Lam Research Corporation (LRCX) Q4 2012 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Lam Research Corporation June 2012 Quarterly Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Shanye Hudson, Director of Investor Relations. Please go ahead.

Thank you, Douglas. Good afternoon, everyone, and welcome to Lam Research Corporation's quarterly conference call. With me today are Martin Anstice, President and Chief Executive Officer; and Ernie Maddock, Senior Vice President and Chief Financial Officer. Shortly, Ernie will discuss financial results for the June 2012 quarter and outline some of the impacts associated with our Novellus acquisition. Martin will then share Lam's business outlook for the September 2012 quarter and combined company guidance before opening up the call for Q&A. The press release detailing our financial results was distributed over the wire services shortly after 1 p.m. this afternoon and is available on our website at lamresearch.com. Today's call contains certain forward-looking statements including those related to our expectations for the global macroeconomic environment of market size; wafer fab equipment spending; market share changes; consumer demand, customer spending and behavior and the factors that will influence those expectations as well as our spending projections; our investment plans; our business strategies; our aspirations of the benefits with our merger with Novellus; our intentions for research and development activities, our contemplated tax rate and our forecast of market shares, shipments, revenues, expenses, margins operating profits, share repurchase activities, earnings per share and cash generation on both a GAAP and a non-GAAP basis, 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 recent Form 10-K filed with the Securities and Exchange Commission. All forward-looking statements are based on current information and the company assumes no obligation to update any of them. This call is scheduled to last until 3:00 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 you, Ernie.

Thank you, Shanye, and good afternoon, everyone. The June quarter marks an important milestone in the history of Lam Research. As you know on June 4, we successfully completed the acquisition of Novellus Systems. Our combined financial results, which are reflected in the press release issued earlier today, include only 20 days of Novellus activity. With that in mind, I'd like to begin my remarks today by reviewing Lam's standalone performance for the June quarter as it relates to the guidance we've provided on our April call. We ended our fiscal year with solid performance and exceeded the midpoints of our guidance range for all metrics provided. Specifically, shipments were approximately $727 million for the quarter, up 2% from the March quarter, supported by capacity additions for leading etch Foundry customers and DRAM capacity conversions for the 2x and 3x technology nodes. Although moderating, leading edge NAND capacity additions continue to be a meaningful part of the company's shipment profile. Turning to the breakdown by application and market segment for Lam's standalone shipments, applications for sub 4x technology nodes represented 96% of overall system shipments. Foundry shipments accounted for 48% of total system shipments while the Memory segment accounted for 46% total shipments divided between NAND at 18% and DRAM at 28%. Lastly, Logic and Other constituted the balance of 6%. Revenue in the June quarter was $716 million, up 9% sequentially. Non-GAAP gross margin was 41.9%, up 1 percentage point from the prior quarter, primarily due to a more favorable customer and product mix and improved factory and field utilization. Non-GAAP operating expenses for the quarter were approximately $195 million versus $197 million in the March quarter. The operating expense level reflects our continued investment in the strategic products and projects offset by favorability related to deferred compensation plan…

Thank you, Ernie, and good afternoon, everyone. Lam's June quarter was very successful and I continue to be encouraged by the company's achievements. In addition to delivering targeted financial performance, we closed our acquisition of Novellus and immediately began executing on the objectives we established for the combined company while at the same time, ensuring continued focus on commitments made to our customers as 2 previously standalone companies. Before I expand on our progress internally, I'd first like to share our views on the current business environment. Since our April call, optimism around macroeconomic strength has waned somewhat and while views for 2012 GDP remain in the 2.5% to 2.7% range, estimates for 2013 growth appear to have weakened to below 3%, a level that is now more consistent with a stable growth outlook year-over-year with potential, we believe, for electronics growth in 2013 in excess of 2012. It is premature to start predicting 2013 wafer fabrication equipment spending with any certainty clearly. But our initial modeling of IC unit supply and demand would cause us to anticipate that spend would remain around the $30 billion level for a fourth straight year. Continued concerns over the Europe debt crisis, unemployment in the U.S. and questions about the level of China's growth outlook, all have the potential to constrain or negatively impact consumer electronics demand. We expect our customers to continue to focus on aligning their capacity additions with their own view of that demand outlook. One reasonable conclusion is that our near-term future is quite unsettled due to these macro factors. As such, we would now expect 2012 wafer fabrication equipment spending to be at the low end of our previously communicated $30 billion to $32 billion range. Turning first to the Foundry segments. We continue to expect Foundry WFE…

[Operator Instructions] Our first question comes from the line of C.J. Muse with Barclays Capital.

I guess first question, Martin, I was hoping to get an update from you now that you've had some time with the combined company and get a vision from you as to how you see the product portfolio here, whether there's anything that you feel like you need to add or given competitive positioning, you could exit and kind of get an idea of what you'll look like 12, 18 months from now?

That's a really simple question to ask and a really difficult one to answer. We clearly just began the process of assimilating the 2 companies and certainly, at this point in time, we remain absolutely committed to the full portfolio of products that are -- that define Lam Research and Novellus as 2 standalone companies. As you might expect, we have a clearly stated ambition to be #1 in the market share in all segments that we compete in. And it's true, in at least one Lam business and 1 or 2 deposition businesses from Novellus that we're not the #1 player. So we clearly, as a management team, have to work ahead of us to rationalize the path to being successful against the definition of success that I just described. So the message today to our customers and to our investment community is we're absolutely committed to the portfolio of products that are active in both companies and we've got some work ahead. I would expect potentially that we'll have some more helpful commentary in the November analyst meeting. But frankly, even in that timeline, that's a pretty small amount of time for what I consider to be fairly strategic decisions.

That's helpful. As a quick follow-up, I guess kind of a 2 part question. In terms of your net cash roughly $2 billion, and so I'm curious, how should we think about share repurchase in the current quarter, particularly at current levels? And also, in terms of the guide at 183 million shares. What are you embedding there in terms of additional repurchase on top of the 2 million to 3 million shares associated with the June quarter program?

This is Ernie. We would expect that our September quarter purchases will be more systematic as opposed to some of what we saw in the June quarter with respect to some more structured programs. And so, what was embedded is I would say, relatively more modest than what you saw us do in the June quarter, but nonetheless, will represent another significant step in the overall program. And we'd be currently tracking at these levels during the calendar year, spending somewhere north of 2/3 or so of the overall authorization with a little bit of wiggle room one either side.

Our next question is from the line of Terence Whalen with Citi.

I believe, Martin, you alluded to some progress in terms of Foundry at 20 nanometer in 2013, a very basic question, I was wondering for a fab of 45K wafer per month, what do you think the etch value is at a 20-nanometer Foundry versus at 28?

So I'm going kind of get you there in kind of building blocks as opposed to answer in one way. The assumption we're making for a 10,000 wafer starts capacity addition in Foundries at 20 nanometer is about $1 billion and we're estimating about $1.3 billion based on kind of public commentary from customers at the 20 nanometer load and maybe it's $1.3 billion, maybe it's a $1.4 billion. It's certainly, meaningly, meaningfully more expensive. And frankly, I would use the kind of traditional 13% of wafer fab estimate for etch as a vehicle for kind of backing into the etch specific answer to your question. There clearly is in the 28-nanometer, 20-nanometer Foundry transition some pretty meaningful process flow related changes for high key metal gates and also, in the area of multiple patenting that I think are net positive to the etch segments and we're positioned to exploit that opportunity when it presents itself.

Okay. That's helpful. And then the follow-up is on NAND spending. It sounds like initially you had some expectation of order activity in the second half and that's been pushed into the first half. Is it reasonable to assume that those orders will come in the first quarter of '13 and is that what you're preparing for based on your schedule now?

A definition of reasonable in this industry is tough to get to. I mean, certainly early 2013 is the expectation. Frankly speaking, we have cycle times in the company that allow us to respond pretty quickly to changes from customers and I expect changes from customers as a natural course of business. So I mean, the reduction appears to be there less in terms of demand, more in terms of kind of cautiousness from a profitability level point of view and pricing from our customers. But I think we're still pretty positive around the long term on NAND as the segment of spending.

Our next question is from the line Satya Kumar with Credit Suisse. Satya Kumar - Crédit Suisse AG, Research Division: Martin, really just a quick math on the OpEx. I'm doing some marketing [ph] here, looks like your [indiscernible] OpEx guidance is about $292 million and I can get there by taking the June OpEx and adding it to Novellus' core OpEx from their last supported quarter in March, which I think is pretty good considering I guess perhaps Novellus was under investing. Going forward, you're talking about potentially, you're looking at cost synergies with the Novellus acquisition. I was just wondering how do you think about the OpEx progression beyond the September quarter, especially as it relates to how we should think about investment at Novellus?

So Satya, this is Ernie. Martin commented in his remarks that we would expect fairly consistent OpEx for the December quarter and certainly, as we think about 2013, we're going to be doing that in the context of the environment that Martin described a little bit earlier, and so it's a little too early for us to give a perspective on 2013 at this point, but I think you can expect relatively consistent performance to that implied number for the balance of 2012 certainly.

Yes, Satya, the only thing I would add is, and maybe this is for everybody's benefit, I think it's a little unfair to characterize that Novellus wasn't investing. I think we would all say that in terms relative to the investment profile of Novellus, we were certainly outpacing in terms of some of the engagements we've had with some customers in certain application areas. But the investment profile for the Novellus piece [ph] business has been meaningful, substantive, even -- I would say even including the 450-millimeter wafer size transition preparedness as well. So I think it's fine to consider in relative terms there being a slightly different reality, but it's not quite as binary as was implied by your question. Satya Kumar - Crédit Suisse AG, Research Division: Thanks for the clarification. Just a quick couple of follow-ups on Foundry and NAND. I guess like, you seem to think there is a bit of runway on 28-nanometer and it seems like the major change in your CapEx outlook is really on the NAND flash side for the year -- from what you thought 3 months ago and now. Just was wondering if you could clarify, if you saw any changes in demand for Foundry shipments in the second half of the year versus your prior expectations, particularly in the September quarter. And for NAND, it's really a very simple question, what do you expect, based on what you're seeing right now for CapEx for NAND this year and your overall plan [ph] for CapEx next year, the bit supply growth would be for NAND in 2013.

So maybe I'll give you a little bit more data to kind of help you get frames thinking through answering that question. If you look at our guidance, so embedded in the $950 million of shipments guidance, obviously, the primary component of that relates to our systems and the foundry component approximately is in the high 40s, maybe 47% plus or minus a bit, and memory component is about 43% of the shipments guidance, again plus or minus points, and the logic represents the remaining 10%. And within that memory, 43%, the NAND shipments actually are a little stronger in absolute dollars than the DRAM shipments. So that's kind of the context I guess for answering this specific question. Certainly, we've messaged exactly as you hypothesized in your question. The primary change for us against our original assumptions is in NAND and not in Foundry. There's a little bit of movement, but it's not a material enough for me to kind of add to what we have previously stated. You are going to have to ask your question again on the NAND piece on the end. I missed it. Satya Kumar - Crédit Suisse AG, Research Division: What do you think in 2013 the supply growth for NAND?

We are assuming today less bit growth in 2013 than in '12 and I would say the 50% to 55% range is a reasonable stake in the ground at this point.

Our next question is from the line of Vishal Shah with Deutsche Bank.

Martin, I was wondering if you can provide some framework on how we should think about December quarter shipments in light of some of the comments you made about the NAND and DRAM customers. Should we expect at least the Foundry segment to be strong in the December quarter or should that also be relatively weak?

Well, we had said in our guidance last quarter and in our commentary around the business last quarter, albeit as a standalone company, but frankly, I think the message is the same as the combined company as it was standalone. We had anticipated that calendar 2012, from a shipments perspective, would be reasonably flat, plus or minus a little bit. And clearly, in light of messaging today, that's our wafer fabrication equipment spending outlook for the year. It's at the low end of the range, we would now slightly modify the first half, second half commentary and say that the first half, we believe, is slightly stronger than the second half and I would, of course, in percentages I would put the first half in the low 50s and the second half the high 40s. So that's how you should think about kind of first half and second half at this point of time and I would say that the ratio I just gave you, the low 50s and the high 40s, first half, second half, WFE, is accentuated a little in the foundries. For December, clearly, there's a lot of moving parts and it would be premature for us to be specific about guidance today. Directionally, I'm thinking that our shipments levels will be flat to slightly up over September, but there is a lot of time ahead of us for that to change. But that's the assumption set that we would have today.

Great. And just a follow-up, in the largest segment, I know you guys have a lot of opportunity in your core etch business, have some of the decisions at 14-nanometer have already been made or do you think there's still an opportunity for you guys to gain some traction there?

I think a lot of decisions are made at this point and clearly, there are still some remaining probably I'm sure and we work hard each and every day as does our competition, I'm sure. And so -- I really have no additional comments from what we've said previously there.

Our next question is from the line of Jim Covello with Goldman Sachs.

Martin, question is really on the microprocessor segment. It's going to be more important to you going forward, both the global foundries and of course through the Novellus acquisition with the exposure to Intel. And if you look at the inventory at the microprocessor companies, it's at the record level now. So the big CapEx in the last couple of years has created significant inventory on the part of the microprocessor companies. And so I wonder, relative to the commentary, if you're feeling good about wafer fab equipment being at near record levels again next year? If you perceive any risk in the microprocessor segment due to inventory or do you think the technology spending has to continue, no matter how much excess inventory those customers have?

Yes, I mean, I think relative to this specific [ph] inventory, we're probably one of the least qualified companies to answer that question. Hopefully, our customers in that segment are more qualified. But we're not seeing a significant message there. I mean, the commentary around 2013 was more a statement that when you look at a GDP outlook and what would naturally transpire in terms of electronics growth, there is presumably, we hope, either not the same set of constraints imposed on the industry from a supply point of view like, for example, the hard disk drive constraints in the first part of this year in 2013 and clearly, with life cycle extensions in the PC and kind of a consumer environment that hopefully is somewhat similar next year. There are a number of PC messages that frankly can be quite positive, and the 22-nanometer production is kind of ramping and the 14-nanometer tool-buy [ph] starts by the end of the year, kind of ramping through next year and we see that typically as a transition that would drive WFE in the microprocessor space.

Great. And then I guess, for my follow up, I would just ask a slightly more directed question toward the Foundry. Your biggest Foundry customer commented about weakness in their Q4 and Q1 utilization rate. So does it -- do you share any concerns in that segment due to your biggest customer's comments there?

Well, I think consistent with our comments previously, our customers do a really good job and as time passes, an even better job managing the equipment purchasing decisions to minimize the risk that you've just described. And so there's clearly always a risk profile, but I think as well as there being commentary from a foundry, there's also commentary from the fabless companies and the fabless companies, the QUALCOMMs, the [indiscernible] of this world, for example, are commenting to no slowdown in 20-nanometer demands, 28-nanometer design wins continuing ramp occur [ph] the 28 nanometers expected demand has not slowed. So again, I guess it depends on your perspective. If you're all over the short term, it's probably a different kind of message, but in the long term, there's always this macroeconomic thing that everybody's going to hang their hat on because none of us know the answer to that question. But the basics and the fundamentals, I think, are actually quite favorable.

Our next question is from the line of Chris Blansett with JPMorgan. Christopher Blansett - JP Morgan Chase & Co, Research Division: Ernie, I wanted to get an idea of the linearity of the delayed Novellus revenue we should expect over the next few quarters.

I would expect that most of the linearity issues that we highlighted today will be worked through by the time we provide our December quarter guidance, so we really had a June issue, we had a September issue, which we've quantified as we discussed. And based on our current view, by December, we will be back to a more normalized pace for the combined company. Christopher Blansett - JP Morgan Chase & Co, Research Division: Okay. And then I also wanted just to get your thoughts on additional costs that may not be captured in a non-GAAP basis associated with the integration of the 2 companies. And what this might mean to your overall operating margins structure for the, say, the next 6 months?

Clearly, the June quarter had embedded within it several things that I would consider more one-time than not, things like banker fees, as well as some specific stock compensation issues related to the acquisition itself. I think on a more ongoing basis, you are likely to see somewhere in the range of $5 million to $10 million a quarter for specific integration related costs perhaps for the next couple of quarters and then diminishing from that point forward.

Our next question is from the line of Edwin Mok with Needham & Company. Edwin Mok - Needham & Company, LLC, Research Division: First, just a kind of forward question on the foundry side. Since you guys haven't changed your view there, have you seen any changes in terms of your customer and mix on the foundry side? In other words, have you seen more broadening to smaller foundry customer or is this still really concentrated?

Well, there aren't many foundries in the world, so it's hard to kind of like step away and start declaring broadening. There's a little bit of movement, but I wouldn't speak to a particular message with any conviction. So there's a few guys participating. You know who they are and they're all participating at some level. Edwin Mok - Needham & Company, LLC, Research Division: Okay, that's fair. And then maybe a question on your product. I think on your [indiscernible] you talked about and you guys have recently talked about single wafer clean and you're developing this next generation product to kind of expand opportunity there. I was wondering, any concerns, it takes time to develop a product and sometimes product, product timing, this certain customer mill [ph] cycle. You might take a few years before you start to see kind of the growth there. Any kind of concern that the timing of the development maybe a little bit late for the current 20-nanometer cycle and that you might run the risk of maybe not gaining the share that you are targeting?

I think it's a very good question and clearly, we're paying a lot of attention to doing everything we can to synchronize timing of product releases to the decisions of our customers. We have a huge amount of energy invested in that particular issue. I would say, if there's ever a segment of our business of our company where the risk profile is lowest is being Clean and the reason and that's true is because Clean is a yield-enhancing investment by the customer. It's not a feature-creating investment for the customer. And so even in a scenario where you didn't synchronize necessarily a new product to a DTOR decision or a first phase PTOR decision, Clean is one of the segments where if you can demonstrate value to the customer in terms of yield solutions in excess of a previously selected equipment set, then you have a much better chance of establishing co-PTOR positions and ultimately displacing a competition in a buy. If there's ever a place in the business where you feel better around the risk you've just spoken to, Clean is definitely the second.

Our next question is from the line of Patrick Ho with Stifel, Nicolaus. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Martin, in terms of the foundries and the transition from 28 to 20 nanometers, do you see this continued buildup that you mentioned about 28 potentially pushing out the adoption and I guess the ramp of 20 nanometers?

Really hard to tell. I mean, I don't think -- I mean, frankly, what's the biggest influence over that? The biggest influence is the design decisions of the customers, of the foundries. Everything that we've been able to kind of analyze would cause us to conclude what we're concluding relative to the 300,000 wafer starts message for 28-nanometer. I think at least one other equipment company has messaged something very similar recently. And I think the foundry public announcements have tended to talk about 28-nanometer spending in '13 and the 20-nanometer beginning to production ramp in '13, but primarily in '14. So it kind of hangs together as best we can tell. That all being said, clearly, every semiconductor company in the world is motivated to achieve lowest-cost unit output, and if a 20-nanometer solution achieves that, that may be their motivation. But again, I'd put that in context of the WFE message that I shared in an earlier question. The cost consequence of 10,000 wafer start addition of 20 nanometers is in the range of 30% to 40% more expensive than 28. So it's not an easy trade-off. I mean, it's definitely stressing what has been a fairly kind of simple set of decisions historically. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Great, that's helpful. Maybe moving to some of the announcements recently by your peers, as well as Intel, in terms of the 450 in EUV investments with ASML. How does that announcement potentially change your outlook for fourth [indiscernible] and the investments you need to make that program?

There is a joke that I could respond with, but I'm going to control myself. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Please tell the joke.

I would say the fundamentals of thinking through preparing our company to participate in 450 are exactly the same today as they were previously. I think high-volume manufacturing -- it still seems to be in the 2017, '18 timeframe. There are potentially -- is a higher probability today of a more broader equipment profile being available in a pilot line environment earlier, but frankly, that doesn't impact the plans of our company in a very meaningful way. We were invested in preparing to support customers in pilot line transitions that begin potentially with the G450 transition and then other pilot lines that have followed in the industry and that's our focus. So I don't know that it really changes anything fundamentally to the existing plans that are like what [ph] we have in our company.

Our next question is from the line of Stephen Chin with UBS.

A follow-up question on the September shipment guidance. Can you share any color on Lam's standalone or Novellus' standalone shipment guidance? Are both segments being kind of similar shipment declines in the near term?

Stephen, this is Ernie. I would say that's a reasonable conclusion to draw. So perhaps the Novellus product's down margin-- well, actually, it's pretty equivalent, so it's -- I would say they're both impacted similarly.

Okay. And then a follow-up question, Ernie. Can you elaborate what you meant by a step-function decrease in OpEx in the middle of next year? is that related to possible product rationalization or is it something else?

I think the comments were specifically related to the realization of our synergy targets. And I think as we have talked about now, we have a very large systems integration project that is currently scheduled to be concluded about the middle of 2013. And certainly, relative to realizing synergies in the IT world, synergies in certain support functions like finance, where having a common, general ledger, a common ERP system, makes things much more simple and as a result of that, enables us to drive a very significant step-function reduction relative to those synergy targets. So it is important to keep in mind that the statements relate to the achievement of that synergy run rate.

A nice simple example, going from 2 SAP systems to 1.

Our next question is from the line of Krish Sankar with Bank of America Merrill Lynch.

I don't know if this question's for Martin or Ernie. The $100 million synergy that you mentioned was between COGS and OpEx, what is the baseline COGS number and what is the baseline OpEx you're using?

The targets, Krish, were prepared in the context of the information presented in the proxy. And so that would be a baseline, so it's 2013 view, which actually includes that 2013 view of wafer fab and associated revenues. I think I've mentioned before that there is a relatively modest OpEx increase for Lam forecasted in there, a bit more significant OpEx increase for Novellus. But I think it's important at this point to understand that those estimates are now many, many months old and what will become relevant which we'll be sharing here in the November timeframe will be our view for 2013. That's going to be derived in a timeframe that is much more relevant to the actuality of '13 than existed at the time we put the proxy together.

Got it, all right. And then as a follow-up, when you look at your 450-millimeter investments coming down the road, what order of magnitude should we think about given that you have multiple product lines? And does it really make sense to migrate all your products to 450 or would you mind dropping some of the lower market share ones like the PVD at Novellus?

I am going to specifically decline to answer most of that question for reasons that I hope are obvious to everybody. A big part of value proposition is competitive differentiation, which if you tell everybody what you're doing, you kind of tend to lose. We are clearly encumbered as is every equipment company with a complex set of trade-offs. It is not obvious that walking away from 300-millimeter positions because you have imperfect market share is the right answer to questions. It is not obvious how any of us can kind of parallel process multiple nodes, 300-millimeter investments with 450 and one of the dynamics that exists for the entire industry in a 450-millimeter transition is different than 300 is we don't have everybody talking about it all at the same time. And so rather than just kind of shoot from the hip, which is what we would be doing, at this point in the process, we have an analyst meeting scheduled for November and we'll take an action to give as much color as we can on this particular point without compromising the competitive position of the company.

And operator, we have time for 2 more quick questions.

Our next question comes from the line of Ben Pang. Benedict Pang - Caris & Company, Inc., Research Division: On your 2013 assumption for wafer fab equipment spending, is there a difference in the relative growth rate of the etch, 2012 to 2013 versus the products that you picked up from Novellus?

In terms of the market size, I would say no. I think the types of things that are positive to the etch business in terms of 3D transitions, materials transitions, high-k metal gate transitions and patenting are relevant in the Novellus products as much as they are in etch and Clean for Lam. The one thing that is slightly different is, in relative terms, the Lam position in the areas that are impacted is relatively stronger than the Novellus position. But obviously, that's something we're working hard to address. Benedict Pang - Caris & Company, Inc., Research Division: Okay. My follow up is, you talked a little bit about the market share not changing too much. What's your expectation for your ending market share for the wet clean.

Ending as they are higher [ph] or... Benedict Pang - Caris & Company, Inc., Research Division: Ending this year. Ending 2012.

I think we'll be -- we said we're in kind of in the mid-20s level, frankly, as an approximate area for market share and it's a pretty neutral year for us. I would expect to the question that was raised a little earlier, the market share momentum in the company against the 5 to 10 percentage points of share that we're targeting over 3 to 5 years to begin the kick in next year.

Our next question is from the line of Weston Twigg with Pacific Crest Securities.

I'm just -- I'm curious a little bit given the large increase in double patterning steps that we expect that 20 nanometer at the foundries [ph], why you're not more bullish on the opportunity for etched to maybe outperform or grow faster than fab equipment in general, can you explain that?

Well, I -- as is always true, there's a lot of complexity to answering simple questions. And one of the things that we're very convicted on is that when you look at these transitions, the process time consequences to etch and clean and deposition are quite significant, right? And we've talked about in the 3D transition, generally a 5% to 15% process time increase and in the 28 to 20 foundry transition, we've talked about a meaningful 15% to 25% process time increase for the S [ph] segments. The challenge is, how are everybody else's process times changing and while we have a really good knowledge about our business, we don't really have good knowledge about everybody else's business, number one. Number two, the ultimate consequence of all of this is defined on an income statement and what shows up on an income statement isn't process time, what shows up on an income statement is the sum of the invoices that you get paid by customers for, and so relative pricing roadmaps of customers and how that ultimately plays out is important. And so very, very simple message. We are very convicted about delivering a message that there's some positives in segments that we will benefit from in these transitions. And it's our job to make sure that we position that value very well at the customer and then we get paid for it fairly and then just kind of what that turned out to be and how it plays out as a function about what we do, what our customers do and those of our peer group as well, complicated math.

Okay, good, very helpful. And then just a quick follow-up, clarification on the Novellus contribution that was not recognized in terms of revenue. Was that $37 million in fiscal Q4 that was not recognized?

No, the $37 million actually represents the totality of revenue that Novellus have previously recorded. There are 2 impacts for the quarter. The first is the part of that revenue that would have been recognized, the second relates to the revenue recognition policy change and so I would estimate the totality of that for the quarter to be more in the range of $60 million to $65 million from a top line perspective.

Okay. And then $100 million next quarter and then winding down by December?

That's correct.

And did you say that there are associated costs with that, that you will break out for us each quarter?

Well, we're certainly going to reconcile between GAAP and non-GAAP results, the differences in the inventory values. So that is what allowed us to make commentary that relative to the guidance that we provided earlier, were it not for this change, you'd have an improvement in margins by about a percentage point and the result in TPS [ph] impact from about a quarter.

And I'd now like to turn the call back over to management for closing remarks.

Wonderful. I'd like to thank you all for joining us today. The audio replay of today's call will be available on our website later this afternoon. And again, thank-you for your interest in Lam Research.

And ladies and gentlemen, that does conclude our conference for today. We'd like to thank for your participation and you may now disconnect.