Lam Research Corporation (LRCX) Q1 2014 Earnings Report, Transcript and Summary

Welcome to the Lam Research Corporation September 2013 Quarterly Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to our host, Shanye Hudson, Senior Director of Investor Relations. Please go ahead.

Great. Thank you, Douglas. Good afternoon, everyone, and welcome to our quarterly conference call. With me today are Martin Anstice, President and Chief Executive Officer; and Doug Bettinger, Executive Vice President and Chief Financial Officer. During today's call, we'll share our outlook on the business environment and review our financial results for the September 2013 quarter and our outlook for the December 2013 quarter. Following today's Q&A, Martin will share a few concluding remarks prior to closing the call. The press release detailing our financial results was distributed over the wire services shortly after 1:00 p.m. this afternoon and can also be found in the Investor Relations section of the company's website along with the presentation slides accompanying today's call. Today's presentation and Q&A will include statements about our expectations and beliefs regarding certain future outcomes including our guidance. A more thorough list of forward-looking topics that we expect to cover are shown on the slide deck accompanying my remarks. All statements made that are not historical facts are forward-looking statements based on current information and are subject to risks and uncertainties that may cause actual results to differ materially. We encourage you to review the risk factor disclosure in our public filings including our 10-K and our 10-Q. The company undertakes no obligation to update these forward-looking statements. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. Detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings press release. The call is scheduled to last until 3:00 p.m. Pacific Time. [Operator Instructions] And with that, I'll turn the call over to you, Martin.

Thank you, Shanye. Good afternoon, everyone, and thank you for joining today's call. As you may have read in our press release today, September 2013 marked the highest revenue quarter in the company's history, surpassing the $1 billion mark for the first time. We grew operating margins by nearly 200 basis points, sequentially, demonstrating a strong execution throughout the company. Additionally, we've made progress towards our strategic growth objectives, winning key production tool decisions across various technology inflections and shipping new products, including our next-generation clean system and latest 3D NAND etch capability into leading-edge customer engagements. Overall, the quarter was more than satisfactory and reinforced the substance of our vision objectives and our strategies and capabilities to execute. The September quarter marked the close of an important transition period for the company as we successfully concluded our major integration activities. Singularly focused, we now present one face to our customers for all products and services, and we enjoy the full complement of a well-aligned employee population. Aligned, not just to our business objectives and plans, but to our stated culture and values. Related, I would like to take this opportunity to thank each and every employee for their contribution to these outstanding accomplishments, which would not have been possible without their hard work and dedication. As stated previously, I regard acquisition integration capabilities at Lam as a competitive differentiator within our industry. The aspiration to be the most collaborative semiconductor equipment company grows in our consciousness as we look forward to planning our actions in calendar 2014. Turning now to the industry environment. As we enter the final months of the calendar year, we are able to narrow our 2013 wafer fabrication equipment spend forecast to $29 billion, plus or minus $1 billion. This outlook is largely consistent with our views throughout 2013, though there are some well-publicized moving pieces that I'll highlight for you now. Starting with the Logic segment. We now project WFE spends close to $6 billion for the year, slightly lower than our prior view, as certain customers have been able to reuse more of their existing equipment to support their leading-edge production needs. In Foundry, at least one customer has started to ramp 20-nanometer capacity and the pace of those investments has accelerated in the second half of this year. We still expect overall foundry spending around $12 billion, albeit with slightly less trailing-edge investments than previously expected. We see healthy demand and a positive profit and spending trajectory from memory customers and maintain our WFE forecast of approximately $11 billion for that segment for the calendar year. NAND manufacturers are making the transition to the 20-nanometer technology nodes and below for planar devices, and consistent with our expectations, total shipments for the first phase of 3D NAND's production are beginning, as we speak, and extend into the first half of 2014. Depending on qualification and time to yield this capacity, we assume, would likely begin contributing to NAND's bit supply in the mid-2014 timeframe. Overall, we project bit growth in the mid-40% range for 2013, with relatively stable supply and demand balance headed into 2014. In DRAM, contract ASPs have surged by 10% to 20% over the past month driven by tight supply conditions. Due to the well-known short-term supply chain disruption, we've lowered our estimates for 2013, bit supply growth by a couple of points to the mid-20% range and expect a balance between supply and demand to remain extremely tight and disciplined through 2014. Over the past couple years, WFE spend has been driven primarily by mobile electronics. Media tablets have grown at a compound annual rate of greater than 130% since 2010, and we expect smartphones will represent about half of total cellphone units this year versus around 20% in 2010. While annual unit growth rates for tablets and smartphones are intuitively starting to decelerate, off the much lighter base, continued demand and density expansion for mobile products supports our preliminary view for 2014 wafer fabrication equipment spending to be in the range of $32 billion, plus or minus $2 billion, assuming a flattish GDP. Actual spending levels are likely to vary, of course, around customers' investment supporting technology inflections, and in the coming months, we expect customers will continue fine-tuning their plans and outlook. We will share more information as this becomes available. It has been nearly 1 year since we introduced our growth strategy for the broadened and newly formed Lam Research. This strategy is founded on market expansion and share gain opportunities derived, in large parts, from technology inflections, such as multiple patenting, 3D device transitions and advanced packaging. Having completed our merger integration slightly ahead of schedule, we are now singularly focused on executing against those strategic growth objectives. We shared with you, previously, our view of success relative to the transition from planar to 3D NAND. While we continue to work hard strengthening competitive differentiation and protecting positions established, we can report today that we are pleased by the initial production tool decisions. In etch, we sustained strong and above our overall average market share, securing critical dielectric high aspect ratio applications. We expect our new capacity addition, served available market, or SAM, to expand by 30% to 40% over the planar baseline. In the deposition segments in which we compete, we believe our new capacity addition, SAM, grows by 60% or 70% compared to the planar baseline. Further, we believe we've made sizable share gains, winning critical applications in both CVD and tungsten CVD. Our focus over the next 12 to 24 months is on achieving a similar outcome with each of the remaining NAND manufactures, as and when they transition to 3D device structures, in high volume manufacturing. Overall, we estimate it will cost more to add new 3D NAND capacity versus the same amount spent on equivalent wafer starts in that final planar generation. Based on our market size and market share expectations for high volume manufacturing when 3D NANDs become mainstream, we believe that Lam's stands to realize more than 1/3 of the transition opportunity, representing incremental revenues in etch and deposition combined, of approximately $25 million per 10,000 wafer starts at capacity added, or more than 60% market share on the incremental SAM. Equally important are the production tool decisions for the foundry, 16-nanometer, 14-nanometer technology node. Compared with the 20-nanometer node, this initial FinFET transition represents a SAM growth opportunity of 5% to 10% for LAM's markets and conductor etch is a key beneficiary of this transition. The complexity of the transistor increases exponentially with FinFET structures and the need for precise control of etch processes has grown accordingly. This plays well into Lam's strength as a leader in conductor etch, with the ability to control CD uniformity to within a few assets. We believe that we are well-positioned here to maintain our critical share positions and benefit from market expansion. This FinFET transition also creates opportunities for our deposition markets over the next couple of technology nodes. Process steps requiring highly conformal dielectric films are growing. These processes have historically been very slow in nature, requiring a single heir to be deposited at a time. We are partnering with customers to develop high productivity solutions, targeting these applications. With the need for thinner barriers and low resistivity film stacks, we are leveraging our production experience and technology leadership in tungsten deposition to further prevent metal applications. We have a strong engagements with the leading foundry and logic customers in each of these areas and are encouraged by our progress. In terms of shipped market share, based on our current outlook for 2013 WFE spend and the associated customer mix, we stand to gain a couple of points in Etch this year. We successfully won application decisions in logic and DRAM and expect to benefit from additional patterning steps in both foundry and DRAM. We've also defended above average in the initial 3D NAND's transition. In deposition, higher than expected equipment reuse has been headwind for shipped market share this year. However, we still expect to gain a point or so, supported by application wins in 3D NAND and through-silicon via copper fill. Looking ahead, we anticipate that our application wins combines with the message around SAM expansion is a great story for Lam deposition. In single-wafer clean, we anticipate shipped market share in the upper teens this year. We've successfully defended most, all our positions in the back-end-of-line this year and continue to focus on growth opportunities in front-end applications. We have started to ship our next-generation clean tool for evaluation with a leading customer and have focused on making these customer engagements successful. As we've shared in the past, we would expect to have a better understanding of the tool's performance in the first half of 2014, with the potential for early revenue towards the end of next calendar year. While it is still too soon to specifically quantify share growth projections for 2014, I'm encouraged by the solid progress we're making across each of our product segments and the level of customer engagement across a broader set of applications. We remain fully committed to our stated long-term share goals, our resolve against competitive threats, never stronger. As we have said on a number of occasions, this is a period of significant change for our customers and significant challenge within the wafer fabrication equipment industry. That fact is further illustrated by the recently announced plans to merge our 2 largest competitors. We believe the consolidation can be an opportunity to create value for our customers to the extent that it allows for the sustainable competition necessary to fuel innovation throughout the industry. As an example, our acquisitions of SEZ and Novellus Systems allowed us to leverage process adjacencies, but to stay committed to our mantra that the customer deserves the best-in-class technology and productivity solutions. That's the bases of competition today. We do have the opinion that it is possible for consolidation to reach a size and scope that goes beyond those value-creating fundamentals, and that conversation is active with our customers, real-time. We continue to believe customers remain invested in Lam's success and we will only strengthen our collaboration with them. It is very clear that our vision of being #1 in customer trust has never been more important, or valued, than in this environment. Prior to turning the call over to Doug for a review of the September quarter's financials, I'd like to share with you a celebratory event that occurred earlier this month. We renamed our Fremont campus, the James W. Bagley campus, in honor of Jim's many contributions to Lam Research across his 16-year tenure with the company. Among his accomplishments, Jim established Lam's mission, vision and core values, which reshaped our culture and continue to serve as the guiding principles for how all of our employees engage in business today. He also provided the inspiration and leadership to our decade-long etch segment leadership journey. I had the pleasure of working under Jim's leadership for many years and strongly believe the principles he established are the genesis of Lam's value-based culture and innovation spirit, which both differentiate the company competitively, I believe, and enable a rich and ongoing tradition of customer trust and collaboration going forward. With that, I would like to hand the call over to Doug for his prepared remarks.

Thanks, Martin. Good afternoon, everyone. Thanks for joining our call today. In the September quarter, as Martin has already told you, we delivered record revenue for the second consecutive quarter, topping the billion-dollar mark, which was a first for Lam Research. We achieved gross margin performance at the high-end of our guidance range, with both operating margins and earnings per share exceeding our expectations. These results demonstrate what I believe are solid execution against our cost synergy objectives as well as our discipline in managing expenses. Shipments for the September quarter came in at $987 million, slightly below the midpoint of our guidance range and down a little bit, sequentially. Our results were impacted, somewhat, by delays in shipments to certain memory customers, as well as a slight decline in spares levels, driven by lower overall utilization in the industry. Partially offsetting these declines were stronger-than-expected shipments to foundry customers. Specific to our systems business, excluding spares and services, the combined memory segment accounted for 48% of our system shipments versus 46% in June. NAND represented 28% of system shipments compared to 18% in June. DRAM was 19% of system shipments, with approximately 1% attributed to other memory shipments. On an absolute basis, memory shipments were slightly down for the June quarter. Foundry represented 36% of total system shipments and that compares with 43% in June, and the remaining 16% was comprised of logic and other shipments. And as I've noted earlier, we recorded more than $1 billion in revenue, which was in line with our expectations and was up 3% sequentially. September gross margin was 45% and at the high end of our guidance range. This represents a 50 basis point improvement from the June quarter, as we delivered margin performance, in line with our published models, a bit earlier than expected, reflecting a richer mix, as well as an acceleration of our factory and manufacturing efficiency plans. We were obviously pleased to see the benefits from the supply chain cost synergies that I've spoken about before. And as we've shared in the past, our margin performance is a function of business volumes as well as overall mix and we would expect to see fluctuations from quarter-to-quarter depending on those factors. Operating expenses declined to $292 million, or approximately 29% of revenues, and this compares with $297 million in the June quarter. The decline reflects the timing of certain R&D program activities which can be lumpy at times. Importantly I think, the activities necessary to complete our targeted annualized cost savings of $100 million are now largely complete, and we expect to realize the remaining savings as we exit the December quarter. Looking ahead, we will continue to seek operating efficiencies while investing in new technology and capabilities that are necessary to fuel our future growth. Let me now turn to operating income. The combination of higher gross margin and lower operating expenses resulted in operating income of $165 million and operating margin of 16.2%, exceeding the high end of our guidance range. Taxes for the quarter were approximately 12%, a little bit lower than we expected. For the fiscal year 2014, I'm now expecting a tax rate in the low teens for the year. Our expectation for the December quarter was for a tax rate in the high-single to low-double digits. Can I just point out you, that if the federal R&D tax credit were extended prior to our fiscal year end, which is in June, the annual rate would be reduced by a couple of percentage points. Based on a share count of approximately 171 million shares, earnings per share for the September quarter totaled $0.81, and that was up $0.01 from the June quarter and it exceeded our guided range. Can I just point out to you, the dilutive impact from our 2041 convertible notes was 5.6 million shares based on an average quarterly share price of $48.83. And as planned, we began executing against our $250 million share repurchase authorization during the September quarter. We spent $96 million and took delivery of approximately 1.9 million shares of common stock. We plan to complete this authorization by the end of calendar year 2014. We ended the quarter with gross cash, short-term investments, including our restricted cash, of $2.6 billion, and that compares with $2.7 billion in the June quarter. Of this cash, roughly 25% was onshore and the remaining 75% was offshore. We had deferred revenue of $334 million, and this excludes approximately $84 million in shipments to Japanese customers that will revenue in future quarters. Those Japanese shipments remained as inventory on our balance sheet. DSO increased to 64 days, as shipments for the quarter were more back-end loaded than last quarter, something we expect to see recur in the December quarter. And I point out to you that many receivables are paid on the last day of the calendar month, which, last quarter, was 1 day after our September 29 fiscal quarter end. Had those end-of-month payments been received in the quarter, our DSO performance would have improved by several days. Inventory turns were 3.8 and that's down from 4.1 in the June quarter, as we increased on-hand inventory to support our growing December quarter outlook. Cash from operations was $52 million, and that's down from $175 million in the June quarter. Operational cash was depressed this quarter, primarily due to the receivable growth and inventory build activities that I just mentioned. Calendar year-to-date, distributed [ph] cash flows from operations are comparable to operating income, as a percentage of revenue, and this would be a valid planning assumption for the December quarter as well. Company noncash expenses include, among other items, $23 million for equity comp, $42 million for amortization and $32 million for depreciation. We incurred $24 million for capital expenditures in the quarter. And finally, we exited the quarter with approximately 6,500 regular full-time employees. So let me now turn to our guidance for the December 2013 quarter. On a non-GAAP basis, we expect shipments to be $1.125 billion, plus or minus $30 million. Revenue of $1.1 billion, plus or minus $30 million. Gross margin at 46%, plus or minus 1 percentage point. Operating margin of 18.5%, plus or minus 1 percentage point. And earnings per share of $1.02, plus or minus $0.05, based on a share count of approximately 174 million shares. So let me just briefly summarize. Overall, we were very pleased with our solid execution in the September quarter. Our September performance, as well as our December quarter outlook, reflect, what I believe, reflect our achievement against our near-term financial models and demonstrate our focus on delivering against our long-term business objectives. As we've shared many times, there are always puts and takes within any given quarter. Looking into 2014, we remain focused on achieving our published models and still view them as the best proxy for modeling our financial performance. That concludes my prepared remarks. Operator, please open up the call for questions.

[Operator Instructions] Our first question comes from the line of Krish Sankar with Bank of America Merrill Lynch.

I have a quick one. Martin, have you seen any impact in the December quarter from the recent Hynix file? And if so, how much of that is added to your shipment forecast for December?

Krish, I think that it's fair to say that, as a company, to the extent there's an impact that's reflected in our guidance and, indeed, there are some systems that are included in our shipments forecast, but we're not going to specifically disclose that number with you, with respect to our customer.

All right. So could I just have a quick follow-up. Martin, you highlighted how 3D NAND is going to be much more expensive. Is there any way you can quantify, from an industry standpoint, going from planar to 3D, how much more it would cost per 10,000 wafers for the industry, if the planar was around $400 million or something, how much would it be for 3D NAND?

I've come to appreciate, maybe I'm getting old, maybe I'm getting wise, but the best person to answer that question is the customer. Inevitably, Krish, we've got a very comprehensive understanding of the segments that we participate in, which is why the disclosure in my prepared comments biased etch and depositions segments. Whatever happens in clean is the byproduct of the yield experienced through pilot lines in the early phase of production. But we consider the opportunity in etch and deposition to be significant. We've ranged that historically in the 30% to 50% range, incremental, compared to planar baseline, and we've provided more commentary here today. I think the $25 million reference point per 10,000 wafer starts, we believe, is a significant component of the cost increase, and I think, I read in the ASML transcript that they stated LIFO intensity, in 3D, equivalent to planar. So I think you can probably connect some dots and figure that one out yourself.

Your next question is from the line of Mahesh Sanganeria with RBC Capital Markets.

Martin, the question I have, you touched upon the consolidation happening in the industry and you talked about that it can reach a point where it's not very productive. If you can elaborate on that, and also, if you can include if you have seen a reaction from your customers on how they are viewing the consolidation in the industry, and will that change your view in going after the next acquisitions?

I think, the -- just to kind of state the obvious, there is, inevitably, a review process associated with every deal. And so, there is a limit to the disclosure that I can make. And certainly, I don't intend to encroach on the disclosure that our customers might make. But the headline that I conveyed in my prepared comments, I think, is an important one. We do believe that size and scope can risk value-creation and, frankly, our voice in this process is a very small one, and it's not the important one. The voice, that's the important one, is the voice from the customer and the voice for the regulator. Relative to our approach to acquisition and collaboration, I would say, nothing has changed. We believe that we have a very clear vision today, to be a leader in the etch and deposition and clean markets, and to the extent that we execute any deals or collaborations or partnerships or licenses, according to the definition of today's strategy, that frames around accelerating our growth in those markets against stated plans. And the primary definition of success that I always hold us accountable to, is the value creation for the customer. And if you can articulate that, not just as a company, but as an industry, and I think the values of our company causes to do that really well because we all think and process and make decisions oriented to customer, company and then, individual, then I think you make the right decision in the end. So I think you have to talk directly with customers, at this point, to get a sense of what their opinion is.

Just a quick question on operating margin, Doug. Can you describe, you have a significant upside in gross margin and operating margin for the September, as well as December quarter. Are these a permanent impact or do you have some moving parts, or lumpiness, which goes away in the March quarter? So just, if you can separate the permanent facts and some timing-related items on the gross margin and operating margin, that will be helpful.

Sure, Mahesh. Happy to do it. I think and I tried, actually, to stick in my prepared remarks a couple of different times, that was financial models that we put out are still the best planning or working assumptions, in terms of managing and modeling our financial performance. So we're thinking about those things when we make decisions here and you should think about those models when you put your numbers together, so that's my first guidance. Within gross margin, there's always puts and takes, ups and downs, mix of different tool types matters. How hard running a factory matters, the types of think going on in the factory can impact utilization and things like that, so that's important to understand. There's puts and takes, always. And as I explained, with our spending in this quarter, oftentimes, you can get spending profiles that can be lumpy, there can be big programs that happen in 1 quarter or push from 1 quarter to the next. The total spending, across multiple quarters, probably doesn't change but within any given quarter, there can be ups and downs. And you saw that, a little bit, sequentially, in September. And when you go do the math on the December quarter, you see we get back to a spending level that is kind of more in line with the previous quarter, so there's always ups and downs. To run your models, please think about those financial models that we put out in the past.

Next question is from the line of Timothy Arcuri with Cowan and Company.

A couple of questions. I guess, first, Martin, just a follow-up on the questions around the Applied/TEL deal. I mean, it sounds like, at least one big customer is definitely not very happy about it, and I'm wondering if you've seen any near-term changes in the share dynamic, i.e., have you seen any share come your way, as customers try to maybe plan around this, if it actually happens?

The best way I can answer that question, Tim, is somewhat similar in my prepared comments. I believe that our customers are invested in our success, and I believe they understand and appreciate the value of the stated objectives for the company.

Okay, all right. Maybe let me ask a question then, on earnings guidance. And I think I asked you the same question, last quarter. But you've beaten -- the last 6 quarters, you've beaten, by about an average of a dime, on the earnings line. So I'm wondering, have you sort of changed the way you guide or are you still guiding to what -- at least the last 6 quarters has been a fairly conservative view, and I'm just sort of wondering how to handicap that, because now you've pretty consistently begun to beat by about $0.10 per quarter.

Thank you for asking the questions, Tim, I'm glad you did. And I'll repeat, somewhat, the answer I gave you last time we talked about this. One of the things, I hope, everybody appreciates is the complexity associated with bringing 2 companies together. I mean, at the high level, there are integration challenges, there are product portfolio challenges, there are business process integrations, SAP systems and there is getting to know the financial performance of the company. And in every respect, we've gone through a tremendous learning curve in the last 12 to 18 months, and that includes, relative to financial performance, our guidance for the last 15, 18 months, and our guidance today is defined, in exactly the same way it has been in every year of the 13 years that I've been in Lam Research, it's our best view of our performance. And the fact that we've beaten this is sometimes the byproduct of we're kind of getting to know the company and learning how its inflows are influenced in the short term. Some part of it is, we've had changes of behavior from customers and we've had positive surprises that we've been out to exploit, competitively. And the headline that Doug conveyed, right at the end, I think, is a very important one. There is a reason why we have the long-term models of the company, they're intended to be the best commentary we can give you on financial statements and what I would not want to happen is for everybody to go, "Oh. Every time they've beaten for the last 6. Therefore, we're going to add that $0.10 to every forward-looking guidance, because that would be inconsistent with the message that we're trying to communicate. But we're doing our very best to communicate through the eyes of management, sometimes we get positive surprises, sometimes we're more effective managing the company than we originally anticipated. But the guidance and the framework of long-term models is the very best commentary we can give you.

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

Martin, if I could ask you to kind of characterize the dynamics of around memory spending, first, I guess, there was the comment that's some memory spending slipped out a little bit. But then based on their memory shipments, slipped out a little bit. But based on the guidance, I assuming that just slipped into the fourth quarter. So first, if can you confirm that? And then, secondly, is this a dynamic where the writing capacity exactly as they need it? Is it a dynamic that the writing capacity based on the technology transitions? Or is it a situation where one customer is kind of looking around and, seeing another customer, a competitor of theirs is adding capacity in a tight environment, and then wants to add their own capacity, so they don't lose share?

First question is easier than the last one. I do think that, in general, it was a very slight push from September quarter to December quarter. So your hypothesis was correct there. I think there are a couple of things that DRAM and NAND have in common and there are some things that are slightly different. So in common, I think, is the discipline of our customers relative to spending. I'm not seeing any evidence of extravagant spending behavior, almost any time a customer talks to me, or us, about market share, they're incorporating the word profitable market share into the conversation. So I think the awareness and sensitivity to the value of discipline is now well-established in the industry, and I have no expectation of that changing anytime soon. The DRAM story, obviously, there was some short-term disruption in supply chain that caused some pluses and minuses in the short term. And the principal spending outlook is oriented to upgrading capacity to the most leading-edge device. And I think the pace of the customers willingness to do that is defined around their profitability levels and their outlook for the industry. And as you know, a 3D NAND, it's a little bit more complex because you have a very fundamental device transition. And you have 4 customers that will talk about it, but their timeline for adoption by public disclosure today are significantly varied. And I frankly don't know any better than you do, whether the second, third and fourth customers accelerate plans, or keep plans as currently stated, based on the performance of the guy that's going first. So I think we are going to have a big learning experience in the first half of next year, not least for the customer that is going first. They're going to learn and impact in the marketplace. They're going to learn yield in a production environment, and that will contribute to answering your question. It's a really big question and one that is tough to answer right now.

If I'm allowed one, on top of that, it would just be, the bear case on Wall Street around companies are all around the 3D NAND transition. People say 3D NAND doesn't work. It's not going to work. We're not going to see all the memory spending that you, Jim, or some of the other companies think we're going to see. What do you say when people say that, to you?

Well, not so many people say that to me, but if they did say it to me, I would say, "Our customers that are articulating transitions are pretty smart people. They are convicted, and when they have established plans, previously, and in the transitions in the industry, they've kind of -- they can execute it in the way they thought they would. As I said, in the last call, until I have evidence to the contrary, I'm going to believe the statements from our customers.

The next question is from the line of John Pitzer with Credit Suisse. John W. Pitzer - Crédit Suisse AG, Research Division: Martin, always appreciative of your willingness to kind of give us macro actual numbers. I'm kind of curious, when you look to the $32 billion in WFE next year, can you give us some broad ranges of how you think that plays out between memory, logic and foundry? Just a sense of how you're thinking about those 3 buckets relative to that $32 billion WFE number?

Yes, I'm happy to do that, John. I would kind of just ask that you allow me the flexibility of kind of, slightly, a broader percentage range on these numbers because it is really early to be having a segment based conversation. But based on our understanding today, we would tend to presume that the single largest investment segment, next year, is foundry and a $13 billion to $14 billion range is probably a reasonable placeholder. The next biggest is memory, and we would see memory in the $12 billion to $13 billion range. And I think DRAM and flash are probably as close to 50-50 as they've been for a while since the dollars of invested capital and the balance is microprocessor, logic and other for us. So that $6 billion or so there. But there's a $4 billion range on the overall number I gave you. So please, remember that, as you think through the answer I've just given you. John W. Pitzer - Crédit Suisse AG, Research Division: That's very helpful. And then on -- Just to drill down on the foundry section. I think you've talked a little bit this year about 20-nanometer, you kind of given ranges between 30,000 and 50,000 wafer starts of investment, and I think, last quarter, you said the low end of that, one, has that changed. And as you think about foundry growth next year, how important is the 20-nanometer buildout? And does your number need FinFET build next year to get hit?

A certainly think there's traction on the FinFET 14, 16 node. I believe, every customer is publicly articulating some plans and I believe in the most recent CS&C earnings release that would say a specific statement on their timing. We have 2/3 and 1/3 is the relationship we're assuming right now, in terms of 20-nanometer capacity expansion next year versus the 14, 16 kind of a pilot and early phase production investments. And again, we got plenty of time to learn whether that's reasonable or not, and adjust it. I would say, as I said previously, for an equipment company, there's not a huge difference between the 20-nanometer spend and a 14, 16 spend. In fact, I think I saw a communications from customer in the last month that said, they have about a 95% equipment overlap between the final planar and first FinFET. And we've never been quite so precise in our quantification, but when the customer is articulating that and when, as I said, previously, when they visit with us, they've almost don't distinguish between the 20-nanometer ramp and the 14, 16. Hopefully, that is -- that's helpful perspective as well.

The next question is from the line with the Stephen Chin with UBS.

Just a follow-up on the WFE view in 2014, Martin. Just wanted to see if you could share any early thoughts on how you're planning to manage the company and perhaps the first half of calendar 2014? Are you kind of managing, maybe for first half shipments, to stay at similar levels that we saw here in the second half, the calendar 2013? Or maybe something different?

I'm presuming you're not prepared to accept the answer, "I plan to manage the company well." But I think, relative to shipments, for example, our job and the philosophy of their running this company is, "We're going to ship to customers, when they need it. We're going to take orders off the street, when they're available to take off the street." As I think about running the company, there is a very clear commentary of discipline today, and I think that's probably an industry statement, but it's, for sure, a company statement. We take a lot of responsibility for the investment choices we're making. We are invested in the long-term success of the company, but we recognize that being responsible, supplementing the investment profile of the company, is really critical, and the best we can articulate, at a high level, is the financial model that Doug presented some time back for '13, '14 year and 15, 16 period. So that's really the framework for answering the question. We're not planning to go crazy spending more money next year. I suspect our customers are going to put lots of pressure on us, relative to the price of what we sell and, I suspect, the competitive dynamic will be as intense as ever. And I hope that the performance of the company, in the last 12 to 15 months, gives you some level of confidence that we are able to manage that. And certainly, that's the basis of our forecast ongoing. But I don't sit here and try to plan linear -- linearizing the calendar year. I would like us to take orders when they're available, ship when customers need it, get at revenues and qualify it as production capacity as fast as possible and collect cash. And then, start all over.

And maybe just a quick follow-up question on the December shipment guidance, can you share any color on how you think that'll split across, I guess, memory, foundry, logic?

Yes, I mean, Steve, we talked about $1.125 billion. Within that, I think memory is probably up a little bit. I think, we're seeing reuse in the logic space, so it's likely that, that's down a bit. Foundry, maybe a push to slightly up. I think you're going to see some spending in 20 and maybe some of the legacy stuff nodes behind that, down slightly. And then, spares. We do ship spares, which we don't talk all that much about. But that is driven by utilization, at times, and I think you probably know, utilization in the industry is down a little bit, so we're probably shipping a fewer spares next quarter.

Next question is from the line of Harlan Sur with JPMorgan. Harlan Sur - JP Morgan Chase & Co, Research Division: On the last call, you mentioned push outs by some foundry suppliers to make the move to 20 nanometers. What are you seeing in your pipeline from those customers? Are they potentially pulling the trigger this quarter? Or are they stepping up the transition to 20 nanometers, in maybe more like first half of '14? Do you have visibility into when these customers are going to transition?

Actually, Harlan, I don't think that the story is much different today than it was 3 months ago. I mean, at least, qualitative, I described the fact, last call that, having originally anticipated 2 customers investing at 20 in a significant way, we were seeing evidence that it might be one and, in fact, the quantified reset of WFE is made on that basis today, with our narrowed range. And there's a big debate and I don't know the answer to the debate at this point. Again, it is not so impactful to us. Is it a 20? Or are they skipping to go to 16, 14?I will tell you that the FinFET transition is a very tough one. It has a lot of complexity to it, in terms of technology transition and has a lot of complexity in terms of yielding, and it isn't going to be easy. But we have very capable customers around the world and, I believe, that they believe there are performance [ph] benefits in the end-device and cost benefits in terms of their business. And so, my presumption is, if the fabless community is on the same page, everybody's going to want to get there as fast as possible. But for an equipment company, we may be the last to know because it isn't so important. Harlan Sur - JP Morgan Chase & Co, Research Division: Yes. Makes a lot of sense. When we think about the complexities of next-generation manufacturing technology as we typically tend to think of things like higher selectivity, some thickness uniformity, et cetera, but we were just talking with a large memory supplier the other day, and they were pretty frustrated about the significant increase in manufacturing cycle times with some of these next-generation technology migrations, especially in NAND and DRAM. I think they were talking about something like a 40% increase in process steps and 30% increase on average cycle times to the fabs. So as Lam competes for PTOR on some of these new process modules, how much of the decision centers more around connectivity, i.e., cycle time? And is this a major differentiator for you on some of your next-generation tools and etch step in clean

That is a really good question. I would say, as a general theme, and it's one of the reasons that the mission statement of the company doesn't just say, "We want to be an innovator of technology." It says we want to be an innovator of technology and productivity solutions. I mean, the economics, for everybody, is such that we kind of deliver more to the customer around the productivity for many reasons, including the ones that you cited. That would be my general answer. At a specific level, particularly, when you get very significant changes in the definition of SAM and the most obvious example is deposition in 3D NAND. Productivity is a huge play. It isn't the only play, because there's a lot of complexity to the deposition process, high aspect ratio, reentering profiles, a lot of complexity there, in metals and in dielectric. But one of the themes of the deposition business of Lam Research is a multi-sequential station deposition architecture. And so, I believe, we have the most competitive offering in terms of productivity throughput solution sets and also clean room density, which is hugely relevant to the costs and the issues that you're describing. So I believe you're right. And I believe that the product and technology roadmap of Lam Research is structured to contribute the most value to the customer and to reinforce the legitimacy of the share gains we're pursuing.

The next question is from the line of Patrick Ho with Stifel, Nicholas. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Martin, first, in terms of the discussion you had about the 3D NAND and the increasing SAM, related to both etch and deposition, specifically on the etch side, given your current positions in silicon and dielectric, where do you see the biggest incremental opportunities as this industry transition is being made?

Where do I see the biggest opportunity in etch? Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: In etch, yes, between silicon and dielectric.

I would say the bigger opportunity is in dielectric. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Okay. Then maybe...

I mean, but they're both -- obviously, they're both very important, not just in terms of growth, but they're both are important it in terms of defense. So they're getting a lot of our attention, but the biggest opportunity gain is, I would say, is in dielectric. And the success, frankly, that I would describe, the planar NAND share for the company is significantly above our average, kind of going into this transition. So that's a really fabulous result for the company, if it's exactly the same, and if it's better, that takes very good to very, very good, I guess. Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division: Okay, now that's helpful. Maybe for Doug, on the OpEx side of things. You guys did really good job this quarter and you did mention that there is some R&D timing issues related to when projects are. Just on a going forward basis, now that you've completed the integrations with Novellus, what are some of the other levels that you can play around with, in terms of the OpEx line, as you go forward?

Patrick, there's always tons of opportunities to do things more efficiently and better. And in the technology industry, you have to do that every year, and we will be doing that as we get into the next calendar year. In terms of thinking about it, Patrick, I'd encourage you to go back those financial models that I referred to. We've kind of got a certain level of spending baked into those models and that really is how we're thinking about -- running and managing the company is making sure we achieve and attain those models that we've committed to you guys.

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

On the foundry segment, when you talk about 2014 expectation, do you see any kind of seasonality and foundry spending next year? Or do you think that this year -- next year is going to be different, given that only one customer is having 20 nanometer, and given a piece of technology [indiscernible]. And I have a follow-up.

I think I gave my best shot at answering that already. I -- clearly, there is one customer that, at least today, is leading the investments and the public commentary from them supports that. And clearly, there are a number of companies invested in creating an opportunity for competitive advantage with the FinFET transition. So maybe that's the slightly different story. But all things being equal, we would say, at this point, that the 20 nanometer is reasonably concentrated but broadening a little. And the 14 and the 16 FinFETs node is very early, obviously, and I think the foundry community wants to be -- everyone of them wants to be there first, for fairly intuitive reasons.

Okay. That's helpful. And just of the foundry shipments, what percentage of your shipments would be to the 28? Or excluding the 20 nanometers, what percentage of your shipments will be to some of the other customers?

For next year?

For the fourth [ph] quarter.

I'm not sure. I don't have that to hand, unfortunately. I can't give you that right now.

Yes. We typically don't break it at that level of detail, Vishal.

Operator, we have time for 2 more questions, I think.

Your next question is from the line of Edwin Mok with Needham & Company. Y. Edwin Mok - Needham & Company, LLC, Research Division: First question, on foundry shipment. Do guys see any pull within -- you mentioned shipments would be higher in the September quarter, and it's sounds like December, it remains strong. Any risk that business is going pulled in from the first half of '14 into the second half of this year?

I guess, the only honest answer to that question is, there's always risk, but we don't see it today. Y. Edwin Mok - Needham & Company, LLC, Research Division: I see. Okay, that's fair. And then, maybe moving on to 3D NAND. You mentioned you're beyond the one large customer that -- obviously, if you a NAND customer who was working towards that and you're targeting a similar option in those customer, have any -- when we listen to this customer, they talk about 3D NAND being, frankly, some of them talk about 2 years out, right?

Yes. Y. Edwin Mok - Needham & Company, LLC, Research Division: How realistic are those opportunities being a 2014 opportunity? Or are lot of that still quite far out? And in terms of customer decision, are they getting close to making a decision? Because typically, they have to make the decision ahead of time, right? Are they close to a decision for equipment choice or are they still pretty far along?

I think, it varies enormously by customer. And it's one of the things we talked about in the analyst meeting and, again, in the last call. There are timelines of PTOR decisions and they range by, probably a year, from first customer to last customer, and there are PTOR decisions for customers that range, I think, 2 years, probably. And so, whether it's resting on our laurels or not, we've got to manage the risk that when we think we've won, that we can protect that win, all the way through the adoption. And when we haven't won, that we can turn it around for a production buy. So I would say, generally, the 3D NAND environment is still, significantly, in flux. Certainly, when it comes to high-volume manufacturing, and that will probably be true for a reasonable period of time in calendar '14.

It's your final question. It's from the line of Terence Whalen with Citi.

Just a very quick single question. I, obviously -- commented on EUV push outs. I want to understand your perspective of what's going on there, and whether you're seeing any feedback from customers, specifically, with regard to roadmaps that used to be EUV versus traditional multi-patterning?

Well, it's a question I always ask the customer, and I have a sense that the answer that they give me is very similar to the answer that they'd probably give you. So I don't to have too much to add. Obviously, it shows up for us, in a tangible way, around patterning opportunities. And I would say, today, the recent disclosures we would only see as a positive, relative to an opportunity for Lam Research, principally in etch, but also, to some extent, in deposition. And I don't see downside to the SAM as we know it today, or the increased patents that we shared with you in our recent 2 analyst meetings. So for me, our job is to support the needs of the customer, and where they don't have any real alternative to patterning, they're going to look to us. And our job is to do that as economically as we can.

Martin, you said you don't see downside to multi-patterning. Do you see upsides based on recent developments?

I guess, I can always be hopeful of that, and the reason I'm, perhaps, I'm hesitant is because, if I do, there are upsides that would show up a couple of years from now, right? When you've kind of gone beyond double and you're into quadruple and I even saw a presentation with octuple, the other day. Now whether that ever plays out, that's a number of years away and a lot can change on an EUV roadmap or a customer's device architecture between now and then. So we'll cross that bridge when we get there.

And that's all the time that we have for Q&A. I'd like to turn the call back over to management for closing remarks.

I like to say thank you, all, again, for your continued interest in the company. As you likely can extract from our discussion today, we're very pleased at the continued progress against our mission and vision objectives. We remain excited about our future opportunities and customer partnerships. Based on our current understanding, we expect an expanding WFE market through 2014, and believe that Lam is nicely positioned in the areas of technology transition. The legacy strength of the company bodes well for the generally anticipated memory investment expansion. The new products across each of our businesses continue to strengthen our competitiveness, and the culture and values of our new company are firmly established. We believe that action speaks louder than words and hope the demonstration of financial performance reported today, that's consistent with our model, is recognized generally as validating our vision and our strategies and execution capability broadly. Thank you, again. We look forward to meeting with key shareholders in the coming quarter to discuss these themes more. Thank you.

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