Lam Research Corporation (NASDAQ:LRCX) Q1 2009 Earnings Call April 22, 2009 5:00 PM ET
Carol Raeburn - Senior Director, IR
Ernie Maddock - SVP and CFO
Steve Newberry - President and CEO
Gary Hsueh - Oppenheimer World Markets
Jim Covello - Goldman Sachs
Brett Hodess - Bank of America/Merrill Lynch
Tim Arcuri - Citigroup
Satya Kumar - Credit Suisse
Weston Twigg - Pacific Crest Securities
Atif Malik - Morgan Stanley
Stephen Chin - UBS
Ben Pang - Caris & Company
CJ Muse - Barclays Capital
Patrick Ho - Stifel Nicolaus
Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Lam Research Corporation March 2009 Quarterly Conference Call. During today's presentation all participants are in listen only mode. Following the presentation the conference will open for questions. (Operator Instructions). This call is schedule to conclude at 3 o'clock PM Pacific Time.
At this time I would like to turn the conference over to your host Ms. Carol Raeburn, Senior Director of Investor Relations. Please go ahead, ma'am.
Thank you, operator. Good afternoon, everyone, and welcome to Lam Research Corporation's quarterly conference call. Here today are Steve Newberry, President and Chief Executive Officer; and Ernie Maddock, Lam's Chief Financial Officer.
Today we will discuss the financial results for the March 2009 quarter, and Steve will share our business outlook for the June quarter before opening up for Q&A.
A press release detailing our financial results for the quarter ended March 29, 2009 was distributed by Business Wire shortly after 1 o'clock this afternoon and is available on our website, at lamresearch.com.
Today's call contains forward-looking statements including those relating to our forecasts of shipments, revenues, expenses, margins and earnings per share, as well as other statements of the company's expectations, beliefs and funds that are important factors that could cause actual results to differ materially from those described in these forward-looking statements, which can found in the slide package accompanying this conference call and on our most recently filed Form 10-K. All forward-looking statements are based on information as of today's date and the company assumes no obligation to update any of them. This call is scheduled to last until 3 PM and we ask that you please limit questions to one per firm.
With that, I will turn the call over to Ernie for a review of the March quarter results.
Thank you, Carol. This afternoon we will discuss our March 2009 quarter financial performance. While lower business volumes were clearly evident during the quarter we are pleased to have met our guidance in all categories. Shipments for the March quarter were $159 million consistent with the mid point of our guidance range and down 30% from last quarter. For the quarter 300-millimeter applications represented 87% of total system shipments and applications at less than or equal to the 90-nanometer technology node were 87% of system shipments.
Memory segment customers in the quarter comprised about 56% of total systems shipment and as a subset, the NAND component represented approximately 22% of total memory. Foundry customers were 16% of system shipments with logic and other at 28%.
March quarter revenue was at the mid point of our guidance range at $174 million and down 38% from the prior quarter. Both our systems and installed base business units performed at expected levels. During this period of reduced capital spending on equipment, our installed base business unit continues to be an important contributor to our revenues.
March quarter ongoing gross margin was at the high end of guidance at 26.8% and lower than the 38.5% gross margin for the December quarter. Approximately half of the margin difference is due to lower factory and field absorption and the remainder is due to product and business unit mix.
Turning now to review our quarterly expenses. Ongoing operating expenses were $129 million in the March quarter which is up $2 million from the December quarter. As you may recall, our December quarter operating expenses benefited from one-time credits related to accrued compensation reversals and the reduction in Executive Deferred Compensation liabilities resulting from stock market declines.
In the March quarter operating expenses, we saw the expected savings from the salary reductions that we are announced on our last call, as anticipated though this compensation savings were offset by an increase in employer payroll taxes which are typically higher in the first quarter of a new calendar year.
Additionally, in response to recent financial announcements from our customer base, we recorded within operating expenses a charge of $7 million to increase the reserve against our receivables balance.
Our ongoing operating loss comes in at the mid range of guidance at $82 million. In the March quarter ongoing other income was $8 million an increase of $8 million from the prior quarter as the December quarter was negatively impacted by a $4 million ineffective revenue hedge.
For the March quarter half of the other income is from net interest income and the other half is from foreign exchange hedge gains. We recorded non-ongoing expenses totaling $108 million for the quarter, this consist of a $7 million gain on currency fluctuations related to our accelerated tax planning strategy and a $23 million charge associated with our restructuring plan as outlined in our 8-K filing of March 19, 2009.
The majority of the restructuring charge was for severance payments related to headcount reductions as well as asset impairments. The facilities component of that restructuring plan and the results and savings are still being determined and will be communicated as soon as we have the information available. In addition, we have recorded a non-cash expense of $89 million for the impairment of goodwill related to our clean product group. We will provide more detail on this goodwill impairment in a few minutes.
For the March quarter, we had an ongoing tax expense of $16 million which is an effective tax rate of negative 21.6% outside the expected range of negative 7% to negative 12% of our operating loss. The change in tax rate relative to our forecast range is primarily the result of a change in California tax law that reduces the estimated 2009 benefit of R&D tax credits by approximately $5 million, while these changes will provide a long-term reduction in Lam’s tax obligations the fiscal year 2009 impact is negative. For the June quarter we anticipate a tax expense of approximately 10% of our operating loss.
GAAP loss per share was $1.58 and the ongoing loss was $0.71 per share consistent with our guidance range and based on our share count of 125.6 million shares. During the course of the last two quarters, we have announced cost reductions totaling $40 million to $45 million per quarter versus our base line quarter of September 2008 with approximately 60% to 70% of these reductions realized in operating expenses and the remainder in gross margin.
As of the March quarter Lam has delivered approximately $25 million in operating expense savings and we are on-track to deliver on the remainder of our overall commitment during the June quarter. We are also on target to achieve the cost reductions committed in the gross margin line. Substantively all of these cost reductions are manifest as a reduction of cash outflows.
Turning now to the March quarter balance sheet, cash and short-term investments including restricted cash totaled $806 million. This balance represents a reduction of $312 million versus the December quarter and is comprised of three key elements, debt repayment, non-operating cash impacts, and net cash used by operations. Debt repayment of $240 million was paid in anticipation of not meeting certain loan covenants.
Due to the current credit environment the refinancing options available at the time were unattractive from a cost perspective and given the strength of our balance sheet we made the decision to pay off a loan, reduced our interest expanse and avoid higher interest payment and other cost related to refinancing.
Non-operating cash impacts of $48 million included investments related to the acquisition of worldwide exclusive sales, distribution and manufacturing rights for the (inaudible) product line of [Social] Incorporated. And net cash used by operations of $24 million consist of $52 million in cash losses from ongoing operations. Other operational related cash disbursements of $59 million both offset by a reduction in account receivable of $87 million.
Looking to June, we expect to reduce cash operating losses from ongoing operations and based on current expense levels we expect that Lam will be neutral on an operating cash basis at revenue levels of approximately $250 million depending upon the product and business mix and business cycle timing.
Accounts receivable days outstanding increased to 103 days up from 93 days in the December quarter predominately as a result of revenues declining more quickly than receivables. As we discussed in last quarter's call we expect that higher DSO levels will continue for the next few quarters.
Inventory was down 3% for the March quarter. Main stream manufacturing and spares inventory performed as expected however several components of our inventory do not vary directly with business levels.
Lam’s balance sheet strength allows us to make critical inventory investments despite the business cycle which help us in maintaining customer trust, securing market share and responding quickly to short term customer requirements. these investments includes spares inventory priced at customer sites to enable rapid response to machine down conditions, evaluation and joint development project units, placed with customers to promote increases in our market share and flexible factory inventory to allow us to respond shortly timed system and upgrade opportunities.
These investments coupled with lower overall business volumes contributed to lower inventory performance of 2.1 turns in the March quarter versus a December quarter performance of 2.7 turns.
At the end of March Lam’s differed revenue balance was $44 million and this amount does not include shipments to Japanese customers of $8 million that will revenue in future quarters.
Returning now to the goodwill impairment as a result of a combination of factors including the current economic environment, a sustained decline in the market valuation for semiconductor capital equipment companies and a decline in Lam's operating results. We have concluded that the fair value of our clean product group is below its caring value.
As a result the company has recorded a non-cash goodwill impairment charge of approximately $89 million in the March quarter. The goodwill impairment charge is based on a current best estimate and will be finalized in the 10-Q report. Total capital expenditures were approximately $11 million for the quarter and depreciation and amortization increased slightly to $20 million.
Employee headcount declined to approximately 2950 from 3300 employees and reflects the additional headcount reductions announced last month. For more complete breakdown of the geographic shipments revenues, please see today's press release in our website for a reconciliation of our shipments revenue, deferred revenue, cash and operational cash disbursements.
Now to Steve's comments.
Thank you, Ernie and good afternoon everyone. Clearly this past quarter was a challenging period for the company as spending on semiconductor capital equipment continued to decline sharply. As Ernie outlined in his comments there are many moving parts to our P&L and balance sheet this quarter.
Bottom line is our actions in the March quarter are consistent with maintaining our strong balance sheet, applying appropriate conservative financial decisions to evaluation and reserves and aggressively reducing cost while deploying our working capital at a variety of ways and strengthen our position for the future.
I think at this point in the cycle, we remained in very good position with our customers and our balance sheet. As many of you have likely observed and heard over the past several weeks the semiconductor industry is starting to see signs that as Intel said recently. The worst is behind us.
As memory prices is improving and utilization of the foundries is increasing particularly at the leading edge 65 and 45 nanometer nodes.
However, visibility into shipment request over the next few quarters is still very limited and as a result we remain cautious about when any significant resumptions and equivalent spending will occur.
We continue to expect that most tool purchases for 2009 will be limited to select technology buys and as such wafer fab equipment spending is likely to be in the range of $10 billion for the year. Consistent with the outlook we shared in our last conference call.
Going forward we expect that several memory customers will upgrade DRAM lines and put in place new wafers to or capacity at the 5X technology. NAND Flash companies will move forward with their conversion to the 3X node and advanced logic and foundry capacity are slowly being put in place at the 4X node. Microprocessor companies will move to 3X over the course of 2009 and early 2010.
All of this activity should result in sustainable shipment levels higher than the March quarter on a going forward basis. But as to how much higher is still unclear beyond the June quarter.
At this point of cycle we are sharply focused on the development of next generation technology solutions working side-by-side with our customers. We have deployed working capital replaces significant number of etch and clean joint development projects and evaluation units at our customers locations to enable successful penetration of new applications and to spend in grow our existing market share.
And as we believe there are number of areas of opportunity for market share growth in both conductor and dielectric.
In conductor these opportunities include critical front end DRAM applications at the 5X node and below. Double patterning where NAND customers are evaluating patterning schemes at the 3X node. And high-k/metal gate in advance logic and foundry for the 3X nodes and below.
In dielectric etch we expect to see increased opportunity for market share growth as a transition of memory from aluminum to copper is completed at 5X DRAM for most memory manufacturers.
In 2008, we won and successfully defended several back end of the line copper selections in both DRAM and NAND as well as some high aspect ratio contact selections for leading edge technology nodes in both of these memory segments.
As the remaining conversion to copper at 5X occurs it remains a sizable revenue and important market share growth opportunity for us. With new application wins in both dielectric and conductor we expect our application based market share to increase by a few more percentage points in 2009 over 2008.
In the clean market we see growth opportunities due to the continued adoption of single-wafer clean in front end of the line applications in 5X and 4X DRAM and NAND, 4X and 3X logic and foundry and particular node is the introduction of single-wafer clean tools in both front and back the line for NAND manufacturing after 4X and 3X technology node.
We are focused on penetrating these new applications in memory and logic as well as defending and growing our strong backend to the line and backside clean positions in our key foundry and logic customers.
Some foundry and logic customers will make tool selection decisions in 2009 for 4X and 3X technology nodes and we are working closely with most of them to win PTOR positions high-k/metal gate, front-end of the line post-etch and post-etch clean applications.
We are positioning the spend base DV Prime to penetrate post-etch and post-etch clean in front end of the line as well as defended expand our backend the line, backside clean market position through the DV Primes ability to efficiently recycle and deliver superior residue particle removal and drying performance in a high productivity low cost tool.
This capability delivers the customer an excellent value proposition related to traditional batch and other single-wafer clean solutions and we have a number of JDP in the ebows with major customers focused on these opportunities.
The traditional strength of our Spin Clean has been in the copper back end of the line and backside Clean for foundry and logic and we continue to work with our key customers to defend and grow these positions and win new applications at the advanced technology nodes.
Our linear clean technology is gaining momentum in front end of the line, memory logic and foundry demonstrating strength specifically in the front end of the line postage cleans where problems of material selectivity critical dimension control and damage control continued to demand technically superior solutions.
We are developing with our customers innovative new technologies in particle removal, drying and multi-step processors that enhance device yields and 4X and 3X nodes and below.
We continue to make progress wining qualifications for new applications at both memory and logic customers. Dry bevel clean continues to be an important area for us in the single-wafer clean markets and we see relative strength in this area for our clean product portfolio during this downturn.
These tools offer yield improvements to our customers by removing defect sources at the wafer etch as well as increasing the number of good dye at the wafer etch. Our bevel clean technology is significantly penetrated at the leading-edge in all IC areas, memory foundry logic and microprocessor and we think that metal hard mass structures in the future will demand more bevel cleaning steps at each successive node.
As we move to next generation nodes in all of these device categories we expect the dry bevel cleaning market to go from an estimated fan of approximately $50 million today to approximately $150 million over the next few years, and we expect to have a very significant market share in this segment.
With our spin, linear and dry bevel clean products, we provide our customers the broadest most personal, high productivity yield-enhancing clean solutions in the industry. Relative to the near-term environment, our June guidance is as follows.
Shipments between $200 million and $230 million. Revenues between $180 million and $210 million. Gross margin at 30% plus, or minus two percentage points. Operating loss of $60 million, plus or minus $10 million. And loss per share of $0.50 plus, or minus $0.10.
So as we carefully manage the P&L expense structure of the company during this downturn, we are even more focused on managing our cash flow. While we have increased our focus on limiting cash outlays to maintain a strong balance sheet, we are using and we will continue to use our balance sheet to make strategic investments in product development and solution support at the customer interface and to make expenditures in other areas that strengthen our position in downturn, so we can optimize our profitable growth in the upturn.
So with that, Ernie and I will now take your questions.
Thank you, sir. (Operator Instructions). And our first question comes from the line of Gary Hsueh with Oppenheimer World Markets. Please go ahead.
Gary Hsueh - Oppenheimer World Markets
Thanks, can you hear me, sorry.
Yes, we can hear you.
Gary Hsueh - Oppenheimer World Markets
Okay, I thought am I had a mute button on. If you look at your WSE, and you are kind of maintaining the $10 billion number for 2009, and so just a bit I guess is over the last quarter in terms of spending the environment has stabilized.
Now that 10 billion coming down from roughly 22 employees, a decline of 57%, would it be reasonable to start modeling shipment numbers, somewhere down 50% to 55%, or is there a little bit more upside in the second half that we are somehow missing that might be baking in 2010 CapEx. Can you just help me out with the trajectory of the shipment number coming up of pretty good guidance here for the June quarter?
Well, I think that, where our view is that wafer fab equipment was is probably somewhere around $20 billion, maybe $21, so we are down 50%, 52% as opposed to 57%. But having said that, I think that when you look at the industry and we are no exception. Our shipments were down significantly in the March quarter and our guidance is for shipments to be up at the midpoint about 35% in June.
And I think you look at where we are going to have to be if the wafer fab equipment environment in somewhere around $10 billion. And again, I would emphasize around $10 billion, because it's a very fluid environment that you would expect that shipments would begin to stabilize somewhere in that vicinity as we go forward for the rest of the year if in fact it ends up being a $10 billion wafer fab equipment market.
Thank you. And our next question comes from line Jim Covello with Goldman Sachs please go ahead.
Jim Covello - Goldman Sachs
Great, good evening. Thanks so much for taking the questions. Steve a couple of questions. First just relative to one of the concerns that folks have had about the memory segment in particular, just the idea that there is whole bunch of adornment or latent capacity out there, that is prices improved in memory of this latent capacity would come flooding back online and prevent anybody for making orders.
Given the increase in shipments that you are talking about and the increase in orders that [Nobel] has talked about tonight, I would imagine that doesn’t seemed to be the case, but can you adjust that little bit?
Yeah, I think that when we look at the latent memory capacity it's all sitting at 8X and 7X and even with memory pricing stabilizing, I think you are right that if those that have shutdown the 7X or 8X turned those lines back on, and brought those 512 megabit devices into the market.
You could probably see that, that pricing environment tank. I think that where we look at the investments is that in DRAM, on the rating etch the spending is going to be on 5X and the efforts is going to be on getting two gigabit DRAMs up and in production.
And I think that part of what's in our wafer fab equipment's forecast is an expectation that some of that 300-millimeter toolsets that are been ideal in these 7X and 8X lines are going to come into market in some of the non-critical areas for etch and would service somewhat of damper in terms of how much spending you would normally have to spend to create a 5X line.
So, we are spending a lot of time with our customers looking at whether they want to upgrade, whether they want to refurb and have us take older equipment and upgrade it, whether they want to just buy upgrade chambers and whether they are going to buy new systems.
So there is quite a bit of activity, but it's centered around the customers who have money with which to go and make 5x, investment. I think we also are recently were, just today I think Hynix talked about raising 900 or something million with an equity play.
And so companies are trying to figure out how to get access to capital, so they can make the conversion to 5x. But I think that the speed at which that's going to recur it is going to be muted by what's the demand environment and that's kind of a controlled point for everything, is that if the general economy situation keeps demand suppressed, we are not going to see significant amounts of investment of 5X even if they have the money and they have the technology capability to make the move.
Thank you. And our next question comes from Brett Hodess with Bank of America/Merrill Lynch. Please go ahead.
Brett Hodess - Bank of America/Merrill Lynch
Good afternoon. Steve, you just articulated that some of the areas you are working with the customers, specifically on the technology upgrade. I am wondering if you could talk specifically about for Lam. How much dollar opportunity is there if a company wants to upgrade a fab from 7X t o 5X or on the DRAM side upgrading 6X to a 4X on the foundry side. Can you sort of size for us what those opportunities look like in dollars?
Yeah. We have been doing some work in that area, when you want to upgrade, it depends on how much equipment is available. But I think that if we took a 10,000 wafer start, 5X line and you are going to convert and reuse some 7X.
I think you can probably spend about, let me check it, look at some data right now. Relative to what you would have to spend if you bought all new equipment, you would have to spend 10,000 wafer starts you don't have to spend 95, 90 million in wafer fab equipment.
And if you upgrade and you have a significant reuse, you might only have to spend 10. And so one of the things that and maybe it's a little bit more than that. But I think that we look at it from that etch standpoint. So I can't speak to what it means for LIFO and CBD and PBD and all those tools. But the answer is that are in 7X line or in a 6X line going to convert to 5X or 4X is as fairly good reuse capability on the non-critical steps, and there is also an ability to upgrade a chamber, so that while at it may have been running a critical 7X application, you can actually upgrade that chamber for reasonable price to operated at 4X.
And so I think that what it does is that it can significantly reduce if the equipment is available, how much expenditures going to that 5X line, but I don’t think that there is that much conversion that will occur for too long because we are in one of those periods right now because the overall demand is low, companies can actually a 7X line that would normally be running full out and they could go and shut it down and convert it or they could reduce the wafer starts through that and convert some of those pieces of equipment. But as we see demand start to pick-up the ability to convert some of those tools to 5X or to 4X NAND is going to be reduced.
Thank you. And our next question comes from the line of Tim Arcuri with Citigroup. Please go ahead.
Tim Arcuri - Citigroup
Hi Steve, first I just wanted to get stock-based compensation by line item. And then second of all I had a question about the structural margin profile. I am just looking back to the last big downturn, I am looking back to like 2003 and at a pretty similar revenue level margins that are bottoming about 1000 basis points lower this time. Glad you have clean business this time, but you are back up to kind of $200 million revenue range and the margins are again about 1000 basis points below where they were back then as well. Certainly that gap is going to close going forward but I am wondering relative to what you did you look at the old company versus the new company. What sort of structural margin degradation if any should we think as the revenue grows in next few years?
Okay, this is Ernie. The total equity-based compensation for the March quarter was about $13 million and relative to the question on margin I will turn that over to Steve.
I will answer part of it and then Ernie will fill in some more details. I think there is a couple of important points to make. In the last downturn in 2001 to 2003 system's business fell about 70% to 80%. Where we are right now in the cycle is the system's business for Lam is down closer to 85% to 90% and it's probably worse for us in this quarter because with no revenues out of Intel and Intel being a spender at this part of cycle. It's exacerbated a little bit. Our model was built on the ability to handle a peak to trough decline of 40% and with the ability to very rapidly shed volume based variable cost and with still running 60% of the volume of where we were.
The absorption on the fixed cost components is still significant. When you dropped 80% to 90% down in terms of your system shipments than the absorption factors of very small component a fixed infrastructure make up a very high percentage of what your cost structure is. So, we have that issue in the factory and Ernie can detail some of that out if we want to. But we also have it in the field, because we charge all of our field service cost to above the line. And so, as we have made specific decisions to in essence three certain aspects of our field service headcount as strategic, we are running under absorbed relative to the amount of installation warranty and service contract were that would normally have them fully occupied. That impacts our margin as well and in this downturn again because of the magnitude of the current hole in system shipments we are having an overstated short-term effective under absorption in the field that contributes to the margin numbers that you are seeing.
Relative to the field and factory based absorption as Steve said the ongoing decline in particular in the systems business in this cycle versus the 2001 cycle is putting a strain or under absorbing the factory to a far more significant degree on a percentage basis. I would be happy to go through some of the specific numbers in a follow-up call, but I believe that part of the structural margin change that you have articulated here is clearly the result of this unprecedented low level of system shipments relative to even a greatly reduced level of factory spending. And in fact the same phenomenon in the filed with pharma systems available for warranty and installation and our decision to keep that strategic resource in the field to remain able to provide critical service needs to our customers.
Thank you. And our next question comes from Satya Kumar with Credit Suisse. Please go ahead.
Satya Kumar - Credit Suisse
Yes, hi. Thanks for taking my question. Steve just a little bit of math if wafer fab equipment stayed flat at 10 billion, I think you commented your shipments with a flat at these levels. If equipment spending is flat at these levels by our math you could upgrade the memory factory so with the next two years, especially looking at one of the commentary from the NAND flash thing the shrink to 3X will not be as capital intensive.
And right now some of these non factories are running at 70%, several DRAM factories running at 50%. So, the question is if you spend $10 billion then my math you can get 25% big supply growth in DRAM and about 50% in NAND flash. These numbers shown about right to you and do we have a structural need for a CapEx higher than that through the next two years unless demand has to be higher than that?
Yes, let me cover a couple of things. We are saying that we still believe that the way fab equipment environment is likely to be around $10 billion and then relative to some of the questions about what does that mean for shipments? What I said was clearly the shipments have to come up from the levels that we saw in March. We have clearly indicated that they will be up 35% in June, where they go in the second half. If it's going to be a $10 billion with fab equipment year we have to be in that vicinity or even higher.
Having said that, I mean, when we look at 25% big growth in DRAM which is in the vicinity of what we think. 50% big growth in May end in the near-term then it's consistent with that kind of spending it's also consistent with some assumptions that there is upgrade and refurbished equipment that go into the 5X line, particularly DRAM. And in NAND not as high what we use orientation. But as to what that means out in the future, I think it all depends on one, where are we economically, where is GDP growth, what's happening with new products, new applications that have what degree of memory intensity, what kind of progress do we make for 64 gig NAND flash devices and what's their costs and therefore, what's the SSD penetration. And the reality is I mean my ability to forecast that is no better or perhaps significantly worse than anybody else. And so we are not worried and we are not focused on what's going to happen or not happen in 2010.
Our focus is staying close to our customers, helping them develop the solutions that they need in etch and clean at 5 and 4 and 3X. Winning those market share opportunities, managing the cash flow and being prepared if this last for a while, we can handle it. If it comes back sooner we will be able to respond to that as well.
Thank you. And the next question comes from the line of West Twigg with Pacific Crest Securities. Please go ahead.
Weston Twigg - Pacific Crest Securities
Hi. Just a couple of quick questions. The first one actually may not be quite so quick. Its on the double pattern you mentioned that is an opportunity in NAND. The ramp in double pattering processes this year. I am just wondering, also they were using a spacer based processing, I am just wondering if you could give us an idea of what the etch opportunity is since that’s a more etch intensive process.
Well there is both, what we call non-critical double patterning opportunities and there are critical opportunities in the double patterning arena. How much that grows the etch opportunity and the NAND 3X fab versus a 4X we will have to go and get that data, have it on the top off my head. Clearly it represents a number of additional wafer passes and so we are looking at how we can win a significant market share position in doing that. It looks like maybe three critical layers 6 to 9 critical layers and then depending upon the throughputs associated with that. So we can get you what the sizing is it will vary by customer because each customer has a slightly different approach but we can get back to you with that.
Thank you. Our next question comes from line of Atif Malik with Morgan Stanley. Please go ahead.
Atif Malik - Morgan Stanley
Hi, thanks for taking questions and my first question is that, Steve, thanks for providing the math on the incremental DRAM, spending of $10 million per year if it start their month from some 6, 7 to 5X, our analysis suggest that, LIFO is about 60% of that incremental WAT spending and I just wanted to know what do you think is etch opportunity for you guys.
And my second question is if I look at the Gartner data on market share for a single-wafer processors, Lam SEZ market share was 31% in '07 it dropped to 17% in '08 then DNS increased by 20 percentage point into '08. I just want to know, what is driving that has that mean a mixed factor customer spending factor and what is going to take reverse that market share trend in 2009?
Okay, so let's talk about etch first then we will talk about clean. So relative to spending, we think that the wafer fab equipment spending in 2009 for memory this is both NAND and DRAM, its going to be somewhere around $4 billion to $4.5 billion. So etch is going to be somewhere around 10% of that. Because in this environment instead of being its typical 12% or 13% it will be somewhat lower than that and then when you end up with [we use] et cetera. You probably end up in a situation where you can end up with 300 and something million spent in etch.
So we would expect that we would have more than 50% of that because that’s what our market share is in both DRAM and NAND. And so it all depends on really how much of a reused strategy is. But I guess the total is really what 400 and maybe it’s closer to 400 to 450 in total spending for DRAM and NAND in 2009. And figure us for about 50%.
So relative to clean the clean market is moving in many, many different directions and it’s extremely confusing even for those of us that are in it let alone those who are trying to figure out what’s going on.
So let me give you a little bit of perspective. One is what is classified as single-wafer clean. In the Gartner Dataquest numbers, they included a single-wafer clean scrubber cleans which are going through a conversion process and we do not include in the single-wafer clean because that’s not in our served market.
We are not in the scrubber business, so that’s one. Two, the big spenders in 2008 were Samsung and Intel and the third big spender was Toshiba. Our historical market share position has been in foundry and logic and largely back end of the line and there was very little spending in those market segments.
If you take those customers as those secret we have no position at Intel. We have a position at Samsung, it has been impacted by decision by Samsung to buy from a Korean vendor [Simus] in Korea and we are working closely with Samsung now to win back some of that market share and win some new applications in front end of the line.
Toshiba the other big spender we have had some position in backend of the line we were also impacted in 2007 and 2008 with Toshiba deciding to go with a Japanese supplier Shibaura for some of the non-critical which impacted our market share.
So the bottom line is one the size of the single-wafer market from our perspective is little over $400 million. We have about 25% share of that market. If I take Toshiba and Intel out of the market not that we are not going to and are not working with them.
Given that they were $200 million of the market in 2008. Our market share in the rest of the market is 50%. So two customers are clearly having a big impact on us in an environment where the spending is very depressed and very low in logic and foundry and in back end of the line and in back side cleaning which is were our strength is.
So, as we go forward our focus is to make sure that we defend our backend of the line and back side as well as look for opportunities to grow that in places like Samsung and Toshiba. And so that when spending for backside and back end of the line cleaning resumes we will be able to leverage that market position.
And in the mean time work with all of these customers relative to the critical front end of the line needs and there is no question that with a small group of customers really dominating the amount of spending and those customers largely being historical DNS customers.
Our market share in the short-term don’t look very good as the function of mix and as the function of the economic environment and where CapEx is being spent.
Thank you and the next question comes from the line of Stephen Chin with UBS. Please go ahead.
Stephen Chin - UBS
Yeah thanks. If you know the cost cutting that the company say what side of incremental first margin do you think we should think about modeling going forward as the Lam's business and probably improve, will it be similar to this significant level that we saw this quarter instead Lam going forward?
This is Ernie. About third give or take of the cost reductions that we talked about are reflected in gross margin and I think as you are thinking about margins going forward you would certainly see an improvement from that but you would also see an improvement from further absorption of the factory and field resources. So I think that both items will be significant contributors to the gross margin improvement and provide leverage going forward.
Thank you and our next question comes from by line of Ben Pang with Caris & Company. Please go ahead.
Ben Pang - Caris & Company
Thank you for taking my question. In terms of the DRAM transition are all the design wins done 4 or 5X at this point, is there any new design win for 5X?
I think most of them are done but there are still a number of them that are actually being finalized in, and what you really have is that there is low level of 5X production running today and maybe 20,000 or 30,000 wafer starts. By the end of the year we expect that there will be over 100,000 wafer starts running on 5X. And so you really have not won it until you shift it. And so I think that while it's fair to say that the decisions have been made. It's a competitive environment out there and people work hard to try and change decisions and reverse decisions. But for the most part they are done and we will now begin to see in 2009 how that market stay plays out as your orders are placed and the products are actually shipped.
Thank you. Our next question comes from the line of Weston Twigg with Pacific Crest Securities. Please go ahead.
Weston Twigg - Pacific Crest Securities
Hi, just had a quick follow up, two parts; one, on the space appears that you were talking about. Just wondering if you actually won new business already related to that in the NAND segment double patterning? And then related to copper transition, are you seeing any push out or delay in terms of adoption of copper processes from the two big DRAM customers?
So relative to double patterning wins NAND, yes, yes, we have won, I am not going to specify where and which customers but the answer is yes, and as it relates to copper, I am not aware of any delay or push out as it relates to the transition from aluminum to copper that’s going on with the big DRAM guys.
Thank you. And the next question comes from the line of CJ Muse with Barclays Capital. Please go ahead.
CJ Muse - Barclays Capital
Good afternoon, thank you for taking my question. I guess have product questions. First, could you share the makeup of the June shipments in terms of NAND, DRAM foundry and logic?
And then looking to your OpEx it looks like implied in your guide is roughly going down from 130 in March around 115 in June. I was hoping you could help me understand what that would look like exiting calendar '09 and the December quarter. Thank you.
Okay, relative to the OpEx, we don't expect a need to increase OpEx to any significant degree provided business volumes stay in the range that we would expect. We will obviously have some seasonal fluctuations related to normal patterns. But relative to the overall OpEx levels, we expect to be able to largely contain them at that level throughout the rest of this year.
So relative to the breakout of our shipments in the March quarter, we had a 56% were memory and of that as Ernie said 22% of that was NAND and then 28% logic and 15% foundry.
So in logic we put logic, microprocessor and other. And then 16% foundry. And then the June quarter just kind of from what is likely to occur, if the mix will be pretty similar, I think it will be a little stronger in NAND, because we got some activity from one of the big NAND players. It will be slightly down in logic, but it will be up significantly in foundry.
I think most people have been reading about what's happening on the foundry leading-edge, where utilizations 65 and 45 or way up, it's no secrete. Our TSMC has announced that they are going to be expanding their 4X wafer starts and as a major supplier with high market share with that customer, we are participating in that and we will be shipping into the foundry segment, where we anticipate shipping into the foundry segment in the June quarter.
Thank you. And our next question is a follow-up question from a line of Tim Arcuri with Citigroup. Please go ahead.
Tim Arcuri - Citigroup
Hi, just that quickly follow-up on my last question, Steve, last cycle you were kind of in the high 40s to even 50% kind of at the $400 million level. I am kind of wondering, once you get through this under absorption, period here and you kind of absorb these costs, what can we expect margins to be at kind of the $400 million revenue level as revenue ramps this time versus last time?
We could probably figure that out pretty quick, but to be perfectly honest with you. Given that we have just been bouncing around that 175, and we are like deciding whether throw a party, because we are forecasting our revenue to be over $200 million or around $200 million, I should say exact, 195 plus or minus 15.
I really haven't thought about what's going to happen at 400, but we can model that and we will get it back to you but kind of the message I would say you is we expect and what we are seeing in the environment right now, we have looked at this as competitive as what’s going on in etch, there’s essentially very little to no pricing erosion and margin erosion at the product margin level.
There are some issues about mix in terms of which customer, and which quarter because there is a little bit of different margin profile. And so we expect etch once the volumes get up and the absorptions improve, we will be right back in the vicinity where it’s been.
We look at clean and the reality is that we think that there is a very strong likelihood and certainly, our target is that our margins in the clean business are going to be in the 40s. Now whether they are low 40s or mid-40s, it depends on what the timing is and when the revenues get back to that level, because we've got some work to do with the product option architecture, we've got some work to do in terms of getting our outsource suppliers up to speed, getting our volumes up and our cost down.
But we really expect that we are going to be largely in the same vicinity, but we can model that out and kind of share with you. But for the most part, you should expect we are going to be right in the same vicinity.
Thank you and our next question comes from the line of Patrick Ho with Stifel Nicolaus. Please go ahead.
Patrick Ho - Stifel Nicolaus
Thanks a lot. Steve, in terms of the revenue uptick in June, characterize how it breaks down between a pickup in the services and spare parts of your business as well as the pickup in, I would assume technology by shipments during the quarter?
Yeah I think from a percentage standpoint, I'm willing to talk about revenue, but revenue is kind of a lagging indicator, because we do revenue on acceptance. And so I think a better way to maybe characterize is going on in real time is the shipment's environment.
And the shipment's environment for the June quarter is going to be up somewhere around 30% or 40% and the services, spare parts type activity is up more around 20% from where they were. And so the combined is up 35. But clearly from percentage basis, most of the shipment growth is actually occurring as a function of system's shipment improvements.
Thank you ladies and gentlemen. That concludes today's question-and-answer session. At this time, I would like to turn over to management for any closing comments.
Okay. Thank you. So I think we all recognized that over the last couple of quarters, we have clearly gone through a period of really almost unprecedent levels of drop in demand for our customers.
Clearly their profitability issues resulted in almost near shutdown even with the strongest in most technically advanced and cost-effective to customers and that made for a very tough December and March quarter.
What we are seeing is that the strongest customers are moving forward with what we would call the technology investments. These are not capacity expansion investment; they are next technology node investment.
And clearly when you look at the foundry, there are both technology node investment but they make them as a function of they got customer demand at the 4X that want us wafer starts.
A memory company or NAND company wants to move to the next technology node, so they can produce the 64 gigabit in NAND, or they can get to the 2 gigabit in the DRAM, and so they have cost and density issues that are motivating them to move, so I think we are now in that phase where the spending for technology buyers, which have largely been suspended for three, four, five months have now begun.
And so that's why my comments were, there is an element of sustainability that exist once you get into that mode. Where we go from here, when we move to stronger levels of spending that's clearly not something that we have visibility to, and feel like we can comfortably forecast, but I do think that its far more likely that the worst of what we been dealing with this behind us, and now the focus is market share penetrations, product positioning, cash management, ultimately getting to cash-neutral, ultimately getting our P&L where we would like it to be.
And I think as I mentioned in my earlier comment, I think we are in good shape with the customers, good shape with our balance sheet and we are feeling very good about our ability to compete successfully and make the expenditures strategically and tactically that we need and we expect to come out of this environment stronger, and more capable then ever before.
So thank you for your attention, and I will look forward to talking to you again in the future.
Thank you for joining us today. Please be advised a webcast of today's call will be available on our website later this afternoon. Thank you for your interest in Lam Research and participating in today's call.
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