Satya Kumar - Vice President of Investor Relations Martin Anstice - President and Chief Executive Officer Doug Bettinger - Executive Vice President and Chief Financial Officer.

Timothy Arcuri - Cowen & Company C.J. Muse - Evercore ISI Stephen Chin - UBS Investment Bank Farhan Ahmad - Credit Suisse Harlan Sur - JPMorgan Chase & Co.

Krish Sankar - Bank of America Merrill Lynch Sidney Ho - Deutsche Bank Toshiya Hari - Goldman Sachs Atif Malik - Citigroup Patrick Ho - Stifel Nicolaus Amit Daryanani - RBC Capital Markets Bill Grinstead - Susquehanna International Group, LLP.

Good day and welcome to the Lam Research Corporation December 2016 Conference Call. At this time, I would like to turn the conference over to Mr. Satya Kumar, Vice President of Investor Relations. Please go ahead, sir..

Thank you and good afternoon, everyone, and welcome to the Lam Research quarterly earnings 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, review our financial results for the December 2016 quarter, our outlook for the March 2017 quarter. The press release detailing our financial results was distributed a little after 1:00 PM Pacific Time 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 includes forward-looking statements that are subject to risks and uncertainties reflected in the risk factor disclosures of our SEC public filings.

Please see accompanying slide in the presentation for additional information. During 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 3:00 PM Pacific Time. And as always, we ask that you limit your questions to one per firm with a brief follow-up, so we can accommodate as many questions as possible. As a reminder, the replay of this call will be available later this afternoon on our website. And with that, let me hand the call over to Martin..

Thank you, Satya. Good afternoon, everyone, and thank you for joining us today. We’ll first start with an overview of our December quarter results followed by comments on our 2016 performance milestones and their relevance to sustainable growth opportunities for the company.

Lastly, we’ll speak to the industry updates and their assumptions relative to wafer fab equipment spending in 2017. In December 2016, Lam delivered another record quarter, reporting all-time high shipments, revenues, profit dollars and EPS. All of which also exceeded the midpoints of our guidance range.

That foundation and momentum reflects itself in our March quarter guidance, where shipments and revenue both exceed $2 billion for the first time in our history. We are inspired by the opportunity to support the success of our customers and for Lam to continue its trajectory of multiyear outperformance again in 2017.

But first, let me take a moment to reflect on 2016, the fifth consecutive year of growth and outperformance for Lam with a shipments CAGR of almost 20% over that period. In the year, we grew our shipments to a record $6.7 billion, two times faster than the 5% increase in WFE that we estimate occurred.

We consider this relative outperformance as well as a further solidifying of our share of WFE as noteworthy, especially in the context of a meaningful decline in DRAM investments last year. Customer segment mix will be better for us in 2017 than was true in 2016 we believe.

As we establish new record results, it is important to recognize the demonstrated quality of our earnings, because our focus remains on delivering sustainable profitable growth.

This is particularly true in the context of the balance we described at our Analyst Day between the various business segments of multi-patterning, 3D non-volatile memory, packaging and installed base service.

Lam has strengthened its momentum in foundry and logic with significant application share gains from the 2016 [ph] nodes to the 10 and 7 nanometer nodes.

As an example, during the quarter we more than doubled our installed base for our production proven Atomic Layer Etch system for logic self-aligned contact application with our dielectric etch product and mixed mode pulsing technology.

Application share wins such as this helped us grow our foundry shipments 15 percentage points faster than foundry WSE growth of 25% last year. Said differently, the foundry business segment for Lam Research grew 40% in 2016 year over year.

Turning 3D NAND, which has emerged as one of the strongest growth opportunities for the semiconductor industry, we grew our NAND shipments by over 80% in 2016, almost twice the rate of growth in NAND’s WFE.

This record growth was made possible, because Lam’s product portfolio addresses a variety of critical applications in the manufacture of this device architecture. We shared with you previously that our revenue opportunity increases by approximately 50% per incremental bit of capacity added for 3D NAND compared to planar technology.

Perhaps unique to Lam, our opportunity is relatively agnostic to whether the incremental bit capacity is added by new greenfield wafer capacity or through conversions and upgrades, which means that in a conversion driven world our opportunity to outperform remains significant.

Most importantly, we continued our market share momentum in 3D NAND and other non-volatile memory derivatives by defending 100% of critical applications and by adding additional applications for staircase etch and atomic layer deposition for advanced memory, and 64-layer selections, which will ramp in 2017.

Specifically in atomic layer deposition, we continue to expand the number of applications with several key penetrations at multiple memory and logic customers.

While we are very happy with what we accomplished and delivered in 2016, we are committed to the success of our customers long-term and are enthusiastic about the multi-year growth opportunity ahead.

As we said at our Analyst Day, the industry is clearly now more than Moore as powerful demand drivers in the form of cloud, mobility and connected devices create new challenges that we are well positioned to help our customers address.

Important to catalyzing on the opportunities ahead is the fact that we have the right products at the right time to help our customers enable this industry transformation.

This multiyear product positioning by Lam creates sustained outperformance opportunity, central to which is our technical competency and capability, and the trust our customers place in delivery of technology in a form that contributes to their success.

Complementing the customer engagement momentum achieved through technology innovation is the capability of Lam manufacturing, supply chain and customer support organizations. Our largely U.S.

based manufacturing organization once again delivered record factory output for the December quarter, managing and ramping a complex global supply chain and our own manufacturing capacity both.

The flexible business model of Lam and the commitments to invest in our future has enabled, consistent with our guidance today, scaling of the company by more than 40% in the March 2017 quarter from the average shipments level in calendar 2016 of slightly less than $1.7 billion.

Record systems shipped means record systems installed and supported, and here once again our global customer organization affected accelerated production ramps across multiple sites throughout the world. Our focus is on supporting the time-to-market needs of our customers.

Rounding out the overall value proposition to our customers is the service capability provided by our customer support business group, a value proposition that has increasing emphasis, particularly in the context of IoT.

This component of our business reported the fifth consecutive year of growth and has more than doubled in revenues over the last five years.

Simply stated, our focus is on improving the technology and productivity of our 40,000 plus process modules in the installed base through innovative product, upgrade and service offerings, in turn increasing the competitiveness of our underlying etch deposition and clean systems capabilities.

Now, turning to the overall equipment spending trends of 2016 and our expectations for 2017, WFE investments in 2016 ended a little over $34 billion, essentially unchanged from our prior views.

We are in a data-centric world characterized by the cloud and connected devices, which we believe is driving a multiyear growth trajectory for semiconductor contents across a number of electronic devices. As a result, we are seeing our customers increase their WFE investments to capture these opportunities.

We remain optimistic on the potential for global economic stability and growth, without exception our key indicators or models more positive in calendar 2017 than for calendar 2016. In 2017, we expect the following trends.

DRAM supply and demand balance has tightened significantly in the second half of 2016 due to strong ends demand, and depletion of inventories generally. We expect continued tight supply and demand in 2017 as investments recovers from the extremely low levels of 2016. We continue to see multiple demand drivers for DRAM.

On the consumer side, the migration to 8-gigabit die densities enabled by the transition to 20 and 1x nanometer DRAM combined with increasing use of advanced processes is enabling exciting new application such as VR and 4K gaming, also sustaining healthy DRAM content growth in mobile and the PC.

On the enterprise side, the migration to 40 nanometer server processes with new architectures including increasing attach rate of hardware accelerators and new high bandwidth memory interfaces are driving significance DRAM content.

As a result of these favorable supply and demand dynamics, we expect to see a double-digit recovery in DRAM spending in 2017, still largely focused on conversions with approximately a quarter of the industry capacity converted to 1x node by the end of calendar 2017.

This is a commentary on increased investments with continued discipline relative to our expectations for supply and demand balance.

We expect NAND CapEx to once again grow double-digits in 2017 with more than 700,000 wafer starts per month of 3D NAND shift capacity expected by the end of 2017, representing less than half of the total NAND wafer capacity for the industry, we expect at that time.

While there is continued focus on where we are in the conversion from 2D to 3D, we believe the industry is in a much earlier stage on the broader transition to solid state storage. As an example the average NAND content in a smartphone was only about 25 gigabytes in 2016, a tenth of the levels for high-end flagship models.

The transition from 128 to 256 gigabyte for PC SSDs with line-of-sights of 512 gigabyte reaching cost parity with hard drives is increasingly a consensus view. In the data center, high density SSDs are playing a pivotal role to usher in new architectures. Consistent with headlines of our recent analyst meeting this is a world of increasing content.

Combined these trends are on track to drive significant growth in revenues for our memory customers. We expect memory industry WFE in the high teen billion dollars with growth representing stable capital intend to the in 2017 year-over-year.

We expect foundry and logic investments to be flattish in 2017 characterized by investments primarily in new 10 and 7 nanometer capacity for leading edge processes for both mobile and compute applications. Approximately a quarter of the foundry industry capacity we anticipate will be at the 20 nanometer and below nodes by end of 2017.

Matching capacity in aggregates that is equivalent to the 28 nanometer node. Coincidence with this leading edge spending, we see meaningful investment of the 28 and 40 nanometer nodes for various types of sensors and communication chips for mobile and IoT applications again this year.

Overall we thing WFE is likely to grow mid to high single digits in 2017 to the mid $37 billion level plus or minus $2 billion. Consistent with our prior commentary at this time we expect investments by domestic China memory companies more a 2018 story than 2017.

We remain optimistic about the focus on global supply and demand, and disciplined investment by all. In closing, let me take a moment to acknowledge the hard work and contributions of our global employees, and the supports of our customers without which our past, present and future would not be possible.

We are positive on long-term semiconductor growth and for 2017 specifically. From our comments again today, I hope it is clear that we believe Lam is unmatched in its positioning and opportunity relative to market and technology transition. With that, let me turn the call over to Doug..

$32 million for equity compensation, $39 million for amortization, and $39 million for depreciation. Capital expenditures were $37 million, which is down a little bit from the $42 million that we spent in the September quarter. We exited the quarter with approximately 8,200 regular full-time employees.

Headcount additions were targeted at supporting increased business levels and customer ramps. Let me now turn to our outlook for the March quarter. I’d like to provide with our non-GAAP guidance. We’re expecting record shipments of $2.350 billion plus or minus $75 million. We expect record revenues of $2.125 billion plus or minus $75 million.

We expect gross margin of 45.5% plus or minus 1 percentage point. Gross margin is down somewhat from the previous quarter due to business mix. Forecasting operating margins of 25.5% plus or minus 1 percentage point. Spending is up in the forecast due to profit depended expenses and payroll related taxes in addition to new R&D investments.

And finally, we forecast record earnings per share of $2.55 plus or minus $0.10 based on a share count of approximately 180 million shares. So in closing, we’re very pleased with our performance in the December quarter, as well as calendar year 2016 and the milestones we achieved throughout the year.

Looking ahead, we remain committed to our objective of creating value for shareholders and to successfully executing on the growth opportunities ahead of us. We continue to expect 2017 will be a first-half weighted year with shipments more first-half weighted than revenue.

Also, as we sit here today relative to the June quarter, we’re expecting June shipments that are roughly in line with what we’re seeing for March. That concludes my prepared remarks. Operator, Martin and I would now like to open up the call for questions..

[Operator Instructions] And we’ll take our first question from Timothy Arcuri with Cowen & Company. Please go ahead. Your line is open..

Thank you very much.

So, I guess, Doug, the first question I have is as you look, I mean, obviously you have some concentration issues in March, but do you think that the concentration is going to get a little better or a bit more favorable as you look out to June and the shipments are basically flat?.

Yes, it might, Tim, but as always remind you, keep in mind the financial model when you model things. We’re right in the sweet-spot of where we should be relative to that financial model relative to operating income percentage, and gross margin and spending obviously both go into that number.

But we’re kind of where we should be is how I think about it. There’ll always be puts and takes around it as you’ve seen over the last couple of years..

Okay. And then I guess just a question, you guys are doing a great job, I mean there is no question about that. Everybody can get that. But I guess, as you think strategically, Martin, as you’re looking out a couple of years, KLA would have been great, but it didn’t happen.

So as you think about sort of making hay when the sun shines right now and how you want to remake the company for the next couple of years, is display something that’s interesting to you, given that we’ve seen very early in that cycle? Is there any technology you can bring to bear maybe in that vertical? Thank you..

Well, probably the most important thing to say in response to that question, Tim, and I appreciate your comments about the force [ph] of the company, thank you, is that actually there is no need to kind of remake the company. I mean, that we are not sitting here as the leadership team feeling encumbered with that responsibility for several reasons.

The first reason is the company is performing very well. The second reason is, in the context of how we expect the market to evolve in the next several years, in the context of these secular demand drivers for the semiconductor industry more broadly, the KLA-Tencor conversation for the company was leveraging a position of strength.

And that’s the position of strength that we expect to continue for number of years. So I feel like we’ve got a tremendous opportunity with the product portfolio in the markets that we currently occupy. As we touched upon, albeit briefly, in the analyst meeting, we have attention always to capital redistribution conversations.

We have attention always to adjacent market growth opportunities. And that strategic dialogue has always been active and will continue to be active.

But I feel like, even if we took no action relative to product to markets, the story of the company in the next several years is going to be a story of outperformance, if we continue to execute in the way that we have..

Thanks, Tim..

Thank you. And we will take our next question from C.J. Muse with Evercore. Please go ahead. Your line is open..

Yeah, good afternoon. Thank you for taking my question. I guess, first question is sustainability in longer stronger cycle kind of question. And, I guess, within that perhaps if we could just focus on the NAND side.

So curious, how do you think about, and I know you put up the $50 billion number, but how do you think about perhaps a world where there is more conversions next year as opposed to greenfield, and your exposure to both; and whether or not the strong level of spend in NAND that we are seeing today can continue into calendar 2018 and beyond?.

Yeah, C.J. it’s a very good question. Thank you. So a couple of things to say and maybe I’ll kind of like step up a little bit from the NAND dialogue here just to give a little bit of context.

So in our prepared comments today, Doug, specifically called out an expectation that shipments in the June quarter would be somewhat similar to shipments in the March quarter. We’ve talked about a couple of times now on expectations that this is a WFE year that has a bias more to the first-half than the second-half.

And we’ll see where the year ends out. But if you ask me today what I expect the balance to be in terms of shipments and WFE, it’s hard for us to see today at an industry level and the company level a better balance in shipments, and WFE than 55/45 first-half/second-half.

And the NAND flash segment is one of the segments that’s a little bit more acute from that in terms of first-half bias, in large part simply a byproduct of the timing of customer investment decisions and not every NAND flash customer in the world is biased to first-half investments.

But the sum of all of the market as best we understand it today is slightly more first-half concentrated than the overall 55/45 reference I just gave you for the industry.

So in answer more specifically to your question, we clearly take a position that the secular trends, the multitude of demand drivers the SSD roadmap that our customers are invested in, is a multiyear and a long-term reality.

And we’ve articulated, I hope the substance of the positioning of Lam Research in the mix of enabling that, and the etch and the deposition portfolios of the company get stronger. And they are relevant, if not, more relevant today than they were a month or two ago relative to the future of our customers.

So as we think about the question, I would say, 3D NAND is clearly a very strategic investment, number one. Number two, there is a multitude of demand drivers that are very well established and legitimate I think for our customers. We do see discipline and the timing is really just a byproduct of individual choices for investment for our customers.

We expect to end the year with less capacity in qualification than when we started the year, which maybe is another commentary on discipline. And maybe most important of them all, the capital intensity conversation is really unchanged year over year, which I think is positive for the industry.

And in addition to last comment, the investment plans for the industry to transition to 3D in our models would cause us to end this year with less than half the installed base 3D capable, so multiple year investment for demand and technology roadmap drivers..

That’s very helpful.

If I could just ask a quick follow-up, I guess, Doug, as we look at deferred revs including Japan growing again, and shipments being more first-half oriented is there sort of a dollar figure we should be thinking about, where revenues will surpass shipments for all of calendar 2017?.

I’m not going to give you a dollar number, C.J., but I’ll remind you, the way to think about it is when you’ve got an accelerating shipment profile like we’ve had you always get revenue lags as it just takes time to get things into the fab and they accepted.

And when you’re seeing a guide in March where revenue again is lagging shipments and so I accept deferred revenue will build in March. What happens when shipments level off or if they in one quarter might go down a little bit, then revenue will catch up.

Over time it all normalizes and it’s going to be the same numbers, right? It’s just a matter of the rate of change, a second derivative if you will of what’s going on there..

Maybe last point to add on that, if you take a long-term model, which Doug has already said, is the guidance we can give you always for modeling the financials of the company.

If you look at the stated revenue model for the company, in the 2017/2018 timeframe at a $35 billion WFE, implied by that model and our statements today around WFE expectations for 2017, which cause you to conclude that a revenue level for the company in the $8 billion range is a reasonable stake in the ground.

Now, that is obviously not a forecast, it’s not guidance. It’s kind of triangulating around the disclosure of the company. And if WFE turns out in the way that we’ve articulated today, we would expect an $8 billion reference for revenues as a legitimate framework for modeling the company..

For calendar 2017..

Thank you. And we’ll take our next question from Stephen Chin with UBS. Please go ahead. Your line is open..

Thanks. Hi, Martin, and nice results and guidance as well..

Thank you..

Thanks, Steve..

Yes, I wanted to just follow-up on the DRAM view for 2017. Can you remind us of how much Lam has historically outperformed DRAM spends during these WFE upturns? Last year, I think you said, Lam’s NAND shipments outgrew the industry by 2X.

Is DRAM something along the same lines as NAND outperformance?.

I have to profess I don’t know the exact off the top of my head. If we can get it by the end of this call we’ll provide it. But needless to say, we’re in great shape in terms of kind of DRAM position.

I mean, it has a dominant profile to it in terms of conversion spending and the segments of etch particularly is in the kind of top-end of the investments of the customer that are typically upgraded from node to the other. So there was a noticeable headwind for us last year because of a reduced spending. And that situation is very different this year.

Now, all that said, in spite of the fact that we expect more investments in calendar 2017 in DRAM than 2016, we still expect the level of investments in DRAM in 2017 to be lower than the levels of 2015 and 2014, just as a proxy.

And I think everybody understand pricing tells the story, and it tells the story really well right now in DRAM relative to supply and demand balance or even maybe constraint..

Okay. Thanks for sharing that, Martin.

And then just a follow-up question on your view about domestic China being a 2018 opportunity as opposed to a 2017 opportunity, is your view that developing intellectual property is kind of the key hurdle rate for domestic China before they spend?.

Well, I think maybe what’s true role of us in the supply chain is - two things need to come together maybe at least two things need to come together to be successful. You have to have the money to fund investment.

And you have to have the know-how the competency and the capability to execute, and reality is for all of us getting access to know-how competency and capability includes a broad range of incentives and technology licensing and acquisition can be one of them, but it’s not the only one.

And so I would maybe, say, our view relative to China and to be very clear, I specifically called out China domestic memory is my message today, clearly there is a history and reality in the future of well-established domestic foundry investment in China as well as the participation of the global equipment, of the global semiconductor companies.

So my comment was really focused on domestic China memory more 2018 to 2017, and money, and know-how competency and capability is what it takes for all of us in any part of the world to go execute..

Thanks, Stephen..

Thank you. And we will take our next question from Farhan Ahmad with Credit Suisse. Please go ahead. Your line is open..

Thanks for letting me ask a question, and congrats on the great results. My first question, Doug, is on the potential tax reform.

You guys have a significant amount of your cash offshore; how should we think about your capital return, if there is a tax reform? Have you given any thought to it?.

You think about all time, Farhan, I mean the practical reality of it is until there is a definitive law out there that you can understand exactly what it requires and what are the laws you do, it’s hard to specifically answer the question.

Obviously, if we get accessibility to worldwide cash without having tax penalty that creates a whole lot more flexibility for us to access the cash to do a variety of different things. Some of which might be capital return investment in the business, as Martin talked about adjacent M&A.

We haven’t had any definitive conversation, because just too early right now and too much uncertainty. But stay tuned, we’re paying very close attention to it..

Thank you. And as a follow-up, I just had a question on the linearity of the year. You talked about March quarter and June quarter being significantly higher than December.

Can you provide us some color on what’s driving the incremental growth from December quarter to first half of the year? Is it foundry, or are you seeing more growth in other areas, as well? And is the linearity between first half and second half, if any different between different segments?.

Farhan, you heard Martin described kind of more first half weighted overall both WFE and shipments, and also describe NAND is maybe more first half weighted than the other stuff, so that’s a data point for you. When we look at March as well as June, everything is pretty strong.

Everything investments are recurring at leading edge, it’s NAND, it’s DRAM, it’s foundry logic, it’s hitting on all cylinders from my perspective I don’t know, Martin, if you….

Yeah, I would say maybe just to be very direct. Our shipments guidance today from March quarter assumes that there will be sequential growth across foundry, DRAM, and NAND. Next question, please..

There you go.

You got a follow-up, Farhan?.

Okay. We’ve got next question from Harlan Sur with JPMorgan. Please go ahead. Your line is open..

Good afternoon, and great job on the quarterly execution and outlook. At Analyst Day, I think you guys showed a slide deck China WFE spend would up this year. And I think the biggest component of that was the incremental growth coming from the domestic China programs.

And so first of all, do you still see the spending landscape playing out this way for 2017. And I assume most of the domestic China spend is more 28 and 20 nanometer foundry and logic. Any insight to it would be appreciated..

Yes, I mean, actually our China perspective today I feel is actually unchanged from the commentary of the analyst meeting. Clearly, there is an ambitious agenda. Our assumption is there is a greater investment in calendar 2017 in China.

And the largest single component of that expansion year-over-year we’ve assumed is domestic, not international, and it’s logic foundry in focus..

Great. Thanks for the insights there..

Thank you..

And given your advanced equipment toolsets and process modules, I’m assuming that it’s becoming more difficult for your customers not to be engaged in some sort of service and productivity engaging. And so, as it relates to your installed base business and I think last you gave us an update, it’s about 25% of your business.

You’ve been growing that at a stable double-digits CAGR, very accretive to the cash flow generation.

So for calendar 2016, how much did your services business grow both revenues and operating profitability? And do you guys expect it to grow double-digits this calendar year?.

Yes, Harlan, I mean, it grew consistent with our expectations. I can’t remember off the top of my head whether it grew a little bit more in the equipment business or not. But it was roughly in line. It’s still roughly a quarter of the company’s overall business.

And you got it right, it’s very cash generative, very profitable business, very broad-based in terms of the number of engagements and number of customers. And generally speaking that chart that Tim Archer showed you at the Analyst Day, we’re very much on track to deliver that, that growth that we had targeted and are targeting..

I think one of the reasons why we answer the question the way we do, Harlan, is because there are two value propositions of the customer service business group and one of them is the contribution to the company of profitable growth, which is the essence of your question.

The second is the contribution to the company through the delivery of installed base performance that makes the underlying systems businesses of etch and deposition, clean more competitive and it’s more valuable to the customer and to the company.

So that’s how I think about the totality of value that’s possible for the customer and the company, and so that the - the specificity of income statements by segment is not so relevant for us..

Thanks, Harlan..

And we’ll take our next question from Krish Sankar with Bank of America. Please go ahead. Your line is open..

Yes, hi, thanks for taking my question. And congrats again on the good execution, guys. Two quick questions; first one, I just want to ask the DRAM CapEx question a different way. If you look at the DRAM WFE spending last year and possibly this year, it’s going to be roughly half of the NAND WFE spend.

Do you see that increasing for DRAM to go back to like the 2014/2015 levels or do you think conversions are going to be the norm this year and into next year that what you’re going to see in DRAM WFE is more a bonds off the bottom or bonds at the really low levels of 2016? And then I had a follow-up..

Thank you for your comments there at the beginning. No, I think as I said a few minutes ago, our expectation is I wouldn’t describe it as a bounce. I’d describe it as a demand-driven investments by our customers. But the expectation is that the level of investments continues to be sustainable, continues to be disciplined.

And we’re certainly modeling a level of investment for 2017 that is lower than the levels of investment that occurred in 2015 and 2016, but to your point, higher than 2016.

So it’s probably a little early for us to get specific on segments at the WFE level, given we’re only in the first month of the year, but you should expect us to put more substance on that maybe in the next earnings call..

Got it, got it. Thanks for that, Martin.

And then a follow-up, when do you expect the 3D NAND customers to move to 96 layer? And if you think that’s going to happen next year and NAND WFE holds up at these levels, and then you add in China memory CapEx coming in from the domestics, do you think $40-billion-plus WFE is not way out of the range for next year? Thank you..

Yes, I mean, I - maybe it’s a little - I’ll break your question into two parts. One of them is the kind of technology roadmap of the customer. And I think we don’t actually have a tremendous amount of data points in terms of the pacing of 3D device architecture kind of scaling.

As you know the end of last year and this year it’s really first year, where we have a broad participation by every semiconductor company in this space, in 3D device architecture.

There is a roadmap that’s a multiple node roadmap, I think we presented that in analyst meeting, I think our customers talk about having multiple steps beyond the 64-layer device.

And we currently have a stake in the ground that’s going to 18 months as a reasonable proxy, and obviously our R&D engagements run all the way through the roadmap of the customer for the next five years.

So I think the answer to your economic question, investment levels is all a byproduct of momentum in the marketplace around this broad set of drivers and kind of momentum in terms of solid state drive technology.

And I’ve read a bunch of questions around yields of customers in this technology, and I think ironically investment is the commentary on confidence around yield, and I think ironically the creation of demand in the space is somehow related to economics.

And so there is a momentum around creating legitimacy in the vision of the entire ecosystem, and economics, and scaling the devices central to that and we are here to do the best we can to support the vision of our customers..

Thanks, Chris..

Thank you. And we will take our next question from Sidney Ho with Deutsche Bank. Please go ahead. Your line is open..

Thanks for taking my questions, and congratulations on results and guide. I want to go back to DRAM for a second. You talked about - you expect DRAM WFE to go up double-digits in 2017, but your customers suggest wafer capacity will be relatively unchanged from 2016.

First of all, do you agree with that? And second, from your conversations with their customers, how much does capital increase - capital intensity increases at 18 nanometers or 1x nanometer, and do you think Lam would do better in that?.

Yeah. I think, we have an opinion and it’s always plus or minus. We have an opinion that actual wafer starts capacity for DRAM is relatively constant through the year.

So our view right now is no material change in capacity end of year 2017 compared to beginning of year 2017, the best color I can give you right now on capital intensity is that it’s dominated by a conversion based investments in DRAM, and we are not seeing a material positive or negative in the next several technology nodes around capital intensity.

The position of the company is very strong, we have good share, and as to your earlier question, good SAM presence in the context of WFE. So I feel like we’ve positioned very nicely but certainly no expectations of capacity addition, and if capacity addition does occur, I have every confidence it will be demands driven..

Okay, great. And then my follow-up is similarly on the NAND side. You guys talked about 3D NAND shipped or installed capacity going up to 700,000 or more by the end of this year, but one of your biggest customers is only guiding full-year for the industry and themselves to be around 30% range.

Is that because capital intensity is a lot higher for 64 layers, or are yields a lot worse than what we expected? And when do you expect an inflection point where this relationship maybe reverse itself?.

Maybe, I am not quite understanding your question. I will take a shot at giving you some color on it. I think the commitments of every customer to their technology is a statement on either actual yield or planned and realizable yields in the eyes and minds of the customer.

I think there is enough discipline around all of us, but we make investments when we have confidence and we don’t make them or not. So that would a kind of generic answer to your question and obviously the intensity, the investment levels at least of 64 layer device for more than 48 in the investment levels of 96, and more than 64.

And the answer to your question in terms of capital intensity is going to be a byproduct to the pricing on the die when it comes off a wafer. And I think the customer is much better equipped to answer that than we are..

Thank you. And we will take our next question from Toshiya Hari with Goldman Sachs. Please go ahead. Your line is open..

Great. Thanks for taking my question, and congrats on the solid execution. My first question is on EUV. I realize it’s only been a couple of months since your Analyst Day, but ASML, they continue to be pretty vocal about potential EUV deployment at the leading edge in a couple of years.

But when you sit down with customers and discuss N plus 1, N plus 2 technologies, did you sense any change in your opportunity over the next couple of years or not so much?.

Yeah, I mean the disclosure from everybody privately and publically that we have access to causes me to say no change in the message of the analyst meeting. And to refresh, we articulated SAM expansion for Lam at 40% from the 2015 to 2016 timeframe through the 20.

We are definitely an advocate of technology innovation like EUV as a contribution to extending the value of the entire semi-ecosystem.

And we’re invested in contributing to the enablement of that to the extent that we can, so no real change the set of assumptions that we articulated in terms of number of passes, and the economics of that implementation for us. And I think importantly the market characterization between space based multi-patterning and litho-etch schemes.

We communicated I think exactly the same headlines and messages today as we did in the analyst meeting..

Okay, great. Thank you. And then I’ve my follow-up, but I had a question on OpEx in to the June quarter, if I may. Doug, you talked about your OpEx number becoming more variable and dependent on profitability, I suppose in the quarter. If we assume revenue in June is kind of flattish relative to March, and gross margin is pretty stable.

Is it fair to assume that your total OpEx numbers is also flattish relative to March or is it not that simple?.

That’s probably a reasonable assumption, Toshiya, yeah, it’s - that’s not unreasonable..

Thank you. And we will take our next question from Atif Malik with Citigroup. Please go ahead. Your line is open..

Hi, thanks for taking my question, and congratulations. Martin, your outlook of $37 billion WFE is a lot more bullish than the Street is thinking.

Can you just talk about what will it take to get to the high end of that range and then in the low-end basically what’s the swing factor?.

What we - I guess, we have a $4 billion range on this - which is customary for us. So what does it take to be the high end of any range? It takes legitimate demand for semiconductor devices and the need to add capacity. I kind of - I go back to one of the core themes of the analyst meeting.

This is no longer the world of a killer app nor one dominant device. And even that one dominant device that we talked about five years ago, I think by most people’s view is seeing a stabilizing, or decline, or maybe even potential for growth this year.

This is a world of secular demands and a very diverse set of demand drivers, and I think our customers when I sit down where the customer today, the entire conversation is focused on time to market for them, and enabling their business strategies and competitiveness ambition to prevail.

So I mean the simple answer is demand, if the vision of the customer and the industry, and the performance of the entire ecosystem deliver what’s possible then we are in the multiple year period of expansion, and we’ve called out specifically what we think that means for our company..

And it’s a follow-up for Doug, you had a product rationalization charges in the COG [ph] plan.

Can you just talk about what those products or areas were?.

Yeah. I am not going to give you specificity is just investments we were making with an eye towards of penetration, two nodes from now that didn’t end up come into fruition. And so we ended up with some assets that didn’t have a forward useful life, so that’s what that was, it was an investment that we decided we were no longer investing in..

Thank you. And we will take our next question from Patrick Ho with Stifel Nicolaus. Please go ahead. Your line is open..

Thank you. I’d like to extend my congrats as well. Martin, first in terms of 3D NAND, a couple of years ago before this market really took off like it has today, you talked about some of the capital intensity trends, but you revise them higher over the last few analyst days.

As the industry moves potentially to 96 and 128 layers in future years, is there the potential for increases in that capital intensity as well, or do you still feel very comfortable with the numbers you laid out at the most recent Analyst Day?.

I guess, the amusing interpretation of that is, we are not so good at analytics, because it takes us a while to get it right. I feel like actually - and maybe it’s all about Satya joining the company that the analytics of the company are now perfect.

Now, I actually think that we now have much more experience under our belts, right? I mean, to give us a little bit of credit, if you go back three to five years this was a concept and there was really only one customer in the world that was singularly committed to that device architecture.

And collectively we’ve gone through an incredible learning about what it takes to manufacture that device architecture. And we’ve gone through an incredible learning relative to how the customers individually implement considering greenfield opportunities, conversion from planar to 3D and plain simple scaling of 3D capacity.

So I feel like a knock on wood that the analytics presented at the analyst meeting are good for the next several years. But I am sure you will ask your question in a year’s time if I say something different..

I just want to make it clear. I didn’t criticize your analytics..

It’s okay, Patrick..

A follow-up question for you, Doug, in terms of the services business you talked about the growth aspects both on this call as well as the Analyst Day.

Can you give some, I guess, tangible areas where you’ve improved the profitability? Is it what you’re offering? Is it just internal cost reductions? What’s made services a more profitable business for you guys?.

I don’t know if it’s necessarily more profitable year on year, Patrick. It’s always been quite profitable. It’s a great business, right? All the investment occurs in new equipment. It gets leveraged in installed base. It doesn’t require a whole lot of investment. It’s just - it’s a very profitable part of the business.

But on a year-on-year basis I don’t think it’s really more profitable necessarily..

I think there is a kind of macro trend that is very important to us as we think about the strategy for this business. And the macro trend is a trend for us at least of targeting by investment, the most valuable products and services for the customer. So there are two types of business you can have in the installed base space.

You can sell spare parts and maintain equipment at one extreme.

At another extreme, you can be all of that and also a provider of advanced services around installed base optimization, for example, or taking productivity improvements that you’ve embedded in latest generation leading-edge equipments and putting them back into a 28 nanometer space, for example.

So advanced services and value creating products and services is our focus. And if we’re successful developing that capability, if we are successful having it competitive over time. I think there is a trend to higher profit opportunities. So that would be maybe another characterization for you..

Thanks, Patrick..

Thank you. And we will take our next question from Amit Daryanani with RBC. Please go ahead. Your line is open..

Hey, thanks for taking my question. So it sounds like generally, you guys expect the first-half strength in WFE and shipment.

Do you see any sub-segments of pockets of strength manifesting in the second-half of 2017 or do you see declines across all sub-segments?.

No. We don’t see decline across all segments. There is a - maybe I can go back to my earlier statements. It is only January, so we have a tremendous amount of adds and subtracts ahead of us by virtue of push and pull, and changes in the investment strategies of our customers.

So please recognize that we are giving you the best we can, but I guarantee it will change. The best we can say today relative to first-half and second-half is exactly what I noted earlier. We don’t expect a more balanced shipments and WFE year than 55/45.

And as I added as a supplement the concentration to the first-half shipments in WFE for NAND, we believe is above that average. Now, everything I just said could change, but that’s the best we got for you today in terms of first-half and second-half balance.

The second thing that I try to provide some context to you for analytical purposes, that was a reference to revenues. And what I wanted to do there was to make sure that everybody interpreted the long-term stated financial models as we had intended.

And so there was a long-term model that referenced revenues, not shipments, referenced revenues in the 2017 and 2018 calendar year timeframe with an assumption of $35 billion of WFE with revenues $7.25 billion to $8 billion.

And what I said today is that, that we had intended that with that information you would derive approximately a $8 billion revenue reference to the assumptions of SAM concentration and WFE and share that we’ve communicated in the last several months including this earnings call..

Thank you so much.

And as a follow-up, when China begins to ramp in the 2018/2019 timeframe, what percent of revenue do you think you could see China achieving? And is it something like 20%, 30% and how long could that sustain for?.

Wow, I really don’t know that I have a basis to answer that question. I mean, there are so many moving parts. There is clearly a very strong ambition for investments and there are kind of stated numbers I think available to us all.

And whether those numbers are investment dollars or those numbers are kind of wafer in start references, I think I’ve read references to 3,000 to 4,000 wafer starts for NAND. I think I read 1,000 wafer starts to DRAM. I mean I have no idea on how this will kind of play out.

But we continue to engage in every region of the world with every customer in the world to support to the best of our abilities..

Thank you. And we’ll take our next question from Mehdi Hosseini with SIG. Please go ahead. Your line is open..

Good afternoon, guys. This is Bill Grinstead in for Mehdi. Just a quick question here on internal manufacturing capacity, obviously, you guys are looking for pretty strong shipments in the first-half.

What is your capacity and how high is your utilization or do you guys think you’ll need to flex that up?.

Well, we’re constantly investing in flexing and it’s a nature of this industry. It’s less today from traditional cyclicality and disconnects on an industry level between supply and demand, more today because of the variability that any one customer can bring to us as a supplier to the semiconductor industry.

We have no public disclosure for you on utilization or capacity. But I would reinforce the point that I made a little earlier.

We are focused on proactively investing in the business of our company and that means proactively investing in technology and also operational capabilities for manufacturing and supply chain and service, to execute and support the success of our customers.

And we did a lot of that already, right? We’ve invested in creating the potential to increase the output of this company by 40% in a really short period of time. Our average shipments in calendar 2016 were $1.6 billion I think, and maybe $1.6 billion to $1.7 billion. And we just gave guidance materially in excess of that.

So the investments is proactive and we’re obviously focused on the flexibility of our business model as much as ever..

Okay, operator, that’s going to be our last question..

Okay, operator, conclude the call. Thank you..

And this does conclude today’s conference. Thank you for your participation. You may disconnect your line anytime and have a wonderful day..