科磊 (KLAC) 2011 Q1 法說會逐字稿

Good afternoon.

My name is Amanda and I will be your conference operator.

I'd like to welcome everyone to the KLA-Tencor first quarter fiscal 2011 conference call.

I would now like to turn the conference call over to Mr Ed Lockwood of KLA-Tencor Investor Relations.

Mr Lockwood, you may begin.

Thank you Amanda and we apologize for the technical difficulties this afternoon.

Good afternoon, everyone and welcome to KLA-Tencor's first quarter fiscal year 2011 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 available on demand following its completion on on the Investor section of our website.

There you'll 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, 2010 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 2010 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 can 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.

Thank you all for joining us for our call today.

I'm going to focus my commentary on the summary highlights of the September quarter, and then provide guidance for December, then Mark's going to follow with a review of the financials.

First of all there's no shortage of debate today as to the pace of the global economic recovery or the near term direction in semiconductor and the semiconductor equipment market.

KLA-Tencor's September results demonstrate that process control adoption remains at a very high level.

Our numbers also show the Company successfully executing on our long-term strategic objectives, delivering sustained market leadership, strong revenue growth, record margins, record earnings per share in the quarter.

New bookings in the September quarter were $785 million, that's the third highest level in the Company's history.

The high level of demand we're experiencing today is driven by the combination of strong adoption in the core markets, and healthy contribution from new markets and our services business.

Revenues grew 22% sequentially to $682 million, significantly above the range of guidance and indicative of the high sense of urgency among our customers for getting our latest generation process control technologies qualified and in place.

Non-GAAP earnings was a record $0.99 per share in Q1, significantly above the guidance range of $0.80 to $0.88 per share.

Underlying this outstanding financial performance in Q1 were record non-GAAP gross margins of 62%, and record non-GAAP operating margins of 36%.

With incremental margins coming in above our 60% to 70% target for gross margin, and our 50% to 60% target for operating margin.

And we ended the quarter with $1.5 billion in cash and investments and $1.4 billion in backlog.

Now, in response to the high levels of demand we've been experiencing lately, we're focused on driving our operations to meet customer requirements.

And we are positioned for continued growth in shipments, revenue and earnings as we move forward.

Our strong financial performance is a result of KLA-Tencor's technology and market leadership, and it demonstrates the value our technology and services deliver in helping our customers execute their leading edge technology road maps.

It also helps us sustain a high level of R&D.

Which is essential to achieve our customer focus and growth strategies, and provides the resources for us to deliver significant cash returns in the form of dividends and share repurchases.

To that end, KLA-Tencor repurchased approximately 2 million shares of our common stock for approximately $62 million, and paid cash dividends of approximately $42 million in the quarter.

As you may recall, on July 13 we announced that our Board of Directors authorized an increase in the level of the quarterly dividend to $0.25 per share.

Which took effect with our first quarter dividend.

That move reflects management and the Board's confidence in the long-term outlook for the Company, as well as the ongoing efforts to reward our shareholders for their continued investment.

Turning now to some specifics of the demand picture.

Gross bookings in Q1 were $785 million, the third highest on record for KLA-Tencor, but below the midpoint of the range of guidance for the quarter.

The first quarter end market picture was highlighted by a sustained strong demand from foundries coming in at 44% of new orders in the September quarter.

Our foundry customers are operating at high levels of capital intensity as they expand capacity to address a heightened competitive environment and increased business levels, driven by rapid proliferation of new fabless designs.

Looking at the memory market, bookings from memory customers were 38% of the total in Q1, while DRAM pricing and PC demand have been declining of late, our leading edge DRAM customers remain very profitable and are sustaining their investments to transition to the 4X nanometer and the 3X nanometer technology nodes.

We also saw an increase in NAND equipment demand in Q1 to meet strong bit growth, driven by rapid adoption of SmartPhones and tablet PCs.

Orders from NAND Flash customers grew to 72% of memory orders with market leaders investing to ramp 30-nanometer and to qualify 20-nanometer technologies.

Logic was 18% of bookings in September, driven by the continued migration to 22-nanometer.

Now as you know, technology changes that enable Moore's law are constant in our industry.

Regardless of where we are in the industry cycle, chip manufacturers are continuously innovating to lower the cost of production and improve performance of their products, and process control is essential to successful innovation.

Although orders remained at a high level compared with historical averages, the downward trend in bookings in the first quarter following an extended period of robust growth was consistent with seasonality for KLA-Tencor.

It's also indicative of a more cautious approach our customers have recently adopted with their capital spending budget as weakening consumer PC demand and persistent uncertainty regarding the macro economy have impacted spending in the short-term.

However, overall semiconductor industry dynamics remain healthy and the importance of maintaining cost and performance leadership continues to drive investment at a high level.

Current external market estimates have semiconductor revenues growing in the range of 30% in calendar 2010.

With growth currently forecast in the mid single digits for calendar 2011.

Fab utilization also remains at a high level.

And the WFE market is forecast to grow 120% in calendar 2010, with 2011 expected to be roughly flat year-over-year.

We're tracking 13 new fab projects currently in development, or scheduled to qualify over the next several quarters.

The majority of semiconductor capital spending today is focused primarily on technology investment and not capacity.

And that focus is a key driver of the high demand we're seeing in process control.

And with the continued success of new products, and sustained market leadership, coupled with our strong backlog and high performance business model, KLA-Tencor is well positioned to deliver outstanding revenue, profitability and earnings as we move ahead.

Moving now to guidance.

Gross bookings in December are projected to be flat to down 20%.

We also expect continued revenue growth and strong margin performance with December revenue expected to be in the range of $700 million to $740 million.

And non-GAAP earnings in the range of $1 to $1.10 per share.

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

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 amortization and write-down of intangible assets associated with acquisitions.

Expenses associated with our stock options related litigation, and certain cost 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 refer to non-GAAP information, 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.

The differences between this quarter's GAAP and non-GAAP numbers are acquisition related charges of $8 million before taxes, or $0.03 a share after taxes, and a $9 million non-cash tax charge due to a cumulative shortfall position in our employee stock activity.

Removing this charge from GAAP earnings added about $0.06 per share to non-GAAP EPS.

Following our record Q4, the Q1 new order total was $785 million.

Which was our third best quarter ever.

Net orders were $787 million.

Revenue and EPS for Q1 were above the top end of our guidance ranges we issued in July, as we processed the strong order pick up we experienced in the last few quarters.

Regional distribution of new systems orders in the quarter to quarter change in distribution was as follows.

The US was 21% of new systems orders in Q1, down form 25% in the June quarter.

Europe was 4% of new system orders, down are from 12% in Q4.

Japan was 7%, down from 12% last quarter.

Korea was 24%, up from 19% last quarter.

Taiwan was 34%, up from 18% last quarter.

And the rest of Asia was 10%, down from 14% in Q4.

The Q1 distribution of new systems and services orders by product family and the quarter to quarter change in distribution was as follows.

Wafer inspection was 49%, compared with 48% last quarter.

Reticle inspection was 11%, down from 19% last quarter.

Metrology was 17%, up from 14% in the prior quarter.

Solar, storage, high brightness LED and other non-semi was 6%, even with last quarter, and services was 17% of new orders in Q1.

Up from 13% last quarter.

Foundry customers comprised 44% of semiconductor systems orders in Q1, versus 41% in Q4.

Logic customers were 18% of systems orders in Q1, versus 21% in Q4.

And memory system orders were 38% in Q1, even with last quarter.

67% of the semiconductor systems orders in Q1 were for 32-nanometer and below technology, versus 41% in the June quarter.

Looking forward, we expect that new orders for fiscal Q2 will be within a range of flat to down 20% from Q1.

Shipments in Q1, which include both system shipments and services revenue, were $677 million, up from $622 million last quarter.

We added a little over $100 million to our backlog in Q1, and ended the quarter with $1.44 billion in total systems backlog.

The backlog at September 30 included $337 million of revenue backlog, for products that have been shipped and invoiced but have not yet been recognized as revenue, and $1.1 billion in system orders that have not yet shipped.

Systems revenue for Q1 was up 28% to $550 million, compared with $430 million in Q4.

Services revenue was $132 million in Q1, up slightly from $129 million in Q4.

Our expectations for total revenue in Q1 is a range between $700 million and $740 million.

Non-GAAP gross margin was 62% in the September quarter, up 2 percentage points from June.

For Q2, we are modeling an incremental gross margin target roughly equal to our stated goal of 60% to 70%.

Operating expenses were $180 million, up $15 million from the June quarter.

About $3 million of the quarter to quarter increase resulted from giving our employees new iPad devices and grossing them up for taxes.

Another $3 million of the increase was due to a Q4 credit in G&A expense for recovery of our claim arising from the Spansion bankruptcy which did not repeat in Q1.

We expect our non-GAAP operating expenses to increase slightly in Q2, in line with our stated incremental operating margin target of 50% to 60%.

Other income and expense, or OIE, was a net $12 million expense in Q1, about $1 million higher than Q4.

For modeling purposes we expect OIE to be a net expense of approximately $11 million in Q2.

In Q1, our non-GAAP income tax expense was $63 million, or 27% pretax income, versus $41 million in Q4, which was 25% of pretax income.

The tax rate increase arose largely from a change in the distribution of earnings between the US and lower taxed international operations.

Non-GAAP net income was $169 million, or $0.99 per share in Q1.

If we exclude the iPad distribution expense and apply our model tax rate of 30%, our Q1 non-GAAP earnings per share would have been $0.96.

At the revenue range I previously mentioned, we would expect our Q2 non-GAAP earnings to be somewhere between $1 and $1.10 per share assuming a tax rate of 30%.

Weighted average shares used to compete EPS in Q1 were 169.8 million, versus 171.3 million in Q4.

During Q1 we spent $62 million repurchasing about 2 million shares, and as of September 30 we had approximately 3.2 million shares available under our current repurchase authorization.

We anticipate continuing to repurchase shares in the December quarter.

For guidance purposes we are modeling an average share count of 169 million for Q2.

Turning to the balance sheet, cash and investments ended the quarter at $1.5 billion, about even with prior quarter end.

Cash generated from operations was $96 million in Q1, compared with $83 million in Q4.

Quarter-over-quarter increase in operating cash flow largely resulted because we had $133 million more in customer collections and we did not have to make a $26 million semiannual interest payment this quarter.

These effects were partially offset by larger outlays, including annual bonus payments we made in September.

Net accounts receivable ended the quarter at $500 million, up from $440 million at June 30, largely resulting from the $55 million increase in shipments from Q4 to Q1.

DSOs were 67 days, September 30, versus 72 days at the end of June.

Both DSO figures are net of allowance for uncollectible accounts in factory.

Net inventories increased by $62 million from June 30 and ended the quarter at $464 million.

Inventory turnover based upon GAAP cost of revenues was 2.3 turns in Q1, flat with Q4.

Net capital expenditures were $11 million in Q1, versus $6 million in Q4.

Total headcount at September 30 was 5,180, up from 4,989 at June 30.

We expect our headcount will increase slightly during Q2.

In summary, our guidance for Q2 is new orders flat to down 20% from Q1.

Total revenue between $700 million and $740 million.

Non-GAAP EPS between $1 and $1.10.

Assuming the 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 Q&A.

Okay.

Thank you, Mark.

At this point, we would like to open up the call to Q&A and we do once again request you limit yourself to one question given the limited time we have for the call today.

Feel free to requeue for your follow-up questions and we'll do our best to get everyone on today's call.

Operator, we're readily for our first question.

(Operator Instructions) Your first question comes from the line of Satya Kumar from Credit Suisse.

Your line is now open.

This is [Anton] for Satya.

I had a question on orders.

How do you think orders will be in first half 2011?

And what portion of backlog do you think is shippable within next six months?

Yes, I'll take the first part of that and I'll have Mark take the second part.

As you know, we don't forecast that far out.

We don't guide bookings out into the next calendar year.

But, I would say that the perspective right now is that calendar 2011 looks to be flat with calendar 2010, which of course was up significantly over 2009.

Whether that's back end loaded or not I think a lot of factors are at play, but if I model out the whole year, I think we're looking at a calendar 2011 that we think overall is flat.

We're tracking about 13 new projects and it really depends on the timing of when those projects get released and make their investments.

Yes, with respect to your -- I'm sorry.

With respect to your second question on what portion of the backlog is shippable over the next six months, we typically don't guide shipments.

However, I do understand the nature of your question and because we're in a hyper ramp right now, I will tell you that our internal plan is to ship north of $800 million in the current quarter, and repeat something like that coming out of Q2.

So, we would expect all of our backlog and maybe even a little bit more to try to ship out over the next six months.

Those shipment figures do include, by the way, services revenue.

We wouldn't typically guide this, but I do understand the nature of your question.

Okay.

Great.

Thanks a lot.

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

Your line is now open.

Yes, good afternoon.

Thank you for taking my question.

I'm curious on the foundry side.

I guess I would love to hear kind of what you're seeing there from your customers and whether there was some push-outs there in the September quarter as to why your orders came in at the lower end of your guided range.

And then thinking a little bit longer term into calendar 2011, clearly very robust spend for you in calendar 2010.

Can that repeat itself or has a lot of the kind of -- has a lot of the spend been front end loaded and I guess within that discussion I would love to hear your comments and thoughts around the spend for 28-nanometer and high K metal gate and how all the interplay for foundry spend should look as we move into calendar 2011.

Yes, CJ.

Good questions.

I think we did see a bit of softening, as we said we're in the bottom part of the range for bookings for September and not really outside of normal for seasonality for us.

But clearly, there has been a slight digestion period we think we are in right now across the industry, and that includes the foundries, but there are several projects on the books.

When we look out, there are major foundry players talking about increasing CapEx for calendar 2011 and we see many projects outside of just the major players, you go across the space and there's a lot of investment across foundries.

Whether 2011 will repeat 2010, our current model is we see 2011 nominally being flat with what we see 2010 shaping up to be.

Very hard to predict at this time where that will happen inside of the different segments, but we think foundry stays pretty strong, logic pretty steady and I think DRAM probably remain soft offset by NAND spending continuing.

That's kind of how we see it.

Very helpful.

Thank you.

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

Your line is now open.

Hi, great.

Thanks so much for taking the question.

I appreciate it.

The shipments versus revenue, if we're going to ship 800 for each of the next couple of quarters, how do you think that translates into revenue, given recognition issues and things of that nature?

I think it's hard to predict it exactly, Jim, but as you might imagine, we have guided up in revenue for next quarter and we would expect that if we actually follow through with the shipment plan that we've currently got in place, obviously the revenue would have to be increasing as we look out to our fiscal Q3 as well.

It will follow in due course if we meet the shipment plan.

Do you think kind of with the -- I know this is hard as you're saying, but is it increase directionally or do you think on an absolute basis consistent with the shipment numbers?

I wouldn't want to get too fine with it.

But I would say that the slope of both should be close.

Okay.

How's that?

Great.

On the cash, I mean, is the plan to continue to do both, both dividends and the buyback?

Yes.

Right now, we're obviously generating a tremendous amount of cash and when we adopted the dividend we obviously had a long-term perspective in mind with our new highly profitable model at current levels and so we're sort of full steam ahead on that.

Great.

Thanks a lot.

Congratulations.

Thanks, Jim.

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

Your line is now open.

Thanks for taking my question.

Rick, if I look at your auto guidance, the spread is about $160 million.

What drives the low end and the upper end of the guidance?

Well, Krish, as you know, just got big projects out there and whether or not they come through.

I think you also know that from our perspective we like to keep the range wide enough to not have any particular customer feel like they're going to be the difference between us making inside or outside the range.

Big lumpy deals, I do think in this environment you end up with large deals happening and some of them come in and out and you certainly -- if you're in our position with the backlog we've got, we don't want to be needy about the orders and so there are times where the negotiations get pretty deep into the quarter over price and so on.

So, we want to leave ourselves some wiggle room.

Got it.

My final question is late last year you saw a nice tailwind from TSMC deal issues in the 4X-nanometer.

When the new entrants in foundry go to sub 4X, are you seeing similar deal issues you're experiencing and how does it benefit you?

Thank you.

Definitely seeing issues across the board and we're hearing more and more challenges as people scale down and pushing really hard on our development projects.

What it's doing is we're engaging quite closely with customers and helping them come up with strategies to deal with the challenges of advanced design rules, and at the same time pushing very hard on getting the new products out that are going to help provide the capability to make the inspection and measurement necessary to support the advanced node.

So, no question that the challenges our customers face for yield are only increasing as we go forward.

Thank you.

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

Your line is now open.

Hi, Rick.

If you look at your shipments and you just take 2010 relative to last year, it's up about 80% year-over-year and CapEx is up about 2X.

Is that just shipment timing or is there some, is there some particular mix that's causing the shipments to sort of be more back end loaded in the year and even into Q1 for you than for your peers?

Thanks.

Yes, sure.

I think that we look at all those metrics and I think it is certainly true that we have some long lead items that take a little time for us to get out.

I also think if you look at bookings were up more, were up about 95% year on year, if you count the middle of the range and shipments would be lagging at about 80%.

We're certainly in line when we look at the bookings side, but the shipment's a little bit delayed.

Next question.

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

Your line is now open.

Hi, this is Max for Stephen.

Thanks for taking my question.

Given uncertainty of memory spending in the next year, would you say KLA market share is stronger at NAND Flash customers compared to DRAM?

That's really hard to separate.

I think our market share ends splitting more along specific customer lines.

I have to think through how I would tally that up.

I don't think there's a big difference, frankly, between NAND and DRAM for us in terms of share.

Kind of comes and goes.

Over time our share ends up being pretty strong in some product lines and obviously not as strong in some others.

One quick follow-up.

What do you think the orders by customer type would be in the coming quarter?

Sure.

Yes, we're looking forward to December.

We see memory being about 36% of the overall orders.

When we look at logic, see that about 10%.

And 54% out of foundry and 7% non-foundry, non-semi.

All right.

Thank you very much.

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

Your line is now open.

Hi, this is Casey calling in for Mahesh.

If you were to look at the range in the bookings guidance, would you say more of the uncertainty comes from foundry versus memory or the other way around?

Yes, I wouldn't -- yes, I wouldn't attribute it to either one.

I'd say the range is really more of a broader statement than a specific customer type.

Okay.

And when you look into next year and at the moment you're looking for flat CapEx, what are some of the products out there or the nature of products out there that cause you similar concern?

Our products or customer products?

Customers projects.

Oh, the projects that are out there.

I see.

Well, clearly in 2011 what we're counting on is continued investment as I said, probably steady investment in logic.

We think that there will be continued investment in foundry as the foundry competition really increases and actually gets more meaningful, more players investing.

I think DRAM is likely to be a little bit soft and NAND would make that up.

So, if you take any of those and they don't hold then that obviously would have a downward pressure.

On the other hand, if we see more strength, let's say in the second half to DRAM, then that could strengthen the position of the DRAM customers, driving more investment by them.

So, when we balance the whole thing we do come up with a range where we see scenarios where it's up and then we see scenarios where it's down, and we ended up coming out right in the middle.

Okay.

Good.

Thank you.

Your next question comes from the line of [Mani Tosini] from Susquehanna.

Your line is now open.

Thank you.

For the quarter, can you please provide the mix of revenue and bookings from ICOS?

I'm sorry, for which quarter?

For the September quarter.

September.

Yes, we don't break out individual divisions, but we have said the non-semi, which is where we lump the back end test for us because it's non front end, non-WFP was about 6% overall of the bookings and forecasted, consistent with what it was in June and forecasted in the December quarter to go into 7%.

Now, that includes back end tests, high brightness LED, solar, and hard disk drive storage market so really it's rather -- it's broader than what we get out of any one product division.

But overall consistent as a percent with what we saw in June.

Understood.

And then with equipment lead time, in my opinion coming in and considering flattish CapEx for next year, don't you think that your customers could wait until Q2 to place the orders that would impact their production for the second half of next year?

Certainly.

Yes, I mean I think customer if you had to average lead time is on the order of six months for us, then certainly they could wait until June to get December shipments, December order fulfillment next calendar year.

Not really a big change.

What we've really been dealing with is ramping to meet the demand.

I think with a lot of heroic effort, we're doing that and I think we'll be able to continue that but yes, there's no question that you would have to see bookings in the first half to support the second half numbers.

And just very quickly, what should I think your booking guidance and your overall turn of the business relative to some of the other front end equipment companies that have reported and have been relatively more constructive about the near term booking momentum.

Yes, I think the biggest difference with -- I think we have from many of the peers is the backlog that we have and the strength that we had in prior quarters for us, for example, the June quarter created a lot of backlog which we're now working off and so when we look at that -- even that, given, even that scenario, we added to backlog over $100 million in the last quarter.

For us we continue to drive the revenue growth and the earnings that go with that.

But we actually don't see that the bookings is going to be at the same level for the December quarter, will be slightly under, but we'll still have a tremendous amount of backlog in the Q and be able to continue to drive earnings.

I think a lot of the other businesses end up being more turns businesses which cause them to perhaps burn off that backlog a lot faster.

Thank you.

Your next question comes from the line of [Ari Tundra] from Deutsche Bank.

Your line is open.

Thank you.

In terms of the order mix you noted that the technology of upgrades was driving it.

Could you give the split between capacity orders versus technology upgrades?

How do you see that percentage shifting over the next couple of quarters?

And any vertical or segment tilting towards capacity.

Yes, I think right now it's really hard to tell exactly when you look at some of the systems that are in place and except for when you're looking at pure R&D.

Because we're really go into pilot, early part of a ramp and then the product goes forward.

Clearly we're benefiting from the advanced technology nodes.

I think the capacity buys are there, but if I had to do a rough split, just off the top of my head, I'd say it's 60/40 right now technology versus capacity and that, that will probably trend and I think there's probably more coming as we look forward and we think about some of the build-outs that are going to happen in things like NAND where you see factories coming online in the next few quarters that will be more capacity oriented.

But it's really hard to say exactly what that split is given the outside of the pure R&D technology buys.

Does that make sense?

Yes.

Thank you.

And one quick question on the December shipment split.

How do you see that shaping up?

Shipment split should approximately follow the bookings profile.

Okay.

If you look to the prior quarter, in this case maybe the prior quarter and-a-half.

Thank you.

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

Your line is now open.

Great.

Thank you for taking my question.

Could you explain, maybe you did explain this on the call but I just didn't hear, joined a little bit late, so I apologize, but could you explain why there's this re-divergence in terms of shipments in revenue?

What in the product mix is driving that divergence or ability to recognize revenue?

Seems like you're building a decent amount of deferred revenue now.

And just second question, sort of a bigger picture question with still a lot of sort of new fab projects in the pipeline, particularly for NAND in 2011, there's this sort of common perception that NAND is less CapEx intensive than DRAM for semicap equipment spending overall.

I was wondering if that's the same case for inspection or metrology, and whether or not inspection or metrology could actually see higher CapEx intensity with NAND compared to processing?

I'll take part of that and let Mark deal with the divergence, your question on that.

Let me start with the second part of your question, capital intensity for NAND and DRAM.

From our perspective, and a process control world, we are seeing new challenges emerge in advanced design rules on NAND that even our customers weren't aware of as recently as three to six months ago, challenges they're having.

So, as a result, we are seeing increased activity and an increase in the process control percentage that people are willing to invest and need to invest.

So, I think for us, NAND is going to be a healthy market as we go forward.

That said, we've still got a lot of work to do to execute on our strategy to support that and I don't see -- DRAM right now, I just think it's overall there are many challenges associated with the technology.

But we just don't see the overall activity level being as high for DRAM in general as we do for NAND.

Mark can take the split.

Let me take a quick response to your question on the divergence between the shipment profile and the revenue profile.

First of all, it usually takes at least 90 days to turn shipments into revenue when you get into just passing the units along, installing customer burn in and then final product acceptance.

When we're moving in, let's call it normal circumstances which isn't that often as it turns out, you will see a 90 day turn of that or a little bit longer than 90 days.

When you're in a stiff up-ramp like we're in right now, it takes a little bit longer to turn that into revenue.

I will say this, however.

In Q1 we actually revenued ahead of the prior quarter's shipments.

We actually revenued 683 this quarter and we shipped 622 last quarter.

It can move back and forth.

That won't happen every quarter, but it will happen often enough just to let you know that it should vacillate at 90, or slightly greater than 90 days.

I hope that's responsive to your question.

Again, if we meet the shipment profile, the revenue will follow relatively shortly thereafter in the next couple quarters.

Okay, can I sneak in one more question real quickly here?

If you are going through a digestion phase and you are reflecting that in terms of your order guidance here in the December quarter coming off September, then in September why did metrology kind of hold fast at roughly the $130 million kind of range?

I would have thought that if you're starting to see the impact of capacity digestion, you would have seen metrology kind of down tick a little bit more than any other sector or division for you.

Is there a reason for that?

Why September -- I'm sorry, September metrology held in there, but overall we were down.

Yes, why did metrology of all things hold up better in your order book compared to other segments when we're going through a little bit of a capacity digestion as you indicated on the call?

Well, I think it's a relative thing.

Right?

I think from our perspective, in that case there is some metrology that is, turns out to be closer to turns business and has to do with supporting capacity, where some of our inspection markets are longer lead and, therefore, the timing is offset among different product lines.

And so just like process control guys probably had more turns in September, we had more turns in metrology.

We also came off of a very strong market period in June for things like reticle, so it's a relative basis.

Does that make sense?

Yes, absolutely.

All right.

Thank you.

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

Your line is now open.

Hi.

Thanks for taking my questions.

And nice quarter, nice results.

Mark, I have a question, as we think about EUV over the next couple of years, I just want to know your operating expense R&D line, is there a reason to believe that, that can kind of creep up into next year because of EUV efforts, or if you're going to stick with your actinic approach, you can move around R&D over some different projects?

Actually, it's an interesting observation, Atif.

It is possible that we could -- we would have some upward pressure on the R&D line next year, just as a function of the total OpEx and as a function of revenue.

And that could be just as a result of the timing of new product introductions, and certainly EUV is a big frontier for us on the R&D side.

What you'll see right now is we previously laid out the model for KLA-Tencor.

We're experiencing levels of profitability in the current performance that were considerably ahead of where we were before, and we believe moving into this period, when we spoke three or four years ago, we believe that we would get a 200 to 300 basis point improvement, both from the operational improvements and some of the decisions that we made with respect to offshore manufacturing and things like that.

200 to 300 basis point improvement in operating margin.

We obviously are getting more than that right now.

But that is certainly partially a function of the actions we took, but it's also partially a function of the timing of when new projects come on board and when new R&D hits, and it's possible we could experience some of that pressure as we look out into the first half of next year and beyond that a little bit.

In the long run, we believe we have obtained 200 to 300 solid basis points of improvement in the operating line.

Just to be clear, the absolute dollars on EUV and R&D could be higher, but the operating margins could still improve because of better supply chain?

I don't know if the they would improve as a percentage from here.

They should certainly go up as the revenue improves.

We are experiencing a really high level of operating margin contribution right now as a function of revenue and my point is, is that we may be operating with a little bit of a tailwind in terms of complex R&D projects and if you look out farther than that, 452.

Got it.

Just a follow-up.

In your non-semi segments, can you -- I know it's a small contribution, but can you give some kind of order on where you saw the most strength in LEDs or data storage?

Yes, sure.

We had a record quarter in solar for the September quarter.

It's a small business for us, but it did have a record quarter.

I'd say high brightness LED continues to look good and we continue to see growth there.

Obviously there's been some softening in the disk space, but we're actually pretty well positioned with new products there.

And then lastly in back end packaging we did see a little bit of softening and we expect that to continue, reflecting some of the challenges in the back end in the short-term.

But we think that will recover as we go into next year.

Big enough technology inflection points in these markets this year or next year where PDC could benefit or is it kind of more the old?

There's definitely growth.

We're seeing -- for us it's a pretty good business segment.

If we look overall, we're at $200 million, $250 million run rate, outside of core semi and we think the long-term growth trajectory of that space is probably 20%.

The challenge is of course it's coming off a smaller base relative to the rest of our business, but there are definitely challenges in each of those markets if you walk through them and we've got products and we've got market position and the ability to invest and drive those as we go forward.

It's part of our long term growth plan.

But relative to the other sides of the business, it remains reasonably small.

Thanks.

Your last question comes from Jagadish Iyer from Arete Research.

Your line is now open.

Thanks for taking my question.

Two questions, Rick.

First question is that you are upset about WFE being flat for 2011.

The question is that given the mix is going to change between DRAM, NAND and logic and foundry, do you think that you can outgrow the WFE in 2011, please?

We do.

We think that, again, if I go through it again, I think foundry's flattish.

We think that logic's flattish.

We think there will be increases in the NAND space, heavy investment there and less so in DRAM, and based on our current positions and the investments that we're making, certainly it's our plan to continue to grow.

We do have the emerging markets as well, so yes we believe we can continue our strategy of executing a growth strategy that takes us faster than the overall industry performance.

Second question is that if the orders -- if the order bust continues for the next two quarters or three quarters, do you think that you could sustain a gross margin of over 60% if assuming the revenue run rate is over $700 million?

Well, yes, the answer is yes.

If you look at our incremental gross margin we've gotten it up there.

We guided, 7, 740.

You can infer from our model, a 60% to 70% incremental gross margin.

We've got a strong -- we're actually in that zone with gross margin, so we're in a strong position.

But yes, we believe that, that's what we're committed to.

We think it's there.

And as long as revenue hangs in there or grows then we're in great shape.

Last question, if I could squeeze it.

Every one of your peers is talking about TSD and wafer level packaging.

How much is clearly tracking income (Inaudible)?

Thank you.

Yes, sure.

We have plays in that.

Obviously, we've got some work going on in the back end.

We've got a very strong position with the businesses that we have there and we think for both wafer level packaging and TSD we've got good opportunities and the potential to add, but we want to make sure that those markets really materialize in a way we can get a good return on those investments.

We are tracking them and working closely, but we believe we're very well positioned for them.

At this time there are no further questions.

I'll turn the call back over to Ed Lockwood for closing remarks.

Okay, Operator.

Thank you very much.

Thank you all for joining us on our call today.

And your continued support.

This concludes our call.

This concludes today conference call.

You may now disconnect.