Lam Research Corporation (LRCX) Q2 2012 Earnings Report, Transcript and Summary

Martin B. Anstice - Chief Executive Officer, President and Chief Operating Officer Ernest E. Maddock - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Head of Silfex Incorporated Shanye Hudson - Director of Investor Relations

Benedict Pang - Caris & Company, Inc., Research Division Stephen Chin - UBS Investment Bank, Research Division Mehdi Hosseini - Susquehanna Financial Group, LLLP, Research Division James Covello - Goldman Sachs Group Inc., Research Division Christopher J. Muse - Barclays Capital, Research Division Satya Kumar - Crédit Suisse AG, Research Division Christopher Blansett - JP Morgan Chase & Co, Research Division Krish Sankar - BofA Merrill Lynch, Research Division Terence R. Whalen - Citigroup Inc, Research Division Edwin Mok - Needham & Company, LLC, Research Division Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division Vishal Shah - Deutsche Bank AG, Research Division Weston Twigg - Pacific Crest Securities, Inc., Research Division Mark Heller - Credit Agricole Securities (USA) Inc., Research Division

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Lam Research Corporation December Quarter 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Shanye Hudson, Director of Investor Relations. Please go ahead.

Thank you, Joe. Good afternoon, everyone, and welcome to Lam Research Corporation's quarterly conference call. Here with me today are Martin Anstice, President and Chief Executive Officer; and Ernie Maddock, Senior Vice President and Chief Financial Officer. Shortly, Ernie will discuss the financial results for the December 2011 quarter. Martin will then share Lam's business outlook for the March 2012 quarter before open the call up the call up for Q&A. The press release detailing our financial results was distributed over the wire services shortly after 1 p.m. this afternoon and is also available on our website at lamresearch.com. Today's call contains certain forward-looking statements, including those related to our expectations for the further global macroeconomic environment; of market size; wafer fab equipment spending; market share changes; consumer demand; customer spending and behavior; and the factors that will influence those expectations, as well as our spending projections; our investment plans; our business strategies, our aspirations of the benefits of our planned merger with Novellus; our intentions for research and development activities; our contemplated tax rate and our forecast of market share, shipments, revenues, expenses, margins, operating profit, share repurchase activities, earnings per share and cash generation on both a GAAP and non-GAAP basis, as well as other statements of the company's expectations, beliefs and plans. There are important factors that could cause actual results to differ materially from those described in these forward-looking statements, and a list of these factors can be found in the slide package accompanying this conference call and on our most recent Form 10-K filed with the Securities and Exchange Commission. All forward-looking statements are based on current information, and the company assumes no obligation to update any of them. This call is scheduled to last until 3 p.m. [Operator Instructions] With that, I'll turn the call over to Ernie.

Thanks, Shayne, and thanks, everyone for joining us today. We ended the calendar year with a solid performance leading or exceeding the midpoint of our guidance ranges for the December quarter on all financial metrics. In calendar year 2011, Lam delivered $2.8 billion of revenue, generated $696 million in cash from operations, representing 25% of revenues and returned approximately $233 million to our shareholders through stock repurchases. Moving now to the specifics for the quarter ended December 25, shipments were $563 million higher than the midpoint of our guidance range and down 3% from the September quarter. Application and market segment breakdown for the quarter were as follows: Applications at 45-nanometer and below represented 90% of overall system shipments, and we further estimate that about 87% of our quarterly shipments were targeted for applications below the 4x technology node. System shipments for the memory segment were 42% of the overall total and included NAND at 28% and DRAM at 14% of total system shipments. Foundry shipments were 46% of total system shipments, while logic and other constituted the balance at 12%. I'd like to note, the beginning in the December quarter we made a change for our market segment reporting methodology for shipments. Previously our foundry numbers included only pure-play foundries. Starting with this quarter and going forward, we have modified the foundry category to include manufacturers that have a majority of their logic capacity available for the foundry business. These shipments were previously reported in the logic and other category. December quarter revenues were approximately $584 million, representing a sequential decrease of 14% and coming in better than the midpoint of our expected range. Non-GAAP gross margin was 40.1%, down from 41.7% in the September quarter and in line with the midpoint of our guidance. In addition to product mix, our gross margin performance for the quarter was primarily affected by reduced factory and field utilization rates correlated to the lower revenue levels. December quarter non-GAAP operating expenses were approximately $180 million, down about $2 million sequentially. Versus the September quarter, we had lower levels of variable compensation reflecting lower overall business levels. As we highlighted last quarter, our exiting December month run was on an upper trajectory, which we expect to continue in a manner consistent with prior commentary relative to the need for increased levels of headquarters and customer-facing research and development. Non-GAAP operating income was $54 million versus $101 million in the September quarter, and resulted in a non-GAAP operating margin of 9.2% above the high-end of our guidance range. Our non-GAAP tax rate for the December quarter was 21.8%, higher than we had anticipated due to geographic income mix. As we previously outlined, our tax rate is highly dependent on our U.S. versus non-U.S. income mix. For fiscal tax share planning purposes, we make certain assumptions on geographic income mix and overall profitability levels, and actual results may vary from those assumptions. Going forward, we would expect an overall fiscal year 2012 non-GAAP tax rate in the high-teens to low-20% range. This fiscal year rate includes only a 2-quarter benefit from the R&D tax credit which expired December 2011. Based on a share count of approximately 121 million shares, December quarter non-GAAP earnings per share were $0.34 at the high-end of our guidance range for the quarter. The higher tax rate negatively affected our EPS by about $0.02 in the quarter as did the fact that we suspended share repurchases in conjunction with the contemplation of the Novellus transaction. Moving to the balance sheet, our cash and short-term investments including restricted cash and investments totaled $2.4 billion versus $2.2 billion last quarter. In the December quarter, we generated $169 million in cash from operations, up $82 million sequentially. DSO for the quarter were 72 days, up from 70 days in the September quarter, primarily reflecting collection timing differences due to the year-end cutoff. Inventory turns were 3.7, down from the September quarter-end performance of 4.0, largely due to declines in September quarter output levels. We exited the December quarter with deferred revenues of $192 million, up from $181 million in the September quarter and as usual, this excludes shipments to Japanese customers that will revenue in the future quarters. In December, the revenue value for these shipments totaled approximately $16 million. Non-cash expenses include, among other items, $18 million for equity compensation and $22 million for depreciation and amortization. Capital expenditures were $27 million, and we exited the quarter with approximately 3,850 regular full-time employees. As a reminder, in December, we announced our new share repurchase authorization of $1.6 billion, which replaced our prior authorization and which is expected to be completed within one year of the closing of our merger with Novellus. During the December quarter, due to deal-related restrictions, our trading activity was very limited. We repurchased approximately $10.6 million of our common stock at an average price of $39 per share, and in addition, we settled a $100 million structured repurchase program and received 2.6 million shares. This structured repurchase program was previously discussed on our September quarter conference call. Due to the Novellus transaction, we will have only a short open trading window within the March quarter and we intend to execute repurchases during that open window. I'll now turn it over to Martin for his comments.

Thank you, Ernie. Before getting started, I would like to acknowledge that this is my first earnings call following the transition of CEO duties at the end of 2011. Although I've spoken with many of you in the past and most recently subsequent to the Novellus acquisition announcement, it is a pleasure to reengage with the investment community and together with the rest of the Lam team, I look forward to working with you prospectively. The wafer fab equipment industry has never been known for its predictability, and 2011 was no exception. The macroeconomic environments remain volatile, highlighted by the European debt crisis, slowing growth in Asia and of course, sluggish performance here in the U.S. In addition, catastrophes in Japan and Thailand created significant disruptions in the consumer electronics and PC supply chains. Combined, this environment caused our customers to be incrementally more cautious despite relatively robust demand for smartphones, tablets and other devices in the year. For the equipment market, spending for the second half of 2011 was lower than the first half by a double-digit percentage, and was focused almost entirely on leading edge migrations, which include 32-, 28-nanometer expansion for the foundries, 3x and 2x conversation for DRAM and 2x and 2y node capacity additions for NAND. We believe that wafer fabrication equipment spending for the year was a healthy $31 billion to $32 billion, up about 9% from 2010. As previously communicated for Lam specifically, the combination of customer mix and spending patterns resulted in Lam's served markets declining on a year-over-year basis. Notably microprocessor investments represented nearly 20% of overall spend in 2011 compared with approximately 11% in 2010. Additionally, the profile of equipment purchases for leading edge foundry and logic capacity resulted in expending towards the low-end of its historical range at roughly 12% to 12.5% of the overall wafer fabrication spending, compared with a high 13% range in 2010. With this context, we believe our shipped market share performance for 2011 to be in the upper 40s percentage range for etch and the lower 20s percentage range for single-wafer clean, the headline being a relatively neutral year for the company on this metric. On application share basis, which is indicative of forward-looking market share momentum, we anticipate positive gains in etch through N plus 1 with 13 new application wins in 2011 primarily in critical front-end-of-line memory and foundry, more successes than not defending positions and the benefit of a transition to conductor etch associated with various patterning and metal hard mask processing schemes. This performance extends to 11 years, our track record as the global market share leader in etch. In single-wafer clean, we believe we gained 10 new applications and successfully defended our existing positions. Both the new and defended applications are in areas where we currently hold strong positions and have demonstrated differentiated results. These include back-end-of-line applications and those targeted for the backside of the wafer. We also continue to gain traction in the area of high aspect ratio cleans, where our drying technology has a demonstrated advantage. As we talked about in recent quarters, this is a time of significant critical technology and productivity challenges for our customers, and Lam remains strongly committed to making the necessary R&D investments to address those needs. We believe that this commitment will be recognized with the opportunity to gain share on an ongoing basis and continue to target a 3- to 5-percentage share gain in etch and 5- to 10-percentage share again in single-wafer clean over the next 3 to 5 years. Specific 2012 focus areas for the company include the expansion of double patterning steps of the 14-nanometer logic node, quadruple patterning for 2y DRAM devices, 14-nanometer FinFET architectures and 3D NAND structures. We are heavily engaged with key customers in each of these areas, some of which could begin production as early as 2013. In etch, our ability to tightly control critical dimensions positions us well for these applications. While in single-wafer clean, we continue to leverage our technology differentiation while driving activities to enhance our product capabilities to address a broader range of front-end-of-line applications. All said, our strategy has been and remains focused on developing products and services that strengthen our competitive offerings in established markets and on expanding our business through adjacent market growth both organically, through increased collaboration and through acquisitive measures where appropriate. While we are limited by what we can share with you today, our recently announced transaction with Novellus is a clear example of executing that strategy. Their position as a market leader in thin-film deposition and wafer surface preparation technologies complements Lam's core competencies and market leadership. It directly supports our stated adjacent growth market growth strategy. With Novellus, we are not only adding critical process steps that are directly adjacent to our etch and clean solutions, we are also creating a combined company that is well-situated to accelerate and optimize collective developments of next-generation 300-millimeter and when appropriate, 450-millimeter products and services. We plan to share further information regarding our integration plans and expectations for the combined company's performance following the release of our proxy statement in the coming weeks. I'd like to now take a look at our early views on 2012. We believe that the macroeconomic environments will be the single largest influence on 2012 WFE spending variability. Consensus anticipates a slowing of GDP growth globally with risk in the Eurozone and Asia particularly, China and the potential for slight improvements in the U.S. Consumer electronics' demand remains healthy and semi revenue should grow as a result, albeit at a modest pace. We anticipate the PC unit growth will be in the low single-digits as the industry recovers from the impact of hard disk drive shortages. The emergence of the ultrabook, a generally accepted highlight from CES recently, should lend support to electronics' demand, but we don't expect penetration rates to grow marketably until more competitive price points are reached later in the year. In addition, we expect both tablet and smartphone unit growth of approximately 40% to play a big role sporting customer investments. Given this demand profile and following recent capital spending announcements from a few key device manufacturers, we now forecast 2012 WFE spend levels to be in the range of $30 billion, flat to slightly down from 2011. This is an improvement in our outlook. As generally acknowledged, DRAM customers are focusing on conversion of existing capacity to the 3x node and below to address their profitability objectives, although it's important to note the contract pricing has stabilized in recent weeks. Overall, we anticipate a continued environment of limited new capacity adds with bit growth in the range of 35% to 40% resulting in flat WFE spending year-over-year in this segment. For NAND, contents-rich products such as smartphones and tablets are showing strong demand driving another year of relatively healthy NAND spend with bid growth assumed in the 65% range. A faster ramp for ultrabooks represents an upside for those figures as does a broader and faster SSD adoption, which we're assuming to have approximately a 10% penetration in the mobile PC market currently. In the foundry space, we see continued capacity adds at the leading-edge technology nodes, driven by wireless customer demand that appears sustainable. As implied by earlier comments, we are cautiously more optimistic in our 2012 outlook than we were 3 months ago, the big uncertainty being the macro environment. We believe our performance will be consistent with our previously published financial models and commentary by the company today and since SEMICON West 2011. Specifically, we plan to continue making the strategic investments necessary to successfully position the company for sustainable growth, but are planning to do so with a quarterly spend profile of no more than $200 million operating expenses this year based on our current understanding of opportunities and customer demand. As Ernie pointed out, our near-term tax rate has increased by approximately 20% being negatively impacted by geographic revenue mix and timing uncertainty relative to the extension of the R&D tax credit, which expired at the end of calendar our 2011. From a market share perspective, this is an important year for the company with meaningful selections anticipated by customers around the many significant transitions and technology inflection points. Aside from investing for the long-term growth with a focus on strengthening positions in dielectric etch and front-end-of-line single-wafer clean, we are targeting successful defenses across our product lines and new applications market share penetrations for the 20-nanometer logic, 2x DRAM and 2y 1x NAND nodes. Considering the timing of implementing key customer selections in 2012 and the customer spending profile and 2012 similar to 2011, from a shipments market share perspective, we would expect modest progress to our previously stated 3- to 5-year growth objectives. In summary, 2012 is a critical year for Lam to continue executing against the company's long-term adjacent market growth strategy. In addition to closing the Novellus transaction and executing on our integration plans to deliver targeted results, I previously outlined a number of important milestones in our strategic customer programs that we will be focused on as they develop the architectures, processes and devices necessary to meet the cost and performance demands. We believe that we are well positioned for these opportunities building a stronger model of collaboration with customers, and that will be a large area of focus for us this year. Turning now to our outlook for the March 2012 quarter, our guidance is: Shipments of $700 million, plus or minus $25 million; revenues of $640 million, plus or minus $20 million; gross margin at 41%, plus or minus 1%; Operating profit at 10.5%, plus or minus 1% and earnings per share of $0.44, plus or minus $0.05. With that, Ernie and I will be happy to take your questions.

[Operator Instructions] Our first question comes the line of Satya Kumar with Crédit Suisse. Satya Kumar - Crédit Suisse AG, Research Division: I guess, first off, Martin, could you talk a little bit about the percentage in terms of gross margin drivers as you look into the March shipments, pretty big uptick in terms of shipments. Obviously, the incremental gross margins appear to be going to the 15%, so anything you could talk about that?

Sure. Yes, I think one of the things that's really important to make a statement on and my sense is this a generally accepted and understood factor is the level of concentration in spending particularly in the March quarter is very high on 1 or 2 significant customers. And that concentration is a very big part of why the gross margin guidance is what it is. I do expect if the mix of customers is more balanced than through the rest of the year, and that's currently what we are modeling that the gross margin percentage that shows up in the March guidance would trend upwards, independent of their being more absolute dollars of revenue. But a big part of the guidance we gave on profitability specifically at the margin level is associated with concentration on 1 or 2 key customers. I didn't get the second part of your second, Satya. Satya Kumar - Crédit Suisse AG, Research Division: No, that was the first question. I guess the second was could you talk a little bit about how the shipment pipeline might look like as you look into the June quarter?

I'm obviously limited in terms of the visibility that we always have prospectively. But I think it's fair to say that the shipments' guidance of the company, which is a reasonably reliable leading indicator of kind of outlook is stronger than the revenue guidance for the quarter. And so certainly as we see it today, we would expect continued strengthening. But as we all know, customers can change their plans pretty quickly. But that's we are -- what we're seeing today. In terms of the kind of segmentation, there's a fairly strong segmentation to kind of the foundry community -- the new definition that Ernie reported and disclosed a little earlier. So about 50% of the shipments in the March quarter is directed to that segment.

Our next question comes the line of Mark Heller from CLSA. Mark Heller - Credit Agricole Securities (USA) Inc., Research Division: I guess, Martin, you gave a wafer fab equipment forecast of about $30 billion for 2012. I'm just wondering how you think that shapes up sort of first half versus second half. Would you expect -- I know, I mean, what type of visibility, I guess, would you have for the second half of this year? And do you expect the first half maybe to be stronger than the second half?

We're certainly in terms of kind of a planning processes in the company. We're certainly anticipating a slightly stronger first half and second. But frankly, the level of visibility we have in the second half, and I think the level of uncertainty and the kind of general macroeconomic climate is such that it's the point of data or the point in time, but lots may change. But at least for now, slightly stronger in the first half is the assumption we're making for planning purposes. Mark Heller - Credit Agricole Securities (USA) Inc., Research Division: Okay, I got it. Can I also ask, as -- when we look at sort of etch logic versus -- and foundry versus memory, how is etch dollar content different for Lam versus the 2 different categories?

Yes. I mean, I think from a market share perspective generally in the company, we communicated now for the last several years that we have very good market share across the spenders in the industry and there's one exception to that and the one exception is a big microprocessor company. And so the share of the company and the size of the SAM [ph] with that exception, are kind of reasonably balanced for us. Obviously, the absolute dollars of spending for 10,000 wafer starts in memory comparing to the for foundry or logic is quite different. But putting that aside, the basic opportunity for the company to participate in a dollar of spending with the one exception I referred to is pretty balanced.

Our next question comes the line of C.J. Muse with Barclays Capital.

I guess to follow on to the prior question on gross margins. I'm curious how we should think about that as the breadth of customer spending expands and we moved to the $650 million, $750 million range. What kind of gross margin can we assume in that type of environment?

C.J., this is Ernie. I think as you see revenues expand into the $750 million range, I'd refer you back to sort of the model results that would put us in a pretty consistent pace with a $3 billion revenue run rate for the year, so you're going to see sort of mid-40s performance at that level.

And then I guess to follow on to your comments in terms of your market share goals and the work that you're doing in terms of R&D. I was hoping you could expand a bit on the comments around 14-nanometer double patterning and FinFET? And how we should think about, I guess, the timing there and the magnitude of what that could mean for you guys?

Yes. Obviously, all those are very significant inflection points for the industry. Practically, the first kind of catalyst for any significant spending in our population in the logic arena is the FinFET transition that the big microprocessor company has communicated. They're intending of the 22-nanometer technology node, and that means more for the industry, and fortunately, it does for Lam Research in terms of near-term outlook. But we are making a very concentrated and focused investment in positioning the products of the company at those inflection points. And I think there's some critical decisions that will be made in calendar 2012. But to a very large extent, the revenue opportunities will extend into the '13 or '14 kind of calendar year. So this is really a time to position, and we'll see the revenues when the investment profile occurs, obviously.

Our next question comes from the line of Edwin Mok with Needham & Company. Edwin Mok - Needham & Company, LLC, Research Division: Martin, you talked about the etch market and how you guys are positioned and what translates -- when you translate into a lower share in 2011. I was wondering if you can go for that same mix size on wet clean, given that you have gained share. Did you actually grow your record revenue in 2011? And in terms of market exposure, did that hurt you guys?

We -- I'm going to declined to specifically answer your question about kind of revenues with the product line level because we don't have segment disclosure. But the critical message for us in single-wafer clean is we had good success -- actually very good success without exception defending the positions that we were focused on, and to a very large extent, the penetrations we were pursuing, we were successful in. The big opportunity prospectively that is something we're very focused on is strengthening the competitive offering of the company to address the front-end-of-line opportunities. And that's something that is embedded in the spending communication that we have made for the last several quarters. It's a big focus for the company, and that will be pretty influential in terms of the market share story going forward. My opinion is that I think we're very focused on investments in building that capability and we'll see a fairly kind of mutual 12 months in terms of impact on shipments market share in clean business. And then if we've done the right thing at the right time with customers, we'll be making progress in the following years. Edwin Mok - Needham & Company, LLC, Research Division: Great, very helpful. And then just quickly, there's some chatter about customer -- that DRAM customer that you're consolidating. How do you kind of see that impacting the industry and your business?

Consolidation obviously, has kind of a couple of consequences to it. One of them is that to the extent, profitability in the semiconductor industry requires it, it's a positive for the equipment industry because it serves no purpose to have semiconductor companies in a state of kind of profitless prosperity, so to speak. And so there's a positive associated with consolidation from that regard. On the other side of that coin, scale in any relationship between a supplier and a customer is always a challenging reality. I would say relative to the specific chatter that you're describing, my opinion is that's a positive for the industry because maybe a bit it creates a competitive dynamic in the semi space that allows the next leg of investment more proactively.

Our next question comes the line of Weston Twigg from Pacific Crest Securities.

Just wondering if you could give us a little bit better of an idea of how your customers are responding to the Novellus acquisition? And then maybe just moving a step beyond that whether it's related or not, I don't know. But your collaborative relationship with customers and how it relates to some of the technology focus areas you mentioned in 2012?

Yes. So relative to the Novellus acquisition, we've -- I think in the last call, I -- we were communicating that obviously that was the beginning of a process to dialogue with customers in any substance and we spend a lot of time with customers since that time. And I would say the feedback is very positive. We're getting a very good participation by key customers. We're encouraging them actively to communicate their expectations of the combined company. We're encouraging them to participate in sharing their thoughts and ideas in terms of organization and/or collaboration models. We're encouraging them to articulate their view of strengths and weaknesses of both companies. And I'm very optimistic that as a result of that we will continue to build upon the customer trust momentum that we've established as independent companies over many years. So the basic headline in terms of customer reaction to the announced acquisition is positive. To the second part of your question, which is more directed to the model of collaboration, the most fundamental example of that really speaks to the level of engagement that we have, as an equipment company, with our customers in their R&D environment. And in the last year particularly, our engagements, our collaboration with key customer R&D environments, 2 generations and beyond today's production node is dramatically increased, and that's necessary for a couple of reasons. Their challenges and issues are increasing and the need for a collaboration model is in their interest as much as it is ours. And it's part of obviously, the strategy we have to continue to grow the company and at least as importantly to create the type of dynamics around protecting what we gain going forward.

Our next question comes the line of Patrick Ho with Stifel Nicolaus. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Martin, maybe first, can you give a little bit of color of what you perceived, etch, as a percentage of total wafer spending in calendar 2012? Obviously '11 was more tilted toward lithography and process control. How do you see etch as a percentage this year?

We are modeling -- we have 2011 in the 12% to 12.5% range, and we're assuming in the kind of high 13 range for calendar '12. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: And is it fair to say that, that's more of the customer mix changing also?

Yes. It's a combination of both the customer and the trade that you set up in your question relative to the lithography investment. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Great. And my follow-up question in terms of 3D devices particularly for the memory guys, how do you see that progressing in your discussions with customers? And do you see the dollar content for etch potentially increasing as the industry -- specifically the memory industry moving to that type of process technology?

I think there's lots of unanswered questions clearly. I think the one generally accepted example where the 3D structure maybe creates some of relief in terms of lithography investment, which conversely creates a relative expansion of etch share along with other segments, although wafer fab is in NAND flash, where there's a generation or 2 of relaxing of litho rules with the current roadmap in terms of 3D NAND. But to my knowledge, that's the only kind of material rebalancing of spending that exists as a result of the 3D architecture ahead of us.

Our next question comes from the line of Stephen Chin with UBS.

Wonder if, Martin, you could elaborate a little more on your first half outlook in NAND flash. As you called out shipments in NAND decline more than overall than WFE in the second half of last year. So I was just wondering if you're preparing Lam for -- to a NAND CapEx recovery soon or there's higher NAND flash CapEx more of a second half event in your opinion?

I think in terms of this first half/second half play, we're -- we've obviously -- we're seeing a significant commitment in the NAND flash area to capacity adds, which is a very different story. The DRAM -- DRAM is not quite exclusively, but almost about upgrade and not capacity addition. Certainly, the visibility we have today would suggest that actually, the flash environment is kind of fairly first half concentrate, actually reasonably balanced. And that's true also in DRAM. I think the upside for the second half of the year is all about consumer confidence. It's all about SSD roadmap. It's all about what happens in ultrabooks. And if the hard disk drive kind of shortages get resolved sooner, then there's potential to see some PC growth above and beyond the assumptions that everybody is meeting today. And I think in the context of comments that Dell made, where they, I think, expressed the fact that only about 40% or so of corporate upgrades, the kind of Windows 7, were accomplished to date, they would appear to be a fairly positive opportunity should that issue get illuminated. So at least for now, we're assuming reasonably equivalent first half/second half for both segments. I think the second half for DRAM is probably a little stronger than first.

Our next question comes the line of Chris Blansett with JPMorgan. Christopher Blansett - JP Morgan Chase & Co, Research Division: Martin, I wanted to ask a quick question. Your shipment guidance is up quite a bit obviously more than your revenue guidance for the current quarter. Some thoughts there, are your shipping some new products that need to be signed off, new customers, how should we think about that delta?

That's a really good question, and it's one that I asked couple of hours ago. And the answer to the question is actually if you look at the units of shipments that are leaving the factory, there's quite good linearity. The number of systems that actually leaving in January and February and March are quite flat. But the dollars associated with those things are quite different. And so it really is not a commentary about the time it takes to get acceptance on shipments. It's more just a byproduct of the specific timing of the shipments and the specific value of those shipments. So kind of certainly no fundamental message relative to what's going on in the company. Christopher Blansett - JP Morgan Chase & Co, Research Division: And then last question, the second one is tied to. You gave a lot of puts and takes in your prepared commentary about the outlook. Can you kind -- you were obviously cautious in that. But we are seeing a pretty good acceleration of demand here. So how do we contrast what you're seeing in your guidance and kind of your more cautious commentary?

Well, I think the cautious commentary is intended to reinforce what I think is a very important headline. The macroeconomic environment is very unstable, I mean, we're seeing kind of news every day, the latest being kind of IMF announcements about kind of Eurozone concerns. We saw kind of a positive momentum in terms of employment levels in the U.S. But best I can tell, we're still at 10.5% or more in the Eurozone and there's lots of unanswered questions. So if that doesn't play out and there's a more positive profile of consumer confidence, then the upside is clearly there and we're certainly managing the company to prepare for either one of those environment.

Our next question comes the line of Jim Covello with Goldman Sachs.

Martin, you made a comment in response to the question about margins about one of the big customers getting some pricing, I guess in exchange for the big orders. Can you talk a little bit more about that and then maybe that in relation to the idea of a lot of people talking about increasing capital intensity and the business you guys have kind of given us your metrics on that. How much does pricing concessions potentially offset that? And the reason I'm asking is because it looks like semi revenues are going to be up a fair amount this year and wafer fab equipment spending is going to be flat or down. So I just wonder how we can think about capital intensity being up when the most obvious metric of capital intensity would be down?

That's a very big question. So, to the first part of your question, I didn't actually say we gave pricing for an order. And in fact, one of the reasons we don't give guidance on orders today is because we want to take off the table that dynamic because it serves the shareholder and the customer and the company kind of no value. So our objective is to take orders off the market as soon as they are there. The dynamic that I attempt to communicate is that when a big customer participates very significantly in a proportion of the business of the company as is particularly true in the March quarter this year. This level of concentration is the highest in the last 4 quarters, and we don't see such equivalent concentration in the 4 quarters of calendar '12 today. The specific yields that surround that volume and those configurations in this case happened to drive profitability level in the way it does. I think your question relative to efficiency -- capital efficiency is a legitimate one. I don't think there's any particularly new message in calendar '12 over '11. And we are assuming right now that semi revenue is the kind of $310 million to $315 million range. And we're assuming as I said already, the spending level in terms of wafer fab, flat to slightly down. I think the one really big headline that we've communicated some time and I think it's feature significantly going forward is the cost associated with scale and particularly, in the foundry space and some part of that is associated with scaling in and of itself. Some part of that is associated with the various patterning schemes, but obviously are a component of answering one of the earlier questions today around the balance outstanding etch in wafer fab.

That's helpful. If I'm allowed to ask a quick follow-up. When I think about the breath of spending this year, we know Samsung is obviously up a tremendous amount. Is there anybody -- I certainly wouldn't ask the customer, but do you expect any other customers to be up year-over-year in wafer fab equipment spending other than the biggest customer?

I think it's frankly a little too early to answer that question at this time. Frankly, as we all know there are a few very big customers that have a very dominant influence over spending, and they have much interest in not answering the question that you're asking as we do, so it is what it is in the month of January.

Our next question comes from the line of Ben Pang with Caris & Company. Benedict Pang - Caris & Company, Inc., Research Division: You commented that the $30 billion that you expect this year is better than what you're thinking was earlier. Can you provide what number you were thinking about earlier, and also which sectors are better or which ones are worse?

Yes. We had -- it's the one I said better than previously in our last earnings call. And this was a very preliminary view of 2012 by the time we indicated an expectation of down 5% to down 20% year-over-year, which was at the time in line with the consensus. And so what's changed this since then, I think the most fundamental change has been the demand curve that we're seeing at the 28-nanometer node for the foundry and the positive that you have all been witness to in terms of communications on some MPU spending. And memory specifically, NAND flash has kind of held up nicely with some positive demand curves for NAND-rich content. Benedict Pang - Caris & Company, Inc., Research Division: Okay. And my follow-up is on the DRAM spending, you gave an outlook for 35% bit growth. DRAM spending would be essentially flat. What would the number -- what kind of DRAM growth would you have to see in order for DRAM spending to start to increase?

One of the parts to answer that question obviously is at what nodes does the demand occur. And one of the dynamics that existed in calendar '11 continues actually in an increased state in 2012. So our current assumption is that a bit growth of around the 35% to 40% range drives a very small addition of capacity where we can all assume no more than about 20,000 wafer starts and drives a conversion of about 550,000 wafer starts. And that conversion is necessary to a large extent to support the profitability needs of that community of customers. And so I think the headline you should extract is that if there is a bit growth that exceeds 40%, it has a good shot of being a catalyst for addition of capacity because the assumption today is almost none.

Our next question comes from the line of Terence Whalen, Citigroup.

I think in the earlier comments, you alluded to gaining some market share growth at 14-nanometer and at the 2x node. I was wondering whether you see better opportunities for share gain in etch or in clean at 14 and 20.

So I may have inadvertently confused on an earlier comment. A lot of the 14-nanometer decisions are ahead of us. They have not been made yet, and there's quite a few significant unanswered questions around architecture in our customer base to be made before the selections occur. Relative to the second half, where do I see the opportunity? Clearly in the context of the more kind of longer-term growth plans that we have communicated. And I kind of reinforced those again today, we are speaking to a target of between 3 and 5 percentage points of share gain in etch and 5 to 10 percentage points of share gain single-wafer clean over 3- to 5-year period. Obviously, in order to kind of put that into context of what that means for earnings, you should obviously reflect the fact that the size of the etch market is meaningfully bigger than clean when you're calculating the dollar opportunity.

Okay, perfect. And then as my follow-up if I can do some top line to their bottom line or their below the line expenses. It seems like an OpEx, when you look at the information you communicated with investors in July, it seems like OpEx has not gone the way perhaps the way you expected in July. Can you comment a little bit about how you might improve this communication on OpEx going forward? And in addition, why your confidence that OpEx -- I think your guiding OpEx to full $195 million. Why are your confident that, that realistic ceiling for us to approach here against that are fall through as we see a -- [indiscernible]? [Technical Difficulty]

Okay. Your line was breaking up. I heard the word OpEx and I heard some part of the question, so you're going to have to re-ask if I didn't get it all. So I heard a question about confidence, and I would say the confidence level, given that we're ultimately in control of it is pretty high. So as Ernie and I communicated earlier today, we have just guided operating expense level consistent with we messaged a couple of months ago. And we are in a position today where we believe the expansion can be contained to the $200 million level for the rest of the calendar year based on what we know today.

Our next question comes from the line of Vishal Shah, Deutsche Bank.

Just wanted to follow-up on the gross margin question. I guess if you look at the -- some of the announcements so far in CapEx and everyone is sort of talking about the assumption CapEx being up more than 30%. Do you think that customer concentration, this year, would be much higher than, say 2011. So I guess my question is does this customer problem -- customer concentration problem just a one-quarter phenomenon or do you think that this going to be multiple quarters? And I have a follow-up.

So Vish, this is Ernie. I think as we indicated in our prepared comments, it is a March quarter circumstance. We would not expect to see this persist in subsequent quarters. So it's a one-quarter phenomenon, as best we know at the present.

Great. And then just another follow-up, you mentioned foundries of 50% of your March quarter shipments. Is that just the logic to foundry conversion or is it all foundry?

It's an accumulation of investments, which trends to the 28-nanometer technology node of that community of customers. And again, I want to make the point that I may already and Ernie made it at the beginning, that definition now includes beyond pure-play foundry. So to the extent, there's a logic guy out there that makes available a significant proportion of its capacity for foundry, it's included in that percentage.

Our next question comes from the line of Krish Shankar with Bank of America.

Martin, if you look at the etch market last year, the split between dielectric and conductor etch is roughly 50-50. But it seems like conductor, as a percentage of the values [ph] continued growing relative to dielectric. And in terms of your prepared comments of the 3% to 5% etch share gain, what is the implicit growth for the conductor etch market with this actual share gain or just basing on income, when sort of getting your 3% to 5% share?

You've asked a very precise question. and I'm not going to give you a very precise answer. In mean, everything is kind of in the mix. There is no question that the transition that you just described and the transition from a dielectric bias weighting to a more balanced or even conductor-heavy at certain point in time, is a benefit to us and that's part of -- that's incorporated in the decisions we make in terms of where we're focused, where we're investing, where we're pursuing penetrations, et cetera. But clearly, we are aggressively pursuing conductor and dielectric market share gain, displacing competition where we believe we can do that. And in addition to the extent, there are new applications and new process flows herein, making sure that we are the guy that's positioned to get that business. So both real displacements and market share gain, effectively defending the positions and the successes of the company in the past, along with taking advantage of this benefit that happens to play with the strength of the company historically, is all a part of that 3% to 5% target that I described.

And if I could just ask a follow-up. On the single-wafer clean side, it looks like some of your competitors have been coming out of this super-high throughput system for single-wafer clean. Arguably, most of them are in the front-end-of-line. But nonetheless, are you worried that the clean market will actually remain ecstatic or even shrink, given that the throughput they're getting like really, really high?

No. I think it's a good question. It's certainly not something that we are particularly concerned about today. And I made that statement in the context of kind of 2 things. One of them being the point you just made, as systems become higher throughput systems, the challenge for any equipment company is to preserve the value of that offering and ultimately get paid for it. I think the other side of that coin, which is particularly important answering the question in clean is, if you go chat with any semiconductor company in the world, they will, with rare exceptions, talk about the emerging criticality, the increasing criticality of clean as a process step. And so productivity is part of for value proposition, but the technology enabling around, for example, things like high-aspect ratio drying is a big part of what ultimately the customer frames with their equipment selection, but ultimately a big part of positioning by our company for value.

Our next question comes the line of Mehdi Hosseini with Susquehanna.

I have 2 follow-ups. Martin, given the new classification of shipment and revenue mix, to what extent do you expect the dollars of shipment opportunity were to exceed the prior peak of, I believe, September of 2010, you had $234 million from Korea. And I'm asking -- let me rephrase the question. To what extent do you think the revenues from Korea are going to exceed $234 million, given the reclassification of your customers?

I'm not sure I understand that question. Can you...

Yes, sure. You're reclassifying the foundry mix to include non-pure play. And to that extent, I'm just trying to better understand dollars of opportunity out of Korea since there is a non-pure foundry player there?

Mehdi, right. We're sort of crossing a segment with a region, and obviously, if we are precise in answering that question we're revealing something that is not appropriate for us to reveal. So we need a -- I think that history will tell going forward what the improvement in the foundry segment is. And we'll have to wait and let that play out over the course of the year because we're not going to reveal customer specific information.

Sure. And then in terms of, sticking with the revenue mix and given the Novellus acquisition, to what extent are you planning to provide revenue mix by different product groups?

Mehdi, we're in the process of reviewing that as we think about the acquisition. We wouldn't expect that Lam's revenue segmentation will change as a result of that. And we're currently in the process of reviewing sort of the practices of Novellus. And as things become further along in the integration and the work, we'll make the determination.

Sure, fair. But would -- don't you think it would be prudent given how there's a different growth opportunities between clean and etch, it would help us better with estimating opportunities by having a better understanding of the mix?

But we do actually share with you what the overall market size is for clean and for etch. And we share with you market share and those 2 things together can really essentially provide the information that you're seeking. So I don't know that there's any need to segment differently than we do right now. But we are looking at that. We continue to look at it, and if we feel it's important to change then we'll provide better information than we currently provide, then we'll certainly make that change.

I'd like to turn the call back to management for any closing remarks.

I'd like to thank you all for joining us today. As a reminder, the audio replay of today's call will be available on our website later this afternoon. And with that, that concludes our call.

Ladies and gentlemen, this concludes the Lam Research Corporation December Quarter 2011 Earnings Conference Call. You may now disconnect. Thank you for using ACP Conferencing.