Shanye Hudson - Director of Investor Relations Ernest E. Maddock - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Head of Silfex Incorporated Martin B.

Anstice - Chief Executive Officer, President and Director

James Covello - Goldman Sachs Group Inc., Research Division Edwin Mok - Needham & Company, LLC, Research Division Olga Levinzon - Barclays Capital, Research Division Terence R. Whalen - Citigroup Inc, Research Division Krish Sankar - BofA Merrill Lynch, Research Division Mark J.

Heller - Credit Agricole Securities (USA) Inc., Research Division Vishal Shah - Deutsche Bank AG, Research Division Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division Weston Twigg - Pacific Crest Securities, Inc., Research Division Satya Kumar - Crédit Suisse AG, Research Division Thomas Diffely - D.A.

Davidson & Co., Research Division Benedict Pang - B. Riley & Co., LLC, Research Division Stephen Chin - UBS Investment Bank, Research Division Christopher Rand Blansett - JP Morgan Chase & Co, Research Division

Lorenzo, thank you. Good afternoon, everyone, and welcome to Lam Research Corporation's quarterly conference call.

Here with me today are Martin Anstice, President and Chief Executive Officer; and Ernie Maddock, Senior Vice President and Chief Financial Officer. Shortly, Ernie will discuss financial results for the December 2012 quarter.

Martin will then share Lam's business outlook for the March 2013 quarter before opening the call up for Q&A. The press release detailing our financial results was distributed over the wire services shortly after 1 p.m.

this afternoon and is also available on our website at lamresearch.com. Today's call contains certain forward-looking statements, including those related to our expectations for the global macroeconomic environment; of market size; wafer fab equipment spending; the revenue expectations of shipments to our Japanese customers; technology trends and transitions that may affect our business; market share changes; consumer demand, customer spending and behavior and the factors that will influence those expectations; as well as our spending projections, our investment plans, our business strategies, our expectations of the benefits resulting from our Novellus acquisition; our intentions for research and development activities; our contemplated tax rate; and our forecast of market share, shipments, revenues, expenses, margins, operating profit, share repurchase activities, earnings per share and cash generation on both a GAAP and non-GAAP basis, as well as other statements of the company's expectations, beliefs and plans.

There are important factors that could cause actual results to differ materially from those described in these forward-looking statements, and a list of these factors can be found in the slide package accompanying this conference call and on our most recent Form 10-Q filed with the Securities and Exchange Commission. All forward-looking statements are based on current information, and the company assumes no obligation to update any of them.

This call is scheduled to last until 3:00 p.m., and we ask that you please limit questions to one per firm with a brief follow-up. And so with that, I'll turn the call over to you, Ernie.

Thank you, Shanye, and good afternoon, everyone. Before I begin my prepared remarks, I'd like to add a few words to the press release announcing my planned departure from the company in April.

First, I'd like to convey how much I've enjoyed working with each of you since my appointment in the CFO role in September 2008 and that I look forward to continuing to do so in the next couple of months. I also appreciate the experience of being part of a values-based management team that puts customers first, and I'm committed to ensure a smooth and orderly transition to my successor.

Now on to business. The December quarter results reflect a solid finish to our calendar year as we met or exceeded the midpoints of our guidance in all areas.

Total shipments were $803 million, down 14% sequentially. Approximately 78% of our system shipments were for applications at the sub-4X technology node and by segment breakdown as follows: foundry shipments accounted for 51% of total system shipments; the memory segment accounted for 20% of total system shipments, which includes NAND at 11% and DRAM at 9%; comprising the remainder were logic and other at 29%.

Revenue in the December quarter was $861 million, down 5% from the prior quarter. Non-GAAP gross margin was 44.2%, down just 20 basis points from the prior quarter, reflecting favorability in our product mix, complemented by our continued focus on operational execution.

Non-GAAP operating expenses for the quarter were approximately $281 million, down $3 million from September and in line with our expectations of synergy achievement. We remain focused on our integration efforts and are making strong headway towards achieving our cost-related synergy targets of $100 million.

Two key elements of this achievement are the transition to a single ERP system and the completion of activities related to supply chain rationalization, and in the December quarter, we made significant progress in both areas. This progress will pave the way for the remaining $60 million of annualized run rate operating expense and cost of goods sold synergies, which we've committed by the end of calendar year '13.

Although Martin will be providing March quarter guidance in a few minutes, it's worth noting that the March quarter of 2013 will see both an extra week of operating expenses together with our normal seasonal increase in employer taxes, which represent approximately $10 million. Back to December, non-GAAP operating income was $99 million, and non-GAAP operating margin was 11.5%, slightly above the midpoint of our guidance range.

Our non-GAAP tax rate for the quarter was 17.3% compared to 16.3% in the prior quarter. With the extension of the federal R&D tax credit earlier this month, we would now expect our tax rate for the fiscal year to be in the low double digits.

Under this scenario, we expect a March quarter non-GAAP tax rate near 0% and a June quarter non-GAAP tax rate in the low single-digit range. Based on a share count of approximately 173 million shares, non-GAAP earnings per share for the December quarter were $0.45.

Moving to the balance sheet. We ended the quarter with cash and short-term investments, including restricted cash, of $2.7 billion in total versus $2.9 billion for the September quarter, with our cash generation again being exceeded by our ongoing share repurchase program.

Approximately 40% of the December ending cash balance was onshore. DSO and inventory turns for the December quarter were both slightly improved at 62 days and 4.1 turns, respectively.

We ended the quarter with deferred revenue of $282 million, excluding approximately $46 million in shipments to Japanese customers that will revenue in future quarters. Cash from operation was $193 million, or 22% of revenue, in the December quarter, and combined company noncash expense include, among other items, $24 million for equity compensation, $44 million for amortization and $34 million for depreciation.

Capital expenditures were $39 million, and we exited the quarter with approximately 6,600 regular, full-time employees. In closing, I want to provide an update on our share repurchase activity during the December quarter.

We bought back around 10 million shares of common stock for approximately $354 million at an average price of $34.74 per share. For the full calendar year 2012, we've repurchased nearly $1.4 billion at an average price of $35.74.

We've continued to execute our share repurchase program subsequent to the close of the December quarter and, as of today, have approximately $100 million of the authorization remaining. Consistent with our comments on our analyst meeting, we will provide a further update on our capital deployment strategy once we have completed the current authorization.

With that, I'll now turn it over to Martin.

Thank you, Ernie, and good afternoon, everyone. As Ernie just reported, we had a solid finish to 2012, including a transformative year for Lam Research.

The year began following our announced merger with Novellus Systems, and we aggressively executed plans to integrate both companies. On the strategic front, we presented a single face to our customers starting day 1, which is a function of our rigorous planning efforts, and we executed to the commitments made as 2 stand-alone companies.

We enhanced our focus on core businesses and made the decision to divest the Peter Wolters business and transition PVD to a sustaining mode with existing customers. We have successfully combined organizations and made progress in streamlining our infrastructure.

We have established an ambitious plan for integrating business systems and remain on track to complete the majority of that work by the middle of this year. We're well down the path towards achieving our target of $100 million in cost synergies.

Related to capital structure, we repurchased approximately 39 million shares of stock, returning nearly $1.4 billion to our shareholders through 2012. This financing strategy monetized overall industry and economic conditions, lowering the effective purchase price of Novellus by approximately $200 million.

Within our etch business, we had our customary opportunities and threats, successes and failures. But after more than a decade of absence for Lam, we are pleased to report today that we have now been successful in achieving a production tool of record selection by a leading logic company.

We have received our first production tool order and expect business to continue to materialize in calendar year 2013. We are very pleased with these accomplishments and many more not called out today.

They are testament to the dedication and hard work of our employees and the commitment to our values and vision by our leadership team. A big thank you is due to all.

Relative to market share, we believe we are #1 or strong #2 in each of the product segments we now serve. We view this as crucial given the increasing focus by our customers and strategic partners to work with a select few leading equipment suppliers.

Worthy of note for calendar 2012 in deposition and strip, we were successful in gaining critical back-end-of-line applications in PECVD at a couple of key logic manufacturers for both leading-edge production and next-generation device nodes. We acquired Axcelis' dry-strip intellectual property, further strengthening our product road map, particularly for non-oxidizing strip applications for advanced memory and logic.

Overall, we are on a positive trajectory broadly, achieving shipped share across our targeted deposition markets in the mid-30% range and are realizing initial plans beyond traditional WFE growth to advanced packaging. In etch, we had forecast and we delivered in 2012 a relatively neutral year in terms of shipped share.

More specifically, we successfully defended over 90% of the n and n+1 PTOR decisions that were made in 2012, and we positioned penetrations to gain a percentage point or so in the remaining selection decisions in 2013. We introduced next-generation uniformity control hardware for our conductor products.

This capability is targeted for advanced logic and memory applications at the sub 20-nanometer technology node and is gaining traction with customers already. And as stated earlier, we achieved our goal of penetrating a leading logic company after a long period of absence.

Turning to the single-wafer clean market. We've spoken about a few trends that have developed over the last couple of years.

First is the transition from batch to single-wafer processing for front-end applications, and second is the introduction of high-productivity platforms. Lam is focused on developing a next-generation clean product, which will enable us to more effectively compete for a broader range of applications inclusive of these areas.

We were successful in defending essentially 100% of the positions we held with our existing products in 2012. However, until the new product is released, our opportunities for share expansion are limited, and our shipped share will likely remain in the 20% range, plus or minus a couple of points, until that time.

2013 is a critical year for us in clean. We are actively testing and characterizing the new products and are on track to begin shipping beta units for key customer evaluations around the middle of this year.

Overall, we remain committed to deliver against our long-term share gain targets of 3% to 5% in etch, 4% to 8% in deposition and 5 to 10 percentage points in single-wafer clean. We have confidence in our ability to develop the best-in-class products and leverage our recently expanded adjacencies to deliver differentiated solutions to capture a disproportionate number of the opportunities created by technology inflections.

As discussed extensively before, the inflections, including patterning, FinFET, 3D NAND and TSV, are all creating growth opportunities. Sometimes, those are measured in terms of market share expansion and sometimes in terms of market size expansion.

Our continued execution and decision making to reinforce customer trust are fundamental to achieving our goals. Touching briefly on the industry environment, we had outlined a scenario for WFE spending to be within a range of $30 billion in 2013 last November.

From our perspective at the segment level, NAND investment remains the primary uncertain influence over 2013 spending. Obviously, the macro remains a major consideration also.

Based on our analysis, since November, a couple of additional inputs have been made available: slight upticks in outlooks for WFE in 2013 from 2 of the top 3 semiconductor companies, and a slight reduction in NAND spending due to likely higher proportion of conversion than originally planned. Taken as a whole, the $30 billion WFE level, plus or minus $2 billion, remains our planning assumption.

As we discussed during our recent analyst event, our view is based on the following primary assumptions. For a third straight year, we are forecasting essentially no new capacity additions for DRAM with bit growth demand in the range of 30%, investments are limited to upgrades and conversions.

In NAND, we are forecasting demand growth in a range of 50%, which would require capacity investments to resume towards the middle of this year. Absent any new capacity additions, we believe supply would be limited to around 40% bit growth through conversions.

3D NAND investments are seen to be late in the year, and we currently forecast approximately 20,000 wafer starts of 3D NAND capacity to ship by the end of 2013. We project foundries to strongly continue making 28-nanometer investments and forecast 28-, 32-nanometer capacity in the range of 330,000 wafer starts, plus or minus, per month exiting 2013.

Additionally, 20-nanometer will begin to ramp in the second half, and we currently expect total capacity to reach approximately 40,000 wafer starts at that node by the end of the year. Finally, our forecast reflects a slight decline year-over-year in other logic spending with the potential for upside given recently announced spending plans.

Using $30 billion as our baseline, our resulting expectation is for spending to increase through the year with approximately 55% of total spending occurring in the second half. In this environment, given the consolidation of our customer base and overall competitive dynamics, we continue to fund long-term strategic investments and execute the strategies that we articulated during our recent analyst event.

To name a few areas of focus, we're engaging with customers on conformal film applications by leveraging our ability to deposit metals and dielectrics in high aspect ratio structures with the atomic layer precision required for FinFET devices. We're engineering tungsten films with the lowest resistivity for filling these structures, which ultimately benefits the electrical performance of the device.

We've introduced proprietary hardware on our conductor etch tool, which enables selectivity at the atomic level required by high aspect ratio features. We've designed that same proprietary hardware for our dielectric tool, which widens the process window, enabling customers to achieve their stringent requirements associated with high aspect ratio processes also in 3D NAND.

In addition, in 3D NANDs, we're combining our strengths in defectivity control and process repeatability, both important in logic applications with the productivity advantages offered by our multi-station sequential deposition architecture to strengthen our PTOR positions in PECVD. In through-silicon via, we are leveraging our knowledge as a market leader in Electrofill and advanced pretreatments to grow our market share.

We're also working towards capturing all available benefits of the merger with Novellus. Ernie outlined our progress to achieving our stated cost synergy targets.

Beyond that, our focus is on executing plans to achieve accelerated growth and deliver on the value proposition this union brings to our customers and shareholders. Finally, we remain focused on prudently managing spending, which includes our commitment to contain quarterly operating expenses to a level no greater than $305 million per quarter at $1 billion revenue level through 2013.

Turning now to our outlook for the March 2013 quarter. Our non-GAAP guidance is as follows: shipments of $880 million, plus or minus $30 million; revenues of $830 million, plus or minus $30 million; gross margin at 43.5%, plus or minus 1%; operating profit at 8%, plus or minus 1.5%; and earnings per share of $0.35, plus or minus $0.07, based on a share count of approximately 170 million shares.

Prior to taking questions, I would like to take a moment on behalf of the board of directors, the management team and the employee population to recognize Ernie for his dedication of service to Lam for the past 15 years and especially for his service as CFO. Ernie has made a big impact on the company throughout his tenure.

He has a work ethic that is truly remarkable. He sets a standard of performance that challenges those around him to achieve more than they thought possible.

And he has a versatility level that has accommodated the significant breadth of responsibilities held during his time at Lam. As noted in our press release today, Ernie's planned departure will be handled smoothly and without disruption to our customers, our shareholders or our employees.

We have an active search ongoing, and Ernie will remain until a new person is in place and plans to assist in the transition. I would like to extend my sincere thanks to Ernie for his service, for his accomplishments and his commitment to the company, our shareholders and our employees throughout his career and wish him every success in his future.

We will now open the call for Q&A.

Ernie, let me offer my congratulations up front. You've done a great job and it's -- you're a real glutton for punishment as you kind of stuck with everything through the tough part of the cycle.

And as things start to look up, you're moving on, so congratulations on that.

Thanks, Jim.

I guess, Martin, if I could start off. Certainly, it's a unique time in the cycle because we have obviously a couple of the big customers talking about record CapEx and some of the other big customers talking about things coming down a little bit, and then you mentioned a comment about better expectations in the back half.

How do you balance out the very likely prospect, as you highlighted, of NAND getting a lot better in the second half of the year versus TSMC's comments that 2/3 of their CapEx was kind of front half loaded? Do you think that NAND can pick up enough to offset the expected declines at TSM?

Well, I think to your point, they're obviously very unconnected variables. I guess if there is a connection, it would be a macro.

But that aside, our view is that if you believe in the $30 billion baseline that we've talked about, we would expect a 45-55 split in the calendar year. So I think in the foundry space, the commentary from TSMC in the public domain is exactly as you articulated.

My expectation is that a broader foundry participation exists in the second half of the year. But first half, second half, overall, we're assuming 45-55.

And by segment, I'd assume DRAM is about 50-50. The foundry world, all in, is probably 50-50 with every participant, and the world of flash looks more like a 30-70 kind of split.

So it's a very kind of diverse, segment-based progression in the year, and we're kind of focused on execution independent of that, frankly.

That's very helpful. If I could ask for my follow-up.

On the big opportunity in logic that you penetrated, first of all congratulations on that. Second of all, what -- how big do you think that opportunity could be?

In other words, of the process tool of record you could eventually have there, what percentage do you think you're currently shipping?

Our aspirations extend beyond our penetration. That's a fair statement.

We owe respect to a lot of our customers. And as you might expect, answering a very specific like -- a question like that is kind of one of them.

So we're focused on building upon the momentum we have clearly established. We're excited about the opportunities.

At the end of the day, we have tough competition, and we have to execute well. But I think calendar '13 is a very instrumental year relative to the position that we've established.

My first question is on the 3D NAND. I think when you're referring to the opportunity, you said you expect somewhere between [ph] 20,000 wafer starts for this year to be coming in the second half.

I was curious what technology do you expect to come in. Our understanding on some of the 3D NAND technologies, there is not much change in 2 set [ph] from existing NAND.

How do you -- can you make some comments around that as well?

Yes, I mean, we're not assuming, frankly, an immense proportion of investments directed to 3D NAND production. We clearly are expecting some in the second half, and that's important in terms of the size of the opportunity and the share growth that we believe we are targeting.

But the inflection points even for the most ambition -- ambitious customers in the transition will only kind of show evidence of traction on spending towards the end of the calendar year. So -- and I think, just giving you maybe a little bit more data beyond the comment I made to Jim's question, we do see some evidence that there's a little bit more of a bias to conversions today in the calendar year than we previously anticipated, and our assumption remains that there's about 115,000 wafer starts of new capacity added in NAND this year and about 500,000 wafer starts of conversion.

And that kind of delves [ph] it to the original plan of record that we had. It's probably about $0.5 billion.

I'm not sure it's that material in the scheme of things, but that's the kind of essence of our outlook today.

Great, that was very helpful. And then just kind of going back to your win at a logic customer.

Just curious, is there a way you can you kind of describe what technical advantage you have on that, too? And I know you probably don't want to put in too much in terms of your contacts in the opportunity, but maybe just talk about is it only in conductor?

Is it kind of branching beyond conductor? Or do you see yourself branching beyond conductor in the current technology node that, that customer is ramping?

I'm going to substitute the word probably for definitely. It's a big deal to make any change, and one of the scale and scope with a customer is very significant.

I did speak to the fact that this was a conductor penetration. The reason I believe the penetration was successful is because a lot of people worked very hard over a long period of time.

I believe we have technical deference -- differentiation that's valued and recognized by the customer. And in a very important phase of delivering that, we executed very well, and our challenge and our opportunity is to continue to execute very well.

And I believe that if we do that, we will hopefully have opportunities ahead of us.

This is Olga Levinzon calling in for C.J. Just wanted to follow up on the logic win.

If we take your -- the wins that you've been able to get there, coupled with the comments that we heard from the customer last week and, I guess, some of the incremental 3D NAND and 20-nanometer etch opportunities that you highlighted for this year, what sort of etch share gains could we count on for either on a shipment or revenue basis for 2013?

Yes, that's a really interesting question, and thank you for your comments at the beginning there. There are clearly opportunities in front of us still in the 20-nanometer transition.

But frankly speaking, and I think this is kind of true for everybody, because the next transition in foundry to the FinFET structure is such a significant one, if the customer can find any way possible to retain their 28-nanometer selection, they're biased to do that, and that's something that affects us all as equipment companies. And I believe that will continue to play out as a fairly dominant reality there.

There are opportunities to displace other people, to grow. There are also risks.

And from my perspective, it will be defined around execution, and it will be defined around kind of productivity. I think the focus of the customer when they happen, the full spectrum of challenges in front of them with a FinFET adoption is going to clearly bias more stability in share in 28 to 20 has been significant swing [ph] .

We're really focused for the reasons we talked about in our analyst call on the significant inflections, including the FinFET. And that is one of the things in the mix of the 3% to 5% share gain in etch that we talked about as a long-term objective.

And although perhaps a little discounted to the average because of the dominance of lithography investments in logic, the investments in patterning as a market is something that affords the company opportunity as well.

So I guess could you see, I guess, a decent move in that 3% to 5% etch share gains for this year? Or will the 20-nanometer more meaningful ramp in 2014 be kind of the key driver to getting to that 3% to 5% goal?

I think directly to your question, I just said no.

And then on the double -- on the kind of the maintaining the WFE outlook and talking about NAND being much more second half weighted, have you seen any -- I know that you don't disclose orders, but any sort of order activity from any of the NAND customers to sort of support your view on both the demand growth and the capacity that would be necessary in the second half of the year?

They're very slight, but I don't think that's particularly relevant, with due respect, because the cycle time, the lead time now between a purchase order and the additional capacity is so short. A second half ramp will be kind of bookings towards the end of the first half of this year.

So that will be the reality. That is the reality for all of us.

And I think the best I can offer you is the commentary around demand, which, in the areas of the smartphone, the mobile space generally, the SSD road map, the kind of server and cloud space, there are some decent catalysts of demand in NAND flash and the supply is really tight. We ended calendar '12 with about the tightest balance of supply and demand that we believe has existed in several years, and I think that should give folks confidence that unless there's a very significant input in terms of technical challenge or macros, the investment will kind of play out or, frankly, the big growth that's necessary to support some of this road map, we believe, won't be available.

I wanted to echo my congratulations and best of luck to Ernie.

Thank you.

The first question that I have is regarding a comment you made on 20-nanometer capacity being 40,000 wafers per month by the end of calendar '13. When you made that comment, were you referring to only one customer's foundry capacity?

Or does that assume multiple foundries having 20-nanometer available?

Not one, correct.

Okay, terrific. And then as my follow-up, I just wanted to actually -- one that relates to the OpEx side of things.

In terms of cost synergy, you made the comment that you remain on track with an additional $60 million of cost synergy by end of calendar '13. But can you just remind us for the remainder of the cost synergy what the split is between OpEx and COGS?

Terence, this is Ernie. You're going to probably see something like 80% -- 75% to 80% COGS and 20% to 25% OpEx over that remainder of work that's yet to be completed over the course of this calendar year.

Okay, great. And then just one last one is again, coming back to the 20-nanometer comment.

As we look into the beginning of 2014 and see sort of a morphing between 20 and 16 and 14 tri-gate, do you expect that, that will be led by one customer? Do you expect 2 customers to be spending on tri-gate foundry in the beginning of '14?

That's getting awfully specific about the plans of the second of the foundries. I would say you should assume there is a lot of credence in kind of 2 public inputs.

One of them is the input from TSMC around the speed of ramping that they expect in 20 nanometer. And the public commentary from the fabless community, which tends to speak to an interest in having multiple supply alternatives.

So I guess that's the best I can give you in terms of response there.

And congrats again, Ernie, for a terrific career. And I'm pretty sure all the investors besides your employees are going to be missing you.

Thank you.

So Then, I'm going to have a -- I had a couple of questions. Number one, Martin, is there any way to quantify?

We're hearing TSMC going to 20-nanometer planar end of the year and the recent chat about Samsung looking at 16- or 14-nanometer, whatever you call that, and it appears that might be a FinFET approach. So when a foundry moves from a 20-nanometer planar to a 16- or 14-nanometer FinFET, what are the incremental opportunities for Lam just going from planar to FinFET of the node?

I'm probably -- I'll give -- I mean, I'll give you a general answer, which is I think a lot of the specifics are going to deal with the patterning consequences in that transition. I mean, clearly, the importance of etch in the formation of the transistor is going up, which would tend to suggest that the complexity is increasing and process times, if anything, will get longer.

So that will kind of feed into answering your question. And I do believe there's incremental growth for the company in the FinFET transition.

I don't believe that increment is quite as great as the increments we saw from 40 to 28 with high-k/metal gate or 28 to 20, but we will see. I mean, I think there's still a lot of unanswered questions there.

Got you. And then just as a follow-up, congrats on your -- I mean, with the logic customer on the conductor side.

So my question was what was the conductor etch market you think exiting 2012? And what do you think it would be baking in this logic win?

So I believe our shipped market share exiting 2012 was in the kind of high 40s range, and you've heard us talk about kind of 3 to 5 percentage points as a long-term growth objective. And while specifically, the position that you just referred to is not a prerequisite to execute that, it certainly helps us manage risk, and it certainly helps us kind of get to the high end of the range in the plans that we have.

And what was the -- just the conductor etch specifically market share in 2012? I think your mid-40s is probably.

. .

Yes, probably. I am -- I was -- everyone in the room's looking at me going, "What are you saying?"

and now I know why. Yes, so we're typically in the 75% range, 80% range as a baseline for conductor etch.

So 70% to 80% is probably a decent range to be thinking of.

Ernie, I'm going to put you on the spot here. So you maintain the $30 billion wafer fab equipment number.

I think on the Analyst Day you had said revenues for the year would be about $4.1 billion on a $30 billion WFE, so I'm wondering if that still stands.

Yes, it does. However, I would hasten to point out that we were really clear on our Analyst Day presentation that, that was not a 2013 forecast and that presumes, for example, the disposition of the Peter Wolters business as well as some incremental share gains.

So as it turns out, all the great news that Martin has shared may actually allow all that to come true in 2013, which would be a little earlier than we thought. But in general, and we have taken a look at our progress vis-à-vis our model, and we're pretty happy with where we stand in light of what we shared with you back in November.

Okay, great. And just a question on the quarter.

So it looks like the logic part of the shipments were up pretty significantly in the quarter. I'm just wondering what drove that as it sounds like the logic customer isn't ramping until another couple of quarters or a quarter or so.

Yes, I mean, one, I think you need to think about the overall shipment number in total, and we're dealing with a percentage. And so given the incremental lack of representation from the memory segment, that also will have the effect of making the foundry segment appear a little bit larger than it had.

And then we had a pretty strong representation from the other logic segment. And so at the end of the day, it was a combination of those 3 things.

So at an application level, the comment I would add is image sensors, kind of server as well as kind of general microprocessor, there was -- that's the composition of that segment. So the image sensor space was definitely kind of a decent component.

Okay, got it. And then next, for calendar Q1, any thoughts there?

For calendar Q1, we would expect to see probably a little bit stronger representation from the memory segments, continued strong showing in the foundry world and then the logic and other segment perhaps dropping back to more normalized levels.

I just wanted to understand your trajectory for the year. You mentioned 55% in the second half for WFE.

How should I think about your revenue profile, I mean, assuming the 4.1 plays out this year? I mean, are we talking about 40-60 first half, second half?

Is that -- given the share gain prospects for the second half?

Well, I don't know if I can directly answer it, but you should -- I think you're smart enough to kind of understand the timing differences between shipments and revenues, and the shipment is the best correlation to the timing of WFE. So certainly, it's going to be kind of closer to that than the 45-55 baseline, but it's frankly highly dependent on the timing of shipments within a quarter.

The difference between a first month-biased shipment quarter and a last month shipment quarter is significant in terms of answering the question that you're asking. But making an assumption that there's a one-quarter delay on average between a shipment event and a revenue event is not an unreasonable baseline.

Great. And just wanted to understand your -- that idea [ph] of getting close to the buybacks that you had announced.

I mean, what are your thoughts around cash and use of cash as you think about the next couple of years?

Well, I think the consistency is hopefully loud and clear. Our primary investment bias is in the profitable growth of this company.

And to the extent that we have cash that is excess to that need, then we review all options available to us in terms of distribution. But beyond that, frankly nothing to say until we're done with the authorization in place.

And Ernie, I'd also like to extend my congratulations and best of luck on your future endeavors.

Thanks.

Martin, on your Analyst Day, you talked about TSV as being one of your growth opportunities and one of inflection points for Lam on a going forward basis. I guess what do you see at this point come in terms of the traction, the adoption?

And what do you believe right now as maybe inhibiting, I guess, the increasing use of TSV?

My assumption is a little bit economic still. But presumably kind of at the end of the day, the form factor requirements of the device are kind of part of answering your question as well.

And for the company, we're very pleased about the positioning of the company in that application area. It is early days in terms of the size of that marketplace.

I don't know if the TSV-specific SAM is going to be much more, about $100 million of WFE, this year, but that's 70% expansion year-over-year. So it's an important component of growth opportunity.

It's a very important inflection. But in relative terms, it's still early days.

Okay, great. And a question for you, Ernie.

In terms of the cost savings targets and the integration, you mentioned ERP and the supply chain rationalization. Are they still the biggest drivers on a going forward basis as you achieve that goal?

Or is there is still one major project that you have to do internally to get to that remaining $60 million that's still out there?

Now, Patrick, as we've talked about before, obviously the supply chain work has most impacted the cost of goods sold. The ERP integration is going to enable the remainder of the operating expense synergies.

So for sure, there are a number of other smaller projects with other milestones, but it's hard to think of any more that approach that scope and scale and impact.

First, just wondering if you're seeing yet any inflection in orders related to double patterning ramps this year.

I'd say always. I mean, the patterning environment generally is a perpetually expanding marketplace.

And as we articulated, the spending concentration in the leading foundry space and logic space is significant. So yes, each and every day we show up to work, the answer to that question is yes.

But I guess specifically not just patterning but double patterning orders are starting to benefit your order book?

Yes, yes.

Okay. And then also, just on the Axcelis agreement, collaboration on materials, just wondering if you can help us understand maybe the importance of implant etch interactions and what you might be potentially working on with Axcelis.

Yes, we are in the very early stages of kind of developing the plans, and, frankly, there is a very obvious competitive consequence to saying too much on this call. But I am optimistic that the types of things that are available to one of my competitors as a result of their acquisition is available to us in terms of joint development activity.

So we're going to work hard to make that possible, and I think we're pretty excited about developing opportunities and plans in the weeks and months ahead.

Just a clarification to start off, Martin. What was your estimate of 2012 wafer fab spending?

Ask the question again. 2012 what?

I think it's...

WFE, was that your question?

Yes.

Oh, $28 billion.

$28 billion? Okay.

And related to your March guidance, there is slight decline in your gross margin of 50 basis points even though you're taking up your shipment guidance 10% or so. And the customer mix shouldn't hurt you as much, I guess.

It's more to Taiwan, I would think. Could you just talk a bit about pricing, any volume thus far and the like affecting gross margins?

And then on OpEx, there is a fairly sizable step-up in OpEx, I guess, embedded in your guidance. Again, it's below what you're saying your model is, but there is a sequential increase in OpEx of $14 million.

Is there any increase in OpEx that's being driven again due to competitive reasons because plate [ph] materials is going through a management transition or are these problematic spending that's happening?

So Satya, this is Ernie. I tried to give you as much color on that as I could in my comments when I suggested that given that the company had an extra week of -- week's worth of OpEx in the March quarter, so we literally have a 13-week quarter or a 14-week quarter, plus you have the normal seasonality of payroll taxes.

That's a $10 million lump for a company that is the size, scope and scale of the new Lam. And I'll -- Martin will provide commentary on the customer agreements, but if you look at the gross margin performance vis-à-vis the revenue decline, actually I think it does speak to the continued work we're doing on the synergy activities as well as some amount of benefit gain from the factory.

So my view would be that the gross margin performance in the March quarter is pretty consistent with the ebb and flow of the business and the customers and the products. And so we're actually pretty, pretty pleased with that.

Maybe another question on NAND here. Do your comments include NAND that was taken offline last year that's coming back online?

Or is it strictly, is the NAND portion running full out right now and they're going to convert from DRAM to NAND?

Well, our comments include our best understanding of available capacity and current utilization, correct.

Okay. I'm just wondering if you think the conversion is going to pick up here, does your view of DRAM change at all this year?

I don't know if I'd make a big connection between those 2 things. I think the kind of dominant answer to the DRAM investment is the PC.

We've gotten kind of maybe a little bit more conservative on the PC in the last 2 months, having been kind of maybe articulating a view of neutral to slightly up to being kind of neutral to slightly down. I think that's kind of the overwhelming tribe [ph] .

But, I mean, there are some kind of nice headlines in terms of mobile-related DRAM growth, and the non-PC proportion of DRAM is very important. But I think the catalyst for investments in terms of capacity addition is going to be tied to the PC story.

Okay. You don't see a big difference in your tool set between mobile DRAM and PC DRAM?

That's kind of hard for me to speak to that. I don't think so.

You commented on 2012 you defended 90% of your positions in etch. How has that historical looked over the last 3 years?

Is that about the number that you have or is that better?

We're usually in the kind of, I would say, maybe 85% to 95% range is probably like our history. I wasn't really kind of trying to focus too much on the number, more focused on the qualitative commentary of the strength of the differentiation: is there evidenced by an overwhelmingly successful kind of defense?

And so one of the questions that was asked a little earlier around spending profile in the company, our focus is on our offense. We clearly have to defend effectively.

We don't defend everything. We never do.

But on average, if we defend more than we don't and win more of our penetrations than others, then the share of the company goes up. And that's the plan, and that's why we stand committed to our 3% to 5% long-term goal.

Okay. And is there any pattern around that?

The 10% or 15% you don't get, is it just pretty random? Or is there some specific application that's more difficult to defend?

I was going to be really cute and say the consistent theme is we weren't good enough or someone else was better. But I guess what I would tend to conclude as a summary here is that a big part of the focus of the company, a big part of the strength of the company has been in and around the more critical applications in the fab.

And so when we do have a defense exposure, it's much more likely to be in a noncritical space. And there's a reason why the commercial dialogue becomes more relevant there.

But in the long term, our belief is still the same today as it was 5 years ago or 10 years ago, that if we focus on critical applications, our cycles of learning will be greater than anybody else's, and we will continue to be able to succeed to the ambition we're speaking to.

And we have time -- Oh, I'm sorry. I was going to say I believe we have time for 2 more questions.

Just a follow-up question on the win at the leading logic company. I was just wondering, Martin, if you could share any color on what kind of a ramp in shipments and sales we might think about at this new customer.

Is it more of a sales ramp 2 to 3 years from now? Is that kind of how we should consider modeling?

Well, I'm kind of sorry I can't share too much with you. It's a production tool.

So that means it's part of an active production buy.

Okay, fair enough. And then as a follow-up question, just a follow-up on the possibility of paying the dividend.

Does Ernie's decision to leave Lam impact the timing of the board's decision on the dividend? Can Lam or does Lam need to find a permanent CFO first?

Or can the dividend discussion and decision be made with the search ongoing?

Well, as much as Ernie is a tremendously important component to our company, there is no relationship to a decision on capital structure and whether he is here or someone else is here. I mean, we don't want to kind of dump a surprise on somebody, but we're not going to do that.

So we will, as a company, make the right decision at the right time with support from our board of directors independent of individuals and individual transitions.

Martin, I had a question about this win at your leading logic customer. And it really comes down to although you just announced the win, you've probably been spending money on this for maybe over a year.

So I wanted to understand the leverage on the OpEx going forward as revenue from that customer ramps. And is the business big enough and is the leverage large enough that we'll actually see it in the financial model?

Well, the operating -- the answer to the question is yes, I think you'll see it in the financial model. We certainly will see it in that we have more access to information, I guess.

But the commentary from Ernie at the analyst meeting, which we repeated again today, speaks to the leverage in the company, the operating expense levels in the company, the targeted profitability levels in the company. So I -- you shouldn't be kind of like separating the 2 conversations.

They're part of the same.

Okay. And then the second question I had is related to the CFO replacement.

Are you likely to look for someone internal inside Lam? Or do you -- is this an external search?

We have an active search today. We have a really talented finance organization and a great team and we're blessed with that, but we have decided, given the scale and scope of the company and our needs, an active search is an appropriate conclusion.

Thank you, Lorenzo. I would like to thank everyone who has joined us here on the call today.

An audio replay can be available and found on our website later this afternoon. And then on behalf of the entire management team, we appreciate your interest in Lam Research.