Lam Research Corporation (LRCX) Q4 2010 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen, thank you so much for standby. Welcome to the Lam Research Corporation June 2010 Quarterly Results Conference Call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). As a reminder this call is scheduled to conclude at 3 PM Pacific Day light time. I would now like to turn the conference over to Ms. Carol Raeburn, Managing Director of Investor Relations. Please go ahead ma'am.

Good afternoon everyone. Welcome to Lam Research Corporation's quarterly conference call. Here with me today are Steve Newberry, President and Chief Executive Officer and Ernie Maddock, Senior Vice President and Chief Financial Officer. Today we will discuss the financial results for the June 2010 quarter and Steve will share our business outlook for the September 2010 quarter before opening up for Q&A. The press release detailing our financial results for the quarter ended June 27, 2010 was distributed by Business Wire shortly after 1 p.m. this afternoon and is available on our website at Lamresearch.com. Today's call contains forward-looking statements including those relating to our forecast of market share, shipments, revenues, expenses, margins, and earnings per share, as-well-as other statements of the company's expectations, beliefs and plans. There are important factors that could cause actual results to differ materially from those described in these forward-looking statements, and a list of these factors can be found in the slide package accompanying this conference call and on our most recently filed Form 10-K. All forward-looking statements are based on information as of today's date and the company assumes no obligation to update any of them. This call is scheduled to last until 3 p.m. and we ask that you please limit questions to one per firm with a brief follow-up. With that I'll turn the call over to Ernie for a review of the June quarter results.

Thank you, Carol. I'll be sharing the results of another strong quarter for the company. In June we delivered record revenue together with strong operating profits and earnings performance. Shipments for the June quarter were 694 million down approximately 5% from the record shipment levels that we reported in the March quarter. Application and market segment breakdown for the quarter were as follows; Applications at 65 nanometer and below represented 96% of total system shipments. DRAM accounted for 37% of total systems shipments with NAND comprising 30% and other memory customers approximately 2% such that the total memory segment customers were 69% of system shipments. Foundry customers accounted to 23% of system shipments while logic and others were 8%. June quarter revenue was 695 million up 10% over the March quarter driven by strengthening demands for Etch and Clean products as well as related service and spare parts. On going gross margin was 46.7% up 40 basis points from the March quarter. This improvement was primarily the result of favorable product mix and initial benefits for our efforts to improve efficiencies in our Clean products business. Ongoing operating expenses for the June quarter were 152 million and included the acceleration of R&D spending on new products as well as variable compensation expenses associated with the company's higher revenue and profit levels. Ongoing operating profit was 172 million and reflects 16% growth over the March quarter resulting in ongoing operating margin of 24.8%. Other income was 3.5 million largely due to interest income and favorable impacts from currency movements. We incurred net expenses of non-ongoing nature of 16.7 million during the quarter which includes 13.3 million related to a reassessment of obligations associated with certain facility arrangements and 3.4 million related to asset impairments. Our ongoing tax rate for the June quarter was 15.3% primarily due to favorable geographic mix of operating income and adjustments related to non U.S. reserves. For the full fiscal year the ongoing tax rate was 18.8%. For the September quarter we expect an ongoing tax rate in the mid-teens and current rate projected levels of business we would expect the fiscal year 2011 tax rate to be similar. For the June quarter our ongoing EPS was a $1.17 based on account of 128 million share. Relative to our expected performance of $0.94 approximately $0.09 of the incremental EPS was generated as the result of the favorable tax rate, while the remaining $0.14 was generated from our strong operating performance. Turning to the balance sheet, our cash and short-term investments including restricted cash totaled 992 million. In June we generate 165 million in cash from operation translating to 24% of total revenue During the June quarter we continued making share repurchases to offset dilution from employee equity plans and repurchased approximately 700,000 shares at an average price of $39.56. A portion of these shares purchased settled outside of the June quarter a will be reflected in our September quarter cash flow statement. Accounts receivables days outstanding were 65 days; a decline from 75 days in the June quarter and inventory returns was 4.7. At the end of the quarter differed revenues was 207 million and as usual exclude shipments to Japanese customer that will revenues in future reports. These shipments totaled $52 million. Non-cash expenses included among other items 12 million for equity compensation and 18 million for depreciation and amortization. Capital expenditures were 12 million and our employee headcount at June end was approximately 3,150. With that I'll turn it over to Steve for his comments.

Thank you, Ernie and thank you all for joining us on the call this afternoon. Since today's call comes close in the hills of our analyst event a couple of weeks ago with SEMICON West I will keep my comments today relatively brief. As we stated a couple of weeks ago, based on our customers' current request for shipments it looks like wafer fab equipments spending for the second half is currently at a run-rate of approximately 30 billion to 32 billion. When added to the first half run-rate of 24 billion to 26 billion, this will result in total estimated spending for calendar year 2010 of between 27 billion and 29 billion. Certainly a much stronger year than projected at the beginning of 2010. Based on conversations we have with customers' at SEMICON West, they believe that demand for IC's will remain strong for the foreseeable future and therefore most indicated they need to continue a strong level of investment to support wafer start expansion and technology conversions through at least the middle of 2011. Key drivers of demand for semiconductors appear to be broad based strength in consumer electronic as well as the beginning of a corporate refresh of both PC and IT server infrastructure. In the consumer electronic sector has been surprisingly robust despite broadly disseminated concerns of person of debt burden and a persistently higher unemployment rate in the United States. With full feature high end smartphones now containing up to $75 of semiconductor content and semiconductor content in a 64 gigabyte tablor costing more than a $150, the consumer segment is an increasingly important factor in semiconductor demand. On the corporate side we're hearing more companies planning to initiate PC refresh cycles and IT infrastructure upgrades starting in the second half of 2010, which will likely create strong demand for memory ICs, for potentially the next eight quarters or more. Despite record levels of profitability in many sector and historically high cash balances, many corporations to-date have been some cautious in initiating major technology investments. This situation appears to be changing if spending forecasts are correct. Therefore, if there is no deterioration in the macro economic environment then the corporate refresh cycle accelerates and assuming consumer electronics continues to play a significant role in the demand for semiconductors, then it would appear that 2011 is likely to be another year of strong investment and wafer fab equipment. As it relates to Lam shipment as a comparative of first half versus second half 2010, we anticipate that over the next couple of quarters we will see increased strength foundry and logic as a percent of our shipments and proportionately less of our total shipment activity coming from memory. Overall, the shipment patterns in the second half have a little less customer concentration than we saw in the first half with additional foundry, logic and memory customers taking deliveries over the next couple of quarters. However, the additional memory customers are not yet adding significant new capacity, so it appears DRAM pricing is likely to remain above manufacturer's cash cost throughout the end of the year if the demand environment remains robust. Given Lam strong market position in both memory and foundry logic, any shifts in buying between these groups over the next few quarters will have essentially now impact on our continued strong shipment and revenue performance. We are on track to meet the 8 to 10 percentage points of shipped market share for 2010 in both of our Etch and Clean businesses and we continue to achieve application wins through out calendar 2010. These application wins as we talked about at or analyst event position us for additional market share gains in future years. Our market share gains are clearly the primary driver behind Lam's ability to grow faster than the rate of increased WFE spending. This level of shipment in revenue performance also reflects the ability of our manufacturing operations to respond rapidly to our customer short lead time needs for delivery. During this period of robust new systems demand Lam's strong field operational capability has allowed us to maintain our focus on supporting the installed base needs of our customers by providing five start ups, high levels of spares and service report in addition to responding to refurbished equipment and upgrade request. These active markets support revenue streams, provide a meaningful contribution to our overall financial performance and offer more stable source of revenue throughout the cycle. Over the next several quarters our focus for the business will be on meeting the strong level of demand for LAN systems and install base support as well its continuing to focus on winning new applications and execute to our product road maps. Now turning to the September quarter our guidance is as follows; shipments of 800 and 10 million plus or minus 20 million, revenues of 790 million plus or minus 15 million, gross margin at 46 .5% plus or minus 1 percentage point, operating profit at 26% plus or minus 1 percentage point and earning $1.35 plus or minus $0.07. In closing our performance achieved Q June and our expectations for Q September performance are due in large part to the extraordinary commitment Lam Research in place have for our customers and the Company. Their willingness to go the extra mile is legendary in our industry and I would like to express my thanks and appreciation for their great work. With that Ernie and I will take your questions.

Alright, thank you sir. At this time we will begin our question-and-answer session. (Operator Instructions) Our first question is from line of Satya Kumar with Credit Suisse. Please go ahead.

Yeah hi thanks, good quarter guys. Steve I was just wondering if you had any thoughts on any outlets towards December in terms of shipments if the linearity can be maintained or not? And the shipments under the September is that above or below this 30 to 32 run rate you talked about?

The 30 billion to 32 billion run-rate it's kind of an average run-rate that we think will occur. If the customers go forward with what they are currently asking us to ship to them in the December quarter, they are asking for more shipments in December than we are out putting in September. And if that occurs then I would expect that those shipments and revenue for December would be higher. But I think that one other things everybody recognize is with lead times for most of the companies in the equipment industry is barely short. It's a pretty volatile environment when you get out three or four quarters. But that's what their telling us they want for December at this particular point in time.

And then the quick follow-up to that Steve, I was -- if you look at the lithography sector and look at the capacitor additions that's happening in that sector. Shipment profile for which has the longest lead time appear to be growing up middle up of next year. If that were to be the case is it reasonable to think that shipment moment continues into the first half of next year?

Well I think that as I kind of mentioned many, many times, I thin it's all about the demand. Currently we are certainly in a strong demand environment. I think if in fact the corporate refresh cycle for PC and server infrastructure accelerate as many predict, I think we're going to see memory demand continue to strength as we go forward. Clearly in the foundries they all talk about the fact that there is very strong demand at 180 and 150 nanometers as well as 65 being a very dominant node. In addition their leading edge logic companies whether they are fab like companies or foundries are taking as much 40 nanometer product as they can get their hands on and the lead times have gone out. Their expectations for a demand out of the foundries on the leading edge is that it's expected to be very sustainable through the first half of 2011. And so -- I mean there is a lot of fundamental positive signs around semiconductor demand. And if it continues to manifest it self and there is no question in my mind that they will have to continue to spend at least at the rate that we're seeing for September and December in the first half of 2011. But with the uncertainties that we have in the world today when you get that far out who knows. But there is a lot of things you could point to as to why a sustained or even growing shipment rate could occur.

Alright, thank you. Our next question is from line of Patrick Ho with Stifel Nicolaus. Please go ahead.

Thanks a lot congratulations. First of on the Etch side of things, In terms of the application wins can you say how many net applications wins you had this quarter? And what are some of the specific application wins or where else can you characterize which customer segments they are coming from?

I think we had four total this quarter. Most of the application wins activity in the first half of the year have been in conductor. We have 10 net application wins to-date, total between conductor and Etch. And for a competitive reasons I am not going to detail out the specifics because at some cases our competitors don't even know yet that they have lost. But I will tell you that when you look at what's going on in the conductor space its things, its wins that are at the 28 to 32 nanometer node, both in the front end -- primarily in the front end when they are talking about conductor. When you go to dielectric again it's in the memory space, it's mostly some 4X and 3X activity and then in NAND there is some 2X activity associated with double paddling. So it's what you would expect in terms of those things that are just going into production and so we've began to ship some of those application wins. And in some cases where it relates to memory it's 3X for DRAM and 2X for NAND which I don't expect will really ship much volume until late 2010 and early 2011.

Great. And a follow-up question on the Clean side of things, you've been making a lot of progress on the front end as you detailed at the Analyst Day. Can you describe I guess what some of the -- what is the applications or what some of the technology process changes that are helping you gardener these wins?

Well one of the big areas that we have been focusing on is drying technology. As you get into 3X and 2X types of environments you end up in a situation where drying becomes very critical. We've had a number of wins both in logic, but primarily in DRAM where drying has been a technical differentiator that's been benefital for us. We've also continue to expand our market share in other foundries beyond where we had application wins in the past. And we've also now began to increase our penetration wins at a number of memory companies. So that we expect by the end of the year that when we look at Clean, Clean will be about 55% of the shipment will go to logic foundry and 45% will be going to memory. And that's an encouraging improvement for us given that memory spending tends to be 50% to 55% of total wafer fab equipments spending. So we like the positive aspects of penetration in memory.

Alright, thank you. Our next question is from the line of Stephen Chin with UBS. Please go ahead.

Great, thanks for taking my question, Steve and Ernie. Just a follow-up question on the strong September shipment guidance. What percentage of those shipments do you think will be for capacity expansion versus your technology upgrade?

We're starting to see that -- if we look at DRAM, we look at DRAM and say we think that by the end of the year will be about 150, 160,000 wafer starts per month that's pure capacity. And another 500,000 wafer starts that are a function of being converted from 6X or 7X to 5X or 4X. And early in the year most of the work was conversions. And so some of that 160,000 -- 150,000 capacity only are scheduled to ship in the second half, the bulk of it is scheduled to ship in the second half. But there are still conversion activity going on. In NAND you have kind of a similar story. There is probably a 150 to 160,000 of capacity addition. Most of that is going to be shipping in Q3 to Q4 going into the 3X and then the 2X ramp that -- the 2X ramp is going to start in the Q3, Q4 and most of that is going to be from new capacity adds.

And just a follow-up question, in Taiwan basically if you saw that the Taiwanese regulator push back at some of the application for equity rising by power chip in NAND. Do you need these second tier Taiwanese customers to stand on equipment to see WFE sustained at this $32 billion run-rate?

Well as I commented in the call, we've started to see that the request for shipments from a broader segment of customers is coming into play. That's certainly true in memory and it's also true in foundry and logic. I think it's pretty typical that particularly in the memory space that companies that struggled from a financial standpoint and had some balance sheet issues and access to capital issues are now returning to fairly strong levels of cash flow, some doing better than others. And as a function of that we're seeing some investment in technology conversion in some of those other memory -- DRAM memory companies. I think that when you have a strong general up-turn with demand for semiconductors being very broad based. If you look at the growth in micro-controllers, if you look at the growth in analog, if you look at the growth in just regular non-advanced logic those growth rates are very strong in 2010. So that causes the other foundries and other memory logic companies to start participating. And this is what we expected and I think we'll see them participate on an ongoing basis, so I think they'll contribute to a strong WFE spending environment over the next two to for quarters would be something I have a high degree of confidence in. What happens beyond that we'll just have to see how the economies are holding up?

Thank you. Our next question is from the line of Peter Kim with Deutsche Bank. Please go ahead.

Hi, thank you very much. With regards to, your current shipments rates I've seen -- this is record pace and given that your shipments rate at this level, do you expect -- are you seeing a simpler percentage of returns business in the quarter? Or are you seeing customers booking further in advance?

Well I'd like to tell you that we're seeing a lot more customer's book in advance. But the reality is that if they don't need to they don't. One of the pluses of us having one of the fastest supply chain response capabilities in the industry is that some times customers don't actually deliver the purchase orders till late service. So the return environment is fairly high. But we basically reserve slots on the basis quotation processes. We're doing a lot of work with these customers well in advance of when they actually physically deliver the purchase order. But, if I had to say most customers are delivering purchase orders 8, 14 maybe sometime 16 weeks in advance. But they are talking to us typically six months in advance, sometimes even longer than that and giving us an idea of what they're thinking about wanting from us in terms of deliveries.

You said earlier that you were expecting the foundry and logic to be an increasing mix go forward in terms of shipment and memory becoming a little less. I was wondering if you could kind of quantify that for us. What do you think is, if the memory be less than 50% next in the September shipment quarters?

In the September quarter, as Ernie talked about, in our June quarter 69% was memory. And so what it's looking like now is that we're going to see memory in the September time frame drop to I think it's about 50%. What's going to happen in December is something that's -- in September probably 57, but it's dropping down from 69. And so in December, I mean the problem that we have is if we were sitting here three months ago on our conference call for September, our September shipment demand went up about 35% from the conference call that was one month into the June quarter and by the time the June quarter ended September shipments had increased 35%. And so with the concentration of customers I couldn't tell you exactly how it's going to play out for December. But my senses is that it's going to be very strong for our logic and foundry throughout the second half. And then we'll se how the percentages play out. But memory is dropping as a percent as a function of the increase in logic and foundry spending.

Alright, thank you.

Thank you. Our next quarter is from the line of Krish Sankar with Bank of America/Merrill Lynch. Please go ahead. Krish Sankar - Bank of America/Merrill Lynch: Yeah hi, thanks for taking my question. Steve, I just wanted to follow-up on the September to December customer mix. Do you think it's going to be the same customer spending into December? Or you see further broadening of the customer base into the December?

I think we're in a -- there aren't that many customers any more in the industry. So we know the top 10 is probably spending 80%, 85 % and you get to the next 10 and they're probably spending 95% plus. And so I think when we're looking at who is participating in the second half, you pretty much have all the players that are of any substance taking deliveries in the second half. Krish Sankar - Bank of America/Merrill Lynch: If I could just follow-up for Ernie, in terms of your transition of your spin Clean supply chain, two of your outsource, code outsource model, is it complete or do you think it's still on track for the end of the year completion? And do you see any up-tick in growth margin because of that? Thank you.

Krish it is on track relative to the products that we focused for the outsourcing efforts. Part of the phenomena of the current environment is that you're seeing a lot of customers reorder process of record tool that were not necessarily a focus of the outsourcing effort. So it really -- in terms of the operational execution it's pretty much on track. We would need to see a transition of our customers to that product. And yes, as we've talked about it before we would expect to see continuing improvements in our gross margin performance in the Clean business as time progress and we make those transitions.

I mean I think that one of the things that we should point out is that, we're absolutely ramping significantly our Clean shipments in the second half. As a percentage of our total shipments it's growing faster than our Etch shipments. So when we look at our margins you might question why they are kind of flat on higher shipments in revenue. And fundamentally it's because we have mix changes from where we were with clean at lower gross margins today dragging down margins a little bit. And then we have some customer mix issues. If we have what we are looking at for December occur, we're going to see some of those cost reduction benefits come into play in the Clean business December a more favorable mix of customers. And so we're expecting that on higher shipments and higher revenue of some sort in December that we'll also see improved operating margin and gross margin as a function of things I just mentioned.

Thank you. Our next question is from the line of C.J. Muse with Barclays Capital. Please go ahead.

Yeah, good afternoon. Thank you for taking my question. I guess first question, when you think about likely pick-up in shipments in Q4 after Q3 how much of that do you think is the cycle? And how much of that is related to share gains particularly in Etch as well as the expansion of Etch as we finally see a kind of pick-up in double patterning orders?

It's a combination of both. There's no question C.J. that we've got customers still wanting to come in and increase the deliveries of equipment which I think is certainly related to the cycle. But certainly given the market shares that we outlined at the analyst event in terms of some of these emerging applications on 3X and 2X, you're starting to see shipments for those technology node of curve later in the second half. And so, our market share gains in those nodes are contributing to the pace of which you'll see our shipments increase relative to just the WFE market itself and perhaps some other competitors.

That's helpful. And as a follow-up there has been some noise out there about I guess GAS mix expedited delivery but look for constrains causing that to move to just normal delivery. So my question is, are still seeing mid-fold constrains I guess impacting the timing of your shipments? And I guess how should we think about in the second half of this year and into 2011?

Well I think that certainly in the June quarter we saw -- in the last couple of weeks we saw 25 million to 30 million of what had planned to ship be asked to be held for two to three weeks. That was a function of either facilities issues or not having the ability for delivery. Some of which was lift out, some was others. So, as some of the issues in the supply chain that are occurring that are unrelated to our ability to do things, we can actually have our shipments impacted for a verity of reasons and that's one of the reasons why our shipments weren't quite as strong as we had actually built and expected to execute in June. So as we go forward in the second half I think -- you can all see the extend with which ASML was ramping lift out, I think that's going to become less of a concern as we go forward. I think we've got a lot of new fabs that are coming on line. I think that all of those are potentially at some degree of risk that if those fabs don't come up don't get built or ready you could see equipment suppliers asked to delay shipments from one period to another. So it's one of the reasons why our guidance range kind of go up a little bit higher. Another reason is that when you start getting up revenues and shipments in the 800 level, the air band gets a little bit -- needs to be a little bit wider given the rhyme of that. But the other issue is, I mean if we have 50 million or 70 million in a quarter going to one customer and we do and that customer decides that they don't really have the ability to swallow that much equipment for whatever reason, I mean we can easily have 20 million or 30 million pushed out into the next period. And while it doesn't change anything in terms of ultimately our market share and ultimately the revenue we generate it does create some choppiness. But I think can some times be confusing.

Thank you. Our next question is from the line Jim Covello with Goldman Sachs. Please go ahead.

Great guys, thanks so much, I appreciate the taking the question. You guys generated about $1.20 free cash flow per share this quarter, could you give us some idea where you think that free cash flow generation might look like for the September quarter with the higher revenue and shipment level?

You're probably going to see cash flow really come close to mimicking our overall operating income, Jim. It -- there maybe a small probation, but in general it's going to of mimic the operating income guidance that was given.

And then so is it fair to say if we have a few quarters to sustainable revenue and shipments like this as Steve has been discussing here we could be looking at a cash per share on the balance sheet of between $15 and $20 by the end of next year, is that kind of the right level to be thinking about?

Certainly if you presume that the performance that we have and going to have in December continues throughout the year, yeah you can absolutely get there.

Okay, great. And then if I could just ask you've given a lot of color on the various segments which has been helpful. If we look at some of the big NAND flash fabs that have been announced, where are those folks in their process time line? I mean is that what creates some of the sustainable visibility? Or those things starting to be aggressive already? Thank you.

Well certainly, a couple of the big news fabs that everybody is aware of. One is it's going to be taking deliveries in the second half I think that the other that's in Japan its still filling out, the Y4 wafer starts and the technology conversions Y5 will come online middle of 2011. And if you look at what a lot of people think its terms of the supply, demand relationship with NAND that it's going to stay in pretty tight balance for the rest of this year. And lot people are forecasting that with a lot of new products that are coming out that the demand for NAND is going to continue to rise at a rate that's faster than output is being put in place. So I think its good news that there will be fabs that are available to be filled with equipment. And that's why I see a lot of customers really rushing around putting a lot of effort into making sure they get their fabs ready because they always have the choice not to equip them. But if the fab isn't ready you're in big trouble.

Thank you. Our next question is from line of Atif Malik with Morgan Stanley. Please go ahead.

Hi, thanks for taking my questions. Steve, on the comment that you made that there were some push outs at the end of June quarter, 25 million to 30 million into September. I'm just trying to -- can you give some color on which segment were they in? Or just broadly across the all segments?

There was four customers, I'm not going to detail which once they were because customers kind of don't like us talking about specifics in terms of what they were doing. But there were some in memory, some in foundry. And so wasn't one customer, it was four and they all had different reasons.

Sure, thanks. And then a bit of philosophical question here, has anything changed with the foundries this cycle where you think they are willing to run utilization at much lower levels, let's 85%, 80% on normalized basis and not give market share away. Or you think once if the demand starts to slow down they might kind of stop spending on expansion. Has anything changed with the foundries in the cycle versus previous cycle?

Well I think, probably the best place to get that answer is really to talk to the foundries. I do think with Samsung clearly signaling that they are increasing their investments in their LSI and foundry business with global foundries being created and having access to capital and building a new fab in New York, you certainly have the potential for increased competition on the leading edge. And I think that contributes to some level of up-front investment by some of the foundry companies from that are going to compete for some of that leading edge. How that actually manifest itself in terms of how much supply is available relative to demand we'll just have to kind of see. But I think probably the best answer you can get would be to ask the foundries, have they changed their philosophy at all. I think the level of spending we're seeing right now is more a function of -- we're in a new wave of logic chip integration into consumer products. I think we're in a situation where a lot of the previous logic companies that have their own fabs are now moving most of their leading edge, if not all of their leading edge to the foundries. So you're seeing it as a concentrated visible expenditure. So I think those are the dominant trends relative to foundry.

And thank you. Our next question comes from the line of Edwin Mok with Needham and Company. Please go ahead. Edwin Mok - Needham & Company: Hi, thanks for taking my question. Steve, I remember a few weeks ago you laid out a scenario where WFE is 31 billion to 32 billion. And at that time you said that you're revenue could be 3.5 billion earnings of $6. Now I understand that some share gain associated with that. But it seems like you're shipments guidance already approaching that level. Is that how -- is that because you see a through in share gain? Or do you -- are we seeing up side to that even those targets, can you help -- help us in terms of recognizing that sizing through numbers.

Well that's why I've said that, if you look at the second half run-rate it's looking like 30 to 32. And if you look at kind of what we are guiding for September that out put in revenue is closer to 30. And if the customers do take the deliveries that they are looking for in December given that I've said that it's currently looking like it's going to be higher, that's going to be closer to 32. And then when you see what kinds of shipments and revenues we can generate at that level, if that were to be sustainable and that's a big if. But if that were to be sustainable and we had a four quarter period of -- a rolling four quarter period at that level then I think you would see our revenues being up right on that model that we presented at SEMICON. Edwin Mok - Needham & Company: Great, that was certainly helpful. Thanks for clarifying that. And then just one quick question on spare and service side, I think historically you've talked about that being 25% of your sales. With the ramp on Clean is it still at roughly on that range? Or is it lower? Can you help us on that? And is that additionally growth experimented?

Yeah, that's a good question and you're exactly right. It is lower as a percent of out total revenues now. And so probably a better model is to think in terms of accelerating upturn wit big systems growth. We're really talking about probably closer to what 17%, 18%

Yeah you are going to still be maybe low end 18 and high end in the very low 20's and it says very quarter to quarter based on customer order patterns and things. So maybe an notch down fundamentally because the Clean business is less spares intensive of than the Etch business. And as that becomes an increasing part of our revenue stream you're going to see that percentage moderate a little bit.

Thank you. Our next question is from line of (inaudible) 0:44:27.8Research. Please go ahead.

Thanks, for taking my question, two questions. First is that how much of your market share will be impacted in '11 if there is moderation we should might start the challenges with the tier two DRAMs phase in terms of technology renovation.

When you look at the market share gains that we're forecasting for 2010 the vast majority of that's walked in relative to the technology nodes at are really at the heart of the demand in 2010. So that means it's a 4X leading edge in logic foundry, its 4X, 5X in DRAM and its primarily 3X in NAND which is where most of the purchases and technology conversions have gone. And so if -- for some reason things were to moderate on a going forward basis relative to the ramp for the 3X and 2X nodes, I don't think it -- market shares what you get as a percentage of what they spend. And so I don't think that if they slow down the total rate of spending that they're going to slow down the speed at which they attempt to put into production the next generation technology. We always see in fact an acceleration of movement to the next technology node in the down terms because that's where lower costs are and higher performance and that's what they used to try to stimulate more demand from their customers.

Just as a follow-up, if you have to take up a snap shot of the next four quarters how would you characterize the labor task environment out there?

Can't micro of all don’t go out four quarter relative to wafer starts. I think that if we look at the next couple quarter relative to what our customers think the demand environment is going to be and we look at the shipment environment, I think we're looking at a situation where the wafer starts are probably going to go up maybe 50,000, maybe 100,000 in DRAM, and I think in NAND you're probably going to get wafer starts that go up -- let's see, maybe a 100,000 in NAND. So it's about a 100,000 increase in the wafer starts per month in both NAND and DRAM.

Thank you. Our next question is from the line of Tim Kerry with Citigroup Global Markets. Please go ahead.

Hi, Steve, couple of things. Just sort of on the point of how quickly things can change, there was a big back end in Taiwanese OSAP that made some comments earlier today that they've seen a pretty broad fade in their business the last couple of weeks. So I am sort of wondering whether you've heard any sort of incremental change in tone at specific to your foundry customers during the very recent, like week or two?

I haven't talked to any of them since SEMICON which was quite a week and a half or ago or something, two weeks ago. And -- I mean talked extensively with a lot of different customers about where's the demand coming from, what do they think about the sustainability, why did they did think it's sustainable, what do they think the rest are et cetera, et cetera. And I mean clearly there is a lot of confidence that some of the fundamental drivers as to why the demand should be sustainable at least over the next two to four quarters is behind. Why they are willing to bring this level of equipment in and somewhat higher over the next quarter or so. But when you start getting out beyond two to four quarters, there is so many wild cards which I'll be the first to acknowledge. And so they have not talked to me about any near term changes that would be different than what they talked about at SEMICON.

Okay, got that. And then just second thing from Steve, if I look at your gross margin guidance it's about flat on a fairly big up run revenue quarter. And if you look at the incremental margin it's about 40% margin on a drop two basis. Is that all customer mix, I know you were talking about some large customers taking some shipments. Is that all mix? Or is there a very big slug of Cleans business also shipping in that quarter?

Tim this is Ernie. It's actually a customer mix story predominantly. There is certainly some products mix that plays a role in that. But the big story is customer mix as Steve alluded to earlier. You have significant customers who would represent $40 million or $50 million as much as $70 million worth of shipments in a quarter. And that can have an impact on the overall margin performance if there are significant difference of margins among customers.

Operator, we have time for two more questions.

The next question is from line of Gary Hsueh - Oppenheimer and Company. Please go ahead sir. Gary Hsueh - Oppenheimer & Company: Hey thanks for taking the question here. I think most of my questions have been asked. But Steve, just to kind of circle back, I think I've heard this question asked a multiple times. But let me just ask in be clear here. But it looks like we're just saying as in the second half the memory kind of buck in terms of shipments is starting to fade. But given market share gains and given other sort of customer foundry logic, logic idea on that you could see that back filling maintain sort of an 800 million per quarter run-rate per shipments, is that correct? And exactly which bucket in the December quarter do you think its start to fill in more meaningfully if memory does start to fade even more in December versus September? And I've got a quick follow-up for Ernie.

Well, I think you probably normally know that one part of my answer is going to be one quarter is not constituted to tramp. So therefore I don't look at the fact that the memory request for shipment in December which exist today is necessarily going to be what actually ships when we get around to December, that's one. Two, even if memory were to decline on a relative basis because the absolute basis is rising. There's still a lot of memory shipments going on. And I really think that when you look at what people are talking about for the first half of '11 and I don't necessarily believe -- I don't necessarily put a lot of weight on what they're saying. I think that the memory guys believe that it's the PC refresh and server infrastructure upgrade cycle is starting. I think if memory happens to be down in December it will no stay that way going forward into March and June. If in fact the refresh investment cycle occurring. Gary Hsueh - Oppenheimer & Company: Okay, Steve just to follow that up. I thought I heard you say that shipment forecast in September and your visibility in December suggest that the memory chip makers were adding roughly a 100,000 thousand wafer starts per month into the capacity and your visibility right now for 2011 suggest that for the full year 2011 the same memory chip maker are adding roughly a 100,000 wafer starts per month in terms of capacity for a full year. So doesn't that suggest that the trajectory is down and that the memory shipment numbers should start to fade as we get into 2011?

No. I apologies if I confused you. What I was saying was in the second half of 2010 in terms of new capacity there is a 100,000 wafer starts beings added in DRAM of new capacity a 100,000 wafer starts of new capacity being added in NAND. There is also spending going on for continued technology conversion. But I didn’t comment at all about what I thought the capacity addition would be for 2011. And early side didn’t think I did and wasn’t intending to, it was -- I was answering a question about for the second half of this year how much wafer start capacity increases were going to occur. Does that clear it up what we were talking about?

Looking like we have time for one more question it's from the line of Ben Pang with Caris and Company. Please go ahead Ben Pang - Caris & Company: Thanks for taking my question; I hope I don’t confuse it more. You mentioned a 150,000 I think wafer starts per month of NAND capacity that’s going to be added this full year, right?

I said 150 to 160, yes. Ben Pang - Caris & Company: What is the Etch market related to that number?

A lot. Ben Pang - Caris & Company: Like, can you give a dollar value on that?

I probably could, but I couldn’t give you give you right of the top of my head. I'll have somebody follow-up with you and try to give you an idea of what we're looking at in terms of Etch specifically because it will depend on if its new wafer start capacity, it's one answer, if it's a technology conversion it's another answer. So we'll break that down for you. Ben Pang - Caris & Company: Okay. Then one quick for follow-up you mentioned that I guess if we had looked backwards your shipment outlook is up 35% from a couple of month's backwards, right? On the third quarter, or is that calendar 3Q is that correct?

Yeah, what I was saying was that if you take this point in time in the last quarter, the September quarter changed significantly as the June quarter played out. And so therefore here we said in September quarter and if things hold true to firm what actually is going to occur in December could change quite dramatically. That has been the trend going back to a year ago where -- when we were in the September quarter talking about September guidance, the December quarter changed dramatically by the time we got there. March quarter changed dramatically by the time we got there in 2010, same thing for the June quarter et cetera. So when we are in this rising environment the next quarter out is pretty unpredictable. And so we'll just have to see how December actually plays out because things could change pretty significantly between now and when we have this conversation again.

Thank you. And that does conclude our question-and-answer session. Management please continue with any closing remarks you may have.

Thank you for joining our call today. The audio replay will be available on our website later this afternoon. That concludes our call.