Please stand by. We're about to begin. Good day, welcome to the Lam Research Corporation March 2015 conference call. At this time, I'd like to turn the conference over to Audrey Charles, investor relations. Please go ahead.
Thank you. Good afternoon, everyone, welcome to the Lam Research quarterly conference call. We would like to thank you for accommodating our change in schedule this week. With me today are Martin Anstice, President and Chief Executive Officer, and Douglas Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we'll share our outlook on the business environment and review our financial results for the March 2015 quarter and our outlook for the June 2015 quarter. The press release detailing our financial results was distributed a little after 1:00 P.M. 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 our outlook.
A more 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 disclosure in our 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 base, 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 questions to one per firm with a very brief follow-up so that we can accommodate as many questions as possible. As a reminder, a 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, Audrey. Good afternoon, everyone, and thank you for joining us today. In recognition of the competency, capability, and effort necessary to repeatedly deliver record levels of performance, I would like to begin today by extending my sincere thanks to the employees of Lam Research, who strive tirelessly to meet commitments made and build competitive advantage for the company. Defined by the substance of our culture, we are intuitively predisposed to find ways to contribute to the success of our customers through the delivery of innovative technology, trusted productivity, and speed to solutions. It is in this context that we continue to be very pleased with the fundamentals and the trajectory of the company and are more inspired than ever by the long-term growth outperformance opportunity. Thank you all.
As is customary, I will now review our March quarter accomplishments, highlighting the multi-year outperformance drivers and their relevance to our strong results and guidance today. We will summarize our 2015 outlook for wafer fabrication equipment spending and conclude with some updates on our strategic focus. The March quarter concluded with results generally in line with our expectations above midpoints for all guided metrics. This represented our seventh consecutive quarter of greater than $1 billion in revenues and was the highest yet reported levels of revenue, shipments, and operating income, each showing double-digit growth from the same quarter last year. The delivery of this performance, we believe, is a strong endorsement of our culture and values, a commentary on levels of customer trust, and a validation of our ability to scale effectively.
The combination of a strong March quarter and a stronger next quarter guide, and a perspective that there is some uniqueness to the market dynamics for Lam, provides the company opportunity for a strong second half. We continue to believe our performance is the result of increasing levels of trust and support from customers broadly. Markets that are sustainably growing faster than the average WFE baseline, a differentiated Lam product and service offering, which when deployed in a true partnership with customers, are together facilitating the technology inflections of multi-patterning, 3D device architecture, and advanced packaging. These inflections are at the core of semiconductor scaling, critical to our customers' and to their customers' success as they respectively pursue competitive differentiation with higher performance, more power efficient, and more cost-effective devices.
We believe that inflection spending continues to rise proportionately, tracking to one-third of WFE this year and reaching the 50% level in 2017, a viewpoint that remains a major influence over our confidence in achieving multi-year growth outperformance. The multi-patterning and 3D device architecture inflections are now well recognized as being etch and deposition intensive, making likely these segments grow faster than the market for the next several years. The continued strengthening of our product portfolio creates a growing SAM. That number, we believe, will exceed 30% by calendar 2017. Lam's opportunity to outperform continues to have upside through market share gains.
We previously reported a greater than 50% inflection-based market share headline and further achieved applications defense and penetration performance so far this year above expectations at the 90% success level. Both data points reflect good momentum against our three-year market share targets of 4%-8% increase in deposition market share, 3%-5% in etch, and 5%-10% in clean. Over the last several quarters, we have talked about the success of our VECTOR ALD product with a targeted tripling of business this year and an equivalent increase in breadth of customer engagements. Growth in our ALD presence, while primarily driven by multi-patterning applications, is being augmented by the successful extension of our product to other applications, such as high aspect ratio liners and image sensor devices.
Our momentum in this fast-growing market segment is enabled by our technology, which is delivered with the productivity necessary for high-volume manufacturing adoption. In conductor etch, we continue to extend our leadership with the most comprehensive product portfolio and development capability. We are extremely pleased with the market adoption for our latest generation Kiyo etch products. Illustratively, we recently secured another critical 3D NAND conductor etch position at a leading device manufacturer, and as a result, the Kiyo product addressing this market will now have more than double its installed base in the first half of calendar 2015. This type of success builds fundamental capability and competitive advantage from demonstrated production performance, and it validates our conviction that for deposition and etch combined, we believe we have secured 90% of the critical 3D NAND application selections so far made in the industry.
We have long partnered with customers to demonstrate the value of our Kiyo with Hydra technology, which allows for localized fine-tuning. Significant benefits are being seen for patterning and CD-sensitive applications. The differentiated on-wafer results are accelerating adoption of this unique and well-patented capability. Tactically, as we have stated many times, we don't win or defend everything successfully, but if we continue to win more than not, our momentum builds. Strategically, we recognize that our greatest areas of growth opportunity remain in dielectrics deposition and dielectric etch. Accordingly, we prioritize investments and engagements to realize that vision. Now turning to our industry updates. With the first quarter of 2015 concluded in line with our expectations and disclosure by companies in aggregate more or less consistent with our planning assumptions, we maintain our general outlook for WFE investments.
The predicted trends in semiconductor consumption, including demand at the leading edge, the value proposition of technology investments by our customers, and the well-established spending discipline, we believe together support a growth outlook. The perpetual environment of change, pull and push, real and perceived, is not new. Our focus on achieving long-term success, a key guiding principle. We believe that the fundamentals remain strong for our company. This is an opportunity-rich environment where our long-term commitment to customer trust across all market segments and all active technology nodes, combined with a vigorous pursuit of technology leadership across our full product portfolio, never more important. In the DRAM segment, we see disciplined investment strength across multiple customers, notwithstanding the well-publicized weakness in PCs. Market demand continues to be driven by mobile and enterprise DRAM growth.
DRAM investments, which appear biased to the first half of 2015, are very efficient and focused primarily on technology conversions to 20 nanometer. For NAND memory, we believe there will remain a healthy balance in overall supply and demand. We still anticipate that investments will include planar conversions and 3D NAND capacity additions in 2015, with the 3D investments being more second half weighted. At this time, we project 2015 3D NAND investments to be slightly greater than planar. Overall, we anticipate 2015 memory WFE spending at or slightly above the $15 billion level. For the foundry segment, we continue to see that investments in 2015 are focused on FinFET enablement at a number of customers as they compete for opportunity in their marketplace. The previously noted 28 nanometer capacity additions are occurring as anticipated.
Our view of foundry investments is slightly lower than the spending levels we saw in 2014, again, reasonably distributed across the industry and the year. We expect logic spending of between $6 billion and $7 billion, more or less flat with 2014, reflecting a sustained commitment to technology conversions with optimized reuse of the installed base. This downward market pressure is offset at some level by mobile demand-driven spending within the image sensor segments. Bottom line, we continue to model 2015 WFE at $34 billion ±$200 million for the year. As we highlighted last quarter, execution on our current opportunities, continually increasing customer trust, building strategic alliances with key customers, profitably growing the business, and preparing for the next set of technology inflections are areas of strategic focus.
Our commitment to R&D is the most fundamental element of sustaining outperformance for the company, and as such, we target to allocate more than 60% of operating expenses consistently to the delivery of innovation, fundamental research, and concepts and feasibility evaluations. Seeking to optimize both short-term performance with our ambition for long-term sustainable growth. We continue to realize the benefits of that focus in atomic layer processing and control, in deposition and in etch both, which effectively leverages our established strengths, providing a credible, and we believe executable technology roadmap for the future. As we continue our journey of growth, 2015 is a year which in many respects solidifies and expands upon our successes of 2014. It is a year where we target to build competitive advantage through an intense focus on execution. We are pleased by our performance so far, but believe our opportunity and potential are greater.
We aspire to strengthen the foundation of success and ensure that our most enabling vision objective, to make Lam Research a place where successful people want to work, is a long-term competitive advantage that builds with intensity and drives value for the full community of stakeholders. Doug.
Thanks, Martin. Good afternoon, everyone, and thank you again for joining us today. We're very pleased with our results for the March quarter, a quarter where we achieved record levels for shipments, revenue, as well as operating income. Each of these items grew double digits sequentially. We delivered performance above the midpoint of guidance for all of our metrics and delivered earnings per share above the guided range. Execution from the company was clearly very strong in the quarter. Shipments for the quarter were $1,497,000,000, which was up 20% sequentially, and again, near the high end of the guided range. I'd just point out this was the fastest sequential shipment growth in the last seven quarters. Memory shipments continued to be strong in the quarter, with the combined memory segment making up 67% of the total system shipments, compared to 53% in the prior quarter.
DRAM shipments represented 45% of system shipments, which was up from 43% in the prior quarter. NAND made up 21% of the shipments, which was up from 10% in the December quarter. The foundry segment was flattest sequentially in dollar terms, accounting for 24% of system shipments. I'll remind you that foundry in the December quarter represented 32% of system shipments. Finally, the logic and other segment was slightly down, contributing 9% of system shipments. While we don't normally comment on bookings, this quarter, I'd just mention that as we ended the March quarter, the book-to-bill was comfortably above one. We delivered record revenue of $1,393,000,000 in the March quarter, an increase of 13% from December. Gross margin for the period came in at 44.7%, again, towards the high end of our guided range.
Better utilization from the factory and field, in addition to a slightly more diverse customer base, up gross margin. Also helping was the fact that we made solid progress in improving the manufacturability of some of our newer deposition tools. As we've shared before, our actual gross margins are a function of a number of factors such as business volume, product mix, and customer concentration, and you should expect to see variability quarter-to-quarter. I'll remind you that our financial model is still the best way to think about our ongoing performance in the longer term. Operating expenses in the quarter grew to $345 million, but decreased 2% as a percentage of revenue to 25%. Spending was above the midpoint of the implied guidance, primarily due to an increase in profit-dependent expenses during the quarter. R&D spending increased sequentially, while SG&A declined.
We continue to drive our spending profile to have an increasing portion of our operating expense in R&D versus SG&A. R&D represented a greater percentage of total OpEx in March compared to last quarter. These R&D investments are critical to preparing for the current as well as future technology inflections in our industry. Operating income in the March quarter came in at a record level of $277 million, up 20% from the prior quarter. Operating margin was 19.9%, up from 18.7% in December, and again, at the high end of the guided range. Operating margin improved sequentially as we delivered leverage from the growth in revenue. The tax rate for the quarter was up slightly, as expected, to 11%. The tax rate of middle teens remains the right level for you to include in your models.
The March tax rate was a little bit below the normalized level due to more income generated in lower tax jurisdictions, as well as a provision to return true-up. Based on a share count of approximately 174 million shares, earnings per share for the March quarter were $1.40, above the high end of our guided range. The primary drivers of this being the higher revenue and the above midpoint gross margin. The share count at this point includes dilution from all three of our convertible notes, with the total dilutive impact being 12 million shares on a non-GAAP basis. I'll remind you that the dilution schedules for the 2016, 2018 and 2041 convertible notes are available on our investor relations website for your reference. During the quarter, we spent $112 million and took delivery of about 1.4 million shares at an average share price of $78.45.
We also returned $0.18 per share in dividend distributions. At the end of the quarter, 11 months into our two-year program, we had completed about 55% of the current $850 million share buyback authorization. Let me now turn to the balance sheet. Cash and short-term investments, including our restricted cash, increased notably in the quarter to $4.1 billion. We decided to take advantage of what we perceived to be a favorable interest rate environment and completed the issuance of $1 billion in principal value of investment-grade senior notes. The issuance creates some flexibility for the company on a number of fronts. One of those being something I mentioned in last quarter's call. We have the first of our convertible notes maturing in mid-2016, and we plan to use a portion of the proceeds from this issuance to refinance those notes.
Cash from operations was $191 million, which was up from $161 million in December. This cash generation ended up being a little better than I foreshadowed last quarter, due to a little bit more linear shipments during the quarter. Day sales outstanding increased by two days to 68 days. Cash generation was partially offset by our capital return programs as well as capital expenditures. We exited the quarter with deferred revenues of $485 million, which was up from $374 million in December. I'll point out that this excludes $45 million in shipments to customers in Japan, which will revenue in future quarters. These Japanese shipments remain as inventory on our balance sheet. Company non-cash expenses included $33 million for equity comp, $40 million for amortization, and $31 million for depreciation. Capital expenditures were $32 million, which was down from $61 million in the December quarter.
CapEx in this business can at times be lumpy due to the timing of certain investment programs. We exited the quarter with approximately 7,000 regular full-time employees. Now, looking ahead, I'd like to provide our non-GAAP guidance for the June quarter. We expect shipments of $1 billion, $600 million ±$50 million. We expect continued strength in memory and slight growth in both foundry and logic. Revenue of $1 billion, $460 million ±$50 million. Gross margin of 45.5% ± one percentage point. Operating margins of 21% ± one percentage point. Finally, earnings per share of $1.46 ±$0.07, based on a share count of approximately 174 million shares. Given we just issued new debt, I'd like to provide you some guidance on how to model the P&L impact from the 2020 and 2025 senior notes.
On a quarterly basis, we anticipate the incremental interest expense, net of interest income and the tax impact to be between $4 million and $5 million. That concludes my prepared remarks. Operator, Martin and I would now like to open up the call for questions.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone to make sure that your mute function is off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask a question. We'll pause for a moment to allow everyone an opportunity to signal. We'll take our first question from Jim Covello with Goldman Sachs.
Great. Thanks so much, guys. Good afternoon and congratulations on the terrific results.
Thanks, Jim.
Thanks, Jim.
Martin, when you made your comments about the industry environment, I thought you emphasized the word in aggregate, there's been no change. Obviously, there's been a couple of high-profile cuts. You're used to the word in aggregate there, and the fact that you haven't changed the overall results suggest there may be some other customers that are actually spending a little bit more than they suggested earlier in the year. Is that a fair way to interpret your comments?
I think that's fair, Jim. The use of the word aggregate was deliberate. One of the kind of realities, obviously, when we're opining on what's changing in the industry outlook, each of us have a baseline, and just occasionally those baselines are the same, and just occasionally they're different. Sometimes we're anticipating announcements, sometimes we're not. What has changed quite clearly is, we've seen the public disclosure from the logic and foundry space, that I think is well understood in the industry. For us, we've got some pretty positive and meaningful offsets in logic, in and around image sensor applications opportunities. That's an offsetting positive. The memory investments in 3D NAND is a little stronger than we had anticipated in the second half. I think now we've gone three sequential earnings calls with slightly better outlook in 3D NAND.
If you back up two, we said we thought planar was greater than 3D NAND, then we said that we thought they were about the same. Today we've said we believe 3D is slightly stronger than planar investments in the calendar year. That got a little bit better. In DRAM, the investment level is probably slightly higher than we anticipated, but I would say it is slightly more efficient because the balance of conversions got slightly stronger. You'll remember the ads which we talk about in DRAM are really not technically ads because they're just a compensation of the consequence of technology transition. We had some foundry and some kind of microprocessor negative. We had some image sensor, some 3D NAND, and some DRAM positive.
At the end of the day, our WFE number, I think, is within $200 million or $300 million today from where we estimated it to be in January.
That's incredibly helpful. Thank you. If I could ask for my follow-up. On the 3D NAND side, would you characterize that strengthening in the back half being driven mostly by one customer, or is it a little broader than that? Thank you.
I think it's pretty distributed, Jim. I have a sense at this point that everybody is invested in the substance and the reality and the benefits of the transition, the investments are occurring at a different pace, obviously, from one customer to another. As best I can tell, everybody's describing an ambition to have HVM capability in calendar 2016, which means they're investing in a meaningful way in the second half of this year to accomplish that objective.
Very helpful. Thanks so much and good luck.
Thank you.
We'll take our next question from Timothy Arcuri with Cowen and Company.
Thank you very much. Guys, I wanted to ask a question about 3D NAND. It sounds like it's a little bit better than what you thought during the back half of the year, but you said last call that you thought you'd add about 70K, or not you, but the industry would add about 70K, I think going from 60K last year up to 130 closing this year. Does that mean that that 70K has gone up a bit?
I think that number is not a bad reference point today, honestly. These numbers are, when you're talking about additions, they're pretty big numbers for 5,000 or 10,000 wafer starts. I'm not sure I would extract a very meaningful headline today in terms of number of wafer starts. Similar commentary today. I do think that perhaps our view is that there's maybe 10,000 wafer starts of capacity shipped in, but it won't be productive and installed by the end of the calendar year. We probably have revised our outlook in terms of what will be in process being qualified, but it doesn't play a role at all in terms of supply and demand balance in the industry. It's same message, more or less.
Got it. Okay, thank you. Doug, you said last call, you said that the bottoms-up forecast was, at the time, implying that technically that the first half looked a little bit better than the back half. Now, given that June is in fact that much better than what you thought at that time, do you still think that the first half like, have we just pulled into the first half or is the annual number, in fact, better than what you thought it was at this time last quarter?
Yeah. Tim, as you know, in this business, you don't have perfect clarity in the second half when you're sitting here at the end of March. Our expectation is, as Martin described, is a strong second half. There may still be a slight bias to the first half in terms of shipments. It's probably not lost on you that deferred revenue grew this quarter, such that there might be more balance in revenue than shipments. Honestly, we're going to guide one quarter at a time. It's still a little bit early for us to give you definitive visibility in the second half, but a little bit of color anyway.
Awesome, guys. Thanks so much.
Thank you.
Thanks, Tim.
Our next question comes from Weston Twigg with Pacific Crest Securities.
Hi. Thanks for taking my questions. Just wanted to follow up on the DRAM piece. Given that DRAM pricing's been falling and PC demand has been quite soft this year, do you have confidence that the spending plans will hold up in the second half? I guess maybe you could give us a weighting just specifically on DRAM first half, second half.
Yeah. It's almost dangerous to say we're like really confident because life doesn't ever work out exactly as you anticipate it. I do think the headline of discipline in the industry that we've talked about a lot now is a valid assumption for the rest of the year. I think the entire supply chain is invested in accomplishing that objective. None of us get excited about wild swings in the volumes of our business. Frankly, one of the things that does make me feel good today, the only kind of primary change that we're talking about today in DRAM is that it got more efficient. It's a slightly bigger number of investment, but the value delivered from that investment in the industry, is greater than we originally anticipated, because there is now a greater proportion of investment assigned to conversions than we were originally kind of thinking.
That's a very positive headline from my point of view regarding sustainability. Let's not forget that, even with the pace of investment we're describing here, by the time you get to the end of calendar 2015, probably two-thirds, if not slightly more of the installed base, has yet to be upgraded to the 20 nanometer technology node. That's, I think, a multi-year sustainable statement.
Okay. That's very helpful. Just wondering on the R&D line, big step up in the March quarter. On an absolute basis, do you think R&D stays around that level, or we just vary it as a % of sales, to keep it in that range?
It'll hold steady, and to the extent that revenue's a little stronger in June, total spending will tick up slightly, Wes. It's probably in a pretty steady state level for the next quarter or so.
%-wise or absolute dollar-wise? Both, I guess, through the year, maybe.
Absolute dollars.
Got it. Thanks.
Thanks, Wes.
Our next question comes from Credit Suisse, Farhan Ahmad. Please go ahead, sir.
Thank you. Thanks for taking my question. My first question is for Martin. In terms of the 3D NAND ramp, particularly as you look at next year, how do you think the spending between the planar and 3D would be for next year? Is it fair to assume that maybe close to 90% or even more could be 3D NAND? Secondly, as you think about spending mix between conversions from planar to 3D and 3D new capacity, how does that affect your business? You mentioned like on DRAM, the conversion being stronger resulted in a lot higher revenue for you. I would imagine like if there is more portion of the spending going to conversion, the spending on dep and etch would be a lot stronger.
I would say at a general level, it's kind of segments unspecific, the more efficient the spending for the customer, the more sustainable their investment is, and the more likely they are to be successful. We actually, in general, are very positive when we see conversions and upgrades. Specific to the first part of your question, wow, I'm not sure I know that I could opine on a percentage per se, for 3D NAND, but I definitely think it's the majority of spending next year. As best I can tell, most of the plans of the customers are not greenfields. They're existing facilities, and they're conversions based. The implications of that to Lam Research are very good because, the 3D NAND transition is deposition and etch intensive, as you know. We care about sustainability.
Conversions are very good, and whether it's new or a conversion, the dep and the etch components are going to be disproportionately and positively, a big feature of that spending.
Thanks, Martin. Just one question on the linearity of CapEx, this year. Some of your peers have talked about foundry spending being kind of flattish through the year, while DRAM is mostly first half faded. I just wanted to hear your thoughts, like if you're seeing similar trends.
Yeah, I don't know that we've got kind of a perspective that's that much different from the rest of the industry. I think we kind of more or less align to that message.
Thank you. That's all I have.
Thanks, Farhan.
From Evercore ISI, we have C.J. Muse.
Yeah, good afternoon. Thank you for taking my question. I guess first question, when I look at your results implied in your first half guidance, can you comment on whether you're pulling in here your target model for 2016, 2017, that it may absolutely come to fruition in 2016? Would love to hear your thoughts on that.
Yeah. C.J. I'm not ready to update the financial model. You should expect to hear an update from us when we get to our investor event at SEMICON. I feel good about where we're tracking relative to that model, I'm not ready to give you any update today.
Okay, sure. I guess maybe as part of that then, when you think about the right parts of the market that you're levered to, what do you principally attribute your outperformance in the first half to? Is it memory exposure? Is it share gains in ALD etch? Is it double patterning? Would love perhaps rank order of what's driving this relative outperformance near term, then perhaps looking to the back half of the year, with 3D NAND ramping, what the key drivers will look like there.
Well, the memory component obviously features in a pretty meaningful way as communicated by Doug's segmentation comments on March quarter and on the June outlook, right? In terms of rank order, first half of the year, there's a very strong message for us there. The outperformance commentary from the company is a byproduct of kind of the three inflections we've talked a lot about, right? Multi-patterning, 3D device transitions in memory and logic both, advanced packaging. These are the reasons we said we would, with execution, outperform, these are the very same reasons that we are outperforming. They're real, our focus is execution.
You heard me say in my closing that the intensity of focus on execution here is kind of everything, because we have, at least by the decisions of customers, set ourselves up for a greater than 50% market share of inflection-based business. As long as we execute that, the story for the company is extremely positive. We got a little bit of momentum on that, obviously, from a memory point of view in the first half. Relative to our model, it is clear, and we've talked about it several times, we're growing the company a little faster than we had originally anticipated, in large part because of the multi-patterning transitions that were accelerating, particularly in DRAM, earlier and faster than we originally modeled. We're working really hard to make sure the profitability of that growth kind of plays out consistent with our models.
That's the reason why we don't change this model more than kind of once a year. We feel really good about growth, and there's a lot of people in Lam Research who are really busy making sure growth is profitable.
Very helpful. Thank you.
Thanks, C.J.
Our next question is from Patrick Ho with Stifel Nicolaus.
Thank you very much, and also congratulations. First off, in terms of 2015, your comments about planar NAND versus 3D NAND and seeing, I guess, a pickup and improvements on that front, do you see any potential shifts in dollars from original planar NAND investments that are now going to 3D? Or has your number basically stayed static on planar NAND, and you're just seeing more of 3D NAND in the second half?
We have a tweak less planar conversions than we originally anticipated. Our assessment today is in overall NAND WFE investment is greater today than we anticipated in January. There is some adjustments, but the dollars of investment today, we believe, are higher than we anticipated in January.
Just a little bit, Patrick.
Great. That's helpful. Maybe, Doug, on the financial side, there's been a little bit of a discrepancy that's gotten a little bit larger between shipments and revenues over the past few quarters, which does give you a little bit of visibility on the revenue front. However, is that more related to new tools that are getting out there in the field that takes a little longer revenues, or is there something different on the accounting side that we should be aware of?
There's nothing different on the accounting side. It is a little bit of the new tools. It's also the fact that we're shipping this to some new fabs, it can sometimes take a little bit longer to get the acceptance in that situation.
Great. Thank you.
Thanks, Patrick.
Our next question is from Stephen Chin with UBS.
Thanks. Hi, Martin. Doug, also, congrats on the execution.
Thank you.
I also had a follow-up question on 3D NAND. We've heard recently from some of the customers giving updates on the 48 layers for 3D NAND. Do you think your second half is also perhaps benefiting from 48-layer 3D NAND being significantly more capital-intensive than perhaps 32-layer NAND was last year?
Maybe we need to remind everybody we're actually not a NAND memory company. I guess we have a perspective, but our perspective is never as reliable as our customers on this point. It's a little hard, frankly, to opine on capital intensity from where we sit. We have very good visibility to deposition and etch, and indeed, a 48-pair has more intensity of deposition and etch than a 32-pair, and a 60 has more than a 48, and so on and so forth. Performance benefits and yields all have to kind of play out for the substance and the validity of those plans to kind of emerge. We're not really articulating a headline today that I think is a byproduct of the number of pairs in a device changing from our expectations in January today.
I think more we're articulating that some of our customers have made some changes in their plans a little bit around the balance of planar and 3D investments. I think that's more the message than kind of the layer count.
Okay. Thanks for sharing that. Just a follow-up question on the operating expense trends going forward. Now that some of these key inflection technology programs seem like they're well underway at customers, such as FinFET and 3D, can we think about Lam's OpEx spend normalizing a little bit lower soon? Are there other big projects like FinFET and 3D that are coming down the pipeline that we just don't know about?
Stephen, as always in technology, you have to be innovating your capabilities such that you're growing revenue two years down the road. The right way to think about the level of our spending, I would encourage you to go back and look at that financial model. That will answer the question for you.
Next question, please.
Hey, this comes from Harlan Sur with JPMorgan.
Hi, good afternoon. Congratulations on a very well-executed quarter. On your memory spending outlook for $15 billion or higher this year, can you just break out the rough mix DRAM versus NAND spend within that memory view?
Yes, I can if I get a slide in front of me. Okay, here we go.
We got it.
We have today, an assumption of between kind of, I would say, eight and a half and nine for DRAM. You can answer the NAND question. There's a little bit of other memory, but eight and a half to nine is our assumption on DRAM.
Appreciate that, Martin. For Doug, team is looking for a solid 80 basis points of gross margin improvement here in June. How much of that is due to a more diverse customer base versus some of the cost improvements on new tools that are starting to ship? Given your pipeline and product visibility, does the bias suggest that you can kind of maintain this sort of 45% plus range as you move through a stronger second half of the year?
Yeah, Harlan, it's pretty evenly split in terms of the sequential improvement gross margin between tool maturation one, which is all about manufacturability, as well as the slight broadening out of the customer base. It's a little bit of both. Relative to expectations beyond that, again, the reason I point to the financial model is it is how we're thinking about the profitability of the company and how we're trying to run the company. We're kind of in the sweet spot of where you would expect us to be if you go back and look at those models. It's probably steady as she goes for the most part.
I mean, we feel really good about the growth in the company. Hopefully, that's kind of clear. We're working really hard to make sure we get the profitability expansion that we were targeting. The most stressful point, as we've talked about many, many times, is the gross margin percentage. It's the one which is a very, very, very hard thing to execute to because you have kind of competing influences in terms of introducing technology as fast as you can possibly get it to the customer, and at the same time maturing it so that in an HVM buy, in a high volume environments, the economics are where you want them to be. That's a really tough thing to pull off.
The long-term success of the company is more important than short-term success, and our customers have high expectations of our industry to contribute to their business. We're really focused, as Doug just said, on the long-term financial models that we have given you, and we feel really good about growth, and we're working really hard on the profitability.
Excellent. Thank you.
Thanks, Harlan.
Our next question is from Mark Heller with CLSA.
Thanks for the question and congratulations also on the good results.
Thanks.
Doug, I was wondering if you could maybe just give a little more color on the end market breakdown for June. I know you said memory would remain strong, but can you give maybe a little bit more color on the percentages?
I'm not going to give you the hard percentages. I said memory will remain strong. That's plus or minus what we did in March, likely. I said I expect logic and foundry both to be sequentially stronger. I'm not going to get into quantifying it specifically, but that's the directional body language on it.
Okay. Cash flow generation has really been excellent. I was wondering, is there any targets that you have for calendar 2015? Aside from the debt refinancing, which I think is for next year, what are the other expected uses of cash? Could we see a dividend increase or another buyback?
Well, we're not changing the plans of the company as we sit today. I told you we're 55% of the way through the two-year buyback authorization, and we're about, like end of the quarter, we were 11 months into it. That's got a ways to play out yet. I described part of the debt that we raised targeted towards refinancing the 2016 convertible notes. Beyond that, our priorities for cash are first, the profitable reinvestment in the business. We are absolutely committed to returning cash to shareholders. I don't have an update for you on the program that we've got in place. Then you got to invest in CapEx in the business as well. That's how we're thinking about that.
The only other thing I would add is, relative to a kind of target for cash from operations, we don't really have a kind of pulling out there for you guys, but clearly the operating income performance of the company is a decent proxy in the long term for cash from operations performance. In practice, when it's higher or lower, that's much more to do with the direction of the industry and the company than anything else. If business volumes are in a positive direction, i.e. growing at the end of this calendar year, then we will be much more likely investing in even more growth. Maybe you don't drive cash from operations as strong as your operating income. If the reverse is true, then you drive better cash from operations. That tends to be how we think about it.
Over a multiple year horizon, the operating income % is a good proxy for us in terms of cash from operations performance.
Thank you. Congratulations again.
Thank you.
Thanks, Mark.
Our next question is from Atif Malik with Citi.
Hi. Thanks for taking my question. Congratulations on good set of numbers. Martin, what, if anything, is different about equipment reuse, especially at foundries, as foundries migrate from 20 to 16 and down to 10 nanometer? If you can talk about either your end markets or any other end markets which are more prone to equipment reuse?
I would say, historically, the markets where reuse has featured significantly have had a limited number of kind of die in a fab, in a line. A microprocessor fab and a memory fab have historically been kind of the perfect models of equipment reuse. Our customers get better at that, and we get better at supporting them. Frankly, it's in everybody's best interest in the long term that we're able to kind of execute collectively consistent with that. As is always the case, there's two sides to every coin, and one of the realities as an equipment company is the profitability level measured by the percentage of profitability is often greater on the conversion on the upgrade than the original equipment sale. You get a smaller dollar, but you get better kind of leverage in terms of the percentages.
In the foundry space specifically, I would say, where you have a really big customer with a very focused demand requirement in terms of the number of die, then you have an opportunity for reuse in ways that in a typical foundry with many customers and many die, you don't have. We don't actually see any change today from the world that we anticipated. Now, maybe we were lucky, or maybe we put a lot of thought into anticipating it well, but I think we've been saying for a year, we expected the equipment for a 16-nanometer foundry buy to have 90%-95% overlap with the 20 selections. There's a lot of reuse potential, and our outlook today in terms of investments in foundry is just the same as it was before. Obviously, considering the recent announcements from at least one foundry customer.
Great. Thanks. Very helpful. In response to Tim's question, you mentioned the incremental NAND wafer starts per month for this year, you think that's still in the 70,000 ballpark. Can you also verify that the DRAM wafer starts for this year are still in the 60,000-70,000 wafer starts range?
That's fine.
Yeah, it's about the same, Atif.
Thanks.
We'll take our next question from Krish Sankar with Bank of America.
I have two quick questions. Martin, the first one is, when you look at your ALD product, looks like you're getting pretty good traction, but my sense is you're not there in that many layers that you compete in today. Is there a potential to grow that with the existing product, or do you need additional investments to get more footprint on the ALD product side?
I think from a hardware perspective, we're in decent shape, Krish. As is the case, though, hardware gets you about 25% of the way to where it results on the wafer, and the rest of it is kind of the process and the materials integration. There's always a lot of work to do in terms of precursor developments and then process to get uniformity and selectivity and conformality that we're targeting at a level of yield performance that makes sense for our customers. I think we're off to a great start. We're coming from behind, as you know, in ALD, the momentum of the company, I would say, is very positive.
As I mentioned in my prepared comments today, we're taking kind of a very focused foundation and platform of growth, we're trying to broaden the applications now, we've got some tough competition, we respect their capability as I hope, just a little bit, they might respect ours.
Got it. That's very helpful. A quick question for Doug. What is your mix of onshore versus offshore cash?
After we raise the debt, it's close to kind of evenly balanced.
Got it. Thank you.
Thanks, Krish.
Our next question is from Mahesh Sanganeria with RBC Capital Markets. Please go ahead, sir.
Hi, this is [Shanyang for Hesh. Thanks for taking my questions. Just one quick question. Martin, DRAM spending has been very strong for the past two quarters, and I think you mentioned that the efficiency of the investment is better than anticipated. At the beginning of the year, when you initially presented the $14 billion-$15 billion memory WFE, you said that spending will drive about 30% bit growth. Now, with the improving efficiency, do you think the bit supply in DRAM will be higher than that 30% you mentioned before?
Yeah, I don't think that we have a position that is different from the industry on bit growth in any segments of the industry. We try to kind of triangulate as best we can, and the high 20s and kind of 30 level is, I think, where the industry is, and I think it's a very disciplined commitment by our customers. It doesn't serve anybody's interest for anybody to get ahead of this thing, and I think you've got a lot of discipline through consolidation and capability in the supply chain for that to continue. I hope it does.
Okay. Thank you, Martin.
Our next question is from Mehdi Hosseini with SIG.
Yes, thanks for taking my question. A couple of follow-up. Just want to clarify on the 3D NAND, you said that the dollar spending is slightly higher than the planar NAND, and incremental capacity add is about 70K. Does that mean that you still expect the NAND industry to be able to grow bit capacity by more than 30%? What am I missing here?
No, yeah.
Yes.
Yes is the answer to that.
Yes.
More than half of the CapEx for NAND is 3D. When we look into next year, as maybe some of your customers start to reuse the NAND, should we assume some sort of a slight decline in capital intensity, or do you think this kind of a capital intensity is sustainable for multi-years?
Well, I think, we're not a very representative company to answer that question because our participation in this inflection is a deposition and etch participation. That's a very powerful place to be. We don't really get to opine on capital intensity for the industry, I don't think. There's another company in the equipment industry that'll do a much better job than us doing that. I would say, we are very invested in the opinion that our customers are focused on sustainability of investments. They're going to do at least as much as you might want them to do in terms of conversions to make it efficient and sustainable. What does that mean for us? I think it means we're in the right place at the right time with the right products. If we execute, we can continue to string together some outperformance.
Got it. On image sensor, are these new customers or existing customers that are following new projects?
Existing customers.
Existing customers. Thank you.
Thanks, Mehdi.
Our next question is from Edwin Mok with Needham & Company.
Hi, thanks for taking my question. On your comment about DRAM, spending more dollars on conversion for this year, Is it a way you can break it down? Is it driving more incremental etch or deposition business for you guys?
Yes is the answer to that. I think that's just headline on the intensity of etch from a conversion point of view. It's a very favorable transition for us. It's a commentary on the patterning transition in etch and deposition both. We believe that the total wafer fabrication equipment investment in DRAM is slightly higher than we thought. We believe it's more efficient, to my earlier point, and we believe it should favor the segments of deposition and etch.
Okay. Okay. All right. That's helpful. On 3D NAND, I'm curious, have you guys started to see shipment or you expect to start to see shipment in the June quarter? Then, sorry, slightly unrelated question, in your ALD product that you talked about, is that tied to the 3D NAND investment or is it other inflection that you mentioned?
I'm not sure I answered the first part of your question. If your first part of the question was, is 3D shipments, are they happening now or-
Yes
I mean, they've been happening on a continuing basis. There's always someone somewhere buying something for a 3D NAND application. Sometimes that's an addition to an HVM capability. Sometimes that's a first-phase pilot. Sometimes it's second phase. There's four guys, they have different timing and different commitments to investment. I think everybody's there as an industry. We have two more guys we're going to try and get to here. Can we go to the next question, please?
Yes, sir. Our next question is from Sandeep Sethi from Jefferies.
Hi, guys. Thanks for taking my question. Just one on the foundry side. If you would just give us an update on the total amount of 20 nanometer, 16 and 14 capacity that you're now expecting to see exiting 2015. Are you seeing a bigger shift toward 14 and 16 rather than 20? If possible, share with us how you're thinking about the progression of this capacity into 2016. Thanks.
Well, as I said before, at least in the dialogues that we have with the customer, we're not really distinguishing too much between 20, 16, and 14. There's a huge amount of overlap in terms of equipment. The basic message today, we think, is the one that was communicated to you publicly in the last couple of weeks that there's commitments to technology conversions and a little bit less today at the 14, 16 kind of node for the year, from an industry perspective than was originally anticipated. I think that the basic commitment to a FinFET conversion, first wave, and then the pilot investments in 10 nanometer are there. That would be my comments on foundry.
We're assuming by the end of this year that the capacity that has been shipped in at or less than 20 nanometer is in the range of 200,000-210,000 wafer starts per month.
Great. Thanks so much.
Thanks, Sandeep.
Our next question is from Tom Diffely with D.A. Davidson.
Yeah, good afternoon. First, a quick clarification. Did you say you had won 90% of the 3D NAND critical etch and deposition steps?
Yeah. Which is a disclosure, by the way, we made at SEMICON West a year ago. I was really just kind of repeating that based on our assessment of critical and non-critical applications in that segment, we think the 90% headline that we communicated at SEMICON West is valid today. In fact, as I said in my prepared comments, we had a nice kind of reinforcement of that in a selection this quarter.
Okay. Critical makes up what % of the overall etch and dep for 3D NAND?
We don't actually make that disclosure.
Okay. Then finally, when we look at the competitive front, are you seeing any kind of increased presence with local vendors in places like Korea and Taiwan?
No, I would say it's a very kind of constant competitive threat, I don't think it's anything new. The reason, by the way, I said we don't disclose it is because the value of the critical position is much less to do with the percentage of the business, it's a reasonable percentage, otherwise I wouldn't bother telling you. The value proposition of the critical wins is you create cycles of learning for your company that your competition does not have. If you do that for long enough, then your ability to be successful broadly in a marketplace is greater than theirs. Value is not the percentage. The value is the learning and the critical feature capability that we develop broadly in the marketplace.
Okay. Thank you. Thanks for squeezing me in.
Thank you.
Yeah. Thanks, Tom.
All right. That concludes our call for today. Thank you very much for joining. A replay will be available on the website.
Thank you.
Thank you.