科林研發 (LRCX) 2015 Q1 法說會逐字稿

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

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

Please go ahead.

Thank you.

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 September 2014 quarter and our outlook for the December 2014 quarter.

A 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 our 10-Q.

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 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.

Good afternoon, everyone, and thank you for joining us today.

I will start by commenting on our September quarter results, then provide some color on our outlook for wafer fabrication equipment spending in the remainder of calendar 2014 and discuss some trends that we consider relevant to 2015.

Before transitioning the call to Doug, I will share some updates on Lam's key initiatives that we feel are central to understanding the narrative of outperformance as a major theme for Lam in 2014 and beyond.

The September quarter marked another period of strong execution for Lam.

Executing on our commitments with results in line with the midpoints of our guided ranges across all metrics, continue to the theme of outperformance relative to the semi-conductor equipment industry, with an anticipated greater than 20% year-over-year revenue growth versus an industry baseline of 10% for calendar year 2014.

Performance for Lam Research is ultimately measured by our ability to deliver value across the full community of stakeholders.

At the customer interface, this value creation is focused on the leading edge, where Lam is helping to solve the most critical, technical and economic challenges related to a set of technology inflections that will define the next several years of our industry, most importantly, multi-patterning, FinFET, 3D NAND and advanced packaging.

It is also increasingly focused on the lifetime performance improvement opportunities for our customer fabs across many technology nodes.

That priority is the essence of our focus in our installed base, spares and service business unit.

As discussed at our investor event in July, the technology inflections through calendar 2017 provide a $2 billion market expansion opportunity for the Company; and a substantial portion of our growth over the medium term is defined by our ability to succeed through these device architecture and process flow transitions.

We continue to believe that our market share at the technology inflections is approximately 50% across the portfolio of deposition, etch and clean products.

This strong position is particularly important when considering that roughly one-third of WFE spending in calendar 2015 will be focused in these areas at a time when next-generation technology node conversions for memory and logic are just getting underway.

Notably, by calendar 2017, we expect half of WFE spending to be in these categories; hence, the conviction we have regarding the opportunity for Lam to deliver a compelling growth story as the targeted market expansion occurs.

Our objective is to realize this outperformance opportunity with a clear strategic vision, disciplined operational performance, and thoughtful scaling of the Company, positioning us to deliver profitable growth in line with the updated financial models shared earlier this year.

At the same time, we continue to utilize the strong cash flow generated from our growth to reinvest and further strengthen our product and services portfolio, to strengthen our market position and make possible sustained performance around opportunities as they are created.

We remain committed to create value for our shareholders through this investment and also through share repurchases and dividends ongoing.

As we enter the final quarter of calendar year 2014, we expect the second half to unfold largely as we had projected, with customer spending relatively balanced between the first half and second half.

Spending by segment is largely tracking the projections that we shared through the year, with Memory slightly stronger in the first half and the second half having more broad-based Logic participation.

The WFE spending environment continues to feature a healthy degree of discipline from customers in what is today a consolidated industry, reflecting what we believe is a continued trend toward reduced cyclicality.

Speaking to segment trends more specifically, starting with NAND Flash.

We continue to see a balance in overall supply and demand for bits.

The majority of investments for NAND have been for planar conversions focused below 20-nanometer.

We expect installed 3D NAND wafer starts capacity to conclude this year at approximately the 60,000 wafer start per month level, and see a focus and broad participation in 3D NAND development and deployment at various stages, in line with customer stated plans.

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

In DRAM, we see continued strength in investment plans from our customers, with strong market demand driven largely by mobile and enterprise DRAM growth.

Pricing remains stable.

Investments in DRAM are primarily being made to enable the transition to the mid-2X nanometer and below nodes.

These investments continue to be, from our perspective, very efficient, with a focus on upgrades and maximizing installed footprint capability.

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

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

The Foundry and broader Logic segments have also more or less progressed in line with our expectations.

The first half of the year was focused on 20-nanometer Foundry investments.

The second half of the year is more weighted to early FinFET purchases, with a broadening of participants and some planar technology investments by a number of customers at the 28-nanometer technology node.

In summary, we see the industry largely in line with expectations and maintain our outlook for calendar 2014 at $32 billion, plus or minus $1 billion.

As we look forward to 2015, our bias remains in favor of a growth year.

While there are many factors supporting this, such as publicly stated customer investment plans and net positive macroeconomic indicators related to consumer electronic adoption trends and global GDP, it is always fair to say that much can change.

While we plan to provide more detail on the anticipated 2015 WFE spending level and composition in January, we can say today that from industry analysis, customer and peer commentary to date, that WFE growth rates in the 5% to 10% range would be a reasonable starting assumption.

As always, the opportunity here is defined by the success of latest generation devices utilizing leading-edge technology in the marketplace; and also, the ability of the ecosystem to supply these devices in a timeframe and at a price point that the market will sustain.

We consider that our opportunity in calendar 2015 is greater than this WFE baseline, due to Etch and Deposition markets growing faster than the average of other segments, combined with the relative strength of our product portfolio and sentiments of customer support, for which we are sincerely grateful.

As mentioned at the start of my prepared remarks today, we would like to take this opportunity to provide you with an update on some of the Company's strategic initiatives that have supported our growth this year and will, in our opinion, continue to drive our future.

The focus on solving customers' toughest problems puts a premium on commitments to significant investment in leading-edge solutions and to our customer trust and collaboration model.

I mentioned earlier that our execution levels, so far, have translated into what we estimate is a market share of approximately 50% of the inflections spanning multi-patenting, FinFET, 3D NAND and advanced packaging for Lam Research.

With respect to overall market share, we shared with you at our Semicon West Investor Day this year that we were performing at roughly 90% success rate for our targeted penetrations in defenses in the first half of the year and that there were many more decisions outstanding through the end of the year.

I'm very pleased to report that through a busy September quarter, we've executed well and remain at that same magnitude of customer decisions in our favor.

For this reason, we maintain our conviction about the opportunity to realize our targeted market share gains short- and long-term.

From our standpoint, the commitment to investment in leading-edge innovation will reinforce trust, leadership, and cycles of differentiated learning for the Company.

We focus on technology leadership and productivity, which it seems capability and costs are equally important to our customers.

One measure of our success is the milestones we are able to achieve, and we've had several of them recently.

The shipment of our 4,000th Deposition system from our Oregon facility, the shipment of our 2,000th Vector PECVD module, and our 100th 2300 Syndion chamber shipment for deep silicon etch, which we announced earlier this week.

The Syndion product allows for the very high aspect ratio silicon etches central to the production of image sensors, interposers and through silicon vias, a market inflection just emerging.

We also expect to hit another milestone by the end of this year with the shipment of our 250th Flex FX product for memory, high aspect ratio applications.

Our Flex systems showcase why we continue to build our market share in etch, delivering innovation and achievement with our proprietary pulsing technology and best-in-class uniformity tuning, contributing capability to sustain our delivery of differentiated results on the wafer.

We are continuing to deliver the next generation of solutions that define the leading edge, such as atomic layer Deposition capability for applications such as spacer based patterning schemes and atomic layer etch for high aspect ratio etch process steps.

These technologies have long suffered from under-adoption in the industry because of productivity concerns, but Lam is now changing that paradigm with frequency of new product releases and engagements with customers that are designed to enable continued scaling for our customers.

As we move into calendar 2015, we will further emphasize by our actions the priority of staying close to our customer at a strategic and tactical level both, partnering with them on their technology introduction and ramp plans, sizing and allocating our R&D investments accordingly.

We remain highly focused on delivering sustainable growth today, efficiently scaling our business, maintaining a strong cash generation profile and managing our balance sheet to enable execution on broader strategic goals.

All of these efforts, as well as our capital return programs, are designed to enhance value creation for all stakeholders.

With the focus of the Company as outlined, we think it is hard to find a better positioned semiconductor capital equipment company to capitalize on emerging industry trends.

That is a byproduct of many years of hard work, continuity of leadership, strength of culture and values, clear strategic vision, and solid execution.

We truly have one integrated and very capable team at Lam, which is inspired to achieve more than ever and contribute to the success of our customers long term.

Let me conclude by thanking them all, the dedicated employees of Lam Research, without whom our performance would not be possible to achieve or sustain.

With that, I will hand the call over to Doug.

Okay.

Thank you, Martin.

Good afternoon, everyone, and thank you for joining us today.

Before I share the results from our September quarter, I'd like to pause for a moment to recognize and thank Carol Raeburn, who has done an excellent job temporarily heading our Investor Relations team, in addition to her role as Corporate Controller.

Carol will be handing over responsibility for the team to Audrey Charles, who is stepping in as Senior Director of Investor Relations.

Audrey's been with Lam for over 18 years and brings to the role a broad base of experience in both customer as well as technology management.

I'm pleased that she will now be applying her talent and leadership to our Investor Relations team.

I think you guys will enjoy getting to know Audrey.

Now, on to our September quarter performance.

We posted another solid quarter, delivering results at or above the midpoint of guidance for all financial metrics and extending our positive momentum heading into the second half of the calendar year.

In the September quarter, shipments came in at $1.111 billion, pretty much right at the midpoint of our guidance range.

Relative to system shipments, systems for the foundry segment increased substantially in the September quarter, accounting for 45% of system shipments.

And that compares to 30% in the prior quarter.

As we anticipated, there was a broadening out of customer spending in the Foundry space for a wide range of projects across multiple technology nodes.

And I'd just point out that this percentage of foundry shipments is the highest percentage for us since the March 2013 quarter.

The combined Memory segment made up 44% of system shipments, and this was down from 59% in the prior quarter.

NAND shipments actually grew and represented 26% of the system shipments, which was up from 20% in the June quarter.

NAND spending reflected a continued focus on planar node technology conversions.

DRAM shipments were down, as we expected, after the very strong levels we saw in the June quarter.

DRAM shipments came in at 18% of system shipments and this was down from 39% in June.

And finally, Logic shipments held steady at 11% of system shipments.

September quarter revenue came in at $1.152 billion and has been now running at a level above $1 billion for five consecutive quarters.

Gross margin for the period came in at 45.8%, which was a little bit above the midpoint of our guidance and a little bit ahead of our near-term financial model.

Our gross margin performance is determined by many factors that I've told you before, such as business volumes, product mix and customer mix.

You should expect to see variability quarter to quarter, particularly in quarters with high or low customer concentration.

Operating expenses were flattish, at $321 million.

SG&A declined sequentially, while R&D spending increased both in absolute dollars, as well as a percentage of total operating expenses.

We continue to invest in R&D programs to ensure we are ready for the current as well as next set of technology and inflections, which is critical to enable our revenue growth.

This R&D spending is focused in areas like ALD and ALE, which Martin referenced earlier.

Operating income in the September quarter was $207 million, with operating margin of 18%, which again was a little above the midpoint of our guidance.

The tax rate for the quarter came in at 18%, which was up sequentially due to the geographic distribution of revenue for the quarter, with more revenue being generated in the United States.

For the December quarter, I would be modeling a rate in the middle teens.

And for the remainder of the fiscal year, I would be modeling a tax rate in the high teens.

And I'll just remind you, if the Federal R&D tax credit were to be extended, the impact would be a reduction of a couple of percentage points on the tax rate relative to the numbers that I just referenced.

Based on a non-GAAP share count of approximately 175 million shares, earnings per share for the September quarter were $0.96, which again was above the midpoint of our guided range.

Recall that with the increase in the share price, the share count now includes dilution from all three of our convertible notes, offset by the impact of the note hedge that we put in place.

The net dilutive impact from all three notes on a non-GAAP basis is approximately 10 million shares.

And I'll remind you, dilution schedules for the 2016, 2018 and 2041 convertible notes are available on our Investor Relations website to help you with your modeling.

We made good progress on our $1 billion capital return program.

During the quarter, we spent approximately $300 million and took delivery of approximately 4 million shares at an average purchase price of $72.40.

We executed these buybacks partially through open market purchases and partially through an accelerated share repurchase program, which will not close until the December quarter.

On July 2, we paid our $0.18 per share dividend, which consumed $29 million.

We are pleased with the cash generation capability of the Company and continue to be committed to returning a meaningful level of that cash to shareholders.

Let me now move to the balance sheet.

We ended the quarter with cash and short-term investments, including restricted cash, of about $3 billion.

This is down from $3.2 billion in the June quarter, with cash generation in the quarter being more than offset by our ongoing share repurchase and dividend programs.

Deferred revenues were $357 million, and this excludes $34 million in shipments to customers in Japan which will revenue in future quarters.

These Japanese shipments remain as inventory on our balance sheet.

Cash from operations was $141 million, down from $246 million in the June quarter.

Cash from operations was lower, primarily due to the lower revenue.

Additionally, we built some inventory in preparation for an increase in shipment output over the next couple of quarters.

DSO also trended higher by 10 days, due to the shipment profile within the September quarter.

And finally, we exited the quarter with approximately 6,600 full-time employees.

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

We expect shipments of $1.240 billion, plus or minus $50 million.

We expect revenue of $1.230 billion, plus or minus $50 million.

We're forecasting gross margin of 45.5%, plus or minus one percentage point.

We forecast operating margins of 19%, plus or minus one percentage point.

And finally, we forecast earnings per share of $1.12, plus or minus $0.07, based on a share count of approximately 173 million shares.

So let me just summarize.

We're pleased with our performance, delivering another quarter of solid operational execution.

We had results aligned to our objectives and are tracking to our targets as outlined in the financial model.

With that, I will conclude our prepared remarks.

Operator, please open up the call for Martin and I to take questions.

(Operator Instructions)

Krish Sankar, Bank of America Merrill Lynch.

Thanks for taking my question.

I had two of them.

Number one, Martin, when you look into 2015, it looks like you're pretty optimistic on FinFET and DRAM.

I'm just kind of curious.

It looks like this year, most of the NAND spending was on planar.

Do you expect a similar trend in 2015, or do you think 3D NAND will increase as a percentage of the mix?

And I also had a follow-up.

I think that next year we'll continue to see planar investment levels being greater than 3D.

Obviously, there's a decent amount of installed base available.

And I think, without exception today, every customer is committed to scaling and committed to a 3D NAND transition.

And as you know, there's various timing available from the customer.

My expectation is that NAND Flash investment continues to be very disciplined.

In fact, I would say it's probably the tightest of any of the segments, in terms of the balance of supply and demand, next year.

And I think we'll see a meaningful addition of capacity in 3D NAND, but we would still expect planar spending to be higher than 3D.

Got it.

That's very helpful.

And then as a follow-up, I'm kind of curious on the status of your single wafer clean product for the front end of line.

Have you seen any traction?

Or is it a product or is it a strategy you're going to pursue, you're going to focus on BEOL at this time.

Thank you.

The front end of the line is the largest market expansion opportunity.

The Company is very competitive in back-end-of-line.

We have great position.

And through the last several technology nodes, we've been very successful at defending those positions.

So the investment levels in clean and the growth opportunity in clean for sure have some back-end-of-line growth opportunities.

But in large part, this is a front-end-of-line expansion opportunity.

And we continue to be very engaged with customers.

Since the last earnings call, we have at least one more engagement, to my knowledge.

And I would still say that the initial revenues for the new product, although there is some evidence of that today in a material context, that's really still a 2015 event for the Company.

And there are two parts to the decision-making process relative to a new product.

One of them is the decisions of the Company to stay committed to investment.

And we've clearly performed and executed with that in mind in calendar 2014.

And then ultimately, a set of decisions by customers to adopt the technology.

And we're kind of in that critical phase where, in many respects, the decision-making about the health and the direction of our clean business is more in the hands of the customer than the Company.

I think we've done what we should have done.

We delivered a productive platform.

We have a clear strategy around differentiated solutions offerings.

And it will either demonstrate differentiation of value for the customer and cause them to adopt our product or not.

And I think the next 6 to 12 months is critical for the Company, in that regard.

That's very helpful.

Thanks, Martin.

CJ Muse, ISI Group.

First question, when you look back -- I guess we're still in 2014.

But when you think about outpacing the market, basically growing 2 times, how do you think about the key drivers there?

Is there a way to rank order by end market, or by FinFET or SADP for DRAM, in terms of what really drove that outperformance?

And then as you think of 2015 and your outlook for WFE, what will be the key drivers there?

Well, really nothing new from the Company on this point, really, CJ.

The outperformance of the Company is now kind of a two-year work product.

We've had revenue performance greater than WFE for 2 years in succession.

And I believe we're going to enjoy the same performance benefits in calendar 2015, and hopefully beyond.

We've got a lot of execution, obviously.

But certainly, the set up is very healthy in that regard.

And the growth opportunity is defined principally by SAM expansion, by the markets of Deposition and Etch growing faster than the average, and the multiple patterning opportunity in DRAM and Logic both, the 3D NAND transition, and ultimately, advanced packaging are the critical areas of segmentation that present that.

And we're working really hard to compound that opportunity by actually executing market share growth in each of our businesses, as well, in the long-term.

And the short-term performance, from my perspective, makes the long-term objectives rational and credible.

So the largest opportunity in the inflections continues to be multi-patterning; second largest, 3D NAND.

And both of those are heavy Etch and Deposition intensive process flows and device architectures.

So I think the future is built upon the same outperformance elements as our recent history.

And as I said in my prepared comments, the success of the Company in terms of market share and positioning products and services, which has demonstrated outperformance in the last couple of years, is building momentum as the proportion of WFE spending biases the inflections.

So this year, I think the inflections see about 25% of WFE.

Next year, we're at approximately one third.

And by 2017, probably 50% of WFE spending will be directly related to the inflections that are providing the outperformance potential on SAM expansion and market share for the Company.

That's very helpful.

As my second question, you basically saw pretty similar trends first half versus second half.

How do you think about 2015 and linearity of spend there, particularly on the Foundry side, given some of the commentary that it's going to be first-half weighted?

The only conviction I have is there will be a first half and second half.

(Laughter)

It's really hard to answer a question like that.

We've got a pretty wide range on our WFE number.

It feels really too early to answer that question.

I do think, consistent with Doug's comments on our inventory build, which you see in our balance sheet in September, we do expect a strong first half of next year, and quite how strong it will be is still to be determined.

But for sure, the visibility through the March quarter would imply that will be the case today.

And it is really difficult when you're 9 months away and 12 months away to start opining with any substance on the second half.

I'll take a shot at answering that question, if I may, in January.

Sounds good.

Thanks so much.

Sundeep Bajikar, Jefferies.

Thanks for taking my question.

The first one is related to Foundry.

How much 14-nanometer capacity, roughly, do you think we should expect to see in the industry exiting 2015?

And when do you think we start to see more optimized versions of multi-patterning in Foundry?

Basically something like spacer-based patterning or Intel's approach, both of which would be more Deposition and Etch intensive.

I think to the latter part of the question, the spacer based approach is definitely a trend which is accelerating.

I'm not going to directly answer your question in terms of capacity at the 14-nanometer node, because, frankly, we don't spend a huge amount of time getting precise to one node.

We're grouping 20 and 16 and 14 together.

Because to a very large extent, the equipment selection to the customer is irrelevant for all three nodes or half nodes, if you want to characterize it that way.

But we would expect that, according to the assumptions I've given you, this up 5% to 10% WFE number, we would expect that calendar 2015 ends with about 210,000, 220,000, maybe 230,000 wafer starts per month of capacity at 14, 16, 20.

Great.

That's extremely helpful.

A quick follow-up.

There seems to be a lot of talk around strategic capacity expansion and semi-conductor manufacturing in China.

Are you starting to see this in terms of discussions around equipment purchases?

Or do you think we're still in very early stages of planning a potential build in China?

I think there's actually a meaningful investment, and there are a number of expansion plans in China.

And clearly, in light of the government and region-specific agenda, I think everybody is developing and finessing their China strategies.

And I would certainly say that's relevant for Lam Research, as well.

We have a very strong team.

We have very close engagement with customers.

And I think we are participating well in the spending, as it is going to play out in the next year or so.

Relative to the big unanswered questions, where does the government's investment end up between device design, device manufacturing, or even materials and equipment supply, my sense is, in those four areas, there's a meaningful investment level in the device manufacturing.

But I think design is going to take a lot of that money.

That's my instinct today.

Thank you very much.

Patrick Ho, Stifel Nicolaus.

Martin, maybe first, a big picture in terms of a lot the recent chatter on EUV from one of your peers.

How do you see your road map relative to some of the comments out there?

Has it changed any?

Or do you believe that things are still on track, based on a lot of the comments you've highlighted in your previous Analyst Days?

I think our position on EUV is almost identical today as it was at the Analyst Day.

The customer comments continue to reinforce that 10-nanometer insertion is not the plan of record for EUV.

And I'm even reading customer commentary that talks about non-EUV assumptions, or non-EUV possibilities for 7-nanometer logic flows, as well.

Our assumption is that 7-nanometer insertion -- first of all, it's not relevant to the calendar 2017 models of the Company, right?

So, it's a 2018 influence, if at all.

And we think it will be implemented with multiple patterning.

And so one of the things I'm struck by some of the external commentary that I read, there's this debate in the investment community around EUV, and a very simplistic commentary on ASML winning, Lam losing, or Lam winning and ASML losing.

And I think that dramatically oversimplifies things.

When we look at the base EUV road map and the assumptions that we think are relevant to modeling the impact of EUV on our business at the 7-nanometer technology node, we think 2 to 3 passes is a relevant insertion magnitude for EUV, and if you want to be more aggressive, then maybe you assume 5 or 4 or 6 or even 8. But even in that more aggressive scenario, what it does for our SAM -- and remember the context for our SAM -- so long as there is multi-patterning, there is a SAM expansion opportunity for the Company.

And if you look at the 10-nanometer technology node from the material that we've previously presented to you, there's a meaningful expansion of SAM opportunity for the Company from first-generation foundry FinFETs to the second 10-nanometer.

And we still believe there's SAM expansion going to 7-nanometer, even with the aggressive adoption that we've characterized.

So if you want to be extremely conservative about the impact of EUV on the SAM of Lam Research, you'd maybe size the impact to a couple hundred million dollars.

But it is not any more than that from the perspective that we have on insertion, even with a 6 to 8 pass assumption at the 7-nanometer technology node.

Great.

That's really helpful, Martin.

A question for Doug as my follow-up.

In terms of the gross margin outlook for December, what's the key variable for your outlook there?

Is it more customer concentration mix or product mix, given that the volumes obviously are higher in terms of both shipments and revenues?

It's a little bit of all of that.

Customer mix actually might be the biggest one every quarter, Patrick.

But to the extent that things unfold the way we expect going into this quarter through the December quarter, I feel pretty good about the 45.5% that we put out.

Interestingly, if you look at the last quarter, the quarter unfolded pretty much as we expected, almost to every single customer.

And if that happens, I feel pretty good about that gross margin forecast.

Just to add a little bit to that -- and this is as much as you're going to get on March -- I think the Deposition portfolio, which has a greater magnitude of new product releases which are maturing in terms of demonstrating value and also cost reduction to the Company, definitely, there's a greater proportion of Deposition products in our mix in December than in September.

So that's to Doug's point part of the story.

But the concentration of the business in December is actually not so very different from September, from a customer point of view.

But for March, it will be very concentrated.

So our outlook right now for March is the top three customers will represent, for us, maybe two thirds of our system shipments.

And that compares with about the 45% level for December.

So concentration of customers is definitely going to be a relevant part of our conversation in the March quarter, based on what we see today.

Great.

Thank you very much.

Mark Heller, CLSA.

Martin, I was wondering if you could give a little bit more color as far as the node spending trend within the 45% for Foundry during the quarter.

Are you seeing a lot of FinFET within that?

And can you also give some geographic trends as far as where you're seeing spending strengths within Foundry?

Maybe I'll start, and then I'll -- this is Doug, Mark -- I'll let Martin embellish.

We saw a decent amount across a lot of different programs, a lot of different customers.

We saw spending at 28.

We saw a little bit at 20.

And we saw some at that first FinFET node, 16 FinFET.

So it was pretty broad in September, and we expect that's going to continue going into December, as well.

I have nothing to add.

Awesome.

And maybe as my follow-up, Doug then, can you maybe give us an estimate for the shipment split in December, as well?

You know, I'm not going to get into specifics.

I'll give you a little color, at least directional stuff.

I think we're going to continue to see strong Foundry shipments.

And I think it's going to continue to be relatively broad-based.

Dollar-wise, probably not all that different than what we saw in the current quarter.

I think Memory is going to be up a little bit.

And probably that's a statement more around DRAM than NAND, given how strong NAND was in the current quarter.

And I'm guessing -- or I think Logic, actually, I'm not guessing -- Logic should be up a little bit, as well.

So that's a little bit of color to think about.

Thank you.

Timothy Arcuri, Cowen and Company.

First question, Martin, I know you don't want to say too much about March.

But I try to ask you this pretty much every call.

So if I look at the inventory build, it would suggest that you're planning on a shipment increase in March of somewhere in the range of maybe 10% to 15%.

Maybe I'm not calculating that right, but I wanted to ask you that, number one.

What do you think my reply is going to be, if you've asked me this question before?

(Laughter)

Yes, I'm not going to go there right now.

I think we're looking at a strong March.

And I wouldn't say strong if it wasn't more than $100 million or $150 million or $200 million, which is kind of the range that you're talking about.

But that's as good as you're going to get for now.

Okay.

Great.

And then, Doug, also, a question on margins.

Maybe it's sort of picking a little bit.

But the guidance is a little bit below the financial model, just a smidge below.

And that's due to the factors that you already talked about.

But are those going to remain in effect, given the concentration in March?

Should we expect the margin in March to also be below financial model, because of the customer concentration issues?

Thanks.

Well, Tim, actually 45.5% isn't below, at least from a gross margin standpoint, the model.

If you remember the 14/15 model, 45% was the number.

So we're kind of right there.

I think the directional color Martin was giving you is we expect consumer concentration in the March quarter to be more concentrated.

And everything else equal, that will be a little bit of a headwind from a margin standpoint.

Having said that, if we've got stronger top line, that should offset a little bit of that at the operating income line.

Yes.

Okay.

Great.

Thanks.

John Pitzer, Credit Suisse.

Congratulations on the strong results.

Thanks for letting me ask a question.

Martin, I want to go back to an answer you gave earlier around your expectations exiting next year for wafer start capacity at 20, 16 and 14.

One of your peers talked about a 175,000 number exiting this year, which relative to your 2015 expectation, would mean a lot of that spending was already done.

I'm wondering if you could give us your view on that 175,000 number or help us understand how to put your end of 2015 into perspective for the calendar year 2015?

Our end of 2014 number is 130,000 to 140,000.

That's helpful.

Maybe the difference is the timing of someone's order placement or it was an order commentary versus ship commentary.

We're all about ship commentary, as you know.

So hopefully, that helps.

And then relative to Doug's answer around shipment breakdown for December, is it too much to read into the view that maybe the March quarter, or the first half of next year, you're going to see a significant step up in Memory spending?

And when you look at the Foundry strength in the back half of this year for you, how much of that is at the industry level versus you guys perhaps gaining some share?

Relative to the Foundry performance of the Company, it's a bit of everything.

It's the level of investment as 28-nanometer expansion occurs.

It's first-generation FinFETs get invested and committed broadly across the industry.

And there is this 28-nanometer kind of play, as well.

So we definitely get to float with the rising tide.

There's a very specific commentary from the Company around SAM expansion through multi-patterning, and also 3D device architecture and Logic.

And we've got a little bit of share gain in the mix, as well.

But as I've mentioned a number of times, I think the primary story for the Company is the SAM expansion story.

The market share is definitely a bonus for us, but a very important part of what we're investing to achieve.

You had a second part to the question, which I've forgotten, I think.

Sorry.

Memory trends into the first half of next year.

It's sounds like we could set up for a pretty good Memory half in the first half of 2015?

Yes, I think so.

I think Memory will be up, but we're not going to give you first half, second half, specifically.

Perfect.

Thanks, guys.

Jim Covello, Goldman Sachs.

Question, also on the financial model.

Tim had asked about the model relative to March.

I would ask about the model relative to the full year 2015.

At the top end of your WFE range, assuming we come in at $32 billion this year, at the top end of the guidance for next year, we'd be in that $35 billion-plus range.

Your financial model contemplates a certain earnings number.

I believe that was for 2016-2017, the $35 million wafer fab equipment.

How different do you think your earnings might be in 2015 if we get to that $35 billion number, compared to what you would've had in the model in 2016 and 2017?

If you could help us out, that would be great.

Thank you.

Yes.

(Multiple speakers).

Are we both going to do this?

Go ahead.

All I was going to say -- and then feel free to add on, Martin -- Jim, is there's a time component of that model, as well just the level of top line, also.

Part of this is maturation of some new tools, that gross margin gets better as we mature the product line.

So there's a time component in addition to just volume.

So it wouldn't be as good were we to get that spending level earlier than the 2016-2017 profile.

It should probably be part way in between the two models.

I think in terms of the output of the Company, and the business sales in the Company, we're tracking ahead of 2014 and 2015 revenue level, as many of you guys have made that point.

But to Doug's point, timing is a very significant part.

Or the passing time is a very significant part of the 2016 and 2017 model.

And it's not just about maturing products, which is very important, but it's about the magnitude of WFE, which is at an inflection.

It's about the success of market share growth plans in the Company over multiple years.

So 2016 and 2017 really does mean 2016 and 2017.

So my advice relative to modeling 2015 is use the 2014, 2015 model that we've given you and flex it for the WFE assumption.

That's what I would do.

And more or less, the 25% operating expense level that's defined in 2014 and 2015 is a legitimate reference point for the Company.

That's really, really helpful.

I appreciate that.

And then just one follow-up.

I think I know the answer to this, but I just want to make sure.

Based on your comments that you said for March, you would expect the book-to-bill in December to be above 1?

Yes, I would.

But it doesn't trouble me if it isn't.

Because the magnitude of backlog in this industry today is insanely low.

And it's about versatility and flexibility to respond to short-term demand.

So the magnitude of order placements and shipments in short order is high.

And these days, the conversion of shipments to revenues is pretty high, as well.

Very helpful.

Thanks so much.

Congrats.

Harlan Sur, JPMorgan.

Martin, thanks for the preliminary WFE spending outlook for next year.

I know you've talked about the 33% mix of inflection technologies.

But can you give us a sense on the relative contribution to the growth, NAND versus DRAM versus Foundry and Logic next year?

Yes.

I feel like I'm going to be pretty miserable at responding to that, honestly.

Because I think you had a version of that question on the last call.

And we've given you that answer for the 2017 horizon, the 2016, 2017 horizon.

And I'll just kind of refresh that as a reference, so everybody has it.

So in the context of the $2 billion SAM that we defined, we've said that $800 million, plus or minus $100 million, is in the Foundry Logic space, which includes device architecture and multi-patterning; $300 million, plus or minus $50 million, is in the DRAM space, which in large part is a multi-patterning; $600 million, plus or minus $100 million, is NAND, in large part, 3D NAND; and the advanced packaging opportunity is $300 million, plus or minus $100 million.

And a big part of that is obviously 3D transition through silicon via.

So that's kind of the reference point.

Now what is going to be prevalent and most dominant in that context in calendar 2015?

I think the answer to that question is multi-patterning in Logic and DRAM, FinFET device transition.

And we will see a continued deployment of 3D NAND.

But I think calendar 2016 will be a much stronger play than 2015 for 3D NAND HVM.

I think there will be a meaningful addition of 3D NAND capacity in 2015, but I don't think it will compare to the additions in 2016.

And advanced packaging, I would say, is going to show up, but it's probably, again, more of a 2016 play in substance than 2015, at this point.

Hopefully, that's some color that you can work with.

Yes.

I appreciate that.

One of the interesting dynamics in the Memory segment is that as we transition to these inflection technology nodes, there's actually a loss of capacity for a fixed area of floor space.

So obviously, this is true for the migration to the 2X nanometer node for DRAM.

I think we're hearing as much as 15% capacity reduction.

Are you seeing the same impact on the NAND suppliers as they transition to 16- and 15-nanometer planar technologies?

And the second question is, are your tools and flows -- how are your tools and flows helping your customers to alleviate some of these capacity challenges?

Well, I definitely think that the impact on output for square foot of clean room in the DRAM space is a very relevant conversation.

And certainly, to the extent there are additions of capacity forecasted and assumed for DRAM next year, they don't take the baseline of available capacity up in any meaningful way, for the reason that you've just described.

So I think we've got about a 60,000 wafer start assumption for 2015 adds.

But those adds just simply keep available capacity almost flat year on year.

In the NAND space, my instinct is the conversation is much more relevant in the planar to 3D transition than it is in traditional planar scaling.

I'm sure there's some elements, but I haven't seen it show up prominently in conversations with the customers.

Where it's huge at the customer interface is in planar to 3D transition in NAND Flash.

That's a big one, in terms of complexity of line layouts and density of process chambers in a clean room.

Thank you.

Steven Chin, UBS.

I had a follow-up question, Martin, on the market share at the technology inflections.

Do you think the market share at these technology inflections can go higher than your 50% target, if there's still uncertainty between this merger between Applied and Tokyo Electron?

That will be our plan.

(Laughter) I mean, it's -- we're working really hard to take advantage of every opportunity, including any opportunities that are provided by competitors being distracted in any way, shape or form.

And if that distraction happens to be a merger, if a merger's approved, because integrating companies is not an easy skill to acquire.

It's extremely difficult.

We're going to work hard to exploit every single opportunity to grow this Company.

And that's a SAM expansion statement and it's a market share statement.

And you know, we'll see how this plays out.

But that's the plan.

Okay.

And I also have a follow-up question on the financial model.

Does the model include higher shipments to a large Logic customer?

I was wondering if these Logic shipments start ramping in the December quarter, if that is also in this long-term model?

Thanks.

All of the share gain opportunities that you've heard us talk about before are comprehended in the model.

Said differently, yes.

Mahesh Sanganeria, RBC Capital Markets.

This is Shawn Yuan for Mahesh.

Martin, we appreciate that you provided color to the 2015 WFE.

But 5% to 10% is a relatively broad range.

I don't know you want to comment specifically on the segment movement, but we are wondering can you talk qualitatively which segments are going to grow towards the higher end of the range, which segments are below the range?

Just qualitatively, any color would be helpful.

Thank you.

I think it's very similar to the answer I gave a few moments ago.

I think that planar scaling in NAND Flash is clearly the majority of spending next year.

And that's a very tight space.

Supply and demand balance is really tight there, and you can see that evidenced in the pricing stability and profitability levels of our customers.

I think the investment in DRAM next year, to a very large extent, is very efficient.

It's about technology conversions.

There are performance benefits associated with the shrink, but there's meaningful cost benefits to the shrink.

So I think the motivation of customers to take advantage of an opportunity to invest, to improve their financial performance with the cost benefits of scaling, is clearly the very important part of their commitment.

And there is a pretty aggressive race to the FinFET Foundry opportunity.

So those are the influences that I think are relevant to answering your question for the industry.

For the Company, our big growth trajectories are multi-patterning in Logic and DRAM.

And 3D device architecture is very beneficial for the Company, and that's valid in the Logic space.

And it will be valid in the 3D NAND space, as well.

But again, to my earlier point, not to the extent that I expect it to be relevant as people transition -- as everybody transitions, I think, out of pilot into HVM in the calendar 2016 timeline.

Great.

Thank you very much.

We have time for two more callers.

Thank you.

Weston Twigg, Pacific Crest Securities.

First, just on the 3D NAND piece.

Wondering if you're seeing customers decommit a little bit from what you expected earlier this year?

I think previously you were looking at maybe 80,000 wafer starts.

Now you're talking 60,000.

And earlier this year, you were thinking that 2015 would be the volume ramp year.

So just curious of your thoughts on customer activity on 3D NAND.

I think all of our customers have more or less said the same thing, right?

They've said they're working really hard to extend planar as much as possible and as long as possible.

But I think they're all invested in the legitimacy of a 3D NAND transition, and there's commitment by all of them to development and deployment.

I had expected -- if I look at the beginning of this year -- I had expected the performance and the cost benefits of 3D device to have matured sufficiently by the end of 2014, the kind of market dynamics accelerated the stated timelines of all four customers that have engagements.

And it hasn't played out in quite that way.

And so I think the original commentary from customers around a 2- or 3-year timeline difference between first adopter and last adopter is probably as valid today as any reference point.

So I think HVM transition is relevant in calendar 2015, but I don't think it's relevant for everybody.

I think the HVM relevancy for everybody at 3D NAND is going to be a 2016 play.

Now, all bets are off if someone is in the marketplace with significant performance and cost benefits and deployments, it gets pulled in, which was my hypothesis before.

And maybe that shows up.

And if it does, I think life will get pretty exciting pretty quickly.

Okay.

That's helpful.

And then thinking about this a bit further, so you identified double patterning and 3D NAND as your main SAM expansion drivers over the next couple of years, but you also indicated that the Foundry spend is still fairly heavy at 28-nanometer right now and that the NAND producers are still focused on planar extension.

So is there some risk developing around your ideas on SAM expansion in 2015?

No.

I don't think so.

I think we feel very comfortable with the assumption of the one third of WFE being inflection-based next year.

I think the 28-nanometer investment is supplemental and takes what already was a node that was in the 330,000 wafer starts per month range and makes it even a little bit bigger.

It's a lot cheaper, obviously, for our customers to add 28-nanometer capacity than FinFET capacity.

So in spite of the fact that it's a decent number of wafer starts, it's economic consequence is lower.

Okay.

Thanks a lot.

Romit Shah, Nomura Securities.

Doug, is 50% to 60% incremental gross margin still the right way to think about the model, potentially for next year, in light of some of the customer concentration you expect to see in March?

Romit, I would redirect you back to the financial model, which in 2014-2015 shows 45% gross margin and roughly 20% operating income as the right way to be modeling the business next year.

Okay.

And then just one final question on the current environment.

If I take the midpoint in December, it would imply that revenues for the second half of the calendar year come in about $100 million below your guidance of flat.

And at the same time, you seem to be more positive on March.

I'm just wondering if there was any dynamic here with a particular customer or program that's influencing your guidance for December, as well as how you're thinking about the March period?

With due respect, I went to an awful lot of trouble last quarter to say not precisely flat.

And I think a 51/49 profile, which is kind of the mathematical derivative of the midpoint, is pretty consistent with what I tried to position in the last earnings call.

And obviously, relative to running the Company and making choices about investments in the future and the growth of the Company and positioning to exploit SAM expansion and market share opportunities as they exist, when we get these kind of ebbs and flows -- and I realize $100 million is a lot of money -- but when we get to these ebbs and flows, they're not actually very material to us in terms of how we think about running the Company.

And the difference between December and January is not worth a huge amount of anything to us.

It's important to be aware of, it's important to be transparent on.

And you have our commitment to continue to try to do the best we can in that context.

Got it.

Thank you, Martin.

Thank you for joining us today.

Please visit our Investor page, at lamresearch.com, for further information on our Company and to hear a playback of this call, which will be available later this afternoon.

This concludes our call.

Thank you, everyone.

That does conclude our conference for today.

We thank you for your participation.