Lam Research Corporation F4Q06 (Qtr Ending Jun 25, 2006) Earnings Conference Call Transcript (LRCX)

| About: Lam Research (LRCX)

LAM Research Corporation (NASDAQ:LRCX)

F4Q06 Earnings Conference Call

July 19, 2006, 5:00 pm ET

Executives

Kathleen Bela, Director of Investor Relations

Steve Newberry, President and Chief Executive Officer

Martin Anstice, Chief Financial Officer

Analysts

CJ Muse - Lehman Brothers

Unidentified Participant - Goldman Sachs

Satya Kumar - Credit Suisse

Robert Maire - Needham & Company

Gary Hsueh - CIBC World Markets

Timothy Arcuri - Citigroup Global Markets

Jay Dana - J. P. Morgan

Mark Bachman - Pacific Crest Securities

Steve O’Worth, Deutsche Bank Securities

David Duley - Merriman Curhan Ford & Co.

Mark Fitzgerald - Banc of America Securities

Patrick Ho - Stifel Nicolaus & Company

Operator

Good afternoon, ladies and gentleman. Thank you for standing by. Welcome to the LAM Research Corporation June Quarter 2006 Financial Results Conference Call. [Operator Instructions]. Following today’s presentation, instructions will be given for the question and answer session. [Operator Instructions].

I would now like to turn the conference over to Kathleen Bela, Director of Investor Relations, please go ahead ma’am.

Kathleen Bela, Director of Investor Relations

Thank you, Mary. Good afternoon and thank you for joining us to discuss the financial results for the quarter ending June 25th 2006 and the business outlook for the September 2006 quarter. By now you should have received the copy of today’s press release, which was distributed by Business Wire at approximately at 1 p.m. We are webcasting a slide presentation in conjunction with today’s commentary. The presentation can be accessed through the Investor Relations section of our website at www.lamrc.com.

Here today are Steve Newberry, President and Chief Executive Officer, and Martin Anstice, Chief Financial Officer. Except for historical information, the information LAM is about to provide and the questions LAM answers during this call may contain certain forward-looking statements, including but not limited to statements that relate to the company’s future revenue, orders and operating expenses, management’s plans and objectives for future operations and product development, management’s plans for continuing the company’s stock repurchase program, global economic conditions including consumer sentiment and customer spending, and the demand acceptance and competitiveness of the company’s products.

These statements are subject to various risks, uncertainties and changes in conditions, significance, value and effect that could cause results to differ materially and in ways not readily foreseeable and which are detailed in the company’s SEC reports. We encourage you to read those reports in their entirety. LAM would also like to disclaim any obligation to correct or update any of the information we are about to provide.

This call is scheduled to last until 3 p.m. We ask that you please limit questions to one per firm. I will now turn the call over to Martin for discussion of the financial results.

Martin Anstice, Chief Financial Officer

Thank you, Kathleen. This afternoon we will discuss our June 2006 Quarter Financial Results.

Before focusing on the quarter, a few words to characterize our 2006 fiscal year. Company revenues exceeded $1.6 billion. Gross margin performance exceeded 50% of revenues for the second straight year. Incremental operating expense investments were focused on etch market share expansion and the actions necessary to support multiple product growth.

Our effective tax rates adjusted for non-ongoing items was less than 20%, financing of $350 million provided liquidity to support a foreign earnings repatriation of $500 million and our closing net total cash balance was $1.2 billion.

Highlights for the June quarter include, ordered growth of 23% sequentially at $640 million. Operating income as a percentage of revenue had a historical high point of 30.3%.

A flow through of 56% from operating income growth of 45% and revenue growth of 20%. Ongoing EPS of $0.96, 300mm applications represented approximately 89% of total systems new orders and 89% of orders were for applications have less than or equal to the 90 nm technology node. Orders upside to guidance this quarter occurred in the IDM/Logic and Foundry segments. Memory orders were essentially flat compared to the prior quarter.

In absolute dollars, Asia-Pacific and Japan were the two geographies exhibiting strongest sequential growth. Accordingly, systems new orders market segmentation for the quarter was memory at 40%, IDM/logic Other 34% and Foundry at 26% of the total. Dedicated land applications represented approximately half of the memory orders.

Revenue of $526 million exceeded the high points of our guidance range. On increasing customer demand shipments at $543 million were up 6% sequentially, slightly less than we expected due principally for the timing of shipments between the June and July months. This scheduling effect contributed to approximately half the inventory bill sequentially.

The ending unshipped grew substantially up approximately 29% of $521 million. For more complete details on the geographic breakdown of our orders and revenues, please see today’s press release and our website for reconciliation of new orders, shipments revenues, deferred revenues and backlogs.

As presented last week in our Investors and Analyst meeting, we targeted operating income levels between 28.1% at $500 million and 30.5% at $550 million in revenues. For that reason, we see today’s reported results as on the higher end of those stated objectives. Our gross margin of the quarter of 52.2% exceeded our guidance. In general, this improvement is a result of favorable mix but is not expected in future period, improving warranted performance as well as leverage from higher factory volumes. As we commented last earning’s call, we are in the process of implementing our targeted fair cost price reduction to support our customer’s business plans, our implementation is ongoing.

Operating expenses increased as planned at $1150 million reflecting the impact of variable compensation driven by higher profits and also discretionary investments to support our growth and search market expansion plans. This quarter, we finalized decisions related to foreign earnings repatriation under the Provisions of the American Jobs Creation Act. The June quarter earnings repatriation of $350 million brought the total in the year up to $500 million. The non-ongoing tax expense consequence of this final decision was approximately $17 million in June.

As we fund growth in the business, we delivered cash in operations of $92 million this quarter supporting our plans to deliver cash in operations of greater than 25% of revenues this calendar year. Inventory performance continues to set the standard for the industry at 6 terms, our accounts receivable days outstanding was 71 days.

In the quarter, we received 49 million from the exercise of employee equity plans and we used $37 million to repurchase slightly less than 800,000 shares at an average price of $46.93. We have $332 million remaining in our board approved stock repurchase authorization. Our total net cash balance including restricted cash was $1.2 billion at the end of June. Deferred revenue at $230 million continues to grow and exceeds our previous high watermark with the deferred profit balance at $140 million. These balances exclude approximately $74 million of anticipated future revenue values for shipments made to Japanese customers where it has not yet transferred; these shipments are currently recorded at cost in inventory.

In the quarter, adjustments from backlog were a net positive $30 million reflecting a revision of estimates for installed based service contract. Order cancellations were approximately 10 million, capital expenditures including purchase of intangible assets were $26 million, depreciation and amortization was 6 million. As we invest in organization and capabilities to support our expanding etch market share and multi product growth opportunities, employment levels increased by 60 to approximately 2,400. Now to Steve’s comments.

Steve Newberry, President and Chief Executive Officer

Thank you Martin, and thank you for joining us today. I know that many of you attended our Analysts and Investor event held in conjunction with SEMICON West last week. However, for those of you who may not have been there, I will spend just a few moments recapping the key things of that meeting before moving on to industry comments and a review of our near-term business outlook and expected business performance.

During our Analyst and Investor Meeting at SEMICON West, we outlined the focus for the company over the next few years. Specifically, we stated that we are focused on executing to the near-term production rate requirements of our customers, expanding our leadership position in etch, leveraging our etch expertise into adjacent markets and delivering best in class financial performance.

I believe our June quarter results reflect our ongoing success in each area. We are pleased with our continuing market share momentum in etch, to early positioning we are achieving with our new products, and our ability to achieve strong operating income and asset management performance.

Moving to the semiconductor market environment, we are currently seeing our customers respond to increasing demand and high utilization with steady continued investment. As this equipment is installed and moved into production we expect our customer base to continue to approach the need for capacity additions in a measured way. We believe that the September quarter will likely see higher orders than December, but expect that the second half 2006 orders will exceed the first half by approximately 15%. We anticipate utilization will remain relatively high through this period as a result of this measured capacity expansion activity and the normal, seasonal output RAM. We expect to see continued strength in the memory device sector for this foreseeable future. In particular, the outlook for NAND, FLASH remains solid with demand and supply expected to stabilize and price the clients to slow in the second half of ‘06 due to increase in demand.

The increased production in the NAND, FLASH market has helped stabilize the supply demand cycle in DRAM for the near term. This demand in DRAM is expected to grow about 50% for 2006 and supply constraints have kept pricing above expectations in the first half. We are expecting capital spending in the memory sector overall to increase 25% to 30% in 2006 with CapEx in NAND, FLASH to double year-over-year and be about 45% of the memory mix, with spending in the other memory categories expected to be slightly up year-over-year.

Our orders for memory suppliers in the June quarter were essentially flat quarter-over-quarter while declining as a percent of orders to 40% from 52% last quarter. The mix was about 50/50 between NAND, FLASH and other memory. Demand for Foundry products remained solid through the second quarter, and has been better than seasonally normal in the first half of 2006. Utilization rates remained high at the leading edge and Foundries have responded with orders for front-end equipments to incrementally add capacity for production in the second half of calendar year ‘06. We expect a 26% increase in CapEx spending in 2006 to about 7.2 billion, still notably below the 9.6 billion level of 2004, and slightly below the average spending from Foundries for the years 2004, 2005.

During the June quarter of 2006, our Foundry orders were above expectations and increased more than 70% sequentially. We have been successful in the past year at winning new applications at the Foundries particularly in dielectric etch and are now receiving volume orders and are shipping many systems related to those winds.

As for the remaining logic IDM market, we saw a strong June quarter bookings growth driven by 300mm expansion plans from around the world. Overall, we expect wafer fab equipment shipments to increase about 7% to 10% into logic IDM customers during 2006 with a total wafer fab equipment market growing 31% from 22.5 billion to 30 billion in calendar year 2006.

As Martin outlined, the June quarter for LAM Research achieved records and milestones as we exceeded growth and operating margin targets versus our model. We were able to achieve our operating margin target of 30% one quarter faster than planned. A record ordered level of 640 million is a strong indication of our customer’s trust in the capabilities of our people, products and services.

As I noted last week, we are expecting our market should gain momentum to continue in 2006 with seven to eight points of shipment shared gains which will result in 44% to 45% total etch market share. We are expecting our booked market share to be higher than shipped share in 2006 driving further share gain in 2007 as the 65 nm node begins to ship in greater volume. Our target of 10 to 12 new application wins in the in the first half of 2006 was met with a gain of 11 new wins making the total since the start of 2005 a net gain of 18 application wins. We are gaining share in a broad based fashion across all regions, all the wise types and films, with a strong trend toward a higher share at each advancing technology node. We are continuing to make progress and positioning our new clean product and announce that SEMICON West our new double clean product, which focuses on improving deals through the defects at the edge of the wafer. Our strategy is to leverage our platform and product architectures with our global etch knowledge to develop enhanced productivity solutions for our customers.

I’m pleased with the progress we are making in getting these new products into the market. These targeted adjacent market represent an opportunity to expand our available market to 19% to 22% of wafer fab equipment and that a potential $700 to $900 million in additional revenue in the next 3 to 5 years.

Now I would like to move on to guidance for this September quarter. We expect orders to be up 5% to 10%, revenue in the $580 to $600 million range, our shipments will be up 20% to 25% and our gross margins will be around 51.5%. Our operating margin will be greater than 30% at the revenue guidance midpoint and our earnings per share will be between $1 and $1.05 per share with the share count assumed at 145 million shares and a tax rate assumed to be 25%.

Having given this guidance, I want to announce that in the future, we will stop giving bookings guidance effective with our January 2007 conference call. We are going to stop giving bookings guidance, as a function of the fact that our focus is on shipments, revenue and operating profit and that is consistent with having run the business. Our assessment of business momentum is to find by market share and new application penetrations. As a company, we are focused on short-term execution operationally and financially and a long term positioning of our new product in the new markets and how they affect the future of our business. Lead times are now so sure that our customers are leveraging that capability evidenced by the short term nature of our backlog, that in order some backlog guidance becomes less valuable as a statement of cycled momentum. And many of our investors have indicated that they see little benefit to bookings guidance and prefers to talk about the execution performance of the company and our longer-term prospects in the business.

In closing, I want to thank and commend the efforts of our employees who are keeping our product and service offerings aligned to the needs of our customers while meeting the rigorous demands of the significant production ramp with outstanding on-time delivery of high quality products and services. And with that, I will now turn the call back over to Kathleen for Q&A.

Kathleen Bela, Director of Investor Relations

Thank you. Operator, we are ready for Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

And our first question comes from CJ Muse with Lehman Brothers. Please go ahead.

CJ Muse - Lehman Brothers

Yeah, good afternoon. I guess first question is, could you elaborate more I guess on what gave you the confidence that bookings in the second half can be 15% greater than the first half and whether or not visibility extends into the first half of ‘07 and then I have a quick follow up.

Steve Newberry

Well, what gives me confidence is that we have a pretty good visibility of what the customers are willing to book in the September quarter. Order activity in the first three weeks of the quarter has actually been very robust and so we believe that the September quarter be in that 5% to 10% up range.

I think that when we look at what the customers are telling us they plan to do over the rest of the second half, while their order rate looks like it’s going to come down from what is planned to book in September, it’s still going to be a good quarter just not as high as the September quarter. I think that most customers when they look at what’s going on in the demand environment, in many of the segments, the demand for IT units has been pretty strong. We are forecasting that we think IC unit growth in calendar 2006 is going to be about 18% or 19% and I think that with that kind of demand, there is going to be a continuing need to make continuing ongoing prudent investments in wafer fab equipment and so I think that we should expect that December will be a quarter where there is good order volume just not as high as September.

CJ Muse - Lehman Brothers

And a quick follow up, with Japan strengthening here in the bookings front, Martin can you talk a little bit about how we should think about any at all impact in terms of deferred revenues and gross margin?

Martin Anstice

Yeah, it’s a continuation of the message we kind of floated out for some while. You will remember for the majority of the business, for the non-Japan business, the cycle from a shipment to a statement of revenue the acceptance ranges between one and four months for us. And in the case of Japan, title does not transfer to our customers until that point of acceptance and so what happens is the product that we ship gets recorded in our finished goods inventory until the point of acceptance. Typically, those acceptance cycles today are getting very close to the worldwide average so in kind of pure physical terms I wouldn’t expect a big disconnect between the shipment events and the revenue. Just know that the accounting is slightly different, the balance never gets into deferred revenue, it just sits as inventory until it’s accepted and then shows up on the face of the P&L.

CJ Muse - Lehman Brothers

Yeah, I guess in terms of fixed costs, no wouldn’t they have an impact when you’re building the tools for Japan?

Martin Anstice

No, absolutely no consequence at all. I guess, all the product is valid in just the same way. The only nuance with Japan is the deferred revenue cost, the underlying accounting, the value of the tools, the margins all gets accounted for in the same way.

CJ Muse - Lehman Brothers

Thank you.

Operator

And the next question comes for Jim Cavello with Goldman Sachs, please go ahead.

Unidentified Participant

Hi, this is Arkit on behalf of Jim Cavello. Just a quick question on the use of cash, given the record cash on the balance sheet, just curious what your thoughts are regarding share repurchases, dividends et cetera?

Martin Anstice

The number one objective here relative to use of cash is totally invest in the profitable growth of the company. And directly to your question, we are executing today and generating cash on operation at record levels and we are still absolutely focused on delivering cash from operations above 25% of revenues for the calendar year and based on our performance in the first half of the year, we would have an exception that we can generate cash from operations at a level that’s greater than 30% of revenues in the second half of this calendar year.

We have as you know a board approved stock repurchase plan which is the chosen path by the company to return excess cash to shareholders and we continue to exercise our plan according to the approval and I have expectations that, that will continue to be the path we will pursue in the coming quarters.

Unidentified Participant

Okay, great, that’s very helpful, thank you.

Operator

Next question comes from with Satya Kumar with Credit Suisse, please go ahead.

Satya Kumar - Credit Suisse

Hi. I saw that -- on Analyst Day, you guys sounded fairly cautious in terms of the capacity editions from NAND, FLASH and I guess it looks like just looking at very different (inaudible) maybe down 4% or so based on whatever you’ve said before. Specifically when orders start declining (inaudible) 50% or 60%, do you think that the cycle -- is there any reason to think that this cause maybe any difference?

Steve Newberry

Satya, I think that what we are seeing is that investment in memory and the continued investment in both the NAND and DRAM was steady this quarter and I would expect it in the September quarter an increase in total memory investment with the ratios maybe being a little higher in the September quarter in terms of NAND, FLASH order content, but as the year goes on, due to the favorable pricing environment and strong demand in DRAM, that we are going to see continued investment in DRAM from an ordering standpoint all the way through the end of the year. I think that’s driven by the fact that there is clearly positioning going on to preconfigure PC sales for the Vista operating system and if there is expectation that there will be strong PC demand in 2007 as a function of Vista and other elements of a upgrade cycle for servers and desktops et cetera. So I think that what we are looking at here is we have a pretty good investment over the last four quarters, I think it’s going to represent that CAPEX will be about 21% of semiconductor revenue, I think that’s a very healthy level.

I think that we probably settled on the fact that maybe 20% of revenue is about the right point to be at.

And so I see the industry beginning to make adjustments in their rate of how much capacity they’re adding and beginning to bring that down slowing from the levels of equipment that they are bringing in right now I think that the industry again like they did in 2004 and 2005 is behaving very rationally, the amount of capacity additions are rational and logical in this timeframe based on unit demand growth. And I see them slowing down that rate of investment, as they work on keeping supply and demand in sync, and so I don’t expect to see a large correction. I think that there is every reason to believe that 2007 from a demand standpoint will be a good year. I think later in 2007, if we look at the historical behaviors of what the money supplies are operating in the year before a US election and we’ve got China as in Olympics here in 2008, so I think that 2007 is going to be an interesting year and it’s way too early to predict exactly what’s going to happen, but I think the industry is behaving very prudently and I think we are going to see some slowdown in the rate of investment, but I don’t think it’s going to be significant.

Satya Kumar - Credit Suisse

Okay, I mean I guess, just to ask you a different way. You know, if you don’t see the historical type of 50% decline but let’s say we go over the 30% or 35% decline, your gross margin at the last cycle was something like 19%, is it reasonable to think that maybe in this cycle, the gross margin level -- maybe if you look at the two cycles of growth, the gross margins are negative, but is there a trend where the gross margins can actually get higher at the next gross overlap?

Steve Newberry

I think that’s a good question and before I answer specifically what we are going to be targeting to do, I think one you know, what occurred a couple of cycles ago is fundamentally almost totally irrelevant in terms of looking at LAM Research because that cycle in 2001, 2002, we were on a completely different business model.

We have completely restructured the company and so the performance of the company in the 2004-2005 cycle is far more representative of what we would be targeting to do. So if we were in a scenario along the lines of what you talked about just using your numbers, we would expect that we have the opportunity to apply decisions as to what we want to do it, the variable cost structure of our P&L. We can move our factory cost structure down very rapidly and therefore maintain good gross margins as a function of our outsourced strategy in our factory, the key factor for us will be during this time period of whatever level of bookings slowdown occurs or shipment in revenue slowdown occur, we are using 2007 as a key year for positioning of new products.

And so our expectation is we are going to maintain our operating expense investment in the cycle and that might put potentially a little more pressure on our operating margin but that will be by choice. If we decide that or if we look at the downside, we feel like it’s going to be more severe than what we are talking about here, we have the flexibility in our financial model to make decisions with discretionary spending and to make the adjustments and my target would be that we would not drop below 15% operating income but that we have every opportunity to operate 20% depending upon the magnitude of the situation.

Satya Kumar - Credit Suisse

Okay, if we could speak one more thing, given that you are not going to guide bookings going forward from the January month I guess, is there something else that you can give us in terms of trying to evaluate how well your progress is -- how much progress you are making the new growth areas, would you be discussing that separately or give us some ways to think about that in the future? Thanks.

Steve Newberry

Sure. We will be talking about the progress that we are making in positioning our new product activity, so we will talk specifically about that. We will also look at providing perhaps a little broader horizon on what we see as our shipment activity, our revenue activity, and how we would expect our operating margins will perform, but we will definitely be talking very specifically on a quarter by quarter basis what kind of progress we are making in getting penetrations of our new products as we go forward.

Operator

Thank you, our next question comes from Robert Maire with Needham & Company, please go ahead.

Robert Maire - Needham & Company

Yes. If I look at your guidance in the second half now talking about being up significantly, it sounds like most of that is on the Foundry side. There has been some concerning among some of industry watchers and other firms that we might have seen some weaknesses, is mostly the increase you’re expecting is that shared gain or do you think that their overall standing is up or you know, perhaps you could give us a little more detail on that.

Steve Newberry

Well from an order standpoint, we expect the orders will be up about 15%, second half versus first half, and the reality is, is that’s not really coming from some accelerated amount of ordering in the Foundry. The Foundries are actually going to be very steady investors in the second quarter and on an going-forward basis, so again I think we’ve talked about the behavior of the Foundries. I think they have got a very good model of how they try to add capacity in small incremental bunches and ordering pieces of equipments every three months or even six months and they are operating to that model.

I think memory is going to be a place strong and continued investment in the second half of the year and I think that’s a function of what’s happening in the NAND markets and the fact that you still have 50% growth in DRAM. So I don’t think what I talked about in terms of second half versus first half is the Foundry issue, it’s a combination of all the segments and again they are going to be investing a little bit higher in the September, or they are ordering a little bit high in September and a little bit less in December.

Robert Maire - Needham & Company

Okay, just to clarify, if you are talking about being up 16% do you think overall spending or orders would do with perhaps the industry average being lower given your share gain?

Steve Newberry

Yeah, I’m glad you reminded me about that. There is no question that when you look at the percentages that we are sharing that there is a significant aspect of it, that’s the function of our share gain. Perhaps one way to demonstrate that would be, if we look at the etch market size in 2004, about $3.3 billion and our expectations that the etch market will -- ship market will be about $3.9 billion in 2006, I mean the etch market grew about 18% from ‘04 to ‘06, we are going to grow 66% in that same timeframe, so we are going to grow about 3.66 times more than what the etch market grew.

So if you translate that into market share points, back in 2004 we were about 34%, today I have just recently commented on the fact that I believe we will be at 44% to 45% market share, so we have greater than 10 market share points of a game. On a $3.9 billion market that translates to at least $390 million of incremental shipments and revenue as a function of that market share, so clearly there is an aspect of our bookings growth that’s greater than the industry and greater than the competitors and certainly our revenue growths and our shipments growth will be more accelerated than our competitors as a function of those market share games.

Robert Maire - Needham & Company

Okay, so if you are 15% percent in the second half, it’s fair to assume that the reminder of the market might only be up 5% or 10%?

Steve Newberry

Right, because the 50% is LAM and that’s not the industry, and if you had to calculate the impact of market share, the industry as a whole would be down much closer to the number that we just talked about.

Operator

Thank you. Our next question comes from Gary Hsueh with CIBC World Markets, please go ahead.

Gary Hsueh - CIBC World Markets

Yeah Steve, the last time you are going to be giving the last quarter kind of commentary guidance on orders, I thought I might try to pin you down a little bit more here, you talked about NAND, FLASH and memory generally growing as a percentage the overall order content in September, I had to presume that Korea is going to be coming back because of that. Now if I look at your 15% up for the second half in terms of orders that suggest that orders are down in just number roughly 9% to 10%. Are the points actually sabotaging December and pulling into September is that kind what’s driving your order outlook for December?

Steve Newberry

Well, I mean I want to make sure that -- I made I have heard part of your commentary right, but I mean memory in the September quarter is going to be about 68% of our order mix. So there is clearly an increase in memory ordering in the September quarter, and memory will go down in the December quarter. Most of that will be a reduction in NAND, FLASH ordering with DRAM and other memory actually being pretty consistent.

And so I think that while your overall perspective of what the orders for LAM might be down in December, there is an element of pull in activity, but there is also an element of some push out activity. If we looked at the previous three quarters they would be dominated by pull in type of activities and we are now in a period where while there is still pull ins, there is some push out activity going, it’s still netting in favor of pull in, but I would expect as we go forward over the next three or four months, that we will see those things kind of balance out a little bit, but I wouldn’t necessarily say that September is up because of orders being pulled forward from December.

Gary Hsueh - CIBC World Markets

Okay. Well the other thing I was trying to get at is, is the downward trends in orders in December, that’s something you know, that’s a consistent trend as you see or is it because of sort of near term pull in and push out that’s kind of driving out something in September going to December?

Steve Newberry

Well I think that -– I mean, when you look at memory, part of our order situation for memory in September is because there were some orders we expected in June but the customer actually didn’t place the orders until the September quarter and you know, one of the reasons that we are kind of been moving away from bookings guidance is the fact that the future is always lumpy and we are sitting here today and I’m kind of giving you a picture of what September looks like and December is going to be down slightly from September, but we could sit here and talk a month from now and all it takes is one customer decide to move the fab in and all of a sudden December looks different and maybe that pulled in from March, but maybe it didn’t.

So it’s really hard to answer your question in terms of it having any validity because what has occurred in the last five days will in fact change over the next five or ten days in the future. So I don’t think you should draw out too much from pull-in’s and push-out’s in terms of what the impact is of September, of a December and it’s one of the reasons why we I kind of talk about you know, here’s the order environment for the second half and this is what we kind of see they’re going to do and the actual timing of when they actually place the orders we can’t control that. I mean, we don’t really worry about it very much, but in the second half, we would expect that when it’s all said and done, our orders at LAM will be about 15% higher than what we booked in the first half of ‘06.

Operator

Thank you, your next question comes from Timothy Arcuri with Citigroup, please go ahead.

Timothy Arcuri, Citigroup Global Markets

Hi. Two things, first of all Steve, it would seem that with (NASDAQ:ASML) this morning talking about orders being down roughly 30% sequentially for you know, calendar Q3, it would seem that maybe you know, the orders that you are seeing in September and December are kind of the last gasp to kind of fill up all that little you know, tools that have been ordered during the first half of the year. So it would seem that the conversation should shift to what the margins are going to look like during a down shift in shipments and in revenues, so I am wondering if you did $320 million in revenue much like you did during the 12th of ‘04, would your operating margin be -– would you be able to hold it at that same 19%?

Steve Newberry

Well, I think that’s a good question. I think certainly the ability to do that exist in the flexibility in our model. Whether we will choose to do that is another thing given the timing of whatever adjustments occur in the cycle because our purpose in 2007 is going to be about getting our new clean product, continually positioned about getting our bevel cleaner out there and about getting our patterning tool, and so we are very focused that one of our big priorities in 2007 is on product positioning and we will spend the necessary R&D and other operating expenses to achieve that.

Now we would expect that our margin profile would be similar to what we were able to achieve from the highs in ‘04 and then to the lows in ‘05 where we kind of came off in terms of margins from the 52% we dropped down to about 48% - 48.5%. So I would expect our gross margins would stay up with potentially some impact in terms of how much revenue we take on some of the new product introductions which we would expect -- some of them would be potentially lower margins in our corporate average, but I think the real swing will be how much investment we need to continue to make to ensure that we get our products positioned the way we want to in ‘07 because we are really not going to be focused on the short-term of ’07 as much as we are making sure that we can get the product positioning that will give us accelerated revenue and profitability growth in ‘08 as those new products gain traction and increase in volume.

Gary Hsueh - CIBC World Markets

Great, so I guess it sounds like margins are going to scale, I mean from the operating margin will scale down a little more i.e. be a little worse during this downturn than they were you know, during the last 18 to 24 months, is that kind of the right way to read that?

Steve Newberry

I wouldn’t read it that way. What I said was that I would expect our margins to scale down exactly like we were able to do in the 2004 to 2005 timeframe. I said the only consideration that might possibly occur is as a function of some of those new product introduction, they may be slightly less gross margins, but we don’t really know what their impact is going to be because we don’t really know what the volume of revenues are going to be but overall, they are likely to be a small revenue contribution therefore a small impact to gross margins.

Operator

Thanks, your next question come from Jay Dana with J. P. Morgan please go ahead.

Jay Dana - J. P. Morgan

Thanks, good afternoon. Steve, if you look at 45nm, compare your new products in etch to the new products that are being introduced by your competitors, can you talk you know, a little about what you think are your advantages that will keep your momentum going through 45nm and 32nm specifically in etch. And then secondly, in terms of your new products which ones are showing the most likelihood of actually delivering some sort of material RAM sooner rather than later?

Steve Newberry

Okay, relative to 45nm, one of the things that we have done is been able to take our technology and our product architecture and continue to modify orthodox based technologies and create next generation products. So whether it’s our 2300 Exelan and then went to Exelan Flex and now goes to Exelan 45, they are all built on the same fundamental technology that we have really had in the marketplace since -- about 1998. And if we look at our conductor products that are on Versys, that have moved from Versys to Versys Star to Versys Star Key to Kiyo, the Kiyo 45, they are on the same TCP technology that’s actually been in place since 1990.

What that does is two things, one, our learning loops as we go forward with each modification and the iteration around those core technologies, it’s faster and faster in terms of our ability to recognize problems, deal with those problems and design solutions. The second benefit is the customers are very familiar with these technologies and the ability for them to be able to continue to go forward from technology node to technology node with a chamber that operates with very similar fundamental characteristics allow them to take their own process integration learning capability and extend it more quickly in terms of delivering the kinds of results and the wafer that they need and helps them get up the yield curve faster.

So one of the keys to defending market share and giving yourself opportunities to grow market share is your ability to have a stable technology, a stable technology team and a product set that the customers can utilize generation after generation.

I think that our competitors, as a function of their technologies not scaling from 200 to 300 and that has a chosen new technologies to try to address the needs in the market place, are still in the mode of trying to find the technology that they can stabilize on and while every company can bring some interesting results early in the evaluation process, I think that the fact that our core technologies have been in production producing hundreds of thousands of wafers every year gives us a big advantage in terms of the customer’s confidence in us and gives us a big advantage in terms of the speed at which we can deliver ongoing solutions.

Jay Dana - J. P. Morgan

Okay, quick follow up on that, are there any new systems floating around out there that are perhaps six chamber systems from you or anyone else and I was wondering what that was looking like, and then secondly which are the new products that are showing the most early traction?

Steve Newberry

Okay. As it relates to six-headed monsters or six-headed chambers or such, my comment would be one, any new advanced tools that we ship out that have not been announced are done so under nondisclosure agreements with their customers and we don’t comment on them. When they are in their early timeframe and when they are under nondisclosure, so I won’t comment on any potential new chamber configurations as it relates to etch.

As it relates to our new product that we have announced, I think that we have a couple of interesting opportunities. One, our double etch product, which we will begin shipping in next couple of months. I think if it is successful at solving some of the yield issues that are occurring at the function of defects at the etch or the wafer, could be a product add in ‘07 contribute some revenue that is going to be reportable, and we will kind of define the size potential of that a little bit later in the year probably next quarter when we have more information about how that product could work, but I think it’s one that has good potential. And then our clean product which we will have out about 8 to 10 of those in beta by the end of ‘06, will represent another product that depending upon the speed at which customers want to move forward and depending upon the degree of success that has, that it could be a good contributor to incremental revenues in ‘07.

I think the patterning market is one that’s still emerging, it’s a market that we are developing. It’s a market that we are working with multiple customers on, and that one is potentially a very big market, but it’s not yet clear what the activity level for that product would be in ’07.

Operator

And your next question comes from Mark Bachman with Pacific Crest Securities please go ahead.

Mark Bachman - Pacific Crest Securities

Hi guys. Martin, I would like to kind of revisit this kind of options thing that we have been talking earlier -- not options, but margin question. If I use the September 2005 quarter as a proxy versus your latest revenue model, it does appear that LAM wouldn’t be able to hold the up margin 19%. I know Steve has already answered it in his way, I want to hear from you, has there been any change in the model that suggest that your cost structure made (inaudible) side can be more punitive at the lower revenue levels and then kind of what probability do you think that you could put on this RAM that reaches levels sometime in the next four quarters?

Martin Anstice, Chief Financial Officer

I’m going deal with the last part of question first, because it’s easier. I’m sure you can figure out the probability just as good as I can, so I’m going to decline to respond on that one, but specifically to the comparison I think your question is right on. If you look at the September 2005 quarter, our revenue was $320 million a margin of 49% and roughly of 18.6%. The model that I have consistently shared in the last 18 months now has a operating income percentage at 19% at $350 and 14% at $300.

And so if you are trying to kind of come to the models, the midpoints on the model is around 16.5%. Now perceived to the earlier points, the model is intended to be a statement of clearly articulating the leverage in the company’s business model and the financial performance that we can achieve under those circumstances. Independent of the statement of volume, we make this discretionary investments in R&D and the timing and pace and size of those investment is defined by our determination of gross potential and optimizing investments to the pace and needs of our customers to best leverage profitable growth.

The one thing that had changed in the cost structure that is in today’s model that wasn’t in September ‘05 is the magnitude of equity-based compensation. And if you go back to the transcripts in September ‘05 you’ll remember that our equity compensation was in the range of $5 million and that cost structure was a partial cost structure because in September the first all employee grounds in the company occurred in August and so we had a kind of partial equity cost in the company in September. We also delayed all of the long-term compensation for the executive offices in the company for a six-month period and you will remember in March of this year I spoke of the financial consequence of that. And so the one cost structure that does exist today that did not exist in September is that, is the equity and the cash comp for the executive officers but all of that is reflected [audio gap] capability to deliver operating income including all of these equity compensation cost between 14% and 19%.

Mark Bachman - Pacific Crest Securities

Okay, excellent. And then I just had final question for Steve, you just were going to talk about the clean product, the double product.

Steve Newberry

Yeah, I hope that will be the case, certainly that’s our target. I think that the potential for that to exist still holds and I mean that would be -- what we would like to target and see happen.

Operator

Thank you. And your next question comes from Steve O’Worth, with the Deutsche Bank, please go ahead.

Steve O’Worth, Deutsche Bank Securities

Thank you. Question for you on orders, can you tell us which etch segment in particular kind of grow to this strength in orders and what you expect to and along those same lines, what kind of market share do you think you have had in the dielectric etch and the silicon etch?

Steve Newberry

From an order standpoint, order activity in the June quarter was (inaudible), 40% of our orders were from memory, about 26% from Foundry and about 34% from logic and other and as we talked about at our Analyst and Shareholders call, we have at the 65 nm node, we expect that we will have 40% market share in dielectric and about 65% market share in conductor and when you look at the mix dielectric being about 60% of the spending in etch and conductor being about 40%, if you take those percentages you will come up with a number that says we are about 49 and 50% market share at the 65 nm node and we have slightly less than that as the 90 nm node and so the reason that we are saying that our market share in ‘06 is about 40% to 45% is because the shipments in ‘06 are largely and significantly 90 nm shipments and as we go forward in those seven we will see a shift to much more of a waiting to 65 nm which will give us a market share increase in ‘07 as a function of the mix of 65 nm going into the installed base.

Steve O’Worth, Deutsche Bank Securities

Was it dielectric etch that drove the order strength in this past quarter, incremental strength?

Steve Newberry

Clearly we have gained market share in dielectric, in the Foundries and we saw 70% increase in orders at the end of June quarter from the March quarter in Foundry and certainly our dielectric market share position and Foundry was helpful, in the quarters from the Foundry in June.

Operator

And your next question comes from David Duley with Merriman, please go ahead.

David Duley - Merriman Curhan Ford & Co.

One clarification is, why were the Korean orders down during the quarter? And I was wondering if you might be able to comment on, if you think that 2007 based on your commentary now, is it growth year for the industry and finally just a quickie, what are your lead times now?

Martin Anstice

Well I’d take the last one first, so I won’t forget it, our lead times are probably anywhere from 8 to 12 weeks, they are very short, they are very fast, one of the reasons why you see our backlog is very short, so we are able to deliver in RAM very quickly.

In terms of Korea being –- orders being down, it’s again probably would be, it’s really not very useful to look at any one quarter and make a judgment about whether anything going on is significant. The order patterns out of the customers are lumpy and it just so happened in the June quarter, not as many memory companies decided they wanted to place orders in the September quarter, a bunch more of them are now.

I think that one thing about memory is whether you are talking NAND, FLASH or you’re talking DRAM, memory players are in a significant big growth environment. The expectations for DRAM in 2007 is that it may actually increase its big growth from the 50% in 2006 to maybe close to 60% in 2007. Internally we’re all aware that the big growth in NAND, FLASH is still forecasted to be 150+% in 2007.

So I don’t know exactly how much the spending in 2007 for memory will be relative to 2006, but I am very comfortable that there will be a strong and sustained level of investment in memory throughout 2007.

David Duley - Merriman Curhan Ford & Co.

So the one big Korean customer that tends to order I think in June and December quarters, it just looks like the timing of which would be September this time and is that the kind of the message that we should take away from the Korean in order rate?

Steve Newberry

I think that’s probably a pretty good way to look at it. The fact that any –- because I don’t comment about any particular customer, but I think that I wouldn’t draw any conclusions about the June quarter as being any significant activity to draw any conclusions from, because the investment is going to be there in September and the investment is going to be there in December.

Operator

And your next question comes from Mark Fitzgerald with Banc of America, please go ahead.

Mark Fitzgerald - Banc of America Securities

Martin, on the $521 million in backlog, what percentage is shippable over the next six months?

Martin Anstice

Yeah, the headline on the backlog is a short-term backlog and that’s evident by the fact that -- I think the last three quarters now the backlog at the end of the quarter has been less than the bookings of that quarter and that’s true, today we have bookings in the quarter of 640 and we have a backlog of 521. And so the headline when that reality exist is, it is a short-term backlog. Not all of this is scheduled to ship in the September quarter, some of it is scheduled to ship in December, but there is not a whole bunch of scheduled into next year.

Mark Fitzgerald - Banc of America Securities

So given that, the back logically short term you have short lead time, how can you guys argue that booking isn’t an important number to give the street a leading indicator at this point?

Martin Anstice

Because the reality is in that backlog as I’m just trying to say, there is some part of it that is in December, not much beyond but it’s a short-term deal. And so the best way we can characterize momentum, the best way we can characterize the economic things relative to things that we manage, all day everyday are to focus on fabrication wings, to focus on similar events and to focus on revenue and cash cycles and that’s really the decision that we’ve made.

Operator

Thank you, and we have time for one final question. Our final question will come from Patrick Ho with the Stifel Nicolaus, please go ahead.

Patrick Ho - Stifel Nicolaus & Company

Thanks a lot -- up on the quarter. In terms of your guidance and looking up the December quarter, it relatively appears that you give a lot more color than lot of your -- I guess your competitors, what’s giving you that visibility to basically comment on the December quarter? Is it because you have a shorter cycle time in the shorter that gives you more confidence to give that type of an outlook?

Steve Newberry

Well, I can’t comment on the why others are doing, what they’re doing. There has been some people commenting on what they believe the CapEx spending will be for 2007 and I am not going to comment on that at all because I don’t have a clue what’s going to happen in 2007.

I think what I am trying to do is give people a flavor for kind of what’s going on with some specificity in September, which is specific guidance and then some directionality in terms of December and so people can get a feel for what customer thinking is today over the next six months.

Now this is a volatile industry, we could sit here and talk three weeks from now and that view of what people are planning to do over the next six months could change. I think that when we look at what’s going on, all of a sudden you are looking at what happens to the demand on a going forward basis over the next three or four months as we head into the Christmas season, if the second half of ‘06 is a strong demand environment, then that’s going to demand well for the utilization of the capacity that is an ordered and it’s going to be coming online.

If we have a weak demand environment, if we have a economic situation in the US and around the world where consumer spending is weak, then there will obviously be an adjustment in terms of how much additional equipment is ordered and how much additional capacity, the IT manufacturer is trying to bring on.

But the reality is none of us know at least certainly we don’t know what that’s actually going to play out. I am just trying to share with people that this is what customers are telling us today what they are planning to do and I think we all have to take into consideration that those plans are certainly subject to change.

Mark Fitzgerald - Banc of America Securities

Well fair enough, and a final question, now that we have gotten through a lot of the 65nm evaluations, and a lot of your shared gains at the technology node, as you are looking to 45 nm, what are some of the new challenges that the chip makers who are beginning those evaluations come to you now with -- at that technology node?

Steve Newberry

Well, I think consistent with what they want at every technology node is they want more capability for less cost and certainly, we are challenged to provide them with higher wafers apps with greater capability.

I think the big issue at 45 is going to really be two things. One is, defectivity is a big issue in terms of how it impacts the Y-shield and so there is a lot of activity going on to understand the impacts of defects and to look at ways to reduce the number of defects that are produced in the processing and cleaning of the processing steps. And the other will be, what choices will the semiconductor device manufacturers make relative to new materials.

Will we see the introduction of metal gates, will we see the introduction of porous (locales). A lot of those new materials will have significant challenges associated with them, and we will be expected to find the solutions and find them quickly so that as they make the purchases they can take that multibillion-dollar investment in a leading fab and get good capital asset productivity results on it.

So we will be in the middle of that game and I would expect for us to continue to enjoy the trust from our customers and be a major player in the equipment processes.

Operator

Thank you. At this time, I will turn the conference back to you for any closing comments you may have.

Kathleen Bela, Director of Investor Relations

Thank you, ma’am. We want to thank you just for joining us today for this quarter’s conference call and we look forward to speaking with you again next quarter.

Operator

Thank you ladies and gentlemen, that concludes today’s teleconference, and thank you again for your participation, and at this time you may disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!