科磊 (KLAC) 2010 Q3 法說會逐字稿

Good afternoon.

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

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

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

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

(Operator Instructions).

Thank you.

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

Ed Lockwood, with KLA-Tencor Investor Relations.

Please go ahead.

Thank you, Simon.

Good afternoon, everyone, and welcome to KLA-Tencor's third 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.

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 our investor section of the website.

You'll also find a calendar of future investor events, presentations and conferences as well as links to KLA'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'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, 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 those 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'll turn the call over to Rick.

Thanks, Ed.

We're pleased with the Company's performance in the March quarter, and as the results show, KLA-Tencor is successfully executing our strategic objective in an improving industry environment.

The new orders in March were $649 million, an increase of 26%, compared with December and above our range of guidance, a result of better than expected demand in our core markets and increased bookings from new markets.

Third quarter revenue was $478 million, which was at the high end of guidance.

With the combination of new product revenue and solid operations execution, we delivered strong margin performance in the quarter with non-GAAP EPS came in above the range of guidance at $0.41.

We also grew our cash and investments to approximately $1.6 billion by quarter end, while repurchasing 2 million shares of common stock in the period.

These numbers demonstrate the effectiveness of strategies we've been implementing since 2006 to extend our leadership in process control, access new growth markets, and drive operational excellence.

Mark will provide some greater detail in the March quarter in his comments to follow.

Looking forward, we're very excited about the opportunity for more good news to come.

Given a healthy investment cycle and the continued strong execution by the team, we believe KLA-Tencor is positioned to deliver top line growth and profitability performance that will rival prior peaks for the Company.

I would like to give you some perspective on how we aim to achieve this as it relates to our four strategic objectives.

Our first strategic objective is customer focus.

This really speaks to how we collaborate with our customers, how we drive innovation and how we execute our product strategy.

And we measure success and customer focus in terms of our market position, where our goal is to lead every market we serve.

Today, we're the leader in nearly every one of our end markets, and our position in our core inspection and measurement markets remain as strong as ever with our new brightfield, darkfield and reticle inspection products enjoying strong acceptance in the marketplace.

On top of continued strength in the core, we're making advances in markets where we've not traditionally been a leader.

One example is the recent success of our new e-beam review tool, the eDR-5210.

Our penetration in e-beam review markets strengthens our overall market position and helps drive adoption in the process control markets.

By collaborating to anticipate our customers' needs and executing, we're able to deliver the best tools for the market at the right time, which helps our customers maximize their ROI and serves as an integral part of their business success.

Our second strategic objective is growth.

Our objective here is to drive growth over times in excess of the market driven by increased process control adoption, diversification into new markets and continued expansion of our services business.

Regarding adoption, we see the technical complexity as the leading edge driving an increasing need for process control.

And the industry research shows that adoption continues through the peak in this cycle, and as the market leader, we anticipate seeing our share of growth contributing to our top line.

We also see our acquisition strategy now making an impact.

Our approach for growth in new markets is to focus on extending KLA-Tencor's technology and market leadership into adjacent industries.

We believe recent acquisitions have increased our available market by about 20%, adding new revenue opportunities to our business.

Finally, we see services becoming increasingly more important as our installed base grows.

Successful execution in our service business is, first and foremost, defined by addressing our customers' needs.

We have over 22,000 tools in the field today.

As the complexity of our tools increases and the breadth of our services offerings continues to grow, the services we provide make an even better contribution to our customers' success.

When we evaluate our progress and our growth objectives, the data indicates we're successfully delivering on our targets.

For example, the estimates show that those WFE, wafer front-end spend recovering in 2010 to 20% to 30% of 2006 levels, which is when we first launched these strategies.

We believe the success in our growth strategies and increased adoption in new markets has enabled KLA-Tencor to outperform this expected recovery in WFE.

Our focus on diversification also helps buffer declines in a downturn.

For example, when we look at calendar 2009, when WFE investment declined 46%, our revenue was down 35% in the year.

Looking ahead in the cycle and beyond, we believe the continued strong execution in our growth objectives will fuel top line performance that could rival the prior peaks for KLA-Tencor.

Our third objective is operational excellence.

Successful execution here not only enables the resources to return value to shareholders, but also helps fuel investment in growth and innovation, which of course would drive future profitability.

Execution in our operations focus is about decisively and effectively taking action to adjust to changing industry conditions, which we demonstrated in the recent downturn.

Ongoing efforts related to this objective include our move to Singapore manufacturing, platform consolidation, and programs which are focused on streamlining our operations and supply chain.

The March results showed our operational excellence focus bearing fruit.

As evidenced by strong margin performance in the quarter, which exceeded our targets of 60% to 70% for incremental gross margin, and our targets for 50% to 60% per incremental operating margin.

Long-term comparisons also demonstrates a strong leverage effect enabled in our model.

Today we're supporting business at levels that are not far from calendar year 2006 but on an operating cost structure that's 15% below 2006 levels.

KLA-Tencor features a flexible business model that responds well in both good times and bad.

This is not by accident, but a direct result of our market leadership and a continuing commitment to drive improved efficiency in our global operations.

Our fourth objective is talent.

People are the key to our success at KLA-Tencor.

Our recent accomplishments, as well as our ability to achieve our future goals, are only possible with the dedicated commitment of everyone in our workforce.

So in conclusion, the March quarter results reflect a healthy demand environment and show the Company performing at a high level.

We're well positioned with our customers with new products in the marketplace.

Our growth strategy are delivering results, and we're delivering increased leverage in our business model.

We have a great deal of optimism as we look forward, and I think we're well positioned for even stronger results as we move through the cycle.

Turning now to our outlook for the fourth quarter of fiscal year 2010, we expect this momentum to continue with gross bookings in June projected up 5% to 25% compared with March, revenue expected in the range of $530 million to $570 million, and non-GAAP earnings per share in the range of $0.54 to $0.62.

With that I'll turn the call over to Mark for his review of the numbers.

Mark?

Thanks, Rick.

As most of you know, we present our income statement in two formats, one under US GAAP and the other in a non-GAAP format, which excludes acquisition and writedown of intangible assets associated with acquisitions, expenses associated with our stock options related litigation and certain costs and expenses which are outside of our core operations, 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 and operations will reference our non-GAAP income statement, but where I reference GAAP numbers, I'll make the distinction.

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

Revenue for Q3 was $478 million at the high end of our guided range of $450 million to $480 million.

Non-GAAP earnings per share were $0.41; Q3 GAAP EPS was $0.33.

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 $4 million before taxes or $0.01 per share after-taxes, and stock option litigation expenses of $5 million pre-tax, or $0.02 per share after-taxes.

We also recorded a non-cash tax charge of about $3 million associated with the cumulative shortfall position in our employee stock activity.

Removing this charge from GAAP earnings added $0.02 per share to non-GAAP earnings.

The recent improvement in order activity continued in Q3.

New orders for the March quarter were $649 million, an increase of 26% over Q2 new orders of $516 million.

We also scheduled in about $10 million of orders received in prior quarters, resulting in net orders of $659 million, up about 20% from Q2.

We added $180 million to our backlog in Q3, and ended the quarter with $939 million in total systems backlog.

The backlog at March 31 included $280 million of revenue backlog for products that have been shipped and invoiced, but have not yet been recognized as revenue, and $659 million in system orders that have not yet shipped.

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

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

The US was 23% of new systems orders in Q3, up from 16% in the December quarter.

Europe was 3% of new systems orders, down from 4% in Q2.

Japan was 10%, down from 14% last quarter; Korea was 16%, down from 19% last quarter; Taiwan was 39%, up from 33% last quarter; and the rest of Asia was 9%, down from 14% in Q2.

Q3 distribution of new systems and services orders by product family and the quarter-to-quarter change in distribution was as follows.

Wafer inspection was 48%, up from 42% last quarter.

Reticle inspection was 15%, even with last quarter; metrology was 10%, down from 13% in the prior quarter; and solar, storage, high brightness LED and other non-semi was 8%, compared with 6% last quarter.

Services was 19% of new orders in Q3, down from 24% last quarter.

Foundry customers comprised 50% of the semiconductor systems orders in Q3, versus 59% in Q2.

Logic customers were 13% of systems orders in Q3, versus 24% in Q2, and memory system orders rose to 37% in Q3 compared with 17% in Q2.

Technology purchases generated most of the activity this quarter with 45-nanometer and below development pilot activity comprising 93% of the semiconductor systems orders versus 95% in Q2.

Orders for 32-nanometer and below were 43% of the semiconductor orders received in the quarter.

Looking forward, we expect that new orders in Q4 will increase between 5% and 25% over Q3 new orders, or a range of about $680 million to $810 million.

Shipments in Q3, which include both systems shipments and services revenue, were $515 million, up 12% from $459 million last quarter.

Systems revenue for Q3 was up 11% to $350 million, compared with $315 million in Q2.

Services revenue was $128 million in Q3, up 2% from $125 million in Q2.

Our expectations for total revenue in Q4 is a range between $530 million and $570 million, and we expect services to contribute about 25% of the total.

Non-GAAP gross margin was 58% in the March quarter, up three percentage points from December.

The improved gross margin percentage in Q3 was better than our incremental target of 60% to 70% because of favorable product mix and lower excess and obsolete reserve requirements.

For Q4 we are modeling an incremental gross margin target roughly equal to our stated goal of 60% to 70%.

Operating expenses were $167 million, an increase of $3 million from the December quarter.

R&D was $84 million, a $2 million increase from Q2; and selling, general and administrative expenses, or SG&A, were $3 million, excuse me, $83 million this quarter, up $1 million 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 about $4 million in additional operating expenses this quarter.

Without the additional accruals, operating expenses would have been about $163 million, or down $1 million versus Q2.

Other income and expense, or OIE, was a net $11 million expense in Q3, or approximately $2 million higher than the $9 million we recorded in Q2.

The Q3 increase in OIE was essentially attributable to a writedown of two investments in our KT Ventures portfolio.

In Q4 we expect OIE to be a net expense of approximately $9 million to $10 million.

In Q3, our non-GAAP income tax expense was $27 million, or 27% of pre-tax income versus $18 million in Q2, which was also 27% of pre-tax income.

Our GAAP tax rate in Q3 was 29%, down considerably from 43% in Q2, mostly because of lower non-cash charges resulting from how accounting rules are applied to cumulative shortfalls in our employee stock activity.

Non-GAAP net income was $71 million, or $0.41 per share in Q3.

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

At our model tax rate of 30%, our Q3 non-GAAP earnings per share would have been $0.39.

At the revenue range I previously mentioned, we would expect our Q4 non-GAAP earnings to be somewhere between $0.54 and $0.62 per share, assuming a tax rate of 30%.

The weighted average shares used to compute EPS in Q3 were 173.4 million versus 173.8 million in Q2.

During Q3, we also restarted our stock repurchase program and spent $55 million buying back about 2 million shares.

As of March 31, we had 7.8 million shares available under our current repurchase authorization, and we anticipate some repurchase activity in the June quarter.

For guidance purposes we are modeling an average share count of 172 million for Q4.

Turning to the balance sheet, cash and investments ended the quarter at about $1.6 billion, about even with the prior quarter end.

Cash generated from operations was $128 million in Q3, compared with $164 million in Q2, which included a tax refund of $72 million.

Net accounts receivable ended the quarter at $323 million, up from $298 million at December 31, mostly because of higher shipments.

DSOs were 61 days at March 31, versus 62 days at the end of December.

Both DSO figures are net of allowance for uncollectible accounts and factored.

Net inventories increased by $22 million from last quarter and ended the quarter at $374 million.

And inventory turnover based upon GAAP cost of revenues was 2.3 turns in Q3 down slightly from 2.4 turns last quarter.

Net capital expenditures were $10 million in Q3, versus $11 million in Q2.

Total headcount ended the quarter at 4,873, up slightly from 4,850 at December 31.

We expect our headcount will increase slightly during Q4, especially in our manufacturing locations as we adjust our capacity in response to the recent demand increase.

During Q3, we entered into a proposed settlement of the federal derivative shareholder suit stemming from our historical stock option granting practices, and we reached proposed settlements with two former KLA executives, which will resolve their claims against us.

The proposed settlement is scheduled to be heard for final approval on May 24th.

When the settlements are approved by the court they will result in KLA making cash payments of approximately $27 million and issuing about $8 million in KLA stock.

We also expect to receive cash proceeds of about $33 million, mostly from our insurance carriers as a result of resolving these matters.

While we can't predict the exact timing of the payments and receipts associated with these settlements until they become effective, resolution of these matters should significantly reduce or eliminate KLA's ongoing cost of the stock options related litigation after Q4.

Overall, we are very happy with how Q3 unfolded.

Net systems orders were the best we have seen in 11 quarters.

The increased production volumes have allowed us to take advantage of the lower cost manufacturing location moves we have made over the last three years, and we are very happy at the prospect of getting most of the options related litigation behind us.

In summary, our guidance for Q4 is new orders are expected to increase by 5% to 25% over Q3 new orders, total revenue between $530 million and $570 million, non-GAAP earnings per share will be $0.54 to $0.62, assuming a tax rate of 30% is pre-tax income.

This concludes our prepared remarks on the quarter.

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

Thank you, Mark.

We're now happy to take your questions.

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

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

(Operator Instructions).

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

Muse with Barclays Capital.

Your line is open.

Yes, good afternoon.

Thank you for taking my question.

I guess first question on the gross margin line, the 58% was pretty phenomenal at the 478 revenue level.

I think the last time you did that was around $635 million, so I guess the question is what's the trajectory look like from here?

Is there further savings in the move to Singapore, and I guess target wise, are we still looking at 60% around the $650 million level or could that be even lower?

Yes, C.J., hi, this is Mark.

The answer is we're probably getting as much as we had originally expected out of the moves to Singapore in our lower cost manufacturing locations.

We're not completely at full capacity yet, but we're certainly starting to get there, and that is part of the contribution.

I also noted in my prepared remarks that we're getting some benefit from the mix of very high margin products in that performance that we just posted for this quarter, and we still think that our long-term trajectory from here is 60 to 70 incremental points of margin improvement, with each additional dollar of revenue.

So most of what we have done in terms of preparing for this upturn is coming to pass in terms of our cost savings, and I would say that we are putting a lot of operational focus on just making sure we're running as lean an operation as possible, so all of that is turned in our favor, and we're seeing the benefits in the line.

I would say we're still on the long-term growth trajectory towards that 60 to 70 incremental gross margin target though.

Great.

And I guess as my follow-up, your overall backlog grew 24% sequentially, and I guess the question here is, are you still planning to manage to roughly six months backlog?

And does that change higher or lower as you think about continued strength in bookings?

And what does that mean for revenues in the second half?

It would suggest to me a very nice uptick.

Yes, we still have a target to manage to six months in the backlog, and what we're currently doing right now is producing at a pretty high rate and shipping everything we can.

It does bode well for the second half in terms of our revenue performance, because as you said, with all of the strong bookings performance right now, we will have some catch-up period of time before it drops to the revenue line.

So all of that's a pretty good story.

Great.

Thank you.

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

Your line is open.

Hi, this is Kate Kotlarsky for Jim Covello.

Thank you for taking the question.

I was hoping you could give us a little bit more color on your memory orders during the quarter.

It looks like there's been some increased activity there, and I was hoping you could break it down for us between NAND and DRAM, and then maybe comment on whether the composition of Q2 orders were --whether you're starting to now see some capacity buying in there as you had mentioned that Q1 there was a lot of technology buying still.

Thank you.

Hi, Kate, yes, thanks for the question.

The March quarter played out pretty much the way we had forecast.

Memory did pick up.

We saw 37% of our orders coming from memory, and that was predominantly in the DRAM space, so 74% of that was DRAM, 26% was NAND.

We look forward, we figure June is about the same as a percentage, so we're modeling about 36%, but we think probably closer to 50/50 in terms of composition between DRAM and NAND.

And what we are seeing, to your question, is we are definitely seeing some capacity buys happening in addition to the technology.

So this is what we've been outlining for a few quarters is we thought that first we would see technology, and then we would see the ramping on the other side on the capacity.

And that's kind of how it's playing out right now.

Just as a follow-up on that, in terms of the capacity buying that you're seeing, is it distributed among a number of customers or is it concentrated between one or two customers?

No, it's pretty widespread and as we model going forward, we see broadening, and we see some new projects coming online later in the calendar year as well, so definitely seeing that across a number of customers.

Okay, and then maybe one final question.

On the gross margin front you had alluded to the fact that there was some help from mix during the quarter.

Is there anything that's driving that shift to higher margin systems that you're seeing?

I don't think -- Kate, this is Mark.

I don't think that that's a long-term trend, but it's suffice to say that we're getting new and nice contribution from the products that we released in the last 12 months.

And they're margin rich, that is certainly helping things.

But quarter to quarter, that will go up and down and shift around slightly, and we just happen to catch it right this quarter.

And as much of our performance on margin is associated with our internal efforts toward cost reduction and management, we continue to earn good pricing for our customers, but heavily focused on streamlining the operations.

And you put a lot of hard work into that over the years and now we're seeing that bear fruit.

Great.

Thank you so much.

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

Your line is open.

Hi, guys.

Thanks.

Two things.

Rick, there's some talk out there of some more challenged, competitive atmosphere for you, particularly in Korea, and so I was wondering what your take is on the competitive front, and then I had a follow-up.

Thanks.

Yes, Tim, as you know, we always face competition, and I think we look back over the stories of the last couple years and I think our competitive position has held up quite well and our market share is up.

And we face competitors everywhere around the globe, and I don't think that's likely to change.

So we got to keep doing what we do, which is bring out new products that have more capability and work closely with customers.

I'm pretty comfortable with our strategy there.

Okay, and then I guess there's obviously a pretty hot debate out there about what happens in the back half of the year.

If you do some run rate work and you look at the bookings and the shipments, we're pretty much within a very close shouting distance of what the peak was last cycle on a run rate basis for wafer fab equipment, certainly for some types of equipment.

So I'm wondering what you think in terms of what the environment holds from a back half versus front half.

I think most companies would have thought that there was a pullback in the back half, but I guess recently, some companies have been a bit more positive about the back half.

So I'm wondering what your sense is second half versus first half.

Tim, it's a great question.

I think for us, we have a lot of run room -- runway because of a couple things.

One is while our overall bookings look very strong and the bookings guidance for June looks very strong, 8% of that is non-semi.

Our services business has grown, so when we look at the actual businesses that we had in the last upturn, our complexion is different and so we actually think there's more opportunity, and we talked to a lot of customers about new projects.

So even if the core semi stuff cools off, we think we've got the ability to continue to grow, and as you're seeing in our operational performance, gross margin and bottom line, it is not dilutive to our model.

In fact, we see we're putting up better numbers than we did at the same point in the cycle, so I think we're not the same as the other players in the space.

I guess, Rick, just one more quick thing.

If I just look at your systems revenue, and if I actually strip out services, there's been quite a bit of compression there, so you're keeping up with wafer fab equipment, but it's mostly because of services.

So it seems like there is some sort of compression on kind of a relative basis in the systems revenue, and I'm wondering why that is.

Is that the result of you exiting some products versus back then or some pricing pressure?

Why might that be?

No, I think there's a couple things.

One is we did -- there were some product lines that we traded out of, but I also think if you look at our June guide for bookings, and you look at the backlog we've been building, our profile is different.

I don't know who else is guiding up plus five to plus 25 for June on bookings.

And as you know our revenue is coming in significantly below, which means we're building backlog.

I think if you do the math, you model that out for the rest of the year, I don't think you see the compression.

Okay, Rick.

Thanks.

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

Your line is open.

Yes, thanks for taking my question.

Rick, when I look at it with all of the new fabs coming online and maybe later this year or next year, when do you think you're going to start seeing significant orders for these new fabs and new shows come and hit you guys?

Well, there certainly are new fabs and I think some of the timing has been -- it's fun to say that, right?

There are new fabs; we haven't said that in a while.

There are various timings for those that we're in conversations, and I think this is if anything that's the best part of the story for the second half is some of those new fabs start ordering in the summertime and into the fall.

So we do have new projects that are out there in addition to the expansions of the existing ones.

So I think the timing -- we're having conversations with those folks right now, and if anything -- what's interesting is the momentum toward trying to pull in some plans that had been later in 2011; now there's desire to get it done sooner.

Got it, and to follow-up on the completive question, is it fair to assume besides the normal competitive posturing that happens between you guys and others, is there more activity happening among your competitors versus between you and your competition?

Is it fair enough to assume, or do you think there's nothing that's changed in the last four to six months?

Well I think in the last couple years there's definitely a change in the mix of competitors, and you've seen some competitors exit the market.

And I think that's changed the position, but you don't have to do a lot of math to figure out that we're doing quite well, relative to the rest of the space.

Our gross margin indicates that we're getting good pricing, and we're also doing a good job on cost.

So our competitive position continues to be very strong, and I do think that we will never ever have 100% market share in any of these markets.

And so as a result, there's going to be mix on the other end of some of those markets, and I think those competitors will come and go, but if we play our -- if we continue to execute on our strategy we'll continue to be in a strong position.

Got it and just a final follow-up.

Did you say anything on shipment guidance for June?

Thank you.

Yes, we don't guide shipments forward anymore.

We will fully disclose the shipments that we had in the current quarter, but we don't have any guidance on shipments.

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

Your line is open.

Yes, hi, thank you.

Very good quarter guys.

Just wanted to touch up on the foundry exposure a little bit.

Are foundries pretty much holding that same 50% level in June?

That's how we're modeling them, correct.

All right.

Some of your big foundry customers have recently talked about defect densities improving significantly at 40-nanometer.

I was wondering if that could potentially cause a pause in buying from the sector, or do you actually start, are you starting to see activity at maybe the 28 node that's starting to come in as well?

No, we're definitely seeing a push.

And the other thing that's happening in terms of Next Generation, but the other thing that's happening is there are multiple foundries in play right now.

So it's -- a year ago, we would have said it was pretty isolated, and now it's much broader, so there's a bit of a challenge out there for multiple companies and multiple fabs to execute on 40.

The other thing you see is when they're hitting defect densities you look at the volume, and it's pretty small.

So what we're talking about is a relatively early part of the manufacturing ramp on the advanced design rules, and a recognition that in order to maintain those defect densities as they ramp, they've got to have more coverage from inspection and measurement.

So I'd like to think of it we're helping contribute to the fact that people are driving down their densities.

They are seeing the value, and then they will expand out as they ramp on those nodes, because many of the tool sets out there just weren't capable of handling broad-based 40-nanometer production.

Got it, and in terms of the NAND order that you're seeing in June that's pretty much doubling from March levels, could you talk about concentration of that NAND orders?

Is there any projects in there that surprised you in terms of size, in terms of how much capacity is coming on?

I wouldn't say surprised us.

If anything, we have been working quite a while with our customers in terms of their basically understanding their needs and positioning our products.

We are starting to see just increased activity overall in terms of people wanting to ramp.

So the surprise, if there was one, was just that we're finally getting to the point where people are letting loose their capital budgets for inspection and metrology, and we're pretty well positioned to handle that right now.

Got it.

One quick follow-up.

How much would the reduction litigation expense lower the OpEx by all that's being the same in September?

Well, if you just look at the non-GAAP OpEx, we already stripped the litigation cost out, but we've been running an ongoing rate in terms of our GAAP numbers of somewhere between $3 million and $5 million a quarter, so we should begin to see that relief beginning in the next fiscal year.

Got it.

Thanks.

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

Your line is open.

Hi, thanks for taking my questions and nice quarter.

Rick, you mentioned that multiple foundries that are ordering in the June quarter, and I presume some of them are Tier 2 foundries.

So I just want to get a sense of confidence level of an order that you do coming through from some of these foundries, especially in China.

Historically speaking, I know these foundries have made decisions sometimes to move forward with the fabs, but never come through.

So just want to get a sense on the confidence level of Tier 2 foundry spending.

Well, there are a couple, I guess, questions and assumptions in there, Atif.

One is that geographically where they're coming from, let me say this, we are very confident in the order book that we've got based on the customer conversations that we had and our understanding of their capital budgets and their procurement cycle.

And as you know, we're very conservative in terms of how we allocate credit to customers, and we're pretty confident that they are very solid.

I understand.

And a quick follow-up, the guidance.

Historically you've had some seasonality in the June quarter, some years you haven't had that seasonality.

Is there any seasonal element to the services business that's making the order guidance look stronger?

Well, we have had seasonality in the past, and it's not in the services business, and it tended to coincide with our fiscal year end.

I don't know after the last year how much we reverted to historical practices.

What we do see is that there's a strong demand out there, and that's why we guided up and it's based on our conversations.

The second half of the year has uniqueness to it as we discussed earlier on this call, in that there are new fabs that are actually being built and coming online.

So I think it's early for us to forecast out what the second half looks like, but certainly from where we sit, June looks very good.

But I don't think it's as much about seasonality as it is just increased confidence in our customers that now is the time for them to invest.

Okay, and one last one.

The non-semi business ,which one is looking the best among ACD and high brightness LED, solar, which one is looking the best?

You know, it's really a mix.

I've been delighted with the performance that we have outside the core, and these are some bets we placed in the downturn and there were a couple quarters where we were all looking around wondering what we were thinking.

But now they've come back, and we've seen solars pick up, the high brightness LED.

You know, it's funny, even hard disk drive, we're seeing investment happening there, and as we've said, these businesses the way we structured them and integrate them into KT, they support our overall business model, so we're pleased with that as well.

We also have back end packaging which wasn't historically in our model and we're seeing great success back there too, so it's really a blend of all of those.

Great.

Thanks.

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

Your line is open.

Hi, thanks for taking the question.

Rick, can you talk a little bit about inspection intensity and memory?

I think previously, you've acknowledged that it's obviously a bit lower than it is in the foundry space, and I think you've said you have to prove your case there a little bit.

Should we assume that that begins to pick up in the relative short-term, or is that a longer-term process before we start seeing that?

Yes, on the last call, Raj, you're exactly right.

I said that we needed to show it, and I like to think that in the March quarter, we demonstrated some of that.

We have some evidence now with the increase that we had, and I think it's an unfolding story.

The combination of customers have to feel the need, and I think they've got the need, and then they have got to be convinced that our products actually will support them.

And we're showing evidence of that now, so as we guide forward, we guided overall bookings up and we guided memory to be basically as a percentage of our overall bookings flat, which says we assume we're going to continue to see growth on the memory side.

And this time a little split between DRAM and NAND, so I think it's working.

We continue to be in there every day with our customers trying to demonstrate that value, but it's work in progress.

And do you think that -- is that an easier case for you to make as people start adding capacity on some of the new nodes where they've been moving and may have been able to I don't know, use other techniques or whatever to get to their objectives?

Is that facilitated by just simply more volume, or do we just need more shrink than more time?

No, more it's been facilitated by new products from us.

The most important thing was getting our new products into the customers' hands and them seeing what they were missing.

In a lot of cases, that's been the challenge.

Because without one of the advanced tools, ours or competing with either an old tool that we had or somebody else's, they didn't necessarily know what they were missing.

So we got to get the tools in there, and then they start seeing results.

And then we've seen a remarkable increase and I was in Asia a couple weeks ago and the conversations were about how do we get our tools into their factories faster to support their memory RAMs, which is a very nice conversation to be having except for we then have to get our tools in there faster which is a challenge.

Yes, and Mark just a quick one for you.

Any thoughts on your capital structure?

Obviously it changed several years ago with your predecessor.

Do you think this is the right kind of capital structure or hypothetically, is there a different model over time that you'd like to move to?

Thanks.

Yes, we were certainly with the upturn in having flown through the crisis period, Raj.

This is not a bad time to be thinking it through.

We are having discussions.

We're certainly not in a hurry to do anything rash right away, but I certainly think from the debt leverage perspective, we're happy with this right now.

I would like to feel a little bit better about the prospects of inflation going forward before we would think it through differently, but as it is right now, we're reasonably satisfied with the basic capital structure.

And as we noted in earlier in the call, we did restart the buyback program earlier this quarter, which is the confidence that we've stabilized.

Great.

Thanks, nice quarter.

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

Your line is open.

Hi guys.

This is K.C.

calling for Mahesh.

A couple of quick questions.

You talked a bit about the shipments into 4X and the 3X nodes.

Could you give some color on the timing of shipments and orders into the 2X node?

Well we're seeing some activity in 2X as you might imagine now, there's been development even for some time in R&D.

And so I think it really is very customer dependent on when they are going toward 2X and, as you know, technology dependent where the NAND guys will get there first.

And then we'll see the DRAM guys follow and some of the logic guys.

But there is certainly R&D spend, but as a percent of our overall order book, the 2X is very small right now, and I'd say that that is going to remain a small percentage of our business for the next several quarters.

Okay.

In the memory space, you said that the DRAM versus NAND is going to be about 50% of your orders in June.

Going forward, would you expect that ratio to continue, or would you expect NAND to dominate the memory spend?

I think it goes to some of the projects overall that we're talking about that are out there.

If you look at the projects that are being contemplated, there are a few NAND projects that are obviously going to influence that as we go forward.

So assuming they go ahead, then you would see NAND pick up, and I guess the question will be what will the DRAM guys do in conjunction, but we certainly see growth on the NAND space.

NAND is, as you know, dependent on a lot of external factors right now and so I think it's early to call that one.

Okay, and last question.

What would you think is the approximate timing, as far as you can see, for orders from Tier 2 and 3 DRAM players?

Yes, it's a great question.

I don't know.

I think it depends on how well the memory markets hold up in terms of the pricing, and right now, pricing has been obviously much more encouraging, so I think they are increasing their conviction.

So that's probably a second half of the year kind of story.

Okay, thanks guys.

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

Your line is open.

Hi, thanks.

Hi, Rick and Mark, nice quarter also.

Just a follow-up question on the improvement in memory customer orders that you're seeing.

Do you get the sense there could be another step function increase in orders from perhaps the DRAM companies, Rick, when they eventually get to the 40-nanometer node in volume.

Because it looks like that's when your foundry customers really ramped inspection orders at the 40-nanometer node with KLA over the past year.

Is that kind of your sense?

My sense is that they are going to run into increasing challenges as they ramp, and I think they are seeing that.

As I said I think earlier in this call, our burden, our challenge is to demonstrate the value of our products and to have them realize those ROIs.

We think we've got the right products.

We think we've got the right teams in place to do that, but it's very much a show me story right now of we've got to demonstrate the values, and our customers have to recognize that and follow through.

We just simply did not anticipate the reaction in the foundry space.

So as much as we had predicted increase in intensity of inspection and measurement, we guessed low on that.

And I think it's very possible that we're modeling low right now in the memory, but it's incumbent on us to show the value.

And that's what our teams are working on every day.

Okay, and then just a follow-up question about the number of new fabs that you're seeing built out there.

Did you get the sense that KLA's order opportunity is stronger during the years when there are more new factory builds, especially since you've got a larger product offering in the sub-cycle?

Yes, in general, our footprint is bigger and so we're dependent on two things, as you know; we're dependent on technology and we're dependent on capacity.

And we tend to do pretty well in technology.

What's interesting about the new fabs is, of course, they are both, right?

They are looking at ramping on new technology as new fabs, so I think that's very encouraging.

Where we have had less success in the past is if somebody was ramping on an older technology, but that's not going to be the case in these new fabs, so I think given our product breadth, and given our positioning, we do have tremendous opportunity, and it's a matter of executing.

Okay, thanks, Rick.

Nice quarter again.

Thank you.

(Operator Instructions).

Your next question comes from the line of Jagadish Iyer with Arete Research.

Hi, thanks for taking my question.

Two questions, Rick.

First question is that if you look at 2008 in terms of your logic bookings, you had substantial bookings from the logic customers.

How should we think about logic bookings as you progress through 2010 please?

Yes, we're forecasting logic to kind of hang in there roughly where we were this last quarter.

For the June quarter, we're at 13% and we go up to 14%, and it's not so much a function that logic isn't investing.

It's just the other segments are increasing pretty significantly, so even with that, we see increase in logic.

We looked at the second half, there's some projects out there that look encouraging, but there just aren't the same number of new fabs coming online and there's not as much anticipated overall investment.

And the logic guys have just been more steady throughout the course of the cycle as they have been historically.

So I'd say we see good opportunity there, but it's not the primary growth.

Okay.

The second question is how -- you had mentioned in your prepared remarks about your e-beam review product getting considerable traction.

Can you give us some more color and what is driving that product traction, please?

Yes, I think there's a couple things.

One, and probably most important, is our most advanced inspectors find defects that there's really no other way to review than with our most advanced e-beam review product.

So as we sell inspectors, as we sell new inspectors, our customers are realizing that the new review capability that we have is enabling them to identify clearly the defects that we're catching, so that they can go take corrective action.

And they really can't do that with any other equipment on the market, so that's been a tremendous value to our customers and that's really driving it.

I think the other thing that's overall of course is the general pick up in market is driving more e-beam review in general, but competitively, we've got a product that works extremely well with our inspectors which is where most of the market is is with our inspectors.

Thank you.

Thank you.

There are no further questions at this time.

Mr.

Lockwood, I'd turn the call back over to you.

Thank you, operator.

Thank you all for joining us today.

We look forward to seeing you through the course of the quarter, and that concludes our call.

This concludes today's conference call.

You may now disconnect.