Carol Raeburn - Investor Relations Martin Anstice - President and CEO Doug Bettinger - Executive Vice President and CFO.

Krish Sankar - Bank of America Merrill Lynch C. J. Muse - ISI Group Sundeep Bajikar - Jefferies Patrick Ho - Stifel Nicolaus Mark Heller - CLSA Timothy Arcuri - Cowen and Company John Pitzer - Credit Suisse Jim Covello - Goldman Sachs Harlan Sur - JP Morgan Stephen Chin - UBS Weston Twigg - Pacific Crest Securities Romit Shah - Nomura Securities.

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 Raeburn. 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 PM this afternoon.

It can also be 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 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-K 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 of 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’ll 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 ‘14 and discuss some trends that we consider relevant to 2015.

Before transitioning the call to Doug, I will share some updates on Lam’s key initiatives that we feel essential to understanding the narrative of outperformance as a major theme for Lam in 2014 and beyond. The September quarter marked another period of strong execution for Lam.

Executing on our commitments with results in line with the midpoints of our guided ranges across all metrics continued to 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 ‘14.

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, 3D NAND and advanced packaging.

It is also increasingly focused on the life time performance improvement opportunities for our customer fabs across many technology nodes. That priority is the essence of a focus in our installed base, spares and service business unit.

As discussed at our analyst investor events in July, the technology inflections for calendar ‘17 provide a $2 billion market expansion opportunity for the company and a substantial portion of our growth over the medium term is defined by our ability to succeed through these device 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 one-third of WFE spending in calendar ‘15 will be focused in these areas at a time when next generation technology node conversions from memory and logic are just getting underway.

Notably, by calendar ‘17, we expect half of WFE spending to be in these categories, hence the conviction we have regarding 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 models shared earlier this year.

At the same time, we continue to utilize the 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 dividend 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 and what is today consolidated industry, reflecting what we believe is a continued trend toward 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 3D NAND wafer starts capacity to conclude this year at approximately to 60,000 wafer starts per month level and see a focus and broad participation in 3D NAND’s developments and deployments at various stages in line with customer 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 on below nodes.

These investments continue to be from our perspective very efficient, with a focus on upgrades and maximizing installed footprint capability. Projections are up for DRAM bit growth of approximately 30% this year. Overall in memory we maintain our projection for 2014 WFE at $12 billion to $13 billion.

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 planer 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 billion 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 nets 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’t say today that from industry analysis customer and peer commentary to-date at WFE growth rates in the 5% to 10% would be a reasonable starting assumption.

As always, the opportunity here is defined by the successive 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 price points that the market will sustain.

We consider that our opportunity in calendar ‘15 is greater than 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 customer support for which we are sincerely grateful.

As mentioned at the start of my prepared remarks today, 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 customer’s toughest problems puts a premium on commitments to significant investments in leading edge solutions and to our customer trust and collaboration level.

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, planning multi-patterning FinFET 3DNAND and advanced packaging for Lam Research.

With respect to overall market share, we shared with you at our SEMICON West Investor Day this year that we were performing at roughly 90% success rates for our targeted penetrations in 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 remained at that same magnitude of customer decisions in our favor. For this reason, we maintained our conviction about the opportunity to realize our targeted market share gains, short and long-term.

From our standpoint, the commitments 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 is the milestones we are able to achieve and we’ve had several of them recently. The shipments of our 4,000 deposition system from our Oregon facility, the shipment of our 2,000th VECTOR PECVD Module and our 100th 2300 Syndion Chamber shipment for Deep Silicon Etch which we announced earlier this week.

The Syndion product allows for the very high aspect ratio of silicon etches essential 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 aspect ratio application.

Our Flex systems showcase why we continue to build our market share in etch, delivering innovation and achievements with our 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 steps.

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&D investments accordingly.

We remain highly focused on delivering sustainable growth today, efficiently scaling 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 programs are designed to enhance value creation for all stakeholders.

With the focus of the company as outlined, we think it is hard to find the better position 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 and 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 Raeburn, who’s 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 the 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 on to our September quarter performance.

We posted another solid quarter, delivering results at or above the midpoint of guidance for all financial metrics and extending our positive momentum heading into the second half of the calendar year. In the September quarter, shipments came in at $1,111 million, 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’d 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 the 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 $1,152 million and has been now running at a level of $1 billion for five 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 as I’ve told you before such as business volumes, product mix and customer mix. We should expect to see variability quarter-to-quarter, particularly in quarters with high or low customer concentration. Operating expenses were flattish at $321 million.

SG&A declined sequentially while R&D spending increased both in absolute dollars as well as a percentage of total operating expenses. We continue to invest in R&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&D spending is focused in areas like ALD and ALE which Martin referenced earlier. Operating income in the September quarter was $207 million 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 geographic 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&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 million shares, earnings per share for the September quarter were $0.96, 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 million shares.

And I’ll remind you dilution schedules for the 2016, 2018 and 2041 convertible notes are available on our Investor Relations website to help you with your modeling. We made good progress on our $1 billion capital return program.

During the quarter, we spent approximately $300 million and took delivery of approximately 4 million shares at an average purchase price of $72.40. We executed these buybacks partially through open market purchases and partially through an accelerated share repurchase program, which will not close until the December quarter.

On July 2nd, we paid our $0.18 per share dividend which consumed $29 million. We’re pleased with the cash generation capability of the company and continue to be committed to returning a meaningful level of net 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 billion. This is down from $2.2 billion 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 million and this excludes $34 million 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 million, down from $246 million in the June quarter.

Cash from operations was lower primarily due to the lower revenue. Additionally, we’ve 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 in 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 billion plus or minus $50 million. We expect revenue of $1.230 billion plus or minus $50 million. We’re forecasting gross margin of 45.5% plus or minus one percentage point.

We forecast operating margins of 19% plus or minus one percentage point. And finally we forecast earnings per share of $1.12 plus or minus $0.07 based on a share count of approximately 173 million shares. So let me just summarize. We’re pleased with our performance delivering another core of solid operational execution.

It results in line to our objectives and attracting 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 you. (Operator Instructions). We’ll take our first question from Krish Sankar with Bank of America Merrill Lynch.

Yes, hi. Thanks for taking my question, I have two. Number one, Martin, when you look into 2015 it looks like you are pretty optimistic on FinFET and DRAM. I’m just kind of curious, it looks like this year most of the NAND selling was on planar.

Do you expect a similar trend in 2015 or do you think 3D NAND would increase as a percentage of the mix? And I also had a follow-up..

I think next year we’ll continue to see planar investment levels being greater than 3D. Obviously there is a decent amount of installed base available and I think without exception today every customer is committed to scaling and committed to 3D NAND transition. And as you know there has been a various timing available from a customer.

My expectation is that NAND flash investment continues to be very disciplined and in fact I would say it’s probably the tightest of any of the segments in terms of the balances supply and demand next year. And I think we’ll see a meaningful addition of capacity of 3D NAND, but we would still expect planar spending to be higher than 3D..

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 are going to pursue even on just focus on BEOL at this time? Thank you..

No, I mean the front-end-of-line is 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 has 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 engage 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’s 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 two 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 in mind in calendar ‘14 and then ultimately set decisions by customers to adopt to technology and we’re kind of in that critical phase where in many respect the decision making about the health and the direction of our clean business is more in the hands of the customers than 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 difference here, the solutions offerings and it will either demonstrate differentiation of added the customer and call them to adopt our product or not.

And I think the next kind of 6 to 12 months is kind of critical for the company in that regard..

Okay. It’s very helpful. Thanks Martin..

Thanks Krish..

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 or I guess we’re still on 4-K.

But when you think about outpacing the market, basically going two times, how do you think about the key drivers there? Is there way to rank order by end market or by FinFET or [SAPB] for DRAM in terms of what really drove that outperformance.

And then as you think of 2015 and your outlook for WFE, what will be the key drivers there?.

I think really kind of nothing new from the company on this point really, C. J. I mean the outperformance of the company is now kind of a two year work product. I mean we had revenue performance greater than WFE for two years in succession. And I believe we’re going to enjoy the same performance benefits in calendar ‘15 and hopefully beyond.

We’ve got a lot of execution obviously. But certainly the set up is very healthy in that regards.

And the growth opportunity is defined principally by SAM expansion by the markets of deposition and etch going faster than the average, and the multi-patterning opportunity in DRAM and logic, both the 3D NAND transition and ultimately advanced packaging are kind of 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 inflection continues to be multi-patterning, second largest, 3D NANDs and both of those are heavy etch and deposition intensive process flows and device architectures. So I think the future is build 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 positioning products and services which is kind of demonstrated outperformance in the last couple of years is kind of building momentum at the proportion of WFE spending by us as the inflections.

So this year, I think the inflections see about 25% to 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 so 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 in linearity of spend, particularly on the foundry side given some of the commentary that it’s going to be first half weighted?.

Yes, the only conviction I had 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 builds 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 will what will be the case today.

And it is really difficult when you’re kind of nine months away and 12 months away to start a timing 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 C.J..

We’ll go next to Sundeep Bajikar 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 etch?.

Well, I think to the latter part of the question the kind of spacer-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 40 nanometer nodes because frankly we don’t spend a huge amount of time getting precise to one node, we’re kind of grouping 20 and 16 and 14 together because to a very large extent the equipment selection for the customers are relevant for kind of all three 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 kind of the 15% ends with about 210,000 and 220,000 maybe 230,000 wafer starts per month of capacity at 14, 16 and 20..

Great. That’s 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 a very early stages of planning a potential build in China?.

No, I think there is actually a meaningful investment 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 closed engagement with the customers and I think we are participating well in the spending as it’s going to flatten in the next year or so.

Relative to the big on unasked questions where does the government investment end up between device design, device manufacturing or even materials and equipment supply.

My sense is in those four areas, there is a meaningful investment level in the device manufacturing, but I think design is going to take a lot of that money, that’s my instinct today..

Thank you very much..

Thanks Sundeep..

We’ll go next to Patrick Ho with Stifel Nicolaus..

Thank you very much. Martin, maybe first off 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 comments you’ve highlighted in your previous Analyst Day?.

Yes, I think our position with EUV 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 plan 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 ‘17 models of the company. So it’s a ‘18 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 is this kind of like debate in the investment community around EUV and a very simplistic commentary on ASMI winning, Lam losing or Lam winning and ASMI losing. I think that dramatically oversimplifies things.

When we look at kind of the base EUV roadmap and the assumptions that we think are relevant in modeling, the impact of EUV on our business at the 7 nanometer technology node, we think kind of two to three passes is kind of a relevant insertion magnitude for EUV.

And if you want to be more aggressive, then maybe you’ll see in five or four or six or even eight. But even in that more aggressive scenario, what it does for our SAM and remember the context for our SAM. As 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’ve previously presented to you, there is a meaningful expansion of SAM opportunities for the company from first generation fabric FinFETs to the second 10 nanometers.

And we still believe that SAM expansion go into 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 may size the impact of couple of hundred million dollars.

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 a 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 in to 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 in new product releases which are kind of maturing in terms of demonstrating value and also kind of cost reduction to company, definitely there is a greater proportion of deposition products in our mix in December than in September, so that’s two 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 from 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 two-thirds of our system shipments and that compares with about the 45% level for December. So concentration of customers is definitely going to be 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% 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 the foundry?.

Yes, maybe I’ll start and then -- this is Doug, Mark, I’ll let Martin on balance. We saw decent amount across a lot of different programs, a lot of different customers, we saw spending at 28, we saw little bit of 20, and we saw some at 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..

I have nothing to add. 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. And 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, 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 question 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 are 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 one..

What you think my reply is going to be if you’ve asked me this question before? Yes, I’m not going to give that right now.

We are -- I think we’re looking at a strong March and I wouldn’t say it’s strong if there wasn’t kind of more than $100 million bucks or $150 million bucks or $200 million bucks, which is kind of the range that you are kind of talking about. But that’s as good as you can 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 a fact giving the concentration in March.

Should we expect the margin in March to also be below financial model because of the customer concentration issues? Thanks..

Well, Tim actually 45 isn’t below at least from a gross margin standpoint, the model. If you remember the ‘14, ‘15 model, 45% was the number. So, we’re kind of right there.

I think the directional color Martin was giving you as 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, great. Thanks..

Thanks Tim..

We’ll go next to John Pitzer with Credit Suisse..

Yes, good afternoon guys. Congratulations as well and thanks for letting me ask a 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 and ‘14.

One of your peers sort of talked about a 175K number exiting this year, which relative to your ‘15 expectation would mean a lot of that spending was already done.

I’m wondering you could just give us your review on that 175K number or help us understand how to put your end of ‘15 into perspective for the calendar year ‘15?.

Yes. Our end of ‘14 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 its order commentary versus ship commentary, I mean we’re all of that 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 at the industry level versus you guys perhaps gaining some share?.

Well, it’s relative to kind of the foundry performance for the company. It’s kind of a bit of everything. I mean it’s the level of investments as 20-nanometer expansion kind of occurs as first generation FinFETs get invested and committed broadly across the industry and there is this kind of 28-nanometer kind of play as well.

So we definitely get to kind of floats with the rising tide. It’s a very specific commentary from the company around SAM expansion through multi-patterning and also 3D device architecture and logic. And we’ve got a little bit of a share gain in the mix as well.

So, as I’ve mentioned a number of times I think the primary story for the company is kind of the SAM expansion story. The market share is definitely a bonus for us, but a very important part of what we’re investing to achieve. You had a second part to the question which I’ve forgotten I think, sorry..

Memory trends into the first half of next year, it sounds like we can set up some pretty good memory in the first half of ‘15?.

Yes, I think so. Remember we’re not going to give you first half, second half specifically..

Okay. Thanks guys..

Thanks John..

And we’ll go next to Jim Covello 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 billion this year at the top end of the guidance for next year, we’d be in that $35 billion plus range. Your financial model contemplates to certain earnings number; I believe that was for 2016, 2017 at 35 billion wafer fab equipment.

How different do you think your earnings might be in 2015 if we get to that $35 billion number compared to what you would have had in the model in 2016 and 2017 if you could help us out that’d be great? Thank you..

Yes..

Yes..

We both could give this good effort. All I was going to say and then feel free to add on, Martin, Jim is the time component of that model as well as just the level of top-line also..

Right..

This has maturated some new tools that gross margin gets better as we mature the product line. So there is a time component in addition to just volume, so it won’t be as good where we’d get that spending level earlier than the ‘16, ‘17 profile, should probably be partly in between the two models..

Yes, I mean I think in terms of the output of the company and the business done from the company, we’re kind of tracking ahead of ‘14 and ‘15 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 the very significant part of the ‘16 and ‘17 model.

And it’s not just about that 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 of multiple years. So, ‘16 to ‘17 really does mean ‘16 to ‘17.

So my advice relative to kind of modeling ‘15 is use the ‘14, ‘15 model that we’ve given you and flex it through the WFE assumption. That’s what I would do. And more or less, the 25% operating expense level that’s defined in ‘14 or ‘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 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 placement to shipments in short order is high and these days the conversion of shipments to revenues is pretty high as well..

Very helpful. Thanks so much. Congrats..

Thank you..

Thanks Jim..

And we’ll go next to Harlan Sur with JP Morgan..

Good afternoon and thanks for taking my question. Martin thanks for the preliminary WFE spending outlook for next year. I know you have talked about 32% 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 I’m going to be pretty miserable responding to that honestly. I think I had a version of that question on the last call. And we’ve kind of given you that answer for the ‘17 horizon, the ‘16, ‘17 horizon. And I’ll just kind of refresh that as a reference so everybody has it.

So in the context of a $2 SAM that we defined we’ve kind of said that $800 million plus or minus a 100 is in the kind of foundry logic space which includes device architecture and multi-patterning. 300 plus and minus 50 is in the DRAM space which in large part is a multi-patterning. 600 plus and minus the 100 is kind of NAND in large part 3D NAND.

And the advance packaging opportunity is 300 plus or minus a 100. And big part of that is obviously kind of 3D transition, three 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 questions is multi-patterning and logic in DRAM, since that device transition, and we will see a continued deployment of 3D NANDs, but I think calendar ‘16 will be a much stronger play than ‘15 for 3D NAND HVM.

I mean I think there will be a meaningful addition of 3D NAND capacity in ‘15, but I don’t think it will compare to the additions in ‘16. And the advanced packaging I would say is going to show up, but it’s probably again more of a ‘16 play in substance than ‘15 at this point. Hopefully that’s some color that you can work with..

Yes, I appreciate that. What are the interesting dynamics in the memory segment and that as you transition to these inflection technology nodes, there is actually a loss of capacity, right, for fixed area floor space. So obviously this is true for the migration to the 2x nanometer node for DRAM. I think we’re hearing as much as 15% capacity reduction.

Are you seeing the same impact on the NAND supplier as they transition to 16 and 15 nanometer point planar technologies? And 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 outputs 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 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 60,000 wafers our assumption for 2015 adds, but those adds just simply keep available capacity almost flat to kind of year-on-year. In the NAND space, my instinct is the conversation is much more relevant in the planar to 3D transition that it is in kind of traditional planar scaling.

I’m sure there is some elements, but I haven’t seen it show up permanently in conversations with the customers where it’s huge customer interface is in kind of planar to 3D transition in NAND flash. That’s a big one in terms of complexity of line layout and density of process chambers in a clean room..

Thank you..

Thanks Harlan..

And we’ll go next to Stephen Chin 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 is still uncertainty between this merger, between Applied and Tokyo Electron?.

Well that will be our plan. I mean we’re working really hard to take advantage of every opportunity including any opportunities provided by competitors being distracted in any way shape or form.

And if that distraction happens to a merger, if a merger is approved because integrating companies is not an easy skill to acquire it, it’s extremely difficult. We are going to work hard to exploit every single opportunity to grow this company and that’s a time expansion, Stephen and it’s a market share Stephen.

And then we’ll see how it plays out, but that’s the plan..

Okay. And then just I also have 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, if that is also in this long-term model. Thanks..

All of the share gain opportunities that [Jupiter] has talked about before are comprehended in the model. Say it differently, yes..

And we’ll go next to Mahesh Sanganeria with RBC Capital Markets..

Hi. This is Julian for Mahesh. Thanks for taking my questions.

Martin, we appreciate that you provided color for 2015 WFE, but 5% to 10% is going to be a broad range I know you don’t want to comment specifically on this at the movement, but we’re wondering can you talk qualitatively, which segments are going to grow towards the higher end of the range which segments are sort of below the range just qualitatively any quote will be helpful.

Thank you..

Well, I think it’s kind of very similar to the answer I gave few moments ago.

I think that planar scaling in NAND flash is clearly the majority of spending next year and that’s a very tight specs, 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 the 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 performance benefits associated with the shrink, but there is meaningful cost benefits to the shrink.

So, I think the motivation of customers to take advantage of an opportunity to invest to improve their financial performance with the cost benefits of scaling, it’s clearly a very important part of their commitment. And there is a pretty aggressive raise 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 and logic in DRAM. And 3D device architecture is very beneficial for the company and that’s valid in the logic space and it will be valid in the 3D 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 had a pilot into HVM in the kind of ‘16 time line..

Great. Thank you very much..

We have time for two 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 3D NAND piece, I’m wondering if you are seeing customers de-commit a little bit from what you expected earlier this year. I think previously you were looking on 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 year.

So just curious your thoughts on customer activity on 3D NAND..

Yes, I mean, I think all of our customers have kind of more or less said the same thing, right. I mean they have said they are working really hard to extend planar for as much as possible and as long as possible.

But I think they are all invested in the legitimacy of a 3D NAND transition and there is kind of commitment by all of them to developments and kind of deployments.

I had expected, if I kind of look at beginning of this year, I had expected the performance and the cost benefits of 3D device to have matured sufficiently by the end of ‘14, but the kind of market dynamics accelerated the stated timelines of all four customers that have kind of engagements. And it hasn’t kind of played out in quite that way.

And so I think the original commentary from customers around kind of two or three year timeline difference between first 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 it’s relevant for everybody.

So I think the HVM relevancy for everybody in 3D NAND is going to be a 2016 play.

Now all bets are off, if someone is in the marketplace with the significant performance and cost benefits and kind of deployments gets kind of pulled in which was my hypothesis before and maybe that cheers up and if it does, I think 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 3D NAND as your main SAM expansion drivers over the next couple of years. But you have also indicated that foundry spend is still fairly heavy at 20-nanometer right now and that the NAND productions are still focused planar extension.

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 kind of one-third of WFE being inflection based next year, I think the 28 nanometer investments is kind of supplements all and takes what already was in nodes that was in the 330,000 wafer starts per month range and makes it even a little bit bigger.

It’s a lot cheaper obviously for our customers to add 20-nanometer capacity than FinFET capacity. So in spite 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 Romit Shah with Nomura Securities..

Yes, 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?.

Romit, I would just redirect you back to the financial model which in ‘14, ‘15 shows 45% gross margin and roughly 20% 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 at December, it would imply that revenues for the second half of the calendar year come in about 100 million 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 the 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 in awful of trouble last quarter to say not precisely flat. And I think a 51-49 profile which is kind of the 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, in the growth of the company and positioning to exploit SAM expansion, market opportunities as they exist.

When we get these kind of ebbs and flows, and I realize the $100 million 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 and January is not worth of huge amount of anything to us, it’s important to be aware of, it’s important to be transparent on, our commitment to continue to try to do the best we can in that context, so..

Got it. Thank you Martin. .

Thank you for joining us today. Please visit our investor page at lamresearch.com for further information on our company and to hear a playback of this call which will be available later this afternoon. This concludes our call..

Thank you everyone. That does conclude our conference for today. We thank you for your participation..