Here’s the entire text of the Q&A from Lam Research's (ticker: LRCX) Q3 2005 conference call. The prepared remarks are 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.
Thank you sir. Ladies and gentlemen at this time we will begin the question and answer session. If you have a question, please press the “*” followed by “1” on your telephone keypad. _____ process may press the “*” followed by the “2”. So, we have two-tone prompt to acknowledge your selection and your questions will hold in the order they are received. Please limit your questions to one question and a follow up. For any additional questions please re-queue using the “*”“1” feature. (static). Our first questions come from Bill Ong with American Technology Research. Please go ahead.
Q: Yeah congratulations on a nice quarter. I would just like to get some update upon what percentage your product line is now fully outsourced to Selectron and maybe what areas of manufacturing are being done at contract manufacture verses done in-house, in your system built? Thanks.
A: Well Bill thank you, you said what percentage of our product is outsourced to Selectron…
Q: EMS and GELO, so it does not have to be Selectron?
A: Okay good. We have about 75% to 80% of our value of the product that is outsourced, primarily the activity the we do it in our factory here is a final integration for some customers who want to see the product in a final integration state prior to shipment. For most customers, we have the major modules shipped from our suppliers and then we rerouted and just packaged together for shipment to our customers and the only think we do here is a certain amount of high IP related technology component parts in the chamber that we want to maintain high control of so we do that assembly work here and the base majority the product is outsourced and shipped either directly from the outsourced provider or merely routed through the factory here.
QThanks. Is there any potential margin for further outsourcing or probably more cot control and high revenues?
AI think that we are continuing the process to work with our outsourced providers on strategies that involve year over year continuous cost reduction and our strategy as it relates to going to low cost manufacturing regions has been built around going with our suppliers and having them utilize their networks and their organizations that exist overseas. There is potential and we are certainly pursuing it that we are bringing some new suppliers into our activity. These suppliers are ones that have a larger set of operations and experience base already existing in whether it is Korea, Taiwan, China or Singapore and we are working with them to get our products built in lower cost regions and I expect that to contribute to opportunities for us to have margin improvement, as we go forward in conjunction with increased volumes that output from the factory.
Thank you and our next question comes from Timothy with the CD Group, please go ahead.
Q: Hi, Actually I had one and then I have a quick followup. If I look at your foundry orders, you were guiding the orders roughly flat sequentially and they actually came in down a little bit. Am I misreading that or was there kind of a change there and I have a quick follow up.
A: No. Tim you are not misreading it, we had said that we thought that there was a situation as it related to the foundries which for us was very strong in the June quarter but we expected them to be flat, but we had a number of situations were what the foundries are going to do in the order environment was really sitting on a September, October time frame, and as it turned out some of the orders that we thought were likely to occur in the September quarter, actually will go down in the December quarter, and when you look at the amount of business on a systems basis, it’s only really three systems or so, but because of the ASPs of the system and the low overall volume kind of percentage wise they look greater than the actual numbers are.
Q: Understood, thanks Steve and then just a really quickly if I look at your guidance that you gave back in July you gave kind of six month forward guidance back then, you gave both revenue and you gave shipment guidance out six months, and if I look at what you are saying now, what you are going to do in December for shipment and revenue, both of them are about between $20 and $25 million higher than what you though back in July, where is that pull-incoming from, is it memory getting incrementally better, or where is that coming from?
A: It’s coming from actually memory and there are some logically related pull-ins, we are seeing a general uptrend, I should say in bookings activity and as the function of the short lead times and typical customer behavior with short lead times, is they wait and they wait and then they order and they also want short delivery. So, we have been able to incremental up our December output plan greater than the 15% to 20% that I had talked about last quarter and that has resulted in the second half of ’05 being down versus the first half of ’05 in shipments by only 6% as opposed to the 15% that we had expected but the pull-ins are occurring primarily in memory, but in other segments as well.
Thank you our next question comes from _____ please go ahead.
Q: Thanks. Steve wouldn’t your customers have a fair idea of how the next year’s CapEx would be based on, wouldn’t they being seeing that in your activity, can you share some of those thoughts with us.
A: Well, most of the customers today are in the process of working on what their CapEx is going to be for ’06 and what the lead times in the whole supply chains being as short as they are, the reality is that if you can think about or look at the business in six months increments that’s where you could have a degree of accuracy, and so we are sitting at the October time frame and wanting to know what’s the second half of ’06 going to look like and there is so much that can occur between now and then, that the ability to predict that is really limited. In the past, lead times were long enough and when demand got way out in front of supply then people would basically be committing to order environments and delivery environments that extended out to nine months. Today all the cycles are so short and the whole industry is far more consumer dependent that it’s really not a situation where anything other than macro analysis can tell you what’s going to go on in ’06. So our perspective if we look at what’s going on is, we are clearly seeing an uptake in bookings in December. Our expectations would be that has we look forward that we ought to expect that things would remain positive in the March quarter and when we look at the fact that we are upping our shipments 30% then we would expect that we are going to be able to output more in the March quarter because our bookings will be up in the December quarter.
Thank you your next question comes from Gary with CIBC World Markets. Please go ahead.
Q: Hey guys, good job here in terms of gross margins in the quarter but I am wondering about your clean chamber and your clean product and as you start the RAM shipments in Q4, how is that going to impact margins out in ’06? I have a quick follow up.
A: So you want to know how our clean product may affect our margins in the December quarter, is that the question
A: Well more in ‘06.
A: Well first off let me try to put the clean product into context because I think its important that while we created recognition of the activity that’s going on there, one of the things I commented on last call was that we did not expect that there would be any revenue being reported by the company until the June time frame at the earliest. The second thing I think that is important is the product is primarily being targeted as a technical solution to some cleaning application challenges at 45 nm and the potential for some 65 nm activity, that it may be a needed solution or it may be a preferred solution provided the product brings enough reliability and cost of ownership and production worthiness to the party. We are in the process right now going through evaluation of number of customers where increasing our beta shipments in the December quarter and in the March quarter, none of those will end up hitting the P&L for revenue, and we are expensing most of the cost for those as part of the expense increased structure that we talked about in R&D, and we will be better able to answer the specific questions on the products margin activity when we better understand the value it delivers, the pricing we will able to achieve relative to the cost to produce the product.
Q: Okay and a quick follow up for Martin, as you look out in ’06, I know you gave guidance as to the financial model in ’05, could you care to give some details on kind of the top stones for the model for ’06 say around 1.6 billion or 1.7 billion?
A; There really is a good reason why we only give guidance of that level for one quarter so I am going to decline to give any specific commentary on that.
Next question comes from Michel Brian with _____ please go ahead.
Q: Hi good afternoon, just from your general talk about the memory being 60% or so I think of orders of what you said, so I assume that you got the boundary uptake or meaningful uptake in your March quarter assumption, would that be accurate?
A: One of the things I talked about is that I expect in the next three to six months that the foundries are gonna need to come into the marketplace with higher order levels. The reality is that is not necessarily visible in a significantly meaningful way. What we are seeing is each quarter there is always foundry activity and its currently being invested as I said at a level that is resulting in a CapEx spending of 34% less in calendar year ’05 than in ’04. So at some point time whether it’s the March quarter or June quarter, my expectation is that the foundries are going to come in at higher levels than we see, but currently right now based on what they are saying and what they are telling as they want to do, the foundry activity is going to be causing bookings to be in the similar area in the December quarter as they were in the September quarter. So I am just forecasting from a general perspective that when I look at the foundry business as a whole, I think it is need to increase its spending, but that has not yet become visible.
Thank you, our next question comes from _____ please go ahead.
Q: Hello I guess a sort of a similar question when you prepared for March you talked about uncertainly in terms of planning a foundry yet, your confidence levels in bookings guidance appears to be rather high, so I am wondering what gives you the visibility to such strength in December?
A: Well when we look at the current quarter that we are in, we have a couple of things, one was essentially in two to three weeks into this quarter. Customer activity in a stable demand environment and one that is not in the bottom of the downturn or on the sharp rise of an upturn can be very predictable or at least relatively predictable in the kind of circumstances that we are at. So we had been in discussions with customers for a long time and we calibrate and look at which customers are saying they are going to place orders in what time frame, which of those customers are on the bubble between a December placement and a January placements and we look at all of those things and we factor in where we are in the cycle and that results in a situation where when we place our guidance, we feel that there is a strong likelihood that we can deliver the bookings in the range that we set. But there are certain times in a semiconductor industry cycle where it becomes more difficult to project with a high degree of accuracy what the customers’ bookings behaviors are going to be, but I think we are in one of those more stable times right now.
Thank you our next question come from Bill Lou with HyperTraffic, please go ahead.
Q: Yeah hi good afternoon. You guys had a pretty nice pickup in bookings in the US in the September quarter and you also talked about some share gains in the quarter, are those two things related, is any of the order pickup in the September quarter coming from many customers?
A: Yes there is some correlation to share gains that I talked about as it relates to North America and it is also just that the activity level in North America did pick up in terms of three relatively large customers ended up placing orders and again in comparison to the prior quarter, it really was not that North America was exceptionally strong in the September quarter. They were slightly weak in the June quarter, so when you combine those two you can end up with the kind of percentage changes that we saw, but it is a result of increased customer activity and some market share wins.
Our next question comes from Geoff Corvelo with _____ . Please go ahead.
Q: Good afternoon thank so much. Steve good question about Lam specifically and then I will followup on the industry. I know Lam is gaining shares, we hear that from all the checks that everyone does, can you help me reconcile that the fact that your year-over-year revenue growth is kind of flattish, which is sort of consisting with the over all CapEx budget from, is that a reflection of customer exposure this year as is it just coming off from the higher base because we really all do believe you are gaining share, it did not show up on your revenue numbers?
A: I a.m. glad you asked that question because actually I think CapEx is going to be down 7% to 8% with wafer fab equipment spending being down slightly more at around 12% and I think Etch is going to down closer to 15%. We wen back because I made these comment in the last conference call that in downturns Etch tends to fall further and in upturns tends to grow faster and we went back and looked tonsillectomy and adenoidectomy the last four downturns and going back to 1997 and not only is what I said true for Etch, it is also true for other processing equipment segments in the front end. And so when we go back and look at the 1999 upturn, wafer fab equipment grew 22%, Etch market grew 28%. If we go back to 2004, the wafer fab equipment grew 69% and the Etch market grew 96%. And just to kind of reinforce it in the downturn environment, the downturn that occurred in ’98, the market dropped 28% and Etch dropped 36%, the downturn in 2002, the wafer fab equipment dropped 32%, the Etch market dropped 40%, So we believe wafer fab equipment is down 12%, Etch is down 15%, therefore the fact that our revenue between ’04 and ’05 is flat, that represents a market share gain of 4 to 5 market share points.
Q: That’s a very helpful analysis, thank you. If I could just ask a question on the memory side of the equation relative to your comments about 60% of the orders, can you help us break that down between DRAM and NAND and then relative to the DRAM orders some of the companies are profitable, some of them aren’t, do you think the DRAM industry has to be profitable to keep ordering equipment or do you think there are scenarios where some of the customer can continue to lose money, but still make some orders? Thanks so much.
A: I will try to give you a little perspective on what we see in the memory market and some of the breakdowns between Flash and DRAM that have occurred that we can understand. We think that DRAM represents around 66% of the total memory spending and Flash about 33%. There are mixed lines out there, but there are lines that are now being put up that are dedicated to DRAM or dedicated to Flash, and a lot of that has to do with the fact that you end up in a mixed model, that you will have about a 10% loss in capacity output depending upon whether you set it up for DRAM and then you run Flash you will get 10% less out, if you set it up for Flash and you run DRAM you get 10% less out, and it has do with the need for more dielectric steps in DRAM and more Gate and silicon application steps for Flash. Having said that, I think that clearly in a market like memory, it’s a part of the business that they is very cost driven and the players in this industry need to be able to continue to provide their customers with product almost independent of what’s happening to the pricing environment, and the memory market has the tendency when there is too much memory out there to result in price drops and that triggers increased memory being placed in the various products that use memory. When memory supply falls behind demand and prices go up the end user customers just cut back on how much memory they are putting in there so there is multiple regulator types of environments in the memory business and so if a customer is losing money in the short term, they are still are going to continue to invest, if they are going to play in this business, because if they stop investing they stop having the ability to continue to output to the device unit growth demands that are present every year or they will lose market share and they will make their problems go from difficult to worse very quickly. So I think that the players that are in memory, given the consolidation that we’ve seen, have a high degree of commitment, but having said that that doesn’t mean that management teams at some of these companies aren’t necessarily looking at what they want to do, with their lines and how much goes into DRAM, how much goes into Flash and whether they are considering looking at diversifying into other semiconductor activities as a function of cost competitiveness, technology capability etc.,
The next question comes from David Duley with _____ , please go ahead.
Q: yes. Just two very quick questions, given kind of the decline in bookings in Japan, would you expect the revenue in that country to grow again sequentially and if my math is right when you gave us the order guidance for December and gave a 60% in memory, I think that implies basically all the DRAM orders are up nicely and the other sectors would be down, could you just clarify that to make sure my math is right.
A: I think that in Japan, the spending continues to remain strong, and again that when we look at the percentages we really talking in many cases here, sometimes two systems, sometimes three or four systems, that both along the quarter don’t put the net, and that create a change in Japan being 28% in June and 22% in September. And then on a going forward basis, we can be plus or minus that number by 5% point and it really doesn’t necessarily constitute a trend. You are correct about memory in the December quarter, being a higher percentage, there is clearly memory companies around the world in Korea, in Taiwan, in the United States that are making investments in memory, we have very good market share, in memory, we have at the leading memory companies around the world we have a higher market share, with them, it’s a higher market share has been our global average market share so when memory spends it’s beneficial to us as a function of our market position.
Q: One follow up the 4% to 5% increase in market share that I guess you are siding for calendar ’05, what geographic region was the biggest contributors for that.
A: we had a very good year in Japan, one that we’ve been investing in for really for a long time but we are successful in making some significant in roads last year, that has accelerated to the point where Japan 2 to 3 years ago was really a drag on our overall global market share, we are now booking business in Japan at the same market share that we have on a global average.
The next question comes from Jeff _____ with Morgan Stanley, please go ahead.
Q: Alright, good afternoon you guys, Steve just a quick question back from the DRAM and Flash memory segment and recognizing that some of the lines and mix. Could you just sort of compare Lam’s competitive position in DRAM and Flash memory and are you guys seeing any differences between those two in terms of the pricing environment? Thank you.
A: We took a look at our position in DRAM, as well as our position in the NAND Flash lines, in the DRAM segment our market share is just slightly below 50% and the NAND segment it’s above 50%. So clearly with NAND being the fastest growing segment, we are pleased that we have an even stronger market share position in that segment and overall our market share in memory as a total is like I said higher than our global average market share. Can you repeat the second question.
Q: Did you see in the pricing environment between those two segments, we have highlighted some of the challenges in DRAM pricing, we have highlighted NAND Flash being the faster growing segment, so I would assume that there is some difference that you see in the pricing environment.
A: Yeah. When you talk about, you are talking whether there is equipment pricing differences between NAND and DRAM and there are. The competitive environment that exists out there in the market place whether it is foundry whether it is logic whether it’s NAND, Flash or DRAM. It’s is not significantly different in anyway.
Our next question comes from Mark Fitzgerald with Bank of America, please go ahead.
Q: Steve, two quick questions, I was wondering if you guys did any share buybacks in the quarter.
A: I will take that real quick, yeah we did. We spent a sum of $79 million repurchasing 2.6 million shares at an average price of $29.76 and that brings our year to date activity against the Board approvals to $246 million. So since we began repurchasing stock we’ve spent $246 million, we repurchased in the range of 8.5 million shares. So against the original Board approval we’ve $4 million available and obviously we have everything available in the latest half of billion approval that the Board gave us.
Q: And then the just on the gross margin guidance here, if you look back to your March quarter when you had a similar revenue level, you were doing from up 50% gross margin, so I am just a little concerned here, wondering why you are not getting the similar type of leverage.
A: I am glad you asked that question because we took a look at that too, and the answer is a couple of things – one, in the march quarter we did not have any equity based compensation and those numbers and so that’s a half of margin point degradation contributor. The other aspect is that the product mix that we are shipping is different and so too is the customer mix that we are shipping to, but most importantly it’s the product mix issue, and what we have been doing in the last two quarters and certainly accelerating in the December quarter is increasing the shipments of our 65 nm capable products are Versys Kiyo, silicon based product, which has been out in the marketplace since December of 2004, and has greater than 150 chambers that will have shipped by the end of the calendar year. Our new next generation products have a tendency to have a higher material cost and slightly installation and warranty costs as a function of the first fab and their characterization activities. In addition to the Kiyo 65 nm capable product, we have begun shipping Kiyo 45 which is the next generation beyond that and that is in our product mix and margin mix in the December quarter. In the dielectric arena we have been shipping the Exelan Flex, which is a 65 nm capable chamber configuration, we have been shipping that since the June frame of 2004 with over 400 chambers so that product will have been shipped by the end of the calendar year, but we have begun since June of ’05 to ship our next generation product of Flex 45, which is a 45 nm and below capable dielectric Etcher and it is in our product mix and it is in our margin mix and has the same introduction types of cost structures associated with it that i mentioned earlier. So my expectation is that there is a bit of margin pressure as a function of the new products in terms of the material cost, in terms of their installation and warranty support cost as we work with our customers on the very challenging aspects of what is takes to get them successful yield of 65 nm, what I expect that we will work through all of those issues, our material cost will improve, we will clearly establish the value in the product which will enable us to maintain or even potentially improve our average selling price and that I would expect that our field based cost to work through the 65 nm solution with our customer will improve as well as we go into the ’06 period.
Thank you. Our next question comes from Jay Dena with JP Morgan, please go ahead.
Q: Hi. Thanks Steve for the detailed analysis. Two questions I have is first of all, is you penetration of the two large Flash suppliers about the same or are you more biased towards one to the other, and the second question is it is pretty clear that you are negating a concern here, talking about up orders in the December quarter, following a little bit of up in September and possibly again in march, can you give a sense as to what the potential magnitude or duration of this cycle could be?
A: If I could do that I did probably doing pretty well in some other business making a lot of money, I think it is not very hard to fiscal term when you, when your bookings come up the bottom and they are up 3% and your revenue at the bottom then goes up. I think your question is a $64 million question and the reality is that we just don’t know and we are in the process right now of working through our forecasting activities for calendar ’06, I will have comment on what I think the ’06 looks like on the next conference call, I want to let the current environment play itself out a little bit, see how the consumer with the post hurricane activity and I think that will give us a little better feel and there will be little higher confidence that we are going to able to find the right vicinity for ’06. As it relates to our market share in the big Flash players, we are doing very well at both of those Flash players, I am not going to break out the specifics between the one or the other, but we have a greater than 50% market share on both of those players and I think that’s the relevant point.
Thank you. Our next question comes from _____ please go ahead.
Q Yeah, hi good evening and congratulations on a good quarter.
A: Thank you.
Q: I have a question on the dielectric Etch and how it applies to particularly on the logic side and it seems like you folks have the whopping lead in terms of performance that and that might be somewhat bridging particularly on wafer performance, but could but could you tell us are you still beating costs on the cost of ownership side or what other areas you still have quite a lead on that side?
A: You know logic we were talking about the critical application to get everybody’s tension is proper dual _____ , Etching and via entrenches and the ability to do both via entrench all in one including a strip application and what we have found is well everybody in the industry continues to improve their products that we still possess an ability from a production worthiness, from a predictability, from a defect control standpoint to deliver to our costumers not only a very technically advanced result on the wafer, but one that brings a production worthy predictability and a yield benefit that most customers are still finding compellingly differentiated, so we continue to have an opportunity to take that install based position to run just thousands and thousands of wafers through these chambers, and our technical team are very busy incorporating all of learning into next generation design modifications that are going to satisfy to 65 nm needs for our customers and so the more wafers you can run, the faster you can learn, and the faster you can learn, and we are benefiting from that and its helping us win the additional new application market share gains that I mentioned in my opening comments.
Thank you our next question comes from Patrick Lowe with _____ , please go ahead.
Q: Thanks a lot, congratulations, also. Two part questions, first on the bookings outlook and then on the market share, on the bookings front in terms of your outlook, is that 5% to 10% range would you say that the foundry are still the swing factor and on the market share question are the opportunities for gains coming from new customer winds or they be driven by as you mentioned expansions with customers that are putting it towards new applications.
A: Okay. When I talk about a bookings guidance of 5% to 10%, 10% above where we are is $30 million, if a foundry customer in our forecast were to not order, that certainly going to affect whether we come in are flat or 10%,. But at the same time, if a memory customer should decide to delay, that can affect to an equal extent and so what we try to do is look at the totality of what’s going on out there, put probabilities and expectations and give our best estimates of what’s going on recognizing that somebody may fall out, but we may also have somebody come in that wasn’t in the forecast so I don’t’ think It would be right to say that only a foundry is really the swing factor, I think that any one customer can be a swing factor. Certainly we have foundry in that forecast, we are expecting that those foundry orders will come through, but they are not the only factors as to whether we achieve that 5% to 10% upside in orders.
Q: And the market share question.?
A: On market share, it’s both, we look at market share obviously at the end of the day, it’s about revenue percentage versus all the money that’s been spent. But we look at application whence we look at increasing our market share at existing customer where we improve our market share position and we also have been successful at penetrating customers where we had no dielectric business or no silicon business and in some cases we have penetrated customers where we had essentially no business and so it is a combination of both of those but we continue to win new applications at customers where we have significant market share because they have gained increased confidence as a function of the business that they gave us over the last few years, and they want to increase that level of business with us on different applications.
Thank you. Our next question comes from _____ , please go ahead.
Q: Just two quick ones. First on the interest in the strength of this quarter, where there any one time items and how you expect that the trend next quarter, and second when you look at the lot of discussions done on market share today, where do you think ultimately your overall industry market share can go before the customers at some point, say “Hey, we’ve got have some balance so that we can have more than one supplier or what not” Steve, what do you think the natural peak of that might be?
A: I will take the other income and expense question first. This is real kind of plain vanilla P&L which may explain the frequency of the questions that I am getting today, but there are really only two components to the item, one is interest income, and as it’s common for most people with the type of investment portfolio that we have which is very conservative, a 3% yield is a pretty good yield, we have $850 million of cash on an average during the quarter so the interest income and the net interest income for the company is going to range around $6 million. The only other item in their, if it is significant this quarter is foreign currency, and as I articulated in some detailed last quarter, that number to a large extent is naturally hedged by the fact that more than 80% of our revenues and more than 80% of our costs are US denominations. The only significant exposure we have to that is the Yen denominated revenues and we have contracts in place from order placement through cash collections to manage that risk. So foreign currency for us ends up just being kind of plus or minus 2 to $3 million that is kind of there as a function of the asset and liability positions of the company, and currencies have been reasonably volatile but for us it’s actually being defined around the weakening of the Taiwan Dollar on a liability position so you really got kind of two things, one is interest income $6 million the other is gain on foreign currency mostly Taiwan Dollar clearly in terms of outlook, the only real certainty is the cash position of the company and the interest income affects largely self managed, but our guidance seems zero gains zero loss on foreign currency.
A: Okay, on your question about how high market share can go, well, certainly there are companies and products out there with 70% type market share, so I would have say that on a theoretical basis it’s possible, but in our segment I think it’s highly unlikely. We have four major players three of whom have about 90% of the market, and what is takes to get market share in the 40% to 50% plus type ranges Is a combination both of our excellence in terms of technologically differential capability that our competitors cannot achieve, and at the end of the day that really has to do with whether we can create a yield benefit that the economics becomes so over powering that the customer is not concerned about whether or not you have too much share, they really are going to go your direction because the economics of yield dominate everything. And so if we look at what’s going on today, if we look at the market share wins that we are continuing to generate this year, we stated that our objective for the next upturn, whenever it is or however long it lasts, that we were targeting a 45% market share position, I believe that when I look at the competitive landscape today that, that potential is still readily available, I think if we can execute to the opportunities, if we can continue to be seen by our customers as the fastest to their solution needs, that they will reward us with that kind of market share. So the potential is there, the execution is really up to us. And we have a plan, we have a roadmap and we have ways in which we are attempting to get to that position and we will keep you informed as we go.
Thank you our next question comes from Steve _____ with Georgia Bank, please go ahead.
Q: Good afternoon thank you, just a follow on Steve to the market share discussion here, with higher market share that you have in memory, how much of that is metal etch and how could that change for Lam as memory transitions to _____ ?
A: Well, metal is not very large, it’s about 10% of total Etch market, and over time that’s going to trend down, but even as the memory guys move more toward getting out of metal, there is typically one level of metal that’s still remains and I think that metal hard mask is a new application that ‘s actually come into the market place, and so what you see is that metal has been hanging in there around that 10% range for quite a while and I think we are going to see metal remain in the memory device structures for the next couple of generations and I think we actually may see that there is some small increase in metal depending upon the adoption rates for metal hard mask, so I don’t think what you just talked about represents a concern.
Thank you, our next question comes from John Spencer with _____ , please go ahead.
Q: Good afternoon guys, couple of questions, Steve first can you talk about the clean market, you sort of characterized it as niche tech application and used the necessary versus preferred solution, I am wondering if you can give us an understanding of how big a market we should be thinking about NAND addressing with the clean application, then I have a follow up.
A: Okay. I don’t recall saying niche market, but we are certainly targeting a need for a new technology solution as it relates to certainly primarily logic cleaning activities around copper bias. the product is designed initially to address certain issues in that area, and the market that we are talking about in the first couple of years, is a 2 to 300,000 million market and within 3 years from the time frame that we are talking about is looking more additional applications and a $500 million market. To what degree we can address effectively the markets that I just mentioned and to what degree we can expand those markets, are certainly within our potential and what we want to do right now is to get the product understood, it’s performance established and we will talk more about the markets and the sizes and what we think the challenges and issues are, some times in the early part of ’06, when we are going to have the more information and I think we will be able to provide you with a clear picture of what we are trying to do, I just don’t want to say too much about that product at this point in time because I think that it’s too early in the process.
Q: Great, secondly you said you don’t want to talk about 2006 CapEx but in your prepared comments, you kind of went through and analysis that argued that foundries would need to increase at least 20% to 25% next year. Foundries have been running about 20% to 25% of the business so that incremental sort of 4 to 6 on the overall incremental growth of about 4 to 6% so the overall business which is good, it’s just not that exciting, I am just kind of curious at the end of the day when you look at the other two big segments, memory and logic, is your buy is directionally flat down or up for ’06 CapEx.
A: Let me talk specifically about the foundry numbers that we just talked about, because foundry in ’05 is really going to closer to about 15% of the total CapEx and back in ’04 it was 21% but if you go back to ’03 it was actually around 14% or 15%. So foundry if I average ’04 and ’05 is really in the 17.5% 0- 18% of total CapEx, and what I am suggesting is that if it’s going to in that vicinity in ’06 and as a function of that if they are 15% today, and they go and become 18% of a CapEx number in ’06, that’s essentially the same, the total CapEx, they are going to up 20% to 25% to go from 15% to 18% type of range and then it might be 25%, if it’s also includes the fact that overall CapEx is up a little bit, so I don’t think their percentage as a function of total CapEx is the size what you were talking about.
Thank you, our next question comes from Brett Hank with Prudential, please go ahead.
Q: Hi. Just a follow up on the foundry situation, two question there, number one, what do you expect the foundry to spend in terms of technology nodes, is that 60 or 90 nm, and the second question is that in one of the answers to an earlier question you mentioned that Lam has had market share gains in certain products, you have a better position per dollar on memory versus foundry. Can you quantify what the difference is between memory versus foundry. Thank you.
A: When you talk about the 90 and 65 spending in the foundries, the foundries are spending and booking orders to date for 90 nm expansions and most of the equipment is 65 nm capable, and the 65 nm buys are more along the lines of earlier pilot type of activity so the volume is 90 nm and I would expect that over the course of ’06, we will see a switch in the amount of equipment that is ordered for 90, it will go down and 65 will become more prevalent, the exact timing of that, it’s too early to tell.. When we talk about market share for memory, we talk about market share for foundry, I think the comment that I will make is, I’ve already said that our market share in memory is higher than our global average, our market share in foundry is also higher than the global average, which obviously leads to the fact that our market share is logic is below the global average and I think everybody knows that, that’s primarily driven by the fact that a couple of key spenders in the logic arena, we don’t’ have a position and so I do think that our position in foundry and our position in memory are very good indicators of the competitiveness and the capability of our products and our service teams.
We definitely have time for one more question, our final question comes from Vineesh Goyal with CREF Investments, please go ahead.
Q: Actually my question has been answered. Thank you.
Okay, Well in that case we would like to thank you for joining us today to discuss the results for the September quarter, we appreciate your interest in the company.
Okay. This concludes the Lam Research September Quarter 2005 financial results conference. Thank you again for your participation on today’s conference, you may now disconnect.
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