Q1 2020 Earnings Call
Thank you operator, thank you and good afternoon, everyone. Welcome to the Lam Research quarterly earnings Conference call with me today, our Tim Archer, President and Chief Executive Officer, and does that injure executive Vice President and Chief Financial Officer.
During today's call, we will share our overview on the business environment and review our financial results for the September 2019 corridor and our outlook for the December 2019 quarter.
The press release detailing our financial results was distributed a little after one o'clock PM Pacific time. This afternoon. The release can also be found on the Investor Relations section of the company's website, along with the presentation slides that accompany today's call.
Today's presentation in Q in a includes forward looking statements.
And are subject to risks and uncertainties reflected in the risk factors disclosures about FCC public filings. Please see accompanying slides in the presentation for additional information.
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. This call is scheduled to last until three o'clock PM Pacific time.
A replay of this call will be available later this afternoon on our web site.
With that let me hand, the call over to Tim Thanks to new and welcome everyone.
In the September quarter, Lamb delivered solid results or continued execution to commitments combined with our guidance for the December quarter increases our conviction Lam is in a strong position to outperform as wafer fabrication equipment spending influx higher.
Doug will cover the financial results in more detail shortly but I'm, especially pleased with the demonstrated earnings power of the company.
The midpoint of our December guide calendar year 2019 diluted earnings per share will be the second highest in our history. Despite the current industry cycle.
I would like to take this opportunity to thank our customers and partners for their continued supportive Lam and our employees throughout the world for their contributions to these results.
From an industry perspective, we have revised upward our view on 2019 Wi Fi to the mid 40 billion dollar range versus our prior estimate of down mid to high teens percentage year on year, which implied below $40 billion level of spending.
We are beginning to see improvement in the memory market.
Led first by NAND.
NAND demand dynamics are improving and oversupply conditions should continue to abate as we move through the December quarter.
We expect to exit 2019, with a bit supply growth rate for NAND of approximately 30%.
Which is well below our view on long term demand and as a result, NAND inventories are expected to decline to normalized levels in the first half of calendar 2020.
While the timing of a memory equipment spending recovery is always hard to predict.
We are encouraged that customers continue to manage supply growth, even as we are starting to see favorable end market demand indicators.
This is a sign of a healthy industry and a good set up for increased NAND spending in 2020.
On the DRAM front inventories have remained elevated and we do not expect them to reach normalized levels until the second half of 2020.
However, we see positive demand catalyst ahead in both the server and smartphone markets server CPU upgrade cycle is expected to begin next year with increased adoption of new generation platforms from leading manufacturers.
For smartphones major vendors are planning to launch additional fiveg models, which is expected to drive content growth for the overall smartphone market in 2020.
Turning to foundry and logic spending in this segment has been strong throughout 2019 and based on recent customer commentary looks to remain so heading into next year.
Diverse end market applications are driving higher levels of foundry logic spending Moreover, challenges and scaling functional block such as SRAM and logic devices are leading to increases in die sizes. In these in turn are accelerating changes in device architectures and chip manufacturing technologies.
Lams growing position with key foundry and logic customers has positioned us to incrementally benefit from these secular trends.
Competitively, we are executing at a high level.
Based on the midpoint of our December guidance, Lams, 2019 foundry and logic revenues are set to significantly outgrow announced customer Capex plans.
A share gains we're now seeing in the foundry and logic segment are the result of close customer collaboration and strong product execution over many years and multiple technology transitions. They are evidence of the benefit of sustained investment in R&D throughout industry cycles.
Looking at the market as a whole, including memory foundry and logic. We are on track in 2019 to deliver our best ever penetration in defense performance as measured by net forward looking three year revenue opportunity for application decisions made in this calendar year.
A key contributor to our strong penetration in defense performance has been continued focus on technologies that enable threed device architectures.
Which are becoming increasingly important to performance and cost scaling across all market segments.
We invested early in two d. to Threed inflections and as these transitions are occurring we are seeing expansion in both our Sam and market share.
Etch and deposition processes are critical enablers for Threed scaling and we are investing aggressively to deliver the technology and productivity innovation required to satisfy customer roadmaps.
As evidenced by our penetration in defense when this year. We believe we are extending lams leadership in this space.
In Threed NAND, we have successfully defended 100% of our memory whole died electric etch positions and continue to be the supplier for this application that all threed NAND manufacturers.
We're also winning Threed NAND applications, where productivity is the primary point of differentiation.
Notably Lam has been the first to deliver production proven edge yield solutions for edge.
In this quarter, we used our corvus tunable edge hardware on our flextime electric etch system to improve profile tilt uniformity and when an important productivity sensitive slit etch application.
On the conductor etch front, we want to Threed NAND application for a new vertical architecture, the reduces die size and as a technical solution for lowering bit cost.
In deposition, we recorded an important threed NAND win for the vector DT.
Which deposits backside films to control stress as layer counts increase.
Another significant deposition win was for our Stryker LD tool used to deposit high quality liners, and gapfill as aspect ratios get higher.
We also continued to extend our threed expertise and physician outside of the Threed NAND space, including in rapidly growing markets such as advanced packaging in heterogeneous integration.
Over the last three years, the installed base for our Sabre Threeg electroplating system has grown by more than 70% and we are the leading at electroplating supplier for TSV for DRAM Cmos image sensor and logic devices.
Our sabre Threed electroplating solutions embedded best in class technology backed by years of high volume production experience.
With each successive when across our served markets the installed base of Lamb equipment continues to grow.
Resulting in an expanding long term revenue opportunity for our customer support business.
To create value for customers over the entire lifecycle of tool ownership, we are actively developing upgrades and advanced services targeted at extending technical capability and increasing productivity from existing installed base assets.
These offerings help our customers reduce their total costs.
And as a result, we continue to see growing demand.
Revenues from our customer support business grew in the September quarter on a sequential basis, and our reliant business achieved record quarterly revenue for the third quarter Roe.
We expect 2019 overall will be another growth year for our customer support business.
Looking at our year to date performance, we have made tremendous progress against our objectives of expanding our Sam increasing our market share and building our installed base business.
Importantly, 2019 has done a year, where lam has strengthened its position in the foundry and logic segment.
Also with early indications of improving NAND demand and positive catalyst on the horizon for DRAM.
We are increasingly optimistic the calendar year 2020 is setting up to be a year of outperformance for Lam spending mix moves back in our favor.
Thanks, again for joining today and now here's Doug.
Okay, great. Thank you, Tim and good afternoon, everyone and thank you for joining us today on what I know is a busy earnings season.
We're pleased with enhanced performance in the September quarter, our results once again exceeded the midpoint of guidance for all financial metrics.
Operating income and diluted earnings per share came in at the high end of our guidance range as we remained prudent in managing our spending throughout the quarter.
Let me begin as I always do by talking about our revenue segmentation in the September quarter.
The combined memory segment was flat with the June quarter at 64% of total systems revenue.
We had a decrease in the September quarter in the non volatile memory segment, moving from 46% to 38%.
While DRAM increased to 26% from 18% of systems revenue.
Spending on the land segment was focused on multiple modes and we're beginning to see the first ramp of 128 layer structures.
On the DRAM side apart from the onex in one why nodes, we are seeing initial investments at one zee.
As I noted on our last quarter earnings call.
Foundry and logic spending was strong and we expect strength from this segment to continue through the remainder of the calendar year.
The foundry segment represented 25% of our systems revenue in the quarter.
Strengthen this segment is related to spending on the seven and five nanometer nodes.
The logic another segment was down slightly from the prior quarter level coming in at 11% of system revenue.
We've continued to demonstrate strong progress in the foundry and logic segments, enabling us to maintain solid profitability levels during a period of depressed memory spending.
I believe foundry and logic spending will be even stronger in December .
Revenues for the quarter came in at $2.166 billion.
Which was again above the midpoint of guidance.
Our revenue had a slightly broader geographic mix in the September quarter compared to the June quarter.
Our top regions continued to be China, Korea, and Taiwan.
The China region quarter performance remained higher remains higher than our historic average concentration of revenue.
And similar to what I talked about last quarter. The majority of this came from indigenous Chinese customers across multiple segments.
Gross margin came in at 45.4%, which was 40 basis points above the midpoint, mainly due to customer mix.
And as we've stated in prior quarters, you should expect gross margins to be a function of several factors such as business volumes product mix and customer concentration.
And we expect to see variability quarter to quarter.
We continue to manage our spending levels in the company is operating expenses in the September quarter declined to $431 million, which was down from $450 million in previous quarter.
We remain laser focused on investing and research and development programs.
As we saw the percentage of spending in R&D increased quarter over quarter to 67% of operating expenses.
The December quarter, the guidance reflects total spending increasing back to the June level.
Primarily due and due to an increase in variable compensation expense.
Our variable compensation fluctuate based on the level of quarterly profitability.
I'd also remind you that as we look ahead to the 2020 calendar year.
You will see the normal seasonal spending increases related to the March quarter.
Comes from things like payroll taxes.
Operating income in the September quarter was $552 million and operating margin was 25.5% at the top of our guidance range.
Our September quarter, non-GAAP tax rate was approximately 11%.
Which was slightly lower than our long term rain.
There will be fluctuations in the rate from quarter to quarter, and we now expect our long term rate to be in the low teens level.
Other income and expense was a total of approximately $11 million and expense in the September quarter.
The main components of other income and expense our interest income from the cash and investment balances we hold.
Offset by expense related to our outstanding debt.
The total interest expense on all trenches of our debt is right now about $41 million per quarter.
You should expect that other income and expense will fluctuate quarter to quarter based on several market related items, such as our deferred compensation assets.
Venture capital investments and foreign exchange.
We continued to execute on our capital return program during the September quarter.
We allocated $234 million to capital return in the quarter was $75 million related to open market share repurchases and $159 million in dividends.
I would like to remind you that we continue to have an ongoing structured repurchase program that is expected to mature in the December quarter.
This will continue to reduce our share count.
We remain on track with our committed capital return.
We currently have approximately $3 billion remaining in our board authorized share repurchase program.
Okay.
Diluted earnings per share came in at $3.18, which was at the high end of the guidance range that we provided for September .
We ended the September quarter with diluted shares for earnings per share at approximately 151 million shares.
Which is the seventh consecutive quarter, where our diluted share count has declined.
The share count includes a to do a dilutive impact of approximately 5 million shares from the 2041 convertible notes.
And I'll remind you dilution schedules for the remaining 2041 convertible notes is available on our Investor Relations website for your reference.
Let me now switch to the balance sheet, our cash and short term investments, including restricted cash increased slightly in the September quarter to $5.8 billion from $5.7 billion in the June quarter.
Cash flows from operations were $464 million, which was offset by share repurchase and dividends.
Year to date in calendar year 29 team, we've had strong cash from operations performance and we're on track to end this year with the second highest level of free cash flows in the company's history.
Yes, so increased to 69 days versus 56 in the prior quarter.
The DSO increase is related to the timing of customer payments occurring at the end of the September calendar month, which falls within our December fiscal quarter.
Our inventory balance declined sequentially by $57 million, which is the fifth consecutive quarter, where inventory balance decline.
Inventory turns were 3.2 turns which was just a little bit less than 3.3 terms that we saw in the June quarter.
700 regular full time employees.
So now looking ahead I'd like to provide our non-GAAP guidance for the December 2019 quarter.
We are expecting revenue of $2.500 billion, plus or minus $150 million.
Gross margin of 45% plus or minus one percentage point.
Operating margins of 27% plus or minus one percentage point.
And finally earnings per share of $3, an 80 cents plus or minus 20 cents based on a share count of approximately 150 million shares.
I'm pleased to share with you the results we've delivered throughout calendar year, 2019, and what has been a challenging industry environment.
As Tim noted the supply demand environment is improving for the memory segments and we've made good progress in our foundry and logic positioning.
Our installed base business continues to be on track to deliver a growth here in 2019.
We're well positioned heading into 2020 and are optimistic about our future performance going forward.
Finally, I'd like to announce our plans to hosted Investor day on March 3rd 2020 in New York City.
Details on the venue and precise time will be forthcoming.
Operator that concludes my prepared remarks, Tim and I would now like to open up the call for questions.
Thank you if you'd like to ask a question to signal pressing star on a telephone keypad, if you're using a speakerphone. Please make sure. Your mute function is turned off to layer signal to reach our equipment. Once again that is star one if you'd like to ask a question.
Well take a first question from smelly with Citi.
Hi, Thanks for taking my question and good job on the execution.
Question on the Wi Fi opinion mentioned WFP going from low 40 billion to mid 40 billion I'm I wanted to span if the if the majority of the increase has come from the foundry logic segment segment in terms of device outlook.
Maybe maybe a few a few modifications I mean, clearly as we've said we've continued to see strengthening in foundry logic. So that is a portion of it.
The some very early indications of NAND spending increase as we now have guided for December quarter, and finally, continuing strengthening in the China.
The as we've kind of seen increased strength throughout the year. So combination of all those things led to our upward revision in WSE.
Okay, and just a follow up in your prepared remarks, you mentioned foundry logic share gains above foundry logic Capex. This year, how should we think about the outperformance off your foundry logic business the into next year and out given that some of the elements like reuse and growing easy steps.
Well that's a that's a great question you basically as we have said on a number of occasions, the intensity of etch and deposition, we see continuing to increase it every technology node or Sam grows whether be tend to seven to five to three on into the future Sam increases even in the phase.
Most of you be increase increased usage and there's a number of reasons for that patterning complexity continues to.
Increase regardless of the introduction of UBI.
And so there there are additional steps for.
Deposition and etch.
You'll be itself introduces new requirements for hard mask, which gives lamb opportunity to.
Participate from a deposition perspective, and you'd be also we've talked about in the past introduces opportunities for new steps like and processes like atomic layer edging that can be used to help increase quality and productivity of the pattern itself. So I think the way you should think about it is.
Our sammis expanding competitively are gaining share at some of these new layers and.
We feel we're well set up in both the foundry and logic space going forward as technology transitions.
Thanks. Thanks.
Thank you, we'll now take our next question from CJ Muse with Evercore.
Yeah. Good afternoon. Thank you for taking the question I guess first question, if we look back to 2018.
It looks like your share of wallet and does it for Wi Fi with Dan It's roughly 30% I'm just curious as you think about moving to a rising layer count.
And your leadership and a high aspect ratio etch.
Let me just announced.
Position with.
So on the call Tonight, how should we think about your share of wallet as we go to 128 layer in a bump into 20 twond.
Our Sam as a percentage of customer spend continues to increase with.
With layer count and Thats port for two reasons, one I mean, obviously the.
The simple fact of building in entering the higher stack, but also the fact that as I mentioned, there are new steps and new opportunities to get created for dealing with.
Issues, such as in the vector de Teekays distressed associated with those taller layer counts, so I think that.
Our view is Sam Sam grows as layer count increases.
Thanks, Jim and I guess as a follow up Doug I'm I'm not sure. If you spoke to the entirety of installed base revenues, but did they grow sequentially in September and how should we think about the trend or what should we kind of model it to enter into 2020.
Yes, you Jay I think Tim actually mentioned in his prepared remarks at the did grow sequentially and it was the third consecutive record quarter for the reliant component of that business.
Yeah, I'm not going to quantify next year, yet so little bit too soon but what we said in the past and I continue to be very comfortable saying today is I have a hard time envisioning a year when the installed base business doesn't grow it should grow every single year.
Because chamber count grows every year, it's growing this year, even in a depressed memory spending environment.
We continue to bring new advanced service offerings to market.
That will enable us to achieve more and more the the customers opex spend.
So that's that's how you should be thinking about that CJ.
Great. Thanks, so much.
Actually there.
Thank you I'll now take our next question from Harlan sur with JP Morgan.
Good afternoon, great job on the quarterly execution. This is second quarter in a row of the heavier China domestic mix do you guys anticipate just bias to continue into the December quarter and into next year and similar to my question last time is this in your view a focused effort by China to accelerate there.
Semiconductor manufacturing capabilities, given the trade tensions what the U.S. or more youre trying to customize just having more confidence to move forward with their early memory and foundry programs.
Yeah, Harlan what I've tried to describe in fact I tried to foreshadow what last quarter and earnings that this is above normal run rate of local Chinese customer spend.
But Tim did point out in his his remarks that some of the strengthening and Wi Fi came from local China.
Probably now nominally somewhat above $6 billion and Wi Fi.
And as we look into next year, we absolutely think it will grow again next year.
But it'll ebb and flow is all you know these these big projects can be lumpy at times and it'll go up and it will go down depending on when equipment ships ships into anyone Fab project, Tim you want to add anything yeah, I think that as I commented, we've seen strengthening in domestic China spend through the year anticipate that continuing.
And maybe the most important part of that story for Lam is that clearly a big portion of the new incremental spending in China is targeted towards the memory market and obviously, our Sam and our share in memory spaces.
Is quite good so from that perspective, we see China's.
Area of strength for Us Harlan I I forgot the one part of your question you're asked we think anything pulled in actually really don't.
I don't think it would make sense that wouldn't be pulling things in sooner because if you're concerned about our inability to ship being the reason they pull them if they can't get spares and service from us They can't actually really utilized tools very well. So I don't believe that there was poland's related or anything like that.
Great. Thank you. Thank you for the insights then you know the team continues its strong design win momentum on non critical and or legacy technology known as part of it as you pointed out is the relying systems products continue to do well we continued to hear from your customers that they are laser focused on productivity throughput uptime foot.
Plant all of the things that impact overall wafer costs are you guys now in a position to at least give us some sense on how fast the non critical slash refurbish business systems business is growing and roughly the size of this business relative to your total revenue base.
Maybe you have to wait till investor day for that.
No. We do plan, we do we have promised for sometime now to provide you more detailed in those areas and ER and and we're just we will do that I think maybe a couple of points your comment about customers being laser focused on productivity I mean, it's one of the reasons why we have been talking about it. It takes some time for those products for our.
Efforts to to really start to show up and in new wins that you know we're starting to see in this area that Doug talked about in advanced services, you know where some of these intelligent database tools are really starting to help us reduce for instance, troubleshooting time on the systems reduce unscheduled downs on the systems and those are things that they can.
Summers are pulling hard for because again its productivity for tools that are already in place and.
Relatively easy to implement so.
We are we're prioritizing productivity because it's in the best interest to the customer and the industry as a whole.
Yes. Thank you.
Thanks Harlan.
Thank you will hear now from John Pitzer with credit Suisse.
Yes. Good afternoon, guys. Thanks, Let me ask the question congratulation on the strong results Tim I just want to go back to the market opportunity in logic foundry for you. If you kind of look at calendar year to date.
That business combined for you is up somewhere between 30% to 40% year over year, I guess I'm, just trying to get a sense of how we think about your market position us maybe in North America as we see 14 go to 10 go to seven and maybe in Taiwan as we see seven go to five go to three can you talk a little bit about how much.
Visibility you have on product tool of record on some of these critical etch and deposition steps and then how we might think about your share opportunity as we migrate down these nodes.
Sure.
I can do that without quite getting as specific as North America questions, Taiwan on those nodes.
So maybe I'll I'll point, you just a couple of comments I made and then embellish those a little bit.
As I said it within the logic and foundry space. It takes many years to establish yourself as the first the development tool of record and then ultimately see that rollout into volume buys as the production tool of record.
And so when we talk about.
I gave we gave a little bit of a new look into this penetration in defense.
Forward looking three year revenue opportunities statement.
That is designed to give some indication as to how long it takes from the time, we when one of those selection decisions.
And you'll see that revenue opportunity trying to take place over those following three years, that's definitely true in the foundry and logic space and so I think that when we talk about improving opportunity at 10, and seven and then five.
You can kind of look out and say if.
I'd like a five nanometer decision is revenue opportunities that now we're rolling over the course of the next several years so.
Yes that may not be quite the level of specificity wanted but but basically says things that we are winning now we'll actually be our revenue for the next.
Three years plus in that space.
That's helpful. And then Doug you mentioned in your prepared comments you still have about $3 billion left on the buyback and I apologize to capital allocation call, but you know this this most recent quarters of buybacks dipped down a little bit, which I guess is understandable just given the level of uncertainty any color you can give us around the patient when she.
Might want to try to execute.
It is actually going forward and how we should think about kind of just remind us again, the cash return policy you're trying to hit.
Yeah, John I mean, one thing I would point out too and if you look over the last two years, you will have seen several quarters, where the cash we actually deployed moved down somewhat.
That was because in the quarter before that we put one of these accelerated share repurchase programs in place.
You have the same phenomenon going on this quarter, so even though the cash that we deployed in terms of open market repurchases wasn't all that significant this quarter that MSR was still executing buying stock back and that MSR. That's currently out there were completed in the December quarter. So we'll be thinking about what we're going to do incrementally as we go forward.
So far.
Please remind you what we talked about its been a while now the last analyst day that we're we're committed to at least 50% of free cash flow returned to shareholders and obviously, if you look at our history.
Over the last five six years, we've done a whole lot more than that.
And I've been silent on the timing to complete the current authorization and I'm going to kind of remain that way.
Set in the past we'll be opportunistic.
And that's as much as I have one right now.
Alright, thanks, guys congratulations.
Thanks, John .
Thank you we'll take our next question from Timothy Arcuri with CBS .
Thanks, a lot.
I guess my first question Doug is can you help us a little bit with the mix in December I'm curious if the uptick.
In.
Revenue is going to be more than and side or more on the foundry side. Thanks.
Yeah, So what I said, Tim in my in my remarks was I expect December we'll continue to be pretty strong foundry and logic quarter. So that's a key piece of what's going on.
Okay awesome.
And that I just wanted to.
I just wanted to drill down a little bit into the China piece. So.
China is about 25% of your revenues now on the you know trailing 12 month basis.
So I guess I'm curious how much of this is going into indigenous projects versus the multinationals because I thought you said.
China was about 5 billion of 2018, Wi Fi and I think at that time, you were talking about $3 billion of that 5 billion being domestic China and I think you just said that China is gonna be over six this year. So can you sort of like level set us on how much of that six this year will be.
Multi versus domestic and and maybe how much domestic even grow next year. Thanks.
Yeah, Let me walk it back for a little bit because some things have moved around a little bit you know when I look at what happened last year local China ended up being I don't have four and a half billion dollars of Wi Fi roughly.
So it ended up being maybe a little bit more than than that for that we've been talking about and the way we see it today, it's above six it somewhat above six.
Don't know for sure what next year is going to look like but as we as we looked at our analytics in the fab projects that are coming in and whatnot.
Use pretty strongly believe it will grow next year I'm not ready to tell you how much yet we'll give you more clarity on our WFP view for next year on the next earnings call.
But I think local China will continue to grow next year.
And just to clarify those numbers are local China numbers right that's right Yep.
Okay. Thanks much.
Yes, you're welcome.
Thank you we'll take the next question from Toshiya Hari with Goldman Sachs.
Yeah. Thanks for taking my question and congrats on the strong results I'd tell you talked about early signs of recovery in NAND in your prepared remarks, and Doug do you just mentioned that most of the growth or at least Simplistically I. Thank you. You can you commented that most of the growth in December quarter should be coming from foundry and logic.
So should we expect some of the NAND projects that were all collectively hearing about.
Should hit the March quarter from a red rock perspective.
Yes.
Yes.
Maybe maybe there is not such a big change here from from what we've said we don't ever since the beginning the year, we said that.
Memory spending would likely remain relatively weak throughout the year.
And when I talked about early signs.
Is the is very early isn't there were now starting to see some of those projects transpire as you just talked about meaning a little bit of ordering occurring in the December quarter.
But we still maintain our view that we exit the year with this 30% that supply growth rate and that customers are prudently managing the the supply growth, but I do think those projects you know, it's kind of that early signs that the healthy industry and we're going to see growth in 2020, So exact timing, we really don't.
When I give you that right now, but it's it's a it looks to be coming.
Got it and then as a follow up I just wanted to hit the logic and foundry opportunity.
Dynamic into took into 2020, obviously you guys have done a great job over the past couple of years and gaining share in both buckets. If we assume that spending in logic and foundry is largely flat in 2020, and if you assume you view adoption continues to grow.
Based on what you guys know from a from a design win or application. One perspective can you still grow logic and foundry revenues in that and that sort of environment backdrop. Thanks.
Yes, that's a great question and the answer is yes, we would expect to grow in that in that scenario based on a couple of things one as you move forward even on the same Wi Fi our Sam as a percent of that WP should increase as transitions still continued to occur to more advanced nodes etch and deposition opportunity increases.
At each successive technology node, even in the face of the so I think in the scenario described we would expect to have a larger opportunity and we do believe that we're winning share as well and therefore, we would we would grow.
Great. Thanks, so much.
Hi structure.
Thank you with your NAFEM, Krish Sankar with Cowen and company.
Hi, Thanks for taking my question I had two of them first one for you that Tim or Doug.
I want to industry focus question you spoke about how non bid growth exiting this year is going to be 30%.
Curious like our fuel customers start ramping 120 live NAND.
It's next tier demand bit growth is below 30% do you still expect the 120 Lee of spending to go through next year, because it's more strategic low cost in nature or do you think it might get throttled back if demand that go to slower.
Maybe I'll take an intermediary.
I mean, Chris what what I don't think Thats whats going to happen, but were that to be what happened I think you would see a year that looked somewhat like this year in that most of the industry spending was allocated to node conversions as opposed to new capacity adds.
'cause it lowers cost per bit the economics are better.
In all of that in the other thing I would say a mental that came out on.
When we look into early next year I believe supplied growth rate will continue to decline based on the investments that have occurred this year right because they have reduced this year and so you are moving into a a declining rate a growth as we look into the first half of next year.
Tim anything yeah, I think just to reiterate doug's point, I mean trend technology transitions, we think occur.
Every year simply because of the benefit to that cost and so.
I guess I would say that in any year, which is not our view of declining supply growth. We would leave it still see the majority of the spend in technology transitions and I guess, there's one other key point due to think about we've we've mentioned this a few times in a technology transition.
From say 96 layers 120 layers. The majority of that spend is for etch and deposition. So.
There's definitely an outperformance statement there if if spend continues to be based just on.
Technology transitions.
Got it definitely helpful. And then a follow up I think Jim in your prepared comments you spoke about how you guys have successfully defended hundred person who failed dollar tree gets marketshare kind of curious on the non side is that a fit enough statement. If you look past 128, Leo higher than 120 led deal all tools what is that more.
Up to 120 leaves.
Well I mean, our statement is always as those decisions are made so we always speak about accomplishments made so.
I don't know of any decisions have been made well beyond the 128 later node.
So we feel it's obviously something that we compete for it every node.
But yeah, I guess, what I'd point out is there is a very important.
Piece of learning that has come from us running now millions of wafers through our dielectric etch tools and there was a question earlier about productivity.
Reliability stability.
Defect performance those are all things that again, we have millions and millions of wafers that experience and so the kind of come in with an edge every node that you have to compete for as the incumbent so that.
But specifically I think you could bucket most of those in that.
Hundred 28 nanometer in below.
No since their decisions already made.
Got it thanks, Tim Thanks, Doug.
Thanks.
Thank you and Patrick Ho with Stifel.
Thank you very much and also congrats on a a really nice quarter, maybe Tim first a lot of the market questions have been answered on my end, but as you look at next generation memory technologies like a m. Ram re Ram.
Can you just give them maybe a qualitative view of how Lam is positioning itself to capitalize on those next generation opportunities.
Yeah, Weve I guess, maybe that the simplest statement that I they make inside the company is.
We're not running from our leadership position in memory and that includes in these new emerging memory markets and so.
We're actively looking to develop new applications, new tools that meet the needs of those those are those devices. We've spoken about one of them in particular, so far this year, which is the ion beam etch tool that used for MRM and we have established a very strong position for.
For that particular application.
Thanks change memory Reram other other devices, where we're actively engaged in development with the leading company. So.
It is a target market for us in fact, one might argue that we feel we sort of we already sort of own that memory space and and I.
I think it's a focus got just add on if you really want more detail you can go look at the transcript of the Flash memory segment were Tim and restart show spent lots of time talking about how we view these emerging memory architectures.
Great. Thanks, Doug and maybe as my follow up question.
You talked a little bit about your a lot atomic layer deposition opportunity I guess, what it should perspective, how do you see the total available market for you in that and do you see it expanding from where it looks like you have a strong position on the memory side of things can this also expand onto the foundry logic side of things.
Oh it already has expanded I mean, the L.D. is not not memory specific so we use we use these films also on the logic and foundry side.
ASV.
Atomic layer etch and Tom atomic layer deposition and atomic layer etch and these are these are technologies that will continue to be increasingly used as devices become smaller and smaller and structures become more complex. So I think it's an expanding market opportunity and in fact, I think in coming years, you'll start to see.
Flexions for instance.
From batch processing tools to single wafer LD, just again for the type of Ah.
For uniformity and.
And.
Requirements of those processes going forward. So it's an area, where we're we're growing and we feel confident about our development activities.
The tools himself.
Great. Thank you.
Thanks, Patrick.
Thank you will hear now from Craig Ellis with B. Riley FBR.
Yes. Thanks for taking my question, Tim I wanted to follow up on the comments you made that calendar 2000 could be a year of outperformance for Lam can you just help us understand how much of that comes from moving deeper into the sweet spot of the foundry logic share gain that you've been talking about versus.
Help that you would get from what appears to be had a nice and very young.
Very encouraging upturn, that's starting to occur in the Andrew maybe something else like Sam expansion.
Yeah, I think for us to give you more detail on the breakout on that you have to wait until we actually speak to our our 2020 WP outlook next quarter, but.
You kind of hit it I mean, we deal with the way I think about outperformance in 2020. It's it's just what you said first and foremost you everyone knows that we are.
Highly leveraged to the memory market and we do believe that spending mix moves back in our favor next year.
And even in the face of stronger.
And continuing strength in logic and foundry memory will improve.
To some extent.
We've strengthened our logic and foundry.
Sam opportunity as well as share position and so thats a continued benefit as logic and foundry remains strong and also as Doug mentioned CSB G continues to grow as we expand our portfolio advanced services in that space and so.
Can break it out for you how much each of those contributes but each of them. It is important part of the story in 2020.
Thanks, Tim and then I'll do the follow up to Doug Doug impressive.
Trough to trough operating margin improvement of about 300 basis points and within that Theres dramatic improvement with operating expense as a percentage sales and as you noted there has been significant mix shift R&D. The question is.
How much further benefit is there in the model for.
For increased operating leverage and how much room do you have to further drive expense towards R&D for mass unit.
Yeah, it's something we've been working on for.
For years, I mean, Tim was driving this.
Years ago honestly in rest of companies rally behind that.
You know, we're going to keep squeeze inefficiency out every question a dollar we spend we want to be you know.
Totally rigorous about that so that we can allocate more those dollars to R&D I think that 67% last quarter might be an all time high for the company haven't gone all the way back but in my recent memory that wasn't all time high we're going to keep at that we're going to continue to try to get better. We do this everywhere. It's part of the culture the company.
It will be focused on continuous improvement I don't know how high weaken or we can get it honestly, but we're going to keep working that.
Thanks, guys.
That's correct.
Thank you here now from the Vic area with Bank of America.
Thanks for taking my question and I joined that is late so I apologize. If this was asked but the DRAM was quite strong in the quarter and I'm wondering what caused that then how sustainable is that strength.
Oh, you know when I look at it it's it's primarily conversion spending.
That's really what we've seen for the for the entire a year is focused on node conversions, it'll ebb and flow the important thing.
We think about DRAM is to understand when we look at similar to what we were describing NAND exiting.
You are below where we believe demand growth to be you got to similar story in DRAM as we look at the investments that are occurring in DRAM. This year exiting the year supply growth is probably in the low teens.
And we believe long term demand growth is in high teens, maybe approaching 20%.
There's a ways to go visit to continue to burn inventory out of a channel I think thats going to take a little bit longer.
But what I do know is at some point the inventory will be burned off in spending will will will grow more significantly in quarter by quarter. It's just going to be dependent on what projects are underway at what customers.
Got it very helpful and then as a follow up.
Kind of looking at your cash flow generation.
Fiscal 19 from what I notice that was a lot of cash inflows from working capital looking on the model right. How should we think about the plus and minus from Lucky capital. This year that thank you.
If you look at the first half of this your calendar year again, I never really think too much in terms of fiscal calendar year. I mean were cash was just super strong I think we had two consecutive quarters around $900 million, an operational cash flow and you're right a lot of that came from working capital.
What you normally see with the business when it's growing it will consume working capital, meaning it will take cash to build inventory and receivables and so forth.
On a levels offer contracts it will generate cash and that's really what went on in the first half of the year I mean, we manage cash quite.
Proactively, but the practical reality of business ebb and flow is that's what happens.
The right way to think about the free cash flow the businesses. It's a couple points below where operational cash flow should be on a sustainable basis.
But it'll ebb and flow around wherever read in the business cycle.
Thank you.
You're welcome Thanks for the question.
Thank you we'll take our next question from joke quite Lucky with Wells Fargo.
Yeah. Thanks for taking the question.
You talked about improvements and inventory that you've seen across the NAND Flash I was wondering if you could talk about to the extent you can factory utilization rates and your installed base.
Yeah, that's hard for us actually to put our finger on exactly what Utilizations are I mean, we saw it pulled back a little bit in both NAND and DRAM. This year I think that was pretty well telegraphed from our customers.
But better it's about a question to put for them. We don't always know exactly what their utilizations are.
Okay fair enough.
And maybe a follow up to that.
You talked about exiting this year at 30% supply growth.
I mean for NAND, and and made and potentially going lower than that next year on the first part of the year I guess the question is how do we think about the level of capacity expansion needed.
Ted to hit I'm kind of the I guess.
Expected demand growth for 2020.
Mmm tough question and answer Joe to be honest.
What's occurred this year in NAND largely has been conversions, maybe with a couple.
Exceptions, but if you look at man W., if you through the year. This year, but that's what was going on and you saw a declining rate of supply growth.
Such that.
As we exit the year, obviously, we said, 30% and I think long term NAND growth is in the high Thirtys maybe 40%.
To have 40% supply growth you need to be adding a few wafers every single year and so didn't happen quite so much this year and you've seen supply growth decline.
I don't know if that helps you, but that's how I think about it.
Okay. Thanks.
Thank you we'll take our next question from Mitch Steves with RBC capital markets.
Hey, guys. Thanks for taking my question I really had to most of them have been answered but from a high level. I mean, do you guys talking about kind of a better market from memory and 2020. So when do you think will see capacity upgrades or is this all going to be technology upgrades and then secondly, you guys gave a lot of color on them, but not so much in DRAM. So based on a commentary about server demand.
And kind of an increase there in Q1, because I mean, you guys think that that's going to be kind of the bottom or do you think that exiting the year, we're going to start to see supply demand balance for DRAM.
Well I think that what we said about DRAM, maybe just was that we think through the first half of next year inventory remains elevated and so it's really not I guess our view at this point is.
DRAM, maybe more of a second half story for next year.
Obviously, we'll give far more colors, we as we develop our full 2020 look it's just that NAND is much more upon us right now simply because the the issues or are being worked through.
More quickly as a result of the supply constraints that have been in place this year and.
And maybe also the demand catalysts for NAND that are occurring right now.
Got it and as their capacity upgrades or what time and 2020 is I would like back half or do you think capacity upgrades again earlier than that.
You know much too soon for us to talk in any detail about 2020 hold off for one quarter, we'll give you a little a little better visibility on it it's still a little bit too far away for us to going into detail.
Okay got it thank you.
Thanks much.
Thank you and that does conclude today's question and answer session in like the Tech conference back over to Miss Korea for any additional closing remarks.
Just wanted to thank you everyone for joining us today appreciate it.
Thank you and that does conclude today's conference. Thank you for your participation you may now disconnect.
Good day and welcome to the September 20 next quarter furniture coal for Lam research at this time like to turn the conference over to Mr., Chris Corporate Vice President Investor Relations. Please go ahead.
Thank you operator, thank you and good afternoon, everyone. Welcome to the Lam Research quarterly earnings Conference call with me today, our Tim Archer, President and Chief Executive Officer, and does that under executive Vice President and Chief Financial Officer.
During today's call, we will share our overview on the business environment.
Review, our financial results for the September 2019 corridor, and our outlook for the December 2019 corridor.
Press release detailing our financial result was distributed a little after one o'clock PM Pacific time. This afternoon. The release can also be found on the Investor Relations section of the company's website, along with the presentation slides that accompany today's call.
Today's presentation in Q in a includes forward looking statements that are subject to risks and uncertainties reflected in the risk factors disclosures about FCC public filings.
Please see accompanying slides in the presentation for additional information.
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. This call is scheduled to last until three o'clock PM Pacific time.
A replay of this call will be available later this afternoon on our website with that let me hand, the call over to Tim Thanks Gene and welcome everyone.
In the September quarter, Lamb delivered solid results or continued execution to commitments combined with our guidance for the December quarter increases our conviction Lamb isn't a strong position to outperform as wafer fabrication equipment spending influx higher.
Doug will cover the financial results in more detail shortly but I'm, especially pleased with the demonstrated earnings power of the company.
At the midpoint of our December guide.
I Wonder year 2019 diluted earnings per share will be the second highest in our history. Despite the current industry cycle.
I would like to take this opportunity to thank our customers and partners for their continued support of Lam and our employees throughout the world for their contributions to these results.
From an industry perspective, we have revised upward our view on 2019 WFP to the mid 40 billion dollar range versus our prior estimate of down mid to high teens percentage year on year, which implied low $40 billion level of spending.
We are beginning to see improvement in the memory market.
Let first by NAND.
NAND demand dynamics are improving an oversupply conditions should continue to abate as we move through the December quarter.
We expect to exit 2019, with a bit supply growth rate for NAND of approximately 30%.
Which is well below our view on long term demand and as a result, nandan inventories are expected to decline to normalized levels in the first half of calendar 2020.
While the timing of a memory equipment spending recovery is always hard to predict we are encouraged that customers continue to manage supply growth.
Even as we're starting to see favorable end market demand indicators.
This is a sign of a healthy industry and a good set up for increased NAND spending in 2020.
On the DRAM front inventories have remained elevated and we do not expect them to reach normalized levels until the second half of 2020.
However, we see positive demand catalyst ahead in both the server and smartphone markets server CP you upgrade cycle is expected to begin next year with increased adoption of new generation platforms from leading manufacturers.
For smartphones major vendors are planning to launch additional fiveg models, which is expected to drive content growth for the overall smartphone market in 2020.
Turning to foundry and logic spending in this segment has been strong throughout 2019 and based on recent customer commentary looks to remain so heading into next year.
Verse end market applications are driving higher levels of foundry logic spending Moreover, challenges and scaling functional block such as SRAM and logic devices are leading to increases in die sizes and these in turn are accelerating changes in device architectures and chip manufacturing technologies.
Lams growing position with key foundry and logic customers has positioned us to incrementally benefit from these secular trends.
Competitively, we are executing at a high level.
Based on the midpoint of our December guidance lamps, 2019 foundry and logic revenues are set to significantly outgrow announced customer Capex plans.
The share gains we're now seeing in the foundry logic segment are the result of close customer collaboration and strong product execution over many years and multiple technology transitions.
We're evidence of the benefit of sustained investment in R&D throughout industry cycles.
Looking at the market as a whole, including memory foundry and logic. We're on track in 2019 to deliver our best ever penetration in defense performance as measured by net forward looking three year revenue opportunity for application decisions made in this calendar year.
A key contributor to our strong penetration defense performance has been continued focus on technologies that enable threed device architectures, which are becoming increasingly important to performance and cost scaling across all market segments.
We invested early in two d. to Threed inflections and as these transitions are occurring we are seeing expansion in both our Sam and market share.
Action deposition processes are critical enablers for Threed scaling and we are investing aggressively to deliver the technology and productivity innovation required to satisfy customer roadmaps.
As evidenced by our penetration defense when this year. We believe we are extending lams leadership in this space.
In Threed NAND, we have successfully defended 100% of our memory whole died electric etch positions and continue to be the supplier for this application that all threed NAND manufacturers.
We're also winning Threed NAND applications, where productivity is the primary point of differentiation.
Notably Lam has been the first to deliver production proven edge yield solutions for edge.
In this quarter, we used our corvus tunable edge hardware on our flextime electric etch system to improve profile tilt uniformity and when an important productivity sensitive slit etch application.
On the conductor etch front, we want to Threed NAND application for a new vertical architecture that reduces die size and as a technical solution for lowering bit cost.
In deposition, we recorded an important threed NAND win for the vector DT.
Which deposits backside films to control stress as layer counts increase.
Another significant deposition win was for our Stryker LD tool used to deposit high quality liners, and gapfill as aspect ratios get higher.
We also continued to extend our three d. expertise and physician outside of the Threed NAND space, including in rapidly growing markets, such as advanced packaging and heterogeneous integration.
Over the last three years, the installed base for our Sabre Threed electroplating system has grown by more than 70% and we are the leading electroplating supplier for TSV for DRAM Cmos image sensor and logic devices.
Our sabre Threed electroplating solutions embedded best in class technology backed by years of high volume production experience.
With each successive when across our served markets the installed base of Lamb equipment continues to grow.
Resulting in an expanding long term revenue opportunity for our customer support business.
To create value for customers over the entire lifecycle of tool ownership, we are actively developing upgrades and advanced services targeted at extending technical capability and increasing productivity from existing installed base assets.
These offerings help our customers reduce their total costs and as a result, we continue to see growing demand.
Revenues from our customer support business grew in the September quarter on a sequential basis, and our reliant business achieved record quarterly revenue for the third quarter Roe.
We expect 2019 overall will be another growth year for our customer support business.
Looking at our year to date performance, we have made tremendous progress against our objectives of expanding our Sam.
Increasing our market share and building our installed base business.
Importantly, 2019 has been a year, where lam has strengthened its position in the foundry and logic segment.
Also.
With early indications of improving NAND demand and positive catalyst on the horizon for DRAM.
We are increasingly optimistic the calendar year 2020 is setting up to be a year of outperformance for Lam spending mix moves back in our favor.
Thanks, again for joining today and now here's Doug.
Okay, great. Thank you, Tim and good afternoon, everyone and thank you for joining us today and what I know is a busy earnings season.
So please request performance in the September quarter, our results once again exceeded the midpoint of guidance for all financial metrics.
Operating income and diluted earnings per share came in at the high end of our guidance range as we remained prudent in managing our spending throughout the quarter.
Let me begin as I always do by talking about our revenue segmentation in the September quarter.
The combined memory segment was flat with the June quarter at 64% of total systems revenue.
We've had a decrease in the September quarter in the non volatile memory segment, moving from 46% to 38%.
Well DRAM increased to 26% from 18% of systems revenue.
Depending on the land segment was focused on multiple modes and we're beginning to see the first ramp up 128 layer structures.
On the DRAM side apart from the Onex and one why nodes, we are seeing initial investments at ones.
As I noted in our last quarter earnings call.
Foundry and logic spending was strong and we expect strength from this segment to continue through the remainder of the calendar year.
The foundry segment represented 25% of our systems revenue in the quarter.
Strengthen this segment is related to spending on the seven and five nanometer nodes.
The logic another segment was down slightly from the prior quarter level coming in at 11% of system revenue.
We've continued to demonstrate strong progress in the foundry and logic segments, enabling us to maintain solid profitability levels during a period of depressed memory spending.
I believe foundry and logic spending will be even stronger in December .
Revenues for the quarter came in a $2.166 billion.
Which was again above the midpoint of guidance.
Our revenue had a slightly broader geographic mix in the September quarter compared to the June quarter.
Our top reagents continues to be China, Korea, and Taiwan.
The China region quarter performance remained higher remains higher than our historic average concentration of revenue.
And similar to what I talked about last quarter. The majority of this came from indigenous Chinese customers across multiple segments.
Gross margin came in at 45.4%, which was 40 basis points above the midpoint, mainly due to customer mix.
And as we've stated in prior quarters, you should expect gross margins to be a function of several factors such as business volumes product mix and customer concentration.
And we expect to see variability quarter to quarter.
We continue to manage our spending levels in the company is operating expenses in the September quarter declined to $431 million, which was down from $450 million in previous quarter.
We remain laser focused on investing in research and development programs.
As we saw the percentage of spending in R&D increased quarter over quarter to 67% of operating expenses.
The December quarter, the guidance reflects total spending increasing back to the June level.
Primarily doing due to an increase in variable compensation expense.
Our variable compensation fluctuate based on the level of quarterly profitability.
I'd also remind you that as we look ahead to the 2020 calendar year.
You will see the normal seasonal spending increases related to the March quarter comes from things like payroll taxes.
Operating income in the September quarter was $552 million, an operating margin was 25.5% at the top of our guidance range.
Our September quarter, non-GAAP tax rate was approximately 11%.
Which was slightly lower than our long term rate.
There will be fluctuations in the rate from quarter to quarter, and we now expect our long term rate to be in the low teens level.
Okay.
Other income and expense was a total of approximately $11 million an expense in the September quarter.
The main components of other income and expense our interest income from the cash and investment balances we hold.
Offset by expense related to our outstanding debt.
The total interest expense on all trenches of our debt is right now about $41 million per quarter.
You should expect that other income and expense will fluctuate quarter to quarter based on several market related items, such as our deferred compensation assets.
Venture capital investments and foreign exchange.
We continue to execute on our capital return program during the September quarter.
We allocated $234 million to capital return in the quarter with $75 million related to open market share repurchases.
And $159 million in dividends.
I would like to remind you that we continue to have an ongoing structured repurchase program that is expected to mature in the December quarter.
This will continue to reduce our share count.
We remain on track with our committed capital return.
We currently have approximately $3 billion remaining in our board authorized share repurchase program.
Diluted earnings per share came in at $3, an 18 cents, which was at the high end of the guidance range that we provided for September .
We ended the September quarter with diluted shares for earnings per share at approximately 151 million shares.
Which is the seventh consecutive quarter, where our diluted share count has declined.
The share count includes a little dilutive impact of approximately 5 million shares from the 2041 convertible notes.
And I'll remind you the dilution schedules for the remaining 2041 convertible notes is available on our Investor Relations website for your reference.
Let me now switch to the balance sheet.
Our cash and short term investments, including restricted cash increased slightly in the September quarter to $5.8 billion from $5.7 billion in the June quarter.
Cash flows from operations were $464 million, which was offset by share repurchases and dividends.
Year to date in calendar year 2019, we've had strong cash from operations performance and we're on track to end this year with the second highest level of free cash flows in the company's history.
Yes, so increased to 69 days versus 56 in the prior quarter.
The DSO increase is related to the timing of customer payments occurring at the end of the September calendar month, which falls within our December fiscal quarter.
Our inventory balance declined sequentially by $57 million, which is the fifth consecutive quarter, where inventory balance decline.
Inventory turns were 3.2 turns which was just a little bit less than 3.3 turns that we saw in the June quarter.
Non cash expenses included approximately $43 million for equity compensation $49 million for depreciation and $16 million for amortization.
September quarter capital expenditures came in at $39 million, which was a decrease from $66 million in the June quarter.
Our September quarter end head count was flat with the prior quarter at approximately 10700 regular full time employees.
So now looking ahead I'd like to provide our non-GAAP guidance for the December 2019 quarter.
We are expecting revenue of $2.500 billion, plus or minus $150 million.
Gross margin of 45% plus or minus one percentage point.
Operating margins of 27% plus or minus one percentage point.
And finally earnings per share of $3, an 80 cents plus or minus 20 cents based on a share count of approximately 150 million shares.
I'm pleased to share with you the results we've delivered throughout calendar year, 2019, and what has been a challenging industry environment.
As Tim noted the supply demand environment is improving for the memory segments and we've made good progress in our foundry and logic positioning.
Our installed base business continues to be on track to deliver a growth year in 29 team.
Well positioned heading into 2020 and are optimistic about our future performance going forward.
Finally, I'd like to announce our plans to hosted Investor day on March 3rd 2020 in New York City.
Details on the venue and precise time will be forthcoming.
Operator that concludes my prepared remarks, Tim and I would now like to open up the call for questions.
Thank you if you'd like to ask a question. Please signal pressing star on and telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned out to layer signal to reach our equipment. Once again that is star one if you'd like to ask a question.
And we'll take a first question from Miller with Citi.
Hi, Thanks for taking my question and good job on the execution.
Question on the Wi Fi at Tim You mentioned Wi Fi going from low 40 billion to mid 40 billion I wanted to span if the if the majority of the increase has come from the foundry logic segment segment in terms of the device outlook.
Maybe maybe a few a few modifications I mean, clearly as we've said we've continued to see strengthening in foundry and logic. So that is a portion of it.
The.
Some very early indications of NAND spending increase as we guided for December quarter, and finally, continuing strengthening in the China.
Wi Fi as we've.
Seen increased strength throughout the year. So combination of all those things led to our upward revision in WSE.
Okay, and just a follow up in your prepared remarks, you mentioned foundry logic share gains above foundry logic Capex. This year, how should we think about the outperformance off your foundry logic business into next year and out given that some of the elements like reuse and growing steps.
Well, that's that's a great question you basically as we have said on a number of occasion the.
Intensity of etch and deposition, we see continuing to increase at every technology node, our Sam gross whether it be tend to seven to five to three on into the future.
Sam the increases even in the face of the increase increased usage and there's a number of reasons for that patterning complexity continues to.
The increase regardless of the introduction of UBI.
And so there there are additional steps for.
Deposition and etch.
The itself introduces new requirements for hard mask, which gives lamb opportunity to.
Participate from a deposition perspective, and you be also we've talked about in the past introduces opportunities for new steps like and processes like atomic layer anything that can be used to help increase quality and productivity of the pattern itself. So I think the way you should think about it is.
Our Sam is expanding competitively are we're gaining share at some of these new layers and.
We feel we're well set up in both the foundry and logic space going forward as technology transitions.
Thanks. Thanks.
Thank you, we'll now take our next question from CJ Muse with Evercore.
Yes. Good afternoon. Thank you for taking the question I guess first question, if we look back to 2018.
Looks like your share of wallet and Doug if your Wi Fi with Dan It's roughly 30%.
I'm curious as you think about moving to a rising layer count.
And your leadership in the high aspect ratio, which.
Let me just announced.
Position wins on the call Tonight, how should we think about your share of wallet as we go to 128 layer and above into 2020.
Our Sam as a percentage of customer spend continues to increase with.
With layer count and Thats port for two reasons, one I mean, obviously the.
The simple fact of.
Building and etching the higher stack, but also the fact that as I mentioned, there are new steps and new opportunities to get created for dealing with.
Issues, such as in the Vectra da Teekays distress associated with those taller layer counts, so I think that.
Our view is Sam Sam grows as layer count increases.
Thanks, Tim and I guess as a follow up Doug I'm not sure. If you spoke to the entirety of installed base revenues, but did they grow sequentially in September and how should we think about the trend or what should we kind of model it to enter into 2020.
Yes, I think Tim actually mentioned in his prepared remarks at the did grow sequentially and it was the third consecutive record quarter from low for the reliant component of that business.
I'm not going to quantify next year, yet, but little bit too soon but what we said in the past and I continue to be very comfortable saying today is I have a hard time envisioning a year when the installed base business Doesnt grow it should grow every single year.
Because chamber count grows every year, it's growing this year, even in a depressed memory spending environment.
We continue to bring new advanced service offerings to market.
That will enable us to achieve more and more the the customers opex spend.
So that's how you should be thinking about that CJ.
Great. Thanks, so much.
Thanks.
Thank you all know pick our next question from Harlan sur with JP Morgan.
Good afternoon, great job on the quarterly execution.
This is second quarter in a row of the heavier China domestic mix do you guys anticipated demand bias to continue into the December quarter.
And into next year and similar to my question last time. It in your view of focus differ by China to accelerate their semiconductor manufacturing capabilities, given the trade tensions and what do you less or more youre trying to customize just having more confidence to move forward with their hurting memory and foundry programs.
Yes, Harlan what I've tried to describe in fact I tried to foreshadow at last quarter and earnings that this is above normal run rate of local Chinese customer spend.
But Tim did point out in his his remarks, some of the strengthening and Wi Fi came from local China.
Probably now nominally somewhat above $6 billion and Wi Fi.
And as we look into next year, we absolutely think it will grow again next year.
But it'll ebb and flow in digital.
These big projects can be lumpy at times and it will go up and it will go down depending on when equipment ships ships into anyone Fab project, Tim you want to add anything yes, I think that as I commented, we've seen strengthening in domestic China spend through the year.
Anticipate that continuing and maybe the most important part of that story for Lam is that.
Clearly a big portion of the new incremental spending in China is targeted towards the memory market and obviously, our Sam and our share in the memory of spaces.
Is quite good so from that perspective, we see China is.
Area of strength for us and Harlan I forgot the one part of your question you asked we think anything pulled in actually really don't.
I don't think it would make sense that they would be pulling things in sooner because if you're concerned about our inability to ship being the reason they pull them if they can't get spares and service from us that can actually really utilized tools very well. So I don't believe that but there was poland's related anything like that.
Great. Thank you. Thank you for the insights Dan you know the team continues its strong design win momentum on non critical and or legacy technology node as part of it as you pointed out is that rely in systems products continue to do well we continued to hear from your customers that they are laser focused on productivity throughput uptime.
Try and all of the things that impact overall wafer costs are you guys now in a position to at least give us some sense on how fast the non critical slash refurbish business systems business is growing and roughly the size of this business relative to your total revenue base.
Maybe I'll have to wait till investor day for them.
No. We do plan, we do we have promised for sometime now to provide you more detailed in those areas and and and we're just we will do that I think maybe a couple of points your comment about customers being laser focused on productivity I mean, it's one of the reasons why we have been talking about it. It takes some time for those products for our.
Our efforts to really start to show up and in new wins that you know we're starting to see in this area that Doug talked about in advanced services, where some of these intelligent database tools are really starting to help us reduce for instance, troubleshooting time on the systems reduced unscheduled downtime on the systems and those are things that.
Customers are pulling hard for because again its productivity for tools that are already in place and.
Relatively easy to implement so.
We are we're prioritizing productivity because it's in the best interest to the customer and the industry as a whole.
Yes. Thank you.
Thanks Harlan.
Thank you will hear now from John Pitzer with credit Suisse.
Yes. Good afternoon, guys. Thanks, Let me ask the question congratulation on the strong results Tim I just want to go back to the market opportunity in logic foundry for you. If you kind of look at calendar year to date.
That business combined can you is up somewhere between 30% to 40% year over year.
I guess I'm, just trying to get a sense of how we think about your market position maybe in North America as we see 14 go to 10 go to seven and maybe in Taiwan as we see seven go to five go to three can you talk a little bit about how much visibility you have on product tool of record on some of these critical etch and deposition steps and then how.
We might think about your share opportunity as we migrate down these nodes.
Sure.
I can do that without quite getting as specific as North America versus Taiwan on those nodes.
So maybe I'll I'll point, you just a couple of comments I made and then embellish those a little bit.
Yes.
As I said it within the logic and foundry space. It takes many years to establish yourself as the first the development tool of record and then ultimately see that rollout into volume buys as the production tool of record.
And so when we talk about.
I gave we gave a little bit of a new look into this penetration in defense.
Forward looking three year revenue opportunities statement.
That is designed to give some indication as to how long it takes from the time, we when one of those selection decisions.
And you'll see that revenue opportunity trying to take place over those following three years, that's definitely true in the foundry and logic space and so I think that when we talk about improving opportunity at 10, and seven and then five.
You can kind of look out and say if.
I'd like a five nanometer decision is revenue opportunities that now we'll roll in over the course of the next several years so.
Yes that may not be quite the level of specificity wanted but but basically says things that we are winning now we'll actually be our revenue for the next.
Three years plus in that space.
That's helpful. And then Doug you mentioned in your prepared comments you still have about $3 billion left on the buyback and I apologize if the capital allocation call, but you know this this most recent quarter the buybacks dipped down a little bit.
I guess is understandable just given the level of uncertainty any color you can give us around the pace at which you might want to try to execute buybacks going forward and how we should think about kind of just remind us again, the cash return policy you're trying to head.
Yes, John I mean, one thing I would point out too and if you look over the last two years, you will have seen several quarters, where the cash we actually deployed moved down somewhat.
That was because in the quarter before that we put one of these accelerated share repurchase programs in place.
You have the same phenomenon going on this quarter, so even though the cash that we deployed in terms of open market repurchases wasn't all that significant this quarter that MSR was still executing buying stock back and that sorry, Thats. Currently out there were completed in the December quarter. So we'll be thinking about what we're going to do incrementally as we go forward.
So far.
Those remind you what we talked about its been a while now the last analyst day that we're we're committed to at least 50% of free cash flow returned to shareholders and obviously, if you look at our history.
Over the last five six years, we've done a whole lot more than that.
And I've been silent on the timing to complete the current authorization and I'm going to kind of remain that way.
Set in the past we'll be opportunistic.
And that's as much as I have one right now.
Alright, thanks, guys congratulations.
Thanks, John .
Thank you we'll take our next question from Timothy Arcuri with CBS .
Thanks, a lot.
I guess my first question Doug is can you help us a little bit with the mix in December I'm curious if the uptick.
In.
Revenues going to be more than and side or more in the foundry side. Thanks.
Yes, what I said, Tim in my in my remarks was I expect December we'll continue to be pretty strong foundry and logic quarter.
So thats a key piece of what's going on.
Okay awesome.
And then I just wanted to.
I just wanted to drill down a little bit into the China piece. So.
China is about 25% year revenues now on the trailing 12 month basis.
So I guess I'm curious how much of this is going into indigenous projects versus the multinationals.
You said.
China was about 5 billion of 2018, Wi Fi and I think at that time, you were talking about $3 billion of that 5 billion being domestic China.
And I think you just said that China is going to be over six this year. So can you sort of like level set us on how much of that six this year will be.
Multi versus domestic and and maybe how much domestic can even grow next year. Thanks.
Yes, let me walk back for a little bit Tim because some things have moved around a little bit.
When I look at what happened last year.
Local China ended up being I don't have four and a half billion dollars of WFP roughly.
So it ended up being maybe a little bit more than than that for that we have been talking about and the way we see it today, it's above six at somewhat above six.
Don't know for sure what next year is going to look like but as we as we looked at our analytics and the fact projects that are coming in and whatnot.
I'd use pretty strongly believe it will grow next year I'm not ready to tell you how much yet we'll we'll give you more clarity on our WFP view for next year on the next earnings call.
I think local China will continue to grow next year.
And just to clarify those numbers are local China numbers right, that's right yep Okay.
Okay. Thanks much.
You're welcome.
Thank you we'll take the next question from push here how are you with Goldman Sachs.
Yes, thanks for taking the question and congrats on the strong results.
You talked about early signs of recovery unmanned.
In your prepared remarks, and Doug you just mentioned most of the growth rallies Simplistically I. Thank you you can you commented that most of the growth in December quarter should be coming from foundry and logic. So should we expect.
Some of the NAND projects that were all collectively hearing about.
Should hit the March quarter from a Rev Rec perspective.
Yes.
Yes.
Maybe there is not such a big change here from from what we've said we will ever since the beginning of year, we said that.
Memory spending would likely remain relatively weak throughout the year.
And when I talked about early signs.
It is the is very early isn't there were now starting to see some of those projects transpire as you just talked about meaning a little bit of ordering occurring in the December quarter.
But we still maintain our view that we exit the year with this 30% that supply growth rate and that customers are prudently managing the the supply growth, but I do think those projects you. It's kind of that early signs that the healthy industry and we're going to see growth.
In 2020 so.
That timing, we really don't want to give you that right now but it's.
It looks to be coming.
Got it and then as a follow up I just wanted to hit the logic and foundry opportunity.
Dynamic into took into 2020, obviously you guys have done a great job over the past couple of years and gaining share in both buckets. If we assume that spending in logic and foundry is largely flat in 2020, and if you assume you view adoption continues to grow.
Based on what you guys know from a from a design win or application. One perspective can you still grow logic and foundry revenues in that and that sort of environment backdrop. Thanks.
Yes, Thats great question and the answer is yes, we would expect to grow in that in that scenario based on a couple of things one as you move forward even on the same Wi Fi our Sam as a percent of that WFP should increase as transitions still continue to occur to more advance nodes etch and deposition opportunity increases.
At each successive technology node, even in the face of the so I think in the scenario described we would expect to have a larger opportunity and we do believe that we're winning share as well and therefore, we would we would growth.
Great. Thanks, so much.
Thanks, Doug.
Thank you as you know from Krish Shankar with Cowen and company.
Hi, Thanks for taking my question I had two of them first one for you that Tim or Doug.
I want to industry focus question you spoke about how non bid growth exiting this year is going to be 30 posts and kind of curious like our fuel customers started ramping 120 layers NAND.
If next unit demand bit growth is below 30% do you still expect the 120 live spending to go through next year, because most strategic low cost in nature or do you think it might get throttled back if demand would go to slower.
Maybe I'll take an intermediary.
Chris what one I don't think thats whats going to happen, but we're that to be what happened I think you would see a year that looks somewhat like this year in that most of the industry spending was allocated to node conversions as opposed to new capacity adds.
Because it lowers cost per bit the economics or better.
And all of that in the other thing I would say and then I'll, let Tim add on.
We look into early next year I believe supply growth rate will continue to decline based on the investments that have occurred this year Bryant because they have.
Produced this year and so you're moving into a a declining rate of growth as we look into the first half of next year.
Tim anything I think just to reiterate doug's point, I mean trend technology transitions, we think occur.
Every year simply because of the benefit to that cost and so.
I guess I would say that in any year, which is not our view of declining.
Supply growth, we would leave it still see the majority of the spend in technology transitions and I guess, there's one other key point due to think about we've we've mentioned this a few times in a technology transition.
From say 96 layers 120 layers. The majority of that spend is for etch and deposition. So.
There's definitely an outperformance statement there if if spend continues to be based just on.
Technology transitions.
Got it definitely helpful. And then a follow up I think Tim in your prepared comments you spoke about how you guys have successfully defended hundred wasnt.
Electric etch market share kind of curious on the non side is that a fit enough statement. If you look past 128, Leo higher than 120 live dealer tools floaters that mall up 220 layers.
Well I mean, our statement is always as those decisions are made so we always speak about accomplishments made so.
I don't know of any decisions have been made well beyond the 128 later node.
So we feel it's obviously something that we compete for it every node, but yes, I guess, what I'd point out is there is a very important.
Piece of learning that has come from us running now.
Millions of wafers through our died electric etch tools and there was a question earlier about productivity.
Reliability stability.
Defect performance those are all things that again, we have millions and millions of wafers of experience and so the kind of come in with an edge every node that you have to compete for as the incumbent so that.
But specifically I think you could bucket most of those in that.
Hundred 28 nanometer in below.
No since their decisions already made.
Got it thanks, Tim Thanks, Doug.
Thanks.
Thank you again, welcome Patrick Ho with Stifel.
Thank you very much and also congrats on a a really nice quarter, maybe Tim first a lot of the market questions have been answered on my end, but as you look at next generation memory technologies like.
M. Ram we ran.
Can you just give a maybe a qualitative view of how Lam is positioning itself to capitalize on those next generation opportunities.
Yes, Weve I guess, maybe that the simplest statements that they make inside the company is.
We're not running from our leadership position in memory and that includes in these new emerging memory markets and so.
We're actively looking to develop new applications, new tools that meet the needs of those those.
Those devices, we've spoken about one of them in particular, so far this year, which is the ion beam etch tool that used for and Ram and we have established a very strong position for for that particular application.
Exchange memory Reramp other other devices. We are we're actively engaged in development with the leading companies. So.
It is a target market for us and check one might argue that we feel we sort of we already sort of own that memory space and.
I think it's a focus Patrick I'd just add on if you really want more detail you can go look at the transcript of the Flash memory segment were Tim and reduction of spent lots of time talking about how we view these emerging memory architectures.
Great. Thanks, Doug and maybe as my follow up question.
You talked a little bit about share a lot atomic layer deposition opportunity I guess, what it should perspective, how do you see the total available market for you in that and do you see it expanding from where it looks like you have a strong position on the memory side of things can this also expand onto the foundry logic side of thing.
Oh it already has expanded I mean, the LD is not not memory specifics. So we use we use these films also on the logic and foundry side.
AOCI.
Atomic layer etch and.
Position and atomic layer etch and these are these are technologies that will continue to be increasingly used as devices become smaller and smaller and structures become more complex. So I think it's an expanding market opportunity and in fact, I think in coming years, you'll start to see inflections for instance.
From batch processing tools to single wafer LD, just again for the the type of.
Of wafer uniformity and.
And.
Requirements of those processes going forward. So it's an area, where we're we're growing and we feel confident about our development activities.
The tools himself.
Great. Thank you.
Thanks, Patrick.
Thank you will hear now from Craig Ellis with B. Riley FBR.
Yes. Thanks for taking my question, Tim I wanted to follow up on the comments that you made that.
Calendar 2000 could be a year of outperformance for Lam can you just help us understand how much of that comes from moving deeper into the sweet spot of the foundry logic share gain that you've been talking about versus.
Help that you would get from what appears to be nice and very.
Very encouraging upturn that starting to occur in the and there may be something else like Sam expansion.
Yes, I think for us to give you more detail on the breakout on that you'll have to wait until we actually speak to our our 2020 WFP outlook next quarter, but you kind of hit it I mean, we deal with the way I think about outperformance in 2020. It's it's just what you said first and foremost you everyone knows that we are.
Highly leveraged to the memory market and we do believe the spending mix moves back in our favor next year.
And even in the face of stronger and continuing strength in logic and foundry memory will improve.
To some extent.
We've strengthened our logic and foundry.
Sam opportunity as well as share position and so thats a continued benefit as logic and foundry remained strong and also as Doug mentioned see SBG continues to grow as we expand our portfolio of advanced services in that space and so.
Can break it out for you how much each of those.
Contributes but each of them. It is important part of the story in 2020.
Thanks, Tim and then I'll do the follow up to Doug Doug.
Impressive.
Trough to trough operating margin improvement of about 300 basis points and within that Theres dramatic improvement with operating expense as a percentage sales and as you noted there has been significant mix shift R&D. The question is.
How much further benefit is there in the model for.
For increased operating leverage and how much room do you have to further drive expense towards R&D for mass unit.
It's something we've been working on for.
For years, I mean, Tim was driving this.
Years ago honestly in.
Yes, the company's rally behind that.
You know, we're going to keep squeeze inefficiency out every question a dollar we spend we want to be you know.
Totally rigorous about that so that we can allocate more those dollars to R&D I think that 67% last quarter might be an all time high for the company haven't gone all the way back but in my recent memory that wasn't all time high we're going to keep at that we're going to continue to try to get better. We do this everywhere. It's part of the culture the company.
It will be focused our continuous improvement I don't know how we can we can get it obviously, but we're going to keep working to.
Thanks, guys.
Thanks, Craig.
Thank you again now from the Vic area with Bank of America.
Thanks for taking my question and I joined late so I apologize. If this was asked but DRAM was quite strong in the quarter and I'm wondering what caused that then how sustainable is that strength.
You know when I look at it it's it's primarily conversion spending.
That's really what we're seeing for the for the entire year is focus on node conversions, it'll ebb and flow the important thing.
We think about DRAM is to understand when we look at similar to what we were describing NAND exiting.
We are below where we believe demand growth to be you got to similar story in DRAM as we look at the investments that are occurring in DRAM. This year exiting the year supply growth is probably in the low teens.
And we believe long term demand growth is in high teens, maybe approaching 20%.
There is a ways to go visit to continue to burn inventory out of a channel I think thats going to take a little bit longer.
But what I do know is at some point the inventory will be burned off in spending will will will grow more significantly in quarter by quarter. It's just going to be dependent on what projects are underway at what customers.
Got it.
And then as a follow up.
Kind of looking at your cash flow generation.
Fiscal 19 from what I notice that was a lot of cash inflows from working capital looking on the model right. How should we think about the plus and minus from Lucky capital. This year that thank you.
If you look at the first half of this year the calendar year again, I never really think too much in terms of fiscal calendar year work cash was just super strong I think we had two consecutive quarters around $900 million, an operational cash flow and you're right.
A lot of that came from working capital.
What you normally see with the business when it's growing it will consume working capital, meaning it will take cash to build inventory and receivables and so forth.
When it levels off for contracts it will generate cash and that's really what went on in the first half of the year I mean, we manage cash quite.
Proactively, but the practical reality of business ebb and flow is that's what happens.
The right way to think about the free cash flow the businesses. It's a couple points below where operational cash flow should be on a sustainable basis.
But it'll ebb and flow around wherever read in the business cycle.
Thank you.
You're welcome Thanks for the question.
Thank you we'll take our next question from Joe quite Rocky with Wells Fargo.
Yes, thanks for taking the question.
Talking about improvements and inventory that you've seen across to NAND Flash I was wondering if you could talk about to the same can factory utilization rates.
And your installed base.
It's hard for us actually to put our finger on exactly what Utilizations are I mean, we saw it pulled back a little bit in both NAND and DRAM. This year I think that was pretty well telegraphed from our customers.
But better it's about a question to put for them. We don't always know exactly what their utilizations are running at.
Okay fair enough.
And maybe a follow up to that.
You talked about exiting this year at 30% supply growth.
And for NAND, and made and potentially going lower than that next year on the first part of the year I guess the question is how do we think about the level of capacity expansion needed.
To hit.
The I guess expected demand growth for 2020.
Mmm tough question and answer Joe to be honest.
What's occurred this year in NAND largely has been conversions, maybe with a couple.
Exceptions, but.
If you look at man W., if you through the year. This year, that's what was going on and you saw a declining rate of supply growth.
Such that.
As we exit the year, obviously, we said, 30% and I think long term man growth is in the high Thirtys maybe 40%.
To have 40% supply growth you need to be adding a few wafers every single year in so didnt happen quite so much this year and you've seen supply growth decline.
I don't know if that helps you had but that's how I think about it.
Okay. Thanks.
Thank you we'll take our next question from Mitch Steves with RBC capital markets.
Hi, guys. Thanks for taking my question. It really had to most of them have been answered but from a high level. I mean, do you guys talking about kind of a better market from memory and 2020. So when do you think will see capacity upgrades or is this all going to be technology upgrades and then secondly, you guys gave a lot of color on NAND, but not so much in DRAM. So based on a commentary about server demand.
Kind of an increase in Q1 is I mean, you guys think that that's going to be kind of the bottom or do you think that exiting the year, we're going to start to see supply demand balance for DRAM.
Well I think there what we said about DRAM, maybe just was that we think through the first half of next year inventory remains elevated and so it's really not I guess our view at this point is.
DRAM, maybe more of a second half story for next year.
Obviously, we'll give far more color as we as we develop our full 2020 look it's just that NAND is much more upon us right now simply because the the issues or are being worked through.
More quickly as result of the supply constraints that have been in place this year and.
And maybe also the the demand catalysts for NAND that are occurring right now.
Got it and as their capacity upgrades or what time in 2020 as I'd like back half or do you think capacity upgrades again earlier than that.
It's too soon for us to talk in any detail about 220 hold off for one quarter, we'll give you a little a little better visibility on it it's still a little bit too far away for us is going into detail.
Okay got it thank you.
Thanks much.
Thank you and that does conclude today's question and answer session in like the to the conference back over to Miss Korea for any additional closing remarks.
Just wanted to thank you everyone for joining us today appreciate it.
Thank you and that does conclude today's conference. Thank you off participation you may now disconnect.