Here’s the entire text of the prepared remarks from Lam Research's (ticker: LRCX) Q3 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Good afternoon ladies and gentlemen welcome to Lam Research September Quarter 2005 Financial Results Conference Call. At this time all participants are on a listen only mode. Following today’s presentation, instructions will be given for the question and answer session. If anyone needs any assistance at anytime during the conference, please press the “*” followed by the “0”. And as a reminder, this conference is being recorded today, Wednesday October 12, 2005. I will now hand over the conference over to the Kathleen Bela director of investor relations, Lam Research. Please go ahead.
Kathleen Bela, Investor Relations
Thank you Robert. Good afternoon and thank you for joining us to discuss the financial results for the quarter ending September 25, 2005 and the business outlook for the December ending quarter. By now you should have received a copy of today’s press release, which was distributed by business wire at approximately 1:00 pm. We are webcasting a slide presentation in conjunction with today’s commentary. The presentation can be accessed through our website at www.lamrc.com.
Here today are Stephen Newberry, President and Chief Executive officer and Martin Anstice, Chief Financial Officer. Except for historical information, the information Lam is about provide and the questions Lam answers during the call may contain certain forward looking statements, including but limited to statement that are related to the company’s future revenue and operating expenses, management plans and objectives for future operations and product development, managements plans for continuing the company’s stock repurchase program, global economic conditions including consumer sentiment and customer standing and the demand acceptance and competitiveness of the company’s products. These statements are subject to various risks, uncertainties and changes in conditions, significance, value and effects that could cause results to differ materially and in ways not readily foreseeable, and which are detailed in the company’s SEC report. We encourage you to read those reports in the entirety.
Lam would also like to disclaim any obligations to correct or update give any of the information we are about to provide. This call is scheduled to last until 3:00 pm. We ask that you to please limit your questions to one per firm. I will now turn the call over to Martin for a review of our financial results.
Martin Anstice, CFO
Thank You Kathleen. This afternoon we will discuss our September 2005 quarter financial results. Highlights today include a positive new audit inflection point, representing 3% growth sequentially. In line revenues at $321 million, earnings of $0.35 that were stronger than guided due in equal measure to our operational cost management, lower equity-based compensation expense and higher other income, and cash-in operations of $47 million consistent with our plan and strongly correlated with our earnings performance this quarter.
New audit entered into backlog for the quarter up 3% at $326 million, adjustments out of backlog were $13 million and there were essentially no order cancellations. 300 mm applications represented approximately 78% of total systems new orders. Our strength at leading edge applications is reconfirmed by the proportion of orders at less than or equal to the 90 nm technology node of 76%, against our guidance of flat to down 5%, the 3% growth in new orders reported today was geographically concentrated in Asia notably Korea, Taiwan and Japan. As we anticipated, our systems new orders market segmentation was fairly balanced relative to overall ways of outspending comprising memory at 52% ID and logic 26% and foundry other at 22% of the total.
Revenue of $321 million met the mid point of our guidance range. As a reminder our typical customer expectance cycle times have ranged between two and five months from the date of shipments to the customer. Our market share success is generally and particularly due to those in Japan, introduce the probability that first in SAB installations trends to the longer end of that expectance range, for that reason we remained focused on managing our equipment installations with customers. Our revenue guidance ongoing will continue to reflect our best estimate of likely outcomes.
Shipments in the quarter were generally where we expected down approximately 21% sequentially. As we characterized in our prior earnings call, this change in our shipments level was in appropriate alignments of factory output to the pattern of orders over the last several quarters. To illustrate this point our shipments, book to bill for the last 12 months is 1.01, on new orders of 1.3 billion. Our September quarter book to bill was 1.16 our ending unshipped backlog increased by 31 million to 382 million. For more complete details on orders and revenues, geographic breakdown, please see our press release today and our website for a reconciliation of new orders, shipments, revenues, deferred revenues and backlog.
Gross margins were approximately 48.6% in the September quarter including approximately 1.1 million or 0.3% points for equity based compensation. This performance exceeds the model we shared with you a year ago. Total operating expenses increased at a slightly slower pace than originally planned. We continue to target and incur expenses related to discretionary investments in R&D focused on leading edge, plasma edge, strip and clean. These investments were offset by lower equity based compensation expense and higher than anticipated vacation benefits. Accordingly total R&D expenses were contained below our original estimates. Worthy of note, our total company equity-based compensation cost, were $5.2 million less than our original estimate of up to $9 million. This reflects our current intentions to grant equity to certain executive offices later than originally planned pending shareholder approval for a minor incentive plan modification and separately the challenge with new expense item with limited history of RS use and specific knowledge of grand dates and our share price _____ is bringing to forecasting.
As you might have expected, we where conservative with our equity compensation expense guidance in September the first quarter of adoption, our effective tax rate was 27.4% for the September quarter, our current expectations for the fiscal 2006 year remains 27% plus or minus 1% points. If the R&D tax credit is approved again this year our tax rate has the potential to reduce by 1% point from its estimate. Continuing the theme of prior courses, the cash outlay for the taxes was substantially lower than the income statements rate due mainly to the conversion of deferred tax assets into cash.
Our reported income tax expense was $19 million, our consumption of deferred tax assets in the quarter was $15 million. We generated cash from operations of $47 million this quarter, driven primarily by profit levels and sustained industry leading worth in capital performance. We received $17 million from the exercise of employee equity plans and we used $79 million to repurchase 2.6 million shares at an average price of $29.76. For you convenience, we are adding a cash flow statement to our press release tables, we hope you find this addition useful. The total cash balance including restricted cash was $874 million at the end of September. Deferred revenue and deferred profits were $107 million and $64 million respectively. These balances exclude approximately $54 million of anticipated future revenue value for shipments made to Japanese customers where title has not yet transferred. These shipments are currently recorded as cost in the inventory.
Capital expenditures were $5 million, depreciation and amortization announced to $6 million for the quarter. At the end of the period, net fixed assets were $40 million and we retained employment levels essentially flat at 2,200. We will now move to Steve’s comments.
Stephen Newberry , President and Chief Executive officer
Thank you, Martin, and thank you for joining us. This afternoon I will recap the financial highlights, comment on the company’s performance in this September quarter and on the industry environment and conclude with our guidance for the December quarter.
The company delivered another quarter of excellent financial performance, I am particularly pleased with our cash generation and operating margin results in a period that represents the bottom for revenue in this cycle on a revenue decline from the peak of approximately 100 million or 24%. Our operating margin performance remained above our target model presented in November 2004. This is the first time in our history we have been able to handle a significant revenue decline and deliver strong operating profits throughout the downturn cycle. While we are proud of what we have accomplished, it is where we are headed that has our complete focus and engagement. Looking forward we believe we are positioned to continue to deliver excellent financial performance that meets or exceeds our target model of 19% operating margins at revenue levels of 350 million. Our market share momentum continued in this September quarter. Lam’s products were selected by customers in a number of regions representing leading edge market share gains that have positioned as well for fab expansions.
Our experience in deep knowledge base in Etch sets our sales and support teams apart, and is often a key factor in both wining new share and extending our position. Etch is one of the most critical applications in the fab, due to the fact that Etch can compensate for upstream process variations and optimize downstream processes, which can lead to improved yield. In a sub 65 nm environment, the value of incumbency in Etch is increasingly important. With our world class support in product technology leadership, we expect to be successful at leveraging our current position to enable new market share wins. Examples of this our seven new application wins in the past two quarters on sub-90 nm applications and an expectation of five to seven additional new wins in the December quarter.
I will turn now to the overall industry environment and outlook before concluding with our December guidance. We have begun to see positive signs and demands for equipment resulting from the continued strength in semi-conductor unit growth and higher utilization rates. Most recent data shows unit growth in the high single digit percentage range, price declines in memory have recently firmed as big growth from both DRAM and the NAND Flash markets have accelerated with this demand. Lead times in the semiconductor device industry remains short from a historical perspective as customers keep a tight leash on inventory. Semiconductor manufacturers are holding relatively low levels of inventory and managing supply to demand very carefully. Utilization is rising in general and particular is greater than 90% at less than a 130 nm. We see an aggressive move to 90 nm technology in the foundries driven by demand from fabulous companies and IVMs migrating to a fab like strategy, to our supplying devices for the upcoming game console product cycle and various consumer wireless products putting a significant load on leading edge output. Though foundries continue to remain cautious in placing new orders for equipment, we believe that they will need to increase their level of investment and new capacity in the next three to six months. This is supported by an analysis of foundry spending. In calendar year ’05 foundry CapEx will decline 34% versus ’04. If spending is averaged between calendar year ’04 and calendar year ’05 and then extended to ’06, foundry spending needs to increase at least 20% to 25% to add the same capacity additions as were added on average in the calendar year ’04 and ’05 time frame. There is reason to believe that demand in calendar year ’06 will require capacity additions at least equal to the average of the past two years. We expect to see continue strong investment for equipment in the memory sector. In particular the outlook for NAND Flash is strong, Flash bit growth is expected to be in the 100% to 120% per year range. While DRAM bit growth is expected to remain strong in the 50% per year range.
As Lam is well positioned in the largest NAND Flash and DRAM producers our memory business remains very healthy. Lam has also achieved new market share wins in the expanding memory market in Korea, Taiwan and Japan, which we have orders in the September quarter above our forecast. We expect our strong bookings to continue in the December quarter, with memory customers representing around 60% of our bookings. As for the remaining market logic and IDN customers are continuing to invest at consistent levels with year-over-year spending roughly flat. I will now provide the guidance for the quarter, guidance on margins and earnings include the impact of equity-based compensation. We expect new order for December to increase approximately 5% to 10% over September levels. Shipments will increase approximately 30%, we expect to post revenue levels between $330 million and $350 million with growth margins being approximately flat relative to September. Operating expenses are expected to increase slightly to around $100 million, and this will result, in operating margins estimate of 18% to 20%, which is at or slightly above our target model performance. Earnings per share are expected to range between $0.34 to $0.39 per share on a share count 140 million shares. These financial numbers, again include $8-9 million of equity compensation expense.
In summary, I am please with strong performance our employees delivered in the September quarter. We continue to execute to our objectives, and I believe our results both recently, and those attained over the last several years, represent a solid foundation upon which to achieve a level of performance that will result in enabling cost effective solutions for our customers, and the potential for strong returns for our shareholders. With that I would like to turn the call back to the operator to call for your questions.
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