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Operator
Good afternoon, my name is Sean, and I will be your conference operator today.
At this time, I would like to welcome everyone to the KLA-Tencor second-quarter fiscal 2011 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, Investor Relations.
Please go ahead, sir.Please go ahead, sir.
Ed Lockwood - Sr. Director, IR
Thank you, Sean.
Good afternoon, everyone, and welcome to KLA-Tencor's second-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.
We're here today to discuss second-quarter results for the period ended December 30, 2010.
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 Investors section of our website.
There 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, 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.
Rick Wallace - President and CEO
Thanks, Ed.
Thank you all for joining our call today.
I'll focus my commentary on summary highlights of our December quarter results, and then provide guidance for March.
Then I'll turn the call over to Mark for a more detailed review of the financials, and we'll conclude with M&A.
KLA-Tencor ended calendar year 2010 with an outstanding December quarter.
We delivered record shipments, revenue, and non-GAAP net income, and we began 2011 with good momentum as we head into the year.
This achievement is the result of the Company's technology and market leadership, our growth from adoption, and new markets.
It also demonstrates great execution by the KLA-Tencor team in meeting customer needs and driving operational excellence in a very healthy industry cycle environment.
Here are some highlights of the Q2 results.
New bookings in the December quarter came in at $725 million.
Shipments increased 22%, to a record $828 million in Q2.
Over the past several years, we have transitioned the manufacturing of multiple products to facilities in Singapore and Israel, and these operations continue to perform at a very high level, and yield significant cost advantages.
Revenues grew 12% sequentially in December, to a record $766 million, significantly above the range of guidance.
In excluding some one-time charges, we achieved a new high in non-GAAP net income of $187 million, or $1.10 per diluted share in Q2.
Finally, cash flow from operations was also very strong in Q2, coming in at $194 million, and we ended the quarter with $1.6 billion in cash and investments.
These results show clearly that our long-term strategies are working, our business model is showcasing its strong profit and cash-generation ability.
Turning now to some specifics on the current demand picture.
Q2 orders reflected another quarter of high demand from the foundries, with foundry bookings at 72% of total new orders in the December quarter.
The foundries are investing at a very high level to advance their technology road maps and to add capacity, and to keep pace with the rapid growth and advanced (inaudible) designs.
Logic was 8% of bookings in December, driven by the continued migration to 22 nanometers.
Recent commentary from our leading logic customers point to an anticipated significant increase in CapEx budget for calendar 2011, in order to further expand their global manufacturing capabilities.
Finally, bookings from memory customers were 20% of the total in the December quarter.
While Q2 memory demand was below the recent trend lines, due to some shifts in order timing, we expect memory orders to recover in the March quarter, driven by an increase in NAND Flash investment.
Let me turn my focus to our view of what's in store for calendar 2011.
Current external market estimates have semiconductor revenues forecasted to grow in the mid-single-digits for calendar 2011.
And with recently announced increase in some of our foundry and logic customers' CapEx forecasts for the year, semi-cap equipment market fundamentals appears solid, with a positive outlook for growth in equipment spending in the year ahead.
In the memory market, while DRAM pricing continues to weigh on the industry, industry forecasts call for a significant increase in NAND Flash capital investment in 2011, in order to support bit growth rate projections in the range of 80% to 90% for the year.
As our customers execute their investment strategies at the leading edge, each successive generation of new technology is characterized by increasing process complexity, shorter market windows, and more challenging yield requirements.
Process controls on the critical path for successful management of these complex technical challenges.
And as the market leader, KLA-Tencor's position to continue to benefit from higher adoption of inspection to measurement, as our customers move ahead with their advanced technology road maps.
To summarize, the December quarter was an outstanding finish to a very successful calendar year 2010 for KLA-Tencor.
Our numbers show the Company is operating in a very high level, delivering record results in a period of very strong market demand.
This performance also illustrates the strength of our long-term strategies, the value of our market leadership, and the significant leverage in our industry-leading business model.
Moving now to the March quarter guidance.
Gross bookings are projected to be up 5% to up 25% in the third quarter.
Revenue is expected to be in the range of $780 million to $830 million, and non-GAAP earnings in the range of $1.15 to $1.30 per share.
With that, I'll turn the call over to Mark for his review of the financial results for the quarter.
Mark?
Mark Dentinger - EVP and CFO
Thank you, Rick.
Consistent with our recent history, 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 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 on operations will refer to non-GAAP information; but where I reference GAAP numbers, I'll make distinction.
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 amortization charges of $8 million before taxes, or $0.03 per share after taxes; a $4 million non-cash tax credit from inter-year recovery of our cumulative shortfall position in employee stock activity.
Removing this credit from GAAP earnings reduced non-GAAP earnings by $0.02 per share.
We had about $1 million in restatement-related charges, and about $1 million of other GAAP-only gains, which offset each other and had no impact on EPS.
Q2 new orders were $725 million; net orders were $726 million.
The regional distribution of new systems orders and the quarter-to-quarter change in distribution were as follows -- the US was 19% of new systems orders in Q2, down from 21% in the September quarter; Europe was 10% of new systems orders, up from 4% in Q1; Japan was 5%, down from 7% last quarter; Korea was 16%, down from 24% last quarter; Taiwan was 45%, up from 34% last quarter; and the rest of Asia was 5%, down from 10% in Q1.
Q2 distribution of new systems and services orders by product family and the quarter-to-quarter change in distribution were as follows -- wafer inspection was 30%, compared with 49% last quarter; reticle inspection was 26%, up from 11% last quarter; metrology was 20%, up from 17% the prior quarter; solar, storage, LED, and other non-semi was 5%, down from 6% last quarter; [end] services were 19% of new orders in Q2, up from 17% last quarter.
Foundry customers comprised 72% of semiconductor systems orders in Q2, versus 44% in Q1.
Logic customers were 8% of new systems orders in Q2, versus 18% in Q1, and memory systems orders were 20% in Q2, down from 38% in Q1.
Looking forward, we expect that new orders for our fiscal Q3 will be within a range of up 5% to up 25% from the December quarter.
In Q2, we shipped $828 million, versus $667 million last quarter.
The shipment number includes both systems shipments and services revenue, and we expect a similar shipment level for Q3.
The backlog at the end of Q2 decreased slightly from September 30, and we ended the quarter with $1.4 billion in total systems backlog.
The backlog at December 31, 2010, was -- included $396 million of revenue backlog, or products that have been shipped and invoiced but have not yet been recognized as revenue; and a little over $1 billion in systems orders that have not yet shipped.
Total revenue for Q2 was $766 million, up 12% from $682 million last quarter.
Systems revenue for Q2 was up 14% to $628 million, compared with $551 million in Q1, and services revenue was $138 million in Q2, up about $7 million from Q1.
Our expectations for total revenue in Q3 is a range between $780 million and $830 million.
Non-GAAP gross margin was 60% in the December quarter, down two percentage points from September.
Gross margin percentage decrease from last quarter was largely a function of product mix.
For Q3, we are modeling a gross margin percentage improvement, with a little better -- a little better than our long-term model of 60% to 70% incremental margin improvement on the expected Q3 revenue increase.
Operating expenses were $184 million, up about $4 million from the September quarter, and we expect a small increase in our operating expenses in Q3.
OIE was a net $18 million expense in Q2, about $6 million higher than Q1.
The OIE increase over last quarter was largely attributable to writing down an equity investment in our venture portfolio.
For modeling purposes, we expect OIE to be a net expense of approximately $13 million in Q3.
In Q2, our non-GAAP income tax was $72 million, or 28% of pre-tax income, versus $63 million in Q1, which was 27% of pre-tax income.
The tax rate increase largely arose from a change in the distribution of earnings between US and lower-taxed international operations, offset by the effects of reinstating the R&D tax credit during Q2.
Non-GAAP net income was $187 million, or $1.10 per share in Q2.
If we apply our model tax rate of 30%, our Q2 non-GAAP earnings per share would have been $1.07 per share.
The revenue range I previously mentioned, we would expect our Q3 non-GAAP earnings to be somewhere between $1.15 and $1.30 per share.
The weighted average shares used to compute EPS in Q2 were 169.5 million, versus 169.8 million in Q1.
During Q2, we spent $58 million repurchasing about 1.6 million shares; and as of December 31, 2010, we had approximately 1.7 million shares available under our current repurchase authorization.
We anticipate continuing to repurchase shares in the March quarter; for guidance purposes, we are modeling an average share count of 169 million for Q3.
Turning to the balance sheet, cash and investments ended the quarter at $1.6 billion, up about $100 million from the end of September.
Cash generated from operations was $194 million in Q2, compared with $96 million in Q1.
The improved operating cash generation mostly resulted from $140 million more in customer collections, and the collections increase was offset by higher income tax payments and our semi-annual interest payment.
Net accounts receivable ended the quarter at $531 million, up from $500 million at September 30.
DSOs were 63 at December 31, versus 67 at the end of September.
Both DSO figures are net of allowance for uncollectible accounts and [factoring].
Net inventories increased by $41 million from September 30, and ended the quarter at $505 million.
Inventory turnover based upon GAAP cost of revenues was 2.6 turns in Q2, versus 2.3 turns in Q1.
Capital expenditures were $12 million in Q2, versus $11 million in Q1; and we completed the sale of our vacated San Jose campus, which resulted in $18 million in net cash proceeds.
Total head count at December 31 was 5,267, up from 5,180 at September 30.
We expect our head count will increase slightly during Q3.
In summary, our guidance for Q3 is -- new orders up 5% to 25% from Q2, total revenue between $780 million and $830 million, non-GAAP EPS between $1.15 and $1.30.
This concludes our prepared remarks on the quarter.
I will now turn the call back over to Ed to begin Q&A.
Ed Lockwood - Sr. Director, IR
Okay.
Thank you, Mark.
At this point, we'd like to open up the call to Q&A.
And we do ask, once again, that you limit yourself to one question, given the limited time we have for our call today.
Feel free to re-queue for your follow-up questions, and we'll do our best to get everyone on today's call.
Sean?
Operator
Thank you.
(Operator Instructions)And our first question comes from Krish Sankar, Bank of America Merrill Lynch.
Your line is open.
Krish Sankar - Analyst
Yes, thanks for taking my question.
I had a couple of them, Rick.
The first one is, when you look at 2011, how do you feel calendar second half is going to be relative to first half?And we saw the different verticals that's going to drive the second half of they year -- foundry, NAND, et cetera.
And I had a follow-up.
Rick Wallace - President and CEO
Sure, Krish, I think right now -- just back up, and as we look across 2011, I would say our bias has switched.
If you go back, probably, last quarter, we were thinking flat to down 10% for the year, and we're modeling now flat to up 10%, with some of the recent announcements, some of the activities, and 15 projects that we're following.
It's always tough on timing, but I would think that -- we see NAND continuing, probably coming back for us this coming quarter, the March quarter, and then some good projects out there.
And foundry, there continues to be strong investment in foundry.
And I think we'll see that in the first half, but there's also projects that we see on the books now for second half.
So I think foundry stays pretty solid during the year.Also for us, we see wafer [guides] continuing, and -- to ramp -- and we see more investment happening with the wafer guides, and we see some of the back end pretty strong.
So, I would say right now, it's kind of hard to break the first half, second half, but we do see about flat to up 10% for the overall year.
Krish Sankar - Analyst
Got it.
Thanks, Rick.
And then, a follow up with -- clearly you guys are running at a pretty high healthy run rate from all shipment booking and the revenue standpoint.
What is your quarterly capacity?
How much revenue can you ship on a quarterly basis from your factories today?
Mark Dentinger - EVP and CFO
I don't think we're capacity-limited, although there's certainly -- we're stretched, and we're running pretty hot on overtime, and we have a lot of people working hard to meet the demands out there.
But we forecast, and pretty much all the scenarios we can imagine, I don't think we're going to be capped on capacity as we go forward.
Krish Sankar - Analyst
Thank you.
Rick Wallace - President and CEO
I would just add that when we set up the offshore structure in Singapore and Israel three years ago, we had hypothesized that we should be able to -- with the right balance in the quarter, and so on and so forth, carry a $3.5 billion run rate if we got to that level.
But, interestingly enough, we're beginning to get into that range.
So, we're stretched, but we still have a little head room.
Krish Sankar - Analyst
Thank you.
Operator
Your next question comes from the line of C.J.
Muse with Barclays Capital.
Your line is open.
C.J. Muse - Analyst
Great, thanks.
Thank you for taking my question.
First question, I was hoping you could help me understand why memory was so, I guess, light in Q4.
And then, I guess, importantly, on the March quarter, what kind of mix do you expect, I guess, between foundry and logic and memory?
Rick Wallace - President and CEO
Hi, C.J.
Yes, we had some stuff that kind of fell out of the quarter timing, and specifically in NAND, and we do see that coming back.
So, it's a project that just -- we didn't get through the -- all the complete negotiations.
So we see probably 75% or so of the March memory orders being NAND, and that was -- they were pretty low in the December quarter.
But overall, we think memory is probably around 30% for us in March.
C.J. Muse - Analyst
Okay, that's helpful.
And then, I guess, second question on the gross margin side.
In terms of the weakness there in December, is that just primarily mix?
And then, I guess, looking at the March quarter, it looks like at the midpoint of your guide, you're telling us gross margins will at least marginally exceed the September quarter.
Is that the right way to look at it?
Rick Wallace - President and CEO
That is the right way to look at it.
This was primarily a mix phenomenon in this quarter.
If you look at the last, I don't know, six to eight quarters, you will see a very consistent trend where we have overperformed our long-term 60% to 70% incremental margin target.
So, we were probably due for a corrective quarter with respect to meeting that target.
But, as you can see in the guidance, we're anticipating that we'll push north of that, and again, get back on an upward swing on the margins.
Mark Dentinger - EVP and CFO
And just one last comment, C.J.
The bookings we're getting now would support that, when [it is converted to] revenue in the future, too.
C.J. Muse - Analyst
Great.
Thank you.
Operator
Your next question comes from the line of Timothy Arcuri with Citigroup.
Your line is open.
Timothy Arcuri - Analyst
Hi, guys, two things from me.
First of all, Rick, if I go back and I look at memory as a percent of your bookings and I compare it to some of your -- not direct peers, but some of the other companies in the general sector, it's about half in some cases, over time, as a relative percentage of your business.
And my first question is, is there something that's going to happen in the memory business that's going to change that, that's going to make maybe memory become a little more inspection-intensive?Because once you get past this big foundry bubble, it would seem like NAND is sort of what's going to keep the cycle going, if you will.
And then I had a follow-up.
Thanks.
Rick Wallace - President and CEO
Sure, Tim.
There are some inflections, I think, for the memory guys, they do struggle as they're bringing out the new processes.
But clearly, we have seen intensity in the foundries be very favorable for us.
So we've got some work to do to demonstrate that on memory, but we do have some good signs.
I think I mentioned in the past, we actually also end up having a mix question.
There are certain customers that are more memory-intensive, inspection-intensive, than other in the memory sector, so it is not entirely just along device type.
And we do see some favorable, let me say, favorable trends in regard to who's making the investments and how memory inspection-intensive they are.
So, I think it will get better for us as we go forward.
Timothy Arcuri - Analyst
Got you.
Okay.
And then, just last one for me.
If I compared to the peak of 2007, most -- I mean, you've grown earnings quite a bit, obviously, but most of the growth in earnings has come from taking out OpEx, taking out SG&A.
And I'm wondering as you go forward, as you're shipping more products into the market, we heard from Lam yesterday that they -- that they're having to increase SG&A going forward, because of influx of shipments into the marketplace, to basically support all those tools.
Will we see some lift in your OpEx going forward, as you have to support all of these tools in the field?
Thanks.
Mark Dentinger - EVP and CFO
Yes, two things on that, Tim.
The truth of the matter is, is that R&D as a percentage of revenue is cyclical, in and of itself, in the sense that it depends on new product timing and new product introductions and so on and so forth.
So that actually, in terms of our OpEx, operates a little bit more independently of the revenue line, at least in the short run, than the G&A does.
The G&A structure we have right now is largely fairly intact, with respect to how much we think we will need going forward, but it does fluctuate a little bit based upon sales volume.
Obviously, you have to have feet on the street to meet demand.
And it also is a little bit captive, and a portion of our G&A growth since the '07 period of time has been just as a result of exchange rates, because we incur a fair amount of that in international currency.
So to sum it up, R&D will move a little bit more independently over time to the revenue line, but the G&A expense, we think we're pretty well resourced right now.
It may fluctuate a little, but we don't anticipate it going wildly up or down from here.
Timothy Arcuri - Analyst
Thanks, Mark.
Operator
Your next question comes from the line of Satya Kumar with Credit Suisse.
Your line is open.
Satya Kumar - Analyst
Yes, hi.
Thanks.
Good quarter.
First of all, on foundry, yesterday Lam talked about 130,000 to 150,000 of new capacity coming on line in 2011.
Have you guys gone through what you have at the end of December in your foundry backlog to see what portion of that is in the backlog and what is still ahead of you?
Rick Wallace - President and CEO
Yes, sure, of course we have.
And, from our standpoint, there are several projects that still are in early phases that we haven't seen the bookings yet.
And, of course, we have backlog, which you can figure out based on where our bookings have been.
So we see foundry continuing as we go forward, and as you know, foundry growth rates are higher, I think, than the other sectors.
And our intensity there is pretty good, plus we've got new players making strategic investments in the space.
So, we're pretty confident that foundry is going to continue to be robust through 2011.
Satya Kumar - Analyst
Got you.
And, as a quick follow-up, your backlog, if you look at your book to ship for Q1, it's still 1.0, and you're not really [bleeding] that $1.4 billion backlog, which was almost three times what you were running at the trough back in '09.
How should we think about bleeding the backlog into revenue as you move beyond March?
Rick Wallace - President and CEO
Well, you know, this has been interesting -- interesting question.
As we came into -- I would say, as we said six months ago, three months ago even, we had forecasted a downward draft for 2011, a flat to down 10%, and so we were being a little more prudent with the backlog.
And we look at it now, and we -- it gives us some ability to continue to ramp revenue and earnings as we go forward, because to your point, if you look at our guide against our ship and revenue, we're not burning a lot of it off.
And we do have customer demands to meet.
So, I would say we don't need it for protection as much as now we're doing everything we can to support our customers and to meet their needs going forward, but it does give us some runway.
Ed Lockwood - Sr. Director, IR
Next question.
Operator
Your next question comes from the line of Stephen Chin with UBS.
Your line is open.
Stephen Chin - Analyst
Thanks, hi, Rick and Mark.
Nice results, too.
Just a follow-up question on the March quarter, customer orders by foundry and logic.
Rick, I know you said memory could be 30% of orders, but how do you see logic trending in the percentage of March orders, and should logic steadily increase as we go through the year?Is that kind of how you see that shaping out?
Mark Dentinger - EVP and CFO
Well, so, two things, Stephen.
One is, logic, we think -- and these are imprecise numbers, but we modeled it roughly flat at 8%, but of course we said the overall -- I think bookings are up 5% to 25%.
So, we're seeing growth, and we are seeing foundries continue to be strong, at a 60%, 65% range for us.
But we do think that logic will grow.
This is lower than it's been in the past.
We do see some signs that probably part of what helped us view the 2011 as being up is -- some investment we know is happening as we get later in the calendar year for logic.
Stephen Chin - Analyst
And then, just a follow-up question -- on the wafer inspection equipment orders here in the December quarter, it looks like it was a little bit lower than the last couple of quarters.
Is that just some customer order timing for wafer inspection equipment, and it's not indicative of any share losses that -- and maybe you would see that grow back to the 40% of the total bookings going forward?
Rick Wallace - President and CEO
No, it's -- we already see it for the March quarter, we're modeling in the 45% to 50% range, probably -- pick the middle of that range to be fair.
We had a very strong reticle quarter, which is also part of what happened, is reticle came in very strong.
And we said 26% of orders, and that won't hold, that will come down.
But it will shift a little back toward historic numbers as we get to March.
Stephen Chin - Analyst
Okay.
Thanks, Rick.
Rick Wallace - President and CEO
You bet.
Operator
Your next question comes from the line of Raj Seth with Cowen and Company.
Your line is open.
Raj Seth - Analyst
Yes, hi, thanks.
Thanks for taking my question.
Rick, can you talk a little bit more about the capital intensity trend in this business?
You partially answered this, I guess, in response to Tim's question around memory.
But over the next, I don't know, two, three years, what do you see for PDCs specifically, if possible, if you can talk about memory versus the trend you see in foundry.
Are there any metrics that you can put around what I presume is a -- at least what Lam suggested was an overall increase by capital intensity.
I know it varies by segment.
Thanks.
Mark Dentinger - EVP and CFO
It certainly varies by segment, Raj.
I think there's two factors going into this.
One, foundry is going through a couple of changes, I think, if you look fundamentally over the last few quarters.
One is, they're finally having to add technology and capacity to compensate for IDMs having shipped at a lot of their manufacturing to the foundries.
That so that was one trend driving intensity.
The other trend that drives it for us is that they need to be able to handle multiple process flows, and they need to have the ability to get a better handle on their yield, so they don't start too many wafers or start too few.
And so, that drives it for us, and we've benefited from that.
And then the other factor, I guess, is there's increased competition now.
So overall, I think the intensity is going up because there's multiple players trying to get part of that growth segment.
So all of those are kind of favorable factors, whereas memory, on the other hand, it had probably -- as we know, had more capacity than the market could support.
And so, that certainly didn't drive intensity up, and they don't have some of the same dynamics quite yet.
You know, I modeled overall PDC, we're very conservative in our modeling.
It probably is flat to up slightly in terms of overall adoption over the next couple of years.
But really, we think, if anything, that's the upside in our earnings model.
And as we review it out for the next five years, we think there is good chance we just have to make it happen in terms of making sure our products provide that value for our customers.
But all the drives are driving more intensity, and that favors us if we can continue to execute on our product roadmap.
Raj Seth - Analyst
Good.
Thanks for that.
Good quarter.
Mark Dentinger - EVP and CFO
Thank you.
Operator
Your next question comes from the line of Mahesh Sanganeria with RBC Capital Markets.
Your line is open.
Mahesh Sanganeria - Analyst
Thank you.
If you can help us with the gross margin a little bit in terms of the product mix.
Looks like for last three or four quarters, your mix has been rich, and then suddenly it has changed.
And, can you give us some more color -- was that vertical inspection very strong for the last three quarters, or is it metrology coming back stronger?
Rick Wallace - President and CEO
Yes, Mahesh, let me help you a little bit with it.
Part of the reason that you can get a quarter-to-quarter mix phenomenon is that -- just the way we do some of the cost accounting on -- when we ship a tool.
The customer orders a base tool now with an option to upgrade.
We basically cost out the entire cost of the tool, both base tool today and the option to upgrade in the future.
So, when we get that order in the future, with the upgrade that comes in at almost 100% margin.
So when we say product mix, it is more complex than just it's coming out of this family or that family.
It actually can get into what is actually the nature of the order.
So, if there is enough new tools going out, with future options on them, you are actually going to get a relatively lower-margin operating quarter, with the knowledge that at some point in the future you are going to get margin-rich revenue coming through.
So that's an example.So when we say product mix, it's a pretty complex answer, actually.
Mahesh Sanganeria - Analyst
Should we expect that maybe two or three quarters down the road -- I'm not sure that that will be the case, but should we expect that two or three quarters down the road that mix might improve?
Because right now you might be getting a lot of new orders?
Rick Wallace - President and CEO
No, you -- we certainly will -- we know inside of our -- the contents of our backlog, we absolutely know that at some point you're going to get some more margin-rich revenue.
It's very difficult to call the exact timing, and it's very difficult to call the timing inside the -- a quarter in the future in which other phenomenon might be happening.
You might have to take a big E and a D reserve, or something like that, in some future quarter.
So, what you can't say, though, is that as we examine this problem quarter to quarter, we do -- we can pretty easily isolate in on the mix phenomenon as the large contributor of this quarter.
And you can see in our guide going into next quarter that we do have some confidence that the margin will improve.
Mark Dentinger - EVP and CFO
Just one thing to add to this, if you just do the math, we're saying incremental gross margin 60% to 70%, and we believe that going forward, you start hitting at the size numbers that we are, it gets very hard to move that average once you're in the 60%s, significantly up, and you occasionally -- you get this bouncing around.
But it's pretty -- we're sticking with an incremental 60% or 70%, and as we go forward, you can do the math on where that kind of gets you.
Rick Wallace - President and CEO
It finally is -- obviously, as your incremental gross margin begins to approach your average -- or your average begins to approach the incremental number, you can see that there is some natural ceiling to it as well.
So -- anyway.
Mahesh Sanganeria - Analyst
Right, okay.
That's very helpful.
Thank you.
Operator
(Operator Instructions)Your next question comes from the line of Peter Kim with Deutsche Bank.
Your line is open.
Peter Kim - Analyst
Hi Thanks for taking my question.
I think this morning one of your largest customers talking about potentially putting in a 450-millimeter wafer capacity a few years down the road.
I was wondering if you could talk about whether or not you guys -- how long ahead of that, that you guys would have to start the development process.
And would there be a meaningful impact in terms of the cost that would come through?
Rick Wallace - President and CEO
Yes, Peter, that's a great question.
There is already work going on, on 450, and there has been.
But obviously, we're in very close contact with the customers that have expressed an interest in 450.
So there has -- already, in the OpEx line, there is some money that's spent on it.
As you might imagine, some of our tools would be first of a kind in the 450 development, tools specifically for wafer metrology and wafer -- bare wafer inspection, because that goes very early.
So those tools are on roadmaps that can support that.
They are inside the plans that we talked about, when we talk about our incremental operating margin, it is contemplating that at some point in the future, those tools will come to market.
I think the timing for that, by the time you'll see any meaningful impact to the spend line is -- that shows up in anything, is in the 2014 kind of timeframe, because we can do the things that we need to do well within the budget.
So, I don't think it's anything in the next few years that's going to materially change our story.
Peter Kim - Analyst
Great.
And if I could just have a quick follow-up.
You guys released a new product for the LEDs, I was wondering if you could kind of show us what your views are in terms of the market size and what your potential could be, let's say, this year and next year?
Mark Dentinger - EVP and CFO
Sure.
Yes, there's -- we're seeing pretty healthy business outside the core, in the -- what we call the non-semi space, and we're at 5% of the bookings for last quarter.
So you go forward, you're in a $250 million, $300 million run rate for non-core, and that's up from pretty much zero four or five years ago.
So that's been good for the Company, I think there is a lot of growth potential overall in the non-core semi, including high-brightness LED.
I think the growth rate on that is high.
It's probably 15% to 20% growth rate going forward.
But that particular portion is a relatively small market.
So, again, we think that rate will grow over time.
But high-brightness LED -- maybe that business could become $100 million in the next three years.
We can get it to that.
It's certainly not there yet.
But we have a full position, we're a leading share, and we have great technology, and we're working actively with those customers.
And we bring real value to that.So, we think that will grow over time.
But it's inside of that, as I said, 5% to 6% of our overall business.
Peter Kim - Analyst
Great.
Thank you.
Operator
And your final question comes from the line of Jagadish Iyer from Arete Research.
Your line is open.
Jagadish Iyer - Analyst
Yes, thanks for taking my question, Rick.
I have two questions.
First one is that, as you enter calendar '10, can you give us an update on how your market share ended, at least for your core products?
And can you share with us what you might have in term of targets for '11, please?
I have a follow-up.
Rick Wallace - President and CEO
Yes.
Market share ended up pretty strong.
We gained some share during the year.
There are always puts and takes to that as you go through the year, depending on exact configurations of who's buying.
But overall, part of our strength in 2010 was in market share, and we did that both through new products, but also just working very closely with our customers.
So, very strong on that.
I'm not sure I understood the -- was the forecast for 2011 in terms of share?
Jagadish Iyer - Analyst
Yes, in terms of how many -- yes, exactly.
What do you plan to achieve, at least?Is there any targets that you can share with us, please?
Rick Wallace - President and CEO
Well, we certainly don't expect our share to go down.
We don't have a target to have the share go down, but we do have shares -- we target to grow share.
We've done a good share in the macro inspection market growing market share, and we've actually done a good job in review.
And I think that trend continues as we contemplate our product roadmap and the reception that some of the early meetings with customers are having in terms of next-generation products.
So, we expect to be able to grow share in the segments where historically we haven't had a leading position.
And I think we'll build on the strength in the ones that we do.
So, as we look forward, we're investing very heavily to continue to have our market leadership position in those core markets.
Jagadish Iyer - Analyst
Okay.
And just a follow-up, I wanted to find out, you are going to generate lots of cash this year, any more on buybacks or hike in dividends, please?
Rick Wallace - President and CEO
Yes, I'll let Mark take that one.
Mark Dentinger - EVP and CFO
Yes, we signaled that we would continue with our buyback program into Q3.
And as part of our annual review of both our strategic plan and our capital structure review, we will probably be looking at that over the next couple of quarters.
And if we have an update, we will certainly indicate it out to you guys, as part of our regular communication plan.
Jagadish Iyer - Analyst
Thank you.
Operator
At this time, I would now like to turn the call over to Mr.
Lockwood.
Sir, please go ahead.
Ed Lockwood - Sr. Director, IR
Thank you, Sean.
And, we'd like to thank everyone for joining us on our call this afternoon.
A replay of the call will be available on our website by about 5.00 Pacific Time, and will be accessible throughout the end of the quarter.
Once again, thank you all for your continued interest in KLA-Tencor.
Operator
Ladies and gentlemen, this concludes today's conference call.
You may now disconnect.