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Lam Research (NASDAQ:LRCX)

Q3 2011 Earnings Call

April 20, 2011 5:00 pm ET

Executives

Ernest Maddock - Chief Financial Officer, Chief Accounting Officer, Senior Vice President and Head of Silfex Incorporated

Stephen Newberry - Vice Chairman and Chief Executive Officer

Shanye Hudson - Director of Investor Relations

Analysts

James Covello - Goldman Sachs Group Inc.

Atif Malik - Morgan Stanley

Wenge Yang - Oppenheimer

Mehdi Hosseini - Susquehanna Financial Group, LLLP

Jagadish Iyer - Arete Research Services LLP

Stephen Chin - UBS Investment Bank

Christopher Muse - Barclays Capital

Krish Sankar - BofA Merrill Lynch

Patrick Ho - Stifel, Nicolaus & Co., Inc.

Edwin Mok - Needham & Company, LLC

Benedict Pang - Caris & Company

Satya Kumar - Crédit Suisse AG

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Lam Research Corporation March 2011 Quarterly Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Shanye Hudson. Please go ahead.

Shanye Hudson

Thank you, Brandy. Good afternoon, everyone, and welcome to Lam Research Corporation's quarterly conference call. With me here today are Steve Newberry, Chief Executive Officer and Vice Chairman of the Board; and Ernie Maddock, Senior Vice President and Chief Financial Officer.

Shortly, Ernie will discuss financial results for the March 2011 quarter. Steve will then share Lam's business outlook for the June 2011 quarter before opening up the call for Q&A. The press release detailing our financial results was distributed by Business Wire shortly after 1 p.m. this afternoon and is 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, cash generation and free cash flow, 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 slide package accompanying this conference call and on our most recent Form 10-K filed with the Security 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 p.m., and we ask that you please limit questions to one per firm with a brief follow-up.

With that, I'll turn the call over to Ernie.

Ernest Maddock

Thank you, Shanye. I'm pleased to report very good overall performance for the March quarter, resulting in earnings per share above the high end of our guidance. Quarter-to-quarter, shipments were within our guidance range at $813 million, a sequential decrease of 9%. Application and market segment breakdown for the quarter were as follows: Applications at 65-nanometer and below represented 92% of overall system shipments, and 79% of overall system shipments were for applications at 45-nanometer and below; system shipments for NAND were 23% of overall system shipments, followed by DRAM at 15% and other memory at 4%, making the total Memory segment 42% of overall system shipments. Logic and Other accounted for 33% of overall system shipments, and the remaining 25% were to Foundry customers.

Revenues for the March quarter were above the midpoint of our guidance range at approximately $809 million, down 7% sequentially. Ongoing gross margin was near the high end of our guidance range at 46.2% and was down from 46.8% in the December quarter, due to reduced factory absorption and a less favorable customer mix.

Consistent with the plans we shared with you last quarter, we've increased our investment in customer-facing productivity enhancement and research and development activities. These customer-facing activities are supported with selected incremental investments in core R&D activities and were the primary drivers of the sequential operating expense increase of $11 million, bringing total OpEx to $177 million.

As we discussed last quarter, we expect another quarter or so of incremental investment levels, and we then expect to see these investments stabilizing after that time. We believe that these ongoing investments are important to enable us to maintain and enhance our competitiveness and achieve continued market share gains.

Ongoing operating income was $197 million, which resulted in an ongoing operating margin of 24.3%. During the March quarter, our ongoing tax rate was 8.3%, a few percentage points lower than anticipated, primarily due to certain favorable discrete tax items.

For fiscal year 2011, we continue to expect our tax rate to be in the low teens, and based upon the current business outlook, anticipate a similar low teens rate for the remainder of the calendar year. Based on our share count of approximately 125 million shares, earnings per share was $1.45, exceeding the midpoint of our guidance range by $0.12. Approximately half of this delta was due to the more favorable tax rate, and the remainder was the result of our stronger operating performance.

Moving to the balance sheet. We ended the March quarter with cash and short-term investments, including restricted cash, of $1.4 billion. DSO for the March quarter was 72 days, flat from the December quarter, and inventory turns were 4.9, down from 5.6 days in the December quarter. Our DSO and inventory performance both reflect the timing of customer shipments during the quarter.

Deferred revenue at the end of the quarter increased to $247 million and excludes $36 million of shipments to Japanese customers that will revenue in future quarters. Equity compensation expense came in at $12 million. Depreciation and amortization was $18 million, and capital expenditures were $36 million. We ended the quarter with about 3,500 employees, and there were no share repurchases during the quarter.

During the March quarter, our cash flows from operations were $242 million, representing 30% of total revenues, and we are on track to deliver similar or higher levels of performance in the June quarter. Over the last four quarters, Lam's cash flows from operations were approximately 27% of total revenues. And during the same period, our free cash flow was approximately 23% of total revenue.

Lam's business model enables us to generate strong cash flows, while at the same time, making the investments we believe are necessary to further strengthen our market position and benefit from future growth opportunities. With that, I'll turn it over to Steve for his comments.

Stephen Newberry

Thank you, Ernie, and good day, everyone. Thank you for joining our call today. As Ernie shared just now, our March quarter financial performance was in line with our expectations and reflected solid operational performance across all of our business units. Since our last call in January, political tensions around the world, rising fuel costs, higher food prices and the tragic events in Japan have all contributed to clouding the macroeconomic outlook.

It's still too early to fully understand the impact of these events on the overall global economy and the electronics industry, however, GDP growth projections for 2011 remain in the range of 3% to 3.5%, and our current assessment is similar, leading us to believe that, overall, our industry fundamentals and market drivers will remain relatively strong.

Consumer electronics environment continues to be largely driven by increased adoption of global products, smartphones and tablet devices. While we expect overall IC unit growth to be 10% to 12% this year, we believe that NAND unit growth should outpace over all IC unit growth rates by approximately 2x, resulting in bit growth in the range of 85%. This level of bit growth should translate into NAND wafer fab equipment spending in the range of approximately $8 billion, up from 2010's baseline of approximately $6 billion.

With our belief that tablet capabilities will expand beyond a content consumption orientation to include content creation, we expect tablet growth rates to remain strong over the next 18 to 24 months, leading to sustainable and growing NAND demand during that same period. Looking at the DRAM market, consumer PC demand in established markets is growing at a modest 3%, but corporations are continuing to proceed with their PC refresh cycles.

The pace of this activity has remained flat with the back half of 2010. And as a result, we have adjusted our view for calendar year 2011, total PC unit growth to approximately 11%. This creates a DRAM bit growth forecast that's at the lower end of an estimated range of 50% to 55%, and results in a decline in wafer fab equipment spending for DRAM in calendar year 2011 to approximately $5 billion, down from the approximately $8 billion spent in 2010. Combined, total memory, wafer fab equipment spend is projected to decline by approximately $1 billion or about 7% year-over-year.

As we take a look at the Foundry segment and Advanced Logic, we continue to expect a strong year in terms of WFE spend. Consistent with our expectations, these manufacturers are investing in leading-edge capacity to position themselves to meet their customers' expected needs at the advanced notes. Typically, these investments will occur before actual demand materializes. As a result, we expect 2011 WFE spend for Foundry and IDM advanced logic to increase to $14 billion to $15 billion versus approximately $11 billion in 2010.

As device complexity continues to grow, the cost for our customers to add incremental new capacity or upgrade, existing capacity continues to increase with each successive technology node. While this trend applies to all market segments, the impact is particularly pronounced in the Foundry/Advanced Logic space where technology node shrinks are primarily accomplished by adding new capacity rather than converting and upgrading an existing process line.

A specific example of this capacity cost increase can be seen by comparing a 65-nanometer logic process with a 28-nanometer logic process. Adoption of new process steps such as high-k/metal gates and metal hard mask schemes and back-end processing along with continued increasing layers per device collectively contribute to etch process times for each 28-nanometer wafer, which are more than 50% greater than that of a 65-nanometer wafer.

This increase results in more etch chambers required to output the same number of wafers. As Lam is the acknowledged and established etch market share leader in each of these areas for Foundry and Advanced Logic, we are well-positioned to benefit from this increase in investment levels.

The increase of process complexity also translates into the single-wafer clean market, requiring customers to transition more to wafer cleaning steps from batch to single-wafer processing to effectively manage defect densities and device yields.

Single-wafer clean process has represented approximately 65% of the total clean steps for our 65-nanometer foundry logic device. At 28-nanometer, we expect that percentage to increase to 85%. Our differentiated spin clean technology and innovative linear clean tools are designed to capitalize on this trend, and we expect to benefit from incremental share gains in 2011.

Looking beyond the 28-nanometer and 22-nanometer nodes, our customers are facing unprecedented technology challenges, including 3D device structures such as thin set gates [ph] and vertical NAND. These technology inflections are driving our customers to initiate major R&D activity earlier than they have typically done in the past.

Not surprisingly, Lam must parallel our customers' investments, to ensure that we are strategically positioned to deliver solutions, and ultimately, benefit from those future market opportunities. The investment plans that Ernie spoke of earlier are intended to do just that. We are committed to further build upon our success by differentiating on critical leading-edge applications and leveraging our install base position for early learning and partnering with our customers to deliver solutions that address their most difficult manufacturing and technical challenges.

Given this set of industry challenges and opportunities, our expectation is that overall calendar year 2011 wafer fab equipment shipments will grow by 12% to 17%, with total spend between $32 billion and $34 billion. While this represents meaningful improvement from 2010, it's important to recognize that in the consolidated industry environment in which we now operate, where 10 customers comprise approximately 85% of WFE spend, it is and will be increasingly common to see quarter-to-quarter shipment variability.

While being mindful of the short-term financial impacts of this variability, Lam Research will remain focused on ensuring we meet our customers' productivity and technology solution needs, as they respond to the growing demand trend for advanced semiconductor devices.

With these factors in mind, our June quarter guidance is as follows: Shipments of $780 million, plus or minus $25 million; revenues of $745 million, plus or minus $20 million; gross margin at 45%, plus or minus 1%; operating profit at 20.5%, plus or minus 1%; and earnings per share of $1.07, plus or minus $0.07.

In summary, as we look at 2011, despite short-term pushouts from recent events, we think current prospects for the industry remain healthy. This environment provides Lam with the opportunity to solidify and enhance the value that we bring to our customers, and we expect it to result in the further strengthening of our market position going forward.

With that, Ernie and I will take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes the line of Stephen Chin with UBS.

Stephen Chin - UBS Investment Bank

Steve and Ernie, nice [indiscernible] Just a follow-up question, Steve, on the given shipment guidance. Could you share more color on the customer type that response for the pushouts. Is it mostly the memory customers? And did the guidance in the June quarter assume any pushouts, because of the shortage of raw wafers that might be available in the industry?

Stephen Newberry

Yes, the activity for us as it relates to requested shipments in the June quarter are really, primarily, a function of both some memory pushouts. Most of it was DRAM-related. Some of that was offset by some pull-ins of NAND, but really kind of the biggest net pushout, in fact, was really related to foundry and other types of logic activities. Obviously, when we see that kind of activity, we have extensive conversations with our customers as to what the reason is behind the pushes and what their expectation is in terms of when they're going to want those deliveries, and I think the good news is that customers' intentions relative to when they want them is to, for the most part, take those deliveries in the September quarter with a few of the pushes ending up in December. But primarily, they want delivery in September. As it relates to material shortages, none of our customers have indicated that currently they're experiencing any wafer start, other types of material shortages. I think if we think about the inventories that these customers normally carry, if we look at the public statements as well as the private comments that they make to us, I think that most customers, if not all of them, really expect that they're going to be able to work through what potential issues there may be, because most of them carry 2 to 3 months worth of wafer inventory, and the expectation is that wafer supply will be back in good shape in that timeframe.

Operator

Our next question comes from the line of Patrick Ho with Stifel, Nicolaus.

Patrick Ho - Stifel, Nicolaus & Co., Inc.

Steve, could just give us a quick update in terms of the application wins that you saw in the etch marketplace? And do you feel -- and the follow-up question is, do you feel that you guys are still on target for some of the share gains or the share position for your company for 2011 for both etch and clean?

Stephen Newberry

Yes. I think we're one quarter into a lot of the activity that we're working with customers, as it relates to those applications that they're looking for qualification. I think to date, we're on track with our expectations in terms of the progress that we're making, in terms of the etch penetrations, as well as the clean penetrations. I think probably at SEMICON West, we'll probably provide a more comprehensive update, because we'll have more information at that time. But clearly, here, we had a lot of momentum, a lot of wins in the second half of 2010 that will manifest themselves into shift market share gains in 2011. And then, of course, when we look at the makeup of wafer fab equipment spending in 2011, it's going to be materially different, given Intel's statements as recently as yesterday at the last day or two that they're going to increase their capital spending even more than what they had previously announced. And so clearly, as a function of us not participating in much of that and none of it on the etch side, that will be some market share issues that will have to kind of offset with the application wins and the shipments that we do in 2011. So we'll see how that plays out over the year. We'll update that at SEMICON West. And as it stands right now, we're in good shape.

Operator

Our next question comes from the line of Atif Malik with Morgan Stanley.

Atif Malik - Morgan Stanley

Steve, if the pushouts are not macro-driven or Japan earthquake or wafer shortages or indirect shipment delays in Japan, and the memory pricing has been going up year-to-date, I just want to understand what's driving those pushouts? Is it that some of the spending that was going on both per-market-share reasons on the logic side and they're not materializing, and those customers are changing their plans?

Stephen Newberry

Well, I think that there's a little bit of activity that we saw post the earthquake tsunami where I think a lot of customers kind of froze in place, so to speak. And what they really wanted to understand was, will this or could this have an impact in terms of demand in the marketplace? Would this or could this cause issues relative to supply chain? And so, there's definitely some aspect of that, but I think we're going to move beyond that, if not already have moved beyond that. When you talk about pricing, certainly, the NAND pricing environment is very favorable right now, and that's why what we saw in terms of what customers want in the June quarter is more NAND shipments to take advantage of the supply-and-demand situation that exists there. Where as memory, the pricing is tighter. The demand is a little bit lower than what people thought because of the consumer PC growth not being as strong. And so, ultimately, what we have is the Foundry Logic segment, which was pretty bullish, I think earlier in the year, for a variety of reasons some may be related to how quickly they could absorb a lot of what they've already taken, what are their customers doing relative to their demand profiles, what's happening as customers move from running product on 65-nanometer to run it on 40 or 45. What's the pace at which customers are wanting to come up and take 28-nanometer type ICs. I think they're in kind of a period of evaluating and assessing all of that. And so, they've kind of put some of the things on hold for a number of weeks or a couple of months. But I do think that as the year plays out, we're going to see that Foundry Logic will be very strong in the second half.

Atif Malik - Morgan Stanley

And there's a follow-up for Ernie. Ernie, assuming revenues of $800 million exiting this year, how should we think about the OpEx exiting this year?

Ernest Maddock

As we indicated, based upon the guidance Steve provided or the OpEx that you would infer from the guidance that was provided, we'll probably see another couple of million dollar variation in that as we move forward, but then we expect that to level off.

Atif Malik - Morgan Stanley

Okay, thanks.

Operator

Our next question comes the line of Jim Covello with Goldman Sachs.

James Covello - Goldman Sachs Group Inc.

Guys, thanks so much. Maybe, first, if I could start with Steve, what's the thought process around the buybacks at this point? Obviously, you continued real significant accumulation of cash.

Stephen Newberry

You know, Jim, I think one of the things that's important to remember is, we do have a significant amount of offshore cash. And so, if you look for example at where we would be at the end of March and you exclude the company's restricted cash balances, you'd be at 50-50 onshore-offshore. If you include that restricted cash, you're closer to 40-60. So the overall cash balance that's available to the company relative to any share repurchases in the short term may not be as great as it would at first appear. And as we look forward into the end of this year, we would expect to see 70% to 80% of the cash accumulation of the company occur offshore. So I think our philosophy remains fundamentally unchanged, which is that we are open to share repurchases, as we see the appropriate opportunities come along. And when those do, you'll see us take action under the authorization that we currently have available to us from the board.

James Covello - Goldman Sachs Group Inc.

And then maybe, if I could just ask one follow-up on that, and then I'll throw on my final question and then I'll go away. So on the buyback, would you ever consider -- I know some companies that have an offshore cash issue have issued some debt against the offshore cash and used that to buy back some stock. Is that ever anything that you'd consider? And then secondly, with the disruptions in Japan at some of the manufacturing facilities at a place like Tel, is that just too short term in nature for Lam to potentially pick up any share, or is there a potential share gain opportunities as they're unfortunately disrupted in their manufacturing facilities. Thanks very much.

Ernest Maddock

Sure, Jim. I'll take your questions about the borrowing, and then I'll turn it to Steve for the comments on Tel. So we're always looking at the market that are available to us, relative to options that we have. So yes, we are looking at that idea of borrowing, secured by the offshore cash. We're looking at other forms of potential liquidity for the company that would enable us to be even better-positioned to do some sort of activity, whether that be something strategic or a share repurchase. And as those circumstances we feel are favorable to the company, we will act upon them.

Stephen Newberry

So Jim, I think Tokyo Electron has communicated that their plant, their new plant where they were going to produce etchers is going to be delayed coming online. I think the reality is that they were still in production with their etch tools in another plan in a different location. And I think that from that standpoint, then I think they have been able to make the deliveries that are consistent with their customers' needs. And so, I don't expect that we will see market share gains as a function of the plant issues that they have in Japan.

James Covello - Goldman Sachs Group Inc.

Thanks very much.

Operator

Thank you. Our next question comes from the line of Satya Kumar with Crédit Suisse.

Satya Kumar - Crédit Suisse AG

Thanks. Steve, I think earlier you'd said that the first half of this year was looking approximately similar to the second half last year, and June shipments could have been up obviously with the pushouts, they're looking down. Would you sort of maintain or perhaps even taken up the expectation on CapEx for the year. I get most of the facts from Intel, does that mean you're looking at a second half that has to be higher than the current level in the first half and, specifically, looking to the September quarter, are you expecting to shipments directionally up or down from here?

Stephen Newberry

Yes. My comments a couple of calls ago and last call were that I expected the first half would be relatively flat to the second half. And with the recent activity that we've had, we're going to be at least from the standpoint of Lam, which may be different from other companies as a function of who their customer base is, we'll probably be down in the first half approximately $100 million relative to the second half of 2010. And then, consistent with your perspective that if the total WFE environment is somewhere between $32 billion to $34 billion, the second half will have to come up when we look at what our customers are asking us for in terms of second-half delivery. They are requesting a higher number of shipments in that second half, somewhere in the 10% range, potentially more second half of '11 versus first half. We'll have to see how that plays out but if the industry isn't going to spend $33 billion or potentially $34 billion, at least from the profile for Lam, our shipments would need to come up in the second half.

Satya Kumar - Crédit Suisse AG

That's helpful. And just color on September, if you could, and a follow-up on memory. Thanks for giving the WFE numbers on NAND and DRAM, I was wondering if you have any different perspective on the total wafer start numbers that you had previously given out, which I think for NAND was 200 new wafers starts and 400 upgrades, and DRAM 125 new wafer and 450 upgrades. Have those numbers changed at all?

Stephen Newberry

Now we could talk about those a little bit. As it relates to September, I'm not going to comment specifically, because the reality is, we are sitting here at the start of the June quarter, which is clearly changed pretty significantly from what we thought would occur when we are on this conference call three months ago. And I think that consistent with my prepared comments that with such a concentrated customer base, all it really takes is one major customer who decides that they want to pull something in or push something out, and you can swing the shipment activity for us, $50 million to $100 million. And by the end of the year, it may not change the equation, but it could certainly change how things play out in a given quarter. And so, I think that if you just think in terms of there was a fair amount of pushout activity from the second quarter and, as I commented earlier, most of that push out is residing in September. In terms of current request, we'll see how that plays out. It could decide to spread out a little bit more, but I think the important message is that as it stands right now, the year is holding consistent with what we thought, just a different distribution by quarter. So relative to wafer starts, we think that there's been probably more conversions, at least in DRAM, where the big growth is a little bit slower. And so, we think that probably somewhere around 450,000 wafer starts per month will be conversion-oriented with only 65,000 to 70,000 wafers starts per month, being new wafer start capacity. And that's important because the conversions only cost a company somewhere between $65 million and $70 million for 10,000 wafer starts. But if you want to put new 10,000 wafer starts, it will cost you $300 million. In NAND, it's a little bit different story. NAND, with the higher bit growth, can't satisfy that with just conversions. And even though the conversions are still high, we think that they probably increased from around 400,000 conversions to about 500,000 wafer starts per month conversion. But that they are still going to have to add slightly more than 200,000 wafer starts per month of new capacity output. And so, when you look at those ratios, that's why you kind of end up with DRAM spending about $5 billion, and NAND spending is probably going to be about $8 billion. And it's largely -- the delta is largely driven by the fact there's a lot more new wafer starts being added in NAND in order to meet the bit growth.

Operator

The next question comes the line of C.J. Muse with Barclays Capital.

Christopher Muse - Barclays Capital

Thank you for taking my question. I guess first question with the decline in shipments, the revenues guided down worse. I guess the question is, I would have thought that perhaps deferred revenues in the Japanese revenues might have sheltered that a little bit better. So I guess if you could comment on that? And then I would love to hear your thoughts on, if we see that trajectory of shipments rising in the second half, how we should think revenues should track that rise?

Stephen Newberry

Yes. I think, C.J., that one of the things for us being a revenue-on-acceptance company is that the ability to keep shipments and revenue pretty closely in line really has to do with, as you ramp up, what's the linearity of that. And as the shipments ramped down, as we've seen, what's the linearity of that. And what we saw in the March quarter is that we had a nonlinear distribution with a lot more system shipping in March that's getting revenue in the March quarter. But more importantly, when we look at our June, our June is nonlinear again with a lot more of the shipments in the last four to six weeks of the quarter than there are in the first six or seven weeks of the quarter. And eventually, those things kind of even out but the reality for us is that in December of 2010, we were revenue-ing $870 million. We're forecasting that we will revenue $745 million. So in the course of a couple of quarters, we're going to drop $125 million. And I guess, on one hand, people could look at the fact that our operating income is coming down from 27.7% to a forecast of 20.5%. But if I look historically, in the past, when we've seen these kinds of revenue drops, we've actually dropped our financial performance significantly greater. If we go back to the last time this happened, when we looked at some of the higher revenues in 2007, a couple of quarters later dropping $125 million in revenue, our profitability dropped 14 percentage points as opposed to the 7% that we dropped here. And obviously, we could mitigate that if we were to choose to react in a short-term way by pulling back on some of our customer facing and R&D investments, but I think that that's not a smart move for us to do. We tried to articulate why we're doing what we're doing. And at the same time, while the P&L might be looking a little bit rough, our cash generation is really strong, the 30% in March that Ernie talked about and we expect to be at least that in the June quarter. And so, I think one last aspect which relates to the second half of your question is, if we felt that the decline in shipments and revenue that we're seeing coming off the peak in December was a trend heading south, we might be taking different actions. Clearly, we're operating to the assumption based on our discussions with our customers that the second half is going to play out with stronger shipments, and therefore, the opportunity for higher revenues. And so, we're going to stay the course in the short term, and we're going to continue to build on the relationships and the trust that we built with our customers. And I think target to be able to deliver them solutions that ultimately manifest tough in, continued share growth going forward.

Christopher Muse - Barclays Capital

As my follow-up, can you talk a little bit about, I guess, gross margins. And I know clearly, shipments and revenues played a role in that. But as you look at the tailwind from what you're doing on the clean side, can you comment, I guess on a steady-state revenue line item? What kind of upside we could see over the next six plus months from what you're doing on the clean side?

Stephen Newberry

Ernie may have some comments that he wants to add, but I mean we've talked about the fact that our target, as a function of our product option architecture redesign of our moving to a remote factory outsourced supply or model that is similar to etch, that we wanted our margins in the low to mid 40s for our spin cleaning product and we certainly want our overall margins from our other products to be at least in that mid-forties range. I think we're on track relative to those outsourcing and option architecture activities. I think that how the margins will play out will really be a function of how much of our business is coming from what you might call spin clean, noncritical or commodity versus spin clean critical and linear critical where we're bringing a differentiated capability to bear, and therefore, our customers in recognizing that critical capability are willing to pay more for that. So there's going to definitely be mix issues and there will be total volume issues. But I believe that as we look at the second half that we have an opportunity, if customers come through with what they said they would do, we'll see our margin contribution from our Clean division be a more positive factor than what's going on right now at this time.

Ernest Maddock

Yes, C.J., let me add, this is Ernie, if you step back and look at the SEMICON models and presume, based on the shipment patterns that we just talked about that we get back into that range, we're going to be back within spitting distance of those models that may not be precisely there as the result of product or customer mix, as Steve articulated. But that's a good long-term guide to think about relative to macro-level margin performance for the company at those shipment levels.

Operator

Our next question comes the line of Edwin Mok with Needham & Company.

Edwin Mok - Needham & Company, LLC

Thanks for taking my question. So first question regarding, just if I look at your geographic mix of your shipment, it seems like North America picked up a lot last quarter. Can you kind of maybe help us out in terms of defining what kind of customer you're shipping there and then what type of product between etch and clean are shipping for these Northeast, North American customer.

Stephen Newberry

Hang on a second. [indiscernible]

Shanye Hudson

In terms of the shipments, North American customers picked up a lot and could you help with the make up.

Stephen Newberry

I mean from a detail standpoint, we report what we do kind of where the geographic headquarters of a company is. And so clearly, if you think about who's headquartered in North America that spends, you have some activities relative to Micron, you have some activities relative to global foundries. We also -- do we report Samsung's America stuff as North America? Okay. So I think that, probably, the biggest aspect of it would really be what's the activity going on for the logic activity in Austin, and then you've got some activity that's related to other North American operations.

Edwin Mok - Needham & Company, LLC

So great, obviously, not the incremental that's been told there, I guess. One more question that's more longer term for you, Steve. The industry is talking about going to 3D transistor there. And on your commentary, you talked about, eventually, that can be a driving -- a growth driver for your Etch business. Is there a way you can kind of quantify how industry transition to 3D could potentially benefit the silicon etch market? And any way you can quantify in terms of increased number of steps or anything like that?

Stephen Newberry

Well, I think that when you look at the time frame that these new 3D architectures are going to come to market, we're talking about three to five years depending upon whether you're talking logic or you're talking NAND. So I mean we're not talking about things that are going to be really resulting in significant revenue gains in the short term. I think the comment that we're making is that the difficulty in getting performance and yield at next-generation-plus semiconductor devices is quite challenging for our customers. And so, when you look at capital intensity that has jumped up significantly from the 40-nanometer node to the 28-nanometer node, which will increase again at the 20-nanometer node, I think it's a reasonable expectation that with the complexities involved with thin sets [ph] and vertical transistors and NAND and then ultimately other new transistors and new materials being entered introduced in DRAM, that there's going to be some significant spending relative to the need for very critical etch capability. We've already seen that the trend where dielectric etch was moving to 60%, and maybe even for some periods it was 65% of total etch market. We think by the second half of 2010, that Silicon segment, the Conductor segment is, probably now operating pretty dog on close to 50% of the total etch market. And I think that's that trend will probably stay pretty stable in that arena. But there is a potential that it could continue to grow, depending upon what kinds of materials ultimately are used in terms of barriers and metal hard masks and what are the etch rates and how many chambers on a dedicated basis will have to be used. But I think that -- we talk about what's going on at the 14-nanometer node, really, as a function of driving recognition of the customer facing and the R&D activity that's going on that's much greater than what would normally have occurred.

Operator

Thank you. Our next question comes the line of Krish Sankar with Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch

Thanks, Steve. Just a couple of questions. Number one, if you look at your NAND shipments in March and probably what they'll end up being in June, if you take that run rate, do you think that's good enough to sustain an $8 billion investment in NAND this year? Or do you think there should be a snap back in the second half?

Stephen Newberry

Well, I think that when we look at the March activity, certainly, it was strong for NAND. It will be stronger in June. But when you look at what's being requested, there still will be a strong September, potentially, September being stronger than March, and December is looking pretty strong already. And we're a long way off from December. And so, NAND might be more balanced in terms of kind of a 50-50 type shipment profile. But really, at this point in the year, that could change, but that's kind of how it's playing out right now.

Krish Sankar - BofA Merrill Lynch

Got it. All right. You also alluded to the fact that the silicon etch market should grow at a faster growth rate than the dielectric market this year. I'm kind of trying to figure out what it means for Lam Research, given the fact that you guys are already probably 2/3 of the silicon etch market, how will you know the income into the incremental share gains from here going forward?

Stephen Newberry

Well, I think that, clearly, our strongest market share is in the silicon-based applications. And so, as silicon increases its growth rate, then that just contributes to an even greater overall contribution to our etch market share. And we believe we're in the very high 60% relative to silicon, and we are right in the high 30s or 40% for dielectric. I think both markets are very important. But clearly, we benefited from strategic orientation relative to capturing very high market share with a lot of the new applications in the middle of the line. Certainly, in NAND, has double patterning has emerged, and we're using our conductor tools for that, that has been beneficial to us. And so, I think that over the next couple of years, you will continue to see our etch market share increment up, certainly from an application's win basis. Exactly what it is year-over-year, we'll sometimes fluctuate as a function of which customers are spending to what percentage of the served available market. But at the end of the day, we can't control that. What we can control is continuing to win new applications and grow the overall potential for our market share going forward.

Krish Sankar - BofA Merrill Lynch

Thanks, Steve.

Operator

Thank you. Our next question comes the line of Mehdi Hosseini with Susquehanna International.

Mehdi Hosseini - Susquehanna Financial Group, LLLP

Thanks for taking my question. Steve, going back to your earlier commentary regarding the comeback in the second half, and especially considering the fact that maybe some of these pushout or marginal weakness has come from foundries, how can I reconcile that with the lead times and how foundries have to manage their capacity for the second half, assuming that they would have their most weight per shipment in Q3 in advance of the holiday season? And as they exit the year, obviously, they're going to have less wafer shipment, and to that extent, why should they procure more equipment when the realization rate could come under pressure exiting this year?

Stephen Newberry

Well, that's a good question, and the answer is potentially very complicated, because when you look at foundry and logic, you have to recognize that in the December quarter, there was a very significant output of shipments into the industry. And that's clearly being absorbed right now and being converted to output largely 65 and 40-nanometer related. I think that when you look at what the foundries are going to do later in the year, there will clearly be, I think, an increased investment at 40, as some customers of the foundries are indicating that they would like to move perhaps a little faster from 90 and 65 to the 40-nanometer node. And so, the foundries have to kind of rationalize how many wafer starts am I running at which technology node. And so sometimes, they have to kind of rethink and replan. The other thing that I think will be a major reason for high level of spending in the second half of the year, at least in terms of dollars, is that a lot of the wafer starts that will be purchased in the second half will be targeted for 32-nanometer and 28-nanometer. And the cost per 10,000 wafer starts at that technology node is somewhere around $1 billion for 10,000 wafer starts versus, if you're adding 40-nanometer, you're probably spending 850, maybe 750. It kind of depends whether it's 45 or 40. But capital intensity, as a 32, 28 is significantly higher. And so, when you look at the spending that will occur in the second half, a significant portion of that is for 30 to 28 node, and it's expensive.

Mehdi Hosseini - Susquehanna Financial Group, LLLP

And then just one question for Ernie. Any particular reason why DSOs went up by 9 days?

Ernest Maddock

They were essentially flat, Mehdi, and that's really a function of, that Steve spoke of earlier, the shipment pattern for the quarter where many of the shipments were occurred in the last 30 to 45 days in the quarter, and anything that ships within that time is not collectible.

Operator

Our next question comes from the line of Ben Pang with Caris & Company.

Benedict Pang - Caris & Company

Thanks for picking the question. First, a follow-up on the previous line of question regarding the foundries. You commented that you did see some foundry pushouts, but you expect that some of them could come back in the second half of the year. What node has pushed out right now? And is it going to be the same technology node in the stock or a different node?

Stephen Newberry

Well, that clearly varies by customer, and I'm not going to address that specifically, because of customer confidentiality reasons. And so, you'd really have to ask them, but I mean we've got a variety of customers. They're running volume production on typically, I mean, three nodes. And so, it varies across the board depending upon which customers you're talking about. And I think, really, if you go back and look at how much was shipped into Foundry Logic in December, it was extremely high. For us, it was about 60% of our shipments. There was still a significant amount of shipment activity in the foundry logic arena for March. And it's not unusual that after a couple of quarters of really significant shipments, you kind of have a quarter of -- we've got to absorb all this stuff. We have to get it all started up. We've got to get it in production. We've got to get it yielding, and that's certainly a part of kind of what I see going on in foundry. And it's why I think that when we talk to our customers about what they're doing and what they expect to be doing in the second half that I'm confident that we'll see a strong Foundry Logic spending environment in the second half.

Benedict Pang - Caris & Company

My follow-up is based on your new -- the new makeup of wafer fab equipment in 2011 that you guys are working off of, what's changed? Is there served available market for your clean products between 2010 and 2011?

Stephen Newberry

I think that as the logic sector continues to move more and more wafer starts to 40 and then to 30 to 28, I think what we're seeing is, we believe that the single-wafer clean market is probably going to grow 20% to 25% next year. We expect that our Clean division will grow greater than that, as a reflection of the market share wins from last year and early this year that will manifest itself in shipments, and I think that it's going to grow. It may be the fastest segment that we'll see in terms of growth over '10 and '11, because logic is very much a single-wafer, clean-oriented environment and becoming even more so. But there are also opportunities as conversions starts to pick up in NAND and DRAM, and that contributes to the growth rate of the clean market.

Benedict Pang - Caris & Company

Thank you very much.

Operator

Thank you, and our next question comes from the line of Timothy Arcuri with Citigroup.

Wenge Yang - Oppenheimer

This is Wenge Yang for Tim. Thank you for taking my question. Recently, there is a lot of discussion on the readiness of EUV for the next couple of nodes. Could you comment on what does EUV impact on after market, and specifically for Lam's for the silicon etch products?

Stephen Newberry

The impact for EUV on silicon etch. Well, I think when people talk about EUV, it's similar to talking about new fits and structures and other 3D. It's a significant ways out. And we've done the modeling relative to when EUV, and if EUV is introduced, how many layers is it going to be applied to and how many double-patterning type of solution orientations will then reduce down into one. And the reality is by the time EUV gets introduced, there are going to be such a significant number of additional etch steps that would have been added as a function of the metal hard masks, other structures that are going to require additional etches to be able to execute that we believe that the impact of EUV is, at worst case, neutral and as a function of architectures. And when it will be did introduced, I would expect that we'll be shipping more etch dollars per 10,000 wafer start at that time than we do today by a fair amount.

Wenge Yang - Oppenheimer

That's helpful. Just a quick follow-up. TSMC is discussing 450-millimeter fab in 2013 timeframe, what's the plan on 450? Thank you.

Stephen Newberry

Well, we will and we have committed to our customers that as they define what it is they would like to do with 450-millimeter, that we will do what we need to do, and we'll be in position to support them. And so, we engage in discussions with a number of customers about it, and I think our technology roadmap is well-aligned to what customers are asking us to do.

Operator

Thank you. Our next question comes from the line of Jagadish Iyer with a Arete Research.

Jagadish Iyer - Arete Research Services LLP

Thanks for taking my question. Two questions, Steve. If I look at the third-party estimates for etch markets as a percentage of W feed, it popped up nicely to 15% last year. So do you think that, that trend could continue for this year? And I have a brief follow-up.

Stephen Newberry

Well, I think my advice would be is to take with a high degree of suspicion, the inputs that to get from some of the third parties that etch is 15%. I think our analysis and others who actually are in this business would say that it's closer to 13%, maybe -- may have been 13.5%, but for the most part, 13%. I think that percentages can also be deceiving, because as a number of logic companies have commented that once you go to 28 and 22, that litho becomes extremely expensive. And so, etch as a percent may actually drop. But etch on an absolute basis for every 10,000 wafer starts will actually increase. And so, maybe an example would be for 10,000 wafer starts, at 65-nanometer, you probably had to spend $65 million in etch. And that was 12.5% to 13% of that $600-or-so-million that you spend or $550 million you spend at 65-nanometer. If you have to spend around $1 billion at 28-nanometer, etch might fall to 12% to 12.5%, but that means you're going to spend $120 million to $125 million for those 10,000 wafer starts. And so, from the standpoint of increased business for us, it's going to be clearly there. And so, I think you're looking at percentages can be deceiving.

Jagadish Iyer - Arete Research Services LLP

And just a follow-up. Given that you have your PC growth that you have set at about 11%, do you believe that shipments in DRAM could show an uptick from current levels for you, I mean, meaningfully in the second half? Thanks.

Stephen Newberry

I think that if the corporate refresh cycle decides to get more aggressive and accelerate, if investments in enterprise come up and, certainly, if we see that the Consumer PC segment, whether it's in the kind of established countries or we see some acceleration is emerging. And clearly, there's a potential that more capacity will have to be added in DRAM. But we'll just have to see how that is, and we think we've kind of positioned this based on our conversation with customers that people are being relatively prudent, relatively conservative, and we'll see where it goes as the year plays out.

Jagadish Iyer - Arete Research Services LLP

Thank you.

Operator

Thank you. I'd now like to turn the call back over to management for any closing comments.

Shanye Hudson

Thank you. Thank you all for joining us here today. As a reminder, the audio replay will be available on our website later this afternoon, and that concludes our call.

Operator

Thank you. Ladies and gentlemen, this concludes the Lam Research Corporation's March 2011 Quarterly Results Conference Call. You may now disconnect. Thank you for using AT&T Conferencing.

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