Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Lam Research Corporation (NASDAQ:LRCX)

F3Q2014 Earnings Conference Call

April 23, 2014 5:00 PM ET

Executives

Shanye Hudson – Senior Director, IR

Martin Anstice – President and CEO

Douglas Bettinger – EVP and CFO

Analysts

Farhan Rizvi – Credit Suisse

Douglas R. Bettinger

James Covello – Goldman Sachs Group Inc.

Krish Sankar – BofA Merrill Lynch

Harlan Sur – JPMorgan Chase

Timothy Arcuri – Cowen and Company, LLC

Weston Twigg – Pacific Crest Securities

Mahesh Sanganeria – RBC Capital Markets, LLC

Benedict Pang – Northland Capital Markets

Mehdi Hosseini – Susquehanna Financial Group

C. J. Muse – ISI Group

Edwin Mok – Needham & Company, LLC

Tom Diffely – D. A. Davidson

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Lam Research Corporation March 2014 Quarterly Results Conference Call. (Operator Instructions). At this time I would like to turn the conference over to Shanye Hudson, Senior Director, Investor Relations. Please go ahead ma’am.

Shanye Hudson

Great, thank you Vince. Good afternoon, everyone, and welcome to our quarterly conference call. With me today are Martin Anstice, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer.

During today’s call we will share our outlook on the business environment and review our financial results for the March 2014 quarter and our outlook for the June 2014 quarter. The press release detailing our financial results was distributed over the wire services a little after 1 PM this afternoon and can also be found on the Investor Relations section of the company’s website, along with the presentation slides that accompany today’s call.

Today’s presentation and Q&A will include statements about our expectations and beliefs regarding certain future outcomes including our guidance. A more thorough list of forward-looking topics that we expect to cover is shown on the slide deck accompanying my remarks. All statements made that are not historical in-fact are forward-looking statements based on current information and are subject to risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factor disclosures in our public filings, including our 10-K and 10-Qs. The company undertakes no obligation to update forward-looking statements.

Today’s discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today’s earnings press release. This call is scheduled to last until 3 PM Pacific time and as always we ask that you limit questions to one per firm with a very brief follow-up such that we can accommodate as many questions as possible. As a reminder, a webcast replay of this call will be available later this afternoon on our website.

Finally I would like to announce plans to host our investor and analyst event on Tuesday, July the 8th. This event will be held in San Francisco in conjunction with the SEMICON West Industry Conference. You can expect to see further details in the coming weeks on our Investor Relations website.

With that I will turn the call over to you Martin.

Martin Anstice

Thank you, Shanye and good afternoon everyone. I’ll start today’s call by sharing highlights from the quarter and then update you with a short commentary on the industry environment before concluding with our perspective on Lam’s opportunities and progress against our growth objectives.

Then Doug will summarize our financial results and provide guidance for the June quarter. Lam Research is off to a really great start in 2014, hence we’re pleased to report another quarter of strong execution across key areas of the business. We delivered great financial performance in the March quarter with results topping the mid-points of our guided ranges across all metrics and meeting or exceeding our long-term models in absolute terms as well as in timing.

Our business models are focused on driving profitable growth. Consistent with expectations we grew revenue by 10% sequentially and grew operating income nearly twice that pace with excellent cash from operations performance at 24% of revenues.

We are very busy with new technology and product release activities taking advantage of industry transitions and increasing support from our key customers. We continue to solidify to solidly gain traction across each of our targeted market segments and enjoy increasing market share in etch and deposition, both a claim recently endorsed by independent industry research.

In 3D NANDs production qualifications are underway for our high productivity dielectric deposition platform, our latest generation dielectric etcher and our tungsten extreme fill tool.

These transistors are defined by uniformally depositing alternating films using our PECVD system. Next these transistors are connected by precisely etching a very high aspect ratio down through the entire film stack using our dielectric etch tool.

Finally that hole is filled with tungsten using our CVD system which electrically connects the transistors in the device. Essentially from selections made by our customers every critical step in the all-important transistor formation in 3D NAND is addressed by Lam equipments.

In DRAM, contemplating our strong etch position in the area of multi-patterning we secured production application wins with our dielectric ALD tool for 20 nanometer technology node. Importantly we have demonstrated the ability to achieve our customer’s stringent uniformity requirements without compromising productivity.

In the area of advanced packaging we were successful with two new systems, two new customers for our 3D copper electric planting tools thus extending our lead in copper fill. And in our clean business we have leading edge joint development activity now with three leading device manufacturers to evaluate our next generation clean system and we’re pleased to report that one of these systems has been released for production for multiple front end line applications. While we’re still in the early stages of assessing these tools production capabilities we are of course encouraged by our early progress and remain optimistic about the opportunity ahead.

We continue to focus on delivering technology and productivity solutions that enhance the value we offer to our customers. The ability to do so correlates directly to our long standing focus on unit process excellence, customer trust and industry collaboration leadership which we believe are differentiators of substance for our company.

This differentiation is more important and more valuable than ever in an environment which is being impacted by the scale of customer and the equipments industry consolidation at the same time that customers are demanding very best supports to their most complex and pressing technical challenges.

We believe the results we report today further illustrates how customers are demonstrating their commitment to Lam as a technology and productivity solutions partner for their most critical challenges and inflections.

Turning now to our industry outlook, we continue to forecast wafer fabrication equipment spending at approximately $32 billion in calendar 2014. The headline here is we’ve seen some strengthening in DRAM largely with multi-patterning and technology conversion, some slight delays in 3D NANDs to our earlier expectations and a sustained commitment in logic and foundry to 20 nanometer and FinFET adoptions and multi-patterning integration schemes.

Starting with the NAND segments we saw very strong investments in the March quarter, both for Planar and 3D NAND devices. We continue to expect WFE spend for Planar devices will represent the majority of spending this year and remain relatively steady as customers transition to the sub-20 nanometer technology node.

Specific to 3D NAND the timing of second generation device ramps appears now more likely to extend into early 2015 for some. As a result we now estimate that the cumulative amount of 3D NAND shipped capacity exiting 2014 to be at the bottom end of our prior range of 80,000 to 100,000 wafer starts per month. This shift has not impacted our outlook for 2014 NAND supply bid growth which remains essentially in the lower 40% range. In DRAM we saw an acceleration of investment plans in the March quarter to convert capacity to the mid-2x and 20 nanometer nodes. We expect similar DRAM investments to continue through the balance of calendar 2014, for Lam, more than offsetting the delays I just mentioned in 3D NAND. As a result we have maintained our projections for memory WFE spend in a range of $12 billion to $13 billion in 2014.

Finally, in both the foundry and broader logic segments our outlook remains pretty consistent with what we outlined in our January call. Although it seems there is a perpetual debate around pulls and pushes, the ramp plans for 20 nanometer foundry and 14 nanometer logic appear from our perspective to be progressing largely as expected through the first half of this year and we started to see initial pilot capacity installation for foundry FinFET.

Overall we estimate that approximately 25% of total WFE investments this year will be directly associated with inflection technologies including 3D NAND, FinFET devices for foundries, multi-patterning and advanced packaging. Our customers are motivated to transition to these next generation devices because they can offer a competitive advantage in their markets in cost and/or outperformance. Again, based on the importance of these technology inflections and the current pace of pilot and production ramps we’re still projecting overall WFE spending within a $32 billion range. We assume spending is relatively balanced between halfs with memory investments slightly stronger in first half and logic foundry slightly stronger in the second half of this calendar year.

For Lam, we believe we are well-positioned with these inflections and have the opportunity to outpace the industry growth once again in calendar 2014 as our customers begin to transition to these devices. More, if we execute to our plan this outperformance should accelerate as a greater proportion of total spending relates to these inflections in the next two to three years.

Further adoption of multi-patterning schemes is a sizable cornerstone of sustainable growth to the company. We are continuing to benefit from the ongoing investments in leading etch foundry capacity. However these trends may be most pronounced currently in the DRAM segments. With the transition to the 20 nanometer node, the number of multi-patterning passes increases from four or so steps at the 25 nanometer node to 15 or 20 steps at 20 nanometer. These critical applications play to our leadership position in conductor etch and have supported equipment bias.

We are already benefiting from the initial 3D NAND production bias and have further strengthened our development share positions which bodes well for the company as other NAND manufacturers commence technology transition to 3D devices in volume next year and beyond. In addition, LAM’s exposure to each of the industry segments is more balanced today than ever in the company’s history. In the last 18 months we strengthened memory positions for deposition products particularly NAND positions and ALD technology broadly. We have also fortified positions for etch in microprocessor and foundry both.

Noteworthy, across the sum of our product portfolio in calendar 2014 I believe our global market share in foundry is expected to be within five percentage points of our market share in memory. In addition, year-over-year 2014 versus 2013 our logic shipments market share, including microprocessor, general purpose logic and packaging is likely to increase by 10 percentage points, approximately two-thirds coming from deposition and one-third from etch.

At the end of the day we believe Lam exited 2013 having gains two to three points of ships market share in etch and point or so in deposition with essentially no change to our positions in claim. In a world that at times offers confusing or conflicting industry claims on growth and market share perhaps there is no more fundamental measure than relative revenue growth.

In that regards we established an industry benchmark in calendar 2013 with year-on-year revenue growth that outpaced the industry and all of our primarily direct competitors by a significant market. We are increasingly confident in our product positioning and particularly the support we are receiving from customers at this time. In addition to the beneficial deposition and etch market expansion opportunities available for the long-term, particularly with multi-patterning and 3D transitions we are poised to gain another one to two percentage points of shipped share in both etch and deposition this year.

Our strong performance within the quarter and outlook underscore Lam’s unique value and growth opportunity we believe. We are executing at a high level and believe our customers are very invested in Lam addressing their most critical challenges long term. With that I will turn the call over to Doug.

Douglas Bettinger

Thank you Martin. Good afternoon, everyone and thank you today when I know is a busy earnings day for all of you. And I’ll reiterate a little bit of what Martin said. We are starting 2014 with some very positive momentum. We continue to execute on our growth plans and to deliver solid performance very much in line with our financial model.

Shipments for the March quarter again hit an all-time high. We achieved record revenues for the fourth consecutive quarter. Operating income continued to outpace revenue growth this quarter by almost double the rate. Gross margin came in towards to the upper end of our expectations. Earnings per share exceeded the high end of our guidance and we clearly demonstrated the cash generation ability of our business model by more than doubling our operational cash flow on a sequential basis.

Shipments in the March quarter were $1.264 billion, which is up more than 10% compared to the December quarter and again above the midpoint of our guidance range. Memory shipments continued at a healthy pace. Relative to our expectations at the beginning of the quarter DRAM upside compensated for slightly softer NAND spending.

The combined memory segment represented 66% of total system shipments, about flat in percentage terms with the December quarter. Of that NAND shipments contributed 36% The build out of initial 3G NAND production capacity made up a large portion of NAND shipments in the March quarter. I would point out however that we still expect planar NAND node conversion spending to represent the majority of NAND investments for the full year.

DRAM shipments were 30% of system shipments. These shipments were targeted at 25 nanometer conversions and initial 20 nanometer pilot production. We are benefitting disproportionately in this area due to our strong market position in multiple patterning applications.

Foundry shipments were 28% of total system shipments, flat on a percentage basis compared to last quarter. However in total dollar terms up sequentially by nearly 15%. In addition to ongoing capacity expansion for the 20 nanometer node we are starting to see shipments for FinFET pilot production.

And finally logic and other shipments comprised 6% of total system shipments which was down from 8% in the prior quarter. Revenue for the March quarter was $1.227 billion, representing a 10% increase from the December quarter. We saw revenue growth significantly above 10% sequentially in both etch and deposition driven by share expansion in the memory space.

March quarter gross margin came at a little better than expected at 45.5% and again was in-line with our financial model. And I will just remind you that we expect to see quarterly variability in our gross margin performance based on multiple factors such as product mix, customer mix and business volumes. We continue to manage our operating expenses which were within expectations for the March quarter at $311 million. This spending was 25% of revenue compared to 27% of revenue in the December quarter.

We remain focused on driving efficiencies in SG&A in order to enhance funding for strategic R&D investments. R&D grew to 60% of total operating expenses in the March quarter while we slightly lowered SG&A expenses. The incremental R&D spending supported areas like the 3D copper electroplating, ALD and tungsten CVD that Martin mentioned earlier. We delivered solid operating income in the March quarter at $248 million, which was up 19% from the $209 million in the December quarter.

Our operating margin came in at 20.2% near the high end of our guidance range, again reflecting leverage in our model. The tax rate for the March quarter was approximately 12% .I expect the rate to hold steady in the low to mid-teens for the balance of the fiscal year. And the resulting earnings per share for the quarter came in at $1.26 exceeding our expectations. Majority of the upside is attributable to our operating performance and to a lesser extend a more favorable tax rate.

Our earnings per share were based on a share count of roughly 172 million shares. The share count includes the dilutive effect of 6.8 million shares from the 2041 convertible note. And let me just remind you that the schedule for this note is posted on our investor relations website to assist you with your modeling.

We generated very strong cash from operations in the March quarter at $290 million which was about 24% of revenue. Our operational cash generation more than doubled from the $129 million in the December quarter due to a very strong focus on collections [Technical Difficulty] repurchased approximately 930,000 shares of common stock. At year-end we had completed about $186 million or approximately 75% of our current $230 million authorization at an average cumulative share price of $15.19. We are anticipating share purchase under authorization in near term. You should expect us to update you on our long plans in this area as we complete this authorization. We remained committed to a prudent return of available cash to our shareholders. So now let me turn to balance sheet.

We ended the quarter with gross cash and short term investments including our restricted cash of $2.9 billion. This compares with $2.7 billion in the December quarter. We had deferred revenue of $432 million which does not include $57 million of shipments to Japanese customers which will convert to revenue in future quarters.

Let me now turn to our non-GAAP guidance for the June quarter. We expect shipments of $1.150 billion plus or minus $50 million. We expect revenue of $1.240 billion plus or minus $50 million. Our expectation for gross margin is 46% plus or minus one percentage point. We are forecasting operating margins of 20% plus or minus one percentage point. And finally we forecast earnings per share of $1.21 plus or minus $0.07 based on a flattish share count of approximately 172 million shares.

Based on our current outlook we expect our shipment profile to be relatively balanced between the first and second half perhaps with a slide bias towards a little bit stronger first half. We are seeing a slight pause in shipments during the middle part of this year. Consistent with the prior remarks we would expect variability quarter-to-quarter given our consolidated customer base and the ongoing uncertainties about the scope and timing of investments for next generation devices.

Operator that concludes my prepared remarks. Martin and I would be pleased to take your questions now.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen we will now begin the question-and-answer session. (Operator Instructions). Our first question is from the line of John Pitzer with Credit Suisse. Please go ahead.

Farhan Rizvi – Credit Suisse

Hi, thanks for taking my question. This is for Farhan asking the question on behalf of John. I was just wondering like you talked about your multi-patterning opportunity and it seems like there is a huge growth for you going from 25 nanometer to 20 nanometer. I wanted to know relative to the previous guidance that you have provided at the analyst day, how do you see your SAM growth in terms of percentage on a per wafer basis when you go from 25 nanometer to 20 nanometer DRAM?

Martin Anstice

Yeah, we don’t – we don’t actually kind of get to precisely answer that question in the context for SAM expansion of the company obviously includes the DRAM transition but there is kind of much more to SAM expansion than that but I guess at a very high level, if you look at the inflection in DRAM from the mid 2x node to 20 nanometer we would expect SAM expense in the 30% to 40% range. And a big part of that obviously relates to patterning and as best we can tell and I think today’s results are a decent amount of evidence so that the share momentum for the company is positive. But the headline I would ask you keep in mind is that inflection sits in the context of 4 or 5 and the total SAM expansion opportunity for the company is in a $1 billion range.

Farhan Rizvi – Credit Suisse

Got it and thank you. And then talking about the shipment mix in terms of your June quarter, how do you see different mix by different segments?

Douglas R. Bettinger

Yeah, I mean obviously regarding this is Doug by the way, we are guiding shipments down a little bit. Within that your memory is down a little bit, NAND probably down and DRAM is actually flat to slightly up. Logic is up a little bit and foundry is flattish, may be flattish to slightly down.

Farhan Rizvi – Credit Suisse

Thank you. That’s all I have.

Operator

Thank you. Our next question comes from the line of Jim Covello with Goldman Sachs. Please go ahead.

James Covello – Goldman Sachs Group Inc.

Great guys good afternoon. Thanks so much for taking the question. Can you talk a little bit about the breadth of the DRAM activity is it just one or two guys or is it the more than one person who is driving the changes there?

Martin Anstice

Well there aren’t so many customers left in our world, so…

James Covello – Goldman Sachs Group Inc.

I guess really is the just one or is it two?

Martin Anstice

No, it’s more than one. So there is I mean there is a decent amount of conversion activity happening today and my expectation Jim is that there is probably in the range of 500,000 wafer starts of DRAM conversion going to take place in the calendar year kind of all in. And that will mean that we kind of if you place out that way they will still be in the range of 400,000 wafer starts at capacity at kind of 3x or greater, in terms of kind of technology node. So a decent amount of conversion but at the end of the year even with that assumption there is still a fair amount of capacity still adds 3x or above.

James Covello – Goldman Sachs Group Inc.

That ultimately could still be converted next year right?

Martin Anstice

Exactly.

James Covello – Goldman Sachs Group Inc.

And on the 3D NAND, is your view there that the reason that that the changes you are seeing in that market is that because of yield on those products or is it because may be we already have what we need for NAND right now before we add any more, what’s the color on what the changes are being driven by?

Martin Anstice

Yeah it’s obviously a question that at the end of the day the customers you want to really answer. I am sure everything that has been written is probably relevant in some way to this. I mean there is continues to be evidence of really good discipline in terms of supply and demand balance in memory period and that’s really NAND as much as it is in the DRAM. As we’ve talked about a number of times the transition from planar to 3D technology in Flash memory is extremely challenging and clearly this is the year where our customers are making in varying levels of commitments investments in that evaluation and obviously there is one kind of big I that’s a step ahead in terms of their commitments.

But frankly as best we can tell everybody is in investing at some level beginning to evaluate the technology. And the commentary from customers today is very similar to the commentary a year or so ago, there is up to a kind of two to three year timeline associated to transitions to 3D device depending on the customer. But I am sure the complexity of building a device, yielding a device delivering performance in a device and to the committed discipline of customers to only add capacity when it is matched by demand are all relevant in answering your question.

James Covello – Goldman Sachs Group Inc.

Really helpful, thanks so much, good luck.

Martin Anstice

Thanks Jim.

Operator

Your next question comes from the line of Krish Sankar with Bank of American. Please go ahead.

Krish Sankar – BofA Merrill Lynch

Yes, great thanks for taking my question. I had two quick ones, one Martin I noticed that in your etch market segments when you talk about – you mostly focus on dielectric etch, kind of curious, is the incremental opportunity mostly in dielectric etch because which you’re kind of maxed out, you already have a high conductor etch it or is there something else going on?

Martin Anstice

Well by virtue of market share in dielectric etch being lower than conductor etch I would all say that the opportunity again is greater. I would not agree that we are maxed out in conductor etch, I mean we have a set of business objectives to grow in all segments of our business that’s clearly more difficult when you have a very strong leadership position but it’s not impossible. And frankly we’re making investments to grow both of etch but we have been approximately a 35% market share company for some time in dielectric and as I’ve talked about a number of times, particularly evidenced by market share momentum in memory already and we’re seeing some really nice signs of pick-up in support from customers in logic emerging as well. I believe we have a product to this point that is very competitive and for the first time in the long time I think we’re very optimistic about the growth potential in dielectric.

Krish Sankar – BofA Merrill Lynch

Great, that’s very helpful and then a quick follow up, just in terms of the capital investment obviously you have a lot of free cash oversea and looks like you guys got investment grade status recently. So I’m kind of curious what’s your appetite for debt, getting on debt as of this point given that you have a delicate balance between debt and the investment grade status?

Douglas R. Bettinger

Yeah, Krish we’re working our way through the current buyback authorizations. That’s what we’re going to do until that’s completed at which point we’ll develop a new plan and communicate to you what we’re going to do. I wouldn’t tell you that raising debt is completely off the table but I think we’ll be able to develop a pretty good plan and have a pretty good cash return opportunity without doing that. But having said that we still have an ability to take debt on if we choose to do so, haven’t made the decision yet.

Krish Sankar – BofA Merrill Lynch

That is terrific, thanks a lot guys.

Martin Anstice

Thanks Krish.

Operator

Thank you. Our next question is from the line of Harlan Sur with JPMorgan Chase. Please go ahead.

Harlan Sur – JPMorgan Chase

Great, thank you for taking my question and solid job on the quarterly execution. As a follow up to Jim’s question, the equipment spenders have been fairly limited in the first half but with your balance kind of first half second half outlook, do you also see a pipeline of more customers and program spending in the second half versus the first half? On the NAND side as you mentioned you know you’ve got the transition the 15 nanometer planar by one or two of your customers, you’ve got 20 nanometer DRAM transitions and an initial ramp-up of 16 nanometer FinFET by foundry customers. Does that spender base continue to broaden into the second half?

Martin Anstice

Absolutely yes, I think in every segment that’s a true statement. We, as I mentioned in the question from Jim, concentration is in efforts of the high – but the first quarter of our year is the most concentrated. We’re about 70% of our outlook to three guys and that three guy reference point probably drops to the 60% level, 50%, 60% level for the rest of the year. So macro level definitely more diversity at a specific level NAND transition more participant in second half to first half for sure, DRAM pretty stable while the foundry is definitely opening in the second half of the year and I think that’s very consistent with kind of the comments from TSNC around their concentration spending in the first half. And the microprocessor world obviously is overwhelmed in investment terms at least by one customer and their strategy which cannot play that last year in a big way is still very relevant to them but original equipment bias in emerging theme as we step through the year for them.

Harlan Sur – JPMorgan Chase

Great and then solid job on the operating margin expansion in the March quarter and holding it here in the June quarter. Obviously the team had a lot of new development initiatives ongoing. As WFE spending growth plays rather as you would expect how should we think about the OpEx profile as the year enfolds off of the June quarter base?

Martin Anstice

I think the most important guiding principle is we’re not going to compromise a long-term success of a company for a kind of a short-term if any. But having said that we’re not sitting here today with a belief that we have kind of fundamental disconnects between investment levels and opportunities. Always there’s an appetite to do more and to spend more and I wouldn’t expect us to look very different frankly from the rest of the capital equipment given in terms of increasing investments in the year. I think more or less we track together today, none of us are really kind of shocking in terms of disproportionate increases or decreases in investment.

Douglas Bettinger

Yeah and Harlan if you do the math on the guide for the June quarter you’ll know that spending is picking up a bit. It’s the timing of our annual merit cycle as well as new equity grants I wouldn’t you shouldn’t expect that to occur again for the remainder of this year, that’s an annual pipeline so that’s the reason for step up right now I wouldn’t expect that to continue.

Harlan Sur – JPMorgan Chase

Okay. [Technical Difficulty] qualitative mentioned you expect a little more bias of foundries in second half of this year, well obviously do you see spending of 30 nanometers or do you see on the next generation of 16 nanometer in the coming year?

Martin Anstice

That’s really [Technical Difficulty. So I’ll try and triangle it for you a little bit. I do believe for the year that the 20 nanometer and investments all represent only 80% or so ending and I do believe that for the year there were – 20 nanometer investments to FinFET investments probably kind of 60:40 something in that range. So you’re going to have to work with that because I don’t that I expect specificity at the half level to kind of take you beyond that at this time.

Harlan Sur – JPMorgan Chase

No it’s fair enough. You mentioned that you got some new clean products out in the market place that you are trying to get some attraction back in that area. Should we look at 2014 as kind of the ceding year and 2015 as the year where you expect to generate some more revenues and market share gains in that business segment?

Martin Anstice

Yeah I think it’s fair to say that, the whole of the plans of the company is the one in the long-term that’s the more hockey sticks and that’s a byproduct of being disadvantaged in a couple of ways in the last three or four years we were not competitive in terms of productivity. We believe we now are. We have a 16 chamber configuration which has mechanical throughput capabilities that I think are very competitive and the process and chamber offerings we’ve designed to allow us to participate in the front end of the line clean segment in ways that we were not able to historically.

But as I will always state getting penetration in a segment of the industry which is not feature creating. It’s all about yield obviously, is a very tough proposition and we respect our competition enormously. So this is a very important year for us, no question and we exit the year with one of two products, either a lot of confidence around the plans of the company and spending level consistent with that or a redefinition of the outlook for the business but we certainly as we sit here today the customer engagement is very positive and in fact we’re getting kind of more pulls than we’re actually satisfying today. Couple of customers are interested in the product and we’re holding back a little until we validated some of the offering in the existing engagements.

Harlan Sur – JPMorgan Chase

Great, thank you.

Martin Anstice

Thanks Harlan.

Operator

Thank you. Our next question comes from the line of Timothy Arcuri with Cowen and Company. Please go ahead.

Timothy Arcuri – Cowen and Company, LLC

Thanks a lot. A couple of things guys first of all Martin I wanted to fit what you said about a pause in mid-year, you said there’s going to be pause in mid-year but then you also talked about shipments being only a little bit front half loaded this year. So I guess you probably don’t want to give guidance for calendar Q3 but that would sort of imply that the September shipments are not going to come down much if they come down at all, that’s the first question and then I had a follow up.

Martin Anstice

Your assumption is right, I’m not going to give guidance on September and good try though. The answer obviously for September is by product not just of June but also December and so really is kind of early for me to be calling a quarter at this point. I would not expect September to be up. I think it will be about flattish or down a little. But I might be wrong and there’s a lot of weeks between now and the real kind of decision point I think relates to September and December uncertainty.

At a revenue level, again it’s an imperfect science for us to be articulating a view for the calendar year but I would say that our expectation is that second half quarters – if we are going to track to this $32 billion WFE number, that we believe is the case, the second half quarters will have a revenue level that’s kind of plus or minus $100 million of the average of the first two quarters of this year. So that’s our kind of reference point for the second half as we see it today in revenues and obviously some part of that is answering your question because revenues are byproduct of shipments.

Timothy Arcuri – Cowen and Company, LLC

Perfect, awesome. As always, thanks for that. And then, just a question more for Doug. So clearly, you guys were taking a lot of WFE share this year. If I go back to the slide you put out at SEMICON West and you have your long-term financial model, you are basically at $5 billion revenue run rate right now and gross margin 46%, operating margin 22%. So you are pretty already at your 2015, 2016 model. So is this your sort of one-time mix issues that helped too in December and March or should we think that there is headroom to that model particularly given the huge second generation 3D NAND you have? Thanks.

Douglas Bettinger

Yes, Tim, I am not changing that model as we sit here today. We are not quite at that $5 billion. It’s kind of high fours. And part of the margin improvement from where we are today, we are a little bit shy of that 22% and approaching the revenue level prior to its time in terms of maturing products and getting everything ramped in manufacturing. Could there be headroom? Maybe, but, it’s too early to call it right now. SEMICON and our Analysts Day are too far away. We may be updating some things for you them, but there is time for that now.

Martin Anstice

So, just to kind of supplement to that, I would say a couple of things. It isn’t kind of mix thing and just looks good for the quarter. I mean there are very fundamental, SAM expansion opportunities that are relevant to our company. As I said a number of times, I don’t think, there is a better positions company in the equipment space by virtue of what we have in the product portfolio and what we don’t in the product portfolio to exploit four or five inflections. I think we are at the right place, at time with the right products. The patterning expansion is very real and as I mentioned in the last call, we were positively surprised by the scale and scope of that in DRAM and we’re only just at the beginning of it in the kind of Logic kind of rollout and all of commentary that I read at least says that, that opportunity is an increasing opportunity and substance for us through at least the 10 nanometer technology node and the longer that installed base gets positioned, the more challenging the intercept points are easy relative to kind of greenfield trade off.

So that’s a very real opportunity. I think, one thing to keep in mind in terms of calling it too early or calling it too late in terms of whether we revise models is, let’s not forget the intensity of the conversation from the customer on cost, right. One of the most important complexities that we have to walk through as an industry and as a company in the next number of years, all of these inflections are getting more expensive, right. Capital intensity almost in every transition is either not going down as much as it used to or quite the reverse, it’s going up.

And so, we have tremendous SAM expansion opportunities. We are at least flat or positive in market share in these transitions, but the industry and part of the industry is going to see increasing pressure I am sure over the next several years as this goes from kind of pilot and technology evaluation in the case of 3D NAND into ultimately HVM manufacturing. But may be kind of finish off the thoughts, let’s just kind of go back to first principles. In our last Analyst Meeting, we articulated [Technical Difficulty] to our market share we are about a 40% market share company in the segments that we compete, about a 50% share company in etch, mid 30% in deposition and high teens, low 20s in clean. And through the decisions that customers have made to-date, we believe that our market share around the inflections exceeds the 50% level. So, let’s say kind of 10 point increase in market share before and after inflections.

And so, one of the most important headlines for everybody across the company is, if we continue to execute and that isn’t easy, the challenge from competitors and expectations from customers are incredibly demanding, but if we execute to the plans of the company, the result is that, the outperformance you are seeing today is going to accelerate as a greater proportion of spending of customers is associate with these inflections and that’s not a guidance statement, that’s a statement of understanding and belief. We have got a lots of work to do to pull that off but that’s what this company is focused on executing.

Timothy Arcuri – Cowen and Company, LLC

Wonderful, Martin. Thank you.

Martin Anstice

Sorry for the long answer, but I felt like time for me to make that statement.

Douglas Bettinger

Thanks, Tim.

Operator

Thank you. Out next question is from the line of Weston Twigg with Pacific Crest Securities. Please go ahead.

Weston Twigg – Pacific Crest Securities

Hi. Thanks for taking my questions. Just real quickly wanted to ask a little bit more about shareholders expectations. It sounds like you do have some level of conviction in a rebound in the second half largely weighted towards foundry. But, I’m just wondering related to FinFET from the conversations you are having with your customers, does it feel to you that they are really moving full steam ahead or that there seemed to be some risk or some hesitation perhaps to second half spend and just kind of gauging a level of conviction on that spend.

Martin Anstice

I sense conviction. It seems a very important transition for established community I think a lot of the date around custom performance for the 20 nanometer node tends to suggest that there are significant opportunities for performance improvements on both of those definitions in a FinFET device and architecture and not surprisingly it’s a very competitive space for the foundry. So at least as far as the interactions that I have, there is a lot of conviction to be successful through this inflection.

Weston Twigg – Pacific Crest Securities

Okay, good. And then just a similar question on 3D NAND, now you are indicating that there may be 80,000 wafer starts might be installed by the end of the year. And I’m just wondering if you think there will be may be more downside risk or upside potential to that number at this point?

Martin Anstice

Really hard to tell. I don’t know that there is a lot of either frankly and I don’t think there is a tremendous amount of downside because the 80,000 wafer start level that is a pretty minimalist investment in the industry to evaluate that technology. And it’s a critical period for evaluating that technology. I think every NAND customer is talking about evaluating the technology and they have their own timelines and own roadmaps in terms of HVM adoption. But I don’t think any one of the NAND flash memory customers can afford to be only outside looking a technology transition. They will make their own choices about what the right point of intercept is, how many layers in a device makes sense in terms of cost comparisons, but I sense there is very minimal downside to the number that we have shared today.

Weston Twigg – Pacific Crest Securities

Okay. Good. Very helpful. Thank you.

Martin Anstice

Thanks Weston.

Operator

Thank you. Our next question comes from the line of Mahesh Sanganeria with RBC Capital Markets. Please go ahead.

Mahesh Sanganeria – RBC Capital Markets, LLC

Thank you very much. Martin, just want to follow up on your SAM expansion with multiple patterning comment. The conventional wisdom has that with multiple patterning lithography expands the most. But looking at your results and comparing, it looks like you are benefiting a lot more than some of your competitors for some of your segments. Is there something we are missing here? Is that something in the technology that is helping you more than others in terms of SAM expansion in multiple patterning?

Martin Anstice

Well, I think the – I don’t know if there is anything that you are missing. You just described the substance, the opportunity, the strength of the company’s position in etch and deposition both and the specific integration scheme in DRAM is very beneficial to us. And certainly with the predominance of investments in DRAM except for kind of patterning probably being upgrade related, you’re going to see a bias and a waiting to the etch and deposition space by the very nature of that scheme.

Mahesh Sanganeria – RBC Capital Markets, LLC

Okay. And then the second follow up on your clean tool is the opportunity or the veneer or gearing, is it specific to – is it more towards foundry logic or it’s memory can you give us little bit more color on where you are and what kind of results you are getting by device?

Martin Anstice

It’s the engagement is memory and logic both, the win is memory. And the win is front end of line which is an important kind of test for us because that’s the area of the Single Wafer Clean segment there we had been least competitive in the last three to four years. So I feel that it is an important statement from a customer but it’s one. And that is not the definition of success, definition of success is establishing market share leadership in all of the products of our company and we’re not there yet by a long way.

Mahesh Sanganeria – RBC Capital Markets, LLC

All right that’s very helpful. Thank you so much.

Martin Anstice

Thank you.

Operator

Thank you. Our next question comes from the line of Ben Pang with Northland Capital Markets. Please go head.

Benedict Pang – Northland Capital Markets

Thanks for taking my question. On your 32 billion WFE if I understand you correctly the only thing that’s changed on your forecast from the beginning of the year to now is that 3D NAND is lower and DRAM is higher but foundry is pretty much the same, is that right?

Martin Anstice

More or less, yeah I mean there is plus or minus $100 million here there but that’s the headline.

Benedict Pang – Northland Capital Markets

Okay. And what’s the lead time for your products right now for just the dep and etch?

Martin Anstice

Well the expectation from the customers typically is they place an order today and get the product tomorrow. And just occasionally we get somewhat close to that. But the typical lead times for the products in our segments are going to be inside of a quarter. And then sometimes there will be less than eight weeks and sometimes more than eight weeks.

And one of the important transitions for us in clean one of the reasons why going to next generation clean is so important to us is the lead times on the clean systems are the longest in our company today, with be old generation and new generation they will be very competitive with the deposition and etch portfolio. So we are much shorter lead time play than the bulk of them if that’s your question.

Benedict Pang – Northland Capital Markets

Okay, is it fair to characterize the majority of the business in a quarter, is it trans business there?

Martin Anstice

We turn a decent amount of our business absolutely in the quarter and that’s through from order placement to shipments and shipments to revenue. We can run shipment revenue turns of 60%.

Benedict Pang – Northland Capital Markets

Perfect, thank you very much, good quarter.

Martin Anstice

Thank you very much.

Operator

Thank you. Our next question comes from the line of Mehdi Hosseini with Susquehanna International Group. Please go ahead.

Mehdi Hosseini – Susquehanna Financial Group

Yes, thanks for taking my question. Martin during the January conference call you were talking about the 20 nanometer foundry to be more of the first half and then 16, 14 since that kicking it in the second half. But today’s commentary suggests that may be there is a little bit of 20 nanometer foundry push out into the second half since you described 20 nanometer as 60% of the foundry’s spend.

Could you clarify or reconcile the January commentary with today’s commentary and I have a follow up.

Martin Anstice

Yeah, No, I didn’t say 20 nanometer was 60% of foundry spending, I said in the relationship between 20 nanometer and FinFET investment there will be a 60-40 split. So there is still an investment in foundry at the 28 nanometer node and even a little at 40. So and there are some upgrade and technical node transition as well as original equipment body. So I actually don’t think there is much to reconcile here. I think evidenced by the commentary from TSMC about their first half concentration at the 20 nanometer and the plans that the industry has for second half pilot line adoption at least the math that I do today would kind of refresh and repeat what we said in January. I think we just provided more color today but basically the same headline and certainly no message to the investment community about delay.

Mehdi Hosseini – Susquehanna Financial Group

Got it. And then going back to the share gain how should we – should we assume that the share gains coming against the larger competitors that are consolidating or is that against a smaller one, especially DRAM looking at the competitive landscape may be customers would prefer you gaining share because the larger two competitors may be becoming too big. And this I something that keeps coming up in the conference call but your results showed [Technical Difficulty] any industry, any customer and see significant scaling through consolidation of their supply chain is their staff the risk associated with that and absolutely do I see that opportunity for [inaudible] yeah I see that short term opportunity and the long-term opportunity.

And so we’re going to work very hard partnering with customers to make sure that we have the opportunities as a – it doesn’t kind of detract from the headline that I shared before which is we take our competition very seriously big, companies, small companies, the companies that survive today are generally very capable and very competent.

And so we’re going to have to kind of keep working as hard as we are and partner with customers and I have every confidence that the partnership of Lam Research and the customer is always going to sustain the economics and story we’ve characterized today.

Mehdi Hosseini – Susquehanna Financial Group

Got it, thank you.

Martin Anstice

Thanks Mehdi.

Operator

Thank you. Our next question comes from the line of C.J. Muse with ISI Group. Please go head.

C. J. Muse – ISI Group

Yeah hi thanks for taking my question. I guess first question I think you talked about second half being slightly down than first half and I was hoping to see if you can put some numbers around, is that around 55:45 or how should I think about that?

Martin Anstice

Yeah it’s pretty well balanced C.J. it’s high 40s, low 50s, it’s plus or minus our forecasting ability on this so I would call it flattish C.J.

C. J. Muse – ISI Group

Okay. And then in terms of your relative outperformance at least how I am modeling WFE versus your number what do you think you are seeing in terms of rising capital intensity, etch and deposition this year as well as share gains that you’ve mentioned on the call as well as the 40 nanometer logic that’s coming in? What do you think those three things add for you that other guys are not seeing?

Martin Anstice

Well honestly speaking I don’t spend a huge amount of time focused on capital intensity in the way that the industry mentions it because I think it’s like really misleading. I have no idea what the value of correlating leading investment levels to current year revenues is for the industry and it’s just a bizarre data point from my perspective.

But there is clearly SAM expansion for etch and deposition clean and we’ve kind of sized that at about the $1 billion level. And there is clearly market share expansion that we’ve kind of framed multiple times including our analyst meeting and again today. So I believe that the SAM expansion opportunity is bigger than the market share but the market share is pretty big as well.

And if we can continue to execute from the positions that we’ve established we’ve got a 5 to 10 percentage point gain in share here through these inflections which is a really important headline for the company. And we don’t kind of go out there with kind of guidance but I mean connecting the dots that we’ve described today and we’ve talked about kind of flattish revenues first half, second half and I try to frame for you the plus and the minus around the average in the second half.

In calendar ‘14 we are targeting to outperform the industry. And I would expect if there is a $32 billion wafer fabrication equipment year which is up may be 10 to 12 percentage points or so, depending on the kind of your baseline, I would expect that our revenues grow year-over-year by approximately 20% and if you do the math on that you are going to kind of answer a lot of your question.

And if we execute 20% year-over-year growth that means we’re focused on targeting upward income growth twice as much as revenues and delivering cash from operations growth twice as much as operating income. And if we do that we’re going to generate $1 billion cash from operations this year. So that’s how it will kind of walks itself through the financial statements, if the $32 billion year prevails.

C. J. Muse – ISI Group

That’s helpful. Thank you, Martin.

Martin Anstice

Thank you.

Shanye Hudson

And then I think we’ll try to take two more quick questions if we can.

Operator

Thank you. The next question is from the line of Edwin Mok with Needham & Company. Please go head.

Edwin Mok – Needham & Company, LLC

Hi, thanks for squeezing me in. So the first question is on if I look at logic out of shipment buckets I’ve seen that that has been trending lower over the last few quarters. How do you kind of think about that business is it just a customer not spending there? And I understand I remember a few quarter ago you guys talked about share gain in that area right how you kind of think about long term?

Douglas Bettinger

Yeah I mean Edwin one thing you are right it’s ticked down a little bit. There is a lot of [Inaudible] go on in the space especially in deposition so that’s one of the things that is impacting our shipments. It’s not so much that anything has been moving around from the application standpoint is being reused. And obviously you heard me talk about our expectation for June is that’s ticking up a little bit and I would expect that probably does that again in December.

Edwin Mok – Needham & Company, LLC

I see, okay that’s helpful. And then talk a little bit about the ALD when you have on a DRAM. Do you see opportunities for ALD and NAND? That’s the first question. Second part, I understand the ALD part is very different from the one that we had seen in a logic side to the extent that what you have done in logic do you think you have option to grow in logic for ALD?

Douglas Bettinger

So I think yes and yes I mean we are going to see emerging opportunities for atomic level control period through traditional scaling and 3D architecture. And the most prominent win that we communicated today to your point is ALD in DRAM that we have active engagements ALD logic, a different dielectric but very active engagements and I would expect that, that continues to be true for us. So a lot of focus and big guys, small guys will try to take share from everybody.

Edwin Mok – Needham & Company, LLC

All right thanks Doug.

Douglas Bettinger

Great, thanks.

Operator

Thank you. Our last question comes from the line of Tom Diffely with D. A. Davidson. Please go ahead.

Tom Diffely – D. A. Davidson

Yeah, good afternoon. I was hoping that in your slide deck you talked about some wins in events packaging. I am just curious how big advance packaging is today and how do you expect to grow to ramp over the next couple of years?

Edwin Mok – Needham & Company, LLC

It’s the smallest SAM for the company a $150 million something like that and it’s the fastest growing and it might be the most difficult to predict, I think the 2.5 and 3D in the road map is still subject to some debates. It’s something we’ve clearly prioritized in the company as an important growth opportunity and its being presents with competitive action deposition clean products to pursue that is our objective. But it’s the smallest of all by a long way and it’s growing very quickly but from a small base. And now – go ahead sorry.

Tom Diffely – D. A. Davidson

So have you seen the leaders land space or the drivers being more in the memory or the logic side of this point?

Martin Anstice

I think it’s more a logic play then anything today.

Tom Diffely – D. A. Davidson

Okay. All right, thank you.

Martin Anstice

Thank you.

Operator

Thank you. Gentlemen at this time I’ll turn the conference back over to you for any closing remarks.

Shanye Hudson

Great, thank you. A webcast replay of this call will be available later this afternoon on our website and on behalf of the entire management team I’d like to thank you for joining us here today. We do really appreciate your interest in Lam Research.

Operator

Thank you, ma’am ladies and gentlemen that concludes our conference for today. Thank you for your participation. You may now 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!

Source: Lam Research's CEO Discusses F3Q2014 Results - Earnings Call Transcript
This Transcript
All Transcripts