科磊 (KLAC) 2012 Q1 法說會逐字稿

Good afternoon.

My name is Steve.

At this time I would like to welcome everyone to the KLA Tencor first quarter fiscal year 2012 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'll now turn the call over to Ed Lockwood, KLA Tencor Investor Relations.

Please go ahead.

Thank you, Steve.

Good afternoon, everyone, and welcome to KLA Tencor's first quarter fiscal year 2012 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 to discuss first quarter results for the period ended September 30, 2011.

We released these results this afternoon at 1.15 PM Pacific.

If you haven't seen the release you can find it on our website at www.kla-tencor.com or call 408-875-3600 to request a copy.

A simulcast of this call will be accessible on demand following its completion on the Investor Relations section of our website.

There you'll also find the 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, 2011, 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 these 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 2011 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, any updates we do provide will be broadly disseminated and available over the web.

With that I'll turn the call over to Rick.

Thank you, Ed.

And welcome everyone to our first quarter fiscal year 2012 earnings call.

September quarter results show KLA Tencor executing well in a difficult industry environment, capitalizing on our market leadership and strong business model to deliver solid operating performance and return significant cash to our shareholders.

Revenue was $796 million in Q1, just above the mid point of guidance.

And non-GAAP net income per share was right at the mid point of guidance of $1.17.

We generated $219 million in operating cash flow in the quarter, paid our quarterly dividend of $0.35 per share, reflecting the increase in our dividend level announced in July, and repurchased approximately 1.8 million shares of common stock.

Ending the quarter with a healthy $2.1 billion in cash and securities.

Looking at the September demand environment, persistent economic weakness compounded the normal cyclical factors facing our industry, leading customers to scale back or delay capacity expansion plans.

Spending was concentrated among the market leaders and focused primarily on supporting technology development at the leading edge.

New orders for KLA Tencor in Q1 were $486 million, down 43% sequentially.

This result was in line with our revised outlook we gave on September 8 and reflects the general demand climate I just outlined.

Although overall order levels were low in Q1 as expected, the end market story is highlighted by relative strength from the foundries in the quarter.

Foundry bookings were 57% of new orders in Q1.

And we are expecting growth from the foundries to continue in Q2 with demand coming from selected market leaders investing to ramp their 28-nanometer designs to enable advanced technology development at the next nodes.

Bookings from logic customers were 22% of the total in September quarter.

And memory orders were low at 21% of the total.

Setting aside the macro-economic and cyclical factors currently impacting the industry, we look ahead to 2012 with a good deal of optimism as the forces that propel KLA Tencor's growth and market leadership remain solid.

Though overall equipment demand is experiencing a cyclical pause, technology investment remains a priority for the market leaders as they execute their competitive strategies at the leading edge.

This technology focus is favorable for KLA Tencor, as process controls plays a critical role in helping IC manufacturers address the increasingly more complex yield challenges associated with qualifying new technologies.

And this is driving higher adoption in our core markets.

Given KLA Tencor's market leadership, strong new product acceptance, and industry-leading business model, we think the stage is set for the Company to outperform in 2012.

Now turning to the guidance for the December quarter.

We exited Q1 with new orders picking up in the final days of the quarter.

We expect this momentum to continue in Q2, highlighted by strength from the Tier 1 foundries and growing adoption of our latest generation Brightfield technology and leading-edge memory.

December bookings are expected to be up 35%, plus or minus 10%, compared with September.

Revenues for the quarter are expected to be between $600 million and $650 million.

With non-GAAP earnings in the range of $0.56 per share to $0.72 per share.

With $1.1 billion in backlog as of September 30.

And our anticipated order growth in Q2, we expect revenue growth to resume in the first quarter of calendar 2012.

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

Mark?

Thanks, Rick, and good afternoon, everyone.

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 writedowns of intangible assets associated with acquisitions, restructuring related charges and credits, and any cost or credits which are outside of our core operations including unusual tax items.

There was a $0.04 per share difference between this quarter's GAAP and non-GAAP earnings.

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

Most of my prepared remarks will be 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.

Q1 new orders were $486 million and net orders were $481 million.

Both order figures were down about 43% from last quarter.

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

The US was 25% of new systems orders in Q1, down from 32% in the June quarter.

Europe was 7% of new systems orders, down from 8% in Q4.

Japan was 8%, down from 22% last quarter.

(inaudible), up from 13% last quarter.

Taiwan was 22%, up from 21% last quarter.

And the rest of Asia was 9%, up from 4% in Q4.

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

Wafer inspection was 28% compared with 42% last quarter.

Reticle inspection was 18%, up from 17% last quarter.

Metrology was 14%, down from 18% in the prior quarter.

Solar, storage, LED, and other non-semi was 9%, up from 6% last quarter.

And service was 31% of new orders in Q1, up from 17% last quarter.

Finally, for semiconductor systems, the distribution of new orders by product and the quarter-to-quarter change in distribution was as follows.

57% of new systems orders in Q1 were from foundry customers, up from 43% in Q4.

Logic customers were 22% of new orders in Q1 versus 27% in Q4.

And memory orders were 21% in Q1, down from 30% last quarter.

Looking forward, we expect that new orders for Q2 will be up by 35% plus or minus 10% from Q1 new orders.

Or a range of about $605 million to $705 million.

In Q1 we shipped $690 million versus $892 million last quarter.

The shipment number includes both systems shipments and services revenue, and we expect shipments between $650 million and $700 million in Q2.

Total backlog at the end of Q1 decreased by $316 million from June 30.

And we ended the quarter with $1.1 billion in systems backlog.

The backlog at September 30, 2011 included $275 million of revenue backlog for products that have been shipped and invoiced but have not yet been recognized as revenue.

And about $780 million in systems orders that have not yet shipped.

Total revenue for Q1 was $796 million, down 11% from $892 million last quarter.

Systems revenue for Q1 was down 13% to $650 million.

And services revenue was $146 million, down about $3 million.

Our expectation for total revenue in Q2 is a range between $600 million and 650 million.

Non-GAAP gross margin was 58% in the September quarter, down from 60.7% in June.

About half of the quarter-to-quarter decline in margin percentage was attributable to higher excess inventory reserves and excess capacity.

And a portion related to the lower revenue volume.

For Q2, we are expecting gross margins between 57% and 58%.

Operating expenses were $198 million in Q1 compared to the $184 million in Q4, which was benefited by a $10 million payment from Spansion following bankruptcy in 2009.

Research and development expenses were $105 million in Q1.

And selling, general and administrative expenses were $93 million.

We expect operating expenses to be about $200 million to $205 million in Q2.

OIE was the net $7 million expense in Q1, down about $3 million from Q4.

For modeling purposes we expect OIE to be a net expense of approximately $10 million in Q2.

In Q1 our non-GAAP income tax expense was $59 million or 23% of pre-tax income versus the 26% rate in Q4.

The Q1 tax expense percentage was lower than in Q4 in part due to a favorable resolution of a US federal tax audit during Q1.

Non-GAAP net income was $198 million or $1.17 per share, down from $1.50 last quarter.

If we apply our model tax rate of 26%, our Q1 non-GAAP earnings would have been $1.12 per share.

At the revenue range I previously mentioned, and using a tax rate of 26%, we would expect our Q2 non-GAAP earnings to be somewhere between $0.56 and $0.72 per share.

Weighted average shares used to compute EPS in Q1 were 169.8 million versus 170.9 million in Q4.

During Q1 we spent $67 million repurchasing about 1.8 million shares.

And as of September 30, 2011, we had approximately 7.3 million shares available of current repurchase authorization.

We also paid $58 million in dividends during Q1.

We anticipate continuing to repurchase shares, as well as paying a quarterly dividend of $0.35 per share in Q2.

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 $2.1 billion, up about $62 million from the end of June.

Cash generated from operations was $219 million in Q1 compared with $290 million in Q4.

Net accounts receivable ended the quarter at $462 million, down from $583 million at the end of June.

DSOs were 53 days at September 30 versus 59 days at June.

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

Net inventories increased by $37 million from June 30 and ended the quarter at $613 million.

Inventory turnover based upon GAAP cost of revenues was 2.2 turns in Q1 versus 2.5 turns in Q4.

Capital expenditures were $12 million in Q1, down from $3 million from Q4.

Total headcount at September 30 was 5,047, up from 5,492 at June 30.

We expect our headcount will increase slightly during Q2.

In summary, our guidance for Q2 is new orders up between 25% and 45% from Q1.

Total revenue between $600 million and $650 million.

And non-GAAP earnings between $0.56 and $0.72 per share with a tax rate of 26%.

This concludes our prepared remarks on the quarter.

And I'll now turn the call back over to Ed to begin Q&A.

Thanks, Mark.

We'll now be happy to take your questions.

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

With that, Operator, we're ready for our first question.

(Operator Instructions) Satya Kumar of Credit Suisse.

Rick, sometimes I read the press nowadays, it feels like the world is ending.

But you guys are guiding orders up strongly and so are some of your peers.

Was wondering if you could add some more perspective on how the order rates are increasing as much as they are, given utilization that appeared to be somewhat lower?

Specifically I'm talking about the foundry segment.

Is there any concentrated orders that are happening that may not persist beyond the November quarter?

Or was wondering if you can add some perspective.

Sure, Satya.

Definitely world not ending, not this quarter.

And we see strong demand, primarily focused on, I'd say, 28-nanometers, would be the slogan.

It's all about 28-nanometer yield and the investment going on for that.

Obviously, there's demand for it and there's challenges with yield.

I think in the last couple quarters, some of the products, it's become apparent to our customers the value of those products.

So we have some situations where we've got products now that we don't have slots out through June and so we're scrambling to get capacity in some of our leading-edge technology-enabled products.

And we're seeing that from multiple foundries.

So right now it looks very good.

To what extent are the yield issues at 28-nanometer for logic manufacturing mitigated at the moment?

And do you see customers ordering inspection equipment for multiple technology nodes?

One of your customers talked about going all the way to 14-nanometer.

Do you see more than the normal number of nodes being ordered?

Perhaps you might be able to quantify how much of your orders are 22-nanometer and below.

If you have a sense of that it would be good.

It's always true that they want to extend the technology out.

So anybody that orders a new tool today will expect the performance to give them some insight and capability as they extend.

And certainly for 22 and 20.

But since the manufacturing ramp right now is happening in 28, and as people see the latest technology, that's really where the main application is.

But I would say a year ago we had people buying our technology that we had available then, trying to do 28.

What's happened is they realized there are critical defect types and measurements they can't make, or can't make as well.

So they are always buying out but they don't often realize the value of the new tool until they get a comparison.

And so, often we're competing with our own generation, prior generation, and we have to share the differentiation which is happening now.

But they want insight into their R&D stuff, as well.

Krish Sankar with Bank of America.

Rick, in terms of your December bookings, can you help us figure out the breakdown?

I understand it's driven by foundries, but can you give us some more granularity?

And also, are you seeing any kind of pickup in capacity related purchases, given your long lead times?

Or do you think it's also technology related?

Right, Krish.

Not much in terms of capacity.

More technology oriented.

What we're modeling right now is foundry very strong in the December quarter, in the 75% range for the order book.

And logic dropping back down to 9%.

And then the remainder of the semiconductor is at about 16% for memory.

And most of that NAND.

So very strong in foundry.

And multiple geographies for foundry, so it's not one location.

In fact, when we look at the geographies, just to give you a sense of that, US 24% is what we see.

Europe 17%.

Taiwan 28%.

Korea 13%.

So it's really spread across from a geography perspective.

But much more focused on foundry.

So along those lines, that would probably put your December orders from foundries close to $500 million, which is what you had in Q1 of this year, calendar Q1 of this year.

And was the concentration in Q1 much different from what you're seeing in December?

In other words, was it mostly one guy ordering in Q1 versus in Q4?

You're talking calendar Q1?

Yes, calendar.

If I go back to calendar Q1 more concentrated, I believe, in calendar Q1.

And so it's broadened a bit.

I don't have that data readily available but just given the composition I know that we have out there now, it's literally all the guys that are playing in advanced nodes are active right now.

And then a follow-up for Mark.

I noticed your R&D ticked up quite a bit.

I understand there's some investment going on in EUV.

Looking at the fact that you'd probably be investing in 450 down the road, is this a new normal run rate for R&D?

Or do you think it's going to scale back down sometime in calendar 2012?

I think it's likely to stick around, the levels you're seeing right now, and maybe even tick up slightly as we go through this year.

We'll have to see how the headcount comes through.

And R&D is at least partially a function of the timing and materials purchases and where we are in the R&D cycle.

But as it is right now, we're looking at, the rest of our fiscal year anyways, with the R&D number probably north of $100 million per quarter.

Not a rapid ramp up from there but for a while we're planning to be here.

Atif Malik with Morgan Stanley.

This is [Vis Valuti] for Atif.

Based on your strong foundry outlook, do you think that rate at which foundries are ordering these technology, is this a rate, a ramp steeper than when the transition took place from 65 to 45, or 45 to 32?

Yes, no question it's steeper.

And I think there's a couple factors associated with that.

One is, the foundries tend to be pushing more leading edge than they were at that time.

They weren't leading as much in technology as they are now.

And that's driven by their customer needs.

If you look back in time too, there wasn't, back then, just take one company like a TI, had their own fab capability.

And now they might be ordering and they don't.

So the fabless community has increased and there's more intensity for advanced designs.

The other thing we're seeing is there are actually more design starts at this point in the cycle at 28-nanometer than there were even at 45.

So there's definitely a lot of customer interest in that capability.

The second question I have is there's a lot of activity in 3-D packaging, TSV areas, so I just want to get your thoughts on the opportunity for KLA's (inaudible) of these.

Thank you.

We're already very active in packaging.

And we have capability via the ICSO product line that we have.

So we believe we're in the sweet spot of the opportunities in packaging.

TSV is an interesting technology, has some capability.

We are constantly monitoring and investigating that.

But we don't have a meaningful play, nor do we see the longevity of that market in terms of an opportunity yet.

So we certainly have the technology to enter it but we're not there now and we continue to monitor it.

Jim Covello with Goldman Sachs.

This is Mark Delaney calling for Jim.

Rick, I was hoping you could help us understand a little bit more on the 28-nanometer foundry driver.

The roughly $275 million of foundry orders this quarter.

It sounds like you're guiding to about $500 million for next quarter, very high relative to historical levels.

I'm just wondering if you can help us put that in perspective in terms of maybe what inning you think that is with respect to the 28-nanometer ramp.

Great question.

We were surprised, as I mentioned earlier, in the market interest in some of our advanced technologies.

Most specifically wafer inspection has seen some real strong demand.

But also some of that is new penetration.

So we've had a real nice E-Beam Review business that's picked up and gained some real good share.

And that's partly contributing to it as we're seeing more market share.

And we picked some of that up in, as I said, E-Beam Review.

And that's based on the capability we have to review the defects that our advanced inspectors find, the unique capability.

So part of it is adoption of advanced technology, part of it is share, and part of it, frankly, is there are more foundry players struggling with their yield issues at 28.

And I think it's still relatively early in that.

And so we model the rest, as we look out the next several quarters, we think that bookings, the bottom for bookings, was September quarter.

And through our fiscal year we can see continued strength based on the challenges people are having, not just in the foundries but also some of the things we think are coming along in memory too.

So relatively early, mid in the 28-nanometer challenge.

And that will be followed by 22.

And then as a follow-up question, it sounds like you guys expect your logic business to be down in terms of orders pretty significantly next quarter.

I was wondering, when you think about your logic business, what are your expectations for new capacity adds throughout 2012 to maybe drive that higher.

Or do you think that's more of a run rate level?

Thanks very much.

No, the 9% is light.

And I think a lot of that was there were some new logic capacity that had been in everybody's plans and came out.

And I think that's a big part of that.

But 9% would be low on a sustained basis.

There was a time where logic was one-third.

We were one-third, one-third, and one-third.

And obviously we're not there now.

But I would expect that it would over time pick back up.

It's pretty lumpy as it is, especially with some of our advanced technologies.

Some of our more expensive tools are pretty lumpy in terms of how they go.

So I'd say that's a low number over time.

[Srini Sendarian] from Oppenheimer.

I just have a simple question.

What's your prognosis for 2012 in terms of WFE?

And if you cannot provide that, perhaps for the first half of 2012?

Srini, a simple question, a tough one to answer.

The way we're looking at 2012 right now, it's funny, I back up and I think how we saw the world back in July.

And then I'd say we went through an air pocket and it's looking more like it did back in July than it did in, frankly, August and part of September.

And things look a bit more robust.

So I think overall if I look out to 2012, I think CapEx, barring any macro events, which that's not a certainty, but barring that, the normal industry cycle I think we would expect to see the overall industry in the down 10% range for 2012.

Off of what we think will be a strong finish to 2011.

And so for KT in the first half, as we model it, we said in the prepared remarks that we think our revenue bottoms in the December quarter, and we expect, based on how we're seeing world, that things pick up from here.

I have just one follow-up.

In terms of 450-millimeters, what are your plans right now?

Our plans are to support the transition, which I think will happen at some point but I don't think there will be any meaningful production for quite some time.

Largely just based on the availability of the broad-based tool set.

But we're already selling tools.

Some of our advanced wafer air wafer inspection tools are going to some OEMs.

But based on the flow of that, we think it's several years before there will be pilot capability out in the market.

But all the tools that were in development now have plans to be able to support the 450 transition when it happens.

But I don't think it's going to be a meaningful part of our revenue for several years.

Thanks, just one short follow-up.

On the EUV, because EUV has been delayed, how much more spending do you expect to happen in terms of what it means to KLA?

For us to support EUV?

No just because the fact that EUV has been delayed so therefore there will be more number of material unit inspection steps that have got to go through your tools.

Okay, I see.

Yes, it's funny.

We're almost agnostic about it because there is opportunity.

There eventually will be opportunity in our reticle inspection to support EUV transition.

But in lieu of that, there's opportunity in metrology to support the multiple patterning, double patterning, and maybe even beyond that.

And so when we look at it, in the end it's a wash in terms of where we're going.

We will have investment for EUV.

We also, right now, can bridge the early nodes with our reticle inspection tool with the 600 series.

So we actually have some capability for that now.

So I think there's some support in terms of it will drive some of our business, but it's similar to what we've been modeling.

Jagadish Iyer from Piper Jaffrey.

Two questions, Rick.

So the first question is, given that your visibility is there until June of next year, how would you characterize by the segment in terms of wafer inspection, metrology, as well as reticle inspection going forward for the next two to three quarters, because your wafer inspection has pretty much dropped about 70% from the peak.

Yes, so we see December getting back.

We think wafer gets back to the 40% range and metrology back to about 18% and reticle closer to 15%.

And service becomes a smaller percent of the total at 20%.

And our other businesses probably run around it at 7%.

So not that different from historical.

We did have a September, as I said, an air pocket.

But at the end of the quarter, what we saw was pretty strong interest and that's part of the strength we see this quarter in the wafer inspection, particularly in the Brightfield.

So I think we get back closer to the historical run rate.

And reticle can be lumpy, as you know, depending on relatively low volume, high dollar tools.

And as we continue to grow, if we continue to go up from here, service gets smaller as a percent.

The second question is, as you look out on 2012, how do you see the foundries award playing out in terms of spending amongst the three major players?

I was just wondering, is it going to be one dominant player spending, or is it going to be all the three of them spending to get a share of the market?

That's the great thing about this business.

If you asked me that five weeks ago I would have had a different answer than I have today.

Based on just information as recently in the last couple days, I'd say it's pretty broad based at this point.

Driven by, in particular, I think, some advancements people are making in getting their technologies to work but not full yield.

And also broader customer participation and interest in the foundries.

So ratcheting up investment because they believe they can make a strategic move.

And so as a result, we see players, multiple players, investing to continue to support the business, but also in a hope to gain share.

Mahesh Sanganeria from RBC Capital Markets.

A question on the composition of the December order.

Can you give us some sense of how, by product, the distribution is?

I'm particularly interested, you talked about that you had some products which have lead times which you can't get slot for all the way through June.

So is the product distribution going to be similar or different in the December quarter?

Different.

I just went through that but the wafer looks like it's going up to the 40% range, which is much more similar to what it was in June in December.

Metrology, 18%, which is actually what it was back in June, and up from September.

Reticle 15% and service at 20%, and other hard disk drive and our other at 7%.

So looking more like our historical numbers.

So the long lead time, new tool, you talked about, is that the Brightfield inspection tools?

Yes.

And then just one question on gross margin.

I missed.

You said half of the gross margin last quarter, the miss was because of absorption of (inaudible).

And what was the other half?

The other half of it was increase in what we call excess and low demand parts.

And when you get a steep inflection in the demand curve, because we came off of a very high booking quarter in Q4 and then you go into a lower booking quarter in Q1, the way our excess model works is that, that drives a pretty significant at least temporary it increase in the excess calculation, which results in a P&L hit to the cost of revenue line.

Is that something you can bring back if the demand improves?

Yes, historically we have brought most of it back.

Historically, our scrappage rates are much lower than the absolute dollar that we post for excess and low demand parts.

But the truth is, that because it's a guess we try to stay conservative with that.

And when we do see a demand pulled back, we do set up reserves pretty quickly against that.

And vice versa, if we see an intermediate to longer term demand uptick again, I've talked in prior calls about the fact that, that results in actually reductions in those reserves which come back to us in terms of favorable cost of revenue.

So will that be something close to $700 million, $750 million run rate, I would think, in terms of revenues?

When you say $700 million to $750 million, you're speaking of what?

What I'm saying, that the writedown you took for 100 basis point of gross margin, will you be able to bring that back when the revenue levels go to $750 million level?

Yes, it's probably more correlated when the bookings levels return.

And again, it's a four quarters look forward at our best guess at bookings levels.

But yes, if you saw a couple of quarters of strong bookings activity return, and you heard optimism on the call in terms of our forecast, that would in turn trigger a reversal of that.

And it would probably come back.

I don't know how much of it would come back.

A full point maybe, maybe 75% of 1 point, something would likely come back.

One last question on the backlog.

In the last cycle, in the 2008 cycle, when the world was falling apart completely, your backlog bottomed at $500 million.

What would be your estimate if the revenues bottomed around $600 million, current level around $600 million?

Where will the backlog bottom?

It's hard to tell.

It's a function of, Rick alluded to earlier, when we're getting new orders that have long lead time parts and long lead time supply lines, you can carryback log, even for stuff that's in current demand, up to six months.

When you get a sustained period of a downturn, obviously you drain the backlog pretty significantly over that period of time.

But what we're moving through right now is obviously a pretty choppy period of significant up, with a significant down this quarter where we're looking for a significant up next quarter.

So it's a little hard to tell exactly how the backlog will react.

But it is not absolutely given that it will react a particular way in response to a change in the demand forecast.

I think the other way to look at it is the December quarter, we're nominally looking at one-to-one.

So not consuming any backlog and not really building any.

Which is interesting given where you think we are in the cycle.

Right, that's what is very interesting.

Usually in a downtown you go through the backlog and this time it looks like it remains stable.

And that's the reason I was trying to figure out where this time where does it bottom?

Will it bottom at these levels?

Yes, again depends on how long it lasts but we did chew up $300 million this quarter in backlog.

I think the takeaway is we're pretty conservative on this, we've got a pretty good cushion.

And if things play out the way our current view is, then as you go forward, we've got a lot more power, fire power in it.

I think the other way to think about it is, we had a really good cushion because of all of the uncertainty.

And as uncertainty comes out then it gives you more ability.

But we're pretty happy with the way it's playing right now.

Mehdi Hosseini from Susquehanna International.

Two follow-ups.

Rick, going back to opportunities in sub 30-nanometer among foundries, do you attribute this to difference of technologies, Taiwan versus non-Taiwanese foundries?

Or is it just purely a shrink related yield challenge?

Or shrink related, that shrink that causes the yield issues?

More related to shrink and everything that comes with doing sub 30-nanometer or less, based on any particular implementation of sub 30 technology, geographic-based on otherwise.

And it's in both.

We're seeing it both in the wafer inspection side of the world but also in the metrology side of the world.

The other thing is I think we have a very strong share position so that's helping us, as well.

Is that what the customers are telling you or is that what your service or field people are feeding back to you?

We have 500 applications engineers that work closely with our customers, we've got a whole process control solutions group, and we have a lot of customer interaction.

I'd say we have quite a bit of intimacy with our customers.

And so we have our own assessment, as well as what we're hearing from their technologists.

But recognize we're in the fabs every day, we're in R&D every day with them creating our solutions and supporting them, so we have I think pretty good insight.

It's not so much what they say in conference room but what we see in the fabs and in the engineering part of the world.

And then one follow-up question, has to do with your commentary on overall WFE for next year down 10%.

Given how strongly you're finishing the year in terms of bookings, are you concerned that this strengthening in booking may not last beyond the March quarter?

Or in other words, what gives you the confidence that this could have more leg into it?

I think it's back to, there's really one part of the customer base that's spending.

We're starting to see signs of life out of other segments like the bare wafer guys who have been holding back.

We've got memory has been turned off.

I think DRAM hasn't been spending much at all.

And there's more interest in NAND going forward.

So I think that largely the strength is based on limited capacity adds, mostly technology adds.

So I think there's a lot of opportunities out there, providing the overall macro situation that doesn't deteriorate.

And I think today the world's all breathing a sigh of relief on the macro and we'll see how long that lasts.

In other words that down 10% for W3 next year could easily be revised up if your customers gain confidence, correct?

The one thing we know for sure is that the forecasts people give are adjusted all the time.

And I've been talking recently with some of our key customers who as recently in the last week are thinking about adjusting their CapEx upward for 2012.

Mark Heller with CLSA.

Just a maintenance question.

What is the split between DRAM and NAND within the bookings for the quarter?

It's splitting a really small number, Mark.

I think the NAND as a percent of memory last quarter was 17%.

So that makes it 4% of total, so pretty small.

Going forward, however, the December quarter, that snaps back and we see it being 69% of memory which is 11% of the total.

So up but not at historic levels.

And I didn't quite catch the break out for Korea during the quarter.

And can you also talk about the outlook for order activity coming out of Korea in December and maybe the first part of next year?

Sure.

Korea was 29% of the September quarter.

And December we're forecasting it to come off of that at about 13%.

And as far as next year, I think a couple factors.

Obviously Korea is made up of several customers, but one major one who's committed recently publicly to continuing their investment throughout 2012, which is great.

And the other one has been largely not investing as they go through some transition.

And I think if they get through that transition, we would expect there to be spending there, as well.

As well as some of the other businesses that we have in Korea.

So Korea should shape up to be strong for KLA-Tencor in 2012.

And one last question, if I can.

Could you just talk about maybe how you see your opportunities maybe growing in the NAND market?

I think NAND has got to invest, and right now NAND has been pretty soft in general.

What we have seen, and what we're encouraged by, is some of the limited activity we had was to get some of our latest technology in wafer inspection into NAND customers where they find they are not seeing some of the defects they thought they were seeing.

And I think once capacity investment resumes, we will be in a position to take advantage of that as we support our customers bringing up their new technology.

So that's one.

Certainly we have opportunity in metrology.

We tend to do pretty well in NAND in metrology.

And in our film thickness business, we also have made some progress in our optical CD which is replacing CD SEM for some of the critical measurements.

And all those bode well for the future but those are more capacity related than technology related in terms of getting any kind of material impact to our overall business.

Timothy Arcuri from Citigroup.

Hi, this is Wang in for Tim.

A couple of things.

You mentioned about WFE to down 10% next year.

And also you have some visibility all the way to June quarter in terms of bookings.

So with those information at hand, what do you think about the linearity next year?

Is it going to be front-end loaded like 2011 or do you think it's more geared towards back end?

Yes, I should clarify.

I don't know that we have visibility into 2012.

We have our internal models as to how we think things are going to look.

They're models.

And so right now, we model 2012 to be down 10%.

We do see strength, customers, a lot of, I think, encouraging signs out of customers as they look forward to 2012.

Some have publicly gone in and said they're going to either maintain or increase CapEx.

Others have said they're going to come off 10% to 20%.

So when we add up what they say it looks pretty good.

We do see strength, as we indicated by our guide for December.

And from there, we can spot many projects that are going on.

But we aren't guiding past December but we do see encouraging signs.

And if this is truly the bottom in terms of bookings in September, then of course you'd see a resumption of an increasing trend.

Although it can increase for a while and still not get back to the peaks of the prior cycle that we just went through.

So we are coming off a relatively low base in September.

When we talked to several of your customers, they actually mentioned about the yield challenge foreseeing smaller and complex defects which make them want to have looking into a new, some of the new defect inspection tools.

Could you comment on your offering to address those issues?

And any new product pipelines that could change and meet the demands from your customers on those leading edge nodes?

Right.

Yes, we're hearing very much the same thing and we have a lot of conversations about that when we meet with customers.

And I'll just highlight 3 products that I think are supporting our customers' intent to find and fix those defects.

Brightfield product line is very strong, as I mentioned.

A lot of interest in that.

And we're seeing a strong adoption and we feel very fortunate about our position there and think that will continue to grow.

The same is true for our narrow band tool, our Dartfield tool.

We're seeing a lot of adoption.

Particularly when we think about some of the opportunities we have in memory, that product is strong.

And then the other product that complements those two is our E-Beam Review where we're seeing a continued gain in market share because we've got the only review tool in the market that's capable of reviewing the defects that our advanced inspectors find in a fast and efficient manner.

And it makes everything more valuable.

It makes our Brightfield and Dartfield more valuable for our customers.

Even our wafer benefits from it.

And our customers find that with that insight as to what their problems, are they have a better shot at fixing them.

So I think all those products should continue to be strong.

And we're seeing very much the same thing from our customers that you're hearing from them.

The need to find and fix these critical defects is the only way they can ramp these advanced technology nodes.

Just follow along that line, the other comment is that some of those new solutions are much more complex, and also much more expensive.

So from your point of view, some of your new products, how do they impact on your margin structure moving forward?

This is Mark Dentinger.

I would expect that our margins will stay relatively consistent with what you've seen in the past.

You're right, the price points on some of the new tools are going up.

But our costs go up, as well.

And obviously the research and development leading to them.

But we are focused on maintaining our margins, which allows us to do the next generation of research and development and for future tools.

So it's pretty consistently built into the KLA-Tencor culture.

And we believe as long as our tools are setting the standard in terms of defect metrology solutions, the price point can be commanding.

Okay, one last question.

Some of your peers have taken a pretty drastic approach on the share buyback.

What's your thinking on your strategy on share buyback versus dividend?

And is there any change on your future outlook in terms of how to execute on those two fronts?

Yes, we were the first in the space to introduce a dividend.

We've been growing that dividend about 12% to 15% a year since we did it.

We're committed to the dividend.

We think it's a great way to reward shareholders over the long term.

The buyback is another strategy but we're really focused on the dividend.

We do buyback.

We bought back stock last quarter.

But really, I'd say our emphasis is on returning and rewarding our existing shareholders through the dividend payout.

And we're going to continue to support that.

And our expectation is, as earnings grow over time, we'll be in a position to continue to support that.

C.J.

Muse with Barclays Capital.

Hi, this is Olga calling for CJ.

Just wanted to probe a little bit more on the memory side.

You talked about foundry giving you a lot of visibility into the first half of the year.

Just wanted to see what you're seeing within the memory space, specifically as you mentioned the semi public comments during the week regarding the Korean players.

We do see hope for memory but we didn't see much action.

So it's more talk and less action right now at this point in terms of investment.

But there's a lot of interest.

And we're having very constructive customer meetings about our advanced technology and capabilities.

And again I'd highlight the wafer inspection products as well as metrology, both overlay and film thickness and optical CD.

And all those, I think, have strong plays in memory.

So I think we're well-positioned to support the memory customers as they return to investment mode.

But right now, we're, just like everyone, waiting to see when that will happen, and we're hopeful that will start.

We're not counting on it for December but we think the signs are positive as we go forward.

And then on the OpEx side, clearly there's an uptick heading into December.

In that down 10% environment for 2012, how should we think about your OpEx structure going forward?

This is Mark.

Our view right now is that if 2012 played out just as we've been describing it, as down 10% year, we would not take our foot off of the R&D pedal at all.

Which is not the majority but the biggest piece of OpEx.

That we would stay on the road maps.

And we believe our customers would probably have a continued interest in us advancing those road maps.

On the G&A side, I wouldn't expect it to grow significantly during 2012 with what our view is right now.

But you never know, as we get closer.

So I would expect that right now we're probably sized pretty close to what we would expect to be, at least for the first half of 2012 and then we'll play it by ear.

Yes, we're pretty happy, I think, with our operating margin, the leverage in our model.

And the only way we can continue that over time is making sure we make those investments, as Mark indicated.

So we're going to keep doing that.

Stephen Chin with UBS.

Just a question on the technology upgrades.

With the big focus on technology upgrades going forward, do you think this is the year that KLA's share of total WFE gets back or even exceeds that 14% level?

I'm sorry, that was a question or a statement?

No, that was a question.

Do you think you can get back above that 14% level?

I was going to support your thesis.

We certainly see the right signs now as we look forward.

And of course, we spend our time talking to our customers about the problems and how we can solve them, and not as much about what they're doing with the rest of their spend.

But we look at it.

And I'd say that there is a significant level of discussion about them needing and wanting our latest capabilities.

So we feel pretty good.

And as I said, when we model '12 right now, just to give you a sense, we looked at '11.

And the way we shake out when you look at the mid point of our guide for revenue, and our expectation for the industry, we will have been up 27% and WFE about up 10%.

So we think we may gain some ground there.

And then we think about '12, and we think the industry is probably down 15%-ish, WFE down 10% to 15%.

And if it's down 15%, we've modeled it, we're down 10%.

So we think we'll outperform the rest of the industry in '12, as well.

And then just a follow-up question on your view on CapEx in 2012.

I know you said down 10% but it sounds like you're a lot more optimistic on foundry here.

Is 2012 a year you're still planning foundry CapEx to possibly be up in 2012?

Thanks.

Again, I'm not ready to say it yet because the people that are indicating higher, or thinking about higher, aren't right now in our models higher.

But it's chatter right now, and I would say we'll know a lot more by the time we get to the call for the December quarter, and I have more customer interface with them right now.

But the major foundries, if I think about three of them, two of them had indicated down for 2012 and one indicated up.

And then the others are smaller in terms of the total mix.

I don't know, that could change, and certainly they're more bullish today than they were a few weeks ago.

Chris Blansett from JPMorgan.

This is Bill Peterson calling in for Chris.

A couple questions.

Sticking on the market share theme, it sounds like you're making headway in a lot of your segments.

Should we see that in the numbers that Gartner published in March?

Or due to lead times would this be something we see in the 2012 figures?

It's hard to say whether they will show up or not in Gartner.

I know how the input works on that and I'm not sure.

We will see.

We certainly know what we're hearing from customers.

The other factor is that Gartner tends to be based on revenue.

And we're looking, I think, maybe upstream of that because we're reacting to how bookings are going.

And bookings, for example, let's say you win a new technology node, and it could be a couple tools which are booked and not even revenued.

But you have a sense of where the revenue is going to come from after that.

That wouldn't show up and that's more what we're looking at.

Next, it's maybe a little bit off, maybe towards the end of next year, maybe beyond your fiscal year, but what does vertical NAND mean for KLA-Tencor?

It means some really good technical challenges.

I think specifically the two areas, the one in particular, I'm amazed that our engineers have technologies that can measure some of those.

In film thickness, in particular, and optical CDs, some of the measurements we need to make there.

And I think we've got pretty good approaches to that.

And then there's the defect inspection, which I feel pretty good about our position there.

But any time there's major process architecture change, two things happen.

One, we have to make sure our existing technology can support that change.

And the other is our customers tend to go through integration issues which cause yield problems, which can accelerate their need for inspection and measurement.

So as long as we're able to capitalize on it, I think it creates great opportunity for us.

But at the same time, until it plays out, we don't know that.

But there's certainly a lot of concern.

And the reason they are going to that is because the conventional path they're on, is going to run out of gas beyond 2X.

Last one.

Around, let's say, a $700 million revenue run rate, how should we expect the other businesses such as solar and LED to play out?

There's a lot of weakness in both sectors.

How do we view that looking forward?

It's true, and solar and LED right now is clearly softening.

I think that LED, we have an interesting play there because we're a leader in the inspection of the epi wafers, so we've got a good position, but it's relatively small.

We saw somewhere around 10% of our business was non-semi.

And this September quarter and even December that drops down to 7%-ish.

And it was 6% back in June.

So we continue to be hopeful that those businesses will grow but right now they're still a reasonably small part of our overall business.

And I think throughout 2012, on a relative basis, we hope to see some growth.

But solar has got to recover first and that's going to be a few quarters away at least.

Raj Seth with Cowen and Company.

I know it's early on 28, and the defect mechanisms are probably very different than they were at 40.

But I'm curious, how do the yields look early on in 28 relative to 40, which I recall had issues for folks?

And then as you move to finer nodes, 20 or whatever, where you start introducing more double patterning, maybe thinset, etcetera, does that become incrementally, by definition, more difficult or not?

Hi, Raj.

Yes, you have a good memory.

I think there was a speed bump everybody hit.

And it was interesting because they thought it on 40 and 45.

Actually what happened really is they jumped from 45 to 40, hit some integration problems, and we suddenly watched as our order levels with foundries shot up as a result.

Kind of the same phenomenon happening in 28.

I would say it depends.

There's a range of spectrum of yields on 28 depending on which fab line you're in, and who's managing that.

And I think it's similar in terms of the challenge.

And I think once again, caught many of our customers by surprise because they thought they had it dialed.

And perhaps what they saw in prototyping they thought would extend to manufacturing, and that's not what's happening.

So I'd say good opportunity for us.

Probably the biggest part of that, though, is the new technologies that we brought to market suddenly give us something to show to customers that switch their buying philosophy from -- Boy, that's interesting to I must have it, when can I get my slot, why don't I have a slot, why can't you give me more slots.

Which really we want to help our customers, support them, but it's a challenge for us to be able to ramp up.

So I think good opportunity for us at 28.

And I think the world just gets harder as you go down.

And the challenge for us is to make sure we've got the technology to support the advanced nodes.

Which, back to Mark's point, why are we going to keep investing.

So your dollar intensity, what I'm hearing is your dollar intensity isn't likely to do anything other than go up node to node.

It's not going to bounce up and down node to node.

It seems to be the slope may be difficult to ascertain but it's going to generally continue to go up, shrink to shrink to shrink?

Yes, shrink to shrink, Raj.

There's always the marketing nodes.

A customer's going to have a marketing node where there's not a lot of technology involved there.

They are pitching it as an advanced technology or the next generation but it's really the same process flow.

And then it doesn't necessarily look that way.

But by and large, as long as they're making real process transitions, then we've got great opportunity.

Patrick Ho with Stifel Nicolaus.

Bigger picture question for you guys in terms of the DRAM industry.

Historically it's been less process control intensive relative to your other customer segments.

Do you see the move down to the 20-nanometer node as being an inflection point where you'll see not only both increased process control but perhaps for you guys even share gains as that marketplace grows?

I think we've got pretty good share.

I think that has been the area where, frankly, we've had more challenges with lower cost competitors, is in DRAM in particular.

And part of that is, I think the challenge that we have in DRAM is that you've got redundancy, and so people, they don't need quite as pure a process to be able to survive.

But that said, I think people are really dealing with the challenges.

And lithography is one area where, because of multiple patterning, some of the challenges people face on just the litho constraints.

We have strong business in the metrology.

And I'd say defect inspection, we've got some new product offerings that we think should position us well from a competitive standpoint.

But we've got work to do to demonstrate the capability to be able to drive adoption up.

And clearly, DRAM market in general is not a particularly fast-growing market.

So I think, frankly, NAND has more promise in terms of getting a larger percent of the CapEx as we go forward.

There are no further questions at this time.

I'll turn it back for closing remarks.

Thank you, Steve.

Thank you all for joining us on our conference call today.

And that concludes our call.

Ladies and gentlemen, this concludes today's conference call.

You may now disconnect.