科磊 (KLAC) 2009 Q4 法說會逐字稿

Good evening.

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

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

(Operator Instructions).

Mr.

Lockwood, you may begin your conference.

Thank you, operator.

Good afternoon, everyone.

Welcome to KLA-Tencor's fourth-quarter and fiscal year 2009 year-end 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 fourth-quarter and fiscal year results for the period ended June 30, 2009.

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 June quarter and provide guidance for the September quarter.

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

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

On the website, you'll 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'll find descriptions of risk factors that could impact our future results.

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

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

KLA-Tencor cannot guarantee 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, our subsequently filed quarterly reports on Form 10-Q such as the report we filed for our quarter ended March 31, 2009, and our current reports on Form 8-K.

We assume no obligation and do not intend to update these forward-looking statements.

However, you can be assured that any updates we do provide will be broadly disseminated and available over the web.

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

Thanks, Ed.

Thank you, all, for joining us for our call today.

Because we've provided a strategic and business model update last week during our analyst briefing at Semicon West, I'm going to keep my commentary brief and focus on a few key highlights of the fourth quarter and provide guidance for September.

Then Mark will follow with a more detailed review of our financials for Q4 and for fiscal 2009.

In general, the business environment today seems to have stabilized and visibility has improved with order activity focused primarily on technology buys and investment in the leading edge.

New orders for June were $327 million, up 19% compared to March and at the upper end of the range of guidance largely on the continued strength in the foundries and steady logic demand.

Memory remained at low levels as expected.

Revenue in the fourth quarter was $282 million.

Non-GAAP loss per share, which we projected to be a loss of between $0.08 and $0.24, came in at $0.09 per share.

We generated positive cash flow from operations in the fourth quarter of $73 million and were cash positive for the year on the order of approximately $196 million, a good achievement in such a challenging economic and demand environment and a testimony to the discipline and focus of the KLA-Tencor team as we manage our way through this downturn.

Mark will provide more detail into the financial drivers in the quarter, but as demand stabilizes we are encouraged to see improved margin and operating results in Q4 reflecting the benefit of new products in the revenue mix as well as continued discipline and good execution on the cost side.

We remain focused on maintaining our cost discipline while sustaining a high level of investment in R&D to support our customers as they make their advanced technology investments.

Now I'd like to provide our outlook for the September quarter.

New orders in September are expected to be flat to up 20% compared with June.

Revenues expected to be in the range of $295 million to $335 million and earnings ranging from a loss of $0.10 per share to break even.

Consistent with that, we remain on track to achieve our break even objective by calendar year-end.

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

Thanks, Rick.

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

One, under generally acceptable accounting principals, or GAAP, and the other in a non-GAAP format which excludes amortization and write downs of goodwill and intangible assets associated with acquisitions, expenses associated with our stock options investigation and related litigation, 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 in a GAAP format only.

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

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

Revenue for Q4 was $282 million within the range of guidance we provided in April of $270 million to $310 million and the non-GAAP loss per share was $0.09 at the favorable end of our guided range of an $0.08 to $0.24 loss per share.

Our Q4 GAAP loss per share was $0.15.

A summary of the differences between the Q4 GAAP and non-GAAP numbers are as follows.

Acquisition related charges of $12 million or $0.04 per share after taxes, restructuring and severance charges of $7 million or $0.03 per share after taxes, stock option statement related credits of $2 million which had a $0.01 per share after tax benefit this quarter.

Improved order activity we experienced towards the end of Q3 continued into Q4 and although the environment is still challenging, especially in the memory sector, new foundry orders for advanced production nodes drove Q4 orders to the top end of our guidance range.

While we expect the remainder of calendar 2009 to be stable but not necessarily robust, we are satisfied that adoption of our new products and their continued our market leadership coupled with the fiscal discipline we have exercised through this downturn have positioned us to capitalize on the sector rebound.

New orders for Q4 were $327 million, an increase of 19% over Q3 and at the high end of our guided range of flat plus or minus 20% from last quarter's new bookings of $274 million.

Approximately $67 million pushed out the 12-month delivery window resulting in net new orders of $260 million.

We expect most of the pushed out orders to re-enter our backlog over the next year.

We ended the quarter with $518 million in total systems backlog after adjusting for push outs and foreign exchange impact.

Backlog fiscal year-end included $186 million of revenue backlog or products that have been shipped and invoiced but have not yet been recognized as revenue, and $332 million in system orders that have not yet shipped.

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

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

The US was 29% of new system orders in Q4, down from 43% in the March quarter.

Europe had 4% of new systems orders, up from 2% in Q3 of 2009.

Japan was 4%, down from 11% last quarter.

Korea was 13%, up from 9% last quarter.

Taiwan was 46%, up from 31% last quarter.

And the rest of Asia was 4%, which was flat with Q3.

Approximate Q4 distribution of new systems and services orders by product as well as the quarter-to-quarter change in distribution was as follows.

Wafer inspection was 34%, up from 32% last quarter.

Reticle inspection was 10%, down from 17% last quarter.

Metrology was 18%, up from 10% in the prior quarter, and solar, storage, high brightness LED and other non-semi was approximately 7%, up from 2% last quarter.

Service was 31% of new orders in Q4, down from 39% last quarter.

Foundry customers comprised 53% of semiconductor systems orders in Q4 versus 40% in Q3.

Logic and memory orders were 37% and 10% respectively in Q4 versus 46% and 14% in Q3.

Technology purchases generated most of the activity with 45 nanometer and below development in pilot activity comprising 97% of the semiconductor systems orders received this quarter versus 95% in the March quarter.

Although we are encouraged by the current order activity in the sales funnel for the September quarter, we are cautious about the intensity and duration of the recent upturn.

As a result, we are assuming new orders in Q1 in the range of flat to plus 20% from Q4.

Shipments in Q4 were $344 million, up 24% from $277 million last quarter.

Systems revenue for Q4 was $176 million or 63% of total revenue versus $207 million or 67% of revenue in Q3.

Our services revenue in Q4 was $105 million or 37% of total revenue.

Our services revenue improved by $3 million from the prior quarter and strengthened as the quarter progressed.

Our expectations for total revenue in Q1 is a range between $295 million and $335 million.

Non-GAAP gross margins was 46% in Q4, up 8 percentage points from the March quarter primarily because our outlook for production plans for the remainder of calendar 2009 stabilized during Q4 and, therefore, we recorded $18 million less in excess and obsolete charges than in Q3.

In Q1 our gross margin percentage should remain flat or improve slightly from Q4.

Operating expenses were $148 million, down $4 million from the March quarter.

R&D was $78 million in Q4, up $1 million from Q3, and selling, general and administrative expenses, or SG&A, were $70 million, a $5 million decrease from last quarter.

In Q1, assuming there are no significant additions required to our bad debt reserves, we anticipate that operating expenses will decline slightly from Q4 as the full quarter effect from our March staff reductions should offset the impact of any higher variable compensation.

Other income and expense, or OIE, was a net $11 million expense in Q4 or approximately $6 million higher than in Q3.

The higher Q4 net expense was largely due to a non-recurring gain on the disposal of an investment and foreign exchange gains in the March quarter.

In Q1 we expect net OIE to be approximately flat with Q4.

In Q4, our non-GAAP income tax benefit was $15 million or 50% of the Q4 pretax loss versus a $19 million charge in Q3.

As I mentioned last quarter, we had a net expense in Q3 because of a $29 million charge in anticipation of a change to our California tax apportionment in fiscal 2012.

Without the apportionment change the Q3 tax benefit would have been $10 million or 26% of our pretax loss.

Absent the apportionment charge, the increase in the tax benefit percentage from Q3 to Q4 was principally due to an increase in the asset value of our deferred compensation plan which is not taxable.

As we have mentioned throughout 2009, lower negative pretax profits coupled with other unique factors each quarter make predicting short-term tax rates difficult, but we continue to model a 30% rate for our September quarter and fiscal year 2010.

Our non-GAAP loss was $15 million and $0.09 per share in Q4.

These numbers include a pretax stock-based compensation expense of $26 million.

A portion of our better than expected Q4 loss was due to the higher than modeled tax benefit at 50%.

At our modeled rate of 30%, our non-GAAP loss per share would have been $0.12.

At the revenue range I previously mentioned, we would expect Q1 non-GAAP operating results to be somewhere between break even and a loss of $0.10 per share assuming a tax benefit of 30% and further assuming that there are no anticipated charges required for customer collection issues or excess inventories.

It is possible that we could generate a non-GAAP profit in Q1, especially at the higher end of our guided revenue range.

Turning to the balance sheet, cash and investments ended the quarter at $1.3 billion, an increase of $72 million quarter-to-quarter.

Cash generated from operations was $73 million in Q4 versus $76 million in Q3.

A component in arriving at the $73 million in operating cash we generated this quarter was our $26 million semiannual interest payment which we did not have in Q3.

Net accounts receivable ended the quarter at $210 million, down $31 million from March 31.

DSOs were 68 days at June 30 versus 71 days at the end of March.

Net inventories decreased by $42 million last quarter and ended the quarter at $370 million.

Capital expenditures were $2 million in Q4 versus $3 million in Q3.

Weighted average shares in Q4 were $170 million, the same as in Q3.

For the September quarter, we are expecting a slight loss so our weighted shares are expected to be about $171 million and no stock repurchases are anticipated this quarter.

If we post a profit in Q1, the weighted shares will increase for any diluted securities.

Total headcount ended the quarter at 4,939, a net decrease of 463 from March 31.

The decrease in Q4 largely occurred following the reduction in force action we took in late March.

We expect our headcount will decline slightly during Q1.

We've continually spoken about our plan to reduce our quarterly operating expenses to the $140 million to $145 million range by our December 2009 quarter and doing so should allow us to achieve non-GAAP break even operating margin on revenue of $300 million to $325 million.

We've taken significant steps towards achieving these spending targets and we anticipate that we will not require additional significant actions in order to achieve these levels.

In summary, our guidance for Q1 is new orders are expected to be flat to plus 20% versus Q4.

Total revenue between $295 million and $335 million.

Non-GAAP loss per share will be between break even and $0.10 assuming a tax benefit of 30% of the 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.

Okay.

Thanks Rick, thanks Mark.

We will now be happy to take questions.

We once again request each participant to limit to one question and a brief follow-up to allow us to get to as many callers as possible in the time allotted today.

With that, operator, we are ready for our first question.

(Operator Instructions).

Your first question comes from the line of Timothy Arcuri from Citi.

Your line is now open.

Rick, if I cut the numbers and I look at your share of the overall [WV] market and I can include service, I can strip it out, I can even exclude litho, if I cut it pretty much any which way it shows that your share or the adoption of inspection, if you will, has basically flattened off the last five or six years.

I'm wondering, if you're going to start to out grow the market, that's going to have to start to pick back up.

So I'm kind of wondering if you go back and look at the last five years why did it slow down and the next five years why is it going to pick back up?

Hi, Tim.

What we're seeing now certainly as we go through the 45 nanometer, 40 nanometer transition for our customers, we're definitely seeing an increased percent of spend on process control coming from our key customers.

So when we look at the data, I think it depends on, as you know, a lot of it depends on what part of the ramp we were in and I would say that as we look at it and as we see the indications happening now, what's happened over the last several quarters our business has held up better because I think there's an increasing challenge from our customers so we stick with our thesis that the 45 nanometer, 40 nanometer transition was tough and required a lot of investment.

As we look forward, we don't see those trends abating as people go further in reducing their design roles.

So I think a lot of this has to do with the data and the analysis that you're looking at, but that's certainly what we see.

Okay, thanks.

One quick follow-up from me, Rick.

As you kind of look out to the second half of the year broadly, as foundries maybe have some moderating utilization as you get into Q4, I guess, number one, do you even see that happening?

Number two, if it does, do you think there's enough kind of other business, memory, DRAM to basically offset that such that bookings can continue to grow through the rest of the year?

Thanks.

Sure, when we look out certainly from a September perspective we do see memory increasing as a percent of the overall.

As you know, we guided flat to up 20% for bookings for September.

So we do see as a percent memory wall not as robust as the logic or foundry segment overall will increase off the 10% base.

December is still really hard to see what is going to happen in the December timeframe.

I would say we do see some return in memory to investment for technology transition, the foundry is still relatively stronger, but down from the current level.

So we agree that foundry probably will not maintain its current rate of investment, but will continue to invest in perhaps a little more balance with what we're seeing in memory.

What we still don't see is real capacity investment for the rest of this calendar year.

So we have some visibility in September, I think December's a tougher call because there are definitely other factors at work.

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

Muse from Barclays Capital.

Your line is now open.

I guess first one just to piggyback on the memory question.

Rather than asking, when you see that ramp, I guess can you talk about where your product tool of record and when it does ramp, what kind of share you would anticipate in a recovery?

Sure.

When we look around, I think our share inside memory looks pretty similar to what it is in the logic or foundry, they're kind of puts and takes depending on the product mix question that we have, the different products.

So overall I think we will benefit from an increased investment in the memory side similar to what we benefited in the logic and foundry particularly because as we engage with our customers we definitely see pressure on yields and pressure on making the technology transition.

So just as an example, C.J., when I look at September we did 10%, was basically the percent we did on memory in June and we're modeling September in the 25% to 30% will be out of memory for us.

So it is increasing but, as I said, still not quite as healthy as what we're seeing in foundry, so I think overall share doesn't really suffer.

We do see some comeback but, again, not for major capacity expansion in memory, more technology buys.

That's helpful.

And as my follow-up, you had a nice pick-up there in gross margins in June and clearly within the guide, you're not guiding to 60%, 70% incremental.

I guess as you look through the second half of 2009, what are the kind of puts and takes, positives and negatives as you look at business mix and you look at underabsorption, increased absorption and how we should see gross margin pick up from here?

Yes, I'll let Mark take that one.

C.J., we did talk about gross margins being flat to slightly up entering into the September quarter.

They could go higher depending on the mix.

At this moment, if we don't have to make a capacity cut in terms of our manufacturing output, we shouldn't get any big negative surprises on the excess and obsolete front.

We're still not fully utilized.

We're headed towards that.

Depending on the product mix and whatnot, that could give us some upside in the first half of the new fiscal year.

So we continue to maintain that when we get back to more normal levels of business that gross margin leverage should be there.

Thank you.

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

Your line is now open.

Hey guys, good afternoon.

Thanks so much for taking the question.

Just a couple quick ones.

Could you talk about the dynamics within memory of NAND versus DRAM in Q3 and potentially beyond that?

Sure.

Again, Q3 was, or I guess--

I mean calendar Q3 and beyond.

Yes, let me back up.

June quarter for us, our fiscal Q4, from our perspective we saw NAND was almost half and half.

We're talking small numbers, right?

We could see that continuing.

We have different dynamics at work from the memory, as you know, and the NAND overall.

But from our mix about 50/50 for the June quarter and, as I said, we see the overall percent going up slightly in September maybe to more normal downturn levels, and we see the mix as we model it right now about 50/50 with the range of 25% to 30% of the new systems bookings being out of memory.

Not a big difference between what's happening in DRAM and what's happening in NAND.

I think some of that relates to the different dynamics.

The NAND guys I think are -- they're pushing the technology perhaps a little bit harder on the design role standpoint, but the memory guys are maybe a little bit further behind.

There's more people that need to transition on memory right now.

Are there any particular yield or diagnostic problems associated with DDR3 as that'll be one of the drivers of the ramp over the next couple quarters or is that just kind of normal course?

Obviously it requires a lot of metrology but -- of yield measurement and management, but is there anything in particular there?

I think the issue there, when I talk to customers, is they have pressure I think because there's some capacity challenges around DDR3.

I don't know, Jim, if you're seeing the same thing.

In general they have a lot of capacity, in fact overcapacity to memory but probably not enough on DDR3.

So we're seeing a push to try to squeeze everything they can out.

From the standpoint of unique to the DDR3 design not so much but the need to make sure they're optimizing, getting everything out of that, that's what we're seeing on the advanced DRAM stuff.

That's very helpful.

If I could just ask one more, it would be about the breadth of foundry orders.

Is it -- one, is it broader both in terms of the June and then the September quarters and potentially beyond?

Yes, sure, it's not one.

It's broader and I think that we had -- we had a couple significant players, one smaller player in June and we see it broadening a little bit further in September.

I think that the foundry space is interesting because there seems to be more end demand driving that and there's some unique challenges to the designs on the foundries, so we're seeing across the foundry space maybe more pressure on utilization and a little more optimism from the perspective of [M] drivers.

Terrific, thank you so much.

Thanks, Jim.

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

Your line is now open.

Thank you for taking my question.

This is [Vis] for Satya.

The memory [even that] is coming off of a low base.

Do you see the increase coming from companies making a transition from 7X to 5X or is it more on the bigger players pushing down towards the 4X technology?

Yes, that's a good question.

It's probably, as I've said you have a split between NAND and DRAM so if you will 1X off to start with.

I think that probably mix inside of that is a little bit more biased to the bigger guys right now.

I think some of the smaller guys still are having -- not investing at quite the same rate.

I think September will be interesting to see how that actually plays out.

Does that make sense?

Yes, and one quick follow-up.

How should we think about services going forward with fab utilization rates rates kind of picking up and also what percentage of orders in the June quarter was non-semi?

Okay, yes, so non-semi in June was about 14% and service in June was 31%.

We look forward and service will, we think is off the bottom will start growing again but it'll take a little while to get back to historic growth rates.

So we see, for example, in September quarter that's up somewhat, service as a percent probably holds right around the 30% range.

So I think over time we saw utilizations start picking up at the beginning of the calendar year and that followed on some service business picking up in the March, April, May time frame and we think it starts to climb from here but at a relatively slow rate.

The non-semi stuff, it really depends on some of the end market dynamics.

We had pretty good performance out of our non-semi business and I think we see that continuing to grow as we move forward.

Thank you.

Your next question comes from the line of Krish Sankar from Bank of America Merrill Lynch.

Your line is now open.

Thanks for taking my question.

I had a question and a follow-up.

First on the gross margin line, Q4 the gross margins are pretty good.

How much of that was a function of your cost reduction or product mix and also the fact that sources are so low that it cannot help the gross margin boost up purely from a product front?

Yes, let me take it in reverse.

The 8 percentage point improvement quarter-over-quarter, you can break it down to about 6 points of that was just lower [EN&D] charges.

There's about a point of improvement due to capacity improvement which again gets into the fact that there were some staff reductions that affected us in the manufacturing area and about a point of it was mix.

You can think about that as sort of the bridging of the Q3 to Q4 performance.

Got it, that's very helpful.

Rick, can you give us an update on the dynamics you're seeing on your Bare-Wafer product market and how do you see that trending over the second half and into 2010?

Yes, Krish, great question.

I think Bare-Wafer is for us certainly a capacity play and right now very little activity.

We do have some product coming out, some new capability that customers are interested in but at this point there's no investment for additional capacity and we don't anticipate significant capacity investment happening through the rest of this calendar year.

We think the Bare-Wafer market will continue to be slow and is not really contributing to our gradual recovery here.

But as we look forward to calendar 2010, we think that'll be one of the components that kicks in for us as we see business start to get back to some capacity investment.

But right now, very slow.

Thank you very much.

Thanks, Krish.

Your next question comes from Gary Hsueh from Oppenheimer and Company.

Your line is now open.

Thank you for taking my question.

Mark, just a quick question here on guidance for the September quarter.

It sounds like you're cautiously optimistic that actually at the high end of the revenue range you could actually do much better than the high end of the EPS range.

It seems like it's centered on gross margin.

Could you just run over again why the cautiousness in terms of gross margin guidance for September and by my math if you were to kind of drop through like your normally should 60% plus of the gross margin line on the EPS line, you should be somewhere around $0.03 to $0.05 at the high end.

Yes, Gary.

Several things.

First of all, product mix is always a piece of the equation as it was this quarter as well.

The other thing is the service versus product mix is also a contributor in there.

And the final thing is that again any surprises on the EN&D front to the negative.

We had a pretty good quarter in Q4.

It would take at least a repeat of that to make sure that you're capturing all the incremental margin we talked about previously.

As I did indicate, there is room for that to be better.

If that's better, that would be one of the drivers to get us to positive EPS.

Would I tell you that we're -- you say cautiously optimistic?

I would say cautious.

If you come off the last three quarters we've had, you'll learn not to get too far our ahead of yourself in terms of guiding, but as I did signal, it does exist that upside scenario and we wanted to acknowledge it formally on the call.

Okay and then in terms of modeling, KLA historically has been pretty predictable in terms of the 60% plus drop through on the gross margin, 50% plus drop through on the operating margin side.

Does the model start to stabilize where we can predictably start to model that way in terms of drop through starting the December quarter or when do you think that will happen for KLA?

It may show itself as soon as the September quarter, but we're certainly hoping that if the revenue and the bookings picture continues to improve throughout 2010 that that pattern will become very evident.

Okay.

But, again, we're just coming off the bottom right now and we're I guess cautiously optimistic is the words you used.

We're feeling much the same way but we don't want to get too far ahead of ourselves either.

Rick, just a quick follow-up here.

I think you get it.

You're calling for basically stabilization in the current order pattern here in September and December.

I think semi camp equipment companies fall in two camps, one about stabilization, one camp they fall into is really about further sequential order growth.

What's kind of the difference between or dividing line between those views in the December quarter?

That's a great question.

I look back and I say that there's -- it probably goes to the philosophical view people have of the macro side of things.

Historically I look back in the last several quarters we have -- to the camp concept you have, there's a group that's been pretty optimistic throughout the cycle about overall growth and I think anticipated some things happening.

To Mark's point, we are a pretty careful company.

We look at the last several quarters and think we don't want to get ahead of ourselves.

I think there's no question in my mind we could respond to an upturn.

We're not doing anything that would preclude our ability, but on the other hand I think after you go through the macroeconomic shock that we've been through, it's kind of hard to say that's all done and that there's nothing else out there that can impact it and I think that that is probably at the basis of the different philosophies right now.

Okay, great and just a real quick housekeeping, did you guys guide to order percentage for memory in fiscal Q1 yet?

I did not.

I talked a little bit earlier, it was about 10% we said in June and we think it was 25% to 30%.

It was not in prepared comments, but we think 25% to 30% in the September quarter.

Great, thank you.

Okay.

Your next question comes from the line of Steven Chin from UBS.

Your line is now open.

This is Adam Lilling for Steven Chin.

Could you please talk about the expected bookings linearity in the September quarter given that the expected bookings are better now, better than the historical trends?

Can we assume the visibility is better here than at the start of the September quarter compared to the end of the quarter?

Adam, it's a great question.

I think we do have some pretty good indications because we're now engaged in conversations with customers that if I go back a few quarters earlier we didn't have this early in the quarter and so we're talking about slots and trying to talk about support plans which is why we're probably -- we came out at Semi West saying that we thought we were going to flat to up.

I'd say that that's true.

I think some of our customers have made more positive and affirmative commitments to investing at this phase of the quarter than we saw in the last few quarters.

So I'd say those are all the reasons why.

We don't get into linearity discussions per se.

As you know in this business, historically a lot of this stuff will happen at the end of the quarter.

Not necessarily exactly the case this quarter partly because there is a scarcity of spots for people and so there are some people that had to move earlier to assure that they would make their commitments and ramps.

Does that make sense?

Yes, absolutely.

That's great.

Also, could you share your thinking on how bookings will be broken out by quarter?

Broken up by geography?

And also your outlook for 2010 capital spending trends for the industry.

Sure, I'll start by geography.

We look forward -- we think September is probably in the range of a little bit down as a percent from this quarter so probably in the 25% for the US.

Europe very small.

So US and Europe maybe 28 and last quarter they were a little bit over 30.

Japan continues to be soft and so we're in the 5% range for that.

Taiwan healthy but down.

We were at 46% last quarter and we're seeing probably around 30% and the rest of Asia is probably 17% to 20% and Korea is probably a little bit more like the 20% which is up from where they were last.

So we do see a little bit of shift as we look at the order book right now.

For 2010, there are a lot of models out there, a lot of estimates.

Internally, this is maybe back to an earlier question I got on why is our conservatism more so than others.

I think it's very hard to handicap CapEx without making a statement about overall economic conditions.

So we will have a range of up 20 to up 50 for next year and I think that as we roll out our targets, it's very dependent on I believe what happens overall economy.

From our standpoint, we see there's definitely the upside in that range of 20 to 50.

We'll know more about that as we get later into the year.

So much of that is about whether people are back investing in a meaningful way in capacity.

Right now it's just we don't have visibility to that.

Okay, great, thank you.

Thank you.

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

Your line is now open.

Thanks a lot.

Guys, can you give a little bit of color in terms of your 32 nanometers within that 45 nanometer percentage you gave earlier?

How much are you seeing on that technology node, especially as the logic guys begin to transition to that technology node?

Yes, Patrick, it's hard to say because people are buying.

We introduced some tools that are capable for 32 nodes but 32 is really a development play by and large for people with maybe the exception of one customer.

I'd say it's still a relative small percent of the overall business is 32, but we do see interest in the R&D space for sure for that development.

I don't -- we haven't really broken that out.

I'd say the bulk of what we're seeing right now is related to the transition to the 45 and 40 nanometer nodes on the foundry side.

Okay.

Great.

And a follow-up question in terms of your cost cutting efforts and getting to your new break even targets, are a lot of those remaining I guess cost cuts and restructuring efforts targeted around your acquisitions or is it kind of mixed with your core businesses as well?

Well, a good portion of them are now completed at least if the world doesn't get any worse.

So what we're talking about here is tweaking between now and the end of the year and then we did announce previously that we had a campus consolidation project here in the South Bay area that would kick in next year and give us a little bit more spending relief.

But we don't, at this moment, based upon today's business activities and the prospect that things aren't going to get worse from here, we don't have any major additional new cost reduction actions and that would include both the acquired businesses and the extant businesses of KT.

Great thanks.

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

Your line is now open.

Hi, thanks for taking my question.

I was wondering what your debookings status is today.

Is that improving, or there are less discussions about debookings in the current period?

Yes, the debookings are a function of whether or not orders actually slip out of what we think is a 12-month delivery window.

That is through discussions with customers, are you inside or outside the 12-month delivery window.

The reason they're important is in terms of sizing manufacturing capacity and where we have to ramp, that's the window we look at in terms of having to have capacity ready.

So it is not unusual to see towards the end of the cycle the customers clarify whether or not they want to pull tools in, as Rick indicated, or whether or not they want to push a little further out and the debookings number is essentially a function of that.

I should also clarify that the vast majority of those are not true debookings, they're basically rescheduling in or rescheduling out of existing orders.

Bottom line, you don't expect an increase in activity, essentially there's very little debookings going on today?

Oh, you mean with respect to the September quarter?

Yes.

I would guess the debookings number will probably go down in September again based upon current business trends.

And last question with regards to your bookings rate, your bookings is excuse me, your shipments rate was pretty strong this quarter.

I think this is the first time your shipments rate is running ahead of your shippable backlog number.

I was wondering if you could provide some comments about how you feel about shipping above your quarterly, your backlog number.

Yes, maybe even the more important statistic is that we shipped ahead of revenue for the first time in eight quarters this quarter, back to our fiscal Q1 2008.

So that, again, is a positive indicator.

With respect to the shippable backlog number that will go up and down depending on exactly what happens towards the end of the quarter.

But there's no doubt that that trended up very, very nicely this quarter and if that continues, that's a good sign.

Thank you.

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

Your line is now open.

Hi guys.

This is [Casey] calling for Mahesh.

A couple of quick questions.

When do you guys expect capacity buys to come in from DRAM and NAND makers?

We don't.

I tell you what we don't expect, we don't expect them over the next September quarter or December.

We don't think we'll see much.

Maybe at the end of December, depending on how the view of the market is we might see some activity there.

As I talk to customers in the memory space, they don't anticipate making significant capacity investments the rest of this calendar year.

So that's not in any of our models.

As I talked earlier, that is really the swing factor in what kind of calendar 2010 year the industry has in general.

So I'd say not for the next couple of quarters but assuming a normal economic kind of recovery environment, then we see them starting in the calendar 2010.

Okay.

During the NAND transition to 3X, can you talk a little bit about process control challenges?

Yes, sure, I think there are a number of challenges.

In that case, people are really pushing design rules harder than in any other technology node.

From that perspective alone, there are certain defect types that our customers are really struggling just to find.

We have introduced the new brightfield tool, we talked about, for example, at Semicon West last week we talked about it.

That we're seeing in R&D that that is providing unique value for customers to find unique defects that will impact them as they go to 3X.

In that case, we anticipate demand increasing for our new brightfield, our new darkfield, our new review tool on the defect side and then metrology also is getting pushed pretty hard as well.

That's part of our analysis of why we see growth in process control as we move forward.

New defect types, some are just associated with the structures, but some are just absolute size issues, that there has been no other way to see them and until we get to that node, it hasn't really impacted our customers' yield, but it will at 32 -- I mean the 3X in general.

And lastly, in the [RIG] business segment, where are we on the order cycle with the mask shops?

Are they ordering to -- in anticipation of tech upgrades?

I think there's been some activity.

We talked about in the mask world that March was a reasonable percentage of overall bookings, about 17%.

It dropped a little in June but we anticipate it popping back up in September.

Our new technology needs, but also we have some new product capability we're bringing to the market and there's a strong interest in that from our customers.

We just need to work through finishing and delivering those early tools.

But it is driven on new capability, new technology and as we look forward we expect that the reticle shops, the mask shops will renew their investment which frankly they took several quarters of very low investment as they just didn't see the needs from a capacity or technology standpoint, but we're at a position now where we've had new capability and they've got some new challenges.

Okay, thanks a lot guys.

Thank you.

I want to make one final comment for our fiscal 2009.

This is certainly a challenging year and we know that it won't be the last time the semiconductor industry suffers a downturn.

2009 for us was a year that allowed us to demonstrate the strength of our technology and our people.

In the face of what may well be the steepest industry downturn, KLA-Tencor earned a non-GAAP operating profit in FY 2009 and we generated about $200 million in cash flow from operation.

We fully paid our dividend and we built upon our market leadership.

I'd like to take this opportunity to thank our employees, our customers and our suppliers for supporting us.

We're certainly looking forward to a better fiscal 2010.

Thank you all.

This concludes today's conference call.

You may now disconnect.