Good day, and welcome to the Lam Research Corporation September 2018 Quarter Earnings Call. At this time, I would like to turn the conference over to Miss. Tina Correia, Corporate Vice President of Investor Relations and Communications. Please go ahead.

Thank you and good afternoon everyone. Welcome to the Lam Research Quarterly Earnings Conference Call. With me today are Martin Anstice, 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 2018 quarter and our outlook for the December 2018 quarter. The press release detailing our financial results was distributed a little after 1’o clock p.m. Pacific Time this afternoon. It can be also found on the Investor Relations section of the company’s website along with the presentation slides that accompany today’s call. Today’s presentation and Q&A includes forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosures of our SEC public filings. Please see accompanying slides in the presentation for additional information. 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’o clock p.m. Pacific Time. As a reminder, the replay of this call will be available later this afternoon on our website. With that, let me hand the call over to Martin.

Thank you, Tina, and thank you all for joining us today. Lam delivered results stronger than targeted for the September quarter with revenues gross margin and EPS all exceeding the midpoint of our guidance. In addition consistent with the commentary made during our last earnings call, we are forecasting the December quarter up sequentially and we would still characterize based on engagements with our customers in our markets and outlook for the first half of 2019 that is somewhat stronger than the second half of 2018. In aggregate there has been more semiconductor capital investment volatility both upside and downside in 2017 and 2018 than in the recent prior years and that is only extenuated by broader macro headlines such as trade, tariffs and interest rates. Despite this context, we remain very excited by the long-term drivers for data economy enablement from the world of silicon and the complements of our products and services portfolio to the technology roadmap of the industry. In our opinion, next generation device and systems architectures, the expansion of the materials in chip design and manufacturing creates compelling opportunities for our strength in etch and deposition. We remain committed to invest and innovate for the success of our customers and our company. As always the performance of Lam is defined by customer trust and employee commitments to our vision and values. We sincerely appreciate that partnership the opportunity created and the numerous contributions made. Since our July update, current year WFE expectations continue to track up slightly year-over-year although to a modestly reduced extent. At a segment level 2018, WFE looks a little stronger in logic, a little weaker in NAND and foundry to the assumptions we made three months back. With customer and Lam performance consistent with our December quarter revenue guidance provided today,…

Great, thank you, Martin. Good afternoon everyone and thank you for joining us today. Lam executed well in the September quarter with our results exceeding the midpoint of guidance for all of our financial metrics. Operating margin and earnings per share were at the high end of the guidance range provided demonstrating what I think is discipline in our spending during a decline in industry capital equipment investments. We’re pleased with our execution and ability to respond to the challenging business environment. As a reminder to everybody, we adopted ASC 606 in the September quarter, which is the first quarter of our 2019 fiscal year. Under 606 we generally record revenue at the time of shipment rather than at the time of customer acceptance. With this new standard, we are no longer providing shipment numbers. Our market segment disclosures will be based on the composition of our revenue numbers for the quarter and we’ll do that now as well as into the future. So let me get into that. Memory revenue continued to be strong with the combined memory segment making up 77% of total system revenue. Our overall non-volatile memory revenue remained strong representing approximately 51% of the system revenue and that’s despite the anticipated reduction of spending in nearly every one of our NAND customers. DRAM represented 26% of system revenue. DRAM spending in the quarter continued to be focused on conversions to both the 1x and 1y nanometer node. The foundry segment was stronger in the quarter accounting for 17% of system revenue. And finally, the logic and other segment contributed 6% of system revenue, pretty much consistent throughout calendar 2018. We continue to see strength in the China region with 25% of our revenue being generated there. The strength in China came from both foundry as…

Thank you. At this time, we will open the floor for questions. [Operator Instructions] Our first question from C. J. Muse with Evercore.

Good afternoon. Thanks for taking my question. I guess first question is, as you think about your first half, outlook for calendar 2019 definitely coming in stronger, I think, than many of us thought. Can you walk through, I guess, what you’re seeing in terms of tools versus service? And then if there’s anything that we should be thinking about that is perhaps maybe Lam specific or timing of say image sensors coming in, we would love to kind of hear your thoughts on that front.

Yes needless to say we’re much more qualified to speak to our business than we are kind of like the overall kind of WFE headlines. So, when we think about kind of calendar 2019, obviously there has been some continuous, I would say, muting of investment expectations primarily in NAND flash since our last earnings call. We’re looking at 14 new projects next year, fab projects next year. And I would expect honestly in the second half 2018 to first half 2019 comparison, that our revenue levels will be incrementally higher in DRAM logic other including image sensors to your points and also foundry. I would expect NAND to be down half, over half, second half 2018, compared to first half 2019. Relative to the proportion of our kind of revenue headlines that is the spares and services, the installed base business, obviously it’s a very important part of the economics of the company. And we’ve given some color today on the pace of growth of that business by referencing the installed base and the annuity that comes with it and it’s an important part of the value proposition here. But I would say our headlines for first half WFE are through the systems’ headlines for the markets and the customers that we have. So hopefully that helps C. J.

Very helpful. And if I could ask a follow-up, you’ve always done a great job of managing OpEx. And given, I guess, the increased volatility Doug, how are you thinking about incremental margins from here? I think targeted model is roughly 40%. Is that still the right kind of model up or down depending on the revenue run rate?

Well C. J. I think you rewrote our model. Our model is 32% to 33% in the longer term.

Yes you see you’re too used to C. J. these memory companies with 40% to 50% operating income, that it tainted you.

Yeah.

But, C. J. to more directly ask you question, at these revenue levels kind of high 20s, you just saw us print 27 and guide 27.5, and as things recover and get stronger, you’ll see us kind of inch our way towards that low 30s level. That’s the right way to be thinking about things. There will be variability in spending. And one of the things I’ve purposefully pointed out is the March quarter is a 14-week quarter, so there’s an extra work week in there. And I’ll remind you that in the first half of the year you get certain spending coming back in like payroll taxes and things like that. So don’t forget those things as you’re modeling the next couple of quarters. But hopefully that answered your question.

Very helpful, thank you.

Thanks C. J.

Thank you. We’ll take our next question from John Pitzer with Crédit Suisse.

Yes, good afternoon guys. Congratulations on the solid results. I guess Doug my first question really kind of an accounting question around 606 and deferred revenue, there was a big draw down in the September quarter, sequentially in deferred revenue. How does that line sort of transition over time? Under 606 will that eventually get a zero? How quickly will you get there? And is there going to be uptick in December sort of revenue guidance, a function of just deferred revenue coming down off the balance sheet?

Yes so briefly I’ll go through it John and you can ask me more if you to understand a little more. I mean basically what happened is we crossed into the new fiscal year is there was a bucket of deferred revenue that just fell straight to retained earnings. So that just fell off and is largely why our deferred revenue went down so much quarter-on-quarter. You’ll continue to see deferred revenue though, John, for first of a kind tools, and certain BPA accrual type things that isn’t completely delivered yet, it’ll bounce around a little bit. And generally the way I think about the difference between 605 and 606 is, it’s all just timing. We’re still shipping tools, we’re still collecting cash, all of that is happening in the same timeframe that otherwise would have. In some quarters 606 revenue recognition will be higher than 605, in some quarters I would expect it’ll flip and go the other way. But at the end of the day this is all just timing and what really matters in my mind is when cash is coming into the company and as I think you saw, we had a really strong cash collection quarter at $720 million. Does that help John?

That’s helpful, it does. And then maybe for my follow-up to Martin, Martin, I think, one of the investor concerns out there is, as the industry transitioned from planer to 3D NAND and the rush to get there by your customers just created kind of a once in a lifetime type kind of bulge in NAND CapEx that’s not repeatable. I’m kind of curious as we go through this soft period in NAND, has your view of capital intensity, your SAM or the rate at which your customers are making these transitions changed. And are you still have the mindset that 32 to 64 was probably the most efficient transmission for the industry and as we go from here things get more difficult. Any color there would be helpful.

Yes. I mean lot of questions here. So at a fundamental level no real change in our long-term outlook and that’s a commentary on capital intensity needed for the industry. And we floated at $70 billion reference at the Flash Summit conference a year back, I think maybe repeated again this year actually, so two years in a row same message. I’m not sure we’ve ever really offered an opinion about efficiency of one node or another, but I would certainly align to the fact that’s the challenges gets more complex over time as aspect ratios increase, which is a big part of the opportunity for us. That’s where we’re strong and differentiated. So I think that trends well. And we don’t see the opportunity for 3D NAND as a once in a lifetime gig or a one time event, right? Clearly there were some transitional investments associated with playing a capacity to 3D, there are also investments associated with one generation 3D to next and we did a pine in earlier disclosure that over the next five years I think we expect about 1 million wafer starts per month of incremental capacity to get brought to the system associated with the long-term outlook for nonvolatile memory in this world of data. So from an industry point of view more or less the same. And I guess the one thing I didn’t say is independent of what your view is, good or bad, you should recognize that the segments of action deposition are entirely central and fundamental to that transition. And so, if everybody does well or everybody has opportunity, we should have more and if nobody does so well we should outperform. So that’s an important headline as well.

Helpful. Thanks guys.

Yes. Thanks John.

Thank you. We’ll take our next question from Krish Shankar with Cowen and Company.

Yes. Hi. Thanks for taking my question. Few of them, first one, Martin, if you look at this downturn clearly or this downdraft clearly led by memory. Looks like the CapEx for the WFE cuts have been in retaliation to pricing declines. So from your vantage point, do you think pricing is a key metric to look for to see when it trough and if so, do you think WFE trials for memory along with pricing? And do you have any view on when it’ll happen? And I have a follow-up?

Well, I mean, I think that’s a very important question and quite a complicated one. Clearly there’s a relationship of pricing to investment levels. And I would say that in two ways. The first one is, ASPs should reflect supply and demand balance of capacity. So to the extent the prices are going up or going down, there’s an implied message around the need to add capacity or the needs to kind of reign in capacity. So, that’s been the world we’ve lived in for many, many, many years. What’s a little different today is that pricing is not actually a great leading indicator right now of the customer’s ability to afford to make investments. So back to my rather amusing response to Tim’s earlier question, when the memory companies are making 40% to 50% profits when DRAM is $100 billion business, when flash has grown in the way that it has the sustainability of investments is clearly enabled in ways that wasn’t true three or five years ago. Now having said all of that, I think our customer spends money adding capacity when they have demand from their customers to ship devices. So I don’t think people get carried away at any level these days. So it’s a bit more complicated than it used to be. Pricing is relevant to help you understand supply and demand, but it’s not so relevant in assessing sustainability and the customer’s ability to make capacity or technology related investments. So good luck with your modeling, I guess.

Got it, got it. That’s really helpful, Martin. And then just a follow-up, clearly, everyone understand the long-term upside potential for Lam and the industry and WFE bond. I’m just trying to frame the downside. If you look at the first shoot of drop with NAND followed by DRAM, do you worry that things will get worse before they get better? Or do you think they’re kind of a dropping at these levels?

Well, we are – if anything, we’re super consistent, right? So my approach has always been to describe what I see and we’ve done that. And we’ll always do that. Good or bad, we’ll tell how we see it. And so, we’ve offered perspective that says December is stronger than September and we expect the first half of next year to be stronger than the second half of this year. And of course we might be wrong. And you have to kind of judge the confidence level of our disclosure and kind of move forward, I guess. So best I can offer you.

Got it. Thanks Martin. Thanks for the insight.

Thank you.

Thanks Krish.

Thank you. We’ll take our next question from Timothy Arcuri with UBS.

Thanks so much. I had two, I guess the first question Martin is, if I just hold your wafer fab equipment share and now I’m putting everything in there. But if I just calculate your WFE share for this year and for the last year, it’s up a little bit this year. So if I just hold that into the first half of next year, you’re still annualizing if I give you say, $5 billion worth of revenue in the calendar first half, which was just up a little bit half on half, that would imply that we’re still analyzing to like high 40’s to close to $50 billion WFE. So, I guess the question is, who really knows about the calendar second half? But would you sort of endorse a number close to $50 billion for 2019 WFE?

Technically it’s too early for us to answer that question. It’s pretty customary that we have a response to that in the January earnings call. But fair question, I don’t have the crystal ball, so I can’t answer it with the same level of confidence, so I can answer the near-term questions. But a very interview question might be how do I feel today about the $100 billion two year reference that’s been floated around for the last kind of few months. It’s not a bad reference. We’re trending a tweak below that right now to our analytics. But we’ve trended a little above it at times and a little below and I can’t really tell you what the variability is around it. But that would probably be the best I could give you at this point in time.

Awesome. Thank you. And then Doug, it was a pretty big repo this quarter and I understand that it’s going to sort of play out through the end of March. But I’m curious if you can help us on share count for December and March as this kind of flows through. And then also how you think about when you’re going to kind of re-up for the repo, how you kind of think about that? Thank you.

Yes, I mean, Tim it’s always an ongoing conversation at a board level. We described when we first launched this current authorization at 12 to 18 month timeframe, maybe we’ve gotten through it a little sooner. I did purposefully point out that those ASRs are going to execute kind over a six month timeframe or not out of the market even though all the cash got deployed. When I have something to update you on, I’ll update you relative to what we’re going to do in the future. Obviously it’s something we’re going to be talking about, but I don’t have anything to tell you today.

But just on the share count though, how it actually plays out, how it actually plays through for December and March. Thanks.

Yes. I just guided you that December number of 163 million. I didn’t give you anything for March and we only guide one quarter at a time, Tim, so.

Okay. Awesome, Doug. Thanks so much.

Yes. Thank you.

Thank you. We’ll take our next question from Harlan Sur with JPMorgan.

Good afternoon. Thanks for taking my question. We were at the Flash Memory Summit when the Lam team had its investor event and we also had the opportunity to hear from some of the existing NAND leaders in the market as well as some potential entrants from China who seemed to be making some progress and talked about increasing their manufacturing footprint next year. We’ve also heard the same thing from some of the China domestic DRAM suppliers, albeit at lower levels of production activity. Do you think that China domestic memory starts to become a bigger part of your memory WFE mix looking into next year?

Yes.

Yes, probably does, Harlan, yes.

Both NAND and DRAM, you think?

Yes, probably. As you observed from Flash Memory, the NAND guys in China were a little more visible, maybe a little more confident there. But I think they’re both going to increment…

But I don’t think our fundamental view on China is any different today than it was for the last couple of years. I mean, it’s clearly an ambitious, but in our opinion, quite rational strategic agenda. And as each quarter passes there’s more substance to what they’re doing and we don’t have anything more to add than what I think they’re speaking to in the public markets on their. And obviously independent of all of that the long-term market participants are also investing for next-generation device architectures and market share growth and so on and so forth. So, I mean, it’s a global system and that’s what we respond to. But I think it’s likely that the investment level in China increases in absolutes and proportional terms next year per Doug’s response.

Great, thanks. I just had a quick follow-up. It’s pretty amazing, the amount of supply side, disciplined and focused on profitability and free cash flow by your memory customers and clearly they want to maintain strong profitability levels by modulating supply. If I look at the last time there was a strong focus on sort of reign in supply that was kind of 2016. It took about two quarters of strong equipment spending declines before we did see a positive response in memory placing fundamentals and economics for your customers. Is that how the Lam team still thinks about it as well i.e. that supply discipline in the second half of this year potentially positively impacts supply dynamics and maybe stronger possibility in the first half of next year for your customers?

Wow. I’m not showing that, but I’ll answer that. I mean I would say everything moves faster. So, I think our customers adjust faster and therefore that’s probably true on the upside as much as it is on the downside. We’re a big part of feeding variability along with other market participants for the economics of their business. And I think they take actions anticipating risks as much as ever and that’s a lot more than would be true five or 10 years ago when action would get taken when there was a clear problem statement. So yes, there are supply and demand imbalances that are getting adjusted too. There’s also proactive actions to manage the risk of that. So that’s a good thing I think in the long-term.

Yes.

I mean it kind of gets to this – it gets to the message that the secular headlines for us feel like they’re more important than stronger than the cyclical launch, but you have to make your own decision I guess.

Thanks, Harlan.

Thanks for the insights.

Thank you.

Thank you. I’ll take our next question from Joe Moore [Morgan Stanley].

Great. Thank you. Following up on that last question. I guess, I was surprised at how strong China was in the September quarter and I think you talked about two thirds of that being from domestics, that seems like a pretty big deviation. Is there anything we should be aware of there and how much of that is kind of memory versus you’re sort of the foundry customers, who you’ve seen more frequently?

Yes. I mean Joe, I’ve pointed it out, because it was an uptick from the local guys and I want them to let you know that. I don’t know you’re going to see that every single quarter in fact, I know you won’t. And interestingly, when I look at kind of who the customers are, and I won’t name them by name that there was relative balance between foundry as well as memory.

And logic actually…

Actually in logic, you’re right, Martin. So, it was – it was a strong quarter for us in China and it was a balanced quarter. I mean, my take on this thing answer is, we tend to talk about collectively two or three – two or three core domestic participants in China. Reality is, there are kind of six or seven.

Yes, there’s more.

And some of them are active at 300, some of them are interactive at 200 millimeter, some of them are active at leading edge technologies and some less leading edge, but there’s a fairly meaningful population that doesn’t maybe get fully internalized.

Great. Thank you very much.

Thanks, Joe.

Thank you. We’ll take our next question from Romit Shah with Nomura Instinet.

Yes, thank you. I guess just, as outsiders that all the data points on memory equipment CapEx and fundamentals to seemingly seemed all bad during the quarter and yet you exhausted your entire buyback and you’re reiterating your expectations for growth in December. So, is it fair Martin, just to sort of sum up this report by saying that maybe, your business is more diversified than we realized and you’re confident in September being the bottom. And the question really is just sort of the shape of the recovery from here being either U or V-shaped?

Well, I think we’ve been talking to the subject of diversification now for, it’s kind of three or four years. No question we’re more diversified today than we were. I think we’ve tried to reinforce that message even more than talking about share gains in foundry and share gains in logic by speaking to the SAM expansion headlines. And in the last kind of the year or so, we’ve segwayed into the installed base business of the company, which is not only a great asset relative to creating an opportunity for competitive differentiation in the core systems products of the company, it’s a source of revenue and profit growth at a rate that is faster than the pace of growing our installed base. I mean there’s a massive difference between 55,000 process chambers and 36,000 process chambers relative to the annuity. So that’s all kind of in the mix as well. So, the business is more or less as we had anticipated slightly muted to the expectations of three months ago. But not that much different, I mean, I actually think our calendar 18 WFE number is 98% or 99% exactly what it was three months ago. So, I mean, that’s kind of basic headline there and we’ve expressed an outlook for the first half of next year and we’re not going to put numbers on it now. We’ll kind of deal with that in January. So that will be the time when we or you become some obvious disclosure from the Lam.

Okay. thanks for that. And just on the buyback you’ve exhausted it. So do we have to wait till the next conference call to hear about the size and scope of the next authorization?

Well, even though the cash like I said, Romit, the cash got all committed. We’re still in the market through these structured products, so…

Okay.

And that was purposeful, right, taken a view of pricing, where things were at and wanting to get on with it. But the way this generally works is Martin and I all agree, here is what we think we should do. We’ll go on and we’ll have a conversation with the board and the board will have opinions. So, we’ll modify it and when we have a decision, we will communicate it to you and we’re not at that point yet.

Okay. Thank you.

Yes. Thanks, Romit.

Thank you. We’ll take our next question from Vivek Arya with Bank of America.

Thanks for taking my question. Martin, maybe a question on your services business. If say, hypothetically WFE goes down 5% or 10% next year, what does that imply for your services business? Can you still keep it flat or even grow it? Just what is just the conceptual sensitivity to WFE?

Well, in the calendar year, there’s not so much sensitivity, because in general, when we ship a system to customer, it has a 12-month warranty, so it’s kind of on our dime during that period. The single biggest influence over the size of the installed base businesses, the number of kind of units in the installed base for which we disclosed and then the utilization of fabs. So if you – if we show up in the worlds with the WFE reduction that you’ve just characterized and there is no change in utilization of the installed base, then there’s no consequence. If the utilization of the installed base goes up, you’re likely to see accelerated growth and if the installed base utilization goes down, you see a contraction and spares of service business in the industry. So, our assumption is in the context of customers have done a really good job kind of managing this issue, utilizations will run pretty high and we have no reason to be anxious about a dip in our installed base revenues. In an independent world, as spoken to you for some time now, a little bit here today in prepared comments, we are perpetually building a portfolio of installed base productivity related products and service offerings and invested in contributing more to the success of our customers and creating opportunity for Lam. So, there’s some things in our control and some things that are out of our control.

Got it. And as a follow-up from what you see today, do you think memory CapEx overall is up or down next year and when do you typically get visibility around what the spending environment will be?

Perfectly normal timing where it will give you more color on next year would be in next quarter’s earnings call. It’s just a little bit too early for us to give on the specificity you’re asking for.

Thank you.

Yes. Thank you.

Thank you. We’ll take our next question from Toshiya Hari with Goldman Sachs.

Yes. Thank you so much. Martin, you’ve talked about logic revenue being up in the first half of 2019 relative to the second half of 2018. Is the big driver there basically your key customers CapEx budget going up or is it more due to your positioning improving from say 14 to 10 nanometer or is it both?

It’s both.

It’s a little bit of both.

Okay. And then kind of related to that, if you were to – in terms of magnitude, you guided DRAM, logic and foundry all power for over half. If you had to rank order those three in terms of the magnitude increase from the second half to the first half, is that something that you guys can do?

I haven’t written down on a piece of paper in front of me and now decided like that – I’d like to tell you. So, rank order without any numbers, I would say logic and it’s kind of other logic, which includes, the image sensor opportunities and the legacy stuff, it’s probably the fastest-growing. And DRAM is the slowest-growing and foundries probably in the middle. That would be kind of – and I’m not speaking to kind of industry level here, I’m just characterizing the revenue kind of outlook for Lam, and as I said, NAND’s contractions, so that will be our rank order.

Okay.

Yes. It’s like pretty early to be having those conversations. So, take it for what it’s worth at this point.

Sure. As a quick follow-up, I just had a question on market share. Martin, clearly, if you’re growing your business 14% this year, you’re gaining a bit of share. In your prepared remarks, you’ve talked about some of your net wins, both in dep and etch. Is it fair to say in relation to your long-term model, where you’ve attached $1 billion incremental revenue for market share gains? Are you tracking in line or ahead of that plan or how would you describe, where you stand today relative to the long-term plans?

Was never linear as it’s a tough question to answer. But a couple of data points. So, when we talk about kind of penetration defense activities this year, we’re actually talking more about the economics that will play out a year from now or maybe even in 2020, right, because there’s a leading a timeframe on DTOR decisions and PTOR decisions and you might remember that in the last earnings call, I think I made referenced to the fact that there were tons of decisions in relative terms in the second half of this year compared to the first half of this year. So, that’s kind of a loss still ahead of us. So, fair game for you to ask the same question to me to try and answer it in January. So far, again, we don’t – we never think though that we defend everything, but we have a net positive to forward-looking kind of economics from the penetrations and defenses in the first nine months of this year. So pretty, pretty pleased.

Thank you.

Thanks, Toshiya.

Thank you. We’ll take our next question from Patrick Ho with Stifel.

Thank you very much. Martin, first off, just I guess follow-up on some of your comments on named capital intensity, but looking at it from the DRAM front, as the industry continues to push the 1X, 1Y, eventually to 1Z, we’re seeing a lot of new fab projects in DRAM. Do you believe these capital intensity trends are also impacting DRAM and this could provide a little bit of, I guess, sustainability on some of the equipment spending trends that we’re seeing today?

I think it’s all about kind of the economics on the revenue of the customer honestly. I think what we’ve seen in the last couple of years is, obviously, an emergence of significant discipline, managing supply and demand, and there has been an ASP consequence, but more than that, we’ve seen a transition away from units to content and density in a broader set of demand drivers. And that has allowed our customers to kind of reset the value of the bits that they’re selling to their customers. So, the average bit is worth kind of more by virtue of the value that’s created in this kind of broader cognitive computing environments. And so if there continues to be discipline and if our customers continue to be successful getting paid for the enabled ones in their industry, the fact that from one generation to the next, the DRAM cost transitions are kind of less significant compared to the baseline of five to 10 years ago. It’s much less relevance, right? I mean clearly when no transitions deliver less than they did in history, there’s a lot of intensity by the customer and there’s a lot of intensity by Lam and our peer companies. I’m sure to try and continue to improve the productivity of the DRAM installed base, because we have a collective interest in that. But I think the bigger question to answer relative to DRAM capital intensity is the revenue side of it, not the cost side of it. But as I said three times today, in my – go ahead?

As my follow-up question for Doug, in terms of the services and spare parts business, you mentioned that you have a little bit of the CapEx spend; the increase is incrementally going into that business segment. How much can you leverage, I guess your existing workforce in terms of growing that business on the labor side of things, or is that an area where you’ll also have to increase OpEx to keep up with the fast pace of growth in that business?

Patrick, it’s a different physical factor in a different location. So, there’s not a lot of leverage from a labor standpoint and we have to invest in manufacturing, the parts for manufacturing. So, it’s all goodness at the end of the day, it’s supporting a higher installed base and we got to make investments for that.

Great. Thank you.

Thanks, Patrick.

[Operator Instructions]. We’ll take our next question from Mitch Steves with RBC Capital Markets.

Hey guys, thanks for taking my question. I just had a quick one on kind of nano-secular technology. Is there any of your customers that have already started working on that or is that something that it’s told to come next year?

Unfortunately, our customers have to answer that question.

Okay. Got it. And then secondly, on the DRAM side, do you guys see any, I guess – I guess, when would you guys think that the pricing would stabilize in DRAM in general, or do you guys have no view right now?

Well, we have a view, but I think the view of our customers again, is worth a lot more than ours. I mean it’s all about supply and demand, and our customers have taken action, I would argue proactively as much as reactively. And so everything moves pretty fast these days. So again, customer’s disclosure is worth a lot more than ours on ASPs of devices.

Got it. Thank you.

Thanks, Mitch.

Thank you. We’ll take our next question from Weston Twigg with KeyBanc.

Hi. Thanks for taking my question. First, I’m just wondering if you’re seeing any change in customer behavior related to trade work insurance whether that’s in terms of the conversations you’re having with them or the visibility that they’re providing or commitments regarding new fab capacity heading into 2019. Any color would be helpful?

Yes. To the best of my knowledge, nothing’s really changing directly related to that, although I’ve kind of heard a few statements and read a few things quoted about customers’ kind of referencing terrorists or the costs of terrorists when it comes to the pace at which they’re making investments. In fact, I think I read one today out of Taiwan. So, I’m sure it’s not irrelevant. I mean, to the extent that a company has more of costs, because of terrorists and we probably all do at some level. There is a consequence of that and there is a reprioritization of things in the company. So, not irrelevance, but hard for us to kind of directly correlates. I’m just conscious that I’m seeing statements and I’m hearing some things. And so it’s in the mix of the outlook that we’ve described today.

Okay. That’s very helpful. And then my follow-up question is just on DRAM strength in the first half that you mentioned, is there a strength from – more from some of the pushouts you’re seeing from this half, is it related to new capacity or is it more just ongoing conversion activity?

It’s mostly as originally planned. I don’t think it’s a massive kind of statements. So, there are not so many industry participants in any segment these days. So, you probably got a sense of who is chasing who and who is investing where for what purpose. So, I think it was pretty much originally as consistent with plan.

Okay. Thank you very much.

Thanks, Weston.

Operator, we’ll take one more question please.

Thank you. We’ll take our next question from Mehdi Hosseini with SIG.

Yes. Thanks for squeezing me in. Doug, going back to your commentary by the extra week in the march quarter, which is leading to higher expenses, should I also assume that your revenue would be positively impacted for an extra week?

Well, technically we have an extra week to shift product, Mehdi, I don’t know that it’s going to meaningfully move the revenue number. I do know definitively, it will impact the expenses. we’ll give you the hard guide when we did get the end of the quarter though.

Okay. And then just – I just want to go back to your comment about the deferred revenue. And if I just do a simple math, I get to shipment down 35% on a sequential basis. Is that – does that make sense to you?

Mehdi, we’re not getting shipment anymore. We’re not talking about shipment anymore.

No. this is for the September quarter. This is for the September quarter.

Yes, yes. We’re done talking about shipments publicly; revenue is all we’re going to be describing now. You can do analytics on whatever you want to get shipments, but at the end of the day, given the change in the revenue recognition timing, revenue is what we’re going to be talking about.

Okay, that’s great. Just a follow-up on your services, given the increased installed system, are these service contracts long enough to actually have an impact on your backlog? Does that help you with better visibility?

Yes.

So, if that’s the case and assuming that services is becoming a larger part of your revenue mix, why not offer a longer guide on the revenues rather than just referring to WFE?

We’ll think about it, Mehdi. I mean at the end of the day, we tried to describe what we think is important for you to understand what’s going on in the business. There’s still just a large amount of the business in any one quarter that’s turns based. And to me, backlog isn’t that meaningful, for services, it’s certainly as just Martin said. So, we’ll give you some thought.

Because just the growth in installed system is very compelling, but it still hasn’t made a difference to how you guide and I’m just wondering what is the disconnect here?

I’m not – I’m not sure that’s actually true. I think for the last couple of quarters you have perspective some times quantitative and some times qualitative on the progression for a couple of quarters including today. So, it’s pretty hard to do what we’re doing and as many people characterize that we don’t have the visibility to say what we currently say as those to do. So take it for what it’s worth, we’re doing the best we can.

Thanks, Mehdi.

Thank you.

And speakers, as we have no more questions, I’ll turn it back to you.

Okay. With that, we’ll conclude the call. Thank you, operator.