Lam Research Corp (LRCX) — Q3 2015 Earnings Call Transcript

Thank you. Good afternoon, everyone. And welcome to the Lam Research Quarterly Conference Call. We would like to thank you for accommodating our change in schedule this week. 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 March 201 quarter and our outlook for the June 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. In recognition of the competency, capability, and effort necessary to repeatedly deliver record levels of performance, I'd like to begin today by extending my sincere thanks to the employees of Lam Research, who strive tirelessly to meet commitments made, and build competitive advantage for the company. Defined by the substance of our culture, we are intuitively predisposed to find ways to contribute to the success of our customers through the delivery of innovative technology, trusted productivity, and speed to solutions. It is in this context that we continue to be very pleased with the fundamentals and the trajectory of the company and are more inspired than ever by the long-term growth outperformance opportunity. Thank you, all. As is customary, I will now review our March quarter accomplishments, highlighting the multiyear outperformance drivers and their relevance to our strong results and guidance today. We will then summarize our 2015 outlook for wafer fabrication equipment spending and conclude with some updates on our strategic focus. The March quarter concluded with results generally in line with our expectations above midpoint for all guided metrics. This represented our seventh consecutive quarter of greater than $1 billion in revenues and was the highest yet reported levels of revenue shipments and operating income, each showing double-digit growth from the same quarter last year. The delivery of this performance, we believe, is a strong endorsement of our culture and values. The commentary on levels of customer trust and the validation of our ability to scale effectively. The combination of a strong March quarter and a stronger next quarter guide, along with a perspective that there is some uniqueness to the market dynamics for Lam, provides the company opportunity for a strong second half. We continue to believe our performance is the result of increasing levels of trust and support from customers broadly. Markets that are sustaining, sustainability growing faster than the average WFE baseline, a differentiated Lam product and service offering which, when deployed in a true partnership with customers, are together facilitating the technology inflections of multi-patenting, 3D device architecture and advanced packaging. These inflections are at the core of semiconductor scaling, critical to our customers and to their customers' success as they perceive competitive differentiation with higher performance, more power-efficient and more cost-effective devices. We believe that inflection spending continues to raise proportionately tracking to one-third of WFE this year and reaching the 50% level in 2017. A viewpoint that remains a major influence over our confidence in achieving multiyear growth outperformance. The multi-patenting and 3D device architecture inflections are now well recognized as being etch and deposition intensive, making likely the segment grow faster than the market for the next several years. This represents opportunity and risks both, but the continuous strengthening of our product portfolio creates a growing SAM. The headline today is we now compete for 28.5% of total equipment spending and that number we believe will exceed 30% by calendar 2017. Lam's opportunity to outperform continues to have upside through market share gains. We previously reported a greater than 50% inflection-based market share headline and further achieved applications defense and penetration performance so far this year above expectations at the 90% success level. Both data points reflect good momentum against our three-year market share target of 4% to 8% increase in deposition market share, 3% to 5% in etch, and 5% to 10% in clean. Over the last several quarters, we have talked about the success of our vector ALD product with a targeted tripling of business this year and an equivalent increase in breadth of customer engagement. Growth in our ALD presence is primarily driven by multi-patenting applications, augmented by the successful expansion of our product to other applications such as high aspect ratio liners and image sensor devices. Our momentum in this fast-growing market segment is enabled by our technology, which is delivered with the productivity necessary for high volume manufacturing adoption. In conductor etch, we continue to extend our leadership with the most comprehensive product portfolio in development capability. We are extremely pleased with the market adoption for our latest generation Kiyo etch products; illustratively, we recently secured another critical 3D NAND conduction etch position at a leading device manufacturer, and as a result, the Kiyo product addressing this market will now have more than double its install base in the first half of calendar 2015. This type of success builds fundamental capability and competitive advantage from demonstrated production performance, and it validates our conviction that for deposition and etch combined, we believe we have secured 90% of the critical 3D NAND's application selection so far made in the industry. We have long partnered with customers to demonstrate the value of our Kiyo with hydro technology, which allows for localized fine-tuning. Significant benefits are being seen for patenting and CD-sensitive applications, the differentiated on-wafer results are accelerating adoption of this unique and well-patented capability. Tactically, as we have stated many times, we don't win or defend everything successfully, but if we continue to perform more than not, our momentum builds. Strategically, we recognize that our greatest areas of growth opportunity remain in dielectric deposition and dielectric etch; accordingly, we prioritize investments and engagements to realize that vision. Now turning to our industry update. With the first quarter of 2015 concluded in line with our expectations and disclosures by companies in aggregate more or less consistent with our planning assumptions, we maintained our general outlook for WFE investment. The predicated trends in semiconductor consumption, including demand at the leading etch, the value proposition of technology investments by our customers, and the well-established spending discipline, we believe together supports a growth outlook. The perpetual environment of change and fluctuation, real and perceived, is not new. Our focus on achieving long-term success is a key guiding principle. We believe that the fundamentals remain strong for our company. This is an opportunity-rich environment where our long-term commitment to customer trust across all market segments and all active technology nodes combined with a vigorous pursuit of technology leadership across our full product portfolio are never more important. In the DRAM segments, we see disciplined investment strength across multiple customers, notwithstanding the well-publicized weakness in PCs. Market demand continues to be driven by mobile and enterprise DRAM growth, DRAM investments which have appeared biased toward the first half of 2015 are very efficient, and focused primarily on technology conversions to 20 nanometer. For NAND memory, we believe that it will remain a healthy balance in overall supply and demand. We still anticipate that investments will include play and conversion and 3D NAND capacity addition in 2015, with the 3D investments being more second-half weighted. At this time, we project 2015 3D NAND investment to be slightly greater than planar. Overall, we anticipate 2015 memory WFE spending at or slightly above the $15 billion level. For the foundry segment, we continue to see that investments in 2015 are focused on FinFET enablement at a number of customers as they compete for opportunity in their marketplace. The previously noted 28 nanometer classes of additions are occurring as anticipated. Our view of foundry investments is slightly lower than the spending levels we saw in 2014, again reasonably distributed across the industry and the year. We expect logic spending of between $6 billion and $7 billion more or less flat with 2014, reflecting a sustained commitment to technology conversions with optimized reuse of the installed base. This downward market pressure is offset to some level by mobile demand-driven spending within the image sensor segment. Bottom line, we continue to model 2015 WFE at $34 billion, plus or minus two for the year. As we highlighted last quarter, execution on our current opportunities, continually increasing customer trust, building strategic alliances with key customers, profitably growing the business, and preparing for the next set of technology inflections are areas of strategic focus. Our commitment to R&D is the most fundamental element of sustaining outperformance for the company, and as such we target to allocate more than 60% of operating expenses consistently to the delivery of innovation, fundamental research, and concept feasibility evaluations, seeking to optimize both short-term performance with our ambition for long-term sustainable growth. We continue to realize the benefits of that focus in atomic level processing and control in deposition and in etch, both which effectively leverages our established strength providing a credible and we believe executable technology roadmap for the future. As we continue our journey of growth, 2015 is a year which in many respects solidifies and expands upon our successes of 2014. It is the year where we target to build competitive advantage through an intense focus on execution. We are pleased by our performance so far, but believe our opportunity and potential are greater. We aspire to strengthen the foundation of success and ensure that our most enabling vision objective to make Lam Research a place where successful people want to work is a long-term competitive advantage that builds with intensity and drives value for the full community of stakeholders.

Thanks, Martin. Good afternoon, everyone. And thank you again for joining us today. We are very pleased with our results for the March quarter, a quarter where we achieved record levels for shipments, revenue as well as operating income. Each of these items grew double digits sequentially. We delivered performance above the midpoint of guidance for all of our metrics and delivered earnings per share above the guided range. Execution from the company was clearly very strong in the quarter. Shipments for the quarter were $1,497 million, which was up 20% sequentially and again near the high end of the guided range. I just point out this was the fastest sequential shipment growth in the last seven quarters. Memory shipments continued to be strong in the quarter with the combined memory segment making up 67% of the total system shipments compared to 53% of the prior quarter. DRAM shipments represented 45% of system shipments, which was up from 43% in the prior quarter. NAND made up 21% of the shipments, which was up from 10% in the December quarter. The foundry segment was flattish sequentially in dollar terms, accounting for 24% of system shipments. And I remind you that foundry in the December quarter represented 32% of system shipments. Finally, the logic and other segment was slightly down, contributing 9% of system shipments. While we don't normally comment on bookings, this quarter I just mentioned that as we ended the March quarter, the book-to-bill was comfortably above one. We delivered record revenue of $1,393 million in the March quarter, an increase of 13% from December. Gross margin for the period came in at 44.7%, again towards the high end of our guided range. Better utilization from the factory and field, in addition to a slightly more diverse customer base, upped gross margin. Also helping was the fact that we made solid progress in improving the manufacturability of some of our new deposition tools. As we shared before, our excellent gross margins are a function of a number of factors such as business volume, product mix, and customer concentration, and you should expect to see variability quarter-to-quarter. I'll remind you that our financial model is still the best way to think about our ongoing performance in the longer term. Operating expenses in the quarter grew to $345 million but decreased 2% as a percentage of revenue to 25%. Spending was above the midpoint of the implied guidance primarily due to an increase in profit-dependent expenses during the quarter. R&D spending increased sequentially while SG&A declined. We continue to drive our spending profile to have an increasing portion of our operating expense in R&D versus SG&A. R&D represented a greater percentage of total OpEx in March compared to last quarter. These R&D investments are critical to preparing for the current as well as future technology inflection centers in the industry. Operating income in the March quarter came in at a record level of $277 million, up 20% from the prior quarter. Operating margin was 19.9%, up from 18.7% in December and again at the high end of the guided range. Operating margin improved sequentially as we delivered leverage from the growth in revenue. The tax rate for the quarter was up slightly as expected to 11%. The tax rate in the mid-teens remains the right level for you to include in your models. The March tax rate was a little below the normalized level due to more income generated in lower tax jurisdictions as well as a provision to return true-up. Based on a share count of approximately 174 million shares, earnings per share for the March quarter were $1.40, above the high end of our guided range. The primary drivers of this being the higher revenue and the above midpoint gross margin. The share count at this point includes dilution from all three of our convertible notes with the total dilutive impact being 12 million shares on a non-GAAP basis. I'll remind you that the dilution schedules for the 2016, 2028, and 2041 convertible notes are available on our Investor Relations website for your reference. During the quarter, we spent $112 million and took delivery of about 1.4 million shares at an average share price of $78.45. We also returned $0.18 per share in dividend distributions. At the end of the quarter, 11 months into our two-year program, we had completed about 55% of the current $850 million share buyback authorization. Let me now turn to the balance sheet. Cash and short-term investments, including our restricted cash, increased notably in the quarter to $4.1 billion. We decided to take advantage of what we perceived to be a favorable interest rate environment and completed the issuance of $1 billion in principal value of investment-grade senior notes. The issuance creates some flexibility for the company on a number of fronts. One of those being something I mentioned in last quarter's call. We have the first of the convertible notes maturing in mid-2016, and we plan to use a portion of the proceeds from this issuance to refinance those notes. Cash from operation was $191 million, which was up from $161 million in December. This cash generation ended up being a little better than I foreshadowed last quarter due to a little bit more linear shipments during the quarter. Day sales outstanding increased by two days to 68 days. Cash generation was partially offset by our capital return programs as well as capital expenditures. We exited the quarter with deferred revenues up $485 million, which was up from $374 million in December. I'll point out that this excludes $45 million in shipments to customers in Japan which will revenue in future quarters. These Japanese shipments remained as inventory on our balance sheet. Company non-cash expenses included $33 million for equity compensation, $40 million for amortization, and $31 million for depreciation. Capital expenditures were $32 million, which was down from $61 million in the December quarter. CapEx in this business can at times be lumpy due to the timing of certain investment programs. We exited the quarter with approximately 7,000 regular full-time employees. Now looking ahead, I'd like to provide our non-GAAP guidance for the June quarter. We expect shipments of $1,600 million plus or minus $50 million. We expect continued strength in memory and slight growth in both foundry and logic. Revenue of $1,460 million, plus or minus $50 million. Gross margin of 45.5%, plus or minus one percentage point. Operating margins of 21%, plus or minus one percentage point. And finally, earnings per share of $1.46, plus or minus $0.07 based on a share count of approximately 174 million shares. Given we just issued new debt, I'd like to provide you some guidance on how to model the P&L impact from the 2020 and 2025 senior notes. On a quarterly basis, we anticipate the incremental interest expense net of interest income and the tax impact to be between $4 million and $5 million. That concludes my prepared remarks. The operator, Martin and I would now like to open up the call for questions.

Great. Thanks so much, guys. Good afternoon and congratulations on the terrific results. Martin, when you made comments about the industry environment, I thought you emphasized the word ‘in aggregate’ there has been no change. Obviously, there have been a couple of high-profile cuts. Your use of the word ‘in aggregate’ there and the fact that you haven’t changed the overall result suggests there may be some other customers that are actually spending a little bit more than they suggested earlier in the year. Is that a fair way to interpret your comments?

Yes. I think that's fair, Jim. And the use of the word 'aggregate' was deliberate. One of the realities is obviously when we're opining on what's changing in the industry outlook, each of us has a baseline and just occasionally those baselines are the same, and just in case they are different, sometimes we are anticipating announcements, sometimes we are not. But what has changed quite clearly is we've seen the public disclosures from the logic and foundry space that I think is well understood in the industry. For us, we've got some pretty positive and meaningful offsets in logic in or around image sensor application opportunities, so that's kind of an offsetting positive. The memory investments in 3D NAND are a little stronger than we had anticipated in the second half. So I think now we've gone three sequential earnings reports with a slightly better outlook in 3D NAND. If you back up two, we said we thought planar was greater than 3D NAND. Then we said we thought they were about the same. And today we said we believe 3D is slightly stronger than planar investments in the calendar year. So that's a little bit better. In DRAM, the investment level is probably slightly higher than we anticipated, but I would say this is slightly more efficient because the balance of conversions got slightly stronger, and you remember the odds which we talk about in DRAM really not technically as because they are just a compensation of the consequence of technology transition. So we had some foundry and some kind of microprocessor negatives, we had some image sensor, some 3D NAND, and some DRAM positives. At the end of the day, our WFE number I think is within $200 million or $300 million today where we estimated to be in January.

That's incredibly helpful, thank you. And if I could ask for my follow-up, on the 3D NAND side, would you characterize that strengthening in the back half being driven mostly by one customer or is it a little broader than that? Thank you.

I think it is pretty distributed, Jim. I have a sense at this point that everybody is kind of invested in the substance and the reality and the benefits of the transition, and the investments are recurring at a different pace obviously from one customer to another. But as best I can tell, everybody is describing an ambition to have HVM capability in calendar 2016, which means they are investing in a meaningful way in the second half of this year to accomplish that objective.

Thank you very much. Guys, I wanted to ask a question about 3D NAND, and it sounds like it is a little better than what you thought during the back half of the year. But you said last call that you thought you would add about 70k, not you but the industry would add about 70k, I think going from 60k last year up to 130k closing this year. Does that mean that 70k has gone up a bit?

I think that number is not a bad reference point today. These numbers are, when you are talking about additions, they are pretty big numbers for 5,000 or 10,000 wafer stocks. So I am not sure I would extract a very meaningful headline today in terms of the number of wafer stocks. Similar commentary today. I do think that perhaps our view is that there is maybe 10,000 wafer stocks of capacity shipped in, but it won't be productive and installed by the end of the calendar year. So we probably have revised our outlook in terms of what will be in process being qualified. But it doesn't play a role at all in terms of supply and demand balance in the industry. So it is the same message more or less.

Got it. Okay. Thank you. And then, Doug, you said last call that the bottom-up forecast was at the time, implying that technically, the first half looked a little bit better than the back half. But now, given that June is in fact that much better than what you thought at that time, do you still think that the first half, have we just pulled into the first half, or does the annual number in fact look better than what you thought it was at this time last quarter?

Yes, Tim, as you know in this business you don't have perfect clarity in the second half when you are sitting here at the end of March. But our expectation is, as Martin described, a strong second half. There may still be a slight bias to the first half in terms of shipments. It is probably not lost on you that deferred revenue this quarter suggests that there might be more balance in revenue than shipments, but honestly we are going to guide one quarter at a time. Still a bit early for us to give you definitive visibility in the second half, but a little bit of color anyway.

Hi, thanks for taking my question. Just wanted to follow up on the DRAM piece. Given that DRAM pricing has been falling and PC demand has been quite soft this year, do you have confidence that this spending plan will hold up in the second half? I guess maybe you can give us waiting just specific around DRAM in the first half and second half?

Yes. It is a little dangerous to say we are really, really, really confident because life doesn't ever work as exactly as you anticipate it. But I do think the headline of discipline in the industry that we talked about a lot now is a valid assumption for the rest of the year. I think the entire supply chain is invested in accomplishing that objective. None of us get excited about wild swings in the volumes of our business. And frankly one of the things that doesn't make me feel good today, the only primary change that we are talking about today in DRAM is that they got more efficient. So it is a slightly bigger number of investments, but the value delivered from those investments in the industry is greater than we originally anticipated, because there is now a greater proportion of investments assigned to conversions than we originally thought. So that's a very positive headline from my point of view regarding sustainability. And let's not forget that even with the pace of investment we are describing here, by the time you get to the end of calendar 2015, probably two-thirds, if not slightly more, of the installed base has yet to be upgraded to the 20 nanometer technology node. So that's, and I think a multiyear sustainable statement.

Okay, that's very helpful. And I was just wondering on the R&D line, a big step up in the March quarter. On an absolute basis, do you think R&D stays around that level or does it just vary as a percentage of sales in there to keep it in that range?

It will hold steady. We said that revenues will be a little stronger in June, total spending will tick up slightly, but it is probably in a pretty steady state level through the next quarter or so.

Percentage wise or absolute dollar-wise or both I guess to the year maybe.

Absolute dollars.

Thank you. Thanks for taking my question. My first question is for Martin. In terms of the 3D NAND and DRAM, particularly as you look to next year, how do you think the spending between the planar and 3D would be for next year? Is it fair to assume that maybe close to 90% or even more could be 3D NAND? And secondly, as you rethink about spending mix between conversions from planar to 3D and 3D new capacity, how does that affect your business? Just you mentioned like from DRAM the conversion being stronger resulted in a lot of high revenue for you; I would imagine like if there is more portion of the spending going to conversion, spending on deposition and etch would be a lot stronger?

Yes. I would say at a high level, and it is kind of segment unspecific, the more efficient the spending for the customer, the more sustainable their investment is and the more likely they are to be successful. So we actually, in general, are very positive when we see conversions and upgrades. Specific to the first part of your question, while I am not trying to imply that I could apply on a percentage per se for 3D NAND, I definitely think it is the majority of spending next year. And as best I can tell, most of the plans of the customers is not greenfield. Their existing facilities and their conversion based, and the implications of that to our business are very good because the 3D NAND transition is deposition and etch intensive, as you know, so we care about sustainability. Conversions are very good. Whether it is new or conversion, the demand for components is going to be disproportionately and positively a big feature of that spending.

Thanks, Martin. And just one question on the linearity of CapEx this year. Some of your peers have talked about foundry spending being kind of flattish through the year while DRAM is mostly first half faded. I just wanted to hear your thoughts on if you are seeing similar trends.

Yes. I don't think we got kind of perspective that much different from the rest of the industry. So I think we’re kind of more or less aligned to grow up to that message.

Yes, good afternoon. Thank you for taking my question. I guess the first question when I look at your results implied in your first half guidance, can you comment on whether you are pulling in here your talking model for 2016, 2017 that it actually may absolutely come to fruition in 2016? I would love to hear your thoughts on that.

Yes, C J, I am not ready to update the financial model. You should expect to hear an update from us when we get to our investor event at SEMICON. Obviously, I feel good about what we are tracking relative to that model, but I am not ready to give you any update today.

Okay. Sure I guess maybe as part of then when you think about the right parts of the market that you lever too, what do you principally drive your outperformance, attribute your outperformance in the first half? Is it memory exposure, is it share gain in LDH, is it double patenting? I would love perhaps rank order of what's driving this relative outperformance near terms and then perhaps looking to the back half of the year with 3D ramp, NAND ramping, what the key drivers look like there?

Well, the memory component obviously features in a pretty meaningful way as communicated by Doug's segmentation comments on March quarter and on the June outlook. Right, so in terms of rank order first half of the year, there is a very strong message for us there. But the outperformance commentary from the company is a byproduct of kind of three inflections we've talked a lot about right so multi-patenting, 3D device transition in memory and logic both, and advanced packaging. These are the reasons we said we would with execution, outperform, and these are the very same reasons that we are outperforming. They are real, and our focus is execution. I mean you heard me say in my closing that intensity of focus on execution here is kind of everything, because we have at least by the decisions of customers set ourselves up for a greater than 50% market share of inflection-based business. And as long as we execute that, the story for the company is extremely positive. So we got a little bit of kind of momentum on that obviously from a memory point of view in the first half relative to our model. It is clear, and we talked about it several times, we are growing the company a little faster than we had originally anticipated, in large part because of the multi-patenting transition that we are accelerating particularly in DRAM earlier and faster than we originally modeled. We are working really hard to make sure all the profitability of that growth kind of plays out consistent with our models, and that's the reason why we don't change this model more than kind of once a year. So I feel really good about our growth and there are a lot of people in Lam Research really busy making sure growth is profitable.

Thank you very much, and also congratulations. First off, in terms of 2015 and your comments about planar NAND versus 3D NAND and seeing I guess seeing the pick-up and improvements on that front, do you see any potential shifts in dollars from original planar NAND investments that are not going to 3D, or has your number basically stayed static on planar NAND or you are just seeing more 3D NAND in the second half?

We have tweaked less planar conversion than we originally anticipated. But our assessment today has been that overall NAND WFE investment is greater today than we anticipated in January. So there are some adjustments but the dollars of investment today we believe are higher than we anticipated in January. Just a little bit, Patrick.

Great, that's helpful. And maybe Doug on the financial side. There has been a little bit of discrepancy that's gotten a little bit larger between shipments and revenues over the past few quarters, which does give you a little bit of visibility on the revenue front. However, is that more related to new tools that are getting out in the field that takes a little longer in revenues, or is this something different on the accounting side that we should be aware of?

There is nothing different on the economic side. It is a little bit of new tools. It is also the fact that we are shipping this to some new fabs, and it can sometimes take a little bit longer to get the acceptance in that situation.

Thanks. Hi, Martin, Doug also congrats on the execution. I also have a follow-up question on 3D NAND. We've heard recently from some of the customers giving updates on the 48-layer for 3D NAND. Do you think the second half is also perhaps benefiting from 48-layer 3D NAND being significantly more capital intensive than perhaps 32-layer NAND was last year?

Maybe we need to remind everybody we are actually not a NAND memory company. I guess we have perspective, but our perspective is never as reliable as our customers on this point. It is a little hard frankly to apply on capital intensity from where we sit. We have very good visibility to deposition and etch, and indeed a 48-layer has more intensity of deposition and etch than a 32-layer, and 60-layer has more than 48, and so on and so forth. Now performance benefits and yields all have to play out for the substance and validity of those plans to kind of emerge. So we are not really articulating a headline today that I think is the byproduct of the number of layers in a device changing from our expectations in January today. I think more we are articulating that some of our customers have made kind of some changes in their plans a little bit regarding the balance of planar and 3D investment. So I think that's more the message than the kind of layer account.

Okay, thanks for sharing that. And then just a follow-up question on the operating expense trends going forward. Now that some of these key inflection technology programs seem like they are well underway at customers such as FinFET and 3D, can we think about Lam's OpEx spend normalizing a little bit lower? Or are there the big projects like FinFET and 3D that have come down the pipeline that we just don't know about?

Stephen, as always in technology, you have to be innovating your capability such that you are growing revenues two years down the road. The right way to think about the level of our spending, I would encourage you to go back and look at that financial model, that will answer the question for you.

Hi, good afternoon and congratulations on a very well executed quarter. On your memory spending outlook for 2015 going higher this year, can you just break out the rough mix DRAM versus NAND spend within that memory view?

Yes. I can if I get a slide in front of me. Okay, here we go, so we have today an assumption of between kinds of I would say 8.5 and 9.4 billion for DRAM. So you can answer the NAND's question. There is a little bit of other memory, but 8.5 to 9 is our assumption on DRAM.

Appreciate that, Martin. And then for Doug, the team is looking for solid 80 basis points of gross margin improvement here in June. How much of that is due to a more diverse customer base versus some of the cost improvements and new tools that are starting to ship? And given your pipeline and product visibility, does the buyer suggest that you can kind of maintain this sort of 45% plus range as you move to a stronger second half over the year?

Yes, hi, Harlan, it is pretty evenly split in terms of the sequential improvement in gross margin between tool maturation, which is about manufacturability, as well as the slight running out of the customer base. So it is a little bit of both. Relative to expectations beyond that, again the reason I point to the financial model is how we are thinking about the profitability of the company and how we are trying to run the company. So we are kind of in the sweet spot where you would expect us to be. If you go back and look at those models, so this will probably be steady as you go for the most part.

So I mean we feel really good about the growth in the company. Hopefully that's kind of clear; we are working really hard to make sure we get the profitability expansion that we were targeting. The most stressful point, as we talked about many, many times, is the gross margin percentage is still one which is a very, very, very hard thing to execute to because you have kind of competing influences in terms of introducing kind of technology as fast as you can possibly get it to the customer, and at the same time maturing it so that in HVM buy-in, in a high volume environment, the economics are where you want them to be, and that's a really tough thing to pull off. The long-term success of the company is more important than short-term success. Our customers have high expectations of our industry that contribute to their business, and so we are really focused, as Doug just said, on the long-term financial models that we've given you and we feel really good about growth, and we are working really hard on profitability.

Thanks for the question and congratulations also on a good result. Doug, I was wondering if you could maybe just give more color on the end-market breakdown for June. I know you said memory will remain strong, but can you give maybe some little bit more color on the percentages?

Yes. I am not going to give you the hard percentages. As I said, memory will remain strong, so that's plus or minus what we did in March likely. And I said I expect logic and foundry both to be sequentially stronger. I am not going to get into quantifying it specifically, but that's a directional body language on it.

Okay. Cash flow generation has been excellent. I was wondering if you have a target for 2015 and, aside from the debt refinancing planned for next year, what other expected uses of cash are there? Could we see a dividend increase or another buyback?

Well, we are not changing the plans of the company as we sit today. So I told you we are 55% of the way through the two-year buyback authorization, and we are about like the end of the quarter we are 11 months into it, so that's got a ways to play out. I described part of that debt that we raised targeted towards refinancing the 2016 convertible notes. Beyond that, our priorities for cash are first the profitable reinvestment of the business. We are absolutely committed to returning cash to shareholders. I don't have an update for you on the program that we got in place. Then you got to invest in CapEx in the business as well. So that's how we are thinking about there.

The only thing that I would add is relative to we kind of target for cash from operations, we don't really pin out there for you guys, but clearly the operating income performance of the company is a decent proxy in the long term for our cash from operations performance. And in practice, when it is higher or lower that's much more to do with the direction of the industry and the company than anything else. So if business volumes are in a positive direction, i.e., growing at the end of this calendar year, then we will be much more likely investing in even more growth, and so maybe you don't drive cash from operations as strong as your operating income. If the reverse is true, then you drive better cash from operations. So that tends to be how we think about it over a multiple-year horizon; the operating income percentage is a good proxy for us in terms of cash from operations performance.

Hi, thanks for taking my question. Congratulations on a good set of numbers. Martin, what if anything is different about equipment reuse, especially at foundries, migrating from 20 to 16 and down to 10 nanometer? And if you can talk about either your end markets or any other end markets that are more prone to equipment reuse?

Yes. I would say, historically, the markets where reuse has featured significantly have had a limited number of kind of dies in a fab, and as such, microprocessor fabs and memory fabs have historically been kind of the perfect models of equipment reuse. Our customers get better at that, and we get better at supporting them. Frankly, it is in everybody's best interest in the long term that we are able to execute collectively consistent. But as it is always the case, there are two sides to every coin, and one of the realities is as an equipment company is the profitability level measured by percentage of profitability is often greater on kind of the conversion than the original equipment sale. And so you get a smaller dollar, but you get better kind of leverage in terms of the percentages. In the foundry space specifically, I would say where you have a really big customer with much focused demand requirements in terms of the number of dies, then you have an opportunity for reuse in ways that in a typical foundry with many customers and much die you don't have. We don't actually see any change today from the world that we anticipated. Maybe we were lucky, or maybe we put a lot of thought into anticipating it well, but I think we've been saying for a year we expected the equipment for 16-nanometer foundry die to have 90% to 95% overlap with the 20 selection. There is a lot of reuse potential, and our outlook today in terms of investments in foundry is just the same as it was before. Obviously, considering the recent announcement from at least one foundry customer.

Great, thanks. Very helpful. And then in response to Jim’s question, you mentioned the NAND incremental NAND wafer start per month for this year you think that’s 70,000, could you also verify at the DRAM wafer start for this year are still in the 60,000 to 70,000 wafer start range?

That's fine. It is about the same, Atif.

I have two quick questions. Martin, the first one is when you look at your ALD product, it looks like you are getting pretty good traction, but my sense is you are not developing that many layers that you compete in today. Is there a potential to grow that with the existing product or do you need additional investments to get more footprint on the ALD product side?

I think from a hardware perspective we are in decent shape, Krish. As is the case of hardware, it gets you about 25% of the results on the wafer, and the rest of it is kind of process and the material integration. And so there is always a lot of work to do in terms of precursor development and then process to get uniformity, selectivity, and conformality that we are targeting as a level of yield performance that makes sense for our customers. I think we are off to a great start. We are coming from behind, as you know, in ALD; picking up momentum of the company, I would say, is very positive. As I mentioned in my prepared comments today, we are taking kind of a very focused foundation and platform of growth and we are trying to broaden the applications now, but we have got tough competition, and we respect their capability as I hope just a little bit they might respect ours.

Got it, that's very helpful. And then a question for Doug. What is your mix of onshore and offshore cash?

We have to raise the debt; its cost is kind of evenly balanced.

Hi, this is Shawn in for Mahesh. Thanks for taking my question. Just one quick question. Martin, DRAM spending has been very strong for the past two quarters, and I think you mentioned that the efficiency of the investment is better than anticipated. So at the beginning of the year when you initially presented the 14 to 15 billion in memory, you said that spending would drive about 30% of bit growth. Do you think that pie in DRAM will be higher than 30% you mentioned before?

Yes, I mean I don't think that we have a position that is different from the industry on bit growth in any segment of the industry. We try to kind of triangulate as best we can, and the high 20s and kind of 30 levels is I think where the industry is. I think it is a very disciplined commitment by our customers. It doesn't serve anybody's interest for anybody to get ahead of this thing, and you got a lot of discipline through consolidation, and capable, as you know, supply chain for that to continue. So I hope it does.

Yes. Thanks for taking my question. A couple of follow-up. Just want to clarify on the 3D NAND. You said that the dollar spending is slightly higher than the planar NAND, and incremental capacity at is about 70, so does that mean that you still expect the NAND industry to be able to grow bit capacity by more than 30%? Or what am I missing here?

Yes. The answer is yes.

So more than half of the CapEx for NAND 3D, and so when we look into next year as maybe some of our customers are starting to reuse the NAND, should we assume some sort of a slight decline in capital intensity, or do you think this kind of capital intensity is sustainable for multiple years?

Well, I think we are not a very representative competitor to answer that question because our participation in this inflection is deposition and etch participation; that's a very powerful place to be. But we don't really want to get into applying capital intensity for the industry. I don't think there is another company in the equipment industry that is doing a much better job than us doing that. But I would say we are very invested in the opinion that our customers are focused on sustainability of investments, and they are going to do at least as much as you might want them to do in terms of conversions to make it efficient and sustainable. So what does that mean for us? I think it means we are in the right place at the right time with the right products, and if we execute, we can continue to strengthen some outperformance.

Got it. And then on image sensor, are these new customers or existing customers that are following new projects?

Existing customers.

Hi, thanks for taking my questions. So on your comment about DRAM, spending more dollars on conversion for this year, is that driving, is it a way you can break it down? Is it driving more incremental etch with deposition business for you guys?

Yes, is the answer to that. But I think that's just kind of headline on the intensity of etch from a conversion point of view. It is a very favorable transition for us. And it is a commentary on the patenting transition in etch and deposition both. So we believe that the total wafer fabrication equipment investment in DRAM is slightly higher than we thought. We believe it is more efficient to my earlier point, and we believe it should stay for the second of deposition and etch.

Okay, all right, that's helpful. And then on 3D NAND, I am curious, have you started to see shipment, or are you expect to start seeing shipments in the June quarter? And then sorry, a slide on an earlier question, in your ALD product that you talked about, is that tied to the 3D NAND investment or is it all the inflections that you mentioned?

Let's try and answer the first part of your question. If your first part of the question is 3D shipments, are they happening now? I mean they have been happening on a continuing basis. I mean there is always someone somewhere buying something for a 3D NAND application. So sometimes that's an addition to HVM capability, sometimes that's a first phase pilot, sometimes it is second phase. I mean this four guys have different timing and different commitments to investment, but I think everybody is there as an industry. We have two more guys we are going to try and get to here. So can we get to the next question please?

Hi, guys. Thanks for taking my question. Just one on the foundry side. If you would just give us an update on the total amount of 20 nanometer, 16, and 14 capacities that you are now expecting to see exiting 2015. Are you seeing a bigger shift towards 14 and 16 rather than 20? Also if possible share with us how you are thinking about the progression of this capacity into 2016. Thanks.

Well, as I said before, at least in the dialogues that we have with our customers, we are not really distinguishing too much between 20, 16, and 14. I mean there is a huge amount of kind of overlap in terms of equipment. The basic message today we think is the one that was communicated to you publicly in the last couple of weeks, that there are commitments to technology conversions. A little bit less today at the 14 and 16 kind of node for the year from an industry perspective than was originally anticipated. But I think that the basic commitment to FinFET conversion, first wave, and then the pilot investment in 10 nanometer are there. So that would be my comments on foundry. And we are assuming by the end of this year that the capacity that has been shipped in at or less than 20 nanometer is in the range of 200,000 to 210,000 wafer stocks per month.

Yes, good afternoon. First, a quick clarification. Did you say you had won 90% of the 3D NAND critical etch and deposition steps?

Yes. Which is disclosure, by the way, we made at SEMICON West a year ago. So I was really just kind of repeating that based on our assessment of critical and non-critical applications in that segment. We think the 90% headline that we communicated in SEMICON West is valid today. In fact, as I said in my prepared comments, we had a nice kind of reinforcement of that in a selection this quarter.

Okay. And then critical makes up what percent of the overall etch and dep for the 3D NAND?

We don't actually make that disclosure.

Okay. Then finally, when we look at the competitive front, are you seeing any increased presence with local vendors in places like Korea and Taiwan?

No. I would say it is a very constant competitive threat, and I don't think it is anything new. The reason, by the way, I said we don't disclose it is that the value of the critical position is much less to do with the percentage of the business. It is a reasonable percentage; otherwise, I wouldn't bother telling you. The value proposition of the critical win is you create cycles of learning for your company that your competition does not have. If you do that long enough, then your ability to be successful broadly in a marketplace is greater than theirs. So the value is not the percentage; the value is the learning and the critical feature and capability that we developed broadly in the marketplace.

All right. That concludes our call for today. Thank you very much for joining. A replay will be available on the website.

Thank you.