Good day, and 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, and 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 Doug Beddinger, 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 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. Call.
Today's presentation and Q and 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 ks 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 release, 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 p. M. Pacific Time. And as always, we ask that you limit questions to 1 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 Maury.
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. 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 then 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 expectations above midpoint for all guided metrics. This represented our 7th consecutive quarter of greater than $1,000,000,000 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 the validation of our ability to scale effectively. The combination of a strong March quarter and a stronger next quarter guide and the 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 land product and service offering, which deployed in a true partnership with customers are together facilitating the technology inflections of multi patterning, 3 d 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 efficiencies and more cost effective devices.
We believe that inflection spending continues to rise proportionately tracking to 1 third of WFE this year and reaching the 50% level in 2017, a viewpoint that remains a major influence over our confidence in achieving multiyear growth outperformance. The multi patterning and 3 d 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. This represents opportunity and risk both, but the continued strengthening of our product portfolio creates a growing SAM. The headline today is we now compete for 28.5% of total equipment spending and 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% flexion 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 3 year market share targets of 4% to 8% increase in deposition market share, 3% to 5% in etch and 5% to 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 We are extremely pleased with the market adoption for our latest generation Kiyo etch products. Illustratively, we recently secured another critical 3 d NAND conductor etch position at a leading device manufacturer and as a result, the Keyyo product addressing this market will now have more than double its installed base in the first half of calendar twenty fifteen. This type of success builds fundamental capability and competitive advantage from demonstrated production performance and it validates our conviction that for deposition and edge combined, we believe we have secured 90% of the critical 3 d KEO with hydro technology, which allows for localized fine tuning. Significant benefits are being seen for patterning and CD sensitive applications. The differentiated Onwafer 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 Q1 of 2015 concluded in line with our expectations and disclosure by companies in aggregates more or less consistent with our planning assumptions, we maintain our general outlook for WFE Investments.
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 supports a growth outlook. The perpetual environments 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, withstanding 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 twenty fifteen 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 3 d time, we project 2015 3 d NAND investments to be slightly greater than planar.
Overall, we anticipate 20 15 memory WFE spending at or slightly above the $15,000,000,000 level. For the foundry segments, 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 $6,000,000,000 $7,000,000,000 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 20 15 WFE at $34,000,000,000 plus or minus 2 for the year. As we highlighted last quarter, execution on our current opportunities continually increasing customer trust, building strategic alliances with key key customers, profitably growing the business and preparing for the next set of technology inflections are areas of strategic focus. Our commitments to R and 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 level processing and control, in deposition and in etch both, which effectively leverages our established strength 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 1.490 $7,000,000,000 which was up 20% sequentially and again near the high end of the guided range.
I just point out this was the fastest sequential shipment growth in the last 7 quarters. Memory shipments continued to be strong in the quarter with the combined memory segment making up 67 percent 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 and NAND made up 21% of the shipments, which was up from 10% in the December quarter. The Foundry segment was flattish sequentially in dollar terms, accounting for 24% of system shipments. And I'll remind you that foundry in the December quarter contributing 9% of system shipments.
And while we don't normally comment on bookings, this quarter I just mentioned that as we ended the March quarter, the book to bill was comfortably above 1. 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 of gross margin. Also helping was the fact that we made solid progress in improving the manufacturability of some of our newer deposition tools.
And as we 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 $345,000,000 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 and D spending increased sequentially while SG and A declined.
We continue to drive our spending profile to have an increasing portion of our operating expense in R and D versus SG and A. R and D represented a greater percentage of total OpEx in March compared to last quarter. These R and 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 $277,000,000 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 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 174,000,000 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 12,000,000 shares on a non GAAP basis. And I'll remind you that the dilution schedules for the 2016, 2018, and 2001 convertible notes are available on our Investor Relations website for your reference. During the quarter, we spent $112,000,000 and took delivery of about 1,400,000 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 2 year program, we had completed about 55% of the current $850,000,000 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 $4,100,000,000 We decided to take advantage of what we perceived to be a favorable interest rate environment and completed the issuance of $1,000,000,000 in principal value 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 $191,000,000 which was up from $161,000,000 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 2 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 $485,000,000 which was up from $374,000,000 in December and I'll point out that this excludes $45,000,000 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 $33,000,000 for equity comp, dollars 40,000,000 for amortization and $31,000,000 for depreciation. Capital expenditures were $32,000,000 which was down from 61,000,000 dollars 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 $1,600,000,000 plus or minus $50,000,000 We expect continued strength in memory and slight growth in both foundry and logic. Revenue of $1,460,000,000 plus or minus $50,000,000 gross margin of 45.5 percent, plus or minus 1 percentage point operating margins of 21%, plus or minus 1 percentage And finally, earnings per share of $1.46 plus or minus 0.07 dollars based on a share count of approximately 174,000,000 shares. And given we just issued no new debt, I'd like to provide you some guidance on how to model the P and L impact from the 2020 2025 senior notes. On a quarterly basis, we anticipate the incremental interest expense, net of interest income and the tax impact to be between $4,000,000 $5,000,000 That concludes my prepared remarks.
Operator, Martin and I would now like to open up the call for questions.
Thank you. We'll take our first question from Jim Coveo 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?
Yes, I think that's fair, Jim. And the use of the word aggregate was deliberate. I mean, one of the kind of realities obviously when we're pining 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. But 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 kind of positive and meaningful offsets in logic in and around image sensor applications opportunities. So that's kind of an offsetting positive. And the memory investments in 3 d NAND is a little stronger than we had anticipated in the second half. So I think now we've gone 3 sequential earnings calls with slightly better outlook in 3 d NAND. So if you back up 2, we said we thought Plano was greater than 3 d NAND, then we said that we thought they were about the same.
And today we've said we believe 3 d is slightly stronger than planar investments in the calendar year. So that got a little bit better. And 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. And 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. So we had some foundry and some kind of microprocessor negative.
We had some image sensors, some 3 d NAND and some DRAM kind of positive. And at the end of the day, our WFE number I think is within $200,000,000 or 3 $100,000,000 today from where we estimated it to be in January.
That's incredibly helpful. Thank you. And if I could ask for my follow-up. On the three d 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 kind of invested in the substance and the reality and the benefits of the transition and the investments are occurring at a different pace obviously from one customer to another. But as best I can tell everybody's describing an ambition to have HVM capability in calendar 16, 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.
And 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 3 d NAND. And 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 $70,000 or not you, but the industry would add about $70,000 I think going from $60,000 last year up to $130,000 closing this year. Does that mean that that 70 ks 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 10000 wafer starts. So 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 kind of productive and installed by the end of the calendar year. So 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.
So it's same message more or less.
Got it. Okay. Thank you. And then Doug, you said last
call, you said that the bottoms up forecast
was at the time implying that back half. But 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?
Yes. 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. But 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 we're growth that deferred revenue grew this quarter, such that there might be more balance in revenue than shipments.
But honestly, we're going to guide 1 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. Thank you. Thanks, Tim.
Our next question comes from
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 has 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? And I guess maybe you could give us a weighting just specifically on DRAM first half second half?
Yes. It's always dangerous to say we're like really, really, really confident because life doesn't ever work out exactly as you anticipated. But 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.
And 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. So it's a slightly bigger number of investments, but the value that delivered from that investments in the industry is greater than we originally anticipated because there is now a greater proportion of investments assigned to conversions than we were originally kind of thinking. So that's a very positive headline from my point of view regarding sustainability. And 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 2 thirds if not slightly more of the installed base has yet to be upgraded to the 20 nanometer technology node. So that's a I think a multiyear sustainable statement.
Okay. That's very helpful. And then just wondering on the R and D line, big step up in the March quarter. On an absolute basis, do you think R and D stays around that level or we just vary it as a percentage of sales in that to keep it in that range?
It will hold steady and to the extent that revenue is a little stronger in June, total spending will tick up slightly, Wes, but it's probably in a pretty steady state level for the next quarter or so.
Percentagewise or absolute dollar wise or both, I guess, through the year maybe?
Absolute dollars. Got it. Thanks. Thanks, Wes.
Our next question comes from Credit Suisse, Farhan Mahi. Please go ahead sir.
Thank you. Thanks for taking my question. My first question is for Martin. In terms of the 3 d NAND ramp, particularly as you look at next year, how do you think the spending between the planar and 3 d would be for next year? Is it fair to assume that maybe close to 90% or even more could be 3 d NAND?
And secondly, as we think about spending mix between conversions from planar to 3 d and 3 d new capacity, How does that affect your business? Just you mentioned like on DRAM, the conversion being stronger resulted in a lot higher revenue for you. I would imagine that if there is more portion of the spending going to conversion, the spending on dep and etch would be a lot stronger.
Yes. I would say at a general level and 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. So we actually in general are very positive when we see conversions and upgrades. Specific to the first part of your question, well, I'm not sure I know that I could pine on a percentage per se for 3 d NAND, but I definitely think it's the majority of spending next year.
And as best I can tell, most of the plans of the customers are not greenfields. They're existing facilities and they're conversions based and the implications of that to lab research are very good because the 3 d NAND transition is deposition and etch intensive as you know. And so we care about sustainability conversions are very good and whether it's new or a conversion, the debt and the ex components are going to be disproportionately and positively a big feature of that spending.
Thanks Martin. And 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. And I just wanted to hear your thoughts like if you're seeing similar trends?
Yes. I don't know that we've got kind of a perspective that's that much different from the rest of the industry. So I think we kind of more or less aligned to that message.
Thank you. That's all I
have.
Thanks, Brian. From Evercore ISI, we have C. J.
Muse. Yes, good afternoon. Thank you for taking my question. I guess first question, when I look at your results implied in your half guidance, can you comment on whether you're pulling in here your target model for 2016, 2017 and that may absolutely come to fruition in 2016? Would love to hear your thoughts on that.
Yes. Suji, 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. Obviously, I feel good about what we're tracking the
right parts of the the right parts of the market that you're levered to, what do you principally drive your outperformance 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?
And then perhaps looking to the back half of the year with 3 d ramp 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 meaningful way as communicated by Doug's segmentation comments on March quarter and on the June outlook, But the outperformance commentary from the But the outperformance commentary from the company is a byproduct of kind of the 3 inflections we've talked a lot about, right? So multi patterning, 3 d device transitions in memory and logic both and advanced packaging. These are the reasons we said we would with with execution outperform and these are the very same reasons that we are outperforming. They're real and our focus is execution.
I mean, you heard me say
in my closing that kind of everything because we have at least by the decisions 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. And as long as we execute that, the story for the company is extremely positive. And so we got a little bit of kind of momentum on that obviously from a memory point of view in the first half. Relative to our model, it is clear and we 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 we're accelerating particularly in DRAM earlier and faster than we originally modeled. And we're working really hard to make sure the profitability of that growth kind of plays out consistent with our models.
And that's the reason why we don't change this model more than kind of once a year. So we feel really good about growth and there's a lot of people in lab research really busy making sure growth is profitable.
Very helpful. Thank you.
Thanks, C. J.
And our next question is from Patrick Ho with Stifel Nicolaus.
Thank you very much and also congratulations. First off, in terms of 2015 and your comments about planar NAND improvements on that front. Do you see any potential shifts in dollars from original planar NAND investments that are now going to 3 d? Or has your number basically stayed static on planar NAND and you're just seeing more 3 d NAND in the second half?
We have a tweak less planer conversions than we originally anticipated. But our assessment today is in overall NAND WFE investments is greater today than we anticipated in January. So 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. And 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 and it can sometimes take a little bit longer to get the acceptance in that situation.
Great. Thank you.
Thanks, Patrick.
And our next question is from Stephen Chen with UBS.
Thanks. Hi, Martin, Doug. Also congrats on the execution.
Thank you.
I also had a follow-up question on 3 d NAND. We've heard recently from some of the customers giving updates on the 48 layers for 3 d NAND. So do you think your second half is also perhaps benefiting from 48 layer 3 d 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 60 has more than a 48 and so on and so forth. Now performance benefits and yields all have to kind of play out for the substance and the validity of those plans to kind of emerge.
So we're not really articulating a headline today that I think is a byproduct of the number of payers in a device changing from our expectations in January today. I think more we are articulating that some of our customers have made kind of some changes in their plans a little bit around the balance of planar and 3 d investment. So I think that's more of the message than kind of a layered account.
Okay. Thanks for sharing that. And then 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 as customers such as FinFET and 3 d. Can we think about Lam's OpEx normalizing a little bit lower soon?
Or are there other big projects like FinFET and 3 d 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 2 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.
It comes from Harlan Sur with JPMorgan.
Congratulations on a very well executed quarter. On your memory spending outlook for $15,000,000,000 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. So we have today an assumption of between kind of I would say 8.5% and 9% for DRAM.
So you can answer the NAND question. There's a little bit of other memory, but 8.5 to 9 is our assumption on DRAM.
Appreciate that, Martin. And then for Doug, team is looking for solid eighty 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? And 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?
Yes, Harlan. It's pretty evenly split in terms of the sequential improvement to gross margin between tool maturation 1, which is all about manufacturability as well as a slight broadening out of the customer base. So 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. So 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.
So it's probably steady as she goes for the most part. So 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. And 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 kind of 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 and that's a really tough thing to pull off.
And the long term success of the company is more important than short term success and our customers have high expectations of our industry that contributes to their business. And so 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, Hart. And our next question is from Mark Heller with
CLSA. Thanks for the question and congratulations also on the good results.
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?
Yes, I'm not going to give you the hard percentages. I said memory will remain strong. So that's plus or minus what we did in March likely. And then 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. And then obviously cash flow generation has really been excellent. I was wondering if you could is there any targets that you have for calendar 2015? And 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. So I told you we're 55% of the way through the 2 year buyback authorization and we're about like end of the quarter, we were 11 months into it. So 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. And 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 we've got in place. And then you got to invest in CapEx in the business as well. So that's how we're thinking about that.
The 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. And 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. So 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. And so 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. So that tends to be how we think about it. Over a multiple year horizon, the operating percentage is a good proxy for us in terms of cash from operations performance.
Our next question is from Atif Malik with Citibank.
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? And if you can talk about either your end markets or any other end markets, which are more prone to equipment reuse?
Yes, I
would say, I mean, historically the markets where reuse has featured significantly has had limited number of kind of die in a fab, in a line. And so microprocessor fab and a memory fab have historically been kind of the perfect models of equipment reads and our customers get better at that and we get better at supporting them. And frankly, it's in everybody's best interest in the long term that we're able to kind of execute collectively consistent with that. And as is always the case, there's 2 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 kind of the conversion, the upgrades and the original equipment sale.
And so 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 with a very focused demand requirements in terms of the number of dies and you have an opportunity for reuse in ways that in a typical foundry with many customers and many die you don't have. And 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 equipments for a 16 nanometer foundry buy to have 90% to 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 1 foundry customer.
Great. Thanks. Very helpful. And then in response to Tim's question, you mentioned the NAND 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 to 70,000 wafer starts range?
That's fine.
Yes, it's about the same.
Thanks.
And we'll take our next question from from Karush Sankar with Bank of America.
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
I
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 that we're results on the wafer and the rest of it is kind of the process and the materials integration. And so there's always a lot of work to do in terms 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. And I think we're off to a great start. We're coming from behind as you know in ALD, but the momentum the company, I would say is very positive. And as I mentioned in my prepared comments today, we're taking kind of a very focused foundation and platform of growth and we're trying to broaden the applications now, But we've got some tough competition and we respect their capability as I hope just a little bit they might respect ours.
Got it. That's very helpful. And then 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 Chandanuria with RBC Capital Markets. Please go ahead sir.
Hi. This is Shao Yuan from Mahesh. 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. So at the beginning of the year when you initially presented the $14,000,000,000 to $15,000,000,000 memory WFE, you said that spending will drive about 30% bit growth. And then now with the improving efficiency, do you think the base price in DRAM will be higher than that 30% you mentioned before?
Yes, I don't I mean, 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.
So I hope it does.
Okay. Thank you, Martin.
And our next question is from mihri Hosseini with SIG.
Yes. Thanks for taking my question. A couple of follow-up. Just as a just want to clarify on the 3 d NAND, you said that the dollar spending is slightly higher than the planar NAND and incremental capacity add is about 70 ks. So does that mean that you still expect the NAND Yes, is the
answer to this.
So, Yes is the answer to that.
Yes. So more than half of the CapEx for NAND is 3 d. And so 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 kind of powerful place to be. But we don't really get to a pine on capital intensity for the industry. I don't think there's another company in the equipment industry, they'll do a much better job than us doing that. But I would say we are very invested in the opinion that our customers are focused on sustainability of investments.
And 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. So what does that mean for us? I think it means we're in the right place at the right time with the right products. And if we execute, we can continue to string together some outperformance.
Got it. And then on MX Sensor, are these new customers or existing customers that have that are following new projects?
Existing customers. Existing customers.
Thank you.
Thanks, Mehdi. And our next question is from Edwidge Mak with Needham and Company.
Hi. Thanks for taking my question. So on your comment about DRAM spending more dollar on conversion for this year, is that driving is it a way you can break it down? Is it driving more incremental actual deposition
business for you guys? Yes is the answer to that. I mean, but I think that's just kind of headline on the intensity of etch from a conversion point of view. It's a very favorable transition for us and it's a commentary on the fabrication equipment investments in DRAM is a 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 edge.
Okay. Okay. All right. That's helpful. And then on 3 d NAND, I'm curious, have you guys started to see shipment or you expect to see shipment in the June quarter?
And then sorry, a slight unrelated question. And your ALD product that you talked about, is that tied to the 3 d NAND investment or is it auto inflection that you mentioned?
I'm not sure I answered the first part of your question. If your first part of your question was, is 3 d shipments, are they happening now or I mean, they've been happening on a continuing basis. I mean, there's always someone somewhere buying something for a 3 d NAND application. So sometimes that's an addition to an HVM capability, sometimes that's a 1st phase pilot, sometimes it's 2nd phase. I mean, there's 4 guys, they have different timing and different commitments to investment, but I think everybody's there is an industry.
We have 2 more guys we're going to try and get to here. So can we go to the next question please?
Yes, sir. Our next question is from Sandeep Bechkar from Jefferies.
Hi, guys. Thanks for taking my question. Just one on the foundry side. If you could just give us an update on 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 2014 2016 rather than 2020?
Also 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 for the customer, we're not really distinguishing too much between 2016 and '14. I mean there's a huge amount of overlap in terms of equipments. 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. But I think that the basic commitment to a FinTech conversion, first wave and then the pilot investments in 10 nanometer are there. So, we're assuming by the end of this year that the 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 to 210,000 wafer starts per month.
Great. Thanks so much.
Thanks, Sanjay.
And our next question is from Tom Diffely with D. A. Davidson.
Yes, good afternoon. First a quick clarification. Did you say you had won 90% of the 3 d NAND critical etch and deposition steps?
Yes, which is a disclosure by the way we made at SEMICOM West a year ago. So I was really just kind of repeating that based on our assessment of critical and non critical applications in that segments, we think the 90% headline that we communicated semi home West is valid today. And in fact, as I said in my prepared comments, we had a nice kind of reinforcement of that in a selection this quarter.
Okay. And then critical mix up what percent of the overall etch and depth for 3 d
We don't actually make that disclosure.
Okay. And then finally, when we look at the competitive front, are you seeing any kind of increased presence with local vendors in places like Santa Ana in Korea and Taiwan?
No, I would say it's a very kind of constant competitive threats and 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 and 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. And if you do that for long enough, then your ability to be successful broadly in a market place is greater than theirs.
So it's 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. And thanks for squeezing me in.
Thanks, Todd.
All right. That concludes our call for today. Thank you very much for joining and a replay will be available on the website.
Thank you.
Thank you.