科林研發 (LRCX) 2015 Q2 法說會逐字稿

Good day everyone, and welcome to the Lam Research Corporation December 2014 Conference Call.

At this time, I would like to turn the conference over to Audrey Charles, Senior Director, Investor Relations.

Please go ahead.

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 December 2014 quarter and our outlook for the March 2015 quarter.

The press release detailing our financial results was distributed a little after 1 p.m.

this afternoon.

It can also be found on the Investor Relations section of the Company 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 outlook.

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 factors 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 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 p.m.

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 will hand the call over to Martin.

Thank you Audrey.

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

We will start by speaking to our December quarter results, supplemented by a review of calendar 2014 milestones, with comments on their relevance to the future growth and opportunities for the Company.

We will then segue to provide an update to our outlook for wafer fab equipment spending in 2015.

Then, more specific to Lam as we enter a new year that marks the 35th anniversary of the Company, we want to take this opportunity to outline our focus for the year, and provide some context for the multi-year outperformance potential that exists as a result of the Company's vision and execution.

I will then hand the call over to Doug for a review of our financial and operational performance.

The December quarter concluded with results in line with our expectations, showing strength across all metrics, and reinforcing our outperformance trend for calendar 2014.

Within the quarter, we grew our backlog by greater than 20%.

Additionally our deferred revenue balance has increased, which we expect to continue with the shipment strength anticipated in the first half of 2015.

December was the sixth consecutive quarter of greater than $1 billion in revenues, and concluded a record-breaking year for the Company, with total annual revenue reaching $4.9 billion.

Our revenue growth rates, we believe, outperformed the industry by a factor of two, with profits expansion at more than twice the pace of our revenue growth.

The strong December quarter marked the end of a very rewarding year for Lam that featured the delivery of record-setting performance, execution on our market-share gain and SAM expansion opportunities that exceeded expectations; and a high level of focus on increasing innovation in everything that we do.

In turn, we believe that the differentiated culture, values, and management system of the Company have enabled effective scaling necessary for making profitable growth sustainable.

In 2014 we made meaningful progress against our market share targets, introducing new products and services to participate in the market-expansion opportunities of the various technology inflections, including multi-patterning, FinFET, 3-D NAND, and advanced packaging.

We believe we exited calendar 2014 with an inflection-based market share across the portfolio of deposition, etch, and clean in excess of 50%, a double-digit increase compared with our total Company pre-inflections baseline.

Our strong early position, combined with our unwavering commitment to customer trust and value-enhancing collaboration, positions us to continue to drive our theme of outperformance over the next several years.

Evidenced by our relative revenue growth these last two years, and further under-pinned by our March quarter 2015 guidance today, we accelerated our achievements towards 2017 market share targets, which called for a 4% to 8% increase in deposition market share, 3 to 5 percentage points in etch, and 5 to 10 percentage points in clean.

As previously shared, we maintained a 90% success rate across all plans, penetrations, and defenses in 2014.

As such, we believe that our corporate market share has increased by 200 basis points to the 42% level in calendar year 2014.

At least as importantly, we conclude that we increased our available market size from approximately 26.5% of WFE to 27.5% of WFE in 2014, through the successful introduction of new products.

We've always judged our ability to lead and execute predictably to be one of Lam's core competitive strengths.

We feel that the results presented today again are evidence of very strong execution; but even more noteworthy, perhaps, a demonstration of execution capability through a period when we are scaling the Company real time, preparing for an even more exciting future.

For example, last year we expanded our investment in fundamental research and C&F activities.

We added a significant number of resources in the factory and in the field.

We ramped all manufacturing facilities to multiple shift operations, shipped a record number of systems on time, and at quality standards that are ever more critical to our customers, all while continuing to innovate at perhaps the highest level in our history, delivering more than 20 new products and service offerings to our customers.

Delivering value to all stakeholders was and continues to be a strong theme, and we believe a highlight for 2014.

We collaborated closely with our customers and suppliers on innovations designed to meet the considerable technical and economic challenges of the industry.

Notably, we delivered products such as the Vector ALD oxide deposition system, targeted at extremely thin and uniform layers critical to advanced patterning, and the Flex FX dielectric etch system necessary for critical high-aspect-ratio etch.

Both products are experiencing unprecedented momentum in the market place.

For example, our Vector ALD oxide system output likely comes close to tripling in calendar 2015 year over year, driven primarily by patterning-related application wins.

We augmented our strong earnings performance with the establishment of a $1-billion capital return program, which included the institution of our first ever quarterly dividends program.

We're on track relative to our financial model, and are very pleased to note that in recognition of this strong financial performance, we were recently added to the NASDAQ 100 index.

WFE investment for 2014 was largely in line with the views we expressed through the year.

We estimate spending by our customers in 2014 WFE was approximately $32 billion.

As we enter 2015, we maintain our outlook of a growth year for WFE investments.

The predicted trends in semiconductor consumption, including demand at the leading edge and the publicly stated plans of our customers, we believe support this growth outlook.

But as is customary, I would add that this is predicated on a positive macroenvironment and health industry fundamentals.

Our initial 2015 market outlook is as follows for the key segments, starting first with memory.

In the DRAM segment, we see continued strength in demand, and a supply-constrained market entering the year.

Strong market demand continues to be driven by mobile and enterprise DRAM growth.

Pricing remained stable.

This year, we see DRAM investments to be focused primarily on conversions to 20-nanometer.

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

In the NAND space, we believe there will remain a healthy balance in overall supply and demand.

NAND ASPs, as you are aware, have declined somewhat over the last quarter, but are generally expected to stabilize over the course of the year, reinforcement of continued spending discipline across the industry.

We anticipate that NAND WFE investment will include planar conversions, and 3-D NAND capacity additions in 2015, with the 3-D investment being more second-half weighted; and for the first time, the spending level more or less equal to the planar capacity component.

Our outlook for 2015 NAND supply bit growth remains in the high 30%s.

Overall, we're projecting 2015 memory WFE spending in the range of $14 billion to $15 billion.

Now turning to the foundry segments.

Investments in 2015 will be focused on FinFET enablement at a number of customers, and some 28-nanometer capacity additions responding to increased demand for these devices.

Our current view of foundry investment is that it will be up slightly from the healthy spending levels we saw in 2014, and again reasonably distributed across customers, with consistency compared to fab-less company stated growth forecasts.

We expect logic spending of $6 billion to $7 billion, more or less flat with 2014, reflecting a balance of some slightly positive news on PC volumes, and a sustained commitment to technology conversions with optimized re-use of the installed base by the customer.

Overall, we are modeling 2015 WFE in the range of $34 billion plus or minus $2 billion for the year.

At this point, our visibility for the strong first half is better than the second, as you might imagine.

And we believe the scenario of a relatively balanced first half and second half is not unreasonable.

Of course we will know more as the year progresses, and update you as appropriate.

Now turning to our goals and objectives for the business.

Execution and in turn sustaining outperformance remain the guiding principles for Lam in the new year.

We manage the Company with a strong focus on the fundamental drivers of profitable growth, value-enhancing products and services, scale, and operating effectiveness.

In that regard, our 2015 focus is clear.

Differentiate on customer trust and customer experience.

Execute on the opportunities already won to make sustainable the platform of growth.

Gain market share with a focus on atomic-level control in deposition and etch processes.

Prioritize employee, organization and business systems development to enable efficient scaling, and deliver profitability required to fund growth.

Putting the $2-billion market expansion opportunity we described previously in context Lam's standalone etch and clean product portfolio competed for 19% of WFE.

Subsequent to the addition of the deposition portfolio, we competed for 25% of WFE at the date of the Lam-Novellus merger closing.

On the three-year anniversary of announcing that deal, we have a product portfolio that will compete for approximately 28.5% of WFE in 2015, and we believe by 2017 greater than 30%.

The significant market expansion combined with accelerated market share gains in applications critical to the inflections demonstrate what we consider very good progress with exciting upside.

Before handing the call to Doug, I would like to express my genuine appreciation for the recognition Lam has received for our hard work and achievement over the last year.

Lam was recognized for its leadership and collaboration by multiple stakeholders, including customers, suppliers, investors, industry analysts, and peers.

This recognition serves as a powerful affirmation and acknowledgment for the 6,900 Lam employees who unite around the objectives of the organization to make all of this possible.

On behalf of the entire Lam team, I would like to express our appreciation for the support and opportunity given us in 2014.

We look forward to sharing our performance against our goals and opportunities with you again this year.

Doug?

Thanks Martin.

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

As Martin mentioned in his opening comments, calendar 2014 was a year of fundamental outperformance for Lam Research.

The focus on market share gains and product positioning to take advantage of SAM expansion, combined with strong execution I think was clearly demonstrated in our financial results.

We delivered record levels of shipments and revenue.

We grew revenue at more than double the rate of WFE growth, and we grew operating income at more than double the rate of that revenue growth.

We generated $942 million in operating income for the year, which represented nearly 20% of revenue, and we returned approximately $486 million to our shareholders through the initiation of our first dividend and our continued share repurchases.

Specific to the December quarter, shipments, revenue, and gross margin were in line with the mid-point of our guidance, and earnings per share were at the high end of our range.

In the December quarter, shipments came in at $1.247 billion, which was up 12% sequentially.

The combined memory segment made up 53% of total system shipments, and this was up from 44% in the prior quarter.

DRAM shipments were strong, and contributed 43% of system shipments, which was up from 18% in the prior quarter.

DRAM investments continue to be heavily focused at the 20-nanometer node.

NAND represented 10% of shipments, and this was down from 26% during the September quarter.

The foundry segment remained steady in the December quarter, accounting for 32% of system shipments, versus 45% in the September quarter.

Foundry shipments were relatively broad-based, with investment for sub-20-nanometer FinFET being complemented by 28-nanometer outlays.

The logic segment grew, and made up 15% of system shipments.

This was up from 11% in the prior period.

We delivered $1.232 billion in revenue in the December quarter.

Revenue increased 7% from the prior quarter, marking the sixth consecutive quarter with revenue above the $1-billion mark.

Gross margin for the period came in at 45.4%, essentially at the mid-point of our guidance, and pretty consistent with our near-term financial model.

As I previously mentioned, you should expect some quarter-to-quarter variability in gross margin, due to a number of factors such as product mix and customer concentration.

I think our financial model remains the best way to think about our ongoing financial performance.

Operating expenses increased to $330 million, but they actually decreased as a percent of revenue compared to the September quarter.

SG&A was flattish, while R&D spending for items such as engineering programs and associated materials for our next-generation products increased.

We'll continue to make the strategic investments necessary to successfully position the Company for sustainable growth, and we'll adjust our plans based on our ongoing assessment of these opportunities.

Operating income in the December quarter was $230 million, with operating margin of 18.7%, which was 30 basis points below the mid-point of our guidance.

The tax rate for the quarter came in at 9%, and that compares to 18% last quarter.

The December tax rate benefited from the reinstatement of the R&D tax credit in the United States, as well as a more favorable jurisdictional mix of income.

A tax rate in the middle teens would be reasonable for you to include in your forward-looking models.

Based on a share count of 174 million shares, earnings per share for the quarter were $1.19.

This was at the high end of our guidance range, primarily due to that favorable tax rate.

I would like to remind you that the share count includes dilution from all three of our convertible notes at this point.

The net dilutive impact is 12 million shares on a non-GAAP basis.

With the first of our convertible notes maturing in 2016, and given the current favorable interest rate environment, we will be evaluating our alternatives to refinance this note.

Dilution schedules for the 2016, 2018, and 2041 converts are available on our Investor Relations website for your reference.

In the December quarter we spent about $46 million, and took delivery of approximately 590,000 shares, at an average price of roughly $77.

We also took delivery of 278,000 shares from the accelerated share repurchase that we executed during the September quarter.

I think we're making pretty good progress on the $850 million share repurchase authorization that we announced in April of 2014, with greater than 40% of it completed during the first eight months.

Finally, we returned $0.18 per share in dividend distributions to our shareholders.

Let me switch gears now and move to the balance sheet.

We ended the quarter with cash and short-term investments, including our restricted cash, of $3 billion, which was about flat compared to the September quarter.

Cash generation was partly offset by those capital return programs, as well as capital expenditures.

Cash from operations was $161 million, which was up from $141 million in the September quarter.

With the increase in shipments, accounts receivable and day sales outstanding grew slightly.

We also saw growth in inventory to support the levels of shipments expected in the next couple of quarters.

I just mentioned that I expect the linearity of the March quarter to be even a little bit more back-end loaded; and therefore expect to see a little bit of lengthening in accounts receivable and DSO.

We exited the quarter with deferred revenue of $374 million.

This excludes $53 million in shipments to customers in Japan, which will revenue in future quarters.

These Japanese shipments remain as inventory on our balance sheet.

Company non-cash expenses include $31 million for equity comp, $40 million for amortization, and $30 million for depreciation.

We incurred $61 million for capital expenditures in the quarter.

CapEx was up in the quarter, as we increased our investments in lab and new product development capability.

We exited the quarter with approximately 6,900 regular full-time employees.

This growth of roughly 300 employees comes from supporting new customer sites, higher manufacturing volumes, as well as increases in new product group development activities.

Looking ahead, I would like to provide our non-GAAP guidance for the March quarter.

We're expecting shipments of $1.45 billion, plus or minus $50 million.

We're expecting revenue of $1.37 billion plus or minus $50 million.

We're expecting gross margin of 44%, plus or minus one percentage point.

We're forecasting operating margins of 19% plus or minus one percentage point.

Finally, we forecast earnings per share of $1.30, plus or minus $0.07, based on a share count of approximately 174 million shares.

I'll remind you that as we mentioned during the September quarter call, the March quarter is impacted by both a mix towards more new tools that haven't fully moved down the cost curve yet, as well as a heavier customer concentration.

These items are contributing to the lower gross margin percentage.

I expect this to continue to an extent in the June quarter; but I anticipate improvement in the gross margin percentage in the second half of the year.

The right way to think about our financial performance over the medium and longer term remains our published financial models.

That concludes my prepared remarks.

Operator, please open up the call for questions.

Thank you.

(Operator Instructions)

C.J. Muse, Evercore ISI.

Good afternoon, thank you for taking my question.

First question, was hoping to get some clarity from you on directionality of shipments, revs going into Q2 in the second half.

Last quarter you talked about an uplift a quarter out.

Curious if you could provide some color on that front, and what the key moving parts are, and assumptions?

I guess the answer to that question is once bitten, twice shy.

(laughter) I think one reason I did share a perspective today, C.J., around backlog is I think it should tell you something about the trajectory of the Company, and the industry-spending outlook that we have; but I'm going to avoid a level of specificity at this point in time for the June quarter.

I do think, and I think I mentioned this in my prepared comments, that the outlook for the first half is reasonably clear to us, and pretty strong.

There's still a lot of months left in the year for us to get really specific about the second half.

But I don't think it's unreasonable to assume that we haven't got a shot at reasonable balance this year.

Okay.

I guess as a quick follow-up.

Doug, can you talk a little bit about the up-lift in OpEx?

It came in a little bit higher in the December quarter, and then relative to the guide, roughly $8 million to $10 million higher, as well.

Just curious, are these one-off programs associated with specific customers, or is this a slightly new trend line that we should be thinking about going forward?

The right way to think about our levels of spending are what we perceive to be our sustainable level of profitability.

Yes, we were a little bit below that operating income, but I don't think 30 basis point is too much.

We are ramping up some of our R&D activity, as I indicated in my prepared remarks, which is part of what you're seeing go on in the March quarter.

But the right way to think about how we intend to spend money will be to be roughly consistent with those financial models that we put out.

Right now we do have a little bit of the gross margin headwind that I described, but the spending level is pretty -- is still pretty well within those models.

I think as, just to add, I think Doug's prepared comments that describes the addition of head count also need to be put in context.

I don't spend a huge amount of time talking about this, because I think across the industry it's not a very easily comparable benchmark.

But for the Company, a revenue per employee trajectory is not an unreasonable reference for you to be thinking about.

In fact, through the December quarter and the March guidance that we've given today, the revenue per employee is actually getting better and not worse.

I think the context for spending more money is the growth of the Company is pretty significant.

Our focus as a leadership team is making sure we are effective doing that before we start worrying too much about efficiency, which doesn't mean we don't try to do both, but the customer trust exposure for getting a ramp wrong is not a risk we are biased to take.

We're biased to get this effective so that we can really deliver sustainability for the story that we're telling here today.

Very helpful.

Thank you.

Thanks, C.J.

Jim Covello, Goldman Sachs.

Great.

Good afternoon, guys.

Thanks so much for taking the question.

Congratulations on the good results.

Obviously you guys don't talk about orders on the call, but the shipments going up quite a bit would suggest order activity overall is healthy over the last couple of quarters.

Can you talk about any pushes or pulls in order activity overall?

Obviously your guidance for shipments is a little bit stronger.

Is there any movement within that one way or the other in the various sub-segments?

Thanks, Jim, for your comments there at the beginning.

I don't think there's anything new for us to communicate.

I think the industry generally saw a little bit of a push on some foundry investments, saw a little bit of a pull on some DRAM investments, and the rest of the industry more or less played out in the way we'd expected.

I do think it's a little bit more concentrated a shipment number for us from a customer perspective than even we were anticipating in the October time frame, relative to March of 2015.

But I think those messages are well communicated right now by the rest of the industry.

That's very helpful.

I guess it's always hard to distill the industry down to a couple of things alone that we should be looking for, but is it fair to say that memory margins are probably going to dictate if we do get that balanced half-on-half?

If memory margins stay high, we would expect continued investment in that segment; but if there was any deterioration there, we would run the risk that the back half is a little softer.

Is that one key thing that you would be looking at?

Yes, I think sustained discipline is something we continue to see.

It's something we continue to hear from the customers, and it's something we continue to expect.

But I think history tells us if this gets ahead of itself in a significant way then there's always at a minimum some kind of pause.

We don't expect that.

We expect continued discipline in every segment of the industry, and we come into the year pretty tight almost everywhere.

As best I can tell, the inventory levels and the industry commentary from our customers on inventory supports continued discipline, though I think at some level it's a byproduct of a consolidated industry.

Very helpful.

Thanks a lot, and good luck.

Thanks, Jim.

At this time, we'll take a question from Patrick Ho, Stifel Nicholas.

Thank you very much.

Martin, first in terms of overall memory spending in the year, do you see a bias first half versus second half in terms of DRAM maybe potentially being more first-half weighted, while you see NAND flash more second-half weighted, or do you see a balanced spending across both segments throughout the year?

I have two answers to your question.

One of them is from the bottoms-up forecasting and planning, which is always a little bit limited when you start focusing on something six months from now or nine months from now.

But our bottoms-up analytics would tend to support what you just described, which is a slightly stronger first half for DRAM and a slightly stronger second half for NAND.

But frankly, when all is said and done here, I think we're likely to see a little bit of strengthening in the second half.

But time will tell.

That may play out, it may not play out.

But the basic premise that you just described -- I guess the only other thing I'd supplement with is perhaps compared to the commentary from the Company three months ago where we articulated we expected planar spending in NAND flash to exceed 3-D, we're making the statement today that as best we can tell, it looks more likely to be equal and the planar investment in NAND Flash biased to first half, and the 3-D investment in NAND Flash is biased to the second half.

Great, that is really helpful.

My follow-up question, more for you Doug, in terms of OpEx levels and how we look at the longer-term business model.

One of the areas you talked about at your Analyst Day was building out your installed base business and the services front.

With IOT gaining momentum, and a lot more verbiage out there, how do you see your growth in terms of that business segment, and in terms of the OpEx that may be needed to support the growth over the next few years?

Yes, you may remember Patrick, we talked about, or I tried to talk about our objective with the installed base business is to grow it faster than the new equipment market, right?

There was a graph where I showed that.

Consistent with that, we are growing a little bit of spending in that business group this year over and above what was there last year, to go try and take advantage of those opportunities.

That is part of the investments when I talk about opportunities that are out there.

We do believe we see opportunities to generate returns, and the spending is up there a little bit.

Great, thank you.

Thanks, Patrick.

Timothy Arcuri, Cowen and Company

Hi guys, thanks.

I jumped on here a little bit late.

My first question is around the inventory.

Doug, if I just look at days, days are up to 125.

I'm wondering if that portends some view on June.

I know you don't want to say too much about June, but I'm wondering if that's portends some view that maybe June shipments are going to be up?

I'm not going to give you what June looks like.

I did describe purposefully in my prepared remarks that we expect shipments to be strong in the next couple of quarters, without giving you a direction from March to June.

We've built inventory in anticipation of that.

You should expect that those inventory levels come down in the back half of the year, likely.

But expect us to update that on a quarter-by-quarter basis, Tim.

Okay, then I just had two more quick ones.

First of all Doug, can you give us some sense of what you think the mix will be for shipments in March?

I wanted to know also if all things equal -- so let's just say shipments were flat in June.

I just wanted to try to isolate the customer concentration issue that's bringing down margins in June.

Would margins come right back up to the model -- sorry, in March.

Would the margins come right back up to the model in June, absent this customer concentration issue?

Thanks.

I think directionally in the March quarter memory shipments are going to be up as a percent.

Logic is probably flattish, maybe down a little bit, and I think foundry will be down a little bit, when you put all that together.

By the way, those are system shipments.

I kind of indicated I think the customer concentration piece continues into the June quarter a little bit.

Then my expectation is in the back half of the year the gross margins moving back up from where they are.

It's hard to call.

Things move around, Tim, as you know in this business; but as we sit here today I think we are going to continue to see some concentration in June -- might be a little bit less than it is in March, but this stuff moves around quite a bit.

Awesome.

Thanks so much.

Thanks, Tim.

Steven Chin, UBS.

Thanks.

Hi Martin and Doug.

Nice results last year, too.

Thanks, Steven.

I had a follow-up question on the 3-D NAND spend in the second half of the year.

Just curious if you think the spend on 3-D NAND in the second half will be mostly driven by one customer, or you think it's equally spread across the customer base?

It's been a long time since we've seen any meaningful 3-D shipments to I guess a starting customer, so I'm curious on the diversity you are looking at?

I would say there's clearly an expectation that one of the customers well-publicized is in the lead from an investment timing perspective.

But we expect this year to have a diverse spending, and anticipate all four NAND flash memory companies participating in a meaningful way.

I expect the spending be more distributed in 2015 than it was in 2014.

Just to kind of give you a little bit of a number on capacity we expect to be shipped in, I think in the last call I mentioned we were thinking that we ended the calendar 2014 year with approximately 60,000 wafer starts, 65,000 wafer starts, of a shipped in capacity in 3-D NAND.

As best we can tell that more or less played out as anticipated.

We think by the end of 2015 that 130,000 wafer starts plus or 10,000 is not bad reference point to have.

Okay.

Thanks for sharing those numbers.

It sounds like if Lam were to outgrow WFE again this year, it sounds like if 3-D NAND spend in the industry is strong in the second half of the year that's probably one of the main ways that you outgrow the industry again this year.

It seems like that's one of the messages?

From an inflection point of view, the 3-D NAND inflection is not insignificant.

As we've talked about before and from a timing point of view, it plays a pretty meaningful role in the year-over-year comparison.

But that's also true by the way for the multi-patterning transition, as well.

I would say the only inflection that doesn't really get traction of substance to have a material impact on the outperforming characteristics of the Company is advanced packaging -- which isn't to say there isn't a positive story.

I actually think that the advanced packaging revenues of the Company have a shot at doubling year over year.

But the scale of that compared to multi-patterning and the 3D NAND transition is obviously very different, and meaningfully lower.

Yes, I think outperformance is a commentary on the 3-D NAND, and FinFET and multi-patterning transitions in DRAM and logic both.

It is a commentary on market-share momentum in the Company, which we are I think accelerating.

It doesn't feel to me like it's slowing or stagnating.

It feels to me like the market-share momentum is actually accelerating, which is something we'll work very hard to sustain.

Thanks, Martin.

Thank you.

Weston Twigg, Pacific securities.

Hi, I wanted to follow up on that last comment related to DRAM multi-patterning as being one of the drivers.

Wondering as the industry works through the 20-nanometer conversions and add the additional etch tools for multi-patterning, is there some risk to etch intensity for DRAM in the following years as they -- maybe the incremental etch opportunity slows down, given that they would have more etch tools for re-use?

I think the reality is that even after the investment that we've described in calendar 2015, and our best estimate is approximately 400 -- maybe 400 to 440, or 410 to 430 hard to be specific at this point is the kind of thousand wafer start conversion approximately of the industry.

There is much more than that at the end of calendar 2015 still in need of conversion to the 20-nanometer technology node.

To the extent there's a risk in the form that you're describing it, I don't think it shows up in calendar 2016.

It has a shot at showing up in calendar 2017, but a lot is going to change between now and 2017 relative to the road map of DRAM.

It's not something that's a particularly prominent risk factor for us in the scheme of things.

Okay.

In other words, the same drivers that you see today, the 3-D NAND, FinFET, the DRAM multi-patterning, you expect those to be pretty consistently strong over the next two years?

Yes.

I think the context to one of the earlier questions is the discipline and the balance, the supply and demand balance.

We've had a number of years of demonstrated performance on that, so I think we're getting to the point where trusting that as a legitimate assumption is much more valid.

Great.

Thank you very much.

Thank you.

Sundeep Bajikar, Jefferies.

Hi, guys.

Thanks for taking my question.

First, just following up your comments on heavier mix of new tools expected in the first half.

Can you say which end market these new tools are targeting?

Martin referred to 20 new tool introductions last year.

It's that, so it's obviously broad-based.

If I had to give you a little bit of color, it's probably more biased towards our deposition product group than it is the etch product group in terms of new tools that are coming out, given some of these inflections that are happening.

There's a little bit more going on there.

Okay, great.

Then a quick follow-up on foundry.

Are you continuing to see activity at the 14-nanometer node?

How much 14-nanometer capacity do you expect to see exiting the year?

The answer to the first part of that is yes.

I said before, we're not distinguishing the 14, 16 capacity additions from the 20, because there is so much of an overlap of the equipment portfolio.

90% to 95% of the equipment is going to track from the last planar node to the first FinFET node anyway.

Our assumption is that we exit 2015 with somewhere between 200,000 and 220,000 wafer starts of combined capacity 20, 16, and 14.

Thank you so much.

Thanks Sundeep.

Krish Sankar, Bank of America Merrill Lynch.

Hi, thanks for taking my question.

Thanks for the color on the SAM and share gains that you guys highlighted for last year.

Two quick questions.

First one, Martin in the past you've spoken about a third of WFE spending this year might be for tech inflections.

Curious if that is still the view, or do you think that would change given the challenges people are having at FinFET and 3-D NAND?

Also, I had a follow-up after that.

No, I don't think there's a fundamental challenge.

Instead of maybe 33, maybe we end up saying it's 31 or something like that, or 32 as a byproduct of the 3-D NAND assumption set delaying from 2014 to 2015 a little.

But the fundamental message, I think, is exactly the same today as it was before; and the end game to the extent we're describing one in calendar 2017, the 50% spending proportion on inflections is still the assumption we are running with.

Got it.

That's very helpful.

Then a quick question for Doug.

What is your mix of onshore versus offshore cash?

What do you think is the right moment of cash to run the business?

Thank you.

Krish, it's somewhere between 20% and 25% onshore as we sit here today, and obviously then it's 75% or 80% offshore.

As always, we're thinking through how to fund that $1-billion capital return program.

I've previously said we can fund that with the cash that we have.

That program I think is a pretty significant program in terms of returning cash.

Once we get through the current authorization, you'll hear us talking about what are our plans going forward.

Pretty comfortable with the level of cash.

It's been pretty flat in gross terms over the last couple of quarters, and that's been because we've been returning cash to shareholders.

Got it.

Thank you, guys.

Thanks Krish.

Mark Heller, CLSA Equity Research.

Thank you for taking my question.

Congratulations on the strong results.

Martin, I was wondering if you could update us on the DRAM -- the outlook for the DRAM sector in terms of new capacity additions this year?

I think previously you were talking about maybe 50,000 to 60,000 starts.

I'm wondering if that's still the case for this year?

Yes, I think maybe we would probably say more 60,000 than 50,000.

But I think as a number of customers have said most recently as well, that addition frankly does nothing more than keep the available output kind of constant.

Because in the technology transitions from the 3X range to the mid-20s and to 20, there's a loss per square foot of clean room in terms of output.

The assumption that we're making is that the investment of 60,000 wafer starts or so is -- and maybe it's a little higher, maybe it's 60,000, 70,000, that range.

But it's not 100,000 wafer starts of addition, or anything like that.

It essentially keeps the output potential constant year over year.

Got it.

Then it looks like the shipments to Korea picked up quite a bit during the quarter.

I'm just wondering if that's more weighted to foundry or memory spending?

Thanks.

In the interest of not being specific to any one customer, we're going to elect not to answer that question directly, please.

Thanks, Martin.

You can just listen to what I said in my prepared remarks and get some level of indication, probably.

Sidney Ho, Deutsche Bank.

Thanks for taking my question.

A question on the foundry.

I know you talk about visibility in the first half is good.

How's your visibility in the second half?

If a customer decides to go with FinFET this fall, do you think there's enough capacity to handle that right now, or do you think more equipment needs to be ordered from here?

Well, that's a little hard to answer without getting into a lot of details in terms of a demand statement for those devices.

I guess the headline for us is we trust the substance of the communication from the customer.

I think everybody's saying they have an interest in keeping this thing in balance.

What we're communicating is our best understanding of their investment plans, which as I've said is in the 200,000 to 220,000 wafer starts installed capacity by the end of this calendar year for 20, 16, and 14 combined.

If the customer is underestimating the demand for that device, then I think there will need to be more investment.

It doesn't feel to me like there's risk that they're over-investing it.

I think it's a pretty reasonable commentary on outlook, as best we can tell.

Okay.

A follow-up, maybe this one is for Doug.

You talked about the customer concentration in Q1.

Does it happen every Q1, or it just happened and the stars are aligned this quarter?

Or is it a byproduct of a more concentrated customer base?

I don't know that there is a seasonal profile to it, per se, Sidney.

This is more concentrated than I can recall seeing it in the two years I've been with the Company.

I think this is over and above where you would normally expect it to be.

Okay, great.

Thank you.

Thanks Sidney.

Farhan Ahmad, Credit Suisse.

Thanks for letting me ask a question, and congrats on a great quarter.

Martin, one question on the 2015 WFE.

At the last quarter earnings call you had indicated WFE to be up 5% to 10%.

Now it seems you are indicating it up flat to up 13%.

Just wanted to understand why you are broadening the range?

What are some of the factors that have increased the variability in 2015?

I don't know that I would read too much into it.

I think our headline is the outlook that we've described in percentages three months ago is not so far away from the outlook we're describing with dollars.

It's pretty customary for the Company to start the year with a plus or minus $2 billion, and about the middle of the year narrow that range to plus or minus $1 billion.

We've done our best to translate the outlook of three months ago into the customary form of guidance.

I think what has changed is from the public disclosure of the customers, some foundry spending expansion, DRAM more or less where it was, and commentary from the microprocessor space of the importance of re-use in their overall strategies.

But the $34 billion plus or minus $2 billion is a commentary on -- we're at the beginning of the year and lots can change.

We're doing our best to tell you what we think the range is.

Got it, thank you.

One question on NAND.

You mentioned the spending on the planar versus 3-D should be about balanced this year.

I wanted to ask about the planar spending this year.

How much of the capacity do you think will go through a planar node transition this year?

Again, I've come to appreciate that level of specificity gets a little bit close to the sensitive disclosure of the customers, given there are only so many.

If you may allow me, I'm going to defer that question to our customers.

Got it.

Thank you, that's all I have.

Thank you.

Edwin Mok, Needham and Company.

Hi, thanks for taking my question, and congrats for a great quarter.

First question on the SAM expansion commentary.

Martin, you had that you believe your SAM will expand about 30% of WFE by 2018?

I guess two-part question.

First is how much are you baking in greenfield 3-D NAND investment versus converting existing planar to 3-D?

The second part of that is, does that factor into some kind of adoption of EUV?

Well, first of all we said 2017 not 2018.

Relative to the last part of your question, EUV we don't believe has any relevance of substance in the 2017 time frame, by virtue of the stated plans of the customer not to have an EUV adoption until the 7-nanometer technology node at the earliest.

I think we gave you some color on that the last quarter.

Relative to 30% being a legitimate target for our Company from a proportion of WFE that's available to us, there of course is some assumption associated with how the customer builds 3-D NAND capacity.

But we are not assuming a very grand, I would say, conversion of the planar installed base that sits at more than 1 million wafer starts per month of capacity today.

I think there's a lot of learning still in the industry to know quite what 3-D devices get targeted to in terms of end market, and how fast that conversion will play out.

But we haven't assumed a grand conversion of the installed base.

We're trying to estimate as best we can an efficient way for the customer to establish that capacity.

We tend to bias a conversion assumption rather than an addition assumption for the industry generally.

But as you know, every customer is slightly different relative to answering that question.

There are some that are very focused on addition, and there are others that are very focused on conversion.

Great.

That's very helpful.

Then quickly touch on the clean side.

You guys have a new product.

Any update on how that's coming along?

As that product, assuming that's successful later part of this year, which I think was your target, right?

Where do we expect the first initial adoption?

Is it foundry, DRAM, or NAND?

Frankly, three months is a really short period of time in the context of new products in new markets.

I don't have so much more to say than I did -- today than I did in October.

Maybe the one exception is for the new product, the EOS product, we have had repeat order of the penetrations that we made for one customer, which is I think a meaningful statement of validation.

But it isn't everything we need.

What we need is an industry to make that choice, as well as a couple of customers.

This is the year where I think the decisions of the customers will define the legitimacy of the strategy and the plans of the Company.

I think the Company's done a really good job in delivering the productivity differentiation, and getting us process capability for a front end of line clean growth opportunity.

But just because the Company has done it doesn't mean the customers are going to be invested in that selection and that adoption.

We're doing our best.

As you said, this is the year it really plays out one way or the other.

Operator, we have time for two more questions today.

Mahesh Sanganeria with RBC Capital Markets.

Thank you very much.

I have a question on the foundry commentary you made that spending is up flat to up slightly.

TSMC guided for a 20% increase in CapEx.

I'm assuming other customers are probably reducing their spending.

Can you talk about where the cut is coming from?

Is it other customers, is it in the FinFET area, or they're reducing the investment in mature technologies?

I don't know that I can easily answer that question.

We're assuming that all of the foundry customers are making investments in this calendar year.

We're assuming that at least two-thirds of the wafer starts in the industry are getting added at the 14-, 16-nanometer technology node.

As you've heard from two or three customers, I think the 20-nanometer demand is not insignificant.

That's in the mix, as well.

Okay.

My follow-up, I just want to revisit the financial model you presented at Analyst Day, mostly in terms of revenues.

At $32 billion you were targeting $5.1 -- I think that was probably towards the end of 2015.

I don't think we had that right number -- we don't have that precise number for $34 billion.

According to that model, where will you be at $34 billion revenue?

Yes, Mahesh, I'm not going to give you a new model as I sit here right now, but I will give you a little color on it.

The one thing to think is there's a level of WFE context in the model.

There's also a time component to the model, right?

Because there's a maturation of some of these new tools that are coming out.

Both of those items are very important to the attainment of the financial model.

If you recall, we showed a $5.6-billion 2016-2017 model that got a percentage point better than the 2014-2015 model.

We're probably somewhere in between each of that, once we get through some of these tool maturations.

But we need the time to get through those.

Okay, that's helpful.

Thank you.

Thanks, Mahesh.

Mehdi Hosseini, SIG.

Yes, thanks for squeezing me in.

Martin, going back to your DRAM bit commentary, what are the key assumptions for that 30% bit growth?

I say that because earlier this morning Hynix talked about 25%.

I think Micron is also talking about 25% bit growth.

I'm just trying to understand the underlying assumption in your view?

And I have a follow-up.

Yes, the assumption is when we kind of add up the collective disclosure from customers, and what's available to us from being inside of the industry and participating real time, that's the best assumption we can give you.

Okay.

For the purpose of modeling, Doug, how should I think about working capital requirement?

How does the inventory changes from the December into the March quarter?

Yes, the fact that the denominator goes up even if inventory is flattish, which it probably is going to be, you'll have inventory turns in days come down.

Directionally, inventory's going to trend down I think as we go through the year, as we've built into this level of shipments.

A little bit of color for you to think about as you model it.

Okay, thank you.

Operator, I think actually we have time for a couple more.

Okay, thank you.

At this time we'll move to Atif Malik with Citi.

Hi, thanks for taking my question.

On the $34-billion WFE outlook, Martin can you talk about the swing factor that can take it to $36 billion, or the high end of the range?

Which segment can take it to that range?

Or is it one segment?

I guess any one can in theory.

I think the 3-D NAND conversion is more likely to influence in a positive direction than anything, and that's really a statement on the size of that transition and implications of it, and obviously the degree of uncertainty that exists in terms of market penetration of that device at this time.

I do think FinFET conversions can accelerate, if there's momentum that is in excess of stated plans in terms of going from planar to a FinFET device.

But it feels to me like the up side is greater in memory than foundry logic, and greater in NAND than DRAM.

But I guess in theory, all of them can move in a positive direction.

Got it.

On the timing of EUV insertion, one of the foundries has taken a pilot production litho tool.

I'm just curious if anything has changed to your thinking in terms of insertion node?

No, nothing really.

We're still thinking 7-nanometer is the earliest.

The only thing that I read in the last three months reinforced the complexity of the infrastructure around the EUV process itself as being a significant component of that question.

It didn't look like it got any easier.

It looked like it got more difficult, as best I could tell.

Okay, Harlan, you're up.

Thanks, Atif.

Harlan, you're the last guy today.

Operator, next question please?

Harlan Sur, JPMorgan.

Hi, this is Bill Peterson calling on behalf of Harlan.

Thanks for sneaking us in, and congrats on the good December quarter.

I wanted to clarify a few things relative to your commentary on logic, when you mentioned about re-use.

I'm trying to understand what would be different in logic relative to the foundries.

The nature of them, a lot of the logic -- some logic customers already at FinFET, and a lot of the foundries are not.

If you could provide some color on that, that would be very useful.

Thanks.

I think really it's the age-old relative ease -- I don't think it's easy, but in relative terms it probably is.

With the amount of die concentration that exists in a microprocessor fab compared to the distributed die, and customer reality of a foundry, the conversion cycle really is a big challenge.

I think that's the principal reason.

There is an emerging trend of some substance to conversion in foundry, but it does not compare to what is available to the microprocessor world.

In terms of implications, does that just mean more upgrades?

What does it mean in terms of how do we think about it for implications for Lam and other equipment vendors?

I think it can be when people do conversions, it can be upgrades from a hardware perspective.

Sometimes it's nothing, because they find a way to make the hardware work and there's a process modification.

With rare exceptions, this industry doesn't get paid very much for process.

It gets paid for the hardware that gets sold into a fab, even though perhaps the value contribution that is really made is a process contribution.

But that's a long story.

Great.

All right, thank you operator.

That's all we have time for today.

Thank you for your participation, and we will look forward to talking with you again next quarter.

Thank you.

Once again, this does conclude today's conference call.

Thank you for your participation.