科林研發 (LRCX) 2017 Q4 法說會逐字稿

Good day, everyone, and welcome to the Lam Research Corporation's June 2017 Conference Call.

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

Please go ahead.

Yes, thank you, and good afternoon, everyone.

Welcome to the Lam Research quarterly earnings 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, review our financial results for the June 2017 quarter and our outlook for the September 2017 quarter.

The press release detailing our financial results was distributed a little after 1:00 p.m.

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 includes forward-looking statements that are subject to risks and uncertainties reflected in the risk factor disclosures of our SEC public filings.

Please see accompanying slide in the presentation for additional information.

Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified.

A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings press release.

This call is scheduled to last until 3:00 p.m.

Pacific Time.

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

And with that, let me hand the call over to Martin.

Thank you, Satya.

We delivered another record quarter highlighted by over $3 in earnings per share and reported for the first time in the company's history nearly $5 billion in cumulative shipments in the first half of the calendar year.

Shipments, revenue, profit margins and EPS were all well above the midpoints of our guidance range for the June quarter.

In this context, I would like to thank sincerely our customers for the opportunity to contribute to their success and our employees for their dedication and hard work making these achievements possible.

We will first start with a short update on near-term demand trends, add some context to the drivers behind our success over the last several years and frame the exciting and sustainable opportunity we believe the company has going forward.

As a brief headline, since our last earnings call, DRAM and NAND demands driven spending both have increased our expectations for calendar '17 and calendar '18 company performance.

We have continued investing in capacity and flexibility for business success.

Our operational execution and performance, we believe, continues to set a competitive standard in our industry.

Demand trends are robust particularly in memory, both in enterprise and consumer end markets.

Applications such as machine learning and artificial intelligence are foundational to the next generation of technology innovation and they are driving strong memory content growth for DRAM and NANDs that offer attractive economics for our customers.

The substantial density increases made possible by 3D NAND are driving strong content growth for high-end smartphone devices this year.

Combined, we see tremendous opportunity over the next several years for robust nonvolatile memory growth in consumer end markets driven by innovation such as AR, VR, 5G-automated driving, robotics and other IoT applications.

We continue to be very enthusiastic about the opportunity for a silicon-enabled comprehensive global technology and applications revolution.

With these trends, memory supply/demand balance remains tight and our memory customers are on track to generate record performance with memory industry revenues in 2017 poised to exceed $100 billion for the first time ever.

Consistent with this demand driven-growth, our customers are planning incrementally higher capital spending levels both in DRAM and NAND.

Underscoring our belief that spending levels are demand driven and sustainable, memory industry capital intensity is on track to remain stable at approximately 20%, consistent with long-term averages and well below prior cycle peaks of 30% to 35%.

Nonmemory spending plans remain strong and essentially unchanged versus our prior expectations with a primary focus on technology inflections.

Overall industry WFE spending is now tracking above the high ends of the previous range we provided, and we currently maintain a positive view on a strong customer spending environment once again in 2018.

The improvements in WFE this year has led to increased Lam performance expectations for the calendar year and now a relatively balanced outlook for our shipments first half to second half.

Worthy of note, our full calendar year shipments are on track to significantly exceed the rates of WFE growth once again in 2017.

Related, having previously highlighted the potential for calendar year shipments slightly below $9 billion, we now target slightly below $10 billion.

This is a commentary of increased strategic relevance and effective scaling, also a commentary on the competitiveness of the right products and services at the right time.

As we target this new milestone of slightly less than $10 billion in annual shipments for calendar 2017, I would like to take a moment to reflect upon an incredible journey, a journey that provides the context for Lam's ability to continue to drive long-term sustainable and profitable growth for all our stakeholders.

10 years ago, Lam was a single-product etch company with an addressable market of 10 to 15 percentage points of WFE that was itself a highly cyclical and relatively low-growth market very leveraged to the PC.

With solid strategy, execution and supports from our customers over the last 10 years, we succeeded in several important ways.

We built Lam etch market share to an unmatched technology and market share position deep-rooted in our leading edge capabilities and our commitments to partnership with our customers.

We transitioned from a single product company to a diversified multiproduct and services company extending from etch leadership into clean and the deposition markets.

Combined with a strong focus on identifying and positioning ahead of key technology inflections in semiconductor device manufacturing over many years, we have added over 20 percentage points to our addressable markets, which now exceeds 35% of WFE.

Additionally, while further strengthening our leadership in memory, we have diversified our revenue exposure through a strengthened position in logic and foundry markets and, notably, our customer support business group through its innovative products, advanced services and productivity solutions, continues to deliver growth at a pace that is greater than our installed base unit growth.

Expansion of our served market and market share, combined with solid execution that delivered unmatched multiyear growth and value expansion, is the financial headline of Lam.

But perhaps what is more important, relative to sustainability and value creation, is customer trust and the increased strategic relevance of Lam products and services to the success of our customers.

As a statement of relative performance, we believe, the opportunity for Lam is compelling.

With a very strong foundation, I believe, we are today entering another's exciting phase in our evolution.

Data is the new currency of the global economy.

The collection, storage and analysis of big data to produce artificial intelligence and machine learning has the potential to change nearly every industry.

This trend, we believe, is leading to sustainably higher demand for memory spending.

Indeed, memory capital spending has grown at a 20% CAGR over the last 4 years, about twice as fast as the growth rate of overall industry CapEx.

Our analytics endorse the conviction of our customers to the sustainability of bit density and diverse applications demand growth and the discipline of their investments.

Lam technology and market leadership comes at a time when the semiconductor industry increasingly embraces vertical scaling as a key driver of performance improvement rather than simply traditional shrink.

Vertical scaling is certainly a sweet spot for Lam.

We have the highest market share in etch and deposition markets combined of any market participants.

Our commitments and investments in R&D and a disciplined approach to product pipeline and road map over multiple years, combined with a focused operational execution and rapidly growing installed base, provide a consistent feedback loop to further solidify our positions of leadership.

We will talk more about the opportunities we see in vertical scaling at a special reception that the company will be hosting on August 9 at the Flash Memory Summit Conference here in California.

Rick Gottscho, our Chief Technology Officer, Satya and I very much look forward to engaging with many of you there.

As a preamble to our planned investor and analyst meeting in a few months, when we think about our future beyond the next several years, we believe our competitive and business strength, our operating capabilities and the environment around us all combine to create tangible opportunity for Lam to further deliver long-term value creation.

We have built a strong global presence with core competencies in areas like nanoscale applications enablement, chemistry, plasma and fluidics, advanced systems engineering and expertise in manufacturing, supply chain and our sales channel, that each we believe are foundational to creating shareholder value in all current and future market opportunities.

Our vision continues to optimize long-term and short-term success to the best of our abilities.

Our vision continues to balance investing in the sustainable and profitable growth of Lam through the introduction of disruptive technology and incremental market offerings.

Our vision is to realize full value from natural technology extensions of our company, and our vision includes an ongoing commitment to capital redistribution.

With that, let me turn the call over to Doug.

Okay, great.

Thank you, Martin, and thank you all for joining us this afternoon during what I know is a busy earnings season.

We're pleased with the results we have to share with you today for both the June quarter and for our just concluded fiscal year 2017.

So let me go ahead and just jump into the numbers.

In the June quarter, we performed above the midpoint of guidance for all metrics.

We delivered record levels of shipments, revenues, cash from operations, gross margin dollars, operating income dollars and earnings per share for the quarter and for the fiscal year.

Each of these metrics achieved strong double-digit growth in fiscal year 2017 compared to the prior fiscal year.

We believe these results and milestones clearly demonstrates solid execution against our multiyear outperformance objectives.

Our upward trajectory of shipments continued in June quarter coming in at $2,543,000,000, which is up 5% sequentially and above the midpoint of the guided range.

Shipments for the 2017 fiscal year were $8,586,000,000, which was a 46% increase compared to fiscal year 2016.

Memory shipments remained strong with the combined memory segment making up 73% of total system shipments, which was in line with the prior quarter.

Nonvolatile memory accounted for 59% of the shipments, which was up from 50% in the March quarter.

Demand for 3D NAND equipment continues to be robust with customers executing their plans for increasing layer counts and improving device densities.

DRAM shipments represented 14% of system shipments, which was down from 23% in the prior quarter.

Shipments to our foundry customers were 22% of system shipments in the June quarter, which was down a little from the 24% in the prior quarter.

And finally, the Logic and Other segment accounted for 5% of system shipments versus 3% last quarter.

Revenues for the quarter were again at a record level of $2,345,000,000, which was an increase of 9% compared to the March quarter.

For fiscal year 2017, the revenues of the company came in at $8,014,000,000, which was an increase of 36% compared to the prior fiscal year.

Our installed base business contributed approximately 25% of our revenue in fiscal year 2017.

The installed base now includes over 45,000 process modules and with that growth, comes an increasing opportunity to sell spare parts, upgrades, productivity solutions, system refurbishment and other innovative product offerings.

We have solid momentum behind our objective to grow the installed base business faster than the growth of the installed base itself, which is an important component of the sustainable cash generation of the company.

Gross margin came in above the midpoint of guidance at 46.5%, and as I've shared with you in the past, we expect variability in gross margin on a quarterly basis as a function of a number of factors such as business volume, product mix and customer concentration.

Operating expenses in the June quarter grew to $440 million, and that compares to $414 million in the March quarter.

And of that OpEx spend, we increased the portion allocated to R&D to about 65%.

We're very encouraged by the opportunities we see ahead of us and continue to make strategic investments in R&D programs over a multiyear horizon in support of our customers' road maps and plans.

Operating income in the June quarter was at a record level of $650 million, which was up over 12% from the prior quarter.

Operating income grew at roughly twice the rate of operating expense demonstrating the leverage we have in our financial model and supporting our ability to make strategic investments to sustain our outperformance going forward.

For the first time in the history of the company, operating income generated in the fiscal year topped $2 billion.

Operating margin for the quarter was 27.7%, which was up from 26.9% in March and at the high end of the guided range.

The tax rate for the quarter was approximately 13% and that compares to 12% last quarter.

The tax rate in the low- to middle-teens through the end of calendar year 2017 would be reasonable for you to include in your models.

Based on a share count of about 182 million shares, earnings per share for the June quarter came in at $3.11, which was near the high end of the guidance range.

This share count includes dilution from both the 2018 and 2041 convertible notes with the total dilutive impact of about 18 million shares on a non-GAAP basis.

And I'll remind you that dilution schedules for the 2018 and 2041 convertible notes are available on our Investor Relations website for your reference.

And I would just mention that with the increase in our stock price, we have received requests for early conversions of our 2018 and 2041 convertible notes totaling about $300 million.

These requests will settle in cash and shares and are comprehended in our September outlook.

We returned $587 million of cash to our shareholders during the quarter, $74 million in dividend distributions and $513 million in share repurchases executed largely through a $500 million accelerated share repurchase.

The ASR terminated shortly after the close of our June fiscal quarter on June 30.

Inclusive of the ASR, we have now completed about 70% of our current $1 billion buyback authorization, and we have repurchased 5.3 million shares at an average share price of $135.55.

Now let me transition to the balance sheet.

Cash from operations was very strong at $729 million, which was up from $423 million in March.

For the fiscal year, the company generated over $2 billion in cash from operations.

During the quarter, cash and short-term investments, including our restricted cash, increased to $6.3 billion, which was up from $6.1 billion in March.

The increase in cash balance was obviously the result of the cash from operations that we generated, offset largely by the capital return program that I referenced.

Days sales outstanding improved to 65 days versus 69 days last quarter.

Inventory turns were 4.1, down slightly from the 4.2 we saw in the March quarter.

At the end of the quarter, deferred revenues were $966 million, which was up from $842 million in March.

This number excludes $397 million in shipments to customers in Japan that will also revenue in future quarters.

This Japan number was $260 million last quarter.

And recall that these Japan shipments remained as inventory carried at cost on our balance sheet.

And I'll just do the math for you.

The combined deferred bucket now stands at over $1.3 billion as we exited June.

Company noncash expenses during the quarter included the following: $44 million for equity comp, $39 million for amortization and $40 million for depreciation.

Capital expenditures were $35 million in the quarter, which was down from $44 million in March.

We exited the quarter with approximately 9,100 regular full-time employees.

The growth in headcount was in the factory and field in addition to the R&D organizations.

Now looking ahead, I'd like to provide our non-GAAP guidance for the September quarter.

We expect shipments of $2,350,000,000 plus or minus $100 million.

And as Martin mentioned, we are expecting a roughly balanced first half to second half shipment profile.

We expect revenue of $2,450,000,000, again, plus or minus $100 million.

As we sit here today, we expect that December is likely the high point for both shipments and revenue in calendar year 2017.

We're expecting gross margin of 46.5% plus or minus 1 percentage point, forecasting operating margins of 28%, again, plus or minus 1 percentage point.

And finally, we're forecasting earnings per share of $3.25 plus or minus $0.12 based on a share count of approximately 183 million shares.

We're obviously pleased with the financial performance of the company that we reported and guided today, and we believe we're well positioned with our portfolio of products and services to successfully pursue the opportunities ahead of us.

Operator, that concludes my prepared remarks.

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

(Operator Instructions) And we'll take our first question today from CJ Muse with Evercore ISI.

You talked about memory as the driver of the upside to your outlook here.

And just curious if you could put some numbers around how you're thinking about WFE for both DRAM and NAND this year and next?

We'd love to hear your thoughts there.

Yes, I think, I'm not sure if we have that much to add, frankly, to everything that I've seen written, read by analysts or...

It's all out there, CJ.

Or other equipment companies.

And frankly speaking, the primary purpose of this dialogue is to talk about the economics of the company not the industry.

So what we've tried to articulate, CJ, is an enhanced view of performance this year.

So the slightly less than $10 billion shipment reference is an important one and that's -- that embeds in it a commentary on SAM expansion and share growth.

And we have opined on kind of the sustainability of spending and the strong kind of outlook for calendar '18.

But as is customary, I'd like to take a shot at putting a quantitative reference at the beginning of the year and one at the end and let other people have their moment of glory in the middle.

Okay.

Let me ask another question then.

If I look at what you discussed in terms of shipments and revenues for the full year, it looks like you are going to outgrow WFE roughly by 3x.

And I guess, it's pretty outstanding performance and what's the encore next year?

How should we think about your relative performance and changes technology-wise that can sustain continued outperformance into 2018, '19 and beyond?

Yes, I mean, I think we certainly have a view that the last 5 years and this year don't end at the end of this year.

We're working really hard to make sure that there's an opportunity and demonstrated performance of sustainable growth and outperformance.

And the best way to think about that, frankly, is to think about the commentary that we've made available around our products portfolio increasing its share of wafer fabrication equipment spending.

So that comes about from our own investments in new products and capabilities and it comes about from what I believe is an unmatched positioning of this company to the totality of technology inflections in the industry.

And it comes about through device architecture challenges, device architecture decisions and process flow decisions of our customers.

So we have provided a quantitative reference today that says above 35% of WFE is what we believe we're competing for.

You have all of the disclosure, I think, previously on market share and we see both trends as positive not just in next year but in the years to come.

So there is an ebb and a flow always on a short-term basis, but I mean we feel really good about long-term demand for silicon-enabled innovation.

We feel really good about discipline in the ecosystem, and we feel really good about the unique opportunities for this company.

Moving along, we'll take our next question from Farhan Ahmad with Credit Suisse.

Martin, can you just talk about the mix of spending between larger foundry and memory in the second half?

The first half was really strong in terms of memory spending.

Do you expect the second half to be pretty similar in mix?

Or do you expect a change?

Yes.

So obviously, there's some company disclosure, which is reasonable balance in shipments first half and second half.

When we look at kind of WFE, I think a more or less memory as an aggregated segment is actually also pretty balanced with kind of DRAM a little stronger in the second half and NAND was a little stronger in the first half.

And similarly, kind of foundry and kind of microprocessor as a logic kind of balance themselves out as well.

So foundry was a little stronger in the first half, and we believe microprocessor and other logic is a little stronger in the second half.

So kind of, all in, pretty balanced spending year is the one that we would assume today.

Got it.

And then I just wanted to ask you a question about the overall services business.

If I assume that, that mix of business is pretty flat from last year because I believe at the end of last year also, you had indicated that 25% of the revenue.

So the services business has grown at an extremely fast rate this year.

Can you talk about what has driven that exceptional level of growth which could be about 40% or more from last year to this year?

Yes.

I mean, it's inevitably kind of 2 or 3 things.

One part of the growth of the installed base business, which is in spare parts and services and upgrades and refurbishments is the size of the installed base.

And as Doug talked about in his prepared comments, the installed base has grown significantly in the last 5 years.

So that's kind of baseline, number one.

The second element of this is the breadth of products and services that we've made available to the industry and I think the industry's natural inclination to take a greater advantage of the full portfolio of productivity solutions, so the installed base business spares and service and upgrades and refurbishment is all about productivity, generally speaking.

It's about making an installed base more productive.

And as we've talked about for many, many years, as an industry, the technology challenges don't get any easier but that's also true for productivity challenges.

So as we introduce advanced products and services focused on productivity and so on and so forth, that plays into the performance of the company.

Last thing I would say is that as the technical specifications of device manufacturing are more difficult, that naturally also plays into an enhancement of some elements of the installed base support business.

Our next question today comes from Harlan Sur with JPMorgan.

Maybe stepping back a bit and sort of looking at the end markets supply and demand dynamics.

We had 2 relatively big memory customers report recently.

The CapEx outlook by both looks very healthy and the view by both is, on a go-forward basis, CapEx trends look good on a go-forward basis.

That's also in line with some of your prepared commentary.

But the market seems to be interpreting higher CapEx as new capacity, new wafer starts especially in DRAM so it's raising some cyclical red flags here.

Given your forward pipeline, your visibility, do you guys see any signs that there will be meaningful uptick in total DRAM industry wafer starts this year or next year?

Or is more of the DRAM spend focused on accelerating technology migrations on the installed base?

Yes, I would say, to the best of our abilities, the answer to your question is no.

We do not see meaningful expansion of an installed base.

Clearly, compared to last year, the investment level in calendar '17 in DRAM is significantly improved and enhanced.

But I think, a couple of references for you, we do not believe that the installed base in terms of wafer starts of output is any greater at the end of this calendar year than was true at the end of calendar '15, statement number one.

Statement number two, when you look at kind of capital intensity of memory at the segment level and look at kind of DRAM specifically, it's a long way from kind of creating kind of the anxiety levels that we think would be relevant to kind of cyclical imbalance.

So we have the same conviction that I think is expressed by all, if not most of our customers, around disciplined investment, which doesn't mean it's perfect.

I'm sure there's an ebb and a flow from 1 week and 1 month from 1 quarter to the next.

But the fundamental headlines around content and density and demand and how that's playing out in terms of spending in a consolidated industry, I think, are pretty healthy.

And then on the installed base business, obviously, great to see the continued growth trends there, very stable annuity-like business.

I'm assuming that you guys are also driving leverage in this segment.

Maybe, Doug, if you could comment on services, op margin performance versus corporate margins.

Are service up margins accretive to corporate average?

And are you guys able to drive the same amount of leverage that you are for the total business?

Yes.

No, it's a very nice part of the business model.

It's very cash generative.

As I think I've indicated before, it's probably a little bit accretive to the operating income on a percentage basis.

It doesn't have anywhere near the amount of investment that is required in the new equipment side.

But what I really like about it, Harlan, is the broad base of it.

It's got many, many, many engagements, lots of customers.

It's just a very stable predictable business, and your characterization of an annuity is exactly right.

It is a great part of the business model.

Moving along, our next question comes from Toshiya Hari with Goldman Sachs.

I have 2 questions.

First, on the opportunity in China, if you can talk a little bit about some of the developments over the past couple of quarters both on the memory side and on the foundry side?

Martin, if you can talk a little bit about how you view the second half of '17 and, more importantly, longer term?

Yes.

I mean, again, I'm not sure I have kind of too much to say incrementally here.

As we said for the last couple of quarters, we believe that the China is an increasingly important part of the industry measured by the level of spending.

Today's spending in China is dominated by the global player presence in China.

But this is a year where there is a foundry DRAM and a flash investment by the domestic Chinese community.

And as is consistent with I'm sure every disclosure from every other significant equipment company, we're participating in that as you might expect, and our presence and our plants in China are at least as good as our [average], so it's an important region with an important focus for us.

And we would still say today that calendar '18 is a bigger story than calendar '17 for kind of China.

So certainly that plays into our qualitative statements that we believe calendar '18 is a strong year for the industry.

Okay, great.

And then my second question was on the Logic business.

Martin, I think you briefly talked about shipments being a little bit stronger into the second half relative to the first half.

But longer term, obviously, this is a part of the market where you've historically been under indexed.

And at the same time, you talked about some wins at the 10-nanometer node.

So I guess from a timing perspective, when should we expect this part of your business to inflect to the upside in a more meaningful way?

I mean, I guess that it's always true that it shows that when customer spend money on the applications, you've won.

There's no pendulum swing here.

This is kind of a multiple year transition, and we're super pleased about the progress, which doesn't mean it can't be better and it doesn't mean our aspirations aren't greater than we currently have achieved.

But we're walking towards an objective where the position of the company in Logic is at least as good if not better than the position of the company in Foundry.

And it will take a number of technology nodes to get to that point and we're not there today, but I'm super pleased with our progress.

And the comments on Logic and Foundry, I mean, I don't want to miss the Foundry headline, which we talked about last year.

The performance of the company in Foundry last year against the average of the industry I thought was just outstanding.

So I think we reported 40% increase year-over-year compared to that of 25% assumption on WFE.

So it's going to take a couple of nodes to kind of fully realize our ambition if we're successful in all respects.

And we're certainly working hard to achieve that.

And Toshi, it will be stronger in the second half than it was in the first half for sure.

Our next question today comes from Edwin Mok with Needham & Company.

This is actually Arthur on for Edwin.

Martin, I had a question for you on your natural -- your comment on natural technology extensions.

So a number of your peers have talked about increasing metrology intensity going hand-in-hand with more complex 3D NAND devices.

Given your leadership in 3D NAND, how do you think about your product perform in terms of metrology?

Does it make sense to offer metrology system under the same roof to provide a more comprehensive solution?

Didn't we try that strategy?

And I mean, I guess I wasn't at the heart necessarily of kind of the Lam and K-T ambition, but it was an inevitable kind of part of that strategy.

Today's kind of process control ambition, metrology ambition is really kind of defined around a couple of things.

One of them is that the real-time process control kind of dialogue and the second is the potential for some level of integrated metrology.

So we've articulated our ambition, I think, in terms of SAM expansion on that, and the second part of our strategy is to increase the competitiveness of our underlying etch and deposition and clean products by dealing with one of the most fundamental challenges of the industry, which is tighter specs and the need to open up device design and device manufacturing process window.

So that's where our focus is.

So my comments around kind of natural technology extensions were intended to be a little bit more holistic than kind of metrology and process control.

And really this is kind of like not a new headline or a new thought in the company, but I feel like consistent frankly with the trends of most of the industry participants, I wanted to make sure that everybody understands that we think holistically about how best to harness value from all of the assets and all of the strengths of the company.

And so when we look at that, obviously, our vision is to create sustainable, profitable and kind of accretive growth for the company.

And by natural extensions, we mean focusing on kind of the assets and the strengths of the company as currently defined, with the requirement for kind of high-confidence business plans and leverage in our financial models.

So it's an emerging investment for the company.

It's still quite small.

I would say, the investment by the company in products and services markets beyond our core is in the $20 million to $30 million range probably for the year.

But I think it's an important part of the long-term vision for the future of the company.

Just a quick follow-up question on -- ASML talked about the progress they've made with their EUV tool and the potential that it can address up to 15 layers upon insertion of 7-nanometer.

Given your strength in etch and deposition, has that in any way shaped your initial view on your patterning opportunity?

And do you believe that Lam's well position remained competitive due to improving economics of your multipatterning processes?

Yes, I think it's a really good point.

Actually, I mean, every single day from us and every other participant is delivering litho-multipatterning schemes or spacer-based multipatterning schemes.

We're making the economics better.

And to answer the first part of your question, no, the disclosures recently and the editorial hasn't changed our fundamental view of our opportunity.

We still believe we have SAM expansions through the 5-nanometer technology node that we've currently kind of articulated in the analyst meeting.

We triangulate around public statements and private statements from all of the industry participants that all kind of talk to us.

We feel like we have a nice opportunity.

We have decent strength and our focus is on controlling the things that we can control and making the best of it.

So nothing new to say and one big part of the economics of the company, quite frankly, has been multipatterning and memory and logic both.

Moving on, our next question comes from Krish Sankar with Bank of America Merrill Lynch.

I had a couple, number one, Martin, if you look at the WFE spend on 3D NAND, obviously, it's really healthy driven by end demand is obviously greenfield, the yields are pretty low, there's some conversion from 2D to 3D.

Kind of curious if any one of those vectors slows down, do you think 3D NAND can sustain current levels?

Or are you worried about that going forward?

Well, I mean, I think the fundamental thing we look at is demand, right, which is not so much a units conversation these days.

It's a content conversation and when you kind of look at this year and you look at the road map for smartphone content and service content particularly, I mean, I think that's the most important commentary around sustainability of spending because the spending, despite very critical and strategic technology transition this year, is predominantly defined around the importance of responding to demand and keeping supply and demand in balance to the best of our customers' ability.

And as an industry participant, we're trying to support that.

So when I think about kind of how they spend money, greenfield or conversion to 2D to 3D or 3D scaling, as we articulated in our analyst meeting, we are actually agnostic to how they go execute.

If you look at the unique elements of the Lam Research serviceable markets, there are pretty similar opportunities for us in both implementations.

And our view today is it's quite similar to the view we had a couple of months ago.

More or less, the 3D capable capacity in NAND installed base at the end of the year will be approximately half of the installed base, which is not to say the transition is kind of half done because in the context of the demand message and the technology road map for this particular inflection, I mean, there's a lot of years of opportunity ahead of us, and we're certainly excited about participating and enabling to the extent that we can the success of our customers.

Got it, got it.

That's very helpful.

And then another question on the DRAM side.

I think you did articulate the fact that nothing a whole lot of capacity expansion.

And clearly last year was a cyclical low for DRAM CapEx.

And this year, we're still below 2015 levels.

Is it purely a function of the fact that the number of process steps is increasing as you go below 20 nanometer, it's more difficult to do?

That's why even though optically looks like CapEx is higher, it's not really as high as you think you're expected to be?

I don't know if we're completely qualified to answer the full scope of your question.

I mean, I will tell you for our piece of the pie, and this is true in most every part of the industry, the investment in a given kind of wafer out kind of goes up in technology inflections.

And the trick for our customers, obviously, is making sure that the density in this case or the number of chips on the surface of a wafer goes up in proportion to the increase in kind of cost.

And as I think it's well publicized at this point in time, the most challenging part of the semiconductor kind of road map from kind of long-term perspective is DRAM.

Although frankly speaking, there's kind of 3 or 4 nodes, depending on how you define it in the road map that we have with customers in front of us.

Today, by the end of this year, we estimate that only 25% of the installed base is actually at the 1x technology nodes.

So there's kind of a decent amount of sustainability and value proposition, I think, in front of the industry and for DRAM.

Our next question today comes from Patrick Ho with Stifel.

Martin, first in terms of the capital intensity trend particularly for etch and deposition, where we're seeing growth in the percentage of the spend of those 2 areas.

Given some of that continued changing dynamics of the industry, do you see both of them continuing to increase maybe at a more moderate level?

Or does it soon flatten out particularly if EUV comes into play?

No, I think we have articulated as precisely as we can do in our analyst meeting and I pulled the slides and update the slides for the WFE assumptions that you think are most relevant.

But we've articulated with assumptions we made that I think more or less is being reinforced by other disclosures since we made them, insertions in second phase of 7-nanometer and insertions planned in DRAM.

Our serviceable market increases through the end of this decade and probably slightly beyond.

So on that one axis, as I said, it's a nice opportunity for us and one we're continue to be very focused on.

Right.

That's helpful.

And excuse me, Doug, you talked about R&D being 65% of total OpEx.

On a going-forward basis, given some of the projects you have in hand, do you see that percentage potentially increasing as you keep kind of SG&A as flat as you can?

Or is 65% kind of the right run rate we should be looking at?

Yes, Patrick, we're going to keep trying to drive that higher obviously.

That's the good kind of spending that generates growth in the future.

It's not to say every quarter it's going to be up, but on a year-on-year basis, the way we will manage and run the spending of the company will be to try to allow that to grow and still keep the discipline around the financial model in total and by so doing get more efficient in SG&A.

Our next question today comes from Tom Diffely with D.A. Davidson.

Another question on the service side of the business.

Is the strength that you're seeing there, is that also a reflection of 200-millimeter strength in the industry?

Or is not that a big part of that equation?

Well it's part of the equation, obviously, and I'd extend maybe that comment beyond the wafer side statements and kind of talk about the non-leading-edge investments of our customers as well.

This is a year where, again, the investment levels in 28-nanometer and above, for example, are significant.

And so in the kind of so-called trailing-edge technology nodes and even 200-millimeter wafer fabs, as Doug said, we're engaging a lot of fabs around the world, hundreds of fabs around the world, and we're engaged in every active wafer size and technology node.

And certainly in the scheme of IoT road maps, particularly in the broad set of systems integration that is now kind of the reality for the semiconductor industry, the full spectrum of devices, the full spectrum of wafer sizes continues to be the focus for -- as I said before, truly optimizing the value we deliver to customers and truly optimizing the value we create for our shareholders.

That's another kind of version, frankly, of harnessing the full value from the company and natural technology extension bringing kind of expertise and wisdom that we've developed in 300 and making it available wherever we can.

And Tom, just to add on, as IoT takes off and these analog-y, sense-y kind of devices proliferate, the trailing edge is going to be more and more important over time.

So not necessarily just 200 as Martin pointed out, but trailing-edge capacity between 200 and 300 is something we're certainly very focused on.

Okay, great.

And then a follow-up.

We're trying to hear a little bit more about some domestic OEM semi cap players as well.

Is there anything that changes the landscape as far as the competitive front goes?

I'm not sure I understood the question, Tom.

Domestic OEM?

Just some Chinese domestic players.

Oh it's China.

I don't think there is a headline of significance.

We obviously respect everybody that we get to compete with.

And with rare exceptions, the players that exist in China today have been players that have been there for some years.

And we wish them well but we do our best to excel in the markets worldwide including China.

So nothing, nothing new to articulate today.

Yes, we are pretty good at doing what we do, Tom.

We spent $1 billion in R&D, so it's hard to compete with that level of scale.

Not that as Martin pointed out, we're not paying attention to everybody and paranoid about everybody, but it's hard to do this stuff that we're doing.

Our next question today comes from Craig Ellis with B. Riley.

The first was just an operational question.

Martin, to follow up on a point that you made that the company is getting to a $10 billion in annual shipment levels and congratulations on that milestone.

The growth from $5 billion to $10 billion has been very fast and the company's managed that very efficiently.

As you look at the next leg of growth for Lam, what are the biggest challenges to maintaining the same level of efficiency that you've had from $5 billion to $10 billion to whether it's $12 billion or $14 billion in shipments?

Well, the gray hair transition for me is done so now it's about losing hair, I guess, for the next (inaudible)

So you get a little lighter?

Yes, and I'm taking care of that for you, Martin.

So frankly speaking, I appreciate your recognition, number one, and your statement about efficiency.

It's really hard to scale the company at the pace we are over a multiple year period.

And I'll speak again to the employees and the suppliers and the customers, quite frankly, doing partnership kind of make all of this possible.

We take pride in the business model.

It's a business model that has been in place for as long as I've been in the company, which is now 16 years, I think.

And business model flexibility investing to create kind of capability and capacity to respond to uncertainty in the industry holistically is kind of what our focus is.

And the 3 elements of that you really got to kind of deal with in terms of variability or kind of factory supply chain and service.

And what you do in parallel is make sure you never compromise your investment in fundamental research and never compromise your investment in concept and feasibility and product pipeline because that must kind of exist under any conditions if you're going to take seriously owning kind of long-term success for your company.

The follow-up is for Doug.

Doug, you mentioned that you'll be working through the ASR.

What are the priorities for cash and cash return beyond share repurchase under the existing program?

Yes, so what I said maybe not very clearly is we're about 70% through the current buyback authorization.

We authorized $1 billion and announced it at our Analyst Day back in November.

And I'll remind you, at that point, we meaningfully grew the dividend as well.

I mean, I would expect to give you a more definitive update when we get to that November Analyst Day.

We're going to keep chugging along the current authorization and likely will be close to completion in the November time frame probably and at that point, I'd be ready to give you a more definitive here's what the next leg of this looks like.

But it's likely going to be a continued commitment to a meaningful return of capital to shareholders, how and what -- in what amount, I'm going to save for November.

Our next question today comes from Atif Malik with Citi.

Martin, if I look at your guidance, you're probably around the $41 billion WFE run rate.

A couple of your peers at SEMICON talked about the $40 billion to $45 billion as kind of the new baseline for wafer fab spending.

And you guys are positive on next year.

Would love to get your thoughts if $40 billion is kind of the new baseline for the next 3 years?

Well, I think, as kind of as Doug said in the conference kind of mid-quarter, we don't kind of -- not aligned to the types of statements being made broadly in the industry.

We don't have kind of rational deliver you a different message.

So a number beginning with 4 is a reasonable kind of proxy.

I think, at the end of the day, sustainability is defined by 2 things.

It's defined by the legitimacy and sustainability of demand.

And we see a world of tremendous innovation in software and applications, which is enabled by silicon.

And something really special happened in the last several years, and the special was the world of connectivity and cloud and advanced computation kind of showed up at the same time.

And so there's, I mean, a tremendous amount of excitement around that opportunity.

And it's much more difficult for us to forecast because it's not one device now, it's many.

And it's not a units conversation, it's a content conversation.

But that's kind of the nature of the beast.

So when we look at the most fundamental part of answering a question demand, we feel very good about it, very excited about that opportunity.

The second part of this is all about kind of discipline and balance between supply and demand.

And every indicator we have whether it's supply and demand, statements from a modeling point of view, whether it's ASPs, whether it's inventory levels, whether it's reuse strategies, whatever it is, I mean, the data points that we look to continue to suggest much more discipline than not.

And so in the context of what I just described, with the assumption about stable units and assumption about kind of continued content expansion and assumption about the legitimacy of a China investment, we feel like there's sustainability to the types of spending levels that we're seeing right now.

So our view is this is not an aberration.

I'm sure it goes up and down along this journey and we've all got a lot to learn, but it feels quite fundamental from the seats that we have in the semiconductor ecosystem.

Okay, very helpful.

And as follow-up, in the past, you guys have provided a 3D NAND shift to wafer capacity.

Can you tell us the number for exiting this year?

I'm not going to tell you a precise number because I don't think it's that much different than what we said before.

It's clearly a little higher.

But the fundamental headline, which is the one that I really care about is the opportunity for sustainability of investment that comes from content and there's some great content messages.

And by the end of this year, to the best of our knowledge, about half of the installed base will be 3D device capable in various forms so there's kind of 3 or 4 forms of 3D capacity.

And there is a great technology roadmap with demand and so the opportunity is kind of a multiple-year opportunity.

Our next question comes from Amit Daryanani with RBC Capital Markets.

I have 2 questions, I guess.

Maybe just talk about on the NAND side, understand the cyclical growth narrative that you guys have.

I totally get that part.

But I'm curious, as you think about the next few quarters with all the 3D NAND supply that's getting on board, do you see a pause that occurs there, especially in the early part of next year as some of this capacity gets digested?

And if 2018 has more conversions less Greenfield, does that have any ramification for Lam?

Well, on the last part of the question, the kind of greenfield versus conversion there is almost no implications for Lam.

We articulated a reasonably agnostic view of that in our analyst meeting.

Relative to pauses, I think, the industry now, collectively, the actions of our customers and the action of their supply chain is now sufficiently fast, the disconnects are kind of sometimes not even noticeable and they're much faster than they ever were.

So are they going to be ebbs and flows of investments?

Always.

But I think much less wild swings than was true in our history.

And I guess that's the kind of variability versus cyclicality conversations that we've had a number of times.

So maybe there's pauses and accelerations.

But the customers will do the right thing.

They'll make investments when they have demands to support and as a supply chain, we're running cycle times a day that are fast enough that we're collectively responding pretty well to their needs.

Got it.

And I guess, if I can just follow up, at the Analyst Day, I think you guys laid out a financial model that talked about, I don't know, 25%, 26% op margins, $10 to $11 EPS power in a 2019, 2020 time frame, right?

So far in '17, so you seemed to be closer to a $12 EPS run rate.

So should we think of Lam fundamentally doing high 20% operating margin and potentially higher if the WFE momentum sustains?

If not, why should we think margins coming down towards the mid-20%?

Yes, the first thing I'd tell you is you we'll give you a new model when we get to the November Analyst Day.

We're going to think through kind of investment levels and what that looks like.

If I were you trying to correlate those models to where we are today, I'd essentially run rate the previous model to the level of spend you think is occurring this year.

And when I do that back-of-the-envelope math, there probably, I don't know, a half to maybe a full percentage point on an op income above where those models would suggest and whether we choose to spend a little bit more as we start looking at the numbers.

I think we'll decide that as we go through it.

But that's generally how I'd be thinking about it if I were you, Amit.

That concludes today's question-and-answer session.

Mr. Martin Anstice, at this time I'd like to turn the conference back over to you for any additional or closing remarks.

Yes, thank you very much.

So I just like to say a couple of things in closing of today's call.

The first thing is to say thank you to those of you that were complementary about the performance of the company and kind of recognized the journey and the accomplishments because a lot of people work really hard to achieve that, which is my second comment.

And I recognize I made this in prepared comments, but I'd like to do it again now.

None of this would be possible without the commitment and support of all of our employees in every function, in every location around the world.

And people are working extremely hard to scale the company in the way that we are.

And I extend that thanks also to the supply chain community that makes this possible.

And last but not least, to the really important stakeholder, the customer, because without the customer's partnership and support, we wouldn't be telling the story that we are.

So in closing, a big thank you to a lot of people.

It's a privilege to be part of this company and a privilege to have an opportunity to tell the story that we do.

Thank you for your time, attention and interest in Lam Research.

That concludes today's conference.

Thank you for your participation.

You may now disconnect.