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Lam Research (LRCX) Q2 2019 Earnings Conference Call Transcript

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Lam Research (NASDAQ: LRCX)
Q2 2019 Earnings Conference Call
Jan. 23, 2019 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the December quarter financial conference call. At this time, I'd like to turn the conference over to Tina Correia, corporate vice president of investor relations and corporate communications. Please go ahead, ma'am.

Tina Correia -- Corporate Vice President of Investor Relations and Corporate Communications

Thank you and good afternoon, everyone. Welcome to the Lam Research quarterly earnings conference call. With me today are Tim Archer, president and chief executive officer; and Doug Bettinger, executive vice president and chief financial officer. During today's call, we will share our overview on the business environment and review our financial results for the December 2018 quarter and our outlook for the March 2019 quarter.

The press release detailing our financial results was distributed a little after 1:00 p.m. Pacific Time this afternoon. The release can also be found on the Investor Relations section of the company's website, along with the presentation slides that accompany today's call. Today's presentation and Q&A include forward-looking statements that are subject to risks and uncertainties reflected in the risk factors disclosures of our SEC public filings.

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Please see accompanying slides in the presentation for additional information. Today's discussion of our financial results will be presented on a non-GAAP financial basis unless otherwise specified. A detailed reconciliation between GAAP and non-GAAP financial results can be found in today's earnings press release. This call is scheduled to last until 3:00 p.m.

Pacific Time. A replay of this call will be available later this afternoon on our website. With that, let me hand the call over to Tim.

Tim Archer -- President and Chief Executive Officer

Thank you all for joining us today. It's good to be here with you on my first earnings call as Lam's CEO. I have met many of you before at Lam events, but I recognize there are some on the call that may not know me quite as well. So, I'd like to start by briefly recapping how my experience at Lam and Novellus over the last 24 years has shaped my perspective on what it takes to compete and win in this business over the long term.

I have been fortunate to have opportunities that have spanned the company's operations from being embedded as a process engineer inside the development fab of one of our leading customers to heading our technology organization in Japan, to leading product groups through periods of key technology inflections, to managing our worldwide sales organization. Most recently I've been charged with driving companywide business results as the CEO of Lam since the time of the merger with Novellus. During this period, from the -- from calendar 2013 to 2018, we grew revenue by 2.7 times and increased earnings per share two times faster than the increase in revenue. From my experiences, I believe in the critical importance of building deep and lasting customer collaborations founded on mutual trust.

I am committed to continuously investing in a pipeline of differentiated products that help our customers address their most difficult technology and productivity challenges. And as we see in the current environment, I value having a flexible operating model that enables us to respond rapidly to market changes, to ensure we deliver on our commitments to our customers as well as our shareholders. I believe we are still in the early stages of a long-term secular growth story for the industry and particularly for Lam. What you can expect to see from my leadership as CEO is increased focus on leveraging our core strengths to deliver technology and productivity solutions to the fastest-growing segments of the semiconductor equipment market, which in the long term we believe are those tied to the enablement of the emerging data economy.

I am very proud of what our company has accomplished in recent years and I'm honored to have the opportunity to lead Lam to an even greater future. Before I continue, I want to provide an update on the investigation we announced in connection with Martin's departure. As you know, from our December press release, our board formed an independent special committee to lead a thorough investigation into allegations of misconduct and conduct inconsistent with our core values. That investigation is now substantially complete and there have been no other personnel actions and none have been recommended by the special committee.

Core values have always been a foundation of Lam's success and I am committed to a culture of trust, respect, and open communication built around an environment in which our employees feel free to speak up on workplace issues. To reinforce this culture, the special committee has recommended that we review our policies, practices, and training related to workplace conduct and increase our communications on these topics. To reiterate what we said in December, the alleged misconduct did not call into question the integrity of the company's financial systems or control, and the special committee's investigation has confirmed this. Now turning to our view on the business.

In line with our prior guidance, we delivered a solid December quarter despite a more challenging environment. We also completed the strongest calendar year in the history of the company with $10,871,000,000 in revenues, a 14% year-on-year increase. At the same time, we delivered growth in EPS of 27% and an increase in operating cash flows of more than 50% from the prior calendar year. I would like to thank our customers, our employees, and our partners for their support and contribution to these results.

From Lam's perspective, industry performance for calendar 2018 came in largely as we had communicated in our prior earnings call. Overall, WFE was in line with our expectations of single-digit growth at approximately $50 billion with an increase in memory and a year-on-year decline in non-memory spending. Entering 2019, industry fundamentals have weakened, particularly within memory segments as customers continue to reign in both NAND and DRAM spending. At this point, 2019 WFE is looking to be down in the mid to high teens range.

For NAND, 2019 offers what we believe is a solid long-term setup for the industry as the supply bit growth rate is expected to decline throughout the year. NAND demand should continue to benefit from content increase in consumer and enterprise applications. And we began to see initial signs of demand elasticity in the client SSD markets as we exited 2018. In DRAM, while near-term dynamics remain challenging, customer behavior remains rational and industry profitability characteristics remain compelling.

We believe customers are making prudent adjustments to capacity in response to the overall demand environment they are seeing. We expect DRAM WFE spend correction to extend through 2019 with supply growth falling to the mid teens as we exit the year. Non-memory segments are expected to grow in 2019 and with a continued rise in the importance of 3D architectures, technology innovation for transistor, interconnect, and advanced packaging application remains a critical priority for us as we grow our strategic relevance with our customers in this segment. In aggregate, we feel confident that we're operating in a rational industry environment, one that is well-positioned to deliver attractive long-term growth and opportunity.

With that as context, we are executing to the growth strategy that I described during our Investor Day earlier last year. Our strategy focuses along three primary vectors: expanding the size of our served available markets, gaining market share in the segments in which we compete, and increasing the recurring revenue stream we derive from our installed base. Etch and deposition processes are central to the success of our customers' technology roadmaps and we continue to make substantial comprehensive yet disciplined investments in R&D to fund the innovation required to create differentiated solutions and long-term value. In the December quarter, we continued to build on our leadership position in both NAND and DRAM for critical applications with key penetrations for high aspect ratio etch and 3D NAND dielectric stack deposition application.

Furthermore, we continued to extend our high aspect ratio etch leadership into non-memory segments with critical wins for metal interconnect and spacer applications at leading logic customer. In atomic layer deposition, film quality, repeatability, and productivity are fundamental elements of differentiation for Lam. During the quarter we gained momentum in both DRAM and NAND with new application wins. While we are pleased with these wins in critical applications, we are committed to strengthening the performance of our product portfolio across the board.

Our R&D investments are squarely focused on achieving our vision of best-in-class products everywhere we compete. Turning now to revenue derived from our expanding installed base. Our customer support business group delivered another record year. Installed base revenue growth exceeded installed base unit growth again in 2018 with installed base units in the field ending the year at roughly 56,000 chambers.

We closed out the year on a high note, signing with a key customer. The single-largest installed base deal in our history. Our focus with CSBG is to provide innovative products and services, which create value for customers over the entire lifecycle of tool ownership. We partner closely with customers as we help them extract increased technical capability and higher productivity from existing assets.

And in return, we are building a strong recurring revenue stream for Lam. 2019 is shaping up to be another solid year for our customer support business group, and our progress remains aligned with the long-term growth objectives communicated to the investment community early last year. In closing, the business environment is more challenging than just a few quarters ago, but we are committed to delivering on our multi-dimensional growth strategy and at the same time, responding to near-term revenue trends through a strong focus on operational efficiency. Lam has a proven track record of execution and we believe we are fundamentally well-positioned in the right segments of the market.

The new $5 billion share buyback program we announced earlier today in our press release reflects our continued confidence in Lam's long-term opportunities. Doug will provide details on the program in his comments. Additionally, I'd like to mention that I'll be on the road in the coming weeks and look forward to meeting with many of you. I will also be participating in the Goldman Sachs technology conference in San Francisco on February 13th.

Thanks. And now here's Doug.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, Tim. Good afternoon, everyone, and thank you for joining us today. Lam delivered solid performance in the December quarter, with our results exceeding the midpoint of guidance for all financial metrics. Operating margin and earnings per share exceeded the high end of the guidance range provided, mainly due to our proactive management of our operating expenses.

Overall memory revenue increased slightly from the September quarter with the combined memory segment making up 79% of total system revenue. Non-volatile memory revenue drove the increase in the memory segment and it represented approximately 55% of system revenue. NAND investments were driven primarily by conversions to higher layer count wafers. DRAM represented 24% of system revenue in the December quarter, which was roughly flat with the prior quarter.

The majority of spending in all of memory was targeted at conversions. The Foundry segment declined quarter over quarter, accounting for 13% of system revenue, mainly due to reduced China foundry investments. You may recall on the September call, I spoke about how strong that was and it declined somewhat in December. The Logic and Other segment was up slightly, contributing 8% of system revenue.

From an industry perspective, Tim discussed our view of 2019 WFE. Currently, we believe WFE spending is weighted to the first half of 2019, driven by foundry and logic investments. We believe memory investments will be meaningfully lower in 2019 while the combined foundry and logic will be up. Our assumption, based on our customer interactions, is that there's not a significant recovery in memory spending throughout 2019.

We expect the year end memory will be mainly driven by node conversions to lower our customers costs per bit. DRAM spending will be primarily on conversions to one Y and a little bit of one Z, and NAND converting to 96-layer devices. Let me now turn to our P&L performance. We delivered revenues of $2,523,000,000 in the December quarter.

This was up sequentially by 8% from September, and it was slightly above the midpoint of our guidance. Gross margin for the quarter came in at 46.3%. And as I always do, I'll remind you. Our actual gross margins are a function of several factors such as business volume, product mix, and customer concentration.

And we expect to see variability quarter to quarter. Operating expenses in the quarter came in at $440 million, slightly down from the operating expense level in the September quarter. Worth noting, I think, we decreased our operating expenses for the first half of 2018 to the second half by approximately $100 million as we manage spending relative to the softer business environment. R&D comprise nearly two thirds of our total spending, consistent with the composition of the spending in the previous two quarters.

We've maintained the high percentage of our OPEX in R&d to support the long-term growth objectives for the company. Operating income in the December quarter was $728 million. Operating margin came in over the guidance range at 28.8%, mainly as a result of the reduced spending within the quarter as well as gross margin that came in slightly above the midpoint of our guided range. The non-GAAP tax rate for the December quarter came in at 10% , which was slightly lower than the long-term rate.

This was due to discrete tax benefits realized relative to statute of limitation's expirations within the quarter. In the longer run, a tax rate in the low to middle teens is the right range for you to continue to include in your models. And there will be fluctuations in the tax rate from quarter to quarter. Based on a share count of approximately 162 million shares, earnings per share for the December quarter came in at $3.87, which exceeded our guidance range.

The share count includes dilution from the 2041 convertible notes and the dilutive impact was approximately 6 million shares in the December quarter. I'll remind you that the dilution schedule for the 2041 convertible notes is available at our Investor Relations website for your reference. I'd also point out that the 2018 warrants matured during the December quarter. We continue to execute on our capital return program.

For the December quarter, we paid out $168 million in dividends. Related to the share buyback in January of 2019, we completed our previous $4 billion share buyback authorization, repurchasing over 23 million shares in total. Additionally, as Tim mentioned and that we noted in the press release we issued today, our board has approved a new authorization to repurchase up to $5 billion of our common stock. Today's capital return announcement is consistent with our current plan of returning at least 50% of free cash flow to stockholders.

And in summary, for the calendar 2018 year, we returned $3 billion in share buybacks and over $500 million in dividends, which along with the new authorization that was announced today, continues to demonstrate our commitment to shareholder return. Our cash and short-term investments, including restricted cash, was flat with the September quarter at $3.9 billion. During the December quarter, our cash from operations came in at $642 million, which was offset by paydown on our commercial paper program of approximately $360 million as well as the dividend that I previously mentioned. For the 2018 calendar year, our cash from operations was over $3 billion.

This was consistent with what I mentioned in the last earnings call. DSO during the quarter decreased by five days to 67 days. Our inventory level decreased, and consistent with our expectations, inventory turns increased to 3.2 times, which was an improvement from 2.7 times in the prior quarter. Company noncash expenses included approximately $39 million for equity comp, $36 million for amortization, and $46 million for depreciation.

Capital expenditures came in at $106 million in the December quarter, which was an increase of $56 million from September. Due to the timing of certain projects, December quarter CAPEX was a little bit on the high side of what we expected. I expect that as we go into calendar 2019, CAPEX will be somewhat lower than the 2018 level. And as we noted last quarter, our CAPEX investments are focused on manufacturing expansion for our installed base business as well as strategic R&D investments.

We exited the quarter with approximately 10,950 regular full-time employees, which was relatively flat with September quarter. I think it's worth noting that we maintain flexibility in managing our costs by adjusting our temporary workforce for short-term changes in business conditions. We've reduced our temporary headcount by over 700 people since the peak levels we were carrying earlier this year. So now looking ahead, I'd like to provide our non-GAAP guidance for the March quarter.

We're expecting revenue of $2,400,000,000 plus or minus $150 million. We're forecasting gross margin of 44.5% plus or minus one percentage point. Gross margin declined sequentially due to customer concentration, product mix, and lower factory volumes. And I just mentioned, as we sit here today, we expect that gross margin percentage will be at a low point in March relative to the rest of calendar year 2019.

We're forecasting operating margins of 25% plus or minus one percentage point. And finally, earnings per share of $3.40 plus or minus $0.20 based on a share count of approximately 159 million shares. And I'd just remind you that in the March quarter, we have an extra work week in the fiscal quarter, which happens approximately every six years due to the fiscal calendar cutoff. March spending is expected to be higher in cost of goods sold as well as operating expenses as a result of the extra work week.

I'll also remind you that the March quarter has seasonal impacts due to payroll taxes that go up in the beginning of the year, both of these things are included in our stated guidance. For 2019, first half business view is lower than our prior outlook, given the recent announcements of reductions that you've seen from commentary from others in the technology space. With this current environment, we continue to exercise discipline in our spending and we're focused on prioritizing investments that support Lam's SAM expansion, market share gains, and installed base growth. Operator, that concludes my prepared remarks.

Tim and I would now like to open up the call for questions.

Questions and Answers:

Operator

Thank you. [Operator instructions] And we'll take our first question today from C.J. Muse with Evercore.

C.J. Muse -- Evercore -- Analyst

Yes, good afternoon. Thank you for taking the question. I guess, first question, as you think about WFE levels in the 4Q and 1Q time frame, can you share with us what you think the implied forward bit grade -- growth rate is for both DRAM and NAND?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

C.J., it's Doug. I think generally speaking, as Tim mentioned, we expect bit growth as we go through 2019 to decline as we go through the year as customers adjust their spending. Overall, I think 2018 ended from a NAND standpoint in the low 40s. For DRAM, I think it was low 20s.

And we expect that to decline as we go through 2019, Tim, as customers adjust their spending levels. Tim, would you add anything?

Tim Archer -- President and Chief Executive Officer

Yes -- no, I think that's -- the comment is we, at this point, see us ending the year below what Lam has said about the long-term sustainable demand growth rates. So I think that, Doug, it's why we're pretty optimistic about the setup exiting 2019.

C.J. Muse -- Evercore -- Analyst

I guess, if I could clarify the question. If you look at order run rates today, what is the implied bit growth that would come online, say, three, four quarters from now? I think you've done analysis on that, where I think Q4 DRAM, we're tracking maybe up 10%, if spending just stayed at those levels. Is there any analysis you can share there with us on both DRAM and NAND?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes, Tim. I don't have specific numbers for you except what we describe, which is as we go through the year, it's going to decline as customers adjust their spending level.

C.J. Muse -- Evercore -- Analyst

OK. And as a follow-up, I'm trying to do a little bit more work here and better understand your leverage to technology versus capacity buys, in particular, as it relates on the 3D NAND side and high aspect ratio etch. So, can you walk through what percentage of overall etch spend or etch is in 3D, particularly as we scale up the layer counts?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes, Tim. We haven't given hard numbers on that. But as I think you know, as customers invest in conversions, they spend less money but they spend more as a percentage on etch and deposition. We described that consistently in the past, and that's very much what we see happening this year.

Tim Archer -- President and Chief Executive Officer

But I think if the question was the percentage of high aspect ratio applications, where Lam's position is very strong, it's increasing node by node. And that's just based on the fact that it takes longer in general to complete those etches. And that's, obviously, our task to make those continuously faster but it is increasing at each technology node.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, C. J.

C.J. Muse -- Evercore -- Analyst

OK. Thanks.

Operator

Next we'll hear from Timothy Arcuri with UBS.

Timothy Arcuri -- UBS -- Analyst

Thank you. Doug and Tim, I had a question just about the trajectory of the year. So, if I take the WFE, you guys are guiding to like 42 for this year, it looks like your product WFE share, you don't tell us what services are. But it looks like your product WFE share is somewhere in the low 15s the past couple of years.

So, if I could just assume that they flat, which I wonder that it will, given that UV's ramping, that implies that revenue kind of like is flat throughout the rest of the year from this level. Is that the wrong way to think about it? Thanks.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Tim, I think what we try to describe in -- yes, Tim. I'm getting confused who I'm talking to. I think as the year sets up, we expect the first half of the year is going to be weighted toward Foundry and Logic. It will be stronger in the first half than the second half.

And memory is maybe a little bit stronger in the second half than the first half. We don't see a significant recovery occurring now on memory, I would point that out. And I think, as you know, we tend to be very, very strong in memory. So, with memory down year on year, our share likely trends along with that, that's not a statement around any application, win or loss.

It's just a statement of who's spending money. I don't know. Tim, would you add anything?

Tim Archer -- President and Chief Executive Officer

Yes. I think internally in the company, I mean, you're -- I don't think your thinking is too far off. I mean, we look at the most important measures of success for us this year. And it's how we're doing on the applications that we want to make sure that we own when the spending does pick up.

And as long as we're doing that, then the precise timing of when spending comes back in NAND is less important to us. So, it's really our focus.

Timothy Arcuri -- UBS -- Analyst

Got it. And then, Doug, I had a question on deferred revenue. It was down about $130 million again. So, it sounds like shipments were more like maybe $2.4 billion for the fourth quarter.

So, my question is how much more can you draw down deferred revenue? Because obviously, it sounds like if you give a shipments in March, it will be lower than $2.4 billion, but where does that number -- where does that $493 million worth of deferred revenue, where does that bottom out? Thanks.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes, I think I've described it, Tim, in the past. It's going to bounce around $100 million quarter on quarter. I think some quarters, it will be down, as you're seeing now. Some quarters, I think it will also be up.

I don't know that it meaningfully changes from the level where it's at right now, but it will very depend on the percentage of new tools we're shipping, how strong the business with certain customers is, certain regions of the world is little bit different. I don't view it as going to zero at any point, Tim. But it will bounce around plus or minus $100 million, is how I would be thinking about it.

Timothy Arcuri -- UBS -- Analyst

OK. Got it. So, Doug, so that means shipments are about equal to revenue for March. Is that right?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

I'm not guiding shipments anymore, Tim. What I said was it will be plus or minus $100 million quarter by quarter. Some quarters, it will be down. Some quarters, it will be up.

It's all just timing, quite honestly.

Timothy Arcuri -- UBS -- Analyst

Got it. OK. Awesome, Doug. Thanks.

Tim Archer -- President and Chief Executive Officer

Yes. Thanks, Tim.

Operator

We'll now hear from John Pitzer with Credit Suisse.

John Pitzer -- Credit Suisse -- Analyst

Yes. Good afternoon, guys. Thanks for letting me ask the question. Doug, maybe another way to ask Tim's question.

I was intrigued that you commented that March quarter should be the bottom in gross margin for the year. I'm just kind of curious, is that because you expect March to be the low point in revenue? Or are there mix drivers that help gross margin going forward?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

I always say, John, there's a variety of different things that impact gross margin. I usually mentioned three things. Overall business volume is a component. But as I think you know, we have a highly variable cost structure.

This isn't a big fixed cost business. This isn't like our customers. We're highly variable in our cost. Tool mix is important.

Not all of our tools have the same gross margin. And sometimes that mix will be beneficial sequentially, sometimes it will be negative. And then customer concentration. When you get the bigger customer spending more or it's that more concentrated customers, you might have a little bit of margin headwinds.

All of those things are important to think about relative to the trend in gross margin, and all of those are relevant to the comment I had about March being the low point.

John Pitzer -- Credit Suisse -- Analyst

That's helpful. And then maybe kind of a follow-up to C.J.'s question, just relative -- appreciate the fact that in this volatile environment, your willingness to give us a view on the full year on WFE being down mid to high teens. I'm just kind of curious when you look at your SAM and whether that be some incremental share gains on the Logic front at 10, or some incremental SAM gains as we go from 64 to 96 and/or 1x to 1y to 1z, do you think your SAM outperforms, performs in line or underperforms the overall WFE this year, Tim?

Tim Archer -- President and Chief Executive Officer

I think if we -- taking all those things into account, you just said, I would think that we feel that our SAM actually underperforms WFE this year. And that's primarily because of the heavy concentration of our SAM in 3D NAND, as you know. And so I think that should be the expectation if the year plays out as we have described, which is no material increase in 3D NAND or NAND spending through the year.

John Pitzer -- Credit Suisse -- Analyst

Helpful. Thanks, guys.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes. Thanks, John.

Operator

Krish Sankar with Cowen has our next question.

Krish Sankar -- Cowen and Company -- Analyst

Yes. Hi, thanks for taking my question. I had two of them. First one, Doug and Tim, just on the reconcile what you said in the front of WFE year versus what ASML said.

Is it fair to assume is it because the back half is mainly concentrated on EUV from the foundry side? And then I had a follow-up, too.

Tim Archer -- President and Chief Executive Officer

Well, I think there's a few things, and I'll let Doug jump in here with his comments as well. But the -- when you look at ASML's comments, and as best we understand them kind of talking about the recovery in DRAM in the second half of the year, that's not necessarily inconsistent with us exiting the year with a better setup for the first half. And I think that you have to think about the way that tools come in into new -- into fabs and new projects. Our experience is that litho and metrology tools usually lead etch and deposition tools sometimes by as much as a quarter or so.

So that made those statements maybe not inconsistent, and that's kind of why we're thinking about it. I mean, I guess, our view, everybody in this environment will have a slightly different view in spending to come back, but we're wanting to state at this point that our best view from conversations with customers is no material increase in memory spending throughout 2019.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes. I don't have anything to really add, Krish. I think as Tim said, litho usually leads our stuff, and we'll tell you what we're seeing right now. We could have it wrong.

But when we parsed what we heard from ASML, it didn't really feel inconsistent to us.

Krish Sankar -- Cowen and Company -- Analyst

Got it. Got it. Actually, that's very helpful, Tim and Doug. And as a follow-up question, when you talk to your memory customers, I'm kind of curious, how do they look at CAPEX? Are they waiting for their pricing/margins to bottom before they start getting comfortable about buying semi-cap equipment? Or is it going to be in tandem? Or does one lead the other? And as a subset to that, which do you think is going to recover first from here onwards, NAND or DRAM? Thank you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Well, it's a tough question. I mean, I think that actually, when they're going to spend is a question better asked to them. I mean, exactly what metrics they're looking at. I guess, if we look at which of the two, NAND or DRAM might recover earliest, I mean, I guess, if we look back, we saw NAND correction starting earlier in 2018 than DRAM did.

And so, we're -- I guess, at the end of the day, it's all about demand. But we see both of them tracking as we get to the end of the year, well below what we think are the long-term demand growth bit rates. So, either one could recover. Neither one could recover.

I mean, that's -- it's not a great view, but we think that in both cases, the market sets up for investment in either one as we exit the year.

Yes. Well, what I would tell you, my own personal view, Krish, is it will recover at some point. That I know for sure. And the trend we see relative to spending in the year that we just described suggests to both Tim and I that they're going to need to invest relative to long-term bit demand.

We just don't necessarily see it happening in 2019 quite yet, at least not in a meaningful way.

Krish Sankar -- Cowen and Company -- Analyst

Got it. Thanks, Tim. Thanks, Doug.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, Krish.

Operator

Our next question comes from Harlan Sur with JPMorgan.

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

Good afternoon. Thanks for taking my question and thanks for the detail and outlook for 2019. But can you guys just true us up on your prior view first half '19 versus the second half of last year? Relative to the weak spending environment, how are you seeing the first half of this year relative to last year second half?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes. Harlan, what I tried to described in my remarks is first half of '19 now looks weaker than it previously did. And I'm not going to give quantification of it because then I'd essentially be guiding you for two quarters. We're going to get back to our normal practice of guiding one quarter at a time.

But given the well-understood weakness of smartphones and inventory adjustments in some of our customers as well as the cloud guys, it's somewhat weaker than it was when we described it last time.

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

Great. Appreciate the insights there. And then given the view on WFE being down kind of mid to high-teens this year, at the same time, the team had a strong shipment growth last couple of years. You were driving -- I was looking at it first half of last year, you guys were driving like 25% year-over-year shipment growth.

Many of these tools are coming off warranty and on to service contracts this year. So, this should be a tailwind for the team. So, how should we think about the installed base business trajectory relative to your WFE outlook?

Tim Archer -- President and Chief Executive Officer

Well, I guess, I'll try to cover some of that in my opening remarks. But clearly, we feel very good about our installed base business on two dimensions. One, the strengths of Lam's business over the last several years has caused our overall installed base to grow. So, there's more tools for which we can sell things.

And two, we've been investing in that business to create new products and services. Some in the areas of, as we said, the data economy. Using data that -- to make our tools more productive for customers. And those products and services are getting traction, and this will be another strong year for CSBG for our installed base business.

So, that's a focus of mine, and I think it provides a very important revenue stream for the company long-term.

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

Yes, thanks for the insights.

Tim Archer -- President and Chief Executive Officer

Yes. Thanks, Harlan.

Operator

Our next question comes from Joe Moore with Morgan Stanley.

Joe Moore -- Morgan Stanley -- Analyst

Great. Thank you. On that topic of installed base business, I wonder if you guys have considered providing sort of better disclosure around that? It seems like that would go a long way toward understanding the sustainability of that business versus the other parts of the business.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes, I guess, we haven't really accomplished our objective very well, Joe. We've been talking a lot more about it more recently than we have. We're providing you the tool count of the installed base on a consistent basis. We're trying to make it easy to understand everything we talked about in the past.

Relative to segment reporting, we're not going to do that. We don't need too, because we're not tripping the roles up there. And from a competitive standpoint, we don't necessarily want to have an out quite as visible unless we have to, but it is a meaningful part of how we generate profit. It's a meaningful part of how we generate cash for sure.

And we're trying to talk more about it, so you understand it. I mean, Tim talked quite a bit about it. So, we'll keep trying to do a better job, Joe.

Joe Moore -- Morgan Stanley -- Analyst

Great. That's helpful. And then, I guess, in terms of the buyback and the pace of the buyback and the 50% of free cash, what's your assessment of the right amount of cash to have on the balance sheet? And do you need to have any? Can you be leveraged? How do you think long-term about what the balance sheet should look like?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes, it's a good question, Joe. I haven't communicated specific numbers. We need a certain amount of cash. We like to be able to fund a certain amount of R&D and CAPEX and so forth.

We're carrying more cash today than we need to to run the company. What we decide to do relative to that, I think, will evolve over time, but I don't have a hard and fast number that I'm going to share with you necessarily. We certainly could have more debt on the balance sheet though if we chose to do that. And the pace of the buyback, I think we're going to be opportunistic.

I'm not going to communicate a time frame and I'll let you know quarter by quarter on how we're thinking about it and what we're doing.

Joe Moore -- Morgan Stanley -- Analyst

Very helpful. Thank you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes. Thanks, Joe.

Operator

Patrick Ho with Stifel has our next question.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Thank you very much. Maybe first question in terms of the installed base business, I think in your last Analyst Day, you talked about $1 billion incremental opportunity. Over the next three to five years, how do you see the revenue growth rate? Is this a 10% type of growth business? Or do you see a higher to get to that incremental billion dollars you talked about?

Tim Archer -- President and Chief Executive Officer

Well, I guess -- yes, so you recall the billion-dollar number. I mean, as I mentioned, we're on -- we feel we are on track for that trajectory. At the Investor Day, we said that the installed base business was approximately 25% of our total revenue. And so, I guess, with that information, kind of healthy growth rate.

It's a business that is definitely growing. Our objective is to have the installed base business itself grow faster than the rate of growth of the installed base. And now again, we provide that information this year with the installed base growing from approximately 50,000 chambers to an ending -- year ending 56,000 chambers at the end of last year. So, maybe with those, you can triangulate the numbers.

We can also maybe do it for you and get back to you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes. Patrick, how I think about it and Tim described it the way I think about it, which is on a normalized rate, it's been about 25% of the company's business. If you recall back at the Investor Day, Tim described three growth vectors, each about the same size. So, if you think about installed base, it's a third of the growth and normalized at 25% of the business.

So, you can triangulate that way relative to the growth of it. It will grow faster than the installed base for sure. Now in the year like 2019, if it shapes up the way perhaps, it's going to with WFE down as much, it will be more than 25%, obviously.

Tim Archer -- President and Chief Executive Officer

I think one important point since we're talking about installed base business, I just mentioned, I think it can sometimes get lost in terms of how we are driving this business faster than the installed base itself is growing. And it all comes down to investing in the creation of new products and services. Things that help the customer relocate tools for new applications, extend the technology for those toolsets to new applications, get higher productivity, higher throughput from old assets. And as we've seen in many ways, the lagging node business gets stronger and more heavily utilized.

We find a lot of installed base business for tools that have been around and out in the field for quite a number of years. We have just lot of interest in getting new products and services for that fleet. So, it's a pretty attractive business.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Great. That's also very helpful.

Tim Archer -- President and Chief Executive Officer

Go ahead. You can do one more, if you got it, Patrick.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Real quick on the DRAM on the memory side of things. We know that capital intensity trends increase on the 3D NAND side of things with the layer count. How do you see the transition for etch and deposition as you go from 1x to 1y and eventually to 1z?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Our SAM continues to grow as we step through that. That's all about self-aligned patterning and that is very etch and deposition SAM, Patrick.

Tim Archer -- President and Chief Executive Officer

Yes. And actually, these technology nodes also create new opportunities for films. I mean, so I spoke a little bit about our effort in atomic layer deposition. As you step from 1x to 1y to 1z, there are new applications being created for atomic layer deposition, for instance, that wouldn't have existed in prior nodes.

And so, we're looking at it both from growth in our existing applications as well as our ability to win new ones also.

Patrick Ho -- Stifel Financial Corp. -- Analyst

Thank you.

Tim Archer -- President and Chief Executive Officer

Great. Yes. Thanks, Patrick.

Operator

We'll now hear from Atif Malik with Citi.

Atif Malik -- Citi -- Analyst

Hi, thanks for taking my question. First, quick clarification on the last earnings call, you guys expected DRAM up in first half this year versus second half last year and NAND down. Is it fair to say that you're seeing both DRAM and NAND down in first half of this year versus second half last year?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

We're not going to provide segment-level color on the quarterly guide except we gave a little color on how we see WFE setting up in that [Inaudible] however you like, which is foundry logic is first half weighted. Memory, probably a little bit stronger than the second half.

Atif Malik -- Citi -- Analyst

Got it. And then can you just talk about what you seeing with respect to domestic spending in China? If I recall correctly, you have talked about China domestic was $5 billion in spending last year. What could it be in the $42 billion to $43 billion WFE this year?

Tim Archer -- President and Chief Executive Officer

Yes. Actually, we did say that we thought 2018 was going to come in at about the $5 billion range. I think when all is said and done, it may have come in a little bit lower than that, but pretty close. We actually see 2019 shaping up to be a bit stronger.

And if we look actually at the SAM and share position that we hold where the money will be spent this year, NAND's China domestic business should be up.

Atif Malik -- Citi -- Analyst

Thanks.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, Atif.

Operator

Tom Diffely with D.A. Davidson Companies has our next question.

Tom Diffely -- D.A. Davidson Companies -- Analyst

Yes, good afternoon. Maybe just a quick end market question, after three or four quarters of the price declines in the NAND market, are you seeing evidence of the elasticity of demand that we've been talking about for a couple of years?

Tim Archer -- President and Chief Executive Officer

Yes, I had a very small comment in my opening remarks about the fact that we believe we had seen some demand elasticity at the end of last year. And it was primarily driven by an uptick that we've seen in the adoption rate of SSDs into client. And there was some data to show the percentage of laptops or client devices with the SSD in the lower price ranges had a material uptick. And so it's just one data point, but we do think that as prices have come down, we're starting to see increased demand.

Tom Diffely -- D.A. Davidson Companies -- Analyst

OK. And given that, when you look at kind of the long-term view, the next three to five years, do you still or do you view NAND market as the real big opportunity for you versus the DRAM market knowing that both are strong?

Tim Archer -- President and Chief Executive Officer

For us, without doubt. Our SAM position if you think may be just the world we've gone through, the transition from 2D to 3D NAND, we had a very meaningful increase in the intensity of etch and deposition in that space. And when you think about also end demand, we see NAND outpacing all other markets. And so that's why when I talk about our focus on applications that we want to hold continuously in that critical space, it's in the NAND area.

Now, of course, we want to do well in all markets, but NAND is our biggest opportunity going forward and in the long term.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes. And just to add on from me, Tom, independent of where things are at in 2019, I'm extraordinarily optimistic on the opportunity for both NAND as well as DRAM going forward. Again, Tim alluded to the data economy. We talked about that extensively at the Investor Day.

All of that stuff is still completely intact. It doesn't mean it will happen every single year, it won't. But data is exploding in society. It is not useful unless you can store it and you need a low latency memory to do anything in computer architectures.

Memory is critically enabling for all of that and none of that has changed.

Tom Diffely -- D.A. Davidson Companies -- Analyst

Great. Thank you very much.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, Tom.

Operator

Our next question comes from Quinn Bolton with Needham & Company.

Quinn Bolton -- Needham & Company, LLC -- Analyst

Hi, guys. Thanks for taking my question. Just want to come back. On your prepared comments, you mentioned share gains and high aspect ratio etch 3D NAND deposition and ALD wins in both NAND and DRAM.

Can those share gains help offset some of the SAM underperformance you see in 2019? Or do you really think that that we need to see the memory markets recovering before you see the full benefit of those share gains?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Well, simple answer is no. They cannot offset the magnitude of decline that we see this year. But the other aspect that is one of timing. Typically, the types of applications and wins I was speaking to, we focus on critical application wins, usually one to two nodes before that node ever ends up ramping.

And so in the majority of those cases those would be entering production sometime next year or the following year. And that's why the start of like -- those are the applications once you win it, you kind of know that your businesses is pretty well locked in for the foreseeable future.

Quinn Bolton -- Needham & Company, LLC -- Analyst

Just a quick follow-up. On the China domestic, is that fairly well balanced between memory and foundry and logic or does one segment lead the other end in 2019?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

It's fairly well balanced. Quinn, I mean, memory is probably somewhat stronger than foundry and logic, but there's a broad base set of customers that are spending. It's not just one or two.

Quinn Bolton -- Needham & Company, LLC -- Analyst

Great. Thank you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Thanks, Quinn.

Operator

Sidney Ho with Deutsche Bank has our next question.

Sidney Ho -- Deutsche Bank -- Analyst

Thanks for taking my question. I will start off with a clarification. You said revenue will be first half weighted in 2019. Is that an expectation for your revenue or is it for the industry?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

No, it was a statement, Sidney, around WFE. I didn't say anything relative to Lam's revenue. It was a statement on WFE.

Sidney Ho -- Deutsche Bank -- Analyst

OK. Great. And then my question, it looks like from three months ago to now the change is primarily coming from the DRAM side, CAPEX slowing down. Would you say the NAND side is also incrementally weaker? Or do you think there's more stability there in NAND CAPEX everyday if you start cutting earlier?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Well, we haven't, so far, Sidney, in the past, given you any color on the full year of 2019. This is first time we're making statements on the full year, so I'm not sure I can't even say anything about trajectory or what we thought before because we hadn't done all the full analytic work that we've now have done on 2019.

Sidney Ho -- Deutsche Bank -- Analyst

All right. Maybe just a housekeeping one. Your operating expense is obviously much lower than what you guided for the December quarter. Understanding March's extra week, should we think about June quarter kind of go back to the December level or is it just something higher than that?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes, I'm not going to guide it beyond the current quarter, Sidney. Everything else equal, flattish to maybe slightly down if you just take the one week out, but we'll give you the hard guidance when we get to earnings in the quarter.

Sidney Ho -- Deutsche Bank -- Analyst

OK. All right. Thank you very much.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes. Thanks, Sydney.

Operator

We'll hear now from Mitch Steves with RBC Capital Markets.

Mitch Steves -- RBC Capital Markets -- Analyst

Hey, guys. Thanks for taking my question. I just had one on kind of your commentary in the back half of memory dynamics. So, I guess, what is the reason why there wouldn't be a significant increase in investment when you move to 96-layer technology? Is that because the majority of the WFE spend or the increase in memory spend is because of the planar NAND transition or 3D NAND transition, or is it because there's something special about 96 that makes it a lower investment cycle?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

No, there's nothing special about 96. what we see happening, Mitch, primarily is node conversions in both DRAM as well as 3D NAND. And so that's the way to be thinking about it. It's a heavy focus of spending on node conversions, which -- that's a very cost effective way for our customers to invest because they just need to upgrade essentially etch and deposition equipment or add it to the process flow.

I don't know, Tim, would you add anything?

Tim Archer -- President and Chief Executive Officer

No, I think that's fair. Obviously, it's heavily driven by the ratio of node conversions to greenfield ads. On a greenfield basis, last year I showed a chart that described our increase in opportunity at 96-layer and fundamentally on a greenfield basis, it's significantly higher as you go to 96. So, it's the dynamic of the conversion versus greenfield ads that's Doug's speaking to.

Mitch Steves -- RBC Capital Markets -- Analyst

Perfect. Thank you.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes. Thanks, Mitch. Operator, we're going to do one more.

Operator

So now our final question will come from Vijay Rakesh with Mizuho Bank.

Vijay Rakesh -- Mizuho Bank -- Analyst

Hi, guys. Good quarter. Just on your 2019, just wondering, when you look at 96-layer 3D NAND, what do you -- how do you see capital intensity at 64 versus 96?

Doug Bettinger -- Executive Vice President and Chief Financial Officer

If you do a greenfield-to-greenfield wafer, capital intensity goes up. You've got a longer process flow, you have more tools in the process flow. It goes up. I don't think we've quantified it.

The good part for our business is when you do that conversion, all you're really adding is etch and deposition equipment, you're making the stack bigger and the etch becomes a little bit more challenging to do and so it takes longer.

Vijay Rakesh -- Mizuho Bank -- Analyst

Got it. Got it. And just as you talk about a little bit more softness in memory spending through the year, have you seen -- are you seeing any pushouts on either the 96-layer 3D NAND or 1y transition in DRAM side? Thanks.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

From a timing standpoint, no. I mean, we always had expected 2019 would be a 1y investment year in DRAM with the beginning of 1z and the investments in NAND would be on 96-layer devices, and that's totally what we're seeing. And again, it's primarily focused on conversions right now.

Vijay Rakesh -- Mizuho Bank -- Analyst

Got it. Thanks.

Doug Bettinger -- Executive Vice President and Chief Financial Officer

Yes, thank you.

Tina Correia -- Corporate Vice President of Investor Relations and Corporate Communications

OK. So, this concludes our conference call for this quarter. Thank you for joining us.

Operator

[Operator signoff]

Duration: 54 minutes

Call Participants:

Tina Correia -- Corporate Vice President of Investor Relations and Corporate Communications

Tim Archer -- President and Chief Executive Officer

Doug Bettinger -- Executive Vice President and Chief Financial Officer

C.J. Muse -- Evercore -- Analyst

Timothy Arcuri -- UBS -- Analyst

John Pitzer -- Credit Suisse -- Analyst

Krish Sankar -- Cowen and Company -- Analyst

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

Joe Moore -- Morgan Stanley -- Analyst

Patrick Ho -- Stifel Financial Corp. -- Analyst

Atif Malik -- Citi -- Analyst

Tom Diffely -- D.A. Davidson Companies -- Analyst

Quinn Bolton -- Needham & Company, LLC -- Analyst

Sidney Ho -- Deutsche Bank -- Analyst

Mitch Steves -- RBC Capital Markets -- Analyst

Vijay Rakesh -- Mizuho Bank -- Analyst

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