Please stand by. We're about to begin. 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 Audrey 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 Anstice, President and Chief Executive Officer, and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we'll share our outlook on the business environment 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 1:00 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&A will include statements about our expectations and beliefs regarding certain future outcomes, including our outlook. A more comprehensive list of forward-looking topics that we expect to cover is shown on the slide deck accompanying my remarks.
All statements made that are not historical in fact are forward-looking statements based on current information and are subject to risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factors disclosure in our public filings, including our 10-K and 10-Q. The company undertakes no obligation to update forward-looking statements. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings press release. This call is scheduled to last until 3:00 P.M. Pacific Time. As always, we ask that you limit questions to one per firm with a very brief follow-up so that we can accommodate as many questions as possible. As a reminder, a webcast replay of this call will be available later this afternoon on our website.
With that, I'll hand the call over to Martin.
Thank you, Audrey. Good afternoon, everyone, and thank you for joining us today. 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. 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 multi-year 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 showing strength across all metrics and reinforcing our outperformance trend for calendar 2014. 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 2015. December was the sixth consecutive quarter of greater than $1 billion in revenues and concluded a record-breaking year for the company, with total annual revenue reaching $4.9 billion. Our revenue growth rates, we believe, outperformed the industry by a factor of two, 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 participate in the market expansion opportunities of the various technology inflections, including multi-patterning, FinFET, 3D 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-inflections baseline.
Our strong early position, combined with our unwavering commitment to customer trust and value-enhancing collaboration, positions us to continue to drive our theme of outperformance over the next several years. Evidenced by our relative revenue growth these last two 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%-8% increase in deposition market share, three to five percentage points in etch, and five to 10 percentage points in clean. As previously shared, we maintained a 90% success rate across all plans, penetrations, and defenses in 2014. As such, we believe that our corporate market share has increased by 200 basis points to the 42% level in calendar year 2014.
At least as importantly, we conclude that we increased our available market size from approximately 26.5% of WFE to 27.5% 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 the company real time, preparing for an even more exciting future. For example, last year we expanded our investments in fundamental research and CNF activities. We added a significant number of resources in the factory and in the fields.
We ramped all manufacturing facilities to multiple shift operations, shipped 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. We believe a highlight for 2014. We collaborated closely with our customers and suppliers on innovations designed to meet the considerable technical and economic challenges of the industry. Notably, we delivered products such as the VECTOR ALD Oxide Deposition System, targeted at extremely thin and uniform layers critical to advanced patterning, and the Flex 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 2015 year-over-year, driven primarily by patterning-related application wins. We augmented our strong earnings performance with the establishment of a $1 billion 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 billion. 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.
As is customary, I would add that this is predicated on a positive macro environment and healthy industry fundamentals. Our initial 2015 market outlook is as follows for the key segments, starting first with memory. In the DRAM segments, we see continued strength in demand and a supply-constrained 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, reinforcements of continued spending discipline across the industry.
We anticipate that NAND's WFE investment will include planar conversions and 3D NAND capacity additions in 2015, with the 3D 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 billion-$15 billion. Turning to the foundry segments. Investments in 2015 will be focused on FinFET enablements 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 billion-$7 billion, 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 billion ±$2 billion 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. Turning to our goals and objectives for the business. 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. Execute 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 etch processes. Prioritize employee, organization, and business systems development to enable efficient scaling, and deliver profitability required to fund growth. Putting the $2 billion 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-Novellus merger closing.
On the three-year anniversary of announcing that deal, we have a product portfolio that will compete for approximately 28.5% 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 and 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 acknowledgement 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 2014 was a year of fundamental 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 at more than double the rate of that revenue growth. We generated $942 million in operating income for the year, which represented nearly 20% of revenue, and we returned approximately $486 million 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 $1,247,000,000, 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 continued 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 were relatively broad-based, with investment for sub 20 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 sixth consecutive quarter with revenue above the billion-dollar mark. Gross margin for the period came in at 45.4%, essentially at the midpoint of our guidance and pretty consistent with our near-term financial model. 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 million. They actually decreased as a percent of revenue compared to the September quarter. SG&A was flattish, while R&D spending for items such as engineering programs and associated materials for our next-generation products increased. Continue to make the strategic investments necessary to successfully position the company for sustainable growth. We'll adjust our plans based on our ongoing assessment of these opportunities. Operating income in the December quarter was $230 million, with operating margin of 18.7%, which was 30 basis points below the midpoint of our guidance. The tax rate for the quarter came in at 9%. That compares to 18% last quarter. The December tax rate benefited from the reinstatement of the R&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 million shares, earnings per share for the quarter were $1.19. 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 million shares on a non-GAAP basis. With the first of our convertible notes maturing in 2016. 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 million 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 million share repurchase authorization that we announced in April of 2014, with greater than 40% of it completed during the first eight months. 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 quarter with cash and short-term investments, including our restricted cash of $3 billion, which was about flat compared to the September quarter. Cash generation was partly offset by those capital return programs as well as capital expenditures.
Cash from operations was $161 million, which was up from $141 million in the September quarter. With the increase in shipments, accounts receivable and day sales outstanding grew slightly. We also saw growth in inventory to support the levels of shipments expected in the next couple of quarters. I just mentioned that I expect the linearity of the March quarter to be even a little bit more back-end loaded. Therefore expect to see a little bit of lengthening in accounts receivable in DSO. We exited the quarter with deferred revenue of $374 million. This excludes $53 million in shipments to customers in Japan, which will revenue in future quarters. These Japanese shipments remain as inventory on our balance sheet. Company non-cash expenses include $31 million for equity comp, $40 million for amortization, and $30 million for depreciation. We incurred $61 million 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. Looking ahead, I'd like to provide our non-GAAP guidance for the March quarter. We're expecting shipments of $1,450 million ±$50 million. We're expecting revenue of $1,370 million ±$50 million. We're expecting gross margin of 44% ± one percentage point. We're forecasting operating margins of 19% ± one percentage point. Finally, we forecast earnings per share of $1.30 ± $0.07, based on a share count of approximately 174 million shares.
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 percentage. I expect this to continue to an extent in the June quarter, but I 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 longer term remains our published financial models. That concludes my prepared remarks. Operator, please open up the call for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're on a speakerphone today, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one for questions. At this time, we'll take a question from C.J. Muse, Evercore ISI. Please go ahead.
Good afternoon. Thank you for taking my question. I guess first question, was hoping to get some clarity from you on directionality, I guess the shipments were as going into Q2 in the second half. Last quarter, you talked about an uplift a quarter out. Curious if you could provide some color on that front 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, C.J., around kind of backlog is I think it should kind of tell you something about the trajectory of the company
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. There's still a lot of months left in the year for us to get really specific about the second half. I don't think it's unreasonable to assume we haven't got a shot at reasonable balance this year.
Okay. I guess as a quick follow-up, Doug, can you talk a little bit about the uplift in OpEx? Came in a little bit higher in the December quarter, then relative to the guide, roughly $8-$10 million higher as well. 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?
No, the right way to think about our levels of spending are what we perceive to be our sustainable level of profitability. Yeah, 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&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. 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, just to add, I think Doug's prepared comments that kind of describes the addition of headcount also need to be put in context. I don't want to spend a huge amount of time talking about this because I think across the industry, it's not a very easily comparable benchmark. For the company, a revenue-per-employee trajectory is not an unreasonable reference for you to be thinking about. 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. I think the context for spending more money is the growth of the company is pretty significant.
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 really deliver sustainability for the story that we're telling here today.
Very helpful. Thank you.
Thanks, C.J.
At this time, we'll take a question from James 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 subsegments?
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 expect it. I do think it's a little bit more concentrated a shipment number for us from a customer perspective than even we were anticipating in the October timeframe relative to March of 2015.
Okay.
I think those messages are messages that are well communicated right now by the rest of the industry.
That's very helpful. I guess it's always hard to distill the industry down to a couple of things alone that we should be looking for. 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, 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?
Yeah, I think sustained discipline is something we continue to see, it's something we continue to hear from the customers, and it's something we continue to expect. I think history tells us if this gets ahead of itself in a significant way, 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, we kind of come into the year pretty tight almost everywhere. From as best I can tell, the inventory levels and the industry commentary 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.
At this time, we'll take a question from Patrick Ho with Stifel Nicolaus.
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 kind of a balanced spending across both segments throughout the year?
I kind of have two 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 six months from now or nine months from now. 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. Frankly, when all is said and done here, I think we're likely to see a little bit of strengthening in the second half. Time will tell. That may play out, it may not play out.
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 three months ago, where we articulated we expected planar spending in NAND flash to exceed 3D, we're kind of making the statement today that as best we can tell, it looks more likely to be equal. The planar investment in NAND flash is biased to first half, and the 3D investment in NAND flash is biased to second half.
Great. That's really helpful. Maybe my follow-up question, more for you, Doug, in terms of just 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 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?
Yeah. You may remember, Patrick, I tried to talk about our objective with the installed base business, is to grow it faster than the new equipment market. 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 last year to go try and take advantage of those opportunities. That is part of the investments when I talk about opportunities that are out there. We do believe we see opportunities to generate returns, 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. My first question is around the inventory. Doug, if I just look at days are up to 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.
Yeah. I'm not going to give you 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 direction from March to June, we've built inventory in anticipation of that. You should expect that those inventory levels come down in the back half of the year, likely. Expect us to update that on a quarter-by-quarter basis, Tim.
Okay. I just had two more quick ones. First of all, Doug, just can you give us some sense of what you think the mix will be for shipments in March? I wanted to know also if all things equal, 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 March? Would the margins come right back up to the model in June, absent this customer concentration issue? Thanks.
Yeah. I think directionally in the March Quarter, memory shipments are going to be up as a %. Logic is probably flat-ish, maybe down a little bit, and I think foundry will be down a little bit when you put all that together. By the way, those are system shipments. I indicated, I think the customer concentration piece continues into the June Quarter a little bit, and then my expectation is in the back half of the year, the gross margins move back up from where they are. It's hard to call. Things move around, Tim, as you know, in this business. 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 Chin with UBS.
Thanks. Hi, Martin and Doug. Nice results, last year too.
Thanks.
Thanks, Stephen.
I had a follow-up question on the 3D NAND spend in the second half of the year. Just curious if you think the spend on 3D NAND in the 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 3D shipments to, I guess, a starting customer. 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 in the lead from an investment timing perspective. We expect this year to have a diverse spending and anticipate all four NAND flash memory companies participating in a meaningful way. I expect the spending to be more distributed in 2015 than it was in 2014. Just to give you a little bit of a number on capacity we expect to be shipped in. I think in the last call, I mentioned that we were thinking that we ended the 2014 year with approximately 60,000 wafer starts, 65,000 wafer starts of shipped-in capacity 3D NAND. As best we can tell, that more or less played out as anticipated, and we think by the end of 2015, that 130,000 wafer starts ±10 is not a bad reference point to have.
Okay. Thanks for sharing those numbers. It sounds like, if Lam were to outgrow WFE again this year, it sounds like, 3D 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. Seems like that's one of the messages?
Well, from an inflection point of view, the 3D NAND inflection is not insignificant, as we've talked about before. From a timing point of view, it plays a pretty meaningful role in the year-over-year comparison. That's also true, by the way, for the multi-patterning transition as well. I would say the only inflection 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. The scale of that compared to multi-patterning and the 3D NAND transition is kind of obviously very different and meaningfully lower.
Yeah, I think outperformance is a commentary on the 3D NAND, and FinFET, and multi-patterning transitions in DRAM logic both. 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 intensity for DRAM in the following years as maybe the incremental etch opportunity slows down, given that they would have more etch tools for reuse?
I think the reality is that, even after the investment that we've described in calendar 2015, and our best estimate is approximately 400, maybe 400-440, or 410-430 hard, to be specific at this point, is the kind of 1,000 wafer start conversion approximately of the industry. There's much more than that at the end of calendar 2015, still in need of conversion to the 20 nanometer technology node. 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. It's not something that's a particularly prominent kind of risk factor for us in the scheme of things.
Okay. In other words, the same drivers that you see today, the 3D NAND, FinFET, the DRAM multi-patterning, you expect those to be pretty consistently strong over the next two years?
Yeah. I think the context to one of the earlier questions is the discipline and the balance, the supply and demand balance. We've had a number of years of demonstrated performance on that. I think we're getting to the point where trusting that as a legitimate assumption is much more valid.
Great. Thank you very much.
Thanks, Weston.
At this time, we will take a question from Sundeep Bajikar 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. It is that, it is obviously broad-based. If I had to give you a little bit of color, it is probably more biased towards our deposition product group than it is the etch product group in terms of new tools that are coming out. Given some of these inflections that are happening, there is a little bit more going on there.
Okay, great. Then a quick follow-up on Foundry. Are you continuing to see activity at the 14 nanometer node? How much 14 nanometer capacity do you expect to see exiting the year?
The answer to the first part of that is yes. I said before, we are not kind of distinguishing the 2014, 2016 capacity additions from the 2020, because there is so much of an overlap of the equipment portfolio, 90%-95% of the equipment is kind of going to track from the last planar node to the first FinFET node anyway. Our assumption is that we exit 2015 with somewhere between 200,000-220,000 wafer starts of combined capacity 2016 and 2014.
Thank you so much.
Thanks, Sundeep.
At this time, we will go to Krish Sankar with Bank of America Merrill Lynch.
Yeah, hi. Thanks for taking my question. 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 have spoken about a third of the WFE spending this year might be for tech inflections. Curious if that is still the view, or do you think that would change given the challenges people are having at FinFET and 3D NAND? Also 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 as a byproduct of the 3D NAND's kind of assumption set kind of delaying from 2014 to 2015 a little. The fundamental 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. 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% and 25% onshore as we sit here today, and obviously then it's 75% or 80% offshore. As always, we're thinking through how to fund that billion-dollar capital return program. I previously said we can fund that with the cash that we have. That program, I think is a pretty significant program in terms of returning cash. Once we get through the current authorization, you'll hear us talk about, well, what are our plans as we go forward. 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.
Got it. Thanks a lot, guys. Thank you.
Thanks, Krish.
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. Martin Anstice, I was just wondering if you could update us on the outlook for the DRAM sector, in terms of new capacity additions this year. I think previously you were talking about maybe 50,000 to 60,000 starts. I'm just wondering if that's still the case for this year.
I think maybe we'd probably say more 60 than 50. 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 square foot of clean room, in terms of output. The assumptions that we're making is that the investments of 60,000 wafer starts or so, and maybe it's a little higher, maybe it's 60-70, that range, but it's not 100,000 wafer starts addition or anything like that. It essentially kind of keeps the output potential constant year-over-year.
Got it. 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 directly, please.
Thanks.
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.
Oh, thanks for taking my question. A question on the foundry. I know you talk about visibility in the first half is good. How is your visibility in the second half? If a customer decides to go with chipset this fall, do you think there is enough capacity to handle that right now, or do you think more equipment needs to be ordered from here?
Well, that is 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 of the communication from the customer. I think everybody is saying they have an interest in keeping this thing in balance, and what we are communicating is our best understanding of their investment plans, which as I have said, is in the kind of 200,000 to 220,000 wafer starts installed capacity by the end of this calendar year for 2016 and 2014 combined. If the customer is underestimating the demand for that device, then I think there will need to be more investment. It doesn't feel to me like there is a risk that they are over-investing it. I think it is a pretty reasonable commentary on outlook as best we can tell.
Okay. A follow-up, maybe this one is for Doug. You talked about the customer concentration in Q1. Does it happen every Q1? Has it just happened that the stars are aligned this quarter, or is it a byproduct of a more concentrated customer base?
I don't know that there is a seasonal profile to it per se, Sidney. This is more concentrated than I can recall seeing it, in the two years I have been with the company. 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. 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%-10%. Now it seems you're indicating it up flat to up 13%. Just wanted to understand why you're broadening the range. What are some of the factors that have kind of increased the variability in 2015?
Yeah, I don't know that I would kind of read too much into it. I think kind of our headline is the outlook that we described in percentages three 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 ±$2 billion, and kind of about the middle of the year, narrow that range to ±$1 billion. We've just kind of done our best to translate the outlook of three months ago into the customary form of guidance. 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.
The $34 billion ±$2 billion 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. 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 the capacity do you think will go through a planar node transition this year?
Again, I've come to appreciate that that level of specificity gets a little bit close to the sensitive disclosure of the customers, given there are only so many. 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 have.
Thank you.
Okay. At this time, we'll take a question from Edwin Mok with Needham & Company.
Hi, thanks for taking my question, congrats for a great quarter. 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 two-part question. First is, how much are you baking in top green through 3D NAND investment versus converting existing planar to 3D? The second part to that is, does that factor in some kind of adoption in EUV?
First of all, we said 2017, not 2018. Relative to the last part of your question, EUV, we don't believe has any relevance to 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. 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 3D NAND capacity. We are not assuming a very grand, I would say, conversion of kind of the planar installed base that sits at more than 1 million wafer starts per month of capacity today.
I think there's a lot of learning still in the industry to kind of know quite what 3D devices get targeted to in terms of end market and how fast that conversion will play out. 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. We tend to bias a conversion assumption rather than an addition assumption for the industry generally. 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. 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 it was your target, right? Where do we expect the first initial adoption? Is it foundry DRAM or NAND?
Frankly, 3 months is a really short period of time in the context of kind of new products in new markets, I don't have so much more to say today than I did in October. Maybe the one exception is for the kind of new product, the ALE product, we have had kind of repeat order of the penetrations that we made for one customer, which is I think a meaningful statement of validation. It isn't everything we need, what we need is kind of an industry to kind of make that choice as well as a couple of customers. This is the year where I think the decisions of the customers will define the legitimacy of the strategy and the plans of the company.
I think the company's done a really good job in delivering the productivity differentiation and getting us process capability for a front end of line clean growth opportunity. Just because the company's done it doesn't mean the customers are going to be invested in that selection and that adoption, and we're doing our best. 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 two more questions today.
Thank you. Our next question will come from Mahesh Sanganeria with RBC Capital Markets.
Thank you very much. I had a question on the foundry commentary you made that spending is up, flat to up slightly. TSMC guided for 20% increase in CapEx. 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 are making investments in this calendar year. We're assuming that at least two-thirds of the wafer starts in the industry are getting added at the 14, 16 nanometer technology node. As you've heard from two or three customers, I think the 28 nanometer demand is not insignificant, that's kind of in the mix as well.
Okay, my follow-up, I just want to revisit the financial model you presented at Analyst Day.
Mostly in terms of revenues at $32 billion, you were targeting 5.1. I think that was probably towards the end of 2015. I don't think we have the precise number for $34 billion. According to that model, where will you be at $34 billion revenue?
Yeah, Mahesh, I'm not going to give you a new model as I sit here right now. I will give you a little color on 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. If you recall, we kind of showed a $5.6 billion 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 in. Martin, going back to your DRAM bit commentary, what are the key assumptions for that 30% bit growth? I say that because earlier this morning, Hynix talked about 25%. I think Micron is also talking about 25% bit growth. I'm just trying to better understand the underlying assumption in your view, and I have a follow-up.
The assumption is when we add up the collective disclosure from customers and what's available to us from being inside of the industry and participating real-time, that's the best assumption we can give you.
Okay. 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?
Yeah, 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 and days come down. Directionally, inventory's going to trend down, I think, as we go through the years. We've built into this level of shipments. 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 billion WFE outlook, Martin, can you talk about the swing factor that can take it to $36 billion or the high end of the range? Which segment can take it to that range?
Yeah.
Is it one segment?
I guess anyone can, in theory. I think the 3D NAND's 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 market penetration of that device at this time. I do think FinFET conversions can accelerate if there's momentum that it is in excess of stated plans in terms of going from planar to a FinFET device. It feels to me like the upside is greater in memory than foundry logic, and greater in NAND than DRAM. I guess, in theory, all of them can move in a positive direction.
Got it. Then on the timing of EUV insertion, one of the foundries has taken pilot production litho tools, and just curious if anything has changed to your thinking in terms of the node-
Yeah, nothing really. We're still thinking seven nanometer is the earliest, the only thing that I read in the last three months kind of reinforced the complexity of the infrastructure around the EUV process itself as being a significant component of that question. It didn't look like it got any easier. It looked like it got more difficult, as best I could tell. Okay, Harlan, you're up.
Thanks, Atif.
Harlan, you're the last guy today. Operator, next question, please.
Thank you. The final question will be from Harlan Sur with JPMorgan.
Hi, this is Bill Peterson calling on behalf of Harlan. Thanks for sneaking it in. Congrats on a good December quarter. 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. Is it a nature that some logic customers already have FinFET and a lot of foundries are not? If you could provide some color on that would be very useful. Thanks.
I think really it's kind of the age-old relative ease and not only it's easy, but in relative terms, it probably is. With the amount of die concentration that exists in a microprocessor fab compared to the distributed die and customer reality of a foundry, the conversion cycle really kind of is a big challenge. 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.
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?
Yeah, 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. 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. 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 look forward to talking with you again next quarter.
Thank you.
Once again-