科林研發 (LRCX) 2018 Q4 法說會逐字稿

Good day, and welcome to the Lam Research June 2018 Quarter Earnings Call.

At this time, I'd like to turn the call over to Odette Go, Treasurer for Lam Research.

Please go ahead, ma'am.

Thank you.

Thank you, and good afternoon, everyone.

Welcome to the Lam Research Quarterly Earnings Conference Call.

With me today are Martin Anstice, 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 2018 quarter and our outlook for the September 2018 quarter.

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

Pacific Time this afternoon.

It can be also 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 factors disclosures of our SEC public filings.

Please see accompanying slides 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.

With that, let me hand the call over to Martin.

Good afternoon.

I firmly established that Lam is the priority of contributing to the success of our customers through the increased strategic relevance of our product and services portfolio.

Ultimately, this focus is measured by our financial performance, and the June quarter financial results were outstanding.

Worthy of note, we achieved the milestone of revenues exceeding $3 billion and non-GAAP operating income of approximately $1 billion.

Short-term performance is not simply our goal, however.

We have delivered, and we have aspire to continue to reward our stakeholders with multiyear industry outperformance measured by competing for and winning a greater proportion of our customers' investments, greater in quantity and greater in quality through the degree of codependency and annuity.

In this context, we also concluded the strongest fiscal year in our history by delivering approximately $11 billion in revenues, representing growth of almost 40%, $3.4 billion in non-GAAP operating income and $2.7 billion in cash from operations.

At this point of our journey, I would like to thank our customers, our employees, and our partners, for their active supports and confidence in the company.

Our intense focus on technology and productivity leadership, operational execution and a genuine model of collaboration, we believe, are together the essential foundations for an exciting long-term future.

Well published at this point, customer equipment investment spending has softened near term, as industry participants continue to strive for discipline and sustainability in their businesses.

While it is true to say that the short-term headlines reflect themselves in lower calendar Q3 guidance than we were anticipating earlier, we consider the change a strong positive long-term influence.

We offer the following perspectives.

While not true for every customer, the segments of memory and foundry have both seen, although for different reasons, some reduction in equipment's demand short term, but the largest single adjustments occurred in DRAM.

We now plan overall 2018 WFE, up year-over-year in the single digits range.

We expect the September quarter to be the low point of our calendar year.

We remain optimistic about our mid-term and long-term opportunity, and continue to target Lam's outperformance this year and long term.

With the comprehensiveness of our disclosure earlier this year in our investor and analyst meeting, combined with the abundance of disclosure from other industry participants on the increasing role of silicon, the increasing role of data, and the acceleration of innovation in the cognitive computing environment, there's not so much more to add currently.

Bottom line, our customers have inspirational ambition, and we exist to support them.

Arguably, there's not been a more exciting time in our industry in decades, and the intensity of focus at Lam to mitigate risks and maximize strategic opportunities, combined, we believe, to create a compelling editorial.

While it is true to say that our customers have never invested more absolute dollars in their future, with the recent device ASP trends, they are investing a lower proportion of their annual profits and in any points of the last 15 years.

That is, the new industry and new value proposition headline that we have cited on several occasions now.

We noted last quarter that we expected low double-digit WFE growth in 2018 and a first half, second half shipments allocations in the low 50s, high 40s, with revenues a little more balanced.

We now expect single-digit WFE growth, with the adjustments reflecting themselves primarily in the September quarter.

Having previously anticipated a first half, second half reduction in memory WFE of between 20% and 25%, we now expect a larger reduction with the long-term demands trends intact.

To fully understand our September business volume trajectory, the following headlines that underpin our belief in the extraordinary value proposition of memory strength long term are important.

We have the confidence in the long-term value and opportunity because memory and storage is increasingly prominent in the computer and systems integration road maps of the industry, with fundamental and broadening demand drivers.

Analytically, that reflects itself in the trailing 7-year cumulative growth rate for memory WFE, which is approximately 10x greater than the equivalent logic foundry CAGR.

Similarly, since 2013, memory WFE, as a percentage of total WFE, has trended from 40% to 60%, with the corresponding action deposition memory markets growing faster and to a higher level.

This is our SAM expansion commentary.

Considering these data points and the approximate 25% contribution from our installed base business, our September quarter guidance should be quite intuitive.

Turning to some of the business headlines of the company this quarter.

There should now be a greater awareness to the earnings quality delivered from our installed base business.

The so-called annuity of Lam, and that is where I would like to concentrate my prepared remarks here today.

You will remember our objective to create value for customers through productivity solutions and the development of advanced services to facilitate improved value capture for Lam and growth at a pace faster than the growth of our installed base units.

Our installed base business has grown more than 2 times faster than our installed base unit growth this year, with our worldwide process chamber counts now approximately 55,000 units.

In a world where our customers' focus appropriately seeks optimal asset utilization, our reliance in reuse business recorded first half 2018 growth of approximately 50% year-over-year.

This is a commentary on the broadening of our product offerings and the demand for more than more IoT and MEMS silicon capacity.

As a reminder, our SAM expansion focus has 3 foundations today: first, fully realizing the opportunities of multi-patterning and 3D device scaling over multiple years; second, broadening our systems applications and films' capabilities, where there is opportunity and unmet customer need; and third, increasing value creation from advanced productivity services.

On this last point, the portfolio is now quite comprehensive and harnesses the technologies of big data that we help to create customer engagements are now extensive, ranging from demo and evaluation to fab-wide adoption.

We're pleased with our progress and excited by the opportunity to increase customer value to codependency, at the same time, increasing the quality of Lam Research earnings.

For the systems businesses of etch and deposition, our investments in SAM expansion, market share defense and penetration and disruptive technologies continues at pace, and we're pleased with the comprehensive and the complements of our technology and product road maps to the expectations of customers and the competitive dynamic.

In closing, this is a year characterized by the following: first, the increased prominence of silicon and, in turn, the equipment industry in the creation of value for the global economy; two, rational, disciplined spending by our customers at the highest level in history, supported by the highest revenues and profits in their industry; three, unmatched outperformance opportunity, we believe, for Lam.

To emphasize a few key points.

September P&L guidance for Lam is impacted by 4 things: first, the relative strength of memory and the strength of Lam in memory; second, the actions by some customers in recent weeks to adjust their short-term investment plans; and third, the implementation of new revenue recognition rules and the specifics of customer delivery and acceptance dates, leading up to the new accounting policy adoption; and fourth, the variability of our operating expense cost structure, without compromising our long-term focus.

Current knowledge indicates September will be the low point of our year, and more importantly, the long-term trends of our industry and company, we believe, are as compelling as ever.

On this last point, we look forward to sharing more of that to long-term opportunities at the August 7 Flash Memory Summit conference, where Rick Gottscho, our CTO, Doug, and myself, will be hosting a reception.

With that, I'll turn the call over to Doug.

Great.

Thank you, Martin.

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

The June quarter results represented a solid conclusion to the 2018 fiscal year.

For the quarter, we exceeded the midpoint of our guidance for all financial metrics.

For the fiscal year, we delivered record levels of shipments, revenues, cash from operations, gross margin dollars, operating income dollars as well as earnings per share.

We're obviously very pleased with what we achieved this quarter and this fiscal year.

Shipments for the quarter were, again, at the $3 billion mark, at $3,028,000,000, which was slightly above the midpoint of our guidance.

For fiscal year 2018, shipments were $11,176,000,000, which was a 30% increase compared to fiscal year 2017.

Memory shipments continue to be strong in June, with the combined memory segment making up 80% of total system shipments.

Our overall nonvolatile memory shipments remained strong, representing approximately 55% of the systems shipments compared to 57% last quarter.

DRAM shipments represented 25% of system shipments, down from 27% in the prior quarter.

The foundry segment was up, accounting for 13% of system shipments, relative to 10% in March.

And finally, the logic and other segment contributed 7% of system shipments, just a little bit above the prior quarters 6%.

We delivered record revenues of $3,126,000,000 in the June quarter, an increase of 8% from March, and again, slightly above the midpoint of guidance.

For the fiscal year, revenues came in at $11,077,000,000, which was an increase of 38% from fiscal year 2017.

Our installed base business contributed approximately 25% of our revenues in the fiscal year.

Gross margin for the June quarter came in at 48%, which was up 120 basis points, sequentially, and the highest level in over a decade.

As we shared before, our actual gross margins are a function of several factors, such as business volumes, product mix and customer concentration.

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

Operating expenses in the quarter grew to $507 million, but decreased 60 basis points on a sequential basis to 16.2% of revenues.

On a dollar basis, R&D spending grew, while SG&A spending slightly declined as compared with the March quarter.

R&D comprised nearly 65% of our total spending.

We continue to believe that disciplined R&D investments will increase our likelihood of achieving our future revenue growth objectives.

Operating income in the June quarter came in at a record level of $994 million, up about 15% from the prior quarter.

Operating margin came in close to the high end of the guidance at 31.8%, primarily due to the stronger gross margin performance.

Then I get tax rate for the June quarter was 6.7%, in line with the guidance we provided at the beginning of the quarter.

We expect the tax rate in the low to middle teens for the remainder of calendar year 2018.

That trade in the middle teens remains the right level to include in your modeling.

And there will be fluctuations around this quarter-to-quarter.

Based on a share count of approximately 175 million shares, earnings per share for the June quarter came in at $5.31, above the high end of our guided range.

Primary drivers of the upside versus our guidance, was the improved profitability and a little bit lower share count.

The share count includes dilution from the 2018 warrants and 2041 convertible notes, with the total dilutive impact being about 13 million shares on a non-GAAP basis.

In the June quarter, our 2018 convertible note, which had the remaining balance of $172 million matured and was settled in cash and stock.

The dilution schedules for the remaining 2041 convertible notes is available at our investor relations website for your reference.

For the June quarter, we had $6 million in early conversions for the 2041 notes.

The remaining balance of the 2041 notes is $327 million, and I do expect we will continue to see requests for early redemptions.

In the June quarter, we spent $1.3 billion on share repurchases.

With that, we have completed almost 60% of the current $4 billion authorization, and we repurchased approximately 12 million shares.

We're planning to complete the remainder of the authorization over the next 9 months in tandem with the expected timing of our cash repatriation.

During the quarter, we be paid roughly $80 million in dividends, and we also declared a quarterly dividend of $1.10 per share that will be paid in the September quarter.

Let me now turn to the balance sheet.

Cash and short-term investments, including our restricted cash, decreased in the quarter to $5.2 billion compared with $6.7 billion at the end of the March quarter, largely due to our capital return activities as well as debt repayment.

In addition to retiring the 2018 convert, we also paid down approximately $640 million of commercial paper.

Approximately 80% of the total $5.2 billion cash balance was offshore at the end of the quarter.

Cash from operations for the June quarter was approximately $718 million, which was down slightly from over $1 billion in the March quarter.

DSO decreased by 3 days to 63 days.

Inventory turns came in at 3.5x compared to 3.7 in the prior quarter.

And for the fiscal year, the company generated $2.7 billion in cash from operations.

Company noncash expenses included approximately $47 million for equity comp, $40 million for amortization and $45 million for depreciation.

Capital expenditures were $80 million, which was up from $49 million in the March quarter.

And as a reminder, we expect CapEx in 2018 to be higher compared to 2017 to support manufacturing network expansion and growth in our strategic R&D programs.

We exited the quarter with approximately 10,900 regular full-time employees.

And as we previously noted, we are adopting ASC 606, the new revenue recognition standard, effective in fiscal 2019, which, for Lam, begins in the September quarter.

Under 606, we generally will record revenue at the time of shipment rather than at the time of customer acceptance.

Under our prior accounting methodology for more than a decade, our results have shown revenue recognition lagging shipments.

However, with this new accounting change -- a change in shipments will essentially be equivalent to the change in revenues.

And adjustments in customer's spending activity will have a quicker impact on our revenues and profits, generally within the same quarter.

Because revenues will become more closely correlated to shipments, shipments will cease to have value as a leading indicator.

As a result, we've decided to discontinue reporting shipments.

With the implementation of the new revenue recognition policy coinciding with some of our customers trimming their near-term investment plans, most notably in NAND, we will see the impact right away in our next quarter's results.

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

We are expecting revenues of $2.3 billion, plus or minus $150 million.

We're expecting a meaningful downtick in memory spending in the September quarter.

Gross margin of 46%, plus or minus 1 percentage point; operating margins of 26%, plus or minus 1 percentage point; and finally, earnings per share of $3.20, plus or minus $0.20, based on a share count of approximately 163 million shares.

As we sit here today, we believe the September quarter marks a near-term trough for our business.

Taking back on our messaging at our March Analyst Day, we remain very optimistic on our longer-term growth prospects.

We continue to believe that we have competitively differentiated products and disciplined investments that will continue to drive Lam's outperformance into the future.

That concludes my prepared remarks.

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

(Operator Instructions) And we will take our first question from C.J. Muse with Evercore ISI.

I guess, a 2-part question in one.

Can you speak to how you're expecting the ramp of the recovery into December?

And then, I guess, more importantly, given this extremely rational behavior by your memory customers, how does that, I guess, make you think about the health of this industry, overall, and also, the impact of your vision, for WFE into 2019, all things equal?

Obviously, the first part of the question, C.J., we're not going to guide December specifically in this meeting.

But as Doug and I both said in our prepared comments, we do expect September to be the low point, and we'll be on a positive trajectory in December.

And we'll report, I guess, at that time, the magnitude of it.

But we would not have commented, if we didn't think it was material.

On the second point, I mean, it's a terrific commentary on the maturity of the industry.

That's -- the corrections happened at the pace they do and -- I mean, this is a pretty amazing industry at this point.

If you look at kind of memory companies, their revenues are up, I think they're going to be up maybe this year.

After they were up 60% last year, which is a $100 billion DRAM business, probably this year.

And the profitability levels of memory companies today are trending 40% to 50% operating income.

So there's some really nice headlines in terms of discipline, and some really nice headlines in terms of profitability and sustainability.

And their business is a different business today.

And if you kind of -- if you went even higher than the memory statements and opines on the semiconductor industry, holistically, in the 5 years, 2014 to '18 inclusive, semiconductor revenues are up by about $125 billion, if you believe in a $450 billion or a $460 billion revenue for calendar '18.

In that same time frame, there has been an increase in wafer fabrication equipment investments by probably $18 billion in the low to the high end of that period.

That means the incremental capital intensity is at 15%.

I mean that's an incredible level of efficiency of spending and a great commentary, I think, on sustainability, in light of -- probably the most exciting set of demand drivers and the most diverse set of demand drivers we've had in a decade.

And next, we'll go to Timothy Arcuri with UBS.

I had 2. I guess first thing, Doug.

I wanted to ask what the guidance would have been, net of ASC 606?

Yes.

I'm not going to give you a specific number, Tim, but I will tell you at the end of every quarter in the 10-Q, you'll see for the next year old way and new way.

I'm not going to get into guiding it because lots can change around it, and I'm going to just stick to the current accounting rules.

But you will be able to see it at the end of every quarter, Tim.

Okay, awesome.

And then Martin, you made a comment, when you were talking about service, that it's up 50% year-over-year, was that just a particular piece of the service business?

Or were you talking about service as a whole?

I kind of attempted to deliver 2 messages on the installed base business.

The first one is the growth of the entire installed base, such as spares and service and upgrades and training, and the reliance in reuse business, and that was the 2 times faster in the 6 months of this year than the pace of growth of the installed base units.

The second reference, which is the 50% reference you just spoke to, related to our reliance and reuse business.

So I was focusing on one segment for reasons that hopefully are quite obvious.

And Tim, yes -- as I was just thinking about, maybe just a little more color on that rev rec thing, so we don't continue to get questions on it.

I mean, guys, think about it in the right way.

At the end of the day, this is all just timing, right?

Shipments always turn into revenue, they never don't.

That always happened.

And so holistically, thinking about this change, it's meaningless at the end of the day.

It's purely timing.

It has no impact on cash flow.

It has no impact on how we manage or think about the business.

And in the long term, it really doesn't matter.

And I guess, Doug, just to that point, so the shipments, basically, would have been about 2.3.

That's kind of how to think of it, right?

What I said was, revenue and shipments are going to be much more closely correlated, and we're going to stop guiding shipments, as a result, because it's not as useful as a leading indicator as it used to be.

So we're not going to be talking about shipments anymore, Tim.

And next, we'll go to Harlan Sur of JPMorgan.

I'm just wondering if you could comment on the breadth of the spending base as you look into the second half.

Memory companies are driving 60% gross margin and 50% operating margin profitability, so very strong logic and foundry, guys, also strong profitability levels.

So I guess, profitability is a proxy for the health of the fundamental environment.

So there's really no red flags which would cause your customer base to downshift on your tech migration and capacity plans.

So it seems like what you're seeing in the September quarter is more of a -- project shifts seems to be more maybe customer specific, and maybe limited to 1 or 2 and customers.

Is that kind of the right way to think about it?

It's definitely not all customers.

I mean, there are some pretty kind of selective adjustments.

It's a combination of a push from September to December, and a combination of some movement from the second half of this year to the first half of next year.

But I mean, everything embedded in your question, Harlan, I think, we would endorse.

I mean, there is a fundamental commentary of health, measured by profitability and growth of the semiconductor industry, as it has completely redefined its kind of purpose and value proposition in this broader kind of data economy and ecosystem.

And the long-term drivers are quite compelling.

So individual companies make individual corrections, that will always be the case and you've seen some come together in ways when you haven't seen that in the past.

So it's a good thing, pretty short term, we expect September to be our low point.

And our next question comes from Krish Shankar with Cowen.

I had 2 of them.

First one was on -- thanks for the clarity on the December guidance, or I should say September being the downtick.

Is there a way to quantify what is driving the recovery in December?

Is it DRAM, NAND or is it both of them?

Well, I mean, the interesting thing about the world we live in now, the value proposition that's available in the world of technology requires connectivity, it requires cloud, memory and storage, and it requires computes.

So there's always going to be some kind of ebbs and flows between one segment and another.

But the value proposition requires investments in all.

And I think, that's the fundamental headline that people should internalize.

And what we try to do is supplement that headline with a commentary on the importance of memory in that ecosystem, and the role that memory plays, as an embedded component of systems and even eventually, in the world of computes.

And I gave some statistics today, that I'm not sure fully internalized, but the CAGR of memory investment compared to the CAGR of logic and foundry investment, has no comparison, almost, in the last 5 to 7 years.

And that's the strength of our company in many respects.

And so that's why we speak to unmatched opportunity because we think it's a very balanced investments, and the strength of our company from a product portfolio point of view and our segment exposure creates something that's unmatched.

Got you.

Got you.

That's very helpful.

And if I could just have a follow-up for Doug.

On the September quarter, is there a way you can give some color on the segment mix between DRAM, NAND and foundry?

And also, historically, your services has been roughly, say, 25% of revenues.

How much do you think it's going to be, as a percentage of total revenues, in the September quarter?

Yes, Krish, I'm not going to give you the exact percentage, except to say that when business ticks down a little bit, the installed base really doesn't.

And so it's probably going to be a little bit higher in the September quarter, but I'm not going to quantify it for you.

And then relative to the -- what's going on in September by segment, we don't typically get into the detail.

We do the backward looking, but not necessarily forward looking.

But what you heard, both Martin and I say, relative softness in memory, so you could assume there's probably some stuff going on there.

And next, from Goldman Sachs, we'll hear from Toshiya Hari.

Martin, you talked about 2018 WFE being up in the kind of single-digit range.

As a housekeeping question, what are your updated expectations, for DRAM, NAND and logic and foundry, respectively?

As a housekeeping response, we didn't disclose that before.

And I'm not going to kind of increment the disclosure today.

Obviously, I think, the common knowledge, at this point, the memory bias is first half, and the logic foundry is much closer to a flattish, right?

So you've got that as a kind of broad reference on WFE, and that's where I would sit, responding to the question, specifically.

So maybe I could kind of provide some quality to statements as well that are helpful, in response to the question.

The adjustments we've seen from customers in DRAM, I would say, have avoided overinvestments.

That's a nice, simple way to kind of characterize it.

And we still believe from the analytics that we can perform -- it's still a tight marketplace.

In NAND flash, the pace of the adjustments that we have seen have been moderating.

They've been slowing.

Hence, the commentary that we're giving today around September, and then the expansion of the company, again, in December.

Great.

And then as a follow-up, I just want to get an update on what you're seeing in China.

Obviously, the political landscape is unstable, to say the least.

I don't know if that really impacts what your customers do in China.

But I'm just curious, your outlook on CapEx in China, both for the back half of this year and more importantly, longer term, if that's changeable.

Yes.

I think -- I don't have a crystal ball, obviously, the kind of opine on the political dynamic and how various elements of this conversations play out.

But our assumption today around the execution of our plans is the same as it always has been.

We see legitimacy in the ambition, and we see investments in capacity in China that are synchronized to the demand for units out of fabs, and I would make that statement on a global basis, and I would make it on in regards to China as well.

Obviously, tariff-based conversations can and do impact the operations of companies like Lam, and so left unattended, tariffs create incremental cost structures for us.

And we make the impact immaterial by modifying kind of our supply chain.

We have to take actions to mitigate that risk.

And there's no material exposure embedded in our forecast for tariffs.

Relative to long term, China, if the environment of export control, it is what it is today.

The plans of customers, we'll execute.

If it changes, then we have to kind of revisit the assumptions at that point in time.

We don't see evidence today of planned changes, so nothing to report.

But I would say, we're attentive to the very same things that you are, and we can control only so much of this conversation.

So -- and we'll be on the same boat as everybody else, if and when things change, I guess.

Our next question will come from John Pitzer at Credit Suisse.

Martin, if you kind of look at your growth over the last several years, there's been multiple components to it, but market share gain has been a meaningful driver of your growth profile.

I'm just kind of curious, as you look towards the 9x layer NAND, and then 1y, 1x, 1z, and DRAM.

How are you thinking about your share potential from here?

This is kind of a shorter-term message and a long-term message.

The shorter one is we're in for busy second half because the decisions of the second half have a -- and, I think, are 3 times greater in their impact than the ones at the first half.

So the second half is a busy period for the company.

The objective of the company, I hope, is well understood.

We are investing to increase our relevance to the success of the customers and gain market share in etch and deposition, in memory and in logic foundry.

And we've put together multiple years' worth of momentum that we intend to build upon.

We don't win everything, we don't defend everything, but we've demonstrated over multiple years that we win more than we don't, and that's the objective kind of going forward.

The best reference still is the long-term models that we gave, the call out market share references.

And the last thing I would say is when you think about the holistic growth opportunities of Lam, let's remember market share is $1 billion component of a $3 billion reference.

So we're seeking $1 billion of SAM expansion, we're seeking $1 billion of growth from market share, and we're seeking $1 billion of growth in the space of the installed base business of the company.

So it's kind of 1 element of 3, and all are very important and all are being invested in.

That's all for margin.

And then as you think about kind of the recovery into the December quarter, obviously if your memory customers are more profitable of recovery, it becomes easier, and so there is clearly a price element embedded in the recovery.

But I'm just kind of curious to what extent could it be somewhat ASP-independent on the memory side?

It's just the timing of when these technology transitions your customers are working on begin to inflect again.

Yes, I mean, I think the profitability levels and the revenue levels, it eliminates the limitations on investments, but I don't think profitability levels, on their own, drive investments.

I think demand for chips and elasticity of demand from pricing and attachment rates drive demand for investments.

So I think, profits have taken off the table the limitations, but certain points in our history have limited investments, so there's much more flexibility for our customers today than ever before.

But I think our customers hold themselves accountable to investing capacity when they have chips to sell.

And that's a great commentary on health of an industry.

And next, we have Atif Malik with Citi.

Martin, historically, when we have seen a weakness over your memory customers, they've all happened at the same time, or maybe one after another.

I mean, what's different this time and you talk about not all customers are changing plans, and why should we believe others won't follow the leaders?

Well, I've tried to articulate, again, not just in memory, but broadly in the industry, how I think the industry is different today than it was through kind of 10 years ago.

And one of the differences is that I see very significant customers in leadership positions with very clear segments and market focus that has some differences with very clear strategies and very clear opportunities, and risks and limitations on strategies.

And our customers, and I'll use 3D NAND as a great example.

There was a, I think, a 4-year separation between the first adapter on 3D NAND technology to the last of the 4. And that's illustrative of how their strategies are quite unique.

And that's not a good or bad, it's just a statement of uniqueness, optimized in their minds to the opportunities in the marketplace to be successful growing the business.

So I think customers, they are all attempting to pursue the right ambition, which is profitable market share, not just market share, and we have the same aspiration.

But there is, for sure, a uniqueness of a device targeting in a marketplace, market segmentation.

There's also uniqueness of clean room capacity, there's also uniqueness of investment coming online from a timing point of view.

And there's uniqueness in terms of the installed base road maps of these companies.

And so all of that means, I believe, that the power of the customer is greater than the power of the segment when it comes to analyzing the direction of the industry.

And Doug, fairly aggressive share repurchase here, 60% through.

Is there any consideration of a new repurchase program?

At the end of the quarter, we're still only 60% on the way through.

We need to get a little closer to the end before we can start thinking about what's next, Atif.

But the framework, again, is pretty simple for answering that question, right?

I mean, the priority is investing the profitable growth of the company.

And when we have cash that is in excess of that need, return it to our shareholders.

And we've operated with our philosophy for probably, at least, a decade, may be more.

And it's the guidance under any conditions going forward.

Yes.

We're obviously going to continue the program.

We talked about that.

I'll remind you the Analyst Day commentary, about 50% of cash, but still how we're thinking about the framework.

And our next question will come from Sidney Ho with Deutsche Bank.

If you go back to June quarter, when did you start seeing the weakness in orders or shipments?

I guess, it's more orders than shipments, since your shipment for the June quarter was above expectations.

I'm just trying to reconcile the timing because your other competitors in the equipment space seems to be seeing that a little early than you did.

I think you've got 2 problems with the question and the answer I could give you.

The first problem is none of us have any idea of the assumptions in the original disclosure of the companies that you're talking about, and so any reference is kind of hard to interpret.

I'm not going to get into specifics on dates, but the changes are fairly recent.

Okay.

Maybe a follow-up question is that.

Related to ASC 606, I know you talked about the product side.

But is there any impact on your service revenue as well -- and there are some multiyear service contracts, and like that?

No.

To a much lesser extent, service looks very similar, old rules, new rules.

And next, we'll hear from Patrick Ho with Stifel, Nicolaus.

Most of my questions have been answered, so just one question for you, Doug.

In terms of the installed base business that continues to grow for you, guys, you've always talked about how it's very accretive to your operating margins.

As that business grows, how do you balance the investments needed to continue to grow that business, and I guess, streamline those operations to have it continue to drop to the bottom line?

Yes.

I don't think I've ever said, Patrick, it's really accretive.

It's maybe a little bit at the operating income line, but it's not wildly different.

And some of the things we're doing to try to drive growth in that business are the advanced services you hear us talk about setting objectives around growing faster than the installed base, driving new programs to help solve some of the problems customers have inside of the fab, and unique ways that we know -- we know how to do, given our familiarity with our own equipment.

Yes.

And from an investment point of view, I mean, I wouldn't characterize but we run the installed base part of the company any differently than we do the systems piece.

I mean, we do our best to anticipate and identify opportunities and risks.

We do our best to invest, timely and proactively, to be successful, and we do our best to make sure that when there are changes in business levels, the cost structure of the company in the short term is appropriately responsive without kind of compromising that long-term view.

And so it's the same gig for every business unit and every elements of the portfolio of the company.

And our next question is from Tom Diffely with D.A. Davidson.

So getting back to the memory side of the business, curious if there was any difference in your view of the bit growth for the NAND or the DRAM market.

Not really.

And no difference, frankly, from the view that opines by most of the market participants.

I mean, we've got an assumption of the low 20s, for bit supply and DRAM, and we've got an assumption of the low 40s for NAND.

So I think that's kind of genuinely consistent with what folks are talking about.

From a transition point of view, maybe a little more to help you out.

I mean, our assumption is that the kind of 1x, 1y investment levels in DRAM will represent somewhere around the 50% level, plus or minus kind of the 5 or 10 points by the end of the calendar year.

And we're assuming by the end of the calendar year that the 3D-capable parts of the NAND installed base is a little over the 1 million wafer start per month level.

So -- and obviously, it exists in various forms.

So 3D isn't all generation 4 or generation 5. It's at the full portfolio, but we're well underway to making that the primary output technology of nonvolatile memory.

Okay, great.

And then Doug, would you look at the margins and your guidance that still remain fairly healthy, are there any one time or mix benefits in the quarter, or are those expected margins based on the revenue?

Nothing I'd specifically point to, Tom.

And business goes up, it goes down a little bit.

We do have fixed costs, so that's probably a piece of what's going on.

But there's also a product mix, a customer mix component.

There's always a lot of things that move around quarter by quarter.

And the best profitability metric for the company, forward looking is the long-term model again.

Yes, that's true.

And next from RBC Capital Markets, we'll hear from Mitch Steves.

I just had one in terms of kind of a modeling question, if I look out for fiscal year '19 essentially.

Just -- your margins have improved, both on the gross margins and operating margins trend over the last several years.

Is there any reason that shouldn't continue?

Or how do we think about, by and large, the operating margin profile for the next year or so?

Yes.

Mitch, what I'd point you to is we put out in March an update to the long-term model, kind of looking at that, looking at our revenue levels, looking at where we've been in recent history and correlating the 2 data points, I think, is the best guidance I can give you to answer the question.

And next, we'll hear from Edwin Mok with Needham & Company.

Great.

So I actually have a question around foundry.

If I look at the numbers, it's been down quite a bit in fiscal '18 versus '17.

I think we have heard it from other people, so I'm not surprised it's down.

But just curious in the context at the September guidance, it's down, mostly all -- if not all in memory.

Do you actually expect your foundry revenue to continue to grow sequentially?

Or how do you think about that 3Q or in the calendar second half of the year?

Well, I mean, from a marketplace point of view, as I mentioned a few moments ago, there's much more stability at WFE and foundry, logic combined, first half and second half, and it's true in memory.

And the specific purchasing decision timings for etch and deposition are, I think, kind of well understood at this point in time.

They're a little later in the flow because of shorter lead times, perhaps, than the lithography investments at this point in time.

And we have objectives to gain share, obviously, from 10 to 7, and in turn, to 5. And this year is largely a year of 7-nanometer build-outs and 5 pilots, with as you, I think, well understand, a pretty broad set of participation at the 28-nanometer level.

And we don't have any new headlines today on the EUV, it's exactly the same as it was when we spoke on our analyst meeting.

So it's a nice opportunity for the company, it continues to be a big focus.

And yes, that's I guess the best I can share.

And then, Doug, just on the guidance, if I -- my back-of-the-envelope math tells me your OpEx is down around 10% on the September quarter.

Is that all just from, call it, the leverage ratio or the model, or is there any incoming programs that you might be delaying that may come back in December?

I -- we just wanted to understand how we think about that.

What I'd tell you, relative to R&D programs, is nothing is delayed.

Everything is going forward at the same pace as it always has been.

We're not -- if there's a near-term move-around business, we're not messing around with any of that.

I think I talk maybe a year or so ago that you're going to see more variability quarter-to-quarter in our spend, modulated by profit levels.

Our variable compensation varies with the level of profit of the business.

And so as profitability varies, spending varies, along with it.

And as we look at softening in business for the quarter, we're very aggressively managing discretionary-type spending, things like travel and entertainment and whatnot, just to be responsive to the level of the business.

So it's a combination of all of those things.

But I appreciate you asking the question and recognizing the efforts of the company that respond to balancing short term and long term because it's really hard to do.

It takes a lot of time and efforts to create the guidance that you've just spoken to.

So thank you for recognizing it.

And next, we'll take a question from Weston Twigg with KeyBanc Capital Markets.

First, I just wanted to take a stab, C.J., at the beginning had asked your views on 2019 demand.

And I don't need a number, but I'm just wondering, at this point, do you think you could be -- see a similar level of overall, with WFE next year, or up or down -- do you have a directional indication based on your conversations with customers?

Yes.

I mean, I think there's a number of kind of industry participants, statements in the marketplace today of equivalency or slightly up.

I've seen the kind of $100 billion references over a couple of years.

And I don't have a basis to kind of disagree with those to more specifically speak to something of substance from Lam, I would say, as well as having the expectation that December is higher than September.

Our expectation is that the first half of next year is a stronger half than the second half of this year.

And the order of magnitude, we'll speak to over time.

But we feel really good about the health of the industry, as I've tried to speak to, we feel kind of really good about the value propositions that our customers are seeking, the discipline throughout the ecosystem and the opportunity for the company.

And so while at some level it all feels like a pretty kind of negative moments in the history of our industry when we get these episodes.

It's really good because it's a commentary on timeliness of response and discipline and health.

And what should not get lost in this conversation is the fact that -- if you didn't believe us and you just thought that December EPS would be the same as the September EPS, we have growth in non-GAAP earnings of like 20% year-over-year.

And in most of the companies that I've had an experience of working with, that's not such a bad number, right?

And so -- and adjustments exists in the context of some pretty nice growth for the industry and for the company and obviously for our customers, that's even more true.

So we feel pretty good.

Okay.

That's helpful.

And then just as a follow-up, I think I heard you definitely say, weakness in memory in Q3, or in September.

But Martin, I think, I heard you say it was more of a dam -- DRAM, sorry, DRAM shift.

And then I thought I heard Doug say, there was more trimming in NAND.

And I was just wondering if you can clarify, what's the bigger driver of the downtick in September and that helps us understand the rebound a little bit better, I think.

Yes.

So I was kind of conscious of that potential risk as well as I listened to it.

So what Doug was speaking to was kind of like the absolute kind of dollars comparison between the output of the company in the June quarter as compared to September, and he's right to say the biggest change there is NAND.

What I was speaking to was the prominence of the adjustments in the last kind of month or so.

And DRAM was the biggest adjustments in the last month or so.

So that's how you reconcile the 2 statements.

And there are no further questions in the queue.

I'll turn the call back over to our speakers for closing comments.

That concludes our call.

Thank you very much, everyone, for joining and have a good afternoon.

That concludes today's conference call.

We thank you for joining.