科磊 (KLAC) 2008 Q2 法說會逐字稿

Good afternoon.

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

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

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

(OPERATOR INSTRUCTIONS) Thank you.

I would now like to turn the conference over to Jeff Hall, Chief Financial Officer.

Please go ahead, sir.

Thank you, Cara.

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

I am Jeff Hall, the Chief Financial Officer.

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

We are here today to discuss our second quarter results for the period ended December 31, 2007.

We released these results this afternoon at 1.15 p.m.

Pacific Time.

If you have not 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 quarter, updates on the current market environment, and key product activity, and provide guidance for the March quarter.

Afterwards, I will review the preliminary financial results for the quarter, and then I will open the call 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 links to KLA-Tencor's Security filings.

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

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

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

KLA-Tencor cannot guarantee that those forward-looking statements 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 Q2 earnings call this afternoon.

Today I will discuss highlights from the December quarter, provide an update on the current market environment, discuss our four strategic objectives, and give guidance for the March quarter.

I am pleased to report that we once again we produced solid operating results in the December quarter.

Revenue was $636 million, in-line with guidance for the quarter.

Net income including some one-time charges was above the range of guidance, $138 million, or $0.75 per diluted share.

We generated approximately $126 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 December quarter were $580 million, up 20% from the September quarter in-line with our guidance for the period.

We would now like to discuss the current bookings environment, and provide some more prospective on our various customer segments.

In general, the slowing demand environment we first began to experience late in September continues in each of our markets.

All indications today point to this condition persisting for the next several months, reflecting the impact of a slowing overall macroeconomic climate.

As a result, our customers have become more conservative in their capital investment, delaying or reducing in size, many of the larger capacity addition projects, that had been planned for the next two to three quarters, while sustaining their investment in developing advanced technology.

As those of you who have been following the companies over the years are aware, we take advantage of these periods of contraction in capital spending, leveraging our strong financial resources, acknowledge the expertise, solid customer relationships to step up our investment in innovation, anticipating our customer's next generation inspection and measurements needs, so when the demand climate improves again, we are in a stronger position than ever to capitalize on resurging growth to extend our market lead.

I will have more to say regarding our customer focus and the fruits of our investment, but first, I will provide some perspective on the current bookings environment in our various customer segments.

Memory was once again our largest customer segment during the December quarter.

Memory orders were stronger than expected in the period.

We saw particularly strong demand from one of our large diversified memory customers based in Korea.

Memory customers today are investing in advanced technologies and new materials to allow smaller design rules, higher density applications, as well as reduced costs, in turn, driving increased adoption of process control to reduce defectivity.

Looking ahead, we expect memory CapEx to be choppy.

We are seeing continued interest in process control, as memory manufacturers struggle with the yield and metrology challenges of advanced nodes.

Foundry demand was below plan in December, as one large foundry customer reduced its order forecast in the quarter.

Another significant order was pushed out.

Historically, foundry customers have always been heavy adopters of process control, given the unique nature of their business.

Unique to foundries is the challenge of managing the ever-increasing number of products and processes, while at the same time continuing to reduce their time to market.

These conditions makes achieving targeted yield in a shorter period of time critical to success in this segment.

While some major foundries have reported reduced CapEx forecasts, the continuing need for process control, due to the nature of the foundry business, and will be a driver for our business going forward.

Logic orders in the December quarter were above our forecast, as we felt upside from 2 of our U.S.-based logic customers.

We see investment in leading edge technology as a major driver of demand from the logic segment over the next few quarters.

To summarize, although our near-term visibility has become more clouded, and order timing less predictable over the last several weeks, the increased complexity our customers are facing as they invest in advanced technology, creating new yield and defectivity challenges, driving the need for advanced inspection and measurement technology, and accelerating adoption of process control.

As a result, even in a period of slowing overall wafer manufacturing equipment demand, we expect process control to continue to outperform the industry in the order of 5% or more in 2008.

Again, in spite of the continued uncertainty as to the timing of some large projects, our long-term pipeline remains strong.

Now I would like to discuss some recent highlights at KLA-Tencor, our four strategic objectives, 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 provide solutions in every market that we serve.

Today we enjoy a position, leading market share in almost all of the markets that we serve.

The key to our success has been to collaborate closely with our customers, innovate with them to develop creative and differentiated solutions, and execute in bringing the products to market, and supporting them throughout their life cycle.

I am pleased to report that in the December quarter we sustained our market leadership in each of the key markets and product lines we serve.

As always, a great deal of hard work was required to win the business.

And even more challenging in an environment where capital is tight, our customers have to make sure that the premiums we get on our products are worth the additional investment.

I applaud our team's hard work and successful execution during this particularly difficult period.

Here are some highlights from the December quarter in our core inspection and metrology markets, where we offer a broad portfolio of inspection products starting with the semiconductor, air wafer, and reticle markets.

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

Here are just a few examples of some recent wins in the inspection and metrology space.

The 2810, a full spectrum brightfield tool introduced in July of 2007 and designed specifically for memory applications, on a large capacity expansion order to the Korean memory manufacturer in the December quarter, demonstrating superior sensitivity to capture unique defect signatures and throughput, featuring twice the computing speed of our earlier generation brightfield tools, as well as new optical modes able to increase defect detection.

We also won follow-on orders for the 2810 brightfield tool with a Taiwanese memory manufacturer, in a head-to-head competition.

In the quarter, we made the first placement with a flash manufacturer of our Puma 9150 darkfield inspection platform.

KT's Puma solution was chosen in head-to-head competition after a rigorous competitive evaluation, demonstrating superior throughput, stability, and reliability for production-proven systems against the competition.

Our new e-beam review and classification tool, eDR-5200 was recently declared 'Tool of Record' at a major Taiwanese foundry.

We continued penetration of major memory manufacturers in the quarter, and had placements at four major memory manufacturers during this time period.

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

Our e-beam review tools provide connectivity with inspectors, improves brightfield recipes, while also delivering very high resolution and stage accuracy, allowing maximum capture of defects on the review.

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

Metrology at KLA-Tencor continues to be the market leader at offering a comprehensive suite of metrology products and giving our customers the ability to maintain tight control of their process window.

In the December quarter, we were successful in winning new business by demonstrating superior performance in optical CD, film, overlay metrology for advanced applications in memory, foundry, and logic.

In the December quarter, we successfully demonstrated performance of our next-generation overlay metrology platform at a critical logic customer demonstrating significant performance improvement for our existing overlay solution, as well as demonstrating the capability to extend the technology to meet future requirements.

These are just a few examples of recent success that KLA-Tencor achieved during the December quarter, solving our customer's mission-critical production problems, and expanding our market leadership.

Across the industry the technical challenges our customers are facing are significant.

We are working closely with them to solve those problems.

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

The second strategic objective at KLA-Tencor is growth.

Our goal is to continue to outgrow the industry, and our growth prospects continue to look good, even in this challenging CapEx environment, based upon the investments by customers in each of our market segments, driving forward in their advanced technology road map.

Increasing need for inspection and measurement, device makers address the greater complexity, and yield challenges in advanced design rules.

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

We saw evidence of that potential in our relative growth performance in 2007 compared to the overall wafer fab equipment market.

KLA-Tencor revenue growth of 17% in 2007 outpaced estimated industry growth for the year of about 5%.

As I said in earlier remarks, we believe we are well-positioned to continue to outgrow the industry, as a result of the increased challenges of 45-nanometers, based upon new markets that we have entered during calendar year `07.

During 2007 we entered six new markets, both organically and through M&A activity, increasing our potential addressable 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 markets that present growth prospects that will enable profitable growth.

While we are willing to be patient, we have to make sure we can differentiate and add value to 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.

We will be providing updates as they materialize.

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

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

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.

Jeff will go through the details of our progress in his prepared remarks, but the net result to the actions we have been taking over the past several quarters to achieve higher levels of profitability began to show up in our last quarter.

Our fourth objective at KLA-Tencor is talent development.

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

While historically we have developed world class talent and achieved outstanding financial results through the cycles of the industry, we are increasing our efforts in talent development.

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

These unique attributes are what have sparked our market leadership over the past 31 years, that have fueled 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 March quarter.

Orders are expected to be down 10%, plus or minus 10%, from the December quarter.

Revenue is expected to be between $575 million and $595 million.

EPS in the range of $0.60 to $0.64 excluding stock-based compensation, and excluding one-time charges.

Now I will turn the call back over to Jeff.

Thank you, Rick.

We had another quarter of solid operational execution in December.

Even though revenue was down 8% as expected, gross margin was up and both operating margin and EPS were flat with the prior quarter.

This strong margin performance was the result of two factors.

First, the actions we have been taking over the past several quarters to globalize our operations, reduce overhead, and streamline our cost structure to achieve higher levels of profitability and cash flow, began to show up in the P&L this quarter.

Second, we continued to execute well in our M&A integration efforts.

In December we accelerated the integration of our recent acquisitions, and today with margin dilution from these deals essentially zero, we have achieved our short-term goals a few months ahead of schedule.

Our ability to quickly integrate these acquisitions, and get them at or above Company average margins, is the result of great effort by our operating team, to get the systems converted, the product lines rationalized, the sales and service efforts consolidated into our channels, and of course the elimination of a lot of duplicate activities.

Although our industry is currently in a challenging demand environment, as a result of the successful integration of these accretive acquisitions, and the business model improvements we have been making, our financial model is stronger than ever.

Margins are higher, operating experiences are lower, we are generating more cash flow on a quarterly basis, and our service annuity business has grown by over 45% in the last six quarters.

For the calendar year, our revenue was up 17% compared to about 10% for process control, and about 5% for wafer fab equipment, as demand for our new products drove market shares to historic highs, and increased adoption of KLA-Tencor solutions.

Our operational excellence efforts leveraged this 17% top line growth to create 49% operating margin growth year-over-year.

Incremental growth margin was 70%, and incremental operating margin was 66%.

Of course, we are not going to rest here.

The completion of the integration efforts will allow us to put even greater efforts on other initiatives, the continued transition of manufacturing and supply chain to Asia, improving our service delivery and spare parts distribution models, and improving efficiencies in other areas of our business.

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

In general, the slowing demand environment we first began to experience in the late September quarter continues to prevail in each of our markets, and today our visibility is very low.

Net bookings for the quarter were $580 million, which is up 20% from the September quarter.

This net bookings number includes $22 million of debooking.

Every quarter, we scrub our backlog line by line, and debook any order we do not expect to ship in the next 12 months.

The product distribution of orders was wafer inspection at approximately 48%, reticle inspection was approximately 10%, metrology was 20%, and service was 22%.

We ended the quarter with approximately $1.3 billion of backlog, $827 million of shipment backlog or orders that have not yet shipped, and $437 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.

And as I said earlier, our service business has grown by more than 45% over the last six quarter quarters, and is currently adding about $122 million per quarter of revenue.

We remain confident that we have a strong backlog that is shippable over the next 6 to 9 months.

Our ability to maintain the significant level of both shipment and revenue backlogs continues to help KLA-Tencor sustain high levels of profitability throughout any business cycle.

Now turning to the income statement, revenue for the quarter was $636 million, down 8% compared with the previous quarter, and slightly above the midpoint of our guidance for the December quarter.

Gross margin for the quarter was 55.2%, and this includes $16.5 million of charges for deal-related amortization.

Excluding these items, gross margins including stock options was 57.8%, up about 40 basis points from September, despite a decline in shipments from 707 to 588.

This is a result of the elimination of dilution from the recent acquisitions ahead of schedule, as well as the realization of cost reductions in our Singapore facility.

In the March quarter, we expect gross margins to be slightly lower as a result of the lower levels of product revenue.

Operating expenses were $257 million.

This number includes an $8.5 million charge for deal-related amortization, a $67 million charge for legal fees related to the stock options investigation, as during the quarter we entered into an agreement in principle relating to the settlement of a Securities class action lawsuit.

These charges were partially offset by a gain of $9 million on the sale of our manufacturing facility in Livermore.

Excluding these items, operating expenses were $191 million, down $13 million quarter-to-quarter, as the efforts we have been taking over the last six quarters to reduce the breakeven point of the Company started to bear fruit, and the dilution from acquisitions was eliminated ahead of schedule.

Breaking down operating expenses, R&D expenses were down $6 million quarter-to-quarter, as the reductions resulting from the consolidation of acquired R&D programs offset the increase in spending on new technologies, and customer collaborations at 45-nanometers and below.

SG&A expenses were down approximately $7 million quarter-to-quarter.

In this period of contraction in demand, we will continue to accelerate our investment in R&D, both on N+2 innovations and on growth programs, so that when the demand climate improves again, we are in a stronger position than ever to capitalize on the resurging growth, extend our market lead, and grow into new markets.

These increases in R&D spending will be offset by continuing reductions in SG&A, and as a result, going forward we expect expenses flat to slightly down.

Operating margin for the quarter was 27.7%, down 30 basis points from the prior quarter, as we were able to hold margins despite the reductions in shipments and revenue.

For the quarter, Other income was $13.3 million.

In the March quarter, we expect Other income to be approximately $15 million.

The tax rate was 21.4% in the quarter.

Excluding one-time items the tax rate was 28%.

Net income for the quarter was $84 million, or $0.45 per diluted share.

Excluding the charges discussed earlier, net income was $138 million, or $0.75 per diluted share.

This number includes share-based compensation expenses of $24 million.

And in the March quarter we expect expenses for share-based compensation to be about $26 million.

Turning to the balance sheet, cash and investments ended the quarter at $1.3 billion, an increase of $14 million quarter-to-quarter.

In the quarter we repurchased approximately 2.7 million shares, and paid a dividend of $28 million.

After these share repurchases, approximately 8.4 million shares remain authorized for repurchase under our existing program.

Cash from operations was $126 million in the quarter, as we made a $105 million tax payment, about $65 million higher than normal, as a result of the sale of IP to our Singapore company we discussed last quarter.

Inventory decreased by $17 million to $483 million, and Accounts Receivable finished the quarter at $579 million, down $40 million from the prior quarter.

Net capital expenditures were negative $3 million, as the proceeds from the sale of our Livermore facility, more than offset capital acquisitions in the quarter.

Depreciation was $14.3 million.

So on a net basis, including retirement, fixed assets decreased by $17 million quarter-over-quarter.

Fully diluted shares ended the quarter at $185 million, and headcount was approximately 5,800.

Finally, as we commented earlier, we are in a period of very low visibility.

Given this environment, we are continuing to run our Company in a way that will maintain us -- allow us to maintain high levels of investment in next generation technology, and in collaborations with our customers, while maintaining our high levels of profitability and cash flow for several quarters.

With that, our guidance for the quarter is bookings down 10%, plus or minus 10 points, revenue between $575 million and $595 million, and EPS of $0.60 to $0.64.

This concludes our remarks on the quarter.

We will now open the call for questions.

Let me request you refrain from asking multi-part questions to give others some time, and as always we are on a tight schedule.

Cara, can you begin the polling please?

(OPERATOR INSTRUCTIONS) We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Harlan Sur, Morgan Stanley.

Thank you, good afternoon.

Looking at the soft near-term environment, I am wondering which segments are going to be weaker?

I am assuming that it is Taiwan DRAM and the foundries, but maybe the team can shed some light on the situation here?

Harlan, yes, I think it is frequent we have seen some softening in foundries.

We do expect foundries to pick up a little bit, but that being said they were off more than we expected in the December quarter.

And I think memory, as we said, we think the forecast is generally pretty choppy.

As you know, the challenge for the memory customers is do they invest, and if they don't invest then of course it's hard to stay in the game.

So that's really I think the decision that many of the memory customers have to make right now.

Have there been relative differences between weakness from the DRAM suppliers versus the NAND flash suppliers?

Last quarter I think our -- we saw our DRAM actually was up quarter-on-quarter as a percent from our flash.

So it really kind of comes in pretty lumpy I think is the best way to do it.

Okay, just one quick follow-up question, I am just wondering if you guys could give us an update on the ramp of the Singapore facility, where you are in terms of capacity, and where you expect to be over the next couple of quarters?

Hi Harlan, John Kispert.

It was a pretty key quarter for us in the transition to Singapore.

We essentially shipped -- every SP2 for the Company came out of Singapore.

And as you know, that is one of the flagship products for KLA-Tencor.

The focus for the team has really been in predictability, and they passed with flying colors -- and quality obviously, out-of-box quality, and have passed with flying colors.

So we are lining up two more products that over the next six to nine months we will be starting up in Singapore.

We are seeing the cost advantages that we hoped clearly to the supply chain.

Clearly we are closer to many of our customers there too, and that given us a bunch of leverage in collaborating, and in our support infrastructure.

Okay, great.

Jeff, shipment expectations in the March quarter?

About the same as this quarter, between 575 and 600.

575 to 600.

Okay, thanks a lot.

Your next question comes from the line of Jay Deahna with JPMorgan.

Thank you.

Good afternoon.

Guys, last week in New York Applied did an Analyst meeting, and they put out some aggressive projections of gaining 10 to 15 percentage points of share in process control.

I was just wondering what the strategy is to make sure that doesn't happen?

That is a very good question.

I think, as you know, we have had attractive competitors in our space for many years, and we have heard similar claims from competitors in the past.

Our challenge is really to play our own game.

And that means we keep investing in the R&D, and we are doing that.

And we are closer to our customers.

We are pretty confident in our competitive position and also with what is on the road map.

So our strategy is really to continue to focus on satisfying our customers' needs, and ultimately customers will make those decisions based on the products that we provide.

So really no change of strategy.

It is not exactly the first time somebody has said that they are coming after our market.

Okay.

A quick follow up, if I see units grow say 12 to 13% this year, do you think that it is feasible for that to happen with CapEx down 10, 15%, maybe more percent?

Yes, I mean, if you see the -- you know, Jay, it is all about the ASPs obviously.

But from our standpoint, you know, when we talk to our customers, I think what you are getting at is the visibility of the CapEx spend.

Right now, as we have said, it is pretty murky out there, and that we have very little short-term visibility and probably even less long-term.

Okay, thanks.

Your next question comes from Brett Hodess with Merrill Lynch.

Your line is open.

If your line is on mute, please unmute your line.

We will move to the next questioner.

Your next question comes from Jim Covello with Goldman Sachs.

Thank you so much for the question.

Guys, the question is, obviously the reason we are in the environment we are in now is because we have too much supply.

How comfortable are you that if we just could eradicate the excess supply today, then going forward we are not adding too much capacity?

In other words, even in Q1 of '08, are we adding still too much supply that we are going to have to absorb, or is this just a function of excess capacity that needs to be absorbed that was added last year?

Hey, Jim, John Kispert.

It is really hard for us to tell.

I will give you what we do see.

It is hard for me to directly answer your question.

If I look at the sales funnel in front of us over the next six months in all of our systems, it is actually a higher number than the number we are giving you.

We are putting our windage in as the senior management team, that we think it will be a little bit lower for -- really for the reasons you are mentioning.

Inside of that though, the orders that look most likely to us are more around next generation technology buys, than they are around capacity adds.

There are certainly opportunities for quicker capacity adds, but those are the ones that are getting discussed, and we are going after them, of course, but we are certainly not putting them into the model for the Company going forward.

But I think that your question is still very much in play and hard to understand right now.

I think over the next 60 to 90 days it certainly will play itself out, and we will be in a much better position, thus our conservative guidance.

Thanks a million John.

Your next question comes from the line of Satya Kumar, Credit Suisse.

Hi, this is [Visal Louie] for Satya Kumar.

One of your peers the other day, not a competitor, was talking about pricing pressure in the market due to profitability of your customers.

And now both of you have the same set of customers.

I am wondering can you talk a little bit about pricing trends for KLA, especially in the process control market?

Yes, it is always a good question.

I would say that there isn't a quarter that has gone by over the last 15 years, that we have not had some pricing pressure.

Every deal that goes out there, we are competing against, as Rick said earlier, very worthy competitors.

Typically we are at a higher price, a premium price.

What we have learned through the years is it all about having a close collaboration with our customers, and having the technology that has the highest performance and the highest throughput and the highest sensitivity.

And that is what wins.

And the lowest cost of ownership, by the way, also, and that is what wins.

So there has been no change, I would say, in the last year, or even the last 90 days, as far as pricing pressure.

We feel it every quarter, it doesn't matter if it is an upturn or a downturn.

Okay.

Also, you normally split your orders by segment, right?

Can you split them for the December quarter?

It was about 57% memory, and about 28% logic, and about 15% foundry.

Okay.

And one final question I have is, what percent of your revenues is represented by your biggest customer?

We don't have anybody that is a 10% customer.

Okay.

Above 10%.

In this environment, most folks are, the biggest ones would be around 5% in the quarter.

Okay.

Thank you.

Your next question comes from C.J.

Muse with Lehman Brothers.

Hi, this is Olga calling in for C.J.

I had a couple of questions.

On the last call you had suggested that looking through 2008 you would probably see a revenue run rate of low-to-mid 600s.

Given your guidance for March, do you sort of see that playing -- is that the case, still or do you see it more flattish?

We don't give guidance out more than one quarter.

As we said, it is a pretty murky environment for us right now.

And $575 million to $595 million is a revenue range that we are comfortable, you know, in this environment.

If the environment changes, that may change.

But that is where we are today.

You know, the good news for us is as we move into this environment, we have done so much operating improvement over the last several quarters, that we can hold operating margins above 20%, yet even at those lower levels.

Got you.

And then, you know, assuming the CapEx is down, our models suggesting down probably 15 to 20%, are you sticking by your revenue line basically outperforming that by about 5%?

Absolutely.

Okay.

We historically outgrow and will continue to outgrow.

Nothing has changed there.

Okay.

And then, can you give us, given the orders you have seen in your e-beam product, can you talk about your current share and what your target is for 2008, and what your target is for your existing inspection and metrology products?

We generally don't break out share by product lines.

We talked to kind of broader in the inspection area.

I think by e-beam you mean our review product?

Yes.

In that case, in most of our markets we have leading position 18 out of 20.

That is one of the two where we don't.

What we have seen is some steady progress.

We believe that over the course of the next couple of years, we will continue to build our share position in that.

But as I also said, we want to grow in a way that is profitable, so sometimes you have people that try to enter a market, and will do it at a very low cost, and you find that is very dilutive to their business model.

We won't do that with this.

We are going to differentiate.

It will take a while.

The good news about slowdowns, if there is any good news, is that it does give our customers more time to evaluate our new products, and we find that they are liking what they see with our review product.

So you have not really set a specific goal?

You are just doing it customer by customer?

No.

We have a specific goal.

We don't talk externally [against it].

Okay.

The team is well aware of the specifics.

All right, one final question.

On the Singapore fab, are you still expecting a 1 point gross margin improvement in March quarter from the transition?

We are seeing solid growth margin already.

We started to see the benefits in the December quarter where we had gross margins going up, despite a decline in shipments, and I think gross margin down slightly on lower product revenues going forward.

Certainly we are incredibly happy with the performance of our team in Singapore, and excited about the continued ramp there.

Okay.

Thanks so much.

That is all I have.

Your next question comes from Timothy Arcuri with Citigroup.

Hi, a couple of things.

The first thing, you broke out orders by customer?

Can you break out memory by NAND and DRAM?

About 40% NAND.

40% of memory is NAND.

Okay.

And then Jeff, you know, you and I have talked about this before, but if you plot your orders, even out to the March quarter, and you look at your share of the overall wafer fab equipment pie, and you compare that to the last couple of cycles, usually during a downturn, you guys always gain share -- book share.

And this time looking out to the March quarter it doesn't look like you are.

You gained a little in December but then it kind of lost back in March.

So when you look from peak to trough, it doesn't look like you are gaining share of the overall fab budget.

I am wondering, is that maybe because we have not seen it yet and it will come in June and September?.

It is coming later this cycle?

Or why do you think that the data shows that, or in fact, do you think that the data is wrong?

What I heard you say was we gained share through December, but maybe giving it back a little bit in March?

Well, yes, I am just saying that because your orders are up more in December than everyone else's are, but then they are down more than most companies probably will be in March.

I am saying if you look holistically from the peak to March it doesn't look like you have gained much share of the overall fab budget, when you have during prior downturns, and I am wondering why that might be.

I think we would like to stick with the facts for the moment.

Through December it looks okay.

Let's see how March comes out.

But we are happy with our product set.

We see process control continuing to pick up with our customers.

We are seeing increased demand, solid pricing, high market share.

I think we are not done.

Your next question comes from Gary Hsueh with Oppenheimer.

Thanks for taking my question.

My question is about the breadth of the market.

I mean, you talked about this Korean customer diversified chip.

If you took that one customer out, what would be your order guidance for March, and what would orders have been sequentially in December?

I am just trying to get an idea about how broad the market actually is?

Gary, it is John Kispert.

I will read between the lines here, you are talking about one particular customer in Korea?

Yes.

Every company now is having conference calls right now is just talking really about that one customer.

Wow!

I don't know if you know, but Lam Research is talking about it, and the impact of that one customer on margins.

They are seeing a little bit of margin pressure due to pricing for that one big customer.

It sounds like the breadth of the market is pretty narrow.

I wouldn't say that with us.

I think our memory for December was -- and we don't like talking specifically about customers for obvious reasons, so listen closely.

Memory was broader for us in December than you are implying.

And in the March quarter, it is broader than you are also implying.

That is not to say that a -- both of our large customers in Korea spend with us every quarter.

It is either to add capacity or next generation technologies.

I think both of them right now, we are working very closely on next generation technologies.

But I don't -- either in our guidance or in what we booked this last quarter do we have a huge part of the order book coming from one particular customer.

Okay.

Just a follow-on since everybody else is asking a multipart question.

This implies that since you don't have that much exposure in any one customer, there is not really any concern in the near-term future about the impact of pricing on margins.

You know, I think a couple of your peers are talking about that right now as we speak.

We have over $1 billion worth of backlog.

We feel very good about it.

As Jeff looks at it, he feels as though there is more upside than downside in our margin.

We work very closely with all of our customers.

I don't see a huge change in any of our pricing going forward.

You never know.

Yes.

We work creatively with our customers also to do everything we can to get them what they need, so they can be successful.

Okay, John, one last one.

Just in terms of gross margin flexing down on an incremental basis, it is still business as usual around the 60 to 70%?

Going down is a lot harder.

I think you understand the math on it.

But we are definitely not coming off of that model.

It feels very good.

Thank you.

Yes.

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

Thank you very much.

Jeff, thanks for giving out those details on the charges, and especially that was very helpful.

Hopefully you can continue that.

My question is on the weakness, can you give us a timeframe when the weakness started developing?

Is it something really recent, or it has been there?

Or to put it another way, would your order guidance have been the same if it was two weeks ago?

You know, the weakness started in September.

We started talking about it in the September call.

Certainly it has gotten murkier since then.

What would it have been two weeks ago, no possible way.

I think it is the same.

I was referring more to the last time you suggested the March orders will actually be up.

In reference to that I am asking that question.

You know, if you look at our -- I said earlier our sales funnel today, any of our sales systems in the company, which we spend a lot of time examining almost on a daily basis nowadays, it is actually a higher number than we are telling you.

We are less convinced and we are taking an ultra-conservative position on it.

There are folks in the Company that think March could be better, and June could be better.

But, you know, given the environment that we are operating in, visibility is very low, we are again taking an ultra-conservative position.

And with the big backlog and look to kind of ride this out and be in a better position, both from a market share and a new product portfolio, when and if the upturn starts.

To just add to that, if you look back 30 days, the climate has gotten worse, not better, if that is the nature of your question.

I have one quick question on the reticle inspection.

It seems like reticle inspection is following a semi cap kind of trend, it has been weak for a couple of quarters.

Should we think of reticle inspection similar to semi cap?

I thought that was mostly to mark out so they would have a different cycle?

It is a combination of a couple of things.

One it has a lot to do with actually our product introduction cycle in reticle.

When we bring out new technologies and new capabilities, we will see increasing demand.

So you are right, we have seen some fluctuation with the overall cycle, but it is definitely true that overall reticle is a little bit off cycle.

The other thing though is some of our reticle business is now in wafer fab.

That tends to be more tied to the wafer fab, and that is probably a little bit different than it was a few years ago.

But the overwhelming factor is new generation.

So when we look forward and we see new technologies coming out, then we expect to see increases in reticle as a result.

Okay, that is very helpful.

Thank you very much.

Thank you.

The next questions comes from Hari Chandra, Deutsche Bank.

My question is regarding new products you have recently and also the one that you highlighted in the earnings release.

Can you [inaudible] total available market for them, and how much incremental sales do you expect from them in 2008?

We could barely hear you.

The question was --?

New products we talked about in the earnings release, is that the --?

Am I clear now?

Much better Hari, go ahead.

Regarding the new products, I just wanted to know the total available market for them, and how much incremental sales do you expect from them in 2008?

Sure.

The products that we talked about in the press release are products that were just a continuation, evolution of the product lines that we have.

So those are cases where we are bringing out newer technology, but those are really the same market segments.

In the prepared remarks, we talked about the new markets that we have entered, which we said is about a $700 million TAM opportunity over the last year that we are now involved in.

Does that make sense?

Yes.

And how much incremental contribution do you expect from the new products this year?

If you look at our backlog, Hari, it is about 80% -- I would say 85% of our backlog today are products that we have introduced in the last 12 months.

The other 15% frankly, is for trailing edge quick-turns kind of a backlog.

So it is really all of our products that we are shipping today, at these kind of gross margins that you are seeing, are products of our latest generation.

Sure.

And just a quick follow-up on the share purchases, should we expect the share repurchase activity to accelerate in the face of the cyclical weakness?

We don't like to talk about what is currently going on, but we still have 8.5 million shares authorized, and we are definitely out in the market every day.

And it is a dollar-cost averaging kind of program, where the lower the price is, the more we buy back.

Sure, I appreciate it.

Thank you.

We have time for one more question, Cara.

Your final question is with Ben Pang, Caris & Company.

Thanks for taking my question.

When you guys comment on outgrowing the industry by like 5%, would the overall mix of customer change?

Meaning if memory in total is like 75%, then logic is 15%, and foundry is 10%, does it just follow all of the same lines, or do you guys actually outgrow, let's say, on logic or something?

Can you give some color around that?

Yes, we back up and say, what does the industry growth rate look like overall?

And our target is the growth from a tops down perspective, to make sure we have the programs and products in place to be able to achieve the growth.

The best example, is look back in 2007, the industry grew at 5% and we grew at 17% revenue.

That was an example of significantly outgrowing the industry.

Now to your point, there are specific segments that grow faster than others, and the question is how are we positioned.

Since most of our products serve multiple segments, it is really more about the use case in those customers.

That being said, sometimes we have specific products to support specific customer types, so we have a memory product, the 2810 I talked about, which really is targeted at memory performance.

We set the goal to be overall for the industry, but then we have specific products and programs, depending on the segment.

Does that make sense?

Yes.

One just quick follow-up, I mean, you talked about foundries being down.

In your 5% growth, do you have a different forecast on the industry average for foundries?

In our 5% --?

Are we going to be growing 5% faster?

No.

Not really.

Foundries are interesting because they drive us in a different way than memory does.

Memory drives leading edge design rules, foundries drive the need for a lot of product changes.

So we don't -- if what you are asking is do we count on foundries to achieve our growth target, the answer is no.

It just exercises a different part of our product portfolio, and a different kind of capability in our tools.

But we can grow with really any customer that is spending.

We do need them spending money, though.

Ben, let me just -- I will summarize.

I think I know where you are going on this.

On the foundries historically we have done extraordinarily well, just given the business model, and what their focus is on, et cetera.

So, yes, as a company we like it when the foundries want to expand capacity.

One big change over the last year that Rick has really pushed hard for with all of us, is more focus in tailoring every one of our product lines to the applications and at memory.

So we are in much better shape in the other segments, than say we were years ago, as far as growth with either memory or NAND, where they are pushing the leading edge, but the adoption is actually higher than say years ago.

Does that make sense?

Very helpful.

Thank you very much.

Thank you everyone, for your time.

We look forward to talking to you again next quarter.

That concludes today's conference call.

You may now disconnect.