Lam Research Corporation (NASDAQ:LRCX)
Q4 2008 Earnings Call
January 28, 2009 5:00 pm ET
Carol Raeburn - Senior Director of IR
Ernie Maddock - SVP and CFO
Steve Newberry - President and CEO
CJ Muse - Barclays Capital
Tim Arcuri - Citigroup
Satya Kumar - Credit Suisse
Gary Hsueh - OppenheimerFunds
Stephen Chin - UBS
Jim Covello - Goldman Sachs
Steve O'Rourke - Deutsche Bank Securities
Edwin Mok - Needham & Company
Atif Malik - Morgan Stanley
Patrick Ho - Stifel Nicolaus
Ben Pang - Caris & Company
Brett Hodess - Bank of America-Merrill Lynch
Welcome to the Lam Research Corporation December 2008 Quarterly Financial Results Conference Call. (Operator Instructions).
I would now like to turn the conference over to Carol Raeburn, Senior Director of Investor Relations. Please go ahead, ma'am.
Thank you. Good afternoon, everyone, and welcome to Lam Research Corporation's quarterly conference call. Here today are Steve Newberry, President and Chief Executive Officer; and Ernie Maddock, Lam's Chief Financial Officer.
Today we will discuss the financial results for the December 2008 quarter, and Steve will share our business outlook for the March 2009 quarter before opening up for Q&A.
A press release detailing our financial results for the quarter ended December 28, 2008 was distributed by Business Wire shortly after 1 o'clock this afternoon and is available on our website, at lamresearch.com.
Today's call contains forward-looking statements including those relating to our forecasts of shipments, revenues, expenses, margins and earnings per share, as well as other statements of the company's expectations, beliefs and funds that are important factors that could cause actual results to differ materially from those described in these forward-looking statements, which can found in the slide package accompanying this conference call and on our most recently filed Form 10-K. All forward-looking statements are based on information as of today's date and the company assumes no obligation to update any of them. This call is scheduled to last until 3 PM and we ask that you please limit questions to one per firm.
With that, I'll turn the call over to Ernie for a review of the December quarter results.
Thank you, Carol. This afternoon we will discuss our December 2008 quarter financial performance as well as our 2008 calendar year results.
As expected, our quarterly results are a reflection of the challenging business climate. Shipments for the quarter were $226 million, down 35% from last quarter and consistent with the high end of our revised guidance range. For application and market share market segment breakout for the quarter, 300-millimeter applications represent 85% of total system shipments. Applications at less than or equal to the 90-nanometer technology node were 85% of system shipments.
Memory segment customers in the quarter comprise about 48% of the total system shipments, and as a subset, the NAND components represent approximately 42% of total memory. Foundry customers were 28% of system shipments with logic and other at 24%.
December quarter revenue of $283 million is consistent with the high end of our revised guidance and is down 36% from the prior quarter. 2008 revenue was down 27% from record levels achieved in 2007. During the second half of 2008, we saw declines in systems as well as spares and service revenue relative to the first half of the year, and for calendar year 2008, overall spares and service revenue posted modest growth.
Ongoing gross margin was 38.5% for the December quarter, consistent with the guidance provided in our last call, and is lower than the 42.3% for the September quarter due to product mix and reduced factory absorption related to business volume.
Turning now to review our quarterly expenses, ongoing operating expenses were $126 million in the December quarter, which is down $23 million from the September quarter. Lower expense levels reflect aggressive action to contain expenses in initial benefits from our previously announced restructuring activities.
In addition, our operating expenses benefited from two significant discrete compensation adjustments. The first of these was a reduction in variable compensation liabilities and the second was a reduction in the company's liability to participants in the Executive Deferred Compensation program resulting from recent stock market declines.
Our ongoing operating loss was $17 million or 6% of December quarter's revenue, better than the operating loss of 11% provided in our revised guidance. In the December quarter, ongoing other income was $300,000, a decrease from $9 million in the September quarter.
Our interest income and interest expense were similar to the prior quarter and as a result of declines in forecast revenue, we incurred a foreign exchange loss related to our hedging program. In addition, the re-measurement of our non-US balance sheets resulted in foreign exchange losses.
Non-ongoing items were $27.6 million for the quarter and consisted of $17.8 million for restructuring expenses, a $7.6 million loss on currency fluctuations related to our tax restructuring, and $2.1 million for other non-ongoing items.
Moving onto taxes, we received a tax benefit on our quarterly operating loss as a result of an ongoing tax rate of 31.2%. The benefit was significantly lower than what would have been generated by the 70% to 80% tax rate forecasted for the December quarter and reflects tax decisions made during the quarter as Lam's business outlook including total fiscal year results became more clear.
As many of you know, our tax strategy centers on maximizing earnings in low tax jurisdictions and reducing earnings in the high tax jurisdictions. In periods of losses, this dynamic reverses, accumulating most of the losses in low tax jurisdictions and generating small profits in others.
While we remain confident that our tax strategy will yield a long-term tax rate of approximately 25%, results generated during the next few quarters will be highly variable and non-intuitive. For example, our current view for the March quarter is a tax expense of approximately 7% to 12% of our operating loss.
We continue to avail ourselves of tax opportunities that will generate long-term benefit for the company. The lower tax benefit created by this quarter's tax rate differential generated an ongoing operating loss per share of $0.09 versus our revised guidance of $0.04 to $0.05 loss per share.
Turning now to the balance sheet, cash and short-term investments including restricted cash totaled $1.1 billion representing a decline of about 8% from September. Cash from operations was a negative $39 million. Helped by our strong cash performance in the first half of the year, our cash from operations for the full year was 18% of revenue and within our targeted range of 15% to 20%. We also achieved our objective of generating positive cash from operations in the Spin Clean business.
Major non-operating cash disbursements included $23 million for stock repurchase activity, $12.5 million in debt repayment, and $9 million for the purchase of the remaining minority interest in SEZ. Our stock repurchase activity was concentrated at the beginning of the December quarter, and we have currently suspended purchases under the plan authorized by the Board of Directors.
The rapid change in business volume has contributed to our inventory performance of 2.7 turns versus our September quarter performance of 3.8 turns. Accounts receivable days outstanding increased to 93 days, up from 64 days in the September quarter.
On a forward-looking basis, we will continue to selectively extend payment terms to certain customers and expect that the level of business that includes extended payment terms will remain relatively constant on lower revenues and thus expect higher DSO levels will persist over the next few quarters.
At the end of December, Lam's deferred revenue balance was $68 million. This amount does not include shipments to Japanese customers of $9 million that will revenue in future quarters. Total capital expenditures were $12 million, depreciation and amortization remained almost constant at $17 million.
Employee headcount declined to approximately 3,300 from 3,700 in the September quarter and reflects most of the headcount reduction outlined in our previously announced restructuring plan. For more complete details of the geographic breakdown of shipments and revenues, please see today's press release in our website for a reconciliation of our shipments revenue, deferred revenue, and cash.
I will now turn it over to Steve.
Thank you, Ernie and good afternoon everyone. On our last call, we reported that we were beginning to see signs of rapid deterioration in the semiconductor industry; including decelerating IC unit demand, significant reductions in fab utilization, and sharp declines in investments for new systems shipments as well as the beginnings of reduced spare parts and services purchases.
In November, we implemented a cost reduction plan designed to lower our breakeven and reduce our quarterly spend rates by appropriately $15 million to $20 million per quarter. I might characterize those actions as bracing for a Category Three to Four type hurricane – major, but not quite catastrophic.
As the quarter progressed, conditions continued to deteriorate to the point that now the storm has hit our shores and we are being crumbled by a full blown Category Five hurricane of unprecedented speed and force.
As I speak today, our environment is impacted by continued declines in IC unit demand, high inventories in all segments of semiconductor ICs, along with extremely tight credit markets and the presence of huge losses in the semiconductor manufacturing segment, resulting in an almost total shutdown of purchases for new equipment and a significant reduction in purchases for spare parts, consumables and service support.
New equipment purchases that do exist are almost entirely and strictly for specific tools needed to upgrade production lines to the next technology node. I expect this environment to continue for as long as it takes for the global economies to stabilize and for IC unit demand to recover, and then grow beyond demand levels we saw earlier in 2008.
Eventually, as a function of a stronger global economy and the introduction of new applications in new electronic products created in large part by new semiconductor devices coming out via 4X and 3X generation production fabs, we will see a return to stronger investment for capacity expansion.
How long it will take before meaningful wafer start expansion occurs is anyone's guess, but we are expecting this type of environment to persist for at least the next six to eight quarters. We expect wafer fab equipment spending in calendar year 2009 to be in the vicinity of $10 billion, representing the decline from calendar year 2008 of approximately 50%. This level of spending will be the lowest level of wafer fab equipment spending since 1994 and 35% to 40% lower than the spending in the middle of the last major downturn in 2002.
Reasons for the lower level of spending forecasted for calendar year 2009 is a much more consolidated semiconductor manufacturing industry operating at a more capital efficient 300-millimeter, the availability of used tools to fill 200-millimeter wafer start demands, slower adoption in the foundry and logic fabs to next-generation technology nodes, limited access to debt to invest in new technology production even for those who want to and need to, and during this downturn, no need for investment to position for a new wafer size that existed in 2000 and 2003 timeframe and the move occurred from 200 to 300-millimeter.
This leads us to an outlook for the March quarter. We expect our shipments to decline to a range of $155 million, plus or minus $15 million. Revenues are expected in the range of $175 million, plus or minus $15 million. Gross margins in the range of 25%, plus or minus 2 percentage points.
We anticipate an operating loss in the range of $70 million to $90 million, around the midpoint of the revenue guidance, with net income as a function of the unfavorable tax situation that Ernie described earlier expected to be a loss in the range of $0.60 to $0.80 per share.
As a function of these sharp drops in shipments, revenue and profitability, we will be implementing an additional significant set of reductions to the cost structure of the company, targeting additional variable cost reductions, as well as, this time, elimination of various aspects of our fixed cost structure that are unnecessary relative to our expectations of our future shipment and revenue levels. This cost reduction plan is being developed by our management team as we speak, and I expect we'll be communicating the details of the plan sometime in the first half of the month of March.
In addition to this comprehensive cost reduction plan, we are taking two immediate actions that are targeted at reducing our expenses in the March quarter. These two actions are an additional five days of shutdown in the month of February and the implementation of a salary reduction program for all employees ranging from 17.5% reduction for the CEO to 2.5% reduction for our lowest compensated employees.
These near-term actions are already significantly embedded in our March quarter guidance. Any additional improvement as a function of cost reductions affecting the March quarter will be communicated if material.
In spite of the near term challenges of weathering this Category 5 storm, I remain optimistic and confident in the ability of Lam Research employees around the world to continue to deliver world class solutions to meet our customers' needs. As a result of their previous efforts, we enter this downturn with a strong balance sheet, which we will utilize to enable us to continue our focus on the following priorities while supporting our customer's current install-based needs.
We will continue our investments in the etch markets with a focus on continued application share gains. Areas of focus will be on winning the emerging applications around double patterning and other transistor-related critical etches.
In clean, we will focus on rapid introduction of our newest spin product, the DV-Prime and aggressively pursue penetration into new applications emerging in the front-end of the line, as well as material and manufacturing cost reduction activities in our Spin clean division to improve its gross margin contribution to the company.
We will continue to invest and aggressively work to qualify our linear C3 clean tool into additional critical cleans requiring short contact time and precise CD control or yield and reliability improvement. In addition, we expect to introduce shortly, a new damage free particle removal capability with the linear tool expanding the applications where it delivers superior and differentiated clean results on the wafer.
We will also continue to focus on the development of new products targeted at new markets in need of advanced technology solutions, as well as continue our investments in globalization of our supply pace in order to deliver high quality, low cost, long lasting spare parts and consumables to our customers.
The key objective for us during this downturn will be to prudently utilize our strong cash position to make the appropriate strategic investments which will position us for strong financial and operational performance when the industry returns to investing and expanding wafer start output.
Lam Research has traditionally used downturns as a time to redefine our business model, and work closely with our customers to solve their problems in anticipation of future production ramps. We expect to operate no differently in this downturn, and as before we expect to emerge and even stronger and better company.
This concludes my comments, and with that we will now open the call for your questions.
Thank you. (Operator Instructions). Our first question comes from the line of CJ Muse with Barclays Capital. Please go ahead.
CJ Muse - Barclays Capital
Yeah. Good afternoon. Thank you for taking my question. Steve, question here is on the cost cutting side. I know you're going give more details in March, but I guess, if you can't share a targeted breakeven given your call that this downturn is going to persist for another six to eight quarters, can you share what kind of cash burn you are comfortable with given your current strong balance sheet?
Well, I think that we have a Board of Directors meeting next week and as I have not had an opportunity to discuss that with the Board, we have not really looked at enough of the specifics of the significant cost reductions that we want to take.
I think it would be premature for me to communicate that, because I think that that will be a decision that I and the management team will present to the Board in terms of what we think it's going to take to be able to make the investments that keep our products and our technology position strong, support our customers effectively and we'll come to a set of decisions with the Board as to what that cash burn is likely to be, and then we will complete the specific cost reductions that will be aligned to that. So, sorry, I can't answer that for you right now.
Our next question comes from the line of Tim Arcuri with Citigroup. Please go ahead.
Tim Arcuri - Citigroup
Hi, Steve. I wanted to ask you a question about maintenance CapEx and kind of how you think about that. I remember Jim used to talk about the fact that there is an upgrade that chip makers have to buy that's kind of every two years, that's basically 10% of the initial tool price. So, that would imply that there's kind of 5% of the dollar installed base that basically has to be turned every year and if you look at the trailing five year dollar installed base, you were about $260 billion and there is some that's come out of that because of capacity shutdowns and things like that so maybe you're at 200 or something a little bit higher than that.
So on that math it would imply that kind of, at a wafer fab level maintenance CapEx is maybe about $10 billion, $10 billion to say $12 billion which is basically where we are to a bit higher even than what you're guiding '09 wafer fab equipment. So, I am wondering how do you think about maintenance and would you agree with those numbers.
Yeah, that's a good question and we've been studying that pretty significantly trying to look at what those maintenance levels were in past significant downturns of this magnitude and one of the things that we looked at of course was 2002, $14 billion was spent but when you look at the makeup of that $14 billion, there was a couple of things that were present and one was, one, a much greater number of customers that were involved in spending and we've kind of calculated that at about $3 billion that was spent in 2002 by a lot of the logic companies that were still investing in 200-millimeter and technology buys, and for this downturn essentially with consolidation and no need to invest any significant 200-millimeter because you can get all the 200-millimeter tools you want on the used market.
You then kind of go and look at well, what's happening on the leading edge relative to memory and relative to a foundry and we kind of view that somewhere around $7.5 billion to $8 billion will be spent by the top 10 companies in the industry, and that's actually very correlated to what they spent in 2002. Our data said they spent a little over $8 billion, maybe $8.2 billion. And so, then when you look at the next 10, which are still players that are present, still players that are investing, in 2002 they spent about $2.7 billion and we think in 2009 they're more likely to spend maybe $1.5 billion, and that another billion or so, kind of rounding for other players.
And so, I think that when we look at maintenance levels, it's a function of what's capital asset efficiency today, which I think is clearly higher at 300-millimeter. I think that we have a slower move to the next generation technology node so that the foundries and the logic companies, even though they're trying to move to 4X, they're ready to move to 4X, their customer demand pool at 4X is slow. And so, we can see that the ramp in wafer starts for 4X is muted relative to the speed at which we were moving back in the 2002 timeframe.
And then, if you couple with that, there's memory companies who would like to move, whether it's 6X or 5X, because they have designs where they can't get access to capital, particularly the Taiwanese memory manufacturers who have lost literally billions of dollars in the last couple of quarters. So that's suppressing the ability to operate.
So, I think your numbers that would say under, maybe, credit markets that were flowing, you probably see it more around $12 billion, but that's one of the reasons why we're sitting at about $10 billion because of the accumulation of all of those factors that I mentioned.
Thank you. Our next question comes from the line of (inaudible) with Credit Suisse. Please go ahead.
Hi. Actually, it's Satya Kumar. Steve, if I annualize your Q1 guidance it seems like we read down about 63% year-on-year. Your guidance for CapEx is down 50% and you are talking about a six to eight quarter downturn. Is there really any meaningful inflection that you are seeing in the business? Doesn't seem like that's the case for the rest of the year.
And the second part to that question, if I look at what's happening in DRAM right now with the slowing growth in content per box and the slowing growth in ICs, is there a permanent reset that we are seeing to capital intensity for the semiconductor industry?
Satya, can you repeat the first part of your question again?
Yes. I'm just trying to see if you're seeing any inflection in your business as you look out beyond Q1. If I annualize Q1 revenues, it's down about 63% versus your CapEx outlook of 50%. So it doesn't seem like you are expecting much of a meaningful inflection in your business beyond Q1. Is that the right math?
And the second part is on capital intensity of the industry longer term?
Yes. There are a couple of things going on, both in terms of the December quarter and the March quarter, and that one is the presence of Intel spending, which was probably about $1.2 billion or $1 billion or so of wafer fab equipment. It's not clear what Intel is going to spend in the first couple of quarters. I think it all depends on how fast they want to try to get there 32-nanometer product ramp going.
But clearly, where we are right now is in a situation for the March quarter where even those companies that clearly are planning to do technology related buys are almost on a weekly basis saying yes then no, yes then no. Customers are clearly managing their cash extremely carefully. They're monitoring the demand. They're monitoring their competitors and we have a situation where literally just two days ago, 10 million of what we were scheduled to ship in this quarter were stopped at June.
The magnitude of what has changed in terms of what was planned to ship in the March quarter from only two months ago is about 240 million. So we're in a situation where the March quarter is hopefully the bottom of this in terms of a free fall in just stopping all spending.
And so, while I think that we're going to be in a similar environment, I would expect that it's more likely that we'll see a shipment in the quarters going forward being somewhat higher although not significantly but consistent with a $10 billion level. I think we view that etch, which is typically a 12% to 13% of wafer fab equipment. In this environment, it is likely to be closer to 10% or 11%. Clean, in terms of total clean 5% or 6%, slightly less than what it historically is because there is a lot of capacity related buys as opposed to technology buys.
So you are correct in that the March quarter, if you run rate it, we would be actually operating to a lower wafer fab equipment environment and so, I do expect that we'll see things get slightly better as the year goes forward, but not dramatically so.
And then your second question was about DRAM and capital intensity. I mean, right now, we're sitting on a shutdown of about 550,000 wafer starts per month of DRAM capacity. That doesn't include about 70,000 of 110-nanometer production that occurs in Taiwan that's been shutdown and is likely never to come back.
So, DRAM capital intensity is going to drop to below 20% in 2009, and then probably come back to 25 or 30, but that will be a function of continued DRAM IC unit growth, which we believe will occur, but you've got to suck up a lot of ideal capacity over the course of the year, plus you've got about 300,000 wafers worth of inventory either in finished wafers are in die banks that is a function of excess output that's occurred in the last few months or so.
So, I think that when we look at the long-term capital intensity for DRAM, and I am talking about once we get to unit demands that suck up all the excess and go forward, we're still probably looking at something in the 30% range because one of the issues for memory of course, is that they will be moving to the immersion nodes where 5X and 4X in DRAM and some 4X, but clearly 3X in NAND Flash, and so immersion is going to increase the capital intensity relative to what they were spending at the 6X node. What that means for etch and clean may not be as significant because a lot of that money obviously will go into [lithography].
Thank you. Our next question comes from the line of Gary Hsueh with OppenheimerFunds. Please go ahead.
Gary Hsueh - OppenheimerFunds
Yeah. Hi, Steve hi, Ernie. You've kind of referenced how a $10 million push-out in the March quarter Steve would sort of come back and benefit the June quarter. I know it's really still too early but just, kind of, approximately how much of a hand to mouth situation are we in?
How much of a situation are we in today in terms of hand to mouth, because you don't provide orders or order backlog. I'm just wondering in terms of that $155 million shipment guidance for the March quarter, how much of that is pulling out of backlog and how much of it is instantaneous kind of hand to mouth order turns?
You could probably characterize that as being synonymous with the beggar who's standing on the street corner with a tin cup out hoping that anybody that goes by will drop a dime in our cup. It's one of those situations where you've got only less than two handfuls of customers, some of them with plans to take deliveries of $5 million to $7 million and whether they've got the orders in or not, it's kind of irrelevant because that's one of the reasons why we don't talk about orders because you could have the orders and backlog and it doesn't make any difference.
If they want to push it, they're going to push it. If they want to cancel it, they'll cancel it and with lead times as short as they are, typically most customers are sitting there saying “Okay, here is what we want. Build an inventory and a production plant to support it and then we'll let you know the day before whether we're actually going to take delivery or not."
And so that's one of the reasons why you see us guiding shipments at 155 plus or minus 15 million, because we're in that kind of volatility, and we're at the point where when it pushes into June, it might be helpful to June, but what I don't know is what's going to push out of June and go to September and so, we're in an environment where the visibility is fundamentally, whatever we see and we're told doesn't mean very much, and you don't ship until you ship and everything else is best estimates of what's going to happen.
Thank you. Our next question comes from the line of Stephen Chin with UBS. Please go ahead.
Stephen Chin - UBS
Great, thanks. I was wondering if you could provide or give some more color on the March shipment guidance. Is the sequential shipment decline due more services to a lower spares and services business or is it really from lower equipment shipments or are both segments declining at the same rate now? If you could share any color on how the gross margin at the spare parts service business is holding up relative to I think you guided corporate gross margin is 25%. That would be helpful. Thanks.
I'll have Ernie talk a little bit about some of the makeup of the 25% gross margin, because that's kind of complicated but probably worth addressing for sure. Both the systems business is off dramatically; the spares and service business is off less so. Typically, what we see is that the spares business will track the decline in wafer starts. Thus spare parts and consumables are a function of wafer starts and the time that equipment is running, and so we're looking at an environment where we've seen those wafer starts decline 35%, 40%, foundry utilizations running 40% to 50%. So you can expect that the spares and service business will decline in that vicinity, and that's kind of where we are in the quarter.
Systems business is down in the 60% to 70%, again, because we're in a little bit of a trench here. But clearly, that's a function of fact that you don't need any capacity. People are wary about the rate at which they want to do technology at. And so, that's kind of the makeup of systems and service.
So, Ernie could talk about margin.
Sure. We tend to look at it relative to a pure margin on the toolset, and if we look at that, that is holding up relatively well. Obviously, at these kinds of revenue levels, it is significantly impacted by the mix of which customer is happening to be buying. So, on an underlying margin basis, while there is some small perturbation, we don't see any significant underlying change to the structural components of that.
I think the thing that is most impactive of the March quarter to a far more significant degree than the December quarter is the level of margin impact of the factories, which are obviously being utilized at significantly less intensity than they were during the December quarter and certainly during prior quarters.
If I were going to point to one thing that is most impacting the margin change, it would be a very significant change in the level of absorption coming from the factories, which is related to Steve's comments during his discussion about the fact that we're beginning to look at the fixed cost infrastructure of the company and size that to the environment we see on a going-forward basis to address some of those issues.
One other comment I would add to that is that from a product mix standpoint, in clean over the past year or so a lot of our revenues were associated with a mature released Da Vinci product that had good margins. The environment today in terms of clean purchases is almost exclusively for new technology penetrations and new technology-driven applications, which means we're shipping our Da Vinci Prime, which is a brand new product. It's in its early phases of material and labor manufacturing cost reduction. And if you combine that with the fact that you've got a factory absorption issue, you've got a lot of margin pressure coming out of the clean Group as a function of product mix as well as volume.
Thank you. Our next question comes from the line Jim Covello with Goldman Sachs. Please go ahead.
Jim Covello - Goldman Sachs
Hi, Steve. Thanks so much for taking my question. Could you maybe comment about the idled capacity in Taiwan and elsewhere that's going to have to get absorbed? Can you walk us through the dynamics of how that could come back online and need to get absorbed versus how that would just get shut down at some point if the downturn lasted long enough? Like at what point does that idle capacity just no longer become useful?
One of the things about idle capacity, if it doesn't get used long enough it goes obsolete. That's one of the nice things about our industry. Today, we think that there is an installed 300-millimeter qualified capacity of about 1,340,000 wafer starts per month that exists in DRAM. We think that with about 550,000 of that shut down, you've got 800,000 being utilized and that there is a demand that's about a need for 1 million wafer starts.
Problem is that we entered the first quarter with about 914,000 total wafers in inventory, so about 300,000 wafer starts per month of excess capacity. We see that over the course of the year leading edge DRAM demand will grow to a need for 1,300,000 wafer starts, and that by the end of the year the 1,340,000 of capacity will only grow to about 1,375,000.
And so, we think by the end of the year we'll have worked down the excess inventory, and we'll basically be idle with maybe about 90,000 to 100,000 of idle capacity. And I would expect that that would be 8X type technology that will be idled and probably doesn't come back.
We think there's about 4%, 5% unit growth in DRAM. That equates to about 600 million units of DRAM growth. And then, because the output is shifting from 8X, 7X to 6X, and then we'll see the start of 5X, there will be a need for investment to upgrade the 5X and there will be a need to invest from 8 and 7 down to the next technology node. And so, we'll see all of that go, but we only think that there will be maybe slightly less than $3 billion of wafer fab equipment investment in DRAM.
If you look at NAND, we think that NAND excess is probably only around 100,000 wafer starts per month right now and that the inventory situation is not as bad. There is probably 350,000 wafers to about 100,000 wafer starts per month excess. We think that's going to get absorbed fairly quickly, because we do think that NAND growth is still going to be present.
We think that you're going to end up in a situation where about 700 million units of NAND is needed and while we don't think that's largely SSD driven, we think that they will be positioning for that because we think that Toshiba is going to move in the middle to the later half of the year to 3X and do conversion of 5X wafer starts and Y3 to 3X.
We think Samsung will aggressively move its mix that's largely 5X and 4X related. They'll reduce the 5X and go more heavily to 4X and 3X and then Micron of course is in that mix as well with the ability to move from a 5X production, probably directly to a [4X] and so we think that there is an investment in NAND that's probably around, we're kind of targeting at about 1.7 million to maybe 2 billion.
But we think that by the end of the year with kind of expected demand environment we're talking about that we've got both DRAM and NAND running in a pretty healthy supply and demand balance and then in 2010, I think how much they invest in terms of whether it's similar, or whether it's more, really is what's the global economic environment, what's the recovery in terms of the consumer spending, what are businesses going to do for PC expansion which I'm sure they're going to delay. So, you could be setting a stage where in Memory, you'll see an uptick in spending because they will have to add more wafer starts than they're going to have to deal with in 2009. Hopefully, that was helpful.
Thank you. Our next question comes from the line of Steve O'Rourke with Deutsche Bank. Please go ahead.
Steve O'Rourke - Deutsche Bank Securities
Hi, thank you. Good afternoon. Just sort of shifting gears a little bit here. When you think about this kind of a downturn and maybe some of the opportunities that you might have, how are your etch prospects in segments where you've traditionally not been very strong like logic, and what applications might be the lowest hanging fruit if it's possible to win?
Well, Steve, I think for one, actually our market share in logic is very similar to what it is in DRAM and Memory. The only issue is, when you look at the IDM logic players, they haven't spent very much. If you say foundry is logic, we have over 50% market share in foundry.
Where we're being impacted is our market share in microprocessor because we do very well at AMD who's not spending all that aggressively, and we don't have any business that we do with Intel. So that clearly impacts us and in particular when you have a year where Intel's percentage of spending is up significantly from where it's been in '07 and '06, that impacts our market share.
So, having said that, where we're focused is in making sure that in the dielectric space, where our market share is approximately 40% globally, that we are targeting a number of additional critical dielectric etch steps both in memory particularly DRAM, and foundry, foundry logic, and we believe we have opportunities to move that up.
Our market share in conductor which is slightly more than 60%, we have more limited opportunities, but we are certainly looking at some emerging applications for the use of conductor etch tools in double patterning applications, and we are looking at how we can expand portfolio of our etch products to give us a more diversified set of offerings that cover both what you might call the non-critical segment to the medium-critical to the critical.
But certainly, most of our effort in conductor is about strongly defending our position and in winning a few application games and most of our market share growth objectives are around dielectric, where we see opportunities to exploit our capabilities.
Thank you. Our next question comes from the line of Edwin Mok of Needham & Company. Please go ahead.
Edwin Mok - Needham & Company
Hi, thanks for taking my question. Steve, I have got a question regarding used tools being sold. There was recently some news that some of the Taiwan memory makers are selling off basically some of the fab capacity to other customers.
How much do you think that would impact the market or your business this year, and out of that $10 billion that you have been spending, you are estimating, how much do you think that money will go into buying these (inaudible) some company like yourself?
Well, that's a difficult question Edwin. Certainly, over the last couple of years, we've seen a huge amount of 200-millimeter memory tools come offline and go into the 200-millimeter logic market and go into the 200-millimeter foundry market. Recently, ProMA sold approximately $20 million worth of used tools to TSMC, which went into some trailing edge technology.
We've seen trailing edge fabs in various regions of the world that fundamentally, the entire fab is either started up on used tools. So, when we look at the 200-millimeter market, historically it's been about 10% of the total market spending, and that's in terms of what the OEM equipment suppliers provide, certainly, when you look at the used equipment brokers that's kind of a backdoor channel that there is a lot of difficulty in getting total visibility to that.
So, we end up in a situation where, in a year like 2009, I don't expect that the trailing edge 200-millimeter fabs are going to be purchasing very much 200-millimeter equipment because their demand is down 15% to 20%. And so they are going to be focused on effectively utilizing their existing toolsets.
There will be some investment in 200-millimeter chamber upgrades, which will enable a customer to take a 130 to 200-millimeter line and make it work at 90-nanometer or sometimes going from 90 to 270. But you don't have to buy a new toolset; you can buy upgrade kits that can make an existing 200-millimeter install base perform at the next technology node.
But at this point, we can't characterize what the volume of that is, but it's not going to be a big market in 2009.
Thank you. Our next question comes from the line of Atif Malik with Morgan Stanley. Please go ahead.
Atif Malik - Morgan Stanley
Hi. Thanks for taking my question. Now you had an experience with SEZ for a couple of quarters. Steve, do you still think you can grow the margins for the SEZ spin business too to the corporate level, and then I have a quick follow-up.
Yes. I think that there is a combination of issues. One is, relative to the competitive capability and the competitive pricing environment and the material cost of the product, we believe that we can get the product over the next year or so competitive. Then we have to get the labor component, the use of our outsource suppliers and our overall fixed cost back to infrastructure, more in alignment with what the volumes are going to be.
So I think in the short-term, which means kind of this six to eight period environment where volume is low, that's going to be a more difficult challenge because we're going to need some volume to absorb certain aspects of that infrastructure.
Clearly, over time, we will move the Spin Clean operation from what is largely a very vertically integrated, manufacturing and supply chain structure to an outsource model. While it most likely won't replicate the degree with which we had etch in our linear product to outsource, we will move it strongly in that direction and that will help its ability to be able to get to margins that are consistent with our corporate margins.
But we'll have to see how it success is in terms of penetration and volume, over the next couple of years before we'll know exactly where it fits in.
Atif Malik - Morgan Stanley
Okay. DNS at SEMICON Japan, they mentioned that they are gaining share in wet clean segment in 2008, and they said their sales in the wet team segment are going to be down 10% 2008 versus CapEx spending that's down more than 10%.
I just wanted to get your thoughts on what's happening in the competitive landscape in the single wafer wet clean business I. understand in this depressed spending environment it's hard to see your market share swings, but I just wanted to get your thoughts on what's happening with the market share in the single wafer wet clean business?
Atif, can you restate the beginning part of your question? It was hard to understand.
Atif Malik - Morgan Stanley
Right. DNS at SEMICON Japan last year in December said that they are winning share against other competitors in single wafer wet clean business, specially against SEZ in 2008, and they said their single wafer wet clean sales were down 10% or are going to be down 10% in 2008 versus spending which is going to be down more than 10%.
So it does indicate from the numbers that they're gaining share and I just want to get your thoughts if they are gaining share against you guys or the Korean guys?
Okay. I think that a lot of what DNS focuses on is they obviously have a very strong market share position in the wet bench segment, which is accommodating the front-end of the line, and that is beginning a conversion process on a number of applications in the front-end and so sometimes they win a single wafer position, but that's not really necessarily market share because they are just swapping wet bench sales for single wafer sales.
Having said that, most of SEZs position that they clearly were successful with in the 2006 timeframe was in backend of the line and in back side and bevel cleaning. Over the last year or so, the amount of investment in capacity related, particularly logic backend of the line, investments has been significantly muted.
The battle that is occurring in the front-end of the line, I think that we are in a situation that we've acknowledged where DNS started working a couple of years ago on trying to get their wet bench customers converted to their single wafer tool. I think that they've had a degree of success in getting some tools in early position.
I think fortunately for us, as that front-end situation continues to emerge, the downturn slows down the ramp relative to volume purchases that customers do. It tends to continue to keep the competitive environment open and so we think that both with our linear clean, and with the DV-Prime which is now starting to gain some penetration traction that we're going to have a good opportunity to win our share of the emerging front-end of the line single wafer applications and then we clearly need to be able to continue to defend our traditional backend of the line, back side and wet bevel.
And the reality is, is that there is not much buying going on and there won't be much buying going on there in '09. So, I would say that it is true that DNS has a momentum in the marketplace right now as a function of the timing that they have had relative to their products, but I think that we're going to have an opportunity to compete very hard in 2009 and we'll need to see how the application wins, play out over the course of this year.
Thank you. Our next question comes from the line of Patrick Ho with Stifel Nicolaus. Please go ahead.
Patrick Ho - Stifel Nicolaus & Company, Inc.
Thanks a lot. Steve, in terms of the memory market and the consolidation that's likely to occur in that space, how are you positioning the company to react to a very changed landscape as we look forward?
Well, certainly, what we would expect is the potential to occur in terms of some of the Taiwan DRAM companies combining with each other or with Elpida, with Micron et cetera, those kinds of trends actually since the last major downturn have actually been occurring pretty regularly.
So, whether you talk about the IBM technology alliance of IBM and AMD and Charter and Toshiba and Sony, we are very used to building global account teams that in essence work with the key customer or the key fab that's the source of the technology. The way we approach it is, we certainly make sure that we are well penetrated, well supporting, where the customer is doing their next generation development, we target the ability to win at the so called home fab or mother fab.
And then with the performance of the installed base in the fan-out fab and with strong relationships and strong performance, we not only try to make sure that we replicate to copy the exact fan-out, but we also try to use the performance of our tools to win additional applications steps that we may not have been the first choice at the primary call fab and actually grow our market share in the fan-out fabs above and beyond what it was at the qualification fab.
So, we are quite used to doing that, we are very well positioned with the DRAM companies. We've been growing our share in the Elpida alliance; we've been growing share in the Micron and its Nanya arrangement, and so we expect that we will be in good position when we learn how this is all going to shake out in terms of who combines with whom.
Operator, we have time for two more questions.
Thank you. Our second last question will be from Ben Pang with Caris & Company. Please go ahead.
Ben Pang - Caris & Company
Thank you for taking my question. You mentioned in your prepared remarks that you still will be working on some of the technology transitions that your customers are interested in. How active are these customers? Are they actually going to make decisions in 2009 for some of the double patterning qualifications, high-k/metal gate? Are they're still going to actually make decisions in 2009 or do those all get pushed further down the line?
I think that those customers who have balance sheets that can afford to make the investments to move to the next technology node will do so. One thing about this industry is, technical innovation does not slow down. It may slow down for some who can't afford it, but it does not slow down in the industry as a whole, because what companies recognize is that the way that they're going to find themselves able to be the recipient of market share growth relative to IC unit demand and the segments they compete is that they need to be on the leading edge and they need to be as cost effective as possible.
So, whether you're talking about 6X to 5X or even in some cases some 4X wafer starts in DRAM, certainly NAND is moving from 5X to 4X and we're going to see 3X come into play and then in logic and in foundry, the emphasis will be on growing needed wafer starts at 45, but early pilot lines for 32 positioning will start in the second half of the year.
And what you're seeing as the function of the consolidation of this industry is there are those who have been successful, who have balance sheets that can work through this kind of downturn, there are those whose balance sheets are incredibly laden with debt, can't get access to capital, they will be consolidated in and absorbed in.
But the pace of technology continues, it's the future that I am confident in, because I think that as we get to 32-nanometer in NAND and as we get the 64 gigabit devices and we get down the cost curve and up the yield curve, it's going to be the enabler for huge amounts of demand for SSD sometime in 2010, and I think I'm very positive about the prospects for 2011.
I think you're going to see those who can, try to accelerate the ability to move to 4X technology and 2 gigabit DRAMs and get down the curve relative to more density per bit per wafer. And I think in logic you've got a very intense competition around next generation logic at 32 and 28-nanometer that is both power and performance related, the key being low power, high performance and there is a number of applications waiting for high performance low power logic devices that will be the next generation of smartphone enabled technology from semiconductor companies.
So, those things are going to continue to be invested in. I think we're currently in a period of a temporary lull, but I think that we will see those investments go forward and that's why spending isn't zero. It's why there is still going to be $10 billion worth of wafer fab equipment to support the continued advancement of technology output.
Thank you. Our next question comes from the line of Brett Hodess with Bank of America-Merrill Lynch. Please go ahead.
Brett Hodess - Bank of America-Merrill Lynch
Good afternoon. Two questions, quick ones; you mentioned that the DSOs were up and some of that has to do with the extended terms to some of the customers. Can you categorize which types of customers you're extending terms to? Are they the best quality customers or is there some additional risk in that?
And then can you comment on, you were just talking about your new products and can you give us a feel if most of the spending is focused on upgrading existing fabs? Your etchers are out there already; some of the equipment, that gets upgraded or replaced, or will it have to wait till you see more capacity adds?
I'll take the DSO question. So, we're seeing requests for extended payment terms across a pretty broad set of our customer base, and we have a very structured process that we use to assess whether or not we will extend payment terms to customers.
It includes things like business opportunity, the relationship we've had with the customer over the course of the last several cycles as well as the specific need for technology or other factors. So, while we do see a very broad based request for extended payment terms, we're being very thoughtful and deliberate about the customers to which we extend them.
So relative to kind of the makeup of new systems for technology upgrades versus chamber upgrades, where possible, customers will take an existing installed base, they will upgrade the chamber. If wafer starts that are running down that line are not fully outputting relative to that technology node, and assuming that the rest of the toolsets in there can handle the move, but we do have a robust chamber upgrades business in our shipment numbers.
There are wafer start increases in memory fabs, and there are wafer start increases on next generation technology lines where they can't get an existing line upgraded the way they want, so they put a line in and output the fab and it's different for every customer, and it is different for every segment of DRAM and NAND foundry, but the combination of both new tools and upgrades.
I would like to thank you for joining us today. Please be advised that the webcast of today's call will be available on our website later this afternoon. We hope you will join us for our next quarterly financial update in April. Thank you for your interest in Lam Research and for participating in today's call.
Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and you may now disconnect.
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