Lam Research Corp (LRCX) — Q2 2015 Earnings Call Transcript

Thank you. Good afternoon, everyone, and welcome to the Lam Research quarterly conference call. With me today are Martin Anstice, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today’s call we will share our outlook on the business environment and review our financial results for the December 2014 quarter and our outlook for the March 2015 quarter. The press release detailing our financial results was distributed a little after 1 PM this afternoon. It can also be found on the Investor Relations section of the company’s website along with the presentation slides that accompany today’s call. Today’s presentation and Q&A will include statements about our expectations and beliefs regarding certain future outcomes, including our outlook. A more comprehensive list of forward-looking topics that we expect to cover is shown on the slide deck accompanying my remarks. All statements made that are not historical in fact are forward-looking statements based on current information and are subject to risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factor disclosure in our public filings, including our 10-K and 10-Q. The company undertakes no obligation to update forward-looking statements. Today’s discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today’s earnings press release. This call is scheduled to last until 3 PM Pacific Time and as always we ask that you limit questions to one per firm with a very brief follow-up so that we can accommodate as many questions as possible. As a reminder a webcast replay of this call will be available later this afternoon on our website. With that I’ll hand the call over to Martin.

Thank you, Audrey. Good afternoon everyone and thank you for joining us today. We’ll start by speaking to our December quarter results, supplemented by a review of calendar 2014 milestones with comments on their relevance to the future growth and opportunities for the company. We will then segue to provide an update to our outlook for wafer fab equipment spending in 2015. Then more specific to Lam as we enter a New Year that marks the 35th anniversary of the company we want to take this opportunity to outline our focus for the year and provide some context for the multi-year outperformance potential that exists as a result of the company’s vision and execution. I will then hand the call over to Doug for a review of our financial and operational performance. The December quarter concluded with results in line with our expectations showing strength across all metrics and reinforcing our outperformance trend for calendar 2014. Within the quarter we grew our backlog by greater than 20%. Additionally, our deferred revenue balance has increased, which we expect to continue with the shipment strength anticipated in the first-half of 2015. December was the sixth consecutive quarter of greater than $1 billion in revenues and concluded a record-breaking year for the company with total annual revenue reaching $4.9 billion. Our revenue growth rates we believe outperform the industry by a factor of two with profits expansion at more than twice the pace of our revenue growth. The strong December quarter marks the end of a very rewarding year for Lam that featured the delivery of record-setting performance, execution on our market share gain and SAM expansion opportunities that exceeded expectations and a high level of focus on increasing innovation in everything that we do. In turn, we believe that the differentiated culture, values and management system of the company have enabled effective scaling necessary for making profitable growth sustainable. In 2014, we made meaningful progress against our market share targets, introducing new products and services to participate in the market expansion opportunities of the various technology inflections, including multi-patterning, FinFET, 3D NAND and advanced packaging. We believe we exited calendar 2014 with an inflection-based market share across the portfolio of deposition, etch and clean in excess of 50%, a double-digit increase compared with our total company pre-inflections baseline. Our strong early position, combined with our unwavering commitment to customer trust and value-enhancing collaboration positions us to continue to drive our theme of outperformance over the next several years. Evidenced by our relative revenue growth these last two years and further underpinned by our March quarter 2015 guidance today, we accelerated our achievements towards 2017 market share targets which call for a 4% to 8% increase in deposition market share, 3 to 5 percentage points in etch and 5 to 10 percentage points in clean. As previously shared, we maintained a 90% success rate across all plans, penetrations and defenses in 2014 and as such we believe that our corporate market share has increased by 200 basis points to the 42% level in calendar year 2014. At least as importantly we conclude that we increased our available market size from approximately 26.5% of WFE to 27.5% of WFE in 2014 through the successful introduction of new products. We’ve always judged our ability to lead and execute predictably to be one of Lam’s core competitive strengths. We feel that the results presented today again are evidence of very strong execution but even more noteworthy perhaps a demonstration of execution capability through a period when we are scaling the company in real time, preparing for an even more exciting future. For example last year we expanded our investments in fundamental research and C&F activities. We added a significant number of resources in the factory and in the field; we ramped all manufacturing facilities to multiple shift operations, shipped a record number of systems on time and at quality standards that are ever more critical to our customers, all while continuing to innovate at perhaps the highest level in our history, delivering more than 20 new product and service offerings to our customers. Delivering value to all stakeholders was and continues to be a strong theme and we believe a highlight for 2014. We collaborated closely with our customers and suppliers on innovations, designed to meet the considerable technical and economic challenges of the industry. Notably we delivered products such as the VECTOR ALD Oxide deposition system targeted at extremely thin and uniform layers critical to advanced patterning and the Flex FX dielectric etch system necessary for critical high aspect ratio etch. Both products are experiencing unprecedented momentum in the marketplace. For example our VECTOR ALD Oxide system output likely comes close to tripling in calendar 2015 year-over-year, driven primarily by patterning-related application wins. We augmented our strong earnings performance with the establishment of a $1 billion capital return program, which included the institution of our first-ever quarterly dividend program. We’re on track relative to our financial model and are very pleased to note that in recognition of this strong financial performance we were recently added to the NASDAQ 100 Index. WFE investment for 2014 was largely in line with the views we expressed throughout the year. We estimate spending by our customers in 2014 WFE was approximately $32 billion. As we enter 2015 we maintain our outlook of a growth year for WFE investments. The predicted trends in semiconductor consumption, including demand of the leading edge and the publicly stated plans of our customers we believe support this growth outlook, but as is customary I would add that this is predicated on a positive macro environment and healthy industry fundamentals. Our initial 2015 market outlook is as follows for the key segments starting first with memory. In the DRAM segments we see continued strength in demand and a supply-constrained market entering the year. Strong market demand continues to be driven by mobile and enterprise DRAM growth, pricing remains stable. This year we see DRAM investments to be focused primarily on conversions to 20-nanometer. Projections are for DRAM bit growth of approximately 30% this year. In the NAND space we believe there will remain a healthy balance in overall supply and demand. NAND ASPs, as you are aware, declined somewhat over the last quarter but is generally expected to stabilize over the course of the year, reinforcements of continued spending discipline across the industry. We anticipate that NAND WFE investment will include planar conversions and 3D NAND capacity additions in 2015 with the 3D investment being more second half weighted and for the first time the spending level more or less equal to the planar capacity components. Our outlook for 2015 NAND supply bit growth remains in the high 30s. Overall, we're projecting 2015 memory WFE spending in the range of $14 billion to $15 billion.

Thanks Martin. Good afternoon everyone and thank you for joining us today. As Martin mentioned in his opening comments calendar 2014 was a year of fundamental outperformance for Lam Research. The focus on market share gains and product positioning to take advantage of SAM expansion, combined with strong execution I think was clearly demonstrated in our financial results. We delivered record levels of shipments and revenue. We grew revenue at more than double the rate of WFE growth and we grew operating income at more than double the rate of that revenue growth. We generated $942 million in operating income for the year, which represented nearly 20% of revenue and we returned approximately $486 million to our shareholders through the initiation of our first dividend and our continued share repurchases. Specific to the December quarter shipments, revenue and gross margin were in line with the midpoint of our guidance and earnings per share were at the high end of our range. In the December quarter shipments came in at $1.247 billion, which was up 12% sequentially. The combined memory segment made up 53% of total system shipments and this was up from 44% in the prior quarter. DRAM shipments were strong and contributed 43% of system shipments, which was up from 18% in the prior quarter. DRAM investments continue to be heavily focused at the 20 nanometer node. NAND represented 10% of shipments and this was down from 26% during the September quarter. The Foundry segment remained steady in the December quarter, accounting for 32% of system shipments versus 45% in the September quarter. Foundry shipments were relatively broad-based with investment for sub 20 nanometer FinFET being completed by 28 nanometer outlays. The Logic segment grew and made up 15% of system shipments, and this was up from 11% in the prior period. We delivered $1.232 billion in revenue in the December quarter. Revenue increased 7% from the prior quarter, marking the sixth consecutive quarter with revenue above the $1 billion mark. Gross margin for the period came in at 45.4%, essentially at the midpoint of our guidance and pretty consistent with our near-term financial model. And as I previously mentioned, you should expect some quarter-to-quarter variability in gross margin due to a number of factors such as product mix and customer concentration. I think our financial model remains the best way to think about our ongoing financial performance. Operating expenses increased to $330 million but actually decreased as a percent of revenue compared to the September quarter. SG&A was flattish while R&D spending for items such as engineering program and associated materials for our next generation products increased. We continue to make the strategic investments necessary to successfully position the company for sustainable growth and will adjust our plans based on our ongoing assessment of these opportunities. Operating income in the December quarter was $230 million with operating margin of 18.7%, which was 30 basis points below the midpoint of our guidance. The tax rate for the quarter came in at 9%, and that compares to 18% last quarter. The December tax rate benefited from the reinstatement of the R&D tax credit in the United States as well as a more favorable jurisdictional mix of income. A tax rate in the middle teens would be reasonable for you to include in your forward-looking models. Based on a share count of 174 shares, earnings per share for the quarter were $1.19, and this was at the high end of our guidance primarily due to that favorable tax rate. I would like to remind you that the share count includes dilution from all three of our convertible notes at this point. The net dilutive impact is 12 million shares on a non-GAAP basis. With the first of our convertible notes maturing in 2016 and given the current favorable interest rate environment we will be evaluating our alternatives to refinance this note. Dilution schedules for the 2016, 2018 and 2041 converts are available on our Investor Relations website for your reference. In the December quarter we spent about $46 million and took delivery of approximately 590,000 shares at an average price of roughly $77. We also took delivery of 278,000 shares from the accelerated share repurchase that we executed during the September quarter. And we made pretty good progress on the $850 million share repurchase authorization that we announced in April 2014 with greater than 40% of it completed during the first eight months. And finally, we've returned $0.18 per share in dividend distributions to our shareholders.

Yeah, good afternoon. Thank you for taking my questions. I guess first question, was hoping to get some clarity from you on directionality, I guess the shipments just going into Q2 and the second half. Last quarter you talked about an uplift a quarter out, curious if you could provide some color on that front and what the key moving parts are and assumptions?

I guess the answer to that question is once bitten twice shy. I think one reason I did share perspective today, CJ, around kind of backlog is I think it should kind of tell you something about the trajectory of the company and the industry spending kind of out, that we have but I am going to kind of avoid a level of specificity at this point in time for the June quarter. I do think and I think I mentioned this in my prepared comments that the outlook for the first half is reasonably clear to us and pretty strong and there are still a lot of months left in the year for us to get really specific about the second half. But I don’t think it’s unreasonable seeing we haven’t had a short reasonable balance this year.

No, I mean the right way to think about, kind of our levels of spending are what we perceived to be our sustainable level of profitability. Yeah, we were a little bit below that operating income but I don’t think 30 basis points is too much. We are ramping up some of our R&D activity as I kind of indicated in my prepared remarks which is part of what you are seeing go on in the March quarter. But the right way to think about how we intend to spend money will be to be roughly consistent with financial models that we put out. And right now we do have a little bit of gross margin headwind that I described but the spending level is still pretty well within those models.

I think just to add, I think Doug’s prepared comments that kind of describes the addition of headcount also need to be put in context. And so I don’t spend a huge amount of time talking about this because I think across the industry it’s not a very easily comparable benchmark but for the company, a revenue per employee trajectory is not an unreasonable reference for you to be thinking about. And in fact through the December quarter and the March guidance that we have given today, the revenue per employee is getting better, not worse. So I mean I think the context for spending more money is the growth of the company is pretty significant and our focus as a leadership team is making sure we are effective doing that, before we start worrying about efficiency, which doesn’t mean we don’t try to do both. But the customer trust exposure for getting a ramp wrong is not a risk we are biased to take - we are biased to get this effective so that we can really, really kind of deliver sustainability for the story that we are telling here today.

Great, good afternoon guys. Thanks so much for taking the question. Congratulations on the good results. Obviously you guys don’t talk about orders on the call but the shipments going up quite a bit would suggest order activity overall is healthy over the last couple of quarters. Can you talk about any pushes or pulls in order activity overall, obviously your guidance for shipments is a little bit stronger. Is there any movement within that one way or other in the various sub-segments?

Thanks Jim for your comments at the beginning. I don’t think that this is anything new for us to communicate. I think the industry generally saw a little bit of a push on some foundry investments, saw a little bit of a pull on some DRAM investments and the rest of the industry more or less kind of played out in the way we had expected. I do think it is a little bit more concentrated shipment number for us from a customer perspective than even we were anticipating in the October timeframe relative to March 2015. But I think those messages are well communicated right now by the rest of the industry.

Thank you very much. Martin, first in terms of overall memory spending in the year, do you see it biased first half versus second half in terms of DRAM, maybe potential be more first half weighted while you see DRAM flash more second half weighted or do you see kind of a balanced spending across both segments throughout the year?

So I kind of have two answers to your question. One of them is kind of from the bottoms up forecasting and planning, which is always a little bit limited, when you start kind of focusing on something six months from now and nine months from now but our bottoms-up analytics would tend to support what you just described, which is a slightly stronger first half for DRAM and a slightly stronger second half for NAND. But frankly when is all is said and done here I think we're likely to see a little bit of strengthening in the second half but time will tell, that may play out, it may not play out but the basic premise that you just described.

Hi, guys, thanks. I jumped on here a little bit late, but my first question is around the inventory. Doug if I look at, just look at days, days are up to like 125 and I am wondering if that portends some view on June. I know you don't want to say too much about June, but I am wondering if that portends some view that maybe June shipments are going to be up?

Yeah, I am not going to give you kind of what June looks like. I did describe purposely in my prepared remarks that we expect shipments to be strong in the next couple quarter, without giving you a direction from March to June. And we've built inventory in anticipation of that. So you should expect that those inventory levels come down in the back half of the year likely, but expect us to update that on a quarter-by-quarter basis, Tim.

Thanks, hi Martin and Doug, nice results last year too. I had a follow-up question on the 3D NAND spend in the second half of the year. Just curious if you think the spend on 3D NAND in the second half will be mostly driven by one customer, or you think it’s equally spread across the customer base? It’s been a long time since we have seen any meaningful 3D shipments too, I guess or starting customers, just curious on the diversity you are looking at?

I would say there is clearly an expectation that one of the customers, well publicized is kind of in the lead from kind of an investment timing perspective. But we expect this year to have kind of a diverse spending and anticipate all four NAND flash memory companies participating in a meaningful way. So I expect the spending to be more distributed in ‘15 than it was in ‘14 and just to kind of give you a little bit of a number on capacity we expect to be shipped in. So I think in the last call I mentioned that we were thinking that we ended the calendar ‘14 year with approximately 60,000 wafer start, 65,000 wafer starts, of shipped-in capacity 3D NAND. And as best we can tell that more or less kind of played out as anticipated and we think by the end of ‘15 that 130,000 wafer starts plus or minus 10 is not a bad kind of reference point to have.

Hi, thanks for taking my question. On the $34 billion WFE outlook, Martin can you talk about the swing factor that can take it to $36 billion or the high end of the range? Which segment can take it to that range?

Yes, I guess anyone can in theory. I think the 3D NAND conversion is more likely to influence in a positive direction than anything and that’s really a statement on the size of that transition and the implications of it and obviously the degree of uncertainty that exists in terms of kind of market penetration of that device at this time. So I do think kind of FinFET conversions can accelerate, if there is kind of momentum that it is in excess of stated plans in terms of going from planer to a FinFET device, but it feels to me like the upside is kind of greater in memory than foundry logic and greater in NAND than DRAM. But I guess in theory all of them can move in a positive direction.

Great. Alright, thank you operator. That’s all we have time for today. Thank you for your participation and we look forward to talking with you again next quarter.