Good day, everyone, and welcome to the Lam Research Corporation December 2014 Conference Call. At this time, I would like to turn the conference over to Charles, Senior Director, Investor Relations. Please go ahead.
Thank you. Good afternoon, everyone, and welcome to the LAM Research quarterly conference call. With me today are Martin Enstice, President and Chief Executive Officer and Doug Behringer, 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 December 2014 quarter and our outlook for the March 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 website along with the presentation slides that accompany today's 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 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 Mauryn.
Thank you, Audrey. Good afternoon, everyone, and thank you for joining us today. We'll start by speaking to our December quarter results supplemented by a review of calendar 2014 milestones with comments on their relevance to the future growth and opportunities for the company. We will then segue to provide an update to our outlook for wafer fab equipment spending in 2015. Then more specific to Lam as we enter a new year that marks the 35th anniversary of the company, we want to take this opportunity to outline our focus for the year and provide some context for the multiyear outperformance potential that exists as a result of the company's vision and execution.
I will then hand the call over to Doug for a review of our financial and operational performance. The December quarter concluded with results enjoying strength across all metrics and reinforcing our outperformance trend for calendar 14. Within the quarter, we grew our backlog by greater than 20%. Additionally, our deferred revenue balance has increased, which we expect to continue with the shipment strength anticipated in the first half of twenty fifteen. December was the 6th consecutive quarter of greater than $1,000,000,000 in revenues and concluded a record breaking year for the company with total annual revenue reaching $4,900,000,000 Our revenue growth rates, we believe, outperformed the industry by a factor of 2 with profits expansion at more than twice the pace of our revenue growth.
The strong December quarter marked the end of a very rewarding year for Lam that featured the delivery of record setting performance, execution on our market share gain and SAM expansion opportunities that exceeded expectations and a high level of focus on increasing innovation in everything that we do. In turn, we believe that the differentiated culture, values and management system of the company have enabled effective scaling necessary for making profitable growth sustainable. In 2014, we made meaningful progress against our market share targets, introducing new products and services to in the market expansion opportunities of the various technology inflections, including multi patterning, FinFET, 3 d NAND and advanced packaging. We believe we exited calendar 2014 with an inflection based market share across the portfolio of deposition, etch and clean in excess of 50%, a double digit increase compared with our total company pre infections baseline. Our strong early position combined with our unwavering commitment to customer trust and value collaboration positions us to continue to drive our theme of outperformance over the next several years.
Evidenced by our relative revenue growth these last 2 years and further underpinned by our March quarter 2015 guidance today, we accelerated our achievements towards 2017 market share targets, which call for a 4% to 8 percent increase in deposition market share, 3 to 5 percentage points in etch and 5 to 10 percentage points in clean. As previously shared, we maintained a 90% success rate across all plans, penetrations and defenses in 2014. And as such, we believe that our corporate market share has increased by 200 basis points to the 42% level in calendar year 'fourteen. At least as importantly, we conclude that we increased our available market size from approximately 26 0.5 percent of WFE to 27.5 percent of WFE in 2014 through the successful introduction of new products. We've always judged our ability to lead and execute predictably to be one of Lam's core competitive strengths.
We feel that the results presented today again are evidence of very strong execution, but even more noteworthy perhaps a demonstration of execution capability through a period when we are scaling research and CNF activities. We added a significant number of resources in the factory and in the field. We
ramped all manufacturing facilities to
multiple shift operations, shift a record number of systems on time and at quality standards that are ever more critical to our customers, all while continuing to innovate at perhaps the highest level in our history, delivering more than 20 new products and service offerings to our customers. Delivering value to all stakeholders was and continues to be a strong theme and we believe a highlight for 2014. We collaborated closely with our customers and suppliers on innovations designed to meet the FlexFX dielectric etch system necessary for critical high aspect ratio etch. Both products are experiencing unprecedented momentum in the marketplace. For example, our vector ALD oxide system output likely comes close to tripling in calendar 2,005 year over year, driven primarily by patterning related application wins.
We augmented our strong earnings performance with the establishment of 1 of capital return program, which included the institution of our first ever quarterly dividends program. We're on track relative to our financial model and are very pleased to note that in recognition of this strong financial performance, we were recently added to the NASDAQ 100 Index. WFE investment for 2014 was largely in line with the views we expressed through the year. We estimate spending by our customers in 2014 WFE was approximately $32,000,000,000 As we enter 2015, we maintain our outlook of a growth year for WFE Investments. The predicted trends in semiconductor consumption including demand at the leading edge and the publicly stated plans of our customers, we believe support this growth outlook.
But as is customary, I would add that this is for the key segments, starting first with memory. In the DRAM segments, we see continued strength in demand and a supply constraints market entering the year. Strong market demand continues to be driven by mobile and enterprise DRAM growth. Pricing remains stable. This year, we see DRAM investments to be focused primarily on conversions to 20 nanometer.
Projections are for DRAM bit growth of approximately 30% this year. In the NAND space, we believe there will remain a healthy balance in overall supply and demand. NAND ASPs, as you're aware, have declined somewhat over the last quarter, but are generally expected to stabilize over the course of the year. Reinforcement of continued spending discipline across the industry. We anticipate that NAND's WFE investment will include planar conversions and 3 d NAND capacity additions in 2015 with the 3 d investment being more second half weighted and for the first time the spending level more or less equal to the planar capacity components.
Our outlook for 2015 NAND supply bit growth remains in the high 30s. Overall, we're projecting 2015 memory WFE spending in the range of $14,000,000,000 to $15,000,000,000 Now turning to the foundry segment. Investments in 2015 will be focused on FinFET enablement at a number of customers and some 28 nanometer capacity additions responding to increased demand for these devices. Our current view of foundry investment is that it will be up slightly from the healthy spending levels we saw in 2014 and again reasonably distributed across customers with consistency compared to fabless company stated growth forecasts. We expect logic spending of $6,000,000,000 to 7,000,000,000 dollars more or less flat with 2014, reflecting a balance of some slightly positive news on PC volumes and a sustained commitment to technology conversions with optimized reuse of the installed base by the customers.
Overall, we are modeling 2015 WFE in the range of $34,000,000,000 plus or minus $2,000,000,000 for the year. At this point, our visibility for the strong first half is better than the second as you might imagine. And we believe the scenario of a relatively balanced first half and second half is not unreasonable. Of course, we will know more as the year progresses and update you as appropriate. Now turning to our goals and objectives for the Execution and in turn sustaining outperformance remain the guiding principles for Lam in the New Year.
We manage the company with a strong focus on the fundamental drivers of profitable growth, value enhancing products and services, scale and operating effectiveness. In that regard, our 2015 focus is clear, differentiate on customer trust and customer experience, executes on the opportunities already won to make sustainable the platform of growth, gain market share with a focus on atomic level control and deposition and edge processes prioritize employee, organization and business systems development to enable efficient scaling and deliver profitability required to fund growth. Putting the $2,000,000,000 market expansion opportunity we described previously in context, Lam's standalone etch and clean product portfolio competed for 19% of WFE. Subsequent to the addition of the deposition portfolio, we competed for 25% of WFE at the date of the Lam Novalis merger closing. On the 3 year anniversary of announcing that deal, we have a product portfolio that will compete for approximately 20 8.5% of WFE in 2015, and we believe by 2017 greater than 30%.
The significant market expansion combined with accelerated market share gains in applications critical to the inflections demonstrate what we consider very good progress with exciting upside. Before handing the call to Doug, I would like to express my genuine appreciation for the recognition Lam has received for our hard work achievements over the last year. Lam was recognized for its leadership and collaboration by multiple stakeholders including customers, suppliers, investors, industry analysts and peers. This recognition serves as a powerful affirmation and acknowledgments for the 6,900 Lam employees who unite around the objectives of the organization to make all of this possible. On behalf of the entire Lam team, I would like to express our appreciation for the support and opportunity given us in 2014.
We look forward to sharing our performance against our goals and opportunities with you again this year. Doug? Thanks, Martin.
Good afternoon, everyone, and thank you for joining us today. As Martin mentioned in his opening comments, calendar 14 was a year of outperformance for Lam Research. The focus on market share gains and product positioning to take advantage of SAM expansion combined with strong execution, I think was clearly demonstrated in our financial results. We delivered record levels of shipments and revenue. We grew revenue at more than double the rate of WFE growth and we grew operating income more than double the rate of that revenue growth.
We generated $942,000,000 in operating income for the year, which represented nearly 20% of revenue. And we returned approximately $486,000,000 to our shareholders through the initiation of our first dividend and our continued share repurchases. Specific to the December quarter, shipments revenue and gross margin were in line with the midpoint of our guidance and earnings per share were at the high end of our range. In the December quarter, shipments came in at 1.24 $7,000,000,000 which was up 12% sequentially. The combined memory segment made up 53% of total system shipments and this was up from 44% in the prior quarter.
DRAM shipments were strong and contributed 43% of system shipments, which was up from 18% in the prior quarter. DRAM investments continue to be heavily focused at the 20 nanometer node. NAND represented 10% of shipments and this was down from 26% during the September quarter. The foundry segment remained steady in the December quarter accounting for 32% of system shipments versus 45% in the September quarter. Foundry shipments relatively broad based with investment for sub-twenty nanometer FinFET being complemented by 28 nanometer outlays.
The logic segment grew and made up 15% of system shipments and this was up from 11% in the prior period. We delivered $1,232,000,000 in revenue in the December quarter. Revenue increased 7% from the prior quarter marking the 6th consecutive quarter with revenue above the $1,000,000,000 mark. Gross margin for the period came in at 45.4 percent, essentially midpoint of our guidance and pretty consistent with our near term financial model. And as I previously mentioned, you should expect some quarter to quarter variability in gross margin due to a number of factors such as product mix and customer concentration.
I think our financial model remains the best way to think about our ongoing financial performance. Operating expenses increased to $330,000,000 but they actually decreased as a percent of revenue compared to the September quarter. SG and A was flattish, while R and D spending for items such as engineering programs and associated materials for our next generation products increased. We'll continue to make the strategic investments necessary to successfully position the company for sustainable growth and we'll adjust our plans based on our ongoing assessment of these opportunities. Operating income in the December quarter was $230,000,000 with operating margin up 18.7 percent, which was 30 basis points below the midpoint of our guidance.
The tax rate for the quarter came in at 9% and that compares to 18% last quarter. The December tax rate benefited from the reinstatement of the R and D tax credit in the United States, as well as a more favorable jurisdictional mix of income. A tax rate in the middle teens would be reasonable for you to include in your forward looking models. Based on a share count of 174,000,000 shares, earnings per share for the quarter were $1.19 and this was at the high end of our guidance range, primarily due to that favorable tax rate. I'd like to remind you that the share count includes dilution from all three of our convertible notes at this point.
The net dilutive impact is 12,000,000 shares on a non GAAP basis. With the first of convertible notes maturing in 2016 and given the current favorable interest rate environment, we will be evaluating our alternatives to refinance this note. Dilution schedules for the 2016, 2018 and 2041 converts are available on our Investor Relations website for your reference. In the December quarter, we spent about $46,000,000 and took delivery of approximately 590,000 shares at an average price of roughly $77 We also took delivery of 278,000 shares from the accelerated share repurchase that we executed during the September quarter. I think we're making pretty good progress on the $850,000,000 share repurchase authorization that we announced in April of 2014 with greater than 40% of it completed during the 1st 8 months.
And finally, we returned $0.18 per share in dividend distributions to our shareholders. Let me switch gears now and move to the balance sheet. We ended the cash excuse me, we ended the quarter with cash and short term investments, including our restricted cash of $3,000,000,000 which was about flat compared to the December or September quarter. Cash generation was partly offset by those capital return programs as well as capital expenditures. Cash from operations was $161,000,000 which was up from $141,000,000 in the September quarter.
With the increase in shipments, accounts receivable and day of sales outstanding grew slightly. We also saw growth in inventory to support the levels of shipments expected in the next couple of quarters. And I just mentioned that I expect the linearity of the March quarter to be even a little bit more back end loaded and therefore expect to see a little bit of lengthening in accounts receivable and DSO. We exited the quarter with deferred revenue of $374,000,000 and this excludes $53,000,000 in shipments to customers in Japan, which will revenue in future quarters. These Japanese shipments remain as inventory on our balance sheet.
Expenses include $31,000,000 for equity comp, dollars 40,000,000 for amortization and $30,000,000 for depreciation. We incurred $61,000,000 for capital expenditures in the quarter. CapEx was up in the quarter as we increased our investments in lab and new product development capability. We exited the quarter with approximately 6,900 regular full time employees. This growth of roughly 300 employees comes from supporting new customer sites, higher manufacturing volumes, as well as increases in new product group development activities.
So now looking ahead, I'd like to provide our non GAAP guidance for the March quarter. We're expecting shipments of $1,450,000,000 plus or minus $50,000,000 We're expecting revenue of $1,370,000,000 plus or minus $50,000,000 We're expecting gross margin of 44%, plus or minus 1 percentage point. We're forecasting operating margins of 19%, plus or minus 1 percentage point. And finally, we forecast earnings per share of $1.30 plus or minus 0 point 0 $7 based on a share count of approximately 174,000,000 shares. And I'll just remind you that as we mentioned during the September quarter call, the March quarter is impacted by both a mix towards more new tools that haven't fully moved down the cost curve yet, as well as a heavier customer concentration.
These items are contributing to the lower gross margin anticipate improvement in the gross margin percentage in the second half of the year. The right way to think about our financial performance over the medium and term remains our published financial models. That concludes my prepared remarks. Operator, please open up the call for questions.
Thank you. And at this time, we'll take a question from C. J. Muse, Evercore ISI. Please go ahead.
J.
Muse:] Yes, good afternoon. Thank you for taking my question. I guess first question, I was hoping to get some clarity from you on directionality, I guess, the shipments were as going into Q2 and the and the second half. Last quarter, you talked about an uplift a quarter out. Curious if you could provide some color on that front when and what the key moving parts are and assumptions?
I guess the answer to that question is once bitten twice shy. I think one reason I did share a perspective today CJ around kind of backlog is I think it should kind of tell you something about the trajectory of the company and the industry spending kind of outlook that we have. But I'm going to kind of avoid a level of specificity at this point in time for the June quarter. I do think and I think I mentioned this in my prepared comments that the outlook for the first half is reasonably clear to us and pretty strong. And there's still a lots of months left in the year for us to get really specific about the second half.
But I don't think it's unreasonable to see and we haven't got a shot at reasonable balance this year.
Okay. And I guess as a quick follow-up, Doug, can you talk a December quarter and then relative to the guide, roughly $8,000,000 to $10,000,000 dollars higher as well. And so just curious, are these one off programs associated with specific customers? Or is this a slightly new trend line that we should be thinking about going forward?
Well, I mean, the right way to think about kind of our levels of spending are what we perceive to be our sustainable level of profitability. And yes, we were a little bit below that operating income, but I don't think 30 basis points is too much. We are ramping up some of our R and D activity as I kind of indicated in my prepared remarks, which is part of what you're seeing go on in the March quarter. But the right way to think about how we intend to spend money will be to be roughly consistent with those financial models that we put out. Now right now, we do have a little bit of the gross margin headwind that I described, but the spending level is still pretty well within those models.
I think as just to add, I think Doug's prepared comments that kind of describes the addition of headcount also need to be put in context. And so I don't spend a huge amount of time talking about this because I think across the industry, it's not a very easily comparable benchmark. But for the company, a revenue per employee trajectory is not an unreasonable reference for you to be thinking about. And in fact, through the December quarter and the March guidance that we've given today, the revenue per employee is actually getting better and not worse. So I mean I think the context for spending more money is the growth of the company is pretty significant.
And our focus as a leadership team is making sure we're effective doing that before we start worrying too much about efficiency, which doesn't mean we don't try to do both. But the customer trust exposure for getting a ramp wrong is not a risk we're biased to take. We're biased to get this effective so that we can kind of really, really kind of deliver sustainability for the story that we're telling here today.
Very helpful. Thank you.
Thanks, Sujay.
At this time, we'll take a question from Jim Covello with Goldman Sachs.
Great. Good afternoon, guys. Thanks so much for taking the question. Congratulations on the good results. Obviously, you guys don't talk about orders on the call, but the shipments going up quite a bit would suggest order activity overall is healthy over the last couple of quarters.
Can you talk about any pushes or pulls in order activity overall? Obviously, your guidance for shipments is a little bit stronger. Is there any movement within that one way or the other in the various sub segments?
Thanks, Jim, for your comments there at the beginning. I don't think there's anything new for us to communicate. I think the industry generally saw a little bit of a push on some foundry investments, saw a little bit of a pull on some DRAM investments and the rest of the industry more or less kind of played out in the way we'd expected. I do think it's a little bit more concentrated a shipment number for us from a customer perspective than even we were I think those messages are messages that are well communicated right now by the rest of the industry.
That's very helpful. And then I mean, I guess it's always hard to distill the industry down to a couple of things alone that we should be looking for. But is it fair to say that memory margins are probably going to dictate if we do get that balanced half on half? If memory margins stay high, we would expect continued investment in that segment. But if there was any deterioration there, we would run the risk that the back half is a little softer.
Is that one key thing that you would be looking at?
Yes. I think, that sustains discipline something we continue to see, it's something we continue to hear from the customers and it's something we continue to expect. But I think it kind of history tells us if this gets ahead of itself in a significant way, then there's always at a minimum some kind of pause. We don't expect that. We expect continued discipline in every segment of the industry and we kind of come into the year pretty tight almost everywhere.
And from as best I can tell the inventory levels and the industry commentary are from our customers on inventory kind of supports continued discipline that I think at some level is a byproduct of a consolidated industry.
Very helpful. Thanks a lot and good luck. Thanks Jim.
And at this time, we'll take a question from Patrick Ho with Steve Nicholas.
Thank you very much. Martin, first in terms of overall memory spending in the year, do you see a bias first half versus second half in terms of DRAM maybe potentially being more first half weighted while you see NAND flash more second half weighted? Or do you see a balanced spending across both segments throughout the year?
So I have 2 answers to your question. One of them is kind of from the bottoms up forecasting and planning, which is always a little bit limited when you start kind of focusing on something 6 months from now or 9 months from now. But our bottoms up analytics would tend to support what you just described, which is a slightly stronger first half for DRAM and a slightly stronger second half for NAND. But frankly, when all is said and done here, I think we're likely to see a little bit of strengthening in the second half. But time will tell that may play out, it may not play out.
But the basic premise that you just described and I guess the only other thing I'd supplement with is perhaps compared to the commentary from the company 3 months ago, where we articulated we expected planar spending in NAND flash to exceed 3 d. We're kind of making the statement today that as best we can tell it looks more likely to be equal and the planar investment in NAND flash is biased the first half and the 3 d investment in NAND flash is biased the second half.
Maybe my follow-up question more for you Doug in terms of just kind of OpEx levels and how we look at the longer term business model, one of the areas you talked about at your Analyst Day was building out your installed base business and the services front. With IoT gaining momentum or a lot more verbiage out there, how do you see, I guess, your growth in terms of that business segment and in terms of the OpEx that may be needed to support the growth over the next few years?
Yes. You may remember, Patrick, we talked about
or I tried to talk about our objective with the installed base business is to grow it faster than the new equipment market, right? So there was a graph where I showed that. Consistent with that, we are growing a little bit of spending in that business group this year over and above what was there year to go try and take advantage of those opportunities. So that is part of the investments when I talk about opportunities that are out there. We do believe we see opportunities to generate returns and the spending is up there a little bit.
Great. Thank you.
Thanks, Patrick.
At this time, we'll take a question from Timothy Arcuri from Cowen and Company.
Hi, guys. Thanks. I jumped on here a little bit late. But my first question is around the inventory. Doug, if I look at just look at days, days are up to like 125.
And I'm wondering if that portends some view on June. I know you don't want to say too much about June, but I'm wondering if that portends some view that maybe June shipments are going to be up?
Yes, I'm not going to give you kind of what June looks like. I did describe purposefully in my prepared remarks that we expect shipments to be strong in the next couple of quarters without giving you a direction from March to June and we've built inventory in anticipation of that. So you should expect that those inventory levels come down in the back half of the year likely, but expect us to update that on a quarter by quarter basis, Tim.
Okay. And then I just had 2 more quick ones. First of all, Doug, just can you give us sense of what you think the mix will be for shipments in March? And then, I wanted to know also if all things equal, so let's just say shipments were flat in June. I just wanted to try to isolate the customer concentration issue that's bringing down margins in June.
Would margins come right back up to the model in or sorry, in March, would the margins come right back up to the model in June absent this customer concentration issue? Thanks.
Yes. So I think directionally in the March quarter, memory shipments are going to be up as a percent. Logic is probably flattish, maybe down a little bit and I think foundry would be down a little bit when you put all that together. And by the way, those are system shipments. I kind of indicated, I think the customer concentration piece continues into the June quarter a little bit.
And then my expectation is in the business. But business. But as we sit here today, I think we're going to continue to see some concentration in June, might be a little bit less than it is in March, but this stuff moves around quite a bit.
Awesome. Thanks so much.
Thanks, Tim.
At this time, we'll take a question from Stephen Chen with UBS.
Thanks. Hi, Martin and Doug. Nice results last year too.
Thanks.
Thanks, Stuart.
I had a follow-up question on the 3 d NAND spend in the second half of the year. Just curious if you think the spend on 3 d NAND in second half will be mostly driven by one customer or you think it's equally spread across the customer base? It's been a long time since we've seen any meaningful 3 d shipments to, I guess, the starting customers. Just curious on the diversity you're looking at?
I would say there's clearly an expectation that one of the customers well publicized is kind of in the lead from a kind of an investment timing perspective. But we expect this year to have kind of a diverse spending and anticipate all 4 NAND flash memory companies participating in a meaningful way. So I expect the spending to be more distributed in 2015 than it was in 2014. We expect to be shipped in. So I think in the last call I mentioned that we were thinking that we ended the calendar 14 year with approximately 60,000 wafer starts, 65,000 wafer starts of shifting capacity 3 d NAND and as best we can tell that more or less kind of played out as anticipated.
And we think by the end of 2015, that 130,000 wafer starts plus or minus 10 is not a bad kind of reference point to have.
Okay. Thanks for sharing those numbers. So it sounds like if Lam were to out grow WFE again this year, it sounds like 3 d NAND spend in the industry is strong in the second half of the year. That's probably one of the main ways that you outgrow the industry again this year. Is that seems like that's one of the messages?
Well, from an inflection point of view, the 3 d NAND inflection is not insignificant as we've talked about before. And from a timing point of view, it plays a pretty meaningful role in the year over year comparison. But that's also true by the way for the multi patterning transition as well. I would say the only that doesn't kind of really get traction of substance to have kind of a material impact on the kind of outperforming characteristics of the company is advanced packaging, which isn't to say there isn't a positive story because I actually think that the advanced packaging revenues of the company have a shot at kind of doubling year over year. But the scale of that compared to multi patterning and the 3 d NAND transition is kind of obviously very different and meaningfully lower.
So yes, I think our performance is a commentary on the 3 d NAND and FinFET and multi patterning transitions in DRAM and logic both. And it is a commentary on market share momentum in the company which we are I think accelerating. It doesn't feel to me like it's slowing or stagnating. It feels to me like the market share momentum is actually accelerating, which is kind of something we'll work very hard to sustain.
Thanks, Martin.
Thank you.
At this time, we'll take a question from Weston Twigg with Pacific Crest
Securities. Hi. I just wanted to follow-up on that last comment related to DRAM multi patterning as being one of the drivers. Wondering as the industry works through the 20 nanometer conversions and add the additional etch tools for multi patterning, is there some risk to etch opportunity slows down given that they would have more etch tools for reuse?
I think the reality is that even after maybe 400 to 440 or 410 to 430 hard to be specific at this point is the kind of 1,000 wafer starts conversion approximately of the industry. There's much more than that at the end of calendar still in need of conversion to the 20 nanometer technology node. So to the extent there's a risk in the form that you're describing it, I don't think it shows up in calendar 2016. It has a shot at showing up in calendar 2017, but a lot is going to change between now and 2017 relative to the roadmap of DRAM. So it's not something that's a particularly prominent kind of risk factor for us in the scheme of things.
Okay.
So in other words, the same drivers that you see today, the 3 d NAND, FinFET, the DRAM multi patterning, you expect those to be pretty consistent consistently strong over the
next 2 years? Yes. I mean, I think the context to one of the earlier questions is the discipline and the balance, the supply and demand balance, but we've had a number of years demonstrated performance on that. So I think we're getting to the point where trusting that as a legitimate assumption is much more valid.
Great. Thank you very much.
Thank you. Thanks, Ross.
At this time, we'll take a question from Sandeep Bejhukar with Jefferies. Please go ahead.
Hi, guys. Thanks for taking my question. First, just following up your comments on heavier mix of new tools expected in the first half. Can you say which end market these new tools are targeting?
Martin referred to 20 new tool introduction last year. I mean, it's that. So it's obviously broad based. If I had to give you a little bit of color, it's probably more biased towards our deposition product group than it is the Edge product group in terms of new tools that are coming out, given some of these inflections that are happening. There's a little bit more going on there.
Okay, great. And then a quick follow-up on foundry. Are you continuing to see activity at the 14 nanometer node? And how much 14 nanometer capacity do you expect to see exiting the year?
So the answer to the first part of that is yes. And I said before, we're not kind of distinguishing the 14, 16 FASB additions from the 20 because there's so much of an overlap of the equipment portfolio 90% to 95% of the equipment is kind of going to track from the last planar node to the 1st FinFET node anyway. So our assumption is that we exit 2015 with somewhere between 200,200 and 20,000 wafer starts of combined capacity 2016 2014.
Thank you so much.
Thanks, Sandeep.
And at this time, we'll go to Krish Sankar with Bank of America Merrill Lynch.
Yes. Hi. Thanks for taking my question. And thanks for the color on the SAM and share gains that you guys highlighted for last year. Two quick questions.
First one, Martin in the past you've spoken about a third of the WFE spending this year might be for tech inflections. Curious is that a similar view? Or do you think that would change given the challenges people are having at FinFET and 3 d NAND? And also I had a follow-up after that.
No, I don't think there's a fundamental challenge. Instead of maybe 33, maybe we end up saying it's 31 or something like that or 32 is a by product of the 3 d NAND kind of assumption set kind of delaying from 14 to 15 a little. But the fundamental message I think is message I think is exactly the same today as it was before and the kind of end game to the extent we're describing one of calendar 2017, the 50% kind of spending proportion on inflections is still the assumption we're running with.
Got it. That's very helpful. And then a quick question for Doug. What is your mix of onshore versus offshore cash? And what do you think is the right amount of cash to run the business?
Thank you.
Krish, it's somewhere between 20% 25% onshore as we sit here today and obviously then it's 75% or 80% offshore. And as always, we're thinking through how to fund that $1,000,000,000 capital return program. And I've previously said we can fund that with the cash that we have. And that program, I think is a pretty significant program in terms of returning cash. And once we get through the current authorization, you'll hear us talk about, well, what are our plans as we go forward.
So pretty comfortable with the level of cash. It's been pretty flat in gross terms over the last couple of quarters and that's been because we've been returning cash to shareholders.
Thanks a lot guys. Thank you.
Yes. Thanks, Krish.
And at this time, we'll take a question from Mark Heller with CLSA Equity Research.
Thank you for taking my question. Congratulations on the strong results. Marna, I was just wondering if you could update us on the DRAM, the outlook for the DRAM sector in terms of new capacity additions this year. I think previously you're talking about maybe 50,000 to 60,000 start. I'm just wondering if that's still the case for this year?
Yes, I think maybe we'd probably say more 60 than 50. But I think as I think a number of customers have said most recently as well, that addition frankly does nothing more than keep the available output kind of constant because in the technology transitions from the 3x range to the mid-20s and to 20, there's kind of a loss per kind of square foot of clean room in terms of output. So the assumptions that we're making is that the investments of 60,000 wafer starts or so is and maybe it's a little higher, maybe 60, 70 that range, but it's not a 100,000 wafer starts for additional or anything like that. It essentially kind of keeps the output potential
constant year over year. Got it. And then it looks like the shipments to Korea picked up quite a bit during the quarter. I'm just wondering if that's more weighted to foundry or memory spending? Thanks.
In the interest of not being specific to any one customer, we're going to kind of elect not to answer that question correctly, please.
Thanks. But Mark, you can just listen to what I said in my prepared remarks and kind of get some level of indication probably.
At this time, we'll take a question from Sidney Ho with Deutsche Bank.
Thanks for taking my question. So a question on the foundry. I think I know you talk about visibility in the first half is good. How's your visibility in the second half? And if a customer decides to go with FinFET this fall, do you think there's enough capacity to handle that right now?
Or do you think more equipment needs to be ordered from here?
Well, that's a little hard to answer without kind of getting into a lot of details in terms of a demand statement for those devices. I guess the headline for us is we kind of trust the substance best understanding of their investment plans, which as I've said is in the kind of 200,000 to 220,000 wafer stops and sold capacity by the end of this calendar year for 2016 and 2014 combined. So if the customer is underestimating the demand for that device, then I think they'll need to be more investments. It doesn't feel to me like there's a risk that they're over investing it. I think it's a pretty reasonable commentary on outlook as best we can tell.
Okay. And a follow-up, maybe this one is for Doug. You talked about the customer concentration in Q1. Does it happen every Q1? Is that it just happened that the stars are aligned this quarter or is that a byproduct of a more concentrated customer base?
I don't know that there's
a seasonal profile, it's worth per se, Sydney. I mean, this is more concentrated than I can recall seeing it in the 2 years I've been with the company. So I think this is over and above where you would normally expect it to be.
Okay, great. Thank you.
Thanks, Sidney.
At this time, we'll take a question from Farhan Ahmad with Credit Suisse.
Thanks for letting me ask a question and congrats on a great quarter. Martin, one question on the 2015 WFE. At the last quarter earnings call, you had indicated WFE to be up 5% to 10%. Now it seems you're indicating it up flat to up 15% up 13%. Just wanted to too
much into it. I mean, I think kind of our headline is, too much into it. I mean, I think kind of our headline is the outlook that we've described in percentages 3 months ago is not so far away from the outlook we're describing with dollars and it's kind of pretty customary for the company to start the year with a plus or minus $2,000,000,000 and it's kind of about the middle of the year, now that range to plus or minus $1,000,000,000 So we've just kind of done our best to translate the outlook 3 months ago into the customary form of guidance. So I think what has changed is from the kind of public disclosure of the customers, some kind of foundry spending expansion, kind of DRAM more or less where it was and commentary from the microprocessor space of the importance of reuse in their overall strategies. But the 34 plus or minus 2 is just a commentary on we're at the beginning of the year and lots can change and we're doing our best to tell you what we think the range
is. Got it. Thank you. And then one question on NAND. You mentioned the spending on the planar versus 3D should be about balanced this year.
I wanted to ask about the planar spending this year. How much of capacity do you think will go through a planar node transition this year?
Again, I've come to appreciate that level of specificity gets a little bit to the sensitive disclosure of the customers given there are only so many. So if you may allow me, I'm going to kind of defer that question to our customers.
Got it. Thank you. That's all I had.
Thank you. Thanks, Mark.
At this time, we'll take a question from
So first question on the SAM expansion commentary. Martin, you had that you believe your SAM will expand about 30% of WFE by 2018. I guess 2 part question. First is, how much are you baking in calculating through 3 d NAND investment versus converting existing 3 d plane into 3 d? And the second part to that is, does that factor in some kind of adoption in EUV?
Well, first of all, we said 2017, not 2018. And relative to the last part of your question, EUV, we don't believe has any relevance of substance in the 2017 timeframe by virtue of the stated plans of the customer not to have an EUV kind of adoption until kind of the 7 nanometer technology node at the earliest. And I think we kind of gave you some color on that the last quarter. Relative to 30% being a legitimate target for our company from a proportion of WFE that's available to us, there of course is some assumption associated with how the customer builds 3 d NAND capacity, but we are not assuming a very grand, I would say conversion of kind of the planer installed base that sits at more than 1,000,000 wafer starts per month of capacity today. So, and I think there's a lot of learning still in the industry to kind of know quite what 3 d devices is get targeted to in terms of end market and how fast that conversion will play out.
But we haven't kind of we haven't assumed a grand conversion of the installed base. We're trying to estimate as best we can an efficient way for the customer to establish that capacity. So we tend to bias a conversion assumption rather than an addition assumption for the industry generally. But as you know, every customer is slightly different relative to answering that question. And there are some that are very focused on addition and there are others that are very focused on
conversion. Great. That's very helpful. And then just quickly touch on the clean side. You guys have a new product.
Just any kind of update on how that's coming along? And as that product, assuming that's successful later part of this year, which I think is your target, right? How where do we expect the first initial adoption? Is it foundry DRAM or NAND?
So frankly, 3 months is a really short period of time in the context of kind of new products in new markets. And I don't have so much more to say than I did today than I did in October. And maybe the one exception is for the kind of new product, the EOS products, we have had kind of repeat order of the penetrations that we made for 1 customer, which is I think a meaningful statements of validation, but it isn't everything we need. And so what we need is kind of an industry to kind of make that choice as well as a couple of customers. And this is the year where I think the decisions of the customers will define the legitimacy of the company.
I think the company has done a really good job in delivering the productivity differentiation and getting us process capability for a front end of line clean growth opportunity. But just because the company has done it doesn't mean the customers are going to be invested in selection and that adoption and we're doing our best. And as you said, this is the year that it kind of really plays out one way or the other.
Okay. Operator, we have time for 2 more questions today.
Thank you. Our next question will come from Mahesh Sankaranaria with RBC Capital Markets.
Thank you very much. I had a question on the foundry commentary you that spending is up flat to up slightly. TSMC guided for 20% increase in CapEx. So I'm assuming other customers are probably reducing the spending. Can you talk about where the cut is coming from?
Is that the other customers, is it in the FinFET area or they're reducing the investment in mature technologies?
I don't know that I can easily answer that question. I mean, we're assuming that all of the foundry customers wafer starts in the the wafer starts in the industry are getting added at the 14, 16 nanometer technology node. And as you've heard from
these customers, I think
the 20 nanometer demand is not insignificant. So that's kind of in the mix as well.
Okay. So my follow-up, I just wanted to revisit the financial model you presented at the Analyst Day, mostly in terms of revenues, at $32,000,000,000 you were targeting $5,100,000,000 I think that was probably towards the end of 2015. And I don't think we have the right number for we don't have the precise number for 34%. So according to that model, where will you be at $34,000,000,000 revenue?
Yes, Mahesh, I'm not going to give you a new model as I sit here right now, but I will give you a little color around it. The one thing to think about is there's a level of WFE context in the model. There's also a time component to the model, right, because there's a maturation of some of these new tools that are coming out. Both of those items are very important to the attainment of the financial model. And if you recall, kind of showed a $5,600,000,000 2016, 2017 model that got a percentage point better than the 2014, 2015 model.
We're probably somewhere in between each of that once we get through some of these tool maturations, but we need the time to get through those.
Okay. That's helpful. Thank you.
Thanks. Thanks, Mahesh.
Our final question will be from Mehdi Hosseini with SIG.
Yes. Thanks for squeezing me. Martin, going back to your DRAM bit commentary, what are the key assumptions for that 30% bit growth? And I say that because earlier this morning, Hynix talked about 25%. I think Micron is also talking about 25% bit growth.
So I'm just trying to better understand the underlying assumption in your view. And I have a follow-up.
Yes. I mean, it's the assumption is when we kind of add up the collective disclosure from customers and kind of what's available to us kind of from being kind of inside of the industry and participating kind of real time, that's the best assumption we can give you.
Okay. And then for the purpose of modeling, Doug, how should I think about working capital requirement? How does the inventory changes from the December into the March quarter?
Yes. Just the fact that the denominator goes up even if inventory is flattish, which it probably is going to be, you'll have inventory turns in days come down. Directionally inventory is going to trend down, I think as we go through the years, we've built into this level of shipments. So a little bit of color for you to think about as you model it.
Okay. Thank you.
Operator, I think actually we have time for a couple of more.
Okay. Thank you. At this time, we'll move to Atif Malik with Citi. Please go ahead.
Hi. Thanks for taking my question. On the $34,000,000,000 WFP outlook, Martin, can you talk about the swing factor that can take it to $36,000,000,000 or the high end of the range? Which segment can take it to that range? Yes.
I mean, my I guess anyone can in theory. I think the 3 d NAND conversion is more likely to influence in a positive direction than anything and that's just really a statement on the size of that transition and the implications of it. And obviously, the degree of uncertainty that exists in terms of kind of market penetration of that device at this time. So I do think kind of FinFET conversions can accelerate if there's kind of momentum that it is in excess of stated plans in terms of going from planer to a FinFET device. But it feels to me like the upside is kind of greater in memory than family logic and greater in NAND than DRAM.
But I guess in theory, all of them can move in a positive direction.
Got it. And then on the timing of EUV insertion, one of the foundries have mistaken pilot production lithotools. And just curious if anything has changed to your thinking?
Yes. I mean, we're still thinking 7 nanometer is kind of the earliest and the only thing that I read in the last kind of 3 months kind of reinforce complexity of the infrastructure around the EUV process itself as being kind of a significant component of that question. And it didn't look like it got any easier, it looked like it got more difficult as best I could tell. Kehal in Europe.
Thanks, Arthur.
Harlan, you're the last guy today.
Operator, next question please.
Thank you. The final question will be from Harlan Sur with JPMorgan.
Yes. Hi. This is Bill Peterson calling on behalf of Harlem. Thanks for speaking in. Congrats on a good December quarter.
I wanted to clarify a few things relative to your commentary on Logic when you mentioned about reuse and try to understand what would be different in Logic relative to the foundries? And in nature that a lot of Logic some Logic customers already have since then a lot of foundries are not. If you can provide some color on that, that would be very useful. Thanks.
Yes, I think really it's kind of the age old relative ease and I don't think it's easy, but in relative terms it probably is with the amount of kind of dye concentration that exists in a microprocessor fab compared to the distributed dye and customer reality of a foundry, the conversion cycle really kind of is a big challenge. And so I think that's kind of the principal reason that there is an emerging trend of some substance to conversion in foundry, but it does not compare to what is available to the microprocessor world.
So in terms of implications, does that just mean more upgrades? What does it mean in terms of how do we think about it for implications for Lam and other equipment vendors?
Yes, I think it can be when people do conversions, it can be upgrades from a hardware perspective and sometimes it's nothing because they find a way to make the hardware work and there's a process modification and with rare exceptions, this industry doesn't get paid very much for process. It gets paid for the hardware that gets sold into a fab even though perhaps the value contribution that is really made is a process contribution, but that's a long story.
Great. All right. Thank you, operator. That's all we have time for today. Thank you for your participation and we will look forward to talking with you again next quarter.
Thank
you.