Shanye Hudson - Investor Relations
Steve Newberry - Chief Executive Officer
Ernest Maddock - Chief Financial Officer
C.J. Muse - Barclays Capital
Satya Kumar - Credit Suisse
Patrick Ho - Stifel Nicolaus
Krish Sankar - Bank of America Merrill Lynch
Steve Chin - UBS
Atif Malik - Morgan Stanley
Atif Malik - Morgan Stanley
Edwin Mok - Needham & Company
Timothy Arcuri - Citigroup
Jim Covello - Goldman Sachs
Jagadish Iyer - Arete Research
Ben Pang - Caris & Company
Mehdi Hosseini - Susquehanna International
Peter Kim - Deutsche Bank
Lam Research Corporation (LRCX) Q4 2010 Earnings Call January 26, 2011 5:00 PM ET
Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Lam Research Corporation December 2010 quarterly results conference call. (Operator Instructions)
I would now like to turn the conference over to Shanye Hudson, Director of Investor Relations. Please go ahead, ma’am.
Thank you, Jeremy. Good afternoon everyone and welcome to Lam Research Corporation’s quarterly conference call. Joining me today are Steve Newberry, Chief Executive Officer and Vice Chairman of the Board, and Ernie Maddock, Senior Vice President and Chief Financial Officer.
Ernie will first discuss the financial results for the December 2010 quarter. Steve will then share Lam’s business outlook for the March 2011 quarter before opening up the call for Q&A. The press releasing detailing our financial results was distributed by business wire shortly after 1:00PM this afternoon and is also available on our website at lamresearch.com.
Today’s call contains certain forward looking statements including those related to our forecast of market share, shipments, revenues, expenses, margins, earnings per share, and cash generation as well as other statements of the company’s expectations, beliefs, and plans. There are important factors that could cause actual results to differ materially from those described in these forward looking statements, and a list of these factors can be found in the supplied package accompanying this conference call and on our most recently filed 10K form with the Securities and Exchange Commission.
All forward looking statements are based on current information, and the company assumes no obligation to update any of them. This call is scheduled to last until 3:00PM and we ask that you please limit questions to one per firm with a brief follow. With that I will turn the call over to Ernie.
Thank you, Shanye. Lam delivered an outstanding close to 2010. In the December quarter, Lam delivered strong cash flow, record shipments, record revenues, and record earnings per share. The December quarter performance extends to the year as Lam’s full calendar year revenue, earnings per share, shipments, and operating cash flows all set record levels as well. This performance reflects the company’s continued progress in market share and ongoing enhancement of our business model.
Turning to the specifics, shipments for the December quarter were 892 million, up 10% from the September quarter. Application and market segment breakdown for the quarter were as follows. 65 nanometer and bellow applications represented 88% of total system shipments. VRAM and NAND memory each represented 19% of total system shipments, with other memory comprising 2% making the total memory segment 40% of system shipments.
Foundry customers accounted for 38% of system shipments while logic and others constituted the balance of 22%. December quarter revenues were approximately $871 million exceeding the high end of our guidance range. This represents a sequential increase of 8% over the prior quarter and reflects strength in all product lines particularly our single-wafer clean products.
Ongoing gross margin was 46.8% which is aligned with our guidance range for the quarter. December quarter ongoing operating expenses were $166 million sequentially up $8 million. This increase is driven by continued investments in both core and customer specific R&D programs in support of our market share expansion. Ongoing operating income was $241 million reflecting a 10% growth over the September quarter and resulted in an ongoing operating margin of 27.7% which is at the high end of our guidance range.
Our ongoing tax rate for the December quarter was 10.3% somewhat lower than we had expected primarily due to the favorable impact of the federal R&D tax credit extension which affected both the September and the December quarters. In addition to the benefit reflected in our ongoing December quarter tax rate, our US gap net income was further favorably impacted by $4.8 million R&D tax credit related to the prior fiscal year bringing our December quarter gap tax rate down to 8.4%. Going forward we would expect an overall fiscal year tax rate in the low teens.
For the December quarter, our ongoing diluted EPS was $1.74 based on a share count of approximately $125 million. About $0.13 of the difference between this result and the $1.55 guidance midpoint was generated from our strong operating performance, and the remainder was primarily attributable to lower taxes.
Turning to the balance sheet, our crash and short term investments including restricted cash and investments totaled $1.2 billion. In December, we generated $186 million in cash from operations, and there were no share purchases under our existing board authorization.
For the calendar year 2010, Lam generated $716 million in cash from operations representing 24% of overall revenue. Accounts receivable days outstanding were 72 days, up from 59 days in the September quarter and reflect minor timing differences related to year end customer payment.
Inventory returns were 5.6, up from the September quarter end performance of 5.1.
At the end of the quarter, differed revenue was $223 million and as usual excludes shipments to Japanese customers that will revenue in future quarters. The revenue value for these shipments totaled $48 million. Non tax expenses include among other items 13 million for equity compensation and 19 million for depreciation and amortization. Capital expenditures were 38 million and our employee headcount at December end was approximately 3,400.
As we go forward, our focus will be on leveraging available market opportunities by increasing our investments in both field based customer solutions and core R&D programs. In addition, we expect to build upon 2010’s strong cash generation by delivering even higher levels of operating cash flow performance. The collective management capability of the company will be focused on the successful execution of these objectives. With that I’ll turn it over to Steve for his comments.
Thank you, Ernie. Good afternoon everyone and thank you for joining our call today. As our financial results indicated, Lam ended the calendar year of 2010 on a very strong note. You’ll recall that 2010 began with a lot of uncertainty about the level of spending for wafer fab equipment. As I now reflect back on the year in which that spending progressively strengthened, I’m very pleased by the number of financial firsts that Lam achieved.
For the first time, we surpassed the $3 billion mark in both shipments and revenue. We achieved a record $5.35 in earnings per share and the record level of cash from ops that Ernie mentioned in his comments. All of these achievements and more represent significant milestones in our company’s history. This outstanding performance in a year of wafer fab equipment spending recovery demonstrates our ability to executive against our goal of delivering increasing revenue, earnings, and cash growth cycle to cycle.
The achievement of our aggressive 2010 market share targets was a significant enabler of these financial firsts. In Etch we ended the year with approximately 54% market share making Lam the first and only company to achieve more than 50% share in the highly competitive Etch space. In single-wafer clean, we grew our market share position to nearly 30% as our differentiated drawing technology and process expertise bolstered our penetration into the new front of the line memory and foundry logic applications while defending and increasing our position in our traditional back end of the line and backside cleaning segments.
Looking to 2011, the industry consensus view for wafer fab equipment spending now falls within a range of flat to up 10%, even some at up to 20% above 2010 spending levels, which we estimate was approximately $28.5 billion to $29 billion. Our current view which is based on both inputs from our customers as well as internal analysis suggests that the current consensus views are reasonable given a 3% to 3.5% worldwide GDP growth.
Having said that, industry consensus forecast looked reasonable. The reality in this industry is that forecasting future wafer fab equipment spending is essentially impossible. When spending is up, it frequently goes up higher than expected. When spending declines, it usually worse than expected. So I don’t know what it will actually be in 2011, but I am confident that barring a major global economic dislocation there will be solid spending for wafer fab equipment in 2011 and Lam Research will do very well in that environment.
Let’s take a look now at some of the major components of wafer fab spending expected in 2011. The demand for tablet devices and smart phones is continuing to strengthen. We now expect tablet sales to be in the range of $50 million to $55 million units this year with a potential to grow another 15% to 20% depending on the success of the new devices that are in the market. This bodes well for the NAND flash market where we are currently estimating big growth in the range of 85% to 95%, and we expect that NAND manufacturers will respond to this growth and demand by increasing new wafer start capacity by more than 200,000 wafer starts per month and executing technology conversion upgrades of another 400,000 wafer starts per month.
Spending for NAND is expected to grow by a 25% to 30% in 2011 over 2010. This is a good situation for Lam Research as our market share in NAND is very strong. Looking at DRAM despite relative weakness from the consumer segment, we’re currently projecting PC growth in the range of 12% to 14% this year as the corporate refresh cycle progresses.
In addition to this unit growth, we expect average PC content to go from 3.3 gigabytes per box to 4.4 gigabytes and are currently forecasting big growth of in the range of 50% to 55%. At this level of big growth, we expect manufacturers will need to add approximately 125,000 new wafer starts per month as well as new technology conversions on 450,000 wafer starts per month. Spending in 2011 for DRAM then is expected to decline from 2010 by 15% to 20%.
In the foundry space, continued growth in tablet companies, logic IDMs increasing the use of foundries, and the often commented upon heated competition at the advanced technology notes will drive increased spending this year. We expect pure play foundries will need to add approximately 130,000 to 150,000 new wafer starts per month to capacity to meet this year’s demand. It remains to be seen whether additional wafer fab equipment spend will occur as a result of foundry players positioning for market share and wanting to put capacity in place ahead of demand. Spending for foundry is expected to grow 25% to 30% in 2011 versus 2010.
For the IT manufacturing industry in general, we see capital intensity increasing across all market segments with the move to 2X technology note and below. We would expect this trend to continue for a number of years as customers deal with the complex technological challenges associated with new memory device architectures and new materials and new architectures in advanced logic as well as rising investments related to an eventual transition to 450mm.
As has always been the case, Lam Research will invest the necessary resources across all dimensions of our business to ensure that we successful meet our customers’ technology, and productivity requirements. Considering our proven track record of technology and operational leadership, I’m excited about these opportunities. I believe Lam is in an excellent position to further strengthen our market position going forward.
In 2010, we won 9 new applications in single-wafer clean and netted 15 new application wins in Etch which will support market share growth in 2011 and 2012. In the coming months, we will share with you our progress on application market share growth during 2011 which will form the basis of our ship share performance in future years.
As Ernie already mentioned, our focus in 2011 in addition to supporting our customer technology and productivity needs will be on strong cash generation. We have the potential to achieve around 1 million in cash from operations if wafer fab equipment spending grows 10% or more in 2011 versus 2010.
Moving on to the March quarter, our guidance is as follows: shipments of 820 million plus or minus 20 million, revenues of 800 million plus or minus 20 million, gross margin at 45.5% plus or minus 1%, operating profit at 23.5% plus or minus 1%, and earnings of $1.30 per share plus or minus $0.07 per share. With that Ernie and I will take your questions.
Thank you. We will now begin the question and answer session. (Operator Instructions) Your first question comes from the line of C.J. Muse - Barclays Capital.
First question, Steve, as we heard from you in late 2010, you were suggesting that shipments in the first half of ’11 would look pretty similar to the second half of ’10. With the uptick we saw above the high end of your guidance in Q4, does that still hold? Can you update us on what your thoughts are there?
I think when we look at what the customers are saying they want to do, obviously for the March quarter they’re taking less shipments than the December quarter and they’re indicating that they’re going to want to take a higher level of shipments in June which will result in I think us being pretty close to flat plus or minus a few percentage points. I have to see how that plays out but first half of 2011 looks pretty flat to the shipment rates of second half of 2010.
Thank you. Your next question comes from the line of Satya Kumar -- Credit Suisse.
Firstly on logic, it looks like your revenues are up over 140% sequentially. I guess it’s the highest level that I’ve seen in four years. I was wondering if you can talk about what’s driving the increase in logic shipments, whether there are share gains at any large logic customers and new products like Etch.
Secondly, within the Etch group, I was wondering if you could talk to market share expectations in 2011 given the increase in spending mix we expect from microprocessor in 2011 and some of your competitors coming up with higher productivity Etch systems recently.
Well, as we have commented for quite a long time, our market share in logic is essentially very much the same as our market share in memory. So as logic and foundry moved up as a stronger percent of total spending that our market share would track right along with that.
When we look at the market share gains that we made in 2009 and early 2010 that resulted in shipments, we were certainly successful in both Etch and Clean and increasing our market share in logic and foundry.
So while many are kind of concerned about the fact that DRAM spending may be down 15% to 20% -- more than offset by the way by the increase in NAND spending -- the increase in foundry logic spending will certainly allow Lam Research to hold our market share and grow our market share quite well.
Relative to Etch market share as a function of those 15 net wins, we would expect that we would pick up two to three market share points in a normalized year in 2011 but certainly with the increase in microprocessor spending by Intel where we don’t have an Etch presence there will somewhat be an offset to that. If the year plays out as some are forecasting, somewhere in the 2.5% range, so with our market share growth we’ll probably just neutralize all of that.
In Clean, we’re continuing the momentum in 2011 that we established in 2011, so I would expect we’re going to see a growth in market share in Clean coming off of those wins that I mentioned in comments. So overall I think that we have an opportunity to grow a little faster than wafer fab equipment in 2011 with our market share strength.
Thank you. Your next question comes from the line of Patrick Ho - Stifel Nicolaus.
Two questions on the Clean business. First, your margin’s performance continues to be strong. On a qualitative basis, can you give a little color on some of the variables, the levers on the wet clean business that have allowed you to basically perform better than most discrete expectations?
Secondly, in terms of the single wafer clean wins that you mentioned, can you just give a percentage basis of what it was on the customer concentration of spending, the gains in the back end of the line, gains in the front of the line? What were the biggest drivers this year past year?
I think as we had commented about our efforts in single wafer clean, we’re to re-architecture the option architecture. We were able to largely complete that activity and, as a function of that, then increase our ability to outsource various assemblies and modules, which we were aggressively in pursuit of.
So later in the year as those activities began to flow through the factory and ship out the door and manifest themselves in revenue, we saw an increase in margin which is what we expected. As we go forward in 2011, we will continue to focus on option architecture improvements. We’ll continue to focus on expanding our supplier base in terms of their involvement in supporting our Clean activities.
The Clean market as a whole is going to grow faster than wafer fab equipment in 2011. So that gives us an opportunity for that segment of our basis to grow stronger. Then if you add additional market share gains, we get an additional accelerated bump. I think we’ll deliver stronger margins in 2011 for single wafer clean than 2010.
As it relates to -- what was it?
-- oh, the wins and losses; a lot of the growth in Clean is occurring as a function of the conversion of wet bench cleaning to single wafer in the front end of the line. So we have been focused on delivering some capability with enhanced sulfuric acid that with our reclaim capability has enabled us to penetrate in a number of critical applications in logic. We continue to focus on opportunities where our memory segment becomes a potentially stronger segment.
Today we probably ship about 60% of our products into logic and about 40% into memory. Certainly logic remains critically important because with the number of layers involved in a logic chip it’s a bigger market for Clean as a function of that. But we were pleased with the progress that we made in front of the line application penetrations as well as defending our traditional back end of the line and backside positions.
Next question, please.
Thank you. Your next question comes from the line of Krish Sankar - Bank of America Merrill Lynch.
Steve, I know you didn’t want to give any specific outlook for the year in terms of wafer fab equipment, but can you give some color on do you think it’s going to be more front half loaded or back half loaded or how the trajectory of equipment setting is going to be?
My follow-up is for Ernie. You said there’s no buyback in the December quarter. Am I reading too much into it or is there any thought process behind it? Can you also update us on how you look at the excess cash you have?
I’ll talk about shipments and Ernie will talk about the use of cash, buybacks, et cetera. So the first question was where were the first half shipments relative to second half of 2010? We think the second half of 2010 that the shipments represented a $31 billion wafer fab equipment spending level and because I think that the shipments for the first half are going to flattish, there’s a $31 billion run rate there.
Depending upon if you’re of the mindset that spending is going to be up 10%, then you’re going to see the second half be pretty flat. If you think spending is going to move up 15% or even 20%, then the second half shipments are going to have to grow right along with that. So the run rate of the second half would have to be $34 billion or $35 billion if you’re going to end up the year at $32 billion or $33 billion in total spending.
The important thing that we look at is this year is likely to be a reasonably stable environment. We’re all used to either rocket shooting up 150%, 200% plus in one year, like we saw in 2010, or retrenching like we did in 2008 and 2009.
So 2011 represents a reasonably stable year with different quarters being up and down and it’s one of the reasons why you hear us talk about we’re going to really focus on consolidating our gains, investing very closely with our customers, reinforcing that the decisions that they made to buy more Etch equipment and clean equipment from us was a good decision and we’re also going to take advantage that in a stable environment our ability to generate higher levels of cash flow is much easier than when you’re in a rapidly accelerating revenue environment.
Krish, this is Ernie. Relative to your question, you shouldn’t really read any significance into the no share repurchas, so nothing has changed from our perspective. We have authorizations in place and the necessary structure in place to execute at the pricing we feel is appropriate for a company that can only be a buyer of our shares and not a seller. We’re going to continue to execute on that as we’ve planned. So nothing significantly changed this quarter versus our prior plans.
Thank you. Your next question comes from the line of Stephen Chin - UBS.
Just a question on the continued investment in the operating expenses; how should we think about modeling OpEx as it goes through 2011? Should we continue to model OpEx up equally across both R&D and SG&A? Then I think when you talk about increasing investment in field based support, are you trying to increase Lam’s traditional services sales? Is that one of the goals?
So I think it’s a little misleading in terms of the classification between selling and marketing expense and R&D because we would classify things like evaluations and a lot of the field based work that we do with our customers' ends up beings in our sales and marketing expense.
So really you should think about the totality of those investments as R&D work whether it’s done here in the facility or whether it’s done closer to the customer. So there are just some classification differences that take place, so we are not ramping what I think most people would consider traditional sales and marketing expenses as it might appear on the face of the P&L.
I think it is reasonable over the course of the coming few quarters to model in that continued investment. We recognize that it’s going to be important to both secure the gains that we have as well as do the necessary planning and preparation work for sustaining market share gains that Steve referred to earlier. So we do think that over the course of the coming year you will see some moderate increase in operating expenses that will level out probably sometime mid-year or so.
Thank you. Your next question comes from the line of Atif Malik - Morgan Stanley.
Steve, which innings are we in for NAND spending? If I look at your NAND shipments, we’re still 40% below what we saw in 2006, 2007. Then, I have a follow-up.
So you’re asking who is doing the spending?
No. Which innings would you think we are in terms of NAND spending? Are we just in third or fourth inning? Or the level of NAND orders, does it surprise you that your NAND orders are still quite far below the levels that you saw in 2006 and 2007 with so many demand drivers in front of us?
When I look at the increase in NAND shipments, I think it’s going to go up to about $8 billion. If I go back in 2007, which was a pretty strong NAND spending year, from our analysis we think they spent about $6.1 billion, $4.3 billion in 2008 and probably $1.8 billion in 2009. So I think this $8 billion probably would represent a higher investment in NAND capacity expansion than in prior years.
I think that that makes sense as the industry's consolidated. But the total demand for NAND on a unit basis is going to grow 1 billion units to kind of contrast the DRAM. I mean, DRAM units are going to grow 1 billion. So the absolute rate of units that are growing for NAND is, right now, equal to DRAM.
But because of the lower base of install base capacity, the investment in NAND is going to have to include more new wafer starts, which are much more expensive and 400,000 something wafer starts of conversion, which while less expensive than DRAM conversion would still represent a lot of money having to be spent.
Thank you. Your next question comes from the line of Edwin Mok - Needham & Company.
My first questions relate to just touch on DRAM and maybe relate it to Clean. I notice that both shipment for Clean and DRAM was down the last quarter. I suspect that they will come in sync with each other.
I was just curious. Is that any pushed out related ad? Or was it just customer reducing spending? Do you expect that to pick up in the first half of 2011?
Well, we pretty much expected and I think we talked in our prior earnings call that memory in the calendar December quarter was going to decline as a percent of the total.
I think you always get some interesting behavior in the last calendar quarter of the year as some customers are trying to pool in and get a head start on having available capacity relative to what their competitors are doing. Some customers tend to decide that they've spent enough capital. Sometimes they'll push out. The December quarter tends to have a lot of ins and outs and that's pretty normal.
As we go forward in the year, I think that the percentage of memory is going to come up from the 40% that we saw ship in the December quarter. Probably for the first half I would expect that to be somewhere around 45% of the total. I think that where we're going to see the other 60% is going to be certainly a strong foundry investment for the first half but also a very strong spending in other advanced logic IBM players.
Then a couple follow-ups related to the Clean market. You mentioned you have nine application wins. Anyway you can quantify how much of that came from memory versus logic and where are they all leading at 22 nanometer or anything related to that?
Well, earlier there was a question about that and I talked about the focus being on the front end of the line. There's both logic and memory wins there. I don't want to specifically quantify that because I'd like to keep certain aspects of those wins as confidential as possible for as long as possible. But it's front end of the line and it's both logic and memory related.
Thank you. Your next question comes from the line of Timothy Arcuri - Citigroup.
Two things; first of all, I just wanted some clarification on that question on the buyback. I wasn't sure I understood the answer. Ernie, are you saying the stock just wasn't at a price where you thought that you wanted to be a buyer? Was that the answer?
Then the second question is really on your shipped share, which I know that I'm mixing the service in here. But if I take your shipments and I compare that relative to a $12 billion wafer fab equipment market in 2009 and I take your shipments this year and I compare it against the $28.5 billion wafer fab equipment market, it's about the same market share. It's like 10.8% to 10.9% in both '09 and 2010.
Is there something happening there? Is that an Intel effect? Because Etch seems to be growing faster than the market and you're definitely getting share in clean, so I'm sort of wondering what your view is on that.
Tim, I'll take the share buyback. The reality is the share price didn't hit the triggers that we had in our repurchase plan. So, therefore, no repurchases occurred.
Thank you. Your next question comes from the line of Jim Covello - Goldman Sachs.
Steve, I know you talked about the number of new wafer starts that you project coming online. How many new fabs does that represent for this year? Then do you have an early view on how many new fabs that you could forecast out as we look into next year?
So, Jim, I'll answer that question but since we didn't get a chance to answer the second part of Tim's I'll do that as well if it's okay.
Relative to ship share, very definitely the makeup of the $12 billion in 2009 was light on Etch and was certainly Intel's spending as a percent was strong. So we definitely benefitted from a lower spending as a percent of the total in terms of Intel's contribution. But we also benefitted that Etch went up from probably a 12% to 12.5% of WFE to, I think, in 2010 probably pretty close to 14%. That's one element.
Then we benefitted that single wafer clean mix has changed as we've gone forward, although Clean, because a lot of investment to convert to single wafer was done by some of the single wafer-oriented companies, Clean actually grew slightly less in 2010 than the wafer fab equipment market in full. But our market shares in Clean was able to offset that and even benefit Lam.
So, also, I think that when you look at what our revenue was, the customer service business was a dramatically higher level in 2009. So when you take the $12 billion, which is just for systems and used equipment, and you divide the $12 billion by the $1.2 billion that we were in revenue, you get an incorrect number because now the customer service business is less than 20% whereas in 2009 it was probably 40%, 45% or something like that.
So that's how you get the market share growth when you have fundamentally a similar percent but the mix is very different.
So, Jim, our look at new fabs is there's 12 to 13 new fabs that are going to take shipments this year. There's 16 fabs out there that are somewhere under construction. Some have been completed. Some of the ones that have completed are taking shipments. Some of the completed ones are really just kind of going to wait for a while.
But clearly we have a number of fabs that will take shipments for the first time in 2011. It looks like probably six to seven fabs will take their first deliveries in 2011.
Next question please.
Your next question comes from the line of Jagadish Iyer - Arete Research.
Two questions, the first question is last [time you called] you had laid out a scenario for $31 billion to $32 billion in WFE with $6 in EPS. The question is, with Intel being such a big portion on the WFE spend, are you still holding with the $6 in EPS please?
Yes, that's a good question. Certainly when we laid out that model we didn't have Intel factored in at that high of spending and at that high a percentage. So that will present somewhat of a challenge for us.
But when we look at our various plans that roll up against various scenarios, I think that we continue to have, even with a mix ship, we have a good opportunity to deliver that $6, even with Intel changing as a percent. But, like anything else, it's not just Intel in terms of what their percent is. It's what's the percent that other customers will ultimately end up being and what's our share with them?
So it's definitely going to be more challenging. But we expect to be very much in that vicinity if the spending levels rise to that level.
Yes, and the follow-up would be how do you break up between the silicon and the dielectric and the metal market in terms of year-over-year growth please?
I think we've seen an acceleration of conductor becoming a bigger percent of wafer fab equipment spending for Etch. I think that if you go back to '08 and '09, you saw that the dielectric segment was probably 58%, 56% and conductors come up from about 42% in '08. We think it's about 50%, 50% right now. So, clearly, that's been beneficial to our market share gain because we have a higher market share in the conductor segment than we do in dielectric.
Next question please.
Your next question comes from the line of Ben Pang - Caris & Company.
Two questions; one, a follow-up on a previous question -- If you look at the Etch growth rate up to wafer fab equipment in 2011, which one of those segments do you expect to grow the fastest? Can you kind of give some color around what the growth rates are?
The second question is if you look at the qualification activities that you expect in 2011, is that at a similar level as 2010 in terms of the number of application wins that are possible for both Etch and [Wafer] Clean?
Well, the Etch segment growth rates for 2011, we're still really in the process of trying to quantify those activities. I don't think they're going to be substantially any different in terms of the ratio of conductor to dielectric.
I think that, clearly, the trend that has caused conductor to come up it's going to manifest itself in continued volume output because those are the technology nodes that customers are ramping right now. So I would not expect that we'll see that much of a difference in 2011.
As it relates to -- what was the second part of the question? Sorry.
Can you repeat the second part of the question please?
One moment; I cleared his line. Let me get him back.
So I think the question may have been what do we expect the growth rate to be for single wafer clean? We look at 2011 as a reacceleration year. We think that single wafer clean is likely to grow somewhere between 25% and 30% year over year.
So, depending upon what scenario you want to pick for WFE, I think that we have an opportunity to see our Clean shipments increase as a function of a rising tide and then in addition as a function of picking up some market share gains in 2011.
We haven't quantified how many application wins that we're going to forecast because the year has just started. We haven't forecasted them for '11 in Etch or for Clean. But as we go forward, whether we're at investor conferences or on future conference calls, as we have always done, we will continue to keep the financial community updated on the progress we're making relative to new application wins in both Etch and Clean.
Your next question comes from the line of Mehdi Hosseini - Susquehanna International.
Steve, going back to your earlier comment, I guess in order for shipment to hold up in the second half we have to hit the high end of that double-year fee growth range of flat up 10%, correct?
Yes, I think since the run rate -- the second half of '10 was about $31 billion. I think the run rate for the first half looks to be very close to $31 billion. So if we're flat for the rest of the year, then we would be up basically 8%, 10%, depending upon which number you want to use. That's why I said that.
When you look at a consensus forecast, you've got some people at flat, you've got some people up 5% or 10% and you even have some people that suggest the spending will be up 20%, which would get you closer to a $34 billion-type of level. So we'll just have to see how that plays out.
That's why I kind of said almost any range you pick, unless we have some major financial dislocation that really dries up the capital flows and the demand and all of that, that we're going to really be focused this year on consolidating the gains that we've made and rewarding the trust that our customers have demonstrated to us, position ourselves for the next generation of new memory architectures and new logic materials and new logic architectures over the next two generations.
In this kind of environment, while there may be a slight decline that Ernie talked about in terms of the operating margin performance, depending upon what the spending environment actually turns out to be, we're going to really focus on cash generation because in these kinds of stabilized environments we can be up in the high 20s, in the low 30s as a percent of revenue and cash generation.
Really, at the end of the day, I think our shareholders want to see that strong cash generation. They want to see the investment in our continuous pursuit of technology and productivity solutions for our customers.
Just as a follow-up, when would you expect you would stop shipping to GlobalFoundries, the New York new fab, assuming that you have some exposure there?
One of the things that customers have requested from us and others in the industry is to keep confidential the information they communicate to us relative to what their plans are in terms of delivery. So I think the best way to get that answer is to ask GlobalFoundries what they want to say about when they are going to take shipments and begin operation in their multifab.
Let me rephrase that. Do you think -- in your opinion, do you think there is minimal risk to the $5.5 billion CapEx that they have put out there? Or how would you compare that to a spending that the UMC in Taiwan semi used to have been around for a long time? How would you compare the downside as to these kind of CapEx guidances between the Taiwanese and GlobalFoundries?
One of the things I've learned over my 31 years in this industry is that the minute you think you may know what customers could do they will absolutely prove you wrong.
So the reality is there's always risk associated with any forecast that customers give you. Sometimes the risk is on the downside. Some of the risk is they're going to spend even more.
So I really couldn't tell you. I mean, we, fortunately, are a company that does business with every semiconductor company that's involved in this industry. As a function of that, what we focus on is if the demand is growing and we understand how the supply is matching up with that demand, somebody is going to go and fill that demand and exactly how it's going to turn out; in terms of who ends up spending more and who ends up spending less, way too difficult to predict.
Thank you. Yur next question comes from the line of Peter Kim - Deutsche Bank.
I wanted to ask about the operating improvements, company model improvements, and [Wafer] Clean. Obviously, [Wafer] Clean is going to grow 25% to 30% this year. It will probably be a larger mix of your overall revenues. I was wondering, if [Wafer] Clean revenues are larger, will that have a negative or positive impact on your operating margins?
Well I think one of the things that you've seen is that our margins at the revenue levels that we're dealing with are in that low 46% to high 46%. I think that the challenge for us is as Clean ramps and becomes a bigger percentage of the total revenue that we've got to make sure we execute to the cost reduction activities that I've talked about.
So our thought process relative to margins kind of reflects a recognition that even with that, the margins overall in Clean, from a gross margin standpoint, tend to be somewhat less. From a cash flow perspective, because the P&L carries various aspects of non-cash-related accounting associated with the acquisition, Clean is a nice contributor to cash flow.
It's one of the reasons why we try to spend time, really, talking about cash generation while recognizing that to the extent that we can execute in the way that we'd like to, that we can potentially see improvements in our gross margin performance both as a function of doing that if the volumes increase, but also even as clean increases its percent of our total revenues.
Thank you. Your next question comes from the line of C.J. Muse - Barclays Capital.
Thinking about your OpEx, if you look at the midpoint of your revenue guidance for March relative to a pretty similar run rate in September, that's about $18 million more per quarter. So, I guess, could you help me in understanding precisely where that is going and how long we will see that in the model? If so, is this a new part of your target model?
Well, I think that there's no question that if you go back a couple quarters that our OpEx is up in the vicinity of what you just said. It does, in fact, reflect increases in investment in both field service-based people, process engineering-based people that deal with the larger sustained volumes that we have.
But, as Ernie said, we're increasing the number of people who work on a dedicated basis at a lot of these major customers because they are asking us and we're responding to the difficulties and complexities that they have when they're looking at going to the next generation devices, whether you're talking DRAM, NAND or logic chips.
So, in the short term, we're going to make those investments because that's the right thing to do for our customers, it's the right thing to do for the business and for our longer-term market share growth. In a declining revenue environment, that could put a little pressure on the P&L. But, certainly, in the environment we're talking about, our cash generation is going to be better than it was in 2010.
So I would expect that if we can remain at a reasonably stable 3% to 4.5% GDP environment for a couple years and the customers maintain kind of rational and well-balanced investments in terms of supply versus demand that we will likely have an opportunity to see higher revenues at some point in time in the future.
I think you will see us demonstrate the ability to move our operating margins kind of back up to our 27.5% model that we've kind of said is what we're trying to achieve when we are in the higher spending phases of the cycle.
So I view this as kind of maybe a demonstration that what we're not going to do, if revenues kind of slow down a little bit for a couple quarters, we're not going to try and optimize P&L performance at the expense of making what we think are the right investments for our customers, the right investments for really continuing to build the capability that the company needs.
We're focused on making sure that when the spending and our market share is in the right situation and we have the ability to be a $4 billion company, we want to make sure that we can execute to that very effectively in the coming years.
Thank you. Management, I show no further questions in queue. Please continue with any closing remarks.
I'd like to thank everyone for joining our call today. I'll remind you the audio replay will be available on our website later this afternoon and that concludes our call.
Ladies and gentlemen, this concludes the Lam Research Corporation December 2010 quarterly results conference call. You may now disconnect. Thank you for your participation.
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