And welcome to the Lam Research September 2017 Conference Call. At this time, I would like to turn the conference over to Satya Kumar, Vice President of Investor Relations. Please go
ahead. Yes. Thank you, and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Martin Anstice, President and Chief Executive Officer and Doug Behringer, Executive Vice President and Chief Financial Officer.
During today's call, we will share our outlook on the business environment, review our financial results for the September 2017 quarter and our outlook for the December 2017 quarter. The press release detailing our financial results was distributed a little after 1 P. M. Pacific Time this afternoon. It can also be found on the Investor Relations section of the company's website along with the presentation slides that accompany today's call.
Today's presentation and Q and A includes forward looking statements that are subject to risks and uncertainties reflected in the risk factor disclosures of our SEC public filings. Please see accompanying slide in the presentation for additional information. Today's discussion between the GAAP and non GAAP results can be found in today's earnings press release. This call is scheduled to last until 3 P. M.
Pacific Time. And as always, we ask that you limit your questions to 1 performed with a brief follow-up so that we can accommodate as many questions as possible. As a reminder, the replay of this call will be available later this afternoon on our website. With that, let me hand the call over to Martin.
Thank you, Satya, and thank you all for joining us this afternoon. Lam delivered another outstanding quarter with September shipments revenue and gross margins above the midpoint of our guidance range and operating margins and EPS above the high end of our guidance range. I'd like to thank our employees, our suppliers and our customers for their active support and confidence in Lam. With enhanced opportunity, we have enhanced responsibility to contribute to the success of our customers. And in that context, we are inspired to achieve our full potential.
Calendar 2017 appears destined to be another terrific year of outperformance for Lam, a year that materially exceeded the expectations we had communicated at the beginning of the year for levels of demand driven customer CapEx and our business as a direct result. The midpoint of our December quarter shipment guidance today reflects growth of approximately 50% year over year, nearly double the consensus growth expectations for WFE in 2017 and putting us on track to gain over 2 point expect a strong industry spending environment once again in 2018 and essentially align to stated industry consensus at this time. We believe there are enduring drivers behind the sustainability of industry spending levels and our outperformance. Central to the argument on spending sustainability is the growing importance of data and the fundamental role that the roadmap of silicon is playing. We are entering a new innovation era.
Central to the position of Lam outperformance is the increasing scope of industry relevance and competitiveness in the Lam product portfolio today. The generation, transmission, storage and analysis of increasing quantities of data to create artificial intelligence has the potential to transform every segment of the economy, and we believe Lam Research is positioned comprehensively to capitalize on that trend. The last decade saw the transition from a PC centric to a mobile centric world. We expect the next decade is defined by a transition to an AI centric world. Mobile devices have enabled an incredible platform of almost 4,000,000,000 global smartphone users, which allows for the rapid delivery and scaling of new AI enabled services on a growing array of IoT devices and systems.
Together, these trends are resulting in semiconductor industry revenue growth rates accelerating from an average of just over 2% in the last 6 years to over 15% in 2017. Even more important than revenue and profit growth, a dramatic diversification in end use demand bodes well for our future. The critical role of data in this market transition is particularly positive for memory and storage semiconductor demand in the cloud and also IoT. This is strength and opportunity both for WAN. Cloud Computing is a foundation for extremely data intensive applications, which is driving strong demand for bit growth in server DRAM and of over 30% 50% respectively.
For IoT devices, we are in early stages of adoption of exciting new technologies like 3 d cameras, AR and VR and broad automation trends. This is driving over 40% demand bit growth in these NAND markets. Combined, these demand trends and disciplined investment by our customers are driving record revenues in the memory semiconductor segment, which is on track to grow approximately 60% to about $130,000,000,000 in 2017 at strong levels of profitability. We see our customers increase their spending at sustainable and rational levels to respond to these long term trends with memory capital intensity slightly lower in 2017 when compared to the last 2 years. As we have stated previously, the products and services portfolio of Lam Research is unmatched, we believe, in its broad fit to the primary technology inflections of the industry.
Our focus is to further increase this position of leadership and strategic relevance through a commitment to disruptive and customer enabling technologies. During our presentation at the recent Flash Memory Summit, we offered perspective that lithographic shrinks alone are no longer able to provide the device performance and cost improvements that are required to drive these megatrends in end demand. Logic devices require new solutions to deal with dark silicon and Dennard scaling limitations. DRAM devices require new solutions to deal with signal to noise scaling issues and NAND devices require new solutions to deal with cell to cell interference and reliability. Technology inflections such as vertical scaling, multi patterning, advanced transistor and interconnect technologies and advanced packaging are all critical in addressing these challenges to deliver necessary device performance improvements.
These inflections are fundamentally enabled by etch, deposition and clean technologies, resulting in our served markets growing significantly faster than WFE again this year. We believe this trend is sustainable. Anticipating these and future inflections, we grew our R and D investments by nearly 60% in the last 4 years, reporting during the same period 140% growth in revenues. We continue to release significant capability enhancements across our portfolio, and we have the strongest commitment in our history to new concepts, technologies, products and services from R and D. These investments continue to pay off with significantly more wins and successful defenses than not this year.
Calendar 'seventeen is a stronger market share performance for year, year for Lam than calendar 'sixteen. Although with SAM expansion, this tells less than half of our outperformance story. In addition to maintaining our leadership position of vertical scaling in 3 d NAND, we had several new wins during the quarter across the spectrum of DRAM, NAND and logic devices and across the process flow in front end, transistor, middle of line as well as advanced interconnects. In dielectric etch, we extended our momentum in critical transistor contact applications by delivering differentiated atomic layer etching solutions that resulted in a new PTOR position at a second leading foundry. We continue to maintain strong conductor etch positions with increasing adoption of advanced technology and productivity options on our Keogh conductor etch products at leading edge foundry and memory makers.
In deposition, we won PTOR position for advanced cobalt, interconnect and a major foundry. We had multiple wins for new applications in atomic layer deposition for both dielectric and methyl film applications for nonvolatile memory devices. To further expand our value proposition, we recently acquired Coventor, a market leader in 3 d modeling and simulation in our industry. The addition of Coventor supports Lam's vision that advanced process and equipment control capabilities further enhance our competitiveness, our time to market and enable us to deliver significant incremental value to our customers. Already, the potential value proposition of harnessing Covanta's modeling expertise with Lam's process and physical characterization capabilities to deliver more simulation and virtual fabrication for the development of next generation devices has been reinforced by the excitements and substance of discussions within our engineering and collaboration partner communities.
The growing strength of our systems business is further enhanced by our strong customer support business group, which continues to deliver advanced productivity and technology improvements to the installed base and actively promotes new product offerings in support of MEMS, automotive, power management and IoT device innovation. This business, which represents approximately 1 quarter of our company revenues currently, is on track to deliver another record year of growth at a rate significantly faster than the rate of installed base growth this year, a byproduct of an enhanced portfolio and the strategic fit of the business with our customers' needs. Combined, these strategies have extended our differentiation and delivered consistent outperformance for Lam. We are on track to grow significantly faster than WFE and our served markets this year. Over the last 4 years, we have grown our shipments by 25 percent CAGR to approximately $10,000,000,000 this year at approximately twice the growth rates of both WFE and our largest peers and competitors combined in the equipment industry.
As we look ahead to 2018, we expect to build on this momentum with over 90% of customer decisions on PTYR selection decisions already made and on the back of what already looks to be another strong year for industry CapEx spending. In conclusion, we are encouraged by the scale and sustainability of Lam opportunity, and we continue to invest in extending our differentiation and strategic relevance to our customers. We believe these dynamics position us well to continue to outperform. With that, let me turn the call over to Doug. Okay, great.
Thank you, Martin. Good afternoon, everyone, and thank you for joining us today. We posted another solid quarter, delivering results above the midpoint of guidance for all financial metrics and extending our positive momentum heading into the end of the calendar year. Revenue, operating income, cash from operations and earnings per share were again at record levels in the September quarter and overall the company continues to perform well against our financial and operational objectives. Shipments for the quarter came in at $2,382,000,000 down 6% from the record high level we delivered last quarter and just above the midpoint of our guided range.
The combined memory segment made up 66% of system shipments, which was down from 73% in the prior quarter. Nonvolatile memory shipments represented 49% of the system shipments, which was down from 59% in the June quarter. DRAM shipments ticked up in the quarter coming in at 17% compared to 14% last quarter. Our customers continued to invest in technology migrations at a rational and sustainable level to support demand growth in the mobile and server markets. DRAM pricing continues to be strong, supporting the increased investments.
System shipments into the foundry segment made up 21% of the total, down slightly from 22% in the June quarter. Foundry spend was biased towards investments to execute the 10 nanometer ramp as well as 7 nanometer pilot projects. Logic and other shipments increased nicely in the September quarter accounting for 13% of system shipments compared to 5% in the previous quarter. This record level of logic and other shipments is the highest percentage for us since the June 2015 quarter and is the highest in absolute dollars in the history of Lam. This increase in shipments was driven by the ramp of our application design wins at 10 nanometer as well as broadly higher demand for applications in image sensors as well as power management devices.
September quarter revenue came in at $2,478,000,000 which was up 6% from the June quarter. Gross margin for the period came in at 47.2%, which was an improvement of 70 basis points and again above the midpoint of our guidance. Our gross margin performance as always is determined by several factors such as overall business volumes, product mix and customer concentration and you should expect to see variability quarter to quarter. Operating expenses were essentially flat at $438,000,000 compared to $440,000,000 in the June quarter. Expenses came in a bit lower than the implied guidance as we adjusted our outlook for variable compensation for the year.
We continue to focus our spending toward innovative R and D programs that are enabling our customers' roadmaps. Operating expenses declined as a percentage of revenue to 17.7%, which was down from 18.8% in the prior quarter. Operating income in the September quarter was $733,000,000 up 13% from $650,000,000 last quarter. Operating margin increased to 29.6%, which was up from 27.7% in the June quarter and again above the guidance range. Operating profitability was very strong in the quarter, driven by higher revenue as well as the improvement in gross margin.
The tax rate for the quarter was 14% compared to 13% last quarter. For the December quarter, I'd be modeling a rate in the low to middle teens. Based on a non GAAP share count of approximately 181,000,000 shares, earnings per share for the September quarter came in at $3.46 which was above the guided range. The share count includes dilution from both the 2018 and the 2,041 convertible notes. The net dilutive impact from the notes is approximately 17,000,000 shares on a non GAAP basis.
As we noted during last quarter's earnings call, with the increase in our stock price, we've received requests for early conversions of our 2018 and 2001 convertible notes. Conversions that settled in the September quarter totaled $302,000,000 of which 209,000,000 related to the 2018 convertible bond and $93,000,000 to the 2,041 bond. Dilution schedules included updated notional amounts for the 2018 and 2001 convertible notes are available on our Investor Relations website to help you with your modeling. We continue to execute on the capital return program we announced in November last year, spending approximately $230,000,000 during the quarter in share repurchases as well as dividends and over $1,000,000,000 in the first 3 quarters of the calendar year. As of the end of the September quarter, we had completed approximately 88% of our current $1,000,000,000 share repurchase authorization, buying back a cumulative total of 6,300,000 shares at an average share price of $139.17 We paid out $0.45 per share in dividends or $73,000,000 during the quarter.
Let me now move to the balance sheet. We ended the quarter with cash and short term investments, including restricted cash of approximately $6,400,000,000 in the June quarter. Cash from operations was strong at $858,000,000 up from $729,000,000 we generated in the June quarter. Cash generation in the quarter was at a record level enabling us to grow cash while funding the convertible note redemptions as well as our capital return programs. ESL came in at 56 days, down from 65 days in June.
Inventory turns came in at 4 compared to 4.1 in the prior quarter. Deferred revenues were $938,000,000 This number excludes $344,000,000 in shipments to customers in Japan, which will revenue in future quarters. Company non cash expenses include $42,000,000 for equity comp, dollars 39,000,000 for amortization and $40,000,000 for depreciation. We incurred $60,000,000 for capital expenditures in the quarter. We exited the quarter with 9,800 regular full time employees.
Headcount additions came primarily in the field and factory, with further additions in the technology areas. Let me now turn to our non GAAP guidance for the December quarter. We expect record shipments of $2,600,000,000 plus or minus $100,000,000 I just mentioned that 30% of the system shipments in December are to new greenfield fabs. We expect record revenue of $2,550,000,000 again, plus or minus $100,000,000 We expect gross margin of 47.5 percent, plus or minus 1 percentage point. We're forecasting operating margins of 30%, plus or minus one percentage point.
And finally, we're forecasting earnings per share of $3.65 plus or minus 0.12 dollars based on a share count of approximately 182,000,000 shares. So in summary, we're very pleased with our performance, delivering another quarter of solid operational execution, and we're on track for record financial results for calendar year 2017. Things could always change. As we look into 2018, we continue to see what appears to be a strong year. Our current bias is that shipments in the first half of twenty eighteen will be stronger than the second half of twenty seventeen.
Shipment momentum heading into the March quarter seems meaningfully stronger to us than it is in December. Before transitioning to the Q and A part of the call, I wanted to share some information about the timing of our Investor Day. Now planning to host this event in the March quarter timeframe on an ongoing basis. This timing aligns well for us with executive availability, with the timing of our planning cycle and with what we think will be good investor attendance. We're about the sustainable outperformance opportunity we have ahead of us and we look forward to sharing with you a comprehensive update on the company's plans and objectives at that time.
Operator, that concludes my prepared remarks. Please open up the call for questions.
Thank And we'll take our first question from Ron Hamed with Credit Suisse. Please go ahead.
Thanks for taking my question. My first question is on operating margin. You're guiding to December quarter to 30%, which is meaningfully higher than the long term target model that you shared last time, which was at 28%. Can you just give us a sense of what's a sustainable level of margins for the business? And assuming that the business can grow from here, do you should we think that there's upward bias to the operating margin?
Yes, Fahren, I mean, I'll give you a new formally give you a new model when we get to the Analyst Day. I mean, the way I'd be thinking about it, when I look at gross margin right now, it's probably not going to get much higher than it is right now. In fact, there's really a bias to be a little bit lower than it is. And then it all comes down to what do you think the revenue levels of the company are. We clearly have delivered in the last several years leverage to spending.
And as business volumes increase, we would continue to deliver that leverage. I'm not going to quantify it for you, but that would be the way I'd think about it. And then stay tuned, we'll give you a formal update when we get to the Analyst Day.
And just I mean just to supplement, which is maybe some color relative to our thinking and that kind of guides how we run the company. I mean we run the company with a focus on absolute dollars of profitability and our aspiration is to increase the value of our company and outperform relative to increasing the value of our company. And so the profitability that we care about most is a dollar, not a percentage. And the execution of our business on a day to day basis requires a very careful balance. And certainly, the guidance that I provide to the company is intended to claim our fair share of opportunity, our fair share of profitability without compromising the success of our customers because without the success of our customers, our industry is going to struggle.
So it is as much a choice as anything else, and the choice is defined by how we optimize performance, and we optimize performance according to dollars of profits and dollars of profit growth.
Thank you. And a quick follow-up. In terms of the segment outlook for DRAM NAND, for the December quarter and first half of next year, do you how are you looking at the segments, just qualitative guidance and which segments are stronger or weaker?
Yes. So I would say I mean Doug already provided a little bit of color relative to the first half of next year. Just to remind everybody, he said we bias first half of twenty eighteen shipments stronger than the second half of twenty seventeen. And he said shipments momentum meaningfully stronger in March over December as best we see it today. What I'll add is at a WFE level, our expectation is probably in the mid- to high single digit range year over year.
And we would expect more than 85 percent of the growth in WFE year over year to come from memory.
Got it.
Thank you.
Thanks, Byron.
And we'll take our next question from C. J. Mollus with Evercore ISI.
Yes, good afternoon. Thank you for taking my question. I guess first question, Martin, a longer term question on the memory side. Hyperscale guys are asking for longer term supply agreements from chipmakers, which is clearly a strategic change and speaks to how much more important memory is and how much more strategic it's becoming. And so my question to you is, is that changing your relationship at all, your visibility, how you partner with chipmakers given this kind of change?
The simple answer to that question is yes. I do think we have more visibility. We are clearly more relevant to the success of our customers today by virtue of the scope of the portfolio and the relevance of the portfolio to the technology inflections that are that we've been talking about for some years. We still have to work very hard to do what we do, but I would say relatively speaking, our visibility and our engagements is stronger consistent with the strengthening of strategic relevance of Lam to the industry.
Okay. I guess as
a follow-up, Doug, you talked about OpEx coming a little lighter in the September quarter related to, I guess, bonus plans. And so curious, does that suggest perhaps a delay in terms of timing of clean room coming online or other factors like that have pushed shipments into the first half of calendar twenty eighteen?
No, not really CJ. I mean the 2 are independent. You always when you get to the second half of the year, you start truing things up and your perspective could be a little bit different. It's more got to do with what's going on internally than cleanroom coming online. There's a lot of cleanroom space coming online as we speak.
And I think for the most part, it's consistent with what we expected to see, what the industry has communicated it's doing. There really isn't any difference there. And just to add, I would say it's almost completely independent because bonus plans accrue on revenues and profits on revenues, not on shipments.
Great. Very helpful. Thank you.
Thanks, C. J.
And we'll take our next question from Krishnakar with Bank of America Merrill Lynch. Please go ahead. Yes.
Hi. Thanks for taking my question. I had 2 of them. 1 is Martin or Doug. If I look at your revenue as a percentage of WFE, it's been running around 22%, 23%.
I'm just trying to I'm curious like to get to like a 24 or a higher percentage, what needs to happen? Is it just the SAM expansion? Or do you think share gains are going to be more critical to get to a higher percentage of WFE? And I have a follow-up.
I think they're both relevant. We've articulated for a number of years the opportunity for SAM expansion beyond the boundaries that we're currently reporting. So the technology inflections are results today, the market share momentum in the company is targeted to be positive and is positive. This is a stronger market share year for the company than was true last year, and that sits in the context of the long term models, which you're pretty familiar with. So whether it's a fifty-fifty conversation or biased slightly to the sand expansion conversation, there's certainly some exciting business opportunity and upside for the company in the years to come.
Chris, this is Doug. What I get excited about is just looking at the growth in the installed base and what's going on with our installed base business, which as you know isn't part of WFE necessarily. It just grows along with the installed base, which is, as Martin said in his scripted remarks, is doing really, really nicely this year.
Got it, got it. Thanks, Doug. That kind of leads into my second question or the follow-up, which is can you talk a little bit about your services business? How much is it as a percentage of revenue? And what is the margin structure there like?
And what do you think the CAGR for that is going to be? Thank you.
Yes. I mean, Chris, what we've talked about is we've got objectives to grow it faster than the installed base and it absolutely is doing that over the last several years. I get really excited about what's going on there. Profitability isn't all that different than the rest of the company. When we look at it in aggregate, the gross margins may be a little bit less than selling new equipment, but the level of investment isn't anywhere near what we need to invest in the new equipment side.
So the operating income and the cash generation is very attractive in this part of the business.
Thank you, Doug. Thanks, Martin.
Thanks, Krish.
We'll take our next question from Joe Moore with Morgan Stanley.
Great. Thank you. I wonder if you could talk a little bit about the NAND market in the next few quarters. How do you see the spending shifting between sort of conversion of planar NAND to 3 d? How much do you think now is shifting over towards 3 d scaling?
And what happens to your I assume your share of the market potentially goes up as
we move to more of
a 3 d scaling environment? Just some color on that would be good. Thank you.
Yes. I mean the construct of this year's spending by the customer in the NAND space is reasonably evenly balanced across the kind of 3 implementation scenarios, right? So you've got kind of the addition of new 3 d NAND capacity. You've got a conversion from 2 d to 3 d. And then you've got this kind of vertical scaling of some 3 d capacity from, let's say, generation 2 to generation 3.
And they're all represented. The smaller of the 3 is the 3 d NAND scaling segment. As you've heard us characterize a couple
of times now,
we are actually almost agnostic to the path of the customer between the addition of new capacity and the conversion from 2 d to 3 d. It's more or less the same sized opportunity for the company. And I think that's unique in the industry as a byproduct of the process flow and the position of the company's products to support that inflection. As the 3 d capacity becomes a bigger proportion and still even by the end of this year, I think it may only be about half of the installed base capacity, and that half is in various forms. Not all of it is latest generation, highest layer count, kind of 3 d.
The opportunity for 3 d NAND's vertical scaling investments is going to grow over time, and that's the most efficient path for our customers. It's also the path which is most biased to etch and deposition. So the segment concentration of a vertical scaling is even stronger for us as a relative opportunity to the rest of the industry. So at the end of the day, the customers will make the right choices. They'll optimize fabs and optimize economics, and that's a pretty dynamic space.
So it's one that's pretty difficult to predict, and we actually don't need to for the reasons that I've just summarized.
Very helpful. Thank you very much.
Thanks, Jeff.
We'll take our next question from Hollander with JPMorgan.
Hello, good afternoon and congratulations on another well My question is kind of similar to the last one, except it's more DRAM. And the industry and DRAM has done extremely well, tight supply, very strong demand environment. All eyes are starting to turn to next year when the capital spending trajectory in capacity expansion perspective? And you guys have talked previously about capacity expansion perspective? And you guys have talked previously about 2017, maybe kind of 1% 3% increase in total DRAM industry capacity, pretty disciplined.
So as you guys look into your forward pipeline, talk with your customers, how do you view total DRAM capacity expansion next year? Are you guys continuing to see sort of focus on profitability?
Yes, I would say intensely so. I mean, it's a consolidated industry, and everybody fights for their share of economics. And I think the evidence of the last several years is reinforcing of everything that was embedded in your question. To the best of our ability to model, the capacity for DRAM at the end of 2017 is similar to the capacity at the end of 2015, and that's a kind of wafer starts out statements. And that's a statement of slight growth after the contraction year in calendar 2016.
What's maybe a little bit different today than was true 3 months calendar 2016. What's maybe a little bit different today than was true 3 months ago is the proportion of the installed base that is converting to the 20 nanometer technology node is actually progressing a little bit faster than the assumptions we had 3 months ago. So if you look at the construct of DRAM capacity at the end of this year between 1x capacity, 20 series product and then more than 20 nanometer, we would guess probably 25%, 55% 20%. It's for sure incredibly disciplined, and the balance of conversion is obviously very high. So it's a very efficient investment for our customers.
And to the extent that any capacity gets added, it will get added, as best we can tell from legitimate demand drivers. And we have the same bit growth assumptions as everybody else in the low 20% range for DRAM. And it will come from the relative transitions and density per wafer out. And as I think everybody appreciates, the density per wafer out improvements at the latter stages of the DRAM road map are a little less than was true, let's say, 5 years ago in a transition. So that's part of the story as well.
But I mean as a basic premise, we absolutely expect discipline to continue, and we can't guarantee that. We don't have the crystal ball, but that's the planning assumption and that's the behavior as best we can tell from our customers.
Thanks for the insights there. And you guys are almost completed with the $1,000,000,000 share repurchase program. I guess you'll be done with that by year end. Free cash flow generation sitting kind of in the high 20% range. So does the team wait for potential tax reform?
Or can you take on some debt to fund sort of the next tranche of your repurchase activity? And then just roughly what is the additional debt capacity that the team can take on while maintaining their investment grade status?
Yes, Harlan, I'm not ready to give you a definitive update on that right now. Obviously, we're paying close attention to what's going on relative to the tax discussion in Washington. Your guess is as good as mine in terms of what might happen as well as the timing. We certainly have an ability to take on more debt should we choose to do that. And that's something I'll be talking to the Board, Martin and I will be talking to the Board about.
And when I've got something to update you on, I'll share it with you, but I don't have that right now.
Great. Thank you.
Thanks, Harlan.
And we'll take our next
The uptick you saw in logic shipments in the quarter was a nice surprise. Doug, you talked about the ramp of 10 nanometer, I think image sensors and if I caught you correctly, power management. I guess the question is, is this level of shipments on a quarterly basis the new normal given that 10 nanometer is ramping or was this quarter kind of a one off in terms of shipments?
Things will always ebb and flow, as you know. I mean, we've been talking about the applications wins at 10 nanometer for a while now. Obviously, as that ramps into production, that will continue. Image sensors kind of it comes and it goes and likewise with the power management stuff. But I expect the trajectory to continue here.
We're doing real well and we've been waiting for this for a while and the ramp is beginning to happen. Yes.
Two things to add. One of them is, it is more the new norm than not. And I hope it really isn't a surprise. We've been talking about it for long enough. So it's really nice to actually finally answer the question for everybody and demonstrate the success of our engagements in logic and foundry and etch and deposition both.
It's taken a lot of hard work from a lot of people, and it's really nice to see a further increase in the balanced engagements of the company and the industry. We're fortunate to be in a very good strong position around technology inflections. We're fortunate to have the strength of the company in memory at a time when memory is clearly an increasingly relevant and critical part of the road map of success for all of our customers, and this is icing on the cake at some level. So a really nice result.
Okay, great. And then I had a follow-up on the Coventor acquisition in the quarter. Martin, you went through in your prepared remarks, but if you can kind of reiterate what the rationale was, what you gained from this from a technology perspective and how it could potentially impact your incumbent businesses, that would be great.
Thank you.
Yes. Thank you for the question. In many respects, it's a repeat of much of the rationale we talked about in the context of prior M and A focus for process control in the company. And in some respects, this is consistent with the messaging on data and AI having the potential to change the world, and that includes being relevant in our industry and the industry of our customers as well. So we believe that we have value to deliver to our customers and value to deliver to our shareholders through an enhancement of process control capabilities.
And we are generally collaborative in execution today as strategies, but we have an opportunity to acquire and fully harness the capability of Coventor in the mix. It brings expertise and competency into the company that for sure supplements and strengthens our preexisting computer science algorithm analytics capability, modeling capability. And it's a really nice partnership, I would say, for a virtual modeling business and a true process and a hardware characterization business. So the combination of those two things, we believe has an opportunity to grow faster than was true for a stand alone business, the preexisting products and services of the Covanta business. And it has an opportunity to provide us vehicles to introduce new products and services in that space.
And last but not least, it's an opportunity to increase the competitive differentiation of the etch and the deposition in the cleaning portfolio through enhanced control and faster cycle time in development and better predictability and opening up process windows and so on and so forth. So it's part of what we've been talking about for some time. It was a nice opportunity to take custody over a valuable asset, and we're super excited about the opportunity in front of us. I think that optimism is shared by our customers.
Thank you.
Thanks, Patrick.
And we'll take our next
Thanks for letting me ask a question. Looking at your shipment distribution for the September quarter, China is only your 4th largest geography, but shipments were down sequentially by a decent amount in September. Just curious what this was attributed to and whether you can comment on how the pipeline or trajectory in China looks moving through next year?
Yes. I'd say that what happened in the quarter relative to China is completely unrepresentative of any broader trend. So certainly, don't read anything into that other than the same for any customer, any region. Investment is a byproduct of discrete projects in any one quarter, and that's always going to happen, ebb and end of flow. If we look at kind of new fab projects, maybe I'll kind of give you an update from the disclosure of prior periods.
From now through the end of calendar 'eighteen, we're tracking, I think, 18 fab, greenfield fabs today and a greenfield fab can be a second floor on a double stacked fab, just to be fully disclosed on that. 12 of the 18 are in China and about 8 of them I think are classified as domestic China and 4 of them are kind of global China. And when you look at the distribution of investment that we're expecting next year between global and domestic players in China, it's actually close to fifty-fifty. So equipment purchases, wafer starts, capacity additions in China, domestic community and global community looks fifty-fifty ish at this point in time. That could change, but that's the headline today.
So we'd still say the same thing today that we said before. China for global companies and domestic community is a relevant part of our future. We believe that execution is as disciplined in execution in China as it is anywhere else in the world and hope that, that continues. And we're very focused. We're investing heavily, and our position in memory and logic, both in China, is very strong.
So hopefully, that is helpful to you.
Thanks. Very helpful. And just one quick follow-up question on your comments about shipments being very healthy through the March quarter. Just wondering, are there any discernible shifts you're seeing in spending within memory between NAND and DRAM over that horizon?
Too early for us to comment at this point. I think both segments are disciplined, both segments have overlapping demand drivers, but they have unique demand drivers, and we'll kind of hold off until January to get specific. What I should say, by the way, going back to the China question is, when I gave my reference to 8 domestic, I was referring to memory and logic both, and both segments are represented in the plans of our customers. Okay, great.
Thank you.
Thanks, Brian.
We'll take our next question from Sidney Ho with Deutsche Bank.
Well, thanks for taking my question. A couple of months ago, you guys suggested that the WFE opportunity for NAND would be in the $70,000,000,000 over the next 5 years, And that's assuming 40% bit growth. Now that one of the suppliers actually suggested that market will grow 50% next year and it seems like you agree with that. Does that make your forecast too conservative now? And if it does become 50% per year going forward instead of 40%, how do you think about the NAND WFE?
How will that change?
There's always announcements, positive and negative. There always will be we have no basis to update a $70,000,000,000 reference at this time. Same message today as was true at Flash Memory Summit.
Okay. Maybe switching over to DRAM, a follow-up to earlier question. There is a quite a bit of increase in DRAM CapEx by your customers and it seems like it's a consensus view that maybe CapEx per wafer is going higher. Obviously, cost per bit is still going down. If it is getting more expensive per wafer, how do you think customers justify the high cost?
And are they either eating into the cost granted they are making a lot of money these days? Or do you think that's being passed along to the end users?
I think you might have answered your own question. They're making more money than they ever have done. They're making more money than I do. So I would say as a basic headline, it looks like they've rationalized an ability to make an investment and get paid for it. And I think going back to the questions of discipline, a consolidated industry and a disciplined capacity addition is kind of part of that story.
I think your question is very good because it is appropriate that everybody recognizes that the cost of density is higher. And that's one of the reasons why the next generation memory conversation shows up in the industry today when it didn't do several years ago. But what I want to remind everybody is there's tons of life left in the DRAM device. There are multiple technology nodes ahead of us in the road map of our customers today, and there are many years of investments still left in that product and technology. And I'm sure a year from now, we'll see something even better than that because the industry has a tendency to innovate its way to some pretty outstanding solutions.
All right. Thank you.
Thanks, Cindy.
We'll take our next question from Weston Sood with KeyBanc Capital Markets.
Hi, thanks for taking my question. I wanted to follow-up on one earlier about the record shipments in IBM and Logic. Just wondering, when you mentioned your growth in 2018, I think you mentioned the 85% of the growth looks like it's coming from memory. Why not a little bit more growth coming from the Logic and or maybe the foundry side given the 10 and 7 nanometer ramps?
Okay. I'm glad you asked that because I maybe wasn't quite as clear as I should have been. When I referenced 85%, I was trying to describe our outlook for calendar 'eighteen WFE compared to calendar 2017 WFE. So our expectation is calendar 2018 is higher than 2017. I introduced a mid- to high single digits reference for that, and I provided a perspective that said we expect 85% of the growth in WFE year over year to be memory based.
I apologize for the confusion.
I think I understood it properly. I'm just wondering with say the 10 nanometer ramp at 1 of the big logic customers and the 7 nanometer activity at the foundries way, you wouldn't see more of the growth coming from those segments. And I don't know if it's your particular exposure to memory is just higher or it's a broader reference?
Well, we do the best we can to take every piece of data that's available to us in terms of demand, device demand, the implications of that device demand on various kind of manufacturing segments. To the best of our abilities, we look at kind of reuse capabilities, which is relevant for every segment of the industry. We take into account public and private disclosure of the companies of our customers, and we tell you to best of our abilities what we think our outlook is. So the 85% headline is the best communication we can give you at this point.
Okay. And then as my follow-up, just on the guidance, you've had several quarters of beats and raises, and I know the market is very strong. Are you guiding too conservatively? Do you think that I guess what are you missing when you're guiding over the last few quarters, why is demand outrunning your expectations a little bit?
It's not outrunning it by an enormous amount, Wes. I mean we've done a little bit over the last couple of quarters in terms of gross margin. And I just guided you to the highest gross margin, I think, in the last decade of the company. So it's not conservative by nature. We've done a little better over the last several quarters for sure.
But I just tell you we tell you what we see as we look into
the quarter. And maybe, again, just to supplement, it's actually not easy to give guidance, just to be clear. I mean this is a consolidated industry. The investments of our customers are big. Any one application is big.
Any one investment is big. And so the potential to predict this at a quarterly level can actually be quite challenging. I would say our guidance is really good because consistently, we are guiding and performing within the range of our guidance. So with due respect to your question, maybe we're not as precise as you'd like us to be, but I feel really good about the integrity of the guidance conversation and then performance of the company inside of the guidance range consistently.
All right. Thank you.
Very helpful. Thanks, Wes. Thank you.
We'll take our next from Edwin Mok with Needham and Company. Please go ahead.
Hey, guys. Thanks for taking my question. So I guess just a quick follow-up to Wes' question. I think the general consensus is that China's spending will grow in 2018. So how do you
We've lost you, Edwin. That's contribution from China.
Edwin, ask your question again. Sorry, you broke up midway through there.
Sorry about that. I'm trying to understand how much China is contributing to growth on 2018 within your expectation of mid to high single digit growth?
Yes, too early for us to disclose at this point.
We'll give you better color on next year. I mean, it's a little bit early. Normally, at this juncture, we wouldn't be talking about 2018. We'll give you the normal color when we get to next quarter's earnings.
Okay. All right. I think that's fine. So I guess a follow-up question I have on EUV. There's a lot of talks about EUV developing some edge and deposition to help the challenges like line edge roughness.
Is it possible you can give us some updates around that? Where do you stand on that? And do you think that can potentially be a SAM expression as UAV data adopted?
I would say the basic message and I apologize again, we lost you mid sentence. But the basic message of the company today around our opportunity in the context of an EUV implementation is almost identical to the scenarios we characterized in the investor analysis meeting about a year ago. So the insertion plans of our customers appear to be consistent, and the balance of space to base happening implementations in the industry appears reasonably consistent with the assumptions we made before. So I don't think we can give you anything better than we already did. I apologize.
Okay, thanks. Sorry about my line.
Yes, no problem, Edward. Thanks.
And we'll take our next question from Craig Ellis with B. Riley. Please go ahead.
Yes. Thanks for taking the question and congratulations on the very fine execution guys as well as numerous financial records. I just wanted to follow-up with some of the China commentary with a clarification question. I think you mentioned that of the 18 greenfield patch tracking, 12 were in China. And there's a split between domestic and global.
But even looking at the number of domestic fabs the company has cited that, that could mean that either that exposures with some of the smaller fabs that are trailing at Schlogic or they may be with some of the larger fabs. Can you clarify if you're participating with that number that you provided in some of the larger China fabs next year? Do you see those coming on thereafter?
Yes is the answer to your question. It includes the reference of 8 includes the bigger domestic guys and the smaller domestic guys. It's memory and logic both. It's DRAM and flash. The flash investment is obviously materially greater than the DRAM investments in the context of market opportunity primarily.
But we are seeing the emergence, as we've talked about for some time, of investments by domestic customers in calendar 'eighteen, big and small, memory and logic. And it's still a fairly gradual implementation. So there's no pendulum swing. There's no paradigm shift, but there's a commencement of pilot line investments and then transition out of pilot line into 1st phase high volume manufacturing. But the discipline that we all hope we are seeing to the best of our abilities today.
And Craig, when we think about WFE and pilot investments that Martin is referencing, I mean it's for the local guys, it's an incremental $1,000,000,000 or $2,000,000,000 in terms of total WFE. A lot of the activity continues to be as it is this year, the global multinational is doing projects in
China. Got it. That's very helpful guys. Thank you. The follow-up is just regarding the comments for first half twenty eighteen shipments to be up meaningfully versus the second half of twenty seventeen.
And acknowledging Martin your point that the business is a hard to forecast business, I'm just wondering if there's any color that you can give us on linearity as we think about the first half of twenty eighteen for the business? Thank you.
Yes, let me just clarify, Craig. What we said is first half eighteen higher than second half twenty seventeen, the meaningfully comment was relative to the March quarter, not necessarily the entire half. And it's really too soon for us to call linearity into next year. Again, that's something we typically would do at the end of the December quarter and you can expect to hear from us then.
Thanks guys.
Thank you very much.
Yes. Thanks Craig.
And we'll take our next question from Tom Diffely with D. A. Davidson.
Yes. Another question on the DRAM side of the market. You talked about how wafer starts are roughly flat from 2015. Do you expect them to go up over the next couple of years or mainly just going down to the sub-two-twenty nanometer node?
The planning assumption we have today is up a little, but it really is a little. And it will only go up a little if there's legitimate demand for devices that require that investment. So there really is no headline in terms of capacity expansion in DRAM unless there's a dramatic change to the demand statement for the segment. So it might go up and down a little bit, but it's basically a headline of technology conversion. And the technology conversions, to the point I made before, are less effective gradually in terms of delivering density per wafer out than was true 5 years ago, but they're still incrementally valuable and our customers appear to be making lots of money manufacturing and selling those devices.
Okay. So when you look at the 80% to 85% of the growth from memory next year, is that mainly NAND then?
No, it's not. But I'm not going to give you specifics at this point in time. I felt like I was super extravagant with my 85% memory disclosure. So apparently, you have a never ending appetite for more. We always want more.
Unfortunately, I don't have a never ending appetite to provide more. So if you'll just wait on that question until we get a little further into next year, we'd appreciate it.
All right. Thank you.
Thank you. Thanks, Tom.
And that does conclude our question and answer session for today. I'd like turn the conference back over to Satya for any additional or closing remarks.
Yes. Thank you once again for joining us, and have a wonderful rest of the day. Thank
you. Thanks, Jeff.
And once again, that does conclude today's presentation. We thank you all for your participation, and you may now disconnect.