科磊 (KLAC) 2009 Q3 法說會逐字稿

Good afternoon.

I will be your conference operator today.

At this time, I would like to welcome everyone to the KLA-Tencor third quarter financial results conference call.

(Operator Instructions).

I would now like to turn the call over to Mr.

Ed Lockwood with KLA-Tencor.

Thank you.

Good afternoon, everyone.

Welcome to KLA-Tencor's third quarter fiscal year 2009 financial results conference call.

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

We are here today to discuss third quarter results for the period ended March 31, 2009.

We released these results this afternoon at 1:15 pm 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 companies performance in the March quarter and provide guidance for the June quarter.

Afterwards Mark Dentinger, will review the preliminary financial results for the quarter.

And then we'll open the call for the questions.

A simulcast of this call will be accessible on demand following its completion on the Investor Relations section of our website.

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

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

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

More information regarding factors that could cause those differences is contained in the filings we make with the SEC from time to time, including our fiscal year 2008 Form 10-K, as well as our subsequent form 10-Q and 8-K filings.

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

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

Thanks Ed.

Thank you all for joining us for our call today.

I'll lead off with a brief overview of highlights for the quarter, and provide commentary on what we are seeing in the marketplace today, and guidance for the fourth quarter.

And Mark will follow with details on the financial results, and finally we will conclude with your questions.

First, my perspective on some highlights of the quarter.

KLA-Tencor met our bookings and revenue guidance in the third quarter, despite continued weakness in the global economy and very low levels of demand in the semiconductor equipment market.

Our results show we are adapting well in this tough environment, and successfully managing our business in a climate where visibility continues to be poor, and demand beyond the near term remains very difficult to predict.

Revenue in the third quarter came in above the mid point of guidance at $310 million.

The non-GAAP net loss per share, including stock-based compensation, but excluding some one time items was the loss of $0.34 in Q3.

This net loss figure includes about $0.18 per share, related to a charge for state taxes that we took in the quarter.

Excluding the tax charge, loss per share would have been better than guidance in Q3, as operating expenses were lower in the quarter than our original outlook.

As previously announced in March, we took action to adjust our cost structure to the lower business levels we are expecting over the near and intermediate term, and to position the Company to meet break even target.

Notwithstanding, our emphasis on managing cost we are continuing to focus on customers and sustaining a high level of investment in R&D, maintaining a prolific pace of new product introduction, which will better position KLA-Tencor to extend our lead in our core markets, and to benefit from future growth.

Turning to the March quarter demand picture.

New orders in Q3 were above the midpoint of the range of guidance in the quarter at $274 million, an increase of approximately 13% over the December quarter.

The new order activity that we saw in the March quarter was driven by leading edge customers, in (inaudible) their advance design notes to support an improving demand environment for advanced devices.

While we are encouraged by the technology order that we have received, it's important to point out that they were limited to a small number of customers.

Based upon what we saw in March, and what we anticipate for the rest of the calendar year, 2009 capital investment appeared to be primarily focused on technology development, with a significant capacity investment not anticipated until 2010.

Given the focus on advanced technology, we continue to model overall CapEx to be down in calendar year 2009, somewhere in the range of down 45% to down 50%, off of 2008.

KLA-Tencor is well positioned in a technology-focused demand environment industry, when capacity investment resumes.

Now let's turn to the environment in Q3, and developments for the quarter.

As I mentioned (inaudible) $4 million, an increase of approximately 13% over the December levels.

Investment in Q3 were primarily focused on foundry and logic advance design rules.

Logic was relatively strong in Q3 with 46% of the orders coming from this market.

We expect to see continued investment in logic in the near term.

Foundry were approximately 40% of our orders.

Our foundry customers invested broadly across our product line, and for the next generation wafer needs, Reticle and Metrology products, in order to support their advance design programs.

We expect foundries to continue to invest in the near term as well.

Memory remains flat, off of very low December levels, as the industry continues to process a gradual rationalization of excess capacity, and to sort out issues stemming from ongoing consolidation and constraints on investment capital.

In general, we see pause in memory investment as largely a timing issue.

And we expect memory investment in advanced technology development to resume in due course, in the second half of calendar 2009.

However in the near term, we expect the technology investment to be limited to market leaders.

Overall, while the business environment is certainly challenging and likely to remain so.

We are seeing leading customers making technology investment to support their next generation product development efforts.

We're encouraged by this activity, I believe the trend is likely to continue over the course of the next few quarters.

Now I'd like to take a minute to highlight some of the benefits we are seeing from executing on our customer focus objective in today's market environment.

In a climate where very competitors are in survival mode, investment and innovation remains a top priority for KT.

It brings us closer to the customer, extends our competitive advantage, and it strengthens our leadership position as a trusted technology partner in this very challenging business environment.

Our continuing commitment to making high levels of investment is a key element of our approach to the market in this downturn, and it's critical to our sustained success in the future.

In fact, as the current downturn drags on, we find when engaging more closely than ever with our customers, and enjoying generally a more collaborative environment in the market place, as our customers are placing a heightened emphasis on their suppliers ability to deliver future road maps in these tough times.

Now ultimately we measure our success in customer focus by our market share.

And while it's natural for customers to evaluate alternatives to ensure that their investment is well spent, we worked hard to maintain our market leadership position in the markets that we serve.

We collaborated closely with our customers.

We continue to invest and innovate in our products, and we've executed well in our product introduction process.

The buying decisions made by our customers have validated our approach, as we once again find ourselves building upon our market strength and our core market, while at the same time making share gains in markets where we have historically had lower share likely being reviewed.

In addition to the strength of our current product offerings, we believe we are significantly out (inaudible) our competitors, and we'll be in a position to bring new products to the market more quickly over the next few quarters.

Our close customer collaborations in conjunction with our upcoming, new products will serve us well as the market recovers.

Before I turn the call over to Mark, I'd like to provide our guidance for the fourth quarter.

Given the uncertainty in the market forecasting continues to be challenging in this environment.

As mentioned earlier, calendar year 2009 appears to be focused on technology investment, with only a subset of our customers able to invest in the near term.

Now for specifics on guidance, new orders in June are expected to be flat compared with March plus or minus 20%.

Revenues are expected to be between $270 million and $310 million, with a non-GAAP loss per share in the range of loss of $0.08 per share to a loss of $0.24.

I'll now turn the call over to Mark for his comments.

Thanks Rick.

As most of you you know we present our income statement in two formats.

One under generally accepted accounting principals, or GAAP.

And another in a non-GAAP format which excludes amortizations and writedowns of goodwill and intangible assets associated with acquisition, expenses associated with our stock option 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 statement are presented in GAAP format only.

Most of my prepared remarks on operations will reference the non-GAAP income statement, but where our reference GAAP numbers don't make the distinction.

A full reconciliation of our GAAP to non-GAAP income statement is attached to our press release, and is available in our corporate website at www.kla-tencor.com.

Revenue for Q3 was $310 million at the high end of the guidance we provided in January of $280 million to $320 million.

And other -- and the non-GAAP loss per share was $0.34 at the low end of our guidance range of $0.20 to $0.35 loss per share.

The larger than anticipated loss was affected by $29 million tax charge, following a change in California law this quarter.

Without this charge, our non-GAAP taxes for Q3 would have been a $10 million benefit, reducing our non-GAAP loss per share to $0.17.

Our Q3 GAAP loss per share, including the aforementioned tax charge was $0.49.

The summary of the differences between the Q3 GAAP and non-GAAP numbers are, acquisition related charges of $17 million or $0.06 per share after taxes, stock option restatement related charges of $2 million or $0.01 per share after taxes, and restructuring and severance charges of $19 million to $0.07 after taxes.

While Q3 was similar to Q2, there were signs that business is stabilizing.

As Rick indicated although the environment is extremely challenging and visibility remains low, technology buys and advance production nodes from key customers drove orders to the top end of our guidance range.

Despite these difficult circumstances, our market leading position remains strong, as we continue addressing our customers complex yield challenges at advanced nodes.

New orders for Q3 were $274 million, an increase of 13% over Q2 at the high end of our guidance range of flat, plus or minus 20% from last quarter's new bookings of $243 million.

Approximately $28 million of customer initiated shipment delays pushed out of the 12 month window, resulting in net new orders of $246 million.

We expect most of the pushed out orders to re-enter our backlog in the next six to nine months.

We ended the quarter with $543 million in total systems backlog after adjusting for customer initiated delays and foreign exchange impact.

The backlog at March 31, 2009, included $127 million of revenue backlog for products that have been shipped and invoiced, but have not yet been recognized as revenue, and $416 million in product orders that have not yet shipped.

We expect the vast majority of the unshipped backlog to ship over the remainder of the calendar year.

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

The US was 43% of new system orders in Q3, down from 64% in the December quarter.

Europe was 2%, thats down from 7% in Q2 of '09.

Japan was 11%, down from 22% last quarter.

Korea was 9% versus no new systems orders last quarter.

Taiwan was 31% versus 3% last quarter, and the rest of Asia was 4%, the same as we reported in Q2.

The approximate Q3 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 32%, up from 22% last quarter.

Reticle inspection was 17%, up from 8% last quarter.

Metrology was 10%, down from 15% in the prior quarter.

And storage solar High-Brightness LED and other non-semi was approximately 2%, down from 7% last quarter.

Service was 39% of new orders in Q3, down from 48% last quarter.

With technology purchases generating most of the activity this quarter, 45-nanometer and below development and pilot activity was roughly 95% of the semiconductor system orders received in the quarter.

This level is up from 70% in the December quarter.

While some key business indicators improved during March, we are cautious about the intensity and duration of the improvement.

As a result, we are continuing with plans to reduce our operating expenses and we are assuming new orders in Q4 in the range of flat plus or minus 20% from Q3.

Shipments in Q3 was $277 million, down 15% from the $327 million in the December quarter.

Looking at our income statement, systems revenue for the quarter was $207 million or 67% of total revenue, versus $273 million to 59% of revenue in Q2.

Our services revenue in Q3 was $102 million or 33% of total revenue.

Services revenue declined $21 million or 17% from the prior quarter, as low utilization rate led several customers to suspend service contracts and idle tools in response to the downturn.

Our current expectation for total revenue in Q4 is in the range of $270 million to $310 million.

Non-GAAP gross margin was 38%, down 8 percentage points from the December quarter, primarily due to lower revenue levels and additional reserves for excess inventory.

These factors were partially offset by a stronger systems mix and lower labor cost, following our Q2 restructuring action.

In Q4 we expect to improve our gross margin percentage, assuming build plans stabilize, and therefore additional reserve requirements diminish.

The gross margin improvement resulting from more stable build plans should more than offset the effect of slightly lower revenue levels.

Operating expenses were $152 million, down $47 million from the December quarter.

R&D was $77 million in Q3, down $12 million from December, and selling, general and administrative expenses, or SG&A were $74 million, a $35 million decrease from last quarter.

The quarter-over-quarter operating expense changes were largely due to lower average headcount in all areas of the company, including both R&D and SG&A following our staff reduction in November.

These actions reduced our employee expenses by about $17 million from the prior quarter.

Lower project material spend, as the number of key development programs moved into alpha and beta test phases.

And in Q2, we recorded a $24 million increase in the allowance for doubtful accounts, to reflect collections concern about certain customers who are experiencing financial difficulty.

In Q3 no new bad debt charges were required, so the SG&A comparison was favorably impacted.

In Q4, assuming there are no significant additions required to our bad debt reserve, we anticipate that operating expenses would decrease by approximately $3 million to $5 million in Q3, as we realize the partial effect from our March cost reduction measures.

Other income and expense, OIE was a net $5 million expense for Q3, was approximately $6 million lower than we expected, due to a nonrecurrent gain on an investment in foreign exchange gain.

These favorable factors were partially offset by lower yields on our cash and marketable securities portfolio.

OIE was a $12 million expense in fiscal Q2, in part due to a $4 million charge against our venture investment.

In Q4, we expect net OIE to return to the $10 million to $11 million expense range.

In Q3, our non-GAAP income tax expense was a $19 million charge versus a 29% benefit or $8 million credit last quarter.

As I mentioned earlier, the Q3 tax expense resulted largely from a $29 million charge based, on an anticipated election to change our California income tax apportionment methodology in fiscal 2012.

This anticipated change in apportionment required us to reduce our deferred tax assets this quarter, but the change will not have much impact on our long term tax rate.

As we have discussed in prior calls, lower negative pre-tax profits makes a business, and changes in governmental factors makes predicting short-term tax rates difficult, but we do expect a long term rate to be about 30% and we are modeling a 30% benefit for our June quarter.

Our non-GAAP loss $58 million or $0.34 per share in Q3.

These numbers include stock-based compensation expenses of $23 million, and the weighted shares used to compute the loss per share was 170 million.

At the revenue range I previously mentioned we would expect a Q4 non-GAAP loss of $0.08 to $0.24 per share, assuming a tax benefit of 30% and further assuming that there are no unanticipated charges required for customer collection issues or excess inventory.

On a GAAP basis we record $17 million pre-tax charge in Q3 associated with the March reduction in force, which will lower headcount by about 10% over the remainder of calendar 2009.

Turning to the balance sheet, cash and investments including long term marketable security ended the quarter at $1.3 billion an increase of $35 million quarter-to-quarter.

Cash generated from operations was $76 million in Q3, versus $36 million used in operations during Q2.

We used $25 million in Q3 to pay our dividend.

The net $112 million quarter-over-quarter improvement in operating cash, included the benefit of an income tax refund of about $40 million.

Significant declines in receivables and gross inventory, and the fact that our $26 million semi annual interest payment on our long-term debt occur at our second and third quarter.

Net account receivables ended at $241 million, down $91 million from December 31, 2008.

DSOs was 71 days at March 31, versus 76 days at the end of December.

As I noted, there were no additional charges for bad debt expense during Q3.

Net inventory decreased by $61 million from last quarter, and ended the quarter at $412 million.

A portion of the decrease in the balance resulted from $32 million in new charges for excess material.

Net capital expenditures were $3 million in Q3 versus $7 million in Q2.

The weighted average share in Q3 was 170 million versus 169 million in Q2.

For the June quarter we are expecting another loss so our weighted average share is expected to be about 171 million, and no stock repurchases are anticipated this quarter.

Total headquarter -- excuse me -- total headcount ended the quarter at 5,402, a net decrease from 492 from December 31.

The decrease in Q3, largely occurred following the reduction in force we took in late November, with a large portion of the impact in employees, came off the payroll in late January.

We expect our headcount will decline during Q4, as a result of our March reduction.

In our October and January calls, we announced plans to reduce our operating expenses to $140 million to $145 million range by our December quarter, and doing so it would allow us to achieve breakeven operating margin on revenue of $300 million to $325 million.

We took significant steps during Q3 toward these spending targets, and we currently anticipate that we will not require additional significant actions in order reach these operating expense levels.

In summary, our guidance for Q4 is new orders are expected to be flat plus or minus 20% versus Q3.

Total revenue between $270 million and $310 million, assuming a tax benefit of 30% of the pre-tax loss.

This concludes our prepared remarks on the quarter.

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

Thanks Mark.

We are now ready to take your questions, and we once again request each participant to limit one question, and a brief follow-up to allow us to get as many callers as possible in the time allotted today.

And with that Abigail, we are ready for our first question.

(Operator Instructions).

Your first question comes from the line of Brett Hodess with Bank of America Merrill Lynch.

Your line is open.

Good afternoon and thanks for taking my question.

Two questions.

Rick, it looks like your wafer inspection, reticle inspection orders actually grew quite strongly sequentially versus the other businesses, and obviously technology-driven.

But can you tell us if that sequential growth was new product driven, or was it tied to a specific technology node, and was there some share gain in those areas?

Sure.

Brett, I guess it's really related to the investment we saw fundamentally in advance design rules, which is as we said, most of what is going on right now.

But we believe that our share position is very strong.

I think that in this environment there's a bit of a flight to quality by our customers, where they got to make sure their investment dollars are optimized, and our new products are showing very well.

Plus remember, we have continued to invest in our product development through this cycle, so these are advanced products that are coming out.

So we are seeing them being leveraged for the advance design rule work, and at the same time we are very strong from a market share perspective.

My follow-on to that was, when you look at the product mix these are your best margin products.

So are you seeing the margins being maintained?

I know you have under-absorption issues, but are margins being maintained on a product specific basis?

And you particularly pointed out it, like EB review which you are gaining share in.

Does that have the kind of margin that the other inspection and products have?

Right, as you know, we don't break out by product, Brett, but it's clear in the market areas where we are stronger, we benefit from relative volume.

And so I would say that once we reach a normalized level, we are in the same margin range that we've been in the past, but we have some (inaudible) absorption going on right now.

So we are pleased with our margins.

At the same time.

we have a customer base that is very mindful of value.

We have not really reduced prices in this environment.

We've maintained margins equivalent to what we've had in the past.

The newer products like review, where we have made good share gains still have smaller volumes, so the margins there are going to be less.

And we have longer term plans as we ramp our shares there to improve margins on those products.

Great.

Thank you.

Thanks, Brett.

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

Your line is open.

Yes.

Hi.

This is [Janeed Ahmed].

I am calling in for Tim.

Thanks for taking the question.

My first question, Rick, with respect to your service available market, could you kind of quantify how that is grown over the past several years, with your entry into new markets and all the acquisitions that you've done kind of maybe on a percentage basis?

Yes.

Sure.

It's hard to quantify that in this current market given the overall level of demand that's going on, but when we outline the acquisitions three or four quarters ago, we talked in the range of $600 million to maybe $900 million of available PAM that's opened up to us in a more normalized environment and I would still say that true.

Much of that is dormant right now, and we are not seeing a lot of business in those segments, based on overall macroeconomic situation.

And my second question.

Regarding margins, if I look to where your revenues troughed in the last cycle, it was kind of around the same $300 million range, and at that level, the margins were almost 700 to 800 basis points higher than it is this quarter.

Even accounting for like the higher service revenue that you have now, should we be modeling some permanent degradation over there?

No, we have done that analysis.

And I think it's really important to make sure that you are looking at comparable points and comparable data.

So we go back to March '03, and that looks like a similar level of revenue.

And I would say, what we model is about 200 basis points difference once when get the cost out when we modeled by the end of year.

So if you took our revenue now, and our cost structure, we would have by end of the year, there's a couple hundred basis points between the two.

So pretty close, and then there's additional cost reduction structure that we'll get out.

So we think within 100 basis points, apples to apples comparisons.

For example, you have share-based comp now, and you didn't have it then.

And so there are some other factors, when you look to net income with OIE, where we are servicing debt now, and we are getting income then.

So apples-to-apples on a profit from operations, we think it's probably a hundred basis points, and again, it allows us to access significantly a larger market overall.

So we think that is a reasonable position to be in.

So if revenues go like in the $400 million range what type of gross margin would you be kind of thinking?

Well, from where we are today, our system margins are still pretty good.

It's we get hit with the EN&D in the current environment.

So part of what is happening is we have an absorption problem.

But we think incremental gross margin on the way back up, will be similar to what it has been in the past, which is 60% to 70% range.

So if you normalize that, you've got a 65%, so we see margins actually pretty consistent with what we've seen in the past.

Okay.

And on an operating basis its good.

Obviously service at a lower level, as a larger percent on the whole, dilutes the gross margin but doesn't necessarily dilute the operating margin.

Right.

Okay.

Thank you.

You bet.

Thank you.

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

Muse with Barclays Capital.

Your line is open.

Yes.

Thank you.

Thank you for taking my question.

I guess Rick, first question on the order guide, is that off of the net or gross number, in terms of that 110 million delta, I guess off of the gross, can you comment on what's driving the volatility there?

I'm sorry.

It's off of gross.

So why such a large range -- is that the question?

Yes.

I mean, is there one or two specific projects that moved in or out, that is driving that.

Well, when we look back C.

J., and we looked back to our visibility back in the beginning of January, and what actually happened during the course, I'd say we, it was pretty clear there was low visibility.

So we anticipate that that visibility continues to be low and the volatility continues to be high which is the reason for that range.

Our view is if there are technology investments made, then we will continue to do well.

In fact, we'll gain a pretty good percent of the overall CapEx.

But volatility on bookings, I think in this environment is wise to have a big range.

What we said was basically flat from the gross level.

Okay.

And then I guess you talked about in your prepared remarks about recovering in the second half for tech spending on the memory side.

Is that primarily DRAM, nand, both, any color there would be helpful.

Sure.

They are both pretty suppressed right now.

So we are seeing the technology advance really on both sides, but it's clear that DRAM has been even more dormant.

And right now I think that if there is going to be multiple players, they are going to have to invest in technology to get ahead.

So I think we'll see some of both.

But again, we are talking about second half and it's a ways out.

But whats clear, I was in Asia last couple weeks, and as you talk to customers, they clearly want to make the technology investment, but it's been a challenge to get funding.

We have seen recent signs lately, that we think some of that will come around, but they still have an over capacity situation in memory.

If I can sneak one last question.

Can you provide an update I guess on success of new XR mass inspection tool, what kind of feedback you are getting from customers?

Yes.

Sure, what you saw was Reticule was 17% last quarter, so that was up.

We have not introduced new product which is coming out, so it's all on existing product.

We did very well from a share basis, and that is the existing product line.

So we are real pleased with that performance, and frankly didn't necessarily anticipate it in this quarter, but we saw some technology buys coming in.

From a share standpoint we are right where we want to be with Reticule, and we have new products coming out.

Can you update on the new products?

Not until we release them.

We announced the XR as you said, so that one I'd say is doing well and my point is, in the pipeline there's more coming.

Thank you.

Thank you.

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

Your line is open.

Hi.

One quick question.

What is your deferred revenue in the quarter?

We don't break out -- we have two lines.

We have deferred revenue from services contracts, that we actually do break out and display, and that number at the end of the quarter was $61 million .

And then we also have deferred systems profit, which nets down to deferred revenue against system sales against the deferred cost on system sales, which turned out to be about $74 million worth of deferred profit at March

Okay.

And then for services, how are you looking what your utilization rates improving, how are you seeing service levels for the rest of the year like -- so for Canada for '09 compared to '08?

Yes, I think what is interesting, is we've seen, I think the rate of decline has stopped in terms of utilization, and as you know some utilization numbers are up.

So the leading indicators are things that we track.

We've seen stabilization, and we suspect some of the tools that have gone off contract, will come back on contract.

So we are modeling it, as we look out over the year, gradual increase in service, but I'd say slow and steady increase off of the current level.

So we suspect we probably bottomed on service revenue in the March quarter.

One last thing.

How are you seeing your non-semi business, you introduced a solar inspection tool during the quarter.

Where do you see that --

A lot of growth opportunity in the non-semi.

As bad as semi stuff has been, the solar stuff has really slowed down quite a bit, as the solar industry grappled with some funding challenges and credit challenges.

From a market share position, we are very well positioned, but we do see relatively small amount of activity.

A lot of interest, but not a lot of buying yet.

So we anticipate what we'll see when that activity resumes, is good growth out of those segments.

Thank you.

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

Your line is open.

Good afternoon guys.

Thanks so much for taking the question.

One main question from me.

I am just trying to compare a little bit, or get a way to think about your orders and guidance versus of some of the others in the industry.

And I know this is always a difficult exercise.

On one hand, you guys came in much higher on a sequential basis in March.

On the other hand, June your fiscal year-end it is mostly technology buying that is going on.

And you have very good exposure to one of the biggest customers that is ordering right now from a technology perspective.

And you had some of the other companies guide out pretty meaningfully from an order perspective for the June quarter.

So how do you think we can reconcile all of that a little bit?

Yes, Jim.

Good question.

It's think its hard to speak for what the other guys are doing.

We look at them and if there's investment, we'll continue to reap the benefit of that, because as you say we are well positioned.

I think our market share is very strong, and we have got new products in the offing that our customers need.

From that standpoint, I'd say we are well positioned.

I suppose, if we had been down quite a ways, we would have to be talking about it going up.

We are looking at an environment where we think it's relatively flat for the calendar year, and so if there's upside, you are right, June is the end of our quarter.

But I've been careful in this cycle, not to try and map back to historical patterns because it's such a different world we are in.

And then the only other question, some of the other companies, and again I know your dynamics can be quite a bit different at times from their's, but some of the other companies are talking about some technology buying from the memory companies also, whereas you are talking about that kind of maybe in the second half.

Again, is there some possibility that comes in in June, or there is some dynamic relative to how these companies are adding some capacity that would potentially cause your orders to come in a quarter later?

I would characterize it this way.

If it happens, it's upside for us.

If it happens, I think some of those, they might need it to make their plan.

Great.

Thanks so much.

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

Thank you.

Hey Rick.

Historically, you've described your opportunity in good times and dollar per fab kind of metric.

In this kind of an environment, are there any metrics that you use to think about what your opportunity is in a fab that is moving from one technology node, say 65 to 40, how much of the re-use of the tool set exists, how much of an opportunity there, lets say on a DRAM fab that is moving from one node to another, but not adding a lot of net capacity?

Yes.

That's a great question.

It's a little bit harder to model in this environment as you know.

We have done some of those models and you look at what is -- for example a 10,000 wafer start conversion look like in terms of the number of tools.

But since there's not been a pattern established of that, it's kind of hard to come off with a model that we can really back up, because we don't have any history on it.

I would say the pattern that we've just seen in the last couple of quarters, where our bookings have held up significantly better than peers, is in the other parts of the equipment, suggest that our thesis, that the investment and process control inspection metrology at 45 and below, is going to be a larger percent of the overall pie.

And so, I think as companies are focused on technology, obviously yield is critical to them and getting it to work.

So what we are looking at now, is how do we from an absolute dollar standpoint, capture a larger percent of the spend that is going on, and that's really where our focus is, trying to help our customers understand if they invest in our capability that we offer then they'll minimize the need for additional capital in other areas.

In this environment, do people take sampling rates up or down?

Well certainly with new technologies, they are taking them up, because I think what they are recognizing is, that they are struggling with some of the yields, and we are seeing that across the board, both memory and DRAM and nand.

But also, we certainly saw it in logic, and that is part of what drove our order activity in the March quarter.

And one last quick one, if I could.

The mix shift that Brett was talking about in the beginning of the call towards Reticle, et cetera, would you expect that to continue?

Is, in this technology by environment, the mix going to shift in any particular way between your sort of three major segments or not?

I would attribute it more heavily weighted towards inspection, both in reticle and wafer, and probably towards some of the tools that are more oriented toward the characterization and development activity, and less towards the tools that are more oriented toward capacity.

So yes, I would probably say that is true.

The metrology is very critical, but some of that does play more in a ramp environment.

Great.

Thank you.

Thank you.

Your next question comes from the line of Weston Twigg with Pacific Crest.

Your line is open.

Hi, Yes.

Just a question on an upcoming technology shift.

So the nand companies are expected to use a double patterning technology, which should drive increased litho metrology needs.

And I am just wondering if is there any difference in the metrology requirements, if they use a spacer double patterning process versus like a litho etch -- litho etch, and to follow up, are the nand customers starting to talk to you now about ordering tools for these 32 nanometer rams?

Sure.

I'd say Wes, but on both counts.

The first one, the metrology needs on double patterning vary probably more from the optical CD standpoint.

than they do from an overlay perspective.

And in both cases, the overlay requirements are very tight.

The optical CD has some different characteristics, whether its in photo or etch.

So I'd say there is opportunity, incremental opportunity there.

In terms of are they talking to us, absolutely.

What I think, will be interesting to see when they release capital, but right now they've been conservative in their spend for various reasons.

We are seeing increased discussions, but we just haven't seen the orders yet.

Okay, And just one more question, kind of coming back to the re-use idea.

If we get a lot of 300 millimeter second hand equipment on the market, I am wondering, is a large portion of that if it's --KLA inspection or metrology equipment, is that reusable or is it upgradeable or do customers need to come in and buy a new version of the tool from KLA?

Part of our strategy on focusing heavily on new product introduction was to try to avoid that issue.

And so our newer tools have better cost ownership, more capability and so our view is that most of our markets will be protected from some of that secondhand tool.

We have had a used tool business.

We continue to do that.

I would say that is the business that gets impacted by this trend, which I think is a real trend.

But that's constituted maybe a couple percent of our business in the past.

We don't think it's a major impact.

But for sure, I think for capacity buys for process equipment, that is a risk.

I think less so, for process control.

Thanks.

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

Your line is open.

I wonder if you can talk about gross margin, particularly relative to original expectations, because when I look at my model, you guys definitely over achieved in terms of ratcheting down operating expenses.

I was expecting something like $170 million, but you guys turned in something much lower.

But on 170 million I was expecting gross margin of around 39%, 40%, yet you came in with 38%.

Am I reading too much into this?

Or were gross margins light, even relative to your own expectations?

No, I think gross margin really paid the price for the speed in which the ramp has come down.

And I think that means the EN&D, so when we look at actual system marg, and we strip out the inefficiencies, we are right where we've historically been.

I think what happens in this environment though, you are caught with more material than you needed, because the rate of the decline.

And so that's part of what we are working through now.

That will abate over time, so you will see margins go up just as a result of that comes off.

and we don't get hit with those charges.

Mark, any color to that?

That's essentially it Gary.

The reality is when we entered the quarter, we were hoping for stable build plans.

We had to take them down early in the quarter, and as a result of taking them down, we had to absorb an additional $32 million worth of excess inventory charges.

That was higher than we were hoping to have to absorb, and that explains all of the difference between where we were modeling, which is probably close to what you are articulating, and where we landed.

But no, the incremental margins of the tools going out the door remain steady and highly lucrative.

But in this type of a ram down, the excess capacity in the EN&D hits do take their toll.

Okay.

And Rick is right, we will get, obviously get a wind fall on the way back up.

Okay, that makes a lot of sense.

Just a follow-up question.

Just on the reticle inspection kind of rebound and those orders, is that primarily TeraScan, TeraFab, and if it's one or the other, what does that indicate in terms of a near term trend here, on the inspection side in reticles?

It was more oriented towards fab, which was a bit of a surprise to us, a good surprise, but a surprise.

And I think what it indicates is, as customers are ramping their advanced design rules in the fab, they are worried about the haze and crystalline growth.

And so this was to deal with those challenges.

We haven't seen mass shop turned back on, and I think as you know, Gary, we got new products coming out to deal with that.

I think the other hand, there has been from a share standpoint, as you know there have been alternatives in the market, and I think that customers have really had a chance shake out and evaluate the alternatives, and to evaluate our tools, and I think there is this general flight to quality going on and that is part of the story too.

Okay.Thank you very much.

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

Your line is open.

Thank you.

Can you talk a little bit about OpEx progression?

Are we getting all the benefit in the June quarter or how did that progress through the year?

Yes, we won't get all of the benefits in the June quarter Mahesh, because the reduction action that we just took in March, under the Warren Act, it will take a little more than half the quarter before all of the reductions comes off of our payroll.

We will get partially benefit which we signaled with a $3 million to $5 million OpEx Improvement in that quarter, and then you will get sort of a full quarter benefit, as we turn to the second half of the year.

So that's in essence how to think about it.

And as we talked about trying to get to our OpEx levels to 140 to 145 by the December quarter.

Certainly based upon the progress this quarter, the 140 looks more probably at this moment.

140 is the more likely number?

I think it's more likely.

That's right.

Okay.

The second quick question if you can give us some indication on how will your segment (inaudible) order supply foundry memory look in June?

Is it tending toward one segment more than another in June?

Or does it remain essentially the same?

It looks pretty similar.

I would say we could see a little more memory activity, although not a lot.

When we look across logic and foundry, we are modeling, foundry may be down a little bit, and you see a little bit of logic come off.

And again, that's both because we see more memory but not a lot of memory.

And the logic side, is there any other activity other than microprocessors?

Well yes.

There are other players in that space but the way we've been, clearly microprocessors is a reasonable part of that.

But yes there's other activity as well.

There's other logic investments going on, both in the US and in other regions as well.

And again, not huge levels, but, yes.

Okay.

Thank you very much.

Your next question comes from the line of Patrick Ho with Stifel Nicolaus.

Your line is open.

Thank you.

Can you guys hear me?

Yes.

Quick question in terms of your orders outlook and the variability.

I know you guys are coming off pretty low levels, and you guys did pretty well in terms of the March quarter.

But that plus or minus 20%, is that variance related to one customer, or one or two customers, or is it a bunch of customers that can swing it either way?

And I guess, what customer segment is it?

Is it primarily memory, foundry or logic thats that variance?

Yes, Patrick, thats a good question.

I think internally we would debate whether to guide bookings at all, given the variability in this environment.

As you know many of the other equipment companies have stopped guiding bookings.

So our view on that is, is that we think there's a number of things in the hopper.

We have assigned probabilities to them, but we realize some of those things could fall out.

So the issue is really variability and the general lack of visibility in the environment.

So is it any one specific customer that is going to swing it either way?

No, because as I said, last quarter we didn't predict the orders that we got, and we couldn't see them at the beginning of the quarter, and I don't think that changes in this environment.

Okay, and one follow-up question on the cost side of things.

Now that you guys have taken your cost reduction efforts and you have least gone through them.

Can you just kind of put on a percentage wise how much of it was -- were what I would guess be permanent structural cost and the rest temporary cost?

Was it something like 30% was permanent cost reduction and 70% temporary cost reduction?

Can you break it down now, in terms of how much of each segment was?

Yes.

I wouldn't -- I would hesitate to characterize.

Clearly, there's some both -- and clearly as business levels increase, the temporary actions that we are taking like a week off a quarter, and reduced bonuses, and reduced variable compensation in general, it will clearly climb back, as the business gets back to normal.

But there are also several actions that we took that we announced including closing some facilities and shipping capacity within the company that would be permanent in nature.

So I hesitate to characterize how much of the actions are permanent versus temporary.

It's some of both, but it's really a question of at what level of output are you looking at.

At this level obviously right now there's a greater percentage that is temporary, as they recover the balance would be permanent.

Great.

Thank you very much.

This concludes the question-and-answer portion of today's call.

I will now turn the call back to Mr.

Lockwood for any additional or closing remarks.

On behalf of Rick and Mark and the rest of the KLA-Tencor team, I would like to say thanks to everyone for joining us on the call today.

We look forward to speaking with you in our follow-up discussions through out the quarter.

This concludes your conference call for today.

You may now disconnect.