科磊 (KLAC) 2008 Q4 法說會逐字稿

Good afternoon.

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

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

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

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

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

Lockwood, you may begin your conference.

Thank you, Christian.

Good afternoon, everyone and welcome to KLA-Tencor's fourth 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 are here today to discuss fourth quarter results for the period ended June 30, 2008.

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

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

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

On the Investor section 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 calendar of future investor events and links to KLA-Tencor's security filings, including our most recent 10Q filing for the period ended March 3, 2008 and our 10K 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, 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 will do will be broadly disseminated and available over the web.

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

Thank you, Ed.

Good afternoon, everyone, and thank you for joining us for our Q4 earnings call this afternoon.

Today I'll discuss highlights of our fiscal year '08 performance, I'll talk about the June quarter, and give an update on the current market environment.

Lastly I'll provide guidance for the September quarter.

KLA-Tencor advanced our market in technology leadership in FY'08.

We executed our growth strategy both organically and through M&A.

We improved our cost structure, we generated strong cash flow, and returned values to shareholders.

Revenue in FY'08 was $2.5 billion, down 8% year-over-year.

Net income, including share-based comp but excluding one-time and deal related costs, was $512 million or $2.78 per diluted share.

We generated approximately $668 million in cash flow from operations, and were active in returning value to shareholders in the year we're purchasing just over $1.1 billion in common stock and paying cash dividends of approximately $109 million.

Like the highlights and key developments in FY'08 in context of our four strategic objectives which are customer focus, growth, operational excellence and talent.

As most of you know, at KLA-Tencor we solve mission critical production problems for our customers and we do that by delivering a portfolio of differentiated solutions realizing both inspection and metrology.

Our tools help our customers increase their ROI and keep pace with the increasing complexity of yield requirements and advanced technology nodes.

Today we are market leaders in 20 of the 22 markets that we serve.

We do this as a result of our high level of investment in innovation and close collaboration with our customers that enables us to anticipate their future needs and develop appropriately bringing technology when it's need.

Our goal is to leverage our leadership and financial resources to deliver long-term growth at least 5% faster than the industry.

And although our revenue is down in FY'08 our relative performance exceeded this 5% goal.

We are well-positioned to continue out pace industry growth to a comprehensive product portfolio and our product roadmap which will address the future challenges our customers face at 45 nanometers and beyond.

In terms of our growth objective, the increase in complexity of advanced design rules is fueling growth in our core inspection metrology markets, and this is based on the fact that the new processes require more complicated and difficult inspection.

We are modeling an increased potential of 30% in the revenue opportunity as we transition from 45 to 32 nanometer nodes, when we look back and compare to the 65 to 45 nanometer transition.

We look back our Q4 orders about 75% of those were for 45 nanometer, pilot lines and development.

On the strategic growth front, in June we completed the acquisition of ICOS Vision Systems furthering our expansion in the new markets in both back end package inspection, solar and high brightness LED; and yesterday we announced the intent to acquire the microelectronic inspection equipment business of Vistec Semiconductor Systems.

This business is product leadership and mass registration and mass CD metrology complements our own leadership in mass inspection and strengthens our product roadmap to address future market opportunities particularly in double patterning (inaudible).

Additionally the business has a highly regarded legacy for developing precision inspection in metrology equipment that will complement and enhance KLA-Tencor's own core competencies.

We are in the process of securing regulatory approval for this acquisition, and subject to those approvals, we expect it to close within the next few months.

We will continue to execute our M&A strategy as a key component of our long term growth objectives.

We are also continuously focusing on improving our business model.

Today we are driving many initiatives worldwide, which is a result of structural changes we put in place two years ago to improve our profitability by optimizing our global footprint and enhancing our organizational efficiency.

These changes have begun to bear fruit and today our model is performing better in terms of profitability than it has at comparable revenue levels in the past, even in the sound market.

Of course none of this is possible without the world class talent within KLA-Tencor.

We work very hard to attract, develop, and retain an outstanding work force and we have been successful in building our our team and I'm especially proud of the performance of the entire team during fiscal year '08.

In summary, we're pleased with our execution in '08 in what's been a very challenging year for semi-inspector equipment manufacturers.

Our strategy is working and we are excited about the opportunities that lie ahead as we help our customers continue to tackle difficult yield issues as they adopt new technologies.

Turning now to a review of the fourth quarter.

In general, we continue to operate in a difficult demand environment and visibility remains poor.

There are some bright spots, however, the market leaders continue to invest in technology development and to drive design rules down.

But business is down in all our major markets and across all product lines as the semiconductor industry works to resolve an excess capacity condition while facing increased headwinds from poor macroeconomic conditions and diminished end-user demand.

Despite these weak demand conditions we continue to execute well financially in the period with the June quarter revenue coming in above the range of guidance at $591 million and net income, excluding some one time charges was at the top of the range, or $0.60 per share.

Cash flow was also strong as we generated approximately $188 million in cash from operations in the quarter.

Bookings for the June quarter came in at $469 million, down 15% from March.

At our Analyst Day in June, we said that we saw order timing pushing out late in the quarter with order volume trending to the bottom end of the range of guidance.

In the final weeks of the quarter we experienced a further slow down with orders that we were originally expecting to see in June pushing out to the December quarter and beyond.

Q4--however, Q4 was another good quarter for logic demand as customers continue to drive investment in 45 nanometer build-out and 32 nanometer development.

Logic was 46% of the bookings in the quarter.

Foundries grew sequentially and was 35% of the orders in the fourth quarter as foundries continued to build out their 45 nanometer capacity.

Memory was approximately 19% of orders in Q4, well below resent results due to push outs from NAND customers and continued restraint in DRAM spending.

NAND was 29% of memory orders in the quarter.

Looking ahead in the second half of calendar '08, the outlook for near-term recover in orders is muted.

Although we expect some pockets of strength among our large customers as they invest in development at advanced design rules, the global economic weakness continues to dampen end user demand for high-tech products and we remain cautious in our expectations for a broad-based recovery in the second half.

In this tough environment, we are driving the following key factors to enable continued strength in our market leadership.

We're focusing our customer experience, we're maintaining a high level of investment and innovation and we're improving our cost structure to drive a better business model performance and deliver high returns to our shareholders.

All these efforts position us well to capitalize on growth when the cycle conditions improve.

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

First in defect inspection.

Technology and product differentiation continues to enable market leadership for the Company, and we had another strong quarter of Brightfield adoption in Q4, placing 28 excess full spec and Brightfield tools with industry leaders in both foundry and memory.

Our Brightfield portfolio is unparalleled in the marketplace and delivering advanced capability required to find the killer defects and critical patterning layers allow performing competitive technologies in terms of sensitivity, defect capture and speed.

In radical inspection, we continue to drive our product development roadmap.

At Semicon earlier this month, we introduced the latest version of our computation lithography tool, PROLITH 11.

This new tool and the industry leading PROLITH line is the only lithography simulator capable of modeling topographic and predicting effects specific to double patterning for 32 nanometers.

This provides an essential tool for radical manufacturers to control their development costs without having to commit the resources of a mass shop.

We continue to invest heavily in our radical business to address increasing complexity for radical manufacturers at advanced design rules and create new opportunities for KLA-Tencor.

In metrology KLA-Tencor continues to be the market leader by offering a comprehensive suite of metrology products to offer customers the ability to maintain tighter controls of their process window.

In the June quarter, our next generation overlay metrology platform, the Archer 200, was chosen as tool of record with (inaudible) customer for 32 nanometer production demonstrating superior performance in production environment over an extensive five month evaluation period.

Archer 200 features an enhanced optical system that provides significant performance improvements that are critical to helping customers meet the much tighter overlay requirements for double patterning lithography at the 32 nanometer design rule node.

These are just a few examples of our market successes in the quarter each an indication of continued emphasis on delivering an outstanding customer experience; and delivering superior customer experience and best in breed technology, KLA-Tencor creates a significant competitive advantage that translates to strong market leadership, revenue growth, and profitability.

Moving on to the September quarter guidance, keep in mind September is typically seasonally down for KLA-Tencor with bookings being down sequentially in 8 of the last 11 years.

Given the poor demand environment, today we expect the same pattern to repeat in Q1 '09.

We are projecting bookings for Q1 to be down 15% with a range of plus or minus 10%.

Revenues expected to be between $510 million and $525 million and EPS in the range of $0.32 to $0.36 cents including stock-based compensation, and excluding one- time charges.

With that, now I'll turn the call over to John Kispert.

Thanks, Rick.

Revenue for the quarter was $591 million and fully diluted GAAP earnings per share was $0.43.

Non-GAAP earnings per share was $0.60.

The difference between the GAAP EPS and non-GAAP EPS numbers are as follows: First acquisitionary charges of $50.4 million or $0.22 after tax is related to the acquisition of ICOS Vision Systems; second stock option restatement related charges of $2.7 million or $0.01 after tax; finally there were two benefits.

First, a net gain of $1.4 million related to sale of buildings, that was partially offset by some restructuring severance charges, and second, a non-recurring tax gain of $8.4 million or $0.055 after tax.

In summary, this totals to $0.17 of after tax adjustments, and non-GAAP earnings per share of $0.60.

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

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

This is reflective of the financial performance of KLA-Tencor, it's how we run the business, it enables the transparent comparison of results across periods amongst peers.

As previously mentioned, we completed our acquisition of ICOS Vision Systems at the end of May.

So the results for the June quarter include ICOS operations for one month.

And for this month, ICOS' revenue was $9 million and its impact on gross margins and EPS was dilutive.

Excluding ICOS, revenue for KLA-Tencor was $582 million, slightly above the guidance range provided in April of $560 million to $580 million; and earnings per share was $0.60 which is at the top end of the guidance range of $0.56 to $0.60.

This was a solid quarter for KLA-Tencor in terms of financial performance and operational execution, however, as we discussed in early June, and again just a few weeks ago, the order environment significantly weakened as the quarter progressed.

A number of expansions that appeared solid in April pushed out one after the other through May and then accelerated in June and as a result net orders for the quarter was $469 million.

That's down 15% from the March ending quarter and at the low end of our guidance range.

The slowing demand environment we first began to experience late in September quarter of last year continues in each of our markets, and has declined further over the last few months.

Economic instability is continuing to (inaudible) impact the world's demand for our customer's product and as a result, it is clearly affecting their capital investment decisions both in size and in timing.

While there are pockets of strength driven by customers continuing to focus on new technology development for next generation production nodes, most of our customers are in an aggressive capital preservation mode and are limiting their equipment investments to only the most critical applications.

Our market position in all markets is consistent with the last several quarters.

In short, we are winning the orders there just aren't that many of them.

The regional distribution of orders is as follows: the US with 37%, Europe with 7%, Japan with 17%, Korea with 15%, Taiwan with 7% and the rest of Asia with 18%.

The approximate distribution of orders by market was: wafer inspection approximately 40%, radical inspection approximately 10%, metrology approximately 19%, and services approximately 27%.

Storage solo eye brightness LED and other non-semis added up to be approximately 4%.

Where customers are spending capital, it is at the leading edge of technology nodes.

In semiconductors, 45 nanometer and below development in pilot activity investment roughly 75% of our orders received in the quarter.

In total we ended the quarter with approximately $1.1 billion of backlog.

This dollar amount is after backlog adjustments for ordered and customer initiated shipment delays, acquisition related adjustments and/or foreign exchange impact.

We break this backlog into what has shipped and what has not.

The breakout is as follows: $715 million of shipment backlog or orders that have not yet shipped to customers and expect to ship over the next six to nine months, and $364 million of revenue backlog or products that have been shipped and invoiced but have not yet been signed off by customers.

Keep in mind that we do not include any service contracts in this backlog.

Looking forward as we have said in the last couple of conference calls visibility into a meaningful turn in the business continues to be low.

Similar to June, a number of significant memory foundry and wafer expansions in the sales funnel for the September quarter have now pushed out of the September quarter and into the back end of the calendar year.

In addition, the September quarter has historically been a seasonally down quarter for KLA-Tencor.

Given these factors, we do not anticipate a sequential turn in the September quarter and as a result we will continue to run the business in a very conservative manner until visibility into a turn is clear.

Recently we updated you in detail on our progress on a number of operational initiatives that enable higher profitability, improved operational flexibility, and operating cash flow versus our historical performance at various revenue levels which we will improve while preserving our investments in our research and development and customer support.

These initiatives around globalization, product development, and acquisition integration are now beginning to favorably impact the business model for KLA-Tencor.

These efforts are critical to positioning the Company to grow in the next cycle both organically and through the new markets we have acquired at lower operating expense to revenue ratio and without having to make any significant capital investments beyond our current levels.

Looking at our current income statement we feel our teams executed extremely well against aggressive business model targets in a difficult environment.

Revenue for the quarter was $591 million.

This level was down 2% quarter to quarter and down 20% from the same quarter last year.

Non-GAAP gross margins were 56.6%, down 25 basis points for the March quarter.

We continue to focus on sizing our organizations to the current business level while maintaining capability to ramp new products globally; and, of course, focus on flexibly being able to respond on any rapid shifts in demand when it occurs.

In the September ending quarter, our systems revenue in shipments will both decline sequentially.

We expect our core gross margins to decline at similar incremental margins as the last few quarters.

Keep in mind that we also need to continue to work through these acquisitions that currently carry dilutive gross margins to our base business.

Non-GAAP operating expenses were $193 million or up $3.5 million from the March quarter.

R&D was $97.2 million, up $2.4 million from Q3.

As we continue to invest in key research and development activity and customer collaborations for the next generation technology irrespective of the business and climate.

Our plan was to introduce 16 new products in the past 12 months and our plan is to introduce another 18 new products over the next 18 months.

SG&A for the quarter was $95.3 million, up slightly quarter to quarter as we continue to focus on sales channel efficiency and elimination of acquisition redundancies.

Our focus over the coming quarters will continue in this area in the core business as we believe there are additional opportunities here.

In the September quarter non-GAAP operating expenses will increase by about $12 million to $15 million as we absorb a full quarter of the ICOS operations.

We expect these expenses to decline from this point over the next several quarters as SG&A efficiency improvements in the core business partially offset the increase driven by our M&A activities.

Non-GAAP other income for the quarter was $7.1million as earnings on our cash portfolio exceeded the interest expense associated with our mid-core debt offering.

In the September ending quarter we expect other incomes to decline to $3 million to $4 million as we increase--as the increased interest expense from our long-term debt for the full quarter offsets expected other income and issues from the investment portfolio that is lower due to the weak interest rate environment.

The pro forma tax rate was 28.6% in the quarter, lower than the 30% range that was discussed in the conference call last quarter due to higher than expected revenue from products shipped from offshore facilities to non-U.S.

customers.

Going forward we expect the pro forma rate to be approximately 29% plus or minus 2 to 3 points.

Non-GAAP net income was $107 million or $0.60 per diluted share.

This number includes stock-based compensation expenses of $29 million.

In the September quarter we expect expenses for stock-based compensation to be roughly flat.

Now let me turn to the balance sheet.

Cash and investments ended the quarter roughly $1.6 billion, an increase of $265 million quarter to quarter.

In the quarter we repurchased approximately 122 million of stock at an average price of $43 and paid a dividend of $26 million.

Cash from operations was $188 million in the quarter as we continued to deliver solid profitability and working capital management to enable predictable cash flow.

For the fiscal year ending in June, operating cash flow increased by over 9% in a year when net income was down 21%.

Inventory increased by $16 million quarter to quarter to $459 million.

Note that ICOS added $33 million of inventory in the quarter.

The Company has continued to focus on reducing our cycle times to lower inventory on hand--our inventory on hand requirement, short and long lead time material risks, and improve our overall clean room utilization.

As well as to respond very quick to customers' needs when the time is right.

Cycle times across KLA-Tencor's product portfolio are down 30% over the last 12 months.

Accounts receivable finished the the quarter at $492 million, down $81 million from the prior quarter.

ICOS added approximately $25 million to that number.

Net fixed assets increased by $28 million, $10 million was actual capital expenditure within the core business, and remaining $18 million due to the ICOS acquisition.

So again capital expenses were $10 million in the quarter.

Pro forma depreciation was $14 million.

Fully diluted shares ended the quarter at just over 178 million.

For the June quarter, fully diluted shares are expected to be at about 175 million.

Head count ended the quarter at 6,060.

Finally as we commend earlier, the business environment continues to be challenging, both in terms of cyclical debt and duration.

As a result we remain extremely cautious in this environment.

We believe that it is financially prudent to adjust our expected revenue down to more closely align with the current business level.

While we continue to run the Company in a way that will enable us to maintain sufficient backlog and continuously make key investments, and of course, ensure sustained profitability and cash flow.

Our guidance for the upcoming quarter does not include the impact of our recently announced intent to acquire a microelectronic inspection business of Vistec Semiconductor Systems.

With that, to reiterate our guidance for the quarter is bookings expected to be minus 15%, plus or minus 10 points.

Revenue between $510 million and $525 million and EPS, including stock-based compensation, but excluding one time charges and amortization of $0.32 to $0.36.

This concludes our remarks in the quarter and I'll now turn the call back over to Ed to begin the Q & A.

Thank you, John.

At this point, we'd like to open up the call to Q&A and we once again request you limit yourself to one question given the limited time we have today.

Feel free to requeue for your follow-up questions and we'll do our best to get everyone in today's call.

So, Christian, we're ready for our first question.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Jay Deahna with JPMorgan.

Good afternoon, how are you doing?

Hey, Jay.

A couple of years ago, when pretty much all of your customers were buying, you guys were very bullish and were talking about a fairly lengthy cycle, which pretty much started to drop within a quarter of that commentary; and now that really nobody's buying and everybody's pushing out, you guys are sticking the knife in your stomach.

So I'm just kind of wondering if you look at it kind of objectively at this point in the ball game, you talked about a lot of projections being pushed out over the last couple of months.

Do you see a lot of projects left that are still at risk of being pushed out, or do you think with the flash spending coming down recently that we've sort of flushed it out?

Right now Jay we look forward, I think September as we said we are guiding September down and there still are some projects in there so there is is still some risk.

But I would say overall I think we have got a pretty good sense of September given the visibility we have now.

But if your point is could it come back stronger than--it's very hard to see that right now.

That's not really the point.

The point is that are there a lot of projects out there at this point that would be viewed as highly risky, or have we flushed out most of those?

I think many of them flushed out and as you know, they tend to move out rather than--and if that's what you mean, yes.

But there is still some risk.

There is some risk in what people are forecasting for September, and I think that people who see a strong December are just more bullish on the risk.

Okay.

Thanks.

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

Brett?

Hello?

How are you doing, Brett?

Hey.

Good afternoon.

I just was--wanted to check on some of the progress on margins at this point , obviously very little decline this quarter only 25 basis points, given the outsourcing going on, new products coming in, ICOS coming in, how do you see the gross margin line trending in this

Brett, I think the way to model it, I guess internally, I think we're very happy with the speed and the progress we have made on the programs that we have; and also our new product introduction, some of which we haven't actually announced but we are shifting the Beta systems right now.

So we think the cost point is definitely coming down, again a lot of that doesn't show up in the P&L for awhile.

We are happy with the backlog and the profitability of the backlog at this point, too, and I think that will bode well over the next couple of quarters.

I think you hit upon the one thing that's a little bit more difficult to predict.

and that's the acquisitions and how quickly we can for lack of a better word integrate and do some things process-wise, to help the profile.

As we talked about last time we were all together, we think that will take two to three quarters in general, and obviously, with ICOS they have a great team and we have started those--those plans to make--to improve the gross margin.

And as we do other acquisitions, again I think that is the hardest part to predict, but we have plans to improve them and get them up to KT kind of standards in two to three quarters.

That help?

Yes, that helps.

Thank you.

Next question from the line of Atif Malik with Morgan Stanley.

Thanks for taking my question.

Can you give the shipment for the June quarter?

Yes, Atif, they were about 545.

Okay, and then a follow-up on the Vistec acquisition, how should we think about the margins on these products, are they similar to radical inspection products or similar to the inspection products.

Atif, it's too early for us to say.

As you know we just entered a term sheet with them and we have to go through regulatory.

What we can say is we like their market position and we believe it will help us build the franchise but it's preliminary for us to talk about margin.

Thanks.

Our next question is from the line of Timothy Arcuri with Citigroup.

Hi, guys.

John, can you give us some sense of what you think you'll ship in September?

And then I had a follow-up.

Sure, Tim.

The ship plan is moving around right now.

I would say it's anywhere--unfortunately anywhere from $500 million to $450 million.

Today it's closer to $500 million, but given this is conference call, I mean, there is probably--given it's the September quarter also things can change quickly.

I give a wide range there 450 to 500.

Okay, so let's just take kind of the mid-point of that range.

So at that shipment level, you'd have about total when you take your revenue backlog and you shipment backlog you have about 5.8 months which is on the very low end of what you had the last three or four or five years.

So that would imply that unless bookings come back significantly in December that you wouldn't be able to ship a whole lot more.

In fact, maybe even a little bit less in December to actually build back up some backlog; is that the right way to think about it?

Yes, I would--I think generally let me give you a couple more things to put in to your algorithm as you're thinking about it.

Two very important things.

One is if you are looking at it over a period of time, the thing that I would remind you is that service is not that months of backlog, and as you know we are up about 40% or 50% over the last two years in service; and so it's a much bigger part of the total equation.

So when I look at the months of backlog now, I feel very good about it.

I think the second piece is one we have talked about in the past, and just given the transitions the industry is going through right now, we have quite a bit of inventory from Beta shipments that are out there right now that we don't count--as obviously count as orders.

Because we are working with the--on the leading edge in 32 nanometer, 45 nanometer kind of R&D projects.

As those orders come in we'll count them as orders, shipments, and revenue almost at the same time.

That is a larger number than historically at least over the last two years.

If you add those two extra pieces to it, we feel very good about the backlog.

The other thing I would remind everybody when it comes to backlog is the industry, as Tim knows and most of you know, industry has changed quite a bit on this point over the last two to three years and that the lead times now have to be in that two to three month time frame.

So we have to be able to turn quickly to take care of our customers.

So we are balancing that in that months of backlog and so we feel relatively good about the next two quarters in revenue and kind of keeping it at the pace that we just gave you guidance at.

Okay, John.

Thanks.

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

Muse with Lehman Brothers.

Good afternoon, thank you for taking my question.

I guess I was hoping you could help a little bit on ICOS and what we should think about in terms of revenue contribution in the second half of the calendar year as well as the impact to gross margins.

C.J., I'm going to be as helpful as I can.

We decided not to get--set the precedent of breaking out any of our businesses like we have done for the last 15 to 20 years.

We took one month of it, obviously the month of June and that was about $9 million of revenue.

Going forward the back end is obviously, you guys know not as strong as it usually is right now.

The business is dilutive to our model.

It's basically a break-even business over the next quarter, but that does have a bunch of what I'll call integration or bubble costs as we work with the senior management team there and kind of sort things out between the two organizations.

So we think it will be very profitable over time but I'd say over the next quarter or so probably less profitable than historically for ICOS standards.

Okay, great, and if I could sneak in a second question on the service fund you talked about that being strong for the last two years, could you put some numbers around that from a growth perspective that you anticipate for calendar '08 and maybe an early read on calendar '09?

Yes, if you look at it over the last say ten years it's been compounded growth rate at I think it's about 14%, 15%.

We just shipped a lot of tools over the last two years that will come off of warranty and will go on contract.

And so I think, from what I can tell, working with our customers, they are all happy with the service KLA-Tencor can provide consistently, predictably at 300 millimeter with the challenges they all have at 65 and 45 nanometer.

I think our contact penetration will continue to be at the rate it has been so I don't see any reason to see a change from kind that have mid-teens growth rate in our service organization.

Great.

Thank you.

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

Hi.

Thanks for taking my question.

Just on the radical inspection, looking at your bookings in this segment it's been down more than your system's bookings have been over the last couple of fiscal years.

It used to sort of grow to be a bigger portion of your business several years ago.

Is there any reason to be worried about market share versus just some kind of a cycle in the radical inspection business I should think about?

Yes, Satya, it's Rick, I'll take that.

There is two things about radical--kind of good news and bad news.

Start with the bad news.

The bad news is (inaudible) just are not spending right now and the reason they are not spending is because they have built out the 45 nanometer capability.

The good news is we have done well in our share, and we have seen strength in the new offerings that we have had since we have the WPI.

We are at--in a product transition year, so the 5 X X product we've been shipping for quite awhile will transition over the next 12 months.

So we forecast the radical will pick up when two things happen.

One, when the mathshops turn back on, and right know they're subject to this slow down as pronounced as anyone else, in fact, in some respects they've slow down more.

The second one is we'll have new products in the next 12 months to 18 months we'll see a radical build up as a percent of the other business.

The other factor when you look at it is on a percentage basis as John's pointed out service has grown over time.

So, and we have added some businesses through acquisition.

And on foundries, if I could have a follow-up, just some clarity on what's happening from a cyclical and a secular perspective foundry orders are unequally high in the first half.

What kind of a seasonal order strength do you see for the second half and from a longer-term perspective, TSMC reported this morning and is talking about taking down the capital intensity secularly.

I look at the capacity growth they're actually adding more waiver start capacity for less CapEx dollars in the last few years.

How do we reconcile those comments versus capital intensity growing with technology transitions?

How should I think about that?

Yes, well I think there is two things.

One is our value add is to help them increase their efficiency and overall, to be able to leverage the equipment that they buy more effectively.

So we've seen foundries be a strong source of business especially as they try to juggle multiple product lines and multiple design rules at the same time.

I think our foundry business has done reasonably well in that and we do see signs of additional starts happening and we see some good early indicators as we move forward that way.

But I do think that there has been, as you said, the efficiencies clearly are playing out in the foundry space and our goals is to be part of the overall value add to that.

Thank you.

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

Hi, this is Kate Kotlarsky on behalf of Jim Covello.

Quick questions about the pushouts that you talked about that you have been seeing over the last couple of months.

Are those primarily pushouts associated with previous plans by your memory customers to expand capacity; or are those actually related to some of the technology node shrinks that perhaps are being pushed out today?

And also was just curious what you are baking into your September order guidance in terms of memory orders that you're expecting in September?

Sure, Kate.

A couple of things.

One is pushouts that we have seen are primarily associated with the capacity portions.

We still see technology buys and it is just generally, as John indicated, we are seeing a very conservative spend and bringing on new capacity from our customer base.

So it is not anything in particular.

In terms of memory, we talked about memory being overall--we look forward to September and we think probably overall at around 55% for memory.

55% of orders you expect to be memory orders?

Correct.

Hey, Kate, this is John Kispert.

So 55% right now in our guidance for the September ending quarter.

I will say that that's a very fluid number, particularly around I think the essence of your question, which is really the new fabric capacity kind of ads it's sliding around between the December ending quarter and the September ending quarter.

Our best shot right now is probably 55% of the guidance we just gave you for the September quarter would be in the memory space.

But we'll see how it plays out.

And again, Kate, that's of the orders that are segmented in the memory foundry and logic.

Because we still have another 24% of our business that's outside of that space.

Okay, and just a quick housekeeping question.

You mentioned OpEx going up as a result of ICOS.

Could you maybe talk about how that breaks out between R&D and SG&A?

How we should think about where we expect the increase to come from?

Sure, Kate, it's kind of 50/50.

50% and it's--I would tell you folks to kind of think of it in the range of $12 million to $15 million in total.

You can break them in half, and somewhere in that range; and I'd expect it to be closer to 12 over some period of time than to 15.

Okay.

That's helpful.

Thank you.

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

Thank you.

Can you give us a break up of the--on the acquisition-related charges?

Which one--how much is the amortization of intangibles and how much are one-time and what should we model for the September quarter in terms of amortization of intangibles?

So the--let's see.

The amortization of intangibles this last quarter I don't have it in front of me.

It is roughly $8 million, I think it was $7.8 million.

The one-time for ICOS this quarter was about $36 million, 35.9 if I remember right.

And obviously some of that--the prior acquisitions that will probably pop up with not only ICOS but with Vistec if and when that deal gets done.

Does that help?

Are you including that?

No, I'm not.

amortization is included?

amortization--what we have today is in this last income statement we are talking about is $7.8 million, and all I'm trying to say is it probably goes up a little bit, over time.

Okay.

Okay.

Thank you.

Yes.

Our next question is from Gary Hsueh with Oppenheimer.

Hey, guys, thanks for taking my question.

Just longer term here it looks like the real story in terms of growth is in your service business.

That business is up roughly 17% year-over-year, your semi business, your product business is down 26.

So obviously that is a more sustainable kind of growth trajectory for you over the next year or two independent of the cycle.

Just wondering for fiscal '09, I think this question was asked, but what are your expectations for an absolute kind of dollar value per quarter in terms of your service run rate?

And with tools actually coming off warranty, what is your forecast there for '09?

Well, Gary, I think you have got some math wrong in how you asked the question.

I'm not even sure, the question is what is the '09 plan for service?

Yes, that's the first question, yes.

Okay, I'm not going to give that out.

Okay.

We don't break out our plans over the next year.

Okay, but assuming that it grows and knowing that the service business in terms of cost is fully loaded and the cost of sales number, I mean, what's the disparity today between your service and your product business and moving forward, where do you see more wood to chop?

Is it in your product business or in your service business?

And if it's in your service business, how do you go about doing that?

Let me just back up.

You said something about our product business being down 26% year on year.

I guess I don't know how you can come up with that.

Just looking at the June quarter, the product business is down 26%, and service business is up 17% year-over-year.

Oh from June to June?

Yes, and for the fiscal year product is down 12% and service is still up 16% that's all I'm looking at.

I mean, it's--so is the rest of the industry.

I guess my point is it's far better than the rest of the industry.

As far as how we manage service, and the rest of the divisions of the 40 different products that we have in gross margin, it's all very similar.

I mean, it comes down to efficiency of training of folks, of engineers, not only in R&D, but also in the field; and we are going to stay focused on that across our entire install base.

We've talked many times about Ediagnostics.

We have talked many times about making it much more efficient from a people's perspective.

The other big piece, obviously with each generation is the parts side of the business, which the cost of parts keep going up the complexity keeps going up; and so how we support our customers with the right parts at the right place at the right time has become a bigger and bigger part of our business.

I think we are doing very well at it.

The efficiency in our service business has improved mightily.

It's helped the productivity of the service business, but so has our manufacturing organizations in the gross margin also.

And I'd say they are probably improving at the same rate over the last couple of years.

Okay.

John, I guess last quarter you talked about service increasing as a percentage of sales.

And with some gross margin issues coming about, because of naturally lower gross margins and service and you talking about the need to kind of do some more work there, I'm just trying to follow-up on that comment from last quarter.

I'd do more work.

We are very happy with the progress the service organization is making.

The profitability is what it is, and I think that's--you can see that in the profitability of the entire business and what we just talked about.

It's all in gross margin and we are pretty happy with the gross margins of the Company particularly at this point in this cycle.

I'm missing, Gary, what you want me to try to predict what the profitability of service is over the next year or so?

Yes, just trying to figure out what the--how much you can glean in terms of incremental gross margin from higher efficiency in your service business.

That's all.

I wouldn't go and predict much improvement there.

We are going to work like heck to keep up with the needs of our customers.

Okay.

And it's annuity business that is forever more and more challenging that we're very happy with the profitability on and it's a balancing act, continuously.

Okay.

Great.

Thank you.

Our next question is from the line of Jenny Yuen with JPMorgan.

Hi, good afternoon.

Just a quick question.

You mentioned some of your projects were getting pushed out to the end of the calendar year.

Does that mean we could maybe perhaps model a turn in orders in the calendar fourth quarter or shipments, or I just kind of wand to get some more clarity on that?

Yes, well we said--Jenny, it's Rick--that clearly we see September historically has been down and it's really tough to predict whether December's up off of that.

But when we look out we do see more projects happening in the December time fram than what we see in September; but as you know, the visibility is very tough in this environment, so I'd say it's early.

If you look at overall capacity for the industry, September is certainly--certainly pretty low number relative to historical numbers.

So from that standpoint we are anticipating some improvement beyond September.

But we are running the business, as John said, we are doing everything prudently to run the business, maintain backlog and kind of work through this cycle and come out stronger than ever as we look to the other side; but it's very early to call December up.

Okay.

Great.

Thank you.

Our next question is from the line of Bill Ong with American Technology.

I think you mentioned memory orders represent about 19% of the bookings mix, is that correct?

Well give me a second here, Bill.

I think I said memory, memory, memory.

DRAM was about yes, 19% with NAND and DRAM.

That is a pretty big drop.

Because in absolute dollars that means it's about 68% quarter to quarter sequential drop and it looks like logic went up in the quarter.

Can you offer a little bit of color on what is the dynamics and what is happening in logic?

I know why memory is down but it seems like it's down very severely.

Yes, I think the memory--as you know the industry is kind of retrenching on memory.

Logic, we continue to see the investment for the 45 nanometer node, and some work now on 32 and that is really been driving that segment for us and we are very happy with our performance there.

That means with $90 million in bookings in memory, you pretty much bother me now it does seem like down side with memory over the next quarter, so.

I think you are right, Bill.

There is not a lot of orders in there.

Okay.

Thank you.

Our next question is from the line of Chris Hankar with Banc of America Securities.

I had two questions.

In terms of memory, you guys are saying 55% of your September orders will be from memory.

That is a pretty big jump in terms of dollars from June to September.

How do you see that actually trending into December if you can just give some directionality?

I think if you look out and you do the math, Chris you realize it's still not back to Even march levels.

It is up but as we pointed out it's off a pretty low number.

December it goes back to what do you believe about forecast in the projects that are out there and right now it's very early to predict what December's going to look like, although to John's point in the previous comment, it's certainly--things are pretty soft right now.

So when we look out there it is not unreasonable to think we'd see improvement off of September and memory is definitely part that.

I think the thing to think about with DRAM right now for us is it certainly feels like it's stabilized; and as the prior caller mentioned, at very low levels.

When I say stabilized, I'm talking about pricing.

Also, we know that we are in the part of the year seasonally where pricing often becomes a little bit softer.

So we are taking a conservative view on, in our guidance and what we are talking to you about, as far as what we think will land in the September quarter as far as orders are concerned; and--but when you add it all up at that low level it does look to be anywhere from 45% to 55% of the total order in September.

And there is in our sales funnels a bunch--a higher amount that's actually sitting in the December quarter.

Okay, is that (inaudible - highly accented language) the foundry too because you said you spent almost two-thirds of the CapEx in the first half of the year.

Obviously your foundry orders are going down in September.

Is there any reason to think it is actually going to pick up back in December?

Sure there is plenty of reasons to think it would pick up if you look kind of customer by customer.

Again, it's hard to predict in this environment when they let the orders go.

We have a very--I think very prudent number in there for the September quarter.

Which, as you said, is down.

Right now, our customers would tell us it's higher in the December quarter, but we'll see how things go with the economy through the next three or four months and how they decide to run their businesses.

I think with the foundries the thing you need to think about and watch is the leading edge utilizations.

Utilization in total for the foundries is relatively good but what's the leading edge.

Leading edge picks up, we'll get orders.

Last question with any cancellations and what's your share count assumption for September?

We debooked about $15 million across six different customers.

We debooked about $100 million over the last couple quarters, four quarters.

So we think the backlog's in pretty good shape; and share count for the quarter I think was $178 million.

Share count assumption for September?

I think about 175.

Thank you.

Our next question is from the line of Peter Kim with Deutsche Bank.

Thanks for taking my question.

Hey I was wondering if you could give us the idea about what the ICOS contribution was for the guidance in terms of revenue bookings and shipments and how much it added to your backlog?

Peter, were you listening to the earlier part of the call?

I can repeat it all.

I didn't hear you give guidance.

I think you only mentioned shipments, the total number.

And also I didn't know that you mentioned anything about the ICOS' contribution to backlog.

It's a relatively small contribution.

We only took a month of the--of the think of it as the P&L side.

We took the whole balance sheets into our business.

I also think the way to think about it is that the back end isn't as strong as it has been in prior quarters.

But that's--we don't normally break out our backlog for folks.

Okay.

So with regards to the how it was trending is it trending in line with like the semiconductor cycle right now, with kind of similar to your front end business, or is it slower decline?

Could you kind of characterize that?

Yes, it's more similar I think overall semi the back end has been down as well.

So it's similar to what we are seeing.

Okay great.

Thanks.

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

Thanks for taking my question.

One question.

If you look out to the second half of the year, do you expect that your orders for less than 45 nanometer go up, and can you put some color around that?

How many customers maybe that you have ordering the type of equipment?

Thank you.

Sure, Ben.

The 45 nanometer was about 75% of the business that we did in the June quarter that just finished and that seems about the right rate as you go forward.

I think the question is these are pilot investments, and what we are hoping to see is obviously the expansion into more manufacturing and more ramp up.

So we anticipate that as a percentage we probably won't see a lot of difference but obviously we are hoping for volumes to pick up toward the end of the year.

Thank you very much.

Our next question from the line of Stephen Chin with UBS.

Great, thank you.

My question is about the ICOS acquisition.

Now that it's integrated into the Company, do you have plans in place to move the manufacturing of their products over to Singapore, and when would that be, and how much could that help gross margin at some point?

Hey, Stephen, John Kispert.

We don't have any plans to make any changes at this point we are working closely with the management team at ICOS.

So I would say it's very premature to even think about the things you are talking about in your question.

Thanks, John.

Our next question is from the line of Patrick Ho with Stifel Nicolaus.

Thanks a lot.

As you shift to the outsourcing in Singapore, how quickly can you react if there's a snap back in demand and request for shipments?

Well, that, of course, is the key to our business.

We feel very good right now about--at this level being able to quickly, when I say quickly, over a two to three quarters, be able to double the size of our output.

Our cycle times, as I said in the prepared remarks, are down.

The newer products are coming out with common platforms and much lower cycle times.

The Singapore plan is doing outstanding.

That is not one of my big concerns.

I think we can react very quickly to any sort of pick up anywhere in the world.

Thank you very much.

Our next question is follow-up from the line of Timothy Arcuri with Citi.

Hi guys, again.

John, I'm not super bearish on memory.

But I guess the big argument to kind of make memory better over the longer term is that the orders come down and they kind of stay down for at least a couple quarters.

So I'm just looking at the increase in September.

It's about a tripling albeit off of a low level in June, but is that increase pretty broad-base or is that being driven by one particular spender?

I would think of it as being one, maybe one and a half large orders.

Okay, and then, just kind of a bigger picture question relative to 45 nanometer.

The leverage in the story, really, the kind of incremental opportunity at 45 versus 65 has been a big part of the story.

And I guess as I'm looking at the order mix you are kind of already, it seems like, 75% of the way through the mix shift now.

So is the 45 nanometer story, would you argue, the kind of leverage that you get incrementally versus 65?

Is that kind of over now and so you are already looking forward to 32 incrementally?

Tim, it's Rick.

No, unfortunately what we're not seeing much of is 45 production, we are seeing 45 development this pilot lines.

So we are getting early validation and in this kind of environment the reason we hold up relatively well is because we get a lot of technology buys.

We get technology buys and that's what's going on right now but they're not--people aren't scaling production; and so we'd expect to see the ramp up of 45 play out in the models that we have discussed in terms of incremental opportunity.

Rick, just to make sure you said that the incremental opportunity at 32 relative to 45 is 30%.

Is that the same number as 45 relative to 65?

Correct.

Our next question from the line of Gavin Duffy with Broadpoint Capital, Inc.

Yes, thanks, guys.

I was just wondering you are talking about debooking $15 million in the quarter and then you have got this 17 or $715 million shipped backlog.

And I'm just figuring so you are pretty comfortable with that number that it's scrubbed enough?

Great question.

We are watching it very closely.

I think the point I was trying to make was we have been watching it closely for the last four quarters.

In other words, we didn't just wake up this quarter and debook $15 million.

We have debooked every quarter for the last four quarters.

So we feel comfortable today with our backlog.

Most of the deliveries are within the next six months.

A couple of them have moved out to maybe 7 or 8 months, but I feel very comfortable that at this point in the cycle with the backlog.

If you look at our history every quarter we are debooking.

So I'm not giving you a number that all of a sudden we'll drop on you.

It is our very best estimate and we call it actually every two weeks in this environment and recheck with customers.

I think the other data point that you should think about with your question is the shipment number I gave out earlier also.

We are shipping quite a bit of it just in this quarter and also in the December quarter.

Okay, and I-- appreciate it.

If I could just sneak one more in here, with business being down across all the product lines when you start to see some improvement is it one area that might improve before the others in terms of wafer, radical or metrology?

There is a case historically and many of the folks listening know that, Rick mentioned this earlier.

As we come out with newer products, particularly in the radical space and the wafer space you might see those places pick up first because obviously those are the--you need radicals and you need better wafers to ramp.

Those are typically the first jumps that we'll see.

But in this case I think to some of the prior questions we have a bunch of capacity-like opportunities for large companies that are taking advantage of the environment the economic environment to get a jump on people with some of their--with newer fabs.

And in the case of memory, to Tim's question they're trying to move quickly from 200 millimeter to 300 millimeter.

They are trying to get below 6 X technology nodes.

Why?

Because they want to lower their cost and drive profit.

I think in this case you might see a pop some time in the end of the calendar year driven less around technology more about just somebody trying to change the basis of their business.

Thank you very much.

Ladies and gentlemen, we have reached the allotted time for question.

Mr.

Lockwood, please proceed with any closing remarks.

Okay, great.

Thank you, Christian.

Thank you all, once again for your participation today and your continued support.

This concludes our call.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.