科磊 (KLAC) 2010 Q2 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 Corporation second quarter fiscal year 2010 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).

Ed Lockwood, you may begin your conference.

Thank you, Alicia.

Good afternoon, everyone, and welcome to KLA-Tencor's second quarter fiscal year 2010 earnings 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 second quarter results for the period ended December 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.

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

On that website, you will also find a calendar of future investor events, presentations and 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, 2009, 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.

And 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 these differences is contained in the filings we make with the SEC from time to time, including our fiscal year 2009 form 10-K and our current reports on form 8-K.

We assume no obligation and do not intend to update those forward-looking statements, however, you could be reassured that any updates we do provide will be broadly disseminated and available over the web.

With that I will turn the call over to Rick.

Thank you, Ed.

Welcome to our second quarter fiscal year 2010 earnings call.

In my remarks today, I will discuss the financial highlights and the demand environment in the December quarter, provide some perspective on our industry outlook for calendar 2010, and provide guidance for the March quarter.

Mark Dentinger will then take you through the details of the December quarter results, and we'll conclude with your questions.

So let's get started.

We are pleased with the Company's second quarter performance.

The combination of strengthening industry dynamics, strong demand for new products, and good execution, contributed to solid results for KLA-Tencor.

Second quarter revenue was $440 million, an increase of 28% compared with September.

Non-GAAP net income was $49 million, up 88% sequentially, and non-GAAP net income per share, including stock-based compensation, but excluding some one-time charges was $0.28 in the quarter.

In addition to strong revenue growth and profit performance, we also generated $164 million in operating cash flow in the period, and our cash position grew to $1.5 billion at quarter end.

So by any of these measures, a very good result for KLA-Tencor in the December quarter.

As we look into calendar 2010, we see the semiconductor equipment marketplace on solid footing, and progressing steadily in what analysts project to be a healthy cyclical recovery for the industry.

This is driven by solid IC growth, and a favorable supply/demand balance and high fab utilization.

Current consensus is for the semiconductor revenue percentage growth in the mid-teens range in 2010.

And the market analysts are forecasting capital expenditure to increase in the range of 50% to 60% for the year, with investment focused primarily on advanced technology development.

We expect process control will be a key enabler of our customers' success in this period of technology-focused capital investment.

This is because our customers execute their investment strategies to drive down costs and achieve better device performance.

Each successive generation of new technology is characterized by increased process complexity, shorter market windows, and more challenging yield requirements.

Process controls on the critical path for successful management of these complex technical challenges enabling our customers to quickly ramp new processes, get them into production, and then maintain high yields in order to drive cost efficiencies and meet their time to market goals.

As the market leader in process control, KLA-Tencor is positioned to benefit from higher adoption of inspection and measurement, and to achieve our goal of growth in excess of the industry.

Now, turning to some specifics of KLA-Tencor's performance.

Gross bookings in Q2 were $516 million, an increase of 5% compared with September, and we delivered the fourth consecutive quarter of order growth off our December quarter 2008 low.

Demand was characterized by sustained high levels of investment from foundry, increasing strength in memory, and continued technology investment in logic.

Orders were focused primarily on advanced technology development, with some capacity investment at the advanced nodes.

Foundries were 59% of system orders in Q2.

The continued challenges in achieving 4x nanometer yield targets increased demand from (inaudible) customers and heightened competition are driving foundry capital intensity to levels not seen in recent years.

We expect this trend to continue and to benefit KLA-Tencor as our foundry customers are typically high adopters of process control.

With market leaders forecasting higher levels of capital spending in calendar 2010, it appears the investment cycle in foundry is poised to continue.

Memory grew sequentially in the December quarter to 17% of orders.

And our near term forecasts show memory orders on an upward trajectory, with demand primarily focused on technology buys.

Memory customers are facing increased technical challenges as they develop advanced technologies, such as DDR3 for DRAM and 3X nanometer in NAND.

The increased complexity associated with introducing new architectures and materials in advanced memory devices is driving more inspection and metrology steps in the manufacturing process.

We believe memory customers are progressing along the same path as did the foundries early in the development stage of 4X nanometer.

We anticipate as memory customers ramp their processes over the next few quarters, they too will encounter additional yield challenges, driving an increased need for inspection and measurement to ramp their yields to meet tight market windows, leading to additional business for KLA-Tencor.

Logic was up sequentially in Q2 to 24% of bookings, as this market continues to ramp 3X nanometer technology.

We look ahead to 2010 with a great deal of excitement.

We have new products in place, addressing both our core semiconductor and emerging markets such as the high brightness LED market.

We are well positioned with our customers, and our adoption story is playing out very well in the early stages of this cycle.

Our expectation is for process control adoption to continue to grow, as customers in each of our semiconductor end markets face increasing challenges at the leading edge.

From a business model perspective, our relentless focus on operational excellence continues to differentiate KLA-Tencor, and provides resources to fuel our investments in growth.

With the benefit of the actions we have taken throughout the past several years, and particularly in response to the recent industry downturn and world economic crisis, we are positioned to deliver higher profitability than we have at comparable revenue levels in the past.

Driving improved operational leverage remains a key focus of the management team, and we're committed to translating our strong business returns into increased shareholder value, as we progress through the growth stage of this cycle.

Now, I would like to give my perspective on guidance for the March quarter.

As I mentioned earlier, the prevailing view for the calendar 2010 is for the semiconductor equipment demand to grow in the range of 50% to 60%, driven largely by catch-up technology spending for memory customers, after a period of under-investment, and continued high capital intensity in foundry.

In addition, with spending primarily focused on advancing Moore's Law and the increased technical complexity at the advanced nodes driving new yield challenges, and resulting in higher adoption of process control, we see 2010 shaping up to be a very strong year for our industry, and for KLA-Tencor.

In terms of our outlook for the third quarter of fiscal year 2010, we expect orders in March to be flat to up 20%, compared with December, revenues are expected to be between $450 million and $480 million, with non-GAAP earnings per share in the range of $0.31 to $0.37.

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

Mark?

Thanks, Rick.

As a reminder, we present our income statement in two formats.

One under US GAAP and the other in a non-GAAP format, which excludes amortization and write-downs of intangible assets associated with acquisitions, expenses associated with our stock options related litigation, and certain costs and expenses which we do not expect to be recurring, such as restructuring charges and unusual tax items.

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

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

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

Revenue for Q2 was $440 million, slightly towards the high end of our guided range of $420 million to $450 million.

Non-GAAP earnings per share was $0.28.

Q2 GAAP EPS was $0.13.

A summary of the differences between this quarter's GAAP and non-GAAP numbers are as follows.

Acquisition-related charges of $8 million before taxes or $0.03 per share after taxes, restructuring and severance charges of $14 million before taxes, or $0.05 per share after taxes, stock option litigation expenses of $7 million pretax or $0.02 per share after taxes.

We also recorded a noncash tax charge of about $9 million associated with the cumulative short fall position in our employee stock activity.

Removing this charge from GAAP earnings added $0.05 per share to non-GAAP EPS.

The recent improvement in order activity continued in Q2, with foundry orders generating the largest portion of new business.

New orders for Q2 were $516 million, an increase of 5% over Q1 new orders.

We also scheduled in about $33 million of orders received in prior quarters, resulting in net orders of $549 million, up about 15% from Q1.

To clarify the new versus net order phenomenon, older orders tend to be delayed or scheduled out of our 12-month delivery window during downturns, resulting in new orders that exceed net.

Conversely, older orders tend to be scheduled in during upturns and as a result, net will exceed new.

We added over $110 million to our backlog in Q2, and ended the quarter with $759 million in total systems backlog.

The backlog at December 31 included $245 million of revenue backlog for products that have been shipped and invoiced but have not yet been recognized as revenue, and $514 million in systems orders that have not yet shipped.

Most of the backlog typically ships over the following six months.

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

The US was 16% of new system orders in Q2, up from 13% in the September quarter.

Europe was 4% of new systems orders, up from 3% in Q1.

Japan was 14%, up from 9% last quarter, Korea was 19%, up from 6% last quarter, Taiwan was 33%, down from 51% last quarter, and the rest of Asia was 14%, down from 18% Q1.

The Q2 distribution of new systems and services orders by product family and the quarter-to-quarter change in distribution was as follows.

Wafer inspection was 42%, up from 32% last quarter.

Radical inspection was 15%, down from 22% last quarter, metrology was 13%, down from 17% in the prior quarter, and solar, storage, high-brightness LED and other non-semi was 6% compared with 7% last quarter.

Services was 24% of new orders in Q2, up from 22% last quarter.

Foundry customers comprised 59% of semiconductor systems orders in Q2 versus 76% in Q1.

Logic and memory orders were 24% and 17% in Q2, versus 11% and 13% in Q1, respectively.

Technology purchases generated most of the activity this quarter, with 45 nanometer and below developed with pilot activity, comprising 95% of the semiconductor systems orders, the same percentage we experienced in Q1.

Looking forward, we are assuming new orders in Q3 will be within a range of flat to up 20% from Q2.

Shipments in Q2, which include both systems shipments and services revenue, were $459 million, up 20% from $383 million last quarter.

Systems revenue for Q2 was up 38% to $315 million, versus $229 million in Q1.

Services revenue was $125 million in Q2, up 11% from $113 million in Q1.

Our expectations for total revenue in Q3 is a range between $450 million and $480 million, and we expect services to contribute a little less than 30% of the total.

Non-GAAP gross margin was 55% in December, up three percentage points from September.

The improved margin percentage in Q2 was consistent with our stated margin leverage targets, and we expect the gross margin percentage will continue to improve in Q3 as well.

Operating expenses were $164 million, an increase of $11 million from the September quarter.

R&D was $82 million, a $4 million increase from Q1, selling, general and administrative expenses or SG&A were also $82 million this quarter, a $7 million increase from last quarter.

The primary reason for the operating expense increase was a higher accrual rate for variable pay based upon our updated full-year projections for operating profit.

These higher accruals resulted in $8 million in additional operating expense this quarter.

Without the additional accruals, operating expenses would have been about $156 million, or up $3 million versus Q1.

Other income and expense, or OIE, was a net $9 million expense in Q2, or approximately $17 million lower than our Q1 net credit of $8 million.

The Q1 net credit largely resulted from a nonrecurring $16 million gain from reversing a consumption tax contingency.

Without this credit, Q1 OIE would have been a net expense of about $8 million.

In Q3, we expect OIE to be a net expense of approximately $8 million to $10 million.

In Q2, our non-GAAP income tax expense was $18 million or 27% of pretax income, versus $6 million in Q1 or 17% of pretax income.

The rate increase in Q2 was largely because we had nontaxable investment gains in our deferred compensation plan in Q1.

Our GAAP tax percentage rose considerably from Q1, as a result of a noncash component that added $9 million in additional tax expense in Q2.

This additional expense results from how accounting rules are applied to cumulative shortfalls in our employee stock activity, and will be more fully described in our 10-Q for this quarter.

Because this expense is noncash, non-predictable and materializes only when a company is in a cumulative shortfall position, we removed it in preparing our non-GAAP statements.

Non-GAAP net income was $49 million or $0.28 per share in Q2.

These numbers include pretax stock-based compensation expenses of $21 million.

At our model tax rate of 30%, our Q2 non-GAAP earnings per share would have been $0.27.

At the revenue range I previously mentioned, we would expect our Q3 non-GAAP earnings to be somewhere between $0.31 and $0.37 per share, assuming a tax rate of 30%.

The weighted average shares used to compute EPS in Q2 were 173.8 million, versus 173 million in Q1.

For the March quarter, our average share count should be approximately 175 million, assuming we do not repurchase shares.

Turning to the balance sheet, cash and investments ended the quarter at $1.5 billion, an increase of $135 million quarter to quarter.

Cash generated from operations was $164 million in Q2, and included a US federal tax refund of about $72 million.

Excluding the tax refund, our cash flows from operations would have been about $92 million in Q2, compared with $73 million in Q1.

In Q3, our cash flow from operations will likely decrease because we won't be receiving a tax refund.

Net accounts receivable ended the quarter at $298 million, up from $244 million at September 30, mostly because of higher shipments.

DSOs were 62 days at December 31, versus 66 days at the end of September.

Net inventories increased by $5 million from last quarter, and ended the quarter at $352 million, but inventory turnover based upon GAAP cost of revenues improved from 1.9 turns last quarter to 2.4 turns this quarter because of higher volumes.

Net capital expenditures were $11 million in Q2, versus $4 million in Q1, a significant portion of the Q2 capital spending increase related to our Bay Area campus consolidation project.

Total headcount for the quarter ended at 4,850, no change from September 30.

We expect our headcount will remain relatively flat during Q3.

With today's report, hopefully we have closed the book on a tough two-year period, we saw the cap equipment industry experience significant double digit percentage declines in both 2008 and 2009.

Although business improved steadily in 2009, and we are optimistic about our prospects for calendar 2010, we will continue to manage the business prudently based upon the adjustments we have made during the last 18 months, and we expect our financial performance will continue to reflect the improved leverage in our model.

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

Total revenue between $450 million and $480 million.

Non-GAAP earnings per share will be $0.31 to $0.37 assuming a tax rate of 30% of the pretax income.

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.

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

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

(Operator Instructions).

Your first question comes from the line of CJ Muse with Barclays Capital.

Your line is now open.

Good afternoon.

Thank you for taking my question.

I guess first question, following (inaudible) overnight, there's clearly a concern of a near term peaking in shipments.

So I guess my question is this, do you subscribe to this view or do you see a different shipment pattern for KLA, particularly given your growing leverage to memory?

Yes, CJ, it's Rick.

I think that what we see as we look out is that our exposure to memory is increasing, and we did not have that much exposure in the last two quarters, as you know, as we said then, we saw it going up and we continue to see that happening over time.

I think that for us, it might be a little different than some of the process guys that are more capacity related, and for that reason, we're anticipating an increase again in the March quarter and better prospects throughout the year.

So we don't see a peaking.

We also see foundry, while we don't anticipate foundry to be at the same level of percent of our business, we believe and all the indications are it will continue to be strong for us.

So we don't see a short-term peak for us.

Right, and as a quick follow-up, on the memory side, I guess, what are you looking for to give you the confidence that memory process control will, indeed, increase, and I guess can you comment on your expectations for NAND relative to DRAM.

Thank you.

Sure.

Yes, what we are seeing is, I characterize it this way, there was an increase of -- a reasonably dramatic increase from some of our customers in their need to respond to the market.

And I think that their first inclination in those situations was to ramp up starts and get some process equipment in, but they didn't really go to work on yield.

We know that the native yield before people can do repair is very low, on the advanced devices, but you can make up for that with repair, but it's not long term what you really want to be doing in process.

So all the conversations, all the discussions we are having with our customers lead us to believe that there's a very high likelihood that we are going to see increased demand as we go forward, enabling our customers to get native yields up and ultimately to get their costs down over time.

In terms of the NAND complexion, NAND was about 25% of the memory orders and memory was only about 17% of what we saw in the December quarter, and we anticipate those going to about 35% in the March quarter, and we see memory up to probably about 35% of our overall business.

So we see a third of a third being left in NAND.

So not huge levels of investment yet, and NAND in DRAM picking up before NAND does.

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

Your line is now open.

I just wanted to follow up on the memory question regarding increased capital intensity.

Is there any way you could quantify what it was last cycle versus this cycle?

Because it seems like the DDR3 and additional complications are actually increasing the process control capital intensity, but is there any way to quantify it versus DDR2 or the prior cycle.

Krish, we don't really have -- we don't have a detailed model on that or time to go over it.

We have the detailed model but not really time to go over it.

I think that part of what happened in the last cycle, of course as we know was, there was probably more capacity to put online than the market was going to support.

So from that standpoint, overall intensity was higher and we don't anticipate things getting back to that level.

But in a steady state, where you are not over-building, we do see process control intensity increasing cycle on cycle for memory, but lagging what we saw in foundry.

So we do see it increasing but as a said, they have a redundancy card to play, which delays the insertion, and we have seen that in the past with memory.

So we anticipate that that will be a similar -- the way things play out for us in this cycle as well.

And then I just have another big picture question.

If you look at the last cyclical (inaudible) for wafer fabs in 2007, it was about $30 billion, do you actually think we could reach those levels this cycle?

Well, I have -- I don't have a crystal ball that's any better than -- and certainly not as active as all of you guys that cover the space.

Let me put it this way, we are not building our business and planning our future based upon exceeding the prior peak.

And we believe we can continue to grow, and we can exceed our prior peak without the industry exceeding its prior peak.

That said, if it does, we will certainly be in a position to capitalize from it.

But part of our acquisition strategy was to get into new TAMs to give us more exposure to new markets, so that if the next cycle wasn't as high, we still have great opportunities for growth.

Thank you.

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

Your line is now open.

Hi, this is Kate Kotlarski for Jim Covello.

A couple of questions.

One I think you answered in part, but just I'm hoping you could comment on why, perhaps, your guys' order increase was not as significant as we have seen some of the other companies announced.

Was it because your foundry exposure is generally a little bit greater than some of the other companies in the space, and then your memory exposure is a little bit lower and that's where a lot of the orders are coming from?

And to the extent that's true, should we expect you guys to sort of play catch-up in the next couple of quarters and see your memory business increase in line with some of the your peers?

Yes, Kate, we've had pretty steady improvement in our bookings.

This is the fourth sequential up quarter for us since the December 2008 low.

So we feel pretty good about where we are.

I can't really comment on the other players.

What I do know is that as I just mentioned, we did not see and did not anticipate seeing memory to be a catalyst for us in the near term.

We saw it as a growing and important part of our business, but not the dominant part.

But we do see it increasing over time, and we are anticipating even in this quarter, in the March quarter, where memory will go from 17% of our order book to about 35%.

So -- and we expect that increase to continue over time.

Okay.

That's very helpful.

And then, you had mentioned earlier that from your perspective, you don't believe that business is approaching peak levels.

If we were to think about it, sort of by segment, foundry, let's say, versus memory, do you think that the foundry business perhaps is getting closer to peak levels, and the memory side of the business still has a way to go.

I think certainly for us, if you just do the model of what we said last quarter, we did in foundry in the quarter before, we did 76% of our business in September.

We did 59% in December, and we're anticipating about 54% in March for foundry.

So it will become a smaller percent of our overall business as our business is going up.

So we think foundry continues to invest at similar levels.

There are some pretty big foundry projects that are not currently being booked because they are out there a ways in terms of getting facilities ready.

While there could be near term lulls in that, the largest foundry player's committed to increasing CapEx, we see other players having to follow, and the demand position along with competitive pressures are driving those guys.

So we think it should be a pretty robust year for foundry throughout the year, but you can always -- it's very hard smoothing function on these to predict exactly quarter by quarter.

But e anticipate in the calendar year that foundry will be strong throughout 2010.

Okay.

Great.

And just a quick other one.

Do you guys have an expectation for shipments for next quarter?

Yes, we don't typically -- or haven't guided shipments in the last five quarters or so, Kate.

We do have an internal expectation but we don't externally guide it.

Okay.

Thank you so much.

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

Your line is now open.

Hi, thanks.

Rick, I was wondering if you could elaborate a little bit on some of the memory new challenges that you said your customers are facing.

Is that any different this cycle around compared to previous shrinks, and where do you think we are with the overall big picture, particularly in NAND flash as you go to the sub 3X nodes.

Yes, it is different.

I mean, I think that with every sequential generation for memory, they start off with lower yields and they have to compensate through repair, and that's certainly the understanding that we have.

So the native yield right out is rather low.

And as we see it, that's not really different.

It's gotten more difficult, I think for our customers, but it doesn't keep them from shipping, and it actually doesn't even keep them from yielding.

What it does is keeps them from being as cost effective as they want to be.

So what we play a part in is improving that overall native yield, and sometimes that results in them having to ship a lower density device off the same chip because of the yield concerns.

So we are seeing a lot of pressure.

Without going into specific customer details, you can imagine what's driving it.

The NAND guys are driving the most advanced design rules, as you know, and the memory guys have a lot of concerns about the overall process integration.

So we are seeing that pressure right now from many of our customers and are working closely with them to serve it.

We are also engaged heavily in their R&D but also trying to help them in production work through those problems.

But I would say increased problems and they do have a way to compensate, but it's harder for them, at the beginning of a ramp, they just want to get wafers out and they want to get chips out.

So I think they are more prone to start more wafers than a foundry might be.

Okay.

On the foundry, how concentrated are your foundry orders?

How big is -- is there a number two customer placing orders in foundries at this point?

Yes, absolutely.

It's pretty much concentrated in the sense there's a concentrated number of foundries, but we are seeing activity from all of them, and I think that that really has been the story.

There's obviously a leading foundry company who has been investing (inaudible) heavy investment, but others have followed as well, so we are seeing really across the foundry space.

Obviously there's another foundry player with plans for a new fab coming late in the year, which will be a bit of an inflection point.

That's very late in the year, I would presume.

Yes.

Okay, and lastly, if you look at all of these different trends that are playing out between you guys and some of your peers, if CapEx is up 50% or 60% from these technology-type buying, how should we think about KLA's potential to overgrow or undergrow the market this year.

Yes, we remain committed to our thesis that we can outgrow the market by about 5%.

And that's based on, our position in the market, our ability to grow into new markets, and we think actually 2010 sets up pretty well for that when we look across our forecast and the industry projections we are talking about.

We do see processed capital -- process control intensity increasing.

Our calculations were that it was around 13% in 2009, and we anticipate it going up in 2010, and again into 2011.

So from that standpoint, we do see a -- the opportunity to outgrow the overall market.

What that means, Rick, is that you are reasonably comfortable maintaining the bookings revenue rate as you proceed through the year?

That's basically what that would imply if you want to grow 60% this year?

Right.

Well, it depends on what you believe the industry will do.

I am the last guy who is going to tell you what the right number is for the industry, but what I will tell you is that our objective is to out-perform the industry.

And we think that that's very doable with what we see right now, but of course as we have all witnessed in the last couple of years, forecasting is a difficult business.

I understand.

Thank you.

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

Your line is now open.

Gary Hsueh from Oppenheim and Company, your line is now open.

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

Your line is now open.

Hi, guys.

A couple of things.

I'm just trying to get to the backlog number.

It looks like backlog was up $88 million on a systems basis, but you only ordered $57 million more than you shipped.

So was there a reverse adjustment there?

No.

There wasn't a reverse adjustment in the sense that we didn't take anything out, but we did actually bring a net $33 million back in, which I alluded to in this distinction between new orders and net orders in the quarter, Tim.

And that is that, again, when you go into an upturn, things that pushed out of our 12-month visibility, which is our definition of what's on backlog.

We typically take out of our backlog and call that a push out.

When you are on a ramp back in, those orders tend to come back in and we brought $33 million back in on the quarter.

I'm sorry, so Mark, so the $516 million that you talked about gross does not include those?

Yes, it does not include those, and the net number was, I believe, $549 million.

Oh, okay.

I got it.

That makes sense.

Okay.

And then the second question, so if I just sort of run a very simple -- I mean, this is bookings so it's kind of flawed but if I look at your share of WFE and I look at what ASML is doing and LAM, they are pretty darn close to peak.

They are 5%, maybe 10% away from their prior peak bookings, and you are still about 20% away.

Now, I certainly understand that that could be due to Samsung, because they are such a big portion right now of the bookings, but is there any other factor, because I know you guys talk about PDC gaining as a percent of wafer foundry equipment.

But it doesn't seem like it in recent years, and certainly right now it doesn't seem like it either.

So I'm wondering if there's some customer-specific issue right now that would explain it, that would reverse itself going forward, that would allow you to basically gain share.

Thanks.

Yes, Tim, again, we look at calendar '09 and it did gain.

We saw the intensity of process control was higher than the prior year, and the early signs, I think, there will certainly be quarters where that won't be true but we think in aggregate, as we look across, we will see that play out.

Obviously time will tell, but a lot of that goes to the indications, the comments that I made earlier about what's happening, and particularly in memory.

We are the first to admit, we were not going to come on as fast as the other guys did in memory, but we see a steady increase in that as we go forward.

And, of course, we benefit in some areas that perhaps the other guys hadn't as much.

So year on year, we believe strongly in our thesis that we'll outgrow overall WFE in calendar 2010 as we did in 2009.

Okay, I will have to look at the numbers again.

Thanks, Rick.

Your next question comes from the line of Stephen Chin with UBS.

Your line is now open.

Hi, Rick and Mark.

I wanted to ask, Rick, about the continued strong wafer inspection, orders that you continue to show.

Do you get the sense you are taking share at foundry customers for wafer inspection, and are any of the 300-millimeter wafer growers contributing yet to wafer inspection orders.

Yes, Stephen.

I wouldn't say we are necessarily taking share.

I think our share position kind of stays in the same range as it has.

I think that it is true we are seeing, I think, some benefit from adoption, and so that's part of our story.

We did see some business in the bare wafer segment, I wouldn't say it was the main guys, but it was signs from some of the other players.

So we had some signs of life there, which is great to see, because it's been quite a while, and we've talked about that in the past, that that was one of the legs that hadn't really turned on.

I wouldn't say it's a large percent of our business but there was some improvement there.

And we would anticipate, as we model the demand for wafers, and the overall industry trajectory, we think that as we move through this calendar year, that business will continue to improve.

But right now, it's a relatively anemic compared to prior peaks.

Yes, that was helpful.

And then a follow-up question, Rick.

The orders from these new products, solar and LED, have they been running about $30 million a quarter.

Do you get the sense that you could see a substantial increase soon given the big solar capacity additions that are happening in the industry, and the large LED capacity additions you are seeing here in 2010?

You know, Stephen, it's hard to say.

We are certainly hopeful of that, but I also believe that it will take some time.

I think the solar dynamics are challenging, and I think that that's part of the issue here.

There is capital being spent, but as we look at it, we think our share position is good.

I'm just -- I'm a little bit wait and see on that.

So we think the current run rate we've got is pretty good.

The good news for us is we are in a good margin position on that business.

So we're not in need of huge volume to be making it accretive to our model, and we also didn't invest heavily in R&D for that.

So that's how we are playing that market.

Okay.

Thanks, Rick.

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

Your line is now open.

Thanks for taking the question.

Hey, Rick, on the 40-nanometer buzz that continues to float around about yield challenges and lack of capacity, etc.

Is there something unusual about 40 new defect mechanisms or something that makes that very different from previous transitions in logic, or is this really just the usual sort of teething with a new technology and on the same sort of learning slope that we've seen historically?

Well, I think what made it different for our customers is they couldn't see them because they were working on old technologies of ours, and so from that standpoint, they got hit pretty hard by stuff they couldn't see.

They had to believe it first, and then when we did evaluations on our new equipment, there was a bit of a scurry to get the new equipment in there so they could see the stuff.

And you know the deal, Raj, if you can't see it, you can't fix it, and that was part of the problem with those guys.

As we say, we believe the same trend will play out in memory.

There's a phase lag to it though.

And as you move to 32, any difference in sort of the intensity of 32, or is it the normal step up, node to node that you have typically seen in the past?

I think there's a step up.

I think that the issue for us is the problems are there, and the problems are getting harder.

Our real challenge is making sure we've got the tools that can find the problems that the customers can then take and use to solve the problems.

And so for us, it's a matter of inspecting them and reviewing them, and we have a lot of investment playing out.

We are very solid with our roadmap but we have to play it out.

But we think the trend continues, and we have just got to keep executing on our product development to be able to capitalize on that.

One last one, if I might.

You touched on ADE, you mentioned some signs of life.

Can you talk about some of the other pieces you added through acquisition, ICOS and the like.

Are you seeing anything there.

Yes, we don't break out the individual products but what I can tell you is we have seen some activity in the back end which has been encouraging.

I think the back end had really shut off during last year, and we saw that come back, and so that's encouraging.

We see a number of opportunities there.

We do see some high-brightness LED opportunities, and some good growth there, but off a very small basis.

Even our business, like SensArray, we have seen a nice pickup in that business, so really they are starting to kick in.

I would say the acquisitions still have a ways to go to get to their full potential, and we're working very hard to see that happen.

But from my perspective, they represent upside as we move forward.

All right.

Thank you.

Your next question comes from the line of Wenge Yang with Oppenheimer & Company.

Your line is now open.

Hi, this is Wang actually for Gary.

A couple of questions.

First one is, we see foundries struggling quite a bid at 40-nanometers.

Based on your current observation, do you see the memory guys running into similar troubles when they move to 40-nanometer DRAM, or 30-nanometer NAND technologies?

Yes.

There's no question that the memory guys face yield issues, defectivity issues, metrology issues, as they move down in design roles.

Very similar to what we have seen foundries, and foundries maybe got hit with it a little bit earlier in the cycle.

The memory guys have a bit of a hedge because they have redundancy and so they can play off of that.

And that's why we believe we have seen this lag for us in terms of our order book on the memory side.

As we go forward, we are certainly working very hard to realize those opportunities, but they are definitely seeing and being challenged by the defectivity levels that they are having to deal with.

And it's just a matter of smaller devices, smaller design rules, so smaller defects matter now that didn't used to matter to them, and there's integration challenges as well as they run these processes which is tighter and tighter for them.

Okay.

Just a follow-up.

Some of the process tool guys, subcomponent constraints, and supply chain kind of constraints.

Do you guys see similar things and what is your lead time at this moment, compared to maybe a quarter ago.

Well, I would say we definitely see constraints in our supply chain.

I think there's no way you can go from where the industry was, to where it is now, and not have strain in the supply chain.

In the same way perhaps our customers see constraints from us.

That said, you can imagine there's a tremendous amount of work going on to close those gaps, to not miss those shipments and to be in a position to support our customers.

So from our standpoint, our materials people, our manufacturing people, are working really hard and doing a great job of closing those gaps, so we can meet those customer demands.

But there's no question that when you whipsaw an industry the way this one has been whipsawed, you are going to run into some of those constraints.

Fortunately, I think throughout the cycle, we stayed very close with our key suppliers, worked closely with them to be in a position to anticipate ramping up, and we continue to do that.

And I think that that's -- again, there's a lot of work going on in our manufacturing area around the world to try to close those gaps.

Thank you.

(Operator Instructions).

Your next question comes from the line of Steve O'Rourke with Deutsche Bank.

Your line is now open.

Good evening.

Rick, do you think that the visibility over the next few quarters for process control is a bit better than for just process equipment?

I don't know what their visibility is, Steven.

I think that's part of the challenge for us.

I think from our standpoint, we have pretty good dialogue and discussion with customers.

I think that given the nature of our products and the lead time of our products, I think most of our customers know that the products that they want from us, they can't just get and order and get in the same quarter.

I think that gives us probably, naturally a bit more visibility into what's going on with our customer base.

That's why I think if you look back at the ramp, we have been pretty consistently doing what we thought we would do relative to this ramp.

So I would say from that perspective, our visibility is better actually than it's been in quite a while.

A year ago I was saying we had no visibility into anything.

Now I think we've got at least more like normal visibility.

Okay.

And can you comment on what you are seeing with the Taiwanese memory manufacturers?

Yes, I wouldn't want to break out specific regions.

I guess -- it's probably okay to talk about Taiwan.

I think that Taiwan has got a couple of -- really the, obviously the kind of two groups there, and I think that there has been, as you know, more investment, at least dollars becoming available, and I think given the pricing and you know this better than I do, I think they are in a better position to make investments going forward.

And Taiwan, obviously, has been an important region for us, but I would say that the next four quarters I think will tell the story, because we are anticipating more investment in memory overall, and if anyone doesn't invest over the next four quarters, I think they are going to have to have a different strategy beyond that, because they are just going to be out of position.

I think everybody got a bit of a pass, if you go back over the last year, of not investing because the leaders had backed off so much.

That's no longer the case, so, you know the deal, if you don't keep your investment going, you better find a different strategy that doesn't rely on the leading edge.

Does that make sense.

It does.

Thank you.

Your next question comes from the line of [Jordisch Ayer] with ROK Research.

Your line is now open.

Thanks for taking my question, Rick.

I have two questions.

First is how do you see the subset wins between wafer inspection metrology and (inaudible) inspection playing out as we go into 2010.

And as a follow-up, I wanted to find out, how do you see the metrology business coming along, particularly in light of new materials and new technology being adopted.

Thank you.

And as a follow-up -- and a question for also -- for Mark, is that these one-time charges, when did -- how do you see them going forward for the next two quarters.

Thank you.

Okay.

Why don't you take the first --

Yes, why don't we start with the one-time charges.

They are not actually technically all of one time.

We have an unresolved stock option litigation exercise, which we're hoping comes to an end at some point in the future, but that's very difficult to predict, and as long as that's out there, we are adopting the industry convention, and sweeping that out.

Obviously that's one where it will not be ongoing in the long term run of the model, but it's hard to say when it gets cut off short term.

The second, sort of batch of GAAP to non-GAAP adjustments goes with acquisition premiums.

Typically those are intangible assets that we acquire along with the acquisitions.

They get amortized over three to five years, so if you don't do an acquisition for three to five years after about a five year period, you will see those things essentially fade away.

The third category is something that's completely out of the normal operating purview of the company, just a one-time settlement, something like that, and those are little bit difficult to predict.

In terms of restructuring charges, which we did have a small amount this quarter, we are pretty much near the end of that presuming we don't have a big course correction with the worldwide economic situation in 2010.

The latest restructuring charge had to do with the campus consolidation from us moving out of our former San Jose facility over to Milpitas.

That is now done, so we don't anticipate anything there.

The final category, which I won't bore you with, has to do with the tax treatment of employee stock grants, and that is that we earn an unusual -- meaning that not many other companies are in it, where we are in an excess shortfall position cumulatively.

And when you are in that position, the tax impact, if it exceeds the book impact of employee stock charges, actually winds up running through your tax expense line, instead of your equity.

That will go back and forth between quarters.

Most companies are not in the excess shortfall position, so they basically take all of those charges through equity.

We are doing that sometimes.

In the quarters in which we are taking it through the tax expense line, we are actually scheduling those out.

So the short answer to your question is, the nonrecurring stuff that comes out of the blue that's hard to see should be infrequent.

The other areas where we are seeing some consistency hopefully fade in the relatively -- let's call it the intermediate term, it won't be next quarter.

Thank you.

All right and on your question regarding wafer versus metrology, and what we see for that, as you know, we have been in the wafer metrology reticle in service, and I will just give you a perspective.

We did see wafer increase in the December quarter to 42%, and metrology is down slightly as wafer picked up to 13, and radicals went from 21 to 15.

And service crept up to 24.

There is a lot of opportunity in metrology, and as we go forward, we do see a lot of opportunity but that's another case where we've just got to be in a position to capitalize on it.

So some of it is a matter of us executing on our products and demonstrating that to our customers.

So we think there's a lot of opportunity.

That said, I would say right now there's probably more opportunity in the yield challenges that our customers face.

So I don't know that we're going to see metrology increase as a percentage, given the enormous opportunities there are in wafer inspection.

But there's definitely growth potential in metrology, and I think we are well positioned to build on that as we go forward.

Reticle is kind of an interesting story.

That's a lumpier business because of the nature of the products that we have, and I think that we will continue to see strength in reticle, but it will continue to be lumpy, just by the nature of the ASPs and the relative small number of units that we sell in reticle.

And service, while we have seen healthy service growth, in an environment where CapEx is growing faster, service ends up becoming a smaller percentage of the business.

In an environment where the CapEx is growing slower, service becomes a larger percent.

Does that answer your question?

Yes, I didn't -- just a clarification.

I just wondered on the year-over-year basis, on the fiscal year-over-year basis, do you think the wafer inspection can probably outgrow the other three segments?

You know, it really depends.

I think they all have opportunities and inside it's a horse race for these guys to see how the different divisions operate.

I definitely think that there's tremendous opportunities for metrology, but it's like anything, you've just got to execute against them.

So right now, we have models but we are not forecasting any particular segment over the other.

I would say the yield challenges out there have certainly presented a lot of opportunities but you look at lithography and it creates a lot of metrology opportunities as well.

Thank you, that's helpful.

(Operator Instructions).

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

Your line is now open.

Hi, Rick.

Just a quick follow-up on something you were saying.

You know, if you look at foundry orders and you look at memory orders versus prior peak, it's pretty interesting how much lower memory orders are for you, versus the peak and foundry is much higher.

Obviously that has much to do with the 4X yield issues that the foundries are actually having, but NAND has now moved through 4X and they haven't -- their bookings haven't picked up very much.

So I'm wondering, what's going to be the straw that breaks the camel's back for the DRAM guys to ultimately see the same yield issues that the foundry guys have.

Because I'm just wondering whether there's something structural that has changed for the DRAM guys that maybe their process inspection intensity has gone down.

Yes, Tim, it's a good question.

I think that, again, what we attribute it to is kind of two things.

One is there's no question that the memory guys have not seen the same level of pain causing them to act as the foundry guys.

No question.

It just shows in our numbers.

I think the other question is have we demonstrated our capability as effectively with the memory guys causing them to act?

And I would say that that's where we have more work to do.

We think we have done some good work.

We think it's going to continue to progress.

We think the opportunity is there, but I'm like you in terms of we've got to demonstrate it and prove it, and we saw signs of improvement over the last quarter.

We are forecasting March again up.

I think that we have been pretty consistent on what we have been able to do with memory, but we definitely have to go demonstrate it over the next year.

We think the opportunity is there.

We just think that we've got to execute and demonstrate our abilities there, and then the numbers will prove themselves.

But it's pretty hard to argue with the analysis to date.

But I guess, Rick, I'm just wondering, are they telling you that it's just a matter of time, so they are saying, look, we have problems down the pipe, it's just six months from today, whenever we get all of this other equipment and we start to ramp production, that's when we are going to have the problems.

Or are these things that only you see that are coming from your side, not from the customer side?

No, I think, Tim it gets down to a conversation that goes like this.

Look, if you can solve this problem for us, if you can demonstrate, you can find these defects at this throughput, at this cost of ownership, we will deploy your tool.

If you haven't demonstrated that, then we are going to wait and see, and we are going to find other ways around it.

And one other way around it is to repair but we don't like that way because that's a painful process and ultimately we need you to solve the problem.

So I think there's some technical challenges that we've got to overcome.

There's some demonstrating that we've got to do, and if we execute on that and we are seeing signs of that and we will see it continue to grow as part of our business.

From my standpoint, the good news is the opportunity is there.

The challenge for us is to demonstrate that our tool set solves those problems and we'll generate the ROI.

So I think the opportunity is there.

We just got to execute on it.

Got it.

Thanks, Rick.

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

Your line is now open.

Rick, another question on metrology.

Metrology seems to be a lot more volatile.

For example, 2008, when the market was down 33%, you were down only 4%, but this year the market is down close to 40%, and you are down close to 55%, 60%.

Why are you seeing that volatility?

Is it related to the wafer market volatility?

So, you took out our metrology percent, you tracked it over time?

That's how you came up with that.

You report in your 10-Q, the metrology revenues.

Right.

Right.

Right, okay.

I get it from that.

I think that's a great question.

It's not about the wafer.

It's much more related -- metrology probably is a better proxy for us for process equipment.

It's the part of our business that looks more like process equipment than does our wafer business.

But the products that go and sell to the wafer manufacturers, if that's what you were referring to.

Right.

Are actually not in the metrology group.

More so -- .

Okay.

They are much more dominantly in the wafer group.

The 80 portion of the business, that also goes in the inspection group?

Yes, that's part of wafer.

Okay.

And a question on OpEx.

At the current level, like the way you guided EPS, you are sort of in $1.60, $1.65 kind of range.

Is that what we should model for 500 kind of run rate, $1.65 kind of number.

Is that still valid?

Yes, we don't expect to add, as I indicated, the two operative -- the three operative levers in operating expenses are the headcount levels of the company, how much material procurement we do on new research and development projects.

That can go up and down a little bit.

Right now it's fairly stable.

And the other is variable compensation, which does tend to go up and down with our expectations about the business, but as I indicated in my prepared remarks, we wouldn't expect to see wild fluctuations in the operating expense levels, at least in the, let's call it the near to intermediate term.

I will call that less than six to nine months.

So at least for the short term, for short term modeling purposes, I wouldn't expect it to move around a lot.

Okay.

Thank you.

There are no further questions at this time.

I will now turn the call back over to you for closing remarks.

Thank you, operator.

That concludes the time we have for our call today.

Thank you all for joining us, and we look forward to speaking with you later on in the quarter.

Thank you.

This now concludes today's conference call.

You may now disconnect.