Lam Research Corp (LRCX) — Q3 2019 Earnings Call Transcript

Thank you, and good afternoon everyone. Welcome to the Lam Research Quarterly Earnings Conference Call. With me today are Tim Archer, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we will share our overview on the business environment and review our financial results for the March 2019 quarter, and our outlook for the June 2019 quarter. The press release detailing our financial results was distributed a little after 1:00 P.M. Pacific Time this afternoon. The release can also be found on the Investor Relations section of the Company's website along with the presentation slides that accompany today's call. Today's presentation and Q&A includes forward-looking statements that are subject to risks and uncertainties reflected in the Risk Factors disclosures of our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings press release. This call is scheduled to last until 3:00 P.M. Pacific Time. A replay of this call will be available later this afternoon on our website. With that let me hand the call over to Tim.

Thanks, Tina and hello everyone. After Doug and I go through our prepared comments, we look forward to your questions. Lam delivered a solid March quarter and continued to demonstrate strong execution in a challenging near-term industry environment. Key metrics including revenue, gross margin, and operating income margin, all came in above the midpoint of guidance that we gave on our last earnings call. EPS of $3.70 exceeded the high-end of our range helped by a favorable tax rate and the benefit of ongoing share repurchases. This performance and continued execution in the business is attributable to the support of our customers and partners, and as always, the exceptional efforts of Lam employees around the world. Turning now to our perspective on the current industry environment and outlook. Industry conditions are directionally unchanged from our January call. We continue to expect customer WFE spending for calendar year 2019 to be in the low $40 billion. Though since our last call, we now see a marginal downtick in Memory spending offset by slightly better expectations in Foundry and Logic. Also consistent with our prior commentary, we expect Memory supply growth as we exit 2019 to be below the long-term demand trend line for both, NAND and DRAM. In DRAM we continue to believe the spending correction will extend through this calendar year as customers continue to rationalize long-term profitability with near-term focus on reducing channel inventories and bringing supply and demand dynamics into balance. In NAND, recent industry data indicates that bit shipments were better than normal seasonal trends for the February month, and we continue to believe that market conditions are setting up well for future recovery as demand and supply balance improves through the year. On the Foundry and Logic side, 2019 WFE spending is slightly higher than our prior baseline as customers appear to be ramping leading etch notes faster than we previously forecast, which we believe is partly due to increased semiconductor content in smartphones related to 5G. While predicting the exact timing of cyclical change is always difficult, our confidence in the long-term demand drivers for Lam's business is unchanged. We're positioning Lam to capitalize on long-term demand through execution on our three growth vectors of served available market expansion, share gains, and revenue generation from our installed base. Semiconductor demand drivers such as Industry 4.0, Artificial Intelligence, 5G, and IoT are creating compelling served available market expansion opportunities for Lam; all require innovations in the transmission, processing, and storage of data using a minimum number of computed cycles at lower power and lower costs. This is leading to changes in compute system architecture and driving growth in new on-chip and off-chip memory designs. Key trends include the use of high-bandwidth memory interfaces for leading accelerator designs, heterogeneous integration for system on chip solutions, and the move to MRAM for embedded memories. I would like to provide a few specific examples of how Lam is set to benefit from these trends. First, new memory devices like GDDR6 improved bandwidth by adding among other things more bit lines which increases etching deposition intensity. Second, high-bandwidth memory and heterogeneous packaging integration are driving an increased need for through-silicon vias and other novel wafer level packaging technologies. Lam's SABRE 3D electroplating and Syndion etch tools are recognized technology and market leaders in the TSV market and provide a stable etch depth and VSL capability required for high-volume production. For wafer level packaging, the market-leading SABRE 3D system delivers technology-enabling co-planarity on our production-proven platform. And third, emerging memory devices such as MRAM are employing novel materials which require the introduction of new ion beam etch technology. Lam's ion-beam etch technology is differentiated by its control over both ion energy and angle to deliver superior device profiles and ultimately increased yield and bit density for our customers. Broadly, we believe the product and services portfolio of Lam Research is unmatched in its fit to these emerging technology inflections, and our focus is to deliver disruptive customer-enabling technologies to expand our served available market. From a market share perspective, we continue to perform well on penetration and defense activities. In the first calendar quarter, we successfully defended all key positions in addition to winning multiple new opportunities, and we remain committed to our goal of growing market share in both etch and deposition. Our confidence in our share gain opportunity is rooted in fundamental product architecture and technology differentiation. Lam's unique quad-station model or QSM is rapidly becoming the process chamber architecture of choice for 3D NAND. The QSM serves as the core high-productivity platform on which Lam's process teams build differentiated 3D NAND Technology Solutions. Examples where the QSM is delivering a capability advantage for our customers include our market-leading films for the ON-ON STACK, wafer bow management using backside deposition, new ALD films for high-aspect ratio gap fill, and low-resistivity tungsten fill for word line. Our ability to deliver compelling technology and productivity including fab-space-saving using the QSM architecture is unparalleled. We hit a milestone this quarter with our 7,000 module shipped, a metric that signifies the growing importance of this platform for 3D NAND and other markets. In Logic and Foundry, gate contacts and interconnect layers require new materials for better device performance, reliability, and scaling beyond 10-nanometer. In recent engagements, we have shown our ability to leverage Lam's long-held leadership position in copper electroplating to win applications for new materials such as cobalt as leading etch notes. And in Memory, we continue to penetrate key semi-critical etch positions through our focus on productivity innovation. An example of this focus is the separate press release we issued today stating that in partnership with a leading semiconductor manufacturer, we have successfully demonstrated one full year of uninterrupted production on Kiyo Etch System equipped with a unique productivity-focused hardware set. We believe the Kiyo Etch System utilizing our Corvus R technology ushers in a new era of self-maintaining equipment. Today's announcement is also a demonstration of Lam's commitment to leverage Industry 4.0 technologies, advanced computing, and Big Data to bring innovative products and services to our customers. And finally, in our Customer Support Business Group, we saw continued sequential growth in revenues we drive from our installed base. Our Reliant Systems business grew strongly in the March quarter reaching its highest quarterly revenue level in our history. This was driven primarily by investments in non-leading etch notes in Foundry, as well as spending on more and more IoT initiatives. Overall, our installed base business is on track to deliver another record year, growing again at a rate faster than the installed base. In summary, Lam is well positioned to capitalize on the long-term demand drivers in the semiconductor industry. We are performing well in a challenging near-term industry environment. And by continuing to focus on execution and investing to meet our growth objectives, we believe we will emerge stronger as WFE spending recovers. With that, let me turn the call over to Doug for his prepared remarks.

Great. Thanks, Tim. Good afternoon everyone and thank you for joining us today on what I know is a busy earnings season. Lam executed well in the March quarter with our results exceeding the midpoint of guidance for all financial metrics. Earnings per share exceeded the high-end of the guidance range that we provided mainly due to a lower tax rate that we realized in the quarter. We had a more favorable tax benefit from our annual employee stock grant investing due to the increase in our stock price during the March quarter. I'd also like to highlight that during the March quarter our cash from operations came in at $933 million which on a quarterly basis is the second highest cash generation in the history of Lam Research. As we discussed during our last quarter earnings call, we believe WFE spending for the first half of 2019 would reflect lower memory spending levels and spending would be driven more by Foundry and Logic investments. Our view today is largely unchanged. Full year 2019 Foundry and Logic WFE might be a little bit stronger than we expected a quarter ago, and DRAM might be a little bit weaker. We continue to expect WFE will be down in the mid to high-teens percent year-over-year from 2018. WFE spending as a percentage of semi-industry profit dollars has been running at a fairly consistent level over the last several years. We continue to track a double-digit number of new fab projects this year spending leading etch Foundry, Memory, and IoT driven legacy notes. Overall, Lam's system revenue for the combined Memory segment decreased to 61% of total system's revenue from the 79% we saw in the December quarter. The composition of the Memory segment was mostly driven by conversions and included non-volatile Memory spending at 40% and DRAM spending at 21%. NAND spending continues to be focused on both 6x and 9x layer wafers, and DRAM spending is focused on the 1x and 1y notes. The Foundry segment more than doubled quarter-over-quarter accounting for 27% of system revenue which is the highest level in Foundry we've seen since March of 2017. Foundry spending in 2019 is focused on 7-nanometer and 5-nanometer. As a comparison, the profile in 2017 was targeted at 10-nanometer and 7-nanometer nodes. And finally, the Logic and other segment was also up contributing 12% of systems revenue. Let's turn to the P&L performance for the March quarter. We delivered revenues of $2.439 billion which was down slightly from the December quarter and above the midpoint of the March guidance we've provided. Gross margin for the quarter came in at 45.1%; we came in slightly better than expected, primarily due to product mix and spending control. And as I always do, I'll remind you that 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-over-quarter. Operating expenses in the March quarter were $488 million which increased by approximately 11% from the prior quarter. Spending in the March quarter was negatively impacted by the appreciation of the stock market during the quarter and the resulting impact on the cost of our deferred compensation plan. We do hedge this to mitigate the exposure; however, the offset to this expense shows up in other income and expense. It's neutral to earnings per share at the end of the day. R&D investments continue to be a focus for us with R&D comprising nearly two-thirds of our spending in the March quarter. In June total operating expenses are expected to be lower on a sequential basis compared to the March quarter. I'd also just point out one spending item that you'll see in the GAAP to non-GAAP reconciliation table of our press release. We incurred a charge of approximately $11 million related to severance payments for a workforce action we took during the March quarter. Operating income in the March quarter was $611 million and operating margin was 25.1%, pretty much in line with the midpoint of the guidance range. The non-GAAP tax rate for the March quarter was approximately 8% which is lower than our long-term rate due to the tax benefits related to the employee stock investing that I described earlier. For the June quarter in 2019 calendar year, we continue to expect the tax rate in the low to mid-teens and there will be fluctuations in this rate quarter-by-quarter. In March we completed the issuance of $2.5 billion in principal value of senior notes as we decided to take advantage of a favorable interest rate and credit environment. The note proceeds are for general corporate purposes including among other things to fund our stock repurchase program and to pay dividends. For other income and expense, our newly issued debt added approximately $8 million in interest expense for the March quarter. However, as I pointed out, this was offset in OINE by gains on assets related to obligations under our deferred compensation plan. Going forward, we expect to have approximately $26 million of quarterly interest expense related to our new debt. In total, interest expense on a quarterly basis is now around $45 million. We continue to demonstrate our commitment to capital return during the quarter funding more than $1 billion in dividends and share repurchases. For the March quarter, we paid out $171 million in dividends and we completed $862 million in share buybacks through a combination of open market and structured repurchases. These repurchases were made under the new $5 billion authorization that we announced at our earnings call in January. And I'd just point out to you that in the last year we have lowered quarterly diluted share count by approximately 20 million shares; that's over 11% reduction. Earnings per share came in at $3.70 which was over our guidance range for the March quarter, mainly driven by that favorable tax rate. Diluted shares per EPS were 158 million shares which reflects a decrease from the September quarter related to the share buyback program. The share count includes a dilutive impact of approximately 5 million shares from the remaining 2041 convertible notes in the March quarter. And I'll remind you the dilution schedules for the remaining 2041 convertible notes is available on our Investor Relations website for your reference. Let me now turn to the balance sheet. Our cash and short-term investments, including restricted cash increased notably in the March quarter to $6.4 billion from $3.9 billion in the prior quarter. This was driven by the $2.5 billion debt issuance that I mentioned, and the over $900 million operational cash flow. DSO improved by six days to 61 days. Our inventory levels decreased and consequently inventory turns increased to 3.4 times compared to 3.2 times in the prior quarter. Company non-cash expenses included approximately $53 million for equity compensation, $46 million for depreciation, and $36 million for amortization. Capital expenditures were $76 million in the March quarter which was a decrease from $106 million in the December quarter. Due to the timing of certain projects, December quarter CapEx was somewhat on the high side, and the decrease in the March quarter was in line with our expectations. The majority of the CapEx in March was directed towards investment supporting our installed base business. We exited the March quarter with approximately 10,800 regular full-time employees which is down slightly from the prior quarter due to the workforce action that I previously mentioned. For the long-term, we continue to prioritize headcount that is supporting Lam's SAM expansion, market share gains, and installed base business growth. Looking ahead, I'd now like to provide our non-GAAP guidance for the June 2019 quarter. We're expecting revenues of $2.350 billion, plus or minus $150 million; gross margin of 45.5%, plus or minus one percentage point; operating margins of 26%, plus or minus one percentage point. And finally, earnings per share of $3.40, plus or minus $0.20 based on the share count of approximately 155 million shares. Operator, that concludes my prepared remarks. Tim and I would now like to open up the call for questions.

Hi guys, this is Adaa calling in for John. I was wondering if you could maybe talk through what your OpEx trajectory is looking like for the remainder of the year given the lumpiness that we saw in March?

Yes, we only provide guidance for one quarter at a time. The best way to think about it is that it will be close to our performance in the June quarter. However, we only formally guide numerically one quarter at a time.

Thank you. And then, if you could maybe provide us with an updated view of the domestic China opportunity where you think that looks like this year in terms of WFE and then your puts and takes around that given the macro situation?

Sure, I can do that. We mentioned in our last call that we expected China domestic WFE this year to exceed $5 billion, and we still hold that view. Our position in China is also as strong as it is in other parts of the world, so we indicated that our business in domestic China would grow as well. There has been no change in the regulatory environment that affects our results, and while we are monitoring it closely, we do not anticipate any impact on our business at this time.

Good afternoon. Thank you for your question. To start, you've mentioned the ongoing weak pricing in both Memory segments, and I want to commend you for achieving over $1 billion in total shipments each quarter, largely driven by technology advancements. With that in mind, looking towards the latter half of the year and considering the transition to 96-layer technology, as well as ASML's expected ramp-up, how should we anticipate that trajectory? Are there signs of improvement in the second half of the year, or should we expect better performance to manifest in the first half of 2019 or 2020?

Yes. Tim and I will address this. Our outlook hasn't changed since we last reported earnings a quarter ago. We don’t anticipate a recovery in Memory this year, but we believe it positions us well for what is likely to happen in 2020. We expect that the exit rate of supply in both NAND and DRAM will be lower than demand, which means it is reducing some of the inventory and positions us favorably. However, we do not foresee a significant recovery this year. Tim, do you have anything to add?

No, I think it's a very clear statement of our position. We've been saying that we really don't see the recovery this year. You mentioned a couple of other items like the 96-layer conversion, and from the standpoint of the job we're doing, Lam is focused on technology conversations. Technology conversions are a great way for customers to reduce costs and increase capabilities during cycles like this. So Lam is focused on helping our customers execute those technology conversions, and when capacity additions occur, that will be an additional positive indicator. But right now, we’ve stated that we don't see that happening this year.

And C.J., I have one more comment. As I've mentioned, I am confident it will recover eventually, whether that's later this year or early next year is an interesting timing consideration, but it will recover at some point. The industry is working through inventory in the channel, which will take some time, and eventually investment will exceed current levels.

Okay, very helpful. And as a follow-up; considering the magnitude of the debt offering in the quarter can you kind of walk through what net cash or gross cash rather you need to run the business? And are you contemplating perhaps a more aggressive buyback with the funds? Thank you.

Yes. C.J., nothing new to communicate relative to the buyback. We just announced the $5 billion a quarter ago, we executed $862 million last quarter, we view this as a favorable debt market as I described in my prepared remarks relative to rates and credit demand and whatnot, we've decided to take advantage of that. It really doesn't impact too much how I'm thinking about the timing of the buyback, the quantum of the buyback. Obviously, I think we've been pretty judicious with returning cash to shareholders in the past and will continue to do so in the future, but I don't really have anything new to tell you except that that debt issuance helps fund what we plan to do. Thanks C.J.

Hi, thank you for taking my question and great job navigating a challenging environment. Tim, I have a question regarding your market share. We all know that WFE share is influenced by a complex mix of end markets and your customer base. The Gartner data released today indicates that your WFE share has seen a slight decline over the past year. I would like to know what strategies you can implement with your products to counteract the natural challenges posed by the growth in EUV, especially as it gains more traction compared to Logic spending. Furthermore, looking ahead one to two years, during my visit to the SPIE Conference, there was significant discussion on the use of horizontal nanotubes or nanosheets for 3-nanometer Logic devices, akin to the transition from 2D to 3D NAND. What are your thoughts on when your Logic share might start to recover due to these architectural advancements? Thank you.

Certainly, there were a lot of insightful questions, so I’ll address them. First, regarding market share, we recognize from the Gartner report that we don’t win every competition, but we are proud of our achievements in recent years, especially in critical applications. These applications are the most challenging to secure, yet they are the most enduring because customers are less likely to switch once they adopt them. We've concentrated our efforts on these critical applications, particularly in fast-growing sectors like 3D NAND, ensuring we establish a strong foothold. This foundation allows us to build and deepen our collaboration with customers. While I remain committed to improving our presence in semi-critical applications, it’s essential to focus on establishing a solid base in critical applications first. In terms of our approach, our recent press release highlights our dedication to innovation in productivity. As our customers expand, particularly this year amid changes in pricing and spending in the Memory sector, they appreciate productivity innovations. The semi-critical space often relies on our advancements in productivity, such as our recent Kiyo Etch announcement. Lam will continue to set productivity benchmarks in this area, which should enhance our market share. However, there are factors beyond our control, such as device mix fluctuations. For instance, we noticed a substantial increase in DRAM WFE from 2017 to 2018, with little change in NAND WFE. Our strategic decisions have positioned Lam effectively in 3D NAND, and I believe our standing is strong. While some years may not play out in our favor, I wouldn’t trade our current position for anyone else’s. Regarding Logic applications, we aim to enhance our standing and are continually investing in improvements across all applications. Our CTO office is monitoring emerging technologies, including those related to advanced nanosheet applications, as we leverage these trends to gain market share. I hope this provides clarity. Thank you.

Thank you very much. Tim, maybe first off in terms of the 2019 outlook. You detailed about the memory outlook remaining pretty much muted through the rest of this year. I guess what are some of the key variables that investors should look out for whether it be in NAND and DRAM, is it just the pricing environment? Is it the inventory situation? What are some of the key variables that you guys are monitoring that will lead to a change or a turn in positive spending for the Memory market?

It's a great question and one we consider daily. Our customers have a clearer understanding of their strategies and what triggers them to start investing. From our perspective, the current situation seems rational. The pricing environment provides some indications, and there's been discussion about reducing a small amount of capacity, which we believe will help improve the supply-and-demand balance. We're monitoring these developments closely and maintaining ongoing conversations with customers. As Doug mentioned, we are confident that demand will rebound. I discussed several key demand factors earlier, and we have no doubts about the return of Memory demand. Our focus is on remaining close to our customers and ensuring that when they decide to place orders for tools, we can deliver on their timelines without any limitations.

Patrick, this is Doug. How I think about it is that I think we all understand there is inventory in the channel, there is inventory with the hyperscale guys, there is inventory with our customers that needs to clear itself out. And we can all do our best to model that, you can do it as well as we can; obviously, we model it, I know you do too. To me when I think about pricing, pricing is an indication of how supply and demand are clearing and until all the inventory is worked out, a lot of what you're seeing in pricing will be determined by how that inventory is moving through the channel; so you got to pay attention to that because that tells you how things are clearing out. And as Tim said, at some point it will clear up and we're all waiting to see when that does.

Right. And as my follow-up question for you Doug; I know you've talked about the installed base business as being kind of a hidden growth driver for the Company and we've seen it now over the last couple of years. Can you just qualitatively perhaps give a little bit of color of both where the leading edges installed base continues to grow obviously with more shipments to 3D NAND and that front, as well as some of the opportunities on a trailing etch where you're saying upgrades, productivity improvements. Can you just give a little bit of color of how much that installed base growth is driven from both, leading etch versus trailing etch?

A significant portion of our activities involves leading edge etch processes, which are the most technically complex chambers we operate. Consequently, these require more spare parts than other field tools. However, as we've mentioned before, our tools are built to last for decades, which is a key advantage of our business. This aspect of our business model relies on regular upgrades, maintenance, and the need for spare parts. Eventually, when a customer no longer needs a tool, they may return it to us for refurbishment, allowing us to sell it again. This creates a long-lasting revenue stream from existing equipment in the field, making up about a quarter of our business. This year, with a decline in new equipment sales, that proportion is likely to exceed 30%. It's encouraging that this segment of the business is growing this year. Tim, do you have anything to add?

Yes, I think the only thing I would add is, maybe even to reinforce Doug's point about the performance in this business this year; this is the kind of business that quite often when our customers are looking for opportunities to increase their capability without having to go to that next increment which is to actually add capacity which is definitely their mindset right now this year. They turn to us for productivity upgrades, capability upgrades, services that help them get more out of the existing installed base and that's what this whole business is intended to do, is to help them leverage the tools that they've already put in place and probably it's kind of a win-win but it means that in a year like this year it's a very good business.

Thank you very much. So I had two. I guess, Tim first, I wanted to dovetail on the answer that you've just had. And obviously, you guys are a great leverage to 3D NAND but I still get a lot of questions sort of on capital intensity and what your share is of the wallet in the layer migration world versus kind of a planner to a 3D conversion world. So, can you sort of help us baseline that sort of per 1K or per 10K; how much you think the WFE spending is and what's your capture is of that wallet?

What I would say is that you’ve asked a great question, and I’ll refer back to a few other points we’ve made to help provide some detail. We are significantly involved in the technologies necessary for layer conversions and 3D NAND, particularly in increasing stack density, such as moving from 64-layer to 96-layer. While I don’t think we’ve quantified our share of that external spending, we do have a good understanding internally. At our Investor Day last year, we noted that Lam's opportunities significantly increase with each layer transition, as expected. Building taller stacks involves deeper etching and new films necessary for controlling wafer bow, which are essential for processing and achieving yields. This transition does raise the capital intensity for us. Additionally, we mentioned during our Investor Day that while the total dollar amount spent on conversions is lower, our share of wallet in wafer fabrication equipment actually increases since the primary tools needed for layer transitions are etch and depth heavy. Therefore, in a year focused on conversions, we could see a higher share of total spending in that area. However, I acknowledge that I haven’t quantified this externally, and I’m not prepared to do so today.

Thanks, Tim. Yes, that was kind of where I was getting at, just layer migration versus the 2D to 3D world. So, thank you for that. And then Doug, just a quick follow-up; so on free cash flow payout I think you paid a little more than all of your free cash flow this quarter. Is that still the sort of payout all of your free cash flow going forward? And I guess the question really is on repo and how opportunistic you were when the stock was lower versus now that the stock is higher? Thanks.

Yes, Tim. I mean our formally committed metric that we are committed to return is I think we did this at our Analyst Day last year is at least 50% of the free cash flow and your observation is exactly right, last quarter it was more than 100% and the last several years it's been close to 100%. The way I think about it is, we are opportunistic, we are sensitive to what we perceive fair value of our business to be and where things are trading, we announced at our last earnings call a new authorization, $5 billion, I didn't communicate the timeframe for that and we'll see as it goes. But obviously the fact that in the June quarter year regarding the share count down again, you know we're going to be the market again in June and I've described it as being opportunistic. I'm not going to exactly say what that means but we do pay attention to the value of the stock as we're executing.

Hi, thanks for taking my question. I have two of them. First, Tim, regarding market share last year, it seems you lost some share, particularly in dielectric etch in NAND compared to tail, and I understand that tail is being directed to two customers due to productivity. I'm trying to determine if there's a way to recover from that loss or if your gains in more challenging channel whole etches will more than compensate for any decline in flip etch. I'll have a follow-up question for Doug.

I won't discuss specific applications, but generally speaking, regarding semi-critical applications where both technical capability and productivity matter, our focus will be on delivering top-tier products that excel in both areas. We already excel in several areas, such as the QSM and deposition tools, which have improved productivity for 3D NAND in terms of cost per wafer and fab space efficiency. We believe we are unmatched in productivity delivery. While there may be some room for improvement in certain etch applications, addressing these challenges is our priority. Our proven track record in equipment and process development for critical applications shows we have the ability and knowledge to enhance productivity. I'm not overly worried, but we remain committed to securing critical applications that will benefit us long-term, and we are ready to tackle the challenges in semi-critical areas.

Got it, that's helpful Tim. And then a follow-up for Doug. If I look at your OpEx and try to normalize it on a weekly basis given that March had an extra week in the quarter; it looks like the OpEx run rate really hasn't changed, it looks like it's about $35 million on a weekly basis. But you guys did takeout 150 headcount, so I'm just wondering was it more flexing on the COGS side or should we expect maybe a downside to OpEx going forward?

Yes, I mean the best I'll give you prospectively is that we just got the June quarter. I don't know what it will be precisely, I'm not going to tell you September and December and beyond. What I said in response to an earlier question is the best guidance to give you is plus or minus where we are in June. And I think, Krish, in the first half of the year you have some unique things that happened the first, you're absolutely right, it was our 14-week quarter that occurs every six years, something like six years. We have that elective deferred compensation program, drive spending up that was offset in OINE. I don't anticipate that happens again, but if the market significantly moves you will see some permutations for things like that. In the first half of the year also you get payroll taxes come in that go away later in the year. So that dynamic comes and goes and then quite honestly with our R&D spending, it's based on programs and projects and schedules and it's not perfectly linear, it's not the same every single quarter, there will be some lumpiness to that and that's why we'll guide you quarter-by-quarter as we go. We're conscious of the profitability of the Company, obviously we're conscious of wanting to maintain that profitability, it's why we undertook the workforce action we did. And the last thing I'd say is, part of that workforce action Krish was in cost of goods sold, it wasn't just in direct spending. So there is lots of things moving around.

Good afternoon. Nice job on the quarterly execution. We're going to see the focus on semi-critical layer applications. The market doesn't tend to focus here a whole lot but there appears to be a lot of opportunity here as you mentioned where the team can win on attributes like productivity, reliability, tool footprint, and all of this obviously have a significant impact on overall wafer cost for your customers. So, of the share gain targets that you guys have set forth in your 2021 model, how much of this share capture is due to winning semi-critical applications?

We haven't quantified it Harlan but a piece of it certainly is, a piece of it certainly is. And you know when I think about it is and what I hear Tim say all the time is, obviously, productivity is a technology challenge, right. The most productive platform doesn't necessarily mean the cheapest, it doesn't, right? You innovate in productivity, you innovate with the architectures as Tim talked about. You can win business at nice profitability which is what we're aspiring to do.

Yes, that's a great question. In many ways, you're enhancing performance even in critical areas while working on elements like artificial differentiation for semi-critical applications. This isn't about completely altering attributes; it's a natural progression, particularly in the 3D NAND space, as the technology has developed and matured. A couple of years ago, there was a greater emphasis on the technical enablement of 3D NAND, which led to more applications being viewed as critical. Now that the technology has matured, we have identified which areas we can push the boundaries of throughput and cost reduction, enabling us to make 3D NAND production more affordable for our customers, potentially increasing volume through elasticity. This focus is not new; many deposition applications have long been competitive in the semi-critical space, which is why unique tool plans have been developed that enhance productivity through architectural differentiation. The recent Kiyo Etch and Corvus R announcement highlights that nearly every cost issue demands a technological solution. The idea of a tool that can replace its own hardware without human intervention is a clear solution to a cost and productivity challenge. This is just the beginning of what we aim to achieve through our technology organization focusing on cost.

Yes, perhaps a little, Harlan. As you may know, our spare parts consumption is often correlated with fabrication utilization; so if utilization decreases, we can expect a slight reduction in spare parts consumption. Regardless, we still anticipate strong growth for our installed base. We're on track to deliver record levels of revenue and profits in that segment of the business. So yes, we're still very optimistic about the current situation. Tim, do you have anything to add?

No, no. I think I'd just point you back to the comment I made. The utilization portion that was what Doug was commenting on, obviously some work dependence there on utilization to things like spares and consumables etcetera. But I made the comment which I think is also shouldn't be lost; it's in years like this the customers are looking to us to help them improve the productivity of their installed tools through upgrades and services, and so you may be getting a little bit of a balance between those two elements of our installed base business and that's why even in face of this business we're telling you we'll deliver a record year in installed base.

I actually wanted to follow-up on the installed base business. I'm wondering that if you have a significant slowdown until shipments this year; does that impact your installed base revenue growth trajectory next year and come more importantly, does it put that 2021 target model at risk?

No, we're still tracking to where we want to be relative to the growth drivers in this business. You're right, if the growth of chambers slows there will be a lag effect to the growth of the installed base business but we're still feel really good about where we're headed here.

Okay, that's helpful. And as a follow-up, you talk about the self-maintenance chamber, that's sound really interesting. I'm wondering who would be the typical customer and is that something that could help you accelerate revenue growth next year as the Memory CapEx begins to recover?

We are indeed working on that. This technology can be applied across various applications; its initial focus was a Memory-related etching application. It is particularly beneficial in scenarios where high-volume production is needed with minimal human intervention. Essentially, it enables us to avoid interrupting the tool for maintenance. Therefore, any high-volume application could effectively utilize it. If it continues to succeed as it currently is, it presents an opportunity for us to gain market share, positioning us better when spending starts to recover.

All right, that's helpful. Just to clarify, so you think there will be a product in the marketplace next year helping generate revenue growth?

Yes.

Westin, it's in the market right now.

Thank you.

First one, during your prepared remarks you guys stated that you saw a little bit more softening in DRAM; but then you didn't have a comment on NAND. So my reason is mostly in between lines, I think maybe NAND price is bottoms high of DRAM or is that I guess a bad assumption to make?

I mean, it's just read it be our outlook for NAND is unchanged.

Okay, got it. And then secondly in terms of the China demand right now. And obviously has been a lot of growth in terms of what the impact has been between the tariffs. So can you kind of quantify the impact of the tariffs U.S.?

If you're asking about the specific effect of the tariffs on our results, we have noted that we have managed to reduce their impact to the point that they are reflected in our financial reports and included in our guidance, and I would say that their effect has been very minimal at this time.

How to mitigate what might have occurred Mitch. It's gotten material impact on anything you're seeing from us right now.

Tim, I'm wondering how is the visibility and outlook for the second half now versus what have thought quarter ago. We have heard from some of the Memory customers that they are expecting some optimism about the second half but the inventory situation is not getting much better. So I'm just wondering how you're looking at the second half what's on your dashboard as you look at visibility and at what point do you think you will be shipping demand? Has that view changed in the last quarter or so?

Yes, that's a good question. We are in constant communication with our customers. The message we're conveying today, as we did in our last call, is that this year is unfolding as we anticipated, with no significant recovery in Memory spending. We expect to finish the year with supply growth considerably trailing long-term demand for both DRAM and NAND. We have mentioned that 2019 is a year that reflects the balance of supply and demand, with inventory issues resolving in a way that positions us for a much stronger outlook in 2020. We reiterate that we still see it progressing this way and that’s our perspective.

Yes, we'll give you one follow-up. Operator just a heads-up we have a time after this for one more call.

So very quickly, I don't know whether you answered it before. But what's the sensitivity of the services business to what you're seeing on those businesses? So you will mean historically to see our historically does it mean services go down next year or do you think that enough growth in the installed base and consumables to still have conceptually a positive year consummately positive year next year?

We that when we look at this we see this as a growth year for the installed base business and it will grow next year too.

Thank you. All the good questions have you asked. I just have one quick follow-up. When you talk about Logic and Foundry, and others, does that include advanced packaging and image sensors? And if not what does that put in which pocket?

Yes, Mehdi for us it's Logic and Other as you rightly pointed out. So yes, that's where image sensors goes, that's where advanced packaging goes, it's Logic plus everything else.

When you talk about a slight upside to Logic and Foundry, would that include better-than-expected advanced packaging and image sensors?

That's not what's driving the upside in spending that we're seeing, it's more leading etch stuff.

Thank you all for joining us today.