Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Better Than AdSense

Lam Research Corporation (NASDAQ:LRCX)

F2Q07 Earnings Call

January 17, 2006 5:00 pm ET

Executives

Kathleen Bela - Director of IR

Martin Anstice - CFO

Steve Newberry - President and CEO

Analysts

Timothy Arcuri - Citigroup

Jim Covello - Goldman Sachs

Satya Kumar - Credit Suisse First Boston

Steve O'Rourke - Deutsche Bank

Jay Deahna - J.P. Morgan

Steven Paleo - HSBC

Mark Bachman - Pacific Crest Securities

Harlan Sur - Morgan Stanley

Gary Hsueh - CIBC World Markets

Brett Hodess - Merrill Lynch

Mark Fitzgerald - Banc of America

Presentation

Operator

Good afternoon ladies and gentlemen, and welcome to the Lam Research December Quarter 2006 Financial Results Conference Call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (Operator Instructions). And as a reminder, this conference is being recorded today, Wednesday, January 17, 2007. And this call is scheduled to conclude at 3:00 PM Pacific Time.

I would now return the conference over to Kathleen Bela, Director of Investor Relations

Kathleen Bela

Thank you, Rob. Good afternoon and thank you for joining us to discuss the financial results for the quarter ending December 24, 2006, and the business outlook for the March 2007 quarter. By now you should have received a copy of today's press release which was distributed by Business Wire at approximately 1:10 PM. We are webcasting a slide presentation in conjunction with today's commentary. If you cannot see the slide at this point, please reload on your computer and the slide will reload at that time. The presentation can be accessed through the IR section of our website at www.lamresearch.com, and will also be available as a podcast.

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 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 conditions significance the value and effect that could cause results to differ materially and in ways not readily foreseeable, and these statements are subject to various risks. We encourage you to read those reports from the SEC in their entirety. LAM would also like to disclaim any obligations to correct or update any of the information we are about to provide. This call is scheduled to last until 3:00 PM. We ask that you please limit questions to one per firm.

I will now turn the call to Martin for a review of the financial results.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors competitor's transcript (example).

3. Issuer-sponsored research firm sponsors client's transcript (example).

4. Investment newsletter sponsors transcripts of successful stock picks (example).

5. IR firm sponsors transcript of micro-cap company (example).

6. Consulting company sponsors company's transcript in sector of interest (example).

Learn more, or email Zack Miller for details.

Martin Anstice

Thank you, Kathleen. This afternoon we will discuss our December 2006 quarter financial results. Highlights of today's reported earnings include new orders of 779 million, representing 7% sequential growth, revenues of $633 million at a gross margin of 51%, operating income as a percent of revenue of 30.7%, cash from operations of approximately $162 million in the quarter which combines with our performance in September exceeded our second half 2006 target of 30% of revenues.

As we conclude the 2006 calendar year, a few points of summary in comparison to the 2005 year. New orders were at $2.7 billion, up 96%, revenue was $2.2 billion, up 59%, GAAP operating income was up 121%. Cash from operations was a record high at $581 million.

Our leading edge strength continues to be illustrative by 300 millimeter applications representing approximately 90% of total systems new orders and applications at less than or equal to the 90 nanometer technology node representing 93%. As anticipated, the activities of our memory segment customers in the quarter represented 74 of total system orders, with the DRAM components accounting for approximately 70% of total memory.

As anticipated the activities of our memory segment customers of the quarter represented 74% of total systems orders, with the DRAM components accounting for approximately 70% of total memory. Foundry were 12% and Logic/Other was 14% of the total systems orders. Overall, and in order of impact Taiwan, Europe, Korea and China accounted for the sequential growth. Shipments at $645 million were up slightly falling short of our earlier expectation of up 4% to 5% sequentially, which reflected a number of scheduling adjustments by our customers later in the quarter. Consistent with strong orders, our ending unshipped backlog grew to an all time high of $719 million, and consistent with our shipments Coventry today has a meaningful customer delivery request timeline that extends through the June quarter.

Revenue of $633 million exceeded the highpoint of our guidance range, gross margins for the quarter, net expectations at 51%. Sequentially, the anticipated reduction of 80 basis points in gross margins from September reflects the latter stages of our consumable spare parts price reduction activity, and certain costs associated with install-based upgrades to support our customers and position LAM for continued market share expansion in calendar 2007.

Operating expenses for the company increased as planned by approximately $10 million, 75% of which was in R&D due to discretionary investments targeted new etch and adjacent product growth opportunity. These cost increases were related in roughly equal measure to our recent headcount additions and engineering material supplies as customers evaluate our new products. Combined these items deliver the operating income of 30.7% that we report today.

We generated cash from operations of $162 million. Inventory performance was 5.8 turns, accounts receivable days. Days sales outstanding was 66 days. Our total net cash balance including restricted cash was 1.3 billion at the end of December which included the impact of our $177 million purchase of certain Bullen Ultrasonic assets which was neutral to earnings as expected this quarter. And the first turn loan that came in of $50 million, earlier than we had anticipated.

Deferred revenue and deferred profit continues to strengthen at $284 million and $177 million, respectively. In addition there is an approximately $64 million of anticipated future revenue value for previously made shipments to Japanese customers. From a balance sheet classification perspective, you will notice that subsequent to our foreign earnings repatriation earlier in the year, we have repositioned our investment portfolio from cash and cash equivalents to short-term investments. In addition, restricted cash reduced by $55 million as a direct result of the previously noted partial loan repayment.

In the quarter adjustments from backlog were a net negative $7 million including $5 million in order cancellations. For more complete details on geographic breakdown of orders and revenues please see today's press release and our website for a reconciliation of new order shipments revenues, deferred revenues, and backlog.

In the quarter, capital expenditures were $14 million, depreciation and amortization was $9 million. We received $23 million from the exercise of employee equity plans and we used $75 million to repurchase slightly more than $1.4 million shares at an average price of $51.83. We have $257 million remaining in our Board approved stock repurchase authorization at the end of December. As we invest in our organization to support our expanding etch market share a multi-product growth opportunities, employment levels increased by about 340 in the quarter to 2800 including slightly more than few hundred Bullen employees. Now for Steve's comment.

Steve Newberry

Thank you, Martin. Good afternoon and thank you all for joining us today to discuss the company's performance and our outlook for 2007. First I will comment on what was an outstanding year in terms of financial, operational and market share performance for LAM. In 2006 we generated record cash from operations, posted three consecutive quarters of 30% plus operating margins and drove excellent growth and operating income year-over-year. In addition, we saw significant market share gains in our etch business and strong growth in our spares and services businesses reflecting the trust and confidence that customers have in Lam Research.

These facts when the final tally's are reported in a few months, that LAM will have ended 2006, will shift market share of approximately 46% in etch. A growth of nine full points from the prior year. We are gaining share in a broad-based fashion across all regions and market segments when they trend toward higher share at each advancing technology nodes.

In December, we saw a strong activity around the world including both new and repeat wins in every semiconductor manufacturing region. Shipment activity in the quarter also included new product shipments including our first bevel clean tools along with systems for MEMS and next generation patterning. I believe our 2006 performance has positioned us well as we entered an exciting and challenging 2007.

I will comment now on our industry outlook. We think the chip industry in calendar year 2007 continues on a steady growth mode up approximately 7%, driven by a continued double-digit unit demand and expect a rising level of fab utilization as we move beyond a typically seasonally low first quarter. While utilization rates were generally high enough during 2006 to support strong capital spending growth, we believe customers intend to moderate the growth rate in spending for capacity additions in 2007 versus 2006.

Our outlook for 2007 capital spending is for growth of 5%, with continued emphasis on disinvestment being used for equipment to support capacity expansion. Therefore, we are currently forecasting wafer fab equipment to grow 5% in 2007 and for the etch market which grew slightly faster than wafer fab equipment in 2006, to be roughly flat. Increased memory content in PCs and continued growth in NAND Flash applications will drive memory IC unit growth strongly in 2007.

In particular, the outlook for NAND Flash bits remained strong, the forecast calling for this market to see 140% to 170% bit growth. Focus on the NAND Flash market has helped stabilize the supply-demand cycle in DRAM for the near term, and has kept pricing above expectations through Q4. With this demand growth in DRAM, we expect to come in just below 50% for 2006 and is expected to accelerate to 65% to 70% bit growth in 2007, and we've begun to see the anticipated surge in DRAM related shipments. We are expecting CapEx spending into the DRAM sector to increase 15% to 20% in 2007 with investment in NAND Flash, which has declined slightly 3% to 5% and be just over 35% of the memory mix with overall CapEx for memory up 8% to 10% in calendar year 2007.

Foundry demand has recently been impacted by the need for corrections in the inventory pipeline. However, demand for leading edge capacity continues to be strong. Utilization is greater than 90% at the less than or equal to 90 nanometer node. And we expect incremental investment for 65 nanometer, will occur in the second half of 2007. Therefore, we expect foundry CapEx to grow 10% to 15% in 2007.

As for the remaining markets in logic, analog and the microprocessors, we expect spending to be flat, plus or minus 5% as capacity additions remain moderate as inventory is absorbed.

Overall, we believe LAM is well positioned to continue delivering solid performance in this environment. We are enthusiastic about our continued market share gains in etch, and the opportunities for our new products.

With our product momentum and our high performance operating model, we expect to deliver another strong year of earnings and operating cash flow, even in the year of relatively flattish spending in etch. Therefore, I expect revenue for LAM in 2007 to be up approximately 10% to 15% due to an additional 3 to 4 points of market share growth, $80 million to $100 million of revenue additions from new products and higher flow through of deferred revenue in Japan-shipped systems. I would expect our shipments to be up 5% to 10% over 2006.

We would anticipate generating cash from operations of greater than 25% of revenue and earnings per share in the $4.10 to $4.30 range based on the flat etch spending in the 10% to 15% up revenue scenario I just described.

Guidance for the March quarter is as follows: I expect shipments for the first half to be up 5% to 10% over the second-half of calendar year 2006. Specifically in March, due to requested customer rescheduled delivery push outs, I expect March quarter to be down 5% to 7% and the June quarter to be up 25% to 30% over March. Revenue in March will be between $635 million and $650 million at approximately 50% gross margin and operating profit will be approximately 28%. Earnings per share will be $1.03 to $1.07 with an assumption of 22% tax and 144.5 million shares.

I would like to wrap up my comments with an update on some of our new products entering 2007. This is a key year for customer validation of our new products. We expect to continue to place evaluation systems, while beginning first production ramps of several of these new products in the first half of the year.

Total shipments from all new products is expected to exceed $120 million with $80 million to $100 million flowing through the revenue, a majority of that coming in the second half of the year.

Our focus in 2007 is on ensuring that our new products are effectively positioned to key customers and that there are optimal conditions for proving out their technical and production worthiness. Revenue from the new products is expected to begin ramping meaningfully in 2008.

Majority of our new products are plasma-based and leverage off of our core etch capabilities. Plasma-based products are our Bevel-Clean, Next-Generation Patterning, MEMS, and Strip and along with our offerings in productivity enhancing software applications and our C3 cleaner, comprise a significant opportunity for LAM in the future.

Our new C3 clean product is focused on front-end of the line and back-end of the line, post etch applications, and as such will benefit from our extensive knowledge in etch. The product is gaining very favorable early reviews and is successfully enhancing higher yields at 45 nanometer. We expect to ship an additional four to six units in the first half of 2007, and begin revenue shipments of our production released model in the September quarter.

In addition to cleans, our other major new products are targeted at Bevel-Clean, Next-Generation Patterning, and MEMS. We expect these products to do very well in these new markets. All three of these new products have shipped multiple evaluation units in 2006, and we expect these products to gain rapid acceptance and begin acceptance for revenue in the June quarter.

I look forward to keeping you updated on the progress of these products, as well as our core etch businesses as the year unfolds.

In closing, I want to congratulate and commend all of the employees of Lam Research worldwide, who have done a magnificent job of developing new and innovative products and solutions, and have been executing to the higher standards of performance in our industry, pure dedication to our customers and the company is truly impressive and appreciated.

With that, I will open the call for questions.

Question-and-Answer Session

Operator

Thank you Sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions). The slides for this conference will be available after the conference on the Lam Research website. Please limit your questions to one question and a follow-up. (Operator Instructions). Our first question comes from Timothy Arcuri with Citigroup. Please go ahead.

Timothy Arcuri - Citigroup

Hi guys. I have a question, then I have a quick follow-up. First of all Steve, if I look at your shipments guidance for March and the guidance for June, its about $25 million less for March than you saw about three months ago, and it looks like its about $75 million less for June than you'd thought as well. So, I guess, when I add up that $100 million that's pushed out in shipments, what kind of customer group does it come from? Is it a customer specific issue, or is it a broader issue? And then I have a quick follow-up.

Steve Newberry

Well first, when I commented last quarter, I only commented on the March quarter shipments. I never made any comments about what I thought the shipments would be in June. So, I am not sure totally where you are coming from in terms of talking about what you expected the first half shipments to be, but independent of that, what we fundamentally have had, is in March we have one major DRAM customer who has pushed into June, because of export license issues. We've got a logic customer, who has fundamentally rethought their plans that had expected to take delivery in March and has now pushed that actually into the September and December quarters. And then the foundries, which have been positioning three or four months ago, about winding March deliveries have decided that they want to push most of those deliveries into June, a couple of the foundries have split their deliveries into the June quarter and the September quarters.

And so, it's kind of a mixed bag, but there are pushes in DRAM, pushes in logic, and then pushes in foundry. And then, in the December quarter, just in case there is a question on that, fundamentally we are little bit short of what we thought we would ship because at the last minute, some of the foundry deliveries that were scheduled in December, primarily due to one customer's facility delays, resulted in us not being able to ship some systems that we actually built and had to push them later in the first half.

Timothy Arcuri - Citigroup

Thanks Steve. That's great. I guess just as a quick follow-up on that. One of your biggest customers, memory customer in their earnings call last week indicated that their capital spending profile in 2007 is going to be pretty dramatically front-half loaded and the CapEx in the second half of the year would be down about 50%, if not a little more, second half versus first half of this year. Do you think is that a customer specific situation or do you think that's indicative of what the kind of overall DRAM or overall memory spending profile might look like this year? Thanks.

Steve Newberry

Yeah I think that when I look at what memory customers are currently scheduling for shipments. I think that it clearly is to-date front-end loaded. It's probably in the 40% to 50% down in the second half range, if they actually take deliveries that they scheduled. That could moderate as some of the planned deliveries that are scheduled for June, slipped into the month of July or August even. But, I think it's fair to say that the front-half of the year loading for memory is an accurate statement. We will just have to see how that actually plays out throughout the year.

Operator

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

Jim Covello - Goldman Sachs

Good afternoon guys. Thanks very much. Congratulations on the good execution here. Question really is about the fungibility of capacity between DRAM and NAND. Obviously the NAND end-market is in a pretty bad state right now, even though the demand for NAND applications is robust. So, obviously, we have a pretty bad supply problem. How likely is it that we see some of the excess NAND capacity from those who can do it, move back over to DRAM, and is there any risk that mitigates any of the incremental DRAM shipments or deliveries that are currently scheduled for later on this year?

Steve Newberry

Thank you for your comments, Jim. You have raised a good question. There is always that potential certainly with a number of the major NAND suppliers being DRAM suppliers. In our discussions with them, they have tended to move pretty strongly in 2006 to setup more dedicated lines because there's greater efficiency in terms of use of capital. And none of them have indicated that, that’s what they are thinking about doing. I think that when you look at the DRAM market, I think that there is a pretty strong bullish sentiment that they need to get those lines put in place and those DRAM-dedicated capacity capabilities put in place. But certainly in excluded environment as we are in memory, the potential that they could choose to run DRAM down a NAND line, and therefore back off on some of the capacity spending certainly is a possibility. But we are not hearing any of that talk today.

Jim Covello - Goldman Sachs

Terrific. Thank so much and congratulations again.

Steve Newberry

Thank you.

Operator

Thank you. Our next question comes from Satya Kumar with Credit Suisse First Boston. Please go ahead.

Satya Kumar - Credit Suisse First Boston

Yeah. Thanks for taking my call. I have a question on margins. Steve, it looks like gross margins were flat and slightly higher revenues than guidance and operating margins were down. I think you’ve talked a little bit about how -- what you are investing in R&D. If I recall, earlier you have talked about ramping R&D expenses and you hit specific milestone and you talked about these new businesses contributing $80 million to $100 million this year versus $100 million targeted, sort of given before. Can you help us give us a sense as to what you are thinking longer-term? How these businesses can develop? And what gives you the confidence that you meet to actually ramp R&D here over these next couple of quarters when revenues are probably coming a little late?

Steve Newberry

Okay. I will comment on couple of that and then have Martin talk a little bit about our investments in operating expenses and what the makeup is -- of that is and why we’re doing that. But specifically as it relates to gross margin, we have commented earlier in the year that we had made some very specific aggressive consumable spare parts pricing reductions that would impact our margins by 1 to 1.5 points. We’ve certainly now begun to see that manifest itself and we expect that we fundamentally have absorbed most of that with what we have forecasted our margins to be in March.

In addition, we’ve decided to accelerate some of our product upgrade activities that are focused on improving certain aspects of these activity controls that are really helping our customers deal with some of the really difficult challenging aspects of yield at 65. And a lot of those early upgrade improvement activities we’ve just taken them and expensed them to cost of sales. And we would expect as those improvements prove themselves out that will then be able to ship them in our new products and sell some of these upgrades which will take some of the pressure off of the current environment for gross margin.

The other aspect that’s putting a little pressure on the gross margin line is that our product mix in etch is now beginning to move strongly to what we call our 45 series. So, our dielectric Flex45, our conductor in metal, Kiyo45, these are our new products. They are still at relatively low volumes and so we have a little bit of a higher cost make-up relative to those products. As it relates to the new product targets, we've had $100 million target that we've talked about for a while now. I still am and the rest of the members of our new product organizations are committed to the 100 million, have kind of given us a little bit of room here by having us modeled in the $80 million to $100 million range, because we've made a specific decision as it relates to clean that given the opportunities that our customers are demonstrating to us they are interested in that we wanted to make sure that we really got that product designed from the standpoint of being a very robust and reliable production-worthy product but also one that was going to be able to allow us to get down the cost curve very quickly.

So as a result, we've decided to slow down the volume of what we called our Version 2 Class product and accelerate the development of our production release model, which will occur in the September quarter. And so as a result of that we are going to have a few less revenue-oriented systems for cleans than what we had originally anticipated. But we will still be shipping the same number of evaluation and qualification tools and in fact we are actually expanding that because in the beginning we thought we would be largely targeted on back in the line applications, and now we are targeting both backend and have an equal number of opportunities and evaluations going on to the front end. So hopefully it helps you with the gross margin and the new product activities. I'll ask Martin to comment on our spending global line.

Martin Anstice

You probably asked most of the answers for your question on the margins from what Steve just focused I will focus on the operating expense. Clearly we had a projection of $10 million September to December, and as I characterized in my prepared comments here, 75% of that was focused in R&D. And if you have interest in the composition of that, obviously on lower profitability the variable compensation costs of the company went down. We have through the backend of the year particularly been adding headcounts to the company. We saw full quarter impact of the September additions in our salaries and benefits and obviously to the extent we hired and have the benefit of people through the quarter. The December quarter incurred that costs as well. And so that salary and benefit consequence really masses the bonus comment I just made, really accounts for about 30% to 40% of the OpEx increase. And the most other significant item which is in a similar range, the 30% to 40% level relates to the cost of engineering material supplies associated with the pace of the evaluation activities and qualification on hedge and new product that Steve just spoke to.

From a guidance perspective, we obviously haven’t specifically guided to an OpEx number, but I am sure most of you will get to a number that’s more or less as we have modeled. One thing, I did want to draw your attention to is that, clearly there is an operating expense expansion, December to March. And if you look at that progression, a big part of it really is, is outside of what we told about in terms of new product. The big part of it is associated with what we always talk about in March, which is the impact of slighter costs to payroll as people have higher proportions of social costs embedded in their taxes and so does the company in the first quarter of the year.

As you also remember, we delayed the all employee focal grant for restricted stock units through to the March quarter, so that becomes a March quarter cost to the company and its valued obviously at a much higher share price today. So, to the extent we have RSUs granted there, now expense with a much higher cost in the first year grants, a year or so ago. So, probably that 75% of that progression is really outside of the new product story, and so when take all of those things together and kind of ask yourself some basic questions about fixed costs and variable costs, I still feel pretty comfortable that the breakeven point for the company is in the 200, 225 range. So, not so very different from the number I articulated last quarter.

Satya Kumar - Credit Suisse First Boston

Just a quick follow-up that Martin, would OpEx then come down in the June quarter and secondly what factors should be used for modeling in '07? Thanks.

Martin Anstice

I think the pace of OpEx progression is something that will be consistent with the opportunities we see with our customers on specific qualifications, activities and so we are not specifically giving guidance on that. I do think that the pace of the progression of the OpEx is slowing down and so we have clearly seen a September-December progression that’s pretty big and we have modeled here a reasonable progression December to March. I think we’re getting to the end of the end that pace of progression.

Steve Newberry

And I think, if I would add just one thing, kind of taking the specifics of Martin's comments and trying to put them in context to some of the previous comments that I have made. 2007 for us is a very important to get our new products positioned, but also a very important year for us to make sure that we make the proper investments in our infrastructure, both in terms of people capability out in the regions close to the customer fabs, but also in terms of, as we move from a $2.2 billion company to a $3 million to $4 billion company in the next two, three, four years whatever the cycles and our success allow us. It's important for us to get those kinds of capabilities into our company at this time, so that when we ramp through the next level of output, we have the systems in place, we have the people in place and we will have successfully positioned our new product. So, this is an intentional strategy to make sure that we put this kind of capability in place, and it will result in our operating margin performance being down a couple of points from the 30% that we've been successfully running for the last three quarters.

Operator

Thank you. And our next question comes from Steve O'Rourke with Deutsche Bank, please go ahead.

Steve O'Rourke - Deutsche Bank

Hi good afternoon. The most recent [cyclist] data had Q3 utilization for the industry I think below 90% and when I look at sort of capacity going in and wafer starts to grow it will probably decline in Q4, probably in Q1 as well, can you help us understand how you incorporate a decline in utilization profile with your '07 outlook? And should we be anticipation a brief equipment correction over the next couple of quarters that then kind of reverses in the back half of the year?

Steve Newberry

Well I think one of the things that we all need to understand is, when we are looking at utilization, we are really talking primarily where they measure the foundries and potentially another logics, because when you look at DRAM and NAND flash, those guys run full out. So, when we look at overall industry utilization, yes we would agree that overall utilization has fallen in the fourth calendar quarter, probably to about 84-85%, but I think it’s very important that we make sure that we stay focused, what's happening to leading edge utilization, and leading edge utilization remains over 90%, even though it has fallen from the mid 90s that we saw for most of the period in 2006, but from an equipment company perspective, if leading edge utilization and the expanding needs in this case as our customers move to 65, a lot of their existing fab capability cannot handle the tools that requirements for 65-nanometer and so that's why, I said that, I would expect that in the second half of the year, we will see a ramping environment for shipments into logic and in the foundries as a function of them having worked through their inventory issues, having them look ahead to what their needs are, and I expect that they will take more deliveries in the second half. I think it should be noted that in reality the last two quarters or certainly this quarter and the next two quarters in logic. The shipment levels are going to be down a fair amount until I think that adjustment as a function of utilization is going on right as we speak.

Steve O'Rourke - Deutsche Bank

Fair enough that’s helpful. A quick follow-up question. Are you going to be selling standalone clean tools as well as integrated?

Steve Newberry

Yes, we will sell primarily standalone clean tools, although certainly with Etch and Strip capability. We are working with a number of customers on multi-sequential Etch Strip and clean capability, but our primary product offering will be standalone clean tools.

Operator

Thank you and our next question comes from Jay Deahna with J.P. Morgan, please go ahead.

Jay Deahna - J.P. Morgan

Thanks. Couple of questions, Steve. If I look at the numbers that you’ve reported overtime, usually you have a revenue quarter which is fairly similar to orders within a quarter or two. And you are doing well north of 700 million here, two quarters in a row for orders. So, is there a $700 million plus revenue quarter out there? That’s the first question. The second question is assuming your revenues, I don’t know it sounds like peak in Q2 and dip in Q3-Q4. When would you expect revenues to start coming up again? Is that a Q1 calendar ‘08 concept? And last but not least, if you could repeat your guidance for the full year in the quarter? I didn’t quite catch it all.

Steve Newberry

Okay. Let me comment on your very perceptive observation that, if you look at booking strengths eventually a quarter or two later, you would expect and we have typically manifested a revenue level that matches that. I think that a 700 million revenue quarter is certainly a possibility but, when you get into this kind of environment, we tend to see a little bit more spreading out of order deliveries, and we had obviously a very strong bookings quarter in December, but we are starting to see that some of the delivery date requests rather being concentrated in a couple of month period or sometimes now being scheduled over four or five months period. And so, when we head -- when we head into an environment where kind of the rate of capacity expansion moderates and that’s clearly where I see is heading as the year unfolds. You tend to see some of those concentrated bookings quarters actually spread themselves out a little bit. So, while its certainly possible based on the bookings rate that we have had, it's really too early to tell kind of how the customers are actually going to take their shipment deliveries. In terms of revenues moderating in the second half, I think that clearly if I guided that we are going to be up 5% to 10% in shipments in the first half. Clearly, I would expect that we will see our shipments levels and our revenue levels be lower in the second half, or I think that given the way this year is kind of unfolding, it's really too early to predict when would we expect to see the shipment environment starts to climb and therefore the revenue environment. What I would say is that, when the shipment environment picks up, the revenue environment can follow pretty quickly because typically customers once they start accelerating capacity additions, they want to get them in and signed-off and up and operating pretty quickly. But I really can't answer that. So, in terms of repeating the guidance, the March quarter guidance specifically was revenue 635 to 650, shipments being down 5% to 7%, but June shipments expected to be up another 25% or 30% for an overall 5% to 10% increase in shipments first half of '07 compared to second half of '06. Gross margins approximately 50%, operating margins approximately 28%, earnings per share $1.03 to $1.07, and share count at $144.5 million, a 22% tax rate.

And then, reiterating 2007 potential performance, if we have a flattish Etch CapEx year, I think, our revenue would be expected to be at 10% to 15% because of market share growth, 80 million to 100 million in revenue from new products and higher flow through of deferred revenue in system shipped to Japan, shipments up 5% to 10% for the year, cash from operations greater than 25% of revenue, based on this scenario, and earnings per share in the range from $4.10 to $4.30, again based on that scenario.

Jay Deahna - J.P. Morgan

And why did you decided to give full-year guidance? I don't remember you doing that before?

Steve Newberry

What I did last year and we always end up with this [dramatics term]. I didn’t give guidance. I gave potential performance. But I'm sure that what will happen is that it will get reported as guidance, but I mean be that as it may, last year what I did is, I laid out a scenario and basically I said, if you have CapEx at this, then you might expect Lam Research to be at this level. For this year, I just said, look based on 5% CapEx wafer fab equipment up 5%, based on that scenario, I expect that potential performance for Lam is what I laid out. And the reason for doing that is, I think that it's beneficial to the financial community to get an idea that if the year plays out at this 5% wafer fab equipment growth and a flattish Etch environment, this is what you can expect Lam Research will achieve. If the year plays itself out, very much different from that, well, then obviously our performance and our results are going to be different. So, I think it's very important to make sure that the context and how I described what I thought we would do in 2007 is it’s predicated on that scenario assumption of 5% CapEx, 5% wafer fab equipment growth.

Martin Anstice

Jay, if I could add just kind of two very quick comments to Steve’s for specifics here, clearly still the majority of our backlog of our backlog in the systems backlog is scheduled for delivery in March and absolutely more than 90% of it is scheduled for delivery before the end of the June quarter. And in terms of margin progression from a guidance point of view, we kind of talked about two things in the past, we’ve talked about the systems business and the fact that there is clearly a concentration spending, big customers expecting us to contribute to their cost reduction success that’s part of the gross margin progression of the company. We also see the final stages of the consumable price reductions that was talked about, and just as I spoke to, the OpEx progression about a third of the reduction of gross margins is directly related to the above the line FICA, the merit, and the equity that's associated with this time of year.

Operator

Thank you. Our next question from Steven Paleo with HSBC, please go ahead.

Steven Paleo - HSBC

Thank you, Its interesting the growth potential performance or guidance for '07 and in light of your shipment guidance, as well for June up 25% to 30%, I think [gets those shipments up in the 725 million] range and then you have your EPS guidance of about $1 or $1.07 or something like that. But you're essentially in the March quarter doing about 25% of your potential performance for that EPS number and you’re guiding to a pretty big ramp in shipments in the June quarter, which has been likely pretty large in June and September revenue. I am curious about that profile of revenue and EPS based on that shipment guidance that you are giving and then, really you are confident in light of you're seeing push outs happening from all three areas logic, DRAM, and the foundry guys?

Steve Newberry

Steve, those are good question and here is the reality. The customers have taken what they had previously planned. They want it shipped in March and some have pulled in and more of them decided that they wanted their deliveries in June and clearly we have a big backlog requested shipments in June. Anytime you get into an environment like this where the rate of capacity expansion is moderate. There is always the risk that the requested deliveries that we currently have for June, may not manifest themselves. So, I am just basically telling you what the customers are asking us to deliver today related to that big backlog that we just reported, and yes they take their deliveries then you are right, we will have a shipment quarter well over $700 million, and if they don't then they'll spread those things out. Given that, most of what is planned for shipments in that first half of the year is memory related. In other words we have about 75% of the -- 72% of the first half shipments are targeted at memory companies. Given that, that's where the dramatic unit growth is and given that's where clearly customers believe they need to make the investments, it would suggest to me that there is a reasonably strong belief or reasonably strong expectation that the requested deliveries that we're getting in the first half will manifest themselves as I've described.

Steven Paleo - HSBC

All right, I will keep my fingers crossed that June does comes through and then we will continue to push. And then, I think Satya asked the question about the full year tax rate, did you guys answer him there?

Martin Anstice

Yes, we have two answers to the question, one is the fiscal year answer, and the fiscal year answer is consistent with the guidance assumptions that Steve gave today, 22%, and the outlook I have for the fiscal year '08, I am really articulating around less than the 25% level. It's really too early for me to get specific -- any more specific than that at this time.

Steven Paleo - HSBC

Okay. Thanks, guys.

Operator

Thank you. Our next question comes from Mark Bachman with Pacific Crest Securities. Please go ahead.

Mark Bachman - Pacific Crest Securities

Hi, Steve. Just like a follow-up on what Steve just asked as well, are you trying to communicate to us today that the --

Martin Anstice

Somebody back (inaudible)

Mark Bachman - Pacific Crest Securities

Hello

Martin Anstice

Yes, we hear you.

Mark Bachman - Pacific Crest Securities

Are you trying to communicate today that the risk of push-outs and cancellations has increased now over the past three months or so? Or are you just nearly trying to give us some information on customer specific items that have pushed out?

Steve Newberry

Well, what I am trying to do is couple of things. One is we had previously communicated that we thought the March quarter would be up, 5% to 10% from December, and we've clearly come in and said, its going to be down 5% to 7%. So that's a pretty significant change, and therefore I believe needs an explanation, which is also why I try to provide some directionality and some color on what June looks like, and the reality is that I have been in this business for too many years maybe, but when you start to see the rate of capacity additions moderate, and clearly, we're beginning to see that. You definitely have the tendency for customers to start to slowdown the speed at which they take deliveries, and memory is the most consistent set of customers that you can count on because most memory investment is very strategic and you are either in the game or you are not in the game. And so you don't tend to see all that much pushing from memory type suppliers which is why I think that we have high likelihood that what we are being asked to deliver in the first half will actually occur. But reality is that things can change, and so I think we are in an environment where 2007 is really a -- in facet it is a transition year. It's an absorption of the capacity, it's positioning for strong opportunities in memory. And the logic guys are kind of pulling back and clearly have slowed their rate of shipments deliveries, and are basically communicating that they planned to be back in the market and taking deliveries in the second half. We will just have to see how that plays out, and all I am really trying to do is try to give all of you in the investment community a little better feel for a kind of what the make up is of 2007 because it's a little bit of an unusual year.

Mark Bachman - Pacific Crest Securities

Okay, I just want to say thanks so much for discussing all sorts of progress on your new offerings. I am just wondering if you could go into a little bit more detail how that $80 million to $100 million of revenues in 2007 is going to be broken out may be on a quarterly basis. And also, how is it allocated across these new products. It sounds as if with the push of the C3 product here, is that probably where the majority of the revenues were associated?

Steve Newberry

Yes, I am sure my competitors would love for me to break that out for you guys as well on a quarter-by-quarter basis, and a product-by-product basis. And so, I am not going to do that. I think that there is two reasons, one, I don't want to give out more information that is beneficial to my competitors. And two, when you are dealing with new products, the rate and the pace of each of them is a little bit different and the acceptance cycles range from six months to one year. And so, you really have a lot of fluidity until these things kind of ramp up to speed. Having said that, I will tell you that, the bevel clean product is one that we are shipping in good numbers. The product is doing really well and it's the product that will begin to generate a significant amount of revenue throughout 2007, as it relates to that $80 million to 100 million. Our MEMS products are also having gone through a year of significant evaluation and product redesign, are positioned to deliver a good portion of that revenue and then you have the next-generation patterning in the clean products and also a good amount of revenue from our software productivity improvement product. So, other than that I am going to leave it at what I have said.

Operator

Thank you. Our next question comes from Harlan Sur with Morgan Stanley. Please go ahead.

Harlan Sur - Morgan Stanley

Thank you for taking my call. Steve it looks like book-to-market share in the calendar fourth quarter was somewhere around the mid-50% range, that's up sequentially in the quarter. And as you have said 46% for the full year and I think you are saying up another 3 to 4 percentage points this year. I am just wondering, what do you think the ceiling is in terms of market share for you core segments?

Steve Newberry

I think that as it relates to the 65 nanometer node, we are going to basically finish up that node right around 50% and that's why you are going to see our shipped market share move up into the 50% range because that's what's going to dominate the shipments over the next year, year and a half. It's way too early to really tell what's going to happen at 45. Certainly, we've targeted a number of new application wins that would, if we are successful give us the potential to pickup another 3, 4, 5 market share points. Certainly our competitors are really trying to figure out how they can slow down our rate of market share progression. And so, I think that, clearly I don't view the cap at 50% but ultimately at the end of the day, it's going to be, we continue to provide differentiated solutions, and we continue to have speed of solution implementation that essentially continues to out execute our competitors, and if we do so, our market share will continue to grow.

Harlan Sur - Morgan Stanley

Great and then my second question for you is, and this is something that you focused on and your customers are focused on, which is obviously yield improvement or defect density reduction. And I'm just wondering if you can share with us some of the early feedbacks you are getting on your bevel, etch products. I'm not sure if you can quantify early defect density reduction studies or cost of ownership or other performance parameters relative to competitive products?

Steve Newberry

I think the comment that I would make that might be relevant is the bevel etch chambers that we shipped out through to multiple customers have gone in. They have started up extremely well. They have delivered and performed to the specifications and results that we and the customer expected. They are in the final stages with some final product evaluations that are necessary before customers will ramp these products to volume, but they are performing like we expected. They're getting -- they are delivering the results that our customers are looking for. And so, we are pleased with the progress, with the early shipments in the bevel cleaner.

Harlan Sur - Morgan Stanley

Great. Thank you.

Operator

And our next question comes from Gary Hsueh with CIBC World Markets. Please go ahead.

Gary Hsueh - CIBC World Markets

Yes. Hi, Steve. Thanks for taking my question. I've got to admit to you guys, I appreciate all the information you provided but I'm very confused here, both near-term and long-term. So, I was wondering if you could help me out. Number one, near-term, your shipment guidance in June was up 25% to 30% and your backlog of $700 million plus, 90% shipping by the June quarter. It just -- to me it looks like June is a parking lot and to me it looks like there's risk of further push outs of cancellations impacting your kind of quarter shipment target for June. What kind of confidence level do you have that you can kind of meet that up 25% to 30% kind of growth number in June? Why is it not a parking lot?

Steve Newberry

Maybe I haven't been very effective but I think I've tried to answer this question a couple of times.

Gary Hsueh - CIBC World Markets

What percentage of your shipments in June are memory or DRAM specifically?

Steve Newberry

About 70%

Gary Hsueh - CIBC World Markets

And does that changed from the March quarter. Is that the same as the March quarter?

Steve Newberry

Yes.

Gary Hsueh - CIBC World Markets

Okay. So, there's still that roughly 20% or 30% logic foundry, other, that could still risks further push out beyond the June quarter, is that right?

Steve Newberry

Well, a potential for that always exits, but again memory guys tend to be pretty strategic and the way that the memory guys operate is, they put their plans in place and they look at when they need to have deliveries in order to ramp their product up. And so, all I can tell you is, this is where they've got it scheduled. Our memory shipments are a little bit stronger in terms of what's scheduled for June than what is scheduled for March, and why there's kind of a hole in March relative to December and June. Again, part of it's licensing that delay the fab, part of it's just the fact that there's a new fabs going in that aren't quite ready. There's a number of factors going on, none of which are related to customers saying, I've changed my mind. I'm reducing my CapEx plans. These are just movements of weeks and sometimes months that are really a function of readiness for these companies to take these deliveries.

Gary Hsueh - CIBC World Markets

Okay. And then on the back half of the year, I mean, you're talking about logic and maybe foundry kind of picking back up in terms of the shipments. So you seem to be hedging in terms of your shipment forecast in the back half of the year but you're giving guidance for sequential drops in shipment rates in Q3 and Q4 calendar Q3 and Q4 of roughly 10% and 15%. So, you're most certainly calling for a downturn here in the back half of the year but qualitatively you look -- you sound like you're hedging. So, I'm just trying to reconcile the quantitative information you provided and some of the qualitative information that you're talking about. It doesn't seem to kind of sink up.

Steve Newberry

Well, it does sink up.

Gary Hsueh - CIBC World Markets

Okay.

Steve Newberry

If you're going to have a shipment environment in the first half that I just described and you're going to have a shipment environment for the year that's up 5% to 10%, then you're right. As it lays out today, the second half of the year, we'll have lower shipments, and the second half of the year would have lower revenue. Now, I mean I think most of you have been around this industry long enough to know that what we're talking about here is how this year might shape out if it's a 5% increase in spending and wafer fab equipment and the reality is, of course if we have strong first half shipments, the second half has to be lower because if you look at the shape of '06, the first half of '06 was much lower than the second half of '06.

So, if we're going to be, if a company was going to be flat year-over-year, they wouldn't be flat quarter after quarter after quarter. So, it's one of the reasons that sometimes people don't talk about any of this stuff because if -- what comes out of this conversation is a belief that since I've talked to you about what I think the year may play out, that's suddenly now the gospel and that's exactly what's going to happen. Well, that's just flat out not true. We don't know what's going to happen in the second half and what we do know is that if CapEx spending plays out like I've scenarioed it to be, then this is how it's going to look and we'll be at 410 to 430 from an EPS guidance standpoint. So, I'm trying to give people a feel around that scenario and hopefully it's helpful, but if it's confusing I apologize, but I'm not sure what to do.

Operator

Thank you. Our next question comes from Brett Hodess with Merrill Lynch. Please go ahead.

Brett Hodess - Merrill Lynch

Good afternoon, Steve. I actually think your commentary makes very consistent guidance with or outlook with the industry outlook. Company specific, two questions. Now that you've reduced the pricing and the spares parts business, do you expect to see a pick up and is that going to contribute something to the growth in the coming year and the second question is given this profile we've talked about in the second half, will operating margins still do you think stay in this high 20% range with some of the -- even with the potential for some of the dip in the second half given some of the other programs going on?

Steve Newberry

Yeah. Those are good questions, Brett. One in terms of our spare parts pricing actions, it is done what we had looked for it to do which was to stabilize and then actually allow us to increase our market share. So our growth in our spares business has been very good. The growth rate in spares certainly relative to systems in 2006 was lower. But I would expect that we would actually see a stronger growth rate in spares relative to the systems business in 2007. And so a lot of what we did in 2006 was to give us the best opportunity to do that. As it relates to operating margins, that's kind of 64 million question because I think it will depend on what really ends up being the strength of shipments and revenues. The benefit for us is as a revenue on acceptance company, we're going to be taking a fair amount of deferred revenue type of revenues to the P&L which will have good margins. We've already embedded our operating expense cost structure relative to the new product activity which is actually more expense intensive in the first half and we actually expect it to decline in the second half. And so, we expect that with stable gross margins that we will be able to have some reductions in our operating expense spendings and so our plan is that if we execute this year as we're planning that we would be able to stay around that 28% range.

Brett Hodess - Merrill Lynch

Great. Thank you.

Kathleen Bela

Thank you. We'll take one more caller. Operator?

Operator

Thank you. And our final question comes from Mark Fitzgerald with Banc of America. Please go ahead.

Mark Fitzgerald - Banc of America

Your two main competitors are out new with new products at this point. I am curious, I know you're confident on market share but is there any more price competition that's contributing to the margin erosion?

Steve Newberry

I think that the last six months of 2006, there's certainly been a lot of competitive scrambling as I think our competitors kind of realize that the reality of all the market share we were taking couldn't be denied anymore. And so, we've seen some pretty aggressive pricing activities but here is the reality. If you have a differentiated result, particularly if you have one that is giving you even 1, 2 or 3 yield point advantage, the competitor almost can't price to overcome that. And so, what we've done is the other aspect that I've talked about earlier in the year was we have increased our market share at some of the largest top-ten companies in the world, and in exchange for that, customers ask us to give them more beneficial pricing and we ended up picking up 10% to 15% more market share at some of those customers but accepted a reduction in the prices as a function of that kind of partnership. So that's somewhat present in the margin decline that you've kind of seen over the last six months.

Mark Fitzgerald - Banc of America

Thank you.

Operator

Thank you. At this time, we have no further questions. I would like to turn the conference back to management for any concluding comments. Please go ahead.

Kathleen Bela

We would like to thank you all for joining us today and again I want to apologize for the technical difficulties regarding the slides at the beginning of this call. You will be able to download them shortly from the Investor Relations section of the Lam Research website. There will be a PDF version now available. Again, thanks for joining us and we look forward to speaking with you next quarter. Bye.

Operator

Ladies and gentlemen, that does conclude the Lam Research December quarter 2006 financial results conference call. Thank you again for your participation today and you may now disconnect.

TRANSCRIPT SPONSOR

Better Than AdSense

What if there was a way to promote your company to a perfectly targeted group of potential customers, partners, acquirers and investors? What if you could tailor your pitch to them at the moment of maximum interest? And what if you could do this for a no-brainer price?

This is exactly what Seeking Alpha is offering with transcript sponsorships.

Six types of companies are sponsoring earnings transcripts on Seeking Alpha:

1. Company sponsors its own earnings call transcript (example).

2. Company sponsors competitor's transcript (example).

3. Issuer-sponsored research firm sponsors client's transcript (example).

4. Investment newsletter sponsors transcripts of successful stock picks (example).

5. IR firm sponsors transcript of micro-cap company (example).

6. Consulting company sponsors company's transcript in sector of interest (example).

Learn more, or email Zack Miller for details.

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 F2Q07 (Qtr End 12/24/06) Earnings Call Transcript
This Transcript
All Transcripts