科林研發 (LRCX) 2014 Q4 法說會逐字稿

Good day and welcome to the Lam Research Corporation June, 2014 quarterly results conference call.

At this time I would like to turn the conference over to Ms. Carol Raeburn.

Please go ahead, ma'am.

Good afternoon, everyone, and welcome to the Lam Research 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 June 2014 quarter, and our outlook for the September 2014 quarter.

The press release detailing our financial results was distributed a little after 1:00 PM this afternoon.

It can also be found on the Investor Relations section of the Company's website, along with the presentation slides that accompany today's call.

Today's presentation and Q&A will include statements about our expectations and beliefs regarding certain future outcomes, including our guidance.

A more comprehensive list of forward-looking topics that we expect to cover is shown on the slide deck accompanying my remarks.

All statements made that are not historical in fact 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 factor disclosure in our public filings, including our 10-K and 10-Q.

The Company undertakes no obligation to update forward-looking statements.

Today's discussion of our financial results will be presented in a non-GAAP financial basis unless otherwise 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 3:00 PM Pacific time.

And, as always, we ask that you limit questions to one per firm, with a very brief follow-up, so 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 now hand the call over to Martin.

Thank you, Carol, and good afternoon, everyone.

I'll start today by commenting on our performance in the June quarter and 2014 fiscal year.

Then provide a little more color on our view for the outlook of wafer fab equipment spending in the second half of calendar 2014 and the full year 2015.

Before transitioning to Doug I will conclude with thoughts on Lam's growth and describe areas of focus for the Company.

This should provide you with helpful context.

In the June quarter, Lam continued the trend of outperformance, and we delivered another quarter of strong execution across the Business.

Results topped the midpoints of our guided ranges across all metrics, reinforcing our confidence in our recently updated long-term financial models.

The June quarter marks the end of our fiscal year, a truly remarkable year for Lam.

In a period of transformation within our Company and the industry generally, we reported record revenues in each successive quarter, and operating income that more than doubled year over year.

We believe that a major theme for Lam in our recent year and, more importantly, in our future is the opportunity for sustainable outperformance.

This is made possible through our position and focus on market leadership in the segments of WFE that we serve, our critical applications growth strategy targeted to deliver leading-edge solutions through significant technology inflections, and our demonstrated ability to execute predictably, meeting commitments to the full community of stakeholders.

These strengths all combined to provide a path for Lam to create value of substance for shareholders over the next several years, value creation that should accelerate with continued execution in our markets as they represent an expanding proportion of WFE due to the primary technology inflections, most notably in areas related to patterning, 3D devices, and advanced packaging.

Overall we estimate that approximately 25% of total WFE investments this year will be directly associated with the inflection technologies.

And based on the importance of these enabling transitions to our customers and the current pace of pilots and production ramps, we maintain our view of WFE spending within a $32 billion range.

For our Company, due to the complement of our strengths with the spending bias of our customers, we continue to remain optimistic that the second half of calendar 2014 can achieve a revenue level reasonably similar to the first half of the year.

Although much can change, at this time it would be fair to characterize that we expect December to be stronger than September.

Now to the segment details.

Starting with NAND flash memory, we continue to see balance between supply and demand of bits, as sustainable profitability continues to be a strong customer focus.

We believe that customers are supplementing and converting capacity in a very rational manner, with WFE spending relatively consistent with earlier expectations.

Investment is focused on 16-nanometer and below planar conversions, as well as initial 3D NAND capacity.

As noted at our investor and analyst event recently, we continue to expect planar investments to represent the majority of NAND's WFE spending this year, representing approximately two-thirds of the total.

Our outlook for 2014 NAND supply bit growth remains in the lower 40% range.

In DRAM we saw continued strength and investments in the June quarter.

Strong DRAM ASPs with a supply-constrained market are underpinning an industry focused on realizing healthy returns on investments made.

Accordingly, investments are primarily being made to enable the transition to mid 2X and below technology nodes, transitions which we believe offer meaningful value to customers from a very efficient upgrade-oriented spending.

Projections for DRAM bit growth are approximately 30% this year.

Overall in memory we maintain our projection for 2014 WFE at $12 billion to $13 billion.

Lastly, in both the foundry and broader logic segments, our outlook remains more or less consistent with the prior view.

The ramp plans for 20-nanometer foundry and 14-nanometer logic appear, from our perspective, to be progressing largely as expected, with the foundry focused on 20-nanometer investments in the first half of the year, and the second half of the year weighted to early FinFET purchases and a broadening of participants.

Restating my earlier message, we expect WFE at the $32 billion level in calendar year 2014, and revenues at Lam that materially outperform to that baseline year-over-year comparison.

For 2015, we continue to believe that WFE spending levels are biased to be stronger than 2014, with key opportunity and risk being defined by success of latest generation devices, utilizing new enabling technology measured by performance and cost benefits in their markets, and the conviction of participants to grow profitably in an increasingly consolidated and competitive semiconductor industry.

For Lam, we believe that the share of WFE that will be attributed to markets that we serve will increase as technology inflections become more mainstream, and represent perhaps approximately one-third of total spending next year by our customers.

Combined with this SAM growth outperformance, we believe that our technology inflections applications market share is in excess of 50% across the portfolio of deposition, etch and clean products.

We remain excited by this unique opportunity, and work hard each day to meet our commitments and continuously strengthen the trust that our customers place in our Company and the individuals who work here.

This commitment to outperformance and execution is evidenced in our reported 90% success rate in targeted penetration and defense activities in the first half of calendar 2014.

This is one of the most fundamental measures of the trust in Lam and the quality of our people, our product and technology road map, and our ability to execute.

Our momentum, particularly in the most challenging critical applications, is enabled by our commitment to invest in the inflections for the long-term and emphasis on customer collaboration in pursuit of solutions to their most critical challenges.

Execution in these areas is underpinned by the fact that we have shipped 17 new product configurations in the last 12 months, marking, perhaps, the most active period of innovation in our Company -- in a company that has long prided itself on its innovation at the leading edge.

Our focus areas are on the critical path for our customers.

And this shared value proposition is providing significant growth opportunities for Lam.

Illustratively, our leadership in the patterning area is aligned with customers' needs for scaling solutions in advance of next-generation litho.

Our leadership in back-end-of-line clean is aligned with customers' critical yield initiatives.

As we discussed in some detail recently, we're also focused on expanding our engagement with customers related to their installed base, partnering to achieve the level of performance they need to be successful over the long term.

An opportunity exists for Lam to differentiate itself through comprehensive and configurable lifecycle solutions, partnering with our customers to innovate through the economic challenges of scaling.

That is a key focus for our customer service business group.

The capability to rapidly address customers' challenges with innovative and cost-effective solutions, combined with increasing level of support we are receiving from customers globally, is fundamental to executing our vision.

Neither the outperformance we have delivered to date, nor the opportunities presented here, would be possible without successful collaborations with our customers and partners more broadly through the industry.

We thank them all sincerely, and are delighted by the recognition we have received for our efforts.

As we shared a couple of weeks ago, the next six months are a very busy period for us at the customer interface, supporting their most critical ramps, and focusing on the significant number of equipment selection decisions outstanding for this year, staying aligned with our customer on their needs, planning and executing accordingly.

As you might expect, for a company that is targeted to grow between 20% and 25% year over year in calendar 2014, in turn creating approximately $1 billion of cash from operations; for a company with a vision to grow meaningfully through a multi-year technology inflection period, Lam leadership is committed to successful scaling of our Company in a manner that is transparent and value-creating for our customers and shareholders.

In conclusion, and notwithstanding the formidable strengths of our competitors, we continue to believe we are well-positioned to outperform in the coming years.

We plan to execute to win key applications.

And with a $2 billion SAM expansion opportunity through calendar 2017, we are very excited about a future of growth.

Last but not least, I would like to recognize the Lam team, the full complement of 6,700 employees globally who worked tirelessly through a complex and transformative period for the Company, who believed in the opportunity and prioritized their role modeling our values of customer first, company, and then individual, and achieving our vision objective of being number one in customer trust above all else.

Many thanks to everybody.

With that I'll hand the call over to Doug.

Okay, thanks, Martin.

Good afternoon, everyone.

And I want to thank you today for joining us during what I know is a busy earnings season for you guys.

Let me just begin by saying we're very pleased with the results from our June quarter, which top off a very strong performance for fiscal year 2014.

Operating income continued to outpace revenue growth, growing at roughly twice the rate, both in the quarter as well as in the year.

Gross margin and earnings per share both came in above the midpoint of our guidance, demonstrating the strength of our business model.

We continued to execute on our plans to outperform the industry around the key technology inflections, as well as to deliver on our financial commitments.

Shipments in the June quarter were above the midpoint of our guidance range at $1.160 billion, which was down about $100 million sequentially but up slightly when you compare it to the December quarter.

The memory segment represented 59% of total system shipments, and that was down from 66% in the March quarter.

Within that, NAND shipments contributed approximately 20% of total system shipments.

And I'd just point out, we still anticipate that planar NAND node conversions will represent the majority of NAND investments for the full year.

And we do expect to see an increase in planar investments in the back half of the calendar year.

DRAM shipments were strong at 39% of system shipments.

And that was up from 30% in the March quarter.

With healthy pricing in the DRAM market, and supply remaining tight relative to demand, we've seen an increase in spending to support both 25-nanometer and 20-nanometer node conversions.

Our successful product positions for multi-patterning applications continue to be a tailwind with respect to the DRAM segment.

Foundry shipments were 30% of total system shipments.

And this was up from 28% in the prior quarter.

We expect to see a strengthening in foundry investment in the second half of the calendar year, with a broadening of the customer base investing in FinFET pilot production, as well as additional investments in the 28- and 20-nanometer nodes.

And, finally, logic and other shipments comprised 11% of total system shipments, and this was up from 6% in the March quarter.

Revenue for the June quarter came in at $1.249 billion, setting a new high for the fifth consecutive quarter.

June gross margin percentage came in at 46.4%, an increase of about 90 basis points compared to the March quarter.

And as we shared with you in the past, business volumes and overall business mix contributed to the variability in our gross margin performance.

And we expect to see fluctuation in gross margins on a quarterly basis.

Our operating expenses were within our expectations for the June quarter at $322 million, holding steady at about 26% of revenue.

We continue to prudently manage SG&A costs to allow us to appropriately fund strategic development programs that are expected to generate growth in future revenues.

Our R&D spending is focused at the leading edge technology nodes, as well as the technology inflections that you heard us talk about during our investor meeting earlier this month.

We are spending on products in etch and deposition that will move us farther into atomic scale processing.

We are spending on products in clean to deliver next-generation yield solutions for our customers.

Operating income delivered in the June quarter was $258 million, and this was up about $10 million from the March quarter.

Our operating margin came in at 20.6%, above the midpoint of our guidance range, reflecting the leverage in our model.

The tax rate for the June quarter was approximately 15%.

I do expect this rate to rise somewhat as we move into our 2015 fiscal year.

I would be modeling a rate in the high teens for the near future.

This increase is driven by a more significant amount of our revenue being generated domestically where tax rates are a little bit higher.

I should point out to you that this tax rate estimate does not include any benefit from the potential extension of the R&D tax credit in the United States.

If that tax credit is extended it would lower our rate by 2 to 3 percentage points.

The resulting earnings per share for the quarter came in at $1.25, and that was above the midpoint of our guidance range.

The majority of the upside is attributable to our improved gross margin for the quarter.

The earnings per share were based on a share count of roughly 173 million shares.

The share count includes the dilutive effect of 8.2 million shares from the 2041 convertible note.

And I'll just remind you that the dilution schedules for this note, as well as now the 2016 and 2018 notes, are posted on our Investor Relations website to help you with your modeling.

As our share price has ticked up in the last quarter, modeling the dilutive impact from our converts now requires looking at all three of the notes.

Cash from operations was robust at $246 million generated in the June quarter, and this was about 20% of revenue.

Cash from operations benefited from continued focus on working capital metrics.

Days sales outstanding improved in June to 58 days, and that compared to 61 days in the March quarter.

Inventory turns did decline slightly as we added a little bit of inventory for future business growth.

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 $3.2 billion.

This was up 11% from $2.9 billion in the March quarter.

Cash in the quarter was bolstered by $135 million from the sale of some nonessential real estate assets.

We had deferred revenue of $362 million, which does not include $34 million in shipments to Japanese customers which will convert to revenue in future quarters.

And I'll just remind you, on April 29 we announced that the Board of Directors approved a $1 billion capital return program, which consists of an $850 million share repurchase authorization, along with the first quarterly dividend in the 34-year history of the Company.

During the June quarter we spent $36 million on the repurchase of approximately 624,000 shares at an average price of $56.89.

We expect to complete the balance of the share repurchases over the next two years.

The quarterly dividend was initiated at $0.18 per share, which was paid out on July 2. The scope of the capital return program demonstrates the confidence we and the Board of Directors have in the cash-generation capability of this Company.

Let me now turn to our non-GAAP guidance for the September quarter.

We expect shipments to come in at $1.110 billion, plus or minus a range of $50 million.

We expect revenue of $1.150 billion, again plus or minus $50 million.

Shipments and revenue reflect a sequential decline in total memory spending, offset by a growth in foundry spending.

We expect gross margin to come in at 45.5% plus or minus 1 percentage point.

We are forecasting operating margins of 17.5% plus or minus 1 percentage point.

And, finally, we forecast earnings per share of $0.92, plus or minus $0.07, based on a share count of approximately 177 million shares.

And I'd just like to pause for a moment and point out to you that within the midpoint of this EPS guidance, is the impact of roughly $0.05 from the incremental dilution from the converts, as well as the increase in tax rate.

Operator, that concludes my prepared remarks.

Martin and I would now like to open up the call for questions.

(Operator Instructions)

CJ Muse, ISI Group.

Good afternoon.

Thank you for taking my question.

First question, in terms of the implied guide for second-half revenues consistent with the first half, it looks like you're looking at revenues growing roughly 15% sequentially in the December quarter.

The question there is, one, can you talk about visibility; and then, two, how much of that will be an increase in shipments versus a drawdown of deferred revenues?

I think the first thing to say is visibility for something six months away isn't as good as the visibility three months away.

But we certainly do our best, CJ, to give you an appropriate linkage between commentary from the customers and the opportunity for the Company.

I will remind you that I said approximately similar, not precisely the same.

So, first half, second half, side.

I'd be sensitive to being a little too precise in the calculation here.

But for all intents and purposes, we believe we've got a revenue opportunity and expansion between September and December, and will be approximately equal first half and second half.

We don't typically disclose our backlog in orders in a conversation like this.

Obviously we're about to file a 10-K and there will be a backlog number in there.

But I will comment that the backlog for the Company, the difference between the orders received from customers and shipments made to customers has built by more than $200 million in the last two quarters.

So, we're building backlog.

And, frankly speaking, the relationship between shipments and revenues is reasonably consistent from one period to another.

So, in answer to the second part of your question, is it a drawdown -- it would only ever be a drawdown if the circumstances of the customer were causing us to respond to their request that way.

But there isn't a fundamental message on ship and revenue turns that would undermine the outlook that we've shared with you.

That's very helpful.

And then, Doug, if I could ask you a quick question here.

In terms of greater cash generated here in the US, how does that change your thinking in terms of perhaps being more aggressive on buybacks and/or upside to that $850 million?

It doesn't really.

The two are not related in my mind, CJ.

We announced the capital return program before I had really modeled what I expected the tax rate for the next fiscal year to be.

So, in my mind it's not interrelated.

And, again, the uptick, just to clarify, in the tax rate has a lot to do with the fact that we are just shipping more systems into the US, which has a higher tax rate than when we ship them elsewhere.

But the two things are independent in my mind, CJ.

Okay, thank you.

Timothy Arcuri, Cowen and Company.

Thanks a lot.

Just, Doug, a question on calendar Q4.

I know that you don't want to talk too much about it.

But if you just look at your guidance to grow the revenue between 20% and 25% for the year and you take the midpoint, certainly it suggests that the revenue in December is going to be a little bit better than what it was in June.

And I'm wondering, from a gross margin perspective, is there anything abnormal in the shipment concentration in what's likely to ship in December that would make gross margin or the profile any different?

Because then that would argue that your gross margin should be better in December that it was in June.

Thanks.

I don't know, Tim, you know I'm not going to answer that question.

We're not going to get into giving hard guidance more than one quarter out.

I think your thinking on the top line is probably directionally right.

I haven't quite gone through where all of the mix would fall out.

I would take you back, though, to the financial models that we put out as the best guideposts for how I would be thinking about the profitability and the gross margin of the Company, Tim.

Okay, great, thanks.

Thanks.

And then, Martin, can you talk a little bit about, are there concrete examples -- I know you probably don't want to get too much into the specifics -- but are there examples, when you talk to your customers, that you have gained share or you've gained a slot as a result of the ongoing proposed merger that's happening out there with your larger peers?

Are there any examples of you absolutely gaining share as a result of that merger?

Thanks.

There's absolutely a lot of evidence that we're gaining share.

Whether it's precisely a byproduct of the customers' reaction to a planned merger or not is a conversation I don't waste my time having with the customer, honestly.

I am sure that the value proposition, to the extent the customers are not positive - and you will need to talk to customers directly to figure out whether they are or are not -- but to the extent that they are not positive about that planned merger, my personal opinion is the benefit is a more medium- and long-term benefit to the Company, not short-term, for the simple reason that it takes a long time to make changes to market share at this company.

And when you get selected or you're working on a selection, they tend to stick pretty well.

I'm sure there is an example or two along the way where we might be able to claim it was because of reaction.

But, frankly speaking, I think it's not a conversation we tend to have.

We just focus on delivering the best solution that we can, and focusing on established differentiation in the critical application space.

And we try to articulate that in our forward-looking targets.

And we try to articulate it at the most recent analysts call by reminding everybody that in the patterning space we're addressing two-thirds of all the multi-patterning critical steps.

And in the 3D NAND conversion, we have 90% position on the critical applications across all memory customers, and more than 60% on all applications.

So, gaining share and growing our Company is all about critical applications focus and inflections.

And if along the way, whether it's associated with a reaction to a competitor merger plan or not, if we gain other business by building customer trust then we're excited about that opportunity, as well.

Awesome, Martin.

Thanks so much.

John Pitzer, Credit Suisse.

Good afternoon, guys.

Thanks for letting me as the question.

Martin, my first question just relates to some incremental news on EUV that was out in the market today that clearly impacted, I think, your stock and some of your peers' stock.

I'm curious, from your perspective, if the timing of EUV in your mind has changed all that much.

I know you address this at Analyst Day but I'd be curious again to get a better understanding from your perspective, if EUV gets inserted quicker than we think what that might do to that $2 billion TAM opportunity that you've talked about?

Very simply, my view of the intercept points on the EUV is no different today than it was the last time we were in public domain.

And relative to the impact of EUV insertions to the 2017 $2 billion SAM expansion, little or nothing of impact.

And that's just the commentary that I would extract from the statements of our customers.

Our customers have almost, without exception, stated no intercept at 10-nanometer in logic.

And maybe there's a back qual opportunity but it's one or two levels, one or two passes.

So, I think fundamentally no change in view of intercept, and no impact of substance to the $2 billion SAM expansion we articulated.

Martin, that's helpful.

Then maybe as my follow-up, I know you talked about directionally WFE being up in calendar year 2015.

I'm wondering if you could attempt to quantify that, or, at least if not quantify, qualify the puts and takes within the broader buckets of NAND, DRAM and FinFET.

And I'm particularly interested in FinFET because the sense I get is that this time last year, looking a year out, the visibility on 20-nanometer seemed to be a lot more tangible than the visibility on 16/14-nanometer is for the next 12 months.

Maybe if you can address that, that would be helpful.

I'm going to resist the temptation to respond quantitatively because it just feels too early to do that.

But, as I said at the analyst meeting, I think there's two or three levels to the conclusion on bias to growth next year.

One of them is a statement of capital intensity.

I think in each of these transitions, whether it's the patterning, the incremental patterning steps that we articulated, or in logic and DRAM, whether it's the incremental SAM expansion that exists in NAND Flash, and even in litho, I believe, there's an opinion that there's capital intensity increase in a planar to 3D NAND transition.

So, capital intensity, I think, is a part of the story.

I think the general commentary on demand for electronics, consumer and enterprise, and IC units, if you begin with a GDP commentary, is a little bit more positive in 2015 that it is in 2014.

I think the competitive dynamic that exists in a consolidated semiconductor world tends to deliver two things to us.

It tends to deliver discipline in spending and it creates very high risk-reward opportunities for growth for our customers.

And, so, I think there's a tremendous amount of conviction associated with establishing market share leadership positions through these technology inflections.

And clearly calendar 2015 is the first year of substance when we're going from pilot line investments into an HVM regime.

So, I look at the sum of all of the data points available to us, and none of them seem particularly negative, if negative at all.

We'll hold our breath, and maybe by the time we get to the October earnings call put a number out for you.

But I would say at this point we expect WFE to be stronger, and we expect our share of that expansion to be a positive story, as well.

Remember, our view on the proportion of WFE that's inflection-related goes from about 25% in calendar 2014 to approximately one-third in calendar 2015.

Thanks, guys.

Harlan Sur, JPMorgan.

Good afternoon.

Nice job on the quarterly execution.

At your Analyst Day you mentioned inflection technology spend at about one-third of WFE spend next year versus 25% this year.

Looking at it at a more granular level, it seems like you still expect 3D NAND to exit this year at about 6% to 7% of total installed NAND capacity.

Can you just give us some numbers on where you expect 20-nanometer DRAM mix to be in terms of the installed capacity exiting this year?

What I'm trying to get at is or get a sense for is what is the upgrade tailwind as we look into 2015?

When you say 20-nanometer did you say 20-nanometer DRAM or 20-nanometer --?

Yes, 20-nanometer DRAM.

I think the opportunity for a sustainable upgrade is pretty significant.

Our estimate for the end of calendar 2014 is that there's probably 450,000 wafer starts per month of capacity at 3X or above, which is a pretty significant number.

And our estimates on the 2X proportion by the end of the calendar year is still a pretty low number.

So, I think conversion opportunity down to 20-nanometer is going to be a significant part of the story for calendar 2015, and even more so for the Company because of the transitions in terms of double patterning.

I'll remind you that there are three to four steps of multi-patterning in a mid 2X technology node, and there are 15 to 20 steps of multi-patterning at 20-nanometer, and 30 to 40 steps at 1X.

And as Dave Hemker our CTO explained in the analyst meeting, there are multiple passes for each one of those steps.

So, I think the story in terms of sustainable investment through upgrades is going to have a very prominent theme for WFE next year.

And I think it will be even stronger for the Company for the reasons I just stated.

Makes a lot of sense.

And then, Martin, within your balance first-half, second-half shipment outlook, last quarter you had anticipated a broadening out of the spenders in the second half.

Looking at your shipment guide for September and the pipeline for the second half of the year, is it unfolding this way?

I know you mentioned the broader base of spenders in logic and foundry.

Are you also seeing a broader set of customer spending in memory, as well, here in the second half?

Harlan, this is Doug.

I'll take that one.

The memory spending, it's the same guys.

In memory, when we look first half, second half, is maybe a little bit first-half weighted.

Foundry, conversely -- actually foundry and logic -- is a little bit second-half weighted.

And the broadening out that we described to you a quarter ago, we're absolutely still expecting to see.

You're seeing a broadening out of people spending on FinFET.

We're seeing some investment at 28- and 20-nanometer, as well, and it's more substantial in terms of the number of people spending in the second half than the first.

Got it.

Okay, thank you very much.

Jim Covello, Goldman Sachs.

Great, thanks so much for taking the question.

I appreciate it.

Martin, I hate to go back to the noise of the day, but I think it was important, as John Pitzer suggested relative to some of the stocks.

Could you offer us your perspective just from a technical standpoint on, if indeed the wafers that IBM was talking about processing were processed without any photoresist on them, what exactly that would mean in terms of what kind of test that would be from an industry perspective and a technical perspective?

I don't think -- I can give you some fairly superficial commentary.

We're not the experts here, we're not qualified, and we don't know enough about what they stated.

I've read a bunch of reports.

I promise you, you know more than I do.

That may be true.

But the basic headline for the Company is, the multiple patterning opportunities of growth for us are fundamental, they're real, and they're not likely impacted in the 2017 timeframe by an EUV conversation.

There's a tremendous amount of learning still ahead of the industry relative to EUV, very clear.

And every year that passes, the builds and installed base of alternatives in terms of etch and deposition systems for spacer-based DRAM multiple patterning, or immersion litho and etch systems in logic, every year that passes, the bigger the installed base is, the motivation for reuse is very significant.

And, so, the economic trade-off on the intercept actually is even more challenging, not less challenging, as every year passes.

So, I don't know that people are really processing that.

But clearly the long-term benefit for the customer, if the productivity performance that is being described by ASML is achieved in a production environment, is a good thing for the industry and sustaining Moore's law.

But in the meantime, we've got a lot of things to focus on.

And certainly in the 2017 timeline I don't think there's much, if anything, to talk about today.

That's helpful, thank you.

As a follow-up, you and a lot of folks have talked a lot about the broadening out of the foundry spend, and the second-tier foundry customers starting to spend a little bit more money.

Can you walk us all through a little bit of the differences in timing on when you may see orders and deliver shipments of some of the second-tier foundries versus some of the other peers in the industry, and how that could impact half on half growth?

And even how that might affect your visibility into the early part of 2015 shipments to the extent that maybe some of those orders are coming for you in the back half of 2014, whereas some of those orders from the second-tier foundries might have come to some of your peers in the earlier part of 2014?

Not to be semantic, but to the best of my knowledge, there aren't so many equipment companies with a big backlog today.

So, it's much less about an orders conversation, and it's much more about the quality of the conversation and the demonstrated performance of the customer in that conversation to plans and commitments communicated to us.

And there is an expectation in our first half and second half that, as Doug said, the foundry business and the proportion of shipments in foundry have a meaningful increase.

And relative to concentration, just taking a quick look at numbers, there's not a customer in that population that's outside of -- the biggest guy on that list is 30% to 40% of our shipments.

So, it's a fairly diverse participation level.

And it's happening at a time when there's a very unique and very critical opportunity to establish market share leadership in a FinFET device marketplace.

And, so, when I think through risk, as I've said multiple times this year, I think the risk profile for calendar 2014 is actually pretty low.

There's always an adjustment a little bit here or there, but that's, in the scheme of things, noise.

Where things get a little bit more unpredictable is being able to articulate a view on transitions out of pilot lines for HVM.

The headline is, there are only so many customers today for the equipment industry.

There are only so many semiconductor companies spending money adding leading-edge capacity.

And it is critically important that they validate their capability to do that so that when someone's in a marketplace, whether they're going to be a follower or a leader, with a competitive device in terms of performance or cost, they can move quickly.

And, so, I actually don't feel like there's a tremendous amount of exposure to the commentary of the Company in the second half of the year.

I might be wrong but that's how I feel.

I feel like calendar 2015 is much more challenging to predict.

Very helpful, thank you.

Krish Sankar, Bank of America Merrill Lynch.

Hi, thanks for taking my question.

First one, Martin, I just wanted to see if you could take -- you highlighted how one-third of WFE next year would go to the inflections.

If you were to take a swag, which would be the biggest bucket of spending among the one-third?

Would it be the FinFET, 3D NAND or multi-patterning DRAM?

Wow, that's a -- I thought you were going to ask me a slightly different question.

Next year.

I've got an answer to that question for the three years.

I don't know.

Rather than take a flyer at it I'm going to hold off.

Clearly, in the $2 billion context, we have said that the foundry logic transitions, which is a mixture of patterning and the FinFET device, are the single largest proportion for us.

Next is NAND flash, 3D NAND.

And the third in this is multi-patterning DRAM.

And the fourth is advanced packaging.

I guess it's a reasonable commentary, from what I just said, to conclude that the foundry implications in 3D NAND are greater than DRAM next year.

But for our Company we clearly have very strong participation in DRAM, as well.

Got it.

That's helpful.

And then a question for Doug.

If I look at the margin structure, are there any other levers for improving the margin?

Are we going to be floating around the mid 40%s gross margin and maybe low 20%s on margin?

Is it purely a function of revenue from here or do have other levers to improve the margins?

The thing to understand, Krish, when you're running a company the scale and scope of Lam Research, you've got to be driving cost reduction every day, every year.

You have to be making sure your efficiencies and things like that in the manufacturing and supply chain are being pushed as hard as they can be pushed.

You've got to do it every year.

And we are absolutely doing that this year as hard as we did last year, and we'll do it just as hard next year, because we have expectations from our customers that they're going to get some pricing reduction.

You've got to at least drive costs as fast as that just to stay in place.

I think the thing I would then take you to, Krish, is go back to the financial models that we just put at the beginning of this month.

That's the way you should be thinking about the profitability levels of the Company.

We put in the 2014-2015 model a gross margin at 45%, going over the next three to four years to 46%, and approaching 47%.

That's the way you should be thinking about things.

And there will be puts and takes quarter by quarter around those numbers.

We constructed those models and tried to be very thoughtful about how the portfolio of business was going to look.

Just to add to that, if you don't do what Doug says, you don't just float, you drown.

So, it is critically important to focus on the totality of the things that influence the gross margin and the operating expenses of the Company.

We have two levers, simply stated, in gross margin.

One of them is cost, and one of them is revenue.

And the pricing consequence is all a byproduct of the competitive environments and differentiation.

Which is why we make such an investment to position the product and technology portfolio to be as strong as it can be.

And it can always be stronger, but as strong as it can be in terms of differentiation.

And the last thing that we think about when we position profitability in our long-term model is what do we think is a fair distribution of profits over the supply chain, and what do we think is a defendable, sustainable position to take with customers.

Because as best I can tell, economics still represents a significant component of risk relative to Moore's Law.

It isn't just physics.

And if you get that long-term positioning wrong, you create a customer trust exposure which, in my opinion, is really high.

So, we try to position profitability levels in ways that we feel comfortable justifying at the customer interface.

And in that context, we believe, we position for best customer trust and ultimately best partnership, best collaboration.

And if we execute in the way that we intend to, ultimately outperformance of revenues and profits, as well.

Got it, thank you.

That's very helpful.

Thanks, Martin and Doug.

Romit Shah, Nomura.

Thanks.

Great job on gross margin.

Doug, I noticed the incremental gross margin in the quarter was extremely high.

It was roughly 100%.

Was there anything one-time worth highlighting here in the June period?

No, there was nothing one-time.

As I tried to describe, you get the impact of different kinds of mix characterizations, different customer mixes, different tool mixes.

Not everything here has the same profitability.

We benefited from pretty favorable mix last quarter.

And it's coming back to where it was in the previous quarter in our current guide.

Okay.

And then how are you thinking about the share count going forward with the authorization you have in place?

There's an $850 million buyback authorization.

We're only just starting on it.

We're going to execute that buyback over approximately the next two years.

And you should assume we'll consistently be in the market buying that back.

What's moving against us a little bit right now is the dilution from those convertible notes.

And even though we were in the market last quarter, share count's ticking up and it's really all about what's happening from an increasing share price and the impact on those converts.

So, we'll continue to be aggressive with the buyback.

What I can't control is the note dilution right now.

Thanks, Doug.

Mahesh Sanganeria, RBC Capital Markets.

Thank you very much.

Just to follow up on the foundry spending in the second half, if you can make an attempt at quantify the broadness of the foundry, putting in two buckets, 28-nanometer and higher and 20-nanometer lower, can you break down your expectation for the second half in those two buckets?

More of it is at the leading edge, Mahesh.

The 20-nanometer and the FinFET investment is more substantial than 28, by a decent amount.

Okay, that's very helpful.

And the second one, I think on the memory, memory has been very strong this year, and your first half is about 55% on average.

We have seen a wild fluctuation in memory investment in the last three years.

And now with the increased capital intensity, will you be able to make a guess at how do you see a normalized percent spending of memory going forward?

Like, is it 40% you expect, or 50%, or 30%, in that range?

Just a very high ballpark number, that would be helpful.

I wish I could help but we're not going to.

Frankly, for those folks that want to have conversations about memory or cycles, it's getting really hard to do that because I don't know how to do that anymore.

What I can see is a community of 10 customers, or 15, that each have their own cycles, that are spending consistent with their windows of opportunity.

They're being very disciplined and very effective in terms of upgrading and the pace at which they add capacity, keeping supply and demand in balance.

When I think about extendability and sustainability of spending, I focus on profitability levels of customers.

And as best I can tell, in memory today that's pretty good.

And I focus on the proportion of capacity that is still available for upgrade to known near-term technology road map transitions.

And as I already said, in the DRAM world we exit this year even with a significant level of spending, but probably 450,000 wafer starts per month of capacity at 3X or above.

And in the NAND Flash world, we probably exit this year with maybe 500,000 wafer starts per month of capacity at 20-nanometer or above.

So, there are known upgrade paths of near-term significance.

And those are both opportunities that on their own represent the same type of spending level that exists in calendar 2014.

So, that's how I think through sustainability.

I don't spend much time trying to correlate the spending of customers this year, which is intended to support revenues next year and beyond, with the revenues of this year.

I've never understood that.

Okay, that's very helpful.

Thank you very much.

Edwin Mok, Needham & Company.

Hi, thanks for taking my question.

I have a question regarding your comment I heard that you talk about logic being maybe more back-half weighted this year.

I was wondering, is that to do with more to do with your share gain in the logic space, or is it the customers start ramping investment?

I'm just trying to get some color on that.

My comment was around our shipments being a little more back-end, back-half loaded.

I think WFE -- I'm just eyeballing it here right now -- is maybe a little bit back-half loaded, as well.

It's not significant, Edwin, but it is a little second-half weighted.

And memory, conversely, is a little bit front-half weighted.

So we have an assumption in about a $13 billion foundry WFE, that the first half is $6 billion and the second half is $7 billion.

Just to clarify, you're talking about logic or foundry or both?

Because I thought you mentioned logic specifically.

That was foundry.

And in the world of microprocessor and other logic we're, to Doug's point, reasonably balanced.

I see.

Okay, great.

Thanks for clarifying that.

And then any update you can provide on the new clean product?

I understand you guys have it in the marketplace now and you probably start getting some customer data on that.

Any update on that, when you expect to actually officially announce the product?

How do we think about that as the next-year growth driver for you guys?

The first update is we still have one.

The second update is we've got a really nice engagement with the three customers we talked about.

I think we've been very pleased with the mechanical validation, the productivity, the reliability of those systems.

So, really good performance.

In fact I would say, we started up -- and the performance we have in startup has surpassed expectations, frankly, for a product of this maturity.

So, that's really good.

The process learning is the focus of the Company in the second half of the year.

And that's where everything comes together because now you're delivering results from the wafer, and you are creating validated yield improvements for the customer.

So that's a critical phase.

And we have pull from two further customers, and I believe we are scheduled for shipments in the September quarter for the second two we will receive the early next-generation clean system.

I feel as good as we could at this point.

But I would register that obviously there's a significant amount of process learning ahead of us.

And as far as modeling is concerned, I'll remind you that, although in percentage terms the clean market share growth plans are the largest in the Company -- they're the 5% to 10% clean market share over the timeline through 2016 and 2017 -- they are also the market share growth plans which are most hockey stick.

So, in your modeling please don't linearize the growth of the Company in clean.

Great.

That's all I have.

Thank you.

Patrick Ho, Stifel Nicholas.

Thank you very much.

Martin, in one of your comments, I think to another question, you talked about how unpredictable it is to get the timing of pilot to high-volume manufacturing, maybe as it relates to 3D NAND.

As you mentioned that you're seeing more planar conversions in the second half of the year, how fungible, how balanced can you be if the customers decide to accelerate 3D NAND versus doing planar conversions?

How do you react to any of those type of changes?

As we articulated, we have great participation in both of them, but we have a higher share in 3D NAND than we do planar.

And we have a significantly greater SAM in 3D than we do in planar, as well.

So, the consequence of an acceleration of 3D NAND is we got a lot more output leaving factories, which means we need to be proactive ensuring we've got capacity in factories to build things, got capacity in the supply chain to buy things, and we got capacity in the field service organization to install systems.

Because of the uncertainty, we end up running a level of risk management that has some level of cost in the Company.

We try to keep it manageable but there is a cost to uncertainty.

And what we've clearly got to do is be able to execute because we put a lot of time and effort and money into creating the opportunity to outperform, and so we've got to be resourced sufficiently to execute it.

As best I can tell, every one of the four NAND Flash guys today is invested in some level of planar scaling and also 3D NAND expansion.

And every one of them has some fairly specific plans of substance emerging in the back half of this year and obviously calendar 2015.

And I do expect that calendar 2015 is obviously a big year for demonstrated performance and cost benefits of the 3D device.

Great, that's helpful.

Maybe a question for Doug in terms of the services opportunity that you talked about at the Analyst Day.

What are some of the levers for both the cost of goods line as well as on the OpEx line as it relates to the services business that will help you keep the corporate margins at least at your targeted model?

Patrick, we had, you'll remember the slide that I had, I'm sure, that showed outperformance in terms of top-line growth from that services business.

That success there is comprehended in that model.

And I think typically the gross margin is typically a little bit lower in that business but the operating income is actually quite good.

The success of that part of the business is comprehended in those financial models that we provided.

I'll add one thing, and that is a commentary on mix.

And this is where the rubber meets the road in terms of the economics of the Company.

If our focus is on percentages of profitability, then selling more upgrades to customers is the right answer because the upgrades business of the Company is a very highly profitable business for the Company in relative terms.

But the downside of that is it's a much lower dollar than an original equipment sale.

We try to focus on the long-term financial performance, which means doing what is right for the customer in the long term, is the guiding principle.

We're not going to ebb and flow between new system sales and upgrades on a whim, trying to manage percentages versus dollars.

We're going to do the right thing for the customer relative to this trade-off.

So, that's an important lever but one that responds to the needs of the customers more than it does a particular orientation of the Company.

Sundeep Bajikar, Jefferies.

Hi, guys, thanks for taking my call.

As we think about a potentially large migration of end customer business from one big foundry to another next year, what level of capacity build do you expect to see over the next 12 to 18 months?

And what portion of it would be new greenfield capacity versus upgrades to existing capacity particularly in 14-nanometer FinFET?

And as a follow-up to that, given the competition in foundry has increased dramatically, do you think there's a chance of an overbuild of foundry capacity near term?

I'm going to start with the back end of your question first.

I think there's tremendous discipline and I don't think there's a material risk of overcapacity.

And my frame of reference for that is that the 28-nanometer technology nodes, there's probably 350,000 wafer starts of installed capacity.

And even with the competitive environment that you just described, I believe that by the end of this year the sum of the 20-nanometer, planar and first-generation FinFET 16/14-nm is going to be in the range of 120,000 to 140,000 wafer starts capacity.

So, it doesn't feel like it's anywhere close to a high risk profile.

In answer to your question how much capacity gets added, that's a little hard to tell.

But, frankly speaking, most of the last three years have seen capacity additions in one node or another at foundries of around about the 100,000 wafer starts per month level.

And certainly I would expect that to be directionally relevant for calendar 2015, maybe a little stronger.

And as we mentioned many times, because of the multi- patterning effects for the Company and the positioning in terms of share, we should have some outperformance potential in that context.

Thank you very much.

That concludes our call for today.

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That concludes our comments.

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