Novellus Systems' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Feb. 2.12 | About: Novellus Systems, (NVLS-OLD)

Novellus Systems (NASDAQ:NVLS-OLD)

Q4 2011 Earnings Call

February 02, 2012 4:30 pm ET

Executives

Robin S. Yim - Former Vice President of Investor Relations

John D. Hertz - Chief Financial Officer, Principal Accounting Officer, Vice President and Corporate Controller

Richard Hill - Chairman and Chief Executive Officer

Timothy M. Archer - Chief Operating Officer

Analysts

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Christopher Blansett - JP Morgan Chase & Co, Research Division

Vishal Shah - Deutsche Bank AG, Research Division

Thomas Diffely - D.A. Davidson & Co., Research Division

Christopher J. Muse - Barclays Capital, Research Division

Satya Kumar - Crédit Suisse AG, Research Division

James Covello - Goldman Sachs Group Inc., Research Division

Edwin Mok - Needham & Company, LLC, Research Division

Terence R. Whalen - Citigroup Inc, Research Division

Benedict Pang - Caris & Company, Inc., Research Division

Eliot Glazer

Operator

Good day, and welcome to Novellus Fourth Quarter and Fiscal Year 2011 Earnings Release Conference Call. As a reminder, this call is being recorded today, Thursday, February 2, 2012. I would now like to turn the conference over to Ms. Robin Yim of Novellus Systems. Please go ahead.

Robin S. Yim

Thank you, Robert. Good afternoon, and thank you for joining the Novellus Systems' Fourth Quarter and Fiscal Year 2011 Earnings Conference Call. Joining me on the call today are Rick Hill, Chairman and Chief Executive Officer; Tim Archer, Chief Operating Officer; and John Hertz, Chief Financial Officer.

Financial results for the fourth quarter and fiscal year 2011 were released by Marketwire shortly after 1 p.m. Pacific Time. You can obtain a copy of the news release in the Investor Relations section of our website at novellus.com.

Today's earnings call contains forward-looking statements about Novellus' business outlook, the pending merger with Lam Research, our products and forecasts of key metrics for the first quarter of 2012. Specific forward-looking statements include, but are not limited to, our expectations and beliefs as to various factors, demand drivers and demand drivers that are fueling the current cycle, the value and productivity of our product, the forecasted new bookings and shipment volumes, revenue, gross margins and earnings per share target for the first quarter of 2012, and our tax rate for the first quarter of 2012, and any other unanticipated future event.

We caution you that forward-looking statements are projections and expectations regarding future events. They involve risks and uncertainties that could cause actual results to differ materially from the results contemplated, including an inaccurate basis for our financial forecast. Information concerning risks that could cause actual results to differ materially is contained in today's press release and our filings with the Securities and Exchange Commission, including our Form 10-K for fiscal 2010 and our subsequent filings on forms 10-Q and 8-K. Forward-looking statements are based on information as of today, and we assume no obligation to update these statements.

During our call today, we will make references to non-GAAP financial measures, which exclude certain charges, benefits and other items, which are detailed in our earnings release. For a reconciliation of non-GAAP to GAAP financial measures, please refer to our earnings release and our Form 8-K furnished to the SEC today. We do not provide a reconciliation of the forward-looking non-GAAP to GAAP measures because of our inability to project certain charges, cost and expenses.

John Hertz will begin today's call with a review of the financial results for the fourth quarter and fiscal year 2011. Rick Hill will provide an overview of the business environment and guidance for the first quarter of 2012, and then we'll open up the call for our question-and-answer session. Now I'd like to turn the call over to John.

John D. Hertz

Thank you, Robin. Good afternoon, everyone, and thank you for joining our call today. We're happy to report that we closed an overall strong 2011 with solid financial performance in the fourth quarter. For the year, despite semi cap equipment spending being down 19% in the second half of 2011 versus the first half, we delivered $1.4 billion in revenue and record EPS of $3.20 per share, that's versus $2.79 per share in 2010 on flat year-over-year revenue.

We generated $363 million in cash flow from operations, which is 27% of revenue. In addition, we returned $976 million to our shareholders in 2011 through our stock repurchase program at an average price of $34.21. And related to the share repurchases, we improved our capital structure through the issuance of $700 million and 30-year convertible securities with a 2 5/8% coupon.

Now turning specifically to the fourth quarter. Net bookings for the fourth quarter came in at $287 million, that is up 26% versus the third quarter and just above the midpoint of our revised guidance range of up 20% to 30%. We saw order strength from both foundry and logic customers.

Fourth quarter shipments were $277 million, that's down 8% versus the third quarter and at the low end of our guidance range, up $270 million to $300 million. With shipment outpacing bookings for most of 2011, our year-end backlog decreased by 27% to $228 million at the end of 2011.

Fourth quarter revenues were $283 million, that's down 8% from the September quarter and just above the midpoint of our guidance range of $260 million to $290 million. The fourth quarter revenues by geographic region were as follows: United States, 35%; Greater China, 27%; Korea, 20%; Japan, 6%; Europe, 12%. Fourth quarter gross margin was 46.8%. It's down from 48.2% in the third quarter as expected but at high end of our guidance range of 46% plus or minus 1 point.

Total GAAP operating expenses for the quarter were $81 million. Excluding the impact of nonrecurring net benefits of $8 million, ongoing operating expenses were $89 million. That is down from a $93 million run rate in the September quarter. Decrease was due to our customary annual shutdown during the holidays, as well as the decrease in variable compensation and control over discretionary spending. The net $8 million nonrecurring benefit is comprised of the $6.7 million gain on the sale of real estate in Europe related to our industrial business that we mentioned in our Q4 mid-quarter update call, and the $5.6 million recovery of legal costs associated with the appeal court's decision in the Linear trial. Those benefits were partially offset by $3.7 million in cost related to our pending merger with Lam Research. Fourth quarter GAAP operating margin was 18.1% versus 18.6% in the third quarter.

Our fourth quarter effective tax rate was 17.7%, which was above the high end of the range of 14%, plus or minus 2 points. The increase was primarily due to the recovery of legal cost related to the Linear trial, which occurred in the U.S. tax jurisdiction. For the year ended December 31, 2011, our effective tax rate was 14.5%, which was in line with our forecasted rate of 15% plus or minus a couple of points. We expect the 2012 rate to be approximately 10% plus or minus a couple of points.

Additionally, during the first quarter, we reached an agreement with the IRS regarding income tax refunds due to Novellus, related to the 2006 and 2007 tax years. Due to the magnitude of the refunds, they are subject to approval by Congress' joint committee on taxation. If the joint committee were to approve the refunds during the first quarter, it will result in a Q1 tax benefit of approximately $16 million, which is not currently reflected in our 10% tax rate guidance.

Fourth quarter GAAP net income was $39 million or $0.56 per fully diluted share. Excluding the after-tax impact of nonrecurring items, fourth quarter net income was $31 million or $0.45 per fully diluted share, both of which were within our guidance range of $0.42 to $0.62. Also note that there were $59 million -- 59 million fully diluted shares outstanding in the fourth quarter for purposes of the earnings per share calculation.

Now turning to the balance sheet. We ended the year with $1.1 billion of cash, short and long-term investments including $123 million of restricted cash. We generated $85 million of cash from operations in Q4 which was 30% of revenue, and we did not purchase any stock in the quarter.

Accounts receivable decreased $34 million in the fourth quarter, and our DSOs improved to 60 days from 65 days in the previous quarter. Inventory turns declined to 2.5x, compared to 2.9x in Q3, as inventory levels remain relatively unchanged quarter-to-quarter.

Q4 capital expenditures were $10 million. Noncash expenses in the quarter included $9 million of depreciation and amortization and $11 million of equity compensation. Employee headcount at the end of December was 2,855, that's versus 2,700 at the end of 2010.

In closing, despite the pause in semi cap equipment spending in the second half of the year, the fourth quarter financial results were solid and capped off a record EPS year for Novellus Systems.

So with that, I'd like to turn the call over to Rick to provide an update on the state of the business and guidance for the first quarter of 2012.

Richard Hill

Thank you very much, John, and thank you, ladies and gentlemen, for joining us. We're very proud of our solid performance in 2011 despite the second half slowdown. And while we didn't break many records on the revenue line, we generated $363 million in cash flow from operations and turned in the highest earnings per share in the history of Novellus at $3.20.

As John mentioned, up until the beginning of the fourth quarter, we continued to execute our stock buyback program by purchasing over 28.5 million shares, and returned 976 million to shareholders in 2011. Since our program began in 2002, we've returned over 3 billion to shareholders through our buyback program, which represents approximately 109 million shares at an average cost of $27.74.

Now last year, we forecasted CapEx to be up 15% to 20% and in fact, with the early results in, 2011 looks to be up approximately 18% year-over-year. I guess I'd rather be lucky than good. For quite some time, my view for 2012 has been that we'll see CapEx flat to slightly up, primarily because the demand drivers remain unchanged. The pervasiveness of NAND only continues to grow along with the successful implementation of 3D NAND technology, which will only further its impact on devices throughout the world. Along with 3D NAND technology, mobile DRAM is coming of age and will become increasingly important in the investment strategy by foundries and logic customers. We see strong and continued robust demand from foundry and logic as a PC refresh cycle is coming along with the advent of solid state disk drives in the notebook arena.

With that, I'll provide you with our guidance for the first quarter of 2012. Our bookings will be up 20% to 30%. Shipments will be in the range of $300 million to $330 million. Revenues, $300 million to $330 million. Gross margins, 47% plus or minus 1%, and our earnings per share will be between $0.71 and $0.86, provided we receive the tax benefit John spoke about. Without that onetime benefit, the EPS would be $0.50 to $0.65 per share. Our tax rate was 10% plus or minus 2% if we do not receive that onetime tax refund from the government, if they were not to approve it at the Congress, which we believe is highly unlikely.

For Q1 EPS modeling purposes, you should use 76 million shares versus the fourth quarter diluted share count of 69 million. The 7 million of incremental shares in Q1 is a result of the incremental dilution associated with the convertible notes as the value of the notes accrued and in the money stock options at today's stock price, as well as associated exercises that occurred in Q4 of 2011.

So in closing, in the event that this is our last conference call, I'd like to thank all of you for your support of me over the last 19 years. And I'm confident that the combination of Lam and Novellus will create the most technologically and financially successful semiconductor capital equipment company in the industry. I have full confidence in both Tim Archer and Martin Anstice to continue the strong performance of both Lam and Novellus, in a combined entity, that's been waited for, for the last 19 years.

I also want to thank all the employees of Novellus, who have been unwavering in their commitment and dedication in making Novellus one of the premier companies in the semiconductor equipment industry and deservedly are recognized as the best in the industry.

So again, thank you very, very much for your strong support, and potentially we'll see you in one more call. But if the transaction closes early, my best wishes to all of you.

And with that, I'll open it up for any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] We will go first to Mahesh Sanganeria of RBC Capital Markets.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Rick, first let me congratulate you on your very successful career and if this is the last call, going like a lion from this industry.

Richard Hill

Well thank you very much, Mahesh. We're in like a lamb this year, out like a lion.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

Yes, definitely. So moving on to more mundane questions here. In terms of your booking guidance of up 20% to 30%, the incremental order increased. Can you -- let's talk -- give us more color on which segment that is coming from?

Richard Hill

I'm going to let Tim answer that.

Timothy M. Archer

Okay. Mahesh, primarily we see the strength coming, as Rick mentioned, in foundry and logic. This is significant, a lot of investment. They are both from capacity ramping, as well as further technology investments. We haven't seen as much investment yet on the memory side, but we anticipate that we'll start to strengthen in the second half of 2012.

Mahesh Sanganeria - RBC Capital Markets, LLC, Research Division

And then just a quick question on the gross margin side. I suppose that is lower than what would be at these levels primarily for one big customer. So is that what's most of the companies have kind of indicated? Will that be consistent?

John D. Hertz

Yes, Mahesh, this is John. That's exactly right. It's consistent with what you might have heard from our peers last week.

Operator

We will go next to Chris Blansett of JPMorgan.

Christopher Blansett - JP Morgan Chase & Co, Research Division

Rick, I wanted to talk about your SG&A. You keep cost controls very tight here and so -- we only have one quarter left, but should we kind of expect this to remain pretty tight? We weren't sure if there's any deal or related activity that was keeping SG&A down.

Richard Hill

We have the deal -- there were deal costs in the fourth quarter.

John D. Hertz

Yes, so I'm not sure if you're looking at GAAP SG&A, which includes the gain on the sale of the rumored property, as well as some refunding of legal fees offset by merger costs, but that's about $10 million under our normal run rate. So looking forward to the first quarter, given where kind of bookings and shipment is going and given some of the projects, I would expect us to kind of return back towards our Q3 type run rate in $93 million to $95 million.

Christopher Blansett - JP Morgan Chase & Co, Research Division

Okay. And then just last question, I know Lam had mentioned that there was a small window of opportunity for them to repurchase shares before the merger is completed, I wasn't sure if you're able to do so as well.

Richard Hill

Well, we refer everything to Lam relative to that from this point forward.

Operator

We will go next to Vishal Shah of Deutsche Bank.

Vishal Shah - Deutsche Bank AG, Research Division

Rick, congrats again and good luck. A question on your bookings trajectory. I was wondering if you can talk a little bit about how you think the year is going to shape up. It looks like a lot of foundries are ordering in the first half, and if expectations are for flat CapEx, what happens to bookings momentum in the second half?

Richard Hill

Well again, the future is always very, very hard to predict, and you can see the industry coming up from down 15% to where they're almost flat now. My bet would be that what you're going to see is the foundry spending in the first half followed by fairly robust NAND-type spending in the second half. That's just sort of a global. And as I've said many, many times before, the foundry model is the only model that can be successful in semiconductors. So I continue to see that as a very strong driver going forward. And I think with China investing much more heavily in infrastructure, that's going to also help us in the second half of the year. So that's the best take I can give you.

Vishal Shah - Deutsche Bank AG, Research Division

Very helpful. And just on the thin line, can you maybe help us understand what the mix will be between foundry and memory in 2012? Would it be very similar to 2011?

Richard Hill

I don't have that break out in front of me right this very minute. Potentially, Martin and Tim will answer that on the next call or a subsequent call. How does that sound? All right?

Thomas Diffely - D.A. Davidson & Co., Research Division

Sounds good.

Operator

We will go next to C.J. Muse of Barclays.

Christopher J. Muse - Barclays Capital, Research Division

And Rick, had I known you were E.F. Hutton of the call in CapEx, I would have written my notes down more diligently. But curious on '12, you talked slight to slightly up, and I guess we'd love to hear your thoughts on, I guess within that assumption, what your underlying view is for DRAM. And how should we model that for calendar '12?

Richard Hill

Well, I think you have to model DRAM as flat, with mobile DRAM being the only investment area, and very little capacity expansion for normal DRAM. I think until we see that the real big driver in memory is going to be NAND. And this is the last bastion for the replacement of electromechanical devices with solid state, I still believe that it will be a major driver over the next 3 to 5 years. And they're going to probably continue to surprise people on the upside.

Christopher J. Muse - Barclays Capital, Research Division

That's helpful. And then I guess as a follow-up, as you think about order book for the second half and I know clearly, that's a long time from here. But I guess, particularly to the logic side of things in microprocessor world, I'm curious on your thoughts on given that the likelihood of filling out those fabs whether we'll see a sharp pickup in equipment orders not CapEx orders in that time frame.

Richard Hill

Well I think we tend to lead, right? You have to put capacity into place. I think when I talked about a PC refresh cycle driven by ultrabooks where you really have a lot more use of solid state memory than you do hard disk drives, you look at the IPO of a Facebook who's bringing $5 billion into the company. Clearly, the revenue growth potential for an operation like that is huge, and so they have to have the infrastructure prepared to be able to handle it, because obviously it's an eyeballs-and -click type of marketplace. And as a result, those are forerunners for what the semiconductor industry has to put in place to supply, and at the core of that are going to be servers and at the eyeball level, it's going to be basically clients or appliances. And I think that this socialization frenzy that is going on within the world has lots of legs to run, and infrastructure build-out is going to continue to be strong and robust going from 3G to 4G networks as that bandwidth increases, okay? Clearly, upgrades are required throughout the system, but I think all of that bodes well for the future. Those are the big drivers. Those are the fundamental big drivers.

Operator

And we will go next to Satya Kumar of Crédit Suisse.

Satya Kumar - Crédit Suisse AG, Research Division

Rick, I guess you mentioned that you said this could be your last call in the event the acquisition closes early. Is there any change in your thought process on the timing? Can you remind us what your expectation is of when it can close and what's the earliest you could possibly close?

Richard Hill

Our belief it will close in Q2. That's the current best knowledge that we have. But it might be a moot point for us to have a conference call since we wouldn't be forecasting Q2 earnings. So that's why I said what I said that there's a probability that I won't have another call.

Satya Kumar - Crédit Suisse AG, Research Division

Okay. I see.

Richard Hill

No, I don't want to leave it early. In fact, I'm hanging on by my fingernails. If you've every seen that cat hanging on the window of a car, that's me.

Satya Kumar - Crédit Suisse AG, Research Division

I can imagine that, Rick. We're all going to miss you. But I guess, like one of the business-related questions, I guess last year you said CapEx was up 15% to 20%, and your shipment was actually down 6%, right? And historically, you have more exposed -- you're less exposed to DRAM, which actually underperformed last year, which should have helped you. Now that the year is over, what more color do you have relative to your SAM growth and market share trends for last year? And as you look into this year, the CapEx being plus/minus 5%, how do you see your SAM growth and share for this year?

Richard Hill

Well, again, I think the market growth opportunity, we're increasing our SAM, but we're also working like crazy to be the most competitive company in the world and have made tremendous progress in the throughput of our systems. We're now -- we're having systems that are outputting 270 wafers per hour. The bad news is that causes you to sell a couple of LED systems but it secures your market position. We've spoken before about the advent of 3D, where you're adding so many layers that there is an opportunity where we again see market expansion, and that's what we got to keep developing. And I do believe you'll see that materialize in this year, probably sooner rather than later, maybe a little bit earlier. I think I was forecasting the fourth quarter of the year about 6 months ago. I think you could see that come even a little bit sooner than the fourth quarter. And so those are the things we just got to keep doing. I think the combination with Lam affords us the ability, as I've spoken about before, to improve our cycle time with development by more closely coupling both the deposition and the EDGE process together within our own labs, still providing the product excellence, unit process excellence in EDGE and in deposition and -- but our ability to solve customer problems gives them down the road -- map -- and hence, makes us more successful. So in long -- in the long version, as I just told you, market size is expanding, and I do believe we'll see the growth from that.

Operator

We will go next to Jim Covello of Goldman Sachs.

James Covello - Goldman Sachs Group Inc., Research Division

Rick, and just relative to the comments about the full year CapEx outlook. I guess your major customers have given forecast for the year now, and they're all down except for one. So is there some kind of -- and I'm just trying to reconcile the last number that you're talking about versus what the customers and...

Richard Hill

Well, they're all down on their forecast for the market.

James Covello - Goldman Sachs Group Inc., Research Division

No, I mean their own CapEx forecast. Everybody's CapEx forecast except for one is down.

Richard Hill

Yes, on the CapEx for the industry. I'm the only one who's forecasting CapEx flat to slightly up.

James Covello - Goldman Sachs Group Inc., Research Division

No, that's right. That's right.

Richard Hill

And I've articulated why I've said that, okay?

James Covello - Goldman Sachs Group Inc., Research Division

Just because you think the NAND guys are going to raise as we go throughout the year, is that the [indiscernible]?

Richard Hill

That's right. That's what I think.

James Covello - Goldman Sachs Group Inc., Research Division

And I mean, I guess, I certainly -- you could say it's absolutely intuitive, but over the next 5 years, NAND continues to grow because there's great drivers for it. But at least for this year, you're actually seeing NAND folks delaying CapEx on the start of the year. So I mean is that -- what do you think would be the nearer-term driver? I know the longer-term drivers, and I can put it in the equation, but I guess I'm struggling with nearer-term drivers because of some cutting in the first quarter to raising in the third and fourth quarter.

Richard Hill

Well, clearly, you've seen early on reports by Intel forecasting CapEx up. You've seeing Samsung come out and forecast CapEx up, okay? I think these are really, really smart people, and I think that in general, you're going to have a very, very robust PC market this year. You're going to have a lot of stimulus. You've got an election year coming. People are -- there's going to be a lot of money stuffed in Europe, stuffed in the United States that people want things to be spent, okay? People are worried about deflation, not inflation. And I think all those things bode well for our refresh cycle. We talked about social networking and that expansion. You guys are at the forefront of that IPO, which was raised in $5 billion, the largest ever. I have to believe that $5 billion dollars have to go to put in infrastructure in order to prepare for the number of eyeballs and number of clicks you got to have in order to make that revenue to get that kind of valuation and how that can't -- that infrastructure takes time to put in place and it starts with equipment purchases, and that's going to start sooner than you're going to see the revenue materialize because if you run out of servers and people can't access Facebook, they'll be limited as well. So I think all those are positive drivers, globally. And certainly, China is not going to let themselves go into the tank, and there's a major thrust in China that I think people are ignoring. They don't realize that Chinese are quite capable of moving into the semiconductor industry in a very serious way, not just at inferior nodes, but dealing with state-of-the-art technology, and you're going to see pick-up there for most people. And so I'm just bullish, that's it. I've tried to explain and I've been very upfront, that if you look at industry prognosticators, they say one thing and I've tried to give you the things that I'm looking at that causes me to be a little bit more biased to the positive. Now having said that, I look at the industry prognosticators, and over the last 6 months and 3 months in particular, they've come from being down 20% this year to where now they're saying it's only going to be down by 5%. So they're at least moving in my direction.

Operator

We'll go next to Edwin Mok of Needham & Company.

Edwin Mok - Needham & Company, LLC, Research Division

So I have a question regarding the gross margin. You guys mentioned that you saw a similar kind of customer concentration kind of impacting your gross margin here a little bit. Rick, do you see that as kind of a short-term event, or do you kind of believe this is the new norm in the industry now and that you might see that beyond this first quarter?

Richard Hill

I'll let John and Tim answer that question.

John D. Hertz

Edwin, this is John. I think, as Timothy Archer here is revealing as a first quarter phenomenon and not for the full year.

Edwin Mok - Needham & Company, LLC, Research Division

Great. And then I have one follow-up question for you, John. For the 10% tax rate that you guys are guiding to, is that a full year guidance? And how do you kind of see that as you -- assuming [indiscernible] through in the second quarter, how you see that changing if you're not being part of Lam Research?

John D. Hertz

So in terms of -- it's a first quarter forecast. And as it relates to Lam Research, I mean, it's too early in the days to comment on how the 2 tax structures come together and what that might look like on a combined company basis.

Edwin Mok - Needham & Company, LLC, Research Division

I see. But 10% is quite lower than what you guys have ever done. Is that because of regional mix? Or what did you do with this 10%?

John D. Hertz

10% is down. I mean, keep in mind we just started benefiting from the structure in the '10 time frame and what you see as these things mature is you have less in the way of royalties being paid for intellectual properties from the U.S. entity to the international entity. And so that plays itself over time, and that's where you could see the lowering of the effective tax rate.

Edwin Mok - Needham & Company, LLC, Research Division

I see, and one last question for you, Rick. The industrial group, I just wanted to see how things are progressing there. And how do you see that setting a larger semi equipment company? Do you see that as still a piece that you think makes sense as part of a big company?

Richard Hill

Well, I think that will be up to the management of the combined entities to determine. But what we have is a very, very robust high-technology company in Peter Wolters that is really expanding into the Chinese market and really addressing very, very high-end finishes, which is extremely important in 450-millimeter wafers, because without them, you're not going to make 450-millimeter wafers. And then even from a standpoint of the finishes required for state-of-the-art products, they have capability that can greatly enhance that. So I've always seen the fit, otherwise I wouldn't have hung on to the business. It's developed quite nicely. It looks to be remaining robust and -- but it's always been run as a separate entity, and it's connected by an umbilical cord called SAP, but it runs out a separate instance. So it's ideal in the way it's coming in and to the extent it's successful and additive, I think they'll be great together and if they choose not to, they'll be able to do that as well. And it is a good asset. So it will really be up to Martin and Tim to decide what they want to do with it, and I'm sure it will be successful no matter what it does as well.

Operator

We will go next to Terence Whalen of Citi.

Terence R. Whalen - Citigroup Inc, Research Division

This one is for Rick. Rick, when I look at the proxy files recently, and I look at Novellus' management case, I'm looking at the revenue lines specifically, it's projecting $1.45 billion revenue in '12 and then really accelerating strongly into '13 to the $2 billion level. My question is what sort of underlying assumptions, both in terms of WFE capture and overall WFE, do you use in that projection? And what fundamentally do you see to support that level of acceleration in 2013?

Richard Hill

So I'm going to let Tim answer that question because we actually presented that case at SEMICON West so that's not a new case for anybody in the industry. And if anything, we become more convinced that it's doable. And Tim's got the details to the extent he wants to share and what we he share.

Timothy M. Archer

Sure, we -- at SEMICON West last year, as Rick said, we did lay out, we build to that 2013, $2 billion number. And it does comprehend the consensus view right now for 2013 will be a strong year for WFE. As we've highlighted, we think that memory both in NAND and eventually in DRAM that spending does come back, and that spending will be additive to continued investments that are made in both the logic and foundry space. So there is a market tailwind in the 2013 timeframe. But more importantly for the Novellus' growth both in 2012 and 2013 that is even faster than that market growth has to do with the focus that we've placed on a couple of adjacent markets. For us, the most important being the move into the 3D advanced packaging space, which 2 years ago was a business that Novellus didn't participate in at all. It is a market that's growing 20% to 30% a year. And at SEMICON West last year, we highlighted that would be as much as $700 million new SAM opportunity for Novellus by around the 2015 timeframe. It utilizes technology where we've done very well in copper electroplating in the front end interconnects space. And already, we see tremendous penetration in that market, and 2012 revenue shipments and revenues will benefit from that space. The other big driver in 2013 is, Rick's mentioned, almost on every single call the fact that we are strong believers of 3D NAND, is a technology that will come online very soon, and will be a key enabler for a pretty rapid expansion of NAND consumption in all manners of consumer devices and PCs. And so Novellus is very well-positioned in both RP, CVD and tungsten and dry strip products to participate in, in the 3D NAND technology. We showed that if you compare Novellus' opportunity, comparing a 2D NAND to 3D NAND device, Novellus' opportunity grows 30% for the exact same bit growth rate. And so we think we have the technology, we have the development tool the tool of record placements already in 3D, and we expect that to start to ramp in 2013. And then beyond that, there's additional improvements we laid out. Our installed base has continued to grow as we've done better. Shipments have increased over the last few years, and we've increased our aftermarket sales business to leverage that growing installed base, and so we layer in some additional growth in our aftermarket sales business to our installed base.

Terence R. Whalen - Citigroup Inc, Research Division

Okay, Rim. And then as a follow-up, the follow-up is in relation to a couple of comments made by some of your peers who have already reported. They've actually made a very similar comment regarding R&D, the R&D intensity required to support customers' increasing at these advanced loads. I guess my question at these advanced nodes. I guess my question is a little bit higher-level question. As we observe this trend of increasing capital intensity, what's the discussion like between suppliers and customers especially considering the concentration of customers with regard to how to allocate the economic burden of the higher capital intensity?

Timothy M. Archer

When you say how to allocate the higher capital intensity, you started with the question about R&D intensity, I guess which was -- if you're talking about the allocation from our perspective as suppliers, it's interesting. As customers consolidated, it's true that, that actually has played to some benefit in terms of the amount of money that suppliers have to invest with those customers. One of our big expenses in general as a supplier is the money we spend to engage early on with key customers through tool placements in their R&D labs. As customers have consolidated, that commitment has reduced. However, somewhat offsetting that is the fact that the number of applications, and the complexity of that R&D, has increased to the point where today, in order to drive the kind of growth we were forecasting, we have to participate in more applications earlier on. And so you kind of have a put and take in terms of spending with fewer customers but perhaps spending with each of those customers from our perspective is higher.

Operator

We will go next to Ben Pang of Caris & Company.

Benedict Pang - Caris & Company, Inc., Research Division

Congratulations and good luck on the future as well, Rick. We'll miss you certainly. Two quick questions. One, for Tim, on the NAND Flash 3D, can you compare the capital intensity for your served developed market for 3D NAND relative to DRAM? And for Rick, you commented that the DRAM spending is probably flat this year. What do you think the bit growth needs to get to in order to revive DRAM spending?

Timothy M. Archer

Okay. Let me take a shot at mine first. I mentioned the capital intensity relative to our SAM 3D versus 2D, that's an analysis we've done pretty extensively. And I mentioned that's about 30% better for us comparing 2D NAND to 3D NAND. We haven't completed the exact same analysis with respect to DRAM, which I think was what your question was. But if I were to make an estimate, based on my understanding of what goes into the 3D NAND, it's very intensive on PECVD deposition. In order for the customers to hit their target, they want anywhere from 32 to 64 pairs of alternating PECVD layers to make the template for 3D. That clearly drives PECVD to a greater intensity on 3D NAND and anything that exists in DRAM. We also see significant use of PECVD tungsten to back build those structures. And so I would say that in general, the thickness and deposition time required for tungsten will also be greater than DRAM. So I think whether you compare it versus 2D NAND or versus DRAM, 3D NAND is a big jump up for us.

Benedict Pang - Caris & Company, Inc., Research Division

Do you think it can like be 100% higher, though, based on the 30% for 2D versus 3D? I mean, is that reasonable?

Timothy M. Archer

I'd have to take a look at it. I don't know. It seems just given the thickness of the films, the answer would be possibly. But again, there is always the competing requirements that customer needs to build these chips at a cheaper cost, and so they will put pressure on us to increase the productivity of those depositions. So I just can't give it to you versus DRAM. I haven't done the analysis.

Richard Hill

Okay. And Ben, you asked the question at what point -- what kind of bit growth do we need in order to start to see expansion of capacity. I think as the node gets down to the 1x and 1y node, the bit growth has to be less in order to see capacity expansion. Because as you know, you'll get capacity by shrinking, as well as by increasing the number of wafers out that you're going to put. And I think that shrinking is slowing down, and so you're probably dealing with, at this juncture, a need for about a 40% bit growth in order to see CapEx expansion. You do have replacement capital obviously to move down the node that continues to be there. But to see a net increase in the DRAM investment, I think we need about 40%, and I could see that dropping down to as low as about 20%. But that would be out and about the 14% to 15% range. So that -- those are sort of the technological drivers. As we come off to the technological wall, capacity expansion from shrinks is going to go away, and capacity expansion is going to become by more and more wafers out the door. So that's how we see the market.

Operator

[Operator Instructions] We will go next to Eliot Glazer of du Pasquier.

Eliot Glazer

Rick, I just want to extend my compliments for being a great leader for 19 years, and state that all of us analysts are truly going to miss you.

Richard Hill

Thank you very much, Eliot. It's been a long time. What's your question?

Eliot Glazer

Well, I think you already answered it, except I'll phrase it a different way. Can you be more specific about why you're more bullish than all of the other industry leaders for incoming capital expenditures in 2012?

Richard Hill

Well, as you know, as well as anyone, I am -- always like to be optimistic with the future. And I think when you look at the minds we have in this industry, there is no lack of creativity and ideas, and I think at the core, really developing and making those ideas come to fruition. Semiconductor technology is at the heart of it. So I truly believe that this industry still has room to grow. And I've tried to articulate specifically areas of the near term that are going to grow. The replacement of hard disk drives by solid state memory is clearly here. I think 3D NAND is going to help enable and accelerate that transition. I think the value proposition of the consumer is compelling, so that's a big driver. I spoke about the infrastructure expansion as more and more people get into social networking, the bandwidth required, remote storage in the cloud, all of these things are fundamentally driven by semiconductor technology, and that's why I'm bullish. You can have it down quarter or you can have maybe it down year but in this industry, it's going to be hard not to expand capacity, and keep this thing going, because people's ability to consume electronics, and communication between people is essential. And at the heart of it is this, what we're doing and have been doing. So that's the best I can give you. That's why I'm bullish.

Operator

We will go next to Chris Blansett of JPMorgan.

Christopher Blansett - JP Morgan Chase & Co, Research Division

Could you just give us a quick walk-through of the share dilution you're expecting for the quarter and just how that plays out?

John D. Hertz

Yes, sure, Chris. This is John Hertz. I guess if you go back to our baseline where we exited fourth quarter at 69 million. So one of the things that's at play is our convertible note structure where the strike on that was at $39.50. So as the stock price went up, that is coming to the money and you're seeing about $3 million, $2.5 million to $3 million at current stock prices of incremental dilution relative to the convert.

Richard Hill

Now that doesn't mean people are putting the convert to us, they're not.

John D. Hertz

Note that it's strictly earnings per share, fully diluted calculation. Second piece of it is, we had a tranche of options with a $38 strike price that were even considered in earnings per share calculation that came in at the money at the of December. And so you've got about 2 million of shares that popped into the calculation as a result of those being exercised when it came into the money, and what have actually expired have not been exercised. And then the remainder is just simply with the stock price being where it is, there's more in the way of dilution from the -- in the money options that we have outstanding.

Operator

And at this time, there are no further questions. I will turn the call back over to Rick Hill for any closing remarks.

Richard Hill

Well, again, thank you very much for joining us on the 2011 year-end conference call. We appreciate all your support through the years. And we're confident that the combination of Lam and Novellus will be a very, very strong company and a great investment for all of you in the future. So thank you very much. I appreciate it.

Operator

And this does conclude today's conference call. We would like to thank you for your participation, and have a wonderful day.

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