Lam Research Corp (LRCX) — Q1 2020 Earnings Call Transcript

Thank you, operator. 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 September 2019 quarter and our outlook for the December 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 welcome everyone. In the September quarter, Lam delivered solid results. Our continued execution on commitments, combined with our guidance for the December quarter increases our conviction that Lam is in a strong position to outperform as wafer fabrication equipment spending inflects higher. Doug will cover the financial results in more detail shortly, but I’m especially pleased with the demonstrated earnings power of the Company. At the midpoint of our December guide, calendar year 2019 diluted earnings per share will be the second highest in our history despite the current industry cycle. I would like to take this opportunity to thank our customers and partners for their continued support of Lam and our employees throughout the world for their contributions to these results. From an industry perspective, we have revised our view on 2019 WFE to the mid $40 billion range versus our prior estimate of down mid-to-high teens percentage year on year, which implied a low $40 billion level of spending. We are beginning to see improvement in the memory market, led first by NAND. NAND’s demand dynamics are improving and oversupply conditions should continue to abate as we move through the December quarter. We expect to exit 2019 with a bit supply growth rate for NAND of approximately 30%, which is well below our view on long-term demand; and as a result, NAND inventories are expected to decline to normalized levels in the first half of calendar 2020. While the timing of the memory equipment spending recovery is always hard to predict, we are encouraged that customers continue to manage supply growth even as we are starting to see favorable end-market demand indicators. This is a sign of a healthy industry and a good setup for increased NAND spending in 2020. On the DRAM front, inventories have remained elevated, and we do not expect them to reach normalized levels until the second half of 2020. However, we see positive demand catalysts ahead in both the server and smartphone markets. Our server CPU upgrade cycle is expected to begin next year with increased adoption of new generation platforms from leading manufacturers. For smartphones, major vendors are planning to launch additional 5G models which is expected to drive content growth for the overall smartphone market in 2020. Turning to foundry and logic, spending in this segment has been strong throughout 2019 and based on recent customer commentary, looks to remain so heading into next year. Diverse end market applications are driving higher levels of foundry and logic spending, moreover, challenges in scaling functional blocks such as SRAM and logic devices are leading to increases in die sizes and these in turn are accelerating changes in device architectures and chip manufacturing technologies. Lam's growing position with key foundry and logic customers has positioned us to benefit from these secular trends. Competitively, we are executing at a high level. Based on the midpoint of our December guidance, Lam's 2019 foundry and logic revenues are set to significantly outgrow announced customer CapEx plans. The share gains we are now seeing in the foundry and logic segment are the result of close customer collaboration and strong product execution over many years and multiple technology transitions. They are evidence of the benefit of sustained investment in R&D throughout industry cycles. Looking at the market as a whole including memory, foundry, and logic, we are on track in 2019 to deliver our best ever penetration and defense performance, as measured by net forward-looking, three-year revenue opportunity for application decisions made in this calendar year. A key contributor to our strong penetration and defense performance has been continued focus on technologies that enable 3D device architectures, which are becoming increasingly important to performance and cost scaling across all market segments. We invested early in 2D to 3D inflections; and as these transitions are occurring, we are seeing expansion in both our SAM and market share. Etch and deposition processes are critical enablers for 3D scaling, and we are investing aggressively to deliver the technology and productivity innovation required to satisfy customer roadmaps. As evidenced by our penetration and defense wins this year, we believe we are extending Lam's leadership in this space. In 3D NAND, we're successfully defending 100% of our memory whole dielectric etch positions and continue to be the supplier for this application at all 3D NAND manufacturers. We are also winning 3D NAND applications where productivity is the primary point of differentiation. Notably, Lam has been the first to deliver production proven edge-yield solutions for etch. In this quarter, we used our Corvus tunable edge hardware on our flex dielectric etch system to improve profile tilt uniformity and win an important productivity sensitive slit etch application. On the conductor etch front, we won a 3D NAND application for a new vertical architecture that reduces die size and is a technical solution for lowering bit cost. In deposition, we recorded an important 3D NAND win for the VECTOR DT, which deposits backside films to control stress as layer counts increase. Another significant deposition win was for our Striker ALD tool used to deposit high quality liners and gapfill as aspect ratios get higher. We also continue to extend our 3D expertise and position outside of the 3D NAND space, including in rapidly growing markets such as advanced packaging and heterogeneous integration. Over the last three years, the installed base for our SABRE 3D electroplating system has grown by more than 70%, and we are the leading electroplating supplier for TSV, for DRAM, CMOS image sensor, and logic devices. Our SABRE 3D electroplating solutions embed best-in-class technology backed by years of high-volume production experience. With each successive win across our served markets, the installed base of Lam equipment continues to grow, resulting in an expanding long-term revenue opportunity for our customer support business. To create value for customers over the entire lifecycle of tool ownership, we are actively developing upgrades and advanced services targeted at extending technical capability and increasing productivity from existing installed base assets. These offerings help our customers reduce their total cost; and as a result, we continue to see growing demand. Revenues from our customer support business grew in the September quarter on a sequential basis and our Reliant business achieved record quarterly revenue for the third quarter in a row. We expect 2019 overall will be another growth year for our customer support business. Looking at our year-to-date performance, we have made tremendous progress against our objectives of expanding our SAM, increasing our market share, and building our installed base business. Importantly, 2019 has been a year where Lam has strengthened its position in the foundry and logic segment. Also, with early indications of improving NAND demand and positive catalysts on the horizon for DRAM, we are increasingly optimistic the calendar year 2020 is setting up to be a year of outperformance for Lam as spending mix moves back in our favor. Thanks again for joining today and now here's Doug.

Okay, great. Thank you, Tim, and good afternoon everyone, and thank you for joining us today on what I know is a busy earnings season. We're pleased with Lam's performance in the September quarter. Our results once again exceeded the midpoint of guidance for all financial metrics. Operating income and diluted earnings per share came in at the high end of our guidance range as we remain prudent in managing our spending throughout the quarter. Let me begin as I always do by talking about our revenue segmentation in the September quarter. The combined memory segment was flat with the June quarter at 64% of total systems revenue. We had a decrease in the September quarter in the nonvolatile memory segment, moving from 46% to 38%, while DRAM increased from 26% from 18% of assistant revenue. Spending in the NAND segment was focused on multiple nodes and we're beginning to see the first ramp of 128 layer structures. On the DRAM side, apart from the 1x and 1y nodes, we're seeing initial investments at 1z. As I noted on our last quarter earnings call, foundry and logic spending was strong and we expect strength from this segment to continue to the remainder of the calendar year. The foundry segment represented 25% of our systems revenue in the quarter. Strength in this segment is related to spending on the 7 and 5 nanometer nodes. Logic another segment was down slightly from the prior quarter level coming in at 11% of system revenue. We continue to demonstrate strong progress in the foundry and logic segments, enabling us to maintain solid profitability levels during a period of depressed memory spending. I believe probably foundry logic spending will be even stronger in December. Revenues for the quarter came in at $2,166 million which was again above the midpoint of guidance. Our revenue had a slightly broader geographic mix in the September quarter, compared to the June quarter. Our top reasons continue to be China, Korea and Taiwan. The China region quarter performance remains higher than our historic average concentration of revenue. And similar to what I talked about last quarter, the majority of this came from indigenous Chinese customers across multiple segments. Gross margin came in at 45.4% which was 40 basis points above the midpoint, mainly due to customer mix. And as we stated in prior quarters, you should expect gross margins to be a function of several factors such as business volumes, product mix and customer concentration, and we expect to see variability quarter to quarter. We continued to manage spending levels in the Company as operating expenses in the September quarter declined to $431 million which was down from $450 million in previous quarter. We remain laser focused on investing in research and development programs, as we saw the percentage of spending and R&D increased quarter-over-quarter to 67% of operating expenses. The December quarter guidance reflects total spending, increasing back to the June level, primarily due to an increase in variable compensation expense. A variable compensation fluctuates based on the level of quarterly profitability. I'm going to also remind you that as we look ahead to the 2020 calendar year, you will see the normal seasonal spending increases related to the March quarter, comes from things like payroll taxes. Operating income in the September quarter was $552 million and operating margin was 25.5%, at the top of our guidance range. Our September quarter non-GAAP tax rate was approximately 11% which was slightly lower than our long-term rate. There will be fluctuations in the rate from quarter to quarter and we now expect our long term rate to be in the low teens level. Other income and expense was a total of approximately $11 million in expense in the September quarter. The main components of other income and expense our interest income from the cash and investment balances we hold, offset by expense related to our outstanding debt. The total interest expense and all tranches of our debt is right now about $41 million per quarter. You should expect that other income and expense will fluctuate quarter-to-quarter, based on several market-related items such as our deferred compensation assets, venture capital investments and foreign exchange. We continue to execute on our capital return program during the September quarter. We allocated $234 million to capital return in the quarter with $75 million related to open market share repurchases and $159 million in dividends. I would like to remind you that we continue to have an ongoing structured repurchase program that is expected to mature in the December quarter. This will continue to reduce our share count. We remain on track with our committed capital return. We currently have approximately $3 billion remaining in our Board authorized share repurchase program. Diluted earnings per share came in at $3.18, which was at the high end of the guidance range that we provided for September. We ended the September quarter with diluted shares for earnings per share at approximately 151 million shares, which is the seventh consecutive quarter where our diluted share count has declined. The share count includes a dilutive impact of approximately 5 million shares from the 2041 convertible notes. 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 switch to the balance sheet. Our cash and short-term investments, including restricted cash, increased slightly in the September quarter to $5.8 billion from $5.7 billion in the June quarter. Cash flows from operations were $464 million, which was offset by share repurchase and dividends. Year-to-date in calendar year 2019, we have had strong cash from operations performance and we're on track to end this year with the second highest level of free cash flows in the Company's history. DSO increased to 69 days versus 56 in the prior quarter. The DSO increase is related to the timing of customer payments occurring at the end of the September calendar month, which falls within our December fiscal quarter. Our inventory balance declined sequentially by $57 million, which is the fifth consecutive quarter where inventory balance declined. Inventory turns were 3.2 turns, which was just a little bit less than the 3.3 turns that we saw in the June quarter. Non-cash expenses included approximately $43 million for equity compensation, $49 million for depreciation and $16 million for amortization. September quarter capital expenditures came in at $39 million, which was a decrease from $66 million in the June quarter. Our September quarter-end headcount was flat with the prior quarter at approximately 10,700 regular full-time employees. So now looking ahead I'd like to provide our non-GAAP guidance for the December 2019 quarter. We are expecting revenue of $2,500 million, plus or minus $150 million. Gross margin of 45% plus or minus 1 percentage point, operating margins of 27% plus or minus 1 percentage point. And finally, earnings per share of $3.80 plus or minus $0.20 based on a share count of approximately 150 million shares. I'm pleased to share with you the results we've delivered throughout calendar year 2019 and what has been a challenging industry environment. As Tim noted the supply demand environment is improving for the memory segments and we've made good progress in our foundry and logic positioning. Our installed base business continues to be on track to deliver a growth year in 2019. We're well positioned heading into 2020 and are optimistic about our future performance going forward. Finally, I'd like to announce our plans to host an Investor Day on March 3rd, 2020 in New York City. Details on the venue and precise time will be forthcoming.

Question on the WFE, Tim, you mentioned WFE going from low $40 billion to mid $40 billion. I wanted to understand if the majority of the increase has come from the foundry/logic segment in terms of the revised outlook?

We've seen some improvements, particularly in the foundry and logic sectors. There's also early evidence of increased spending in NAND, as we have projected for the December quarter. Additionally, we've noticed ongoing growth in the China WFE, which has strengthened throughout the year. All these factors contributed to our upward revision in WFE.

Yes. Good afternoon thank you for taking the question. I guess first question, if we look back through to 2018, it looks like your share of wallet for WFE with NAND is roughly 30%. So curious as you think about moving to a rising layer count and your leadership in the high aspect ratio etch, and the just announced deposition wins on the call tonight, how should we think about your share of wallet as we go to 128 layer and above into 2020?

Our SAM as a percentage of customer spend continues to increase with layer count, and that's for two reasons; one, I mean obviously the simple fact of building and etching the higher stack, but also the fact that, as I mentioned there are new steps and new opportunities that get created for dealing with issues such as; in the VECTOR DT case the stress associated with those taller layer counts. So, I think that our view is SAM grows as layer count increases.

Yes. C.J., I think, Tim, actually mentioned in his prepared remarks that they did grow sequentially and it was the third consecutive record quarter for the Reliant component of that business. I'm not going to quantify next year yet, a little bit too soon. But what we said in the past, and I can continue to be very comfortable saying today is, I have a hard time envisioning a year when the installed base business doesn't grow, it should grow every single year because chamber count grows every year, it's growing this year, even in a depressed memory spending environment, and we continue to bring new advanced service offerings to market that we hope enable us to achieve more and more of the customer's OpEx spend. So that's how you should be thinking about that C.J.

This is the second quarter in a row of the heavier China domestic mix. Do you guys anticipate this bias to continue into the December quarter and into next year and similar to my question last time? Is this in your view a focused effort by China to accelerate their semiconductor manufacturing capabilities, given the trade tensions with the U.S. or more your China customers just having more confidence to move forward with their early memory and foundry programs?

Yes, Harlan, what I meant to convey is that I hinted at this last quarter, indicating that the current spending level from local Chinese customers is above normal. Tim highlighted that some of the recent growth in WFE originated from China, likely around $6 billion. Looking ahead to next year, we anticipate further growth, though it may vary; these large projects can be inconsistent at times, with fluctuations depending on when equipment is delivered to specific fab projects. Tim, would you like to add anything?

Yes, I believe we've observed an increase in domestic spending in China throughout the year, and we expect this trend to continue. A significant aspect of this development for Lam is that a large portion of the new spending in China is focused on the memory market, in which our serviceable addressable market and our market share are quite strong. Therefore, we view China as a key area of opportunity for us.

Thank you for the insights. The team is maintaining its strong momentum in design wins for non-critical and legacy technology nodes. As you mentioned, the Reliant systems products are performing well. We are hearing from customers that they are extremely focused on productivity, throughput, uptime, and footprint, all of which affect overall wafer costs. Can you provide any information on the growth rate of the non-critical and refurbished business systems and how this segment compares to your total revenue?

Maybe you'll have to wait until Investor Day for that. We do plan to provide more detail in those areas, and we will deliver on that promise. Regarding your comment about customers being focused on productivity, that’s one reason we have been discussing it. It takes time for our products and efforts to translate into new wins, but we're beginning to see progress in advanced services, particularly where our intelligent database tools are helping to reduce troubleshooting time on systems and minimize unscheduled downtimes. These are important to customers because they enhance productivity for tools that are already in place and are relatively easy to implement. Therefore, we are prioritizing productivity as it benefits both the customers and the industry overall.

Yes, good afternoon guys. Thanks, let me ask the question. Congratulations on the strong results. Tim, I just want to go back to the market opportunity in logic/foundry for you. If you kind of look at calendar year-to-date that business combined for you was up somewhere between 30% to 40% year-over-year? I guess, I'm just trying to get a sense of how we think about your market position, maybe in North America as we see 14 go to 10 go to seven and maybe in Taiwan as we see seven go to five go to three, can you talk a little bit about how much visibility you have on product tool of record on some of these critical etch and deposition steps? And how we might think about your share opportunity as we migrate down these nodes?

Sure, I can address that without getting too specific about North America or Taiwan. I want to highlight a couple of points I've made before. In the logic and foundry space, it takes years to establish yourself as a leading development tool, and eventually, you'll see that transition into significant production tool usage. When discussing the three-year revenue opportunity, it's intended to indicate how long it takes from winning one of those selection decisions to realizing revenue, which is certainly the case in the foundry and logic sectors. As we evaluate growth opportunities at 10, then seven, and then five nanometers, it's important to note that decisions made now will generate revenue over the next several years. While this may not provide the exact specificity you were looking for, it essentially means that our current wins will contribute to our revenue in that space for at least the next three years.

Yes, John, I mean, one thing I would point out to you and if you look over the last two years, you will have seen several quarters where the cash we actually deployed moved down somewhat. That was because in the quarter before that we put one of these accelerated share repurchase programs in place. You have the same phenomenon going on this quarter. So even though the cash that we deployed in terms of open market repurchases wasn't all that significant this quarter, that ASR was still executing buying stock back, and that ASR that's currently out there will complete in the December quarter. So we'll be thinking about what we're going to do incrementally as we go forward. So far, just remind you what we talked about and it's been a while now the last Analyst Day that we're committed to at least 50% of free cash flow returned to shareholders, and obviously if you look at our history, over the last five, six years, we've done a whole lot more than that. And I had went on the timing to complete the current authorization and I'm going to kind of remain that way. I've said in the past, we'll be opportunistic and that's as much as I have quite right now.

Thanks a lot. I guess my first question, Doug is can you help us a little bit with the mix in December. I'm curious, if the uptick in revenue is going to be more on the NAND side and more on the foundry side? Thanks.

Yes, what I said, Tim in my remarks, was I expect December will continue to be pretty strong with foundry and logic quarter. So that's a key piece of what's going on.

Okay, great. I wanted to focus a bit on the situation in China. Currently, China accounts for about 25% of your revenues based on the last 12 months. I'm interested in knowing how much of this revenue comes from domestic projects compared to multinationals. If I recall correctly, you mentioned that China represented about $5 billion of the 2018 wafer fabrication equipment market, and you indicated that around $3 billion of that figure was from domestic sources. Now, you mentioned that China is expected to exceed $6 billion this year. Can you clarify how much of this $6 billion will come from multinational versus domestic sources, and also provide insights on the potential growth for domestic revenue next year? Thank you.

Yes, let me walk it back for you a little, Tim, because some things have moved around a little bit. When I look at what happened last year, local China ended up being I don't know $4.5 billion of WFE roughly. So it ended up being maybe a little bit more than that for that we have been talking about and the way we see it today, it's above $6, it's somewhat above $6. I don't know for sure what next year is going to look like. But as we look at our analytics in the fab projects that are coming in and whatnot, I do see pretty strongly believe it will grow next year. I'm not ready to tell you how much yet. We'll give you more clarity on our WFE view for next year on the next earnings call. But I think local China will continue to grow next year.

Yes. Thanks for taking the question and congrats on the strong results. Tim, you talked about early signs of a recovery in NAND in your prepared remarks. And Doug, you just mentioned that most of the growth or at least implicitly, I think you commented that most of the growth in December quarter should be coming from foundry and logic? So should we expect some of the NAND projects that we're all collectively hearing about should hit the March quarter from a rev rec perspective?

Yes, there may not be a significant change from what we've previously stated. Since the beginning of the year, we've indicated that memory spending would likely remain weak for the entire year. When I mentioned early signs, it's still quite early, but we are starting to see some of those projects materialize, as you highlighted, with some ordering happening in the December quarter. However, we still believe that we will end the year with a 30% growth rate in bit supply, and customers are managing supply growth cautiously. Those early signs indicate a healthy industry, and we anticipate growth in 2020. We prefer not to provide exact timing at this stage, but it seems to be on the horizon.

Got it. And then as a follow-up, I just wanted to hit the logic and foundry opportunity dynamic into 2020. Obviously, you guys have done a great job over the past couple of years and gaining share in both buckets. If we assume that spending in logic and foundry is largely flat in 2020, and if you assume EUV adoption continues to grow. Based on what you guys know from a design win or application win perspective, can you still grow logic and foundry revenues in that sort of environment backdrop? Thanks.

Yes, it's a great question and the answer is yes, we would expect to grow in that scenario, based on a couple of things; one, as you move forward, even on the same WFE, our SAM as a percent of that WFE should increase as transition still continued to occur to more advanced nodes. Etch and deposition opportunity increases at each successive technology node, even in the face of EUV. So I think in the scenario described, we would expect to have a larger opportunity and we do believe that we're winning share as well and therefore we would grow.

Yes. Hi, thanks for taking my question. I had two of them; first one for either Tim or Doug. More an industry focused question you spoke about how NAND bit growth exiting this year is going to be 30%, kind of, curious like ask your customers start ramping 128 layer NAND, if next year demand bit growth is below 30%. Do you still expect the 128 layers spending to go through next year, because it's more strategic, low cost in nature? Or do you think it might get throttle back if demand bit growth is slower?

I don't think that's what will happen, but if it does, I believe the year would resemble this one in that most industry spending would be focused on node conversions rather than new capacity additions, as this approach reduces cost per bit and improves economics. Additionally, I anticipate that the supply growth rate will continue to decline into early next year due to the investment reductions made this year. Consequently, we are moving toward a decreasing growth rate as we approach the first half of next year. Tim, would you like to add anything?

Yes, I think just to reiterate Doug's point, I mean, technology transitions we think occur every year, simply because of the benefit to bit cost. And so, I guess, I would say that in any year, which is not our view of declining supply growth we would still see the majority of the spend in technology transitions. And I guess there is one other key point to think about, we've mentioned this a few times in a technology transition from say 96 layers to 128 layers, the majority of that spend is for etch and deposition. So there's definitely an outperformance statement there, if spend continues to be based just on technology transitions.

Thank you very much. Congratulations on a strong quarter. Tim, many of my market questions have been addressed. Could you provide a qualitative view of how Lam is positioning itself to take advantage of next-generation memory technologies like MRAM and ReRAM?

Yes, I guess maybe the simpler statement that I make inside the Company is we're not running from our leadership position in memory, and that includes in these new emerging memory markets. And so we're actively looking to develop new applications, new tools that meet the needs of those devices. We've spoken about, one of them in particular so far this year, which is the ion beam edge tool, that's used for MRAM and we have established a very strong position for that particular application, phase-change memory ReRAM, there are other devices we are actively engaged in development with the leading companies. So it is a target market for us, in fact, one might argue that we feel we, sort of, we already sort of own that memory space and I think it's our focus.

It's Doug. Just to add-on, if you really want more detail you can go look at the transcript of the Flash Memory Summit, where Tim and Rick Gottscho spent lots of time talking about how we view these emerging memory architectures.

Yes, thanks for taking the question. Tim, I wanted to follow-up on the comments that you made that calendar '20 to be a year of outperformance for Lam. Can you just help us understand how much of that comes from moving deeper into the sweet spot of the foundry/logic share gain that you've been talking about versus help that you would get from what appears to be a nice and very encouraging upturn that's starting to occur in NAND or maybe something else like SAM expansion?

Yes, to provide more details on that, we will need to wait until we discuss our 2020 WFE outlook in the next quarter. You are right in noting that our outperformance in 2020 is closely tied to our heavy reliance on the memory market, and we anticipate that the spending mix will shift back in our favor next year. Even with strong ongoing performance in logic, we expect some improvement in memory. We have enhanced our share and opportunities in logic and foundry, and we continue to benefit as these areas remain robust. Additionally, as Doug mentioned, our CSBG segment is growing as we broaden our portfolio of advanced services. I can break down how much each of these contributes, but each aspect plays a crucial role in our story for 2020.

It's something we've been working on for years, I mean, Tim was driving those on years ago, honestly in rest of companies rally behind it. We're going to keep squeezing efficiency out of every SG&A dollar we spend. We want to be totally rigorous about that. So that we can allocate more of those dollars to R&D. I think that 60%, 70% last quarter might be an all-time high for the Company. I haven't gone all the way back, but in my recent memory that was an all-time high. We're going to keep at that, we're going to continue to try to get better, we do this every words part of the culture of the Company to be focused on continuous improvement. I don't know how we can get it obviously, but we're going to keep working on it.

Thanks for taking my question. And I joined a little late, so I apologize if this was asked. But DRAM was quite strong in the quarter. And I'm wondering what caused that and how sustainable is that trend?

When I look at it, it's primarily conversion spending. That's really what we've seen for the entire year is focused on node conversions, it will ebb and flow. The important thing when you think about DRAM is to understand when we look at similar to what we were describing NAND exiting the year below where we believe demand growth to be, you got a similar story in DRAM. As we look at the investments that are occurring in DRAM this year exiting the year supply growth is probably in the low teens. And we believe long-term demand growth is in high teens maybe approaching 20%. There is a ways to go, Vivek, to continue to burn inventory out of the channel. I think that's going to take a little bit longer. But what I do know is at some point the inventory will be burned off and spending will grow more significantly. In quarter-by-quarter, it's just going to be dependent on what projects are underway at what customers.

Yes, thanks for taking the question. You talked about improvements and inventory that you've seen across the NAND flash. I was wondering, if you could talk about, to the extent you can, factory utilization rates and your installed base?

It's challenging for us to pinpoint exactly what the utilization rates are. We did notice a slight pullback in both NAND and DRAM this year, which our customers communicated fairly well. However, it's a better question for them as we don't always have precise information on their utilization levels.

Thank you for taking my question. I have a couple of inquiries, most of which have already been addressed. At a high level, I want to ask about the memory market in 2020. When do you anticipate we will see capacity upgrades, or will it all be technology upgrades? Additionally, while you provided extensive details on NAND, there was less emphasis on DRAM. Given the commentary about server demand and the expected increase in Q1, does that imply you believe that’s going to be the lowest point, or will we start to see a supply-demand balance for DRAM by the end of the year?

Well, I think that what we've said about DRAM maybe just was that we think through the first half of next year. Inventory remains elevated and so it's really not, I guess our view at this point is DRAM maybe more of a second half story for next year. Obviously, we'll give far more color as we develop our full 2020 outlook. It's just that NAND is much more upon us right now. Simply because the issues are being worked through more quickly as a result of the supply constraints that have been in place this year and maybe also the demand catalysts for NAND that are occurring right now.

Just wanted to thank you everyone for joining us today, appreciate it.