of the June quarter to begin making assessments on how the tools are performing relative to our customers' requirements and our competition in the second half. As we embark on 2014 and beyond, we believe the opportunities available to Lam Research are significant.

We're focused on exploiting those opportunities to their fullest by continuing to strengthen our competitiveness. We're increasing the magnitude of new product releases and customer engagements, particularly in the area of dielectric etch, atomic layer deposition, and single wafer clean.

We're starting to execute newly developed operational plans to drive efficiencies across many aspects of the business, targeting at achieving our 2015/2016 performance ambition. We're reducing our emphasis -- sorry, reinforcing our emphasis on customer trust, broader collaboration, and strategic relevance to our customer in light of semi equipment consolidation trends.

Today, we are very focused on achieving our long-term growth objectives, competing as one integrated Company. We have tremendous strength in the capability and commitment of the whole Lam Research team, and I would like to take this opportunity to thank each and every employee for their contributions last year, and wish them success in pursuit of our 2014 vision.

A year where at the $32 billion WFE level, we anticipate increasing our operating income over 2013 at twice the rate of our revenue growth, further, growing cash from operations year-over-year at twice the rates of operating income. With that, I will turn the call over to Doug to discuss December quarter financial results in more detail, and provide our guidance for the March 2014 quarter.

Okay. Thank you, Martin. Good afternoon, everyone, and thank you for joining our call. We finished calendar year 2013 on what I believe is a very strong note.

Shipments for the December quarter reached an all time high. We achieved record revenues for a third consecutive quarter. We grew operating profit more than two times as fast as revenue, and we delivered earnings per share above our expectations. This financial performance comes partly as a result of us delivering on the promise of bringing Lam and Novellus together.

Let me now provide a little more detail of our December quarter. Shipments increased by 15% sequentially to $1.139 billion which was slightly above the midpoint of our guidance range. Consistent with our expectations, we saw strong growth in Memory shipments as well as the sustained level of Foundry spending. The combined Memory segment represented 64% of total system shipments, and this was up from 48% in September.

NAND system shipments contributed 36% versus 28% in the prior quarter and includes shipments to the first 3D NAND production facility. We saw a sizable increase in DRAM shipments which represented 28% of system shipments which was up from 19% in the September quarter.

Foundry shipments were 28% of total system shipments, and this was down from 36% last quarter. On an absolute dollar basis however, Foundry system shipments were relatively flat supported by ongoing investments for the 20-nanometer node. The remaining 8% was made up of Logic and other shipments.

Revenue for the December quarter was $1.116 billion. This also was slightly above the midpoint of our guided range and was 10% higher than in the September quarter. December gross margin percentage came in pretty much as we expected at 48.5%, which was stronger than our 2013/2014 financial models. This was an 80 basis point increase from the September quarter.

We benefited from a favorable product mix during the quarter, and as I've shared with you before, our gross margin performance is impacted by many factors including product mix, customer mix, and overall business volumes. Increasingly, as we're running at close to full utilization, the impact of volume is less important than the product and customer mix changes. Nonetheless, we will see quarterly fluctuations in our gross margin performance depending on all of those variables.

For the calendar year, our gross margin performance of approximately 45% was fairly consistent with our financial model, and we continue to point to our financial model as the best proxy for our financial performance, including the timing and WFE reference points. Operating expenses for the December quarter increased to $302 million consistent with our expectations. On a percentage basis, our December quarter expenses were 27% of revenue, and this compares with 29% in the previous quarter.

R&D as a percentage of total operating expenses was 58%. We continue to invest in next generation products and technologies to strengthen our competitive position for the long-term success of the Company.

Operating income increased by 27% to $209 million in the December quarter, and this compares with $165 million in the September quarter. Our resulting operating margin was 18.7%, pretty much as we expected and I think shows the operating leverage in our financial model. Other income and expense came in with a positive impact of several million relative to our original expectations. This was primarily due to a strong stock market in the quarter and its resulting impact on our deferred compensation investment portfolio.

Our tax rate for the December quarter was approximately 9.3% which was consistent with our planning assumptions, and I continue to expect the tax rate in the low- to mid-teens will carry through the remainder of the 2014 fiscal year. Based on a share count of approximately 172 million shares, earnings per share for the December quarter totaled $1.10.

This result was better than forecast coming into the quarter, and I should point out the share count includes the dilutive impact from our 2041 convertible note of approximately 6.6 million shares, and that was based on an average quarterly share price of $52.52. And I'll just remind you that we include a schedule on our IR website that shows the impact of this note to help you in your planning.

During the December quarter, we spent $40 million on the repurchase of approximately 760,000 shares of common stock with an average price of $52.20. At this point, we have completed more than half of our current $250 million authorization. This level of buyback will help us accomplish our objective of managing the dilution from our employee equity plans, and I'd also just point out we're well on track to complete this authorization in calendar 2014.

Let me now take you to the balance sheet. We ended the quarter with gross cash and short-term investments including our restrictive cash of $2.7 billion, and this compares with $2.6 billion in the September quarter.

Our cash balances remain roughly 25% onshore and 75% offshore. We had deferred revenue of $405 million, which does not include the $54 million in shipments to Japanese customers, which will convert to revenue in future quarters.

DSO for December was 74 days, and this compares to 64 days in the September quarter. I mentioned on last quarter's earnings call we expected shipments to be back end loaded in the December quarter. Due to the timing of customer projects this profile was somewhat more pronounced than we originally anticipated.

Inventory turns came in at 3.8, and that's flat with the prior quarter. Cash from operations was $129 million or 12% of revenue. This was up from $52 million in the September quarter.

Our operational cash generation was impacted by growth in accounts receivable. Over half of our quarterly shipments occurred in the month of December itself. This translated into less of our receivable balance being due before the end of the quarter.

When business volumes are ramping, as we are today, it's typical to see growth in working capital, and we did see that. Our current quarter outlook for the March quarter reflects a much more linear shipment profile, and I expect operational cash flow to more closely approximate operating income next quarter. I thought I'd just mention, I expect 2014 will be a very strong year for Lam Research's cash generation.

Company non-cash expenses include among other items, $23 million for equity comp, $41 million for amortization, and $33 million for depreciation. In the quarter, we incurred $38 million for capital expenditures, and we exited the quarter with approximately 6,550 regular full-time employees.

Let me now turn to our guidance for the March 2014 quarter. This is our non-GAAP guidance, I should point out. We expect shipments of $1.250 billion, plus or minus $30 million, reflecting continued strength in the Memory segment and ongoing investments for 20-nanometer foundry capacity.

We expect revenue of $1.215 billion, plus or minus $30 million. We currently expect higher customer concentration in the March quarter with nearly 80% of our system related sales derived from our top three customers versus approximately 60% in the December quarter.

We expect gross margin of 45%, plus or minus 1 percentage point. In the March quarter, we have a higher proportion of newly introduced etch and deposition products, which have a slightly negative impact on gross margin while those products are in the early phase of their ramp. We forecast operating margins of 19.5%, plus or minus 1 percentage point. And finally, earnings per share of $1.15, plus or minus $0.05 based on a share count of approximately 173 million shares.

Operator, that concludes my prepared remarks. Martin and I would now be pleased to take your questions.

Harlan Sur, JPMorgan.

Hi, good afternoon. Great job on the quarterly execution.

On the 3D NAND side, I think the team has mentioned previously your views that it's predominantly one guy in the market this year. I know of at least two of your memory customers that have recently talked about some 3D NAND activity later this year or early next year. Just wondering if you're seeing this now in the product pipeline for the second half?

Thanks for your comment at the introduction there, Harlan. The answer to the question is, yes, we are. I expect still one customer to be the dominant emerging out of pilots to production and to the extent that other customers are investing in 3D NAND which we do expect, they're pilots oriented investments. But it is more than a one-customer assumption set that's embedded in our $32 billion, correct.

Great. Thank you.

Then on your significant install base, your services business, how do you expect growth here relative to your overall business this year? Industry utilizations, I would think are trending higher. And then on top of that, what are some of the specific initiatives both top line and cost and expense fund that the team is going to be focused on this year with respect to services?

I think on the utilization front, time will tell. Instinctively, I agree with the hypothesis of your question. But it's not as if with some rare exceptions utilization level are kind of low. They're pretty active.

Certainly in the memory space that's a true statement. And I think the technology nodes, given the flexibility of the foundry community have, utilization, pretty high there as well. To the extent utilization goes up, that's one source of growth.

Another source of growth is the install base of the Company. So there's a natural expansion of the growth consistent with the output of the Company. You can see evidenced by our actual performance and forecast, we've got some nice momentum on outputs of systems into the install base and that bodes well for sustainable growth this year into next year.

As we talked about in our analyst meeting and a little bit in the last two earnings call, the install base business of the Company, the spares, the service, the upgrade, the training, the refurbishments are tremendous opportunities to contribute value to the customer, and that's been a core strength of the history of both Companies. But I would say it is fair to characterize that we're reenergized around that today, in the context of responding to complex challenges from our customers to not just deliver technology but to deliver cost. That's an opportunity for us to strengthen partnerships with our customers.

Thank you, Martin.

Thanks for the question, Harlan.

Timothy Arcuri, Cowen and Company.

Hi, thanks guys. A couple things, relative to WFE for 2014, we're exiting December at the $33 billion run rate as an industry. I'm not sure if you think that's the right number, but that's what I calculate.

If the year's going to be $32 billion, I think you're saying, and if the first half is going to be better, does that imply that the year's going to be front half loaded? Or you just don't have visibility into the back half, and if it's better than the year would be higher than your $32 billion number?

I think as I said in my prepared comments, we obviously have less visibility in the second half than the first. But we do have some assumptions which are based in our $32 billion, and I think reasonable balance between first half and second half is an overall commentary I would offer for WFE in total.

But I would say one segment that stands out in that picture is DRAM, where I think there is a higher profile of first half investment compared to the second. I don't know if that's a 60/40, or a 55/45, or a 65/35, time will tell. But that is the segment which stands out, at least at this point, as being slightly more biased to the first half.

Now, a lot of things could change in either direction, and clearly to the extent that prevails, that's an opportunity for Lam to outperform given memory concentration in the first half compared to the second half, as far as peer comparisons are concerned. Although as I said, I do expect out-performance in the calendar year, period. That's the best I can offer you at this point, Tim.

Okay. Thanks a lot, Martin.

Then just as a second question, you had a pretty big quarter for NAND, obviously in December. Do you have a sense of what the shipment mix is going to look like in March? I would assume memory is going to be down a smidge and foundry's up, but can you give us a sense? Thanks a lot.

I think actually that we've got memory expansion in shipments December to March and foundry fairly stable.

That's exactly what we're expecting.

Okay. Awesome, guys. Thanks.

Patrick Ho, Stifel Nicolaus.

Thank you. Likewise, congratulations on a great 2013.

Martin, first in terms of big picture looking out over the next couple of years in terms of your market opportunities, with the continued delays in EEV, have you made any revisions to your target model in terms of both etch and deposition over the next few years, particularly as you look at 2015 and 2016, giving the push-outs that have occurred?

That's a good question. Thank you for your comment at the beginning as well.

We have not chosen to revise the models for 2015 and 2016 yet. I think clearly we would be looking for incremental opportunities to the baseline that we established if indeed the EEV picture as recently characterized plays out that way.

We've got a lot of time between now and then in terms of positioning for 7-nanometer logic, particularly and to the extent there's any interception of 10-nanometer. Frankly, 10-nanometer decisions are still out there in many respects as well. We haven't changed the model per se, but I would expect us to be chasing a broader set of opportunities as a result of this.

Great. As a follow up to some of your prepared remarks about the DRAM opportunities, particularly for double patterning at 20-nanometers, you talked about the different layer opportunities that increase. Can you maybe go a little more specific in terms of where you see the greatest opportunities within etch, on a more granular detail, as well as the opportunities in deposition? Where specifically do you see the greatest incremental opportunities as you move to 20-nanometers for DRAM?

Wow, that's really specific. One of the things I don't want to do, frankly, is get a little bit ahead of ourselves on the number of extra passes, which is the most tangible area of growth for us in the DRAM conversion. Because I want to see more evidence of actually the emerging messages that I communicated today actually show up on a continuing basis.

But we're really focused on high aspect ratio opportunities. We're really focused, in the X space, we're focused on packaging and ALD with conformability and uniformity challenges being more significant in next generations. That's the area for us. It's all about inflections, and it's all about emerging technologies to support narrowing requirements on process window. They're tough to deal with.

Great. Thank you.

Thanks, Patrick.

Jim Covello, Goldman Sachs.

Great, guys. Thanks so much and congratulations on the good results. Martin, just a clarification first, you said memory up 10% to 20% this year, that was including both DRAM and NAND?

Yes.

Any chance of giving us a breakdown in terms of how you think each of those markets grows this year?

Indeed, I could probably give you some reference on that. If you have a follow-up question, why don't you ask that first, and I'll do a little bit of research while you're --

Sure. The follow-up would be, understanding your comment about 60% of the business coming from the top three in December and 80% from the top three in March, within NAND specifically, is the remainder of the 40% and 20%, respectively, are there other NAND players in there as well? Or is NAND very top-heavy loaded?

There are only so many players obviously in the NAND space. The mixture of spending has three components to it. It has a 3D investment, which in 2014 is different than 2013 by virtue of more people engaged in a pilot line space so that's one investment type.

Another investment type is whatever additions are going to be made in the context of a remaining planer investments. And then a significant investment in NAND flash comes from conversions. That's obviously a planer dominant conversation for the customer.

If I looked at additions, I would say the additions via 3D NAND and if I looked to upgrades, it's all about planer investments. And I would not expect this year to be the year where all in 3D is the majority of NAND's investment. If I look at the sum of additions and upgrades and conversions, I would say calendar year 2014 is getting closer, but it's still likely to be a plainer majority year.

The answer to your first question is obviously the baseline for NAND's WFE in 2013 is a little higher than DRAM. We assume about $6 billion for NAND last year and $5 billion or so for DRAM. I believe there's about a billion dollars or so of growth in NANDs year-over-year, and frankly something similar to that level in DRAM as well. So reasonably equal growth increments, slightly different baseline.

Very helpful. Thank you, good luck.

John Pitzer, Credit Suisse.

Congratulations, thanks for letting me ask the question. I guess my first question, you talked about two dampening impacts to gross margin in the March quarter, new product ramps and customer concentrations. I'm curious if you can help me quantify what kind of hit those two dynamics are having in the March quarter, and how we should think about those dynamics throughout the year as we think about gross margins?

Yes, I'm guiding you down -- John, this is Doug -- 80 basis points from what we just delivered. I'm not going to quantify the specific impact of each of those, but they both contribute, obviously, offset a little bit by slightly higher volumes. But as I tried to indicate, the volume bit is getting to be less and less important because we're running the factories pretty full right now. The upside from that is less today than it has been in the past.

Yes, and I would add I think an important point relative to the interpretation of the financial models. If you go back to what we presented at SEMICON West last calendar year, we had a 2013/2014 model and a 2015/2016 model. The fact that we had two models was intended to be important because it does take time as well as volume to execute cost reduction plans in terms of developing new products for lower cost profiles, et cetera, et cetera. And it does take time to execute and implement strategic plans to improve the performance of the Company, however good we are in terms of competence and capability and execution.

The 2013 and 2014 model had a 45% place holder and within reason that's a great place to be in terms of kind of modeling. And just occasionally we're going to pop up above it as we did in December. Maybe just occasionally we pop below it. It's much less about volume at this point.

We need time to get us through this period of the penetrations on the inflections so we come out of the gates. You launch a new product. It's usually at its lowest profitability point in that first six months to one-year time horizon. The inflections are becoming a greater proportion of the output of the Company.

And 2015 and 2016 is a great place holder for when the majority of that inflection and the majority of the new products associated with it, which should be firing on all cylinders from a cost point of view at that point, have their impact on the Company. I'd ask that you all think through, not just the volume, but the time lines that were defined in the models that we communicated last year.

That's helpful. Martin, as my follow up, I appreciate the detail as always.

As we think account UV getting pushed out, I think one of the things that we're seeing is the chip companies are getting more efficient on multipatterning. The largest foundry guy was not expecting a density improvement at 2016. Now he's talking about it, the largest logic guy is talking about being able to stay on Moore's law even without a UV for a lot longer than we thought.

I guess my question to you is I'm trying to understand, if they learn to be more efficient with multipatterning does that actually take market opportunity away from you? Or are they becoming more efficient because of what you're providing?

I'm sure all of the above is the answer to that question. I mean the perpetual challenge in this industry is bringing technology to the customer at lower costs, bringing capacity and output to the customer at lower cost. I am sure and hope quite frankly that we're enabling not just technology road maps for customers but cost reduction road maps for customers because I think we all recognize the complexity of our customers' industry and our customers' customers' industry for that matter.

We have to run Lam Research with a long-term perspective in mind. So I always think it is very artificial to try and bias performance in the short-term by not delivering solutions to the customers that in the long-term will allow them to be most successful. I'm sure we're part of enabling and indeed the customer by virtue of consolidation and influence over the equipment industry brings it back to the table as well.

Thanks, guys.

Stephen Chin, UBS.

Thanks, just one follow up question on WFE. If the industry spends more than your initial view of $32 billion, where do you think the upside would come from? Do you think it would be higher foundry, or would it be on the memory side?

I think it's a couple of things. It is a demand story, so I don't think $32 billion is the most aggressive view of GDP and consumer confidence. If that trended up, I think there's a little bit of upside there.

The other part of it, to your point frankly, is emerging evidence of cost and performance benefits of inflection-led device transition. If the industry sees cost and/or performance benefits, I guess the industry of our customers' customers sees the benefits, then there's likely to be an acceleration, if history is a relevant indicator of our future. What the probability of that is at this point, I have no idea, which is why I give you $32 billion, plus or minus $2 billion.

Yes. Okay, and it wouldn't be like memory over foundry, if there was some upside?

I wouldn't characterize one way or the other at this point, which one I thought was more likely to happen. There are clearly independent variables on the supply side. They're very dependent on the demand side, so I don't know. It could go either way.

Okay. Thanks.

Krish Sankar, Bank of America Merrill Lynch.

Yes, hi. Thanks for taking my question and congrats on the good results, guys.

Martin, I had two questions. Number one, in terms of the 3D NAND on the etch side, is your market share similar or better or lower compared to [cleaner] NAND?

It's at least as good, and I would expect in some of the selection spaces slightly better.

Got it. That's very helpful.

Then, one other question, in terms of your industry outlook, you said that you're seeing a lot of reuse of equipment on the logic side which is not a big surprise. The question I was trying to find out is are you seeing with capital intensity the foundries still very high? Are you seeing more reuse tendencies from the foundry customers, or do you think it's going to happen going forward?

I think it will be an emerging trend. I think it's a very hard thing to execute and at some level the need and the expectations for it are obviously embedded in the numbers we've given you on WFE. But I think the economic realities of scaling for the foundries make it much more important than ever.

And the challenge obviously is if they have sustaining commitments from their customers so the legacy geometry is however they free up the capacity to make it happen on scale. So I think it shows up more how big it ultimately is. I think time will tell.

Thanks, Martin.

Mehdi Hosseini, SIG.

Thanks for taking my question. The first one is for Doug. Do you have any plans to help increase the cash on shore as a means to increase shareholder return?

Mehdi, I've described our approach to cash as we've got a plan in place at least through 2014 which is the $250 million buyback authorization. Yes, we're always looking at opportunities and whether there could be more cash brought on shore. The guidance I've provided is roughly 20% of the prospective cash, we generate is onshore.

We may be able to tick that up a little bit. In fact, I think we will. We're always looking at a couple of different things. And we'll communicate with you year-by-year or quarter-by-quarter, as we work our way through this authorization what the concrete plans of the Company are as we go forward.

My brief follow up is for Martin. Do you have any market intelligence, especially from downstream players to help us understand the application for 3D NAND use, especially with the 80,000 to 100,000 wafer per month capacity that you were referring to?

I think we do, but I'm going to reserve the right to keep that to ourselves and respect the interest of our customers.

Can you talk around it, or qualitatively talk about some of the general use of the 3D NAND?

I know you don't like me doing this, but I am going to resist it because I feel like we put a lot of information out and just occasionally I've got to stay honest to protect some of what we spend lots of time building, which is relationships with customers and customers' customers, so that we have a good sense of where the industry's headed.

You're saying that this 80,000 to 100,000 will be installed by September, so the shipment would start by December, is that right?

No, it's statement of physical shipments to customers, by the end of the calendar year, that is the number I gave you.

I say that because the Korean customers have both told us that --

Mehdi, we're going to move on here now. Could we get the next question, please.

Mahesh Sanganeria, RBC.

Thank you very much. Martin, a question on the foundries, the linearity of 20-nanometer NAND. You talked about the NAND base is dependent on the availability of the technology. Where do you think the 20- and 14-, 16-nanometer are in terms of readiness, and from that what can you tell us about the RAM profile of these technologies?

I think back to my earlier statements, the assumption that we're making today, based on our conversations with customers and our own modeling is that foundry is a reasonably stable year. It's going to have obviously a majority form 20-nanometer the first half, and 14-nanometer and 16-nanometer emerges in the second half as kind of pilot lines.

You're going to see a different node of spending in the calendar year. And if nothing changes in terms of commitments to the customers' customer to FinFET devices then the race by the foundry to get whatever early share of momentum is available, tends to suggest a pretty convicted spending to that plan. I don't think this is the year where that 14 to 16 investment is particularly subject to risk on yield because it will be too early. It's not enough.

It'll be a much more relevant conversation in calendar 2015, 14-nanometer, 16-nanometer yields aren't where the customers want it to be, yet I'm sure that'll be relevant to the pace of the add capacity. But I don't see that as being a particularly big factor in calendar 2014.

Okay. That's very helpful, and then you made comments regarding space [of base] double patterning driving ALD. My question is, is there a significant adoption of space [of base] double patterning in the DRAM and the logic devices? NAND is 100% space to double pattern, but are you seeing a lot of interests from DRAM as well as logic devices?

DRAM, yes.

Okay. Thank you.

You're welcome.

Ben Pang, Northland Capital Markets.

Thank you for taking my questions. In terms of the reuse, can you characterize the amount of reuse for your equipment, 28- to 20-nanometer, 20-nanometer to FinFET, and split that between etch and CVD?

You'll need to ask that question again because you were breaking out. Sorry.

If you look at the equipment reuse between 28-nanometer foundry logic and 20-nanometer, and similarly 20- to 16- or 14-nanometer FinFET, what's the difference in the amount of your equipment that can be reused? And is there a difference between etch and CVD?

Okay. The etch and CVD conversation's a little bit premature for me to have. The first one, the first piece of it's a little difficult, but the best I could give you probably is that I think in general the equipment sets for 20-nanometer generally is much more overlapping with a 14- and 16-nanometer equipment set than was true for 28- to 20-nanometer. I would say intuitively it would seem there are more opportunities for reuse 20- to 14-, 16-nanometer than existed 28- to 20-nanometer.

Now that's a line availability statement or ease of transition. That doesn't take off the table the challenge I described a little earlier which is if you've got demand from a customer, and you have legacy demand for some years, how do you free enough capacity to go do it? But intuitively, I think that the reuse opportunity for the foundry is greater 20- to 14-, 16-nanometer, presuming you have 20 investments of a sufficient amount than was true at 28- to 20-nanometer.

Okay. My follow up is you talked a little bit about the customer concentration. For 2014 calendar year, do you expect the same concentration as 2013?

No, I actually think it'll be a little bit less. The March quarter is pretty concentrated. I think the whole year is actually going to be the same or maybe even a little bit less than 2014 relative to 2013.

Okay. Thank you very much.

Edwin Mok, Needham and Company.

Thanks for taking my question, and also congrats for a good quarter. The first question regarding (inaudible) on your foundry WFE outlook for 10% to 20%. I was wondering how much of that comes from increased capital intensity in the foundry versus broadening of customer base?

We heard from one of your peers talking about (inaudible) order push-out at the foundry side. I was wondering if that had an effect on how you think about foundry outlook for this year?

I don't think the dollars invested in 14- and 16- will be as high as 20-nanometer in the calendar year. That's the assumption that we have at this point.

And we have said and we're much more able to speak to this for deposition, etch, and clean than we are wafer fab as a whole, but we've sized the increments in [fam] to the 5% to 10% level for the comparison of final generation play in our first generation FinFET for foundry. That's the best I can give you on capital intensity.

I see. Okay. That's fair, and then I think you mentioned about one of the largest service contractors you signed on the quarter, and how you focused on the service area.

Any way you can quantify how much of your business is service right now? How do you think that will transpire as we look beyond this year, let's say 2015, 2016? Do you expect greater growth in that area and any metric to measure that?

Yes, I think actually we gave a pretty good shot at answering that question in the analyst meeting at SEMICON West last year, so I'd refer you back to the July 9 presentation. There's more substance there than we have time for today.

Just so we're not confused, it's not just a service play. It's an upgrade play. It's an install base utilization play. It's a reliability play. It's training.

It's everything that's available to us as an equipment Company supporting our customers' install base and improvement expectations. Service is one part of that, but it's not a growth plan limited to service.

Okay. Great. Thanks.

Operator, I think we have time for two more questions.

Terence Whalen, Citi.

Hi, great. Thanks for taking my question. Actually two quick ones.

First, you gave the 80,000 to 100,000 NAND installed capacity by the end of 2014. Can you just help us understand what that number was end of 2013?

I think we had like 20,000 to 25,000 as the communication at the end of last year.

I think we said 20,000, Terence.

Okay. Terrific. The second question's on customer concentration.

Starting at 80% in the first quarter, it implies a pretty sharp broadening in the second half of customer shipments. Can you just explain to me how you expect that to develop sequentially, and again remind us what 2013 was? And I ask that because with the context of understanding whether conviction in those shipments and the timing and assurance of those shipments is higher or lower than with the larger customers. Thanks.

Yes, Terence, I think the most concentrated quarter is going to be the March quarter. I'm not going to get into the specifics of each quarter after that because things move around, but it'll broaden out our view as we get through the remaining quarters.

I don't know, to the soft part of your question, is it a higher risk or lower risk to have more people participating? Who the hell knows. I tend to feel that the reasons for more people investing, and there are more reasons around technology inflections inherently have more conviction than generic capacity additions. So I actually feel pretty good about that.

I also feel like the environments that supply and demand balance and the fact that we come into the year pretty tight, the fact that pricing levels for memory, the fact that the profitability levels for semiconductor companies generally is, maybe they would argue not as good as they'd like it to be, but it's far better than it has been. I tend to feel better about it.

I do think that you should -- we should, continue to expect variability quarter-to-quarter. It is really hard to predict the output of these companies when two to three to four guys can represent everything about the performance of your Company. One guy moves left or right, and you've got a different picture.

We've kept our ranges pretty narrow on our guidance, and we'll keep them that way as long as we feel like we can manage it. But I would say it's getting much more difficult to manage variability of individual customer movements than ever before.

Congrats. Best of luck.

Vishal Shah, Deutsche Bank.

Hi, this is Chad Dillard on the line for Vishal. From an energy perspective, can you talk about how you see the amount of 20-nanometer being installed for 2014 from a wafer start perspective?

Yes, given the concentration to a couple of customers I'm going to resist that level of specificity. As I said, I do expect maybe you've got to triangulate a little here. We are forecasting in the range of $13 billion, $14 billion of WFE.

The public commentary and analyst commentary on 20-nanometer costs is approximately, $1.25 billion, $1.3 billion per 10,000 wafer starts addition. I said I expect the 20-nanometer addition is greater than the 14- and 16-nanometer addition. I think if you work with those data points, you're going to find out a pretty reliable answer to your question.

Great. Maybe you could just unpack the foundry shipment, a number in December. What was the mix of 20-nanometer versus the rest?

That's disclosure above and beyond what we have customarily done. I'm sorry.

Got it. Okay. Thank you.

Operator. Thank you, and I would like to turn it back over to Management for closing remarks. Please go ahead.

Wonderful. We truly wish to thank you all for spending the last hour or so here with us today.

As a reminder, a webcast replay of this call will be available later this afternoon on our website. On behalf of the entire Management team, we appreciate your interest in Lam Research.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.