科磊 (KLAC) 2008 Q1 法說會逐字稿

Good afternoon.

My name is Marvin, and I will be your conference operator today.

At this time, I would like to welcome everyone to the KLA-Tencor Corporation's first quarter fiscal 2008 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer session.

(OPERATOR INSTRUCTIONS)

I would now like it turn the conference over to Mr.

Jeff Hall, Chief Financial Officer.

Please go ahead, sir.

Thank you, Marvin.

Good afternoon and welcome to KLA-Tencor's first quarter fiscal year 2008 earnings conference call.

I am Jeff Hall, the Chief Financial Officer.

Joining me today are Rick Wallace, our CEO, and John Kispert, President and COO.

We are here today to discuss our first quarter results for the period ended September 30, 2007.

We released these results this afternoon at 1:15 Pacific Time.

If you haven't seen the release, you can find it on our website, www.kla-tencor.com, or call 408-875-3600 to request a copy.

Rick will lead off today's call with highlights from the September quarter, updates on the current market environment and key productivity, and provide guidance for the December quarter.

Afterwards I will review the preliminary financial results for the quarter, and then I will open the call up for questions.

On the Investor section of our website you will find a simulcast of this call, which will be accessible on demand for 90 days.

On the website you will also find a calendar for Investor Events and Presentations at Investor Conferences.

You will also find link to say KLA-Tencor's Security filings.

In those filings you will find descriptions of risk factors that can impact our future results.

As you know, our future results are subject to risks.

Any forward-looking statements we make, including those we make on the call today are subject to those risks.

KLA-Tencor cannot guarantee that those forward-looking comments will come true.

Our actual results may differ significantly from those projected in our forward-looking statements.

Although we take no obligation to update those forward-looking statements, you can be assured that any updates we do make will be broadly disseminated, and available over the web.

With that, I will turn it over to Rick.

Thank you, Jeff.

Thank you all for joining us for our Q1 earnings call this afternoon.

Today I will be discussing highlights from the September quarter, updates on the current market environment, an update on our fourth four strategic objectives, and guidance for the December quarter.

I am pleased to report that we once again produced solid operating results.

Revenue was $693 million, at the upper end of our range of guidance for the quarter.

Net income excluding some one-time charges was also at the upper end of guidance at $146 million, or $0.76 per diluted share, and we generated approximately $205 million in cash flow from operations in the quarter.

Jeff Hall will provide additional details on the Company's financial highlights later in the call.

Orders for the September quarter were $482 million, down 32% from the June quarter.

Again, September has historically been a difficult period for bookings at KLA-Tencor since it is our first fiscal quarter.

This first quarter seasonality was compounded by a general end market weakness, which resulted in timing delays for some orders, from certain logic and DRAM customers during the last few weeks of the quarter.

Some of these have subsequently shifted into next year.

In addition, during the last week of September we found that we are not able to reach final terms with a few customers, and as a result, these orders did not close in September and will be shifting to December.

During the final weeks of the quarter, we also experienced a weakened demand in our other end markets including Logic, Foundry, Reticle, Bare Wafer, and Service.

This softening in demand will likely result in some orders that were expected to book during September and December moving into calendar 2008.

I would like to take a few moments to clarify the current bookings environment by commenting on our customer base by customer segment.

Memory was once again our largest segment during the first quarter.

The current climate with memory customers is sincerely similar to what we have experienced over the the past six months.

That is that memory with bit rate growth continues to be strong, despite persistent unit price declines in both DRAM and NAND Flash, and an unfavorable balance of supply and demand in DRAM.

As memory end unit demand is expected to gain strength due to seasonality and the proliferation of new applications, our memory customers are continuing to invest in advanced technologies and new materials, to enable smaller design rules and higher density applications, and to reduce costs, which in turn leads to increased adoption of process control to drive down defectivity.

Looking ahead we expect overall memory CapEx to be choppy, but have seen an increased interest in process control, as memory manufacturers struggle with the yield and metrology challenges of advanced nodes.

Foundry records in September were down following a strong June quarter as we expected.

Historically the level of adoption of process control for foundry customers has always been driven by the nature of the foundry business.

Faster learning cycles during development and increased mix of products inside the foundries and reduced time to market.

These conditions make achieving targeted yields in a shorter period of time critical to the success of the foundry segment.

While some major foundries have reported reduced CapEx forecasts, their increased need for processed control due to the nature of the foundry business, will continue to be a driver for our business.

Logic orders in the September quarter came in lower than expected, as upside from one MPU customer was offset by the pushout of a meaningful order from another U.S.

based customer, who has recently scaled back it's CapEx plans.

We are forecasting higher order levels from the logic segment in 2008, which will be driven by additional investment in leading edge technology by one of our MPU logic customers.

To summarize I would like it note here although in the short-term we are experiencing the somewhat choppy order market with some uncertainty as to the timing of some large projects, our long-term pipeline remains strong.

Next I would like to discuss some recent highlights for KLA-Tencor on our four strategic objectives.

Our customer focus, growth, operational excellence, and talent development.

Customer focus is the first of our four strategic objectives at KLA-Tencor.

We work hard to understand our customers requirements and to provide solutions in all of the markets that we serve.

Our measure of success is our market share, and our goal is to have market leadership in all of the markets that we serve.

Today we have market-leading positions in 18 of 20 of the markets we serve, and our key to success is to collaborate closely with our customers, innovate to bring creative differentiated solutions, and then execute in bringing the new products to market, and support them through their product life.

In the September quarter, we are successful in maintaining our market share in the markets where we have already established a leadership position.

In addition to that, we were able to gain share in one significant market where we currently do not enjoy market leadership, e-beam review.

Our new electron beam review and classification tool, the eDR-5200 was recently declared Tool of Record for the 45-nanometer node at a European logic facility.

The eDR-5200 is an e-beam review solution that also enhances resolution improving the productivity of our inspectors.

Our customers needed to dramatically reduce their stem nonvisual rates, and improve performance of defect detection on 65-nanometer and 45-nanometer technology nodes.

KTE's eDR-5200 solution provided connectivity with inspectors to improve brightfield recipes, while also delivering very high resolution and stage accuracy, allowing maximum capture of defects on the review system.

Another eDR-5200 was installed at a key U.S.

development center, to enable advanced process development at the 32-nanometer node.

Competing eDR solutions cannot resolve the smallest defects at the 32-nanometer node.

We believe the eDR-5200 provides a great solution and positions us for growth in this new market.

Now I will spend a few minutes going through our core markets of inspection and metrology.

We have a broad portfolio of inspection products serving the bare wafer reticle manufacturers, as well as the semiconductor markets.

Included in this are the search scans, brightfield, darkfield, e-beam inspection, and our reticle inspection products.

Our market share performance remained at historical levels in all of the key markets and product lines that we have.

As in the past there is always a lot of hard work required to win the business, especially in an environment when capital is tight, and our customers have to make sure that the premium that is we get on our products are worth the additional investment.

As in the past our teams did a good job of demonstrating our value, and we are pleased with our market share performance across our inspection products.

Let me give a couple of specific examples.

Our 2810 Full Spectrum Brightfield tool introduced in July 2007 and designed specifically for memory applications, won a large capacity expansion order with a Taiwanese memory manufacturer in the September quarter, demonstrating superior sensitivity, capture of key defect signatures, and throughput in head to head competition.

The 2810 features twice the computing speed of our earlier generation bright field inspection tool, as well as new optical modes that enable increased defect detection.

The latest addition to our Puma Darkfield inspection platform, the Puma 9150 was chosen by a logic customer, to help it achieve improved device quality and zero defect product reliability for specialized applications.

After a rigorous six months evaluation against the competing product, KT received orders for delivery of multiple Puma 9150 units.

The Puma 9150 demonstrated superior throughput stability and reliability of a production proven system against the competition.

In Metrology, KLA-Tencor continues to be the market share leader by offering a comprehensive suite of metrology analysis process window optimization products, to give our customers the ability to maintain tight control of their process windows.

In the September quarter we were success informal winning new business and displacing several competitors tools, by demonstrating superior performance in optical CD, film, overlay metrology for advanced applications applications in memory, foundry and logic customers.

Overall, our market share in the September quarter met our expectations with regards to maintaining our leadership positions in our core markets, in addition to picking up nice gains in the e-beam review market.

In addition to that, we are well-positioned going forward, based upon our product pipeline fueled by our R&D investments across our portfolio.

These are just a few examples of recent successes KLA-Tencor achieved during the September quarter in solving our customers mission critical production challenges, and expanding our market leadership.

Across the industry the technical challenges our customers are facing are significant, and we are working closely with them to solve those problems.

Our second strategic objective at KLA-Tencor is growth.

Our goal is to continue to outgrow the industry.

Our growth prospects continue to look good, based upon the market segments that we serve, and the increasing need for inspection measurement, as device makers address the increased challenges of advanced design rules.

The increased complexity our customers are facing as they transition to the 45-nanometer node, whether in introducing new manufacturing techniques, such as immersion lithography, double patterning, pitch splitting, or integrating new materials to improve device performance, such as high-k/metal gates is creating new yield in defectivity challenges, driving the need for more accurate inspection and measurement technology.

This is helping to drive accelerated adoption of process control, and in turn new revenue opportunities for KLA-Tencor.

We estimate the increased adoption of process control by chip manufacturers at 45-nanometers, translates to an incremental revenue opportunity for KLA-Tencor of 30% or more, as compared with the 65-nanometer node.

We see evidence of that growth potential in our projections for the calendar year '07 performance for KLA-Tencor, relative to overall CapEx market.

Based upon our current estimates, KLA-Tencor will outgrow the market in calendar '07, as we will grow revenues in the range of 15 to 20%, compared with an industry CapEx growth rate of around 5%.

While it is very hard to predict calendar '08, we believe we are well-positioned to continue to outgrow the industry, as a result of the increased challenges of 45-nanometers, and based upon new markets that we have entered during calendar '07.

During calendar '07, we have entered six new markets, both organically and through M&A activity, which increases our potential available market by more than $700 million, as sized by industry analysts.

That being said, we are very selective about the growth prospects that we pursue.

We will only enter market that present growth prospects that will enable profitable growth.

While we are willing to be patient, we have to make sure that we can differentiate and add value and grow in each market that we enter.

In addition to the six new markets that we entered during calendar '07, we have more growth initiatives in place at KLA-Tencor, and we will be providing updates as they materialize.

Our strategy will be to continue our organic efforts, as well as leveraging our ability to successfully use acquisitions as a way to enter new markets.

Our third strategic objective at KLA-Tencor is operational excellence.

Over a year ago we laid out a four-year plan to drive continued improvement in our business model by driving operational excellence throughout the Company.

We have made steady progress on our plans, and have seen the results of our efforts.

During his prepared remarks, Jeff will go through the details of our progress.

Our fourth objective at KLA-Tencor is talent development.

None of the success that KLA-Tencor enjoys would be possible without our world class workforce.

While historically we have developed world class talent and achieved outstanding financial results through the cycle of the industry, we are increasing our efforts in talent development, as we know that our people are the key to our success.

In summary, KLA-Tencor continues to be a company with an unparalleled portfolio of inspection measurement technologies.

Enjoying relationships with every major IT manufacturer, and great people who are driven by an unwavering passion for innovation and commitment to ensure our success.

These unique attributes are what has sparked our market leadership over the past 31 years, and what fuels our strong financial performance, providing the resources for continued innovation, and a strong foundation for growth.

We believe these attributes help to position KLA-Tencor to continue to outgrow the industry in 2008 and beyond.

I would like to wrap up my comments now by giving you our guidance for the December quarter.

Orders are expected to be up 20%, plus or minus 10% from the September quarter.

Revenues expected to be between $625 million and $640 million.

EPS in the range of $0.68 to $0.73, including stock-based compensation and excluding one-time charges.

Thank you for your attention this afternoon.

I will now turn the call back over to Jeff Hall.

Thanks, Rick.

As Rick said, KLA-Tencor had a solid operational execution in the September quarter.

As shipments, revenue, and EPS all came in at or above guidance.

Operating margin was also above expectations as some of the operational improvements we have been making began to show up, despite the drag of recent acquisitions and costs of transitions to Singapore.

Cash from operations was $205 million.

We also ramped production of a second product in Singapore, and made significant progress towards integrating our recent acquisitions.

Our goal with these transitions is to get them seamlessly integrated with the rest of KLA-Tencor, and begin recognizing the synergy as quickly as possible.

This means converting systems and processes, engineering products onto common platforms, taking pre-acquisition bookings and commitments to the P&L, consolidating distributors, sales and service efforts into our channels, and of course, eliminating a lot of duplicate activities.

It takes a considerable amount of effort and expense to execute these integration efforts, while continuing to serve our customers well.

In the September quarter, these activities were approximately 1.6 points dilutive to gross margin, and 2.4 points, or approximately $15 million dilutive to operating margins.

We expect this dilution to be reduced in the December quarter, and eliminated by the end of the March quarter.

Overall, our integration efforts are continuing to meet our expectations, and we are on-track to achieve our margin improvement targets.

Now let me spend a minute going through the quarter in more detail.

September is always a challenging bookings quarter for us as it is our first fiscal quarter.

In the last few weeks of this quarter, timing of orders for some logic and DRAM customers became less clear, and some orders moved into the next calendar year.

In the final few days of the quarter, we were unable to agree on final terms with a few customers, and as a result didn't close on these orders by September 30th.

We did close on these orders in early October.

While we expected some weakness in memory in the second half, it turned out to be more widespread than we anticipated, as end markets for Foundry, Logic, Reticle, and Bare Wafer were all impacted.

As a result of this, we now don't expect to close on the commercial terms of several orders until early 2008.

Net bookings for the quarter were $482 million, which is roughly 32% lower than the June ending quarter.

This net bookings number includes $32 million of debookings.

Every quarter we scrub our bookings backlog line by line, and debook any order we do not expect to ship in the next twelve months.

The product distribution of orders was, Wafer inspection was approximately 40%, Reticle inspection was approximately 13%, Metrology was 23%, and Service was 24%.

We ended the quarter with approximately $1.3 billion of backlog.

$835 million of shipment backlog, or orders that not yet shipped, and $485 million of revenue backlog, or products that have been shipped but have not yet been signed off by customers.

Remember, we do not include any service bookings or revenue in this backlog.

We remain confident that we have strong backlog shippable over the next six to nine months, and our ability to maintain this significant level of both shipments and revenue backlog, continues to help KLA-Tencor sustain profitability throughout any business cycle.

Now turning to the income statement, revenue for the quarter was $693 million, down about 6% compared with the previous quarter.

At the mid-point of our guidance for the December quarter, we expect revenue growth for calendar year to be approximately 17%, compared to about 10% for total process control, and about 6% for wafer fab equipment.

We attribute this outperformance to new products and increasing adoption of process control, as the industry moves to 45-nanometer design rules and below.

Gross margin for the quarter was 55.9%.

This includes $10.7 million of charges for deal-related amortization and reductions in force.

Excluding these items, gross margin including stock options was 57.4%, down about 1.8 points from Q4.

Our recent acquisitions were 1.6 points dilutive to margin, as we took several pre-acquisition commitments to the P&L, and continued to consolidate and integrate the manufacturing operations.

Operating expenses including both SG&A and R&D were $210 million.

This number includes $6 million of charges for deal-related amortization, reductions in force, and legal fees related to the stock options investigation.

Excluding these items operating expenses were $204 million, down $8 million quarter-to-quarter, as we continued to focus on driving down the breakeven point of the Company.

Breaking down operating expenses, R&D expenses were flat quarter-to-quarter as we continued to ramp development programs and customer collaborations at 45-nanometers and below.

SG&A expenses were down approximately $8 million quarter-to-quarter, despite the addition of costs from the first full quarter of Thermal Wave.

As a result of our continuing efforts to streamline the business and reduce the breakeven point, we expect operating expenses in the December quarter to be down another $8 million, as a result of lower SG&A spending, to approximately $196 million, slightly below the levels of operating expense we had before the addition of over $25 million of quarterly expenses from the recent acquisitions.

Operating margins for the quarter excluding one-time charges was 28%, down 2.4 points from the prior quarter.

This decline was the result of the integration of the recent acquisitions.

We expect the margin pressure of these acquisitions to be reduced in December, and expect them to be at company average margins in the March quarter.

For the quarter Other income was $17.5 million.

In the December quarter we expect Other income to be approximately $14 million.

The tax rate was 57.4% in the quarter.

This rate was higher than our estimate of 28%, as a result of an up-front tax payment related to the Singapore transition.

In addition to the cost savings expected as part of our ongoing globalization strategy, we also expect significant tax savings.

In order to maximize these savings, we moved the related intellectual property to a non-U.S.

legal entity, resulting in a one-time tax expense of $47 million.

In the December quarter, we expect a tax rate of approximately 28%.

Net income for the quarter was $88.2 million, or $0.46 per fully diluted share.

Excluding the charges discussed earlier, net income was $146 million, or $0.76 per fully diluted share.

This number includes share-based compensation expenses of $28 million, or $0.10 per diluted share.

In the December quarter, we expect expenses for share-based compensation to be approximately the same.

Turning to the balance sheet, cash and investments ended the quarter at $1.3 billion, a decrease of $428 million quarter-to-quarter.

In the quarter we spent $683 million to repurchase approximately 12 million shares, and paid a dividend of $28 million.

After these share repurchases, approximately 11 million shares remain authorized for repurchase under our existing programs.

Inventory decreased by $35 million to $500 million, accounts receivable finished the quarter at $619 million, up $37 million from the prior quarter as a result of higher shipment levels and increased sales to Japan, cash from operations was $205 million in the quarter, and capital expenditures were approximately $11.6 million, while depreciation was $14.6 million.

On a net basis including retirements, fixed assets decreased by 3 million quarter-over-quarter.

Fully diluted shares ended the quarter at 193 million, and head count was about 6,000.

Finally, as Rick commented earlier, we were in a choppy CapEx environment, and so we continue to run our company in a way that will allow us to maintain high levels of investment in next generation technology, and in collaborations with our customer, while maintaining our high levels of profitability and cash flow.

With that, our guidance for the quarter is bookings up 20%, plus or minus 10 points, revenue between 625 and $640 million, operating expenses down an additional 8 million, to approximately $196 million, and EPS including share-based compensation, but excluding one-time charges and amortization of $0.68 to $0.73.

This concludes our remarks on the quarter.

We will now open the call to questions.

Before I turn the call over to Marvin to give the polling instructions, let me request that you refrain from asking multi-part questions to give other some time.

As always, we are all on a tight schedule.

Marvin, can you begin the polling please?

Ladies and gentlemen (OPERATOR INSTRUCTIONS) Our first question comes from the line of Harlan Sur with Morgan Stanley.

Thank you.

Good afternoon.

Yield issues are clearly a pressure point for the industry here, you know, career guys struggling on 50-nanometer NAND, foundries struggling with 65-nanometers.

I know there are some people concerned about TSMC's comments about CapEx being down next year.

Taking all of this into account, I would assume that even in a down CapEx environment for foundries, and even for memory, that the spend for KLA solutions will be up.

Is that a fair assumption?

Yes, Harlan.

I think it is a good point.

Obviously we are seeing various concerns from different customers about their yield challenges, and that has actually heightened recently.

John and I were both in Asia last week meeting with customers, and an increased level of interest, particularly in driving the latest technologies forward, so as we look forward, we see process control continuing to outperform the overall industry.

However, it is hard to say when you get into calendar '08, what it will overall look like, but we think we are going to outperform as a result of the challenges associated with the advanced nodes, in both Logic and DRAM and also the Foundry spaces.

Great.

And then given the sort of large revision down in bookings in September, from your expectations entering the quarter, I am just wondering what your confidence level is here in the December quarter, about delivering on the up 20% in orders?

Harlan, it is John Kispert.

One of the things that happened in the September quarter is we saw a good chunk of the originally forecasted orders kind of move into the first week of October, so we are fortunate in the guidance that we just gave you for the December quarter, we are off to a real fast start, in that we already have a bunch of it already booked, so the linearity of the quarter will be far different, as far as the order outlook, than then say the September quarter was.

Got it.

One last question for Jeff.

What do you expect shipments to be like here in the December quarter?

You know, right now we are running about 575 to 600.

Okay.

Great.

Thank you very much.

Our next question comes from the line of Brett Hodess with Merrill Lynch.

Good afternoon.

A couple items.

I am wondering if you can talk about if the environment stays sort of flattish like this, let's say the orders bounce back up after the big drop off, but generally staying in this range, can you give us more insight now that you are moving the second product line into Asia, about what kind of margins we should see over the next couple of quarters, if you are in sort of a flattish revenue and shipping environment?

What kind of expansion we can see?

Hi, Brett, John Kispert.

I think the way to think about it for us right now, given our backlog position and what we see out in front of us, is if you average over the last couple of quarters we have kind of been running about a $700 million with lots of ups and downs, it is always a chunky business, but roughly a $700 million run rate for the Company.

Right now it looks to us kind of run rate for the next couple of quarters closer to 625 or so.

There will be some quarters where we ship a little less, and some quarters where we ship a little bit more, but we'll manage through that, and that's kind of our bottom's up analysis of that.

To layer in Singapore which we have told you in the past is kind of at 5% of its capacity right now, and there is a relatively large overhang of excess capacity for us, they are ramping very nicely.

I would think am coming out of this quarter, the December ending quarter, we are closer to maybe 25 to 30% of their capacity, but still only about 5 to 10% of our shipments, but we will begin to absorb more and more of that overhead, and that will add at that at that 600, 625 run rate for us, about a point of gross margin, which should be helpful.

Okay.

So just to be clear, that is a point of gross margin in the coming quarter, or over the next few quarters at that 625ish kind of run rate?

Over the next few quarters.

It is going to take a couple quarters to get Singapore ramped up.

They are off to a fast start, but the point was over the next three to four quarters you will start to see it ramp.

Got it, very good.

Thank you.

Our next question comes from the line of Jim Covello with Goldman Sachs.

Good afternoon, guys.

Thanks so much.

My question just keep it to one question is when I think back to Semicon West, and what the implication was for orders at that time for the second half of the year, versus total second half versus what we are look at today, what do you think in a nutshell has changed the most, and why do you think that you have a handle on kind of the environment going forward?

Given the delta between then and now, how do you get comfortable that your view on the environment over the next couple quarters is good, given all the CapEx forecast declines that we are getting from the customers right now?

Jim, it is John Kispert.

See, from you are talking back to July, I guess?

Yes, Semicon.

I think you guys had, you know, had a much more optimistic outlook scenario for the total second half of the year at that time.

So as Rick said in his prepared statements, I would say the big change has been really over the last 30 days, and it came kind of in two flavors at least my perception of it, in the last 30 days we have seen the larger capacity adds that have been planned over the next six to nine months become smaller.

In other words, they are going to still add some capacity, they are just smaller chunks or smaller bites, in our case smaller orders.

That happened about 30 days ago, and as you would imagine, because it has been about 50% of our business if not a little bit more, most of it is in memory.

I think the other piece that happened kind of in the last couple of weeks is definitely a movement out of some of the capacity like adds, where folks who had planned on purchasing stuff maybe in the December ending quarter, and installing and ramping in the March timeframe are now thinking more like the late spring/summertime, and so you see this kind of movement out, or to the right as we say.

When you combine those two together for us, and you guys will do all the math here, you know, it was kind of a movement of maybe a half a quarter of orders at our run rate back then, has kind of moved out into 2008, and as Jeff said, our position is as usual we are going to be very cautious from here on in.

We are running the business that way.

To Brett's earlier question, we are sizing the Company in the low 600s right now for the next couple quarters, and we will wait and see.

As you know, we work closely with our customers, so we will be on top of it.

Thank you.

Jim, have a good weekend.

Thank you.

Our next question comes from the line of Satya Kumar with Credit Suisse.

Satya, you there?

Hi.

This is [inaudible] on behalf of Satya Kumar.

Okay.

How are you?

Doing good.

One quick question.

Now like a major foundry talked about the slowing spending in 2008, what is your outlook for CapEx for 2008, and I just wanted to get your thoughts on why foundries would be lowering CapEx when your [inaudible] rates are so high?

It is a confusing time.

When we look at the forecast from folks like yourself and lots of other folks listening in, the way we see it, there is a wide range of 2008 CapEx being anywhere from flat to down 15%.

We tend to look at it on the lower half, when we do any kind of bottom's up conversations with our customers, so we are again to the earlier questions we are taking a cautious stance there.

The drivers to that underneath that are certainly a fall-off in DRAM spending.

I think NAND will continue to be stronger.

I think when we look at the foundry business, the timing of any sort of capacity as in Foundry, I think are very much in question right now.

We see a lot of technical upgrading that we can do in the the foundry businesses, but it is a smaller piece of the entire pie, so it is either going to be flat to maybe slightly down, and as Rick said earlier, we think we can do well in that space.

It is just that we don't see a lot of spending today through 2008, a big uptick in other words, and that leaves Logic, which to us right now looks to be down in 2008 as far as CapEx is concerned.

We think we can outperform there and given the 45-nanometer challenges and things that we can do there, we will probably be at KLA-Tencor be flat to up in Logic, but the industry tells us it is probably down.

Okay.

Thank you.

Our next question comes from the line of Timothy Arcuri with Citi.

Hi, guys, a couple things.

First of all, John, if you look at the bookings in the second half of the year versus the first half of the year, and if you compare that to some of the other OEMs, it seems like most of the suppliers and most of the other OEMs are down about 15%, half over half, and you are down 2X that.

I mean, obviously differences in timing of your tools versus their tools, but what do you think the reason is?

Is it specific customers where you have big exposure that are cutting back, or is it maybe that people kind of over bought inspection equipment early on?

What do you think the delta is there?

Tim, that is news to me, but I will tell you that we have like nine month lead times generally across our product line, and I think the folks you are comparing us to probably have much shorter lead times.

In fact, I know they do, because I deal with this continuously with our customer base, so our lead time in our orders tend to be further out in time, as far as being able to install and turn them into capacity.

Sure.

Okay.

I understand.

So John last question looks like shipments were about 710 in September.

Is that about right?

About 700.

700.

Okay.

Thanks, guys.

Our next question comes from the line of C.J.

Muse with Lehman Brothers.

Good afternoon.

Thank you for taking my call.

A quick question here.

If you look at the delta of your bookings guide at the midpoint, or I guess the lower end and the actual down 32% suggests roughly 100 million being pushed to December, which would suggest pulling that out roughly $500 million bookings run rate, which compares to kind of a mid-600 revenue guide.

How should we think about this mismatch and the implications to your revenues in the quarters ahead?

C.J., there was a prior question on that that I tried to answer that question.

We have a bunch of backlog that will taper, and I also think as we said in the guidance our orders are going to be up in December.

I guess I was going to lead to my second question.

Just it seems like two months ago you guys were talking a lot more bullishly about foundry and logic spending and now pulling back there.

What gives you the confidence that your backlog is secure today?

Our customers, our backlog is generally technology buys for the work that they are doing in their pilot lines, strategic, we actively debook, C.J., where we don't think where there are capacity buys that is we think are in danger of not actually happening.

We are focused with our backlog and keeping it in the strategic aims of where our customers will need the tools, so they can push their business along.

I think if you look at our track record, rarely do you see us have to debook a large part of our backlog in any kind of environment.

Sounds good.

Appreciate it.

Our next question comes from the line of Mark Fitzgerald with Banc of America.

Great.

The delay in some of these bookings and stuff that's getting pushed out into the first calendar quarter here, when you have these conversations with your customers, are they waiting to see how market conditions unfold?

Is that the issue hanging a couple of these orders up?

I think there is a couple of issues.

One is a lot of them base their as you know, base their investment plans based on overall market conditions, and as those have softened, I think people have slowed down some of those overall, and I think we saw early signs of some of the recent announcements that have been made.

We saw that at the end of September, the things that have just been made in the last few days, and so I think they are getting down, they have reset their baseline about what do you think they need to invest.

As you know, counter balancing that is a concern that they don't want to get behind, particularly on new technologies.

That's where we see a lot of, why we have more confidence as John was saying in our backlog, and then some of these orders coming in.

As John also said, they tend to overall get a little bit smaller and they get a little bit further out.

And just to follow on here, is there DRAM prices are approaching a lot of people's cash costs.

Is that an issue in terms of any of these orders getting pushed out, in terms of your conversations?

Certainly that is part of the factoring into it, but as you know for many of these customers if they want to stay in the market, they have to keep investing, so that is the counter balance to that.

You can make a pretty good case that over the next twelve months there might not be as many players twelve months from now as there are right now, and that is why John was saying, we think for overall market for '08 we're probably more cautious than most.

And just one final question if I might slip it in is, on the logic side of the business when you look post 2000 you really haven't seen this part of the business come back in a big way, and I am curious if these technology node shifts on the logic side of the business are just slowing down from your guys vantage point?

I think the ramping of them has marked, there is big spending to your point, but as you know we are constantly collaborating with them on next generation technologies, and so from that vantage point, we don't feel like it slowed down at all.

You look at that as over a long-term still a growth business, the logic part of it?

Sure.

Not like it has been in the past, but certainly great opportunities, particularly with our next generation technology.

That is where we can get a lot of learning early on, as they move forward with their next gen, we have our entire suite of tools that has to be coupled with them.

I think some of what has happened as well Mark, as is some of the Logic over time has turned into Foundry spend, as some of these guys stopped making some of their own devices.

But foundry spend is not looking great either post 2000 here?

Post 2000?

The recoveries post 2000 are all memory driven at this point.

Overall from an overall industry there is no question that NAND, for example, you can even get more specific, a lot of it has been about NAND investment, and DRAM kind of has been a little more cyclical, and now we are seeing correction in NAND.

I think that is true.

I think for us that we still see our penetration in the logic and in the foundries being pretty strong relative to overall CapEx, and whether the overall CapEx is at the similar levels to what it has been historically I think that may be more of the point.

The big CapEx spenders tend to be memory now.

Thank you.

Our next question comes from the line of Ben Pang with Caris & Company.

Thanks for taking my question.

I just want to get a clarification on a couple of your comments regarding 2008 spending.

You mentioned for Logic you expect the industry to be down, but KLA, or spending on PDC will be flat to up, correct?

I think flat, Ben, would be the right way to term it.

When you talk about Logic, are you including Foundry in that?

No.

So that is IDM spending?

Yes.

Your comments regarding foundry itself, could you just repeat that again?

You still expect PDC to be up for Foundry in 2008?

No.

By the way, 2008 we are rarely right in predicting this, and we are just talking to a lot of folks, and trying to anticipate how should we size the Company and anticipate these questions.

Right now Foundry to us does look like it is up marginally year-to-year, and that's based on the plans we are getting from our Foundry customers, but as you know, we typically are well adopted in the Foundry model, so we would expect to do well there.

Foundry as a percentage of the total pie for CapEx is today is a smaller percentage, but we would expect it to be high inner 2008.

Okay.

The last question from me regarding memory spending, you commented that your orders for the 1Q were down, because it was primarily was memory driven, is that correct?

Yes.

And when those companies come back in the 2Q, is that on the technology, or is is it capacity?

A little bit of both.

Primarily what you see moving on is capacity.

When you talk about memory, often they are the same thing, Ben, as you know.

They will be pushing the envelope and adding capacity at the next technology node, so to answer your question I would say it is probably 50/50.

Okay.

Thank you very much.

Yes.

Our next question comes from the line of Gary Hsueh with CIBC World Markets.

Thanks for taking my question.

If I take the low end of the range for September, and I take the mid-point of your order guidance for December, it looks like you are basically missing $75 million out of orders booked in the second half, so my question is basically is there a reasonable expectation for orders in the first half of '08 now, to somehow get to a 650 to 700 million per quarter run rate, or has that 75 million just permanently flew the coop?

Right now it is definitely sitting in Q1, Gary.

John, there is a possibility here we could start to book somewhere between 650 to 700 million per quarter here in March?

I think our bottoms up would put us somewhere around there right now.

So we didn't permanently lose that business?

No, definitely did not.

There is no share loss here.

In fact, we did really well with share.

We have a pretty nice running start here in March on an order basis, and pretty strong backlog?

That is how it looks today, and it is a very fluid environment we are operating in.

Okay.

I appreciate the honesty.

Can you just give me a quick comment here on pricing?

I know there is a lot of concern about DRAM pricing, and how that might be transferring over to tool pricing?

Oh, I don't price DRAMs.

Our pricing is hanging in there real well.

The next generation tools have done real well with cost of ownership, sensitivity improvements.

We are forever battling pricing, and trying to come up with the lowest cost of ownership with our customers, but the technology needs are such that I think it is a fair battle, so our pricing is no change in say the rest of this year has been.

John, can I sneak in one more question for Jeff here?

Absolutely.

Jeff, what's going on here with unearned revenue?

I see that for the first time there is a slug of unearned revenue now moving to the long-term liability line?

Is anything going on there?

There is actually nothing going on.

What happened is we implemented what is called FIN 48, a new accounting rule in the quarter, first quarter of the new year for us, and as we did that, it changed how we bucketed some of our tax lines, and we bucketed, that resulted in us having some taking some short-term tax liabilities and moving them to long-term tax liabilities.

Previously the unearned revenue had all been rolled up into short-term, but when we created the long-term liability section of our balance sheet, we then moved the unearned revenue from short-term to long-term.

Perfect.

Thanks.

Our next question comes from the line of Steven Pelayo with HSBC.

This is like the second or third quarter I think where bookings have been a bit of a surprise.

KLA historically has been pretty good at forecasting especially in the technology focus, nine month lead times, and bookings guidance with a plus or minus 10% band.

Is there any kind of secular change going on?

Has the consistency, reliability or forecast ability kind of deteriorated?

What should I be thinking here, especially given your comment I guess you just suggested, bottoms up you are looking at first quarter bookings potentially to be up again from the 600-ish level, to maybe 650 or 700ish?

The first half of the answer is just the math.

It is bottoms up.

It definitely looks that way to us.

The first part I am scratching my head, Steve, I think we have beat the order guidance a number of quarters in a row, and as you know we followed the Company for a long time that the September quarter is typically a more difficult quarter, and I hopefully have characterized pretty well for you, it was back-end loaded with generally memory orders that either slid out of the September quarter into the December quarter and we closed those, but I think since then what you ha've seen is the, across the industry is folks relooking at their plans, and kind of moving around the beginning of 2008, when they are going to start adding some things, and that is what we are in the midst of right now, and we are giving you our best view of that we have right now.

You are doing good on the cost side, John.

You just talked about OpEx being down again in December.

If you do stay at a revenue run rate in the low 600 to 625 range, can OpEx head even lower?

The plan is for R&D and keep chugging along here, particularly with what we call end plus two, two generations out we are going to keep, we see plenty of opportunities.

Rick highlighted a bunch of them in his prepared remarks.

I think SG&A there is room for us to continuously consolidate some things, so at around the 600 million, 625 million run rate we think in the operating profit line we can be in that high 20s as a percent, 28, 29, 27%, and that is kind of how we think we can run it at that level.

Jeff, at that level are you still sustaining the kind of 30% of revenue and cash flow from operations, that is pretty good?

Yes, absolutely.

I think what you will see is if things level out cash flow actually goes up.

We had a strong cash flow quarter this quarter.

But for some big tax payments next quarter we will have another really big cash flow quarter next quarter, so we are now starting to work down the working capital.

Great, guys.

Thanks.

Our next question comes from the line of Mahesh Sanganeria with RBC Capital Markets.

Thank you.

Quick question on the wafer market.

I know you guys did really well this year.

Can you talk about a little bit what the size of the wafer market, and how does that look in 2008?

Hi, Mahesh, it is Rick.

We don't break out the market segments.

You are right, we have done well in Wafer.

I think that overall the demand for 300-millimeter had been building, but we certainly see just like everything else, I think probably a softening environment overall for wafer manufacturers as well, in terms of additional spend on CapEx, but that being said, we are well-positioned with them, and we expect we have some new products in the pipeline to be able to do better than the overall CapEx, based on our ability to bring out new technologies and new tools, which will drive some ASP growth.

Okay.

At quick question on some, Jeff, does the amortization of intangibles, does that go mostly in COGS, or distributed in along Alt-A lines?

In the way it works in an acquisition is typically the first couple of quarters it is heavier in COGS, and that starts to go down as we realize the revenue on some of the tools, and then the tail is in SG&A.

Okay.

So should we put that most of the 12 million on whatever you said?

The bulk of that is in SG&A going forward.

Okay.

All right.

Thank you very much.

Our next question comes from the line of Suresh Balaraman with ThinkEquity.

Thanks.

Regarding Japan, were there any specific product groups, say Reticle inspection or [3D SEM] that drove the orders, or just normal lumpiness, the 20 percentage points above historical is unusual, isn't it?

Well, it is above normal.

Unfortunately it was based on the fact that that we had more softness in the other regions.

So the percentage goes up as you might imagine.

So Japan held in there pretty well.

Most of our softness was in other regions, so as a percent it goes up.

Does that make sense?

Okay.

Also can you break out the things that you usually do, DRAM foundries, NAND flash as a percent of DRAM?

Did I miss that data?

What is the question, Suresh?

You used to give the breakdown of DRAM NAND Flash Foundries and Logic?

For the September quarter?

Yes.

Yes, so for the September quarter memory was about 55% of the total and about half of that was NAND.

Logic was 25, and Foundry was 20.

Great.

Thank you.

Our next question comes from the line of David Egan with Lehman Brothers.

Guys, C.J.

already got it.

I think we are out of time anyway.

I would like to thank you all for participating in our conference call today, and we look forward to speaking with you again next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.