Good day, and welcome to the Lam Research Corporation September 2014 Quarterly Results Conference Call. At this time, I would like to turn the conference over to Carol Rayburn. 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 will share our outlook on the business environment and review our financial results for the September 2014 quarter and our outlook for the December 2014 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 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 guidance. 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 factor disclosure in our public filings, including our 10 ks and our 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 pm Pacific Time. And 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 this call will be available later this afternoon on our website. With that, I'll now hand the call over to Martin.
Thank you, Carol. Good afternoon, everyone, and thank you for joining us today. I will start by commenting on our September quarter results, then provide some color on our outlook for wafer fabrication equipment spending in the remainder of calendar Before transitioning the call to Doug, I will share some updates on Lam's key initiatives that we feel are central to understanding the narrative of execution for Lam. Executing on our commitments with results in line with the midpoints of our guided ranges across all metrics continued the theme of outperformance relative to the semiconductor equipment industry with an anticipated greater than 20% year over year revenue growth versus an industry baseline of 10% for calendar year 2014. Performance for Lam Research is ultimately measured by our ability to deliver value across the full community of stakeholders.
At the customer interface, this value creation is focused on the leading edge where Lam is helping to solve the most critical technical and economic challenges related to a set of technology inflections that will define the next several years of our industry. Most importantly, multi patterning, FinFET, 3 d NAND and advanced packaging. It is also increasingly focused on the lifetime performance improvement opportunities for our customer many technology nodes. That priority is the essence of a focus in our installed base, spares and service business unit. As discussed at our investor events in July, architecture and process flow transitions.
We continue to believe that our market share of the technology inflections is approximately 50% across the portfolio of deposition, etch and clean products. This strong position is particularly important when considering that roughly 1 third of WFE spending in calendar 15 will be focused in these areas at a time when next generation technology node conversions for memory and logic are just getting underway. Notably, by calendar 2017, we expect half of WFE spending to be in these categories, hence the opportunity for Lam to deliver a compelling growth story as the targeted market expansion occurs. Our objective is to realize this outperformance opportunity with a clear strategic vision, disciplined operational performance and thoughtful scaling of the company positioning us to deliver profitable growth in line with the updated financial model shared earlier this year. At the same time, we continue to utilize strong cash flow generated from our growth to reinvest and further strengthen our product and services portfolio to strengthen our market position and make possible sustained performance around opportunities as they are created.
We remain committed to create value for our shareholders through this investment and also through share repurchases and dividends ongoing. As we enter the final quarter of calendar year 14, we expect the second half to unfold largely as we had projected, with customer spending relatively balanced between the first half and second half. Spending by segment is largely tracking the projections that we shared through the year with memory slightly stronger in the first half and the second half having more broad based logic participation. The WFE spending environment continues to feature a healthy degree of discipline from customers in what is today a consolidated industry, reflecting what we believe is a continued trend towards reduced cyclicality. Speaking to segment trends more specifically, starting with NAND flash.
We continue to see a balance in overall supply and demand for bits. The majority of investments for NANDs have been for planar conversions focused below 20 nanometer. We expect installed 3 d NAND wafer starts capacity to conclude this year at approximately the 60,000 wafer start per month level and see a focus and broad participation in 3 d NAND's developments and deployments at various stages in line with customers' stated plans. Our outlook for 2014 NAND supply bit growth remains in the 40% range. In DRAM, we see continued strength in investment plans from our customers with strong market demand driven largely by mobile and enterprise DRAM growth.
Pricing remains stable. Investments in DRAM are primarily being made to enable the transition to the mid-2x nanometer and below nodes. These investments continue to be from our perspective very efficient with a focus on upgrades and maximizing installed footprint capability. Projections are for DRAM bit growth of approximately 30% this year. Overall in memory, we maintain our projection for 2014 WFE at $12,000,000,000 to $13,000,000,000 The Foundry and Broader Logic segments have also more or less progressed in line with our expectations.
The first half of the year was focused on 20 nanometer Foundry investments. The second half of the year is more weighted to early FinFET purchases with a broadening of participants and some planar technology investments by a number of customers at the 28 nanometer technology node. In summary, we see the industry largely in line with expectations and maintain our outlook for calendar 14 at $32,000,000,000 plus or minus 1. As we look forward to 2015, our bias remains in favor of a growth year. While there are many factors supporting this such as publicly stated customer investment plans and net positive macroeconomic indicators related to consumer electronic adoption trends and global GDP, it is always fair to say that much can change.
While we plan to provide more detail on the anticipated 2015 WFE spending level and composition in January, we can say today that from industry analysis, customer and peer commentary to date, a WFE growth rate in the 5% to 10% range would be a reasonable starting assumption. As always, the opportunity here is defined by the success of latest generation devices utilizing leading edge technology in the marketplace and also the ability of the ecosystem to supply these devices in a timeframe and at a price point that the market sustain. We consider that our opportunity in calendar 2015 is greater than this WFE baseline due to etch and deposition markets growing faster than the average of other segments, combined with the relative strength of our product portfolio and sentiments of we would like to take this opportunity to provide you with an update on some of the company's strategic initiatives that have supported our growth this year and will in our opinion continue to drive our future. The focus on solving customers' toughest problems puts a premium on commitments to significant investments in leading edge solutions and to our customer trust and collaboration model. I mentioned earlier that our execution level so far has translated into what we estimate is a market share of approximately 50% of the inflections spanning multi patterning FinFET, 3 d NAND and advanced packaging for Lam Research.
With respect to overall market share, we shared with you at our SEMICOM West Investor Day this year that we were performing at roughly 90% success rate for our targeted penetrations and defenses in the first half of the year and that there were many more decisions outstanding through the end of the year. I'm very pleased to report that through a busy September quarter, we have executed well and remain at that same magnitude of customer decisions in our favor. For this reason, we remain our we maintain our conviction about the opportunity to realize our targeted market share gains short and long term. From our standpoint, the commitment to investments in leading edge innovation will reinforce trust, leadership and cycles of differentiated learning for the company. We focus on technology leadership and productivity, which assumes capability and cost are equally important to our customers.
One measure of our success milestones we are able to achieve and we've had several of them recently. The shipments of our 4000th deposition system from our Oregon facility, the shipment of our 2,000 vector PECVD module and our 1 100 and 2,300 Syndion chamber shipment for deep silicon etch, which we announced earlier this week. The Syndion product allows for the very high aspect ratio silicon etches central to the production of image sensors, interposers and through silicon vias, a market inflection just emerging. We also expect to hit another milestone by the end of this year with the shipments of our 250th Flex FX product for memory high ratio applications. Our Flex systems showcase why we continue to build our market share in etch, delivering innovation and achievements with proprietary pulsing technology and best in class uniformity tuning, contributing capability to sustain our delivery of differentiated results on the wafer.
We are continuing to deliver the next generation of solutions that define the leading edge such as atomic layer deposition capability for applications such as spacer based patterning schemes and atomic layer etch for high aspect ratio etch process These technologies have long suffered from under adoption in the industry because of productivity concerns, but Lam is now changing that paradigm with frequency of new product releases and engagements with customers that are designed to enable continued scaling for our customers. As we move into calendar 2015, we will further emphasize by our actions the priority of staying close to our customer at a strategic and tactical level both partnering with them on their technology introduction and ramp plans, sizing and allocating our R and D investments accordingly. We remain highly focused on delivering sustainable growth today, efficiently scaling our business, our business, maintaining a strong cash generation profile and managing our balance sheet to enable execution on broader strategic goals. All of these efforts as well as our capital return are designed to enhance value creation for all stakeholders. With the focus of the company as outlined, we think it is hard to find a better positioned semiconductor capital equipment company to capitalize on emerging industry trends.
That is a byproduct of many years of hard work, continuity of leadership, strength of culture and values, clear strategic vision and solid execution. We truly have one integrated and very capable team at Lam, which is inspired to achieve more than ever contribute to the success of our customers long term. Let me conclude by thanking them all, the dedicated employees of Lam Research, without whom our performance would not be possible to achieve or sustain. With that, I'll hand the call over to Doug.
Okay. Thank you, Martin. Good afternoon, everyone, and thank you for joining us today. Before I share the results from our September quarter, I'd like to pause for a moment to recognize and thank Carol Rayburn, who has done an excellent job temporarily heading our Investor Relations team in addition to her role as Corporate Controller. Carol will be handing over responsibility for the team to Audrey Charles, who is stepping in as Senior Director of Investor Relations.
Audrey has been with Lam for over 18 years and brings to the role a broad base of experience in both customer as well as technology management. I'm pleased that she will now be applying her talent and leadership to our Investor Relations team. I think you guys will enjoy getting to know Audrey. Now onto our September quarter performance. We posted another solid quarter delivering results at or above the midpoint of guidance for all financial metrics and extending positive momentum heading into the second half of the calendar year.
In the September quarter, shipments came in at $1,111,000,000 pretty much right at the midpoint of our guidance range. Relative to system shipments, systems for the foundry segment increased substantially in the September quarter accounting for 45% of system shipments and that compares to 30% in the prior quarter. As we anticipated, there was a broadening out of customer spending in the foundry space for a wide range of projects across multiple technology nodes. And I just point out that this percentage of foundry shipments is the highest percentage for us since the March 2013 quarter. The combined memory segment made up 44% of system shipments and this was down from 59% in the prior quarter.
NAND shipments actually grew and represented 26% of the system shipments, which was up from 20% in the June quarter. NAND spending reflected a continued focus on planar node technology conversions. DRAM shipments were down as we expected after the very strong levels we saw in the June quarter. DRAM shipments came in at 18% of system shipments and this was down from 39% in June. And finally, logic shipments held steady at 11% of system shipments.
September quarter revenue came in at 1,000,000,000,001 and $52,000,000 and has been now running at a level above $1,000,000,000 for 5 consecutive quarters. Gross margin for the period came in at 45.8%, which was a little bit above the midpoint of our guidance and a little bit ahead of our near term financial model. Our gross margin performance is determined by many factors that I've told you before, such as business volumes, product mix and customer mix. You should expect to see variability quarter to quarter, particularly in quarters with high or low customer concentration. Operating expenses were flattish at $321,000,000 SG and A declined sequentially, while R and D spending increased both in absolute dollars as well as a percentage of total operating expenses.
We continue to invest in R and D programs to ensure we're ready for the current as well as next set of technology inflections, which is critical to enable our revenue growth. This R and D spending is focused in areas like ALD and ALE, which Martin referenced earlier. Operating income in the September quarter was $207,000,000 with operating margin of 18%, which again was a little above the midpoint of our guidance. The tax rate for the quarter came in at 18%, which was up sequentially due to the distribution of revenue for the quarter with more revenue being generated in the United States. For the December quarter, I would be modeling a rate in the middle teens.
And for the remainder of the fiscal year, I would be modeling a tax rate in the high teens. And I'll just remind you, if the federal R and D tax credit were to be extended, the impact would be a reduction of a couple of percentage points on the tax rate relative to the numbers that I just referenced. Based on a non GAAP share count of approximately 175,000,000 shares, earnings per share for the September quarter were 0.9 $6 which again was above the midpoint of our guided range. Recall that with the increase in the share price, the share count now includes dilution from all three of our convertible notes, offset by the impact of the note hedge that we put in place. The net dilutive impact from all three notes on a non GAAP basis is approximately 10,000,000 shares.
And I'll remind you, dilution schedules for the 2016, 2018 and 2,041 convertible notes are available on our Investor Relations website to help you with your modeling. We made good progress on our $1,000,000,000 capital return program. During the quarter, approximately $300,000,000 and took delivery of approximately 4,000,000 shares at an average purchase price of $72.40 We executed these buybacks partially through open market purchases and partially through an accelerated share program, which will not close until the December quarter. On July 2, we paid our $0.18 per share dividend, which consumed $29,000,000 We're pleased with the cash generation capability of the company and continue to be committed to returning a meaningful level of that cash to shareholders. Let me now move to the balance sheet.
We ended the quarter with cash and short term investments, including restricted cash of about $3,000,000,000 This is down from $3,200,000,000 in the June quarter, with cash generation in the quarter being more than offset by our ongoing share repurchase and dividend programs. Deferred revenues were $357,000,000 and this excludes $34,000,000 in shipments to customers in Japan, which will revenue in future quarters. These Japanese shipments remain as inventory on our balance sheet. Cash from operations was $141,000,000 down from $246,000,000 in the June quarter. Cash from operations was lower primarily due to the lower revenue.
Additionally, we built some inventory in preparation for an increase in shipment output over the next couple of quarters. DSO also trended higher by 10 days due to the shipment profile within the September quarter. And finally, we exited the quarter with approximately 6,600 full time employees. Let me now turn to our non GAAP guidance for the December quarter. We expect shipments of $1,240,000,000 plus or minus $50,000,000 We expect revenue of 1.2 $30,000,000 plus or minus $50,000,000 We're forecasting gross margin of 45 point 5%, plus or minus 1 percentage point.
We forecast operating margins of 19%, plus or minus 1 percentage point. And finally, we forecast earnings per share of $1.12 plus or minus 0 point approximately 173,000,000 shares. So let me just summarize. We're pleased with our performance delivering another quarter of solid operational execution. It results aligned to our objectives and are tracking to our targets as outlined in the financial model.
With that, I will conclude our prepared remarks. Operator, please open up the call for Martin and I to take questions.
Thank We'll take our first question from Krish Sankar with Bank of America Merrill Lynch.
Yeah. Hi. Thanks for taking my question. I had 2 of them. Number 1, Martin, when you look into 2015, it looks like you're pretty optimistic on FinFET and DRAM.
I'm just kind of curious, looks like this year most of the NAND spending was on planar. Do you expect a similar trend in 2015? Or do you think 3 d NAND would increase as a percentage of the mix? And I also had a follow-up.
I think that next year we'll continue to see planar investment levels being greater than 3 d. Obviously, there's a decent amount of installed base available and I think without exception today, every customer is committed to scaling and committed to a 3 d NAND transition. And as you know, there's kind of various timing available from the customer. My expectation is that NAND flash investment continues to be very disciplined. In fact, I'd say it's probably the tightest of any of the segments in terms of the balance of supply and demand next year.
And I think we'll see a meaningful addition of capacity 3 d NAND, but we would still expect planar spending to be higher than 3 d.
Got it. That's very helpful. And then just as a follow-up, kind of curious on the status of your single wafer clean product for the front end of line. Have you seen any traction? Or is it a product or is it a strategy you're going to pursue?
Or are you going to like just focus on BOL at this time? Thank you.
No. I mean the front end of the line is the kind of largest market expansion opportunity. I mean the company is very competitive in back end of line. We have kind of great position and through the last several technology nodes, we've been very successful at defending those positions. So the investment levels in clean and the growth opportunity in clean for sure have some back end of line growth opportunities.
But in large part, this is a front end of line expansion opportunity. And we continue to be very engaged with customers. Since the last earnings call, we have at least kind of one more engagement to my knowledge. And I would still say that the initial revenues for kind of the new products, although there is some evidence of that today in a material context, that's really still a 2015 event for the company. And there are kind of 2 parts of the decision making process relative to a new product.
One of them is the decisions of the company to stay committed to investments and we've clearly performed and executed with that in mind in calendar 14 and then ultimately a set of decisions by customers to adopt the technology. And we're kind of in that critical phase where in many respects the decision making about the health and the direction of our clean business is more in the hands of the customers and the company. I think we've done what we should have done. We delivered a productive platform. We have a clear strategy around kind of differentiated solutions offerings and it will either demonstrate differentiation of added to the customer and cause them to adopt our product or not.
And I think the next kind of 6 12 months is kind of critical for the company in that regard.
That's very helpful. Thanks, Glenn.
We'll take our next question from C. J. Muse with ISI Group.
Yes, good afternoon. Thank you for taking my question. I guess first question, when you look back at well, I guess we're still in 14, but when you think about outpacing the market basically growing 2 times, how do you think about the key drivers there? Is there a way to rank order by end market or by FinFET or SATV for DRAM in terms of what really drove that outperformance? And then as you think at 2015 and your outlook for WFE, what will be the key drivers there?
Well, I think really kind of nothing new from the company on this point really CJ. I mean the outperformance of the company is now kind of a 2 year work product. I mean we've had revenue performance greater than WFE for 2 years in succession and I believe we're going to enjoy the same performance benefits in calendar 15 and hopefully beyond. We got a lot of execution obviously, but certainly the setup is very healthy in that regard. And the growth opportunity is defined principally by And the multiple patterning opportunity in And the multiple patterning opportunity in DRAM and logic both the 3 d NAND transition and ultimately advanced packaging are the critical areas of segmentation that present that.
And we're working really hard to compound that opportunity by actually executing market share growth in each of our businesses as well in the long term. And the short term performance from my perspective makes the long term objectives rational and credible. So the largest opportunity in the inflections continues to be multi patterning, 2nd largest 3 d NANDs and both of those are heavy etch and deposition intensive process flows and device architectures. So I think the future is built upon the same outperformance elements as our recent history. And as I said in my prepared comments, the success of the company in terms of market share and position products and services, which has kind of demonstrated our performance in the last couple of years is kind of building momentum as the proportion of WFE spending biases the inflections.
So this year, I think the inflections see about 25% of WFE, next year we're kind of at approximately a third and by 2017, probably 50% of WFE spending will be directly related to the inflections that are providing the outperformance potential on SAM expansion and market share for the company.
That's very, very helpful. I guess as my second question, you basically saw pretty similar trends first half versus second half. How do you think about 2015 and linearity spend there, particularly on the foundry side given some of the commentary that it's going to be first half weighted?
Yes. The only conviction I have is there will be a first half and second half. It's really hard to answer a question like that. I mean we've got kind of a pretty wide range on our WFE number, it feels really too early to answer that question. I do think consistent with Doug's comments on our inventory build, which you see in our balance sheet in September, we do expect a strong first half of next year and quite how strong it will be is kind of still to be determined, but for sure the visibility through the March quarter would imply that what will be the case today.
And it is really difficult when you're 9 months away and 12 months away to start a pining with any substance on the second half. I'll take a shot at answering that question if I may in January.
Sounds good. Thanks so much. Thank you. Thanks Suji.
We'll go next to Sandeep Vazakar with Jefferies.
Hi. Thanks for taking my question. First one is related to foundry. So how much 14 nanometer capacity roughly do you think we should expect to see in the industry exiting 2015? And when do you think we start to see more optimized versions of multi patterning and foundry?
Basically something like spacer based patterning or Intel's approach, both of which would be more deposition and hedge intensive?
Well, I think to the latter part of the question, the kind of space to based approach is kind of definitely a trend, which is accelerating. I'm not going to directly answer your question in terms of capacity at the 14 nanometer node because frankly we don't spend a huge amount of time getting precise to one node. We're kind of grouping 2016 and 14 together because to a very large extent the equipment selections of the customers are relevant for kind of all 3 kind of nodes or half nodes if you want to characterize it that way. But we would expect that according to the assumptions that I've kind of given you this up 5% to 10% WFE number, we would expect that calendar 15 ends with about 210, 220, maybe 230,000 wafer starts per month of capacity at 14, 16, 20.
Great, extremely helpful. A quick follow-up, there seems to be a lot of talk around strategic capacity expansion in semiconductor manufacturing in China. Are you starting to see this in terms of discussions around equipment purchases? Or do you think we're still sort of in very early stages of planning a potential build in China?
No. I think there's actually a meaningful investments and there are kind of a number of expansion plans in China. And clearly in light of the kind of government and region specific agenda, I think everybody is developing and finessing their kind of China strategies and I would certainly say that's relevant for Lam Research as well. So we have a very strong team. We have very close engagement with customers and I think we are participating well in the spending as it is going to play out in the next year or so.
Relative to the big unanswered questions, where does the government's investment end up between device design, device manufacturing or even materials and equipment supply. My sense is in those four areas, there's a meaningful investment level in the device manufacturing. But I think design is going to take a lot of that money. My instinct today.
Thank you very much.
Thanks, Andy.
We'll go next to Patrick Ho with Stifel Nicolaus.
Thank you very much. Martin, maybe first a big picture in terms of a lot of the recent chatter on EUV from one of your peers. How do you see your roadmap relative to some of the comments out there? Has it changed any? Or do you believe that things are still on track based on a lot of the commentary you've highlighted in your previous analyst days?
Yes, I think our position on EAV is like almost identical today as it was at the Analyst Day. I mean the customer comments continue to reinforce the 10 nanometer insertion is not the plant record for EUV. And I'm even reading kind of custom commentary that talks about non EUV assumptions or non EUV possibilities for 7 nanometer logic flows as well. Our assumption is that 7 nanometer insertion, first of all, it's not relevant to the calendar 2017 models of the company, right. So it's a 2018 influence if at all.
And we think it will be implemented with multiple patterning. And so one of the things I'm struck by some of the external commentary that I read, there's this kind of like debate in the investment community around EUV and a very simplistic commentary on ASML winning, Lam losing or Lam winning and ASML losing. And I think that dramatically oversimplifies things. When we look at kind of the base EUV roadmap and the assumptions that we think are relevant to modeling, the impact of EUV on our business at the 7 nanometer technology node, we think kind of 2 to 3 pass is kind of a relevant insertion magnitude for EUV. And if you want to be more aggressive, then maybe you'll see in 5 or 4 or 6 or even 8.
But even in that more aggressive scenario, what it does for our SAM, right, and remember the context for our SAM, so long as there is multi patterning, there is a SAM expansion opportunity for the company. And if you look at the 10 nanometer technology node from the material that we previously presented to you, there's a meaningful expansion of SAM opportunity for the company from 1st generation foundry FinFETs to the 2nd 10 nanometer. And we still believe there's SAM expansion going to 7 nanometer even with the aggressive adoption that we've kind of characterized. So if you want to be extremely conservative about the impact of EUV on the SAM of Lam Research, you'd maybe size the impact to a couple of $100,000,000 but it is not any more than that from the perspective that we have on insertion even with a 6 to 8 pass assumption at the 7 nanometer technology node.
Great. That's really helpful, Martin. A question for Doug as my follow-up. In terms of the gross margin outlook for December, what's the key variable for your outlook there? Is it more customer concentration mix or product mix given that the volumes obviously are higher in terms of both shipments and revenues?
Yes, I mean it's
a little bit of all of that. Customer mix actually might be the biggest one every quarter, Patrick. But to the extent that things unfold the way we expect going into this quarter through the December quarter, I feel pretty good about the 45.5% that we put out. Interestingly, if you look at the last quarter, the quarter unfolded pretty much as we expected almost to every single customer. And if that happens, I feel pretty good about that gross margin forecast.
Just to kind of add a little bit to that and this is as much as you're going to get on March.
I think the deposition portfolio which has a greater magnitude of new product releases which are kind of maturing in terms of demonstrating value and also kind of cost reduction in the company. Definitely there's a greater proportion of deposition products in our mix in December than in September. So that's to Doug's points kind of part of the story. But the concentration of the business in December is actually not so very different from September from a customer point of view, but for March it will be very concentrated. So our outlook right now for March is the top three customers will represent for us maybe kind of 2 thirds of our system shipments and that compares with about the 45% level for December.
So concentration of a relevant part of our conversation in the March quarter based on what we see today.
Great. Thank you very much.
Thanks, Patrick.
We'll go next to Mark Heller with CLSA.
Thanks for taking my question. Martin, I was just wondering if you could give a little bit more color as far as the node spending trend within the 45 percent for foundry during the quarter. Are you seeing a lot of FinFET within that? And can you also give some geographic trends as far as where you're seeing spending strengths within foundry?
Yes, maybe I'll start and then I'll this is Doug, Mark. I'll let Martin embellish. We saw a decent amount across a lot of different programs, a lot of different customers. We saw spending at 28%. We saw a little bit at 20%.
And we saw that first FinFET node, 16 FinFET. So it was pretty broad in September and we expect that's going to continue going into December as well.
That's enough to ask. Awesome.
And maybe as my follow-up, Doug then can you maybe give us an estimate for the shipment split in December as well?
I'm not going to get into specifics. I'll give you a little color at least directional stuff. I think we're going to continue to see strong foundry shipments and I think it's going to continue to be relatively broad based. Dollar wise, probably not all that different than what we saw in the current quarter. I think memory is going to be up a little bit.
Probably that's a statement more around DRAM than NAND given how strong NAND was in the current quarter. And I'm guessing or I think logic actually, I'm not guessing, logic should be up a little bit as well. So that's a little bit of color to think about.
Thank you.
Thanks, Mark.
We'll go next to Timothy Arcuri with Cowen and Company.
Hi, guys. Thanks a lot.
First Martin, I know you don't want to say too much about March, but I try to ask you this pretty much every call. So if I look at the inventory build, it would suggest that you're planning on a shipment increase in March of somewhere in the range of maybe 10% to 15%. Maybe I'm not calculating that right, but I wanted to ask you that number 1.
What do you think my reply is to be if you've asked me this question before? Yes, I'm not going to give that right now. I think we're looking at a strong March and I wouldn't say strong if it wasn't more than $100,000,000 or $150,000,000 or $200,000,000 which is kind of the range that you're kind of talking about. But that's as good as you're going to get for now.
Okay, great. And then Doug, also a question on margins. So maybe it's sort of picking a little bit, but the guidance is a little bit below the financial model, just a smidge below and that's due to the factors that you already talked about. But are those going to remain in effect given the concentration in March? Should we expect the margin should in March to also be below financial model because of the customer concentration issues?
Thanks.
Well, Tim actually 45.5% isn't below at least from a gross margin standpoint the model. If you remember the 14%, 15% model 45 percent was the number. So we're kind of right there. I think the directional color Martin was giving you is we expect customer concentration in the March quarter to be more concentrated and everything else equal that will be a little bit of a headwind from a margin standpoint. Having said that, if we've got stronger top line that should offset a little bit at the operating income line.
Yes. Okay. It's great. Thanks.
Thanks, Tim.
We'll go next to John Pitzer with Credit Suisse.
Yes. Good afternoon, guys. Congratulations on strong results. Thanks for letting me ask the question. Martin, I want to go back to an answer you gave earlier around your expectations exiting next year for wafer start capacity at 2016 2014.
1 of your peers sort of talked about a 175 ks number exiting this year, which relative to your $15,000 expectation would mean a lot of that spending was already done. I'm wondering if you could just give us your view on that $175,000 number or help us understand how to put your end of 2015 into perspective for calendar year 2015?
Yes. Our end of 2014 number is 130 to 140.
That's helpful. And then
So I mean maybe the difference is the timing of someone's order placement or it's an order commentary versus ship commentary. I mean, we're all about ship commentary as you know. So hopefully that helps.
And then relative to Doug's answer around shipment breakdown for December, is it too much to read into sort of the view that maybe the March quarter or the first half of next year going to see kind of a significant step up in memory spending? And when you look at the foundry strength in the back half of this year for you, how much of that is different at the industry level versus you guys perhaps gaining some share?
Well, it's relative to kind of the foundry performance of the company, it's kind of a bit of everything, right? I mean, it's the level of investments as 20 nanometer expansion occurs as 1st generation FinFETs get invested and committed broadly across the industry. And there's this 28 nanometer kind of play as well. So we definitely get to kind of float with the rising tide. There's a very specific commentary from the And we've got a little bit of share gain And we've got a little bit of share gain in the mix as well.
But as I've mentioned a a bonus for us, but a very important part of what we're investing to achieve. You had a second part of the question, which I've forgotten, I think, sorry.
Memory trends into the first half of next year. It sounds like we could set up for a pretty good memory half in the first half of twenty fifteen?
I think so.
Yes, I think memory would be up, but we're not going to give you first half second half specifically. Perfect. Thanks guys. Thanks,
John.
We'll go next to Jim Cavallo with Goldman Sachs.
Great, guys. Thanks so much for taking the question. I appreciate it. Question also on the financial model. Tim had asked about the model relative to March.
I would ask about the model relative to the full year 2015. At the top end of your WFE range assuming we come in at $32,000,000,000 this year at the top end of the guidance for next year we'd be in that 35 $1,000,000,000 plus range. Your financial model contemplates a certain earnings number. I believe that was for 2016, 2017 the $35,000,000,000 wafer fab equipment. How different do you think your earnings might be in 2015 if we get to that $35,000,000,000 number compared to what you would have had in the model in 2016 2017?
If you could help us out that would be great. Thank you.
Yes.
We're both going to do this. All I was going to say and then feel free to add on Martin, Jim is there's a time component to that model as well as just a level of top line also. Part of this is maturation of some new tools that gross margin gets better as we mature the product line. So there's a time component in addition to just volume. So it wouldn't be as good where we did get that spending level earlier than the 2016, 2017 profile.
So probably be partway in between the two models.
Yes, I mean, I think we're in terms of the output of the company and the business development of the company, we're kind of tracking ahead of the 2014 and 2015 kind of revenue level as many of you guys have kind of made that point. But to Doug's point timing is a very significant part or passing time is a very significant part of the 2016 and 2017 model. And it's not just about kind of maturing products, which is very important, but it's about the magnitude of WFE, which is an inflection. It's about the success of market share growth plans in the company over multiple years. So 2016 to 2017 really does mean 2016 to 2017.
So my advice relative to kind of modeling 2015 is use the 2014, 2015 model that we've given you and flex it for the WFE assumption. That's what I would do. And more or less the 25% operating expense level that's defined 14% to 15% is a legitimate reference point for the company.
That's really, really helpful. I appreciate that. And then just one follow-up. I think I know the answer to this, but I just want to make sure. Based on your comments that you said for March, you would expect the book to bill in December to be above 1?
Yes, I would. But it doesn't trouble me if it isn't because the magnitude of backlog in this industry today is insanely low and it's about versatility and flexibility to respond to short term demand. So the magnitude of order placements of shipments in short order is high. And these days, the conversion of shipments to revenues is pretty high as well.
We'll go next to Harlan Sur with JPMorgan.
Good afternoon and thanks for taking my question. Martin, thanks for the preliminary WFE spending outlook for next year. I know you've talked about 33% mix of inflection technologies. But can you just give us a sense on the relative contribution to the growth NAND versus DRAM versus foundry and logic next year?
Yes, I feel like I'm going to be pretty miserable responding to that honestly because I think I had a version of that question in the last call. And we've kind of given you that answer for the 2017 horizon, the 2016, 2017 horizon. And I'll just kind of refresh that as a reference, everybody has it. So in the context of the $2,000,000,000 SAM that we defined, we've kind of said that $800,000,000 plus or minus 100 is in the kind of foundrylogic space, which includes device architecture and multi patterning. 300 plus or minus 50 is in the DRAM space, which in large part is a multi patterning.
600 plus or minus 100 is kind of NAND in large part 3 d NAND. And the advanced packaging opportunity is 300 plus or minus 100. And a big part of that is obviously kind of 3 d transition through Silicon Via. So that's kind of the reference point. Now what is going to be prevalent and most dominant in that context in calendar 15.
I think the answer to that question is multi patterning and logic and DRAM, FinFET device transition. And we will see a continued deployment of 3 d NANDs, but I think Canada 16 will be a much stronger play than 2015 for 3 d NAND HVM. I mean, I think there will be a meaningful addition of 3 d NAND capacity in 2015, but I don't think it will compare to the additions in 2016. And advanced packaging, I would say, is going to show up, but it's probably again more of a 2016 play in substance than 2015 at this point. Hopefully, that's some color that you can work with.
Yes. I appreciate that. One of the interesting dynamics in the memory segment is that as you transition to these inflection technology nodes, there's actually a loss of capacity, right, for a fixed area of floor space. So at least this is true for the migration to the 2x nanometer node for DRAM. I think we're hearing as much as 15 percent capacity reduction.
Are you seeing the same impact on the NAND suppliers as they transition to 16 and 15 nanometer planar technologies? And the second question is, are your tools and flows or how are your tools and flows helping your customers to kind of alleviate some of these capacity challenges?
Well, I definitely think that the impact on output for square foot of clean room in the DRAM space is a very relevant conversation. And certainly to the extent there are additions of capacity forecasted and assumes for DRAM next year, they don't take the baseline of available capacity up in any meaningful way for the reason that you've just described. So I think we've got about a 60,000 wafer start assumption for 2015 ads, but those ads just simply keep available capacity almost flat kind of year on year. In the NAND space, my instinct is the conversation is much more relevant in the planer to 3 d transition where it's huge at the customer interface is in kind of playing out to 3 d transition in NAND flash. That's a big one in terms of complexity of line layouts and density of process chambers in a clean room.
Thank you.
Thanks, Arlen.
We'll go next to Stephen Chen with UBS.
Thanks. Hi, Martin and Doug. I had a follow-up question Martin on the market share at the technology inflection. Do you think the market share at these technology inflections can go higher than your 50% target if there's still uncertainty between this merger Applied and Tokyo Electron?
Well, that will be our plan. I mean, it's we're working really hard to take advantage of every opportunity including any opportunities that are provided by competitors being merger is approved, because integrating companies is not an easy skill to acquire. It's extremely difficult. We are going to work hard to exploit every single opportunity to grow this SAM expansion statement and it's a market share statement. And we'll see how this plays out, but that's the plan.
Okay. And then just a I also had a follow-up question on the financial model. Does the model include higher shipments to a large logic customer? I was just wondering if these logic shipments start ramping into December quarter, if that is also in this long term model? Thanks.
All of the share gain opportunities that you've heard us talk about before are comprehended in the model.
Said differently, yes.
And we'll go next to Mahesh Singhanuria with RBC Capital Markets.
Hi. This is Sean on for Mahesh. Thanks for taking my questions. Martin, we appreciate that you provided colors of the 2015 WFE, but 5% to 10% is a relatively broad range. I know you don't want to comment specifically on the segment movement, but we're wondering can you talk qualitatively which segments are going to grow towards the higher end of the range?
Which segment are sort of below the range? Just qualitative any color would be helpful. Thank you.
Well, I think it's kind of very similar to the answer I gave a few moments ago. I think that a planar scaling in NAND flash is clearly the majority of spending next year and that's a very tight space. I mean supply and demand balance is really tight there and you can kind of see that evidence in the kind of pricing stability and profitability levels of our customers. I think the investments in DRAM next year to a very large extent is very efficient. It's about technology conversions.
There are the the motivation of customers to take advantage of an opportunity to invest to improve their financial performance with the cost benefits of scaling is clearly a very important part of their commitment. And there's a pretty aggressive race to the FinFET foundry opportunity. So I mean those are the influences that I think are relevant to answering your question for the industry. For the company, our big growth trajectories
are kind of multi
patterning in logic and DRAM. The logic space. And it will be valid in the logic space and it will be valid in the 3 d NAND space as well. But again to my earlier point, not to the extent that I expect it to be relevant as people transition as everybody transitions, I think, out of pilots into HVM in the calendar 16 timeline.
Great. Thank you very much.
It's time for 2 more callers. Thank you. We'll go next to Weston Twigg with Pacific Crest Securities.
Hi. Thanks for taking my question. First just on the 3 d NAND piece. I'm wondering if you're seeing customers decommit a little bit from what you expected earlier this year. I think previously you were looking at maybe 80,000 wafer starts, now you're talking 60,000.
And earlier this year you were thinking that 2015 would be the volume ramp here. So just curious to your thoughts on customer activity on 3 d NAND?
Yes. I mean I think all of our customers have kind of more or less said the same thing, right? I mean they said they're working really hard to extend planar for as much as possible and as long possible. But I think they're all invested in the legitimacy of a 3 d NAND transition and there's kind of commitment by all of them to developments and kind of deployments. I had expected if I kind of look at the beginning of this year, I had expected the performance and the cost benefits of 3 d device to have matured sufficiently by the the end of 'fourteen that the kind of market dynamics accelerated the stated timelines of all four customers that have kind of engagements.
And it hasn't kind played out in quite that way. And so I think the original commentary from customers around kind of a 2 or 3 year timeline difference between 1st adopter and kind of last adopter is probably as valid today as any reference point. So I think HVM transition is relevant in calendar 15, but I don't think relevant for everybody. I think the HVM relevancy for everybody at 3 d NAND is going to be a 2016 play. Now all bets are off if someone is in the marketplace with significant performance and cost benefits and kind of deployments, it gets kind of pulled in, which was my hypothesis before and maybe that shows up.
And if it does, I think that life will get pretty exciting pretty quickly.
Okay. That's helpful. And then just thinking about this a bit further. So you identified double patterning and 3 d NAND as your main SAM expansion drivers over the next couple of years. But you also indicated that boundary spend is still fairly heavy at 28 nanometer right now and that the NAND producers are still focused on cleaner extension.
So is there some risk maybe developing around your ideas on SAM expansion in 2015?
No, I don't think so. I think we feel very comfortable with the assumption of the kind of 1 third of WFE being inflection based next year. I think the 28 nanometer investment is kind of supplemental and takes what obviously for our customers to add to add 28 nanometer capacity than FinFET capacity. So in spite of the fact that it's a decent number of wafer starts, it's kind of economic consequence is lower.
Okay. Thanks a
lot. Thanks, Wes.
And we'll take our last question from Rameet Shah with Nomura Securities.
Yeah. Thanks. Doug, is 50% to 60% incremental gross margin still the right way to think about the model potentially for next year in light of some of the customer concentration you expect to see in March?
I mean, Raman, I would just redirect you back to the financial model, which in 2014, 2015 shows 45 percent gross margin and roughly 20 percent operating income is the right way to be modeling the business next year.
Okay. And then just one final question on the current environment. I guess if I take the midpoint of December, it would imply that revenues for the second half of the calendar year come in about $100,000,000 below your guidance of flat. And at the same time, you seem to be more positive on March. So I'm just wondering if there was any dynamic here with a particular customer program that's influencing your guidance for December as well as how you're thinking about the March period?
Yes. With kind of due respect, I went to an awful lot of trouble last quarter to say not precisely flat and I think a 51, 40 9 profile, which is kind of a mathematical derivative of the midpoint is pretty consistent with what I tried to position in the last earnings call. And obviously relative to kind of running the company and making choices about investments in the future and the growth of the company and positioning to exploit some expansion and market share opportunities as they exist. When we get these kind of ebbs and flows and I realize $100,000,000 is a lot of money, but when we get to these ebbs and flows, they're not actually very material to us in terms of how we think about running the company and the difference between December January is not worth a huge amount of anything to us. It's important to be aware of, it's important to be transparent on and you have our commitment to continue to try to do the best we can in that context.
Got it. Thank you, Martin.
Thank you for joining us today. Please visit our call. Thank you, everyone. That does conclude our conference for today.