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Lam Research Corporation (NASDAQ:LRCX)
Q1 2019 Earnings Conference Call
October 16, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Lam Research Corporation September 2018 quarterly earnings call. At this time, I would like to turn the conference over to Miss Tina Correa, Corporate Vice President of Investor Relations and Communications. Please go ahead.

Tina Correia -- Vice President of Investor Relations and Communications

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

During today's call, we will share our outlook on the business environment and review our financial results for the September 2018 quarter and our outlook for the December 2018 quarter. The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific time this afternoon. It can also be found on the investor relations section of the company's website along with the presentation slides that accompany today's call.

Today's presentation and Q&A includes forward-looking statements that are subject to risks and uncertainties reflected in the risk factors and disclosures of our SEC public filings. Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP results can be found in today's earnings press release. This call is scheduled to last until 3:00 p.m. Pacific time. As a reminder, the replay of this call will be available this afternoon on our website.

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

Martin Anstice -- Chief Executive Officer

Thank you, Tina. Thank you all for joining us today. Lam delivered results stronger than targeted for the September quarter, with revenues, gross margin, and EPS all exceeding the midpoint of our guidance.

In addition, consistent with the commentary made during our last earnings call, we are forecasting the December quarter up sequentially. We would still characterize, based on engagements with our customers in our markets, an outlook for the first half of 2019 that is somewhat stronger than the second half of 2018.

In aggregate, there has been more semiconductor investment capital volatility, both upside and downside in 2017 and 2018 than in the recent prior years. And that is only accentuated by broader macro headlines such as trade, tariffs, and interest rates. Despite this context, we remain very excited by the long-term drivers for data, economy enablement from the world of silicon. And the complements of our product and services portfolio to the technology roadmap of the industry.

In our opinion, next generation device and systems architectures, the expansion of the materials in chip design and manufacturing create compelling opportunities for our strength in etch and deposition. We remain committed to invest and innovate for the success of our customers and our company.

As always, the performance of Lam is defined by customer trust and employee commitments to our vision and values. We sincerely appreciate that partnership the opportunity created and the numerous contributions made.

Since our July updates, current year WFE expectations continue to track up slightly year over year, although to a modestly reduced expense. At a segment level, 2018 WFE looks a little stronger in logic, a little weaker in NAND and found reach of the assumptions we made three months' back. With customer and Lam performance consistent with our December quarter revenue guidance provided today, calendar '18 would represent a healthy revenue growth year of 14% for the company with profit performance marginally stronger versus the calendar year 2017 benchmark.

In deposition, we continue to see evidence of Lam's growing strategic relevance to the success of our customers with key penetrations of new films for patenting, new specialty applications for 3D NAND, and deeper partnership models emerging for 3D NAND applications.

In Etch, perhaps our most critical area of focus in 3D NAND is the continued enablement of customers increasingly challenging technology roadmaps, where we continue to strengthen our leading capabilities in high-aspect ratio applications. Our solutions are invested in customers' vision for continued 3D NAND scaling targeted to accelerate demand elasticity in their markets for the next several years.

Combined, Etch and deposition market share penetration and defense activity is a net positive so far for Lam in calendar '18. Fundamental to the quality and sustainability of Lam earnings is the performance delivered by our customer support business group. Our install base business has grown year to date at a pace more than two times faster than our install base unit growth during the same period. Our worldwide process chamber accounts now exceeds 55,000 units compared to 36,000 units at the end of 2014. And this is the foundation for ongoing spared service and upgrade revenues.

We are increasingly focused on value creation for our customers through investments made in equipment intelligence products. We are providing performance enhancements in areas such as tool analytics, preventive maintenance, and chamber matching to enhance productivity for our customers and create opportunity for Lam.

In addition, driven by our customers' aspirations of better asset utilization in addressing the non-leading edge and also the emergence of new IoT and MEMS silicon opportunities, our reliance business recorded calendar year to date growth of more than 35% versus the same period in 2017, a good illustration, we believe, of Lam's ability to be flexible in addressing the full scope of our market opportunities.

In closing, the September quarter and our outlook on December are largely as we shared with you last earnings call and sure to deliver more than $3 billion in cash from operations this year. We remain focused on investing in our profitable growth objects, at the same time delivering value through a balanced cash redistribution to shareholders.

In this regard, incorporating December 2018 quarter guidance provided today, year over year operating expenses increased by 9% with 75% of our growth focused on R&D. And our fully diluted quarterly share count reduces by approximately 10%, end of year '18 versus end of year '17.

We anticipate a healthy long-term opportunity for our customers and our company both, with continued attention based on strategies intended to deliver targeted returns on the investment that each market participant makes. With that, I'll turn the call over to Doug.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Great. Thank you, Martin. Good afternoon, everyone. Thank you for joining us today.

Lam executed well in the September quarter with our results exceeding the midpoint of guidance for all of our financial metrics. Operating margin and earnings per share were at the high-end of the guidance range provided, demonstrating what I think is disciplinary spending during a decline in industry capital equipment investments. We're pleased with our execution and ability to respond to a challenging business environment.

As a reminder to everybody, we adopted ASC 606 in the September quarter, which is the first quarter of our 2019 fiscal year. Under 606, we generally record revenue at the time of shipment rather than at the time of customer acceptance. With this new standard, we are no longer providing shipment numbers. Our market segment disclosures will be based on the composition of our revenue numbers for the quarter and we'll do that now as well as into the future.

So, let me get into that. Memory revenue continued to be strong with the combined memory segment making up 77% of total system revenue. Our overall non-volatile memory revenue remains strong, representing approximately 51% of the system revenue and that despite the anticipated reduction of spending in nearly every one of our NAND customers.

DRAM represented 26% of system revenue. DRAM spending in the quarter continued to be focused on conversions to both the 1x and 1y-nanometer node. The foundry segment was stronger in the quarter, accounting for 17% of system revenue. Finally, the logic and other segment contributed 6% of system revenue, pretty much consistent throughout calendar year of 2018.

We continued to see strength in the China region, with 25% of our revenue being generated there. The strength in China came from both foundry as well as memory. Nearly two-thirds of the revenue in September came from domestic Chinese customers. We delivered revenues of $2.331 billion in the September quarter, a decrease of 25% from June and slightly above the midpoint of our guidance.

Gross margin for the quarter came in at 46.4%. And as we've shared before, our actual gross margins are a function of several factors, such as business volumes, product mix, and customer concentration. You should expect to see some volatility quarter to quarter.

Operating expenses in the quarter were down to $451 million, which was a decrease of $57 million from the June quarter. R&D comprised nearly two-thirds of our total spending, consistent with our composition of the June quarter operating expenses. We continued to maintain a higher concentration of spending and R&D, as believe that disciplined R&D investments are critical to achieving our future revenue growth.

One thing I'd like to mention to help you with your future P&L modeling -- when we get to the March quarter of next year, we will have an extra work week in our fiscal quarter. This occurs approximately every six years due to our fiscal calendar cut off. March spending will be higher as a result of the extra workweek. So, keep that in mind as you put your March models together, please.

Operating income in the September quarter came in at $630 million. Operating margin came in at the top of the guidance range at 27%, primarily due to stronger gross margin performance, as well as flexibility in our spending in a quarter of lower business volumes. The non-GAAP tax rate for the September quarter was 11.9%, in line with the guidance provided last quarter.

In the longer run, a tax rate in the low to middle teens is the right level to include in your models. I will point out that you see fluctuations around this quarter to quarter. Based on share count of approximately 165 million shares, earnings per share for the September quarter were $3.36, again, at the high end of our guided range. The primary driver of the upside versus our guidance was stronger profitability.

The share count includes dilution from the 2041 convertible notes and the 2018 warrants that are still outstanding. The total dilutive impact for both of these was approximately 8 million shares. I'll remind you that dilution schedules for the remaining 2041 convertible notes is available on our investor relations website for your reference. In the September quarter, we had about $80 million in early conversions of the 2041 notes. The remaining balance of the 2041 notes is $248 million.

We continue to execute on our capital return program. In the September quarter, we committed approximately $1.7 billion toward share repurchases deploying all of our current board authorization from a dollar perspective. Our repurchases were executed largely through accelerated share repurchase programs that will cover repurchases until the March quarter of 2019. For dividends following the declaration of $1.10 per share last quarter, we paid out $174 million in dividends to our shareholders.

Let me now shift to the balance sheet. Cash and short-term investments including restricted cash decreased in the quarter to $3.9 billion. That compares with $5.2 billion at the end of the June quarter, the change largely due to our capital return activities. We continue to make progress bringing our cash on shore.

Cash from operations for the September quarter remain strong at $720 million, which was roughly flat with the $718 million we generated in the June quarter. DSO increased by nine days to 72 days, which is related to the linearity of revenue during the quarter. Inventory was roughly flat in dollar terms, while inventory terms declined to 2.7 times. This compares to 3.5 times in the prior quarter.

We do expect to see terms improve in the December quarter. Comp non-cash expenses included approximately $50 million for equity comp, $36 million for amortization, and $44 million for depreciation. Capital expenditures were $56 million, which was down from $80 million in the June quarter.

For the calendar year, we expect CapEx in 2018 will be flat to slightly higher compared to 2017 levels. CapEx this year is going toward investment and manufacturing expansion for our installed base business, as well as strategic R&D investments. We exited the quarter with approximately 11,000 regular full-time employees, which is relatively consistent with the June quarter.

So, now, looking ahead, I'd like to provide our non-GAAP guidance for the December quarter. We are expecting revenue of $2.5 billion plus or minus $150 million. We're expecting a modest uptick in customer spending across multiple segments. Gross margin of 46% plus or minus one percentage point, operating margins of 27.5% plus or minus one percentage point, and finally, earnings per share of $3.65 plus or minus $0.20 based on a share count of approximately 163 million shares.

Consistent with our prior comments, we forecast that September quarter marks a near-term trough for our business. While near-term forecasts are subject to change, we remain optimistic on our longer-term growth prospects that we highlight during our investor event back in March. We continue to prioritize disciplined investments that drive competitively differentiated products as well as Lam's outperformance opportunity into the future.

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

Questions and Answers:

Operator

Thank you. At this time, we will open the floor for questions. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press *1 to ask a question. We'll pause for just a minute to allow everyone an opportunity to signal for questions.

We'll take our first question from CJ Muse with Evercore.

CJ Muse -- Evercore ISI -- Managing Director

Good afternoon. Thank you for taking my question. I guess the first question is as you take a look at your first half outlook for 2019, definitely coming in stronger, I think, than many of us thought. Can you walk through, I guess, what you're seeing in terms of tools versus service and then if there's anything that we should be thinking about that is perhaps maybe Lam-specific or timing of image sensors coming in? We'd love to hear your thoughts on that part.

Martin Anstice -- Chief Executive Officer

Yeah. Needless to say, we're much more qualified to speak to our business than we are the overall WFE headlines. So, when we think about calendar '19, obviously, there's been some continued, I would say, muting of investment expectations, primarily in NAND flash since our last earnings call. We're looking at 14 new projects next year, 5 projects next year. would expect honestly in the second half '18 to first half '19 comparison that our revenue levels will be incrementally higher in DRAM logic including image sensors, to your point, and also foundry.

I would expect NAND to be down half over half, second half '18 compared to first half '19. Relative to the proportion of our revenue headlines is the install-base business, obviously, it's a very important part of the economics of the company and we've given some color today on the pace of growth of that business by referencing the install base and the annuity that comes with it and it's an important part of the value proposition here. But I would say our headlines for first half WFE are systems headlines for the markets and the customers that we have. So, hopefully that helps, CJ.

CJ Muse -- Evercore ISI -- Managing Director

Very helpful. And if I can ask a follow-up, you've always done a great job of managing OpEx. Given, I guess, the increased volatility, Doug, how are you thinking about incremental op margins from here? I think the targeted model is roughly 40%. Is that still the right kind of model up or down, depending on the revenue run rate?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Well, CJ, I think you rewrote out model. Our model is 32% to 33% in the longer-term.

Martin Anstice -- Chief Executive Officer

See, you're too used to, CJ, these memory companies at 40% to 50% operating income these days. It's tainted you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yeah. CJ, to more directly answer your question -- at these revenue levels, kind of high-20s, you just saw us print 27 and guide 27.5 and as things recover and get stronger, you'll see us kind of inch our way toward that low 30s level, that's the right way to be thinking about things. There will be variability in spending. And one of the things I purposefully pointed out is the March quarter is a 14-week quarter.

So, there's an extra workweek in there. And I'll remind you that in the first half of the year, you get certain spending coming back in like payroll taxes and things like that. So, don't forget those things as you're modeling the next couple of quarters, but hopefully that answers your question.

CJ Muse -- Evercore ISI -- Managing Director

Very helpful. Thank you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, CJ.

Operator

Thank you. We'll take our next question from John Pitzer with Credit Suisse.

John Pitzer -- Credit Suisse -- Managing Director

Yeah, good afternoon, guys. Congratulations on the solid results. I guess, Doug, my first question, really kind of the crowning question around 606 and deferred revenue -- there was a big drawdown in the September quarter sequentially in deferred revenue. How does that line transition over time? Under 606, will that eventually get a zero? How quickly will you get there? Is any of the uptick in the December revenue guidance a function of deferred revenue coming down off the balance sheet?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yeah. Briefly, I'll go through it, John, and you can ask me more if you want to understand a little more. Basically, what happened as we crossed into the new fiscal year is there was a bucket of deferred revenue that just fell straight to retained earnings. So, that just fell off. It's largely why deferred revenue went down so much quarter on quarter. You'll continue to see deferred revenue, John, for first of a kind tools and certain BPA-accrual-type things. That isn't completely delivered yet. It will bounce around a little bit.

Generally, the way I think about the difference between 605 and 606 is it's all just timing. We're still shipping tools. We're still collecting cash. All of that is happening in the same timeframe that it otherwise would have. In some quarters, 606 revenue recognition will be higher than 605.

In some quarters, I would expect it will flip and go the other way, but at the end of the day, this is all just timing. What really matters on my mind is when cash is coming into the company. As I think you saw, we had a real strong cash collection quarter at $720 million. Does that help, John?

John Pitzer -- Credit Suisse -- Managing Director

That's helpful. Maybe from my follow-up to Martin. Martin, I think one of the investor concerns out there is as the industry transitioned from planar to 3D NAND and the rush to get there by your customers just created kind of a once in a lifetime bulge in NAND CapEx that's not repeatable.

I'm kind of curious -- as we go through this soft period in NAND, has your view of capital intensity, your SAM, or the rate at which your customers are making these transitions changed and are you still of the mindset that 32 to 64 was probably the most efficient transition from the industry and as we go from here, things get more difficult? Any color there would be helpful.

Martin Anstice -- Chief Executive Officer

Yeah. There are a lot of questions here. So, at a fundamental level, no real change in our long-term outlook. That's a commentary on capital intensity needed for industry. We floated a $70 billion reference to the Flash Summit conference a year back, I think, or maybe repeated again this year, actually, two years in a row the same message. I'm not sure we've ever offered an opinion about efficiency of one node or another, but I would certainly align to the fact that the challenges get more complex over time as aspect ratios increase, which is a big part of the opportunity for us. That's where we're strong and differentiated.

So, I think that trends well. And we don't see the opportunity for 3D NAND as a once in a lifetime gig or one-time event. Clearly, there were some transitional investments associated with planar capacity to 3D. There are also I investments associated with one generation of 3D to the next. We did opine in early disclosure that over the next five years, I think, we expect about 1 million wafers of incremental capacity to get brought to the system associated with a long-term outlook for non-volatile memory in this world of data.

So, from an industry point of view, more or less the same. I guess the one thing I didn't say is independent of what your view is, good or bad, you should recognize that the segments of action deposition are entirely central and fundamental to that transition. So, if everybody does well or everybody has opportunity, we should have more. If nobody does well, we should outperform. That's an important headline as well.

John Pitzer -- Credit Suisse -- Managing Director

That's helpful. Thanks, guys.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, John.

Martin Anstice -- Chief Executive Officer

Thank you. We'll take our next question from Krish Sankar with Cowen and Company.

Krish Sankar -- Cowen and Company -- Analyst

Thanks for my question. First, Martin, if you look at this downturn, clearly this down graph, clearly led by memory, it looks like the CapEx or the [inaudible] have been in retaliation to pricing declines. So, from your vantage point, do you think pricing is a key metric to look for to see when it drops and if so, do you think [inaudible] for memory along with pricing? Do you have any view on when it will happen? And I have a follow up.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

I think that's a very important question and quite a complicated one. Clearly, there's a relationship of pricing to investment levels. I would say that in two ways. The first one is ASPs should reflect supply and demand balance of capacity. So, to the extent that the prices are going up or going down, there's an implied message around the need to add capacity or the need to rein in capacity. So, that's been the world we've lived in for many, many years.

What's a little different today is that pricing is not actually a great leading indicator right now of the customer's ability to afford to make investments. So, back to my rather amusing response to Tim's earlier question, when the memory companies are making 40% to 50% profits, when DRAM is a $100 billion business, when Flash has grown in the way that it has, the sustainability of investments is clearly enabled in ways that wasn't true three or five years ago.

Now, having said all of that, I think our customers spend money adding capacity when they have demand from their customers to ship devices. I don't think people get carried away at any levels these days. It's a bit more complicated than it used to be. Pricing is relevant to help you understand supply and demand, but it's not so relevant in assessing sustainability and the customer's ability to make capacity or technology-related investments. So, good luck with your modeling, I guess.

Krish Sankar -- Cowen and Company -- Analyst

Got it. That's very helpful, Martin. Just a follow-up, clearly everyone understands the long-term upside potential for NAND in the industry and [inaudible]. I'm just trying to think of the downside. If you look at the first year to drop was NAND followed by DRAM, do you worry that things will get worse before they get better or do you think we are kind of troughing at these levels?

Martin Anstice -- Chief Executive Officer

Well, if anything, we're super consistent, right? So, my approach has always been to describe what I see and we've done that. We'll always do that. Good or bad, we'll tell it how we see it. So, we've offered perspective that says December is stronger than September and we expect the first half of next year to be stronger than the second half of this year. And of course, we might be wrong. You have to kind of judge the confidence level of our disclosure and move forward, I guess. So, best I can offer you.

Krish Sankar -- Cowen and Company -- Analyst

Thanks, Martin. Thanks for the insight.

Martin Anstice -- Chief Executive Officer

Thank you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, Krish.

Operator

Thank you. We'll take our next question from Timothy Arcuri with UBS.

Timothy Arcuri -- UBS -- Managing Director

Thanks so much. I have two. I guess the first question, Martin, is if I just hold your wafer fab equipment share and now I'm putting everything in there, but if I just calculate your WFE share for this year and for last year, it's up a little bit this year. So, if I just hold that into the first half of next year, you're still annualizing if I'm giving you $5 billion worth of revenue in the calendar year first half, which is just up a little bit half on half.

That would imply that we're still annualizing to like high-40s to close to 50 billion WFEs. So, I guess the question is who really knows about the calendar second half, but would you endorse a number close to 50 billion for 2019 WFE?

Martin Anstice -- Chief Executive Officer

Technically, it's too early for us to answer that question. It's pretty customary that we have a response to that in the January earnings call. But fair question. I don't have the crystal ball, so I can't answer it with the same level of confidence that I can answer the near-term questions. But a variance of your question might be how do I feel today about the $100 billion two-year reference that's been floated around for the last couple of months.

It's not a bad reference. We're trending a tweak below that right now to our analytics. But we've trended a little above it at times and a little below and I can't really tell you what the variability is around it, but that would probably be the best I can give you at this point in time.

Timothy Arcuri -- UBS -- Managing Director

Awesome. Thank you. And then Doug, it was a pretty big repo this quarter and I understand that it's going to play out through the end of March. I'm curious if you can help us on share count for December and March as this kind of flows through and then also how you think about when you're going to reup for the repo, how you kind of think about that. Thank you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Tim, it's always an ongoing conversation at a board level. We described when we first launched this current authorization at a 12 to 18-month timeframe, maybe we've gotten through it a little sooner. I did purposefully point out that those ASRs are going to execute over a six-month timeframe. So, we're not out of the market even though all the cash got deployed. When I have something to update you on, I'll update you relative to what we're going to do in the future. Obviously, it's something we're going to be talking about. But I don't have anything to tell you today.

Timothy Arcuri -- UBS -- Managing Director

But just on the share count, though, how it actually plays through for December and March. Thanks.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

I just guided you a December number of 163. I didn't give you anything for March. We only guide one quarter at a time, Tim.

Timothy Arcuri -- UBS -- Managing Director

Okay. Awesome, Doug. Thanks so much.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Thank you. We'll take our next question from Harlan Sur with J.P. Morgan.

Harlan Sur -- J.P. Morgan -- Analyst

Good afternoon. Thanks for taking my question. We were at the Flash Memory Summit when the Lam team had its investor event and we also had the opportunity to hear from some of the existing NAND leaders in the market as well as some potential entrants from China who seem to be making some progress and talked about increasing their manufacturing footprint next year. We've also heard the same thing from some of the domestic DRAM suppliers, albeit at lower levels of production activity. Do you think that China domestic memory starts to become a bigger part of your memory, WFE mix looking into next year?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yeah, it probably does, Harlan, yeah.

Harlan Sur -- J.P. Morgan -- Analyst

Both NAND and DRAM, you think?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yeah, probably. I mean, I think as you observed from flash memory, the NAND guys in China were a little more visible, maybe a little more confident there, but I think they're both going to increment.

Martin Anstice -- Chief Executive Officer

I don't think our fundamental view on China is any different today than it was for the last couple of years. It's clearly an ambitious but in our opinion quite rational strategic agenda. As each quarter passes, there's more substance to what they're doing and we don't have anything more to add than what I think they're speaking to in the public markets on their own.

Obviously, independent of all of that, the long-term market participants are also investing for next generation device architectures and market share growth and so on and so forth. It's a global system and that's what we respond to. I think it's likely that the investment level in China increases in absolutes and proportional terms next year, per Doug's response.

Harlan Sur -- J.P. Morgan -- Analyst

Thank you. I just had a quick follow-up. It's pretty amazing the amount of supply side discipline and focus on profitability and free cashflow by your memory customers. Clearly, they want to maintain strong profitability by modulating supply. If I look at the last time there was a strong focus on reining in supply that was 2017, it took about two quarters of strong equipment spending declines before we did see a positive response in memory pricing fundamentals and economics for your customers.

Is that how the Lam team still thinks about it as well, i.e. that supply discipline in the second half of this year potentially positive impacts supply dynamics and maybe stronger profitability in the first half of next year for your customers?

Martin Anstice -- Chief Executive Officer

Wow. I'm not sure we know how to answer that. I would say everything moves faster. So, I think our customers adjust faster and therefore, that's probably true on the upside as much as it is on the downside. We're a big part of beating variability along with other market participants for the economics of their business. I think they take actions anticipating risks as much as ever and that's a lot more than would be true five or ten years ago when action would get taken when there was a clear problem statement.

So, yes, there are supply and demand imbalances that are getting adjusted to. There's also proactive actions to manage the risks of that. That's a good thing, I think, in the long-term. It gets to the message that the secular headlines for us feel like they're more important and stronger than the cyclical ones, but you have to make your own decision.

Harlan Sur -- J.P. Morgan -- Analyst

Thanks for the insights.

Martin Anstice -- Chief Executive Officer

Thank you.

Operator

Thank you. We'll take our next question from [audio cuts out].

Unknown Analyst -- Unknown -- Analyst

Great. Thank you. Following up on that last question, I guess I was surprised at how strong China was in the September quarter. I think you talked about two-thirds of that being from domestics. That seems like a pretty big deviation. Is there anything we should be aware of there and how much of that is memory versus the founding customers who you've seen more frequently?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yeah, Joe, I pointed it out because it was an uptick from the local guys and I wanted to let you know that. I don't know that you're going to see that every single quarter. In fact, I know you won't. Interestingly, when I look at who the customers and I won't name them by name, there was relative balance between foundry as well as memory. So, it was a strong quarter for us in China and it was a balanced quarter.

Martin Anstice -- Chief Executive Officer

My take on the answer is we tend to talk about collectively two or three core domestic participants in China. The reality is there are six or seven. Some of them are active at 300, some are active at 200 mm, some are active leading-edge technologies and some less leading edge, but there's a fairly meaningful population that doesn't maybe get fully internalized.

Unknown Analyst -- Unknown -- Analyst

Great. Thank you very much.

Operator

Thank you. We'll take our next question from Romit Shah with Nomura Instinet

Romit Shah -- Nomura Instinet -- Managing Director

Yes, thank you. I guess just as outsiders, all the data points on memory equipment, CapEx, and fundamentals seemingly seemed all bad during the quarter and yet, you exhausted your entire buyback and you're reiterating your expectations for growth in December. So, is it fair, Martin, so sum up this report by saying maybe your business is more diversified than we realized and you're confident in September being the bottom? The question really is the shape of the recovery from here being either U or V-shaped?

Martin Anstice -- Chief Executive Officer

Well, I think we've been talking to the subjects of diversification now for three or four years. No question we're more diversified today than we were. I think we've tried to reinforce that message even more than talking about share gains in foundry and share gains in logic.

By speaking to the expansion headlines in the last year or so, we've segued into the install base business of the company, which is not only a great asset relative to creating an opportunity for competitive differentiation in the core systems products of the company, it's a source of revenue and profit growth at a rate that is faster than the pace of growing our install base.

There's a massive difference between 55,000 process chambers and 36,000 process chambers relative to the annuity. That's kind of all in the mix as well. The business is more or less as we had anticipated, slightly muted to the expectations of three months ago, but not that much different.

I actually think our calendar '18 WFE number is 98% or 99% exactly what it was three months ago. That's a basic headline there. We've expressed an outlook for the first half of next year. We're not going to put numbers on it now. We'll deal with that in January. So, that will be the time when V or U becomes an obvious disclosure from Lam.

Romit Shah -- Nomura Instinet -- Managing Director

Thanks for that. Just on the buyback, Doug, you've exhausted it. So, do we have to wait for the next conference call to hear about the size and scope of the next authorization?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Well, even though the cash, like I said, Romit, the cash got all committed, we're still on the market through the structured products. That was purposeful, right? Taking a view of pricing, where things are at and wanting to get on with it. But the way this generally works is Martin and I will agree, here's what we think we should do. We'll go on and have a conversation with the board and the board will have opinions and we'll modify it and when we have a decision, we will communicate it to you and we're not at that point yet.

Romit Shah -- Nomura Instinet -- Managing Director

Okay. Thank you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yeah, thanks, Romit.

Operator

Thank you. We'll take our next question from Vivek Arya from Bank of America.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thanks for taking my question. Martin, maybe a question on your services business -- if hypothetically WFE goes down 5% or 10% next year, what does that imply for your services business? Can you still keep it flat or even grow it? What is the conceptual sensitivity to WFE?

Martin Anstice -- Chief Executive Officer

Well, in the calendar year, there's not so much sensitivity because in general, when we ship a system to the customer, it has the 12-month warranty. So, it's kind of on our dime during that period. The single-biggest influence over the install base business is the number of units in the install base for which we disclosed and then the utilization of fabs. So, if we show up in a world with the WFE reduction that you just characterized and there's no change of utilization of the install base, then there's no consequence.

If the utilization of the install base goes up, you're likely to see accelerated growth and if the install base utilization goes down, you see a contraction in spares and service business in the industry. So, our assumption is in the context, our customers have done a really good job managing this issue. Utilizations will run pretty high and we have no reason to be anxious about a dip in our install base revenues.

In an independent world, as spoken to you for some time now a little bit here today in prepared comments, we are perpetually building a portfolio of install base productivity related products and service offerings and invested in contributing more to the success of our customers and creating opportunity for Lam. So, there are some things in our control and some things that are out of our control.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

And as a follow-up, from what you see today, do you think memory CapEx overall is up or down next year? When do you typically get visibility around what the spending environment will be?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Vivek, the normal timing where we'll give you more color on next year will be in next quarter's earnings call. It's just a little bit too early for us to give the specificity you're asking for.

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Thank you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yeah. Thank you.

Operator

Thank you. We'll take our next question from Toshiya Hari with Goldman Sachs.

Toshiya Hari -- Goldman Sachs -- Managing Director

Yeah. Thank you so much. Martin, you talked about logic revenue being up in the first half of '19 relative to the second half of '18. Is the big driver there basically your key customers' CapEx budget going up or is it more due to your positioning improving from, say, 14 to 10-nanometer or is it both?

Martin Anstice -- Chief Executive Officer

It's a little bit of both.

Toshiya Hari -- Goldman Sachs -- Managing Director

Okay. Then kind of related to that, in terms of magnitude, you guided DRAM, logic, and foundry up half over half. If you had to rank order those three in terms of the magnitude increase from the second half to the first half, is that something you guys could do?

Martin Anstice -- Chief Executive Officer

I have it written down on a piece of paper in front of me and now I've decided I'm not going to tell you. So, rank order without any numbers, I would say logic and kind of other logic, which includes the image sensor opportunities and the legacy stuff is probably the fastest-growing and DRAM is the slowest-growing and foundry is probably in the middle.

That would be kind of -- I'm not speaking to industry level here. I'm just characterizing the revenue outlook for Lam and I said, NAND's contraction. That will be our rank order. It's like pretty early to be having this conversation, so take it for what it's worth at this point.

Toshiya Hari -- Goldman Sachs -- Managing Director

Sure. As a quick follow-up, I just had a question on market share. Martin, clearly if you're growing your business 14% this year, you're gaining a bit of share. In your prepared remarks, you talked about some of your net wins. Is it fair to say in relation to your long-term model where you attached $1 billion incremental revenue from market share gains, are you tracking in line or ahead of that plan? How would you describe where you stand today relative to those long-term plans?

Martin Anstice -- Chief Executive Officer

It was never linear. This is a tough question to answer, but a couple of data points -- so, when we talk about penetration defense activity this year, we're actually talking more about the economics that would play out a year from now or maybe even in 2020 because there's a leading timeframe on DTOR decisions and TTOR decisions. You might remember that in the last earnings call, I think I made reference to the fact that there were tons of decisions in relative terms in the second half of this year compared to the first half this year.

So, there's kind of a lot still a head of us. So, fair game for you to ask the same question would be to try and answer it in January. So far, again, we defend everything, but we have a net positive to forward-looking economics from the penetrations and defenses in the first nine months of this year. So, pretty pleased.

Toshiya Hari -- Goldman Sachs -- Managing Director

Thank you.

Operator

Thank you. We'll take our next question from Patrick Ho with Stifel.

Patrick Ho -- Stifel, Nicolaus & Company -- Analyst

Thank you very much. Martin, first off, just to follow-up on some of your comments on capital intensity, looking at it from the DRAM front, as the industry continues to push to 1x, 1y and eventually to 1z. We're seeing a lot of new fab projects in DRAM. Do you believe these capital intensity trends are also impacting DRAM and this could provide a little bit of, I guess, sustainability on some of the equipment spending trends that we're seeing today?

Martin Anstice -- Chief Executive Officer

I think it's all about the economics on the revenue of the customer, honestly. I think what we've seen in the last couple years is obviously an emergence of significant discipline managing supply and demand and there has been an ASP consequence. But more than that, we've seen a transition away from units, the content and density in a broader ret of remand drivers. That has allowed our customers to kind of reset the value of the bits that they're selling to their customers. So, the average bit is worth more by virtue of the value that's created in this broader cognitive computing environment.

So, if there continues to be discipline and if our customers continue to be successful getting paid for the enablement in their industry, the fact that from one generation to the next, the DRAM cost transitions are less significant compared to the baseline of five to ten years ago. It's much less relevance, right?

Clearly, when no transitions deliver less than they did in history, there's a lot of intensity by the customer and there's a lot of intensity by Lam and our peer companies, I'm sure, to try to continue to improve the productivity of the DRAM install base because we have a collective interest in that. But I think the bigger question to answer relative to DRAM capital intensity is the revenue side, not the cost side of it.

Patrick Ho -- Stifel, Nicolaus & Company -- Analyst

My follow-up question for Doug in terms of the services and spare parts business -- you mentioned a little bit of the CapEx spend, the increase is incrementally going into that business segment. How much can you leverage, I guess, your existing workforce in terms of growing that business on the labor side of things or is that an area where you'll also have to increase OpEx to keep up with the fast pace of growth in that business?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yeah, Patrick, it's a different physical factor in a different location. So, there's not a lot of leverage from a labor standpoint. We have to invest and manufacture the parts from manufacturing. So, it's all goodness at the end of the day. It's supporting a higher install base and we've got to make investments for that.

Patrick Ho -- Stifel, Nicolaus & Company -- Analyst

Great. Thank you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, Patrick.

Operator

Again, ladies and gentlemen, if you would like to ask a question, please press *1. We'll take our next question from Mitch Steves with RBC Capital Markets.

Mitch Steves -- RBC Capital Markets -- Analyst

Hey, guys. Thanks for taking my question. I just had a quick one on 96-layer technology. Are there any of your customers that have already started working on that or is that something that's still to come next year?

Martin Anstice -- Chief Executive Officer

Unfortunately, our customers have to answer that question.

Mitch Steves -- RBC Capital Markets -- Analyst

Okay. Got it. Then secondly, on the DRAM side, do you guys see any -- I guess when would you guys think the pricing would stabilize in DRAM in general or do you guys have no view right now?

Martin Anstice -- Chief Executive Officer

Well, we have a view, but I think the view of our customers is worth a lot more than ours. It's all about supply and demand and our customers have taken action. I would argue proactively as much as reactively and everything moves pretty fast these days. Again, customers' disclosure is worth a lot more than ours on the ASPs of devices.

Mitch Steves -- RBC Capital Markets -- Analyst

Got it. Thank you.

Operator

Thank you. We'll take our next question from Weston Twigg with KeyBanc.

Weston Twigg -- KeyBanc Capital Markets -- Analyst

Hi, thanks for taking my question. I'm just wondering if you're seeing any change in customer behavior related to trade war concerns, whether that's in terms of the conversations you're having with them or the visibility they're providing or commitments regarding new fab capacity heading into 2019. Any color would be helpful.

Martin Anstice -- Chief Executive Officer

Yeah. To the best of my knowledge, nothing's really changing directly related to that, although I've heard a few statements and read a few things quoted about customers kind of referencing tariffs or the costs of tariffs when it comes to the pace at which they're making investments. I think I read one today out of Taiwan.

So, I'm sure it's not irrelevant to the extent that a company has more cost because of tariffs and we probably all do at some level. There's a consequence of that and there's a reproductization of things in the company. So, not irrelevant, but hard for us to directly correlate. I'm just conscious that I'm seeing statements and I'm hearing some things, so it's in the mix of the outlook that we've described today.

Weston Twigg -- KeyBanc Capital Markets -- Analyst

Okay. That's very helpful. Then my follow-up question is just on DRAM strength in the first half that you mentioned. Is that strength more from some of the push-outs you're seeing from this half? Is it related to new capacity or is it more just ongoing conversion activity?

Martin Anstice -- Chief Executive Officer

It's mostly as originally planned. I don't think it's a massive statement. So, there are not too many industry participants in any segment these days. So, you probably got a sense of who's chasing who and who's investing where for what purpose. So, I think it was pretty much originally as consistent with plan.

Weston Twigg -- KeyBanc Capital Markets -- Analyst

Okay. Thank you very much.

Tina Correia -- Vice President of Investor Relations and Communications

Operator, we'll take more question, please.

Operator

Thank you. We'll take our next question from Mehdi Hosseini with SIG.

Mehdi Hosseini -- Susquehanna International Group-- Analyst

Thanks for squeezing me in. Doug, going back to your commentary about the extra week in the March quarter, which is leading to higher expenses, should I also assume that your revenue would be positively impacted for an extra week?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Well, technically we have an extra week to shift product. I don't know that it's going to meaningfully move the revenue number. I do know definitively it will impact the expenses. We'll give you the hard guide when we get to the end of the quarter, though.

Mehdi Hosseini -- Susquehanna International Group-- Analyst

Then I just want to go back to your comment about the deferred revenue. If I just do simple math, I get to shipment down 35% on a sequential basis, does that make sense to you?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Mehdi, we're not guiding shipment anymore. We're not guiding shipment.

Mehdi Hosseini -- Susquehanna International Group-- Analyst

This is for the September quarter.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yeah. We're done talking about shipments publicly. Revenue is all we're going to be describing now. You can do analytics on whatever you want to get shipments, but at the end of the day, given the change in the revenue recognition timing, revenue is what we're going to be talking about.

Mehdi Hosseini -- Susquehanna International Group-- Analyst

Okay. That's fair. Just a follow-up on your services given the increase install system -- are these service contracts long enough to actually have an impact on your backlog? Does that help you with the visibility?

Martin Anstice -- Chief Executive Officer

Yes.

Mehdi Hosseini -- Susquehanna International Group-- Analyst

So, if that's the case and assuming that services has become a larger part of your revenue mix, why not offer a longer guide on the revenues rather than just referring to WFE?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

We'll think about it, Mehdi. At the end of the day, we try to describe what we think is important for you to understand what's going on in the business. There's still a large of the business in any one quarter that's turns-based and to me, backlog isn't that meaningful. For service it certainly is, as Martin said. So, we'll give it some thought.

Mehdi Hosseini -- Susquehanna International Group-- Analyst

The growth in install systems is very compelling, but it still hasn't made a difference to how you guide. I'm just wondering what is the disconnect here?

Martin Anstice -- Chief Executive Officer

I'm not sure that's actually true. I think for the last couple of quarters, you have perspective, sometimes quantitative and sometimes qualitative on the progression for a couple of quarters, including today. So, it's pretty hard to do what we're doing. Many people characterize that we don't have the visibility to say what we currently say as those that do, so take it for what it's worth. We're doing the best we can.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, Mehdi.

Operator

And since we have no more questions, I'll turn it back to you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

With that, we'll conclude the call. Thank you, Operator.

Operator

Thank you, ladies and gentlemen. You may now disconnect and have a great rest of the day.

Duration: 57 minutes

Call participants:

Tina Correia -- Vice President of Investor Relations and Communications

Martin Anstice -- Chief Executive Officer

Doug Bettinger -- Executive Vice President and Chief Financial Officer

CJ Muse -- Evercore ISI -- Managing Director

John Pitzer -- Credit Suisse -- Managing Director

Krish Sankar -- Cowen and Company -- Analyst

Timothy Arcuri -- UBS -- Managing Director

Harlan Sur -- J.P. Morgan -- Analyst

Unknown Analyst -- Unknown -- Analyst

Romit Shah -- Nomura Instinet -- Managing Director

Vivek Arya -- Bank of America Merrill Lynch -- Analyst

Toshiya Hari -- Goldman Sachs -- Managing Director

Patrick Ho -- Stifel, Nicolaus & Company -- Analyst

Mitch Steves -- RBC Capital Markets -- Analyst

Weston Twigg -- KeyBanc Capital Markets -- Analyst

Mehdi Hosseini -- Susquehanna International Group-- Analyst

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