Lam Research Corp (LRCX) — Q1 2019 Earnings Call Transcript

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 o’clock p.m. Pacific Time this afternoon. It can be also found on the Investor Relations section of the company’s website along with the presentation slides that accompany today’s call. Today’s presentation and Q&A includes forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosures of our SEC public filings. Please see accompanying slides in the presentation for additional information. Today’s discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today’s earnings press release. This call is scheduled to last until 3 o’clock p.m. Pacific Time. As a reminder, the replay of this call will be available later this afternoon on our website. With that, let me hand the call over to Martin.

Thank you, Tina, and 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 midpoint of our guidance. In addition, consistent with the commentary made during our last earnings call, we are forecasting the December quarter to be up sequentially and we would still characterize, based on engagements with our customers, that our markets' outlook for the first half of 2019 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 this is only exacerbated by broader macro headlines such as trade, tariffs, and interest rates. Despite this context, we remain very excited about the long-term drivers for data economy enablement from the world of silicon and the complements of our products and services portfolio to the technology roadmap of the industry. In our opinion, next-generation device and systems architectures—along with the expansion of materials in chip design and manufacturing—creates compelling opportunities for our strengths 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 the partnership 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 a segment level, 2018 WFE looks a little stronger in logic and a little weaker in NAND and foundry relative to the assumptions we made three months back. With customer and Lam performance consistent with our December quarter revenue guidance provided today, calendar 2018 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 roadmaps, 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 has been a net positive so far for Lam in the calendar 2018. 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 two times faster than our installed base unit growth during the same period. Our worldwide process chamber counts now exceed 55,000 units compared to 36,000 units at the end of 2014, and this is the foundation for ongoing spares, 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 enhancement in areas such as tool analytics, preventive maintenance, and chamber matching to enhance productivity for our customers and create opportunity for Lam. In addition, driven by our customers' aspirations for better asset utilization in addressing the non-leading edge and 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 for December are largely as we shared with you last earnings call, and we should deliver more than $3 billion in cash from operations this year. We remain focused on investing in our profitable growth objectives while 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% at the end of year 2018 versus end of year 2017. We anticipate a healthy long-term opportunity for our customers and our company, 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 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 non-volatile memory revenue remained strong, representing approximately 51% of the system revenue, and that’s despite the anticipated reduction of spending in nearly every one of our NAND customers. DRAM represented 26% of system revenue. DRAM spending continued to be focused on conversions to both the 1x and 1y nanometer node. The foundry segment was stronger in the quarter, accounting for 17% of system revenue. Finally, the logic and other segment contributed 6% of system revenue, pretty much consistent throughout calendar 2018. We continue to see strength in the China region, with 25% of our revenue generated there. The strength in China came from both foundry as well as memory. Nearly two-thirds of the revenue in September came from domestic Chinese customers. We delivered revenues of $2,331 million 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%. 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 variability quarter-to-quarter. Operating expenses in the quarter were down to $451 million, a decrease of $57 million from the June quarter. R&D comprised nearly two-thirds 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 six 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 of 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, a tax rate in the low to middle-teens is the right level to include in your models. I will point out that you will see fluctuations around this quarter-to-quarter. Based on share count, we’re approximately 165 million shares. Earnings per share for the September quarter were $3.36, again at the high end of a 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 these was approximately eight million shares. I’ll remind you that the dilution schedules for the remaining 2041 convertible notes are 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 the 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 compared to $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 nine 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 2.7 times. This compares to 3.5 times in the prior quarter. We do expect to see turns improve in the December quarter. Company non-cash expenses included approximately $50 million for equity compensation, $36 million for amortization, and $44 million for depreciation. Capital expenditures were $56 million, down from $80 million in the June quarter. For the calendar year, we expect CapEx in 2018 to 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 $2.5 billion, plus or minus $150 million. We’re expecting a modest uptick in customer spending across multiple segments, gross margin of 46%, plus or minus one percentage point, operating margins of 27.5%, plus or minus one percentage point. 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 the 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 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.

Good afternoon. Thanks for taking my question. I guess, first question is, as you think about your first half outlook for calendar 2019, definitely coming in stronger than many of us thought. Can you walk through 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 Lam-specific or timing of image sensors coming in, we would love to 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 the overall WFE headlines. So, when we think about calendar 2019, obviously there has been some continuous 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. I would expect honestly that our revenue levels will be incrementally higher in DRAM, logic including image sensors, and also foundry. I would expect NAND to be down over half in the second half of 2018 compared to the first half of 2019. Relative to the proportion of our kind of revenue headlines that is the spares and services, the installed base business, obviously, it’s a very important part of the economics of the company. 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 through the systems’ headlines for the markets and the customers that we have.

Very helpful. And if I could ask a follow-up, you’ve always done a great job of managing OpEx. Given the increased volatility Doug, how are you thinking about incremental margins from here? I think the targeted 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 has tainted you.

Yeah.

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. One of the things I’ve purposefully pointed out is the March quarter is a 14-week quarter, so there’s an extra work week in there. 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. Don’t forget those things as you’re modeling the next couple of quarters. But hopefully that answered your question.

Very helpful, thank you.

Yes, good afternoon guys. Congratulations on the solid results. I guess Doug, my first question really kind of involves an accounting question around 606 and deferred revenue; there was a big 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 zero? How quickly will you get there? And is there going to be an uptick in December 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 is we crossed into the new fiscal year; there was a bucket of deferred revenue that just fell straight to retained earnings. That’s largely why our 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’ll bounce around a little bit. 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 timeframe that otherwise would have. In some quarters, 606 revenue recognition will be higher than 605; in some quarters I would expect it’ll 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. You saw we had a really strong cash collection quarter at $720 million. Does that help, John?

That’s helpful, it does. And then maybe for my follow-up to Martin, Martin, I think one of the investor concerns out there is, as the industry transitioned from planar to 3D NAND and the rush to get there by your customers just created kind of a once-in-a-lifetime type of bulge in NAND CapEx that’s not repeatable. I’m curious as we go through this soft period in NAND, has your view of capital intensity—the rate at which your customers are making these transitions—changed? Do you still have 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 here. At a fundamental level, no real change in our long-term outlook, and that’s my commentary on capital intensity needed for the industry. We floated a $70 billion reference at the Flash Summit conference a year back and I think maybe repeated again this year, so two years in a row 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 as the challenges get more complex over time with aspect ratios increasing—this is a big part of the opportunity for us. That’s where we’re strong and differentiated. So, I think that trends well. We don’t see the opportunity for 3D NAND as a once-in-a-lifetime gig or a one-time event. Clearly there were some transitional investments associated with transitioning capacity to 3D; there are also investments associated with one generation of 3D to the next. We did outline in earlier disclosures that over the next five 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 non-volatile memory in this world of data. From an industry point of view, more or less the same. I guess the one thing I didn’t say is that 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. So, if everybody does well or everybody has opportunity, we should have more; if nobody does so well, we should outperform. That’s an important headline as well.

Helpful, thanks guys.

Yes. Hi, thanks for taking my question. A few of them, first one, Martin, if you look at this downturn clearly or this downdraft, it’s clearly led by memory. Looks like the CapEx for the WFE cuts have been in retaliation to pricing declines. So, from your vantage point, do you think pricing is a key metric to look for to see when it troughs, and if so, do you think WFE trials for memory along with pricing? Do you have any view on when it’ll happen? 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 between pricing and investment levels. I would say that in two ways. The first one is that ASPs should reflect supply and demand balance of capacity. So, to the extent prices are going up or down, there’s an implied message about the need to add capacity or the need to hold back. That’s been the world we’ve lived in for 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’s earlier question—when the memory companies are making 40% to 50% profits when DRAM is a $100 billion business, when flash has grown in the way that it has, the sustainability of investments is enabled in ways that wasn’t true three or five years ago. Now, having said all 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 and the customer’s ability to make capacity or technology-related investments. So, good luck with your modeling, I guess.

Got it. That’s really helpful, Martin. And then just a follow-up, clearly, everyone understands the long-term upside potential for Lam and the industry and WFE bond. I’m just trying to frame the downside. If you look at the first shoot of drop with NAND followed by DRAM, do you worry that things will get worse before they get better or do you think they’re kind of at dropping at these levels?

We are—if anything, we’re super consistent, right? My approach has always been to describe what I see, and we’ve done that. We’ll always do that—good or bad, we’ll tell how we see it. 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. Of course, we could be wrong. You have to judge the confidence level of our disclosure and move forward, I guess. So that’s the best I can offer you.

Got it. Thanks, Martin. Thanks for the insight.

Thanks, Krish.

Thanks so much. I had two— 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 the 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 was just up a little bit half on half, that would imply that we’re still annualizing to like high 40’s to 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 the crystal ball, so I can’t answer it with the same level of confidence I can answer the near-term questions. But a very interesting question might be how do I feel today about the $100 billion two-year reference that’s been floated around for the last 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. I can’t really tell you what the variability is around it, but that would probably be the best I could give you at this point in time.

Awesome. Thank you. And then, Doug, it was a pretty big repurchase 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 plays through. Also, how you think about when you’re going to re-up for the repurchases with the program; how do you think about that? Thank you.

Yes, I mean, Tim, it’s always an ongoing conversation at a board level. We described when we first launched this current authorization at a 12- to 18-month timeframe; 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 six-month timeframe or not out of the market even though all the cash got deployed. 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 it plays out, how it plays through for December and March? Thanks.

Yes, I just guided you on December number of 163 million. I didn’t give you anything for March, and we only guide one quarter at a time, Tim.

Okay, awesome, Doug. Thanks so much.

Yes. Thank you.

Good afternoon. Thanks for taking my question. We were at the Flash Memory Summit when the Lam team had its investor event, and we also had the opportunity to hear from some of the existing NAND leaders in the market as well as some potential entrants from China who seemed 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 does, Harlan, yes.

Both NAND and DRAM, you think?

Yes, probably. As you observed 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 couple of years. I mean, it’s clearly an ambitious, but in our opinion, quite rational strategic agenda. 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. 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. It’s a global system, and that’s what we respond to. I think it’s likely that the investment level in China increases in absolute and proportional terms next year, per Doug’s response.

Great, thanks. I just had a quick follow-up. It’s pretty amazing, 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 by modulating supply. If I look at the last time there was a strong focus on sort of reigning in supply, that was kind of 2016. It took about two quarters of strong equipment spending declines before we did see a positive response in memory placing 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 a stronger possibility in the first half of next year for your customers?

Wow. I’m not shown that, but I’ll answer that. Everything moves faster. 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, for the economics of their business. I think they take actions anticipating risks as much as ever, and that’s a lot more than would be true five or ten years ago when action would get taken when there was a clear problem statement. Yes, there are supply and demand imbalances that are being adjusted too. There are also proactive actions to manage the risk of that. That’s a good thing I think in the long term.

Yes.

I mean, it kind of 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.

Thanks, Harlan.

Thanks for the insights.

Great. Thank you. Following up on that last question. I guess I was surprised at how strong China was in the September quarter. I think you talked about two-thirds 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’ve pointed it out, because it was an uptick from the local guys, and I want 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. 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…

Actually, in logic, you’re right, Martin. So, it was a strong quarter for us in China, and it was a balanced quarter. My take on this thing is we tend to talk about two or three core domestic participants in China. Reality is there are kind of six or seven. And some of them are active at 300, some of them are interactive 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.

Great. Thank you very much.

Thanks, Joe.

Yes, thank you. I guess just, as outsiders, all the data points on memory equipment CapEx and fundamentals seemingly seemed all bad during the quarter, and yet you exhausted your entire buyback and you’re reiterating your expectations for growth in December. Is it fair Martin, just to 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? 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, it’s kind of three or four years. No question we’re more diversified today than we were. I think we’ve tried to reinforce that message even more, talking about share gains in foundry and share gains in logic, and by speaking to the SAM expansion headlines. 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. There’s a massive difference between 55,000 process chambers and 36,000 process chambers relative to the annuity. So that’s all kind of in the mix as well. The business is more or less as we had anticipated, slightly muted to the expectations of three months ago. But not that much different; I mean I actually think our calendar 2018 WFE number is 98% or 99% exactly what it was three months ago. That’s kind of the 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 the time when we or you become some obvious disclosure from Lam.

Okay, thanks for that. 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 these structured products, so…

Okay.

And that was purposeful, right? Taking a view of pricing, where things were at and wanting to get on with it. The way this generally works is Martin and I all agree, here’s what we think we should do. We’ll go on and we’ll have a conversation with the board, and the board will have opinions. We’ll modify it, and when we have a decision, we will communicate it to you, and we’re not at that point yet.

Okay. Thank you.

Yes. Thanks, Romit.

Thanks for taking my question. 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 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 dime during that period. The single biggest influence over the size of the installed base businesses is the number of units in the installed base for which we disclosed, and then the utilization of fabs. If we show up with a WFE reduction that you’ve just characterized and there is no change in utilization of the installed base, then there’s no consequence. If the 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 of service business in the industry. Our assumption is that 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 I’ve spoken to you for some time now, a little bit here in today’s prepared comments, we are perpetually building a portfolio of installed base productivity-related products and service offerings and invested in contributing more to our customers’ success and creating opportunities for Lam. Some things are in our control and some things are out of our control.

Got it. 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?

Perfectly normal timing where it will 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 you that specificity.

Thank you.

Yes, thank you.

Yes. Thank you so much. Martin, you’ve talked about logic revenue being up in the first half of 2019 relative to the second half of 2018. 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 all power for over half. If you had to rank order those three in terms of the magnitude increase from the second half to the first half, is that something that you guys can do?

I haven’t written down on a piece of paper in front of me and now decided like that—I’d like to tell you. So, rank order without any numbers, I would say logic and it’s kind of other logic, which includes image sensor opportunities and the legacy stuff, it’s probably the fastest-growing. 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’s contractions, so that will be our rank order.

Okay.

Yes, it’s pretty early to be having those conversations, so take it for what it’s worth at this point.

Sure. 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 gaining a bit of share. In your prepared remarks, you’ve 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, so it’s a tough question to answer. A couple of data points. When we talk about kind of penetration defense activities 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 timeframe on DTOR decisions and PTOR decisions. You might remember that in the last earnings call, 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. That’s kind of a loss 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 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 nine months of this year, so pretty, pretty pleased.

Thank you.

Thanks, Toshiya.

Thank you very much. Martin, first off, just I guess follow-up on some of your comments on NAND capital intensity, but looking at it from the DRAM front. As the industry continues to push the 1X, 1Y, 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’re seeing 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 an emergence of significant discipline in 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. That has allowed our customers to kind of reset the value of the bits that they’re selling to their customers. The average bit is worth kind of more by virtue of the value that’s created in this kind of broader cognitive computing environments. If there continues to be discipline and if our customers continue to be successful getting paid for the enabled ones 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 five to ten years ago—it’s of much less relevance. Clearly, when no 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. The bigger question to answer relative to DRAM capital intensity is the revenue side of it, not the cost side of it. As I said three 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 you have a little bit of the CapEx spend; the 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 in manufacturing—the parts for manufacturing. It’s all goodness at the end of the day; it’s supporting a higher installed base and we got to make investments for that.

Great, thank you.

Thanks, Patrick.

Hey guys, thanks for taking my question. I just had a quick one on kind of nano-secular technology. Is there any of your customers that have already started working on that, or is that something that is told to come next year?

Unfortunately, our customers have to answer that question.

Okay, got it. And then secondly, on the DRAM side, do you see any, I guess— 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?

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. Everything moves pretty fast these days. Customer disclosure is worth a lot more than ours on ASPs of devices.

Got it, thank you.

Thanks, Mitch.

Hi. Thanks for taking my question. First, I’m just wondering if you’re seeing any change in customer behavior related to trade work insurance—whether that’s in terms of the conversations you’re having with them or the visibility that they’re providing or commitments regarding new 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. I’m sure it’s not irrelevant. To the extent that a company has more costs because of tariffs, we probably all do at some level, and there is a consequence of that, as well as a reprioritization of things in the company. So, not irrelevant, but hard for us to 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. There are not so many industry participants in any segment these days. You probably got a sense of who is chasing who and who is investing where for what purpose. I think it was pretty much as consistent with plan.

Okay, thank you very much.

Thanks, Weston.

Operator, we’ll take one more question please.

Yes. Thanks for squeezing me in. Doug, going back to your commentary by the extra week in the March quarter, which is leading to higher expenses, should I also assume that your revenue would be positively impacted from an extra week?

Well, technically we have an extra week to ship products, Mehdi; I don’t know that it’s going to meaningfully move the revenue number. I do know definitively it will impact the expenses. We’ll give you the hard guidance when we did get the end of the quarter though.

Okay. And then I just want to go back to your comment about the deferred revenue. If I do a simple math, I get to shipments down 35% on a sequential basis. Does that make sense to you?

Mehdi, we’re not getting shipments anymore, we’re not talking about shipments anymore.

No, this is for the September quarter.

Yes, 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 great. Just a follow-up on your services. Given the increased installed system, 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 tried 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 one quarter that’s turn-based. To me, backlog isn’t that meaningful; for services, as Martin said. We’ll give you some thought.

I’m not—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. It’s pretty hard to do what we’re doing. As many people characterize it, we don’t have the visibility to say what we currently say as those to do. So take it for what it’s worth; we’re doing the best we can.

Thanks, Mehdi.

Thank you.

Okay. With that, we’ll conclude the call. Thank you, operator.