Lam Research Corp

NASDAQ:LRCX

Earnings Call Transcript 2018-Q3

[Operator]

Please standby. Good day and welcome to the Lam Research Corporation March 2018 Conference Call. At this time, I would like to turn the conference over to Satya Kumar, Vice President of Investor Relations. Please go ahead, sir.

[Satya Kumar, Vice President, Investor Relations]

Yes, thank you and good afternoon, everyone. Welcome to Lam Research quarterly earnings conference call. With me today are Martin Anstice, Chief Executive Officer and Doug Bettinger, Executive Vice President and Chief Financial Officer.

During today’s call, we will share our outlook on the business environment; review our financial results for the March 2018 quarter and our outlook for the June 2018 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time this afternoon. It can also be found on the Investor Relations section of the company’s website along with the presentation slides that accompany today’s call. Today’s presentation and Q&A includes forward-looking statements that are subject to risks and uncertainties reflected in the Risk Factor disclosures of our SEC public filings. Please see accompanying slide in the presentation for additional information.

Today’s discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today’s earnings press release. This call is scheduled to last until 3:00 p.m. Pacific Time. And as always, we ask that you limit your questions to one per firm with a brief follow-up, so we can accommodate as many questions as possible. As a reminder, the replay of this call will be available later this afternoon on our website. Due to some technical difficulties, our presentation today will be audio-only and the slides accompanying today’s presentations have been posted on our website separately from the webcast.

With that, let me hand the call over to Martin.

[Martin Anstice, Chief Executive Officer]

Again, thank you all for joining us today. As reported, Lam delivered strong financial results for the March 2018 quarter, with revenue, gross margin dollars and EPS all at record levels and above the midpoint of guidance. In addition, we completed our first ever quarter with over $3 billion in shipments. Including the June quarter outlook, Lam will deliver revenue growth on a year-over-year basis in 23 out of the last 24 quarters, which is a testament to both the successful scaling of our company and a multiyear environment of demand led and more sustainable customer investments. I would like to take this moment to thank our customers, our employees and our partners for the opportunity they provide us for their trust and contributions made, without which the performance of Lam would not be possible. I will keep my comments brief today given that we provided a comprehensive update on our vision, strategy and objectives at our recent Investor Day.

Cost effective scaling of semiconductor device performance remains critical to addressing opportunities provided by the transition to the data economy and now is substantially more diverse in scope than traditional shrink. In this context, our focus is on systematically strengthening the competitiveness and relevance of Lam’s product portfolio to the success of our customers. Broadly recognized, etch and deposition technologies are now foundational and permanent features in the current roadmap of vertical scaling, multi-patterning, advanced packaging and advanced transistor architectures. These inflections have resulted in substantial growth in our serviceable addressable market, or SAM and reiterating a headline of the recent Investor Day, we are on track to grow our SAM to over 40% of wafer fabrication equipment spending by 2021.

As an acknowledged leader in etch and deposition markets, we have an opportunity to capture a greater proportion of our customers spending by delivering unit process excellence, leveraging our multi-product capabilities and engaging in closer collaboration within the semi-ecosystem. We are making substantial comprehensive and disciplined investments in R&D to fund innovation that is intended to extend the differentiation of our products and services portfolio and we continue to prudently scale the infrastructure of the company to support our 2021 objectives.

Customer equipment selection decisions in the March 2018 quarter were consistent with expectations in the context of our long-term objectives. Irrespectively, we secured additional wins in dielectric etch one for a high aspect ratio DRAM application and another for NAND flash, both at leading memory manufacturers. We also won a new nonvolatile memory application with an advanced etch capability harnessing value from our unit process excellence and unmatched collaboration between Lam etch and deposition business units. We see solid momentum with our deposition portfolio and we are pleased recently to celebrate our 500 VECTOR Strata PECVD product shipments. This platform continues to offer industry leading productivity and film property control that together creates custom enablements and competitive differentiation for Lam creating value and enhancing codependency in multi-stack deposition applications in 3D NAND for example.

Our systems business is augmented by our installed base business where we have been focused on enhancing the breadths and competitiveness of our products and services as a means of further enabling our customer’s success. Customer support business unit revenue growth continued to outperform that’s of our installed base growth in the March quarter and we achieved key customer penetrations within our reliance and advanced services business. At our recent Investor Day we provided several metrics of our long-term growth not only to illustrate the value of this annuity like business, but more importantly to emphasize the integral role it plays in value creation, value capture and increasing codependency with our customers.

Now, turning to the macro and wafer fabrication equipment, WFE spending environments, expectations for global economic growth remains strong and are healthy. We believe that content growth remains a powerful multiyear driver of demand in the data economy. Context for multiyear customer investments is not simply a byproduct of market efficiency from consolidation and disciplines operational execution through the semiconductor supply chain, it is more fundamentally endorsed by the evergreen verticals of climate change, education, food and water, healthcare, security and transportation that together define the opportunity for silicon based artificial intelligence, AI technologies and applications and services innovation globally. In the smartphone end markets innovative data intensive services will increasingly be deployed leveraging AI and using a range of enabling artificial and virtual reality technologies.

The deployment of 5G networks will improve the quality of these services, but to deliver the best user experience the smartphones themselves will require a combination of higher screen resolution, faster refresh cycles and lower power. This will drive the need for nearly 2x the DRAM contents in smartphones relative to the current global average. Additionally, density increases associated with higher layer counts in 3D NANDs create the opportunity for terabyte level storage in smartphones within the next few years. For 2018 WFE investments by our customers remain prudent and demand led. Since our update in January WFE continues to track up low double-digits in 2018 compared to 2017 with slightly higher DRAM mix and slightly lower logic investments compared to our earlier baseline.

For NAND and nonvolatile memory broadly the totality of our perspective would be that long-term demand drivers are compelling. Customer investments in 2018 appear essentially equivalents to those of 2017 and considering the impacts of customer specific to our moving plans this year spending we expect will be first half biased. For Lam aggregating all customer segments, we currently anticipate a first half second half shipments waiting at the low 50s high 40s level in 2018. We expect relatively balanced revenues through the year. As always this prospective account will likely change as our customers seek ways to exploit their competitive advantage and market timing later in the year. It seems that the perpetual bull-bear debate surrounds the sustainability of memory based investments. In that context, we think it is worthy to note that associated with the emergence of cloud and collectivity, the 7-year cumulative annual growth rate for memory WFE is 15%, 10x greater than the comparable foundry logic WFE CAGR.

Combined with the concentration to etch and deposition technologies, a strong memory business in the new data economy is a sustainable asset and not a liability from our perspective. In addition and perhaps still somewhat underappreciated is the strengthening of Lam business, the diversification of Lam business into foundry and logic. In only the 24-month period ending December 2018, we expect Lam shipments in these segments to grow 2x faster than the pace of the underlying foundry logic WFE. In short, we feel that’s the historic strength of Lam has never been more valuable. Further, the historic relative weakness of Lam is becoming much stronger.

In closing, we target outperforming overall industry growth again in calendar year 2018 and we are focused on successfully executing to our near and long-term objectives growing some and increasing market share with an enhanced product and services portfolio. Strong March quarter performance is consistent with our expectations and we remain pleased with the company’s execution in financials in an overall healthy industry environment.

With that, I will turn the call over to Doug.

[Doug Bettinger]

Okay, great. Thank you, Martin. Good afternoon, everyone. Thank you for joining us today. We are very pleased with our results for the March quarter delivering record levels in shipments, revenue and operating income dollars. Each of these items grew double-digit percentage sequentially from the December quarter. Execution from the company continues to remain very strong. Shipments for the quarter came in at $3.135 billion, which was up 19% sequentially and within the guided range. Shipments were up 30% year-over-year. Timing of shipments to certain new customer projects was a primary factor in our shipment profile coming in slightly below the midpoint.

As we expected, memory shipments continued to grow in the quarter, with the combined memory segment making up 84% of total system shipments and that compares to 77% in the previous quarter. Our overall nonvolatile memory shipments remain very strong representing approximately 57% of system shipments compared to 53% last quarter. DRAM shipments represented 27% of system shipments, which was up from 24% on prior quarter. The NAND and DRAM markets continue to benefit from density growth as we transition to the new data enabled economy.

The Foundry segment was down accounting for 10% of system shipments relative to 15% of system payments in December. The logic and other segment contribute 6% of both system shipments compared to 8% in the prior quarter. And we would point out we expect that both foundry and logic shipments will be stronger as we go through the remainder of this year. We delivered record revenue of $2.892 billion in the March quarter, which was an increase of 12% from December and above the midpoint of our guidance.

Gross margin for the period came in at 46.8%, which was down 80 basis points sequentially, but towards the higher end of our guided range. And as we shared before, our actual gross margins are a function of several factors such as business volumes, product mix and customer concentration and we expect to see variability on a quarter-to-quarter basis.

Operating expenses in the quarter grew to $486 million, but decreased 60 basis points on a percentage basis to 16.8% of revenues. On a dollar basis, R&D spending and SG&A both increased sequentially and we continue to have approximately 63% of our spending allocated to R&D. Investments in R&D are fundamental to driving long-term value creation for all of our stakeholders within the S&P 500 sectors the semiconductor and equipment group flagged the highest in the percentage of R&D spend on average for the last several years. Our strong R&D investment strategy is central to maintaining our technology leadership as we position the company to benefit from the multiple technology inflections and to deliver the growth that we have highlighted during our Investor Day in March.

Operating income in the March quarter came in at a record level of $867 million, which was up over 11% from the prior quarter. Operating margin came in at the high end of our guidance at 30% due to the stronger gross margin performance and slightly better operating expenses than we expected. Excluded from non-GAAP earnings are approximately $47 million in losses from the sale of investments in anticipation of cash repatriation under the recent U.S. tax reform. We are essentially liquidating our fixed income portfolio to enable the cash to come to the United States. The tax rate for the quarter was 1%. We expect the tax rate to be in the mid single-digit percentage range for the first half of calendar 2018 of high single-digit percentage for the June quarter. I will just remind you in the longer run a tax rate in the middle teens remains the right level for you to include in your models.

Based on the share count of approximately 178 million shares, earnings per share for the March quarter were $4.79, above the high end of our guidance, excuse me. The primary drivers of this upside versus our guidance were higher revenue, higher profitability, lower taxes and the lower share count. The share count includes dilution from the 2018 and 2041 convertible notes with the total dilutive impact being approximately 13 million shares on a non-GAAP basis. Total conversions that settled in the March quarter were 228 million with 193 million related to the 2041 bond and the remainder related to the 2018 convertible note. The dilution schedules for the 2018 and 2041 convertible notes are available on our Investor Relations website for your reference.

And just a reminder at our Analyst Day in March, we announced the plan to return at least 50% of our free cash flow to stockholders over the next 5 years. This included a plan to increase quarterly dividends by 120% to $1.10 and an additional $2 billion share repurchase authorization for a total of $4 billion authorized since November of last year. At the end of the quarter, we had completed approximately 25% of the current $4 billion share repurchase authorization. This was primary executed through an accelerated share repurchase program that is still ongoing. We are planning to complete our authorization over the next 12 months to 18 months in tandem with the expected timing of our cash repatriation. During the quarter we paid roughly $80 million in dividends.

So now let me switch to the balance sheet, cash and short-term investments including restricted cash increased during the quarter to $6.7 billion compared to $6 billion at the end of the December quarter. Approximately 87% of this total cash is still offshore. We do expect to be able to move some portion of the offshore cash to the United States during the June quarter. Cash from operations was slightly over $1 billion, up from $29 million in December. Cash generation was partially offset by our capital return programs and capital expenditures. Day sales outstanding decreased by 14 days to 66 days. You may recall me talking last quarter about the timing of certain collections falling just outside of the December quarter. All of those were collected in the March quarter. Inventory turns remained roughly consistent the prior quarter at 3.7x. And as we mentioned in our December quarter earnings call adoption of the ASC 606 new revenue recognition standard will start in the September quarter for Lam. We will provide additional clarity on the impact of the standard in our next earnings call, but I wanted to highlight that adoption of ASC 606 will make our revenue more closely aligned with the timing of shipments.

Company non-cash expenses included approximately $41 million each for equity comp, amortization and depreciation. Capital expenditures were $49 million, which was down from $85 million in the December quarter. And as a reminder, we expect CapEx in 2018 will be higher versus 2017 levels to support manufacturing network expansion and growth in strategic R&D investments. We exited the quarter with approximately 10,600 regular full-time employees. The headcount additions were primarily in the factory and field with other additions in R&D.

By looking ahead, we would like to provide our non-GAAP guidance for the June quarter. We are expecting shipments of $3 billion plus or minus $150 million. We expect continued strength in memory and slight growth in both foundry and logic. We’re forecasting revenue of $3.100 billion plus or minus $150 million, gross margin of 47.5% plus or minus 1 percentage point, operating margins of 31% plus or minus 1 percentage point, and finally, earnings per share of $5 plus or minus $0.20 based on the share count of approximately 178 million shares. We are pleased with our performance in the March quarter and with the guidance we have just shared for the June quarter, we anticipate our shipments to be biased to the first half primarily due to heavier first half NAND spending by our customers, we expect comparatively more balanced to our revenues half-on-half. Overall, we continue to execute well by having the right products, making the right investments at the right time to take advantage of the technology inflections driving the transition to the new data economy.

That concludes my prepared remarks. Operator, please open up the call for questions.

[Operator]

Thank you. [Operator Instructions] And we will take our first question from CJ Muse with Evercore.

[CJ Muse, Evercore]

Yes, good afternoon. Thank you for taking my question. I guess first question, clearly a lot of debate around sustainability of memory and I was hoping maybe you could help out on the DRAM side. As you think about shrinking at the next node, what kind of bit growth are you seeing overall for the industry and what kind of new greenfield capacity do you think is required each and every year as we proceed from here?

[Martin Anstice, Chief Executive Officer]

That’s a very precise question, CJ, each and every year. So, I mean, I think the headlines that you have just highlighted with your question is that where at an inflection relative to the economics of DRAM in two respects, one of them is the cost of the investments it costs more for bit density today than it did 5 years ago. But on the other side of that coin, the value proposition associated with what our customers are selling and what they are ultimately getting paid for those devices is dramatically different as well and to the point that we tried to make in our investor meeting, while it’s true to say that our customers have never spent more money, it’s also true to say that in many respects they have never spent a smaller proportion of their profits. And so when we look at bit density per wafer out, it is obviously lower today than it was 5 years ago, but pricing stability in DRAM appears there. Profits for sure are healthy in the memory community. Last time, I looked most of our customers were reporting 40% to 50% operating income levels. And I think when we look at the spending, the best of our ability is to figure out, CJ, it looks disciplined, it looks balanced and it looks healthy in the context of how customers are executing with a prudent investment in additions and significant investment in conversions.

[CJ Muse, Evercore]

Very helpful. And as my follow-up, I guess, Doug, can you kind of walk through how you are expecting mix in gross margin to be impacted by mix as we move into the second half of the calendar year?

[Doug Bettinger]

CJ, we don’t really give guidance one quarter at a time, but what I would suggest to you is as I always do in my scripted remarks, gross margin will move around quarter-to-quarter depending on business volumes, product mix, customer concentration. If I looked at the last, I don’t know year or two, we have bounced around between 46% and 47% and that’s kind of what we have got baked into the financial model, so that’s probably a good signpost used relative to how to think about it C.J.

[CJ Muse, Evercore]

Very helpful. Thank you.

[Martin Anstice, Chief Executive Officer]

Thanks C.J.

[Operator]

Thank you. Our next question comes from Vivek Arya with Bank of America/Merrill Lynch.

[Vivek Arya, Bank of America/Merrill Lynch]

Thanks for taking my question. First one, Doug I think you mentioned on shipments some timing of shipments came out of March, went into June if you could had to quantify that. And then as we look into June you are guiding to some small decline in shipments quarter-to-quarter which I believe is somewhat different than the seasonal norm if you could provide any color around that would be also useful?

[Doug Bettinger]

Yes. Vivek, I mean quite honestly, we missed the midpoint in guidance by $40 million which honestly is four or five tools when you think about in the grand text of what’s happening with our numbers, so as always you have got things that shipped and they moved around every quarter. And I am not really going to comment on any specific customer, but it was a pretty modest variance in terms of how to think about them.

[Martin Anstice, Chief Executive Officer]

I think on the seasonality components of the question, one of the themes of the investor meeting was the irony of consolidating kind of customer base, but a more diversified demand portfolio. And in transitions away from kind of simple units to a density and the role that enterprise and clouds and data center has in the construct of this marketplace, I am not sure any of us would agree what the headlines of seasonality are. I am not sure I could articulate as the guidance only being in this industry close 20 years I wouldn’t be able to describe to you what seasonality is today, because it’s a dramatically different profile of demand for IC and the discipline of our customers is very different today than it was 10 years ago.

[Vivek Arya, Bank of America/Merrill Lynch]

Alright. And the follow-up, Martin our foundry contribution, only about 10% in march, I think probably one of the lowest levels we have seen, how do you think about that the contribution on a quantitative basis as we move throughout the rest of the year and especially the pipeline ahead of some of the node migrations that your foundry customers are going to go through? Thank you.

[Martin Anstice, Chief Executive Officer]

Yes. I mean the foundry headline for company is awesome. I mean it could be better, it can more awesome, but we have made a significant amount of progress in the last of couple years and I talked about in my compared comments that’s not only do I think we have foundational strengths from the memory presence in the company, but the diversification of foundry and logic is the strength, but perhaps it’s a little underappreciated. The objective we have running the company is to ship products to customers when they ask for them not early, not late and so when you see these quarterly kind of movements it really is nothing more than a customer’s request. And frankly I mean we would love to live in the world of perfectly calm and predictable and unknown variable world if we don’t, so we do the best we can to ship to customers when they ask for it. So there really is no headline associated with the 10% number that you referred to for the foundry other than that just happened to be the schedule of the customers request compared in contrast with December and compared to contrast with the June quarter. So the strength what we characterized is real we believe sustainable and we are working hard to make it even more valuable going forward.

[Doug Bettinger]

And Vivek we expect foundry will grow as we go through the year as well and just to reiterate the comment I had in my script.

[Vivek Arya, Bank of America/Merrill Lynch]

Got it. Thank you very much.

[Martin Anstice, Chief Executive Officer]

Thanks Vivek.

[Operator]

And your next question comes from Toshiya Hari with Goldman Sachs.

[Toshiya Hari, Goldman Sachs]

Great. Thanks very much for taking the question. Martin, I was hoping you could provide an update on China, I think there have been a couple of media reports recently about some of your customers winning real business for the first time and some of your customers planning on ramping capacity later this year and to 2019, so it does feel like we are getting closer to a decently sized ramp if you will. So, I guess the question is what are you seeing in terms of bookings today and what are your expectations over the next 12 months to 18 months?

[Martin Anstice, Chief Executive Officer]

Yes. Actually, I think our expectation today is almost exactly the same to the expectation that we started the year with, maybe even had almost a year ago. I mean we believe in the vision that’s being articulated and we see our customers investing to build competency, capability and know how to go execute that vision. And indeed we are aware that the customers kind of reported real end customer business and outlet that presumably legitimizes this. So, going back to where we started this conversation in earlier in the year, we expect a couple of billion dollars of incremental WFE this year in China and that represents 10%, 12% or so of the overall WFE kind of marketplace. So, the bulk of the industry is still outside of China and obviously included in China or at least the global company investments as well as the domestic community. So, I would say it continues to appear like there is steady progress.

[Toshiya Hari, Goldman Sachs]

Okay, great. And then as my follow-up I was hoping you guys can talk a little bit about the ALD opportunity longer term I think you touched on the subject briefly at your Investor Day, but if you could remind us how you use size the opportunities at longer term, if you can talk a little bit about the competitive landscape there? That would be helpful as well. Thank you.

[Martin Anstice, Chief Executive Officer]

Yes. I mean, I think we have obviously articulated not just for deposition business unit, but also for the etch business unit, the importance of control and repeatability and opening our process windows for our customers and atomic level processing is an important part of delivering that. There are other significant challenges for our customers, not least aspect ratios, but atomic level processing is increasingly relevant to the success of the company and the success of the customers. So, it’s big investments. It’s one of the biggest areas of competitive momentum. We don’t actually characterize in any detail the proportion of WFE that we think is directly assignable because that we obviously have competitive sensitivity to that, but I think we got fundamental differentiation on technology and productivity and the engagement with the customer is comprehensive. And I am pretty pleased with the momentum we have.

[Operator]

Thank you. Your next question comes from Romit Shah with Nomura Instinet.

[Romit Shah, Nomura Instinet]

Yes, thank you. Martin, I definitely appreciate your comments around just DRAM spending looking balanced and disciplined, but seeing that shipments here over 30% sequentially and 50% year-on-year, I mean, obviously realized that higher cost per bit is a factor, but at what level do you become concerned that your DRAM customers are adding too much capacity?

[Martin Anstice, Chief Executive Officer]

I would say I would be concerned that our customers are adding a few much capacity if the analytics in our company in terms of end use demand concluded that there was a dramatic imbalance and we have no evidence of that. I mean, we are trying to articulate and our prospective may not be the best that’s a choice obviously that you have to make, but we do our best to analyze kind of end markets. And when we look at bit mind and bit consensus and then the construct of the market and isolate, for example, a 45% servr bit growth assumption in DRAM and that impact on investment levels and then to the best of our abilities understands, bit per wafer and the investment choices for customers between conversions and additions. We end up in the same place that our customers are articulating plans. And so it’s left to do with how big the number is in my opinion and much more to do with whether it correlates to the statement of demand.

[Doug Bettinger]

As well as affordability, Romit, as you know, I mean, DRAM revenue and profits are all-time record levels.

[Romit Shah, Nomura Instinet]

Yes, got it and helpful. Thanks for that. And then could you also just talk about what’s happening in logic you have – or at least my understanding is you have a very strong position at 10-nanometer, certainly a better position than you did at the previous node and we have seen revenues in this category run up last year, you had a very strong Q3, but shipments down the last couple of quarters and I think you mentioned that logic was a little weaker than you anticipated in the first quarter?

[Martin Anstice, Chief Executive Officer]

Yes. I don’t know that it’s particularly material in the long-term. Again, I go back to my answer to the earlier question in foundries, I mean, all we try to do if I am very correct and honest is ship product to customers let me ask for it, not earlier and not late and that’s our focus and that’s priorities. So, you are going to see up and down as customers adjust schedules and most of the time we get that light fairly well to our midpoint guidance and we almost always get it correct in our range, in fact, I think always in our range. So, I mean, I don’t think we are doing that job a signaling here. But it’s just a matter of the timing of investments by customers and that goes up and down and we just roll on truly. But focus of the company to where you started is making sure that we have a product portfolio that’s more relevant to our logic and foundry customers and to making sure that we are gaining more market share and in the microprocessors and foundry both hopefully we have been effectively communicating pretty positive market share in the last couple of years.

[Doug Bettinger]

And Romit the only other thing I would add on that is I do think probably when you look at the logic shipments for the course of 2018 it will go up from where it is in March.

[Romit Shah, Nomura Instinet]

Okay, helpful. Thank you.

[Operator]

Thank you. Your next question comes from Harlan Sur with JPMorgan.

[Harlan Sur, JPMorgan]

Well, good afternoon and great job on the quarter of the execution. As a follow-up to the prior questions on DRAM, maybe a different way of asking the question is to see if the team can help us quantify some of the reviews, overall DRAM industry capacity has been trending about 1.1 million wafers products per month and relatively flattish for the past several years, the market has been getting nervous in the amount of announced DRAM CapEx spend announcement of new fiber expansion product or projects, but a lot of it I think is just to offset capacity declines and technology conversion and just to maintain a stable bit supply output, so wanted to get your views on how much you see total industry capacity going this year?

[Martin Anstice, Chief Executive Officer]

So I 100% agree with what you articulated in terms of the rationale for investments whether tradition or conversion, I mean it’s for demand and it’s the consequence of capital intensity relative to the incremental bits of various kind of nodes transitions. So I mean not exactly the same place, we are in exactly the same place that you articulated in your question. Unfortunately in a world of very few customers today it’s almost impossible for an equipment company to answer directly the question that you just asked. It’s too competitively sensitive for our customers. So we do respect I have to ask you to ask them, but what I will say is we do see a modest increase in capacity in DRAM associated with the driver of demand to the consensus of the kind of low to mid-20 bit growth number that everybody seems to kind of talk about these days. And it seems like it’s perfectly relevant to the choices that our customers are making. So unfortunately, quantification has to come from them and that’s what I can tell you is it appears modest and balanced and rational.

[Harlan Sur, JPMorgan]

Great. Thanks for the insights there Martin. Doug a question for you, great job on the strong free cash flow almost I think 35% free cash flow margins in the March quarter, although you did tell us that you are going to play some catch up here versus the weaker December quarter, but at the high level, going back to last earnings call and Analyst Day, we will just assume that you can maintain operating margins in sort of the 30%, 31% plus range this year, we would anticipate free cash flow margins for the full calendar year in the range of about 26% to 27% for the full year is that kind of the right way to think about it?

[Doug Bettinger]

Yes. That’s the right way to think about it Harlan. I mean CapEx in the model in terms of how we think about it is 3% to 4% of revenue typically so yes, that’s what’s company had it in the model we gave in March.

[Harlan Sur, JPMorgan]

Great, alright. Thank you very much.

[Martin Anstice, Chief Executive Officer]

Thanks Harlan.

[Operator]

Thank you. Our next question comes from Farhan Ahmad with Credit Suisse.

[Farhan Ahmad, Credit Suisse]

Thanks for taking my question. Doug, we saw a lot of volatility in the share prices in the March quarter, so a bit surprised that we didn’t see more significant buybacks, can you just talk about what are some of the variables that you think about in terms of buying back the shares, is there any constraints that stopped you from buying more?

[Doug Bettinger]

The primary thing Frahan relative to the $4 billion authorization is just availability of cash domestically, 87% of the cash that the company has still is domicile outside the United States. It takes time to move that around. We have taken step one of that in terms of beginning to liquidate the portfolio, but there is administrative paperwork to dividend things up and down, the tax structure to get the cash and that’s the primary thing that we need to have. We need the cash before we can buy significant stock and that will come over the next 12 months with almost all of the cash will be available by the end of year.

[Martin Anstice, Chief Executive Officer]

So I think in the context of the questions were certainly important to emphasize kind of the long-term vision for the company that we talked about at the investor meeting which is kind of redistribution of 50% of free cash flow generated over the long-term and nothing new to say today. So, it’s a transactional moment in time, but a bit longer term commitments adding us the important message.

[Farhan Ahmad, Credit Suisse]

Got it. And then one question on the non-CapEx at the beginning, you had talked about non-CapEx being kind of modestly up this year and DRAM being up more significant. If I look at your March quarter shipments up a lot and I was just wondering if your outlook in NAND has changed in any way in terms of the overall CapEx spending this year?

[Martin Anstice, Chief Executive Officer]

Not really. It’s more or less the same today as it was kind of 3 months ago kind of what you are seeing is first half bias, which Doug talked about in his prepared comments more or less the investments that we expected is the one that seems to be playing out. And any 1 month or any 1 week or any one quarter that can go left or right a little bit, but pretty much where we expected it to be and no fundamental message is in terms of kind of bit growth that are different from the consensus and maybe the only incremental thing I would say is our expectations of investments this year which kind of lead to approximately a similar level of shipped capacity not yet qualified at the end of ‘18 to the level that existed in ‘17, which obviously definitely means the same level of discipline at the end of the beginning that existed at the beginning of the year.

[Farhan Ahmad, Credit Suisse]

Got it. Thank you. That’s all I have.

[Martin Anstice, Chief Executive Officer]

Thanks, Farhan.

[Operator]

Thank you. Our next question comes from Joe Moore with Morgan Stanley.

[Joe Moore, Morgan Stanley]

Great. Thank you. Can I ask a slightly annoying question I guess that people are asking me as well? You said on the last call that you thought that the shipment levels would be relatively balanced through the year, they are down a little bit in Q2, they are going to be down a little bit in the second half, is that just at the noise level, I realized these are very small changes? Has anything changed in terms of the way you see the pattern that you see through the year?

[Martin Anstice, Chief Executive Officer]

Not really. And I don’t want to sound dismissive about the short-term, but again in context whether it’s in the context of the answer to the shipments kind of midpoint question or the difference between what we said last time and what we said this time and I think it’s the same message in slightly different words and none of it changes in our opinion the long-term opportunity and the importance of investing for long-term and the potential that we described in the investor meeting. So, from the inside out, this is transactional noise more than anything fundamental and if that changes we will tell you, but that’s about it right now.

[Joe Moore, Morgan Stanley]

Great. That’s what I thought. Thank you so much.

[Martin Anstice, Chief Executive Officer]

Thanks, Joe.

[Operator]

Thank you. Our next question comes from Timothy Arcuri with UBS.

[Timothy Arcuri, UBS]

Hi, thank you. I had two questions guys. First on China trade, well actually both of them on China trade. First of all, is there the potential is there any President for the government to restrict exports of equipment into China?

[Martin Anstice, Chief Executive Officer]

Well, we have lived in that world before. And it wasn’t I would say a fundamental restriction it just made the process of doing business in China a more bureaucratic. We have to file for licenses and so on and so forth. So, there is President for U.S. export restrictions of technology, not so much into semiconductor, but into semiconductor when there was a dual use that the defense department or the commerce department we are trying to manage. Maybe if I take the essence of your question and go somewhere beyond it’s precisely to kind of the conversation of our tariffs. We don’t see an impact today on our business or on our customers’ business or on our industry that would cause us to say that there is a new kind of long-term message. But we are attentive to two very important things. If tariffs starts to be disruptive to consumer confidence that has an impact in the global economy and it will eventually impact semiconductors and in turn equipments and we are attentive to domestic equipment company agendas as well. And I am not seeing that today, but if things got a little bit tit for tat, then there are obviously risks at a minimum that we need to be attentive to, but the end of the day, there is the fundamental value proposition that comes from every equipment company that’s 30 years or 40 years old and we win business and we enable based on our expertise competency and know-how. So, I am not seeing kind of risks today, but we are attentive to the other two things that we have just – that I just described attentive to consumer confidence changes and attentive to domestic equipment company agendas.

[Timothy Arcuri, UBS]

Got it. Thank you. And then just this, it seems to be a school of thought that maybe this could accelerate the pace of the build out of some of these indigenous projects, I mean they seem pretty rational and pretty return focused, but have you seen any signs that they may want to pull forward some of the timelines because of some potential down the road for this to evolve into something that is bigger than it is today?

[Martin Anstice, Chief Executive Officer]

No.

[Timothy Arcuri, UBS]

Great. Thank you.

[Doug Bettinger]

Thanks.

[Operator]

Thank you. Our next question comes from Edwin Mok with Needham & Company.

[Edwin Mok, Needham & Company]

Great. Thanks for taking my question. So first my questions is on our foundry just to clarify your comment, you said that foundry CapEx you expect to be largely in line will it tell you something, is that correct, we will see more conversion from 10 nanometer to 7 nanometer, I would expect maybe slight decline in foundry. And then kind of looking beyond this year kind of based on how will you guys look at demand and the foundry capacity, do you see a scenario of what a foundry spending can potentially grow beyond this year?

[Martin Anstice, Chief Executive Officer]

I think we started the year with a kind of flat to slightly down kind of concrete for foundry year-over-year and no change today. And I think if I heard the second part of your question it relates to whether there is upsides, did I get it correct?

[Edwin Mok, Needham & Company]

Yes. These are just – is there upside probably laid on this year or going into 2018 there is some speculation…?

[Martin Anstice, Chief Executive Officer]

I would say maybe I mean we are doing our best to articulate what we think is likely to happen. And there maybe is interwoven in this conversation around advanced computes as the components of this value proposition in AI and data economy and it serves in the purpose to have a great cloud with great storage and great memory without great competition. So, if the value proposition accelerates, then I think it is an industry-wide opportunity. But in the context of the pilot line timings that we understand with our customers for 5 nanometer, the investments in 7 nanometer and 10 nanometer plans, the outlook that we have described is the best we have to offer right now.

[Edwin Mok, Needham & Company]

I see, okay, great. I think that’s all I have. Thank you.

[Operator]

Thank you. Our next question comes from Mehdi Hosseini with SIG.

[Mehdi Hosseini, SIG]

Yes, two follow-ups. You mentioned your revenue for the second half of the current year is more balanced with the first half and we have the revenues for the first half, does that suggest that we should assume a quarterly revenue that has provided you the free handle for the September and December quarter?

[Doug Bettinger]

Yes. Mehdi necessarily relative balance could be plus or minus 51.9 something like that, it’s – and I have given you guidance for every quarter through the rest of the year right now.

[Mehdi Hosseini, SIG]

Alright, okay.

[Doug Bettinger]

Martin described shipments low-50s, high-40s half-on-half, my comment was revenue would be a little bit more balanced in comparing that.

[Mehdi Hosseini, SIG]

Sure. In terms of the guidance, I wanted to go back to some of your commentary from the Analyst Day and obviously we have been debating sustainability of the memory spend since your shipment hit the $1 billion target and now we are at the $3 billion and sustainability of memory spend keeps coming up, in the mean time revenues are actually diversifying you have recently started to highlight the services mix and especially with the new tools for non-customers is the higher services content and if you really believe in a new paradigm shift why can’t you help us to better model and kind of shift away from these seasonality where if I take your shipment for the March quarter and analyze it, that would suggest shipment up, well over 20% for the year and perhaps maybe some additional color on the revenue mix could better help us and move away from this seasonality that is being just lingering?

[Martin Anstice, Chief Executive Officer]

I am not sure exactly what you are referring to the seasonality, but I mean at the end of the day shipments and revenue mix will be exactly the same, one is timing shipments sometimes happen sooner than revenues. So at the end of the day, it all normalizes to the same thing which is why we give you the shipment probably the way we do.

[Doug Bettinger]

If I can add just one more thing, I would say if I mean for anybody on the call at any point in time listening to Lam Research, if you have recommendations on specific disclosure that you think would be helpful if we feel like we can do it in the context of respecting our customers and if we can do it in the context of preserving competitive advantage, we have every motivation to do that. So, we are doing the best we can to articulate an outlook in an opportunity and risk and so on and so forth. And if you have specific recommendations, please make the most line and we will do the best we can.

[Mehdi Hosseini, SIG]

Does your shipment represent services and parts or is it just a system?

[Martin Anstice, Chief Executive Officer]

When I gave you the color on the percentages every quarter, Mehdi, I specifically say system shipment, so it’s system.

[Mehdi Hosseini, SIG]

Right. If you are going to realize the $1 billion of incremental revenue from services that won’t be captured by shipment and that’s what could become the difference looking forward?

[Martin Anstice, Chief Executive Officer]

Potentially, yes, Mehdi.

[Mehdi Hosseini, SIG]

Alright. Just I think the suggestion with the customer with the guide?

[Martin Anstice, Chief Executive Officer]

We will consider. We will think about how we can give you better understanding on what’s going on the services which I think at the end of the day is what you are asking for right.

[Mehdi Hosseini, SIG]

Yes.

[Martin Anstice, Chief Executive Officer]

Alright. We will think about it offline if you want to share with us what would be helpful too. That would help us think about it.

[Mehdi Hosseini, SIG]

Thanks.

[Martin Anstice, Chief Executive Officer]

Thanks, Mehdi.

[Operator]

Thank you. Our next question comes from Atif Malik with Citigroup.

[Atif Malik, Citigroup]

Yes, hi, thanks for taking my question. Just want to go back to the shipment mix and you made point of expectations on the timing of the projects, can you share with us if there is one end-market that’s responsible for this $40 million shortfall, is it more foundry or is it more NAND?

[Martin Anstice, Chief Executive Officer]

Atif, as you can appreciate, we have a very small set of customers and we are giving more color than just timing of certain projects – with certain customer projects is probably the best we can do for you.

[Atif Malik, Citigroup]

Okay. And then as a follow-up just broadly speaking can you share with us your expectations on the timing off the 92, 96 layer 3D NAND for the industry versus the 64-layer NAND migration, when should we expect the majority of the NAND makers moving to 92, 96 layer NAND? Thank you.

[Martin Anstice, Chief Executive Officer]

I think the best we can do is refer you back to the flash memory summit presentation we made last year, which to the best of my recollection details all of our assumptions in terms of phases of development for NAND flash and rather be selective to ones and risking being inconsistent with that, I’d ask you to kind of go back to that disclosure. And if there is the remaining question then, please follow-up with Satya. Thanks, Atif.

[Operator]

Thank you. Our next question comes from Patrick Ho with Stifel.

[Patrick Ho, Stifel]

Thank you very much. Mart, maybe first off in terms of foundry logic commentary you detailed, given a lot of the noise out there surrounding EUV, can you detail from a Lam perspective – what applications and what new areas do you see etch and deposition that are helping you grow that serve the available market in spite of I guess some of the air concerns about EUV reducing the capital intensity of those two processes?

[Martin Anstice, Chief Executive Officer]

Well, I guess, at the very basic level we have attempted for the last several years to articulate a set of assumptions, which I think are generally consistent with the assumptions that our customers communicate and the assumptions that ASML would communicate around adoption of EUV and using those assumptions we have attempted to communicate this through the 5-nanometer transition, our SAM increases in etch and deposition. So, I would say the first part of answering the question is we have articulated to the best of our ability increasing SAM through 5-nanometer and we will see what integration scheme show up a 3 before answering that question. In addition to that, the company is making a very specific set of investments and you have seen one of them quite publicly or maybe two of them quite publicly, but I will pick one of them now and that’s the world of advanced equipment process control. So we have articulated incremental SAM that we are targeting for the purposes of delivering more control and process and more a repeatability or uniformity so on and so forth. And that is directly relevant to foundry and microprocessor opportunity for the company as well and I am not going to go into details, but we have 3 or 4 pretty significant SAM expansion objectives above and beyond the inflections we have been talking about for the last several years and that’s all obviously incorporated in the long-term financial models that we presented a few weeks ago.

[Patrick Ho, Stifel]

Alright. Thanks for asking that. And Doug, as a follow-up, I know you probably won’t say that visibility has significantly increased, but just based on customer projects and timing of them, it seems like your equipment industry as a whole is getting much better visibility than they have ever gotten. Your balance sheet metrics in the procurement and everything you have done seems to be reacting very well. What changes have you made that has allowed you to adjust to I guess maybe increase visibility as well as the higher demand levels?

[Doug Bettinger]

I mean all the technology inflections you have seen happened over the last several years, Patrick that required our customers to have very advanced conversations those are well in advance of when they need certain capability, because we need to develop the equipment quite honestly. So, I don’t think that’s new. It’s been happening over the last several years and it’s enabled us to plan our company to be able to support where we are at today. So, the conversation is very deep and rich when you are enabling the customer’s roadmap in the way that we are.

[Patrick Ho, Stifel]

Right, thank you.

[Martin Anstice, Chief Executive Officer]

Thanks, Patrick.

[Operator]

Thank you. Our next question comes from Craig Ellis with B. Riley FBR.

[Craig Ellis, B. Riley]

Thanks for taking the question. I appreciate all the color on the call so far, guys. I just wanted to ask a question to get some longer term context around the full year shipment commentary. I think if I look back over the last 2 years there have been years when we have looked for a half-on-half profile that would be down in the second half and yet the year played out and it wound up being up. So as you look at the risks on both sides, can you just recap the upside risk to that shipment outlook as well as the downside risk? Thank you.

[Martin Anstice, Chief Executive Officer]

I guess, I am not sure it’s bigger. I mean at the end of the day, if you believe the statements that we are making around discipline and demand led investments, then the kind of known commodities at this point in time relates to the capital intensity of any one technology node or any one kind of device architecture. So, I don’t think there is kind of too many risks or opportunities relative to people’s understanding of kind of cost consequence of a DRAM or a 3D NAND transition. Individual customer plans in a short-term can create artificial kind of disruption I would say in terms of WFE. In the long-term, I don’t think it’s all, because if one customer decreases and other one likely increases, if one increases and other one slightly decreases, so you kind of see kind of customer risks and opportunities. And if your window of focus is a quarter, then that will be disruptive to you if your window of focus is the year, it’s irrelevant, because it’s a dynamic kind of marketplace. I do think – and I would extend the customer conversation into a regional conversation, something like China. Right, I mean, I think our hypothesis still remains that with any of the regions of the world, including China that the investment will be demand based and rationale. So, I do think where there is still a significant amount of variability in plans is kind of how people choose to go execute and you can change the WFE investment profile quite materially through the choices you make around new capacity additions versus plaintiff to 3D transitions versus 3D transition scaling versus that maybe modifying a DRAM line to flash line or vice-versa. So – yes and even some of these strategies and that will sound maybe quite transactional, but it can have a fairly significant impact. So, we do our best to try and get a dialogue with customers to understand where they are going to head. I would say the simplest headline to your answer is if demand is stronger or weaker, it has – for ICs associated with these AI transitions and value propositions of the data economy, whether you will see it in the calendar year was debatable, but you will see it over a couple of year period in a positive or negative direction. And the rest of it I think is more operational execution as customers try to optimize their fabs, their line layouts and they try to optimize their use of cash.

[Craig Ellis, B. Riley]

That’s helpful. Thanks, Martin.

[Operator]

And that concludes today’s question-and-answer session. I would like to turn the conference back to our presenters for any additional or closing remarks.

[Satya Kumar, Vice President, Investor Relations]

Yes, that’s all the time we have for the call today. Thank you for joining us.

[Operator]

That does conclude today’s presentation. We thank you for your participation.