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Executives

Carol Raeburn - SD of IR

Steve Newberry - President and CEO

Martin Anstice - CFO

Analysts

Satya Kumar - Credit Suisse

Jim Covello - Goldman Sachs

Wayne Guyon - Oppenheimer and Company

Jay Deahna - JPMorgan

Timothy Arcuri - Citigroup

Bill Ong - American Technology Research

Steve O'Rourke - Deutsche Bank

Edwin Mok - Needham & Company

Patrick Ho - Stifel Nicolaus

Brett Hodess - Merrill Lynch

Keith Todd - Morgan Stanley

Krish Shankar - Banc of America Securities

Stephen Chin - UBS

C.J. Muse - Lehman Brothers

LAM Research Corp. (LRCX) F4Q08 (Qtr End 06/29/08) Earnings Call July 29, 2008 5:00 PM ET

Operator

Welcome to the Lam Research Corporation June 2008 quarterly financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. [Operator Instructions]. I would now like to turn the conference over to Ms. Carol Raeburn, Senior Director of Investor Relations. Please go ahead, ma'am.

Carol Raeburn

Thank you, Operator. Good afternoon, and welcome to Lam Research Corporation’s quarterly conference call. Here today are Steve Newberry, President and Chief Executive Officer and Martin Anstice, Chief Financial Officer. Today we will discuss the financial results for the quarter ended June 29, 2008 and share our business outlook for the September 2008 quarter. A press release detailing our financial results for the June 2008 quarter was distributed by Business Wire at approximately 1 o'clock this afternoon and is available on our website at lamresearch.com.

Today's call contains forward-looking statements and actual results may differ materially from those discussed in these forward-looking statements. Additional information concerning factors that could cause results to differ can be find in our most recently filed Annual Report and Form 10-K. This call is scheduled to last until 3:00 p.m. and we ask that you please limit questions to one per firm.

With that, I'll turn the call over to Martin for a review of the June quarter results.

Martin Anstice

Thank you, Carol. This afternoon, we will concentrate the discussion on our June 2008 quarter financial performance and where appropriate provide some linkage to recent disclosure in our investor and analyst meeting.

Highlights of reported earnings for the quarter are very strong cash performance, including a solid contribution from our recently acquired SEZ business. Stronger revenue performance than initially anticipated, some specific cost containment in operating expense, one-time costs to lower the future breakeven points of our Clean Product Group, and tax rate benefits, one-time and ongoing, also contributed to our EPS performance being stronger than our guidance.

As a reminder, this is the first full quarter of consolidation for our recent SEZ acquisition and to assist you in understanding our business through this period of transition, I'll again provide some specificity related to our Clean Product Group. I will be deliberate in my references to the total company, to the SEZ business, or to the underlying pre-acquisition core of Lam as appropriate.

Now to expand on these headlines. total company shipments declined 25% sequentially, and in aggregate, we're at the low end of our guidance range. Now our customary etch applications and market segment shipments disclosure is 300-millimeter applications at 90%, applications at less than or equal to the 90-nanometer technology node at 90%, memory segment customers in the quarter at about 75% of the total with the NAND components accounting for approximately 38% of total memory. Foundry was 12% with logic other at 13% of the total.

Earnings for the June 2008 quarter included revenues slightly above our high-end guidance at 566 million, the upside driven from our etch business. Overall, the high level of customer concentration in our business, discussed earlier this year, continued through June. For the SEZ business specifically, we were successful in our transition to an acceptance-based model, reporting revenues of slightly less than 40 million in the quarter, which was consistent with our expectations.

Consolidated ongoing gross margin of slightly less than 44% of revenues was in the upper range of guidance, although down sequentially, due principally to worsening of the higher customer concentration theme, the lower business volumes impact on fields and factory resource utilization, and specifically the unfavorable impact of SEZ to our consolidated gross margins of approximately 1 percentage point.

As we have stated consistently, we continue to invest in long-term growth of the company and with that in mind, our total company ongoing operating expense level was approximately 161 million in the June quarter, representing an increase of 12 million sequentially. We incurred a full quarter ongoing operating expense for SEZ of 24 million, compared to the past quarter expense of 6 million in March. The underlying operating expenses of core Lam reduced sequentially by 6 million. in large part due to lower variable compensation on lower profits and the return to a more normalized level of payroll taxes.

Before moving to the balance sheet, non-ongoing P&L items are as follows. We incurred approximately 19 million in restructuring expenses related to streamlining our Clean Product Group, approximately two-thirds was non-cash. A headcount reduction of approximately 170, incurred 6 million in one-time costs. In addition, we recorded a 13 million asset impairment associated with facilities actions and initial product line integration roadmaps.

As previously stated, we expect these actions to result in annualized savings of 25 million effective September 2008 quarter. In addition, and unrelated, the company reported a one-time tax benefit 12 million from a favorable settlement of an international tax item. To a large extent, impacted by this benefit, also a more optimistic outlook for our use of historic tax assets of SEZ and some other customary year-end tax items. The US GAAP income tax rate for the fiscal year ended June 2008 was in the range of 24%, compared to the 28% previously anticipated. This rate reduction in the time frame close to the fiscal year-end significantly lowers ongoing rate for the June 2008 quarter.

Our best estimate of our medium term income tax rate is still in the 25% range, plus or minus a percentage point, and this is the basis for our September quarter guidance that will be provided today.

Now turning to the balance sheet, cash and short-term investments, including restricted cash, increased by approximately $200 million, to end the quarter at $1.2 billion. This achievement is largely a contribution from two factors. The first, strong customer collection performance, and second, decreasing material purchases and inventory balances on lower business volumes.

Our cash from operations was 35% of revenues, which is on its own a significant headline for the company. As I stated last week, although we are expecting the operating performance of SEZ to be dilutive to earnings in the calendar year, we are targeting positive cash generation in 2008 from that business. In the June quarter we meaningfully delivered to this objective by contributing approximately $15 million to the total company.

The consolidated deferred revenue balance for the total company was $194 million. In addition there was approximately $52 million of anticipated future revenue for our previously made shipments to Japanese customers.

In the quarter there was no stock repurchase activity by the company, consolidated capital expenditures were $19 million, depreciation and amortization was $19 million, our employee head count ended the quarter in the 3700 range.

In addition to the earlier comments of SEZ cash generation, our operating asset performance and focus remains very strong. Total company account receivable collection performance had a DSO of 66 days, with inventory performance at 4.5 churns.

As always, for more complete details of the geographic breakdown of shipments and revenue, please see today's press release on the web site for a reconciliation of shipments, revenue, deferred revenue and cash.

To recap the important headlines, we were pleased that through a period of significant contraction in the industry, we delivered healthy ongoing operating performance and in particular, strong cash from operations. We lowered the ongoing operating expenses of the core Lam business and prepared for further reduction of spending that will feature in our September quarterly guidance today

We consolidated a full quarter of SEZ into the financials and accelerated our integration plan, lowering the break-even of our cleaning product group, and we reported two significant non-ongoing items this quarter, the $19 million restructuring expense and a $12 million favorable tax benefit. Now to Steve's comments.

Steve Newberry

Thank you Martin, and good afternoon everyone. As Martin described, I think Lam had a very successful quarter in a challenging environment, with our June quarter shipments, revenues, and earnings per share all beating or exceeding our previously stated expectations.

In addition to solid financial results we made significant progress with our SEZ integration activities, and have begun extensive cost reduction activities to more appropriately size our clean product group for the market served and deliver improved financial performance in future quarters.

Since our last quarterly call we updated our 2008 outlook. The macro-economic environment has continued to deteriorate, and our outlook for 2008 wafer fabrication equipment is for spending to be down 25% to 30%, compared to 2007.

As we previously indicated, even a down 25% spending scenario for 2008 requires a significant uptick in shipments activity in the December quarter. For this to happen we would need to see improvement in both NAND and DRAM, supply versus demand balance, and a resumption of spending by the Taiwanese DRAM manufacturers, as well as foundries.

On the positive front overall IC units are still forecasted up 11% in calendar year ‘08, and the PC and cell phone market outlook continues to be strong with forecasted unit growth between 10% and 15% in 2008. Cell phone demand is being driven more by lower-end phones, which means demand for high chip content and performance requirements has not been as strong as expected.

The growth in PC's and cell phones, however, suggests that some demand-led capacity additions may be on the horizon, although the timing of those capacity additions is still uncertain. The expected level of spending for equipment in the September quarter will be sharply down, relative to June, it may represent the trough in equipment purchases for this cycle. But the question remains, as to how many quarters this trough type environment will continue.

In etch and clean, we believe the reduction in equipment spending for calendar year 2008 may be down a few additional percentage points more than general wafer fab equipment, which is the normal trend in those markets in a downturn.

With the current uncertainty around the timing of the resumption of customer spending for wafer fab equipment, I would like to discuss our areas of focus during the challenging near term environment. Right now on clean, our focus is on activities which provide a single point of contact to the customer, in addition to targeting numerous application specific penetration opportunities with our broad clean product portfolio.

As we shared with you at our recent analyst event, we are engaged with several significant customers in valuing opportunities for transition to single wafer clean in the front end of the line, and are encouraged by the number of opportunities for product penetration and market share expansion. Customer recognition of the need for more effective clean solutions at the 5X and 4X nodes and below is rapidly increasing along with our interest in the advance solution capabilities we provide.

As the adoption of single wafer clean moves to the front end of the line, we believe our production proven single wafer clean technologies in the back end of the line will help us make significant penetrations and facilitate strong participation in the growth of the overall single wafer clean market over the next few years.

As a function of the current environment, we have accelerated a contraction of the operating expenses of the SEZ group and we undertook a worldwide restructuring activity in the Clean Product Group during the June quarter. We expect these actions will lower ongoing costs in our Clean Product Group by approximately 6 million per quarter. We continue to evaluate opportunities for cost reduction and operating asset improvements, as we align the product roadmaps and backoffice needs of the combined companies, and we expect to have a second round of cost reduction activities for the Clean Product Group later in 2008, largely related to backoffice efficiencies.

In addition, our variable business model has allowed us to reduce cost in the company as a whole and we continue to evaluate ongoing cost reduction activities where appropriate. Specifically, we plan to significantly lower certain variable costs which we expect to generate savings of more than 5 million per quarter from our current operating expense levels, and these reductions are reflected in our September guidance.

We will continue focusing on the fundamentals for future growth by continued investment in R&D, and by targeting application-specific market share gains in etch and penetrating new markets with new products. For the September quarter, our guidance will reflect the fact that we are clearly in the midst of a very challenging shipment and revenue environment. Specifically, for September, we expect shipments to range between 350 million to 390 million. Revenues are expected to be in the range of 425 million to 455 million. Gross margins are forecasted at 42.5%, plus or minus 1 percentage point, operating margin guidance is in the range of 7.5%, plus or minus 1 percentage point, and GAAP EPS is expected to be in the range of $0.21 to $0.27 per share for the quarter.

To summarize, the remainder of 2008 remains uncertain from a wafer fab equipment spending perspective. However, with the sharp decline in our shipments from the prior quarter to the September 2008 quarterly guidance, we think we are at or very close to the bottom of this cycle, setting the stage for increased purchases in the next quarter or two. The decisions we are making at Lam today are based on how to best manage the company to remain profitable in the short-term, while keeping the company well positioned for the beginning of the new cycle.

Our longer-term strategic view is for return to growth in wafer fab equipment spending in 2009 and for spending to be in the 33 million to 36 billion range in 2010, which is supported by continued favorable IC unit demand outlook over the next several years. To capture that opportunity, we will continue to invest, to extend our positions in etch and single wafer clean by providing our customers with solutions to the technology challenges present at each new generation of integrated circuits. And we will continue the R&D activity necessary to support entry into other adjacent new markets.

As we invest in the opportunities for increasing the profitable growth of the company, we will also continue to leverage our operating model to execute on cost reduction initiatives to support our current profitability cash generation needs.

Thank you for your attention, and we will now open the call to questions. Carol?

Carol Raeburn

We will go ahead with our first question.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from Satya Kumar from Credit Suisse. Please pose your question.

Satya Kumar - Credit Suisse

Yeah. Hi, thanks. Steve and Martin, I just was wondering related to your comment that September to could be the trough. Your shipment run rate in September is clearly much below the revenue run rate and the look out into the order pipeline for the second half. What sort of shipments pickup would you envision in the December quarter? And are you projecting any increases from Taiwan DRAM specifically in December?

Steve Newberry

I think that consistent with the comments that I talked about that should be down 25% in wafer fab equipment spending in 2008, we would have to have a sharp increase in December, and if you look at where the level of the shipments are in September, you're talking really about 50% plus increase in shipments in the December quarter to get into that 25% of range. As it stands right now, customer requests for deliveries in December would support that kind of number, but as we've certainly seen over the last couple months, I think that it's not really a set of deliveries that we can have a lot of confidence in. I think that we will have to watch what happens to pricing, and supply and demand for DRAM and NAND. And if those environments stabilize, then I think the customers will go ahead. But I think there's a lot of fluidity in the December quarter for sure.

Satya Kumar - Credit Suisse

And quick follow up for Martin. Curious what was the reasoning for not buying back stock in the quarter, can you remind us, now that you have SEZ, what's the new minimum cash you need to run the business and what's your thoughts process on buybacks given by the stock side?

Martin Anstice

And so the obvious response to the question is we don't have an authorization from the Board of Directors to exercise a stock repurchase plan relative to thinking, obviously there's a lot of uncertainty and fluidity, using Steve's words in terms of our outlook. In addition fair amount of, I would say, volatility in capital markets generally, which is very relevant for us answering the question.

Clearly we have cash in excess of our day-to-day operational needs. In fact we just generated probably our top five quarters ever, in terms of cash from operations performance in the company. So, I would say at least for now the decision making process relative to what we are doing is still defined around investing in the profitable growth of our company. That clearly is a long-term perspective and decision, and we're not going to make a short-term choice to undermine the long-term potential growth of the company.

So for now plenty of dialogue at the executive team level on the subject. I'm sure a continued dialogue at the Board level, but until we have a Board authorization there really is nothing more to contribute.

Satya Kumar - Credit Suisse

Thanks.

Operator

Thank you. Ladies and gentlemen, please limit your questions to just one question. And the next question comes from Jim Covello from Goldman Sachs, please go ahead.

Jim Covello - Goldman Sachs

Thank you very much, I appreciate you taking the question. If I'm only allowed to ask one, I'll ask about gross margins and the dynamics of gross margins. As we get to the bottom of the cycle and then we come out of the bottom of the cycle, between shipments or among shipments, revenues and mix, how do we think about modeling gross margins going forward? What's the most important criteria, is it shipments, revenues, is it the mix or how does that all break down? Thanks so much

Steve Newberry

I hate to say all of the above, but I'm going to kind of say that. But to be a little bit more helpful I'll try and bridge a couple perspectives for you. One of them is, as you look at the June quarter compared to March, we drifted off in the range of 4 percentage points of margin, and typically – and this is a very, very general kind of response to the question, typically a 50 million change in volume impacts the company by about percentage point increase margins and it is plus or minus a bit. But if you kind of took a very long-term perspective, a point or so gross margin for $50 million is where we are and clearly volume in that area was an impact in the quarter.

We did have, as I said, about a percentage point for SEZ and the remainder was mix and the mix has kind of two components to it. One of them is a concentration of the business around a few number of customers and we're clearly not for obvious reasons go get into too many specifics with that, but we did begin the trend of concentration of spending in the March quarter. It worsened and that contributed one or two percentage points to the regression of gross margins in the quarter.

The other elements of the mix is the importance of the customer service business group. So, in the March to June timeframe where our revenues kind of contracted to the $566 million level, the underlying customer service install base business spares and service, and upgrade and refurbishing etc, actually expanded. And in fact in the outlook that is also a continuing theme. So you've got an environment where although Cap Ex is coming down or has come down year-over-year, our business in customer service is actually increasing. And as a reminder customer service business group gross margins are in the range of 5 to 10 percentage points worse than the system's business, but the operating income level is about the same. But the profile of the income statement is quite different. You have got a lot of moving parts unfortunately Jim, but I hope that context around a point or so for every million, the type of impact of concentration and the SEZ can kind of get you there.

I am hopeful that certainly what goes with an expectation of any uptick in December in spending, is less concentration and more participants in spending. And just like when we had less participants, margins got worse, I would expect with more participants, margins would get a little better. But, you know, lacking, I would say real substance and fidelity about predicting December business, it would be a little premature for me to start signaling a margin expansion for mix right now.

Jim Covello - Goldman Sachs

I really appreciate it, thank you.

Operator

Thank you. Our next question comes from Gary Hsueh from Oppenheimer and Company. please go ahead with your question.

Wayne Guyon - Oppenheimer and Company

Hi, this is [Wayne Guyon] for Gary. First question regarding the revenue looking forward. If we assume 25% CapEx trough in 08 and looking at the first half of the yea and the guidance for Q1, we are looking at below 400 million level on the revenue for Q4. Does that make sense to you regarding below 400 level or the revenue run, and if that's the case, what kind of gross margin are we looking at and operating margin are we looking at?

Steve Newberry

I'm glad you asked that question, because I think that typically if you look at shipments in a given quarter, it's a pretty good proxy for revenue in the next quarter. But the reality is, is that it's not always the case. If the shipments pick up strongly in December as they're currently scheduled to do with our ability to turn about 50% of those shipments into revenue, you can very much change the revenue forecast for the December quarter to be at a much higher level than what the shipments level are in September.

And so while December is clearly remaining an unknown, if we do get that uptick and if we do assume the 25% CapEx environment, then the revenues in the December quarter will actually be higher than the revenues in the September quarter, even though the shipments in September are very low. And so I think that what you can expect from a margin standpoint is that we certainly would be absorbing significantly better relative to factory period expense.

We certainly would expect somewhat of a better mix environment, although as Martin said, it's really hard to predict what's going to happen in the December quarter because there's so many moving pieces right now. But the reality is, is that we have every expectation that if spending is down 25%, shipments will be up sharply in December, revenues will be up for Lam in December, and so will our profitability. But I don't want to get specific because there's just too many unknowns right now.

Operator

Our next question comes from Jay Deahna from JPMorgan. Please pose your question.

Jay Deahna - JPMorgan

Thanks very much. Martin, can you give us the line item breakdown of the restructuring and the tax issues, so that we can accurately pull those out of the income statement?

Martin Anstice

Yes, I will do that. We have got, and there should be a reconciliation table on the website Jay, so if I don't get it perfectly it probably is worth a quick look at that as well. We have got restructuring and asset impairments in cost of goods sold and in operating expenses. The cost of goods sold item which obviously impacts gross margin in GAAP terms is 12.6 million and the operating expense restructuring impairment is 6.4.

We have some residue and some new costs associated with the stock option on the new cost is the tender offer and any tax penalties that go with that reality until we have complete resolution with the IRS, so that's combined $3.7 million and the tax benefit on all of those things is $6 million. In addition to that, so that's kind of the headline in terms of the restructuring asset impairments. In addition to that, there's a one-time $12 million benefit associated with an international tax settlement. So combined, you end up driving to an ongoing operating income as a percentage of revenues of just a little more than 15%.

Jay Deahna - JPMorgan

Okay. And then Steve, quick fundamental follow-up here. Now that you have had a few quarters to kind of get to know SEZ, digest it, etcetera. What you got, how does that compare to what you think you were getting when you decided to buy the company? And can you give me a little more detail on where you stand in terms of product tightening, the combined modules and platform?

Steve Newberry

Well, I think that in terms of buying what we thought we were buying, I think it was largely what we expected, although certainly what we weren't expecting was that the magnitude of decline in spending would be as sharp as it is. And given that a lot of SEZs prior revenues were from logic and foundry in the back-end and clearly the rate of investment in logic and foundry in '08 is below what was expected and SEZ had pretty good share in memory as well.

So what we're very pleased about is that the product capability and the technology solution capability on what's called the Da Vinci prime is very strong. We're beginning to shift that product in increasing numbers each quarter. The customers' recognition of needs at the 5X and 4X node is really something that's starting to change very rapidly. And what they recognizes is that some of those needs are going to be best served by our C3 linear cleaner because of its short contact exposure time and its developing a very high particle removal efficiency and damage free capability and then in more of the let's say critical but slightly less critical areas that are more of a high productivity play than the DV prime is really getting a lot of traction along with our plasma [BEFL] product.

So in terms of answering the last part of your question, we think that we're going to be able to take some of our drying technology, some of our particle removal and damage free capability and integrate some of those technologies into the SEZ platform and the SEZ product mix for the DV prime. But we're in the middle of really looking at all the engineering issues associated with that.

I think what the customers recognizes given the diversity of applications and the difficulty of some of the technical solutions that are needed, that it's very likely that you're going to need different types of technologies on different types of platforms and one of the things that they're very happy about is that, Lam is a single source provider, in the sense that they can work through all of these activities using different technologies and different platforms, but they can do them with one supplier and they're very happy about that.

So we're very encouraged about the opportunity going forward, but it's clearly going to be a number of quarters of penetration and volume ramping. But we're happy with what we got and in particular we're very happy with the people, with the engineering and technology capability, with the enthusiasm of the SEZ people and they're integrating with our people very well and I suspect it's going to be a great team.

Operator

Our next question comes from Timothy Arcuri from Citigroup. Please go ahead with your question.

Timothy Arcuri - Citigroup

Hi guys. Steve if I look at the difference between your shipments and your revenue, you've never. And, I mean I'm going back like three years. You've never had two quarters where you have such a big gap between revenue and shipments. If I take the June quarter and take the guidance, for Q3, so yet you're kind of talking about Q4 saying that, shipments could be up in Q4. It would seem to me like there's more downside risk given the gap that you have seen in both June and September that, there's more downside risk to revenue in December. Is there some reason why, something that's going to be different in the December quarter that's going to allow you to turn business a lot faster than what you could in either June or September.

Steve Newberry

Well, if you look at the shipments in June while they were down our revenue, you know, continued to be very good because we're able to draw from our deferred revenue, which is both our deferred revenue and our Japan situation, and I think that we're going to end up in a situation where if we look at what's going on in September, we're clearly going to take that very low shipment environment, but we're going to turn a lot of those shipments to revenue and we're going to pull from deferred again. Now, clearly if the shipment environment in December were to let's say go flat and if it goes flat then we're talking about really having wafer fab equipment spending for the year be 30%, maybe 30% plus. So if that were to occur then yeah, we would certainly see our revenues drop from the levels in September. But if we get the uptick and it's a significant uptick that's currently being forecasted, then because of our ability to turn 50% of that plus the residuals that came from the prior quarter, plus we still have some deferred, we would actually be able to increase our revenue at a rate that's well above the shipment levels of September.

And so it's one of the benefits of a very fast cycle time is that when your customers respond and you can increase your factory output, you can turn up the revenue very quickly.

Martin Anstice

I just would like to add one point, Tim, to kind of [segue] from an earlier comment I made around mix and the customer service business group business. So, we have kind of articulated a couple messages for the last six months or so. One of them is, we said the customer service business group, part of the business is, in the range of 20 to 25 percentage points of our revenue at any point in time. In this call today I've articulated that, in spite of the fact that our business levels have come down, our customer service business group continues to increase. So we're kind of pushing the upper end or even beyond that boundary and that business does turn on the day it ships.

So we don't have an acceptance space delay for the customer service business group and so as it takes an increasing proportion of our revenue stream, it is in fact distorting this relationship between revenues and shipment. And unfortunately in the timeframe, if you look at the last couple years you have to go back, all the way back to March 2006 to see anything close to the revenue level that we have guided. And I can absolutely assure you that the customer service business group revenue stream in that timeframe was significantly less than the level of business that we have today as a by product of the install base expansion that we have been talking about for the last couple years.

So I mean unfortunately it's a modeling challenge and we're helping as much as we can. But it's obviously, it's rather difficult right now.

Operator

And our next question comes from Bill Ong from American Technology Research. Please go ahead with your question.

Bill Ong - American Technology Research

Yes. What's the revenue portion of the group in the June and December quarter.

Steve Newberry

In the June quarter, it was pretty much where we had anticipated, it was just less than 40 million. And consistent with my comment during the last call, we are not intending to segment our revenue stream ongoing. So we haven't been specific in our guidance today.

Bill Ong - American Technology Research

Okay. It's probably looking that general range in September, is that somewhat fair? I just want to get a sense of September, how much is core and how much is the SEZ?

Steve Newberry

I'm going to be really boring and say we have made a decision not to segment our stream of revenues for the SEZ business in September.

Operator

Our next question comes from Steve O'Rourke from Deutsche Bank. Please pose your question.

Steve O'Rourke - Deutsche Bank

Thank you. Good afternoon. I hate to kind of beat a dead horse here but as far as Q4 goes, calendar Q4, can you help us understand what the composition of this potential upswing in shipments is in the December quarter? What are you seeing that kind of gives you confidence to internally forecast this potential shipments increase?

Steve Newberry

Well, I mean, I understand people's concerns, but if you kind of look at we have been coming down really now in memory since the September quarter of '07. And while it's been ratcheting down, the June quarter represented a pretty sharp drop and now the September quarter represents another even sharper drop. And everybody's kind of reporting the same thing. And the reality is that I think that if we look at where we think supply and demand is going with NAND flash and DRAM that we think that those things will start to get in balance sometime in the fourth quarter, and customers are going to need to take deliveries in the fourth quarter and get their output capability back online.

And when you drop as low as the June quarter was in shipments and then you drop really low in shipments in the September quarter, it doesn't take a whole lot to kind of bounce back up and even if you were up 50%, 60%, 70% below the bottom from a system shipment perspective, even still have a December quarter that's well below what the March quarter was.

And so I think that the basis for the forecast is really two things. One, kind of what we think is going on in the macro environment, and most importantly, it's based on what the customers are telling us, they believe that they need to do, the timing of when they need to do it, and also the basis of their assumptions relative to what they think is going on in the market. And so clearly if the demand environment falls off, then I think we have the issue where we will see December shipments decline from what is currently being looked at right now.

And I think that's why anybody you talk to will tell you that December's looking like it should be much better than September, but, I mean, there is too much change going on right now and so we're positioning ourselves that if we have to output those shipments, we can do it, we can convert it to revenue and we will have improving profitability. If the environment bumps along at the bottom for another quarter or so, then we will continue with our cost reduction activities and we will continue with keeping the company positioned for the future, but insuring that we deliver profitable performance and cash generation.

Operator

Our next question comes from Edwin Mok. Please pose your question.

Edwin Mok - Needham & Company

Hi. Just about last question. So can I ask if your outlook for the December quarter given that you believe you might have high shipment in December quarter. Is there any part of that driven by foundries that come back to place order there? And just housekeeping, do you expect to have any restructuring charge next quarter?

Steve Newberry

Martin will answer the question related to restructuring charges. But if I look at the makeup of what the current customer mind set is for deliveries in the December quarter, it's up in memory, it's up in foundry, it's up in logic and that's not really saying a whole lot, because when you have the kind of forecast for shipments in the September quarter that I think represents what's bottom in the shipment demand. You would expect that each of these segments would move forward in a more positive direction, but certainly foundry is looking like it will be higher in the December quarter than in September.

Martin Anstice

So to the restructuring question, unfortunately I can't be quite so specific in my response. But let me kind of reinforce a couple things that we said in the analyst meeting. First of all, there is kind of a second leg to our cost reduction and breakeven point lowering in the Clean Product Group associated with kind of backoffice integration, legal entity, warehouse, etcetera. And the business message on that is we are very focused on delivering to those plans as fast as is practically possible.

And I would say at this point in time, it's not clear to me whether that will be precisely in the September quarter or precisely in the December quarter. I would be surprised if it ran into the March quarter where we're focused on this calendar year in terms of execution. It is possible with costs associated with those actions won't warrant a specific restructuring plan. It is also possible that they may. And so, unfortunately I can't specifically respond, but hopefully you have a sense that we're tentative to driving the right set of economics in the company as fast as possible. And obviously if that means we have an opportunity to take steps to improve performance. Sooner rather than later we wil and the money we spend to realize those benefits is obviously assessed in terms of a pay-back point of view. Pretty much the same away as the actions we have just completed.

Operator

Our next question comes from Patrick Ho with Stifel Nicolaus. Please go ahead with your question.

Patrick Ho - Stifel Nicolaus

Thanks a lot. Steve, just looking at the current memory environment and given the problems of many of your customers, particularly in terms of financing, are you doing anything in terms of payment schedules to help these customers and does that potentially affect some of the shipment and revenue recognition that you're talking about over the next few quarters.

Steve Newberry

That’s kind of two answers to the question. One of them is pure simple collections and payment cycles and as you might expect, there is a fair amount of pressure on us andi am sure every equipment company to try and assist and accommodate the types of possible challenges of many of our customers and in some cases real economic challenges of customers, but I would say, we can't let into the air, we made choices in terms of how we were going to allocate the capacity of this company to be part of that process and in fact quite honestly it's gone better than I anticipated. So the actual extension of terms hasn't been as great as we had originally kind of anticipated at the beginning of the year and the quality of receivable that we have is very high. We have probably about as good as we have ever had in terms of on-time payment of performance.

So in general, a fairly kind of positive message, but something to be attentive to, relative to the impacts on shipments half of that will non- relative to the impact in terms of revenue recognition. There is a potential, but to-date we have actually not elected to defer any material revenues as a by-product of collections concerns. So that's I guess a basic no to your question. And perhaps other than the obvious that if the customer doesn't have any money at all they're not going to be buying stuff.

Operator

Our next question comes from Brett Hodess from Merrill Lynch. Please go ahead with your question.

Brett Hodess - Merrill Lynch

Good afternoon. I'm wondering since the customers are indicating the sharp uptick as you mentioned in the fourth quarter and that means that capacity will be coming online in the first quarter, which is usually a seasonally weak quarter, if you think the customer needs here are basically, a quick upgrade in technology that could drop off again or do you think it's sustainable as you move into the first part of the year?

Martin Anstice

Well, I mean, that's a good question Brett. And the reality is that with the steep reductions in shipments in June and September, I think that some of the customers are expecting that demand environment going forward is going to be okay. And that there's probably going to be a shortage situation that may come about in the fourth quarter and they're going to need to add capacity in the first quarter and then expectations of a reasonable demand environment in DRAM, but a accelerating demand growth environment in NAND Flash as additional applications come online for smart phones and a second half of '09 ramp for SSD in PC's. There are some new fabs that are working with new partnerships, specifically the Micron, [NAND], you have JV that is going to be a [switch-in] technology. And so there's some longer lead-time of all activities that can contribute to this environment as well.

Operator

Our next question comes from [Keith Todd from Morgan Stanley], please go ahead with your question.

Keith Todd - Morgan Stanley

Hi, thanks for taking my question. Could you remind me what percentage of the single wafer clean market is memory and what's non-memory and what's your market share in each of these segments.

Steve Newberry

We're not, we're not breaking down the clean market share in each of these segments right now. What we're focused on is certainly that there's a lot of activity at the 5X and 4X, which is very much both DRAM and NAND Flash oriented. And to some degree in logic as logic begins to do some of the early pilot runs at the 45 nanometer node. We want to kind of let the next six months or so, all of 2008 kind of sort itself out in terms of where's the activity going? Because we understand it as it relates to the back end of the line cleans, but the front end of the line is a really dynamic and moving environment in terms of a lot of evaluation, but not necessarily clarity as to who's going to buy what single wafer cleaners, for what applications, for what volume production. So we will be h happy to kind of take a look and share with you our thoughts about the clean market by segment but we are going to that more towards the end of 2008.

Operator

Our next question comes from Krish Shankar from Banc of America Securities. Please go ahead.

Krish Shankar - Banc of America Securities

Yeah. Thanks for taking my question. Just a quick question. Martin if I look at your SEZ, probably your gross margin and these margins are running in like the single digits. Let's say post-restructuring for Lam as a whole, what are gross margin and operating margin look like, let's say at $600 million revenue run rate? And also can you tell me what percentage of shipments will be from memory in September?

Steve Newberry

This is Steve. I'm going to talk about the generalities of the SEZ margins and the core Lam margins. So the core margins for Lam in the June quarter were in the 19% range, and the core margins for September even in the midst of this very significant down environment will be around 11% or so. And the reason that I bring this up is that what we have always talked about in the company was in the core Lam business that we would be able to handle a peak to trough revenue decline of 40% and keep the operating income performance of the company above 10%. And we are clearly doing that, although it's certainly difficult to see, but that is the case.

The margins for SEZ at this point right now given the low volume and the high absorption cost not only in the factory, but in the OpEx structure are in the mid-20s and certainly as we get some improvement in that volume, I would expect them to move very rapidly into the mid-30s. And then certainly as we begin to grow and leverage the business more effectively, our target is to get those margins into the 42.5% to 45% range and we will have to see how well we're able to do that by leveraging the volume, reducing the cost structure, but also being able to price the value relative to the competitiveness of the products. And so that will play itself out over the next 18 months or so. But I did want to speak to the performance of the non-SEZ core Lam because I think that it's very strong and it's right on our models.

Carol Raeburn

We have time for two more questions.

Operator

Our next question comes from Stephen Chin from UBS.

Stephen Chin - UBS

Thank you. Just a follow up to that in terms of managing the company in case the shipments stay at these depressed levels, do you think this 7.5% operating margin guidance that you gave for the September quarter, you can [now describe] operating margin for the company. And just a follow-up for Martin, is the Clean division still targeted to have a revenue breakeven level of 85 million to 95 million. Is that [company] concept still the target? Thanks.

Steve Newberry

Relative to the 7.5% be in the trough, I hope so. I mean, certainly if we get the shipments uptick in the December quarter, and we get the revenue that flows with it, as I talked about, it will be. But the reality is that I don't really know what's going to happen. And so if you play out the 25% wafer fab equipment down scenario, then it will be. If it's 30% then we will have to see how the mix plays out, we will have to see how our cost reduction activities would play out. But certainly we're going to stay very focused on continuing to deliver profitability, continue to generate cash and we will take whatever appropriate cost reduction activities there are to make sure that the company remains profitable even if the environment continues to be very negative for the next quarter or two.

Martin Anstice

This is the second part of your question to be more specific. Relative to the breakeven point, when we were in the Analyst Meeting SEMICON West, I said we are as a byproduct to the actions we have just reported, we are positioning the Clean Product Group to have a breakeven of around $85 million to $95 million in quarterly revenue. Now the Clean Product Group is the collection of three businesses for us. It's the former SEZ business, which is a spin base business, it's the bevel plasma business we have from our Coronus product and its also our linear C3 product.

So one of the messages that I hope everybody has recognition of is that the 85 to 95 isn't an SEZ breakeven point, it's a breakeven point for a collection of three businesses and that's quite a significant difference. As I also attempted to articulate in the Analyst Meeting, I'll reconfirm today we have already identified a kind of second level of cost reductions that are currently in plan and that should kind of further lower that breakeven point in the range of $5 million to $10 million. So our business plan here and our objective clearly is not to have a business with revenues and a loss, and so everything we're doing is intended to position the company to have a profitable a return as fast as possible from the collection of clean businesses that we have in the company today.

Operator

Our next question comes from C.J. Muse from Lehman Brothers. Please pose your question.

C.J. Muse - Lehman Brothers

Yeah. Good afternoon. Thank you for taking my question. I guess, I was hoping to get a little more granularity and not try to kind of harp on 4Q shipments, but could you talk a little about, I guess mix- wise for 4Q that you see shaping up now relative to what mix looked like in June. And then if you can maybe provide some color around geography or whether it's Tier-1 or Tier-2 DRAM, NAND? That would be helpful. And then the second part of question, maybe the last one here. Can you give us a growth outlook for service and spares for calendar ‘08 and also an early look into calendar ’09? Thank you.

Steve Newberry

So I understand your desire CJ from the standpoint of more granularity, but the reality is, I don't think it's an exercise that's really worth pursuing. Because I can tell you that every week there's literally 25 to 50 million in customer orders that come in or customer requests for shipments that come in and 20, 30, 40, 50 million that go out. And today I could give you a mix of what we're looking at relative to memory and I'll guarantee you that in two weeks it will be different.

What I think that you should think about is if we're going to have a strong uptick in the December quarter, it will clearly need to be largely driven by memory investments and that would be both NAND Flash and DRAM. It will likely include an uptick in general purpose logic, advanced logic and foundry. And, I think, that it's going to require that the Taiwanese who have certainly suffered significant losses believe that a return to profitability relative to DRAM pricing is there. But, we will all just have to watch this play itself out. Because, I think everybody's well aware of what the planned investments are and the reality is that they may or may not manifest itself.

Relative to our customer service business, it's going to grow about 12% to 13% in calendar year ‘08 versus ‘07. And we would expect that even though, we continue to have a decline in the amount of investment in waiver fab equipment purchases in ‘08, the install basis still growing. And as the install base grows, if the IC unit demand continues to grow, which we forecast will be the case in ‘09, then wafer starts are going to grow. So if waiver starts grow then the customer service business will grow as a function of that.

And so we would expect that it's probably – we're going to be looking at probably about a 10% growth in the customer service business for calendar year ‘09 over ‘08.

Martin Anstice

And almost through the ‘08 commentary that Steve just gave, relative to wafer, he excludes the impact of the SEZ acquisition. So it's an apples and apples comparison.

Operator

Thank you. I would like to turn the conference back over to management for any closing comments.

Carol Raeburn

I would like to thank you for joining us today. Please be advised that the webcast of today's will be available on our website later this afternoon. Please join us for our next quarterly financial update scheduled for Wednesday, October 22nd, 2008. Thank you for your interest in Lam Research and for participating in today's call.

Operator

Ladies and gentlemen, this concludes the Lam Research Corporation June, 2008 quarterly financial result. We thank you for your participation, you may now disconnect.

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Source: LAM Research Corp. F4Q08 (Qtr End 06/29/08) Earnings Call Transcript
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