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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day and welcome to the December Quarter Financial Conference Call. At this time, I would like to turn the conference over to Tina Correa, Corporate Vice President of Investor Relations and Corporate Communications. Please go ahead ma’am.
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 December 2018 quarter and our outlook for the March 2019 quarter. The press release detailing our financial results was distributed a little after 1 o’clock 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 financial results can be found in today’s earnings press release. This call is scheduled to last until 3 o’clock 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.
Thank you all for joining us today. It’s good to be here with you on my first earnings call as Lam’s CEO. I have met many of you before Lam events, but I recognize there are some on the call that may not know me quite as well. So I’d like to start by briefly recapping how my experience at Lam and Novellus over the last 24 years has shaped my perspective on what it takes to compete and win in this business over the long term.
I have been fortunate to have opportunities that expanded the company’s operations from being embedded as a process engineer inside the development fab of one of our leading customers to heading our technology organization in Japan to leading product groups through periods of key technology inflections to managing our worldwide sales organization. Most recently, I has been charged with driving company-wide business results as the CEO of Lam since the time of the merger with Novellus.
During this period, from calendar 2013 to 2018, we grew revenue by 2.7 times and increased earnings per share two times faster than the increase in revenue. From my experiences I believe in the critical importance of building deep and lasting customer collaborations founded on mutual trust. I am committed to continuously investing in a pipeline of differentiated products that help our customers address their most difficult technology and productivity challenges.
And as we see in the current environment, I value having a flexible operating model that enables us to respond rapidly to market changes to ensure we deliver on our commitments to our customers as well as our shareholders. I believe we are still in the early stages of a long-term secular growth story for the industry and particularly for Lam. What you can expect to see from my leadership as CEO is increased focus on leveraging our core strength to deliver technology and productivity solutions to the fastest growing segments of the semiconductor equipment market, which in the long-term we believe are those tied to the enablement of the emerging data economy. I am very proud of what our company has accomplished in recent years and I am honoured to have the opportunity to lead Lam to an even greater future.
Before I continue, I want to provide an update on the investigation we announced in connection with Martin’s departure. As you know from our December press release, our board formed an independent special committee to lead a thorough investigation into allegations of misconduct and conduct inconsistent with our core values. That investigation is now substantially complete and there have been no other personal actions and none have been recommended by the special committee. Core values have always been a foundation of Lam’s success and I am committed to a culture of trust, respect and open communication built around an environment in which our employees feel free to speak up on workplace issues.
To reinforce this culture, the special committee has recommended that we review our policies, practices and training related to workplace conduct and increased our communications on these topics. To reiterate what we said in December, the alleged misconduct did not call into question the integrity of the company’s financial systems or controls, and the special committee’s investigation has confirmed this.
Now turning to our view on the business. In line with our prior guidance, we delivered a solid December quarter despite a more challenging environment. We also completed the strongest calendar year in the history of the company with $10.871 billion in revenues, a 14% year-on-year increase at the same time we delivered growth in EPS of 27% and an increase in operating cash flows of more than 50% from the prior calendar year. I would like to thank our customers, our employees and our partners for their support and contribution to these results.
From Lam’s perspective, industry performance for calendar 2018 came in largely as we have communicated in our prior earnings call. Overall, WFE was in line with our expectations of single-digit growth at approximately $50 billion with an increase in memory and a year-on-year decline in non-memory spending. Entering 2019, industry fundamentals have weakened, particularly within memory segments as customers continue to reign in both NAND and DRAM spending. At this point, 2019 WFE is looking to be down in the mid to high-teens range. For NAND, 2019 offers what we believe is a solid long-term setup for the industry as the supply bit growth rate is expected to decline throughout the year. NAND demand should continue to benefit from content increase in consumer and enterprise applications and we began to see initial signs of demand elasticity in the client SSD markets as we exited the 2018.
In DRAM, while near-term dynamics remaining challenging, customer behaviour remains rationale and industry profitability characteristics remain compelling. We believe customers are making prudent adjustments to capacity in response to the overall demand environment they are seeing. We expect DRAM WFE spend correction to extend through 2019 with supply growth fall into the mid-teens as we exit the year.
Non-memory segments are expected to grow in 2019 and with the continued rise in the importance of 3D architectures, technology innovation for transistor, interconnect and advanced packaging applications remains a critical priority for us as we grow our strategic relevance with our customers in this segment. In aggregate, we feel confident that we’re operating in a rational industry environment, one that is well positioned to deliver attractive long-term growth and opportunity.
With that as context, we are executing to the growth strategy that I described during our Investor Day earlier last year. Our strategy focuses along three primary vectors: expanding the size of our served available markets, gaining market share in the segments in which we compete and increasing the recurring revenue stream we derived from our installed base. Etch and deposition processes are central to the success of our customers technology roadmaps and we continue to make substantial, comprehensive, yet disciplined investments in R&D to fund the innovation required to create differentiated solutions and long-term value.
In the December quarter, we continued to build on our leadership position in both NAND and DRAM for critical applications with key penetrations for high aspect ratio Etch, and 3D NAND dielectric stack deposition applications. Furthermore, we continued to extend our high aspect ratio Etch leadership into non-memory segments with critical wins for metal interconnect and spacer applications at a leading logic customer. In atomic layer deposition film quality, repeatability and productivity are fundamental elements of differentiation for Lam.
During the quarter, we gained momentum in both DRAM and NAND with new application wins. While we are pleased with these wins in critical applications, we are committed to strengthening the performance of our product portfolio across the board. Our R&D investments are squarely focused on achieving our vision of best-in-class products everywhere we compete.
Turning now to revenue derived from our expanding installed base, our customer support business group delivered another record year. Installed base revenue growth exceeded installed base unit growth again in 2018 with installed base units in the field ending the year at roughly 56,000 chambers. We closed out the year on a high note, signing with a key customer, the single largest installed base deal in our history. Our focus with CSBG is to provide innovative products and services, which create value for customers over the entire life cycle of tool ownership. We partner closely with customers as we help them extract increased technical capability and higher productivity from existing assets. And in return, we are building a strong recurring revenue stream for Lam.
2019 is shaping up to be another solid year for our customer support business group and our progress remains aligned with the long-term growth objectives communicated to the investment community early last year. In closing, the business environment is more challenging than just a few quarters ago, but we are committed to delivering on our multidimensional growth strategy and at the same time responding to near-term revenue trends through a strong focus on operational efficiency. Lam has a proven track record of execution and we believe we are fundamentally well positioned in the right segments of the market.
The new $5 billion share buyback program we announced earlier today in our press release reflects our continued confidence in Lam’s long-term opportunities. Doug will provide details on the program in his comments.
Additionally, I’d like to mention that I’ll be on the road in the coming weeks and look forward to meeting with many of you. I will also be participating in the Goldman Sachs Technology Conference in San Francisco on February 13. Thanks. And now, here’s Doug.
Excuse me. Thanks Tim. Good afternoon everyone and thank you for joining us today. Lam delivered solid performance in the December quarter with our results exceeding the midpoint of guidance for all financial metrics.
Operating margin and earnings per share exceeded the high end of the guidance range provided, mainly due to our proactive management of our operating expenses.
Overall memory revenue increased slightly from the September quarter with the combined Memory segment making up 79% of total system revenue. NAND volume and memory revenue drove the increase in the Memory segment and it represented approximately 55% of system revenue. NAND investments were driven primarily by conversions to higher layer cut wafers.
DRAM represented 24% of system revenue in the December quarter, which was roughly flat with the prior quarter. The majority of spending in all of memory was targeted at conversions. The foundry segment declined quarter-over-quarter, accounting for 13% of system revenue, mainly due to reduced China foundry investments. You may recall on the September call, I spoke about how strong that was and it declined somewhat in December. The logic and other segment was up slightly, contributing 8% of system revenue.
From an industry perspective, Tim discussed our view of 2019 WFE. Currently, we believe WFE spending is weighted to the first half of 2019, driven by Foundry and Logic investments. We believe memory investments will be meaningfully lower in 2019 while the combined Foundry and Logic will be up. Our assumption based on our customer interactions is that there is not a significant recovery in memory spending throughout 2019. We expect the year in memory will be mainly driven by node conversions to lower our customers’ cost per bit. DRAM spending will be primarily on conversions to 1y and a little bit of 1z and NAND converting to 96-Layer devices.
Let me now turn to our P&L performance. We delivered revenues of $2.523 billion in the December quarter. This was up sequentially by 8% from September and was slightly above the midpoint of our guidance.
Gross margin for the quarter came in at 46.3%. As I always do, I’ll remind you, our actual gross margins are a function of several factors such as business volume, product mix and customer concentration. And we expect to see variability quarter-to-quarter.
Operating expenses in the quarter came in at $440 million, slightly down from the operating expense level in the September quarter. Worth noting, I think, we decreased our operating expenses for the first half of 2018 to the second half by approximately $100 million as we managed spending relative to the software business environment.
R&D comprised nearly two thirds of our total spending, consistent with the composition of spending in the previous two quarters. We’ve maintained a high percentage of our OpEx and R&D to support the long-term growth objectives for the company.
Operating income in the December quarter was $728 million. Operating margin came in over the guidance range at 28.8%, mainly as a result of the reduced spending within the quarter as well as gross margin that came in slightly above the midpoint of our guided range.
The non-GAAP tax rate for the December quarter came in at 10%, which was slightly lower than the long-term rate. This was due to discrete tax benefits realized relative to statute of limitations explorations within the quarter. In the longer run, the tax rate in the low to middle teens is the right range for you to continue to include in your models. And there will be fluctuations in the tax rate from quarter-to-quarter.
Based on a share count of approximately 162 million shares, earnings per share for the December quarter came in at $3.87, which exceeded our guidance range. The share count includes dilution from the 2041 convertible notes, and the dilutive impact was approximately six million shares in the December quarter. I’ll remind you that the dilution schedule for the 2041 convertible notes is available on our Investor Relations website for your reference. I’d also point out that the 2018 warrants mature during the December quarter.
We continue to execute on our capital return program. For the December quarter, we paid out $168 million in dividends. Related to the share buyback, in January of 2019, we completed our previous $4 billion share buyback authorization, repurchasing over 23 million shares in total. Additionally, as Tim mentioned and that we noted in the press release we issued today, our board has approved a new authorization to repurchase up to $5 billion of our common stock. Today’s capital return announcement is consistent with our current plan of returning at least 50% of free cash flow to stockholders. And in summary, for the calendar 2018 year, we returned $3 billion share buybacks and over $500 million in dividends, which along with the new authorization that was announced today, continues to demonstrate our commitment to shareholder return.
Our cash and short-term investments, including restricted cash, was flat with the September quarter at $3.9 billion. During the December quarter, our cash from operations came in at $642 million, which was offset by pay down on our commercial paper program of approximately $360 million as well as the dividends that I have previously mentioned.
For the 2018 calendar year, our cash from operations was over $3 billion. This was consistent with what I mentioned in the last earnings call.
DSO during the quarter decreased by five days to 67 days. Our inventory levels decreased, and consistent with our expectations, inventory turns increased to 3.2 times, which was an improvement from 2.7 times in the prior quarter.
Company noncash expenses included approximately $39 million for equity comp, $36 million for amortization and $46 million for depreciation.
Capital expenditures came in at $106 million in the December quarter, which was an increase of $56 million from September. Due to the timing of certain projects, December quarter CapEx was a little bit on the high side of what we expected. I expect that as we go into calendar 2019, CapEx will be somewhat lower than the 2018 level.
As we noted in the last quarter, our CapEx investments are focused on manufacturing expansion for our installed base business as well as strategic R&D investments.
We exited the quarter with approximately 10,950 regular full time employees, which was relatively flat with September quarter. I think it’s worth noting that we maintain flexibility in managing our cost by adjusting our temporary workforce for short-term changes in business conditions. We reduced our temporary headcount by over 700 people since the peak levels we were carrying earlier this year.
So now looking ahead, I’d like to provide our non-GAAP guidance for the March quarter. We are expecting revenue of $2,400,000,000 plus or minus a $150 million. We’re forecasting gross margin of 44.5% plus or minus one percentage point. Gross margins will decline sequentially due to customer concentration, product mix and lower factory volumes. And as I just mentioned, as we sit here today, we expect the gross margin percentage will be at a low point in March relative to the rest of calendar year 2019. We’re forecasting operating margins of 25% plus or minus one percentage point. And finally, earnings per share of $3.40 plus or minus $0.20 based on the share count of approximately 159 million shares.
And I just remind you that in the March quarter, we have an extra work week in the fiscal quarter, which happens approximately every six years due to the fiscal calendar cutoff. March spending is expected to be higher in cost of goods sold as well as operating expenses as a result of the extra work week. I’ll also remind you that the March quarter has seasonal impacts due to payroll taxes that go up in the beginning of the year. Both of these things are included in our stated guidance.
For 2019, first half business view is lower than our prior outlook, given the recent announcements of reductions that you’ve seen from commentary from others in the technology space. With this current environment, we continue to exercise and discipline in our spending, and we’re focused on prioritizing investments to support Lam’s SAM expansion, market share gains and installed base growth.
Operator that concludes my prepared remarks, Tim and I will now like to open up the call for questions.
Thank you. [Operator Instructions] And we’ll take our first question today from C. J. Muse with Evercore.
Yes good afternoon. Thank you for taking the question. I guess, first question. As you think about WFE levels in the 4Q and 1Q time frame, can you share with us what you think the implied forward – growth rate is for both DRAM and NAND?
C. J. it’s Doug. I think, generally speaking, as Tim mentioned, we expect bit growth as we go through 2019 to decline as we go through the year as customers adjust their spending. Overall, I think 2018 ended from a NAND standpoint in the low-40s. DRAM, I think, is low-20s. And we expect that to decline as we go through 2019, Tim, as customers adjust their spending levels. Tim, would you add anything?
No, I think that’s – the comment is we, at this point, see us ending the year below what Lam has said about the long-term sustainable demand growth rates. So I think that, it’s why we’re pretty optimistic about the setup exiting 2019.
I guess, if I could clarify the question. If you look at order run rates today, what is the implied bit growth that would come online, say, three, four quarters from now? I think you’ve done analysis on that where I think Q4 DRAM, we’re tracking maybe up 10%. If spending just stayed at those levels, is there any analysis you can share there with us on both DRAM and NAND?
Yes, Tim. I don’t have specific numbers for you except what we describe, which is as we go through the year, it’s going to decline as customers adjust their spending level.
Okay. And as a follow-up, I’m trying to do a little bit more work here and better understand your leverage to technology versus capacity buys, in particular, as it relates on the 3D NAND site in high aspect ratio etch. So can you walk through what percentage of overall etch spend or etch is in 3D, particularly as we scale up the layer counts?
Yes, Tim. We haven’t given hard numbers on that. But as I think as customers invest in conversions, they spend less money but they spend more as a percentage on etch and deposition. We describe that consistently in the past, and that’s very much what we see happening this year.
But I think if the question was the percentage of high aspect ratio applications where Lam’s position is very strong, it’s increasing node by node. And that’s just based on the fact that it takes longer in general to complete those etches. And that’s, obviously, our task to make those continuously faster. But it is increasing at each technology node.
Thanks, C. J.
Okay, thanks.
Next we’ll hear from Timothy Arcuri with UBS.
Thank you. Doug and Tim, I had a question just about the trajectory of the year. So if I take the WFE you guys are guiding to like 42 for this year, it looks like your product WFE share, you don’t tell us what services are. But it looks like your product WFE share is somewhere in the low-15s the past couple of years. So if I could just assume that they flat, which I wonder that it will given that UV’s ramping, that implies that revenue kind of like is flat throughout the rest of the year from this level. Is that the wrong way to think about it? Thanks.
Tim, I think what we try to describe in short. Yes, Tim, I’m getting confused who I’m talking to. I think as the year sets up, we expect the first half of the year is going to be weighted towards Foundry and Logic. It will be stronger in the first half from the second half. And memory is may be a little bit stronger in the second half than the first half. We don’t see a significant recovery occurring on memory, I would point that out. But I think, as you know, we tend to be very, very strong in memory. So with memory down year-on-year, our share likely trends along with that. That’s not a statement around any application, win or loss. It’s just a statement of who’s spending money. Tim, would you add anything?
Yes. I think internally in the company, I don’t think your thinking is too far off. And we look at the most important measures of success for us this year. And it’s how we’re doing on the applications that we want to make sure that we own when the spending does pick up. And as long as we’re doing that, then the precise timing of when spending comes back in NAND is less important to us. So it’s really our focus.
Got it. And then Doug, I had a question on deferred revenue. It was down about $130 million again. So it sounds like shipments were more like maybe $2.4 billion for the fourth quarter. So my question is how much more can you draw down deferred revenue? Because obviously, it sounds like if you give a shipments in March, it will be lower than $2.4 billion. But where does that number – where does that $493 million worth of deferred revenue? Where does that bottom out? Thanks.
Yes, I think I’ve described it, Tim, in the past. It’s going to bounce around $100 million quarter-on-quarter. I think some quarters, it will be down as you’re seeing now. Some quarters, I think, it will also be up. I don’t know that it meaningfully changes from the level where it’s at right now. But it will very depend on the percentage of new tools we’re shipping, how strong the business with certain customers is, certain regions of the world is little bit different. I don’t view it as going to zero at any point, Tim. But it will bounce around plus or minus $100 million, it is how I would be thinking about it.
Okay, got it. So Doug, so I mean shipments are about equal to revenue for March, is that right?
Yes. I’m not guiding shipments anymore, Tim. What I said was it will be plus or minus $100 million quarter-by-quarter. Some quarters will be down. Some quarters will be up. It’s all just timing, quite honestly.
Got it, okay. Thanks.
Yes, thanks, Tim.
We’ll now hear from John Pitzer with Credit Suisse.
Yes. Good afternoon, guys. Thanks for let me ask the question. Doug, maybe another way to ask Tim’s question. I was intrigued that you commented that March quarter should be the bottom in gross margin for the year. I’m just kind of curious, is that because you expect March to be the low point in revenue? Are there mix drivers that helped gross margin going forward?
I always say, John, there’s a variety of different things that impact gross margin. I usually mentioned three things. Overall business volume is a component. But as I think, we have a highly variable cost structure. This isn’t a big fixed cost business. This isn’t like our customers. We’re highly variable in our cost. Tool mix is important. Not all of our tools have the same gross margin. And sometimes, that mix will be beneficial sequentially. Sometimes, it will be negative. And then customer concentration, when you get the bigger customer spending more or it’s that more concentrated customers, you might have a little bit of margin headwinds. All of those things are important to think about relative to the trend in gross margin, and all of those are relevant to the comment I had about March being a low point.
That’s helpful. And then maybe kind of a follow-up to CJ’s question, just relative – appreciate the fact that in this volatile environment, your willingness to give us a view on the full year on WFE being down mid-to-high teens. I’m just kind of curious when you look at your SAM and whether that be some incremental share gains on the Logic front at 10 or some incremental SAM gains as we go from 64 to 96 and/or 1x to 1y to 1z. Do you think your SAM outperforms, performs in line or underperforms the overall WFE this year, Tim?
I think if we – taking all those things into account you just said, I would think that we feel that our SAM actually underperforms to be a few this year. And that’s primarily because of the heavy concentration of our SAM in 3D NAND as you know. And so I think that should be the expectation if the year plays out as we have described, which is no material increase in 3D NAND or NAND spending through the year.
Helpful, thanks, guys.
Yes. Thanks, Joh.
Krish Sankar with Cowen has our next question.
Yes. Hi, thanks for taking my question. I had two of them. First one, Doug and Tim, just on the reconcile what you said in the front of WFE year versus what ASML said, is it fair to assume is it because the back half is mainly concentrated on EUV from the foundry side? And then I had a follow-up, too.
I think there is a few things, and I will let Doug jump in here with his comments as well. But when you look at ASML’s comments and as best we understand them kind of talking about the recovery in DRAM in the second half of the year, that’s not necessarily inconsistent with us exiting the year with a better setup for the first half. And I think that you have to think about the way the tools come in into new – into fabs and new projects.
Our experiences that litho and metrology tools usually lead etch and deposition tools sometimes by as much as a quarter or so. So that made those statements maybe not inconsistent, and that’s kind of why we’re thinking about it. I mean, I guess, our view, everybody in this environment will have a slightly different view in spending to come back. But we’re wanting to state at this point that our best view from conversations with customers is no material increase in memory spending throughout 2019.
Yes. I don’t have anything to really add, Krish. I think as Tim said, litho usually leads our stuff. And we’ll tell you what we’re seeing right now. We could have it wrong. But when we parsed what we heard from ASML, I didn’t really feel inconsistent to us.
Got it, got it. Actually, that’s very helpful, Tim and Doug. As a follow-up question, when you talk to your memory customers, I’m kind of curious how do they look at CapEx? Are they waiting for their pricing/margins to bottom before they start getting comfortable about buying semi cap equipment? Or is it going to be in tandem? Or does one lead the other? And as a subset to that, which thing is going to recover first from here onwards in NAND or DRAM? Thank you.
Well. It’s a tough question. I mean I think that actually, when they’re going to spend is a question better asked to them. I mean, exactly what metrics they’re looking at. I guess, if we look at which of the two, NAND or DRAM might recover earlier, I mean I guess, if we look back, we saw NAND correction starting earlier in 2018 than DRAM did. And so we’re – I guess, at the end of the day, it’s all about demand. But we see both of them tracking as we get to the end of the year, well below what we think are the long-term demand growth bit rates. So either one could recover. Neither one could recover. I mean that’s – it’s not a great view, but we think that in both cases, the market sets up for investment in either one as we exit the year.
Well, what I would tell you, my personal view, Krish. It will recover at some point. That I know for sure. And the trend we see relative to spending in the year that we just described suggests to what Tim and I that they’re going to need to invest relative to long-term bit demand. We just don’t necessarily see it happening in 2019 quite yet, at least not in a meaningful way.
Got it. Thanks, Tim. Thanks, Doug.
Thanks, Krish.
Our next question comes from Harlan Sur with JPMorgan.
Good afternoon. Thanks for taking my question and thanks for the detail and outlook for 2019. But can you guys just true us up on your prior view first half of 2019 versus the second half of last year? Relative to the weak spending environment, how are you seeing the first half of this year relative to last year second half?
Yes. Harlan, what I tried to described in my remarks is first half of 2019 now looks weaker than it previously did. And I’m not going to give quantification of it because then I’d essentially be guiding you for two quarters. We’re going to get back to our normal practice of guiding one quarter at a time. But given the well-understood weakness of smartphones and inventory adjustments in some of our customers as well as the cloud guys, it’s somewhat weaker than it was when we describe it last time.
Great, appreciate the insights there. And given the view on WFE being down kind of mid to high-teens this year, at the same time, the team had a strong shipment growth the last couple of years. You were driving – I was looking at it first half of last year, you guys were driving like 25% year-over-year shipment growth. Many of these tools are coming off warranty and on to service contracts this year. So this should be a tailwind for the team. So how should we think about the installed base business trajectory relative to your WFE outlook?
Well, I guess, I’ll try to cover some of that in my opening remarks. But clearly, we feel very good about our installed base business on two dimensions. One, the strengths of Lam’s business over the last several years has caused our overall installed base to grow. So there is more tools for which we can sell things. And two, we’ve been investing in that business to create new products and services. Some in the areas of vis-à-vis the data economy, using data to make our tools more productive for customers. And those products and services are getting traction, and this will be another strong year for CSBG for our installed base business. So that’s a focus of mine, and I think it provides a very important revenue stream for the company long-term.
Yes, thanks for the insights.
Yes. Thanks, Harlan.
Our next question comes from Joe Moore with Morgan Stanley.
Great, thank you. On that topic of installed base business, I wonder if you guys have considered providing sort of better disclosure around that? It seems like that will go a long way towards understanding the sustainability of that business versus the other parts of the business.
Yes, I guess, we haven’t really accomplished our objective very well, Joe. We’ve been talking a lot more about it more recently than we have. We’re providing you with tools kind of the installed base on a consistent basis and I will try to make it easy to understand everything we talked about in the past. Relative to segment reporting, we’re not going to do that. We don’t need too, because we’re not tripping the roles up there. And from a competitive standpoint, we don’t necessarily want to have an out quite as visible unless we have to. But it is a meaningful part of how we generate profit. It’s a meaningful part of how we generate cash for sure. And we’re trying to talk more about it, so you understand it. I mean, Tim talked quite a bit about it. So we’ll keep trying to do a better job, Joe.
Great, that’s helpful. And then I guess, in terms of the buyback and the pace of the buyback and 50% of free cash, what’s your assessment of the right amount of cash to have on the balance sheet? And do you need to have any? Can you be leveraged? How do you think long-term about what the balance sheet should look like?
Yes, it’s a good question, Joe. I haven’t communicated specific numbers. We need a certain amount of cash. We like to be able to fund a certain amount of R&D and CapEx and so forth. We’re carrying more cash today than we need to run the company. What we decide to do relative to that, I think, we’ll evolve over time. But I don’t have a hard and fast number that I’m going to share with you necessarily. We certainly could have more debt on the balance sheet know if we chose to do that. And the pace of the buyback, I think we’re going to be opportunistic. I’m not going to communicate a timeframe and I will let you know quarter-by-quarter on how we’re thinking about it and what we’re doing.
Very helpful. Thank you.
Yes, thanks, Joe.
Patrick Ho with Stifel has our next question.
Thank you very much. Maybe first question in terms of the installed base business, I think in your last Analyst Day, you talked about $1 billion incremental opportunity. Over the next three to five years, how do you see the revenue growth rate? Is this a 10% type of growth business? Or do you see a higher to get to that incremental billion dollars you talked about?
Well, I guess – yes, so you recall the billion-dollar number. I mean, as I mentioned, we’re on – we feel we are on track for that trajectory. At the Investor Day, we said that the installed base business was approximately 25% of our total revenue. And so, I guess, with that information, you kind of healthy growth rate. It’s a business that is definitely growing. Our objective is to have the installed base business itself grow faster than the rate of growth at the installed base. And now again, we provide information this year with the installed base growing from approximately 50,000 chambers to an ending – year ending 56,000 chambers at the end of last year. So maybe with those, you can triangulate the numbers. We can also maybe do it for you and get back to you.
Yes. Patrick, how I think about it and Tim described it the way I think about it, which is on a normalized rate, it’s been about 25% of the company’s business. If you recall back at the Investor Day, Tim described three growth vectors, each about the same size. So if you think about installed base, it’s a third of the growth and normalized at 25% of the business, so you can triangulate that way relative to the growth at that. It will grow faster than the installed base for sure. Now in the year like 2019, if it shapes up the way perhaps, it’s going to with WFE down as much. It will be more than 25%, obviously.
I think one important point since we’re talking about installed base business. I just mentioned, I think it can sometimes get lost in terms of how we are driving this business faster than the installed base itself is growing. And it all comes down to investing in the creation of new products and services. Things that help the customer relocate tools for new applications, extend the technology for those toolsets the new applications, higher productivity, higher throughput from owned assets. And as we’ve seen in many ways, the lagging node business gets stronger and more heavily utilized. We find a lot of installed base business for tools that have been around and out in the field for quite a number of years. We have just lot of interest in getting new products and services for that fleet. So it’s a pretty attractive business.
Great. That’s also very helpful.
Go ahead. If you can do one more, if you got it, Patrick.
Real quick on the DRAM on the memory side of things, we know that capital intensity trends increase on the 3D NAND side of things with the layer count. How do you see the transition for etch and deposition as you go from 1x to 1y and eventually to 1z?
Our SAM continues to grow as we step through that. That’s all about self-aligned patterning and that is very etch and deposition SAM, Patrick.
Yes. And actually, these technology nodes also create new opportunities for films. I mean I spoke a little bit about our effort in atomic layer deposition. As you step from 1x to 1y to 1z, there are new applications being created for atomic layer deposition for instance that wouldn’t have existed in prior nodes. And so we’re looking at it both from growth in our existing applications as well as our ability to win new ones also.
Thank you.
Yes, thanks, Patrick.
We’ll now hear from Atif Malik with Citi.
Hi, thanks for taking my question. First, quick clarification on the last earnings call, you guys expected DRAM up in first half this year versus second half last year and NAND down. Is it fair to say that you’re seeing both the DRAM and NAND down in first half of this year versus second half last year?
Yes. We’re not going to provide segment level color on the quarterly guide except we gave a little color on how we see WFE setting up in that [indiscernible] like, which is foundry logic is first half weighted. Memory, probably a little bit stronger than the second half.
Got it. And then can you just talk about what you seeing with respect to domestic spending in China? If I recall correctly, you have talked about China domestic was $5 billion in spending last year. What could it be in the $42 billion to $43 billion WFE this year?
Yes. Actually, we did say that we saw 2018 was going to come in at about a $5 billion range. I think when all is said and done, it may have come in a little bit lower than that but pretty close. We actually see 2019 shaping up to be a bit stronger. And if we look actually at the SAM and share position that we hold where the money will be spent this year NAND’s China domestic business should be up.
Thanks.
Thanks Atif.
Tom Diffely with D. A. Davidson Companies has our next question.
Yes, good afternoon. Maybe just a quick end market question, you know after three or four quarters of the price declines in the NAND market, are you seeing evidence of the elasticity of demand that we’ve been talking about for a couple of years?
Yes, I had a very small comment in my opening remarks about the fact that we believe we have seen some demand elasticity at the end of last year and it was primarily driven by an uptick that we’ve seen in the adoption rate of SSDs into client. And there was some data to show the percentage of laptops or client devices with the SSD in the lower price ranges had a material uptick. And so it’s just one data point, but we do think that as prices have come down we’re starting to see increased demand.
Okay. And given that when you look at kind of the long-term view, the next two to five years, do you still – or do you view NAND market as the real big opportunity for you versus the DRAM market knowing that both our strong?
Both for us without doubt. Our SAM position if you think may be just the world we’ve gone through, the transition from 2D to 3D NAND, we had a very meaningful increase in the intensity of etch and deposition in that space. And when you think about also end-demand, we see NAND outpacing all other markets. And so that’s why when I talk about our focus on applications that we want to hold continuously in that critical space in the NAND area.
Now, of course, we want to do well in all markets, but NAND is our biggest opportunity going forward and in the long term.
Just, add-on from me Tom, independent of where things are at in 2019, I’m extraordinarily optimistic on the opportunity for both NAND as well as DRAM going forward. Again, Tim alluded to the data economy. We talked about that extensively at the Investor Day. All of that stuff is still completely intact. It doesn’t mean it will happen every single year, it won’t. But data is exploding in society. It is not useful unless you can store it and you need a low latency memory to do anything in computer architectures. Memory is critically enabling for all of that and none of that has changed.
Great. Thank you very much.
Thanks Tom.
Our next question comes from Quinn Bolton with Needham and Company.
Hi guys, thanks for taking my question. Just want to come back on your prepared comments. You mentioned share gains and high aspect ratio at 3D NAND deposition and ALD wins in both NAND and DRAM. Can those share gains help offset some of the SAM underperformance you see in 2019 or do you really think that that we need to see the memory markets recovering before you see the full benefit of those share gains?
Well simple answer is no. They cannot offset the magnitude of decline that we see this year. But the other aspect that is one of timing. Typically, the types of applications and wins I was speaking to, we focus on critical application wins, usually one to two nodes before that node ever ends up ramping. And so in the majority of those cases those would be entering production sometime next year or the following either. And that’s why the start of like – those are the applications once you win it you kind of know that your businesses is pretty well locked in for the foreseeable future.
Just a quick follow-up on the China domestic is that fairly well balanced between memory and foundry logic or just one segment lead the other end in 2019?
It’s fairly well balanced. Quinn, I mean, memory is probably somewhat stronger than foundry logic, but there’s a broad base set of customers that are spending it’s not just one or two.
Great, thank you.
Thanks Quinn.
Sidney Ho with Deutsche Bank has our next question.
Well thanks for taking my question. I will start off with a clarification you said revenue will be first halfway weighted in 2019. Is that an expectation for your revenue or is it for the industry?
No, it was a statement Sidney around WFE. I didn’t say anything relative to Lams revenue. It was a statement on WFE.
Okay, great. And then my question, it looks like from three months ago to now the change is primarily coming from the DRAM side CapEx slowing down. Would you say the NAND side is also incrementally weaker or do you think there’s more stability there and then NAND CapEx everyday you start cutting earlier?
Well, we haven’t, so far Sidney in the past, given you any color on the full year of 2019 this is first time we’re making statements on the full year or so I’m not sure I can’t even say anything about trajectory what we thought before because we hadn’t done all the full analytic work that we’ve now have done on 2019.
All right, maybe just a housekeeping one. Your operating expense is obviously much lower than what you guided for the December quarter, understanding March is an extra week, should we think about June quarter kind of go back to the December level or is it just something higher than that?
Yes, I’m not going to guide it beyond the current quarter Sidney, everything else equal, flattish to maybe slightly down if you just take the one week out, but we’ll give you the hard guidance when we get to earnings in the quarter.
Okay. All right, thank you very much.
Yes. Thanks Sydney.
We’ll hear now from Mitch Steves with RBC Capital Markets.
Hey guys, thanks for taking my question. I just had one on kind of your commentary in the back half in memory dynamics. So I guess what is the reason why there wouldn’t be a significant increase in investment when you move to 96-Layer technology? Is that because the majority of the WFE spend or the increase in memory spend is because of the planar NAND transition or 3D NAND transition or is it because there’s something special about 96 and makes it a lower investment cycle?
No, there’s nothing special about 96 what we see happening, Mitch primarily is node conversions in both DRAM as well as 3D NAND and so that’s the way to be thinking about it. It’s a heavy focus of spending on node conversions which – that’s a very cost effective way for our customers to invest because they just need to upgrade essentially etch and deposition equipment or add into the process flow. Tim, would you add anything?
No, I think that’s fair obviously it’s heavily driven by the ratio of node conversions to greenfield ads. On a greenfield basis, last year I showed a chart that described our increase in opportunity at 96-Layer and fundamentally on a greenfield basis, it’s significantly higher as you go to 96. So the dynamic of the conversion versus greenfield ads that’s Doug speaking to.
Perfect. Thank you.
Yes, thanks Mitch. Operator, we’re going to do one more.
So now our final question will come from Vijay Rakesh with Mizuho Bank.
Hi guys, good quarter. Just on your 2019, just wondering, when you look at 96-Layer 3D NAND, what do you – how do you see capital intensity at 64 versus 96?
If you do a greenfield-to-greenfield wafer, our capital intensity goes up, you’ve got a longer process flow, you’ve more tools and the process flow goes up. I don’t think we’ve quantified it. The good part for our business is when you do that conversion, all you’re really adding is etch and deposition equipment, you’re making the stack bigger and the etch becomes a little bit more challenging to do and so it takes longer.
Okay. And just as you talk about a little bit more softness in memory spending through the year have you seen – are you seeing any push out on either the 96 layer three 3D NAND or 1Y transition in DRAM side? Thanks.
From a timing standpoint, no, I mean we always had expected 2019 would be a 1Y investment year in DRAM with the, the beginning of 1Z and the investments in NAND would be on 96 layer devices and that’s totally what we’re saying and again, it’s primarily focused on conversions right now.
Got it thanks.
Yes, thank you.
Okay, so this concludes our conference call for this quarter. Thank you for joining us.
This will conclude today’s conference call. Thank you for your participation. You may now disconnect.