Audrey Charles - IR Martin Anstice - President and CEO Doug Bettinger - EVP and CFO.

C. J.

Muse - ISI Group James Covello - Goldman Sachs Patrick Ho - Stifel Nicolaus Timothy Arcuri - Cowen & Company Stephen Chin - UBS Weston Twigg - Pacific Crest Securities Sundeep Bajikar - Jefferies Krish Sankar - Bank of America Merrill Lynch Mark Heller - CLSA Sidney Ho - Deutsche Bank Farhan Ahmad - Credit Suisse Mahesh Sanganeria - RBC Capital Markets Mehdi Hosseini - Susquehanna Financial Group Atif Malik - Citigroup Bill Peterson - JP Morgan.

Good day everyone and welcome to the Lam Research Corporation December 2014 Conference Call. At this time I would like to turn the conference over to Audrey Charles, Senior Director, Investor Relations. Please go ahead..

Thank you. Good afternoon, everyone, and welcome to the Lam Research quarterly conference call. With me today are Martin Anstice, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer.

During today’s call we will share our outlook on the business environment and review our financial results for the December 2014 quarter and our outlook for the March 2015 quarter. The press release detailing our financial results was distributed a little after 1 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 outlook.

A more comprehensive list of forward-looking topics that we expect to cover is shown on the slide deck accompanying my remarks. All statements made that are not historical in fact are forward-looking statements based on current information and are subject to risks and uncertainties that may cause actual results to differ materially.

We encourage you to review the risk factor disclosure in our public filings, including our 10-K and 10-Q. The company undertakes no obligation to update forward-looking statements. Today’s discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified.

A detailed reconciliation between GAAP and non-GAAP results can be found in today’s earnings press release. This call is scheduled to last until 3 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 hand the call over to Martin..

Thank you, Audrey. Good afternoon everyone and thank you for joining us today. We’ll start by speaking to our December quarter results, supplemented by a review of calendar 2014 millstones with comments on their relevance to the future growth and opportunities for the company.

We will then segue to provide an update to our outlook for wafer fab equipment spending in 2015.

Then more specific to Lam as we enter a New Year that marks the 35th anniversary of the company we want to take this opportunity to outline our focus for the year and provide some context for the multi-year out performance potential that exists as a result of the company’s vision and execution.

I will then hand the call over to Doug for a review of our financial and operational performance. The December quarter concluded with results in line with our expectation showing strength across all metrics and reinforcing our outperformance trend for calendar ’14. Within the quarter we grew our backlog by greater than 20%.

Additionally, our deferred revenue balance has increased, which we expect to continue with the shipment strength anticipated in the first-half of 2015. December was the sixth consecutive quarter of greater than $1 billion in revenues and concluded a record breaking year for the company with total annual revenue reaching $4.9 billion.

Our revenue growth rates we believe outperform the industry by a factor of two with profits expansion at more than twice the pace of our revenue growth.

The strong December quarter marks the end of a very rewarding year for Lam that featured the delivery of record setting performance, execution on our market share gain and SAM expansion opportunities that exceeded expectations and a high level of focus on increasing innovation in everything that we do.

In turn, we believe that the differentiated culture, values and management system of the company have enabled effective scaling necessary for making profitable growth sustainable.

In 2014, we made meaningful progress against our market share targets, introducing new products and services to participate in the market expansion opportunities of the various technology inflections, including multi-patterning, FinFET, 3D NAND and advanced packaging.

We believe we exited calendar 2014 with an inflection-based market share across the portfolio of deposition, etch and clean in excess of 50%, a double-digit increase compared with our total company pre-inflections baseline.

Our strong early position, combined with our unwavering commitment to customer trust and value enhancing collaboration positions us to continue to drive our theme of outperformance over the next several years.

Evidenced by our relative revenue growth these last two years and further underpinned by our March quarter 2015 guidance today we accelerated our achievements towards 2017 market share targets which call for a 4% to 8% increase in deposition market share, 3 to 5 percentage points in etch and 5 to 10 percentage points in clean.

As previously shared we maintained a 90% success rate across all plans, penetrations and defenses in 2014 and as such we believe that our corporate market share has increased by 200 basis points to the 42% level in calendar year ‘14.

At least as importantly we conclude that we increased our available market size from approximately 26.5% of WFE to 27.5% of WFE in 2014 through the successful introduction of new products. We’ve always judged our ability to lead and execute predictably to be one of Lam’s core competitive strength.

We feel that the results presented today again are evidence of very strong execution but even more noteworthy perhaps a demonstration of execution capability through a period when we are scaling the company real time, preparing for an even more exciting future.

For example last year we expanded our investments in fundamental research and C&F activities.

We added a significant number of resources in the factory and in the field; we ramped all manufacturing facilities to multiple shift operations, shipped a record number of systems on-time and at quality standards that are ever more critical to our customers, all while continuing innovate at perhaps the highest level in our history, delivering more than 20 new product and service offerings to our customers.

Delivering value to all stakeholders was and continues to be a strong theme and we believe a highlight for 2014. We collaborated closely with our customers and suppliers on innovations, designed to meet the considerable technical and economic challenges of the industry.

Notably we delivered products such as the VECTOR ALD Oxide deposition system targeted at extremely thin and uniform layers critical to advanced patterning and the Flex FX dielectric etch system necessary for critical high aspect ratio etch. Both products are experiencing unprecedented momentum in the marketplace.

For example our VECTOR ALD Oxide system output likely comes close to tripling in calendar 2005 year-over-year, driven primarily by patterning-related application wins. We augmented our strong earnings performance with the establishment of a $1 billion capital return program, which included the institution of our first ever quarterly dividend program.

We’re on track relative to our financial model and are very pleased to note that in recognition of this strong financial performance we were recently added to the NASDAQ 100 Index. WFE investment for 2014 was largely in line with the views we expressed through the year. We estimate spending by our customers in 2014 WFE was approximately $32 billion.

As we enter 2015 we maintain our outlook of a growth year for WFE investments.

The predicted trends in semiconductor consumption, including demand of the leading edge and the publicly stated plans of our customers we believe support this growth outlook, but as is customary I would add that this is predicated on a positive macro environment and healthy industry fundamentals.

Our initial 2015 market outlook is as follows for the key segments starting first with memory. In the DRAM segments we see continued strength in demand and a supply constrained market entering the year. Strong market demand continues to be driven by mobile and enterprise DRAM growth, pricing remains stable.

This year we see DRAM investments to be focused primarily on conversions to 20-nanometer. Projections are for DRAM bit growth of approximately 30% this year. In the NAND space we believe there will remain a healthy balance in overall supply and demand.

NAND ASPs as you are aware declined somewhat over the last quarter but is generally expected to stabilize over the course of the year, reinforcements of continued spending discipline across the industry.

We anticipate that NAND WFE investment will include planar conversions and 3D NAND capacity additions in 2015 with the 3D investment being more second half weighted and for the first time the spending level more or less equal to the planar capacity components. Our outlook for 2015 NAND supply bit growth remains in the high 30's.

Overall we're projecting 2015 memory WFE spending in the range of $14 billion to $15 billion. Now turning to the Foundry segment; investments in 2015 will be focused on FinFET enablements at a number of customers and some 28 nanometer capacity additions, responding to increased demand for these devices.

Our current view of foundry investment is that it will be up slightly from the healthy spending levels we saw in 2014 and again reasonably distributed across customers with consistency compared to fabless company stated growth forecasts.

We expect logic spending of $6 billion to $7 billion, more or less flat with 2014, reflecting a balanced and some slightly positive news on PC volumes and a sustained commitment to technology conversions with optimized reuse of the installed base by the customers.

Overall, we are modeling 2015 WFE in the range of $34 billion plus or minus $2 billion for the year. At this point our visibility for the strong first half is better than the second as you might imagine and we believe the scenario of a relatively balanced first half and second half is not unreasonable.

Of course we will know more as the year progresses and update you as appropriate. Now turning to our goals and objectives for the business; execution and in turn sustaining outperformance remain the guiding principles for Lam in the New Year.

We managed the company with a strong focus on the fundamental drivers of profitable growth, value enhancing products and services, scale and operating effectiveness.

In that regard our 2015 focus is clear; differentiate on customer trust and customer experience; execute on the opportunities already won to make sustainable platform of growth; gain market share with a focus on atomic level control in deposition and etch processes; prioritize employee organization and business systems development to enable efficient scaling; and deliver profitability requires to fund growth.

Putting the $2 billion market expansion opportunity, we described previously in context, LAM's standalone etch and clean product portfolio competed for 19% of WFE. Subsequent to the addition of the deposition portfolio we competed for 25% of WFE at the date of the Lam- Novellus merger closing.

On the three year anniversary of announcing that deal we have a product portfolio that will compete for approximately 28.5% of WFE in 2015 and we believe by 2017 greater than 30%.

The significant market expansion, combined with accelerated market share gains in applications critical to the inflections demonstrate what we consider very good progress with exciting upside.

Before handing the call to Doug I would like to express my genuine appreciation for the recognition Lam has received for our hard work and achievements over the last year. Lam was recognized for its leadership and collaboration by multiple stakeholders, including customers, suppliers, investors, industry analysts and peers.

This recognition serves as a powerful affirmation and acknowledgements for the 6,900 Lam employees who unite around the objectives of the organization to make all of this possible. On behalf of the entire Lam team I would like to express our appreciation for the support and opportunity given us in 2014.

We look forward to sharing our performance against our goals and opportunities with you again this year.

Doug?.

Thanks Martin. Good afternoon everyone and thank you for joining us today. As Martin mentioned in his opening comments calendar ‘14 was a year of fundamental outperformance for Lam Research.

The focus on market share gains and product positioning to take advantage of SAM expansion, combined with strong execution I think was clearly demonstrated in our financial results. We delivered record levels of shipments and revenue.

We grew revenue at more than double the rate of WFE growth and we grew operating income at more than double the rate of that revenue growth.

We generated $942 million in operating income for the year, which represented nearly 20% of revenue and we returned approximately $486 million to our shareholders through the initiation of our first dividend and our continued share repurchases.

Specific to the December quarter shipments, revenue and gross margin were in-line with the midpoint of our guidance and earnings per share were at the high end of our range. In the December quarter shipments came in at $1.247 billion, which was up 12% sequentially.

The combined memory segment made up 53% of total system shipments and this was up from 44% in the prior quarter. DRAM shipments were strong and contributed 43% of system shipments, which was up from 18% in the prior quarter. DRAM investments continue to be heavily focused at the 20 nanometer node.

NAND represented 10% of shipments and this was down from 26% during the September quarter. The Foundry segment remained steady in the December quarter, accounting for 32% of system shipments versus 45% in the September quarter.

Foundry shipments were relatively broad based with investment for sub 20 nanometer FinFET being completed by 28 nanometer outlays. The Logic segment grew and made up 15% of system shipments, and this was up from 11% in the prior period. We delivered $1.232 billion in revenue in the December quarter.

Revenue increased 7% from the prior quarter, marking the sixth consecutive quarter with revenue above the $1 billion mark. Gross margin for the period came in at 45.4%, essentially at the midpoint of our guidance and pretty consistent with our near-term financial model.

And as I previously mentioned you should expect some quarter-to-quarter variability in gross margin due to a number of factors such as product mix and customer concentration. I think our financial model remains the best way to think about our ongoing financial performance.

Operating expenses increased to $330 million but actually decreased as a percent of revenue compared to the September quarter. SG&A was flattish while R&D spending for items such as engineering program and associated materials for our next generation products increased.

We continue to make the strategic investment necessary to successfully position the company for sustainable growth and will adjust our plans based on our ongoing assessment of these opportunities. Operating income in the December quarter was $230 million with operating margin of 18.7%, which was 30 basis points below the midpoint of our guidance.

The tax rate for the quarter came in at 9%, and that compares to 18% last quarter. The December tax rate benefited from the reinstatement of the R&D tax credit in the United States as well as a more favorable jurisdictional mix of income. A tax rate in the middle teens would be reasonable for you to include in your forward-looking models.

Based on a share count of 174 shares earnings per share for the quarter were $1.19, and this was at the high end of our guidance primarily due to that favorable tax rate. I would like to remind you that the share count includes dilution from all three of our convertible notes at this point.

The net dilutive impact is 12 million shares on a non-GAAP basis. With the first of our convertible notes maturing in 2016 and given the current favorable interest rate environment we will be evaluating our alternatives to refinance this note.

Dilution schedules for the 2016, 2018 and 2041 converts are available on our Investor Relations website for your reference In the December quarter we spent about $46 million and took delivery of approximately 590,000 shares at an average price of roughly $77.

We also took delivery of 278,000 shares from the accelerated share repurchase that we executed during September quarter. And we made pretty good progress on the $850 million share repurchase authorization that we announced in April 2014 with greater than 40% of it completed during the first eight months.

And finally we've returned $0.18 per share in dividend distributions to our shareholders. Let me switch gears now and move to the balance sheet. We ended the quarter with cash and short term investments, including our restricted cash of $3 billion which was about flat compared to the September quarter.

Cash generation was partly offset by those capital return programs as well as capital expenditures. Cash from operations was $161 million, which was up from $141 million in the September quarter. With the increase in shipments account receivables and day sales outstanding grew slightly.

We also saw growth in inventory to support the levels of shipments expected in the next couple of quarters, and I just mentioned that I expect the linearity of the March quarter to be even a little bit more back end loaded, and therefore expect to see a little bit of lengthening in accounts receivables and DSO.

We exited the quarter with deferred revenue of $374 million and this excludes $53 million in shipments to customers in Japan which will revenue in future quarters. These Japanese shipments remain as inventory on our balance sheet.

Company non-cash expenses include $31 million for equity comp, $40 million for amortization and $30 million for depreciation. We incurred $61 million for capital expenditures in the quarter. CapEx was up in the quarter as we increased our investments in lab and new product development capability.

We exited the quarter with approximately 6,900 regular full-time employees. This growth of roughly 300 employees comes from supporting new customer sites, higher manufacturing volumes as well as increases in new product group development activities. So now looking ahead I'd like to provide our non-GAAP guidance for the March quarter.

We're expecting shipments of $1.450 billion plus or minus $50 million. We're expecting revenue of $1.370 billion plus or minus $50 million. We're expecting gross margin of 44%, plus or minus one percentage point. We’re forecasting operating margins of 19% plus or minus one percentage point.

And finally we forecast earnings per share of $1.30 plus or minus $0.07 based on a share count of approximately 174 million shares.

And I’ll just remind you that as we mentioned during the September quarter call, the March quarter is impacted by both a mix towards more new tools, that haven't fully moved on the cost curve yet as well as a heavier customer concentration. These items are contributing to the lower gross margin percentage.

I expect this to continue to and extend in the June quarter but I anticipate improvement in the gross margin percentage in the second half of the year. The right way to think about our financial performance over the medium and longer-term remains our published financial models. That concludes my prepared remarks.

Operator please open up the call for questions..

Thank you. [Operator Instructions]. And at this time we'll take the question from C. J. Muse, Evercore ISI. Please go ahead..

Yeah, good afternoon. Thank you for taking my questions. I guess first question, was hoping to get some clarity from you on directionality, I guess the shipments just going into Q2 and the second half.

Last quarter you talked about an uplift a quarter out, curious if you could provide some color on that front and what the key moving parts are and assumptions?.

I guess the answer to that question is once bitten twice shy.

I think one reason I did share perspective today CJ around kind of backlog is I think it should kind of tell you something about the trajectory of the company and the industry spending kind of out, that we have but I am going to kind of avoid a level of specificity at this point in time for the June quarter.

I do think and I think I mentioned in this in my prepared comments that the outlook for the first half is reasonably clear to us and pretty strong and there is still a lots of months left in the year for us to get really specific about the second-half. But I don’t think it’s unreasonable seeing we haven’t a short reasonable [ph] balance this year..

Okay, and I guess as a quick follow-up, Doug can - you talked a little bit about the up lift in OpEx, came in a little bit higher in the December quarter and then relative to the guide you know roughly $8 million to $10 million higher as well.

So just curious are these one-off programs associated with specific customers or is this a slightly new trend line that we should be thinking about going forward?.

No, I mean the right way to think about, kind of our levels of spending are what we perceived to be our sustainable level of profitability. Yeah, we were a little bit below that operating income but I don’t think 30 basis points is too much.

We are ramping up some of our R&D activity as I kind of indicated in my prepared remarks which is part of what you are seeing go on in the March quarter. But the right way to think about how we intend to spend money will be to be roughly consistent with financial models that we put out.

And right now we do have a little bit of gross margin headwind that I described but the spending level is still pretty well within those models..

I think as just to add, I think Doug’s prepared comments that kind of describes the addition of headcount, also need to be put in context.

And so I don’t spend a huge amount of time talking about this because I think across the industry it’s not a very easily comparable benchmark but for the company a revenue per employee trajectory is not an unreasonable reference for you to be thinking about.

And in fact through the December quarter and the March guidance that we have given today, the revenue per employee is getting better not worse.

So I mean I think the context for spending more money is the growth of the company is pretty significant and our focus as a leadership team is making sure we are effective doing that, before we start worrying about efficiency, which doesn’t mean we don’t try to do both.

But the customer trust exposure for getting a ramp wrong is not a risk we are biased to take - we are biased to get this effective so that we can kind of really, really kind of deliver sustainability for the story that we are telling here today..

Very helpful, thank you..

Thanks, CJ..

At this time we will take a question from Jim Covello of Goldman Sachs..

Great, good afternoon guys. Thanks so much for taking the question. Congratulations on the good results. Obviously you guys don’t talk about orders on the call but the shipments going up quite a bit would suggest order activity overall is healthy over the last couple of quarters.

Can you talk about any pushes or pulls in order activity overall, obviously your guidance for shipments is a little bit stronger.

Is there any movement within that one way or other in the various sub-segments?.

Thanks Jim for your comments at the beginning. I don’t think that this anything new for us to communicate. I think the industry generally saw a little bit of a push on some foundry investments, saw a little bit of a pull on some DRAM investments and the rest of the industry more or less kind of played out in the way we had expected.

I do think it is a little bit more concentrated shipment number for us from a customer perspective then even we were anticipating in the October timeframe relative to March ’15. But I think those messages are messages that are well communicated right now by the rest of the industry..

That’s very helpful.

And I mean I guess it’s always hard to distil the industry down, there a couple of things alone that we should be looking for, but is it fair to say that your memory margins are probably going to dictate, if we do get that balanced half on half, if memory margins stay high we would expect continued investments in that segment but if there was any deterioration there we would run the risk that the back half is a little softer.

Is that one key thing that you would be looking at?.

Yeah, I think sustained discipline is something we continue to see, is something we continue to hear from the customers and it’s something we continue to expect. But I think kind of history tells us if this gets ahead of itself in a significant way then there is always, at a minimum some kind of pause.

Where, we don’t expect that, we expect continued discipline in every segment of the industry and we kind of come into the year pretty tight almost everywhere.

And from, as best I can tell, the inventory levels and the industry commentary are, from our customers on inventory kind of supports continued discipline that I think at some level is a byproduct of a consolidated industry..

Very helpful. Thanks a lot and good luck..

Thanks, Jim..

And at this time will take a question from Patrick Ho with Stifel Nicolaus..

Thank you very much.

Martin, first in terms of overall memory spending in the year, do you see it biased first half versus second half in terms of DRAM, maybe potential be more first half weighted while you see DRAM flash more second half weighted or do you see kind of a balanced spending across both segments throughout the year?.

So I kind of have two answers to your question.

One of them is kind of from the bottoms up forecasting and planning, which is always a little bit limited, when you start kind of focusing on something six months from now and nine months from now but our bottoms up analytics would tend to support what you just described, which is a slightly stronger first half for DRAM and a slightly stronger second half for NAND.

But frankly when is all is said and done here I think we're likely to see a little bit of strengthening in the second half but time will tell, that may play out, it may not play out but the basic premise that you just described.

And I guess the only other thing I'd supplement with is perhaps compared to the commentary from the company three months ago, where we articulated we expected planar spending in NAND flash to exceed 3D.

We're kind of making the statement today that as best we can tell it looks more likely to be equal and the planar investment in NAND flash is biased the first half and the 3D investments in NAND flash is biased the second half..

Great, that's really helpful. Maybe and my follow-up question, more for you Doug in terms of just kind of OpEx levels and how we look at the longer term business model. One of the areas you talked about at your Analyst Day was building out your installed base business and the services front.

With IOT kind of gaining momentum a lot more verbiage out there, how do you see, I guess your growth in terms of that business segment and in terms of the OpEx that maybe needed to support the growth over the next few years..

Yeah, you may remember Patrick we talked about or I tried to talk about our objective with the installed base business is to grow at faster than the new equipment market, right. So there was a graph where I showed that.

Consistent with that we are growing a little bit of spending in that business group this year over and above what was there last year to go try and take advantage of those opportunities. So that is part of the investments when I talk about opportunities that are out there.

We do believe we see opportunities to generate returns and the spending is up there a little bit..

Great. Thank you..

Thanks Patrick..

At this time we'll take the question from Timothy Arcuri from Cowen & Company..

Hi, guys, thanks. I jumped on here a little bit late, but my first question is around the inventory. Doug if I look at, just look at days, days are up to like 125 and I am wondering if that portends some view on June.

I know you don't want to say too much about June, but I am wondering if that portends some view that maybe June shipments are going to be up?.

Yeah, I am not going to give you kind of what June looks like. I did describe purposely in my prepared remarks that we expect shipments to be strong in the next couple quarter, without giving you a direction from March to June. And we've built inventory in anticipation of that.

So you should expect that those inventory levels come down in the back half of the year likely, but expect us to update that on a quarter-by-quarter basis, Tim..

Okay, and then I just had two more quick ones.

First of all Doug, just can you give us some sense of what you think the mix will be for shipments in March and then I wanted to know also, if all things equal, so let's just say shipments were flat in June, I just wanted to try to isolate the customer concentration issue that's bringing down margins in June.

Would margins come right back up to the model in March, would margins come right back up to the model in June, absent this customer concentration issue. Thanks..

Yeah, so I think directionally in the March quarter, memory shipments are going to be up as a percent, logic is probably flattish, maybe down a little bit and I think foundry will be down a little bit, when you put all that together and by the way those are system shipments.

I kind of indicated, I think the customer concentration piece continues into the June quarter a little bit and then my expectation is in the back half of the year the gross margins move backup from where they are. It’s hard to call things move around Tim, as you know in this business.

But as we sit here today I think we are going to continue to see some concentration in June, might be a little bit less than it is in March but this stuff moves around quite a bit..

Thanks so much..

Thanks Tim..

At this time we will take a question from a Stephen Chin with UBS..

Thanks, hi Martin and Doug, nice results last year too. I had a follow-up question on the 3D NAND spend in the second half of the year.

Just curious if you think the spend on 3D NAND in the second half will be mostly driven by one customer, or you think it’s equally spread across the customer base? It’s been a long time since we have seen any meaningful 3D shipments too, I guess or starting [ph] customers, just curious on the diversity you are looking at?.

I would say there is clearly an expectation that one of the customers, well publicized is kind of in the lead from kind of an investment timing perspective. But we expect this year to have kind of a diverse spending and anticipate all four NAND flash memory companies participating in a meaningful way.

So I expect the spending to be more distributed in ‘15 than it was in ‘14 and just to kind of give you a little bit of a number on capacity we expect to be shipped in.

So I think in the last call I mentioned that we were thinking that we ended the calendar ‘14 year with approximately 60,000 wafer start, 65,000 wafer start, of shipped-in capacity 3D NAND.

And as best we can tell that more or less kind of played out as anticipated and we think by the end of ‘15 that 130,000 wafer starts plus or minus 10 is not a bad kind of reference point to have..

Okay, thanks for sharing those numbers. So it sounds like if Lam were to outgrow WFE again this year, it sounds like 3D NAND spend in the industry is strong in the second half of the year.

That’s probably one of the main ways that you outgrow the industry this year, does that - seems like that’s one of the messages?.

Well from an inflection point of view the 3D NAND inflection is not insignificant, as we’ve talked about before and from a timing point of view it plays a pretty meaningful role in the year-over-year comparison. But that’s also true by the way for the multi-patterning transition as well.

I would say the only inflection that doesn’t kind of really get traction of substance to have kind of a material impact on the kind of outperforming characteristics of the company is advanced packaging, which isn’t to say there isn’t a positive story, because I actually think that the advanced packaging revenues of the company have [indiscernible] kind of doubling year-over-year but the scale of that compared to multi-patterning and then the 3D NAND transition is kind of obviously very different and meaningfully lower.

So yeah, I think our performance is a commentary on the 3D NAND and FinFET and multi-patterning transitions in DRAM and logic both, and it is a commentary on market share momentum in the company which we are, I think accelerated, it doesn’t feel like it’s slowing or stagnating, it feels to me like the market share momentum is actually accelerating.

This is kind of something we’ll work very hard to sustain..

Thanks, Martin..

Thank you..

At this we will take a question from Weston Twigg with Pacific Crest Securities..

Hi, just wanted to follow-up on the last comment related to DRAM multi-patterning as being one of the drivers.

Wondering as the industry works through the 20-nanometer conversions and add the additional etch tools for multi-patterning, is there some risk to etch intensity for DRAM in the following years as they kind of - as maybe the incremental etch opportunity slows down given that they would have more etch tools for use?.

I think the reality is that even after the investment that we’ve described in calendar ‘15 and our best estimate is approximately 400, maybe 400 to 440 or 410 to 430, hard to be specific at this point, is the kind of 1,000 wafer start conversion, approximately of the industry.

There is much more than that at the end of calendar ’15, still in need of conversion to the 20 nanometer technology node. So to the extent there is a risk in the form that you are describing it I don't think it shows up in calendar '16.

It has the shortest showing up in calendar '17 but a lot is going to change between now and '17 relative to the roadmap of DRAM. So it's not something that's a particularly prominent kind a risk factor for us in the scheme of things..

Okay so in other words the same drivers that you see today, the 3-D NAND, FinFET, the DRAM multi-patterning, you expect those to be pretty consistently strong over the next two years?.

Yeah, I mean I think the context to one of the earlier questions is the discipline and the balance, the supply and demand balance, but we had a number of years to demonstrate the performance on that. So I think we're getting to a point where trusting that is the legitimate assumption it is much more balanced..

Great. Thank you very much..

Thank you..

At this time we'll take a question from Sundeep Bajikar with Jefferies. Please go ahead..

Hi guys thanks for taking my question.

First just following up your comments on heavier mix of new tools expected in the first half, can you say which end market these new tools are targeting?.

Martin referred to 20 new tool introduction last year, I mean it's that. So it's obviously broad based.

If I had to give you a little bit of color it's probably more biased towards our deposition product group then it is the etch product group in terms of new tools that are coming out, given some of these inflections that are happening there is a little bit more going on there..

Okay great. And then a quick follow-up on foundry.

Are you continuing to see activity in the 14 nanometer node, and how much 14 nanometer capacity do you expect to see exiting the year?.

So the answer to the first part of that is yes. And I said before we are not kind of distinguishing the 14, 16 capacity additions from the ‘20 because there are so much of an overlap of the equipment portfolio, 90% to 95% of the equipment is kind of in a track [ph] from the last planar node to the first FinFET node anyway.

So our assumption is that we exit 2015 with somewhere between 200,000 and 220,000 wafer starts of combined capacity 2016 and '14..

Thank you so much..

Thanks Sundeep..

And at this time we'll go to Krish Sankar with Bank of America Merrill Lynch..

Yeah, hi thanks for taking my question. And thanks for the color on the SAM and share gains that you guys highlighted for last year. Two quick questions, first one, Martin in the past you’ve spoken about a third of the WFE spending this year might be for tech inflection.

Curious if that is still the view or do you think that would change given the challenges people are having at FinFET and 3D NAND? I also have had follow-up after that..

No, I don't think there is a fundamental challenge. Instead of maybe 33, maybe we end up saying it’s 31 or something like that, or 32 is the byproduct of the 3D NAND kind of assumption set, kind of delaying from '14 to '15 a little.

But the fundamental message, I think is exactly same today as it was before and the kind of end gains to the extent we are describing one of calendar '17, the 50% kind of spending proportion on the inflection is still the assumption we're running with..

Got it. That's very helpful. And then a quick question for Doug. What is your mix of on-shore versus offshore tax and what do you think is the right amount of cash to run the business? Thank you..

Krish, it's somewhere between 20% to 25% onshore, as we sit here today and obviously then 75% to 80% offshore. And as always we're thinking through how to fund that $1 billion capital return program and I previously said we can fund that with the cash that we have in that program. I think it's a pretty significant program in terms of returning cash.

And once we get through the current authorization you will hear us talk about what are our plans as we go forward. So pretty comfortable with the level of cash. It's been pretty flat in gross terms over the last couple of quarters and that's because we've been returning cash to shareholders..

Got it. Thanks a lot, guys. Thank you..

Yeah, thanks Krish..

And at this time we'll take a question from Mark Heller with CLSA Equity Research..

Thank you for taking my question. Congratulations on the strong results. Martin I was just wondering if you could update us on the DRAM, the outlook for the DRAM sector in terms of new capacity additions this year. I think previously you were talking about maybe 50,000 to 60,000 starts. I am just wondering if that’s still the case for this year..

Yeah, I think maybe we would probably say more 60 than 50, but I think a number of customer have said most recently as well that addition frankly does not do more than keep the available output kind of constant because in the technology transitions from the 3x range to the mid-20 and to 20 there is kind of loss per kind of square foot of clean room in terms of output.

So the assumptions that we are making is the investments of 60,000 wafer stocks or so is maybe it’s a little higher, maybe it’s 60-70, that range but it’s not a 100,000 wafer stocks of additional or anything like that. It essentially kind of keeps the output potential constant year-over-year..

Got it. And then it looks like the shipments to Korea picked-up quite a bit during the quarter. I am just wondering if that’s more weighted to foundry or memory spending. Thanks..

In the interest of not being specific to any one customer we are going to kind of elect not to answer that question directly please..

Thanks..

But Mark you can just listen to what I said in my prepared remarks and kind of get some level of indication from there..

At this time we will take a question from Sidney Ho with Deutsche Bank..

Thanks for taking my question. So a question on the foundry. I think I know you talked about visibility in the first half is good.

How’s your visibility in the second-half? And if a customer decides to go with FinFET this fall do you think there is enough capacity to handle that right now or do you think more equipment needs to be ordered from here?.

Well, that’s a little hard to answer without kind of getting into a lot of details in terms of a demand statement for those devices. I guess the headline for us is we kind of trust the substance of communication from the customer.

I think everybody is saying that in the interest of keeping everything in balance and so what we are communicating is our best understanding of their investment plans, which as I said it’s in the kind of 200,000 to 220,000 wafer starts installed capacity by the end of this calendar year for 2016 and ‘14 combined. So.

If the customer is underestimating the demand for that device then I think there will need to be more investment. It doesn’t show to me like there is risk, that they are over investing it. I think it’s pretty reasonable commentary on outlook as best we can tell..

Okay, and a follow-up, maybe this one is for Doug, you talked about the customer concentration in Q1.

Does it happen every Q1, is that - it just happened that the stars are aligned this quarter, or you think it’s a byproduct of a more concentrated customer base?.

I don’t know if there is seasonable profile to it per se, Sidney. I mean this is more concentrated then I can recall seeing it in the two years I have been with the company. So I think this is over and above where you would normally expect it to be..

Okay, great. Thank you..

Thanks, Sidney..

At this time we will take a question from Farhan Ahmad with Credit Suisse..

Thanks for letting me ask a question and congrats on a great quarter. Martin, one question on the 2015 WFE, at the last quarter earnings call you had indicated WFE to be up 5% to 10%. Now it seems you are indicating it up flat to up 13%.

Just wanted to understand why you are broadening the range? What are some of the factors that have kind of increased the variability in 2015?.

Yeah, I don’t know that I kind of read too much into it. I mean I think kind of our headline is the outlook that we described in percentages three months ago is not so far away from the outlook we are describing for dollars.

And it’s kind of pretty customary for the company to start the year with a plus or minus $2 billion and it’s kind of out in the middle of the year now in that range to plus or minus a $ 1 billion.

So we’ve just kind of done our best to translate the outlook of three months into a customary form of guidance I think what has changed is from the kind of public disclosure of the customer, some kind of foundry spending expansion and kind of DRAM more less the way it was and commentary from the micro-processor space of the importance of reusing their overall strategies.

But the 34 plus or minus two is just a commentary on we’re at the beginning of the year and lots can change and we are doing our best to tell you what we think the range is..

Got it, thank you. And then one question on NAND. You mentioned the spending on the planar versus PD should be about balanced this year. I wanted to ask about the planar spending this year.

How much of the capacity do you think will go through a planar node transition this year?.

Again, I've come to appreciate that, that level of specificity gets a little bit close to the sensitive disclosure of the customers, given there are only so many. So if you may allow me I'm going to kind of defer that question to our customers..

Got it. Thank you. That's all I have..

Thank you..

At this time we'll take a question from Edwin Mok with Needham & Company [ph]..

Hi, thanks for taking my question and congrats for a great quarter. So first on the SAM expansion commentary, Martin you had - that you believed your SAM would expand about 30% of WFE by 2018.

I guess two parts question, first is how much are you baking in, help [ph] greenfield 3D NAND investment versus converting excess planar to 3D? And the second part to it is does that factor in some kind of adoption of EUV?.

Well, first of all we said 2017, not '18 relative to last part of your question, EUV we don't believe has any relevance of substance in 2017 timeframe by virtue of the stated plans of the customer not to have an EUV kind of adoption until kind of the 7 nanometer technology node at the earliest.

And I think we kind of gave you some color on that the last quarter.

Relative to 30% as being a legitimate target for our company, from a proportion of WFE, that's available to us, there of course is some assumption associated with how the customer builds 3D NAND capacity, but we are not assuming a very grand, I would say conversion of kind of the planar installed base that sits at more than a million wafer starts from their capacity today.

So and I think there is a lot of learning still in the industry to kind of know quite what 3D devices get targeted to in terms of end markets and how fast that conversion will play out. But we haven't kind of - we haven't assumed a grand conversion of the installed base.

We're trying to estimate as best as we can an efficient way for the customer to establish that capacity.

So we tend to bias a conversion assumption rather than an addition assumption for the industry generally, but as you know every customer is slightly different relative to answering that question and there are some that are very focused on addition, and there are others that are very focused on conversion..

Great that's very helpful. And then just quickly touch on the clean side, you guys have a new product, just any kind of update on how that's coming along.

And as that product assuming that's still later year part of this year which I think was your target right, where do we expect first initial adoption, is it foundry DRAM or NAND?.

So, frankly three months is a really short term period of time in the context of kind of new products and new markets.

And I don’t have so much more to say than I did - today than I did in October and maybe the one exception is for the kind of new product, the ES [ph] product we have had kind of repeat order of the penetrations that we made for one customer which is, I think, a meaningful statement of validation, but it isn’t everything we need and so what we need is kind of an industry, to kind of make that choice as well as a couple of customers and this is the year where I think the decisions of the customers will define the legitimacy of this strategy and plans of the company.

I think the company has done a really good job in delivering the productivity differentiation and getting us process capability for a front end of line clean growth opportunity.

But just because the company does, it doesn't mean the customers are going to be invested in that selection of that adoption and we're doing our best and as you said this is the year that it kind of really plays out one way or the other..

Okay, operator we have time for two more questions today..

Thank you. The next question will come from Mahesh Sanganeria with RBC Capital Markets..

Thank you very much. I had a question on the foundry commentary you made that spending is up flat to up slightly. TSMC guided for 20% increase in CapEx. So I'm assuming other customers are probably reducing the spending.

Can you talk about where the cut is coming from, is that other customers, is it in the FinFET area or they’re reducing the investment in mature technologies?.

I don’t know that I can easily answer that question. I mean we are assuming that all of the foundry customers are making investments in this calendar year and we’re assuming that at least two-thirds of the wafer starts in the industry are getting added at the 14, 16-nanometer technology node.

And as you’ve heard from two of those customers I think the 28-nanometer demand is not insignificant. So that’s kind of in the mix as well..

Okay, so my follow-up I just want to revisit the financial model you presented at Analyst Day mostly in terms of revenues at $32 billion, you were targeting 5.1. I think that was probably towards the end of 2015 and I don’t think we have the right number - we don’t have the precise number for 34.

So according to that model where will you be at $34 billion revenue?.

Yes, Mahesh I am not going to give you a new model, as I sit here right now but I will give you a little color around it. The one thing to think about is there is a level of WFE context in the model. There is also a time component to the model right, because there is a maturation of some of these new tools that are coming out.

Both of those items are very important to the attainment of the financial model and if you recall we kind of showed a $5.6 billion, ‘16-17 model that got a percentage point better than the ‘14-‘15 model and we are probably somewhere in between each of that once we get through some of these tool maturations but we need the time to get through those..

Okay, that’s helpful. Thank you..

Thanks Mahesh..

Our final question will be from Mehdi Hosseini with SIG..

Yes, thanks for squeezing me. Martin, going back to your DRAM bit commentary, what are the key assumptions for that 30% bit growth and I say that because earlier this morning Hynix talked about 25%. I think Micron is also talking about 25% bit growth.

So I am just trying to better understand the underlying assumption in your view? And I have a follow-up..

Yeah, I mean the assumption is when we kind of add up the collective disclosure from customers and kind of what’s available to us kind of, from being kind of inside of the industry and participating kind of real time, that’s the best assumption we can give you..

Okay, and then for the purpose of modeling, Doug how should I think about working capital requirement, how does the inventory changes from the December into the March quarter?.

Yeah, just the fact that the denominator goes up even if inventory is flattish, which it probably is going to be. You will have inventory turns and days come down. Directionally inventory is going to trend down, I think as we go through the year, as we’ve built into this level of shipments.

So a little bit of color for you to think about as you model it..

Okay, thank you..

Operator, I think actually we have time for a couple more..

Okay, thank you. At this time we’ll move to Atif Malik with Citi. Please go ahead..

Hi, thanks for taking my question.

On the $34 billion WFE outlook, Martin can you talk about the swing factor that can take it to $36 billion or the high end of the range? Which segment can take it to that range…?.

Yes I guess anyone can in theory. I think the 3D NAND conversion is more likely to influence in a positive direction than anything and that’s really a statement on the size of that transition and the implications of it and obviously the degree of uncertainty that exists in terms of kind of market penetration of that device at this time.

So I do think kind of FinFET conversions can accelerate, if there is kind of momentum that it is in excess of stated plans in terms of going from planer to a FinFET device, but it feels to me like the upside is kind of greater in memory than foundry logic and greater in NAND than DRAM.

But I guess in theory all of them can move in a positive direction..

Got it. And then on the timing of EUV insertion, one of the foundries has taken a pilot production, little tools [ph] and just curious if anything has changed to your thinking in terms of different node….

Yeah, nothing really. I mean we’re still thinking 7-nanometer as kind of the earliest and the only thing that I read in the last kind of three months kind of reinforced the complexity of the infrastructure around the EUV process itself as being kind of significant component of that question.

And it didn’t look like it got any easier, it looked like it got more difficult as best I could tell. Okay, Harlan you are up. Thanks Atif. Harlan you are the last guy today. Operator, next question please..

Thank you. The final question will be from Harlan Sur with JPMorgan..

Yes, hi, this is Bill Peterson calling on behalf of Harlan. Thanks for sneaking me in and congrats on a good December quarter. I want to clarify a few things relative to your commentary on logic, you mentioned about re-using.

In fact to understand what will be different in logic relative to the foundries and the nature of that, some logic customers are already at FinFET and a lot of foundries are not, if you could provide some color on that, that would be very useful, thanks..

You know, I think really it’s kind of the age old, relative ease and I don’t think it’s easy but in relative terms it probably is, you know with the amount of kind of die concentration that exists in the microprocessor fab compared to the distributed die and customer reality of the Foundry, the conversion cycle really kind of is a big challenge.

And so I think that’s kind of principle reason that there is an emerging trend of some substance to conversion in foundry but it does not compare to what is available to the microprocessor world..

So in terms of implications is that there should be more and more upgrade or what does it mean in terms of how do we think about it for implications for Lam and other equipment vendors?.

Yeah, I think it can be, when people do conversions, it can be upgrades from a hardware perspective and sometimes it is nothing because they find a way to make the hardware work and there is a process modification and you know with rare exception this industry doesn’t get paid very much for process.

It gets paid for the hardware that gets sold into a fab even though perhaps the value contributions in that is really made is the process contribution but that’s a long story..

Great. All right, thank you operator. That’s all we have time for today. Thank you for your participation and we look forward to talking with you again next quarter..

Thank you..

Once again this does conclude today’s conference call. Thank you for your participation..