Good day. Welcome to the Lam Research Corporation December 2015 earnings conference call. At this time, I would like to turn the conference over to Satya Kumar, Vice President of Investor Relations. You may begin.
Okay. Thank you, Aaron. Good afternoon, everyone. Welcome to the Lam Research quarterly conference call. With me today are Martin Anstice, President and Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we'll share our outlook on the business environment, review our financial results for the December 2015 quarter, our outlook for the March 2016 quarter, and provide an update on a planned business combination with KLA-Tencor. The press release detailing our financial results was distributed a little after 1:00 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&A will include statements about our expectations and beliefs regarding certain future outcomes, including the time and the party's ability to close the proposed business combination with KLA-Tencor and achieve the anticipated benefits, technological advances, and synergies to be realized as part of the proposed transaction and the anticipated structures of future combined operations. A comprehensive list of forward-looking topics that we expect to cover is shown on the slide deck accompanying my remarks. All statements made that are not historical in fact are forward-looking statements based on current information and are subject to risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factors disclosures in the public filings, including our 10-K and 10-Q. The company undertakes no obligation to update forward-looking statements.
Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings press release. This call is scheduled to last until 3:00 P.M. Pacific Time. As always, we ask that you limit your questions to one per firm with a very brief follow-up so we can accommodate as many questions as possible. As a reminder, the webcast replay of this call will be available later this afternoon on our website. With that, I'll hand the call over to Martin.
Thank you, Satya, and thank you all for joining us today. I will first begin with a review of our calendar 2015 accomplishments, including comments on the relevance to the growth outperformance opportunities for the company, then offer a perspective on wafer fab equipment spending in 2016, as well as the trends driving our longer-term favorable outlook. Concluding my prepared comments with a progress update on our planned business combination with KLA-Tencor. Doug will then review our financial and operational performance, as well as provide guidance for the March 2016 quarter. 2015 was another record year for Lam Research, augmented by our plan to combine with KLA-Tencor this year. A partnership that we believe will create an unmatched capability for the global semiconductor industry by uniting best-in-class process technologies with process control, creating a new paradigm in process enablement, accelerating innovation for the benefit of our customers.
Last year, for the first time in our history, we exceeded $6 in earnings per share, grew shipments by 25% to nearly $6 billion, reported record revenues of $5.9 billion with operating profits expanding at greater than 1.5 times revenues. Demonstrating, we believe, sustainable leverage in our business model. In this context, in 2015, we achieved record output from our factories while improving our on-time delivery performance and shortening cycle time for installations. A very solid operational contribution. 2015 was the third consecutive calendar year in which we have significantly outgrown the industry. Over the last three years, we have grown our shipments at an annualized rate of more than 22%, well in excess of WFE CapEx growth of 6% in the same period. Our success is always predicated on customer trust and the opportunity customers are willing to provide us.
It is also the result of a vision, strategy, and operational execution to bring a capability in leading-edge process technologies to bear on the most fundamental technology inflections that are driving an increasing proportion of wafer fab equipment spending. In short, calendar 2015 was a year we are very proud of. Many worked extremely hard, but the increased strategic relevance of Lam and the demonstrated results make that effort rewarding. I would like to take this opportunity to express my sincere appreciation to all of our employees across every function and in every location, without whom, as a collective group, these accomplishments would not have been possible. The culture and values of Lam and a priority on continued learning and development remain a foundation of competitive differentiation. We recommit to that as even stronger aspiration in 2016.
We estimate that the industry grew wafer fab equipment spending by approximately 4% to $33 billion in 2015. Marginally stronger than earlier expectations, our SAM share of WFE expanded to slightly more than 30% in 2015, driven by the technology inflections, including the industry conversion to 3D device architecture in non-volatile memory and also in logic, increased use of multi-patterning in DRAM and logic applications, and increased adoption of advanced packaging integration schemes. Our demonstrated strength in these extremely complex technology and cost-sensitive process flows allowed us to grow Lam share of our SAM to the mid to high 40% range in 2015. Multiple patterning has become a key driver in enabling our customers' scaling plans. Our VECTOR ALD and our Hydra conductor etch technology have enabled scaling and proactively positioned reductions in the cost of multiple patterning through variability reduction and productivity improvements.
We solidified our number one position in 3D NAND for deposition and etch with differentiated products such as the high-productivity VECTOR Strata and industry-leading ALTUS and Flex products, which address the high aspect ratio challenges of advanced memory applications. In the multi-patterning segments, we saw an unprecedented ramp for our Kiyo with Hydra technology for conductor etch, where we've increased our installed base by more than a factor of five in the last 12 months. The Hydra conductor etch process control technology has delivered improved CD uniformity by approximately 50% from the prior baseline. We saw very strong momentum for our VECTOR ALD products, where we doubled our shipments for multi-patterning applications enabled by best-in-class within-wafer, wafer-to-wafer film thickness, and CD variation control. The VECTOR ALD platform has improved system productivity by up to 50% in the year, delivering the lowest cost of ownership available in the industry currently.
All market segments combined, the headline for Lam deposition was an approximate two percentage points market share gain in the year on a very strong SAM expansion. In 2015, founded on the depth of etch technical competency and capability at Lam and supplemented by some positive customer mix, we achieved the largest expansion of market share in over five years in our etch business, growing our total share by over five percentage points to the high 50% level. We are well on track towards delivering the longer-term goal that we communicated at our Analyst Day in July last year. In a perpetually competitive industry segment, we had a truly great year, maintaining our leading HVM position in conductor etch and making substantial gains in dielectric etch. In the conductor segments, we saw a fast ramp of Kiyo S-Series products at multiple DRAM and 3D NAND customers.
We were particularly pleased with the substantial market share gains we had in dielectric etch in 2015 with our Flex F and G-Series product families at multiple memory customers, with increased potential and momentum emerging also in logic. We remain focused on delivering critical etch technologies for high aspect ratio etch as our customers scale the DRAM capacitor and the film stack heights in 3D non-volatile memory structures. In our clean business, 2015 was a year of solid execution and some strategic repositioning. We recorded our largest increase in single-wafer clean market share in any prior year with a mid-single-digit percentage gain. Our strategic planning process ratified again the increasing strategic relevance of clean within our product portfolio. It also provided a framework for the streamlining actions we reported to you late last year.
We enter 2016 energized about a future of sustainable, profitable growth, excited about the increasing breadth of the Lam wet and dry technology product portfolio, targeted at supporting traditional clean and increasingly complex surface preparation and other yield-enhancing applications. Providing the foundation for the overall business momentum is the performance of our installed base, a key focus of our customer service business group. Here, we set another record for revenues. This business group is focused on creating collaborative solutions to improve our customers' productivity, also asset utilization, and reduce their risk through the equipment life cycle with products including advanced predictive services and productivity upgrades. We're also addressing the needs of leading-edge and trailing-edge customers across a variety of wafer sizes and markets through a broader and more capable refurbished tools offering.
2016 has begun with well-publicized volatility and some contraction in growth expectations for the global macro economy, with risks in some emerging markets, but balanced by steady, if slow, improvement in a number of developed markets. Within this environment, Lam continues to be optimistic that the underlying technology drivers of mobility, cloud, and the Internet of Things provide a foundation for an exciting multi-year opportunity for our products and services. We assume 3D non-volatile memory and new memory technologies adoption are at a tipping point this year, resulting in an accelerated demand for solid-state memory in 2016. We are particularly optimistic in this segment, where we see many years of technology visibility and opportunities for Lam to improve the cost and performance roadmaps for our customers. We expect to see double-digit growth in non-volatile memory CapEx in 2016, driven by the need for the industry to convert to 3D-capable capacity.
Based on our analytics, the equipment industry is scheduled to support the delivery of a 3D-capable installed base of between 350,000-400,000 wafer starts per month of tool capacity by the end of this year, supporting NAND bit growth this year of mid-30%. Rational industry spending is a common theme in a consolidated world. We anticipate meaningfully reduced year-over-year spending in DRAM, with customers focusing on 20 nanometer and 1X nodes migrations to continue to improve their cost competitiveness, supporting industry bit growth in the mid-20% range. On a combined basis, we expect overall memory CapEx at the $15 billion level, ±$1 billion. From a foundry and logic CapEx standpoint, we continue to see an increase in projected spending for 10 nanometer investments, as well as 28 nanometer and above investments across a number of customers.
Since our update in October, we've seen some reported weakness in end market demand for high-end smartphones with content continuing to expand, however. In that context, we expect to see growth in 14 nanometer wafer demand as more companies ramp products at this node throughout the year. Taken together, we expect foundry and logic spending to be up slightly year-over-year at the $17 billion-$18 billion level in 2016. As a result of these trends, we expect that 2016 WFE will track to approximately $33 billion ±$2 billion, which is relatively unchanged from the initial views we provided you in October. We are off to a great start this year with broadly positive customer engagements and an anticipated book-to-bill in March comfortably exceeding one.
Based on our current understanding of customer plans, we are very confident that our shipments in the first half of calendar year 2016 will exceed the second half of calendar 2015, and early indications suggest our shipments in the second half of 2016 will grow from this new first half baseline. As a closing headline, December was our weakest shipments quarter in a record-setting calendar 2015 year. We anticipate the March quarter as our weakest in the 2016 year, which overall is anticipated to be stronger for Lam than 2015. I will now update our progress towards completing our planned combination with KLA-Tencor and provide an early glimpse of our integration planning. We are working closely with regulatory agencies across several global regions to obtain the necessary approvals for the closing of this transaction. We remain confident that we can secure approvals to complete the transaction in mid-2016.
Any updates to the developments on the regulatory front will be made through relevant filings or press releases that will be broadly disseminated to investors. We will not comment further on this subject in this meeting today. We are in the early stages of planning for the successful integration of Lam and KLA and the process that will enable us to realize the full strategic and financial potential of the combination while continuing to operate as two standalone companies with compelling products, technologies, and people. We formed an integration planning team. We plan to leverage our experience from successfully integrating Lam with Novellus. A team with strong representation from both companies is established and already quite active, with a primary focus to develop a comprehensive understanding of what we both do and exactly how we do it.
At a more personal level, I continue to be very pleased with the dialogue with customers around the world who, without exception, look to the value proposition available of enhanced innovation from this business combination. As has been clear from our public filings related to the merger, we intend to continue the existing KLA-Tencor supply and support relationship with the broad industry ecosystem of our customers and suppliers to our customers both. We will be ready for day one execution. I have no doubt. Based on numerous interactions worldwide, I am delighted that we have an engineering and technology community in both companies who see more opportunity each and every day to deliver a more compelling value together than is possible separately. Excitement is definitely building, our deal hypothesis being validated through our planning.
While 2015 was a record year for Lam Research, we believe that 2016 holds even more promise. With the current quarter momentum in our business, our opportunity for continued outperformance, and the anticipated creation of an even stronger and more strategically relevant company in partnership with KLA, we are positioning Lam for significant performance improvements now and over the long term. In closing, I'd like to express my thanks again to our customers for their trust and partnership, employees for our differentiated culture and performance, suppliers for their support and commitments, and investors for their confidence and continued interest in Lam. Let me now turn the call over to Doug, who will provide a review of our financial performance and our March quarter outlook.
Great. Thanks, Martin. Thank you everyone for joining us today on what I know is a busy earnings day. We ended calendar year 2015 with strong performance, meeting or exceeding the midpoint of our guidance for the December quarter on all financial metrics. Earnings per share came in above the high end of our guidance range. In addition to the numerous milestones Martin mentioned during his prepared remarks, during calendar year 2015, we generated over $1.2 billion in cash from operations, which was an increase of more than 45% compared to calendar year 2014. We returned more than $410 million to our shareholders through stock repurchases and dividends. We're very pleased with what we've achieved this quarter as well as this calendar year. Shipments continued at a healthy level in the December quarter, totaling $1,288,000,000, which was a little bit above the midpoint of our guidance.
As we anticipated, memory shipments decreased in the quarter with the combined memory segment representing 65% of total system shipments, that compares with 72% in the prior quarter. DRAM shipments made up 42% of the system shipments, which was up from 32% in the previous quarter. DRAM investments continue to be largely focused on 20 nanometer conversions. Customers continued to ramp NAND and other non-volatile memory technologies, which made up 23% of the system shipments, this was down from the 40% level that we saw in the September quarter. NAND investments were again primarily directed towards deployment of 3D NAND capacity. December quarter foundry shipments were 25% of system shipments, this was up from 18% in the previous quarter. Foundry spending was broad-based, with a combination of 10 nanometer pilot capability, 1st generation FinFET capacity, as well as trailing edge investments.
The logic and other segment accounted for 10% of system shipments, which was about the same level as last quarter. Revenue in the quarter came in at $1.426 billion, which was a little bit above the midpoint of guidance and down 11% compared to the record high level that we saw in the September quarter. Gross margin came in right at the midpoint of guidance at 45.5%. As I always mention, you should expect to see some quarter-to-quarter variability in gross margin due to multiple factors such as product mix, customer concentration, as well as overall business volumes. Our financial model continues to be the right tool for you to use to build your models and think about our ongoing financial performance. Operating expenses in the December quarter declined to $352 million, coming in at 25% of revenue, this compared with 23% in the September quarter.
About 63% of the OpEx spend in the quarter was allocated to R&D, which was around the same ratio we've held throughout the calendar year. Funding of strategic R&D programs to continue our technology and productivity leadership is critical to meeting our objectives of growing the company at a faster pace than the industry. The market share success we are currently enjoying is a result of investments we've made in previous years. We aim to continue that outperformance. Operating income in the December quarter was $296 million, down from $380 million in the prior quarter. Operating margin was 20.8%, which was down from 23.8% in September and a little bit above the midpoint of the guided range. Operating income and operating margin declined sequentially as a result of the lower revenues in the period. Our tax rate for the quarter was approximately 7%, down compared to 14% last quarter.
The tax rate was lower, primarily due to the permanent extension of the R&D tax credit in the United States. A tax rate of low to mid-teens for the remainder of 2016 would be a reasonable number for you to include in your models. Based on a share count of about 172 million shares, earnings per share for the December quarter were $1.57. This was above the high end of our guided range due to the favorable tax rate in the quarter, as well as the higher revenue. The share count includes dilution from the 2016 and 2041 convertible notes, with the total dilutive impact of about 11 million shares on a non-GAAP basis. Dilution schedules for the 2016, 2018, and 2041 convertible notes are available on our investor relations website for your reference. In the quarter, we returned $48 million in dividend distributions to our shareholders.
We did not repurchase any shares in the December quarter, as we have temporarily suspended share repurchases in anticipation of the business combination with KLA-Tencor. Let me now move to the balance sheet. Cash generation was strong again in the quarter, with cash from operations coming in at $295 million. During the quarter, cash and short-term investments, including restricted cash, increased to $4.7 billion, up from $4.5 billion in September. Days sales outstanding increased to 70 days versus 62 days last quarter. The increase in DSO was due to the timing of shipments within the quarter, with shipments being more biased towards the back half of the period. Inventory turns remained strong at 3.6 times. Deferred revenue at the end of the quarter were $395 million, which was down from last quarter.
I'd just point out, this number excludes $109 million in shipments to customers in Japan, which we'll revenue in future quarters. I'd like to remind you that those Japan shipments remain as inventory carried at cost on our balance sheet. Company non-cash expenses during the quarter included the following: $33 million for equity comp, $39 million for amortization, and $33 million for depreciation. Capital expenditures were $28 million, which was down from $49 million in the September quarter. CapEx can sometimes be a lumpy number, as you saw in December. CapEx for the year came in at $173 million. We ended the quarter with approximately 7,300 regular full-time employees. I point out that we have been relatively flat headcount-wise for the last two quarters. Entering 2016, we continue to be pleased with the momentum in our business and the progress we're making towards our targeted financial model.
For the March quarter, our non-GAAP guidance is as follows. We expect shipment growth to $1.430 billion ±$75 million. We expect revenue of $1.3 billion ±$75 million. This lower revenue for March is largely consistent with our December shipments. We expect gross margin of 44% ±one percentage point. The margin decline in March is due to both customer as well as product mix. I expect margin to improve from this level as we go through 2016. We forecast operating margins of 17% ±one percentage point. Finally, we're forecasting earnings per share of $1.07 ±$0.10, based on a share count of approximately 172.5 million shares. In the outlook for the company, we are optimistic in the trajectory of demand for our products and services.
We expect shipments and revenue in the June quarter will be stronger than in the March quarter. With the anticipated strength in shipments, we expect to grow our deferred revenue balances in the first half of 2016. As we sit here today, I expect the second half of the year will have a stronger top line than the first half due to investments in leading-edge foundry and logic. That concludes my prepared remarks. Operator, please open the call for questions.
Certainly. At this time, ladies and gentlemen, you may register to ask a question by pressing the star then one on your touch-tone phone. You may withdraw your question at any time by pressing the pound key. Once again, it is star then one to ask a question. We remind you to please limit yourself to one question and one follow-up. Any additional questions, you may register again to ask. We will take our first question from Harlan Sur with J.P. Morgan. Your line is open.
Hi. Good afternoon. Thank you. Congratulations on the solid quarterly execution. Within the team's flattish WFE outlook for 2016 and your view on the positive trajectory of your business this year, maybe you can just give us a sense, DRAM, NAND, logic, and foundry, what the bias on customer spending trends look like first half versus second half. I assume, for example, 3D and 28 nanometer may be strong first half with 10 nanometer and 1X DRAM may be strong in the second half. Wanted to get your views.
Thank you for your comments at the beginning there, Harlan. Obviously, we're at the beginning of the year. Lots to learn. Our analytics to date would cause us to think that year-over-year, 2015 to 2016, the memory investment level is maybe down by $1 billion. The foundry is up by about $1 billion. Logic and other kind of flattish. There's a plus or minus on each one of those. That's a kind of segment composition. Our sense of first half, second half WFE, we're currently modeling a 47/48, 53/52 type of profile, overall stronger second half than first half. DRAM foundry and microprocessors, all second half stronger than first half. NAND, to your point, slightly stronger in the first half of the year.
I would say that the upside, to the extent there's upside in the first half, second half split that I've just characterized with NAND, is all defined around the performance of devices and then momentum in kind of SSD markets and so on and so forth. That's the summary of our modeling at this point in the year.
Great. Thanks for the insights there. As you mentioned, seems like legacy 20 nanometer is a pretty resilient node. There's still a lot of design starts going on in this node. I think UMC just reported last night they're doubling their CapEx spend this year primarily for 20 nanometer. Hearing the same thing from some of the other China domestic manufacturers. How much of a driver of the foundry outlook this year is from some of these legacy nodes?
It's not insignificant, for sure. There's a healthy investment at above 20 nanometer. I would say it's kind of almost equal to the same level of wafer starts that we saw added in 2015. Had slightly different composition. It's relatively broad-based, so there's kind of two to three customers at almost every foundry node. There's a capital intensity at the 14, 16, and 10 nanometer technology nodes, obviously, that make those investments relatively more expensive. Certainly, there's a decent chunk of foundry wafer fabrication equipment spending that is 28 and above.
We can take our next question from Romit Shah with Nomura. Your line is open.
Yes. Thank you. Let me echo my congratulations on a very solid 2015. Martin, under an environment that you characterized as kind of flattish WFE for this year, based on your comments, I'm sort of concluding that the company shipments can grow, presumably revenues would grow. As you think about operating expenses and some of the other below the line items, do you think it's reasonable to assume that the company can grow earnings per share?
Yeah, I think we've got a pretty clear statement of modeling on that. Our long-term financial model that we used at SEMICON West is a great reference point for you. It's almost replicated in the S-4 filing. There's 22% operating income references, there's growth references, there's SAM expansion references. The headline is the inflection story, which is the catalyst for SAM expansion, continues to progress 2015 into 2016 and all the way through 2018. Just to remind you, our estimate of inflection-based spending as a percentage of WFE, in the year just completed was in the low 30% range. By the time we get to 2018, our estimate is 55% or slightly higher. The SAM expansion story, the targeted market share story, certainly have us optimistic that we are continuing to grow the company in an environment of flat WFE.
The economics that we're targeting are exactly as we've communicated in our long-term financial model. I think the answer to your question is yes.
Okay. That's terrific. Then, as a follow-up, Doug, just on gross margins for Q1, you mentioned that customer and product mix were negatively impacting gross margins. Can you just give us a little bit more color on the specifics there?
Probably not much more. You see variability. I think if you go back in December, we're 45.5%. You go back the quarter before we were 46.4%. Now we're seeing 44%. You get lots of puts and takes when different customer mix, customer concentration, tool mix, not every tool we sell is the same profitability level. Overall business volume is part of this too. All of it is contributing, Romit. As I said in my scripted remarks, I expect this to be the low mark in terms of gross margin percentage for the company in 2016.
If I maybe just build on that and take the question in the context of the totality of investments that we're making in the company. Let me deal with margin and OpEx together. The thought process, relative to the operating expenses of the company is, we have a tremendous opportunity here to continue to outgrow the industry, and our commitments to invest in R&D to support that initiative is a really important commitment for the company. We're not jerking left and right our commitments to customers around enabling technology. We're committed, and we have to work through these short-term kind of variability that we see as a result of concentrated customers these days.
Having said that, we talked a lot about R&D and SG&A percentages. Doug can talk more if you want to on the call, but I think you know what we're trying to do there. We've essentially, in the guidance provided today, retained or constrained the operating expense investments to a level that's pretty similar to the March 2015 quarter. And just to remind you, in March 2015, we were just coming off the back of a $5 billion revenue year. Now we're coming off the back of a $6 billion revenue year. To have the operating expenses at the $350 level, I think is a testament to the business model and the commitment of the management team to be responsible in the context of long-term and short-term performance improvements.
Last thing to say, relative to gross margins, I don't think we're the first large equipment company to message December to March gross margin contraction. In the scheme of things, the best counsel we have for you is the long-term model, and the 22% range of operating income is still the ambition of the company in the 2016 year.
Yep. Thanks, Romit.
We'll take our next question from Timothy Arcuri with Cowen and Company. Your line is open.
Thanks a lot. I had two things. I guess first of all, Martin, just a sort of a question about the environment today versus three or so months ago. You guys have been very clear about the first half of this year, shipments being up versus the back half of last year. Now it sounds like you're a bit even more optimistic on June shipments, and particularly now you're sort of looking into the back half and also showing that you're pretty bullish there too. The question really is, what's gotten better? What particular customer area or what particular region has gotten better in that time? Thanks.
Well, I guess the context of what I'm about to say is I've said $33 billion WFE, which is exactly the same as what I said in October. What's different today? Obviously, the passing of three months always provides a little bit more visibility, always provides a little bit more of a confirmation on technology roadmaps of customers and their ability to yield through very complex technology transitions. It's the same numerical presentation, and if my tone's a little bit more positive, that's really a commentary on the passing of time and being able to validate plans and being able to see customers validate their plans a little bit more in January than we were able to do in October.
Got it. Okay. I guess, Martin, just following on that, if you add up all the projects in China, there's like $20 billion worth of WFE. Clearly there's a big fab, well, not huge, but a decent sized fab that's actually ordering right now in China. There's a lot of other very big fabs. I'm wondering, what's your assessment on the timing of that? Is any of that going to come into the back half of your year, or is that more of like a 2017, 2018 thing? Thanks.
Yeah, I'm going to reserve the right to not get specific to any one fab. I think the headlines are clear from that customer, what they're intending to do, as you know, we've got great position in the 3D NAND transition. To remind everybody, we're at about a 90% market share, etch and dep, critical applications, and we made progress between planar and 3D. We are a very active participant in the spending plans of the customer that you're referring to, and I should defer to their public commentary on timing.
Thanks, Tim.
We can take our next question from Krish Sankar with Bank of America Merrill Lynch. Your line is open.
Yeah. Hi. Thanks for taking my question. Two of them, Martin, again, Martin, congrats on a good calendar 2015. The first question is on the 3D NAND spending. Looks like everyone is universally bullish on this. I'm just wondering, is there a risk that if customers run into yield issues, could that slow the pace of adoption, or do you think the demand is strong enough that they're going to punch through even mediocre yields? I also had a follow-up.
I think it would be irresponsible to say that yield isn't relevant relative to cost, isn't relevant to adoption. There's kind of a chicken and egg here. I think one of the things that we're trying to do, we have obviously a tremendous opportunity to grow our company and outperform in the context of enabling many of the 3D NAND architecture in partnership with our customers. What goes with opportunity is a lot of responsibility, and we've got a lot of responsibility to help the customers yield to create an environment from a cost and performance point of view, which is a catalyst for demand. I'm not sure which comes first in all of this, and the customer is going to speak to their tolerance of risk. To your point, everybody is invested with plans in 3D NAND this calendar year.
As best we can tell, 95% of the non-volatile memory spending is focused on 3D device architecture. It seems like there's a universal commitment to this, and we're certainly kind of head down, working hard to contribute in our small way to the success of the customer.
Got it. That's very helpful. Just to follow up for either yourself or for Doug, when you look into next year or even later this year, the next year, looks like the spending shift might move more towards 10 nanometer logic or foundry. Is there a way to quantify how much of a margin tailwind would it be when the mix shifts from memory to foundry?
I don't think there's really any substantial differential due to any of the segments in the business. There's differentials customer to customer sometimes, larger early adopting customers that help with development sometimes get a little better pricing, I don't think segment to segment, you should think of it that way, Krish.
I think as a basic headline, what you've heard us talk about for many years is the philosophy relative to pricing what we sell to our customers. Our number 1 focus is to build customer trust. Our number 1 way of building customer trust is to position for fair compensation, right? We're not the highest gross margin company in the industry by a long stretch, but I think we're the fastest-growing or one of the fastest-growing, and there's always a balance between targeted profitability and growth. We spend a lot of time thinking through the legitimacy of the gross margin objectives of the company, and the range that we talked about for the last several years, this kind of mid-40% range, 45%, 46%, is I think, a very defendable place for us to be.
In general, in a consolidated world, it's pretty segment and customer agnostic, right? We don't want to play a role influencing the competitiveness of customers based on our pricing strategy. That would be a sure way to lose customer trust.
We'll take our next question from Farhan Ahmad with Credit Suisse. Your line is open.
Thanks for taking my question. Congratulations on the great quarter and the year. My first question is on 3D NAND. Martin, you mentioned that the overall NAND spending is going to be up double-digit. I wanted to ask if you can provide a breakup between planar and 3D, and specific to 3D, how much of increase in spending do you expect this year?
We are, at least in this call, going to keep our WFE disclosure for memory at the memory level as opposed to a DRAM number and a NAND number. The reason for that is because we see there are some pretty big decisions for a couple of customers to make around where their allocation of spending will be. I'm hoping that by the time we get to the next call, that clarity is there. To the first part of your question, our assumption is 95% of the investments in 2016 in non-volatile memory, NAND, and other schemes is 3D. It's dominating the investments, and it is a very complex mix of conversions and upgrades, as well as some additions. I would say it's a very efficient spend plan, and it has everybody participating.
Got it. Just a clarification, how much was the split between planar and 3D in, say, 2015 spending?
I want to say 60-40.
Yeah, it was about 60% 3D.
60% 3D.
Then one longer-term question, Martin. If I look at what happened over the last three, four years, Lam has outgrown the industry massively. Part of the reason was obviously, you guys have been following a strategy of investing very heavily on the growth trends within the industry, whereas some of your other competitors, AMAT and TEL, for a period of time, kind of moved away their focus from semiconductors and were looking at other market, and were kind of throttling the investment in the semis. Looking ahead, it seems like both these companies have kind of seen the outperformance that you have been able to deliver and kind of changed their strategy to start investing more in the space.
Do you think, is there a change when you look at the competition that you are seeing in the growth areas of the market, is it any higher now than what you used to see, let's say, three years ago?
Well, I think I used the word perpetually competitive when I described the etch segment. It feels the same today as it ever has done. This is a tough industry, a tough segment. It isn't just about the big guys. It's sometimes the smaller competitors, the regional alternatives, so on and so forth. We have been very disciplined, making the investment in our future, long-term future, a priority for the company. It's a multi-year commitment that extends way back. It's a tough thing to get balanced. I think the company did a nice job of identifying the opportunity to grow through technology inflections. The technology and engineering resources company did a fantastic job delivering us competitive products and services. Our field organization nails the interface with the customer in terms of positioning, more importantly, supporting ramps and productivity agendas and install base performance.
It's a total team effort. Our plan is to build upon that foundation, and whether we can do exactly the same thing in the next three years that we did in the last three, time will tell, but you've got a pretty committed company to a growth trajectory that is profitable.
Thanks, Martin.
We'll take our next question from C.J. Muse with Evercore. Your line is open.
Yeah, good afternoon. Thank you for taking my question. I guess first question, was hoping to drill a little bit deeper in terms of SAM expansion here for calendar 2016. You grew 20-plus% in 2015 versus the market 3%-5%, so great job there. Curious what the puts and takes are this year. How do we think about maybe, a fall off in image sensors, but a pickup in share in Logic, the move to greater NAND, less DRAM, deferred revenues. What are the key drivers we should be thinking about, plus and minus, for this year?
I'll deal with one part of that, and maybe Doug will deal with the deferred revenue piece. At a segment level, the story that I described for WFE is slightly stronger foundry year-over-year relative to slightly weaker memory investments. Historically, that's meant something to us in terms of the degree of outperformance. One piece of really important context is, we really positioned well in the image sensor transitions, and I think when other folks were struggling a little bit with Logic spend reductions, we generally kind of marched right through that because of that positioning, and it's as strong today as it was then. Our momentum in foundries and in microprocessor Logic is now, I hope, well understood to be a positive trajectory for the company. We still believe that in essentially a flat WFE, our SAM increases.
One part of that is the inflections message, right. Something like a 33% reference point for 2015, the proportion of WFE that is inflection-based, and that's kind of working its way to the 55% level. We've just come off a stunning market share year for the company, and we're going to keep kind of working hard. The long-term market share objectives, I think, are well within grasp at this point, so we're pretty pleased about that.
Yeah, CJ, just a follow-on on the second part of your question. Normally you'll see when we've got shipments ramping up, deferred revenue will grow, and vice versa, when shipments are coming down, deferred revenue will come down. You kind of saw that in December. In my scripted remarks, I talked about an expectation that in the first half of 2016, we expect deferred revenue to grow. It's because we expect to be on a ramping profile of shipments.
Very helpful. I guess as my follow-up, if I take your commentary around shipments, more second half weighted than first half, it looks like we're going to hit roughly $1.6 billion-$1.7 billion, and curious, A, do you agree with that assessment? B, does that mean that we should be targeting 46.5%+ gross margin exiting 2016?
Yeah, C.J., I'm not ready to quantify anything yet. The fact that we're giving you color on the second half we thought was important, given March was a low level for the year. I'm not going to quantify it quite yet. In terms of the profitability level, I'd just take you back to the financial model we put out back in July as the right way to think about the performance of the business on a medium-term basis.
We can take our next question from Patrick Ho with Stifel Nicolaus. Your line is open.
Thank you very much. Doug, first off, in terms of the revenue recognition versus the shipments and the deferred revenues that you're talking about, obviously Japan is a portion of it. Are there any other variables, like say, as you mentioned, the new Chinese fab, things of that nature that also cause a potential delay in terms of revenue recognition?
Every customer is a little bit different in terms of how they accept tools that are shipped. Customer to customer, there's variation. Fab to fab, there can be variation, especially when there's a new fab you're shipping to. Sometimes it can take a little bit longer to clear customs, as an example. The differential between ship and revenue has several different variables.
It's, I think, fair to say that the mix of customers, this was a relatively slow turn.
That's right.
We probably speed up a little bit over time.
Great. That's helpful. Martin, just going to the ALD market for a second. You guys have made a big foothold to try and get into that market. You're starting to see some of the gains, especially as multi-patterning on the logic and foundry side. Kind of a two-part question there. One, how do you see the capital intensity increasing for the ALD market, first as a whole, and secondly, how do you see your share gain potential, particularly as you move from, say, the 16, 14 nanometer node to 10 nanometers?
The share gain kind of sits in the context of the overall objectives for the company in deposition. We've kind of given you a reference point of 5-10 percentage points in the calendar 2013 through 2018 timeframe. The ALD question's a really interesting one. I think there are actually a lot of unanswered questions relative to the choices of technology and integration schemes to address really complex challenges. Our expectation is that ALD is a market that grows faster than any other that we participate in the deposition segments. We come from behind in many respects, in the last kind of five years. In relative terms, the market share momentum that we're seeking in ALD is higher than the average in deposition. It's a faster-growing market with a faster market share growth ambition, which doesn't mean it's easy.
It's really hard. It's hard because everybody wants a piece of that.
We can take our next question from Stephen Chin with UBS. Your line is open.
Thanks. Hi, Martin, Doug. Congrats also on the 2015 execution.
Thanks.
Thanks, Stephen.
Just a follow-up question on market share. Do you feel comfortable that Lam's overall share in NAND this year will stay the same or even grow now that we've got a new entrant? Just wondering if customer mix in NAND this year can have another positive impact to Lam's market share this year.
At a level which is kind of relevant to a conversation between us, there's not that much difference between the market share positions at any one customer. When we've won something, we've kind of won it at an application-specific level because we have a very competitive technology. As you know, there is one of the four players that has a different integration scheme, I want to be a little bit careful, and just kind of hold back because their scheme is theirs, and I don't want to kind of focus too much on that difference. The basic headline of a 90% market share, critical applications, a 60% market share all in, which is a kind of double-digit kind of gain for us from planar to 3D. That's what we have to build upon, and it's what others are trying to take from us.
That's our responsibility.
Okay. Thanks for that. Just a follow-up question on China. Do you think, Martin Anstice, we're at the point yet where Lam Research will invest more in a local China infrastructure or services to support future customers in China? Just wondering if China is part of the Lam Research investments this year, part of the bet you're making going forward.
Oh, for sure. I wouldn't say that's a new reality. As a customer invests in building a fab, we have to invest consistent with supporting that. As noted a couple of times in this conversation, there's a reasonable investment in China, and it's increasing, and we're making investments proactively to ensure that when we win positions, we build trust through a customer's ramp, right? The worst thing to do is to win a development position and then fail to execute because you don't have enough field process or field service engineers to support a ramp. Absolutely, we are investing in infrastructure to support growth of the China marketplace, but that's true in every region of the world.
Thanks, Stephen Chin.
We'll take our next question from Weston Twigg with Pacific Crest Securities. Your line is open.
Hi. Yeah, thanks for taking my question. First, just wondering on the 10 nanometer logic and foundry expectations for stronger second half installations and then a ramp into 2017. Can you give us an idea, kind of like you do for 3D NAND, how many wafer starts you think might be shipped this year and next year?
Yeah. I'm going to do this with some kind of caution, hesitation, so I can put a range around it. We're still over kind of the 300,000 wafer starts per month reference point for 28 nanometer technology node, and the sum of kind of below 20, right? 20, 16, 14, and 10, we would expect by the end of this year to have a shipped capacity, which is different than a qualified capacity, but a combined shipped capacity of about 260,000 wafer starts, plus or minus 20 .
Okay. How much do you think that might expand in 2017?
Can I wait to get through 2016 before answering that?
I guess so. All right.
Just right. Thanks.
Wafer cleans, you mentioned you're getting some good traction. Can you just give us a better update, maybe on the evaluation programs that were in place last year and your overall market share position at this point?
Yeah. It still obviously is the weaker link in the company in terms of market share performance, certainly relative to etch and deposition. We did some kind of strategic repositioning, as you might remember, towards the end of last year and rationalized some cost structure and kind of focused a little bit more on what we consider to be the most relevant opportunities to grow. It's a kind of mid to high teens market share play for us today. The message we communicate today is strategically relevant. We're excited about kind of a profitable growth opportunity coming into 2016, and we're broadening the product portfolio, wet and dry. Time will tell what we can accomplish as a result of that investment. I think that most of us would say we feel better about clean this year than we did last year, and long may that continue.
Thanks, Russ.
We'll take our next question from Atif Malik with Citigroup. Your line is open.
Hi, thanks for taking my question. Martin, you talked about in your prepared remarks that you've received positive feedback from your customers on the merger with KLA. Can you talk about maybe one or two key areas where they think you guys can add value to maybe the yields or some of the applications?
Yeah, I think the basic message is going to be the same as the hypothesis we presented last time. The challenge for the industry is not just a challenge of physics, it's a challenge of economics. At a strategic level, we concluded that the responsible action we could take, the most significant contribution we could make to the success of our customers would come from the integration of process and process control. A big part of that value proposition is associated with new engagements across the companies, with customers, because the reality is, as you all know, the KLA team is a little bit more entrenched and stronger, relatively, in foundry logic than we are, and we are more than them in memory. There's absolutely a kind of an opportunity there. There are engineering exchange programs.
We're building momentum, specifying the types of things that we think are relevant to new collaborations and joint development activities with customers when we get to be one company. Quite how far that goes, how quickly, your reference right now is the $600 million bogey we have in the proxy for revenue synergies. I would say I feel better about that today than I did when I talked to you about it last time, because I see excitement emerging in the engineering community around the substance of opportunity, which is kind of everything about delivering vision here. I see a sustained willingness in the customer base to support our plans to support them. Pretty excited at this point.
Great. Then as follow-up, Doug, the Street has a tendency to mismodel your revenues. I think in the past, you guys have talked about a formula for revenues, 50% of shipments in the prior quarter and 50% from shipments in the current quarter. Is that still the right rule of thumb moving forward?
I'd be cautious about doing that because I think it's proven to be a really hard thing to model. The reason is because we live in a consolidated customer world, and the difference between a week one shipment and a 13-week shipment is huge relative to the turn. It moves absolutely. We cannot really give you a nice, simple reference like we used to be able to. I remember vividly describing a relationship to you 10 years ago that would work for three years, five years. It doesn't work anymore because it is consolidated. It is a much more variable play, and every week counts. We have a little bit slower turn in the March timeframe, and we expect it to speed up.
Best we can give you in terms of counsel on modeling is the exact guidance for the next quarter, the tone of qualitative sentiment on direction, and the long-term model that Doug has talked about a number of times. Triangulating on those three, you might get a quarter wrong, but hopefully you get the year right.
Yeah. Thanks, Atif. Operator, I think we've got time for one more.
We'll take our final question from Jagadish Iyer with Redstone Technology Research. Your line is open.
Yeah, thanks for taking my question. Congrats once again. Just wanted to dive in on two aspects. First, Martin, I just wanted to get your thoughts on the DRAM side. Given the technology challenges and the market challenges, what needs to happen to trigger an investment going forward? Can we have an upside in DRAM investment this year? I have a follow-up.
I guess the answer to that question always has to be, yes, there can be. Do I think there will be? Not clear to me today. It would be kind of a second half environment, not a first half environment, because I think the inventory situation is getting better, but it's probably not all the way there, but it's a lot better. There's tremendous discipline. It's a very efficient spend because it's all about conversions, which is increased performance and lower cost, which is more profitability. Despite the fact the profitability levels have come down, they're still reasonably able to support investment. I just think it's like a lot of discipline in a year when bit density conversion is playing out in DRAM as well, which creates a little bit more complexity to your question. I would say we have modeled pretty conservatively our expectations.
Maybe there's a little bit of upside in the second half of the year. At the end of the day, it's all going to be about end user and end units demand, and you'll probably see that before we will.
Okay. Just as a follow-up, can you kind of compare or contrast your growth in your etch and deposition segments holistically for the year, given the spending mix as we compare it to last year? Thanks.
I'm not sure I quite get the question. We had a really tremendous year in terms of share gain last year, and that was particularly true in the etch business. It was an extraordinary year for the etch team. Do you get to repeat that every year? No, you don't. We typically target kind of 1 to 2 percentage points of share gain. That's a great result in a year or in a technology node conversion. We just did something like that in deposition. We did a lot better than that in etch. I would expect the 1% to 2% reference to be a better long-term modeling than what we just did. Again, time will tell.
This does conclude the question and answer session. I'd like to turn the program back to Satya Kumar for any closing remarks.
Yes. Thank you, operator. That's all the time we have for today. Thank you for your participation, and we look forward to updating you again next quarter. Thank you.
Thank you for your participation. This does conclude today's program. You may disconnect at any time.