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Edited Transcript of LRCX earnings conference call or presentation 24-Apr-19 9:00pm GMT

Q3 2019 Lam Research Corp Earnings Call

FREMONT Apr 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Lam Research Corp earnings conference call or presentation Wednesday, April 24, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Douglas R. Bettinger

Lam Research Corporation - Executive VP, CFO & CAO

* Timothy M. Archer

Lam Research Corporation - President, CEO & Director

* Tina Correia

Lam Research Corporation - Corporate VP of IR & Communications

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Conference Call Participants

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* Ada Menaker

Crédit Suisse AG, Research Division - Research Analyst

* Atif Malik

Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst

* Christopher James Muse

Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst

* Harlan Sur

JP Morgan Chase & Co, Research Division - Senior Analyst

* J. Ho

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector

* Mehdi Hosseini

Susquehanna Financial Group, LLLP, Research Division - Senior Analyst

* Mitchell Toshiro Steves

RBC Capital Markets, LLC, Research Division - Analyst

* Sreekrishnan Sankarnarayanan

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Timothy Michael Arcuri

UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment

* Vivek Arya

BofA Merrill Lynch, Research Division - Director

* Weston David Twigg

KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Lam Research Corporation's March Quarter Financial Conference Call. At this time, I would like to turn the conference over to Tina Correia, CVP of Investor Relations. Please go ahead, ma'am.

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Tina Correia, Lam Research Corporation - Corporate VP of IR & Communications [2]

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Thank you, and good afternoon, everyone. Welcome to the Lam Research Quarterly Earnings Conference Call. With me today are Tim Archer, President and Chief Executive Officer; and Doug Bettinger, 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 March 2019 quarter and our outlook for the June 2019 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. 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 and Q&A includes forward-looking statements that are subject to risks and uncertainties reflected in the Risk Factors disclosures of our SEC 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. 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. A replay of this call will be available later this afternoon on our website.

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

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [3]

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Thanks, Tina, and hello, everyone. After Doug and I go through our prepared comments, we look forward to your questions.

Lam delivered a solid March quarter and continued to demonstrate strong execution in a challenging near-term industry environment. Key metrics, including revenue, gross margin and operating income margin, all came in above the midpoint of guidance that we gave on our last earnings call. EPS of $3.70 exceeded the high end of our range, helped by a favorable tax rate and the benefit of ongoing share repurchases. This performance and continued execution in the business is attributable to the support of our customers and partners and, as always, the exceptional efforts of Lam employees around the world.

Turning now to our perspective on the current industry environment and outlook. Industry conditions are directionally unchanged from our January call. We continue to expect customer WFE spending for calendar year 2019 to be in the low $40 billions. Though since our last call, we now see a marginal downtick in Memory spending, offset by slightly better expectations in Foundry and Logic.

Also consistent with our prior commentary, we expect Memory supply growth as we exit 2019 to be below the long-term demand trend line for both NAND and DRAM. In DRAM, we continue to believe the spending correction will extend through this calendar year as customers continue to rationalize long-term profitability with near-term focus on reducing channel inventories and bringing supply and demand dynamics into balance for our business. In NAND, recent industry data indicates that bit shipments were better than normal seasonal trends for the February month, and we continue to believe that market conditions are setting up well for a future recovery as demand and supply balance improves through the year.

On the Foundry and Logic side, 2019 WFE spending is slightly higher than our prior baseline as customers appear to be ramping leading-edge nodes faster than we previously forecast, which we believe is partly due to increased semiconductor content in smartphones related to 5G.

While predicting the exact timing of cyclical change is always difficult, our confidence in the long-term demand drivers for Lam's business is unchanged. We are positioning Lam to capitalize on long-term demand through execution on our 3 growth vectors of served available market expansion, share gains and revenue generation from our installed base.

Semiconductor demand drivers, such as Industry 4.0, artificial intelligence, 5G and IoT, are creating compelling served available market expansion opportunities for Lam, all require innovations in the transmission, processing and storage of data using a minimum number of compute cycles and lower power and lower cost. This is leading to changes in compute system architecture and driving growth in new on-chip and off-cheap memory design. Key trends include the use of high-bandwidth memory interfaces for leading accelerator designs, heterogenous integration for system-on-chip solution and the move to MRAM for embedded memories.

I would like to provide a few specific examples of how Lam is set to benefit from these trends. First, new memory devices, like GDDR6, improved bandwidth by adding, among other things, more bit lines, which increases etching deposition intensity.

Second, high-bandwidth memory and heterogenous packaging integration are driving an increased need for through-silicon via and other novel wafer level packaging technologies. Lam SABRE 3D electroplating and Syndion etch tools are recognized technology and market leaders in the TSV market and provides a stable etch depth and fill via capability required for high-volume production. For wafer level packaging, the market-leading SABRE 3D system delivers technology-enabling coplanarity on a production-proven platform.

And third, the emerging memory devices, such as MRAM, are employing novel materials, which require the introduction of new ion-beam etch technology. Lam's ion-beam etch technology is differentiated by its control over both ion energy and angle to deliver superior device profiles and, ultimately, increased yield and bit density for our customers.

Broadly, we believe the product and services portfolio of Lam Research is unmatched and is fit to these emerging technology inflections, and our focus is to deliver disruptive, customer-enabling technologies to expand our served available market.

From a market share perspective, we continue to perform well on penetration and defense activities. In the first calendar quarter, we successfully defended all key positions in addition to winning multiple new opportunities, and we remain committed to our goal of growing market share in both etch and deposition. Our confidence in our share gain opportunity is rooted in fundamental product architecture and technology differentiation.

Lam's unique quad-station module, or QSM, is rapidly becoming the process chamber architecture of choice for 3D NAND. The QSM serves as the core high-productivity platform on which Lam's process teams build differentiated 3D NAND technology solutions. Examples where the QSM is delivering a capability advantage for our customers include our market-leading films for the ONON stack, wafer bow management using backside deposition, new ALD films for high-aspect ratio gapfill and low-resistivity tungsten fill for word line. Our ability to deliver compelling technology and productivity, including fab space saving, using the QSM architecture is unparalleled. We hit a milestone this quarter with our 7,000 modules shipped, a metric that signifies the growing importance of this platform for 3D NAND and other markets.

In Logic and Foundry, gate contacts and interconnect layers require new materials for better device performance, reliability and scaling beyond 10 nanometer. In recent engagements, we have shown our ability to leverage Lam's long-held leadership position in copper electroplating to win applications for new materials, such as cobalt and leading-edge nodes.

And in Memory, we continue to penetrate key semi-critical etch positions through our focus on productivity innovation. An example of this focus is the separate press release we issued today stating that in partnership with a leading semiconductor manufacturer, we have successfully demonstrated 1 full year of uninterrupted production on the Kiyo etch system equipped with a unique productivity-focused hardware set. We believe the Kiyo etch system utilizing our Corvus R technology ushers in a new era of self-maintaining equipment. Today's announcement is also a demonstration of Lam's commitment to leverage Industry 4.0 technologies, advanced computing and Big Data to bring innovative products and services to our customers.

And finally, in our Customer Support Business Group, we saw continued sequential growth in revenues we drive from our installed base. Our Reliant Systems business grew strongly in the March quarter, reaching its highest quarterly revenue level in our history. This was driven primarily by investments in nonleading-edge nodes and foundries as well as spending on more than Moore and IoT initiatives. Overall, our installed base business is on track to deliver another record year, growing again at a rate faster than the installed base.

In summary, Lam is well positioned to capitalize on the long-term demand drivers in the semiconductor industry. We are performing well in a challenging near-term industry environment. And by continuing to focus on execution and investing to meet our growth objectives, we believe we will emerge stronger as WFE spending recovers.

With that, let me turn the call over to Doug for his prepared remarks.

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [4]

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Great. Thanks, Tim. Good afternoon, everyone, and thank you for joining us today on what I know is a busy earnings season.

Lam executed well on the market quarter with our results exceeding the midpoint of guidance for all financial metrics. Earnings per share exceeded the high end of the guidance range that we provided, mainly due to a lower tax rate that we realized in the quarter. We had a more favorable tax benefit from our annual employee stock grant vesting due to the increase on our stock price during the March quarter. I'd also like to highlight that during the March quarter, our cash from operations came in at $933 million, which, on a quarterly basis, is the second-highest cash generation in the history of Lam Research.

As we discussed during our last quarter earnings call, we believe WFE spending for the first half of 2019 would reflect lower Memory spending levels and spending would be driven more by Foundry and Logic investments. Our view today is largely unchanged. Full year 2019 Foundry and Logic WFE might be a little bit stronger than we expected a quarter ago, and DRAM might be a little bit weaker. We continue to expect WFE will be down in the mid- to high-teens percent year-over-year from 2018. WFE spending as a percentage of semi-industry profit dollars has been running at a fairly consistent level over the last several years.

We continue to track a double-digit number of new fab projects this year spending leading-edge Foundry, Memory and IoT-driven legacy nodes. Overall, Lam's system revenue for the combined Memory segment decreased to 61% of total system's revenue from the 79% we saw in the December quarter. The composition of the Memory segment was mostly driven by conversions and included nonvolatile Memory spending at 40% and DRAM spending at 21%. NAND spending continues to be focused on both 6x and 9x layer wafers, and DRAM spending is focused on the 1x and 1y nodes. The Foundry segment more than doubled quarter-over-quarter, accounting for 27% of system revenue, which is the highest level in Foundry we've seen since March of 2017. Foundry spending in 2019 is focused on 7 and 5 nanometer. As a comparison, the profile in 2017 was target at 10- and 7-nanometer nodes. And finally, the Logic and Other segment was also up, contributing 12% of systems revenue.

Let's turn to P&L performance for the March quarter. We delivered revenues of $2.439 billion, which was down slightly from the December quarter and above the midpoint of the March guidance we provided.

Gross margin for the quarter came in at 45.1%. We came in slightly better-than-expected, primarily due to product mix and spending control. And as I always do, I'll remind you that our actual gross margins are a function of several factors, such as business volumes, product mix and customer concentration, and you should expect to see variability quarter-on-quarter.

Operating expenses in the March quarter were $488 million, which increased by approximately 11% from the prior quarter. Spending in the March quarter was negatively impacted by the appreciation of the stock market during the quarter and the resulting impact on the cost of our deferred compensation plan. We do hedge this to mitigate the exposure. However, the offset to this expense shows up in other income and expense. It's neutral to earnings per share at the end of the day. R&D investments continue to be a focus for us, with R&D comprising nearly 2/3 of our spending in the March quarter. In June, total operating expenses are expected to be lower on a sequential basis compared to the March quarter.

I'd also just point out one spending item that you'll see in the GAAP to non-GAAP reconciliation table of our press release. We incurred a charge of approximately $11 million related to severance payments for a workforce action we took during the March quarter.

Operating income in the March quarter was $611 million, and operating margin was 25.1%, pretty much in line with the midpoint of the guidance range.

The non-GAAP tax rate for the March quarter was approximately 8%, which is lower than our long-term rate due to the tax benefits related to the employee stock vesting that I described earlier. For the June quarter and 2019 calendar year, we continue to expect the tax rate in the low to mid-teens, and there will be fluctuations in this rate quarter-by-quarter.

In March, we completed the issuance of $2.5 billion in principal value of senior notes as we decided to take advantage of a favorable interest rate and credit environment. The note proceeds are for general corporate purposes, including, among other things, to fund our stock repurchase program and to pay dividends.

For other income and expense, our newly issued debt added approximately $8 million in interest expense for the March quarter. However, as I pointed out, this was offset in OI&E by gains and assets related to obligations under our deferred compensation plan. Going forward, we expect to have approximately $26 million of quarterly interest expense related to our new debt. In total, interest expense on a quarterly basis is now around $45 million.

We continue to demonstrate our commitment to capital return during the quarter, funding more than $1 billion in dividends and share repurchases. For the March quarter, we paid out $171 million in dividends, and we completed $862 million in share buybacks through a combination of open market and structured repurchases. These repurchases were made under the new $5 billion authorization that we announced at our earnings call in January. And I'd just point out to you that in the last year, we have lowered quarterly dividend share count by approximately 20 million shares. That's over an 11% reduction.

Earnings per share came in at $3.70, which was over our guidance range for the March quarter, mainly driven by that favorable tax rate.

Diluted shares per EPS were 158 million shares, which reflects a decrease from the September quarter related to the share buyback program. The share count includes a diluted impact of approximately 5 million shares from the remaining 2041 convertible notes in the March quarter, and I'll remind you that dilution schedules for the remaining 2041 convertible notes is available on our Investor Relations website for your reference.

Let me now turn to the balance sheet. Our cash and short-term investments, including restricted cash, increased notably in the March quarter to $6.4 billion from $3.9 billion in the prior quarter. This was driven by the $2.5 billion debt issuance that I mentioned and the over $900 million operational cash flow.

DSO improved by 6 days to 61 days. Our inventory levels decreased, and consequently, inventory turns increased to 3.4x compared to 3.2x in the prior quarter.

Company noncash expenses included approximately $53 million for equity compensation, $46 million for depreciation and $36 million for amortization.

Capital expenditures were $76 million in the March quarter, which was a decrease from $106 million in the December quarter. Due the timing of certain projects, December quarter CapEx was somewhat on the high side, and the decrease in the March quarter was in line with our expectations. The majority of the CapEx in March was directed towards investments supporting our installed base business.

We exited the March quarter with approximately 10,800 regular full-time employees, which is down slightly from the prior quarter due to the workforce action that I previously mentioned. For the long term, we continue to prioritize headcount that is supporting Lam SAM expansion, market share gains and installed base business growth.

Looking ahead, I'd now like to provide our non-GAAP guidance for the June 2019 quarter. We're expecting revenues of $2.350 billion, plus or minus $150 million; gross margin of 45.5%, plus or minus 1 percentage point; operating margins of 26%, plus or minus 1 percentage point; and finally, earnings per share of $3.40, plus or minus $0.20 based on a share count of approximately 155 million shares.

Operator, that concludes my prepared remarks. Tim and I would now like to open up the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from John Pitzer with Crédit Suisse.

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Ada Menaker, Crédit Suisse AG, Research Division - Research Analyst [2]

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This is Ada calling in for John. I was wondering if you could maybe talk through what your OpEx trajectory is looking like for the remainder of the year given the lumpiness that we saw in March?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [3]

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Yes. I mean we only really guide just 1 quarter at a time. The best, I guess, way I would give you to think about it is it's going to be plus or minus where we're at in the June quarter. But again, we only formally guide numerically 1 quarter at a time.

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Ada Menaker, Crédit Suisse AG, Research Division - Research Analyst [4]

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And then if you could maybe provide us with an updated view of the domestic China opportunity, where you think that looks like this year in terms of WFE. And any puts and takes around that given the macro situation?

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [5]

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Sure. I can do that. We said on our last call actually that we had expected China domestic WFE this year to be a little bit greater than $5 billion. We haven't changed our view on that. And our position in China, we've also said, is a bit stronger or at least as strong as elsewhere in the world, so we gave guidance on the last call that our business in domestic China would be up as well. There really has been also no change in the regulatory environment that is impacting our results. And while we're monitoring it closely, we don't really expect any effect on our business at this point.

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Operator [6]

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We'll now take a question from C.J. Muse with Evercore.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [7]

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I guess first question here given the backdrop of weak pricing across both segments in Memory, it's a great job on your part in terms of getting, what I imagine, roughly $1-plus billion for the quarter in total shipments just on technology buys alone. And so I guess the question is, as you look into the back half of the year and you think about the transition 96 layer and if we take into account what we've heard from ASML in terms of the second half ramp at (inaudible), how should we think about that trajectory? Are there green shoots there into the back half of the year? Or is that something that would shine in the first half of 2019 -- 2020, sorry?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [8]

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Yes. Tim and I (inaudible) a little bit, I think. C.J., our outlook hasn't really changed at all from what we communicated at earnings and quarter ago. We don't see a recovery in Memory this year. We do think it sets up well for what likely happens in 2020. We expect the exit rate of supply in both NAND and DRAM to be under where demand is, meaning it's consuming some of the inventory, which I think sets us up well. But we really don't see a meaningful recovery or recovery at all this year. Tim, you want to add anything?

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [9]

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Yes. No, I think that's -- it's a very clear statement of our position. We've been saying that we really don't see the recovery this year. You mentioned a couple of items though like the 96 layer conversion, and I guess from the standpoint of the job we're doing, Lam is squarely focused in the middle of technology conversions. And technology conversions are a great way for customers to reduce their cost, increase their capability through cycles like this. And so Lam is just focused on helping our customers execute those technology conversions. And when they come and there's capacity additions, that'll be, as you say, an additional green shoot. But right now, we've said we don't see that right now through this year.

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [10]

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And C.J., just maybe one more comment from me as I sit here. Yes, and think -- I do know it recovers at some point. Whether it's later in this year or early next year, to me, it's somewhat interesting from a timing standpoint. But obviously, it will recover at some point. The industry is working through inventory in the channel and what not. That will take some time. And at some point, investment will be more than it is right now.

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Christopher James Muse, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Global Semiconductor Research & Senior Equity Research Analyst [11]

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Okay. Very helpful. And as a follow-up, considering the magnitude of the debt offering in the quarter, can you kind of walk through what net cash or gross cash value you need to run the business? And are you contemplating perhaps a more aggressive buyback with the funds?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [12]

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Yes, C.J., nothing new to communicate relative to the buyback. We just announced the $5 billion a quarter ago. We executed $862 million last quarter. We view this as a favorable debt market, as I described in my prepared remarks, relative to rates and credit demand and whatnot. We decided to take advantage of that. It really doesn't impact too much on thinking about the timing of the buyback, the quantum of the buyback. Obviously, I think we've been pretty judicious with returning cash to shareholders in the past, and we'll continue to do so in the future. But I don't really have anything new to tell you, except that debt issuance helps fund what we plan to do.

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Operator [13]

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We'll now take your question from Atif Malik with Citi.

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Atif Malik, Citigroup Inc, Research Division - VP and Semiconductor Capital Equipment & Specialty Semiconductor Analyst [14]

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Good job in a tough environment. Tim, I have a question on your market share. We all understand WFE share is a complicated mix of end market, your customer mix. The Gartner data came out today, and it shows your WFE share declined modestly last year. I just wanted to understand, moving forward as EUV becomes a little bit bigger push in off-the-logic spending, what are the things that you can do with your products that can offset kind of the natural headwind from EUV? And then looking beyond 1 to 2 years, when I was at SPIE conference, there was a lot of discussion on horizontal nanotubes or nanosheets being used for 3-nanometer logic devices, similar to what we have seen from 2D to 3D NAND migrations. So just your thoughts in terms of when your logic share can start to improve because of architectural changes.

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [15]

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Okay. Sure. What great questions in there. So I'll do my best. I mean, first, maybe just taking kind of the share question head-on. Obviously, we looked at the Gartner report. We will be the first to acknowledge we don't win everything we compete for. But I want to point out, we feel -- when we think about market share, we feel very good about what we've accomplished the last few years relative to our positions in critical applications. Critical applications are the hardest to win. But once you have them, they're also the stickiest, I mean the applications that our customers are least likely to change. And so we really did, we focused on those. And we made sure that in key, fast-growing segments in WFE, like 3D NAND, we made sure that we secured those critical applications because that's really the foundation on which we then can go build everything else, and those are the applications that get you closely collaborating with customers.

I think when you think about share, I've said -- I said it last time, I'll say it again, I want us to do better in the semi-critical applications. But again, you have to have the critical application foundation first, then you build semi-critical on top of that. What can we do in that area? A lot of that is you just saw in this press release. We're focused on productivity innovation. And as our customer scale up, and you see it this year with the focus on the pricing environment and spending environment in Memory, productivity innovation is welcomed by our customers. So semi-critical is usually a battlefield about productivity. The press release about the Kiyo etch with Corvus R, I think Lam will continue to try to set benchmarks for productivity in this space, and that will drive share for us. Those are all things that are within our control.

Things that are not so much within our control, device mix. And so just to point out, as you look at some element of spending last year, what took place was that '17 to '18 saw a significant increase in DRAM WFE and not such a large increase in -- in fact, almost no increase in NAND WFE by our calculation. So again, based on choices we've made and strategic positioning, we have positioned Lam to be extremely strong in 3D NAND, and I think you all know that. And so some years, it'll go. Some years, it doesn't work out quite as well. Now -- but we feel really good. And quite honestly, I wouldn't trade our position we have right now for anybody else's.

Now your point about logic, kind of just finish on that one, we intend to improve. We're always investing to improve our position across the entire spectrum of applications. I'm not -- I won't play -- I'm not an expert on your 3-nanometer horizontal nanosheet's application though, but we have our CTO office looking at every new inflection that comes. And those inflections, kind of we've proven our ability to use those inflections as share get opportunities for ourselves, and we'll continue to do so. So hopefully, that answers your question. Thanks.

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Operator [16]

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We'll go to a question from Patrick Ho with Stifel.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [17]

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Tim, maybe first off in terms of the 2019 outlook. You detailed about the Memory outlook remaining pretty much muted through the rest of this year. I guess what are some of the key variables investors should look out for, whether it be a NAND and DRAM? Is it just the pricing environment? Is it the inventory situation? What are some of the key variables that you guys are monitoring that will lead to a change or a turn in positive spending for the Memory market?

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [18]

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Okay. Yes, I mean it's a great question, and it's one we're asking ourselves all the time every day. Our customers have a much better view on what their strategies are and what the trigger points are for them to begin investing. But what we're trying to say is that, at least from our view, what's happening right now is very rational. I mean the pricing environment -- you have seen some talk about taking small amounts of capacity off-line. These are all things that we believe will accelerate improvement in the supply and demand balance. So we just watch -- we're watching those. We're talking to customers continuously. And what we're making sure is that, regardless, as Doug said, we know it's going to come back. I talked about a lot of the demand drivers. There's no question for us about when will -- whether Memory comes back, and so we're just focused on staying close to customers and making sure that when they do want to place orders for tools, there's no limitation in our ability to ship to them on the dates they want the systems.

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [19]

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Patrick, this is Doug. How I think about it is that I think we all understand there's inventory in the channel. There's inventory with the hyperscale guys. There's inventory with our customers that needs to clear itself out, and we can all do our best to model that. You can do it as well as we can. Obviously, we model it. I know you do, too. To me, when I think about pricing, pricing is an indication of how supply and demand are clearing. And until all the inventory is worked out, a lot of what you're seeing in pricing will be determined by how that inventory is moving through the channel. So you got to pay attention to that because that tells you how things are clearing out. And as Tim said, at some point, it will clear up, and we're all waiting to see when that does.

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J. Ho, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Technology Sector [20]

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Right. And as my follow-up question for you, Doug, I know you've talked about the installed base business as being kind of a hidden growth driver for the company, and we've seen it now over the last couple of years. Can you just qualitatively perhaps give a little bit of color of both where the leading-edge installed base continues to grow obviously with more shipments to 3D NAND in that front as well as some of the opportunities on trailing edge, where you're saying upgrades, productivity improvements? Can you just give a little bit of color of how much that installed base growth is driven from both leading edge versus trailing edge?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [21]

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I mean a lot of it, Patrick, is leading-edge stuff, right? That tends to be the most technically complex chambers we have in the field, and as a result, it tends to consume more spare parts than stuff that's out in the field. But as we've talked about in the past, our tools will run for decades. That's a great part about this business, and this part of the business model is things need to be upgraded, things need to be maintained. They all need spare parts on a regular basis. At some point, one customer might be done with the tool. We'll buy it back, refurbish it and sell it to somebody else. So there's a very long tail to the profit generation from the stuff in the field. That's how I think about it. And we've described this in the past as being roughly a 1/4 of the company's business. Now in a year like this year when new equipment sales are down as much as it is, it'll be more than that obviously, likely this year, well north of 30%. And so that's a great part of the business. This year is -- this is actually growing this year, Patrick. So it just keeps going. Tim, would you add...

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [22]

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Yes. No, I think the only thing I would add is -- maybe even to reinforce Doug's point about the performance in this business this year. This is the kind of business that -- quite often, when our customers are looking for opportunities to increase their capability without having to go through that next increment, which is to actually add capacity, which is definitely their mindset right now this year, they turn to us for productivity upgrades, capability upgrades, services that help them get more out of the existing installed base. And that's what this whole business is intended to do to. It's to help them leverage the tools that they've already put in place, and that's how it's kind of a win-win. But it means that in a year like this year, it's a very good business.

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Operator [23]

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(Operator Instructions) We'll take our next question from Timothy Arcuri with UBS.

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Timothy Michael Arcuri, UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment [24]

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So I had 2. I guess, Tim, first, I wanted to dovetail on an answer that you just had. And obviously, you guys are very levered to 3D NAND. But I still get a lot of questions sort of on capital intensity and what your share is on the wallet and the layer migration world versus kind of a planer to a 3D conversion world. So can you sort of help us baseline that sort of per 1,000 or per 10,000, how much you think the WFE spending is and what your capture is about wallet?

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [25]

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Oh, boy. What I'd -- here's what I'd say, I mean it's a great question, and maybe I'll refer back to the few of the things we've said, and we can then see how close we can get to the level of detail you're looking for. Obviously, we participate -- as you're just talking specifically for layer conversions and 3D NAND, we participate quite significantly in the technologies required to make the stack taller, right, basically to increase the density. So we're talking about going from, say, 64 layer to 96 layer. I don't believe -- and Doug can correct me if we have, but I don't believe we've actually quantified exactly what we think our share of that spend is externally.

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [26]

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Yes, we haven't quantified it numerically.

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [27]

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Clearly, we've done it internally. We understand that all. What we did show at the Investor Day last year was that, obviously, for a greenfield investment, Lam's opportunity increases meaningfully at every layer transition, as you might expect. I mean you're building a taller stack, and it's the taller stacks, deeper etches, the new films that -- I mentioned one. To get to a taller stack, these new films required to control wafer bow are critical to being able to build those taller stacks on the wafer and still be able to process and yield the wafer. Those things do increase capital intensity for us when you're moving between layers.

I think the other piece though that we did mention at Investor Day and I guess we can reiterate is that from a conversion perspective, while the absolute dollars spent are less our share of wallet, I should say our share of WFE actually increases quite significantly because the primary tools that are required to inflect that layer transition are etch- and depth-heavy. And so in a year like this when most of the attention is turned toward conversion, it becomes a year in which maybe we would be achieving and obtaining a higher share of total spend in that area. But I know that doesn't quantify for you, but I don't believe we've done that externally. We're probably not prepared to do so today.

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Timothy Michael Arcuri, UBS Investment Bank, Research Division - MD and Head of Semiconductors & Semiconductor Equipment [28]

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Tim, yes, that was -- I mean that was kind of what I was getting at, just the layer migration versus the 2D to 3D world. And then, Doug, just a quick follow-up. So on free cash flow payout, I think you paid a little more than all of your free cash flow this quarter. Is that still -- you just thought to sort of pay out all of your free cash flow going forward? And I guess the question really is on the repo and how opportunistic you were when the stock was lower versus now that the stocks are higher?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [29]

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Yes, Tim, I mean our formally committed metric that we are committed to return is, I think we did this at our Analyst Day last year, is at least 50% of the free cash flow. And your observation is exactly right. Last quarter, it was more than 100%. And the last several years, it's been close to 100%.

The way I think about it is we are opportunistic. We are sensitive to what we perceive fair value of our business to be and where things are trading. We announced at our last earnings call a new authorization, $5 billion. I didn't communicate a time frame for that, and we'll see as it goes. But obviously, the fact that in the June quarter, we're guiding share count down again. You know where we're going to be in the market again in June. And I've described it as -- I think about it as being opportunistic. I'm not going to exactly say what that means, but we do pay attention to the value of the stock as we're executing.

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Operator [30]

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We'll now take a question from Krish Sankar with Cowen & Company.

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Sreekrishnan Sankarnarayanan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [31]

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I have 2 of them. First one, Tim, just to touch upon the market share. Last year, it looks like you guys did lose some share, especially on dielectric etch and NAND versus TEL. And my understanding was that tel has gotten 2 of the customers because of productivity. Just trying to figure out -- I mean maybe the press release you had was probably related to that. Is there a way that loss can be stemmed? Or do you think that your share gains in the more challenging channel hole etches will more than offset any weakness in the flip etch? And then I have a follow-up question for Doug.

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [32]

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Okay. Well, I am not going to talk about any specific applications. But in general, my comments about semi-critical applications, where both your technical capability to do the application as well as productivity are it's not equally important certainly like in the mix of the decision. That's an area where obviously it's more competitive, and what I'm basically messaging is our company is going to focus on delivering best-in-class products that are best-in-class both for technology and productivity. In many areas, we already do that. I talked about the QSM, the deposition tool for like the Strata ONON tool.

In terms of productivity delivered to 3D NAND, on many dimensions, cost for wafer, fab space, per wafer out. These are all dimensions we're -- as we said, we believe are unparalleled in terms of productivity delivered.

Some of the etch applications, we may have some room to go. And so when you say, can it be stemmed? It's an area of focus for us, and I think our track record of both equipment and process development and critical application demonstrates we have the capability to do it. We have the productivity know-how inside the company to do it as well. And I will say not overly concerned, but it is somewhat coming from our strategy. We needed to ensure we were securing critical applications that will continue to pay out for us for many years to come first, and I think now we can definitely take on some of the challenges we've had in semi-critical.

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Sreekrishnan Sankarnarayanan, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [33]

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Got it. Got it. That's helpful, Tim. And then a follow-up for Doug. If I look at your OpEx and try to normalize it on a weekly basis given that March had an extra week in the quarter, it looks like the OpEx run rate really hasn't changed. It looks like it's about $35 million on a weekly basis. But you guys did take out 150 headcount. So I'm just wondering, was it more flexing on the COGS side? Or should we expect the -- maybe a downside to OpEx going forward?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [34]

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Yes, I mean the best that I can give you perspective is that we just guided through June quarter. I don't know what it will be precisely. I'm not going to tell you September and December and beyond. What I said in response to an earlier question is the best guidance to give you is this plus or minus where we are in June.

And I think, Krish, in the first half of the year, you have some unique things that happen the first. You're absolutely right, it was our 14-week quarter. That occurs every 6 years, something like 6 years. We had that elective deferred compensation program drives spending up. That was offset in OI&E. I don't anticipate that happens again, but if the market significantly moves, you'll see some permutation for things like that. In the first half of the year also, you get payroll taxes come in that go away later in the year. So that dynamic comes and goes. And then quite honestly, with our R&D spending, it's based on programs and projects and schedules. And it's not perfectly linear. It's not the same every single quarter. There will be some lumpiness to that, and that's why we'll guide you quarter-by-quarter as we go. We're conscious of the profitability of the company. Obviously, we're conscious of wanting to maintain that profitability. It's why we undertook the workforce action we did.

And the last thing I'd say is part of that workforce action, Krish, was in cost of goods sold. It wasn't just in direct spending. So there's lots of things moving around.

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Operator [35]

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We'll now take a question from Harlan Sur with JPMorgan.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [36]

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Nice job on the quarterly execution. Great to see the focus on semi-critical layer applications. The market doesn't tend to focus here a whole lot, but there appears to be a lot of opportunity here, as you mentioned, where the team can win on attributes like productivity, reliability, tool footprint. And all of these obviously have a significant impact on overall wafer cost to your customers. So of the share gain targets that you guys have set for in your 2021 model, how much of this share capture is due to winning semi-critical applications?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [37]

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We haven't quantified it, Harlan, but a piece of it certainly is. A piece of it certainly is. And when I think about this and what I hear Tim say all the time is, honestly, productivity is a technology challenge, right? The most productive platform doesn't necessarily mean the cheapest. It doesn't, right? You innovate -- in productivity, you innovate with the architecture, as Tim talked about. You can win business at nice profitability, which is what we're aspiring to do.

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [38]

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Yes. No, it's a great question. Some element of it. I mean in many ways, you're improving performance even on critical when you're working on things like architectural differentiation for semi-critical. So this isn't where you need to drive completely different attributes. I think it's just a natural part, especially in the 3D NAND space actually of how the technology has also evolved and matured as well.

I mean if you go back a couple of years ago, maybe there was a lot more focus on the technical enablement of 3D NAND, meant a lot more applications looked critical. And I think now as it matured, we figure out which ones we can push the boundaries of throughput and cost reduction in a way that we can make 3D NAND lower cost for our customers to produce and therefore maybe drive increased volume, I mean, basically through elasticity. So it's a focus of ours. And like I said, it's not something new. I mean the -- many of the deposition applications for a long time have competed in the semi-critical space, and that's why you see unique tool plan that bring back up the QSM architectural differentiation specifically for productivity. It's a winner. The Kiyo etch and Corvus R announcement. Doug's point about almost every cost problem requires a technology solution. Now that's a technology solution. I mean it may sound easy, but the idea of a tool that can replace its own hardware without human intervention, that's a technology solution to a cost and productivity problem. And I think it's just the first example of the types of things that we want to drive out of our technology organization focused on cost.

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Harlan Sur, JP Morgan Chase & Co, Research Division - Senior Analyst [39]

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Yes, and then as my follow-up, as your Memory customers continue to focus on profitability and free cash flow, they started off by cutting CapEx, now they're limiting supply into the market by building inventory and then more recently idling capacity or even cutting wafer starts. And I know that utilization in fab activity does drive a part of your installed base business, and so wondering if you can comment on whether or not you expect to see any potential impact of these customer actions on your services business on a go-forward basis.

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [40]

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Yes, maybe a little bit, Harlan. Honestly, as I think you well know, our spares consumption often -- well, not often, is correlated with fab utilization. So if utilization comes down, the consumption of spare parts will reduce a bit. Independent of that, we still see a nice growth here for the installed base. We still are going to deliver record levels of revenue and profits in that part of the business. So yes, we're still feeling great about what's going on. Tim, anything?

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [41]

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Yes. No, no, I think I'd just point you back to the comment I made. The utilization portion, that was what Doug has commented on, obviously some were dependent there on utilization to things like spares and consumables, et cetera. But I made the comment, which I think is also shouldn't be lost, it's in years like this that customers are looking to us to help them improve productivity of their installed tools through upgrades and services. And so you maybe getting a little bit of a balance between those 2 elements of our installed base business, and that's why, even in the face of this, we're telling you we're going to deliver a record year in installed base.

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Operator [42]

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We'll now take your question from Weston Twigg with KeyBanc.

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Weston David Twigg, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [43]

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I actually wanted to follow up on the installed base business. I'm wondering that if you have a significant slow down in total shipments this year, does that impact your installed base revenue growth trajectory next year? And kind of more importantly, does it put that 2021 target model at risk?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [44]

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No, Wes, we're still tracking to where we want to be relative to the growth drivers in this business. You're right, if the growth of chambers slows, there will be a lag affect to the growth of the installed base business. But we're still feeling really good about where we're headed here.

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Weston David Twigg, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [45]

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Okay. Good. That's helpful. And as a follow-up, you talked about the self-maintenance chamber. That sounds really interesting. I'm wondering, who would be the typical customer? And is that something that could help you accelerate revenue growth next year as the Memory CapEx begins to recover?

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [46]

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Well, that's right. That's why we're doing it. Yes, obviously, it could apply to all applications. Its first application here was in a memory-focused etch application. And I think that we -- it's just -- again, it will be more sensitive to places where you're wanting to manage a very high-volume production with minimal human intervention. I mean what it really does is it allows us to not have to interrupt the tool by opening into replaced parts, and so I guess any high-volume application could be a target for it. If it's as successful as it's proving out right now, then sure, it represents a share gain opportunity for us and therefore a better position when spending recovers.

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Weston David Twigg, KeyBanc Capital Markets Inc., Research Division - MD & Senior Research Analyst [47]

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All right. That's helpful. But just to clarify, so you think that will be a product in the marketplace next year helping generate revenue growth?

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [48]

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Yes.

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [49]

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It's in the product -- Wes, it's in the market right now.

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [50]

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Yes, its -- that was the announcement, was that it is in manufacturing right now, high-volume manufacturing.

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Operator [51]

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We'll take our next question from Mitch Steves with RBC.

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Mitchell Toshiro Steves, RBC Capital Markets, LLC, Research Division - Analyst [52]

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I have 2. Maybe I'll start off with the first one. During your prepared remarks, you guys stated that you saw a little bit more softening in DRAM. But I think that you didn't have a comment on NAND. So am I reading too much between the lines by thinking that maybe NAND is probably at the bottom of DRAM? Or is that a, I guess, a bad assumption to make?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [53]

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Mitch, just read it to be our outlook for NAND is unchanged.

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Mitchell Toshiro Steves, RBC Capital Markets, LLC, Research Division - Analyst [54]

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Okay. Got it. And secondly, in terms of the -- hello?

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [55]

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Yes, go ahead.

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Mitchell Toshiro Steves, RBC Capital Markets, LLC, Research Division - Analyst [56]

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In terms of the China demand right now, obviously, there's been a lot of [issues] in terms of what impact has been between the tariffs. So do you guys have any view of what to kind of quantify the impact of the tariff in the U.S.-China relation?

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [57]

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Well, if you mean specifically the impact of the tariffs on Lam's results, what we have said is that we've been able to mitigate -- they're to the point that -- I mean they're included and reported in our financials, and they're part of our guidance. And I would that they have been a very minimal impact at this point.

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [58]

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We'll figure out how to mitigate what might have occurred, Mitch. It's gotten immaterial impact on anything you're seeing from us right now.

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Operator [59]

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We'll now go to a question from Vivek Arya with Bank of America Merrill Lynch.

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Vivek Arya, BofA Merrill Lynch, Research Division - Director [60]

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Tim, I'm wondering, how is the visibility and outlook for the second half now versus what you thought quarter ago? We have heard from some of the Memory customers that they are expecting some optimism about the second half, but the inventory situation is not getting much better. So I'm just wondering how you are looking at the second half. What's on your dashboard as you look at visibility? And at what point do you think you will be under shipping demand? Has that view changed in the last quarter or so?

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Timothy M. Archer, Lam Research Corporation - President, CEO & Director [61]

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Got it. Yes, so it's a great question. We have been -- I mean what do we look at? I mean we're, as I said, in constant contact with our customers. The message we delivered today and are delivering on this call is that the year is playing out pretty much as we stated on the last call, which is no meaningful recovery in Memory spending through this year, and we exit with supply growth meaningfully below the long-term demand both in DRAM and NAND. And so we've said 2019 is a year in which kind of the balance of supply and demand and the inventory issues get resolved in a way that we exit the year and are set up for a much stronger outlook in 2020. That's what we said in January. I guess I'd say we just are reiterating that we still see it playing out that way, and that's how we're looking at it.

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Vivek Arya, BofA Merrill Lynch, Research Division - Director [62]

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So very quickly, you -- I don't whether you answered it before, but what's the sensitivity of the services business to what you're seeing on the tools business this year? The tools are down this year. Historically, does it mean services are down next year? Or do you think there's enough growth in the installed base and consumables to still have conceptually a positive year next year?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [63]

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Vivek, when we look at this, we see this as a growth year for the installed base business, and it will grow next year, too.

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Operator [64]

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We'll take a question from Mehdi Hosseini with SIG.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [65]

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And all the good questions have been asked. I just have one quick follow-up. When you talk about Logic/Foundry and others, does that include advanced packaging and image sensor? And if not, what does that put in, which buckets?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [66]

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Yes, Mehdi, for us, it's Logic and Other, as you rightly point out. So yes, that's where image sensors goes. That's where advanced packaging goes. It's Logic plus everything else.

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Mehdi Hosseini, Susquehanna Financial Group, LLLP, Research Division - Senior Analyst [67]

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When you talk about a slight upside to Logic and Foundry, would that include better-than-expected advanced packaging and image sensors?

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Douglas R. Bettinger, Lam Research Corporation - Executive VP, CFO & CAO [68]

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That's not what's driving the upside in spending that we're seeing, Mehdi. It's more leading-edge stuff.

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Operator [69]

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That does conclude today's question-and-answer session. At this time, I will turn the conference back to Ms. Tina Correia for any additional or closing remarks.

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Tina Correia, Lam Research Corporation - Corporate VP of IR & Communications [70]

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Thank you all for joining us today.

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Operator [71]

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This concludes today's call. Thank you for your participation. You may now disconnect.