科磊 (KLAC) 2008 Q3 法說會逐字稿

Good afternoon.

My name is Rachel, and I'll be your conference operator today.

I'd like to welcome everyone to the KLA-Tencor Corporation third quarter fiscal year 2008 earnings conference call.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Lockwood you may begin your conference.

Thank you, operator.

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

I'm Ed Lockwood with KLA-Tencor Investor Relations.

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

We're here today to discuss third quarter results for the period ended March 31, 2008.

We released these results this afternoon at 1:15 p.m.

pacific time.

If you haven't seen the release, you can find it on our website on 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 June quarter.

Afterwards, John Kispert will review the preliminary financial details for the quarter and then we'll open the call for questions.

On the investor's session of our website you'll find a simulcast of this call which will be accessible on demand for 90 days.

On the website you'll also find a calender for investor events in presentations and investor conferences.

You'll also find links to KLA-Tencor's security filings, including our most recent 10Q filing for the period ended December 31, 2007, and our 10-K for the period ended June 30, 2007.

In those filings, you'll find descriptions of risk factors that could 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 this call today are subject to those risks.

KLA-Tencor cannot guarantee these forward-looking statements will come true.

Our actual results may differ significantly from those projected in our forward-looking statements, and although we take no obligation to update those forward-looking statements, you can be assured that any updates we do will be broadly disseminated and available over the web.

With that, I'll turn the call over to Rick.

Thank you, Ed.

Good afternoon everyone and thank you for joining us.

Q3 was a period of solid execution for KLA-Tencor in a tough overall market environment.

Despite our persistent weakness in the global semiconductor equipment market, we net or exceeded each of our financial targets for the period and took a significant step to expand our potential market opportunity to the pending acquisition of ICOS Vision Systems.

We also delivered stronger operating performance than at comparable levels in the past.

Our relatively strong performance in this very challenging demand environment reflects continued strength in our market leadership, the superior value we deliver to customers in helping them meet their yield demands, and continued great execution by the KLA-Tencor team.

Revenue in the March quarter was $602 million above the range of our guidance for the quarter.

Net income, excluding some one-time charges, was also above the range of guidance at $121 million or $0.67 per diluted share and we generated approximately $148 million in cash flow from operations in the period.

Orders for the March quarter were $554 million, down approximately 4% from Q2 and above the mid point of the range of our guidance for the period.

I would now like to provide some more perspective on the current demand environment.

In general, the weak demand climate that began in late 2007 does not improve to any significant degree in the first calendar quarter 2008.

Although there are some pockets of strength among our larger customers as they ramp investment at 45 nanometer, current indications are the weak overall demand environment will continue to persist into the second half of 2008.

I'll now provide perspective on the current bookings environment in our various customer segments.

Memory was once again our large customer segment during the March quarter.

Memory customers today are investing in advanced technologies and new materials to enable (inaudible-bad sound quality) and higher density applications as well as reduced costs in turn driving increased adoption of process control to reduce defectivity.

In March we saw strong (inaudible) adoption among memory customers investing in 45 nanometer development.

Foundery demand improved in March.

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

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

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

Project orders in the March quarter reflected bookings for advanced development pilot lines.

Investing in leading edge technology continues to be a major driver of demand in the logic segment.

To summarize, although our customers remain cautious with their capital investment, the increased complexity of advance on technologies is creating new yield in activity challenges driving the need for advanced inspection and measurement technology and accelerating adoption of process control.

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

Now I would like to discuss some recent highlights for KLA-Tencor on 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 we serve.

The key to our success is to collaborate closely with our customers, innovate to develop creative differentiated solutions to meet their inspection and measurement needs and then execute in bringing new products to market and supporting them throughout the product life cycle.

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

As always, a great deal of hard work was required to win the business made even more challenging in an environment when capital was tight.

I saw our team's hard work and successful execution in this particularly difficult period.

I'd like to share some key product and competitive highlights from the quarter.

First, in defect inspection where our customers are ramping their investments in development of 45 nanometer technology, we continue to maintain a leading market position.

We had a strong quarter of bright field adoption in March placing 28 1X full spectrum bright field tools at three different logic customers.

The 28 1X features new optical modes that enable increase defect protection at twice the computing speed of earlier generation tools while demonstrating superior sensitivity, capture of unique defect signatures and throughput.

Daily 10 course full spectrum DQV broadband technology is unparalleled in the marketplace in delivering increased sensitivity required to tune for key defects in critical pattern layers as advanced technology notes.

In dark field inspection, we won orders for our Puma 9150 platform both DRAM and flash customers.

Our Puma 9150 delivers desired sensitivity at twice the throughput of competitive offerings.

We expanding our market penetration and the review market in the period.

Our new eDR-5200 is an (inaudible) review solution that offers enhanced resolution improving the productivity of the inspectors and providing connectivity to improve bright field recipes while also delivering high resolution and stage accuracy allowing maximum capture defects on the review system.

The eDR-5200 provides a great solution and positions us for growth in this important market segment.

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

In the March quarter, our next generation overlay metrology platform was chosen to a record with logic customer demonstrating significant performance improvement over our existing product line as well as providing important product extendibility.

Moving on to radical inspection.

Last week we introduced our latest technology called Wafer Planes Inspection, or WPI.

Designed to serve the 32 nanometer mask node, WPI a single system tool that provides the versatility to find all defects on the mask and show the defects that will print the national device wafer.

WPI also operates up to 40% faster than previous inspection systems, reducing defect inspection cycle times and reducing cost of ownership for our customers.

The ability to accurately define printable defects on the inspection system means that this is the first direct link between defect inspection and printability.

A major innovation over traditional techniques which require multiple inspection systems or print check method.

There's been extensive field testing of this revolutionary technology to support 32 nanometer process development.

These are just a few examples of recent successes we achieved during the March quarter and solved in our customer's mission critical production challenges and expanding our market leadership.

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

We're working closely with them to solve those problems.

Looking forward, our strong product pipeline and high level of R&D investment positions us well to meet our customers next generation inspection and measurement needs.

In these periods of contraction and capital spending, we leverage our long resources, technology expertise and solid customer relationship to step up our investment and innovation, anticipating our customer's requirements so that when the demand climate improves again, we'll be in a stronger position than ever.

Our 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 level of investment by customers in each of our market segments in driving forward their advanced technology road map and the increasing need for inspection measurement as device makers increase the greater complexity of their yield challenges in advanced design.

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

We look to complement our core market growth through strategic acquisitions and adjacent markets.

We have a disciplined approach to M&A and we are very selective about the growth prospects we pursue with the strategy.

We'll only undermarket the feature prospects profitable growth comparable to our own and where we can differentiate and add value.

In February we announced the intent to acquire ICOS Vision Systems a leading supplier of packaging and interconnect inspection solutions for the semiconductor industry.

ICOS Systems also performs inspection of solar wafers and solar cells, enabling solar manufacturers to effectively monitor the production process at different stages of production.

The ICOS transaction, which fit our acquisition criteria very well, setting the stage for additional growth and diversification outside our full inspection of metrology markets.

We are currently in the tender offer phase of this transaction and if it is successful, we expect it will close in the current quarter and be accretive to EPS within the first year.

In addition to the new market that we have entered over the past 18 months, we have more growth initiatives in place at KLA-Tencor and we'll be providing updates as they materialize.

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

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

In June 2006 we laid out plans to improve efficiencies in our business model and deliver operational excellence throughout the company.

At the core of our operational excellence efforts is a company-wide effort to leverage what was already a very good business model in our industry and drive operational improvements throughout our cost structure, optimizing our business model through better management efficiency, reducing the number of common engineering platforms and leveraging the globalization of our workforce with the ultimate result being sustainable, higher margin performance and significant scale advantage at higher revenue levels.

John will go through the details of some of these results in his prepared remarks, but the bottom line is that these actions helped us achieve higher level of profitability in our business than we delivered at comparable revenue levels in the past.

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've developed world class talent and achieved outstanding financial results throughout the cycles of the industry, we are increasing our efforts in talent development as we know the people are key to our success.

In summary, KLA-Tencor continues to be a company with unparalleled portfolio of inspection measurement technology and great people who are driven by unwaivering passion for innovation and commitment to ensure our success and we enjoy relationships with every major IT manufacturer.

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

I'd like to wrap up my comments now by giving you our guidance for the June quarter.

Orders are expected to be down 5% plus or minus 10% from the March quarter.

Revenues are expected to be between $560 million and $580 million.

And EPS in the range of $0.56 to $0.60 including stock-based compensation and excluding one-time charges.

Now I will turn the call to John Kispert.

Thanks, Rick.

Once again, revenue for the quarter was $602 million and fully diluted GAAP earnings per share was $0.61.

Non-GAAP earnings per share was $0.67.

The difference between the two EPS numbers are, first, acquisition related charges which in this quarter were a net gain of 2.2 million or $0.01 of EPS.

This was caused by unrealized gains resulting from the Euro call option contract related to the pending ICOS acquisition.

Second, restructuring, severance, and inventory-related charges of 13.5 million or $0.07 per share.

And finally, more investigation charges of $5.2 million or $0.03.

This adds up to about $0.09 pretax or $0.06 after tax.

Again, the difference between $0.67 per share and $0.61 per share.

In our press release you'll find a GAAP to non-GAAP reconciliation which covers the non-GAAP adjustments I just mentioned in far, far more detail.

The remainder of my comments on the quarter will be focused on the non-GAAP results which excludes the adjustments I just mentioned but does include stock-based compensation.

This is reflective of the financial performance of KLA-Tencor and how we run the business and enables a transparent comparison of results across periods and among peers.

Operating results were driven by our expectation of orders received during the quarter and we're managing the company according to our best estimate of the business environment over the coming quarters.

For the March ending quarter, net bookings were $554 million, down 4% from the December ending quarter and above the mid point of our guidance of down 10%.

At the end of the quarter we initiated a $31million debooking.

This was due to recurring delivery date changes by two customers and not due to a cancellation by either customer.

We anticipate these orders will rebook some time over the next 6 to 9 months.

Looking back over the last two quarters, new orders, that is gross value of orders before the previously mentioned adjustments were for the December ending quarter 602 million and new orders for the March ending quarter were 585 million.

So the new order environment and business level has changed little for KLA-Tencor over the last six months.

Customers are focusing on new technology development and pilot lines for next generation production notes and our differentiated products play a significant role in that effort.

The slowing demand environment we first began to experience late last year continues in each of these markets.

Macroeconomic instability adversely impacting demand for our customers' products and, as a result, it's clearly affecting their capital investment decisions both in size and in timing.

While our business level appears to be stabilizing around current levels, visibility into meaningful growth inflection points continues to be very low.

In total, we ended the quarter with over $1.2 billion of backlog which is approximately the same as last quarter.

You could break out as $795 million of shipment backlog or orders that have not yet shipped to customers and 416 million of revenue backlog, or products that have been shipped but have not yet been signed off by customers and, thus, we have not taken revenue for them.

Keep in mind that we do not include any service bookings or service revenues in any of our backlog numbers.

The regional distribution of orders was the U.S.

is approximately 22%, down from 28% from the December quarter.

Europe was approximately 6%, down from 11%, Japan was approximately 29% and that's up from 22% last quarter.

Korea was approximately 15%, down from 20%.

Taiwan was approximately 20%, and that's up from 18% last quarter.

And the rest of Asia was approximately 8%, and that's up from 1% a quarter ago.

Our new products continue to do well at 45 nanometer and below.

The market segment distribution of orders did not change significantly from last quarter.

The approximate distribution was wafer inspection 43%, radical inspection was 11%, metrology was 22%, service was 23% and other markets including LEDs, storage and some solar was 2%.

45 nanometer and below investment continued to be a compelling customer spending trend for us.

Those orders made up 53% of the orders received in the quarter.

Looking at our income statement, operational execution was solid in the March quarter.

As I said earlier, revenue was 602 million, slightly above our guidance range of 575 to 595.

This level was down 5.3% quarter-to-quarter and down 16% from the same quarter last year.

Non-GAAP gross margin was 56.9%.

We continue to focus on the productivity and efficiency of manufacturing and service organization as we ramp new products globally and improve our service delivery and spare parts distribution in the face of lower shipment volume.

In our current fiscal year, service revenue is expected to be about 20% of total revenues, up from approximately 16% two years ago.

While the significant growth of our service business is becoming a dilutive mix factor in our overall gross margin percentage, I believe it's the gross margin dollars that this business drops to the become line serves as a solid and predictable cash flow generator for the company.

As we told you about 24 months ago when we laid out our operational plan, the company remains committed to a number of key operational initiatives focused on operational flexibility and operating cash flow.

In fact, over this period we have increased our sustainable cash flow yield to find operating cash flow as a percent of revenue by over 25%.

We've done this while integrating four acquisitions, adding customer development support resources, investing heavily in channel development and infrastructure for adjacent markets outside semiconductors and transitioning major product lines offshore.

We've successfully ramped our Singapore operation to ship our SP2 product line and ramp down portions of our U.S.

operation.

We are encouraged by the predictability and efficiency of our team there.

We are meeting our customer commandments and seeing better than expected cost savings.

Currently, our Singapore plant is only 20% of capacity and we have multiple products in the Q to transition from the U.S.

to Singapore over the next several quarters.

The operation continues to yield a cost advantage to us, our customers and our shareholders.

In addition to this facility along with operations in the U.S.

and in Israel, provide a global footprint that enables us to focus more on continued outsourcing of noncore manufacturing activities in the supply chain worldwide.

In terms of working capital management, we are continuing to focus on cycle times across our businesses.

Across the company we've improved over 30% over the last year in manufacturing and in long lead time material flexibility.

These initiatives will provide us with the long-term operational flexibility that is required to respond quickly to changes in customer demand, both down and believe it or not soon enough up while generating more operating carb flow in any scenario.

In the June quarter we expect gross margin to be slightly lower due primarily to revenue mix as we expect product revenue to decline 20 to 30 million quarter-to-quarter and we expect service revenue to be up 3 to 5%.

Non-GAAP operating expenses were down $2 million quarter-to-quarter to 189 million.

R&D was 94.8 million up 1.8 million from the December ending quarter.

As we continue to accelerate key research and development activities driving organic growth in our core businesses as well as in programs in recently acquired companies.

We have several new product introductions planned over the next two months.

SG&A for the quarter was 94 million, down 3.7 million quarter-to-quarter.

We continue to focus on the sales channel efficiency and elimination of acquisition redundancies.

Over the last year we've made significant progress integrating acquisitions and streamlining our core business cost structure.

In fact, since the June quarter of last year SG&A per quarter is down 19 million.

While we're pleased with this progress, we believe there's additional opportunity here and we expect to continue to focus on these areas over the next several quarters.

Historically, downturns have been an opportunity to strengthen our leadership position as our backlog level and product differentiated business model enables us to sustain profitability while continuing to invest in key product development programs and to enhance the many key customer collaborations we have going.

(Bad audio - inaudible) As a result we expect total non-GAAP fixed costs on the core business will be roughly 190 million over the next several quarters.

Other income for the quarter was 24.2 million.

We realized gains from the redemption of our investment portfolio to fund the cash requirements for our proposed acquisition of ICOS.

In the June quarter we expect other income to be approximately 10 million as we use cash to fund our proposed acquisition of ICOS if, as expected, we get it closed in the June quarter.

The tax rate was 31.8% in the quarter, higher than the 28% discussed in the last conference call due to reduction in tax exempt interest.

So incremental other income was almost fully offset by the higher tax expense.

Non-GAAP net income was 121 million or $0.67 per fully diluted share.

This number includes share-based compensation expenses of 25.9 million.

In the June quarter we expect expenses for share-based compensation to be roughly flat at about 26 million.

Turning to the balance sheet, cash and investments ended the quarter at roughly 1.3 billion, an increase of 17 million quarter-to-quarter.

In the quarter we purchased approximately $180 million of stock and paid a dividend of 27 million.

Cash from operations was 148 million in the quarter.

Inventory decreased by 39 million to 444 million.

Results of the quarter include 18.3 million of charges from the scrapping and disposing of service inventory due to fundamental changes in our spare parts delivery model primarily in two key areas.

First, we've improved in service efficiency, particularly in the areas of diagnostic capability, service engineer training and, most importantly, the overall reliability of our products from our engineering teams.

And, second, our push over the last 24 months towards more commonality across our platforms and new products.

These common platform initiatives which are key component of our operational plan have enabled platform maturation which has led to earlier product performance stabilization requiring lower average average parts usage versus what we have seen historically.

We believe these improved areas in the service delivery are sustainable and will enable us to support the growing business as lower inventory levels in the future.

As a result, due to the nature of this event, we initiated one-time action to scrap the now, not needed spare parts from inventory.

Accounts receivable finished the quarter at 573 million down 5 million from the prior quarter.

Net capital expenses were negative 5 million.

Note the brief proceeds from the sales of three of our buildings in San Jose offset capital acquisitions by approximately $10 million in the quarter.

Depreciation was 15.8 million.

So on a net basis, including retirements, fixed assets decreased by $21 million quarter-over-quarter.

Fully diluted shares ended the quarter at just under 181 million.

For the June quarter, fully diluted shares expected to be 179 million.

Headcount ended the quarter at 5,770 employees, essentially flat to the December ending quarter.

Finally, as we commented earlier, we believe that our business appears to be stabilizing at roughly these levels.

However, we continue to be in a period of very low visibility.

As a result, like last quarter we remain very cautious.

Given this environment, we'll continue to run the company in a way that will enable us to maintain key investments while ensuring sustained profitability and cash flow.

Our guidance for the upcoming quarter does not include the financial impact of announced intent to acquire ICOS Vision Systems.

With that, to reiterate Rick's guidance for the quarter, bookings are expected to be minus 5% plus or minus 10%, revenue between 560 and 580 million, EPS, including share-based compensation but excluding one-time charges at $0.56 to $0.60.

This concludes our remarks on the quarter.

I will now turn the call back to Ed to begin the Q&A,

Operator, will you please pull the audience for questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from Jay Deahna.

Your line is open, sir.

Okay.

Can you hear me?

Jay, we can hear you fine.

Okay.

Can you address this issue that's come up recently about the competition in the mask inspection business?

Obviously it regards supplied materials.

Just kind of wondering, do you see your market share at risk?

Is there differential between the fab and the mask shop?

If there is a viable threat, does it impact pricing across your entire line and to what extent; for the overall company can you offset a little bit of pricing pressure with off shoring and your Singapore operations?.

That's on the mask side.

If you could go in detail, I'd appreciate it.

It seems to be the core issue regarding your stock right now.

And the, secondly, do you see any threatening products on the Bright Field side of the equation?

Thank you.

Jay, thanks.

This is Rick, I'll take both of those.

Let me start on the mask side.

As you know, we've had a strong market position in mask for a number of years.

We are always dealing with competition and that's why our market share tends to be in the 80% range, certainly fluctuates over time in modest amounts based on where we are in the cycle and product cycles as well.

But we feel pretty good about our mask position.

We just announced and introduced, as I mentioned during the prepared remarks, our WPI and we think that capability, in addition to the things that we've been doing on our product road map in general, positions us well.

There are different mask segments for wafer fab and for mask shop.

They're both competitive and they're both, in both cases you have to prove your differential performance and we've done a good job of doing that.

We don't really see that the mask situation is significantly different than in the past.

We've always had competitive pressures and we tend to do pretty well in spite of that.

It's an attractive market.

It's a growing market.

We know that's going to attract competition.

With regards to the second question about Bright Field, it's a similar story, actually.

Bright Field, because of the importance of it and increased adoption of inspection of metrology and advanced nodes, we definitely see a lot of interest from competitors in trying to get into the space and they have for a number of years.

We believe that our broadband [DPUV] technology is uniquely differentiated and when we go head-to-head with alternatives in the market, we tend to do very well.

As I talked about in my prepared remarks, we had a very strong quarter in our Bright Field product line as we helped our customers deal with their advanced design roles.

Overall competition is always tough for us.

We always work hard to win orders, but feel pretty confident of our position now and going forward.

And a quick follow-up.

To what extent is your order guidance for the June quarter impacted by that typical end of the fiscal year sales push phenomenon and to what extent is it reflective of true demand in the market?

And how would that role out into September?

Do you view June as the bottom for orders for this thing or is it kind of a rolling second quarter, third quarter thing?

How do you see that?

Hey, Jay.

John Kispert.

The guidance are our best attempt to size what is out there and doesn't take into account any, I guess, forecasted pull ins or push outs for that matter.

I can say that we have taken the conservative approach relative to what we see actually in the sales over the next two quarters, but it's, we have not forecasted in the bookings number or the revenue number anything that would tie to stuff being pulled in.

The second question, Jay, was?

Well, do you see 2Q or 3Q together as a rolling bottom or do you see one stronger than the other?

Just kind of get a sense.

Yes, I got it.

I think going forward, the best we can see today is we're looking at numbers kind of mid 500s to high 500s across all our businesses and, of course, timing of those orders and the subsequent revenue is always the hard part in times like this, but I think if you're thinking about modeling it through the second half of the year, that's what we see.

I know conventional wisdom would say there's a pick-up somewhere in the second half of the year and I can't, I wouldn't say that we're discounting that, but we'll wait to see it before we start to rev up production and and start shipping more.

One last real quick one.

If you're going to experience a 30% increase in your revenue per fab opportunity at 45 nanometers versus 65 blended between logic and memory, when would you start to see outperformance in your orders relative to the industry?

Is that happening now relative to this opportunity or when we see a concerted upswing in capacity expansion are you going to see your orders shoot out faster than the industry?

Yes, it's the last part.

You answered the question yourself, Jay.

The last part is when they start going to more capacity-like buys, pilot line into capacity is historically when we'll see the adoption shoot up.

Right now what we're shipping clearly is early pilot stuff in R&D which are more one-system per fab per mass shop per R&D project.

Great.

Thanks very much.

Your next question is from [Gary Sway].

Your line is open, sir.

Hi.

Thanks for taking my question.

John, just on the back of Jay's last question, just looking at orders and the potential sort of bottom here in the back half, if I sort of flat line your mid point of your order guidance in the June quarter all the way out to September and December for the full year, your orders would only be down to 10%, but everybody is claiming CapEx is down 20.

Understand that basically KLA will outperform given inspection metrology and it's important on the next kind of technology note, but a 5% difference would still argue for a little more downside.

Are you just getting more visibility here in the back half and maybe getting visibility on booking '09 CapEx in the back half?

Can you shed any light there?

I understand the question, Gary, it's tough to say right now.

The reason it's tough, our customers are certainly confused themselves as far as what they want to do in the second half of the year or even this quarter.

So there's lots of things moving around.

Best we can tell is people are focused more on the latter half of '08, calendar year '08, and that is as of today.

We've been doing this too long to go and hang our hat on that.

Things can either get pulled in or pushed out from there.

I wouldn't say we have much more visibility than most folks, we tend to have some higher end products which will be longer lead time, which gives us a little bit more visibility, but I have to tell you one of the big changes in the industry over the last couple years is the lead times as we try to help our customers more and more and their profitability and helping their flexibility the lead times have come way down.

To the extent we used to enjoy longer, better visibility in times like this, it's really not there as much now as we really have shortened our cycle times and put ourselves in a position to deliver quicker to our customers.

Okay.

My next question is just on gross margin.

You talked about the product mix and increasing a bit about service sort of negatively impacting gross margin.

Other peers have talked about consolidating base of buyers particularly in this downturn and they spoken about pricing pressure.

Are you seeing pricing pressure and what exactly are you doing on the cost side to sort of offset any kind of pricing pressure that you do see?

Gary, we've been seeing pricing pressure since I've been in the company.

That's 13 years.

Rick -- 19 years, 20 years?

Yes, 20 years.

Every quarter what we're really focused on in times like this with our customers, have been for probably over a year now is you'll see a lot more loaner tools out from KLA-Tencor, a lot more consignment tools, we'll extend warranties, all of these are cost of ownership benefits to our customer.

We're doing a lot more extra support, ramp support, move support, application support that doesn't have to get paid for today but can be pushed out over time.

We've not cut it all in any of our application support.

So we've really pushed a lot more advantages to our customers and pricing, of course we're seeing pricing pressure and we're doing the best we can to help our customers with that because they're clearly under profit constraints, but I wouldn't say it's any different than any other time over the last 10, 15 years.

One thing we do, Gary, in times like this is, John mentioned consignment, you have to understand sometimes that just means that we'll have capability on a tool or we'll provide a tool with a little less capability with the option to upgrade it later.

So allowing people to get in at a lower price point early on but have extendibility to take it on later.

That's an important offering for our customers when they're really constrained on their capital but they want our technology.

Got it.

One last housekeeping question, I don't think you broke out your orders by memory foundery and logic IDM bucket.

Could you do that?

By percentage?

Yes.

Kind of interesting, a quarter and a quarter and a quarter and a quarter.

Logic was about 25%.

Foundery 25%.

DRAM 25% and NAND about 25%.

Okay, so you did see a nice pop in foundries.

Okay, great thank you

Your next question comes from Timothy Arcuri.

Your line is open, sir.

Hi, guys.

Several things.

First of all, John, can you give us what the shipment number was for March and tell us what you're planning on shipping for June?

Yes, I know the June number better, Tim.

What I'm thinking is somewhere between 550 and 575 for June and the reason for the range obviously is, again, the back half of the quarter some larger shipments are sitting right on the cuffs.

So I think it's somewhere in that range and I'm looking for a shipment number, this last quarter was 582.

582.

Okay.

And then, John, did you say in answering a prior question you were talking about a trough run rate in the mid to $500 million.

Were you talking about orders or were you talking about revenues?

I was kind of talking about both.

Both, okay, so you don't see the business getting materially worse from here, you know from a bookings point of view?

Not today.

Okay, and then I guess, can you also, John, can you update what your new financial model might look like?

I know there's a lot of different moving parts, but do you have any sense of, you kind of gave this model last semicon, so do you have a sense of how that model would look now and particularly say at the same revenue level that you peaked out at during this last cycle, would your margins once they get back to that point given the new state of the company, would the margins be better than that now?

We're going to spend more time on this at semicon and I think we have an analyst day coming up in about a month.

I will spend a lot more time on it for everybody.

We are ahead of plan.

As you guys all remember, we said this was not a big bang plan, we're going to work on it over a two to three year period.

We're ahead of all the plans we put in place so I'm not concerned that at any level of revenue that we won't outperform where we have been in the past.

I think we're in pretty good shape there.

Okay, John, to be clear on that, so I think you said maybe six months ago you said at the $625 million level that you were talking about kind of mid 59 gross margin.

Is that still intact and do you think you're actually better than that right now?

I think that's about right and the tough part of guessing on the 625 is what's the mix there and particularly around service, so when does it happen?

So we're probably at that if not a little bit better.

Great, all right.

Thanks, John

Your next question comes from Harlan Sur.

Your line is open.

Good afternoon and great job on the quarterly execution.

We continually hear about customers, especially in memory, sort of struggling with yield issues as they make current technology transitions.

I guess my question is where are the major pressure points as it relates to yield.

Is it lithography?

Is it the use of new materials?

Is it etch?

What are your customers telling you and how much of this is contributing to your book of business now versus next Jen tool buys?

Harlan, great question.

Absolutely memory and you hit on the main things that are happening.

I think what happened in the last six to nine months is as the memory guides shrink, what they found was the fleet of tools they had, mostly our tools, inspection of measurement were not finding the later defects that they had to find, the smaller ones as they shrank in design rules.

So they fixed some of the big problems, but then they got into two things.

One is the defects, the size themselves and the signatures.

This kind goes to a theme we'll talk about more in the future of the systematic defects became a larger percent of what they're trying to find.

You really need higher resolution to do that.

It does happen around lithography, both emersion lithography but just advanced lithography in general, but also certainly when new materials come in and even new device structures.

Certainly was a part of the business and we talked about success we had in the March quarter serving the memory market with Bright Field tool.

That was kind of universal across our memory customers is the realization that they needed that advanced capability just to see what was going on in their process and make improvements.

I think a lot of them felt that they were not reaching their yield entitlement and that's why our thesis is a higher percent of their capital will be spent on inspection metrology just to make sure they're getting leverage out of the capital they've published for their process.

Thank you for that.

And on the radical inspection side, maybe share with us the early feedback on new Tera fab tools as customers start their eval work and I think at a high level is it fair to assume your radical inspection business will growth in line with overall business looking out over the next couple years?

Yes, great question.

Start with WPI, I think the number one thing we're seeing in radical right now, and I just was meeting with customers this week and talked about this, is just really desire to get capability in their hands faster.

Part of the challenge we've got is how do we deliver and deploy the advanced technology we've got, like WPI, because it's not just hardware, it's also the application support for that.

So having that discussion with a lot of customers around the world and how do we deploy?

We do think there's a big opportunity.

One of the things that is happening, of course, is we push lithography it is putting more strain on the radicals which drives the need for inspection of metrology.

With the EUV looking like it's being pushed out further and further, a lot of people as they are facing some of the additional challenges coming up, are looking to the radical strategy to help bridge the gap.

We're seeing increased interest in the current generation of products we have and a lot of discussion about our road map and how we can get more capability to them sooner.

All right, thank you.

Thanks, Harlan.

Your next questions in Jim Covello.

Your line is open.

Great.

Thanks so much.

Good afternoon, guys.

First, quick housekeeping.

I might have missed it, but did you give the shipments for this quarter?

Sure did, Jim.

I can't remember what I said.

582.

582.

Okay, thank you.

And my real question is the last cycle was obviously driven by memory.

We hadn't seen anything like that in 10 years and there's some argument that we wouldn't see anything like that in 10 years again, so working under the assumption that memory as a percentage is going to kind of normalize downward, I would think that that is a good thing for KLA.

Can you talk about that a little bit?

Your penetration in memory versus the other areas of the market.

Obviously you have a lot of business in memory, but on a relative basis what that means for margins and what that means about your ability to potentially outperform in the next cycle which would presumably not be as dominated by memory as the last one was.

Jim, you're right in this is the way memory's built, the level of repetition to the production line as you get 30, 40, 50, 60, 70,000 wafer starts a month.

You don't need as much inspection to measurement.

At least that's what our customers try to do.

And that is certainly not the case in the microprocessor logic and foundry world.

Now we worked hard over the last year to introduce new products after new problems, new issues on the memory side of the business.

So we think that we're fine no matter what happens to be hitting, as far as who's spending money, but clearly in the years where the foundry side of the business, the logic side of the business is having a better year, a better quarter, a better half, it's usually better for KLA-Tencor just because of the level of complexity and quick turns and price per unit that's at play for our customers because they want to spend more in what is essentially insurance for their yield.

Yes, and just to build on John's point, I think one of the differences is the memory guys figured out that they really needed the inspection measurement to optimize and get their entitlement yield and that drove our business.

I think logic guys know when they push the design rule it's enabling.

So they have got to have the capability earlier and that drives more advanced tools.

I think the one thing we've seen is 45 nanometer starts even 65 is not so prevalent in foundries right now.

As those [IDMs] convert more of that, we think there's a big potential for inspection metrology there.

This is not an easy question, but do you have an opinion of the normalized breakdown between memory, foundry, and logic is going to be.

Obviously it is not as memory intensive but memory may be a little bit bigger piece of the pie sort of five years out than it was five years ago, but obviously not as big as it's been the last couple years.

What do you think the normalized break down is?

It's hard to forecast that.

I'd say it likely asymptotes to what it's been.

One exception to that is man being a new driver, has a new long-term potential.

We didn't have that in the past as driving leading edge.

I think you're right, but the difference being there's more application space that NAND can serve so that is kind of, if you will, almost a fourth market because DRAM is more tied, as you know, to the PC side.

I do think, and we're seeing it now, some of the correction in the overbuild for memory is clearly what's been going on the last couple quarters.

Terrific.

Well, thank you very, very much.

Your next question is from Satya Kumar.

Your line is open.

Hi.

Thanks.

Is your outlook for mid 500s to high 500s for bookings?

There has actually been an increase in bookings I guess from your seasonally slow September quarter.

Just wanted to confirm if that includes or excludes contributions for ICOS.

What do you expect that to be in the second half?

Satya, I said in the prepared remarks nothing we've talked about includes any impact from ICOS.

Okay, can you help me understand bottoms of what's driving that sequential increase in the second half for you versus most of your peers looking at significant declines.

Specifically, you mention that some of your larger memory customers are still very active and strong in the first half.

What do you see in terms of linearity of orders from these large memory customers and also you seem a pretty good increase from the foundries in the March quarter as in terms of the orders in the second half.

Satya, I'm a little bit confused.

We haven't said anything about an increase in the second half.

Looking at your June order guidance of 525ish, right?

You said mid 500s to high 500s.

Yes, I see what you're doing.

It looks relatively flat to us out to the second half today and we're putting some conservative windage in that just because we don't know what's going to happen in the second half of the year in all cases, but I wouldn't build in an up second half for KT right now under the environment we're operating in.

When I said mid 500s to high 500s, I also, if you listened to the prepared remarks, pointed out that our gross new orders for the quarter were 580.

Okay.

So if you put those two together, our mid point and 580 you end up with about a 550 number going into what seasonally usually is a soft period for us, which is the summertime.

I am still a little confused.

I think your guidance was 525 for June.

Is that higher than --

It's a range.

-- gross number, is that right?

It's a net number and it's a range plus or minus 10%.

Okay, so we should be really think of like 525 run rate in the back half of the year for bookings.

I don't know what you--

I'm trying to figure out by what you meant by mid 500s to high 500s.

That is what I think our order range is going forward.

Okay and you're saying it doesn't imply an increase in the second half of June.

Not that I know of, no.

Maybe I'll check back with you offline.

Just a bigger picture question, Rick.

When I look at process control and percentage (inaudible - bad sound) over multiple years, I see that it's actually sort of stabilized on the 13% level, it used to grow quite a bit in early 2000.

You mentioned KLA can outgrow process control.

What were you seeing going forward that will help process control increase the percentage that wasn't there before?.

Yes, Satya, primarily 45 nanometer.

What we're seeing now, the preliminary look at 45 and, as John mentioned, we're really in the development phases of that and pilot production, but not large scale production of 45.

It's pretty clear to us what our customers are telling us is a lot more challenges they face both that are related to defectivity and systematic defects, size of defects and also metrology.

That's when we've modeled that in the early data supporting there's going to be a larger percent of their spend spent as they ramp 45 nanometer and that's what drives the outperform in terms of relative to the rest of the space.

The early data looks pretty good on that.

As we move forward, I think we're fairly confident that's how it's playing out.

Okay, thank you

Your next question comes from Mahesh Sanganeria.

Your line is open.

Yes.

Thank you very much.

I have a question on year-over-year deferred revenue and shipment.

Last year your shipment was up 6% and the revenue was up 17%.

This year can you give us an idea, since you're entering with a much lower deferred revenue, will the, the revenue growth will be in line with the shipment growth?

Mahesh, it's John Kispert.

Difficult question to answer, we're just in April.

It's really a function of how quickly our customers sign off on shipments.

We like to, we have in the past, for many years, run the business with essentially what we call five to six months of on-ship backlog.

That essentially means that we could, with no orders shipped for another five to six months at the current rate and then we've run for a number of years with two to three months of deferred revenue.

That model really hasn't changed over the last couple, last couple of years.

So to the extent you're looking at modelling KLA-Tencor, I'd stick with those assumptions because that's just how we like to run the business and it really works well with our customers, too.

I wouldn't deviate from that.

The, the other thing I want to check is your, looks like service revenue is increasing significantly.

And if I take your 550 number and flatline that, it looks like your, and take your equipment, does the systems revenue down 20% and service down, up 10%, that will give us the kind of revenue you're talking about and I think that's what people are confused about.

Everybody's talking about 20 to 25% kind of CapEx or 25 to 30 and you're not implying that.

I think probably it's the service includes that is helping you in the revenues, is that a good way to look at it?

Currently services, really two fundamental reasons is doing well.

One is the what we call older install base to create more cash flow for our customers.

KLA-Tencor maintenance can certainly help there and that's been a big shot in the arm in the service business and the other one is just newer tool shipments.

Far more complex, far more connectivity which helps with the growth of the service business.

As I mentioned in the prepared remarks, the, it's a, it dilutes our gross margin, but bottom line it's about the same as the rest of our business and so it's, it is growing nicely.

It does offer us a buffer in tougher times, like right now when it's well over 100 million a quarter.

Gives us kind of a lower bandwidth that we won't drop down too low because we have the annuity stream.

(inaudible -- bad sound) 24% last year can we, going forward model on a steady state, 5 to 10% growth because last year I think you had a couple acquisitions on the service side, 5 to 10%, is that a good way to model?

I think you're very safe at 10%.

Okay, thanks a lot

Your next question is from Steven Pelayo.

Your line is open, sir.

John, just a quick question.

Gross margin guidance for June, you suggested down, that's obvious on lower revenues, but then you also talked about mix impacts, service moves kind of 20% revenue from the mid teens a couple years ago.

I guess two questions then, you talked about June's service revenues growing.

What was March revenue?

Was it in line with the 23% service bookings that you had?

It's in the, it's in the press release, Steve.

It's right there.

Oh, sorry.

I missed that one then.

Can you just quantify the margin ranges on products versus services?

Bottom line, they're about the same.

Operating margin levels are about the same.

About the company average.

Gross margin level?

Very dilutive on the gross margin.

Essentially all the cost of services in gross margin.

So it's heavily dilutive in gross margins.

We can talk about a number later.

Your tax rate for the June quarter, what do you think?

32%.

Okay.

And then last question, I'm just curious given the increased competitive environment and industry-wide reductions and lead times.

Have you guys changed your goal of trying to carry a couple quarters of backlog deferred revenues?

Do you think you have to manage that down lower going forward?

Steve, we've been managing it for a couple years.

I don't think the competitive landscape for KLA-Tencor has changed a great deal in the last three or four years.

We're forever trying to help our customers by giving it to them exactly when they want it.

So I, it's to the extent we have, and we're still able to keep the essential model we've had for the same period of time.

I wouldn't guess that you'll see a change very much.

Great, thanks.

Yes.

Your next question comes from Raj Seth, your line is open.

Hi.

Thanks.

Rick, a couple of quick follow-ups on previous discussion.

On the technology transitions in the industry shrinks, obviously a key driver for you, are you seeing outside of the memory space where they seem to be very aggressive, are you seeing people back away in any sense from the aggressive scaling we've seen in the past?

TSMC has kind of talked about half note transitions.

Is there anything meaningful there from your perspective?

Yes, I think that's a good observation.

There's definitely, it's been slower outside of memory with the exception of microprocessor advances.

In the logic space there's been slower transition in the terms of the design rule.

I think it's a function of a couple things.

One is the desire to not overinvest and I think a lot of the foundries have been careful and the other one is I think there has been not as much demand for the advanced design rules from their customers, but we also see signs that that's changing.

I think that will result in an increased need for advanced capability, but it's still early in that.

So not a secular trend that in some way affects you as more and more goes to the foundries and people go fab light?

Foundries ought to get back on track is what you're saying?

I think they're going to have to or face more competition from what are traditionally IDMs getting into their space.

There's enough pressure on that that if they don't shrink, some of the established guys will find another path.

I think they're going to get pushed into it.

That's our sense.

Thanks.

One more if I might.

Back on the radical side, you introduced this way for plane inspection, [Amat] has something that sounds similar in terms of printability, simulation.

Is there something that is happening here that could cause a discontinuity in terms of an investment cycle or is this stuff all kind of evolutionary?

And what is driving this fundamentally?

Is it increased sort of face shift masking and OPC that's now requiring this kind of functionality?

What's happening here and is growth in the radical space, is there any reason to believe it will be less than fairly linear?

Is there an upgrade cycle coming from the industry given what's happening in litho?

Raj, good question.

I think the general answer is the radicals are bearing more of the brunt of trying to extend design rules because lithography emersions out there people see what that can do and they're trying to avoid, of course, going to double patterning, although there's some inevitability to that for some customers.

So the radicals are just getting pushed harder and the cost of radicals and the cost of design is high so a lot goes to radical inspection, so we view that as a good opportunity.

In terms of technologies.

As you know, with our market position in radical, we model all the available architectures and we chose the WPI approach because when we look at that we work with our customers, we're confident we've got the best approach for dealing with that.

There have been competitors in this space and we believe there always will be, but we think we're uniquely positioned to benefit from the increased complexity of radical both in the mask shop and as it plays out for inspection measurement in the fabs.

Are we at a point, just a quick follow-on, are we at a point where incoming inspection, which is something you've tried for a while to encourage to expand the market, that incoming inspection in fabs becomes a larger and larger part of this business?

I think it's, I think it has pretty good growth but the mask shop growth is driven a little bit more on complexity.

To answer your question, there are other ways to qualify radicals, and so the question is do people use the wafer inspection products to do it through print downs or do they use incoming?

We think they are going to do some of both and it's really customer preference, but I don't think it's a particularly faster growing segment.

I think it's consistent with the kind of growth we see in our radical in the past.

Your first question, I don't see any revolutionary change.

I just think it's increased challenge for the radical guys and that drives the need for more and more inspection.

Got it, thank you

Your next question comes from [Olga Lavinza].

Your line is open.

It's [Olga] calling in for (inaudible).

I had a couple of questions.

Assuming ICOS closes in June, I know you suggested it'd be accretive in the first year, would we see dilution in the September quarter?

[Olga], really difficult to tell right now.

We haven't spent enough time with the folks from ICOS.

Haven't finished the deal.

It's difficult to forecast that.

All right.

Can you talk about what sort of CapEx assumptions you're making at the low end versus the high end of your order guide and that 500 to high 500s outlook that you have for the second half?

You mean matching industry CapEx to our market position?

Yes.

We said six or eight months ago I guess now we thought calendar '08 was going to be down 10 to 15%.

At the time, obviously we appeared pessimistic.

Now that would be optimistic from a lot of people's perspective, so I think we model it anywhere from down 20 to down 30.

But so much uncertainty out there.

Got it.

You saw a pretty big uptick in foundry orders this quarter.

Have you become a little more incrementally more positive in that front or is this more initial uptick like one, two type of tool deals?

We do see the foundries.

I think, again, investing more heavily in inspection and measurement than in production capacity because of the new technologies and capabilities they have to deal with and we think that looks pretty stable as we go forward.

So we're not forecasting a big uptick in that, but we think it looks pretty solid in terms of their overall needs.

As you might imagine, discussions with them all the time.

Got it.

I guess one final question, would you, I mean you've talked about your need for radical inspection as you go to 45 nanometer and below.

Within all the spaces that you currently participate in, which ones do you think would outgrow the overall process controlled spaces or undergrow?

We don't actually have to spend a lot of time working on that problem and I'll tell you why.

Years ago, it's better to have portfolio solutions and let customers pick.

Some people think dark field, some people feel bright field, some people think bare wafer, but our approach is to provide the capabilities our customers need and let them decide.

From that standpoint, it's a bit of non-answer.

Part of our strategies have a large portfolio and let our customers do it.

They are very interdependent and people can emphasize one technology over the other.

We don't really have to play winners and losers when it comes to specific inside our space.

Although we have 25 managers around here saying it's going to grow faster than the others.

All right.

We sure don't want to tell anybody they're not so....

All right, thanks so much.

Your next question is a follow-up question from Timothy Arcuri.

Your line is open.

John, you've now gone basically two cycles.

If I look at the trough of the last cycle and I assume things don't get too much worse from here, you've now basically gone two cycles where you're earning significantly in excess of your cost of capital in the trough of the cycle so I'm wondering now that you've proven the model, what your view is in putting leverage onto the balance sheet?

Thanks.

You're not going to give me the day off here are you, Tim?

Our strategy hasn't changed, our vision hasn't changed.

Just off the top of my head if I think about last two years, we've returned about $2 billion worth of cash to shareholders through our dividend or through buybacks.

We're focused on growing the company in process control or inspection to measurement.

We see plenty of opportunities as the world comes up with smaller and smaller things that become more and more complicated that have to get measured and data that has to get shared from process step to process step and if we have to change the, continue to change the capital structure of the company, do that, clearly we will.

But no need at this point.

Okay.

Thanks, John.

Your last question comes from Ben Pang.

Your line is open, sir.

Thank you for taking my question.

You commented that over 50% of your orders are 45 nanometer.

Do you expect that is the mix you see for the second half of the year, calendar year and if that's true, does that mean you don't need to see the DRAM capacity spending come back in order to get your flattish outlook here for orders?

Ben, I couldn't answer what it is past the June quarter, but I definitely see 45 nanometer and below being above 50% again for the June-ending quarter.

God, I hope DRAM doesn't go away, but we feel pretty good about what we call the technology buys across our entire product line going forward with the transitions to the smaller line, the smaller, the changes in the transistor.

And could you provide the share count guidance again?

Off the top of my head I think I said $179 million.

Thank you very much.

Thanks everybody for attending the call.

We'll talk to you again in 90 days

This concludes today's conference call.

You may disconnect your line.