科林研發 (LRCX) 2016 Q3 法說會逐字稿

Good day, everyone, and welcome to the Lam Research Corporation March 2016 earnings conference call.

At this time I would like to turn the conference over to Satya Kumar, Vice President of Investor Relations.

Please go ahead.

Yes, thank you.

Good afternoon, everyone, and welcome to 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'll share our outlook on the business environment, review our financial results for the March 2016 quarter, our outlook for the June 2016 quarter, and provide an update on our planned business combination with KLA-Tencor.

The press release detailing our financial results was distributed a little after 1 PM Pacific time 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 events.

All statements made that are not historical facts are forward-looking statements based on the current information and are subject to risks and uncertainties that may cause actual results to differ materially.

These forward-looking statements include the timing for the closure of the proposed business combination with KLA-Tencor, the benefits to be realized from that transaction, the anticipated structure of future combined operations, and our guidance on revenues, shipments, costs, margins, share count and earnings.

Other forward-looking topics that we expect to cover are included in the slide deck accompanying our remarks.

We encourage you to review the risk factors disclosure in our public filings with the SEC including our 10Ks and 10Qs.

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 PM Pacific time.

(Caller Instructions)

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

With that, I'll hand the call over to Martin.

Thank you, Satya, and thank you all for joining us today for our quarterly earnings conference call.

This afternoon I will share highlights from the March quarter, provide some perspective on how we're performing relative to our growth objectives, and share commentary on the industry environment so far this year.

Prior to turning the call over to Doug, I will conclude my prepared remarks with a status update on our planned business combination with KLA-Tencor.

Lam Research is off to a very solid beginning in 2016, with our March quarter results providing evidence of continued strong execution against our longer-term outperformance ambition.

2016 is a year where, connected with the device architecture and process flow decisions of our customers, also with our decisions several years back to invest for the long term in enabling key technology inflections, we actively compete for more than 30% of WFE.

In the quarter just ended, we delivered revenues and shipments above the midpoint of our guidance; and gross margin, operating income and non-GAAP EPS that were all above the high end of our guidance range.

We demonstrated business model flexibility by managing core operating expenses to a level last reported a year ago, while growing investments in R&D over the same period.

Importantly, the results this quarter reflect a healthy balance of leadership focus on both our short term and long term.

Most important, of course, is our long-term commitment to the success of our customers.

Overall, our performance is a testament to the high-quality focus, the teamwork and execution of Lam employees throughout the Company.

And for that, I would like to thank them all sincerely.

As we evaluate the performance of Lam currently and develop strategies to support our vision for the combined Company, we are driven by the opportunity for compelling value creation.

Standalone and combined with KLA-Tencor, we model robust and predictable cash generation supplemented by growth outperformance and over time, more opportunities for investing in profitable growth and returning excess cash to shareholders.

The growth thesis for Lam over the next several years is rooted in our strategy to partner closely with our customers to enable key technology inflections, such as 3D device architecture and multi-patterning process flows and is validated by our performance in the last several years.

As our results reveal, this strategy is working and is enabling the increased strategic relevance of Lam Research in our industry.

Calendar 2016 is a year where industry spending trends are increasingly biased to disciplined and strategic investments across most device segments, which lends further support to our conviction in a multi-year Company outperformance opportunity.

This spending bias, we contend also, is a driver for continued healthy WFE spending levels for the foreseeable future, despite somewhat tepid macro conditions.

Now looking at our progress across the inflections, first with 3D NAND, we see increasing adoption rates of this technology, strong traction for our products and service offerings, and growing clarity around next-generation device industry roadmaps.

First-generation 3D NAND production involves etching through 30 or more stacked pairs of films.

These are growing to 60 or more pairs for next-generation devices, resulting in increased challenges for critical high-aspect ratio dielectric etch and also staircase conductor etch.

Our Flex F and G series dielectric products featuring proprietary ion energy control and high selectivity have tripled their installed base in the last year and established Lam as the market leader in dielectric etch segment.

Our Kiyo conductor etch platform with industry-leading etch selectivity has enabled more than a 2 times improvement in the number of layers that can be etched in situ for staircase applications, with the result that a majority of 3D NAND customers have now included Lam in their staircase etch HVM purchases.

Our Vector ALD platform offers differentiated processing capability, allowing expansion of our SAM from multi-patterning, to now include 3D NAND gap fill applications also.

Turning to FinFETs and multi-patterning, during the quarter we continued to build on the momentum of our differentiated Kiyo with Hydra conductor etch and Flex dielectric etch platforms for critical front-end of line FinFET transistor solutions for 10 nanometer and 7 nanometer technology nodes.

As we communicated at the recent SPIE lithography conference, atomic level processing to control variability is increasingly critical for multi-patterning and that need will persist in an EUV-enabled environment.

Our customers at the conference continued to affirm their strategy of leveraging improvements in both EUV and multi-patterning to address their needs, and together with our peer group, we have conviction that deposition and etch multi-patterning applications will grow for many years to come.

Fundamental to enabling our share gains has been the performance of our 35,000-plus process module installed base, and in calendar 2015, a 10-point improvement in our customer satisfaction indexes.

On this last point, it was extremely satisfying that our logic segment capabilities and partnership have progressed to a point where we were one of very few companies recognized recently as Preferred Quality Supplier to Intel.

The focus we explained at SEMICON West 2015, of developing new value-add products and services is intended to provide our customers productivity, utilization, and reuse benefits in addition to creating new SAM growth opportunities across leading edge and mature technology nodes for our Company.

As planned, over a multi-year period we are on schedule for our installed base business revenues to outgrow materially our installed base units expansion.

In calendar 2016, our emphasis includes implementing systemic improvements in customer satisfaction, increasing our spares market share with new products differentiated by Lam-specific OEM knowledge and learning, and building upon the early adoption successes of new installed base advanced services and productivity solutions achieved last year.

Now I would like to provide a brief update on demand and WFE trends.

Expectations of the experts, for global economic growth have been revised slightly lower since our last report.

End market demand trends for technology products remain mixed, with additional weaknesses in the PC market and relatively stable, although lower than expected, growth rates in mobile.

Meanwhile we continue to expect solid demand for leading edge silicon in the enterprise market driven by the long-term move to the cloud: storage and computation applications both.

More importantly perhaps, we believe that Lam and the equipment industry broadly have an opportunity and responsibility to innovate for and with our customers to create a catalyst for the higher levels of IC unit demand.

Certainly that is our conviction and thinking, both as a standalone process Company and combined with KLA-Tencor.

Our outlook for the memory market continues to reflect the offsetting factors of strong 3D NAND spending and meaningful declines in DRAM spending driven largely by PC weakness year over year.

The latter has resulted in now well-publicized and rational response from our DRAM customers, which should continue to help improve the IC unit supply/demand balance.

We expect DRAM capacity to remain essentially flat to slightly down this year.

DRAM WFE we estimate to represent mid to high $5 billion spending this year, focused almost exclusively on 20 nanometer and 1X nanometer upgrade investments to improve cost competitiveness and device performance.

We expect nonvolatile memory industry WFE to exceed $9 billion in 2016 with every industry participant committed to the 3D roadmap.

Spending patterns and the strategic actions by our customers in 2016 offer the clearest evidence yet that 3D NAND and new nonvolatile memories are evolving to have a transformational influence on the compute and storage industry as device and system architectures evolve for consumer and enterprise cloud applications.

3D NAND, in particular, has an integration scheme that is heavily biased towards deposition and etch, a statement that is increasingly true as the customers transition from building greenfield 3D fabs to conversions from 2D to 3D, and eventually from first-generation 3D through subsequent vertical scaling.

We assess that the equipment industry remains on track to ship a cumulative 350,000 to 400,000 wafer starts per month of 3D NAND capacity by the end of 2016, which includes around two-thirds by year end production qualified.

The headline for Lam is that with just under one-quarter of global capacity 3D NAND capable by the end of this year, we are in the very early stages of a multi-year growth opportunity.

There is much for us to be excited about.

We continue to expect flat to slightly better WFE in foundry and logic, where the majority of the spending is focused on strategic investments to enable 10-nanometer technology, although as stated previously IoT applications, automotive, wearables and low-end phones, et cetera are driving a healthy resurgence of 28-nanometer capital expenditure.

Doug will provide more details in our financial guidance, but our shipments outlook in a flattish WFE environment is consistent with our ongoing outperformance commentary and prior long-term models.

We ended the quarter with our strongest backlog and deferred revenue balance combined in the recent history of Lam.

And we expect stronger shipments in June with sequential growth of approximately 9%.

We retain our 2016 WFE outlook of $33 billion, plus or minus $2 billion.

And from a momentum perspective, guide the first half 2016 shipments stronger than our second half 2015, and although slightly muted perhaps from our more conservative DRAM outlook today and some first-half/second-half rebalancing, we are still encouraged by the potential for slightly stronger shipments second half 2016 over our first half 2016.

Now I will conclude with some comments on the planned combination of Lam Research with KLA-Tencor.

As a reminder, with continued execution and our priority on being number one in customer trust, we have the confidence that standalone Lam Research has a continuing growth outperformance opportunity over the next several years.

We have elected to use this recent period of strength and an exciting outlook to pursue an even more strategic agenda to innovate beyond what is possible in two great companies separately for the benefit of all stakeholders.

We invested a number of years developing the strategy with our customers, and believe with all subsequent interactions they are materially invested in the success of our vision.

They trust our genuine commitment to the broad ecosystem, and they are increasingly motivated by the opportunity for new joint development projects together.

As we move through the early stages of integration planning, our conviction in the business combination and the opportunities it will drive for the customer and combined Company is only getting stronger.

The integration planning team has been focused on understanding the organizational design and business processes of the two companies in order to ensure a seamless transition for our customers, suppliers and employees.

We have announced internally and introduced to our customers a very strong global leadership team with balanced representation from both companies.

Although we remain two separate companies until the date of deal closing, and until that time our most fundamental responsibility is to deliver on pre-existing commitments made to our customers, comprehensive integration activities have reinforced our confidence in achieving both the stated cost and revenue synergies.

In recent weeks, we received approval from both KT and Lam stockholders and have received regulatory approvals in Israel, Taiwan and Ireland.

We are actively engaged with all other required agencies, and remain confident that we will close the transaction sometime around mid-year.

Our best estimate is June/July, plus or minus a couple of months.

With that, let me turn the call over to Doug who will provide an update on the March quarter and our guidance for June.

Okay, great.

Thank you, Martin.

Good afternoon, everyone, and thank you for joining us today on what I know was a busy earnings day.

We are pleased with the momentum to be starting the year with.

Our results for the March quarter came in above the midpoint of guidance for all metrics.

Shipments for the quarter were $1.446 billion, which was up 12% sequentially and above the midpoint of the guided range.

Memory shipments were strong in the quarter, with the combined memory segment making up 70% of total system level shipments, and that compares with 65% in the prior quarter.

Memory shipments were weighted heavily toward the nonvolatile segment, which represented 43% of shipments in the March quarter.

This was up from 23% in the prior quarter driven by ongoing customer investments in 3D NAND wafer capacity, as well as increasing layer counts.

We continue to see 3D NAND spending focused on both new wafers as well as technology conversions.

DRAM made up 27% of the shipments, which was down from 42% in the December quarter.

We're seeing continued disciplined spending in the DRAM segment with a focus on 20-nanometer technology conversions to both reduce cost per bit and to enable improved performance.

The foundry segment was up slightly in dollar terms in the March quarter, accounting for 23% of system shipments.

Foundry spending is focused on both leading edge 10-nanometer investments as well as continued spending at 28-nanometer and above.

The logic and other segment contributed 7% percent of system shipments.

Shipments into the China region were particularly strong in March, representing 27% of total shipments.

The majority of spending in China continues to be spent by global multinational customers putting capacity in place within the country.

Revenue came in at $1.314 billion in the March quarter, which was down roughly 8% from the December quarter.

This revenue result was consistent with our expectations for the quarter.

Gross margin for the period came in at 45.1%, somewhat stronger than we expected.

Better field and factory utilization and favorable product mix benefited gross margin in the quarter.

And as I've shared with you before, our gross margins are a function of a number of factors such as overall business volumes, product mix and customer concentration.

And you should expect to see some variability quarter to quarter.

I'd like to remind you that our financial model is still the best way to think about our ongoing performance.

Operating expenses in the quarter were roughly flat at $350 million, and this compares to $352 million in the December quarter.

The majority of our spending continues to be allocated to funding our critical R&D programs.

These investments are important in preparing for the current and next-generation technology inflections, enabling us to take full advantage of the opportunities ahead of us.

Operating income in the March quarter came in at $242 million, and that compares to $296 million in the prior quarter.

Operating margin was 18.4%, above the high end of the guided range due to both the higher revenue as well as the stronger gross margin.

The tax rate for the quarter was 14%, and that compares with 7% last quarter.

That, by the way, was about what we expected.

A tax rate in the low to mid-teens for the remainder of 2016 would be reasonable for you to use in your earnings models.

Based on a share count of approximately 172 million shares, earnings per share for the March quarter were $1.18, above the guidance range.

This share count includes dilution on a non-GAAP basis from both the 2016 and 2041 convertible notes, with a total dilutive impact of about 11 million shares.

Dilution schedules for the 2016, 2018 and 2041 convertible notes are available on our investor relations website for your reference.

We returned $48 million in dividend distributions to our shareholders.

This equated to $0.30 on a per-share basis.

We did not repurchase any shares in the open market in the March quarter, consistent with our stated plans ahead of closing the proposed KLA-Tencor transaction.

So now let me turn to the balance sheet.

We continue to have a healthy cash position.

Cash and short-term investments, including restricted cash, increased to $4.8 billion at the end of the quarter.

Cash from operations was $183 million, and that compares to $295 million in December.

The March shipment profile was biased toward the back end of the quarter, resulting in an increase in both accounts receivable and days sales outstanding quarter over quarter.

DSO increased to 86 days in March.

I expect this will reduce in the June quarter, as linearity is less back-end weighted.

The quality of our receivable balance continues to be very strong.

We've got a blue-chip set of customers.

Inventory turns declined to 3.2 times due to the inventory build for the growth in the June quarter.

Days payable outstanding extended to 46 days as a result of the timing of purchases within the quarter.

Cash generation was partially offset by dividends paid, as well as capital expenditures.

We exited the quarter with deferred revenues of $511 million, which was up from $395 million in December.

This amount excludes $121 million in shipments to customers in Japan, which will revenue in future quarters.

These Japanese shipments remain on our balance sheet as inventory carried at cost.

Company non-cash expenses for the quarter included $35 million for equity comp, $39 million for amortization and $35 million for depreciation.

Capital expenditures were $46 million, which was up from $28 million in the December quarter.

We ended the quarter with approximately 7,300 regular full-time employees, which was flat with December.

Looking ahead now, I'd like to provide our non-GAAP guidance for the June quarter.

We expect shipments of $1.575 billion, plus or minus $75 million.

We expect revenue of $1.525 billion, again plus or minus $75 million.

We expect gross margin of 46%, plus or minus 1 percentage point.

I do expect that the September quarter gross margin will be a little bit softer than in June due to customer concentration and product mix.

We forecast operating margins of 22%, plus or minus 1 percentage point.

And finally, we're forecasting earnings per share of $1.63, plus or minus $0.10, based on a share count of approximately 173 million shares.

We're pleased with our performance this quarter and with the guidance we've just shared for the June quarter.

We're delivering financial results coming from the strategic focus of the Company on creating differentiated product and service offerings that enable the success of our customers.

As we sit here today, I continue to expect the second half of the year will have a stronger top line than the first half due to investments in leading edge foundry and logic.

And just one last item I'd like to share with you.

We will not be doing our normal Investor Day at SEMICON West this year.

Our plans will be to something later in the year, likely in the month of November.

We'll announce exact dates and venue later in the year as we finalize our plans.

That concludes my prepared remarks.

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

(Operator Instructions)

Amit Daryanani, RBC Capital Markets.

Couple of questions from me.

Could you just -- maybe I missed this.

But the gross margin dynamic.

Could you talk about what's driving the 90 basis points uptick sequentially in the June quarter, and how much of that is really leverage versus mix driven?

And then what exactly is happening to the mix in September, I guess, that takes it down again, and could you quantify that number for us?

Yes.

There's a lot of different things, Amit, that move gross margin around, which are overall business levels.

You get product mix, you get a little bit of customer concentration sometimes that move it around.

You've got a combination of all of those things occurring in the June quarter.

And then it softens up a little bit in September, which is why I gave you a little bit of that color which I normally wouldn't do.

I think it'll be a little bit lighter in September.

Got it.

Is there a way to think about just the quantification of how much, is it 90 basis points that reverses back in September, or a much smaller number potentially?

I'm not going to quantify it numerically, except just to tell you it's going to be a little bit softer.

Got it.

And could I just follow-up on the KLA transaction?

Could you just talk about what are the regulatory requirements or any of the milestones that's left to be achieved?

I know you mentioned some that are already done, but I'm curious what's left over here for the deal to close.

We don't have specific disclosure on the agencies that we are working with.

We have more to do.

We're kind of public with disclosure as and when certain kind of milestones are achieved.

So you kind of have what you have.

I think the important message is we're still confident of achieving approval for this transaction midyear.

And I provided a little bit more color in prepared comments.

Again, basic headlines, there are no product overlaps between these two companies.

And at least as best I can tell, from every customer reaction I had before we announced this deal and every customer transaction that I've had the benefit of having subsequently, there's a genuine investment in the success of the combined Company and the innovation that will be possible as a result of this investment.

Thanks, Amit.

Tim Arcuri, Cowen and Company.

Martin, I just wanted to ask about China.

And I know that most of the activity's from the multinationals right now.

But can you sort of talk a bit about there's a lot of these big, huge chunky numbers out there, these big memory projects, most of them beginning at the end of this year and sort of into next year.

You can debate how much IP they have, but certainly they seem pretty focused on spending that money.

So I'm wondering whether you've thought about, sort of what the incremental is to WFE, or more specifically your business from the captive Chinese projects?

Could it add a couple billion dollars to WFE as early next year?

Thanks.

I would certainly think there is a very compelling and thoughtful strategic rationale for the investments.

The kind of balance of payments motivation, from my point of view at least, is very intuitive.

As Doug outlined in his prepared comments today, the majority of today's investment is the international companies.

And so clearly there is upside to the extent that there are indigenous company investments made, which to your point, require access to technology one way or other.

Either it's acquired, partnered, or developed internally.

My instinct is that in the long term the investment that's available to our industry, the investment in WFE, naturally balances around supply and demand.

So is there a spike at the beginning of a geographic commitment to an investment like China?

Probably yes.

Exactly how much?

To be determined in my opinion.

But I think at least perhaps if not more important question is, what are the opportunities for incremental IC unit demand to be created from this investment, and what capital equipment additions would prevail in that context.

I think we all recognize that incremental IC unit growth only occurs when there are performance or cost benefits above and beyond a baseline.

Certainly the partnerships that emerge in China between design houses, semiconductor companies, electronics companies and ultimately semiconductor manufacturers create opportunities for partnerships to be a catalyst to demand.

Whether performance benefits prevail is to be determined.

And cost benefits obviously capture the government incentives and agenda that are relevant, particularly in China in the next several years.

So I do expect a bump, to be determined how big.

I do think it's an authentic agenda.

I do think it will be executed with discipline.

I think in the long term it's all about the cost and the performance of a chip.

Got it, Martin.

Thank you for that.

Then I guess just as a quick follow-up.

I think the numbers suggest that the industry's adding this year sort of from a trajectory point of view in 3D roughly 200,000 versus where you closed last year and versus that 350,000 to 400,000 that you'll close this year.

At that sort of 200,000 run rate, is there -- is that a reasonable number to assume that the industry will add per year going forward, or rather will convert?

Or is this year a year that was like abnormally above that?

I'm just sort of trying to figure out how much more -- how many more years -- people are concerned about how many more years there's left on the conversion of the existing planar.

I'm trying to help that thinking.

Thanks.

I think as best I can tell, it's kind of four years, plus or minus a bit.

That's kind of the customer dialogue.

Another piece of data is that the data that I think I included in my prepared comments, that the 350,000 to 400,000 is a shipped capacity reference.

Probably a third of that is being qualified at the end of the year.

So it'll take some time to get production ready.

There are, I think, 1.3 million wafer starts per month of capacity in the nonvolatile memory space.

So the headline is, less than 25% of it is capable of making a 3D device by the end of this year.

I think your question, obviously is specifically unanswerable because at the end of the day the pace at which the customer transitions is a byproduct of success in the marketplace on performance and cost.

But the momentum is clearly there.

It is the device, and our customers have made that commitment.

So I think 95% of spending this year is 3D device architecture.

And they'll, as best I can tell, execute that over a four-year period, plus or minus a bit.

Three to five years is probably a reasonable proxy, but it speeds up or slows down on the basis of cost and performance.

And Tim as you know, even once is converted 3D will evolve in terms of layer count and the architecture.

So even after planar to 3D is done making that conversion, 3D to 3D has a long way in front of it.

Yes.

I mean, it's -- for sure, it is a 10-year roadmap to be very clear with you.

And deposition and etch segments are well recognized, I think, by every industry participant at this point that we're kind of very central to vertical scaling.

And the other reference I think that's relevant to answer your question is, what is the roadmap for SSDs.

This is probably the single biggest example in the semiconductor industry for IC unit demand creation.

And there is a $30 billion hard disk drive marketplace that every solid-state drive company is pursuing.

And our ability to contribute productivity and performance to that agenda is a real enabler of incremental IC unit demand, which is a supplement to what we are describing here.

So from my point of view, it is a really exciting headline.

Thanks, Tim.

For sure, guys.

Thanks.

Harlan Sur, JPMorgan.

Good afternoon, and solid job on the quarterly execution.

Martin, you seem confident on second half sales growth versus first half.

You seem to have maybe a slightly more tempered view on second half shipment growth versus first half.

Maybe not as much as you had previously anticipated.

I think you mentioned maybe a slightly lower DRAM spending profile.

Any other moving pieces, logic or foundry, which slightly tempers your kind of second-half shipment outlook?

No.

Simple answer.

It really is kind of a PC and DRAM kind of story.

There's a little bit of rebalancing going on between the June quarter and September quarter, but that will always be true and we'll probably see even more by the time we get there, in what direction I can't tell you today.

But the headline for us in terms of momentum I think is really positive.

We believe that our -- as we're guiding today, our first half 2016 shipments exceed our second half 2015 shipments.

We believe that we've got potential for second half 2016 shipments to exceed first half 2016 shipments.

And we're very confident that second half 2016 revenues exceed first half 2016 revenues.

At a segment level, our first half 2016 memory shipments exceed our second half 2015 memory shipments.

That's probably a Company-specific commentary that you're going to have to absorb and digest from a modeling point of view.

But the real swing factor in terms of WFE was PC units and the consequence in DRAM.

And certainly the good news is, I made both of those statements because if we had a PC adjustment and no adjustment in DRAM spending, we'd be setting ourselves up collectively for a bigger problem statement.

For me, that's a great commentary on the industry's ability to react to changes in their marketplace.

Yes.

Appreciate that.

That's good color.

Solid job on the disciplined OpEx.

Implied within your guidance, I think, for the June quarter is a step up to about $365 million.

It's still lower than the overall top-line growth and responsible for the operating margin expansion.

As the team steps up revenues into the second half of the calendar year, how should we think about your level of OpEx growth relative to top-line growth?

Yes.

Harlan, the way you should think about it is, I'll just refer you back to the financial model that we shared with you at SEMICON mid-last year.

That's how we think about managing the Company.

It won't be exactly that every single quarter, but we do have that in our minds when we let R&D spending, and by the way, in the June quarter the biggest uptick in spending will be R&D.

But we're cognizant of the profitability of the Company as we manage things.

Great.

Thank you.

Thanks, Harlan.

Farhan Ahmad, Credit Suisse.

Martin, my question is on your etch market share on staircase.

One of your competitors was obviously talking about market share at staircase early in the 3D NAND cycle.

I just want to understand what drove the market share shift towards Lam?

And how big is the market, and where are we in terms of -- what's the market share like on the already installed base and how you see that going forward on the staircase etch?

I think the most important headline today, is the very same headline we communicated I think in SEMICON West 2014.

And the headline was, the most important selection decision is the production tool of record decision.

That is true for us as it is for anybody else in the industry.

We all work really hard to get a development tool of record position, but the only way you actually extend that into a production total of record decision, which is where the money gets spent, is by demonstrating an ability to meet the specifications that you sold or positioned, and making it productive and repeatable, and having consistency of high-volume manufacturing production for our customers.

That's a continuum.

And all of a sudden it is not just, oh, we are done.

We never have to worry about that anymore.

We have to work really hard every single day to make sure that the advantage that we've been able to present, that has legitimized our participation in staircase selections is something that sustains itself over multiple years.

That's clearly the objective for the Company.

It's really about just the natural passing of time and transitioning from DTOR to PTOR.

Staircase is an important application.

It's not the most critical.

I think you recollect that we have about 90% market share in the critical etch and deposition applications in the 3D NAND transition.

And that's the kind of foundation of competitive strength for the Company, and the staircase is something we worked hard to position in the HVM selections.

And we're very pleased with the results, although we've got more work to do, and more upside of course.

Thank you.

My second question is regarding the ALD and ALE opportunity.

At SPIE, obviously Lam talked about the great importance of ALD and ALE and some of your customers as well, in addressing some of the edge placement error issues.

I want to understand, like, should we think of these markets as being incremental to your core market, or is just that you have more of the traditional etch being replaced by atomic layer etch?

And how does the shift from more of the traditional etches to atomic layer etch, how does that affect your market opportunities?

Is it much slower, is it -- like on a per layer basis, much more intensive?

If you could talk about that, that would be really helpful.

I would say, and this is going to be a Lam-specific commentary.

I would say for etch I would not be thinking of it as particularly incremental.

I think it's a commentary on more capability, more defendability, and higher barriers of entry around the critical applications focus that we have in our Company and the position of strength we have in etch.

So, for me, as the technology roadmap of the customer gets more challenging, the bigger the proportion of etch-related differentiation will be occupied by atomic-level control.

The deposition answer might be slightly different.

And again, this is clearly a commentary for Lam Research because we don't have the comprehensive deposition product portfolio.

We have at least one sizable gap in the product portfolio compared to others.

And so the atomic level deposition product roadmap for us has an opportunity to be disruptive more holistically and create growth potentials for Lam Research above and beyond what might be available for a generic deposition kind of baseline.

Thank you.

Joseph Moore, Morgan Stanley.

Great.

Thank you.

I wondered if you talk a little bit about your memory customers and the relationship between their spending levels and their cash flow.

Both NAND and DRAM are quite a bit worse than I probably thought they'd be year to date.

I think there's pretty good cash flow coverage on the spending now.

But it's eroding as the year goes by.

What are your conversations with your customers telling you about that?

And how much of your thinking in the second half is predicated on memory economics getting better?

Well, it may or may not surprise you but I don't actually have that precise conversation with a customer, because that is their gig and their business, not mine.

What I do focus on is sustainability of investments.

So what I do focus on is a strategic nature of investments and what I do focus on is the response to changes in IC unit demand.

And so when I look at memory, I see the type of correction happening in DRAM that I consider to be healthy, responsible, and disciplined.

And that's a good thing for the future of the industry and it kind of sets us up, I think, in DRAM for a more positive year in 2017 than 2016.

But a lot can happen between now and then.

And in NAND, this is about as strategic as it gets.

You have the first year in history where every single participant of the nonvolatile memory space is committed to 3D architecture.

And clearly they have to have an ability to pay for that roadmap.

But I think it is so strategic, few would be compromised by short-term profitability or short-term kind of cash issues.

Hope that helps.

Yes, that helps.

Then I guess also in DRAM where all three of your DRAM customers are working on important yield transitions.

Are you seeing flexibility there?

And I think you talked about maybe a little bit of lower expectation for DRAM.

Any concerns that that continues to deteriorate if DRAM continues to deteriorate?

No.

Clearly the market is telling us something with ASPs, with announcements in the kind of PC space and DRAM generally.

I think people are kind of adjusting their plans.

And there still is significant legitimacy to 20-nanometer transitions and 1X roadmaps, and there's a generation or two beyond that, in people's strategic plans.

And there are real performance and cost benefits that go with that roadmap.

We are assuming we ended the year with slightly less capacity in terms of wafer starts than we began the year, which kind of sets us up nicely for next year.

That's very helpful.

Thanks very much.

Thanks, Joe.

Patrick Ho, Stifel.

Thank you very much.

Martin, first in terms of the logic and foundry space, you mentioned that you saw both investments in 10- and 28-nanometer.

How is the life extension of these logic nodes, particularly for 28-nanometer, and probably for both 14-nanometer and 10-nanometer.

How does that extension of life for these nodes, I guess, benefit you specifically in terms of both systems as well as the after-market sales?

I am not sure I'm going to get your question here, but I will give it a shot.

Obviously we have a very long tail to our installed base business when we sell something.

It is a 20-year commitment to our customers once we sell the system in many respects, and a 20-year opportunity in terms of upgradability and productivity improvements and so on and so forth.

Clearly, this is the year where the majority of investments in logic and foundry are focused on leading-edge technology.

But the cycle of investments in IoT and other broad marketplaces, the 28 is creating installed base business opportunities above and beyond our baseline.

You may recollect from our SEMICON West presentation a year or so ago we talked about an objective to grow our installed base business at a rate that was faster than our installed base segment growth as we introduce new products and services to accommodate and respond to the productivity needs of our customers in the mature technology nodes, and that's exactly what we're executing.

Hopefully, I got the essence of your question there.

Yes.

I will use my follow-up maybe to kind of expound on that.

I guess what I was trying to get is, in the past you see leading-edge nodes when they ramp up, the previous node kind of starts falling off and pretty rapidly.

But you're seeing these older nodes last a lot longer.

What are the incremental opportunities, both on a system side as well as on the after-markets there is for Lam, given these changing industry dynamics?

There clearly is an opportunity.

And so, incremental 28-nanometer shows up because it's a great node in many respects.

It has a good performance threshold and cost dynamic that is relevant for a lot of kind of IoT-related demand.

And it's kind of a sweet spot in many respects.

We have great position.

We are developing in some cases a new product to be more competitive in the more mature technology nodes.

And there are even examples where we're introducing new 200-milimeter products, believe it or not, for some of these applications.

They're not necessarily material in the context of the revenues of the Company, but hopefully illustrative of the commitment that we make to all customers, not just those customers with the leading edge.

Clearly when it comes to productivity solutions, clearly when it comes to installed base improvement, advanced services, utilization, productivity and reuse are everything to do with the economics of the semiconductor industry these days.

And that's not really new.

But to your point, we're finding ways to contribute more to the customer success and create SAM expansion opportunities and increase market share for Lam at the same time.

Thank you.

Thanks, Patrick.

Steven Chin, UBS.

Congrats on the results.

Just a follow-up question on the strong shipments that you saw to China in this March quarter.

Can you share some color on the customer diversity there?

Was it concentrated in just one of these multinational customers or more than one?

Just wondering if we should think about China being a lumpy shipment region, or are there enough multinational customers to make this a consistently high region every quarter?

You are seeing pretty much everybody that's spending at the leading edge and some not at the leading edge, actually it's not really leading edge, making investments in China.

80%-ish of the spending that we are seeing are global multinationals putting some level of capability in China, Steven.

And it is not one, it is pretty much across the board.

And I think it's been pretty well chronicled in the trade press who's making those investments.

Okay.

Thanks for sharing that.

And then just a follow-up question on trying to size up the wafer fab equipment opportunity in China.

Do you think we can think about looking at China's installed base of 200-milimeter wafer capacity, and possibly thinking about how much it costs to bring all of that to, let's say, state-of-the-art 300-milimeter capacity?

Is that a reasonable way to try to size up the long-term China WFE market?

Thanks.

You probably have to ask them.

I am sure that the full spectrum of options will be exploited at some level, right?

There are assets in place at 200-milimeters and below and assets of 300-milimeters, and the customer will optimize that footprint as well as they can.

But if they have presumably productive fabs at 200-milimeters that are at technology nodes that meet and are correlated with the domestic demand, there as likely if not more likely to stay in that form than be changed.

Our instinct is that if you go back to your first principles here, performance and cost matter when it comes to the agenda and the sustainability of an agenda.

It would seem more rational that more of the spending is 300-milimeters related, certainly in terms of greenfield.

Thanks, Martin.

Thanks, Steven.

Krish Sankar, Bank of America.

Hi.

Thanks for taking my question.

I had a couple of them.

Thanks for the color on the second-half shipment and revenue.

I wanted to the question a different way.

If the industry is flattish this year for WFE, given the last couple of years you guys are out-perform the industry.

Is it fair to assume your growth, revenue growth, to be better than the industry trend for this year, calendar 2016?

That is the plan.

Yes, Krish.

We've talked about these technology inflections.

It'll be a bigger percent of the total spend this year than they were last year.

And as you know, that benefits us.

Another reference, and it's not a linear progression.

So it's a little hard for us to give you much more than these two reference points.

The out-performance commentary of the Company is highly correlated to the technology inflections, 3D device architecture and multi-patterning.

We talked about it many times.

Our estimate of the proportionate of WFE last year that was inflections-based was 33%.

Our estimate of the proportion of WFE that will be inflections-based in calendar 2018 is approximately 55%.

We're on a journey.

We've come from 0% to 33% last year, and we're on our way to the mid-50%s a few years from now.

Got it, got it.

That's helpful.

And then an industry-level question.

When you see the second half versus first half competitors and on the spending run rate, looks like there's more 3D NAND spending in the first half of this year.

Should we assume the second half is going to be weighted more towards 10-nanometer, logic foundry customers?

And if so, does it have any impact on your gross margin profile?

We had previously stated that all segments except NAND were second-half biased.

As the byproduct of this PC and DRAM story, we would now say memory first half 2016 is stronger than second half 2016, and logic foundry, to your point, is second half 2016 stronger than first half 2016.

If you want a kind of first-half/second-half profile, our assumption is memory is in the mid-50%s in the first half and foundry logic is 55% to 60% level in the second half of 2016.

Got it.

Thank you.

That's very helpful.

Thanks guys.

CJ Muse, Evercore.

Good afternoon.

Thank you for taking my question.

I guess first question, Martin, you've outlined basically a flat WFE outlook.

Curious what it would take to see growth this year?

Where would you handicap the highest probability where you could see an upward surprise?

I would -- I don't think I would call out DRAM.

(Laughter) I guess that means I'd call out 3D NAND or logic.

I think there's, as we've discussed many times, there is a real value proposition here to high-performing and lower cost nonvolatile memory relative to solid state drive and hard disk drive trade-offs.

There is a compelling motivation to be as good as we can as an ecosystem as fast as we can.

This is a pretty complex transition and it's the first year where everybody is kind of invested in it.

So it's not the easiest thing to do.

But I would say at least from the interactions I've had with customers, the direction in terms of yielding is very positive.

Probably the biggest upside is 3D NAND in terms of really getting traction.

And how that plays out, we will see.

Technically there's probably upside in foundry relative to 7-nanometer.

But that is some ways off probably, if I interpret the comments from our customers in the last several days correctly.

Very helpful.

I guess as my follow-up, there seems to be a pretty good debate around sustainability of 10- and 7-nanometer foundry logic spending.

Just curious.

If we added roughly 10,000 equipment shipped in 2015, roughly 35,000 this year, how do you think the world evolves next year?

I know it's a long time from now, but would love to hear your thoughts.

Yes.

Unfortunately I'm not going to be quantitative about those thoughts.

Qualitatively, as best I can tell, CJ, there is much more substance to a 10- and 7-nanometer conversation in terms of performance and cost benefits for the fabless community than was true at 16-nanometer.

The tape-out data that's presented looks like it is supporting that rationale.

The fabless community and the foundries have growth trajectories that exceed overall semiconductors.

So at the end of the day it's going to boil down to the reality of power, processing speed, and cost.

And if the substance of those roadmaps is there, from my point of view, they will be demanded.

And IC unit growth in those segments will create capital equipment expansion in our industry.

That's the best I can do.

Very helpful.

Thank you.

Thanks, CJ.

Edwin Mok, Needham & Company.

Thanks for taking my question.

First I want to kind of quickly follow up on the installed base business.

I think previously you guys talk about how you're expecting 13% growth for the business over the next few years.

Was wondering, are you tracking in line with that?

And as some of these new products you have shipped over the last few years come off warranty, do you expect that to drive some incremental growth in that business?

Yes, yes, and yes.

The prepared comments actually were intended to communicate that.

We put a lot of time and effort in the last several years into engineering a set of products and services consistent with the objectives that you correctly stated.

We validated a number of those with key customer selections last year.

And now it's about broadening the penetration of those products.

I would expect that the installed base business as a proportion of our business goes up, not down consistent with the SAM expansion that we're describing to you and executing on a day-by-day basis.

We come into the year pretty strong, I would say, on installed base products and services.

Great.

Actually, that is great color.

Just quick follow-up on the DRAM investment there.

I think one of your peers has talked about potentially increased DRAM investment they expect to come in the second half of this year, maybe predicated on 18-nanometer investment.

Do you have any color in terms of timing of that and where do you think customers are in terms of actually getting ready to ramp 18-nanometer?

There clearly is this kind of roadmap for below 20-nanometer and there's clearly described value from a performance and a cost point of view, and there clearly is some investment showing up this year, at least to the lead times that are relevant in our business in etch and deposition.

We don't expect the second half to be stronger than the first half.

But depending on your lead times it could well be.

And if you have long lead times and that's your conclusion, that probably bodes well for us in the first quarter of next year.

Okay.

Actually, that is good color.

Thank you.

Thanks.

Wes Twigg, Pacific Crest Securities.

First just wanted to come back to this ALD growth idea.

And wondering if you could give us an idea of your growth expectations or revenue expectations in 2016?

Unfortunately not.

I would love to help you, Wes.

But it is one of the more strategic product lines in the Company.

There are hugely complex dynamics associated with positioning an ALD technology against others.

We are behaving with stealth for reasons that are really important to us in terms of competitive advantage.

Okay.

That makes sense, I guess.

I will ask another question you probably can't answer then.

(Laughter) You spoke about nonvolatile memory WFE this time.

I think what you're trying to perhaps do is be inclusive of 3D Xpoint.

And I'm just wondering if you're seeing any 3D Xpoint activity yet, or if you think that will be meaningful this year?

Or do think that's more of a 2017 event for you?

I think we've obviously got a little bit careful with disclosure.

But I've heard at least one other equipment company say what I'm about to say, which is the vast majority of spending is related to traditional kind of 3D NAND architecture.

And I'll leave it at that, if I may.

Thank you.

There is a reason, Wes, that we're saying nonvolatile memory, because a lot of things are beginning to happen.

Got it.

Thank you.

Mehdi Hosseini.

Thanks for squeezing me in.

I have two follow-up.

Martin, your September quarter is historically kind of seasonally down.

And with the second half up compared to the first half, is there any quarterly trend we need to be aware?

If I just take the midpoint of your shipment guide for the June and go flat from there, I get to mid-single digit growth.

But I also want to be aware if there's any seasonality with September quarter.

I frankly -- I literally never think about seasonality because I don't know what it would mean for our business anymore for all the same reasons that I don't know what cyclicality means anymore.

The segments of the industry are trending and tracking differently.

This is a very strategic year.

Best counsel I can give you relative to modeling Lam is what we've said.

The long-term financial model is the best calibration for profitability and performance, given WFE.

And you've heard us describe an expectation that our second-half revenues are higher than first-half revenues this year.

We've got a decent shot at having some upside in shipments as well, second half over first half.

That's the best we can offer you at this point.

Good enough.

The second follow-up or clarification.

You talked about 350,000 to 400,000 wafers per month 3D NAND capacity added.

How do you think about the yield impact if three of the four vendors -- or sorry, manufacturers are going through the learning curve?

Would that have any material impact on wafer capacity add in 2017 as yields improve?

My presumption is not, but that is an industry answer not a Company answer because we tend -- we like obviously, as many customers as we can have.

And we don't have so many.

But honestly speaking, I think as an equipment industry we're agnostic to kind of who is spending the money.

My presumption is if there's demand for ICs, someone will fill it.

And they'll need to buy equipment to make it.

There are five companies participating in the nonvolatile memory ramp, as best I know, on a significant scale.

And they're competing with intensity to get their fair share.

We're supporting all of them in the exercise of their objectives.

But if one yields faster or slower, presumably it nets itself out for the industry.

Okay.

Thank you.

Ladies and gentlemen, this does conclude our Q&A portion of the call.

I will return the floor to our speaker for closing comments.

Yes.

Thank you, operator.

That is all the time we have today.

Thank you for your participation.

We look forward to updating again you next quarter.

Thank you.

This does conclude today's program.

Thanks for your participation.

You may now disconnect.

Have a great day.