科磊 (KLAC) 2011 Q3 法說會逐字稿

Hello.

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 third quarter fiscal year 2011 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)

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

Ed Lockwood, Senior Director, Investor Relations.

Please go ahead, Sir.

Thank you, Sean.

Good afternoon everyone and welcome to KLA-Tencor's third quarter fiscal year 2011 earnings covered 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 third quarter results for the period ended March 31, 2011.

We released these results this afternoon at 1.15 PM Pacific time.

If you haven't seen the release, you can find it at 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'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 disruptions 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 our filings we make with the SEC from time-to-time, including our fiscal year 2010 form 10-K and current reports on form 8-K.

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

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

And with that, I'll turn the call over

Thanks, Ed, thank you all for joining us on our call today.

I'll focus my commentary on summary highlights of our March quarter results and provide guidance for June.

Then, I will turn it over to Mark for more detailed review of the financials and we we'll conclude with Q&A.

KLA-Tencor's March results features another quarter of high levels of demand, record quarterly revenue and earnings and strong cash flow's.

These results show KLA-Tencor's market and technology leadership and the dedication of our global workforce, driven by our culture of innovation and focus on the customer.

They also demonstrate the strength of our business model and its profits and cash generation ability, as well as our continued commitment to delivering industry-leading financial performance.

That performance enables us to return value to shareholders in the form of dividends and share repurchases at a level that sets the Company apart from our to our technology peers.

Here are some highlights of the Q3 results.

New bookings grew 18% sequentially to finish $853 million, representing the second highest quarterly bookings level in company history.

On our January earnings call, we gave an initial range of bookings guidance for the March quarter to be flat to up 20%, Then in February, we updated that view by observing the bookings were trending to the top of the range or above.

The final bookings results came in just below our updated outlook.

Due in part to order timing issues that emerged late in the quarter.

Third quarter revenue grew 9% compared with December, ending above the guidance range at a record $834 million, and we ended Q3 with over $1.4 billion in total backlog, positioning the Company to continue to deliver revenue and profitability at historically high levels as we move ahead.

We also achieved a new high in quarterly, non-GAAP net income of $225 million or $1.31 per diluted share in Q3.

Underlying these record earnings were gross margins of 61.3%, and record operating margins of 38.6%.

Clearly, the value we are creating for our customers and in helping them solve their most complex yield challenges is being reflected in the strong at option and record financial performance we are reporting today.

Cash flow from operations was at a healthy $244 million in Q3, and our balance sheet is strong, ending the quarter with $1.8 billion in cash and investments.

And, consistent with our continued commitment to return value to shareholders, we repurchased approximately $58 million of our stock in Q3, in addition to paying our regular orderly dividend of $0.25 per share.

Turning now to some specifics on the current demand picture.

Orders in March quarter demonstrated the continuing trend of high demand we are experiencing in the cycle.

In fact, in the past four quarters, KLA-Tencor has booked over $3.3 billion in new orders, for an average of about $830 million per quarter.

This amounts to 14% growth over the previous four quarter company high for new orders set in the 2006 to 2007 timeframe.

This growth is a result of our market leadership, strong at option in the core, growth in services and the addition of new markets.

The order book for March shows another strong quarter from the foundries.

The foundry bookings at 58% of total new orders.

Foundry demand remained at a high level as increased technical complexity at the leading edge, intense competitive dynamics and rapid growth of new fabulous designs are all driving very strong at option at process control.

Bookings from memory customers grew to 27% of the total in the March quarter, with Nan accounting for 73% of memory orders in the quarter.

And logic was 15% of bookings in March driven by requirements to support 22 nanometer production ramps this year, and in 2012.

Though there are some uncertainty clouding short-term visibility in the marketplace today, overall market fundamentals remain healthy.

The market leaders are reporting strong revenue growth and profitability.

It is our view that the industry is in a multi-year growth cycle.

Fuelled by customer adoption of new, breakthrough products and services that leverage the convergence of computing, the Internet and mobility.

In this dynamic environment, our leading-edge customers continue to invest at a high level to advance more is law to leverage the competitive and cost advantages of having world-class manufacturing capabilities at the leading edge.

As a result, industry capital intensity is on the rise.

And with the increasingly more complex technical challenges our customers are facing as they evaluate multiple options for driving more is law, we are also seeing higher adoption of process control.

These conditions play into our strength as a market leader.

And with our backlog, industry-leading business model, and strong balance sheet, KLA-Tencor is well-positioned to continue to drive superior financial performance and shareholder returns as we advance through this cycle.

Moving now to June quarter guidance.

Gross bookings are projected to be flat to down 20% in the fourth quarter.

Revenue is expected to be in the range of $840 million to $900 million and non-GAAP earnings in the range of $1.28 to $1.44 per share .

With that, I will turn the call over to Mark for his review of the financial results for the

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, any 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 on 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.

There was a $0.09 per share difference between this quarter's GAAP and non-GAAP earnings, the difference consisted of acquisition related amortization charges of a $8 million before taxes, or $0.03 per share after taxes.

Continuing expenses related to indemnification obligations of former corporate officers related to stock options back-dating litigation of about $3 million before taxes, or $0.01 per share after taxes.

And, an $8 million non-cash tax charge resulting from a cumulative shortfall position in our employee stock activity.

Removing this charge from GAAP earnings increased our non-GAAP earnings by $0.05 per share.

Q3 new orders were $853 million, and net orders were $856 million .

The regional distribution of new systems orders in the quarter to quarter change in distribution, were as follows.

The US was 25% of new systems orders in Q3, up from 19% in the December quarter, Europe was 16% of new systems orders, up from 10% in Q2, Japan was 17%, up from 5% last quarter, Korea was 9%, down from 16% last quarter, Taiwan was 23%, down from 45% last quarter, and the rest of Asia was 10%, up from 5% in Q2.

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

Wafer inspection was 48%, compared to 30% last quarter, reticle inspection was 10%, down from 26% last quarter, metrology was 19%, down from 20% the prior quarter, Solar, storage, LED and other non-semi was 6%, up from 5% last quarter.

And services were 17% of new orders in Q3, down from 19% last quarter.

Finally, for semiconductor systems, the approximate distribution of new orders by market was.

58% of orders in Q3 were for foundry customers versus 72% in Q2; logic customers were 15% of orders in Q3 versus 8% in Q2; and memory orders were 27% in Q3 up from 20% in Q2.

Looking forward, we expect that new orders for our fiscal Q4 will be within a range of flat to down 20% from Q3 new orders, or a range of approximately $680 to $855 million.

In Q3 we shipped $823 million versus $828 million last order.

The shipment number includes both systems shipments and services revenue, and we expect shipments of $850 million to $900 million in Q4.

Total backlog at the end of Q3 increased slightly from December 31 and we ended the quarter with $1.4 million in total systems backlog.

The backlog at March 31, 2011 includes $383 million of revenue backlog, for products that have been shipped and invoiced but yet have not been recognized as revenue, and a little over $1 billion in systems orders that have not yet shipped.

Total revenue for Q3 was $834 million, up 9% from $766 million last quarter.

Systems revenue for Q3 was up 10% to $691 million, compared with $628 million in Q2, and services revenue was $143 million in Q3, up about $4 million from Q2.

Our expectation for total revenue in Q4 is a range between $840 million and $900 million.

Non-GAAP gross margin was 61.3% in the March quarter, up 1.2 percentage points from December.

Gross margin percentage improvement from the last quarter was largely a function of volume increase in systems revenue mix.

For Q4, we are expecting gross margin improvement consistent with our long-term model of 60% to 70% incremental margin on the Q4 revenue increase.

Operating expenses were $190 million in Q4, and were split evenly between R&D and SG&A.

OpEx was up about $6 million from the December quarter, mostly for variable compensation, and we expect a small increase in our operating expenses in Q4.

OIE was a net $10 million expense in Q3, about $7 million lower than Q2.

The OIE decrease from last quarter followed a write down of an equity investment in our venture portfolio during Q2.

For modeling purposes, we expect OIE to be a net expense of approximately $11 million in Q4.

In Q3, our non-GAAP income tax expense was $87 million or 28% of pre-tax income versus $72 million in Q2, which was also 28% of pre-tax income.

Non-GAAP net income was $225 million or $1.31 per share in Q3, up from $1.10 last quarter.

If we apply our model tax rate of 30%, our Q3 non-GAAP earnings would have been $1.27 per share.

At the revenue range I previously mentioned, we would expect our Q4 non-GAAP earnings to be somewhere between $1.28 and $1.44 per share.

The weighted average shares used to compute EPS in Q3 were 171.3 million, versus 169.5 million in Q2.

Our average share count rose in Q3 because the diluted share count was based on a higher stock price.

During Q3, we spent about $58 million repurchasing about 1.3 million shares and as of March 31, 2011, we had approximately 10.4 million shares available under our current repurchase authorization.

We anticipate continuing to repurchase shares in the June quarter, for guidance purposes we are modeling the same average share count as Q3.

Turning to the balance sheet, cash and investments ended the quarter at $1.8 billion, up about $200 million from the end of December.

Cash generated from operations was $244 million in Q3 compared with $194 million in Q2.

Net accounts receivable ended the quarter at $566 million, up from $531 million in December.

DSOs were 62 days at March 31, were 63 days at the end of December.

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

Net inventories increased by $52 million from December 31, and ended the quarter at $557 million.

Inventory turnover based upon GAAP cost of revenues is 2.5 turns in Q3, versus 2.6 in Q2.

Capital expenditures were $14 million in Q3, versus $12 million in Q2.

Total head count at March 31 was 5,386, up from 5,267 at December 31.

We expect our head count will increase slightly during Q4.

In summary, our guidance for Q4 is -- new orders flat to down 20% from Q3, total revenue between $840 million and $900 million, and non-GAAP EPS between $1.28 and $1.44.

This concludes our prepared remarks on the quarter.

I will now turn the call back over to Ed to

Okay, thank you, Mark.

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

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

And so operator, we are ready for our first question.

(Operator Instructions).

Krish Sankar, Bank of America Merrill Lynch.

Rick, a couple of them.

Number one, you spoke about the order timing issues.

Can you be more specific as to -- do these get pushed into the June quarter, or do they get pushed beyond that, and which customer verticals are they from?

Both foundry and memory, and they got pushed into June.

To June, okay.

And when you look into your June quarter order mix, what do we think about from a mixture point, whether its foundry, RAM, DRAM, logic?

We finished about 27% in memory for March, and that looks pretty consistent with what we're seeing for June.

Logic was 15%, we think that's going to be up to about 20%.

And foundry was 58% and we see that dropping down to about 51%.

Thank you.

Very helpful.

C.J.

Muse, Barclays Capital.

Rick, I think the debate out there is whether we're in a pause right now, or the beginning of a downturn.

In your prepared remarks you talked about a multi-year cycle, and given your greater leverage to foundry and logic, and clearly that's an important driver of sustaining the cycle.

Would love to hear your thoughts on what gives you the confidence that this, in fact, is a multi-year cycle and that this is just a pause?

I think that the reaction that our customers have had, and I have talked to many of them-- both semiconductor, even the fabless guys as well as the manufacturers -- is that the pause that we're seeing is largely driven by some of the uncertainty that was created by the events in Japan.

I think that, that put the brakes on what was otherwise still tremendous demand out there.

So, I expect, and what we're modeling, is a couple of quarters of digestion of all the capacity that's been purchased, but then a resurgence.

And for us, because KLA-Tencor's been leveraged against the challenges of Moore's Law, we're seeing now in memory some of the early phenomenon we saw in foundry, which is the need for more inspection measurement as people push on their design rules.

So as I said we see probably a couple of quarters and then growth returning.

Customers are still talking about a lot of projects later in the year, and I just think it's a momentary delay in that.

And, your sense is based on your conversations and those projects you talked about, that you could see a pickup sometime in the second half, or is it something that you would expect in 2012?

It's very hard, CJ, to forecast that far out, but the conversations we're having lead more towards the second half, the end of the second half.

I think if you think around the December quarter, but historically, June is usually a pretty good quarter for us, but we see some downdraft now, and then it depends a lot on general, overall consumer confidence I think will be part of the driver, but I'd say more toward the end of the calendar year, then into 2012.

Very helpful.

Thank you.

Jim Covello, Goldman Sachs.

Rick, the issue you had mentioned, the fact that June is usually a little bit better for you.

Are you seeing any of those dynamics in June that's kind of partially offsetting some of the other things that are going on?

Or, is it just not your typical season or year-end?

Jim, it's hard to call it because it's early, and I think we're 6 weeks back from -- about 6 weeks from the events in Japan, and that, I think, for a lot of people got people to back off.

I'd say in the last couple of weeks things have actually strengthened a little bit in our view of June.

At the quarter that we ended, even though we were off what we thought we were going to do in March, it's still our second-highest quarter ever.

And so, we're guiding flat to down 20 in anticipation there may be some room to see the order book fill up as we get toward the end of the year.

But I think it takes a little while for this uncertainty to work its way through and that's really what we're trying to factor in on that as well.

And then, if I could just ask the follow-up.

You talk about the capital intensity going higher, and that could be true, but if customers don't need capacity because they have too much supply, then it doesn't really matter whether it costs more, less or the same to add capacity this cycle versus the last cycle.

Isn't the amount of capacity or excess capacity that some customers may be sitting on at the end of the year a bigger driver for the business in 2012 than the capital intensity question?

For sure.

I think the question will be what happens to the advanced starts, because right now the softness we've seen is actually not in the most advanced starts, it's in the older technologies.

And so, the intensity, of course, is driven by the newer stuff and there's still a lot of take-ups that are coming through the system.

So, that's part of what we see coming down the road, is a lot of advanced technology work.

So for KT and in particular for us, we think that leverages our strength as well, even if there weren't as much capacity coming on line as the challenges associated with the new technology.

That's helpful.

Thanks so much.

Good luck.

Stephen Chin, UBS.

Just a follow-up, Rick, on the orders by customer type in the June quarter.

How are you modeling NAM versus DRAM in the June quarter?

Is NAM likely to remain very strong customer type not only in June but I guess through the rest of year?

Yes, we are definitely seeing more strength in NAM.

NAM was about 73% of the total of the memory business that we had, and we see it in the same kind of range for the June forecast.

As you well know, Stephen, the DRAM is driven by PC demand, where we've seen softer demand, and that is not something we are modeling short-term.

I think there is a longer-term trend there, but right now that's not where the business is coming.

Thanks, and could I just ask a question on KLA's opportunity to help rebuild some of the customers' semiconductor wafer facilities in Japan?

Is there an estimate on how you would size, and what kind of investment might be required to help these customers rebuild the raw wafer facilities, and do you think this is perhaps a multi-year investment cycle for raw wafer customers?

There's certainly a tremendous amount of energy on getting those [fabs] back up and running, and the latest estimates report I got, even as recently as yesterday, was a desired pull-in from getting the fab fully back up.

And so we're seeing some opportunity there where in some cases we've got some critical tool types for them that were working very hard to get back into production, and then there's some additional capacity I think that's going to be required, not just there, but around the world to balance some of the shortfall that we're seeing there.

So, some opportunity.

We don't give it a particular dollar size.

The wafer component of our business is meaningful but I would say it is still on a relative basis reasonably small for the overall KT footprint.

Thanks, Rick.

Satya Kumar, Credit Suisse.

Rick, I was wondering how you see the spending pattern in the foundry space from first half to second half; two big foundries have sort of guided their CapEx to be about two-thirds of the total CapEx.

I was wondering how you see that tracking through process control?

I think there is no question,we benefited so far in the year and the last year from the foundry spending.

When we model the overall year to be up, still we think 10% to 15% of the overall CapEx for the year, very much dependent on how long this pause goes on, and we expect, even in the June quarter, our reliance on foundry to reduce down to the 50% and obviously we are at 72% if you go back to December.

So we are seeing the other segments increase for us.

I think foundry -- there's a couple of factors that are having to be taken into account right now.

It's not just 1 or 2; there are 4 players that are actively investing in foundry.

And, we're still seeing that level of investment, although there has been caution recently.

So I would say if there is an upside to our overall, fiscal -- I'm sorry the rest of the calendar year, it would be that the foundries actually increase their investment off of what we are modeling.

We are modeling that they -- perhaps a good part, I would say two-thirds of the overall, but a good part has been committed already.

Okay.

How do you see the trend on the other business?

Data storage, solar, packaging businesses?

I'm assuming on a different sort of spending cycle I was wondering how to think about the growth there over the next three quarters?

They are very different, those 3 in particular.

I would say that we are seeing good business, but on a relative basis were up quarter-on-quarter in those businesses held in there in terms of that growth rate.

I think that in [PB], we're seeing some overall strength for us and opportunity, but there is some hesitation recently in that market as well.

[Hybrid LED] has it's own dynamic.

There are more yield challenges.

We're seeing good opportunity there, and I think the disk drive stuff has been a little bit slower and probably we won't see as much, although we have some great product offerings there.

So we're modeling them at 6% of the overall business, and probably throughout the year, 6% to 8% is about the right way to think about those businesses for us.

$200 million to $250 million, and I think over time they'll grow, but the growth is not going to be linear.

Yes, you guys presented on the [SPIE] conference on [EUV lithography].

Is that something we should think about in terms of an opportunity?

Well, we are very early days on that, so I think, although I know you are a long-term guy, that's more like the 2015, 2016 timeframe for us.

So, that's quite a ways out there, but we have an exciting technology and a lot of customer interest, but we're not going to see the impact of that to our revenue picture for several years.

Thank you.

Timothy Arcuri, Citi.

Just a follow-up on that question about litho.

EUV is really struggling right now, obviously, and I'm wondering whether one or the other outcome of that is better for you, because if immersion gets extended, that's probably, I would think, and better deal for you the next couple of years because it will require more inspection I would think, so I get your been on that.

And secondly, I wanted to see whether, in the past couple of weeks, pretty much everybody has been talking about some push outs.

I'm wondering sort of what the tone is, with respect to broader push outs or if it's still very customer specific and I did join the call late, so you might have answered that.

Yes, Tim, good question.

The first one on litho.

We're relatively agnostic.

I think that the challenge with EUV there's plenty of challenges, it's already driving business for us in the reticle inspection, even for inspecting blanks as well as inspecting the early layers.

Double patterning pushes very hard on some of our metrology capabilities, specifically overlay.

I think the other trend that is out there is as EUV continues get pushed, there will be more and more interest in going to 450 as a way to reduce cost, and I would say that I'm far more of the belief that, that's going to happen in the last 6 months than I was in the last year before that.

I just think there's going to be a desire for productivity which is good for KT but in a different timeframe.

So as it goes forward, were defiantly getting business out of the EUV investment that's going on, but we are benefiting from double patterning.

So I don't think it really swings too much on us either way.

In terms of push outs, we've seen the same impact others have seen.

I don't think it's limited to 1 or 2 customers.

I think there is a broader sense out there of a pause, and I think that's part of what we're seeing is a general pause in the market as people try to assess the impact.

A lot of it's second order.

I don't think there are necessarily saying on their own, they're just trying to wait and see what happens.

Our estimate is we're about 6 weeks through since the initial events in Japan.

I'd say in the next 6 weeks we'll get a lot more clarity as we get later in -- toward the end of the June quarter.

Thanks a lot.

(Operator Instructions).

Mahesh Sanganeria, RBC Capital Markets.

Just to follow up on one of the answers you gave.

You said you're guiding down 10%, but hopefully as we progress through the quarter maybe the orders fill up, being your stronger quarter.

Where would you get the upside from?

Will it be -- are you expecting on the memory side or logic side?

Well , Mahesh, we said flat to down 20, and obviously the midpoint of that is down 10.

I think it is hard to say.

Right now, we're certainly looking at caution, I'd say, across the board is what's going on, but still with a level of investment.

I think that certainly some of the backing off that we have seen in some of our customers are both in memory and in foundry, so, it would just have to be who happens to come up.

The other thing is that you know, based on our product mix and portfolio, we do have some high-dollar products that all of you have to see is one or two of those come in, and that would move us up in the average.

So, I wouldn't say it's specific to any particular segment.

I think it's more general, and I think it could be from a number of places.

But, we monitor on a weekly basis with the order book looks like, and there are puts and takes

Actually, that's a very interesting point you talked about.

I'm sure you're talking about reticle inspection.

And, just a follow-up on that.

How is that reticle inspection spending dealing with the overall capital spending?

Is there a -- are there usually aligned or is there an offset, and if there is an offset, can you talk about a little bit on that one?

You know, it's not -- I'd say it's uncorrelated.

It may occasionally look, if you mapped it out, that it's based upon some kind of correlation, but I think there are a couple of driving factors.

One has to do with advanced design starts.

When those increase and people reach a capacity point, were they need an incremental number of tools, you see big movement.

These are high-dollar, low number of tools.

So, incremental movement is a big shift.

The other thing I think that happens is, along the same lines of there's technology transition, to EUV for example, you'll see initial investment associated with being able to handle that transition.

So, we kind of get in both but it's more related to what's going on in the design front, and to some degree capacity of advanced masks.

And when that happens, we see trigger.

The other thing that happens is when we introduced new capability, we typically create demand for that, and you'll see that we get a large number of orders, and that will actually work its way through in revenue, which is part of where our strength in our backlog is, and why we are $1.4 billion in backlog, is some of those reticle tools that came out last year have booked, but we're still working on deliveries of them.

Okay.

Thank you very much.

And actually we have no further questions at this time.

I'll turn the call back over to our presenters for any closing remarks.

Okay, thank you, Sean, and we'd like to thank everyone else for joining us this afternoon.

A replay of this call will be available on our website at about 5 o'clock Pacific time and it will be accessible through the end of the quarter.

Once again, thank you your continued interest in KLA-Tencor, and we look forward to speaking with you soon.

This concludes today's conference call, you may now disconnect.