科磊 (KLAC) 2009 Q2 法說會逐字稿

Good afternoon.

I'll be your conference operator today.

At this time, I would like to welcome everyone to the KLA-Tencor Corporation second quarter fiscal 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) Now I will turn the call over to Mr.

Ed Lockwood, sir you may begin your conference.

Thank you, operator.

Good afternoon, and welcome to KLA-Tencor second quarter fiscal year 2009 earnings conference call.

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

Joining me on our call today are Rick Wallace our President and Chief Executive Officer; and Mark Dentinger, our Chief Financial Officer.

We're here today to discuss second quarter results for the period ended December 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 at www.KLA-Tencor.com or call 408-875-3600 to request a copy.

Rick will lead off today's call with updates on the current market environment and the Company's performance in the December-quarter, and provide guidance for the March-quarter.

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

The simulcast of this call will be accessible on demand following its completion on the investor section of our website.

On the website you will also find a calendar of future investor events, presentations and investor conferences as well as links to KLA-Tencor's SEC filings including our annual report on Form 10-K for the year ended June 30, 2008, and our subsequently filed 10-Q reports.

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

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

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

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

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

With that I will turn the call over the to Rick.

Thanks, Ed.

Good afternoon, everyone.

Our second quarter fiscal 2000(Sic-see press release) results reflected the compounding effects that the continued macro economic recession is having on an already weak industry environment for semiconductor equipment.

In Q2, KLA-Tencor paid sharp reductions in capital spending order push outs and factory shut downs across all end markets and geographies and during the quarter our customers accelerated plans to cut costs and conserve cash and they are dramatically scaling back their investment plans and reducing factory utilization throughout the period.

This resulted in an unprecedented low level of demand by the quarter end, and as a result, we experienced sharper than anticipated declines in our orders, our revenue and our profitability in the period.

Also we see little sign of any meaningful recovery in the near term, and we are guarded against the possibility the business could actually decline from these already low levels.

In light of this for an ongoing review of our short term outlook.

We have already taken aggressive measures to reduce our operating expense and to drive structural efficiencies across our work and now we're in the process of evaluating additional actions to adjust our cost structure in order to further reduce our break even revenue levels and to maximize our cash in this extremely challenging business condition.

There's no doubt that we are experiencing extraordinary times.

However, while we can't change the economic environment in which we're operating, we are well equipped because of our market leadership, the resources we have, and our experience required to manage through this period and to continue to execute on our long term strategy.

So notwithstanding our increased emphasis on reducing costs we do continue to invest in our business, our technology and our customers to strengthen our competitive position and lay the foundation for future growth.

We are confident we can manage through this downturn and emerge an even stronger Company than we entered it.

Let me talk about the December-quarter end market environment.

On January 12, we updated our guidance to reflect the steep decline in the industry activities that we were experiencing in the month of December.

Our final results for the December-quarter were in line with the revised outlook.

New bookings were $243 million, down approximately 25% from September and Q2 bookings reflected greater than expected drop in process control demand in the period.

As our customers effectively halted technology development activity in the face of their extraordinary challenging market conditions.

This is a unique condition and I think this reflects the depth and severity of this downturn.

For years and throughout several cycles customers have told us that even under the most severe end market conditions they would continue to invest in technology development as a means of preserving near future competitive advantage.

In this period, customer activity was an exception to that rule, in fact excluding logic which did continue to invest, foundry and memory were essentially idle during the quarter.

As we manage the current downturn and position the Company for the future we will continue to maintain strict cost disciplines as we advance on our strategic objectives, we're going to focus on our customers, we're going to drive a high level of investment in our market leadership and optimize the growth opportunities that have been available to us in our recent acquisitions.

We believe this will pay a critical roll in our long term success.

I shift my focus and talk about the year ahead and discuss where we're placing our emphasis as we execute on our strategic objectives in this environment.

First our focus on our customer remains our top priority, we're maintaining a level investment in R&D as we are sure to have the critical success after for KT.

Our goal is to maintain a leading position versus our nearest rival in every market we serve and today we have a leading position in all but two of the 24 markets that we participate in.

We are going to continue to maintain our leadership in the environment in spite of the fact our customers are looking for ways to conserve their capital.

In fact we believe our competitive position will actually strengthen in this downturn as customers recognize that we're committed to maintaining a high level of investment and innovation throughout this cycle while others are cutting back to preserve their viability.

Our continued emphasis on innovation and this high level of investment gives our customers assurance that they are going to get the most value for their investments today and in the future.

Our second objective is growth, here our long term strategy is to consistently grow faster than the industry.

Obviously industry growth was negative in 2008, and is forecast to be negative again in 2009.

We have adjusted our focus to concentrate on cultivating and really strengthening the new markets that we gained both organically and through acquisitions.

We are going to continue to innovate and drive differentiation and gain efficiencies in our new platform.

So we are in a position to grow in new segments as we come out of this downturn.

In terms of our operational excellent which is our third objective our focus here is to drive structural improvements and achieve efficiencies across our businesses.

With the particular emphasis on the short term of managing our cost structure to reduce our break even revenue level and to maximize cash.

As we announced in November we are executing plans to reduce our operating expenses over the next couple of quarters in line with this objective and we are currently in the process of evaluating further steps to adapt to the declining macro economic conditions that we've seen.

We define doing globalization efforts and our focus on streamlining our organization will position ourselves to be even stronger when business stabilizes and growth resumes.

Our fourth objective is talent.

Here our focus is on developing and motivating the world class talent that's the heart of our Company and our focus in this current environment is to really optimize and engage and motivate those in place and help power us through these tough times.

We've weathered many downturns before and we are prepared to navigate through this one.

Clearly the market is uncertain, but we are focused on the right markets with the leading edge technology, we will have unparalleled solutions and world class talent for executing on our strategy.

From a position of strength, I think we continue to build our Company as we go through this period.

It does present actually unique opportunities to capitalize on our competitive advantage as we pull further away in terms of technology leadership, market leadership and leverage our financial strength to position us for the future.

In terms of the March guidance, given the variability in our customers forecast today and the results of the implication for our financial results we are adjusting our typical guidance practice to widen the range for our quarterly guidance estimates.

New orders in March are expected to be flat compared with December plus or minus 20%.

Revenues are expected to be between 280 million and $320 million with the non-GAAP loss per share in the range of a loss of $0.20 to a loss of $0.35 per share.

With that I will turn the call over to Mark.

Thanks, Rick.

I will remind everyone that we represent our income statement in two formats, one under generally accepted accounting principles or GAAP and the other in a non-GAAP format which includes amortization and write downs goodwill and intangible assets associated with acquisitions.

And expenses associated with our stock options investigation and related litigation and any other cost and expenses which we do not expect to be recurring such as restructuring charges.

Our balance sheet and cash flow statements are presented only in a GAAP format.

Most of my prepared remarks will reference our non-GAAP income statement, but where I reference the GAAP numbers I'll make a distinction.

A full reconciliation of our GAAP to non-GAAP income statement is attached to our press release and available at our corporate website.

KLA-Tencor.com.

Revenue for Q2 was $397 million, slightly below the guidance we provided in October of 410 million to $430 million and the GAAP loss per share was $2.57.

Non-GAAP loss per share was $0.12, below the low end of our guidance at break even plus or minus $0.02.

The larger than anticipated non-GAAP loss was driven by the following factors, lower than anticipated total revenues, net of standard gross margin impact, about $0.05 per share after taxes, lower than expected gross margins, $0.07 a share after taxes, lower than expected operating expenses, $0.02 of benefit after taxes, and higher than expected charges for other income and expense or OIE $0.02 a share after taxes.

The summary of the differences between Q2 GAAP and non-GAAP numbers are acquisition-related charges of $457 million or $2.28 per share after taxes which includes a $437 million impairment writedown securing costs of our acquired intangibles and goodwill.

Stock option restatement related charges of $9 million nd $0.05 per share after taxes and restructuring and severance charges of $24 million or $0.12 per share after taxes.

In summary, Q2 was a difficult quarter.

The deterioration in business conditions that we experienced in September continued throughout Q2 and worsened late in December.

In our October call we indicated that we would be taking steps beginning in Q2 to reduce our operating expenses to the 165 million to $170 million per quarter level by June of this year.

In addition to the reduction steps that began in the December-quarter, based on current conditions it is apparent that we need to further reduce costs and we plan to take additional cost reduction actions later this quarter.

Despite these difficult circumstances and our market leading position, most of our products was consistent with the last several quarters and we remain focused on developing our next generation tools.

New orders for Q2 were $243 million, below our guided range of plus or minus 10% from last quarters new bookings of $325 million.

In addition, approximately $28 million of customer initiated delays pushed out the December quarter and resulted in net new orders of $215 million.

We expect the pushed out orders to reenter our backlog when the industry begins to recover.

We ended the quarter with $628 million in total systems backlog after adjusting for customer initiated delays for foreign exchange impact.

The backlog at December 31, 2008, includes $177 million of revenue backlog for products that have shipped and been invoiced but have not been signed off by customers and $451 million in orders that have not yet shipped.

We expect the majority of the unshipped backlog to ship over the next six to nine months.

The approximate regional distribution of new systems orders and the quarter to quarter change in regional distribution was as follows.

US was 64% of new orders in Q2, up from 45% in the December-quarter.

Europe was 7% up from 4% in Q1 of '09.

Japan was 22%, up from 21% last quarter.

Korea had no new orders this quarter versus 13% last quarter.

Taiwan was 3% versus 6% last quarter, and the rest of Asia was 4% down from 11% in Q1.

The approximate Q2 distribution of new systems and services orders by market as well as the quarter to quarter change in market distribution was as follows.

Wafer inspection was 22% down from 30% last quarter.

Radical inspection was 8% down from 10% last quarter.

Metrology was 15% up from 14% in prior quarters.

And solar, storage, high brightness LED and other non semi was approximately 7% down from 9% last quarter.

Service was 48% of new orders in Q2 up from 37% last quarter.

45 nm and below development in pilot activity was roughly 70% of the semiconductor systems orders received in the quarter.

This is down from 85% in our September-quarter.

As we move forward, visibility into a meaningful turn of the business is very low, and we do not anticipate significant improvements in orders in Q3.

For planning purposes we are assuming new orders in Q3 of flat plus or minus 20% versus Q2.

Shipments in Q2 were (inaudible) down from $420 million in the September-quarter.

Looking at our income statement, revenue for the quarter was $397 million, this is down 24% (sic) (see press release) from last quarter and down 38% from Q2 of last year.

Our services business which has been much steadier and more resilient than our systems business also declined $4 million or 3% from the prior quarter as several customers suspended service contracts and idle tools in response to the downturn.

Our current expectations for total revenue in Q3 is a range of 280 million to $320 million.

Non-GAAP gross margin is 46% down 9% from September-quarter and 4 points below what we internally modeled at the beginning of Q2.

Lower than expected gross margin was largely attributable to $20 million in net additional excess inventory reserves required as a result of lowering our calendar 2009 manufacturing plant.

Operating expenses were $199 million down $10 million from the September-quarter.

R&D was $89 million in Q2 down $15 million from the September-quarter and selling, general and administrative expenses or SG&A was $110 million a $5 million increase from last quarter.

Quarter-over-quarter operating expense changes were due to lower average head count in all areas of the Company including both R&D and SG&A.

In Q2 we reduced our accruals for non-executive bonuses by $12 million, which reduced full categories of operating spending and the head count and bonus reductions in the SG&A line were more than offset by a $24 million increase in our allowance for doubtful accounts during the quarter reflecting collection concerns about certain customers who are experiencing financial difficulty.

In Q3, assuming there are no significant additions required to our bad debt reserves we anticipate that operating expenses will decrease by approximately $30 million as the full quarter impact from the Q2 cost cutting measures is realized.

Other income and expense or OIE was a net $12 million expense in Q2 largely as a result of lower yields on our cash and marketable securities portfolio and a $4 million write down of investments in our venture portfolio.

OIE was a $4 million gain in fiscal Q1 in part due to a $9 million one time recovery of bad taxes.

The non-GAAP tax rate benefits is 29% in Q2 versus a 37% charge last quarter.

Although our Q2 rate f 29% is very close to our long term modeling rate of 30%.

The rate benefit in Q2 was comprised of our expected benefits in fiscal 2009 of about 40% offset by quarter specific charges of about $3 million.

Our non-GAAP operating loss was $20 million or $0.12 per share in Q2.

These numbers include stock-based compensation expenses of $22 million, and the weighted shares used to compute the loss per share were 169 million.

At the revenue range I previously mentioned we would expect Q3 non-GAAP loss of $0.20 to $0.35 per share assuming a tax benefit of 30% and further assuming that there are no meaningful charges required for additional customer collection problems or unanticipated charges for excess inventory.

As I previously mentioned, we also took a $437 million GAAP impairment charge in Q2 to write down carrying value of the unamortized portion of acquired intangibles and goodwill.

The goodwill component of the charge is $272 million and was attributable to acquisitions in the Metrology space.

The other intangibles impairment of $163 million was largely attributable to lower near term expectations for businesses we recently acquired.

Turning to the balance sheet, cash and investments including long term marketable securities ended the quarter at just over $1.2 billion, a decrease of $84 million-quarter to quarter.

Cash used in operations which include the semiannual interest payment of $26 million was $36 million in Q2 versus $81 million in operating cash generated during Q1.

We also used $49 million in cash to repurchase shares early in Q2, $25 million to pay our dividend and we generated $21 million from stock sales to our employees.

Net accounts receivable ended the quarter at $332 million, down $38 million from the prior quarter end.

DSOs were 75 days at December 31, versus 63 days at September 30.

It was previously noted we increased our allowance for accounts to $24 million during Q2 to reflect collection concerns and the allowance at December 31, 2008, stands at $36 million.

Inventory decreased by $31 million from last quarter and ended the quarter at $473 million, a large portion of the decrease in the balance resulted from a $20 million net charge for excess material and this charge was also principally responsible for the lower than expected gross margin in Q2.

Net capital expenditures were $7 million in Q2 versus $10 million in Q1.

The weighted average shares in Q2 were 169 million versus 174 million shares in Q1.

The decline in weighted average shares is largely the result of using the diluted method in Q1 when we had positive earnings versus the basic method in Q2 when we incurred a loss.

For the March-quarter we are expecting another loss, so our weighted shares are expected to be about 171 million shares.

No stock repurchases are anticipated in the quarter.

Total head count ended the quarter at 5,894 a decrease of 412 from December 30, the decrease if Q2 largely occurred following a reduction in force action we took in mid November and we expect our head count will continue to decline during Q3 as we adjust the Company to reflect for our business levels.

Finally, our visibility into demand for semiconductor based products continues to be limited.

At this point we do not expect any meaningful capacity related spending for at least the first half of calendar 2009.

Long term fundamentals are compelling and we are confident in our new product pipeline, but we are also aware of our business conditions.

In our October call we announced plans to reduce our quarterly operating expenses to the 165 million to $170 million range by the end of June of '09.

And doing so will allow us to break even between 350 million and $400 million in quarterly revenue.

We took significant steps during Q2 but in light of the continuing weakness in the industry and uncertainties in the macro economy we now expect to take additional actions in Q3 and Q4 to further reduce operating expenses to the 140 million to $145 million level by the second half of calendar 2009.

These expense levels should allow us to break even at the operating cash flow line.

At total revenue level, 300 million to $325 million a quarter, assuming there can are no additional customer collectibility issues and manufacturing plant is stabilized.

In summary our guidance for Q3 is new orders are expected to be flat plus or minus 20% versus Q2.

Total revenue between 280 million and $320 million.

Non-GAAP loss per share which includes stock-based compensation but excludes one time charges and amortization will be a loss of $0.20 to $0.35 per share assuming a tax benefit of 30% pretax loss.

This concludes our prepared remarks on the quarter.

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

Thank you, Mark.

At this point we would like to open the call for questions 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 will do our best to get everyone in today's call.

Operator, we're ready for our first question.

Your first question comes the line of Jay Deahna, with JPMorgan.

It is [Jennie Yu] in for Jay.

(Inaudible) yesterday said they were in the midst of a category five hurricane and it's going to last six to eight quarters and WSA will be down 50%.

Do you feel the same with respect to your business and if you can explain why that would be great?

Hi, Jennie.

It is Rick.

I'm sorry, the -- down 50%?

Was that the number?

Yes, WSA will be down 50% in '09.

For '09, yes.

I think that as we look out on the year -- we don't make a business of forecasting the business over the long term.

It is very difficult the do that.

Instead we try to model what do we think reasonable scenarios are and how do we react.

We want to have some lead time in our models because we've got -- the actions that we take take a little while to implement.

There's no question as we have seen a pretty dramatic done draft in the business and a lot of customers shutting off.

When we look at '08 it was a difficult year.

We did hold up better than the rest of our major peers, however and we think the same thing will happen in '09 but I do think it is reasonable to assume you can model anywhere between a down 35 to down 50 for CapEx in '09 but it's still early to tell what's going to actually happen in terms of later in the year.

We have trouble predicting what March is going to look like.

We are trying to size the Company appropriately and that's why we talked about the 300 to 325 run rate and go from there but I think it is awfully early to forecast that far out.

You perform better than your peers because you are in process control or because of market share gains or why would that be?

We look across a number of metrics, booking, shipping revenue, operating profit.

It is a combination of factors but stemming from the necessary investment our customers find in the segments that we serve, inspection metrology, we also believe that our market position enables us to earn the significant investment it requires our customers to make to buy our tools.

But they see value in that.

It is a function of the segments that we're in and I think our business model also enables us to continue to perform even in very difficult periods like this relative basis better than the rest of our peers.

Okay.

Thank you.

Okay.

The next question comes from Jim Covello with Goldman Sachs..

You guys have talked about some logic activity in terms of Q4 orders, but really foundries and memory being idle.

Relative to the flat guidance in Q1 is that what you expect from an order perspective in Q1 and then potentially looking a little bit further out is that what you see for the foreseeable future?

Sure, Jim, a little bit of action, we expect a little memory spending I wouldn't say a lot.

Nothing is a lot in these ranges but certainly you heard Korea was 0 for last quarter.

We see some in memory and a little in foundry but still the dominate part of our business the largest share would be in the logic.

The way we're currently modeling it.

I have to put a caveat on that which is there's been a lot of variability so it is very hard for us at this time to have much certainty around any of these forecasts.

Thank you so much.

Thanks.

Your next question comes from Timothy Arcuri with Citi.

Your line is open.

Mr.

Arcuri, your line is open.

Can you hear me now?

Hello.

Yes this is (inaudible) calling in for Tim.

Hi, Rick.

Have you looked at maintenance CapEx for the industry?

It would be interesting to see what your view on that is?

Sure.

I understand the model.

It is an interesting thesis and I agree there is some level of investment our customers continue to make just to keep their relevancy of the investment fleet that they have.

In our case, we do see products being upgraded.

So I think the idea that we are close to maintenance is an interesting way to view it however it is not exactly case for our kind of equipment.

We do see investment going on in upgrading the existing fleet.

Since we are not so closely tied to production, when we're tied to the development of new technologies and ramping it doesn't apply as much for KLA-Tencor.

I think the notion that the CapEx is bottoming and we are in the down 35 to 50% range for the calendar year.

If you attribute that to this maintenance concept I think that is a reasonable thing to do.

And have you looked at a number which the down 50%?

As I said earlier we modeling a down 35 to down 50 because we have such little visibility into the later parts of this year.

We have a reasonable understanding of what March could look like but even then we have wide numbers around it and then we believe a slight improvement in the overall environment in the June-quarter.

So much of this depends on the macro economic factors as we now and also on the credit and availability of our customers to get access to funds.

I think that those are factors that make it very hard to call.

That's why we have a fairly large range for our internal modeling purposes.

Okay.

Thank you.

Okay.

Thank you.

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

Your line is open.

Good afternoon.

Rick, I am wondering in this kind of environment when you are looking at your sales technology buys mostly into logic, what parts of your product portfolio are doing better, nothing is doing great but what is doing better than others and are you seeing a change in the competitive environment in this kind of weak environment or is there just not enough business to judge that?

I think I missed it if you gave it but usually you give the break down by product segment orders.

Sure.

Yes, Brad first of all we do still give it and I think we looked at -- Mark can pull that up.

Brett, let me give it to you real quickly and I'll make one correction before I turn it back to Rick.

In my prepared remarks I think I said the revenue for Q2 was down 24%.

That was incorrect it was actually down 26%.

So if you were listening, I apologize for that.

Let me just say, what we disclosed in my prepared remarks is the wafer inspection was 22% this quarter which was down from 30 last quarter.

Radical inspection was 8% this quarter, that was down from 10 last quarter.

Metrology was up a little bit, 15 this quarter, versus 14 last quarter.

The storage solar high brightness LED and the non semi stuff was down approximately 7% this quarter and that was elative to 9% last quarter and service was up considerably this quarter as a percentage of the whole.

It was 48% in Q2 versus 37% in Q1.

Okay.

Brett, so on your other question, technology buys unlike in the past where this part of the cycle we would have seen people buying in anticipation of ramping or slow ramps, this is almost pure technology buy so the products that tend to sell more in that kind of environment are the ones that are used for process characterization and development.

Almost nothing for pilot production monitoring.

So that means the high end bright deal wafer inspection tools would be an example of the kind of product we would be selling in this environment.

So we don't see much in the way of overall business capacity but it certainly tends to be on the high end.

In terms of the competitive front, there really isn't a lot of data to see market share but the indications are we have actually strengthened our position and I believe that is because our competitors are dealing with lability issues and we are continuing to invest pretty heavily in the R&D.

We have also made an upside maybe, is we have made remarkable progress in our product roadmaps, unfortunately that's because we're not being bothered by field issues because our IT customers are running very high utilization.

It does give our engineering guys a chance to focus but we made really good progress on the product roadmap this last quarter.

One last quickie, are you having to extend , we have heard from some companies that they're having to extend terms and things like that.

Are you seeing a big change in what you are needing to do to secure some of

Yes, Brett.

This is Mark.

The answer is yes.

That does come in, entered into the discussion, and we deal with it on a case by case basis but yes, the customers financial issues are being passed along to us and it is reality of doing business in this environment.

On top of that we are being careful about how we do that.

So that is something that we do look at as Mark said case by case.

Great.

Thank you.

Thanks, Brett.

Your next question comes from C.J.

Muse from Barclays Capital.

Your line is open.

Good afternoon.

Thank you for taking my question.

I guess with this deck coming in I guess starting in Q4, how do you think about your non semi equivalent business growth or lack of growth rate in 2009 calendar year relative to calendar '08?

How should we think about that contribution?

It is a great question C.J.

I think right now they're different segments we are seeing in that, the MIEs for (inaudible) actually is pretty tied to the rest of our business.

I would say that's not really a business that is outside our core, the radical business and that business seems to be doing all right relatively speaking.

We have seen a slow down in the back end, pretty severe slow down in the back end and we have also seen a recent slow down in the solar business.

I would say that the expectations for the growth rate we have for those businesses we are not seeing it right now and I don't see anything in the near term that leads us to believe that there will be significant growth on that side of the business.

The one exception is the high brightness LED stuff seems to be going along and so there's some business there for us.

To net it all out though it is not much of a factor it looks pretty consistent with the rest of KT.

Okay.

And then in terms of the order guide that $100 million range, I know that we are bouncing along the bottom here but could you give a little specificity.

Is that one or two orders?

Is that primarily Korea, how should we think about that?

It is such a big number as you gathered.

And we debated on whether we should guide at all because it is such a big number.

It's really a number of factors.

Based on what we saw in the December-quarter, I think our historical ability to predict who comes and who goes is just such that it is really hard to say because people that we counted on in the past that always invested and were always there no matter what the environment was for the last ten years, they backed out at the end of last quarter.

It is really, unfortunately it's across the board because member service is a good part of our business so you are really talking very broad range on the systems business.

Okay.

If I can sneak one last one.

The tax rate 30% fiscal '09 and fiscal '10.

Yes, good question.

Actually our fiscal '09 I think that the rate is likely to be a little bit higher than that just because there's some unique things happening this year and in fact if you looked at, if you broke down comments on the Q2 tax rate it was actually spare one time items, we probably would have had a tax benefit closer to 40%.

My suspicion is we are going to be a little bit better than 30% for the rest of fiscal '09.

But I think when we, when we turn the corner and go into fiscal '10, the best guess we have is our long term modeling assumption which we use for all of our internal planning of 30% is still where the rate will vacillate around.

Okay.

Great.

Thank you, guys.

Your next question comes from the line of Raj Seth with Cowen and Company.

Rick, you may have touched on it before but I missed it.

Can you talk about how you expect ser in this environment to trend across the relative to the equipment forecast you gave?

Sure, Raj.

I think what we are seeing is pressure in the service business for sure and we did see service come down last quarter due to that pressure.

What is interesting now though is when we talk to our customers what we are finding is they're actually pretty heavily utilizing the tools that they have.

So I think for the process equipment guys there's a cost of consumables and it is directly tied to wafer processing so they're going to I think suffer more greatly than we will on our service business.

We have seen is customers actually increase sampling range and keep the tools utilized.

I was talking to a team yesterday that were talking to customers and they said with your excess capacity.

And the customer said we don't have any excess capacity.

We are using it all.

As a result of that I think our service business will hold up better than our peers but there is pressure on it.

Our challenge is to make sure we continue to deliver value to our customers in that so we are working very hard on it.

We don't have the consumables part of that and I think that is part of what helps us in this.

Sure.

If wafer starts let's say are down 35%, and other service businesses are down proportional to that, is half of that rate realistic for you?

I think it is and maybe even better.

I think the reason better is because a lot of the equipment that we have under contract is being used for some of the development work.

So I think that that could help us.

But there is definitely pressure on it for sure.

Customers are looking to cut their operating expense as well.

Great.

Thanks.

Thanks, Raj.

Your next question comes from the line of Atif Malik with Morgan Stanley.

Your line is open.

Hi.

Thanks for taking my question.

Rick, you mentioned KLA is going to come out stronger competitively through this downturn.

If I look at the PVC market let's say you have 60% of market share, you have 10% applied, and 10% with Hitachi and the remaining 20% is quite fragmented assuming all of those guys go out of business in this downturn, what percentage of the 20% can you capture and given your powders and positioning?

That's a great question.

I think it is two things.

One by stronger I mean better products, we keep investing, we have got some very exciting products in pipeline.

So I think it could be two thing, one we can create more value which means not necessarily share gain per se but more pricing power.

That's an important attribute and the other thing is I do think some of the smaller guys are not going to make it through this cycle.

From that standpoint there could be some share gain involved in that.

We are not modeling any.

I think that our general belief is we focus on maintaining our share, we kind of like our share where it is but we think we can to continue to create more value and that will help protect and build our gross margins in the recovery.

Right.

But have you actually had discussions with customers or have they come to you with the concerns that the smaller guys won't be able to, they don't want to rely on the smaller guys to cycle?

Yes, actually we have seen some of that.

I think that there is some concern from our customers about the ability of some of the smaller players to continue to invest.

On the other hand, our customers still have dual supplier policies and I don't see them changing that behavior.

So I think it is a combination.

For us, the best thing we can do is keep creating products that our customers need and I think we will be able to do that by virtue of our balance sheet and our business condition.

One quick one, shipment guidance for the March-quarter, what is the number.

We actually have suspended giving shipment guidance on a quarterly basis, did that last quarter.

We are disclosing shipments but not shipment guidance.

Okay.

Thanks.

Your next question comes from Satya Kumar with Credit Suisse.

Hi.

Thanks for taking my question.

I jumped on the call a little bit later, Rick.

I just was wondering if you had any comments on the variability of the bookings guidance for March?

Is that because, is there any large products at all that might be swinging things around or is there a bunch of little orders that can move numbers from the low end to the high end or what would cause that?

The variability of the guidance is we are at such low numbers that you are talking in some cases, if you talk about one of our larger tools it can swing a very large percentage.

It is not so much that there are large orders, it is that for us many single sales constitute a larger percentage than ever before at these levels.

What I said earlier is we debated whether or not to even give the guidance at all but I figured with a larger range we can talk about the midpoint of where we were pointing.

We saw so much strange behavior last quarter in terms of our customers that we felt that it was necessary to widen the range.

Understood.

If I look at the deferred revenue balance, I missed that number.

What was it at the end of December and what do you expect the volume will be in March?

Let me look it up for you real quick.

It is two components, the deferred revenue number at the end of December was about $71 million and the deferred systems profit number was $83 million.

Okay.

And how you look at it.

The deferred revenue number from the September-quarter was up a little bit about $10 million, and the deferred profit number was essentially flat.

Sorry, did you say $177 million or $77 million?

77.

Okay.

And what do you expect the draw down on that will be in March?

We are not forecasting what the specific draw down would be on the deferred revenue in March.

Would there be a draw at all or would it be--?

I suppose it go could go either way.

Understood.

And on cost reductions you mentioned that you are going to take more expense reductions.

How should we think about the magnitude of that as we look at the second half?

Yes, actually the cost reduction actions that we are looking at that we would start the action on this quarter are designed to drive us into an operating cost structure of 140 million to $145 million a quarter, probably realizable in the second half of this year at some point.

Got it.

Thank you.

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

Great.

First a clarification your guidance for bookings flattish.

Is against the growth or 243 gross or the 215 net in the December-quarter?

And second question is your revenue guidance is relatively in line with consensus but EPS range is weaker there.

The two areas that we haven't talked about is really the gross margin line or the other income line.

Are there anything special going on there we should be thinking about in the March-quarter.

The other income line, that should stabilize again assuming that we don't have any additional writedowns required in the venture portfolio and interest rates are reasonably stable as we move through the quarter.

They are so low right now but he passive yield on our investment portfolio is so low right now it is hard to imagine it going much further.

On the venture portfolio there's always some risk it could go down but those are the two things that drove it a little bit lower.

On the operating side it is strictly a question of how soon we can action some of the decisions we need to make about the further cost reduction actions on operating expenses but as I indicated we are going to start them this quarter and try to drive forward.

The gross margin line is the tricky one, with the guidance as wide as it is and we have contemplated and taken into all the considerations that Rick previously mentioned in establishing the guidance, the real question boils down to product mix versus service mix and whether or not we are required to draw down build plans any further than what we have already drawn it down for the rest of calendar '09.

We are being cautious about the gross margin percentage that we are implicitly guiding to but it is a wide range of variability and that does account for some of the reason why you would see not as robust a profit as you might expect at those revenue lines.

The bookings guidance is that on natural gross number comparison?

Yes.

Yes, it is against gross?

Yes, against gross.

Final question for me is I think at the end of each calendar year you get some service contract renewals so is your expectation that service bookings are down in March and system bookings are up?

Yes, not necessarily we are keeping a tight eye.

We did get a drop off in the, if you will contract renewals or contract suspensions as we ended the December-quarter.

It is possible as we move forward into the third and fourth quarter that we can make some of that back up with what we call the billable work where people call up and we get an increased chargeability so we are not necessarily signaling one way or another what that might have to do with how that may respond to this (inaudible).

Your next line is from Steven Chen with UBS.

Your line is open.

Hello.

This is (inaudible) calling in for Steven Chen.

My question is your service and sales have been relatively stable.

Do you expect them to continue at that relative strength going guard and then I have a follow-up.

It is not clear, we would expect it to be stabler, as Rick indicated, than some other industry and than some other companies in our peer compares, but just by virtue of the nature of the business but it is not clear whether or not it will strengthen or weaken in this environment and we are sort of prepared for a flattish type of outcome as we are looking at it right now and clearly hoping for better than that but as it is right now it is a little difficult to tell.

It was fairly strong into early Q1 but it did drop off, excuse me into early Q2 but it did drop off late in Q2 so as it is right now it is not clear exactly where it is going and it was down slightly for the whole quarter, again we are thinking about that as flattish right now and looking for further signals.

It is not likely to rapidly drop off and face of earth and it's also not likely to skyrocket in the current environment.

Thanks for that.

Just as a quick follow up.

Since sales to Korea were 0, do you get the sense that your Korean customers are waiting for a decision on the Taiwanese Government bail out before signing orders to create some pent up demand?

Wow.

I -- I hadn't thought that aspect through.

I think that what we saw there was just reluctance to spend capital in an environment where pretty severe changes to their end market.

So I think a lot of our customers are just trying to get their footing right now and figure out what does the world look like before they spend.

And we had one major customer in Korea obviously go through a reorganization.

That probably contributed to a slowing decision making process.

So we will see.

All right.

Thank you.

Your next question comes from the line of Gary Hsueh with Oppenheimer.

Hey.

Thank you for taking my question.

I might have missed this but did you give the order break out by memory, foundry and logic?

Sure.

Well, what we did is we broke it down actually we didn't actually disclose that.

We did have the data compiled somewhere.

Let me see if I can look it up for you.

Let me just move on.

I am just trying to parse the difference in your guidance with the difference perhaps in Variant, you guys are guiding to a much more modest decline in revenue and certainly the order outlook looks like it is a lot more benign than what the industry feels like.

Do you feel that has more to do with your inspection Metrology market or do you think it has more to do with your specific customer exposure primarily to one single logic IDM customer here near term in December and March?

All right, Gary.

So I will take the first part of your question also.

Memory is about 3% last quarter so logic was 90 and foundry was about 5%.

It didn't quite average to 100, 92, 3, and 5.

We have 25% of our business was non-semi and the service business is holding up better than our peers.

So I think back to your question of why do we think things are -- why are we projecting that we will hold up better.

I think it is a combination of a couple factors.

One, we still do see technology buys happening although at a low level for technology development and the people that are doing pilot production are counting on production aren't going to see any of that business and that tends to be heavily inspection metrology related.

I also say that the service business holds up better for us in this kind of environment because of the nature of the business we are not selling consumables, we are not tied directly to manufacturing volumes.

And I think the third thing is we do have some business outside of semi which are doing okay right now, I wouldn't say they're doing great but we said the non semi was going to be a reasonable part of our business.

That continues to go.

Those are the factors that allow us to view the world that way but our pure semi systems business we do see a, that would be more pronounced now but we have some other businesses to support us.

Okay.

My last question is just to kind of test how conservative your guidance is.

Are you automatically assuming here a certain percentage push out in shipments and revenue out of your currently existing forecast for the March quarter?

Are we -- is there a sufficient amount of conservatism now built into your March-quarter guidance that pretty much preclude a negative preannouncement here at the end of Q1?

Obviously that's why we would preannounce it.

We gave a range, we widened it because of the volatility and the lack of visibility in the industry.

This we thought was a reasonable look given all the variations.

But, I would say this market almost anything goes, and if you saw what happened at the end of December, I think it surprised a lot of people.

So, obviously there are other things that can happen, but we scrub it weekly, we look at it closely and right now we think it is reasonable estimate for March.

With regards to push outs, we have modeled that I think reasonably well, and I think it is pretty reasonable estimate at this point.

Okay.

Fair enough.

Thank you.

Thanks.

Your next question comes from the line of Mahesh Sanganeria, your line is open.

Thank you very much.

Just the break out you gave for the systems orders just want to make sure that logic 90%, foundry 5% and memory 3%.

Yes, logic 92 was the actual.

Okay.

So if I look at your system order close to [100 million to $120 million], logic most of, looks like probably from one customer, how does that logic order trend in next couple of quarters?

Yes, I wouldn't assume one customer.

The other thing on this is I would say, that doesn't count non semi which was about 25% nor does it count service but how did it trend, I think that we expect the March-quarter logic to not be as strong as either a percent of our total and since we are guiding flat it also means it would be down in absolute terms.

So logic is going to be down and you expect foundry or memory, which one?

We are talking such small numbers so let me just be clear because if somebody says you are talking about memory going up by a factor of five I will say we are talking about a small number of orders of things that we are pretty clear visibility into memory.

Some small percentage of memory and a slight up tick in the foundry business.

So overall can you give us an idea of how the non semi business is going to do in 2010 versus 2009?

Seriously?

In this environment.

Sorry, sorry.

2009 versus 2008.

Oh, okay.

Okay.

That is still hard by the way.

I think the 2009 is, it is at everything that we can see, the end of the calendar year of '08.

For example our solar business was chugging along and growing and we saw the brakes just get hit late in the year, in the calendar year, so I think solar has cooled off quite a bit and I think it is a multitude of reasons for that so we will see some business there.

The high brightness LED, even those guys I think have stopped growing, I don't know if they're shrinking yet but they stopped growing, there's some business there and some opportunity.

Back end tests right now is virtually turned off.

There's a number of segments there that are going be down just like the rest of the market and it is hard to see any short term catalyst for really anything.

That's why we are so guarded on our visibility.

We model '08 overall '08 to '09 and it looks like overall trends continue to be downward pressing.

Okay.

Thank you very much.

Thank you.

Your next question comes from the line of Peter Kim with Deutsche Bank.

Hi.

Thanks for taking my questions.

I was wondering, given the sharp cuts to OpEx and R&D I'm sure is included in there, do you expect to exit or shed any market segments?

We have an ongoing review of our portfolio Peter, and I think the decisions that we have made in the last few years still are the right ones in terms of the markets we chose to exit.

Right now everything is under review but we actually like the position we have in all the market segments and I think the challenge for us is to maintain those options for growth platforms as we go forward.

Part of our belief in this downturn is that others will have to do that because they're not as financially viable as we are and then we will be in a position to grow share as we come out.

There's none we are currently look at exiting at this point.

Okay.

You characterize the back end and some of the sub segments of the front end.

I was wondering if you could characterize the bare wafer market how that is doing relative to the other segments?

Sure.

Bare wafer is off.

There's almost no advancement going on at bare wafer and I think that the bare wafer manufacturer has seen the demand for their products reducing.

Whether or not that ticks up later in the calendar year is a pretty hard one to judge right now.

But there may be some technology things that happen there but capacity I think are -- I think they've got enough.

Okay.

Thank you.

Your next question is from Patrick Ho with Stifel Nicolaus.

Thank you for taking the question.

My name is [Marianne] in for Patrick Ho.

What is your take or position in terms of the potential consolidation in the DRAM market?

And do you think this could hurt or help (inaudible) when all is said and done -- when all is said and done?

I think overall it is probably healthy for the market to get to a more rational number of players and so I think that if there is consolidation that comes through the cycle in the longer run that would probably make a healthier industry and that's goods for us.

I think it's also -- it favors larger players.

So from that standpoint I think it's good for us.

I do think for the short term though, it means there's churn, there's less decision making and that's part of the turmoil we are seeing in the market right now.

I don't think for the short term it is good for anybody but longer term probably good.

Okay.

My last question is what is your view on cash and what do you expect to burn in the near term?

Obviously cash is critical in this environment.

That's the, I think that's pretty clear for all of the major players.

So our philosophy has been to do everything we can to reduce our burn rate but at the same time recognizing that we do have a very strong balance sheet and we have the means to be able to trade off some cash usage for continued R&D investment.

I'll let Mark add any color to that.

Yes, when you talked about the model going forward by the end of calendar 2009, basically break even at the operating cash line is a 300 million to $325 million line.

It gives you a sense of the fact that if we can stabilize that line, we think we -- our cash balances and our other resources will allow us to continue for quite a while at those levels.

Okay.

Thank you.

That concludes today's questions.

Do you have any closing remarks?

No.

Thank you very much, operator.

Thank you, everyone for joining us on our call today.

We look forward to seeing you all on the call, our next earnings call is scheduled in April.

This concludes today's conference call.

You may all now disconnect.