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

James Covello - Goldman Sachs Krish Sankar - Bank of America Merrill Lynch Patrick Ho - Stifel Nicolaus Timothy Arcuri - Cowen and Company Farhan Ahmad - Credit Suisse Weston Twigg - Pacific Crest Securities C.J. Muse - Evercore ISI Harlan Sur - J.P.

Morgan Romit Shah - Nomura Edwin Mok - Needham and Company Mahesh Sanganeria - RBC Capital Markets Jagadish Iyer - Piper Jaffray.

Good day and welcome to the Lam Research Corporation June 2015 Conference Call. At this time, I would like to turn the conference over to Audrey Charles. Please go ahead..

Thank you, operator. 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 June 2015 quarter and our outlook for the September 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 Web-site 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 disclosures 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 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 Web-site. With that, I’ll hand the call over to Martin..

Thank you, Audrey, and good afternoon everyone. We would like to thank those of you who attended or listened to our recent Investor and Analyst Event on July 14th in San Francisco. During that meeting, we described the drivers of our sustainable outperformance, reviewed our perspective on the industry, and updated our long-term financial model.

As that update was just two weeks ago, we will keep our prepared comments today brief starting first with a review of our June quarter and fiscal 2015 results followed by a brief recap of key messages we shared with you during our Analyst Event, then providing an update on our near term industry outlook including with a reinforcement of the unique SAM expansion story for Lam.

The June quarter reported results were in line with our expectations at or above midpoint for all guided metrics, and for the second straight quarter, we set records for revenue, shipments, and operating income.

The June quarter marked the end of our 2015 fiscal year, a year where we surpassed the $5 billion level for shipments and revenues and generated more than $1 billion in operating income.

We demonstrated our commitment to long-term profitable growth and returned value to shareholders with a 16% growth in net income fiscal year-over-year and $630 million or three times increase year-over-year of returned value to shareholders through buybacks and dividends.

It's important to note that the substance of the outperformance trends that we're demonstrating is based on technology and productivity leadership, strength and execution across the entire organization, the values and culture of our Company, and the support we have earned from our customers through our focus on customer trust and collaborations aimed at helping them solve their most difficult challenges.

As stated before, our opportunity to continue the outperformance trend is driven by a broad-based market participation in the now well-understood deposition and etch-intensive inflections of multi-patterning, 3D device architecture and advanced packaging.

Focusing on one element of that headline today, at our recent Investor Event we discussed how the patterning market for Lam likely grows through the 5-nanometer technology node with or without EUV. An important dynamic within this segment is the increasing relevance of spacer-based patterning.

Spacer-based quadruple patterning as we illustrated in our Analyst Meeting can increase the number of deposition, etch, and clean passes up to five times driving the need for process variability control and cost reductions.

To address these challenges in logic and memory segments both, we are focused on delivering technically enabling capabilities at high levels of productivity such as the VECTOR ALD Oxide and Kiyo with Hydra technology products.

With these offerings, we've been able to establish a very strong and we believe sustainable number one position in etch for multi-patterning and grow our ALD share dramatically in just a couple of years.

With our assumption that approximately 60% of old foundry logic patterning steps are spacer based at 7-nanometer, our leadership in this segment is illustrative of the value we have already been able to deliver to the customer, and more importantly the opportunity that lies ahead.

Now turning to the near-term industry update, with the second quarter of calendar 2015 concluded in line with our expectations, we continue to see discipline in the industry with recent puts and takes being directionally consistent with movements last quarter, i.e., strengthening in 3D NAND investments, foundry, and logic both slightly down.

Investments by our customers is supporting a very strong September for the Company as evidenced by our guidance today.

Although it is way too early to guide 2015 December quarter shipments, a September outlook that is materially higher than most expectations, ours and yours, our comments at the recent Analyst Event combined with the last couple of weeks of general industry tone suggests we will likely see a December quarter with shipment levels lower than our 2015 March quarter.

In many respects, this is illustrative of the variability of business we described as the new challenge of the consolidated industry as the plans and investment decisions of any one customer or segment presents a more immediate and more significant short-term effect than ever before.

With strong mid and long-term fundamentals for the Company and building deferred revenue balances in the first half of this year, we now expect slightly stronger revenues for the Company in the second half of 2015 compared with the first half 2015.

Overall, we maintain our view for calendar 2015 WFE investment of $34 billion, plus or minus $2 billion, and as is customary, we would add that our view is predicated on a healthy macro environment. We are encouraged by the opportunity we see for Lam in the industry.

Investments appear rational across segments and are largely consistent with our understanding of capacity needs and reasonable assumptions on rising capital intensity.

From our perspective, there are positive and broad-based emerging indicators for demand at the leading edge with increased device designs, tape outs, and new product penetrations, plans to take advantage of targeted performance and cost benefits available from latest device architecture and process flows.

In the DRAM segments, market's demand continues to be driven by mobile and enterprise DRAM growth. DRAM investments, which as we have said, are biased for the first half of calendar 2015, are very efficient and focused primarily on technology conversions to 20-nanometer.

Investments appear to essentially keep the installed base wafer start level flat year-over-year with strong segment participation for Lam Research. For NAND, 3D NAND momentum has continued to increase through the June quarter.

As we recently stated, we now expect that shipped capacity for 3D NAND will be approximately 150,000 wafer starts by the end of calendar 2015 with perhaps slightly more than half this amount being qualified for HVM device outburst. Overall, we anticipate 2015 memory WFE spending at approximately the $16 billion level.

For the foundry segment, we continue to see that investments are focused on FinFET enablement at a number of customers. The previously noted 28-nanometer capacity additions this year continue to be a meaningful part of the foundry segment investments with healthy end demand.

We reiterate our view that foundry investment will be slightly lower than the spending levels we saw in 2014. We expect logic spending of between $6 billion and $7 billion, slightly down from 2014, reflecting a sustained commitment to technology conversions with optimized reuse of the installed base.

As noted last quarter, strength in demand for image sensors driven by mobile communications and share gains for Lam has provided some upside in the logic segment for us.

Today, significant device technology migrations are fundamentally enabled by the most advanced deposition and etch intensive inflections of multi-patterning and 3D architecture which we aim to extend and make more productive for our customers each and every day.

As we outlined at our recent Investor and Analyst Event, these inflections together with advanced packaging are driving what we now see as a $3 billion plus multiyear market expansion for Lam with multi-patterning and 3D NAND being the biggest opportunities, each representing approximately 40% of that total.

We believe that continued execution of Lam combined with our market-leading deposition and etch positions in these segments is an undeniable relative and accelerating growth opportunity for the Company through 2018.

As we enter the second half of 2015, we are excited about the long-term opportunities ahead and sufficiently confident in our ability to execute to recently update our growth targets and long-term Lam financial model indicating the potential for $8 plus annual earnings per share within the next three years.

It is an exciting time in the industry and from the perspective that we have, Lam is better positioned than most for growth through multiple segment inflections over a multiyear period. Of course, being in a good position is not enough.

Our focus on contributing to the long-term success of our customers must continue to be paramount, our ability to execute our opportunity only possible with commitments and hard work of more than 7,000 Lam employees worldwide who make this a special and rewarding place to work.

I would like to take this opportunity to thank them all for their commitments and continued focus on industry excellence. With that, I'll now hand the call to Doug..

Okay. Thank you, Martin, and thank you to everyone for joining us on the call today. We have what I think are some strong results to share with you today for both the June quarter as well as for our just concluded 2015 fiscal year. So I'll go ahead and just get started going through the numbers. It's an exciting time for Lam Research.

We delivered record levels of shipments, revenues and operating income for the quarter and for the fiscal year. Each of these metrics achieved double-digit growth in the June quarter compared with the June quarter of last year. In the quarter, we performed at or above the midpoint of guidance for all of the metrics.

And for the fiscal year we hit some impressive milestones crossing $5 billion in both revenue and shipments for the first time in our history and generating more than $1 billion in operating income, again for the first time. We believe these strong results and milestones clearly demonstrate solid execution against our opportunities.

Our upward trajectory of shipments continued in the June quarter with shipments coming in at $1.616 billion, which was up 8% sequentially and above the midpoint of the guided range. And as I just mentioned, shipments for the fiscal year topped the $5 billion mark.

As we expected coming into the quarter, memory shipments were flattish in dollar terms and declined slightly in percentage terms during the quarter. The combined memory segment paid up 60% of total system shipments and that compares with 67% in the prior quarter.

DRAM shipments represented 37% of system shipments, which was down from 45% in the prior quarter. DRAM shipments were largely being driven by 20-nanometer conversion spending. NAND and other non-volatile memory accounted for 23% of shipments, which was flat with 22% in the March quarter.

NAND investment in the quarter was primarily directed towards investments in 3D NAND. Shipments to our foundry customers were at 26% of system shipments in the June quarter, which was up a little bit from 24% in the prior quarter. Foundry spending in June was a mix of FinFET investment as well as 28-nanometer capacity spending.

The logic and other segment had a nice uptick accounting for 14% of system shipments compared with 9% last quarter. Strength here came from continuing investments in CMOS image sensors. Record revenues for the quarter were at a level of $1.481 billion, which was an increase of 6% compared with the March quarter.

For fiscal year 2015, the revenues of the Company also exceeded the $5 billion mark for the first time. You've consistently been hearing us talk about our strong position around the technology inflections and our differentiation in the marketplace. I think you can absolutely see that position reflected in our shipment and revenue outperformance.

Gross margin came in right at the midpoint of guidance at 45.5%, and as we shared with you in the past, we expect to see variability in gross margins on a quarterly basis as a function of a number of factors such as business volumes, product mix, particularly our newer products where we're still moving down the cost curve as well as relative levels of customer concentration.

Operating expenses in the June quarter grew a little bit to $355 million but decreased as a percentage of revenue to 24%, which was down from 25% in the March quarter. In the quarter, 63% of the OpEx spend went to R&D which was about the same level as last quarter.

The top priority of the Company is to continue to fund R&D programs and infrastructure to enable the future growth of the Company. These ongoing investments are crucial to being ready for the current as well as next set of technology inflections.

R&D is funding development of capabilities like our Flex G Series dielectric etcher, our VECTOR ALD Oxide systems as well as our Kiyo conductor etch systems. Operating income in the June quarter was also at a record level coming in at $319 million, which was up over 15% from the prior quarter.

Another first in the history of the Company, as I mentioned, operating income generated in fiscal year topped $1 billion. Operating margin in the quarter was 21.6% which was up from 19.9% in March and again above the midpoint of the guided range.

Operating margin improved quarter over quarter with the growth in revenue along with the improvement in gross margin. And similar to my comments about gross margin, we expect to see variability in operating income with variability in gross margin as well as overall business levels.

The tax rate for the quarter was approximately 16%, which was up compared to 11% in the March quarter. A tax rate in the middle teens would be reasonable for you to continue to include in your financial models.

With share count of about 174 million shares, earnings per share for the June quarter were $1.50, above the midpoint of the guidance, driven by the higher revenue and the higher operating margin.

The share count at this point includes dilution from all three of our convertible notes with the total dilutive impact of about 12 million shares of a non-GAAP basis. And I'll remind you that dilution schedules for the 2016, 2018 and 2041 convertible notes are available on our Investor Relations Web-site for your reference.

We spent $59 million and took delivery of 754,000 shares at an average share price of $78.80 during the quarter. At the end of the quarter we had completed more than 60% of the current $850 million share repurchase authorization.

We also returned $29 million in dividend distributions to our shareholders and during the quarter announced a 67% increase in the dividend level raising the dividend at $0.30 per share each quarter starting with the payment made earlier in the September quarter. Let me now move to the balance sheet.

Cash from operations was strong at $292 million, which was up from $191 million in the March quarter. During the quarter, cash and short-term investments including our restricted cash increased to $4.2 billion, up from $4.1 billion in March.

The increase in the cash balance was primarily a result of the cash from operations, offset by those share repurchases and dividends as well as capital expenditures. Day sales outstanding decreased a little bit to 67 days versus 68 days in March.

And as we mentioned in the Investor Event, we recorded in the June quarter an impairment of goodwill and intangibles on the balance sheet primarily related to our clean business. The total impairment of $89 million are treated as one-time expenses and included in our non-GAAP adjustments for the June quarter.

At the end of the quarter, deferred revenues were $518 million, which was up from $485 million in March. This number excludes $164 million in shipments to customers in Japan which will revenue in future quarters. And I'll just remind you that these Japan shipments remain as inventory carried at cost on our balance sheet.

Company non-cash expenses during the quarter included the following; $40 million for equity comp, $39 million for amortization and $31 million for depreciation. Capital expenditure was up a little bit to $63 million which was up from $32 million in the March quarter. Investments in the quarter were largely attributed to lab tool investments.

We exited the quarter with approximately 7,200 regular full-time employees. And I'll just take a moment to mention that the growth in headcount you've been seeing from us over the last few quarters will level out as we go forward. So now looking ahead, I'd like to provide our non-GAAP guidance for the September quarter.

We're expecting shipments of $1.580 billion, plus or minus $75 million. Shipments will continue to be strong driven by 3D NAND. We're forecasting revenue of $1.6 billion, plus or minus $75 million. We expect gross margin of 45.5%, plus or minus 1 percentage point. We're forecasting operating margins of 22.5%, plus or minus 1 percentage point.

And I just point out, this operating margin includes some growth in spending that is of a discrete nature. I'd expect spending in the December quarter to come down somewhat from this level. And then finally we're forecasting earnings per share of $1.70, plus or minus $0.10, based on a share count of approximately 174 million shares.

Operator, that concludes my prepared remarks. Martin and I would be pleased to open up the call for questions..

[Operator Instructions] We'll take our first question from Jim Covello with Goldman Sachs..

Congratulations on the very strong results and guidance.

Martin, if I could just ask a question, since Intel cut the CapEx again on the last call and kind of made the comments about slowing down Moore's Law, slowing down some technology transitions which a lot of people think TSMC is kind of suggesting they will do as well, obviously that's not affecting you in the short term given the terrific results and guidance, but what do you think the long-term impact is this on your business of that?.

I think when we look at the totality of our industry and while it is true we have a consolidated industry and that means looking at 5 to 10 companies, everybody does have a slightly different story, and as an equipment company, our profile of business with any one customer is slightly different than others, and as many people have written, in fact the negative commentary from Intel from a cadence perspective obviously doesn't impact us as much as it does possibly for others.

But we look kind of holistically here at the full spectrum of technology inflections and still feel very positive around medium-term and long-term business opportunities, and logic is in the mix and traditional shrink is in the mix, but there are many other market inflection opportunities for the Company and that's kind of what we're investing for and that's what we're trying to describe in terms of outperformance opportunity for the Company.

So it takes all customers, all segments, all inflections and it's a lot of opportunity from my perspective to be innovative and creative, solving and contributing to the success of our customers long-term..

That's very helpful, thank you.

And if I could just ask for a follow-up, similar kind of situation to last quarter where the market was very concerned about what your results and guidance would look like on the heels of an Intel cut and maybe some more cautious commentary from TSM and just like last quarter you guys delivered a terrific quarter and gave guidance well above the street, do you think this is just a function of that much less exposure to those customers or do you think there's some dynamic here of you gaining share even if some of the customers that might be slowing down a little bit such that your commentary is much more constructive and your numbers are much better than your peers even in the context of those customers slowing down?.

I mean let's not be confused, the outperformance commentary of the Company is not a commentary of being weak in places, so they are cutting investment.

It is a fundamental commentary on deposition and etch and to some extent clean intensive technology inflections, which is creating a rather unique opportunity for our Company in our industry to grow and outperform, and the commentary that we've articulated today is a little stronger than we did a couple of weeks ago relative to revenues because as I hope all noticed, we said, we're now expecting revenues in the second half slightly stronger than the first half as opposed to kind of roughly balanced, and if we execute to that plan, we will be delivering our third straight year of 20% revenue growth in the Company, which is a tremendous commentary on fundamental growth opportunities that we think have traction for several years yet..

Terrific. Thanks a lot for the color and congratulations again..

We'll take our next question from Krish Sankar with Bank of America..

I have two of them.

First one, Martin, even though if December shipments are going to be down, it looks like your year-over-year shipments are still very impressive comparing where the WFE is going to be, so based on that my question is that if the growth, can you parse it out between how much of your growth is coming from SAM expansion and how much is it market share, is it 50-50, two third-one third, and then I have a follow-up?.

1 don't know that I can answer that specifically for the year, Krish, but we have kind of characterized from the beginning of this inflection story roughly a two third-one third profile in favor of SAM expansion. So the market share story is indeed a meaningful component but it is the smaller of the two.

And as a side note, we did recently increase our expectations to share growth in etch from the original 3% to 5% target to the 4% to 8% level..

Got it, got it.

And then as a follow up, if I look at your September guidance and try to analyze it, you're kind of at the run rate that you gave in your target model on revenue side at a $36 billion WFE run rate, which obviously is not the case in September but it looks like you guys are running pretty well ahead of target, thanks to your model, the question here is that is most on the earnings power going forward going to be driven by the top line or are there any specific levers to pull on the OpEx side or customer mix that's going to drive the incremental EPS upside?.

Krish, a lot of it is going to come from revenue growth. Having said that though, we're not going to grow spending as quickly as we believe revenue growth will grow which is how you get from kind of where we are today at call it 22%, up to the 24% or so over the next several years.

So there's leverage in the model, little bit in gross margin probably and in the spending line..

And just to supplement, we talked a lot about the focus on long-term growth, today's inflections, tomorrow's inflections, and the team has done a really nice job getting the proportion of operating expenses that's focused on R&D above the 60% level, and we've kind of repeated that again this quarter.

And again to supplement Doug's point, the guidance today kind of really answers your question because today's guidance September over June is a 13% expansion of EPS on an 8% expansion of revenue's midpoint. So we're really focused on leverage and profitable growth not just market share and revenue growth. So we know the game..

Yes, we've been doing it for three years running now..

Got it..

We'll take our next question from Patrick Ho with Stifel Nicolaus..

Congrats on a really nice quarter and fiscal year. Martin, you talked about some of the spending trends that you saw in the first half of the year where DRAM was highly biased, you're seeing the emergence of 3D NAND spending as we head into the second half of the year.

Are there any other segments that you're seeing the second half of the year that are picking up that's helping you deliver some of the outlooks both for September as well as the December quarter?.

I think we have a pretty good presence through each of the inflections in the segment as you know and with the recent disclosure, despite comments on this call, the recent disclosure in press release about our progress with the North America logic company, we feel pretty good about participating broadly in the spending habits of our customers.

To your point, the view of the world today is not so very different in many respects to the view we had at the beginning of the year.

We expected DRAM to be first half biased and it still looks that way, and we expected NAND to be second half biased and it's kind of picked up, and we expected kind of foundry logic to be neutral to maybe slightly stronger in the first half as well.

So running this Company in this industry, all of that is relevant and certainly notable but we're much more invested in investing with a medium-term, kind of longer-term horizon for obvious reasons. $3 billion SAM expansion opportunity is very important for us to stay focused on executing..

Okay, great. And Doug, maybe a question for you, something you've talked about on the Analyst Days and over the last few calls of the services business, some of the revenue opportunities there, that's always a business where you could always have margin improvement.

What are some of the actions you're taking there to I guess further streamline that opportunity to help drive better leverage to the bottom line?.

Patrick, what we're really trying to do more than anything is set that part of the business to grow faster than just the growth rate of the installed base. As you know, the profitability of this part of the business is pretty good. It requires some direct investment, not a lot.

But really what we're doing is, innovating the business model, innovating in how we're delivering value to customers so that we can grow the top line and the bottom line falls through just as the top line grows..

To be very direct, Patrick, it's all about value you can provide to the customer. If you can't provide much value to the customer, then you're not going to make much money selling it. So it's all about finding ways to understand their challenges and issues and support them as well as we can and we've got a lot of people invested in that agenda..

Great, thank you very much..

We'll next go to Timothy Arcuri with leads Cowen and Company..

Couple of things.

I guess, Doug, I'm just looking at gross margin and if I compare gross margin and I look at the guidance and I compare that to the end of calendar 2013, revenues are up about $500 million a quarter or roughly $2 billion annualized and model has definitely played out, there's no question about that, I guess the one thing would be that margins hadn't really gone up despite all that additional revenue, and I guess are there any things you can do from a high level to sort of address that? I know you've talked about doing some more one-off projects for some customers which seems to be [indiscernible] a lot more value to them, so I wonder if maybe there's some way something you can do to capture that value to cause margins to have some upside from here?.

Tim, when I look at operating margin at least, we've delivered nice upside. We've gone from high teens a year ago into low 20s, right, so even though gross margin is kind of been level a little bit.

The reason gross margin to level is, as we've talked about in the past, we've got more new tools coming out in the last 12 months than we ever had in the history of the Company, and in the first couple of quarters that new equipment is shipping.

You don't have your cost as low as it's going to get and as you mature those tools and get them released into the high-volume environment, costs come down and margin gets better. That's really what is going on the gross margin line..

And this is maybe an important point relative to the philosophy of the Company, our most important vision objective is to focus on customer trust, which means in all respects, and we have to be cognizant of the distribution profit to the supply chain, we have to target a profitability level that we think is going to support the sustainable growth ambition of the Company, and so the model that we've articulated historically has been a baseline and I think although we didn't report a gross margin percentage in the long-term model the other day, Doug described the fact that more or less the headline for gross margins was the same today as it was a year or so ago..

Thanks a lot for that, Martin.

And then I guess my second question is on shipments and you're not guiding December shipments, Martin, but it sounds like shipments are going to come down maybe 200 million to 300 million versus what they were in September, and I'm wondering given all the issues in China and you look at semis, many of the semis are guiding way below seasonal for Q3 and there's some obvious signs that foundry is going to get softer, so I'm just trying to assess how much in the foundry segment in particular, how much is risk-adjusted in that down 200 million to 300 million shipment number from September to December, is that primarily 3D NAND coming down or is there some risk adjustment also for the foundry segment too?.

spending. If you're a $6 billion company, which is kind of what we're run rating to right now, that means in any one quarter the average spending from one of those top five customers is $0.25 billion. So all it takes is an adjustment from one guy and you spring into the types of numbers that you talked about.

Our focus is kind of obviously flexibility of business model to deal with that variability as well as we can but not to compromise the focus on long-term growth in the Company.

So we've done our best to absorb the rumor and the substance of kind of industry tone in the last couple of weeks and obviously we spend a lot of time directly with customers trying to learn as much as we can and that's reflected in the guidance that we have given you..

Next we'll go to Farhan Ahmad with Credit Suisse..

Congrats on another set of solid results here. Martin, I wanted to probe you on the fourth quarter expectations just a little bit. You kind of quantified the upside on the shipments, like the maximum ceiling for shipments in the fourth quarter. I was hoping you can provide some color on what level of downside could there be.

And secondly, like you've built deferred revenues of about $200 million over last three quarters.

How should we think about the revenues in the fourth quarter? Could we still get like flattish revenues from September to December?.

I'm going to respectfully contain my comments on December quarter shipments which seem a long way away from our seat at this point in time to the answer I just gave to Tim's question, but certainly relative to revenues the message from the Company is very clear I hope.

We expect slightly stronger revenues in the second half of this year than the first half of this year, and if we executed our plan, this will be our third consecutive year of 20% growth which I think is a remarkable commentary on the substance of the technology inflection growth opportunities we've described to you now..

Thank you.

And just a quick question related to your comment on NAND shipments, you mentioned the term 'NAND and other non-volatile memory' and considering that there was a new memory architecture that was announced yesterday, I just wanted to hear if you have started to see other orders or shipments in next-generation memory?.

It's Doug. We spend a lot of time working with customers on all of their next-generation technologies and aspirations. I'm not going to answer a question about any specific customer except to say we're very well integrated with everybody in the industry..

We'll next go to Weston Twigg with Pacific Crest Securities..

First just I know it's really early but wondering if you could just give us a little bit of your view on which segments might be up or down in your opinion in 2016 foundry, NAND, logic, DRAM, up or down, some early color?.

West Twigg, you are very optimistic today with your question. So I'll do my best here and I think it's more qualitative than quantitative.

As we said in the Analyst Event, we are still biased to an expansion of wafer fabrication equipment spending in calendar 2016 over 2015, and frankly a big part of that is influenced by the SAM expansion conversation that we have most knowledge of.

So asking any equipment company to really applying with substance on WFE is a bit of a stretch because none of us sell product into every single segment of the industry, so we're always kind of imputing a WFE headline.

But I would say, the demand message holistically looks pretty descent I would expect and I see unit number next year that's probably a little higher than this year.

I think that to the extent there are kind of inventory – I don't know if I would describe them as issues right now because I think it's pretty modest but there are certainly some evidence of minor industry corrections kind of playing out in the second half of the year.

I think we go into next year with really good supply/demand balance in all segments of the industry.

Next year is a very important year relative to transitioning from first phase investments and for some maybe second but primarily first phase investments in next-generation technology, and so the technology inflections of 3D NAND and FinFET transistor for example are really just beginning to get traction as device relevant.

So I look at the demand statement and I feel reasonably good about all of it. And then obviously I think there's maybe four fabs coming online in the first half of next year, three of them I think are foundry logic and one is memory.

So it's very clear that the customer is committed to the medium and long-term inflections and they are very disciplined around their execution.

So even in a world like DRAM for example where perhaps as a by-product of ASPs in the last three months, there's some level of anxiety, it's a superefficient conversion and it is a conversion that has business subsets, it's a better performing DRAM at lower cost.

And so at the end of the day it's all about the customer's ability to pay for that and if they can afford to do the upgrade then I think you see it executed.

So I don't know if I would call out any one segment right now, I feel like there's legs in all three of them as we describe them, and we will see how the next kind of six months plays out before we get quantitative..

That was a very good answer, very helpful especially for what's a difficult question.

So as a follow-up, can you help me understand the nature of the big increase in the future Japanese revenue, was that more CMOS image sensor or was that perhaps some memory shipment?.

It was perhaps a little bit of both of those things, West..

Perfect. Thanks again..

We'll next go to C.J. Muse with Evercore ISI..

I guess first question, I was hoping to get I guess discuss your thoughts on 10-nanometer ramp on the foundry logic side and how you would compare and contrast it to what you saw to 20 nanometer, 16 nanometer, 14 nanometer, both in terms of timing and magnitude of equipment, first the pilot and then high-volume?.

I think in terms of timing, I'd refer you back to the slide that I presented in the Analyst Meeting, kind of not so much more to add there but the substance of 10 nanometer we think emerges next year and continues through 2017 with 7 nanometer investments playing out in the 2018 timeframe.

So there's more details in the Analyst slide deck for you to take a look at. In terms of how we would expect the 10 nanometer investment to compare and contrast, I don't know that anybody can really answer that question today and I'm repetitively exposed to a broad diverse set of opinions.

My personal opinion is that 16 nanometer and 14 nanometer is obviously important nodes as first FinFET but I have the impression that the fabless community have expectations of performance and cost benefits in relative terms with 10 nanometer that will be greater than they realized in the 20 nanometer and 16 nanometer, 14 nanometer space, and when I read what I read from the foundries, that seems to be consistent with what they are describing as a business objective as well.

So, I would expect 10-nanometer to be a very robust technology node for the industry. In our models, as a point of reference we try to assess risk in our long-term models or opportunity in our long-term models.

I think by the time we get to calendar 2018 in the logic and foundry combined, we've assumed about 150,000 wafer starts of 10-nanometer capacity..

By calendar start 2018?.

That's it. By the time we get to the end of 2018, and I should have said foundry only, sorry, foundry only about 150,000 wafer starts by the end of 2018, that's our assumption in our [indiscernible]..

Great.

And I guess my follow up for Doug, two parts here, one, can you share what ending backlog was, and then two, for OpEx trajectory and the discrete items here in the September quarter, should we be getting back to low, mid-350s in December?.

C.J., I'm not going to give you bookings. I did that a quarter or so ago just kind of as a one-off thing..

No, but you do report ending backlog. I'm curious if you can share that..

We don't report that..

You're going to see that in the 10-K..

We report it one time a year and it's – I actually haven't even looked at it, C.J..

Okay..

So then your second question on spending, it will come down, probably a little bit above the quarter that we just announced but pretty close I think..

Just to put the backlog statement in context, the reason Doug said what he said is the same reason that about seven or eight years ago Lam Research guys were not reporting bookings anymore. It gives a very misleading commentary on the ebbs and flows of the industry.

And so when you take that input and then you take the very short-term nature and the cycle time compression that exist in the industry, the backlog for any of our companies today is much less a commentary on the future of the industry than ever before. So that's why it is only an annual disclosure that shows up in the 10-K filing..

And it's not that meaningful for kind of upcoming shipments..

We'll take our next question from Harlan Sur with J.P. Morgan..

Congratulations on the solid quarterly execution. On the roughly flattish shipment outlook for September, you pointed out strong 3D NAND.

Can you guys just give us the rough sense directionally for your DRAM, foundry and logic shipments in September?.

I'll give you a little color. It's going to be strong 3D NAND. DRAM is probably down a little bit. Everything else I think is pretty steady, plus or minus..

Okay, great, thanks for that.

And I'm not complaining about the gross margin performance here but given your commentary around sort of record loadings in your manufacturing facilities back at SEMICON a couple of weeks ago, I'm also kind of somewhat surprised that the team is not driving some gross margin benefits from better overhead absorptions on higher revenues in the September quarter.

Is it mix related as you mentioned or are there some other cost related issues that are masking the potential absorption benefits?.

As you might expect, we're driving this conversation really hard but as you might also expect our customers drive the very same coefficient really hard relative to us contributing to their long-term success. So frankly speaking, the gross margin conversation does not exist in isolation, at least as we run our Company.

We are very focused on trying to get the balance right, we feel like we've got a tremendous growth opportunity that can be executed in the context of the models that we presented, and for us to execute that and have sustainability it means we have to respond and respect to the long-term interest of our customers and other companies may choose different strategies and they may have different growth and profitable growth profiles as a result of that, ours I hope is very clear..

And we'll next go to Romit Shah with Nomura..

Martin, you mentioned 20% growth in the last couple of years as well as this year.

When you think about sustainable growth, is 20% sort of the number that you have in your head looking forward?.

That's a good try, Romit. I would say our objective is to grow faster than the industry. We have an outperformance objective. We've talked about trying to grow twice as fast as the industry and we've been able to demonstrate an ability to do that.

I think that's the more definitive objective for the Company, and if WFE kind of goes up and it coincides with 20%, that's great..

We should grow faster than the market and the industry, Romit, is the important point..

Understood. Thanks. And then the other point you guys have mentioned at least as far as 2016 goes is, one reason why you're optimistic on DRAM is that 20-nanometer conversion is still low as a percent of the installed base.

Do you have an updated number for what you think that is or what it might be towards the end of the year?.

More or less the same number today, Romit, as before. Our expectation is, by the end of this year we've done about a third of the conversion to 20-nanometer done.

So if the industry continues at the pace of calendar 2015 from a conversion point of view, it's another 18 months to two years before you're done and that's without one X and one Y and maybe even one Z in the roadmap of our customers.

So as I said in the Analyst Meeting, we've got kind of two to three nodes after the 20-nanometer technology node in the roadmaps of customers as we understand them today. So I think there's decent sustainability here.

At the end of the day, as has been demonstrated many times in this industry, it's all about ability to pay and if the ASP environment puts too much pressure on profitability then obviously it's tough for folks to spend money on converting even if there's business substance to that investment..

We'll take our next question from Edwin Mok with Needham and Company..

Congrats on a great quarter.

So first question on the etch market share number, I understand obviously you guys gave that target on the Analyst Event, but just kind of think about how you can achieve those numbers, how much of that is already designed that you believe you have already won in existing 3D NAND or FinFET or kind of newer inflection [indiscernible] opportunity versus has any of that or what portion of that is relying on customer corroborating to let's say thicker 3D NAND there like 72 layer 3D NAND or [indiscernible] 10-nanometer process and you won that business, is that what [indiscernible]?.

I mean in the timeframe of right now, the selection decisions that are being made by the industry in logic, for example 10 nanometer selection decisions, now there are some a little bit left of that and then maybe even some a little bit right of that from a kind of early-stage selection perspective, but it would be irresponsible for me to say it's all in the bank because in this industry we should constantly have respect for the competency and capability of our competition, everybody that survived this long is good, and we should recognize that we have to work hard every single day to continue to realize the opportunity that we've described.

But I do feel like if we continue to execute in this Company and meet the commitments that we've made to customers, then in large parts the inflection story absolutely is as much in our control if not more in our control than anybody else.

So 'in the bank' too strong a word but I think we've got good track records, we've employed the right strategy and you've heard me talk a lot in this call about supporting beliefs of customers, I think the instinct and the philosophy that we employ in the business on a day to day basis makes this story sustainable..

Okay, great, that's fair.

And then, Doug, can I ask you about capital structure, any thoughts, I know you guys did the buyback and you guys put up dividend and raised dividend recently but any thoughts about putting more leverage on the balance sheet or maybe putting more, adding more debt on the balance sheet and can you remind us how much of your cash is onshore versus offshore?.

I mean right now I'm pretty comfortable with the balance sheet as it's at. We just a quarter ago raised $1 billion in debt. I feel very good about the cash we have in terms of funding what we need. So I don't see doing anything in the near term beyond what's there because we've got what we need.

In terms of onshore/offshore cash, a little less than half of the cash today on the balance sheet is onshore and obviously a little more than half is offshore..

Okay, great. That's all I have, thank you..

Our next question comes from Mahesh Sanganeria with RBC Capital Markets..

I will just combine both of my questions in one. Martin, just a question on the memory, DRAM versus NAND, industry trend and specific to your Company, you talked about logic and foundry being down slightly, of course memory is up.

Can you talk a little bit about relative growth in DRAM and NAND for industry specific and also for your shipments because if I look at your shipment last year, your DRAM shipment were probably 40%, 50% more than NAND, and this year I get to almost even NAND and DRAM, so NAND has to be a huge growth, so if you can describe that a little bit qualitatively that will be helpful?.

I mean from an industry perspective, the wafer fabrication equipment spending kind of the 2014 compared to 2015 under the assumptions we described in this meeting, DRAM and NAND both increased year-over-year and the increase is slightly greater I would say in DRAM than NAND Flash actually. I'm sorry, I said that back to front.

So for the Company, we obviously have communicated to you a really important message in terms of a sound expansion for 3D NAND and that means in relative terms the story for the Company is going to be positive around the 3D NAND transition which is heavily deposition and to some extent also etch intensive.

So you got to see a stronger story for the Company in NAND because of that, but our outlook is both segments spent more money this year than last year and we see obviously a very meaningful inflection expansion for NAND next year and we believe consistent with the answer to last question that there's sustainability to the DRAM investment as well..

It does conclude our question-and-answer session for today. So at this time we will go ahead – we do have one more question..

We'll take one more, operator..

We'll take that question from Jagadish Iyer with [Bridgestone Technology] [ph]..

Thanks so much for squeezing me in. Just one quick question, Martin. One of your competitors have highlighted that next year potentially there could be a slight slowdown in DRAM spending and one of your customers has also indicated that the bit growth for next year for DRAM could be lower.

In such a scenario, how should we be thinking about the patterning opportunity for you for next year vis-a-vis this year?.

I mean it's appropriate that you should make a connection between the multi-patterning growth opportunities for the Company in DRAM because multi-patterning shows up in DRAM as well as logic. I think the relationship in our assumptions next year is probably two-thirds logic one-third DRAM in terms of multi-patterning SAM.

So there's definitely a consequence. If there was a scenario where DRAM spending did not play out, there is some level of consequence into the multi-patterning opportunity but the majority in the two-thirds I think if my memory serves me correct is logic based anyway..

That's helpful. Thanks so much..

Thank you, operator. That's all we have time for today. Thank you for your participation and we look forward to updating you again next quarter..

Thank you for your participation. That does conclude today's call..