科林研發 (LRCX) 2019 Q1 法說會逐字稿

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

At this time, I would like to turn the conference over to Ms. Tina Correia, Corporate Vice President of Investor Relations and Communications.

Please go ahead.

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 and review our financial results for the September 2018 quarter and our outlook for the December 2018 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 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.

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

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

Thank you, Tina.

Thank you all for joining us today.

Lam delivered results stronger than targeted for the September quarter with revenues, gross margin and EPS all exceeding the midpoints of our guidance.

In addition, consistent with the commentary made during our last earnings call, we are forecasting the December quarter up sequentially, and we would still characterize based on engagements with our customers in our markets an outlook for the first half of 2019 that is somewhat stronger than the second half of 2018.

In aggregate, there has been more semiconductor capital investment volatility, both upside and downside in 2017 and 2018 than in the recent prior years, and that is only accentuated by broader macro headlines, such as trade, tariffs and interest rates.

Despite this context, we remain very excited by the long-term drivers for data economy enablement from the world of silicon and the complements of our product and services portfolio to the technology road map of the industry.

In our opinion, next-generation device and systems architectures, the expansion of the materials in chip design and manufacturing creates compelling opportunities for our strength in etch and deposition.

We remain committed to invest and innovate for the success of our customers and our company.

As always, the performance of Lam is defined by customer trust and employee commitment to our vision and values.

We sincerely appreciate their partnership, the opportunity created and the numerous contributions made.

Since our July update, current year WFE expectations continue to track up slightly year-over-year, although to a modestly reduced extent.

At the segment level, 2018 WFE looks a little stronger in Logic, a little weaker in NAND and Foundry to the assumptions we made 3 months back.

With customer and Lam performance consistent with our December quarter revenue guidance provided today, calendar '18 would represent a healthy revenue growth year of 14% for the company with profit performance marginally stronger versus the calendar year 2017 benchmark.

In deposition, we continue to see evidence of Lam's growing strategic relevance to the success of our customers with key penetrations of new films for patterning, new specialty applications for 3D NAND and deeper partnership models emerging for 3D NAND applications.

In etch, perhaps our most critical area of focus in 3D NAND is the continued enablement of customers' increasingly challenging technology road maps, where we continue to strengthen our leading capabilities in high aspect ratio applications.

Our solutions are invested in customers' vision for continued 3D NAND scaling targeted to accelerate demand elasticity in their markets for the next several years.

Combined, etch and deposition market share penetration and defense activity is a net positive so far for Lam in calendar '18.

Fundamental to the quality and sustainability of Lam earnings is the performance delivered by our customer support business group.

Our installed base business has grown year-to-date at a pace more than 2x faster than our installed base unit growth during the same period.

Our worldwide process chamber counts now exceeds 55,000 units compared to 36,000 units at the end of 2014, and this is the foundation for ongoing spare service and upgrade revenues.

We are increasingly focused on value creation for our customers through investments made in equipment intelligence products.

We are providing performance enhancements in areas such as tool analytics, preventive maintenance and chamber matching to enhance productivity for our customers and create opportunities for Lam.

In addition, driven by our customers' aspirations of better asset utilization in addressing the non-leading edge and also the emergence of new IoT and MEMS silicon opportunities, our reliance business recorded calendar year-to-date growth of more than 35% versus the same period in 2017.

A good illustration, we believe, of Lam's ability to be flexible in addressing the full scope of our market opportunities.

In closing, the September quarter and our outlook on December are largely as we shared with you last earnings call and should deliver more than $3 billion in cash from operations this year.

We remain focused on investing in our profitable growth objectives, at the same time, delivering value through a balanced cash redistribution to shareholders.

In this regard, incorporating December 2018 quarter guidance provided today, year-over-year operating expenses increased by 9% with 75% of that growth focused on R&D.

And our fully diluted quarterly share count reduces by approximately 10% end of year '18 versus end of year '17.

We anticipate a healthy long-term opportunity for our customers and our company both with continued attention placed on strategies intended to deliver targeted returns on the investments that each market participant makes.

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

Great.

Thank you, Martin.

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

Lam executed well in the September quarter with our -- excuse me, our results exceeding the midpoint of guidance for all of our financial metrics.

Operating margin and earnings per share were at the high end of the guidance range provided, demonstrating what I think is discipline in our spending during a decline in industry capital equipment investments.

We're pleased with our execution and ability to respond to the challenging business environment.

As a reminder to everybody, we adopted ASC 606 in the September quarter, which is the first quarter of our 2019 fiscal year.

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

With this new standard, we are no longer providing shipment numbers.

Our market segment disclosures will be based on the composition of our revenue numbers for the quarter, and we'll do that now as well as into the future.

So let me get into that.

Memory revenue continued to be strong with the combined Memory segment making up 77% of total system revenue.

Our overall nonvolatile memory revenue remains strong, representing approximately 51% of the system revenue, and that despite the anticipated reduction of spending in nearly every one of our NAND customers.

DRAM represented 26% of system revenue.

DRAM spending in the quarter continue to be focused on conversions to both the 1x and the 1y nanometer node.

The Foundry segment was stronger in the quarter, accounting for 17% of system revenue.

And finally, the Logic and Other segment contributed 6% of system revenue, pretty much consistent throughout calendar year 2018.

We continue to see strength in the China region with 25% of our revenue being generated there.

The strength in China came from both foundry as well as memory.

Nearly 2/3 of the revenue in September came from domestic Chinese customers.

We delivered revenues of $2,331,000,000 in the September quarter, a decrease of 25% from June and slightly above the midpoint of our guidance.

Gross margin for the quarter came in at 46.4%.

And as we've 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 some volatility quarter-to-quarter.

Operating expenses in the quarter were down to $451 million, which was a decrease of $57 million from the June quarter.

R&D comprised nearly 2/3 of our total spending, consistent with the composition of the June quarter operating expenses.

We continue to maintain a higher concentration of spending in R&D as we believe that disciplined R&D investments are critical to achieving our future revenue growth.

One thing I'd like to mention to help you with your future P&L modeling.

When we get to the March quarter of next year, we will have an extra work week in our fiscal quarter.

This occurs approximately every 6 years due to our fiscal calendar cutoff.

March spending will be higher as a result of the extra work week, so keep that in mind as you put your March models together please.

Operating income in the September quarter came in at $630 million.

Operating margin came in at the top of the guidance range at 27%, primarily due to stronger gross margin performance as well as flexibility in our spending in a quarter of lower business volumes.

The non-GAAP tax rate for the September quarter was 11.9%, in line with the guidance provided last quarter.

In the longer run, the tax rate in the low to middle teens is the right level to include in your models, and I will point out that you will see fluctuations around this quarter-to-quarter.

Based on the share count of approximately 165 million shares, earnings per share for the September quarter were $3.36, again at the high end of our guided range.

The primary driver of the upside versus our guidance was stronger profitability.

The share count includes dilution from the 2041 convertible notes and the 2018 warrants that are still outstanding.

The total dilutive impact for each of -- for both of these, excuse me, was approximately 8 million shares.

And I'll remind you, the dilution schedules for the remaining 2041 convertible notes is available on our Investor Relations website for your reference.

In the September quarter, we had about $80 million in early conversions of the 2041 notes.

The remaining balance of the 2041 notes is $248 million.

We continue to execute on our capital return program.

In the September quarter, we committed approximately $1.7 billion towards share repurchases, deploying all of our current board authorization from a dollar perspective.

Our repurchases were executed largely through accelerated share repurchase programs that will cover repurchases until the March quarter of 2019.

For dividends, following the declaration of $1.10 per share last quarter, we paid out $174 million in dividends to our shareholders.

Let me now shift to the balance sheet.

Cash and short-term investments, including restricted cash, decreased in the quarter to $3.9 billion, and that compares with $5.2 billion at the end of the June quarter, the change largely due to our capital return activities.

We continue to make progress bringing our cash onshore.

Cash from operations for the September quarter remained strong at $720 million, which was roughly flat with the $718 million we generated in the June quarter.

DSO increased by 9 days to 72 days, which is related to the linearity of revenue during the quarter.

Inventory was roughly flat in dollar terms while inventory turns declined to 2.7x.

This compares to 3.5x in the prior quarter.

We do expect to see turns improve in the December quarter.

Company noncash expenses included approximately $50 million for equity comp, $36 million for amortization and $44 million for depreciation.

Capital expenditures were $56 million, which was down from $80 million in the June quarter.

For the calendar year, we expect CapEx in 2018 will be flat to slightly higher compared to 2017 levels.

CapEx this year is going towards investment in manufacturing expansion for our installed base business as well as strategic R&D investments.

We exited the quarter with approximately 11,000 regular full-time employees, which was relatively consistent with the June quarter.

So now looking ahead, I'd like to provide our non-GAAP guidance for the December quarter.

We are expecting revenue of $2,500,000,000 plus or minus $150 million.

We're expecting a modest uptick in customer spending across multiple segments; gross margin of 46%, plus or minus 1 percentage point; operating margins of 27.5%, plus or minus 1 percentage point; and finally, earnings per share of $3.65, plus or minus $0.20 based on a share count of approximately 163 million shares.

Consistent with our prior comments, we forecast that September quarter marks a near-term trough for our business.

While near-term forecasts are subject to change, we remain optimistic on our longer-term growth prospects that we've highlighted during our investor event back in March.

We continue to prioritize disciplined investments that drive competitively differentiated products as well as Lam's outperformance opportunity into the future.

That concludes my prepared remarks.

Operator, please open up the call for questions.

(Operator Instructions) We'll take our first question from C.J. Muse with Evercore.

I guess first question, as you think about your first half outlook for calendar '19, definitely coming in stronger, I think, than many of us thought.

Can you walk through, I guess, what you're seeing in terms of tools versus service?

And then if there's anything that we should be thinking about that is perhaps maybe Lam specific or timing of, say, image sensors coming in.

Would love to kind of hear your thoughts on that front.

Yes.

Needless to say, we're much more qualified to speak to our business than we are kind of like the overall kind of WFE headline.

So when we think about kind of calendar '19, obviously, there's been some continued, I would say, muting of investment expectations primarily in NAND flash since our last earnings call.

We're looking at 14 new projects next year, fab projects next year.

And I would expect honestly in the second half '18 to first half '19 comparison that our kind of revenue levels will be incrementally higher in DRAM, Logic/Other including image sensors, to your point, and also Foundry.

I would expect NAND to be down half over half, second half '18 compared to first half '19.

Relative to the proportion of our kind of revenue headlines that is the spares and service, the installed base business, obviously, it's a very important part of the economics of the company.

And we've given some color today on the pace of growth of that business by referencing the installed base and the annuity that comes with it, and it's an important part of the value proposition here.

But I would say, our headlines for first half WFE are 3D systems headlines for the markets and the customers that we have.

So hopefully, that helps, C.J.

Very helpful.

And if I could ask a follow up.

You've always done a great job of managing OpEx.

And given, I guess, the increased volatility, Doug, how are you thinking about incremental op margins from here?

I think your target model is roughly 40%.

Is that still the right kind of model up or down depending on the revenue run rate?

Well, C.J., I think you rewrote our model.

Our model is 32% to 33% in the longer term.

Yes.

You see, you're too used to, C.J., these memory companies with 40% to 50% operating income, that it tainted you.

Yes.

But C.J., to more directly answer your question, at these revenue levels, kind of high 20s, you just saw us print 27% and guide 27.5%.

And as things recover and get stronger, you'll see us kind of inch our way towards that low 30s level.

That's the right way to be thinking about things.

There will be variability in spending, and one of the things I purposefully pointed out is the March quarter is a 14-week quarter so there's an extra work week in there.

And I'll remind you that in the first half of the year, you get certain spending coming back in like payroll taxes and things like that.

So don't forget those things as you're modeling the next couple of quarters.

But hopefully, that answers your question.

We'll take our next question from John Pitzer with Credit Suisse.

I guess, Doug, my first question, kind of an accounting question around 606 and deferred revenue.

There was a bit drawdown in the September quarter sequentially in deferred revenue.

How does that line sort of transition over time?

Under 606, will that eventually get to 0?

How quickly will you get there?

And is the uptick in the December sort of revenue guidance a function of just deferred revenue coming down off the balance sheet?

Yes.

So briefly, I'll go through it, John, and you can ask me more if you want to understand a little more.

I mean, basically, what happened as we crossed into the new fiscal year is there was a bucket of deferred revenue that just fell straight to retained earnings.

So that just fell off, and it's largely why deferred revenue went down so much quarter-on-quarter.

You'll continue to see deferred revenue though, John, for first-of-a-kind tools and certain BPA accrual type things that isn't completely delivered yet.

It will bounce around a little bit.

And generally, the way I think about the difference between 605 and 606 is it's all just timing.

We're still shipping tools.

We're still collecting cash.

All of that is happening in the same time frame that it otherwise would have.

In some quarters, 606 revenue recognition will be higher than 605.

In some quarters, I would expect it will flip and go the other way.

But at the end of the day, this is all just timing, and what really matters in my mind is when cash is coming into the company.

And as I think you saw, we had a really strong cash collection quarter at $720 million.

Does that help, John?

That's helpful.

And then maybe for my follow-up to Martin.

Martin, I think one of the investor concerns out there is as the industry transition from planar to 3D NAND and the rush to get there by your customers just created kind of a once-in-a-lifetime tight kind of bulge in NAND CapEx that's not repeatable.

I'm kind of curious as we go through this soft period of NAND, has your view of capital intensity, your SAM or the rate at which your customers are making these transitions changed?

And are you still of the mindset that 32 to 64 was probably the most efficient transition for the industry, and as we go from here, things get more difficult?

Any color there would be helpful.

Yes.

I mean, a lot of questions there.

So at a fundamental level, no real change in our long-term outlook, and that's a commentary on capital intensity needed for the industry.

And we floated a $70 billion reference at the Flash Summit conference a year back, I think, or -- and maybe repeat it again this year actually.

So 2 years in a row, the same message.

I'm not sure we've ever really offered an opinion about efficiency of one node or another.

But I would certainly align to the fact that the challenges get more complex over time as aspect ratios increase, which is a big part of the opportunity for us.

That's why we're strong and differentiated, so I think that trends well.

And we don't see the opportunity for 3D NAND as a once-in-a-lifetime gig or a onetime event, right?

Clearly, there were some transitional investments associated with planar capacity to 3D.

There are also investments associated with one generation 3D to the next.

And we did opine in earlier disclosure that over the next 5 years, I think, we expect about 1 million wafer starts per month of incremental capacity to get brought to the system associated with the long-term outlook for nonvolatile memory in this world of data.

So from an industry point of view, more or less the same.

And I guess the one thing I didn't say is independent of what your view is, good or bad, you should recognize that the segments of etch and deposition are entirely central and fundamental to that transition.

And so if everybody does well or everybody has opportunity, we should have more.

And if nobody does so well, we should outperform.

So that's an important headline as well.

We'll take our next question from Krish Sankar with Cowen and Company.

Two of them.

First, on margin.

If you look at this downturn, clearly, there's downdraft clearly led by memory.

It looks like the CapEx of the WFE cuts are being in retaliation to pricing declines.

So from your vantage point, do you think pricing is a key metric to look forward to see when it troughs?

And if so, do you think WFE troughs for memory along with pricing?

And do you have any view on when it will happen?

And I have a follow-up.

Well, I mean, I think -- that's a very important question and quite a complicated one.

Clearly, there's a relationship of pricing to investment levels, and I would say that's in 2 ways.

The first one is ASPs should reflect supply and demand balance of capacity.

So to the extent that price is going up or going down, there is an implied message around the need to add capacity or the need to kind of rein in capacity.

So that's been the world we've lived in for many, many, many years.

What's a little different today is that pricing is not actually a great leading indicator right now of the customer's ability to afford to make investments.

So back to my rather amusing response to Tim'sJim's earlier question, when the memory companies are making 40% to 50% profits when DRAM is $100 billion business, when flash has grown in the way that it has, the sustainability of investment is clearly enabled in ways that wasn't true 3 or 5 years ago.

Now having said all of that, I think our customers spend money adding capacity when they have demand from their customers to ship devices.

So I don't think people get carried away at any level these days.

So it's a bit more complicated than it used to be.

Pricing is relevant to help you understand supply and demand, but it's not so relevant in assessing sustainability on the customer's ability to make capacity or technology-related investments.

So good luck with your modeling, I guess.

Got it.

Got it.

That's very helpful, Martin.

Then just a follow-up.

Clearly, we all understand the long-term upside potential for Lam and the industry and WFE bonds.

I'm just trying to think the downside.

If you look at the first here to drop was NAND followed by DRAM.

Do you worry that things will get worse before they get better?

Or do you think they're kind of troughing at these levels?

Well, we are -- if anything, we're super consistent, right?

So my approach has always been to describe what I see, and we've done that.

And we'll always do that, good or bad, we'll tell it how we see it.

And so we've offered perspective that says December is stronger than September, and we expect the first half of next year to be stronger than the second half of this year.

And of course, we might be wrong, and you have to kind of judge the confidence level of our disclosure and kind of move forward, I guess.

So best I can offer you.

We'll take our next question from Timothy Arcuri with UBS.

I had 2. I guess, the first question, Martin, is if I just hold your wafer fab equipment share -- and now I'm putting everything in there, but if I just calculate your WFE share for this year and for last year, it's up a little bit this year.

So if I just hold that into the first half of next year, you're still annualizing if I give you, say, $5 billion worth of revenue in the calendar first half, which is just up a little bit half on half.

That would imply that we're still annualizing to like high 40s or close to $50 billion WFE.

So I guess the question is who really knows about the calendar second half, but would you sort of endorse a number close to $50 billion for 2019 WFE?

Technically, it's too early for us to answer that question.

It's pretty customary that we have a response to that in the January earnings call, but fair question.

I don't have a crystal ball, so I can't answer it with the same level of confidence that I can answer the near-term questions.

But a variant of your question might be how do I feel today about the $100 billion 2-year reference that's being floated around for the last kind of few months.

It's not a bad reference.

We're trending a tweak below that right now to our analytics, but we've trended a little above it at times and a little below.

And I can't really tell you what the variability is around it, but that would probably be the best I can give you at this point in time.

Awesome.

And then Doug, it was a pretty big repo this quarter, and I understand that it's going to sort of play out through the end of March.

But I'm curious if you can help us on share count for December and March as this kind of flows through.

And then also how you think about when you're going to kind of reup for the repo, how do you kind of think about that?

Yes.

I mean, Tim, it's always an ongoing conversation at a board level.

And we described when we first launched this current authorization at 12- to 18-month time frame, maybe we've gotten through it a little sooner.

I did purposefully point out that those ASRs are going to execute kind of over a 6-month time frame, so we're not out of the market even though all the cash got deployed.

And when I have something to update you on, I'll update you relative to what we're going to do in the future.

Obviously, it's something we're going to be talking about, but I don't have anything to tell you today.

But just on the share count though, how would it actually play out?

How would it actually play through for December and March?

I just guided you a December number of 163 million.

I didn't give you anything for March.

And we only guide 1 quarter at a time, Tim.

We'll take our next question from Harlan Sur with JPMorgan.

We were at the Flash Memory Summit when the Lam team had its investor event, and we also had the opportunities to hear from some of the existing NAND leaders in the market as well as some potential entrants from China, who seem to be making some progress and talked about increasing their manufacturing footprint next year.

We've also heard the same thing from some of the China domestic DRAM suppliers, albeit at lower levels of production activity.

Do you think that China domestic memory starts to become a bigger part of your memory WFE mix looking into next year?

Yes.

Yes, probably it does, Harlan.

Yes.

Both NAND and DRAM, you think?

Yes, probably.

I mean, I think as you observe from flash memory, the NAND guys in China were a little more visible, maybe a little more confident there.

But I think they're both going to increment.

But I don't think our fundamental view on China is any different today than it was for the last kind of couple of years.

I mean, it's clearly ambitious, but in our opinion, quite rational strategic agenda.

And as each quarter passes, there's more substance to what they're doing, and we don't have anything more to add than what I think they're speaking to in the public markets on their own.

And obviously, independent of all of that, the long-term market participants are also investing for next-generation device architectures and market share growth and so on and so forth.

So I mean, it's a global system, and that's what we respond to.

But I think it's likely that the investment level in China increases in absolutes and proportional terms next year for Doug's response.

I just had a quick follow-up.

It's pretty amazing, right, the amount of supply side discipline and focus on profitability and free cash flow by your memory customers.

And clearly, they want to maintain strong profitability levels in margining in supply.

If I look at the last time there was a strong focus on sort of reining in supply, that was kind of 2016.

Took about 2 quarters of strong equipment spending declines before we did see a positive response in memory pricing fundamentals and economics for your customers.

Is that how the Lam team still thinks about it as well, i.e., that supply discipline in the second half of this year potentially positively impacts supply dynamics and maybe stronger profitability in the first half of next year for your customers?

Wow.

I'm not sure I know how to answer that.

I mean, I would say everything moves faster, so I think our customers adjust faster, and therefore, that's probably true on the upside as much as it is on the downside.

We're a big part of feeding variability along with other market participants to the economics of their business.

And I think they take actions, anticipating risks as much as ever.

And that's a lot more than would be true 5 or 10 years ago when action would get taken when there was a clear problem statement.

So yes, there are supply and demand imbalances that are getting adjusted to, but there's also proactive actions to manage the risk of that.

So it's a good thing, I think, in the long term.

I mean, it kind of gets to -- it gets to the message that the secular headlines for us feel like they're more important and stronger than the cyclical ones.

But you have to make your own decision, I guess.

We'll take our next question from Joe Moore.

Following up on that last question, I guess I was surprised at how strong China was in the September quarter.

And I think you talked about 2/3 of that being from domestics.

That seems like a pretty big deviation.

Is there anything we should be aware of there?

And how much of that is kind of memory versus your sort of the foundry customers who you've seen more frequently?

Yes.

I mean, Joe, I pointed it out because it was an uptick from the local guys.

I wanted to let you know that.

I don't know you're going to see that every single quarter.

In fact, I know you won't.

And interestingly, when I look at kind of who the customers are, and I won't name them by name, there was relative balance between foundry as well as memory.

And logic actually, for that matter.

And actually in logic, you're right, Martin.

So it was a strong quarter for us in China, and it was a balanced quarter.

I mean, they're -- my take on this thing, answer is we tend to talk about collectively 2 or 3 core domestic participants in China.

And reality is there are kind of 6 or 7.

Yes, there's more.

And some of them are active at 300, some are active at 200 millimeters.

Some of them are active at leading edge technologies and some, less leading edge.

But there's a fairly meaningful population that doesn't maybe get fully internalized.

We'll take our next question from Romit Shah with Nomura Instinet.

I guess, just as outsiders, all the data points on memory equipment CapEx and fundamentals just seemingly seemed all bad during the quarter, and yet, you exhausted your entire buyback, and you're reiterating your expectations for growth in December.

So is it fair, Martin, to sort of sum up this report by saying that maybe your business is more diversified than we realized and you're confident in September being the bottom?

And then the question really is just sort of the shape of the recovery from here being either U or V-shaped.

Well, I think we've been talking to the subject of diversification now for kind of 3 or 4 years.

No question, we're more diversified today than we were.

I think we've tried to reinforce that message even more than talking about share gains in Foundry and share gains in Logic by speaking to the SAM expansion headlines.

And in the last kind of year or so, we've segued into the installed base business of the company, which is not only a great asset relative to creating an opportunity for competitive differentiation in the core systems products of the company.

It's a source of revenue and profit growth at a rate that is faster than the pace of growing our installed base.

I mean, there's a massive difference between 55,000 nonprocess chambers and 36,000 process chambers relative to the annuity.

So that's all kind of in the mix as well.

So the business is more or less as we had anticipated, slightly muted to the expectations of 3 months ago but not that much different.

I mean, I actually think our calendar '18 WFE number is 98% or 99% exactly what it was 3 months ago.

So I mean, that's kind of basic headline there.

And we've expressed an outlook for the first half of next year, and we're not going to put numbers on it now.

We'll kind of deal with that in January, so that will be a time when V or U becomes an obvious disclosure from Lam.

Okay.

And just on the buyback, you've exhausted it.

So do we have to wait till the next conference call to hear about the size and scope of the next authorization?

Well, even though the cash, like I said, Romit, the cash got all committed, we're still in the market through the structured products so -- and that was purposeful, right, taking a view of pricing, where things were at and wanted to get on with it.

But the way this generally works is Martin and I all agree, here's what we think we should do.

We'll go in, and we'll have a conversation with the board, and the board will have opinions and will modify it.

And when we have a decision, we will communicate it to you, and we're not at that point yet.

We'll take our next question from Vivek Arya with Bank of America.

Martin, maybe a question on your services business.

If say, hypothetically, WFE goes down 5% or 10% next year, what does that imply for your services business?

Can you still keep it flat or even grow it?

Just what is just the conceptual sensitivity to WFE?

Well, in the calendar year, there's not so much sensitivity because in general, when we ship a system to a customer, it has a 12-month warranty so it's kind of on our guide during that period.

The single biggest influence over the size of the installed base business is the number of kind of units in the installed base for which we disclosed and then the utilization of fabs.

So if we show up in a world with the WFE reduction that you just characterized and there's no change in utilization of the installed base, then there is no consequence.

If utilization of the installed base goes up, you're likely to see accelerated growth.

And if the installed base utilization goes down, you'll see a contraction in spares and service business in the industry.

So our assumption is in the context of customers have done a really good job kind of managing this issue, utilizations will run pretty high, and we have no reason to be anxious about a dip in our installed base revenues.

In an independent world, as spoken to you for some time now, a little bit here today in prepared comments, we are perpetually building a portfolio of installed base productivity-related products and service offerings and invested in contributing more to the success of our customers, including opportunity for Lam.

So there are some things in our control and some things that are out of our control.

And as a follow-up, from what you see today, do you think memory CapEx overall is up or down next year?

And when do you typically get visibility around what the spending environment will be?

Vivek, the normal timing where we'll give you more color on next year would be in next quarter's earnings call.

It's just a little bit too early for us to give the specificity you're asking for.

We'll take our next question from Toshiya Hari with Goldman Sachs.

Martin, you talked about Logic revenue being up in the first half of '19 relative to the second half of '18.

Is the big driver there basically your key customers' CapEx budget going up?

Or is it more due to your positioning improving from, say, 14 to 10-nanometer?

Or is it both?

It's both.

It's a little bit of both.

Okay.

And then kind of related to that, if you were to -- in terms of magnitude, you guided DRAM, Logic and Foundry up half over half.

If you had to rank order those 3 in terms of the magnitude increase from the second half to the first half, is that something that you guys can do?

I have it written down on a piece of paper in front of me, and now I've decided I'm not going to tell you.

So rank order without any numbers, I would say Logic and kind of Other/Logic, which includes the image sensor opportunities and the legacy stuff, is probably the fastest growing.

And DRAM is the slowest growing, and Foundry is probably in the middle.

That would be kind of -- and I'm not speaking to kind of industry level here.

I'm just characterizing the revenue kind of outlook for Lam and as I said, NAND contraction.

So that will be our rank order.

Again, it's like pretty early to be having this conversation, so take it for what it's worth at this point.

Sure.

And as a quick follow-up, I just had a question on market share.

Martin, clearly, if you're growing your business 14% this year, you're getting a bit of share.

In your prepared remarks, you talked about some of your net wins, both in dep and etch.

Is it fair to say in relation to your long-term model, where you've attached $1 billion incremental revenue for market share gains, are you tracking in line or ahead of that plan?

Or how would you describe where you stand today relative to the long-term plans?

It was never linear.

It's a tough question to answer, but a couple of data points.

So when we talk about kind of penetration and defense activity this year, we're actually talking more about the economics that will play out a year from now or maybe even in 2020, right?

Because there's a leading time frame on DTOR decisions and PTOR decisions.

And you might remember that in the last earnings call, I think I made reference to the fact that there were tons of decisions in relative terms in the second half of this year compared to the first half of this year.

So that's kind of a lot still ahead of us.

So fair game for you to ask the same question to me to try and answer it in January.

So far, again, we don't -- we never think though that we defend everything, but we have a net positive to forward-looking kind of economics from the penetrations and defenses in the first 9 months of this year.

So pretty pleased.

We'll take our next question from Patrick Ho with Stifel.

Martin first off, just, I guess, follow up on some of your comments on NAND capital intensity, been looking at it from the DRAM front.

As the industry continues to push to 1x, 1y and eventually to 1z, we're seeing a lot of new fab projects in DRAM.

Do you believe these capital intensity trends are also impacting DRAM and this could provide a little bit of, I guess, sustainability on some of the equipment spending trends that we've seen today?

I think it's all about kind of the economics on the revenue of the customer, honestly.

I think what we've seen in the last couple of years is, obviously, an emergence of significant discipline managing supply and demand, and there has been an ASP consequence.

But more than that, we've seen a transition away from units to content and density in a broader set of demand drivers.

And that has allowed our customers to kind of reset the value of the bits that they're selling to their customers so that the average bit is worth kind of more by virtue of the value that's created in this kind of broader cognitive computing environment.

And so if there continues to be discipline and if our customers continue to be successful getting paid for the enablement in their industry, the fact that from one generation to the next, the DRAM cost transitions are kind of less significant compared to the baseline of 5 to 10 years ago.

It's much less relevant, right?

I mean, clearly, when node transitions deliver less than they did in history, there's a lot of intensity by the customer, and there's a lot of intensity by Lam and our peer companies, I'm sure, to try and continue to improve the productivity of the DRAM installed base because we have a collective interest in that.

But I think that the bigger question to answer relative to DRAM capital intensity is the revenue side of it, not the cost side of it.

But as I've said, many times today in my -- go ahead.

As my follow-up question for Doug in terms of the services and spare parts business.

You mentioned that a little bit of the CapEx spend increase is incrementally going into that business segment.

How much can you leverage, I guess, your existing workforce in terms of growing that business on the labor side of things?

Or is that an area where you'll also have to increase OpEx to keep up with the fast pace of growth in that business?

Patrick, it's a different physical factor, in a different location.

So there's not a lot of leverage from a labor standpoint, and we have to invest to manufacture the parts for manufacturing.

So it's all good news at the end of the day.

It's supporting a higher installed base, and we've got to make investments for that.

(Operator Instructions) We'll take our next question from Mitch Steves with RBC Capital Markets.

I just had a quick one on kind of 96-layer technology.

Is there any of your customers that have already started working on that?

Or is that something that's still to come next year?

Unfortunately, our customers have to answer that question.

Okay, got it.

And then secondly, on the DRAM side.

Do you guys see any -- I guess, when would you guys think that the pricing would stabilize in DRAM in general?

Or do you guys have no view right now?

Well, we have a view, but I think the view of our customers again is worth a lot more than ours.

I mean, it's all about supply and demand, and our customers have taken action.

I would argue proactively as much as reactively, and so everything moves pretty fast these days, so again, customers' disclosure is worth a lot more than ours on ASPs of devices.

We'll take our next question from Weston Twigg with KeyBanc.

First, I'm just wondering if you're seeing any change in customer behavior related to trade work concerns, whether that's in terms of the conversations you're having with them or the visibility that they're providing or commitments regarding your fab capacity heading into 2019.

Any color would be helpful.

Yes.

To the best of my knowledge, nothing's really changing directly related to that, although I've kind of heard a few statements and read a few things quoted about customers kind of referencing tariffs or the costs of tariffs when it comes to the pace at which they're making investments.

In fact, I think I read one today out of Taiwan.

So I'm sure it's not irrelevant, I mean, to the extent that a company has more cost because of tariffs, and we probably all do at some level.

There's a consequence of that, and there's a reprioritization of things in the company.

So not irrelevant but hard for us to kind of directly correlate.

I'm just conscious that I'm seeing statements, and I'm hearing some things.

And so it's in the mix of the outlook that we've described today.

Okay, that's very helpful.

And then my follow-up question is just on DRAM strength in the first half that you mentioned.

Is there strength from -- more from some of the pushouts you're seeing from this half?

Is it related to new capacity?

Or is it more just ongoing conversion activity?

It's mostly as originally planned.

I don't think it's a massive kind of statement.

So there are not so many industry participants in any segment these days.

So you probably got a sense of who's chasing who and who's investing where for what purpose.

So I think it was pretty much originally as consistent with plan.

We'll take our next question from Mehdi Hosseini with SIG.

Doug, going back to your commentary about the extra week in the March quarter, which is leading to higher expenses, should I also assume that your revenue will be positively impacted by an extra week?

Technically, we have an extra week to ship product, Mehdi.

I don't know that's going to meaningfully move the revenue number.

I do know definitively it will impact the expenses.

We'll give you the hard guide when we get to the end of the quarter then.

Okay.

And then just -- I just want to go back to your comment about the deferred revenue.

If I just do a simple math, I get to a shipment down 35% on a sequential basis.

Is that -- does that make sense to you?

Mehdi, we're not guiding shipment anymore.

We're not talking about shipments anymore.

No, just for the September quarter.

Just for the September quarter.

Yes.

We're done talking about shipments publicly.

Revenue is all we're going to be describing now.

You can do analytics on whatever you want to get shipments.

But at the end of the day, given the change in the revenue recognition timing, revenue is what we're going to be talking about.

Okay, that's fair.

Just a follow-up on your services.

Given the increased installed systems, are these service contracts long enough to actually have an impact on your backlog?

Does that help you with better visibility?

Yes.

So if that's the case, and assuming that services is becoming a larger part of your revenue mix, why not offer a longer guide on the revenues rather than just referring to WFE?

We'll think about it, Mehdi.

I mean, at the end of the day, we try to describe what we think is important for you to understand what's going on in the business.

There's still just a large amount of the business in any 1 quarter that's turns based, and to me, backlog isn't that meaningful.

For service, it certainly is, as Martin said.

So we'll give it some thought.

Yes, because just the growth in installed systems is very compelling, but it still hasn't made a difference to how you guide.

And I'm just wondering what is the disconnect here.

I'm not sure that's actually true.

I think for the last couple of quarters, you have perspective, sometimes quantitative and sometimes qualitative, on the progression for a couple of quarters including today.

So I -- it's pretty hard to do what we're doing.

And as many people characterize that we don't have the visibility to say what we currently say as those that do, so taking it for what it's worth, we're doing the best we can.

And speakers, we have no more questions.

I'll turn it back to you.

Okay.

With that, we'll conclude the call.

Thank you, operator.

Thank you.

Ladies and gentlemen, you may now disconnect, and have a great rest of the day.